Automatic stabilizers are the components of federal revenues and outlays that automatically increase or decrease with cyclical changes in the economy to help strengthen a weakening economy or cool an overheating one. Examples of automatic stabilizers at work are when, during a downturn, income tax receipts decline as incomes fall, and unemployment insurance spending increases as more people claim unemployment benefits—or when tax receipts increase and unemployment insurance spending falls during an expansion. Those changes, which occur without any legislated changes in tax or spending policies, help stabilize the economy by boosting or restraining private spending.
Estimating the effects of automatic stabilizers on the federal budget sheds light on how much of the projected changes in budget deficits occurs automatically in response to economic fluctuations and how much is driven by other factors. Those other factors include scheduled changes in policy—such as executive actions and changes in legislation—and demographic trends.
In this report, the Congressional Budget Office provides estimates of the budgetary effects of automatic stabilizers—as well as the size of federal budget deficits without them—back to 1974 and forward to 2034. Effects are measured in dollars and in relation to CBO’s estimate of potential gross domestic product (GDP), which is the economic output that can be produced if labor and capital are employed at their maximum sustainable rates. Key takeaways include the following:
- In CBO’s projections, automatic stabilizers decrease federal deficits by an average of 0.3 percent of potential GDP from 2024 to 2027 and increase federal deficits by an average of 0.1 percent of potential GDP from 2028 to 2034.
- Averaged over the 2024–2034 period, automatic stabilizers neither increase nor decrease federal deficits, in CBO’s projections. From 1974 to 2023, automatic stabilizers increased federal deficits by an estimated average of 0.4 percent of potential GDP per year.
- In CBO’s projections, deficits with the effects of automatic stabilizers removed (that is, deficits without the automatic effects of cyclical changes in the economy) average 6.3 percent of potential GDP over the next decade, about the same percentage of potential GDP for total deficits and nearly double the 50-year average of 3.2 percent for those cyclically adjusted deficits.
Those and other estimates in this report are based on historical data and projections released in June as part of CBO’s latest report on what the federal budget and the economy would look like in the current year and over the next 10 years if laws governing taxes and spending generally remained unchanged. Like that June report, this report reflects economic developments and information through May 2, 2024, and the assumption that legislation enacted through May 12, 2024, would generally remain unchanged. Unlike the June report, this report estimates deficits as a percentage of potential GDP. Originally published at https://www.cbo.gov/publication/60662
