Projections of Deficits and Debt Under an Alternative Scenario for the Budget

This letter responds to a request for an analysis of projected deficits and debt under an alternative scenario for the budget that reflects two changes to CBO's baseline. Specifically, Senator Merkley asked how CBO’s projections of deficits and debt would change if certain provisions of the 2017 tax act (Public Law 115-97) were extended permanently. (By statute, estimates of the effects of tax legislation are made by the staff of the Joint Committee on Taxation, or JCT.) Senator Merkley also asked how those projections would change if revenues were reduced by an additional $150 billion in each year of the 10-year budget window and by a fixed percentage of gross domestic product (GDP) thereafter.

In CBO’s most recent extended baseline projections, which reflect the assumption that current laws generally remain unchanged, primary deficits (that is, deficits excluding net outlays for interest) average 2.0 percent of GDP over the 2025–2055 period and equal 1.9 percent of GDP in 2055.

Total deficits average 6.3 percent of GDP over that period and reach 7.3 percent of GDP in 2055. Federal debt held by the public increases from 100 percent of GDP to 156 percent of GDP—exceeding any previously recorded level and on track to increase further.

CBO estimates that if provisions of the 2017 tax act were extended, tax revenues were lower by the additional amount Senator Merkley specified, and there were no other changes to fiscal policy, debt held by the public would reach 220 percent of GDP in 2055, 63 percentage points higher than in the long-term baseline projections. Interest rates would also be higher, and real gross national product (GNP) per person—a measure of the resources available to U.S. households—would be lower in that year.

Those estimates incorporate the economic effects that would result from the extension of provisions of the 2017 tax act and the additional reductions in revenues that Senator Merkley specified. Those effects include increases in the supply of labor and investment brought about by lower marginal tax rates on income from labor and capital, increases in output in the short term caused by greater overall demand for goods and services, and decreases in output in the longer term caused by larger federal deficits and debt.