The Uncertainty Of Long-Term US Government Budget Projections

Budget projections are inherently uncertain. CBO’s projections in The 2014 Long-Term Budget Outlook generally reflect current law and estimates of future economic conditions and demographic trends (those projections are called CBO’s “extended baseline”). If future spending and tax policies differ from what is prescribed in current law, budgetary outcomes will differ from CBO’s extended baseline, as discussed in a blog post last week.

But even if future policies match what is specified in current law, budgetary outcomes will undoubtedly differ from CBO’s projections because of unexpected changes in the economy, demographics, and other factors. To illustrate the uncertainty of its projections, CBO estimated how variation in the following four key factors would affect budgetary outcomes:

• The rate of decline in mortality,
• Productivity growth,
• Interest rates, and
• Growth in federal health care spending.

CBO’s analysis shows that the main implication of CBO’s central estimates applies under a wide range of possible values for those factors—namely, if current laws remained generally unchanged, federal debt, which is already high by historical standards, would be at least as high and probably much higher 25 years from now.

How Would Altering Four Key Factors Affect Projected Budgetary Outcomes?

Different paths for those four factors would affect the budget in various ways. For example, lower-than-projected mortality rates would mean longer life expectancy, which would increase the number of people who received benefits from such programs as Social Security, Medicare, and Medicaid; and faster growth in spending for Medicare and Medicaid would boost outlays for those two programs. Both of those changes would increase deficits and debt—which would lead to lower output and higher interest rates, economic feedback that would further worsen the budgetary outlook. By contrast, faster growth in productivity and lower interest rates on federal debt held by the public would reduce deficits and debt—the first by raising output and increasing revenues, the second by lowering government interest payments.