Budgetary Implications of Economic Scenarios with Higher and Lower Interest Rates

ABSTRACT:This paper illustrates how the Congressional Budget Office's (CBO's) July 2021 baseline budget projections would have differed if the agency had used two alternative economic scenarios. The high-sixth scenario is based on the average values of projections for several variables—including inflation and the growth of gross domestic product after removing the effects of inflation (real GDP)—from the six Blue Chip forecasters (about one-sixth of the total) with the highest average interest rate projections. The low-sixth scenario is based on the average values of projections for the same variables from the six Blue Chip forecasters with the lowest average interest rate projections. Using its simplified model of how macroeconomic changes would affect the federal budget, the CBO found that projected deficits would be $2.1 trillion larger from 2022 to 2031 under the high-sixth scenario (totaling $13.8 trillion) than under the low-sixth scenario ($11.7 trillion). Despite a greater amount of debt in dollar terms under the high-sixth scenario, federal debt held by the public as a percentage of GDP would total about 101 percent at the end of 2031 under both scenarios.