Order Code RL32812
CRS Report for Congress
Received through the CRS Web
The Budget for Fiscal Year 2006
Updated July 21, 2005
Philip D. Winters
Analyst in Government Finance
Government and Finance Division
Congressional Research Service { The Library of Congress

---

The Budget for Fiscal Year 2006
Summary
The Congressional Budget Office (CBO) released The Budget and Economic
Outlook: Fiscal Years 2006-2015 on January 25, 2005. CBO’s baseline assumptions,
for fiscal year (FY) 2005 through FY2015, had a FY2006 deficit of $295 billion
(2.3% of gross domestic product (GDP)). This would be smaller than CBO’s
estimated FY2005 baseline deficit ($368 billion, 3.0% of GDP). Baseline estimates
do not include assumptions about possible or likely future legislative budget changes.
CBO’s baseline assumes that the tax cuts of 2001 and 2003 will expire as currently
scheduled in 2010, reverting the tax code to pre-tax cut levels and that there will be
no additional funding for actions in Afghanistan or Iraq after FY2005.
On February 7, 2005, the President presented his FY2006 budget, containing
proposals and estimates for FY2006 through FY2010. The proposal has a deficit 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 specific proposals that, over five years,
would reduce spending among the non-defense discretionary programs; slow the
growth in defense spending; slow the growth in selected categories of mandatory
spending; and make further tax cuts along with making permanent the 2001 and 2003
tax cuts.
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 (H.Con.Res.95) and Senate (S.Con.Res.18) adopted their
respective budget resolutions for FY2006 on March 17, 2005. After extensive
leadership discussions, a conference reported (H.Rept. 109-62) an agreement on the
resolution on April 28, which both the House and Senate adopted later that day. The
conference agreement included reconciliation instructions for three separate bills for
spending reductions, tax cuts, and an increase in the debt limit.
By mid-July, 2005, the House had passed all 11 of its regular appropriation bills
for FY2006; the Senate is expected to finish passing some, but not all of its 12
regular appropriation bills by August.
Actual and expected higher receipts allowed the Administration to reduce, in its
Mid-Session Review (July 13, 2005), the deficit estimates throughout its forecast
period (through FY2010). The smaller deficit estimates do not eliminate the deficit
by FY2010 nor do they resolve the existing long-term budget imbalance.
This report will be updated as events warrant.

---

Contents
Background and Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
The Current Situation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Budget Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Budget Estimates and Proposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Uncertainty in Budget Projections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Budget Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Outlays . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Receipts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Deficits (and Surpluses) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
CBO’s Alternative Policies Not Included in the Baseline . . . . . . . . . . . . . . 17
The Longer Run . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
The Budget and the Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
For Additional Reading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
CRS Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
List of Figures
Figure 1. Uncertainty in CBO’s Projections of the Surplus or Deficit Under
Current Policies(Deficit or surplus as a percentage of GDP) . . . . . . . . . . . . 6
Figure 2. Outlays, FY2003-FY2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Figure 3. Receipts, FY2003-FY2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Figure 4. Deficits/Surpluses, FY2003-FY2015 . . . . . . . . . . . . . . . . . . . . . . . . . . 16
List of Tables
Table 1. Budget Estimates for FY2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Table 2. Outlays for FY2004-FY2010 and FY2015 . . . . . . . . . . . . . . . . . . . . . . . 8
Table 3. Receipts for FY2004-FY2010 and FY2015 . . . . . . . . . . . . . . . . . . . . . . 12
Table 4. Surpluses/Deficits(-) for FY2004-FY2010 and FY2015 . . . . . . . . . . . . 15
Table 5. The Budgetary Effects of Selected Policy Alternatives Not
Included in CBO’s Baseline . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

---

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.1 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
Since the adoption of the budget resolution in late April, both the House and
Senate have begun passing appropriation bills for FY2006. The House has passed
all 11 of its regular appropriations (by July 4, 2005). The Senate may pass up to half
of its 12 regular appropriations by the beginning of August.
1 Current services baseline estimates, and baseline estimates in general, 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 follows instructions in the Balanced Budget and
Emergency Deficit Control Act of 1985 (DCA) and the Congressional Control and
Impoundment Act of 1974.

---

CRS-2
The Administration’s Mid-Session Review (July 13, 2005) included a smaller
deficit estimate for FY2006 than was included in the original budget request
(February 2005). Unexpectedly higher receipts in 2005 led the Administration to
lower its deficit estimate for FY2006 (and for FY2005) from $390 billion (3.0% of
GDP) to $341 billion (2.6% of GDP). The report also estimated that the cumulative
five-year reduction in the deficit (including policy, economic, and technical changes)
would come to $326 billion. The improved short-term deficit outlook has little effect
on the long-term budget imbalance.
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 Resolution, 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
Conf. Rept. Budget Resolution 4/28/05
2,195
2,577
-383
OMB MSR 7/13/05
2,273
2,613
-341
BEO — The Budget and Economic Outlook, CBO.
EPP — CBO’s estimates of the President’s proposals.
CSB — The Administration’s current services baseline.
MSR — OMB’s Mid-Session Review.

---

CRS-3
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

---

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 the size of the outlay savings that
would result from the reduced budget authority.
CBO’s March 2005 report analyzed the President’s policy proposals using
CBO’s own underlying assumptions (such as the economic outlook) and budget
estimating methods. The analysis produced smaller deficits in the first couple of
years of the five year period in the President’s budget and somewhat larger deficits
in the later years. CBO extrapolated the policy proposals through FY2015, finding
the budget remaining in deficit throughout the period. In CBO’s estimates and
projections, the deficit falls as a percentage of GDP from an estimated 2.6% of GDP
in FY2006 to approximately 1.3% of GDP in FY2012, where it remains through
FY2015.
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 by including smaller mandatory spending cuts in
reconciliation instructions, larger tax cuts in reconciliation instructions, 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, making reaching an agreement difficult and time
consuming.
The conference agreement on the budget resolution passed by the House and
Senate on April 28, 2005, included revenues of $2,195 billion, outlays of $2,577
billion, and a deficit of $383 billion. The resolution also included three
reconciliation instructions that would, over five years, reduce mandatory spending
(with the sources of the savings spread among several committees of jurisdiction in
the House and Senate) by $35 billion, reduce total revenues by $70 billion, and raise
the debt limit to $8.965 trillion. Over the five years covered by the budget resolution,
its proposals will produce larger deficits than would have occurred without the
included policy changes. CBO’s March 2005 baseline deficit estimate was $298
billion while the resolution has a proposed deficit of $383 billion. Under the budget
resolution proposals, the cumulative five-year deficit (for FY2006 through FY2010)
is $1,797 billion; under CBO’s March baseline (no policy changes), the five-year

---

CRS-5
cumulative deficit is $1,232 billion, more than $550 billion smaller than the amounts
proposed in the budget resolution.
The July 13, 2005 OMB release of the Mid-Session Review reflected the effect
on the estimates of the higher than expected receipts flowing into the Treasury in
2005. The Administration showed the higher receipts (along with technical and
economic changes) reducing the deficit through the five years forecast. Whether the
higher receipts will persist through the years shown by the Administration or will
disappear in a short time, is unsettled at this time.
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.
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
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.

---

CRS-6
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.
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
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.

---

CRS-7
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
covered by the reconciliation instructions, reducing the mandatory spending cuts
(from baseline estimates), and increasing the discretionary spending caps, adopted
its budget resolution.
Resolving some of the differences between the House and Senate resolution
became more difficult than initially hoped. By the end of April, the House and
Senate leadership had reached an agreement on the FY2006 budget resolution. A
conference committee reported (H.Rept. 109-62) the agreement on April 28, 2005,
which was quickly (on the same day) adopted by the House and Senate. The House
and Senate committees affected by the resolution’s three sets of reconciliation
instructions (reducing mandatory spending, reducing revenues, and raising the debt
limit) are scheduled to report during September 2005.
By July 4, 2005, the House had passed all 11 of its regular appropriation bills
for FY2006. The Senate had passed three of its twelve regular appropriation bills.

---

CRS-8
The Senate is expected to continue considering the appropriation bills through the
rest of the summer. Differences between the House and Senate coverage in the
various appropriations, as well as the differing content of the bills, may make for
difficult conferences on the legislation.
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
—
Conf. Rept. Budget Resolution 4/05
2,455
2,577
2,644
2,750
2,873
2,995
—
OMB MSR 7/13/05
2,472
2,613
2,661
2,750
2,888
3,063
—
a. Actual outlays for FY2004.
EPP — CBO’s estimates of the President’s proposals.
CSB — The Administration’s current services baseline.
MSR — OMB’s Mid-Session Review.
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

---

CRS-9
FY2006.4 The modifications had a relatively minor effect on the current services
outlay estimates this year.
The President’s budget did not include
the estimated costs of ongoing action in
Discretionary and Mandatory
Spending
Afghanistan or Iraq after the end of FY2005
(except for outlays flowing from the
The President’s budget includes, in its
s u p p l e m e n t a l a p p r o p r i a t i o n t h e
glossary, the general definition of
Administration proposed for FY2005 —
discretionary spending as “...budgetary
see below). Although unknown, the
resources ... provided in appropriation
amount is unlikely to be zero. This implies
acts.” Mandatory spending is defined
that the Administration’s initial outlay
as “...spending controlled by laws
estimate for FY2006 (and for the following
other than appropriations acts....”
years) is smaller than actual outlays will be,
even if the estimates for the remaining parts
Currently, discretionary spending
produces 38% of total outlays (42% of
of the budget are accurate. A week after the
total discretionary spending is for
b u d g e t b e c a m e a v a i l a b l e , t h e
defense) and mandatory spending,
Administration proposed, on February 14,
including net interest, produces the
2005, an $82 billion supplemental
other 62% ( net interest is
appropriation (budget authority) mostly for
approximately 8% of total outlays).
these costs. Approximately $35 billion of
this will become outlays in FY2005 and
Discretionary spending is not
$25 billion in FY2006, with the remaining
completely discretionary and
being spent in following years. Although
mandatory spending is not completely
this produces some outlays for the war on
mandatory. All government activities
require some discretionary spending to
terror in FY2006, the Administration is
pay salaries and other operating
expected to request another supplemental
expenses of the government. The laws
(although when is unclear) specifically for
underlying mandatory spending can be
FY2006.
changed by Congress, altering the
nature of the programs, how much
As shares of gross domestic product
they spend, and how they are funded.
(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 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
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.

---

CRS-10
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.
Figure 2 shows three possible paths for outlays through FY2015 as percentages
of GDP. CBO’s estimates and projections and the President’s proposals (as
estimated by CBO) are relatively similar throughout the period. They both fall as
percentages of GDP through FY2012 before rising over the last three years. They
both remain below the current (FY2005) level of outlays as a percentage of GDP.
The third line, labeled the CBO alternative baseline, incorporating assumptions about
continued funding for Iraq and Afghanistan and faster rates of growth for
discretionary spending (than in the baseline estimates), rises as a percentage of GDP
over time. Larger outlays make the future deficit reductions more difficult.
The House and Senate budget resolutions (H.Con.Res. 95; S.Con.Res. 18) and
the conference agreement held total outlay growth to less than 5% from FY2005 to
FY2006. For the period FY2005
through FY2010, the resolutions
Figure 2. Outlays, FY2003-FY2015
show outlays growing at a 3.8% to
4.1% annual rate. These outlay
(as percentages of GDP)
22%
totals included, in the Allowances
function, $50 billion in budget
authority and $32 billion in outlays
21%
for FY2006 (that is expected to
used for the global war on terror).5
No additional funding is assumed
20%
or provided in the budget
resolutions for subsequent years.
19%
The growth proposed for
discretionary spending (and non-
18%
CBO Baseline 1/05
defense discretionary spending in
particular) in the budget resolution
CBO Alternative Baseline 1/05
conference agreement differs
17%
markedly from that for mandatory
CBO's Estimate of the President's
spending and total outlays. Total
Budgetary Proposals 3/05
outlays grow at an average annual
16%
rate of 3.8% between FY2006 and
2003 2005
2007 2009 2011
2013 2015
FY2010. Mandatory spending
grows at an average annual rate of
6.1% (even with the reduction in
5 The effect of the supplemental in FY2005 and the one allowed for in FY2006 boosts
defense budget authority and outlays in those two years compared to the amounts in
subsequent years through FY2010. The result is a peak in defense funding in FY2006
followed by reductions in defense funding. Excluding the additional funding, defense
spending would grow slowly throughout the five-year period.

---

CRS-11
mandatory spending proposed in the reconciliation instructions).6 Total discretionary
spending over the period would actually fall at an average annual rate of 0.3%.
Discretionary defense spending would grow at an average annual rate of 3.1%, even
without assumptions about future spending for operations in Iraq and Afghanistan
or the global war on terror. Since defense discretionary spending grows, non-defense
discretionary spending must fall fairly rapidly for total discretionary spending to fall,
and it does. Non-defense discretionary spending falls at an average annual rate of
3.5% from FY2006 to FY2010.
The two resolutions and the conference agreement included reconciliation
instructions to constrain growth in mandatory spending between FY2006 and
FY2010. The House instructions were for $69 billion in savings while the Senate
included $17 billion in mandatory spending savings. The conference agreement
included $35 billion in mandatory savings for the FY2006 through FY2010 period.
The conference agreement included a discretionary spending cap, for the
Appropriations Committees, of $917 billion in outlays ($843 billion in budget
authority) for FY2006, similar to the levels included in the House and Senate
versions of the budget resolution for FY2006. The cap does not include the $50
billion allowance that is expected to become a defense supplemental appropriation
sometime during the year.
The Administration’s Mid-Session Review (MSR; OMB; July 13, 2005)
increased the FY2006 outlay estimates by $46 billion over the President’s outlay
estimates in the FY2006 budget in February. Most of the increase ($37 billion) came
from additional war funding; the rest was a combination of small policy changes and
the effect of technical and economic revisions on outlays. The inclusion of the
Administration’s proposed Social Security policy changes (the personal or private
accounts) raise the new outlay estimates above the Administration’s previous
estimates, beginning in FY2009. As has been the Administration’s practice, the
MSR did not include any estimates for future costs for the operations in Iraq and
Afghanistan. Such costs, which are likely to occur in future years, will raise outlays
in those years above the levels shown in the MSR.
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
Administration’s receipt proposals, produced relatively little change from the
Administration’s baseline estimates. Much of the budgetary effect of making the tax
cuts permanent would not occur until after FY2010, the last year shown in the
budget. The Administration estimated that making the cuts permanent would reduce
6 Between FY2006 and FY2010, the budget resolution shows cumulative mandatory
spending totaling $9.068 trillion. The $34 billion five-year reduction in mandatory spending
in the reconciliation instructions is 0.37% (a little over one third of one percent) of
cumulative mandatory spending over the period.

---

CRS-12
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.7
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
—
Conf. Agree. Budget Resolution 4/05
2,057
2,195
2,331
2,496
2,635
2,784
—
OMB MSR 7/13/05
2,140
2,273
2,428
2,588
2,727
2,893
—
a. Actual receipts for FY2004.
EPP — CBO’s estimates of the President’s proposals.
CSB — The Administration’s current services baseline.
MSR — OMB’s Mid-Session Review.
The Administration’s proposals did not include any extension of the current
relief from the alternative minimum tax (AMT)after the end of FY2005. Without a
further extension, a growing number of middle-class taxpayers will find themselves
subject to the AMT.8 CBO estimated (January 2005) that providing extended or
7 These amounts from CBO do not include the outlay effects (usually interest costs
associated with larger deficits) of the extensions.
8 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
(continued...)

---

CRS-13
permanent AMT relief would reduce receipts by $198 billion between FY2006 and
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.9
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.10 Receipts still rise
Figure 3. Receipts, FY2003-FY2015
as a percentage of GDP, but much
(as percentages of GDP)
more slowly than in the President’s
22%
proposal or CBO’s baseline. By
CBO Baseline 1/05
FY2010, receipts have risen to
$2,727 billion and 17.3% of GDP.
21%
CBO Alternative
By FY2015, the alternative
Baseline 1/05
estimated receipts rise to $3,508
20%
CBO's Estimate of the
billion and 17.9% of GDP.
President 's Budgetary
Proposals 3/05
CBO’s March 2005 estimates
19%
of the President’s revenue
proposals (using CBO’s underlying
assumptions and budget model)
18%
produced numbers similar to those
in the President’s budget (a bit
larger in the early years and a bit
17%
smaller in the later years of the
FY2006 to FY2010 period).
16%
2003 2005 2007 2009 2011 2013 2015
Figure 3 shows receipts as
percentages of GDP for the fiscal
years 2003 through 2015
(projected). The two lines following similar paths are CBO’s estimates of the
President’s policy proposals and an alternative baseline based on CBO’s baseline.
8 (...continued)
Individuals: Legislative Initiatives and Their Revenue Effects, by Gregg A. Esenwein.
9 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.
10 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.

---

CRS-14
Both of these series include the assumption that the tax cuts from the first term of the
Administration will not expire, as currently required by law, in FY2010. The result
is of revenues growing slowly throughout most of the period shown as percentages
of GDP. Under the Administration’s proposals, revenues would rise from less than
17% of GDP (a very low level in modern history) to about 17.5% in FY2010 to 18%
in FY2015. The alternative baseline rises to just over 17% in FY2010 to a little over
17.5% of GDP in FY2015. The CBO baseline in Figure 3 reflects the growth in
revenues after FY2010 if the tax cuts are allowed to expire. Revenue grow from just
under 18% of GDP in FY2010 to somewhat over 19% of GDP by FY2012.
The House and Senate budget resolutions followed the lead of the President’s
budget and included tax cuts or other tax changes for the period FY2006 through
FY2010. The resolutions did not address the expiration of the tax cuts in 2010. The
House resolution included $106 billion in revenue reductions over five years, $45
billion of which were included in reconciliation instructions. 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 of which was
included within reconciliation instructions.
The conference agreement on the budget resolution included five-year revenue
reductions of almost $106 billion, $70 billion of which fell under reconciliation
instructions. The $11 billion reconciliation protected reduction for FY2006 is not
large enough (by an estimated $5 billion) to accommodate all of the tax breaks that
expire this year. Among those tax breaks expiring is the relief from the Alternative
Minimum Tax (AMT) for many (and growing) middle-class taxpayers. The House
Ways and Means Committee and the Senate Finance Committees will determine
what is included and excluded from the tax cut reconciliation bill that each Chamber
will initially consider. Whether a separate tax cut bill, continuing or extending other
expiring tax cuts, will be introduced is uncertain.
The Administration expects that the unforeseen increase in receipts in 2005,
reported in the Mid-Session Review (MSR; OMB; July 14, 2005), will persist through
FY2010, with each succeeding year (after FY2006) showing slightly smaller
increases.11 The Administration attributes the higher revenues to stronger economic
growth, which the Administration claims results in large part from its tax cut policies.
The stronger economic growth is not reflected in the economic data included in the
MSR. The MSR and the President’s February FY2006 Budget contain the same rate
of economic growth for FY2005 (and the MSR contains a marginally lower rate of
GDP growth for FY2006).12 Future receipts may also be smaller than the MSR
indicates if Congress and the President continue adjusting the Alternative Minimum
Tax (AMT) to provide relief to middle-class taxpayers.
All major types of federal receipts, corporate income taxes, payroll taxes, and
individual income taxes are growing faster than expected. The sources of the income
11 Receipts are $87 billion larger for FY2005 and by $95 billion larger for FY2006 than in
the President’s FY2006 budget from February, 2005.
12 Some analysts have pointed out that if the higher receipts are due to faster economic
growth, why is the faster GDP growth not reflected in the economic estimates in the MSR.

---

CRS-15
generating the taxes is uncertain. Those data are not available at the time taxes are
collected and will not be available for many months. The data, when available, will
help determine whether the increased income producing the larger receipts in 2005
comes from temporary or more permanent factors. Without this information, analysts
find it difficult to accurately determine whether or not the increase is a one-time
event owing to special circumstances or a longer-lasting increase in income and
receipts.
Deficits (and Surpluses)
Deficits and surpluses are the residuals left after Congress and the President set
policies for spending and receipts. Surpluses, in which receipts are greater than
outlays, reduce federal debt held by the public which can lead to lower net interest
payments (among other effects). Deficits, in which outlays exceed receipts, increase
government debt held by the public, generally increasing net interest payments
(assuming no change in interest rates). Reducing the deficit and eventually reaching
a balanced budget or generating and keeping a surplus (the government had its first
surplus in 30 years in FY1998) was a major focus of the budget debates in the late
1980s and throughout the 1990s.
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
$-412a
$-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
—
Conf. Agree. Budget Resolution 4/05
-398
-383
-313
-254
-238
-211
—
OMB MSR 7/13/05
-333
-341
-233
-162
-162
-170
—
a. Actual deficit for FY2004.
EPP — CBO’s estimates of the President’s proposals.
CSB — The Administration’s current services baseline.
MSR — OMB’s Mid-Session Review.
The President’s FY2006 budget proposals included 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 indicated that its policies would produce the halving of the deficit
as a percentage of GDP by the end of the five years in the budget. This goal could
be frustrated if additional AMT relief is implemented, additional defense
supplementals are adopted, and non-defense discretionary spending grows rather than
falls after FY2006.

---

CRS-16
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, allowing AMT
relief to end after FY2006, some revenue-reducing tax cuts. An inability to hold to
these spending and revenue levels, a task that may prove difficult, would result in
larger deficits than those expected in the President’s budget. On the other hand,
faster than expected economic growth (some hints of which occurred during the
spring of 2005) would tend to reduce the deficit below the levels in the President’s
budget.
Incorporating selected CBO alternative policies (to reflect faster discretionary
spending growth, ongoing spending for the war on terror, extending the expiring tax
cuts, retaining relief from 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 over the next 10 years.
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).
Figure 4. Deficits/Surpluses, FY2003-FY2015
Both are below the deficits
for those years proposed in
(as percentages of GDP)
-4%
the budget. CBO’s
reestimated deficits are
below the Administration’s
deficits through FY2008
-3%
and larger than the
Administration’s deficit
estimates in FY2009 and
-2%
FY2010. CBO extended
the reestimates through
FY2015 (beyond the
CBO Baseline 1/05
-1%
FY2010 endpoint of the
President’s budget).
CBO Alternative
Baseline 1/05
Figure 4 shows the
0%
changes in the deficit (or
CBO's Estimate of the
President's Budgetary
surplus) for the fiscal years
Proposals 3/05
2 0 0 3 t h r o u gh 2 0 1 5
1%
(projected).13 CBO’s
2003
2005
2007
2009
2011
2013
2015
estimates of the President’s
policy proposals show the
deficit falling from
approximately 3.5% of GDP in FY2004 to approximately 1.5% of GDP in FY2010
and dropping a bit more to about 1.3% of GDP in FY2015. These CBO reestimates
of the President’s proposals include the assumption that additional revenue
13 Note that falling deficits move towards zero, which is lower than the negative percentages
of GDP. Surpluses appear at the bottom of the chart.

---

CRS-17
reductions occur over the next five years, that spending, both mandatory and
discretionary are constrained, and that the 2001 and 2003 tax cuts do not revert to
previous law in 2010.
The CBO baseline represents the future deficit and surplus path under existing
policies, including the currently scheduled expiration of the 2001 and 2003 tax cuts,
no future adjustments to lessen the coverage expansion of the alternative minimum
tax (AMT), and no further funding for the military activities in Iraq and Afghanistan.
The result is a falling deficit that becomes a surplus in FY2012.
The alternative baseline path, which assumes faster spending growth, the
extension of the tax cuts, future adjustments to the AMT, and future funding for
military action in Iraq and Afghanistan, produces almost steady or rising deficits as
percentages of GDP throughout the period. By FY2015, the alternative baseline
deficit approaches 4% of GDP.
The House and Senate budget resolutions, in following the Administration’s
lead, showed declining deficits throughout the five years covered by the resolution.
The conference agreement on the resolution followed the same pattern. The
differences among these deficit estimates were slight (see Table 4). The conference
agreement set a FY2006 deficit of $383 billion (3.0% of GDP) falling to $211 billion
(1.1% of GDP) in FY2010.
The Mid-Session Review (MSR) included smaller deficit estimates for each year
in the five-year forecast (compared to the President’s FY2006 February budget).
Most of the improvement came from higher than previously expected receipts. A
small amount came from smaller than expected interest payments resulting from the
slower growth in federal debt (because of the smaller deficits).
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 represent a different path that future policy may follow (other than CBO’s
baseline or the President’s proposals). The amounts shown estimate the costs or
savings of these alternatives when measured against CBO’s baseline estimate of the
deficit. The alternative policies include making the 2001 and 2003 tax cuts
permanent and adjusting the alternative minimum tax to reduce its expansion among
middle class taxpayers. Another alternative policy would freeze discretionary
spending at FY2005 levels instead of growing at the rate of inflation as baseline does,
which would reduce the estimated deficit.
Table 5, on the next page, contains data from the CBO budget report for three
time periods, FY2006-FY2010, FY2011-FY2015, and FY2006-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.

---

CRS-18
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.

---

CRS-19
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.

---

CRS-20
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.14
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
14 CBO, The Budget and Economic Outlook: Fiscal Years 2006-2015, Jan. 2004, pp. 10-11.

---

CRS-21
changes generally have on the economy. The worse-than-previously-expected
economic conditions that lasted from 2001 into 2003, played a minor 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 were to grow
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 2015.15
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.
15 Potential GDP represents an estimate of what GDP would be if both labor and capital
were as fully employed as is possible.

---

CRS-22
For Additional Reading
U.S. Congressional Budget Office. The Budget and Economic Outlook: Fiscal Years
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.

---

CRS-23
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.

---