February 27, 2004

Honorable Ted Stevens
Chairman
Committee on Appropriations
United States Senate
Washington, DC 20510

Dear Mr. Chairman:

As you requested, the Congressional Budget Office (CBO), with contributions from the Joint Committee on Taxation, has analyzed the President's budget submission for fiscal year 2005. This letter and the attached tables summarize the main results of CBO's work; a report on the full analysis, including an assessment of the macroeconomic effects of the President's proposals, will be published on March 8.

Under the President's budget, CBO estimates, the deficit would be $478 billion in fiscal year 2004 and $356 billion in 2005 (see Table 1). As a share of the economy, the deficit would total 4.2 percent of gross domestic product (GDP) this year, then fall to 2.9 percent next year. Under the President's policies, the deficit would decline further--to 2.1 percent of GDP--in 2006 and then remain between 1.6 percent and 1.8 percent through 2014.

Over the 10-year period from 2005 through 2014, deficits would total $2.75 trillion under the President's policies--$737 billion higher than CBO's baseline projection of the cumulative deficit.⁽¹⁾ Debt held by the public would rise from 36 percent of GDP at the end of 2003 to about 40 percent during the years 2006 through 2014.

Under the President's budgetary proposals, revenues would grow from 15.8 percent of GDP this year to 16.8 percent of GDP in 2005, slightly below the baseline level (see Table 2). By 2007, revenues would reach nearly 18 percent of GDP and remain around that level through 2014. From 2005 through 2014, outlays would total slightly less than 20 percent of GDP if the President's policies were enacted. Over that same 10-year period, spending for entitlements and other mandatory programs under the President's proposals would grow faster than nominal GDP (5.7 percent annually versus 4.7 percent), whereas discretionary outlays would grow at an average annual rate of only 1.8 percent a year.

By CBO's estimates, the President's budget proposes nearly $823 billion in discretionary budget authority for 2005 (including $2.5 billion previously enacted for Project Bioshield) and $44 billion in obligational authority for transportation programs--for total discretionary funding of $867 billion. (The Administration does not include the advance appropriations for Project Bioshield in its discretionary funding total. In addition, for a number of reasons, including different projections of offsetting collections and the effect of changes to mandatory programs proposed in appropriation bills, the Administration estimates that budget authority will be $1.8 billion lower than CBO's figure.) Total discretionary funding for 2004 (including $43 billion in obligational authority for transportation programs and $0.9 billion for Project Bioshield) is $919 billion (see Table 3). That total includes $87 billion in supplemental budget authority for reconstruction efforts and ongoing military operations in Iraq and Afghanistan. The President's budget for 2005 does not include any funding for those purposes.

If the supplemental appropriations for 2004 were excluded from the comparison, growth of discretionary funding (including obligational authority) in 2005 under the proposed budget would equal 4.2 percent, or $35 billion. Defense spending would grow by nearly 7 percent, and nondefense spending for homeland security would rise by 15 percent. Other nondefense funding, by contrast, would grow by 1 percent. For the years 2006 through 2009, the President has proposed average annual increases of 4.8 percent in defense funding, 4.0 percent in homeland security funding, and 0.5 percent in all other nondefense discretionary funding.

Compared with the policies assumed in CBO's baseline, the President's budgetary proposals would reduce the cumulative deficit between 2005 and 2009 by $99 billion, largely by holding both defense and nondefense discretionary spending below baseline levels (see Table 4). Over the 2005-2014 period, however, the President's policies would increase the total deficit by an estimated $737 billion. Revenues under those policies would be almost $1.3 trillion below baseline levels over the 10 years, primarily because of the proposal to extend the expiring provisions of the tax cuts of 2001 and 2003. Proposals affecting mandatory spending--mostly refundable tax credits--would increase the deficit by $110 billion over the 10-year period, CBO estimates; debt-service costs on additional borrowing would add another $37 billion. Discretionary spending under the President's budget, by contrast, would be $708 billion below baseline levels over the 10-year budget window--in part because CBO's baseline extends the 2004 supplemental appropriations for activities in Iraq and Afghanistan throughout the period.⁽²⁾

In conjunction with its analysis of the President's budget, CBO typically updates its baseline projections to take into account new information from the budget and other sources. Those changes are almost exclusively technical; revised estimates for Medicaid and for Parts A and B of Medicare account for most of them. Legislative changes since January have been minimal and CBO has not updated the baseline's underlying economic assumptions. CBO now projects that the cumulative deficit for the 2005-2014 period will total a little more than $2 trillion under the assumptions made in the baseline--an increase of $119 billion from the projections that CBO published in January (see Table 5).

Sincerely,

Douglas Holtz-Eakin
Director
 

Attachments

Identical letter sent to the Honorable Robert C. Byrd