CONGRESS OF THE UNITED STATES

Economic Effects of Policies 

Contributing to Fiscal 

Tightening in 2013

November 2012
Contents

CBO

CBO’s Analytical Approach 2

Short-Term Effects of Policies Contributing to Fiscal Tightening 5

Eliminate the Automatic Reductions in Defense Spending Specified in the 

Budget Control Act 6

Eliminate the Automatic Reductions in Nondefense Spending Specified in the 

Budget Control Act and the Scheduled Reductions in Medicare’s Payment 

Rates for Physicians 9

Extend Most Expiring Tax Provisions and Index the AMT for Inflation 9

Extend Most Expiring Tax Provisions—Except for the Lower Tax Rates on 

Income Above Certain Thresholds—and Index the AMT for Inflation 10

Extend the Reduction in Employees’ Portion of the Payroll Tax and 

Extend Emergency Unemployment Benefits 11

Implement All of the Policies Assumed in the Alternative Fiscal Scenario 11

Implement All of the Policies Assumed in the Alternative Fiscal Scenario and 

Extend the Payroll Tax Reduction and Emergency Unemployment Benefits 11

Longer-Term Effects of Policies Contributing to Fiscal Tightening 12

Table

1. Estimated Increase in the Deficit from Eliminating Various Components of 

Fiscal Tightening Scheduled for Fiscal Years 2013 and 2014 7

Figures

1. Estimated Economic Effects in the Fourth Quarter of 2013 of Eliminating 

Various Components of Fiscal Tightening Scheduled for 

Fiscal Years 2013 and 2014 3

2. Estimated Economic Effects in 2013 of Eliminating Various Components of 

Fiscal Tightening Scheduled for Fiscal Years 2013 and 2014 Relative to 

Budgetary Costs in 2013 8

Pub. No. 4570
CBO

Economic Effects of Policies Contributing to 

Fiscal Tightening in 2013

Substantial changes to tax and spending policies 

are scheduled to take effect in January 2013, significantly 

reducing the federal budget deficit. According to the 

Congressional Budget Office’s (CBO’s) projections, if all 

of that fiscal tightening occurs, real (inflation-adjusted) 

gross domestic product (GDP) will drop by 0.5 percent 

in 2013 (as measured by the change from the fourth 

quarter of 2012 to the fourth quarter of 2013)—reflecting a decline in the first half of the year and renewed 

growth at a modest pace later in the year.1

 That contraction of the economy will cause employment to decline 

and the unemployment rate to rise to 9.1 percent in the 

fourth quarter of 2013. After next year, by the agency’s 

estimates, economic growth will pick up, and the labor 

market will strengthen, returning output to its potential 

level (reflecting a high rate of use of labor and capital) 

and shrinking the unemployment rate to 5.5 percent by 

2018. 

Output would be greater and unemployment lower in the 

next few years if some or all of the fiscal tightening scheduled under current law—sometimes called the fiscal 

cliff—was removed. However, CBO expects that even if 

all of the fiscal tightening was eliminated, the economy 

would remain below its potential and the unemployment 

rate would remain higher than usual for some time. 

Moreover, if the fiscal tightening was removed and the 

policies that are currently in effect were kept in place 

indefinitely, a continued surge in federal debt during the 

rest of this decade and beyond would raise the risk of a 

fiscal crisis (in which the government would lose the 

ability to borrow money at affordable interest rates) and 

would eventually reduce the nation’s output and income 

below what would occur if the fiscal tightening was 

allowed to take place as currently set by law. 

In August, CBO presented estimates of the budgetary 

and economic outcomes that would occur under current 

law and under an “alternative fiscal scenario” that represents a continuation of many long-standing policies and 

thus a significant reduction in the amount of fiscal tightening next year. To provide additional information about 

the sources of that tightening and its effects, this report 

presents estimates of the budgetary and economic impact 

of the main changes to current law that would occur 

under that alternative scenario, as well as estimates of the 

impact of eliminating various other components of fiscal 

tightening scheduled for 2013.

In order to focus on the short-term impact of policy decisions, the analysis in this report is based on the assumption that the fiscal tightening would be removed and current policies maintained for two years and that the 

tightening provided by current law would occur thereafter. (In contrast, CBO’s August analysis of the alternative fiscal scenario was based on the assumption that 

those current policies would be maintained indefinitely.) 

On the basis of its analysis, CBO concludes the 

following:

 Eliminating the automatic enforcement procedures 

established by the Budget Control Act of 2011 that 

are scheduled to reduce both discretionary and mandatory spending starting in January and maintaining 

Medicare’s payment rates for physicians’ services at the

1. The figures in this paragraph are unchanged from those in CBO’s 

previous analysis of this issue. See Congressional Budget Office, 

An Update to the Budget and Economic Outlook: Fiscal Years 2012 

to 2022 (August 2012).
2 ECONOMIC EFFECTS OF POLICIES CONTRIBUTING TO FISCAL TIGHTENING IN 2013 NOVEMBER 2012

CBO

current level would boost real GDP by about threequarters of a percent by the end of 2013 (see Figure 1).2

 Extending all expiring tax provisions other than the 

cut in the payroll tax that has been in effect since 

January 2011—that is, extending the tax reductions 

originally enacted in 2001, 2003, and 2009 and 

extending all other expiring provisions, including 

those that expired at the end of 2011, except for the 

payroll tax cut—and indexing the alternative minimum tax (AMT) for inflation beginning in 2012 

would boost real GDP by a little less than 11⁄2 percent 

by the end of 2013.

 Making all of the changes described in the two preceding bullets—which captures all of the policies 

included in the first two years of CBO’s alternative 

fiscal scenario—would boost real GDP by about 21⁄4 

percent by the end of 2013 (as CBO estimated in 

August).3

 Thus, of the total difference in the projected 

growth of GDP next year under current law and under 

the alternative fiscal scenario, about two-thirds owes 

to changes in tax policies and about one-third owes to 

changes in spending policies. 

 The estimated economic effect next year of those 

changes in spending is about half the estimated effect 

of extending the expiring tax provisions, even though 

the budgetary impact of the changes in spending is less 

than one-quarter of the impact of the changes in taxes. 

The larger “bang for the buck” next year of the spending policies under the alternative fiscal scenario occurs 

because, CBO expects, a significant part of the 

decrease in taxes (relative to those under current law) 

would be saved rather than spent. 

 Extending all expiring tax provisions other than the 

cut in the payroll tax and indexing the AMT for inflation—except for allowing the expiration of lower tax 

rates on income above $250,000 for couples and 

$200,000 for single taxpayers—would boost real GDP 

by about 11⁄4 percent by the end of 2013. That effect is 

nearly as large as the effect of making all of those 

changes in law and extending the lower tax rates on 

higher incomes as well (which CBO estimates to be a 

little less than 11⁄2 percent, as noted above), primarily 

because the budgetary impact would be nearly as large 

(and secondarily because the extension of lower tax 

rates on higher incomes would have a relatively small 

effect on output per dollar of budgetary cost). 

 Extending both the current 2 percentage-point cut in 

the payroll tax and emergency unemployment benefits—extensions that are not assumed in the alternative fiscal scenario—would boost real GDP by about 

three-quarters of a percent by the end of 2013. Making 

those changes along with making all of the changes in 

CBO’s alternative fiscal scenario would boost real 

GDP by about 3 percent by the end of 2013.

CBO’s Analytical Approach

For each potential change in law discussed in this report, 

CBO used evidence from empirical studies and econometric models to estimate the impact on: 

 Output next year—specifically, the effect on real GDP 

in the fourth quarter of 2013 and on average nominal 

GDP in 2013 per dollar of total budgetary cost (measured in terms of additional government spending or 

reduction in taxes)—and

 Employment next year—specifically, the effect on 

years of full-time-equivalent (FTE) employment in 

the fourth quarter of 2013 and on average FTE-years 

in 2013 per million dollars of total budgetary cost in 

that year.

Although the analysis here focuses on those two measures, other criteria are also important for evaluating fiscal 

policies. Those other criteria include the economic effects 

in later years, consistency with long-term fiscal objectives, 

the distributional consequences (that is, who bears the 

costs and receives the benefits), and the value to society of 

any added goods and services that would be produced in 

the short term.4 2. The economic measures presented in this report apply to calendar 

years. The budget figures are for fiscal years, which run from 

October 1 through September 30. 

3. For a detailed explanation of the policies underlying the alternative fiscal scenario, see Congressional Budget Office, An Update to 

the Budget and Economic Outlook: Fiscal Years 2012 to 2022

(August 2012).

4. For additional discussion of those criteria, see the statement of 

Douglas W. Elmendorf, Director, Congressional Budget Office, 

before the Joint Select Committee on Deficit Reduction, 

Confronting the Nation’s Fiscal Policy Challenges (September 13, 

2011).
NOVEMBER 2012 ECONOMIC EFFECTS OF POLICIES CONTRIBUTING TO FISCAL TIGHTENING IN 2013 3

CBO

Figure 1.

Estimated Economic Effects in the Fourth Quarter of 2013 of Eliminating Various 

Components of Fiscal Tightening Scheduled for Fiscal Years 2013 and 2014

Source: Congressional Budget Office.

Notes: The estimated budgetary effects presented do not include debt service.

GDP = gross domestic product; AMT = alternative minimum tax.

a. This component incorporates extensions of title I of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 

2010 (which extended for 2011 and 2012 income tax provisions enacted in 2001, 2003, and 2009); of title III of that act (which modified 

estate and gift taxation for 2010 through 2012); of the higher exemption amount for the AMT (which was previously increased through 

the end of December 2011), along with an indexing of higher exemption amount and AMT tax brackets for inflation after 2011; of the 

treatment of nonrefundable personal credits (which also was continued through the end of 2011); and of about 80 other tax provisions 

(many of which expired at the end of December 2011). Nearly all of those 80 provisions have been extended previously; some, such as the 

research and experimentation tax credit, have been extended more than once.

b. This component incorporates extensions of title I of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 

2010 (which extended for 2011 and 2012 income tax provisions enacted in 2001, 2003, and 2009) except for the reductions to the top 

two tax rates on ordinary income and to the tax rates on capital gains and dividends for taxpayers filing jointly with income above 

$250,000 and for single filers with income above $200,000 (with both thresholds indexed for inflation since 2009); of the elimination of 

limits on itemized deductions and personal exemptions except for those high-income taxpayers; of title III of that act (which modified 

estate and gift taxation for 2010 through 2012); and of about 80 other tax provisions (many of which expired at the end of December 

2011). It also incorporates indexing the AMT for inflation.

c. The budgetary cost is for a two-year extension of the policies.

d. Implements the first two years of the alternative fiscal scenario, combining the first three components listed in the figure.

e. Combines the first three components and the fifth component listed in the figure.

0123456 0123456

0.2 0.7

0.4

0.1 0.6

0.4

0.3 2.5

1.4

0.2 1.2

0.7

0.3 2.3

1.3

0.6 3.9

2.2

0.8 5.0

2.9

0.2 0.7

0.4

0.1 0.7

0.4

0.5 3.1

1.8

0.3 1.3

0.8

0.5 2.8

1.6

0.8 4.5

2.7

1.1 5.8

3.4

Inflation-Adjusted GDP 

(Percentage difference from CBO’s baseline)

Full-Time-Equivalent Employment 

(Difference from CBO’s baseline in millions)

Eliminate the Automatic Reductions in 

Defense Spending Specified in the 

Budget Control Act

Eliminate the Automatic Reductions in

Nondefense Spending Specified in the 

Budget Control Act and the Scheduled Reductions in 

Medicare’s Payment Rates for Physicians 

Extend Most Expiring Tax Provisions and

Index the AMT for Inflationa

Extend the Reduction in Employees’ Portion of the 

Payroll Tax and Extend Emergency 

Unemployment Benefitsc

Extend Most Expiring Tax Provisions—Except for the

Lower Tax Rates on Income Above Certain Thresholds—

and Index the AMT for Inflationb

Implement the Policies Assumed in the 

Alternative Fiscal Scenario and 

Extend the Reduction in Employees’ Portion of the 

Payroll Tax and Emergency Unemployment Benefitse

Implement the Policies Assumed in the 

Alternative Fiscal Scenariod
4 ECONOMIC EFFECTS OF POLICIES CONTRIBUTING TO FISCAL TIGHTENING IN 2013 NOVEMBER 2012

CBO

The approach adopted to estimate the short-term economic impact of alternative policies is similar to the 

method that CBO has used to assess the impact of the 

American Recovery and Reinvestment Act and the 

impact of various potential policies designed to increase 

output and employment.5

 The estimated effects on output of a given policy include both its direct and indirect 

effects. Direct effects consist of immediate effects on economic activity. For example, government purchases of 

goods and services directly elicit economic activity and 

thereby have a direct dollar-for-dollar impact on output. 

Indirect effects may enhance or offset the direct effects. 

For example, if the economy has idle resources, as it does 

now, government funding for projects can lead to the hiring of otherwise unemployed workers. The additional 

spending by those workers, who would have more 

income, would constitute a positive indirect effect. In 

contrast, a substantial increase in government spending 

financed by borrowing tends to drive up interest rates, 

which discourages spending on investment and on durable goods by raising the cost of borrowed funds. Those 

indirect “crowding-out” effects would offset some of the 

direct effects. In its analysis, CBO chose, on a judgmental 

basis, low and high estimates of the effects on output for 

a given policy to encompass most economists’ views 

about the effects of that type of policy.

The monetary policy of the Federal Reserve has an 

important influence on the economic effects of changes 

in taxes and government spending. In its August 2012 

An Update to the Budget and Economic Outlook, CBO 

anticipated that the economic slowdown brought about 

by fiscal tightening under current law, coupled with a 

lack of inflationary pressure, would prompt the Federal 

Reserve to introduce new policies to hold down the rate 

on 10-year Treasury notes. Changes in the laws governing 

federal taxes and spending that would offset the fiscal 

tightening scheduled under current law and ameliorate 

the projected economic slowdown could lead the Federal 

Reserve to scale back or eliminate those policies. In this 

analysis, CBO assumed that, at least through 2013, the 

Federal Reserve would react in that way. That reaction 

would increase long-term interest rates a little relative to 

the rates in CBO’s baseline projections and thereby 

slightly attenuate the economic effects of policies that 

would reduce fiscal tightening.

Fiscal policies may also affect spending by individuals and 

businesses by altering people’s uncertainty or confidence 

about future economic conditions or government policies. Many firms appear to be uncertain today about 

future demand for their products, and that uncertainty 

seems to be leading them to be cautious about increasing 

their investment and hiring. Fiscal policy actions that 

boosted demand might lessen that uncertainty and 

increase employment.6

 However, some fiscal policy 

actions might exacerbate uncertainty about future government policies—for example, if firms’ managers wondered whether a temporary policy might later be 

extended or what other changes in fiscal policy might be 

made later. Because quantifying reactions of that sort to 

changes in fiscal policy would be extremely difficult, this 

report does not incorporate such reactions.

To assess a policy’s impact on employment, CBO used a 

series of steps to translate the estimated effects on output 

into estimated effects on FTE-years (each FTE-year being 

40 hours of employment per week for one year). First, 

CBO estimated the impact on the output gap—the percentage difference between actual output and potential 

output. Next, CBO calculated the magnitude and timing 

of effects of changes in the output gap on productivity, 

hours per worker, and employment using the historical 

relationships between those measures. Changes in the 

output gap affect employment gradually over several 

quarters, as part of a rise in output initially shows up as 

higher productivity and hours per worker rather than as 

increased employment. CBO also took account of the 

effect of changes in employment on the size of the labor 

force, because discouraged workers and people who have 

chosen to pursue activities such as schooling rather than 

work tend to return to the labor force when unemployment declines and the economic environment improves.

To measure the impact on employment in FTE-years, 

CBO incorporated the estimated effects of policies on the 

number of hours worked in addition to their effects on 

5. See Congressional Budget Office, Estimated Impact of the 

American Recovery and Reinvestment Act on Employment and 

Economic Output from April 2012 Through June 2012 (August 

2012); the statement of Douglas W. Elmendorf, Director, 

Congressional Budget Office, before the Senate Committee on the 

Budget, Policies for Increasing Economic Growth and Employment in 

2012 and 2013 (November 15, 2011); and Felix Reichling and 

Charles Whalen, Assessing the Short-Term Effects on Output of 

Changes in Federal Fiscal Policies, Congressional Budget Office 

Working Paper 2012-08 (May 2012).

6. See Nicholas Bloom, “The Impact of Uncertainty Shocks,” 

Econometrica, vol. 77, no. 3 (May 2009), pp. 623–685.
NOVEMBER 2012 ECONOMIC EFFECTS OF POLICIES CONTRIBUTING TO FISCAL TIGHTENING IN 2013 5

CBO

the number of people employed. Projected increases in 

the average number of people employed during a year do 

not include shifts from part-time to full-time work or 

overtime and are generally somewhat smaller than 

increases in FTE-years.

For estimates of the amounts in 2013 of additional output per dollar and employment per million dollars of 

total budgetary cost, the cost used in the calculations was 

the effect on the federal deficit in calendar year 2013. 

Policy options with a smaller impact per dollar require 

more budgetary resources to generate given amounts of 

extra output and employment, and those with a larger 

impact per dollar require less budgetary resources.7

Since its November 2011 analysis presented in Policies for 

Increasing Economic Growth and Employment in 2012 and 

2013, CBO has refined some aspects of its analytic 

approach and its presentation of results. For example, 

CBO now estimates that changes in GDP affect employment more gradually than it estimated previously. That 

change implies that generating a given increase in 

employment in the first year of a policy requires a larger 

increase in GDP. In addition, CBO now presents the 

effects of different policies on nominal GDP per dollar of 

budgetary cost, whereas the previous analysis presented 

the effects on real GDP measured with 2008 prices; that 

change in presentation (which better matches the effect 

on GDP to the budgetary cost of a policy, measured in 

nominal dollars) has slightly increased the effects on output per dollar of budgetary cost presented in this report, 

while leaving the effects on employment unchanged.

Since its August 2012 analysis of the alternative fiscal scenario, CBO has made one change of note: To focus on 

the short-term impact of the policies that constitute that 

scenario and the others analyzed in this report, the current analysis is based on the assumption that the policies 

would be maintained though calendar year 2014 and that 

the changes embodied in current law would unfold thereafter. In contrast, the August analysis was based on the 

assumption that the polices would be maintained indefinitely. Shortening the duration of the policies significantly reduces their cumulative budgetary effects and 

therefore their drag on output and income in the long 

run. However, that shorter duration makes little difference in the policies’ projected budgetary and economic 

effects in the short run. In particular, because the tax cuts 

have been in place for so long, CBO expects that households would view an extension of current tax rates as a 

continuation of established tax policy and would therefore alter their spending very little. If households viewed 

the two-year extension as less than permanent, they 

might spend less and provide a smaller short-term boost 

to economic output. However, that effect might be offset 

by a positive effect from a smaller increase in long-term 

interest rates if participants in the financial markets felt 

less concerned about the prospect of higher government 

debt in the future.

Short-Term Effects of Policies 

Contributing to Fiscal Tightening

CBO estimated the short-term impact on output and 

employment of five sets of policies:

 Eliminate the scheduled automatic reductions in 

defense spending;

 Eliminate the scheduled automatic reductions in 

nondefense spending and the scheduled reductions in 

Medicare’s payment rates for physicians;

 Extend most expiring tax provisions and index the 

AMT for inflation;

 Extend most expiring tax provisions—except for the 

lower tax rates on income above certain thresholds—

and index the AMT for inflation; and

 Extend both the payroll tax cut and emergency 

unemployment benefits.

CBO also estimated the impact of two combinations of 

those sets of policies:

 The alternative fiscal scenario, which encompasses the 

first three items listed above, and

7. One might attempt to calculate the budgetary cost per FTE-year 

for different policies by inverting the number of cumulative years 

of full-time employment per million dollars of budgetary cost 

(reported below). However, such calculations could be misleading 

for two reasons. First, for many of the options considered here, 

employment is affected beyond 2013—in part because effects on 

employment tend to lag behind those on GDP. Second, CBO’s 

ranges of estimated effects on GDP (and thereby employment) are 

chosen to be centered relative to the distribution of possible outcomes, but the inverses of those ranges are not necessarily centered 

relative to the distribution of the inverses of those outcomes.
6 ECONOMIC EFFECTS OF POLICIES CONTRIBUTING TO FISCAL TIGHTENING IN 2013 NOVEMBER 2012

CBO

 The alternative fiscal scenario plus an extension of the 

payroll tax cut and emergency unemployment benefits 

(the first three items and the last one).

The effects of the policies differ both because they vary in 

their budgetary cost and because they spur output and 

employment by different amounts per dollar of budgetary 

cost. 

Eliminate the Automatic Reductions in Defense 

Spending Specified in the Budget Control Act 

The Budget Control Act specified automatic procedures 

to reduce both discretionary and mandatory spending 

during the coming decade in the event that specified 

amounts of deficit reduction were not achieved through 

legislation originating from a Congressionally appointed 

committee.8

 Those automatic reductions will take the 

form of equal cuts (in dollar terms) in funding for defense 

and nondefense programs in fiscal years 2013 through 

2021. For 2013, those reductions will be achieved by 

automatically canceling a portion of the budgetary 

resources (in an action known as sequestration) for most 

discretionary programs as well as for some programs and 

activities that are financed by mandatory spending.9

From 2014 to 2021, the reductions will be achieved by 

lowering the caps on discretionary budget authority as 

specified in the Budget Control Act and through sequestration for mandatory spending. The law exempts a significant portion of mandatory spending from sequestration, however.

CBO has previously estimated how much discretionary 

and mandatory funding will change under the automatic 

enforcement mechanisms, and those estimates are used in 

this analysis. However, the Administration’s Office of 

Management and Budget would implement any reductions on the basis of its own estimates.10

CBO estimated in August that the automatic enforcement procedures will reduce outlays for defense programs 

by $24 billion in fiscal year 2013 and by $51 billion in 

fiscal year 2014 (see Table 1). Because mandatory spending makes up less than 1 percent of all defense spending, 

almost all of that reduction in outlays in the defense category will be achieved by sequestering discretionary budget authority provided for 2013 and by lowering the caps 

on defense appropriations in 2014.

CBO estimates that precluding those reductions in 

defense outlays would increase real GDP by 0.4 percent 

and increase full-time-equivalent employment by about 

0.4 million in the fourth quarter of 2013 (see Figure 1 on 

page 3). Those figures represent CBO’s central estimates, 

which correspond to the assumption that the values that 

describe key parameters of economic behavior (in particular, the extent to which lower federal taxes and higher 

federal spending boost aggregate demand in the short 

term) equal the midpoints of the ranges used by CBO.11

The full ranges that CBO uses for those parameters suggest that, in the fourth quarter of 2013, real GDP could 

be between 0.2 percent and 0.7 percent higher, and 

employment 0.2 million to 0.7 million higher, if the 

scheduled reductions in defense outlays did not occur.

CBO measures the cost-effectiveness of a fiscal policy in 

generating additional output and employment by the 

ratio of its economic effects to its budgetary cost. On that 

basis, CBO estimates that eliminating the automatic 

reductions in defense spending would boost GDP in 

2013 by about $1.20 for every dollar of budgetary cost in 

that year; the full range of estimates runs from $0.50 to 

$2.00 of GDP per dollar of budgetary cost (see Figure 2). 

That policy is estimated to boost employment by about 

7 FTE-years in 2013 per million dollars of budgetary 

cost, but that amount could range from 3 to 11 FTEyears.

8. Discretionary spending is spending out of budget authority provided in appropriation acts. Mandatory spending is spending on 

programs that are not normally controlled by the annual appropriation process; many of them provide benefits based on formulas 

and eligibility criteria set in law. 

9. Budgetary resources consist of all sources of authority provided to 

federal agencies that permit them to incur financial obligations, 

including new budget authority, unobligated balances, direct 

spending authority, and obligation limitations.

10. See OMB Report Pursuant to the Sequestration Transparency Act 

of 2012 (September 14, 2012) for the Office of Management 

and Budget’s estimates of the effects of the potential sequestration 

for 2013. Those estimates differ slightly from the totals that CBO 

published in August in An Update to the Budget and Economic 

Outlook: Fiscal Years 2012 to 2022. 

11. For a discussion of CBO’s approach to analyzing the short-term 

effects of fiscal policy, see Reichling and Whalen, Assessing the 

Short-Term Effects on Output of Changes in Federal Fiscal Policies. 
NOVEMBER 2012 ECONOMIC EFFECTS OF POLICIES CONTRIBUTING TO FISCAL TIGHTENING IN 2013 7

CBO

Table 1.

Estimated Increase in the Deficit from Eliminating Various Components of 

Fiscal Tightening Scheduled for Fiscal Years 2013 and 2014

(Billions of dollars)

Source: Congressional Budget Office.

Notes: The estimated budgetary effects presented do not include debt service.

AMT = alternative minimum tax.

a. The estimated effect on the budget represents the cost in fiscal years 2013 and 2014 of a 10-year extension of the policy, as shown in 

Congressional Budget Office, An Update to the Budget and Economic Outlook: Fiscal Years 2012 to 2022 (August 2012).

b. This component incorporates extensions of title I of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 

2010 (which extended for 2011 and 2012 income tax provisions enacted in 2001, 2003, and 2009); of title III of that act (which modified 

estate and gift taxation for 2010 through 2012); of the higher exemption amount for the AMT (which was previously increased through 

the end of December 2011), along with an indexing of higher exemption amount and AMT tax brackets for inflation after 2011; of the 

treatment of nonrefundable personal credits (which also was continued through the end of 2011); and of about 80 other tax provisions 

(many of which expired at the end of December 2011). Nearly all of those 80 provisions have been extended previously; some, such as the 

research and experimentation tax credit, have been extended more than once.

c. This component incorporates extensions of title I of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 

2010 (which extended for 2011 and 2012 income tax provisions enacted in 2001, 2003, and 2009) except for the reductions to the top 

two tax rates on ordinary income and to the tax rates on capital gains and dividends for taxpayers filing jointly with income above 

$250,000 and for single filers with income above $200,000 (with both thresholds indexed for inflation since 2009); of the elimination of 

limits on itemized deductions and personal exemptions except for those high-income taxpayers; of title III of that act (which modified 

estate and gift taxation for 2010 through 2012); and of about 80 other tax provisions (many of which expired at the end of December 

2011). It also incorporates indexing the AMT for inflation.

d. The budgetary cost is for a two-year extension of the policies.

e. Implements the first two years of the alternative fiscal scenario, combining the first three components listed in the table.

f. Combines the first three components and the fifth component listed in the table.

Eliminate the Automatic Reductions in Defense 

Spending Specified in the Budget Control Acta 24 51

Eliminate the Automatic Reductions in Nondefense 

Spending Specified in the Budget Control Act and the

Scheduled Reductions in Medicare’s Payment Rates

for Physiciansa 40 61

Extend Most Expiring Tax Provisions and Index the

AMT for Inflationa,b 330 420

Extend Most Expiring Tax Provisions—Except for the

Lower Tax Rates on Income Above Certain Thresholds—

and Index the AMT for Inlationa,c 288 382

Extend the Reduction in Employees' Portion of the Payroll

Tax and Extend Emergency Unemployment Benefits

d 108 150

Implement the Policies Assumed in the Alternative Fiscal Scenarioa,e 395 532

Implement the Policies Assumed in the Alternative Fiscal Scenario and

Extend the Reduction in Employees' Portion of the Payroll Tax and

Emergency Unemployment Benefits

f 503 682

2013 2014
8 ECONOMIC EFFECTS OF POLICIES CONTRIBUTING TO FISCAL TIGHTENING IN 2013 NOVEMBER 2012

CBO

Figure 2.

Estimated Economic Effects in 2013 of Eliminating Various Components of 

Fiscal Tightening Scheduled for Fiscal Years 2013 and 2014 Relative to 

Budgetary Costs in 2013

Source: Congressional Budget Office.

Notes: The estimated budgetary effects presented do not include debt service.

GDP = gross domestic product; AMT = alternative minimum tax.

a. This component incorporates extensions of title I of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 

2010 (which extended for 2011 and 2012 income tax provisions enacted in 2001, 2003, and 2009); of title III of that act (which modified 

estate and gift taxation for 2010 through 2012); of the higher exemption amount for the AMT (which was previously increased through 

the end of December 2011), along with an indexing of higher exemption amount and AMT tax brackets for inflation after 2011; of the 

treatment of nonrefundable personal credits (which also was continued through the end of 2011); and of about 80 other tax provisions 

(many of which expired at the end of December 2011). Nearly all of those 80 provisions have been extended previously; some, such as the 

research and experimentation tax credit, have been extended more than once.

b. This component incorporates extensions of title I of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 

2010 (which extended for 2011 and 2012 income tax provisions enacted in 2001, 2003, and 2009) except for the reductions to the top 

two tax rates on ordinary income and to the tax rates on capital gains and dividends for taxpayers filing jointly with income above 

$250,000 and for single filers with income above $200,000 (with both thresholds indexed for inflation since 2009); of the elimination of 

limits on itemized deductions and personal exemptions except for those high-income taxpayers; of title III of that act (which modified 

estate and gift taxation for 2010 through 2012); and of about 80 other tax provisions (many of which expired at the end of December 

2011). It also incorporates indexing the AMT for inflation.

c. The budgetary cost is for a two-year extension of the policies.

d. Implements the first two years of the alternative fiscal scenario, combining the first three components listed in the figure.

e. Combines the first three components and the fifth component listed in the figure.

0 2 4 6 8 10 12

3 11

7

2 8

5

1 5

3

1 5

3

1 6

4

1 6

4

1 6

4

0123

0.5 2.0

1.2

0.3 1.5

0.9

0.2 0.9

0.5

0.2 0.9

0.6

0.2 1.1

0.7

0.2 1.0

0.6

0.2 1.1

0.6

Eliminate the Automatic Reductions in 

Defense Spending Specified in the 

Budget Control Act

Eliminate the Automatic Reductions in

Nondefense Spending Specified in the 

Budget Control Act and the Scheduled Reductions in 

Medicare’s Payment Rates for Physicians 

Extend Most Expiring Tax Provisions and

Index the AMT for Inflationa

Extend the Reduction in Employees’ Portion of the 

Payroll Tax and Extend Emergency 

Unemployment Benefitsc

Extend Most Expiring Tax Provisions—Except for the

Lower Tax Rates on Income Above Certain Thresholds—

and Index the AMT for Inflationb

GDP (Dollars of annual average GDP in

2013 per dollar of budgetary cost in 2013)

Full-Time-Equivalent Employment Years

(Average in 2013 per million dollars of

budgetary cost in 2013)

Implement the Policies Assumed in the 

Alternative Fiscal Scenario and 

Extend the Reduction in Employees’ Portion of the 

Payroll Tax and Emergency Unemployment Benefitse

Implement the Policies Assumed in the 

Alternative Fiscal Scenariod
NOVEMBER 2012 ECONOMIC EFFECTS OF POLICIES CONTRIBUTING TO FISCAL TIGHTENING IN 2013 9

CBO

Eliminate the Automatic Reductions in Nondefense 

Spending Specified in the Budget Control Act and 

the Scheduled Reductions in Medicare’s Payment 

Rates for Physicians 

Estimating the amount of the automatic reductions for 

nondefense programs is more complicated than estimating those reductions for defense programs, particularly 

because provisions in the Budget Control Act limit cuts 

in most Medicare benefits to 2 percent and exempt many 

mandatory programs (including Social Security and Medicaid) from sequestration altogether. Taking those limitations into account, CBO estimated in August that, in fiscal year 2013, the automatic enforcement procedures will 

reduce Medicare spending by about $4 billion (including 

indirect effects), other mandatory spending by $5 billion, 

and other nondefense spending by $21 billion. In total, 

the enforcement procedures will reduce nondefense outlays by about $30 billion in fiscal year 2013 and by 

$45 billion in fiscal year 2014.

In addition, under current law, spending for Medicare 

will be constrained starting in January 2013 by a ratesetting system called the sustainable growth rate, which 

controls the fees that physicians receive for their services. 

If the system is allowed to operate as currently structured, 

physicians’ fees will be reduced by 27 percent at the 

beginning of the year and by additional amounts in subsequent years, CBO projected in August. If, instead, lawmakers override those scheduled reductions—as they 

have every year since 2003—spending on Medicare 

would be greater than the amounts projected in CBO’s 

baseline. For example, if payment rates stayed as they are 

now, outlays for Medicare (net of premiums) would be 

$10 billion higher in fiscal year 2013 and $16 billion 

higher in fiscal year 2014 than they are in CBO’s currentlaw baseline.12

Together, eliminating the automatic reductions in 

nondefense spending and maintaining Medicare’s current 

payment rates for physicians would increase outlays by 

$40 billion in fiscal year 2013 and by $61 billion in fiscal 

year 2014, according to CBO’s estimates. 

CBO projects that the additional spending would 

increase real GDP by 0.4 percent (by 0.1 percent to 

0.6 percent under CBO’s full range of assumptions) and 

increase full-time-equivalent employment by 0.4 million 

(with a range from 0.1 million to 0.7 million) in the 

fourth quarter of 2013. Dividing those economic effects 

by the budgetary cost of the policies yields an estimated 

increase in GDP of about $0.90 in 2013 for every dollar 

of budgetary cost in that year (the full range of estimates 

runs from $0.30 to $1.50); the increase in employment 

would be about 5 FTE-years in 2013 per million dollars 

of budgetary cost (the full range is from 2 to 8 FTEyears). 

Those economic effects per dollar are smaller than the 

effects of the changes in defense spending because a larger 

share of the affected nondefense spending represents government payments to people or state and local governments, rather than direct purchases of goods and services. 

Because people and state and local governments would 

not spend all of such payments in 2013, the increases in 

nondefense spending have a smaller per-dollar effect on 

aggregate demand. 

Extend Most Expiring Tax Provisions and 

Index the AMT for Inflation

CBO projects that federal revenues will increase by about 

one-third between fiscal years 2012 and 2014 as a result 

of several factors, including the scheduled expiration at 

the end of 2012 of a number of tax provisions and the 

expiration at the end of 2011 of certain provisions related 

to the AMT. As a result, under current law, revenues will 

reach 19.6 percent of GDP in 2014, compared with 

15.8 percent in 2012, CBO estimates. 

Under the rules that govern CBO’s baseline, all of the 

provisions of the Tax Relief, Unemployment Insurance 

Reauthorization, and Job Creation Act of 2010 are 

assumed to expire as scheduled. Those expirations will 

increase revenues in 2013 by raising individual income 

tax rates, reducing the child tax credit, eliminating the 

American Opportunity Tax Credit, raising estate tax 

rates, lowering the effective exemption amount for the 

AMT (which rose at the end of December 2011), and 

making other changes. 

In addition, numerous other tax provisions—beyond the 

income tax, estate and gift tax, and AMT provisions—

expired at the end of 2011 or are scheduled to expire at 

12. On November 1, 2012, the Centers for Medicare and Medicaid 

Services issued a final rule specifying that Medicare’s payment 

rates for physicians’ services during calendar year 2013 will be 

26.5 percent lower than current payment rates. That recent action 

is not reflected in CBO’s estimates used for this report.
10 ECONOMIC EFFECTS OF POLICIES CONTRIBUTING TO FISCAL TIGHTENING IN 2013 NOVEMBER 2012

CBO

some point during the next 10 years. The staff of the 

Joint Committee on Taxation (JCT) and CBO estimate 

that the total impact of extending all expiring tax provisions (other than the cut in the payroll tax that has been 

in effect since the beginning of 2011) and indexing the 

AMT for inflation beginning in 2012 would be to reduce 

revenues and increase outlays for refundable tax credits by 

$330 billion in fiscal year 2013 and by $420 billion in 

fiscal year 2014.

CBO estimates that such a change in law would increase 

real GDP by 1.4 percent (by between 0.3 percent and 

2.5 percent under CBO’s full range of assumptions) and 

increase full-time-equivalent employment by 1.8 million 

(with a range from 0.5 million to 3.1 million) in the 

fourth quarter of 2013. Dividing those economic effects 

by the budgetary cost of the change yields an estimated 

increase in GDP in 2013 of about $0.50 for every dollar 

of budgetary cost in that year (the full range of estimates 

runs from $0.20 to $0.90) and an estimated increase in 

employment of about 3 FTE-years in 2013 per million 

dollars of budgetary cost (the full range is from 1 to 

5 FTE-years).13

The estimated economic impact of those policies per dollar of budgetary cost is smaller than that of eliminating 

the scheduled reductions in spending because people 

would save some of their extra after-tax income rather 

than spending it all in 2013. As a result, the short-run 

increase in aggregate demand and output would be 

smaller than it would be for increased government purchases of goods and services, which would directly add 

dollar for dollar to aggregate demand in 2013. 

Extend Most Expiring Tax Provisions—Except for 

the Lower Tax Rates on Income Above Certain 

Thresholds—and Index the AMT for Inflation 

The budgetary cost of extending the expiring tax provisions would be lower if certain provisions were allowed to 

expire that otherwise would apply to some high-income 

households.14 According to JCT and CBO’s estimates, if 

the AMT was indexed for inflation beginning in 2012 

and all of the other expiring tax provisions were extended 

except for the specific provisions affecting high-income 

taxpayers (and the payroll tax cut), revenues would be 

lower and outlays for refundable credits would be higher 

by $288 billion in fiscal year 2013 and by $382 billion 

in fiscal year 2014, compared with CBO’s baseline 

projections.

CBO estimates that such changes would increase real 

GDP by 1.3 percent (by 0.3 percent to 2.3 percent under 

CBO’s full range of assumptions), and increase full-timeequivalent employment by 1.6 million (with a range from 

0.5 million to 2.8 million) in the fourth quarter of 2013. 

Dividing those economic effects by the budgetary cost 

yields an estimated increase in GDP of about $0.60 in 

2013 for every dollar of budgetary cost in that year, with 

the full range of estimates running between $0.20 and 

$0.90, and an estimated increase in employment of about 

3 FTE-years in 2013 per million dollars of budgetary 

cost, with a full range from 1 to 5 FTE-years. 

The estimated economic effects per dollar of budgetary 

cost of these changes in law are slightly larger than those 

of extending all of the expiring tax provisions (except for 

the payroll tax cut) and indexing the AMT for inflation 

because the income affected by the higher tax rate under 

this policy would be that of high-income taxpayers, who, 

in comparison with others, probably save a larger portion 

and spend a smaller portion of each dollar of reduced 

taxes. However, the differences in the estimated effects 

of the two sets of policies are small (and therefore are 

generally not visible in the rounded numbers shown in 

Figure 2 on page 8), in part because the tax savings on 

13. The estimated effects on GDP per dollar of budgetary cost are 

somewhat larger than those CBO estimated for a similar policy in 

November 2011. The difference arises because the previous analysis applied to a one-year extension of expiring tax provisions and 

reported economic effects for that year relative to the full budgetary cost (including the part of the cost that would spill over to a 

second year), whereas the current analysis applies to a two-year 

extension of expiring tax provisions and reports economic effects 

for the first year relative to the budgetary cost in that year alone.

14. Specifically, this alternative policy incorporates extensions of title I 

of the Tax Relief, Unemployment Insurance Reauthorization, and 

Job Creation Act of 2010 (which extended for 2011 and 2012 

income tax provisions enacted in 2001, 2003, and 2009) except 

for the reductions to the top two tax rates on ordinary income and 

to the tax rates on capital gains and dividends for taxpayers filing 

jointly with income above $250,000 and for single filers with 

income above $200,000 (with both thresholds indexed for inflation since 2009); of the elimination of limits on itemized deductions and personal exemptions except for those high-income 

taxpayers; and of title III of that act (which modified estate and 

gift taxation for 2010 through 2012). It also incorporates indexing 

the AMT for inflation.
NOVEMBER 2012 ECONOMIC EFFECTS OF POLICIES CONTRIBUTING TO FISCAL TIGHTENING IN 2013 11

CBO

income above the specified thresholds are a small share of 

the total tax savings under the broader option and in part 

because high-income taxpayers are presumed to save only 

a modestly larger portion of reductions in their taxes.

Extend the Reduction in Employees’ Portion of the 

Payroll Tax and Extend Emergency Unemployment 

Benefits

Employees’ share of the payroll tax was reduced by 2 percentage points (from 6.2 percent to 4.2 percent) for 

calendar years 2011 and 2012, reducing federal revenues 

in fiscal years 2011 through 2013. CBO estimates that 

the scheduled expiration of that tax cut will boost revenues as a share of GDP by 0.7 percentage points between 

2012 and 2014.

Emergency unemployment compensation, which was 

extended in the Middle Class Tax Relief and Job Creation 

Act of 2012, is scheduled to expire at the end of 2012, so 

people will not be eligible to receive such benefits next 

year or beyond. As a result, outlays for unemployment 

compensation will be smaller in 2013 than in 2012 for 

any given level of unemployment.

If the cut in the payroll tax and eligibility to receive emergency unemployment benefits were extended through 

2014, revenues would be lower and benefit payments 

higher by a combined $108 billion in fiscal year 2013 

and $150 billion in fiscal year 2014.15 Those changes in 

law would increase real GDP by 0.7 percent (by 0.2 percent to 1.2 percent under CBO’s full range of assumptions) and increase full-time-equivalent employment by 

0.8 million (with a range from 0.3 million to 1.3 million) 

in the fourth quarter of 2013, CBO estimates. Dividing 

those economic effects by the budgetary cost yields an 

estimated increase in GDP of about $0.70 in 2013 for 

every dollar of budgetary cost in that year, with the full 

range of estimates running from $0.20 and $1.10, and an 

increase in employment of about 4 FTE-years in 2013 

per million dollars of budgetary cost, with a full range 

from 1 to 6 FTE-years. 

The estimated economic impact of those policies per 

dollar of budgetary cost is larger than that of extending 

other expiring tax provisions and indexing the AMT for 

inflation because a larger share of the additional 

unemployment benefits and extended payroll tax cut 

would be spent by the recipients in 2013. As a result, 

the short-run increase in aggregate demand and output 

would be greater.

Implement All of the Policies Assumed in the 

Alternative Fiscal Scenario

Making all of the changes included in the first two years 

of CBO’s alternative fiscal scenario—namely, making all 

of the changes to federal spending described above, 

extending all of the expiring tax provisions (except the 

payroll tax cut), and indexing the AMT for inflation—

would increase spending and reduce taxes by a combined 

$395 billion in fiscal year 2013 and $532 billion in 2014 

(excluding the effects on interest payments), according to 

JCT and CBO’s estimates in August. 

CBO estimates that such changes in law would boost real 

GDP by 2.2 percent (by between 0.6 percent and 

3.9 percent under CBO’s full range of assumptions) and 

increase full-time-equivalent employment by 2.7 million 

(with a range from 0.8 million to 4.5 million) in the 

fourth quarter of 2013. About two-thirds of those effects 

would owe to changes in tax policies and about one-third 

to changes in spending policies. The economic effects of 

the tax and spending changes are not proportional to 

their budgetary effects because, by CBO’s estimates, the 

spending changes would boost GDP more than the tax 

changes would for each dollar of budgetary cost. 

Implement All of the Policies Assumed in the 

Alternative Fiscal Scenario and Extend the 

Payroll Tax Reduction and Emergency 

Unemployment Benefits

Making all of the changes included in the first two years 

of CBO’s alternative fiscal scenario as well as extending 

both the reduction in the payroll tax and emergency 

unemployment benefits would increase the deficit by 

$503 billion in 2013 and by $682 billion in 2014. CBO 

estimates that such changes in law would boost real GDP 

by 2.9 percent (by between 0.8 percent and 5.0 percent 

under CBO’s full range of assumptions) and increase 

full-time-equivalent employment by 3.4 million (with a

15. The great majority of that budgetary impact—$86 billion in fiscal 

year 2013 and $119 billion in fiscal year 2014—stems from the 

payroll tax reduction. There would also be a small budgetary effect 

in fiscal year 2015.
12 ECONOMIC EFFECTS OF POLICIES CONTRIBUTING TO FISCAL TIGHTENING IN 2013 NOVEMBER 2012

CBO

range from 1.1 million to 5.8 million) in the fourth 

quarter of 2013.16

CBO’s August 2012 projection of the deficit under current law in fiscal year 2013—$641 billion—would represent a decline in the deficit of $448 billion from fiscal 

year 2012 to fiscal year 2013; that amount is less than the 

estimated $503 billion budgetary cost in 2013 of the 

combination of the policies in the alternative fiscal scenario plus extension of the payroll tax cut and emergency 

unemployment benefits.17 That difference occurs because 

CBO’s baseline projection of the deficit includes effects 

on the budget of the macroeconomic impact of the 

scheduled fiscal tightening, other scheduled changes in 

policy not part of the combination being analyzed here, 

and other factors that normally affect year-to-year 

changes in revenues and spending. 

Longer-Term Effects of Policies 

Contributing to Fiscal Tightening

Although reducing the fiscal tightening scheduled to 

occur next year would boost output and employment in 

the short run, doing so without imposing a comparable 

amount of additional tightening in future years would 

reduce the nation’s output and income in the longer run 

relative to what would occur if the scheduled tightening 

remained in place. If all of the policies considered in this 

analysis were extended for a prolonged period beyond the 

two years assumed here, federal debt held by the public—

which is currently more than 70 percent of GDP, its highest mark since 1950—would continue to rise much faster 

than GDP. Such a path for federal debt could not be sustained indefinitely, so policy changes would be required 

at some point.18

Over the longer term, the nation’s potential to produce 

goods and services is the key determinant of output and 

income. That potential depends on the size and quality of 

the labor force, the stock of productive capital (such as 

factories, vehicles, and computers), and the efficiency 

with which labor and capital are used. Lasting changes in 

those factors can have an enduring influence on the economy’s ability to produce goods and services. 

Federal budget policies affect potential output mainly by 

affecting the amount of public saving (the combined surpluses or deficits run by the federal government and state 

and local governments) and the incentives for people and 

businesses to work, save, and invest. Different methods of 

achieving any given increase in public saving could have 

different effects on those incentives. For example, 

increases in marginal tax rates on labor would tend to 

reduce the amount of labor supplied to the economy, 

whereas increases in revenues of a similar magnitude from 

broadening the tax base would probably have a smaller 

negative impact or even a positive impact on the supply 

of labor.19 Similarly, cutting government benefit payments would generally strengthen people’s incentive to 

work and save, but the actual impact would depend on 

the nature of the cuts.

16. CBO’s central estimate of a 2.9 percent increase in GDP in the 

fourth quarter of 2013 from the policies of the alternative fiscal 

scenario and extension of the payroll tax reduction and emergency 

unemployment benefits—undoing nearly all of the changes in 

policy that lead to fiscal tightening under current law—is notably 

smaller than a previous estimate of 3.9 percent for removing all of 

the scheduled fiscal restraint (see Congressional Budget Office, 

Economic Effects of Reducing the Fiscal Restraint That Is Scheduled to 

Occur in 2013, May 2012). Those estimates differ primarily 

because CBO now projects a smaller decline in the deficit between 

2012 and 2013, in part because the deficit in 2012 turned out to 

be smaller than the agency projected. 

17. In August, CBO projected that the decline in the deficit under 

current law would be $487 billion. Because the deficit in 2012 

turned out to be smaller than CBO projected, that difference is 

now $448 billion.

18. See Congressional Budget Office, The 2012 Long-Term Budget 

Outlook (June 2012).

19. Broadening the tax base would have opposing effects on the supply of labor. On the one hand, reducing taxpayers’ after-tax 

income would tend to cause them to work more to make up for 

the loss in income. On the other hand, some approaches for 

broadening the base would raise some taxpayers’ marginal tax 

rates—by pushing them into higher tax brackets, for example—

which would tend to cause them to work less. Whether the net 

effect was positive or negative would depend upon the details of 

the base-broadening policy.
NOVEMBER 2012 ECONOMIC EFFECTS OF POLICIES CONTRIBUTING TO FISCAL TIGHTENING IN 2013 13

CBO

CBO has not estimated the longer-term economic effects 

of the fiscal policies analyzed in this report, but the 

agency has estimated the effect on output that would 

occur in 2022 under the alternative fiscal scenario, which 

incorporates the assumption that several of the policies 

are maintained indefinitely. CBO estimates that in 2022, 

on net, the policies included in the alternative fiscal scenario would reduce real GDP by 0.4 percent and real 

gross national product (GNP) by 1.7 percent.20 That 

projected effect primarily reflects two opposing forces: 

People’s incentives to work and save would be greater 

with that scenario’s lower tax rates, but the larger budget 

deficits and rapidly growing federal debt would hamper 

national saving and investment and thus reduce output 

and income. 

In years beyond 2022, rising deficits under the alternative 

fiscal scenario would lead to larger negative effects on 

GDP and GNP and to larger increases in interest rates 

relative to the rates that would prevail under current law. 

Ultimately, the policies assumed in the alternative fiscal 

scenario would lead to unsustainable federal debt, from 

both an economic and a budgetary perspective.

20. Those figures represent CBO’s central estimates, which correspond to the assumption that the values that describe key parameters of economic behavior (in particular, the extent to which 

higher deficits crowd out private investment and the extent to 

which lower marginal tax rates on labor income boost the labor 

supply) equal the midpoints of the ranges used by CBO. The full 

ranges that CBO uses for those parameters suggest that in 2022 

real GDP could be between 2.0 percent lower and 2.1 percent 

higher, and real GNP between 3.5 percent lower and 0.9 percent 

higher, under the policies of the alternative fiscal scenario than 

under current law. 

GNP differs from GDP primarily by including the capital income 

that residents earn from investments abroad and excluding the 

capital income that nonresidents earn from domestic investments. 

GNP is a better measure for analyzing the impact of growing deficits and debt on income because projected budget deficits would 

be partly financed by inflows of capital from other countries that 

would lead to a future flow of income to those countries. 

For a more detailed discussion of CBO’s longer-term estimates of 

economic effects of fiscal policies, see Congressional Budget 

Office, The 2012 Long-Term Budget Outlook (June 2012), 

pp. 29–40.
14 ECONOMIC EFFECTS OF POLICIES CONTRIBUTING TO FISCAL TIGHTENING IN 2013 NOVEMBER 2012

CBO

About This Document

This Congressional Budget Office (CBO) report was prepared in response to a request by the 

Chairman of the Senate Finance Committee. In keeping with CBO’s mandate to provide objective, 

impartial analysis, this report makes no recommendations.

Benjamin Page and Felix Reichling of CBO’s Macroeconomic Analysis Division prepared the report, 

under the supervision of Wendy Edelberg and William Randolph. Mark Booth, Jeffrey Holland, and 

Christina Hawley Anthony assisted with the analysis. 

John Skeen edited the report, and Maureen Costantino prepared it for publication. This report and other 

CBO publications are available at the agency’s Web site (www.cbo.gov).

Douglas W. Elmendorf 

Director

November 2012