.

The Federal Budget: Current and
Upcoming Issues
D. Andrew Austin
Analyst in Economic Policy
Mindy R. Levit
Analyst in Public Finance
August 27, 2009
Congressional Research Service
7-5700
www.crs.gov
R40088
CRS Report for Congress
P
repared for Members and Committees of Congress
c11173008

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The Federal Budget: Current and Upcoming Issues

Summary
The federal budget implements Congress’s “power of the purse.” It expresses Congress’s
priorities as spending is allocated among competing aims. The Obama Administration describes
several important changes in its FY2010 budget submission, which include increased funding for
certain domestic priorities, major programmatic reforms, and proposes cuts and reductions in
spending for some programs.
Over the past decade, federal spending has accounted for approximately a fifth of the economy
(as measured by gross domestic product—GDP) and federal revenues have ranged between just
under a sixth to just over a fifth of GDP. In FY2008, the U.S. government collected $2.5 trillion
in revenue and spent almost $3.0 trillion. Outlays as a proportion of GDP rose from 18.4% in
FY2000 to 21.0% of GDP in FY2008. Federal revenues as a proportion of GDP reached a post-
WWII peak of 20.9% in FY2000 and then fell to 16.3% of GDP in FY2004 before rising slightly
to 17.7% of GDP in FY2008.
The current economic climate poses major challenges to policymakers. Federal spending tied to
means-tested social programs has increased due to rising unemployment, while federal revenues
are projected to fall as individuals’ incomes drop and corporate profits sink. Federal deficits,
according to OMB and CBO projections, will likely be high relative to historic norms over the
next few years, as spending rises and revenues fall relative to previously anticipated levels. The
August 2009 CBO baseline showed FY2009 outlays rising to $3,688 billion (26.1% of GDP) and
revenues falling to $2,100 billion (14.9% of GDP), resulting in a total federal deficit of $1,587
billion (11.2% of GDP).
The Obama Administration released an outline of the FY2010 budget on February 26, 2009,
followed by the release of the remaining budget documents on May 7 and 11, 2009. The main
policy initiatives described include significant spending and investment targeted toward health
care reform, clean energy, and education. Congress began its consideration of the FY2010 budget
in late March 2009. The Budget Resolution Conference Report (S.Con.Res. 13) followed the bulk
of the President’s initiatives and was agreed to on April 29, 2009. It specified $2,322 billion in
revenues and $3,555 billion in outlays, resulting in a FY2010 deficit of $1,233 billion. A FY2009
war funding supplemental (P.L. 111-32) was enacted in June 2009. As of July 30, 2009, the House
passed all 12 regular FY2010 appropriations acts and as of August 7, the Senate had passed four.
The federal government has undertaken significant financial interventions in an attempt to
alleviate economic recession. The final costs of federal responses to this turmoil will depend on
how quickly the economy recovers, how well firms with federal credit guarantees weather future
financial shocks, and the magnitude of government losses or gains on its asset purchases.
Estimating those costs is difficult, both for conceptual and operational reasons. Federal loans or
loan guarantee programs may help provide liquidity to distressed financial markets and stimulate
economic activity, but may also expose the federal government to substantial credit risks.
While many economists concurred on the need for short-term fiscal stimulus despite adverse
impact on the deficit, widespread concerns remain about the long-term fiscal situation of the
federal government. The rising costs of federal health care programs and Baby Boomer
retirements present serious challenges to fiscal stability. Operating these programs in their current
form may pass on substantial economic burdens to future generations. This report will be updated
as events warrant.
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Contents
Overview .................................................................................................................................... 1
Revenues, Outlays, and Deficits for FY2008 ......................................................................... 1
Trends................................................................................................................................... 3
Federal Spending ............................................................................................................ 3
Federal Revenue ............................................................................................................. 4
Deficits, Debt, and Interest .................................................................................................... 5
Federal Deficits............................................................................................................... 5
Federal Debt ................................................................................................................... 5
Debt Limit ...................................................................................................................... 6
Net Interest ..................................................................................................................... 6
Budget Cycle ........................................................................................................................ 7
Budget Baseline Projections .................................................................................................. 8
Budgeting in Tough Economic Times: the FY2009 and FY2010 Budgets .................................... 9
Financial and Economic Turmoil........................................................................................... 9
Federal Response to Turmoil in 2008 and 2009 ..................................................................... 9
What Counts As an Outlay? .......................................................................................... 10
Current Federal Budget Scoring Ignores Some Credit Risks .......................................... 11
Budget Fiscal Year 2009...................................................................................................... 12
FY2009 Supplemental Appropriations........................................................................... 13
Why Did Budget Deficit Estimates for FY2009 Change?............................................... 15
Budget Fiscal Year 2010...................................................................................................... 15
Obama Administration FY2010 Budget......................................................................... 15
Congressional Consideration of the FY2010 Budget Resolution .................................... 17
Considerations for Congress...................................................................................................... 19
Short-Term Considerations.................................................................................................. 19
General Budget Issues......................................................................................................... 20
Managing Federal Credit Risks ..................................................................................... 20
Stimulate and Stop ........................................................................................................ 20
Budget Transparency..................................................................................................... 21
Budget Enforcement Measures ...................................................................................... 21
Long-Term Considerations .................................................................................................. 22

Figures
Figure 1. Total Outlays and Revenues As a Percentage of GDP, FY1990-FY2019........................ 2
Figure 2. Outlays by Type as a Percentage of GDP, FY1990-FY2019 .......................................... 4

Appendixes
Appendix. The Budget and Macroeconomic Policy ................................................................... 24

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Contacts
Author Contact Information ...................................................................................................... 28

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he federal budget is central to Congress’s ability to assert its “power of the purse.” Federal
budget decisions express Congress’s priorities among competing aims and reinforce
T Congress’s influence on federal policies. The budget also affects, and is affected by, the
national economy as a whole. The federal budget over the next few fiscal years will likely face
significant challenges to both revenues and outlays as a result of recent turmoil in the economy
and financial markets.
Making budgetary decisions for the federal government is an enormously complex process,
entailing the efforts of tens of thousands of staff persons in the executive and legislative branches,
totaling millions of work hours each year. The budget process allows the President and Congress
to negotiate and refine spending plans for the nation’s fiscal priorities.1
The current budget situation is challenging. The federal government faces very large budget
deficits, rising costs of entitlement programs, and significant spending on overseas military
operations. The enactment of financial intervention and fiscal stimulus legislation designed to
alleviate a credit crunch and to bolster the economy will push up the deficit, shifting fiscal
burdens into the future.
The economic downturn has not only pushed federal spending up and revenues down, but also
threatens to slow economic growth for the next few years. The federal government has responded
to the economic slowdown with an array of policy responses unprecedented in recent decades,
including fiscal stimulus and loan programs. These federal interventions may help stimulate
economic activity and reduce dislocation in financial markets, but may also expose the federal
government to substantial credit risks.
Concern remains about the federal government’s long-term fiscal situation. The rising costs of
federal health care programs and the effects of the baby boom generation’s retirement present
serious challenges to fiscal stability. Operating these programs in their current form may pass on
substantial economic burdens to future generations.
Overview
Revenues, Outlays, and Deficits for FY2008
Over the past decade, federal spending has accounted for approximately a fifth of the economy
(as measured by gross domestic product—GDP) and federal revenues have ranged between just
under a sixth and just over a fifth of GDP, as shown in Figure 1. In FY2008, the U.S. government
collected $2.5 trillion in revenue and spent almost $3.0 trillion. Outlays as a proportion of GDP
rose from 18.4% in FY2000 to 21.0% of GDP in FY2008.2 Federal revenues as a proportion of
GDP reached a post-WWII peak of 20.9% in FY2000 and then fell to 16.3% of GDP in FY2004
before rising to 17.7% of GDP in FY2008.

1 For more information, see CRS Report 98-721, Introduction to the Federal Budget Process, by Robert Keith.
2 U.S. Congressional Budget Office, A Preliminary Analysis of the President’s Budget and an Update of CBO’s Budget
and Economic Outlook, March 2009, available at http://www.cbo.gov/ftpdocs/100xx/doc10014/03-20-
PresidentBudget.pdf. Older data were taken from Office of Management and Budget (OMB) historical statistics.
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Figure 1. Total Outlays and Revenues As a Percentage of GDP, FY1990-FY2019

Source: CBO, Historical Tables, available at http://www.cbo.gov/budget/historical.shtml; An Analysis of the
President’s Budgetary Proposals for Fiscal Year 2010, June 2009, available at http://www.cbo.gov/doc.cfm?index=
10296; The Budget and Economic Outlook: An Update, August 2009, available at http://www.cbo.gov/doc.cfm?index=
10521; OMB, Budget for Fiscal Year 2010 Mid-Session Review, Table S-1, August 2009, available at
http://www.whitehouse.gov/omb/budget/MSR/. Data for FY2009 are estimates and data for FY2010-FY2019 are
projections. CBO did not revise its estimates of outlays or revenues under the President’s proposed policies in
its August update.
The annual budget deficit (or surplus) is revenue (i.e., taxes and fees) that the government collects
minus outlays (i.e., spending).3 The total deficit in FY2008 was $459 billion, or 3.2% of gross
domestic product (GDP), sharply higher than the FY2007 deficit of $162 billion. The August
2009 CBO current law baseline estimate put the FY2009 total deficit at $1,587 billion, or 11.2%
of GDP.4 The Administration estimates the FY2009 deficit at $1,580 billion, or 11.2% of GDP.5
(A detailed discussion of how the FY2009 deficit has changed since the estimates were last issued
is provided later in this report, in the section titled, “Why Did Budget Deficit Estimates for
FY2009 Change?”)
The total deficit, according to some budget experts, gives an incomplete view of the government’s
fiscal condition because it includes Social Security surpluses (which are then held in Treasury
trust funds until used to pay future benefits). Excluding off-budget items (Social Security benefits

3 Most economists use data on federal outlays to track larger budget trends, while most program analysts use budget
authority to track changes in specific program areas.
4 U.S. Congressional Budget Office, The Budget and Economic Outlook: An Update, August 2009, Table 1-2, available
at http://www.cbo.gov/doc.cfm?index=10521.
5 U.S. Office of Management and Budget, Budget for Fiscal Year 2010, Mid-Session Review, Table S-1, August 2009,
http://www.whitehouse.gov/omb/budget/MSR/.
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paid net of Social Security payroll taxes collected and the U.S. Postal Service’s net balance) the
(on-budget) FY2008 federal deficit was $642 billion. The August 2009 CBO estimate of the
FY2009 on-budget deficit, at $1,720 billion, was even higher. The estimation of federal deficits is
complicated by the difficulties in estimating the costs of major federal interventions in the latter
half of 2008, such as the creation of the Troubled Assets Relief Program (TARP) and placing the
mortgage giants Fannie Mae and Freddie Mac under conservatorship.6
Trends
Federal Spending
Budget enforcement legislation divides federal outlays into discretionary and mandatory
spending, as well as net interest.7 Discretionary spending flows from and is controlled by annual
Congressional appropriations acts. Mandatory spending encompasses federal government
spending on entitlement programs, the Supplemental Nutrition Assistance Program (SNAP;
formerly the Food Stamp program), and other spending controlled by laws other than annual
appropriation acts.
Outlays rose from 18.4% of GDP in FY2000 to 21.0% of GDP in FY2008. Over time, mandatory
spending has generally grown faster than discretionary spending. As Figure 2 shows, mandatory
spending equaled 11.3% of GDP in FY2008, composing over half of total outlays, up from 9.8%
of GDP in FY2000. Mandatory spending is projected to reach 13.1% of GDP in FY2019.
Discretionary spending as a share of GDP fell in the 1990s, but rose from 6.3% of GDP in
FY2000 to 8.0% of GDP in FY2008. By 2019, discretionary spending is projected to fall to 7.0%
of GDP, similar to the levels it reached in the mid-1990s.
Discretionary outlays increased 4.3% a year on average in real terms from FY1999 to FY2008.
The share of discretionary spending as a proportion of total federal outlays rose from 33.6% in
FY1999 to 38.0% in FY2008. Higher defense outlays accounted for 64.6% of the increase in
discretionary spending over the past decade. On average, from FY1999 to FY2008, defense
outlays grew 5.5% per year in real terms, while real non-defense discretionary outlays grew 3.1%
per year.
Entitlement programs such as Social Security and Medicare make up the bulk of mandatory
spending.8 Other mandatory spending programs include Temporary Assistance to Needy Families
(TANF), Supplemental Security Income (SSI), unemployment insurance, veterans’ benefits,
federal employee retirement and disability, SNAP (formerly Food Stamps), and the Earned
Income Tax Credit (EITC). Congress sets eligibility requirements and benefits for entitlement
programs, rather than appropriating a fixed sum each year. Therefore, if the eligibility
requirements are met for a specific mandatory program, outlays are made automatically.

6 Ibid, pp. 25-27, and Testimony of Elizabeth Warren, Chair of the Congressional Oversight Panel, in Congress, Senate
Banking Committee, Pulling Back the TARP: Oversight of the Financial Rescue Program, hearings, 111th Congress, 1st
sess., February 5, 2009, available at http://banking.senate.gov/public/_files/Warrentestimonyfinal2509.pdf.
7 For more information on trends in discretionary and mandatory spending, see CRS Report RL34424, Trends in
Discretionary Spending, by D. Andrew Austin and Mindy R. Levit and CRS Report RL33074, Mandatory Spending
Since 1962, by D. Andrew Austin and Mindy R. Levit.
8 For more information see CRS Report RS20129, Entitlements and Appropriated Entitlements in the Federal Budget
Process, by Bill Heniff Jr.
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Figure 2. Outlays by Type as a Percentage of GDP, FY1990-FY2019
30%
Total Outlays
Mandatory Spending
25%
Discretionary Spending
Net Interest
20%
P
f GD
o
e
g 15%
ta
en
c
Per
10%
5%
0%
0
1
2
3
5
7
9
0
2
4
5
6
7
8
0
1
2
3
5
7
9
199 199 199 199 1994 199 1996 199 1998 199 200 2001 200 2003 200 200 200 200 200 2009 201 201 201 201 2014 201 2016 201 2018 201
Fiscal Year

Source: CBO, Historical Tables, available at http://www.cbo.gov/budget/historical.shtml and The Budget and
Economic Outlook: An Update, August 2009, available at http://www.cbo.gov/doc.cfm?index=10521. Data for
FY2009 are estimates and data for FY2010-FY2019 are projections.
Over the past 40 years, mandatory spending has taken up a larger and larger share of the federal
budget. In 1962, before the 1965 creation of Medicare and Medicaid, less than 30% of all federal
spending was mandatory. At that time, Social Security accounted for about half of all mandatory
spending. By FY2008, mandatory spending had grown to 53.7% of total outlays, with Social
Security, Medicare, and the federal share of Medicaid alone comprising over 43% of all federal
spending. Discretionary spending totaled 38.0% in FY2008. Net interest payments accounted for
the remaining 8.3% of total spending.
Because discretionary spending is now at a historic low as a proportion of total federal outlays,
some budget experts contend that any significant reductions in federal spending must include
mandatory spending cuts. Other budget and social policy experts contend that cuts in mandatory
spending would cause substantial disruption to many households because mandatory spending
funds important parts of the social safety net.
Federal Revenue
Individual income taxes have long been the largest source of federal revenues, followed by social
insurance taxes. The amount of income tax revenue can vary substantially with changing
economic conditions. In FY2008, individuals paid $1,146 billion in taxes, or about 45% of total
revenues collected and 8.1% of GDP. Corporate income taxes ($304 billion), social insurance
taxes ($900 billion), and other taxes ($174 billion) generated the remaining revenue. Individual
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income taxes as a percentage of GDP, which are estimated to drop to 6.5% of GDP in FY2009,
are projected to rebound as economic recovery begins.9
Deficits, Debt, and Interest
The federal government’s fiscal stance is often gauged by the annual budget deficit. The budget
deficit, however, may give a partial and potentially misleading picture of the government’s fiscal
condition.10 Annual budget deficits or surpluses determine, over time, the level of federal debt and
affect the growth of interest payments to finance the debt.
Federal Deficits
Deficits can serve as a powerful instrument of fiscal policy. Differences between revenues and
outlays determine whether or not the budget is in surplus or deficit, which often serves as a
measure of the federal government’s fiscal health. Annual budget deficits or surpluses determine,
over time, the level of federal debt and affect the amount of annual interest paid to finance the
debt. Occasional deficits, in and of themselves, are not necessarily problematic. Deficit spending
allows governments to smooth outlays and taxes to shield taxpayers and program beneficiaries
from abrupt economic shocks. Persistent deficits, on the other hand, lead to growing
accumulations of federal debt that may lead to higher interest payments, tax increases, or
spending cuts, and may also have adverse macroeconomic consequences in the long term.
Deficit projections for the next several fiscal years are high relative to historic standards. The
deficit reached its peak in FY1943 at 30.3% of GDP. After WWII, deficits remained relatively
low until the mid-1980s. In FY1985, the deficit reached 6.0% of GDP. If the deficit in FY2009
reaches the projected level, it will be the highest deficit as a percentage of GDP since FY1946.11
According to CBO, the FY2009 deficit is estimated to reach 11.2% of GDP. In FY2010, the CBO
current-law baseline deficit is projected to fall to 9.6% of GDP, while CBO estimates that under
the President’s proposals that the deficit would be 9.9% of GDP.12
Federal Debt
Gross federal debt is composed of debt held by the public and intragovernmental debt.13
Intragovernmental debt is the amount owed by the Federal government to other federal agencies,
to be paid by the Department of the Treasury. This amount largely consists of money contained in
trust funds, such as Social Security, that has been invested in Federal securities as required by
law.14 Debt held by the public is the total amount the Federal government has borrowed from the

9 U.S. Congressional Budget Office, The Budget and Economic Outlook: An Update, Table 1-2.
10 See CRS Report RL33623, Long-Term Measures of Fiscal Imbalance, by D. Andrew Austin.
11 U.S. Office of Management and Budget, Budget for Fiscal Year 2009, Historical Tables, Table 1-3, available at
http://www.gpoaccess.gov/usbudget/fy09/pdf/hist.pdf.
12 U.S. Congressional Budget Office, The Budget and Economic Outlook: An Update, Table 1-2 and An Analysis of the
President’s Budgetary Proposals for FY2010, June 2009, Table 1-3, available at http://www.cbo.gov/ftpdocs/102xx/
doc10296/06-16-AnalysisPresBudget_forWeb.pdf.
13 Gross federal debt is also referred to as total debt or total public debt outstanding. Intragovernmental debt is also
referred to as intragovernmental holdings or debt held by federal government accounts.
14 U.S. Office of Management and Budget, Budget of the U.S. Government, Fiscal Year 2009, Analytical Perspectives,
(continued...)
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public and remains outstanding. This measure is generally considered to be the most relevant in
macroeconomic terms because it is the amount of debt sold in credit markets.
Changes in debt held by the public generally track the movements of the annual on-budget
deficits and surpluses. Whether or not the movements of gross federal debt will follow those of
debt held by the public depends on how intergovernmental debt changes. Higher debt levels could
slow investment and lower economic growth.15
Debt Limit
Congress sets a ceiling on federal debt through a legislatively established limit that helps
Congress assert its constitutional prerogative to control spending. The debt limit also imposes a
form of fiscal accountability that compels Congress and the President to take visible action, in the
form of a vote authorizing a debt limit increase, to allow further federal borrowing when nearing
the statutory limit. The debt limit can hinder the Treasury’s ability to manage the federal
government’s finances when the amount of federal debt approaches this ceiling. In those
instances, the Treasury has had to take unusual and extraordinary measures to meet federal
obligations.16 While the debt limit has never caused the federal government to default on its
obligations, it has caused inconvenience and uncertainty in Treasury operations at times.
On February 17, 2009, the American Recovery and Reinvestment Act of 2009 (H.R. 1, P.L. 111-
5) increased the debt limit to $12,104 billion.17 As of August 24, 2009, federal debt subject to
limit was $11,661 billion, of which, $7,386 billion was held by the public.18 CBO projects that
debt subject to limit will reach $11,876 billion by the end of FY2009, bringing it close to the
current debt limit.19
Net Interest
In FY2008, the U.S. spent $253 billion, or 1.8% of GDP, on net interest payments on the debt.
What the government pays in interest depends on market interest rates as well as on the size and
composition of the federal debt. Since FY1968, the U.S. spent an average of 2.2% of GDP on
interest payments. In FY2004, interest payments dipped to a low of 1.4% of GDP. If the value of
the federal debt in real terms were to grow faster than the economy, the burden of paying interest
on the debt would grow as well.
Currently, low interest rates have held down net interest payments as a percentage of GDP
relative to the historical average. CBO projects net interest payments for FY2009 will fall to 1.2%

(...continued)
Feb. 2008, p. 408.
15 For more information, see CRS Report RL34712, Ebbs and Flows of Federal Debt, by Mindy R. Levit.
16 General Accountability Office, Debt Ceiling: Analysis of Actions Taken During the 2003 Debt Issuance Suspension
Period, GAO-04-526, May 20, 2004.
17 For more information, see CRS Report RL31967, The Debt Limit: History and Recent Increases, by D. Andrew
Austin and Mindy R. Levit.
18 U.S. Department of Treasury, Financial Management Service, Daily Treasury Statement, August 24, 2009, available
at http://fms.treas.gov/webservices/show/?ciURL=/dts/09082400.pdf, accessed on August 26, 2009.
19 U.S. Congressional Budget Office, The Budget and Economic Outlook: An Update, Table 1-6.
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of GDP, despite increases in borrowing to finance the deficit.20 However, some economists have
expressed concern that federal interest costs could rise sharply once the economy recovers,
resulting in future strain on the budget.21
Budget Cycle
A single year’s budget cycle takes roughly three calendar years from initial formation by the
Office of Management and Budget (OMB) until final audit.22 The executive agencies begin the
budget process by compiling detailed budget requests in the calendar year before the President’s
budget submission. Many agencies start working on their budgets during the spring and
summer—about year and a half before the fiscal year begins. OMB oversees the development of
these agency requests. The President, by law, must submit a budget, which is based on OMB’s
work, by the first Monday in February.23
Because this date followed Inauguration Day so closely, the Obama Administration had little time
to compile budget documents. In past decades, some new presidents relied on their predecessors’
budget teams to outline a budgetary framework for submission in February and then submit their
own budget or revisions at a later date.24 The Obama Administration presented an outline of the
FY2010 budget on February 26, 2009, and submitted its full budget proposal on May 7 and 11,
2009.
Congress typically begins formal consideration of the budget once the President submits his
budget request. This year House and Senate Budget Committees began work on budget
resolutions in March, even though the President’s full budget submission had not yet been
submitted. The budget resolution sets out a plan, agreed to by the House and Senate, that
establishes the framework for subsequent budget legislation.
House and Senate Appropriations Committees and their subcommittees typically begin work on
bills that fund discretionary spending programs once the budget resolution is agreed upon.
Appropriations Committees review agency funding requests and propose levels of budget
authority (BA). Appropriations acts passed by Congress set the amount of BA available for
specific programs and activities. Authorizing committees, which control mandatory spending, and
committees with jurisdiction over revenues also play important roles in budget decision-making.
During the fiscal year, which begins on October 1, Congress and OMB oversee the execution of
the budget. Once the fiscal year ends on the following September 30, the Treasury Department
and the Government Accountability Office (GAO) begin year-end audits.

20 U.S. Congressional Budget Office, The Budget and Economic Outlook: An Update, Table 1-2.
21 Carmen M. Reinhart and Kenneth S. Rogoff, “The Aftermath of Financial Crises,” American Economic Review, vol.
99 (2009), no. 2; Alan Auerbach and William Gale, “The Economic Crisis and the Fiscal Crisis: 2009 and Beyond,”
Tax Policy Center working paper, February 2009, available at http://www.taxpolicycenter.org/UploadedPDF/
411843_economic_crisis.pdf.
22 CRS Report 98-325, The Federal Fiscal Year, by Bill Heniff Jr.
23 The contents of the Presidential budget submission are governed by U.S. Code, Title 31, Sec. 1105.
24 Additional information on budget during transition is available in CRS Report RS20752, Submission of the
President’s Budget in Transition Years, by Robert Keith.
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Budget Baseline Projections
The Congressional Budget Office (CBO) provides data and analysis to Congress throughout the
budget and appropriations process. Each January, CBO issues a Budget and Economic Outlook
that contains current-law baseline estimates of outlays and revenues. In March, CBO typically
issues an analysis of the President’s budget submission with revised baseline estimates and
projections. OMB issues a Mid-Session Review in July with budget data revised to reflect changes
in policy proposals, changed economic conditions, and other factors. In late summer, CBO issues
an updated Budget and Economic Outlook with new baseline projections.
Due to changing economic conditions and the enactment of major legislation in the early part of
2009, CBO also posted interim analyses as requested by Congress in order to provide more up-to-
date projections of the fiscal outlook between the release of its January and March baselines.25
These legislative changes as well as revised economic assumptions were incorporated into CBO’s
March 2009 A Preliminary Analysis of the President’s Budget and an Update of CBO’s Budget
and Economic Outlook.26 CBO revised its estimates of the President’s policies in June 2009 in its
report, An Analysis of the President’s Budgetary Proposals for Fiscal Year 2010.27 CBO released
a revised budget and economic outlook on August 25.
The CBO current-law baseline sets a benchmark to evaluate whether legislative proposals would
increase or decrease outlays and revenue collection. Baseline estimates are not intended to predict
likely future outcomes, but to show what spending and revenues would be if current law remained
in effect. CBO typically evaluates the budgetary consequences of legislative proposals and the
Joint Committee on Taxation (JCT) evaluates the consequences of revenue proposals.
CBO computes baseline projections using certain assumptions.28 Forecasts based on these
assumptions typically yield higher revenue estimates and slower growth of discretionary spending
relative to scenarios independent forecasters consider likely. More specifically, CBO baseline
projections incorporate three legislatively mandated assumptions: that discretionary spending
remains constant in inflation-adjusted terms, that the 2001 and 2003 tax cuts fully expire after
2010 (as current law specifies), and that one-year “patches” to the alternative minimum tax
(AMT) will lapse even though past Congresses have extended AMT patches year after year.
However, CBO does provide projections of these costs separately from its baseline. In addition to
these legislative assumptions, macroeconomic assumptions, namely the point at which CBO
expects the recession to end, will also affect the baseline estimates and projections especially
given the current economic climate.

25 U.S. Congressional Budget Office, Estimated Impact on the Deficit of Three Alternative Policy Scenarios as
Specified by Speaker Pelosi and Chairman Spratt, February 23, 2009, available at http://www.cbo.gov/ftpdocs/100xx/
doc10003/02-23-ThreePolicyScenarios.pdf and Estimated Macroeconomic Impacts of the American Recovery and
Reinvestment Act of 2009, March 2, 2009, available at http://www.cbo.gov/ftpdocs/100xx/doc10008/03-02-
Macro_Effects_of_ARRA.pdf.
26 U.S. Congressional Budget Office, A Preliminary Analysis of the President’s Budget and an Update of CBO’s
Budget and Economic Outlook, March 2009.
27 U.S. Congressional Budget Office, An Analysis of the President’s Budgetary Proposals for Fiscal Year 2010, June
2009.
28 While some budget enforcement legislation constraining the computation of CBO baseline estimates has expired,
CBO has continued to follow those legislative guidelines.
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Previous baseline projections showed substantial growth in receipts after 2010, when most of the
tax cuts from 2001 and 2003 expire. Federal deficits are expected to grow rapidly beyond the 10-
year forecast window unless major policy changes are made, however, largely because of
increased outlays due to rapidly growing health care costs and Baby Boomer retirements.
Budgeting in Tough Economic Times: the FY2009
and FY2010 Budgets
Aside from the specific issues related to the budget in Presidential transition years, the current
economic climate poses another major challenge to policymakers shaping the federal budget.
Federal spending tied to means-tested social programs has been increasing due to rising
unemployment, while federal revenues will likely fall as individuals’ incomes drop and corporate
profits sink.
Financial and Economic Turmoil
Financial markets have been in turmoil since August 2007. That turmoil intensified in March
2008 when the investment bank Bear Stearns was forced to sell itself to JPMorgan Chase, and
intensified again on September 7, when government-sponsored mortgage guarantors Fannie Mae
and Freddie Mac were placed into conservatorship. A week later, on September 15, the
investment bank Lehman Brothers declared bankruptcy. The insurance giant AIG avoided a
similar fate only by obtaining an $85 billion loan from the federal government. In December
2008, the National Bureau of Economic Research (NBER) determined the U.S. economy had
been in a recession since December 2007.
Federal Response to Turmoil in 2008 and 2009
The federal government has responded to this financial turmoil with an extraordinary set of
measures. In February 2008, Congress enacted a $152 billion package (P.L. 110-185, Economic
Stimulus Act of 2008) to stimulate consumption that sent refunds to taxpayers and let firms
depreciate their capital more quickly. Later in the year, the Federal Reserve created a panoply of
lending facilities, such as the Term Auction Facility (TAF), the Primary Dealer Credit Facility
(PDCF), and the Term Securities Lending Facility (TSLF) among others. These facilities provide
financial institutions with loans in exchange for various types of collateral.
On October 3, Congress passed the Emergency Economic Stabilization Act of 2008 (EESA; P.L.
110-343), which authorized the Treasury Secretary to use $700 billion (subject to certain
Congressional restrictions and notifications) to intervene in financial markets or to inject capital
into key financial institutions as part of a Troubled Assets Relief Program (TARP). While
Treasury Secretary Henry Paulson first proposed using TARP funds to buy mortgage-related
securities, those plans were later shelved. Instead, the Treasury Department injected TARP funds
to recapitalize banks and financial institutions by acquiring preferred shares. On November 12,
Paulson announced that a portion of TARP would fund a new Federal Reserve collateralized
lending program, the Term Asset-Backed Securities Loan Facility (TALF), which will take in
securities based on “newly and recently originated” loans, such as for education, automobiles, and
credit cards. Treasury Secretary Geithner announced details of a plan to use TARP funds, in
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cooperation with public-private partnerships, to purchase legacy (i.e., troubled) assets in March
2009.29
Additional efforts to jump-start economic growth came in the form of another stimulus package
passed by Congress on February 13, 2009, and signed into law by President Obama on February
17, 2009. The American Recovery and Reinvestment Act of 2009 (ARRA; H.R. 1, P.L. 111-5)
includes provisions that, according to CBO, would total $787.2 billion in increased spending and
reduced taxes over the FY2009-FY2019 period or just over 5% of GDP in 2008.30 ARRA includes
support for state and local governments in the form of increased infrastructure, Medicaid, school
funding, funding for health care IT, extended unemployment benefits, as well as tax cuts and
rebates among other provisions.31
The size, variety, and complexity of federal responses to financial and economic turmoil present
many challenges to budget analysis. The ultimate costs of these responses will depend on how the
economy performs, how well firms with federal credit guarantees weather future financial shocks,
and whether or not the government receives positive returns on its asset purchases. Estimating
how much these responses will cost the federal government is difficult, both for conceptual and
operational reasons.
What Counts As an Outlay?
The distinction between outlays and budget authority is important to understanding the budgetary
consequences of federal responses to economic and financial turmoil. Outlays are disbursed
federal funds. Budget authority, as determined by what Congress appropriates, is what federal
agencies can legally spend. Budget authority has been compared to funds deposited into a
checking account, which then can be used for federal purposes. Giving federal officials the ability
to spend requires budget authority. Until the federal government disburses funds to make
purchases, however, no outlays occur. Outlays will not increase until those funds are actually
disbursed.
Outlay data are used to assess the macroeconomic effects of the federal budgets, while budget
analysis of specific federal programs is typically based on budget authority figures.
Appropriations legislation is generally framed in terms of budget authority because that is what
Congress can most directly control.
Estimating the precise budgetary impact of programs like TARP is difficult. For example, much
of the early amounts of TARP funds were used to purchase preferred equity stakes in major
banks. CBO contended that EESA requires those equity purchases to be costed on a net present
value basis with an adjustment for market risk, so that the future sale of those equity stakes would
offset much of the cost of acquiring them. Under the Bush Administration, OMB argued for a
cash basis approach, so that those equity purchases would increase the federal deficit for FY2009
and future sales would reduce deficits in out-years as those equity stakes are sold off. However,

29 For more information, see CRS Report RL34730, Troubled Asset Relief Program: Legislation and Treasury
Implementation, by Baird Webel and Edward V. Murphy.
30 U.S. Congressional Budget Office, Cost Estimate For the Conference Agreement For H.R. 1., February 13, 2009,
available at http://cbo.gov/ftpdocs/99xx/doc9989/hr1conference.pdf.
31 For more information on the provisions of ARRA, see CRS Report R40537, American Recovery and Reinvestment
Act of 2009 (P.L. 111-5): Summary and Legislative History, by Clinton T. Brass et al.
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under the Obama Administration, OMB Director Peter Orszag adopted the scoring practices he
advocated while head of CBO, thus eliminating a large portion of previous divergences in budget
estimates. Even though the value of TARP purchases is now being estimated on a net present
value basis by CBO and OMB, differences still remain, which illustrate the complexity in
evaluating their true cost. OMB estimated TARP outlays on a net present value basis at $235
billion in FY2009 and $70 billion in FY2010 (with further outlays beyond FY2010).32 CBO
estimates the value of these outlays, on that basis, at $133 billion in FY2009 and $80 billion in
FY2010.33
The final scope of many elements of the financial intervention programs remains unclear given
that the Treasury Secretary has been granted wide discretion in how to use these funds. Outside of
TARP, other federal agencies have also used their statutory authority to provide relief to the
financial sector and credit markets in various ways. The ultimate costs and budgetary implications
depend on how long the recession lasts and what, if any, additional federal resources are put
toward dealing with the current economic and fiscal issues with or without additional
Congressional action.34
Current Federal Budget Scoring Ignores Some Credit Risks
The federal government has provided credit guarantees to several firms to reduce systematic
financial or economic risks to the economy. The cost of making these guarantees to the
government, however, may be much less than the value of the guarantees. If economic conditions
improve soon, those credit guarantees will not result in new federal outlays. On the other hand, if
the economic conditions deteriorate, the government may face major losses. The Federal Credit
Reform Act of 1990 (FCRA) requires that the reported budgetary cost of credit programs equal
the estimated subsidy cost at the time the credit is provided.35 FCRA subsidy calculations,
however, have typically omitted risk adjustments.36 The true economic cost of federal credit
guarantees can be substantially underestimated when risk adjustments are omitted.37 CBO, in its
budget outlook, included risk adjustments in estimates of the costs associated with the Troubled
Asset Relief Program (TARP) and the conservatorship of the government-sponsored mortgage
guarantee giants Fannie Mae and Freddie Mac.38 OMB estimates of the TARP program also
include risk adjustments.

32 U.S. Office of Management and Budget, Budget for Fiscal Year 2010, Mid-Session Review, Table S-4.
33 U.S. Congressional Budget Office, The Budget and Economic Outlook: An Update, Table 1-4.
34 President Obama’s budget documents for FY2010 included an additional $250 billion as a placeholder for potential
future financial stabilization efforts in FY2009. However, in its Mid-Session Review, OMB removed this placeholder.
35 The Federal Credit Reform Act of 1990 was created as part of the Omnibus Budget Reconciliation Act of 1990 (P.L.
101-508). FCRA defines a subsidy cost as “the estimated long-term cost to the government of a direct loan or a loan
guarantee, calculated on a net present value basis, excluding administrative costs.” For details, see CRS Report
RL30346, Federal Credit Reform: Implementation of the Changed Budgetary Treatment of Direct Loans and Loan
Guarantees, by James M. Bickley.
36 While the FCRA calculations include estimates of default costs, they do not discount more volatile income flows, as
a private firm would.
37 U.S. Congressional Budget Office, Estimating the Value of Subsidies for Federal Loans and Loan Guarantees, Aug.
2004, available at http://cbo.gov/doc.cfm?index=5751.
38 U.S. Congressional Budget Office, The Budget and Economic Outlook: Fiscal Years 2009 to 2019, January 7, 2009,
pp. 25-26, available at http://www.cbo.gov/ftpdocs/99xx/doc9957/01-07-Outlook.pdf; Testimony of Elizabeth Warren,
Chair of the Congressional Oversight Panel, in Congress, Senate Banking Committee, Pulling Back the TARP:
Oversight of the Financial Rescue Program, hearings, 111th Congress, 1st sess., February 5, 2009, available at
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Some economists argue that the federal government should not charge for the risks it accepts.
That argument, however, properly applies only to diversifiable risks—that is, risks that can be
minimized by pooling small risks. For non-diversifiable risks, such as systematic risks to
financial markets, governments may spread or redistribute risks, but cannot eliminate them via
pooling. Some argued that because the U.S. government can borrow at a risk-free rate, that
budget accounting for federal credit programs should not include a risk premium.39 The U.S.
Treasury’s ability to borrow funds cheaply, however, derives from the government’s ability to tax.
The U.S. government can borrow at a risk-free rate not because it can eliminate risks, but because
it can transfer risks to taxpayers and program beneficiaries.40
Federal responses to financial turmoil and the recession may expose the government to significant
credit risks. Large amounts of difficult-to-value financial assets have been put on the Treasury
and Federal Reserve balance sheets. Estimating scale and market cost of those risks is difficult
because the way some programs will be administered is unclear. Potential costs also depend on
how quickly the economy recovers and how the structure of financial markets evolves.41
Budget Fiscal Year 2009
Recent economic issues and resulting legislation enacted to reduce the impact of the housing and
credit crises have profoundly altered the budgetary landscape. Financial turmoil and the recession
will also affect outlay and revenue projections over the next several years. Any additional
measures, such as further financial intervention, could impact the budget and budget balance in
FY2009 and beyond.
During the past several budgetary cycles, Congress did not pass all of the regular appropriations
bills, which determine discretionary spending, before the start of the fiscal year. The FY2009
budget cycle was no exception. Congress provided its budgetary outline in the budget resolution
adopted in early June 2008, which called for $1,183 billion in discretionary spending and $1,883
billion in mandatory spending. Although the budget resolution is not law, it constrains spending
plans and thus plays a central role in determining budgetary outcomes.42 Regular appropriations
bills for Defense, Homeland Security, and Military Construction were included in the
Consolidated Security, Disaster Assistance, and Continuing Appropriations Act of 2009 (P.L. 110-
329), which was signed into law on September 30, 2008, the day before the start of FY2009. The
act also provided continuing appropriations for other parts of the government until March 6,
2009. To complete FY2009 funding, the House passed the Omnibus Appropriations Act of 2009
(H.R. 1105) on February 25, 2009, on a 245-178 vote. Passage in the Senate was delayed,
requiring an additional stop-gap measure (H.J.Res. 38, P.L. 111-6) to provide funding until March

(...continued)
http://banking.senate.gov/public/_files/Warrentestimonyfinal2509.pdf.
39 U.S. government is widely regarded as having no default risk, although government securities may carry other risks,
such as interest rate risks and for foreign holders, exchange rate risks.
40 U.S. Congressional Budget Office, Estimating the Value of Subsidies for Federal Loans and Loan Guarantees, Aug.
2004, p. 4.
41 For details, see CRS Report RL34427, Financial Turmoil: Federal Reserve Policy Responses, by Marc Labonte.
42 The Congressional Budget Act sets April 15 as a target date for Congress to adopt a budget resolution. In some years,
that target date was not met. For more information see CRS Report 98-814, Budget Reconciliation Legislation:
Development and Consideration, by Bill Heniff Jr.
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11, 2009. The Senate passed the omnibus bill on a voice vote on March 10, 2009, and the
President signed it the next day (P.L. 111-8), which completed regular FY2009 appropriations.
FY2009 Supplemental Appropriations
War Funding43
Costs of the wars in Iraq and Afghanistan have been funded for the most part by emergency
supplemental appropriations since 2001. By contrast, most of the funding for the Vietnam war
after the first few years was provided in regular appropriations.44 Since 2004, war funding has
been requested in two parts: an emergency “bridge” fund to cover the first part of the year that
has been included as emergency appropriations in the Department of Defense’s (DOD’s) regular
appropriations and a supplemental that has been submitted later in the fiscal year. The
Supplemental Appropriations Act, FY2008 (P.L. 110-252) provided both the second part of war
funding for FY2008 bringing the annual total to $187 billion, and $66 billion to cover the first
part of FY2009.45
On April 9, 2009, the Obama Administration requested $83.4 billion for a FY2009 supplemental
including $75.5 billion to fund DOD’s war costs in Afghanistan and Iraq, $7.1 billion for
primarily war-related foreign aid, and $0.4 billion for other needs.46 Coupled with previously
appropriated war funding, the request would bring the DOD total for FY2009 to $141.4 billion.
Presumably this request reflects the President’s decision to send an additional 21,000 troops to
Afghanistan “to stabilize a deteriorating situation” and to reduce the number of Brigade Combat
Teams in Iraq by two, a decrease of about 18,000 troops in FY2009.47 According to OMB, this
should be the last war-related supplemental. Funding for war costs in FY2010 was submitted
along with the regular budget on May 7, 2009.
The Administration submitted three additional requests for supplemental funds including funds
for pandemic flu preparedness and response measures, to cover potential risks to the Treasury
from expanding the U.S. contribution to the borrowing authority of the International Monetary
Fund, and additional funds for unanticipated needs for influenza. Together with the initial April 9
proposal, this brought the total Administration request for the FY2009 supplemental to $92.145
billion. By June 18, both the Senate and the House passed the final version of the bill

43 Section written by Amy Belasco, CRS.
44 CRS Report RS22455, Military Operations: Precedents for Funding Contingency Operations in Regular or in
Supplemental Appropriations Bills, by Stephen Daggett, pp. 5-6. For a discussion of how war funding may affect the
federal budget, see CRS Report RL31176, Financing Issues and Economic Effects of American Wars, by Marc Labonte
and Mindy R. Levit.
45 CRS Report RL33110, The Cost of Iraq, Afghanistan, and Other Global War on Terror Operations Since 9/11, by
Amy Belasco.
46 Office of Management and Budget, ”Letter to the President on the FY2009 Supplemental,” Estimate No. 1, 111th
Congress, April 9, 2009, available at http://www.cq.com/flatfiles/editorialFiles/temporaryItems/2009/supp-omb-
letter.pdf; Office of Management and Budget, FY2009 Supplemental Request, Estimate No.1, 111th Congress, April 9,
2009, available at http://www.whitehouse.gov/omb/assets/budget_amendments/supplemental_04_09_09.pdf.
47 OMB, A New Era of Responsibility: Renewing America’s Promise, February 26, 2009, pp. 53-55 and Table S-7;
“Responsibly Ending the War in Iraq,” Remarks by President Barack Obama at Camp Lejeune, North Carolina,
February 27, 2009, available at http://www.whitehouse.gov/the_press_office/Remarks-of-President-Barack-Obama-
Responsibly-Ending-the-War-in-Iraq/; White House, Blog, “A New Strategy for Afghanistan and Pakistan, March 27,
2009, available at http://www.whitehouse.gov/blog/09/03/27/A-New-Strategy-for-Afghanistan-and-Pakistan/.
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(Supplemental Appropriations Act 2009; H.R. 2346), totaling $105.9 billion.48 As often happens
with supplementals, the FY2009 supplemental included not only much of the additional funding
requested by the Administration, but also other funding added by Congress. President Obama
signed the FY2009 supplemental (P.L. 111-32) on June 24.
Supplemental war appropriations complicate the budget process. First, some argue that war
funding should be included in DOD’s regular appropriations. DOD and others have suggested that
war costs remain fluid and that combining regular and war appropriations could make the
administrative and budgetary segregation of war funding and the costs of DOD’s baseline
peacetime program more difficult. Some contend that the George W. Bush Administration used
supplemental appropriations to obscure the costs of wars in Iraq and Afghanistan to the public.
Second, the irregular timing of supplemental appropriations requests complicates comparisons of
baseline budget forecasts. Supplementals have also been criticized for making it easier to add
unrelated spending items that would be more difficult to pass individually, which is particularly
the case for supplemental acts that provide funds to support troops engaged in war.
According to the terms of budget enforcement conventions, CBO baseline presumes that
discretionary spending levels will continue, as enacted, for the following fiscal year in real (i.e.,
inflation-adjusted) terms. If these projections are run when Congress has only enacted bridge
funding to cover part of the year, the baseline is likely to understate the full amount of spending
for the Department of Defense. On the other hand, if the baseline is run after a supplemental is
passed and an overall decline in U.S. military operations is anticipated because the drawdown in
Iraq is expected to be greater than the increase in Afghanistan, then assuming the same level of
war funding may overstate total defense spending. In either case, when the amount for defense
spending includes war funding, it overstates the amount needed to carry on DOD’s ongoing
baseline peacetime program, and will not capture any changes in U.S. military operations for
overseas contingencies.
Finally, many in Congress have questioned whether after seven years, war appropriations are
appropriately categorized as “unanticipated” emergencies not subject to caps in annual
congressional budget resolutions. Although Congress required a full year’s war request starting in
FY2008, the Bush Administration failed to submit one for FY2009 (Sec. 1007, P.L. 110-364).
“Cash for Clunkers”
In addition to the war funding supplemental discussed above, the House passed a second
supplemental appropriations measure (H.R. 3435) to extend the “Cash for Clunkers” program on
July 31 on a 316-109 vote. The Senate approved the measure on August 6 on a 60-37 vote and it
was signed into law by the President on August 7, 2009 (P.L. 111-47).49 To pay for this extension,
Congress transferred $2 billion of ARRA funds into “cash for clunkers.”

48 Congressional Record, “Supplemental Appropriations Act 2009 (H.R. 2346) Conference Agreement (H.Rept. 111-
151), June 16, 2009, pp. H6871-H6905; see also CRS Report R40531, FY2009 Spring Supplemental Appropriations for
Overseas Contingency Operations, coordinated by Stephen Daggett and Susan B. Epstein.
49 For further details on the program, see CRS Report R40654, Accelerated Vehicle Retirement for Fuel Economy:
“Cash for Clunkers,” by Brent D. Yacobucci and Bill Canis.
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Why Did Budget Deficit Estimates for FY2009 Change?
Both CBO and OMB revised their budget deficit estimates for FY2009 downward in their August
releases of The Budget and Economic Outlook: An Update and the Mid-Session Review,
respectively. In its baseline figures issued in March, CBO estimated an FY2009 deficit of $1,667
billion. The revisions in the August 2009 report show a deficit of $1,587 billion. The $80 billion
reduction in the deficit between March and August is largely a result of a decrease in the TARP
subsidy cost by $203 billion. Further declines in revenues of $85 billion, along with legislative
and economic changes to the baseline figures resulting in increased outlays, contributed the
remaining amount to the deficit revision.50
The revisions in the OMB proposed budget deficit estimates, from a May FY2009 deficit estimate
of $1,841 billion to an August estimate of $1,580 billion, are largely a result of the elimination of
the $250 billion placeholder for additional financial stabilization efforts. OMB determined that
the increased stability in the financial markets provided indication that the placeholder was no
longer needed. In addition, OMB also reduced projected outlays for FDIC’s deposit insurance
program by $78 billion due to improved conditions in the banking industry. Offsetting these lower
outlays is an $83 billion decline in revenues due to revised economic and technical assumptions.51
Budget Fiscal Year 2010
The Obama Administration released an outline of the FY2010 budget on February 26, 2009, the
full budget proposal on May 7 and 11, 2009, and the Mid-Session Review on August 25, 2009.
Using the President’s February outline, Congress began its consideration of the FY2010 budget in
late March 2009. Versions of the budget resolution were agreed to in the House (H.Con.Res. 85)
and Senate (S.Con.Res. 13) on April 2, 2009. The Conference Report on the budget resolution
(S.Con.Res. 13) was agreed to on April 29, 2009.
As of July 30, 2009, the House had passed all 12 regular appropriations acts. As of August 7, the
Senate had passed four regular appropriations acts.52 Some budget experts have expressed
optimism that all or most of the regular appropriations bills might be passed before FY2010 starts
on October 1, 2009.53
Obama Administration FY2010 Budget
The Administration’s FY2010 budget contains five volumes: (1) A New Era of Responsibility:
Renewing America’s Promise; (2) Historical Tables; (3) Analytical Perspectives; (4) Appendix;
and (5) Terminations, Reductions, and Savings.54 These documents lay out the Administration’s

50 U.S. Congressional Budget Office, The Budget and Economic Outlook: An Update, Table A-1. Further details
explaining the changes in the baseline deficit estimates between March and August are explained in Appendix.
51 U.S. Office of Management and Budget, Budget for Fiscal Year 2010, Mid-Session Review, Table 1, p. 2, and p. 15.
52 For details on the progress of appropriations bills, see the CRS Appropriations Status Table, available at
http://crs.gov/products/appropriations/appover.shtml. The Congressional Budget Office’s “Discretionary
Appropriations Status Tables” are available at http://www.cbo.gov/budget/approps.shtml.
53 Stan Collender, “The Three Tests for This Year’s Appropriations,” Roll Call, April 28, 2009; Stan Collender,
“Appropriations As A Sex Object,” Capital Gains and Games Blog, July 17, 2009, available at
http://capitalgainsandgames.com/blog/stan-collender/984/appropriations-sex-object.
54 A New Era of Responsibility: Renewing America’s Promise is the budget overview document released in February.
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projections of the fiscal outlook for the country, along with spending levels proposed for each of
the federal government’s departments and programs. The Historical Tables volume also provides
significant amounts of budget data, much of which extends back to 1962 or earlier.
In an attempt to present a full picture of the current and future fiscal outlook, the Obama
Administration provided three separate deficit projections.55 First, OMB projected a Budget
Enforcement Act (BEA) baseline, using methods that mirror those CBO uses to project its
current-law baseline. The BEA baseline presumes that discretionary spending remains constant in
real (i.e., inflation-adjusted) terms, the 2001 and 2003 Bush Administration tax cuts expire in
2010, and that the alternative minimum tax (AMT) will not be “patched.”56 Many budget analysts
believe such current law projections offer an overly rosy scenario of the long term budget
picture.57 Under this scenario, the FY2010 deficit is projected to total $1,426 billion.
The Obama Administration also projected a Current Policy Baseline, which in its view, provides a
more transparent and realistic reflection of the federal government’s current fiscal situation. They
also propose to continue using this methodology as a base for future budget enforcement purposes
and as a mechanism for understanding how new policy choices effect the fiscal outlook,
essentially replacing the current BEA baseline. The Administration’s Current Policy Baseline
presumes that the 2001 and 2003 tax cuts will be extended, that the alternative minimum tax
(AMT) will be “patched,” that certain Medicare physician payments will not be cut. This baseline
also includes costs for overseas contingency operations and estimated average annual costs of
major disasters, as well as an adjustment for the conversion of Pell Grants from discretionary to
mandatory spending. The deficit under this scenario would reach $1,449 billion in FY2010.
The final deficit projection, the Proposed Budget, illustrates the impact on the budget outlook if
all of the policies of the Obama Administration are implemented. In FY2010, the Administration
projects that the deficit would reach $1,502 billion. Both the Current Policy Baseline and the
Proposed Budget project deficits throughout the 10-year budget window, with deficits peaking in
FY2009 and then remaining stable, as a percentage of GDP, in the out-years.
In his budget for FY2010, President Obama also presented a wide ranging policy agenda. The
main policy initiatives he emphasized include significant spending and investment targeted
toward health care reform, clean energy, and education.
Health Care Reform
In its budget documents, the Obama Administration argues that achieving health care reform is
necessary in order to realize fiscal stability in the long-run because of the large amount of federal

(...continued)
The summary tables in this document were updated in May in the publication titled Updated Summary Tables. The
other four volumes were released in May. The President’s budget proposals can be found on the OMB website at
http://www.whitehouse.gov/omb/budget/.
55 For details of these projections, see U.S. Office of Management and Budget, Budget for Fiscal Year 2010, Mid-
Session Review, Tables S-1 (Proposed Budget) and S-7 (BEA Baseline and Current Policy).
56 The tax cuts were enacted in the Economic Growth and Taxpayer Relief Act of 2001 (EGTRRA; P.L. 107-16) and
the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA; P.L. 108-27).
57 For a discussion of budgetary enforcement legislation, see CRS Report 98-721, Introduction to the Federal Budget
Process, by Robert Keith.
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spending which goes towards financing major health programs (i.e., Medicare and Medicaid).
However, they also acknowledge that the plans for reform are not yet finalized and consultation
with Congress remains key to this process. In order to achieve meaningful reform, the
Administration cited the need to decrease the growth in health care costs, which have previously
risen faster than the economy, along with reforms to the Medicare physician payment system to
give physicians incentives to improve quality and efficiency while cutting costs.
A Clean Energy Future
Funding for clean energy investment is contained in the President’s Research and Development
(R&D) budget request. These initiatives for a new energy economy include reducing U.S.
dependence on oil, creating “green” jobs, and reducing the impact of climate change by
supporting renewable energy and energy efficiency technologies and limiting carbon emissions
and their impact. Additional funding for these initiatives was also contained in ARRA (H.R. 1,
P.L. 111-5). The President has proposed the creation of a cap-and-trade system, whereby emission
allowances will be auctioned, to provide future funding for these investments.
Education
The President is proposing to increase outlays for education and training with the goal of
developing a more skilled and productive labor force. Funding will be provided at both the
federal level as well as via grants to state and local governments for individual programs such as
Head Start and aid for higher education. Additional outlays for education and training purposes
are earmarked for physical investment and research and development.
The federal government also assists individuals and families with the financing of higher
education by providing grants, loans, and loan guarantees through various programs. As a result
of tight credit markets, Congress enacted legislation to enhance the authority of the Secretary of
Education with respect to purchasing student loans made under the Federal Family Education
Loan (FFEL) Program and to make other programmatic changes.58 Building on these reforms, the
FY2010 budget proposes to finance future loan originations through the William D. Ford Federal
Direct Student Loan Program, generating programmatic savings by eliminating subsidies to FFEL
lenders.59 In addition, the Administration proposes to move Pell Grant outlays from the
discretionary spending category to the mandatory spending category. The President also
recommends an increase in the maximum award amount for the Pell Grant program.
Congressional Consideration of the FY2010 Budget Resolution60
The House Budget Committee approved its budget resolution (H.Con.Res. 85) on March 25,
2009, on a 24-15 vote. The Senate Budget Committee approved its budget resolution (S.Con.Res.

58 For more information on recent Congressional action regarding these programs, see CRS Report RL34452, The
Ensuring Continued Access to Student Loans Act of 2008, by David P. Smole.
59 For more information on the FFEL and William D. Ford Federal Direct Student Loan Program, see CRS Report
R40122, Federal Student Loans Made Under the Federal Family Education Loan Program and the William D. Ford
Federal Direct Loan Program: Terms and Conditions for Borrowers, by David P. Smole.
60 For more information on consideration and the policies of the Congressional Budget Resolution, see CRS Report
R40559, S.Con.Res. 13: The Budget Resolution for FY2010, by Megan Suzanne Lynch and Mindy R. Levit.
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13) the next day on a 13-10 vote. The House (on a 233-196 vote) and Senate (on a 55-43 vote)
agreed to their versions of the budget resolution on April 2, 2009. The conference agreement on
the budget resolution (S.Con.Res. 13) was passed in the House (on a 233-193 vote) and in the
Senate (on a 53-43 vote) on April 29, 2009.
The House budget resolution provided for revenue levels of $2,328 billion and outlays of $3,550
billion in FY2010, differing slightly from the Senate budget resolution levels of $2,288 billion in
revenues and $3,534 billion in outlays. The House budget resolution also included reconciliation
instructions to allow for health care and education initiatives, while the Senate did not include any
reconciliation instructions. There were some other differences in the House and Senate budget
resolutions, including assumptions regarding future legislation concerning estate tax rates and the
number of years for which the alternative minimum tax (AMT) would be patched, as well as the
number of reserve funds.61
A budget resolution conference agreement was filed on April 27, 2009, and included $2,322
billion in revenues and $3,555 billion in outlays for FY2010, resulting in a projected deficit of
$1,233 billion. Further, it allowed for $1,086 billion in new, non-war discretionary budget
authority, of which $556 billion is allocated for national defense and $530 billion for non-defense
discretionary spending. An amount of $130 billion in new budget authority is also provided for
overseas deployment and other activities (i.e., war costs). By FY2014, the budget resolution cuts
the projected deficit by half to $523 billion. The conference agreement passed both the House and
Senate on April 29, 2009.
The conference agreement also assumes three additional years of AMT relief (through FY2014), a
two-year extension of expired and expiring tax provisions, and a new incentive for retirement
savings. The agreement supports the permanent extension of tax relief first enacted in 2001 and
2003 for middle-income taxpayers (the resolution does assume the expiration of the current top
two income tax rates, which will rise to 36 percent and 39.6 percent in 2011) and the continuation
of current estate tax rates. The conference agreement does not include any assumptions regarding
whether President Obama’s Making Work Pay tax credit would be made permanent beyond
FY2010.
While legislation addressing these policies is accommodated in the budget resolution conference
agreement, such legislation may be constrained by other House and Senate rules, specifically the
pay-as-you-go (PAYGO) rules in each chamber (House Rule XXI, clause 10, and Section 201 of
S.Con.Res. 21, the FY2008 budget resolution). The budget resolution, however, does provide (in
Section 421) that in the House any projected increase in the deficit resulting from certain
legislation, relating to the Medicare payment system for physicians, middle class tax relief,
reform of the AMT, and reform of the estate and gift tax, up to specified amounts, not count for
PAYGO purposes if the House has passed legislation reinstating a statutory PAYGO requirement,
or such requirement is in the legislation. The budget resolution conference agreement does not
include a similar provision that would apply in the Senate.62

61 Details of the House-passed budget resolution are available at http://budget.house.gov/menu_congress.shtml. Details
of the Senate-passed budget resolution are available at http://budget.senate.gov/democratic/senatebudres.html.
62 For more information on PAYGO requirements, see CRS Report RL34300, Pay-As-You-Go Procedures for Budget
Enforcement, by Robert Keith.
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President Obama’s major initiatives on health care and education reform, clean energy, and
infrastructure investment are provided for in separate deficit-neutral reserve funds in the
conference agreement. Deficit-neutral reserve funds provide that a committee may report
legislation with spending in excess of its allocations, but require the excess amounts be “offset”
by equivalent amounts of tax increases or spending cuts.63
Reconciliation instructions are also included for health care and education reform initiatives,
which direct the committees of jurisdiction in the House and Senate to submit legislative
language to their respective Budget Committees by October 15, 2009. Reconciliation instructions
are in the form of a directive to a specific committee to recommend legislative changes. These
instructions are specific and include (1) the committee responsible for making the change, (2) the
dollar amount of the change, and (3) the period over which this change should be measured.
Reconciliation instructions also include a deadline for the committee to submit such
recommendations. Reconciliation legislation, once reported, is considered under special
procedures that limit what matters may be included in reconciliation legislation, prohibit certain
amendments, and encourage completion in a timely fashion.64
Although the overall spending and revenue amounts are enforceable, the policy assumptions
underlying the budget resolution are non-binding, leaving Congress and the Administration with
some flexibility in making longer-term policy choices.
Considerations for Congress
Congress faces extraordinary budgetary challenges in FY2010 with both short-run and long-run
budget priorities that may conflict in critical ways. In the short term, economic issues may
dominate policy debates, creating pressure for higher deficit spending. In the long term,
increasing federal health care costs are expected to keep mandatory spending rising.
Short-Term Considerations
Thus far in 2009, many indicators of economic activity remained weak. If economic conditions
worsen, Congress may choose to enact more government spending in response to the state of the
economy. While the power of debt-financed government spending to provide fiscal stimulus is
independent of how those funds are spent, clearly taxpayers and beneficiaries of federal programs
gain more when that spending reduces households’ economic vulnerabilities or promotes future
economic efficiency.
Soon after the 111th Congress was sworn in, work began on a major fiscal stimulus package, the
American Recovery and Reinvestment Act of 2009 (H.R. 1, P.L. 111-5) , which was enacted
February 17, 2009. The $787.2 billion package (according to CBO) includes extended
unemployment benefits, aid to state and local governments in the form of higher infrastructure,
Medicaid, school spending, health care information technology funding, as well as tax cuts and

63 For more information on reserve funds, see CRS Report R40472, The Budget Resolution and Spending Legislation,
by Megan Suzanne Lynch.
64 For more information on reconciliation legislation, see CRS Report 98-814, Budget Reconciliation Legislation:
Development and Consideration, by Bill Heniff Jr.
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rebates. The Appendix to this report discusses the macroeconomic policy options available to
combat economic downturns and details reasons for enacting fiscal stimulus when monetary
policy options are no longer available.
Apart from any additional stimulus spending, the U.S. auto industry, facing the worst downturn in
auto sales in 15 years and a significant loss in market share, asked for $34 billion in loans through
TARP or through other means to revitalize and restructure its companies. The 110th Congress did
not pass proposals to provide additional aid to automobile manufacturers in late 2008, but on
December 19, 2008, the Bush Administration announced a plan to provide $17.4 billion in loans
to General Motors and Chrysler using funds from the Troubled Asset Relief Program (TARP).65
General Motors and Chrysler have said they would likely have filed for bankruptcy protection if
they had failed to receive federal aid. In order to further stabilize the industry, on March 19, 2009,
Treasury Secretary Geithner announced a program to provide auto suppliers with up to $5 billion
in credit to help ensure the continuation of their operations in the face of slow sales to the
struggling auto industry. This program is intended to ensure that suppliers receive payment for
their parts shipments regardless of what happens to the downstream car companies. Despite
federal aid provided in late 2008 and early 2009, the Chrysler company filed for bankruptcy on
April 30, 2009, and General Motors filed for bankruptcy on June 1.66
General Budget Issues
Congress may wish to consider some general budgeting issues beyond short term considerations
of annual funding requests and fiscal stimulus.
Managing Federal Credit Risks
FCRA requires that federal loan and credit program costs be recorded on a net present value
basis. The calculations mandated by FCRA, while an advance over previous practices, do not take
into account risks borne by the federal government, and indirectly, risks borne by taxpayers and
program beneficiaries. Federal responses to economic and financial turmoil expose the
government to substantial credit risks. Congress may opt to consider methods to undertake a
systematic accounting of risks undertaken by government activities.
Stimulate and Stop
While some economists contend that sharply rising unemployment rates signal the need for more
fiscal stimulus, President Obama said in late June 2009 that a second stimulus package was not
yet necessary.67

65 John D. McKinnon and John D. Stoll, “U.S. Throws Lifeline to Detroit,” Wall Street Journal, December 20, 2008;
U.S. Department of Treasury, “Secretary Paulson Statement on Stabilizing the Automotive Industry,” Press release HP-
1332, December 19, 2008, available at http://www.ustreas.gov/press/releases/hp1332.htm.
66 See CRS Report R40003, U.S. Motor Vehicle Industry: Federal Financial Assistance and Restructuring, coordinated
by Bill Canis.
67 New York Times, “President Obama’s Press Briefing,” June 23, 2009, available at http://www.nytimes.com/2009/06/
23/us/politics/23text-obama.htm.
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Debt-financed fiscal stimulus measures, like ARRA, eventually must be paid for through higher
taxes or future cuts in government programs. Banks and other financial institutions must
eventually be weaned off Federal Reserve and Treasury borrowing facilities. After the economic
recovery begins, Congress may use oversight authority to rein in spending as soon as is
appropriate.
Budget Transparency
The budget, reflecting the size and complexity of the federal government, is complicated and
detailed. The budget books that OMB compiles provide an enormous amount of information, and
other budget data reported by federal agencies provide even more detail on federal spending
plans. The Federal Funding Accountability and Transparency Act of 2006 (P.L. 109-282) included
several measures to increase the accessibility of budget information. For example, as a result of
that act, OMB now runs the USAspending.gov website, which provides detailed information on
federal spending. Some, however, have raised concerns about quality of those data. Moreover, it
is not clear that those data are thoroughly coordinated with other federal budgeting data systems.
Congress and the President have undertaken additional efforts in an attempt to improve
transparency in light of the large amounts of spending currently occurring as a result of economic
stabilization efforts and federal financial interventions. Websites, such as Recovery.gov, were
launched to track stimulus spending. The Congressional Oversight Panel was established in
EESA to oversee TARP spending. Despite this, criticisms remain and requests for greater
transparency continue.
In certain cases, despite the large amount of data provided by OMB and other government
agencies, it can be difficult to answer relatively simple budget questions. Critics maintain that the
federal government in general and OMB in particular should take steps to make data on federal
spending more transparent to taxpayers and more useful to policymakers. Congress may consider
requiring these changes to provide more organized and transparent budget data to citizens and to
itself.
Budget Enforcement Measures
The Budget Enforcement Act and other budget enforcement legislation was widely credited for
laying the groundwork for the federal government’s surpluses in the late 1990s. The Budget
Enforcement Act, which imposed certain “Pay-as-you-go” (PAYGO) rules, expired in 2002.
PAYGO rules discourage or prevent the enactment of mandatory spending and revenue legislation
that is not deficit neutral (i.e., legislation that would cause, or increase, a deficit or reduce a
surplus).68 The House and Senate in the 111th Congress have enacted modified forms of PAYGO
procedures. In June 2009, President Obama encouraged Congress to reinstitute statutory PAYGO
rules.69

68 See CRS Report RL34300, Pay-As-You-Go Procedures for Budget Enforcement, by Robert Keith.
69 White House, “President Obama Calls for Restoring Statutory Pay-As-You-Go Requirements,” press release, June 9,
2009, available at http://www.whitehouse.gov/the_press_office/President-Obama-Calls-for-Restoring-Statutory-Pay-
As-You-Go-Requirements/.
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When the economy starts to grow again, attention may turn to deficit reduction efforts, in which
case PAYGO procedures could become more important. Some budget experts, however, warn that
while PAYGO rules in the past have helped enforce stricter budgetary discipline, PAYGO is not a
cure-all for fiscal challenges.70
Long-Term Considerations
Annual budget deficits or surpluses are not always the best indication of long-term fiscal stability.
Most economists agree that, under certain conditions, running a budget deficit may be necessary
to provide economic stimulus or pull an economy out of recession. A large budget deficit, in
itself, does not necessarily indicate a longer term problem. The federal government, however,
faces serious long-term budget challenges. Some measures of fiscal solvency in the long term
indicate that the U.S. may face a major future crisis, specifically as it relates to rising healthcare
costs and the likely impact on government financed health care spending.
CBO, GAO, and OMB agree that the current mix of federal fiscal policies is unsustainable in the
long term. The nation’s aging population, combined with rising health care costs per beneficiary,
seems likely to keep federal health costs rising faster than per capita GDP. CBO has concluded
that “under any plausible scenario, the federal budget is on an unsustainable path,” extending well
into this century. In their August 2009 budget reports, OMB and CBO identified fiscal challenges
related to future healthcare costs as a major issue affecting the country’s long-term budget
outlook.
Keeping future federal outlays at 20% of GDP, approximately its current share, and leaving fiscal
policies unchanged, according to CBO projections, would require drastic reductions in all
spending other than that for Medicare, Social Security, and Medicaid or reigning in the costs of
these programs. A former CBO Acting Director stated that, “by 2030 ... spending for those
programs [Medicare, Social Security, and Medicaid] is projected to reach roughly 15 percent of
GDP.... If that increase happened ..., the rest of the budget would have to be cut by more than
half” to keep overall spending close to its current level.
The Social Security, Medicare, and Medicaid programs present different challenges to the long-
term fiscal position of the federal government. Estimates of the long-term fiscal gap between
Social Security (OASDI) outlays and Social Security revenues as a proportion of long-term GDP
are generally much smaller than estimates of the long-term fiscal gap between Medicare (HI, Part
B, and Part D) outlays and revenues as a portion of long-term GDP. These long-term estimates of
fiscal imbalances are sensitive to changes in assumptions regarding productivity growth and
interest rates. Spending projections for Medicare and Medicaid are sensitive to medical inflation.
Past projections that medical inflation would slow have proved to be overly optimistic.
The call for health care reform has grown. The Obama Administration laid out a reserve fund in
their FY2010 budget intended as a down payment to fund future health care reform. The FY2010
budget conference agreement also contained provisions to allow for health care reform
legislation. Both House Speaker Pelosi and Senate Majority Leader Reid have indicated that they
intend to accomplish health care reform this year.

70 Stan Collender, “PAYGO Is Just a Condiment, Not the Main Ingredient,” Roll Call, June 23, 2009.
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When the economy recovers, Congress may focus more effort on balancing the budget and
reining in the debt. This would require less spending, increases in revenue collections, faster than
average economic growth, or a combination of these things. Many economists agree that having
some federal debt is a good thing because it builds credit which allows for more favorable
borrowing terms. It encourages investment within the country because federal debt is seen as
relatively low-risk and safe. Debt is not free, however, and requires interest payments that strain
budgets. High debt levels could limit the government’s flexibility in meeting its obligations or in
responding to emerging needs of its citizens. Ultimately, failing to take action to reduce the
projected growth in the debt potentially might lead to future insolvency or government default.71

71 Recent trends in the credit default swap market imply an increased market perception of the likelihood of default on
certain Treasury securities. In past years, Treasury securities were typically regarded as risk-free. See Alan Auerbach
and William Gale, “The Economic Crisis and the Fiscal Crisis: 2009 and Beyond,” Tax Policy Center working paper,
February 2009.
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Appendix. The Budget and Macroeconomic Policy
Governments typically strive to keep economic growth steady and employment high while
maintaining price stability.72 Macroeconomic policy instruments are often divided into three
components: monetary policy (i.e., control of monetary base and short-term interest rates), fiscal
policy (government borrowing and spending), and structural factors. Structural factors include
regulation and competition policies that may enhance the efficiency of an economy. While these
standard macroeconomic policy tools have been highly effective in moderating economic
fluctuations over the past few decades, the financial turmoil and credit crunch in FY2009 present
special challenges that led the government to consider other types of responses.
The Limits of Monetary Policy
Monetary policy has several important advantages in macroeconomic stabilization. The Federal
Reserve, the central bank of the United States, can deploy traditional monetary policy tools such
as open-market interventions that help control certain key short-term federal interest rates. The
independence of the Fed insulates it from political pressures and allows it to act quickly in
response to new developments in the economy. The Fed, in conjunction with the Treasury
Department, developed innovative responses to the financial turmoil that broke out in August
2007. As economic problems deepened in 2008, the Fed redoubled its efforts to unfreeze critical
areas of credit markets.
In the current economic situation, traditional monetary policy initiatives appear to have neared
their effective limits.73 In their December meeting, the Federal Reserve set a target range for the
federal funds rate between zero and ¼ % and cut the rate on discount window loans (made to
commercial banks and other financial institutions) by 75 basis points to ½ %.74 Thus, the Federal
Reserve has little room for further cuts. In addition, declining investment demand and investors
seeking a safe harbor for funds have pushed short-term interest rates on federal Treasury
securities to very low levels.
Furthermore, many economists doubt that pushing those interest rates even lower would spur
much additional lending when banks and other lenders worry about the solvency of financial
counterparties. Monetary policy loses much of its effectiveness in such a “liquidity trap,” as
banks’ reluctance to lend frustrates the Fed’s efforts to expand the money supply. Moreover, while
new Federal Reserve lending facilities may improve credit conditions or at least limit further
deterioration, those programs were not designed to address the larger macroeconomic issue of

72 The Humphrey-Hawkins Act (P.L. 95-523) specifies price stability and full employment as goals of national
economic policy. Most economists interpret full employment to mean the highest level of employment consistent with
a sustainable macroeconomic policy. See John. P. Judd and Glenn D. Rudebusch, “The Goals of U.S. Monetary
Policy,” FRBSF Economic Letter 99-04, January 29, 1999, available at http://www.frbsf.org/econrsrch/wklyltr/
wklyltr99/el99-04.html.
73 For example, Jan Hatzius, Chief Economist for Goldman Sachs’s U.S. Research Department, wrote that “with
riskless short-term interest rates now close to zero, conventional monetary policy is becoming ineffective.” “Macro
Policy in a Liquidity Trap,” US Economics Analyst, issue 08/46, November 14, 2008.
74 Federal Reserve Bank Board of Governors, Press Release, December 16, 2008, available at
http://www.federalreserve.gov/newsevents/press/monetary/20081216b.htm.
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stimulating economic growth.75 Finally, while the Fed responses in 2008 and early 2009 have
been aggressive and creative, there may be limits to what additional programs can accomplish.
Logic of Fiscal Stimulus
The context for fiscal policy begins with national income accounting. The national income, as
measured by GDP, is the sum of expenditure categories. Specifically, the national income
accounting identity is
Y ≡ C + I + G + Net Exports
where
Y = national income (GDP)
C = private consumption
I = private investment
G = government spending.
The identity implies that national income falls when private consumption and investment fall
unless offset by increases in either government spending or net exports. In the current economic
environment, government spending increases have become the focus of attention as a source of
stimulus as consumption and investment continue to decline. While some measures of economic
activity remained resilient in the first half of 2008, despite rapidly rising unemployment and sharp
drops in asset prices and in housing prices in many areas of the country, most forecasters predict
sharp decreases in key economic indicators in 2009.76
Private consumption fell in the last half of 2008 for several reasons. Rising unemployment rates
left some households with lost earnings, and prompted others to increase savings to cushion
against possible future job losses. Some households that had borrowed using home equity credit
lines, credit cards, or other types of credit became unable to continue borrowing, thus requiring
cutbacks in consumption. Other households became unable to afford mortgage payments,
contributing to increasing foreclosure rates and reducing consumption. Auto sales, an important
component of private consumption, fell drastically as financing became harder to obtain and gas
prices rose in mid-2008.
Private investment falls when businesses believe that demand for what they sell is falling or will
fall. Non-residential investment, a component of private investment, has been weak relative to

75 These credit facilities, according to the Federal Reserve, were created to increase the availability of credit and to
reduce interest rate spreads to more normal levels. While these facilities have greatly expanded the Federal Reserve’s
balance sheet, they do not appear to have had significant effects on monetary aggregates. See “Term Asset-Backed
Securities Loan Facility: Frequently Asked Questions,” December 19, 2008, available at http://www.newyorkfed.org//
markets/talf_faq.html.
76 For example, the December 2008 Blue Chip Consensus Forecast, compiled from predictions of 50 economists,
foresees a 1.1% decline in real GDP. Blue Chip Economic Indicators, Top Analysts’ Forecasts of the U.S. Economic
Outlook for the Year Ahead, vol. 33, no. 12, December 10, 2008. Most of the forecasters surveyed by Blue Chip based
their predictions on the presumption that Congress will pass a major fiscal stimulus package. The January 2009 CBO
baseline, which does not presume a fiscal stimulus package will pass, projects a 2.2% decline in GDP in FY2009. U.S.
Congressional Budget Office, The Budget and Economic Outlook: Fiscal Years 2009 to 2019, January 7, 2009,
available at http://www.cbo.gov/ftpdocs/99xx/doc9957/01-07-Outlook.pdf.
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historical levels since the mid-1990s, although information technology investment was strong
until the collapse of dot-coms in 2000. The Federal Reserve then sharply lowered short-term
interest rates. Capital inflows, especially from East Asia, pushed down market interest rates. Low
interest rates helped housing prices rise and stimulated new residential construction and
development, boosting fixed residential investment.
As housing prices in many areas of the country reached their peak or began to decline in 2007,
investors who once had thought that home prices would continue to rise backed away.
Additionally, many investors began to fear that residential mortgage-backed securities (RMBS)
were much riskier than anticipated, and capital markets became reluctant to put more money into
the residential sector. A credit crunch, partially sparked by concerns over RMBS, emerged in
August 2007. Foreclosure rates have climbed, as refinancing options for many homeowners
dwindled, putting added downward pressure on home prices. High levels of fixed residential
investment over the past decade have created large inventories of new houses, which may
dampen incentives for future construction. All of these variables contributed to declines in private
investment, which are not expected to reverse in the near term.
The United States has run trade deficits since the mid-1980s. In recent years, the trade deficit has
narrowed (so that net exports are less negative) in part because the dollar has weakened relative to
most major currencies. Sharply higher energy prices in 2008 offset many of those gains, but
falling energy prices in late 2008 may help shrink the trade deficit further. As trading partners
have begun to face their own economic problems, demand for American exports may fall.
American consumers, however, may buy fewer imported goods during the recession. The
combined effect on net exports is likely to be mixed, causing them to be an ineffective source of
stimulus.
Most macroeconomists believe that reductions in private consumption and investment will cut
economic growth unless debt-financed government spending increases to provide substantial
fiscal stimulus. Other measures, such as investment incentives or broad tax cuts may also promote
economic growth, although some economists believe debt-financed government spending is a
more effective stimulus to aggregate demand in a recession.
Applying Fiscal Policy
Standard applied macroeconomic theory suggests that fiscal policy is more effective when short-
term interest rates are extremely low. Fiscal policy therefore plays an especially important role in
economic policy during economic downturns. The amount and composition of the federal
spending along with the size of the federal deficit are key fiscal policy instruments.
During economic downturns, government revenues fall and expenditures rise as more people
become eligible for unemployment insurance and income support programs, causing deficits to
increase or surpluses to shrink. These effects, known as “automatic stabilizers,” provide a
countercyclical stimulus in the short run without the need for new legislative action. Automatic
stabilizers, however, probably cannot provide enough fiscal stimulus to pull the current economy
out of a recession.
Higher government spending financed by borrowing, above and beyond the automatic stabilizer
effects, provides a powerful fiscal policy tool that can help counteract recessions. A
countercyclical fiscal policy, in which taxes are cut or spending is increased, can dampen
economic fluctuations and limit the depth of economic downturns.
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Debt-financed government spending is one component of Keynesian demand management—the
theory that government can stabilize the economy, or at least moderate economic fluctuations by
using fiscal policy to offset changes in private consumption and investment. The federal
government, according to that theory, can shift buying power from future to the present more
easily than firms and households, and is therefore better able to maintain stable economic
conditions. In the view of most macroeconomists, Keynesian demand management, as one
component of a well-designed macroeconomic policy regime, can increase economic efficiency
by preventing labor and capital goods from becoming unnecessarily idle during economic
downturns.
Reducing government deficits when economic growth is robust is another key component of a
well-designed macroeconomic policy regime. In this respect, responsible fiscal policy requires
that spending in economic downturns be paid for by future spending reductions and/or tax
increases. Of course, higher taxes in the future reduce private consumption and cuts in future
government programs reduce consumption of publicly provided goods and services. If debt is not
reduced, higher interest rates may reduce future investment.
Caveats Regarding Fiscal Stimulus
Some economists have criticized the logic of Keynesian demand management and the
discretionary application of fiscal spending by governments. Some have contended that
Keynesian fiscal policy arguments do not take sufficient account of choices made by firms and
individual households. Others argue that Keynesian demand management policies can create
administrative problems and note that mustering the political will to maintain a sustainable fiscal
policy by reducing spending over the economic cycle can be hard.
Some economists have argued that not just the government, but also households can shift
spending through time via borrowing and saving. Thus households, according to some, may
counteract government fiscal policies by saving during economic downturns, thus further
reducing consumption. Other economists note that many households are not in a position to
choose between saving and consuming and that the low interest rates typically found in economic
downturns may weaken incentives to save. Some evidence suggests that high-income households
may take savings measures that offset government fiscal policies, but low-income households are,
in general, less able to rearrange their finances in ways that would reduce the effectiveness of
fiscal policy.
The argument for Keynesian demand management presumes that governments run surpluses
during economic expansions to repay debt accumulated when applying fiscal stimulus during
economic downturns. Critics of deficit-financed fiscal policy argue that policymakers are more
willing to raise government spending when economic growth slows than to cut spending when
growth accelerates.77 Certain federal programs or increased spending, enacted during economic
downturns, may remain in place after they are no longer necessary because of the interests of
influential beneficiaries rather than overall economic welfare. On the other hand, some programs
created during the Great Depression such as Social Security, have helped make many families
less vulnerable to economic shocks.

77 Milton Friedman, Capitalism and Freedom (Chicago: Univ. of Chicago Press, 1962), pp. 75-84.
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Few economists believe that large changes in fiscal policy designed to counterbalance short-term
economic downturns can be timed precisely. Certainly, macroeconomists are more skeptical about
the ability to fine-tune fiscal policy than their predecessors a generation ago. Most
macroeconomists nonetheless believe fiscal policy is an important tool during deep or prolonged
periods of slow or negative growth.

Author Contact Information

D. Andrew Austin
Mindy R. Levit
Analyst in Economic Policy
Analyst in Public Finance
aaustin@crs.loc.gov, 7-6552
mlevit@crs.loc.gov, 7-7792




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