The sequestration across-the-board spending reductions are on effect on the CBO’s Baseline Budget Projections, as The Budget Control Act of 2011 mandated, because the Joint Conference Committee failed to agree on a long-term plan to reduce the US Federal Budget Deficit.

In the budget negotiation taking place next week in Congress, senators have the possibility to release the caps on spending if they agree in a long-term plan to reducing the Nation’s Deficit. 

CBO projects a deficit for 2012 and 2013 of 1,087 and 642 billion dollars, respectively (7.0% and 4.0% of GDP[1]). It is projected to achieve a minimum of 378 billion dollars in year 2015 (2.1% of GDP), and then the deficit will raise again reaching 782 billion dollars in 2021 (3.3% of GDP).

If the caps in spending required by the Budget Control Act where removed, the deficit in 2013 would be 753 billion dollars (4.7% of GDP), 111 billion dollars higher than actual projections. In this scenario without caps, the budget deficit would be, for every year until 2021, about 0.5 - 0.6% of GDP higher than actual baseline.

The federal debt held by the public amounts $11,281 billion in 2012. With deficits as projected, debt will remain above 70% of GDP in 2021. A high debt is likely to have big impacts in the economy, as stated in many CBO documents. First, and assuming a scenario where interest rates will increase in the next years, interests payments will also increase significantly. High federal borrowing would have the consequence of smaller national savings, leading to less investment and smaller amount of capital stock. All of this will in turn affect the labor market by lowering wages.

On the other hand, and based in our estimations[2], canceling the automatic spending cuts from August 2013 until the end of fiscal year 2014 would cause real GDP of the third quarter of calendar year 2014 (last quarter of fiscal year 2014) to be 0.7 percent higher than GDP related to actual baseline budget projections, and also would cause employment of that quarter to be 0.9 million higher. These estimations are based on the assumption that higher federal spending boosts aggregate demand in the short term. Nonetheless, as stated in previous paragraph, long term consequences of higher fiscal spending can be harmful for the economy.

See below for a summary of budget proposals of both Republican and Democratic parties, as well as of the Obama Administration. 

[1] It is used the GDP values of CBO’s document of May, 2013 “Updated Budget Projections: Fiscal Years 2013 to 2023”.
[2] “How Eliminating the Automatic Spending Reductions Specified by the Budget Control Act Would Affect the U.S. Economy in 2014”,
File Size: 24 kb
File Type: docx
Download File

Leave a Reply.


    **This website is a forum on which participants in the PP250 budget simulation can communicate, collaborate and come together in character as players in the budget negotiation process. All statements and positions are purely academic, and do not express the opinions of the real personalities in DC, the Goldman School or the University of California**


    Congressional Budget Office


    November 2013