Two policy changes since September 2008 have permanently reduced the deficit—the Budget Control Act (BCA; P.L. 112-25 ) as amended since 2012 and the winding down of overseas contingency operations (OCO) beginning in 2009. The major changes involve the extension of expiring tax provisions and temporary extensions of the "doc fix." Overall, the effect of legislative changes on the deficit was more than twice as large as economic and technical changes combined from 2009 to 2014, and would have been larger if assistance to the GSEs was classified as a legislative change. The budget has proven to be disproportionately affected by past recessions, however. In other words, were a recession to occur in the next 10 years, it would likely increase cumulative budget deficits over the course of the budget window by more than the baseline projection of steady growth, even after accounting for higher than projected growth in expansion years. The budget is not projected to be on a sustainable path under current policy in the long term because the debt held by the public would continuously grow more quickly than GDP. Economists view this as unsustainable because it would imply that an ever-growing portion of national income would be needed to meet interest payments. Because deficits are projected to continue to grow in the long run, growing reductions in spending or increases in taxes would be required over time to maintain sustainability. CBO projects that spending would need to be cut or revenues increased by 1.8% of GDP immediately and permanently to stabilize the debt-to-GDP ratio over the next 75 years, or 7.4% of GDP under the alternative fiscal scenario. The deficit is a long-term issue in that any negative economic consequences from running large deficits have been minor to date, but there is the risk that the deficit's effect on the economy could become negative at any time. Although economic theory suggests that larger deficits provided a stimulative boost to the economy during the recent recession by partially offsetting the contraction of private spending, continued deficits would be expected to eventually have a negative effect on the economy. If that is the case, the decline in the trade deficit may reverse. To that end, deficit reduction proposals can start with the observation that Social Security, Medicare, net interest (which cannot be changed), and defense discretionary make up almost two-thirds of total spending. In 2009, spending reached its highest share of GDP since 1945 and revenues reached their lowest share of GDP since 1950. Spending rises under the baseline projection despite discretionary spending falling to its lowest share of GDP since data were first collected because mandatory spending and net interest on the federal debt are projected to grow relative to GDP. Discretionary Spending

Discretionary spending has fallen from 12.3% of GDP in 1962 to a projected 6.8% of GDP in 2014. The baseline, based on current law, assumes that discretionary spending will adhere to the levels set in the Budget Control Act (BCA) through 2021 and discretionary spending not subject to the caps (notably, OCO) will rise at the rate of inflation. In part, the link between entitlement spending and deficits is driven by the assumptions that go into these projections—other spending is assumed to gradually fall relative to GDP in the long run, revenues are projected to gradually rise relative to GDP because of bracket creep, while health spending per capita is projected to continue to grow faster than GDP per capita. However, CBO's projections already assume the decline will continue, and it still results in an unsustainably large budget deficit. Revenues

In 2009 and 2010, revenues were at historically low shares of GDP across all major categories—individual income taxes were at their lowest share of GDP since 1950, corporate income taxes were at their lowest share of GDP since the 1930s, social insurance receipts were at their lowest share of GDP since the 1970s, and excise taxes were at their lowest share of GDP since 1934, the first year for which data are available. In 2013, revenue as a share of GDP returned closer to historically average levels because of the economic recovery and because of the expiration of the payroll tax cut and certain provisions from the 2001 and 2003 tax cuts. Bracket creep does not lead to a significant increase in revenues relative to GDP over a 10-year projection, but it does over a 75-year projection.
The federal budget deficit was the largest it has been since World War II as a percentage of GDP from 2009 to 2012, peaking at 10.1% of GDP. This occurred because spending reached its highest share of GDP since 1945 and revenues reached their lowest share of GDP since 1950. Since then, the deficit has declined to a projected 2.8% of GDP in 2014, which is still above the 1946 to 2008 average. Over the next 25 years, deficits are projected to become very large again under current law.
The recent decline in the deficit is partly due to improvements in the economy, the expiration of temporary measures taken in response to the recession, and spending cuts (mainly to discretionary spending). Spending was cut by the Budget Control Act of 2011 (BCA; P.L. 112-25) and the reduction in overseas contingency operations (OCO), primarily in Iraq and Afghanistan. Since September 2008, legislative changes to spending have added a cumulative $1.12 trillion to deficits and legislative changes to revenues, mainly the extension of expiring tax provisions, have added $1.75 trillion to deficits, excluding resulting interest costs.
Looking forward, several uncertainties are inherent in the baseline that may lead to different outcomes than projected. There have been large errors to budget projections historically, in part because economic forecasting is subject to large errors. The budget has also proven to be highly sensitive to recessions, and CBO does not project a recession in its 10-year projection. Budget projections also do not assume any significant changes in spending on future wars or disasters. The baseline projection follows current law, assuming that the "doc fix" and tax "extenders" will expire as scheduled. If Congress temporarily extends either, as it has done regularly in the past, the deficit will be larger than projected.
In the long run, legislative changes will be needed to reduce spending or increase taxes to keep the debt on a sustainable path. Postponing action requires larger changes to be made in the long run, and limits the ability to phase in changes gradually. Economists view the debt as currently unsustainable because it is projected to grow faster than gross domestic product (GDP) indefinitely under current policy, causing an ever growing share of national income to be devoted to servicing the debt. The main source of long-term fiscal unsustainability is the growth in elderly entitlement spending. In particular, spending on major health programs, such as Medicare and Medicaid, is assumed to continue to grow faster than GDP, as it has historically. Overall, mandatory spending has grown as a share of GDP, rising from 4.7% of GDP, when data were first compiled in 1962, to a projected 12.3% of GDP in 2014, and is projected to continue rising. By contrast, discretionary spending has fallen from 12.3% of GDP in 1962 to a projected 6.8% of GDP in 2014, and under the baseline it is projected to decline to its lowest share of GDP ever, primarily because of the BCA's statutory caps. Revenues are projected to stay near their historical average over the next 10 years.
Economic theory predicts that deficits have a stimulative effect on the economy during recessions, but harm economic growth by resulting in an increase in interest rates or the trade deficit during economic booms. Thus, the state of the economy is a consideration for the timing of deficit reduction.
Options for deficit reduction on the spending side are constrained by the fact that Social Security, Medicare, net interest, and defense discretionary spending make up almost two-thirds of total spending. On the revenue side, 80% of revenue is raised by income and payroll taxes.