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The Macroeconomic Effects of Eliminating Automatic Reductions to Discretionary Spending Caps 1 (August 11, 2015)

handle is hein.congrec/cbo2473 and id is 1 raw text is: CONGRESSIONAL BUDGET OFFICE Keith Hall, Director U.S. Congress Washington, DC 20515 August 11, 2015 Honorable Bernard Sanders Ranking Member Committee on the Budget United States Senate Washington, DC 20510 Re: The Macroeconomic Effects of Eliminating Automatic Reductions to Discretionary Spending Caps Dear Senator: The Budget Control Act of 2011 created caps on discretionary budget authority for each year through 2021.1 That act also provided for automatic reductions in those caps that would be triggered under certain conditions. At your request, the Congressional Budget Office has analyzed the macroeconomic effects of eliminating those automatic reductions for fiscal years 2016 and 2017. Fully eliminating the reductions would allow for an increase in appropriations of $90 billion in 2016 and $91 billion in 2017. According to CBO's estimates, such an increase would raise total outlays above what is projected under current law by $53 billion in fiscal year 2016, $76 billion in fiscal year 2017, 2 $30 billion in fiscal year 2018, and a cumulative $19 billion in later years. Those changes in spending would have the following macroeconomic effects:3 * Over the course of calendar year 2016, on average, CBO estimates that the spending changes would make real (inflation-adjusted) gross domestic product (GDP) 0.4 percent larger than projected under current law. They would also increase full-time-equivalent employment by 0.5 million. Those effects would result chiefly from two partly offsetting forces. First, the increase in federal spending would lead to more aggregate demand than under current law. Second, monetary policy would tighten slightly in response to the slightly stronger economic growth and to the slight increase in inflationary pressure that would result. That tighter monetary policy would begin to dampen the positive effects on output and employment. 1 Budget authority is the authority provided by law to incur financial obligations that will result in immediate or future outlays of federal funds. Discretionary budget authority is provided and controlled by appropriation acts. 2 Defense discretionary outlays would be $34 billion higher in fiscal year 2016, $45 billion higher in fiscal year 2017, and $16 billion higher in fiscal year 2018; nondefense discretionary outlays would be $19 billion higher in fiscal year 2016, $31 billion higher in fiscal year 2017, and $15 billion higher in fiscal year 2018. As is the case with most discretionary appropriations, not all of the funds that would be made available to agencies would be spent. 3 For a general explanation of how CBO analyzes the macroeconomic effects of fiscal policy changes, see Congressional Budget Office, How CR0 Analyzes the Effects of Changes in Federal Fiscal Policies on the Economy (November 2014), wwwcbo..ov/publication49494. www.cbo.gov

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