The Long-Term Budget Outlook Under Alternative Scenarios for Fiscal Policy
Expanding on its earlier long-term baseline projections, CBO shows how the federal budget and the economy would evolve under three scenarios in which laws would be changed to continue certain policies now in place, leading to higher debt.
Each year, CBO publishes extended baseline projections—a set of budget projections that incorporate the assumption that current laws generally remain unchanged, extending the agency’s 10-year baseline projections beyond the coming decade. In CBO’s most recent extended baseline, revenues grow more rapidly than gross domestic product (GDP), rising to levels well above their historical average, because recently enacted tax changes are scheduled to expire and because of the structure of the tax system. In addition, discretionary spending falls substantially in relation to the size of the economy. Nevertheless, federal debt held by the public rises from an amount equal to 78 percent of GDP in 2018 to 118 percent of GDP in 2038.
This report expands on CBO’s extended baseline projections by showing how the federal budget and the nation’s economy would evolve under three alternative scenarios. In those scenarios, laws would be changed to continue certain policies now in place, leading to even higher debt.
In the first scenario, current law is changed to maintain certain major policies that are now inplace—including the individual income tax provisions of Public Law 115-97 (originally called the Tax Cuts and Jobs Act and called the 2017 tax act in this report), which are scheduled to expire in 2026 under current law. Most other parts of the tax system’s structure are left unchanged, including those that cause revenues to rise as a percentage of GDP. In addition, discretionary spending equals a larger percentage of GDP than under the extended baseline, and that percentage remains roughly flat after 2028. In that scenario, CBO projects, deficits would be larger than they would be under the extended baseline. Federal debt would equal 148 percent of GDP in 2038 and continue to rise in later years.
The second scenario resembles the first scenario initially, but after 2028, tax policy is assumed to be changed so that revenues remain flat as a percentage of GDP, rather than growing over time. In that scenario, deficits would be even larger than in the first scenario. Debt would equal 151 percent of GDP in 2038 and keep rising thereafter.
The third scenario is like the second, except that tax policy is assumed to be changed so that revenues remain flat in relation to GDP after 2018 rather than after 2028. In that scenario, deficits would be larger still. Debt would equal 165 percent of GDP in 2038 and keep rising.
Under all three scenarios, the nation’s economic output in 2038 would be smaller than it would be under CBO’s extended baseline.
Those projections through 2038 are all uncertain, but what would happen by 2048 (the last year covered by the extended baseline) is even less certain, because in all three scenarios, debt as a percentage of GDP rises to levels substantially outside historical experience. Employing its usual models, CBO projects that in any of the scenarios, debt would equal more than 200 percent of GDP by 2048—but those models probably understate the increase in debt.