Order Code RL32812
CRS Report for Congress
Received through the CRS Web
The Budget for Fiscal Year 2006
Updated March 31, 2005
Philip D. Winters
Analyst in Government Finance
Government and Finance Division
Congressional Research Service ˜ The Library of Congress

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The Budget for Fiscal Year 2006
Summary
The budget report of the Congressional Budget Office (CBO), The Budget and
Economic Outlook: Fiscal Years 2006-2015 (January 25, 2005), included baseline
estimates (assuming current policies) for FY2005 through FY2015. Under the
baseline assumptions, CBO estimated a FY2006 deficit of $295 billion (2.3% of
gross domestic product [GDP]). This is smaller than CBO’s FY2005 baseline deficit
estimate ($368 billion, 3.0% of GDP). CBO’s baseline estimates do not include
assumptions about possible future legislation that may increase or decrease spending
or receipts and therefore change the deficit. The baseline assumptions assume the
continuation of current law, including that laws changing the level of future revenues
or outlays will go into effect as scheduled. Therefore, CBO’s revenue estimates
include the assumption that the tax cuts of 2001 and 2003 will expire as scheduled
in 2010, reverting the tax code to pre-tax cut levels.
The President presented his FY2006 budget, containing proposals and estimates
for FY2006 through FY2010, on February 7, 2005. It included a deficit estimate of
$390 billion (3.0% of GDP) in FY2006, and steadily declining deficits through
FY2010. The budget did not include estimates of the cost of the war on terror
beyond FY2005. It did not include cost estimates of the Administration’s proposals
for changes in Social Security. It did include proposals that, over five years, would
reduce spending among the nondefense domestic discretionary programs in inflation
adjusted terms; slow the growth in defense spending; slow the growth in selected
areas of mandatory spending, including Medicaid; and make further tax cuts and
make permanent the 2001 and 2003 tax cuts, the effects of which do not appear in a
significant way within the years covered by the budget.
CBO’s estimate of the President’s policy proposals (March 2005) had a smaller
deficit ($332 billion, 2.6% of GDP), from slightly higher revenues and slightly lower
outlays, than in the President’s budget. Although the pattern of spending and receipts
varies somewhat between the Administration totals and CBO reestimates, their
cumulative amounts for receipts, outlays, and the deficit for FY2006 through FY2010
were similar.
Both the House and Senate adopted their respective budget resolutions for
FY2006 on March 17, 2005. The House resolution (H.Con.Res.95) closely followed
the Administration’s proposals; the Senate’s resolution (S.Con.Res.18) diverged in
several areas from the resolution in the House and the Administration’s proposals.
The House-passed FY2006 budget resolution matched the resolution adopted by the
House Budget Committee. The Senate-passed budget resolution differed (with
higher discretionary spending; higher reconciliation covered tax reductions) from the
one adopted by the Senate Budget Committee. The Senate resolution also reduced
the size of the cut (from baseline estimates) in mandatory spending. A conference
to resolve these differences is expected to begin in early April.
This report will be updated as events warrant.

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Contents
Background and Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
The Current Situation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Budget Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Budget Estimates and Proposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Uncertainty in Budget Projections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Budget Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Outlays . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Receipts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Deficits (and Surpluses) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
CBO’s Alternative Policies Not Included in the Baseline . . . . . . . . . . . . . . 13
The Longer Run . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
The Budget and the Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
For Additional Reading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
CRS Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
List of Figures
Figure 1. Uncertainty in CBO’s Projections of the Surplus or Deficit
Under Current Policies(Deficit or surplus as a percentage of GDP) . . . . . . . 5
List of Tables
Table 1. Budget Estimates for FY2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Table 2. Outlays for FY2004-FY2010 and FY2015 . . . . . . . . . . . . . . . . . . . . . . . 7
Table 3. Receipts for FY2004-FY2010 and FY2015 . . . . . . . . . . . . . . . . . . . . . . 10
Table 4. Surpluses/Deficits(-) for FY2004-FY2010 and FY2015 . . . . . . . . . . . . 12
Table 5. The Budgetary Effects of Selected Policy Alternatives Not
Included in CBO’s Baseline . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

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The Budget for Fiscal Year 2006
Background and Analysis
Presidents submit their budget proposals for the upcoming fiscal year (FY) early
in each calendar year. The Bush Administration released its FY2006 budget (The
Budget of the U.S. Government, Fiscal Year 2006) on February 7, 2005. The
multiple volumes contain general and specific descriptions of the Administration’s
policy proposals and expectations for the budget for FY2006 through FY2010. It
includes a section on long-term fiscal issues facing the nation and provides limited
information on the revenue and mandatory spending changes after 2010. 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
CBO released its baseline budget report (The Budget and Economic Outlook:
Fiscal Years 2006-2015) on January 25, 2005. The baseline estimates, according to
statute, incorporate current government policy, including any already-enacted future
policy changes — such as the expiration of many of the 2001 and 2003 tax cuts at the
end of the decade. The baseline estimates are not meant to be CBO’s estimate of
what the budget in the future will actually look like, since CBO is constrained by
current policy assumptions.1 The Administration, through the Office of Management
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 and enacted future changes into the future.
Discretionary spending is increased by the rate of inflation. Their construction generally
(continued...)

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CRS-2
and Budget (OMB), presented the President’s budget to Congress and the public on
February 7, 2005. The President’s budget incorporated most of the President’s
proposals, but did not contain the details of his proposals for changes in Social
Security or future costs of the war on terror. The House and Senate Budget
Committees adopted their versions of the budget resolution for FY2006, during the
week of March 7. The House and Senate followed up by passing their (differing)
budget resolutions (H.Con.Res. 95; S.Con.Res. 18) on March 17, 2005.
Budget Totals
Table 1 contains budget estimates for FY2006 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 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 are generally
expected to change over time from those originally proposed or estimated by the
President, CBO, or Congress.
Table 1. Budget Estimates for FY2006
(in billions of dollars)
Deficit (-)/
Receipts
Outlays
Surplus
CBO, BEO Baseline, 1/05
$2,212
$2,507
$-295
OMB, Budget Proposals, 2/05
2,178
2,568
-390
OMB, Budget, Current Services Baseline, 2/05
2,178
2,539
-361
CBO, Revised Baseline, 3/05
2,212
2,510
-298
CBO, EPP 3/05
2,210
2,542
-332
House Budget Committee, 3/05
2,195
2,571
-376
Senate Budget Committee, 3/05
2,197
2,559
-362
Senate FY06 Budget Resolution 3/05
2,193
2,562
-368
BEO — The Budget and Economic Outlook, CBO.
EPP — CBO’s estimates of the President’s proposals.
CSB — The Administration’s current services baseline.
1 (...continued)
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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Budget Estimates and Proposals
CBO’s first budget report for FY2006, the Budget and Economic Outlook:
Fiscal Years 2006-2015 (January 2005), contained baseline estimates and projections
for FY2005 through FY2015. The report estimated a FY2006 deficit of $295 billion
(down from an estimated $368 billion deficit in FY2005). By FY2010, the baseline
deficit estimate had fallen to $189 billion. Under the baseline assumptions, CBO
estimates increase discretionary spending at the rate of inflation; do not include
extending the 2001 and 2003 tax cuts after 2010; and allow the alternative minimum
tax (AMT) relief to expire as currently scheduled. The effects of these assumptions
increase receipts in the near-term (because of the reversion of the AMT to previous
law) and increase receipts by substantial amounts after FY2010 when most of the tax
cuts from 2001 and 2003 expire under current law. The result of the assumptions
that CBO must follow likely understates the size and persistence of the deficit over
the next 10 years.
The CBO baseline assumptions show the budget remaining in deficit through
FY2011 ($80 billion) followed by surpluses through FY2015 ($141 billion). The
reduction in the deficit after calendar year 2010, leading to the surpluses, is largely
explained by the required inclusion of the expiration of major tax cuts in the baseline
estimates, producing a rapid increase in revenues.
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. They usually reflect possible future policy, such as making the tax cuts
permanent and fixing the AMT problem, or changing the rate of discretionary
spending growth. In CBO’s report, making the tax cuts permanent increases the five-
year (FY2006-FY2010) cumulative deficit (including higher debt-service costs) by
$156 billion, and by a cumulative $1.9 trillion over the 10-year period, FY2006-
FY2015). CBO’s estimate of reforming the alternative minimum tax produces a
$218 billion five-year cumulative increase in the deficit and a $503 billion increase
over 10 years (FY2006-FY2015). If discretionary spending grows at the rate of GDP,
rather than at the rate of inflation, the five-year cumulative deficit increases by $378
billion and the 10-year cumulative deficit increases by $1.7 trillion. Freezing
discretionary appropriations at the FY2005 level would reduce the five-year
cumulative deficit by $294 billion and the 10-year cumulative deficit by $1.3 trillion.
President Bush’s FY2006 budget called for extending and making permanent
most of the tax cuts adopted in 2001 and 2003. The budget showed this reducing
receipts by $53 billion between FY2006 and FY2010 and by $1.1 trillion between
FY2006 and FY2015 (these estimates do not include the resulting higher debt-service
costs resulting from the change). The Administration’s total receipt proposals, which
include other revenue changes, would reduce five-year receipts by $106 billion and
10-year receipts by $1.3 trillion.
The Administration again this year used a slightly modified set of assumptions
to produce the OMB current services baseline estimates, moving the estimates
somewhat closer together. Instead of following the traditional method of
constructing baseline estimates, the Administration’s FY2006 current services
baseline assumed the extension of certain tax provisions (that by current law are

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CRS-4
scheduled to expire), excluded the future cost of one-time events, and included a
timing adjustment to the calculation of federal pay increases. For FY2006, the
differences produced an Administration current services baseline deficit estimate $9
billion smaller than the traditional baseline estimate. By FY2010, the
Administration’s estimated baseline deficit is $16 billion smaller than the traditional
baseline deficit estimate.
The Administration’s budget provided a limited amount of information for the
years beyond FY2010. The budget did include estimates of the cumulative proposed
revenue changes and proposed mandatory spending changes for the periods FY2006
through FY2010 and FY2006 through FY2015, but it contained no information for
the individual years after FY2010.
The President’s budget included a list of 150 discretionary program eliminations
or reductions. According to Administration documentation, these changes would
produce approximately $11 billion in budget authority (not outlay) savings in
FY2006. The documentation did not indicate how large the outlay savings would
result from the reduced budget authority.
The House-passed budget resolution (H.Con.Res. 95) closely followed the
President’s budget. The Senate passed budget resolution (S.Con.Res. 18) deviated
from the House resolution, containing smaller mandatory spending cuts included in
reconciliation, and larger tax cuts covered by reconciliation, and a higher
discretionary spending cap. The Senate made these changes to the Senate Budget
Committee’s reported resolution. The changes moved the House- and Senate-passed
resolutions further apart and may make a conference agreement more difficult to
achieve.
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.2 Small changes in economic conditions, particularly the rate of
GDP growth (from those used in the estimates) can produce large changes in the
budget estimates. According to CBO, a persistent 0.1% increase in the growth rate
of real GDP (beginning in January 2004) would reduce the deficit (including interest
costs) by $51 billion cumulatively over a five-year period. This change would reduce
the cumulative deficit by $236 billion over the next 10 years. Reductions in the rate
of growth would increase the deficit by similar amounts over the same time periods.
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
growing retirements in 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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CRS-5
Figure 1 is from CBO’s January 2005 Budget and Economic Outlook. CBO
indicates that the most likely deficit or surplus outcomes (as percentages of GDP),
through FY2010, are clustered in the center of the figure, in the darkest area. The
lighter shades indicate the less likely outcomes. The distance from the top to the
bottom of the image in the chart (the fan) represents the range within which CBO
predicts that the deficit (or surplus) has a 90% chance of occurring. In FY2010 this
ranges from a surplus of 4% of GDP to a deficit of 5% of GDP.
The President’s (FY2006) budget included a chapter in the Analytical
Perspectives volume titled “Comparison of Actual to Estimated Totals.” The chapter
examined the causes of the changes from the initial budget estimates for FY2004
through the actual results for that year. Like the CBO information, this provides
another example of the uncertainty surrounding budget estimates. The chapter
included a chart based on historical experience, that indicates the possible range of
budget balance (surplus or deficit) outcomes with a 90% certainty. The range for the
current year and following year (which the Administration calls the budget year) rise
from $256 billion to $548 billion.3 By five years beyond the current year, the range
exceeds $1 trillion.
Figure 1. Uncertainty in CBO’s Projections of the Surplus or
Deficit Under Current Policies
(Deficit or surplus as a percentage of GDP)
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% that actual
deficits or surpluses will fall in the darkest area and 90% 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.
3 The current year is the fiscal year we are in: 2005. The budget year is the year that the
President’s budget covers — 2006 — and that Congress will pass legislation to implement.

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CRS-6
Budget projections are very dependent on the underlying assumptions about the
direction of the economy, 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 the budget estimates and projections.
Budget Action
CBO and the Administration released their first budget reports for FY2006, in
late January and early February 2005, respectively. CBO’s report provided baseline
estimates for FY2005 through FY2015. The CBO baseline estimates, following the
instructions mandated by law, did not include any estimated cost for ongoing
operations in Afghanistan and Iraq after FY2005 or any estimates of the
Administration’s proposed, but undefined, change in Social Security. The estimates
assumed that the tax cuts adopted over the Administration’s first term will expire in
2010 as required by current law and that the Alternative Minimum Tax (AMT) will
revert to its previous incarnation when the temporary relief provisions expire at the
end of FY2005. Some alternative assumptions about likely future policy might better
represent the budget’s likely future than the baseline estimates.
OMB’s documents provided estimates for FY2005 through FY2010 with a few
instances of cumulative estimates for FY2006 through FY2015 (these were limited
to revenues and mandatory spending and provided no data for the individual fiscal
years after FY2010). 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 FY2010.
On March 4, 2005, CBO provided its preliminary estimates of the President’s
2006 budget. The estimates takes the policies in the Administration’s budget and
recalculates the effect of those policy proposals using CBO’s underlying assumptions
and budget estimating methods. CBO’s estimates produced smaller deficits than the
Administration for FY2005 through FY2007. They were essentially the same in
FY2008 and were larger than the Administration’s proposals in FY2009 and FY2010.
The full CBO report contained more details, a fuller discussion of the differences,
and unchanged reestimates.
During the week of March 7, 2005, both the House and Senate Budget
Committees adopted their respective versions of the budget resolution for FY2006
(H.Con.Res. 95; S.Con.Res. 18), on party-line votes. Both resolutions followed the
general outline of the Administration’s proposals: constraining discretionary
spending; cutting the growth of some entitlement programs; and extending or making
permanent various tax cuts, and some additional tax reduction. The House and
Senate adopted their resolutions on March 17. The House, after defeating several
substitutes, adopted the budget resolution as approved by the HBC. The Senate, after
debate and a number or amendments, including increasing the size of the tax cut

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CRS-7
covered by the reconciliation instructions, reducing the mandatory spending cuts
(from baseline estimates), and increasing the discretionary spending caps, adopted
its budget resolution. Early in April, a conference committee is expected to begin its
work — which is expected to be difficult — to resolve the differences between the
two resolutions,.
Outlays
The Administration’s FY2006 budget proposed $2,568 billion in outlays for
FY2006, rising to $3,028 billion in FY2010, the last year shown in the President’s
budget. The Administration’s proposals, if adopted, would raise outlays by $83
billion (3.6%) above the Administration’s FY2005 outlay estimate and by 17.9%
from FY2006 to FY2010. (Outlays are expected to grow by 8.2% between FY2004
and FY2005.) Measured against the Administration’s FY2006 current services
baseline outlay estimates, the proposed level of outlays grow by $29 billion (1.1%).
The difference between the current services baseline outlay estimate and proposed
outlays for FY2006 indicates the “cost” of the Administration’s proposed policies.
The year-to-year change (the $83 billion increase) combines the “costs” 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.
Table 2. Outlays for FY2004-FY2010 and FY2015
(in billions of dollars)
FY2004 FY2005 FY2006 FY2007 FY2008 FY2009 FY2010 FY2015
CBO Baseline, 1/05
$2,292 a
$2,425
$2,507
$2,618
$2,743
$2,869
$2,996
$3,706
President’s FY06 Budget, 2/05
2,479
2,568
2,656
2,758
2,883
3,028
—
President’s FY06 CSB, 2/05
2,443
2,539
2,650
2,770
2,897
3,048
—
CBO, Revised Baseline, 3/05
2,444
2,538
2,621
3,731
2,860
2,987
3,777
CBO, EPP 3/05
2,451
2,542
2,629
2,742
2,872
2,999
3,796
House FY06 Budget Resolution, 3/05
2,451
2,571
2,635
2,743
2,864
2,987
—
Senate Budg. Comm. Budg. Res., 3/05
2,455
2,559
2,651
2,755
2,874
2,999
—
Senate FY06 Budget Resolution 3/05
2,455
2,562
2,658
2,760
2,880
3,007
—
a. Actual outlays for FY2004.
EPP — CBO’s estimates of the President’s proposals.
CSB — The Administration’s current services baseline.
As it did in last year’s budget, the Administration modified some of the
underlying policy assumptions in creating its current services baseline estimates for

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CRS-8
FY2006.4 The modifications had a relatively minor effect on the current services
outlay estimates this year.
The President’s budget did
not include estimated costs of the
Discretionary and Mandatory
ongoing action in Afghanistan or
Spending
Iraq after the end of FY2005
(except for outlays flowing from
The President’s budget includes, in its
the supplemental appropriation the
glossary, the general definition of
Administration proposed for
discretionary spending as, “...budgetary
FY2005 — see below). Although
resources...provided in appropriation acts”.
unknown, the amount is unlikely
Mandatory spending is defined as,
to be zero. This implies that the
“...spending controlled by laws other than
Administration’s initial outlay
appropriations acts...”.
estimate for FY2006 (and for the
following years) is smaller than
Currently, discretionary spending
actual outlays will be, even if the
produces 38% of total outlays (42% of total
estimates for the remaining parts
discretionary spending is for defense) and
of the budget are accurate. A week
mandatory spending, including net interest,
after the budget became available,
produces the other 62% (net interest is
the Administration proposed, on
approximately 8% of total outlays).
February 14, 2005, an $82 billion
supplemental appropriation
Discretionary spending is not
(budget authority) mostly for these
completely discretionary and mandatory
costs. Approximately $35 billion
spending is not completely mandatory. All
of this will become outlays in
government activities require some
FY2005 and $25 billion in
discretionary spending to pay salaries and
FY2006, with the remaining being
other operating expenses of the
spent in following years. Although
government. The laws underlying
this produces some outlays for the
mandatory spending can be changed by
war on terror in FY2006, the
Congress, altering the nature of the
Administration is expected to
programs, how much they spend, and how
request another supplemental
they are funded.
(although when is unclear)
specifically for FY2006.
As shares of gross domestic product (GDP), the Administration’s proposals
showed outlays falling from 19.9% of GDP in FY2006 to 19.0% of GDP in FY2010.
CBO’s preliminary estimate of the President’s outlay proposals (March 2004)
showed the shares falling from 19.7% of GDP in FY2006 to 19.0% of GDP in
FY2010, before rising to 19.3% of GDP in FY2015. These outlays-as-shares-of-GDP
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
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 are included in the baseline.

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are below both the average from FY1980 through FY2004 (21.0% of GDP) or the
average from FY1990 through FY2004 (20.2% of GDP).
CBO’s baseline estimates showed outlays falling from 19.5% of GDP in
FY2006 to 19.0% of GDP in FY2010 and sliding slightly to 18.9% of GDP in
FY2015. Using two of CBO’s alternative scenarios for spending — assuming the
phase-down of activities in Iraq and Afghanistan over a number of years and that
total discretionary spending increases at the rate of nominal GDP growth (rather than
the rate of inflation), outlays as shares of GDP would rise from 20.1% of GDP in
FY2006 to 21.0% of GDP in FY2015.
The House and Senate budget resolutions hold total outlay growth to less than
5% from FY2005 to FY2006. For the period FY2005 through FY2010, the
resolutions show outlays growing at a 3.4% annual rate. These outlay totals included
an expected defense supplemental for FY2006 (and the one for FY2005), the two
supplementals providing funding for defense activities in Afghanistan and Iraq. After
FY2006, the resolutions made no assumptions, and provided no funding, for future
activities in Afghanistan and Iraq.5 The supplementals raise outlays in FY2006 while
slowing the growth in outlays for FY2007 through FY2010. If defense
supplementals were to be adopted in these future years, they would raise total outlays
above the levels shown in the resolution and therefore the rates of outlay growth from
those mentioned above.
In both resolutions, because of the assumed FY2006 defense supplemental and
its boost to FY2006 discretionary spending, total discretionary spending falls year-to-
year from FY2006 through FY2008. (Total outlays grow over the same period.)
Although the House and Senate assumed the same size supplemental for FY2006
($50 billion in budget authority), they used different methods of including the
expected supplemental in their respective budget resolutions. The House used the
Allowances function (920) to show the assumed supplemental’s budget authority and
outlays, while the Senate included the assumed supplemental amounts directly in the
Defense function (050). This results in differences in the apparent amount of
discretionary defense spending contained in the House and Senate budget resolutions.
The discretionary spending caps included in both resolutions differed by $5
billion, approximately 1% of nondefense discretionary spending expected in FY2006.
Receipts
The Administration’s FY2006 budget proposed extending and making
permanent many of the tax cuts adopted in the first term that otherwise would expire
(as required by law) mostly in 2010. The change, incorporated in the
5 The effect of the defense supplementals in FY2005 and FY2006 boosts defense outlays in
those two years compared to discretionary defense outlays in FY2007, FY2008, and
FY2009. Only in FY2010, the last year shown in the resolutions, do discretionary defense
outlays exceed the dollar amount in FY2005 or FY2006. Without the supplementals,
defense spending grows slowly throughout the period.

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CRS-10
Administration’s receipt proposals, had little effect on the numbers in the President’s
budget, with the budget numbers generally running through FY2010. The
Administration estimated that making the cuts permanent would reduce receipts by
$53 billion between FY2006 and FY2010 and by $1.0 trillion between FY2011 and
FY2015. CBO’s estimate of these proposals put the cost at $143 billion for the
FY2006 through FY2010 period and $1.5 trillion for the FY2011 through FY2015
period.6
Under the initial request, receipts would grow from an estimated $2,178 billion
in FY2006 to $2,821 billion in FY2010. The increases continue the dollar growth
in receipts that began in FY2005, following three years of dollar declines in receipts
(FY2001 to 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 $1,782 billion)
and as a percentage of GDP (to 16.4%), with that share of GDP being the lower than
in any year since FY1955. Receipts grew to $1,880 billion, but fell to 16.3% of GDP
in FY2004. The Administration estimated receipts of $2,053 billion (16.8% of GDP)
in FY2005, exceeding FY2000 receipts in dollars, and $2,178 billion (16.9% of GDP
— still below recent averages) in 2006.
Table 3. Receipts for FY2004-FY2010 and FY2015
(in billions of dollars)
FY2004 FY2005 FY2006 FY2007 FY2008 FY2009 FY2010 FY2015
CBO Baseline, 1/05
$1,880 a
$2,057
$2,212
$2,357
$2,508
$2,662
$2,806
$3,847
President’s FY06 Budget, 2/05
2,053
2,178
2,344
2,507
2,650
2,821
—
President’s FY06 CSB 2/05
2,053
2,178
2,347
2,518
2,668
2,841
—
CBO, Revised Baseline, 3/05
2,057
2,213
2,357
2,508
2,662
2,807
3,847
CBO, EPP 3/05
2,057
2,210
2,350
2,492
2,625
2,770
3,540
House, FY06 Budget Resolution, 3/05
2,057
2,195
2,331
2,496
2,635
2,784
—
Senate Budg. Comm. Budg. Res., 3/05
2,057
2,197
2,352
2,496
2,638
2,792
—
Senate, FY06 Budget Resolution 3/05
2,057
2,193
2,343
2,483
2,623
2,775
—
a. Actual receipts for FY2004.
EPP — CBO’s estimates of the President’s proposals.
CSB — The Administration’s current services baseline.
The Administration’s proposals did not include any extension of the relief from
the alternative minimum tax (AMT), which expires at the end of FY2005. Without
a further extension, a growing number of middle-class taxpayers will find themselves
subject to the AMT.7 CBO estimated (January 2005) that providing extended or
permanent AMT relief would reduce receipts by $198 billion between FY2006 and
6 These amounts from CBO do not include the outlay effects (usually interest costs
associated with larger deficits) of the extensions.
7 For discussions of the AMT issue, see CRS Report RL30149, The Alternative Minimum
Tax for Individuals; and CRS Report RS22100, The Alternative Minimum Tax for
Individuals: Legislative Initiatives and Their Revenue Effects, by Gregg A. Esenwein.

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CRS-11
FY2010 and by $395 billion between FY2006 and FY2015. Without some
adjustment to the AMT, it will recapture much of the tax reduction provided in the
2001 and 2003 tax cuts.8
The CBO baseline and OMB’s proposed and baseline estimates are fairly similar
from FY2006 through FY2010. Under both baselines, receipts rise from 16.8% of
GDP in FY2005 to between 17.8% (CBO) and 17.7% of GDP (OMB) in FY2010.
CBO’s baseline, which assumed the scheduled expiration of the tax cuts, extended
the projections through FY2015. In the CBO baseline, receipts rise rapidly after
FY2010 (the year the tax cuts expire) and reach 19.6% of GDP in FY2015.
Using CBO’s estimates of alternative revenue policies — to extend the tax cuts
and to reform the alternative minimum tax (AMT) — results in a much slower
growth in receipts in dollars and as shares of GDP.9 Receipts still rise as a
percentage of GDP, but much more slowly than in the President’s proposal or CBO’s
baseline. By FY2010, receipts have risen to $2,727 billion and 17.3% of GDP. By
FY2015, the alternative estimated receipts rise to $3,508 billion and 17.9% of GDP.
CBO’s March 2005 estimates of the President’s revenue proposals (using
CBO’s underlying assumptions and budget model) produced numbers similar to
those in the President’s budget (a bit larger in the early years and a bit smaller in the
later years of the FY2006 to FY2010 period).
The House and Senate budget resolutions included tax cuts or extensions for the
period FY2006 through FY2010. The House resolution included $106 billion in
revenue reductions over five years, $45 billion of which would be included in a
reconciliation bill. The Senate, in amending the resolution as presented by the Senate
Budget Committee, increased the five-year revenue reduction to $129 billion (from
$70 billion), all to fall within a reconciliation bill. To produce a reconciliation bill,
agreement will need to be reached between the House and Senate over the size of the
tax reductions.
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
8 See CRS Report RS21817, The Alternative Minimum Tax (AMT): Income Entry Points and
“Take Back” Effects, by Gregg A. Esenwein, for more information on the interaction of the
AMT and the tax cuts.
9 CBO indicates 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.

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CRS-12
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 FY2006 budget proposals include an estimated deficit of $427
billion (3.5% of GDP) in FY2005 falling to $390 billion (3.0% of GDP) in FY2006.
The deficit would fall to an estimated $207 billion (1.3% of GDP) in FY2010. The
President’s budget stated that its policies would reduce the deficit by half, as a
percentage of GDP, from its FY2004 level (3.6% of GDP) to 1.5% of GDP in
FY2009. If AMT relief is implemented and additional defense supplemental are
passed after FY2006, the stated goal could be thwarted.
The Administration’s deficit reduction proposals require strict limits on the
growth in domestic discretionary spending, a modest reduction (from baseline
estimates) in some entitlements, slowing defense spending growth, and revenue-
reducing tax cuts, including making permanent the 2001 and 2003 tax cuts. An
inability to hold spending growth to the levels in the budget, a task that may prove
difficult, could affect the significant budget reduction projected in the President’s
budget. The success of the Administration’s deficit reduction efforts depend heavily
on what many observers consider unrealistic spending constraints and reductions in
nondefense discretionary spending. The continuing growth in entitlements and net
interest, along with the ongoing efforts to cut taxes and the need to continue the
efforts against terrorism, could effectively narrow the focus of deficit reduction
efforts by Congress and the President to approximately one-fifth of total spending,
consisting of nondefense discretionary spending.
Table 4. Surpluses/Deficits(-) for FY2004-FY2010 and FY2015
(in billions of dollars)
FY2004 FY2005 FY2006 FY2007 FY2008 FY2009 FY2010 FY2015
CBO Baseline, 1/05
$-412 a
$-368
$-295
$-261
$-235
$-207
$-189
$141
President’s FY06 Budget, 2/05
-427
-390
-312
-251
-233
-207
—
President’s FY06 CSB 2/05
-390
-361
-303
-251
-229
-207
—
CBO Revised Baseline 3/05
-365
-298
-268
-246
-219
-201
122
CBO EPP 3/05
-394
-332
-278
-250
-246
-229
-256
House FY06 Budget Resolution, 3/05
-394
-376
-304
-247
-229
-203
—
Senate Budg. Comm. Budg. Res., 3/05
-397
-361
-299
-258
-236
-208
—
Senate, FY06 Budget Resolution, 3/05
-397
-368
-315
-277
-257
-232
—
a. Actual deficit for FY2004.
EPP — CBO’s estimates of the President’s proposals.
CSB — The Administration’s current services baseline.
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 do not fall below 2.5%
of GDP throughout the forecast period (FY2005-FY2015). If the President’s
proposal to make the tax cuts permanent succeeds, the budget might remain in deficit
for at least the next 10 years.

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CRS-13
CBO’s estimates of the President’s proposals put the FY2005 deficit at an
estimated $394 billion (3.2% of GDP) and the FY2006 deficit at an estimated $332
billion (2.6% of GDP). Both are below the deficits in the budget. The reestimated
deficits are below the Administration’s deficits through FY2008 and larger than the
Administration’s deficit estimates in FY2009 and FY2010. CBO extended the
reestimates through FY2015, beyond the FY2010 endpoint of the President’s budget.
CBO projected that the Administration’s policies would produce deficits each year
between FY2006 and FY2015, sliding slowly from 2.6% of GDP in FY2006 to 1.5%
of GDP in FY2010 to 1.3% of GDP in FY2015.
CBO’s Alternative Policies Not Included in the Baseline
CBO’s January 2005 budget report included estimates of the “budgetary effects
of policy alternatives not included in CBO’s baseline.” The alternative policies are
those that may more likely reflect future policy than CBO’s baseline. One of the
alternative policies makes the 2001 and 2003 tax cuts permanent and adjusts the
alternative minimum tax to reduce its expansion among middle class taxpayers.
Another of alternative policy freezes discretionary spending at FY2005 levels instead
of growing at the rate of inflation as baseline rules require. The costs or savings of
these alternatives are measured against CBO’s regular baseline calculation.
Table 5, on the next page, contains data from the CBO budget report for the
three time periods, FY2006-FY2010, FY2010-FY2015, and FY2011-FY2015. The
alternative policies would substantially increase or decrease the cumulative deficit
over these periods. Freezing discretionary spending produces larger estimated
surpluses sooner than in CBO’s baseline estimates. Increasing discretionary
spending at the rate of GDP growth raises the cumulative deficit estimate by almost
$350 billion between FY2006 and FY2010 and by another $1.4 trillion between
FY2011 and FY2015.
Making the 2001 and 2003 tax cuts permanent would increase the cumulative
deficit estimate by $143 billion from FY2006 through FY2010 and by another $1.5
trillion over the subsequent five-year period as measured against the CBO baseline.
The big increase in the cost of the tax cuts after FY2010 occurs because that is when
the 2001 and 2003 tax cuts expire and tax law reverts to pre-tax cut (higher) levels.
The “loss” of this additional revenue, as measured from CBO’s baseline estimates
indicates the estimate cost of making the cuts permanent.

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CRS-14
Table 5. The Budgetary Effects of Selected Policy Alternatives
Not Included in CBO’s Baseline
(billions of dollars)
Total,
Total,
Total,
2006-
2011-
2006-
2010
2015
2015
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
-133
-418
Debt service
-51
-121
-172
Increase Total Discretionary Appropriations at the Growth Rate of Nominal GDP
Effect on the deficit
-347
-1,090
-1,437
Debt service
-31
-237
-268
Freeze Total Discretionary Appropriations at the Level Provided for 2005
Effect on the deficit
269
849
1,118
Debt service
25
183
208
Policy Alternatives That Affect the Tax Code
Extend Expiring Tax Provisionsb
Effect on the deficit
EGTRRA and JGTRRA
-60
-1,261
-1,321
Other
-83
-212
-295
Total
-143
-1,473
-1,616
Debt service
-13
-225
-238
Reform the Alternative Minimum Taxc
Effect on the deficit
-198
-197
-395
Debt service
-20
-88
-108
Memorandum:
Total Deficit (-) or Surplus in CBO’s Baseline
-1,188
333
-855
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.
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. The details are
described in An Alterative Budget Path Assuming Continued Spending for Military Operations
in Iraq and Afghanistan and in Support of the Global War on Terrorism (February 2005).
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.

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CRS-15
The Longer Run
Over a longer time period, one beginning in the next decade and lasting for
decades into future, CBO indicates (in its January 2005 budget documents) that it
expects, under existing policies and assumptions, that demographic pressures will
produce large and persistent deficits. CBO states
In the decades beyond CBO’s projection period, the aging of the baby-boom
generation, combined with rising health care costs, will cause a historic shift in
the United States’ fiscal situation....
Driven by rising health care costs, spending for Medicare and Medicaid is
increasing faster than can be explained by the growth of enrollment and general
inflation alone. If excess cost growth continued to average 2.5 percentage points
in the future, federal spending for Medicare and Medicaid would rise from 4.2
percent of GDP today to about 11.5 percent of GDP in 2030....
Outlays for Social Security as a share of GDP are projected to grow by more than
40 percent in the next three decades under current law: from about 4.2 percent
of GDP to more than 6 percent....
Together, the growing resource demands of Social Security, Medicare, and
Medicaid will exert pressure on the budget that economic growth alone is
unlikely to alleviate. Consequently, policymakers face choices that involve
reducing the growth of federal spending, increasing taxation, boosting federal
borrowing, or some combination of those approaches.10
The Administration indicated similar concerns about the outlook for the budget
over the long term but tied much of its discussion to the President’s proposed reforms
to Social Security. Less was said about Medicare and Medicaid.
The short-term budget outlook can change when it is buffeted by economic or
policy changes. The long-term budget outlook is expected to be dominated by the
expansion of the population eligible for Social Security, Medicare, Medicaid, and
other programs for the elderly as the baby boom generation begins retiring in large
numbers. The steady price increases experienced by the health programs, if
unchanged, could begin to dominate future budget debates. 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, spending increases, and
policy changes of the last few years have not produced the difficult fiscal future, but
they appear to have made an already difficult situation 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
10 CBO, The Budget and Economic Outlook: Fiscal Years 2006-2015, Jan. 2004, p.10-11.

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CRS-16
changes generally have on the economy. The worse-than-previously-expected
economic conditions that lasted from 2001 into 2003, played a role, directly and
indirectly, in the deterioration of the budget outlook over those years. CBO expects
continued economic growth during calendar years 2005 and 2006, which should
result in higher revenues and lower spending than would occur if the economy was
growing at a slower rate. Because there is no way of predicting the timing of
economic ups and downs, especially as estimates run into the future, CBO projects
that GDP will grow at a rate close to potential GDP for the period 2007 through
2015.11
Under governmental policies that are in fiscal balance, a return to normal
economic growth (growth close to that 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 2006 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, using the alternative assumptions, has a basic fiscal imbalance that
cannot be eliminated by economic growth. To produce a balanced budget or one in
surplus under those policy conditions would require spending reductions or tax
increases.
11 Potential GDP represents an estimate of what GDP would be if both labor and capital
were as fully employed as is possible.

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CRS-17
For Additional Reading
U.S. Congressional Budget Office. The Budget and Economic Outlook: Fiscal Years
2006-2015. Washington, January 25, 2005.
———. An Analysis of the President’s Budget Proposals for Fiscal Year 2006.
Washington, March 2005.
U.S. Council of Economic Advisors. The Economic Report of the President.
Washington, GPO, February 2005.
U.S. Office of Management and Budget. The Budget of the United States
Government for Fiscal Year 2006. Washington, GPO, February 7, 2005.
CRS Products
CRS Report RL32791, Congressional Budget Actions in 2005, by Bill Heniff, Jr.
CRS Report RS22073, An Analysis of the Administration’s Deficit Reduction Goal,
by Gregg Esenwein and Marc Labonte.

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 RS22100. The Alternative Minimum Tax for Individuals: Legislative
Initiatives and Their Revenue Effects, by Gregg Esenwein.
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 RL32502. What Effects Have the Recent Tax Cuts Had on the
Economy? by Marc Labonte
CRS Issue Brief IB95060. Flat Tax Proposals and Fundamental Tax Reform: An
Overview, by Jim Bickley.
CRS Report RS21126. Tax Cuts and Economic Stimulus: How Effective Are the
Alternatives? by Jane Gravelle.
CRS Report RL30839. Income Tax Cuts, the Business Cycle, and Economic
Growth: A Macroeconomic Analysis, by Marc Labonte and Gail Makinen.
CRS Report RS21136. Government Spending or Tax Reduction: Which Might Add
More Stimulus to the Economy? by Marc Labonte.

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CRS-18
CRS Report RS21756. The Option of Freezing Non-defense Discretionary Spending
to Reduce the Budget Deficit, by Gregg Esenwein and Philip Winters.
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 RL31414. Baseline Budget Projections: A Discussion of Issues, by
Marc Labonte.
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 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 RL31728. House Rules Changes Affecting the Congressional Budget
Process in the 108th Congress (H.Res. 5), by Bill Heniff, Jr.
CRS Report 98-720. Manual on the Federal Budget Process, by Robert Keith and
Allen Schick.
CRS Report RL30708. Social Security, Saving, and the Economy, by Brian W.
Cashell.

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