Fiscal Policy Considerations for the Next Recession (CRS Report for Congress)
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| Release Date |
June 20, 2019 |
| Report Number |
R45780 |
| Report Type |
Report |
| Authors |
Mark P. Keightley |
| Source Agency |
Congressional Research Service |
Summary:
Although the United States is currently experiencing its longest economic expansion, history has shown that economic expansions inevitably give way to economic slowdowns. If the next slowdown is significant, the economy could enter a recession, which is typically characterized by falling output and rising unemployment. Short-term forecasts are predicting continued economic expansion, but predicting when the economy may transition from expansion to recession is notoriously difficult, as the ebb and flow of the economy is determined by many different factors, including a number that lie outside the country's borders.
This report identifies and summarizes options Congress may consider in response to a possible recession. Recognizing that the economy has the potential to return to full employment without intervention, one policy option is simply to allow the economy to correct on its own with the support of certain "automatic stabilizers" already in place. Automatic stabilizers work without congressional action to lower taxes and increase spending as the economy weakens. Examples include the progressive structure of the income tax system and Unemployment Compensation (UC) benefits, among others. Congress also has a range of other options it could consider when designing a stimulus package should a recession occur and automatic stabilizers are not sufficient to counteract it.
The options presented in this report are drawn from the Congressional Budget Office (CBO) and Moody's Analytics, both of which estimated the impact of specific policies or approaches in response to the Great Recession. While a general approach to stimulating a weakened economy with reduced taxes and increased spending is often advocated, specific policies have different impacts on the economy and differing administrative complexities. CBO's and Moody's estimates provide insight into which specific policy options may be most worthwhile to implement during the next downturn. The policy options presentedâor variations of themâare ones commonly considered when designing a fiscal stimulus package and are not unique to either CBO or Moody's.
The United States' recent budget deficits and the country's long-run budget outlook could influence the size of any stimulus package. Large and persistent budget deficits can hamper economic growth by lowering the rate of capital formation via reduced national saving, and can potentially offset short-term economic stimulus. At the same time, high levels of debt relative to gross domestic product can constrain a country's borrowing capacity. There are no signs that federal borrowing capacity will be exhausted in the short term. However, the consequences of exhausted fiscal space may be worth considering in designing the next stimulus package since it would increase both deficits and the debt.
