The Timing of Policy Changes

The size of the policy changes needed to achieve a particular goal for federal debt would depend, in part, on how quickly that goal was expected to be reached. Regardless of the chosen goal for federal debt, lawmakers would face trade-offs in deciding how quickly to implement policies designed to stabilize or reduce debt as a percentage of GDP.

CBO estimated the extent to which the size of policy adjustments would change if deficit reduction was delayed until 2030 or 2035. (The agency did not make any assumptions about the specific policy changes that might be used to reduce the deficit.) If lawmakers sought to reduce debt as a share of GDP to 79 percent in 2050 and if the necessary policy changes did not take effect until 2030, the annual reduction in the primary deficit would need to amount to 4.4 percent of GDP rather than the 3.6 percent that would accomplish the same goal if the changes were made starting in 2025 (see Figure 5^[10]). If lawmakers chose to wait another five years to implement the policies (having them take effect in 2035), even larger changes would be necessary; in that case, the required annual reduction in the primary deficit would amount to 5.9 percent of GDP.

Effects on the Economy. Over the first few years following their adoption, such policy changes would dampen overall demand for goods and services, thus decreasing output and employment below amounts projected under current law. (CBO did not analyze short-term economic outcomes under those scenarios.) That dampening effect would be temporary, however. Lower deficits and debt would eventually reduce prices and interest rates, which would increase the resources available for private investment, household consumption, and net exports.

If policymakers decided to reduce the deficit sooner rather than later, the benefits would include a smaller accumulated debt, smaller policy changes required to achieve long-term outcomes, and less uncertainty about the expected changes.