CBO’s Estimate of the President’s Budget
Earlier this month, the Congressional Budget Office (CBO) released a preliminary analysis of the President’s budget request for fiscal year 2011.1 This report provides more detail about the President’s proposals and about CBO’s updated baseline budget projections through 2020, which assume the continuation of current tax and spending policies. It also incorporates the effects of two pieces of legislation—the Temporary Extension Act of 2010 (Public Law 111-144) and the Capitol Police Administrative Technical Corrections Act of 2009 (P.L. 111-145)—that have been enacted since CBO completed its preliminary analysis, along with other minor revisions to its estimates. CBO’s estimates do not include the effects of the Patient Protection and Affordable Care Act, which was enacted on March 23, 2010.2
The agency’s analysis of the President’s proposals is based on its own economic assumptions and estimating techniques (rather than the Administration’s) and incorporates revenue estimates from the staff of the Joint Committee on Taxation (JCT) for tax provisions. According to CBO’s projections, if all of the President’s budget proposals were enacted, those polices would add $132 billion to the deficit in this fiscal year, reducing revenues by nearly $60 billion and boosting outlays by more than $70 billion. The deficit in the current fiscal year, which ends on September 30, would total $1.5 trillion, or 10.3 percent of gross domestic product (GDP). As a share of the economy, that deficit would be slightly greater than the 2009 shortfall, which totaled 9.9 percent of GDP.
Over the 2011–2020 period, deficits would total $9.8 trillion, or 5.2 percent of GDP during that period (see Table 1-1). In 2011, CBO estimates, the deficit under the President’s budget would decline to 8.9 percent of GDP and would total $1.3 trillion—$346 billion more than the deficit that CBO projects in its March baseline (which is based on the assumption that current laws and policies remain in place).
Deficits in succeeding years under the President’s proposals would be smaller but would continue to add significantly to federal debt. The deficit would fall to about 4 percent of GDP by 2014 but would rise steadily thereafter, reaching 5.6 percent of GDP in 2020 (see Figure 1-1). The cumulative deficit over the 2011–2020 period would be $3.8 trillion more than the cumulative deficit projected under CBO’s baseline. Of that difference, $3.0 trillion stems from proposed changes in policy, and the other $0.8 trillion results from additional interest on the public debt.
Under the President’s budget, debt held by the public would grow from $7.5 trillion (53 percent of GDP) at the end of 2009 to $20.3 trillion (90 percent of GDP) at the end of 2020—$5 trillion above what CBO projects for 2020 in its baseline (see Figure 1-2). In addition to the $3.8 trillion in added deficits from the President’s policies, the government’s borrowing needs would rise by another $1.3 trillion in order to finance additional direct lending to students and other credit programs. (The subsidy costs of that lending are included in the projected deficits, but they represent only a small fraction of the cash disbursements for loans.)
Comparison of Projected Revenues, Outlays, and Deficits in CBO’s March 2010 Baseline and CBO’s Estimate of the President’s Budget
Source: Congressional Budget Office.
Note: GDP = gross domestic product; n.a. = not applicable.
a. Negative numbers indicate an increase relative to the deficit in CBO’s baseline.
Net interest payments would nearly quadruple over the projection period (in nominal dollars, without an adjustment for inflation), rising from $244 billion in 2011 to $916 billion in 2020, about 25 percent more than under the assumptions for the baseline. Such payments would total 4.1 percent of GDP in 2020 under the President’s budget, nearly 1 percentage point higher than in the baseline.
If the President’s proposals were enacted, total revenues as a share of GDP would grow from 16.4 percent in 2011 to 19.6 percent in 2020. At that level, revenues would be 0.7 percentage points of GDP below the baseline projection for that year, but 1.5 percentage points above their average share of GDP over the past 40 years.
Total outlays would measure 25.4 percent of GDP in 2011 under the President’s budget, as compared with 24.8 percent in 2010. They would fall over the next two years, to 23.0 percent, and then rise over the remainder of the projection period, reaching 25.2 percent in 2020—about 2 percentage points of GDP above the baselineprojection for that year and well above the 40-year average of 20.7 percent. Mandatory outlays would measure 14.4 percent of GDP in 2011 and then decline to around 13 percent for the next several years. Such outlays would rise in the second half of the projection period, reaching 14.5 percent of GDP in 2020. Discretionary outlays would drop significantly relative to GDP throughout the period, from 9.4 percent in 2010 to 6.6 percent in 2020.
Total Deficits or Surpluses, 1970 to 2020
(Percentage of gross domestic product)
Source: Congressional Budget Office.
Of the various initiatives the President is proposing, the tax proposals would have by far the largest budgetary impact. The President proposes to index for inflation (starting at their 2009 levels) the amounts exempted from the alternative minimum tax (AMT) and to extend many of the tax reductions enacted in the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA). Over the next 10 years, those policies would reduce revenues and boost outlays for refundable tax credits by a total of $3.0 trillion.
Other policies would have smaller but still significant effects on the budget and would largely offset one another. Freezing Medicare’s payment rates for physicians at the current level through 2020, as the President proposes, would boost the cumulative deficit by $0.3 trillion, relative to the amount under current law (which calls for sharp reductions in payments to physicians). Various changes that the President proposes for the Pell Grant program would add another $0.2 trillion to the deficit between 2011 and 2020. Other proposals would reduce projected baseline deficits. Defense spending under the President’s budget would total $0.3 trillion less than the amount projected in CBO’s baseline, primarily because the baseline assumes that funding for war-related activities will continue at $130 billion a year, the amount provided so far this year, with adjustments for inflation—in contrast to the President’s placeholder of $50 billion a year after 2011. A proposal to limit, to 28 percent, the rate at which itemized deductions reduce an individual’s tax liability would decrease the deficit by $0.3 trillion. The President’s budget assumes that a proposal to expand health insurance coverage and make other changes to the health care system would lower the deficit by $0.2 trillion. Other proposals would have smaller effects over the 10-year period.
In a few cases, the Administration did not provide sufficient details about the President’s proposals to allow for a full assessment of budgetary effects, so this analysis incorporates the Administration’s estimates as placeholders to indicate the approximate effects of the proposed policies.
Debt Held by the Public Under CBO’s March 2010 Baseline and CBO’s Estimate of the President’s Budget
(Percentage of gross domestic product)
Source: Congressional Budget Office.
Essentially, CBO has interpreted the Administration’s estimates in those cases as indicating targets for the budgetary impact of the detailed policies that may be proposed in the future. For example, the budget does not contain details regarding the President’s proposal to expand health insurance coverage and make other changes to the health care system. Instead, the budget contains a placeholder calculated as the average of the effects estimated by CBO and JCT for the bill passed by the House in 2009 and legislation similar to the Senate-passed bill. The Administration extrapolated those estimates for an additional year, through 2020. CBO has incorporated that placeholder in this analysis.3
Similarly, the budget refers to a policy on climate change but provides no details; such a policy could have a significant effect on both revenues and outlays, but the Administration has indicated its intent that the policy have no net effect on the deficit. In the absence of details, CBO’s analysis of the budget assumes that this intent will be realized.
CBO’s estimate of the deficit for 2010 under the President’s budget is lower than the Administration’s by $55 billion but higher in each year thereafter by a total of $1.2 trillion over the 2011–2020 period. Most of those differences stem from underlying differences in baselines rather than from varying assessments of the effects of the President’s policy proposals.
Policy Proposals Affecting Revenues
The President proposes a number of changes to tax law over the next decade. If enacted, those policies would decrease revenues relative to the amount in CBO’s baseline by $1.4 trillion over the 2011–2020 period (and would increase outlays, through refundable tax credits, by $0.4 trillion over the same period).4 The reductions in revenues from some proposals in the President’s budget would be partly offset by increases in revenues from others. As a share of GDP, revenues would average 18.9 percent over the 10-year period (see Table 1-2).
CBO’s Estimate of the President’s Budget
Source: Congressional Budget Office.
Note: n.a. = not applicable.
Provisions Related to EGTRRA and JGTRRA. Proposals related to modifying and permanently extending provisions of EGTRRA and JGTRRA that are set to expire in 2010 would reduce revenues by $2.2 trillion (or 1.1 percent of GDP) and increase outlays by $311 billion (or 0.2 percent of GDP) over the next 10 years relative to the amounts in CBO’s baseline (see Table 1-3).5 The provisions scheduled to expire include reductions in some individual income tax rates, reductions in tax rates on capital gains and dividends, changes to estate and gift taxation, limits on phaseouts of personal exemptions and itemized deductions for certain taxpayers, an increase in the child tax credit, relief from the so-called marriage penalty, and changes in the tax treatment of certain investments in equipment by small businesses. Some of those proposals would also affect outlays because the credits are refundable, as discussed later in this chapter.
The President proposes to permanently extend, at 2010 levels, tax rates on income, capital gains, and dividends for married taxpayers with income under $250,000 and single taxpayers with income under $200,000. For taxpayers with income above those amounts, the President proposes to maintain the income tax rates, the phaseout of the personal exemption, and the limits on itemized deductions scheduled to go into effect in January 2011 under current law; those higher-income taxpayers would also be subject to a tax rate of 20 percent on capital gains and dividends. In addition, the President proposes to modify estate, gift, and what are termed generation-skipping transfer (GST) taxes.6 For such taxes, the 2009 parameters would be permanently adopted—incorporating a top tax rate of 45 percent, an estate and GST exemption amount of $3.5 million, and a lifetime exclusion for gifts of $1 million. The President also proposes to extend the $1,000 child tax credit enacted in EGTRRA and the reduced earnings threshold at which families can qualify for at least a partial credit, which was enacted in the American Recovery and Reinvestment Act of 2009 (ARRA).
Alternative Minimum Tax. The President proposes to provide relief from the AMT mainly by permanently setting various provisions—the AMT exemption amount, the income threshold for the 28 percent tax rate, and the income threshold for the phaseout of the exemption amount—at their 2009 levels and then indexing those amounts for inflation and permanently extending the unrestricted use of certain personal tax credits under the AMT. Relative to current law, the proposal would reduce revenues by $577 billion between 2011 and 2020, JCT estimates.7
Health Care Legislation. The proposal that would raise the most revenues, relative to the amounts in the baseline, is health insurance reform. The President’s budget includes a placeholder of $743 billion in related revenues between 2011 and 2020. Because the Administration did not provide details of an underlying legislative proposal, for the purposes of this analysis CBO has assumed that the policies would have the effect set forth in the budget.
Limits on the Rate at Which Itemized Deductions Reduce Tax Liability. The President’s proposal to limit, to 28 percent, the rate at which itemized deductions reduce an individual’s tax liability would increase revenues by $289 billion, according to JCT.
Reform of the U.S. International Tax System. The President proposes a series of changes to the U.S. system of taxing international income that JCT estimates would raise revenues by $127 billion over 10 years. Those changes include strengthening information-reporting requirements and modifying tax rules, particularly as they relate to calculating foreign tax credits and allocating expenses and income between domestic and offshore foreign sources.
Financial Crisis Responsibility Fee. The President also seeks to impose a fee—termed the Financial Crisis Responsibility Fee—on certain financial firms with assets above $50 billion; the fee would equal about 0.15 percent of the value of certain types of liabilities. Pending further specification of the details of the proposal, this analysis incorporates the Administration’s estimate that the fee would raise $90 billion through 2020.
Build America Bonds Program. The Build America Bonds program, which was created under ARRA, provides a subsidy payment to state and local governments for 35 percent of their interest costs on taxable government bonds issued through 2010 to finance capital expenditures. The President proposes to expand and permanently extend the program but to lower the subsidy rate to 28 percent. By substituting taxable for tax-exempt bonds, the program increases taxable interest income. According to JCT, the proposal would increase revenues by $80 billion over the 2011–2020 period.8
Making Work Pay Tax Credit. The President proposes to extend for one year the Making Work Pay credit, which expires at the end of 2010 under current law. The credit equals 6.2 percent of earned income, up to a maximum credit amount of $800 for married taxpayers ($400 for single filers) and phases out for married taxpayers with income above $150,000 ($75,000 for single filers). Extending the credit would reduce revenues by $42 billion between 2011 and 2020, according to JCT. (As discussed later in the chapter, this proposal would also affect outlays because the credit is refundable.)
Jobs Initiatives. The President proposes to provide temporary tax credits for businesses that hire new employees and increase their payroll. Those employment-related initiatives would reduce revenues by $16 billion in 2010 and $24 billion in 2011, JCT estimates.
Other Proposals Affecting Revenues. All other tax proposals in the President’s budget would have the net effect of raising revenues by $29 billion over 10 years. Proposals that would raise revenues include repealing the "last-in, first-out" method of accounting for inventories and reducing tax preferences for the production of fossil fuels. Partly offsetting those increases would be reductions in revenues from extending temporary bonus depreciation for certain property and making permanent the research and experimentation tax credit, among other proposals.9
Proposals Affecting Mandatory Spending
The President proposes changes to mandatory spending that would, on net, increase such spending (relative to that authorized under current law) by $65 billion in 2010 and by $1.9 trillion over the 2011–2020 period. Those totals do not include the impact of the additional borrowing that would occur under the President’s budget, which would boost net interest payments by about $800 billion (0.4 percent of GDP) relative to CBO’s baseline estimate.
Health Care Legislation. The proposal to expand health insurance coverage and make other changes to the health care system would have the largest effect on mandatory spending. The Administration estimates that such legislation would increase mandatory outlays by $6 billion in 2010 and by $593 billion from 2011 through 2020—about $150 billion less than the added revenues assumed to result from such legislation. As in the case of revenues, that estimate of outlays is a placeholder calculated by the Administration that CBO has incorporated in this analysis.
Refundable Tax Credits. The Administration proposes to extend or expand various refundable tax credits, including the earned income, child, Making Work Pay, and certain education credits. The portion of a refundable tax credit that exceeds a person’s tax liability is paid to that taxpayer and recorded as an outlay in the budget. In addition, other tax proposals would also generate some additional outlays for refundable tax credits. According to JCT’s estimates, all of those changes would boost outlays by $401 billion over the 2011–2020 period.
Education. Most of the President’s proposals for education fall into two areas. The first would replace the existing discretionary funding for Pell grants with new mandatory spending, index the maximum award for inflation in future years beginning in 2011, and make changes to the formulas that determine eligibility for grants. Under current law, the program is funded with a combination of annual discretionary appropriations and mandatory funds. The proposed changes would boost mandatory spending by $374 billion over the 2011–2020 period, of which $177 billion would replace discretionary spending in CBO’s baseline; thus, the net effect of the proposal would be an increase of $197 billion in outlays over the next 10 years. Because the program has already received an appropriation this year, however, CBO continues to categorize current year spending for Pell grants as discretionary, whereas the President’s budget categorizes it as mandatory. As a result, CBO’s estimate of mandatory outlays is $25 billion lower than the Administration’s in 2010.
CBO’s Estimate of the Effect of the President’s Budget on Baseline Deficits
Sources: Congressional Budget Office; Joint Committee on Taxation.
Note: * = between -$500 million and $500 million; EGTRRA = Economic Growth and Tax Relief Reconciliation Act of 2001; JGTRRA = Jobs and Growth Tax Relief Reconciliation Act of 2003; AMT = alternative minimum tax; OMB = Office of Management and Budget.
a. The estimated effects of the President’s proposals related to EGTRRA and JGTRRA interact with the proposal to index the AMT. This analysis first estimates the revenue effects of the proposal for the AMT relative to projections under current law, and it then estimates the proposals related to EGTRRA and JGTRRA relative to projections under current law modified for the proposed changes to the AMT. Thus, the estimate for the proposals related to EGTRRA and JGTRRA includes estimated losses in revenues that would result from interactions with the AMT proposal.
b. The estimates include the effects of maintaining, for taxpayers with income above certain levels, the income tax rates of 36 percent and 39.6 percent scheduled to go into effect in 2011 under current law. For the remaining taxpayers, tax rates would be at the levels for 2010 specified in EGTRRA.
c. The estimates include the effects of imposing a 20 percent tax rate on capital gains and dividends for taxpayers with income above certain levels, starting in January 2011. Tax rates for the remaining taxpayers would be at the levels for 2010 specified in JGTRRA.
d. The estimates include the effects of extending the $1,000 child tax credit enacted in EGTRRA and the reduced earnings threshold for the refundable portion, which was enacted in the American Recovery and Reinvestment Act of 2009.
e. The current Pell Grant program includes both discretionary and mandatory components. CBO’s estimate of the costs of modifying Pell grants includes indexing the maximum award level for future years (beginning in 2011), making changes to the formulas that determine eligibility for grants, and replacing the existing discretionary spending with new mandatory spending. That change would result in eliminating discretionary spending for Pell grants from CBO’s baseline, which currently includes $177 billion in outlays for new grant awards over the 2011–2020 period.
f. Negative numbers indicate an increase in the deficit.
The second major proposal for education would eliminate the federal program providing guarantees for student loans, replacing them with loans made directly by the Department of Education. Under the Federal Credit Reform Act, the budgetary cost of both guaranteed and direct loans is the estimated present value of the total cash flows over the life of each loan; such cash flows are discounted to the time of loan disbursement using the rates on U.S. Treasury securities of comparable maturity. Under current law, according to CBO’s estimates, guaranteed loans will account for 55 percent of all federal student loans in 2010, and that share will fall to 40 percent by 2013. The direct loan program is estimated to have a lower cost per dollar loaned than the guaranteed loan program has. Therefore, replacing the guaranteed loan program by providing additional direct loans would, by CBO’s estimates, yield budgetary savings totaling $1 billion in 2010 and $67 billion over the 2011–2020 period.10
Medicare’s Payment Rates for Physicians. Under current law, Medicare’s payment rates for physicians’ services are slated to be reduced by 21 percent beginning in April 2010, by about 6 percent in 2011, and by about 2 percent a year for most of the rest of the decade. The President proposes to avoid those reductions by freezing the payment rates at the 2009 levels through 2020. The higher payments to physicians that would result under the proposal (relative to those under current law) would increase outlays by $5 billion in 2010 and by $286 billion from 2011 to 2020.
Build America Bonds. The President’s proposal to extend and expand the Build America Bonds program and to lower the subsidy rate paid to state and local governments (from 35 percent to 28 percent) under the program would increase outlays by $88 billion over the 2011–2020 period.11
Jobs Initiatives. The Administration has proposed to spend a total of $50 billion on unspecified policies to promote job creation. The budget states that, as a result, outlays would increase by $12 billion this year and by $38 billion over the 2011–2014 period; CBO assumes that the President will propose policies consistent with those figures and has therefore included those outlays in its analysis.
Other Proposals Affecting Mandatory Spending. Other proposals in the President’s budget would increase spending only this year or next. Such proposals include an extension of benefits for the unemployed, which would cost $24 billion in 2010, and a one-time payment of $250 this year for Social Security beneficiaries, which would cost $14 billion. In addition, the Administration would extend for one year the increase, enacted in ARRA, in the share of Medicaid costs paid by the federal government—at a cost of $24 billion in 2011.
Proposals for Discretionary Spending
Discretionary outlays under the President’s budget would total $1.4 trillion in both 2010 and 2011 and $13.7 trillion over the 2011–2020 period, CBO estimates. That cumulative amount is $329 billion below CBO’s baseline estimate, largely as a result of reduced spending for activities related to the wars in Iraq and Afghanistan.12
Proposed Changes in Discretionary Budget Authority in the President’s Budget, 2009 to 2011
Source: Congressional Budget Office.
Notes: Does not include obligation limitations for certain transportation programs.
ARRA = American Recovery and Reinvestment Act of 2009.
For 2010, the Administration is requesting $47 billion in supplemental funding. Of that amount, nearly $35 billion would be appropriated for war-related activities—$31 billion for military operations and $4 billion for diplomatic operations and foreign aid. (The Department of Defense has also requested $2 billion to address higher fuel costs in operations and activities unrelated to the wars.) In addition, the President requests $5 billion for disaster relief and almost $5 billion to resolve discrimination claims by certain black farmers as well as to fund a settlement related to the management of funds held by the government for Native Americans. In total, CBO estimates, the proposed supplemental funding would increase outlays by $10 billion this year and by $37 billion in future years. Furthermore, providing funding for the Pell Grant program (as the President proposes) through permanent law rather than through appropriations would reduce discretionary outlays by nearly $2 billion in 2010 (and $177 billion from 2011 through 2020).
For 2011, the President has requested $1.3 trillion in discretionary budget authority—an amount that is nearly identical to the total for 2010, based on the amount provided thus far plus the requested supplemental funding for this year—consisting of $733 billion for national defense and $537 billion for nondefense programs (see Table 1-4). Under the President’s budget, total discretionary funding would drop over the following two years, to $1.2 trillion, but would grow thereafter, reaching nearly $1.5 trillion by 2020.
Discretionary Budget Authority Requested by the President for 2011 Compared with Funding for 2010, by Budget Function
Source: Congressional Budget Office.
Notes: * = between -$500 million and $500 million.
a. Spending from the Highway Trust Fund and the Airport and Airway Trust Fund is provided through obligation limitations. Budget authority for those programs is provided in authorizing legislation and is not considered discretionary. The President proposes reclassifying some funding for highway and mass transportation programs as discretionary budget authority rather than as obligation limitations.
From 2010 to 2011, funding for discretionary defense programs in the President’s budget would grow by $16 billion, or 2.2 percent. Budget authority unrelated to military operations in Iraq and Afghanistan would grow by $18 billion, or more than 3 percent. Partially offsetting that increase, appropriations for the wars would edge down from $161 billion this year (with the requested supplemental appropriations included) to $159 billion in 2011.
For the period after 2011, the Administration’s budget includes the placeholder of $50 billion a year for war-related operations. As a result, overall funding for defense would drop from $733 billion in 2011 to $642 billion in 2012 and would remain below the 2011 amount until 2018. Funding for defense activities other than military operations in Iraq and Afghanistan would grow by an average of 3 percent annually through 2020.
Total nondefense discretionary budget authority requested by the President would fall from $556 billion in 2010 to $537 billion in 2011 (see Table 1-5). Most of that drop would result from the proposal to provide mandatory funding for Pell grants rather than continue the program with funding that is primarily discretionary (which would reduce discretionary funding by $18 billion in 2011). Additionally, most supplemental funding for 2010 is not repeated in the request for 2011, and funding for the census would be reduced by $6 billion next year (following the completion of the decennial census this year).
Conversely, budget authority for veterans’ benefits and services would grow by almost $4 billion in 2011, primarily because of an advance appropriation for health care already provided for 2011. Additionally, funding for health programs would also increase by $1.7 billion, mostly for research conducted by the National Institutes of Health. Other areas of the budget that would see an increase in funding are international affairs ($1.5 billion) and energy ($1.1 billion).
Overall, nondefense appropriations that the Administration classified as related to "security" would see a $14 billion increase from 2010 to 2011, while other nondefense programs (excluding supplemental funding requested for 2010 and the shift in funding for Pell grants) would remain at essentially the same level next year.13 Subsequently, programs classified as related to security would grow gradually, but funding for other programs would remain flat through 2013; past that point, funding for programs not classified as related to security would also rise gradually through 2020.
Differences Between CBO’s and the Administration’s Budget Estimates
CBO’s estimate of the deficit under the President’s policies is $55 billion lower than the Administration’s for 2010. For the 2011–2020 period, CBO’s estimate of the cumulative deficit exceeds that projected by the Administration by $1.2 trillion.
Those differences stem mainly from differences between CBO’s and the Administration’s baselines rather than from diverging assessments of the effects of the President’s policy proposals. Overall, CBO’s estimate of revenues between 2011 and 2020 under the President’s budget is below the Administration’s by $1.8 trillion; most of that difference stems from the impact of CBO’s economic assumptions relative to those used by the Administration. However, CBO’s economic assumptions also produce lower estimates of outlays over that same period—about three-quarters of the magnitude of the difference in revenues. In total, differences deriving from economic assumptions account for $0.3 trillion of the gap between the two estimates of the cumulative deficit. The larger difference—$0.9 trillion—results from variation in modeling and other technical assumptions (see Table 1-6).
Very small differences also result from CBO’s incorporating legislation enacted after the release of the President’s budget.
Differences in 2010. CBO’s estimate of receipts for the current year is $47 billion lower than the Administration’s. Differences in the baselines cause the Administration’s estimate of revenues for 2010 under current law to exceed CBO’s by $54 billion; that figure is slightly offset by CBO and JCT’s estimate that the President’s policy proposals will lower revenues by $7 billion less than the Administration’s estimate. Much of the variance between the 2010 baseline revenue estimates arises from technical differences. Those differences may result, in part, from different judgments about the persistence of recent weakness in the collections of individual and corporate income taxes.
Sources of Differences Between CBO’s and the Administration’s Estimates of the President’s Budget
Sources: Congressional Budget Office; Joint Committee on Taxation.
Note: * = between -$500 million and $500 million.
CBO’s estimate of outlays in 2010 is $102 billion less than the Administration’s estimate; almost all of the difference involves spending under current law. Of that amount, $91 billion derives from a lower estimate of mandatory outlays. That figure is the net result of many differences, the largest being a difference in baseline estimates of outlays for Fannie Mae and Freddie Mac. Mostly because CBO and the Administration have adopted different budgetary treatments for those entities, CBO’s estimate of outlays for them this year is $36 billion less than the Administration’s. CBO’s estimate of 2010 outlays reflects the likely future cost of mortgage guarantees made in 2010, whereas the Administration’s estimate largely reflects the continuing deterioration of mortgages issued before 2010.14
CBO’s estimate of mandatory spending for Pell grants is $25 billion lower than the Administration’s in 2010, mostly because of the difference described above in categorizing this year’s funding for the Pell Grant program. The agency’s estimate of spending for unemployment benefits is also lower, by $22 billion, mostly because of different judgments related to the amount of benefits to be paid for emergency unemployment compensation and extended benefits.15 In the other direction, estimates of outlays for the Troubled Asset Relief Program (TARP) are $17 billion higher in CBO’s baseline than in the Administration’s, as a result of different assessments of the future costs of assistance provided by the program.16 The remaining differences in estimates of mandatory outlays—which amount to $25 billion—are spread among a number of other programs.
For discretionary spending, CBO’s estimate for 2010 is also lower than the Administration’s, by $33 billion. The two largest sources of difference are in spending for defense and education, and they nearly offset each other. CBO anticipates slower spending than does the Administration from 2010 appropriations for activities related to the wars in Iraq and Afghanistan (including spending of supplemental funds); as a result, CBO’s estimate for 2010 is $16 billion lower. Conversely, CBO estimates $16 billion more in discretionary spending for education programs than does the Administration, mostly because of the difference in categorizing funding for Pell grants. For various energy and transportation programs, CBO anticipates a slower rate of spending than does the Administration; consequently, CBO’s estimate of discretionary spending for those programs this year is $17 billion lower than the Administration’s. Smaller differences in a number of other areas of the budget make up the remaining $14 billion of variance between the agencies’ estimates of discretionary spending for 2010.
In their estimates of net interest in 2010, CBO and the Administration differ by $22 billion; CBO’s higher estimate derives mostly from differences in assessing transactions related to credit programs (such as projections of cash flows for the federal student loan program) and technical differences associated with borrowing related to cash flows for the TARP.
Differences over the 2011–2020 Period. For the years beyond 2010, CBO’s estimates of the annual deficit exceed the Administration’s. The gap is $75 billion in 2011 and $86 billion in 2012; it diminishes to just under $20 billion in 2013 and 2014 but then rises steadily each year thereafter, reaching $251 billion by 2020. As noted above, most of the gap stems from underlying differences in the baseline projections, rather than differences in estimates of the effects of the Administration’s policy proposals.
Differences in revenue projections explain most of the variance between CBO and the Administration in their estimates of the deficit; for the 2011–2020 period, CBO projects about $183 billion less per year in receipts, on average, than does the Administration and $1.8 trillion less overall—a difference of about 5 percent. Most of that difference stems from varying economic assumptions. Most notably, CBO estimates that, over the next 10 years, nominal GDP and wages and salaries will both be about 4.5 percent lower than the Administration projects. Other, much smaller, differences stem from technical judgments about the revenues yielded from a given set of economic conditions, as well as the effects on revenues of the Administration’s policy proposals.
CBO’s estimates of spending also are lower than the Administration’s—though the gap is smaller, averaging about $61 billion (or 1.3 percent) per year and totaling $610 billion over all 10 years of the projection period. The difference is driven mainly by a gap in estimates of mandatory outlays; CBO projects $601 billion less in mandatory spending than does the Administration. Differences related to economic factors, totaling $848 billion, account for more than all of that amount—comprising lower estimates of Medicare outlays and of cost-of-living adjustments for retirement and other benefit programs because of CBO’s lower projections for inflation.
Technical differences in estimates of mandatory outlays go in the other direction, adding $247 billion to CBO’s outlay estimates relative to those of the Administration. That gap is made up of several offsetting differences; for technical reasons alone (leaving aside other factors) CBO estimates outlays that are higher for Medicare (by $437 billion), mortgage credit programs (by $99 billion) and deposit insurance (by $54 billion), which are offset by lower estimates of spending for Medicaid (by $166 billion) and veterans’ compensation and pensions (by $126 billion).
CBO projects higher discretionary outlays than does the Administration—$123 billion more over the 10-year period—almost entirely resulting from divergent estimates of collections related to certain housing programs and spending related to defense appropriations.
Differences between CBO and the Administration in estimates of net interest outlays total $132 billion for the 2011–2020 period. Economic differences push CBO’s total below the Administration’s by $369 billion, primarily because of lower projected interest rates for Treasury securities. On average, between 2011 and 2020, the rates that CBO anticipates are 77 basis points lower for 3-month Treasury bills and 55 basis points lower for 10-year Treasury notes.17 Technical differences offset that difference by $236 billion, stemming from varying estimates of cash flows in the financing accounts for credit programs as well as additional debt-service costs stemming from technical differences elsewhere in the budget.
CBO’s Baseline Budget Projections
In conjunction with its analysis of the President’s budget, CBO routinely updates its baseline budget projections, which assume the continuation of current tax and spending policies over the next 10 years. Those revisions take into account new information gleaned from the President’s budget and other sources, as well as any legislation enacted since the completion of the previous baseline in January.18 CBO’s current baseline projections differ slightly from those the agency released on March 5 because it has incorporated the effect of legislation that was enacted after it completed that preliminary analysis, along with other minor revisions.
As is typical for CBO’s March analyses, the agency has used the same set of economic assumptions as in the January baseline. The information about the economy that has become available since the January forecast was developed indicates stronger growth in output during the second half of last year and slower growth in wages and salaries, but most other economic data—on inflation, interest rates, employment, total personal income, household spending, and business fixed investment (which includes businesses’ spending on structures, equipment, and software)—have been similar to the figures in the January forecast. On balance, the recent information indicates that CBO’s January forecast remains a reasonable basis for budget projections.
CBO’s March revisions to its baseline have produced modest net changes to the estimates of the deficit this year and the cumulative 10-year total. CBO’s current estimate of the deficit for 2010 is $20 billion higher than the amount projected in January (see Table 1-7). The agency now estimates that, in the absence of further legislation affecting spending or revenues, the deficit in 2010 will reach $1.37 trillion, up slightly from the $1.35 trillion it projected earlier this year. (The President’s proposals would add to CBO’s baseline projections of this year’s deficit and future ones.) Changes to baseline projections of the cumulative deficit for the 2011–2020 period are similarly modest but result in a net decrease; assuming the continuation of current laws and policies, CBO estimates a 10-year deficit totaling $5.99 trillion, down $57 billion from the $6.05 trillion projected in January. As a share of GDP, CBO’s estimate of the baseline deficit over the 2011–2020 period is unchanged, at 3.2 percent (see Table 1-8).
CBO raised its projections of revenues by relatively small amounts, about $2 billion for 2010 and $4 billion per year on average from 2011 to 2020. The largest change stems from increased projections of taxable income resulting from the Build America Bonds program.
Changes in CBO’s Baseline Projections of the Deficit or Surplus Since January 2010
Sources: Congressional Budget Office; Joint Committee on Taxation.
Note: * = between -$500 million and $500 million; TARP = Troubled Asset Relief Program.
a. Negative numbers indicate an increase in the deficit.
The changes in CBO’s baseline outlay projections mostly result from technical updates. A few pieces of legislation were enacted into law between the publication of the January baseline and the completion of the estimates for this report on March 12. The estimated changes in revenues and outlays associated with that legislation are small, with one exception. CBO estimates that the enactment of the Temporary Extension Act of 2010—which mainly provided around a 1-month extension for certain expiring programs—will increase outlays by $1 billion for payments to physicians under the Medicare program and by $7 billion for extended unemployment benefits.
For 2010, the largest increase in estimated outlays, $11 billion, is for the TARP, resulting mostly from an updated assessment of the cost of assistance to the American International Group (AIG). CBO now estimates that the total cost of the TARP will be $109 billion, compared with $99 billion in the January baseline projections. In addition, the estimate of net spending in 2010 for Medicare has been boosted by $7 billion, mainly because of a recent decision by the Department of Health and Human Services that will reduce payments from states that are used to offset some of the federal government’s spending for Medicare’s prescription drug program. Partially offsetting the increases in spending for the TARP and Medicare are reductions, of $8 billion and $4 billion, respectively, in projected outlays for federal higher education programs and discretionary programs.
CBO’s Baseline Budget Projections
Source: Congressional Budget Office.
Note: n.a. = not applicable.
Over the 2011–2020 period, changes in estimated outlays lower the projected cumulative deficit by $21 billion, a net change dominated by a nearly $100 billion (or about 3 percent) decrease in projected outlays for Medicaid. However, roughly $68 billion in additional spending projected for veterans’ benefits and services, Medicare, and Social Security offsets more than half of that reduction. The remaining $11 billion increase in projected outlays is the net result of increases and decreases in spending in a number of other areas of the budget.
CBO reduced its estimate of federal outlays for Medicaid to reflect a change in its expectations about states’ policies regarding the program. Recent evidence suggests that the weak economy; projected shortfalls in state budgets; and the December 31, 2010, expiration of the higher federal matching share established under ARRA will lead states to take steps to slow the rate of growth in enrollment and their payments to providers; such actions will reduce federal outlays under this program as compared with the amounts in CBO’s January baseline.
In the other direction, CBO has raised its estimate of outlays for veterans’ benefits and services by $21 billion over the 10-year period, mostly to account for additional compensation payments to veterans for certain service-connected disabilities. Projected outlays for Medicare are also up, by a total of $24 billion over the period, largely as a result of changes in projected enrollment and in the annual growth rate of per capita spending for the prescription drug program. CBO has also raised its estimate of outlays for Social Security by $23 billion for the 2011–2020 period. That change stems from an increase in the number of beneficiaries and in the average monthly benefit payment expected in the Old-Age and Survivors Insurance program, coupled with a rise in applications in the Disability Insurance program.
Congressional Budget Office, letter to the Honorable Daniel K. Inouye providing a preliminary analysis of the President’s budget request for 2011 (March 5, 2010).
CBO’s estimates also do not include the impact of the Hiring Incentives to Restore Employment Act (HIRE), which the President signed into law on March 18, 2010. According to CBO’s calculations, HIRE will add $5 billion to the baseline deficit in 2010 and $6 billion in 2011. The effects on projected deficits under the President’s budget would differ from those effects on the baseline, however, because the provisions of HIRE overlap somewhat with the President’s tax proposals.
The placeholder for those broad changes to health care policy does not include the effects of four provisions contained in those bills that the Administration shows separately in the budget.
An income tax credit is refundable if the taxpayer receives a refund when the allowable credit exceeds the amount of income tax owed.
The estimate of revenues incorporates the effects of interactions with the proposal for the AMT, which increase the projected loss of revenues.
GST taxes are levied on transfers directly from a decedent to an heir who is more than one generation younger than the decedent, such as a grandchild.
The estimate does not include the interactions between the AMT provisions and the proposal to extend and modify the tax provisions related to EGTRRA and JGTRRA. As mentioned in footnote 5, the effects are included in the estimate for that proposal.
The subsidy payments made by the federal government to states and localities are recorded on the outlay side of the budget. The proposed changes would increase outlays by an estimated $88 billion over 10 years.
Bonus depreciation allows firms to immediately deduct from taxable income a portion of any investment made in equipment.
The gross savings (affecting mandatory spending) for the proposal would be partially offset by an increase in discretionary costs for administration of new direct loans, subject to appropriation of the necessary amounts. For more details, see Congressional Budget Office, letter to the Honorable Judd Gregg on the budgetary impact of the President’s proposal to alter federal student loan programs (March 15, 2010).
As described earlier, the proposal would also increase revenues by $80 billion. Thus, the net impact on the budget is an estimated increase in deficits of about $8 billion over the 2011–2020 period.
According to footnote 1 in Summary Table S-10 of the President’s budget submission, requested funding for most discretionary programs after 2011 is based on the Administration’s assumed rates of inflation. If CBO’s projections of inflation were applied to such funding, discretionary outlays under the President’s budget over the 2011–2020 period would be about $40 billion lower.
The Administration applies the classification "security" to discretionary funding for the Departments of Defense, Homeland Security, and Veterans Affairs and the National Nuclear Security Administration in the Department of Energy. The classification also applies to discretionary funding for programs related to international affairs.
For a discussion of the budgetary treatment of Fannie Mae and Freddie Mac and the differences between CBO’s and the Administration’s treatment, see Congressional Budget Office, CBO’s Budgetary Treatment of Fannie Mae and Freddie Mac (January 2010).
Those programs provide additional benefits to people who exhaust their regular unemployment compensation.
See Congressional Budget Office, Report on the Troubled Asset Relief Program—March 2010 (March 2010).
A basis point is one one-hundredth of a percentage point.
For CBO’s previous baseline projections, see Congressional Budget Office, The Budget and Economic Outlook: Fiscal Years 2010 to 2020 (January 2010).
