March 20, 2009
We have just released our latest projections for the budget and economic outlook, updating the projections published in early January 2009. In addition, we have reviewed the Presidents budgetary proposals contained in the February publication A New Era of Responsibility: Renewing Americas Promise, and our report summarizes our preliminary analysis of that budget plan. For a detailed discussion of the economic forecast underlying the report click here.
Our updated budget projections indicate that:
- Largely as a result of the enactment of recent legislation and the continuing turmoil in financial markets, CBOs baseline projections of the deficit have risen by more than $400 billion in both 2009 and 2010 and by smaller amounts thereafter. Those projections assume that current laws and policies remain in place. Under that assumption, CBO now estimates that the deficit will total almost $1.7 trillion (12 percent of GDP) this year and $1.1 trillion (8 percent of GDP) next yearthe largest deficits as a share of GDP since 1945. Deficits would shrink to about 2 percent of GDP by 2012 and remain in that vicinity through 2019.
- Under current laws and policies, outlays are projected to decline from 27.4 percent of GDP in 2009 to about 22 percent in 2012 and subsequent years, as spending related to the current recession phases out, problems in the financial markets fade, and discretionary spending--under the assumptions of the baseline--declines as a share of GDP.
- At the same time, under current laws and policies, revenues are estimated to rise from 15.5 percent of GDP in 2009 to about 20 percent in 2012 and subsequent years. Much of that projected increase in revenues results from the growing impact of the alternative minimum tax (AMT) and, even more significant, the scheduled expiration in December 2010 of provisions enacted in the recent economic stimulus legislation and tax legislation in 2001 and 2003.
Our analysis of the Presidents budget proposals indicates that:
- As estimated by CBO and the Joint Committee on Taxation, the Presidents proposals would add $4.8 trillion to the baseline deficits over the 20102019 period. CBO projects that if those proposals were enacted, the deficit would total $1.8 trillion (13 percent of GDP) in 2009 and $1.4 trillion (10 percent of GDP) in 2010. It would decline to about 4 percent of GDP by 2012 and remain between 4 percent and 6 percent of GDP through 2019.
- The cumulative deficit from 2010 to 2019 under the Presidents proposals would total $9.3 trillion, compared with a cumulative deficit of $4.4 trillion projected under the current-law assumptions embodied in CBOs baseline. Debt held by the public would rise, from 41 percent of GDP in 2008 to 57 percent in 2009 and then to 82 percent of GDP by 2019 (compared with 56 percent of GDP in that year under baseline assumptions).
- Proposed changes in tax policy would reduce revenues by an estimated $2.1 trillion over the next 10 years. Proposed changes in spending programs would add $1.7 trillion (excluding debt service) to outlays over the next 10 years. Interest costs associated with greater borrowing would add another $1.0 trillion to deficits over the 20102019 period.
- Our estimates of deficits under the Presidents budget exceed those anticipated by the Administration by $2.3 trillion over the 2010-2019 period. The differences arise largely because of differing projections of baseline revenues and outlays. CBOs projection of baseline deficits exceeds the Administrations estimate (prepared on a comparable basis) by $1.6 trillion.
Our current assessment of economic developments indicates that:
- Although the economy is likely to continue to deteriorate for some time, the enactment of the American Recovery and Reinvestment Act and very aggressive actions by the Federal Reserve and the Treasury are projected to help end the recession in the fall of 2009. In CBOs forecast, on a fourth-quarter-to-fourth-quarter basis, real (inflation-adjusted) GDP falls by 1.5 percent in 2009 before growing by 4.1 percent in both 2010 and 2011.
- For the next two years, CBO anticipates that economic output will average about 7 percent below its potentialthe output that would be produced if the economys resources were fully employed. That shortfall is comparable with the one that occurred during the recession of 1981 and 1982 and will persist for significantly longermaking the current recession the most severe since World War II. In this forecast, the unemployment rate peaks at 9.4 percent in late 2009 and early 2010 and remains above 7.0 percent through the end of 2011. With a large and sustained output gap, inflation is expected to be very low during the next several years.