A new study by the CBO projects a smaller budget deficit thanks to lower spending on health insurance due to the Affordable Care Act, or Obamacare.
The report saw a decline in the budget deficit of $455 billion, or 13% of the total budget in 2014. Projected Federal government spending in 2015 remains uncertain, but President Obama has submitted a budget requesting $3.9 trillion in spending, or an increase of just over 10% from the prior year.
Despite higher spending, the budget deficit is declining because of higher revenues, which project to rise nearly 30% from the prior year. The fall in the deficit is 2.4% of total U.S. GDP.
Additionally, the U.S. government’s actual deficit was substantially lower than the president’s projections. In his budget proposal, President Obama expected a $744 billion budget, much higher than the $483 deficit that the government actually saw. Some analysts believe the deficit might shrink even further than CBO projections, thanks to rising national incomes contributing to higher tax revenues.
According to the CBO, the lower deficit is due to lower net costs of Obamacare as the cost of health insurance falls. "The largest factor underlying that reduction is a downward revision to projected growth in private health insurance spending, which is estimated to lower the net cost of the provisions of the Affordable Care Act (ACA) that are related to insurance coverage and to increase overall revenues from income and payroll taxes,” said the CBO in their report.
High Debt Levels
The lower deficit means that publicly held debt is likely to fall to 74% of GDP over the next few years, remaining at a historically high level but lower than immediately after World War II, when public debt was over 100% of GDP.
The CBO warns that this large amount of debt could have “serious negative consequences for the nation” if interest rates rise to “more typical, higher levels.” The rise in interest rates would cause Federal spending on interest payments to rise, while borrowing would also cause the nation’s capital stock to fall. The CBO also warned that this trend could damage productive and total wages, as well as a higher risk of a fiscal crisis, "during which investors would lose so much confidence in the government’s ability to manage its budget that the government would be unable to borrow at affordable rates."
Economists remain polarized about the dangers of current debt levels. Fiscal hawks warn of inflation and lower investor confidence, as mentioned in the CBO report, while Keynesian economists argue that taking on debt when the multiplier effect is so strong could be beneficial.
In a report on the topic dating from 2012, Professor Dennis Leech of the University of Warwick argued that fiscal stimulus could have a strong stimulative effect that causes debt-to-GDP ratios to fall. Other prominent Keynesians have asserted this trend is more significant for long-term growth trends, especially in countries where currency demand remains high.