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The Portion of the Deficit Due to Cyclical Weakness 1 (October 2011)

handle is hein.congrec/cbo10589 and id is 1 raw text is: CONGRESSIONAL BUDGET OFFICE Douglas W. Elmendorf, Director U.S. Congress Washington, DC 20515 October 4, 2011 Honorable Chris Van Hollen Ranking Member Committee on the Budget U.S. House of Representatives Washington, DC 20515 Dear Congressman: This letter responds to your September 27, 2011, request for an estimate of the portion of the federal deficit that is due to the current underutilization of capital and labor resources in the economy. The Congressional Budget Office (CBO) estimates that if those resources were not underutilized-that is, if the economy was operating at its potential level-the projected federal deficit under current law in fiscal year 2012 would be about a third lower, or roughly $630 billion instead of the $973 billion projected in CBO's most recent baseline. That deficit would be equal to about 4.0 percent of gross domestic product (GDP), compared with the 6.2 percent deficit projected for 2012 in CBO's baseline. If the economy was operating at its potential, the deficit would be lower because incomes and, therefore, revenues would be higher, while the rate of unemployment and, therefore, outlays for certain government programs would be lower. How CBO Developed Its Estimate CBO calculated its estimate of the portion of the deficit attributable to those cyclical factors, about $340 billion, using the same methodology that the agency uses to estimate the so-called automatic stabilizers-the automatic responses of revenues and outlays to changes in real (inflation-adjusted) output and unemployment.' Specifically, CBO estimated what taxable income would be if output equaled its potential; under those circumstances, taxable income (as measured in the national income and product accounts maintained by the Department of Commerce's Bureau of Economic Analysis) would exceed the taxable income currently projected by about $850 billion (or by about 712 percent). CBO translated that difference into an estimate of how much higher revenues would be in the absence of cyclical factors. ' See Congressional Bud get Off ice, The Effects of the Automatic Stabilizers on the Federal Budget (April 2011). www.cbo.gov

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