The federal debt is set to explode over the next decade even as the budget deficit is projected to reach its lowest level of the Obama presidency, the Congressional Budget Office said Monday.
The annual deficit should total $468 billion for the 2015 fiscal year, which will end Sept. 30, the nonpartisan budget office said. That’s a tad better than the $483 billion in fiscal 2014, and it amounts to about 2.6 percent of the overall economy, the smallest percentage since 2007 and just a hair under the 50-year average.
The improving deficit numbers are temporary, however. Budget deficits are projected to begin going up again in 2018, and to nearly double by 2024 as retiring baby boomers strain the health and retirement systems, the economy grows more slowly and interest on the nation’s outstanding debt rises.
By 2025, the annual budget deficit is forecast to hit 4 percent of the overall economy, much higher than the 2.7 percent historical average.
Every year’s deficit adds to the debt, which already stands at $18 trillion by one measure and which would be much higher if not for the historically low costs of borrowing, which have allowed the U.S. government to retire or roll over debt with unusually low costs.
The Federal Reserve is set this year to start gradually ratcheting up lending rates across the economy, and that will eventually translate into higher borrowing costs for the government as well. CBO Director Douglas Elmendorf cautioned in a news conference Monday that interest “payments by the government have been quite low.”
The federal government is expected to spend $277 billion on interest on the debt in the current fiscal year. That’s projected to soar to $827 billion by 2025. As a percentage of the economy, it would more than double from 1.3 percent in 2015 to 3 percent in 2025.
Simply put, it will cost the government more to borrow in coming years to pay bills already incurred. Consequently, the $13.4 trillion in debt held by the public projected for 2015, which would be akin to 74 percent of the overall economy, is projected to swell to $21.6 trillion by 2025, when it would total 79 percent of the economy. As recently as 2007, before the Great Recession, it was equal to about 35 percent of the economy.
It’s as if for every $100 you earn, you have outstanding debts equal to almost $80.
Particularly challenging about the costs of long-term debt and the projected return to higher deficits is that they’re driven by hard-to-cut entitlement programs for the elderly, such as Social Security and Medicare.
The past two presidents have had special commissions recommend fixes, only to be ignored by Congress and the White House.
“A debt this large doesn’t come overnight. We make promises we pay for with gimmicks and IOUs,” said Sen. Michael Enzi, R-Wyo., the new chairman of the Senate Budget Committee. “It will be a challenge, but I want to change that. The habit of spending now and paying later is deeply ingrained. As a country we aren’t paying it forward.”