US deficits to shrink, but debt to deepen

Democrats put the emphasis on the progress made in reducing deficits and in fostering economic recovery.

"The report confirms that the economy has made important progress over the last few years, but there is clearly more to do," said Representative Chris Van Hollen, the top Democrat on the House Budget Committee. "Our first priority must be putting Americans back to work, but unfortunately, congressional Republicans have blocked progress at every turn.

The report comes as President Barack Obama called for another temporary delay in the automatic spending cuts, an overture that was quickly rebuffed by House Republicans.

If Congress were simply to cancel the cuts with no savings to offset them, that would add about $1.2 trillion to the cumulative projected 10-year deficit, pushing it to over $8 trillion.

Republicans in the House of Representatives are preparing a budget that aims to achieve balance within 10 years - a phenomenon not seen since 2001.

In a separate report, CBO said that would require about $4 trillion in additional fiscal tightening through tax hikes, spending cuts or both over the next decade -- while leaving in place or replacing the automatic sequester cuts.

It forecast that if $4 trillion in additional 10-year budget savings were achieved, output would be reduced by 0.6 percentage point in 2014 compared with its current-law "baseline." But it would add 1.7 percentage points to growth in 2023 by reducing debt service costs and freeing up investment capital.

A more modest deficit reduction plan of $2 trillion also would have some near-term pain and long-term gain, reducing 2014 growth by 0.3 percentage point, while adding 0.9 percentage point to 2023 growth.

Fed may run dry

The CBO also forecast that a major cash cow for the government in recent years - the Federal Reserve - could run dry as a revenue source in about five years.  

Flush with earnings from the massive bond holdings it has accumulated to hold down interest rates, the Fed is expected to contribute some $95 billion a year to federal coffers through 2016. But these will drop off quickly as the US central bank unwinds its holdings and takes some capital losses as rates rise, CBO says. Such remittances are projected to fall to zero between 2018 and 2020, resuming again in 2021 at lower levels.

Interest rates for benchmark 10-year US Treasury notes will average 2.1 percent this year and stay below 3 percent in 2014, but will start to rise thereafter, averaging 4.5 percent in the 2015-2018 period, CBO projects.