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CBO’s Economic and Budget Projections


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To support the Congressional budget process, CBO provides the Congress with objective, nonpartisan, and timely analyses of legislative proposals and of budgetary and economic issues. This presentation highlights CBO’s process for developing its economic forecast and baseline budget projections and provides an overview of the current forecast and projections.

Presentation by Robert Arnold, Chief of the Projections Unit in CBO’s Macroeconomic Analysis Division, and Christina Hawley Anthony, Chief of the Projections Unit in CBO’s Budget Analysis Division, at the NABE Foundation’s 15th Annual Economic Measurement Seminar.

Published in: Government & Nonprofit
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CBO’s Economic and Budget Projections

  1. 1. 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
  2. 2. 1 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
  3. 3. 2 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
  4. 4. 3 CBO  Advisory  Independent  Nonpartisan  Responsive and transparent CBO’s Characteristics
  5. 5. 4 CBO CBO’s Process for Developing the Economic Forecast
  6. 6. 5 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
  7. 7. 6 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
  8. 8. 7 CBO CBO’s Current Economic Forecast
  9. 9. 8 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
  10. 10. 9 CBO The output gap is the difference between actual GDP and potential GDP. Output Gap
  11. 11. 10 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
  12. 12. 11 CBO Inflation is measured here with the price index for personal consumption expenditures. Consumer Price Inflation
  13. 13. 12 CBO Interest Rates
  14. 14. 13 CBO CBO’s Process for Developing the Budget Baseline
  15. 15. 14 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
  16. 16. 15 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
  17. 17. 16 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
  18. 18. 17 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
  19. 19. 18 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
  20. 20. 19 CBO CBO’s Current Projections of the Federal Budget
  21. 21. 20 CBO Revenues and Outlays
  22. 22. 21 CBO Revenues
  23. 23. 22 CBO Mandatory Outlays and Net Interest
  24. 24. 23 CBO Discretionary Outlays
  25. 25. 24 CBO Deficits
  26. 26. 25 CBO Debt Held by the Public in the Baseline
  27. 27. 26 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
  28. 28. 27 CBO Congressional Budget Office, The Budget and Economic Outlook: 2018 to 2028 (April 2018), Robert W. Arnold, How CBO Produces Its 10-Year Economic Forecast, Working Paper 2018-02 (Congressional Budget Office, February 2018), Congressional Budget Office, An Analysis of the President’s 2019 Budget (May 2018), Related Publications