![]() That tightening includes the reduction in federal spending resulting from the sequestration that went into effect on March 1 the expiration of the payroll tax cut that was in place in 20 and the increase in tax rates on income above certain thresholds starting in 2013.Īfter 2014, the projected effect of automatic stabilizers on the budget deficit shrinks steadily, dropping to 0.2 percent of potential GDP in 2017 and about zero in 2018. The contribution will remain at 2.5 percent of potential GDP in 2014, accounting for roughly three-quarters of the projected deficit next year.ĬBO expects that the budgetary effects of automatic stabilizers will remain large because of the continued weakness in the economy, which is caused in part by the fiscal tightening that is occurring in calendar year 2013 under current law. That contribution accounts for about half of the estimated deficit this year. (Those historical calculations, as well as the projections presented below, involve potential GDP rather than actual GDP because potential GDP excludes fluctuations that are attributable to the business cycle.) How Large Will the Budgetary Effects of Automatic Stabilizers Be Over the Next Decade?Īccording to CBO’s projections under current law, the contribution of automatic stabilizers to the federal budget deficit, measured as a share of potential GDP, will rise slightly in fiscal year 2013, to 2.5 percent. ![]() That outcome marked the fourth consecutive year that automatic stabilizers added to the deficit by an amount equal to or exceeding 2.0 percent of potential GDP, an impact that had previously been equaled or exceeded only twice in the past 50 years, in fiscal years 19. ![]() In fiscal year 2012, CBO estimates, automatic stabilizers added $386 billion to the federal budget deficit, an amount equal to 2.3 percent of potential GDP. How Large Were the Budgetary Effects of Automatic Stabilizers Last Year? Given CBO’s economic and budgetary projections under current law, the agency expects that automatic stabilizers will continue to add significantly to the budget deficit and to support economic activity in 20 but that their effects on the budget and the economy will decline significantly from 2015 through 2018 in response to improving economic conditions. According to CBO’s estimates, automatic stabilizers added significantly to the budget deficit-and thereby helped to strengthen economic activity-in fiscal years 2009 through 2012. (Those effects of automatic stabilizers are in addition to the effects of any legislative changes in tax and spending policies.)ĬBO uses statistical techniques to estimate the effects of the business cycle on federal revenues and outlays and, thus, on federal budget deficits. Under those circumstances, automatic stabilizers offer a smaller boost to economic activity and thereby slow its growth. Conversely, when real (inflation-adjusted) gross domestic product (GDP) moves up closer to the maximum sustainable output of the economy (termed potential GDP), revenues automatically rise and outlays automatically fall. Such reductions in revenues and increases in outlays-known as automatic stabilizers-help bolster economic activity during downturns, but they also temporarily increase the federal budget deficit. ![]() ![]() In addition, some federal outlays-to pay unemployment insurance benefits, for example-automatically increase. Corrected: On March 15, 2013, this document was reposted the updated version includes some corrections to the formatting.ĭuring recessions, federal tax liabilities and, therefore, revenues decline automatically with the reduction in output and income. ![]()
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