How Changes in Economic Conditions Might Affect the Federal Budget: 2026 to 2036

At least once a year, the Congressional Budget Office publishes a report providing the agency's projections of what the federal budget and the economy would look like in the current fiscal year and over the next 10 years if current laws governing taxes and spending generally remained unchanged. The agency uses its economic forecast—which includes projections of income, inflation, interest rates, and other variables—as a basis for projecting revenues from each major revenue source (individual income taxes, payroll taxes, corporate income taxes, customs duties, and other taxes), spending for federal budget accounts, the resulting deficits or surpluses, and federal debt. If economic conditions differed noticeably from those in CBO's forecast, budgetary outcomes could diverge from those in the agency's baseline 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, CBO generated four economic scenarios that would result in larger budget deficits. In isolation, each of those scenarios would cause the cumulative deficit for the 2027–2036 period to be larger than it is in CBO's baseline projections—by an amount from $166 billion to $379 billion. (The total deficit projected for that period is $24.4 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, economic growth (as measured by annual changes in real gross domestic product—that is, GDP adjusted to remove the effects of changes in prices) would slow, which would reduce gross domestic income and, in turn, federal revenues. Although some of that decrease in revenues would be offset by reductions in outlays, annual deficits would be larger than projected by amounts that would reach $65 billion in 2036, CBO estimates. The cumulative deficit for the 2027–2036 period would be $317 billion (or 1.3 percent) larger than it is in CBO's baseline budget projections.
• Slower growth of 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 the unemployment rate was the same as forecast, economic growth would slow, and annual deficits would be larger than those in the agency's baseline budget projections by amounts that would reach $37 billion in 2036. The cumulative deficit for the 2027–2036 period would be $166 billion (or 0.7 percent) 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 and other variables were the same as those in the agency's forecast, the government's net interest costs would be greater than they are in the agency's baseline projections by amounts that grow each year through 2036. If other variables were the same as forecast, higher-than-forecast interest rates would cause deficits to exceed the agency's baseline projections by $60 billion in 2036 and by $379 billion (or 1.6 percent) over the 2027–2036 period.
• Higher inflation and interest rates. If all wage and price indexes grew 0.1 percentage point faster each year than they do in CBO's economic forecast but real values for GDP, interest rates, and other variables affected by inflation were the same as those underlying CBO's baseline, annual deficits would be larger than projected by amounts that would climb to $51 billion in 2036. With real GDP unchanged, higher inflation would push up nominal GDP, resulting in more taxable income. Higher inflation would also increase benefit payments from certain programs and, with real interest rates unchanged, would increase nominal interest rates. As in the previous scenario, those higher nominal interest rates would drive up interest payments on federal debt. The cumulative deficit for the 2027–2036 period would be $311 billion (or 1.3 percent) larger than projected.

Those scenarios and the resulting budgetary and economic effects are referred to as CBO's rules of thumb. For illustrative purposes, budget deficits are larger in each scenario than they are in the agency's baseline. Differences between the economic projections and actual outcomes may result in deficits that are larger or smaller than those in CBO's baseline budget projections. Because the rules of thumb are roughly symmetrical, they can be used to analyze changes in both directions. If, for example, productivity or the labor force grew 0.1 percentage point faster than projected, or if interest rates or inflation were 0.1 percentage point lower than projected, deficits would be smaller than they are in the agency's baseline budget projections by about the same amounts as they are larger in the rules of thumb.