Today CBO released a preliminary analysis of the proposals contained in the President’s budget for fiscal year 2012 and their estimated effects on federal revenues, outlays, and budget deficits. This analysis does not include an assessment of the macroeconomic effects of the President’s proposals, which will be addressed in a more comprehensive report that CBO will release in April.
The Key Points
CBO’s Updated Baseline Projections. As a basis for analyzing the President’s budget, CBO updated its baseline budget projections, which were last issued in January 2011. Unlike its estimates of the President’s budget, CBO’s baseline projections largely reflect the assumption that current tax and spending laws will remain unchanged. Under that assumption, CBO estimates that the deficit will total $1.40 trillion in 2011—$81 billion less than the agency estimated in January. For the 2012–2021 period, CBO now projects a cumulative deficit of $6.7 trillion—$234 billion less than the amount in the previous baseline. CBO has not modified its economic forecast since January, so the updated baseline projections largely reflect new information that the agency has obtained about various aspects of the federal budget.
CBO’s Analysis of the President’s Proposals. CBO analyzes the President’s budget using its own economic assumptions and estimating techniques (rather than the Administration’s) and incorporates estimates prepared by the staff of the Joint Committee on Taxation (JCT) for tax provisions. According to CBO’s projections, if all of the President’s budgetary proposals were enacted, they would add $26 billion to the baseline deficit for 2011. The 2011 deficit would total $1.43 trillion, or 9.5 percent of gross domestic product.
In 2012, the deficit under the President’s budget would decline to $1.2 trillion, or 7.4 percent of GDP, CBO estimates. That shortfall is $83 billion greater than the deficit that CBO projects for 2012 in its current baseline. Deficits in succeeding years under the President’s proposals would be smaller than the deficit in 2012, although they would still add significantly to federal debt. The deficit would shrink to 4.1 percent of GDP by 2015 but then widen in later years, reaching 4.9 percent of GDP in 2021. Federal debt held by the public would double under the President’s budget, growing from $10.4 trillion at the end of 2011 to $20.8 trillion at the end of 2021.
The President’s policy proposals, on net, would have the largest effect on the revenue side of the budget. Those proposals would reduce revenues, relative to CBO’s baseline projections, in every year of the coming decade. Nevertheless, revenues would rise relative to GDP: from 16.2 percent in 2012 to 19.3 percent in 2021. That figure is below CBO’s baseline projection for 2021 (20.8 percent) but higher than the average ratio of revenues to GDP seen over the past 40 years (18.0 percent).
Most of the revenue changes would result from extending tax policies that are currently in effect or were in effect in the recent past. The tax package enacted late last year extended through December 2012 many of the tax reductions originally enacted in 2001 and 2003. The President proposes to extend those reductions permanently, with some modifications, and to permanently index for inflation the amounts of income exempt from the alternative minimum tax, starting at their 2011 levels. In addition, the President proposes that, beginning in January 2013, estate and gift taxes return permanently to the rates and exemption levels that were in effect in calendar year 2009. Those policies would reduce tax revenues and boost outlays for refundable tax credits by a total of more than $3.0 trillion over the next 10 years relative to the amounts projected in CBO’s baseline.
Outlays would be greater under the President’s budget than in CBO’s baseline in each of the next 10 years, largely because the proposed reduction in revenues would boost deficits and thus the costs of paying interest on the additional debt that would accumulate. In particular, net interest payments would nearly quadruple in nominal dollars (without an adjustment for inflation) over the 2012–2021 period and would increase from 1.7 percent of GDP to 3.9 percent. Total outlays under the President’s budget would equal 23.6 percent of GDP in 2012, decline slightly as a share of GDP over the following two years, and then rise for the rest of the 10-year projection period. They would equal 24.2 percent of GDP in 2021—about 0.3 percentage points above CBO’s baseline projection for that year and well above the 40-year average for total outlays, 20.8 percent.
Spending proposals with the largest budgetary impact over 10 years include the following:
Differences Between CBO’s Estimates and the Administration’s Estimates. Compared with the Administration’s estimates, CBO’s estimates of the deficit under the President’s budget are lower for 2011 (by $220 billion) but higher for each year thereafter (by a total of $2.3 trillion over the 2012–2021 period). That disparity stems from differences in the underlying projections of what would happen under current law ($1.3 trillion) as well as from differing assessments of the effects of the President’s proposals ($1.0 trillion).