The Policy Growth Model (PGM) is one in a suite of models that the Congressional Budget Office uses to analyze how economic growth and the federal budget interact:
How estimates of economic growth affect projections of federal budget variables, such as spending, tax rates, and deficits.
For example, more rapid growth of productivity leads to higher incomes and tax revenues.
How changes in those federal budget variables, in turn, affect economic growth.
For example, increased marginal tax rates on labor income lead households to reduce their hours worked on net, lowering economic growth.
By contrast, reduced federal deficits lead to lower interest rates and, therefore, more private investment, boosting economic growth.
