The Budget and Economic Outlook: 2020 to 2030

In CBO’s projections of the outlook under current law, deficits remain large by historical standards, federal debt grows to 98 percent of GDP by 2030, and the economy expands at an average annual rate of 1.7 percent from 2021 to 2030.

At a Glance

The Congressional Budget Office regularly publishes reports that present projections of what federal deficits, debt, revenues, and spending—and the economic path underlying them—would be for the current year and for the following 10 years and beyond if existing laws governing taxes and spending generally remained unchanged. This report is the latest in that series—and it shows a cumulative 10-year deficit that is slightly larger and a cumulative 30-year deficit that is notably larger than those in CBO’s previous projections.


The Budget.

In CBO’s projections, the federal budget deficit is $1.0 trillion in 2020 and averages $1.3 trillion between 2021 and 2030. Projected deficits rise from 4.6 percent of gross domestic product (GDP) in 2020 to 5.4 percent in 2030.

Other than a six-year period during and immediately after World War II, the deficit over the past century has not exceeded 4.0 percent for more than five consecutive years. And during the past 50 years, deficits have averaged 1.5 percent of GDP when the economy was relatively strong (as it is now).

Because of the large deficits, federal debt held by the public is projected to grow, from 81 percent of GDP in 2020 to 98 percent in 2030 (its highest percentage since 1946

see Chapter 1

).


The Economy.

In 2020, inflation-adjusted GDP is projected to grow by 2.2 percent, largely because of continued strength in consumer spending and a rebound in business fixed investment. Output is projected to be higher than the economy’s maximum sustainable output this year to a greater degree than it has been in recent years, leading to higher inflation and interest rates after a period in which both were low, on average. Continued strength in the demand for labor keeps the unemployment rate low and drives employment and wages higher.

After 2020, economic growth is projected to slow. From 2021 to 2030, output is projected to grow at an average annual rate of 1.7 percent, roughly the same rate as potential growth. That average growth rate of output is less than its long-term historical average, primarily because the labor force is expected to grow more slowly than it has in the past. Over that same period, the interest rate on 10-year Treasury notes is projected to rise gradually, reaching 3.1 percent in 2030 (

see Chapter 2

).


Changes Since CBO’s Previous Projections.

CBO’s estimate of the deficit for 2020 is now $8 billion more—and its projection of the cumulative deficit over the 2020–2029 period, $160 billion more—than the agency projected in August 2019. That 10-year increase is the net result of changes that go in opposite directions. Lower projected interest rates and higher estimates of wages, salaries, and proprietors’ income reduced projected deficits, but a combination of recent legislation and other changes increased them (

see Appendix A

).

Relative to the projections in CBO’s long-term budget outlook, last published in June 2019, debt held by the public as a percentage of GDP in 2049 is now projected to be 30 percentage points higher. That increase is largely the result of legislation enacted since June—which decreased revenues and increased discretionary outlays—and of lower projected GDP (

see Box 1-1

).


Notes

Notes

In late December 2019, major legislation was enacted that funded the federal government for the rest of the fiscal year. The projections in this report reflect the budgetary and economic effects of that legislation but do not reflect economic developments, administrative actions, or regulatory changes that occurred after January 7, 2020, or any legislation enacted after that date. Because the timing of the major legislation did not allow enough time for all of the analysis and writing that the Congressional Budget Office typically performs, this report omits some chapters and appendixes that have often appeared in past editions. However, some of those components will be published separately on February 6, 2020.

Unless this report indicates otherwise, all years referred to in describing the budget outlook are federal fiscal years, which run from October 1 to September 30 and are designated by the calendar year in which they end. Years referred to in describing the economic outlook are calendar years.

Numbers in the text, tables, and figures may not add up to totals because of rounding.

Some of the figures in this report use shaded vertical bars to indicate periods of recession. (A recession extends from the peak of a business cycle to its trough.)

As referred to in this report, the Affordable Care Act comprises the Patient Protection and Affordable Care Act (Public Law 111-148), the health care provisions of the Health Care and Education Reconciliation Act of 2010 (P.L. 111-152), and the effects of subsequent judicial decisions, statutory changes, and administrative actions. This spring, CBO will publish a report about subsidies for health insurance coverage for people under age 65.

Supplemental data for this analysis are available on CBO’s website (


www.cbo.gov/publication/56020


), as are a glossary of common budgetary and economic terms (


www.cbo.gov/publication/42904


), a description of how CBO prepares its baseline budget projections (


www.cbo.gov/publication/53532


), a description of how CBO prepares its economic forecast (


www.cbo.gov/publication/53537


), and previous editions of this report (


https://go.usa.gov/xQrzS


).

CBO has corrected this report since its original publication. Corrections are listed at the end of the report.

In this report, the Congressional Budget Office provides detailed projections of the federal budget and the U.S. economy under current law for this year and the decade that follows as well as projections for the following two decades. The cumulative deficit currently projected for the next 10 years is slightly larger than what CBO projected last August because deficit increases resulting from new legislation and other changes are greater than the deficit-reducing effects of revisions to CBO’s economic forecast. Beyond 2030, projected deficits have increased substantially. As a result, debt held by the public as a percentage of gross domestic product (GDP) in 2049 is now projected to be 30 percentage points higher than it was in CBO’s previous long-term projections.

Deficits and Debt


CBO estimates a 2020 deficit of $1.0 trillion, or 4.6 percent of GDP. The projected gap between spending and revenues increases to 5.4 percent of GDP in 2030. Federal debt held by the public is projected to rise over the ­coming decade, from 81 percent of GDP in 2020 to


98 percent


of GDP in 2030. It continues to grow ­thereafter in CBO’s projections, reaching 180 percent of GDP in 2050, well above the highest level ever recorded in the United States.

Percentage of Gross Domestic Product

Over the 2020–2030 period, primary deficits—that is, deficits excluding net outlays for interest—are projected to average 2.6 percent of GDP. Over the same period, federal debt and interest rates are both projected to rise, causing net outlays for interest to increase steadily, from 1.7 percent of GDP in 2020 to 2.6 percent of GDP in 2030.


See



Figure 1-3

Percentage of Gross Domestic Product

High and rising federal debt would reduce national saving and income, boost the government’s interest payments, limit policymakers’ ability to respond to unforeseen events, and increase the likelihood of a fiscal crisis.


See



Figure 1-4

Revenues


In CBO’s baseline projections, revenues total $3.6 trillion in 2020, or 16.4 percent of GDP, and rise to 18.0 percent of GDP in 2030.

Percentage of Gross Domestic Product

Total revenues as a share of GDP are projected to rise, primarily because of increases in individual income taxes. Driving those increases are the expiration of certain provisions of the 2017 tax act (at the end of calendar year 2025) and real bracket creep—the process in which, as income rises faster than inflation, a larger proportion of income becomes subject to higher tax rates.


See



Figure 1-8



; * = between zero and 0.05 percentage points

Outlays


In 2020, CBO estimates, outlays will total $4.6 trillion, or 21.0 percent of GDP. In the agency’s baseline projections, they rise to 23.4 percent of GDP in 2030.

Percentage of Gross Domestic Product

The aging of the population and the rising costs of health care boost mandatory outlays, particularly for Social Security and Medicare.

Outlays for discretionary programs fall in relation to GDP because of caps on funding and because rates of inflation, which are used to project future funding, are lower than the rate of economic growth.

Net interest costs rise steadily because of accumulating debt and rising interest rates.


See



Figure 1-7

The Economy


Adjusted for inflation, GDP is projected to grow by 2.2 percent in 2020. From 2021 to 2030, output


is projected to grow at an average annual rate of 1.7 percent, roughly the same rate as the economy’s


maximum sustainable output (or potential GDP), which is determined by factors such as the size of the labor force, the average number of hours worked, capital investment, and productivity growth.

Percentage Change

In CBO’s projections, output grows faster than potential GDP in 2020, largely because of strong consumer spending and a rebound in business fixed investment. In later years, economic growth slows as growth in consumer spending and private investment moderates.


See



Figure 2-1


Percent

The unemployment rate remains near historic lows throughout 2020. It then rises steadily, mostly because of slower economic growth. In 2024, it surpasses the natural rate of unemployment (the rate arising from all sources other than fluctuations in the overall demand for goods and services).


See



Figure 2-2


Percent

The strong labor market keeps the labor force participation rate elevated for much of 2020. Starting in 2021, as economic and job growth slows, participation falls toward its potential rate, which also decreases, largely because of the aging of the population.


See



Figure 2-2

Average Annual Percentage Change

Over the next decade, real potential GDP is projected to grow more slowly than it did before 2008, primarily because the labor force is expected to grow more slowly than it has in the past.


See



Figure 2-6

Percentage Change

In CBO’s projections, a number of factors cause inflation to accelerate in 2020, including strong labor and product markets. After 2021, diminishing strength in those markets slows the rate of inflation.


See



Figure 2-4



; PCE = personal consumption expenditures

Percent

Factors that push projected interest rates below their pre-2008 average include lower average expected inflation and slower growth of the labor force. Those factors are partially offset by others, such as a larger federal debt relative to GDP.


See



Figure 2-5

The Budget Outlook

If current laws governing taxes and spending generally remained unchanged, federal deficits would continue to be large by historical standards from 2020 through 2030 and beyond, the Congressional Budget Office projects (see


Figure 1-1


). As a result of those deficits, federal debt would rise each year, reaching a percentage of the nation’s output that is unprecedented in U.S. history.

Percentage of GDP

Deficits as a percentage of GDP are projected to rise from 4.6 percent in 2020 to 5.4 percent in 2030. They exceed their 50-year average throughout that period.

Source: Congressional Budget Office.

When October 1 (the first day of the fiscal year) falls on a weekend, certain payments that would have ordinarily been made on that day are instead made at the end of September and thus are shifted into the previous fiscal year. All projections presented here have been adjusted to exclude the effects of those timing shifts. Historical amounts have been adjusted as far back as the available data will allow.

GDP = gross domestic product.

CBO currently projects a federal deficit of $1.0 trillion in 2020; in its baseline budget projections, deficits average $1.3 trillion per year and total $13.1 trillion over the 2021–2030 period (see


Table 1-1


). Relative to the size of the economy, deficits would remain above 4.3 percent of gross domestic product (GDP) in every year between 2020 and 2030. Other than a six-year period during and immediately after World War II, the deficit over the past century has not exceeded 4.0 percent for more than five consecutive years. Over the past 50 years, the annual deficit has averaged 3.0 percent of GDP, but it generally has been much smaller when the economy was strong.

Source: Congressional Budget Office.

GDP = gross domestic product; n.a. = not applicable; * = between -0.05 percent and 0.05 percent.

a. The revenues and outlays of the Social Security trust funds and the net cash flow of the Postal Service are classified as off-budget.

Those large deficits would lead to growth in debt held by the public: Under current law, debt held by the public would rise from 79 percent of GDP in 2019 to 98 percent at the end of 2030. Federal debt at that point would be higher as a percentage of GDP than at any time since 1945 and 1946. In the years after 2030, it would continue to increase, reaching 180 percent of GDP in 2050, CBO projects, well above the highest level ever recorded in the United States.

Relative to the projections CBO published in August 2019, the agency’s estimate of the deficit for 2020 is now 0.7 percent (or $8 billion) more, and projected deficits over the 2020–2029 period total 1.3 percent (or $160 billion) more.


1

That increase over the next 10 years is the net result of changes that go in opposite directions. Revisions to CBO’s economic forecast reduced deficits by $705 billion. However, enacted legislation increased projected deficits by $505 billion through 2029, and all other changes increased them by another $360 billion

Appendix A

).

Relative to the agency’s most recent long-term budget projections, published in June 2019, debt held by the public as a percentage of GDP in 2049 is now projected to be 30 percentage points higher.


2

CBO constructs its baseline in accordance with provisions set forth in the Balanced Budget and Emergency Deficit Control Act of 1985 (Public Law 99-177, referred to here as the Deficit Control Act) and the Congressional Budget and Impoundment Control Act of 1974 (P.L. 93-344). Those laws require CBO to construct its baseline under the assumption that current laws will generally stay the same. Thus, CBO’s baseline is not intended to provide a forecast of future budgetary outcomes; rather, it is meant to provide a benchmark that policymakers can use to assess the potential effects of future policy decisions on federal spending and revenues and, therefore, on deficits and debt.

CBO estimates that, in 2020, the federal deficit will reach $1,015 billion, which is $31 billion more than the shortfall recorded last year. Relative to the size of the economy, this year’s deficit would be about the same as last year’s shortfall—4.6 percent of GDP—which is the difference between revenues equal to 16.4 percent of GDP and outlays equal to 21.0 percent of GDP.

Ten-Year Projections

Over the next 10 years, deficits are projected to increase by more than 1 percentage point of GDP, rising from 4.3 percent in 2021 to 5.4 percent in 2030. Both revenues and outlays are projected to grow faster than GDP, though the increases in outlays would be larger. Federal revenues rise in CBO’s projections, from 16.6 percent of GDP in 2021 to 18.0 percent of GDP in 2030. The projected growth in revenues after 2025 is mostly attributable to the scheduled expiration of nearly all of the individual income tax provisions of P.L. 115-97, referred to here as the 2017 tax act. Federal outlays are projected to climb from 20.9 percent of GDP in 2021 to 23.4 percent in 2030 (see


Figure 1-2


).


3

Percentage of GDP

Source: Congressional Budget Office.

When October 1 (the first day of the fiscal year) falls on a weekend, certain payments that would have ordinarily been made on that day are instead made at the end of September and thus are shifted into the previous fiscal year. All projections presented here have been adjusted to exclude the effects of those timing shifts. Historical amounts have been adjusted as far back as the available data will allow.

GDP = gross domestic product.

The average deficit projected over the next 10 years is 1.8 percentage points more than the 3.0 percent of GDP that annual deficits have averaged over the past 50 years. Until recently, deficits tended to be small by historical standards when the economy was relatively strong over a period of several years. For example, between 1969 and 2018, the average deficit totaled 1.5 percent of GDP in years when the unemployment rate was below 6 percent. CBO projects that the unemployment rate will remain below 6 percent in each year through 2030. (In CBO’s economic forecast, the unemployment rate peaks at 4.6 percent in 2026 and 2027.)

Primary deficits—that is, deficits excluding net outlays for interest—are projected to range between 2.3 percent and 2.9 percent of GDP over the next 10 years, averaging 2.6 percent of GDP from 2021 through 2030. The primary deficit in 2030 is 0.3 percent of GDP larger than the one in 2021. At the same time, mostly because of projected increases in interest rates and federal borrowing, net outlays for interest would grow steadily from 1.7 percent of GDP to 2.6 percent (see


Figure 1-3


). The increase in federal borrowing is the most significant factor affecting the projected growth in those outlays.

Percentage of GDP

In CBO’s projections, primary deficits fluctuate between 2.3 percent and 2.9 percent of GDP over the next decade, but total deficits grow because of rising interest costs.

Source: Congressional Budget Office.

Primary deficits or surpluses exclude net outlays for interest.

When October 1 (the first day of the fiscal year) falls on a weekend, certain payments that would have ordinarily been made on that day are instead made at the end of September and thus are shifted into the previous fiscal year. All projections presented here have been adjusted to exclude the effects of those timing shifts. Historical amounts have been adjusted as far back as the available data will allow.

GDP = gross domestic product.

The deficits projected in CBO’s baseline would boost federal debt held by the public, which consists mostly of the securities that the Treasury issues to raise cash to fund the federal government’s activities and pay off its maturing liabilities. The net amount that the Treasury borrows by issuing those securities (calculated as the amounts that are sold minus the amounts that have matured) is influenced primarily by the annual budget deficit.

In CBO’s baseline, after accounting for all of the government’s borrowing needs, debt held by the public rises from $17.9 trillion at the end of 2020 to $31.4 trillion at the end of 2030 (see


Table 1-2


). As a percentage of GDP, that debt would increase from 81 percent at the end of 2020 to 98 percent by the end of the projection period. At that point, such debt would be the largest since 1946 and more than twice the average over the past 50 years.

Billions of Dollars

Source: Congressional Budget Office.

GDP = gross domestic product.

a. Factors not included in budget totals that affect the government’s need to borrow from the public. Those factors include cash flows associated with federal credit programs such as student loans (because only the subsidy costs of those programs are reflected in the budget deficit), as well as changes in the government’s cash balances.

b. Debt held by the public minus the value of outstanding student loans and other credit transactions, cash balances, and various financial instruments.

c. Federal debt held by the public plus Treasury securities held by federal trust funds and other government accounts.

d. The amount of federal debt that is subject to the overall limit set in law. That measure of debt excludes debt issued by the Federal Financing Bank and reflects certain other adjustments that are excluded from gross federal debt. The debt limit was most recently set at $22.0 trillion but has been suspended through July 31, 2021. On August 1, 2021, the debt limit will be raised to its previous level plus the amount of federal borrowing that occurred while the limit was suspended. For more details, see Congressional Budget Office,

Federal Debt and the Statutory Limit, February 2019

(February 2019),

www.cbo.gov/publication/54987

.

Long-Term Projections

Beyond 2030, debt held by the public is projected to increase substantially (see


Figure 1-4


). By 2050, it would equal 180 percent of GDP, CBO pro­jects, nearly 75 percentage points higher than it was in 1946, when federal debt reached its peak. (See


Box 1-1


for more details on CBO’s long-term budget projections.)

Beyond the coming decade, the fiscal outlook is daunting. In the Congressional Budget Office’s projections, growing budget deficits boost federal debt dramatically over the next three decades (see the table). By 2050, debt is projected to reach 180 percent of gross domestic product (GDP), far higher than any percentage previously recorded in the United States and on track to grow even larger. Relative to GDP, CBO projects, federal debt would be higher and deficits larger over the next three decades than the agency projected in June 2019, when it last updated its long-term budget projections.

Those long-term projections follow CBO’s 10-year baseline projections for the coming decade and then extend the baseline concept for subsequent years.


1

The paths of the economic and demographic variables used to construct CBO’s projections are uncertain. But even if their values differed from those underlying the extended baseline projections, federal debt would probably be much higher in 30 years than it is today, if current laws generally remained unchanged.

Projected Spending and Revenues Through 2050

Federal revenues would rise relative to GDP under current law, increasing from 16.3 percent of GDP in 2019 to 18.6 percent in 2050. However, spending would increase even more, rising from 21.0 percent of GDP in 2019 to 30.4 percent in 2050—driven by increases of 4.8 percentage points in mandatory spending and 5.4 percentage points in net outlays for interest. Increases in mandatory spending would result from the aging of the population and growth in per capita spending on health care. Higher interest costs would stem from increases in federal borrowing and rising interest rates. In contrast, discretionary spending is projected to decline by 0.8 percentage points as a share of GDP. All told, the budget deficit in 2050 would be close to 12 percent of GDP, almost four times what it has averaged over the past 50 years.

Changes in CBO’s 30-Year Projections

In CBO’s extended baseline projections, debt in 2049 is equal to 174 percent of GDP, which is 30 percentage points higher than the level the agency projected in June.


2

Three factors account for that upward revision. First, revenues as a share of GDP are projected to be lower, primarily as a result of legislation enacted in December 2019. Second, CBO has increased its projections of spending, largely as a result of legislation enacted in August. Third, CBO has lowered its projections of GDP growth.


Changes in Revenues.

The long-term projections for revenues are lower than they were last June, primarily because the tax on employment-based health insurance plans with high premiums was repealed. Other factors, including slower projected economic growth and other legislative changes, also reduced long-term revenue projections. As a share of GDP, revenues in 2049 are now projected to total 18.5 percent, which is 1.0 percentage point lower than CBO projected last June.


Changes in Spending.

Projections of spending over the next three decades are higher than those reported last June, primarily because of the higher limits on discretionary funding in 2020 and 2021 put in place by the Bipartisan Budget Act of 2019. (Those higher limits were reflected in the 10-year baseline budget projections that CBO released last August.) The projected path of discretionary spending in the extended baseline is extrapolated from that higher level. Meanwhile, net outlays for interest are initially lower and then higher than CBO previously projected. That pattern results from a downward revision to interest rates in the first decade that is attenuated over the next two decades as greater federal borrowing is projected to put upward pressure on interest rates. Overall, projected spending in 2049 totals 30.0 percent of GDP, 1.7 percentage points higher than in the agency’s June projections.


Changes in Economic Growth.

In CBO’s current projections, real (inflation-adjusted) GDP grows at a rate of 1.7 percent per year over the next 10 years, slightly slower than in the agency’s June 2019 projections. Over the subsequent two decades, the rate of growth, at 1.6 percent, is also slower than it was projected to be in June—in part because of slower growth in the agency’s projections of capital services resulting from higher projected deficits in the long term. In addition, CBO now accounts for how changes in long-term population growth and household formation reduce private residential investment. Slightly slower population growth also contributes to the slower growth of GDP.

Percentage of GDP

High and rising federal debt would reduce national saving and income, boost the government’s interest payments, limit policymakers’ ability to respond to unforeseen events, and increase the likelihood of a fiscal crisis.

Source: Congressional Budget Office.

GDP = gross domestic product.

Consequences of Rising Federal Debt

If federal debt as a percentage of GDP continued to rise at the pace that CBO projects it would under current law, the economy would be affected in two significant ways:

That growing debt would dampen economic output over time, and

Rising interest costs associated with that debt would increase interest payments to foreign debt holders and thus reduce the income of U.S. households by increasing amounts.

The increases in debt that CBO projects would also pose significant risks to the fiscal and economic outlook, although those risks are not currently apparent in financial markets. In addition, high debt might cause policymakers to feel constrained from implementing deficit-financed fiscal policy to respond to unforeseen events or for other purposes, such as to promote economic activity or strengthen national defense. Negative economic and financial effects that were less abrupt but still significant—such as expectations of higher inflation or an increased burden of financing public and private activity—would also have a greater chance of occurring. Those effects would worsen the consequences associated with high and rising federal debt.

To put debt on a sustainable path, lawmakers will have to make significant changes to tax and spending policies—increasing revenues more than they would under current law, reducing spending below projected amounts, or adopting some combination of those approaches.

Uncertainty in Projections of Deficits and Debt

Future deficits and debt are likely to differ from CBO’s current-law projections for a number of reasons. Changes to laws and administrative actions—particularly those affecting fiscal policies—that cause them to differ from the laws and policies underlying CBO’s baseline projections could lead to budgetary outcomes that diverge considerably from those in the baseline.

Even if federal laws remained the same over the next decade, actual budgetary outcomes would differ from CBO’s baseline projections because of unanticipated changes in economic conditions and in other factors that affect federal spending and revenues. CBO’s projections of outlays and revenues, and therefore of deficits and debt, depend in part on the agency’s economic projections for the coming decade, which include forecasts for such variables as interest rates, inflation, and growth in productivity. Discrepancies between those forecasts and actual economic outcomes—for example, because of a crisis in the financial sector—can cause significant differences between baseline budget projections and budgetary outcomes. Differences might also be caused by unanticipated developments that affect other aspects of CBO’s projections, such as new trends in spending on health care, or changes in the claiming of tax credits or participation in benefit programs. CBO aims for its projections to be in the middle of the distribution of possible outcomes, given the baseline assumptions about federal tax and spending policies, and recognizes that actual outcomes will typically differ to some degree from any such projections.

Historical experience gives some indication of the magnitude of the uncertainty of budget projections.


4

On the basis of an analysis of its past projections, CBO estimates that there is approximately a two-thirds chance that, under current law, the deficit in 2021 would be between 3.3 percent and 5.4 percent of GDP. The range in 2025 would be larger: CBO estimates that, under current law, there is approximately a two-thirds chance that the deficit would be between 3.1 percent and 6.8 percent of GDP in that year (see


Figure 1-5


).

Percentage of GDP

CBO estimates that, under current law, there is roughly a two-thirds chance that the deficit as a share of GDP in 2025 would be within 1.9 percentage points of the agency’s projection.

Source: Congressional Budget Office.

When October 1 (the first day of the fiscal year) falls on a weekend, certain payments that would have ordinarily been made on that day are instead made at the end of September and thus are shifted into the previous fiscal year. All projections presented here have been adjusted to exclude the effects of those timing shifts. Historical amounts have been adjusted as far back as the available data will allow.

The shaded area around CBO’s baseline deficit projection, which encompasses two-thirds of possible outcomes, is based on the errors in CBO’s one-, two-, three-, four-, five-, and six-year projections of the deficit for fiscal years 1984 through 2018.

Actual outcomes will be affected by legislation enacted in future years. The effects of future legislation are not reflected in this figure.

GDP = gross domestic product.

Errors in the projections of debt tend to compound over time, so the uncertainty surrounding those projections is greater. For example, in CBO’s baseline, federal debt held by the public is projected to equal 89 percent of GDP in 2025. Taking into account the errors in its past projections, CBO estimates that there is approximately a two-thirds chance that, under current law, federal debt would be between 80 percent and 98 percent of GDP in that year.

Federal outlays in CBO’s baseline are projected to rise from $4.6 trillion in 2020 to $7.5 trillion in 2030. Increases in mandatory spending—particularly for Social Security and Medicare—account for nearly three-quarters of that increase.

Total Outlays in 2020

In CBO’s projections, total federal outlays in 2020 increase by $201 billion (or 5 percent) from their 2019 amounts. Most of that increase is attributable to mandatory outlays, which are anticipated to rise by $125 billion (or 5 percent). Discretionary outlays also are expected to increase by 5 percent this year, to a total of $1.4 trillion, an increase of $69 billion. The government’s net interest costs in 2020 are expected to inch up by $7 billion (or 2 percent), to $382 billion. (See


Box 1-2


for descriptions of the three major types of federal outlays.)

Outlays are the issuance of checks, disbursement of cash, or electronic transfer of funds made to liquidate a federal obligation. (The authority provided by federal law to incur such obligations is known as budget authority and is sometimes referred to as funding.) On the basis of their treatment in the budget process, federal outlays can be divided into three broad categories: mandatory, discretionary, and net interest.


Mandatory outlays

consist primarily of payments for benefit programs, such as Social Security, Medicare, and Medicaid. The Congress largely determines funding for those programs by setting rules for eligibility, benefit formulas, and other parameters rather than by appropriating specific amounts each year. In making baseline projections, the Congressional Budget Office generally assumes that the existing laws and policies governing those programs will remain unchanged. Mandatory outlays are net of offsetting receipts—fees and other charges that are recorded as negative budget authority and outlays. Offsetting receipts differ from revenues: Revenues are collected through the government’s sovereign powers (in the form of income taxes, for example), whereas offsetting receipts are mostly collected from other government accounts or from members of the public for businesslike transactions (in the form of premiums for Medicare or royalties for the drilling of oil on public lands, for example).


Discretionary outlays

result from the funding controlled by annual appropriation acts in which policymakers specify how much money can be obligated for certain government programs in specific years. Appropriations fund a broad array of government activities, including defense, law enforcement, education, and veterans’ health programs. They also fund the national park system, disaster relief, and foreign aid. Some of the fees and charges triggered by appropriation acts are classified as offsetting collections and are credited against discretionary budget authority and outlays for the particular accounts affected. In any year, some discretionary outlays arise from budget authority provided in the same year, and some arise from appropriations made in previous years.

In addition to outlays for the activities described above, CBO’s baseline projections include discretionary outlays for highway and airport infrastructure programs and public transit programs, all of which receive mandatory budget authority from authorizing legislation. Typically, outlays of mandatory budget authority are also classified as mandatory. Each year, however, appropriation acts control outlays for those transportation programs by limiting how much of the mandatory budget authority the Department of Transportation can obligate. For that reason, those obligation limitations are often treated as a measure of discretionary budgetary resources, and the resulting outlays are considered discretionary.


1

They serve to constrain outlays only during periods when they are in effect.


Net interest

consists of interest paid on Treasury securities and other interest that the government pays (for example, interest paid on late refunds issued by the Internal Revenue Service) minus the interest that it collects from various sources (for example, from states that pay interest on advances they received from the federal Unemployment Trust Fund when the balances of their state unemployment accounts were insufficient to pay benefits promptly). Net interest is determined mostly by the size and composition of the government’s debt and by market interest rates.

Federal outlays in 2020 are projected to be 21.0 percent of GDP, 0.6 percentage points above their average of 20.4 percent over the 1970–2019 period. Mandatory spending (net of the offsetting receipts that are credited against such outlays) is expected to equal 12.9 percent of GDP in 2020, compared with an average of 10.1 percent over the past 50 years. As a share of GDP, the other major components of federal spending are projected to fall below their 50-year averages: Discretionary outlays are expected to equal 6.4 percent of GDP this year, compared with their average of 8.3 percent over the past 50 years, and net outlays for interest are expected to equal 1.7 percent of GDP, compared with their 50-year average of 2.0 percent.

Total Outlays in 2030

Over the coming decade, CBO projects, federal outlays would grow at an average annual rate of 4.9 percent. Outlays for Social Security, Medicare, and net interest account for a little more than two-thirds of the $2.8 trillion increase in outlays over the projection period.

As a result of that growth, federal outlays in 2030 are projected to exceed their 50-year average by 3.0 percentage points, totaling 23.4 percent of GDP (see


Figure 1-6


).

Percentage of GDP

Source: Congressional Budget Office.

When October 1 (the first day of the fiscal year) falls on a weekend, certain payments that would have ordinarily been made on that day are instead made at the end of September and thus are shifted into the previous fiscal year. That happened in 1994 and 1995, so values for 1995 have been adjusted to exclude the effects of those timing shifts.

GDP = gross domestic product.

a. Consists of outlays for Medicare (net of premiums and other offsetting receipts), Medicaid, the Children’s Health Insurance Program, premium tax credits, and related spending.

Specifically, in 2030:

Mandatory spending, which is projected to reach 15.2 percent of GDP, would exceed its 50-year average by 5.2 percentage points.

Net interest outlays are projected to total 2.6 percent of GDP, exceeding their historical average by 0.5 percentage points of GDP.

In contrast, discretionary outlays are projected to decline to 5.6 percent of GDP, 2.7 percentage points below their average over the previous 50 years and lower than at any point during that period. (Under the rules that govern the construction of CBO’s baseline, discretionary spending after 2021 is projected to keep pace with future inflation, but GDP is projected to grow faster.)

Mandatory Spending

Mandatory, or direct, spending includes outlays for most federal benefit programs and for certain other payments to people, businesses, nonprofit institutions, and state and local governments. Such spending is generally governed by statutory criteria and is not normally constrained by the annual appropriation process.


5

Certain types of payments that federal agencies receive from the public and from other government agencies are classified as offsetting receipts and are accounted for in the budget as reductions in mandatory spending.

The Deficit Control Act requires CBO to construct baseline projections of most mandatory spending under the assumption that current laws continue unchanged. Therefore, CBO’s baseline projections of mandatory spending reflect the estimated effects of economic influences, growth in the number of beneficiaries participating in certain mandatory programs, and other factors related to the costs of those programs, even those programs that are set to expire under current law.


6

The projections also incorporate a set of across-the-board reductions in budgetary resources (known as sequestration) that are required under current law for some mandatory programs.

Outlays for mandatory programs (net of offsetting receipts), which totaled $2.7 trillion in 2019, are projected to rise to $4.9 trillion by the end of the projection period (see


Table 1-3


). Overall, mandatory outlays are projected to increase at an average annual rate of 5.4 percent between 2019 and 2030.

Billions of Dollars

Source: Congressional Budget Office.

Data on outlays for benefit programs in this table generally exclude administrative costs, which are discretionary.

MERHCF = Department of Defense Medicare-Eligible Retiree Health Care Fund (including TRICARE for Life).

a. Excludes the effects of Medicare premiums and other offsetting receipts. (Net Medicare spending, which includes those offsetting receipts, is shown in the memorandum section of the table.)

b. Premium tax credits are federal subsidies for health insurance purchased through the marketplaces established by the Affordable Care Act. Related spending consists alm ost entirely of payments for risk adjustment and the Basic Health Program.

c. Includes outlays for the American Opportunity Tax Credit and other credits.

d. Includes Temporary Assistance for Needy Families, Child Support Enforcement, Child Care Entitlements to States, and other programs that benefit children.

e. Includes benefits for retirement programs in the civil service, foreign service, and Coast Guard; benefits for smaller retirement programs; and annuitants’ health care benefits.

f. Includes veterans’ compensation, pensions, and life insurance programs. (Outlays for veterans’ health care are classified as discretionary.)

g. Cash payments from Fannie Mae and Freddie Mac to the Treasury are recorded as offsetting receipts in 2019 and 2020. Beginning in 2021, CBO’s estimates reflect the net lifetime costs—that is, the subsidy costs adjusted for market risk—of the guarantees that those entities will issue and of the loans that they will hold. CBO counts those costs as federal outlays in the year of issuance.

h. Includes premium payments, recoveries of overpayments made to providers, and amounts paid by states from savings on Medicaid’s prescription drug costs.

Much of the projected growth in mandatory spending as a percentage of GDP over the coming decade is attributable to two factors: an increasing number of participants in Social Security and Medicare, and growth in federal health care costs per beneficiary. The number of participants is growing rapidly because the United States is an aging society. The number of people age 65 or older is now more than twice what it was 50 years ago, and that number is expected to rise by about one-third by 2030. When the percentage increase in the number of participants is greater than in the population and costs per beneficiary grow faster than GDP per capita, then spending as a percentage of GDP increases. In CBO’s projections for Medicare and Medicaid, per-enrollee spending grows faster than GDP per person, averaging 5.3 percent per year between 2019 and 2030. Projected increases in the volume and intensity of health care utilization contribute to that faster growth. Taking into account the range of experience over the past three decades, CBO’s projections of per-enrollee spending growth are higher than the growth over the past decade and lower than that over the two decades preceding that period.

The effects of those two long-term trends on federal spending are already apparent over the 10-year projection period—especially for Social Security and Medicare—and are expected to persist beyond that period.


Social Security and the Major Health Care Programs.

Outlays for Social Security and the major health care programs—Medicare, Medicaid, premium tax credits and related spending, and the Children’s Health Insurance Program—account for more than 90 percent of the projected growth in mandatory spending through 2030.


7

Under current law, spending for those programs, net of offsetting receipts, would grow at an average annual rate of 6.1 percent over the coming decade, CBO estimates, increasing from 10.2 percent of GDP in 2019 to 13.0 percent in 2030.


8

Specifically, in CBO’s current baseline:

Outlays for Social Security, which totaled 4.9 percent of GDP in 2019, rise steadily thereafter, reaching 6.0 percent of GDP in 2030 (see


Figure 1-7


).

Percentage of GDP

Source: Congressional Budget Office.

GDP = gross domestic product.

a. Consists of outlays for Medicare (net of premiums and other offsetting receipts), Medicaid, the Children’s Health Insurance Program, premium tax credits, and related spending.

Outlays for Medicare, which totaled 3.0 percent of GDP in 2019, grow in most years through 2030, when they total 4.4 percent.

Federal outlays for Medicaid remain relatively stable as a percentage of GDP over the coming decade, averaging about 2 percent each year.

Outlays for premium tax credits and related spending average 0.2 percent of GDP per year through 2030.


Other Mandatory Programs.

Aside from spending on Social Security and the major health care programs, all other mandatory spending, which totaled 2.7 percent of GDP in 2019, is projected to decline as a share of GDP, to 2.2 percent in 2030. That category includes spending on income support programs (such as unemployment compensation and the Supplemental Nutrition Assistance Program), military and civilian retirement programs, most veterans’ benefits, and major agriculture programs. The projected decline in spending relative to GDP occurs in part because benefit amounts for many of those programs increase each year to keep pace with inflation, and in CBO’s economic forecast, the rate of inflation is less than the rate of growth in nominal GDP. (For more details about CBO’s economic forecast, see

Chapter 2

.)

Discretionary Spending

Discretionary spending encompasses an array of federal activities that are funded through or controlled by annual appropriations. That category includes most defense spending as well as spending for many non­defense activities, such as elementary and secondary education, housing assistance, international affairs, and the administration of justice, along with outlays for highway programs. In any year, some discretionary outlays arise from budget authority provided in the same year, and some from appropriations made in previous years.


9

The Bipartisan Budget Act of 2019 (P.L. 116-37) revised the limits (or caps) that had previously been set on discretionary appropriations for 2020 and 2021.


10

CBO’s projections of discretionary funding incorporate those limits and are formulated on the basis of principles and rules that are largely set in law. In accordance with section 257 of the Deficit Control Act, CBO bases its projections for individual accounts on the most recent appropriations and applies the appropriate inflation rate to project funding for future years.


11

After account-level projections are made, the total amount of budget authority is adjusted to comply with the caps on discretionary funding through 2021. Projections for years after 2021 reflect the assumption that discretionary funding keeps pace with inflation.

Some elements of discretionary funding are not constrained by the caps—for most of those exceptions, the caps are adjusted to accommodate the provided funding.


12

In CBO’s baseline, discretionary budget authority totals $1.4 trillion in both 2020 and 2021, including $113 billion in 2020 and $114 billion in 2021 for OCO and other activities not constrained by the caps (see


Table 1-4



)

.


13

The amount for 2020 that is constrained by the caps—$1,304 billion—is $16 billion more than the overall limit on discretionary funding for this year; that excess occurs because the appropriation acts for 2020 included provisions that were estimated to reduce budget authority for mandatory programs.


14

For 2021, the remaining amount of projected budget authority is equal to the cap, or $1,298 billion.

Billions of Dollars

Source: Congressional Budget Office.

CBO’s current baseline projections incorporate the assumption that the caps on discretionary budget authority and the automatic enforcement procedures specified in the Budget Control Act of 2011 (as amended) remain in effect through 2021.

Nondefense discretionary outlays are usually greater than budget authority because of spending from the Highway Trust Fund and the Airport and Airway Trust Fund that is subject to obligation limitations set in appropriation acts. The budget authority for such programs is provided in authorizing legislation and is considered mandatory.

n.a. = not applicable; * = between zero and $500 million.

a. The amount of budget authority for 2019 and 2020 in CBO’s baseline does not match the sum of the caps on funding plus adjustments to the caps. That occurs mostly because estimated reductions in mandatory budget authority stemming from provisions in appropriation acts for those years were credited as offsets to new discretionary budget authority in judging the acts’ compliance with the caps. In the baseline, those changes to mandatory budget authority appear in their normal mandatory accounts.

b. Some or all of the discretionary funding related to seven types of activities is not constrained by the caps; for most of those activities, the caps are adjusted to accommodate such funding, up to certain limits. Specifically, appropriations designated for overseas contingency operations and activities designated as emergency requirements are assumed to grow with inflation after 2020, and the caps are adjusted accordingly. For four other activities—disaster relief, wildfire suppression (for 2020 and 2021), activities related to the 2020 census (for this year only), and certain efforts to reduce overpayments in benefit programs—the extent to which the caps can be adjusted is subject to annual constraints, as specified in law. In addition, the 21st Century Cures Act (Public Law 114-255) requires that discretionary funding for certain authorized activities—up to amounts specified in law—be excluded from calculations of funding subject to the caps.

c. When October 1 (the first day of the fiscal year) falls on a weekend, as it will in calendar years 2022, 2023, and 2028, payments for military pay that would have ordinarily been made on that day are instead made at the end of September and thus are shifted into the previous fiscal year.

Over the 2020–2030 period, total discretionary budget authority is projected to increase by 2.2 percent a year, on average. Measured in dollar terms, the outlays that would flow from the projected budget authority would rise from

$1.4 trillion in 2020 to $1.8 trillion in 2030, for an average yearly increase of 2.3 percent. Measured as a share of GDP, however, discretionary outlays would drop from 6.4 percent in 2020 to 5.6 percent in 2030. That 2030 percentage would be the smallest in any year since 1962 (the earliest year for which such data have been reported); by comparison, discretionary outlays averaged

8.3

percent of GDP over the past 50 years, although they were as low as 6.0 percent of GDP in 1999.


Defense Spending.

By CBO’s estimate, discretionary funding for defense programs in 2020 currently totals $746 billion, including $72 billion for OCO and $8 billion for activities designated as emergency requirements. Defense outlays, which amounted to $676 billion in 2019, will increase by $28 billion (or 4 percent), to $705 billion, the agency estimates. Outlays are projected to increase by $9 billion (or 3 percent) for operation and maintenance, $9 billion (or 7 percent) for procurement, $6 billion (or 7 percent) for research, development, test, and evaluation, and $4 billion (or 3 percent) for military personnel, among other smaller changes in other areas.

In 2021, budget authority for defense programs is projected to equal $753 billion, an increase of $7 billion (or 1 percent) from the 2020 amount. Most of that increase is constrained by the cap on defense funding, which is scheduled to rise by $5 billion (or less than 1 percent) from 2020 to 2021. The remaining $2 billion reflects increases in projected funding for OCO and emergency requirements, which grows with inflation. After 2021, defense funding is projected to grow by 2.5 percent a year, on average, reaching $937 billion in 2030. Over the same period, CBO projects, outlays for defense programs would grow at a rate similar to that of budget authority, rising from $752 billion in 2022 to $906 billion in 2030. As a percentage of GDP, discretionary outlays for defense are projected to fall from 3.2 percent in 2020 to 2.8 percent in 2030.


Nondefense Spending.

For 2020, nondefense discretionary funding in CBO’s baseline totals $671 billion. That amount includes $33 billion that is not limited by the caps on discretionary budget authority (including $18 billion for disaster relief). CBO estimates that nondefense discretionary outlays will increase by $41 billion (or 3 percent) in 2020, to $701 billion. Among the largest components of that increase are $5 billion for the 2020 census, $5 billion for agriculture programs, and $4 billion for veterans’ benefits and services. The remaining growth in nondefense discretionary outlays is the result of smaller increases in spending for various programs.

For 2021, CBO’s projection of nondefense discretionary budget authority totals $659 billion, $12 billion (or 2 percent) less than 2020 amounts. Although the cap on nondefense funding increases by $5 billion in 2021, CBO estimates that complying with the cap would require a $12 billion reduction in the amount of budget authority provided for activities that are constrained by it, unless the appropriation acts for 2021 contained provisions that would reduce mandatory budget authority. Projected funding for activities that are not limited by the cap on nondefense discretionary funding remains at $33 billion.

After 2021, funding is projected to grow by 2.6 percent a year, on average, reaching $828 billion in 2030. Discretionary outlays for nondefense programs are estimated to be $715 billion in 2021; they would then follow the same trajectory as budget authority, increasing to $884 billion in 2030.


15

Relative to the size of the economy, outlays for nondefense discretionary programs would fall from 3.2 percent of GDP in 2020 to 2.8 percent of GDP in 2030.

Net Interest

In the budget, net outlays for interest primarily encompass the government’s interest payments on federal debt, offset by interest income that the government receives. Net outlays for interest are dominated by the interest paid to holders of the debt that the Treasury Department issues to the public. The Treasury also pays interest on debt issued to trust funds and other government accounts, but such payments are intragovernmental transactions that have no effect on the budget deficit.

In CBO’s projections, net outlays for interest in 2020 edge up to $382 billion, from $376 billion in 2019. Those outlays more than double over the next 10 years, reaching $819 billion in 2030. As a result, under current law, net outlays for interest are projected to grow from 1.7 percent of GDP in 2020 to 2.6 percent in 2030.

Two primary factors affect the federal government’s net interest costs: the amount of debt held by the public (which is projected to be 87 percent more at the end of 2030 than it was at the end of 2019) and interest rates on Treasury securities. The projected increase in federal debt is the most significant factor affecting the projected growth in net outlays for interest.

The increase in interest rates accounts for about two-fifths of the projected growth in net interest outlays over the projection period. CBO estimated the contribution of rising interest rates to net interest costs by keeping interest rates on marketable debt held by the public at their values in the fourth quarter of fiscal year 2019. For example, the rate paid on 10-year Treasury notes was assumed to remain at 1.8 percent, rather than rising to 3.1 percent in 2030, as CBO projects in its economic forecast. (For a more detailed discussion of CBO’s forecast of interest rates, see

Chapter 2.

) In that scenario, outlays for interest in 2030 would be $284 billion lower (including the effects of debt service) than in CBO’s baseline projections, and debt would be $1.3 trillion lower at the end of that year.

Federal revenues in 2019 totaled $3.5 trillion, or 16.3 percent of GDP. Under current law, CBO estimates, revenues will increase by 4.9 percent in 2020, to just over $3.6 trillion. As a percentage of GDP, revenues are expected to rise to 16.4 percent this year, below the average of 17.4 percent recorded over the past 50 years. Over the next decade, CBO projects, revenues would rise markedly, reaching 18.0 percent of GDP by 2030. That growth—which mainly reflects an increase in revenues from individual income taxes and, to a lesser extent, from corporate income taxes and estate and gift taxes—would slow because of a decline in receipts from excise taxes. Other sources of revenue are projected to grow at the same pace as GDP (see


Figure 1-8


).

Percentage of GDP

Source: Congressional Budget Office.

GDP = gross domestic product; * = between zero and 0.05 percentage points.

a. Real bracket creep occurs when more income is pushed into higher tax brackets because people’s income is rising faster than inflation.

In CBO’s baseline, the largest movements in revenues over the next decade are as follows:


Individual income tax receipts

increase relative to GDP between 2020 and 2030, mostly because the expiration of provisions of the 2017 tax act is projected to increase receipts relative to taxable personal income (see


Figure 1-9


). Real bracket creep and other factors (explained in more detail below) also contribute to that increase.

Percentage of GDP

Individual income tax revenues are projected to rise sharply after certain provisions of the 2017 tax act expire at the end of calendar year 2025.

Source: Congressional Budget Office.

GDP = gross domestic product.

a. Real bracket creep occurs when more income is pushed into higher tax brackets because people’s income is rising faster than inflation.


Estate and gift tax receipts

increase slightly relative to GDP between 2020 and 2030, primarily because of the expiration of a provision of the 2017 tax act that doubled the exemption amount through tax year 2025.


Excise tax receipts

decline in 2021 following the final payment of a tax on health insurance providers, which was recently repealed. Excise taxes continue to gradually decline as a share of GDP thereafter, along with the tax bases on which many excise taxes are levied.

Individual Income Taxes

In 2019, receipts from individual income taxes totaled $1.7 trillion, or 8.1 percent of GDP. Under current law, receipts from individual income taxes are expected to rise by 4 percent, to almost $1.8 trillion in 2020. That percentage increase is about the same as the increase expected for nominal GDP, so individual income tax receipts would remain at 8.1 percent of GDP. CBO pro­jects that, if current laws remained unchanged, individual income tax receipts would rise by 1.4 percentage points as a share of economic output over the next decade.


Scheduled Tax Changes After 2025.

The most significant factor pushing up taxes relative to income is the scheduled expiration, at the end of calendar year 2025, of nearly all the individual income tax provisions of the 2017 tax act. The provisions that are scheduled to expire include lower statutory tax rates, the higher standard deduction, the repeal of personal exemptions, the expansion of the child tax credit, and the deduction for qualified business income. Those expirations would cause tax liabilities to rise in calendar year 2026, boosting individual income tax receipts relative to GDP by 0.8 percentage points.


Real Bracket Creep and Related Effects.


16


Other Factors.

Also, as the population continues to age, taxable retirement income will tend to grow more rapidly than GDP. CBO expects the retirement of members of the baby-boom generation to cause a gradual increase in distributions from tax-deferred retirement accounts and traditional defined benefit pension plans, as well as taxable Social Security benefits. Partially offsetting those revenue increases is a projected decline in realizations of capital gains relative to the size of the economy. Those realizations have been larger in the past several years than their historical average share of GDP (after accounting for differences in applicable tax rates). CBO projects that such realizations would gradually return to levels consistent with their historical average by 2030.

Corporate Income Taxes

In 2019, receipts from corporate income taxes totaled $230 billion, or 1.1 percent of GDP. CBO expects corporate tax receipts to rise by 2 percent in 2020, remaining at 1.1 percent of GDP. Under current law, CBO projects, corporate income tax receipts would rise through 2025, reaching 1.4 percent of GDP. After 2025, receipts would begin to decline, falling to 1.3 percent of GDP in 2030. That pattern reflects the varying effects over time of provisions of the 2017 tax act and other factors.


Provisions of the 2017 Tax Act.

A number of provisions of the 2017 tax act include scheduled changes over the next decade that will increase corporate taxes by reducing allowable deductions or increasing tax rates on certain types of income. Those changes contribute 0.1 percentage point to the increase in receipts as a share of GDP between 2020 and 2030.

Most significantly, provisions allowing firms to immediately deduct from their taxable income 100 percent of their investments in equipment are scheduled to phase out between 2023 and 2026. Additionally, in 2022, a stricter limit on the deductibility of interest expenses will take effect, and firms will be required to capitalize and amortize certain expenditures for research and experimentation as they are incurred over a five-year period, rather than immediately deducting them. Rules related to the taxation of profits abroad will also change in 2026, increasing revenues in subsequent years.


17

Receipts will be further affected over the next decade by the end of the scheduled payments for a onetime tax on certain foreign profits. That tax applied to foreign profits for which U.S. taxes had been deferred under previous law. Taxes on those earnings, which are based on the value of those profits as of late 2017 (and which are unrelated to future business activity), can be paid in installments over eight years. Because the required installments are not equal in size, the effect of those receipts in CBO’s baseline varies over the 2019–2026 period. As a result, those payments boost receipts to varying degrees from 2019 through 2026 but not in subsequent years, thereby contributing to the reduction in receipts relative to GDP through 2030.


Other Factors.

Over the next decade, other factors would raise projected receipts as a share of GDP by 0.1 percentage point. CBO projects that domestic corporate profits would increase slightly relative to GDP over the next decade. That anticipated increase in profits would cause corporate tax receipts to rise as a share of the economy. In addition, a number of tax provisions that were recently extended temporarily by the Further Consolidated Appropriations Act, 2020, are scheduled to expire after 2020, which would also boost receipts over the next several years.

Receipts From Other Sources

Receipts from all other sources, which are described below, totaled $1.5 trillion in 2019, or 7.1 percent of GDP. Those receipts are projected to remain between 7.1 percent and 7.3 percent of GDP over the next decade.


Payroll Taxes.

Receipts from payroll taxes, which fund social insurance programs—primarily Social Security and Medicare—totaled $1.2 trillion in 2019, or about 5.9 percent of GDP. Those receipts are projected to remain at that share throughout the next decade because workers’ earnings, which constitute most of the payroll tax base, remain relatively stable as a share of GDP in CBO’s economic forecast.


Estate and Gift Taxes.

Revenues from estate and gift taxes totaled $17 billion in 2019, or just below 0.1 percent of GDP. Revenues from that source are projected to rise to just above 0.1 percent in 2027 and subsequent years after a provision of the 2017 tax act that doubled the amount of the estate and gift tax exemption expires at the end of calendar year 2025.


Excise Taxes.

Excise taxes are levied on the production or purchase of particular types of goods or services, including motor fuels, tobacco, alcohol, and aviation services. Collections of excise taxes totaled $99 billion in 2019, or 0.5 percent of GDP. Those receipts are projected to remain at that level in 2020 before declining to 0.3 percent of GDP by 2030. That decline would occur primarily because many excise taxes are imposed as a fixed dollar amount per unit sold, and the number of units is growing slowly or declining.

In addition, an annual fee on health insurance providers was recently repealed by the Further Consolidated Appropriations Act, 2020. Because the final payment of that fee is due in September 2020, it will boost receipts this year but not in subsequent years.


Customs Duties.

Collections of customs duties, which are assessed on certain imports, totaled 0.3 percent of GDP in 2019. Those receipts are projected to rise to 0.4 percent of GDP in 2020 and remain at that level throughout the next decade. Those duties include tariffs imposed by the Administration beginning in 2018 that have increased customs duties by roughly 0.2 percent of GDP.


18

CBO’s baseline incorporates the assumption that tariffs, along with any subsequent exemptions provided by the Administration, continue throughout the projection period at the rates in effect as of January 7, 2020, when the economic forecast was completed.


19


Remittances From the Federal Reserve.

The income produced by the various activities of the Federal Reserve System, minus the cost of generating that income and the cost of the system’s operations, is remitted to the Treasury and counted as revenue. The central bank remitted $53 billion to the Treasury in 2019, or 0.2 percent of GDP. CBO expects remittances to increase to 0.3 percent of GDP in 2020, primarily as a result of lower short-term interest rates, which reduce the Federal Reserve’s interest expenses and therefore increase remittances. CBO projects that remittances would remain at 0.3 percent of GDP throughout the next decade.


Miscellaneous Fees and Fines.

Receipts from other fees and fines totaled $32 billion in 2019, or 0.2 percent of GDP. CBO projects that, under current law, collections of fees and fines would remain between 0.1 percent and 0.2 percent of GDP in each year through 2030.

Tax Expenditures

The tax rules that form the basis for CBO’s projections include an array of exclusions, deductions, preferential rates, and credits. Those provisions reduce revenues for any given level of tax rates in both the individual and corporate income tax systems. Many of those provisions are called tax expenditures because, like government spending programs, they provide financial assistance for particular activities as well as to certain entities or groups of people.


20

Unlike many spending programs, tax expenditures are not subject to annual appropriations. Because of that budgetary treatment, tax expenditures are less transparent than discretionary spending or spending on benefit programs. In fact, most tax expenditures are not explicitly recorded in the federal budget. The one exception is the portion of refundable tax credits that exceeds a taxpayer’s tax liability; that amount is recorded as mandatory spending in the budget.

Tax expenditures contribute to the budget deficit just as federal spending does. They also influence people’s choices about working, saving, and investing, and they affect the distribution of income. The Congressional Budget and Impoundment Control Act of 1974 requires the federal budget to list tax expenditures, and every year the staff of the Joint Committee on Taxation (JCT) and the Treasury’s Office of Tax Analysis each publish estimates of individual and corporate income tax expenditures.


21

Tax expenditures have a large effect on the federal budget. In fiscal year 2020, the value of the more than 200 tax expenditures in the individual and corporate income tax systems will total about $1.8 trillion—or 8.0 percent of GDP—if their effects on payroll as well as income taxes are included.


22

That amount, which was calculated by CBO on the basis of estimates prepared by JCT, equals almost half of all federal revenues that are projected to be collected in 2020 and exceeds all projected discretionary outlays combined (see


Figure 1-10


).


23

Estimates of tax expenditures measure the difference between households’ tax liabilities under current law and the tax liabilities they would have incurred if the provisions generating those tax expenditures were repealed but households’ behavior was unchanged. Such estimates do not represent the amount of revenues that would be raised if those provisions were eliminated, because the changes in incentives that would result from eliminating those provisions would lead households to modify their behavior in ways that would mute the impact on revenues.

Percentage of GDP


Tax expenditures, which are projected to total more than $1.8 trillion in 2020, reduce revenues and, like spending programs, contribute to the deficit.

Source: Congressional Budget Office, using estimates by the staff of the Joint Committee on Taxation.

GDP = gross domestic product.

a. The outlay portions of refundable tax credits are included in tax expenditures as well as mandatory outlays. In 2020, they are estimated to total 0.6 percent of GDP.

b. This total is the sum of the estimates for all of the separate tax expenditures and does not account for interactions among them. However, CBO estimates that in 2020, the total of all tax expenditures roughly equals the sum of each considered separately. Because estimates of tax expenditures are based on people’s behavior with current provisions of the tax code in place, they do not reflect the amount of revenues that would be raised if those provisions were eliminated and taxpayers adjusted their activities in response.

The Economic Outlook

If current laws governing federal taxes and spending generally remained in place, the economy would expand at an average annual rate of 1.7 percent over the next decade, the Congressional Budget Office projects. By comparison, that rate was 1.8 percent over the past 15 years and 2.3 percent over the past 5 years. The agency’s latest economic forecast includes the following projections of real (inflation-adjusted) gross domestic product (GDP) and other key variables for 2020 through 2030:


In 2020, real GDP is projected to grow by 2.2 percent on a fourth-quarter-to-fourth-quarter basis.

Consumer spending and business fixed investment will largely drive growth this year, CBO projects. Growth in consumer spending is expected to remain solid in 2020, buoyed by recent gains in household wealth and by momentum in the growth of wages and salaries. Growth of business fixed investment rebounds this year, CBO projects, because many of the factors that weighed on investment during 2019—including lower oil prices, rising business uncertainty about future trade policies, and a decline in aircraft purchases—are expected to reverse or to have a smaller impact on growth. In subsequent years, economic growth is projected to slow as the growth of consumer spending and private investment moderates because of rising interest rates, slowing growth in labor compensation, and diminishing fiscal stimulus (see


Table 2-1


).

Sources: Congressional Budget Office; Bureau of Economic Analysis; Bureau of Labor Statistics; Federal Reserve.

For economic projections for each year from 2020 to 2030, see

Appendix B

.

GDP = gross domestic product; PCE = personal consumption expenditures.

a. Values for 2019 do not reflect the values for GDP and related series that the Bureau of Economic Analysis has released since early January 2020.

b. Real values are nominal values that have been adjusted to remove the effects of changes in prices.

c. Excludes prices for food and energy.

d. The consumer price index for all urban consumers.

e. Actual value for 2019.

f. The employment cost index for wages and salaries of workers in private industry.

g. Value for the fourth quarter of 2024.

h. Value for the fourth quarter of 2030.

i. The average monthly change in the number of employees on nonfarm payrolls, calculated by dividing the change from the fourth quarter of one calendar year to the fourth quarter of the next by 12.

j. Adjusted to remove distortions in depreciation allowances caused by tax rules and to exclude the effects of changes in prices on the value of inventories.


GDP is expected to be higher than potential GDP in 2020 to a greater degree than in recent years, leading to increases in inflation and interest rates after years in which both remained low.

Potential GDP is an estimate of the maximum sustainable output of the economy. When GDP is above potential GDP, the overall demand for goods and services exceeds the economy’s maximum sustainable level of production, which leads to upward pressure on inflation and interest rates. In CBO’s projections, solid economic growth in 2020 increases the output gap—the difference between GDP and potential GDP, expressed as a percentage of potential GDP—so that it reaches a cyclical peak of 0.8 percent. In later years, as economic growth moderates, the output gap narrows steadily and real GDP eventually falls below its potential level (see


Figure 2-1


).

In CBO’s projections, output grows faster than the economy’s maximum sustainable output in 2020, largely because of increased consumer spending and a rebound in business fixed investment. In later years, economic growth slows as growth in consumer spending and private investment moderates.

Strong demand for labor and products pushes the output gap to a cyclical peak in 2020. Over the next few years, the output gap narrows, reducing the upward pressure on inflation and interest rates.

Sources: Congressional Budget Office; Bureau of Economic Analysis.

Real values are nominal values that have been adjusted to remove the effects of changes in prices. Potential GDP is CBO’s estimate of the maximum sustainable output of the economy. Growth of real GDP and of real potential GDP is measured from the fourth quarter of one calendar year to the fourth quarter of the next.

The output gap is the difference between GDP and potential GDP, expressed as a percentage of potential GDP. A positive value indicates that GDP exceeds potential GDP; a negative value indicates that GDP falls short of potential GDP. Values for the output gap are for the fourth quarter of each year.

Values for 2019 are CBO’s estimates.

GDP = gross domestic product.


Solid economic growth and continued strength in labor demand are projected to keep the unemployment rate low and drive employment and wages higher in 2020.

In CBO’s estimation, strong growth in labor demand this year will move employment further above potential employment.


1

When employment exceeds its potential, employers bid up the price of labor to recruit and retain workers, putting upward pressure on wages and salaries and other forms of labor compensation. In later years, moderating economic growth and rising wages are projected to restrain growth in the demand for labor, reducing job growth. Although economic and job growth are projected to slow, employment, which tends to lag behind movements in output, is expected to remain above its maximum sustainable level over the next five years, supporting relatively robust wage growth during that time.


In the second half of the projection period, real GDP is projected to grow at an average annual rate of 1.7 percent, the same as its potential.

CBO’s projections of GDP, unemployment, inflation, and interest rates for 2025 through 2030 are based mainly on the agency’s projections of underlying trends in the factors that determine those variables. Over most of that period, in CBO’s forecast, real GDP tends to grow at the same rate as real potential GDP, which is determined by factors such as the size of the labor force, the average number of labor hours per worker, capital investment, and productivity growth. CBO’s analysis of those factors accounts for the effects of federal tax and spending policies, as well as trade and other public policies, embodied in current law. In some cases, the agency expects that those policies would not only affect potential output but also influence the overall demand for goods and services.

Significant uncertainty surrounds CBO’s economic forecast, which the agency constructed to be the average of the distribution of possible outcomes if, through 2030, the federal policies embodied in current law were generally unchanged and the trade policies in effect when CBO completed its projections remained in place. If federal fiscal policies, trade policies, or other policies (such as federal regulations) changed, then economic outcomes would probably differ from CBO’s economic projections. Even if no changes were made to those policies, economic outcomes would still probably differ from CBO’s projections because of other factors, such as unexpected changes in the underlying trends in productivity and labor force growth, international developments, and perhaps a recession.

CBO’s current economic forecast is similar to the forecast the agency published in August 2019, but it differs in some ways. In particular, CBO’s current projections of interest rates and inflation are lower. CBO also lowered its estimates of potential output growth and its projections of the unemployment rate in the latter part of the projection period.

CBO’s economic projections in this forecast are similar to those of other forecasters. They are within the full range of forecasts for 2020 and 2021 by the private-sector economists who contributed to the January 2020

Blue Chip Economic Indicators

, as well as the latest forecasts for 2020 through 2022 contained in the Federal Reserve’s

Summary of Economic Projections

.

CBO’s economic projections reflect the federal fiscal policies specified in current law. They also incorporate the assumption that the tariffs on U.S. imports and exports in effect as of January 7, 2020—the day the agency completed its economic projections—will remain in place through 2030.


2

Changes in federal fiscal policies affect the economy not only through changes in the federal government’s purchases of goods and services but also through changes in the federal tax code and federal transfer programs (such as Social Security and Medicare), which affect households’ spending, saving, and labor supply decisions as well as businesses’ investment and hiring decisions. Changes to trade policies—such as increases in tariffs on certain imported and exported goods—can affect economic activity through changes to domestic prices and through uncertainty about future changes in trade policies, which, in turn, influence trade flows, business investment, and real output and income.

Federal fiscal policies and tariffs directly affect deficits and debt. Changes in deficits and debt affect CBO’s long-run projections of potential GDP by altering national saving (the total amount of saving by households, businesses, and governments) and, in turn, the funds that are available for private investment in productive capital (such as office buildings, factories, and equipment).

Fiscal Policies

According to CBO’s estimates, recent changes in federal fiscal policies will increase the level of real GDP over the next few years as a result of greater government spending and lower taxes. In particular, legislation enacted since the agency published its previous economic projections in August 2019 will boost the level of real GDP (on a calendar year basis) by about 0.1 percent in 2020 and by less than that amount in 2021 and 2022.

The most significant legislation affecting CBO’s economic projections—the Consolidated Appropriations Act, 2020 (Public Law 116-93), and the Further Consolidated Appropriations Act, 2020 (P.L. 116-94), both enacted in December 2019—provided annual appropriations for the entire federal government and adopted various tax provisions, including the extension of certain individual and business tax provisions and the repeal of three excise taxes related to health care. As a consequence, CBO modestly increased projected federal spending and lowered projected federal revenues over the next few years. The effect of those appropriation acts and other recently enacted legislation increased CBO’s projections of the primary deficit—that is, deficits excluding net outlays for interest—by $48 billion in fiscal year 2020 and $451 billion over the 2020–2029 period (see

Appendix A

). Almost all of that increase was driven by a reduction in revenues stemming largely from the repeal of three excise taxes related to health care.

CBO projects that those larger primary deficits would eventually cause the level of real GDP to be 0.1 percent lower by the end of the projection period than it otherwise would have been. When the government borrows, it borrows from people and businesses whose savings would otherwise be financing private investment. Although an increase in government borrowing strengthens the incentive to save, the resulting rise in saving is not as large as the increase in government borrowing; national saving, or the amount of domestic resources available for private investment, therefore falls. However, private investment falls less than national saving does in response to government deficits, because the higher interest rates that are likely to result from increased federal borrowing tend to attract more foreign capital to the United States. In CBO’s assessment, the crowding out of private investment occurs gradually, as interest rates and the funds available for private investment adjust in response to increased federal deficits.

Another element affecting CBO’s current-law projections in later years is the expiration of certain provisions of the tax code. The expiration of some provisions affecting individual income taxes at the end of 2025 and the phaseout of bonus depreciation by the end of 2026 are projected to temporarily push down the level of real GDP relative to its potential. Real GDP then recovers until the relationship between the levels of GDP and potential GDP reaches its long-run average in the final years of the projection period.

Trade Policies

In CBO’s estimation, the trade barriers put in place by the United States and its trading partners between January 2018 and January 2020 would reduce real GDP over the projection period. The effects of those barriers on trade flows, prices, and output are projected to peak during the first half of 2020 and then begin to subside. Tariffs are expected to reduce the level of real GDP by roughly 0.5 percent and raise consumer prices by 0.5 percent in 2020. As a result, tariffs are also projected to reduce average real household income by $1,277 (in 2019 dollars) in 2020. CBO expects the effect of trade barriers on output and prices to diminish over time as businesses continue to adjust their supply chains in response to the changes in the international trading environment. By 2030, in CBO’s projections, the tariffs lower the level of real GDP by 0.1 percent.

In January 2018, the United States started imposing new trade barriers. As of January 7, 2020, the United States had imposed tariffs on 16.8 percent of goods imported into the country, measured as a share of the value of all U.S. imports in 2017 (see


Table 2-2


).


3

Some of those tariffs apply to imports from nearly all U.S. trading partners, including tariffs on washing machines, solar panels, and steel and aluminum products. A few countries are exempted from certain tariffs. For example, Canadian and Mexican imports were granted exemptions from the tariffs on steel and aluminum products. Other tariffs affected only imports from China, covering about half of U.S. imports from China and targeting intermediate goods (items used for the production of other goods and services), capital goods (such as computers and other equipment), and some consumer goods (such as apparel and footwear).

Billions of Dollars

Source: Congressional Budget Office, using information from the Census Bureau and the Office of the U.S. Trade Representative.

The values and shares of affected goods are measured relative to their amounts in 2017—the year before the tariffs were imposed.

n.a. = not applicable; * = between zero and $500 million; ** = between zero and 0.05 percent.

In response to the tariffs, U.S. trading partners have retaliated by imposing their own trade barriers. As of January 7, 2020, retaliatory tariffs had been imposed on 9.3 percent of all goods exported by the United States—primarily industrial supplies and materials as well as agricultural products (see


Table 2-3



)

.

Billions of Dollars

Source: Congressional Budget Office, using information from the Census Bureau and the Office of the U.S. Trade Representative.

The values and shares of affected goods are measured relative to their amounts in 2017—the year before the tariffs were imposed.

n.a. = not applicable; * = between zero and $500 million; ** = between zero and 0.05 percent.

In CBO’s projections, increases in tariffs reduce U.S. economic activity in three ways. First, they make consumer goods and capital goods more expensive, thereby reducing the purchasing power of U.S. consumers and businesses.


4

Second, they increase businesses’ uncertainty about future barriers to trade. Such uncertainty leads some U.S. businesses to delay or forgo new investments or make costly adjustments to their supply chains. Third, they prompt retaliatory tariffs by U.S. trading partners, which reduce U.S. exports by making them more expensive for foreign purchasers. All of those effects lower U.S. output. U.S. consumers and businesses replace certain imported goods with goods produced in the United States, which offsets some of that decline. In addition, tariff revenues, by reducing the deficit, increase the resources available for private investment in later years.

In CBO’s projections for 2020 to 2024, economic growth initially exceeds and then falls below its maximum sustainable pace. CBO expects real GDP to grow by 2.2 percent this year, by 1.8 percent in 2021, and by 1.6 percent in 2022, all measured on a fourth-quarter-to-fourth-quarter basis (see



Table 2-4


).

Percent

Source: Congressional Budget Office.

Real values are nominal values that have been adjusted to remove the effects of changes in prices.

Data are annual. Changes are measured from the fourth quarter of one calendar year to the fourth quarter of the next.

GDP = gross domestic product; * = between zero and 0.05 percentage points.

a. Consists of personal consumption expenditures.

b. Comprises business fixed investment and investment in inventories.

c. Consists of purchases of equipment, nonresidential structures, and intellectual property products.

d. Includes the construction of single-family and multifamily structures, manufactured homes, and dormitories; spending on home improvements; and brokers’ commissions and other ownership transfer costs.

e. Based on the national income and product accounts.

Strong economic growth in 2020 is projected to push output further above its potential level this year, putting upward pressure on inflation and interest rates. CBO expects rising inflation this year and next, along with continued strength in labor and product markets, to prompt the Federal Reserve to start tightening monetary policy by increasing the range of the federal funds rate by the end of 2021. (The federal funds rate is the interest rate that financial institutions charge each other for overnight loans of their monetary reserves.) In the agency’s projection, those factors and diminishing fiscal stimulus slow the economy and dampen the labor market’s current momentum, narrowing the output gap and the gap between employment and potential employment in 2021 and 2022.

CBO’s projections of the economy over the next five years reflect anticipated fluctuations in the components of final demand (such as consumption and investment), projected changes in supply-side factors (such as growth in productivity and the labor supply), and the interactions between them.


5

In CBO’s forecast, near-term fluctuations in economic activity are determined primarily by demand-side developments but are also influenced by supply-side factors. For example, if an increase in demand pushed GDP beyond its maximum sustainable level, then upward pressure on inflation and interest rates would be expected. If the increase in demand was matched by an equivalent boost to potential output, however, then GDP would not exceed its maximum sustainable level, and no additional upward pressure on inflation or interest rates would occur.

Output

CBO expects output to grow 2.2 percent in 2020. In the agency’s projections, that growth is supported by continued strength in consumer spending and a marked pickup in real business investment, with investment in aircraft and in oil wells rebounding and a restraint on investment growth loosening as adverse effects on growth from uncertainty about future trade policies are reduced. Some of the factors that are expected to support output growth this year would taper off in later years, CBO projects.

The growth of real GDP is expected to average 1.6 percent per year from 2021 through 2024, slower than real potential GDP’s pace of 1.9 percent over the same period. In CBO’s projections, that difference arises because government purchases and residential investment grow at rates that are slower than the growth rate of real potential GDP.


Consumer Spending.

In the agency’s projections, real consumer spending on goods and services remains robust in 2020, increasing by 2.5 percent compared with 2.7 percent in 2019 (see


Table 2-4


). Faster gains in wages and salaries over the past few years have helped drive the recent increases in consumer spending. In addition, CBO estimates that the 2017 tax act helped support spending growth, largely because the reduction in individual income taxes led to an increase in disposable personal income.


6

Solid increases in housing wealth, sharp increases in equity wealth, and continued increases in the availability of consumer credit last year also boosted consumer spending. In 2020, CBO expects recent gains in household wealth and the momentum in the growth of wages and salaries to support strong consumer spending throughout the year.

Over the 2021–2024 period, in CBO’s projections, average annual growth in consumer spending slows to 1.9 percent, similar to the rate of growth of real disposable income. The growth of consumer spending moderates as the boost from the 2017 tax act diminishes and as rising interest rates and a slowing aggregate economy moderate the growth of asset prices and wages and salaries.


Business Investment.

In CBO’s projections, real growth in business fixed investment picks up this year to 4.2 percent, after slowing to 0.2 percent in 2019 from 5.9 percent in 2018. That slowdown was due, in part, to the suspension of deliveries of the Boeing 737 MAX aircraft, rising business uncertainty about future trade policies, and reduced drilling activity (see


Table 2-4


). CBO expects many factors that weighed on the growth of investment in 2019 to reverse or to have a smaller impact in 2020. Less investment in aircraft due to fewer deliveries of Boeing’s 737 MAX subtracted about a half percentage point from growth of business fixed investment in 2019; a resumption of deliveries, including inventoried aircraft, will add at least that much to growth of business fixed investment in 2020, CBO projects. Increased tariff rates and rising business uncertainty about future trade policies reduced investment in 2019. Although increased uncertainty associated with trade policies is likely to remain in 2020, it is unlikely to restrain growth of investment as much as it did in 2019. CBO expects oil prices to rise in 2020, causing oil exploration and development to increase. The agency estimates that the 2017 tax act boosted the growth of business fixed investment during 2018 and 2019 and will continue to do so in 2020.

From 2021 through 2024, in CBO’s projections, the growth of real business fixed investment slows to an average of 2.2 percent per year. One reason is that slower economic growth reduces businesses’ desire to expand capacity. CBO also expects rising interest rates to increase the cost of new investment. In addition, the tax code’s treatment of research and development expenditures becomes less favorable beginning in 2022, and the treatment of equipment investment under bonus depreciation becomes progressively less favorable beginning in 2023. However, CBO expects businesses’ uncertainty about future trade policies to gradually fade, which would remove one factor restraining investment.


Residential Investment.

In CBO’s projections, real residential investment, which declined in 2018 and grew moderately in 2019, grows considerably faster than overall GDP in 2020 but at more moderate rates thereafter. Specifically, after declining by 4.4 percent in 2018 and growing by 0.9 percent in 2019, real residential investment increases by 5.7 percent in 2020 and by an average of 1.3 percent per year from 2021 through 2024 (see


Table 2-4


). In CBO’s assessment, the decline in residential investment in 2018 resulted in part from provisions of the 2017 tax act that reduced incentives to own homes and also from higher mortgage interest rates. The rise in 2019 and the anticipated pickup in growth in 2020, by contrast, mainly reflect lower mortgage interest rates than in 2018, continued strength in household formation, and further easing of mortgage lending standards. CBO expects growth of residential investment to slow after 2020 as mortgage rates gradually rise.


Government Purchases.

If current laws governing federal taxes and spending generally remained in place, real purchases of goods and services by federal, state, and local governments would increase by 0.9 percent in 2020—down from 2.6 percent in 2019—and then grow by an average of 0.5 percent per year from 2021 through 2024, CBO estimates (see


Table 2-4


).

In CBO’s projections, the growth in real purchases by the federal government slows from 3.3 percent in 2019 (on a fourth-quarter-to-fourth-quarter basis), which reflected a significant increase in discretionary outlays in fiscal year 2019, to 1.4 percent in 2020 (on a fourth-quarter-to-fourth-quarter basis). CBO’s baseline projections for federal purchases incorporate recently enacted legislation, which boosted discretionary spending in fiscal year 2020 relative to 2019. Those projections also incorporate the assumption that discretionary funding will comply with the caps on discretionary appropriations that were established by the Budget Control Act of 2011 (P.L. 112-25, as amended) through fiscal year 2021 and then will grow at the rate of inflation.


7

Taken together, those assumptions generate the projected slowdown in the growth of real federal purchases by the end of calendar year 2020.


8

From 2021 through 2024, real purchases by the federal government are projected to grow by an average of 0.5 percent per year.

After growing 2.2 percent in 2019, real purchases by state and local governments are projected to increase by 0.7 percent in 2020 because of a drop-off in state and local investment. That drop-off is partly driven by a slowdown in the growth of real personal income and, as a result, a slowdown in the growth of real state and local tax receipts. From 2021 through 2024, real purchases by state and local governments are expected to grow by an average of 0.6 percent per year, roughly keeping pace with the growth of the population.


Net Exports.

After declining since 2014, real net exports rose in 2019 but are projected to decline slightly from 2020 through 2024. Real import and export growth were unusually weak in 2019, as imports fell by 2.3 percent and exports fell by 0.7 percent (see


Table 2-4


). In 2020 and 2021, CBO expects that the growth of real exports and real imports will rebound from those historically slow growth rates, resulting in declining real net exports due to a stronger rise in imports. Beyond 2021, CBO projects growth in imports and exports to be mostly offsetting, as weaker growth in U.S. domestic demand (which is the sum of consumption, private investment, and government purchases) limits the growth of U.S. imports and the continued strength of the dollar suppresses U.S export growth.

Growth of real imports is expected to increase in 2020 as the negative effects of import tariffs continue to wane. In 2019, real imports fell as the higher trade barriers imposed since January 2018 increased the cost of imports, especially imports of capital goods. In 2020, CBO expects a small rebound in U.S. import growth, as businesses continue adjusting their global supply chains in response to tariffs and increase imports from countries not subject to the tariffs imposed between January 2018 and January 2020. However, projected weaker growth of U.S. domestic demand in 2020 is expected to reduce U.S. purchases of imported goods and services, partially offsetting that positive effect.

Growth of real exports in 2020 is expected to rebound modestly for three reasons. First, in CBO’s projections, stronger growth of U.S. exports is driven mostly by increases in exports of aircraft. In 2019, the suspension of deliveries of the Boeing 737 MAX aircraft sharply reduced U.S. real exports of capital goods and created a backlog of unfulfilled foreign aircraft orders. CBO projects that Boeing will resume its deliveries in 2020, leading to a surge in exports of aircraft that had been held in inventory. The second reason for the rebound in export growth is the diminishing effect of trade barriers imposed since 2018, as U.S. businesses adjust their supply chains and find new destinations for their exports. The last reason for stronger export growth is a projected increase in the pace of economic activity among the United States’ leading trading partners, which will increase demand for U.S. exports.

Partially offsetting the factors that increase U.S. exports in 2020 is the continued strength of the dollar, which reduces the competitiveness of U.S. exports in foreign markets. The exchange value of the dollar rose substantially during the past two years. The recent strength of the dollar reflects relatively tighter monetary policy and relative strength in the U.S. economy compared with those of its major trading partners. In CBO’s projections, the divergence in monetary policies is expected to persist, keeping the dollar strong through 2024. CBO expects that strength to reduce the growth of real exports by making U.S. goods more costly for foreign purchasers.

After 2020, in CBO’s projections, U.S. imports and exports continue to grow slowly and at similar rates. As growth of U.S. consumer spending and investment slows in those years, growth of U.S. imports remains weak, averaging 2.3 percent. Growth of U.S. exports is also modest, because of continued slow growth in the economies of major U.S. trading partners and the persistent strength of the dollar. From 2021 to 2024, U.S. real exports are expected to grow by an average of only 2.3 percent.

The Labor Market

Labor market conditions continued to improve in 2019 and are projected to remain strong over the next few years (see


Figure 2-2


). Job growth in 2019 maintained a solid pace, on average, particularly in several service-providing industries. The unemployment rate reached its lowest point since the 1960s, and the overall labor force participation rate rose. In addition, wage growth has been increasingly broad-based in recent years, with low-wage earners seeing particularly robust growth in their hourly wages since 2016 and middle-wage earners seeing a moderate acceleration in their hourly wages last year.

In CBO’s projections, the unemployment rate remains near historic lows throughout 2020. It then rises steadily, mostly because of slower economic growth, and surpasses the natural rate of unemployment in 2024.

The strong labor market keeps the labor force participation rate elevated for much of 2020. Starting in 2021, as economic and job growth slows, participation falls toward its potential rate, which also decreases, largely because of the aging of the population.

Wage growth remains strong over the next several years as employers continue to bid up the price of labor to recruit and retain workers.

Sources: Congressional Budget Office; Bureau of Labor Statistics.

The unemployment rate is the number of jobless people who are available for and seeking work, expressed as a percentage of the labor force. The natural rate of unemployment is the rate that results from all sources except fluctuations in aggregate demand, including normal turnover of jobs and mismatches between the skills of available workers and the skills necessary to fill vacant positions.

The labor force participation rate is the percentage of people in the civilian noninstitutionalized population who are at least 16 years old and either working or seeking work. The potential labor force participation rate is CBO’s estimate of the rate that would occur if economic output and other key variables were at their maximum sustainable amounts.

Wages are measured using the employment cost index for wages and salaries of workers in private industry. Growth in wages is measured from the fourth quarter of one calendar year to the fourth quarter of the next.

For the unemployment rate and labor force participation rate, data are fourth-quarter values.

Values for wages in 2019 are CBO’s estimates.

Despite the overall strength, some indicators signal that growth of demand for labor is leveling off. The number of job openings has been moderating since early 2019. In addition, after picking up materially in 2018, growth in two key measures of labor compensation—the employment cost index and the average hourly earnings for production and nonsupervisory workers in private industries—has slowed more recently.


Employment.

Job growth slowed somewhat in the middle of 2019 but picked up again in recent months. Growth in nonfarm payroll employment averaged 176,000 jobs per month in 2019, compared with an average monthly gain of 223,000 jobs in 2018. Job growth slowed in the manufacturing sector but remained fairly robust in several service-providing industries, including health care and social services and professional and business services.

In CBO’s projections, the current momentum of strong job growth continues in the first half of 2020, aided by the temporary hiring of federal workers for the decennial census. Those workers are expected to be discharged in subsequent quarters, which, combined with a projected slowdown in private-sector job growth, is expected to give rise to sharp declines in monthly employment statistics in the second half of 2020. All told, nonfarm payroll growth is projected to average 215,000 jobs per month in the first half of 2020, 55,000 jobs per month in the second half, and 135,000 jobs per month over the whole year.

CBO projects that the average pace of job growth will remain subdued after 2020. As labor compensation rises further and output growth falls below its potential, job growth is expected to slow, causing the gap between employment and its potential to narrow. Specifically, in CBO’s projections, nonfarm payroll growth averages 28,000 jobs per month between 2021 and 2024, below the agency’s estimate of potential job growth of 81,000 jobs per month. Although economic and job growth slow, employment, which tends to lag behind movements in output, is expected to remain above its maximum sustainable level over the entire 2020–2024 period, supporting relatively robust wage growth during those years.


Unemployment.

The unemployment rate, which continued to edge downward in 2019, stood at 3.5 percent at the end of the year, its lowest point since the 1960s and about 0.9 percentage points below CBO’s estimate of the natural rate of unemployment. (The natural rate of unemployment is the rate arising from all sources other than fluctuations in the overall demand for goods and services, including normal job turnover and the structural mismatch between the skills that jobs require and those that job seekers possess.)

In CBO’s projections, solid economic growth is expected to keep the unemployment rate at about 3.5 percent in 2020. After 2020, as economic growth moderates, the unemployment rate is expected to rise steadily, reaching and surpassing its natural rate of 4.3 percent in 2024 before settling into its long-term path (roughly a quarter of a percentage point higher than the natural rate) in later years.


Labor Force Participation.

The labor force participation rate (LFPR) among the civilian noninstitutionalized population (age 16 or older), which has hovered at about 62.8 percent since 2014, showed considerable cyclical strength and edged up over the past year. It stood at 63.2 percent at the end of 2019, roughly 0.5 percentage points higher than CBO’s estimate of its current potential rate—that is, the rate that would occur if the economy’s output and other key inputs were at their maximum sustainable amounts. In CBO’s estimation, the potential LFPR fell from 64.0 percent in 2014 to 62.8 percent in 2019. That decline was driven largely by the aging of the population (because older people tend to participate less in the labor force than younger people do) and, in particular, by the retirement of baby boomers.


9

The LFPR of people ages 25 to 54, which excludes much of the effect of the aging of the population, has risen in recent years, from 80.9 percent in 2015 to 82.0 percent in 2018 and 82.5 percent in 2019 (see


Figure 2-3


). Such near-term strength in labor force participation reflects the cumulative benefits of sustained economic growth, which encourages additional workers to enter and existing workers to stay in the labor force.

Percent

In recent years, participation in the labor force among 25- to 54-year-olds has almost reached prerecession levels as a result of sustained economic growth. As economic growth slows in CBO’s projections, that upward trend flattens.

Sources: Congressional Budget Office; Bureau of Labor Statistics.

The labor force participation rate is the percentage of people in the civilian noninstitutionalized population who are either working or seeking work.

Data are annual average values.

Cyclical strength in the economy keeps the overall LFPR above 63.0 percent throughout 2020, CBO projects; starting in 2021, as economic and job growth slows, the overall LFPR falls toward its potential. In CBO’s projections, the overall LFPR falls from 63.0 percent in early 2021 to 61.9 percent by late 2024, whereas its potential rate falls from 62.6 percent to 61.8 percent during that period. By contrast, the LFPR of people ages 25 to 54 is projected to stay stable, hovering just above 82.8 percent during the 2020–2024 period; that stability is the result, among other things, of the increasing average education level of the workforce offsetting the downward pressure of slowing economic activity.


Labor Compensation.

After accelerating in 2018, wage growth by a couple of key aggregate measures—namely, the employment cost index and the average hourly earnings of private-sector workers—stalled during 2019. That development partly reflects a slowdown in wage growth in service-providing industries, particularly the health care and social services industries. Economywide, data from household surveys show that gains in hourly wages have become increasingly broad-based in recent years: They have been especially strong for low-wage earners since late 2016. In 2019, wage growth also picked up notably for middle-wage earners.

As the labor market remains relatively strong, CBO expects employers to continue to bid up the price of labor to recruit and retain workers, putting further upward pressure on wages and salaries and other forms of labor compensation in the coming years. In CBO’s projections, the annual increase in the employment cost index for wages and salaries of workers in private industry rises from 3.1 percent in 2019 to 3.6 percent in 2020, its highest rate since the early 2000s, and then averages 3.5 percent from 2021 to 2024. Other measures of labor compensation, such as the average hourly earnings of production and nonsupervisory workers in private industry, are also expected to pick up further in the next few years. The faster pace of wage growth is expected to restrain the growth in the demand for labor, gradually slowing the pace of job and wage growth in later years.

Inflation and Interest Rates

CBO expects strong labor and product market conditions to apply upward pressure on inflation and interest rates over the next few years. That upward pressure is projected to dissipate in later years as the current strength in labor and product markets subsides.


Inflation.

The growth rate of the price index for personal consumption expenditures (PCE)—the measure that the Federal Reserve uses to define its 2 percent long-run objective for inflation—was below that objective in 2019. The traditional measure of core PCE price inflation, which excludes food and energy prices because they tend to be volatile, was also below 2 percent in 2019. However, that low inflation was largely driven by declines in particular components, such as financial services prices, that CBO does not expect to occur again in 2020. Alternative measures of core inflation that are designed to eliminate the effects of such short-lived factors (not only food and energy prices) remain close to 2 percent.


10

The evidence as a whole suggests that the current shortfall from the Federal Reserve’s long-run objective is probably the result of temporary factors.

In CBO’s projections, the effects of those temporary factors wear off, and the core PCE price index increases by 2.2 percent in 2020 and by 2.1 percent in 2021 (see


Figure 2-4


). Several factors support that increase in the rate of inflation, including strong labor and product market conditions. Growth in the overall PCE price index will also rise, CBO projects, meeting the Federal Reserve’s long-run objective in 2020 and then slightly overshooting it in 2021. After 2021, the agency expects growth in both the core and the overall PCE price index to fall gradually to 2.0 percent by 2024 as the strength in labor and product markets subsides. Growth in the consumer price index for urban households (CPI-U), which tends to be faster than growth in the PCE price index, rises to 2.4 percent in 2020 and 2.6 percent in 2021 before falling gradually to 2.3 percent in 2024, in CBO’s projections.

In CBO’s projections, a number of factors cause inflation to accelerate in 2020, including strong labor and product markets. After 2021, diminishing strength in those markets slows the rate of inflation.

At the end of 2021, the Federal Reserve begins raising the target range for the federal funds rate—which helps reduce inflationary pressures, in line with the Federal Reserve’s long-run objectives.

Sources: Congressional Budget Office; Bureau of Economic Analysis; Federal Reserve.

The inflation rate is based on the price index for personal consumption expenditures; the core rate excludes prices for food and energy.

Inflation is measured from the fourth quarter of one calendar year to the fourth quarter of the next.

The federal funds rate is the interest rate that financial institutions charge each other for overnight loans of their monetary reserves.

Values for inflation in 2019 are CBO’s estimates.

For the federal funds rate, the data are fourth-quarter values.

PCE = personal consumption expenditures.


Interest Rates.

CBO expects the Federal Reserve to keep its current target range for the federal funds rate unchanged through late 2021. The agency expects rising inflation and tighter labor and product markets to prompt the Federal Reserve to begin gradually raising interest rates at the end of 2021. In CBO’s projections, the Federal Reserve continues to increase the federal funds target range, reaching an average of 2.4 percent by the end of 2024. CBO expects those rate hikes to slow economic growth, putting downward pressure on inflation in later years.

The interest rate on 3-month Treasury bills is expected to remain near its current rate of 1.6 percent through the first half of 2021 and then begin to rise, partly in response to higher U.S. inflation, improvements in the outlook for the global economy in 2020 and early 2021, and market participants’ expectations of future rate hikes by the Federal Reserve. In CBO’s projections, the interest rate on 3-month Treasury bills rises from 1.6 percent in the first half of 2021 to 2.2 percent by the end of 2024 (see


Figure 2-5


).

Percent

In CBO’s projections, short-term interest rates follow a path similar to that of the federal funds rate over the next several years, and long-term interest rates rise—in part because of investors’ expectations about short-term rates.

Sources: Congressional Budget Office; Federal Reserve.

The federal funds rate is the interest rate that financial institutions charge each other for overnight loans of their monetary reserves.

Data are fourth-quarter values.

CBO expects long-term interest rates to rise over the entire 2020–2024 period for two reasons. First, long-term interest rates reflect investors’ expectations that short-term interest rates will rise. Second, CBO expects the term premium (the premium paid to bondholders for the extra risk associated with holding longer-term bonds) to increase over the next few years as factors that have recently pushed it to historically low levels dissipate. Two such factors are investors’ heightened concerns about relatively weak global economic growth and the increased demand for long-term bonds as a hedge against unexpectedly low inflation.

In CBO’s projections, as foreign economic growth improves and the rate of inflation reaches the Federal Reserve’s long-run objective of 2 percent, investors’ demand for long-term bonds weakens slightly, putting upward pressure on long-term interest rates. CBO also expects faster foreign growth to put upward pressure on the interest rates on foreign governments’ debt. (Many of those interest rates were negative for much of 2019.) That would lessen the demand for, and therefore push up the interest rates on, U.S. Treasury securities. The interest rate on 10-year Treasury notes is projected to rise to 2.8 percent by the end of 2024.

CBO’s projections of the economy for 2025 through 2030 are based mainly on its projections of underlying trends in key variables, such as the size of the labor force, the average number of labor hours per worker, capital investment, and productivity.


11

In addition, CBO considers how the federal tax and spending policies—as well as trade and other public policies—embodied in current law would affect those variables.

In CBO’s projections, some policies not only affect potential output but also influence overall demand for goods and services, causing the gap between actual output and potential output to change. For example, the scheduled expiration of certain provisions of the 2017 tax act—including the expiration of most of the provisions affecting individual income taxes at the end of 2025 and the phaseout of bonus depreciation by the end of 2026—is projected to slow real GDP growth and to lower real GDP in relation to its potential in those years. Changes in law that prevented certain provisions of the 2017 tax act from expiring would affect CBO’s forecast and cause the agency’s economic projections to change.

Output

In CBO’s projections, potential output grows at an average rate of 1.7 percent per year over the 2025–2030 period, driven by average annual growth of about 0.3 percent in the potential labor force and about 1.4 percent in potential labor force productivity (see


Table 2-5

and see



Box 2-1


). That annual 1.7 percent growth of potential output is nearly one-quarter of a percentage point slower than its projected growth of 2.0 percent per year over the earlier 2020–2024 period (see


Figure 2-6


). That slowdown is attributable in approximately equal parts to slower growth of the potential labor force and slower growth in potential labor force productivity.

Although changes in the overall demand for goods and services strongly influence the Congressional Budget Office’s economic projections during the first half of the period covered in this outlook, the agency’s projections over the entire period are fundamentally determined by its assessment of the prospects for growth of a few key inputs: the potential number of workers in the labor force, capital services (that is, the flow of productive services provided by the available stock of capital), and the potential productivity of those factors. In CBO’s assessment, growth of potential output over the entire 2020–2030 period is projected to average 1.8 percent per year, a rate roughly equal to the average over the past 15 years.

In CBO’s assessment, growth in potential output continues at its recent trend because the growth of potential total factor productivity (TFP) in nonfarm business is quickly returning to a rate more consistent with longer-term averages than with recent experience. In CBO’s projection, potential TFP growth increases from an annual average of 0.7 percent since the beginning of the last recession to an average of 1.1 percent during the forecast period. That projected increase directly adds 0.3 percentage points to the growth of potential output and also indirectly adds to growth by encouraging more investment than would otherwise occur. In addition, the relatively strong projected growth of residential investment yields more rapid growth of capital services from owner-occupied housing than has been typical of the current business cycle. A further contribution comes from a modest acceleration in growth in potential labor productivity outside of nonfarm business.

The projected acceleration of growth in potential TFP more than offsets adverse trends in other fundamental determinants of potential output over the projection period, compared with recent history. In particular, CBO projects an ongoing decline in the growth of the potential labor force from 0.5 percent per year in recent years to 0.3 percent by 2030, a decline that reflects underlying trends, such as the aging of the population and other demographic shifts. Similarly, investment trends in nonfarm business (which accounts for about three-quarters of economic activity and nearly all of the growth in productivity) are expected to yield slightly slower growth in that sector’s capital services than has occurred during the current business cycle.

Percent

Source: Congressional Budget Office.

Real values are nominal values that have been adjusted to remove the effects of changes in prices. Potential GDP is CBO’s estimate of the maximum sustainable output of the economy.

The table shows compound annual growth rates over the specified periods. Those rates were calculated using calendar year data.

GDP = gross domestic product.

a. The ratio of potential GDP to the potential labor force.

b. The services provided by capital goods (such as computers and other equipment) that constitute the actual input in the production process.

c. The average real output per unit of combined labor and capital services, excluding the effects of business cycles.

d. The ratio of potential output to potential hours worked in the nonfarm business sector.

Percentage Change

Over the next decade, real potential GDP is projected to grow faster than it has since the last recession because of faster growth in potential labor force productivity. However, growth in the potential labor force is projected to be slower than in previous periods, largely because of the aging of the population.

Source: Congressional Budget Office.

Real values are nominal values that have been adjusted to remove the effects of changes in prices. Growth in real potential GDP is the sum of growth in the potential labor force and growth in potential labor force productivity. The potential labor force is CBO’s estimate of the size of the labor force that would occur if economic output and other key variables were at their maximum sustainable amounts. Potential labor force productivity is the ratio of real potential GDP to the potential labor force.

The bars show average annual growth rates over the specified periods, calculated using calendar year data.

GDP = gross domestic product.

The slowdown in potential output growth is expected to be slightly more pronounced in the nonfarm business sector, which produces roughly three-quarters of domestic output, than in other sectors of the economy. Annual growth of potential output in that sector is projected to slow by about a quarter of a percentage point, from nearly 2.3 percent over the 2020–2024 period to about 2.0 percent over the 2025–2030 period. The contribution to potential output growth from potential hours worked falls from nearly 0.4 percentage points per year, on average, in the first half of the projection period to 0.2 percentage points in the second half. The contribution from capital services drops from an average of 0.8 percentage points per year to about 0.6 percentage points. (By itself, that reduction would lead to slower growth in labor force productivity.)

The slower growth of potential hours worked and capital services in nonfarm business reflects underlying long-run trends—such as the aging of the population and other demographic shifts—as well as the scheduled increase in taxes under current law. Changes in trade policies and legislation enacted since August 2019 are also expected to have a small negative effect on potential output in the sector, although considerable uncertainty surrounds that assessment.

Unlike the growth of potential hours worked and capital services, the annual growth of potential total factor productivity (TFP)—that is, the average real output per unit of combined labor and capital services, excluding the effects of business cycles—in the nonfarm business sector accelerates in CBO’s forecast, from slightly more than 1.1 percent in the first half of the projection period to nearly 1.2 percent in the second half. That acceleration somewhat offsets the slowdown in the growth of other inputs to production. The increase in potential TFP growth in the nonfarm business sector also plays a key role in making economywide potential output grow faster than its estimated average rate of about 1.6 percent per year since 200

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