The Dark Shadow Hanging Over the Economic Recovery
Policy + Politics

The Dark Shadow Hanging Over the Economic Recovery

On the heels of President Obama’s upbeat pronouncements on the economy, the non-partisan Congressional Budget Office on Monday forecast modest continued economic growth over the next few years spurred by increased consumer spending, expanded business and residential investment, and plummeting oil prices. But it’s not all good news.

CBO’s latest projections say that real Gross Dometic Product will grow by about three percent in 2015 and 2016 and by two-and-a-half percent in 2017 – compared with 2.2 percent in 2014.

Related: Obama Touts ‘Middle Class Economics’ at State of the Union  

With this relatively strong economic headwind and continued restraints on government spending, the budget deficit this year and next will be at its lowest levels since 2007, or roughly $468 billion a year.

Yet without further intervention by Congress or the Obama administration, deficits will rise again in 2018 as the economy slows and health care and Social Security costs begin to surge as more baby boomers retire, the report says.

The CBO has given similar warnings before. The latest report, however, provides economic and budget grist for lawmakers just a week before the president is due to submit his fiscal 2016 budget to Congress.

In his State of the Union address last Tuesday night, Obama cited the economic recovery and declining unemployment rate while outlining a series of high-ticket proposals to help middle-income Americans.

Related: Boehner and McConnell Skewer Obama’s SOTU Plans

“At this moment – with a growing economy, shrinking deficits, bustling industry and booming energy production – we have risen from the recession freer to write our own future than any other nation on Earth,” Obama said. “It is now up to us to choose who we want to be over the next 15 years, and for decades to come.”

Republican lawmakers say they’re also committed to helping the middle class and lifting caps on defense spending to address growing terror threats. But many conservatives and Tea Party members are also concerned about the long-term deficit and debt – and are likely to find strong ammunition for that worry in the CBO study.

The latest CBO projection shows the deficit climbing from $540 billion in 2015 to $948 billion in 2022 – and to more than $1 trillion in 2025. The cumulative deficits over the 2016-to-2025 period would total $7.6 trillion. Spending would surge from roughly 20 percent of GDP this year to about 22 percent in 2025.

“This report should pour cold water on claims our debt problems have been solved,” said former Pennsylvania Governor Ed Rendell (D) and former Sen. Judd Gregg (R) of New Hampshire, the co-chairs of Fix the Debt, an advocacy group, in a statement. “It’s true our deficits have fallen tremendously from recession-era highs, but they will soon be rising again.”

Related: CBO Says Budget Deficit Dipped to $486 Billion in 2014

The increased federal outlays will be driven by a huge increase in retirees, more federal subsidies for health insurance, increasing health care costs per beneficiary and rising interest rates on the federal debt, according to CBO.

At the same time, federal revenues are projected to rise significantly, buoyed by the expiration of several tax code provisions that reduced tax liabilities and by the ongoing economic expansion. Assuming no change in current law, CBO projected revenues will equal about 18.5 percent of GDP in 2016 and remain between 18 percent and 18.5 percent through 2025.

CBO expects federal debt held by the public will amount to 74 percent of GDP at the end of this fiscal year – more than twice what it was at the end of 2007 and higher than in any year since 1950. By 2025, in CBO’s projections, federal debt rises to nearly 79 percent of GDP.


CBO put it best: The large amount of debt might restrict policymakers’ ability to use tax and spending policies to respond to unexpected future challenges, such as economic downturns or financial crises.

“We need a plan to slow the growth of our debt while speeding the growth of our economy,” said Rendell and Gregg. “To do so, Congress and the president need to work together to pursue pro-growth tax and entitlement reform. This isn’t about austerity; it’s about sustainability, prosperity, and the next generation."

Related: Why Budget Experts Are Worried About the Next CBO Chief   

Ryan Alexander, president of Taxpayers for Common Sense, said lawmakers must tackle fiscal challenges as baby boomers age.

“Responsible infrastructure investments will [also] need to be made,” she said. “Now is the time to tackle comprehensive tax reform, Pentagon contracting and compensation issues, as well as entitlements.”

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