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1 1 (November 28, 2018)

handle is hein.crs/govyce0001 and id is 1 raw text is: The U.S. Economy in a Global Context November 28, 2018 Congress faces challenges in formulating policies to foster economic growth. The imbalance between federal spending and revenues will continue and grow in the long run if current policies are continued. This imbalance will lead to unsustainable growth in the federal debt. Nevertheless, deficit reduction that is too large can temporarily slow economic growth. Near Term Outlook The economy has recovered from the 2007-2009 recession with a historically low level of unemployment (3.7% in October 2018). The labor force participation rate of 62.8% is at its trend level. It has declined over time largely due to the aging of the population. The economy continues on a growth path at an average rate of 2.2% from 2010 through 2017. Growth in the first and second quarters of 2018 was 2.2% and 4.5 % with a preliminary estimate of 3.5% for the third quarter. The Congressional Budget Office (CBO) estimates a growth rate of 3.1% in 2018, with the higher growth rate reflecting the increase in government spending, reductions in taxes, and faster growth in investment. The Blue Chip Forecast consensus is similar with a projected growth rate of 2.9%. Longer-Term Issues Economic Growth and the Debt Growth is expected to slow to trend in the future, with recovery complete, transitory effects of the 2017 tax cuts (P.L. 115-97) fading, and various moderating forces including reductions in government spending, increases in interest rates, and uncertainties about trade and trade policy. CBO projects a growth rate of 2.4% in 2019, slowing to an average of around 1.6% to 1.7% from 2020 through 2028. CBO's projections are similar to those of private forecasters. In the longer run, economic growth depends on the growth of the labor force, growth of human capital in the labor force (which depends in part on the age distribution given the importance of on-the-job training), growth of the capital stock, and the rate of technological change. Federal government policies have limited influence on the magnitude of most of these variables. Technological advance can be encouraged through grants and tax subsidies but probably cannot be significantly affected. Although tax cuts have often been aimed at encouraging savings and investment, the most direct effect on the capital stock may be through government dissaving (or increasing debt), which crowds out private investment. This crowding out effect is moderated by borrowing from abroad, but the returns to that investment must be paid to foreign investors. A more fundamental issue with government debt is its unsustainability given projected deficits. During the recession and recovery, the debt grew from about 40% of GDP in FY2008 to 77% in FY2016 (the highest since World War II). Although the debt to GDP ratio stabilized in FY2017, it increased in FY2018 as revenues declined by 0.7% of GDP following the 2017 tax cut. Spending declined slightly by 0.2% of GDP for a net increase in the deficit of 0.5% of GDP. CBO projects the debt to reach 96% of GDP by FY2028, 118% by FY2038, and 152% by FY2048. This projection (which assumes spending reductions and the expiration of the individual tax cuts enacted in 2017) depicts an unsustainable path. The debt can grow without increasing the ratio of debt to GDP as long as it rises at a rate less than or equal to GDP growth. For example, if the debt is 80% of GDP and the economy is growing at 1.6%, a deficit of 1.28% of GDP (1.6% of 80%) will maintain the debt to GDP ratio. The 2018 deficit is 4% of GDP. The debt is projected to grow in the future largely because spending grows faster than revenues, due to long- recognized issues, such as the aging population and increased health care costs. Over the 30-year period (up to FY2048), Social Security is projected to grow from 4.9% of GDP to 6.3% and health spending is projected to grow from 5.2% to 9.2%, an increase of four percentage points, with three-quarters of that increase due to Medicare. Moreover, the compounding debt also causes a rapid growth in interest payments, which rise from 1.6% of GDP to 6.3%, an increase of 4.7% of GDP. Other spending (including defense and nondefense discretionary spending) is projected to decline as a percentage of GDP, from 8.9% to 7.6%. Revenues, after dropping to 16.6% of GDP in FY2018 due to the tax cut, are projected to grow over time, reaching 19.8% of GDP in FY2048. About a third of this increase is due to the expiration of the individual income tax cuts and the remainder largely due to real bracket creep in the individual income tax, as payroll taxes, corporate taxes, and other revenues remain relatively stable as a percentage of GDP. This long-term outlook for the debt might be considered by some as optimistic given the difficulty of maintaining spending cuts and the possibility of making the individual tax cuts permanent. Moreover, were the economy to encounter a recession, the increase in deficits (through automatic stabilizers that reduce revenues and increase spending as well as potential discretionary fiscal policy stimulus) would add to the long-term debt. The earlier measures are taken to address the debt, the less difficult such measures will be, because interest payments https:/crsreports.congress go

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