Order Code RL32264
CRS Report for Congress
Received through the CRS Web
The Budget for Fiscal Year 2005
Updated May 27, 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 2005
Summary
CBO’s budget report, The Budget and Economic Outlook: Fiscal Years 2006-
2015 (January 25, 2005), included revised baseline estimates (which assume the
continuation of current policies) for FY2005. The estimates included a $368 billion
deficit for FY2005, only slightly above the President’s FY2005 deficit proposal
($364 billion) in February 2004. The President’s FY2006 budget contained revised
proposals and estimates for FY2005 (with a deficit of $427 billion) in early February
2005. This deficit estimate incorporated the costs of the Administration’s $82 billion
supplemental request for defense and other funding in FY2005. The FY2006 budget
resolution (H.Con.Res. 95; April 28, 2005), using CBO’s underlying assumptions
other than policy, included an FY2005 deficit of $398 billion
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 an 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 lack of a congressionally passed budget resolution for FY2005, added
procedural hurdles to resolving already existing policy disputes and further slowed
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.
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Budget Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Outlays . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Receipts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Deficits (and Surpluses) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
CBO’s Alternative Policies Not Included in the Baseline . . . . . . . . . . . . . . 19
The Longer Run . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
The Budget and the Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
For Additional Reading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
CRS Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
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) . . . . . . 6
Figure 2. Outlays, FY2003-FY2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Figure 3. Receipts, FY2001-FY2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Figure 4. Deficits(-)/Surpluses,FY2003-FY2015 . . . . . . . . . . . . . . . . . . . . . . . . 18
List of Tables
Table 1. Budget Estimates for FY2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Table 2. Outlays for FY2004-FY2009 and FY2014 . . . . . . . . . . . . . . . . . . . . . . 11
Table 3. Receipts for FY2003-FY2009 and FY2014 . . . . . . . . . . . . . . . . . . . . . . 14
Table 4. Surpluses/Deficits(-) for FY2005-FY2009 and FY2014 . . . . . . . . . . . . 17
Table 5. The Cumulative Effects of CBO’s Policy Alternatives Not
Included in CBO’s Baseline for Selected Time Periods . . . . . . . . . . . . . . . 20

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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 (P.L108-447; December 8, 2004). 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. The Administration requested an $82 billion supplemental
appropriation for FY2005 ($35 billion of which will become outlays in FY2005) for
military activities in Iraq and Afghanistan, the war on terror, and tsunami relief. The
Administration expected its proposals and economic and technical changes (from

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CRS-2
previous proposals and estimates) to produce a deficit of $427 billion for FY2005.
CBO’s March 2005 estimate of the President’s policy proposals estimated that the
proposals would produce a deficit of $394 billion in FY2005, including the requested
supplemental.
The House and Senate budget resolutions for FY2006, both adopted in March
2005, included changes to the FY2005 budget, in particular accommodating the
effects of the Administration proposed supplemental. A conference agreement was
reached and passed by the House and Senate on April 28, 2005.
On March 16, 2005, the House passed the President’s requested supplemental
(H.R. 1268) after amending it. The Senate passed its version on April 21. A
conference reached agreement on May 3, 2005. The agreement passed the House on
May 5 and the Senate on May 10. The President signed the supplemental into law
(P.L.109-13) on May 11. Another supplemental of possibly $50 billion, for ongoing
military activities, might be needed before the end of FY2005.
Budget Totals
Table 1 contains budget estimates and proposals 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 as
they become available; and data from congressional budget deliberations.
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
CBO, EPP, 3/05
2,057
2,451
-394
House FY06 Budget Resolution 3/05
2,057
2,451
-394
Senate FY06 Budget Resolution 3/05
2,058
2,455
-397
Conference FY06 Budget Resolution 4/05
2,057
2,455
-398
*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.

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DCA Current Services Baseline — Current Service Baseline estimates that follow the Deficit Control Act
directions for producing baselines.
CSB — Current services baseline
Differences in totals result from differing underlying economic, technical, and
budget-estimating assumptions and techniques in the various estimates and
proposals, as well as differences in policy assumptions. Often the policy-generated
dollar differences for an upcoming fiscal year may be relatively small compared to
the budget as a whole. These small differences can 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.
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
for FY2004 through FY2014.1 The report estimated an FY2005 deficit of $362
billion (down from an estimated, at that time, deficit of $477 billion in FY2004; the
actual deficit for FY2004 was $412 billion). 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, expected the tax
cuts to expire as scheduled, and allowed the alternative minimum tax (AMT) relief
to expire as scheduled (which would then boost receipts).
The report also, under baseline assumptions, had the budget in deficit through
FY2013 ($16 billion). The baseline estimates produced 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 large increase in revenues.
In March 2004, CBO released revised baseline estimates, including a $1 billion
increase (to $363 billion) in the expected deficit for FY2005. The revised projections
also had a deficit (of $15 billion) in FY2014 instead of the surplus expected in the
January estimates. The CBO September 2004 revisions had a smaller ($348 billion)
FY2005 baseline deficit estimate and a larger FY2014 baseline deficit ($65 billion)
estimate than its previous 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 (in CBO’s January 2005 report, this would increase the five-year
cumulative deficit by $103 billion, and the 10-year cumulative deficit by $1.4
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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CRS-4
trillion), reforming the alternative minimum tax (a $147 billion five-year cumulative
increase in the deficit and by $430 billion over 10-years), 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) to increasing
discretionary spending at the growth rate of gross domestic product (GDP; a $236
billion five-year cumulative increase in the deficit and a $1.3 trillion 10-year
cumulative increase).
President Bush’s FY2005 (February 2004) 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 billion
revenue reduction (from Administration baseline estimates) between FY2005 and
FY2009 and a $1,240 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 $227 billion between FY2005 and FY2009
and by $1,402 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. Instead of following the traditional method of constructing baseline
estimates (as instructed in the Balance Budget and Deficit Control Act of 1985 and
the Congressional Control and Impoundment Act of 1974), 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 was
$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 little other information for the
individual years after FY2009.
The Administration provided 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 estimated receipts between the
January and July reports came from changes in underlying economic assumptions and
technical reestimates rather than any substantial changes in policy. Most of the
increase in outlays between the two estimates came from changes in policy.
CBO included revised baseline budget estimates for FY2005 in its January 2005
budget report, The Budget and Economic Outlook: Fiscal Years 2006-2015. The
revised estimates produced a deficit for FY2005 that was very close to the baseline
deficit estimate that CBO made in January 2004 (see Table 1).

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The President’s FY2006 budget request (February 7, 2005) contained re-
estimated FY2005 budget data, including a larger deficit ($427 billion) than in its
July 2004 mid-year report ($331 billion). The proposed policy changes combined
with changes in underlying assumptions produced smaller receipts, larger outlays and
a larger deficit for FY2005 than the Administration’s previous estimates. The
President’s FY2006 budget included the estimated effects of the proposed defense
supplemental on the FY2005 budget. CBO’s analysis (March 2005) of the
President’s FY2006 budget proposals resulted in a smaller FY2005 deficit ($394
billion), outlays, and similar receipts than the Administration forecast (see Table 1).
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 five years have demonstrated this volatility. The original
proposals and estimates for FY2002, made in early 2001, dramatically changed over
the 20 to 21 months of congressional and presidential action on the budget. (The
budget estimates in the OMB and CBO budget documents for five to 10 years in the
future are subject to even greater variability.)
The early 2001 estimates for FY2002 estimated a surplus of $231 billion to
$313 billion. The year ended on September 30, 2002 with a deficit of $158 billion.
The September 2001 terrorist attacks on the United States, the legislation adopted in
response, the bursting of the stock market bubble, the weak economy, and a shift in
underlying budget relationships, all contributed to a large change in the year’s budget
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
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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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 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
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. CBO predicts that the
deficit or surplus will have a 90% chance of falling somewhere between the top and
bottom of the fan over the five years covered.

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The President’s (FY2005, February 2004) 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 proposals and 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 its own baseline estimates in the report, An Analysis of the
President’s Budgetary Proposals for Fiscal Year 2005. The report recalculated the
Administration’s proposals using CBO’s underlying assumptions and estimating
techniques. CBO also extended its projections of the Administration’s proposals
through FY2014. The CBO reestimates produced smaller deficits in FY2004 and
FY2005 than in the President’s budget.
By late February and early March 2004, the House and Senate Budget
Committees began discussing the budget resolution for FY2005. The Senate Budget
Committee (SBC) reported its version of the FY2005 budget resolution on March 5
(without a numbered report). The Senate considered the resolution (S.Con.Res. 95)
the week of March 8 and, after amending the committee-adopted resolution,
approved it on March 12.

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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 (a $22.9 billion
revenue reduction and a $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 needed to 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 never considered the FY2005 budget resolution conference report.
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
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 was
open to amendment in the Senate. This difficulty was resolved with the enactment
of the first appropriation (Defense) for FY2005 (see the next paragraph).

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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 as was being 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 would 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.
The Administration’s FY2006 budget’s policy proposals, other than a requested
supplemental appropriation (see next paragraph), had little effect on the FY2005
budget totals. Changes in the underlying assumption, both economic and technical,
produced most of the change in the budget numbers between the July 2004 mid-year
Administration budget report and the President’s FY2006 budget.
At the same time as the release of the Administration’s FY2006 budget
proposals (February 2005), it proposed an $82 billion supplemental appropriation for
FY2005 to support the military activity in Iraq and Afghanistan, the “global war on
terror”, tsunami relief, along with other activities. Of the $82 billion in budget
authority requested, the Administration expected about $35 billion to become outlays
in FY2005 and another $25 billion in outlays in FY2006. The House passed the
supplemental appropriations (H.R. 1268), with changes, on March 16, 2005. The
Senate passed its version of the legislation on April 21, 2005. The Senate’s version
differed from the one passed by the House and what the Administration proposed.
A conference committee reached agreement on May 3. The agreement provided the
$82 billion, but changed numerous allocations and policies (compared to the

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CRS-10
President’s request).3 The President signed the legislation into law on May 11, 2005
(P.L.109-13).
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 that budget.4 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, showed smaller differences caused by policy changes between the
proposals and the traditional current services baseline estimates.
The Administration’s original proposals, if adopted, would have (under
Administration’s estimates) raised outlays $81 billion (3.5%) above the
Administration’s FY2004 outlay estimate and $3 billion (0.1%) above its FY2005
current services baseline outlay estimate.5 The difference between the current
services baseline outlay estimate and proposed outlays for FY2005 measures the
“cost” of the Administration’s proposed policies. The year-to-year change (the $81
billion increase) combines the effects of policy changes from year to year with the
relatively automatic growth in large parts of the budget. These automatic increases
include cost-of-living adjustments, growth in populations eligible for program
benefits, and inflation driven cost of goods and services bought by the government.
The President’s budget did not include estimated costs of action in Afghanistan or
Iraq after the end of FY2004, which produced smaller outlay estimates for future
years than if these 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 FY2005 Defense
appropriation bill (P.L.108-387; August 5, 2005).
3 For additional and detailed information on the supplemental, see CRS report, CRS Report
RL32783, FY2005 Supplemental Appropriations for Iraq and Afghanistan, Tsunami Relief,
and Other Activities.
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 to the baselines.
5 The FY2005 outlay proposals would be $42 billion (1.7%) below the traditional
formulation of the baseline.

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CRS-11
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
—
CBO, EPP, 3/05
—
2,451
2,542
2,629
2,742
2,872
3,611
House FY06 Budget Resolution 3/05
—
2,451
2,571
2,635
2,743
2,864
—
Senate FY06 Budget Resolution 3/05
—
2,455
2,562
2,658
2,760
2,880
—
Conference FY06 Budget Res. 4/05
—
2,455
2,577
2,644
2,750
2,873
—
* 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.
As shares of gross domestic product (GDP), the Administration’s original
(February 2004) proposals showed outlays falling from to 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 20.0% of GDP in FY2004 to 19.7% of GDP
in FY2005 to 19.6% of GDP in each of the fiscal years from 2006 through 2010,
before rising to 19.9% of GDP in FY2014. These outlays-as-shares-of-GDP are
below both the average from FY1980 through FY2003 (21.1% of GDP) or the
average from FY1990 through FY2003 (20.2% of GDP).
CBO’s March 2004 revised baseline estimates showed outlays rising from
20.0% of GDP in FY2005 to 20.1% of GDP in FY2009 and remaining at that level
through FY2014. Using one of CBO’s alternative scenarios for spending, one that
assumes discretionary outlays would grow at the rate of nominal GDP rather than the
lower rate of inflation, outlays would equal 20.1% of GDP in FY2005, rising to
21.0% of GDP in FY2009 and to 21.9% of GDP in FY2014.
OMB’s Mid-Session Review (MSR; July 2004) indicated a modest increase 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%

---

CRS-12
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 traditional baseline
assumed that all discretionary spending will grow at the rate of inflation. For CBO,
the baseline estimates showed that the slow dollar growth in discretionary spending
would offset some of the growth in mandatory and net interest spending. The result
was a reduction in total outlays as a
Figure 2. Outlays, FY2003-FY2015
share of GDP. CBO’s adjusted
baseline, which included a faster rate
(as percentages of GDP)
22%
of growth for discretionary spending,
slowly raised outlays as a share of
GDP over the 10 years.
21%
The January 2005 CBO budget
report reduced, slightly (from $2,442
20%
billion to $2,425 billion), estimated
baseline outlays compared to its
September 2004 estimates. CBO’s
19%
new report estimated that outlays
through FY2014 would be slightly
smaller in each year than it had
18%
CBO Baseline 1/05
expected in its previous report.
Different assumptions about
CBO Alternative Baseline 1/05
discretionary spending between the
17%
CBO's Estimate of the President's
two reports produced the apparent
Budgetary Proposals 3/05
reduction in outlays. When made
16%
comparable, the January 2005 outlay
2003 2005 2007 2009 2011 2013 2015
estimates are higher than September
2004 outlays estimates.
The President’s FY2006 budget (February 2005) showed slightly larger outlays
for the years FY2005 through FY2009 than it had estimated in July 2004. The
Administration’s proposed supple-mental appropriation ($82 billion in budget
authority; $35 billion in outlays in FY2005) plus some changes in underlying
assumptions produced most of the changes between the two estimates. The FY2006
budget contained little additional policy changes for FY2005.

---

CRS-13
Figure 2 shows outlays as shares of GDP from CBO’s January 2005 and March
2005 budget reports (The Budget and Economic Outlook: Fiscal Years 2006 to 2015;
An Analysis of the President’s Policy Proposals for Fiscal Year 2006). CBO’s
baseline estimates for FY2003 through FY2015 decline as shares of GDP over most
of the period. The baseline estimates are constructed following rules set in law. The
alternative baseline adjusts the CBO baseline to assume an ongoing reduction in
funding for military operations in Iraq and Afghanistan, continued funding for the
war on terror, and discretionary spending growth that matches the rate of growth of
GDP (rather than the rate of inflation, which is generally smaller). These two
changes produce outlays that grow as a share of GDP throughout the period, rising
to almost 21% of GDP in FY2015. CBO’s estimate of the President’s FY2006 policy
proposals is a re-estimate of the Administration’s policies using CBO’s underlying
economic and technical assumptions. Since the Administration’s policies include
slowdowns in mandatory spending growth, close to a freeze (if not actual reductions)
in nondefense discretionary spending, a slowing in defense spending growth, and did
not include assumptions about future supplementals for Iraq and Afghanistan, the
estimates show outlays falling as shares of GDP.
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 estimated (by the Administration) $213
billion over FY2005 to FY2009 period and by $1,240 billion over the FY2005 to
FY2014 period.6 CBO estimated (March 2004) that these proposals would cost $181
billion for the FY2005 through FY2009 period and $1,299 billion for the FY2005
through FY2014 period.7
Under the initial request, receipts would grow from an estimated $2,036 billion
in FY2005 to $2,616 billion in FY2009. These increases would reverse the slump
in receipts over the years FY2001 through FY2003. Receipts had reached their
highest post World War II 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 lower than in any year since FY1955. In FY2004,
6 These estimates were 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 CRS Report RS21420, President Bush’s 2003 Tax
Cut Proposal: A Brief Overview, and CRS Issue Brief IB10110. Major Tax Issues in the
108th Congress, coordinated by David Brumbaugh (archived: available from the author: 7-
7792) for more information on the proposals.
7 These amounts from CBO do not include the outlay effects of the extensions or other
proposals.

---

CRS-14
receipts grew to $1,880 billion, but fell further as a share of GDP to 16.3% of GDP.
The Administration expected receipts in FY2005 to exceed, in dollars (but not as a
percentage of GDP), receipts in FY2000.
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
—
CBO, EPP, 3/05
—
2,057
2,210
2,350
2,492
2,625
3,540
House FY06 Budget Resolution 3/05
—
2,057
2,195
2,331
2,496
2,635
—
Senate FY06 Budget Resolution 3/05
—
2,057
2,193
2,343
2,483
2,623
—
Conference FY06 Budget Resolution 4/05
—
2,057
2,195
2,331
2,496
2,635
—
* 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.
The Administration’s proposals would extend the current middle class relief
from the alternative minimum tax (AMT) for one year. Without a further extension,
a growing number of middle class taxpayers will find themselves subject to the
AMT. Estimates indicate that the AMT, which affected a little over 600,000
taxpayers in 1997, could affect 33 million taxpayers by 2010.8 CBO estimated
(September 2004) that providing extended or permanent AMT relief would reduce
receipts by $136 billion between FY2005 and FY2009 and by $340 billion between
FY2005 and FY2014.
The President’s budget reduced its FY2004 and FY2005 initial receipt estimates
by $20 billion and $15 billion respectively, “in the interest of cautious and prudent
8 See CRS Report RL30149, The Alternative Minimum Tax for Individuals, by Gregg A.
Esenwein, for a discussion of the AMT issue.

---

CRS-15
forecasting.”9 The downward adjustment increased the resulting estimated deficits
by $20 billion (in FY2004) and by $15 billion (in FY2005).
The 2004 mid-year budget reports from both OMB (July 2004) and CBO
(September 2004) contained higher receipt estimates than in their earlier 2004 budget
reports. Both OMB and CBO attributed these increases mostly to technical
reestimates and revisions in the economic outlook rather than policy changes.
In early 2005, revised receipt estimates and projections from CBO and OMB
were fairly similar for FY2005 through FY2009 (see Table 3) and somewhat smaller
than the previous budget reports from CBO and OMB. The new receipt estimates
were shown rising from 16.3% of GDP in FY2004 to 16.8% in FY2005 and to 17.7%
of GDP in FY2009. CBO’s baseline (in its January 2005 report), incorporated the
scheduled expiration of most of the tax cuts and ran the projections through FY2015.
These baseline projections of
Figure 3. Receipts, FY2001-FY2015
receipts have them rising rapidly
after FY2010 and reaching 19.6% of
(as percentages of GDP)
22%
GDP in FY2015 (the currently
CBO Baseline 1/05
scheduled expiration of the tax cuts
at the end of calendar year 2010
21%
causes rapid increases in receipts in
CBO Alternative
Baseline 1/05
subsequent years).
20%
CBO's Estimate of the
Using CBO’s January 2005
President's Budgetary
Proposals 3/05
estimates of alternative revenue
policies — making the tax cuts
19%
permanent and reforming the
alternative minimum tax (AMT) —
produces much slower growth in
18%
receipts as a share of GDP after
FY2010 compared to the baseline
17%
(see the CBO alternative baseline in
Figure 3).10 Receipts still rise as a
percentage of GDP, but by much less
16%
than in the baseline estimate.
2003
2005
2007
2009
2011
2013
2015
Throughout the forecast period,
FY2005 through FY2015, receipts in
CBO’s alternative baseline never exceed 17.6% of GDP. This is below the share of
GDP for federal receipts in most years since the mid-1970s, except for recession
years. CBO’s estimates of the President’s FY2006 budget proposals (March 2005),
produce smaller receipts over the forecast period than CBO’s baseline, but somewhat
larger receipts than CBO’s alternative baseline (see Figure 3). The CBO estimates
of the President’s revenue proposals are similar as percentages of GDP to the
9 OMB, Budget of the U.S. Government for Fiscal Year 2003, February 2004, Analytical
Perspectives, p. 239.
10 CBO indicates in its Update that combining the reform of the AMT and the tax extenders
produces an interactive effect that makes the combined loss greater than the sum of the two
estimates separately.

---

CRS-16
percentages in the Administration’s proposals. The Administration’s February 2005
proposals, like the ones from 2004, included making the tax cuts permanent, and like
last year, did not propose a multi-year solution to the expanding coverage of the
AMT. Figure 3 illustrates the gap that arises after FY2010 in receipts as shares of
GDP between receipt estimates that assume the tax cuts expire (the CBO baseline)
and the estimates that assume the tax cuts are made permanent (the CBO alternative
baseline and CBO estimate of the President’s proposals). The 1.5% to 2.0% of GDP
gap in 2015 equals between $300 billion and $400 billion, approximately 8% to 11%
of total receipts in that year (CBO’s estimate of the President’s policies).
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 (FY1988 saw the first surplus
in 30 years; the budget returned to deficit in FY2002) 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. Those projections showed the
deficit falling to $237 billion in FY2009. The $237 billion would fulfill the
Administration’s pledge to reduce the deficit by half (starting from the FY2004
estimated deficit). Most of the deficit’s fall would occur from FY2004 to FY2006,
after which it shows relatively little change (in dollars). The February 2004 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, using the Administration’s policy
proposals and assumptions.
The success of the Administration’s deficit reduction efforts, both in its FY2005
and FY2006 budget depended (and depends) on underlying policy assumptions that
may prove difficult to maintain. One is the heavy reliance on constraints and
reductions in nondefense discretionary spending, approximately one-sixth of total
outlays. Another is the absence of any estimates for the funding of operations in
Afghanistan and Iraq after FY2005. A third is the absence of a longer-term fix for the
expanding coverage of the Alternative Minimum Tax (ATM). The Administration’s
FY2006 does not include ATM relief after FY2005. The continuing growth in
entitlements and the likely growth in net interest, along with the Administration’s
opposition to tax increases, limits the focus of the Administration’s deficit reduction
proposals to relatively small areas of the budget. (The FY2006 budget proposals
included small reductions in mandatory spending.)
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

---

CRS-17
the forecast of a small surplus in FY2014, leaving instead a small deficit of $15
billion.
Table 4. Surpluses/Deficits(-) for FY2005-FY2009 and FY2014
(in billions of dollars)
FY2003 FY2004 FY2005 FY2006 FY2007 FY2008 FY2009 FY2014
CBO Baseline, 1/26/04
-375 a
-477
-362
-269
-267
-278
-268
13
President’s F05 Budget, 2/2/04
-521
-364
-268
-241
-239
-237
—
President’s 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
—
CBO, EPP, 3/05
—
-394
-332
-278
-250
-246
-247
House FY06 Budget Resolution 3/05
—
-394
-376
-304
-247
-229
—
Senate FY06 Budget Resolution 3/05
—
-397
-368
-315
-277
-257
—
Conference FY06 Budget Resolution 4/05
—
-398
-383
-313
-256
-238
—
* The conference report (H.Rept. 108-498) passed the House on May 19, 2004, but was not considered in the
Senate.
a. Actual deficits 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 estimates of the President’s proposals (March 2004) put the FY2004
deficit at an estimated $478 billion and the FY2005 deficit at an estimated $356
billion. The reestimates had an FY2009 deficit of an estimated $258 billion, not
quite the 50% reduction in the deficit claimed by the Administration. CBO’s revised
March baseline showed little change in the near-term from its January estimates. The
changes, although not large in dollars, eliminated 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 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

---

CRS-18
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) in both the 2004 and 2005 CBO budget reports,
results in deficit estimates
Figure 4. Deficits(-)/Surpluses,
that do not shrink as a
FY2003-FY2015
percentage of GDP. Figure
(as percentages of GDP)
4 shows the deficit estimates
-4%
from CBO’s 2005 budget
r e p o r t ( b a s e l i ne a n d
alternative) and CBO’s
-3%
e s t i m a t e o f t h e
Administration’s FY2006
p o l i c y p r o p o s a l s a s
-2%
percentages of GDP. The
scheduled expiration of the
tax cuts by the end of 2010
CBO Baseline 1/05
(and the subsequent surge in
-1%
receipts) produces most of
the rapid shrinkage in the
CBO Alternative
CBO baseline deficit
Baseline 1/05
0%
projection after FY2010.
CBO's Est imate of the
The baseline shows the
President's Budgetary
emergence of a surplus in
Proposals 3/05
FY2012. CBO’s estimates
1%
2003
2005
2007
2009
2011
2013
2015
of the President’s policies
indicates a steady reduction
in the deficit from FY2004
through FY2010, after which there is only minor further reduction. The CBO
estimate of the Administration’s policies, like the President’s budget, does not
include future funding for Iraq or Afghanistan, includes assumptions about very low
growth rates in nondefense discretionary spending and reductions in the growth rate
of a number of mandatory spending programs, and does not assume future relief from
the expanding coverage of the Alternative Minimum Tax (AMT). The effect of these
assumptions allows much of the reduction in the deficit in CBO’s re-estimate.
CBO’s March 2005 revised baseline estimates included a deficit estimate of
$365 billion, for FY2005, $20 billion above CBO’s September 2004 estimate. For
all subsequent years, CBO’s deficit estimates from March 2005, are smaller (leading
to a $99 billion surplus in FY2014 and a $122 billion in FY2015) than in its
September 2004 estimates. The underlying assumptions in the two estimates differ,
requiring some adjustment to make them comparable. Because of the statutory rules
that CBO must follow in constructing its baseline, the September 2004 baseline
estimates included, in each year in the forecast, an extrapolation of the supplemental
funding provided for FY2004. The rules exclude the FY2004 supplemental funding
from the January and March 2005 estimates.

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CRS-19
According to CBO, including the effects of the supplemental in the September
forecast raised the cumulative (FY2005-FY2014) deficit by $1.4 billion. In its
January 2005 budget report, CBO explained the differences and adjusted the
September and January estimates to make them comparable. The adjusted September
2004 numbers produced a cumulative (FY2005 through FY2014) deficit estimate of
$861 billion, down from the $2,294 billion originally shown in the September report.
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]...” 11 When made comparable, the estimates
showed the budget outlook deteriorating, rather than improving, between the
September 2004 estimates and the January (and March) 2005 estimates.12
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. CBO’s January 2005 budget report included similar
information, but two alternative estimates of discretionary spending — a freeze at
FY2005 levels and an increase at the rate of GDP growth — rather than the four
included in the 2004 budget report. The 2005 budget report also included an estimate
of the cost of a phasedown in military activities in Afghanistan and Iraq and the
global war on terrorism. Table 5 contains the estimates for these policy alternatives
from the FY2006 budget report (January 2005).
Most of the alternative policies would be fairly costly when compared to CBO’s
baseline, running from $96 billion in lower receipts by 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 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.
The costs or savings of the alternatives become substantially larger over the 10
years, FY2005 through FY2014, rather than in the next five years. CBO’s January
2005 report estimated that extending expiring tax provisions for the 10-year period
would increase the cumulative deficit by $1.3 trillion (with another $156 billion in
11 CBO, The Budget and Economic Outlook: FY2006-FY2015, January 2005, pp. 1-2.
12 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.
13 These two policies would produce an estimated $7 billion and $16 billion in interest costs
respectively.

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CRS-20
higher interest costs). Most of that, $1.2 trillion (and $149 billion in higher interest
costs), occurs in the second five years, FY2010 through FY2014. Reforming the
alternative minimum tax over the 10 years would cost an estimated $347 billion plus
another $83 billion in interest costs. Of the total 10 year cost, $210 billion (plus $73
billion in interest costs) falls in the second five years. Figure 4 shows the CBO
baseline deficit, an alternative deficit path (incorporating the costs of extending the
tax cuts, reforming the AMT, and increasing discretionary spending at the rate of
GDP growth), and CBO’s March 2005 estimate of the President’s policy proposals
for FY2006.
Increasing discretionary spending at the rate of nominal GDP growth produced
a 10-year $1.2 trillion 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.
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.

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CRS-21
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.
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
14 CBO, The Budget and Economic Outlook: Fiscal Years 2005-2014, Jan. 2004, p. 8-9.

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CRS-22
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 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
15 OMB. Budget of the United States Government for Fiscal Year 2005, Feb. 2004, p.38-39.
16 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-23
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.

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CRS-24
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.
——The Budget and Economic Outlook: Fiscal Years 2006-2015. Washington,
January 27, 2005.
——An Analysis of the President’s Budgetary Proposals for Fiscal Year 2006.
Washington, March 2005.
U.S. Council of Economic Advisors. The Economic Report of the President.
Washington, GPO, February 2004.
——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 2005. Washington, GPO, February 2, 2004.
——Fiscal Year 2005 Mid-Session Review. Washington, GPO, July 30, 2004.
——The Budget of the United States Government for Fiscal Year 2006.
Washington, GPO, February 7, 2005.
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.

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CRS-25
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 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 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.

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