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posted on 11 June 2016

A Macroeconomic Analysis Of The President's 2017 Budget

from the Congressional Budget Office

The President's budget proposals would make U.S. output larger over the next decade than it would be under current law - mostly by changing immigration laws. The economic effects would affect the budget in ways that would reduce deficits.

Each year, after the President releases the Administration's budget request, the Congressional Budget Office analyzes the proposals in that request. Using its own economic projections and estimating procedures, CBO projects what the federal budget would look like over the next 10 years if the President's proposals were adopted. CBO provides that information in two reports. In general, the first report examines the proposals' direct effects on the budget; the second, which takes more time to prepare, shows the effects that the proposals would have on the economy and how those macroeconomic effects would, in turn, feed back into the budget.

CBO's first report typically does not incorporate any of that macroeconomic feedback. This year, however, a proposal related to immigration would affect the economy more directly than Presidential proposals usually would, chiefly by increasing the size of the labor force, and that increase would result in significantly higher receipts from income and payroll taxes. Therefore, the budgetary projections in this year's version of the first report, which was published in March, included some feedback resulting from the immigration proposal.

This second report describes the effects of the President's budget request as a whole on the economy, including the effects of the immigration proposal that were incorporated into the first report. It then describes how the resulting macroeconomic feedback, combined with the proposals' direct effects on the budget, would affect the federal government's budget deficits.

How Would the President's Proposals Affect the Economy?

Under the President's proposals, the nation's real (inflation-adjusted) gross national product (GNP) would be 0.2 percent higher, on average, during the 2017 - 2021 period, and 1.8 percent higher during the 2022 - 2026 period, than it would be under current law, CBO estimates. Most of that increase would be due to the immigration proposal's expansion of the labor supply.

How the President's Proposals Would Affect Population and Output

Because some factors that influence CBO's projections are uncertain, CBO also makes projections using ranges of estimates of those factors. When using those ranges, the agency projects that the increase in GNP would probably be between zero and 0.5 percent over the 2017 - 2021 period and between 1.0 percent and 2.5 percent over the 2022 - 2026 period. Those ranges reflect uncertainty about three key factors that influence CBO's projections: the effect of changes in overall demand on output, the effect of marginal tax rates on the supply of labor, and the effect of increased immigration on total factor productivity (the efficiency with which labor and capital are used to produce goods and services). However, many other factors that influence CBO's projections are also uncertain, and actual outcomes could lie outside the ranges of probable outcomes estimated by CBO.

Unlike total GNP, per capita GNP would be lower under the President's proposals than under current law, primarily because of the immigration-related increase in the size of the population. According to CBO's analysis, the President's proposals would reduce per capita GNP by about 0.6 percent over the 2017 - 2021 period, on average, and by about 0.7 percent over the 2022 - 2026 period.

How Would the President's Proposals Affect Budget Deficits?

Deficits under the President's proposals would rise from 2.3 percent of gross domestic product (GDP) in 2017 to 3.4 percent in 2026, CBO estimates (see figure below). By contrast, in CBO's baseline - which is a projection of the path that federal deficits would take if current laws generally remained unchanged - deficits rise from 2.8 percent of GDP to 4.9 percent over the same period. CBO estimates that over the course of the 2017 - 2026 period, deficits under the President's proposals would be a total of $2.4 trillion, or about 1 percent of GDP, smaller than they are in the baseline. That estimated difference incorporates the proposals' direct effects on the budget and also their macroeconomic feedback into the budget.

Deficits Projected Under CBO's Baseline and Under the President's Proposals

The projected budgetary effects of the President's proposals over 10 years vary by less than $35 billion from what CBO estimated in its first report, and they are almost identical to what was estimated in that report when measured as a percentage of GDP. The main reason is that the largest feedback effects were already incorporated into that earlier report. Another reason is that the additional feedback effects analyzed in this second report would largely offset one another. The smaller deficits resulting from the President's proposals would raise output in the long run; that higher output would generate more tax revenue. But the workers added to the labor force under the President's immigration proposal would increase the ratio of labor to capital, raising the rate of return on capital and therefore raising interest rates throughout the economy; those higher interest rates would raise federal borrowing rates and thus federal interest payments. (Even though that feedback effect on interest payments would result from the immigration proposal, it was not incorporated into CBO's first report.)

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