Order Code RL32812
CRS Report for Congress
Received through the CRS Web
The Budget for Fiscal Year 2006
Updated October 5, 2005
Philip D. Winters
Analyst in Government Finance
Government and Finance Division
Congressional Research Service ˜ The Library of Congress

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The Budget for Fiscal Year 2006
Summary
Hurricane Katrina’s devastation of the central Gulf Coast and additional damage
done by Hurricane Rita has changed the budget outlook for fiscal year (FY) 2006.
Substantially higher spending and lower receipts are expected, which will raise the
year’s deficit by some unknown amount (already $60 billion has been approved for
recovery efforts). The budgetary effects of the response to the hurricanes are
expected mostly in FY2006, but are likely to extend over several years. The costs are
not expected to worsen the budget’s already difficult long-term outlook.
The first budget reports for FY2006 from the Congressional Budget Office
(CBO; The Budget and Economic Outlook: Fiscal Years 2006-2015, January 25,
2005) and the President’s budget proposals for FY2006 (February 7, 2005) both
expected smaller deficits for FY2006 than in FY2005.
The President’s 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 March 2005 estimate of the President’s policy proposals produced a
smaller deficit ($332 billion, 2.6% of GDP) than had the Administration. Slightly
higher estimated revenues and slightly lower estimated outlays led to the difference.
The cumulative amounts were similar in the respective estimates for receipts, outlays,
and the deficit for FY2006 through FY2010.
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. Since only two regular
appropriations have become law, Congress passed, and the President signed, a
continuing resolution on appropriations (P.L.109-77; H.J.Res. 68) on September 30,
2005, to fund otherwise unfunded parts of the government.
Higher receipts in 2005 allowed the Administration to reduce, in its Mid-Session
Review (July 2005), the deficit estimates throughout its forecast period (through
FY2010) by assuming that the higher receipts would continue. The smaller deficit
estimates do not eliminate the deficit by FY2010 nor do they resolve the existing
long-term budget imbalance. CBO’s mid-year budget report also expected the higher
receipts to reduce the deficit in FY2006, but to have little effect in subsequent years,
and to have little effect on the long-term budget outlook.
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Receipts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Deficits (and Surpluses) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
The Longer Run . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
The Budget and the Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
For Additional Reading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
CRS Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
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, FY2005-FY2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Figure 3. Receipts, FY2005-FY2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Figure 4. Deficits, FY2005-FY2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
List of Tables
Table 1. Budget Estimates for FY2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Table 2. Outlays for FY2004-FY2010 and FY2015 . . . . . . . . . . . . . . . . . . . . . . . 9
Table 3. Receipts for FY2004-FY2010 and FY2015 . . . . . . . . . . . . . . . . . . . . . . 13
Table 4. Surpluses/Deficits(-) for FY2004-FY2010 and FY2015 . . . . . . . . . . . . 17

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The Budget for Fiscal Year 2006
Background and Analysis
Presidents submit their budget proposals for the upcoming fiscal year (FY) early
in each calendar year. The Bush Administration released its FY2006 budget (The
Budget of the U.S. Government, Fiscal Year 2006) on February 7, 2005. The
multiple volumes contain general and specific descriptions of the Administration’s
policy proposals and expectations for the budget for FY2006 through FY2010. It
includes a section on long-term fiscal issues facing the nation and provides limited
information on the revenue and mandatory spending changes after 2010. The full set
of budget documents (Budget, Appendix, Analytical Perspectives, Historical Tables,
among several others) contains extensive and detailed budget information, including
estimates of the budget without the proposed policy changes (current service baseline
estimates), historical budget data, detailed budget authority, outlay and receipt data,
selected analysis of specific budget related topics, and the Administration’s economic
forecast.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
The start of FY2006 began with most regular appropriations unfinished.
Congress passed a continuing resolution on appropriations (CR; P.L.109-77; H.J.Res.
68), and the President signed, on September 30, 2005, to fund otherwise unfunded
federal activities as the new fiscal year began. The CR will provide funding through
November 18. Funding levels are likely to vary among various categories of
spending and in some cases could be unchanged from FY2005 levels.
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.

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CRS-2
The budgetary effects of Hurricane Katrina on FY2006 remain uncertain, but are
expected to be significant. Already Congress and the President have approved over
$60 billion in appropriations for relief and recovery. Additional funding for recovery
is expected. In addition to higher spending, the loss of jobs and business in the
affected areas are likely to reduce federal revenues. At this time, whether or not the
storms will have any nationwide economic effects and therefore additional effects on
the budget are unknown. The combination of higher spending and lower revenues
are likely to raise the for FY2006 to near $500 billion.
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. The policy-generated dollar differences
for an upcoming fiscal year can be 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
CBO Update, Baseline, 8/15/05
2,280
2,595
-314
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.
Update — CBO’s The Budget and Economic Outlook: An Update.

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Budget Estimates and Proposals
CBO’s first budget report for FY2006, the Budget and Economic Outlook:
Fiscal Years 2006-2015 (January 2005), contained baseline estimates and projections
for FY2005 through FY2015. The report estimated a FY2006 deficit of $295 billion
(down from the estimated FY2005 deficit of $368 billion). By FY2010, the baseline
deficit estimate had fallen to $189 billion. Under the baseline assumptions, CBO:
increases discretionary spending at the rate of inflation; does not include extending
the 2001 and 2003 tax cuts after 2010; and allows 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 showed 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 estimates (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, fixing
the expanding coverage of the AMT, or changing the rate of discretionary spending
growth. In CBO’s January 2005 report, making the tax cuts permanent increased 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 produced a
$218 billion five-year cumulative increase in the deficit and a $503 billion increase
over 10 years (FY2006-FY2015). If discretionary spending were to grow at the rate
of GDP, rather than at the rate of inflation, the five-year cumulative deficit would
increase by $378 billion and the 10-year cumulative deficit would increase 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 proposed and
baseline estimates somewhat closer together. Instead of following the traditional
method of constructing baseline estimates, the Administration’s FY2006 current

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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, 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 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 would 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 had a proposed deficit of $383 billion. Under the budget
resolution proposals, the cumulative five-year deficit (for FY2006 through FY2010)
was $1,797 billion; under CBO’s March baseline (no policy changes), the five-year

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cumulative deficit was $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 had reduced deficits
in FY2006 and subsequent years (through FY2010) because of the higher than
expected receipts flowing into the Treasury in 2005. CBO’s August 2005 Update
had a similar pattern of changed deficit estimates. CBO expected less persistence in
the higher receipts and no long-term improvement in the budget outlook (compared
to its March budget report).
The federal response to the devastation caused by Hurricane Katrina and the
lesser damage from Hurricane Rita will produce a substantial, but unknown,
budgetary response. The higher spending and lower revenues will raise the FY2006
deficit to as much as $500 billion (as some press reports are speculating). Smaller
deficit increases, compared to the mid-year budget reports, may follow for several
years as funding for recovery from the hurricanes continues into the future.
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
2 Some things are known with certainty about the direction of future spending and receipts.
Demographics can partly determine the shape of future budgets. In the next decade, the
growing retirements in the baby boom generation will rapidly drive higher the spending for
Social Security and Medicare as well as other federal spending or tax breaks for the elderly.
Because virtually all those who will become eligible for these benefits are alive today,
estimating the growth in the populations eligible for these programs is relatively
straightforward.

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through the actual results for that year. Like the CBO information, this provides
another example of the uncertainty surrounding budget estimates. The chapter
included a chart based on historical experience, that indicates the possible range of
budget balance (surplus or deficit) outcomes with a 90% certainty. The range for the
current year and following year (which the Administration calls the budget year) rise
from $256 billion to $548 billion.3 By five years beyond the current year, the range
exceeds $1 trillion.
Figure 1. Uncertainty in CBO’s Projections of the Surplus or
Deficit Under Current Policies
(Deficit or surplus as a percentage of GDP)
Source: Chart created by CBO; from The Budget and Economic Outlook: FY2006-FY2015, January
2005, p. 11.
Note: This figure, calculated on the basis of CBO’s forecasting track record, shows the estimated
likelihood of alternative projections of the budget deficit or surplus under current policies. The
baseline projections described in this chapter fall in the middle of the darkest area of the figure. Under
the assumption that tax and spending policies will not change, the probability is 10% that actual
deficits or surpluses will fall in the darkest area and 90% that they will fall within the whole shaded
area. Actual deficits or surpluses will be affected by legislation enacted in future years, including
decisions about discretionary spending. The effects of future legislation are not reflected in this figure.
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.
3 The current year is the fiscal year we are in: 2005. The budget year is the year that the
President’s budget covers — 2006 — and that Congress will pass legislation to implement.

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Budget Action
CBO and the Administration released their first budget reports for FY2006, in
late January and early February 2005, respectively. CBO’s report provided baseline
estimates for FY2005 through FY2015. The CBO baseline estimates, following the
instructions mandated by law, did not include any estimated cost for ongoing
operations in Afghanistan and Iraq after FY2005 or any estimates of the
Administration’s proposed, but undefined, change in Social Security. The estimates
assumed that the tax cuts adopted over the Administration’s first term will expire in
2010 as required by current law and that the Alternative Minimum Tax (AMT) will
revert to its previous incarnation when the temporary relief provisions expire at the
end of FY2005.
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. These estimates take the policies in the Administration’s budget and
recalculate their effect 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 deficits in FY2009 and FY2010. The full CBO report (An
Analysis of the President’s Budgetary Proposals for Fiscal Year 2006, March 2005)
contained more details, an extended discussion of CBO’s calculations, CBO’s
estimates of the President’s proposals, and revised baseline estimates.
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

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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. (In September, the
congressional leadership pushed the reporting date for the reconciliation legislation
into late October, responding to demands on Congress as it attempted to finish the
FY2006 appropriations, responded to Hurricane Katrina, and the Senate held
hearings on a new Chief Justice.)
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.
The Senate continued considering its appropriation bills through the rest of the
summer. At the end of July, two appropriations bills (Interior and the Legislative
Branch) cleared Congress and were signed by the President.
In September, the Senate resumed its consideration of its remaining
appropriation bills. By mid-September, the outlook for the timely adoption of the
regular appropriations remained unclear. Speculation was widespread that at least
one continuing resolution on appropriations (a CR) would be needed at the beginning
of FY2006. The differences in the number, coverage, and amounts in the regular
appropriation bills for the House and Senate seems to have complicated the already
difficult process of adopting the annual appropriations.
During the last week of September, the Appropriation Committees indicated that
a CR would be needed. The CR that emerged (P.L.109-77; H.J.Res. 68) would run
through November 18, 2005, with funding levels varying by spending category.
Congress passed, and the President signed, the CR on September 30, 2005.
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.
As it did in last year’s budget, the Administration modified some of the
underlying policy assumptions in creating its current services baseline estimates for

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FY2006.4 The modifications had a relatively minor effect on the current services
outlay estimates this year.
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
—
CBO Update 8/15/05
2,473
2,595
2,721
2,860
2,997
3,134
3,905
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.
The President’s budget did not include the estimated costs of ongoing action in
Afghanistan or Iraq after the end of FY2005 (except for outlays flowing from the
supplemental appropriation the Administration proposed for FY2005 — see below).
Although unknown, the amount is unlikely to be zero. This implies that the
Administration’s initial outlay estimate for FY2006 (and for the following years) is
smaller than actual outlays will be, even if the estimates for the remaining parts of
the budget are accurate. A week after the budget became available, the
Administration proposed, on February 14, 2005, an $82 billion supplemental
appropriation (budget authority) mostly for these costs. Approximately $35 billion
of this will become outlays in FY2005 and $25 billion in FY2006, with the remaining
being spent in following years. Although this produces some outlays for the war on
terror in FY2006, the Administration is expected to request another supplemental
(although when is unclear) specifically for FY2006.
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
As shares of gross domestic product
(GDP), the Administration’s proposals
showed outlays falling from 19.9% of GDP
Discretionary and Mandatory
Spending
in FY2006 to 19.0% of GDP in FY2010.
CBO’s estimate of the President’s outlay
The President’s budget includes, in its
proposals (March 2004) showed the shares
glossary, the general definition of
falling from 19.7% of GDP in FY2006 to
discretionary spending as “...budgetary
19.0% of GDP in FY2010, before rising to
resources ... provided in appropriation
19.3% of GDP in FY2015. These outlays-
acts.” Mandatory spending is defined
as-shares-of-GDP are below both the
as “...spending controlled by laws
average from FY1980 through FY2004
other than appropriations acts....”
(21.0% of GDP) or the average from
FY1990 through FY2004 (20.2% of GDP).
Currently, discretionary spending
produces 38% of total outlays (42% of
CBO’s baseline estimates showed outlays
total discretionary spending is for
falling from 19.5% of GDP in FY2006 to
defense) and mandatory spending,
19.0% of GDP in FY2010 and sliding
including net interest, produces the
slightly to 18.9% of GDP in FY2015.
other 62% ( net i nterest is
Using two of CBO’s alternative scenarios
approximately 8% of total outlays).
for spending — assuming the phase-down of
activities in Iraq and Afghanistan over a
Discretionary spending is not
number of years and that total discretionary
completely discretionary and
spending increases at the rate of nominal
mandatory spending is not completely
GDP growth (rather than the rate of
mandatory. All government activities
require some discretionary spending to
inflation), outlays as shares of GDP would
pay salaries and other operating
rise from 20.1% of GDP in FY2006 to
expenses of the government. The laws
21.0% of GDP in FY2015.
underlying mandatory spending can be
changed by Congress, altering the
Figure 2 shows three possible paths for
nature of the programs, how much
outlays from OMB’s and CBO’s mid-year
they spend, and how they are funded.
budget reports through FY2010 and FY2015
as percentages of GDP (these numbers do
not reflect the subsequent spending on
hurricane recovery). CBO’s baseline varies
little throughout the period, slowly declining as a share of GDP from FY2006 to
FY2015. The Administration’s proposed level of outlays falls sharply after FY2006,
in part the result of the Administration’s assumption of reductions in non-defense
discretionary spending (the large amounts of expected spending for Hurricane
Katrina recovery is likely to raise FY2006 outlays — and possibly in subsequent
years — as a percentage of GDP above the levels shown in Figure 2). Both sets of
estimates remain below the current (FY2005) level of outlays as a percentage of
GDP. The third line, the alternative baseline based on CBO estimates, incorporates
the assumption that discretionary spending will grow at the rate of nominal GDP
growth, which is faster than the baseline assumption that it grows at the rate of
inflation. The result is a rise in outlays as a percentage of GDP.5
5 The alternative estimate includes the associated higher interest payments resulting from
larger deficits because of the higher spending. For consistency with the following two
sections, the alternative estimate also includes the higher debt servicing costs associated
(continued...)

---

CRS-11
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 showed outlays
growing at a 3.8% to 4.1% annual rate. These outlay totals included, in the
Allowances function, $50 billion in
Figure 2. Outlays, FY2005-FY2015
budget authority and $32 billion in
outlays for FY2006 (that is expected
(as percentages of GDP)
23%
to used for the global war on terror).6
No additional funding is assumed or
provided for the war on terror in the
22%
budget resolutions for subsequent
years.
21%
The reduction proposed for
discretionary spending (and non-
20%
defense discretionary spending in
particular) in the budget resolution
conference agreement differs
19%
markedly from the growth in
mandatory spending and total
CBO Baseline
outlays. Total outlays grow at an
18%
Alternative Estimate
average annual rate of 3.8% between
OM B Estimate
FY2006 and FY2010. Mandatory
spending grows at an average annual
17%
rate of 6.1% (even with the reduction
2005
2007
2009
2011
2013
2015
in mandatory spending proposed in
the reconciliation instructions).7
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 proposed reduction in non-
defense discretionary spending would cut it both per capita and as a percentage of
GDP.
5 (...continued)
with the alternative, and lower, receipt estimates shown in Figure 3.
6 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 in FY2005 and
FY2006, defense spending would grow slowly throughout the five-year period.
7 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
The two resolutions and the conference agreement included reconciliation
instructions to slow (barely) 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 also included a discretionary spending cap for the
House of $917 billion in outlays ($843 billion in budget authority) for FY2006,
similar to the discretionary spending levels included in the House and Senate
versions of the budget resolution for FY2006. The cap did 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 proposed personal or
private accounts) raised 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.
CBO’s mid-year Update (August 2005) revised FY2006 outlays upward by $84
billion, most of which reflected the adoption of the defense supplemental earlier in
2005. Because the baseline rules require CBO to assume the repetition of the
supplemental each year in its forecast, outlays in all the years were larger than in the
March 2005 CBO baseline estimates. CBO estimates using alternative assumption
that reduce funding for Iraq and Afghanistan and the war on terror over a period of
time, produced 10-year cumulative outlay estimates that were $705 billion smaller
(including interest savings) than the cumulative 10-year baseline estimates.
Congress passed a continuing resolution on appropriations (P.L.109-77;
H.J.Res. 68; CR) at the end of the fiscal year, September 30, 2005. The CR funds
governmental activities through November 18, 2005, that are not already funded by
permanent authority or by a FY2006 regular appropriation. For most activities, the
CR would fund them at the lower of the House-passed or Senate-passed
appropriation or the FY2005 current rate of spending.
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

---

CRS-13
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
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.8
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 FY2004, following three years of dollar declines in receipts
(FY2001 through FY2003). Receipts reached their highest level (since World War
II) 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. 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 (later estimates raised
these amounts).
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
—
CBO Update 8/15/05
2,142
2,280
2,396
2,526
2,675
2,817
3,848
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.
Update — CBO’s The Budget and Economic Outlook: an Update.
8 These amounts from CBO do not include the outlay effects (usually interest costs
associated with larger deficits) of the extensions.

---

CRS-14
The Administration’s proposals did not include extending 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.9 CBO estimated (January 2005) that providing extended or 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.10
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 January 2005 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.11 Receipts still
rise as a percentage of GDP, but much more slowly than in the President’s proposal
or CBO’s baseline. By FY2010, the alternative receipts have risen to $2,727 billion
and 17.3% of GDP. By FY2015, the alternative estimated receipts rise to $3,508
billion and 17.9% of GDP.
CBO’s March 2005 estimates of the President’s revenue proposals (using
CBO’s underlying assumptions and budget model) produced numbers similar to
those in the President’s budget (a bit larger in the early years and a bit smaller in the
later years of the FY2006 to FY2010 period).
The House and Senate budget resolutions 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 to be
included within reconciliation instructions.
9 For discussions of the AMT issue, see CRS Report RL30149, The Alternative Minimum
Tax for Individuals; and CRS Report RS22100, The Alternative Minimum Tax for
Individuals: Legislative Initiatives and Their Revenue Effects, by Gregg A. Esenwein.
10 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.
11 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-15
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 FY2006 $11 billion tax reduction under reconciliation (in the
budget resolutions) would not be large enough (by an estimated $5 billion) to
accommodate all of the tax breaks that expire that 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.
Figure 3 uses data from the OMB and CBO 2005 mid-year budget reports. It
shows receipts as percentages of GDP for fiscal years 2003 through 2015 (projected).
The two lines following similar paths through FY2010 are CBO’s baseline estimate
and the OMB’s MSR Both show revenues growing slowly as percentages of GDP
through FY2010.
CBO’s baseline assumes tax
Figure 3. Receipts, FY2005-FY2015
increases after 2010, with the
(as percentages of GDP)
currently scheduled expiration of the
23%
2001 and 2003 tax cuts. This
CBO Baseline
assumption raises receipts rapidly as
22%
Alternative Estimate
a percentage of GDP in the first half
of the second decade of the 21st
OM B Estimate
century. The alternative estimate
21%
used CBO’s August 2005 alternative
scenarios that assume the tax cuts are
extended and that the AMT relief is
20%
adjusted annually. This alternative
outlook for receipts shows them
remaining between 17.0% and 17.5%
19%
of GDP throughout the FY2005 to
FY2015 period.12
18%
The MSR showed revenues
rising from less than 17% of GDP to
17%
over 18% of GDP in FY2010.
2005
2007
2009
2011
2013
2015
CBO’s baseline rises to just below
18% of GDP in FY2010 to almost
19.5% 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.
The MSR (July 2005) indicated that the unforeseen increase in receipts in 2005
would persist through FY2010. The Administration attributed the higher revenues
12 By FY2015, CBO’s baseline and the alternative estimate are approximately 2% of GDP
or $400 billion apart.

---

CRS-16
to stronger economic growth, which the Administration claimed resulted 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). 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.
CBO’s mid-year report (the Update, August 2005) showed a large increase in
receipts for both FY2005 and FY2006 with smaller increases in several subsequent
years, compared to its March 2005 baseline estimates. CBO attributed most of the
increased receipts to higher than expected income taxes (both individual and
corporate). CBO indicated that the increases were likely the result of temporary tax
law changes that have expired. CBO attributed some of the more persistent increased
receipts to changes in its expected economic conditions. CBO does not expect the
increased receipts to affect the budget’s long-term imbalance. Better analysis of the
changes in receipts will appear in the future as more detailed data on the receipts
becomes available.
At this time, the effect of Hurricane Katrina (and possibly of Hurricane Rita) on
federal revenues is uncertain. Although a short-term reduction in collections is
possible, the rebuilding that is expected may replace some of the loss over time.
Deficits (and Surpluses)
Deficits and surpluses are the residuals left after Congress and the President set
policies for spending and receipts. Surpluses, in which receipts are greater than
outlays, reduce federal debt held by the public, which can lead to lower net interest
payments (among other effects). Deficits, in which outlays exceed receipts, increase
government debt held by the public, generally increasing net interest payments
(assuming no change in interest rates). Reducing the deficit and eventually reaching
a balanced budget or generating and keeping a surplus (the government had its first
surplus in 30 years in FY1998) was a major focus of the budget debates in the late
1980s and throughout the 1990s.
The President’s FY2006 budget proposals had estimates of the FY2006 deficit
falling to $390 billion (3.0% of GDP) from an FY2005 deficit of $427 billion (3.5%
of GDP). The deficit would fall to an estimated $207 billion (1.3% of GDP) in
FY2010. The President’s budget indicated that its policies, if adopted, would halve
the deficit as a percentage of GDP by the end of FY2010. This goal would likely not
be reached if additional AMT relief is implemented, additional defense
supplementals are adopted, or non-defense discretionary spending grows rather than
falls after FY2006.
Achieving the Administration’s deficit reduction proposals would require, over
five years, strict limits on the growth in domestic discretionary spending, a modest
reduction (from baseline estimates) in some entitlements, slowing defense spending
growth, and letting AMT relief to lapse after 2005. The proposals included some

---

CRS-17
revenue-reducing tax cuts, increasing other changes needed to reduce the deficit.13
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.
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
—
CBO Update 8/15/05
-331
-314
-324
-335
-321
-317
-57
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.
Update — CBO’s The Budget and Economic Outlook: An Update.
CBO’s March 2005 estimates of the President’s proposals put the FY2005
deficit at $394 billion (3.2% of GDP) and the FY2006 deficit at $332 billion (2.6%
of GDP). Both are below the deficits for those years proposed in the budget. CBO’s
reestimated deficits are below the Administration’s deficits through FY2008 and
larger than the Administration’s deficit estimates in FY2009 and FY2010. CBO
extended its projections of the President’s policies through FY2015 (the President’s
budget estimates ended with FY2010).
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.
13 The Administration’s current services baseline estimate, which assumes current policy,
had smaller deficits in each year through FY2009 (and the same sized deficit in FY2010)
than the President’s proposed budget. The cumulative five-year deficit would be smaller
without the President’s proposed policy changes than with them.

---

CRS-18
Figure 4 shows deficit estimates as shares of GDP for FY2005 through FY2015
based on data from the OMB’s and CBO’s mid-year (July and August 2005
respectively) budget reports.14 The CBO baseline deficit estimate in August 2005
included assuming the expiration of the 2001 and 2003 tax cuts in 2010, no future
adjustments to lessen the expanding coverage of the AMT, adjusting non-defense
discretionary spending for inflation, and an annual repetition of the 2005 funding
supplemental for the military activities in Iraq and Afghanistan. The result,
particularly after FY2010, is a rapid fall in the deficit as a share of GDP, but which
does not reach surplus by FY2015.
The OMB July 2005 estimates show the deficit falling quickly from FY2006 to
FY2008, to just over 1% of GDP, and remaining at that level through FY2010, the
end year of the Administration’s
Figure 4. Deficits, FY2005-FY2015
estimates. The Administration’s
proposal to make the tax cuts
(as percentages of GDP)
-5%
permanent has little effect on the
deficit estimates until after FY2010.
The Administration’s policies would
likely result in increases in the deficit
-4%
as a percentage of GDP in the years
after FY2010.
CBO Baseline
-3%
The alternative baseline in
Alternative Estimate
Figure 4 used selected estimates of
OM B Estimate
alternative policies created by CBO
-2%
(that reflect faster discretionary
spending growth, extending the
expiring tax cuts, retaining relief
from the AMT, and incorporating
-1%
increased debt servicing costs).
Under these assumptions, the deficit
estimates begin rising after FY2006
0%
and approach 5% of GDP by
2005
2007
2009
2011
2013
2015
FY2015.
The Administration’s Mid-Session Review (MSR, July 2005) 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).
The CBO August 2005 budget report, The Budget and Economic Outlook: An
Update, like the OMB MSR, expected substantial reductions in the deficit in both
FY2005 and FY2006, mostly because of the higher than expected receipts collected
14 Note that in the chart, larger deficits are towards the top and smaller deficit are towards
the bottom.

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CRS-19
in 2005. CBO did not expect the deficit shrinkage to persist in the future or have
much, if any, effect on the long-term budget outlook.
The hurricanes that caused extensive damage along the Gulf Coast changed the
budget outlook for FY2006 (after the release of the OMB and CBO mid-year
reports). The higher spending expected, along with reduced receipts, is likely to add
many tens, if not hundreds of billions of dollars to the deficit in FY2006 and possibly
in subsequent years. At this time (early October 2005), no official estimates of the
costs, both spending and receipts, to the government of the hurricanes are available.
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.15
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
15 CBO, The Budget and Economic Outlook: Fiscal Years 2006-2015, Jan. 2004, pp. 10-11.

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CRS-20
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
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 2015.16
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, but does not
move into surplus throughout the forecast period. Under CBO’s 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,
particularly if 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 requires spending reductions or tax increases.
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-21
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. Tax Cuts, the Business Cycle, and Economic Growth: A
Macroeconomic Analysis, by Marc Labonte and Gail Makinen.
CRS Report RS21136. Government Spending or Tax Reduction: Which Might Add
More Stimulus to the Economy? by Marc Labonte.

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CRS-22
CRS Report RS21756. The Option of Freezing Non-defense Discretionary Spending
to Reduce the Budget Deficit, by Gregg Esenwein and Philip Winters.
CRS Report RL30239. Economic Forecasts and the Budget, by Brian W. Cashell.
CRS Report RL31235. The Economics of the Federal Budget Deficit, by Brian W.
Cashell.
CRS Report RL31414. Baseline Budget Projections: A Discussion of Issues, by
Marc Labonte.
CRS Report 98-560. Baselines and Scorekeeping in the Federal Budget Process, by
Bill Heniff, Jr.
CRS Report RS20095. The Congressional Budget Process: A Brief Overview, by
James V. Saturno.
CRS Report RL30297. Congressional Budget Resolutions: Selected Statistics and
Information Guide, by Bill Heniff Jr.
CRS Report 98-511. Consideration of the Budget Resolution, by Bill Heniff, Jr.
CRS Report RS21752. Federal Budget Process Reform: A Brief Overview, by Bill
Heniff, Jr. and Robert Keith.
CRS Report 95-543. The Financial Outlook for Social Security and Medicare, by
Geoffrey Kollmann and Dawn Nuschler.
CRS Report RS21684. FY2004 Consolidated Appropriations Act: Reference Guide,
by Robert Keith.
CRS Report RL31728. House Rules Changes Affecting the Congressional Budget
Process in the 108th Congress (H.Res. 5), by Bill Heniff, Jr.
CRS Report 98-720. Manual on the Federal Budget Process, by Robert Keith and
Allen Schick.
CRS Report RL30708. Social Security, Saving, and the Economy, by Brian W.
Cashell.

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