Budgetary and Economic Outcomes Under Paths for Federal Revenues and Noninterest Spending Specified by Chairman Enzi, March 2015

At the request of the Chairman of the Senate Budget Committee, Senator Mike Enzi, CBO has projected budgetary and economic outcomes over the next decade under paths for federal revenues and spending (excluding interest payments) specified by the Chairman and his staff. 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 Enzi released on March 18, 2015, 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 2016 to 2025 under Chairman Enzi’s specified paths for revenues and noninterest spending. The projections show how the total amounts of federal revenues and spending—and the resulting amount of federal borrowing—under those paths would affect the economy and how those macroeconomic effects (or feedback) in turn would affect the federal budget. The projections do not show any other potential effects of the changes in policies relating to revenues and spending that might be used to generate those paths.

The assessment of the paths specified by Chairman Enzi is based on the 10-year budget and economic projections that CBO released in January 2015. The amounts of federal debt and economic output estimated under current law and under the paths specified by Chairman Enzi are highly uncertain. That uncertainty stems from the difficulties inherent in budgetary projections even without regard to their macroeconomic effects and from the difficulties in projecting the effects of federal fiscal policies on the economy.

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. Policy changes that would increase federal spending or decrease taxes would generally have the opposite effect. In the long term, policy changes that would decrease federal spending or increase taxes would lower the amount of federal debt held by the public relative to what it would be otherwise. Over time, smaller federal deficits and debt would leave more funds available for private investment and thereby cause output to be higher than it would be otherwise. Larger federal debt would have the opposite effect, “crowding out” private investment and decreasing output.

Under the paths for revenues and noninterest spending specified by Chairman Enzi and his staff, the amount of federal debt held by the public would be smaller in all future years than it would be under CBO’s baseline projections. The paths specified by Chairman Enzi envision cuts in spending (from the amounts projected to occur under current law) that begin in 2016 and grow successively larger in later years. The paths also envision allowing revenues to rise roughly as projected under current law over the next decade. Under those paths, the cumulative deficit over the 2016–2025 period, excluding interest savings and macroeconomic effects, would be roughly $4.9 trillion lower than in CBO’s baseline. With interest savings included and the resulting macroeconomic effects incorporated, the budget would be balanced in 2025. Federal debt held by the public as a share of gross domestic product (GDP) would fall to 56 percent in 2025 under the specified paths, CBO projects—compared with 79 percent under the baseline. 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 CBO’s baseline.

Chairman Enzi’s specified paths for revenues and spending would require major changes in current law. In particular, by 2025, noninterest spending would be about 16 percent less under those paths than under current law, CBO estimates; if that same proportional reduction had been applied in 2014, it would have represented a reduction of roughly $500 billion in noninterest spending. The specific policies that were adopted to produce those future paths would affect overall economic output not only by reducing federal borrowing but also by altering incentives to work and save and by altering federal investment. In addition, those policies would affect people’s well-being in various ways beyond the effects on 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.