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Economic News, Data and Analysis

Deficit Projections

Yesterday the CBO released a projected 10-year surplus of about $1 trillion (down from over $5.5 trillion as of January last year).
The change is due in part to the tax cuts enacted last year, economic changes, technical changes, and other legislation.
Keep in mind, however, that these are baseline estimates. They assume 1) no change in policy, and 2) an average economy. If policy, or the economy, changes, so too will the deficit.
Since we are projecting out 10 years, small changes in economic assumptions (particularly real GDP growth rates) can lead to very large changes in projected deficits.
How much uncertainty is there? Take a look at the following graph from the CBO (which indicates only the uncertainty from non-policy changes.)

Uncertainties in Projecting Budget Surpluses: A Discussion of Data and Methods
Uncertainty in CBO’s Projection of the Total Budget Surplus Under Current Policies.

This figure shows the estimated likelihood of alternative projections of the surplus under current policies. The calculations are based on CBO’s past track record. CBO’s baseline projection falls in the middle of the darkest area. Under the assumption that current policies do not change, the probability is 10 percent that actual surpluses will fall in the darkest area and 90 percent that they will fall within the whole shaded area.
Actual surpluses will of course be affected by legislation enacted during the next five years, including decisions about discretionary spending. The effects of future legislation are not included in this figure.

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Filed under: Economics, Policy

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