WASHINGTON — The federal deficit has shrunk to its lowest level since 2008, according to a report released Tuesday, but House Republicans will begin the next budget battle this week with a vote that threatens to shut down the federal government unless President Obama agrees to halt his healthcare law.

The deficit has dropped from its peak at the start of the Great Recession and is on track to decline even more thanks to an improving economy, higher taxes on the wealthy and reduced federal spending, the report from the nonpartisan Congressional Budget Office concluded.


But the long-term outlook remains bleak. The nation’s publicly held debt — the accumulation of annual deficits — keeps piling up. It’s expected to equal the economy’s annual output, or gross domestic product, by 2038.

“The unsustainable nature of the federal government’s current tax and spending policies presents lawmakers and the public with difficult choices,” the report says. “To put the federal budget on a sustainable path for the long term, lawmakers would have to make significant changes to tax and spending policies.”


The short-term improvements have not tempered the GOP’s appetite for more brinkmanship in its drive to cut spending and push its policy priorities. After having extracted steep budget reductions, some hard-core Republican deficit hawks now want to repeal, or delay, the president’s healthcare law.

House Republican leaders see almost no option but to yield to those demands, even though such a measure is all but certain to be rejected by the president and the Senate, where Democrats hold the majority.


But some Republicans see the threat of an Oct. 1 government shutdown — and a default a few weeks later if the nation’s debt limit is not increased — as their best leverage to force Democrats to cut a deal.

The Republican-led House could vote this week to halt spending for the president’s Affordable Care Act as part of legislation needed to keep the government open after Sept. 30, when the current funding runs out. House leaders also are considering a one-year delay of the health law in exchange for raising the debt limit.


“Are we going to get control of the debt before it reaches a breaking point?” said Rep. Paul D. Ryan (R-Wis.), the House Budget Committee chairman and former vice presidential candidate. “We should start by delaying Obamacare and paying down the debt to help grow the economy.”

Sen. Marco Rubio (R-Fla.) said the deadline to fund the government “is actually a major opportunity to save our people from the job-killing disaster that is Obamacare.”


“This short-term budget represents our last chance to stop it by defunding it,” Rubio wrote Tuesday in an essay on the conservative website Townhall.com.

The White House has said it will not stop implementation of the healthcare law, with online markets for buying medical insurance set to open Oct. 1.


Treasury Secretary Jacob J. Lew reiterated that position during a speech before the Economic Club of Washington on Tuesday. “That’s just not reality, and they’re going to have to start dealing in reality,” Lew said.

Senate Majority Leader Harry Reid (D-Nev.) said Tuesday that “anarchists” controlled the Republican Party and were “obsessed” with the healthcare law “that passed four years ago, a bill that was declared constitutional by the Supreme Court of the United States. They can’t get over that.”


In many ways, the budget outlook is improved from a few years ago, when deficits — the difference between annual revenue and expenditures — soared to nearly 10% of annual GDP during the recession, the budget office said.

After Obama took office in 2009, “the federal government recorded the largest budget deficits relative to the size of the economy since 1946, causing federal debt to soar,” the budget office said.


Those deficits helped push the debt higher than at any point since World War II. Total debt had doubled during the George W. Bush administration in large part because of war spending and new prescription drug benefits for seniors.

The public debt is now about 73% of GDP. The full U.S. debt, which also includes transfers between government departments, is about $16.7 trillion.


A 2011 debt ceiling showdown between Republicans in Congress and the White House led to a rare downgrade of U.S. credit. But with the economic recovery, annual deficits began to fall. Federal stimulus spending was phasing out and tax revenue, at all-time lows during the recession, started climbing.

Last year’s budget deal brought steep cuts and new taxes on the wealthy, and shrank the deficit even more. This year’s deficit is about 4% of GDP, according to the budget office.


The future, though, remains grim. Rising healthcare costs from the aging population will help put the budget on an unsustainable course.

The choices for lawmakers will be difficult, the budget office said.


“On the one hand, waiting to cut federal spending or raise taxes would lead to a greater accumulation of debt,” the report said. “On the other hand, implementing spending cuts or tax increases quickly would weaken the economy’s current expansion.”

lisa.mascaro@latimes.com


Times staff writer Jim Puzzanghera contributed to this report.