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  • 1. Congressional Budget Office
    Presentation to the
    National Association for Business Economics
    Fiscal Policy Choices
    March 8, 2010
    Douglas W. Elmendorf
    Director
  • 2. 2
    Fiscal Policy Choices
    • Review the estimates done by the Congressional Budget Office (CBO) and the staff of the Joint Committee on Taxation (JCT).
    • 3. Discuss a number of challenges to those estimates.
    • 4. Nothing I’m going to say is new: Everything is drawn from the letters that CBO has released. But probably you have not been following everything we’ve written as closely as I have, so some or all of this may be new to you.
  • 3
    Forecast for a Slow Recovery
    • Severe economic downturns often sow the seeds of robust recoveries:
    • 5. During a slump in economic activity, consumers defer purchases, and businesses postpone capital spending.
    • 6. Once demand picks up, spending and employment can accelerate rapidly.
    • 7. The current recovery will be dampened by several factors:
    • 8. Continuing fragility of some financial markets and institutions.
    • 9. Restrained increase in household spending.
    • 10. Declining support from monetary and fiscal policy.
  • 4
    Real Federal Funds Rate
    Percent
    Note: The real federal funds rate is defined as the nominal rate less the year-over-year change in the core PCE price index.
  • 11. 5
    Estimated Budgetary Effects of ARRA
    Billions of Dollars
  • 12. 6
    Effect of ARRA on the Output Gap
    Gap Between Actual and Potential GDP as Percentage of Potential GDP
    Without
    Stimulus
    Legislation
  • 13. 7
    The Budget Deficit or Surplus
    Percentage of GDP
  • 14. Unemployment Rate
    Percent
    8
  • 15. Budget Deficit or Surplus
    Percentage of GDP
    With
    Tax Cuts Extended and AMT Indexed
    9
  • 16. 10
    CBO’s Estimate of the President’s Budget, 2011-2020
    Note: * = Less than $0.05 trillion.
  • 17. Rising Debt Burden
    Percentage of GDP
    11
  • 18. 12
    Why Does Rising Federal Debt Matter?
    • Tax revenues are used to pay interest rather than finance current programs.
    • 19. Crowdingout of saving and investment lowers future output and income relative to what would otherwise occur.
    • 20. The ability of the government to respond to future needs is reduced.
    • 21. The risk of a sharp jump in interest rates (perhaps related to flight from U.S. Treasuries or U.S. assets more generally) is heightened.
  • 13
    Debt Burden Across Countries in 2007
    Percentage of GDP
    Source: OECD.
  • 22. 14
    The Path of Fiscal Policy
    • The problem with the federal budget deficit is not its level today when the economy is weak. The problem is its future path.
    • 23. Forecasts of budget and economic outcomes are highly uncertain. We believe that our projection balances the risks.
    • 24. The outlook for the budget under “current policy” is bleak. The key choices are not whether to change course on the federal budget, but how quickly and in what way.
  • 15
    Effective Federal Tax Rates
    Percent
  • 25. 16
    Federal Revenues, 1970 to 2020
    Percentage of GDP
    Note: Extending certain tax provisions enacted in 2001 and 2003 would also increase outlays for refundable tax credits. However, the outlay effect is shown here in the revenue line.
  • 26. 17
    Components of the Federal Budget
    Note: Figures are shown net of offsetting receipts where relevant.
  • 27. Outlays for Some Key Federal Programs Will Exceed Total Federal Revenues Under “Current Policy”
    Percentage of GDP
    18
    Note: Extending certain tax provisions enacted in 2001 and 2003 would also increase outlays for refundable tax credits. However, the outlay effect is shown here in the revenue line.
  • 28. 19
    If the Goal is to Balance the Budget in 2020
  • 29. 20
    Conclusion
    • The problem posed by the federal budget deficit is not its current level, but its trajectory—especially if policymakers make changes to current law to maintain what many people view as current policy.
    • 30. In the past several decades, the country paid for increases in Social Security, Medicare, and Medicaid spending through cuts in defense spending relative to the size of the economy. That approach is not feasible in the future. Instead, significant changes will be needed in taxes or spending directly visible to many Americans.

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