The fiscal year 2016 budget resolution passed by Congress in May requires the Congressional Budget Office and the Joint Committee on Taxation to include the macroeconomic feedback effects of changes in policy on the budget when evaluating major legislation (CBO and JCT are the official number crunchers of Congress).
Specifically, Section 3112 of the resolution requires CBO and JCT to “incorporate the budgetary effects of changes in economic output, employment, capital stock, and other macroeconomic variables resulting from such major legislation.”
Put another way, when Congress considers a bill that cuts taxes or removes work disincentives, CBO and JCT are now required to estimate the budgetary effects of those policies resulting from changes in the economy or employment.
This new requirement is a fundamental transformation from traditional “static” scorekeeping which assumes that macroeconomic factors, such as the level of employment or economic growth, are unchanged by policy.
These new “dynamic” estimates aren’t perfect by any means. However, they will provide policymakers with a better assessment for how legislation will actually affect the federal fisc.
Repealing Obamacare would increase the gross domestic product by 0.7 percent—equivalent to an additional $1,400 in the pocket of each household per year.
The new dynamic scoring rule was recently tested in response to a request from Senate Budget Committee Chairman Mike Enzi, R-Wyo., to estimate how the repeal of the Affordable Care Act, or Obamacare, would affect the deficit and the economy.
For the first time, the CBO and JCT found that repealing Obamacare would increase the gross domestic product by 0.7 percent and that effect alone would reduce projected deficits by $216 billion over the 2016 to 2025 period.
This may sound trivial, but a 0.7 percent increase in GDP is equivalent to an additional $1,400 in the pocket of each household per year. CBO also found that repealing Obamacare would increase capital stocks and the number of people working over the next 10 years.
CBO and JCT also found that that repealing Obamacare would reduce the deficit over the next five years but would then steadily increase the unified budget deficits. However, that assumes Congress will allow both the 40 percent excise tax on high cost health care plans and an automatic reduction in Obamacare subsidies to kick in by 2018, both which seem increasingly unlikely to actually happen.
It also assumes that $802 billion in Medicare cuts will also be realized even though the program’s chief actuary has warned that should these take place many seniors will lose access to providers or their current coverage through the popular Medicare Advantage.
There are also several concerns with the presentation of the analysis that are critical to understanding the effects of Obamacare repeal. For instance, the estimated changes on direct spending and revenues including the macroeconomic feedback do not include a breakout of on-budget and off-budget effects. However, it’s important to have these pieces so that budgeteers have a clear idea about how much money is being borrowed from Social Security to fund the Obamacare coverage expansion.
Those concerns aside, the provision of this dynamic analysis is a significant step forward for those interested in a more honest discussion of how legislation affects the federal budget.