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The Budget and Economic Outlook: Fiscal Years 2004-2013 January 2003 |
Budget resolution targets, adopted by both Houses of Congress in most years, specify proposed levels of revenues and spending for the upcoming fiscal year. The targets in the 2002 concurrent budget resolution, adopted in May 2001, yielded a proposed budget surplus of $219 billion. However, the deficit for fiscal year 2002 was $158 billion, a difference of $376 billion from the surplus that the budget resolution anticipated. This appendix analyzes the divergence between the resolution's targets
and the actual outcomes for the year. In 2002, actual revenues were $1,853
billion, or about $317 billion lower than expected for the year. Although
tax legislation reduced revenues by slightly more than the resolution anticipated,
the weak economy and other factors accounted for almost all of the difference
in revenues. Total outlays, at $2,011 billion, ended up higher than anticipated
by $59 billion--primarily because appropriations were higher than the budget
resolution assumed. That increase was largely the consequence of funding
provided in response to the terrorist attacks of September 11, 2001.
Elements of the AnalysisThe budget resolution is a concurrent resolution adopted by both Houses of Congress that sets forth the Congressional budget plan over five or more fiscal years. The resolution consists of targets for revenues, spending, the surplus or deficit, and debt held by the public. The budget resolution does not itself become law; instead, it is implemented through subsequent legislation, including appropriation acts and changes in the laws that affect revenues and spending, which are sometimes in response to reconciliation instructions that are included in the resolution. The targets established in the budget resolution are generally enforced through procedural mechanisms set out in the Congressional Budget and Impoundment Control Act of 1974. For this analysis, the differences between the levels specified in the budget resolution and the actual outcomes are allocated among three categories: policy, economic, and technical. Although those categories help explain the discrepancies, the divisions are inexact and necessarily somewhat arbitrary. Differences attributed to policy derive from enacted legislation that was not anticipated in the resolution (such as the legislation addressing terrorism) or legislation that was estimated to cost a different amount than the resolution assumed. Differences attributed to policy may also reflect lawmakers' failure to enact legislation that the budget resolution assumed would pass. To identify such differences arising from legislation, the Congressional Budget Office (CBO) normally uses the cost estimates that it prepared at the time the legislation was enacted. (To the extent that the actual budgetary impact is different from what CBO estimated, that difference is characterized as a technical change.) A key element in preparing the budget resolution is forecasting how the economy will perform in the upcoming fiscal year. Ordinarily, the Congress adopts the most recent economic assumptions published by CBO. However, in seven of the years since 1980, the Congress chose to use a different forecast (generally, the Administration's, published by the Office of Management and Budget).(1) The forecast for the budget resolution is usually made more than nine months before the fiscal year begins. Forecasting the economy is always an uncertain endeavor, and almost invariably, the economy's actual performance differs from the forecast. Nevertheless, every resolution is based on the forecast's assumptions about numerous economic variables--mainly, gross domestic product (GDP), taxable income, unemployment, inflation, and interest rates. Those assumptions are used to estimate revenues, spending for benefit programs, and net interest. In CBO's analysis, differences that can be linked directly to the agency's economic forecast are labeled economic. (Other differences that might be tied to economic performance, such as changes to estimates of capital gains realizations or distributions from retirement plans, are categorized as technical.) In analyzing the deviation between budget resolution targets and outcomes, CBO cumulates differences that arise from changes in the economic forecast since the time that the resolution was completed. But CBO does not subsequently adjust that calculation, even though revisions to data about GDP and taxable income continue to trickle in over a number of years. Technical differences between the budget resolution targets and actual
outcomes are those variations that do not arise directly from legislative
or economic sources as categorized. The largest dollar effects of technical
differences are concentrated in two areas: on the revenue side of the budget
and among the government's open-ended commitments, such as entitlement
programs. In the case of revenues, technical differences stem from a variety
of factors, including changes in administrative tax rules, differences
in the sources of taxable income that are not captured by the economic
forecast, and changes in the relative amounts of income taxed at the various
rates. In the case of entitlement programs, factors such as an unanticipated
change in the number of beneficiaries, unforeseen utilization of health
care services, changes in farm commodity prices, or new regulations can
produce technical differences.
Comparing the Budget Resolution and Actual Outcomes for Fiscal Year 2002The budget resolution for 2002 adopted the economic assumptions that CBO published in January 2001. Using those assumptions and incorporating policy changes, the resolution established the following targets for the year: total revenues of $2,171 billion, outlays of $1,952 billion, and a surplus of $219 billion (see Table B-1). Ultimately, revenues were lower by $317 billion, and outlays were higher by $59 billion, resulting in a deficit that was $376 billion lower than the surplus anticipated in the resolution. Technical factors, mostly on the revenue side, accounted for more than half of the difference ($201 billion), and economic factors accounted for about a third (see Table B-2). Differences Arising from Policy Changes
The 2002 resolution assumed that discretionary outlays would remain near the level projected in CBO's baseline ($683 billion). In actuality, budget authority was $73 billion higher than anticipated in the resolution, resulting in $52 billion more in outlays. Much of that amount stemmed from costs incurred as a result of the terrorist attacks of September 11, 2001. Outlays in 2002 for almost all budget functions turned out higher than provided for in the resolution; nearly 60 percent of the excess went to defense spending. Two mandatory spending proposals with noticeable budgetary effects were included in the resolution: a farm bill, which was enacted, and legislation boosting health care spending for the uninsured (which was not acted upon). The Farm Security and Rural Investment Act of 2002 (Public Law 107-171) increased outlays by an estimated $2 billion in 2002 (and will increase them by about $80 billion from 2002 to 2011). The legislation providing health care for the uninsured had an anticipated cost of $8 billion in 2002--an amount that was incorporated into the resolution but that did not translate into outlays since the legislation did not pass. Two tax laws also increased mandatory spending. The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), anticipated in the budget resolution, resulted in increased spending on refundable tax credits by $6 billion in 2002. The Job Creation and Worker Assistance Act of 2002 (P.L. 107-147)--commonly referred to as the economic stimulus package--extended unemployment benefits for individuals at a cost of about $8 billion in 2002. Altogether, policy changes reduced mandatory spending by $1 billion from the level assumed in the budget resolution. On the revenue side of the budget, the resolution assumed that the President's proposed tax cut would be passed and would reduce revenues by about $65 billion in 2002. However, the enacted tax law, EGTRRA, resulted in a smaller reduction, estimated at $31 billion, for that year. The Congress and the President also enacted tax legislation that the budget resolution did not anticipate. Public Law 107-147 further eroded revenues by about $43 billion. Differences Arising from Economic Factors
The resolution assumed that real (inflation-adjusted) GDP would grow by 2.7 percent in fiscal year 2001 and by 3.2 percent in 2002. However, the economy fell into a recession in March 2001. As a result, growth in real GDP turned out to be just 0.8 percent in 2001 and 1.7 percent in 2002. The recession reduced the level of nominal GDP compared with that anticipated by the resolution and slowed the growth of wages and salaries, thereby reducing revenues from individual income taxes. Furthermore, lower-than-expected corporate profits caused corporate income tax receipts to decline. Mandatory spending is also sensitive to changes in the economic forecast. Although such spending flows from the provisions of permanent laws, the spending for many mandatory programs is keyed to the economy. As a result, spending on mandatory programs increased as the economy weakened. Overall, for economic reasons mandatory outlays turned out to be $11 billion above the level assumed by the resolution--almost entirely because of increased spending on unemployment insurance. Lower-than-anticipated interest rates drove projected outlays for net interest payments below the level assumed in the budget resolution. Most significantly, the resolution assumed that short-term interest rates would average 4.8 percent in 2002; however, as a result of actions by the Federal Reserve, those rates averaged just 1.7 percent. Those differences resulted in outlays for net interest of more than $18 billion less than those anticipated in the budget resolution. Differences Arising from Technical Factors
Some of that decrease in revenues may stem indirectly from economic
factors (for example, decreased capital gains realizations may be related
to the strength of the economy) or may result from economic factors that
will be revealed in future revisions to economic variables; however, a
full analysis of the 2002 results cannot be done now because information
about sources of individual income typically lags behind the tax year by
a couple of years. The additional increase in outlays attributable to technical
differences resulted from slightly higher than expected spending on Medicaid,
Medicare, unemployment insurance, and a host of other programs. In addition,
debt-service costs were higher, mostly because of the technical factors
that reduced projected revenues.
Comparing Budget Resolutions and Actual Outcomes from Fiscal Years 1980 Through 2002Actual outcomes always differ to varying degrees from budget resolution targets. Over the 1980-1992 period, the deficit consistently exceeded the target in the resolution by amounts ranging from $4 billion in 1984 to $119 billion in 1990 (see Table B-3). That pattern changed in 1993, in part because spending for deposit insurance was substantially lower than expected. From 1994 through 2000, actual outcomes continued to be more favorable than the targets (with the exception of 1999, when there was no conference agreement on a budget resolution). However, in 2001, lower-than-expected revenues and higher-than-anticipated outlays combined to reduce the surplus to less than what was envisioned in the resolution. In 2002, those same factors caused a deficit instead of the envisioned surplus. The difference between the target and the outcome in 2002, both in monetary terms and as a percentage of outlays, was by far the largest of any year over the 1980-2002 period. Differences Arising from Policy Changes
Most of the impact stemming from legislation over the period was on the outlay side of the budget. On average, policy decisions added about $16 billion a year to the spending totals. In fact, 1988 and 1991 were the only years in which legislative action held outlays below the budget resolution targets. The biggest difference due to policy changes was in 2000, when the effects of legislation increased outlays by about $65 billion. The difference in 2002 was second largest: a $46 billion increase. On the revenue side of the budget, the largest difference arising from policy changes occurred in 2001, when legislation reduced taxes by $65 billion more than was anticipated by the resolution. By contrast, in 2002 that difference was a $9 billion reduction. Differences Arising from Economic Factors
In absolute terms (disregarding whether the errors were positive or negative), the typical difference in the surplus or deficit attributable to incorrect economic assumptions was about $33 billion a year over the 1980-2002 period. Regardless of the direction of the errors in the forecasts, differences between the resolutions' assumptions and what actually happened in the economy primarily affected revenues. Differences Arising from Technical Factors
The magnitude and causes of the differences ascribed to technical factors have varied over the years. On the revenue side, technical misestimates were generally not very great through 1990, but the budget resolutions significantly overestimated revenues in 1991, 1992, and 2002, when tax collections were weaker than economic data suggested. The difference was particularly pronounced in 2002, when, for technical reasons, revenues came in $183 billion lower than the budget resolution anticipated. From 1997 through 2001, revenues were much higher than the budget resolution targets. The individual income tax was the source of most of those technical discrepancies, primarily because of higher realizations of capital gains, unexpected increases in the effective tax rate, and higher reported incomes. Greater realizations of capital gains most likely stemmed from upturns in the prices of stocks and the volume of stock transactions. The unexpected rise in the effective tax rate was largely due to a disproportionate increase in income among taxpayers taxed at the highest marginal rates. Misestimates arising from technical factors also show up on the outlay side of the budget. Through the mid-1980s, discrepancies in estimating receipts from offshore oil leases and spending on farm price supports, defense, and entitlement programs were the dominant technical differences. In addition, in the early 1990s, during the savings and loan crisis, outlays for deposit insurance were a major source of discrepancies attributable to technical factors. In recent years, technical differences between estimates of outlays and actual outlays have been spread among a variety of programs. They were quite small in 2000 and 2001--within $10 billion and near zero, respectively--but grew to $18 billion last year. Differences as a Percentage of Actual Revenues
or Outlays
The size of the total difference between actual surpluses or deficits
and the surpluses or deficits anticipated in budget resolutions depends
in large part on whether the differences for revenues and outlays offset
each other. For years in which the discrepancies for revenues and outlays
affected the surplus or deficit in opposite ways, the total difference
dropped to as little as 0.5 percent of actual outlays. But in other years,
the discrepancies for both revenues and outlays affected the surplus or
deficit in the same way. Indeed, from 1980 to 2002, the differences between
estimates of revenues and outlays in the budget resolutions and the actual
amounts went in the same direction relative to the surplus or deficit in
13 years. In 2002, the actual deficit was below the surplus anticipated
in the budget resolution by an amount equal to 18.7 percent of actual outlays--much
greater than the 5.4 percent absolute average over the 23-year period.
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