Budget Impact on Economy

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The Economic Impact of the President’s 2013 Budget
April 2012

CONGRESS OF THE UNITED STATES

Contents
Overview How the Government’s Fiscal Policies Can Affect the Economy Fiscal Policies and Output in the Short Run Fiscal Policies and Output in the Long Run How the President’s Budgetary Proposals Would Affect the Economy Effects on the Economy Through 2017 Effects on the Economy After 2017 Economic Models and Results Estimated Economic Effects and Their Budgetary Implications Through 2017 Estimated Economic Effects and Their Budgetary Implications After 2017 Comparison with CBO’s Estimate of the President’s 2012 Budget Appendix: CBO’s Methodology for Analyzing the Economic Impact of the President’s 2013 Budget About This Document 1 2 2 3 3 3 4 8 8 9 10 13 19

Tables
1. Projected Deficits Under CBO’s March 2012 Baseline and CBO’s Estimate of the President’s Budget With and Without Macroeconomic Effects 2. CBO’s Estimates of Effective Federal Marginal Tax Rates on Capital Income 3. CBO’s Estimates of Effective Federal Marginal Tax Rates on Labor Income 4. CBO’s Estimates of How the President’s Budget Would Affect Inflation-Adjusted Gross National Product 5. Difference in Projected Deficits Under CBO’s March 2012 Baseline and CBO’s Estimate of the President’s Budget With and Without Macroeconomic Effects A-1. CBO’s Estimates of How the President’s Budget Would Affect Inflation-Adjusted Gross National Product, 2018 to 2022 2 5 7 8 9 17

CBO

The Economic Impact of the President’s 2013 Budget

ach year, after the President releases his annual budget request, the Congressional Budget Office (CBO) analyzes the proposals and, using its own estimating procedures and assumptions, projects what the federal budget would look like over the next 10 years if those proposals were adopted. CBO usually provides those results in two parts: The first part presents an examination of the proposals’ budgetary impact without considering their effects on the U.S. economy. The second part, which takes more time to prepare, shows their potential effects on the economy and, in turn, the impact of those macroeconomic effects on the budget. CBO has now completed that second analysis, and this report summarizes the results.

E

2022, deficits would total $6.4 trillion (or 3.2 percent of total GDP projected for that period), $3.5 trillion more than the cumulative deficit in CBO’s baseline. Estimates of the macroeconomic effects of those proposals depend on many specific assumptions and judgments, so CBO used several different approaches to estimating those effects, generating a range of possible outcomes. The estimates cover the periods 2013 to 2017 and 2018 to 2022. CBO estimates that the President’s budgetary proposals would boost overall output initially but reduce it in later years. For the 2013–2017 period, under most of the estimates CBO produced using alternative models and assumptions, the President’s proposals would increase real (inflation-adjusted) output (relative to that under current law) primarily because taxes would be lower than those under current law, and, therefore, people’s disposable income and their demand for goods and services would be greater. Over time, however, the proposals would reduce real output (relative to that under current law) because the deficits would exceed those projected under current law, and the effects of increasing government debt would more than offset the favorable effects of lower marginal tax rates on labor income.2 When the net impact of those two types of effects would shift from an increase in real output to a decrease would depend on various factors, including the impact of increased aggregate demand on output and the effect of deficits on investment. By CBO’s estimate, under the President’s proposals, the nation’s real output during the 2013–2017 period would 2. A marginal tax rate reflects the rate that applies to the last dollar of income.

Overview
In its analysis of the...
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