At the request of the Chairman of the House Budget Committee, Congressman Paul Ryan, CBO has projected budgetary and economic outcomes under paths for federal revenues and spending (excluding interest payments) specified by the Chairman. The projections do not represent a cost estimate for legislation or an analysis of the effects of any specific policies. In particular, CBO has not considered whether the specified paths are consistent with the policy proposals or budget numbers that Chairman Ryan released on April 1, 2014, as part of his proposed budget resolution.
The projections in this report represent CBO’s assessment of how federal debt and economic output would evolve from 2015 to 2040 under Chairman Ryan’s specified paths for revenues and noninterest spending. They show how the paths would affect the economy and how those macroeconomic effects (or feedback) in turn would affect the federal budget. For comparison, CBO also updated the estimated effects of the four budget scenarios that it analyzed in its report The 2013 Long-Term Budget Outlook, published in September 2013:
- CBO’s extended baseline, which is based on the assumption that current law generally remains unchanged;
- An extended alternative fiscal scenario, which includes the continuation of certain policies that have been in place for a number of years and the modification of some provisions of law that might be difficult to sustain for a long period;
- An illustrative scenario in which unspecified fiscal policies reduce the cumulative deficit over the next 10 years by a total of $2 trillion (excluding interest savings and macroeconomic effects) compared with the deficit projections in the extended baseline; and
- An illustrative scenario in which unspecified fiscal policies reduce the cumulative deficit over the next 10 years by a total of $4 trillion (excluding interest savings and macroeconomic effects) compared with the deficit projections in the extended baseline.
The updates to those scenarios and the assessment of the paths specified by Chairman Ryan are based on CBO’s most recent 10-year budget and economic projections, which were released in February 2014.
In the short term, policy changes that would decrease federal spending or increase taxes—and thus shrink budget deficits—would generally reduce total demand for goods and services. As a result, such fiscal policies would reduce output and employment below the levels projected in CBO’s baseline. In the long term, the most important economic effect of such policies in this analysis comes from changes in the amount of federal debt held by the public. Over time, lower federal debt leaves more funds available for private investment and thereby causes output to be higher than it would be otherwise. Higher federal debt has the opposite effect, “crowding out” private investment and decreasing output.
Under the paths for revenues and noninterest spending specified by Chairman Ryan, the amount of federal debt held by the public would be smaller in all future years than it would be under CBO’s extended baseline projections or under the three alternative budget scenarios that CBO analyzed (see the figure below).
The paths specified by Chairman Ryan envision cuts in spending (from the amounts projected to occur under current law) that begin in fiscal year 2015 and grow successively larger in later years; the paths also envision allowing revenues to rise as projected under current law until they reach 19 percent of gross domestic product (GDP)—in 2032, CBO projects—and then remain at 19 percent. Under those paths, the cumulative deficit over the 2015–2024 period, excluding interest savings and macroeconomic effects, would be roughly $5 trillion lower than in CBO’s baseline; with interest savings included and the resulting macroeconomic effects incorporated, the budget would show a surplus beginning in 2024. Economic output would be lower in the short term (because less federal spending would reduce total demand for goods and services), and higher in the long term (because less federal borrowing would free up resources for private investment), than under any of the other scenarios that CBO considered (see the figure below).
Chairman Ryan’s specified paths for revenues and spending would require major changes in current law. In particular, by 2040, noninterest spending would be roughly one-quarter less under those paths than under current law, and revenues would be roughly one-twentieth less; if those same proportional reductions had been applied in 2013, they would have represented reductions of roughly $800 billion in noninterest spending and a little over $100 billion in revenues. The specific policies that were adopted to produce those future paths would affect economic output not only by reducing debt but also by altering incentives to work and save and by changing behavior in other ways. In addition, those policies would affect people’s well-being in various ways beyond the effects on overall economic output. This analysis includes the macroeconomic effects of changes in federal debt but not the effects of any specific policies on output or other aspects of people’s well-being, because CBO did not analyze a set of policies underlying the specified paths.
The amounts of federal debt and economic output estimated for all of the scenarios in this report are highly uncertain. That uncertainty stems from the difficulties inherent in projecting the effects of federal fiscal policies, especially far into the future.