Congressional Budget Office
Director’s Blog

Today CBO released its estimates of federal revenues and outlays for the first 10 months of fiscal year 2009. The budget deficit through July 2009 reached $1.3 trillion, CBO estimates, close to $880 billion greater than the deficit recorded in the 10 months through July 2008. Outlays rose by almost $530 billion (or 21 percent) and revenues fell by more than $350 billion (or 17 percent) compared with the amounts recorded during the same period last year.

The estimated deficit reflects outlays of about $169 billion for the Troubled Asset Relief Program (TARP), recorded on a net-present-value basis adjusted for market risk, and net cash payments of $83 billion in support of Fannie Mae and Freddie Mac. CBO believes that Fannie Mae and Freddie Mac should now be considered federal operations and that the full scope of their activities should be incorporated in the federal budget. The Treasury statements, however, are just recording the cash infusions from the Treasury as federal outlays. CBO estimates that spending increases and revenue reductions stemming from the American Recovery and Reinvestment Act of 2009 (ARRA) have totaled more than $125 billion so far this year (excluding the impact on the budget from the effects that the legislation has had on the economy).

According to CBO’s estimates, receipts were about $8 billion (or 5 percent) lower in July 2009 than they were in July 2008, marking the 15th consecutive month in which receipts were lower than those in the same month of the previous year. Withholding for income and payroll taxes was about $11 billion (or 8 percent) less than that in July 2008, CBO estimates; about half of that decline resulted from provisions in ARRA, primarily the Making Work Pay tax credit.

Outlays were $71 billion higher this July than in the same month last year because of growth in spending and the effects of the calendar. August 1, 2009, fell on a weekend, which shifted about $24 billion in outlays from August to July. Without that timing shift, the growth in outlays this July would have totaled $46 billion (or about 18 percent). TARP spending of $22 billion was the largest contributing factor to that increase. In addition, unemployment benefits and Medicaid outlays rose by $8 billion and $5 billion, respectively, boosted by stimulus spending from ARRA.

For the first 10 months of the fiscal year, receipts from individual income and payroll taxes are down by almost $200 billion (or 12 percent) compared with collections during the same period last year. Receipts from corporate income taxes have declined by 57 percent. Spending for unemployment benefits is more than 2 1/2 times what was spent in the first 10 months of 2008, because of higher unemployment and legislated increases in the amount and duration of benefits. Medicaid outlays have risen by 24 percent, largely because of a provision in the stimulus bill that temporarily increases the federal government’s share of that program’s costs.

The Department of Defense’s (DoD’s) proposed budget for fiscal year 2010 includes a number of significant changes in planned military programs. Many of the issues addressed in the budget have been apparent for some time to analysts in CBO’s National Security Division. (J. Michael Gilmore led this division from 2001 until earlier this year; Matthew S. Goldberg is CBO’s Acting Assistant Director for National Security.) Indeed, many of the programmatic changes just proposed have been examined by CBO in recent publications, including:

• Budget Options, Volume II (August 2009)
• Options for Combining the Navy’s and the Coast Guard’s Small Combatant Programs (July 2009)
• The Effects of Proposals to Increase Cost Sharing in TRICARE (June 2009)
• An Analysis of the Army’s Transformation Programs and Possible Alternatives (June 2009)
• Alternatives for Modernizing U.S. Fighter Forces (May 2009)
• Options for Deploying Missile Defenses in Europe (February 2009)
• The Army’s Wireless Communications Programs (February 2009)
• Long-Term Implications of the Fiscal Year 2009 Future Years Defense Program (January 2009)
• Resource Implications for the Navy’s Fiscal Year 2009 Shipbuilding Program (June 2008)

Here are some examples of relevant CBO analysis:

• Based on the five-year plan that accompanied last year’s budget request, DoD was planning to expand the active Army from 42 combat brigades to 48 combat brigades by 2011. In a budget option that has long been under formulation (Option #050-1, page 6), CBO noted that the Army would probably be unable to identify 23,000 additional soldiers (beyond those already identified) to fully populate six new brigades under the current cap on total Army personnel. One option analyzed by CBO would explicitly relax the cap and add 23,000 soldiers to the force, at a total cost of about $16 billion over the next five years.
• The Army has been developing its Future Combat System (FCS) program which would encompass eight new models of manned combat vehicles as well as new unmanned aerial and ground vehicles, sensors, and munitions. All of these components would be linked by advanced communications networks into an integrated combat system. Starting with a report released in August 2006, CBO has evaluated several alternatives to the FCS program that would forgo the development of new combat vehicles and instead “spin out” FCS improvements in communications and other systems to upgrades of existing tanks and fighting vehicles. Most recently, CBO estimated in a budget option that these changes to the FCS program could save the Army roughly $5 billion in outlays over the next ten years (Option #050-4, page 10).
• CBO evaluated DoD’s practice of hiring contractors to provide decision-makers with analyses and various other support activities—so-called contract advisory and assistance services. CBO analyzed an alternative that, in conjunction with “spinning out” the FCS program and curtailing or cancelling selected other weapon-system procurements, would reduce the volume of advisory and assistance services by 20 percent. Along somewhat similar lines, Secretary Gates announced a plan to reduce the number of support service contractors from the current 39 percent of DoD’s total workforce to the pre-2001 level of 26 percent and replace them with full-time government employees.

CBO regularly presents compendiums of budget options to help inform Members of Congress about the effects that various policy choices would have on spending or revenues. For the current budget cycle, CBO has issued Budget Options in two volumes. The first volume, released in December 2008, focused on options regarding health care and its financing. The second volume, released today, includes options that address other areas of federal spending and revenues. Estimates for most of the revenue options were supplied by our colleagues at the Joint Committee on Taxation. In keeping with CBO’s mandate to provide objective, impartial analysis, these volumes make no recommendations.

Today’s report presents 188 illustrative options that cover an array of programs and policy areas—from defense to energy to entitlement programs to provisions of the tax code. The options include some changes that would decrease spending and others that would increase it, as well as some changes that would reduce revenues and some that would raise them. The options come from legislative proposals, the President’s budget, Congressional and CBO staff, other government entities, and private groups, among others. They are intended to reflect a range of possibilities, not a ranking of priorities, and the selection or omission of a potential policy change does not represent an endorsement or rejection by CBO.

The budgetary effects shown for each option span the 10 years from 2010 to 2019 (the period covered by CBO’s March 2009 baseline budget projections). Some options would have significant effects beyond that horizon. For each option, a table shows its estimated effect on spending or revenues in each year from 2010 to 2014 and summary projections for 5 and 10 years. The accompanying discussion provides background, describes the policy change envisioned in the option, and summarizes arguments for and against the change.

Today CBO released a letter that contains an estimate of the change in federal costs, adjusted for the cost of market risk, that might result from enactment of the President’s proposal to prohibit new federal guarantees of student loans and to replace those guarantees with direct loans made by the Department of Education. The Federal Family Education Loan Program provides federal guarantees for loans made to students by private lenders and is the predominant source of loans for higher education; CBO projects that, under current law, guaranteed loans will account for 70 percent of all new direct and guaranteed student loans made over the next 10 years. Under the President’s proposal, the Department of Education, through the William D. Ford Direct Loan Program, would provide federal support for student loans only by lending money directly to students.

In its cost estimate last week for the Student Aid and Fiscal Responsibility Act of 2009, as approved by the House Committee on Education and Labor, which would incorporate the President’s proposal, CBO estimated that replacing new guarantees of student loans with direct lending would yield gross savings in federal direct (or mandatory) spending of about $87 billion over the 2010–2019 period. (Mandatory spending is governed by existing provisions of law and does not require future appropriations.) About $7 billion of those savings would represent a reduction in the administrative costs of the guaranteed loan program, which are recorded in the budget as mandatory spending. In contrast, most of the administrative costs for the direct loan program are funded in appropriation bills and recorded as discretionary spending. Thus, of the $87 billion reduction in direct spending, roughly $7 billion would be offset by an increase in future appropriations for administrative costs, for an estimated net reduction in federal costs from the President’s proposal of about $80 billion over the 2010–2019 period.

Those estimates follow the standard loan-valuation procedure called for in the Federal Credit Reform Act of 1990 (FCRA). The law specifies that the cost of federal loans and loan guarantees be estimated as the net present value of the federal government’s cash flows, using the Treasury’s borrowing rates to discount those flows; that calculation does not include administrative costs, which are recorded in the budget year by year on a cash basis (that is, undiscounted). The FCRA methodology, however, does not include the cost to the government stemming from the risk that defaults will exceed the estimated rate, especially at times of market stress. CBO found that, after accounting for the cost of such risk, the proposal to replace new guaranteed loans with direct loans would lead to estimated savings of about $47 billion over the 2010–2019 period—about $33 billion less than CBO’s estimate under the standard credit reform treatment.

In this year’s discussion of health reform, many people have put forth the goals of “bending the curve” of the federal budgetary commitment to health care, the federal budget deficit, or overall national health expenditures. Accordingly, Members of Congress are asking CBO to analyze the extent to which different health reform proposals meet these goals. Last month we wrote to Senator Conrad and Senator Gregg:  “CBO does not provide formal cost estimates beyond the 10-year budget window because the uncertainties are simply too great. However, in evaluating proposals to reform health care, the agency will endeavor to offer a qualitative indication of whether they would be more likely to increase or decrease the budget deficit over the long term.”  Let me explain our methodology for doing this and the limits of that methodology, beginning with the federal budget and then concluding with national health spending.

The health reform proposals being discussed this year generally include many specific changes to tax and spending policies. Although we and the staff of the Joint Committee on Taxation base our 10-year estimates of the budgetary effects of reform proposals on detailed examination of these changes, we cannot realistically conduct longer-term analysis at that level of detail. Therefore, we group the changes in a reform proposal into several broad categories and evaluate the rate at which the budgetary impact of each of those broad categories is likely to increase over time. Some elements of reform proposals, such as subsidies for people who purchase insurance through exchanges, tend to grow roughly in line with health care costs, although the allocation of those growing costs between enrollees and the government can push the growth rate somewhat higher or lower. Other elements of some proposals, like tax increases unrelated to health care, would generally grow along with increases in taxable incomes, although we aim to take into account specific aspects of legislation that can raise or lower that rate. Still other parts of proposals, such as changes in Medicare and Medicaid payment rates or practices, can have effects that increase at a range of rates at different points in time depending on the nature and extent of the changes. For all of these parts of reform proposals, we evaluate the impact of the legislation as written and do not assess the likelihood that policies will be changed later through subsequent legislation. 

After we have developed an estimate of the growth rate of the costs or savings in each broad category, we assess how those costs or savings would evolve from the end of the 10-year budget window through the following decade. The result is a very approximate sense of whether a piece of legislation is increasing or decreasing the federal budgetary commitment to health care or the federal budget deficit during the second decade and at the end of that decade.

We are very reluctant to extend these extrapolations further into the future, because the uncertainties surrounding them magnify considerably. Although we publish projections of the federal budget 75 years ahead, those projections are inherently uncertain and are designed to identify broad trends rather than to reflect specific pieces of legislation. Trying to project several decades ahead not just the evolution of the health care system under current law but also the effects on that system of a particular comprehensive and interacting set of reforms is extremely difficult. One particular challenge is that our long-term projections under current law incorporate changes that we expect would be made by state governments and the private sector in response to the growing burden of health care spending (responses which could occur under current federal law). Because that burden will mount over time, the responses will likely increase in intensity as well; as a result, determining whether reforms proposed in current legislation might ultimately have occurred through the actions of these other agents becomes increasingly complicated as the time horizon lengthens. Indeed, our Panel of Health Advisers has encouraged us to focus on estimating the effects of legislation during the next couple of decades and not to attempt to estimate effects further out.

So, how do we evaluate whether certain health reform proposals “bend the curve” in terms of the federal budgetary commitment to health care or the federal budget deficit? And what does “bend the curve” mean? If the projected budget deficit is lower 20 years from now under a reform proposal than it would be without any policy changes, then that curve is clearly being bent downward, on average, during the next twenty years; if the projected deficit is higher, then that curve is being bent upward. Would those downward or upward trajectories continue indefinitely?  That sort of extrapolation might seem natural, but we simply cannot tell whether it is appropriate. Although we think we can provide a rough indication of the level of federal health spending or the budget deficit 20 years ahead, we are not confident that we have an analytic basis for projecting their growth rates at that point, much less for evaluating whether those growth rates will continue in future years. Therefore, we are more confident talking about whether proposals would “lower” or “raise” the curve of the federal budget deficit or budgetary commitment to health care 10 to 20 years from now than we are discussing the shape of the curve in that time period or the level or slope of the curve beyond that period.

CBO does not analyze national health expenditures (NHE) as closely as we analyze the federal budget (although we are working to enhance our capabilities in this area). Accordingly, we cannot provide precise quantitative estimates of the effect of health reform proposals on NHE even within the first 10 years. However, we will try to offer a qualitative indication of whether proposals would be more likely to raise or lower NHE during the next couple of decades.  Expanding insurance coverage would raise NHE, because insured people generally receive more medical care than do uninsured people (see CBO’s Key Issues in Analyzing Major Health Insurance Proposals, December 2008, pages 71-76). Yet, the increase in NHE would be much smaller than the increase in federal spending because some of that additional spending represents a shift in costs from other payers to the government (for example, new subsidies for people who would have purchased insurance anyway). At the same time, changes in Medicare or Medicaid that reduce federal spending and do not merely shift health costs to other payers would generally reduce NHE. For specific pieces of legislation, we will try our best to provide a very approximate sense of balance between these two opposing forces.

In sum, as health reform legislation is considered by the Congress, CBO will endeavor to offer a qualitative indication of whether certain legislation would be more likely to increase or decrease the federal budgetary commitment to health care, the federal budget deficit, and national health expenditures in the decade beyond the 10-year budget window. Whether these effects would persist in more-distant decades is not clear, and that uncertainty is an inherent feature of policy changes that could have substantial effects on such a large and growing share of the U.S. economy.

In the past few days, I’ve received many calls and e-mail messages from people around the country commenting on my participation in a meeting this past Monday at the White House.  Most of these people expressed their concern about CBO’s ability to carry out its responsibilities with its traditional independence and nonpartisanship.  I appreciate the interest in CBO’s work, so let me try to allay those fears.

The President asked me, and other experts in the room, for our insights into possible ways to reduce the nation’s health care spending.  The very capable staff at CBO has thought a lot about this subject, and I shared those thoughts with the President.  Although the audience was unique, my comments were no different from what we have said publicly on numerous other occasions.  The CBO staff and I have offered our thoughts on this subject to the Congress and the public in published reports and letters, and we have discussed them in many meetings with Members of Congress and their staffs of both political parties.  Across the range of topics we study, we deliberately spend a lot of time explaining our thinking to policymakers, because we believe that such openness is a responsibility of our agency and can help policymakers to reach better-informed policy decisions.  But we never adjust our analysis or conclusions to please our audience (as the reaction to various CBO reports amply demonstrates).

CBO will continue to do what it has always done—provide independent, nonpartisan analysis for the Congress, communicate that information as clearly as possible, and provide as much transparency as possible about our methodology and assumptions.  A visit to the White House won’t change that a bit!

Yesterday CBO released a preliminary analysis, conducted with the staff of the Joint Committee on Taxation (JCT), of H.R. 3200, the America’s Affordable Health Choices Act of 2009, as introduced by several House committees on July 14. Earlier this week, CBO released a preliminary report on the health insurance coverage provisions of the bill; this latest report added analysis of the other provisions.

According to CBO’s and JCT’s assessment, enacting H.R. 3200 would result in a net increase in the federal budget deficit of $239 billion over the 2010-2019 period. That estimate reflects a projected 10-year cost of the bill’s insurance coverage provisions of $1,042 billion, partly offset by net spending changes that CBO estimates would save $219 billion over the same period, and by revenue provisions that JCT estimates would increase federal revenues by about $583 billion over those 10 years.

By the end of the 10-year period, in 2019, the coverage provisions would add $202 billion to the federal deficit, CBO and JCT estimate. That increase would be partially offset by net cost savings of $50 billion and additional revenues of $86 billion, resulting in a net increase in the deficit of an estimated $65 billion.

The figures released yesterday do not represent a complete cost estimate for the legislation. In particular, the estimated impact of the provisions related to health insurance coverage is based on specifications provided by the committee staff, rather than on a detailed analysis of the legislative language. (The estimates for other spending provisions reflect the specific legislative language. JCT has separately published its estimates of the effects of revenue provisions contained in H.R. 3200.) In addition, the figures do not include certain costs that the government would incur to administer the proposed changes and the impact of the bill’s provisions on other federal programs, and they do not reflect any modifications or amendments made after the bill was introduced. Nevertheless, this analysis reflects the major net budgetary effects of H.R. 3200.

CBO released a study today that examines alternatives to current Navy and Coast Guard long-term procurement strategies for their small surface ships known as small combatants. As articulated in their respective long-term shipbuilding plans, the Navy and the Coast Guard intend to purchase a total of 83 small combatants. CBO estimates these purchases would cost more than $47 billion over the next 20 years.

The Navy is building two versions of its new combat ship designed for operations near coastlines (the littoral zone). Also, the Coast Guard is building replacements for its existing classes of high-endurance cutters and medium-endurance cutters. As the designation “small combatant” implies, the Navy’s two versions of littoral combat ships (LCSs) and the Coast Guard’s national security cutters (NSCs) and offshore patrol cutters (OPCs) are designed to be significantly shorter in length, lighter in weight, and shallower in draft than most Navy surface warships (carriers, amphibious ships, cruisers, and destroyers).

Although all four types of ship are about the same size, they are designed to perform different missions. In general, The Navy’s LCSs are designed to have less range than Coast Guard cutters but to operate at much greater speeds and close to shore during wartime as part of a naval battle network. The Coast Guard ships are meant to operate independently at sea for long periods of time and at some distance from the shore and not to engage in major combat operations.

In the early stages of implementing the ship programs, however, the Navy and the Coast Guard have encountered various challenges—including cost overruns and construction problems. As a result of those delays and cost overruns, some members of the Congress and independent analysts have questioned whether the Navy and the Coast Guard need to buy four different types of small combatant and whether—in spite of the services’ well-documented reservations about using similar hull designs—the same type of hull could be employed for certain missions.

To explore that possibility, CBO examined three alternatives to the Navy’s and the Coast Guard’s current plans for these four ships.

• Option 1 explores the feasibility of having the Coast Guard buy a variant of the Navy’s LCS—to use as its offshore patrol cutter.
• Option 2 examines the effects of reducing the number of LCSs the Navy would buy and substituting instead a naval version of the Coast Guard’s national security cutter.
• Option 3 examines the advantages and disadvantages of having the Coast Guard buy more national security cutters rather than incur the costs of designing and building a new ship to perform the missions of an offshore patrol cutter.

According to CBO’s estimates, all three alternatives and the services’ plans would have similar costs, regardless of whether they are calculated in terms of acquisition costs or total life-cycle costs. CBO’s analysis also indicates that the three alternative plans would not necessarily be more cost-effective or provide more capability than the services’ existing plans. Specifically, even if the options addressed individual problems that the Navy and Coast Guard might confront with their small combatants, the options would also create new challenges.

Eric J. Labs of CBO’s National Security Division wrote this report. Eric has been at CBO for 14 years and holds a Ph.D. from MIT. With three children, two dogs, and two cats, Eric’s hobby is sleeping.

Today I had the opportunity to testify before the Senate Budget Committee about CBO’s most recent analysis of the long-term budget outlook.

Under current law, the federal budget is on an unsustainable path, because federal debt will continue to grow much faster than the economy over the long run. Although great uncertainty surrounds long-term fiscal projections, rising costs for health care and the aging of the population will cause federal spending to increase rapidly under any plausible scenario for current law. Unless revenues increase just as rapidly, the rise in spending will produce growing budget deficits. Large budget deficits would reduce national saving, leading to more borrowing from abroad and less domestic investment, which in turn would depress economic growth in the United States. Over time, accumulating debt would cause substantial harm to the economy. The following chart shows our projection of federal debt relative to GDP under the two scenarios we modeled.

Federal Debt Held by the Public Under CBO’s Long-Term Budget Scenarios (Percentage of GDP)

Keeping deficits and debt from reaching these levels would require increasing revenues significantly as a share of GDP, decreasing projected spending sharply, or some combination of the two.

Measured relative to GDP, almost all of the projected growth in federal spending other than interest payments on the debt stems from the three largest entitlement programs—Medicare, Medicaid, and Social Security. For decades, spending on Medicare and Medicaid has been growing faster than the economy. CBO projects that if current laws do not change, federal spending on Medicare and Medicaid combined will grow from roughly 5 percent of GDP today to almost 10 percent by 2035. By 2080, the government would be spending almost as much, as a share of the economy, on just its two major health care programs as it has spent on all of its programs and services in recent years.

In CBO’s estimates, the increase in spending for Medicare and Medicaid will account for 80 percent of spending increases for the three entitlement programs between now and 2035 and 90 percent of spending growth between now and 2080. Thus, reducing overall government spending relative to what would occur under current fiscal policy would require fundamental changes in the trajectory of federal health spending. Slowing the growth rate of outlays for Medicare and Medicaid is the central long-term challenge for fiscal policy.

Under current law, spending on Social Security is also projected to rise over time as a share of GDP, but much less sharply. CBO projects that Social Security spending will increase from less than 5 percent of GDP today to about 6 percent in 2035 and then roughly stabilize at that level. Meanwhile, as depicted below, government spending on all activities other than Medicare, Medicaid, Social Security, and interest on federal debt—a broad category that includes national defense and a wide variety of domestic programs—is projected to decline or stay roughly stable as a share of GDP in future decades.

Spending Other Than That for Medicare, Medicaid, Social Security, and Net Interest, 1962 to 2080 (Percentage of GDP)

Federal spending on Medicare, Medicaid, and Social Security will grow relative to the economy both because health care spending per beneficiary is projected to increase and because the population is aging. As shown in the figure below, between now and 2035, aging is projected to make the larger contribution to the growth of spending for those three programs as a share of GDP. After 2035, continued increases in health care spending per beneficiary are projected to dominate the growth in spending for the three programs.

Factors Explaining Future Federal Spending on Medicare, Medicaid, and Social Security (Percentage of GDP)

The current recession and policy responses have little effect on long-term projections of noninterest spending and revenues. But CBO estimates that in fiscal years 2009 and 2010, the federal government will record its largest budget deficits as a share of GDP since shortly after World War II. As a result of those deficits, federal debt held by the public will soar from 41 percent of GDP at the end of fiscal year 2008 to 60 percent at the end of fiscal year 2010. This higher debt results in permanently higher spending to pay interest on that debt. Federal interest payments already amount to more than 1 percent of GDP; unless current law changes, that share would rise to 2.5 percent by 2020.

Yesterday CBO released a brief that analyzes intergovernmental issues in the context of The Unfunded Mandates Reform Act of 1995 (UMRA). UMRA focuses attention on federal requirements imposed on state, local, and tribal governments and the private sector that are not conditions for receiving federal aid. The law specifies which types of requirements should or should not be considered mandates, establishes procedures that govern Congressional consideration of such mandates, and directs CBO to estimate the costs of mandates. UMRA’s goal is to promote informed decisionmaking by the Congress as it considers questions about the appropriateness of federal mandates and about the desirability of providing financial assistance to cover the costs of those mandates. Because UMRA applies additional procedural hurdles for legislation that imposes requirements on public entities, this brief focuses specifically on intergovernmental mandates.

There are often questions about which bills are covered by UMRA and about how the law defines an intergovernmental mandate. UMRA’s application is limited in three ways:

• It does not apply to the broad policy areas of national security or constitutional rights (including voting rights) or to some segments of the Social Security program.
• In most cases, it does not consider new conditions related to federal grant programs to be mandates.
• It focuses on mandates with costs above a threshold—originally set at $50 million, and adjusted annually for inflation so it is now $69 million.

Most legislation that the Congress has considered since 1996 has contained no intergovernmental mandates as UMRA defines them. Only 13 percent of the more than 7,600 bills and other legislative proposals CBO reviewed between 1996 and 2008 (most as they were reported out of committee) contained such mandates. Less than 9 percent of those mandates would have imposed costs above UMRA’s threshold. Only eleven bills with estimated costs over the threshold have become law since 1996. Those include increases to the minimum wage, preemptions of state taxing authority, requirements on commuter railroads and transit authorities, reductions in funding for some entitlement programs, and new standards for issuing driver’s licenses.

This brief was written by Leo Lex in the Budget Analysis Division. In his spare time Leo enjoys photography, gardening, and recently, glassblowing (but not in the heat of summer).