CBO Estimates Economic Effects of the President's Final Budget
In addition to producing its own estimate of the budgetary effects of the President's budget, CBO typically estimates the economic effects of the budget as well, in essence producing a dynamic score of the President's proposals. This year's Macroeconomic Analysis of the President's Budget draws a similar conclusion as the previous few: the labor supply effect of immigration reform increases the size of the economy somewhat while other factors on net slightly reduce it, leaving higher Gross National Product (GNP) overall but lower GNP per capita. Overall, the budget would increase real GNP per 1 percent on average over the next ten years (and by about 2.5 percent in the last year), but GNP per capita would be about 0.7 percent lower over the same time period. Dynamic effects not already accounted for would increase deficits by $32 billion over ten years.
It's worth noting that CBO's previous estimate of the President's budget already incorporated the effect of immigration reform on labor supply (from increased population) into its numbers, finding $101 billion of deficit reduction over ten years as a result. The economic analysis incorporates more indirect effects of the increased labor supply, specifically that the larger labor force would increase the return to capital, which in turn would increase productivity by 0.7 percent in 2026. The increased return to capital would, however, also raise interest rates on federal debt.
Other factors would hurt economic growth. In particular, the budget's net tax increases, which are larger than in years past, would raise marginal tax rates by around 3 percent on labor income and around 3.5 percent on capital income when the increases are fully phased in. CBO also finds that the budget's investments would reduce economic growth in the short term, particularly since the increased higher education spending would encourage people to drop out of the labor force and attend school. Most of the investments' effects on productivity would occur beyond the ten-year window.
The budget's $2.4 trillion of deficit reduction itself also produces economic effects. In the short term, the deficit reduction reduces demand, but when the economy recovers close to its potential by the end of the decade, the deficit reduction reduces crowding out of private investment.
Overall, the additional economic effects of the budget (beyond the immigration labor supply effect) add $32 billion to deficits over ten years. The deficit increase is concentrated in the nearer term, with those effects increasing deficits by $69 billion in the first five years but reducing them by $37 billion in the second five years. Though this modest amount makes little difference for nominal debt, the larger economy would slightly lower debt as a share of GDP from 77.4 percent to around 76 percent.
As in past years, the budget's inclusion of immigration reform would increase the size of the economy while other factors would slightly offset that effect. Thus, accounting for economic effects would not change the numbers in the President's budget very much.