Budgetary and Economic Outcomes Under Paths for Federal Revenues and Noninterest Spending Specified by Chairman Price, March 2016

At the request of the Chairman of the House Budget Committee, Dr. Tom Price, CBO has projected budgetary and economic outcomes 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 Price released on March 15, 2016, as part of his proposed budget resolution.

Summary

The projections in this report represent CBO’s assessment of how federal debt and economic output would evolve from 2017 to 2040 under Chairman Price’s specified paths for revenues and noninterest spending and, for comparison, under three alternative paths. The benchmark for those projections is CBO’s extended baseline, which incorporates the assumption that current law generally remains unchanged. The extended baseline follows CBO’s January 2016 10-year baseline projections through 2026 and then extends the baseline concept into later years.

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 any specific changes in policies relating to revenues and spending that might be used to generate those paths.

Paths Specified by Chairman Price and His Staff

The paths specified by Chairman Price envision cuts in spending (from the amounts projected to occur under current law) that begin in 2017 and grow successively larger in later years. The paths also envision revenues that are slightly higher than under current law and rise until they reach 19 percent of gross domestic product (GDP), in 2035, and then remain at 19 percent. Federal revenues would be lower than under the extended baseline after 2037. Under those paths, the cumulative deficit over the 2017–2026 period, excluding interest savings and macroeconomic effects, would be roughly $6.7 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 2026.

Federal debt held by the public as a share of GDP would fall to 57 percent in 2026 and to 22 percent in 2040 under the specified paths, CBO projects. Over the next few years, economic output would be lower than under any of the other paths CBO considered because differences in federal spending and revenues would reduce total demand for goods and services. In the long term, output would be higher because less federal borrowing would free resources for private investment.

The Extended Baseline and Three Illustrative Paths

For comparison, in addition to the extended baseline, CBO also updated the estimated effects of two illustrative deficit reduction paths that it analyzed last June in The 2015 Long-Term Budget Outlook. The agency also estimated the effects of a third illustrative path in which the cumulative deficit (excluding interest payments and macroeconomic effects) over the first 10 years of the projection exceeds the baseline deficit by an amount similar to that in the alternative fiscal scenario in The 2015 Long-Term Budget Outlook. Specifically, the extended baseline and those three illustrative paths would have the following implications for federal debt, by CBO’s estimates:

• Under CBO’s extended baseline, federal debt held by the public would grow to 131 percent of GDP in 2040.
• The -$2 trillion path would result in federal debt equal to 97 percent of GDP in 2040. Under that path, unspecified fiscal policies reduce the 10-year cumulative deficit by $2 trillion (excluding interest payments and macroeconomic effects) from the deficit projections in the extended baseline. Also, the deficit reduction in the 10th year, as a percentage of GDP, continues in later years.
• The -$4 trillion path—defined in the same manner as the -$2 trillion path, but with changes twice as large in each year—would result in federal debt amounting to 65 percent of GDP in 2040.
• The +$2 trillion path—defined in the same manner as the -$2 trillion path, but with increases in the deficit each year rather than decreases—would result in federal debt equal to 167 percent of GDP in 2040.

The amounts of federal debt and economic output estimated under current law and under all the budgetary paths in this report 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—especially far into the future.

How CBO Analyzed the Effects of the Budgetary Paths

The short-term and long-term economic effects of changes in projected deficits would differ. Over the next few years, policy changes that would decrease federal spending or increase taxes—and thus shrink budget deficits—would generally reduce total demand for goods and services. Therefore, 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 budget deficits would lower the amount of federal debt held by the public from what it would otherwise be. Over time, smaller federal deficits and debt would leave more funds available for private investment, causing output to be higher than it would be otherwise. Larger federal debt would have the opposite effect, “crowding out” private investment and decreasing output.

The estimated economic effects of the various budgetary paths incorporate no assumptions about the specific policies that might be adopted to produce those paths. However, all paths for revenues and spending analyzed in this report would require major changes in current law. For example, under the paths specified by Chairman Price, by 2026 noninterest spending would be roughly 18 percent less than the amounts in the extended baseline. If that same proportional reduction had been applied in 2015, it would have represented a decrease of roughly $600 billion in noninterest spending. The specific policies 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 and thus private-sector productivity. However, this analysis includes only the macroeconomic effects of changes in federal debt in relation to the extended baseline.

Because CBO did not analyze a set of policies underlying the specified paths, this analysis does not include the effects of any specific policies on output or the resulting feedback effects on the federal budget. CBO also did not analyze the effects of specific policies on other aspects of people’s well-being. For any set of fully specified policies, if some of them increased incentives to work and invest, CBO would estimate that higher income resulting from those policies would feed back to the federal budget primarily by increasing federal revenues. If other policies lowered incentives to work and invest, those effects would reduce income and revenues, the agency estimates. Those policies also would affect people’s well-being in various ways beyond affecting economic output.