CONGRESS OF THE UNITED STATES

CONGRESSIONAL BUDGET OFFICE

A Preliminary Analysis of the President’s Budget and an

Update of CBO’s Budget and Economic Outlook

4
CBO’s Baseline
2
Projection
0
-2
Total Deficit or -4
Surplus -6
CBO’s
(Percentage of GDP) -8
Estimate
-10 of the
-12 President’s
Budget
-14
1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
32
30
28
26 Revenues and Outlays
24
Outlays
Under the
22
President’s Budget
20
(Percentage of GDP)
18
16 Revenues

0
1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

8
6
4
The Gap Between 2
0
Actual and -2
Potential Output -4
-6
(Percentage of GDP)
-8
-10
-12
1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

MARCH 2009
Pub. No. 3196
 CBO
A Preliminary Analysis of the
President’s Budget and an Update of
CBO’s Budget and Economic Outlook
March 2009

The Congress of the United States O Congressional Budget Office

 Notes
Unless otherwise indicated, years referred to in describing the economic outlook are calendar
years, and years referred to in describing the budget outlook are federal fiscal years (which run
from October 1 to September 30).

Numbers in the text and tables may not add up to totals because of rounding.

The figures use dashed vertical lines to separate actual from projected data and use shaded
vertical bars to indicate periods of recession. (A recession extends from the peak of a business
cycle to its trough.)



I n response to a request by the Senate Committee on Appropriations, the Congressional

Budget Office (CBO) offers this analysis. It includes a new economic forecast, updated bud-
get projections, and the agency’s work to date in analyzing the President’s budgetary proposals
for fiscal year 2010, as described in brief in the Office of Management and Budget’s A New
Era of Responsibility: Renewing America's Promise, released in February 2009. Once the Admin-
istration has released the details of those proposals, CBO will complete its analysis.

The baseline spending projections and the estimates of the President’s spending proposals
were prepared by the staff of CBO’s Budget Analysis Division under the supervision of
Peter Fontaine, Theresa Gullo, Janet Airis, Tom Bradley, Kim Cawley, Jeffrey Holland,
Sarah Jennings, Kate Massey, and Sam Papenfuss. The baseline revenue estimates were
prepared by the staff of CBO’s Tax Analysis Division under the supervision of Frank
Sammartino, Mark Booth, and David Weiner. Pamela Greene coordinated the analysis of
the President’s revenue proposals, and the Joint Committee on Taxation prepared most of the
estimates of them. (A detailed list of contributors to the spending and revenue projections
appears in Appendix B.)

The economic outlook was prepared by the Macroeconomic Analysis Division under the
direction of Robert Dennis, Kim Kowalewski, and John F. Peterson. Robert Arnold and
Christopher Williams developed the economic forecast and projections. David Brauer,
Juan Contreras, Naomi Griffin, Juann Hung, Wendy Kiska, Mark Lasky, Damien Moore,
Benjamin Page, William Randolph, Frank Russek, Marika Santoro, Sven Sinclair, David
Torregrosa, Steven Weinberg, and Susan Yang contributed to the analysis. Holly Battelle and
Eric Miller provided research assistance.

Barry Blom of CBO’s Projections Unit was the lead author for Chapter 1. David Brauer
wrote Chapter 2. Eric Miller compiled Appendix A.
John Skeen and Sherry Snyder edited the report, with help from Kate Kelly. Denise Jordan-
Williams and Linda Lewis Harris assisted in its preparation. Maureen Costantino designed
the cover and prepared the report for publication. Lenny Skutnik printed the initial copies,
Linda Schimmel handled the distribution, and Simone Thomas prepared the electronic ver-
sion for CBO’s Web site (www.cbo.gov).

Douglas W. Elmendorf
Director

March 2009
 Contents

Summary ix

1
CBO’s Baseline and Estimate of the President’s Budget 1
CBO’s Baseline Budget Projections

Changes in CBO’s Baseline Since January 2009 4
CBO’s Estimate of the President’s Budget

2
The Economic Outlook 19
Recent Economic Developments 21
CBO’s Short-Term Forecast 27
The Outlook Through 2019 30
Comparison with CBO’s January Forecast 



 
 

A CBO’s Economic Projections for 2009 to 2019 



B
Contributors to the Revenue and Spending Projections

CBO
 VI A PRELIMINARY ANALYSIS OF THE PRESIDENT’S BUDGET AND AN UPDATE OF CBO’S BUDGET AND ECONOMIC OUTLOOK

Tables
!'!( Comparison of Projected Revenues, Outlays, and Deficits in CBO’s
March 2009 Baseline and CBO’s Estimate of the President’s Budget 

1-2. CBO’s Baseline Budget Projections 3

1-3. Changes in CBO’s Baseline Projections of the Deficit Since January 2009 6

1-4. CBO’s Estimate of the President’s Budget


1-5. CBO’s Estimate of the Effect of the President’s Budget on Baseline Deficits 12

2-1. CBO’s Economic Projections for Calendar Years 2009 to 2019 20

2-2. Consensus Forecasts of Foreign Economies’ Inflation-Adjusted

Growth of GDP, 2009 27

2-3. Estimated Macroeconomic Impacts of the American Recovery and

Reinvestment Act of 2009, Fourth Quarters of Calendar Years
2009 to 2019 

')( Key Assumptions in CBO’s Projection of Potential Output 

2-5. CBO’s Current and Previous Economic Projections for Calendar Years
2009 to 2019 

2-6. Comparison of CBO, Administration, and Blue Chip



Calendar Years 2009 to 2019 

2-7. Comparison of Economic Forecasts by the Federal Reserve and CBO for
Calendar Years 2009, 2010, and 2011 

*'!( CBO’s Year-by-Year Forecast and Projections for Calendar Years 2009 to 2019 38

*'(
+',%'+& 

&
 + " !" 

Figures
!'!(  

- .!"/" !"

1-2. Total Revenues and Outlays as a Percentage of Gross Domestic Product in

CBO’s Baseline and the President’s Budget


2-1. The GDP Gap, 1965 to 2015 

2-2. The Unemployment Rate 

2-3. Uncertainty in Projections of Real GDP 

2-4. Vacant Homes, 1965 to 2008 

2-5. Spread Between the Three-Month Libor and the Expected Federal Funds Rate,
January 2007 to March 2009 



 A PRELIMINARY ANALYSIS OF THE PRESIDENT’S BUDGET AND AN UPDATE OF CBO’S BUDGET AND ECONOMIC OUTLOOK
II

Figures (Continued)
2-6. Real Personal Consumption Expenditures, January 1965 to January 2009 25

2-7. Initial Claims for Unemployment Insurance, January 1965 to February 2009 25

2-8. The Trade Balance, 1965 to 2008 26

2-9. Core Consumer Price Index, 1985 to 2011 28


 Summary

T 


  
Office’s (CBO’s) latest projections for the budget and
B At the same time, under current laws and policies, rev-
enues are estimated to rise from 15.5 percent of GDP
economic outlook, updating the projections published in 2009 to about 20 percent in 2012 and subsequent
in early January 2009. In addition, CBO has reviewed years. Much of that projected increase in revenues
the President’s budgetary proposals contained in the results from the growing impact of the alternative
February publication A New Era of Responsibility: Renew- minimum tax (AMT) and, even more significant, the
ing America’s Promise,  

0
 scheduled expiration in December 2010 of provisions
preliminary analysis of that budget plan. (CBO will enacted in the recent economic stimulus legislation
review the complete plan after the Administration sub- and in the Economic Growth and Tax Relief Reconcil-
mits it to the Congress later this spring.) iation Act of 2001 (EGTRRA) and the Jobs and
Growth Tax Relief Reconciliation Act of 2003
CBO’s updated budget projections indicate that: (JGTRRA).

B Largely as a result of the enactment of recent legisla- CBO’s analysis of the President’s budget proposals indi-
tion and the continuing turmoil in financial markets, cates that:
CBO’s baseline projections of the deficit have risen by
B As estimated by CBO and the Joint Committee on
more than $400 billion in both 2009 and 2010 and by
Taxation, the President’s proposals would add
smaller amounts thereafter. Those projections assume
$4.8 trillion to the baseline deficits over the 2010–
that current laws and policies remain in place. Under
2019 period. CBO projects that if those proposals
that assumption, CBO now estimates that the deficit
were enacted, the deficit would total $1.8 trillion
would total almost $1.7 trillion (11.9 percent of gross (13.1 percent of GDP) in 2009 and $1.4 trillion
domestic product, or GDP) this year and $1.1 trillion (9.6 percent of GDP) in 2010. It would decline to
(7.9 percent of GDP) next year—the largest deficits as about 4 percent of GDP by 2012 and remain between
a share of GDP since 1945. Deficits would shrink to 4 percent and 6 percent of GDP through 2019.
about 2 percent of GDP by 2012 and remain in that
vicinity through 2019. B The cumulative deficit from 2010 to 2019 under the
President’s proposals would total $9.3 trillion, com-
B Under current laws and policies, outlays are projected pared with a cumulative deficit of $4.4 trillion pro-
to decline from 27.4 percent of GDP in 2009 to about jected under the current-law assumptions embodied in
22 percent in 2012 and subsequent years, as spending CBO’s baseline. Debt held by the public would rise,
related to the current recession phases out, problems from 41 percent of GDP in 2008 to 57 percent in
in the financial markets fade, and discretionary spend- 2009 and then to 82 percent of GDP by 2019 (com-
ing—under the assumptions used for the baseline— pared with 56 percent of GDP in that year under
declines as a share of GDP. baseline assumptions).


 X A PRELIMINARY ANALYSIS OF THE PRESIDENT’S BUDGET AND AN UPDATE OF CBO’S BUDGET AND ECONOMIC OUTLOOK

B Proposed changes in tax policy would reduce revenues estimate (prepared on a comparable basis) by about
by an estimated $2.1 trillion (or 6.1 percent) over the $1.6 trillion.
next 10 years. The proposals with the greatest effect
on the budget include modifications to and the per- CBO’s current assessment of economic developments
manent extension of provisions of the 2001 and 2003 indicates that:
tax legislation (EGTRRA and JGTRRA); extension of
the Making Work Pay tax credit; indexing of the B Although the economy is likely to continue to deterio-
rate for some time, the enactment of the American
exemption amounts for the AMT; implementation of
Recovery and Reinvestment Act and very aggressive
a cap-and-trade program to reduce greenhouse-gas
actions by the Federal Reserve and the Treasury are
emissions; and limits on itemized deductions.
projected to help end the recession in the fall of 2009.
In CBO’s forecast, on a fourth-quarter-to-fourth-
B Proposed changes in spending programs would add
quarter basis, real (inflation-adjusted) GDP falls by
$1.7 trillion (excluding debt service) to outlays over
1.5 percent in 2009 before growing by 4.1 percent in
the next 10 years, an increase of 4.4 percent above
both 2010 and 2011.
baseline levels. Outlays for refundable tax credits,
higher spending for payments to physicians under B For the next two years, CBO anticipates that eco-
Medicare, and increased discretionary spending for a nomic output will average about 7 percent below its
variety of annually appropriated programs account for potential—the output that would be produced if the
the bulk of those changes. Interest costs associated economy’s resources were fully employed. That short-
with greater borrowing would add another $1.0 tril- fall is comparable with the one that occurred during
lion to deficits over the 2010–2019 period. the recession of 1981 and 1982 and will persist for sig-
nificantly longer—making the current recession the
B CBO’s estimates of deficits under the President’s most severe since World War II. In CBO’s forecast, the
budget exceed those anticipated by the Administration unemployment rate peaks at 9.4 percent in late 2009
by $2.3 trillion over the 2010–2019 period. The and early 2010 and remains above 7.0 percent through
differences arise largely because of differing projec- the end of 2011. With a large and sustained output
tions of baseline revenues and outlays. CBO’s projec- gap, inflation is expected to be very low during the
tion of baseline deficits exceeds the Administration’s next several years.

CBO
 CHAPTER

1
CBO’s Baseline and
Estimate of the President’s Budget

S ince the Congressional Budget Office (CBO) last

issued its baseline projections, in January 2009, the out-
the $1.2 trillion projected in January. (Additional fund-
ing likely to be requested for military operations in Iraq
look for the budget deficit has deteriorated further.1 and Afghanistan would add to that total.) The increase in
Enactment of stimulus legislation and omnibus appropri- the projected deficit results primarily from legislation
ations, a worsening of the economic outlook, and other enacted since January and from an updated assessment
factors have increased CBO’s projections of the deficit by of the costs of actions taken in response to the turmoil
more than $400 billion in both 2009 and 2010 and by affecting the financial markets. In particular, enactment
smaller amounts thereafter. As a result, if current policies of the economic stimulus legislation—the American
remain the same, CBO now anticipates that the deficit Recovery and Reinvestment Act of 2009 (ARRA, Public
will total almost $1.7 trillion (11.9 percent of gross Law 111-5)—will boost outlays in 2009 by $120 billion
domestic product, or GDP) this year and $1.1 trillion and reduce revenues by $65 billion, CBO and the Joint
(7.9 percent of GDP) next year, the largest deficits as a Committee on Taxation (JCT) estimate. In addition,
share of GDP since 1945 (see Table 1-1). CBO has increased its estimate of outlays in 2009 associ-
ated with the Troubled Asset Relief Program (TARP) by
CBO has also analyzed the policy proposals outlined in
over $150 billion.3 Most of the remaining change in
the President’s preliminary budget request.2 Under those
CBO’s baseline estimate for 2009 reflects lower tax
policies, the deficit would total $1.8 trillion (13.1 percent
receipts as well as higher costs for federal operation of
of GDP) in 2009 and $1.4 trillion (9.6 percent of GDP)
Fannie Mae and Freddie Mac, the two government-
in 2010. The cumulative deficit over the 2010–2019 pro-
sponsored enterprises that guarantee mortgages and
jection period would equal $9.3 trillion and would aver-
age 5.3 percent of GDP. Debt held by the public would mortgage-backed securities and that have now been taken
rise from 57 percent of GDP in 2009 to 82 percent of over by the government.
GDP in 2019.
Under current laws and policies, the budget deficit in
2010 would total $1.1 trillion, CBO estimates—
CBO’s Baseline Budget Projections $436 billion higher than projected in January. The
CBO’s baseline projections are estimates of federal cumulative deficit for the 2010–2019 period has also
revenues and spending for the next 10 years under the increased significantly since January. Under the assump-
assumption that current laws and policies remain in tion that current laws remain in place over the next
place. The projected deficit for fiscal year 2009 under 10 years, CBO projects baseline deficits totaling $4.4 tril-
that assumption—$1.7 trillion—is up significantly from lion (2.5 percent of GDP) from 2010 to 2019, roughly
$1.3 trillion higher than its previous projection of
1. For CBO’s previous baseline budget projections, see $3.1 trillion. Most of the change in the 10-year deficit
Congressional Budget Office, The Budget and Economic
Outlook: Fiscal Years 2009 to 2019 (January 2009).
3. The TARP was created by the Emergency Economic Stabilization
2. See Office of Management and Budget, A New Era of Responsibil- Act of 2008 (P.L. 110-343) in October 2008 to enable the Secre-
ity: Renewing America’s Promise (February 26, 2009). tary of the Treasury to purchase or insure troubled assets.

CBO
 2 
 

 

 


Table 1-1.
Comparison of Projected Revenues, Outlays, and Deficits in CBO’s March 2009
Baseline and CBO’s Estimate of the President’s Budget
(Billions of dollars)
Total, Total,
Actual 2010- 2010-
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2014 2019

CBO's Baseline
Revenues 2,524 2,186 2,334 2,783 3,086 3,281 3,436 3,610 3,761 3,927 4,083 4,247 14,921 34,550
Outlays 2,983
_____ 3,853 3,473 _____
_____ ______ 3,476 _____
3,417 _____
3,581 _____
3,746 _____
3,892 _____
4,088 _____
4,239 _____
4,408 _____
4,671 ______
17,693 ______
38,991
Total Deficit -459 -1,667 -1,139 -693 -331 -300 -310 -282 -327 -312 -325 -423 -2,772 -4,441

CBO's Estimate of the President's Budget

 2,524 2,159 2,289 2,586 2,917 3,095 3,231 3,387 3,522 3,669 3,807 3,950 14,118 32,452
Outlays 2,983 ______





4,004 ______
3,669 _____
3,556 _____
3,575 _____
3,767 _____
3,979 _____
4,172 _____
4,417 _____
4,619 ______
4,830 ______
5,139 ______
18,546 ______
41,723
Total Deficit -459 -1,845 -1,379 -970 -658 -672 -749 -785 -895 -949 -1,023 -1,189 -4,429 -9,270

Difference Between the President's Budget and CBO's Baseline

Revenues n.a. -26 -45 -198 -169 -187 -205 -223 -240 -257 -276 -297 -804 -2,097
Outlays n.a.



151





196 80 158 186 233 280 329 380 422 468 853






























































2,732
Total Deficita n.a. -177 -241 -278 -327 -373 -438 -503 -568 -637 -698 -765 -1,657 -4,829

Memorandum:
Total Deficit as a
Percentage of GDP
CBO's baseline -3.2 -11.9 -7.9 -4.6 -2.1 -1.8 -1.8 -1.6 -1.8 -1.6 -1.6 -2.0 -3.5 -2.5
CBO's estimate of the
President's budget -3.2 -13.1 -9.6 -6.4 -4.2 -4.1 -4.3 -4.4 -4.8 -4.9 -5.1 -5.7 -5.6 -5.3

Debt Held by the Public

as a Percentage of GDP
CBO's baseline 40.8 54.8 60.1 62.0 61.6 60.7 60.2 59.5 59.0 58.5 56.1 56.1 n.a. n.a.
CBO's estimate of the
President's budget 40.8 56.8 64.7 68.3 70.1 71.4 73.2 75.2 77.5 79.9 79.3 82.4 n.a. n.a.

Source: Congressional Budget Office.

Note: GDP = gross domestic product; n.a. = not applicable.
a. Negative numbers indicate an increase relative to the baseline deficit.




,,  
 

.#
 Revenues in CBO’s baseline grow from a low of 15.5 per-
changes in other factors having largely offsetting effects cent of GDP this year to 19.9 percent in 2013 and
on projected deficits. remain at roughly 20 percent of GDP thereafter. Much of
that increase results from the growing impact of the alter-
As a percentage of GDP, the baseline budget deficit peaks native minimum tax (AMT) and, even more significant,
in 2009 and then falls in each year through 2013, when it the scheduled expiration in December 2010 of provisions
reaches 1.8 percent of GDP (see Table 1-2). The baseline originally enacted in the Economic Growth and Tax
deficit is projected to roughly stabilize as a share of out- Relief Reconciliation Act of 2001 (EGTRRA) and the
put thereafter, ranging between 1.6 percent and 2.0 per- Jobs and Growth Tax Relief Reconciliation Act of 2003
cent of GDP through 2019. (JGTRRA), as well as tax provisions enacted in ARRA.



 
 A PRELIMINARY ANALYSIS OF THE PRESIDENT’S BUDGET AND AN UPDATE OF CBO’S BUDGET AND ECONOMIC OUTLOOK 3

Table 1-2.


 

Total, Total,
Actual 2010- 2010-
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2014 2019

In Billions of Dollars
Revenues
Individual income taxes 1,146 968 1,043 1,359 1,525 1,658 1,767 1,878 1,986 2,101 2,205 2,317 7,352 17,838
Corporate income taxes 304 174 206 281 339 339 328 338 335 334 336 332 1,493 3,167
Social insurance taxes 900 891 926 972 1,022 1,074 1,117 1,154 1,190 1,231 1,275 1,322 5,111 11,284
Other 174 _____
_____ 153 _____
160 _____
171 _____
200 _____
211 _____
223 _____
239 _____
250 _____
261 _____
268 _____
277 ______
965 ______
2,261
Total Revenues 2,524 2,186 2,334 2,783 3,086 3,281 3,436 3,610 3,761 3,927 4,083 4,247 14,921 34,550
On-budget 1,866 1,533 1,666 2,089 2,360 2,515 2,634 2,776 2,897 3,029 3,151 3,279 11,264 26,396
Off-budget 658 653 668 695 726 766 802 834 864 898 932 968 3,657 8,154
Outlays
Mandatory spending 1,595 2,463 2,004 1,988 1,921 2,023 2,118 2,205 2,345 2,450 2,558 2,753 10,053 22,365
Discretionary spending 1,135 1,221 1,302 1,285 1,240 1,239 1,244 1,256 1,279 1,300 1,320 1,352 6,310 12,816
Net interest 253 _____





170 _____
167 _____
203 _____
256 _____
320 _____
385 _____
431 _____
464 _____
489 _____
530 _____
566 ______
1,330 ______
3,810
Total Outlays 2,983 3,853 3,473 3,476 3,417 3,581 3,746 3,892 4,088 4,239 4,408 4,671 17,693 38,991
On-budget 2,508 3,330 2,920 2,904 2,825 2,964 3,101 3,216 3,376 3,485 3,609 3,823 14,713 32,223
Off-budget 475 523 553 572 592 618 645 676 712 754 799 848 2,980 6,768
Deficit (-) or Surplus -459 -1,667 -1,139 -693 -331 -300 -310 -282 -327 -312 -325 -423 -2,772 -4,441


-642 -1,798 -1,254 -815 -464 -448 -468 -440 -479 -456 -458 -544 -3,449 -5,827
Off-budget 183 130 115 123 134 148 157 158 152 144 133 121 677 1,385

Debt Held by the Public 5,803 7,703 8,658 9,340 9,712 10,016 10,372 10,684 11,034 11,365 11,334 11,753 n.a. n.a.
Memorandum:
Gross Domestic Product 14,222 14,057 14,405 15,061 15,774 16,496 17,241 17,957 18,688 19,436 20,191 20,966 78,977 176,215
As a Percentage of Gross Domestic Product
Revenues
Individual income taxes 8.1 6.9 7.2 9.0 9.7 10.0 10.2 10.5 10.6 10.8 10.9 11.0 9.3 10.1
Corporate income taxes 2.1 1.2 1.4 1.9 2.1 2.1 1.9 1.9 1.8 1.7 1.7 1.6 1.9 1.8
Social insurance taxes 6.3 6.3 6.4 6.5 6.5 6.5 6.5 6.4 6.4 6.3 6.3 6.3 6.5 6.4
Other 1.2




1.1




1.1




1.1




1.3




1.3




1.3




1.3




1.3




1.3




1.3




1.3




1.2




1.3






 
 17.7 15.5 16.2 18.5 19.6 19.9 19.9 20.1 20.1 20.2 20.2 20.3 18.9 19.6
On-budget 13.1 10.9 11.6 13.9 15.0 15.2 15.3 15.5 15.5 15.6 15.6 15.6 14.3 15.0
Off-budget 4.6 4.6 4.6 4.6 4.6 4.6 4.7 4.6 4.6 4.6 4.6 4.6 4.6 4.6
Outlays
Mandatory spending 11.2 17.5 13.9 13.2 12.2 12.3 12.3 12.3 12.5 12.6 12.7 13.1 12.7 12.7
Discretionary spending 8.0 8.7 9.0 8.5 7.9 7.5 7.2 7.0 6.8 6.7 6.5 6.4 8.0 7.3
Net interest 1.8
____ 1.2
____ 1.2
____ 1.3
____ 1.6
____ 1.9
____ 2.2
____ 2.4
____ 2.5
____ 2.5
____ 2.6
____ 2.7
____ 1.7
____ 2.2
____

  21.0 27.4 24.1 23.1 21.7 21.7 21.7 21.7 21.9 21.8 21.8 22.3 22.4 22.1
On-budget 17.6 23.7 20.3 19.3 17.9 18.0 18.0 17.9 18.1 17.9 17.9 18.2 18.6 18.3
Off-budget 3.3 3.7 3.8 3.8 3.8 3.7 3.7 3.8 3.8 3.9 4.0 4.0 3.8 3.8
Deficit (-) or Surplus -3.2 -11.9 -7.9 -4.6 -2.1 -1.8 -1.8 -1.6 -1.8 -1.6 -1.6 -2.0 -3.5 -2.5


-4.5 -12.8 -8.7 -5.4 -2.9 -2.7 -2.7 -2.5 -2.6 -2.3 -2.3 -2.6 -4.4 -3.3

 1.3 0.9 0.8 0.8 0.8 0.9 0.9 0.9 0.8 0.7 0.7 0.6 0.9 0.8


 


  40.8 54.8 60.1 62.0 61.6 60.7 60.2 59.5 59.0 58.5 56.1 56.1 n.a. n.a.

 Congressional Budget Office.

Note: n.a. = not applicable.


 4 A PRELIMINARY ANALYSIS OF THE PRESIDENT’S BUDGET AND AN UPDATE OF CBO’S BUDGET AND ECONOMIC OUTLOOK

As a percentage of GDP, outlays in the baseline peak in Changes in CBO’s Baseline Since
2009 at 27.4 percent of GDP and then fall to 21.7 per-
cent in 2012. They remain roughly constant thereafter, at
January 2009
Revisions to CBO’s baseline incorporate enacted legisla-
about 22 percent of GDP from 2013 to 2019.
tion as well as economic data and technical information
CBO generally constructs its baseline in accordance with that have become available since CBO completed its pre-
the provisions set forth in the Balanced Budget and vious baseline projections in January.
Emergency Deficit Control Act of 1985 and the Congres-
Since January, CBO has increased its current-law estimate
sional Budget and Impoundment Control Act of 1974.
(Although the provisions of the Deficit Control Act that of the 2009 deficit by $481 billion, to $1.7 trillion (see
pertain to the baseline expired at the end of September Table 1-3). Much of that change stems from lower esti-
2006, CBO has continued to use that law’s specifications mated revenues and the increased costs attributable to the
as guidance in preparing its baseline.) The resulting base- TARP. Over the 2010–2019 period, CBO has increased
line projections are not intended to be a prediction of its estimate of the cumulative deficit by $1.3 trillion—
future budget outcomes. Rather, they serve as a bench- mostly because of recently enacted legislation. Nearly
mark that lawmakers can use to measure the effects of half of that projected increase occurs in 2010 and 2011,
spending or revenue proposals, such as those in the largely as a result of the 2009 stimulus legislation
President’s budget. (ARRA). Revisions stemming from CBO’s updated eco-
nomic forecast are substantial but are mostly offsetting
To project revenues and mandatory spending, CBO between the revenue and outlay sides of the budget;
assumes that current laws continue unchanged in the changes in economic assumptions reduce projections of
future, with only a few exceptions.4 That approach revenues and outlays by $1.3 trillion to $1.4 trillion over
includes the assumption that various changes in tax law the 10-year period. Changes resulting from technical
enacted since 2001 expire as scheduled, by the end of adjustments are roughly $177 billion for 2009, primarily
December 2010, causing revenues to rise thereafter. because of revised estimates of the cost of the TARP and
the conservatorship of Fannie Mae and Freddie Mac, as
The Deficit Control Act also provides guidelines for well as reductions in estimated revenue. Technical adjust-
CBO’s projections of discretionary spending, so CBO ments have much smaller effects in subsequent years.
normally assumes that appropriations each year are equal
to the current year’s budget authority adjusted for infla- Legislative Changes
tion and for certain other factors. However, CBO, with CBO estimates that enacted legislation will increase the
the agreement of the budget committees, deviated from deficit by $195 billion in 2009 and by $1.3 trillion over
that procedure for its current baseline. Because of the
the 2010–2019 period. Nearly all of that increase is
unusual size and nature of the funding provided in
attributable to the economic stimulus legislation.5
ARRA, the $283 billion in discretionary budget authority
provided in that act has not been extrapolated in CBO’s Changes in Outlays. Legislation enacted since January will
baseline (that is, funding projected for subsequent years is increase outlays by $134 billion in 2009 and by
based on enacted appropriations excluding those in $1.2 trillion over the 2010–2019 period, according to
ARRA).
CBO’s estimates. Much of that change results from the
enactment of ARRA, but some is attributable to passage
4. The Deficit Control Act specified that mandatory spending pro-
of the Omnibus Appropriations Act of 2009 (P.L. 111-8)
grams whose authorizations are set to expire should be assumed to
continue if they have outlays of more than $50 million in the cur-
rent year and were established on or before the date when the Bal- 5. ARRA also affected CBO’s economic projections by increasing
anced Budget Act of 1997 was enacted. Programs established after output significantly in the short run and reducing it slightly in the
that date are not automatically assumed to continue. The Deficit long run relative to what otherwise would have occurred. For
Control Act also specified that expiring excise taxes whose reve- discussions of the estimated economic impact of ARRA, see
nues are dedicated to trust funds should be assumed to be Chapter 2 of this report and Congressional Budget Office,
extended at their current rates. The law did not provide for the “Estimated Macroeconomic Impacts of the American Recovery
extension of other expiring tax provisions, even if they had been and Reinvestment Act of 2009,” letter to the Honorable Charles
routinely extended in the past. E. Grassley (March 2, 2009).

CBO
CHAPTER ONE A PRELIMINARY ANALYSIS OF THE PRESIDENT’S BUDGET AND AN UPDATE OF CBO’S BUDGET AND ECONOMIC OUTLOOK 5

and the reauthorization of the Children’s Health Insur- 2019 period. The largest change occurs in 2010, for
ance Program (CHIP). which CBO has reduced its projection by $173 billion;
over the following nine years, however, legislation
Economic Stimulus. Provisions in ARRA will increase out- accounts for an upward revision to revenues of
lays in 2009 by $120 billion in CBO’s estimates; $90 bil- $97 billion.
lion of that total is classified as mandatory outlays, and
the remaining $30 billion affects discretionary programs. Economic Stimulus. The largest legislative changes stem
Over the 10-year period, additional outlays resulting from enactment of ARRA. Several provisions of that law
from the stimulus package are estimated to total $456 bil- account for most of the impact on revenues: the new
lion, nearly evenly split between mandatory and discre- Making Work Pay tax credit, which is in effect through
tionary programs.6 2010; one year of relief to individuals from the AMT; and
business tax provisions related to depreciation and
Children’s Health Insurance. The Children’s Health Insur- income from cancellation of indebtedness. JCT and
ance Program Reauthorization Act of 2009 (P.L. 111-3) CBO estimate that ARRA will lower revenues by $245
reauthorized and expanded CHIP through 2013 and billion over the 2009–2010 period and produce small
increased federal funding for the program, relative to gains beginning in 2012, yielding a net reduction of reve-
January baseline figures. CBO estimates that the act will
nues totaling $212 billion over the 2009–2019 period.7
increase mandatory outlays by $2 billion in 2009 and by
$38 billion between 2010 and 2019. Children’s Health Insurance. CBO also adjusted its base-
line projections of revenues to incorporate the effects of
Omnibus Appropriations. The Omnibus Appropriations
an increase in the tobacco tax enacted in the Children’s
Act of 2009, enacted in March, provided funding for the
Health Insurance Program Reauthorization Act of 2009;
rest of fiscal year 2009 for all agencies except the Depart-
those increases will raise revenues by $4 billion in 2009
ments of Defense, Homeland Security, and Veterans
and $71 billion over the 2010–2019 period, CBO
Affairs, which received their appropriations last fall. The
estimates.
funding in that bill (on an annualized basis) is about
$20 billion greater than the amount in the continuing
Economic Changes
resolution, which provided funding for the first part of
In its updated economic forecast, CBO modified projec-
the fiscal year and was the basis for CBO’s January base-
tions of real GDP, inflation, interest rates, the unemploy-
line projections. CBO therefore estimates that the omni-
bus legislation will increase discretionary outlays by ment rate, and other economic variables (for details, see
$9 billion for 2009; assuming similar appropriations Chapter 2). The weaker outlook for the economy gener-
(adjusted for inflation) over the 2010–2019 period adds ates an upward revision of $43 billion to the estimated
$260 billion to the baseline totals. 2009 deficit. Over the following 10 years, economic
changes significantly affect estimates of revenues and out-
Net Interest. Recently enacted legislation directly lays; those changes largely offset each other, however,
increased the deficit for 2009 by an estimated $195 bil- because lower projections of inflation have reduced
lion and the cumulative baseline deficit by $863 billion. CBO’s estimates of both revenues and outlays. CBO has
Interest costs on the additional debt required to fund lowered its projection of revenues by nearly $1.3 trillion
those deficits are estimated to boost net interest costs by but its estimate of outlays by $1.4 trillion. Overall,
$404 billion over the 10-year period. Therefore, pro- CBO’s updated economic forecast leads to a $101 billion
jected outlays between 2010 and 2019 have risen by reduction in the cumulative budget deficit over the next
$1.3 trillion as the result of enacted legislation. 10 years.

Changes in Revenues. As a result of recently enacted leg- Changes in Revenues. As a result of changes to its eco-
islation, CBO has reduced its estimate of revenues by nomic outlook since January, revenues under current law
$61 billion for 2009 and by $76 billion for the 2010– would be lower by $45 billion in 2009, by $14 billion in

6. See Congressional Budget Office, cost estimate for the conference 7. Those estimates do not reflect the impact of the legislation on the
agreement for H.R. 1 (February 13, 2009). economy.

CBO
 6 
 

 

 


Table 1-3.










 


Total, Total,
2010- 2010-
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2014 2019

Total Deficit as Projected in January 2009 -1,186 -703 -498 -264 -257 -250 -234 -272 -234 -188 -235 -1,972 -3,135

Legislative Changes
Revenues -61 -173 -1 17 10 13 14 13 12 12 7 -133 -76


Mandatory outlays
Stimulus 90 116 56 12 10 16 6 -4 -3 -1 -1 209 205
CHIP 2 5 7 8 9 3 1 1 1 1 1 33 38
Other __2 ___* *
__ __1 __1 __4 __5 __5 __6 __6 __7 ___5 34
___
Subtotal, mandatory 95 120 63 20 20 23 12 3 4 6 6 247 277

Discretionary outlays
Stimulus 30 103 71 35 20 12 6 2 1 1 * 241 251
Other Defense 1 1 1 1 1 1 1 1 1 1 1 6 13
Other Nondefense

8 19
__ 23
__ 24
__ 24
__ 25
__ 25
__ 26
__ 26
__ 27
__ 27
__ 115
___ 246
___
Subtotal, discretionary 39 124 95 60 46 38 33 29 28 29 29 362 510
Net interest ___1 ___5 13
___ 22
___ 31
__ 41
___ 48
__ 54
__ 59
__ 63
__ 69
___ 112
___ 404
____
Subtotal, outlays 134 250 171 102 97 101 92 86 91 98 104 720 1,191

Total, Legislative Changesa -195 -422 -172 -84 -86 -89 -78 -73 -79 -86 -97 -853 -1,267

Economic Changes
Revenues -45 -14 -24 -45 -71 -109 -145 -175 -201 -232 -259 -263 -1,276
Outlays
Mandatory outlays
Social Security 0 0 -6 -17 -28 -39 -48 -54 -58 -62 -67 -90 -378
Other COLA programs 0 * -2 -6 -9 -12 -15 -21 -18 -19 -20 -29 -122
Medicare -1 * -2 -6 -12 -17 -22 -26 -31 -36 -42 -37 -194
Medicaid 1 * -3 -6 -9 -14 -17 -19 -22 -24 -27 -31 -140
Unemployment 5 2 1 * -1 -2 -2 -3 -3 -3 -3 -1 -15
Other -1


-2


-2


-1


-2


-1


-2






* -4



-4



-4



-8



-22




Subtotal, mandatory 4 * -14 -36 -61 -84 -105 -123 -136 -148 -164 -195 -871

Discretionary outlays * 1 -4 -13 -27 -41 -51 -58 -64 -70 -76 -84 -404
Net interest
Debt service * 1 1 2 1 -1 -3 -4 -4 -4 -4 3 -17
Rate effect and inflation -5



5

3 -19



-38



-24



-13



-5


-2




3
5 -73



-85




Subtotal, net interest -5 5 5 -18 -37 -25 -16 -9 -6 -2 2 -71 -101
Subtotal, outlays -1 6 -13 -67 -126 -150 -172 -190 -206 -220 -238 -350 -1,377
a
Total, Economic Changes -43 -20 -11 23 55 41 27 15 5 -12 -21 87 101

Continued


CHAPTER ONE A PRELIMINARY ANALYSIS OF THE PRESIDENT’S BUDGET AND AN UPDATE OF CBO’S BUDGET AND ECONOMIC OUTLOOK 7

Table 1-3. Continued

Changes in CBO’s Baseline Projections of the Deficit Since January 2009
(Billions of dollars)
Total, Total,
2010- 2010-
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2014 2019

Technical Changes
Revenues -66 -12 -17 -11 -11 -11 -6 -5 -6 -6 -5 -62 -89
Outlays
Mandatory outlays
TARP 152 15 0 0 0 0 0 0 0 0 0 15 15
Fannie Mae and Freddie Mac 52 5 7 8 8 2 1 * -1 -1 -1 30 28
Medicare -2 -2 4 11 13 19 13 11 15 21 17 45 123
Deposit Insurance -5 6 10 11 7 * -6 -6 -7 -6 * 34 9
Other ___3 __2 __4 __2 __2 __2 __3 __2 __3 __3 __5 12
___ 27
___
Subtotal, mandatory 200 26 25 31 31 23 11 7 10 17 20 137 201
Discretionary outlays -2 -10 5 * 1 1 * * * * * -4 -4
Net interest
Debt service 1 3 4 8 16 27 33 38 44 50 56 57 278
Other -21
___ -37
___ -39
___ -44
___ -48
___ -49
___ -52
___ -53
___ -55
___ -33
___ -12
___ -218
____ -424
____
Subtotal, net interest -21 -35 -35 -37 -32 -22 -19 -15 -12 16 44 -161 -146

Subtotal, outlays 177 -19 -5 -5 * 1 -9 -8 -1 33 64 -28 51

Total, Technical Changesa -243 7 -11 -5 -11 -12 3 3 -4 -38 -69 -34 -140

Total Impact on the Deficita -481 -436 -194 -67 -43 -61 -48 -55 -78 -136 -188 -801 -1,307

Total Deficit as Projected in March 2009 -1,667 -1,139 -693 -331 -300 -310 -282 -327 -312 -325 -423 -2,772 -4,441

Memorandum:
Total Revenue Changes -172 -199 -41 -38 -72 -108 -137 -168 -195 -226 -258 -458 -1,441
Total Outlay Changes 310 237 153 29 -29 -47 -88 -113 -117 -90 -70 342 -135

Source: Congressional Budget Office.

Note: * = between -$500 million and $500 million; CHIP = Children’s Health Insurance Program; COLA = cost-of-living adjustment;
TARP = Troubled Asset Relief Program.
a. Negative numbers indicate an increase in the deficit.

2010, and by $1.3 trillion, or 3.5 percent, over the 2010– Changes in Outlays. Changes in CBO’s economic forecast
2019 period, CBO estimates. Baseline revenues are now have little effect on projected outlays in 2009. However,
lower because the projection for nominal GDP has economic changes—particularly a reduction in various
decreased by more than $7 trillion, or 3.9 percent, over measures of inflation—have significantly decreased pro-
the 10-year period. Compared with the previous forecast, jected spending over the following 10 years; CBO has
the outlook for lower nominal GDP stems from a reduc- lowered its estimate of outlays by $1.4 trillion, or 3.5 per-
tion in the level of real economic activity in 2009 as well cent, for that period. Over 60 percent of that total change
as lower inflation in 2009 and beyond. Lower projected ($871 billion) results from adjustments to spending for
GDP, in turn, leads to a drop in estimated wages and sal- mandatory programs, particularly Social Security, retire-
aries, corporate profits, and other taxable income. ment benefits for federal employees, Medicare, and Med-
icaid. About 30 percent ($404 billion) results from
reduced estimates of discretionary outlays because the

CBO
 8 
 

 

 


inflation rates used to project future funding are now



lower. The remaining change ($101 billion) stems from a 5 
,
.
,, 
decrease in estimated interest on the federal debt. to economic or legislative activity are classified as techni-
cal. For 2009, such revisions increase the deficit by
Social Security and Other Indexed Programs
 $243 billion; they result from adjustments to expected
10-year baseline period, CBO has reduced estimated out- outlays ($177 billion) and expected revenues ($66 bil-
lays by $500 billion for federal retirement and benefit lion). Over the following 10 years, technical changes
programs, including Social Security, because projected account for small increases in deficit projections, averag-
cost-of-living adjustments (COLAs) have fallen since ing about $14 billion a year.
January. No COLAs are currently projected for such
programs from 2010 through 2012; the COLA would
 
 * 

 
amount to less than 2 percent in all future years (an aver- assumptions reduce projected revenues by $66 billion in
age of 0.8 percentage points below CBO’s previous 2009 and by $89 billion from 2010 to 2019. The most
projections for years after 2011). As a result, estimated significant change stems from smaller-than-expected col-
outlays for 2010 to 2019 are $378 billion lower for Social lections from employers’ withholding of income and pay-
Security benefits and $122 billion lower for other federal roll (social insurance) taxes from employees’ paychecks.
programs that incorporate a COLA in their benefit Starting in December, those collections dropped signifi-
calculations (such as civil service retirement, veterans’ cantly compared with a year ago, presumably reflecting,
compensation and pensions, and other federal retirement at least in part, substantial decreases in year-end bonuses
programs). and increasing job losses. However, the year-over-year
Medicare
%:


declines in withholding have continued past the tradi-
tional bonus season and are greater than implied by
adjusted each year on the basis of the estimated rate of
macroeconomic data on labor market activity. CBO
inflation. Because inflation is estimated to be lower, pay-
ment rates for most Medicare services are now projected assumes that this downward effect on revenues will
to drop over the 2010–2019 period. By 2019, payment diminish over the next few years, as most forms of taxable
rates will be about 6 percent lower than previously esti- income return to their historical relationship to GDP.
mated. CBO has therefore reduced projected Medicare

  5 ".
  
spending over that period by $194 billion.
increase estimated outlays by $177 billion. Increased


  #
 

 ' subsidy costs estimated for the TARP, Fannie Mae, and
jections of Medicaid payment rates over the 2010–2019 Freddie Mac total roughly $200 billion. That increase
period, thus reducing estimated Medicaid outlays by is partially offset by a reduction in net interest of
approximately $140 billion. $21 billion.

Discretionary Programs
Reductions in the factors used to Over the 2010–2019 period, technical changes boost
extrapolate discretionary spending (the GDP price index estimated outlays by $51 billion (0.1 percent)—the result
and the employment cost index for wages and salaries) of a $201 billion increase in mandatory outlays (domi-
diminish projected discretionary outlays by $404 billion nated by a $123 billion increase in Medicare outlays) that
over the 10-year period. is partially offset by a $146 billion decrease in net interest
outlays.
Net Interest. From 2010 to 2019, CBO’s projection of net
interest has been reduced by $101 billion. About one- Troubled Asset Relief Program. Since January, CBO has
third of that change stems from lower anticipated raised its estimate of the net cost (on a present-value
inflation adjustments on Treasury Inflation-Protected basis) of the transactions covered by the TARP by
Securities (TIPS); the rest results from lower projections $152 billion for 2009 and by $15 billion for 2010. Those
of other interest rates (mostly for the 2012–2014 period) revisions stem from three factors—changes in financial
and from debt-service costs related to other economic market conditions, new transactions, and a small shift in
changes. the anticipated timing of disbursements.



 
 A PRELIMINARY ANALYSIS OF THE PRESIDENT’S BUDGET AND AN UPDATE OF CBO’S BUDGET AND ECONOMIC OUTLOOK 9

Since CBO’s previous estimate was completed, market and B and a $46 billion reduction in projected spending
yields on securities issued by the firms that have received for Part D. (Parts A and B cover medical and surgical
TARP funds have increased, thereby boosting the esti- benefits; Part D covers prescription drugs.) The major
mated subsidy cost of the Treasury’s purchases of pre- component of the higher projected spending for Parts A
ferred stock, asset guarantees, and loans to automakers. and B is a 2 percent increase in projected enrollment
Also, the Treasury announced additional deals with Bank because of greater participation in Social Security’s Dis-
of America and American International Group (AIG) as ability Insurance (DI) program. (Beginning two years
well as participation of up to $50 billion in the Adminis- after they become eligible for DI, participants in that pro-
tration’s foreclosure mitigation plan, all of which involve gram are automatically eligible for benefits through
subsidy rates that are higher than the averages in the pre- Medicare.) The lower projected spending for the Part D
vious baseline.8 program reflects the expectation that growth in spending
for prescription drugs—which has been lower in recent
Finally, CBO assumed that more transactions would years than CBO had expected—will continue to be lower
occur after October 1, which pushes the recognition of than CBO had previously projected.
more of the subsidy cost into fiscal year 2010.
!
 
  %

 "68,
'
Fannie Mae and Freddie Mac
*   lion lower than in CBO’s January baseline, primarily
management and financial control that the federal gov- because of the Federal Deposit Insurance Corporation’s
ernment currently exercises over Fannie Mae and Freddie (FDIC’s) recent actions to increase insurance premiums
Mac, CBO has determined that the two corporations (which are recorded as offsets to spending). CBO expects
should now be included in the federal budget. In January, that net outlays for deposit insurance will be about
CBO estimated the subsidy cost for their existing busi- $29 billion higher through 2014 than projected in Janu-
ness when the takeover occurred ($200 billion recorded ary; by 2019, most of that increase would be offset by
in 2009) and the estimated subsidy costs for future activi- income from higher premiums and proceeds from selling
ties (nearly $40 billion for 2009 and smaller amounts the assets of failed institutions. On balance, net outlays
thereafter). Since January, however, the condition of the over the 2010–2019 period are projected to be about
two entities has turned out to be worse than expected; as $9 billion higher than was estimated in January.
a result, CBO has increased its estimate of the present
value of future losses for Fannie Mae and Freddie Mac by The annual budgetary impact of deposit insurance activ-
$52 billion for 2009—most of which stems from loans ity depends on several factors, including the expenses
and guarantees inherited at the time of the conservator- stemming from failed institutions, the methods used to
ship—and by $28 billion for their activities between resolve those failures, and the timing of industry pay-
2010 and 2019.9 ments to recoup any losses. CBO estimates that losses
from FDIC-insured institutions could total about



 

:
'


$100 billion through 2014, roughly double the amount
lays over the 2010–2019 period by $123 billion because projected in January. CBO’s projections assume that the
of technical factors (although that increase is largely offset FDIC will continue to raise premiums as needed to
by the decrease in estimated Medicare outlays resulting maintain sufficient balances in the insurance funds and
from CBO’s updated economic forecast). The technical will manage costs in ways that reduce the volatility of
changes in the Medicare baseline are the net effect of a annual outlays—for example, by resolving failures of
$167 billion increase in projected spending for Parts A large institutions through cost-sharing arrangements,
which tend to spread costs over a longer period.
8. CBO’s baseline includes an estimate of the net cost of transactions
for the TARP. Broadly speaking, that cost is the purchase price
"
 
 %
minus the present value (adjusted for market risk) of any esti- from an adjustment to the treatment of interest trans-
mated future earnings from holding purchased assets and the pro- actions with credit financing accounts (nonbudgetary
ceeds from their eventual sale. accounts that record cash flows for federal credit pro-
9. Conservatorship is the legal process in which an entity is grams), the borrowing activities of the Federal Financing
appointed to establish control and oversight of a company to put Bank, and a shift in the maturity structure of federal
it in a sound and solvent condition. borrowing. Such changes reduce interest costs by


 10 
 

 

 


Table 1-4.



 
Total, Total,
Actual 2010- 2010-
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2014 2019

In Billions of Dollars
Revenues
On-budget 1,866 1,506 1,621 1,891 2,192 2,329 2,429 2,554 2,658 2,772 2,875 2,982 10,461 24,302
Off-budget 658
____ 653
____ 668
____ 695
____ 726
____ 766
____ 802
____ 833
____ 864
____ 897
____ 932
____ 968 _____
____ 3,656 _____
8,151



 2,159 2,289 2,586 2,917 3,095 3,231 3,387 3,522 3,669 3,807 3,950 14,118 32,452

Outlays
Mandatory spending 1,595 2,588 2,135 2,025 2,020 2,121 2,225 2,318 2,466 2,581 2,694 2,895 10,526 23,480
Discretionary spending 1,135 1,246 1,362 1,315 1,273 1,279 1,294 1,319 1,351 1,377 1,402 1,438 6,523 13,409
Net interest 253




170
____ 172
____ 216
____ 282
____ 367
____ 460
____ 536
____ 601
____ 661
____ 734
____ 806 _____
____ 1,497 _____
4,834

 2,983 4,004 3,669 3,556 3,575 3,767 3,979 4,172 4,417 4,619 4,830 5,139 18,546 41,723
On-budget 2,508 3,481 3,115 2,983 2,982 3,148 3,333 3,496 3,704 3,864 4,030 4,290 15,562 34,946
Off-budget 475 523 553 573 594 619 646 676 713 755 800 849 2,984 6,777

Deficit (-) or Surplus -459 -1,845 -1,379 -970 -658 -672 -749 -785 -895 -949 -1,023 -1,189 -4,429 -9,270
On-budget -642 -1,975 -1,494 -1,092 -790 -819 -905 -942 -1,046 -1,092 -1,155 -1,308 -5,101 -10,644
Off-budget 183 130 115 122 132 147 156 157 151 143 132 119 672 1,374

Debt Held by the Public 5,803 7,987 9,319 10,292 11,055 11,770 12,628 13,508 14,491 15,523 16,013 17,277 n.a. n.a.

Memorandum:
Gross Domestic Product 14,222 14,057 14,405 15,061 15,774 16,496 17,241 17,957 18,688 19,436 20,191 20,966 78,977 176,215

As a Percentage of Gross Domestic Product

 

On-budget 13.1 10.7 11.3 12.6 13.9 14.1 14.1 14.2 14.2 14.3 14.2 14.2 13.2 13.8
Off-budget 4.6



4.6



4.6



4.6



4.6



4.6



4.7



4.6



4.6



4.6



4.6



4.6



4.6



4.6





 17.7 15.4 15.9 17.2 18.5 18.8 18.7 18.9 18.8 18.9 18.9 18.8 17.9 18.4

  

Mandatory spending 11.2 18.4 14.8 13.4 12.8 12.9 12.9 12.9 13.2 13.3 13.3 13.8 13.3 13.3
Discretionary spending 8.0 8.9 9.5 8.7 8.1 7.8 7.5 7.3 7.2 7.1 6.9 6.9 8.3 7.6
Net interest 1.8



1.2



1.2



1.4



1.8



2.2



2.7



3.0



3.2



3.4



3.6



3.8



1.9



2.7





 21.0 28.5 25.5 23.6 22.7 22.8 23.1 23.2 23.6 23.8 23.9 24.5 23.5 23.7
On-budget 17.6 24.8 21.6 19.8 18.9 19.1 19.3 19.5 19.8 19.9 20.0 20.5 19.7 19.8
Off-budget 3.3 3.7 3.8 3.8 3.8 3.8 3.7 3.8 3.8 3.9 4.0 4.0 3.8 3.8


  -3.2 -13.1 -9.6 -6.4 -4.2 -4.1 -4.3 -4.4 -4.8 -4.9 -5.1 -5.7 -5.6 -5.3
On-budget -4.5 -14.1 -10.4 -7.3 -5.0 -5.0 -5.2 -5.2 -5.6 -5.6 -5.7 -6.2 -6.5 -6.0
Off-budget 1.3 0.9 0.8 0.8 0.8 0.9 0.9 0.9 0.8 0.7 0.7 0.6 0.9 0.8

Debt Held by the Public 40.8 56.8 64.7 68.3 70.1 71.4 73.2 75.2 77.5 79.9 79.3 82.4 n.a. n.a.

 Congressional Budget Office.

Note: n.a. = not applicable.


CHAPTER ONE A PRELIMINARY ANALYSIS OF THE PRESIDENT’S BUDGET AND AN UPDATE OF CBO’S BUDGET AND ECONOMIC OUTLOOK 11

Figure 1-1.
Total Deficits or Surpluses, 1969 to 2019
(Percentage of gross domestic product)
4
Actual Projected
2 CBO's Baseline
Projection
0

-2

-4

-6 CBO's
Estimate of the
-8 President's
Budget
-10

-12

-14
1969 1974 1979 1984 1989 1994 1999 2004 2009 2014 2019

Source: Congressional Budget Office.

$424 billion between 2010 and 2019; added debt-service als in the President’s budget request would reduce reve-
costs stemming from other technical changes increase nues by $26 billion and boost outlays by $151 billion
interest payments by $278 billion over the 10-year (mostly for additional efforts aimed at stabilizing the
period. financial system). As a result, the deficit for this year
would be $177 billion larger than the deficit that CBO
anticipates under current law.
CBO’s Estimate of the President’s
Budget In 2010, the deficit under the President’s budget would
The President’s budget provides a broad outline of his fall to 9.6 percent of GDP, or nearly $1.4 trillion, CBO
policy proposals that will be followed by a more detailed estimates—$241 billion more than the deficit of
budget presentation in April. Nevertheless, most of the $1.1 trillion that CBO projects under current laws
proposals were specific enough that CBO and JCT could and policies (see Figure 1-1). That difference is largely
estimate the budgetary impact using their own technical attributable to additional spending for the government’s
assumptions and CBO’s economic forecast. For discre- actions to stabilize financial markets ($125 billion);
tionary funding, the budget outline provided only aggre- defense spending, primarily for ongoing military opera-
gate amounts of budget authority, which CBO used as a tions in Iraq and Afghanistan and other activities related
basis for estimating such spending. to the war on terrorism ($50 billion); and various revenue
reductions ($45 billion). In total, outlays next year would
Overview of the President’s Budget measure 25.5 percent of GDP under the President’s poli-
If the President’s proposals were enacted, the government cies, and revenues would amount to 15.9 percent.
would record a deficit of $1.8 trillion in 2009, CBO esti-
mates (see Table 1-4). The deficit for 2009 would equal From 2010 to 2019, the cumulative deficit under the
13.1 percent of GDP, with revenues totaling 15.4 percent President’s proposals would total $9.3 trillion, more than
and outlays equal to 28.5 percent of GDP.10 Relative to double the cumulative deficit projected under the
CBO’s baseline budget projections for 2009, the propos- current-law assumptions embodied in CBO’s baseline
(see Table 1-5). Over the 10-year period, proposed tax
10. The estimates presented in this chapter do not take into consider- policies—such as extending some of the expiring provi-
ation any impact that the President’s budgetary proposals might sions enacted in EGTRRA and JGTRRA—would
have on GDP or other broad measures of economic activity. reduce revenues relative to the baseline by an estimated

CBO
 12 A PRELIMINARY ANALYSIS OF THE PRESIDENT’S BUDGET AND AN UPDATE OF CBO’S BUDGET AND ECONOMIC OUTLOOK

Table 1-5.
CBO’s Estimate of the Effect of the President’s Budget on Baseline Deficits
(Billions of dollars)
Total, Total,
2010- 2010-
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2014 2019

Total Deficit as Projected in CBO's March 2009 Baseline -1,667 -1,139 -693 -331 -300 -310 -282 -327 -312 -325 -423 -2,772 -4,441

Effect of the President's Proposals

Revenues
Provisions related to EGTRRA and JGTRRA
Modify individual income tax ratesa 0 0 -68 -99 -104 -109 -114 -119 -124 -129 -134 -379 -999
Modify capital gains and dividend tax ratesb 0 * -5 -20 -25 -27 -28 -29 -30 -31 -32 -77 -226
Modify estate and gift tax rates 0 * -2 -20 -23 -27 -31 -34 -37 -40 -43 -72 -256
Other provisions _0 _0 -28 -46
__ ___ -47
___ -48
___ -49 ___
___ -50 ___
-51 -52
___ -54
___ -170 -427
___ _____
Subtotal, proposed extensions 0 * -103 -185 -199 -211 -222 -231 -242 -252 -263 -698 -1,907
Permanently extend Making Work Pay credit 0 0 -29 -42 -43 -43 -44 -44 -44 -45 -45 -156 -378
Index the AMT starting from 2009 levels 0 -7 -69 -31 -34 -37 -41 -46 -52 -60 -70 -177 -447
Revenues from climate policy 0 0 0 77 77 78 78 79 79 80 80 232 629
Other proposals -26
___ -39
___ 3 12 12 8 5 3 2 1 *
___ ____ ____ ____ ____ ____ ____ ____ ____ ____ _____7
-5
Total Effect on Revenues -26 -45 -198 -169 -187 -205 -223 -240 -257 -276 -297 -804 -2,097
Outlays
Mandatory
Expand earned income and child tax credits 0 * * 36 36 36 36 36 37 37 37 108 292
Provide Making Work Pay and other tax credits 0 0 * 23 24 24 24 24 24 24 24 72 193
Freeze Medicare physician payment rates 0 7 17 22 18 23 28 35 42 45 47 87 285
Support financial stabilization 125 125 0 0 0 0 0 0 0 0 0 125 125
Modify the Family Federal Education Loan
Program 0 -5 -10 -12 -11 -10 -9 -9 -9 -9 -10 -47 -94
Modify Pell grantsc 0 5 20 28 30 33 32 33 35 37 39 116 293
Other proposals *
___ -1
___ ___ ___2
9 ___1 ___* ___1 ___1 ___2 ___3 ___3 11
___ 22
____
Subtotal, mandatory 125 131 37 99 98 107 112 121 131 136 142 472 1,115
Discretionary
Defense 25 50 24 14 7 6 7 9 10 12 13 100 151
Nondefense *
__ __9 __6 19
__ 33
__ 45
__ 56
__ 62
__ 67
__ 70
__ 74
__ 113
___ 442
___
Subtotal, discretionary 25 59 30 33 40 51 63 71 77 82 87 213 593
Net interest ___1 ___6 13 ___
___ 26 48
___ 75
___ 105 ___
___ 137 ___
172 204
___ 239
___ 167 _____
___ 1,023
Total Effect on Outlays 151 196 80 158 186 233 280 329 380 422 468 853 2,732

Continued

$2.1 trillion, an average of 1.2 percent of GDP. In addi- 10-year period relative to the baseline. Debt held by the
tion, under the President’s proposals, spending other than public would rise, from 41 percent of GDP in 2008 to
interest outlays would be $1.7 trillion higher (about 57 percent in 2009 and to 82 percent of GDP by 2019.
1.0 percent of GDP). Discretionary spending would be
$0.6 trillion above CBO’s baseline projection; non- Under the President’s proposals, revenues would climb
defense programs would receive more than 70 percent of from 17.2 percent of GDP in 2011 to 18.8 percent in
that increase. Mandatory spending would be $1.1 trillion 2013 and remain near 19.0 percent thereafter (see
above the baseline total. The resulting higher deficits Figure 1-2 and Table 1-4). That level is slightly above the
would require additional federal borrowing; net interest average of 18.3 percent over the past 40 years and below
paid on that borrowing would add $1.0 trillion over the the baseline projection of 20.3 percent for 2019. The

CBO

 
 A PRELIMINARY ANALYSIS OF THE PRESIDENT’S BUDGET AND AN UPDATE OF CBO’S BUDGET AND ECONOMIC OUTLOOK



 Continued



 




 


Total, Total,
2010- 2010-
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2014 2019

Total Effect on the Deficit d -177 -241 -278 -327 -373 -438 -503 -568 -637 -698 -765 -1,657 -4,829

Total Deficit Under the President's Proposals as

Estimated by CBO -1,845 -1,379 -970 -658 -672 -749 -785 -895 -949 -1,023 -1,189 -4,429 -9,270
Memorandum:
Health Reform Reserve Fundd
Increased revenues from limiting the rate at which
itemized deductions reduce tax liability 0 0 11 30 32 34 37 39 41 43 45 107 311
Reduced spending from specified health proposals 0 2 5 14 20 39 36 36 42 48 55 79 295
New, unspecified benefits from health reformse _0 -2
__ -16
__ -44
__ -51
__ -73
__ -72
__ -75
__ -83
__ -91
__ -100
___ -185
___ -606
___

Net effect on the deficit of the health
reform proposal 0 0 0 0 0 0 0 0 0 0 0 0 0

Total Deficit Under the President's Proposals as

Estimated by OMB -1,752 -1,171 -912 -581 -533 -570 -583 -637 -636 -634 -712 -3,767 -6,969

 Congressional Budget Office; Joint Committee on Taxation.

Note: * = between -$500 million and $500 million; EGTRRA = Economic Growth and Tax Relief Reconciliation Act of 2001; JGTRRA = Jobs
and Growth Tax Relief Reconciliation Act of 2003; AMT = alternative minimum tax; OMB = Office of Management and Budget.
a. The estimates include the effects of maintaining, for taxpayers with income above certain levels, the income tax rates of 36 percent
and 39.6 percent scheduled to go into effect in 2011 under current law. For the remaining taxpayers, tax rates would be at the 2010 levels
specified in EGTRRA.
b. The estimates include the effects of imposing a 20 percent tax rate on capital gains and dividends for taxpayers with income above certain
levels, starting in 2011. Tax rates for the remaining taxpayers would be at the 2010 levels specified in JGTRRA.
c. The current Pell grant program has discretionary and mandatory components. CBO’s estimate of the costs of modifying Pell grants
includes the costs of setting the maximum award at $5,550 in 2010, indexing that award level for future years, and reclassifying the entire
program as mandatory spending. That reclassification would result in eliminating spending for Pell grants in CBO’s discretionary baseline,
which currently includes $195 billion in outlays for new grants over the 2010–2019 period.
d. Negative numbers indicate an increase in the deficit.
e. Health reform benefits may be a combination of revenue reductions and spending increases and are assumed to exactly offset the savings
dedicated to the proposed fund on both the revenue and outlay sides of the budget.




 and refundable tax credits) would be only partly offset by
baseline—including the anticipated recovery from the lower discretionary spending. Spending for mandatory
recession, which results in taxable income rising as a share programs would fall in 2010 and 2011 (largely because of
of GDP, and the expiration of certain provisions of reduced spending to stabilize the financial markets and
ARRA, EGTRRA, and JGTRRA—also cause revenues to gradually declining spending from ARRA and for unem-
rise as a share of GDP in the President’s budget. ployment insurance) and then rise by an average of
4.7 percent annually (about three-fourths of a percentage
Outlays under the President’s policies would increase point above the growth rate of nominal GDP) through
from 23.6 percent of GDP in 2011 to 24.5 percent in 2019.
2019. Both of those figures are above the average of
20.7 percent over the past 40 years; higher mandatory 

% %#  
,%6==,


spending as a percentage of GDP (especially for Medicare 2010 to 2012—largely because of lower outlays related to



 
 

 

 


 

Total Revenues and Outlays as a Percentage of Gross Domestic Product in

CBO’s Baseline and the President’s Budget



30
Actual Projected

25

Outlays

20

Revenues
15

0
1969 1974 1979 1984 1989 1994 1999 2004 2009 2014 2019

 Congressional Budget Office.

Note: Dashed lines represent CBO’s estimate of revenues and outlays as a share of gross domestic product in the President’s budget.

**   #'  

>  that are currently in place but that would require further
grow slightly thereafter. Measured as a percentage of legislation in order to continue in future years. Those
GDP, they would fall from 9.5 percent in 2010 to policies include extensions of most of the provisions of
6.9 percent in 2018 and 2019. CBO’s estimates for dis- EGTRRA and JGTRRA and certain payments to physi-
cretionary spending reflect the President’s proposal for cians participating in the Medicare program. Because
$75.5 billion in additional funding for military opera- CBO’s baseline for mandatory spending and revenues is
tions in Iraq and Afghanistan in 2009 (bringing the total
predicated on current law, this estimate of the President’s
for that year to $141.4 billion), $130 billion for such
budget treats such continuations as policy proposals. The
purposes in 2010, and $50 billion a year thereafter.11
extended policies generally involve increased spending
CBO’s estimate of the deficits under the President’s bud- and reduced revenues; as a result, CBO’s analysis gener-
get are higher each year than those estimated by the ally shows larger spending increases and larger tax reduc-
Administration—by $93 billion for 2009 and by about tions—and thus larger increases in the deficit—than are
$2.3 trillion for the 2010–2019 period. Most of those shown in the Administration’s presentation of its propos-
differences stem from underlying baseline differences als (regardless of differences in economic and technical
rather than from varying assessments of the effect of the assumptions).12
President’s policy proposals. Economic and technical fac-
tors affecting revenue projections account for the largest 12. For discretionary programs, the Administration has compared its
part of those baseline differences. policy proposals with a baseline that assumes that funding for mil-
itary operations in Iraq and Afghanistan continues into future
In its presentation of the budget, the Administration has years at the 2008 level of $180 billion, adjusted for inflation.
compared its policy proposals with a “current-policy” CBO’s baseline, however, extrapolates a lower level of war-related
funding (the $66 billion currently appropriated for 2009) into
baseline that assumes the continuation of certain policies
future years. Thus, CBO’s analysis of the President’s request for
defense appropriations—funding related to operations in Iraq and


 In its initial budget outline, the Administration does not present Afghanistan and funding not directly tied to those operations—
detailed information on its request for future appropriations, so indicates that defense spending under the President’s policies
CBO conducted its analysis on an aggregated basis. would be above baseline levels.



 
 A PRELIMINARY ANALYSIS OF THE PRESIDENT’S BUDGET AND AN UPDATE OF CBO’S BUDGET AND ECONOMIC OUTLOOK


Policy Proposals Affecting Revenues those higher-income taxpayers would also be subject to a

, , tax rate of 20 percent on capital gains and dividends. In
to tax law that would reduce revenues over the next addition, the President proposes to modify estate, gift,
decade relative to CBO’s baseline. Compared with pro- and generation-skipping transfer taxes by extending 2009
jected receipts under current law, total revenues would be law and indexing the estate tax exemption for inflation
$2.1 trillion lower over the 2010–2019 period, according while maintaining the $1 million lifetime exclusion for
to JCT and CBO.13 The proposal to modify and extend gifts.
provisions of EGTRRA and JGTRRA would have the
largest effect, reducing revenues by $1.9 trillion, accord- “Making Work Pay” Tax Credit. 
 '
ing to JCT. On net, the other proposals would lower rev- poses to permanently extend the Making Work Pay
enues by about $190 billion, some reducing revenues by credit, which expires at the end of 2010 under current
roughly $1.1 trillion and others raising revenues by law. The credit equals 6.2 percent of earned income, up
roughly $900 billion. Those estimates do not reflect the to a maximum credit amount of $800 for married tax-
payers ($400 for single filers) and phasing out for married
effect on revenues of several of the President’s proposals
taxpayers with income above $150,000 ($75,000 for sin-
for which sufficient detail was not available. Those pro-
gle filers). Extending the credit would reduce revenues by
posals include implementing international tax reform, for
$378 billion over the 2010–2019 period, according to
which the Administration estimates a revenue increase of
JCT. (This proposal would also affect outlays because the
credit is refundable. See Tax Credits., #(2
$210 billion over 10 years. Until additional details are
available, JCT and CBO treat those proposals as having
no effect on revenues. Alternative Minimum Tax. 
'
Provisions Related to EGTRRA and JGTRRA.  


*:,% %

AMT exemption amount at 2009 levels, indexed for
related to modifying and permanently extending provi- inflation, and permanently extending the unrestricted use
sions of EGTRRA and JGTRRA that are set to expire in of certain personal tax credits under the AMT.15 The
2010 would reduce revenues by $1.9 trillion (or 1.1 per- proposal would reduce revenues by $447 billion between
cent of GDP) over the next 10 years relative to current 2010 and 2019, JCT estimates. That estimate does not
law.14 The provisions scheduled to expire include reduc- include the interaction between the AMT provisions and
tions in some individual income tax rates; reductions in the proposal to extend and modify the tax provisions
tax rates on capital gains and dividends; changes to estate related to EGTRRA and JGTRRA. That interaction is
and gift taxation; limits on phaseouts for personal exemp- included in the estimate for the latter proposal.
tions and itemized deductions for certain taxpayers; an
increase in the child tax credit; relief from the so-called Revenues from Climate Policy. 
 
marriage penalty; and changes in the tax treatment of
    '


certain investments in equipment by small businesses.  

 #
' '
 ( # 

The President proposes to permanently extend, at 2010 ' !!?
:

levels, tax rates on income, capital gains, and dividends Work Pay credit plus $120 billion intended for invest-
for married taxpayers earning under $250,000 and single ment in clean energy technologies. CBO and JCT esti-
taxpayers earning under $200,000. For taxpayers with mate that those proposed uses of the funds could cost
income above those levels, the President proposes to $629 billion: $349 billion for the post-2011 reduction in
maintain the income tax rates, the phaseout of the per- revenues for the Making Work Pay credit, $159 billion in
sonal exemption, and the limits on itemized deductions outlays for the refundable portion of that credit, and
scheduled to go into effect in 2011 under current law; $120 billion for spending on clean energy technologies.
CBO assumes that the proposed cap-and-trade program
13. For proposals that would amend the Internal Revenue Code, would generate $629 billion between 2012 and 2019 to
CBO generally uses estimates provided by JCT. cover the costs of extending that credit and to fund the
14. OMB included an extension of the tax provisions related to
EGTRRA and JGTRRA (without modifications) in its current 15. OMB included this proposal in its baseline projection of current
policy baseline. policy.



 
 

 

 


clean energy investments. In fact, the revenues raised lion between 2010 and 2019. The proposal to expand the
from a cap-and-trade program could be significantly refundability of the child tax credit would increase out-
higher or lower depending on how the program is lays by $74 billion over the 2010–2019 period, JCT esti-
structured. mates. Other tax proposals would increase outlays by
$54 billion over the 2010–2019 period, JCT and CBO
Other Proposals Affecting Revenues. ?  estimate.
in the President’s budget include making the research and
experimentation tax credit permanent; repealing the last- Physicians’ Payment Rates. A proposed change in the cal-
in/first-out inventory accounting method; taxing carried culation of the rates paid to physicians under Medicare
interest as income; and expanding the saver’s credit and would result in additional outlays totaling an estimated
automatic enrollment in individual retirement accounts $285 billion over the next 10 years.19 Under current law,
and 401(k) retirement plans.16 The President’s proposal Medicare’s payment rates for physicians’ services will be
to extend the period to which firms can carry back net reduced by about 21 percent in 2010 and by about 6 per-
operating losses to more than the current two years would cent a year for most of the rest of the decade. The Presi-
reduce revenues in 2009 and 2010 and increase them dent’s policy would freeze those payment rates at the
thereafter.17 Altogether, the President’s other tax propos- 2009 level through at least 2019.
als for which CBO and JCT were able to provide esti-
mates would increase revenues by an estimated $7 billion Reserve for Financial Stabilization Efforts. * 

'
between 2010 and 2019. tration has included a placeholder of $250 billion in fiscal
year 2009 to cover future efforts to stabilize the financial
Policy Proposals Affecting Mandatory Spending system. As with the current budgetary treatment of the
5 

, # . TARP, those outlays reflect the estimated subsidy pro-
they would, on balance, increase mandatory spending rel- vided by the unspecified policies; the Administration cal-
ative to the amounts in the baseline by $1.1 trillion (or culates that the $250 billion would represent the net cost
0.6 percent of GDP) over the next 10 years, CBO esti- of purchases of $750 billion in assets. For the purposes of
mates. Costs and savings from those proposals are shown projecting federal debt, CBO assumes that the total pro-
in Table 1-5 on page 12, and the most significant propos- posed by the Administration would support asset pur-
als are highlighted below. chases, loan guarantees, or other transactions totaling
$500 billion, reflecting a subsidy cost similar to what


*,6)=),



  %
CBO now estimates for the $700 billion already autho-
the 10-year period would stem from tax proposals that
rized for the TARP. CBO also assumes that such addi-
would expand various refundable tax credits.18 According
tional support, if enacted, would be disbursed over the
to JCT’s estimates, the permanent extension and modifi-
next two years—$125 billion in estimated outlays in
cation of certain expiring tax provisions originally
2009 and the same amount in 2010.
enacted in 2001 and 2003 would increase outlays by
$197 billion over the 2010–2019 period, mostly for the
Student Loans. The President’s proposal would essentially
refundable portions of the earned income and child tax
eliminate the federal guaranteed student loan program,
credits. The proposal to extend the Making Work Pay tax
replacing such loans with direct loans made by the
credit would increase outlays by an estimated $159 bil-
Department of Education. Under the Federal Credit
Reform Act, the budgetary cost of direct loans and guar-
16. Carried interest is a component of the typical compensation
anteed loans reflects the total cash flows over the life of
received by a general partner of a private equity or hedge fund. It
is generally a share of the profits on the assets under management. each loan. Under current law, the direct loan program is
estimated to have a lower cost for each dollar loaned than
17. Current law allows firms to use losses from an unprofitable year to
offset taxable income from an earlier year and receive a refund of
does the guaranteed loan program. Thus, assuming that
past taxes paid. Generally, under current law, a net operating loss loan volume does not change, replacing the guaranteed
can be carried back to the prior two tax years. loan program with additional direct loans would yield
18. An income tax credit is refundable if the taxpayer receives a refund
when the allowable credit exceeds the amount of income tax 19. OMB included this proposal in its baseline projection of current
owed. Such refunds are recorded in the budget as outlays. policy.



 
 A PRELIMINARY ANALYSIS OF THE PRESIDENT’S BUDGET AND AN UPDATE OF CBO’S BUDGET AND ECONOMIC OUTLOOK


budgetary savings. CBO estimates that savings would ing $283 billion for ARRA. The President’s budget
total $94 billion over the 2010–2019 period. includes an additional $76 billion in 2009 funding for
operations in Iraq and Afghanistan as well as $7 billion in


 
%  unspecified funding for international activities; such
grants as mandatory spending, set the maximum award funding would add about $25 billion to outlays this year.
level at $5,550 for 2010, and index that amount for
future years. (The maximum amount available in 2009 is The Administration did not provide detailed information
$5,350.) Under current law, the program is funded with about its request for discretionary funding for 2010 to
annual discretionary appropriations and mandatory 2019, so CBO estimated the President’s proposals by
funds. In 2009, outlays from discretionary funds will using the aggregate totals provided in the budget. Over
total about $18 billion and outlays from mandatory that period, projected outlays from the Administration’s
funds will total about $2 billion, CBO estimates. The request for discretionary appropriations would exceed
proposed changes would boost mandatory spending by CBO’s baseline estimate of such outlays by $593 billion
$293 billion over the 2010–2019 period. (About (or 0.3 percent of GDP).
$195 billion of that new mandatory spending is already
reflected in CBO’s discretionary baseline.) Defense outlays would be $151 billion higher over the
10-year period. Funding for the wars would exceed the

 

 
baseline level of $67 billion by $63 billion in 2010—the

, 
  
 ! 9 !" Administration includes $130 billion for that year and
period to expand various programs that assist with
$50 billion a year through the remainder of the 10-year
income security, including $21 billion to modify existing
period.20 Other spending for defense programs would
trigger mechanisms for providing additional unemploy-
ment compensation during periods of high unemploy- exceed baseline levels in all years through 2019.
ment; nearly $10 billion for expanding child nutrition
The President’s proposals would increase nondefense dis-
programs; $9 billion for a program that would provide
cretionary outlays above baseline levels by $442 billion
in-home counseling for low-income first-time mothers;
about $5 billion to extend changes in the Trade Adjust- from 2010 to 2019, CBO estimates, assuming that the
ment Assistance program that were enacted in ARRA; President’s proposal to reclassify Pell grants as mandatory
and more than $4 billion for the Low Income Home spending is implemented. The estimated increase in dis-
Energy Assistance Program. cretionary outlays excluding the changes in the classifica-
tion of Pell grants would be more than $630 billion. The
Proposals that would reduce mandatory spending include majority of the increase stems from additional funding
lowering the amount that the United States Postal Service for the Department of State and other international
(USPS) currently pays for health and life insurance pre- programs and $15 billion per year in budget authority
miums for its employees and reducing payments to USPS beginning in 2012 that is designated for clean energy
retirees who receive workers’ compensation. CBO esti- technologies.
mates that those reductions would save about $16 billion
over the 2010–2019 period. In addition, the President’s The President’s budget includes a separate line item for
budget includes savings from several changes to agricul- disaster-related costs, which is intended to account for
ture programs, including reducing payments to some potential federal assistance for relief and reconstruction in
agricultural producers, decreasing subsidies for crop response to a major disaster. Such funding is normally
insurance, and imposing new fees for government inspec- provided as needed through discretionary appropriations
tion activities. CBO estimates that if those proposals were for the Federal Emergency Management Agency.
enacted, they would reduce spending for agricultural pro- Although the Administration incorporated $226 billion
grams by about $13 billion over the 10-year period, rela- over the 2010–2019 period for disaster costs in its outlay
tive to CBO’s baseline projections.
20. Following the rules governing baseline projections, CBO assumed
Policy Proposals Affecting Discretionary Spending that funding for the wars in 2010 and subsequent years would
As of early March, legislators had appropriated nearly equal the amount provided to date for 2009—$66 billion—
$1.4 trillion for discretionary programs for 2009, includ- adjusted for inflation.



 
 

 

 


totals, it presented no specific legislative proposal. CBO Savings in Outlays Dedicated to Health Reform. CBO
has therefore not included such costs in its estimates. estimates that enacting the provisions aimed at producing
savings to be dedicated to the reserve fund would reduce
Health Reform Reserve Fund federal spending by $295 billion over the 2010–2019
The President’s budget proposal would establish a fund to period. The provisions with the largest estimated gross
finance some of the costs of health care reform, although savings over that period include establishing competitive
the document does not specify the policies that would bidding in the Medicare Advantage program ($176 bil-
constitute such reform. The fund would be credited with lion); reducing payment rates for home health services in
revenues from limiting the rate at which itemized deduc- Medicare ($51 billion); eliminating the Medicare and
tions reduce tax liability; the estimated savings from a Medicaid Improvement Funds ($23 billion); combining
number of proposals to modify payment rates and other Medicare’s payments for hospital inpatient care and post-
provisions of the Medicare and Medicaid programs; and acute services into a bundled payment rate ($18 billion);
the savings from a proposal to establish a regulatory path- increasing rebates paid by pharmaceutical manufacturers
way for the Food and Drug Administration to approve to Medicaid ($16 billion); and establishing a regulatory
the marketing of generic versions of biological pharma- pathway for generic versions of biological pharmaceuti-
ceuticals. The President’s budget allocates the full amount cals ($13 billion). About 25 percent of the cost of services
of those additional revenues and outlay savings for spend- under Part B of Medicare—the Supplementary Medical
ing or tax reductions related to health care reform. The Insurance program—is recovered by premiums charged
combination of all those policies is intended to have no to beneficiaries. As a result, about 25 percent of the sav-
net effect on the budget. Therefore, the President’s bud- ings in Part B would be offset by lower premium receipts
get—and CBO in its analysis of the budget—shows no (which are recorded in the budget as negative outlays).
net effect on either revenues or outlays from this set of CBO estimates that enacting those provisions would
proposals (that is, revenue reductions related to health reduce premium receipts by $33 billion over the 2011–
care reform are assumed to offset the revenue gains from 2019 period.
changing the rate applied to itemized deductions, and
outlays for health care reform are assumed to equal the Net Cash Flows of the Reserve Fund. 5 .
 
outlay savings from the proposed policy changes). JCT estimate, the net savings of $295 billion plus the
$311 billion increase in revenues from limiting the rate at
Limits on the Rate at Which Itemized Deductions Reduce which itemized deductions reduce tax liability would
Tax Liability. 


=' generate $606 billion over the 2010–2019 period for the
cent the rate at which itemized deductions reduce tax health reform reserve fund. Under the President’s pro-
liability. That proposal would increase revenues by posal, that amount would be used for reform of the
$311 billion over the 2010–2019 period, according to health care system, and the combination of those policies
JCT. would have no net effect on the deficit.


 CHAPTER

2
The Economic Outlook

T he current recession, which began in December

2007, took a sudden and severe turn for the worse late
because of the sharp drop in energy and commodity
prices, but also because “core” inflation (for items besides
last year. Of the 4.4 million jobs lost since the recession food and energy) slowed. CBO anticipates that core con-
began, more than half have been lost in just the past four sumer price inflation, which averaged 2.3 percent during
months. According to the Congressional Budget Office’s 2007 and 2008, will fall to 1.5 percent this year and
economic projections, the economy will continue to dete- 1.1 percent in 2010 and remain low through 2012.
riorate for some time, although the adoption of the
American Recovery and Reinvestment Act and very Because of the likely persistence of the various factors
aggressive actions by the Federal Reserve and the Treasury holding down economic activity, CBO does not expect
will help end the recession this fall. the output gap—the difference between actual and
potential output of goods and services—to close fully
In CBO’s forecast, on a fourth-quarter-to-fourth-quarter until about 2014. In the latter part of the decade, CBO
basis, real (inflation-adjusted) gross domestic product projects, GDP will grow at its potential (an average rate
falls by 1.5 percent in 2009 before growing by 4.1 per- of 2.3 percent); the unemployment rate will average
cent in both 2010 and 2011 (see Table 2-1). During 4.8 percent; and core inflation for consumer prices,
the next two years, economic output averages about 1.9 percent.
7 percent below its potential—the output that would be
produced if the economy’s resources were fully employed CBO’s current forecast, particularly for the near term, is
(see Figure 2-1). The shortfall in the nation’s output rela- subject to a greater than normal degree of uncertainty.
tive to its potential is comparable with what occurred Figure 2-3, based on CBO’s past forecasting errors, illus-
during the recession of 1981 and 1982 and will persist for trates the usual uncertainty regarding forecasts of real
significantly longer—making the current recession the GDP. However, the figure probably understates uncer-
most severe since World War II. In the forecast, the tainty today. Both the magnitude of the contractionary
unemployment rate rises further, peaking at 9.4 percent forces operating in the economy and the magnitude of
in late 2009 and early 2010, and remains above 7 percent the government’s actions to stabilize the financial system
through the end of 2011 (see Figure 2-2). The deteriora- and stimulate economic growth are outside the range of
tion in 2009 and the protracted nature of the recovery recent experience. The forecast assumes that financial
reflect a number of factors: tight credit, a large number of markets will begin to function more normally and that
vacant houses continuing to suppress housing construc- the housing market will stabilize by early next year. The
tion, large losses in wealth restraining households’ spend- possibility that financial markets might not stabilize rep-
ing, and weak economic growth overseas. resents a major source of downside risk to the forecast.
Households’ and businesses’ confidence is also difficult to
Inflation in consumer prices has been extremely low predict. For example, if consumers begin to anticipate a
recently and, given the projection of persistently weak period of deflation, they may choose to further postpone
demand and excess productive capacity, it is expected to major discretionary purchases, thereby delaying the
be low over the next few years as well. Overall price recovery; but evidence that economic conditions are sta-
indexes have fallen since September 2008, primarily bilizing could encourage households and businesses to

CBO
  
 

 

 




CBO’s Economic Projections for Calendar Years 2009 to 2019
Estimated Forecast Projected Annual Average
a
2008 2009 2010 2011 2012-2015 2016-2019
Year to Year (Percentage change)
b c
Nominal GDP (Billions of dollars) 14,257 14,047 14,576 15,233 18,138 21,164
Nominal GDP 3.3 -1.5 3.8 4.5 4.5 3.9
Real GDP 1.1 -3.0 2.9 4.0 3.6 2.3
GDP Price Index 2.2 1.5 0.8 0.5 0.9 1.6
PCE Price Indexd 3.3 -0.1 1.1 1.0 1.0 1.6
Core PCE Price Indexe 2.0 1.0 0.8 0.7 0.9 1.6
Consumer Price Indexf 3.8 -0.7 1.4 1.2 1.2 1.9
Core Consumer Price Indexg 2.3 1.5 1.1 0.9 1.1 1.9
Calendar Year Average (Percent)
Unemployment Rate 5.8 8.8 9.0 7.7 5.6 4.8
Three-Month Treasury Bill Rate 1.4 0.3 0.9 1.8 4.0 4.7
Ten-Year Treasury Note Rate 3.7 2.9 3.4 4.0 5.1 5.6
Tax Bases (Billions of dollars)
b c
Economic profits 1,496 1,269 1,386 1,547 1,822 1,940
b c
Wages and salaries 6,543 6,496 6,743 6,953 8,315 9,709
Tax Bases (Percentage of GDP)
Economic profits 10.5 9.0 9.5 10.2 10.4 9.5
Wages and salaries 45.9 46.2 46.3 45.6 45.9 45.9
Fourth Quarter to Fourth Quarter (Percentage change)
Nominal GDP 1.0 -0.3 4.9 4.6 4.4 3.9
Real GDP -0.9 -1.5 4.1 4.1 3.4 2.3
GDP Price Index 1.9 1.3 0.8 0.5 0.9 1.6
PCE Price Indexd 1.7 0.5 1.0 0.9 1.1 1.6
Core PCE Price Indexe 1.8 0.7 0.8 0.7 1.0 1.6
Consumer Price Indexf 1.5 0.6 1.3 1.1 1.3 1.9
Core Consumer Price Indexg 2.0 1.4 1.0 0.8 1.2 1.9

 Congressional Budget Office; Department of Commerce, Bureau of Economic Analysis; Department of Labor, Bureau of Labor
Statistics; Federal Reserve Board.
Notes: GDP = gross domestic product; PCE = personal consumption expenditure.
Economic projections for each year from 2009 to 2019 appear in Appendix A.
a. Figures for the consumer price index, the unemployment rate, and the interest rates are actual values; the other 2008 figures are
estimates.
b. Level in 2015.
c. Level in 2019.
d. The PCE chained price index.
e. The PCE chained price index excluding prices for food and energy.
f. The consumer price index for all urban consumers.
g. The consumer price index for all urban consumers excluding prices for food and energy.


CHAPTER TWO A PRELIMINARY ANALYSIS OF THE PRESIDENT’S BUDGET AND AN UPDATE OF CBO’S BUDGET AND ECONOMIC OUTLOOK 

 
cent. Real GDP fell at a 6.2 percent annual rate in the
fourth quarter and appears likely to have declined sub-
The GDP Gap, 1965 to 2015 stantially further in the first quarter. Housing starts,

 industrial production, and orders and shipments of
8 durable goods all declined sharply in late 2008 and early
6 2009, although consumer spending rebounded somewhat
4 early this year from a very weak holiday season. Inflation
2
is low, but the extremely low rates reported at the end of
last year appear to have been largely transitory.
0
-2
The Housing Market
-4 
 


-6  ,
 %.
% 


-8 Without very high. Consequently, the prices of houses and the
Stimulus
-10 Legislation number of new homes being constructed are likely to be
-12 low for some time.
1965 1975 1985 1995 2005 2015
 

 Congressional Budget Office; Department of Commerce,

Bureau of Economic Analysis. The Unemployment Rate
Notes: The GDP gap is the difference between real (inflation-

adjusted) gross domestic product and its estimated
12
potential level (which corresponds to a high level of use of Without
labor and capital resources). Stimulus
10 Legislation
Data are quarterly and are plotted through 2015.



%


 
 8
forecast. Finally, although CBO’s forecast incorporates
the middle of the range of the agency’s estimates of 6

ARRA’s impact on GDP and employment, that range is

4
quite large. For instance, CBO’s analysis suggests that by
the fourth quarter of 2010, the stimulus legislation will Natural Rate of
2 Unemployment
raise real GDP by between 1.1 percent and 3.4 percent
and increase employment by between 1.2 million and
0
3.6 million jobs.1 1965 1975 1985 1995 2005 2015

 

 
 

! " Bureau of Labor Statistics.



 
 
 Notes: CBO’s estimate of the natural rate of unemployment is the
since CBO prepared its last forecast, which was published rate of unemployment that is not due to the business cycle
in early January.2 Job losses have mounted, with the but to underlying characteristics of the labor market, such as
normal rates of job turnover and the degree to which the job
unemployment rate jumping to a 25-year high of 8.1 per-
seekers’ skills and locations match available openings.
Although the rate of unemployment is projected to peak at a

 See Congressional Budget Office, “Estimated Macroeconomic
lower level than in 1982, the peak unemployment gap (the
Impacts of the American Recovery and Reinvestment Act of
difference between the unemployment rate and the estimate
2009,” letter to the Honorable Charles E. Grassley (March 2,
2009). of the natural rate of unemployment) is projected to be
about the same as in 1982.
2. Congressional Budget Office, The Budget and Economic Outlook:
Data are quarterly and are plotted through 2015.
Fiscal Years 2009 to 2019 
 


  
 

 

 


 

#


  $
(Billions of 2000 dollars)
13,000

12,500

12,000

11,500

11,000

10,500

0
2005 2006 2007 2008 2009 2010

 Congressional Budget Office; Department of Commerce, Bureau of Economic Analysis.
Note: This figure, based on CBO’s past errors in forecasting real (inflation-adjusted) growth, shows a range of possible outcomes for real
GDP. The projection described in this chapter falls in the middle of the darkest area of the figure. If the potential errors in the current
forecast are similar to the errors in CBO’s forecasts published between 1976 and 2006, the probability is 90 percent that real GDP will
fall in the shaded area of the graph. In the current circumstances, larger errors are more likely to occur than usual.

&  4

&
*
%
  U.S. Census Bureau started tabulating them in 1959.
purchase-only house price index, which covers prices of Although they rebounded somewhat, to 583,000 in
houses purchased with conventional conforming mort- February, that number contrasts with the more than
gage loans (those eligible for purchase by Fannie Mae and 2 million starts at the height of the boom in 2005. Even
Freddie Mac), declined by 3.4 percent in the fourth quar- though the construction of new homes has been at an
ter, the largest one-quarter decline in that index’s his- extremely low rate for more than a year, no progress has
tory—leaving it about 10 percent off its early 2007 peak
been made toward reducing the excess supply of vacant
level. Also in the fourth quarter, the Standard & Poor’s
units. The number of vacant units per thousand house-
(S&P) Case-Shiller national home price index, which
covers all types of mortgage loans but is more geographi- holds jumped from 143 at the end of 2005 to 170 at the
cally limited, was down by a larger amount, 18 percent end of 2008 (see Figure 2-4).
from a year earlier and 27 percent from its early 2006
After rising for much of last year, mortgage rates—both
peak. Most analysts believe that the correction in house
prices is far from complete; for example, according to the for conforming loans and for larger, or jumbo, loans—fell
February Blue Chip1#

 late last year, and they have remained low thus far in
about 50 forecasts by private-sector economists), the 20- 2009. Lower mortgage rates have spurred applications for
city version of the S&P Case-Shiller index will fall a fur- refinancing; nevertheless, the number of applications for
ther 14 percent in 2009. loans to finance purchases of homes has fallen this year.

Housing starts in January plunged to 477,000 (at a sea- Foreclosure rates continue to rise for all types of mort-
sonally adjusted annual rate), an all-time low since the gages, especially for subprime adjustable-rate mortgages.


CHAPTER TWO A PRELIMINARY ANALYSIS OF THE PRESIDENT’S BUDGET AND AN UPDATE OF CBO’S BUDGET AND ECONOMIC OUTLOOK 23

Figure 2-4. Banks have tightened standards and terms for lending,
although the pace of credit tightening may have eased a
Vacant Homes, 1965 to 2008 bit late last year. In the Federal Reserve’s most recent sur-
(Vacant homes per thousand households) vey of senior loan officers, in January 2009, 90 percent of
180 the domestic banks reported that they had increased
spreads on commercial and industrial loans in the fourth
160 quarter, and about 70 percent reported tighter lending
standards.3 The percentage of banks reporting tighter
140
standards on residential mortgages dropped sharply, per-
haps reflecting efforts by the Federal Reserve and the
Treasury to increase mortgage lending or less need to
120
tighten standards further given previous tightening. For
consumer loans, 60 percent of banks reported tighter
100 lending standards, about the same as in the October
survey.
0
1965 1970 1975 1980 1985 1990 1995 2000 2005 In the fourth quarter of 2008, the commercial banking
industry experienced its first aggregate loss since 1990,
Sources: Congressional Budget Office; Department of Commerce,
Bureau of the Census; Haver Analytics.
when many savings and loan institutions failed.4 For
Notes: Total number of vacant housing units.
2008 as a whole, earnings fell to $16 billion, compared
with $100 billion in 2007. The proportion of real estate
Data are quarterly and are plotted through 2008.
loans that were 30 days or more past due, at 6.2 percent
Those rates are likely to remain high as long as house in the fourth quarter of last year, had risen steadily from a
prices continue to fall and the unemployment rate year earlier, when it was 3.2 percent. The performance of
climbs. A rising number of homeowners—13.6 million other types of consumer loans and commercial and
in the fourth quarter, according to an estimate by industrial loans also deteriorated. Overall, of the $7.9 tril-
Moody’s Economy.com, compared with only 3.2 million lion in loans and leases outstanding at the end of 2008,
at the end of 2006—have negative equity in their house 5 percent were 30 days or more past due—including
(meaning that they currently owe more on their mortgage 3 percent that were 90 days or more past due, about dou-
than the market value of their house). ble the amount in the fourth quarter of 2007.

Financial Markets Risk spreads remain elevated. They reflect a higher risk of
Although conditions in the financial markets have default amid both the continuing difficulties of the finan-
improved from the acute turmoil in September and cial system and a recession that is already deeper and lon-
October of last year, they remain strained. Large-scale ger than the past several downturns. One important risk
efforts by the Federal Reserve and the Treasury following spread is the difference between the interest rates banks
the collapse of the investment bank Lehman Brothers and pay to borrow from each other (which can be measured
the rescue of insurance conglomerate American Inter- by the three-month Libor, or London interbank offered
national Group (AIG) have brought down risk spreads rate) and market expectations of the federal funds rate
(or differences in interest rates between risky and risk-free (which can be measured from an overnight index swap
assets) from severely elevated levels. Those efforts also
helped restore a considerable degree of activity to credit 3. Board of Governors of the Federal Reserve System, The January
markets. However, many credit markets are not yet able 2009 Senior Loan Officer Opinion Survey on Bank Lending Practices
to function normally without government assistance, and (February 2009).
lending conditions remain tight, especially for financial 4. Federal Deposit Insurance Corporation, Quarterly Banking Profile
firms. (Fourth Quarter 2008).

CBO
  
 

 

 


 
firms has increased since the start of 2008, but the
amount issued by financial firms has fallen by 20 percent
Spread Between the Three-Month over that period, implying that problems with access to
Libor and the Expected Federal Funds credit in the corporate sector are for the most part con-
Rate, January 2007 to March 2009 fined to the financial sector. Although the Federal Reserve


continues to provide extensive support to the market for
commercial paper, the funding required for the central
4
bank’s Commercial Paper Funding Facility has decreased
steadily this year––a positive sign.6
3
The difference between interest rates on corporate bonds
and Treasury securities remains wide, consistent with
2
heightened concerns about credit markets and about the
future course of the economy. Despite those concerns, the
1 amount of corporate debt issued this year is well above
that in the same period in 2008 for both investment-
0 grade securities and high-yield debt.

An important credit channel, securitization, in which

loans are pooled and converted into packages of securi-
2007 2008 2009
ties, has yet to recover from its prolonged slump. The vol-

 Congressional Budget Office; Bloomberg. ume of new securities backed by auto loans, unpaid credit
Notes: A spread is the difference between two interest rates. One, card balances, home equity loans, and student loans has
the three-month Libor (London interbank offered rate), is
plummeted from nearly $900 billion in 2007 to just
the interest rate major banks offer to other banks for loans
of that duration. The other is the average federal funds rate
$6 billion so far in 2009.
expected over a three-month period as measured by the
overnight index swap contract. Diminished expectations of future profit growth because
Data are weekly and are plotted through March 13, 2009.
of the recession in the United States, the marked slow-
down in economic activity in the rest of the world, and
2(5 That indicator of the risk that banks will investors’ reduced appetite for risk have hurt prices of
default on their loans was just over 1 percentage point in corporate stocks. Through March 18, the Wilshire 5000
mid-March, well below its October 2008 peak of 3.6 per- index, the broadest U.S. equity measure, has declined by
centage points but well above its normal level of 0.25 to about 12 percent since the beginning of 2009 and is
0.3 points and about where it was before the failure of down 46 percent since the beginning of 2008. Financial
Lehman Brothers in September 2008 (see Figure 2-5). companies and automakers have been the worst perform-
ers, with share prices down about 70 percent since the
Conditions have improved in the market for commercial beginning of 2008. The decline in stock prices makes it
paper (that is, short-term borrowing by firms), as indi- more expensive for companies to raise equity capital for
cated by a narrower spread relative to Treasury bills. Like the purpose of investing in new plant and equipment
the three-month Libor spread, commercial paper spreads (that is, structures, equipment, and software). And the
have narrowed substantially from October 2008, but that reduction in households’ wealth attributable to falling
narrowing has stalled since early January. The amount of equity and house prices has contributed to a decline in
outstanding commercial paper issued by nonfinancial consumer spending.

5. In an overnight index swap, one party pays the other the daily 6. Board of Governors of the Federal Reserve System, Factors Affect-
effective federal funds rate for the life of the contract in exchange ing Reserve Balances of Depository Institutions and Condition State-
for receiving a fixed rate. Therefore, the fixed rate paid for a three- ment of Federal Reserve Banks


 
month overnight index swap contract provides a market estimate issues), available at www.federalreserve.gov/releases/h41/current/
of the expected federal funds rate. h41.htm.



 
 A PRELIMINARY ANALYSIS OF THE PRESIDENT’S BUDGET AND AN UPDATE OF CBO’S BUDGET AND ECONOMIC OUTLOOK 

Figure 2-6. The weakness in consumer spending since mid-2008

  
"
 (notwithstanding the slight rebound so far this year)
reflects difficult conditions for consumers. Employment
Expenditures, January 1965 to has fallen, households’ wealth has dropped markedly,
January 2009 credit conditions are quite tight, the income tax rebate
(Percentage change from previous year) under last year’s Emergency Economic Stabilization Act
has run out, and consumer confidence has fallen to
10
extremely low levels. But the sharp decline in the price of
8 gasoline and other energy commodities since mid-2008
has boosted real disposable income, providing some sup-
6 port for consumer spending.
4
Over the past four months, the number of jobs has fallen
2 by about 2.6 million (or nearly 2 percent), and aggregate
income from wages and salaries fell 0.8 percent between
0 October and January (or at an annual rate of 3.3 per-
cent). The labor market shows no sign of stabilizing; in
-2
February and early March, initial claims for unemploy-
-4 ment insurance averaged well over 600,000 per week––
1965 1970 1975 1980 1985 1990 1995 2000 2005 roughly twice their average from 2005 to 2007 (see

 Congressional Budget Office; Department of Commerce, Figure 2-7).
Bureau of Economic Analysis.
Note: Data are three-month moving averages of monthly data and Figure 2-7.
are plotted through January 2009. Initial Claims for Unemployment
Insurance, January 1965 to

 
 

   % 
 February 2009
the second half of last year; in the fourth quarter, spend- (Thousands)
ing was slightly more than 1-1/2 percent below its level of 700
a year earlier (see Figure 2-6). However, the latest data
600
suggest a slight uptick in early 2009. Some of last year’s
decline was in sales of light motor vehicles (automobiles 500
and light trucks), which plunged from an average of
400
about 17 million per year between 2000 and 2007 to an
annual rate of just over 10 million in the fourth quarter 300
of last year. But the decline in spending was broader, as
spending on goods and services besides motor vehicles 200

and parts fell by 1.4 percent in the second half of last 100
year.
0
So far in 2009, sales of motor vehicles have fallen even 1965 1970 1975 1980 1985 1990 1995 2000 2005
further, to a 9.1 million annual rate in February. How-
 

 
 
ever, real personal consumption spending rose by 0.4 per- Employment and Training Administration, Unemployment
cent in January, and data on retail sales in February sug- Insurance Division.

gest another modest gain (and the likelihood that the Note: Data are monthly averages of weekly data and are plotted
through February 2009.
January increase will be revised upward).


  
 

 

 


Figure 2-8. war recessions. Shipments of nondefense capital goods

and businesses’ purchases of light vehicles both fell
%%  &'()* sharply in January, pointing to another large drop in

 

 investment in producers’ durable equipment in the first
quarter. Private nonresidential construction dropped sig-
4
Trade Balance nificantly in January, and the American Institute of
Excluding Architects’ billings index, a leading indicator of such con-
2 Petroleum
Imports struction, suggests more of the same through midyear.
0
After hitting an all-time low in June 2008, the ratio of
inventories to sales in the manufacturing and the whole-
-2
sale and retail trade sectors had, by the end of the year,
Trade jumped to its highest level since the last recession. The
-4 Balance ratio of inventories to sales in manufacturing and in
wholesale trade continued to rise in January. The need to
-6
realign inventories with sales is currently dampening
production.
-8
1965 1970 1975 1980 1985 1990 1995 2000 2005
A rise in net exports contributed positively to real growth

 Congressional Budget Office; Department of Commerce, of GDP from the end of 2005 through most of 2008 (see
Bureau of Economic Analysis.
Figure 2-8). However, the global recession and the sharp
Note: Data are quarterly and are plotted through 2008. rise in the value of the dollar since last summer are

 


  
 together undercutting that source of strength. In the
fourth quarter of last year, exports fell even more (in real
stock prices reduced the net worth of households by
terms, 24 percent at an annual rate) than did imports
20 percent between the middle of 2007 and the fourth
(16 percent).
quarter of 2008. By CBO’s estimates, that decrease in
wealth reduced the growth of spending by about 1 per- The outlook for growth in the rest of the world has con-
centage point in 2008 and will have a similar effect in tinued to deteriorate, suggesting that trade is not likely to
2009. Weakness in the stock market and in house prices contribute to growth in the United States in the near
may further dampen consumer spending in 2009, with term (see Table 2-2). Economies that have relied heavily
part of the effect extending into 2010. on exports for economic growth––including many
emerging Asian economies, as well as Germany’s and
The financial turmoil has also played a role in weakening Japan’s—have been particularly hard hit as the global
households’ spending by reducing the credit available to downturn and credit squeeze have crushed demand for
consumers, especially for those with limited opportunity their exports. The situation is especially dire in Japan,
to borrow or little collateral. According to the Federal Taiwan, South Korea, and Singapore, evidenced by the
Reserve’s January 2009 survey of senior loan officers, double-digit rate (annualized) at which real GDP con-
banks had further tightened lending standards on credit tracted in those countries in the last quarter of 2008.
cards and other consumer loans. A significant number of
banks had also reduced the size of existing home equity Spending by State and Local Governments
lines of credit. State and local governments have reduced spending in
response to shortfalls in their revenues, and CBO expects
Investment and Net Exports further cuts to slow economic activity over the next two


? 
1
,%,
 years. Recent spending cuts have taken a variety of forms,
structures, equipment, and software), which had pla- including hiring and pay freezes, furloughs, layoffs,
teaued during the first three quarters of 2008, plunged at reductions in benefit programs, and decreases in pur-
a 21 percent annual rate in the fourth quarter—a rate chases. States and localities have also tapped reserves and,
comparable to the worst declines observed in past post- in a few cases, increased taxes. Some states have increased



 
 A PRELIMINARY ANALYSIS OF THE PRESIDENT’S BUDGET AND AN UPDATE OF CBO’S BUDGET AND ECONOMIC OUTLOOK 


both energy and food—consumer price inflation slowed

++
 in a number of other spending categories as well. The
precipitous drop in petroleum prices from an average of
Economies’ Inflation-Adjusted $133 per barrel in July 2008 to $39 per barrel in Febru-
Growth of GDP, 2009 ary 2009 had a particularly large effect on overall infla-

  tion, as motor fuel prices fell sharply. A decline in prices
Survey of for agricultural commodities also reduced consumer
Region/Country June 2008 Sept. 2008 Mar. 2009 prices. The food-at-home index of the consumer price
Eurozone 1.4 0.9 -2.6 index for all urban consumers (CPI-U) eased down
Germany 1.3 0.8 -3.2 slightly from its November 2008 peak.
United Kingdom 1.3 0.6 -3.0
Canada 2.1 1.8 -1.8 Inflation rates for consumer goods and services other
than energy and food (core inflation) also slowed during
Asia Pacific 4.8 4.6 -0.2 the past few months (see Figure 2-9). Although the core
Japan 1.5 0.9 -5.8
CPI-U grew at an average 2.4 percent rate through the
China 9.4 9.1 7.0
India 8.1 7.6 5.2 first three quarters of 2008, it rose at just a 0.6 percent
rate in the fourth quarter. Some of the reduction is likely
Latin America 3.9 3.7 -0.7 to be temporary, because declines in energy prices
Brazil 4.1 3.8 -0.1 affected prices in some categories (especially the index for
Mexico 3.0 2.6 -2.8 public transportation) and because vehicle prices fell
sharply—factors that are not likely to be repeated on such

 Congressional Budget Office based on data from
Consensus Economics, Inc. a scale in 2009. Some of the disinflation is likely to be
Note: GDP = gross domestic product.
persistent, however, as a general easing in core inflation is
typical during recessions. In addition, the large number
,#
.,
.,#
, of vacant housing units dampened the growth of rents in
down, as unfavorable credit market conditions have made recent months, and that condition is likely to persist for
it more difficult to finance capital projects and to borrow some time.
for the sake of cash management in the short term.

Falling incomes, declining consumer spending, and con-
,%+

tinued decreases in house prices reduced all major sources 5
. 




of state and local revenue collections in 2008. In the the fall. But the rate of decline slows after the first quar-
fourth quarter, collections from personal income taxes fell ter, in part because the effects of ARRA begin to take
by 0.4 percent (measured relative to those in the fourth hold. Reduced tax-withholding rates and increased aid to
quarter of 2007)––the first decline in more than five low-income households in the form of expanded unem-
years. Corporate tax payments decreased by double digits ployment insurance and payments from the Supplemen-
over the year. Sales tax collections were also lower in the tal Nutrition Assistance Program will support consumer
fourth quarter than a year earlier––the only such decline
spending in 2009, as will lower prices for energy. And the
on record during the past half century. Although revenues
stimulus legislation will also contribute to growth via
from property taxes continued to grow, the rate of growth
declined to 2.2 percent, contrasting with 5.4 percent a purchases of goods and services by the federal govern-
year earlier. ment and averted reductions in spending or increases in
taxes that would have otherwise occurred at the state and
 local levels. However, CBO expects that high unemploy-
* 

 ment, tight credit conditions, and the declines in wealth
been dominated by the fall in commodity prices—for will restrain the growth of consumption.


 28 A PRELIMINARY ANALYSIS OF THE PRESIDENT’S BUDGET AND AN UPDATE OF CBO’S BUDGET AND ECONOMIC OUTLOOK

Figure 2-9. rate at 7.2 percent. (That recovery path assumes that pol-
icies aimed at stabilizing financial markets prove to be
Core Consumer Price Index, successful.)
1985 to 2011
(Percentage change at annual rates) With a large and sustained output gap, inflation is
expected to be very low during the next several years. On
7
a fourth-quarter-to-fourth-quarter basis, the core con-
6 sumer price index is forecast to increase just 1.4 percent
in 2009, 1.0 percent in 2010, and 0.8 percent in 2011
5 (see Figure 2-9). Because energy prices are lower in 2009
than they were last year, the overall consumer price index
4 is expected to rise just 0.6 percent in 2009. Even as
3
energy prices are forecast to stabilize, growth in the con-
sumer price index is expected to remain low, at 1.3 per-
2 cent in 2010 and 1.1 percent in 2011. In fact, some
private-sector analysts are now concerned about defla-
1 tion—prices falling for a broad range of goods and ser-
vices for a protracted period. Although CBO’s forecast
0
1985 1990 1995 2000 2005 2010 indicates a drop in the CPI-U between 2008 and 2009,
that decline results from the fall in commodity prices—
Sources: Congressional Budget Office; Department of Labor,
not in prices for a broad range of goods and services—
Bureau of Labor Statistics.
and it is not persistent.
Notes: The core consumer price index excludes energy and food.
Data are quarterly and are plotted through 2011. The rate for 3-month Treasury bills is expected to average
only 0.3 percent in 2009; and for 10-year Treasury notes,
The forecast anticipates that business fixed investment
2.9 percent. Both of those rates are anticipated to rise in
will continue to decline in 2009, reflecting those tight
2010 and 2011 but to remain well below their long-term
lending conditions, much higher costs of funds (espe-
averages. Although large federal budget deficits in CBO’s
cially for equity), and weak demand for output that
would be produced with new capital. Housing invest- baseline projections would tend to boost interest rates,
ment is also expected to continue declining this year. In the weakness in economic activity and the very low infla-
addition, a continued drawdown of inventories and tion rate should hold down nominal interest rates for the
weakening foreign economies will restrain growth this next few years.
year. By the end of 2009, the unemployment rate is pro-
The American Recovery and Reinvestment Act’s
jected to reach 9.4 percent, as employment declines by an
additional 1-1/2 million jobs—for a total loss of nearly Impact on the Near-Term Outlook
6 million jobs since the recession started. CBO’s forecast incorporates the estimated impact of the
spending increases and tax reductions provided by
In the forecast, a recovery begins to take hold late in 2009 ARRA. The major provisions of that law provide for
and quickens in 2010, as the drawdown of inventories direct purchases of goods and services by the federal gov-
ends, housing investment begins to recover, and business ernment, transfers to state and local governments (both
investment responds to the improvement in overall eco- for infrastructure and for other purposes), payments to
nomic activity. And with labor markets no longer deterio- individuals, and temporary tax reductions for individuals
rating, and the negative effects of the drop in wealth and businesses. CBO believes that, without such stimu-
fading, consumer spending is expected to grow modestly. lus, the economy probably would have continued to con-
The unemployment rate declines to 8.5 percent by the tract sharply throughout 2009. The unemployment rate
end of 2010. In 2011, the projected output gap closes probably would have exceeded 10.0 percent by the end of
further, though GDP is still 4.3 percent below its poten- the year and peaked at around 10.5 percent in the first
tial by the end of that year, with the unemployment half of next year.

CBO

 
 A PRELIMINARY ANALYSIS OF THE PRESIDENT’S BUDGET AND AN UPDATE OF CBO’S BUDGET AND ECONOMIC OUTLOOK 

In projecting the impact of ARRA, CBO assessed the Steps to Stabilize Financial Markets
likely magnitude and timing of federal outlays and reve- CBO’s forecast assumes that the Federal Reserve and the
nue reductions, developing a range of estimates of the Treasury, along with the Federal Deposit Insurance Cor-
effects on real GDP. The agency grouped the various pro- poration, will continue to act vigorously to address the
visions into a number of general categories, each of which problems in financial markets. Programs created by those
was assumed to have a range of effects on the economy entities have provided funds or issued guarantees in large
that could be summarized by “multipliers,” or the cumu- amounts to financial institutions. Those programs have
lative impact that a dollar in stimulus would have on out- improved conditions in some financial markets and have
put.7 For example, CBO determined that, with a multi- reduced the risk of a collapse of the financial system. The
plier of 1.0 to 2.5, a one-time increase in federal forecast also assumes that the Federal Reserve will keep
purchases of goods and services of $1.00 in the second the federal funds rate close to zero and will continue to
quarter of this year would raise GDP by $1.00 to $2.50 supply very large amounts of credit to financial markets
in total over several quarters. The range of estimates for until financial conditions and the availability of credit
each category of stimulus is quite wide, reflecting a diver- begin to return to normal. In addition, the forecast
sity of views among economists as to their effectiveness. assumes that the central bank will act quickly to address
CBO’s forecast is based on roughly the midpoint between any adverse developments that threaten liquidity or the
the low and high estimated multipliers within each stability of the financial system.
category.
The Federal Reserve has announced that it will provide
Even after the fact, it will be quite difficult to assess the large amounts of additional funding to financial markets
impact of ARRA on the economy. Uncertainty is great this year. After its March policy meeting, the Federal
about both how the economy would perform in the Reserve stated that it will purchase up to an additional
absence of fiscal stimulus and the impact of stimulus. The $400 billion of securities for its portfolio—$300 billion
best estimates of the impact of stimulus will come later, in longer-term Treasury securities and $100 billion in
from studies carefully designed to isolate the effects of debt issued by the government-owned corporations
particular categories of stimulus from other influences on Fannie Mae and Freddie Mac. In addition to its more
the economy.8 traditional way of purchasing government-related securi-
ties to expand its balance sheet, the Federal Reserve has
In CBO’s forecast, the enactment of ARRA boosts real created two new programs for that purpose. In the first
GDP relative to that in a forecast of what would have program, designed in part to lower mortgage rates, the
happened in the absence of stimulus by about 2-1/2 per- central bank will purchase up to $1.25 trillion of mort-
cent in the fourth quarter of 2009 and by about 2-1/4 gage-backed securities (MBSs) issued by Fannie Mae,
percent in the fourth quarter of 2010 (see Table 2-3). Freddie Mac, and Ginnie Mae. Through March 11, the
The unemployment rate is lower than it would otherwise Federal Reserve had purchased a net $217 billion of
be by about 0.9 percentage points in the fourth quarter of MBSs. The second program, called the Term Asset-
2009 and 1.3 points in the fourth quarter of 2010. The Backed Security Loan Facility (TALF), is designed to
boost to total employment peaks at about 2-1/2 million increase the securitization of certain types of loans,
jobs in the second half of 2010. including commercial mortgages, auto loans, and student
loans. Under the TALF, the Federal Reserve will lend
7. For details, see Congressional Budget Office, “Estimated Macro- funds to private purchasers of top-rated securities backed
economic Impacts of the American Recovery and Reinvestment by such loans for up to a three-year period using those
Act of 2009.”
securities as collateral; the total amount provided by the
8. Examples of such studies include David Johnson, Jonathan Parker, facility may be as much as $1 trillion.
and Nicholas S. Souleles, “Household Expenditure and the
Income Tax Rebates of 2001,” American Economic Review,   The Treasury had bought about $107 billion of MBSs as
no. 5 (December 2006), pp. 1589–1610; and Christian Broda
and Jonathan Parker, “The Impact of the 2008 Tax Rebates on of February 28, 2009, and it continues to purchase them.
Consumer Spending: A First Look at the Evidence,” Kellogg To support the TALF, the Treasury will allocate funds
Insight (August 2008). from the Troubled Asset Relief Program to offset the


  
 

 

 





 /
-"0
 !  
!
Act of 2009, Fourth Quarters of Calendar Years 2009 to 2019
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Real GDP (Percentage change from baseline)
Low estimate of effect 1.4 1.1 0.4 0.1 0 0 -0.1 -0.2 -0.2 -0.2 -0.2
High estimate of effect 3.8 3.4 1.2 0.5 0.3 0.2 0.1 0 0 0 0

GDP Gapa (Percent)

Baseline -7.4 -6.3 -4.1 -2.2 -0.7 -0.1 0 0 0 0 0
Low estimate of effect -6.1 -5.3 -3.7 -2.0 -0.6 -0.1 0 0 0 0 0
High estimate of effect -3.9 -3.2 -2.9 -1.7 -0.5 0 0.1 0 0 0 0
Unemployment Rate (Percent)
Baseline 9.0 8.7 7.5 6.4 5.5 5.0 4.8 4.8 4.8 4.8 4.8
Low estimate of effect 8.5 8.1 7.2 6.3 5.4 5.0 4.8 4.8 4.8 4.8 4.8
High estimate of effect 7.8 6.8 6.6 6.0 5.3 4.9 4.8 4.8 4.8 4.8 4.8

Employment (Millions of jobs)

Baseline 141.6 143.3 146.2 149.3 152.1 153.9 154.9 155.7 156.4 157.0 157.7
Low estimate of effect 142.4 144.5 146.8 149.6 152.2 153.9 155.0 155.7 156.4 157.0 157.7
High estimate of effect 143.9 146.9 148.0 150.0 152.4 154.1 155.0 155.7 156.4 157.0 157.7

 Congressional Budget Office.

a. Real GDP is gross domestic product, excluding the effects of inflation. The GDP gap is the percentage difference between gross domestic
product and CBO’s estimate of potential GDP. Potential GDP is the estimated level of output that corresponds to a high level of use of labor
and capital resources. A negative gap indicates a high unemployment rate and low utilization rates for plant and equipment.

&  

  
  ( tially unchanged since January: The growth of potential
In addition to the funds allocated so far for the TALF, hours worked averages 0.6 percent annually from 2009 to
roughly $250 billion remained uncommitted under the 2019, and the growth of total factor productivity averages
TARP as of mid-March and could be used to inject addi- 1.3 percent during the same period.9 The projected pace
tional capital into banks or to support new programs. of capital accumulation, as measured by growth in the
capital services index, is slightly slower, averaging 2.9 per-
The FDIC has also provided substantial assistance to
cent during the period, down from 3.0 percent in Janu-
financial institutions, which continue to issue new debt
guaranteed by the FDIC under the Temporary Liquidity ary. Once the economy returns to its potential level in
Guarantee Program. That program, which guarantees 2014, CBO assumes that it will continue to produce
debt newly issued by banks and other financial institu- goods and services at or near its potential rate of growth.
tions, was covering more than $250 billion of debt as of
the end of January. The primary difference between the current projections
and the ones published in January is the effect of the
American Recovery and Reinvestment Act of 2009.
The Outlook Through 2019 Although ARRA will boost output significantly in
CBO expects that potential output will grow at an annual
rate of 2.3 percent on average during the 2009–2019  Total factor productivity is average real output per unit of com-
period, or at roughly the same pace as the agency bined labor and capital services. Its growth is defined as the
assumed in its January projections (see Table 2-4). The growth of real output that is not explained by the growth of labor
projections for labor input and productivity are essen- and capital.



 
 A PRELIMINARY ANALYSIS OF THE PRESIDENT’S BUDGET AND AN UPDATE OF CBO’S BUDGET AND ECONOMIC OUTLOOK 



Key Assumptions in CBO’s Projection of Potential Output



Average Annual Growth Projections

1950- 1974- 1982- 1991- 2002- 1950- 2009- 2015- 2009-
1973 1981 1990 2001 2008 2008 2014 2019 2019
Overall Economy
Potential Output 3.9 3.2 3.2 2.9 2.8 3.4 2.2 2.4 2.3
Potential Labor Force 1.6 2.5 1.7 1.1 1.1 1.6 0.8 0.4 0.6
Potential Labor
Force Productivitya 2.3 0.7 1.5 1.7 1.7 1.8 1.4 1.9 1.6
Nonfarm Business Sector
Potential Output 4.0 3.5 3.4 3.3 3.1 3.6 2.5 2.8 2.6
Potential Hours Worked 1.4 2.2 1.7 1.1 0.9 1.4 0.7 0.5 0.6
Capital Services 3.8 4.3 4.2 4.7 2.6 3.9 2.1 3.8 2.9
Potential TFP 1.9 0.7 0.9 1.1 1.6 1.4 1.3 1.3 1.3
Trend TFP 1.9 0.7 1.0 1.0 1.2 1.3 1.2 1.2 1.2
TFP adjustments 0 0 0 0.1 0.5 0.1 0.2 0.2 0.2
Price measurementb 0 0 0 0.1 0.2 0 0.2 0.2 0.2
Temporary adjustmentc 0 0 0 0.1 0.3 0.1 0 0 0
Contributions to the
Growth of Potential Output
(Percentage points)
Potential labor input 1.0 1.6 1.2 0.8 0.7 1.0 0.5 0.3 0.4
Capital services 1.1 1.3 1.3 1.4 0.8 1.2 0.6 1.1 0.9
Potential TFP 1.9
___ 0.7
___ 0.9
___ 1.1
___ 1.6
___ 1.4
___ 1.3
___ 1.3
___ 1.3
___
Total Contributions 4.0 3.5 3.4 3.3 3.1 3.6 2.5 2.8 2.6

Memorandum:



 d 2.6 1.3 1.7 2.2 2.2 2.2 1.8 2.3 2.0

 Congressional Budget Office.

Note: Total factor productivity (TFP) is average real output per unit of combined labor and capital services. The growth of TFP is defined as
the growth of real output that is not explained by the growth of labor and capital.
a. The ratio of potential output to the potential labor force.
b. An adjustment for a conceptual change in the official measure of the gross domestic product chained price index.
c. An adjustment for the unusually rapid growth of TFP between 2001 and 2003.
d. The estimated trend in the ratio of output to hours worked in the nonfarm business sector.

? %.%'

' a smaller amount of private capital. That result occurs
lus legislation on the business cycle will have dissipated because the reduction in overall national saving dampens
by the end of the projection period. In the latter part of spending on business fixed investment and the construc-
the period, the legislation reduces projected output by tion of housing. Although the size of such displacement is
roughly 0.1 percent, principally through its influence on very uncertain, CBO assumes that, in the long run, each
capital accumulation. dollar of additional federal debt crowds out about a third
of a dollar’s worth of private domestic capital (with the
Capital accumulation is affected because the increase in remainder of the rise in debt offset by increases in private
government debt is expected to displace, or “crowd out,” saving and inflows of foreign capital).


  
 

 

 






 !



  1
2009 to 2019
Estimated Forecast Projected Annual Average
2008a 2009 2010 2011 2012-2015 2016-2019
Nominal GDP (Billions of dollars)
b c
March 2009 14,257 14,047 14,576 15,233 18,138 21,164
b c
January 2009 14,304 14,241 14,591 15,347 19,077 22,500
Nominal GDP (Percentage change)
March 2009 3.3 -1.5 3.8 4.5 4.5 3.9
January 2009 3.6 -0.4 2.5 5.2 5.6 4.2
Real GDP (Percentage change)
March 2009 1.1 -3.0 2.9 4.0 3.6 2.3
January 2009 1.2 -2.2 1.5 4.2 3.7 2.3
GDP Price Index (Percentage change)
March 2009 2.2 1.5 0.8 0.5 0.9 1.6
January 2009 2.4 1.8 0.9 1.0 1.8 1.9
Consumer Price Indexd (Percentage change)
March 2009 3.8 -0.7 1.4 1.2 1.2 1.9
January 2009 4.1 0.1 1.7 1.8 2.2 2.2
Unemployment Rate (Percent)
March 2009 5.8 8.8 9.0 7.7 5.6 4.8
January 2009 5.7 8.3 9.0 8.0 5.7 4.8
Three-Month Treasury Bill Rate (Percent)
March 2009 1.4 0.3 0.9 1.8 4.0 4.7
January 2009 1.4 0.2 0.6 2.1 4.5 4.7
Ten-Year Treasury Note Rate (Percent)
March 2009 3.7 2.9 3.4 4.0 5.1 5.6
January 2009 3.7 3.0 3.2 3.6 5.2 5.4
Tax Bases (Billions of dollars)
Economic profits
b c
March 2009 1,496 1,269 1,386 1,547 1,822 1,940
b c
January 2009 1,533 1,384 1,413 1,559 2,001 2,187
Wages and salaries
b c
March 2009 6,543 6,496 6,743 6,953 8,315 9,709
b c
January 2009 6,548 6,551 6,740 7,011 8,742 10,324
Tax Bases (Percentage of GDP)
Economic profits
March 2009 10.5 9.0 9.5 10.2 10.4 9.5
January 2009 10.7 9.7 9.7 10.2 10.6 10.0
Wages and salaries
March 2009 45.9 46.2 46.3 45.6 45.9 45.9
January 2009 45.8 46.0 46.2 45.7 45.8 45.9
Memorandum:
Real Potential GDP (Percentage change)
March 2009 2.6 2.3 1.8 1.7 2.4 2.3
January 2009 2.6 2.4 2.0 1.9 2.4 2.3

 Congressional Budget Office; Department of Commerce, Bureau of Economic Analysis; Department of Labor, Bureau of Labor Statis-
tics; Federal Reserve Board.
Note: GDP = gross domestic product; percentage changes are measured from one year to the next.
a. Figures for the consumer price index, the unemployment rate, and the interest rates are actual values; the other 2008 figures are
estimates.
b. Level in 2015.
c. Level in 2019.
d. The consumer price index for all urban consumers.



 
 A PRELIMINARY ANALYSIS OF THE PRESIDENT’S BUDGET AND AN UPDATE OF CBO’S BUDGET AND ECONOMIC OUTLOOK 

Other factors, however, are expected to partially offset the
"

2
+
negative effect of the crowding out. Many of the legisla-


#


 ,%
tion’s provisions, such as funding for improvements to the differences in the timing of forecasts given the rapid
roads and highways, might add to the economy’s poten- deterioration in economic conditions. CBO’s forecast
tial output in much the same way that private capital reflects information available through early March,
investment does. Other provisions, such as funding for including data on employment and unemployment in
grants to increase access to college education or for February. In contrast, the Federal Reserve’s estimates were
research and development, could raise long-term produc- compiled in late January; the Administration’s forecast
tivity by enhancing people’s skills or speeding the pace of was completed in early February; and the Blue Chip '
technical innovation. And still other provisions could cre- sensus was compiled in early March, but prior to the
ate incentives for increased private investment. According release of the February data on labor markets.
to CBO’s estimates, provisions that could add to long-
term output account for between a quarter and one-third CBO’s forecast has a deeper downturn in economic activ-
of the legislation’s overall budgetary cost. ity for this year than is indicated by most other forecasts,
but it also has a somewhat faster rebound in 2010 and
2011. CBO’s projection for the change in real GDP in

"
2

 2009 (-3.0 percent) is much weaker than the Administra-
Forecast tion’s (-1.2 percent) and slightly weaker than the Blue
5

*
%  Chip consensus forecast (-2.6 percent) (see Table 2-6).
Reinvestment Act, the other major change since CBO On a fourth-quarter-to-fourth-quarter basis, CBO’s
presented its forecast in January is in the underlying out- projection (-1.5 percent) is below the Federal Reserve’s
look for the economy in 2009: It has worsened consider- central tendency (see Table 2-7). However, for 2010 and
ably. The labor market has deteriorated far more than had 2011, on average, CBO’s forecast for real growth of GDP
been anticipated, and the decline in business fixed invest- is similar to the Administration’s and is stronger than the
ment in the fourth quarter was more rapid than had been Blue Chip consensus forecast. CBO’s forecast is at the
expected. CBO also now projects a much sharper draw- high end of the range of estimates by the Federal Reserve
down of inventories over the next several quarters, as for 2010 but is within the central tendency for 2011.
declining production suggests that firms desire leaner
inventories than had been previously thought. News of CBO’s forecast for inflation in the near term is on the low
further weakness in foreign economies has also dampened end in comparison with the other forecasts. It is slightly
the outlook, as has the sharp decline in the stock market lower than those of both the Administration and the Blue
this year. Chip consensus in 2009 and 2010 but substantially lower
in 2011. CBO’s inflation forecast is within the Federal
Since January, CBO has lowered its estimates of inflation Reserve’s central tendency throughout the 2009–2011
for all of the projection period. The expectation of a period but at the low edge of that interval.
deeper recession and slow recovery implies high unem-
ployment rates and a great deal of excess capacity for Reflecting the projections of low inflation and persis-
many years. Those factors make it likely that the United tently high unemployment rates, interest rates for 2010
States will experience very low inflation for a long time. and 2011 in CBO’s forecast are also generally on the low
side of the range of estimates by others. Compared with
For 2010 through 2015, the current projections for the Blue Chip consensus estimates, CBO’s forecasts of
the growth of the CPI-U and the price index for GDP interest rates are identical in 2009, slightly lower on aver-
are significantly lower than the ones in January (see age in 2010, and significantly lower for 2011. (The Fed-
Table 2-5). Inflation is also lower in the latter years of eral Reserve does not publish a forecast of interest rates.)
the projection period because CBO assumes the long
spell of excess capacity will permit the Federal Reserve to For the entire projection horizon, 2009 to 2019, CBO is
achieve a slightly lower rate of inflation on average even estimating higher average growth than that implied by
when the economy returns to its potential. the Blue Chip consensus but lower growth than the


  
 

 

 





"

&0 


& Blue Chip


Calendar Years 2009 to 2019
Estimated Forecast Projected Annual Average
a
2008 2009 2010 2011 2012-2015 2016-2019
Nominal GDP (Billions of dollars)
b c
CBO 14,257 14,047 14,576 15,233 18,138 21,164
b c
Administration 14,281 14,291 14,902 15,728 19,415 23,108
b c
Blue Chip 14,265 14,065 14,515 15,255 18,667 22,603
Nominal GDP (Percentage change)
CBO 3.3 -1.5 3.8 4.5 4.5 3.9
Administration 3.4 0.1 4.3 5.5 5.4 4.4
Blue Chip 3.3 -1.4 3.2 5.1 5.2 4.9
Real GDP (Percentage change)
CBO 1.1 -3.0 2.9 4.0 3.6 2.3
Administration 1.3 -1.2 3.2 4.0 3.6 2.6
Blue Chip 1.1 -2.6 1.9 3.4 3.0 2.6
GDP Price Index (Percentage change)
CBO 2.2 1.5 0.8 0.5 0.9 1.6
Administration 2.2 1.2 1.1 1.5 1.8 1.8
Blue Chip 2.2 1.2 1.2 1.7 2.2 2.3
Consumer Price Indexd (Percentage change)
CBO 3.8 -0.7 1.4 1.2 1.2 1.9
Administration 3.8 -0.6 1.6 1.8 2.1 2.1
Blue Chip 3.8 -0.8 1.6 2.1 2.4 2.5
Unemployment Rate (Percent)
CBO 5.8 8.8 9.0 7.7 5.6 4.8
Administration 5.8 8.1 7.9 7.1 5.3 5.0
Blue Chip 5.8 8.6 9.1 8.1 6.3 5.5
Three-Month Treasury Bill Rate (Percent)
CBO 1.4 0.3 0.9 1.8 4.0 4.7
Administration 1.4 0.3 1.6 3.4 4.0 4.0
Blue Chip 1.4 0.3 1.0 2.8 4.0 4.2
Ten-Year Treasury Note Rate (Percent)
CBO 3.7 2.9 3.4 4.0 5.1 5.6
Administration 3.7 2.8 4.0 4.8 5.2 5.2
Blue Chip 3.7 2.9 3.7 4.5 5.2 5.4

 Congressional Budget Office; Office of Management and Budget; Department of Commerce, Bureau of Economic Analysis;
Department of Labor, Bureau of Labor Statistics; Federal Reserve Board; and Aspen Publishers, Inc., Blue Chip Economic Indicators
(March 10, 2009).
Note: GDP = gross domestic product; percentage changes are measured from one year to the next.
a. Figures for the consumer price index, the unemployment rate, and the interest rates are actual values; the other 2008 figures are
estimates.
b. Level in 2015.
c. Level in 2019.
d. The consumer price index for all urban consumers.


CHAPTER TWO A PRELIMINARY ANALYSIS OF THE PRESIDENT’S BUDGET AND AN UPDATE OF CBO’S BUDGET AND ECONOMIC OUTLOOK 35

estimate by the Administration. CBO projects that real For the years after 2011, the Federal Reserve provides
GDP will be $15.3 trillion in 2019, for an average some longer-run projections, including estimates of levels
growth rate of 2.5 percent per year.10 The Blue Chip’s fig- of real GDP growth and the unemployment rate that
ure is $14.9 trillion, for an average annual growth rate of are sustainable in the long run and of the inflation rate
2.3 percent; and the Administration’s, $15.8 trillion, for
that is consistent with the dual objectives of maximum
a rate of 2.8 percent.
employment and price stability given “appropriate
There are smaller but still significant differences among monetary policy.” CBO’s projection of potential eco-
forecasters for the average rates of unemployment, infla- nomic growth, at 2.6 percent five to six years from now, is
tion, and interest rates for the latter years of the projec- within the Federal Reserve's central tendency of 2.5 per-
tion horizon. For 2016 to 2019, CBO expects about the cent to 2.7 percent for that time frame. CBO’s projection
same average unemployment rate as the Administration
of the unemployment rate from 2016 to 2019, at 4.8 per-
does but a lower rate than does the Blue Chip consensus.
Similarly, CBO’s projection for inflation in those years is cent, is also within the Federal Reserve's central tendency
about the same as the Administration’s but lower than of 4.8 percent to 5.0 percent. However, CBO’s projection
that of the Blue Chip consensus. Last, CBO’s projections of 1.6 percent inflation based on the price index
of interest rates are somewhat higher. for personal consumption expenditures is slightly below
the Federal Reserve’s central tendency of 1.7 percent to
10. Measured in 2000 chain-weighted dollars. 2.0 percent.

CBO
 36 A PRELIMINARY ANALYSIS OF THE PRESIDENT’S BUDGET AND AN UPDATE OF CBO’S BUDGET AND ECONOMIC OUTLOOK

Table 2-7.
Comparison of Economic Forecasts by the Federal Reserve and CBO for
Calendar Years 2009, 2010, and 2011
Federal Reserve
Range Central Tendency CBO
2009

 

 


 
  

Real GDP -2.5 to 0.2 -1.3 to -0.5 -1.5
PCE Price Indexa -0.5 to 1.5 0.3 to 1.0 0.5
Core PCE Price Indexb 0.6 to 1.5 0.9 to 1.1 0.7
Average Level, Fourth Quarter (Percent)
Civilian Unemployment Rate 8.0 to 9.2 8.5 to 8.8 8.8


Fourth Quarter to Fourth Quarter (Percentage change)
Real GDP 1.5 to 4.5 2.5 to 3.3 4.1
PCE Price Indexa 0.7 to 1.8 1.0 to 1.5 1.0
Core PCE Price Indexb 0.4 to 1.7 0.8 to 1.5 0.8
Average Level, Fourth Quarter (Percent)
Civilian Unemployment Rate 7.0 to 9.2 8.0 to 8.3 9.0

2011

 

 


 
  

Real GDP 2.3 to 5.5 3.8 to 5.0 4.1
PCE Price Indexa 0.2 to 2.1 0.9 to 1.7 0.9
Core PCE Price Indexb 0 to 1.8 0.7 to 1.5 0.7
Average Level, Fourth Quarter (Percent)
Civilian Unemployment Rate 5.5 to 8.0 6.7 to 7.5 7.7

Sources: Congressional Budget Office; Federal Reserve Board, “Summary of Economic Projections for the Meeting of January 27–28, 2009”
(February 18, 2009).
Notes: GDP = gross domestic product; PCE = personal consumption expenditure.
The range of estimates from the Federal Reserve reflects all views of the members of the Federal Open Market Committee.
The central tendency reflects the most common views of the committee’s members.
a. The PCE chained price index.
b. The PCE chained price index excluding prices for food and energy.

CBO
 APPENDIX

A
CBO’s Economic Projections for 2009 to 2019

T , 


?? 
'
tion in the body of the report by showing the Congressio-
Instead, the projected values shown in the tables for 2012
to 2019 reflect CBO’s assessment of average values for
nal Budget Office’s (CBO’s) year-by-year economic pro- that period. That assessment takes into account economic
jections for 2009 to 2019 (by calendar year in Table A-1 and demographic trends but does not attempt to forecast
and by fiscal year in Table A-2). CBO does not forecast the frequency and size of ups and downs in the business
cyclical fluctuations in its projections for years after 2011. cycle.


 38 A PRELIMINARY ANALYSIS OF THE PRESIDENT’S BUDGET AND AN UPDATE OF CBO’S BUDGET AND ECONOMIC OUTLOOK

Table A-1.
CBO’s Year-by-Year Forecast and Projections for Calendar Years 2009 to 2019
Estimated Forecast Projected
a
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Nominal GDP
(Billions of dollars) 14,257 14,047 14,576 15,233 15,950 16,684 17,421 18,138 18,873 19,624 20,381 21,164
Nominal GDP
(Percentage change) 3.3 -1.5 3.8 4.5 4.7 4.6 4.4 4.1 4.1 4.0 3.9 3.8

Real GDP
(Percentage change) 1.1 -3.0 2.9 4.0 4.1 4.0 3.5 2.7 2.5 2.4 2.3 2.2
GDP Price Index
(Percentage change) 2.2 1.5 0.8 0.5 0.6 0.6 0.9 1.4 1.5 1.6 1.6 1.6

PCE Price Indexb

(Percentage change) 3.3 -0.1 1.1 1.0 0.8 0.8 1.1 1.4 1.6 1.6 1.6 1.6

Core PCE Price Indexc

(Percentage change) 2.2 1.0 0.8 0.7 0.5 0.6 1.0 1.4 1.6 1.6 1.6 1.6

Consumer Price Indexd

(Percentage change) 3.8 -0.7 1.4 1.2 1.0 1.0 1.2 1.6 1.9 1.9 1.9 1.9

Core Consumer Price Indexe

(Percentage change) 2.3 1.5 1.1 0.9 0.7 0.8 1.2 1.6 1.9 1.9 1.9 1.9

Unemployment Rate
(Percent) 5.8 8.8 9.0 7.7 6.6 5.7 5.1 4.9 4.8 4.8 4.8 4.8
Three-Month Treasury
Bill Rate (Percent) 1.4 0.3 0.9 1.8 3.0 3.9 4.4 4.7 4.7 4.8 4.8 4.8

Ten-Year Treasury
Note Rate (Percent) 3.7 2.9 3.4 4.0 4.6 5.0 5.3 5.4 5.5 5.6 5.6 5.6
Tax Bases
(Billions of dollars)
Economic profits 1,496 1,269 1,386 1,547 1,656 1,764 1,812 1,822 1,859 1,884 1,915 1,940
Wages and salaries 6,543 6,496 6,743 6,953 7,338 7,662 7,990 8,315 8,651 8,997 9,347 9,709

Tax Bases
(Percentage of GDP)
Economic profits 10.5 9.0 9.5 10.2 10.4 10.6 10.4 10.0 9.9 9.6 9.4 9.2
Wages and salaries 45.9 46.2 46.3 45.6 46.0 45.9 45.9 45.8 45.8 45.8 45.9 45.9

Sources: Congressional Budget Office; Department of Commerce, Bureau of Economic Analysis; Department of Labor, Bureau of Labor
Statistics; Federal Reserve Board.
Note: GDP = gross domestic product; PCE = personal consumption expenditure. Percentage changes are measured from one year to the
next.
a. Figures for the consumer price index, the unemployment rate, and the interest rates are actual values; other 2008 figures are estimates.
b. The PCE chained price index.
c. The PCE chained price index excluding prices for food and energy.
d. The consumer price index for all urban consumers.
e. The consumer price index for all urban consumers excluding prices for food and energy.

CBO
APPENDIX A A PRELIMINARY ANALYSIS OF THE PRESIDENT’S BUDGET AND AN UPDATE OF CBO’S BUDGET AND ECONOMIC OUTLOOK 




1,3,1+ 
+
 1'
Actual Forecast Projected

 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Nominal GDP
(Billions of dollars) 14,222 14,057 14,405 15,061 15,774 16,496 17,241 17,957 18,688 19,436 20,191 20,966
Nominal GDP
(Percentage change) 4.3 -1.2 2.5 4.6 4.7 4.6 4.5 4.2 4.1 4.0 3.9 3.8

Real GDP
(Percentage change) 1.9 -2.9 1.5 4.0 4.1 4.0 3.7 2.9 2.5 2.4 2.3 2.2
GDP Price Index
(Percentage change) 2.4 1.7 0.9 0.6 0.6 0.6 0.8 1.3 1.5 1.6 1.6 1.6

PCE Price Indexa

(Percentage change) 3.7 0.2 1.0 1.0 0.8 0.8 1.0 1.3 1.6 1.6 1.6 1.6

Core PCE Price Indexb

(Percentage change) 2.2 1.3 0.8 0.7 0.6 0.6 0.9 1.3 1.6 1.6 1.6 1.6

Consumer Price Indexc

(Percentage change) 4.4 -0.5 1.2 1.3 1.0 0.9 1.1 1.5 1.9 1.9 1.9 1.9

Core Consumer Price Indexd

(Percentage change) 2.4 1.6 1.2 0.9 0.8 0.7 1.1 1.5 1.9 1.9 1.9 1.9

Unemployment Rate
(Percent) 5.3 8.2 9.2 8.0 6.8 5.9 5.2 4.9 4.8 4.8 4.8 4.8
Three-Month Treasury
Bill Rate (Percent) 2.1 0.3 0.8 1.6 2.7 3.7 4.4 4.6 4.7 4.7 4.8 4.8

Ten-Year Treasury
Note Rate (Percent) 3.9 2.9 3.3 3.9 4.5 4.9 5.2 5.4 5.5 5.6 5.6 5.6
Tax Bases
(Billions of dollars)
Economic profits 1,563 1,285 1,340 1,512 1,630 1,740 1,807 1,816 1,852 1,877 1,909 1,933
Wages and salaries 6,521 6,500 6,647 6,901 7,258 7,579 7,909 8,232 8,566 8,910 9,258 9,617

Tax Bases
(Percentage of GDP)
Economic profits 11.0 9.1 9.3 10.0 10.3 10.5 10.5 10.1 9.9 9.7 9.5 9.2
Wages and salaries 45.9 46.2 46.1 45.8 46.0 45.9 45.9 45.8 45.8 45.8 45.9 45.9

 Congressional Budget Office; Department of Commerce, Bureau of Economic Analysis; Department of Labor, Bureau of Labor
Statistics; Federal Reserve Board.
Note: GDP = gross domestic product; PCE = personal consumption expenditure. Percentage changes are measured from one year to the
next.
a. The PCE chained price index.
b. The PCE chained price index excluding prices for food and energy.
c. The consumer price index for all urban consumers.
d. The consumer price index for all urban consumers excluding prices for food and energy.





B
Contributors to the Revenue and
Spending Projections

 #


  
 %  



this report:

!

: Unit Chief
David Weiner Unit Chief
Paul Burnham Retirement income
Grant Driessen Excise taxes
Barbara Edwards Social insurance taxes, Federal Reserve System earnings
Zachary Epstein Customs duties, miscellaneous receipts
Pamela Greene Corporate income taxes, estate and gift taxes
Ed Harris Individual income taxes
Athiphat Muthitacharoen Estate tax modeling
Larry Ozanne Capital gains realizations
Kevin Perese Tax modeling
Kristy Piccinini Capital gains realizations
Kurt Seibert Earned income tax credit, depreciation
Joshua Shakin Individual income taxes

"


Defense, International Affairs, and Veterans’ Affairs
-$
 Unit Chief
John Chin International development and security, international financial
institutions
Kent Christensen Defense
Sunita D’Monte International affairs, veterans’ health care
Raymond Hall Defense (research and development, stockpile sales, atomic energy)


  
 

 

 


Defense, International Affairs, and Veterans’ Affairs (Continued)


@# Defense (military construction and family housing, military activities in
Iraq and Afghanistan and the war on terrorism), veterans’ housing
Dawn Sauter Regan Defense (military personnel)
Matthew Schmit Military retirement, military health care
Jason Wheelock Defense (other programs, operations and maintenance, radiation
exposure compensation, energy employees’ occupational illness
compensation)
Camille Woodland Veterans’ readjustment benefits, reservists’ educational benefits
Dwayne Wright Veterans’ compensation and pensions

Health Systems and Medicare

 % Unit Chief
Stephanie Cameron Medicare, Public Health Service
Mindy Cohen Medicare, Public Health Service
Holly Harvey Medicare
Jean Hearne Medicare
Lori Housman Medicare
Jamease Kowalczyk Medicare, Public Health Service
Julie Lee Medicare
Lara Robillard Medicare, Public Health Service

Income Security and Education

Sam Papenfuss Unit Chief
Christina Hawley Anthony Unemployment insurance, training programs, Administration on
Aging, Smithsonian, arts and humanities, report coordinator
Chad Chirico Housing assistance, Fannie Mae and Freddie Mac, Troubled Asset
Relief Program
Sheila Dacey Old-Age and Survivors Insurance, Social Security trust funds, Pension
Benefit Guaranty Corporation
Kathleen FitzGerald Supplemental Nutrition Assistance Program (formerly Food Stamps)
and other nutrition programs
Justin Humphrey Elementary and secondary education, Pell grants, student loans
Deborah Kalcevic Student loans, higher education
Jonathan Morancy Child Support Enforcement, Temporary Assistance for Needy
Families, foster care, Social Services Block Grant program,
child care programs, child and family services
David Rafferty Disability Insurance, Supplemental Security Income
Jessica Sherry Low Income Home Energy Assistance Program, refugee assistance,
Pension Benefit Guaranty Corporation


  A PRELIMINARY ANALYSIS OF THE PRESIDENT’S BUDGET AND AN UPDATE OF CBO’S BUDGET AND ECONOMIC OUTLOOK 

Low-Income Health Programs and Prescription Drugs

A:% Unit Chief
Julia Christensen Food and Drug Administration, prescription drug issues
Sean Dunbar Medicaid, State Children’s Health Insurance Program, Public Health
Service
Kirstin Nelson Medicaid, Federal Employees Health Benefits program, Public Health
Service
Andrea Noda Medicare Part D, prescription drug issues, Public Health Service
Lisa Ramirez-Branum Medicaid, prescription drug issues
Robert Stewart Medicaid, State Children’s Health Insurance Program, Indian Health
Service
Ellen Werble Food and Drug Administration, prescription drug issues, Public Health
Service
Rebecca Yip Medicare Part D, Medicaid prescription drug policy

Natural and Physical Resources

A

# % Unit Chief
Leigh Angres Science and space exploration, Bureau of Indian Affairs, justice
Megan Carroll Energy, conservation and land management, air transportation
Mark Grabowicz Justice, Postal Service
Kathleen Gramp Deposit insurance, energy, Outer Continental Shelf receipts,
spectrum auction receipts
Greg Hitz Agriculture
Daniel Hoople Community and regional development, Federal Emergency
Management Agency
David Hull Agriculture
James Langley Agriculture
Susanne Mehlman Pollution control and abatement, Federal Housing Administration
and other housing credit programs, including Fannie Mae and
Freddie Mac
Matthew Pickford General government
Sarah Puro Highways, Amtrak, mass transit
Deborah Reis Recreation, water transportation, legislative branch, conservation and
land management, other natural resources
Aurora Swanson Housing finance, water resources
Susan Willie Commerce, Small Business Administration, Universal Service Fund

Other
Janet Airis Unit Chief, Scorekeeping; legislative branch appropriation bill
Jeffrey Holland Unit Chief, Projections
Edward Blau Authorization bills


  
 

 

 




 
  Federal pay, monthly Treasury data, report coordinator
Jared Brewster National income and product accounts, other retirement, report
coordinator
Joanna Capps Appropriation bills (Interior and the environment, Labor–Health and
Human Services)
Mary Froehlich Computer support
Wendy Kiska Troubled Asset Relief Program
Amber Marcellino Federal civilian retirement, other interest, report coordinator
Damien Moore Fannie Mae and Freddie Mac, deposit insurance
Virginia Myers Appropriation bills (Commerce–Justice, financial services, general
government)
Jennifer Reynolds Appropriation bills (Agriculture, foreign relations)
Mark Sanford Appropriation bills (Defense, Homeland Security)
Eric Schatten Interest on the public debt, Troubled Asset Relief Program, report
coordinator
Phan Siris Computer support
Esther Steinbock Appropriation bills (Transportation–Housing and Urban Development,
military construction and veterans’ affairs, energy and water)
Patrice Watson Database system administrator
Steve Weinberg Deposit insurance