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Congressional Budget Office The Budget Outlook Presentation to the National Association for Business Economics Douglas W. Elmendorf Director March 4, 2013

The Budget Outlook

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Director Doug Elmendorf's presentation to the National Association for Business Economics

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Page 1: The Budget Outlook

Congressional Budget Office

The Budget Outlook

Presentation to the National Association for Business Economics Douglas W. Elmendorf Director March 4, 2013

Page 2: The Budget Outlook

C O N G R E S S I O N A L B U D G E T O F F I C E

Topics to Cover

The Budget Outlook

Consequences of High and Rising Federal Debt

Criteria for Evaluating Possible Courses of Action

Page 3: The Budget Outlook

C O N G R E S S I O N A L B U D G E T O F F I C E

How Big Are Projected Federal Deficits and Debt?

Page 4: The Budget Outlook

C O N G R E S S I O N A L B U D G E T O F F I C E

Total Federal Deficits or Surpluses

(Percentage of GDP)

Estimates from The Budget and Economic Outlook: Fiscal Years 2013 to 2023 (February 2013).

Page 5: The Budget Outlook

C O N G R E S S I O N A L B U D G E T O F F I C E

Total Federal Revenues and Outlays

(Percentage of GDP)

Estimates from The Budget and Economic Outlook: Fiscal Years 2013 to 2023 (February 2013).

Page 6: The Budget Outlook

C O N G R E S S I O N A L B U D G E T O F F I C E

Projected Growth in Major Federal Spending Categories

(Percentage of GDP)

Estimates from The Budget and Economic Outlook: Fiscal Years 2013 to 2023 (February 2013).

Page 7: The Budget Outlook

C O N G R E S S I O N A L B U D G E T O F F I C E

Federal Debt Held by the Public

Actual Projected

(Percentage of GDP)

Estimates from The Budget and Economic Outlook: Fiscal Years 2013 to 2023 (February 2013).

Page 8: The Budget Outlook

C O N G R E S S I O N A L B U D G E T O F F I C E

What Are the Consequences of High and Rising Federal Debt?

Page 9: The Budget Outlook

C O N G R E S S I O N A L B U D G E T O F F I C E

High and Rising Debt Relative to the Size of the Economy Is A Significant Concern for Several Reasons

First: Crowding out of capital investment will be greater.

Second: Lawmakers will have less flexibility to respond to unexpected challenges.

Third: There will be a heightened risk of a fiscal crisis.

Page 10: The Budget Outlook

C O N G R E S S I O N A L B U D G E T O F F I C E

Fourth: Debt Would Be Even Larger If…

…Current laws were modified to delay or undo certain scheduled changes in policy.

For example, if lawmakers:

Eliminated the automatic spending cuts that have just taken effect;

Extended all of the tax provisions that are scheduled to expire;

Prevented the reduction in Medicare’s payment rates for physicians scheduled for next January; and

Made no other policy changes with offsetting budget effects...

Then, debt would rise to 87 percent of GDP by 2023.

Page 11: The Budget Outlook

C O N G R E S S I O N A L B U D G E T O F F I C E

Fifth: Original Caps on Discretionary Funding Are Very Low Relative to GDP

Estimates from The Budget and Economic Outlook: Fiscal Years 2013 to 2023 (February 2013). Estimates incorporate the assumption that the automatic spending reductions required by the Budget Control Act do not take effect, although the original caps on discretionary appropriations remain in place and are met through proportional reductions in defense and nondefense budget authority.

0

1

2

3

4

5

6

7

1973 1978 1983 1988 1993 1998 2003 2008 2013 2018 2023

Nondefense Spending

Actual Projected

Defense Spending

(Percentage of GDP)

Page 12: The Budget Outlook

C O N G R E S S I O N A L B U D G E T O F F I C E

2000 2005 2010 2015 2020 2025 2030 20350

5

10

15

2000 2005 2010 2015 2020 2025 2030 20350

5

10

15

Health

Social Security

Medicaid and Other

Medicare

Actual Projected

Sixth: 10-Year Projections Do Not Fully Reflect Long-Term Budget Pressures

(Percentage of GDP)

Estimates from The 2012 Long-Term Budget Outlook (June 2012).

Page 13: The Budget Outlook

C O N G R E S S I O N A L B U D G E T O F F I C E

What Are Some Criteria for Evaluating Proposed Policy Changes?

Page 14: The Budget Outlook

C O N G R E S S I O N A L B U D G E T O F F I C E

Criterion #1: How Much Would Debt Be Reduced?

The more that debt is reduced, the more that the harms caused by high debt would be avoided—but also the greater the loss of government benefits and services or the burdens on individuals and businesses of higher taxes.

Page 15: The Budget Outlook

C O N G R E S S I O N A L B U D G E T O F F I C E

Debt Held by the Public Under Current Law and Alternative Budgetary Paths

Estimates from Macroeconomic Effects of Alternative Budgetary Paths (February 2013).

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 20230

50

60

70

80

90

CBO's Baseline

(Current law)

$2 Trillion Increase in

Primary Deficits

$2 Trillion Reduction in

Primary Deficits

$4 Trillion Reduction in

Primary Deficits

(Percentage of GDP)

Page 16: The Budget Outlook

C O N G R E S S I O N A L B U D G E T O F F I C E

Criterion #2: How Quickly Would Debt Be Reduced?

The sooner deficits are cut, the less debt that will be accumulated—but also the greater the drag on economic activity over the next few years. Indeed, several provisions of current law that are bringing down the deficit will weaken output and employment this year.

Page 17: The Budget Outlook

C O N G R E S S I O N A L B U D G E T O F F I C E

Unemployment Rate

(Percent)

Estimates from The Budget and Economic Outlook: Fiscal Years 2013 to 2023 (February 2013).

Page 18: The Budget Outlook

C O N G R E S S I O N A L B U D G E T O F F I C E

Criterion 3: How Would the Government’s Resources Be Allocated?

Estimates from The Budget and Economic Outlook: Fiscal Years 2013 to 2023 (February 2013).

(Percentage of GDP)

Page 19: The Budget Outlook

C O N G R E S S I O N A L B U D G E T O F F I C E

Criterion #4: How Would Policy Changes Affect Longer-Term Economic Performance?

Possible effects of:

Raising marginal tax rates on labor;

Raising marginal tax rates on capital;

Cutting government benefits; and

Reducing government investment.

Page 20: The Budget Outlook

C O N G R E S S I O N A L B U D G E T O F F I C E

Criterion #5: Who Would Bear the Burden of Policy Changes?

Possible effects on:

Distribution of burden among people at different income levels;

Distribution of burden among people with similar income but other differences; and

Distribution of burden among people in

different generations.

Page 21: The Budget Outlook

C O N G R E S S I O N A L B U D G E T O F F I C E

Key Implication of CBO’s Budget Projections

Putting the debt on a sustainable path will ultimately require increases in taxes or cuts in government benefits or services for people who consider themselves to be in the middle class.