The Budget and Economic Outlook: 2019 to 2029

CONGRESS OF THE UNITED STATES CONGRESSIONAL BUDGET OFFICE

The Budget and Economic Outlook:

2019 to 2029

Percentage

of

Gross

Domestic Product Outlays

25

Av1e9ra6g(92e0toO.3u2%t0l)a1y8s,

20

Revenues

Ave1ra9g6e(91R7toe.4v2%e0n)1u8es,

15

Actual Projected

23.0

18.3

Percentage 15

of

Gross

Domestic

Product

Outlays

10

Revenues

ExpenTdaixtures

10

Percentage of5Gross Domestic Product 4

2

01969 1974 1979

1984

1989

1994

1999

2004

2009

2014

2019

5 2024 2029

0 Mandatory Discretionary Net Interest

0

Percent

-2

8

Deficit

-4

-6

6

-8

Two-Thirds of

4

-10

Possible Outcomes

1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023

2

tage of Gross Domestic Product

Actual Projected

0

Percentage 1129099

of

Gro2ss0D0o4mestic

Produ2c0t 09

InIcnodmiveidTuaaxAl ctuPaalyroPlrloTjeaxcted All Other

EPExIaCnpxyocperoreonpmnldlodieTtriuaatTurtxaeerxess EIInxncpdoeivmniddeiutTuaarlxes All

10-Year Treasury Note Rate 3-Month Treasury Bill Rate

2014

2019

2024

2029

100

0.6 2.4

1.7

2.0

1.5

1.5

1.3

GFroorwcethPorof dPuoctetinvtitiayl Labor

1 0

1.0

2.5

1.6

1.2

1.6

11995703-

11997841-

11998920-

12909011-

1.0 22000027-

0.6 22000188-

0.5 22001293-

0.4

Growth of Potential

the Labor

Force

22002249-

80 60 40 20

0 1999

2005

JANUARY 2019

Debt Held by the Public

Actual Projected

2011

2017

2023

Alternative Scenario

Fiscal

CBO's Baseline

2029

At a Glance

The Congressional Budget Office regularly publishes reports presenting projections that indicate what federal deficits, debt, revenues, and spending--and the economic path underlying them-- would be for the current year and for the next 10 years if existing laws governing taxes and spending generally remained unchanged. This report is the latest in that series.

?? Deficits. In CBO's projections, the federal budget deficit is about $900 billion in 2019 and

exceeds $1 trillion each year beginning in 2022. Over the coming decade, deficits (after adjustments to exclude shifts in the timing of certain payments) fluctuate between 4.1 percent and 4.7 percent of gross domestic product (GDP), well above the average over the past 50 years (see Chapter 1). CBO's projection of the deficit for 2019 is now $75 billion less--and its projection of the cumulative deficit over the 2019?2028 period, $1.2 trillion less--than it was in spring 2018. That reduction in projected deficits results primarily from legislative changes--most notably, a decrease in emergency spending (see Appendix A).

?? Debt. Because of persistently large deficits, federal debt held by the public is projected to grow

steadily, reaching 93 percent of GDP in 2029 (its highest level since just after World War II) and about 150 percent of GDP in 2049--far higher than it has ever been (see Chapter 1). Moreover, if lawmakers amended current laws to maintain certain policies now in place, even larger increases in debt would ensue (see Chapter 5).

?? Revenues. In CBO's projections, federal revenues rise from 16.5 percent of GDP in 2019 to

17.4 percent in 2025 and then grow more rapidly, reaching 18.3 percent of GDP near the end of the decade. The projected growth in revenues after 2025 is largely attributable to the scheduled expiration of nearly all of the individual income tax provisions of the 2017 tax act (see Chapter 4).

?? Spending. Federal outlays (adjusted to exclude shifts in the timing of certain payments) are

projected to climb from 20.8 percent of GDP in 2019 to 23.0 percent in 2029. The aging of the population and the rising cost of health care contribute significantly to the growth in spending for major benefit programs, such as Social Security and Medicare. And rising debt and higher interest rates drive up the federal government's net interest costs. Growth in outlays is curtailed by statutory limits on discretionary funding in place for the next few years (see Chapter 3).

?? The Economy. Real GDP is projected to grow by 2.3 percent in 2019--down from 3.1 percent

in 2018--as the effects of the 2017 tax act on the growth of business investment wane and federal purchases, as projected under current law, decline sharply in the fourth quarter of 2019. Nevertheless, output is projected to grow slightly faster than its maximum sustainable level this year, continuing to boost the demand for labor and to push down the unemployment rate. After 2019, annual economic growth is projected to slow further--to an average of 1.7 percent through 2023, which is below CBO's projection of potential growth for that period. From 2024 to 2029, economic growth and potential growth are projected to average 1.8 percent per year-- less than their long-term historical averages, primarily because the labor force is expected to grow more slowly than it has in the past (see Chapter 2).

publication/54918

Contents

Visual Summary

1

1

Deficits and Debt Overview Deficits

5 5 5

BOX 1-1. SPENDING FOR PEOPLE AGE 65 OR OLDER

12

Debt

14

Uncertainty in Budget Projections

17

The Long-Term Outlook for the Budget

20

2

The Economic Outlook Overview Fiscal and Trade Policies

21 21 24

BOX 2-1. THE EFFECTS OF RECENT CHANGES IN TRADE POLICY

26

The Economic Outlook for 2019 to 2023

28

The Economic Outlook for 2024 to 2029

43

Projections of Income for 2019 to 2029

47

BOX 2-2. CBO'S ESTIMATE AND PROJECTION OF POTENTIAL TOTAL FACTOR

PRODUCTIVITY IN THE NONFARM BUSINESS SECTOR

48

Some Uncertainties in the Economic Outlook

51

Comparison With CBO's August 2018 Economic Projections

54

Comparison With Other Economic Projections

55

3

The Spending Outlook Overview Mandatory Spending

61 61 63

BOX 3-1. CATEGORIES OF FEDERAL OUTLAYS

64

Discretionary Spending

75

Net Interest

85

Uncertainty Surrounding the Spending Outlook

85

4

The Revenue Outlook Overview The Evolving Composition of Revenues

87 87 88

Individual Income Taxes

90

Payroll Taxes

93

Corporate Income Taxes

94

Smaller Sources of Revenues

95

Tax Expenditures

98

Uncertainty Surrounding the Revenue Outlook

103

II The Budget and Economic Outlook: 2019 to 2029

5

Estimated Budgetary Outcomes Under Alternative Assumptions About Fiscal Policy Overview Discretionary Spending Revenues An Alternative Fiscal Scenario

A Changes in CBO's Baseline Projections Overview Legislative Changes Economic Changes Technical Changes

B How Changes in Economic Conditions Might Affect the Federal Budget Overview Background Changes in Productivity Growth and Labor Force Growth Changes in Interest Rates and Inflation

C The Automatic Stabilizers in the Federal Budget Overview Estimates of the Automatic Stabilizers Over the Next Decade Budget Deficits Without Automatic Stabilizers

D Trust Funds Overview Social Security's Trust Funds Trust Funds for Federal Employees' Retirement Programs Medicare's Trust Funds Highway Trust Fund

E

CBO's Economic Projections for 2019 to 2029

F

Historical Budget Data

List of Tables and Figures

JANUARY 2019

105 105 105 106 108

111 111 111 113 117

121 121 121 124 127

131 131 131 136

139 139 142 143 144 145

147

149

161

About This Document

165

Notes

The projections in this report do not incorporate the effects of the partial shutdown of the federal government that started on December 22, 2018, and ended on January 25, 2019.

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. Also, some values are expressed as fractions to indicate numbers rounded to amounts greater than a tenth of a percentage point.

Some figures in this report have vertical bars that indicate the duration of recessions. (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 that the Affordable Care Act extends to people under age 65.

Supplemental data for this analysis are available on CBO's website ( publication/54918), as are a glossary of common budgetary and economic terms (publication/42904), a description of how CBO prepares its baseline budget projections (publication/53532), a description of how CBO prepares its economic forecast (publication/53537), and previous editions of this report ().

Visual Summary

In this report, the Congressional Budget Office provides projections of the federal budget and the U.S. economy under current law for this year and the following decade. The deficits projected in this update are smaller than those in the projections that CBO published last spring, primarily because funding for emergencies is now projected to be lower. The agency's economic forecast has changed little since it was last updated in August 2018.

Deficits

CBO projects a 2019 deficit of about $900 billion, or 4.2 percent of gross domestic product (GDP). The projected shortfall (adjusted to exclude the effects of shifts in the timing of certain payments) rises to 4.7 percent of GDP in 2029.

Percentage of Gross Domestic Product 4 2

Surpluses

Actual Projected

0

-42

-24

-06

Deficits

-28

-1-04 1969 1974

-6 Se2e5Figure 1-1 -8

1979

1984

1989

-120 Perc1e9n6ta9ge o1f9G7r4oss D19o7m9estic1P9r8o4duct1989 1255

Outlays 1200

155

Revenues

100 1969 1974 1979 1984 1989

Average Deficit, 1969 to 2018

(-2.9%)

1994 1999 2004

1994 1999 2004 Average Outlays, 1969 to 2018 (20.3%)

Average Revenues, 1969 to 2018

1994 (1179.49%9) 2004

2009 2009

2009

Actual Projected

Average Deficit, 2020 to 2029

(-4.4%) 2014 2019 2024 2029

2014 2019 2024 2029 23.0 18.3

2014 2019 2024 2029

5

0 1969 1974 1979 1984 1989 1994 1999 2004 2009 2014 2019 2024 2029

See Figure 1-2

Over the 2020?2029 period, deficits are projected to average 4.4 percent of GDP, totaling $11.6 trillion. Such deficits would be significantly larger than the 2.9 percent of GDP that deficits averaged over the past 50 years.

Revenues and outlays are both projected to rise in relation to GDP, but the gap between them is projected to persist, resulting in large deficits and rising debt.

2 THE BUDGET AND ECONOMIC OUTLOOK: 2019 TO 2029

JANUARY 2019

Debt

Federal debt held by the public is projected to reach $16.6 trillion at the end of 2019. Relative to the size

of the economy, that amount--at 78 percent of GDP--would be nearly twice its average over the past 50

years. By 2029, debt is estimated to reach $28.7 trillion, or 93 percent of GDP--a higher level than at any

time since just after World War II. It would continue to grow after 2029, reaching about 150 percent of

GDP by 2049.

Percentage of Gross Domestic Product 120

100

Debt Held by the Public

80

60

40

20

0 1999

See Figure 5-3

2005

2011

Actual Projected

2017

2023

Alternative Fiscal Scenario

CBO's Baseline

2029

In addition to its projections of outcomes under current law, CBO analyzed an alternative fiscal scenario in which substantial tax increases and discretionary spending cuts would not take place as scheduled; instead, major policies that are currently in place would be maintained. Under that scenario, federal debt would rise to 105 percent of GDP in 2029.

Revenues

In CBO's baseline projections, revenues total $3.5 trillion in 2019, or 16.5 percent of GDP, and rise to 18.3 percent of GDP in 2029. Over the past 50 years, revenues averaged 17.4 percent of GDP.

Percentage of Gross Domestic Product 10

Individual Income Taxes 8

Actual Projected

9.6

6

4

2

0 1969 1974 See Figure 4-2

1979

Payroll Taxes Corporate Income Taxes

Other Revenue Sources 1984 1989 1994 1999 2004 2009 2014

2019

2024

5.9

1.4 1.4 2029

Total revenues as a share of GDP are projected to rise, largely because of increases in individual income taxes.

Percentage of Gross Domestic Product 1.5

1.0

0.5

0 2020

2021

See Figure 4-3

2022

2023

Increases in Individual Income Tax Revenues

Other Factors

Tax Provisions That Expire After 2025

2024

Real Bracket Creep and Related Factors

2025

2026

2027

2028

2029

Individual income taxes as a share of GDP are projected to rise by a total of 1.4 percentage points over the next decade. The biggest contribution to that increase is the expiration of certain provisions of the 2017 tax act at the end of 2025.

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