The Macroeconomic and Budgetary Effects of an Illustrative Policy for Reducing the Federal Budget Deficit

The federal government’s debt has increased dramatically in the past few years, and large annual budget deficits will probably continue indefinitely under current laws or policies. If current laws remain unchanged, deficits will total roughly $7 trillion over the next 10 years, the Congressional Budget Office (CBO) projects; if certain policies that are scheduled to expire under current law were extended instead, deficits would be much larger. Beyond the coming decade, the aging of the U.S. population and rising health care costs will put increasing pressure on the federal budget. If debt held by the public continues to expand faster than the economy—as it has since 2007—the growth of people’s incomes will slow, the share of federal spending devoted to paying interest on the debt will rise more quickly, and the risk of a fiscal crisis will increase. At the same time, the recovery from the recent recession has been anemic, and the economy remains in a severe slump. CBO and many private forecasters expect that the unemployment rate will remain high, and that output will remain well below the economy’s potential, for a number of years.