How Changes in Economic Conditions Might Affect the Federal Budget: 2024 to 2034

The Congressional Budget Office's budget projections are subject to uncertainty for many reasons. Some of that uncertainty is related to demographic trends, possible actions by federal agencies, the extent of participation in federal programs, and a variety of other factors. In addition, significant uncertainty stems from the fact that the federal budget is sensitive to economic conditions, which are difficult to accurately forecast. If conditions differed noticeably from those in CBO's economic forecast, budgetary outcomes could diverge from those in the agency's baseline budget projections.

To show how variations in economic conditions might affect its budget projections, CBO analyzed how revenues, outlays, and deficits might change if the values of key economic variables differed from those in the agency's forecast. To do so, CBO generated four economic scenarios that would result in larger budget deficits. In isolation, each of those scenarios would cause cumulative deficits to be larger than the amounts projected in CBO's baseline by between $142 billion and $324 billion over the 2025-2034 period. (The total deficit projected for that period is $20.0 trillion.)

The four scenarios that CBO analyzed are as follows:

• Slower productivity growth. If productivity grew at a rate that was 0.1 percentage point slower each year than it is in the agency's economic forecast, economic growth would slow, which would reduce income and, in turn, federal revenues. Although some of that decrease in revenues would be offset by reductions in outlays, annual deficits would be larger than projected by amounts that would reach $71 billion in 2034, CBO estimates. The cumulative deficit for the 2025-2034 period would be $304 billion larger than it is in CBO's baseline budget projections.
• Slower growth of the labor force. If the labor force grew at a rate that was 0.1 percentage point slower each year than the rate in CBO's economic forecast, and if the unemployment rate remained unchanged, economic growth would slow, and annual deficits would be larger than those in the agency's baseline budget projections by amounts that would reach $33 billion in 2034. The cumulative deficit for the 2025-2034 period would be $142 billion larger than it is in the agency's baseline projections.
• Higher interest rates. If all interest rates-including those on 3-month Treasury bills and 10-year Treasury notes-were 0.1 percentage point higher each year than they are in CBO's economic forecast, the government's net interest costs would grow progressively over the projection period. If other variables were held constant, higher-than-forecast interest rates would cause deficits to exceed the agency's baseline projections by $50 billion in 2034 and by $324 billion over the 2025-2034 period.
• Higher inflation and interest rates. If all wage and price indexes grew at a rate that was 0.1 percentage point faster each year than the rate in CBO's economic forecast, but real (inflation-adjusted) values for gross domestic product (GDP), interest rates, and other variables affected by inflation were the same as those underlying CBO's baseline, annual deficits would be larger than projected by amounts that would climb to $41 billion in 2034. With real GDP held constant, higher inflation would push up nominal GDP, resulting in more taxable income. But higher inflation would also increase benefit payments from certain programs. And with real interest rates held constant, higher inflation would increase nominal interest rates. As in the previous scenario, those higher nominal interest rates would drive up interest payments on federal debt. The cumulative deficit for the 2025-2034 period would be $263 billion larger than projected.

Those scenarios and the resulting budgetary and economic effects are referred to as CBO's rules of thumb. Although budget deficits are larger in each scenario than they are in the agency's baseline, actual economic outcomes may result in deficits that are smaller. Because the rules of thumb are roughly symmetrical, if productivity or the labor force grew 0.1 percentage point more quickly than projected, or if interest rates or inflation were 0.1 percentage point lower than projected, deficits would be smaller than they are in the agency's baseline budget projections by about the same amounts.