Skip Navigation

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

The analysis of the economic outlook presented in Chapter 1 was prepared by the Macroeconomic Analysis Division under the direction of Robert Dennis and John F. Peterson. Benjamin Page wrote the chapter with contributions from Robert Arnold and Frank Russek. Matthew Salomon carried out the economic forecast and projections. Robert Arnold, Laurie Brown, Douglas Hamilton, Kim Kowalewski, Joyce Manchester, Angelo Mascaro, Frank Russek, Matthew Salomon, Kent Smetters, John Sturrock, and Christopher Williams provided background analysis and comments. Derek Briggs and John Romley provided research assistance.

The baseline outlay projections were prepared by the staff of the Budget Analysis Division under the supervision of Paul N. Van de Water, Robert Sunshine, Paul Cullinan, Peter Fontaine, James Horney, Michael Miller, and Murray Ross. The revenue estimates were prepared by the staff of the Tax Analysis Division under the supervision of Rosemary D. Marcuss and Richard Kasten. Daniel Kowalski wrote Chapter 2, and James Horney wrote the summary of the report.

The analysis of the President's budgetary proposals for fiscal year 1997 contained in Chapter 3 was prepared by the staffs of the Budget Analysis and Tax Analysis Divisions at the request of the Senate Committee on Appropriations. The estimates of the President's revenue proposals were prepared by the Joint Committee on Taxation. Jeffrey Holland wrote the chapter.

The analysis of the long-term implications of current fiscal policy presented in Chapter 4 was requested by the Chairman of the Senate Budget Committee and was carried out by Douglas Hamilton, Benjamin Page, and John Sturrock of the Macroeconomic Analysis Division under the direction of Robert Dennis. Douglas Hamilton wrote the chapter, and John Romley and Laurie Brown provided expert research assistance. The appendixes were written by Frank Russek (Appendix A), Susan Strandberg (Appendix B), and Michael Simpson (Appendixes C, D, and E).

An early version of Chapter 4 was discussed at a meeting of CBO's Panel of Economic Advisers. Members of that panel are Michael Boskin, Barry Bosworth, Robert Dederick, Martin Feldstein, Benjamin Friedman, Lyle E. Gramley, Robert E. Hall, Marvin Kosters, Anne Kreuger, Burton Malkiel, Gregory Mankiw, Allan Meltzer, Rudolph Penner, James Poterba, William Poole, Robert Reischauer, Sherwin Rosen, Robert Solow, John Taylor, and James Tobin. Henry Aaron, Alan Auerbach, Stanley Fischer, Laurence Kotlikoff, Edward McKelvey, and Laurence Meyer attended as guests. In addition, Herbert Stein provided comments on an early draft of Chapter 4. Despite the considerable assistance afforded by those outside advisers, the analysis in this report does not necessarily reflect their views, nor are they responsible for any errors.

Paul L. Houts supervised the editing and production of the report. Major portions were edited by Paul L. Houts, Sherwood D. Kohn, Leah Mazade, and Sherry Snyder. Christian Spoor provided editorial and production assistance. The authors owe thanks to Derek Briggs, Marion Curry, Janice Johnson, Dorothy Kornegay, Linda Lewis, John Romley, and Wanda Sivak, who assisted in the preparation of the report. Kathryn Quattrone and Jill Sands prepared the report for final publication.

June E. O'Neill
Director
May 1996
 
 

SUMMARY

ONE - THE ECONOMIC OUTLOOK

• The State of the Economy
• Fiscal Policy
• The Outlook Under Current-Policy Assumptions
• The Outlook Assuming a Balanced Budget by 2002
• Alternative Outlooks

TWO - THE BUDGET OUTLOOK

• The Deficit Outlook
• Changes in the Budget Outlook Since December
• The Revenue Outlook
• The Spending Outlook
• Federal Funds and Trust Funds

THREE - CBO'S ESTIMATES OF THE PRESIDENT'S BUDGETARY PROPOSALS

• The Administration's Proposals
• Differences Between CBO and Administration Estimates
• Estimates of the Budget Aggregates

FOUR - THE LONG-TERM BUDGET OUTLOOK

• The Aging of the U.S. Population
• The Continued Rapid Growth of Federal Health Expenditures
• The Long-Term Effects of an Aging Population
• Sustainable Budget Strategies
• The Benefits of Acting Soon
• Conclusion

APPENDIXES

A - Understanding and Measuring the Structural Federal Deficit
B - An Analysis of Congressional Budget Estimates
C - How the Economy Affects the Budget
D - The Federal Sector of the National Income and Product Accounts
E - Historical Budget Data
F - Major Contributors to the Revenue and Spending Projections

GLOSSARY
 

TABLES
S-1.	Economic Projections Assuming Current Policy for Calendar Years 1996 Through 2006
S-2.	Economic Projections Assuming Balanced Budget Policy for Calendar Years 1996 Through 2006
S-3.	CBO Deficit Projections
S-4.	Changes in CBO Deficit Projections Since December
S-5.	CBO Reestimate of the President's Budget
1-1.	The CBO Current-Policy and Balanced Budget Policy Forecasts for 1996 and 1997
1-2.	Measures of Fiscal Policy Under Current-Policy Assumptions
1-3.	Measures of Fiscal Policy Under Alternative Budget Assumptions
1-4.	Economic Projections Assuming Current Policy for Calendar Years 1996 Through 2006
1-5.	Economic Projections Assuming Current Policy for Fiscal Years 1996 Through 2006
1-6.	Economic Projections Assuming Balanced Budget Policy for Calendar Years 1996 Through 2006
1-7.	Economic Projections Assuming Balanced Budget Policy for Fiscal Years 1996 Through 2006
1-8.	Estimated Economic Effects of Balancing the Budget by 2002
1-9.	Comparison of Forecasts Assuming Balanced Budget Policy for 1995 Through 2006
2-1.	CBO Deficit Projections
2-2.	Changes in CBO Deficit Projections Since December
2-3.	CBO Projections for Revenues Under Current-Policy Economic Assumptions
2-4.	Effect of Extending Tax Provisions That Have Recently Expired or Will Expire in 1996 Through 2006
2-5.	CBO Projections for Outlays Under Current-Policy Economic Assumptions with Discretionary Inflation
2-6.	CBO Projections for Mandatory Spending Under Current-Policy Economic Assumptions
2-7.	Sources of Growth in Mandatory Spending
2-8.	CBO Projections for Offsetting Receipts Under Current-Policy Economic Assumptions
2-9.	CBO Projections for Interest Costs and Federal Debt Under Current-Policy Economic Assumptions
2-10.	CBO Projections for Trust Fund Surpluses Under Current-Policy Economic Assumptions
3-1.	CBO Estimate of the President's Budget
3-2.	The Administration's Proposals for Discretionary Spending in Fiscal Year 1997
3-3.	CBO Reestimate of the President's Budgetary Proposals
3-4.	Major Baseline Estimating Differences Between the Administration and CBO
3-5.	CBO Estimate of the President's Budget Without Contingencies
3-6.	CBO Estimate of the President's Budget with Contingencies
4-1.	Population of the United States by Age, Calendar Years 1950-2050
4-2.	Average Annual Rates of Growth in Payments by Medicare and Medicaid
4-3.	Projections of the Deficit and Debt Held by the Public, Using the Assumptions of the Base Scenario, Calendar Years 1995-2050
4-4.	Projections of Federal Receipts and Expenditures, Using the Assumptions of the Base Scenario Without Economic Feedbacks, Calendar Years 1995-2050
4-5.	Projections of Federal Receipts and Expenditures, Using the Assumptions of the Base Scenario with Economic Feedbacks, Calendar Years 1995-2050
4-6.	Estimated Lifetime Net Tax Rates in the United States by Year of Birth
4-7.	Projections of the Deficit and Debt Held by the Public Under Alternative Budget Strategies, Calendar Years 1995-2050
4-8.	Projections of Real GNP per Capita Under Alternative Budget Strategies
4-9.	Projections of Federal Receipts and Expenditures, Using Alternative Assumptions About Policy and Incorporating Economic Feedbacks, Calendar Years 1995-2050
A-1.	Measures of the Structural Federal Budget Deficit
A-2.	Primary Structural Surplus Needed to Maintain an Initial Debt-to-Output Ratio Under Different Economic Assumptions
A-3.	Structural Budget Balances in OECD Countries
A-4.	Primary Structural Budget Balances in OECD Countries
B-1.	Comparison of the CBO April 1994 Baseline, the 1995 Budget Resolution, and Actual Budget Totals for Fiscal Year 1995
B-2.	Sources of Differences Between the CBO April 1994 Baseline, the 1995 Budget Resolution, and Actual Budget Totals for Fiscal Year 1995
B-3.	Sources of Differences Between Actual Budget Totals and Budget Resolution Estimates, Fiscal Years 1980-1995
C-l.	Effects of Selected Economic Changes on CBO Budget Projections
C-2.	Effects on Budget Projections of a Change in CBO's Projection of Inflation, Assuming Discretionary Spending Remains Level
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 Measured by the National Income and Product Accounts
E-1.	Standardized-Employment Deficit and Related Series, Fiscal Years 1956-1995
E-2.	Revenues, Outlays, Deficits, and Debt Held by the Public, Fiscal Years 1962-1995 (In billions of dollars)
E-3.	Revenues, Outlays, Deficits, and Debt Held by the Public, Fiscal Years 1962-1995 (As a percentage of GDP)
E-4.	Revenues by Major Source, Fiscal Years 1962-1995 (In billions of dollars)
E-5.	Revenues by Major Source, Fiscal Years 1962-1995 (As a percentage of GDP)
E-6.	Outlays for Major Spending Categories, Fiscal Years 1962-1995 (In billions of dollars)
E-7.	Outlays for Major Spending Categories, Fiscal Years 1962-1995 (As a percentage of GDP)
E-8.	Discretionary Outlays, Fiscal Years 1962-1995 (In billions of dollars)
E-9.	Discretionary Outlays, Fiscal Years 1962-1995 (As a percentage of GDP)
E-10.	Outlays for Entitlements and Other Mandatory Spending, Fiscal Years 1962-1995 (In billions of dollars)
E-11.	Outlays for Entitlements and Other Mandatory Spending, Fiscal Years 1962-1995 (As a percentage of GDP)
FIGURES
1-1.	The Economic Forecast and Projections
1-2.	Growth of Labor Compensation
1-3.	Investment over the Business Cycle
1-4.	Stock of Inventories Compared with Sales
1-5.	Expenditures for Personal Consumption
1-6.	Household Payments on Debt
1-7.	Net Exports of Goods from the United States
1-8.	GDP and Potential GDP
1-9.	The National Saving Rate
1-10.	The Short-Term Interest Rate Adjusted for Inflation
1-11.	The Long-Term Interest Rate Adjusted for Inflation
2-1.	Revenues by Source as a Share of GDP Under Current-Policy Economic Assumptions
2-2.	Outlays by Category as a Share of GDP Under Current-Policy Economic Assumptions
4-1.	Number of Births in the United States, 1910-1994
4-2.	Projections of Federal Debt and Real GNP per Capita, Using the Assumptions of the Base Scenario with Economic Feedbacks
4-3.	Long-Term Projections of Interest Rates on Federal Debt and Rates of Economic Growth, Using the Assumptions of the Base Scenario with Economic Feedbacks
4-4.	Projections of Federal Debt, Using Alternative Assumptions About Demographics, Productivity, and Health Costs
4-5.	Projections of Receipts When Tax Increases Alone Are Used to Balance the Budget or Stabilize the Ratio of Debt to GDP
4-6.	Projections of Noninterest Outlays When Spending Cuts Alone Are Used to Balance the Budget or Stabilize the Ratio of Debt to GDP
A-1.	The Structural Deficit
A-2.	The Structural Deficit Corrected for Inflation
A-3.	The Primary Structural Deficit
B-1.	Differences Between Actual Deficits and Deficits in Budget Resolutions, Fiscal Years 1980-1995
D-l.	A Comparison of NIPA and Unified Budget Deficits, Fiscal Years 1980-2006
BOXES
S-1.	Recent Budgetary Events
1-1.	The Change in the Measure of Real Gross Domestic Product
2-1.	CBO Estimate of the Fiscal Dividend
2-2.	Changes in CBO Deficit Projections
2-3.	Raising the Debt Limit
4-1.	Aging of Population and Its Effect on Government Budgets in Other Countries
4-2.	Statistical Evaluation of Alternative Assumptions About Population and Productivity

This document is available in its entirety in PDF.