This report by the Congressional Budget Office (CBO) presents a preliminary analysis of the proposals contained in the President's budget for fiscal year 2012 and their estimated effects on federal revenues, outlays, and budget deficits. A report presenting CBO's full analysis of the President's budget, including an assessment of the macroeconomic effects of the President's proposals, will be published in April.
As a basis for analyzing the President's budget, CBO updated its baseline budget projections, which were last issued in January 2011. Unlike its estimates of the President's budget, CBO's baseline projections largely reflect the assumption that current tax and spending laws will remain unchanged. Under that assumption, CBO estimates that the deficit will total $1.40 trillion in 2011$81 billion less than the agency estimated in January. For the following 10 years (2012 to 2021), CBO now projects a cumulative deficit of $6.7 trillion$234 billion less than the amount in the previous baseline. CBO has not modified its economic forecast since January, so the updated baseline projections mainly reflect new information that the agency has obtained about various aspects of the federal budget since the previous projections were completed.
CBO's analysis of the President's proposals is based on its own economic assumptions and estimating techniques (rather than the Administration's) and incorporates estimates prepared by the staff of the Joint Committee on Taxation (JCT) for tax provisions. According to CBO's projections, if all of the President's budgetary proposals were enacted, they would add $26 billion to the baseline deficit for 2011. As a result, the 2011 deficit would total $1.43 trillion, or 9.5 percent of gross domestic product (GDP).
In 2012, the deficit under the President's budget would decline to $1.2 trillion, or 7.4 percent of GDP, CBO estimates. That shortfall is $83 billion greater than the deficit that CBO projects for 2012 in its current baseline. Deficits in succeeding years under the President's proposals would be smaller than the deficit in 2012, although they would still add significantly to federal debt. The deficit would shrink to 4.1 percent of GDP by 2015 but widen in later years, reaching 4.9 percent of GDP in 2021. In all, deficits would total $9.5 trillion between 2012 and 2021 under the President's budget (or 4.8 percent of total GDP projected for that period)$2.7 trillion more than the cumulative deficit in CBO's baseline. Federal debt held by the public would double under the President's budget, growing 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.
The President's policy proposals mostly affect the revenue side of the budget. Those proposals would reduce revenues, compared with CBO's baseline projections, in every year of the coming decadefor a total reduction of about 6 percent over the 20122021 period. Nevertheless, revenues would rise relative to GDP: from 16.2 percent in 2012 to 19.3 percent in 2021. The 19.3 percent figure is 1.5 percentage points below CBO's baseline projection for 2021 but 1.3 percentage points above the average ratio of revenues to GDP seen over the past 40 years.
Outlays would be greater under the President's budget than in CBO's baseline in each of the next 10 years, primarily because the proposed reduction in revenues would boost deficits and thus the costs of paying interest on the additional debt that would accumulate. In particular, net interest payments would nearly quadruple in nominal dollars (without an adjustment for inflation) over the 20122021 period and would increase from 1.7 percent of GDP to 3.9 percent. Total outlays under the President's budget would equal 23.6 percent of GDP in 2012, decline slightly as a share of GDP over the following two years, and then rise for the rest of the 10-year projection period. They would equal 24.2 percent of GDP in 2021about 0.3 percentage points above CBO's baseline projection for that year and well above the 40-year average for total outlays, 20.8 percent.
Of the various initiatives that the President is proposing, tax provisions would have by far the largest budgetary impact. The 2010 tax act (officially the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, Public Law 111-312) extended through December 2012 many of the tax reductions originally 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). The President proposes to extend those reductions permanently, with some modifications, and to permanently index for inflation the amounts of income exempt from the alternative minimum tax (AMT), starting at their 2011 levels. In addition, the President proposes that, beginning in January 2013, estate and gift taxes return permanently to the rates and exemption levels that were in effect in calendar year 2009. Those policies would reduce tax revenues and boost outlays for refundable tax credits by a total of more than $3.0 trillion over the next decade relative to the amounts projected in CBO's baseline. That total exceeds the $2.7 trillion net increase in the deficit over the next 10 years that would result from the President's budget as a whole; the President's other proposals would reduce the deficit, on balance, over 10 years.
Those other proposals include some initiatives that would widen the deficit and some that would narrow it. For example, the President's proposal to freeze Medicare's payment rates for physicians at the current level through the 20122021 projection period would boost outlays by $0.3 trillion relative to the amount under current law (which calls for sharp reductions in payments to physicians). Higher spending on transportation programs would add another $0.2 trillion to the total deficit between 2012 and 2021. In contrast, the President's budget includes a total of $0.9 trillion less in spending for defense over that period than the amount projected in CBO's baseline. The main reason for the difference is that the baseline incorporates the assumption that funding for war-related activities will continue at $159 billion a year (the amount provided so far for 2011, annualized) with adjustments for inflation, whereas the President's budget includes a request for appropriations of $127 billion for such activities for 2012 and a placeholder of $50 billion a year thereafter. In addition, the President's proposal to cap at 28 percent the rate at which itemized deductions reduce a taxpayer's income tax liability would decrease the deficit by $0.3 trillion over the next decade.
Compared with the Administration's estimates, CBO's estimates of the deficit under the President's budget are lower for 2011 (by $220 billion) but higher for each year thereafter (by a total of $2.3 trillion over the 20122021 period). That disparity stems from differences in the underlying projections of what would happen under current law ($1.3 trillion) as well as from differing assessments of the effects of the President's proposals ($1.0 trillion).