Order Code RL32264
CRS Report for Congress
Received through the CRS Web
The Budget for Fiscal Year 2005
Updated February 14, 2005
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
CBO’s budget report, The Budget and Economic Outlook: Fiscal Years 2006-
2015 (January 25, 2005), included revised baseline estimates (assuming current
policies) for fiscal year (FY) 2005. The estimates included a $368 billion deficit for
FY2005, larger than CBO’s previous (September 2004) estimate. CBO’s baseline
estimates do not include assumptions about future legislation that may increase
spending or decrease receipts in FY2005. The President presented his FY2006
budget, containing revised proposals and estimates for FY2005, on February 7, 2005,
including a deficit estimate of $427 billion. The estimate includes the
Administration’s estimates of additional War-On-Terror funding in FY2005.
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. The budget contained a FY2005 deficit of $364 billion. On May 12,
2004, the Administration requested an additional $25 billion for the ongoing
operations in Afghanistan and Iraq. 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 alternative assumptions
about discretionary spending growth.
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 the first of three
continuing resolutions on appropriations (H.J.Res. 107) on September 29. Congress
adopted three more appropriations during October 2004. In the second after-election
session, Congress passed and the President signed an omnibus appropriation for
FY2005 (The Consolidated Appropriations Act, 2005; P.L.108-447; H.R. 4818)
containing the remaining nine regular appropriations. In early 2005, the
Administration indicated that it will request an $80 billion supplemental
appropriation for FY2005 early in the new year.
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Receipts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Deficits (and Surpluses) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
CBO’s Alternative Policies Not Included in the Baseline . . . . . . . . . . . . . . 17
The Longer Run . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
The Budget and the Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
For Additional Reading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
CRS Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
List of Figures
Figure 1. Uncertainty in CBO’s Projections of the Surplus or Deficit
Under Current Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Figure 2. Outlays, FY2003-FY2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Figure 3. Receipts, FY2003-FY2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Figure 4. Deficit(-)/Surpluses, FY2003-FY2014 . . . . . . . . . . . . . . . . . . . . . . . . . 16
Figure 5. Alternative Deficits(-)/Surpluses, FY2003-FY2014 . . . . . . . . . . . . . . 18
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 . . . . . . . . . . . . 15
Table 5. The Cumulative Effects of CBO’s Policy Alternatives
Not Included in CBO’s Baseline for Selected Time Periods . . . . . . . . . . . . 19

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
Congress and the President completed action on the FY2005 regular
appropriations on November 20, 2004, and December 7, 2004, after the presidential
election. On those dates respectively, Congress passed and the President signed the
Consolidated Appropriations Act, 2005, containing nine of the 13 regular
appropriations for FY2005. Only one regular appropriation had become law before
the start (on October 1, 2004) of the new fiscal year. Congress passed and the
President signed three more during deliberations in October.
The new budget cycle for FY2006 is expected to produce changes to the
FY2005 budget. In late January 2005, the Administration indicated that it would
propose an $80 billion supplemental appropriation for FY2005 (much of which will
be spent in subsequent years). An estimated $30 billion to $35 billion would become
outlays in FY2005. This additional spending would raise the year’s deficit to
approximately $427 billion, according to the Administration.

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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 the CBO and OMB 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, Current Services Baseline, 2/04
2,037
2,397
-360
OMB, Budget DCA 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. CSB 7/30/04
2,108
2,400
-292
CBO Update 9/7/04
2,094
2,442
-348
CBO, BEO Baseline, 1/25/05
2,057
2,425
-368
OMB, Budget Proposals, 2/05
2,053
2,479
-427
OMB, Budget, Current Services Baseline, 2/05
2,053
2,443
-390
*The conference report (H.Rept. 108-498) passed the House on May 19, 2004, but has yet to be considered in
the Senate.
BEO — The Budget and Economic Outlook, CBO.
EPP — CBO’s estimates of the President’s proposals.
DCA Current Services Baseline — Current Service Baseline estimates that follow the Deficit Conttrol Act
directions for producing baselines.
The war on terrorism, the 2001 recession, the slow economic recovery from that
recession, changes in policies (tax cuts; spending increases), and changes in the
technical assumptions in the underlying budget-economic relationships contributed
to the deterioration in the budget outlook since the expectations of large and growing
surpluses from early in 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 FY2014.1 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
2004 revisions showed a smaller ($348 billion) FY2005 baseline deficit and a larger
FY2014 baseline deficit ($65 billion) than its earlier estimates.
CBO’s budget reports generally include the estimated budgetary costs (including
higher or lower debt service costs) of selected policies not included in the baseline
estimates. These alternative policies have included the cost of extending expiring tax
provisions, including interest costs (in CBO’s January 2005 report estimates that this
would increase the five-year (FY2005-FY2009) cumulative deficit by $103 billion,
and by a cumulative $1.4 trillion over the 10-year period, FY2005-FY2014),
reforming the alternative minimum tax (a $147 billion five-year cumulative increase
in the deficit and by $430 billion over 10-years, FY2005-FY2014), and several
alternative assumptions about the growth rate of discretionary spending (including
defense) that ranged from a freeze in appropriations (a $184 billion cumulative five-
year decrease in the deficit and a cumulative $1.0 trillion decrease in the deficit
between FY2005 and FY2014) to increasing discretionary spending at the growth rate
of nominal gross domestic product (GDP; a $236 billion five-year cumulative
increase in the deficit and by $1.3 trillion for the full 10 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
(at that time) of the tax proposals produced a $213.3 billion revenue reduction (from
Administration baseline estimates) between FY2005 and FY2009 and a $1,240.2
billion revenue 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
1 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 Emergency Deficit Control Act of 1985 (DCA) and the Congressional
Control and Impoundment Act of 1974.

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billion between FY2005 and FY2014. Most of the cost of extending the tax cuts
would fall on the budget after FY2009.
The Administration 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 President’s FY2006 budget request (February 7, 2005)
contained re-estimated FY2005 budget data. The revised deficit for FY2005 was
larger (by $96 billion) than in its July 2004 mid-year report.
CBO included revised baseline budget estimates for FY2005 in its January 2005
budget report, The Budget and Economic Outlook: Fiscal Years 2006-2015. Both
receipts and outlays are smaller and the deficit is larger than in CBO’s September
2004 budget report (see Table 1). The baseline estimates do not reflect the
Administration’s January 2005 supplemental proposal for funds for Afghanistan and
Iraq.
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.)


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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
outcome from the originally proposed or estimated amounts. There is little reason
to expect this uncertainty to diminish substantially in current or future budget
projections.2
Figure 1. Uncertainty in CBO’s Projections of the Surplus or
Deficit Under Current Policies
Source: Chart created by CBO; from The Budget and
Economic Outlook: FY2006-FY2015
, January 2005, p. 11.
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
(in this case over five years), by changes in economic and the related technical factors
that underpin the budget estimates (CBO did not include a separate discussion of
uncertainty in its January 2005 budget report.) The chapter contains a discussion of
2 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 the populations eligible for these programs is relatively
straightforward.

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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 January 2005 Budget and Economic Outlook. It represents
the most likely budget outcomes clustered in the center, in the darkest part, of the
figure. The lightest gray represents the less likely outcomes. The entire fan in
FY2010 represents the range within which CBO predicts that the deficit or surplus
will have a 90% chance of falling.
The President’s (FY2005) budget included similar information in the chapter,
“Comparison of Actual to Estimated Totals,” 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 (February
2004) calculations, there would be a 90% chance that the FY2009 budget will have
a deficit or a surplus that would fall within $500 billion above or below the
Administration’s (then) currently estimated deficit for that year. This produced a
range of outcomes from a deficit of approximately $740 billion to a surplus of
approximately $260 billion, within which the deficit or surplus has a 90% chance of
falling.
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
expected or proposed spending and tax policies, or changes in the technical
components of the budget models can have substantial effects on moving the
eventual budget outcomes away from the previous 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

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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)
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 altered the way budget legislation
(appropriations, tax cuts) moves through Congress. The House put in place

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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
reconciliation instructions from an adopted budget resolution, tax cut legislation is
open to amendment 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 passed three more of the 13 regular appropriation bills during October
2004, but was unable to pass the remaining nine individually. Two more CRs (P.L.
108-416, November 11, 2004; P.L. 108-434, December 3, 2004) were adopted to
provide Congress with the time needed to complete action on the FY2005
appropriations. In an after-elections session, Congress combined the remaining nine
regular appropriations into one omnibus bill, using the Foreign Operations
appropriation legislation (H.R. 4818) as the vehicle. The legislation passed Congress
on November 20, 2004, and was signed by the President (P.L. 108-447; The
Consolidated Appropriations Act, 2005) on December 8, 2004. The appropriations
will provide approximately $837 billion in budget authority for FY2005.
Earlier, 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.

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Outlays
The Administration’s FY2005 budget (February 2004) 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.3 Under its modified assumptions,
FY2005 baseline outlays would be $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 Administration’s modified current services baseline estimates, when
compared to the proposals, show smaller changes than the difference between the
proposal and the traditional 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 DCA 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. 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
CBO Baseline 1/25/05
2,292 a
2,425
2,507
2,618
2,743
2,869
3,706
President’s FY06 Budget, 2/05

2,479
2,568
2,656
2,758
2,883

President’s FY06. Current Services 2/05

2,443
2,539
2,650
2,770
2,897

* The conference report (H.Rept. 108-498) passed the House on May 19, 2004, but was not considered in the
Senate.
a. Actual outlays for FY2003 and FY2004.
DCA Current Services — Current Service Baseline estimates that follow the Deficit Control Act directions for
producing baselines.
EPP — CBO’s estimates of the President’s proposals.
CSB — The Administration’s current services baseline.
The Administration’s original proposals, if adopted, would have (under
Administration estimates) raised outlays $81 billion (3.5%) above the
Administration’s FY2004 outlay estimate and $3 billion (0.1%) above its FY2005
3 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
outlays, the modified baseline used this year 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 to the baselines.

CRS-10
current services baseline outlay estimate.4 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 Afghanistan or
Iraq after the end of FY2004, which produced a smaller initial outlay estimate than
if estimates of these costs had been included. 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 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
Figure 2. Outlays, FY2003-FY2014
GDP).
(as percentages of GDP)
21%
CBO’s March 2004
revised baseline estimates
showed outlays rising from
20.0% of GDP in FY2005 to 20%
20.1% of GDP in FY2009
and remaining at that level
through FY2014. Using one
of CBO’s alternative 19%
scenarios for spending, one
that assumes discretionary
outlays grow at the rate of
nominal GDP growth rather
18%
than the lower rate of
inflation, outlays would
equal 20.1% of GDP in
FY2005, rising to 21.0% of
OMB 2/05
GDP in FY2009 and to 17%
OMB DCA Baseline 2/05
21.9% of GDP in FY2014.
CBO Baseline 1/05
CBO Alternative Baseline 1/05
OMB’s
Mid-Session
Review (MSR; July 2004) 16%
indicated a modest increase
2003
2005
2007
2009
2011
2013
4 The FY2005 outlay proposals would be $42 billion (1.7%) below the traditional
formulation of the baseline.

CRS-11
in outlays for the five years forecast. Policy changes accounted for most of the
increase in the estimate for FY2005, while reestimates of underlying policy produced
most of the increases in subsequent years. Outlays as a share of GDP would fall from
19.8% in FY2005 to 19.1% in FY2009. Under the proposals in the MSR, combined
outlays for defense and homeland security would grow by $26 billion over five years;
nondefense, non-homeland security discretionary spending would fall by $1 billion
over the same period; total mandatory spending would grow by $352 billion; and net
interest would increase by $112 billion, over the same five years.
CBO’s revised baseline estimates in its September 2004 Update, showed larger
outlays than in the March baseline estimate for each of the 10 years in the forecast.
Most of the change resulted from legislation adopted after the March report. The
revisions did little to alter relative growth in the components of spending.
Discretionary spending would increase the least, while mandatory and net interest
outlays would increase the most, for both the FY2005-FY2009 and the FY2005-
FY2014 periods.
The Administration’s original proposals envisioned holding to almost zero
growth (if not actual reductions) the non-defense, non-homeland security
discretionary spending throughout the five year forecast. The OMB DCA baseline
assumes that all discretionary spending will grow at the rate of inflation. For CBO,
the baseline indicates that the slow dollar growth in discretionary spending will
counter, to some extent, the growth in mandatory and net interest spending, and will
reduce total outlays as a share of GDP. The CBO adjusted baseline adopts the
assumption that discretionary spending will grow at the rate of GDP growth (faster)
rather than the rate of inflation (slower), raising outlays as a share of GDP over the
10 years covered in the CBO report.
The January 2005 CBO budget report reduced, slightly (from $2,442 billion to
$2,425 billion), estimated baseline outlays compared to its September 2004
estimates. CBO’s new report estimated that outlays through FY2014 would be
slightly smaller in each year than it had expected in its previous report. The
President’s FY2006 budget (February 2005) showed slightly larger outlays for the
years FY2005 through FY2009 than it had estimated in July 2004. Figure 2 shows
OMB outlay estimates, both its proposals and its Deficit Control Act (DCA) baseline
estimates, as percentages of GDP from the FY2006 budget through FY2009. The
figure also includes CBO’s baseline estimates (from January 2005) and its adjusted
baseline that includes the assumption that discretionary spending grows at the rate
of nominal GDP growth rather than at the rate of inflation. This adjusted baseline
shows outlays, after FY2006, growing as a share of GDP. The other 3 estimates all
show outlays declining as a share of GDP to levels below its recent historical
average.

CRS-12
Receipts
The Administration’s original FY2005 budget (February 2004) 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 Administration estimated $213 billion over
FY2005 to FY2009 period and by $1,240 billion over the FY2005 to FY2014
period.5 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.6
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 F005 Budget, 2/2/04
1,798
2,036
2,206
2,351
2,485
2,616

President’s FY05 Current Services 2/2/04
1,791
2,037
2,215
2,354
2,497
2,636

Pres.’s FY05 DCA 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
CBO Baseline 1/25/05
1,880 a
2,057
2,212
2,357
2,508
2,662
3,847
President’s F006 Budget, 2/2/04

2,053
2,178
2,344
2,507
2,650

President’s FY06 Current Services 2/2/04

2,053
2,178
2,347
2,518
2,668

* The conference report (H.Rept. 108-498) passed the House on May 19, 2004, but was not considered in the
Senate.
a. Actual receipts for FY2003 and FY2004.
DCA Current Services — Current Service Baseline estimates that follow the Deficit Control Act directions for
producing baselines.
EPP = CBO’s estimates of the President’s proposals.
CSB — The Administration’s current services baseline.
5 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.
6 These amounts from CBO do not include the outlay effects of the extensions or other
proposals.

CRS-13
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
Figure 3. Receipts, FY2003-FY2014
FY2003, receipts had fallen
for three years in a row in
(as percentages of GDP)
21%
both dollars (to $1,782
OMB 2/05
billion) and as a percentage
OMB DCA Baseline 2/05
of GDP (to 16.4%), with that
CBO Baseline 1/05
share of GDP being the
lower than in any year since 20%
CBO Alternative Baseline 1/05
FY1955. Receipts grew to
$1,880 billion, but fell to
16.3% of GDP in FY2004.
The Administration expected 19%
receipts in FY2005 to
exceed, in dollars (but not as
a percentage of GDP),
receipts in FY2000..
18%
The Administration’s
proposals would extend the
current middle class relief 17%
f r o m t h e a l t e r n a t i v e
minimum tax (AMT) for one
year. Without a further
extension, a growing number
16%
of middle class taxpayers
2003
2005
2007
2009
2011
2013
will find themselves subject
to the AMT. If further
adjustments are not made, estimates indicate that the AMT, which affected a little
over 600,000 taxpayers in 1997, could grow to 33 million taxpayers in 2010.7 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.
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.”8 The downward adjustment increased the resulting estimated deficits
by $20 billion (in FY2004) and by $15 billion (in FY2005).
The CBO baseline and OMB’s proposed and baseline estimates from early 2005
are fairly similar from FY2005 through FY2009 (see Figure 3). Receipts rise from
7 See CRS Report RL30149, The Alternative Minimum Tax for Individuals, by Gregg A.
Esenwein, for a discussion of the AMT issue.
8 OMB, Budget of the U.S. Government for Fiscal Year 2003, February 2004, Analytical
Perspectives
, p. 239.

CRS-14
a little over 16% of GDP in FY2004 to between 17.5% and 18.0% of GDP in
FY2009. CBO’s baseline, which incorporated the scheduled expiration of the tax
cuts, extended the projections through FY2014. In the CBO baseline, receipts rise
rapidly after FY2010 and reach 19.5% of GDP in FY2014 (generally from the effect
on total receipts of the baseline assumption that the tax cuts will expire as currently
required by law).
Using CBO’s estimates of alternative revenue policies to remove the expiration
of the tax cuts and to reform the alternative minimum tax (AMT) results in a much
slower growth in receipts as a share of GDP (see the CBO alternative baseline in
Figure 3).9 Receipts still rise as a percentage of GDP, but by much less than the
other three estimates. By FY2009, receipts are just over 17% of GDP, a level below
most years since the 1950s (when the role of the government was quite different).
By FY2014, the adjusted receipts rise to 17.5% of GDP, below most years since the
mid-1970s (except for recession years).
The 2004 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. CBO’s January 2005 baseline receipt estimates are similar over
the FY2005 through FY2014 to those in its mid-year (September 2004) baseline
estimates. OMB’s FY2006 budget’s receipt estimates are slightly smaller in each
year, between FY2005 and FY2009 than it estimated in its July 2004 report.
Deficits (and Surpluses)
Deficits and surpluses are the residuals left after Congress and the President set
policies for spending and receipts. Surpluses, in which receipts are greater than
outlays, reduce federal debt held by the public which can lead to lower net interest
payments (among other effects); deficits, in which outlays exceed receipts, increase
government debt held by the public, generally 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
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 and assumptions.
9 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-15
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.
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 FY05 Current Services 2/2/04
-528
-360
-253
-229
-218
-211

Pres.’s FY05 DCA Current Services,
-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. CSB 7/30/0
-444
-292
-234
-217
-204
-202

CBO Update 9/04
-422
-348
-298
-308
-318
-312
-65
CBO Baseline 1/25/05
-412 a
-368
-295
-261
-235
-207
141
President’s FY06 Budget, 2/05

-427
-390
-312
-251
-233

President’s FY06 Current Services 2/05

-390
-361
-303
-251
-229

* The conference report (H.Rept. 108-498) passed the House on May 19, 2004, but was not considered in the Senate.
a. Actual receipts for FY2003 and FY2004.
DCA Current Services — Current Service Baseline estimates that follow the Deficit Control Act directions for producing
baselines.
EPP — - CBO’s estimates of the President’s proposals.
CSB — The Administration’s current services baseline.
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.
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.
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 OMB (July 2004) and CBO (September 2004)
reduced the deficit estimates between FY2004 and FY2009, but increased CBO’s baseline

CRS-16
estimates between FY2010 and FY2014 (see Table 4). OMB’s July 2004 deficit estimates
as shares of GDP fell below the February estimates by greater amounts in FY2004 and
FY2005 than in subsequent years. CBO’s September 2004 baseline deficit estimates, as
shares of GDP, were smaller than its March estimates for FY2004 through FY2007 and
larger for the remaining years in its projection (through FY2014).
Incorporating selected CBO alternative policies (to reflect faster discretionary spending
growth, extending the tax cuts, reforming the AMT, and incorporating the increased debt
servicing costs), results in deficit estimates that increase as a percentage of GDP after
FY2006 and through FY2014. Figure 4 shows the deficit estimates from OMB (policy and
baseline) and CBO (baseline and alternative) from their early 2005 reports as percentages of
GDP. The 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 over their five years.
CBO’s January 2005 budget
report raised its deficit estimate to
Figure 4. Deficit(-)/Surpluses,
$368 billion, for FY2005, $20
FY2003-FY2014
billion above its September 2004
(as percentages of GDP)
estimate. For all subsequent years,
1%
CBO’s deficit estimates from
January 2005, are smaller (leading to
a $141 billion surplus in FY2014)
0%
than in its September 2004
estimates. The comparison between
these two CBO estimates is
misleading. Because of the rules -1%
that CBO must follow in
constructing its baseline, the
September 2004 baseline estimates -2%
included, in each year in the
forecast, an extrapolation of the
supplemental funding provided for
FY2004. The January 2005 -3%
estimates did not include the
FY2004 supplemental funding and
with no supplemental funding for -4%
OMB 2/05
FY2005, so far, the new estimates
OMB DCA Baseline 2/05
show smaller outlays and a smaller
CBO Baseline 1/05
deficit throughout the forecast
CBO Alternative Baseline 1/05
period. According to CBO, -5%
including the supplementals in the
2003
2005
2007
2009
2011
2013
September forecast raised the
cumulative deficit by $1.4 billion. CBO adjusted the September and January estimates to
make them comparable. The result lowered the cumulative (FY2005 through FY2014)
deficit estimate by $500 billion in the September estimates. This change indicates that,

CRS-17
instead of showing an improvement in the budget outlook from the September to January
estimates, the outlook has actually deteriorated (see Figure 5).10
Compared to the September 2004 CBO budget report, the January 2005 CBO budget
report showed smaller deficits through FY2011, followed by growing surpluses through
FY2015. Part of the changed outlook came from the change in the year on which the
baseline is built. The change moved the base year from FY2004 for the September report
to FY2005 in January report. Supplemental appropriations for defense for FY2004 were
included in the baseline estimates for FY2005 through FY2014 in CBO’s September 2004
budget report. In CBO’s January 2005 report, with no defense supplementals yet adopted
for FY2005, the baseline estimates are based on the regular appropriations adopted for
FY2005 in during 2004 (calendar year). The difference between the assumptions produced
a smaller 10-year cumulative deficit, by $1.4 trillion, in January 2005 compared to the
September 2004 baseline estimates..11 As CBO notes in its January 2005 budget report, the
January baseline estimates may appear to be an improvement over CBO’s previous baseline
from September 2004. Once the differences in certain policy assumptions are removed, there
is no improvement in the budget outlook. According to CBO (in its January 2005 report —
see pages 1-2), “under identical assumptions about spending on Iraq, Afghanistan, and other
activities related to the war on terrorism, the current baseline outlook [January 2005] is less
favorable than the one presented in September [2004]...” 12 This is illustrated in Figure 5.
The line labeled CBO Baseline Excluding Supplementals 9/04 represents the September
2004 estimates reformulated to match the war on terror assumptions in the January 2005
baseline. The January baseline estimate has a larger deficit in each year in the forecast than
does the reformulated September baseline estimate, indicating a slight worsening in the
budget outlook, according to CBO.
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 were
those that may have been considered or may have more accurately reflected budget
experience than the Deficit Control Act (DCA) 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.
Most of the alternative policies would be fairly costly when compared to CBO’s
baseline, running from $96 billion in lower receipts extending expiring tax provisions from
FY2005 through FY2009 to $220 billion in higher outlays for increasing discretionary
spending at the rate of GDP growth. These amounts do not include the higher interest costs
10 See Table 1-1 in CBO’s January 2005 report, The Budget and Economic Outlook:
FY2006-FY2015.
The beginning of chapter 1 in this report discusses this adjustment.
11 The baseline statutes require that CBO extrapolate all discretionary funding from the most
recent fiscal year in creating its baseline estimates. The September 2004 CBO report
(produced near the end of FY2004) used FY2004 funding, including supplemental funding
for Afghanistan and Iraq; the January 2005 report used already adopted funding for FY2005,
which does not yet include any supplemental funding for Afghanistan and Iraq.
12 CBO, The Budget and Economic Outlook: FY2006-FY2015, January 2005, pp. 1-2.

CRS-18
associated with larger deficits and debt.13 The same report indicated that freezing
discretionary spending at the FY2005 level would reduce spending by an estimated $172
billion for the FY2005 through FY2009 period compared to the baseline estimates over the
same years. Figure 5 shows the CBO baseline deficit and incorporating the costs of
alternative policies for extending the tax cuts, reforming the AMT, and increasing
discretionary spending at the rate of GDP growth (as percentages of GDP) from CBO’s
January 2005 and September 2004 budget reports.
Figure 5. Alternative Deficits(-)/Surpluses,
The costs or savings of the
FY2003-FY2014
alternatives become substantially
(as percentages of GDP)
larger over the 10 years, FY2005
2%
CBO Baseline 9/04
through FY2014, rather than the five
years, FY2005 through FY2009.
CBO Alternative Baseline 9/04
CBO’s January 2005 report estimated
1%
that extending expiring tax provisions
CBO Baseline Excluding
for the 10-year period would increase
Supplementals 9/04
the cumulative deficit by $1.3 trillion
0%
CBO Baseline 1/05
(with another $156 billion in higher
CBO Alternative Baseline1/05
interest costs). Most of that, $1.2
trillion (and $149 billion in higher -1%
interest costs), occurs in the second
five years, FY2010 through FY2014.
Reforming the alternative minimum -2%
tax over the 10 years would cost an
estimated $347 billion plus another
$83 billion in interest costs. Of the -3%
total 10 year cost, $210 billion (plus
$73 billion in interest costs) falls in
the second five years.
-4%
Increasing discretionary spending
at the rate of nominal GDP growth -5%
produced a 10-year $1.2 trillion
2003
2005
2007
2009
2011
2013
cumulative increase in the deficit (plus
another $191 billion in debt service
costs) in CBO’s January 2005 report. Most of the cumulative increase, $934 billion, would
take place in the second five years of the10-year period. The amounts for these alternatives
for the five and ten-year periods from the January 2005 CBO report are shown in Table 5.
13 These two policies would produce an estimated e $7 billion and $16 billion in interest
costs respectively.

CRS-19
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
2010-2014
2005-2014
Policy Alternatives That Affect Discretionary Spending
Assume Phasedown of Activities in Iraq and Afghanistan and
Continued Spending for the Global War on Terrorisma
Effect on the deficit . . . . . . . . . . . . . . . .
-285
-135
-420
Debt service . . . . . . . . . . . . . . . . . . . . . .
-35
-109
-144
Increase Total Discretionary Appropriations at the Growth Rate of Nominal GDP
Effect on the deficit . . . . . . . . . . . . . . . .
-220
-934
-1,154
Debt service . . . . . . . . . . . . . . . . . . . . . .
-16
-175
-191
Freeze Total Discretionary Appropriations at the Level Provided for 2005
Effect on the deficit . . . . . . . . . . . . . . . .
172
726
898
Debt service . . . . . . . . . . . . . . . . . . . . . .
12
137
149
Policy Alternatives That Affect the Tax Code
Extend Expiring Tax Provisionsb
Effect on the deficit
EGTRRA and JGTRRA . . . . . . . . . . . . .
-41
-988
-1,029
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . .
-52
-190
-242
Total . . . . . . . . . . . . .
-96
-1,178
-1,274
Debt service . . . . . . . . . . . . . . . . . . . . . .
-7
-149
-156
Reform the Alternative Minimum Taxc
Effect on the deficit . . . . . . . . . . . . . . . .
-137
-210
-347
Debt service . . . . . . . . . . . . . . . . . . . . . .
-10
-73
-83
Memorandum:
Cumulative Deficit (-) or Surplus in CBO’s Baseline
-1,366
2
-1364
Sources: Congressional Budget Office; Joint Committee on Taxation.
Notes: EGTRRA = Economic Growth and Tax Relief Reconciliation Act of 2001; JGTRRA =
Jobs and Growth Tax Relief Reconciliation Act of 2003; * = between -$500 million and $500
million.
Positive amounts indicate a reduction in the deficit or an increase in the surplus. “Debt service”
refers to changes in interest payments on federal debt resulting from changes in the
government’s borrowing needs.
a. This alternative assumes an eventual slowdown of U.S. activities in Iraq and Afghanistan but
continued spending for the global war on terrorism throughout the 10-year period. It also
includes funding for domestic military operations for homeland security.
b. This estimate does not include the effects of extending the increased exemption amount for
the alternative minimum tax, which expires in December 2005. The effects of that alternative
are shown below.
c. This alternative assumes that the exemption amount for the AMT (which was increased
through December 2005 in the Working Families Tax Relief Act of 2004) is extended at its
higher level and, together with the AMT tax brackets, is indexed for inflation after 2005. 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 $247 billion
(plus $24 billion in debt-service costs) over the 2006-2015 period.

CRS-20
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.14
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....15
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
14 CBO, The Budget and Economic Outlook: Fiscal Years 2005-2014, Jan. 2004, p. 8-9.
15 OMB. Budget of the United States Government for Fiscal Year 2005, Feb. 2004, p.38-39.

CRS-21
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.16
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 under
current policies experiences a shrinking deficit and, under CBO’s January 2005 baseline,
moves into surplus in FY2012. Under the CBO alternative policies, the deficit grows as a
percentage of GDP; it does not shrink or disappear, during a period of expected normal
economic growth. This result implies that the budget has a basic fiscal imbalance that cannot
be eliminated by economic growth. To produce a balanced budget or one in surplus will
require spending reductions or tax increases.
The last, extremely positive budget outlook was forecast in early 2001 and was
substantially based on the favorable future economic conditions that were then expected,
along with government policies that were in approximate balance if not favoring surpluses.
That outlook expected a continuation in the overall improvement of 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.
16 Potential GDP represents an estimate of what GDP would be if both labor and capital
were as fully employed as is possible.

CRS-22
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 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 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-23
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.