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An Analysis of the President's Budgetary Proposals for Fiscal Year 2001 April 2000

As requested by the Senate Committee on Appropriations, the Congressional Budget Office (CBO) has estimated the effects of the proposals in the President's budget request for fiscal year 2001 using CBO's economic and technical estimating assumptions.

Under the Administration's policies, CBO estimates a total budget surplus of $190 billion for 2001--consisting of an on-budget surplus of $24 billion and an off-budget surplus of $166 billion. (On-budget totals exclude Social Security inflows and outflows as well as the net cash flow to the Postal Service.) Cumulative on-budget surpluses, by CBO's tally, would reach $423 billion over the 2001-2010 period, and off-budget surpluses $2.3 trillion, under the President's proposals (see Summary Table 1). CBO's estimates of budgetary totals are quite close to those of the Administration, which projects cumulative on-budget surpluses of $350 billion over the 10-year period and off-budget surpluses of $2.2 trillion.
 

The President's Budgetary Policies

To assess the impact of the President's budget as well as other budget plans, CBO uses its baseline as a benchmark for comparison. The baseline assumes that current laws governing federal revenues and mandatory spending programs remain in place. But discretionary spending is controlled by annual appropriation acts, and no consensus exists about how to define current policy for such spending as it applies to future years. Consequently, CBO has prepared three variants of its baseline, each of which assumes a different path for discretionary spending:⁽¹⁾

• The "inflated" variation assumes that budget authority for discretionary programs grows at the rate of inflation each year after 2000.
  
  
• The "freeze" variation pegs discretionary budget authority to the level enacted for the current year plus amounts already enacted for 2001.
  
  
• The "capped" variation assumes that discretionary spending equals CBO's estimates of the statutory caps on such spending through 2002 and grows at the rate of inflation thereafter.

Over the 2001-2010 period, the President's budgetary proposals lead to a cumulative total surplus that is smaller than such surpluses under CBO's baseline variants--$472 billion less than under CBO's inflated variation (see Summary Table 2) and $1,476 billion less than under the freeze variation (see Summary Table 3). A similar difference would result if the capped baseline was used for comparison. Nearly all of the differences between the budget's and CBO's estimates of the cumulative total surplus show up in on-budget accounts. Cumulative off-budget surpluses would be essentially the same under all three versions of the baseline and the President's budget.
 

The President proposes several uses for the projected on-budget baseline surpluses. Some portion would be devoted to additional spending, and some would finance net tax cuts; the remainder would reduce federal debt. The budget also proposes spending policies that include increasing and extending the current statutory limits on discretionary spending as well as boosting outlays for some mandatory programs. The President's plan for revising the discretionary spending caps calls for a significant increase in 2001; after that, the proposed caps would result in a spending path similar to that suggested by the inflated variation of CBO's baseline. Relative to the freeze variation, the Administration's proposals would add more than $860 billion to discretionary outlays over the 2001-2010 period (relative to the capped baseline, nearly $840 billion would be added).

On the mandatory side of the budget, the proposals of major budgetary significance are concentrated on health initiatives--particularly for Medicare, Medicaid, and the State Children's Health Insurance Program (SCHIP). Additional spending for mandatory programs would total about $218 billion over 10 years, CBO estimates.

The President's revenue proposals would shrink receipts by a total of $146 billion over the 10-year period, according to CBO and the Joint Committee on Taxation. Most of that net reduction would occur in the later years of the period; over the first five years, the estimated effect totals $5 billion. Revenue-dampening proposals include tax cuts to alleviate the marriage penalty and a number of tax credits intended to promote various objectives. Those reductions are partially offset by revenue increases--for example, from raising the excise tax on tobacco.

Under the President's policies, annual spending by the federal government would rise over the projection period, but that spending as a share of gross domestic product (GDP) would fall. Overall, the Administration proposes to spend more than $1.8 trillion--representing 18.3 percent of GDP--in 2001. Total annual spending is estimated to rise to $2.5 trillion in 2010 but would account for only 16.9 percent of GDP, the lowest percentage since 1956. Most of that reduction is attributable to diminishing interest payments on government debt. Revenues would also decline as a share of GDP--from 20.2 percent in 2001 to 19.6 percent in 2010.

Although CBO estimates that on-budget surpluses under the Administration's budget would be smaller and would grow more slowly than under current policies (as reflected in CBO's baseline), they would nevertheless climb over the projection period, from $24 billion to $103 billion. (Off-budget surpluses would change only slightly from the levels projected under current policies.) CBO's estimates of surpluses under the President's proposals are higher than the Administration's estimates, largely because for the most part, CBO's projections of mandatory spending under current law are lower. Social Security accounts for much of the difference: CBO's baseline total for Social Security outlays over the 2001-2010 period is $128 billion less than the Administration's.
 

The President's Health Insurance Proposals

After Social Security, Medicare and Medicaid are the largest federal entitlement programs. Those programs and the grants made to states under the State Children's Health Insurance Program provide federally funded or subsidized health insurance coverage to millions of low-income, disabled, or elderly people.

Initiatives in the President's budget would expand coverage of low-income people by Medicaid and SCHIP and increase Medicare coverage of disabled workers and certain people ages 55 and older who lose health coverage because of a job loss. The President also proposes to add a prescription drug benefit for all Medicare beneficiaries and to encourage health plans in Medicare to compete on the basis of price by enabling beneficiaries who choose low-cost plans to pay lower premiums. In addition, the budget includes a number of proposals to reduce the rate of growth of Medicaid and Medicare spending.

CBO estimates that, on balance, the President's health initiatives would increase federal spending during the 2001-2010 period--by $26 billion for Medicaid, $64 billion for SCHIP, and $69 billion for Medicare. Additionally, the President's proposals to expand eligibility for Medicare would decrease tax revenues by $8 billion and raise Social Security spending by $1 billion.
 

The President's Trust Fund Proposals

Within the federal budget, receipts and expenditures for Social Security, Medicare, and a number of other programs are recorded as transactions of federal trust funds. That accounting structure often leads federal decisionmakers to focus on the financial status of the Social Security and Medicare trust funds and to view their solvency as an important policy objective.

In the public debate, "solvency" means keeping the trust funds from exhausting their balances. Federal trust funds, however, are merely accounting mechanisms established to link receipts that the government collects or assigns to specific uses with the expenditures of those resources; the balances of the funds are not assets of the government. And there is no relationship between the balances in a trust fund and its future obligations. In other words, the government will face claims whether or not the fund has sufficient balances, and it will need to acquire actual resources from the economy to meet those obligations when they come due.

The President's budget contains three proposals that the Administration says will postpone the insolvency of trust funds. The two largest proposals affect the Social Security and Medicare trust funds (the third applies to the Black Lung Disability Trust Fund). The President's budget would transfer amounts from the general fund of the Treasury to the two Social Security trust funds (Old-Age and Survivors Insurance and Disability Insurance) and to the Medicare Hospital Insurance (HI) Trust Fund. The transfers to Social Security would begin in 2011 and continue through 2050. In addition, portions of projected on-budget surpluses would be designated as transfers to the HI trust fund. Those transfers would take place in 2001 and 2002 and again in 2006 through 2010.

Those proposals would create transactions between government accounts, but such intragovernmental transfers would not by themselves increase the resources available to the government to meet its future obligations. Today's lawmakers can make a given set of future obligations more affordable for future generations by taking actions to enhance economic growth. In the short term, the most effective action would be to increase national saving and investment by maintaining projected budget surpluses and paying down debt held by the public. Such an approach would strengthen the nation's future ability to pay for all types of goods and services.
 

Comparison of Economic Forecasts

The Administration's economic assumptions for 2001 through 2010 are similar to those of CBO. Both project that growth over the next 10 years will slow from its recent rapid pace. The Administration expects real (inflation-adjusted) GDP to grow at an average annual rate of 2.7 percent, compared with CBO's forecast of 2.8 percent. Differences arise, however, in estimates of how sharp the slowdown will be and how long it will last. CBO expects a shallower but longer slowdown than the Administration does.

In both forecasts, slower growth brings the unemployment rate up to what is likely to be a more sustainable level. In January, that rate reached 4.0 percent, producing the tightest labor market in 30 years. Both CBO and the Administration project that the unemployment rate will eventually rise to 5.2 percent. In the Administration's forecast, that level is reached by 2003; in CBO's, by 2008.

The Administration generally expects higher inflation rates over the next 10 years than CBO does, with the size of the differences varying according to the index used to measure inflation. Overall, the differences are greater for the GDP price index than for the consumer price index (CPI). The Administration's forecast of CPI inflation is just 0.1 percentage point higher than CBO's in every year except 2001, when the forecasts are the same. However, the Administration expects the GDP price index to grow 0.3 percentage points faster, on average, over the projection period than CBO does.

The Administration assumes that interest rates will remain steady through 2010, averaging 5.2 percent for three-month Treasury bills and 6.1 percent for 10-year Treasury notes. By contrast, CBO assumes that interest rates will follow the same moderate cycle as the growth of real GDP. That assumption reflects CBO's view that the Federal Reserve will raise interest rates further this year to dampen economic growth. As a result, CBO estimates that the rate for three-month bills will average 5.6 percent in 2001 and then fall, averaging 4.8 percent a year from 2004 on. Rates for 10-year Treasury notes are projected to average 6.4 percent in 2001, dropping to 5.7 percent a year in 2004 and beyond.

1. CBO's The Budget and Economic Outlook: Fiscal Years 2001-2010 (January 2000) describes its baseline in detail. The January estimates have been slightly revised; for updated projections, see Appendix A in this report.

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