ECONOMIC AND BUDGET ISSUE BRIEF

Economic Impacts of Waiting to Resolve the 

Long-Term Budget Imbalance

Summary and Introduction

Under current policies, the aging of the U.S. population 

and increases in health care costs will almost certainly 

push up federal spending significantly in coming decades 

relative to the size of the economy. Without changes in 

policy, spending on the government’s major mandatory 

health care programs—Medicare, Medicaid, the Children’s Health Insurance Program, and health insurance 

subsidies to be provided through insurance exchanges—

as well as on Social Security will increase from the present 

level of roughly 10 percent of the nation’s output, or gross 

domestic product (GDP), to about 16 percent over the 

next 25 years. If revenues remain at their past levels relative to GDP, that rise in spending will lead to rapidly 

growing budget deficits and mounting federal debt.

In June 2010, the Congressional Budget Office (CBO) 

issued long-term budget projections under two scenarios 

that reflected different assumptions about future policies 

for revenues and spending.1

 The extended-baseline scenario was based on the assumption that, by and large, 

current law would continue without change. Under that 

assumption, revenues would climb to a higher share of 

GDP than has typically been seen in recent decades. 

Even so, federal debt held by the public would rise from 

62 percent of GDP at the end of fiscal year 2010 to about 

80 percent of GDP by 2035. Only once before in U.S. 

history—during and shortly after World War II—has 

federal debt exceeded 50 percent of GDP. CBO also prepared budget projections under an alternative fiscal scenario, which incorporated several changes to current law 

that are widely expected to occur or that would modify 

some provisions of law that might be difficult to sustain 

for a long period. Under that scenario, debt would soar 

above its historical peak (about 110 percent of GDP) by 

2025 and continue climbing thereafter.

To prevent debt from rising to unsupportable levels, policymakers would eventually have to restrain the growth of 

spending, raise revenues significantly above their historical share of GDP, or pursue some combination of those 

two approaches. Addressing the long-term budget imbalance would, at a minimum, require stabilizing the ratio of 

debt to output. In deciding when and how to do that, an 

important consideration is, what are the costs of delay?

Effects of Delaying Action

Waiting to put fiscal policy on a sustainable course would 

lead to higher levels of government debt, which would be 

costly in several ways:

B Higher debt would reduce the amount of U.S. savings 

devoted to productive capital (resources that produce 

economic benefits over time) and thus would result in 

lower incomes than would otherwise occur, making 

future generations worse off.

B Higher debt would necessitate greater federal spending 

on interest payments, meaning that larger changes in 

revenues and noninterest spending would be needed 

to make fiscal policy sustainable. If those changes took 

the form of bigger cuts to spending programs, they 

would be more difficult for people to adjust to than 

smaller cuts would be. If the changes took the form of 

bigger increases in marginal tax rates, they would create larger disincentives to work and save, which would 

reduce incomes more than smaller tax increases would.

B Higher debt would make it harder for policymakers 

to respond to unexpected problems, such as financial 

crises, recessions, and wars.

CBO A series of issue summaries from

the Congressional Budget Office

DECEMBER 2010

1. See Congressional Budget Office, The Long-Term Budget Outlook

(June 2010, revised August 2010). Pages 19 and 20 of that report 

described preliminary results from an analysis of the issues 

addressed in this brief; those results are updated here.
2 CONGRESSIONAL BUDGET OFFICE

ECONOMIC AND BUDGET ISSUE BRIEF

B Higher debt would increase the likelihood of a fiscal 

crisis, in which investors would lose confidence in the 

government’s ability to manage its budget and the government would thereby lose its ability to borrow at 

affordable interest rates.

At the same time, waiting to put fiscal policy on a sustainable course could make some current generations 

better off than they would be otherwise. In particular, a 

delay would tend to help older generations by deferring 

the tax increases or cuts in benefit payments and government services that they would face. For certain policies, 

that gain would outweigh the greater reduction in future 

incomes and the larger ultimate adjustment to taxes and 

spending that would result from delay, because the effect 

of those differences is muted for people who have completed all or part of their working lives. Whether that 

advantage of waiting would outweigh the costs to older 

generations from the other effects of higher debt—the 

government’s reduced ability to respond to unexpected 

needs and the greater risk of a fiscal crisis—is unclear.

Quantifying the Costs of Delay

In this issue brief, CBO compares the effects of implementing policies that would halt the growth in federal 

debt as a percentage of GDP starting in 2015 with the 

effects of policies that would delay stabilizing the ratio of 

debt to output until 2025.2

 As projected in this analysis, 

debt would be about 40 percentage points higher as a 

share of GDP in 2025 than in 2015.

CBO quantified the costs of delay by using a stylized 

model of the economy similar to one of the models used 

in CBO’s annual analysis of the President’s budget.3

 The 

model captures the effect of policy changes, and resulting 

changes in the economy, on people of different ages. Estimates from the model take into consideration only the 

first two costs of delay listed above (the lower incomes 

resulting from the loss of productive capital, and the need 

for larger changes to revenues and noninterest spending), 

as well as the benefits for some generations from delaying 

revenue increases or spending cuts. The other two costs of 

delay are more difficult to quantify and are not included 

in this analysis, although a separate CBO issue brief discussed the risks and possible effects of a fiscal crisis.4

The size of the actions needed to stabilize federal debt 

and the costs of delaying those actions depend on both 

the budgetary outcomes that are projected to occur if no 

action is taken and on the nature of the policies that are 

eventually adopted. In this analysis, if policies do not stabilize the ratio of debt to GDP until 2025, debt follows a 

trajectory that is broadly similar to the path projected 

under CBO’s alternative fiscal scenario. (The assumptions of that scenario were simplified and adapted for the 

analytic approach used here.) This analysis considers 

three illustrative policy changes to stabilize the ratio of 

debt to output: reducing federal benefit payments for all 

adults, reducing benefit payments for all adults except 

those who are age 60 or older at the time of the change, 

and raising tax rates on income from labor and capital.

CBO estimates that stabilizing the debt-to-output ratio 

in 2015 would require reducing federal outlays or raising 

taxes by about 2 percent to 21⁄2 percent of GDP initially—equivalent to roughly $300 billion to $400 billion 

today—as well as making policy changes that would 

roughly equalize the growth rates of spending and revenues thereafter. The initial action would represent a cut 

of 12 percent to 121⁄2 percent in total noninterest spending projected for 2015, an 11 percent increase in total 

revenues projected for that year, or some combination of 

smaller spending and tax changes (see Table 1). By comparison, stabilizing the debt-to-output ratio in 2025 

would require a policy change in the first year equal to 

51⁄2 percent to 6 percent of GDP—or about $800 billion 

to $900 billion in today’s economy—followed by policy 

changes that would roughly equalize the growth rates of 

spending and revenues. That initial change would 

amount to a cut of 241⁄2 percent to 26 percent in projected noninterest spending in 2025, or an increase of 

261⁄2 percent in projected revenues.

Waiting until 2025 to resolve the long-term budget 

imbalance—and thus allowing the debt-to-GDP ratio to 

rise by roughly 40 additional percentage points before it 

2. A country’s output provides a measure of its ability to pay interest 

on government debt, in the same way that a family’s income helps 

to determine the amount of mortgage interest it can afford.

3. See Congressional Budget Office, An Analysis of the President’s 

Budgetary Proposals for Fiscal Year 2011 (March 2010), for a 

discussion of the set of economic models used by CBO. For a 

detailed description of the model used for this analysis, see 

Shinichi Nishiyama, Analyzing Tax Policy Changes Using a Stochastic OLG Model with Heterogeneous Households, Congressional 

Budget Office Technical Paper 2003-12 (December 2003).

4. Congressional Budget Office, Federal Debt and the Risk of a Fiscal 

Crisis, Issue Brief (July 27, 2010).
ECONOMIC AND BUDGET ISSUE BRIEF

ECONOMIC IMPACTS OF WAITING TO RESOLVE THE LONG-TERM BUDGET IMBALANCE 3

Table 1.

Long-Term Economic Effects of Three Illustrative Policies to Stabilize the 

Ratio of Debt to Output 

(Percent)

Source: Congressional Budget Office.

Notes: This analysis uses a model of the economy that is similar to one of the models that CBO employs for its annual analysis of the President’s budget. In the model, people make decisions about how much to work and save on the basis of current and expected economic 

conditions and government policy.

Results are rounded to the nearest half a percentage point.

GDP = gross domestic product. 

a. The spending cuts would reduce benefit payments to adults in the year of implementation (2015 or 2025) and thereafter. The revenue 

increase would raise tax rates on labor income and capital income (by an equal number of percentage points) in the year of implementation and thereafter; government spending (including benefits) would also be cut after 2040 to remain at a constant percentage of GDP.

b. The long-term decrease is the decrease in 2050 relative to what a given variable would equal in that year if fiscal stabilization was carried 

out in 2015. These estimates quantify the effects of waiting on the supply of labor and on savings devoted to productive capital, as well as 

the effects of those factors on output and consumption; the estimates do not incorporate the value of flexibility that lower debt gives the 

government to respond to unexpected problems or the risks and possible consequences of a fiscal crisis. 

c. For the spending cuts, this value is a percentage of total noninterest spending projected for 2015 or 2025; for the revenue increase, it is a 

percentage of total revenues projected for 2015 or 2025.

was stabilized—would result in lower levels of the capital 

stock, the supply of labor (as measured by total hours 

worked), economic output, and consumption. Specifically, the higher debt resulting from a delay in fiscal 

stabilization would have several long-term effects on the 

overall economy:

B A growing portion of people’s savings would go 

toward buying government debt rather than toward 

investing in productive capital goods, such as factories 

and computers. That “crowding out” of investment 

would reduce the size of the nation’s capital stock by 

between 7 percent and 18 percent compared with 

what it would be if action was taken in 2015. 

B The smaller capital stock would result in lower wages, 

which would diminish people’s incentive to work. In 

addition, if the fiscal stabilization was accomplished 

through an increase in tax rates, the incentive to work 

would be further diminished. In all, the delay would 

reduce the supply of labor by between half a percent 

and 2 percent. 

B The lower capital stock and labor supply would in 

turn reduce output by between 21⁄2 percent and 7 percent, and total consumption by between 11⁄2 percent 

and 51⁄2 percent, compared with what they would be if 

action was taken in 2015. 

The budgetary and economic consequences of delay 

would affect people’s well-being, and those effects would 

differ for different generations. Waiting until 2025 to 

stabilize the ratio of debt to GDP would reduce the 

well-being of all generations born after 2015 by amounts 

Policya

Cut Benefit Payments for All Adults 21⁄2 121⁄2 6 26 7 1⁄2 21⁄2 11⁄2

Cut Benefit Payments for All 

Adults Except Those Age 60 or

Older at Implementation 21⁄2 12 51⁄2 241⁄2 713 2

Raise Tax Rates 2 11 51⁄2 261⁄2 18 2 7 51⁄2

of Noninterest Stabilize the Ratio of Debt to Outputb

of GDP Revenuesc

Size of Spending Cut or 

Economic Variables from Waiting

Percentage Percentage

As a Percentage As a Percentage

Size of Spending Cut or 

 Revenue Increase in 2025a Revenue Increase in 2015a

 Until 2025 Instead of 2015 to

As a of Noninterest

Spending or

Long-Term Decrease in

As a

of GDP

Capital

Stock

Labor

Revenues Supply Output Consumption c

Spending or
4 CONGRESSIONAL BUDGET OFFICE

ECONOMIC AND BUDGET ISSUE BRIEF

equivalent to roughly 1 percent to 3 percent of their consumption over their remaining lifetime, CBO estimates. 

Many current workers and retirees, by contrast, would 

benefit from such a delay (not counting the costs of the 

reduction in the government’s ability to respond to 

unexpected needs and the increased risk of a fiscal crisis) 

because they would receive higher benefits or pay lower 

taxes for a number of years. For example, people who 

were age 60 or older in 2015 would be better off—by 

an amount equivalent to about 2 percent of their future 

consumption—if a policy that stabilized the debt-toGDP ratio by cutting federal benefit payments for all 

adults was delayed from 2015 to 2025. 

The economic consequences of rising federal debt that 

can be quantified using the analytic approach of this brief 

would be gradual and modest over the next 15 years, even 

with the sharp increase in debt projected in this analysis. 

However, other consequences that are not quantified here 

could be severe. The point at which investors would lose 

confidence in the government’s ability to manage its budget and meet its debt obligations is unknown. But rapid 

growth in debt relative to GDP would increase the likelihood of such a crisis—and it could occur long before 

the impact of rising debt on output and consumption 

became substantial. In the meantime, concerns about the 

possibility of such a fiscal crisis and ever-increasing interest costs on federal debt would limit the government’s 

ability to respond to unexpected events or meet other 

pressing needs. Ultimately, the fiscal imbalance will have 

to be addressed, whether quickly or gradually, and the 

longer the necessary adjustments are delayed, the more 

drastic they will need to be.

Rising Federal Debt and Its 

Consequences

The amount of federal debt held by the public has surged 

in the past few years, from 36 percent of GDP at the end 

of 2007 to 62 percent at the end of 2010—the highest 

level of debt relative to output since shortly after World 

War II. The levels of taxes and spending that caused the 

increase in debt have had some beneficial short-term 

effects by increasing demand for goods and services in a 

time of economic weakness. But in the long term, the rise 

in debt will have a negative impact on economic output 

and incomes, unless it is reversed. 

In the next few years, as the economy recovers and 

policies adopted to counteract the severe recession and 

the turmoil in financial markets are phased out, annual 

budget deficits will probably shrink markedly and debt 

will accumulate more slowly. Over the long run, however, 

the budget outlook is daunting. The growing imbalance 

between revenues and noninterest spending projected 

under both of the scenarios in CBO’s latest Long-Term 

Budget Outlook (particularly under the alternative fiscal 

scenario) would lead to larger deficits and mounting 

debt. Moreover, the government would need to issue 

ever-greater amounts of debt to pay rising interest costs, 

which would cause the debt to grow even faster. Although 

temporary budget deficits are generally beneficial when 

the economy’s output is below its potential, persistent 

deficits impose significant economic costs. 

Economic Effects of Temporary Budget Deficits

When the economy has substantial unemployment and 

unused factories, offices, and equipment, running a deficit usually increases output and employment compared 

with what would occur under a balanced budget.5

 For 

example, during a recession, tax revenues automatically 

decline and government spending (such as for certain 

benefits) automatically increases relative to what would 

happen otherwise, thus widening deficits. Such “automatic stabilizers” help reduce the severity of a recession by 

offsetting some of the decline in disposable income and 

thereby supporting demand for goods and services. Moreover, the imbalances between revenues and noninterest 

spending produced by those stabilizers are automatically 

reversed when the economy recovers.6

 Similarly, during 

and immediately after recessions, fiscal stimulus measures 

financed with deficits—such as the spending increases 

and tax cuts in the American Recovery and Reinvestment 

Act of 2009 (Public Law 111-5)—usually keep output 

and employment higher than they would be otherwise.7

However, even temporary deficits incurred during 

periods of economic weakness cause increases in debt 

that have harmful effects in the long term, unless the 

5. See Congressional Budget Office, Policies for Increasing Economic 

Growth and Employment in 2010 and 2011 (January 2010).

6. See Congressional Budget Office, The Effects of Automatic Stabilizers on the Federal Budget (May 2010).

7. See Congressional Budget Office, Estimated Impact of the American Recovery and Reinvestment Act on Employment and Economic 

Output from July 2010 Through September 2010 (November 

2010).
ECONOMIC AND BUDGET ISSUE BRIEF

ECONOMIC IMPACTS OF WAITING TO RESOLVE THE LONG-TERM BUDGET IMBALANCE 5

government runs smaller deficits or surpluses later to pay 

off the additional debt.

Economic Effects of Persistent Budget Deficits 

In CBO’s long-term budget scenarios, rising debt would 

not stem from cyclical economic developments such as 

recessions. Instead, debt would soar largely because federal spending on health care programs and (to a lesser 

degree) on Social Security would rise as a share of GDP, 

while tax revenues would increase to a smaller extent. The 

ever-greater budget deficits and debt would negatively 

affect the economy in several ways:

B Increased government borrowing would crowd out 

private investment in productive capital, because the 

portion of private saving used to buy Treasury securities would not be available to fund such investment. 

The resulting decrease in the nation’s capital stock 

would lead to lower output and incomes in the long 

run than would otherwise be the case and make future 

generations worse off.8

 That crowding-out phenomenon is slow but inexorable: In any given year, the 

incremental effect on output is small, but the effects 

add up over time and can become substantial.

B More debt means greater federal interest payments 

(all else being equal). Making those payments while 

satisfying any given target for overall deficits and debt 

would require larger increases in revenues, larger cuts 

in noninterest spending, or both. Larger cuts to programs such as Medicare or Social Security would be 

more disruptive than smaller cuts, requiring people to 

change the timing of their retirement or to save more 

while working in order to offset larger reductions in 

their future benefits. Larger increases in marginal tax 

rates would reduce people’s incentives to work and 

save, which would lessen incomes further.

B Higher debt would curtail policymakers’ ability to 

respond to unexpected needs. If federal debt had been 

bigger in 2008 than it was, the government would 

have had less flexibility to respond to the turmoil in 

financial markets and the slumping economy by using 

government funds to stimulate economic activity and 

stabilize the financial sector while continuing to fund 

other federal commitments. Similarly, larger debt 

would give the government less flexibility to raise 

spending in response to international events such as 

wars or humanitarian crises.

B Greater debt would raise the probability of a fiscal 

crisis.9

 If federal debt continued to grow relative to the 

nation’s output and income, investors would require 

the government to pay higher interest on its securities 

to compensate for the risk that investors might not 

be repaid or that the value of the securities would be 

eroded by inflation. Interest rates might rise only gradually to reflect such growing uncertainty—but other 

countries’ experiences suggest that a loss of investors’ 

confidence can occur abruptly and might well come 

during an economic downturn. To resolve the resulting fiscal crisis, policymakers would need to make fiscal policy choices that would be much more drastic 

and painful than if policies had been adjusted sooner.

The exact point at which such a crisis might occur is 

unknown—partly because the ratio of U.S. debt to 

GDP is heading into territory outside the modern 

experience of most developed countries, and partly 

because the risk of a crisis is influenced by a number of 

factors besides the government’s outstanding debt, 

including its long-term budget outlook, its near-term 

borrowing needs, and the health of the economy.

8. Several complicating factors deserve mention, although they do 

not reverse the fundamental conclusion. First, increased deficits 

do not reduce output in the long run if they stem from spending 

on public capital (such as infrastructure or research and development) and if that spending generates a return greater than or equal 

to the return on the forgone private investment. However, the rise 

in federal spending as a percentage of GDP projected for the next 

few decades does not stem from greater spending on public capital. Second, larger budget deficits tend to generate greater levels of 

private saving, for several reasons: Deficits generally lead to higher 

interest rates, which increase the return on saving; some people 

save more in anticipation of future tax increases or benefit cuts 

to reduce the deficit; and to the extent that deficits result from 

lower taxes or higher benefit payments now, people have more disposable income available for saving. However, those increases in 

private saving are unlikely to offset the entire increase in the government’s deficit. Third, larger budget deficits tend to generate 

higher levels of foreign investment in the United States, because 

the reduction in domestically provided capital boosts the return 

on capital invested in this country. Such inflows of capital prevent 

investment in the United States from falling as much as saving 

does and thereby alter the effect of larger budget deficits on wages 

and the return on capital. But they also create a corresponding 

obligation for payment of future interest or profits and therefore 

do not prevent growing debt from having a negative impact on the 

future incomes of U.S. residents.

9. For an extended discussion of this issue, see Congressional Budget 

Office, Federal Debt and the Risk of a Fiscal Crisis.
6 CONGRESSIONAL BUDGET OFFICE

ECONOMIC AND BUDGET ISSUE BRIEF

CBO’s Analytic Approach to 

Estimating the Costs of Waiting

If federal spending rises consistently relative to GDP and 

revenues do not, policymakers will have to act at some 

point to resolve the long-term budget imbalance. CBO 

analyzed the costs of waiting 10 years to take action—

specifically, it examined the effects of implementing policies that would stabilize the ratio of debt to output in 

2015 compared with the effects of policies that would 

stabilize that ratio in 2025, at a level roughly 40 percentage points higher than the level in 2015. CBO’s calculations take into account the way in which budgetary 

developments have economic effects that in turn affect 

the budget. The analysis reflects an assumption that the 

stabilization policy would be decided on and announced 

within the next year and that people would start adjusting their behavior accordingly. As a result, people would 

have longer to adjust before the 2025 policy change than 

before the 2015 change. If, instead, the policy change 

occurred suddenly in either year, some people would be 

worse off because they would not have been able to plan 

ahead to accommodate the change; even so, the longterm effects would probably be similar to those reported 

here.

CBO quantified the impact of delay on both the overall 

economy and the economic well-being of different generations. For the economy, CBO estimated the effects on 

the capital stock, labor supply, output, and total consumption. For different generations, CBO estimated how 

much the average member of each generation would be 

willing to pay—or would need to be paid—to be indifferent about whether the government adopted a given policy 

change in 2015 or 2025. To put those payments in context, CBO calculated them as a percentage of the present 

value of the future consumption of the average member 

of each generation (that is, the total value of that person’s 

future consumer spending adjusted to account for the 

fact that money in hand now is worth more than the 

same amount received in the future). 

Alternative Policy Changes

The costs of waiting to address the long-term budget 

imbalance would depend on the policies that were 

ultimately adopted to put the nation on a sustainable 

fiscal path. Therefore, CBO’s analysis considered three 

illustrative policy changes: 

B The first option would be to reduce government 

benefit payments by a certain percentage relative to 

the levels scheduled under current law for all adults—

that is, for anyone age 20 or older. The cuts would be 

larger for older people because they receive the majority of federal benefit payments under current law, primarily through Medicare and Social Security. (The 

cuts are relative to a baseline of current policy that 

assumes steadily rising spending on benefits.)

B The second option would resemble the first except 

that it would exempt from the benefit cuts people who 

were age 60 or older in the year of implementation. 

Instead, those older people would continue to receive 

the benefit payments scheduled under current law. To 

achieve the same reduction in overall spending (and 

thereby stabilize the debt-to-output ratio), benefit 

payments for younger people would be reduced much 

more than under the first approach.

B The third option would be to raise revenues through 

an equal percentage-point increase in tax rates on 

labor and capital income. If government spending was 

allowed to rise indefinitely as a percentage of GDP, the 

share of output collected in taxes would also need to 

rise indefinitely to stabilize the ratio of debt to output. 

That outcome is infeasible, and it cannot be captured 

in CBO’s model beyond 2040. Thus, this option also 

involves a cut in government spending (including for 

benefit payments) after 2040 that would be large 

enough to keep spending at a constant percentage of 

GDP (regardless of whether taxes were increased in 

2015 or 2025).10

None of those options correspond to particular policies 

that are likely to emerge from the legislative process. 

Instead, they were chosen as simple illustrative examples 

to display the economic effects of waiting to stabilize the 

fiscal imbalance. 

Modeling Behavioral Responses to Policy Changes

CBO analyzed the costs of delaying fiscal stabilization 

using a model of the economy that is similar to one of the 

10. Revenues could also be increased without substantially raising 

marginal tax rates—for example, by reducing the standard deduction. In that case, the policy change would not lessen people’s 

incentives to work and save, as increases in marginal rates do, and 

the economic effects of the revenue increase would be more like 

those of a cut in benefits.
ECONOMIC AND BUDGET ISSUE BRIEF

ECONOMIC IMPACTS OF WAITING TO RESOLVE THE LONG-TERM BUDGET IMBALANCE 7

models that it employs for its annual analysis of the President’s budget. In the model, people make decisions about 

how much to work and save on the basis of current and 

expected economic conditions and government policy. 

For example, if the amount of income that people expect 

to receive in the future declines—because of lower expectations about earnings or because of cuts in retirement 

benefits—people work and save more in the meantime to 

make up for the loss. Some noteworthy features of the 

model are described below. 

First, the model does not capture all of the effects of waiting to resolve the long-term budget imbalance. It incorporates the crowding out of investment in productive 

capital and the need for larger adjustments to revenues or 

noninterest spending—because in the model, people’s 

behavior responds to changes in income, wages, interest 

rates, and taxes (and in turn, their behavior induces further changes in those economic variables). However, the 

model does not account for the government’s reduced 

flexibility to respond to future needs or the increased risk 

of a fiscal crisis.

Second, the model reflects the idea that people’s economic decisions depend on their expectations about government policy and the economy through the rest of their 

lives but not on events expected to occur after they die. 

Incorporating the latter effects—for example, assuming 

that people adjust their planned bequests in response to 

their expectations about their children’s economic circumstances—would reduce the estimated impacts of 

waiting to adjust fiscal policy. Conversely, assuming that 

people’s decisions do not depend on careful assessments 

of government policy throughout their lifetimes would 

increase the estimated impacts of waiting to adjust fiscal 

policy. The degree of individual foresight incorporated 

into this model represents a middle ground between an 

assumption that people do not factor any anticipated 

events into their current plans and an assumption that 

they factor anticipated events that will occur after their 

death into their current plans.

Third, in the model, larger budget deficits are assumed to 

be partly offset by higher private saving, but there is no 

increase in borrowing from foreigners and therefore no 

effect of changes in international capital flows on interest 

rates. Incorporating such effects could increase or 

decrease the estimated costs of waiting, depending in 

part on the fiscal situation in other countries.

Fourth, the model includes only a simple representation 

of fiscal policy. Furthermore, any estimates of the effects 

of the budget on the economy carry a large degree of 

uncertainty. For those reasons, the quantitative results 

presented here should be viewed as rough—not precise—

estimates of the likely magnitude of certain effects of 

higher levels of federal debt. 

Effects of Waiting on the Economy

Relative to policies under which debt would spiral 

upward during the coming decades, stabilizing the ratio 

of debt to output in 2015 would require substantial 

changes in benefit payments or taxes. Waiting 10 years 

longer to stabilize that ratio would require initial changes 

that were more than twice as large—because the gap 

between taxes and noninterest spending would be wider 

and because additional interest would be owed on the 

greater debt that would accumulate by 2025. For 

instance, to keep debt from growing any further relative 

to GDP starting in 2015, benefit payments would need 

to be reduced by about 21⁄2 percent of GDP—or 12 percent to 121⁄2 percent of total noninterest spending—in 

that year (see Figure 1). Thereafter, the annual growth 

rate of spending would have to be reduced by enough to 

roughly equal the annual growth rate of revenues.11 By 

comparison, to stabilize the debt-to-output ratio beginning in 2025, benefit payments would have to be cut by 

about 51⁄2 percent to 6 percent of GDP—or 241⁄2 percent 

to 26 percent of total noninterest spending—in that year, 

11. The initial change in spending or revenues needed to stabilize the 

ratio of debt to output is much smaller than the so-called fiscal 

gap reported in CBO’s Long-Term Budget Outlook (p. 15). The 

analysis in this issue brief involves policy changes that are just sufficient to keep the ratio of debt to GDP constant each year, which 

implies a relatively small initial cut in spending or increase in revenues that would grow in later years (relative to the levels projected 

in the absence of a change in policy). By comparison, the fiscal 

gap measures the size of the change in spending or revenues that, 

if implemented immediately and maintained each year at a constant percentage of GDP, would put the ratio of debt to GDP at 

the same level at the end of a period that it was at the beginning. 

For example, CBO estimated that policymakers could eliminate 

the 25-year fiscal gap under the alternative fiscal scenario by 

reducing spending (relative to the amounts projected under current policies) by 4.8 percent of GDP in each year through 2035. 

In that case, the initial change in policy would be large enough to 

generate budget surpluses that would reduce debt relative to GDP 

in the early years, followed eventually by growing deficits that 

would cause debt to rise, finally returning debt to its initial 

percentage of GDP in the 25th year. 
8 CONGRESSIONAL BUDGET OFFICE

ECONOMIC AND BUDGET ISSUE BRIEF

Figure 1.

Federal Noninterest Spending 

If the Ratio of Debt to Output Is 

Stabilized in 2015 or 2025 by 

Cutting Benefit Payments

(Percentage of gross domestic product)

Source: Congressional Budget Office.

Note: This analysis uses a model of the economy that is similar to 

one of the models that CBO employs for its annual analysis 

of the President’s budget. In the model, people make decisions about how much to work and save on the basis of 

current and expected economic conditions and government 

policy.

followed by a sufficiently large reduction in the growth 

rate of spending in subsequent years. Alternatively, stabilizing the ratio of debt to output would require taxes to 

be increased by about 2 percent of GDP in 2015 or by 

about 51⁄2 percent of GDP in 2025 (see Figure 2). Those 

increases equal about 11 percent of the total revenues 

projected for 2015 or 261⁄2 percent of the total revenues 

projected for 2025. 

Under each of the three policy changes that CBO examined, stabilizing the debt-to-output ratio in 2025 rather 

than in 2015 would result in a smaller capital stock and 

would reduce GDP and total consumption in the long 

term (say, by 2050). The economic effect of delay would 

be larger for increases in taxes than for reductions in benefits because of the disincentive effects of higher tax rates 

(see Table 1 on page 3).

Benefit Cuts for All Adults

If debt stabilization was accomplished by cutting benefit 

payments for anyone age 20 or older when the policy 

was implemented, a 10-year delay in instituting the cuts 

would reduce the size of the capital stock in the long run 

by about 7 percent. In addition, the labor supply (as measured by total annual hours worked) would be about half 

a percent lower: A smaller capital stock implies lower 

wages and a reduced incentive to work, but that effect 

would be partly offset because the larger benefit cuts 

required under the delayed policy action would reduce 

expected incomes and encourage more work. As a result 

of those factors, output would be about 21⁄2 percent lower 

in the long run than if the benefit cuts began in 2015 (see 

Figure 3). Total consumption would be about 11⁄2 percent 

lower—a smaller reduction than for output because the 

smaller capital stock resulting from a delay would reduce 

both the saving rate and the amount of depreciation.

Benefit Cuts for All Adults Except Those 

Age 60 or Older at Implementation

If the ratio of debt to GDP was stabilized by reducing 

benefit payments for adults except those who were 60 or 

older in the year of implementation, a 10-year delay in 

making the cuts would have similar—but slightly 

larger—economic effects than if the benefit cuts applied 

to all adults. In particular, waiting until 2025 to carry out 

this policy change would mean that people who were ages 

50 to 59 in 2015 would be spared cuts in benefits they 

2011 2015 2019 2023 2027 2031 2035

0

15

20

25

30

35

Cut Benefit

Payments in 2015

Cut Benefit

Payments in 2025

Cut Benefit Payments for All Adults

2011 2015 2019 2023 2027 2031 2035

0

15

20

25

30

35

Cut Benefit Payments for All Adults

Except Those Age 60 or Older at Implementation

Cut Benefit

Payments in 2025

Cut Benefit

Payments in 2015
ECONOMIC AND BUDGET ISSUE BRIEF

ECONOMIC IMPACTS OF WAITING TO RESOLVE THE LONG-TERM BUDGET IMBALANCE 9

Figure 2.

Federal Revenues If the Ratio of 

Debt to Output Is Stabilized in 

2015 or 2025 by Raising Tax Rates 

(Percentage of gross domestic product)

Source: Congressional Budget Office.

Note: This analysis uses a model of the economy that is similar to 

one of the models that CBO employs for its annual analysis 

of the President’s budget. In the model, people make decisions about how much to work and save on the basis of 

current and expected economic conditions and government 

policy.

would face if action was taken in 2015 instead. As a 

result, they would not increase their work hours and 

saving the way they would if they faced such cuts, and 

the capital stock and output would be reduced by larger 

amounts between 2015 and 2025 than if benefit cuts 

were delayed for all adults. Those lower levels of capital 

and output in turn would lead to higher interest rates and 

lower revenues, which would push up government debt 

more rapidly. (The difference in debt as a percentage of 

GDP in 2025 would persist over the long run because the 

policy change in 2025 is calculated to keep the debt-tooutput ratio steady at that year’s value.)

All told, slightly more crowding out of private investment 

in productive capital would occur than under the previous approach, and the long-run size of the capital stock 

would be reduced by about 7 percent. Output would be 

about 3 percent lower, and consumption would be about 

2 percent lower, than if the change was made in 2015.

Increases in Tax Rates

If debt stabilization was accomplished by raising tax rates, 

a 10-year delay in making the policy change would have a 

larger impact on the economy than a similar delay in cutting benefits would. As with the benefit cuts, most of the 

economic impact of delaying tax increases would stem 

from the crowding-out effects of higher debt. However, 

the higher tax rates that would be required with a delay in 

this policy would also reduce after-tax wages (discouraging work) and the after-tax return on assets (discouraging 

saving). Consequently, both the long-run capital stock 

and the long-run labor supply would be reduced more by 

a delay in raising tax rates than by a delay in cutting benefit payments—by about 18 percent for the capital stock 

and 2 percent for the supply of labor. With the effects 

of both crowding out and higher tax rates taken into 

account, stabilizing the debt-to-GDP ratio by raising tax 

rates in 2025 rather than in 2015 would cause output to 

be about 7 percent lower in the long run and consumption to be about 51⁄2 percent lower.

During the years between 2015 and 2025, however, output would be temporarily higher if action to increase tax 

rates was delayed (see Figure 3). The reason is that the 

relatively lower tax rates during that period—and the 

expectation of a significant tax increase in 2025—would 

boost people’s incentive to work during those years.

Effects of Waiting on the Well-Being of 

Different Generations

Stabilizing the debt-to-output ratio in 2025 rather than 

2015 would affect the economic well-being of people of 

different ages in different ways. Future generations would 

be hurt by such a delay: Maintaining currently scheduled 

benefit payments and tax rates for another decade would 

not directly affect people who will not be old enough to 

work by 2025, but those people would have lower consumption during their lives because of the additional 

crowding out of capital investment and the need for 

larger benefit cuts or tax increases later. In contrast, many 

current workers and retirees might benefit from a delay in 

stabilizing the debt-to-output ratio: Delaying action 

would diminish the benefit cuts or tax increases they 

would face, and the crowding out of capital would have 

less effect on them because the reduction in wages caused 

by a decline in the capital stock would matter less for 

2011 2015 2019 2023 2027 2031 2035

0

15

20

25

30

35

Raise Tax Rates

in 2015

Raise Tax Rates

in 2025
10 CONGRESSIONAL BUDGET OFFICE

ECONOMIC AND BUDGET ISSUE BRIEF

Figure 3.

Effect on Output If the Ratio of Debt to Output Is Stabilized in 2025 

Instead of 2015, Under Three Illustrative Policies

(Percentage change)

Source: Congressional Budget Office.

Notes: This analysis uses a model of the economy that is similar to one of the models that CBO employs for its annual analyses of the President’s budget. In the model, people make decisions about how much to work and save on the basis of current and expected economic 

conditions and government policy. 

The changes in output shown here are relative to what output would equal in a given year if fiscal stabilization was carried out in 2015. 

(Negative percentages indicate that output would be lower under a policy that began in 2025.) The figure shows some differences in 

output before 2015 because, in CBO’s model, people alter their behavior in anticipation of future policy changes.

people who were partly or entirely through their working 

life. However, it is unclear whether that advantage of 

delay (which is quantified in this analysis) would outweigh the costs to current workers and retirees from the 

government’s reduced ability to respond to unexpected 

needs and the greater risk of a fiscal crisis (which are not 

quantified in this analysis). The model that CBO used 

accounts for people of all ages, but for clarity in presenting the results, CBO grouped people into broad generational categories (see Figure 4).

People Age 60 or Older in 2015

The average person born before 1956 would gain, by an 

amount equivalent to more than 2 percent of his or her 

future consumption, from a delay in cutting benefit payments for all adults. By 2015, the majority of people in 

this group would be retired. Delay would enable them to 

receive another 10 years’ worth of retiree benefits before 

the reductions occurred. Moreover, the extra crowding 

out of capital from postponing fiscal stabilization would 

not have much effect on this group: As retirees, they 

would not be receiving wages that would be reduced by 

the smaller amount of capital in the economy.

This group would hardly be affected if policymakers 

waited to implement a reduction in benefit payments for 

adults who were under age 60 when the policy was implemented. People born before 1956 would be too old in 

2025 for those more-targeted benefit cuts to have an 

impact on them.

The group would gain slightly from a delay in raising tax 

rates because some members would benefit from lower 

tax rates during the 2015–2025 period, but by 2025, 

2011 2014 2017 2020 2023 2026 2029 2032 2035 2038 2041 2044 2047 2050

-6

-5

-4

-3

-2

-1

0

1

2

3

Cut Benefit Payments for All Adults

Except Those Age 60 or

Older at Implementation

Cut Benefit Payments for All Adults

Raise Tax Rates
ECONOMIC AND BUDGET ISSUE BRIEF

ECONOMIC IMPACTS OF WAITING TO RESOLVE THE LONG-TERM BUDGET IMBALANCE 11

Figure 4.

Gains or Losses for People Born in Different Years If the Ratio of 

Debt to Output Is Stabilized in 2025 Instead of 2015

(Percentage of people’s remaining lifetime consumption)

Source: Congressional Budget Office.

Notes: The gains or losses for each generation are calculated as the additional amount that the average member of each generation would be 

willing to pay (or would need to be paid) for the ways in which a delay in fiscal stabilization would affect the member’s future plans for 

work and consumption. Those amounts are shown as a percentage of the total value of future consumption for the average member of 

each generation, adjusted to account for the the fact that money in hand now is worth more than the same amount received in the

future. (For additional details, see the appendix to this issue brief available on CBO’s Web site.)

* = between zero and 0.05 percent.

-3.5

-3.0

-2.5

-2.0

-1.5

-1.0

-0.5

0

0.5

1.0

1.5

2.0

2.5

Cut Benefit Payments for All Adults

Before

1956

1956–

1990

1991–

2015

Year of Birth

-3.5

-3.0

-2.5

-2.0

-1.5

-1.0

-0.5

0

0.5

1.0

1.5

2.0

2.5

Before

1956

1956–

1990

1991–

2015

After

2015

Year of Birth

Cut Benefit Payments for All Adults

Except Those Age 60 or Older at Implementation

-3.5

-3.0

-2.5

-2.0

-1.5

-1.0

-0.5

0

0.5

1.0

1.5

2.0

2.5

Raise Tax Rates

Before

1956

1956–

1990

1991–

2015

After

2015

Year of Birth

After

2015

*
12 CONGRESSIONAL BUDGET OFFICE

ECONOMIC AND BUDGET ISSUE BRIEF

most of them would be retired and have lower taxable 

incomes. Under either policy, the indirect effects on 

wages of additional crowding out would matter little for 

this group as a whole because most of its members would 

be retired.

People Ages 25 to 59 in 2015

People born between 1956 and 1990 would experience 

very different effects from a delay in fiscal stabilization 

than people born several decades earlier. The gain for this 

group from waiting a decade to cut benefit payments for 

all adults would be less than one-third the size of the gain 

for earlier generations. On the one hand, the relatively 

large benefits paid to retirees would be reduced by the 

time people in this group collected those benefits, 

whether the cuts were postponed or not. On the other 

hand, the extra crowding out that would result from 

delaying the benefit cuts would reduce these people’s 

wages and consumption while they were working.

This group would gain, by more than 2 percent of future 

consumption, from a delay in cutting benefit payments 

for adults under age 60 when the policy was adopted. 

People who were ages 50 to 59 in 2015 would be 

exempted if those cuts were delayed until 2025, but 

everyone in the group would face reductions if the benefit 

cuts took place in 2015. 

This group would also gain, by about 1 percent of future 

consumption, from a delay in raising tax rates. Most 

members of the group would be working between 2015 

and 2025, and the lower tax rates on earnings during 

those years would outweigh the effects on wages of the 

extra crowding out.

People Under Age 25 in 2015

Postponing a reduction in benefit payments for all adults 

would have little effect on the economic well-being of 

people born between 1991 and 2015. The gains they 

would receive from additional years of higher benefits 

would be slightly more than offset—on average for the 

group as a whole—by losses from the lower wages that 

would result from more crowding out in the long run.

Delaying cuts in benefit payments for adults under age 

60 at the time of implementation would benefit this 

group by roughly half a percent of future consumption. 

Under that policy, the average gains that the group as a 

whole would receive from deferring the larger cut in their 

benefits would more than outweigh the losses resulting 

from greater crowding out. 

A delay in raising taxes, by contrast, would reduce the 

well-being of this group by roughly half a percent of 

future consumption. The impact of higher taxes from 

2015 to 2025 would be outweighed, on average, by 

higher taxes and more crowding out in the long run. 

People Not Yet Born in 2015

Generations born after 2015 would be harmed by delaying fiscal stabilization, regardless of which of the three 

policies examined here was used to achieve that stabilization. Maintaining scheduled benefit payments and tax 

rates for another decade would provide little, if any, 

advantage to people in this group, and the greater crowding out of capital would reduce their future income and 

consumption possibilities. As a result, waiting 10 years to 

stabilize the ratio of debt to output would cause losses for 

this group equal to roughly 1 percent to 3 percent of 

future consumption under all three policies. 

In the case of benefit cuts, the impact of delay on this 

group would be greater if the cuts exempted people age 

60 or older than if they applied to all adults, because 

there would be more crowding out in the long run under 

the former policy change. The impact of delay would be 

greater still with increases in tax rates, because higher 

rates would make people worse off by distorting their 

decisions about work and saving as well as by directly 

reducing their after-tax income.

This brief was prepared by Benjamin Page and Marika 

Santoro of CBO’s Macroeconomic Analysis Division. It 

and other CBO publications are available at the 

agency’s Web site (www.cbo.gov).

Douglas W. Elmendorf

Director