the congressional budget office released its annual budget and economic rp on capitol hill this afternoon. the report projects that by 2028, federal debt would equal the nation's post domestic growth product. hour.s a half >> good afternoon. welcome to the congressional

budget office. i thought before we answer questions, i would read a brief statement. we just released our annual budget economic outlook for this time for 2018 and 2028. i will start with a brief statement if that is ok. in the congressional budget's offices baseline projections, which incorporate the presumption that current laws remain unchanged, the federal deficit rose substantially over the next two years to later on, between 2023 and 2028, it stabilizes in relation to the size of the economy, but at high levels. as a result, federal debt is expected to be on a steadily rising trajectory throughout the decade. as an economist, we have to give you a picture.

there we go. 2018cted deficits over the -2027 period have increased markedly since we issued our last rejections in june of 2017 17 -- 2017. in our economic projections, which underlie our budget productions, inflation-adjusted gdp, which expands by 2.3% this 20 18nd two point 4% by -- 2018. the growth of real gdp exceeds the growth for attention gdp over the next two years.

path of gdp will occur in large part because recent legislation provides significant stimulus at a time when there is very little slack in the economy. new laws from the exert upward pressure on interest rates and prices. 2020-2026 period, those the factors along with a slower growth in federal outlays in the expiration of reductions dampenonal income taxes economic growth. after 2026, economic growth is projected to rise slightly. and 2028, real actual output and potential output are expected to expand. the forecast is the key determinant for actual gdp

through 2028 because actual output is very near its potential level now. is expected to be near its potential level by the end of the period. potential out is expected to grow more quickly than it had a ofd start -- since the start the 2007-2009 recession and output iss, potential expected to grow more slowly as it did earlier in decades. held down by slow growth of , which results partially from the untimely retirement of baby boomers. act,ffects of the 2017 tax raise real potential gdp through the 20 18-2028. 2018-2028 period.

our current economic projections differ from those we made in june of 2017 and a number of ways. the most significant is that potential and actual real gdp potential are expected to grow more quickly over the next few years. projected outlook is greater because of recent legislation. over the next decade, the unemployment rate is lower in our current projections. particular lead during the next two years, economic stimulus boost the need for labor. sure and long-term interest rates are protected to be higher on average for 2018-2023. train to the budget projections, we estimate that the 2018 billion.ill total $804 in our projections, budget

deficits continue increasing after 2018. as duffy says accumulate, debt held by the public rises from 78 percent of gdp at the end of or $29 96% of gdp trillion by 2018. that percentage will be the largest since 1946 and well more than average of the past five decades. years, revenues hovered near their 2018 level of 16.6% of gdp in our projections. they rise a steadily reaching 17.5 percent of gdp by 2025. at the end of that year, many provisions of the tax act expire. in our projections for the next

three years, they remain higher than their average of 20.3% over the last three years. after that outreach, that increase reflects significant growth in mandatory spending mainly because the aging population and health care costs and projected increase for social security and medicare among other programs. it also reflects a significant growth in interest costs which are projected to grow more quickly than any other major component of the budget, the result of rising interest rates and mounting debt and i 2020 at, that outlays for interest are expected to be roughly triple than they are this year in dollar terms. in contrast, discretionary spending is it -- projected to climb in relation to the size of the economy. for the 2018-2027. -- projectedected

revenues are lower by $1 trillion. 2017 areted since june the deficit make 2.7 chilean dollars larger than previously projected between 2018 and 2027 revisions to our ouromic projections cause -- other changes have relatively small effects in projections. an alternative scenario was analyzed in which current law was managed to maintain current policies in place. substantial tax increases and

spending cuts would not take place under current law. in that scenario, for our larger deficits, a much larger debt would result. debt held by the public would reach about 105% of gdp by the end of 2028. on amounts that has been exceeded only once in the nation's history. the pressures continuing to that rise would accelerate push debt up even more sharply in subsequent decades. such high and rising debt would have serious negative consequences for the budget in the nation. likelihood of the a potential crisis in the u.s. would increase to -- increase. i cannot answer some questions. we have some smart people who worked on the report on the side. i would like to ask john to come join me. he is ahead of our tax analysis division.

mind, would you please state your name and news organization when asking a question? they used to be sort of april of thumb that over the previous 40 years, revenue had averaged 18% spending 20%. now, over the next 10 years, you are saying it is revenue at 17% and spending at 20%, is that correct? >> that is correct. >> do you know at what point that changed? over the past 50 years, revenue 18% to 17% from average? >> of the recent dropped -- drop was with the tax act. we expected revenue projections were going to grow back to above

their 50 year average at the end of the 10 year. . -- tenured period. -- which helped bring the past average from 18% to 70%? the great recession actually over doubled the size of the debt in five quick years. me, if you reminds don't mind, let me go back to a picture. it is the business cycle aspect of this. this is the deficit. a time. were the deficit is

getting high, it is altering business cycles and the recessions are you always have this big significant increase. we are well away from the last recession, and we are starting from a very high level. anymore business cycle activity that comes up, starting from this high level, is likely to push the deficit to quite high levels than what we are forecasting right now. in case i haven't depressed you enough. your forecastbout and on the one hand, if i understand correctly, it is a little bit higher than the fed's own -- projection? why would that be?

anything that is on the horizon that would make those rises more quickly? the prospects first and so -- we have actually upped our forecast of interest rates pretty significantly since june of 2017 because we have just had a great deal of fiscal stimulus on an economy that is near slack. we expect we going to have a jump in -- job in -- gdp potential. pressure there will be on prices, on inflation and interest rates. we expect they will accelerate their in -- interest rates.

as part of what we are seeing here in the slowdown of the gdp forecast. we do see federal funds raised. we expected to go up 2.5% by the end of this year, by about 3.5% by the end of next year. we expect the fed will have to deal with these inflation pressures. interest rates are one of the more uncertain parts of our forecast. we have such a high debt level that a little bit higher interest rate and a little bit lower interest rate the what we are projecting makes a real difference in the interest costs. obviously, what we have done -- because of the legislative changes, we expect interest rates to accelerate faster than we did before and get to a same sort of relatively high level that we expected all along.

again, as you mentioned, if interest rates are higher or lower, that would make a pretty big impact on where we are with respect to debt and 10 years. things like terrorists, we have -- tariffs, we have not had a chance to look at that much. those really are not in our forecast. are things that could affect gdp growth. >> just to clarify, the likelihood of higher interest rates is way you believe in gdp will fall below potential around 2020 -- 2020 or 2021? >> that is right. >> when was the last time the economy hit that percentage? >> immediately after role.

it was a really special time. . period. timing of this is special because we are not coming off of the recession and we have very high deficit. >> there is a number in the -- that is suggests a number that is quite higher. can you displaying the discrepancy or how you arrived at that number? a few things about this, it is different from the good work we are dealing- with a different time period, we have a different economic forecast. i can tell you that the economic effects were kind of right in

the middle with other folks in terms of economic impact on things. and don't know if we are higher or lower than other folks, but the $1.9 trillion comes from $2.3 trillion in direct increase in the deficit from the legislation and an economic growth will take off about $460 billion of that deficit increase. that is how we get to where we are. >> i have heard a lot of these reports in the past. you talk about the dangers of the deficit. really send an alarm for us. worse is this, is this

fiscal picture now in terms of legislation? when you say that it increases the likelihood of a fiscal crisis, does it also increase the likelihood that a fiscal crisis would appear early? >> one of the difficulties we have is that nobody knows what is too much debt. at what will cause a fiscal crisis? it really depends upon the country, it depends upon the situation eerie the real key of course is whether people are still willing to bone the federal government money when the government continues to borrow. the one thing we can say and we do try to say is the bigger the debt, the bigger the chances of a fiscal crisis. respect to time, i think one of the most important things about the timing is when you start to fix something like this. wait, the more

measures there have to be to fix the problem. the early you start to tackle it the factorslarming will be. if you continue to ignore it, you are going to require economic policy to make some more dramatic, congress to make some more dramatic changes later on. growth is projected to be much lower than president trump as projected, could you fill me in a little bit more on the potential dynamic impact during this period when unemployment rate is already low? the tricky part for right now, in terms of economics is to have so much stimulus at a time

when there is very little slack in the economy. there is some affect from the tax bill that raises potential gdp, but when we say potential gdp we are talking about the supply side of the economy. there are some increases to the arential gdp, but there more spending limits that pushes above its potential. that is the thing that becomes tricky over the next few years, if we have gdp above potential, we have to anticipate that we are going to have to have a soft landing at some point. 1946, debt was more than 100% of gdp. by 2028, it will be approaching that.

what is the difference between what the outlook was in 1946 looking ahead? how was the debt and fiscal situation different compared to where we will be in 2028 with that on debt? >> the single most important difference is that debt will be high and rising. our forecast beyond 10 years has -- does nothing but show rising debt in the gdp ratio. we anticipate within the next decade after that, that we will break a record under current law. we are getting to really high levels and there is really no trend path under current law to fix the problem. that is the biggest down. on theou guys weigh in best policy solutions for fixing that problem? a policy about --

description that you guys would suggest over others? >> we do not go out of our way for that. there are decisions that congress has to make to fix this problem. they have some options eerie if you sort of look ahead to 10 years from now, just in that costest cost, the annual just of interest payments will exceed total nondefense discussion very spending in 10 years. you are getting at a level were just of the interest cost is getting to be a really big part of your budget. to fix it and deal with it, you have to deal with a big part of the budget to fix it. >> congress is looking at extending the individual tax cut they'reire in 2025,

talking about moving another bill this year that would make that permanent. can you give me an idea on what that would do to the deficit? >> we do have that alternative those tax cuts stay in place, the spending cap would stay in place. that is some of our current policy baseline. being we see the gdp about 106% of gdp instead of 96%. that would have a significant effect. >> that would happen immediately, not in the 10 year window? >> over the 10 year window. actually tricky about our forecast, because we are assuming current law. we have to worry about do people really believe that the tax cut,

that taxes will go back up after 2025? how many believe that they will be extended? we have to deal with expectations and it to uncertainty and our forecast. >> look at the increase in nondefense discretionary spending and 2018, the biggest part of that is disaster spending. at $102 billion, i think. for what extent does that translate into outlays, which actually increase the deficit? we assume that those outlays continue at that level. that is part of why you have the alternate the school scenario. we have taken it down to where we assume the spending is more like $11 billion a year because we think that is more realistic. that is one direction where are alternates would actually help the deficit a little bit because we don't and that $100 billion is going to continue. >> just looking at the $100

billion for 2018, do you assume the all of that budget turns into outlays and adds to the deficit? >> no. >> it would over time. >> it would over time, over the ten-year. . -- ten-year period. >> a question on the tax estimate. can you explain why it is an 11 year window for the 1.8% -- $1.8 trillion? this would be the normal part of our forecast where we take it out that far. this would be our normal budget outlook. we give you 2018 22028. there's nothing different about

that, the estimate earlier was on the old case. >> if you look at the , thenational divisions journal said that you guys a founder of the international provisions would encourage companies to locate assets overseas. can you talk a little bit about that how you you came to that decision? there are provisions that have attempted to try to shift what has been a problem over the year of firms locating certain assets overseas. there are particular provisions to in tandem there intention to try to discourage those locations. we try to identify items

overseas that have a very high returns. one way to work around our role is to put things that have a low return. that is a way to try to soften how much this any abuse rule stuff. veryly, it is a complicated set of decisions that national companies are confronting as they deal with the new tax law. this is one of some observers have found that it may not be working as intended. we're still waiting for guidance on the revenue service to actually outline how these rules will be applied. basis that is looking at is this activity that a u.s. firm has overseas earning a high return? a rule,is what triggers one way to reduce that is to put something below with the high and that gives you something that looks like a typical rate of return. that is a perverse incentive, but it is a potential risk as

firms try to confront their new law. >> there is a box in their which -- isimated that the law there a way to translate that to revenue? >> not directly. i think the observation that we are trying to make is to recognize the fact that these decisions about where to locate certain activities have the ability to actually distort economic specifics. inhink the discussion there pointing out the fact that you -- whetherese flows recall fully educated, under the new law going forward,

the activities of foreign multinational will not necessarily be subject to tax them as it is caught up by these hybrid turn assets types of rules. it is very hard to translate that to a dollar for dollar bottom line impact on revenues. >> when you made out the clock beat $1.5icit to thelion, is that include tax impact on interest rates? this try to put that all in the same box? >> part of the feedback estimate is these types of interest rates and the change in path of interest rates.

think the earlier score of the tax cut was 1.1 chilean dollars -- $1.1 trillion. is this higher estimate of how much increased deficit over 10 years? >> it is a bit of a different estimate. i don't want to play up comparisons to the early estimate because so much has changed. we have a different economic forecasts. we have a different baseline. .e have some new information we have a summer withholding tables that the treasury put out that help inform things this week which were not available earlier. we have taken on more information. there are a number of reasons for why the numbers look a little bit different than they did before. >> i believe that number also does not include the full cost of the debt nervous and how the interest rate affects the debt

service. >> did the effect of federal -- a conventional scorer dynamic score typically would not incorporate affects on debt service from changes to federal darling. -- borrowing. dynamic score typically include in -- changes in interest rates are dashed rates. -- interest rates. >> the answer -- did i answer

all questions? you know where we are if you have additional questions. thank you all for coming.

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