Order Code IB10102
Issue Brief for Congress
Received through the CRS Web
The Budget for Fiscal Year 2003
Updated June 24, 2002
Philip D. Winters
Government and Finance Division
Congressional Research Service ˜ The Library of Congress

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CONTENTS
SUMMARY
MOST RECENT DEVELOPMENTS
BACKGROUND AND ANALYSIS
Budget Totals
Budget Proposals and Estimates
Uncertainty in Budget Projections
Budget Action
Outlays
Receipts
Surpluses Or Deficits
The Budget and the Economy
LEGISLATION
CONGRESSIONAL HEARINGS, REPORTS, AND DOCUMENTS
FOR ADDITIONAL READING
CRS Products

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The Budget for Fiscal Year 2002
SUMMARY
The President released his budget pro-
$6 billion for FY2003, assuming no policy
posals for fiscal year (FY) 2003 on February
changes. The CBO estimates of the Adminis-
4, 2002, shortly after the release of the Con-
tration’s proposals produce a deficit of $121
gressional Budget Office’s (CBO) annual
billion for the year.
budget report (January 31, 2002). The base-
line estimates for FY2003 in these reports
A part of the Administration’s proposal,
show a small surplus ($41 billion) from the
the economic stimulus, was superseded by
Administration and a small deficit ($14 bil-
legislation adopted by Congress on March 7,
lion) from CBO. The President’s proposals
2002 (The Job Creation and Worker Assis-
result in an $80 billion deficit.
tance Act of 2002; P.L. 107-147), that would
increase the deficit (or reduce the surplus) by
If deficits materialize in both FY2002 or
$43 billion in FY2003.
FY2003, they would be the first since
FY1997. The weak economy, the govern-
The House Budget Committee (HBC)
ment’s budgetary response to the terrorist
adopted its version of the budget resolution
attacks of last fall, the tax cut (P.L. 107-16,
for FY2003 on March 13, 2003. The House
the Economic Growth and Tax Relief Recon-
passed the resolution on March 20. The
ciliation Act of 2001) adopted in June 2001,
resolution would result in a projected deficit
and changes in the technical components of
of $46 billion for the year. Like the Presi-
budget models reduced or eliminated the
dent’s budget, much of the focus is on waging
surpluses that were expected for this year in
the war on terrorism and on homeland de-
last year’s budget documents.
fense. The resolution provides room for $28
billion in tax cuts over 5 years and assumes
The President’s budget proposed tax cuts
that any change in the sunset dates under the
and spending increases to stimulate the econ-
June 2001 tax cut would be paid for.
omy, rapid increases in defense and homeland
security spending, and a selection of other
The Senate Budget Committee reported
spending increases and decreases in discre-
its version of the FY2003 budget resolution
tionary spending. The stimulus proposal
(S.Con.Res. 100) on March 22. Its provisions
would cost the government $77 billion in
for defense and homeland security are similar
higher spending or reduced revenue in
to (but not the same as) those in the House
FY2003. The proposed increases for defense
resolution and the President’s budget. The
and homeland security would increase spend-
Senate has yet to consider the Senate Budget
ing by $31 billion. All the other Administra-
Committee’s resolution.
tion proposals combined total another $23
billion in spending increases or tax cuts.
The differences between the congres-
sional proposals plus the close partisan split
In early March 2002, CBO released
within the House and Senate has led to specu-
updated baselines and estimates of the Presi-
lation that a budget agreement may be very
dent’s budget using CBO’s economic and
difficult to reach this year. The disagreements
technical estimating assumptions. Somewhat
have delayed consideration of FY2003 appro-
better than expected economic conditions and
priations.
small technical changes result in a surplus of
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MOST RECENT DEVELOPMENTS
The House passed its version of the concurrent resolution (H.Con.Res. 353; H.Rept.
107-376) on the budget for fiscal year (FY) 2003 on March 20, 2002. The Senate Budget
Committee reported its version of the FY2003 budget resolution (S.Con.Res. 100; S.Rept.
107-141) on March 22. Since then, disagreements over the level of discretionary spending,
additional tax cuts, and other policy disputes have bogged down the adoption of the budget
resolution and, therefore, consideration of appropriations and other legislation for FY2003.
Earlier, the President had presented his FY2003 budget on February 4, 2002 (prepared
by the Office of Management and Budget – OMB). It proposed a deficit of $80 billion,
$2,128 billion in outlays, and $2,048 billion in receipts.
The recession, the government’s response to the terrorist attacks in the fall of 2001, and
the tax cut adopted in June 2001, all contributed to the substantial deterioration in the short-
and long-term budget outlook since the budget reports from CBO and OMB in August 2001.
BACKGROUND AND ANALYSIS
Presidents generally submit their budget proposals for the upcoming fiscal year early
in each calendar year. The Bush Administration presented its FY2003 budget documents on
February 4, 2002. The budget documents contained extensive and detailed budget related
information, including estimates of the budget without the proposed policy changes (current
service baseline estimates), historical budget data, detailed outlay and receipt data, selected
analysis of specific budget related topics, and the Administration’s economic forecast. These
detailed budget documents are an annual basic reference source for federal budget
information in addition to their use as a transmitter of the Administration’s policy proposals.
The Administration’s annual budget submission is followed by congressional action on
the budget. This usually includes the annual budget resolution, appropriations, and, possibly,
a reconciliation bill or bills. During the months of deliberation on budget related legislation,
the Administration often modifies its proposals, not only because of interactions with
Congress, but because of changing circumstances in the economy and the world.
Budget Totals
The annual budget cycle provides the President and Congress with the opportunity to
set policy for the upcoming fiscal year and to partially determine policy in subsequent years.
The decisions made for this year can and often do have repercussions for years into the
future. Last year’s tax cut (the Economic Growth and Tax Relief Reconciliation Act of 2001
– EGTRRA; P.L. 107-16; June 7, 2001) will change federal revenues in each year through
2010, when most of its provisions are scheduled to sunset. Although they are provided each
year in appropriations bills, changes in the level of discretionary spending this year can
influence future levels of discretionary spending.
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Table 1 contains budget estimates and proposals for FY2002 and FY2003 from the
CBO, the Administration (OMB), and, as they become available, budget proposals and
estimates from Congress. Differences in totals occur because of differing underlying
economic, technical, and budget-estimating assumptions and techniques as well as
differences in policy proposals. Most policy differences between the Administration and
various congressional proposals for the upcoming fiscal year are often relatively small in
dollars compared to the budget as a whole. These often small changes, reflecting differing
policy choices, may have large implications for the shape and content of the budget over
extended time periods. As the budget works its way through Congress, budget totals may
be expected to change from the amounts originally proposed.
Table 1. Budget Proposals and Estimates for FY2003 (and FY2002)
(in billions of dollars)
Deficit(-)/
Receipts
Outlays
Surplus
Actual for FY2001
1,991
1,864
127
CBO Budget Outlook for FY2002 1/31/02
1,983
2,003
-21
President’s Budget for FY2002 2/4/02
1,946
2,052
-106
President’s Budget for FY2002 baseline 2/4/02
2,011
2,020
-9
CBO revised baseline for FY2002 3/6/02
2,006
2,001
5
CBO estimate of President’s Budget for FY2002 3/6/02
1,942
2,033
-90
House budget resolution for FY2002 313/02
1,968
2,033
-66
CBO Budget Outlook for FY2003 1/31/02
2,070
2,085
-14
President’s Budget for FY2003 2/4/02
2,048
2,128
-80
President’s Budget for FY2003 baseline 2/4/02
2,121
2,070
51
CBO revised baseline for FY2003a 3/6/02
2,086
2,080
6
CBO estimate of President’s Budget for FY2003 3/6/02
2,013
2,134
-121
House budget resolution for FY2003 3/20/02
2,077
2,122
-46
Senate Budget Committee for FY2003 3/22/02
2,046
2,139
-92
a These numbers exclude the effects of the economic stimulus law (P.L. 107-147) enacted on March 9, 2001
Budget Proposals and Estimates
Budget proposals and estimates depend on underlying assumptions about the economy,
technical components and relationships within the budget estimating models, and
assumptions about current and future policies used in the budget proposals and baseline
estimates. This year, possibly more so than in other recent years, both the expected
underlying economic conditions and the policy choices under consideration appear less
settled among the OMB, CBO, and congressional proposals and estimates than usual.
CBO’s initial budget report for FY2003, the Budget and Economic Outlook: Fiscal
Years 2003-2012 (January 2002), contained baseline estimates and projections for FY2002
through FY2012.1 CBO estimated that without any changes from current policy, the FY2003
1 Baseline estimates provide a foundation from which to measure proposed policy changes. They
extrapolate current policies into the future based on expectations of the future economy and other
(continued...)
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budget would have $2,070 billion in revenues, $2,085 billion in outlays, with a (rounded)
deficit of $14 billion. Over the 10-year forecast period (FY2003 - FY2012) CBO’s
projections produce a cumulative surplus of $2,263 billion. Of that amount, $1,078 billion
is generated in the last two years of the projection period when the 2001 tax cuts fully sunset
as required by current law.2 The 5-year (FY2003 - FY2007) cumulative surplus, reflecting
the deficits and relatively small surpluses expected over this period, is $437 billion.
President Bush’s FY2003 budget proposes, including policy changes, receipts of $2,048
billion, outlays of $2,128 billion, with a resulting deficit of $80 billion. The
Administration’s proposals produce a 10-year total cumulative surplus of $1.0 trillion. Its
5-year cumulative surplus is $157 billion. (The President’s budget provided most data for
the 5-year period, FY2003 through FY2007; the budget provided very little data for either
the individual years beyond FY2007 or cumulatively for the 10-year period, FY2003 through
FY2012.)
The Administration’s current services baseline estimates (the Administration’s estimate
of what the budget numbers would be without policy changes) show receipts of $2,121
billion, outlays of $2,080 billion, with a resulting surplus of $41 billion.3 The differences
between these baseline numbers and the proposed amounts measure the cost, in FY2003, of
the Administration’s proposals. The proposals increase outlays by $58 billion, reduce
receipts by $73 billion, and move the current services baseline from a $41 billion surplus to
an $80 billion deficit. Over the FY2003 through FY2007 period, the time period covered by
the Administration’s baseline estimates, the baseline estimates show a cumulative surplus
of $668 billion, meaning that the Administration’s proposals reduce the cumulative baseline
surplus by $511 billion over the 5 years.
CBO’s estimate of the Administration’s proposals (An Analysis of the President’s
Budgetary Proposals for Fiscal Year 2003, March 2002), using CBO’s economic and
technical assumptions, raises the estimated deficit for FY2003 (from the Administration’s
proposed $80 billion) to $121 billion. CBO’s reestimates reduce revenues by $35 billion and
increase outlays by $6 billion from the Administration’s numbers, producing the $41 billion
difference in the deficit estimate.
The report also included updated CBO baseline estimates that made relatively small
changes in the estimates for FY2003. The updated numbers show a surplus of $6 billion for
1 (...continued)
factors that affect the budget formulated under fairly explicit rules. They are not meant to predict
future budget outcomes.
2 CBO estimated that extending the expiring provisions immediately would reduce cumulative
revenues over the 10year period by $735 billion. The implication is that the cumulative surplus over
the 10-years would be reduced by at least as much and probably by more if higher interest costs are
included.
3 The Administration also produced a variant of the standard baseline. The alternative assumed that
the increased (mostly) emergency spending in FY2002 flowing from the September 11, 2001
terrorist attacks was a one-time event and would not be repeated. Making this assumption increases
the baseline surplus to $51 billion in FY2003. The Administration measured its policy against this
altered baseline. This report uses the standard baseline.
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FY2003, instead of the $14 billion deficit estimated in January. Most of the change occurred
because of higher expected revenues ($15 billion) and slightly smaller expected outlays ($5
billion).4 Expectations of improved economic conditions produced most of the improvement
in the budget outlook.5 Over the 10-year CBO forecast period, the changes increased the
cumulative surplus from $2,263 billion to $2,380 billion, a 5% increase over the January
cumulative surplus estimate. The updated baseline estimates increased the cumulative 5-year
(FY2003-FY2007) surplus from $437 billion to $489 billion, a 12% increase. (Unofficial
early summer 2002 estimates, based on budget data for FY2002, indicate a further
deterioration in the budget outlook, implying larger than previously expected deficits for the
year.)
The House passed budget resolution (H.Con.Res. 353; March 20, 2002) followed, in
general, the policy lead of the President’s budget. Using the same underlying budget
assumptions as the Administration, the resolution has revenues of $2,077 billion, outlays of
$2,123 billion, with a deficit of $46 billion. The resolution, like the President’s budget,
contained estimates and projections for 5 years, through FY2007. The resolution expects the
government to return to a small surplus in FY2004. Over the 5-year period, the resolution
produces a cumulative surplus of $231 billion.
The Senate Budget Committee reported its version of the FY2003 budget resolution
(S.Con.Res. 100; S.Rept. 107-141) on March 22. Using CBO’s underlying assumptions, the
Senate Budget Committee resolution provides similar amounts of funding in FY2003 for
defense and homeland security as the House passed resolution. Many other areas of the
Senate Budget Committee proposal differed from those in the House resolution and what the
President requested. These differences grow over the 10 years covered in the Committee's
resolution.
The Administration, the House, and the Senate Budget Committee all agree on the
general amounts that they want to spend on defense and homeland security and on most of
the federal mandatory programs in FY2003. They disagree by varying degrees on most other
policy issues, including how much to spend on defense and homeland security in future years
and whether to make last year’s tax cut permanent (most of the changes revert to previous
law before or by the end of calendar year 2010). These policy disagreements, which can lead
to substantial differences in the shape of federal programs over time, may make an overall
budget agreement, represented in Congress by the annual congressional budget resolution,
difficult to accomplish.
Part of the annual budget debate’s intensity results from the awareness that the decisions
made for this year affect, in some cases substantially, the funding levels or policy choices
available in future years.
4 CBO estimates that incorporating the effects of the economic stimulus package signed into law
(P.L.107-147) on March 9, 2002, (and not included in CBO’s revised baseline) produces a $40
billion deficit in FY2003.
5 The $20 billion improvement in the budget balance represents only 1% of total receipts or outlays
for the year. Relatively small changes in the underlying factors supporting the budget estimates can
easily change receipts or outlays by larger amounts than this without any change in policy.
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Uncertainty in Budget Projections
All budget estimates and projections are inherently uncertain. Their dependence on
assumptions that are themselves subject to substantial uncertainty and variation makes
budget estimates and projections susceptible to fairly rapid and dramatic changes.
Nonetheless, budget estimates can help differentiate alternative budget proposals and the
effects and approximate magnitudes of various policy proposals even if the estimates
eventually do not match the actual outcomes.
The uncertainty of budget estimates was visibly apparent during the last year. The
baseline estimates for the current fiscal year, 2002, that were produced early in 2001
projected surpluses of between $283 billion (OMB) and $313 billion (CBO). The
Administration’s 2001 proposals for FY2002, a combination of tax cuts and spending
increases, would have reduced the surplus to an estimated $231 billion. Current baseline
estimates (February and March 2002) for FY2002 show either a surplus of $5 billion (CBO)
or a deficit of $9 billion (OMB). The large baseline surpluses expected early last year
evaporated in a weak economy, the June 2001 tax cut, the spending increases in response to
the terrorist attacks of September 2001, and changes in the technical components and
relationships underlying the budget estimates.
The unavoidable inaccuracy of budget projections is also obvious over longer periods
of time. As CBO stated in its January 2002 budget report,
Uncertainty compounds as the projection horizon lengthens. Even small annual
differences in the many key factors that influence the budget projections – factors
such as inflation, increases in productivity, economic growth, the distribution of
income, and growth rates from Medicare and Medicaid spending – can add to
substantial differences in the budget outcome 10 years from now.6
One can obtain a sense of longer-range uncertainty by comparing projections for
FY2001 made in 1996 with the actual amounts for FY2001. The President’s budget for
FY1997 (March 1996) included projections through FY2002. CBO’s Economic and Budget
Outlook: Fiscal Years 1997-2006 (May 1996) contained 10-year projections. The
Administration projected a current services baseline deficit of $131 billion. The President’s
budget proposed eliminating the expected deficit and producing a FY2001 surplus of $8
billion through proposed policy changes. CBO projected a baseline deficit of $259 billion
for FY2001.7 The actual result for FY2001 was a surplus of $127 billion. The large
turnaround in the budget balance in 5 years as well as the change in budget estimates that
occurred over the last year should serve as a caution when considering long-term policy
changes.
Budget projections are dependent on underlying assumptions about the direction of the
economy, future government policy, and technical assumptions of the budget models, and
how these interact. Any deviation from expected underlying assumptions, such as faster or
6 CBO, The Budget and Economic Outlook: Fiscal Years 2003-2012, Jan. 2002, pp. 5-6.
7 The CBO deficit estimate assumed that discretionary spending would grow at the rate of inflation,
as then estimated, after FY1998.
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slower economic growth, higher or lower inflation, or changes in assumed spending and tax
policy can have substantial effects on the budget projections.
Budget Action
Congress considered and passed an economic stimulus bill in early March 2002. The
legislation, the Job Creation and Worker Assistance Act of 2002 (P.L. 107-147; March 9,
2002) will increase FY2003’s expected deficit or reduce the surplus by an estimated $43
billion (plus another $3 billion in higher interest costs). The legislation, passed as an
economic stimulus package, extends unemployment benefits, reduces selected business
taxes, extends selected expiring tax provisions, and makes miscellaneous technical
corrections to the tax code.
The HBC approved its version of the concurrent resolution (H.Con.Res. 353) on the
budget for FY2003 on March 13, 2001. The resolution uses a modified version of OMB’s
economic and technical assumptions rather than CBO’s. Like the President’s budget this
year, the resolution extended its projections 5 years into the future rather than the 10 years
that had been used over the last several years.
The resolution includes a $45 billion deficit for FY2003 that closely matches the
estimated cost of the economic stimulus bill adopted days earlier. It includes almost $28
billion in unspecified tax cuts over 5 years (with upper limits for the size of the cuts for each
year), a $46 billion year-over-year increase in budget authority for defense, close to a
doubling of funding for homeland security between FY2002 and FY2003, and very small
increases (overall) for remaining discretionary spending. The resolution was adopted in
committee on a party-line vote. The House adopted the resolution on March 20.
The Senate Budget Committee adopted its version of the budget resolution (S.Con.Res.
100) on March 22. The Committee’s resolution differed substantially in policy choices, in
areas other than defense and homeland security, from the one adopted by the House.
Although many of the differences are relatively small in FY2003, they become more
significant over the years covered by the two resolutions. The Senate Budget Committee’s
resolution extends through FY2012. The Senate, as of June 24, 2002, has not considered the
Committee’s resolution.
The delay in adopting a budget resolution for the year has delayed consideration of the
appropriations bills and other budget resolution for the new fiscal year.
Outlays
The President’s budget proposed total outlays of $2.138 trillion for FY2003, $76 billion
over the Administration’s proposed FY2002 level.8 The year-to-year change is composed
8 The Administration proposed a $32 billion increase in FY2002 outlays above baseline levels, most
of which was for its proposed “bipartisan economic security plan.” The FY2002 estimate also did
(continued...)
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of proposed policy changes, approximately $26 billion in the President’s proposal, and
relatively automatic growth in outlays in mandatory programs resulting from inflation
adjustments and demand growth. CBO’s estimates of the President’s budget puts the year-to-
year increase in outlays at $101 billion. Of that amount, CBO estimates that $22 billion
results from proposed policy changes with the rest coming from inflation adjustment and
demand growth. Outlays in the Administration’s baseline estimates (excluding the effects
of policy change) increase by $50 billion from FY2002 to FY2003.
The Administration’s proposals would raise FY2003 outlays by $58 billion over the
same year’s baseline estimate, measuring the effect of its policy proposals on outlays for the
year. The proposals include an increase in defense spending of $21 billion, proposed farm
support legislation would increase outlays by another $7 billion, and the proposed “bipartisan
economic security plan” would add $8 billion to the overall increase. The remaining
proposed policy increases were scattered throughout other categories of spending.
Over the 5 years covered in detail in the President’s budget (FY2003-FY2007), total
outlays would rise from $2,052 billion in FY2002 to $2,128 billion in FY2003 to $2,468
billion in FY2007. The average annual rate of growth over the FY2003 through FY2007
period is 3.8% a year, almost the exact rate as the previous 5-year period (FY1997-FY2002).
Over the 5 years, the Administration proposes cumulative outlays of $11,431 billion. (Over
10 years, FY2003-FY2012, shown in a few tables, the Administration proposes cumulative
outlays of $25,478 billion.)
Table 2. Outlays for FY2001-2007
(in billions of dollars)
FY2001 FY2002 FY2003 FY2004 FY2005 FY2006 FY2007
CBO Outlook 1/31/02
$1,864 a
$2,003
$2,085
$2,152
$2,238
$2,319
$2,402
President’s Budget 2/4/02
2,052
2,128
2,189
2,277
2,369
2,468
OMB Baseline 2/4/02
2,020
2,080
2,142
2,218
2,289
2,366
CBO Revised Baselineb 3/6/02
2,001
2,080
2,148
2,231
2,312
2,394
CBO Estimate of Pres.’s Budget 3/6/02
2,033
2,134
2,201
2,291
2,394
2,493
House Budget Resolution 3/13/02
2,033
2,123
2,192
2,289
2,383
2,479
SBC Budget Resolution 3/22/02
—
2,139
2,207
2,313
2,403
2,496
SBC = Senate Budget Committee
a. Actual outlays for FY2001.
b. These numbers exclude the effects of the economic stimulus law (P.L. 107-147) enacted on March 9, 2001
CBO’s estimates of the Administration’s proposals increase FY2003 total outlays by
$6 billion. CBO’s 5-year cumulative estimate of the President’s policy proposals differs by
only $81 billion, of which $44 billion results from higher net interest payments.9 Over the
8 (...continued)
not include any outlays that might flow from the adoption of the Administration’s $27 billion (in
budget authority) supplemental spending request sent to Congress on March 21, 2002.
9 CBO’s larger deficits and smaller surpluses in its estimates of the President’s budget policies slow
the reduction in federal debt held by the public compared to the level in the Administration’s budget.
(continued...)
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longer 10-year period, CBO’s estimates increase cumulative outlays above the President’s
budget by $296 billion, slightly over a 1% increase. Most of the annual differences between
the OMB and CBO estimates of the President’s outlay proposals are also relatively small
compared to total outlays in those years.
The outlays proposed in the House passed budget resolution (H.Con.Res. 353) are
similar to the ones contained in the President’s budget. The House Budget Committee, in
producing the resolution, used the Administration’s underlying assumptions and followed
many of the policy proposals, ensuring a close similarity between the two proposals. The
HBC report (H.Rept. 107-376) compares the budget resolution to the President’s proposals
(see pages 74-75 in the report). Total outlays in the budget resolution are $5 billion smaller
than the President’s proposed total outlays for FY2003, but larger in each subsequent year.
Over the 5 years covered by the two proposals, cumulative outlays in the House budget
resolution are $35 billion larger than the President’s proposed cumulative outlays, with both
increases and decreases to components of the budget – compared to the President’s proposals
– scattered throughout the budget.
The Senate Budget Committee’s budget resolution proposal used CBO’s underlying
assumptions, in contrast to the House’s use of OMB assumptions. This difference by itself
would assure somewhat different numbers in the two budget resolutions even if they
contained the same policy assumptions (which they do not). The Senate Budget Committee’s
budget resolution follows the policies of the House and Administration outlay levels for
defense and homeland security in FY2003 and FY2004, and in general the spending levels
for mandatory programs, although the proposed policies for mandatory programs differ.
Spending for non-defense, non-homeland security discretionary spending in the Senate
Budget Committee budget resolution differs from the allocations found in the House passed
budget resolution and the amounts contained in the President’s budget. Many of these
differences are relatively small in FY2003 but grow over time.
The House passed and the Senate Budget Committee reported budget resolutions, as
well as the President’s budget, would all provide a large boost in defense outlays from
FY2002 to FY2003 of approximately 9%, using each proposal’s own numbers. Between
FY2003 and FY2007 (the last year shown in the House and presidential budget proposals)
the President’s budget and the House budget resolution show defense outlays growing by
almost 4% annually. The Senate Budget Committee passed budget resolution has defense
outlays growing annually by 2% during these years.
Non-defense discretionary spending also gets a larger boost between FY2002 and
FY2003 than in subsequent years in the three proposals. The President’s budget shows these
outlays growing by 4.5%, the House budget resolution by 5.0%, and the Senate Budget
Committee budget resolution by 8.2% between FY2002 and FY2003. The average rate of
growth for non-defense discretionary spending in subsequent years in all three proposals is
less than 2%, a rate that will not maintain spending for these programs against inflation or
population growth. (By comparison, the CBO March baseline estimates of non-defense
9 (...continued)
The larger debt held by the public in the CBO estimate raises the amount of net interest that the
government must pay.
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discretionary spending shows them growing by 2.7% annually in subsequent years, a rate
designed to adjust spending for inflation.)
Receipts
The President’s budget shows that receipts will increase by $102 billion from FY2002
to FY2003, reflecting the Administration’s proposed tax reductions in both FY2002 and
FY2003. Without the Administration’s proposed tax reduction of $65 billion in FY2002 and
$73 billion in FY2003, receipts would increase by $110 billion between the two years (see
Table 3). CBO’s estimates of the President’s proposals put the year-to-year increase at $71
billion.
The President’s budget also proposes making much of the tax cut adopted last year, the
EGTRRA, permanent, along with extending a number of tax provisions scheduled to expire
during the next 10 years. Under current law, most provisions of last year’s tax cut would
expire at the end of calendar year 2010, although some expire sooner. Making the tax cuts
permanent would have little effect in FY2003. The Administration estimates that its
EGTRRA proposals would reduce revenues by $7 billion between FY2003 and FY2007 and
by $343 billion between FY2003 and FY2012. CBO and the Joint Committee on Taxation
(JCT) estimate that extending the provisions expiring in 2010 would reduce revenue by $9
billion between FY2003 and FY2007 and by $374 billion between FY2003 and FY2012
(most of the revenue reduction, $356 billion, occurs in the last two years).10 The
Administration also proposed extending the research and experimentation (R&E) tax credit,
which would reduce revenues by an estimated $14 billion to $15 billion over the FY2003 to
FY2007 period and by $51 billion to $54 billion over the FY2003 to FY2012 period. CBO
and the JCT estimate that extending all the other expiring tax provisions expiring through
FY2012 (including the R&E tax credit) would reduce revenues by an estimated $78 billion
between FY2003 and FY2007 and by $205 billion between FY2003 and FY2012.11
Table 3. Receipts for FY2001-2007
(in billions of dollars)
FY2001
FY2002
FY2003
FY2004
FY2005
FY2006
FY2007
CBO Outlook 1/31/02
$1,991 a
$1,983
$2,070
$2,206
$2,342
$2,447
$2,568
President’s Budget for FY2003 2/4/02
1,946
2,048
2,175
2,338
2,455
2,571
OMB Baseline 2/4/02
2,011
2,121
2,234
2,366
2,461
2,581
CBO Revised Baseline b 3/6/02
2,006
2,086
2,209
2,342
2,448
2,569
CBO Estimate of Pres.’s Budget 3/6/02
1,942
2,013
2,150
2,314
2,442
2,560
House Budget Resolution 3/13/02
1,968
2,077
2,200
2,356
2,472
2,593
SBC Budget Resolution 3/22/02
—
2,046
2,180
2,338
2,464
2,586
10 Making permanent the provisions of the 2001 tax cut expiring before 2010 produce estimated
revenue reductions of $36 billion between FY2002 and FY2007 and $194 billion between FY2003
and FY2012.
11 The reduced revenues in thee various estimates increase deficits or reduce surpluses raising the
federal debt above the level under current law. This increases the government’s net interest
payments over the period.
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SBC = Senate Budget Committee.
a. Actual receipts for FY2001.
b. These numbers exclude the effects of the economic stimulus law (P.L. 107-147) enacted on March 9, 2001
The House passed budget resolution would increase receipts by $110 billion between
the two years, with both FY2002 and FY2003 showing higher revenues than the President’s
budget. The House resolution reflected the revenue effects of the adoption of the Job
Creation and Worker Assistance Act of 2002 (JCWAA), which reduces receipts by, as
estimated by Joint Committee on Taxation, $43 billion in FY2002 and $39 billion in
FY2003. The resolution accommodates $28 billion in unspecified tax reductions through
FY2007. It also accepts, although with relatively little effect because of the assumed offsets
in the years covered by the resolution, the Administration’s proposals to remove EGTRRA’s
sunset provisions.
The Senate Budget Committee’s reported budget resolution shows receipts increasing
by $83 billion between FY2002 to FY2003. Like the House resolution, the Senate Budget
Committee resolution reflects the revenue effects of the adoption of the JCWAA. The
Senate Budget Committee resolution assumes no changes to the existing sunset provisions
of EGTRRA. The resolution assumes that any proposed revenue reductions be offset to
avoid a net reduction in receipts.
Surpluses Or Deficits
Surpluses or deficits are the residuals left after Congress and the President determine
the general level of spending and receipts. Reducing the deficit and eventually reaching a
balanced budget or generating and keeping a surplus (the government had its first surplus
in 30 years in FY1998) has been a major focus of the budget debate for over a decade. The
original baseline projections from both OMB and CBO (in early 2002 for FY2003) showed
modest deficits in the early years and modest, but growing, surpluses in the years through
FY2007 or FY2012, depending on the forecast.
In general, when the government has surpluses, policies can be changed to use them to
cut taxes or to raise spending. If policies are not changed, the surpluses will be used to
reduce federal debt held by the public. The President’s proposals and the House passed
budget resolution for FY2003 would use the projected baseline surpluses to increase
spending, cut taxes, and use the forecast small remaining surpluses in future years to reduce
the debt held by the public. None of the proposals would be able to reserve Social Security’s
reported surplus for debt reduction, a goal striven for in the budget proposals last year, in any
years covered by the proposals.
The events of 2001, reflected in revised budget estimates in early 2002 for FY2003,
ended the expectations of large and growing surpluses between FY2002 and FY2012. The
reappearance of deficits means that federal debt held by the public will increase, at least for
several years, rather than decrease.
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Table 4. Deficits(-)/Surpluses for FY2001-FY2007
(in billions of dollars)
FY2001 FY2002 FY2003 FY2004 FY2005 FY2006 FY2007
CBO Outlook 1/31/02
$127 a
-$21
-$14
$54
$103
$128
$166
President’s Budget for FY2003 2/4/02
-106
-80
-14
61
86
104
OMB Baseline 2/4/02
-9
41
92
148
172
215
CBO Revised Baseline b 3/6/02
5
6
61
111
135
175
CBO Estimate of Pres.’s Budget 3/6/02
-90
-121
-51
24
48
68
House Budget Resolution 3/13/02
-66
-46
8
67
89
113
SBC Budget Resolution 3/22/02
—
-92
-27
26
60
90
SBC = Senate Budget Committee.
a. Actual surplus for FY2001.
b. These numbers exclude the effects of the economic stimulus law (P.L. 107-147) enacted on March 9, 2001
Surpluses in future years not used for increased spending or tax cuts and that do not
disappear because of adverse external events (such as slower than expected economic
growth) would be used by the Treasury, essentially automatically, to reduce federal debt held
by the public. The Treasury can, and has over the last several years, taken a more active role
in retiring debt held by the public by purchasing securities on the market and retiring some
callable federal bonds. The Treasury also could retain the surplus cash generated by a
surplus and build up government cash balances, but this would make little sense for the
government or the economy and seems unlikely.
At the beginning of 2001, the prospect of very large on-budget (non-Social Security,
non-USPS) surpluses continuing indefinitely, produced a general agreement among budget
participants to reserve for debt reduction at least that portion of the total surplus attributed
to the Social Security accounts.12 Some suggestions were made at the time to expand the
reserved amount to include Medicare’s surplus. The revised budget outlooks released by
OMB and CBO in August 2001 ended the effort to expand the reserved amount and made
more difficult the effort to reserve the Social Security surplus exclusively for debt reduction.
The early recognition of the economic slowdown and the budgetary responses to the terrorist
attacks of September 2001 ended any remaining efforts to retain the reported Social Security
surplus (or even any surplus) for reductions in the debt held by the public. The budget
reports for FY2003 in early 2002 revealed the change and the much less favorable budget
balance expected through FY2012.
The Budget and the Economy
The budget and the economy affect each other. The relationship is an unequal one, with
the economy influencing the budget with every economic twinge while even substantial
budgetary changes in policy may disappear in the overall economy with little notice or
consequence.
12 The off-budget accounts include the Social Security and Postal Service Accounts. The surpluses
or deficits of the Postal Service accounts are very small.
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Until the release of the revised budget estimates in August 2001, the positive budget
outlook in 2001 had been buoyed by the favorable economic conditions expected during the
next several years. This would have continued the overall improvement in the budget
situation since the early 1990s. Much of the budget improvement had come from strong and
sustained economic growth. If those favorable economic conditions falter (as happened), so
would an underpinning of the good budget fortunes of the previous few years. What good
economic conditions give, bad economic conditions can take away. The unexpectedly
lengthy economic sluggishness in 2000, the start of a recession in March 2001, (along with
the budgetary responses to the September 2001 terrorist attacks and the June 2001 tax cut),
have raised outlays, reduced receipts, and substantially changed the budget balance
expectations and magnitude from what was forecast just a year ago.
CBO’s budget report, The Budget and Economic Outlook: Fiscal Years 2003-2012
(January 2002) in its chapter on The Uncertainties of Budget Projections, indicated how
significantly the budget can be altered by changes in economic conditions. The chapter
contains optimistic and pessimistic alternative scenarios, along with its baseline projection
(see Table 5). The optimistic scenario assumes that the relatively good underlying economic
and other factors of the last few years would continue indefinitely. The pessimistic scenario
assumes that the favorable conditions of the last few years have been an aberration and that
the economy and other underlying factors revert to the conditions that prevailed previously.
The result of CBO’s exercise is a wide range of possible budget outcomes. Under the
optimistic scenario, the surpluses accumulate over the 10-year period (FY2003-2012) to
almost $6 trillion. Under the pessimistic scenario, a string of deficits appear, accumulating
to almost $2 trillion over the same 10 years. The two scenarios’ budget balances diverge
over the 10 years by $8 trillion. Even in the upcoming fiscal year, the differences between
the two scenarios is relatively wide, ranging from a surplus of $61 billion in the optimistic
scenario to a deficit of $101 billion in the pessimistic scenario.13

Table 5. CBO’s Alternative Scenarios,
Cumulative Surpluses/Deficits(-); FY2003-2007 and FY2003-2012
(in billions of dollars)
FY2003-FY2007
FY2003-FY2012
CBO Optimistic Scenario Total Surplus 1/31/02
$1,448
$5,926
CBO Baseline 1/31/02
416
2,243
CBO Pessimistic Scenario Total Surplus 1/31/02
-732
-1,979
In addition to the alternative scenarios, CBO provides estimates of the effects on the
budget of changes in selected economic assumptions underlying the budget estimates and
projections (see appendix A in the Budget and Economic Outlook: Fiscal Years 2003-2012,
January 2002). OMB provides similar measures in the President’s budget (see chapter 1 in
the Analytical Perspectives volume of the Budget of the United States Government for
13 The $160 billion range in FY2003 approximates 8% of receipts or outlays in that year. Between
January 2001 and January 2002, CBO’s baseline estimate of receipts for FY2003 fell by 11.7% and
its estimate of outlays rose by 5.1%. Between August 2001 and January 2002, CBO’s estimate of
receipts for FY2003 fell by 5.7% and outlays rose by 3.0%.
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FY2003). Both CBO and OMB estimate that a sustained reduction of 1% in the real rate of
GDP growth beginning in early 2002, would reduce the surplus by approximately $30 billion
in FY2003 and by larger amounts in subsequent years. Estimates are provided in both
reports for the effects on the budget of selected economic variables – real economic growth,
inflation, unemployment, and interest rates. Larger changes in the underlying economic
variables would produce larger changes in the budget numbers.
LEGISLATION
H.Con.Res. 353
The Concurrent Resolution on the Budget for Fiscal Year 2003. Adopted by the House
Budget Committee (H.Rept. 107-376) on March 15, 2001, on a party line vote after rejecting
numerous amendments. It follows most of the proposals of the Administration. It was
adopted by the House on March 20.
S.Con.Res. 100
The Concurrent Resolution on the Budget for Fiscal Year 2003. Adopted by the Senate
Budget Committee (H.Rept. 107-141) on March 22, 2001, on a party line vote. Its proposals
for defense and homeland security were similar to those of the Administration, but differed
in many other areas of the budget.
CONGRESSIONAL HEARINGS, REPORTS, AND DOCUMENTS
U.S. Congress. House. Committee on the Budget. Concurrent Resolution on the Budget –
FY2003; Report to Accompany H.Con.Res. 353. March 15, 2002 Washington, U.S.
G.P.O., 2002. (107th Congress, 2nd session. H.Rept. 107-376).
— Senate. Committee on the Budget. Concurrent Resolution on the Budget – FY2003;
Report to Accompany S.Con.Res.100. April 11, 2002 Washington, U.S. G.P.O.., 2002.
(107th Congress, 2nd session. S.Rept. 107-141).
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FOR ADDITIONAL READING
Also see the CRS Electronic Briefing Book on Taxation at:
[http://www.congress.gov/brbk/html/ebtxr1.shtml]
U.S. Congressional Budget Office. An Analysis of the President’s Budgetary Proposals for
FY2003. Washington, March, 2002.
——The Budget and Economic Outlook: Fiscal Years 2003-2012. Washington, U.S. Govt.
Print. Off., January 31, 2001.
U.S. Office of Management and Budget. The Budget of the United States Government for
Fiscal Year 2002. Washington, U.S. Govt. Print. Off., February 4, 2002.
U.S. Council of Economic Advisors. Economic Report of the President. Washington, U.S.
Govt. Print. Off., February 2002.
CRS Products
CRS Report 95-543. The Financial Outlook for Social Security and Medicare, by David
Koitz and Geoffrey Kollmann.
CRS Report RL30839. Income Tax Cuts, the Business Cycle, and Economic Growth: A
Macroeconomic Analysis, by Marc Labonte and Gail Makinen.
CRS Report 98-720. Manual on the Federal Budget Process, by Robert Keith and Allen
Schick.
CRS Report RL30854. Uncertainty in Budget Projections, by Philip Winters.
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