March 24, 2010
This report presents a more detailed analysis of the proposals contained in the President’s budget request for fiscal year 2011 than the preliminary analysis that CBO released on March 5, 2010, and it incorporates the impact of legislation that has recently been enacted. In addition, CBO has completed an analysis of the potential effects on the economy of the President’s budgetary proposals and the impact of those economic effects on the federal budget.
CBO’s analysis of the President’s proposals, before consideration of the budget’s potential impact on the economy, indicates the following:
- If the President’s proposals were enacted, the federal government would record deficits of $1.5 trillion in 2010 and $1.3 trillion in 2011. Those deficits would amount to 10.3 percent and 8.9 percent of gross domestic product (GDP), respectively. By comparison, the deficit in 2009 totaled 9.9 percent of GDP.
- Measured relative to the size of the economy, the deficit under the President’s proposals would fall to about 4 percent of GDP by 2014 but would rise steadily thereafter. Compared with CBO’s current-law baseline projections, deficits under the proposals would be about 2 percentage points of GDP higher in fiscal years 2011 and 2012, 1.3 percentage points greater in 2013, and above baseline levels by growing amounts thereafter. By 2020, the deficit would reach 5.6 percent of GDP, compared with 3.0 percent under CBO’s baseline projections.
- 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, about $5 trillion more than under the assumptions in the baseline. Net interest would more than quadruple between 2010 and 2020 in nominal dollars (without an adjustment for inflation); it would swell from 1.4 percent of GDP in 2010 to 4.1 percent in 2020.
- Revenues under the President’s proposals would be $1.4 trillion (or 4 percent) below CBO’s baseline projections from 2011 to 2020, largely because of the President’s proposals to index the thresholds for the alternative minimum tax (AMT) for inflation starting at their 2009 levels 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). CBO’s baseline projections reflect current law, under which the parameters of the AMT revert to earlier levels and the reductions under EGTRRA and JGTRRA expire as scheduled at the end of 2010. Other proposals in the President’s budget--including those associated with significant changes in the nation’s health insurance system--would, on net, increase revenues.
- Mandatory outlays under the President’s proposals would exceed CBO’s baseline projections by $1.9 trillion (or 8 percent) over the 2011–2020 period; about one-third of that amount would stem from net additional spending related to proposed changes to the health insurance system and health care programs. Much of the rest of the increase in mandatory spending would result from increased spending for refundable tax credits and for the Pell Grant program for postsecondary students.
- Discretionary spending under the President’s budget would be about $0.3 trillion (or 2 percent) lower than the cumulative amount projected for the 2011–2020 period in CBO’s baseline, which assumes that appropriations continue each year at their 2010 amounts with adjustments for inflation. The largest factor in that reduction relates to funding for the wars in Iraq and Afghanistan: The President’s request includes a placeholder of $50 billion a year after 2011, whereas CBO’s baseline assumes that funding will continue, with adjustments for inflation, at the level provided so far this year, which is $130 billion. Excluding funding for war-related activities and the Pell Grant program (which the President proposes to legislatively change so that all such grants are provided through mandatory funding), discretionary outlays over the 2011–2020 period would be $0.4 trillion (or 4 percent) greater than the amounts projected in CBO’s baseline.
- For 2010, CBO’s estimate of the deficit under the President’s budget is $56 billion less than the Administration’s figure, primarily because of differences in baseline estimates of spending. In contrast, largely because it projects lower baseline revenues in future years, CBO estimates deficits that are $75 billion higher for 2011 and $1.2 trillion greater over the 2011–2020 period than the Administration anticipates under the President’s budget.
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:
- For 2011 to 2015, CBO estimates that the President’s proposals would raise real (inflation-adjusted) output relative to that under the assumptions in CBO’s baseline by between 0.9 percent and 1.2 percent, on average. Those estimates incorporate both supply-side effects (influences on the economy’s potential out-put) and demand-side effects (temporary movements of actual output relative to potential output).
- For 2016 to 2020, CBO estimates, the President’s proposals would lower real output relative to CBO’s baseline assumptions by between 0.2 percent and 1.4 percent, on average. Those estimates incorporate only supply-side effects because the magnitude of demand-side effects depends on the state of the economy, which is especially difficult to predict over longer horizons. In addition, the Federal Reserve might offset the demand-side effects of policies that are foreseen well in advance in order to maintain economic stability.
- CBO estimates that the economic feedback from the President’s proposals would reduce their cumulative cost over the period from 2011 through 2015--estimated to be about $1.4 trillion, excluding any aggregate economic effects--by between 2 percent and 14 percent. From 2016 to 2020, the effects of the proposals on the economy would increase their cumulative cost--estimated to be about $2.3 trillion, excluding any aggregate economic effects--by as much as 6 percent or reduce it by as much as 2 percent.
CBO has not modified its economic forecast since January, but the agency updated its baseline budget projections early in March to take into account some legislation enacted since the completion of the previous baseline in January 2010 as well as new information obtained about various aspects of the budget since then. The resulting changes, relative to CBO’s January projections, are modest, adding $20 billion to the projected deficit in 2010 and reducing projected deficits over the 2011–2020 period by a total of $57 billion.