How Changes in Economic Conditions Might Affect the Federal Budget: 2020 to 2030

Some of the uncertainty in budget projections stems from the fact that the federal budget is highly sensitive to economic conditions, which are difficult to predict. If conditions differed from those in CBO’s economic forecast, budgetary outcomes could diverge from those in the agency’s baseline budget projections.

To show how variations in economic conditions might affect the budget, CBO analyzed how the budget might change if values of the following key economic variables differed from those in the agency’s forecast:

• The growth of productivity and, consequently, the growth of real (inflation-adjusted) gross domestic product (GDP);
• Labor force growth, which would also affect real GDP growth;
• Interest rates; and
• Inflation.

To illustrate the budgetary effects of economic changes, CBO created and analyzed four scenarios to develop “rules of thumb” for those variables. The scenarios reflect the following changes from the agency’s current economic forecast: slower productivity growth, slower labor force growth, higher interest rates, and higher inflation. Each of those changes would increase deficits above the amounts in CBO’s baseline budget projections; however, the values of any of the variables could be higher or lower than they are in CBO’s forecast. Because the rules of thumb are roughly symmetrical, if productivity or the labor force instead increased more quickly than projected, or if interest rates or inflation were lower than projected, deficits would be smaller than they are in the agency’s baseline budget projections.

Specifically, CBO’s analysis yielded the following results:

• If productivity grew at a rate that was 0.1 percentage point slower each year than it is in the agency’s economic forecast, annual deficits would be larger than projected by amounts that would climb to $63 billion by 2030, CBO estimates. Over the 2021–2030 period, the cumulative deficit would be $306 billion larger than it is in CBO’s baseline projections.
• If the labor force grew at a rate that was 0.1 percentage point slower each year than it is in CBO’s economic forecast and the unemployment rate remained unchanged, annual deficits would be larger than those in the agency’s baseline budget projections by amounts that would grow each year and reach $35 billion by 2030, CBO estimates. The cumulative deficit for 2021 to 2030 would be $162 billion larger than it is in the agency’s baseline budget projections.
• If all interest rates—including both the rate on 3-month Treasury bills and the rate on 10-year Treasury notes—were 0.1 percentage point higher each year than they are in CBO’s economic forecast, deficits would increase progressively over the projection period by amounts that would rise to $31 billion in 2030. The cumulative deficit for 2021 to 2030 would be $185 billion larger than it is in the agency’s baseline projections.
• If all wage and price indexes—including the GDP price index, the consumer price index for all urban consumers (CPI-U), the chained CPI-U, and the employment cost index for wages and salaries of workers in private industry—rose by 0.1 percentage point more each year than they do in CBO’s economic forecast, annual deficits would be larger than projected by amounts that would climb to $28 billion by 2030. The cumulative deficit for the 2021–2030 period would be $148 billion larger than projected.