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Measuring the Effects of the Business Cycle on the Federal Budget: An Update 1 (September 2009)

handle is hein.congrec/cbo8546 and id is 1 raw text is: CONGRESSIONAL BUDGET OFFICE Measuring the Effects of the Business Cycle on the Federal Budget: An Update September 1, 2009 In August 2009, the Congressional Budget Office (CBO) released its most recent baseline projections of federal revenues, outlays, and budget balances for the next 10 fiscal years.' CBO develops its projections through a process that assumes the con- tinuation of the laws and policies that affect taxes and mandatory spending programs and that extrapolates the growth of discretionary spending by using projected rates of inflation. According to CBO's projections, under current tax and spending policies, the budget deficit would increase from $459 billion in 2008 to $1.6 trillion in 2009 and then fall to $1.4 trillion in 20 10 and to $921 billion in 2011. The size of the deficit is influenced both by policy changes and by the automatic responses of revenues and outlays to economic developments. In addition to the effects of the business cycle (which are most pronounced during recessions), other economic factors influencing the budget include changes in the long-term (trend) growth rate of the economy, movements in the distribution and proportion of income subject to taxation, and variations in interest rates and in the pace of inflation. 2 Table 1 and Table 2 present estimates of the cyclically adjusted deficit or surplus (through fiscal year 2011) that correspond to CBO's latest estimates of the baseline federal budget.3 The cyclically adjusted deficit or surplus is a measure that attempts to filter out the budgetary effects of the economy operating below or above its potential 1 . See Congressional Budget Office, Ihe Buo'geranw'I-conomjir O ttook:An Upadate (August 2009). 2. This update is the latest in a series of reports presenting estimates of adjustments for the effects of the business cycle. The preceding report contains more discussion. See Congressional Budget Office, Mveasuring, the rjh tcs o/'rhe Business ,YC w on the I'dm 8u'get (June 2009). For a description of methodology similar to that used by CBO, see Darrel Cohen and Glenn Follette, The Automatic Fiscal Stabilizers: Quietly Doing Their Thing, in Economic Policy Review. Federal Reserve Bank of New York, vol. 6, no. 1 (April 2000), pp. 35-68. 3. Quarterly estimates of cyclically adjusted net federal government saving (a measure akin to but not the same as the federal budget deficit or surplus) are available in a spreadsheet accompanying this document on CBO's Web site, xxx x cbo gov.

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