Order Code RL33282
CRS Report for Congress
Received through the CRS Web
The Budget for Fiscal Year 2007
Updated September 1, 2006
Philip D. Winters
Analyst in Government Finance
Government and Finance Division
Congressional Research Service ˜ The Library of Congress
The Budget for Fiscal Year 2007
Summary
The Administration’s July 2006 Mid-Session Review and the Congressional
Budget Office’s (CBO) Budget and Economic Outlook: An Update both showed
some minor improvement in the budget outlook for FY2007 (a modestly smaller
deficit), but little improvement over the budget’s longer-term outlook.
The President’s FY2007 budget released in early February 2006 included
proposals to make the 2001 and 2003 tax cuts permanent; slow the growth of
Medicare spending; hold non-defense, non-homeland security funding to little if any
increase; and introduce, in FY2010, private accounts for Social Security. The budget
also assumed that relief from the expanding coverage of the alternative minimum tax
(AMT) and funding for the war on terror would end after FY2007. The
Administration’s budget showed the deficit shrinking (in dollars) through FY2010
before rising slightly in FY2011.
The Congressional Budget Office’s (CBO’s) January 2006 budget report
provided baseline estimates and projections through FY2016. The baseline,
following required guidelines, assumed that most current policies remain unchanged.
The current law expiration of the tax cuts in 2010 leads to small surpluses beginning
in FY2012. CBO’s March 2006 estimates of the President’s proposals (using CBO’s
underlying assumptions and budget estimating methods) produced deficits that, in
most years, were somewhat smaller than those in the Administration’s budget.
CBO’s January 2006 report included estimates of policy alternatives to those in
the baseline. They were used to illustrate how the use of different policy assumptions
can change the baseline estimates. Two of the alternative assumptions would extend
the tax cuts and maintain AMT relief; their effect on receipts would be enough to
eliminate the baseline’s expected surplus. The CBO alternative policy, assuming
faster discretionary spending growth, would make reducing the deficit and reaching
a surplus more difficult.
The Senate passed its version of the fiscal year (FY) 2007 budget resolution
(S.Con.Res. 83) on March 16, 2006. After extended delays, the House passed its
resolution (H.Con.Res. 376) on May 18. The extensive differences between the
Senate and House versions of the FY2007 budget resolution may prevent a House-
Senate agreement. Congress is working on the annual appropriations for FY2007.
Over the longer term, the retirement of the baby boom generation will put
enormous pressure on the federal budget and the economy. Neither the
Administration nor CBO believes that current policies, particularly current federal
policies for the elderly, can be sustained. Absent significant policy change, the effect
of the growing numbers of recipients for federal programs will disrupt not only the
programs themselves, but also the rest of the federal budget, the ability of the
government to finance its obligations, and, possibly, the ability of the economy to
support the expansion of government spending.
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Budget Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Outlays . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Receipts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Deficits (and Surpluses) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
The Longer Run . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
For Additional Reading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
CRS Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
List of Figures
Figure 1.Outlays by Type, FY2000-FY2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Figure 2. Outlays, FY2000-FY2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Figure 3. Receipts by Type, FY2000-FY2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Figure 4. Receipts, FY2000-FY2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Figure 5. Deficits(-)/Surpluses, FY2000-FY2016 . . . . . . . . . . . . . . . . . . . . . . . . 18
List of Tables
Table 1. Budget Estimates and Proposals for FY2007 . . . . . . . . . . . . . . . . . . . . . 3
Table 2. Outlays for FY2005-FY2011 and FY2016 . . . . . . . . . . . . . . . . . . . . . . . 8
Table 3. Receipts for FY2005-FY2011 and FY2016 . . . . . . . . . . . . . . . . . . . . . . 13
Table 4. Surpluses/Deficits(-) for FY2005-FY2011 and FY2016 . . . . . . . . . . . 17
The Budget for Fiscal Year 2007
Background and Analysis
Presidents submit their budget proposals for the upcoming fiscal year (FY) early
in each calendar year. The Bush Administration released its FY2007 budget (The
Budget of the U.S. Government, Fiscal Year 2007) on February 6, 2006. The
multiple volumes contain both general and specific descriptions of the
Administration’s policy proposals and expectations for the budget for FY2006 (still
underway) through FY2011. It includes a section on long-term fiscal issues facing
the nation and provides limited information on the revenue and mandatory spending
changes after 2011. The full set of budget documents (Budget, Appendix, Analytical
Perspectives, Historical Tables, among several other supplemental budget
documents) 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 their 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 Administration released its annual Mid-Session Review (MSR) on July 11,
2006. The MSR showed relatively small changes in FY2007 budget totals from
those in the Administration’s FY2007 budget from February 2006. Receipt estimates
in the MSR were up 1.8% over the February estimates; outlay estimates were up
1.0% from February; and the deficit estimate was down 4.2% from February (falling
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,
which includes future changes in law, over the next 5 to 10 years. Their construction
generally follows instructions provided in the Balanced Budget and Emergency Deficit
Control Act of 1985 (DCA) and the Congressional Control and Impoundment Act of 1974.
CRS-2
from $354 billion to $339 billion). The Administration focused on the improvement
in the budget outlook for FY2006, which saw a dramatic drop in the Administration’s
deficit estimate from February 2006, falling from $423 billion to $296 billion. The
deficit reduction was mostly the result of an unforeseen surge in receipts that most
analysts do not expect to continue in future years. The MSR did not show any
significant improvement in the longer-term budget outlook.
The Congressional Budget Office’s August budget report, The Budget and
Economic Outlook: An Update (Update), showed both baseline receipts and outlays
for FY2007 larger than in its March budget report. Unlike the MSR, CBO expects
the changes to result in an increase in the deficit for FY2007, from the baseline
deficit estimate of $265 billion (1.9% of GDP) in March 2006 to the baseline deficit
estimate of $286 billion (2.1% of GDP) in August 2006. The passage of
supplemental appropriations in the spring of 2006 accounted for most of this change.
As Congress returns in September, none of the regular appropriation bills for
FY2007 have become law. The House had passed 10 of its 11 regular appropriations
for FY2007. The Senate, starting later, had passed one of its 12 regular
appropriations (all 12 have cleared the Committee on Appropriations). Earlier, in the
absence of a completed budget resolution for FY2007, both the House and Senate
separately adopted “deeming” resolutions setting the discretionary spending levels
for FY2007 (they adopted the same discretionary level, $873 billion). This allowed
the two Appropriations Committees to begin consideration of the FY2007 annual
appropriations.
Budget Totals
Table 1 contains budget estimates for FY2007 from the CBO and the
Administration (the Office of Management and Budget, OMB). Differences in totals
can result from differing underlying economic, technical, and budget-estimating
assumptions and techniques, as well as differences in policy assumptions. At the
outset, the policy-generated dollar differences for an upcoming fiscal year may be
relatively small compared to the budget as a whole. These small differences,
however, may grow over time — sometimes substantially — producing widely
divergent future budget paths. Budget estimates generally should be expected to
change over time from those originally proposed or estimated by the President, CBO,
or Congress.
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Table 1. Budget Estimates and Proposals for FY2007
(in billions of dollars)
Deficit (-)/
Receipts
Outlays
Surplus
CBO, BEO Baseline, 1/06 . . . . . . . . . . . . . . . .
2,461
2,732
-270
OMB, Budget Proposals, 2/06 . . . . . . . . . . . . .
2,416
2,770
-354
OMB, Budget, CSB, 2/06 . . . . . . . . . . . . . . . .
2,444
2,701
-257
CBO Analysis of OMB, 3/06 . . . . . . . . . . . . . .
2,431
2,766
-335
Senate Budget Res. (S.Con.Res. 83) 3/06 . . . .
2,433
2,795
-363
House Budget Res. (H.Con.Res. 376) 5/06 . . .
2,422
2,771
-348
OMB MSR 7/06 . . . . . . . . . . . . . . . . . . . . . . . .
2,459
2,798
-339
CBO Update Baseline 8/06 . . . . . . . . . . . . . . .
2,515
2,801
-286
BEO — The Budget and Economic Outlook, CBO.
CSB — The Administration’s current services baseline.
MSR — Mid-Session Review, OMB
Update — The Budget and Economic Outlook: An Update, CBO
Budget Estimates and Proposals
CBO’s first budget report for FY2007, the Budget and Economic Outlook:
Fiscal Years 2007-2016 (January 2006), contained baseline and economic estimates
and projections for FY2006 through FY2016. The report estimated an FY2007
baseline deficit of $270 billion (down from the estimated FY2006 baseline deficit of
$337 billion). By FY2011, the CBO baseline deficit estimate had fallen to $114
billion. The next year, FY2012, the increased receipts from the expiration of the
2001 and 2003 tax cuts produce a small baseline surplus estimate of $38 billion. The
small surplus estimates (never exceeding $75 billion, or 0.4% of GDP) persist
through FY2016.
Under the baseline assumptions, CBO increases discretionary spending at the
rate of inflation, assumes that the 2001 and 2003 tax cuts fully expire after 2010 (as
required under current law), and allows the recently lapsed alternative minimum tax
(AMT) relief to remain lapsed. The effects of these assumptions raise receipts in the
near-term and increase receipts by substantial amounts after FY2010 when most of
the tax cuts from 2001 and 2003 expire under current law. The declining deficit and
appearance of small surpluses over the 10 years in the CBO baseline are largely
explained by the baseline construction rules that CBO must follow. The results likely
understate the future size and persistence of the deficit, as CBO acknowledges in its
report.
CBO’s budget reports generally include estimates of the effect on the deficit (or
surplus) of selected policies not included in the baseline estimates. These policy
alternatives usually reflect policies under discussion or of high interest, such as
making the tax cuts permanent, addressing the expanding coverage of the AMT, or
assuming a rate of growth other than the inflation rate for discretionary spending. In
CBO’s January 2006 report, making the tax cuts permanent increases the five-year
(FY2007-FY2011) cumulative deficit (including higher debt-service costs) by $372
billion, and by a cumulative $2.3 trillion over the 10-year period (FY2007-FY2016).
CRS-4
CBO’s estimate of the revenue loss from reforming the AMT produces a $317 billion
five-year cumulative increase in the deficit and a $691 billion increase over 10 years.
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 an estimated $356
billion, and the 10-year cumulative deficit would increase by an estimated $1.6
trillion. Freezing discretionary appropriations at the FY2006 level would reduce the
five-year cumulative deficit by $317 billion and the 10-year cumulative deficit by
$1.4 trillion.
President Bush’s FY2007 budget called for extending and making permanent
most of the tax cuts adopted in 2001 and 2003, as well as extending other expiring
tax provisions. The budget showed extending the 2001 and 2003 tax cuts would
reduce receipts by an estimated $179 billion between FY2007 and FY2011, and by
an estimated $1.4 trillion between FY2007 and FY2016 (these estimates do not
include the resulting higher debt-service costs resulting from the change).2 The
Administration’s total receipt proposals would reduce five-year receipts by $280
billion, and 10-year receipts by $1.7 trillion. Cumulative receipts over the 5- and 10-
year periods total approximately $13,823 billion and $32,496 billion respectively,
without the proposed changes.
The Administration’s budget provided a limited amount of information for the
years beyond FY2011. The budget did include estimates of the cumulative proposed
revenue changes and proposed mandatory spending changes for the periods FY2007
through FY2011, and FY2007 through FY2016, but these projections contained no
information for the individual years after FY2010. Nor were estimates provided for
other components of the budget or for budget totals beyond FY2011.
Although not included in the budget documents (it was made available on
February 9, 2006), the President proposed the elimination of, the reduction in, or the
reform of approximately 141 discretionary programs. The Administration reports
that these changes would produce an estimated $20 billion in budget authority (not
outlay) savings in FY2007 compared to FY2006. How much these savings would
affect the FY2007 deficit was left unclear.
The budget also proposed reductions (mostly in the rates of increase) in
mandatory programs over the next five years. The proposed net savings total $71
billion over five years, but this is only a partial accounting of the President’s
mandatory proposals. The other proposals include user fee increases ($3 billion in
savings), program “augmentations” ($9 billion in increases), Social Security personal
accounts ($82 billion in increases in FY2010 and FY2011), the outlay effects of
extending the tax cuts ($6 billion in increases), and other mandatory proposals ($1
billion in savings). The net effect increases mandatory outlays by $21 billion over
five years. Over the same five years, cumulative mandatory spending, excluding the
2 The changes are measured from OMB’s current services estimates, its baseline, excluding
the proposals assumed in its revenue baseline. OMB included the assumption that the tax
cuts would be extended in its baseline. This produces a current services revenue estimate
substantially smaller than CBO’s baseline revenue estimate, particularly in the second half
of the 10-year period.
CRS-5
Administration’s proposals, totals an estimated $8,385 billion. The Administration’s
$21 billion proposed increase raises mandatory spending 0.3% above its baseline
estimates.
CBO released its analysis (with contributions from the Joint Committee on
Taxation) of the President’s budget proposal on March 15 (a preliminary analysis was
published on March 3). The analysis involved plugging the Administration’s policy
proposals into CBO’s underlying budget assumptions and budget estimating
methods. The results produced smaller deficits in FY2006 and FY2007 than the
President’s budget, but the deficits were larger than CBO’s baseline estimates (see
Table 1). CBO’s reestimates and the Administration’s deficits were similar for the
subsequent years through FY2011. (CBO extended its reestimates through FY2016,
showing the deficit, under the Administration’s policies, growing slightly as a
percentage of GDP from FY2012 through FY2016.)
The Administration provided its annual Mid-Session Review (for the FY2007
budget; MSR) on July 11, 2006. The report updated the Administration’s budget and
economic estimates for the fiscal years 2006 through 2011. For FY2007, the changes
from the February budget estimates were relatively small. The deficit fell by 4.2%
(to $339 billion), receipts grew by 1.8% (to $2,459 billion), and outlays grew by
1.0% (to $2,798 billion). As shares of GDP (the estimates of GDP also were
revised), the deficit fell from 2.6% of GDP in February 2006 to 2.4% of GDP in July.
Receipts fell by 0.1% of GDP to 17.6% of GDP. Outlays remained unchanged at
20.1% of GDP. The MSR’s current services baseline estimates, which assume no
change in current policy, have a smaller deficit ($266 billion) for FY2007 than does
the Administration’s deficit estimate including its policy proposals. (The MSR
emphasized the revised estimates for FY2006, which were much larger — the OMB
FY2006 deficit estimate fell from $423 billion in February to $296 billion in the
MSR — than the changed estimates for FY2007.)
CBO’s August release of The Budget and Economic Outlook: An Update also
showed fairly dramatic improvement in the deficit for one year, FY2006, but showed
little change from its earlier budget reports (January and March 2006). The adoption
of a FY2006 supplemental appropriation in the spring of 2006, which CBO must
include in its baseline estimates for subsequent years, generated much of the outlay
increase in the FY2007 baseline estimate. Expected higher receipts in FY2007
limited the effect of the increased outlays on the deficit, the combined changes
raising the deficit by $21 billion above CBO’s March baseline estimate.
The somewhat improved short-term budget outlook in the Administration’s
MSR has little effect on the long-term budget imbalance facing the country. The
rapid growth in receipts currently expected in FY2006 is not necessarily going to
continue in future years. The Administration’s assumption about future spending
restraint is also not assured. Even if the Administration’s short-term assumptions
prove correct — without substantial changes to the programs that will expand rapidly
as the baby boom retires or other large policy changes occur — the long-term budget
imbalance remains in place.
CBO’s August revisions showed a slightly worsened long-term budget outlook
under its baseline assumptions, even with the improved expectations for FY2006.
CRS-6
The cumulative deficit in CBO’s August baseline ($34.5 trillion) is $1.3 trillion
larger than CBO’s March baseline estimates ($33.2 trillion).
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.3 Small changes in economic conditions, particularly the rate of
GDP growth (from those assumed in the estimates) can produce large changes in the
budget estimates. According to CBO, a persistent 0.1% increase in the real growth
rate of real GDP would reduce the deficit (including interest costs) by $58 billion
cumulatively over a five-year period and by $272 billion over the next 10 years.
Reductions in the rate of GDP growth would increase the deficit by similar amounts
over the same time periods. Policy changes that are likely, such as supplemental
appropriations for operations in Iraq and Afghanistan, but are not included in CBO’s
baseline, can also change the budget outlook, both for the current budget year and for
future years.
The President’s (FY2007) 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 FY2005
(February 2004) through the actual results for that year. OMB extended its analysis
to find upper and lower bounds to the deficit or surplus estimates over a five-year
period, based on data going back to FY1982. It found that the upper and lower
bounds ranged over $1.1 trillion at the end of a five-year period. In other words, the
Administration’s deficit estimate for FY2011, $205 billion, could range from a
surplus of approximately $300 billion to a deficit of approximately $700 billion (with
a 90% chance of the budget balance falling between those two numbers). Even the
Administration’s deficit estimate for FY2007 has a 90% chance of being as small as
$86 billion or as large as $622 billion.
Budget projections are dependent on the underlying assumptions about the
direction of the economy, expected policy and policy changes, 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, particularly over longer periods.
3 Some of the underlying components of budget estimates are known with some certainty.
Demographics are one known component. In the next decade, the expected retirements in
the baby boom generation will rapidly increase the spending for Medicare and Social
Security as well as other federal activities benefitting 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-7
Budget Action
Congressional committees began hearings on the President’s FY2007 budget
shortly after it was released. The Senate Budget Committee reported its version of
the congressional budget resolution for FY2007 (S.Con.Res. 83) on March 9. After
amending the resolution, the Senate passed it on March 16. As passed, the resolution
had higher outlays and a larger deficit for FY2007 than proposed by the President.
It assumed the extension of numerous expiring tax cuts (but did not include a fix,
temporary or otherwise, for the Alternative Minimum Tax beyond FY2006), and did
not include reductions in mandatory spending.
The House Budget Committee passed its version of the FY2007 budget
resolution (H.Con.Res. 376) on March 29. The House Budget Committee’s
resolution had smaller discretionary spending caps than the Senate-passed resolution,
among other differences. The House, after an extended delay, passed the Budget
Committee’s version of the budget resolution on May 18. The House resolution had
budget totals for FY2007 that were in most respects similar to those proposed in the
President’s budget.
The substantial differences between the House- and Senate-passed budget
resolutions, along with the relatively late adoption of the House resolution in an
election-year-shortened legislative session, reduced the chances of a successful
conference. In the expectation of a very difficult-to-achieve House-Senate agreement
on a FY2007 budget resolution, both the House and Senate adopted deeming
resolutions.4 The deeming resolutions established the discretionary spending levels
for FY2007 (the House and Senate both used $873 billion) for use by the
Appropriation Committees in both chambers. The House adopted its deeming
resolution shortly after it passed its version of the budget resolution; the Senate
attached its deeming resolution to the Emergency Supplemental Appropriations for
FY2006 (H.R. 4939), which became law (P.L.109-234) on June 15, 2006. The
discretionary level in the Senate deeming resolution was almost $16 billion below the
discretionary level in the Senate-passed budget resolution.
Following the adoption of the deeming resolutions, the Appropriation
Committees in the House and Senate began considering and reporting the annual
appropriation bills for FY2007. When Congress left in August, no regular
appropriation had passed. The House had passed 10 of its 11 appropriations; the
House Committee on Appropriations had cleared all 11 of the appropriations. The
Senate had yet to pass any of its 12 appropriations; The Senate Committee on
Appropriations had cleared all 12. The new fiscal year begins on October 1, 2006,
leaving Congress little time to adopt all the regular appropriations for the year. This
has led analysts to assume that Congress will need a continuing resolution on
appropriations covering some or all of the regular appropriations to assure funding
for federal activities not otherwise funded as the new fiscal year begins.
4 The deeming resolutions serve as an annual budget resolution to establish enforceable
budget levels in the absence of an actual congressionally adopted budget resolution.. For
additional information, see the CRS report, The “Deeming Resolution”: A budget
Enforcement Tool, by Robert Keith (RL31443).,
CRS-8
Outlays
The Administration’s FY2007 budget proposed $2,770 billion in outlays for
FY2007, rising to $3,240 billion in FY2011, the last year shown in the President’s
budget. The proposals would boost funding for defense and homeland security
spending, restrain or cut most other discretionary spending, and make modest
growth-slowing changes to Medicare. In FY2010 and FY2011, it would raise
spending by tens of billions of dollars to fund private accounts for Social Security.
The Administration’s proposals, which the budget assumes are adopted, would raise
outlays by $61 billion (2.2%) above the Administration’s revised FY2006 outlay
estimate, and by 17.0% from FY2007 to FY2011.
Measured against the Administration’s FY2007 current services baseline outlay
estimates, the proposed level of outlays grows by $69 billion (2.6%).5 The difference
between the current services baseline outlay estimate and proposed outlays for
FY2007 indicates the “cost” of the Administration’s proposed policies. The year-to-
year change (the $61 billion increase) combines the “costs” of proposed policy
changes for FY2007 with the relatively automatic growth in large parts of the budget
from FY2006 to FY2007. These relatively automatic increases include cost-of-living
adjustments in many federal programs, growth in populations eligible for program
benefits, and inflation-driven costs of goods and services bought by the government.
Table 2. Outlays for FY2005-FY2011 and FY2016
(in billions of dollars)
FY2005 FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2016
CBO Baseline, 1/05 . . . . . . . . . . 2,472 a
2,649
2,732
2,857
2,984
3,105
3,252
4,046
President’s FY06 Budget, 2/05 . . . . . . . . .
2,709
2,770
2,814
2,922
3,061
3,240
—
President’s FY06 CSB, 2/05 . . . . . . . . . . .
2,669
2,701
2,798
2,925
3,050
3,210
—
CBO Analysis of OMB, 3/06 . . . . . . . . . . .
2,675
2,766
2,820
2,906
3,017
3,167
4,044
CBO Revised Baseline, 3/06 . . . . . . . . . . .
2,648
2,726
2,849
2,968
3,099
3,256
3,822
S. Bud. Res. (S.Con.Res. 83) 3/06 . . . . . . .
2,675
2,795
2,843
2,923
3,030
3,164
—
H. Bud. Res. (H.Con.Res. 376) 5/06 . . . . .
2,675
2,771
2,825
2,914
3,022
3,157
—
OMB, MSR 7/06 . . . . . . . . . . . . . . . . . . . .
2,696
2,798
2,847
2,929
3,053
3,224
—
CBO Update Baseline 8/06 . . . . . . . . . . . .
2,663
2,801
2,945
3,079
3,217
3,382
4,211
a. Actual outlays for FY2005.
CSB — The Administration’s current services baseline.
MSR — Mid-Session Review
Update — The Budget and Economic Outllook: An Update, CBO
5 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 by OMB 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. These modifications reduced the reported current services baseline outlay estimate
by approximately $45 billion in FY2007 and by $86 billion in FY2011.
CRS-9
From FY2006 to FY2007, the Administration’s budget made a number of
assumptions, including the following: a $19 billion increase in undistributed
offsetting receipts (that reduce outlays) from proposed sales of a portion of the radio
spectrum; a reduction ($23 billion) in disaster and relief spending for hurricane relief
efforts that the Administration expects to wind down in FY2007; a $22 billion
reduction in federal education funding, mostly for support of higher education;
substantial increases in outlays in net interest ($27 billion), as both the debt and
interest rates rise; a rise in Social Security spending by an expected $31 billion; and
a rise in Medicare spending by an expected $49 billion, including the
Administration’s proposals to slow its growth.
As shares of gross domestic product (GDP), the Administration’s proposals
would reduce outlays from 20.8% of GDP in FY2006 to 20.1% of GDP in FY2007.
By FY2011, the Administration projects that outlays will have fallen to 19.1% of
GDP. CBO’s January 2006 baseline estimates showed outlays falling very slowly
from 19.8% of GDP in FY2007 to 19.4% of GDP in FY2011 and, after falling
slightly in the intervening years, returning to 19.4% of GDP in FY2016. Under a
selection of CBO’s alternative scenarios for spending — including the assumption
that there is a phase-down in activities in Iraq and Afghanistan over a number of
years, that total discretionary spending increases at the rate of nominal GDP growth
(rather than the rate of inflation), and including higher interest costs from the larger
deficits and debt resulting from these changes (and from extending the tax cuts) —
outlays would fall from 20.1% of GDP in FY2007 to 20.0% of GDP in FY2011
before rising to 21.2% of GDP in FY2016.
The President’s budget indicated that Department of Defense (DOD) spending
would increase by 6.9% from FY2006 to FY2007. This increase ($28 billion, from
$411 billion to $439 billion) is based on budget authority (BA) for those two years
and excluded enacted and proposed supplementals for the DOD. The President’s
budget showed outlays, the actual expenditures of the DOD, dropping from FY2006
($512 billion) to FY2007 ($505 billion), a 1.4% reduction in spending.6 (Total
outlays, not BA, and total revenues determine a year’s surplus or deficit.) With the
uncertainty surrounding the financing needs for the war on terror, FY2007 defense
outlays seem likely to change. CBO’s baseline estimates for defense spending
(which include extending supplemental funding) increase BA (by 2.5%) and lower
outlays (by less than 1%) between FY2006 and FY2007.7
Non-defense discretionary outlays in the President’s budget would grow by just
under 1% ($5 billion) from FY2006 to FY2007, from $500 billion in FY2006 to $505
billion in FY2007. The President’s budget showed non-defense discretionary BA
falling by 4.2% ($18 billion) between those two years. Most of that change resulted
from the boost in FY2006 spending resulting from the Administration’s proposed
$18 billion hurricane relief supplemental. Excluding that amount, non-defense
discretionary BA, as a whole, barely changes from FY2006 to FY2007. CBO’s
6 These outlay numbers include both discretionary and mandatory outlays for the DOD.
Mandatory spending for the DOD is less than $2 billion in both years.
7 CBO’s defense category matches the Budget Enforcement Act (BEA) defense category,
a somewhat larger collection of defense related activities than is covered by the DOD alone.
CRS-10
January 2006 baseline non-defense discretionary outlay estimates grow by less than
1% between FY2006 and FY2007, from $499 billion to $502 billion, similar to the
change in the President’s budget. The President’s budget left unspecified his called-
for future year reductions in discretionary spending.
Mandatory spending, federal activities that generally do not need an annual
appropriation, grows by 3.9% ($64 billion) from FY2006 to FY2007, including the
Administration’s proposed $1.7 billion in mandatory spending reductions for FY2007
in the President’s budget.8 This would raise mandatory spending, the largest category
of federal spending, from $1,457 billion in FY2006 to $1,494 billion in FY2007.
CBO’s baseline estimates of mandatory spending showed it rising from $1,432
billion in FY2006 to $1,488 billion in FY2007, a 3.9% increase.
The Administration proposed $36 billion in Medicare savings (from baseline
levels) through FY2011, which would slow, slightly, the expected increase in
Medicare spending. Medicare spending over the five years totals an estimated $2,207
billion. The Administration’s proposed Medicare reduction amounts to a 1.6% cut
from total Medicare baseline spending over the five years. The budget also included
in its mandatory proposals, personal accounts for Social Security (beginning in
FY2010) that would increase spending by $82 billion over the two years, FY2010
and FY2011. The net effect of the Administration’s mandatory proposals would
increase spending by $21 billion over the five years, FY2007 through FY2011.9
The large deficits and rising interest rates have an effect on the interest
payments the government must make on its growing debt. Both the President’s
budget and CBO’s baseline estimates had net interest rising by 12% from FY2006
to FY2007. Continued large deficits that rapidly increase the debt, combined with
expected higher interest rates, will continue to raise the government’s annual interest
payment. Net interest as a share of total outlays will have grown from 7.4% in
FY2005 to an estimated 8.2% in FY2006, and to an estimated 8.9% of total outlays
in FY2007.
The Administration’s July 2006 MSR increased the FY2007 outlay estimate by
$28 billion. Most of the increase came from higher estimates for the global war on
terror and the effect of the FY2006 supplemental (P.L. 109-234) on outlays in
FY2007. Somewhat lower spending estimates in a variety of other programs
moderated the overall increase. Over the five years covered in the MSR the changes
in estimates between February 2006 and July 2006 would raise cumulative outlays
by $45 billion, a barely noticeable amount (total cumulative outlays over the five
years approach $12 trillion).
8 The Administration’s reductions include increased user fee offsets as well as reductions
in mandatory spending.
9 The mandatory proposals would increase spending by an estimated $551 billion over the
10-year period, FY2007 through FY2016, according to the budget documents.
CRS-11
Figure 1.Outlays by Type, FY2000-
Fi g u r e 1 s h o w s t h e
FY2011
Administration’s July 2006 MSR
estimates for spending by category.
(as percentages of GDP)
12%
The data show actual outlays for
defense, non-defense, mandatory,
and net interest spending for the
10%
fiscal years 2000 through 2005 and
Actual
Proposed
the MSR estimates for the fiscal
years 2006 though 2011, all as
8%
M andatory
percentages of GDP. The slide in
National Defense
d e f e n s e a n d n o n - d e f e n s e
Nondefense
discretionary spending as a share of
6%
Net Interest
GDP after FY2006 occurs in both the
Administration’s proposed and
4%
current service baseline estimates
and projections. The reductions
depend on the Administration’s
2%
assumptions that non-defense
discretionary spending falls by 2.0%
7/2006
annually (FY2007 through FY2011)
0%
and that there is limited additional
2000 2002 2004 2006 2008 2010
funding for the war on terror (which
means that DOD outlays fall by 1.5%
a year after FY2007). The President proposed some reduction in mandatory
spending, from current service levels, but they do little to keep mandatory spending
from rising later in the decade as a share of GDP.10 By FY2010 and FY2011, the
President’s proposed private accounts for Social Security raise mandatory spending
as a percentage of GDP above the current services level. Mandatory spending grows
at an annual rate of 6.8% in the MSR, after FY2007.
10 FY2006 mandatory spending was boosted, temporarily, by spending on hurricane
recovery.
CRS-12
Figure 2 shows four possible paths for outlays as percentages of GDP through
FY2016: the CBO August 2006 baseline, the President’s proposal (as reestimated
by CBO), OMB’s MSR, and an alternative estimate derived from CBO data. CBO’s
baseline falls as a share of GDP through FY2012 before beginning to rise. CBO’s
reestimate of the President’s
Figure 2. Outlays, FY2000-FY2016
proposed outlays fall sharply after
(as percentages of GDP)
FY2006, in part the result of the
22%
Administration’s assumption of
reductions in discretionary spending,
before beginning a steady rise after
21%
FY2012 (it mirrors the estimates in
the MSR closely through FY2011,
20%
when the MSR estimates end).
Future outlays in all three estimates
remain below the FY1965-FY2005
19%
outlay average as a percentage of
GDP. The alternative estimate is
Actuals FY2000-FY2005
based on selected policy alternatives
18%
Average, FY1965-FY2005
estimated by CBO that were not
CBO Reestimate of OM B
included in CBO’s baseline. The
Alternative Estimate
alternative incorporates several
17%
CBO Baseline
assumptions. One, that discretionary
OM B M SR
spending grows at the rate of
8/2006
nominal GDP growth (a higher rate
16%
of growth than used in the baseline).
2000
2004
2008
2012
2016
Two, that instead of annually
repeating the recent supplementals
for the war on terror and hurricane relief, funding for the military activities in Iraq
and Afghanistan are phased down over several years and hurricane relief ends after
FY2006. Three, that, because of larger deficits and debt, the government’s interest
costs are larger than in the baseline. And four, that, as in the baseline, mandatory
spending is expected to grow faster than GDP. The lower outlays resulting from the
change in the assumption about repeating the supplementals are overwhelmed by the
higher outlays resulting from the faster rate of discretionary spending and additional
interest costs. Outlays under the alternative estimate fall as a percentage of GDP in
the near future (from 20.1% of GDP in FY2007 to 19.8% of GDP in FY2012) before
rising fairly rapidly to 21.0% of GDP in FY2016.
The Senate-passed budget resolution (S.Con.Res. 83; March 16, 2006) increased
outlays by $120 billion (4.5%) between FY2006 and FY2007. The resolution’s
FY2007 oultays would be $69 billion larger than CBO’s FY2007 baseline outlay
estimate and $25 billion above the President’s FY2007 outlay proposal. Under the
Senate resolution, outlays would fall as a percentage of GDP, from 20.3% of GDP
in FY2007 to 18.9% of GDP in FY2011.
The House-passed budget resolution (H.Con.Res. 376; May 18, 2006) follows
most of the policies of the President’s budget proposal. The resolution has a slightly
smaller deficit and slightly higher outlays than in the President’s proposal for
FY2007. Outlays in the resolution increase by $95 billion (3.6%) from FY2006 to
FY2007. The outlays are $45 billion higher than CBO’s FY2007 baseline outlay
CRS-13
estimate and less than $1 billion above the President’s FY2007 outlay proposal. In
the resolution, outlays would fall from 20.1% of GDP in FY2007 to 18.8% of GDP
in FY2011.
Receipts
Receipts would rise by 5.7% from FY2006 to FY2007 under the
Administration’s FY2007 budget proposal, including the effect of extending the
alternative minimum tax (AMT) relief through FY2007. Over the five years forecast
in the President’s budget, revenues would rise from $2,416 billion in FY2007 to
$3,035 billion in FY2011, a 25.6% increase.
The Administration’s proposal to extend and make permanent many of the tax
cuts adopted in the Administration’s first term has little effect on FY2007 revenues.
Most of the budgetary effect of extending the tax cuts would occur after FY2010.
(Because the Administration incorporated the effect of making the tax cuts permanent
in both its proposed and current services baseline estimates, there is no upward bump
in the current services receipt estimates in FY2010 or FY2011.)
Table 3. Receipts for FY2005-FY2011 and FY2016
(in billions of dollars)
FY2005 FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2016
CBO Baseline, 1/05 . . . . . . . . . .
2,154a
2,312
2,461
2,598
2,743
2,883
3,138
4,113
President’s FY06 Budget, 2/05 . . . . . . . . . .
2,285
2,416
2,590
2,714
2,878
3,035
—
President’s FY06 CSB 2/05 . . . . . . . . . . . . .
2,301
2,444
2,597
2,729
2,901
3,064
—
CBO Analysis of OMB, 3/06 . . . . . . . . . . . .
2,304
2,431
2,585
2,712
2,852
2,964
3,794
CBO Revised Baseline, 3/06 . . . . . . . . . . . .
2,313
2,461
2,598
2,743
2,883
3,139
4,114
S. Bud. Res. (S.Con.Res. 83) 3/06 . . . . . . . .
2,303
2,433
2,593
2,725
2,870
2,986
—
H. Bud. Res. (H.Con.Res. 376) 3/06 . . .
2,303
2,422
2,590
2,723
2,869
2,994
—
OMB, MSR 7/06 . . . . . . . . . . . . . . . . . . . . .
2,400
2,459
2,659
2,772
2,930
3,098
—
CBO Update Baseline, CBO 8/06 . . . . . . . .
2,403
2,515
2,672
2,775
2,890
3,156
4,118
a. Actual receipts for FY2005.
CSB — The Administration’s current services baseline.
MSR — Mid-Session Review
Update — The Budget and Economic Outlook: An Update, CBO
The Administration estimated that making the 2001 and 2003 tax cuts
permanent would reduce cumulative receipts by $179 billion between FY2007 and
FY2011 and by $1.4 trillion between FY2007 and FY2016. The effect of these
extensions and the Administration’s other proposals for receipts would reduce
receipts by $280 billion in the first five years and by $1,667 billion over 10 years.
CBO’s January 2006 budget report estimated that extending the expiring
provisions of the major tax cuts passed in 2001 and 2003 would reduce revenues by
an estimated $346 billion over the first five years and by $1,606 billion over 10 years.
Extending all the tax cuts that expire over the 10-year period would reduce revenues
(from CBO baseline levels) by $582 billion in the first five years and by $2,644
CRS-14
billion over the full 10 years of the forecast.11 CBO’s baseline estimates, following
current law as required, assume that the 2001 and 2003 tax cuts expire in 2010 as
scheduled.
The estimated reductions in revenues from extending tax cuts do not reduce
year-to-year revenues. The Administration projected that receipts would rise from
$2,285 billion in FY2006, to $2,416 billion in FY2007, and to $3,035 billion in
FY2011 (including the effect of the Administration’s proposals). CBO’s revised
baseline estimates (March 2006) showed revenues increasing from an estimated
$2,312 billion in FY2006, to $2,461 billion in FY2007, to $3,139 billion in FY2011,
and to $4,114 billion in FY2016.
The Administration’s MSR (July Figure 3. Receipts by Type, FY2000-
2006), with revised receipt estimates,
FY2011
also showed total receipts rising over
(as percentages of GDP)
this period, from $2,400 billion in 12%
FY2006, to $2,459 billion in
Individual
Social Insurance
FY2007, to $3,098 billion in
Corporate
FY2011. (The Administration’s 10%
Other
FY2002 budget docum en t s ,
Excise
published in April 2001, projected
8%
total receipts of $2,643 billion for
FY2007, almost $200 billion more
than estimated in the MSR.)
6%
Figure 3 shows the President’s
Actual
Proposed
July 2006 revised receipts (from the
4%
7/
MSR) by type for the fiscal years
2006
2005 through 2011. Actual receipts
are shown through FY2005. All are
2%
shown as percentages of GDP. In the
MSR, as in the original budget,
excise and other receipts remain at or
0%
below 1% of GDP. Corporate
2000 2002 2004 2006 2008 2010
income taxes, after rising through
FY2006, decline slowly and steadily as a share of GDP under the Administration’s
projection. Social Insurance receipts remain fairly steady throughout the period
shown. Individual income taxes, having fallen over 3.3% of GDP between FY2000
and FY2004, regain some of their lost share under the Administration’s proposals,
but remain 1.5% points of GDP below their FY2000 level.
The Administration’s proposals included extending the current relief from the
alternative minimum tax (AMT) for fiscal years 2006 and 2007. Without further
extensions of or a permanent fix to the AMT, a growing number of middle-class
taxpayers will find themselves subject to the AMT.12 CBO estimated (August 2006)
11 These amounts from CBO do not include the outlay effects (usually interest costs
associated with larger deficits and debt) of the extensions.
12 For discussions of the AMT issue, see CRS Report RL30149, The Alternative Minimum
(continued...)
CRS-15
that providing annual AMT relief would reduce receipts by $260 billion between
FY2007 and FY2011, and by $513 billion between FY2007 and FY2016. Without
some adjustment to the AMT, it will eventually recapture much of the tax reduction
provided in the 2001 and 2003 tax cuts.13
As shares of GDP, total receipts are expected to remain near or below their
average of 18.2% (between FY1965 and FY2005) throughout the period covered in
OMB’s MSR. CBO’s estimates of
Figure 4. Receipts, FY2000-FY2016
the Administration’s February 2006
budget proposals showed receipts
(as percentages of GDP)
22%
rising slowly from 17.6% of GDP in
Actuals FY2000-FY2005
FY2007, to 17.8% of GDP in
Average, FY1965-FY2005
FY2011, and to 18.2% of GDP in
CBO Reestimate of OM B
21%
Alternative Estimate
FY2016 (CBO extended the
CBO Baseline
Administration’s policies through
OM B M SR
FY2016). As one would expect,
20%
CBO’s revised baseline estimates
(August 2006), which exclude the
extension of the tax cuts, are larger,
19%
rising from 18.3% of GDP in
FY2007 to 18.9% of GDP in
18%
FY2011. By FY2016, CBO’s
baseline revenue forecast reaches
19.8% of GDP.14
17%
The Administration’s MSR
8/2006
(July 2006) showed a jump in
16%
receipts as a share of GDP in
2000
2004
2008
2012
2016
FY2006 (to 18.3% of GDP from
17.5% of GDP in the President’s
February 2006 budget), but the two sets of estimates are relatively close in the other
years. The large increase in receipts expected in FY2006 (mostly from corporate
income and non-withheld individual income taxes) appears to be limited and has
little effect on receipts in subsequent years.
The CBO Update also reflected the jump in FY2006 receipts (from 17.7% of
GDP in CBO’s March 2006 budget report to 18.3% of GDP in its August report), an
increase that dissipates over the 10-year forecast. By FY2011, the August baseline
receipt estimate is 0.2% of GDP larger than CBO’s March 2006 receipts baseline
receipt estimate (18.9% of GDP versus 18.7% of GDP).
12 (...continued)
Tax for Individuals; and CRS Report RS22100, The Alternative Minimum Tax for
Individuals: Legislative Initiatives and Their Revenue Effects, both by Gregg A. Esenwein.
13 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.
14 The CBO baseline incorporates the assumption of a substantial tax increase after FY2010
when the large 2001 and 2003 tax cuts expire under current law.
CRS-16
Modifying CBO’s baseline revenue estimates and projections by using its
alternative policy estimates produces slower growth in receipts, both in dollars and
as shares of GDP, than in CBO’s baseline.15 And although receipts still rise as a
percentage of GDP, they do so more slowly than in the President’s proposal and
much more slowly than in CBO’s baseline. By FY2011, the alternative estimates of
receipts would rise to $2,918 billion, or 17.4% of GDP. By FY2016, the alternative
estimated receipts rise to $3,696 billion, or 17.7% of GDP. This is $420 billion and
2% of GDP below the baseline projections for FY2016.
Figure 4 uses data from the March 2006 CBO budget report analyzing the
President’s proposed policies, from CBO’s August 2006 budget report, and from the
Administration’s July 2006 MSR. The figure shows receipts as percentages of GDP
for fiscal years 2000 through 2016 (projected). Actual receipts are shown for fiscal
years 2000 through 2005. CBO’s August baseline and its March reestimate of the
Administration proposals follow similar patterns through FY2010. In CBO’s
baseline, receipt estimates are larger as shares of GDP than those of the reestimates
of the Administration’s proposals. The CBO baseline does not assume the FY2006
and FY2007 AMT relief that is included in the Administration estimate. The
similarity in the patterns ends in FY2011 when the Administration proposals assume
the permanency of the 2001 and 2003 tax cuts and CBO’s baseline does not. CBO’s
revised baseline shows the big jump in receipts in FY2011, as its baseline
assumptions include the tax increases resulting from the expiration of the 2001 and
2003 tax cuts. CBO’s reestimates of the President’s tax proposals assumes that the
tax cuts are made permanent. Both the reestimates and the alternative estimates in
Figure 4 display a similar pattern, with receipts as a smaller percentage of GDP in
the alternative estimate. The alternative estimates show receipts staying between
17.4% and 17.8% of GDP following the 18.0% of GDP in FY2007. The receipt
estimates from the MSR show the big bump in expected FY2006 receipts and the
subsequent settling of total receipts near 18% of GDP in the following years.
The Senate-passed budget resolution accommodated over $200 billion in
unspecified tax cut extensions over five years. The House-passed budget resolution
included a similar value for tax reductions.
Deficits (and Surpluses)
Deficits and surpluses are the residuals left after Congress and the President set
policies for spending and receipts. Surpluses, in which receipts are greater than
outlays, reduce federal debt held by the public, which can lead to lower net interest
payments (among other effects). Deficits, in which outlays exceed receipts, increase
government debt held by the public, generally increasing net interest payments. The
government had its last surplus in FY2001 ($128 billion and 1.3% of GDP).
15 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-17
Table 4. Surpluses/Deficits(-) for FY2005-FY2011 and FY2016
(in billions of dollars)
FY2005 FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2016
CBO Baseline, 1/05 . . . . . . . . .
-318 a
-337
-270
-259
-241
-222
-114
67
President’s FY06 Budget, 2/05 . . . . . . . .
-423
-354
-223
-208
-183
-205
—
President’s FY06 CSB 2/05 . . . . . . . . . . .
-367
-257
-201
-196
-149
-146
—
CBO Analysis of OMB, 3/06 . . . . . . . . . .
-371
-335
-236
-194
-165
-204
-250
CBO Revised Baseline, 3/06 . . . . . . . . . .
-336
-265
-250
-224
-216
-117
70
S. Budget Res. (S.Con.Res. 83) 3/06 . . . .
-372
-363
-250
-197
-160
-178
—
H. Budg. Res. (H.Con.Res. 376) 5/06 . . .
-372
-348
-235
-191
-153
-164
—
OMB, MSR 7/06 . . . . . . . . . . . . . . . . . . .
-296
-339
-188
-157
-123
-127
—
CBO, Update Baseline 8/06 . . . . . . . . . . .
-260
-286
-273
-304
-328
-227
-93
a. Actual deficit for FY2005.
CSB — The Administration’s current services baseline.
HBC — House Budget Committee
MSR — Mid-Session Review
Update — The Budget and Economic Outlook: An Update, CBO
The President’s budget proposed a FY2007 deficit of $354 billion (2.6% of
GDP). The Administration’s budget showed the deficit shrinking in dollars and as
a share of GDP through FY2010 before rising slightly in FY2011. Without policy
changes, the deficit is likely to begin rising in the years after FY2011 as the baby
boom generation retires in large numbers and raises the demand for federal spending
on the elderly, even as revenues remain near (or possibly below) historical levels.
The Administration asserted that the FY2007 budget will further the President’s
oft-repeated goal of cutting the deficit in half by FY2009. To achieve this goal, the
Administration reaches back to its February 2004 deficit estimate for FY2004 ( 4.5%
of GDP) as the starting point, which was when it first articulated this goal.16 The
FY2007 budget showed the deficit falling below 2% of GDP by FY2008 and to 1.4%
of GDP in FY2009. The goal may be difficult to reach if Congress does not fully
adopt the Administration’s proposals, if additional AMT relief is implemented
beyond FY2007, if additional defense supplementals for the war on terror are adopted
after FY2007, or if any number of budget-related events occur over the next several
years that raise outlays or reduce receipts.
Achieving the Administration’s deficit reduction goals would require, during the
next five years, strict limits on the growth in domestic discretionary spending (if not
actual reductions), a slowing in the growth rate of some entitlements, and letting
AMT relief lapse after 2007. Some of the President’s proposals would increase
spending or reduce receipts, requiring larger spending reductions in other areas of the
budget, since the Administration has steadfastly opposed any tax increases to reduce
16 The actual deficit for FY2004 was 3.6% of GDP. Since 2002, the Administration has
consistently overestimated the size of the current or the next year’s deficit in each year’s
budget.
CRS-18
the deficit.17 Holding to these spending and revenue levels may prove difficult.
Higher than proposed spending or lower than proposed revenues, would result in
deficits larger than those shown in the President’s February 2006 budget.
CBO’s baseline estimates and projections showed the deficit steadily falling in
dollars and as a percentage of GDP through FY2011, after which small surpluses
appear over the remaining years of the forecast. The requirements and assumptions
that CBO must follow in producing the baseline estimates accounts for almost all of
this improvement in the deficit/surplus outlook. Under a selection of alternative
policies not included in the baseline
Figure 5. Deficits(-)/Surpluses,
(as shown in CBO’s August 2006
FY2000-FY2016
budget report) that may better
(as percentages of GDP)
forecast the future path of fiscal
-4%
policy, the deficit does not shrink and
become a surplus. Instead, it grows
-3%
throughout the 10-year period in
dollars and, after FY2012, grows as
a share of GDP (see the CBO-based
-2%
alternative estimate in Figure 5).
-1%
Figure 5 shows deficit
estimates as shares of GDP for
0%
FY2000 through FY2016.18 The
actual amounts for the surpluses and
Actuals FY2000-FY2005
deficits are shown for FY2000
1%
Average, FY1965-FY2005
through FY2005. Subsequent years
CBO Reestimate of OM B
Alternative Estimate
are based on data from the CBO’s
2%
CBO Baseline
March 2006 and August 2006
OM B M SR
budget reports and from the
3%
8/2006
Administration’s July 2006 MSR.
The average deficit for FY1965
2000
2004
2008
2012
2016
through FY2005 is also included.
The CBO baseline deficit estimate assumes the expiration of the 2001 and 2003
tax cuts in 2010, no future adjustments to lessen the expanding coverage of the AMT,
the adjustment of discretionary spending for inflation, and an annual repetition of the
2005 funding supplemental for the military activities in Iraq and Afghanistan and
hurricane relief efforts. The result of these baseline assumptions, as percentages of
GDP, is growing receipts, falling outlays, and a rapid fall in the deficit as a share of
GDP after FY2010 that almost reaches a balance in FY2012. The CBO estimate of
the President’s policy proposals assumes additional spending for defense in FY2006
and FY2007, additional hurricane relief in FY2006, very tight controls on domestic
discretionary spending, a slight slowing in the growth of Medicare, and the creation
17 The Administration’s current services baseline estimate, which assumes current policy,
has smaller deficits throughout the five-year period than the deficits in the President’s
proposed budget. The cumulative five-year deficit would be smaller without the President’s
proposed policy changes than with them.
18 Note that in the chart, deficits are at the top and surpluses are at the bottom.
CRS-19
of personal accounts for Social Security in FY2010 and FY2011. The result is a
decline in the deficit as a percentage of GDP through FY2012, after which the deficit
remains near 1% of GDP through FY2016.19
The alternative estimate in Figure 5 used selected estimates of alternative
policies estimated by CBO (that reflected faster discretionary spending growth,
extending the expiring tax cuts, retaining relief from the AMT, and incorporating
increased debt servicing costs). Under these assumptions, the deficit estimates, after
an upward bump in FY2006, fall slightly through FY2012. By FY2016, the
alternative estimate produces a deficit equal to 3.3% of GDP, a percentage point of
GDP larger than the FY1965 though FY2005 deficit average.
The revised deficit numbers in the MSR were an improvement over the
Administration’s original estimates from February 2006. The newer estimates
included many of the Administration’s assumptions from February. The MSR deficit
estimates (see Figure 5) were slightly smaller (as a percentage of GDP) than CBO’s
reestimates of the Administration’s earlier estimates (and smaller than in the original
FY2007 budget). Larger GDP estimates in the MSR, as well as larger receipt
estimates, contributed to the decline in the deficit estimates as shares of GDP.
The baseline deficit estimates in CBO’s Update (August 2006) were generally
larger than in its March 2006 estimates. Where the March baseline deficit estimates
moved into a small surplus in FY2012 and stayed there, the August baseline esimates
and projections remained in deficit throughout the period. The FY2007 deficit grew
from 1.9% of GDP in March to 2.1% of GDP in August (higher outlays accounted
for most of the change).
The Senate budget resolution contained a slightly larger deficit in FY2007 than
in the President’s budget and is almost $30 billion larger than CBO’s reestimate of
the President’s proposed deficit. Compared with CBO’s revised baseline, the
Senate’s budget resolution deficit is almost $100 billion larger. As shares of GDP,
the deficits in the Senate budget resolution fall from 2.6% in FY2007 to 1.0% of
GDP in FY2010 before rising to 1.1% of GDP in FY2011.
The House budget resolution for FY2007 had a slightly smaller deficit than the
President proposed for FY2007 (by $6 billion) and generally smaller deficits in
subsequent years. The House budget resolution deficit is over $80 billion larger than
the March 2006 CBO baseline deficit for FY2007 and almost $15 billion larger than
CBO’s deficit estimate of the President’s FY2007 proposal.
The Longer Run
Both OMB and CBO agree that over a longer time period, one beginning in the
next decade and lasting for decades, demographic pressure will so badly distort
19 The CBO reestimate of the Administration’s policies was based on budget estimates (the
President’s budget proposals) before the large increase in 2006 receipts were recognized in
the spring of 2006 and incorporated into the summer budget estimates from OMB and CBO..
CRS-20
current policies as to make them unsustainable. The future, under current policies,
will lead to growing and persistent deficits. A CBO report on The Long-Term Budget
Outlook (December 2005) states
Over the next half-century, the United States will confront the challenge of
conducting its fiscal policy in the face of the retirement of the baby-boom
generation.... Under current policies, the aging of the population is likely to
combine with rapidly rising health care costs to create an ever-growing demand
for resources to finance federal spending for mandatory programs, such as
Medicare, Medicaid, and Social Security.... [A]ttaining fiscal stability in the
coming decades will probably require substantial reductions in the projected
growth of spending and perhaps also a sizable increase in taxes as a share of the
economy.20
The Administration indicated similar concerns about the outlook for the budget
over the long term in the President’s FY2007 budget (February 2006).
...the long-term picture presents a major challenge due to the expected growth in
spending for major entitlement programs. In only two years, the leading edge of
the baby boom generation will become eligible for early retirement under Social
Security. In 5 years, these retirees will be eligible for Medicare. The budgetary
effects ... will be muted at first. But if we do not take action soon to reform both
Social Security and Medicare, the coming demographic bulge will drive Federal
spending to unprecedented levels and threaten the Nation’s future prosperity.
No plausible amount of cuts to discretionary programs or tax increases can help
us avert this major fiscal challenge.... By 2070, if we do not reform entitlement
programs to slow their growth, the rate of taxation on the overall economy would
need to be more than doubled....21
The short-term budget outlook can change when it is buffeted by all types of
unexpected events, such as the hurricanes last year or deteriorating economic
conditions. The long-term budget outlook, although susceptible to these types of
events, will largely be determined by the interplay of current policy and
demographics. The retirement of the baby boom generation, rapidly expanding the
population eligible for federal programs serving the elderly, will put enormous
pressure on the federal budget. Without policy changes, these programs could
overwhelm the rest of the budget. Not only will the programs themselves be stressed,
but their growth would be likely to impede the government’s ability to meet its
obligations and the ability of the economy to provide the resources needed.
20 CBO, The Long-Term Budget Outlook, Dec., 2005, p.1.
21 OMB, Budget of the United States Government for Fiscal Year 2007, Feb. 2006, p.18.
CRS-21
For Additional Reading
U.S. Congressional Budget Office. The Budget and Economic Outlook: Fiscal Years
2007-2016. Washington, January 27, 2006.
——. The Long-Term Budget Outlook. Washington, December 2005.
U.S. Council of Economic Advisors. The Economic Report of the President.
Washington, GPO, February 2006.
U.S. Office of Management and Budget. The Budget of the United States
Government for Fiscal Year 2007. Washington, GPO, February 6, 2006.
CRS Products
CRS Report RL32791, Congressional Budget Actions in 2005, by Bill Heniff, Jr.
CRS Report RL33132, Budget Reconciliation Legislation in 2005, by Robert Keith.
CRS Report RS22322, Taxes and Fiscal Year 2006 Budget Reconciliation: A Brief
Summary, by David Brumbaugh.
CRS Report RS21992, Extending the 2001, 2003, and 2004 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 RL30839, Tax Cuts, the Business Cycle, and Economic Growth: A
Macroeconomic Analysis, by Marc Labonte and Gail Makinen.
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-22
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 RS21752, Federal Budget Process Reform: A Brief Overview, by Bill
Heniff, Jr. and Robert Keith.
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.