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1 1 (April 17, 2020)

handle is hein.crs/govcuyt0001 and id is 1 raw text is: Researh Sevice COVID-19 and Short-Run Federal Deficits Updated April 17, 2020 The COVID- 19 outbreak and ensuing economic shock may have major effects on future federal budget deficits (the amounts by which annual outlays exceed annual revenues). The latest federal budget baselines from the Congressional Budget Office (CBO) and Office of Management and Budget (OMB) use economic forecasts produced before the COVID- 19 outbreak; baselines with updated forecasts would typically not be expected for several months, though agencies could decide to provide updates sooner. This Insight briefly discusses the effects that recent economic and legislative developments may have on short-term federal budget outcomes. Recent Projections Budget baseline forecasts projected federal deficits to be well above their historical average before accounting for the ongoing economic decline. CBO's March 2020 baseline included deficit projections of S1,073 billion or 4.9% of gross domestic product (GDP) in FY2020 and S1,002 billion or 4.3% of GDP in FY2021. Those deficit levels are higher than the average inflation-adjusted value from FY1962 through FY2019 (2.7% of GDP), and are attributable to higher outlays and lower revenues than their respective averages over the same period. CBO projections are similar to those produced by OMB's current policy baseline for FY2020 and FY202 1. Some of the fluctuations in budget outcomes are attributable to what economists call automatic stabilizers that work in a countercyclical manner, without congressional action, to temper economic growth when the economy is in danger of overheating and stimulate economic growth during downturns. These automatic stabilizers contribute to lower deficits (or higher surpluses) in periods of high economic growth, as revenues rise from taxes on increased economic activity and spending on programs like unemployment insurance declines. The opposite effect occurs during periods of low economic growth, with higher deficit levels from reduced revenues and increased spending on certain programs. The economic forecast in CBO's latest baseline projected that the economy would operate above potential (i.e., the output higher than expected with full employment and productivity) in the near term. Specifically, automatic stabilizers were projected to reduce budget deficits in FY2020 by 0.4% of GDP and in FY2021 by 0.3% of GDP relative to deficits expected in an economy operating at potential. Congressional Research Service https://crsreports.congress.gov IN11317 GRS }NStGHT Prepaed for Membeivs and cornm ittees o4 Cor~qress ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------