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The Effects of Automatic Stabilizers on the Federal Budget as of 2013 1 (March 2013)

handle is hein.congrec/cbo10984 and id is 1 raw text is: MARCH 2013 The Effects of Automatic Stabilizers on the Federal Budget as of 2013 During recessions, federal tax liabilities and, therefore, revenues decline automatically with the reduction in out- put and income. In addition, some federal outlays-to pay unemployment insurance benefits, for example automatically increase. Such reductions in revenues and increases in outlays-known as automatic stabilizers help bolster economic activity during downturns, but they also temporarily increase the federal budget deficit. Conversely, when real (inflation-adjusted) gross domestic product (GDP) moves up closer to the maximum sustain- able output of the economy (termed potential GDP), revenues automatically rise and outlays automatically fall. Under those circumstances, automatic stabilizers offer a smaller boost to economic activity and thereby slow its growth. (Those effects of automatic stabilizers are in addition to the effects of any legislative changes in tax and spending policies.) The Congressional Budget Office (CBO) uses statistical techniques to estimate the effects of the business cycle on federal revenues and outlays and, thus, on federal budget deficits. According to CBO's estimates, automatic stabi- lizers added significantly to the budget deficit-and thereby helped to strengthen economic activity-in fiscal years 2009 through 2012. Given CBO's economic and budgetary projections under current law, the agency expects that automatic stabilizers will continue to add significantly to the budget deficit and to support eco- nomic activity in 2013 and 2014 but that their effects on the budget and the economy will decline significantly from 2015 through 2018 in response to improving economic conditions. How Large Were the Budgetary Effects of Automatic Stabilizers Last Year? In fiscal year 2012, CBO estimates, automatic stabilizers added $386 billion to the federal budget deficit, an amount equal to 2.3 percent of potential GDP (see Table 1 on page 6 and Table 2 on page 8).' That outcome marked the fourth consecutive year that automatic stabi- lizers added to the deficit by an amount equal to or exceeding 2.0 percent of potential GDP, an impact that had previously been equaled or exceeded only twice in the past 50 years, in fiscal years 1982 and 1983 (see Figure 1). (Those historical calculations, as well as the projections presented below, involve potential GDP rather than actual GDP because potential GDP excludes fluctuations that are attributable to the business cycle.) 1. For a description of a methodology for estimating automatic stabilizers that is similar to CBO's methodology, see Darrel Cohen and Glenn Follette, The Automatic Fiscal Stabilizers: Quietly Doing Their Thing, Economic Policy Review, Federal Reserve Bank of New York, vol. 6, no. 1 (April 2000), pp. 35-68, http://ideas.repec.org/a/fip/fednep/y2000iaprp35-67ny.6no.1. html. See also Glenn Follette and Byron Lutz, Fiscal Policy in the United States: Automatic Stabilizers, Discretionary Fiscal Policy Actions, and the Economy, Finance and Economic Discussion Series, No. 2010-43 (Federal Reserve Board, June 2010), http://ideas.repec.org/p/fip/fedgfe/2010-43,html. CBO's estimates of automatic stabilizers reflect the assumption that discretionary spending and interest payments do not have automatic responses to the business cycle.

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