WASHINGTON -- As the White House and Congress careen toward another fiscal showdown, the nonpartisan Congressional Budget Office warned Tuesday that President Barack Obama and lawmakers have been cutting the wrong kind of federal spending as they try to avoid unsustainable levels of debt in coming decades.
In its annual long-term outlook, the budget office projected that because of government spending cuts and rising tax revenues from the recovering economy, annual deficits will fall in the short term -- to a projected 2.1 percent of the economy's output by the 2015 fiscal year, or about one-fifth of the peak shortfall at the height of the recession in 2009.
But starting in 2016, the office projected that deficits will rise again as more aging baby boomers begin drawing from Medicare, Social Security and Medicaid's long-term care benefits.
By 2023, the annual deficit would rise to an estimated 3.5 percent of the gross domestic product, which is just beyond the level that many economists consider sustainable in a growing economy. By 2038, it would be 6.5 percent.
The accumulated federal debt held by the public, which had averaged 38 percent of the GDP for the 40 years preceding the financial crisis that began five years ago this week, would reach 100 percent of the GDP in 2038. But that probably understates the potential crisis, the budget office said, because it does not account for "the harmful effects that growing debt would have on the economy."
Budget experts have been warning since at least the Reagan era that an aging population in the early 21st century would drive spending for entitlement programs -- chiefly Medicare and Medicaid and, to a lesser degree, Social Security -- to levels that would crowd out military and domestic spending. Interest on the debt would also be a major and growing expense.
What is different now is that the Republican-controlled House and the White House have been on a two-year budget-cutting run that has resulted in reductions in areas not driving the projections of future debt. Those discretionary spending programs include spending as varied as Pentagon weapons buying, air traffic control, science and research, education and national parks.
Discretionary spending had already been in line, since 2011, for annual cuts over nine years. But the across-the-board reductions known as sequestration that took effect in March, when Republicans and Mr. Obama could not agree on alternative deficit-reduction measures, has pared the domestic and military programs further, resulting in increasing layoffs, furloughs and service cutbacks.
Republicans have insisted that the sequestration cuts stay in place rather than accept Mr. Obama's proposal for a mix of higher taxes on wealthy people and some corporations and cuts in future entitlement spending.
Discretionary spending, according to the budget office's report, "would decline to 7 percent of GDP, well below the 11 percent average of the past 40 years and a smaller share of the economy than at any time since the late 1930s."
In contrast, federal spending for the major health programs and Social Security would equal 14 percent of the GDP in 25 years, double the level of the past four decades.
While federal revenues are projected to grow -- to 19.5 percent of the GDP, compared with the 40-year average of 17.5 percent -- that is not enough to offset the rising spending for federal benefit programs.
"Unless substantial changes are made to the major health care programs and Social Security," the report said, "those programs will absorb a much larger share of the economy's total output in the future than they have in the past."
Budgets proposed by House Republicans would replace Medicare with federal subsidies to buy private insurance, although at limited amounts, and would transform Medicaid into much-reduced block grants to states.