Wednesday, June 9, 2010

Automatic Stabilizers' Contribution to the Federal Budget Deficit

The Congressional Budget Office estimated that automatic stabilizers added $282 billion or the equivalent of 1.9 percent of potential Gross Domestic Product to the federal deficit in 2009 and the budget deficit from automatic stabilizers is going to grow through the end of 2011.

Automatic stabilizers are automatic changes in revenues and outlays that are attributable to cyclical movements in real (inflation-adjusted) output and unemployment. So during recessions, the economy contracts and tax revenues automatically fall. At the same time, some federal spending programs, such as unemployment insurance and food stamps, automatically increase. As the economy expands, these trends reverse as tax revenues grow and automatic spending programs contract.

Given the expectations that the economy will grow well below potential, the CBO estimates that the contribution of automatic stabilizers to the budget deficit will be roughly 2.3 percent of potential GDP in 2010 and 2.5 percent of potential GDP in 2011. But beginning in 2012, automatic stabilizers as a share of potential GDP will begin to fall.

CBO estimates that reduced tax revenues will account for the bulk of the deficits arising from automatic stabilizers, which is estimated to average 1.8 percent of potential GDP over the period of 2009 thru 2012.

See the full CBO report here.

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