How Changes in Economic Conditions Might Affect the Federal Budget: 2023 to 2033

The Congressional Budget Office’s budget projections are subject to uncertainty for many reasons. Some of that uncertainty is related to demographic trends, possible actions by federal agencies, the extent of participation in federal programs, and a variety of other factors. In addition, significant uncertainty stems from the fact that the federal budget is sensitive to economic conditions, which are difficult to accurately forecast. If conditions differed noticeably from those in CBO’s economic forecast, budgetary outcomes could diverge from those in the agency’s baseline budget projections.

To show how variations in economic conditions might affect its budget projections, CBO analyzed how revenues, outlays, and deficits might change if the values of key economic variables differed from those in the agency’s forecast. To do so, the agency generated four economic scenarios that would result in larger budget deficits. In isolation, each of those scenarios would cause cumulative deficits to be larger than the amounts projected in CBO’s baseline by between $110 billion and $307 billion over the 2024–2033 period. (The total deficit projected for that period is $20.3 trillion.)

The four scenarios that CBO analyzed are as follows:

• Slower productivity growth. If productivity grew at a rate that was 0.1 percentage point slower each year than it is in the agency’s economic forecast, annual deficits would be larger than projected by amounts that would reach $51 billion in 2033, CBO estimates. Over the 2024–2033 period, the cumulative deficit would be $261 billion larger than it is in CBO’s baseline budget projections.
• Slower growth in the labor force. If the labor force grew at a rate that was 0.1 percentage point slower each year than the rate in CBO’s economic forecast, and if the unemployment rate remained unchanged, annual deficits would be larger than those in the agency’s baseline budget projections by amounts that would increase each year, reaching an estimated $24 billion in 2033. (The unemployment rate is a measure of the number of jobless people who are available for work and are actively seeking jobs, expressed as a percentage of the labor force.) The cumulative deficit for 2024 to 2033 would be $110 billion larger than it is in the agency’s baseline projections.
• Higher interest rates. If all interest rates—including those on 3-month Treasury bills and 10-year Treasury notes—were 0.1 percentage point higher each year than they are in CBO’s economic forecast, deficits would increase progressively over the projection period by amounts that would reach $47 billion in 2033, if other variables were held constant. The cumulative deficit for 2024 to 2033 would be $303 billion larger than it is in the agency’s baseline projections.
• Higher inflation and interest rates. If all wage and price indexes—including the gross domestic product (GDP) price index, the consumer price index for all urban consumers (CPI-U), the chained CPI-U, and the employment cost index for wages and salaries of workers in private industry—grew at a rate that was 0.1 percentage point faster each year than the rate in CBO’s economic forecast, annual deficits would be larger than projected by amounts that would climb to $53 billion in 2033. In this scenario, real values (that is, values adjusted to remove the effects of inflation) for GDP, interest rates, and other variables affected by inflation are the same as in CBO’s baseline. The total increase in the deficit therefore reflects the effects of higher nominal GDP and taxable income resulting from increased inflation, as well as higher nominal interest rates to keep real interest rates unchanged. The cumulative deficit for the 2024–2033 period would be $307 billion larger than projected.

Although these estimates, referred to as CBO’s rules of thumb, involve scenarios that would increase budget deficits, the actual economic outcomes could result in deficits that are smaller than in the agency’s baseline. Because the rules of thumb are roughly symmetrical, if productivity or the labor force increased more quickly than projected, or if interest rates or inflation were lower than projected, deficits would be smaller than they are in the agency’s baseline budget projections by about the same amounts.