CBO’s Estimates of the President’s Budget for Fiscal Year 2009

At the request of the Senate Committee on Appropriations, the Congressional Budget Office (CBO) has analyzed the President’s budget request for fiscal year 2009. The analysis is based on CBO’s own economic assumptions and estimating techniques, incorporating the Joint Committee on Taxation’s (JCT’s) estimates for provisions that affect the tax code. This document provides more detail about the President’s budgetary proposals and about CBO’s updated baseline budget projections than did the preliminary report that CBO released on March 3.¹

If the President’s proposals were enacted, the government would record a deficit of $396 billion in 2008, equal to 2.8 percent of gross domestic product (GDP). By comparison, the deficit in 2007, which totaled $162 billion, was 1.2 percent of GDP (see Table 1-1). Relative to CBO’s baseline budget projections, the proposals in the President’s budget request would reduce revenues in 2008 by $9 billion and boost outlays by $30 billion (mostly for military operations in Iraq and Afghanistan). As a result, the deficit for this year would be $39 billion larger than the deficit CBO anticipates under current law.

		Actual 2007	2008	2009	2010	2011	2012	2013	2014	2015	2016	2017	2018	Total, 2009- 2013	Total, 2009- 2018


		CBO’s Estimate of the President’s Budget for 2009

On-Budget Deficit		-343	-592	-525	-375	-346	-236	-269	-252	-243	-263	-201	-121	-1,751	-2,830
Off-Budget Surplus^a		181	197	183	193	218	236	248	232	214	200	198	194	1,076	2,114

	Total Deficit (-) or Surplus	-162	-396	-342	-182	-129	*	-21	-20	-29	-64	-3	73	-674	-717

		CBO’s Baseline

On-Budget Deficit		-343	-553	-403	-421	-320	-133	-174	-158	-147	-172	-116	-44	-1,451	-2,088
Off-Budget Surplus^a		181	197	196	208	227	238	244	249	251	251	250	246	1,112	2,358

	Total Deficit (-) or Surplus	-162	-357	-207	-213	-93	105	70	90	104	79	134	202	-339	270

		Difference (President’s budget minus baseline)^b

On-Budget Deficit		n.a.	-39	-122	46	-26	-102	-95	-93	-96	-91	-85	-77	-300	-743
Off-Budget Surplus^a		n.a.	0	-13	-15	-9	-2	4	-16	-37	-52	-52	-52	-35	-244

	Total Deficit (-) or Surplus	n.a.	-39	-136	31	-35	-105	-91	-110	-133	-143	-136	-129	-336	-987

Memorandum:
Total Deficit (-) or Surplus as a Percentage of GDP
	CBO’s estimate of the President’s budget	-1.2	-2.8	-2.3	-1.2	-0.8	**	-0.1	-0.1	-0.1	-0.3	**	0.3	-0.8	-0.4
	CBO’s baseline	-1.2	-2.5	-1.4	-1.4	-0.6	0.6	0.4	0.5	0.5	0.4	0.6	0.9	-0.4	0.1

Debt Held by the Public as a Percentage of GDP
	CBO’s estimate of the President’s budget	36.8	38.0	39.0	38.3	37.1	35.5	34.1	32.8	31.7	30.7	29.5	28.1	n.a.	n.a.
	CBO’s baseline	36.8	37.7	37.8	37.3	36.0	33.8	32.0	30.3	28.5	27.0	25.4	23.5	n.a.	n.a.

Probability of a Budget Deficit (Percent)
	CBO’s estimate of the President’s budget	n.a.	100	95	73	64	50	52	c	c	c	c	c	n.a.	n.a.
	CBO’s baseline	n.a.	100	84	76	60	41	45	c	c	c	c	c	n.a.	n.a.

Note: * = between -$500 million and zero; ** = between -0.05 percent and zero; GDP = gross domestic product; n.a. = not applicable.

In 2009, the deficit under the President’s budget would fall to 2.3 percent of GDP, or $342 billion, CBO estimates—$136 billion more than the baseline deficit of $207 billion that CBO projects under current laws and policies. That difference is largely attributable to proposals that would affect revenues and defense spending.

In 2009, the President’s policies would raise discretionary spending for national defense by $50 billion above the amount in CBO’s baseline. That increase stems primarily from additional appropriations—mostly for military operations in Iraq and Afghanistan and for other activities related to the war on terrorism—that the President is requesting for later this year, much of which would be spent in 2009 and beyond.² Other spending under the President’s proposals would be $9 billion below the amount in the baseline (largely as a result of proposed savings in the Medicare program).

Under the President’s budget, revenues would be $94 billion lower in 2009 than the amount projected in the baseline. The President is proposing to extend higher exemption levels for the alternative minimum tax (AMT) through the end of 2008. That change would mitigate some of the effects of the tax and thus reduce revenues by an estimated $70 billion in 2009. Other proposed changes in tax policies would reduce revenues, on net, by another $24 billion.

For years after 2009, the President’s budget is presented in less detail. For discretionary spending, the request for 2010 through 2013 is provided only in aggregate terms (which CBO used to calculate funding totals for defense and nondefense spending), and the budget does not contain year-by-year estimates of spending and revenues after 2013. It does, however, specify the total effect of proposed changes in laws affecting taxes and mandatory spending for the 10-year period through 2018. To determine the impact of the President’s proposals, CBO, with assistance from JCT, developed its own estimates for policies affecting revenues and mandatory spending. It estimated discretionary outlays for the 2014–2018 period by projecting the amount of discretionary budget authority that the President recommended for 2013 and adjusting that amount for inflation.

Under the President’s proposals, the deficit would steadily decline from 2009 through 2012; by CBO’s estimates, the budget would be balanced in that latter year and remain relatively close to balance through 2018 (see Figure 1-1). The cumulative deficit between 2009 and 2018 (the current 10-year projection period) would total $717 billion (0.4 percent of GDP). CBO’s estimates reflect the President’s proposal for $70 billion in funding for military operations in Iraq and Afghanistan in 2009 but no additional funding thereafter, combined with a substantial decline in discretionary spending relative to the size of the economy. The estimates also reflect the absence of any changes to the AMT beyond the proposed one-year extension of higher exemption levels. Under the President’s policies, debt held by the public would rise from 37 percent of GDP in 2007 to 39 percent in 2009, and then gradually fall to 28 percent of GDP by 2018.

On the basis of previous differences between projections and budget outcomes, CBO calculated the likelihood that the budget would be balanced under two sets of conditions: the assumptions embodied in its baseline projections (that current laws and policies remain in place) and its estimates of revenues and outlays under the President’s proposals. Using the assumptions underlying its baseline, CBO calculates that the probability that the budget will record a deficit in 2012 is roughly 40 percent and the probability that it will be balanced (or show a surplus) in that year is 60 percent. If the President’s policies were enacted in their entirety and no other legislation affecting spending or revenues was enacted in the next five years, the chances of either a deficit or a surplus emerging in 2012 would each be 50 percent.

Under the President’s proposals, revenues as a share of GDP would total 17.8 percent this year and 18.3 percent in 2009, CBO estimates (see Table 1-2). That share would climb to 18.6 percent of GDP in 2010 and remain near that level through 2015, gradually increasing thereafter and reaching 19.2 percent of GDP in 2018. At that level, revenues would be about 1 percentage point above their average share of GDP for the past 40 years. The projected future growth of revenues as a percentage of GDP reflects multiple factors: an increase in effective tax rates stemming from the progressive structure of the tax code combined with increases in real (inflation-adjusted) income; the withdrawal of tax-deferred retirement savings as workers with 401(k) plans and traditional individual retirement accounts begin to retire in increasing numbers; and the fact that the AMT is not indexed for inflation. According to estimates by JCT, the President’s proposal to change the tax treatment of health insurance premiums and out-of-pocket spending for health care would also contribute to the growth of revenues as a share of GDP.

				Actual 2007	2008	2009	2010	2011	2012	2013	2014	2015	2016	2017	2018	Total, 2009- 2013	Total, 2009- 2018


				In Billions of Dollars
Revenues
	On-budget			1,933	1,870	2,017	2,182	2,278	2,409	2,495	2,617	2,750	2,901	3,062	3,234	11,380	25,945
	Off-budget			635	667	682	718	762	806	847	885	926	970	1,016	1,063	3,815	8,674

		Total		2,568	2,537	2,699	2,900	3,040	3,215	3,342	3,503	3,676	3,871	4,077	4,297	15,195	34,619

Outlays
	Mandatory spending			1,451	1,578	1,653	1,712	1,810	1,862	1,997	2,132	2,286	2,481	2,603	2,727	9,034	21,262
	Discretionary spending			1,042	1,121	1,171	1,121	1,082	1,061	1,069	1,086	1,110	1,141	1,163	1,185	5,504	11,189
	Net interest			237	234	217	249	277	293	297	304	310	314	314	312	1,332	2,885

		Total		2,730	2,933	3,041	3,082	3,169	3,215	3,363	3,522	3,705	3,935	4,080	4,224	15,870	35,336
			On-budget	2,277	2,463	2,542	2,557	2,624	2,645	2,763	2,869	2,993	3,165	3,262	3,355	13,131	28,775
			Off-budget	454	470	499	525	545	570	600	653	712	770	818	869	2,739	6,560

Deficit (-) or Surplus				-162	-396	-342	-182	-129	*	-21	-20	-29	-64	-3	73	-674	-717
	On-budget			-343	-592	-525	-375	-346	-236	-269	-252	-243	-263	-201	-121	-1,751	-2,830
	Off-budget			181	197	183	193	218	236	248	232	214	200	198	194	1,076	2,114

Debt Held by the Public				5,035	5,406	5,765	5,965	6,112	6,128	6,166	6,202	6,245	6,323	6,340	6,280	n.a.	n.a.