The Fiscal Outlook in a Period of Policy Uncertainty

TAX$POLICY$CENTER$!|!!URBAN!INSTITUTE!&!BROOKINGS!INSTITUTION!$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$The$Fiscal$Outlook$in$a$Period$of$Policy$Uncertainty$$Alan!J.!Auerbach!and!William!G.!Gale!August!7,!2017! $TAX$POLICY$CENTER$!|!!URBAN!INSTITUTE!&!BROOKINGS!INSTITUTION!i$$ACKNOWLEDGEMENTS$$$!!!!!Alan%J.%Auerbach:%Robert%D.%Burch%Professor%of%Economics%and%Law%and%Director,%Robert%D.%Burch%Center%for%Tax%Policy%and%Public%Finance,%University%of%California,%Berkeley,%CA,%USA,%and%Research%Associate,%National%Bureau%of%Economic%Research,%Cambridge,%MA,%USA.%(auerbach@econ.berkeley.edu)%%%William%G.%Gale:%Arjay%and%Frances%Fearing%Miller%Chair%in%Federal%Economic%Policy,%Brookings%Institution,%Washington,%DC,%USA,%and%CoQDirector,%Tax%Policy%Center,%Urban%InstituteQBrookings%Institution,%Washington,%DC,%USA.%(wgale@brookings.edu)%%%We%thank%Hilary%Gelfond%and%Aaron%Krupkin%for%research%assistance%and%Ron%Haskins,%Victoria%Johnson,%and%Alice%Rivlin%for%helpful%comments.%%All%opinions%and%any%mistakes%are%those%of%the%authors%and%should%not%be%attributed%to%the%staff,%officers,%or%trustees%of%any%of%the%institutions%with%which%they%are%affiliated. $TAX$POLICY$CENTER$!|!!URBAN!INSTITUTE!&!BROOKINGS!INSTITUTION!ii$$ABSTRACT$$$$$$$$$While$policy$makers$and$news$headlines$focus$on$debates$about$health$care$and$tax$policy,$the$U.S.$fiscal$outlook$remains$troubling$and$is$a$constraint$against$which$new$proposals$should$be$judged.$Budget$deficits$appear$manageable$in$the$short$run,$but$the$nation’s$debtLGDP$ratio$is$already$high$relative$to$historical$norms,$and$even$under$optimistic$assumptions,$both$measures$will$rise$in$the$future.$Sustained$deficits$and$rising$federal$debt$will$crowd$out$future$investment,$reduce$prospects$for$economic$growth,$and$impose$burdens$on$future$generations.$$$!! $CONTENTS$$TAX$POLICY$CENTER$!|!!URBAN!INSTITUTE!&!BROOKINGS!INSTITUTION!iii$$ACKNOWLEDGEMENTS$.....................................................................................................................$I$ABSTRACT$.......................................................................................................................................$II$INTRODUCTION$...............................................................................................................................$1$THE$10IYEAR$BUDGET$OUTLOOK$.....................................................................................................$3$Assumptions$....................................................................................................................................................$3$Results$.............................................................................................................................................................$3$Sensitivity$Analysis:$The$effects$of$low$interest$rates$......................................................................................$5$Trust$funds$.......................................................................................................................................................$6$THE$LONGITERM$BUDGET$OUTLOOK$...............................................................................................$7$Assumptions$....................................................................................................................................................$7$Debt$projections$..............................................................................................................................................$8$The$fiscal$gap$...................................................................................................................................................$8$Uncertainty$and$its$Implications$....................................................................................................................$10$CONCLUSION$.................................................................................................................................$12$TABLES$AND$FIGURES$....................................................................................................................$13$REFERENCES$..................................................................................................................................$20$$ $TAX$POLICY$CENTER$!|!!URBAN!INSTITUTE!&!BROOKINGS!INSTITUTION!1$$INTRODUCTION$The$recent$release$of$new$projections$by$the$Social$Security$and$Medicare$Boards$of$Trustees$and$the$Congressional$Budget$Office$(CBO)$provides$an$opportunity$to$update$and$reassess$the$fiscal$outlook.1$$$As$it$turns$out,$the$overall$fiscal$projections$remain$largely$unchanged$from$those$based$on$CBO’s$January$2017$analysis$(CBO$2017a),$which$were$analyzed$in$Auerbach$and$Gale$(2017).$$$But$no$news$is$not$always$good$news.$$While$deficits$are$manageable$in$the$short$run,$the$debtLGDP$ratio$is$already$high$relative$to$historical$norms,$and$projections$indicate$that$both$figures$will$rise$in$the$future,$even$under$optimi