|
|
|
Appendix
AChanges in CBO’s Baseline Since January 2008
In conjunction with its annual analysis of the President’s budgetary proposals, the Congressional Budget Office (CBO) typically updates its baseline budget projections, which show the paths of federal spending and revenues over the next 10 years under current laws and policies (see Table A-1). This year, the updated baseline reflects new information from various sources, including the President’s budget, an updated economic forecast by CBO, and legislation enacted since mid-January, when CBO completed its previous baseline projections.1 In most years, CBO does not update its economic forecast when it prepares its March baseline. However, this year, in light of new data about the weakness of the economy, recent actions by the Federal Reserve, and the enactment of the stimulus package, CBO revised its economic projections in February.
CBO’s Baseline Budget Projections
2009-
2013
2009-
2018Source: Congressional Budget Office.
Note: n.a. = not applicable.
CBO constructs its baseline in accordance with provisions set forth in the Balanced Budget and Emergency Deficit Control Act of 1985 and the Congressional Budget and Impoundment Control Act of 1974. (Although the provisions of the Deficit Control Act that pertain to the baseline expired at the end of September 2006, CBO continues to follow that law’s specifications in preparing its baseline.) To project revenues and mandatory spending, CBO assumes that current laws continue unchanged in the future, with only a few exceptions.2 That approach includes the assumption that various changes in tax law enacted since 2001 expire as scheduled, by the end of December 2010, causing a rise in revenues thereafter. To project discretionary spending, CBO adjusts the current year’s budget authority for inflation and for certain other factors, as the Deficit Control Act specified. The resulting baseline projections are not intended to be a prediction of future budget outcomes. Rather, they serve as a benchmark that lawmakers can use to measure the effects of spending or revenue proposals, such as those in the President’s budget.
Since January, CBO has increased its current-law estimate of the deficit for 2008 by $138 billion, to $357 billion (see Table A-2). Most of that change stems from the enactment of the Economic Stimulus Act of 2008 (Public Law 110-185) in February. The net impact that CBO’s baseline updates have had on its projection of the cumulative surplus for 2009 through 2018, however, has been minimal—a drop of $4 billion from CBO’s January estimate of $274 billion. For that 10-year period, changes in economic assumptions improve the budget outlook by an average of $30 billion a year—but technical changes and the impact of enacted legislation more than offset those economic effects. (Technical changes are those not directly related to changes in law or in the economic outlook.)
Changes in CBO’s Baseline Projections of the Deficit or Surplus Since January 2008
2009-
2013
2009-
2018Source: Congressional Budget Office.
Note: * = between -$500 million and $500 million; OCS = Outer Continental Shelf.
a. Includes offsetting receipts.
b. Negative numbers indicate an increase in the deficit or decrease in the surplus.
Changes to Projections of Revenues
Revisions to CBO’s January baseline reduce anticipated revenues in 2008 by $108 billion and increase projected revenues in the subsequent 10-year period by $76 billion. The bulk of those revisions stem from the recent fiscal stimulus legislation.
The Economic Stimulus Act of 2008 provides a tax rebate to individual tax filers who satisfy specific income requirements; it also provides special depreciation allowances to businesses. CBO and the Joint Committee on Taxation estimate that the act will diminish revenues by $114 billion in 2008 and $12 billion in 2009.3 Because much of the initial effect of the depreciation allowances on revenues will result from an acceleration in the timing of deductions, initial revenue losses in 2008 and 2009 will be followed by increases in later years—totaling $44 billion over the 2010–2018 period.
With respect to revenues, the most important differences between CBO’s current economic forecast and the one released in January are in the assumptions about nominal gross domestic product (GDP) and taxable income. CBO now anticipates that nominal GDP will be slightly higher in 2008, slightly lower in 2009 and 2010, and slightly higher in the following years (see Table A-3).4 In addition, taxable income as a percentage of GDP is now projected to be slightly lower over the next two fiscal years. Those differences between forecasts result in a near-term decline in projected revenues—$23 billion for 2008 through 2010—followed by an increase of $57 billion from 2011 through 2018.
CBO’s Current and Previous Economic Projections for Calendar Years 2008 to 2018
a b a b a b a b a b a b Sources: Congressional Budget Office; Department of Commerce, Bureau of Economic Analysis; Department of Labor, Bureau of Labor Statistics; Federal Reserve Board.
Note: GDP = gross domestic product; percentage changes are measured from one year to the next.
c. The consumer price index for all urban consumers.
Technical factors have led CBO to increase its estimate of revenues for 2008 by $6 billion and by smaller amounts thereafter. Between 2009 and 2018, technical revisions total $8 billion. Those revisions mainly affect individual income tax receipts, which have been slightly stronger in recent months than CBO expected in January.
Changes to Projections of Outlays
CBO has added about $30 billion to its estimate of outlays for 2008 and a total of $79 billion (0.2 percent) to its projection for the 2009–2018 period. The new total for 2008 mainly reflects an increase of $39 billion in projected outlays stemming from the recently enacted economic stimulus legislation, partially offset by an expected increase of $11 billion in receipts from auction and leasing activities.
As a result of the economic stimulus legislation, some individuals will receive a rebate in excess of the amount of income taxes that they paid; such rebates are classified as mandatory outlays and are estimated to total $38 billion in 2008 and $4 billion in 2009. The increase in government borrowing necessitated by the stimulus package will add more than $70 billion to interest costs from 2009 to 2018, CBO estimates.
Primarily because sharply lower interest rates have diminished projected borrowing costs, revisions to CBO’s economic assumptions have reduced its estimate of outlays by $10 billion for 2008 and by a total of $265 billion over the 2009–2018 period. Those changes also include a reduction in projected outlays for Medicare, Social Security, and other mandatory programs because of slightly lower near-term inflation.
Net Interest. Most of the budgetary impact of the revised economic outlook stems from the lower interest rates that CBO projects for 2008 through 2010. Those revisions, in conjunction with the effects that other economic changes have on debt service, reduce CBO’s estimates of net interest costs by $90 billion between 2008 and 2011 and by about $15 billion a year thereafter.
Medicare. Changes to CBO’s economic forecast have not affected its projection of Medicare spending for 2008, but they have reduced projected spending in CBO’s Medicare baseline for the following 10 years by a total of $34 billion. That change is primarily the result of updated economic projections that affect two components of the program. CBO has reduced projected spending for Hospital Insurance (Part A of Medicare) by a cumulative $15 billion, a change attributable to smaller projected increases in the so-called market basket used to update prices for institutional providers. CBO has also reduced projected Medicare outlays for prescription drugs (Part D) by a total of $13 billion from 2009 through 2018 as a result of smaller anticipated increases in drug prices.
Social Security. Economic changes have led CBO to reduce projected spending for Social Security by $28 billion for 2010 through 2018. CBO now anticipates that the cost-of-living adjustments that Social Security beneficiaries will receive in January 2010 and 2011 will be smaller (by 0.4 and 0.3 percentage points, respectively) than the increases that CBO projected in its previous baseline; as a result, outlays over the 2010–2018 period are expected to be about $38 billion less than CBO previously anticipated. However, revisions to projections of growth in wages and salaries boost benefit payments for those years by nearly $10 billion.
Discretionary Outlays. CBO’s new forecast incorporates a small downward revision to the estimate of the GDP price index for 2009 and small increases in the estimates for later years. Those changes combine to reduce projected discretionary outlays in the baseline by $4 billion from 2009 through 2018.
For 2008, technical changes to CBO’s projections of total outlays produce a net increase of only $1 billion; however, for the 2009–2018 period, such changes add $263 billion. The largest change for 2008 results from CBO’s estimates of receipts from a recent auction of licenses to use the electromagnetic spectrum and from new oil and gas leasing activity on the Outer Continental Shelf (OCS); that increase in receipts is offset by additional projected net interest payments and other technical revisions. For the 10-year projection period, CBO’s estimates of higher projected spending for the Medicare program ($177 billion) and for veterans’ benefits and services ($18 billion) are the biggest technical changes in outlays.
Medicare. Since publishing its January baseline, CBO has raised its estimate of Medicare spending by $1 billion for 2008 and by $177 billion, or about 2.5 percent, for the following 10 years.
Much of that change stems from an increase in projected spending that occurs because the Centers for Medicare and Medicaid Services has reclassified certain expenditures for recent years. That reclassification shifts expenditures originally attributed to services provided under Part B (Supplementary Medical Insurance), a category that is expected to grow relatively slowly, to faster-growing components of Part A (Hospital Insurance). Moreover, the reduction in projected Part B spending contributes to lower estimates of Medicare premiums over the next 10 years. In addition, CBO has increased its forecast of participation in Medicare Advantage—which is more expensive than traditional fee-for-service Medicare—boosting it from 26 percent of Part A enrollment by 2018 to 29 percent.
Veterans’ Benefits and Services. CBO projects that spending for veterans’ programs will be about $18 billion (1.8 percent) higher between 2009 and 2018 than it anticipated in January. Recent data from the Department of Veterans Affairs regarding caseloads for veterans’ disability compensation suggest that the number of new recipients of such compensation will be larger than previously expected.
Spectrum Auction and OCS Receipts. The results of recent auction and leasing activities have led to an $11 billion increase in CBO’s estimate of offsetting receipts for 2008. In late January, the Federal Communications Commission began auctioning licenses for commercial use of radio frequencies that are currently used for television broadcasts. Bidding results through February suggest that net proceeds from that auction will total about $19 billion, compared with CBO’s previous estimate of $10 billion to $15 billion. CBO increased its projection of receipts for 2008 by $8 billion to reflect not only that higher value but also its expectation that receipts will be recorded more quickly than it had previously assumed. In addition, CBO boosted its estimate of 2008 receipts from oil and gas leasing activity on the Outer Continental Shelf by about $3 billion, largely because the bids for new leases in the Chukchi Sea (off the coast of Alaska) exceeded its previous expectations.
Other Mandatory Programs. Technical changes to projections of spending for other mandatory programs were relatively modest; on net, they increase mandatory outlays by $8 billion over the 2009–2018 period.
For Social Security, CBO has reduced its projections of outlays by $10 billion, or 0.1 percent, over the 10-year period. The overall reduction comprises a $13 billion decrease in spending for the Disability Insurance (DI) program and a $3 billion increase in outlays for the Old-Age and Survivors Insurance (OASI) program. CBO raised its estimates of retroactive DI payments for 2008 and 2009 but reduced its projection of average monthly DI payments throughout the 10-year period. For OASI, CBO increased its estimates of monthly and retroactive retirement-benefit payments but reduced anticipated caseloads.
Smaller changes in CBO’s projections for several other areas of the budget have added a net $18 billion to total projected mandatory spending over the 2009–2018 period.
Discretionary Programs. Technical changes since January have had a much smaller effect on CBO’s baseline projections of discretionary spending than on its projections of mandatory spending. Upward and downward adjustments in several areas of the budget resulted in net increases in CBO’s estimates of discretionary outlays totaling $3 billion for 2008 and $16 billion for the 2009–2018 period.
Net Interest. For 2008, CBO’s current estimate of net interest spending is $8 billion higher than the agency estimated in January. That increase stems from higher estimated intragovernmental interest payments, lower expected interest earnings for the Railroad Retirement Investment Trust Fund, and an increase in projected outlays for interest on delayed tax refunds.
Technical changes to projections of spending for net interest have boosted projected outlays over the next 10 years by $49 billion. That increase is the result of two changes—in opposite directions. First, CBO has lowered its projections of interest costs for the 2009–2018 period by $4 billion, in large part because of revisions to estimates of intragovernmental interest payments. Second, because of increases in projected deficits (or decreases in projected surpluses) resulting from other technical changes to the baseline—changes dominated by the higher estimates for Medicare spending—CBO has added $54 billion to projected debt-service costs between 2009 and 2018.
Those projections were published in Congressional Budget Office, The Budget and Economic Outlook: Fiscal Years 2008 to 2018 (January 2008).
The Deficit Control Act specified that mandatory spending programs whose authorizations are set to expire should be assumed to continue if they have outlays of more than $50 million in the current year and were established on or before the date when the Balanced Budget Act of 1997 was enacted. (Programs established after that date are not automatically assumed to continue.) The Deficit Control Act also specified that expiring excise taxes whose revenues are dedicated to trust funds should be assumed to be extended at their current rates. (The law did not provide for the extension of other expiring tax provisions, even if they had been routinely extended in the past.)
The rebates also affect mandatory spending, as discussed in the section "Changes to Projections of Outlays." See CBO’s cost estimate for H.R. 5140, the Economic Stimulus Act of 2008 (February 11, 2008), for more information on the legislation.
See the letter to the Honorable Kent Conrad, Chairman, Senate Committee on the Budget, from Peter R. Orszag, Director, Congressional Budget Office, updating CBO’s economic forecast, February 15, 2008.
|
|
|
|