CBO Director’s Blog: How Would Some Changes to Current Law Affect the Economy over the Next Decade? How Would the Alternative Fiscal Scenario Affect the Economy? As shown in the table below, CBO estimates indicate that real GDP would be higher in the first few years of the projection period than in CBO’s baseline economic forecast, primarily as a result of increased aggregate demand: Real GDP would be greater than projected under current law by between 0.2 percent and 0.8 percent in the fourth quarter of 2012 and by between 0.5 percent and 3.7 percent in the fourth quarter of 2013. Higher GDP would result in a lower unemployment rate and somewhat higher interest rates over the next few years. But ultimately, economic growth would be dampened: Although the lower marginal tax rates under those alternative assumptions would increase people’s incentives to work and save, the larger budget deficits would reduce (or “crowd out”) private investment in productive capital. By the end of 2022, real GDP would be between 2.1 percent smaller and 0.2 percent larger than it would be under current law, CBO estimates, depending on the particular assumptions employed. In years beyond 2022, the impact on GDP would tend to become more negative, as the projected impact of the alternative fiscal scenario on deficits, and therefore investment, rose. Click for high-res photo

CBO Director’s Blog: How Would Some Changes to Current Law Affect the Economy over the Next Decade?

How Would the Alternative Fiscal Scenario Affect the Economy?

As shown in the table below, CBO estimates indicate that real GDP would be higher in the first few years of the projection period than in CBO’s baseline economic forecast, primarily as a result of increased aggregate demand:

  • Real GDP would be greater than projected under current law by between 0.2 percent and 0.8 percent in the fourth quarter of 2012 and by between 0.5 percent and 3.7 percent in the fourth quarter of 2013.
  • Higher GDP would result in a lower unemployment rate and somewhat higher interest rates over the next few years.

But ultimately, economic growth would be dampened:

  • Although the lower marginal tax rates under those alternative assumptions would increase people’s incentives to work and save, the larger budget deficits would reduce (or “crowd out”) private investment in productive capital.
  • By the end of 2022, real GDP would be between 2.1 percent smaller and 0.2 percent larger than it would be under current law, CBO estimates, depending on the particular assumptions employed.
  • In years beyond 2022, the impact on GDP would tend to become more negative, as the projected impact of the alternative fiscal scenario on deficits, and therefore investment, rose.