Budgetary and Economic Outcomes Under Paths for Federal Revenues and Noninterest Spending Specified in the Conference Report on the 2016 Budget Resolution

At the request of the Chairman of the Senate Budget Committee, Senator Mike Enzi, and the Chairman of the House Budget Committee, Congressman Tom Price, the Congressional Budget Office has projected budgetary and economic outcomes over the 2016–2025 period assuming certain paths for federal revenues and spending (excluding interest payments). Those paths are consistent with the amounts of overall revenues and spending specified in the conference report on the 2016 budget resolution (S. Con. Res. 11), which was filed on April 29, 2015. However, the projections do not represent a cost estimate for legislation or an analysis of the effects of any specific policies that might be adopted to produce the revenue and spending paths anticipated in the resolution.

The specified paths 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 $5 trillion lower than in CBO’s current-law baseline, as adjusted to reflect recently enacted legislation.

The projections in this report represent CBO’s assessment of how federal debt and economic output would evolve from 2016 to 2025 under those 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.

Specifically, under the paths for revenues and noninterest spending specified in the conference report on the 2016 budget resolution, 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. With interest savings included and the resulting macroeconomic effects incorporated, the cumulative deficit over the 2016–2025 period would be $6.0 trillion lower than in CBO’s current-law baseline, and the budget would be balanced in 2024, CBO estimates. 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 78 percent under that baseline.

In addition to the paths specified in the conference report on the 2016 budget resolution, Chairman Enzi and Chairman Price specified paths for revenues and spending for years beyond 2025. Under those longer-term paths, the budget would show a surplus after 2025, and debt would continue to fall relative to GDP—to roughly 20 percent of GDP by 2040, compared with 74 percent today.

Economic output would be lower in the next few years (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:

• In the short term, policy changes that decreased federal spending (or increased taxes)—and thus caused budget deficits to shrink—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 increased federal spending or decreased taxes would generally have the opposite effect.
• In the long term, policy changes that decreased federal spending (or increased 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.

CBO’s assessment of the macroeconomic effects is limited in scope, however, because the projections reflect only the ways in which deficits and debt differ from those projected under the baseline. They do not show any other potential effects on output or well-being of the fiscal policy changes that might be used to generate those paths. (The budget resolution does not specify the details of such policies.) However, the 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 people’s incentives to work and save and by altering federal investment. In addition, those policies would affect people’s well-being in various ways beyond their effects on economic output.

The amounts of federal debt and economic output estimated under current law and under the specified paths are highly uncertain. That uncertainty stems from the difficulties inherent in any budgetary projections, as well as from the difficulties in projecting the effects on the economy of changes in federal fiscal policies.