Each year, after the President releases his annual budget request in February, CBO analyzes the budget proposals and, using its own estimating procedures and assumptions, projects what the federal budget would look like over the next 10 years if those proposals were adopted. CBO usually provides those results in two parts: First, the agency presents an examination of the proposals’ budgetary impact without considering their effects on the economy. The second part, which takes more time to prepare, shows their potential effects on the economy and, in turn, the impact of those economic effects on the budget.
This year, CBO issued that first analysis (Preliminary Analysis of the President's Budget for 2012) on March 18 (see my blog entry that same day for more information). Today, CBO released the second part of that analysis. Today’s report includes, as Chapter 1, the preliminary estimates-—without economic effects—that were originally released on March 18 (with no changes to those estimates), and adds, as Chapter 2, an analysis of those proposals’ potential effects on the economy and the impact of those economic effects on the budget.
It is important to note that all of these estimates involve the President’s budget proposals that were released on February 14 and are not related to the budget plan that the President announced this week.
As indicated in CBO’s March 18 report, CBO’s analysis of the President’s proposals, before considering their potential impact on the economy, shows the following:
- Deficits over the next two years. If the President’s proposals were enacted, the federal government would record deficits of $1.4 trillion in 2011 and $1.2 trillion in 2012. Those deficits would amount to 9.5 percent and 7.4 percent of gross domestic product (GDP), respectively. (By comparison, the deficit in 2010 totaled 8.9 percent of GDP.)
- Deficits over the next 10 years. The deficit under the President’s proposals would fall to 4.1 percent of GDP by 2015 but would generally rise thereafter. Compared with CBO’s current-law baseline projections, deficits under the proposals would be higher. By 2021, the deficit would reach 4.9 percent of GDP, compared with 3.1 percent under CBO’s baseline projections. Over the 2012–2021 period, deficits under the President’s budget would total $9.5 trillion, compared with $6.7 trillion under those baseline projections.
- Comparison with the Administration’s Estimates. CBO’s estimate of the deficit for 2011 under the President’s budget is $220 billion less that the Administration’s figure, mostly because of lower estimates of outlays. In contrast, largely because of lower projections of revenues, CBO’s estimate of cumulative deficits over the 2012–2021 period is $2.3 trillion greater than the Administration’s.
- Debt. Under the President’s budget, debt held by the public would grow from $10.4 trillion (69 percent of GDP) at the end of 2011 to $20.8 trillion (87 percent of GDP) at the end of 2021, about $2.8 trillion more than the amount in CBO’s baseline projections.
The President’s budgetary proposals that were released on February 14 would have effects on the economy, which in turn would influence the budget through changes in such factors as taxable income (which affects the amount of revenues collected), employment (which determines outlays for programs like unemployment compensation), and interest rates (which affect the government’s borrowing costs). CBO projected those effects using different types of macroeconomic models and multiple alternative assumptions about people’s behavior. That analysis indicates the following:
- From 2012 to 2016, the President’s proposals would boost output relative to that under current law primarily because the proposed tax reductions would increase people’s disposable income. As a result, the nation’s real (inflation-adjusted) output would be between 0.2 percent and 0.7 percent greater than CBO projects under current law.
- The higher output, however, would also lead to higher interest rates (and greater interest payments on the national debt), and the net impact of those effects would be to boost budget deficits. As a result, the economic feedback from the President’s proposals would increase the cumulative impact of those proposals on deficits from 2012 through 2016—estimated to be nearly $1.0 trillion excluding any aggregate economic effects—by between $10 billion and $30 billion.
- Over time, the proposals would reduce real output because the effects of increasing government debt would more than offset the stimulative effects of lower marginal tax rates. CBO estimates that the President’s proposals would reduce real output relative to the amount in the agency’s baseline by between 0.1 percent and 1.2 percent, on average, between 2017 and 2021, and by between 0.7 percent and 3.8 percent in the long term.
- From 2017 to 2021, the effects of the proposals on the economy could further boost the cumulative increase in deficits—estimated to be about $1.8 trillion, excluding any aggregate economic effects—by as much as $217 billion or reduce it by up to $8 billion. (The reduction in deficits might result because, under some assumptions, the tax base can increase even when output declines.)