Congressional Budget Office
Robert A. Sunshine, Acting Director
Director’s Blog

Today, CBO released a cost estimate for H.R. 7321, the Auto Industry Financing and Restructuring Act, as passed by the House of Representatives last night.  We estimate that enacting H.R. 7321 would increase net direct spending by $1.7 billion over the 2009-2018 period, mostly for loans to domestic automobile manufacturers.  An additional $7.0 billion in potential costs would be subject to future appropriation action.

The act would provide sufficient funding to cover the costs of up to $14.0 billion in “bridge loans” to the auto manufacturers.  It would make available for that purpose $7.0 billion of federal funds previously authorized to cover the cost of loans to automobile manufacturers and component suppliers for the manufacture of advanced technology vehicles (often labeled “section 136 loans,” referring to the provision of law that authorized them).

How does the $7.0 billion in previous funding relate to the $14.0 billion in loans to be made under this legislation?  Under federal budgeting procedures, most loans and loan guarantees issued by the federal government are not recorded in the budget on a cash basis. Rather, estimates of the various cash flows (including, for example, disbursement of the loan principal, interest and principal payments received, and recoveries on defaults) are netted and discounted to the year of disbursement so as to show a net cost or savings to the government on a present-value basis; the amount of funding needed is not the total amount of the loan, but rather the net cost, if any, on that present-value basis. That net cost, as a percentage of the loan principal, is called the subsidy rate. For example, if the subsidy rate for a $1 billion loan is 50 percent, its net subsidy cost and the amount of funding necessary would be $500 million.

CBO estimates that the subsidy cost for $14.0 billion in loans would be about $7.0 billion (an average subsidy rate of 50 percent), the amount of existing funds made available for that purpose.

In CBO’s judgment, the subsidy cost of the bridge loans authorized in this legislation could fall within a wide range depending on estimates of potential interest income, a significant probability of default (which could be different for different firms), and possible recoveries in the event of default. Under the Federal Credit Reform Act, the Administration determines the estimated subsidy cost of loans based on the procedures specified in that act.  CBO’s point estimate of 50 percent represents a weighted average of many possible outcomes and takes into account the possibility that subsidy rates assigned by the Administration could fall within a wide range.

There is, however, some likelihood that the net costs of the subsidy for the bridge loans would be higher.  To the extent that the Administration assigns subsidy rates to loans that exceed CBO’s current estimate of the average subsidy rate, total funding available for bridge loans would exceed the $7.0 billion reallocated from existing funds. Such an outcome would result in greater spending for bridge loans. If, on the other hand, the Administration assigns subsidy rates lower than 50 percent, there would be no corresponding reduction in spending for loans under the bill because any amounts not required for bridge loans would remain available to the Department of Energy for section 136 loans.  As a result, there is a possibility that the total loan costs resulting from this legislation could exceed the $7.0 billion in existing funds, but no possibility that they could be smaller.  (We sometimes label such a situations a “one-sided bet.”)

Reflecting the significant uncertainty and the possibility that the Administration might assign subsidy rates other than 50 percent,  authorizing the Administration to spend higher amounts if necessary yields about $1.0 billion in estimated additional spending for bridge loans in 2009.

Another $500 million in costs arises because the act would provide, out of the indefinite “such sums” appropriation, $500 million in new funding for the original section 136 loans to auto makers (for advanced-technology vehicles).

The Congress could, in the future, decide to provide an additional $7.0 billion in funding to replace the $7.0 billion that had previously been appropriated for section 136 loans and that, under this legislation, would be used instead for the bridge loans.  This act would authorize future appropriations for that purpose, but would not provide such funding.

The remaining almost $200 million in new costs stem from provisions that would provide government insurance for certain financing arrangements made by transit systems and authorize a cost-of-living increase for federal judges.

Today (December 5), CBO released a letter at the request of House Majority Leader Hoyer analyzing the budgetary effects of two legislative proposals: S. 3715, the Auto Industry Emergency Bridge Loan Act, as introduced on November 20, 2008; and draft legislation released by the House Committee on Financial Services (and posted on that committee’s Web site) on November 17, 2008.

Both proposals would authorize the federal government to provide up to $25 billion in “bridge loans” to support ongoing operations of automobile manufacturers and component suppliers.  S. 3715 would rescind $7.5 billion of funds previously appropriated to the Department of Energy for loans to automakers and also appropriate $7.5 billion for the cost of “bridge loans” to support ongoing operations of eligible auto manufacturers and component suppliers. Repayments of bridge loans would be available to support new loans.

The draft legislation posted by the House Committee on Financial Services would require the Secretary of the Treasury to provide $25 billion in bridge loans to eligible auto manufacturers and component suppliers, to be administered under the Troubled Assets Relief Program (TARP) that was created by the Emergency Economic Stabilization Act of 2008 (Public Law 110-343).

Provisions related to the administration and financial terms of such loans are similar under the two proposals, but significant differences arise regarding their budgetary treatment and potential net impact on the federal budget.  In particular, the subsidy costs of loans under S. 3715 would be calculated on a present value basis following the requirements of the Federal Credit Reform Act (FCRA), while loans made under TARP (as directed by the draft House legislation) would be calculated on a slightly different basis.  Under TARP, subsidy costs would be calculated by adjusting the discounting called for in FCRA to account for the market risk associated with the loans. In contrast, FCRA discounting is done by using the relatively “risk-less” Treasury rate of borrowing. (That difference, and its impact on the net budget impact of the proposals is explained in more detail in the letter to Majority Leader Hoyer.)

Another key difference between the two proposals is that S. 3715 would allow loan repayments to be “revolved” into new loans. That provision would effectively raise the estimated subsidy rate of the initial loans under S. 3715 to 100 percent. That result occurs because repayments would automatically revolve into new loans without subsequent appropriation of any additional funding to cover the subsidy costs of those new loans, as would normally be required under FCRA. By making new loans with the repayments of the initial loans, the government would essentially be spending those receipts, thus adding to the subsidy costs of the initial loans.

A summary of CBO’s estimates for the two proposals is provided in the following table:

CBO also sent a letter today to Cong. John M. Spratt Jr., Chairman of the House Budget Committee, providing information on how two alternative scenarios to provide $34 billion in bridge loans to the auto industry would affect the federal budget. Under both scenarios, the loans would support firms’ ongoing operations and would carry interest rates of 5 percent for the first five years after disbursement and 9 percent thereafter. CBO’s estimates of the subsidy cost for providing $34 billion in bridge loans under the two scenarios specified by Chairman Spratt are summarized in the following table:

CBO estimates that the subsidy rate for bridge loans under standard credit reform accounting (following the requirements of FCRA) would be 50 percent. By comparison, we estimate a subsidy rate of 70 percent for providing such loans under TARP because that program’s accounting requires an adjustment to reflect market risk. Using those subsidy rates, CBO estimates a budget cost of $17.0 billion for the use of new budget authority (with FCRA accounting), and a net budget cost of $13.6 billion to $17.0 billion for use of existing TARP authority.

Yesterday, CBO released its Monthly Budget Review.  CBO estimates that the Treasury will report a federal budget deficit of $408 billion for the first two months of fiscal year 2009, $253 billion higher than the deficit recorded through November of last year.  This estimate includes $191 billion disbursed for the Troubled Assets Relief Program (TARP) during the first two months of the fiscal year.

CBO believes that the equity investments for that program should be recorded on a net present value basis adjusted for market risk, as specified in the Emergency Economic Stabilization Act of 2008, rather than on a cash basis as recorded by the Treasury.  CBO’s preliminary analysis suggests that the present value cost of the TARP transactions made through November totals about $50 billion, $141 billion less than the cash disbursement recorded in the budget by the Treasury.  The estimated cost accounts for subsidized interest rates and market risk, but also for the likelihood that the government will ultimately get much of its money back.  As a result, CBO’s estimates of outlays and the deficit are much lower than the amounts that will be reported by the Treasury. 

Evaluating TARP on a net present value basis, CBO estimates the federal deficit totaled $267 billion through November, compared with a deficit of $155 billion during the same period last year. Revenues are running about 6 percent below receipts during the same period last year—but even excluding the TARP payments and $14 billion in payments to Freddie Mac to cover its losses, outlays are up by about 13 percent (after adjusting for shifts in the timing of certain payments).

Today CBO released the Monthly Budget Review.

In fiscal year 2008, the federal government recorded a total budget deficit of $455 billion — $293 billion more than the deficit incurred in 2007. As a share of the nation’s gross domestic product (GDP), the deficit rose from 1.2 percent in 2007 to 3.2 percent in 2008. That increase in the deficit of 2 percentage points of GDP reflected both a reduction in revenue (which declined by 1.1 percent of GDP) and an increase in spending (which rose by 0.9 percent of GDP).

Today’s report also includes CBO’s first preliminary estimate of operations thus far under the Troubled Asset Relief Program (TARP). In October, the government disbursed $115 billion under the TARP to purchase preferred stock in eight large banks. In CBO’s view, the equity investment and associated warrants should be recorded on a net present value basis, accounting for market risk, as specified in the Emergency Economic Stabilization Act. CBO’s preliminary estimate of $17 billion for the present value cost of the TARP equity injections is included in our estimate of $134 billion for the October deficit. CBO anticipates, however, that the Treasury will report the stock purchases on a cash basis; as a result, CBO estimates that the Treasury will report the October deficit at $232 billion (which is $98 billion, or $115 billion minus $17 billion, larger than the deficit using the net present value figures).

The 2008 deficit totaled $455 billion, roughly $17 billion more than the $438 billion estimated by CBO on October 7th. That difference does not reflect any economic or programmatic developments; rather, it reflects an accounting adjustment by the Department of the Treasury, which increased the outlay and deficit figures for June 2008 by $17 billion. In fact, the surplus for the month of September that was reported in the Monthly Treasury Statement (MTS) was slightly more than CBO had estimated.

The accounting adjustment corrected the amounts reported by the Federal Communications Commission (FCC) for offsetting receipts from the March 2008 auction of licenses to use the electromagnetic spectrum made available by the transition to digital television.  Proceeds from that auction, which totaled nearly $19 billion, are deposited in the Digital Television Transition and Public Safety Fund administered by the Department of Commerce.

The Department of the Treasury adjusted the June outlay figures because the FCC had recorded receipts before it had issued the licenses to the winning bidders. Proceeds from such auctions, as well as from leasing activities and similar asset sales, are deposited in the Treasury soon after an auction closes but are not classified as federal receipts until the government awards the licenses. In this case, the FCC recorded the entire $19 billion in the June MTS in an effort to comply with a statutory directive to book those receipts by June 30, notwithstanding the fact that few licenses had been issued at that time. Because the receipts should not have been recorded at that time, the Treasury has reversed $17.2 billion of the $19 billion that was recorded in June, reducing the surplus for that month from $51 billion to $34 billion (see footnote 2 on Table 1 of in the MTS for September).

CBO anticipates that most or all of the pending licenses will be awarded in the near future and that the receipts will be recorded in fiscal year 2009.

CBO released its Monthly Budget Review today. Based on data from the Daily Treasury Statements, CBO estimates that the federal budget deficit was about $438 billion in fiscal year 2008, $276 billion more than the shortfall recorded in 2007. (The Treasury Department will report the actual deficit for fiscal year 2008 later this month.)

Relative to the size of the economy, that deficit was equal to 3.1 percent of gross domestic product, up from 1.2 percent in 2007. (The average deficit over the preceding five years, 2002-2006, was 2.6 percent of GDP.) The $438 billion figure is about $31 billion more than the $407 billion deficit CBO projected this summer, primarily because revenues are lower than we anticipated and spending for defense and deposit insurance is turning out to be higher.

CBO estimates that receipts in 2008 were about $44 billion (or 1.7 percent) below receipts in 2007, falling from 18.8 percent of GDP in 2007 to about 17.7 percent of GDP in 2008. Corporate income taxes declined the most, falling by about $65 billion (18 percent), due largely to weakness in corporate earnings throughout the fiscal year. Individual income tax receipts declined by about $19 billion (or 1.6 percent) relative to receipts in fiscal year 2007, reflecting $62 billion in tax rebates (from the economic stimulus legislation) that were recorded as offsets to revenues. In contrast, receipts of social insurance (payroll) taxes rose by about $31 billion (or 3.5 percent), and other receipts increased by about $9 billion (or 5.4 percent).

Spending rose by about 8 percent. Contributing significantly to the growth in spending were outlays for tax rebates (those rebates that were recorded on the spending side of the budget because they exceeded the recipients’ income tax liability), for deposit insurance, and for national defense.

CBO released the annual summer update to the Budget and Economic Outlook for Fiscal Years 2008 to 2018 today. (Today’s report updates the Budget and Economic Outlook published in January 2008.)

Today’s report makes it challenging to avoid playing the dismal economist, which I generally dislike doing. The budget deficit has risen substantially over the past year. And according to CBO’s updated economic forecast, the economy is likely to experience at least several more months of weakness. (Whether this period will ultimately be designated a recession or not is still uncertain, but the increase in the unemployment rate and the pace of economic growth are similar to conditions during previous periods of mild recession.) Finally, the Treasury and Federal Housing Finance Agency have announced significant steps regarding Fannie Mae and Freddie Mac, which carry important implications for how the operations of those entities should be reflected in the federal budget.  The estimates presented in the report CBO released today do not reflect the specific details of those actions.

Some more details from today’s report include:

Budget projections

• CBO estimates that the deficit for 2008 will be $407 billion, substantially higher than last year’s $161 billion. As a share of the economy, the deficit is projected to rise to 2.9 percent of GDP this year, up from 1.2 percent of GDP in 2007. That 1.7 percentage point increase as a share of GDP is roughly evenly split between a 0.9 percentage point decline in revenue relative to GDP (reflecting the impact of lower corporate tax revenue and the rebates enacted as part of stimulus legislation this year) and a 0.8 percentage point increase in spending relative to GDP.
• Since March, the bottom line in CBO’s baseline over the next ten years has worsened by an average of nearly $260 billion per year. Some of that deterioration is due to the weakened economy, near-term inflation, and other economic variables; those factors increased projected deficits (or decreased projected surpluses) by about $85 billion a year. However, the larger component of the changes results from extrapolating into future years the supplemental appropriations enacted in June (in accordance with the rules governing the baseline).
• Over the longer term, the fiscal outlook continues to depend mostly on the future course of health care costs as well as on the effects of a growing elderly population. CBO estimates that federal spending on Medicare and Medicaid will grow to 6 percent of the GDP in 2018 and 12 percent of the GDP by 2050.

Economic projections

• An unusual amount of turbulence has roiled the U.S. economy this year, weakening the near-term outlook since CBO’s previous forecast.
• Specifically, CBO forecasts that GDP will grow by about 1.5 percent in real terms in calendar year 2008 and 1.1 percent in calendar year 2009.
• Inflation (as measured by change in the CPI-U) is projected to remain high and average 4.7 percent for 2008 but moderate in 2009, falling to an average of 3.1 percent.
• CBO’s projections beyond the two year horizon indicate real growth averaging 2.8 percent and CPI-U inflation averaging 2.2 percent.

Fannie Mae and Freddie Mac

• Significant government actions regarding Fannie Mae and Freddie Mac occured as this report went to press. The actions were taken to reduce the risk of a systemic shock to the financial system and to stabilize the mortgage markets.
• In a letter issued on the topic in July, CBO noted that “a strong argument can be made that if the Treasury used the proposed authority, the GSEs’ operations should be incorporated directly into the federal budget.” CBO concluded that the proposal at that time, especially to the extent it would result in any government acquisition of an equity stake in the GSEs, raised a significant budgetary question. Currently, data on the GSEs are reported along with federal budget information each year, but the activity of those entities is not encompassed within the budget. As CBO noted at the time, “That treatment could change if the federal government’s financial stake or control changes in a significant way.”
• Given the steps announced by the Treasury Department and the Federal Housing Finance Agency on September 7, it is CBO’s view that the operations of Fannie Mae and Freddie Mac should be directly incorporated into the federal budget. The GSEs’ revenue would be treated as federal revenue and their expenditures as federal outlays, with appropriate adjustments for the manner in which credit transactions (like a mortgage guarantee) are reflected in the federal budget.

CBO released its Monthly Budget Review today. CBO estimates that the federal budget deficit was $486 billion in the first 11 months of the fiscal year, $212 billion more than the shortfall recorded over the same period last year.  CBO anticipates that the government will realize a surplus in September, stemming from quarterly payments of estimated income taxes. The result will be a deficit in the vicinity of $400 billion for the fiscal year. CBO will release a new estimate of the 2008 deficit and updated baseline projections for fiscal years 2009-2018 on September 9.

Total receipts for the first 11 months of fiscal year 2008 were about 1.4 percent lower than receipts in the same period in fiscal year 2007, CBO estimates. Individual income taxes showed a decline in receipts of 3 percent, primarily due to tax rebates. Social insurance (payroll tax) receipts grew by about 4 percent, and corporate receipts fell by about 15 percent during the period.

CBO released the Monthly Budget Review today. CBO estimates that for the first 10 months of fiscal year 2008, the federal budget deficit was about $371 billion—$213 billion more than the deficit recorded over the same period in 2007. While revenues were about 1 percent lower than in the same period last year, outlays over the same period have grown by almost 9 percent. CBO estimates that the federal budget deficit for fiscal year 2008 will be in the vicinity of $400 billion, close to the amount we projected last March after accounting for proposed supplemental appropriations.

CBO estimates that a deficit of $102 billion was recorded for ythe month of July, about $65 billion more than recorded in July 2007; approximately $14 billion of that increase was due to rebate payments resulting from the Economic Stimulus Act of 2008. Receipts were about $5 billion lower than those in July 2007; without the rebates, receipts would have been up by 2 percent. Outlays in July were $61 billion higher than in the same month last year; about $21 billion of that difference was the result of calendar-related shifts in the timing of certain payments. Another major factor contributing to the increase was the $15 billion disbursed in July 2008 by the Federal Deposit Insurance Corporation (FDIC) to cover insured deposits at failed financial institutions; much of that cost should be recovered in the future as the FDIC liquidates the assets held by those institutions and collects higher insurance premiums.

CBO released its monthly budget review today. During the first nine months of FY 2008, the federal government incurred a deficit of $268 billion according to CBO estimates — $148 billion more than the shortfall recorded during the same period in 2007. About $79 billion of that change is due to the tax rebates enacted in the Economic Stimulus Act of 2008. Compared with their level in 2007, outlays have risen by more than 6 percent, whereas revenues have declined by about 1 percent.