The Portion of the Deficit Due to Cyclical Weakness

Report
October 4, 2011

Letter to the Honorable Chris Van Hollen.

In a September 27, 2011, letter, the Honorable Chris Van Hollen requested an estimate of the portion of the federal deficit that is due to the current underutilization of capital and labor resources in the economy. The Congressional Budget Office (CBO) estimates that if those resources were not underutilized—that is, if the economy was operating at its potential level—the projected federal deficit under current law in fiscal year 2012 would be about a third lower, or roughly $630 billion instead of the $973 billion projected in CBO’s most recent baseline. That deficit would be equal to about 4.0 percent of gross domestic product (GDP), compared with the 6.2 percent deficit projected for 2012 in CBO’s baseline. If the economy was operating at its potential, the deficit would be lower because incomes and, therefore, revenues would be higher, while the rate of unemployment and, therefore, outlays for certain government programs would be lower.