Saturday, February 27, 2010

The Budget and Economic Outlook: Fiscal Years 2010 to 2020

The Economic Outlook Severe economic downturns often sow the seeds of robust
recoveries. During a slump in economic activity, consumers defer purchases, especially for housing and durable goods, and businesses postpone capital spending and try to cut inventories. Once demand in the economy picks up, the disparity between the desired and actual stocks of capital assets and consumer durable goods widens quickly, and spending by consumers and businesses can accelerate rapidly. Although CBO expects that the current recovery will be spurred by that dynamic, in all likelihood, the recovery will also be dampened by a number
of factors. Those factors include the continuing fragility of some financial markets and institutions
; declining support from fiscal policy as the effects of ARRA wane and tax rates increase because of the scheduled expiration of key tax provisions; and slow wage and employment growth, as well as a large excess of vacant houses.

In CBO’s forecast, real GDP increases by 2.1 percent between the fourth quarter of 2009 and the fourth quarter of 2010 and by 2.4 percent in 2011 (see Table 2). Given CBO’s estimate of growth in potential output, those GDP growth rates will narrow the difference between actual output and potential output (the output gap) only slightly. Growth of real GDP will accelerate after 2011, spurred by stronger business investment and residential construction. For 2012 through 2014, CBO projects that real GDP will increase by an average of 4.4 percent per year, which would close the output gap completely by the end of 2014.

CBO’s forecast anticipates slower growth in 2010 and 2011 than does the forecast of the Blue Chip consensus (reflecting the views of about 50 private-sector economists). Most private forecasters probably assume that the Congress will not allow previous tax cuts to expire as scheduled. If CBO assumed, in contrast with the assumption of its baseline, that all of the expiring tax provisions were extended beyond 2010, the agency’s forecast of the level of real GDP at the end of 2011 would be in line with the forecast of the Blue Chip consensus (although real GDP in later years would be diminished relative to the baseline projection by the greater accumulation of government debt). CBO’s forecast for inflation is roughly in line with that of the Blue Chip consensus in 2010 but significantly lower in 2011.

The Budget and Economic Outlook

No comments:

Post a Comment