By Nick Timiraos

U.S. federal deficits are projected to drift slightly lower over the next two years before rising steadily, the Congressional Budget Office said Tuesday. The report sharpens the focus on how little fiscal room President Donald Trump inherits to spend more money or slash taxes without pushing deficits higher toward the end of his first term if economic growth doesn't accelerate rapidly.

New forecasts from the CBO show the federal budget deficit would decline to $559 billion in the fiscal year ending Sept. 30, or 2.9% of gross domestic product, down from $587 billion, or 3.2%, in 2016. Those figures are up from the $439 billion deficit, or 2.5% of GDP, recorded in 2015. Until 2015, the budget deficit had declined since 2009.

The deficit will fall this year partly due to a quirk in the calendar. Because Oct. 1, 2016, which was the first day of the fiscal year, fell on a weekend, payments that would ordinarily have been made in 2017 were made in 2016. After accounting for the shift, the deficit would have been $546 billion last year, or 3.0% of GDP, and it would be $555 billion this year, or 2.9% of GDP.

Deficits are projected to fall to 2.4% of GDP in 2018 before rising almost every year after that into the next decade.

The federal debt held by the public is set to hover at around 77% of GDP, its highest level since after World War II, over the next two years before rising higher still through the next decade, to around 89% in 2027. The increase is being driven primarily by an aging population that will boost spending on programs such as Medicare and Social Security.

The CBO again trimmed its estimate of potential and actual economicgrowth. The nonpartisan budget office now expects the economy to be around 0.8% smaller over the coming decade than it did in its projection last August. It sees the economy growing by 2.3% this year and 1.9% next year. The forecast underscores the ambition of Mr. Trump's promise to deliver economic growth of more than 3%, a level that hasn't been reach in more than a decade, by cutting taxes and regulation and renegotiating trade deals.

"Getting significantly higher growth has got some real challenges," particularly from slower growth in the labor force as the baby boom generation leaves the workforce, said Keith Hall, the CBO's director.

The CBO sees labor market slack disappearing by next year, but it cut its projections of borrowing costs for the federal government because it anticipates slowing in the pace of rate increases by the Federal Reserve.

The budget office lowered its estimate for the number of people who will receive health insurance coverage through the exchanges created by the Affordable Care Act to 10 million people a month, on average, down from last year's estimate of 15 million. Last year's higher estimate stemmed from assumptions that more people would lose their employer-sponsored coverage.

While estimates of participation in those exchanges fell by one third, the amount of money the government will spend on subsidies for that insurance dropped by just 20% due to rising costs of health-care premiums.

Along with the 10 million people a month who are expected to receive coverage through the ACA's exchanges, another 12 million people under age 65 will have health insurance this year because of the expansion of Medicaid enacted by the health-care law, the CBO said. The number of Americans without health insurance was little changed from last year and is projected to hold steady, at around 27 million people, under current law.

Writeto Nick Timiraos at nick.timiraos@wsj.com

(END) Dow Jones Newswires

January 24, 2017 12:48 ET (17:48 GMT)

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