Congressional Budget Office forecasts economic growth and deficit reduction

The United States is expected to post solid economic growth of more than 3.0 percent through 2016, accompanied by a shrinking deficit, a government agency said Tuesday.

The Congressional Budget Office, the nonpartisan analysis arm of Congress, said in its latest report that the federal government's tax and spending policies would not constrain economic growth as much as they had in fiscal 2013, which ended September 30.

And state and local governments were expected to increase spending after several years of budget tightening, the CBO said.

In its economic and budget outlook report for 2014 to 2024, the CBO predicted growth in gross domestic product (GDP) at 3.1 percent this year and 3.4 percent in 2015 and 2016.

But growth would fall to 2.7 percent in 2017 and continue to slow "to a pace that is well below the average seen over the past several decades," largely because of slower growth in the labor force due to the aging population and mild inflation under 2.0 percent for the next several years.

The CBO predicted the unemployment rate would end this year at 6.7 percent, unchanged from December 2013.

The federal budget deficit was expected to continue to fall this year and the next before rising through the decade.

The deficit, which stood at 4.1 percent of GDP in 2013, was seen falling to 3.0 percent of GDP this year -- at $514 billion -- and 2.6 percent in 2015.

"That pattern of lower deficits initially and higher deficits for the rest of the coming decade would cause federal debt to follow a similar path," the CBO said.

Debt dips, then mounts

Debt was seen declining to 74 percent of GDP by the end of the year and to 72 percent of GDP through 2017, but then rising, hitting 79 percent of GDP by the end of 2024.

The agency highlighted that debt relative to the size of the economy was "very high" by historical standards. As recently as the end of 2007, debt stood at 35 percent of GDP, before budget deficits grew sharply as government spending accelerated to offset the 2008 financial crisis and the sharp recession.

"Such large and growing federal debt could have serious negative consequences, including restraining economic growth in the long term, giving policymakers less flexibility to respond to unexpected challenges, and eventually increasing the risk of a fiscal crisis (in which investors would demand high interest rates to buy the government?s debt)," the CBO report said.

The report came a day after Treasury Secretary Jacob Lew warned the nation was in danger of defaulting on its debt by the end of February if Congress failed to lift the debt limit.

He urged Congress to increase the borrowing authority by the end of the week, saying the Treasury was expected to exhaust extraordinary measures to prevent default by the end of the month.

In the absence of congressional action, the temporary suspension of the debt limit will expire on February 7, locking in the ceiling at the total amount borrowed on that date. US debt currently stands at $17.3 trillion.

Delaying action "can cause harm to our economy, rattle financial markets, and hurt taxpayers," Lew said in a speech at the Bipartisan Policy Center on Monday.

The debt battle looms large in Washington this week, with Republicans calling for spending cuts to be tied to the debt limit legislation and President Barack Obama insisting he will sign only a bill that excludes conditions.