Beyond the coming decade, the fiscal outlook is significantly more daunting. In CBO’s most recent long-term projections—which extend through 2047—budget deficits rise steadily. Those long-term projections follow CBO’s 10-year baseline projections for the first decade and then extend the baseline concept for subsequent years (see Table 1-7 on page 106).36 Although long-term budget projections are highly uncertain, the aging of the population and growth in per capita spending on health care would almost certainly boost federal spending significantly relative to GDP after 2027 if current laws generally remained in effect. Federal revenues also would continue to increase relative to GDP under current law, but they would not keep pace with outlays. As a result, CBO estimates, public debt would reach 145 percent of GDP by 2047 (taking into account the effects on the economy of the rising debt), higher than any percentage previously recorded in the United States (see Figure 1-8).
Moreover, debt would still be on an upward path relative to the size of the economy in 2047, a trend that would ultimately be unsustainable. To avoid the negative
consequences of high and rising federal debt and 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 for large benefit programs below the projected amounts, or adopting some combination of those approaches.
Chapter 2: The Economic Outlook
T
he Congressional Budget Office estimates that if current laws governing federal taxes and spending generally remain in place, the economy will grow, during the coming decade, at roughly the modest rate observed since the end of the 2007–2009 recession. CBO estimates that the nation’s real gross domestic product (GDP)—that is, total output adjusted to remove the effects of inflation—grew by 1.8 percent last year on a fourth-quarter-to-fourth-quarter basis, restrained by weak growth of business and residential investment (see Table 2-1). But CBO expects business investment tostrengthen, helping to raise the growth of output to 2.3 percent this year and
1.9 percent in 2018. From 2017 to 2027, CBO estimates that real output will expand at an average rate of 1.9 percent per year.
The projected growth of output will raise employment and virtually eliminate slack—
that is, unused productive resources—in the economy over the next two years, in CBO’s view. At the end of 2016, actual output was about 1 percent smaller than CBO’s estimate of potential (that is, maximum sustainable) output. CBO expects that output gap, which is one measure of slack, to nearly disappear by the end of 2018,
36. The long-term projections reported here incorporate the current baseline for the first 10 years. For subsequent periods, CBO has not fully updated all of the projections that it reported in its most recent long-term budget outlook, but the agency has updated its long-term economic projections on an interim basis and applied them to estimates for Social Security spending and net interest. For other components of the budget, CBO adopted the simplified approach that it has regularly used between full updates—in this case, by incorporating the growth rates for such components from the extended baseline in CBO’s July 2016 report (its most recent full update).
Details on the interim long-term economic and budgetary projections presented here are included with the supplemental data for this report, available online at www.cbo.gov/publication/52370. For the most recent full update from July 2016, see Congressional Budget Office, The 2016 Long-Term Budget Outlook (July 2016), www.cbo.gov/publication/51580. For additional information about the simplified approach used here for spending and revenues projections unrelated to Social Security and net interest, see Congressional Budget Office, Budgetary and Economic Outcomes Under Paths for Federal Revenues and Noninterest Spending Specified by Chairman Price, March 2016 (March 2016), pp. 13–14, www.cbo.gov/publication/51260. CBO expects to publish its next complete update of its long-term economic and budgetary projections in the spring of 2017.
after reaching 6 percent during the 2007–2009 recession. Another measure of slack, the shortfall between actual and potential employment, was about 1.6 million people at the end of 2016 and is expected to disappear in 2018. As it does so, CBO expects the unemployment rate to fall from 4.7 percent in the fourth quarter of 2016 to 4.4 percent in the fourth quarter of 2018.
As slack diminishes, CBO expects the rate of inflation to rise and the Federal Reserve to reduce its support of the economy. The rate of inflation, as measured by the price index for personal consumption expenditures (PCE), is projected to rise from 1.5 percent in 2016 to the Federal Reserve’s goal of 2 percent by 2018 and to stay there, on average, for the rest of the projection period. CBO expects the Federal Reserve to steadily raise the target for the federal funds rate (the interest rate that financial institutions charge each other for overnight loans of their monetary reserves) over the next few years. The rising federal funds rate would push up other interest rates in the economy, restraining the overall demand for goods and services and working to prevent inflation from rising above 2 percent.
Unlike CBO’s projections for the next two years, its projections for the 2021–2027 period do not reflect its predictions of business-cycle fluctuations. Rather, they are based primarily on projections of underlying trends in such variables as the size of the labor force, the number of hours worked, capital investment, and productivity—that is, trends that those variables follow after the effects of business-cycle fluctuations are removed. Those trends determine CBO’s estimate of the economy’s potential output.
CBO estimates that potential output over the 2021–2027 period will grow more quickly than it has grown since the 2007–2009 recession, mainly because the agency projects growth in the productivity of the labor force to accelerate nearly to its average over the past 25 years. Nevertheless, the growth of potential output is projected to be slower than its long-term historical average because the working-age population, and hence the labor force, are expected to grow more slowly than they did in the past. Real interest rates are likewise projected to be higher than they were in recent years but lower than they were before the recession.
Many developments, such as unexpected changes in international conditions or in business confidence, could make economic outcomes differ significantly from what CBO has projected, even if the federal tax and spending policies specified in current law remained substantially unchanged. Because of that uncertainty, the agency constructs its projections so that they fall in the middle of the distribution of possible outcomes.
CBO’s current economic projections differ in some respects from its last projections, which were published in August 2016. Because it revised its projections of several factors that determine potential output, the agency now expects real GDP and real potential GDP in 2026 to be modestly lower than projected in August. CBO expects
interest rates to be lower in the first half of the projection period than it expected in August.
The economic projections in this report do not differ significantly from those of most other forecasters. They are generally similar to the Blue Chip consensus forecast that was published this month and to the latest forecasts by Federal Reserve officials.