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Macroeconomic and Budgetary Effects of an Illustrative Policy for Reducing the Federal Budget Deficit 1 (July 14, 2011)

handle is hein.congrec/cbo10568 and id is 1 raw text is: CONGRESSIONAL BUDGET OFFICE The Macroeconomic and Budgetary Effects of an Illustrative Policy for Reducing the Federal Budget Deficit July 14, 2011 The federal government's debt has increased dramatically in the past few years, and large annual budget deficits will probably continue indefinitely under current laws or policies. If current laws remain unchanged, deficits will total roughly $7 trillion over the next 10 years, the Congressional Budget Office (CBO) projects; if certain policies that are scheduled to expire under current law were extended instead, deficits would be much larger. Beyond the coming decade, the aging of the U.S. population and ris- ing health care costs will put increasing pressure on the federal budget. If debt held by the public continues to expand faster than the economy-as it has since 2007-the growth of people's incomes will slow, the share of federal spending devoted to paying interest on the debt will rise more quickly, and the risk of a fiscal crisis will increase.1 At the same time, the recovery from the recent recession has been anemic, and the economy remains in a severe slump. CBO and many private forecasters expect that the unemployment rate will remain high, and that output will remain well below the economy's potential, for a number of years. This analysis describes the economic and budgetary effects of an illustrative policy that would reduce primary deficits-that is, total budget deficits excluding net interest payments-by a cumulative $2.0 trillion between 2012 and 2021 relative to CBO's baseline projections, before taking into account any economic effects of the policy.2 The reduction in primary deficits under that policy, excluding economic effects, was assumed to equal $100 billion in 2012 and to increase gradually until it 1. See Congressional Budget Office, CBO's 2011 Long- Terr Budget Outlook (June 2011); and Federal Debt and the Risk ofa Fiscal Crisis, Issue Brief (July 27, 2010). 2. CBO last issued baseline projections in March 2011 and is scheduled to publish an updated base- line in August 2011. CBO's baseline is a neutral reference point for measuring the budgetary effects of proposed changes to federal revenues or spending. It consists of projections of budget authority, outlays, revenues, and the deficit or surplus over 10 years. Those projections, which are calculated according to rules originally set forth in the Balanced Budget and Emergency Deficit Control Act of 1985, are not intended to be predictions of future budgetary outcomes; rather, they represent CBO's best judgment of how economic and other factors would affect federal revenues and spending if current laws did not change.

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