Order Code RL31784
Report for Congress
Received through the CRS Web
The Budget for Fiscal Year 2004
March 14, 2003
Philip D. Winters
Analyst in Government Finance
Government and Finance Division
Congressional Research Service ˜ The Library of Congress

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The Budget for Fiscal Year 2004
Summary
The President’s fiscal year (FY) 2004 budget includes a deficit of $307 billion
(an estimated 2.7% of gross domestic product – GDP). Under the President’s
proposals and estimates, the deficit shrinks through FY2008 – the last year of the
Administration’s estimates – when it will reach $190 billion (1.4% of GDP). The
proposals call for speeding up and making permanent many of the tax cuts enacted
over the last two years, along with tax changes for economic stimulus, tax incentives,
and expiring tax provisions. The tax proposals would reduce taxes an estimated $493
billion between FY2004 and FY2008 and by $1,461 billion between FY2004 and
FY2013. The President would increase spending in some areas (health) and reduce
it in others (natural resources and environment). Overall, the proposals reduce
outlays – when measured against the baseline estimates – by $40 billion in FY2004
and by $529 billion over the five years. Even with these changes from baseline
levels, both total receipts and total outlays would be larger in FY2004 than they are
estimated to be in FY2003, and larger in FY2008 than in FY2004.
The Congressional Budget Office (CBO) released the first of its annual budget
reports in late January. The baseline estimates from CBO run through FY2013.
CBO’s baseline estimates are similar in construction to those produced by the Office
of Management and Budget (OMB) for the President. CBO’s January baseline has
a $145 billion deficit in FY2004 (down from $199 billion in FY2003), that becomes
a small surplus of $65 billion in FY2008. Because the CBO baseline estimates are
constrained by current policy, they incorporate the scheduled expiration of the 2001
tax cuts at the end of calendar year 2010. This produces a rapid increase in receipts
between FY2011 and FY2013, producing substantial surpluses in these years. Under
CBO baseline estimates – which CBO points out contain policy assumptions may not
hold – the surplus would reach $508 billion in FY2013.
In early March, CBO released its interim report analyzing the President’s
policies. The report also included an update to CBO’s January baseline that pushed
the deficit for FY2004 to $200 billion from $145 billion. The revisions move the
return to a surplus from FY2007 to FY2008 and reduce the cumulative FY2004-
FY2013 surplus from $1,336 billion (January) to $891 billion (March). CBO’s
estimates of the President’s budget, a recasting of the policies using CBO
assumptions and budget estimating methods, raise the expected deficit for FY2004
to $338 billion from the OMB estimated $307 billion.
Both the House and Senate Budget Committees cleared their respective budget
resolutions for FY2004 on March 13. The House Budget Committee's resolution
includes instructions for tax reductions effectively implementing the President’s
economic growth revenue proposals and imposing, with few exceptions, an across
the board 1% reduction in entitlement spending. The Senate Budget Committee’s
resolution incorporates the President’s economic growth revenue proposals, but does
not require mandatory spending reductions. Both provide room for a prescription
drug benefit by different means. They also establish reserve funds for a variety of
purposes. This report will be updated as events warrant.

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Contents
Background and Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Budget Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Budget Proposals and Estimates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Uncertainty in Budget Projections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Budget Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Outlays . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Receipts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Surpluses And Deficits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
The Budget and the Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
For Additional Reading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
CRS Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
List of Tables
Table 1. Budget Estimates for FY2003 and FY2004 . . . . . . . . . . . . . . . . . . . . . . . 2
Table 2. CBO’s Alternative Scenarios, Cumulative Surpluses/Deficits(-);
FY2004-2008 and FY2004-2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Table 3. Outlays for FY2003-2008 and FY2013 . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Table 4. Receipts for FY2002-2008 and FY2013 . . . . . . . . . . . . . . . . . . . . . . . . . 8
Table 5. Surpluses/Deficits(-) for FY2004-FY2008 and FY2013 . . . . . . . . . . . . . 9

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The Budget for Fiscal Year 2004
Background and Analysis
Presidents generally submit their budget proposals for the upcoming fiscal year
(FY) early in each calendar year. For FY2004, the Bush Administration released its
budget document (The Fiscal Year 2004 Budget of the U. S. Government) on
February 3, 2003. The multiple volumes contained general and specific descriptions
of the Administration’s policy proposals and expectations for the budget for FY2004
and for the years through FY2008 (with information on the revenue changes through
FY2013 and a section on long-term fiscal issues facing the government). The full set
of budget documents (Budget, Appendix, Analytical Perspectives, Historical Tables,
among several others) contain extensive and detailed budget 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. In
addition to its presentation of the Administration’s proposals, the budget documents
are an annual basic reference source for federal budget information.
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 legislation, the Administration often revises its original
proposals because of interactions with Congress and changing circumstances in the
economy and the world.
Budget Totals
Table 1 contains budget estimates and proposals for FY2003 and FY2004 from
the Congressional Budget Office (CBO), the Administration (the Office of
Management and Budget – OMB), the revisions produced by OMB and CBO
throughout the year, and, as they become available, from congressional budget
resolutions. Differences in totals occur because of differing underlying economic,
technical, and budget-estimating assumptions and techniques as well as differences
in policy assumptions. Most policy generated dollar differences between the
Administration and congressional proposals or assumptions for the upcoming fiscal
year are often relatively small compared to the budget as a whole. These small
differences may grow, sometimes substantially, producing widely divergent budget
paths over time. Budget estimates should be expected to change over time from
those originally proposed by the President or Congress.
The terrorist attacks on the United States on September 11, 2001, the 2001
recession and the continuing economic uncertainty, changes from expected or

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CRS-2
proposed policies, and changes in the technical components of the underlying budget-
economic relationships, all contributed to the large deterioration in the budget
outlook over the last two years.
Table 1. Budget Estimates for FY2003 and FY2004
(in billions of dollars)
Deficit(-)/
Receipts
Outlays
Surplus
Actual for FY2000
$2,025
$1,789
$236
Actual for FY2001
1,991
1,864
127
Actual for FY2002
1,853
2,011
-158
FY2003 Estimates in 2003
CBO B&E Outlook, 1/31/03
1,922
2,121
-199
OMB, Budget, 2/3/03
1,836
2,140
-304
OMB, Budget, Current Services, 2/3/03
1,867
2,131
-264
CBO Revised Baseline, 3/7/03
1,891
2,137
-246
CBO Estimates of the President’s Policies, 3/7/03
1,856
2,143
-287
FY2004 Estimates
CBO B&E Outlook, Baseline, 1/31/03
2,054
2,199
-145
OMB, Budget, 2/3/03
1,922
2,229
-307
OMB, Budget, Current Services, 2/3/03
2,031
2,189
-158
CBO Revised Baseline, 3/7/03
2,024
2,224
-200
CBO Estimates of the President’s Policies, 3/7/03
1,907
2,245
-338
B&E Outlook – The Budget and Economic Outlook, CBO
Budget Proposals and Estimates
CBO’s first budget report for FY2004, the Budget and Economic Outlook
(January 2003), contains baseline estimates and projections for FY2003 through
FY2013.1 CBO’s report shows the budget in deficit through FY2006, with a $145
billion deficit in FY2004 and a $16 billion deficit in FY2006. The baseline
projections show small surpluses beginning in FY2007 and growing rapidly in
FY2011 through FY2013 as revenues grow quickly with the scheduled expiration of
the 2001 tax reductions from the Economic Growth and Tax Relief Reconciliation
Act of 2001 (EGTRRA; P.L.107-16, June 2001).
President Bush’s FY2004 budget calls for additional tax cuts and both increased
and decreased spending (as measured against baseline estimates) depending on the
activity. The policy changes would increase the FY2004 deficit from OMB’s
baseline of $158 billion to $307 billion. OMB’s current service baseline estimates
move into a small ($5 billion) surplus in FY2006 while the President’s proposals
1 Baseline estimates provide a foundation from which to measure proposed policy changes.
They extrapolate current policies into the future based on expectations of future economic
conditions, other factors that affect the budget, and rules set by Congress that CBO must
follow in creating baseline estimates. They are not meant to predict future budget outcomes.

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produce a deficit of $201 billion in that year and would keep the budget in deficit at
least through FY2008, the last year of the Administration’s estimates.2
Excluded from the Administration’s budget are any estimates for the cost of a
possible military conflict with Iraq. Nor did it indicate the cost of the likely increases
to homeland security and defense spending.
The Administration argues that the tax cuts are needed to boost the lagging
economy and that the acceleration of economic growth resulting from the tax cuts
will lead to the recovery of much of the lost revenue over future years. The
President’s Council of Economic Advisors, in its annual report stated,
Although the economy grows in response to tax reductions (because of higher
consumption in the short run and improved incentives in the long run), it is
unlikely to grow so much that lost tax revenue is completely recovered by the
higher level of economic activity.3
Both OMB’s and CBO’s FY2004 budget documents were produced prior to the
completion of final work on the FY2003 appropriations. This forced both agencies
to estimate spending levels that Congress would approve and the President agree to
for FY2003, leaving the FY2003 to FY2004 spending comparisons less reliable than
usual.
CBO’s early March interim report, An Analysis of the President’s Budgetary
Proposals for Fiscal Year 2004 revised the CBO baseline and estimated the
Administration’s FY2004 budget proposal using CBO’s assumptions and budget
estimating techniques. CBO increased its baseline deficits by $47 billion in FY2003
and by $55 billion in FY2004. CBO attributed $22 billion of the $55 billion increase
in the deficit in FY2004 to legislative changes since January (almost all from the
Consolidated Appropriations Resolution, 2003 (CAR2003; P.L.108-7) adopted in late
February, with the remaining $33 billion attributed to technical changes. Over the
10-year period covered by CBO, it states in the report that,
For the 2004-2013 period, CBO has reduced its projection of the cumulative
surplus by $446 billion [– dropping it from $1,336 billion to $891 billion –],
nearly three-quarters of which derives from enactment of the omnibus
appropriation act in February.4
The deterioration in the budget outlook since the January estimates also delayed, by
one year, the date when CBO’s estimated baseline deficit would move into surplus,
from FY2007 to FY2008.
2 Long-run projections of budget policy existing in FY2003 that are found in the budget (p.
41) indicate that, without substantial policy changes, the budget remains in deficit through
much of this century.
3 Council of Economic Advisers, Economic Report of the President. Feb. 2003. pp. 57-58
4 Congressional Budget Office, An Analysis of the President’s Budgetary Proposals for
FY2004, March 2003, p. 3.

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CBO’s estimates of the President’s policies are similar to the President’s budget,
with little cumulative difference in the amounts generated. CBO estimated a
cumulative deficit of $1.2 trillion under the President’s policies while the
Administration estimated $1.1 trillion.5 When CBO’s estimates of the
Administration’s policies are compared to the (revised) CBO baseline, the
President’s policies would increase deficits or eliminate surpluses in the 10-year
period covered. CBO estimates that about two-thirds of the increase in the deficits
in its estimates of the President’s proposal, excluding higher net interest, results from
reduced revenues (including the effect of the tax cuts in the President’s budget).
The House and Senate Budget Committees both cleared (on party-line votes) 10-
year budget resolutions on March 13, 2003. Both resolutions follow the lead of the
Administration, although each achieve the goals by different means. The resolutions
must be approved by each Chamber and the differences (if they remain) worked out
in a conference committee.
Uncertainty in Budget Projections
All budget estimates and projections are inherently uncertain. Their dependence
on assumptions that are themselves subject to substantial variation over relatively
short time periods makes budget estimates and projections susceptible to fairly rapid
and dramatic changes. The last couple of years have demonstrated this volatility.
The original proposals and estimates for FY2002, made in early 2001, changed
drastically over the 20 to 21 months of congressional and presidential action on the
budget. (The budget estimates for five to 10 years in the future that are included in
the OMB and CBO budget documents are subject to even greater variability.) The
early 2001 estimates for FY2002 estimated a surplus of $231 billion to $313 billion.
The year ended (September 30, 2002) with a deficit of $158 billion. The September
2001 terrorist attacks on the United States, the legislation adopted in response, the
bursting of the stock market bubble, the weak economy, and a shift in critical
underlying budget relationships, all contributed to a large change in the year’s budget
outcome from the originally proposed or estimated amounts.
Information in chapter 5 (The Uncertainties of Budget Projections) of CBO’s
budget report, The Budget and Economic Outlook: Fiscal Years 2004-2013 (January
2003), indicates how significantly the budget outcome can be altered by changes in
economic and related technical factors that underpin the budget estimates. The
chapter contains optimistic and pessimistic alternative scenarios for its baseline
projection (meaning no changes from current policies). The optimistic scenario
assumes that the favorable economic and budget conditions of the late 1990s and
2000 recur. The pessimistic scenario assumes that the economy and the budget
revert to the unfavorable conditions that prevailed in the 1970s and most of the
1980s.
The numbers in Table 2 are calculated from data in the January 2003 CBO
budget report. The results reflect the wide range of possible budget outcomes. The
5 Ibid., p. 1.

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spread results from varying reasonable assumptions about future economic conditions
and technical components that underlie the budget estimates.
The President’s budget includes, in the section, “Charting a Course for the
Federal Budget,” the statement that “... five-year projections are fraught with
uncertainty. The ... error in projecting the surplus or deficit since 1982 ... has been
a $90 billion average absolute forecasting error for the first year alone. A 90-percent
confidence range for 2008 would stretch all the way from a $281 billion surplus to
a $661 billion deficit, a range of nearly $1 trillion.”6 The broadness expands as one
moves further into the future.
Table 2. CBO’s Alternative Scenarios,
Cumulative Surpluses/Deficits(-); FY2004-2008 and FY2004-2013
(in billions of dollars; January 31, 2003)
FY2004-FY2008 FY2004-FY2013
CBO Optimistic Scenario Cumulative Surplus
$566
$4,490
CBO Baseline 1/31/03
-143
1,336
CBO Pessimistic Scenario Cumulative Defiicit
-855
-1,856
Source: CBO, The Budget and Economic Outlook: Fiscal Years 2004-2013, Jan. 2003, p.106;
CRS calculations.
Budget projections are very dependent on the underlying assumptions about the
direction of the economy and future government policy and how these interact. Any
deviation from the underlying assumptions used in the budget estimates, such as
faster or slower economic growth, higher or lower inflation, differences from the
existing or proposed spending and tax policies, or changes in the technical
components of the budget models can, and usually do, have substantial effects on
moving the budget outcomes away from the earlier budget estimates and projections.
Budget Action
CBO and the Administration released their first budget reports for the next fiscal
year, FY2004, in late January and early February 2003. CBO’s report provides
baseline estimates for fiscal years 2003 through 2013. OMB’s documents provide
estimates for FY2004 through FY2008 with a few instances of estimates of
cumulative amounts for fiscal years 2004 through FY2013 (these are limited to
revenues and provide almost no data for the individual fiscal years 2009 through
2013).
The Joint Committee on Taxation (JCT) put out its estimates of the President’s
revenue provisions on March 4, 2003, followed on March 7 by CBO’s interim report,
An Analysis of the President’s Budgetary Proposals for FY2004, which used the JCT
estimates in its analysis.
6 Office of Management and Budget. Budget of the U.S. Government for FY2004, Feb. 3,
2003, p. 28.

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The House and Senate Budget Committees adopted their own, differing,
versions of the FY2004 budget resolution on March 13. The House and Senate are
expected to begin considering the resolutions the week of March 17, 2003.
Outlays
The Administration’s FY2004 budget proposes $2,229 billion in outlays for
FY2004, rising to $2,711 billion in FY2008, the last year forecast in the President’s
budget. The current services baseline in the President’s budget (estimates of what
future outlays would be if policies remained unchanged over the forecast period)
shows outlays of $2,189 billion in FY2004 growing to $2,541 billion in FY2008.
The CBO baseline (created in a manner similar to that of the Administration’s
current services baseline estimates, but with differences in a number of underlying
assumptions) has FY2004 outlays of $2,298 billion, FY2008 outlays of $2,583
billion, and, because CBO’s estimates extend through FY2013, FY2013 outlays of
$3,167 billion. The outlay numbers from the Administration’s FY2004 Budget and
CBO’s Budget and Economic Outlook are shown in Table 3.
The revisions in CBO’s March report raised FY2004 outlays by $25 billion, to
$2,224 billion (mostly because of the adoption of the Consolidated Appropriations
Resolution, 2003 (P.L. 108-7) in February. Every year’s outlays are larger in the
March baseline than in the February baseline.
Table 3. Outlays for FY2003-2008 and FY2013
(in billions of dollars)
FY2002 FY2003 FY2004 FY2005 FY2006 FY2007 FY2008 FY2013
CBO Adjusted Baseline, 1/31/03 $2,011 a
$2,121
$2,199
$2,298
$2,3878 $2,4795 $2,583 $3,167
President’s F04 Budget, 2/3/03
2,140
2,229
2,343
2,464
2,576
2,711
—
President’s FY04 Current Services, 2/3/03
2,131
2,189
2,276
2,348
2,440
2,541
—
CBO Revised Baseline, 3/7/03
2,137
2,224
2,328
2,417
2,513
2,621
3,215
CBO Est. of the President’s Policies,3/7/03
2,143
2,245
2,370
2,491
2,606
2,739
3,452
a. Actual outlays for FY2002.
The Administration’s proposals raise outlays $89 billion above the
Administration’s proposed FY2003 level and $40 billion above its FY2004 current
services baseline outlay estimate. The dollar difference between the current services
baseline outlay estimate for FY2004 and the outlay amount in the President’s
FY2004 proposal provides the cost of the Administration’s proposed policy changes
in FY2004. The change from FY2003 to FY2004 (the $89 billion increase) combines
policy changes from one year to the next with relatively automatic growth in large
parts of the budget. These automatic increases include cost-of-living adjustments,
growth in populations eligible for program benefits, and inflation driven increases.
The President’s budget does not include estimated costs of any potential conflict with
Iraq for either FY2003 or FY2004.

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Total outlays are projected to grow at an average annual rate of 5.0% between
FY2004 and FY2008 in the Administration’s proposals. When the components of
the budget are examined, the budget functions show that the health budget function
increases at an annual average rate of 7.9%, the Medicare function increases at an
annual average rate of 7.8%, and net interest increases at an annual average rate of
9.6%.7 ,8 These three functions account for over 53% of the total outlay increase
during this period. None of the other fifteen budget functions has a compound rate
of growth as large as that of total outlays.9 The relatively low growth in some budget
functions (agriculture 0.8%, education, training, employment, and social services
1.2%, general government 1.2%, and natural resources and environment 1.5%),
growth that is lower than the expected rate of inflation, will reduce these functions’
spending in real terms.
CBO’s March reestimates of the President’s budget policy raise outlays in
FY2004 by $16 billion (to $2,245 billion). Subsequent years show outlays $20
billion to $30 billion higher in the CBO reestimates than in the President’s budget.
Receipts
The Administration’s February 3, 2003 budget included proposals to speed up
and make permanent many of the tax changes enacted over the last two years. The
Administration divided its revenue proposals into an economic growth package ($390
billion over FY2004-FY2008); tax incentives ($72 billion over FY2004-FY2008);
tax simplification (which raises receipts by $13 billion over FY2004-2008);
extending expiring tax provisions ($40 billion over FY2004-FY2008); and
miscellaneous changes (which raise receipts by $2 billion over FY2004-FY2008).
The total proposal would reduce revenues from current services baseline levels by
$493 billion between FY2004 and FY2008 and by $1,461 billion between FY2004
and FY2013.10 The proposed changes slow the growth in receipts but do not stop
them. They grow from $1,922 billion in FY2004 to $2,521 billion in FY2008. The
Administration claims that the revenue reductions will speed economic growth by
7 Budget functions group, “budget data according to the major purpose served” rather than
by agency or program. OMB, Budget of the U.S. Government for FY2004, Analytical
Perspectives, p. 463.
8 The Energy budget function has an even higher rate of increase, growing by an annual
average rate of 18.3%, but since it only makes up 0.04% of total outlays in FY2004 and
0.07% of outlays in 2008, it therefore has little effect on the overall change in outlays.
9 The two budget functions, “allowances”, and “undistributed offsetting receipts”, were
excluded from the total number of functions.
10 These estimate are from the Treasury’s General Explanations of the Administration’s
Fiscal Year 2004 Revenue Proposals. The President’s budget shows a $441 billion revenue
reduction (from baseline estimates) for the FY2004-FY2008 period and a $1,307 billion
reduction for the FY2004-FY2013 period. The Treasury’s estimates were produced after
the release of the President’s budget and reflect adjustments to these estimates. See also the
CRS Report RS21420, President Bush’s 2003 Tax Cut Proposal: A Brief Overview, and the
CRS Issue Brief IB10110, Major Tax Issues in the 108th Congress for more information on
the proposals.

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enough to recover some or all of the forgone revenue (a claim not supported by
standard economic theory).
Table 4. Receipts for FY2002-2008 and FY2013
(in billions of dollars)
FY2002 FY2003 FY2004 FY2005 FY2006 FY2007 FY2008 FY2013
CBO Adjusted Baseline, 1/31/03 $1,853 a
$1,922
$2,054
$2,225
$2,370
$2,505
$2,648
$3,674
President’s F04 Budget, 2/3/03
1,836
1,922
2,135
2,263
2,398
2,521
—
President’s FY04 Current Services 2/3/03
1,867
2,031
2,235
2,352
2,469
2,593
—
CBO Revised Baseline, 3/7/03
1,891
2,024
2,205
2,360
2,504
2,647
3,674
CBO Est. of the President’s Policies,3/7/03
1,856
1,907
2,100
2,273
2,433
2,573
3,350
a. Actual receipts for FY2002.
NA – Not available
CBO’s baseline estimates, assuming no policy change and using a different set
of underlying assumptions than the Administration, show FY2004 revenues of
$2,054 billion. The CBO estimates also assume that the automatic expiration of the
tax cuts of EGTRRA will occur at the end of 2010. The result is a jump in revenues
in the fiscal years after FY2010. CBO estimates that extending all the EGTRRA tax
provisions that would otherwise expire before FY2013, will reduce cumulative
revenues over the FY2004-2013 period by $785 billion (from cumulative baseline
revenues of $27,923 billion). The effect of eliminating the expiring provisions of
EGTRRA are most dramatic after FY2010. In FY2010, the reduction from baseline
revenue estimates is $32 billion; in FY2011 it jumps to $156 billion and in FY2013,
to $260 billion in FY2013.
Surpluses And Deficits
Surpluses and deficits are the residuals left after Congress and the President set
policies for spending and receipts. Surpluses reduce federal debt held by the public
which leads to lower net interest payments; deficits increase government debt,
increasing the government’s interest payments. 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) was a major focus of the budget debate in the
late 1980s and throughout the 1990s. The President’s FY2004 budget has a deficit
of $307 billion in FY2004 and, if his proposed policies are adopted, remains in
deficit throughout the five years (FY2004-FY2008) covered by the budget. The
deficits fall slowly through FY2008 when it reaches $190 billion. The
Administration’s current services baseline has a deficit of $158 billion in FY2004,
becoming a surplus of $51 billion in FY2008.

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Table 5. Surpluses/Deficits(-) for FY2004-FY2008 and FY2013
(in billions of dollars)
FY2002 FY2003 FY2004 FY2005 FY2006 FY2007 FY2008 FY2013
CBO Adjusted Baseline, 1/31/03
-$158 a
-$199
-$145
-$73
-$16
$26
$65
$508
President’s F04 Budget, 2/3/03
-304
-307
-208
-201
-178
-190
—
President’s FY04 Current Services 2/3/03
-264
-158
-40
5
29
51
—
CBO Revised Baseline, 3/7/03
-246
-200
-123
-57
-9
27
459
CBO Est. of the President’s Policies,3/7/03
-287
-338
-270
-218
-173
-166
-102
a. Actual deficit for FY2002.
CBO’s January baseline estimates has the budget returning to surplus in FY2007
and growing through FY2013. The March revisions increased the near-term deficits
and slowed, by one year, the movement to surplus.
The budget resolution from the House Budget Committee moves the budget into
surplus in FY2008 and the Senate Budget Committee’s budget resolution moves it
there in FY2013.
Over a longer period, one running far into the century, the Administration
indicates that it expects, under existing policies and assumptions, large and
continually growing deficits. The retirement of the baby-boom generation, beginning
in large numbers in the next decade, will rapidly drive up spending on Social
Security, Medicare, and other programs for the elderly, increasing the deficit (or
reducing the surplus, if there is one) and putting a severe strain on both the budget
and the economy.
The Budget and the Economy
The budget and the economy affect each other. The relationship is an unequal
one, with small economic changes having a more significant effect on the budget
than large budget policy changes have on the economy. The worse-than-expected
economic conditions over the last two years played a substantial role, directly or
indirectly, in the deterioration of the budget outlook over those years.
The positive budget outlook produced in early 2001 had been buoyed by the
favorable economic conditions that were then expected. These would have continued
the overall improvement in the budget situation since the early 1990s. Much of the
improvement had come from strong and sustained economic growth. When those
favorable economic conditions faltered, so did a portion of the good budget outcomes
of the previous few years. What good economic conditions give, bad economic
conditions can take away. The unexpectedly lengthy economic sluggishness, the start
of a recession in March 2001, the current continuing uncertainty over the economic
outlook, the lengthy fall in the stock market, the policy responses to the September
2001 terrorist attacks, along with negative changes in the technical components of the
budget estimates, raised outlays, reduced receipts, and eliminated the previously
expected surpluses.

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CRS-10
The FY2004 presidential budget documents and CBO’s budget report include
discussions of the expected economic outlook and the budget’s sensitivity to changes
in selected economic variables. Both reports include a table showing the budget’s
sensitivity to changes in selected economic variables (this year, it is found in chapter
2 of the Analytical Perspectives volume of the President’s budget and in chapter 5
of CBO’s report). The effects of the variables are generally symmetrical. A higher
rate of real economic growth (than assumed in the budget proposal) has
approximately the same effect on the budget as same-sized lower rate of economic
growth has, but in the opposite direction. If a 1% lower rate of economic growth
reduces the surplus (or increases the deficit) by $30 billion in FY2004 (from the
OMB table; Table 2-6, p. 32, The Budget of the United States Government, Fiscal
Year 2004, Analytical Perspectives), a 1% higher than expected rate of economic
growth would reduce the deficit (or increase the surplus) by approximately $30
billion. Changes in other variables generally have a smaller effect on the budgetary
balance than changes in real GDP. Sustained changes in the underlying economic
variables tend to produce larger changes in the budget numbers than the effect of one
or two year change.
For Additional Reading
U.S. Congressional Budget Office. The Budget and Economic Outlook: Fiscal
Years 2004-2013. Washington, U.S. Govt. Print. Off., January 31, 2003.
—— Budget Options. Washington, U.S. Govt. Print. Off., March 6, 2003.
U.S. Council of Economic Advisors. The Economic Report of the President.
Washington, U.S. Govt. Print. Off., February 2003.
U.S. Office of Management and Budget. The Budget of the United States
Government for Fiscal Year 2004. Washington, U.S. Govt. Print. Off.,
February 3, 2003.
CRS Products
CRS Electronic Briefing Book, Taxation,
[http://www.congress.gov/brbk/html/ebtxr1.shtml]
CRS Report RL31414. Baseline Budget Projections: A Discussion of Issues, by
Marc Labonte.
CRS Report RL31235. The Economics of the Federal Budget Deficit, by Brian W.
Cashell.
CRS Report 95-543. The Financial Outlook for Social Security and Medicare, by
David Koitz and Geoffrey Kollman.
CRS Report RS21136. Government Spending or Tax Reduction: Which Might Add
More Stimulus to the Economy?, by Marc Labonte.

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CRS-11
CRS Report RL30839. Income Tax Cuts, the Business Cycle, and Economic
Growth: A Macroeconomic Analysis, by Marc Labonte and Gail Makinen.
CRS Report RS21287. Is Another Double Dip Recession Possible?, by Marc
Labonte and Gail Makinen.
CRS Issue Brief IB10110. Major Tax Issues in the 108th Congress. Possible U.S.
Military Intervention in Iraq: Some Economic Consequences, by Marc Labonte.
CRS Report 98-720. Manual on the Federal Budget Process, by Robert Keith and
Allen Schick.
CRS Report RL31585. Possible U.S. Military Intervention in Iraq: Some Economic
Consequences, by Marc Labonte.
CRS Report RS21420. President Bush’s 2003 Tax Cut Proposal: A Brief Overview,
by David Brumbaugh.
CRS Report RL31498. Social Security Reform: Economic Issues, by Jane Gravelle
and Marc Labonte.
CRS Report RL30708. Social Security, Saving, and the Economy, by Brian W.
Cashell.
CRS Report RS21126. Tax Cuts and Economic Stimulus: How Effective Are the
Alternatives?, by Marc Labonte and Gail Makinen.
CRS Report RL30839 Tax Cuts, the Business Cycle, and Economic Growth: A
Macroeconomic Analysis, by Marc Labonte and Gail Makinen.
CRS Report RL31134. Using Business Tax Cuts to Stimulate the Economy, by Jane
Gravelle.
CRS Report RL30973. 2001 Tax Cut: Description, Analysis, and Background, by
David L. Brumbaugh, Jane G. Gravelle, Steven Maguire, Louis Alan Talley, and
Bob Lyke.

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