Analysis of the President's Budget

March 19, 2008

CBO released its full analysis of the President's budget today, following up on a preliminary analysis we issued earlier this month.The budget estimates are the same as in that preliminary analysis, but today's report includes a discussion of macroeconomic effects of the President's budget along with other details.

CBOs estimates of the economic feedback associated with the Presidents proposals may be of most interest---that is, how enacting those proposals mightaffect thenation's economy and how those economic impacts, in turn, would affect the federal budget.We used five different economic models that focus on varying aspects of the economy to estimate those feedback effects. Such estimates depend on a variety of specific assumptions, but under any of the assumptions incorporated into today's analysis, economic feedback would modify the budgetary effects of the proposals only relatively modestly---and the potential effects could either expand or reduce the proposals' net budget impact. Between 2009 and 2013, for example, CBO estimated that the President's proposals would add to deficits or reduce surpluses by a total of $336 billion, without considering any economic effects. Our analysis indicates thatmacroeconomic feedback effects could raise the proposals cumulative impact on the budget deficitto as much as$410 billion or reduce itto about$185 billion.

The reason that the macroeconomic feedback from President's proposals is relatively modest is that over the medium to longer run those proposals have both a negative effect on economic growth(that is, by increasing the budget deficit) and a positive effect on economic growth(for example, by reducing marginal tax rates). The net effect of these countervailing forces tends to be small.

As is now widely recognized, the economy is currently experiencing significant short-term weakness. The short-term effects of many budget policies in this type of unusual condition can vary dramatically from their long-term effects ---and indeed, the short-term impact can often be opposite in sign from the long-term impact.

Analysts in CBO'sMacroeconomic Analysis and Tax Analysis Divisions prepared the analysis of macroeconomic feedbacks. Those sections of the report were written by Benjamin Page, and the modeling was performed by Robert Arnold, Paul Burnham, Ufuk Demiroglu, Mark Lasky, Larry Ozanne, Frank Russek, Marika Santoro, Kurt Seibert, and Sven Sinclair.

Analysts in CBO's Budget Analysis and Tax Analysis Divisions prepared the baseline estimates and estimated the impact of the President's proposals in the absence of macroeconomic feedbacks. (The Joint Committee on taxation prepared most of the estimates of revenue proposals.) Those sections of the report were written by Barry Blom, Pamela Greene, Robert Arnold, and Amber Marcellino.