CBO Finds Smallest Deficit Since 2008

The Congressional Budget Office predicts shrinking deficits -- for now.

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The Congressional Budget Office (CBO) and its director Douglas Elmendorf found that the budget deficit is less than half of what it was in 2009.

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The deficit will shrink this year to $642 billion, according to estimates released Tuesday by the Congressional Budget Office. That's about $200 billion smaller than the deficit the CBO projected in February.

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The CBO's latest report contains even more good news for budget hawks. The nation's budget shortfall has fallen to below half of where it was in 2009. Back then, the deficit was 10.1 percent of GDP, compared to 4.0 percent this year. In addition, the CBO predicts that growing revenues, combined with flat spending, will shrink the deficit to 2.1 percent of GDP in 2015.

Still, it's not time to celebrate a sustainable federal budget just yet. The smaller deficit estimated for 2013 is due to temporary factors, not long-term budget fixes agreed upon by Washington lawmakers.

"CBO's estimate of the deficit for this year is about $200 billion below the estimate that it produced in February 2013, mostly as a result of higher-than-expected revenues and an increase in payments to the Treasury by Fannie Mae and Freddie Mac," writes the nonpartisan office in its latest report.

Those higher-than expected revenues came in part from growing personal income, but were also augmented by the expiration of the payroll tax cut, high-income tax hikes, and increased 2012 income for high-income earners in advance of 2013 tax law changes – all three of which boosted revenues above initial CBO estimates.

[READ: CBO Paints Rosier Economic Picture For 2013]

In addition, a $95 billion increase in payments from Fannie Mae and Freddie Mac has gone a long way toward bringing the estimated 2013 deficit down. The mortgage giants are required to submit quarterly payments to the Treasury, based on how much the companies are worth. While the healing housing market is boosting the government-backed corporations' profits, the CBO report also says that "certain accounting changes significantly raised the entities' estimated net worth for this year."

Congressional Budget Office graph showing the federal spending and revenues since 1973. (CBO)

Beyond 2015, deficits are posted to once again grow, from 2.1 percent of GDP in 2015 to 3.6 percent in 2022, then falling to 3.5 percent the following year. The debt-to-GDP ratio, estimated at 75.1 percent for 2013, is projected to fall, to a trough of 70.8 percent in 2018, and then swell to 73.6 percent by 2023.

The report predicts that growing deficits will be fueled by mandatory spending and interest in the coming decades, both of which are projected to grow as a share of GDP. Discretionary spending, meanwhile, will fall steadily.

Mandatory spending, which is mainly made up of spending on Social Security, Medicare, and Medicaid, is projected to account for more than half of all federal spending by 2023. Finding a fix for these growing costs, says one advocacy group, will be necessary to reining in long-term deficits and debt.

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"[T]he rosier-than-expected near-term projections do not change the fact that rising health care costs, an aging population, Social Security's looming insolvency, and ever-increasing interest payments will greatly expand the national debt as a share of the economy starting at the end of the current decade," said Maya MacGuineas, head of the Campaign to Fix the Debt, a bipartisan organization that advocates for long-term debt reduction, in a Tuesday statement.