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U.S. deficit to 'hold steady' until 2018

NEW YORK (CNNMoney) -- Solid economic growth over the next few years should help keep the annual federal deficit at a very modest level until 2018. But after that, the deficit will start growing again.

That's according to the Congressional Budget Office's latest 10-year budget and economic outlook released Monday.

The CBO projects the deficit for this fiscal year will be $468 billion, or 2.6% of GDP. That's just slightly lower than where it was in fiscal 2014.

Going forward, the deficit - which reflects the gap between how much the government spends and how much it takes in - is projected to remain at or below 2.6% as a share of the economy until 2018. Thereafter, the CBO expects it to gradually grow to 4% by 2025.

Three reasons were cited for the projected increase in the deficit after 2018. The CBO said it anticipates real growth in the economy will fall below the average growth rate seen in the 1980s and 1990s. At the same time, spending on the major entitlement programs - including Social Security, Medicare and health insurance subsidies - as well as interest on the country's debt are projected to grow faster than the gross domestic product.

Those reasons will trump the fact that combined spending on defense and a number of domestic programs -- with the exception of Social Security and Medicare -- is projected to shrink as a share of the economy to its lowest levels since 1940.

Even a projected increase in revenue starting in 2016 -- thanks to economic growth and the expected expiration of certain tax cuts -- won't keep the deficit from growing.

Federal debt owed to the public -- which is an accumulation of annual deficits -- is expected to grow from 74% of GDP this year to 79% by 2025. While those debt levels are far better than the projections issued during the height of the financial crisis - when annual deficits topped 10% - they are more than twice the level seen in 2007 and are higher than in any year since 1950.

By 2039, the CBO projects debt will exceed 100% of GDP.

Such high levels of debt would likely dampen economic growth and limit policymakers ability to deal with emergencies and other challenges that the country may face, the CBO said.

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