Order Code RL30901
CRS Report for Congress
Received through the CRS Web
Projecting the Surplus:
A Discussion of Issues
March 26, 2001
Marc Labonte
Economist
Government and Finance Division
Philip Winters
Analyst in Government Finance
Government and Finance Division
Congressional Research Service ˜ The Library of Congress

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Projecting the Surplus: A Discussion of Issues
Summary
Budget surpluses are currently projected to sum to $5.6 trillion by the
Congressional Budget Office (CBO) over the 10-year budget window. The CBO
baseline that produces these results is a budget tool; it is not meant to be a “best
guess” about future spending and taxation. It follows fairly mechanical rules about
extending existing policy into the future and generates results using assumptions about
future economic conditions and their interaction with existing policies. This report
illustrates how highly sensitive the projected surplus is to relatively minor changes in
underlying assumptions about policy or the economy.
Of the policy assumptions discussed, those concerning the rate of growth of
discretionary spending have the largest effect on the size of the surplus. Baseline rules
assume that discretionary spending grows at the rate of inflation. It has not grown
this slowly since the early 1990s. CBO estimates that if discretionary spending rose
at the rate of economic growth, outlays would rise by $906 billion more than the
baseline over the 10-year forecast, and reduce the surplus by more than that amount
due to higher interest costs.
Lower interest payments from falling debt account for about one-sixth of the on-
budget surplus. But this assumes that the entire surplus is saved. If on-budget
surpluses are not saved, higher interest payments would lower the projected surpluses
by an estimated $624 billion.
The baseline assumes that various spending and tax programs, notably tax
credits, will not be renewed when they expire. Many of these programs have been
renewed several times. OMB estimates that renewing all expiring programs would
reduce the surplus by $181 billion over the 10-year baseline.
The Alternative Minimum Tax (AMT) is not indexed for inflation, and tax credits
will not be exempt from the AMT after 2001. Under current policy, these factors will
increase the number of taxpayers paying the AMT from 1.3% in 2000 to an estimated
15.7% in 2010. Should Congress choose to counter these effects, it would lower tax
revenues by an estimated $125 billion. An additional $192 billion in revenue
reductions over 10 years would be necessary to counter the expanded coverage of the
AMT resulting from parts of the proposed $1.6 trillion tax cut.
Much of the projected surplus is generated by the economic assumptions
underlying the 10-year baseline. Changing those assumptions even slightly has a
considerable effect on tax revenues and outlays. CBO generated an “optimistic”
scenario which would nearly double the size of the on-budget surplus. Alternatively,
its “pessimistic” scenario drops the on-budget portion of the budget into deficit.
Further, if the projected unfunded liabilities of the Social Security and Medicare
programs, which occur beyond the baseline window, were accounted for, the budget
would still be in deficit. In other words, saving the entire unified budget surplus is
projected to be insufficient to meet all current policy obligations for future benefits.
This report will be updated as events warrant.

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Contents
Discretionary Spending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Interest Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Baseline Treatment of Expiring Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
The Alternative Minimum Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Unfunded Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Economic Assumptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
List of Figures
Figure 1. Historical Discretionary Spending . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Figure 2. Projected Government Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
List of Tables
Table 1. Additional Interest Payments from Using the On-Budget Surpluses for
Spending or Tax Cuts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Table 2. CBO’s Optimistic and Pessimistic Scenarios . . . . . . . . . . . . . . . . . . . . . 9
Table 3. Surpluses Under Alternate Budget Assumptions . . . . . . . . . . . . . . . . . 10

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Projecting the Surplus:
A Discussion of Issues
This year, the Congressional Budget Office (CBO) and the Office of
Management and Budget (OMB) produced 10-year budget forecasts using the
“baseline” concept. As CBO explains,
The baseline is intended to provide a neutral, nonjudgmental foundation for
assessing policy options. It is not "realistic," because tax and spending policies will
change over time. Neither is it intended to be a forecast of future budgetary
outcomes. Rather, the projections ... reflect CBO's best judgment about how the
economy and other factors will affect federal revenues and spending under existing
policies.1
Instructions for creating the baseline estimates are contained in the Budget
Enforcement Act (BEA) as amended. Budget baseline estimates and projections, like
all budget estimates, are sensitive to relatively small changes in the underlying factors.
These changes can have substantial effects on the surplus projections. Critics have
argued that several of the underlying assumptions or rules followed by CBO and
OMB in making the budget baselines are not as realistic as they could be.
Applying alternative assumptions to the baseline can significantly reduce the
projected size of the surplus, especially when combined with other policy proposals.
Policy assumptions concerning future discretionary spending, expiring tax and
spending provisions, and the Alternative Minimum Tax have reasonable alternatives.
Some alternative economic assumptions could push the on-budget surplus (that part
of the surplus excluding Social Security and the Postal Service) back into deficit. On
the other hand, making some reasonable changes in underlying economic assumptions
can produce substantially larger surpluses within the 10-year budget window,
although the long-term budgetary pressures caused by the retirement of the baby
boomers remain. The rest of the report examines the effects that some of these
changes could have on the budget outlook.
Discretionary Spending
Discretionary spending, which accounts for about one-third of total outlays,
presents a special problem to budget estimators. Since almost all discretionary
funding comes through annual appropriations, Congress has significant control over
the amounts involved. This means that there is no obvious growth rate of
1 CBO, The Budget and Economic Outlook, Jan. 2001, p. 7. All CBO estimates come from
this publication unless otherwise noted. OMB estimates come from FY2002 Economic
Outlook, Jan. 2001.

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CRS-2
discretionary spending to use in budget forecasts. In practice, however, most
discretionary spending is effectively determined by the levels approved in previous
years and the various ongoing commitments (such as contracts) that the government
is tied to through its discretionary programs. Although the Budget Enforcement Act
as amended (BEA) requires that OMB and CBO use an inflation adjustment for
projecting changes in discretionary spending into the future in their respective
baselines, such an adjustment is not necessarily the only reasonable one. For
example, using historical averages, or GDP growth rates, or inflation plus population
growth as the adjustment mechanism for discretionary spending would each produce
somewhat different budget results for total discretionary spending, total outlays, and
the surplus than the inflation-adjustment requirement. A smaller rate of increase
would slow overall outlay growth, potentially increasing the size of future surpluses.
A higher rate of increase would speed total outlay growth, potentially reducing future
surpluses.
The inflation adjustments to discretionary spending called for in the baseline
projections and in the Bush Administration budget proposals can be generated
through the normal operations of the annual appropriations process without any
substantial policy changes to discretionary programs.2 In other words, Congress and
the President could increase funding for existing discretionary programs by the
amount of inflation without a need to significantly change existing programs to
accommodate the higher level of spending.
In their budget reports this year, CBO and OMB, as required, assume that
overall discretionary spending will stay constant in real, or inflation adjusted, terms.
This has two implications. First, although discretionary spending keeps up with
inflation, there is no adjustment for expected population growth. Under the baseline,
therefore, future discretionary spending can buy the same amount of parks or roads
or military equipment or government services, but there will be fewer of them per
person. OMB estimates that adjusting discretionary spending for inflation and the rate
of population growth would increase outlays by $362 billion over the 10-year
baseline.3
Second, since the economy, as measured by gross domestic product (GDP), is
assumed to grow in real terms over the next 10 years, but real discretionary spending
is assumed to remain constant, discretionary spending would fall as a percentage of
GDP. One implication is that as society becomes wealthier, it will not want to spend
any of its additional wealth on government-provided discretionary goods and services.
Although there are undoubtedly some government-provided goods and services on
which people may not wish to spend their additional wealth, it is not obvious why this
would be true of total discretionary spending, as implied by the baseline. Over 10
years, adjusting discretionary spending for both inflation and GDP growth is estimated
2 After an increase in discretionary spending that is higher than the rate of inflation in 2002,
the Administration proposes to increase discretionary spending roughly at the rate of inflation
throughout the rest of the 10-year budget projection.
3 OMB, Op. Cit., p. 208.

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CRS-3
by CBO to increase outlays by $906 billion and by OMB by $979 billion over their
respective baseline levels.4
Figure 1. Historical Discretionary
Spending
Source: CBO, Budget and Economic Outlook, January 2001.
Does recent history suggest what growth rate is most accurate for discretionary
spending? As seen in Figure 1, total discretionary spending has, in fact, fallen slowly
as a percentage of GDP for decades. Much of the recent decline came from a decline
in military spending. This is often called the “peace dividend” resulting from the end
of the Cold War; given its source, the decline in defense spending seems unlikely to
continue. Non-defense discretionary spending rose slightly as a percentage of GDP
in the 1970s before falling slowly in the 1980s and 1990s.5
While discretionary spending grew more slowly than GDP, it grew more quickly
than the rate of inflation in all but one year between FY1975 and FY1989. In the
1990s, it fell in real terms from FY1990-1995, but then grew in real terms from
FY1996-2000. In 2000, real discretionary spending grew at the rate of economic
growth. Removing the effect of the fall in defense spending, non-defense
discretionary spending increased, with a dip in FY1996, throughout the 1990s. The
baseline assumption that discretionary spending will grow at the rate of inflation
through FY2011 – while maintaining absolute discretionary spending in real terms –
would drop total discretionary spending to its lowest share of GDP since the early
1950s.
4 OMB, Op. Cit., p. 208; CBO, Op. Cit., p. 77.
5 This could be interpreted as evidence that, overall, people do desire less non-defense
discretionary spending as their income rises.

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CRS-4
Interest Payments
Any policy change that either increases spending or lowers revenues from the
baseline automatically reduces the surplus. Smaller surpluses slow the shrinkage in
publicly held federal debt which, in turn, increases the government’s interest payments
from the levels in the baseline projections. This increase in interest payments is part
of the “cost” of policy changes or adjustments to baseline assumptions that reduce
surpluses. (Alternatively, changes that increase the surplus would reduce interest
costs from the baseline levels.)
If the on-budget surplus were fully used for tax cuts or spending increases,
federal debt would be larger in each year by the size of the baseline on-budget surplus
for that year. This larger amount of debt would generate additional interest payments
for the government. Table 1 presents estimates of the higher interest payments over
the next 10 years from not saving the on-budget surplus. About one-sixth of the
baseline surplus comes from the interest payment savings resulting from using the on-
budget surplus for debt retirement.
Table 1. Additional Interest Payments from Using the On-Budget
Surpluses for Spending or Tax Cuts
(Billions of Dollars)
2002-
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2011
Extra Interest from Extra Debt 3.6
12.0 21.6 32.3 44.1 48.0 40.0 30.3 18.6
6.0 256.6
Forgone Interest Income from
1.0
12.0 38.0 68.0 104.0 144.0 367.0
Uncommitted Funds
Total Extra Interest
3.6
12.0 21.6 32.3 45.1 60.0 78.0 98.3 122.6 150.0 623.6
Source: CRS calculation using assumptions from CBO, Budget and Economic Outlook, January
2001.
Note: These calculations somewhat underestimate the size of the interest payments because they use
interest rates based on an assumption that the surpluses will be saved. If they are not saved,
economic theory suggests that interest rates will be slightly higher.
Baseline Treatment of Expiring Programs
Some government spending and tax programs, especially tax credits, have
expiration dates. Both CBO and OMB are required to assume in their baseline
estimates that these programs will expire as scheduled, since that represents current
policy. The baseline reflects this assumption by increasing revenues by the size of the
expired credit or reducing spending by the size of the expired program. But most of
these expiring programs, especially the tax credits, have proven very durable and are
routinely extended. Some examples of expiring programs include deductions for
clean-fuel vehicles, qualified zone academy bonds, welfare-to-work credits, medical
savings accounts, the credit for research and development, and empowerment zone
credits. In its January 2001 report, OMB estimated that if all expiring provisions were
renewed, the 10-year surplus would be reduced by a total of $181 billion from 2002-

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CRS-5
2011, split between $63 billion for higher outlays and $118 billion for reduced tax
revenues.6 CBO estimated the total from renewing tax provisions to be $112 billion.
The Alternative Minimum Tax
The original purpose of the alternative minimum tax (AMT) was to assure that
high-income taxpayers are not able to largely avoid paying taxes by using credits,
exclusions, and deductions for which they are eligible.7 Pressure to alter the current
AMT rules, which would have an effect on expected surpluses, may well grow over
the next few years for a number of reasons.
First, the AMT is not inflation adjusted, so that as inflation raises nominal
incomes over time, more taxpayers fall under the AMT even if their inflation-adjusted
income remains constant. The Office of Tax Analysis (OTA) of the Treasury
Department estimated that under current law, the percentage of taxpayers paying the
AMT could rise from 1.3% in 2000 to 15.7% in 2010. Indexing the AMT to inflation
to prevent this from happening could reduce revenues by an estimated $83 billion (and
result in a smaller surplus) over 10 years.8
Second, personal tax credits are currently exempt from AMT calculations, but
this exemption is set to expire in 2001. CBO’s baseline estimates indicate that
extending this exemption would cost $42 billion over 10 years. If the exemption is
allowed to expire, then the adoption of any new personal tax credits, or expansion of
existing credits, might trigger the AMT for some higher income individuals. The
adoption or expansion of several credits were considered in the last Congress and in
the Administration’s FY2002 budget Blueprint.
Third, Congress appears to be interested in reducing marginal income tax rates
(the House adopted an across-the-board rate reduction on March 8, 2001; H.R. 3).
The Joint Tax Committee, when estimating the revenue impact of an income tax
proposal, does not assume that a tax cut will spur a change in the AMT. Yet it
appears that in some tax reduction proposals, such as H.R.3, many taxpayers will
immediately fall under the AMT when their marginal rates are lowered. Thus, if a
major tax reduction were to become law, it seems likely that pressure to reform the
AMT would increase. The Joint Committee on Taxation estimates that addressing
this issue in the Bush campaign proposal would reduce revenues by $192 billion from
2002-2010.
6 Emergency farm spending accounts for the bulk of the estimated additional revenues. Since
the passage of the Federal Agriculture Improvement and Reform (FAIR) Act (P.L. 104-127),
there has been emergency farm spending each year. It is unclear how large this spending will
be in the future, so OMB assumes that it will equal its average from the past three years.
7 For more information, see U.S. Library of Congress, Congressional Research Service, The
Alternative Minimum Tax for Individuals, by Gregg Esenwein, CRS report RL30149.
8 Robert Rebelein and Jerry Tempalski, Who Pays the Individual AMT?, Office of Tax
Analysis Working Paper 87, June 2000. These estimates were done under lower economic
growth rates than currently being employed by CBO and OMB. Thus, by the new growth
estimates, these figures are understated.

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CRS-6
All of these issues will likely be considered at some point by Congress and the
President. Some observers contend that a modified AMT that takes some of these
arguments into account would be a more realistic baseline assumption.
Unfunded Liabilities
Unlike corporations, the government considers only current-year liabilities in its
budget for two reasons. First, only the current budget balance, the surplus or deficit,
affects aggregate demand in the current economy. Second, unlike corporations, the
government has the power (theoretically) to alter its revenue (i.e., taxes) or spending
levels as necessary to meet almost any future funding need. Nonetheless, long-range
projections indicate that the government faces very large liabilities in its Social
Security and Medicare programs (as currently structured) beginning in the second
decade of this century. The retirement of the baby boom generation will put
enormous pressure on government finances. The benefits of these “pay as you go”
programs are funded by current workers. Over the next 30 years, the ratio of workers
per beneficiary is expected to fall from 3.4 to about 2.
In its Long Term Budget Outlook, CBO (October 2000) calculates the long-
range budget balance that includes the cost of these unfunded liabilities. While
estimating errors over a time frame that long are likely to be large, CBO estimates
that even if the total surpluses are saved, the budget contains an average annual “fiscal
gap” of 0.8% of GDP over the next 75 years. In other words, on average the budget
balance over the next 75 years is projected to be in deficit (by 0.8% of GDP), not
surplus. Most fiscal experts believe that further spending reductions or tax increases
will be required to eliminate the long term fiscal imbalance. CBO estimates that if
only off-budget surpluses are saved, the fiscal gap would increase to 2.2% of GDP
over the 75 years.
Figure 2 illustrates the explosive growth in federal debt in mid century that
would result from the long-term budget imbalance, or fiscal gap, that currently exists
in fiscal policy. The national debt is projected to be reduced quickly in the next few
years if the entire unified budget is saved. After the debt is eliminated around 2010,
the government would accumulate private assets until around 2030. But after 2030,
the rapid retirement of the baby boomers will cause large budget deficits to reappear.
These unfunded liabilities are forecast to exhaust the government’s stock of private
assets in about 20 years. After that, the unfunded liabilities would cause the federal
debt to rise to unsustainable levels above 200% of GDP in mid-century. Saving only
the off-budget surpluses produces the same result, only sooner. Since the
government’s stock of private assets would be much smaller, large budget deficits
would return around 2020, pushing the debt above 200% 20 years earlier than if the
entire unified surplus were saved.
The government has three choices for reducing the funding shortfall for these
future liabilities: 1) using the surplus to increase national saving; 2) reducing benefit
levels; or 3) increasing future taxes. The first option can be done either through the
retirement of the national debt, which frees up private saving for greater private
investment, or through some method of government investment in the private sector.
Government accumulation of private assets can occur either through funding private

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CRS-7
accounts or directly by government purchase, as was assumed in Figure 2.9 Economic
theory sees little difference in how the government uses the surplus to increase
national saving, whether it be through direct investment in the private sector or
through the funding of private accounts. While increasing the national saving rate
does not directly reduce these liabilities, it can mitigate their future burden on the
economy by spurring greater capital formation which increases the future size of the
economy.10 A larger future economy would ease the problems of paying for these
future obligations.
Figure 2. Projected Government Debt
Source: CBO, Long-Term Budget Outlook, October 2000
9 The government accumulation of private assets would become necessary if the budget
remained in surplus after the national debt was retired.
10 This is the concept behind the Social Security trust fund. Increasing the trust fund holdings
of U.S. Treasuries does not give the government any real financial assets because the
government is lending to and repaying itself. Rather, many economists believe that if the
Social Security surpluses are used to retire debt, as is currently done, the shrinking federal
debt should increase the future size of the economy through increased private investment. The
problem is that even the additional economic growth implied by the increase in national saving
spurred by an increased trust fund does not appear to be enough to fund the current level of
various program benefits (without severe economic disruption) for the large number of baby-
boom retirees that become eligible in the first three decades of this century.
Similar arguments can be made for reserving the Medicare and federal retirement trust fund
surpluses for debt retirement because these trust funds are meant to fund future liabilities.
The Medicare trust fund, combining Part A and Part B, totals $407 billion over the 10 year
forecast. The civilian and military retirement funds total $419 billion.

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CRS-8
Economic Assumptions
One of the most remarkable facts about the surplus projections is that they have
continued to grow by billions of dollars with each updated forecast over the last
several years. In recent forecasts, much of the growth has come from more optimistic
economic assumptions and their interaction with revenue estimates. Experience has
demonstrated that long-term budget and underlying economic forecasts generally are
widely off the mark.11 From 1981-1999, the average absolute value of the error in
CBO’s estimated surplus for the following budget year was 1.1% of GDP, after
adjusting for policy changes. In 2000, 1.1% of GDP equaled $109 billion. The
average error for five years in the future was 3.1% of GDP. This variation could
nearly double or eliminate the projected surplus in FY2006. For FY2006, 3.1% of
GDP would amount to $412 billion, less than $100 billion below the CBO baseline
unified surplus for that year ($505 billion) and $100 billion more than the
Administration’s projected surplus for that year, $307 billion.
Complicating the long-term projections further is the current uncertainty over
whether or not the economy is undergoing a shift towards a permanently higher rate
of productivity growth.12 Additionally, the unemployment rate has fallen below a rate
that most economists previously considered consistent with a stable inflation rate; no
one is certain how long this change will last.13 Forecasters are uncertain about how
much of the recent changes might be permanent, which makes the task of producing
the underlying economic outlook for the 10-year budget projections very difficult. Yet
these changes have a major influence on budget projections.
To illustrate the uncertainty underlying the baseline estimates, CBO created a
pessimistic and an optimistic baseline scenario in its January 2001 budget report.
Table 2, below, contains CBO’s total and on-budget surpluses from the optimistic and
pessimistic baseline scenarios. The optimistic scenario assumes that the higher rates
of economic and productivity growth are permanent. This scenario also assumes a
lower rate of increase for government health care costs than in the midrange baseline,
and assumes that much of the recent unexpected growth in tax revenues is permanent.
The pessimistic scenario assumes that there has been no permanent increase in
productivity, and that labor productivity returns to its post World War II average
annual rate-of-growth of 1.5%. It also assumes that a portion of the unexpected tax
revenue growth in the 1990s fades away over the next five years and that the costs of
11 For more information, see U.S. Library of Congress, Congressional Research Service,
Uncertainty in Budget Projections, by Philip Winters, CRS report RL30854.
12 See U.S. Library of Congress, Congressional Research Service, The New Economic
Paradigm: Is It New and Is It a Paradigm?, by Marc Labonte and Gail Makinen, CRS report
98-90E; and The U.S. Long Term Growth Rate: Has It Increased? by Craig Elwell, CRS
report RS20608.
13 See U.S. Library of Congress, Congressional Research Service, Why Has the
Unemployment Rate Fallen When Inflation Is Stable?, by Marc Labonte, CRS report
RL30738.

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CRS-9
Medicare and Medicaid grow one percentage point faster than the mid-range
baseline.14

Table 2. CBO’s Optimistic and Pessimistic Scenarios
(Billions of Dollars)
2002-
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2011
Pessimistic
Total Surplus
257
238
215
175
140
152
156
148
144
136
122 1,627
On-Budget
103
73
39
-8
-57
-56
-64
-87
-102
-120
-143
-525
Surplus/Deficit(-)
Optimistic
Total Surplus
310
386
485
583
676
797
913 1,031 1,168 1,323 1,494 8,856
On-Budget
153
212
291
373
444
543
638
733
848
981 1,129 6,193
Surplus/Deficit(-)
Source: CBO, Budget and Economic Outlook, January 2001.
Even without any policy changes, the CBO optimistic scenario would roughly
double the 10-year cumulative on-budget surplus over the baseline amount. The
pessimistic scenario, without a tax cut or other policy changes, would reduce the on-
budget surplus, pushing it into deficit in FY2004 with increasingly large on-budget
deficits for the remaining years of the 10-year period. It produces a 10-year
cumulative on-budget deficit.
Conclusion
Budget estimates and projections are highly uncertain. Most recently the
estimates have consistently underestimated the size of the surpluses; during much of
the 1980s they consistently underestimated the size of the deficit. The baseline
estimates produced by CBO and OMB, as for all such estimates, are the result of
choices about how to interpret the myriad of variables that are necessary to produce
an estimate of the federal budget. The rules that CBO and OMB must follow in
producing their estimates are in many cases determined by law (the Balanced Budget
Act of 1985 and the Congressional Budget Act of 1974) regardless of the accuracy
of the estimates these rules produce. The topics highlighted in this report are not
exhaustive; there are other factors that could be mentioned. For example, OMB
estimates that if guaranteed spending for certain transportation and conservation
programs had been included in the baseline, it would increase outlays by $31 billion
over 10 years.
Table 3 summarizes the estimated cost effects of the selected components of the
baseline over the 10 year period, FY2002 through 2011, that were discussed here.
When combined, the estimated cost of these components, plus the associated increase
in interest payments, could reduce the on-budget surplus by about one-third. The
remaining on-budget surplus would be roughly $2 trillion.
14 CBO has a separate baseline estimate that assumes the U.S. will undergo a recession similar
to 1990-1991. Interestingly, this assumption has very little effect on the size of the surpluses
over the 10-year window, although it reduces the surplus significantly in the recession year.

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Table 3. Surpluses Under Alternate Budget Assumptions
2002-
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2011
CBO Baseline
313
359
397
433
505
573
635
710
796
889 5,610
Surplus
CBO Baseline On-
142
171
196
212
267
316
359
417
484
558 3,122
Budget Surplus
All Expiring Tax
-2
-4
-5
-8
-10
-12
-14
-16
-19
-22
-112
Provisions Renewed
AMT Indexation
-1
-2
-3
-5
-7
-10
-14
-18
-24
NA
-83
Discretionary
Spending Grows
-6
-19
-35
-55
-74
-95
-118
-142
-167
-195
-906
with GDP
Additional Interest
0
0
-1
-3
-4
-6
-7
-9
-10
-11
-53
Payments
Remaining On-
133
146
151
141
172
194
206
232
264
330 1,968
Budget Surplus
Source: CBO, Budget and Economic Outlook, January 2001; OTA, Who Pays The Individual
Alternative Minimum Tax?, June 2000; CRS calculations using CBO assumptions.
Note: Expiring totals include only tax provisions, not expiring spending provisions. AMT correction
would index the taxable income amounts by the rate of inflation (renewing the tax credit provision
of AMT is included in the expiring tax provision category.) It does not consider an AMT correction
to account for changes in income tax rates. Discretionary Spending remains a constant percentage
of GDP after 2001. The estimated increase in interest payments was based on the three assumptions
made in the table.
Under the pessimistic economic assumptions, shown in Table 2, even without
any policy changes, the on-budget surplus falls into deficit in FY2004. Under
optimistic economic assumptions, the baseline would remain comfortably in surplus,
even after major policy initiatives. Under any set of reasonable assumptions,
however, the total baseline unified surplus cannot produce a sufficiently large increase
in national savings to produce a future economy big enough to meet all of the
budget’s long-term unfunded liabilities that will accrue when the baby boomers retire.

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