CBO Estimates Deficit Reduction Will Increase GDP By 0.5 To 1.4 Percent

From Congressional Budget Office, "RESPONSE TO QUESTIONS ABOUT THE EFFECTS OF GOVERNMENT SPENDING ON ECONOMIC GROWTH, AUGUST 11, 2011, Letter to the Honorable Tim Huelskamp:"

Therefore, the federal government's budgetary policies affect potential output primarily by affecting the amount of national saving and the incentives for individuals and businesses to work, save, and invest. The nation's capital stock depends both on public saving (the surpluses, if any, of state and local governments and the federal government) and on private saving (by households and businesses). A federal deficit represents a reduction in public saving and, therefore, in national saving. An overall decline in national saving reduces the capital stock owned by U.S. citizens over time through a decrease in domestic investment, an increase in net borrowing from abroad, or both.

Taking those effects into account, CBO estimated that the illustrative policy of deficit reduction described above would increase output and income in the longer run by boosting national saving and investment. At the turn of the decade, from 2019 through 2021, GNP would increase by roughly 0.5 percent to 1.4 percent, CBO estimated, again depending on the year and the assumptions used.

Read the CBO summary here.

Read the complete CBO letter here. [Weblink updated.]