CRS Updates Report on Fiscal 2008 Budget

President Bush presented his fiscal year (FY) 2008 budget to Congress on February 5, 2007. For FY2008, the budget showed a deficit of $239 billion, which would become a surplus of $61 billion in FY2012, the last year projected. The proposals included large defense supplementals for FY2007 and FY2008, extending the expiring tax cuts, constraining domestic discretionary spending (and, after FY2008, doing the same to defense spending), slightly slowing the growth of Medicare and Medicaid, and stopping the expanding coverage of the Alternative Minimum Tax (AMT) in FY2007 and FY2008 (but not in subsequent years).

Although the budget proposed a positive outlook over the next five years, it also discussed the long-term fiscal problems facing the nation. According to the longerterm projections from the Administration, the Congressional Budget Office (CBO), and the Government Accountability Office (GAO), the soon-to-begin retirement of the baby boom generation will increase the demand for resources from the federal programs for the elderly (in particular, Medicare, Social Security, and Medicaid). Under any responsible set of projections, the expanding eligible populations and continued growth in medical care costs (in particular) will drive the growth in these programs in the next decades. If overall federal spending is not allowed to grow as a share of gross domestic product (GDP), the growth in these programs will require reductions in most other federal activities. The consequences of unchecked growth in these programs could, at some future date, disrupt the economy's ability to provide the resources needed for the programs.

Earlier in the year (January 24, 2007), the CBO released its annual budget report (The Budget and Economic Outlook: Fiscal Years 2008-2017). The report's baseline estimates and projections attempt to show what happens to the budget with no changes from current policy. CBO's report projected a deficit of $98 billion for FY2008, becoming a $170 billion surplus in FY2012 and a $249 billion surplus in FY2017. The baseline assumes the large tax cuts enacted in the first half of the decade expire as currently scheduled, discretionary spending grows more slowly than its historical trend, no relief from the Alternative Minimum Tax (AMT) is provided, and there is no further funding for the wars in Iraq and Afghanistan. The baseline is designed to be a benchmark against which policy changes can be measured, rather than a prediction of likely outcomes.

Both the House and Senate adopted their own versions of the budget resolution for FY2008 before the end of March 2007 (H.Con.Res. 99 and S.Con.Res. 21 respectively). The resolutions differ, but both would increase domestic spending above the Administration's request, allow some of the tax cuts to be extended if the costs of doing so are offset, and both would reach a surplus or budget balance in FY2012. A conference to resolve the differences reached agreement on May 16. The House and Senate adopted the conference report (H.Rept. 110-153) on May 17.

This report will be updated as events warrant.

 Contents

The Administration's annual budget submission is followed by congressional action on the budget. This usually includes the annual budget resolution, appropriations, and, possibly, a reconciliation bill (or bills) as required by the budget resolution. Over the course of deliberation on the budget, the Administration often revises its original proposals as it interacts with Congress, and as conditions change in the economy and the world.

The House Budget Committee (HBC) reported (H.Rept. 110-69) its version of the FY2008 budget resolution on March 21. The HBC resolution resembled the one reported by the Senate Budget Committee, but with a smaller deficit in FY2008 ($213 billion) and a larger surplus in FY2012 ($153 billion). The House, after rejecting three amendments, passed the resolution on March 29.

The House and Senate appointed (on May 7) conferees to resolve the differences between the two versions of the budget resolution. The conference reached agreement in the afternoon of May 16. The House and Senate adopted the conference report (H.Rept. 110-153) on May 17.

          Table 1. Budget Estimates and Proposals for FY2008

Budget Estimates and Proposals

CBO's first budget report for FY2008 contained budget baseline and economic estimates and projections for FY2007 through FY2017. The report estimated an FY2008 baseline deficit of $98 billion (down from the estimated FY2007 baseline deficit of $172 billion). By FY2012, the CBO baseline showed a surplus of $170 billion, which would grow to a projected $249 billion surplus in FY2017.

CBO's baseline projections assume that discretionary spending grows at the rate of inflation, the 2001 and 2003 tax cuts fully expire after 2010 (as required under current law), and the "patch" to the alternative minimum tax (AMT), which expired at the end of calendar year 2006, is not revived. The effects of these assumptions raise receipts and slow discretionary spending growth. Receipts would grow substantially after calendar year 2010, when most of the tax cuts from 2001 and 2003 expire, which, along with sluggish growth assumed for discretionary spending, explains most of the declining deficit and the emerging surpluses over the 10 years in the CBO baseline. As CBO warns, the 10-year baseline results understate the longer-term size and persistence of the deficit.

CBO's report includes the estimated budgetary effects on revenues and outlays of selected policies not included in the baseline estimates. These include, among a few others, estimates of the budgetary effects of making the 2001 and 2003 tax cuts permanent, indexing the AMT to limit its expanding coverage, increasing discretionary appropriations at the rate of growth of gross domestic product (GDP), and freezing total discretionary appropriations at the level provided in FY2007. The first two reduce expected receipts, the third increases expected outlays, and the last reduces outlays.

President Bush's FY2008 budget called for extending and making permanent most of the tax cuts adopted in 2001 and 2003, as well as extending other expiring tax provisions. The President's proposals would reduce estimated receipts by almost $600 billion between FY2008 and FY2012, and by an estimated $1.9 trillion between FY2008 and FY2017 (these estimates do not include the resulting higher debt-service costs resulting from the change).²

According to the Administration estimates, its proposals would reduce mandatory spending by $96 billion over five years and by $309 billion over ten years (the proposed policy changes include both reductions and some increases -- or augmentations as the Administration refers to them). The budget includes an estimate of the cost, $637 billion over ten years, of the proposed personal accounts for Social Security. On net, including all of the Administration proposals affecting mandatory spending (including the outlay effects of tax proposals and indirect effects), OMB expects five-year savings of $59 billion and 10-year increases of $359 billion (which is due to the proposal for Social Security personal accounts).

The Administration's budget provided a limited amount of information for the years beyond FY2012. The budget does include estimates of the cumulative proposed revenue changes and proposed mandatory spending changes for the periods FY2008 through FY2012, and FY2008 through FY2017, but these projections contained no information for the individual years after FY2012. No estimates are provided for other components of the budget or for budget totals beyond FY2012.

Although not included in the budget documents (they were made available later, on February 12, 2007), the President, as he had last year, proposed the elimination of, the reduction in, or the reform of approximately 141 programs, both discretionary and mandatory. Many of the proposals are the same as last year's. This set of policy changes will, according to Administration estimates, save an estimated $22 billion in budget authority (not outlays) in FY2008 compared to FY2007 levels.

CBO's March 2007 analysis of the President's budget proposals reestimated the proposals using CBO's economic and budget estimating techniques. The reestimates lowered the deficit to $226 billion (from the President's proposed $239 billion) for FY2008, through a combination of slightly higher revenues and smaller outlays.³ By FY2012, CBO's analysis showed the President's proposals producing a deficit of $31 billion instead of the Administration's expected surplus of $61 billion (this is an insignificant difference given the uncertainty of projections). For the five years 2008 through 2012, CBO's cumulative deficit estimate based on the President's proposals was $790 billion, while the President's budget had a cumulative deficit (and surplus) estimate for the same period of $514 billion. The economic forecast and assumptions used in the President's budget produced larger revenues and somewhat larger outlays than the economic forecast and assumptions used in CBO's reestimates of the President's proposals. This underlying difference produced much of the difference in the two estimates.

The Senate budget resolution (S.Con.Res. 21), as reported by the Senate Budget Committee (March 16, 2007), had a deficit of $249 billion in FY2008, $10 billion larger than deficit proposed by the President.⁴ The budget resolution would, like the President's proposal, produce a surplus ($132 billion) in FY2012. The resolution allowed the continuation of the expiring tax cuts, as long as the cost of extending them is offset. It has a different mix of policies, both for receipts and outlays, from those proposed by the President. The totals in both the SBC-reported resolution and versions passed by the Senate (March 23, 2007) were almost the same for FY2008. The amendments adopted by the Senate during its deliberations on the budget resolution reduced the FY2012 expected surplus to $6 billion (from $132 billion in the SBC reported resolution).

The House Budget resolution (H.Con.Res. 99) had a deficit of $213 billion in FY2008, becoming a surplus of $153 billion in FY2012. Like the Senate resolution, the House resolution requires offsets to extend the expiring tax cuts.

All of the proposals, the President's, the House, and the Senate, achieve their balanced budget in FY2012 by including assumptions that may or may not hold over the next five years. The Administration, the House, and the Senate all assume that there will be minimal or no continued funding for military operations after FY2008. This keeps outlays below what they would be with continued finding. They all assume that the AMT annual fix to limit its coverage of middle-income taxpayers will occur after FY2008. This boosts receipts above what they would be if the AMT adjustment was made annually. The President's budget assumes little to no growth in discretionary spending over the five years, keeping outlays smaller than they otherwise would be. The House and Senate budget resolutions assume that the tax cuts from 2001 and 2003 will expire unless the cost of extending them is offset (through other revenue gains or spending reductions). This provides a large jump in receipts after 2010.

Uncertainty in Budget Projections

All budget projections are inherently uncertain (albeit, some more than others). Their dependence on assumptions that are themselves subject to substantial variation over short time periods makes budget estimates and projections susceptible to fairly rapid and dramatic changes.⁵ Small changes in economic conditions (from those assumed in the estimates), particularly the rate of GDP growth, can produce large changes in the budget estimates. According to CBO estimates, a persistent 0.1% decrease in the growth rate of real GDP would increase the deficit (including interest costs) by $61 billion cumulatively over a five-year period and by $273 billion over 10 years. Increases in the rate of GDP growth would decrease the deficit or increase a surplus by similar amounts over the same time periods. In addition to budget changes resulting from economic variations, the adoption of policies that differ from those assumed in the baseline, such as supplemental appropriations for operations in Iraq and Afghanistan or extending the expiring tax provisions, would also change the budget outlook.

The President's (FY2008) budget included a chapter in the Analytical Perspectives volume titled "Comparison of Actual to Estimated Totals." The chapter examines the causes of the changes from the initial Administration budget estimates for FY2006 (from February 2005) through the actual results for that year. OMB extends the analysis to find upper and lower bounds to the deficit or surplus estimates over a five-year period, based on data going back to FY1982. It finds that the upper and lower bounds, based on the Administration's statistical analysis of past experience, ranges over $1.1 trillion at the end of a five-year period. In other words, the Administration's projected surplus for FY2012, $61 billion, could range from a surplus of approximately $600 billion to a deficit of approximately $500 billion (with a 90% chance of the budget balance falling between those two numbers). Even the Administration's $239 billion FY2008 deficit estimate has a 90% chance of falling between a $28 billion deficit and a $516 billion deficit.

Budget projections depend on underlying assumptions about the direction of the economy, expected tax and program changes, and how these interact, along with other factors (such as changing demographics) that affect the budget. Any deviation from the assumptions used in the budget estimates -- such as faster or slower economic growth, higher or lower inflation, differences from the expected or proposed spending and tax policies, or changes in the technical components of the budget models -- will change the budget estimates and projections.

After lengthy informal discussions about the FY2008 budget resolution, both the House and Senate appointed (the week of May 7) conferees to resolve the remaining differences between the House and Senate versions. The conference announced an agreement on May 16. The House and Senate adopted the conference report (H.Rept. 110-153) on May 17, 2007. The conference agreement set the level of discretionary spending (at $954 billion, higher than the President proposed) for FY2008. This provides guidance to the Appropriation Committees, which have already begun work on the FY2008 appropriations.

             Table 2. Outlays for FY2006-FY2012 and FY2017

Measured against the Administration's FY2008 current services baseline ($2,752 billion), the proposed level of outlays ($2,902 billion) is $150 billion (5.5%) higher than the baseline.⁶ This difference represents the "cost" of the Administration's proposed policies. For FY2008, almost all of the increase comes from the Administration's proposed additional funding for "security" activities (which comprise the combined spending for defense, homeland security, and foreign affairs). Most of the proposed additional security funding is for the wars in Iraq and Afghanistan. The budget also proposes, compared to baseline levels, an increase ($8 billion, 1.8%) for "non-security" discretionary spending and a $10 billion (0.7%) reduction in mandatory spending. The Administration's budget shows a net interest increase of $7 billion (2.8%) from baseline levels in FY2008.

The year-to-year change in outlays (the $118 billion increase in outlays from FY2007 to FY2008) is composed of all the factors that make outlays change from one year to the next. These include automatic cost-of-living adjustments in many federal programs, growth in populations eligible for program benefits, policy changes from year-to-year, and inflation-driven costs of goods and services bought by the federal government.

As a share of gross domestic product (GDP), the Administration's proposals would reduce outlays from 20.2% of GDP in FY2007 to 20.0% of GDP in FY2008 (it averaged 20.6% of GDP between FY1966 and FY2006). By FY2012, the Administration's projections show outlays have fallen to 18.3% of GDP (lower than in any year since FY1960). The Administration shows non-defense discretionary spending falling by 0.7% of GDP over these five years. Defense spending falls by 1.1% of GDP over the same period. Mandatory programs increase their share of GDP by 0.3%, while net interest falls by 0.2% of GDP. Both Medicare and Medicaid grow slightly as percentages of GDP, despite the Administration proposals to trim their growth.

Defense spending in the President's budget increases by 6.0% from FY2007 ($569 billion) to FY2008 ($603 billion), including the two-year $140 billion proposed supplemental for military actions overseas. By FY2012, the Administration's projections drop defense spending to $546 billion.

For FY2008, the Administration's proposed level of non-defense discretionary spending is larger than the current services baseline estimates (by $19 billion). Over the five years, the current services estimates for non-defense discretionary outlays grows by an average 0.7% annually, while the Administration's proposed levels fall by an average 0.7% annually. The Administration's budget shows non-defense discretionary spending falling from $511 billion in FY2007 and FY2008 to $493 billion in FY2012. As shares of GDP, the fall is substantial, dropping from 3.7% of GDP in FY2007 to 3.5% of GDP in FY2008 to 2.8% of GDP in FY2012. If these levels are achieved, non-defense discretionary spending would be smaller as a percentage of GDP in FY2012 than in any year since at least FY1962. How the Administration plans to achieve these reductions, particularly after FY2008, is not illuminated in the budget.

Mandatory spending in the President's budget grows by 4.2% ($62 billion) from FY2007 to FY2008. The budget includes proposals to reduce, from baseline levels, mandatory outlays by $10 billion in FY2008. The reductions would be achieved by slowing the growth of selected mandatory spending activities such as Medicare and Medicaid, among others. The effort would reduce (from baseline levels) total mandatory spending over the five years by almost $60 billion (out of total mandatory spending over the period of approximately $1,100 billion). Mandatory spending would remain the largest broad category of federal spending, growing from $1,465 billion in FY2007 to $1,527 billion in FY2008 and to $1,923 billion in FY2012. The budget showed it growing from 10.5% of GDP in FY2008 to 10.8% of GDP in FY2012.

The President's FY2008 budget shows net interest outlays rising by $22.1 billion from FY2007 to FY2008. The growth in federal debt in the recent past, and its continued growth under the Administration's proposals (at least in the near-term), leads to the higher net interest outlays. The proposed net interest outlays in FY2008 are $7.8 billion larger than the Administration's current services baseline estimate for FY2008. The Administration's policy proposals would raise FY2012 net interest outlays almost $30 billion above its current services net interest outlay estimate. The Administration's estimates show net interest changing little as a percentage of GDP throughout the five years (ranging between 1.6% of GDP to 1.8% of GDP).

CBO's January 2007 baseline estimates showed outlays falling over its projection period (FY2007-FY2017), from 19.9% of GDP in FY2007 to 19.7% of GDP in FY2008 to 18.8% of GDP in FY2012 and remaining near that level through FY2017 (18.9% of GDP). Under a selection of CBO-provided alternative policies that would increase outlays above baseline levels (additional war funding, faster discretionary growth), outlays would rise over the 10-year period from 20.2% of GDP in FY2008 to 21.2% of GDP in FY2017. Another CBO-estimated alternative policy, freezing total discretionary appropriations at the level provided for FY2007, would reduce outlays as a percentage of GDP by more than what CBO shows occurring under the baseline.

Defense spending in the CBO baseline estimates (which excluded any new supplemental funding) increased outlays by $7 billion (from $490 billion to $497 billion) between FY2007 and FY2008. CBO's baseline assumptions, which increase total discretionary spending by the rate of inflation, show defense spending rising to $575 billion in FY2012 (and to $652 billion in FY2017). As percentages of GDP, defense spending falls slowly throughout the 10-year period. CBO estimates that it will be 3.9% of GDP in FY2007 and 3.8% of GDP in FY2008. It would then fall to 3.3% of GDP in FY2012 and to 3.1% of GDP in FY2017. CBO's non-defense discretionary spending rises from an estimated $490 billion in FY2007 to $497 billion in FY2008, to a projected $525 billion in FY20012, and to $586 billion in FY2017. As a percentage of GDP, non-defense discretionary spending falls, in CBO's baseline, from 3.6% of GDP in FY2007 to 3.5% of GDP in FY2008, to 3.1% of GDP in FY2012, and to 2.8% of GDP in FY2017. These latter numbers, like the ones from the Administration, are very low by historical standards.

The mandatory spending baseline estimates from CBO rises from $1,455 billion in FY2007 to $1,533 billion in FY2008, a 5.4% increase. By FY2012, CBO's projections increases mandatory spending to $1,866 billion and to $2,568 billion by FY2017. As shares of GDP, CBO's projections raise mandatory spending slowly early in the period and faster later in the period from 10.7% in both FY2007 and FY2008 to 10.8% in FY2012 and to 12.1% of GDP in FY2017.

CBO's baseline estimates show net interest growing by $15 billion from FY2007 to FY2008 (from $235 billion to $250 billion). The smaller deficits in subsequent years in the CBO baseline projections reduce the growth in the debt, slowing the rise and then reversing the rise, in net interest payments. They peak at approximately $270 billion in FY2011 and FY2012 before sliding to $228 billion in FY2017. As shares of GDP, the CBO January 2007 projections show net interest holding fairly steady or falling throughout the ten-year period (from approximately 1.7% of GDP in FY2007 and FY2008 to 1.1% of GDP in FY2017).

CBO's report, An Analysis of the President's Budgetary Proposals for FY2008, re-estimated the President's proposals using CBO's economic assumptions and estimating techniques. It put FY2008 outlays at $2,905 billion, $4 billion larger than outlays in the President's budget. By FY2012, CBO projected outlays under the Administration's proposals at $3,205 billion, $41 billion below the President's estimate. (The March 2007 CBO report also made minor changes to CBO's baseline outlay estimates.)

The Senate Budget Committee's FY2008 budget resolution (S.Con.Res. 21; March 16) proposed outlays of $2,927 billion for FY2008 (rising to $3,229 billion in FY2012). This amount included defense funding matching the President's request in FY2007 and FY2008 and domestic spending that exceeds the amount proposed by the Administration. The Senate-passed resolution as amended (March 23) changed outlays little from the committee's version over the five years.

The House Budget Committee reported its version of the FY2008 budget resolution (H.Con.Res. 99) on March 23. The House passed the resolution unchanged on March 29. The resolution would provide $2,933 billion in outlays in FY2008, rising to $3,252 billion in FY2012.

The May 17, 2007 conference agreement included $2,937 billion in outlays for FY2008, rising to $3,255 billion in FY2012. The FY2008 amount includes money the President requested for the ongoing military operations overseas.

Figure 1 shows spending by category as percentages of GDP from the Administration's February 2007 budget. The data show actual outlays for defense, non-defense, mandatory, and net interest spending for the fiscal years 2000 through 2006 and the estimates and projections for the fiscal years 2007 though 2012. The slide in defense and non-defense discretionary spending as shares of GDP after FY2007 and FY2008 depend on the Administration's assumptions that non-defense discretionary spending falls annually (FY2008 through FY2012) and that there is limited additional funding for the ongoing military operations after FY2008 (the Administration included a $50 billion "placeholder" in its FY2009 estimates for additional war funding). The President proposed some reductions in mandatory spending from current service levels, but they do little to keep mandatory spending from rising slightly as a share of GDP later in the decade. By FY2012, the President's proposed private accounts for Social Security help raise mandatory spending as a percentage of GDP above the current services level.

 

Figure 1. Outlays by Type,

 

FY2000-FY2012

 

(percent of GDP)

 

 

 

The President's proposed outlays fall sharply after FY2007, a result of the Administration's proposals to reduce discretionary spending, both defense and nondefense, and to moderate the rate of growth in some mandatory programs. By FY2012, spending would be just below its percentage of GDP in FY2000.

The alternative estimate is based on CBO-estimated policy alternatives that are not included in its baseline. It incorporates two of several available assumptions directly affecting outlays. The first has discretionary appropriations growing at the rate of nominal GDP growth (rather than at the rate of inflation). The second reduces the number of troops deployed in Iraq and Afghanistan as well as other antiterror activities to 75,000 by FY2013. Both of these assumptions increase outlays above the baseline projections, increasing the deficit (or reducing a surplus), increasing federal debt and subsequent net interest payments. These higher net interest payments are included in the alternative estimate. In addition, the alternative estimate for outlays includes the outlay effects of the changes to the deficit and debt that occur in the alternative estimate for receipts (see the next section). The outlay effects are mostly higher net interest. The alternative estimate grows over the 10 years as a percentage of GDP, rising to 21.1% in FY2017.

 

Figure 2. Outlays, FY2000-FY2017

 

(in percent of GDP)

 

 

 

 

Receipts

 

The Administration estimated that making the 2001 and 2003 tax cuts permanent would reduce cumulative receipts by $374 billion between FY2008 and FY2012 and by $1,617 billion between FY2008 and FY2017. The effect of these and the other Administration proposals for receipts would reduce receipts, from baseline levels, by an estimated $599 billion in the first five years and by $1,854 billion over 10 years (the proposed reductions do not reduce receipts in dollars over time, see Table 3). The budget included relief from the expanding coverage of the Alternative Minimum Tax (AMT) through FY2008 (at an estimated cost of $48 billion in that year), but not in subsequent years.

            Table 3. Receipts for FY2006-FY2012 and FY2017

CBO's January 2007 budget report estimated that extending the expiring provisions of the major tax cuts passed in 2001 and 2003 would reduce revenues (from CBO baseline levels) by an estimated $418 billion over the first five years and by $1,937 billion over 10 years. Extending all the tax cuts that expire over the 10-year period would reduce revenues (again from CBO baseline levels) by $870 billion in the first five years and by $3,178 billion over the full 10 years of the forecast.⁷ CBO estimated that limiting the expanding coverage of the AMT alone would reduce revenues by $280 billion over five years and by $570 billion over 10 years (excluding additional interest costs).

The March 2007 CBO budget report analyzing the President's FY2008 policy proposals produced somewhat lower revenues than the President's budget in all but one (FY2008) of the five years in the budget. Differences in economic assumptions underlying the Administration and CBO estimates produced most of the revenue differences, particularly in the last three years. Technical components of the estimates balanced the economic changes in the first two years of the estimates, producing only small changes in the revenue estimates.

CBO's estimates of the President's revenue policy proposals were cumulatively $479 billion smaller than CBO's baseline estimates over five years.⁸ The President's budget projected cumulative revenues of $14,826 billion over the five years and CBO's reestimates put cumulative revenues at $14,524 billion, 2% less. (CBO included a revised revenue baseline estimate in its March report. No year showed a larger than $1 billion change in revenues.)

The House and Senate budget resolutions do not incorporate extending expiring tax provisions without offsetting their cost. The instructions in the budget resolutions (although different) by the House and Senate generally require that revenue changes need offsets, either revenue increases or spending reductions, to keep the deficit from growing (or the surplus from falling). The conference agreement (H.Rept. 110-153; May 17) includes extensions of some of the expiring tax cuts, if certain conditions are met, and the revenue losses (from baseline levels) are offset.

Figure 3 shows the President's January receipt estimates by type for fiscal years 2000 through 2012. Actual receipts are shown for FY2000 through FY2006. All are shown as percentages of GDP. Excise and other receipts each remain at or below 1% of GDP for the period shown. Corporate income taxes, after rising through FY2006, decline slowly and stabilize near 2% of GDP under the Administration's projection. Social Insurance receipts remain fairly steady from FY2006 through FY2012. Individual income taxes, having fallen from over 10% of GDP in FY2000 to 7% of GDP in FY2004, regain some of their lost share under the Administration's proposals, but remain 1% of GDP below their FY2000 level.

 

Figure 3. OMB Receipts

 

FY2000-FY2012

 

(percent of GDP)

 

 

 

As shares of GDP, total receipts in the President's budget are expected to remain near their 40-year average (between FY1966 and FY2006) of 18.3% throughout the five years. CBO's baseline revenue estimates (revised, March 2007), which exclude the extension of the 2001 and 2003 tax cuts, are larger, rising to over 19.8% of GDP in FY2012 and to 20.1% of GDP in FY2017.

The last few fiscal years have seen unexpectedly rapid growth in receipts from year to year that neither OMB nor CBO expect to continue. Receipts grew by 5.5% from FY2003 to FY2004, by 14.5% from FY2004 to FY2005, and by 11.8% from FY2005 to FY2006. (These increases followed three years of falling receipts, FY2000 through FY2003.) As percentages of GDP, receipts rose from 16.3% of GDP in FY2004 (the lowest level for receipts since FY1959) to 18.4% of GDP in FY2006. OMB showed little change in receipts as a share of GDP over the budget's five years, rising in FY2012 to 18.6% of GDP. CBO's baseline showed receipts jumping to 19.8% of GDP in FY2012 once the 2001 and 2003 tax cuts expire.

Modifying CBO's baseline revenue estimates and projections by using its alternative revenue policy estimates produces slower growth in receipts, both in dollars and as shares of GDP, than in CBO's baseline. The alternative estimate assumes the extensions of all expiring tax cuts, an annual adjustment to the AMT to halt its expanding coverage, and the interaction effect of the extensions and the AMT.¹¹ The changes in policy show receipts falling as a percentage of GDP to approximately 17.5% by FY2012, where they remain through FY2017. In FY2008, CBO estimates that the alternative revenue assumptions would produce $70 billion less revenue than the baseline. By FY2012, the alternative revenue estimate is $389 billion smaller than baseline revenues and in FY2017, the alternative has fallen $560 billion below the baseline projection.

Figure 4 uses data from the January and March 2007 CBO budget reports and from the President's FY2008 budget. The 40-year average of receipts as a percentage of GDP (18.3%) is also shown. The figure shows receipts as percentages of GDP for fiscal years 2000 through 2017 (projected). Actual receipts are shown for fiscal years 2000 through 2006. The four estimates shown remain fairly close through FY2009 or FY2010, and then separate by fairly large amounts. In CBO's baseline, receipt estimates are larger as shares of GDP than those of the Administration's proposals or the alternative estimate. The CBO baseline does not include the FY2007 and FY2008 AMT relief that is included in the Administration estimate and the alternative estimate. The separation in the estimates accelerates in FY2011, when the Administration proposal and the alternative estimate assume the permanency of the 2001 and 2003 tax cuts and CBO's baseline does not. CBO's baseline shows a large jump in receipts in FY2011, as the 2001 and 2003 tax cuts expire (as required by current law). It then climbs slowly to just above 20% of GDP in FY2017. CBO's revenue reestimate and the President's revenue estimates remain close through FY2012 (CBO extends the reestimated policies through FY2017). The Administration's revenue estimates show little variation over the five-years in the FY2008 budget, with only a slight rise in the last year. The alternative estimate shows receipts rising slightly (as shares of GDP) in FY2007 before falling through FY2012, and then showing a slight upward trend after that.

 

Figure 4. Receipts, FY2000-FY2017

 

(in percent of GDP)

 

 

 

 

Deficits and Surpluses

 

The President's proposals result in a deficit of $239 billion for FY2008, and a small surplus ($61 billion) in FY2012 (-1.6% of GDP and 0.3% of GDP respectively). The Administration's current service baseline estimates (assuming no policy changes) showed surpluses appearing in FY2010, two years earlier than the budget reaches a surplus.

      Table 4. Surpluses/Deficits(-) for FY2006-FY2012 and FY2017

Achieving the budget's deficit reduction goals during the next five years, according to the Administration, requires strict limits on the growth in total discretionary spending (both defense and domestic), a slowing in the growth rate of some entitlements, and allowing AMT relief to lapse after 2008. Some of the President's proposals would increase spending or reduce receipts, requiring larger spending reductions in other areas of the budget, since the Administration has steadfastly opposed any tax increases to reduce the deficit.¹²

CBO's January 2007 baseline estimates and projections showed the deficit falling in dollars and as a percentage of GDP through FY2011, after which surpluses appear through the end of its projections in FY2017. The assumptions that CBO follows to produce the baseline generated the shrinking deficits and future surpluses. On the revenue side, the baseline assumes the lack of a fix to the expanding coverage of the AMT and, as required by current law, the expiration of the 2001 and 2003 tax cuts at the end of calendar year 2010. These would boost revenues considerably compared to restricting AMT expansion and extending the tax cuts. On the spending side, discretionary spending is assumed to grow at the rate of inflation, which is a slower rate than it has grown recently, and mandatory spending grows with eligible populations and cost-of-living adjustments.

Substituting a selection of the CBO alternative policy scenarios that it included in its January budget report for policy assumptions used in the baseline, produces a growing deficit from FY2007 through FY2017. These selected alternative policies limit the growing coverage of the AMT, extend the 2001 and 2003 tax cuts, and increase discretionary spending at the rate of GDP growth (see the CBO-based alternative estimate in Figure 5). Under these alternative policies, the deficit would grow from an estimated 1.7% of GDP in FY2008 to 2.3% of GDP in FY2012, and to 3.6% of GDP in FY2017.

The House- and Senate-passed budget resolutions contain FY2008 deficits that fall close to the deficit in the President's budget (see Table 4). By FY2012, the Senate resolution has a surplus of $6 billion and the House resolution has a surplus of $153 billion. The difference between the surpluses in the two resolutions is due to different assumptions about future policy. The conference agreement on the budget resolution (S.Con.Res. 21; H.Rept. 110-153) had a deficit of $252 billion in FY2008, becoming a surplus of $41 billion in FY2012.

Figure 5 shows deficit estimates as shares of GDP for FY2000 through FY2017. The actual shares of GDP for the surpluses and deficits are shown for FY2000 through FY2006. For the years through FY2017, the data are taken from the estimates and projections by CBO and OMB in their budget reports for FY2008. The 40-year average deficit (2.3% of GDP) for FY1966 through FY2006 is also shown.

 

Figure 5. Deficits(-) or Surpluses,

 

FY2000-FY2017

 

(in percent of GDP)

 

 

 

The President's policy proposals assume additional spending for defense in FY2007 and FY2008 (and a minimal "placeholder" in FY2009, with no assumptions about additional war funding in subsequent years), tight controls on domestic discretionary spending, a slight slowing in the growth of Medicare and Medicaid, no additional AMT relief after FY2008, and the creation of personal accounts for Social Security in FY2012. The estimates show a rapid decline in the deficit as a percentage of GDP, with a slight surplus appearing in FY2012.

CBO's (March 2007) reestimates of the President's policies (using CBO's underlying economic and budget estimating assumptions and techniques) had the same size deficit in FY2008 (1.6% of GDP), but larger deficits in subsequent years. In FY2012, CBO's reestimate had a small deficit (0.3% of GDP) unlike the small surplus in the President's budget.

The alternative estimate in Figure 5 uses selected (CBO) estimates of alternative policy scenarios. Under these non-baseline assumptions, the deficit estimate, after a drop in FY2007, grows almost steadily through FY2017, when the deficit reaches 3.6% of GDP, the same level reached in FY2004 (this line moves downward in Figure 5).

In addition, a CBO report on The Long-Term Budget Outlook (December 2005) stated

U.S. Council of Economic Advisors. The Economic Report of the President. Washington, GPO, February, 2007.

U.S. Office of Management and Budget. The Budget of the United States Government for Fiscal Year 2008. Washington, GPO, February 5, 2007.

CRS Products

CRS Report RS21992, Extending the 2001, 2003, and 2004 Tax Cuts, by Gregg Esenwein.

CRS Report RL31775, Do Budget Deficits Push Up Interest Rates and Is This the Relevant Question? by Marc Labonte.

CRS Report RS21939, The Magnitude of Changes That Would be Required to Balance the FY2008 Budget, by Marc Labonte.

CRS Report RL31414, Baseline Budget Projections, a Discussion of the Issues, by Marc Labonte.

CRS Report RL30149, The Alternative Minimum Tax for Individuals, by Gregg Esenwein.

CRS Report RL30239, Economic Forecasts and the Budget, by Brian W. Cashell.

CRS Report RL31235, The Economics of the Federal Budget Deficit, by Brian W. Cashell.

CRS Report 98-560, Baselines and Scorekeeping in the Federal Budget Process, by Bill Heniff Jr. and Justin Murray.

CRS Report RS20095, The Congressional Budget Process: A Brief Overview, by James V. Saturno.

CRS Report RS22605, FY2008 Budget Documents: Internet Access and GPO Availability, by Jennifer Teefy.

CRS Report RL30297, Congressional Budget Resolutions: Selected Statistics and Information Guide, by Bill Heniff Jr.

CRS Report 98-720, Manual on the Federal Budget Process, by Robert Keith and Allen Schick.

CRS Report RL30708, Social Security, Saving, and the Economy, by Brian W. Cashell.

CRS Report RL33868, Medicare: FY2008 Budget Issues, by Hinda Chaikind, and Gretchen A. Jacobsen, coordinators.

² The Administration's current services baseline estimates incorporate some of the Administration's policy proposals, such as the extension of the 2001 and 2003 tax cuts. The effect of the Administration's proposals in this report are taken from OMB tables measuring the full effect of the policy changes.

³ The overall small change in revenues obscures much larger increases and decreases in the components of the changes that CBO shows in its report An Analysis of the President's Budgetary Proposals for Fiscal Year 2008 (see table 1-4 on page 7).

⁴ The House and Senate Budget Committees generally use CBO's budget baseline estimates and economic assumptions in creating the annual budget resolution.

⁵ Some of the underlying components of budget estimates are known with some certainty. Demographics are one known component. In the next decade, the expected retirements from the baby boom generation will rapidly increase the spending for Medicare and Social Security as well as other federal activities benefitting the elderly. Because virtually all those who will become eligible for these benefits are alive today, estimating the growth in the populations eligible for these programs is relatively straightforward.

⁶ The current services baseline estimates, like CBO's baseline estimates, are designed to provide "a neutral benchmark against which policy proposals can be measured." For outlays, the modified baseline used this year by OMB assumes that federal pay adjustment assumptions reflect the (usual) first full pay period in January start of pay-compatibility-adjusted raises rather than October 1, that emergency spending is not extended, and that the debt service (interest payment) changes are included in the baseline. These modifications reduced the reported current services baseline outlay estimate by approximately $41 billion in FY2008 and by $84 billion in FY2012.

⁷ CBO lists almost 100 expiring provisions between FY2007 and FY2017. Almost all of them would reduce revenues. See table 4-10 in CBO's report, The Budget and Economic Outlook: Fiscal Years 2008-2017, January 2007, [http://www.cbo.gov/showdoc.cfm?index=7731&sequence=0].

⁸ CBO's reestimates allow a comparison of the CBO baseline and the Administration proposals because both are derived from the same underlying economic and budget estimating assumptions -- only the policy assumptions differ.

⁹ For discussions of the AMT issue, see CRS Report RL30149, The Alternative Minimum Tax for Individuals; and CRS Report RS22100, The Alternative Minimum Tax for Individuals: Legislative Initiatives In The 109th, both by Gregg A. Esenwein.

¹⁰ See CRS Report RS21817, The Alternative Minimum Tax (AMT): Income Entry Points and "Take Back" Effects, by Gregg A. Esenwein, for more information on the interaction of the AMT and the tax cuts.

¹¹ The interactions of AMT reform and the extension of the 2001 and 2003 tax cuts produces greater revenue losses than the two changes separately. CBO includes in its alternative policies an estimate of this effect.

¹² The Administration's current services baseline estimate, which assumes current policy, has smaller deficits and a quicker move to surplus than the deficits and surplus in the President's proposed budget. The cumulative five-year deficit would be smaller without the President's proposed policy changes than with them.

¹³ GAO. The Nation's Long-Term Fiscal Outlook: January 2007 Update. GAO-07-510R. p.1.

¹⁴ CBO. The ABCs of Long-Term budget Challenges, Director's Conference on Budget and Accounting for Long-Term Obligations, Opening Remarks by Donald B. Marron, Acting Director, December 8, 2006. p. 2.

¹⁵ CBO, The Long-Term Budget Outlook, December, 2005, p. 1.

¹⁶ OMB, Budget of the United States Government for Fiscal Year 2008, February, 2007, p. 16.