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This volume is one of a series of reports on the state of the economy and the budget 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 periodic reports to the Committees on the Budget with respect to fiscal policy and to provide five-year baseline projections of the federal budget. In accordance with CBO's mandate to provide objective and impartial analysis, the report contains no recommendations.

The analysis of the economic outlook presented in Chapter 2 was prepared by the Macroeconomic Analysis Division under the direction of Robert Dennis, Kim J. Kowalewski, and John F. Peterson. David Brauer wrote the chapter. John F. Peterson, Robert Arnold, and David Arnold carried out the economic forecast and projections. Ufuk Demiroglu, Douglas Hamilton, Juann Hung, Mark Lasky, Angelo Mascaro, Preston Miller, Benjamin Page, Frank Russek, Matthew Salomon, Robert Shackleton, John Sturrock, and Christopher Williams contributed to the analysis. David Arnold and Ezra Finkin provided research assistance.

The baseline spending projections were prepared by the staff of the Budget Analysis Division under the supervision of Robert Sunshine, Peter Fontaine, Priscilla Aycock, Thomas Bradley, Kim Cawley, Paul Cullinan, Jeffrey Holland, and Michael Miller. The revenue estimates were prepared by the staff of the Tax Analysis Division under the supervision of Thomas Woodward and Mark Booth. The budget outlook described in Chapter 1 was written by Susan Tanaka. Mark Booth, Richard Kasten, and Thomas Woodward wrote Chapter 3; Laurie Pounder and Ilga Semeiks wrote Chapter 4; and Robert Dennis, Mark Booth, and Paul Cullinan wrote Chapter 5 using economic scenarios calculated by Mark Lasky and John F. Peterson. Robert Arnold wrote Appendix A; Kathleen Gramp, David Moore, and Coleman Bazelon wrote Appendix B; Taman Morris wrote Appendix C and Appendix D; and Ilga Semeiks wrote Appendix E. Jennifer Smith coordinated the revision of the glossary. Jeffrey Holland wrote the summary of the report.

An early version of the economic forecast underlying this report was discussed at a meeting of CBO's Panel of Economic Advisers. Members of the panel are Alan J. Auerbach, Jagdish Bhagwati, Michael Boskin, Barry P. Bosworth, John Cogan, Robert Dederick, William C. Dudley, Martin Feldstein, Robert J. Gordon, David Hale, Robert E. Hall, N. Gregory Mankiw, Allan Meltzer, William Niskanen, William D. Nordhaus, June E. O'Neill, Rudolph Penner, James Poterba, Robert Reischauer, Joel Slemrod, John Taylor, and Martin B. Zimmerman. Kenneth N. Kuttner, Joel Prakken, and Mark Watson attended as guests. Although these outside advisers provided considerable assistance, they are not responsible for the contents of this document.

Sherry Snyder supervised the editing of the report, and Kathryn Quattrone supervised production. Major portions were edited by Sherry Snyder, Leah Mazade, and Christian Spoor. The authors owe thanks to Marion Curry, Linda Lewis Harris, Denise Jordan, Dorothy Kornegay, and Simone Thomas, who assisted in the preparation of the report. Kathryn Quattrone prepared the report for final publication, with assistance from Sam Nadeau, and Laurie Brown prepared the electronic versions for CBO's World Wide Web site. Barry Anderson designed the cover.
 

Dan L. Crippen
Director
January 2000
 
 

SUMMARY

ONE - THE BUDGET OUTLOOK

• Three Perspectives on Discretionary Spending
• Perspectives on Baseline Projections
• The Baseline Concept
• Shortcomings of Baselines
• Recent Changes to the Budget Outlook
• The Outlook for Federal Debt
• Federal Funds and Trust Funds

TWO - THE ECONOMIC OUTLOOK

• The State of the Economy
• The Economic Forecast for 2000 and 2001
• The Medium-Term Outlook
• Risks to the Outlook

THREE - THE REVENUE OUTLOOK

• Individual Income Taxes
• Corporate Income Taxes
• Social Insurance Taxes
• Excise Taxes
• Other Sources of Revenue
• Expiring Tax Provisions

FOUR - THE SPENDING OUTLOOK

• Discretionary Spending
• Entitlements and Other Mandatory Spending
• Offsetting Receipts
• Net Interest
• Proceeds from Investing Excess Cash

FIVE - THE UNCERTAINTIES OF BUDGET PROJECTIONS

• The Accuracy of CBO's Past Budget Projections
• Alternative Scenarios for the Future

APPENDIXES

A - Has the United States Entered a New Era in Productivity Growth?
B - The CBO Baseline for Spectrum Auction Receipts
C - How the Economy Affects the Budget
D - The Federal Sector of the National Income and Product Accounts
E - Historical Budget Data
F - Major Contributors to the Revenue and Spending Projections

GLOSSARY
 

TABLES
S-1.	The Budget Outlook Under Current Policies
S-2.	CBO Baseline Budget Projections, Assuming That Discretionary Spending Grows at the Rate of Inflation After 2000
S-3.	CBO Baseline Budget Projections, Assuming That Discretionary Spending Is Frozen at the Level Enacted for 2000
S-4.	CBO Baseline Budget Projections, Assuming That Discretionary Spending Equals CBO's Estimates of the Statutory Caps Through 2002 and Grows at the Rate of Inflation Thereafter
S-5.	Changes in CBO Projections of the Surplus Since July 1999, Under the Capped Baseline
S-6.	Comparison of CBO Economic Projections for Calendar Years 2000-2010
1-1.	CBO Projections of the Total Surplus Under Alternative Versions of the Baseline, Fiscal Years 2001-2005 and 2001-2010
1-2.	CBO Projections Under Alternative Versions of the Baseline
1-3.	CBO's January 1990, 1993, and 1997 Baseline Projections Compared with Actual Deficits or Surpluses
1-4.	Changes in the Capped Baseline Surplus Since July 1999
1-5.	CBO Projections of Federal Debt at the End of the Year Under Alternative Versions of the Baseline
1-6.	Trust Fund Surpluses
2-1.	Comparison of CBO Economic Projections for Calendar Years 2000-2010
2-2.	The CBO Forecast for 2000 and 2001
2-3.	Comparison of CBO and Blue Chip Forecasts for 2000 and 2001
2-4.	CBO Economic Projections for Calendar Years 2000-2010
2-5.	CBO Economic Projections for Fiscal Years 2000-2010
2-6.	Key Assumptions for the Revised Projection of Potential Output
3-1.	Changes in CBO Projections of Revenues Since July 1999
3-2.	CBO Projections of Revenues
3-3.	Sources of Growth in Individual Income Tax Liabilities in Excess of GDP Growth, Tax Years 1994-1998
3-4.	Percentage of Returns, Adjusted Gross Income, and Tax Liabilities for High-Income Taxpayers, Tax Years 1993-1998
3-5.	Actual Federal Revenues in Fiscal Year 1999, by Source, Compared with CBO's January 1999 Projections
3-6.	CBO Projections of Individual Income Tax Receipts and Tax Base
3-7.	CBO Projections of Corporate Income Tax Receipts and Tax Base
3-8.	CBO Projections of Social Insurance Tax Receipts and Tax Base
3-9.	CBO Projections of Social Insurance Tax Receipts, by Category
3-10.	CBO Projections of Excise Tax Receipts, by Category
3-11.	CBO Projections of Other Sources of Revenue
3-12.	Effect of Extending Tax Provisions That Will Expire Before 2010
4-1.	CBO Projections of Outlays Under Alternative Versions of the Baseline
4-2.	Average Annual Rate of Growth in Outlays
4-3.	Defense and Nondefense Discretionary Outlays, Fiscal Years 1991-2000
4-4.	Nondefense Discretionary Spending: Gross Versus Net
4-5.	CBO Projections of Discretionary Spending Under Alternative Versions of the Baseline
4-6.	CBO Projections of Mandatory Spending, Including Deposit Insurance
4-7.	Sources of Growth in Mandatory Spending
4-8.	Program Continuations Assumed in the CBO Baseline
4-9.	CBO Projections of Offsetting Receipts
4-10.	CBO Projections of Federal Interest Outlays Under Alternative Versions of the Baseline
5-1.	Average Difference Between CBO Budget Projections and Actual Outcomes Since 1986
5-2.	Key Economic Variables Under Alternative Scenarios
5-3.	Budget Surpluses Under Alternative Scenarios, by Assumption About Discretionary Spending
B-1.	CBO Projections of Spectrum Auction Receipts
C-1.	Effects on the Budget If the Real Rate of Growth Is 0.1 Percentage Point Lower per Year
C-2.	Effects on the Budget If Interest Rates Are 1 Percentage Point Higher per Year
C-3.	Effects on the Budget If Inflation Is 1 Percentage Point Higher per Year
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 Measured by the National Income and Product Accounts
E-1.	Deficits, Surpluses, Debt, and Related Series, Fiscal Years 1960-1999
E-2.	Standardized-Budget Deficit or Surplus and Related Series, Fiscal Years 1960-1999 (In billions of dollars)
E-3.	Standardized-Budget Deficit or Surplus and Related Series, Fiscal Years 1960-1999 (As a percentage of potential GDP)
E-4.	Revenues, Outlays, Deficits, Surpluses, and Debt Held by the Public, Fiscal Years 1962-1999 (In billions of dollars)
E-5.	Revenues, Outlays, Deficits, Surpluses, and Debt Held by the Public, Fiscal Years 1962-1999 (As a percentage of GDP)
E-6.	Revenues by Major Source, Fiscal Years 1962-1999 (In billions of dollars)
E-7.	Revenues by Major Source, Fiscal Years 1962-1999 (As a percentage of GDP)
E-8.	Outlays by Major Spending Category, Fiscal Years 1962-1999 (In billions of dollars)
E-9.	Outlays by Major Spending Category, Fiscal Years 1962-1999 (As a percentage of GDP)
E-10.	Discretionary Outlays, Fiscal Years 1962-1999 (In billions of dollars)
E-11.	Discretionary Outlays, Fiscal Years 1962-1999 (As a percentage of GDP)
E-12.	Outlays for Entitlements and Other Mandatory Spending, Fiscal Years 1962-1999 (In billions of dollars)
E-13.	Outlays for Entitlements and Other Mandatory Spending, Fiscal Years 1962-1999 (As a percentage of GDP)
FIGURES
1-1.	CBO Baseline Projections Compared with Actual Deficits or Surpluses, Fiscal Years 1987-1992 and 1994-1999
1-2.	How Discretionary Spending Compares with the Statutory Caps and Their Adjustments, Fiscal Years 1991-2000
1-3.	Debt Held by the Public as a Share of GDP
2-1.	The Economic Forecast and Projection
2-2.	Output per Hour Worked in the Nonfarm Business Sector
2-3.	Import Price Inflation (Excluding Computer and Oil Prices)
2-4.	Price of West Texas Intermediate Crude Oil
2-5.	Inflation in the Consumer Price Index
2-6.	Available Workers
2-7.	Alternative Measures of Hourly Compensation
2-8.	Inflation in Consumer Prices and Compensation per Hour
2-9.	Consumption and Disposable Personal Income
2-10.	The S&P 500 Stock Price Index
2-11.	Home Sales and Affordability
2-12.	The Trade Deficit
2-13.	The U.S. Exchange Rate
2-14.	GDP and Potential GDP
3-1.	Annual Growth of Federal Revenues and GDP
3-2.	Total Revenues as a Share of GDP
3-3.	Revenues, by Source, as a Share of GDP
3-4.	Recent Growth in the Effective Tax Rate on Individual Income
3-5.	Annual Growth of Taxable Capital Gains Realizations
4-1.	Major Components of Spending as a Percentage of GDP, Fiscal Years 1962-1999
4-2.	Nondefense Discretionary Spending, by Category, Fiscal Year 2000
4-3.	CBO Projections of Discretionary Outlays Under Alternative Versions of the Baseline, Fiscal Years 1999-2010
A-1.	Labor Productivity and Its Trend Growth Since 1973
A-2.	Effects of a Trend Break in 1996 on the Trend Growth of Labor Productivity
A-3.	Effects on Potential Labor Productivity of Capital Deepening and an Adjustment for Computer Quality
BOXES
1-1.	Changes in Emergency Spending
1-2.	How Advance Appropriations Affect CBO's Baseline Projections
2-1.	The 1999 Revision of the National Income and Product Accounts
2-2.	Effect of the NIPA Revisions on CBO's Projections
3-1.	Tax Bases and Tax Liability
4-1.	Federal Student Loan Reserve Fund
5-1.	The Budgetary Effects of a Business Cycle

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