A Simplified Model of How Macroeconomic Changes Affect the Federal Budget: Working Paper: 2020-01

By Nathaniel Frentz, Jaeger Nelson, Dan Ready, and John Seliski (all of CBO)

CBO's conventional analysis of changes in federal policy incorporates the behavioral responses by individuals and businesses to incentives of the policy but does not incorporate effects on the overall economy. Thus, in a conventional analysis, the potential macroeconomic effects of policy proposals exert no feedback on the federal budget. Sometimes, however, the budgetary feedback from changes in the macroeconomy may be sizable. Incorporating the budgetary feedback from the macroeconomy into an analysis is often referred to as a dynamic analysis. (CBO conducts dynamic analyses for certain reports and, to the extent practicable, uses dynamic scoring when directed.)

The budgetary feedback model (BFM) is one tool that CBO uses to estimate how changes in the macroeconomy might affect the federal budget. The BFM approximates the budgetary feedback that would be arrived at by using a wider array of CBO's budgetary models and was built to provide a unified framework to quantify changes in projected revenues and outlays relative to CBO's baseline budget projections. This paper describes how the BFM is constructed, how it is used in CBO's dynamic analyses, and the model's limitations.