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The Fiscal Effects of Faster Growth
The Budgetary Impact of The Path to Prosperity Under Alternative Growth Scenarios
March 22, 2012
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KEY POINTS:
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Experts point to tax reform as an essential remedy for the short-term economic malaise as well as a steady foundation for longer-term growth and prosperity.
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A better-designed tax system, by incentivizing economic growth, could raise output.
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The rate of economic growth is one of the most important factors affecting the federal budget – and The Path
to Prosperity contains a number of policy changes, such as fundamental tax reform and structural Medicare reforms, with the potential to significantly change the economy’s growth path.
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Assuming higher growth within a realistic range, the budget could achieve balance in the mid-to-early 2020s, with the upper-bound growth assumption producing budget balance within the ten-year budget window – much sooner than CBO’s estimated balance date of 2039.
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The Path to Prosperity budget resolution, which passed yesterday out of the House Budget Committee, relies upon Congressional Budget Office (CBO) scoring conventions, which essentially assume that the policies in the budget have no impact on the size of the overall economy (i.e., GDP remains fixed relative to the base case). A cautious, conservative approach to scoring is common and appropriate when legislating, but it is also common and appropriate to take a separate look what the impact on the economy of certain policies might be and how pro-growth policies might affect the federal budget. The following analysis makes the case that the policies advanced in The Path to Prosperity budget resolution could result in faster economic growth and better fiscal outcomes than a static score might suggest.
View full report here.
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