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May 16, 2011
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In the Congressional Budget Office's (CBO's) baseline projections, appropriations for discretionary programs are generally assumed to grow each year with inflation, as originally specified in the Deficit Control Act. In March 2011, when CBO prepared its most recent baseline spanning fiscal years 2011 to 2021, it based its projections of discretionary spending on the continuing resolution that was in effect through March 18 (Public Law 112-4). Subsequently, on April 15, full-year appropriations for 2011 were enacted in the Department of Defense and Full-Year Continuing Appropriations Act, 2011 (P.L. 112-10).
CBO has not prepared new baseline projections incorporating the effects of P.L. 112-10; it will next update its baseline, as usual, in August. But in response to requests from Congressional staff, it has extrapolated through 2021 the full-year amounts of discretionary budget authority provided in P.L. 112-10 and compared the results with its March baseline projections of such spending. For that comparison, CBO did not update the factors that it uses to estimate discretionary outlays—the rates at which appropriations are spent, the balances left from appropriations provided in previous years, and other parameters normally revised during the preparation of a new baseline.
Relative to the March baseline, P.L. 112-10 reduced discretionary budget authority for 2011 by $23 billion. Nondefense funding was decreased by nearly $25 billion, whereas funding for defense programs was increased by $2.4 billion. The largest reductions in funding apply to high-speed rail programs ($2.9 billion), the Census Bureau ($1.8 billion), the Public Health and Social Services Emergency Fund ($1.6 billion), and state and tribal assistance ($1.3 billion).
Total discretionary outlays in 2011 will be $3.2 billion higher as a result of the legislation, CBO estimates—an increase of $7.5 billion for defense programs, partially offset by a net reduction of $4.4 billion in other spending. (Part of the reason that total outlays will increase this year is that some defense funding was shifted from slower-spending to faster-spending activities.) CBO had previously estimated that the full-year appropriation act will yield a net reduction of $0.4 billion in nonemergency outlays in 2011. The comparison shown here is different: It includes emergency appropriations, excludes the effects of changes in mandatory programs, and incorporates adjustments to various estimating parameters that were applied to the appropriation act to make them consistent with the March 2011 baseline.
If the full-year funding provided for 2011 grew at the rate of inflation in each of the next 10 years—the assumption underlying baseline projections—total discretionary budget authority over the 2012–2021 period would be $183 billion less than the cumulative amount in CBO's baseline. The outlays resulting from that budget authority would be a total of $122 billion lower over that period than in the March baseline. Like other CBO estimates of the budgetary effects of legislation, these estimates do not include effects on future interest payments on federal debt held by the public.
This report focuses on the automatic responses of revenues and outlays to developments in the economy—the automatic stabilizers—that reflect cyclical movements in real (inflation-adjusted) output and unemployment. CBO estimates that automatic stabilizers are adding significantly to the budget deficit now but that their contribution will steadily fade over the next few years.
In March 2011, the Congressional Budget Office (CBO) released its most recent baseline projections of federal revenues, outlays, and budget balances for the next 10 years. For those projections, CBO assumed the continuation of current laws and policies that affect taxes and mandatory spending programs and extrapolated the growth of discretionary spending by using projected rates of inflation. CBO estimated in March that the baseline budget deficit will rise from $1.3 trillion in fiscal year 2010 to $1.4 trillion in 2011 and then will average $692 billion over the next five years. At 9.3 percent of gross domestic product (GDP) in 2011, the deficit in those terms will be the second largest in more than half a century (behind only the 2009 deficit, which was 10.0 percent of GDP). By comparison, CBO projects that the deficit will average 4.1 percent of GDP during the five years from 2012 through 2016 if current laws remain in place.
CBO's projections of the budget deficit are affected by legislation that governs taxation and spending and by the automatic responses of revenues and outlays to developments in the economy and other factors. This report focuses on a component of the latter group—the automatic stabilizers—that reflect cyclical movements in real (inflation-adjusted) output and unemployment. During recessions, GDP falls relative to potential GDP (the quantity of output that corresponds to a high rate of use of labor and capital), and revenue declines automatically. In addition, some outlays—for example, to pay unemployment insurance claims or to provide federal nutrition benefits—automatically increase. Those automatic reductions in revenues and increases in outlays when GDP is falling relative to potential GDP and unemployment is correspondingly rising help bolster economic activity, but they also temporarily increase the budget deficit. As GDP moves up closer to potential GDP, revenues automatically begin to rise, outlays automatically begin to fall, and the automatic stabilizers offer a smaller boost to output. (For a discussion of the measurement of automatic stabilizers, see the appendix.)
CBO estimates that automatic stabilizers are adding significantly to the budget deficit now but that their contribution will steadily fade over the next few years. In 2010, CBO estimates, automatic stabilizers added the equivalent of 2.4 percent of potential GDP to the deficit, an amount somewhat greater than the 2.1 percent added in 2009. According to CBO's baseline projections, the contribution of automatic stabilizers to the budget deficit will decrease as a share of potential GDP—to 2.1 percent in 2011, 1.7 percent in 2012, and 1.5 percent in 2013 (see Table 1 and Table 2). That contribution will then continue to fall—to 1.0 percent in 2014, 0.5 percent in 2015, and 0.1 percent in 2016—consistent with CBO's projection for output to come back up near potential output by 2016.
The budget balance without automatic stabilizers is an estimate of what the surplus or deficit would be if GDP was at its potential, the unemployment rate was at a corresponding level, and all other factors were unchanged. That budget measure has several applications. For example, some analysts use it to discern underlying trends in government saving or dissaving (that is, trends in surpluses or deficits). Others use it to approximate whether the short-run influence of the budget on aggregate demand and on the growth of real output is positive or negative. More generally, the measure helps analysts estimate the extent to which changes in the budget balance are caused by cyclical developments in the economy and thus are likely to prove temporary rather than long lasting.
Under CBO's baseline assumptions, the budget deficit without automatic stabilizers would constitute 6.7 percent of potential GDP in 2011, up from 6.0 percent in 2010. That increase is primarily due to a rise in mandatory spending from sources other than the automatic stabilizers that amounts to 0.6 percent of potential GDP. Discretionary outlays, which have no automatic response to the business cycle, are projected to decline by 0.2 percent of potential GDP, and interest payments, which are assumed to have no automatic response, are projected to rise slightly. Revenues without automatic stabilizers are projected to decrease by 0.2 percent of potential GDP in 2011.
According to CBO's baseline projections, the budget deficit without automatic stabilizers falls significantly over the next three years, from 6.7 percent of potential GDP in fiscal year 2011 to 4.9 percent in 2012, 2.6 percent in 2013, and 1.9 percent in 2014 (see Figure 1). The drop in 2012 is due mostly to an increase in revenues without automatic stabilizers (from 15.8 percent of potential GDP to 17.1 percent)—largely attributable to the ending of the temporary reduction in payroll taxes for 2011, which was part of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (referred to in this report as the 2010 tax act, Public Law 111-312)—and to a lower amount of depreciation deductions for investment in business equipment resulting from provisions of the 2010 tax act and other recent acts. Outlays without automatic stabilizers fall by 0.5 percent of potential GDP in 2012, reflecting declines in both mandatory and discretionary outlays that are partly offset by an increase in interest payments. In 2013, the decline in the deficit without automatic stabilizers is almost entirely the result of a rise in revenues, which in turn is due to the delayed effects of the scheduled expiration at the end of 2011 of the temporary patch for the alternative minimum tax and, to a greater extent, to the expiration at the end of 2012 of other tax provisions extended or newly implemented in the 2010 tax act, including extensions of the individual income tax reductions enacted in 2001 and 2003. Moreover, some high-income taxpayers will be subject to additional taxes that are scheduled to take effect in calendar year 2013 under provisions of the Patient Protection and Affordable Care Act of 2010 (P.L. 111-148) and the Health Care and Education Reconciliation Act of 2010 (P.L. 111-152). Some of the impacts of those tax changes become larger in 2014, the first full fiscal year the provisions are in effect.
In 2015, the federal deficit without automatic stabilizers reverses course, rising to 2.5 percent of potential GDP in that year and to 3.3 percent in 2016. Those increases stem mainly from a rise in mandatory outlays (largely Social Security, Medicare, and Medicaid) that is not attributable to automatic stabilizers. Revenues without automatic stabilizers fall slightly in those years relative to potential GDP, mostly because of legislation that shifts the timing of corporate income tax payments out of 2016 and into prior years. An uptick in interest costs is roughly offset by a decline in discretionary spending.

At the request of the Senate Committee on Appropriations, the Congressional Budget Office (CBO) has prepared an analysis of the President's budgetary proposals for fiscal year 2012, which were released on February 14, 2011. The analysis uses CBO's economic assumptions and estimating techniques, rather than the Administration's, to project how the proposals in the President's budget would affect federal revenues and outlays and the U.S. economy. For tax provisions, the analysis incorporates estimates prepared by the staff of the Joint Committee on Taxation.
This analysis follows and supplements CBO's "Preliminary Analysis of the President’s Budget for 2012," which was released on March 18, 2011, as an attachment to a letter to the Chairman of the Senate Appropriations Committee. CBO has not changed its estimates from the ones presented there. Chapter 1 of this report reiterates that document, with additional figures and details about the differences between CBO's and the Administration's budget estimates. Chapter 2 presents CBO's analysis of how the President's proposals would affect the overall economy (relative to what would occur under current law) and, in turn, indirectly affect the budget.
The Congressional Budget Office (CBO) has analyzed the proposals contained in the President's budget for 2012, which was released in February 2011. The analysis takes two forms: an assessment of the proposals without considering their effects on the economy, discussed in Chapter 1, and an evaluation of those proposals' potential effects on the economy and, in turn, the impact of those economic effects on the budget, discussed in Chapter 2. (Chapter 1 reiterates CBO's preliminary analysis released last month without changes to the estimates.)
CBO's analysis of the President's proposals, before consideration of their potential impact on the economy, indicates the following:
The President's budgetary proposals would have effects on the economy, which would in turn influence the budget through changes in such factors as taxable income (which affects the amount of revenues collected), employment (which determines outlays for programs like unemployment compensation), and interest rates (which affect the government's borrowing costs). CBO's analysis of those interactions between the budget and the economy indicates the following:
CBO has not modified its economic forecast since January 2011, but the agency's March baseline budget projections take into account legislation enacted from January, when the previous baseline was prepared, through early March, as well as new information obtained about various aspects of the budget. The resulting changes, relative to CBO's January projections, reduced the projected deficit for 2011 by $81 billion and diminished projected deficits over the 2012–2021 period by a total of $234 billion.

In October 2008, the Emergency Economic Stabilization Act of 2008 established the Troubled Asset Relief Program (TARP) to enable the Department of the Treasury to purchase or insure troubled assets as a way to promote stability in financial markets. Section 202 of that legislation requires the Congressional Budget Office (CBO) to prepare a report on those transactions within 45 days of a report issued by the Office of Management and Budget (OMB) on the TARP's activities. This fifth statutory report from CBO on the TARP's transactions follows the report that OMB submitted to the Congress on February 14, 2011.
In October 2008, the Emergency Economic Stabilization Act of 2008 (Division A of Public Law 110-343) established the Troubled Asset Relief Program (TARP) to enable the Department of the Treasury to promote stability in financial markets through the purchase and guarantee of "troubled assets." Section 202 of that legislation requires the Office of Management and Budget (OMB) to submit semiannual reports on the costs of the Treasury's purchases and guarantees of troubled assets. The law also requires the Congressional Budget Office (CBO) to prepare an assessment of each OMB report within 45 days of its issuance. That assessment must discuss three elements:
To fulfill its statutory requirement, CBO has prepared this report on transactions completed, outstanding, and anticipated under the TARP as of March 3, 2011. CBO estimates that the cost to the federal government of the TARP's transactions (also referred to as the subsidy cost), including grants for mortgage programs that have not been made yet, will amount to $19 billion. That cost stems largely from assistance to American International Group (AIG), aid to the automotive industry, and grant programs aimed at avoiding foreclosures. Other transactions with financial institutions will, taken together, yield a net gain to the federal government, in CBO's estimation.
CBO's current estimate of the cost of the TARP's transactions is $6 billion less than the $25 billion estimate shown in the agency's previous report on the TARP (issued in November 2010). The reduction in the estimated cost results primarily from a lower assessment of losses from assistance provided to the automotive industry. CBO's current estimate is well below OMB's latest estimate of $64 billion, largely because of different assessments of the cost of the Treasury's housing programs under the TARP.
When the TARP was created, the U.S. financial system was in a precarious condition, and the transactions envisioned and ultimately undertaken engendered substantial financial risk for the federal government. The costs directly associated with the TARP, when taken in isolation, have come out toward the low end of the range of possible outcomes anticipated when the program was launched; however, funds invested, loaned, or granted to participating institutions through the Federal Reserve and other government entities helped limit those costs. As a result, only $432 billion will be disbursed through the TARP, CBO estimates, well below the $700 billion initially authorized. Overall, the outcomes of most transactions made through the TARP were favorable for the federal government.
