If current laws governing taxes and spending generally remained unchanged, the federal budget deficit would grow substantially over the next few years, CBO projects, with accumulating deficits driving debt held by the public to nearly 100 percent of GDP by 2028. That amount would be far greater than the debt in any year since just after World War II. In CBO’s projections, real GDP growth is relatively strong this year and next, as recent changes in fiscal policy add to existing momentum. Between 2018 and 2028, real GDP expands at an average annual rate of 1.9 percent: Productivity growth returns to nearly its average over the past 25 years and recent changes in fiscal policy boost incentives to work, save, and invest; nonetheless, economic growth is held down by slower growth of the labor force. This presentation provides an overview of the agency’s most recent budget and economic projections, which were published on April 9. It also includes a discussion of the effects of the 2017 tax act on those projections. Presentation by Keith Hall, CBO Director, to the Trustees of the Committee for Economic Development of The Conference Board.

1. Congressional Budget Office
Presentation to the Trustees of the
Committee for Economic Development of The Conference Board
Washington, D.C.
May 16, 2018
Keith Hall
Director
An Overview of
The Budget and Economic Outlook:
2018 to 2028
For more details, see www.cbo.gov/publication/53651.

2. 1
CBO
Outlays, Revenues,
and Deficits

3. 2
CBO
Under current law, revenues and outlays would increase in most years through
2028, and the gap between them would remain large.

4. 3
CBO
Deficits as a percentage of gross domestic product are projected to increase over
the next few years and then largely stabilize. They exceed their 50-year average
throughout the 2018–2028 period.

5. 4
CBO
Growth of GDP

6. 5
CBO
Growth of real gross domestic product (or GDP, the total output of goods and
services adjusted to remove the effects of inflation) is projected to be faster this
year than it was last year, as the 2017 tax act and recent changes in federal
spending policies add to existing momentum in spending on goods and services.

7. 6
CBO
Growth of actual GDP outpaces growth of potential (that is, maximum sustainable)
GDP both this year and next—raising the output gap between GDP and potential
GDP to 1.2 percent in 2019.

8. 7
CBO
After 2018, economic growth is projected to slow, with the growth of real GDP
eventually matching the growth of potential GDP.

9. 8
CBO
Growth of potential GDP, driven in large part by faster productivity growth, is
projected to be stronger over the next 10 years than it has been since the
recession that began in December 2007.

10. 9
CBO
The Labor Market

11. 10
CBO
In CBO’s projections for the near term, output growth boosts the estimated
employment gap—the difference between the number of employed people and
the number who would be employed in the absence of fluctuations in the overall
demand for goods and services.

12. 11
CBO
Output growth pushes the labor force participation rate (the percentage of
people in the civilian noninstitutionalized population who are at least 16 years old
and either working or seeking work) above CBO’s estimate of the potential rate
arising from all sources except fluctuations in the overall demand for goods and
services.

13. 12
CBO
And output growth drives the unemployment rate (the number of jobless people
who are available for and seeking work, expressed as a percentage of the labor
force) below CBO’s estimate of the natural rate arising from all sources except
fluctuations in the overall demand for goods and services.

14. 13
CBO
The demand for labor puts upward pressure on the growth of wages, measured
by the employment cost index for wages and salaries of workers in private industry.

15. 14
CBO
Inflation and
Interest Rates

16. 15
CBO
For several years, in CBO’s projections, demand for goods and services exceeds
the amount that the economy can sustainably supply and drives growth in the
price index for personal consumption expenditures above the Federal
Reserve’s target rate of 2 percent.

17. 16
CBO
CBO expects the Federal Reserve to continue increasing the federal funds rate
(the interest rate that financial institutions charge each other for overnight loans of
their monetary reserves) through 2021 to eliminate excess demand in the
economy.

18. 17
CBO
In CBO’s projections, interest rates on Treasury securities also rise, influenced by
increases in the federal funds rate and in federal borrowing.

19. 18
CBO
Effects of 2017 Tax Act

20. 19
CBO
The tax act is projected to increase the level of potential (maximum sustainable)
GDP by 0.7 percent, on average, over the 2018–2028 period. It does so mainly by
promoting greater investment and potential labor supply.

21. 20
CBO
The effects of the tax act on business fixed investment—purchases of
equipment, nonresidential structures, and intellectual property products—are
positive through 2028, on net.

22. 21
CBO
The 2017 tax act is projected to boost the demand for goods and services,
accelerating the growth of actual output in relation to the growth of potential
output over the first half of the 2018–2028 period.

23. 22
CBO
Heightened overall demand is projected to increase spending by consumers and
businesses—increasing GDP above CBO’s estimate of its potential level and thus
making the output gap (the difference between GDP and potential GDP) more
positive.

24. 23
CBO
Contributions of the 2017 Tax Act to
CBO’s Baseline Budget Projections
Billions of Dollars
2018–2028
Effects Without Macroeconomic Feedback
Effects on the Deficit Excluding Debt-Service Costs 1,843
Effects on Debt-Service Costs 471
Effects on the Deficit 2,314
Effects of Macroeconomic Feedback
Effects on the Deficit Excluding Debt-Service Costs -571
Effects on Debt-Service Costs 110
Effects on the Deficit -461
Total Contributions to Baseline Projections
Effects on the Deficit Excluding Debt-Service Costs 1,272
Effects on Debt-Service Costs 582
Effects on the Deficit 1,854

25. 24
CBO
The Budget Outlook

26. 25
CBO
Under current law, total revenues are projected to rise as a share of GDP largely
because of scheduled changes in tax provisions, wage growth, the taxation of
individual income at higher rates when incomes rise faster than inflation, and
growing distributions from tax-deferred retirement accounts.

27. 26
CBO
Individual income tax revenues rise sharply following the expiration of temporary
provisions of the 2017 tax act at the end of 2025.

28. 27
CBO
Under current law, rising spending for Social Security and Medicare would boost
mandatory outlays. At the same time, growing debt and higher interest rates are
projected to push up net interest costs.

29. 28
CBO
CBO’s projections of discretionary spending incorporate budgetary caps through
2021 and the assumption that discretionary budget authority grows with inflation
thereafter. In those projections, discretionary budget authority is boosted in the
near term by recent legislation but then declines by 8 percent in 2020 because of
scheduled reductions to the caps.

30. 29
CBO
Federal debt held by the public rises from 78 percent of GDP (or $16 trillion) at
the end of 2018 to 96 percent of GDP (or $29 trillion) by 2028 in CBO’s projections.
That percentage would be the largest since 1946 and well more than twice the
average over the past five decades.

31. 30
CBO
CBO also analyzed an alternative fiscal scenario in which current law was altered to
maintain major policies—so that substantial tax increases and spending cuts would
not take place as scheduled under current law—and to provide more typical
amounts of emergency funding than the sums provided for 2018. In that scenario,
debt held by the public would reach about 105 percent of GDP by the end of 2028.