Today CBO released the second part of its analysis of the President’s 2013 budget—the proposals’ potential effects on the economy and, in turn, the impact of those economic effects on the budget. Last month, CBO released the first part of its analysis—the proposals’ budgetary impact without considering their effects on the economy.
Estimates of the economic effects of President’s proposals depend on many specific assumptions and judgments, so CBO used several different approaches to estimating those effects, generating a range of possible outcomes spanning the period from 2013 to 2022. For the 2013–2017 period, projected deficits including the macroeconomic effects are about the same or smaller than projected deficits excluding the macroeconomic effects; for the 2018–2022 period, the projected deficits including macroeconomic effects are larger.
The bottom section of the summary table below shows CBO’s estimate of projected deficits under the President’s budget with and without the macroeconomic effects. Included for comparison are projected deficits under CBO’s March 2012 baseline—a benchmark showing the outcome if current laws generally remained unchanged.
CBO estimates that the President’s budgetary proposals would boost the nation's output initially but reduce it in later years. Specifically:
For the 2013–2017 period, under most of the estimates CBO produced using alternative models and assumptions, the President’s proposals would increase real 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.
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: