SOLUTION: BUS 529 Jawaharlal Nehru Technological University Real Case Application Worksheet

A Visual Summary of
The Budget and Economic Outlook:
2020 to 2030
Congressional Budget Office
Nonpartisan Analysis for the U.S. Congress
January 2020
In this report, the Congressional Budget Office provides detailed projections of the federal budget and the
U.S. economy under current law for this year and the decade that follows as well as projections for the following
two decades. The cumulative deficit currently projected for the next 10 years is slightly larger than what CBO
projected last August because deficit increases resulting from new legislation and other changes are greater than
the deficit-reducing effects of revisions to CBO’s economic forecast. Beyond 2030, projected deficits have increased
substantially. As a result, debt held by the public as a percentage of gross domestic product (GDP) in 2049 is now
projected to be 30 percentage points higher than it was in CBO’s previous long-term projections.
CBO estimates a 2020 deficit of $1.0 trillion, or 4.6 percent of GDP. The projected gap between
spending and revenues increases to 5.4 percent of GDP in 2030. Federal debt held by the public
is projected to rise over the c­ oming decade, from 81 percent of GDP in 2020 to 98 percent of
GDP in 2030. It continues to grow t­ hereafter in CBO’s projections, reaching 180 percent of GDP
in 2050, well above the highest level ever recorded in the United States.
Deficits and Debt
Percentage of Gross Domestic Product
6
Projected
Primary Deficit or Surplus
4
2
0
−2
−4
Net Interest
−6
Total Deficit
or Surplus
−8
−10
1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
2020
2025
2030
Over the 2020–2030 period,
primary deficits—that is,
deficits excluding net outlays
for interest—are projected
to average 2.6 percent of
GDP. Over the same period,
federal debt and interest
rates are both projected to
rise, causing net outlays for
interest to increase steadily,
from 1.7 percent of GDP
in 2020 to 2.6 percent
of GDP in 2030.
See Figure 1-3
Percentage of Gross Domestic Product
200
Projected
Federal Debt Held by the Public
High and rising federal
debt would reduce national
saving and income, boost
the government’s interest
payments, limit policymakers’
ability to respond to
unforeseen events, and
increase the likelihood of a
fiscal crisis.
150
World War II
100
50
0
1790
Great
Depression
World War I
Civil War
1810
1830
1850
1870
1890
1910
1930
1950
1970
1990
See Figure 1-4
www.cbo.gov |
@uscbo
2010
2030
2050
A Visual Summary of The Budget and Economic Outlook: 2020 to 2030
Revenues
January 2020
In CBO’s baseline projections, revenues total $3.6 trillion in 2020, or 16.4 percent of GDP, and
rise to 18.0 percent of GDP in 2030.
Percentage of Gross Domestic Product
Change
(Percentage points)
Revenues
2020
2030
Individual Income Taxes
8.1
9.5
Payroll Taxes
5.9
5.9
Corporate Income Taxes
1.1
1.3
Other Taxes
1.4
1.2
Major Reasons for Change
1.4
*
0.2
−0.1
Expiration of certain provisions of the
Total revenues as a share of GDP are
2017 tax act at the end of calendar
projected to rise, primarily because
year 2025; real bracket creep a
of increases in individual income
taxes. Driving those increases are the
expiration
of certain provisions of the
Not applicable
2017 tax act (at the end of calendar
year 2025) and real bracket creep—the
process
in which,
as income
rises faster
Scheduled
changes
in tax rules
than
inflation,
a larger
proportion
of
enacted
in the
2017 tax
act
income becomes subject to higher
tax rates.
Repeal of a tax on health insurance
providers
See Figure 1-8; * = between zero and 0.05 percentage points
Outlays
In 2020, CBO estimates, outlays will total $4.6 trillion, or 21.0 percent of GDP. In the agency’s
baseline projections, they rise to 23.4 percent of GDP in 2030.
Percentage of Gross Domestic Product
Change
(Percentage points)
Outlays
2020
2030
Social Security
4.9
6.0
Major Health Care Programs
5.4
7.0
Other Mandatory Spending
2.6
2.2
Discretionary Spending
6.4
5.6
Net Interest
1.7
2.6
1.1
1.6
−0.8
0.8
www.cbo.gov |
The
aging
of the
population and
Aging
of the
population
the rising costs of health care boost
mandatory outlays, particularly for
Social Security and Medicare.
Aging of the population; rising costs
of health care
Inflation
is less thanprograms
nominal fall
Outlays
forrate
discretionary
growth
inGDP
relation
to GDP because of caps on
funding and because rates of inflation,
which are used to project future funding,
Caps on funding; inflation rate is less
are lower than the rate of economic
than nominal GDP growth
growth.
−0.4
See Figure 1-7
2
Major Reasons for Change
@uscbo
Accumulating
debt;
interest
Net
interest costs
riserising
steadily
because
ofrates
accumulating debt and rising
interest rates.
January 2020
A Visual Summary of The Budget and Economic Outlook: 2020 to 2030
Adjusted for inflation, GDP is projected to grow by 2.2 percent in 2020. From 2021 to 2030, output
is projected to grow at an average annual rate of 1.7 percent, roughly the same rate as the economy’s
maximum sustainable output (or potential GDP), which is determined by factors such as the size of
the labor force, the average number of hours worked, capital investment, and productivity growth.
The Economy
Percentage Change
6
Projected
4
In CBO’s projections, output
grows faster than potential
GDP in 2020, largely because
of strong consumer spending
and a rebound in business
fixed investment. In later
years, economic growth
slows as growth in consumer
spending and private
investment moderates.
Real GDP
2
Real Potential GDP
0
−2
−4
2000
2005
2010
2015
2020
2025
2030
See Figure 2-1
Percent
10
The unemployment rate
remains near historic lows
throughout 2020. It then rises
steadily, mostly because of
slower economic growth. In
2024, it surpasses the natural
rate of unemployment (the
rate arising from all sources
other than fluctuations in the
overall demand for goods and
services).
Unemployment
Rate
8
6
Natural Rate
of Unemployment
4
2
0
2000
2005
2010
2015
2020
2025
2030
See Figure 2-2
Percent
68
66
The strong labor market
keeps the labor force
participation rate elevated
for much of 2020. Starting in
2021, as economic and job
growth slows, participation
falls toward its potential rate,
which also decreases, largely
because of the aging of the
population.
Potential Participation
Rate
64
Participation Rate
62
60
0
58
2000
2005
2010
2015
2020
2025
2030
See Figure 2-2
www.cbo.gov |
@uscbo
3
A Visual Summary of The Budget and Economic Outlook: 2020 to 2030
January 2020
The Economy
(Continued)
Average Annual Percentage Change
4
3
4.0
2.4
Projected
3.1
0.6
3.3
1.7
2
1
0
3.2
2.0
1.6
2.5
1.6
1.6
1950−
1973
1974−
1981
1982−
1990
Over the next decade, real
potential GDP is projected
to grow more slowly than it
did before 2008, primarily
because the labor force is
expected to grow more slowly
than it has in the past.
2.6
1.2
1991−
2001
1.0
2002−
2007
1.6
2.0
1.7
Real Potential GDP
1.4
Potential Labor Force
Productivity
Potential Labor Force
1.1
1.5
0.5
0.5
0.3
2008−
2019
2020−
2024
2025−
2030
See Figure 2-6
Percentage Change
4
Projected
In CBO’s projections, a
number of factors cause
inflation to accelerate in
2020, including strong labor
and product markets. After
2021, diminishing strength in
those markets slows the rate
of inflation.
PCE Price
Index
3
2
Federal Reserve’s Objective
1
0
2000
Core PCE
Price Index
2005
2010
2015
2020
2025
2030
See Figure 2-4; PCE = personal consumption expenditures
Percent
8
6
4
10-Year Treasury Note Rate
2
0
2000
3-Month Treasury Bill Rate
2005
2010
2015
2020
2025
See Figure 2-5
4
www.cbo.gov |
@uscbo
2030
Factors that push projected
interest rates below their
pre-2008 average include
lower average expected
inflation and slower growth of
the labor force. Those factors
are partially offset by others,
such as a larger federal debt
relative to GDP.
An Overview of the
Economic Outlook:
2021 to 2031
T
he 2020–2021 coronavirus pandemic
caused severe economic disruptions last
year as households, governments, and businesses adopted a variety of mandatory and
voluntary ­measures—collectively referred to here as
social distancing—to limit in-person interactions that
could spread the virus. The impact was focused on
particular sectors of the economy, such as travel and
hospitality, and job losses were concentrated among
lower-wage workers.
Over the course of the coming year, vaccination is
expected to greatly reduce the number of new cases of
COVID-19, the disease caused by the coronavirus. As
a result, the extent of social distancing is expected to
decline. In its new economic forecast, which covers the
period from 2021 to 2031, the Congressional Budget
Office therefore projects that the economic expansion
that began in mid-2020 will continue (see Table 1).
Specifically, real (inflation-adjusted) gross domestic
product (GDP) is projected to return to its prepandemic
level in mid-2021 and to surpass its potential (that is,
its maximum sustainable) level in early 2025. In CBO’s
projections, the unemployment rate gradually declines
through 2026, and the number of people employed
returns to its prepandemic level in 2024.
CBO is using this economic forecast as the basis for
updating its budget projections for 2021 to 2031. The
agency plans to release those budget projections later in
February and a more detailed report about this forecast
later this winter. The forecast incorporates economic and
other information available as of January 12, 2021, as
well as estimates of the economic effects of all legislation
(including pandemic-related legislation) enacted up to
that date.
FEBRUARY | 2021
The Economic Outlook
for 2021 to 2025
In CBO’s projections, which incorporate the assumptions that current laws governing federal taxes and
spending (as of January 12) generally remain in place
and that no significant additional emergency funding
or aid is provided, the economy continues to strengthen
during the next five years.
• Real GDP expands rapidly over the coming year,
reaching its previous peak in mid-2021 and surpassing
its potential level in early 2025. The annual growth
of real GDP averages 2.6 percent during the five-year
period, exceeding the 1.9 percent growth rate of real
potential GDP (see Figure 1).
• Labor market conditions continue to improve. As the
economy expands, many people rejoin the civilian
labor force who had left it during the pandemic,
restoring it to its prepandemic size in 2022.1 The
unemployment rate gradually declines throughout the
period, and the number of people employed returns
to its prepandemic level in 2024.
• Inflation, as measured by the price index for personal
consumption expenditures, rises gradually over the
next few years and rises above 2.0 percent after 2023,
as the Federal Reserve maintains low interest rates
and continues to purchase long-term securities.
• Interest rates on federal borrowing rise. The Federal
Reserve maintains the federal funds rate (the rate that
financial institutions charge each other for overnight
loans of their monetary reserves) near zero through
mid-2024 and then starts to raise that rate gradually.
The interest rate on 3-month Treasury bills closely
1. The labor force is the number of people age 16 or older in the
civilian noninstitutionalized population who have jobs or who
are available for work and are actively seeking jobs.
Notes: Unless this report indicates otherwise, all years referred to are calendar years. Federal fiscal years run from October 1 to September 30 and are
designated by the calendar year in which they end. Numbers in the text and tables may not add up to totals because of rounding.
2
AN OVERVIEW OF THE ECONOMIC OUTLOOK: 2021 TO 2031
February 2021
Table 1 .
CBO’s Economic Projections for Calendar Years 2021 to 2031
Annual Average
2020
Gross Domestic Product
Reala
Nominal
Inflation
PCE price index
Core PCE price indexb
Consumer price indexc
Core consumer price indexb
GDP price index
Employment Cost Indexd
Unemployment Rate
Gross Domestic Product
Reala
Nominal
Inflation
PCE price index
Core PCE price indexb
Consumer price indexc
Core consumer price indexb
GDP price index
Employment Cost Indexd
Unemployment Rate (Percent)
Labor Force Participation Rate (Percent)g
Payroll Employment (Monthly change, in thousands)h
Interest Rates (Percent)
Three-month Treasury bills
Ten-year Treasury notes
Tax Bases (Percentage of GDP)
Wages and salaries
Domestic corporate profitsi
Current Account Balance (Percentage of GDP) k
2021
2022
2023
2024–
2025
2026–
2031
Percentage Change From Fourth Quarter to Fourth Quarter
-2.5
-1.2
3.7
5.6
2.4
4.5
2.3
4.3
2.2
4.4
1.6
3.8
1.2
1.4
1.2
1.6
1.3
2.8
1.7
1.5
1.9
1.5
1.9
2.3
1.9
1.9
2.2
2.2
2.0
2.8
1.9
1.9
2.3
2.3
2.0
3.0
2.1
2.1
2.4
2.4
2.1
3.2
2.1
2.1
2.4
2.4
2.1
3.3
6.8
5.3
4.0e
4.3f
Fourth-Quarter Level (Percent)
4.9
4.6
Percentage Change From Year to Year
-3.5
-2.3
4.6
6.3
2.9
4.9
2.2
4.2
2.3
4.4
1.7
3.8
1.2
1.4
1.3
1.7
1.2
2.9
1.6
1.5
1.9
1.6
1.6
2.1
1.8
1.8
2.1
2.1
1.9
2.6
1.9
1.9
2.3
2.3
2.0
2.9
2.0
2.0
2.3
2.4
2.1
3.1
2.1
2.1
2.4
2.4
2.1
3.3
8.1
61.7
-765
5.7
61.9
521
Annual Average
5.0
4.7
62.1
62.0
145
145
4.2
61.9
135
4.1
61.2
40
0.4
0.9
0.1
1.1
0.1
1.3
0.2
1.5
0.4
2.0
1.7
3.0
44.8
7.6j
-2.8j
44.0
7.9
-2.9
43.9
7.5
-2.4
43.9
7.7
-2.0
43.9
8.2
-2.0
43.6
8.0
-2.2
Data sources: Congressional Budget Office; Bureau of Economic Analysis; Bureau of Labor Statistics; Federal Reserve. See www.cbo.gov/publication/56965#data.
GDP = gross domestic product; PCE = personal consumption expenditures.
a. Real values are nominal values that have been adjusted to remove the effects of changes in prices.
b. Excludes prices for food and energy.
c. The consumer price index for all urban consumers.
d. The employment cost index for wages and salaries of workers in private industry.
e. Value for the fourth quarter of 2025.
f. Value for the fourth quarter of 2031.
g. The labor force participation rate is the share of the civilian noninstitutionalized population age 16 or older that is working or actively seeking work.
h. The average monthly change in the number of employees on nonfarm payrolls, calculated by dividing the change from the fourth quarter of one calendar year
to the fourth quarter of the next by 12.
i. Adjusted to remove distortions in depreciation allowances caused by tax rules and to exclude the effects of changes in prices on the value of inventories.
j. Estimated value for 2020.
k. Represents net exports of goods and services, net capital income, and net transfer payments between the United States and the rest of the world.
February 2021
AN OVERVIEW OF THE ECONOMIC OUTLOOK: 2021 TO 2031
Figure 1 .
The Relationship Between GDP and Potential GDP
Percentage Change
6
Projected
Real GDP Growth
3
Real Potential
GDP Growth
0
−3
2000
2005
2010
2015
2020
2025
2030
Percentage of Potential GDP
2
Output Gap
0
In CBO’s projections,
the annual growth of
real (inflation-adjusted)
GDP exceeds that of real
potential GDP until 2026
and then falls below it. The
output gap between real
GDP and real potential GDP
is positive for several years,
starting in 2025, before
moving back toward its
historical average.
−2
−4
−6
2000
2005
2010
2015
2020
2025
2030
Data sources: Congressional Budget Office; Bureau of Economic Analysis. See www.cbo.gov/publication/56965#data.
Real values are nominal values that have been adjusted to remove the effects of changes in prices. Potential GDP is CBO’s estimate of the maximum sustainable
output of the economy. Growth of real GDP and of real potential GDP is measured from the fourth quarter of one calendar year to the fourth quarter of the next.
The output gap is the difference between GDP and potential GDP, expressed as a percentage of potential GDP. A positive value indicates that GDP exceeds
potential GDP; a negative value indicates that GDP falls short of potential GDP. Values for the output gap are for the fourth quarter of each year.
The shaded vertical bars indicate periods of recession, which extend from the peak of a business cycle to its trough. The National Bureau of Economic Research
(NBER) has determined that an expansion ended and a recession began in February 2020. Although the NBER has not yet identified the end of that recession,
CBO estimates that it ended in the second quarter of 2020.
GDP = gross domestic product.
3
4
AN OVERVIEW OF THE ECONOMIC OUTLOOK: 2021 TO 2031
follows the federal funds rate. The interest rate on
10-year Treasury notes rises gradually as the Federal
Reserve reduces the pace of its asset purchases and
investors anticipate rising short-term interest rates
later in the decade.
CBO’s projections of economic growth have been
boosted by various laws enacted in 2020.2 Most recently,
in late December, the Consolidated Appropriations Act,
2021 (Public Law 116-260), appropriated funds for
the remainder of fiscal year 2021, provided additional
emergency funding for federal agencies to respond to the
public health emergency created by the pandemic, and
provided financial support to households, businesses,
and nonfederal governments affected by the economic
downturn, among other measures. CBO estimates that
the pandemic-related provisions in that legislation will
add $774 billion to the deficit in fiscal year 2021 and
$98 billion in 2022.3 Those provisions will boost the
level of real GDP by 1.5 percent, on average, in calendar
years 2021 and 2022, CBO estimates; the bulk of the
impact will occur in 2021.
The Economic Outlook
for 2026 to 2031
In CBO’s projections, the economy continues to expand
from 2026 to 2031. Real GDP grows by 1.6 percent
per year, on average (see Table 2). Real potential GDP
grows slightly more rapidly (see Table 3). For most of the
period, the Federal Reserve allows inflation to remain
above its target level; the level of real GDP likewise
remains above the level of real potential GDP for several
years. Eventually, less accommodative policies on the part
of the Federal Reserve help push GDP back toward its
historical average relationship with potential GDP.
A mild increase in productivity growth causes potential output in CBO’s projections to grow more quickly
over the 2021–2031 period than it has grown since the
2007–2009 recession. However, potential output still
grows more slowly than it has grown since 1950, mainly
2. See Congressional Budget Office, The Effects of PandemicRelated Legislation on Output (September 2020), www.cbo.gov/
publication/56537.
3. Those provisions are contained in divisions M, N, and EE of the
Consolidated Appropriations Act, 2021.
February 2021
because of an ongoing, long-term slowdown in the
growth of the labor force.
Uncertainties in the
Economic Outlook
CBO’s projections reflect an average of possible outcomes under current law. But these projections are
subject to an unusually high degree of uncertainty, and
that uncertainty stems from many sources, including the
course of the pandemic, the effectiveness of monetary
and fiscal policies, and the response of global financial
markets to substantial increases in public deficits and
debt. As a result, the economy could expand substantially
more quickly or more slowly than CBO projects. Labor
market conditions could likewise improve more quickly
or slowly than projected, and inflation and interest rates
could rise more rapidly or slowly as well. Also uncertain
is the impact of the pandemic on the economy over the
longer term, including its effects on productivity, the
labor force, and technological innovation.
Comparisons With
Previous Projections
CBO currently projects a stronger economy than it did
in July 2020, in large part because the downturn w …
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