Order Code RL32264
CRS Report for Congress
Received through the CRS Web
The Budget for Fiscal Year 2005
Updated October 12, 2004
Philip D. Winters
Analyst in Government Finance
Government and Finance Division
Congressional Research Service ˜ The Library of Congress
The Budget for Fiscal Year 2005
Summary
The Administration released its FY2005 Mid-Session Review (MSR), containing
revised budget estimates, on July 30, 2004. The MSR projected a FY2005 deficit of
$331 billion, $32 billion below the Administration’s February 2004 original estimate.
According to the MSR, expected higher receipts, partially offset by expected higher
outlays, reduced the deficit estimate for FY2005.
The Congressional Budget Office (CBO) released its revised baseline budget
estimates in its report The Budget and Economic Outlook: An Update on September
7, 2004. The update included a deficit estimate of $348 billion for FY2005, $15
billion below CBO’s March estimate. CBO attributed the net reduction in the
FY2005 deficit estimate to technical changes since March. Policy changes increasing
the deficit were offset by economic changes reducing it.
The President’s original FY2005 budget (February 2004) included, among many
policy proposals, extending and making permanent many of the tax cuts adopted in
2001 and 2003. On May 12, 2004, the Administration requested an additional $25
billion for the ongoing operations in Afghanistan and Iraq. The MSR indicated that
more funding beyond the May request will be needed in FY2005. The budget did not
include estimates for the cost of the war on terror beyond FY2004, provided limited
information on the costs of extending the tax cuts past FY2009 (which is the period
in which most of their budget effects would occur), and did not propose providing
relief from the expanding middle-class coverage of the alternative minimum tax
(AMT) after FY2005.
The Congressional Budget Office’s (CBO) January 2004 budget report for
FY2005 (the Budget and Economic Outlook: Fiscal Years 2005-2014) estimated the
FY2005 baseline deficit at $362 billion. CBO’s report provided estimates of the
costs of selected alternative policies (measured from the baseline), such as estimates
of the cost of extending the tax cuts, reforming the AMT, and discretionary spending
growing at various rates.
In March 2004, CBO released its estimates of the Administration’s proposals
using CBO’s underlying assumptions and budget estimating methods. These
produced a deficit of $358 billion in FY2005, falling to $258 billion in FY2009. By
extending the effect of the Administration’s policies past FY2009, the deficit would
climb slightly after FY2010, moving to $284 billion in FY2014.
The Senate did not clear the FY2005 budget resolution (S.Con.Res. 95; H.Rept.
108-498), adding procedural hurdles to already existing policy disputes and further
slowing the passage of the annual appropriations. With only one of the 13 regular
appropriations enacted as the new fiscal year began, Congress passed a continuing
resolution on appropriations(H.J.Res 107) on September 29 to fund the government
through November 20. The President signed the legislation (P.L. 108-309) on
September 30. This report will be updated as events warrant.
Contents
Background and Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
The Current Situation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Budget Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Budget Estimates and Proposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Uncertainty in Budget Projections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Budget Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Outlays . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Receipts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Deficits (and Surpluses) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
CBO’s Alternative Policies Not Included in the Baseline . . . . . . . . . . . . . . 15
The Longer Run . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
The Budget and the Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
For Additional Reading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
CRS Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
List of Figures
Figure 1. Uncertainty of CBO’s Projections of the Budget Deficit or Surplus
Under Current Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Figure 2. Outlays, FY2003-FY2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Figure 3. Receipts, FY2003-FY2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Figure 4. Deficits, FY2003-FY2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Figure 5. Alternative Deficit Paths, FY2003-FY2014 . . . . . . . . . . . . . . . . . . . . 16
List of Tables
Table 1. Budget Estimates for FY2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Table 2. Outlays for FY2004-FY2009 and FY2014 . . . . . . . . . . . . . . . . . . . . . . . 9
Table 3. Receipts for FY2003-FY2009 and FY2014 . . . . . . . . . . . . . . . . . . . . . . 12
Table 4. Surpluses/Deficits(-) for FY2005-FY2009 and FY2014 . . . . . . . . . . . . 14
Table 5. The Cumulative Effects of CBO’s Policy Alternatives Not Included
in CBO’s Baseline for Selected Time Periods . . . . . . . . . . . . . . . . . . . . . . . 17
The Budget for Fiscal Year 2005
Background and Analysis
Presidents generally submit their budget proposals for the upcoming fiscal year
(FY) early in each calendar year. The Bush Administration released its FY2005
budget (The Budget of the U.S. Government, Fiscal Year 2005) on February 2, 2004.
The multiple volumes contained general and specific descriptions of the
Administration’s policy proposals and expectations for the budget for FY2005
through FY2009. It contained limited information on the revenue and mandatory
spending changes after 2009, and a section on long-term fiscal issues facing the
nation. The full set of budget documents (Budget, Appendix, Analytical Perspectives,
Historical Tables, among several others) contains extensive and detailed budget
information, including estimates of the budget without the proposed policy changes
(current service baseline estimates), historical budget data, detailed budget authority,
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 reference source for
federal budget information, including enacted appropriations.
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) as required by the budget
resolution. Over the course of deliberation on the budget, the Administration often
revises its original proposals as it interacts with Congress and as conditions change
in the economy and the world.
The Current Situation
The House and Senate Appropriation Committees began considering the 13
regular appropriations during June 2004, but tight discretionary spending caps and
policy disagreements slowed their consideration and passage. With one day left
before the new fiscal year began on October 1, and only one appropriation enacted,
Congress passed a continuing resolution on appropriations (a CR; H.J.Res. 107) to
fund those government activities not otherwise funded.1 The CR runs through
November 20, giving Congress time when it returns after the election to possibly
finish its work on appropriations. The President signed (P.L.108-309) the joint
resolution on September 30, 2004. Congress may adopt more regular appropriations
during the week ending October 8.
1 Approximately one-third of total spending is funded through appropriations; the other two-
thirds has some form of permanent funding.
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Budget Totals
Table 1 contains budget estimates for FY2005 from the Congressional Budget
Office (CBO) and the Administration (the Office of Management and Budget, OMB);
revisions produced by both during the year, as they become available; and data from
congressional budget deliberations. Differences in totals result from differing
underlying economic, technical, and budget-estimating assumptions and techniques,
as well as differences in policy assumptions. Often the policy-generated dollar
differences between Administration and congressional proposals for an upcoming
fiscal year are relatively small compared to the budget as a whole. These small
differences may grow over time, sometimes substantially, producing widely divergent
future budget paths. Budget estimates should be expected to change over time from
those originally proposed or estimated by the President, CBO, or Congress.
Table 1. Budget Estimates for FY2005
(in billions of dollars)
Deficit (-)/
Receipts
Outlays
Surplus
CBO, BEO Baseline, 1/04
$2,049
$2,411
$-362
OMB, Budget Proposals, 2/04
2,036
2,400
-364
OMB, Budget Adjusted Current Services Baseline, 2/04
2,037
2,397
-360
OMB, Budget BEA Current Services Baseline, 2/04
2,048
2,442
-393
CBO, Revised Baseline, 3/8/04
2,050
2,414
-363
CBO, EPP, 3/8/04
2,029
2,384
-356
Senate, FY05 Budget Resolution S.Con.Res. 95, 3/12/04
2,026
2,367
-341
House, FY05 Budget Resolution H.Con.Res. 393, 3/25/04
2,030
2,406
-377
Conf., FY05 Budget Resolution S.Con.Res. 95, 5/19/04*
2,027
2,405
-367
OMB, Mid-Session Rev. 7/30/04
2,091
2,423
-331
OMB, Mid-Session Rev. Adjusted CSB 7/30/04
2,108
2,400
-292
CBO Update 9/7/04
2,094
2,442
-348
*The conference report (H.Rept. 108-498) passed the House on May 19, 2004, but has yet to be considered in
the Senate.
B&E Outlook — The Budget and Economic Outlook, CBO.
EPP — CBO’s estimates of the President’s proposals.
BEA Current Services Baseline — Current Service Baseline estimates that follow the Budget Enforcement Act
directions for producing baselines.
Adjusted CSB — The Administration’s adjusted current services baseline.
The war on terrorism, the 2001 recession and the long-lasting slowness of the
economic recovery, changes in policies (tax cuts; spending increases), and changes
in the technical assumptions in the underlying budget-economic relationships
contributed to the severe deterioration in the budget outlook since the expectations
of large and growing surpluses in January 2001.
Budget Estimates and Proposals
CBO’s first budget report for FY2005, the Budget and Economic Outlook:
Fiscal Years 2005-2014 (January 2004), contained baseline estimates and projections
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for FY2004 through FY2014.2 The report estimated a FY2005 deficit of $362 billion
(down from an estimated $477 billion in FY2004). By FY2009, the baseline deficit
estimate had fallen to $268 billion. Under the baseline assumptions, the CBO
estimates increased discretionary spending at the rate of inflation, did not include
extending the tax cuts, and allowed the alternative minimum tax (AMT) relief to
expire as scheduled (which would then boost receipts).
The report also showed that under baseline assumptions the budget would
remain in deficit through FY2013 ($16 billion). The baseline estimates showed a
small surplus ($13 billion) in FY2014. The reduction in the deficit after calendar
year 2010, leading to the small surplus, was largely explained by the expiration of
major tax cuts (under the baseline assumptions) after calendar 2010, producing a
revenue surge.
In March 2004, CBO released slightly revised baseline estimates that showed
a small change to the FY2005 deficit (to $363 billion). The revised projections also
showed a deficit of $15 billion in FY2014 instead of a surplus. The CBO September
revisions showed a smaller ($348 billion) FY2005 baseline deficit and a larger ($65
billion) FY2014 baseline deficit than its earlier estimates.
Both CBO’s January report and its September update (the Budget and Economic
Outlook: An Update) included the estimated budgetary costs (including the higher
debt service costs) of selected alternative policies. In the September report, the
alternatives included the cost of extending expiring tax provisions (a $549 billion,
five-year cumulative increase in the deficit; another $1.7 trillion cumulative increase
in the deficit from FY2009-FY2014), reforming the alternative minimum tax (a $149
billion five-year cumulative increase in the deficit; another $276 billion increase in
the deficit in the second five years), and several alternative assumptions about the
growth rate of discretionary spending (including defense) that ranged from a freeze
(a $277 billion cumulative five-year decrease in the deficit; a cumulative $1.1 trillion
decrease in the deficit between FY2009 and FY2014) to increasing discretionary
spending at the growth rate of nominal gross domestic product (GDP; a $290 billion
five-year cumulative increase in the deficit; an increase of $1.1 trillion in the
cumulative deficit in the second five years).
President Bush’s FY2005 budget called for extending and making permanent
a large number of the tax cuts adopted in 2001 and 2003. The Treasury’s estimates
of the tax proposals produced a $213.3 billion revenue reduction (from
Administration baseline estimates) between FY2005 and FY2009 and a $1,240.2
revenue billion reduction between FY2005 and FY2014. The Joint Committee on
Taxation (JCT) estimated (March 3, 2004) that the President’s tax proposals would
reduce receipts by $226.7 billion between FY2005 and FY2009 and by $1,402.4
2 Baseline estimates are not meant to be predictions of future budget outcomes but instead
are designed to provide a neutral measure against which to compare proposed policy
changes. In general, they project current policy into the future. Discretionary spending is
increased by the rate of inflation. Their construction generally follows instructions in the
Balanced Budget and Deficit Control Act of 1985.
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billion between FY2005 and FY2014. Most of the cost of extending the tax cuts falls
on the budget after FY2009.
The Administration’s budget modified its presentation of the current services
baseline estimates (a change in the baseline estimates changes the reported size of the
proposed policy changes). Instead of following the traditional method of
constructing baseline estimates, the Administration’s FY2005 current services
baseline assumed the extension of certain tax provisions (that by current law are
scheduled to expire), excluded the future cost of one time events, such as FY2004
emergency funding, and included a timing adjustment to the calculation of federal
pay increases. For FY2005, the Administration’s modified current services deficit
estimate was $33 billion smaller than the traditional baseline estimate. By FY2009,
the Administration’s modified estimated baseline deficit is $60 billion smaller than
the traditional baseline deficit estimate.
The Administration’s budget provided a minimum amount of information
beyond FY2009. The budget did include estimates of the cumulative proposed
revenue changes and proposed mandatory spending changes for the periods FY2005
through FY2009 and FY2005 through FY2014, but it contained no information for
the individual years after FY2009.
The Administration released revised estimates of the President’s budget in the
Mid-Session Review (July 30, 2004). In general, the revisions showed improvement
in the budget outlook, with smaller deficits, a recovery in receipts, and somewhat
higher outlays through FY2009. The net increase in receipts between the January and
July estimates came from changes in economic assumptions and technical
reestimates; most of the increase in outlays between the two estimates came from
changes in policy. The next official Administration estimates will be in the FY2006
budget, scheduled for release in February 2005.
Uncertainty in Budget Projections
All budget estimates and projections are inherently uncertain. Their dependence
on assumptions that are themselves subject to substantial variation over 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, dramatically
changed over the 20 to 21 months of congressional and presidential action on the
budget. (The budget estimates in the OMB and CBO budget documents for five to
10 years in the future are subject to even greater variability.)
The early 2001 estimates for FY2002 estimated a surplus of $231 billion to
$313 billion. The year ended on 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
underlying budget relationships, all contributed to a large change in the year’s budget
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outcome from the originally proposed or estimated amounts. There is little reason
to expect this uncertainty to diminish in current or future budget projections.3
Figure 1. Uncertainty of CBO’s Projections of the
Budget Deficit or Surplus Under Current Policies
Note: This figure, calculated on the basis of CBO’s forecasting track record, shows the estimated likelihood of
alternative projections of the budget deficit or surplus under current policies. The baseline projections described
in this chapter fall in the middle of the darkest area of the figure. Under the assumption that tax and spending
policies will not change, the probability is 10 percent that actual deficits or surpluses will fall in the darkest area
and 90 percent that they will fall within the whole shaded area.
Actual deficits or surpluses will be affected by legislation enacted in future years, including decisions about
discretionary spending. The effects of future legislation are not reflected in this figure.
Information in appendix A (The Uncertainties of Budget Projections) of CBO’s
budget report, The Budget and Economic Outlook: Fiscal Years 2005-2014 (January
2004), indicated how greatly the budget outcome can be altered, especially over time,
by changes in economic and the related technical factors that underpin the budget
estimates. The chapter contains a discussion of optimistic and pessimistic alternative
scenarios for CBO’s baseline projection. The optimistic scenario assumes more
favorable economic and budget conditions than the baseline while the pessimistic
scenario assumes less favorable conditions than the baseline. CBO estimated that the
10-year cumulative optimistic and pessimistic baseline surpluses or deficits would
be $8 trillion apart. According to CBO, two-thirds of the growth in the difference
occurs in the last five years of the estimates. Figure 1 is from CBO’s September
2004 Update (a revision to the chart in the January 2004 report). It represents the
most likely budget outcomes clustered in the center, in the darkest part, of the figure.
3 Some things are known with certainty about the direction of future spending and receipts.
Demographics can partly determine the shape of future budgets. In the next decade, the
beginnings of the retirement of the baby boom generation will rapidly drive higher the
spending for Social Security and Medicare as well as other federal spending or tax breaks
for the elderly. Because virtually all those who will become eligible for these benefits are
alive today, estimating the growth in these programs is relatively straightforward.
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The lightest color, towards the edge of the graph, represents the less likely outcomes.
The entire fan in FY2009 represents the range within which the deficit or surplus has
a 90% chance of falling.
The President’s budget includes similar information in the chapter,
“Comparison of Actual to Estimated,” in the Analytical Perspectives volume of the
budget. The Administration used budget data from FY1982 to FY2003 to produce
statistical measures of the differences between the estimated and actual surpluses or
deficits over these years. According to the Administration’s calculations, there is a
90% chance that the FY2009 budget will have a deficit or a surplus that falls within
$500 billion above or below the Administration’s currently proposed deficit for that
year. This produces a range of outcomes from a deficit of approximately $740 billion
to a surplus of approximately $260 billion, within which the deficit or surplus is most
likely to fall.
Budget projections are very dependent on the underlying assumptions about the
direction of the economy and expected future government policy and how these
interact along with other factors (such as changing demographics) that affect the
budget. Any deviation from the 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 have substantial effects on changing the budget
outcomes from earlier budget estimates and projections.
Budget Action
CBO and the Administration released their first budget reports for FY2005, in
late January and early February 2004. CBO’s report provided baseline estimates for
fiscal years 2004 through 2014. OMB’s documents provided estimates for FY2004
through FY2009 with a few instances of cumulative estimates for fiscal years 2004
through FY2014 (these were limited to revenues and mandatory spending and
provided no data for the individual fiscal years after FY2009). The budget also
lacked detailed data on program or account spending beyond FY2005. The Analytical
Perspectives volume of the President’s budget provided the Administration’s current
services baseline estimates for the years through FY2009.
On March 8, 2004, CBO released its estimates of the President’s proposals and
slightly revised baseline estimates in its report, An Analysis of the President’s
Budgetary Proposals for Fiscal Year 2005. The report recalculated the
Administration’s proposals using CBO’s underlying assumptions and estimating
techniques. CBO also extended its projections of the Administration’s proposals
through FY2014. The CBO reestimates produced smaller deficits in FY2004 and
FY2005 than in the President’s budget.
By late February and early March 2004, the House and Senate Budget
Committees began discussing the budget resolution for FY2005. The Senate Budget
Committee (SBC) reported its version of the FY2005 budget resolution on March 5
(without a numbered report). The Senate considered the resolution (S.Con.Res. 95)
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the week of March 8 and, after amending the committee-adopted resolution,
approved it on March 12.
The House Budget Committee (HBC) approved its version of the FY2005
budget resolution (H.Con.Res. 393; H.Rept. 108-441) on March 19, a week later than
originally planned. Disagreements within the committee majority over components
of the resolution delayed its consideration. The House approved the resolution, after
rejecting several proposed alternatives, on March 25. The House substituted the text
of H.Con.Res. 393 for the text of S.Con.Res. 95 on March 29 to facilitate the
conference on the resolution.
A conference committee began its efforts to resolve the resolutions’ differences
on March 31. The most difficult issue became the differing pay-go requirements in
the House and Senate resolutions. The House resolution required offsets for
proposed increases in mandatory spending; the Senate resolution required offsets for
both mandatory spending increases and revenue reductions. After a month and a half
of efforts, the conference committee reported (H.Rept. 108-498) an agreement. The
agreement reduced the resolution’s coverage to one year from the five-year coverage
in the resolutions adopted by the House and Senate. The pay-go rules were limited
to the one year of the resolution and would expire on May 15, 2005. The
reconciliation instructions in the agreement incorporated the cost ($22.9 billion
revenue reduction and $4.6 billion in outlay increases) of extending three popular tax
cuts — the marriage penalty relief, the increased child care credit, and the expanded
10% tax bracket that expire this year. The resolution accommodated another $27.7
billion in additional tax cuts that were not included in the reconciliation instructions.
The House passed the conference resolution on May 19. The House Rules
Committee resolution allowing consideration of the conference resolution (H.Res.
649) included a provision putting the budget resolution, once adopted by the House,
in effect for the House. This provided guidance to the Appropriations and other
committees that must adopt legislation to implement the FY2005 budget.
Unsure that it had enough votes to adopt the resolution, the Senate leadership
delayed Senate consideration of the conference agreement until early June. As June
came and went and the summer recess (beginning July 24, 2004) approached, the
conference report on the resolution remained unconsidered by the Senate. The
Senate had still not considered the conference report as of the start of FY2005 on
October 1, 2004.
The lack of a budget resolution for the year changes the processes by which
budget legislation (appropriations, tax cuts) wends its way through Congress. The
House put in place instructions (through H.Res. 649) to treat the budget resolution
conference agreement, once it passed the House, as if it had passed Congress. This
provided a cap for discretionary spending ($821 billion, excluding a $50 billion
reserve for Afghanistan and Iraq) and allocations of that amount among the 13
appropriation subcommittees.
In the Senate, the lack of a resolution initially left the appropriators working
from the discretionary spending cap ($814 billion) for FY2005 included in last year’s
(FY2004) budget resolution (H.Con.Res. 95). In addition, without the tax-cut
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reconciliation instructions from an adopted budget resolution, tax cut legislation may
be amended in the Senate. This difficulty was resolved with the enactment of the
first appropriation (Defense) for FY2005 (see the next paragraph).
Congress passed the first of the 13 regular appropriations on June 22, 2004. The
Defense appropriation (H.R. 4613; H.Rept. 108-622) provided $417.5 billion for the
new fiscal year, including the Administration-requested $25 billion for operations in
Afghanistan and Iraq (this $25 billion became immediately available for FY2004
upon enactment). The legislation, signed into law (P.L. 108-287) by the President
on August 5, 2004, included a provision setting the discretionary spending limit at
$821.4 billion in the Senate, the same amount used by the House.
Speculation began in July 2004 that a continuing resolution on appropriations
(CR) or an omnibus appropriation would be needed before the start of FY2005.
Either would provide funding for federal activities not other wise funded by a regular
appropriation or by permanent funding. As time ran out in September, Congress
passed (H.J.Res. 107) a CR on appropriations to fund otherwise unfunded federal
activities at FY2004 levels (minus supplementals) through November 20, 2004. The
President signed it into law (P.L. 108-309) on September 30. Congress is expected
to resume its deliberations on appropriations after the election..
On September 23, Congress adopted legislation (H.R. 1308) extending over 20
expiring tax provisions. Most of the extensions run through December 2005, while
several extend further into the future. The 10-year estimated cost of the bill was put
at $146 billion. The President signed the legislation into law (P.L.108-311) on
October 4, 2004.
OMB released its mid-year report (the Mid-Session Review) on July 30. It
contained revised estimates for the fiscal years 2004 through 2009. The estimates
showed some improvement in the short-term budget outlook, but did not indicate a
long-term movement towards a budget balance.
CBO’s Update (September 2004), included estimates that showed short-term
improvement in the budget outlook (the FY2005 deficit dropped to $348 billion from
$363 billion in March), but a worsening of the budget outlook in subsequent years.
According to CBO estimates, permanently extending the expiring tax cuts produces
keeps the deficit over $200 billion each year through FY2014.
Outlays
The Administration’s FY2005 budget proposed $2,400 billion in outlays for
FY2005, rising to $2,853 billion in FY2009, the last year forecast in the President’s
budget. The Administration modified its method of calculating its current services
baseline in this year’s budget.4 Under its modified assumptions, FY2005 baseline
4 The current services baseline estimates like CBO’s baseline estimates are designed to
provide “a neutral benchmark against which policy proposals can be measured.” For
(continued...)
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outlays are $2,397 billion, rising to $2,847 billion in FY2009. Under the traditional
method of calculating the baseline, current services baseline outlay estimates would
rise from $2,442 billion in FY2005 to $2,952 billion in FY2009. The modified
current services baseline estimates, when compared to the proposals, show smaller
changes than the difference between the proposal and the unadjusted current services
baseline estimates.
Table 2. Outlays for FY2004-FY2009 and FY2014
(in billions of dollars)
FY2003 FY2004 FY2005 FY2006 FY2007 FY2008 FY2009 FY2014
CBO Baseline, 1/26/04
$2,158 a
2,294
2,411
2,525
2,652
2,783
2,912
3,616
President’s FY05 Budget, 2/2/04
2,319
2,400
2,473
2,592
2,724
2,853
—
President’s FY05. Current Services, 2/2/04
2,319
2,397
2,468
2,583
2,715
2,847
—
Pres.’s FY05 BEA Current Services, 2/2/04
2,319
2,442
2,550
2,676
2,815
2,952
—
CBO, Revised Baseline, 3/8/04
2,296
2,414
2,528
2,658
2,791
2,924
3,635
CBO, EPP, 3/8/04
2,295
2,384
2,482
2,593
2,722
2,853
3,600
Senate, FY05 Budget Resolution, 3/12/04
2,295
2,367
2,469
2,582
2,698
2,815
—
House, FY05 Budget Resolution, 3/25/04
2,295
2,407
2,492
2,591
2,711
2,845
—
Conf., FY2005 Budget Resolution,
2,338
2,405
2,479
2,602
2,725
2,853
—
OMB, Mid-Session Rev. 7/30/04
2,319
2,423
2,500
2,623
2,762
2,895
—
OMB, Mid-Session Rev. Adj CSB 7/30/04
2,319
2,400
2,489
2,611
2,749
2,886
—
CBO Update 9/04
2,293
2,442
2,577
2,714
2,849
2,985
3,713
* The conference report (H.Rept. 108-498) passed the House on May 19, 2004, but has yet to be considered in
the Senate.
a. Actual outlays for FY2003.
BEA Current Services — Current Service Baseline estimates that follow the Budget Enforcement Act directions
for producing baselines.
EPP — CBO’s estimates of the President’s proposals.
Adj. CSB — The Administration’s adjusted current services baseline.
The Administration’s original proposals, if adopted, would (under
Administration estimates) raise outlays $81 billion (3.5%) above the
Administration’s revised FY2004 outlay estimate and $3 billion (0.1%) above its
FY2005 current services baseline outlay estimate.5 The difference between the
current services baseline outlay estimate and proposed outlays for FY2005 measures
the “cost” of the Administration’s proposed policies. The year-to-year change (the
$81 billion increase) combines the effects of policy changes from year to year with
the 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 cost of goods and services bought by the
government. The President’s budget did not include estimated costs of action in
4 (...continued)
outlays, the modified baseline used this year for outlays assumes emergencies are one-time
only, that federal pay adjustment assumptions reflect the (usual) January 1 start of inflation
adjusted raises rather than October 1, and the debt service (interest payment) changes
resulting from these (and revenue related) modifications.
5 The FY2005 outlay proposals would be $42 billion (1.7%) below the traditional
formulation of the baseline.
CRS-10
Afghanistan or Iraq after the end of FY2004. On May 12, 2004, the Administration
requested $25 billion in additional defense funding for continuing operations in
Afghanistan and Iraq. The amount requested was included in the enacted Defense
appropriations (P.L.108-387; August 5, 2005). As with most of the Administration’s
estimates, outlay estimates ran through FY2009.
As shares of gross domestic product (GDP), the Administration’s proposals
showed outlays falling from 19.9% of GDP in FY2005 to 19.4% of GDP in FY2009.
CBO’s March 2004 estimate of the President’s outlay proposals showed the shares
falling from 19.7% of GDP in FY2005 to 19.6% of GDP for the fiscal years 2006
through 2010, before rising to 19.9% of GDP in FY2014. These outlays-as-shares-
of-GDP are below both the average from FY1980 through FY2003 (21.1% of GDP)
or the average from FY1990 through FY2003 (20.2% of GDP).
CBO’s March 2004 revised baseline estimates showed outlays rising from
20.0% of GDP in FY2005 to 20.1% of GDP in FY2009 and remaining at that level
through FY2014. Using one of CBO’s alternative scenarios for spending, one that
assumes outlays grow at the rate of nominal GDP growth rather than the lower rate
of inflation, outlays would equal 20.1% of GDP in FY2005, rising to 21.0% of GDP
in FY2009 and to 21.9% of GDP in FY2014.
OMB’s
Mid-Session
Figure 2. Outlays, FY2003-FY2014
Review(MSR) indicated a
(as percentages of GDP)
modest increase in outlays 22%
for the five years forecast.
Policy changes accounted for
most of the increase in the 21%
estimate for FY2005, while
reestimates of underlying
policy produced most of the 20%
increases in subsequent
years. Outlays as a share of
GDP would fall from 19.8% 19%
in FY2005 to 19.1% in
FY2009. Under the
18%
proposals in the MSR,
combined outlays for defense
and homeland security
17%
would grow by $26 billion
over five years; nondefense,
non-homeland security 16%
discretionary spending
2003
2005
2007
2009
2011
2013
would fall by $1 billion over
OMB Baseline 7/04
the same period; total
OMB 7/04
mandatory spending would
CBO Baseline 9/04
grow by $352 billion; and
Modified CBO Outlays
net interest would increase
by $112 billion, over the
same five years.
CRS-11
CBO’s revised baseline estimates in its September 2004 Update, showed higher
outlays than the March baseline estimate for each of the 10 years in the forecast.
Most of the change in the baseline outlay estimates came from legislation adopted
since March. The revisions did little to alter relative growth in the components of
spending. Discretionary spending has the smallest increase while mandatory and net
interest outlays grow the most, for both the FY2005-FY2009 and the FY2005-
FY2014 periods. Figure 2 (on the previous page) shows both OMB and CBO
estimates from their respective mid-year budget reports. The OMB data show the
Administration’s proposed path for outlays (as of the end of July), along with the
Administration’s baseline estimate, for the years FY2003-FY2009. The CBO data
shown in the chart is the baseline estimate and the baseline modified to assume that
discretionary spending grows at the rate of GDP growth rather than at the rate of
inflation.
Receipts
The Administration’s FY2005 budget proposed extending and making
permanent many of the tax cuts adopted in 2001 and 2003 that otherwise would
expire (as scheduled) between now and 2010. These plus other proposals would
reduce receipts by an estimated $213 billion over FY2005 to FY2009 period and by
$1,240 billion over the FY2005 to FY2014 period.6 CBO’s estimate of these
proposals put the cost at $181 billion for the FY2005 through FY2009 period and
$1,299 billion for the FY2005 through FY2014 period.7
Under the initial request, receipts would grow from an estimated $2,036 billion
in FY2005 to $2,616 billion in FY2009. These increases would reverse the slump
in receipts over the years FY2001 through FY2003. Receipts had reached their
highest level both in dollars ($2,025 billion) and as a percentage of GDP (20.9% of
GDP) in FY2000. By FY2003, receipts had fallen for three years in a row in both
dollars (to $1,798 billion) and as a percentage of GDP (to 16.5%), with that share of
GDP being the lower than in any year since FY1955. The Administration expected
receipts to exceed, in dollars, the amount in FY2000 by FY2005.
The Administration’s proposals would extend the current middle class relief
from the alternative minimum tax (AMT) for one year. Without a further extension,
a growing number of middle class taxpayers will find themselves subject to the
AMT. If further adjustments are not made, estimates indicate that the AMT, which
6 These estimates are from the Treasury’s General Explanations of the Administration’s
Fiscal Year 2005 Revenue Proposals. The President’s budget showed a $175 billion
revenue reduction (from baseline estimates) for the FY2005-FY2009 period and a $1,122
billion reduction for the FY2005-FY2014 period. The Treasury’s estimates were produced
after the release of the President’s budget reflecting modifications to the proposals and
adjustments to the 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.
7 These amounts from CBO do not include the outlay effects of the extensions or other
proposals.
CRS-12
affected a little over 600,000 taxpayers in 1997, will grow to 33 million taxpayers in
2010.8 CBO estimated (September 2004) that providing extended or permanent
AMT relief would reduce receipts by $136 billion between FY2005 and FY2009 and
by $340 billion between FY2005 and FY2014.
Table 3. Receipts for FY2003-FY2009 and FY2014
(in billions of dollars)
FY2003 FY2004 FY2005 FY2006 FY2007 FY2008 FY2009 FY2014
CBO Baseline, 1/31/03
$1,782 a
$1,817
$2,049
$2,256
$2,385
$2,506
$2,644
$3,629
President’s F054 Budget, 2/2/04
1,798
2,036
2,206
2,351
2,485
2,616
—
President’s FY04 Current Services 2/2/04
1,791
2,037
2,215
2,354
2,497
2,636
—
Pres.’s FY05 BEA Current Services, 2/2/04
1,791
2,048
2,245
2,384
2,527
2,681
—
CBO, Revised Baseline, 3/8/04
1,817
2,050
2,255
2,384
2,505
2,643
3,620
CBO, EPP, 3/8/04
1,817
2,029
2,212
2,351
2,469
2,595
3,311
Senate, FY05 Budget Resolution, 3/12/04
1,817
2,026
2,217
2,359
2,481
2,615
—
House, FY05 Budget Resolution, 3/25/04
1,817
2,029
2,220
2,350
2,476
2,609
—
Conf., FY05 Budget Resolution, 5/19/04*
1,821
2,027
2,235
2,383
2,503
2,640
—
OMB, Mid-Session Rev. 7/30/04
1,874
2,091
2,239
2,391
2,534
2,665
—
OMB, Mid-Session Rev. Adj CSB 7/30/04
1,875
2,108
2,255
2,394
2,546
2,683
—
CBO Update 9/04
1,871
2,094
2,279
2,406
2,531
2,673
3,648
* The conference report (H.Rept. 108-498) passed the House on May 19, 2004, but has yet to be considered in
the Senate.
a. Actual receipts for FY2003.
BEA Current Services — Current Service Baseline estimates that follow the Budget Enforcement Act directions
for producing baselines.
EPP = CBO’s estimates of the President’s proposals.
Adj. CSB — The Administration’s adjusted current services baseline.
The Administration reduced its FY2004 and FY2005 initial receipt estimates by
$20 billion and $15 billion respectively, “in the interest of cautious and prudent
forecasting.”9 The downward adjustment increased the resulting estimated deficits
by $20 billion (in FY2004) and by $15 billion (in FY2005).
The CBO and OMB mid-year estimates, the CBO baseline and OMB baselines
(which assumed the extension of the tax cuts) and the OMB policy estimates, are
fairly similar between FY2005 and FY2009 (see Figure 3). Receipts rise from a
little over 16% of GDP in FY2004 to between 17% and 18% of GDP in FY2009.
CBO’s baseline, which incorporated the scheduled expiration of the tax cuts,
extended the projections through FY2014. Receipts rise rapidly after FY2010 and
reach almost 20% of GDP in FY2014 (from the effect of the expiration of the tax
cuts).
8 See CRS Report RL30149, The Alternative Minimum Tax for Individuals, by Gregg A.
Esenwein, for a discussion of the AMT issue.
9 OMB, Budget of the U.S. Government for Fiscal Year 2003, February 2004, Analytical
Perspectives, p. 239.
CRS-13
Figure 3. Receipts, FY2003-FY2014
If the CBO baseline is
adjusted (using CBO
(as percentages of GDP)
22%
es t i m a t e s ) t o r efl ect
extending the tax cuts and
reforming the alternative 21%
minimum tax (see Figure 3),
the result is quite different
from both the first and 20%
second five-year periods.10
Receipts still rise as a
percentage of GDP, but by 19%
much less than the other
three estimates. By FY2009, 18%
receipts are 17% of GDP, a
level below most years since
the 1950s (when the nature 17%
of the government was very
different). By FY2014, the
adjusted receipts rise to 16%
17.6% of GDP, below most
2003
2005
2007
2009
2011
2013
years since the mid-1970s
OMB Baseline 7/04
(except for recession years).
OMB 7/04
CBO Baseline 9/04
CBO Baseline With Cost of Tax Extenders 9/04
The mid-year budget
reports from both OMB and
CBO contained higher
receipt estimates than in their earlier budget reports. Mostly these increases resulted
from technical reestimates and changes in the economic outlook rather than any
changes in policy.
Deficits (and Surpluses)
Deficits and surpluses 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 (among other effects); deficits increase
government debt held by the public, increasing net interest payments (assuming no
change in interest rates). 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 debates in the late 1980s and
throughout the 1990s.
The President’s FY2005 budget proposals included an estimated deficit of $521
billion in FY2004 falling to $364 billion in FY2005. The deficit would fall to an
10 CBO indicates in its Update that combining the reform of the AMT and the tax extenders
produces an interactive effect that makes the combined loss greater than the sum of the two
estimates separately.
CRS-14
estimated $237 billion in FY2009, which would fulfill the Administration’s pledge
of reducing the deficit by half (starting from the FY2004 estimated deficit). Most of
the deficit’s fall would occur between FY2004 to FY2006, after which it shows
relatively little change (in dollars). The February budget showed the deficit falling
from 4.5% of GDP in FY2004, to 3.0% of GDP in FY2005, and to 1.6% of GDP in
FY2009, under the Administration’s policies.
The success of the Administration’s deficit reduction efforts depended (and
depends) heavily on what many observers consider unrealistic constraints and
reductions in nondefense discretionary spending. The continuing growth in
entitlements and net interest, along with the limits on taxation, have left nondefense
discretionary spending, approximately one-sixth of the budget, bearing much of the
Administration’s and Congress’s deficit reduction burden.
CBO’s January 2004 baseline estimates had the budget returning to surplus in
FY2014 ($13 billion). CBO’s baseline revisions in March 2004 showed a slight
slowing in the budget’s improvement (because of technical factors) and eliminated
the forecast of a small surplus in FY2014, leaving instead a small deficit of $15
billion.
Table 4. Surpluses/Deficits(-) for FY2005-FY2009 and FY2014
(in billions of dollars)
FY2003 FY2004 FY2005 FY2006 FY2007 FY2008 FY2009 FY2014
CBO Baseline, 1/26/04
-375 a
-477
-362
-269
-267
-278
-268
13
President’s F05 Budget, 2/2/04
-521
-364
-268
-241
-239
-237
—
President’s FY04 Current Services 2/2/04
-528
-360
-253
-229
-218
-211
—
Pres.’s FY05 BEA Current Services, 2/2/04
-528
-393
-305
-292
-288
-271
—
CBO Revised Baseline 3/8/04
-477
-363
-273
-274
-286
-281
-15
CBO EPP 3/8/04
-478
-356
-270
-242
-252
-258
-289
Senate, FY05 Budget Resolution, 3/12/04
-477
-341
-252
-223
-217
-200
—
House, FY05 Budget Resolution, 3/25/04
-478
-378
-272
-240
-236
-235
—
Conf., FY05 Budget Resolution, 5/19/04*
-474
-367
-255
-194
-186
-174
—
OMB, Mid-Session Rev. 7/30/04
-445
-331
-261
-233
-228
-229
—
OMB, Mid-Session Rev. Adj CSB 7/30/0
-444
-292
-234
-217
-204
-202
—
CBO Update 9/04
-422
-348
-298
-308
-318
-312
-65
* The conference report (H.Rept. 108-498) passed the House on May 19, 2004, but has yet to be considered in the Senate.
a. Actual receipts for FY2003.
BEA Current Services — Current Service Baseline estimates that follow the Budget Enforcement Act directions for producing
baselines.
EPP — - CBO’s estimates of the President’s proposals.
Adj. CSB — The Administration’s adjusted current services baseline.
CBO’s estimates of the President’s proposals put the FY2004 deficit at an estimated
$478 billion and the FY2005 deficit at an estimated $356 billion. The reestimates had a
FY2009 deficit of an estimated $258 billion, somewhat less than the 50% reduction in the
deficit claimed by the Administration. CBO’s revised March baseline had little change in
the near-term, in FY2004 and FY2005, from its January estimates. The changes, although
not large in dollars, for the final years of the projections (FY2011 through FY2014) were
large enough to eliminate the possibility of the earlier projected baseline surplus in FY2014.
CRS-15
The March revisions forecast the deficit falling from 4.2% of GDP in FY2004 to 3.0% of
GDP in FY2005, to 1.9% of GDP in FY2009, and to 0.1% of GDP in FY2014.
The mid-year budget reports from
Figure 4. Deficits, FY2003-FY2014
OMB (July 2004) and CBO
(September 2004) reduced the deficit
(as percentages of GDP)
estimates between FY2004 and
0%
FY2009, but increased CBO’s
baseline estimates between FY2010
and FY2014 (see Table 4). OMB’s -1%
July 2004 deficit estimates as shares
of GDP fall below the February
estimates by greater amounts in -2%
FY2004 and FY2005 than in
subsequent years. CBO’s September
baseline deficit estimates, as shares of
-3%
GDP, were smaller than its March
estimates for FY2004 through
FY2007 and larger for the remaining
years in its projection (through -4%
FY2014). The CBO September 2004
baseline was adjusted to reflect faster
discretionary spending (growing at -5%
the rate of GDP growth), extending
2003
2005
2007
2009
2011
2013
the tax cuts, reforming the
OMB Baseline 7/04
Alternative Minimum Tax, and
OMB 7/04
incorporating the increased debt
CBO Baseline 9/04
servicing costs, produces deficit
CBO Baseline with Adjustments 9/04
estimates that remain at or above 3%
of GDP over the entire FY2004
through FY2014 period. Figure 4 shows the deficit estimates from OMB (policy and
baseline) and CBO (baseline and adjusted) from their mid-year reports as percentages of
GDP. The currently scheduled expiration of many of the tax cuts by or before 2010 produces
the rapid shrinkage in the CBO baseline deficit projection after FY2009. OMB’s policy and
baseline forecasts are similar to each other because some of the (at that time) proposed
policies were included in the baseline.
CBO’s Alternative Policies Not Included in the Baseline
CBO’s January 2004 budget report included estimates of the “budgetary effects of
policy alternatives not included in CBO’s baseline.” Some of the alternatives policies are
those that may be considered or may more accurately reflect budget experience than the
Budget Enforcement Act baseline instructions that CBO must follow. They include
extending expiring tax provisions, the reform of the alternative minimum tax (AMT), and
four variations on the growth of discretionary spending.
The alternative policies are all fairly costly when compared to CBO’s baseline, running
from $148 billion for AMT reform from FY2005 through FY2009 to $590 billion for
increasing discretionary spending at its average historical growth rate for the same years.
CRS-16
These amounts do not include the higher interest costs associated with larger deficits and
debt.11 Freezing discretionary spending at the FY2004 level would reduce spending by an
estimated $237 billion for the FY2005 through FY2009 period compared to the baseline
estimates over the same years. Figure 5 presents the CBO baseline deficit and the baseline
adjusted for the costs of extending the tax cuts, reforming the AMT, and increasing
discretionary spending at the rate of GDP growth (the amounts are shown as percentages of
GDP) from CBO’s January and September budget reports.
The costs and savings of the alternatives become substantially larger over the 10-year
period, FY2005 through FY2014. CBO’s September reports estimates that extending
expiring tax provisions for the 10- Figure 5. Alternative Deficit Paths, FY2003-
year period would increase the
FY2014
cumulative deficit by $1.9 trillion
(with another $363 billion in higher
(as percentages of GDP)
0%
interest costs). Most of that, $1.4
trillion (and $305 billion in higher
interest costs), occurs in the second
five years, FY2009 through FY2014. -1%
Reforming the alternative minimum
tax over the 10 years would cost an
estimated $340 billion plan another -2%
$85 billion in interest costs. Of the
total 10 year cost, $204 billion (plus
$72 billion in interest costs) falls in
the second five years.
-3%
Increasing discretionary
spending at the rate of nominal GDP -4%
growth produces a 10-year $1.2
trillion cumulative increase in the
deficit (plus another $200 billion in
-5%
debt service costs). Again, most of
2003
2005
2007
2009
2011
2013
the cumulative increase, $0.9
CBO Baseline 1/04
trillion, takes place in the second
CBO Baseline 9/04
five years of the ten-year period.
CBO Alt. Budget Policies Baseline 1/04
The amounts for these alternatives
CBO Alt. Budget Policies Baseline 9/04
for the five and ten-year periods are
shown in Table 5 (modified to show
only totals from a CBO table).
11 These two policies would produce an estimated e $14 billion and $51 billion in interest
costs respective.
CRS-17
Table 5. The Cumulative Effects of CBO’s Policy Alternatives Not
Included in CBO’s Baseline for Selected Time Periods
(In Billions of Dollars)
Total,
Total,
Total,
2005-2009
2009-2014
2005-2014
Policy Alternatives That Primarily Affect Discretionary
Spending for Activities in Iraq and Afghanistan
Remove the Extension of Supplemental Appropriations from the Baseline After 2004a
Total discretionary outlays . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,616
5,069
9,685
Effect on the deficitb . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
484
658
1,142
Debt serviceb . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
52
239
291
Assume the Slowdown of Such Activities Instead of Extending 2004 Supplemental Appropriationsc
Total discretionary outlays . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,808
5,192
10,000
Effect on the deficitb . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
291
536
827
Debt serviceb . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
30
161
191
Other Policy Alternatives That Affect Discretionary Spending
Increase Discretionary Appropriations (Except Supplementals) at the Growth Rate of Nominal GDPd
Total discretionary outlays . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,368
6,635
12,003
Effect on the deficitb . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
-267
-909
-1,176
Debt serviceb . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
-23
-189
-212
Freeze Total Discretionary Appropriations at the Most Recently Enacted Levele
Total discretionary outlays . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,845
4,854
9,699
Effect on the deficitb . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
255
873
1,128
Debt serviceb . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
22
181
203
Policy Alternatives that Affect the Tax Code
Extend Expiring Tax Provisionsf
Effect on the deficitb
EGTRRA and JGTRRA . . . . . . . . . . . . . . . . . . . . . . . . .
-157
-1,092
-1,249
Partial expensing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
-281
-156
-437
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
-53
-135
-188
Total
-491
-1,383
-1,874
Debt serviceb . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
-58
-305
-363
Reform the Alternative Minimum Taxg
Effect on the deficitb . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
-136
-204
-340
Debt serviceb . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
-13
-72
-85
Memorandum:
Total Discretionary Outlays in CBO’s Baseline . . . . . . . . . . . . . . . . . .
5,100
5,727
10,827
Total Deficit in CBO’s Baseline . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
-1,584
-710
-2,294
Sources: Congressional Budget Office; Joint Committee on Taxation.
Note: * = between -$500 million and $500 million; EGTRRA = Economic Growth and Tax Relief Reconciliation Act
of 2001; JGTRRA = Jobs and Growth Tax Relief Reconciliation Act of 2003.
a. This alternative does not extend the $115 billion in supplemental appropriations enacted during FY2004 ($87
billion in November and $28 billion in August) but includes the outlays resulting from them.
b. Positive amounts indicate a decrease in the deficit; negative amounts indicate an increase.
c. This alternative does not extend the $115 billion in supplemental appropriations enacted during 2004; however, it
assumes that about $56 billion in budget authority would be needed in 2005 to maintain activities related to Iraq and
Afghanistan (nearly $27 billion of which was already made available in 2004). After 2006, that amount of resources
begins to decline to a level of about $23 billion per year.
d. This alternative assumes that the supplemental appropriations enacted during 2004 are projected at baseline levels.
e. This alternative assumes that regular appropriations for defense are frozen at the 2005 level and that all other
appropriations (including 2004 supplementals) are frozen at the level provided for 2004.
f. This alternative does not include the effects of extending the increased exemption amount for the alternative
minimum tax, which expires in 2004. The effects of that alternative are shown below.
g. This alternative assumes that the exemption amount for the AMT, which was increased through 2004 in the Jobs
and Growth Tax Relief Reconciliation Act of 2003, is extended at its higher level and, together with the AMT tax
brackets, is indexed for inflation after 2004. The estimates are shown relative to current law. If this alternative was
enacted jointly with the extension of expiring tax provisions, an interactive effect would occur that would make the
combined revenue loss greater than the sum of the two separate estimates by about $160 billion (plus $17 billion in
debt-service costs) over the 2005-2014 period.
CRS-18
The Longer Run
Over a longer time period, one beginning in the next decade and lasting for decades into
future, both CBO and the Administration indicate (in their respective budget documents) that
they expect, under existing policies and assumptions, that demographic pressures will
produce large and persistent deficits. CBO states
The aging of the baby-boom generation will cause a historic shift in the United States’
fiscal position in the decades beyond CBO’s projection period. Over the next 30 years,
the number of people ages 65 and older will double... costs per enrollee in federal health
care programs are likely to continue growing much faster than inflation. CBO projects
that [these factors] will cause federal spending for Social Security, Medicare, and
Medicaid combined to increase (even under moderate growth assumptions) by more than
two-thirds as a share of the economy — from more than 8 percent of GDP in 2004 to over
14 percent in 2030 and almost 18 percent in 2050.
Those budgetary pressures will ultimately require choices involving some combination
of a substantial reduction in the growth of federal spending, an increase in taxation —
possibly to levels unprecedented in the United States — and a dramatic boost in federal
borrowing.... economic growth alone is unlikely to bring the nation’s longer-term fiscal
position into balance — making reform of programs for the elderly or substantial tax
increases (or both) necessary.12
OMB echoed the CBO comments in the President’s budget documents. The document
included the comments that
Social Security and Medicare are critical programs for ensuring the financial security and
health of elderly Americans ... Unless these programs are reformed however, over the
long run they will overwhelm the rest of the budget and place an unsustainable burden
on future generations.
Although projections of the budget over the next few decades and beyond are
subject to enormous uncertainty, fundamental forces are at work that will create serious
fiscal problems if left unaddressed.
The main source of the long-run fiscal problem is demographics. As Americans live
longer and the birth rate falls, the ratio of workers to retirees is decreasing....
Because the Nation’s two largest entitlement programs, Social Security and
Medicare, are based in large part on the principle that current workers pay the benefits
of retirees, these programs are heavily influenced by this decline in the ratio of workers
to retirees.... In the next several decades, however, the impact of lower birth rates and
longer life expectancy will begin to take a visible toll on both Social Security and
Medicare....
The result of this demographic shift is a steady worsening of the finances of the
Social Security and Medicare programs....13
12 CBO, The Budget and Economic Outlook: Fiscal Years 2005-2014, Jan. 2004, p. 8-9.
13 OMB. Budget of the United States Government for Fiscal Year 2005, Feb. 2004, p.38-39.
CRS-19
The short-term budget outlook can change when it is buffeted by economic or policy
changes. As indicated by both CBO and OMB, the long-term budget outlook is expected to
be dominated by the rapid spending growth for Social Security, Medicare, Medicaid, and
other programs for the elderly, as the baby boom generation begins retiring in large numbers
in the next decade. Not only will these programs be affected, but their constant growth will
put great stress on the rest of the budget, the government’s ability to finance its obligations,
and the ability of the economy to provide the resources needed. The tax cuts and spending
increases of the last few years have not produced the grim fiscal future, but they appear to
have made a solution more difficult.
The Budget and the Economy
The budget and the economy affect each other unequally. Small economic changes have
a more significant effect on the budget than the effect large policy changes have on the
economy. The worse-than-previously-expected economic conditions that lasted from 2001
into 2003, played a substantial role, directly and indirectly, in the deterioration of the budget
outlook over those years. The rebound from that slower-than-normal growth results,
according to CBO, in expectations of faster than normal growth in 2004 and 2005. For the
period 2006 through 2014, CBO projects that real gross domestic product (GDP) will grow
about as fast as potential GDP.14
Under governmental policies that are in fiscal balance, a return to economic growth that
is close to the growth of potential GDP should reduce or eliminate a deficit or produce a
surplus. In both the President’s budget and in CBO’s budget reports, the budget remains in
deficit (or barely reaches surplus in FY2014 in CBO’s January budget report) throughout the
forecast period. The lack of fairly rapid reduction or elimination of the deficit during a time
of normal economic growth implies that the budget has a fiscal imbalance and that the
current policies of the government are producing outlays that are too large or receipts that are
too small to produce a balanced budget or one in surplus.
The positive budget outlook forecast in early 2001 was substantially based on the
favorable future economic conditions that were then expected, along with government
policies that would continue producing surpluses. That outlook extended the expected
overall improvement in the budget situation that had occurred since the early 1990s. Much
of the improvement in the 1990s had come from strong and sustained economic growth (and
the rest from policy changes to reduce the deficit). When those favorable economic
conditions faltered, so did the string of positive forecasts for the budget outlook. What good
economic conditions give, bad economic conditions can take away. The unexpectedly
lengthy economic weakness into 2003, the start of a recession in March 2001, 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 (beyond policy changes), and eliminated the previously expected surpluses.
14 Potential GDP represents an estimate of what GDP would be if both labor and capital
were as fully employed as is possible.
CRS-20
For Additional Reading
U.S. Congressional Budget Office. The Budget and Economic Outlook: Fiscal Years 2005-
2014. Washington, January 26, 2004.
——An Analysis of the President’s Budgetary Proposals for Fiscal Year 2005. Washington,
March 2004.
——The Budget and Economic Outlook: An Update. Washington, September 2004.
U.S. Council of Economic Advisors. The Economic Report of the President. Washington,
GPO, February 2004.
U.S. Office of Management and Budget. The Budget of the United States Government for
Fiscal Year 2005. Washington, GPO, February 2, 2004.
——Fiscal Year 2005 Mid-Session Review. Washington, GPO, July 30, 2004.
CRS Products
CRS Electronic Briefing Book, Taxation,
[http://www.congress.gov/brbk/html/ebtxr1.shtml]
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.
CRS Report RS21863. Recent House Legislation Extending Selected Provisions of the 2001
and 2003 Tax Cuts, by Gregg Esenwein.
CRS Report RL30149. The Alternative Minimum Tax for Individuals, by Gregg Esenwein.
CRS Report RL32502. What Effects Have the Recent Tax Cuts Had on the Economy?, by
Marc Labonte
CRS Report RL31414. Baseline Budget Projections: A Discussion of Issues, by Marc
Labonte.
CRS Issue Brief IB95060. Flat Tax Proposals and Fundamental Tax Reform: An Overview,
by Jim Bickley.
CRS Report 98-560. Baselines and Scorekeeping in the Federal Budget Process, by Bill
Heniff, Jr.
CRS Report RS20095. The Congressional Budget Process: A Brief Overview, by James V.
Saturno.
CRS Report RL30297. Congressional Budget Resolutions: Selected Statistics and
Information Guide, by Bill Heniff Jr.
CRS-21
CRS Report 98-511. Consideration of the Budget Resolution, by Bill Heniff, Jr.
CRS Report RL30239. Economic Forecasts and the Budget, by Brian W. Cashell.
CRS Report RL31235. The Economics of the Federal Budget Deficit, by Brian W. Cashell.
CRS Report RS21752. Federal Budget Process Reform: A Brief Overview, by Bill Heniff,
Jr. and Robert Keith.
CRS Report 95-543. The Financial Outlook for Social Security and Medicare, by Geoffrey
Kollmann and Dawn Nuschler.
CRS Report RS21684. FY2004 Consolidated Appropriations Act: Reference Guide, by
Robert Keith.
CRS Report RS21136. Government Spending or Tax Reduction: Which Might Add More
Stimulus to the Economy?, by Marc Labonte.
CRS Report RL31728. House Rules Changes Affecting the Congressional Budget Process
in the 108th Congress (H.Res. 5), by Bill Heniff, Jr.
CRS Report RL30839. Income Tax Cuts, the Business Cycle, and Economic Growth: A
Macroeconomic Analysis, by Marc Labonte and Gail Makinen.
CRS Issue Brief IB10110. Major Tax Issues in the 108th Congress, Coordinated by David
Brumbaugh.
CRS Report 98-720. Manual on the Federal Budget Process, by Robert Keith and Allen
Schick.
CRS Report RS21756. The Option of Freezing Non-defense Discretionary Spending to
Reduce the Budget Deficit, by Gregg Esenwein and Philip Winters.
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 Jane Gravelle.
CRS Report RL31134. Using Business Tax Cuts to Stimulate the Economy, by Jane
Gravelle.