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CBO and the Macroeconomics Benefits of Deficit Reduction

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Washington, Apr 1 | comments

Economic growth is one of the major factors behind federal revenue and spending levels—and therefore the size of budget deficits—over a given period. So the Congressional Budget Office has a long history of analyzing the macroeconomic and budgetary effects of deficit reduction, and this year, CBO has estimated the economic impact of the deficit reduction in the House Republican budget resolution. CBO concludes that reining in government spending and paying down the debt have a positive and lasting impact on the economy and the budget.

This latest analysis builds on a long history of CBO’s estimating the effects of deficit reduction on economic growth. In 1997, for example, Congress and the President reached an agreement to balance the budget, which was included in the budget resolution adopted in 1997 and enacted into law by the Balanced Budget Act. This agreement incorporated CBO’s estimate of the macroeconomic effects of deficit reduction. Based on CBO estimates of the polices and the economic feedback, the budget resolution projected a balanced budget by 2002. (See the conference report on the 1998 budget resolution.) As it happened, economic growth surpassed even CBO’s estimates, and the budget was in balance by 1998.

In February 2013, CBO updated its work in a new report, The Macroeconomic Effects of Alternative Budgetary Paths, which studied the economic and budgetary consequences of both higher and lower deficits than its baseline forecasts. CBO concluded that deficit reduction creates lasting economic benefits because it increases the pool of national savings, puts downward pressure on interest rates, and boosts investment, thereby raising economic growth and job creation.

CBO’s analysis is in the mainstream of economic thought. For example, the Committee for a Responsible Federal Budget, a bipartisan non-profit that analyzes fiscal and economic issues concluded in its analysis of the February 2013 CBO report that “[t]he CBO’s report illustrates the importance of not waiting to enact a package of comprehensive deficit reduction in order to secure our fiscal future. The economic benefit of deficit reduction when the economy has recovered is large, and conversely, the cost of waiting too long may be large as well.” And leading Stanford economists John Cogan and John Taylor found both long-term and short-term benefits from deficit reduction in their analysis of the economic effects of the 2013 House budget resolution.

The Heritage Foundation, FreedomWorks, the Club for Growth, and other conservative groups, have long called for the incorporation of economic effects into the scoring of legislation. And House Republicans have long sought to incorporate these analyses into our budget resolution. For example, in 2013, the Budget Committee published the Economic Benefits of Deficit Reduction together with the budget resolution. In a previous Congress, the House has adopted legislation, the Pro-Growth Budgeting Act sponsored by Rep. Tom Price, that would require macroeconomic analysis of major legislation. The House is expected to consider this legislation again on Friday, April 4, 2014.

Considering the economic effects of the budget resolution is common sense. The goal of fiscal policy is to provide necessary government services in a way that promotes economic growth. CBO’s analysis demonstrates that the deficit reduction in the House budget will increase economic growth. And this deficit reduction will help to avert a fiscal crisis that would have dire economic consequences
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