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This Congressional Budget Office (CBO) analysis of the President's budget request for fiscal year 2002 was prepared at the request of the Senate Committee on Appropriations. It was produced by the staffs of CBO's Budget Analysis, Macroeconomic Analysis, and Tax Analysis divisions under the supervision of Robert Sunshine, Robert Dennis, and Tom Woodward. The baseline revenue estimates were prepared by CBO; the estimates of the President's revenue proposals were prepared by the Joint Committee on Taxation.

Sandy Davis of CBO's Projections Unit wrote the report under the supervision of Jeff Holland, with contributions from Mark Booth, Tom Bradley, Jeanne De Sa, Kathy Gramp, John Peterson, and Eric Rollins. Box 1 was written by Mark Hadley. Barry Blom, Ellen Hays, Felix LoStracco, Laurie Pounder, and Erin Whitaker provided valuable assistance. Fact checking was done by Mark Hadley, Ellen Hays, Ken Johnson, Rachel Milberg, Kathy Ruffing, Christi Hawley Sadoti, and Amy Wendholt.

Christine Bogusz edited the report, and Christian Spoor proofread it. Marion Curry produced the tables, and Kathryn Quattrone prepared the report for publication. Lenny Skutnik produced the printed copies, and Annette Kalicki prepared the electronic versions for CBO's Web site.
 

Dan L. Crippen
Director
May 2001
 
 

CBO'S BASELINE

• Revisions to Estimates for Fiscal Year 2001
• Revisions to Projections for Fiscal Years 2002-2011

THE PRESIDENT'S BUDGETARY POLICIES

• Revenue Policies
• Mandatory Spending Policies
• Discretionary Spending Policies
• Contingency Reserve

COMPARISON OF CBO'S AND THE ADMINISTRATION'S ECONOMIC PROJECTIONS

DIFFERENCES BETWEEN CBO'S AND OMB'S BASELINE ESTIMATES

COMPARISON OF THE PRESIDENT'S BUDGET AND THE CONGRESSIONAL BUDGET RESOLUTION

APPENDIX: MAJOR CONTRIBUTORS TO THE REVENUE AND SPENDING PROJECTIONS
 

TABLES
1.	Comparison of Projected Surpluses in CBO's Baseline and Its Estimate of the President's Budget for 2002
2.	The President's 10-Year Budget Plan
3.	Changes in CBO's Baseline Projections of the Surplus Since January 2001
4.	CBO's Projections of Debt Held by the Public and Net Indebtedness at the End of the Year
5.	CBO's Baseline Budget Projections
6.	Comparison of CBO's and the Administration's Estimates of the Budget for 2002
7.	Sources of Differences Between CBO's and the Administration's Estimates of the President's Budgetary Proposals
8.	CBO's Estimate of the Effect of the President's Proposals on Baseline Surpluses
9.	CBO's Estimate of the President's Revenue Proposals, Including Effects on Outlays
10.	CBO's Baseline Projections of Mandatory Spending
11.	Discretionary Spending Under the President's Budgetary Proposals and CBO's Baseline Projections
12.	Comparison of Discretionary Budget Authority Enacted for 2001 and the President's Request for 2002, by Budget Function
13.	Comparison of CBO's and the Administration's Economic Projections for Calendar Years 2001-2011
14.	Comparison of CBO's Baseline and OMB's Current-Services Baseline
15.	Comparison of CBO's Baseline and Alternative Budget Plans
FIGURES
1.	Allocation of Projected Baseline Surpluses Under the President's Budget
2.	Reduction in Revenue Under the President's Proposed Tax Cuts, 2002-2011
BOX
1.	The Cost of Credit Programs in the Federal Budget

 

On April 9, President Bush submitted to the Congress the formal documents detailing his budget plan for fiscal year 2002. The broad outlines of that plan had been submitted on February 28 in a preliminary document titled A Blueprint for New Beginnings. There are few significant differences between the broad budget policies outlined in the President's blueprint and those detailed in his April submission.

At the request of the Senate Committee on Appropriations, the Congressional Budget Office (CBO) has prepared this analysis of the President's April budget submission. The President's plan would produce a total budget surplus of $257 billion in 2002, CBO estimates, including an on-budget surplus of $86 billion and an off-budget surplus of $171 billion (see Table 1). The off-budget figure consists almost entirely of the surpluses of the Social Security trust funds. Budget surpluses over 10 years (2002 through 2011) would total about $3.2 trillion under the President's proposals--$0.7 trillion on-budget and $2.5 trillion off-budget. CBO's estimates of the budget plan are similar to those of the Administration (see Table 2).
 

The President's budget specifies plans for allocating projected surpluses over the 2002-2011 period (see Figure 1). In the absence of policy changes, CBO projects surpluses totaling $5.6 trillion over the 10-year period. The President proposes to devote all of the off-budget surpluses, which CBO estimates will total $2.5 trillion, to reducing debt held by the public.⁽¹⁾ The President's tax and spending policies, CBO estimates, would lower total surpluses by about $2.4 trillion. The President's proposals to cut taxes make up the largest component of that reduction. The Joint Committee on Taxation (JCT) and CBO estimate that those proposals would reduce baseline surpluses by nearly $1.8 trillion between 2002 and 2011 (excluding their impact on debt service). About $1.7 trillion of the reduction would come from lower estimated revenues and about $75 billion from higher outlays for refundable tax credits. Relative to CBO's baseline, other increases in spending would consume about $0.2 trillion of the projected 10-year surplus, and increased debt-service costs would use another $0.5 trillion.⁽²⁾ The President proposes to set aside the remaining surpluses, which CBO estimates at about $0.7 trillion, in a contingency reserve to be used for emergencies, programmatic reforms, further debt reduction, or other purposes. However, because the President's budget does not include specific proposals for using the surpluses held in reserve, CBO assumes in this analysis that they would be used to pay down the debt.
 

Figure 1. Allocation of Projected Baseline Surpluses Under the President's Budget (By fiscal year)

SOURCE: Congressional Budget Office.

Strong economic growth over the past few years has been the largest single cause of the surpluses, but recent signs of a weakening economy have prompted concern that projections of the surplus may fall. Although current economic conditions are somewhat weaker than CBO anticipated last winter, it is not clear that they warrant significant changes to CBO's long-term economic projections.⁽³⁾ CBO does not normally revise its economic forecast until the summer, when it prepares its midyear update of the budget baseline. This analysis, therefore, does not reflect any revisions to CBO's economic assumptions.
 

CBO's Baseline

A baseline is a projection of spending and revenue levels under current budget policies and current economic assumptions. CBO prepares a 10-year baseline under the requirements and guidelines of the 1985 Balanced Budget and Emergency Deficit Control Act and the 1974 Congressional Budget Act, as amended. Revenues and mandatory spending, both of which typically flow from provisions of permanent law, are projected at levels that are estimated to occur under current policies. Discretionary spending, which is provided anew each year in appropriation acts, is projected at the levels enacted for the current year and adjusted for the projected rate of inflation.

The baseline is intended to be a neutral benchmark against which lawmakers can assess the budgetary impact of proposals to change laws governing spending or revenues. It is not a prediction of future outcomes. Policies will change and the economy will perform differently, either better or worse, than CBO now projects. Thus, baseline projections are inherently uncertain, especially in the later years of the 10-year projection period.⁽⁴⁾

In conjunction with this analysis of the President's budget, CBO has revised its January 2001 baseline projections to take into account new information from the President's budget and from other sources. In general, CBO's revised projections differ little from those in its January baseline (see Table 3). The changes reflect technical revisions, such as year-to-date information on spending and receipts, revised rates of projected spending, and budget reclassifications. CBO has not changed the economic assumptions that underlie the baseline, and no new laws affecting spending or revenues have been enacted since the January baseline was prepared.
 

Like the January baseline, CBO's revised baseline shows record surpluses that grow steadily throughout the 10-year projection period. CBO's estimate of the total surplus for the 2002-2011 period remains essentially unchanged at about $5.6 trillion. Of that amount, on-budget surpluses would total $3.1 trillion and off-budget surpluses about $2.5 trillion. CBO continues to project that by 2006 those surpluses would be sufficient to pay off all of the publicly held debt that will be available to be redeemed (see Table 4).⁽⁵⁾
 

Revisions to Estimates for Fiscal Year 2001

The total budget surplus will reach $275 billion in fiscal year 2001, CBO estimates, $6 billion lower than projected in January. That total comprises an on-budget surplus of $119 billion and an off-budget surplus of $156 billion (see Table 5). Revisions to the projected on-budget surplus account for nearly all of the difference, reflecting various technical revisions for updated data on receipts and outlays recorded since January and for new information from the President's budget and other sources.
 

Revenues for 2001 are expected to be lower--by about $20 billion--than CBO estimated in January. CBO now projects that corporate receipts in 2001 will fall $15 billion short of the amount it projected in January, a decline of about 3.5 percent below last year's level. CBO also reduced its estimate of revenues for 2001 by another $5 billion to reflect lower-than-expected collections of withheld income taxes since January. Corporate tax receipts and, to a lesser extent, withheld income taxes have been weaker than expected. Corporate receipts through April were 2.6 percent below those recorded a year ago. That weakness developed recently; from February through April, corporate receipts were 18 percent below the amount recorded during the same period last year. That development is consistent with the weak level of profits recently announced by firms and indicated by national income data for the fourth quarter of calendar year 2000 and the first quarter of 2001. Much of the weakness in profits and receipts was not anticipated when CBO prepared its January baseline projections.

The drop in the 2001 surplus caused by the estimate of lower revenues is partially offset by CBO's estimate of lower spending for 2001. CBO anticipates that this year outlays will fall about $14 billion below the level it estimated in January. That drop in spending largely results from a net reduction of $11 billion in estimated subsidy costs for credit programs that the President's Office of Management and Budget (OMB) plans to record this year. The reduction is an accounting adjustment that OMB makes each year to represent changes in its estimates of the long-term costs of federal direct loans and loan guarantees (see Box 1). Other revisions include a mix of relatively small increases and decreases in spending that reduce net outlays for the year by another $3 billion. Those revisions include slower-than-anticipated growth in discretionary spending for the year and other technical changes.
 

Box 1. The Cost of Credit Programs in the Federal Budget The federal budget includes dozens of programs that either provide direct loans to individuals or businesses or guarantee loans made by private financial institutions. In 2000, federal agencies issued about $35.5 billion in direct loans and guaranteed $180.6 billion of loans issued by others. The terms and conditions of those direct loans and loan guarantees vary, with some programs offering below-market interest rates, some charging fees that are expected to cover most or all of the costs, and others guaranteeing loans for particularly risky ventures. In 1992, the federal budget began recording the cost of credit programs (direct loans and loan guarantees) as the estimated subsidy cost to the federal government of extending credit. The estimated subsidy cost is defined as the net present value of the credit program over its full term, accounting for interest rate subsidies, fees, expected repayments, and anticipated defaults. Accurately projecting loan repayments, defaults, and changes in market interest rates over the uncertain and sometimes lengthy life of federal credit programs is very difficult, and errors are inevitable. The Federal Credit Reform Act of 1990 anticipated the problem, directing agencies to reestimate the cost of the federal credit subsidy for individual programs. Agencies have recorded such reestimates each year since 1994. The President's budget for 2002 includes credit subsidy reestimates that will decrease on-budget outlays by nearly $18 billion in 2001. Of that $18 billion, about $14 billion represents changes in the estimated subsidy needed for outstanding loans, and $4 billion represents the interest savings on those changes. In its January 2001 baseline, the Congressional Budget Office (CBO) accounted for nearly $7 billion in credit subsidy reestimates that it anticipated would be made by the Federal Communications Commission and the Small Business Administration. CBO's May baseline reflects the remaining $11 billion in credit subsidy reestimates that have been included in the President's budget. The reestimates in 2001 will be the largest reduction in outlays for credit subsidies ever recorded. They also differ in direction from most previous reestimates, which in total added about $7 billion to outlays over the 1994-2000 period, excluding interest. The figure below shows cumulative reestimates (without interest) since 1994, indicating the total difference between the original estimate and the current estimate of the costs of credit. Over the 1994-2001 period, the magnitude of annual changes has grown. Aside from loans connected to the auction of licenses to use portions of the electromagnetic spectrum, as the portfolio of outstanding loans increases each year, the magnitude of reestimates is also likely to grow. At this time, however, CBO has no basis for anticipating the direction, size, or timing of future reestimates.   Cumulative Net Credit Subsidy Reestimates, Excluding Interest, 1994-2001 SOURCE: Congressional Budget Office based on data from Budget of the United States Government, Fiscal Year 2002: Analytical Perspectives, pp. 163-4. Despite the magnitude of the reestimates for 2001, those and earlier reestimates still may not indicate the ultimate cost of credit programs. Many of the loans the government makes or guarantees will not mature for years; for 20-year loans made in 1992, final information on subsidy costs may not be available until 2012 or later. Additionally, the performance of existing loans may not accurately predict future behavior. The timing of defaults over the lifetime of a particular loan portfolio is uncertain. Even though the percentage of loans defaulting through 2000 might have been lower than expected (given historical averages), it is possible that more defaults will occur in the next few years. Loan performance during recent years (when the U.S. economy has experienced strong growth) may not be a good indicator of loan performance over the next several years (when economic conditions might not be as favorable).

Revisions to Projections for Fiscal Years 2002-2011

For fiscal years 2002 through 2011, CBO made smaller annual changes in its baseline to reflect the impact of the updated information received for the current fiscal year and other technical factors. For the 10-year period, CBO raised its estimate of total surpluses by $19 billion over the January projections.

CBO views the recent decline in corporate profits and tax receipts as a cyclical weakness in economic activity rather than a permanent one. Therefore, it expects that over the next two years, profits and receipts will revert to the levels projected in January. As a result, CBO reduced its estimate of corporate receipts by $10 billion for 2002 and $5 billion for 2003. It made no changes to the revenue projections beyond 2003.

CBO lowered its estimate of total outlays for the 2002-2011 period by about $34 billion, reflecting net reductions of $27 billion in discretionary outlays and $7 billion in mandatory outlays (see Table 3). One of the largest revisions in the two categories of spending reflects a budget-accounting change for offsetting collections of the Federal Housing Administration's Mutual Mortgage Insurance program. Those collections, now estimated at about $26 billion over the 10-year projection period, have been moved from the mandatory to the discretionary category to be consistent with OMB's treatment of the program. That reclassification lowers discretionary spending by $19 billion and increases the mandatory total by the same amount. In addition, CBO has increased its estimate of those collections by $7 billion since January to reflect a higher anticipated volume of loans. Other revisions in mandatory spending reflect slight changes in estimated caseloads for Supplemental Security Income, Medicaid, and the State Children's Health Insurance Program.
 

The President's Budgetary Policies

In general, CBO's estimates of the President's budget are similar to the Administration's over the 10-year projection period (see Table 6). The estimated surpluses differ by $253 billion over 10 years--with both CBO and the Administration estimating about $26 trillion in revenues and $23 trillion in outlays over that period. The small discrepancies are split between differing estimates of the President's policy proposals and different baseline budget projections (see Table 7). Baseline economic and technical differences between CBO and the Administration are discussed later in this report.
 

Surpluses under the President's budget would sum to about $3.2 trillion over 10 years, CBO projects. Of that amount, on-budget surpluses would total $0.7 trillion and off-budget surpluses would amount to $2.5 trillion. The President proposes to devote all of the projected off-budget surpluses--essentially the surpluses of the Social Security trust funds--to reducing debt held by the public. CBO estimates that total surpluses under the President's budget would be sufficient by 2009 to pay off all publicly held debt that will be available for redemption (see Table 4).

CBO anticipates that the President's tax and spending policies would lower surpluses by about $2.4 trillion compared with its baseline (see Table 8). Those budget effects are concentrated in two broad policy proposals--tax cuts and changes to Medicare. Based on information provided by the JCT, CBO estimates that the President's proposals to cut taxes would lower projected surpluses by $1.774 trillion over the 2002-2011 period. That estimate includes $1.698 trillion in lower revenues and $76 billion in higher outlays for the refundable portion of the President's tax proposals. The President's Medicare proposals, including prescription drug coverage and other changes, are referred to collectively in his budget as the "Immediate Helping Hand and Medicare Modernization" plan. Those proposals have not been specified in detail, so CBO could not prepare an independent estimate. The President's budget includes $153 billion for those proposals over the 2002-2011 period, and CBO has used that figure in this analysis.
 

The President's proposals for discretionary spending would increase outlays by about $6 billion in 2002 and about $78 billion over the 2002-2011 period, relative to CBO's baseline projections. (The Administration estimates that discretionary outlays under the President's budget would rise about $28 billion above its baseline projections over the 10-year period--with most of that increase in the first five years.) Those increases differ largely because of differences in projected inflation and spending rates. In addition, CBO estimates that the President's budget proposals would result in $462 billion in additional outlays for net interest, mainly for higher debt service.

The President proposes to allocate the remaining on-budget surpluses, which CBO estimates at nearly $700 billion, to a contingency reserve. That amount might be used for emergencies, other unforeseen needs, program reforms, or other purposes over the 2002-2011 period. CBO's estimate of the President's budget assumes that the reserved amounts would reduce publicly held debt or increase uncommitted funds.⁽⁶⁾ However, if the contingency reserve was used, both total and on-budget surpluses would fall from the levels that CBO now estimates under the President's budget.

Revenue Policies

The President's budget proposes changes to tax law that would significantly reduce tax revenues over the next decade. The package largely consists of proposals to reduce revenues from the personal income tax, estate and gift taxes, and, to a much smaller extent, the corporate income tax. The major proposals would start in 2002 and phase in over time, becoming fully effective in 2006 or beyond.

CBO and JCT estimate that the proposals in total would reduce revenues by $1.698 trillion over the period from 2002 through 2011 and would increase outlays by $76 billion over the same period through their effects on refundable credits (see Table 9).⁽⁷⁾ As a share of projected gross domestic product (GDP), the revenue reductions would average 1.2 percent over the 10-year period, increasing steadily from 0.2 percent of GDP in 2002 to 1.7 percent of GDP by 2011. The budget includes only two revenue-increasing proposals, which would raise miscellaneous receipts by about $1 billion over the 10-year period.
 

Under the President's plan, the major reductions in personal income taxes would become fully effective in 2006, and estate and gift taxes would be fully repealed by 2009. In all, 28 percent of the estimated reduction in revenue over 10 years would occur during the 2002-2006 period, and the remaining 72 percent would occur during the 2007-2011 period (see Figure 2). The disproportionately large share of the dollar reductions that would occur in the second half of the budget period in part reflects growth in projected income over time, but mostly reflects the phasing-in of the proposals. Adjusting the figures for that growth in income, CBO calculates that 33 percent of the estimated revenue reductions relative to projected GDP would occur during the first half of the 10-year period and the other 67 percent would occur during the second half.
 

Figure 2. Reduction in Revenue Under the President's Proposed Tax Cuts, 2002-2011 (By fiscal year)

SOURCE: Congressional Budget Office.

Seven proposals account for over 90 percent of the cost of the President's tax package. The proposals to reduce existing statutory tax rates and create a 10 percent rate account for about half of the cost over the 2002-2011 period (see Table 9). Following is a brief summary of the major proposals and the total amount by which each proposal would reduce surpluses over the 2002-2011 period.⁽⁸⁾

• Reduce Existing Statutory Tax Rates on Personal Income. The President's proposed rate reductions, which would begin in 2002 and phase in gradually, would replace the five existing statutory tax rates with three rates by 2006. In that year and beyond, income currently taxed at rates of 39.6 percent and 36 percent would be taxed at a rate of 33 percent; income now taxed at a rate of 31 percent and 28 percent would be taxed at 25 percent; and part of income currently taxed at 15 percent would still be taxed at that rate. (Reduction in surpluses: $560 billion.)
  
  
• Create a 10 Percent Tax Bracket. This proposal would establish a new tax rate that would apply to a part of income currently taxed at a rate of 15 percent. The new rate would be 14 percent in 2002 and fall by 1 percentage point a year until it reached 10 percent in 2006 and thereafter. The new rate of 10 percent would apply to earned income of up to $12,000 for couples filing jointly and $6,000 for single filers. (Reduction in surpluses: $317 billion.)
  
  
• Repeal the Estate and Gift Tax and Enact a Carryover Basis of Assets. Tax rates that apply to the estate and gift and generation-skipping taxes would be reduced each year starting in 2002 until those taxes were completely phased out by 2009. After repeal, the basis of property passed to inheritors would be the smaller of the fair market value or the adjusted basis at the time of the decedent's death. Thus, unrealized accruals of capital gains during the decedent's life would be subject to taxation under the income tax when realized by an inheritor. The proposal would allow certain limited adjustments to basis so the proposed basis change would generally not affect inheritors of estates that are not now large enough to be subject to estate and gift taxes. (Reduction in surpluses: $306 billion.)
  
  
• Increase the Child Tax Credit. Starting in 2002, the President's budget would incrementally increase the existing credit of $500 per child until it reached $1,000 per child in 2006. The credit would not be indexed for inflation after 2006. It would also apply to the alternative minimum tax starting in 2002. In addition, the current phasing out of the credit for taxpayers with income above certain thresholds would change. For example, instead of phasing out for taxpayers filing jointly who have more than $110,000 of income, as under current law, in 2006 and thereafter the phase-out would apply only to joint filers with income exceeding $200,000. (Reduction in surpluses: $211 billion.)
  
  
• Reinstate the Two-Earner Deduction. The President would reinstate the deduction for families with two income earners that was in effect from 1982 to 1986. The deduction would start in 2002 and increase over time so that by 2006, when the proposal would become fully effective, taxpayers filing jointly would be allowed to deduct 10 percent of up to $30,000 of income earned by the lower-earning spouse. The cap of $30,000 would not be indexed for inflation beyond 2006. The deduction is intended to reduce existing marriage penalties, in which certain married couples pay more tax jointly than they would pay combined if they were not married and filed their taxes as single taxpayers. However, the proposed deduction would also benefit two-earner couples who do not face marriage penalties under current law. (Reduction in surpluses: $103 billion.)
  
  
• Allow Taxpayers Who Do Not Itemize Deductions to Deduct Certain Charitable Contributions. Nonitemizers would be allowed to deduct their charitable contributions up to the amount of the standard deduction. That change would be phased in starting in 2002 and become fully effective by 2006. In that year, CBO projects, the standard deduction would be $8,650 for married taxpayers filing jointly and $5,200 for single taxpayers. (Reduction in surpluses: $84 billion.)
  
  
• Permanently Extend the Research and Experimentation Tax Credit. The credit is scheduled to expire on June 30, 2004. It was originally enacted in 1981 on a temporary basis and has been extended, sometimes in amended form, 10 times since then. The President's proposal would make the current credit permanent. (Reduction in surpluses: $47 billion.)
  
  
• Other Proposals. The President proposes a number of other changes to tax law, including providing certain individuals with a refundable health insurance credit; allowing individuals a deduction for some long-term care premiums; providing a tax credit to some people who invest in affordable housing projects; and extending certain expiring provisions for one year. (Reduction in surpluses: $146 billion.)

Mandatory Spending Policies

Mandatory spending is usually provided by laws other than appropriation acts. It constitutes about two-thirds of total spending and goes largely for major entitlement programs such as Social Security, Medicare, Medicaid, federal retirement, and other benefit programs (see Table 10). Offsetting receipts are also considered part of mandatory spending.
 

The President's principal mandatory spending initiatives focus on Medicare. Those initiatives are referred to in the budget as the "Immediate Helping Hand and Medicare Modernization" plan. Because the President's budget offers little detail on the proposed changes to Medicare, CBO used the Administration's estimates of the President's Medicare proposals in this analysis.

Immediate Helping Hand and Medicare Modernization. The President's Immediate Helping Hand proposal would give states grants that the Administration estimates would total $3 billion in 2001 and $43 billion over the 2002-2005 period. Those grants would be used to pay for prescription drugs and other health care services for Medicare beneficiaries with low income or high out-of-pocket spending. That grant program would end in 2005, when a Medicare Modernization initiative would add coverage of prescription drugs and protection against high out-of-pocket expenses to Medicare. The Administration estimates that the initiative would increase Medicare spending by $110 billion over the 2005-2011 period.

Medicaid. The President's budget contains a proposal that would restrict states' ability to generate additional Medicaid funds using financing mechanisms related to the Medicare upper payment limit (UPL). Federal regulations issued under the Benefits Improvement and Protection Act of 2000 limit total Medicaid payments for inpatient and outpatient services provided in hospitals operated by local governments to 150 percent of the UPL. The regulations provide a transition period for states that have been making payments in excess of that limit to come into compliance.

Under the Administration's proposal, the federal government would no longer approve amendments to state Medicaid plans that raise payments to hospitals operated by local governments above 100 percent of the UPL. That proposal would not apply to states with plan amendments that were approved on or before December 31, 2000; their limit would remain at 150 percent of the UPL.

CBO estimates that this proposal would reduce federal Medicaid outlays by about $11 billion over the 2002-2011 period, whereas the Administration estimates that it would save about $17 billion over the same period. (CBO estimates that other proposals in the President's budget that affect Medicaid would increase outlays by about $1 billion over the 10-year period.) CBO and OMB have similar estimates of the additional Medicaid payments that will be made under current law because the payment limit for local hospitals is 150 percent of the UPL instead of 100 percent. However, CBO expects that a larger share of those payments will be made to states whose Medicaid plan amendments have already been approved. Since those states would not be affected by the Administration's proposal, CBO's estimate of the savings from the proposal is lower than that of OMB.

Spectrum Auction Receipts. The President's budget includes three proposals that would affect offsetting receipts from the Federal Communications Commission's auction of licenses to use portions of the electromagnetic spectrum. Two proposals involve frequencies slated for auction under the Balanced Budget Act of 1997. The first proposal--a roughly two-year delay in the start of two auctions--would increase proceeds by a total of $1.8 billion over the next five years, CBO estimates, because the auctions would be held closer to the time when the frequencies could be used by the winning bidders. The second proposal aims to reduce the encumbrances on some of those frequencies so they can be used for new services faster than expected under current law. CBO cannot estimate the budgetary impact of that proposal because the President's budget does not provide any details about the new policy. Under the President's third proposal, the government would collect $200 million a year by imposing a lease fee on spectrum used by commercial entities for analog television broadcasts. CBO estimates that such a fee would increase offsetting receipts by a total of $1.6 billion over the 2002-2011 period.

Discretionary Spending Policies

Discretionary spending, which constitutes the remaining one-third of total spending, is provided in and controlled by appropriation acts. In general, it is provided one year at a time and funds a wide array of government activities, including defense, international affairs, energy, education, housing, scientific research, transportation, and general government functions.

CBO estimates that the President's budget would boost total new discretionary budget authority for 2002 to $661 billion, an increase of about 4 percent over the amount enacted for 2001 (see Table 11). By comparison, new budget authority for discretionary programs increased by about 6.4 percent from 2000 to 2001.⁽⁹⁾
 

Within that overall rate of growth, however, the President recommends larger increases for certain high-priority programs and smaller increases or reductions for others (see Table 12). For example, the President's budget proposes to increase budget authority for defense by about 4.5 percent, CBO estimates, and for education, training, and other related programs by about 6.9 percent. Excluding those two categories, new budget authority for discretionary spending in 2002 would increase by 2.9 percent over the amount enacted in 2001. In addition, the Administration is conducting a strategic review of defense activities that may lead to changes in the President's request for defense spending.
 

The President's proposed level of discretionary spending for 2002 does not reflect $22.7 billion in budget authority enacted as advance appropriations in 2001 appropriation acts. In general, advance appropriations are amounts of new discretionary budget authority that become available in the fiscal year following the year covered by the applicable appropriation act. The President asserts that excessive amounts of advance appropriations have been enacted in recent years in order to stay within the limits on discretionary appropriations for the budget year. He therefore proposes to provide the full amount of "normal" funding for the affected programs in 2002 and requests no advance appropriations for 2003. That change in practice would result in an unusually large amount of discretionary budget authority for 2002. The President therefore proposes language, to be included in appropriation acts for 2002, that would reclassify $22.7 billion in budget authority for advances in 2002 as mandatory. That reclassification would affect only advances for 2002 made in 2001 appropriation acts and would not affect outlays.

Over the 2002-2011 period, CBO estimates, total new discretionary budget authority under the President's budget would grow at an average annual rate of about 2.7 percent, a rate of increase generally in line with CBO's baseline for discretionary budget authority.

Contingency Reserve

The contingency reserve proposed by the President reflects the portion of the projected 10-year on-budget surplus that is estimated to remain after the President's spending and tax policies take effect. That amount, estimated by CBO at about $700 billion, is based on current baseline projections of surpluses for the 2002-2011 period. The Administration's estimate of the reserve amount is $841 billion.

The President proposes that criteria be established for using the reserve and that amounts from the reserve be available only if specifically requested by the President and designated for that purpose by the Congress in statute. He proposes to enforce the reserve amount by extending the statutory caps on discretionary spending through 2006 at the levels proposed in his budget and to continue the pay-as-you-go requirement for new laws affecting mandatory spending or revenues. Those requirements would, if enforced, prevent new spending or revenue laws from reducing projected surpluses. They would not, in their current form, keep surpluses from falling because of a downturn in the economy or because of technical revisions in spending or revenue levels that were unrelated to the enactment of new laws.
 

Comparison of CBO's and the Administration's Economic Projections
 

The Administration's economic projections result in larger estimates of revenues and surpluses than those implied by CBO's economic assumptions. Both the Administration and CBO project that real GDP growth will average 3.1 percent a year during the 2002-2011 period. Other aspects of their projections differ, however, resulting in higher projected revenues under the Administration's outlook.

Because the Administration assumes both slightly greater inflation and higher taxable income as a share of GDP, the projected size of the tax base is higher under its assumptions (see Table 13). The Administration projects that the growth of the GDP price index will average 2.1 percent per year, 0.2 percentage points higher than CBO's projection. That causes the Administration's projected level of nominal GDP to be almost $400 billion higher than CBO's in 2011, even though both project the same real growth of GDP. Similarly, corporate profits and wage and salary disbursements are assumed to account for a higher share of GDP in the Administration's forecast, averaging 56.9 percent over the 2002-2011 period, whereas CBO projects that those shares will average 56.2 percent. The combination of higher nominal GDP and higher shares of those two income categories imply a projected tax base higher than CBO's by 2011.