The Budget and Economic Outlook: 2021 to 2031

Chapter 1The Budget Outlook

This chapter provides the Congressional Budget Office’s latest baseline budget projections, spanning fiscal years 2021 through 2031. These projections are based on the economic forecast that the agency developed in January 2021. (For CBO’s assessment of the economic outlook, see Chapter 2, which is identical to the assessment the agency published on February 1, 2021.) These projections incorporate legislation enacted through January 12, 2021, as well as information available as of that date.

CBO’s projections are constructed in accordance with the Balanced Budget and Emergency Deficit Control Act of 1985 (Public Law 99-177) and the Congressional Budget and Impoundment Control Act of 1974 (P.L. 93-344). Those laws require CBO to construct its baseline under the assumption that current laws governing revenues and spending will generally stay the same and that discretionary appropriations in future years will match current funding, with adjustments for inflation.

In consultation with the House and Senate Committees on the Budget, however, CBO deviated from those standard procedures when constructing its current baseline for discretionary spending. Because of the unusual size and nature of the emergency funding provided in response to the 2020–2021 coronavirus pandemic, the agency did not extrapolate the $184 billion in discretionary budget authority that has been provided for such purposes so far in 2021. Emergency funding provided for purposes unrelated to the pandemic was projected to continue in the future with increases for inflation each year after 2021.

CBO’s baseline is not intended to provide a forecast of future budgetary outcomes; rather, it provides a benchmark that policymakers can use to assess the potential effects of future policy decisions. Future legislative action could lead to markedly different outcomes. Even if federal laws remained unaltered for the next decade, though, actual budgetary outcomes would probably differ from CBO’s baseline—not only because of unanticipated economic developments, but also as a result of the many other factors that affect federal revenues and outlays.

This presentation of CBO’s budget projections is much shorter than usual. The information is less detailed so that CBO can provide it to lawmakers as quickly as possible as they continue to address the consequences of the pandemic. CBO will publish more detailed information about these projections and supplementary information later this year.

This chapter comprises six tables. The first one shows CBO’s projections for the budget, by major category; projected deficits amount to $2.3 trillion in fiscal year 2021 and $12.3 trillion over the 2022–2031 period (see Table 1-1). Next are CBO’s projections of federal debt; debt held by the public is projected to reach $35.3 trillion, or 107 percent of gross domestic product (GDP), in 2031 (see Table 1-2). Then additional details are presented about mandatory outlays; taken together, outlays for Social Security and Medicare are projected to almost double over 10 years (see Table 1-3).1 Additional details follow about discretionary spending; annual discretionary outlays from 2022 through 2026 are projected to be less than outlays in 2021, which were boosted by pandemic-related spending (see Table 1-4).2 The next table gives a summary of key projections as specified in section 3111 of S. Con. Res. 11, the Concurrent Resolution on the Budget for Fiscal Year 2016; projected deficits average 4.8 percent of GDP from 2027 through 2031 (see Table 1-5). Finally, detailed information is provided about how CBO’s projections have changed since September 2020; deficits are larger in 2021 but smaller in total from 2021 through 2030 than CBO projected in September (see Table 1-6). For CBO’s analysis of the budgetary effects of tax expenditures in 2021, see the appendix.

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Chapter 2The Economic Outlook

The 2020–2021 coronavirus pandemic caused severe economic disruptions last year as households, governments, and businesses adopted a variety of mandatory and voluntary ­measures—collectively referred to here as social distancing—to limit in-person interactions that could spread the virus. The impact was focused on particular sectors of the economy, such as travel and hospitality, and job losses were concentrated among lower-wage workers.

Over the course of the coming year, vaccination is expected to greatly reduce the number of new cases of COVID-19, the disease caused by the coronavirus. As a result, the extent of social distancing is expected to decline. In its new economic forecast, which covers the period from 2021 to 2031, the Congressional Budget Office therefore projects that the economic expansion that began in mid-2020 will continue (see Table 2-1). Specifically, real (inflation-adjusted) gross domestic product (GDP) is projected to return to its prepandemic level in mid-2021 and to surpass its potential (that is, its maximum sustainable) level in early 2025.1 In CBO’s projections, the unemployment rate gradually declines through 2026, and the number of people employed returns to its prepandemic level in 2024.

This forecast underlies the budget projections that are presented in Chapter 1. The forecast incorporates economic and other information available as of January 12, 2021, as well as estimates of the economic effects of all legislation (including pandemic-related legislation) enacted up to that date.

The Economic Outlook for 2021 to 2025

In CBO’s projections, which incorporate the assumptions that current laws governing federal taxes and spending (as of January 12) generally remain in place and that no significant additional emergency funding or aid is provided, the economy continues to strengthen during the next five years.

• Real GDP expands rapidly over the coming year, reaching its previous business-cycle peak (which was attained in the fourth quarter of 2019) in mid-2021 and surpassing its potential level in early 2025. The annual growth of real GDP averages 2.6 percent during the five-year period, exceeding the 1.9 percent growth rate of real potential GDP (see Figure 2-1).

  Figure 2-1.

  The Relationship Between GDP and Potential GDP

  

  In CBO’s projections, the annual growth of real (inflation-adjusted) GDP exceeds that of real potential GDP until 2026.

  The output gap between real GDP and real potential GDP is positive for several years, starting in 2025, before moving back toward its historical average.

  Data sources: Congressional Budget Office; Bureau of Economic Analysis. See www.cbo.gov/publication/56970#data.

  Real values are nominal values that have been adjusted to remove the effects of changes in prices. Potential GDP is CBO’s estimate of the maximum sustainable output of the economy. Growth of real GDP and of real potential GDP is measured from the fourth quarter of one calendar year to the fourth quarter of the next.

  The output gap is the difference between GDP and potential GDP, expressed as a percentage of potential GDP. A positive value indicates that GDP exceeds potential GDP; a negative value indicates that GDP falls short of potential GDP. Values for the output gap are for the fourth quarter of each year.

  The shaded vertical bars indicate periods of recession, which extend from the peak of a business cycle to its trough. The National Bureau of Economic Research (NBER) has determined that an expansion ended and a recession began in February 2020. Although the NBER has not yet identified the end of that recession, CBO estimates that it ended in the second quarter of 2020.

  GDP = gross domestic product.

• Labor market conditions continue to improve. As the economy expands, many people rejoin the civilian labor force who had left it during the pandemic, restoring it to its prepandemic size in 2022.2 The unemployment rate gradually declines throughout the period, and the number of people employed returns to its prepandemic level in 2024.
• Inflation, as measured by the price index for personal consumption expenditures, rises gradually over the next few years and exceeds 2.0 percent after 2023, as the Federal Reserve maintains low interest rates and continues to purchase long-term securities.
• Interest rates on federal borrowing rise. The Federal Reserve maintains the federal funds rate (the rate that financial institutions charge each other for overnight loans of their monetary reserves) near zero through mid-2024 and then starts to raise that rate gradually. The interest rate on 3-month Treasury bills closely follows the federal funds rate. The interest rate on 10-year Treasury notes rises as the Federal Reserve reduces the pace of its asset purchases and investors anticipate rising short-term interest rates later in the decade.

CBO’s projections of economic growth have been boosted by various laws enacted in 2020.3 Most recently, in late December, the Consolidated Appropriations Act, 2021 (Public Law 116-260), appropriated funds for the remainder of fiscal year 2021, provided additional emergency funding for federal agencies to respond to the public health emergency created by the pandemic, and provided financial support to households, businesses, and nonfederal governments affected by the economic downturn, among other measures. CBO estimates that the pandemic-related provisions in that legislation will add $774 billion to the deficit in fiscal year 2021 and $98 billion in 2022.4 Those provisions will boost the level of real GDP by 1.8 percent in calendar year 2021 and by 1.1 percent in calendar year 2022, CBO estimates.

The Economic Outlook for 2026 to 2031

In CBO’s projections, the economy continues to expand from 2026 to 2031. Real GDP grows by 1.6 percent per year, on average (see Table 2-2). Real potential GDP grows slightly more rapidly (see Table 2-3). For most of the period, the Federal Reserve allows inflation to remain above its target level; the level of real GDP likewise remains above the level of real potential GDP for several years. Eventually, less accommodative policies on the part of the Federal Reserve help push GDP back toward its historical average relationship with potential GDP.

A mild increase in productivity growth causes potential output in CBO’s projections to grow more quickly over the 2021–2031 period than it has grown since the 2007–2009 recession. However, potential output still grows more slowly than it has grown since 1950, mainly because of an ongoing, long-term slowdown in the growth of the labor force.

Uncertainties in the Economic Outlook

CBO’s projections reflect an average of possible outcomes under current law. But these projections are subject to an unusually high degree of uncertainty, and that uncertainty stems from many sources, including the course of the pandemic, the effectiveness of monetary and fiscal policies, and the response of global financial markets to substantial increases in public deficits and debt. As a result, the economy could expand substantially more quickly or more slowly than CBO projects. Labor market conditions could likewise improve more quickly or slowly than projected, and inflation and interest rates could rise more rapidly or slowly as well. Also uncertain is the impact of the pandemic on the economy over the longer term, including its effects on productivity, the labor force, and technological innovation.

Comparisons With Previous Projections

CBO currently projects a stronger economy than it did in July 2020, in large part because the downturn was not as severe as expected and because the first stage of the recovery took place sooner and was stronger than expected (see Table 2-4).5 GDP and employment are projected to be higher and to be accompanied by modestly higher inflation and higher interest rates than they were in CBO’s July projections. The fact that the downturn was less severe and the recovery stronger than previously projected also changed the projected pattern of growth: CBO’s current projections of GDP growth are stronger, on average, for the 2021–2025 period than they were in July but weaker for the 2026–2031 period.

CBO made those changes to its economic projections even though it expects social distancing to be more pronounced and to last longer than projected in July. The projected effects of the Consolidated Appropriations Act, 2021, played a part in improving the economic outlook.

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Appendix: Tax Expenditures

The tax rules that form the basis for the Congressional Budget Office’s projections include an array of exclusions, deductions, preferential rates, and credits. Those provisions reduce revenues for any given level of tax rates in both the individual and corporate income tax systems. Many of those provisions are called tax expenditures because, like government spending programs, they provide financial assistance for particular activities as well as to certain entities or groups of people.1

Tax expenditures contribute to the budget deficit just as federal spending does. They also influence people’s choices about working, saving, and investing, and they affect the distribution of income. The Congressional Budget and Impoundment Control Act of 1974 (Public Law 93-344) requires the federal budget to list tax expenditures and for CBO to report the levels of tax expenditures under existing law. Every year, the staff of the Joint Committee on Taxation (JCT) and the Treasury’s Office of Tax Analysis each publish estimates of individual and corporate income tax expenditures.2

Unlike many spending programs, tax expenditures are not subject to annual appropriations. In fact, most tax expenditures are not explicitly recorded in the federal budget but rather are reflected in the total amount of revenues. The one exception is the portion of refundable tax credits that exceeds a filer’s tax liability; that amount is recorded as mandatory spending in the budget. Because of that budgetary treatment, tax expenditures can be less transparent than discretionary spending or spending on benefit programs.

Tax expenditures have a large effect on the federal budget. In fiscal year 2021, the value of the more than 200 tax expenditures in the individual and corporate income tax systems will total an estimated $1.8 trillion—or 8.2 percent of gross domestic product—if their effects on payroll taxes as well as income taxes are included.3 That amount, which was calculated by CBO on the basis of estimates prepared by JCT, equals about half of all federal revenues that are projected to be collected in 2021 and exceeds all projected discretionary outlays combined (see Figure A-1).4

Estimates of tax expenditures measure the difference between households’ and businesses’ tax liabilities under current law and the tax liabilities they would have incurred if the provisions generating those tax expenditures were repealed but taxpayers’ behavior was unchanged. Such estimates do not represent the amount of revenues that would be raised if those provisions were eliminated, because the changes in incentives that would result from eliminating those provisions would lead households and businesses to modify their behavior in ways that would lessen the effect on revenues.

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About This Document

This document is one of a series of reports on the state of the budget and the economy that the Congressional Budget Office issues each year. It satisfies the requirement in section 202(e) of the Congressional Budget Act of 1974 for CBO to submit to the Committees on the Budget periodic reports about fiscal policy and to provide baseline projections of the federal budget. In keeping with CBO’s mandate to provide objective, impartial analysis, this report makes no recommendations.

The estimates in this report are the work of more than 100 staff members at CBO and the staff of the Joint Committee on Taxation. Barry Blom wrote Chapter 1, and Aaron Feinstein, Avi Lerner, Amber Marcellino, and Dan Ready compiled the projections. Christina Hawley Anthony, Theresa Gullo, Leo Lex, John McClelland, Sam Papenfuss, and Joshua Shakin provided guidance. Robert Shackleton wrote Chapter 2, with contributions from Aaron Betz, Yiqun Gloria Chen, Erin Deal, Daniel Fried, Edward Gamber, Ronald Gecan, Mark Lasky, Junghoon Lee, Michael McGrane, Jaeger Nelson, Sarah Robinson, Jeffrey Schafer, John Seliski, and Christopher Williams. Robert Arnold, Devrim Demirel, John Kitchen, and Jeffrey Werling provided guidance. Kathleen Burke wrote the appendix; John McClelland and Joshua Shakin provided guidance. Erin Deal, Aaron Feinstein, Avi Lerner, Bayard Meiser, Tess Prendergast, Dan Ready, Sarah Robinson, and Olivia Yang fact-checked the report and prepared the supplemental material.

CBO consulted with members of its Panel of Economic Advisers during the preparation of this report. Although CBO’s outside advisers provided considerable assistance, they are not responsible for the contents of this report.

Mark Doms, Mark Hadley, Jeffrey Kling, and Robert Sunshine reviewed the report. Christine Bogusz and Benjamin Plotinsky were the editors, and Casey Labrack was the graphics editor. This report is available on CBO’s website (www.cbo.gov/publication/56970).

CBO continually seeks feedback to make its work as useful as possible. Please send any comments to communications@cbo.gov.

Phillip L. Swagel

Director

February 2021