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1 How Changes in Economic Conditions Might Affect the Federal Budget 1 (June 2018)

handle is hein.congrec/hchecfdg0001 and id is 1 raw text is: ~JUNE 2018 How Changes in Economic Conditions Might Affect the Federal Budget One source of uncertainty in budget projections stems from the fact that the federal budget is highly sensitive to economic conditions, which are difficult to predict. If conditions differed from those in the Congressional Budget Office's economic forecast, budgetary outcomes could diverge from those in the agency's baseline budget projections.1 To show how changes in economic conditions might affect the budget, CBO has analyzed what might happen to the budget if the following key economic variables differed from those in the agency's current economic forecast: The growth of productivity and, consequently, the growth of real (inflation-adjusted) gross domestic product (GDP); Labor force growth and, in turn, real economic growth; Interest rates; and Inflation. 1. For this analysis, CBO used the economic forecast presented in Congressional Budget Office, The Budget and Economic Outlook: 2018 to 2028 (April 2018), www.cbo.gov/publication/53651, and the baseline budget projections published in Congressional Budget Office, An Analysis of the President' 2019 Budget (May 2018), www.cbo.gov/publication/53884. CBO created and analyzed four illustrative scenarios to develop rules of thumb for those variables. The sce- narios are for the following changes from the agency's current economic forecast, all of which would increase deficits above the amounts in CBO's baseline budget projections: slower growth of productivity (in this analy- sis, total factor productivity, which is real output per unit of combined labor and capital services), slower growth of the labor force, higher interest rates, and higher infla- tion. Those scenarios were chosen for simplicity, but the variables could be higher or lower than they are in CBO's forecast. The rules of thumb are symmetrical, so if productivity or the labor force increased more quickly than projected, or if interest rates or inflation were lower than projected, deficits would be smaller than they are in the agency's baseline budget projections. The rules of thumb can be used to analyze other economic scenarios that differ from CBO's forecast, although there are a few caveats that must be kept in mind. Among the most important is that each rule shows the effects of differences in a single key variable, but any factor that caused a change in one such variable would probably have additional direct effects on the economy (and thus on the budget). Those broader effects are not incorporated into the rules of thumb. Background Economic conditions affect federal revenues and outlays in several ways. Revenues depend on the total amount of income that is subject to taxation-including total Note: Unless otherwise indicated, all years referred to in describing budget projections are federal fiscal years, which run from October 1 to September 30 and are designated by the calendar year in which they end. Years referred to in describing economic projections are calendar years. Numbers in the text and tables may not add up to totals because of rounding.

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