Chapter
1

CBO’s Baseline and
Estimate of the President’s Budget

Since the Congressional Budget Office (CBO) last issued its baseline projections, in January 2009, the out­look for the budget deficit has deteriorated further.¹ Enactment of stimulus legislation and omnibus appropri­ations, a worsening of the economic outlook, and other factors have increased CBO’s projections of the deficit by more than $400 billion in both 2009 and 2010 and by smaller amounts thereafter. As a result, if current policies remain the same, CBO now anticipates that the deficit will total almost $1.7 trillion (11.9 percent of gross domestic product, or GDP) this year and $1.1 trillion (7.9 percent of GDP) next year, the largest deficits as a share of GDP since 1945 (see Table 1-1).

Table 1-1.  

Comparison of Projected Revenues, Outlays, and Deficits in CBO’s March 2009 Baseline and CBO’s Estimate of the President’s Budget

(Billions of dollars)

			Actual 2008	2009	2010	2011	2012	2013	2014	2015	2016	2017	2018	2019	Total, 2010- 2014	Total, 2010- 2019
			CBO's Baseline
Revenues			2,524	2,186	2,334	2,783	3,086	3,281	3,436	3,610	3,761	3,927	4,083	4,247	14,921	34,550
Outlays			2,983	3,853	3,473	3,476	3,417	3,581	3,746	3,892	4,088	4,239	4,408	4,671	17,693	38,991
			_____	_____	______	_____	_____	_____	_____	_____	_____	_____	_____	_____	______	______
	Total Deficit		-459	-1,667	-1,139	-693	-331	-300	-310	-282	-327	-312	-325	-423	-2,772	-4,441
			CBO's Estimate of the President's Budget
Revenues			2,524	2,159	2,289	2,586	2,917	3,095	3,231	3,387	3,522	3,669	3,807	3,950	14,118	32,452
Outlays			2,983	4,004	3,669	3,556	3,575	3,767	3,979	4,172	4,417	4,619	4,830	5,139	18,546	41,723
			_____	______	______	_____	_____	_____	_____	_____	_____	_____	______	______	______	______
	Total Deficit		-459	-1,845	-1,379	-970	-658	-672	-749	-785	-895	-949	-1,023	-1,189	-4,429	-9,270
			Difference Between the President's Budget and CBO's Baseline
Revenues			n.a.	-26	-45	-198	-169	-187	-205	-223	-240	-257	-276	-297	-804	-2,097
Outlays			n.a.	151	196	80	158	186	233	280	329	380	422	468	853	2,732
			___	_____	_____	_____	_____	_____	_____	_____	_____	_____	_____	_____	______	______
	Total Deficita		n.a.	-177	-241	-278	-327	-373	-438	-503	-568	-637	-698	-765	-1,657	-4,829
Memorandum:
Total Deficit as a Percentage of GDP
	CBO's baseline		-3.2	-11.9	-7.9	-4.6	-2.1	-1.8	-1.8	-1.6	-1.8	-1.6	-1.6	-2.0	-3.5	-2.5
	CBO's estimate of the President's budget		-3.2	-13.1	-9.6	-6.4	-4.2	-4.1	-4.3	-4.4	-4.8	-4.9	-5.1	-5.7	-5.6	-5.3
Debt Held by the Public as a Percentage of GDP
	CBO's baseline		40.8	54.8	60.1	62.0	61.6	60.7	60.2	59.5	59.0	58.5	56.1	56.1	n.a.	n.a.
	CBO's estimate of the President's budget		40.8	56.8	64.7	68.3	70.1	71.4	73.2	75.2	77.5	79.9	79.3	82.4	n.a.	n.a.

Source: Congressional Budget Office.

Note: GDP = gross domestic product; n.a. = not applicable.

a. Negative numbers indicate an increase relative to the baseline deficit.

CBO has also analyzed the policy proposals outlined in the President’s preliminary budget request.² Under those policies, the deficit would total $1.8 trillion (13.1 percent of GDP) in 2009 and $1.4 trillion (9.6 percent of GDP) in 2010. The cumulative deficit over the 2010–2019 pro­jection period would equal $9.3 trillion and would aver­age 5.3 percent of GDP. Debt held by the public would rise from 57 percent of GDP in 2009 to 82 percent of GDP in 2019.

CBO’s Baseline Budget Projections

CBO’s baseline projections are estimates of federal revenues and spending for the next 10 years under the assumption that current laws and policies remain in place. The projected deficit for fiscal year 2009 under that assumption—$1.7 trillion—is up significantly from the $1.2 trillion projected in January. (Additional fund­ing likely to be requested for military operations in Iraq and Afghanistan would add to that total.) The increase in the projected deficit results primarily from legislation enacted since January and from an updated assessment of the costs of actions taken in response to the turmoil affecting the financial markets. In particular, enactment of the economic stimulus legislation—the American Recovery and Reinvestment Act of 2009 (ARRA, Public Law 111-5)—will boost outlays in 2009 by $120 billion and reduce revenues by $65 billion, CBO and the Joint Committee on Taxation (JCT) estimate. In addition, CBO has increased its estimate of outlays in 2009 associ­ated with the Troubled Asset Relief Program (TARP) by over $150 billion.³ Most of the remaining change in CBO’s baseline estimate for 2009 reflects lower tax receipts as well as higher costs for federal operation of Fannie Mae and Freddie Mac, the two government-sponsored enterprises that guarantee mortgages and mortgage-backed securities and that have now been taken over by the government.

Under current laws and policies, the budget deficit in 2010 would total $1.1 trillion, CBO estimates—$436 billion higher than projected in January. The cumulative deficit for the 2010–2019 period has also increased significantly since January. Under the assump­tion that current laws remain in place over the next 10 years, CBO projects baseline deficits totaling $4.4 trillion (2.5 percent of GDP) from 2010 to 2019, roughly $1.3 trillion higher than its previous projection of $3.1 trillion. Most of the change in the 10-year deficit projection is attributable to recent legislative actions, with changes in other factors having largely offsetting effects on projected deficits.

As a percent age of GDP, the baseline budget deficit peaks in 2009 and then falls in each year through 2013, when it reaches 1.8 percent of GDP (see Table 1-2). The baseline deficit is projected to roughly stabilize as a share of out­put thereafter, ranging between 1.6 percent and 2.0 percent of GDP through 2019.

Table 1-2.  

CBO’s Baseline Budget Projections

				Actual 2008	2009	2010	2011	2012	2013	2014	2015	2016	2017	2018	2019	Total, 2010- 2014	Total, 2010- 2019
				In Billions of Dollars
Revenues
	Individual income taxes			1,146	968	1,043	1,359	1,525	1,658	1,767	1,878	1,986	2,101	2,205	2,317	7,352	17,838
	Corporate income taxes			304	174	206	281	339	339	328	338	335	334	336	332	1,493	3,167
	Social insurance taxes			900	891	926	972	1,022	1,074	1,117	1,154	1,190	1,231	1,275	1,322	5,111	11,284
	Other			174	153	160	171	200	211	223	239	250	261	268	277	965	2,261
				_____	_____	_____	_____	_____	_____	_____	_____	_____	_____	_____	_____	______	______
		Total Revenues		2,524	2,186	2,334	2,783	3,086	3,281	3,436	3,610	3,761	3,927	4,083	4,247	14,921	34,550
			On-budget	1,866	1,533	1,666	2,089	2,360	2,515	2,634	2,776	2,897	3,029	3,151	3,279	11,264	26,396
			Off-budget	658	653	668	695	726	766	802	834	864	898	932	968	3,657	8,154
Outlays
	Mandatory spending			1,595	2,463	2,004	1,988	1,921	2,023	2,118	2,205	2,345	2,450	2,558	2,753	10,053	22,365
	Discretionary spending			1,135	1,221	1,302	1,285	1,240	1,239	1,244	1,256	1,279	1,300	1,320	1,352	6,310	12,816
	Net interest			253	170	167	203	256	320	385	431	464	489	530	566	1,330	3,810
				_____	_____	_____	_____	_____	_____	_____	_____	_____	_____	_____	_____	______	______
		Total Outlays		2,983	3,853	3,473	3,476	3,417	3,581	3,746	3,892	4,088	4,239	4,408	4,671	17,693	38,991
			On-budget	2,508	3,330	2,920	2,904	2,825	2,964	3,101	3,216	3,376	3,485	3,609	3,823	14,713	32,223
			Off-budget	475	523	553	572	592	618	645	676	712	754	799	848	2,980	6,768
Deficit (-) or Surplus				-459	-1,667	-1,139	-693	-331	-300	-310	-282	-327	-312	-325	-423	-2,772	-4,441
	On-budget			-642	-1,798	-1,254	-815	-464	-448	-468	-440	-479	-456	-458	-544	-3,449	-5,827
	Off-budget			183	130	115	123	134	148	157	158	152	144	133	121	677	1,385
Debt Held by the Public				5,803	7,703	8,658	9,340	9,712	10,016	10,372	10,684	11,034	11,365	11,334	11,753	n.a.	n.a.
Memorandum:
Gross Domestic Product				14,222	14,057	14,405	15,061	15,774	16,496	17,241	17,957	18,688	19,436	20,191	20,966	78,977	176,215
As a Percentage of Gross Domestic Product
Revenues
	Individual income taxes			8.1	6.9	7.2	9.0	9.7	10.0	10.2	10.5	10.6	10.8	10.9	11.0	9.3	10.1
	Corporate income taxes			2.1	1.2	1.4	1.9	2.1	2.1	1.9	1.9	1.8	1.7	1.7	1.6	1.9	1.8
	Social insurance taxes			6.3	6.3	6.4	6.5	6.5	6.5	6.5	6.4	6.4	6.3	6.3	6.3	6.5	6.4
	Other			1.2	1.1	1.1	1.1	1.3	1.3	1.3	1.3	1.3	1.3	1.3	1.3	1.2	1.3
				____	____	____	____	____	____	____	____	____	____	____	____	____	____
		Total Revenues		17.7	15.5	16.2	18.5	19.6	19.9	19.9	20.1	20.1	20.2	20.2	20.3	18.9	19.6
			On-budget	13.1	10.9	11.6	13.9	15.0	15.2	15.3	15.5	15.5	15.6	15.6	15.6	14.3	15.0
			Off-budget	4.6	4.6	4.6	4.6	4.6	4.6	4.7	4.6	4.6	4.6	4.6	4.6	4.6	4.6
Outlays
	Mandatory spending			11.2	17.5	13.9	13.2	12.2	12.3	12.3	12.3	12.5	12.6	12.7	13.1	12.7	12.7
	Discretionary spending			8.0	8.7	9.0	8.5	7.9	7.5	7.2	7.0	6.8	6.7	6.5	6.4	8.0	7.3
	Net interest			1.8	1.2	1.2	1.3	1.6	1.9	2.2	2.4	2.5	2.5	2.6	2.7	1.7	2.2
				____	____	____	____	____	____	____	____	____	____	____	____	____	____
		Total Outlays		21.0	27.4	24.1	23.1	21.7	21.7	21.7	21.7	21.9	21.8	21.8	22.3	22.4	22.1
			On-budget	17.6	23.7	20.3	19.3	17.9	18.0	18.0	17.9	18.1	17.9	17.9	18.2	18.6	18.3
			Off-budget	3.3	3.7	3.8	3.8	3.8	3.7	3.7	3.8	3.8	3.9	4.0	4.0	3.8	3.8
Deficit (-) or Surplus				-3.2	-11.9	-7.9	-4.6	-2.1	-1.8	-1.8	-1.6	-1.8	-1.6	-1.6	-2.0	-3.5	-2.5
	On-budget			-4.5	-12.8	-8.7	-5.4	-2.9	-2.7	-2.7	-2.5	-2.6	-2.3	-2.3	-2.6	-4.4	-3.3
	Off-budget			1.3	0.9	0.8	0.8	0.8	0.9	0.9	0.9	0.8	0.7	0.7	0.6	0.9	0.8
Debt Held by the Public				40.8	54.8	60.1	62.0	61.6	60.7	60.2	59.5	59.0	58.5	56.1	56.1	n.a.	n.a.

Source: Congressional Budget Office.

Note: n.a. = not applicable.

Revenues in CBO’s baseline grow from a low of 15.5 per­cent of GDP this year to 19.9 percent in 2013 and remain at roughly 20 percent of GDP thereafter. Much of that increase results from the growing impact of the alter­native minimum tax (AMT) and, even more significant, the scheduled expiration in December 2010 of provisions 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), as well as tax provisions enacted in ARRA.

As a percent age of GDP, outlays in the baseline peak in 2009 at 27.4 percent of GDP and then fall to 21.7 percent in 2012. They remain roughly constant thereafter, at about 22 percent of GDP from 2013 to 2019.

CBO generally constructs its baseline in accordance with the provisions set forth in the Balanced Budget and Emergency Deficit Control Act of 1985 and the Congres­sional Budget and Impoundment Control Act of 1974. (Although the provisions of the Deficit Control Act that pertain to the baseline expired at the end of September 2006, CBO has continued to use that law’s specifications as guidance in preparing its baseline.) The resulting base­line projections are not intended to be a prediction of future budget outcomes. Rather, they serve as a bench­mark that lawmakers can use to measure the effects of spending or revenue proposals, such as those in the President’s budget.

To project revenues and mandatory spending, CBO assumes that current laws continue unchanged in the future, with only a few exceptions.⁴ That approach includes the assumption that various changes in tax law enacted since 2001 expire as scheduled, by the end of December 2010, causing revenues to rise thereafter.

The Deficit Control Act also provides guidelines for CBO’s projections of discretionary spending, so CBO normally assumes that appropriations each year are equal to the current year’s budget authority adjusted for infla­tion and for certain other factors. However, CBO, with the agreement of the budget committees, deviated from that procedure for its current baseline. Because of the unusual size and nature of the funding provided in ARRA, the $283 billion in discretionary budget authority provided in that act has not been extrapolated in CBO’s baseline (that is, funding projected for subsequent years is based on enacted appropriations excluding those in ARRA).

Changes in CBO’s Baseline Since January 2009

Revisions to CBO’s baseline incorporate enacted legisla­tion as well as economic data and technical information that have become available since CBO completed its pre­vious baseline projections in January.

Since January, CBO has increased its current-law estimate of the 2009 deficit by $481 billion, to $1.7 trillion (see Table 1-3). Much of that change stems from lower esti­mated revenues and the increased costs attributable to the TARP. Over the 2010–2019 period, CBO has increased its estimate of the cumulative deficit by $1.3 trillion—mostly because of recently enacted legislation. Nearly half of that projected increase occurs in 2010 and 2011, largely as a result of the 2009 stimulus legislation (ARRA). Revisions stemming from CBO’s updated eco­nomic forecast are substantial but are mostly offsetting between the revenue and outlay sides of the budget; changes in economic assumptions reduce projections of revenues and outlays by $1.3 trillion to $1.4 trillion over the 10-year period. Changes resulting from technical adjustments are roughly $177 billion for 2009, primarily because of revised estimates of the cost of the TARP and the conservatorship of Fannie Mae and Freddie Mac, as well as reductions in estimated revenue. Technical adjust­ments have much smaller effects in subsequent years.

Table 1-3.  

Changes in CBO’s Baseline Projections of the Deficit Since January 2009

(Billions of dollars)

							2009	2010	2011	2012	2013	2014	2015	2016	2017	2018	2019	Total, 2010- 2014	Total, 2010- 2019
Total Deficit as Projected in January 2009							-1,186	-703	-498	-264	-257	-250	-234	-272	-234	-188	-235	-1,972	-3,135
Legislative Changes
	Revenues						-61	-173	-1	17	10	13	14	13	12	12	7	-133	-76
	Outlays
		Mandatory outlays
			Stimulus				90	116	56	12	10	16	6	-4	-3	-1	-1	209	205
			CHIP				2	5	7	8	9	3	1	1	1	1	1	33	38
			Other				2	*	*	1	1	4	5	5	6	6	7	5	34
							__	___	__	__	__	__	__	__	__	__	__	___	___
				Subtotal, mandatory			95	120	63	20	20	23	12	3	4	6	6	247	277
		Discretionary outlays
			Stimulus				30	103	71	35	20	12	6	2	1	1	*	241	251
			Other Defense				1	1	1	1	1	1	1	1	1	1	1	6	13
			Other Nondefense				8	19	23	24	24	25	25	26	26	27	27	115	246
							__	__	__	__	__	__	__	__	__	__	__	___	___
				Subtotal, discretionary			39	124	95	60	46	38	33	29	28	29	29	362	510
		Net interest					1	5	13	22	31	41	48	54	59	63	69	112	404
							___	___	___	___	__	___	__	__	__	__	___	___	____
				Subtotal, outlays			134	250	171	102	97	101	92	86	91	98	104	720	1,191
					Total, Legislative Changesa		-195	-422	-172	-84	-86	-89	-78	-73	-79	-86	-97	-853	-1,267
Economic Changes
	Revenues						-45	-14	-24	-45	-71	-109	-145	-175	-201	-232	-259	-263	-1,276
	Outlays
		Mandatory outlays
			Social Security				0	0	-6	-17	-28	-39	-48	-54	-58	-62	-67	-90	-378
			Other COLA programs				0	*	-2	-6	-9	-12	-15	-21	-18	-19	-20	-29	-122
			Medicare				-1	*	-2	-6	-12	-17	-22	-26	-31	-36	-42	-37	-194
			Medicaid				1	*	-3	-6	-9	-14	-17	-19	-22	-24	-27	-31	-140
			Unemployment				5	2	1	*	-1	-2	-2	-3	-3	-3	-3	-1	-15
			Other				-1	-2	-2	-1	-2	-1	-2	*	-4	-4	-4	-8	-22
							__	__	__	__	__	__	___	___	___	___	___	___	___
				Subtotal, mandatory			4	*	-14	-36	-61	-84	-105	-123	-136	-148	-164	-195	-871
		Discretionary outlays					*	1	-4	-13	-27	-41	-51	-58	-64	-70	-76	-84	-404
		Net interest
			Debt service				*	1	1	2	1	-1	-3	-4	-4	-4	-4	3	-17
			Rate effect and inflation				-5	5	3	-19	-38	-24	-13	-5	-2	3	5	-73	-85
							__	_	__	___	___	___	___	__	__	__	_	___	___
				Subtotal, net interest			-5	5	5	-18	-37	-25	-16	-9	-6	-2	2	-71	-101
				Subtotal, outlays			-1	6	-13	-67	-126	-150	-172	-190	-206	-220	-238	-350	-1,377
					Total, Economic Changesa		-43	-20	-11	23	55	41	27	15	5	-12	-21	87	101
Technical Changes
	Revenues						-66	-12	-17	-11	-11	-11	-6	-5	-6	-6	-5	-62	-89
	Outlays
		Mandatory outlays
			TARP				152	15	0	0	0	0	0	0	0	0	0	15	15
			Fannie Mae and Freddie Mac				52	5	7	8	8	2	1	*	-1	-1	-1	30	28
			Medicare				-2	-2	4	11	13	19	13	11	15	21	17	45	123
			Deposit Insurance				-5	6	10	11	7	*	-6	-6	-7	-6	*	34	9
			Other				3	2	4	2	2	2	3	2	3	3	5	12	27
							___	__	__	__	__	__	__	__	__	__	__	___	___
				Subtotal, mandatory			200	26	25	31	31	23	11	7	10	17	20	137	201
		Discretionary outlays					-2	-10	5	*	1	1	*	*	*	*	*	-4	-4
		Net interest
			Debt service				1	3	4	8	16	27	33	38	44	50	56	57	278
			Other				-21	-37	-39	-44	-48	-49	-52	-53	-55	-33	-12	-218	-424
							___	___	___	___	___	___	___	___	___	___	___	____	____
				Subtotal, net interest			-21	-35	-35	-37	-32	-22	-19	-15	-12	16	44	-161	-146
				Subtotal, outlays			177	-19	-5	-5	*	1	-9	-8	-1	33	64	-28	51
						Total, Technical Changesa	-243	7	-11	-5	-11	-12	3	3	-4	-38	-69	-34	-140
Total Impact on the Deficita							-481	-436	-194	-67	-43	-61	-48	-55	-78	-136	-188	-801	-1,307
Total Deficit as Projected in March 2009							-1,667	-1,139	-693	-331	-300	-310	-282	-327	-312	-325	-423	-2,772	-4,441
Memorandum:
Total Revenue Changes							-172	-199	-41	-38	-72	-108	-137	-168	-195	-226	-258	-458	-1,441
Total Outlay Changes							310	237	153	29	-29	-47	-88	-113	-117	-90	-70	342	-135

Source: Congressional Budget Office.

Note: * = between -$500 million and $500 million; CHIP = Children’s Health Insurance Program; COLA = cost-of-living adjustment; TARP = Troubled Asset Relief Program.

a. Negative numbers indicate an increase in the deficit.

Legislative Changes

CBO estimates that enacted legislation will increase the deficit by $195 billion in 2009 and by $1.3 trillion over the 2010–2019 period. Nearly all of that increase is attributable to the economic stimulus legislation.⁵

Changes in Outlays. Legislation enacted since January will increase outlays by $134 billion in 2009 and by $1.2 trillion over the 2010–2019 period, according to CBO’s estimates. Much of that change results from the enactment of ARRA, but some is attributable to passage of the Omnibus Appropriations Act of 2009 (P.L. 111-8) and the reauthorization of the Children’s Health Insur­ance Program (CHIP).

Economic Stimulus. Provisions in ARRA will increase out­lays in 2009 by $120 billion in CBO’s estimates; $90 bil­lion of that total is classified as mandatory outlays, and the remaining $30 billion affects discretionary programs. Over the 10-year period, additional outlays resulting from the stimulus package are estimated to total $456 bil­lion, nearly evenly split between mandatory and discre­tionary programs.⁶

Children’s Health Insurance. The Children’s Health Insur­ance Program Reauthorization Act of 2009 (P.L. 111-3) reauthorized and expanded CHIP through 2013 and increased federal funding for the program, relative to January baseline figures. CBO estimates that the act will increase mandatory outlays by $2 billion in 2009 and by $38 billion between 2010 and 2019.

Omnibus Appropriations. The Omnibus Appropriations Act of 2009, enacted in March, provided funding for the rest of fiscal year 2009 for all agencies except the Depart­ments of Defense, Homeland Security, and Veterans Affairs, which received their appropriations last fall. The funding in that bill (on an annualized basis) is about $20 billion greater than the amount in the continuing resolution, which provided funding for the first part of the fiscal year and was the basis for CBO’s January base­line projections. CBO therefore estimates that the omni­bus legislation will increase discretionary outlays by $9 billion for 2009; assuming similar appropriations (adjusted for inflation) over the 2010–2019 period adds $260 billion to the baseline totals.

Net Interest. Recently enacted legislation directly increased the deficit for 2009 by an estimated $195 bil­lion and the cumulative baseline deficit by $863 billion. Interest costs on the additional debt required to fund those deficits are estimated to boost net interest costs by $404 billion over the 10-year period. Therefore, pro­jected outlays between 2010 and 2019 have risen by $1.3 trillion as the result of enacted legislation.

Changes in Revenues. As a result of recently enacted leg­islation, CBO has reduced its estimate of revenues by $61 billion for 2009 and by $76 billion for the 2010–2019 period. The largest change occurs in 2010, for which CBO has reduced its projection by $173 bil­lion; over the following nine years, however, legislation accounts for an upward revision to revenues of $97 billion.

Economic Stimulus. The largest legislative changes stem from enactment of ARRA. Several provisions of that law account for most of the impact on revenues: the new Making Work Pay tax credit, which is in effect through 2010; one year of relief to individuals from the AMT; and business tax provisions related to depreciation and income from cancellation of indebtedness. JCT and CBO estimate that ARRA will lower revenues by $245 billion over the 2009–2010 period and produce small gains beginning in 2012, yielding a net reduction of reve­nues totaling $212 billion over the 2009–2019 period.⁷

Children’s Health Insurance. CBO also adjusted its base­line projections of revenues to incorporate the effects of an increase in the tobacco tax enacted in the Children’s Health Insurance Program Reauthorization Act of 2009; those increases will raise revenues by $4 billion in 2009 and $71 billion over the 2010–2019 period, CBO estimates.

Economic Changes

In its updated economic forecast, CBO modified projec­tions of real GDP, inflation, interest rates, the unemploy­ment rate, and other economic variables (for details, see Chapter 2). The weaker outlook for the economy gener­ates an upward revision of $43 billion to the estimated 2009 deficit. Over the following 10 years, economic changes significantly affect estimates of revenues and out­lays; those changes largely offset each other, however, because lower projections of inflation have reduced CBO’s estimates of both revenues and outlays. CBO has lowered its projection of revenues by nearly $1.3 trillion but its estimate of outlays by $1.4 trillion. Overall, CBO’s updated economic forecast leads to a $101 billion reduction in the cumulative budget deficit over the next 10 years.

Changes in Revenues. As a result of changes to its eco­nomic outlook since January, revenues under current law would be lower by $45 billion in 2009, by $14 billion in 2010, and by $1.3 trillion, or 3.5 percent, over the 2010–2019 period, CBO estimates. Baseline revenues are now lower because the projection for nominal GDP has decreased by more than $7 trillion, or 3.9 percent, over the 10-year period. Compared with the previous forecast, the outlook for lower nominal GDP stems from a reduc­tion in the level of real economic activity in 2009 as well as lower inflation in 2009 and beyond. Lower projected GDP, in turn, leads to a drop in estimated wages and sal­aries, corporate profits, and other taxable income.

Changes in Outlays. Changes in CBO’s economic forecast have little effect on projected outlays in 2009. However, economic changes—particularly a reduction in various measures of inflation—have significantly decreased pro­jected spending over the following 10 years; CBO has lowered its estimate of outlays by $1.4 trillion, or 3.5 percent , for that period. Over 60 percent of that total change ($871 billion) results from adjustments to spending for mandatory programs, particularly Social Security, retire­ment benefits for federal employees, Medicare, and Med­icaid. About 30 percent ($404 billion) results from reduced estimates of discretionary outlays because the inflation rates used to project future funding are now lower. The remaining change ($101 billion) stems from a decrease in estimated interest on the federal debt.

Social Security and Other Indexed Programs. Over the 10-year baseline period, CBO has reduced estimated out­lays by $500 billion for federal retirement and benefit programs, including Social Security, because projected cost-of-living adjustments (COLAs) have fallen since January. No COLAs are currently projected for such programs from 2010 through 2012; the COLA would amount to less than 2 percent in all future years (an aver­age of 0.8 percent age points below CBO’s previous projections for years after 2011). As a result, estimated outlays for 2010 to 2019 are $378 billion lower for Social Security benefits and $122 billion lower for other federal programs that incorporate a COLA in their benefit calculations (such as civil service retirement, veterans’ compensation and pensions, and other federal retirement programs).

Medicare. Payment rates for most Medicare services are adjusted each year on the basis of the estimated rate of inflation. Because inflation is estimated to be lower, pay­ment rates for most Medicare services are now projected to drop over the 2010–2019 period. By 2019, payment rates will be about 6 percent lower than previously esti­mated. CBO has therefore reduced projected Medicare spending over that period by $194 billion.

Medicaid. The lower inflation forecast has trimmed pro­jections of Medicaid payment rates over the 2010–2019 period, thus reducing estimated Medicaid outlays by approximately $140 billion.

Discretionary Programs. Reductions in the factors used to extrapolate discretionary spending (the GDP price index and the employment cost index for wages and salaries) diminish projected discretionary outlays by $404 billion over the 10-year period.

Net Interest. From 2010 to 2019, CBO’s projection of net interest has been reduced by $101 billion. About one-third of that change stems from lower anticipatedinflation adjustments on Treasury Inflation-Protected Securities (TIPS); the rest results from lower projections of other interest rates (mostly for the 2012–2014 period) and from debt-service costs related to other economic changes.

Technical Changes

In updates to CBO’s baselines, changes not attributable to economic or legislative activity are classified as techni­cal. For 2009, such revisions increase the deficit by $243 billion; they result from adjustments to expected outlays ($177 billion) and expected revenues ($66 bil­lion). Over the following 10 years, technical changes account for small increases in deficit projections, averag­ing about $14 billion a year.

Changes in Revenues. Adjustments to CBO’s technical assumptions reduce projected revenues by $66 billion in 2009 and by $89 billion from 2010 to 2019. The most significant change stems from smaller-than-expected col­lections from employers’ withholding of income and pay­roll (social insurance) taxes from employees’ paychecks. Starting in December, those collections dropped signifi­cantly compared with a year ago, presumably reflecting, at least in part, substantial decreases in year-end bonuses and increasing job losses. However, the year-over-year declines in withholding have continued past the tradi­tional bonus season and are greater than implied by macroeconomic data on labor market activity. CBO assumes that this downward effect on revenues will diminish over the next few years, as most forms of taxable income return to their historical relationship to GDP.

Changes in Outlays. In 2009, technical adjustments increase estimated outlays by $177 billion. Increased subsidy costs estimated for the TARP, Fannie Mae, and Freddie Mac total roughly $200 billion. That increase is partially offset by a reduction in net interest of $21 billion.

Over the 2010–2019 period, technical changes boost estimated outlays by $51 billion (0.1 percent)—the result of a $201 billion increase in mandatory outlays (domi­nated by a $123 billion increase in Medicare outlays) that is partially offset by a $146 billion decrease in net interest outlays.

Troubled Asset Relief Program. Since January, CBO has raised its estimate of the net cost (on a present-value basis) of the transactions covered by the TARP by $152 billion for 2009 and by $15 billion for 2010. Those revisions stem from three factors—changes in financial market conditions, new transactions, and a small shift in the anticipated timing of disbursements.

Since CBO’s previous estimate was completed, market yields on securities issued by the firms that have received TARP funds have increased, thereby boosting the esti­mated subsidy cost of the Treasury’s purchases of pre­ferred stock, asset guarantees, and loans to automakers. Also, the Treasury announced additional deals with Bank of America and American International Group (AIG) as well as participation of up to $50 billion in the Adminis­tration’s foreclosure mitigation plan, all of which involve subsidy rates that are higher than the averages in the pre­vious baseline.⁸

Finally, CBO assumed that more transactions would occur after October 1, which pushes the recognition of more of the subsidy cost into fiscal year 2010.

Fannie Mae and Freddie Mac. As a result of the degree of management and financial control that the federal gov­ernment currently exercises over Fannie Mae and Freddie Mac, CBO has determined that the two corporations should now be included in the federal budget. In January, CBO estimated the subsidy cost for their existing busi­ness when the takeover occurred ($200 billion recorded in 2009) and the estimated subsidy costs for future activi­ties (nearly $40 billion for 2009 and smaller amounts thereafter). Since January, however, the condition of the two entities has turned out to be worse than expected; as a result, CBO has increased its estimate of the present value of future losses for Fannie Mae and Freddie Mac by $52 billion for 2009—most of which stems from loans and guarantees inherited at the time of the conservator­ship—and by $28 billion for their activities between 2010 and 2019.⁹

Medicare. CBO has raised its projection of Medicare out­lays over the 2010–2019 period by $123 billion because of technical factors (although that increase is largely offset by the decrease in estimated Medicare outlays resulting from CBO’s updated economic forecast). The technical changes in the Medicare baseline are the net effect of a $167 billion increase in projected spending for Parts A and B and a $46 billion reduction in projected spending for Part D. (Parts A and B cover medical and surgical benefits; Part D covers prescription drugs.) The major component of the higher projected spending for Parts A and B is a 2 percent increase in projected enrollment because of greater participation in Social Security’s Dis­ability Insurance (DI) program. (Beginning two years after they become eligible for DI, participants in that pro­gram are automatically eligible for benefits through Medicare.) The lower projected spending for the Part D program reflects the expectation that growth in spending for prescription drugs—which has been lower in recent years than CBO had expected—will continue to be lower than CBO had previously projected.

Deposit Insurance. Estimated outlays for 2009 are $5 bil­lion lower than in CBO’s January baseline, primarily because of the Federal Deposit Insurance Corporation’s (FDIC’s) recent actions to increase insurance premiums (which are recorded as offsets to spending). CBO expects that net outlays for deposit insurance will be about $29 billion higher through 2014 than projected in Janu­ary; by 2019, most of that increase would be offset by income from higher premiums and proceeds from selling the assets of failed institutions. On balance, net outlays over the 2010–2019 period are projected to be about $9 billion higher than was estimated in January.

The annual budgetary impact of deposit insurance activ­ity depends on several factors, including the expenses stemming from failed institutions, the methods used to resolve those failures, and the timing of industry pay­ments to recoup any losses. CBO estimates that losses from FDIC-insured institutions could total about $100 billion through 2014, roughly double the amount projected in January. CBO’s projections assume that the FDIC will continue to raise premiums as needed to maintain sufficient balances in the insurance funds and will manage costs in ways that reduce the volatility of annual outlays—for example, by resolving failures of large institutions through cost-sharing arrangements, which tend to spread costs over a longer period.

Net Interest. Technical changes to net interest mostly stem from an adjustment to the treatment of interest trans­actions with credit financing accounts (nonbudgetary accounts that record cash flows for federal credit pro­grams), the borrowing activities of the Federal Financing Bank, and a shift in the maturity structure of federal borrowing. Such changes reduce interest costs by $424 billion between 2010 and 2019; added debt-service costs stemming from other technical changes increase interest payments by $278 billion over the 10-year period.

CBO’s Estimate of the President’s Budget

The President’s budget provides a broad outline of his policy proposals that will be followed by a more detailed budget presentation in April. Nevertheless, most of the proposals were specific enough that CBO and JCT could estimate the budgetary impact using their own technical assumptions and CBO’s economic forecast. For discre­tionary funding, the budget outline provided only aggre­gate amounts of budget authority, which CBO used as a basis for estimating such spending.

Overview of the President’s Budget

If the President’s proposals were enacted, the government would record a deficit of $1.8 trillion in 2009, CBO esti­mates (see Table 1-4). The deficit for 2009 would equal 13.1 percent of GDP, with revenues totaling 15.4 percent and outlays equal to 28.5 percent of GDP.¹⁰ Relative to CBO’s baseline budget projections for 2009, the propos­als in the President’s budget request would reduce reve­nues by $26 billion and boost outlays by $151 billion (mostly for additional efforts aimed at stabilizing the financial system). As a result, the deficit for this year would be $177 billion larger than the deficit that CBO anticipates under current law.

Table 1-4.  

CBO’s Estimate of the President’s Budget

				Actual 2008	2009	2010	2011	2012	2013	2014	2015	2016	2017	2018	2019	Total, 2010- 2014	Total, 2010- 2019
				In Billions of Dollars
Revenues
	On-budget			1,866	1,506	1,621	1,891	2,192	2,329	2,429	2,554	2,658	2,772	2,875	2,982	10,461	24,302
	Off-budget			658	653	668	695	726	766	802	833	864	897	932	968	3,656	8,151
				____	____	____	____	____	____	____	____	____	____	____	____	_____	_____
		Total		2,524	2,159	2,289	2,586	2,917	3,095	3,231	3,387	3,522	3,669	3,807	3,950	14,118	32,452
Outlays
	Mandatory spending			1,595	2,588	2,135	2,025	2,020	2,121	2,225	2,318	2,466	2,581	2,694	2,895	10,526	23,480
	Discretionary spending			1,135	1,246	1,362	1,315	1,273	1,279	1,294	1,319	1,351	1,377	1,402	1,438	6,523	13,409
	Net interest			253	170	172	216	282	367	460	536	601	661	734	806	1,497	4,834
				____	____	____	____	____	____	____	____	____	____	____	____	_____	_____
		Total		2,983	4,004	3,669	3,556	3,575	3,767	3,979	4,172	4,417	4,619	4,830	5,139	18,546	41,723
			On-budget	2,508	3,481	3,115	2,983	2,982	3,148	3,333	3,496	3,704	3,864	4,030	4,290	15,562	34,946
			Off-budget	475	523	553	573	594	619	646	676	713	755	800	849	2,984	6,777
Deficit (-) or Surplus				-459	-1,845	-1,379	-970	-658	-672	-749	-785	-895	-949	-1,023	-1,189	-4,429	-9,270
	On-budget			-642	-1,975	-1,494	-1,092	-790	-819	-905	-942	-1,046	-1,092	-1,155	-1,308	-5,101	-10,644
	Off-budget			183	130	115	122	132	147	156	157	151	143	132	119	672	1,374
Debt Held by the Public				5,803	7,987	9,319	10,292	11,055	11,770	12,628	13,508	14,491	15,523	16,013	17,277	n.a.	n.a.
Memorandum:
Gross Domestic Product				14,222	14,057	14,405	15,061	15,774	16,496	17,241	17,957	18,688	19,436	20,191	20,966	78,977	176,215
				As a Percentage of Gross Domestic Product
Revenues
	On-budget			13.1	10.7	11.3	12.6	13.9	14.1	14.1	14.2	14.2	14.3	14.2	14.2	13.2	13.8
	Off-budget			4.6	4.6	4.6	4.6	4.6	4.6	4.7	4.6	4.6	4.6	4.6	4.6	4.6	4.6
				___	___	___	___	___	___	___	___	___	___	___	___	___	___
		Total		17.7	15.4	15.9	17.2	18.5	18.8	18.7	18.9	18.8	18.9	18.9	18.8	17.9	18.4
Outlays
	Mandatory spending			11.2	18.4	14.8	13.4	12.8	12.9	12.9	12.9	13.2	13.3	13.3	13.8	13.3	13.3
	Discretionary spending			8.0	8.9	9.5	8.7	8.1	7.8	7.5	7.3	7.2	7.1	6.9	6.9	8.3	7.6
	Net interest			1.8	1.2	1.2	1.4	1.8	2.2	2.7	3.0	3.2	3.4	3.6	3.8	1.9	2.7
				___	___	___	___	___	___	___	___	___	___	___	___	___	___
		Total		21.0	28.5	25.5	23.6	22.7	22.8	23.1	23.2	23.6	23.8	23.9	24.5	23.5	23.7
			On-budget	17.6	24.8	21.6	19.8	18.9	19.1	19.3	19.5	19.8	19.9	20.0	20.5	19.7	19.8
			Off-budget	3.3	3.7	3.8	3.8	3.8	3.8	3.7	3.8	3.8	3.9	4.0	4.0	3.8	3.8
Deficit (-) or Surplus				-3.2	-13.1	-9.6	-6.4	-4.2	-4.1	-4.3	-4.4	-4.8	-4.9	-5.1	-5.7	-5.6	-5.3
	On-budget			-4.5	-14.1	-10.4	-7.3	-5.0	-5.0	-5.2	-5.2	-5.6	-5.6	-5.7	-6.2	-6.5	-6.0
	Off-budget			1.3	0.9	0.8	0.8	0.8	0.9	0.9	0.9	0.8	0.7	0.7	0.6	0.9	0.8
Debt Held by the Public				40.8	56.8	64.7	68.3	70.1	71.4	73.2	75.2	77.5	79.9	79.3	82.4	n.a.	n.a.

Source: Congressional Budget Office.

Note: n.a. = not applicable.

In 2010, the deficit under the President’s budget would fall to 9.6 percent of GDP, or nearly $1.4 trillion, CBO estimates—$241 billion more than the deficit of $1.1 trillion that CBO projects under current laws and policies (see Figure 1-1). That difference is largely attributable to additional spending for the government’s actions to stabilize financial markets ($125 billion); defense spending, primarily for ongoing military opera­tions in Iraq and Afghanistan and other activities related to the war on terrorism ($50 billion); and various revenue reductions ($45 billion). In total, outlays next year would measure 25.5 percent of GDP under the President’s poli­cies, and revenues would amount to 15.9 percent.

Figure 1-1. 

Total Deficits or Surpluses, 1969 to 2019

(Percentage of gross domestic product)

Source: Congressional Budget Office.

From 2010 to 2019, the cumulative deficit under the President’s proposals would total $9.3 trillion, more than double the cumulative deficit projected under the current-law assumptions embodied in CBO’s baseline (see Table 1-5). Over the 10-year period, proposed tax policies—such as extending some of the expiring provi­sions enacted in EGTRRA and JGTRRA—would reduce revenues relative to the baseline by an estimated $2.1 trillion, an average of 1.2 percent of GDP. In addi­tion, under the President’s proposals, spending other than interest outlays would be $1.7 trillion higher (about 1.0 percent of GDP). Discretionary spending would be $0.6 trillion above CBO’s baseline projection; nondefense pro­grams would receive more than 70 percent of that increase. Mandatory spending would be $1.1 trillion above the baseline total. The resulting higher deficits would require additional federal borrowing; net interest paid on that borrowing would add $1.0 trillion over the 10-year period relative to the baseline. Debt held by the public would rise, from 41 percent of GDP in 2008 to 57 percent in 2009 and to 82 percent of GDP by 2019.

Table 1-5.  

CBO’s Estimate of the Effect of the President’s Budget on Baseline Deficits

(Billions of dollars)

								2009	2010	2011	2012	2013	2014	2015	2016	2017	2018	2019	Total, 2010- 2014	Total, 2010- 2019
Total Deficit as Projected in CBO's March 2009 Baseline								-1,667	-1,139	-693	-331	-300	-310	-282	-327	-312	-325	-423	-2,772	-4,441
Effect of the President's Proposals
		Revenues
			Provisions related to EGTRRA and JGTRRA
				Modify individual income tax ratesa				0	0	-68	-99	-104	-109	-114	-119	-124	-129	-134	-379	-999
				Modify capital gains and dividend tax ratesb				0	*	-5	-20	-25	-27	-28	-29	-30	-31	-32	-77	-226
				Modify estate and gift tax rates				0	*	-2	-20	-23	-27	-31	-34	-37	-40	-43	-72	-256
				Other provisions				0	0	-28	-46	-47	-48	-49	-50	-51	-52	-54	-170	-427
								_	_	__	___	___	___	___	___	___	___	___	___	_____
					Subtotal, proposed extensions			0	*	-103	-185	-199	-211	-222	-231	-242	-252	-263	-698	-1,907
			Permanently extend Making Work Pay credit					0	0	-29	-42	-43	-43	-44	-44	-44	-45	-45	-156	-378
			Index the AMT starting from 2009 levels					0	-7	-69	-31	-34	-37	-41	-46	-52	-60	-70	-177	-447
			Revenues from climate policy					0	0	0	77	77	78	78	79	79	80	80	232	629
			Other proposals					-26	-39	3	12	12	8	5	3	2	1	*	-5	7
								___	___	___	____	____	____	____	____	____	____	____	____	_____
						Total Effect on Revenues		-26	-45	-198	-169	-187	-205	-223	-240	-257	-276	-297	-804	-2,097
		Outlays
			Mandatory
				Expand earned income and child tax credits				0	*	*	36	36	36	36	36	37	37	37	108	292
				Provide Making Work Pay and other tax credits				0	0	*	23	24	24	24	24	24	24	24	72	193
				Freeze Medicare physician payment rates				0	7	17	22	18	23	28	35	42	45	47	87	285
				Support financial stabilization				125	125	0	0	0	0	0	0	0	0	0	125	125
				Modify the Family Federal Education Loan Program				0	-5	-10	-12	-11	-10	-9	-9	-9	-9	-10	-47	-94
				Modify Pell grantsc				0	5	20	28	30	33	32	33	35	37	39	116	293
				Other proposals				*	-1	9	2	1	*	1	1	2	3	3	11	22
								___	___	___	___	___	___	___	___	___	___	___	___	____
					Subtotal, mandatory			125	131	37	99	98	107	112	121	131	136	142	472	1,115
			Discretionary
				Defense				25	50	24	14	7	6	7	9	10	12	13	100	151
				Nondefense				*	9	6	19	33	45	56	62	67	70	74	113	442
								__	__	__	__	__	__	__	__	__	__	__	___	___
					Subtotal, discretionary			25	59	30	33	40	51	63	71	77	82	87	213	593
			Net interest					1	6	13	26	48	75	105	137	172	204	239	167	1,023
								___	___	___	___	___	___	___	___	___	___	___	___	_____
						Total Effect on Outlays		151	196	80	158	186	233	280	329	380	422	468	853	2,732
Total Effect on the Deficitd								-177	-241	-278	-327	-373	-438	-503	-568	-637	-698	-765	-1,657	-4,829
Total Deficit Under the President's Proposals as Estimated by CBO								-1,845	-1,379	-970	-658	-672	-749	-785	-895	-949	-1,023	-1,189	-4,429	-9,270
Memorandum:
Health Reform Reserve Fundd
			Increased revenues from limiting the rate at which itemized deductions reduce tax liability					0	0	11	30	32	34	37	39	41	43	45	107	311
			Reduced spending from specified health proposals					0	2	5	14	20	39	36	36	42	48	55	79	295
			New, unspecified benefits from health reformse					0	-2	-16	-44	-51	-73	-72	-75	-83	-91	-100	-185	-606
								_	__	__	__	__	__	__	__	__	__	___	___	___
				Net effect on the deficit of the health reform proposal				0	0	0	0	0	0	0	0	0	0	0	0	0
Total Deficit Under the President’s Proposals as Estimated by OMB								-1,752	-1,171	-912	-581	-533	-570	-583	-637	-636	-634	-712	-3,767	-6,969

Source: Congressional Budget Office; Joint Committee on Taxation.

Note: * = between -$500 million and $500 million; EGTRRA = Economic Growth and Tax Relief Reconciliation Act of 2001; JGTRRA = Jobs and Growth Tax Relief Reconciliation Act of 2003; AMT = alternative minimum tax; OMB = Office of Management and Budget.

a. The estimates include the effects of maintaining, for taxpayers with income above certain levels, the income tax rates of 36 percent and 39.6 percent scheduled to go into effect in 2011 under current law. For the remaining taxpayers, tax rates would be at the 2010 levels specified in EGTRRA.

b. The estimates include the effects of imposing a 20 percent tax rate on capital gains and dividends for taxpayers with income above certain levels, starting in 2011. Tax rates for the remaining taxpayers would be at the 2010 levels specified in JGTRRA.

c. The current Pell grant program has discretionary and mandatory components. CBO’s estimate of the costs of modifying Pell grants includes the costs of setting the maximum award at $5,550 in 2010, indexing that award level for future years, and reclassifying the entire program as mandatory spending. That reclassification would result in eliminating spending for Pell grants in CBO’s discretionary baseline, which currently includes $195 billion in outlays for new grants over the 2010–2019 period.

d. Negative numbers indicate an increase in the deficit.

e. Health reform benefits may be a combination of revenue reductions and spending increases and are assumed to exactly offset the savings dedicated to the proposed fund on both the revenue and outlay sides of the budget.

Under the President’s proposals, revenues would climb from 17.2 percent of GDP in 2011 to 18.8 percent in 2013 and remain near 19.0 percent thereafter (see Figure 1-2 and Table 1-4). That level is slightly above the average of 18.3 percent over the past 40 years and below the baseline projection of 20.3 percent for 2019. The same factors that push up the share of receipts in the baseline—including the anticipated recovery from the recession, which results in taxable income rising as a share of GDP, and the expiration of certain provisions of ARRA, EGTRRA, and JGTRRA—also cause revenues to rise as a share of GDP in the President’s budget.

Figure 1-2. 

Total Revenues and Outlays as a Percentage of Gross Domestic Product in CBO’s Baseline and the President’s Budget

(Percent)

Source: Congressional Budget Office.

Note: Dashed lines represent CBO’s estimate of revenues and outlays as a share of gross domestic product in the President’s budget.

Outlays under the President’s policies would increase from 23.6 percent of GDP in 2011 to 24.5 percent in 2019. Both of those figures are above the average of 20.7 percent over the past 40 years; higher mandatory spending as a percent age of GDP (especially for Medicare and refundable tax credits) would be only partly offset by lower discretionary spending. Spending for mandatory programs would fall in 2010 and 2011 (largely because of reduced spending to stabilize the financial markets and gradually declining spending from ARRA and for unem­ployment insurance) and then rise by an average of 4.7 percent annually (about three-fourths of a percent age point above the growth rate of nominal GDP) through 2019.

Discretionary outlays would decline by $88 billion from 2010 to 2012—largely because of lower outlays related to ARRA and reduced war-related spending—and then grow slightly thereafter. Measured as a percent age of GDP, they would fall from 9.5 percent in 2010 to 6.9 percent in 2018 and 2019. CBO’s estimates for dis­cretionary spending reflect the President’s proposal for $75.5 billion in additional funding for military opera­tions in Iraq and Afghanistan in 2009 (bringing the total for that year to $141.4 billion), $130 billion for such purposes in 2010, and $50 billion a year thereafter.¹¹

CBO’s estimate of the deficits under the President’s bud­get are higher each year than those estimated by the Administration—by $93 billion for 2009 and by about $2.3 trillion for the 2010–2019 period. Most of those differences stem from underlying baseline differences rather than from varying assessments of the effect of the President’s policy proposals. Economic and technical fac­tors affecting revenue projections account for the largest part of those baseline differences.

In its presentation of the budget, the Administration has compared its policy proposals with a “current-policy” baseline that assumes the continuation of certain policies that are currently in place but that would require further legislation in order to continue in future years. Those policies include extensions of most of the provisions of EGTRRA and JGTRRA and certain payments to physi­cians participating in the Medicare program. Because CBO’s baseline for mandatory spending and revenues is predicated on current law, this estimate of the President’s budget treats such continuations as policy proposals. The extended policies generally involve increased spending and reduced revenues; as a result, CBO’s analysis gener­ally shows larger spending increases and larger tax reduc­tions—and thus larger increases in the deficit—than are shown in the Administration’s presentation of its propos­als (regardless of differences in economic and technical assumptions).¹²

Policy Proposals Affecting Revenues

The President’s budget proposes a number of changes to tax law that would reduce revenues over the next decade relative to CBO’s baseline. Compared with pro­jected receipts under current law, total revenues would be $2.1 trillion lower over the 2010–2019 period, according to JCT and CBO.¹³ The proposal to modify and extend provisions of EGTRRA and JGTRRA would have the largest effect, reducing revenues by $1.9 trillion, accord­ing to JCT. On net, the other proposals would lower rev­enues by about $190 billion, some reducing revenues by roughly $1.1 trillion and others raising revenues by roughly $900 billion. Those estimates do not reflect the effect on revenues of several of the President’s proposals for which sufficient detail was not available. Those pro­posals include implementing international tax reform, for which the Administration estimates a revenue increase of $210 billion over 10 years. Until additional details are available, JCT and CBO treat those proposals as having no effect on revenues.

Provisions Related to EGTRRA and JGTRRA. Proposals related to modifying and permanently extending provi­sions of EGTRRA and JGTRRA that are set to expire in 2010 would reduce revenues by $1.9 trillion (or 1.1 percent of GDP) over the next 10 years relative to current law.¹⁴ The provisions scheduled to expire include reduc­tions in some individual income tax rates; reductions in tax rates on capital gains and dividends; changes to estate and gift taxation; limits on phaseouts for personal exemp­tions and itemized deductions for certain taxpayers; an increase in the child tax credit; relief from the so-called marriage penalty; and changes in the tax treatment of certain investments in equipment by small businesses.

The President proposes to permanently extend, at 2010 levels, tax rates on income, capital gains, and dividends for married taxpayers earning under $250,000 and single taxpayers earning under $200,000. For taxpayers with income above those levels, the President proposes to maintain the income tax rates, the phaseout of the per­sonal exemption, and the limits on itemized deductions scheduled to go into effect in 2011 under current law; those higher-income taxpayers would also be subject to a tax rate of 20 percent on capital gains and dividends. In addition, the President proposes to modify estate, gift, and generation-skipping transfer taxes by extending 2009 law and indexing the estate tax exemption for inflation while maintaining the $1 million lifetime exclusion for gifts.

“Making Work Pay” Tax Credit. The President also pro­poses to permanently extend the Making Work Pay credit, which expires at the end of 2010 under current law. The credit equals 6.2 percent of earned income, up to a maximum credit amount of $800 for married tax­payers ($400 for single filers) and phasing out for married taxpayers with income above $150,000 ($75,000 for sin­gle filers). Extending the credit would reduce revenues by $378 billion over the 2010–2019 period, according to JCT. (This proposal would also affect outlays because the credit is refundable. See Tax Credits, below.)

Alternative Minimum Tax. The President proposes to pro­vide relief from the AMT by permanently setting the AMT exemption amount at 2009 levels, indexed for inflation, and permanently extending the unrestricted use of certain personal tax credits under the AMT.¹⁵ The proposal would reduce revenues by $447 billion between 2010 and 2019, JCT estimates. That estimate does not include the interaction between the AMT provisions and the proposal to extend and modify the tax provisions related to EGTRRA and JGTRRA. That interaction is included in the estimate for the latter proposal.

Revenues from Climate Policy. The President’s proposals include a plan to reduce greenhouse-gas emissions through the sale of emission allowances in a cap-and-trade program. The proceeds would raise enough revenue to cover the post-2011 cost of extending the Making Work Pay credit plus $120 billion intended for invest­ment in clean energy technologies. CBO and JCT esti­mate that those proposed uses of the funds could cost $629 billion: $349 billion for the post-2011 reduction in revenues for the Making Work Pay credit, $159 billion in outlays for the refundable portion of that credit, and $120 billion for spending on clean energy technologies. CBO assumes that the proposed cap-and-trade program would generate $629 billion between 2012 and 2019 to cover the costs of extending that credit and to fund the clean energy investments. In fact, the revenues raised from a cap-and-trade program could be significantly higher or lower depending on how the program is structured.

Other Proposals Affecting Revenues. Other tax proposals in the President’s budget include making the research and experimentation tax credit permanent; repealing the last-in/first-out inventory accounting method; taxing carried interest as income; and expanding the saver’s credit and automatic enrollment in individual retirement accounts and 401(k) retirement plans.¹⁶ The President’s proposal to extend the period to which firms can carry back net operating losses to more than the current two years would reduce revenues in 2009 and 2010 and increase them thereafter.¹⁷ Altogether, the President’s other tax propos­als for which CBO and JCT were able to provide esti­mates would increase revenues by an estimated $7 billion between 2010 and 2019.

Policy Proposals Affecting Mandatory Spending

If the proposals in the President’s budget were enacted, they would, on balance, increase mandatory spending rel­ative to the amounts in the baseline by $1.1 trillion (or 0.6 percent of GDP) over the next 10 years, CBO esti­mates. Costs and savings from those proposals are shown in Table 1-5, and the most significant proposals are high­lighted below.

Tax Credits. About $484 billion in increased outlays over the 10-year period would stem from tax proposals that would expand various refundable tax credits.¹⁸ According to JCT’s estimates, the permanent extension and modifi­cation of certain expiring tax provisions originally enacted in 2001 and 2003 would increase outlays by $197 billion over the 2010–2019 period, mostly for the refundable portions of the earned income and child tax credits. The proposal to extend the Making Work Pay tax credit would increase outlays by an estimated $159 bil­lion between 2010 and 2019. The proposal to expand the refundability of the child tax credit would increase out­lays by $74 billion over the 2010–2019 period, JCT esti­mates. Other tax proposals would increase outlays by $54 billion over the 2010–2019 period, JCT and CBO estimate.

Physicians’ Payment Rates. A proposed change in the cal­culation of the rates paid to physicians under Medicare would result in additional outlays totaling an estimated $285 billion over the next 10 years.¹⁹ Under current law, Medicare’s payment rates for physicians’ services will be reduced by about 21 percent in 2010 and by about 6 percent a year for most of the rest of the decade. The Presi­dent’s policy would freeze those payment rates at the 2009 level through at least 2019.

Reserve for Financial Stabilization Efforts. The Adminis­tration has included a placeholder of $250 billion in fiscal year 2009 to cover future efforts to stabilize the financial system. As with the current budgetary treatment of the TARP, those outlays reflect the estimated subsidy pro­vided by the unspecified policies; the Administration cal­culates that the $250 billion would represent the net cost of purchases of $750 billion in assets. For the purposes of projecting federal debt, CBO assumes that the total pro­posed by the Administration would support asset pur­chases, loan guarantees, or other transactions totaling $500 billion, reflecting a subsidy cost similar to what CBO now estimates for the $700 billion already autho­rized for the TARP. CBO also assumes that such addi­tional support, if enacted, would be disbursed over the next two years—$125 billion in estimated outlays in 2009 and the same amount in 2010.

Student Loans. The President’s proposal would essentially eliminate the federal guaranteed student loan program, replacing such loans with direct loans made by the Department of Education. Under the Federal Credit Reform Act, the budgetary cost of direct loans and guar­anteed loans reflects the total cash flows over the life of each loan. Under current law, the direct loan program is estimated to have a lower cost for each dollar loaned than does the guaranteed loan program. Thus, assuming that loan volume does not change, replacing the guaranteed loan program with additional direct loans would yield budgetary savings. CBO estimates that savings would total $94 billion over the 2010–2019 period.

Pell Grants. The President proposes to reclassify Pell grants as mandatory spending, set the maximum award level at $5,550 for 2010, and index that amount for future years. (The maximum amount available in 2009 is $5,350.) Under current law, the program is funded with annual discretionary appropriations and mandatory funds. In 2009, outlays from discretionary funds will total about $18 billion and outlays from mandatory funds will total about $2 billion, CBO estimates. The proposed changes would boost mandatory spending by $293 billion over the 2010–2019 period. (About $195 billion of that new mandatory spending is already reflected in CBO’s discretionary baseline.)

Other Proposals Affecting Mandatory Spending. The President’s budget includes funding over the 2010–2019 period to expand various programs that assist with income security, including $21 billion to modify existing trigger mechanisms for providing additional unemploy­ment compensation during periods of high unemploy­ment; nearly $10 billion for expanding child nutrition programs; $9 billion for a program that would provide in-home counseling for low-income first-time mothers; about $5 billion to extend changes in the Trade Adjust­ment Assistance program that were enacted in ARRA; and more than $4 billion for the Low Income Home Energy Assistance Program.

Proposals that would reduce mandatory spending include lowering the amount that the United States Postal Service (USPS) currently pays for health and life insurance pre­miums for its employees and reducing payments to USPS retirees who receive workers’ compensation. CBO esti­mates that those reductions would save about $16 billion over the 2010–2019 period. In addition, the President’s budget includes savings from several changes to agricul­ture programs, including reducing payments to some agricultural producers, decreasing subsidies for crop insurance, and imposing new fees for government inspec­tion activities. CBO estimates that if those proposals were enacted, they would reduce spending for agricultural pro­grams by about $13 billion over the 10-year period, rela­tive to CBO’s baseline projections.

Policy Proposals Affecting Discretionary Spending

As of early March, legislators had appropriated nearly $1.4 trillion for discretionary programs for 2009, includ­ing $283 billion for ARRA. The President’s budget includes an additional $76 billion in 2009 funding for operations in Iraq and Afghanistan as well as $7 billion in unspecified funding for international activities; such funding would add about $25 billion to outlays this year.

The Administration did not provide detailed information about its request for discretionary funding for 2010 to 2019, so CBO estimated the President’s proposals by using the aggregate totals provided in the budget. Over that period, projected outlays from the Administration’s request for discretionary appropriations would exceed CBO’s baseline estimate of such outlays by $593 billion (or 0.3 percent of GDP).

Defense outlays would be $151 billion higher over the 10-year period. Funding for the wars would exceed the baseline level of $67 billion by $63 billion in 2010—the Administration includes $130 billion for that year and $50 billion a year through the remainder of the 10-year period.²⁰ Other spending for defense programs would exceed baseline levels in all years through 2019.

The President’s proposals would increase nondefense dis­cretionary outlays above baseline levels by $442 billion from 2010 to 2019, CBO estimates, assuming that the President’s proposal to reclassify Pell grants as mandatory spending is implemented. The estimated increase in dis­cretionary outlays excluding the changes in the classifica­tion of Pell grants would be more than $630 billion. The majority of the increase stems from additional funding for the Department of State and other international programs and $15 billion per year in budget authority beginning in 2012 that is designated for clean energy technologies.

The President’s budget includes a separate line item for disaster-related costs, which is intended to account for potential federal assistance for relief and reconstruction in response to a major disaster. Such funding is normally provided as needed through discretionary appropriations for the Federal Emergency Management Agency. Although the Administration incorporated $226 billion over the 2010–2019 period for disaster costs in its outlay totals, it presented no specific legislative proposal. CBO has therefore not included such costs in its estimates.

Health Reform Reserve Fund

The President’s budget proposal would establish a fund to finance some of the costs of health care reform, although the document does not specify the policies that would constitute such reform. The fund would be credited with revenues from limiting the rate at which itemized deduc­tions reduce tax liability; the estimated savings from a number of proposals to modify payment rates and other provisions of the Medicare and Medicaid programs; and the savings from a proposal to establish a regulatory path­way for the Food and Drug Administration to approve the marketing of generic versions of biological pharma­ceuticals. The President’s budget allocates the full amount of those additional revenues and outlay savings for spend­ing or tax reductions related to health care reform. The combination of all those policies is intended to have no net effect on the budget. Therefore, the President’s bud­get—and CBO in its analysis of the budget—shows no net effect on either revenues or outlays from this set of proposals (that is, revenue reductions related to health care reform are assumed to offset the revenue gains from changing the rate applied to itemized deductions, and outlays for health care reform are assumed to equal the outlay savings from the proposed policy changes).

Limits on the Rate at Which Itemized Deductions Reduce Tax Liability. The President proposes to limit to 28 percent the rate at which itemized deductions reduce tax liability. That proposal would increase revenues by $311 billion over the 2010–2019 period, according to JCT.

Savings in Outlays Dedicated to Health Reform. CBO estimates that enacting the provisions aimed at producing savings to be dedicated to the reserve fund would reduce federal spending by $295 billion over the 2010–2019 period. The provisions with the largest estimated gross savings over that period include establishing competitive bidding in the Medicare Advantage program ($176 bil­lion); reducing payment rates for home health services in Medicare ($51 billion); eliminating the Medicare and Medicaid Improvement Funds ($23 billion); combining Medicare’s payments for hospital inpatient care and post­acute services into a bundled payment rate ($18 billion); increasing rebates paid by pharmaceutical manufacturers to Medicaid ($16 billion); and establishing a regulatory pathway for generic versions of biological pharmaceuti­cals ($13 billion). About 25 percent of the cost of services under Part B of Medicare—the Supplementary Medical Insurance program—is recovered by premiums charged to beneficiaries. As a result, about 25 percent of the sav­ings in Part B would be offset by lower premium receipts (which are recorded in the budget as negative outlays). CBO estimates that enacting those provisions would reduce premium receipts by $33 billion over the 2011–2019 period.

Net Cash Flows of the Reserve Fund. In total, CBO and JCT estimate, the net savings of $295 billion plus the $311 billion increase in revenues from limiting the rate at which itemized deductions reduce tax liability would generate $606 billion over the 2010–2019 period for the health reform reserve fund. Under the President’s pro­posal, that amount would be used for reform of the health care system, and the combination of those policies would have no net effect on the deficit.

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1

For CBO’s previous baseline budget projections, see Congressional Budget Office, The Budget and Economic Outlook: Fiscal Years 2009 to 2019 (January 2009).

2

See Office of Management and Budget, A New Era of Responsibil­ity: Renewing America’s Promise (February 26, 2009).

3

The TARP was created by the Emergency Economic Stabilization Act of 2008 (P.L. 110-343) in October 2008 to enable the Secre­tary of the Treasury to purchase or insure troubled assets.

4

The Deficit Control Act specified that mandatory spending pro­grams whose authorizations are set to expire should be assumed to continue if they have outlays of more than $50 million in the cur­rent year and were established on or before the date when the Bal­anced Budget Act of 1997 was enacted. Programs established after that date are not automatically assumed to continue. The Deficit Control Act also specified that expiring excise taxes whose reve­nues are dedicated to trust funds should be assumed to be extended at their current rates. The law did not provide for the extension of other expiring tax provisions, even if they had been routinely extended in the past.

5

ARRA also affected CBO’s economic projections by increasing output significantly in the short run and reducing it slightly in the long run relative to what otherwise would have occurred. For discussions of the estimated economic impact of ARRA, see Chapter 2 of this report and Congressional Budget Office, “Estimated Macroeconomic Impacts of the American Recovery and Reinvestment Act of 2009,” letter to the Honorable Charles E. Grassley (March 2, 2009).

6

See Congressional Budget Office, cost estimate for the conference agreement for H.R. 1 (February 13, 2009).

7

Those estimates do not reflect the impact of the legislation on the economy.

8

CBO’s baseline includes an estimate of the net cost of transactions for the TARP. Broadly speaking, that cost is the purchase price minus the present value (adjusted for market risk) of any esti­mated future earnings from holding purchased assets and the pro­ceeds from their eventual sale.

9

Conservatorship is the legal process in which an entity is appointed to establish control and oversight of a company to put it in a sound and solvent condition.

10

The estimates presented in this chapter do not take into consider­ation any impact that the President’s budgetary proposals might have on GDP or other broad measures of economic activity.

11

In its initial budget outline, the Administration does not present detailed information on its request for future appropriations, so CBO conducted its analysis on an aggregated basis.

12

For discretionary programs, the Administration has compared its policy proposals with a baseline that assumes that funding for mil­itary operations in Iraq and Afghanistan continues into future years at the 2008 level of $180 billion, adjusted for inflation. CBO’s baseline, however, extrapolates a lower level of war-related funding (the $66 billion currently appropriated for 2009) into future years. Thus, CBO’s analysis of the President’s request for defense appropriations—funding related to operations in Iraq and Afghanistan and funding not directly tied to those operations—indicates that defense spending under the President’s policies would be above baseline levels.

13

For proposals that would amend the Internal Revenue Code, CBO generally uses estimates provided by JCT.

14

OMB included an extension of the tax provisions related to EGTRRA and JGTRRA (without modifications) in its current policy baseline.

15

OMB included this proposal in its baseline projection of current policy.

16

Carried interest is a component of the typical compensation received by a general partner of a private equity or hedge fund. It is generally a share of the profits on the assets under management.

17

Current law allows firms to use losses from an unprofitable year to offset taxable income from an earlier year and receive a refund of past taxes paid. Generally, under current law, a net operating loss can be carried back to the prior two tax years.

18

An income tax credit is refundable if the taxpayer receives a refund when the allowable credit exceeds the amount of income tax owed. Such refunds are recorded in the budget as outlays.

19

OMB included this proposal in its baseline projection of current policy.

20

Following the rules governing baseline projections, CBO assumed that funding for the wars in 2010 and subsequent years would equal the amount provided to date for 2009—$66 billion—adjusted for inflation.