Effects Of Physical Infrastructure Spending On The Economy And The Budget Under Two Illustrative Scenarios

from the Congressional Budget Office

CBO examined two illustrative scenarios that would boost federal funding for a mix of types of physical infrastructure by $500 billion over 10 years. The two scenarios differ in how the additional spending would be financed.

Increases in physical infrastructure spending would boost private-sector productivity in the coming decades, contributing to economic growth that could lower the budgetary cost of that spending. To study such increases, the Congressional Budget Office examined two illustrative scenarios that would boost federal funding for a mix of types of physical infrastructure by $500 billion over 10 years. (Those funds would not all be spent within 10 years.) The same broad mix of physical capital is funded in both scenarios, neither of which corresponds to a specific legislative proposal. CBO compared outcomes under each scenario with those from its projections for the economy and the budget if current laws governing taxes and spending generally remained unchanged.

Budgetary Effects of Macroeconomic Changes

In this dynamic analysis, CBO finds that the effects of macroeconomic changes on the federal budget would depend on how additional infrastructure spending was financed and the time period considered.

Under Scenario 1, which is deficit-neutral before accounting for macroeconomic changes, infrastructure is financed by reducing the government’s noninvestment purchases.

• In present value, which expresses the flows of current and future income or payments in terms of their value at a single point in time, the budgetary effects over 30 years stemming from macroeconomic changes would reduce the net cost of funding $500 billion of additional infrastructure by approximately one-third.
• From fiscal years 2022 to 2031, the deficit would decrease by $11 billion because of the macroeconomic changes.

Under Scenario 2, infrastructure is financed by increasing federal borrowing.

• In present value, the budgetary effects over 30 years stemming from macroeconomic changes would increase the net cost of funding $500 billion of additional infrastructure by approximately one-fourth.
• From fiscal years 2022 to 2031, the effects of macroeconomic changes would decrease the deficit by $2 billion (not including the additional outlays for infrastructure).

Data and Supplemental Information

• Data Underlying Figure and Tables

Related Publications

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• The Economic Effects of Financing a Large and Permanent Increase in Government Spending: Working Paper 2021-03

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• Options for Reducing the Deficit: 2021 to 2030

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• A Simplified Model of How Macroeconomic Changes Affect the Federal Budget: Working Paper 2020-01

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• Federal Investment, 1962 to 2018

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• Public Spending on Transportation and Water Infrastructure, 1956 to 2017

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• The Macroeconomic and Budgetary Effects of Federal Investment

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• Approaches to Making Federal Highway Spending More Productive

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• Alternative Approaches to Funding Highways

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Source

https://www.cbo.gov/publication/57327