Honorable Robert C. Byrd
Chairman
Committee on Appropriations
United States Senate
Washington, DC 20510Dear Mr. Chairman:
As you requested, the Congressional Budget Office (CBO), with contributions from the Joint Committee on Taxation (JCT), has analyzed the President’s budget submission for fiscal year 2009. This letter and the attached tables summarize the results of CBO’s work to date. A report that presents the full analysis, including CBO’s assessment of the macroeconomic effects of the President’s proposals, will be published on March 19.
CBO’s analysis indicates the following:
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If the President’s proposals were enacted, the federal government would record deficits of $396 billion in 2008 and $342 billion in 2009. Those deficits would amount to 2.8 percent and 2.3 percent, respectively, of gross domestic product (GDP). By comparison, the deficit in 2007 totaled 1.2 percent of GDP.
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Under the President’s proposals, the deficit would steadily diminish from 2009 through 2012, at which point the budget would be balanced; it would remain close to balance in most years through 2018.1 Several key factors contribute to that outcome, however. The budget excludes funding for military operations in Iraq and Afghanistan after 2009, incorporates significant reductions in discretionary spending relative to the size of the economy, and allows for a substantial expansion of the impact of the alternative minimum tax (AMT).
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The President’s budgetary proposals would result in revenues that were $2.1 trillion below CBO’s baseline projections over the 2009–2018 period, largely because of proposed extensions of various provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA).
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The proposals also would lead to outlays that were below CBO’s baseline projections—by an estimated $1.1 trillion over the 10-year period—because of a smaller amount of funding for discretionary programs and reductions in mandatory spending, particularly in spending for Medicare.
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CBO’s analysis reflects the recent enactment of the Economic Stimulus Act of 2008 (Public Law 110-185), which will add an estimated $152 billion to the deficit for 2008 and $16 billion to the deficit for 2009 (excluding debt service). The analysis also takes into account recent revisions to CBO’s economic forecast.2
Estimated Effects of the President’s Proposals for Fiscal Years 2008 and 2009
Collectively, the proposals in the President’s budget would add $39 billion to the deficit that CBO projects for this year under current law. The President’s policies would reduce revenues by $9 billion and boost outlays by $30 billion (mostly for military operations in Iraq and Afghanistan). If the proposals were enacted, the deficit this year would total $396 billion, or 2.8 percent of GDP, according to CBO’s calculations (see Table 1). By comparison, the deficit in 2007 was $162 billion, or 1.2 percent of GDP.
Comparison of Projected Deficits and Surpluses in CBO’s Estimate of the President’s Budget and in CBO’s March 2008 Baseline
Source: Congressional Budget Office.
Note: * = between -$500 million and zero; ** = between -0.05 percent and zero; GDP = gross domestic product; n.a. = not applicable.
a. Off-budget surpluses comprise surpluses in the Social Security trust funds as well as the net cash flow of the Postal Service.
b. Negative numbers indicate an increase relative to the baseline deficit or a decrease relative to the baseline surplus.
c. Probabilities for years after 2013 cannot be calculated because of an insufficient history of past comparisons between projections and outcomes.
In 2009, CBO estimates, the deficit under the President’s budget would fall to 2.3 percent of GDP, or $342 billion—$136 billion more than the baseline deficit of $207 billion that CBO projects under the assumption that current laws and policies remain the same. That difference is largely attributable to proposals that would affect revenues and defense spending.
Under the President’s budget, revenues would be $94 billion lower in 2009 than projected in the baseline. The President is proposing a one-year extension of the higher AMT exemption levels enacted through 2007, which would mitigate some of the effects of the tax; that change would reduce revenues by an estimated $70 billion in 2009. Other proposed changes in tax policies would reduce revenues, on net, by another $24 billion next year.
On the outlay side of the budget, the President’s policies would raise defense discretionary spending $50 billion above the baseline level. That increase stems primarily from supplemental appropriations—mostly for military operations in Iraq and Afghanistan—that are requested for later this year but that are likely to be spent mostly in 2009 and beyond. Other spending under the President’s proposals would be $9 billion below the amount in the baseline (largely as a result of proposed savings in Medicare).
Estimated Effects of the President’s Proposals Over the 2009–2018 Period
Under the President’s proposals, the deficit would move steadily downward from 2009 through 2012; by CBO’s estimates, the budget would be balanced in that latter year and remain relatively close to balance through 2018. Those results reflect the President’s proposal for an additional $70 billion in funding for military operations in Iraq and Afghanistan in 2009 but no additional funding thereafter, combined with a substantial decline in discretionary spending relative to the size of the economy. The estimates also reflect the absence of any changes to the AMT beyond the proposed one-year extension of the higher exemption levels. Under the President’s policies, debt held by the public would rise from 37 percent of GDP in 2007 to 39 percent in 2009 and then gradually fall to 28 percent of GDP by 2018.
On the basis of previous differences between projections and budget outcomes, CBO has calculated the likelihood that the budget will be balanced under two sets of conditions: the assumptions embodied in its baseline projections (that current laws and policies remain in place) and its estimates of revenues and outlays under the President’s proposals. Using the assumptions underlying its baseline, CBO calculates that there is roughly a 40 percent chance that the budget will be in deficit in 2012 and a 60 percent chance that it will be in balance (or in surplus). If the President’s policies were enacted in their entirety and no other legislation affecting spending or revenues was enacted in the next five years, there would be roughly a 50 percent chance of either a deficit or a surplus in 2012.
Under the President’s proposals, revenues as a share of GDP would total 18.3 percent in 2009, CBO estimates. That share would climb to 18.6 percent of GDP in 2010 and remain near that level for a few years before rising further (see Table 2). The future growth of revenues as a percentage of GDP reflects the progressive structure of the tax code in combination with increases in real (inflation-adjusted) income, the withdrawal of retirement savings as the population ages, and the fact that the AMT is not indexed for inflation.
CBO’s Estimate of the President’s Budget for 2009