CBO Director's Letter to Kasich Including Monthly Budget Review

May 5, 1998

Honorable John R. Kasich

Dear Mr. Chairman:

[1] Based on Treasury reports of actual receipts and outlays since our March baseline was completed, CBO now estimates that the surplus for 1998 is likely to be $43 billion to $63 billion -- $35 billion to $55 billion larger than the $8 billion projected in March. In addition, the strength of revenues this year suggests that the surplus is also likely to be larger in succeeding years than was previously anticipated -- by $20 billion to $30 billion in 1999 (resulting in a surplus of $30 billion or more instead of the $9 billion projected in March) and by smaller amounts thereafter.

[2] Although CBO has not undertaken a comprehensive revision of our baseline projections, cumulative developments over the past few months indicate that the 1998 surplus will be significantly larger than was previously estimated. About two-thirds of the increase in the estimated surplus for 1998 stems from unexpected revenues. Although smaller than last year, a surge in April tax receipts above the level previously projected has occurred again this year. Due almost entirely to an unanticipated increase in nonwithheld taxes, this April's receipts exceeded CBO's March baseline estimate by about $20 billion. In addition, withheld taxes received in recent months have continued to be strong, reflecting in part higher-than- expected total wages in the first quarter of calendar year 1998. Unless the current growth in withheld taxes slows abruptly, it seems likely that total revenues for 1998 will be from $25 billion to $35 billion higher than the $1,680 billion CBO projected in March -- an increase of about 1.5 percent to 2 percent.

[3] Similarly, lower-than-anticipated spending through March and a variety of other developments suggest that total outlays are likely to be $10 billion to $20 billion (about 0.5 percent to 1 percent) lower than CBO's March estimate. Spending is lower than expected in a number of areas, most notably for programs of the National Institutes of Health, the Federal Emergency Management Agency, and the Federal Highway Administration. Offsetting collections, which are recorded as negative outlays, are also higher than expected in some cases -- particularly for the Federal Housing Administration.

[4] In addition, a number of discrete decisions or events could hold this year's net outlays below previous projections. For instance, based on the President's budget, we have assumed that the Administration would record in 1998 the cost of defaults and modifications of loans to winners of an electromagnetic spectrum auction conducted by the Federal Communications Commission. The cost has not been recorded yet. If the Administration chooses not to recognize the cost this year, 1998 outlays will be $3.5 billion lower than we anticipated. Finally, the higher-than-anticipated surplus will reduce total federal borrowing needs, thereby lowering interest payments by close to $2 billion in 1998.

[5] In the absence of an unexpectedly severe downturn in the economy, it seems likely that the surplus will also be larger in 1999 and succeeding years than CBO projected in March. However, because current data do not consistently indicate any long-term improvement in the economy relative to our winter forecast, the likely increase in the surplus for 1999 ($20 billion to $30 billion above the March projection) is smaller than the increase in 1998, and the probable increase declines further in subsequent years.

[6] I have attached a copy of CBO's Monthly Budget Review, which will be released tomorrow. I hope the information contained in this letter and that report is useful in your deliberations on the budget. As the year progresses, we will provide you with any additional information that sheds light on likely budget outcomes for 1998.

Sincerely,

June E. O'Neill

Identical letter sent to:

Honorable Pete V. Domenici,

Honorable Frank R. Lautenberg,

MONTHLY BUDGET REVIEW

Fiscal Year 1998

Based on the Monthly Treasury Statement for March

March 6, 1998

[7] A surge in tax collections during the last week of April raised receipts nearly $20 billion over the expected level for the month. A surplus of $123 billion is estimated for April, and it now appears that the fiscal year will end with a surplus on the order of $43 billion to $63 billion, an increase of $35 billion to $55 billion above the $8 billion surplus projected by CBO in March.

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Receipts            118.4               117.9               -0.5

SOURCE: Department of the Treasury and Congressional Budget

[8] The March deficit of $13.8 billion was $1.2 billion below CBO's estimate for the month, within the expected $2 billion error range for monthly estimates.

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SOURCE: Department of the Treasury and Congressional Budget Office.

[9] An unusually large portion of April receipts were recorded in the closing days of the month, bringing April receipts to a record total of about $260 billion, $31 billion above last year's level. Outlays in April are estimated to be about $137 billion, roughly $2 billion over last year.

[10] The expected surplus of $123 billion for April is $29 billion more than the $94 billion surplus posted a year ago.

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SOURCE: Department of the Treasury and Congressional Budget Office.

[11] Receipts for the first seven months of the fiscal year are up 11 percent over the amount collected last year for the same period, while outlays are up 3.3 percent.

[12] The cumulative net result through April is expected to be a surplus of $53 billion, a $70 billion improvement over the comparable result last year.

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Individual Income    454.7        512.1             12.6

SOURCE: Department of the Treasury and Congressional Budget Office.

[13] April receipts were nearly $20 billion higher than CBO had expected for the month, with the unexpected increase almost entirely in the nonwithheld component of individual income and employment taxes. That component includes final payments on 1997 tax liabilities as well as quarterly payments on estimated 1998 tax liabilities. Although details will not be available until later in the year, it is likely that taxes paid on capital gains realizations during 1997 will prove to be a major factor underlying the robust nonwithheld April receipts.

[14] Withheld income and employment tax collections through April were strong, up 9.3 percent over last year. Continued strength in those collections, coupled with the higher-than-expected nonwithheld individual income and employment tax collections, is likely to boost total receipts above CBO's March estimate by $25 billion to $35 billion -- an increase of about 1.5 percent to 2 percent.

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SOURCE: Department of the Treasury and Congressional Budget Office.

[15] Outlays in April of $137 billion are estimated to be only slightly more than the level posted a year ago. Nearly $3 billion in offsetting receipts from the February sale of the naval petroleum oil reserve are expected to be included in the April monthly Treasury statement.

[16] Cumulative outlays for October through April are estimated to be up 3.3 percent over last year, slower than the 4.4 percent growth for the fiscal year projected by CBO in March. At this point, total outlays for the fiscal year are likely to be $ 10 billion to $20 billion below CBO's March estimate, a decrease of roughly 1 percent.

[17] Outlays for a number of different programs are likely to fall short of CBO's March estimates, including highway construction grants slowed by the short-term authorization and the delay in reauthorization, Medicare spending slowed by payment lags, disaster assistance outlays stalled by court action, and stronger-than- expected offsetting receipts for the Federal Housing Administration. Outlays through March also have been lower than expected for agriculture, energy, public health, and veterans' affairs programs. In addition, debt-service costs will be lower than estimated as a result of reduced borrowing needs.

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SOURCE: Congressional Budget Office.

[18] The surge in April tax collections, continuing strong growth in withheld income and employment taxes, and slower-than- estimated growth in outlays point to a surplus for the fiscal year that could be $35 billion to $55 billion higher than the $8 billion surplus projected by CBO in March.