This morning I briefed the press about The Budget and Economic Outlook: 2017 to 2027, which CBO published today along with two slide decks, The Budget Outlook for 2017 to 2027 in 20 Slides and The Economic Outlook for 2017 to 2027 in 16 Slides, illustrating the report’s key findings.
The briefing opened with the following remarks.
Summary of the Baseline Economic Outlook
The economic forecast that underlies CBO’s budget projections indicates that in real (inflation-adjusted) terms, gross domestic product will expand at an average annual pace of 2.1 percent over the next two years—if current laws generally remained unchanged—after rising last year at an annual rate of 1.8 percent. We expect that growth to boost employment, virtually eliminate the remaining slack in the economy, and drop the unemployment rate to 4.4 percent by the fourth quarter of 2018.
Further ahead, according to CBO’s projections, GDP will expand at an average annual rate of 1.9 percent over the second half of the coming decade. That growth rate represents a significant slowdown from the average over the 1980s, 1990s, and early 2000s, mainly because of the slower growth projected for the nation’s supply of labor, which largely results from the ongoing retirement of baby boomers and the relative stability in the labor force participation rate among working-age women.
As slack diminishes over the next two years, we expect the rate of inflation to rise to the Federal Reserve’s goal of 2 percent and to stay there, on average. We also anticipate that the Federal Reserve will steadily raise the target for the federal funds rate and that interest rates over the next few years will be significantly higher than they are now.
CBO’s current economic projections differ a bit from those it published in August 2016. The agency now expects GDP in 2026 to be modestly lower than it projected last summer. It also expects lower interest rates in the next five years but projects a higher rate of labor force participation throughout the next decade than it projected in August.
Summary of the Baseline Budget Outlook
In fiscal year 2016, for the first time since 2009, the federal budget deficit increased in relation to GDP. CBO projects that over the next 10 years, if current laws remained generally unchanged, budget deficits would eventually follow an upward trajectory—the result of three main trends:
- Strong growth in spending for retirement and health care programs targeted to older people, especially Social Security and Medicare;
- Rising interest payments on the government’s debt; and
- Modest growth in revenue collections.
By the end of the period, the accumulating deficits would drive up debt held by the public from its already high level. Moreover, three decades from now, if current laws remained in place, that debt would be nearly twice as high, relative to GDP, as it is this year, and it would reach a higher percentage than any previously recorded. Such high and rising debt would have serious negative consequences for the budget and the nation, including an increased risk of a fiscal crisis.
Our estimate of the deficit for 2017 is lower than our August estimate primarily because we now expect lower mandatory spending. The current projection of the cumulative deficit for the 2017–2026 period, however, is about the same as we published in August.
Projections for Medicaid and for Health Insurance Purchased Through Marketplaces
I am often asked specifically about our projections for Medicaid and federal subsidies for health insurance purchased through the marketplaces established by the Affordable Care Act. We describe those estimates in the report we published today. They were prepared before the new Administration took office and do not incorporate any effects of executive orders or other actions taken by that Administration. We have no clear basis for judging how the executive order issued last Friday will be implemented, so by itself, it will not affect CBO’s cost estimates for ACA-related legislation; specific agency actions to implement that executive order or future ones could do so.
By CBO’s estimates, an average of 12 million people under age 65 will have health insurance in any given month in 2017 as a result of the expansion of Medicaid under the ACA. In addition, CBO and the staff of the Joint Committee on Taxation estimate that this year, 9 million people per month, on average, will receive subsidies for nongroup coverage purchased through the marketplaces. An additional 1 million people are projected to be covered by unsubsidized insurance purchased through marketplaces. We estimate that 27 million people under age 65 will be uninsured, on average, in 2017.
CBO and JCT currently estimate that in 2017, federal spending for people made eligible for Medicaid coverage by the ACA will be $70 billion and that net federal subsidies for coverage obtained through the marketplaces will be $45 billion. For the 2018–2027 period, if current laws remained in place, those two types of costs would total $1.9 trillion.
The Purpose of CBO’s Baseline Projections
It’s important to note that CBO’s baseline is not intended to be a forecast of what will happen; rather, it is meant to provide a neutral benchmark that policymakers can use to assess the potential effects of policy decisions. CBO’s budget and economic projections are predicated on the assumption that the laws that currently govern federal taxes and spending generally remain in place for an entire projection period. Even if that occurred and there were no changes in those laws before the end of that period, it would still not be possible to predict budgetary and economic outcomes precisely because many other factors are uncertain. Our goal is to construct budget and economic projections that fall in the middle of the distribution of possible outcomes, given both the fiscal policy embodied in current law and the availability of economic and other data.
Keith Hall is CBO’s Director.