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

The baseline spending projections were prepared by the staff of CBO's Budget Analysis Division under the supervision of Robert Sunshine, Peter Fontaine, Janet Airis, Thomas Bradley, Kim Cawley, Paul Cullinan, Jeffrey Holland, and Jo Ann Vines. The economic outlook was prepared by John Peterson and Eric Warasta of the Macroeconomic Analysis Division, with assistance from the staff of the division, under the direction of Robert Dennis. The revenue estimates were prepared by the staff of the Tax Analysis Division under the supervision of Thomas Woodward, Mark Booth, and David Weiner, with assistance from the Joint Committee on Taxation.

Jeffrey Holland wrote the summary of the report. Ellen Hays wrote Chapter 1 and Appendix B, with assistance from Mark Booth, Sandy Davis, Adaeze Enekwechi, Kathleen Gramp, and Jina Yoon. Mark Lasky wrote Chapter 2, with assistance from many members of the Macroeconomic Analysis Division. Mark Booth and Thomas Woodward wrote Chapter 3. Barry Blom and Felix LoStracco wrote Chapter 4, with contributions from Paul Cullinan, Jeanne De Sa, Eric Rollins, and Jina Yoon. Robert Dennis wrote Chapter 5, with assistance from many people in the Budget, Tax, and Macroeconomic Analysis Divisions. Ufuk Demiroglu, Frank Russek, and John McMurray carried out the computations for Figure 5-1. Benjamin Page wrote Chapter 6. Matthew Schmit wrote Chapter 7, with help from Jen Bullard Bowman, J. Michael Gilmore, Theresa Gullo, Leo Lex, David Moore, and Jo Ann Vines. Adaeze Enekwechi wrote Appendixes A, C, and F, and Barry Blom wrote Appendix D.

CBO's Panel of Economic Advisers commented on an early version of the economic forecast underlying this report. Members of the panel are Andrew B. Abel, Alan J. Auerbach, Michael J. Boskin, Barry P. Bosworth, Robert Dederick, William C. Dudley, Martin Feldstein, Robert J. Gordon, Robert E. Hall, N. Gregory Mankiw, Allan Meltzer, William Niskanen, William D. Nordhaus, June E. O'Neill, Rudolph G. Penner, James Poterba, Michael Prell, Robert Reischauer, Alice Rivlin, Joel Slemrod, and Martin B. Zimmerman. Sara Johnson of DRI/WEFA, Chris Varvares of Macroeconomic Advisers, and David Wyss of Standard & Poor's participated as guests at the panel's meeting. Although CBO's advisers provided considerable assistance, they are not responsible for the contents of this report.

Christine Bogusz, Leah Mazade, John Skeen, and Christian Spoor edited the volume. Marion Curry, Linda Lewis Harris, Denise Jordan, and Dorothy Kornegay assisted in its production. Kathryn Winstead prepared the report for publication, with assistance from Sharon Corbin-Jallow. Annette Kalicki, with help from Simone Thomas and Martina Wojak-Piotrow, prepared the electronic versions for CBO's Web site. Barry Anderson designed the cover, and Kathryn Winstead produced it.

Dan L. Crippen
Director
January 2002
 
 

SUMMARY

ONE - THE BUDGET OUTLOOK

• Uncertainty and the Projection Horizon
• The Concept Behind CBO's Baseline
• Changes in the Baseline Since January 2001
• The Outlook for Federal Debt
• Federal Funds and Trust Funds
• The Expiration of Budget Enforcement Procedures

TWO - THE ECONOMIC OUTLOOK

• Recent Economic Developments
• CBO's Economic Forecast for 2002 and 2003
• The Outlook Beyond 2003

THREE - THE REVENUE OUTLOOK

• Changes in CBO's Revenue Projections Since January 2001
• Revenues by Source
• Expiring Tax Provisions

FOUR - THE SPENDING OUTLOOK

• Discretionary Spending
• Entitlements and Other Mandatory Spending
• Offsetting Receipts
• Net Interest

FIVE - THE UNCERTAINTY OF BUDGET PROJECTIONS

• The Accuracy of CBO's Past Budget Projections
• Alternative Economic and Budget Scenarios

SIX - THE LONG-TERM BUDGET OUTLOOK

• Pressures on Spending for Health and Retirement Programs
• Conclusion

SEVEN - HOMELAND SECURITY

• What Is Homeland Security?
• How Much Is Being Spent on Homeland Security?
• Conclusion

APPENDIXES

A - How Changes in Assumptions Can Affect Budget Projections
B - Changes in CBO's Baseline Since August 2001
C - Budget Resolution Targets and Actual Outcomes
D - The Federal Sector of the National Income and Product Accounts
E - CBO's Economic Projections for 2002 Through 2012
F - Historical Budget Data
G - Major Contributors to the Revenue and Spending Projections
 

TABLES
S-1.	Changes in CBO's Baseline Projections of the Surplus Since January 2001
S-2.	The Budget Outlook Under Current Policies
S-3.	CBO's Economic Forecast for 2002 and 2003
1-1.	The Budget Outlook Under Current Policies
1-2.	CBO's Baseline Budget Projections
1-3.	Changes in CBO's Baseline Projections of the Surplus Since January 2001
1-4.	CBO's Baseline Projections of Federal Debt
1-5.	CBO's Baseline Projections of Trust Fund Balances at the End of the Year
1-6.	CBO's Baseline Projections of Trust Fund Surpluses
2-1.	CBO's Economic Forecast for 2002 and 2003
2-2.	CBO's Current and Previous Economic Projections for Calendar Years 2001 Through 2011
2-3.	Changes in Forecasters' Estimates for Calendar Year 2002
2-4.	Comparison of Blue Chip's and CBO's Forecasts for Calendar Years 2002 and 2003
2-5.	Key Assumptions in CBO's Projection of Potential GDP
3-1.	Changes in CBO's Baseline Projections of Revenues Since January 2001
3-2.	Estimated Effects on Revenues of the Economic Growth and Tax Relief Reconciliation Act of 2001, 2001-2011
3-3.	CBO's Baseline Projections of Revenues
3-4.	CBO's Baseline Projections of Individual Income Tax Receipts and the Individual Income Tax Base
3-5.	Sources of Growth of Individual Income Tax Liabilities in Excess of Growth of GDP, Tax Years 1995-1999
3-6.	Actual and Projected Capital Gains
3-7.	CBO's Baseline Projections of Corporate Income Tax Receipts and Tax Bases
3-8.	CBO's Baseline Projections of Social Insurance Tax Receipts and the Social Insurance Tax Base
3-9.	CBO's Baseline Projections of Social Insurance Tax Receipts, by Category
3-10.	CBO's Baseline Projections of Excise Tax Receipts, by Category
3-11.	CBO's Baseline Projections of Other Sources of Revenues
3-12.	Effect of Extending Tax Provisions That Will Expire Before 2012
4-1.	CBO's Baseline Projections of Outlays
4-2.	Average Annual Rate of Growth in Outlays
4-3.	Defense and Nondefense Discretionary Outlays, 1991-2002
4-4.	CBO's Projections of Discretionary Spending Under Alternative Paths
4-5.	CBO's Baseline Projections of Mandatory Spending
4-6.	Sources of Growth in Mandatory Spending
4-7.	Costs for Programs That CBO's Baseline Assumes Will Continue Beyond Their Current Expiration Dates
4-8.	CBO's Baseline Projections of Offsetting Receipts
4-9.	CBO's Baseline Projections of Federal Interest Outlays
5-1.	Average Difference Between CBO's Budget Projections and Actual Outcomes Since 1981, Adjusted for Subsequent Legislation
5-2.	Key Economic Variables and Budget Consequences Under Alternative Cyclical Scenarios
5-3.	Key Economic and Budget Assumptions in Alternative Trend Scenarios
5-4.	Budget Surpluses Under Alternative Trend Scenarios
6-1.	Alternative Assumptions About Health Costs, Population, and Productivity in Calendar Year 2030
6-2.	Spending for Social Security, Medicare, and Medicaid in Calendar Year 2030 Under Alternative Assumptions About Health Costs, Population, and Productivity
7-1.	Appropriations for Combating Terrorism and Protecting Critical Infrastructure Since 1998 and the Funding Requested for 2002 Before September 11, 2001
7-2.	Comparison of Funding for Combating Terrorism and Protecting Critical Infrastructure Before and After September 11, 2001
7-3.	Estimated 2002 Funding for Combating Terrorism and Protecting Critical Infrastructure, by OMB's Classification of Purpose
7-4.	Emergency Supplemental Appropriations Conveyed in Public Laws 107-38 and 107-117, by Activity
7-5.	Additional Resources for Homeland Security Provided in Other Legislation for 2001 and 2002
A-1.	Estimated Effects of Selected Economic Changes on CBO's Budget Projections
A-2.	Estimated Effects on CBO's Baseline of Increasing Discretionary Budget Authority by $10 Billion in 2002
A-3.	Estimated Savings in Net Interest from Borrowing $10 Billion Less
B-1.	Changes in CBO's Baseline Projections of the Surplus Since August 2001
B-2.	Changes in CBO's Baseline Projections of Revenues Since August 2001
C-1.	Comparison of Budget Resolution Targets and Actual Budget Totals, Fiscal Year 2001
C-2.	Differences Between Budget Resolution Targets and Actual Budget Totals, Fiscal Year 2001
C-3.	Differences Between Budget Resolution Targets and Actual Budget Totals, Fiscal Years 1980-2001
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 as Measured by the National Income and Product Accounts
E-1.	CBO's Year-by-Year Forecast and Projections for Calendar Years 2002 Through 2012
E-2.	CBO's Year-by-Year Forecast and Projections for Fiscal Years 2002 Through 2012
F-1.	Revenues, Outlays, Surpluses, Deficits, and Debt Held by the Public, 1962-2001 (In billions of dollars)
F-2.	Revenues, Outlays, Surpluses, Deficits, and Debt Held by the Public, 1962-2001 (As a percentage of GDP)
F-3.	Revenues by Major Source, 1962-2001 (In billions of dollars)
F-4.	Revenues by Major Source, 1962-2001 (As a percentage of GDP)
F-5.	Outlays by Major Spending Category, 1962-2001 (In billions of dollars)
F-6.	Outlays by Major Spending Category, 1962-2001 (As a percentage of GDP)
F-7.	Discretionary Outlays, 1962-2001 (In billions of dollars)
F-8.	Discretionary Outlays, 1962-2001 (As a percentage of GDP)
F-9.	Outlays for Entitlements and Other Mandatory Spending, 1962-2001 (In billions of dollars)
F-10.	Outlays for Entitlements and Other Mandatory Spending, 1962-2001 (As a percentage of GDP)
F-11.	Surpluses, Deficits, Debt, and Related Series, 1960-2001
F-12.	Standardized-Budget Surplus or Deficit and Related Series, 1960-2001 (In billions of dollars)
F-13.	Standardized-Budget Surplus or Deficit and Related Series, 1960-2001 (As a percentage of potential GDP)
FIGURES
S-1.	Uncertainty in CBO's Projections of the Total Budget Surplus Under Current Policies
1-1.	Total Deficits and Surpluses as a Share of GDP, 1962-2012
1-2.	Debt Held by the Public as a Share of GDP, 1940-2012
1-3.	Reasons for the Change in CBO's Projections Since January 2001
1-4.	Debt Subject to Limit Since August 1997
2-1.	The Economic Forecast and Projections
2-2.	Growth in Real GDP
2-3.	Interest Rate Spreads
2-4.	Real Consumer Spending
2-5.	The Federal Funds Rate
2-6.	Real Exports
2-7.	Nonfarm Payroll Employment
2-8.	The Corporate Financing Gap
2-9.	Business Inventory Investment
2-10.	Ratio of Inventories to Sales
2-11.	Gross Domestic Product
2-12.	CBO's and Blue Chip's Projections of Real Business Fixed Investment
2-13.	Corporate Profits Plus Wages and Salaries
3-1.	Annual Growth of Federal Revenues and GDP, 1956-2012
3-2.	Total Revenues as a Share of GDP, 1944-2012
3-3.	CBO's Baseline Projections of Total Revenues, 2001-2011
3-4.	Revenues, by Source, as a Share of GDP, 1960-2012
3-5.	Effective Tax Rate on Individual Income, Tax Years 1990-1999
3-6.	CBO's Projections of the Effects of the Individual Alternative Minimum Tax
4-1.	Major Components of Spending, 1962-2001
4-2.	Annual Growth of Federal Medicaid Outlays, 1978-2012
5-1.	Uncertainty in CBO's Projections of the Total Budget Surplus Under Current Policies
6-1.	Spending for Social Security, Medicare, and Medicaid Under CBO's Midrange Assumptions
6-2.	Factors Affecting Long-Term Pressure on Spending for Social Security, Medicare, and Medicaid
6-3.	Estimated Cost Growth in Excess of Wage Growth per Enrollee in Medicare
F-1.	Federal Debt Held by the Public as a Percentage of Gross National Product, 1790-2000
BOXES
1-1.	The Expiration of Revenue Provisions
1-2.	A Freeze in Discretionary Spending
2-1.	How the Global Downturn Could Affect Economic Recovery in the United States
2-2.	How Does This Recession Compare with Others?
2-3.	Effects on Productivity Growth of Increasing Spending for Security
3-1.	Tax Bases and Tax Liability
4-1.	The Growth in Nondefense Discretionary Outlays
4-2.	$40 Billion of Emergency Discretionary Appropriations for 2001 and 2002
4-3.	Budgetary Treatment of the National Railroad Retirement Investment Trust
5-1.	Innovations in This Analysis
5-2.	Risks from Terrorism
5-3.	Could Monetary Policy Lose Its Clout?
6-1.	How CBO Makes Its Long-Term Projections
7-1.	Homeland Security Spending and the Economy
7-2.	Federal Spending to Aid New York City After the September 11 Attacks
B-1.	Uncertainty About Credit Reestimates for Spectrum Loans

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