Others use it to approximate whether the short-run influence of the budget on aggregate demand and on the growth of real output is positive or negative. For example, some analysts use it to discern underlying trends in government saving or dissaving (that is, trends in surpluses or deficits). That budget measure has several applications. The budget balance without automatic stabilizers is an estimate of what the surplus or deficit would be if GDP was at its potential, the unemployment rate was at a corresponding level, and all other factors were unchanged. That contribution will then continue to fall-to 1.0 percent in 2014, 0.5 percent in 2015, and 0.1 percent in 2016-consistent with CBO's projection for output to come back up near potential output by 2016. According to CBO's baseline projections, the contribution of automatic stabilizers to the budget deficit will decrease as a share of potential GDP-to 2.1 percent in 2011, 1.7 percent in 2012, and 1.5 percent in 2013 (see Table 1 and Table 2). In 2010, CBO estimates, automatic stabilizers added the equivalent of 2.4 percent of potential GDP to the deficit, an amount somewhat greater than the 2.1 percent added in 2009. (For a discussion of the measurement of automatic stabilizers, see the appendix.)ĬBO estimates that automatic stabilizers are adding significantly to the budget deficit now but that their contribution will steadily fade over the next few years. As GDP moves up closer to potential GDP, revenues automatically begin to rise, outlays automatically begin to fall, and the automatic stabilizers offer a smaller boost to output. Those automatic reductions in revenues and increases in outlays when GDP is falling relative to potential GDP and unemployment is correspondingly rising help bolster economic activity, but they also temporarily increase the budget deficit. In addition, some outlays-for example, to pay unemployment insurance claims or to provide federal nutrition benefits-automatically increase. During recessions, GDP falls relative to potential GDP (the quantity of output that corresponds to a high rate of use of labor and capital), and revenue declines automatically. This report focuses on a component of the latter group-the automatic stabilizers-that reflect cyclical movements in real (inflation-adjusted) output and unemployment. By comparison, CBO projects that the deficit will average 4.1 percent of GDP during the five years from 2012 through 2016 if current laws remain in place.ĬBO's projections of the budget deficit are affected by legislation that governs taxation and spending and by the automatic responses of revenues and outlays to developments in the economy and other factors. At 9.3 percent of gross domestic product (GDP) in 2011, the deficit in those terms will be the second largest in more than half a century (behind only the 2009 deficit, which was 10.0 percent of GDP). CBO estimated in March that the baseline budget deficit will rise from $1.3 trillion in fiscal year 2010 to $1.4 trillion in 2011 and then will average $692 billion over the next five years. For those projections, CBO assumed the continuation of current laws and policies that affect taxes and mandatory spending programs and extrapolated the growth of discretionary spending by using projected rates of inflation. In March 2011, the Congressional Budget Office (CBO) released its most recent baseline projections of federal revenues, outlays, and budget balances for the next 10 years.
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