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Congressional Budget Office
National Association for Business Economics
Economic Measurement Seminar
July 17, 2018
Robert Arnold, Chief of Projections Unit, Macroeconomic Analysis Division
Christina Hawley Anthony, Chief of Projections Unit, Budget Analysis Division
CBO’s Economic and
Budget Projections

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CBO
To provide the Congress with objective,
nonpartisan, and timely analyses of legislative
proposals and of budgetary and economic issues
to support the Congressional budget process
CBO’s Role

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CBO
 Developing a budget plan
 Implementing that budget plan
 Assessing the impact of proposed federal mandates
 Considering issues related to the budget and to economic policy
What CBO Helps the Congress With

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CBO
 Advisory
 Independent
 Nonpartisan
 Responsive and transparent
CBO’s Characteristics

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CBO
CBO’s Process for
Developing the
Economic Forecast

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CBO
CBO’s Economic Forecast Process
Step 1: Background Analysis
 Develop preliminary forecast for exogenous variables (e.g., oil prices)
 Review recent data
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

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CBO
CBO’s Forecasting Models
CBO’s Macroeconometric Model
Aggregate Demand Other Variables
• Consumer spending • Inflation
• Business investment • Interest rates
• Residential investment • Labor market variables
• Government spending - Unemployment
• Net exports - Employment
- Wages & compensation
Aggregate 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

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CBO
CBO’s Current
Economic Forecast

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CBO
GDP = gross domestic product. The growth of real potential GDP is the growth of the economy’s maximum sustainable output, adjusted
to remove the effects of inflation.
Growth of Real GDP and Real Potential GDP

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CBO
The output gap is the difference between actual GDP and potential GDP.
Output Gap

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CBO
The natural rate of unemployment is the rate that arises from all sources except fluctuations in aggregate demand for goods and
services.
Unemployment Rate

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CBO
Inflation is measured here with the price index for personal consumption expenditures.
Consumer Price Inflation

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CBO
Interest Rates

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CBO
CBO’s Process for
Developing the
Budget Baseline

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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
 Key part of the law is the Balanced Budget and Emergency Deficit
Control Act, Section 257
– Defines the baseline
– 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
– Establishes rules for discretionary appropriations and inflators
Construction of the Budget Baseline

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CBO
 Is projected for each source
– More than 50 sources
– Largest share of total is from individual income taxes: $1.6 trillion in
2018 (49 percent)
 Usually reflects current law
– Assumption that reductions in the individual income tax expire as
scheduled at the end of 2025
– Exception: Excise taxes dedicated to trust funds are extended at
current rates
 Is sensitive to economic projections
 Tends to increase as a percentage of GDP over time
The Baseline for Revenues

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CBO
 Generally reflects current law (statutory language and administrative
policy)
 Is driven by projections of key variables that affect cash flows
– Enrollment by beneficiaries and their average costs
– Factors underlying CBO’s macroeconomic forecast
The Baseline for Mandatory Spending

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CBO
 Funding
– Uses the enacted amount for the current year
– For individual accounts, incorporates adjustments for inflation for
future years
– Totals constrained by caps through 2021
 Outlays
– Depends on how quickly funding is spent, with that rate differing
widely among programs and accounts
– For a given year, depends on funding in that year and prior years
because funding is usually spent gradually over several years
The Baseline for Discretionary Spending

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CBO
 CBO’s model
– Incorporates 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
– 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

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CBO
CBO’s Current Projections
of the Federal Budget

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CBO
Revenues and Outlays

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CBO
Revenues

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CBO
Mandatory Outlays and Net Interest

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CBO
Discretionary Outlays

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CBO
Deficits

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CBO
Debt Held by the Public in the Baseline

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CBO
In the alternative fiscal scenario, major policies that are currently in place would be maintained, and more typical levels of funding for
emergencies would be provided.
Debt Under an Alternative Fiscal Scenario

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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.
Related Publications