April 15, 2011
CBO has analyzed the proposals contained in the President's budget for 2012, which was released in February 2011. 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 analysis uses CBO's economic assumptions and estimating techniques, rather than the Administration's. For tax provisions, the analysis incorporates estimates prepared by the staff of the Joint Committee on Taxation.)
CBO's analysis of the President's proposals, before consideration of their potential impact on the economy, indicates the following:
- If the President's proposals were enacted, the federal government would record deficits of $1.4 trillion in 2011 and $1.2 trillion in 2012. Those deficits would amount to 9.5 percent and 7.4 percent of gross domestic product (GDP), respectively. (By comparison, the deficit in 2010 totaled 8.9 percent of GDP.) Those deficits would exceed the ones projected to occur under current law, by $26 billion and $83 billion, respectively.
- The deficit under the President's proposals would fall to 4.1 percent of GDP by 2015 but would generally rise thereafter. Compared with CBO's current—law baseline projections, deficits under the proposals would be about 0.5 percentage points of GDP higher in 2012, 1.3 percentage points higher in 2013, and 1 to 2 percentage points higher thereafter. By 2021, the deficit would reach 4.9 percent of GDP, compared with 3.1 percent under CBO's baseline projections. Over the 2012–2021 period, deficits under the President's budget would total $9.5 trillion, compared with $6.7 trillion under those baseline projections.
- Under the President's budget, debt held by the public would grow from $10.4 trillion (69 percent of GDP) at the end of 2011 to $20.8 trillion (87 percent of GDP) at the end of 2021, about $2.8 trillion more than the amount under CBO's baseline projections. Outlays for net interest would nearly quadruple between 2012 and 2021 in nominal dollars (without an adjustment for inflation); they would swell from 1.7 percent of GDP in 2012 to 3.9 percent in 2021.
- Revenues under the President's proposals would be a total of $2.3 trillion (or 6 percent) below CBO's baseline projections from 2012 to 2021, largely because of the President's proposals to index the thresholds for the alternative minimum tax (AMT) for inflation starting at their 2011 levels and to continue many of the tax reductions originally enacted in 2001 and 2003 that were extended in the 2010 tax act (the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010). Under current law, which CBO's baseline projections reflect, the parameters of the AMT will revert to earlier levels, and the reductions in the 2010 tax act will expire at the end of December 2012.
- Mandatory outlays under the President's proposals would exceed CBO's baseline projections by a total of $1.3 trillion (or 5 percent) over the 2012–2021 period. Much of that increase stems from a reclassification of outlays for most surface transportation programs (which are currently categorized as discretionary spending), an increase in transportation spending overall, a greater amount of refundable tax credits, and an increase in Medicare's payment rates for physicians relative to those under current law.
- Total discretionary spending between 2012 and 2021 would be about $1.45 trillion (or 10 percent) lower under the President's budget than in CBO's baseline—which incorporates the assumption that appropriations continue each year at the 2011 amount in effect in early March, with adjustments for inflation. The bulk of that decrease comes from the lower spending proposed by the President for war-related activities, the reclassification of certain outlays for transportation as mandatory, and a five-year freeze on spending for many nondefense programs.
- In comparison with the Administration's figure, CBO's estimate of the deficit for 2011 under the President's budget is $220 billion less, mostly because of lower estimates of outlays. In contrast, largely because of lower projections of revenues, CBO's estimates of the deficit are $63 billion higher than the Administration's for 2012 and $2.3 trillion higher for the 2012–2021 period.
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:
- From 2012 to 2016, the President's proposals would raise the nation's real (inflation-adjusted) output relative to that under CBO's assumptions for its baseline by between 0.2 percent and 0.7 percent, on average. The proposals would boost output in the short run relative to that under current law primarily because tax reductions would increase people's disposable income.
- Over time, however, the President's proposals would reduce real output because the effects of increasing government debt would more than offset the stimulative effects of lower marginal tax rates. CBO estimates that the proposals would reduce real output relative to the amount in the agency's baseline by between 0.1 percent and 1.2 percent, on average, between 2017 and 2021, and by between 0.7 percent and 3.8 percent in the long term.
- The economic feedback from the President's proposals would increase their cumulative impact on deficits from 2012 through 2016—which is estimated to be nearly $1.0 trillion excluding any aggregate economic effects—by between $10 billion and $30 billion. From 2017 to 2021, the effects of the proposals on the economy could further boost the cumulative increase in deficits—estimated to be about $1.8 trillion, excluding any aggregate economic effects—by as much as $217 billion or could reduce it by up to $8 billion.
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.