The Congressional Budget Office (CBO) projects that after three years of declining budget deficits, a slowing economy this year will contribute to an increase in the deficit. Under an assumption that current laws and policies do not change, CBO projects that the budget deficit will rise to 1.5 percent of gross domestic product (GDP) in 2008 from 1.2 percent in 2007.

Enactment of legislation to provide economic stimulus or additional funding for military operations in Iraq and Afghanistan could further increase the deficit for this year.

The state of the economy is particularly uncertain at the moment. The pace of economic growth slowed in 2007,
and there are strong indications that it will slacken further in 2008. In CBO’s view, the ongoing problems in the housing and financial markets and the high price of oil will curb spending by households and businesses this year and trim the growth of GDP. Although recent data suggest that the probability of a recession in 2008 has increased, CBO does not expect the slowdown in economic growth to be large enough to register as a recession.

Economic performance worse than that suggested in CBO’s forecast could significantly decrease projected revenues and increase projected spending. Furthermore, policy changes intended to mitigate the economic slowdown would, by design, tend to increase the budget deficit in the short term.

Subsequently, the budget will show a small surplus of 0.5 percent of GDP in 2012 and remain near that level each year through 2018 (the end of the current 10-year projection period).

The relatively sanguine outlook suggested by the 10-year baseline projections should not be interpreted as implying that the nation’s underlying fiscal condition is sound, both because the United States continues to face severe long-term budgetary challenges and because many observers expect policy changes that would deviate from the current-law baseline over the next decade. Ongoing increases in health care costs, along with the aging of the population, are expected to put substantial pressure on the budget in coming decades; those trends are already evident in the current projection period. Economic growth alone will be insufficient to alleviate that pressure, as Medicare and Medicaid and, to a lesser extent, Social Security require ever greater resources under current law.

A substantial reduction in the growth of spending, a significant increase in tax revenues relative to the size of the economy, or some combination of the two will be necessary to maintain the nation’s long-term fiscal stability.

CBO’s baseline budget projections for the next 10 years are not a forecast of future outcomes; rather, they are based on the assumption that current laws and policies remain the same. The projections stem from longstanding procedures that were, until recently, specified in law, and they serve as a benchmark that lawmakers and others can use to assess the potential impact of future policy decisions. ...

Download The Budget and Economic Outlook: Fiscal Years 2008 to 2018

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The Congress of the United States, Congressional Budget Office. January 2008

Preface:

This volume is one of a series of reports on the state of the budget and the economy that the Congressional Budget Office (CBO) issues each year. It satisfies the requirement of section 202(e) of the Congressional Budget Act of 1974 for CBO to submit to the Committees on the Budget periodic reports about fiscal policy and to furnish baseline projections of the federal budget. In accordance with CBO’s mandate to provide impartial analysis, the report makes no recommendations.

The baseline spending projections were prepared by the staff of CBO’s Budget Analysis Division under the supervision of Peter Fontaine, Keith Fontenot, Theresa Gullo, Janet Airis, Tom Bradley, Kim Cawley, Jeffrey Holland, Sarah Jennings, Leo Lex, and Sam Papenfuss. The revenue estimates were prepared by the staff of the Tax Analysis Division under the supervision of Thomas Woodward, Frank Sammartino, Mark Booth, and David Weiner, with assistance from the Joint Committee on Taxation. (A detailed list of contributors to the revenue and spending projections appears in Appendix G.)

The economic outlook presented in Chapter 2 was prepared by CBO’s Macroeconomic Analysis Division under the direction of Robert Dennis, Kim Kowalewski, and John Peterson. Robert Arnold and Christopher Williams produced the economic forecast and projections. David Brauer, Ufuk Demiroglu, Naomi Griffin, Douglas Hamilton, Juann Hung, Mark Lasky, Angelo Mascaro, Benjamin Page, Frank Russek, David Torregrosa, and Steven Weinberg contributed to the analysis. Adam Weber and Eric Miller provided research assistance. ...

Peter R. Orszag
Director
January 2008

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CBO's mandate is to provide the Congress with:

    * Objective, nonpartisan, and timely analyses to aid in economic and budgetary decisions on the wide array of programs covered by the federal budget and

    * The information and estimates required for the Congressional budget process.

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