An Analysis of the President’s 2018 Budget
Under the President’s proposals, budget deficits from 2018 through 2027 would total nearly one-third less than those in CBO’s baseline projections, ranging between 2.6 percent and 3.3 percent of GDP, down from 3.6 percent in 2017.
CBO, in collaboration with the staff of the Joint Committee on Taxation (JCT), examined the proposals that the Administration submitted to the Congress on May 23, 2017. This analysis is based on CBO’s economic projections and both agencies’ estimating models, rather than on the Administration’s.
How Would the President’s Proposals Affect the Federal Budget?
In their analysis of the President’s budget, CBO and JCT generally produce detailed “conventional” estimates of the President’s proposals for individual provisions—as well as for the deficit and debt—that exclude any feedback from macroeconomic effects; the agencies also produce “dynamic” estimates that include economic feedback effects on the budget for the set of proposals as a whole. The economic projections used in the conventional analysis reflect CBO’s recently published baseline projections, which incorporate the assumption that current laws governing federal outlays and revenues will remain generally unchanged.
Excluding economic feedback effects, CBO and JCT estimate, federal budget deficits under the President’s proposals would shrink relative to the size of the economy over the coming decade, ranging between 2.6 percent and 3.3 percent of gross domestic product (GDP) during that period (see figure below). As a result, the cumulative federal deficit would be nearly one-third smaller than in CBO’s baseline projections for the 2018–2027 period. (Those baseline projections show deficits rising to more than 5 percent of GDP by 2027.) By the end of the coming decade, debt held by the public would total 80 percent of GDP—11 percentage points below the debt-to-GDP ratio projected in CBO’s baseline but 3 percentage points higher than the ratio anticipated for the end of this year.
The reduction in deficits and debt under the President’s budget would be achieved by decreasing both mandatory and discretionary spending significantly compared with projections under current law. In particular, federal spending for health care would be much lower than the amounts in CBO’s baseline, as would outlays for war-related programs and for many nondefense purposes. Revenues also would be lower than baseline amounts under the President’s proposals, offsetting some of the deficit reduction achieved by the spending cuts.
Such reductions in the deficit would have effects on the economy that would further decrease deficits by modest amounts. Including just the effects of economic feedback from deficit reduction would reduce the cumulative deficit over the next 10 years by roughly $160 billion—or about 0.1 percent of GDP, on average—compared with CBO and JCT’s conventional estimate of the President’s proposals. In 2027, debt held by the public would be lower by 0.6 percent of GDP.
How Do CBO’s Estimates of the President’s Proposals Compare With the Administration’s?
The deficits that CBO estimates would occur under the President’s proposals are larger than those estimated by the Administration. Nearly all of that difference arises because the Administration projects higher revenue collections—stemming mainly from a projection of faster economic growth. CBO and the Administration use different economic forecasts, reflecting differences in projections of economic activity under current law and also economic effects that the Administration attributes to its proposals.
How Might the President’s Proposals Affect the Economy?
The President’s proposals would affect the economy in a variety of ways; however, because the details on many of the proposed policies are not available at this time, CBO cannot provide an analysis of all their macroeconomic effects or of the budgetary feedback that would result from those effects. CBO did examine the effects of the reduction in deficits that would stem from the President’s policies (to the extent that CBO and JCT could estimate their budgetary effects). Those estimated macroeconomic effects exclude effects from changes in people’s incentives to work and save and from changes in productivity, which would depend on those details.
The lower federal borrowing, relative to that projected under current law, would increase national saving, domestic investment, and the capital stock, thereby boosting output and income slightly and lowering interest rates somewhat. As a result, average growth in inflation-adjusted GDP over the 2018–2027 period would be about 0.1 percentage point higher under the President’s proposals than under CBO’s baseline. GDP would be little changed through calendar year 2021 and 0.7 percent higher in 2027. Those economic effects would help reduce the deficit.