By David Lawder
WASHINGTON (Reuters) - The U.S. budget deficit will decline slightly to $468 billion this fiscal year, the lowest level since President Barack Obama took office, congressional forecasters said on Monday in a report heralding the end of a brief period of dramatically shrinking red ink.
The deficit, down from the $1 trillion-plus levels of Obama's first four years and a $483 billion gap in fiscal 2014, will stay largely flat in 2016, then begin a steady march upward due to rising costs for servicing the national debt and caring for the fast-retiring Baby Boom generation.
Estimates by the Congressional Budget Office kick off what promises to be a contentious budget debate in Washington, as Republicans now in control of Congress seek to eliminate deficits within 10 years with cuts to social safety net programs while lowering tax rates and boosting military spending.
Meanwhile, President Obama and his Democrats have proposed new education and infrastructure spending and tax breaks for middle-class Americans to set the agenda for the 2016 presidential election.
The CBO report shows the respite in deficits, fueled by a recovering economy, will be short-lived and the federal debt will continue to grow.
Republican House Budget Committee Chairman Tom Price called the report a "sober reminder" of U.S. fiscal challenges.
"If nothing is done, we will continue down an unsustainable path full of rising annual deficits that will add to an already $18 trillion debt. Our vital health and retirement programs will continue to grow further toward insolvency."
A major pressure point for Republican demands to slash spending will come in mid-March, when an extension of the federal debt limit expires. But the CBO estimated that if Congress fails to grant an extension, the Treasury Department could stave off a default crisis until September or October by employing extraordinary cash management measures.
Relative to the size of the U.S. economy, the federal deficit after 2018 will be back above its 50-year average of 2.7 percent of gross domestic product, reaching 4.0 percent, or $1.1 trillion, by 2025. The report says a key factor will be higher interest rates, which will cause interest payments to nearly quadruple to $827 billion in 2025.
The non-partisan budget referee agency also said it expects modest economic growth during the 10-year budget window, with real GDP growth peaking at 3 percent in 2016, then slowing as retiring Baby Boomers constrain growth of the labor force.
(Reporting by David Lawder; Editing by Susan Heavey, Diane Craft and David Gregorio)
