How CBO Estimates Automatic Stabilizers: Working Paper 2015-07

By Frank Russek (formerly an employee of CBO) and Kim Kowalewski (CBO)

Federal receipts and outlays regularly respond to cyclical movements in the economy. When the economy is operating below its potential, personal income and other tax bases are depressed, causing revenues to be lower than if the economy was operating at its potential. At such times, outlays for unemployment insurance benefits and other types of transfer programs are elevated. By contrast, when the economy is operating above its potential, revenues are higher and transfer payments are lower than would be the case if the economy was operating at its potential. Those “automatic stabilizers” thus tend to dampen the size of cyclical movements in the economy, by supporting or restraining private spending. (The effects of automatic stabilizers are in addition to the effects of any legislated changes in tax and spending policies.) The Congressional Budget Office estimates the size of the automatic stabilizers using actual data for past years and the agency’s current-law projections for current and future years by relating movements in various components of federal revenues and outlays to measures of cyclical movements in the economy.