Cyclically adjusted and standardized budget

April 20, 2008

CBO has released an updated report on the cyclically adjusted and standardized budget. The new report is a companion to the baseline budget projections published in CBOs March 2008 Analysis of the Presidents Budget.

The purpose of the companion report is to examine the budget balance after temporary factors, such as the effects of the business cycle or onetime shifts in the timing of federal tax receipts and spending, are removed. (For example, during recessions, the budget deficit tends to increase because of the automatic stabilizers built into the budget: tax revenue tends to decline and certain forms of government spending, such as outlays for food stamps and unemployment benefits, tend to increase.)

The report presents estimates of two adjusted budget measures: the cyclically adjusted deficit or surplus (which attempts to filter out the effects of the business cycle) and the standardized- budget deficit or surplus (which removes the effects of other factors in addition to those of the business cycle).

Under CBOs baseline budget assumptions (which assume continuation of current laws and policies), the cyclically adjusted budget deficit--the total baseline budget deficit after adjusting for the effects of the business cycle--will rise from 0.9 percent of potential GDP in 2007 to 2 percent in 2008, in large part because of the intended effect of the Economic Stimulus Act, and then decrease in 2009 to 0.6 percent, in part from the removal of the effects of the stimulus legislation and also from an increase in revenue from the Alternative Minimum Tax (which would occur under current law). The standardized-budget deficit will increase by somewhat more, climbing from 1.1 percent of potential GDP in 2007 to 2.5 percent in 2008 (after which it declines to 0.9 percent in 2009).