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Congressional Budget Office
American Association for Budget and Program Analysis
The Economic and Budget Outlook
Douglas W. ElmendorfDirector
November 24, 2009
Congressional Budget Office
The Economic Outlook:
“CBO’s economic forecast anticipates a relatively slow and tentative recovery.”
— CBO, Summer Update August 2009
2
Unemployment Rate
Percent
Calendar Year 3
Actual Projected
The GDP “Gap”
Percentage of GDP
Calendar Year 4
Actual Projected
Without Stimulus
Legislation
Inflation Rate
Percent
Calendar Year 5
Actual Projected
PCE
Core PCE
Congressional Budget Office
The Short-Term Budget Outlook:
“Over the coming years, as the economy improves and spending related to the financial rescue and the economic stimulus package abates, the deficit is projected to gradually shrink.”
— CBO, Summer Update August 2009
6
Federal Deficit or Surplus
Percentage of GDP
7Fiscal Year
1969 1974 1979 1984 1989 1994 1999 2004 2009 2014 2019
-12
-10
-8
-6
-4
-2
0
2
4Actual Baseline
Projection
Withdrawal of Fiscal Stimulus
Fiscal Year
Deficit as a Percentage of GDP
8
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
0
2
4
6
8
10
12
Baseline
Exclude theAmerican Recovery and
Reinvestment Act of 2009
The Effect of ARRA on Employment
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
0
1
2
3
4
High Estimate
Low Estimate
Millions of Jobs
Calendar Year 9
Options for Further Stimulus
Create Jobs Directly
Support Businesses
Boost Demand
Modify Mortgage and Housing Policy
10
Reasons for Unemployment
Percentage of Unemployed Persons
11Calendar Year
Job Losers
Permanent Layoffs
Job Finding and Separation Probabilities
Percentage of Unemployed Percentage of Employed
12Calendar Year
Job Finding Rate
Separation Rate (Right Scale)
Congressional Budget Office
The Medium-Term and Long-Term Budget Outlook:
“The federal fiscal situation remains grim.”
-- CBO, Summer Update August 2009
13
Federal Deficit or Surplus
Percentage of GDP
14Fiscal Year
1969 1974 1979 1984 1989 1994 1999 2004 2009 2014 2019
-12
-10
-8
-6
-4
-2
0
2
4Actual Baseline
Projection
Three Reasons That the Fiscal Challenge Is Especially Acute
Current policy as perceived by many people would generate much larger deficits than current law as captured in CBO’s baseline.
Federal debt is already very large relative to GDP by historical standards.
Population aging and rising health spending will continue to push up federal spending under current law.
15
Revenues and Outlays Under Policy Alternative to Extend Tax Cuts and Index Alternative Minimum Tax
Percentage of GDP
16Fiscal Year
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
0
14
16
18
20
22
24
26
28Actual Projected
Outlays
Revenues
Extend Tax Cuts andIndex AMT
Extend Tax Cuts andIndex AMT
Baseline
Three Reasons That the Fiscal Challenge Is Especially Acute
Current policy as perceived by many people would generate much larger deficits than current law as captured in CBO’s baseline.
Federal debt is already very large relative to GDP by historical standards.
Population aging and rising health spending will continue to push up federal spending under current law.
17
Federal Debt Held by the Public
Percentage of GDP
18Fiscal Year1940 1950 1960 1970 1979 1989 1999 2009 2019
0
20
40
60
80
100
120
0
20
40
60
80
100
120Actual Projected
ExtendTax Cuts andIndex AMT
Baseline
Why Does Rising Federal Debt Matter?
Possible Crises Induced by Debt– Capital flight from United States and resulting drop in value
of the dollar and jump in interest rates– Pressure on Federal Reserve to raise inflation
Ongoing Costs of Debt– Tax revenues used to pay interest rather than to finance
current programs– Reduction in saving, investment, output, wages, and
incomes relative to what would occur otherwise
19
Foreign Holdings as a Share of U.S. Debt Held by the Public
Calendar Year
Percent
20
1952 1956 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008
0
10
20
30
40
50
60
Foreign Holdings
Foreign Official Holdings
Net Interest on the Debt
Percentage of GDP
Fiscal Year 21
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
Three Reasons That the Fiscal Challenge Is Especially Acute
Current policy as perceived by many people would generate much larger deficits than current law as captured in CBO’s baseline.
Federal debt is already very large relative to GDP by historical standards.
Population aging and rising health spending will continue to push up federal spending under current law.
22
Revenues Relative to Outlays for Key Programs
23
Percentage of GDP
Fiscal Year
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
0
14
16
18
20
Revenues, with Tax Cuts Extended andAMT Indexed
Outlays for Medicare, Medicaid,Social Security, Defense, and Net Interest
Actual Projected
Federal Debt Under CBO’s Long-Term Budget Scenarios
Percentage of GDP
241962 1972 1982 1992 2002 2012 2022 2032 2042 2052 2062 2072
0
50
100
150
200Actual Projected
AlternativeFiscal Scenario
Extended-BaselineScenario
Fiscal Year
The Population Age 65 or Older as a Percentage of the Population Ages 20 to 64
1962 1972 1982 1992 2002 2012 2022 2032 2042 2052 2062 2072
0
10
20
30
40
50Actual Projected
Percent
25Fiscal Year
Rising Health Care Spending
1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007
-6
-4
-2
0
2
4
6
8
10
Medicare and Medicaid
Total National HealthExpenditures
Excess Cost Growth, in Percentage Points
26Fiscal Year
Factors Explaining Future Federal Spending on Medicare, Medicaid, and Social Security
Percentage of GDP
272009 2011 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035
0
2
4
6
8
10
12
14
16
Effect of Aging
Effect of ExcessCost Growth in
Health CareSpending
In the Absence of Aging andExcess Cost Growth
Fiscal Year
Federal Spending for Social Security, Medicare, and Medicaid
Percentage of GDP
28
1962 1968 1974 1980 1986 1992 1998 2004 2010 2016 2022 2028 2034
0
1
2
3
4
5
6
7
8
9
10Actual Projected
Social Security
Medicare andMedicaid
Fiscal Year
Some Policy Options to Reduce Projected Spending for Social Security
Increase the Retirement Age– Index to longevity?– Social Security alone or also Medicare?
Decrease Benefits– Across-the-board?– Targeted at higher-income beneficiaries or other subgroups?
29
Some Policy Options to Reduce Projected Spending for Medicare and Medicaid
Decrease Payment per Health Care Service– Reductions relative to current law play a significant role in
current reform plans.– Will reductions lead to increased efficiency, lower income for
providers, or reduced access to care or quality of care?
Decrease Number of Health Care Services Provided– Could government policy improve people’s health, and
would that reduce demand for services?– What is the appropriate role of comparative effectiveness
research?– Can payments to providers be restructured to reward value
rather than the number of services provided?– Should beneficiaries pay more in copayments and
deductibles?30
Some Policy Options to Raise Revenues
Increase Rates in Current Tax Structure– Personal taxes or corporate taxes?– Tax income or tax consumption?– Broader base?– Increase efficiency?– Change distribution of tax burden?– Reduce complexity?
Raise Revenue in New Ways– Value-added tax?– Tax on carbon emissions or auction of emission allowances?
31
The Bottom Line
The country faces a fundamental disconnect between the services people expect the government to provide, particularly in the form of benefits for older Americans, and the tax revenues that people are willing to send to the government to finance those services. The fundamental disconnect will have to be addressed in some way if the budget is to be placed on a sustainable course.
32
