The Congressional Budget Office also projects a 14 per cent drop in the number of U.S. residents without health insurance, largely because of Obama's health law.
In a report released Monday, CBO says the deficit will be $468 billion for the budget year that ends in September. That's slightly less than last year's $483 billion deficit.
The official scorekeeper of Congress projects solid economic growth for the next few years, with unemployment dropping slightly.
"In CBO's estimation, increases in consumer spending, business investment and residential investment will drive the economic expansion this year and over the next few years," the report said.
CBO also cited wage increases, rising wealth and the recent decline in oil prices.
For future years however, CBO issued a warning: Beyond 2018, deficits will start rising again as more baby boomers retire and enrol in Social Security and Medicare. By 2025, annual budget deficits could once again top $1 trillion, unless Congress acts.
At that point, Social Security benefits would account for one-quarter of all federal spending, said CBO Director Douglas Elmendorf.
"The underlying point is that we have a handful of very large federal programs that provide benefits to older Americans," Elmendorf said. "And with the rising number of older Americans and a rising cost of health care, those programs get much more expensive."
CBO says the number of U.S. residents without health insurance will drop from 42 million last year to 36 million this year, largely because of Obama's health law. These numbers don't include people who are in the U.S. illegally, who are ineligible for subsidies under the health law.
The report says 19 million people will have health insurance because of the law, which could make it harder for congressional Republicans to make good on promises to repeal it.
Obama inherited an economy in recession when he took office. The annual deficit topped $1 trillion for each of his first four years in office, including a record $1.4 trillion in 2009.
As a share of the economy, CBO says this year's deficit will be slightly below the historical average of the past 50 years.
The federal budget deficit became a big issue during Obama's early years in office. In 2011, Obama and congressional Republicans struck a deal that resulted in significant spending cuts at many government agencies. At the start of 2013, Obama persuaded Congress to further address the deficit by raising taxes on top earners.
The White House said Monday that Congress still has more to do. "CBO's longer-term budget and economic projections confirm the need for Congress to act to strengthen our economy for the middle class while putting our debt and deficits on a sustainable trajectory, including by making the investments that will accelerate economic growth and generate good new jobs for our workers to fill," Deputy Press Secretary Eric Schultz said in a statement.
Declining budget deficits, however, could reduce pressure on Congress to continue addressing the government's finances.
"Over the last few years as deficits have fallen, so too has the effectiveness of Republican rhetoric about a 'big government' boogeyman," said Sen. Charles E. Schumer, D-N.Y. "Now is the time for Republicans to join with Democrats to invest in constructive programs that help middle-class Americans climb the ladder and achieve the American dream."
Republicans, however, signalled that they aren't done cutting spending.
"Thanks to Republicans' efforts to cut spending this year's deficit is projected to be smaller, but in order to balance the budget we must address the true drivers of our debt," said Cory Fritz, a spokesman for House Speaker John Boehner, R-Ohio. "Real, robust economic growth won't occur until we solve our government's spending problem."
CBO projects that the economy will grow at an annual rate of 3 per cent in both 2015 and 2016. In later years, however, CBO projects slower economic growth as more baby boomers retire and the labour force grows more slowly than it did in the 1980s and 1990s.
CBO projects the unemployment rate will gradually decrease to 5.3 per cent in 2017. It is now 5.6 per cent.
"CBO's report is important, but it only tells us part of the story," said Sen. Bernie Sanders, a Vermont independent and the ranking minority member of the Senate Budget Committee. "What we must never forget is that tens of millions of Americans today are struggling to keep their heads above water economically while the disparity between the rich and everyone else is growing wider every day."
The budget agency bases its budget projections on current law, assuming that temporary provisions will be allowed to expire. However, many temporary laws are routinely extended, including dozens of temporary tax breaks and a provision that prevents steep cuts in Medicare payments to doctors.
Future budget deficits would be higher if those provisions are continued. For example, if dozens of temporary tax breaks are extended, they would add $1 trillion to the deficit over the next decade.
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