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Congressional Budget OfficeCongressional Budget Office
Southern Economic Association 88th Annual Meetings
National Association of Forensic Economics
November 18, 2018
Jeffrey F. Werling
Assistant Director, Macroeconomic Analysis Division
CBO’s 10-Year Budget and Economic
Projections
1
CBO
CBO’s Role and Products
2
CBO
 CBO was created by the Congressional Budget and Impoundment Control Act
of 1974.
 The agency provides analysis of budgetary and economic issues that is
objective and impartial. It is strictly nonpartisan.
 The Director is appointed jointly by the Speaker of the House and president
pro tempore of the Senate.
 CBO has about 235 employees, who are hired solely on the basis of
professional competence, without regard to political affiliation. Most have
advanced degrees.
CBO’s Role
3
CBO
 A Panel of Economic Advisers improves CBO’s understanding of economic
research, macroeconomic developments, and economic policy. (See here for
more information.)
 A Panel of Health Advisers improves CBO’s understanding of health research
and of developments in health care delivery and financing. (See here for more
information.)
Outside Advisers
4
CBO
CBO’s products include the following:
 Baseline budget projections and economic forecasts covering the 10-year
period used in the Congressional budget process;
 Long-term budget projections covering a 30-year period and Social Security
projections covering a 75-year period;
 Cost estimates of legislation, including analyses of federal mandates;
 An analysis of the President’s budget (including its likely economic effects
and their budgetary feedback);
 Scorekeeping for enacted legislation; and
 Analytic reports examining specific federal programs, aspects of the tax code,
and budgetary and economic challenges.
CBO’s Products
5
CBO
CBO aims to make its analysis transparent in many ways, including these:
 It explains the basis of and the revisions to its major economic and budget
projections.
 It describes the uncertainty of its projections and quantifies that uncertainty
when appropriate.
 It compares its own estimates with those of other organizations.
 It evaluates its own projections—for example, in
– CBO’s Revenue Forecasting Record,
– An Evaluation of CBO’s Past Outlay Projections,
– CBO’s Economic Forecasting Record: 2017 Update, and
– CBO’s Record of Projecting Subsidies for Health Insurance Under the
Affordable Care Act: 2014 to 2016.
Transparency
6
CBO
The Budget and Economic Outlook
7
CBO
Budget and Economic Data for History and the 10-Year
Projection Period
8
CBO
CBO’s Process for Developing the
Economic Forecast
9
CBO
 The economic forecast is usually published in January and in August.
 Major factors shaping CBO’s economic projections include
– Current law,
– Data and CBO’s own expert analysis and modeling,
– A range of forecasts by other forecasters, and
– Input from CBO’s Panel of Economic Advisers.
 CBO’s key economic projections that affect its budget projections include
– Real GDP and income,
– Inflation, and
– Interest rates.
Behind the Economic Forecast
10
CBO
The Process for CBO’s Economic Forecast
Step 1: Background Analysis
 Develop preliminary forecast for exogenous variables (e.g., oil prices)
 Review recent data and other information
Step 2: Preliminary Forecast
 Use macroeconometric model to develop preliminary forecast
 Incorporate preliminary federal tax and spending projections
Step 3: Internal and External Review
 Obtain input from CBO’s senior staff and other divisions within the agency
 Obtain feedback from CBO’s Panel of Economic Advisers and staff of
Congressional budget committees
Step 4: Final Forecast
 Incorporate feedback and latest data to produce final forecast
 Transmit to CBO’s budget and tax divisions to develop budget projections
11
CBO
CBO’s Forecasting Models
CBO’s Macroeconometric Model
Demand Other Variables
• Consumer spending • Inflation
• Business investment • Interest rates
• Residential investment • Labor market variables
• Government spending - Unemployment
• Net exports - Employment
- Wages & compensation
Supply • Incomes
• Potential output
CBO’s Labor Force
Participation Rate Model
Exogenous Variables
• Population
• Energy prices
• Foreign growth
Policy Variables
• Labor supply elasticities
• Marginal tax rates
• Other fiscal policies
(Labor force participation rate)(Unemployment gap)
CBO’s Forecast
Growth Model
(Investment, potential labor force,
and other variables)
(Potential output, hours, productivity,
and other variables)
CBO’s Budget
Projections
• Federal outlays
• Federal revenues
12
CBO
Determinants of the Growth of Real Potential GDP
13
CBO
Growth of Real GDP and Real Potential GDP
14
CBO
Unemployment Rate
15
CBO
Consumer Price Inflation
16
CBO
Interest Rates
17
CBO
CBO’s Process for Developing Its
Budget Baseline Projections
18
CBO
 Principles and rules mainly come from law, budget resolutions, House and
Senate rules, and the 1967 Report of the President’s Commission on Budget
Concepts.
 A key part of the law is the 1985 Balanced Budget and Emergency Deficit
Control Act, Section 257, which defines the baseline.
– It sets out rules for projecting direct spending and receipts,
– Requires an assumption of full funding for entitlements,
– Directs the treatment of expiring programs and certain excise taxes, and
– Establishes rules for projecting discretionary spending, including rules
governing which measures of inflation to use.
Construction of the Budget Baseline
19
CBO
 It is projected for each source of revenue.
– There are more than 50 such sources.
– The largest share of the total is from individual income taxes: $1.6 trillion in
2018, or 49 percent of the total.
 It reflects current law.
– For instance, it incorporates the assumption that reductions in the
individual income tax will expire as scheduled at the end of 2025.
– An exception is that excise taxes dedicated to trust funds are extended at
current rates.
 It is sensitive to economic projections, and revenues tend to increase as a
percentage of GDP over time because income growth pushes more income
into higher tax brackets.
The Baseline for Revenues
20
CBO
Detail From the Baseline for Revenues
21
CBO
 It likewise generally reflects current law (including statutory language and
administrative policy).
 Projections of mandatory spending are driven by projections of key variables,
such as
– Enrollment by beneficiaries and their average costs and
– Factors underlying CBO’s macroeconomic forecast.
 Projections of discretionary spending are constructed differently.
– Both funding and outlays are estimated.
– For individual accounts, the projections incorporate inflation for future
years.
– Totals are constrained by caps through 2021.
– The projections for outlays depend on how quickly funding is estimated to
be spent; that rate differs widely among programs and accounts.
The Baseline for Mandatory and Discretionary Spending
22
CBO
 CBO’s model
– Incorporates the existing stock of outstanding debt and associated interest
rates,
– Integrates projections of future deficits and other financing obligations,
– Uses CBO’s forecast for interest rates, and
– Relies on a projection of the mix of securities that the Treasury could issue.
 CBO’s projections also include offsets from interest income received on loans
and cash balances.
The Baseline for Net Spending for Interest
23
CBO
Budget Projections by Account
24
CBO
Revenues and Outlays
25
CBO
Revenues
26
CBO
Mandatory Outlays and Net Interest
27
CBO
Discretionary Outlays
28
CBO
Deficits
29
CBO
Debt Held by the Public
30
CBO
Congressional Budget Office, The Budget and Economic Outlook:
2018 to 2028 (April 2018), www.cbo.gov/publication/53651.
Robert W. Arnold, How CBO Produces Its 10-Year Economic Forecast, Working
Paper 2018-02 (Congressional Budget Office, February 2018),
www.cbo.gov/publication/53537.
Congressional Budget Office, An Analysis of the President’s 2019 Budget
(May 2018), www.cbo.gov/publication/53884.
Congressional Budget Office, An Update on Transparency at CBO
(August 2018), www.cbo.gov/publication/54372.
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CBO’s 10-Year Budget and Economic Projections

  • 1. Congressional Budget OfficeCongressional Budget Office Southern Economic Association 88th Annual Meetings National Association of Forensic Economics November 18, 2018 Jeffrey F. Werling Assistant Director, Macroeconomic Analysis Division CBO’s 10-Year Budget and Economic Projections
  • 3. 2 CBO  CBO was created by the Congressional Budget and Impoundment Control Act of 1974.  The agency provides analysis of budgetary and economic issues that is objective and impartial. It is strictly nonpartisan.  The Director is appointed jointly by the Speaker of the House and president pro tempore of the Senate.  CBO has about 235 employees, who are hired solely on the basis of professional competence, without regard to political affiliation. Most have advanced degrees. CBO’s Role
  • 4. 3 CBO  A Panel of Economic Advisers improves CBO’s understanding of economic research, macroeconomic developments, and economic policy. (See here for more information.)  A Panel of Health Advisers improves CBO’s understanding of health research and of developments in health care delivery and financing. (See here for more information.) Outside Advisers
  • 5. 4 CBO CBO’s products include the following:  Baseline budget projections and economic forecasts covering the 10-year period used in the Congressional budget process;  Long-term budget projections covering a 30-year period and Social Security projections covering a 75-year period;  Cost estimates of legislation, including analyses of federal mandates;  An analysis of the President’s budget (including its likely economic effects and their budgetary feedback);  Scorekeeping for enacted legislation; and  Analytic reports examining specific federal programs, aspects of the tax code, and budgetary and economic challenges. CBO’s Products
  • 6. 5 CBO CBO aims to make its analysis transparent in many ways, including these:  It explains the basis of and the revisions to its major economic and budget projections.  It describes the uncertainty of its projections and quantifies that uncertainty when appropriate.  It compares its own estimates with those of other organizations.  It evaluates its own projections—for example, in – CBO’s Revenue Forecasting Record, – An Evaluation of CBO’s Past Outlay Projections, – CBO’s Economic Forecasting Record: 2017 Update, and – CBO’s Record of Projecting Subsidies for Health Insurance Under the Affordable Care Act: 2014 to 2016. Transparency
  • 7. 6 CBO The Budget and Economic Outlook
  • 8. 7 CBO Budget and Economic Data for History and the 10-Year Projection Period
  • 9. 8 CBO CBO’s Process for Developing the Economic Forecast
  • 10. 9 CBO  The economic forecast is usually published in January and in August.  Major factors shaping CBO’s economic projections include – Current law, – Data and CBO’s own expert analysis and modeling, – A range of forecasts by other forecasters, and – Input from CBO’s Panel of Economic Advisers.  CBO’s key economic projections that affect its budget projections include – Real GDP and income, – Inflation, and – Interest rates. Behind the Economic Forecast
  • 11. 10 CBO The Process for CBO’s Economic Forecast Step 1: Background Analysis  Develop preliminary forecast for exogenous variables (e.g., oil prices)  Review recent data and other information Step 2: Preliminary Forecast  Use macroeconometric model to develop preliminary forecast  Incorporate preliminary federal tax and spending projections Step 3: Internal and External Review  Obtain input from CBO’s senior staff and other divisions within the agency  Obtain feedback from CBO’s Panel of Economic Advisers and staff of Congressional budget committees Step 4: Final Forecast  Incorporate feedback and latest data to produce final forecast  Transmit to CBO’s budget and tax divisions to develop budget projections
  • 12. 11 CBO CBO’s Forecasting Models CBO’s Macroeconometric Model Demand Other Variables • Consumer spending • Inflation • Business investment • Interest rates • Residential investment • Labor market variables • Government spending - Unemployment • Net exports - Employment - Wages & compensation Supply • Incomes • Potential output CBO’s Labor Force Participation Rate Model Exogenous Variables • Population • Energy prices • Foreign growth Policy Variables • Labor supply elasticities • Marginal tax rates • Other fiscal policies (Labor force participation rate)(Unemployment gap) CBO’s Forecast Growth Model (Investment, potential labor force, and other variables) (Potential output, hours, productivity, and other variables) CBO’s Budget Projections • Federal outlays • Federal revenues
  • 13. 12 CBO Determinants of the Growth of Real Potential GDP
  • 14. 13 CBO Growth of Real GDP and Real Potential GDP
  • 18. 17 CBO CBO’s Process for Developing Its Budget Baseline Projections
  • 19. 18 CBO  Principles and rules mainly come from law, budget resolutions, House and Senate rules, and the 1967 Report of the President’s Commission on Budget Concepts.  A key part of the law is the 1985 Balanced Budget and Emergency Deficit Control Act, Section 257, which defines the baseline. – It sets out rules for projecting direct spending and receipts, – Requires an assumption of full funding for entitlements, – Directs the treatment of expiring programs and certain excise taxes, and – Establishes rules for projecting discretionary spending, including rules governing which measures of inflation to use. Construction of the Budget Baseline
  • 20. 19 CBO  It is projected for each source of revenue. – There are more than 50 such sources. – The largest share of the total is from individual income taxes: $1.6 trillion in 2018, or 49 percent of the total.  It reflects current law. – For instance, it incorporates the assumption that reductions in the individual income tax will expire as scheduled at the end of 2025. – An exception is that excise taxes dedicated to trust funds are extended at current rates.  It is sensitive to economic projections, and revenues tend to increase as a percentage of GDP over time because income growth pushes more income into higher tax brackets. The Baseline for Revenues
  • 21. 20 CBO Detail From the Baseline for Revenues
  • 22. 21 CBO  It likewise generally reflects current law (including statutory language and administrative policy).  Projections of mandatory spending are driven by projections of key variables, such as – Enrollment by beneficiaries and their average costs and – Factors underlying CBO’s macroeconomic forecast.  Projections of discretionary spending are constructed differently. – Both funding and outlays are estimated. – For individual accounts, the projections incorporate inflation for future years. – Totals are constrained by caps through 2021. – The projections for outlays depend on how quickly funding is estimated to be spent; that rate differs widely among programs and accounts. The Baseline for Mandatory and Discretionary Spending
  • 23. 22 CBO  CBO’s model – Incorporates the existing stock of outstanding debt and associated interest rates, – Integrates projections of future deficits and other financing obligations, – Uses CBO’s forecast for interest rates, and – Relies on a projection of the mix of securities that the Treasury could issue.  CBO’s projections also include offsets from interest income received on loans and cash balances. The Baseline for Net Spending for Interest
  • 30. 29 CBO Debt Held by the Public
  • 31. 30 CBO Congressional Budget Office, The Budget and Economic Outlook: 2018 to 2028 (April 2018), www.cbo.gov/publication/53651. Robert W. Arnold, How CBO Produces Its 10-Year Economic Forecast, Working Paper 2018-02 (Congressional Budget Office, February 2018), www.cbo.gov/publication/53537. Congressional Budget Office, An Analysis of the President’s 2019 Budget (May 2018), www.cbo.gov/publication/53884. Congressional Budget Office, An Update on Transparency at CBO (August 2018), www.cbo.gov/publication/54372. Related Publications