Preliminary Analysis of the President’s Budget
CBO has just released its preliminary analysis of the President’s budget. This analysis presents CBO’s assessment of the budgetary outlook for the 2010-2020 period assuming enactment of the President’s policy proposals and reflecting CBO’s economic forecast and technical estimating procedures. The analysis compares that outlook with CBO’s baseline projections, which—unlike the President’s budget—assume that current laws and policies that affect federal spending and revenues remain unchanged. A report that presents the full analysis, including CBO’s assessment of the macroeconomic effects of the President’s proposals, will be published later this month.
CBO’s preliminary analysis (incorporating contributions from the staff of the Joint Committee on Taxation) indicates the following:
- If the President’s proposals were enacted, the federal government would record deficits of $1.5 trillion in 2010 and $1.3 trillion in 2011. Those deficits would amount to 10.3 percent and 8.9 percent of gross domestic product (GDP), respectively. By comparison, the deficit in 2009 totaled 9.9 percent of GDP.
- Measured relative to the size of the economy, the deficit under the President’s proposals would fall to about 4 percent of GDP by 2014 but would rise steadily thereafter. Compared with CBO’s baseline projections, deficits under the proposals would be about 2 percentage points of GDP higher in fiscal years 2011 and 2012, 1.3 percentage points greater in 2013, and above baseline levels by growing amounts thereafter. By 2020, the deficit would reach 5.6 percent of GDP, compared with 3.0 percent under CBO’s baseline projections.
- Under the President’s budget, the cumulative deficit over the 2011–2020 period would equal $9.8 trillion (5.2 percent of GDP), $3.8 trillion more than the cumulative deficit projected in the baseline. Of that difference, roughly $3.0 trillion stems directly from proposed changes in policy and another $0.8 trillion results from additional interest on the public debt. By far the largest budgetary impact would stem from the President’s proposals to index the alternative minimum tax (AMT) for inflation and to extend various tax provisions contained in the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA). Over the next 10 years, those policies would reduce revenues and boost outlays for refundable tax credits by a total of $3.0 trillion. Other policies would have smaller but still significant effects on the budget and would largely offset one another.
- Under the President’s budget, debt held by the public would grow from $7.5 trillion (53 percent of GDP) at the end of 2009 to $20.3 trillion (90 percent of GDP) at the end of 2020. As a result, net interest would more than quadruple between 2010 and 2020 in nominal dollars (without an adjustment for inflation); it would expand from 1.4 percent of GDP in 2010 to 4.1 percent in 2020.
- Revenues under the President’s proposals would be $1.4 trillion (or 4 percent) below CBO’s baseline projections from 2011 to 2020, largely because of the President’s proposals to index the parameters of the AMT for inflation starting at their 2009 levels and to extend many of the tax reductions enacted in 2001 (EGTRRA) and 2003 (JGTRRA). CBO’s baseline projections reflect current law, under which the parameters of the AMT revert to earlier levels and the reductions under EGTRRA and JGTRRA expire as scheduled at the end of December 2010. Other proposals—including ones associated with significant changes in the nation’s health insurance system—would, on net, increase revenues.
- Mandatory outlays under the President’s proposals would be above CBO’s baseline projections by $1.9 trillion (or 8 percent) over the 2011–2020 period, about one-third of which would stem from net additional spending related to proposed changes to the health insurance system and health care programs. Much of the rest of the increase in mandatory spending would result from increased spending for refundable tax credits and for the Pell Grant program for postsecondary students.
- Discretionary spending under the President’s budget would be about $0.3 trillion (or 2 percent) lower than the cumulative amount in CBO’s baseline, which assumes that appropriations continue each year at their 2010 amounts with adjustments for inflation. The largest factor in that reduction relates to funding for the wars in Iraq and Afghanistan: The President’s request includes a placeholder of $50 billion a year after 2011, whereas CBO’s baseline assumes that funding will continue, with adjustments for inflation, at the level provided so far this year, which is $130 billion. Excluding funding for war-related activities and the Pell Grant program (which the President proposes to convert to a mandatory program), discretionary outlays over the 2011-2020 period would be $0.5 trillion (or 4 percent) greater than the amounts projected in CBO’s baseline.
For 2010, CBO’s estimate of the deficit under the President’s budget is $56 billion less than the Administration’s figure, largely because of differences in baseline estimates of spending. In contrast, largely because it projects lower baseline revenues in future years, CBO estimates deficits that are $75 billion higher for 2011 and $1.2 trillion greater over the 2011–2020 period than what the Administration anticipates under the President’s budget.
In conjunction with its analysis of the President’s budget, CBO has also updated its baseline budget projections. CBO has not modified its economic forecast, so those updated projections just take into account new information obtained about various aspects of the budget since the previous projections were completed in January. The resulting changes are modest, adding $11 billion to the projected deficit in 2010 and reducing projected deficits over the 2011-2020 period by a total of $63 billion.