April 20, 2012
Each year, after the President releases his annual budget request, the Congressional Budget Office (CBO) analyzes the proposals and, using its own estimating procedures and assumptions, projects what the federal budget would look like over the next 10 years if those proposals were adopted. CBO usually provides those results in two parts: The first part presents an examination of the proposals’ budgetary impact without considering their effects on the U.S. economy. The second part, which takes more time to prepare, shows their potential effects on the economy and, in turn, the impact of those macroeconomic effects on the budget. CBO has now completed that second analysis, and this report summarizes the results.
In its analysis of the President’s proposals excluding any macroeconomic effects, which was issued on March 16, CBO concluded that the federal budget deficit would equal $1.3 trillion (or 8.1 percent of gross domestic product, GDP) in fiscal year 2012 and would decline to about $1.0 trillion (or 6.1 percent of GDP) in 2013. The deficit would decline further relative to GDP in subsequent years, reaching 2.5 percent by 2017, but then increase again, reaching 3.0 percent of GDP in 2022.
The projected deficits under the President’s proposals would exceed those in CBO’s baseline—a benchmark showing the outcome if current laws generally remained unchanged—by 0.5 percent of GDP ($82 billion) in 2012, by 2.2 percent of GDP ($365 billion) in 2013, and by between 1.4 percent and 1.9 percent of GDP in each year from 2014 through 2022. In all, between 2013 and 2022, deficits would total $6.4 trillion (or 3.2 percent of total GDP projected for that period), $3.5 trillion more than the cumulative deficit in CBO’s baseline.
Estimates of the macroeconomic effects of those proposals depend on many specific assumptions and judgments, so CBO used several different approaches to estimating those effects, generating a range of possible outcomes. The estimates cover the periods 2013 to 2017 and 2018 to 2022.
CBO estimates that the President’s budgetary proposals would boost overall output initially but reduce it in later years. For the 2013–2017 period, under most of the estimates CBO produced using alternative models and assumptions, the President’s proposals would increase real (inflation-adjusted) output (relative to that under current law) primarily because taxes would be lower than those under current law, and, therefore, people’s disposable income and their demand for goods and services would be greater. Over time, however, the proposals would reduce real output (relative to that under current law) because the deficits would exceed those projected under current law, and the effects of increasing government debt would more than offset the favorable effects of lower marginal tax rates on labor income. When the net impact of those two types of effects would shift from an increase in real output to a decrease would depend on various factors, including the impact of increased aggregate demand on output and the effect of deficits on investment.
By CBO’s estimate, under the President’s proposals, the nation’s real output during the 2013–2017 period would be, on average, between 0.2 percent lower than the amount under current law and 1.4 percent higher than under current law. For the 2018–2022 period, CBO estimates that the President’s proposals would reduce real output, on average, by between 0.5 percent and 2.2 percent compared with what would occur under current law.
Those economic effects would in turn influence the budget through changes in taxable income, in outlays for unemployment insurance and other programs, and in interest payments on government debt, among other factors. According to CBO’s estimates, the effects on the budget would be as follows:
- For the 2013–2017 period, before accounting for the macroeconomic effects, CBO estimates that the President’s proposals would add a total of $1.5 trillion to deficits, resulting in a cumulative deficit of $3.2 trillion over that period (see Table 1). The economic feedback from the President’s proposals would yield projected deficits totaling between $3.0 trillion and $3.2 trillion over that period.
- For the 2018–2022 period, before accounting for the macroeconomic effects, CBO estimates that the President’s proposals would add a total of $2.0 trillion to deficits, resulting in a cumulative deficit of $3.2 trillion over that period. The economic feedback from the President’s proposals would yield projected deficits totaling between $3.3 trillion and $3.6 trillion over that period.