The Budget and Economic Outlook

The Budget and Economic Outlook

April 7, 2021

Presentation to the Society of Government Economists

Jeffrey F. Werling

Director of Macroeconomic Analysis

For further information about the venue, see www.sge-econ.org/category/seminars/.

Some Features of CBO's February 2021

Budget and Economic Projections

In the projections, the recent economic recession and recovery are shaped by the 2020-2021 coronavirus pandemic and associated social distancing.

Vaccination is expected to reduce the number of new cases of COVID-19, resulting in a gradual but steady reduction of social distancing.

The projections generally incorporate the effects of fiscal policies under current law-including the Consolidated Appropriations Act, 2021, but not the American Rescue Plan Act of 2021.

Large deficits decrease after 2022 in the projections, but primary deficits remain large, and the ratio of debt to gross domestic product (GDP) begins to climb steadily in 2028.

Major sources of uncertainty surrounding the projections:

• The pandemic (vaccinations, variants, etc.)
• The effectiveness of monetary and fiscal policies
• Financial markets
• Long-termeffects on economic growth and industrial structure

Composition of the Growth of Real Potential GDP

Over the next decade, real potential GDP is projected to grow faster than it has since the last recession because of faster growth in potential labor force productivity. However, growth in the potential labor force is projected to be slower than in previous periods, largely because of the aging of the population.

The Growth of GDP and Potential GDP

In CBO's projections, the annual growth of real (inflation-adjusted) GDP exceeds that of real potential GDP until 2027.

The Output Gap

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.