The Economic Effects of the President’s 2015 Budget
The President’s policies would make U.S. output larger over the next decade than it would be under current law—mostly by changing immigration laws. Such economic effects would feed back into the budget in ways that would reduce deficits.
Each year, after the President releases his budget request, CBO analyzes the proposals in that request. Using its own economic projections and estimating procedures, CBO projects what the federal budget would look like over the next 10 years if the President’s proposals were adopted. CBO usually provides that information in two reports: The first examines the proposals’ effects on the budget but generally does not incorporate their effects on the U.S. economy. However, this year’s version of that budgetary analysis, which was published on April 17, included some of the macroeconomic effects of the proposals—specifically, some of the effects of the President’s proposal to alter laws related to immigration. The second report, which takes more time to prepare, shows the effects that all of the President’s proposals would have on the economy and, in turn, the implications of those macroeconomic effects for the budget. CBO has now completed that analysis, and this report describes the results.
With only some of the macroeconomic effects included, CBO estimated in its earlier report that the President’s proposals would cause the federal budget deficit to equal about $500 billion in fiscal years 2014 and 2015 and larger amounts in later years, ranging between about $700 billion and $800 billion from 2020 to 2024 (the second half of the 10-year projection period). Starting in 2017, those projected deficits are smaller than the ones that would occur under current law, as estimated in CBO’s baseline (a projection of the paths that federal revenues and spending would take over the next decade if current laws generally remained unchanged). Deficits would total $6.6 trillion between 2015 and 2024 under the President’s proposals—$1.0 trillion less than the cumulative deficit for that period in CBO’s baseline.
Relative to the size of the economy, or gross domestic product (GDP), annual budget deficits would equal about 3.0 percent of GDP throughout the 2015–2024 period if the President’s proposals were implemented, according to estimates by CBO and the staff of the Joint Committee on Taxation. That percentage is quite close to the average deficit seen over the past 40 years, 3.1 percent. Under current law, by comparison, deficits would trend upward, from less than 3 percent of GDP in 2015 to about 4 percent of GDP in the later years of the projection period.
Those projected deficits under the President’s budget already account for the largest economic effects of the President’s proposals: an increase in the number of workers because of the immigration proposal and the taxes that would be paid on those workers’ earnings, which would make deficits smaller than they would be otherwise. Other economic consequences of the immigration proposal and the economic effects of the rest of the President’s proposals would be smaller and would have mostly offsetting effects on deficits. Thus, considering the total economic effects of the President’s proposals does not significantly alter the deficit projections that CBO released in April in its first report on the President’s budget.
How Would the President’s Proposals Affect the Economy?
CBO estimates that the policies proposed in the President’s budget would make the nation’s real output (the total amount of good and services produced, adjusted to remove the effects of inflation) larger in each year of the 2015–2024 period than it would be under current law. Almost all of that estimated effect stems from the President’s proposal to change immigration laws. That proposal would take an approach similar to the one included in the comprehensive immigration legislation passed by the Senate in 2013, which would substantially increase the number of U.S. residents. The Administration has not specified the details of its immigration proposal, so CBO assumed for this analysis that the economic effects of the changes to immigration laws would be identical to the effects that CBO estimated in its analysis of the Border Security, Economic Opportunity, and Immigration Modernization Act (S. 744). Those economic effects would be delayed by one year, however, because the President’s budget proposes implementing new immigration policies one year later than the Senate bill would. On the basis of its analysis of S. 744, CBO estimates that the President’s proposed changes in immigration policies would increase economic output by boosting the supply of labor and, later in the coming decade, by expanding the nation’s capital stock and overall productivity.
Together, the other policies proposed in the President’s budget would increase real output slightly in 2015, CBO estimates, compared with what would occur under current law. After 2015, however, those policies would reduce real output to a small extent, slightly offsetting the positive effects on output from the proposed changes to immigration laws.
All told, the nation’s real gross national product (GNP) would be 0.1 percent to 0.6 percent higher during the 2015–2019 period under the President’s proposals than under current law and 0.8 percent to 2.1 percent higher during the 2020–2024 period, CBO estimates (see the figure below). By contrast, GNP per person would be lower after 2015 under the President’s proposals than under current law primarily because of the immigration-related increase in the size of the population. According to CBO’s analysis, the President’s proposals would decrease per capita GNP by 0.5 percent in 2016, by slightly more in the following few years, and by roughly 1 percent from 2019 through 2024, compared with what would occur otherwise.
Those estimates of the macroeconomic effects of the President’s proposals are uncertain, and their uncertainty increases the farther the estimates extend into the future. CBO has quantified some aspects of that uncertainty. However, the agency did not quantify the significant uncertainty about the effects of changes in immigration policy on the labor supply and productivity in its previous analysis of immigration reform, which serves as the basis for CBO’s estimates of the immigration proposal in the President’s budget.
What Are the Budgetary Implications of Those Economic Effects?
The economic effects of the President’s proposals would feed back into the budget by affecting federal revenues and spending in ways that, on net, would reduce deficits, CBO estimates. The budgetary feedback with the greatest impact on deficits would be additional collections of income and payroll taxes stemming from an increase in the size of the U.S. labor force and from changes in the legal status of some current workers because of the immigration proposal. Those feedback effects on the budget were already included in CBO’s April analysis of the President’s proposals.
The President’s proposals would also alter the economy in other ways, and those economic changes would influence the budget through such factors as the amount of tax revenues collected, the amount of federal spending on unemployment insurance and other programs that are sensitive to changes in the strength of the economy, and the size of interest payments on federal debt. In particular, CBO estimates that higher tax rates under the President’s budget would reduce the supply of labor—offsetting some of the direct increase in revenues from those higher tax rates—and that higher interest rates would increase federal spending on interest payments. However, those and other feedback effects not included in CBO’s earlier analysis would not have a significant net effect on the deficits projected for the 2015–2024 period under the President’s budget (see the table below).
|Projected Five-Year Deficits Under CBO's April 2014 Baseline and Under CBO's Estimate of the
|Trillions of Dollars, by Fiscal Year|
|Total Deficit Under CBO's April 2014 Baseline||-2.9||-4.7|
|Total Deficit Under CBO's Estimate of the President's Budget|
|With some macroeconomic effects of the President's immigration proposala||-2.8||-3.8|
|With macroeconomic effects of all of the proposals in the President's budgetb||-2.8||-3.8|
|a. These estimates were published in Congressional Budget Office, An Analysis of the President's 2015 Budget (April 2014), and reflect the effects of the President's immigration proposal on the size of the labor force.
b. These estimates reflect additional economic effects not included in CBO's April analysis—specifically, changes in the productivity of labor and capital, the income earned by capital, and the rate of return on capital (which affects interest rates on government debt).