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The Budget and Economic Outlook:
Fiscal Years 2004-2013
January 2003


Notes

In the print version of this report, the second, fifth, and sixth columns of numbers in Tables F-12 and F-13 were incorrect. They have been corrected in this version.

Unless otherwise indicated, the years referred to in this report are federal fiscal years, which run from October 1 to September 30.

Numbers in the text and tables may not add up to totals because of rounding.

Some of the figures in Chapter 2 use shaded vertical bars to indicate periods of recession. The bars extend from the peak to the trough of each recession. The end of the most recent recession has not yet been determined by the National Bureau of Economic Research, the organization charged with that duty. CBO has assumed that the recession concluded at the end of calendar year 2001.

Data for real gross domestic product are based on chained 1996 dollars.

Backup data are available for Table 2-5, "Key Assumptions in CBO's Projection of Potential GDP" (spreadsheet), and Table E-1, "CBO's Year-by-Year Forecast and Projections for Calendar Years 2003 Through 2013" (spreadsheet).





                
Preface

This volume is one of a series of reports on the state of the budget and the economy that the Congressional Budget Office (CBO) issues each year. It satisfies the requirement of section 202(e) of the Congressional Budget Act of 1974 for CBO to submit to the Committees on the Budget periodic reports about fiscal policy and to provide baseline projections of the federal budget. In accordance with CBO's mandate to provide impartial analysis, the report makes no recommendations.

The baseline spending projections were prepared by the staff of CBO's Budget Analysis Division under the supervision of Robert Sunshine, Peter Fontaine, Janet Airis, Thomas Bradley, Kim Cawley, Paul Cullinan, Jeffrey Holland, and Jo Ann Vines. The revenue estimates were prepared by the staff of the Tax Analysis Division under the supervision of Thomas Woodward, Mark Booth, and David Weiner.

The economic outlook presented in Chapter 2 was prepared by the Macroeconomic Analysis Division under the direction of Robert Dennis. John F. Peterson, Robert Arnold, and Brian Mathis carried out the economic forecast and projections. David Brauer, Ufuk Demiroglu, Tracy Foertsch, Douglas Hamilton, Juann Hung, Kim Kowalewski, Mark Lasky, Angelo Mascaro, Shinichi Nishiyama, Benjamin Page, Frank Russek, Robert Shackleton, John Sturrock, and Christopher Williams contributed to the analysis. Tumi Coker, John McMurray, and Brian Mathis provided research assistance.

CBO's Panel of Economic Advisers commented on an early version of the economic forecast underlying this report. Members of the panel are Andrew B. Abel, Michael J. Boskin, Barry P. Bosworth, Robert G. Dederick, William C. Dudley, Martin Feldstein, Robert J. Gordon, Robert E. Hall, N. Gregory Mankiw, Allan Meltzer, William Niskanen, William D. Nordhaus, June E. O'Neill, Rudolph G. Penner, James Poterba, Michael Prell, Robert Reischauer, Alice Rivlin, Joel Slemrod, and Martin B. Zimmerman. Kurt Karl attended the panel's meeting as a guest. Although CBO's outside advisers provided considerable assistance, they are not responsible for the contents of this report.

Jeffrey Holland wrote the summary. Sandy Davis and Felix LoStracco wrote Chapter 1, with assistance from Mark Booth and Jo Ann Vines. David Brauer was the lead author for Chapter 2. Mark Booth and Thomas Woodward wrote Chapter 3. Ellen Hays and Barry Blom wrote Chapter 4. Robert Dennis and Frank Russek wrote Chapter 5, with assistance from Ufuk Demiroglu. Sandy Davis and Felix LoStracco wrote Appendix A. Adaeze Enekwechi wrote Appendixes B, C, and F. Barry Blom wrote Appendix D. Jennifer Smith produced the glossary.

Until he left the agency in early January, former CBO Director Dan L. Crippen directed the analytical work that supports this report.

Christine Bogusz, Leah Mazade, John Skeen, and Christian Spoor edited the report. Marion Curry, Linda Lewis Harris, and Denise Williams assisted in its preparation. Kathryn Winstead prepared the report for publication, with assistance from Sharon Corbin-Jallow, and Annette Kalicki, with help from Martina Wojak-Piotrow, produced the electronic versions for CBO's Web site.

Barry B. Anderson
Acting Director
January 2003




CONTENTS


  Summary
   
1  The Budget Outlook
      Uncertainty and the Projection Horizon
      The Return of the Deficit in 2002
      The Concept Behind CBO's Baseline
      Changes in CBO's Projections Since August 2002
      The Outlook for Federal Debt
      Trust Funds and the Budget
      The Expiration of Budget Enforcement Procedures
   
2  The Economic Outlook
      Recent Economic Developments
      CBO's Economic Forecast for 2003 and 2004
      The Economic Outlook Beyond 2004
   
3  The Revenue Outlook
      Recent Revisions to CBO's Revenue Projections
      Revenues by Source
      The Growing Significance of the AMT in CBO's Projections
      The Effects of Expiring Tax Provisions
   
4  The Spending Outlook
      Discretionary Spending
      Entitlements and Other Mandatory Spending
      Net Interest
   
5  The Uncertainty of Budget Projections
      The Accuracy of CBO's Past Budget Projections
      Alternative Economic and Budget Scenarios
   
  Appendix A
The Expiration of Budget Enforcement Procedures: Issues and Options

Appendix B
Budget Resolution Targets and Actual Outcomes

Appendix C
How Changes in Assumptions Can Affect Budget Projections

Appendix D
The Federal Sector of the National Income and Product Accounts

Appendix E
CBO's Economic Projections for 2003 Through 2013

Appendix F
Historical Budget Data

Appendix G
Contributors to the Revenue and Spending Projections

Glossary



Tables  
   
S-1.  The Budget Outlook Under CBO's Adjusted Baseline
S-2.  CBO's Economic Forecast for Calendar Years 2003 and 2004
1-1.  The Budget Outlook
1-2.  CBO's Budget Projections Under Its Adjusted Baseline
1-3.  Changes in CBO's Projections of the Surplus or Deficit Since August 2002 Under the Adjusted Baseline
1-4.  CBO's Projections of Federal Debt Under Its Adjusted Baseline
1-5.  CBO's Projections of Trust Fund Surpluses or Deficits
2-1.  CBO's Economic Projections for Calendar Years 2003 Through 2013
2-2.  CBO's Economic Forecast for 2003 and 2004
2-3.  Comparison of Blue Chip's and CBO's Forecast for Calendar Years 2003 and 2004
2-4.  CBO's Current and Previous Economic Projections for Calendar Years 2003 Through 2012
2-5.  Key Assumptions in CBO's Projection of Potential GDP
3-1.  Changes in CBO's Projections of Revenues Since August 2002
3-2.  CBO's Projections of Revenues
3-3.  CBO's Projections of Individual Income Tax Receipts and the NIPA Tax Base
3-4.  Why Did Individual Income Tax Liability Grow Faster Than GDP From 1994 Through 2000?
3-5.  Actual and Projected Capital Gains Realizations and Taxes
3-6.  CBO's Projections of Social Insurance Tax Receipts and the Social Insurance Tax Base
3-7.  CBO's Projections of Social Insurance Tax Receipts, by Source
3-8.  CBO's Projections of Corporate Income Tax Receipts and Tax Bases
3-9.  CBO's Projections of Excise Tax Receipts, by Source
3-10.  CBO's Projections of Other Sources of Revenue
3-11.  Effect of Extending Tax Provisions That Will Expire Before 2013
4-1.  CBO's Projections of Outlays Under Its Adjusted Baseline
4-2.  Average Annual Rate of Growth in Outlays Under CBO's Adjusted Baseline
4-3.  Defense and Nondefense Discretionary Outlays
4-4.  CBO's Projections of Discretionary Spending Under Alternative Paths
4-5.  CBO's Baseline Projections of Mandatory Spending
4-6.  Sources of Growth in Mandatory Outlays
4-7.  CBO's Baseline Projections of Offsetting Receipts
4-8.  Costs for Mandatory Programs That CBO's Baseline Assumes Will Continue Beyond Their Current Expiration Dates
4-9.  CBO's Projections of Federal Interest Outlays Under Its Adjusted Baseline
5-1.  Average Difference Between CBO's Budget Projections and Actual Outcomes Since 1981, Adjusted for Subsequent Legislation
5-2.  Alternative Scenarios for the Economy and the Budget in the Short Term
5-3.  Potential Economic and Budgetary Effects of War in Iraq
5-4.  Alternative 10-Year Scenarios for the Economy and the Budget
A-1.  The Deficit Compared with the Gramm-Rudman-Hollings Targets
A-2.  Discretionary Spending Under the Budget Enforcement Act
A-3.  Balances Eliminated by Statute from the Pay-As-You-Go-Scorecard
B-1.  Comparison of Budget Resolution Targets and Actual Budget Totals for 2002
B-2.  Differences Between Budget Resolution Targets and Actual Budget Totals for 2002
B-3.  Differences Between Budget Resolution Targets and Actual Budget Totals, 1980-2002
C-1.  Estimated Effects of Selected Economic Changes on CBO's Budget Projections
C-2.  Estimated Effects on CBO's Baseline of Increasing Discretionary Budget Authority by $10 Billion in 2003
C-3.  Estimated Savings in Net Interest from Borrowing $10 Billion Less
D-1.  Relationship of the Budget to the Federal Sector of the National Income and Product Accounts
D-2.  Projections of Baseline Receipts and Expenditures as Measured by the National Income and Product Accounts
E-1.  CBO's Year-by-Year Forecast and Projections for Calendar Years 2003 Through 2013
E-2.  CBO's Year-by-Year Forecast and Projections for Fiscal Years 2003 Through 2013
F-1.  Revenues, Outlays, Surpluses, Deficits, and Debt Held by the Public, 1962-2002 (In billions of dollars)
F-2.  Revenues, Outlays, Surpluses, Deficits, and Debt Held by the Public, 1962-2002 (As a percentage of GDP)
F-3.  Revenues by Major Source, 1962-2002 (In billions of dollars)
F-4.  Revenues by Major Source, 1962-2002 (As a percentage of GDP)
F-5.  Outlays by Major Spending Category, 1962-2002 (In billions of dollars)
F-6.  Outlays by Major Spending Category, 1962-2002 (As a percentage of GDP)
F-7.  Discretionary Outlays, 1962-2002 (In billions of dollars)
F-8.  Discretionary Outlays, 1962-2002 (As a percentage of GDP)
F-9.  Outlays for Entitlements and Other Mandatory Spending, 1962-2002 (In billions of dollars)
F-10.  Outlays for Entitlements and Other Mandatory Spending, 1962-2002 (As a percentage of GDP)
F-11.  Surpluses, Deficits, Debt, and Related Series, 1960-2002
F-12.  Standardized-Budget Surplus or Deficit and Related Series, 1960-2002 (In billions of dollars)
F-13.  Standardized-Budget Surplus or Deficit and Related Series, 1960-2002 (As a percentage of potential GDP)
   
Figures  
   
S-1.  Total Revenues and Outlays as a Share of GDP, 1962-2013
S-2.  Uncertainty of CBO's Projections of the Total Budget Surplus Under Current Policies
1-1.  Total Deficits and Surpluses as a Share of GDP, 1967-2013
1-2.  Total Debt Subject to Limit, August 2000 Through August 2004
1-3.  Surpluses or Deficits (Excluding Interest) of the Social Security and Medicare Hospital Insurance Trust Funds
2-1.  The Economic Forecast and Projections
2-2.  The Federal Funds Interest Rate
2-3.  An Index of Monetary and Financial Conditions
2-4.  Interest Rate Spreads on Corporate Bonds
2-5.  Employment in the Private Nonfarm Sector
2-6.  Civilian Unemployment Rate
2-7.  Growth in Disposable Income
2-8.  Household Net Wealth
2-9.  Mortgage Delinquency Rates
2-10.  Delinquency Rates on Consumer Loans at Banks
2-11.  Sales of New Homes
2-12.  Mortgage Interest Rates for Existing Homes
2-13.  Sales of Cars and Light Trucks
2-14.  The Rate of Capacity Utilization in Manufacturing
2-15.  Business Investment in Inventory
2-16.  The Current-Account Balance
2-17.  The Fiscal Positions of State and Local Governments
2-18.  Inflation in the Consumer Price Index
2-19.  Actual and Potential Total Factor Productivity
2-20.  Corporate Profits
2-21.  Wages and Salaries
3-1.  Total Revenues as a Share of GDP, 1946-2013
3-2.  Annual Growth of Federal Revenues and GDP, 1961-2013
3-3.  Revenues, by Source, as a Share of GDP, 1960-2013
3-4.  Effective Tax Rate on Individual Income, Tax Years 1994-2000
3-5.  Capital Gains Realizations as a Share of GDP, Calendar Years 1990-2013
3-6.  Projected Effects of the Individual Alternative Minimum Tax
4-1.  Major Components of Spending, 1962-2002
5-1.  Uncertainty of CBO's Projections of the Total Budget Surplus Under Current Policies
5-2.  Misestimates in CBO's Projections Made from 1981 to 1997
A-1.  Actual Discretionary Outlays Compared with the Spending Limits as Originally Enacted
A-2.  Emergency Budget Authority Under the Budget Enforcement Act
   
Boxes  
   
1-1.  CBO's Adjusted Baseline
1-2.  The Expiration of Revenue Provisions
1-3.  An Estimate of the Costs of a Potential Conflict with Iraq
1-4.  The Budgetary Effects of Freezing Total Discretionary Appropriations at $751 Billion
2-1.  The Economic Effects of Expiring Tax Cuts
2-2.  The Wealth Effect and Personal Saving
3-1.  Tax Bases and Tax Liability
4-1.  Categories of Federal Spending
5-1.  How CBO Analyzed Its Past Misestimates
5-2.  The Costs and Risks of Deflation
5-3.  Potential Effect of an Unfavorable Trend in Workers' Level of Education
A-1.  Expiring Voting Requirements for a Three-Fifths Majority to Waive Budget Points of Order in the Senate
A-2.  Is It Time for a New Budget Concepts Commission?
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