CHAIRMEN CBO’s Analysis of the President’s FY 2012 Budget

BILL FRENZEL
March 18, 2011
JIM NUSSLE
TIM PENNY
CHARLIE STENHOLM Today, the Congressional Budget Office (CBO) released its preliminary
analysis of President Obama’s FY 2012 budget request, which estimates
PRESIDENT
MAYA MACGUINEAS
that the President’s budget will fall far short of the Administration’s own
goal of balancing the non-interest budget by 2015 and stabilizing the debt
DIRECTORS as a share of the economy. Whereas the President’s budget had projected
BARRY ANDERSON
deficits would fall to around 3 percent of GDP and debt would stabilize
ROY ASH
CHARLES BOWSHER below 77 percent, CBO estimates deficits will reach 4.9 percent of GDP in
STEVE COLL 2021, and debt will continue to rise to above 87 percent.
DAN CRIPPEN
VIC FAZIO
WILLIAM GRADISON This analysis reaffirms our previous concerns that the President’s budget
WILLIAM GRAY, III does not go far enough to stabilize the debt, and reinforces the fact that
WILLIAM HOAGLAND
DOUGLAS HOLTZ-EAKIN
doing so will require looking beyond non-security discretionary
JIM JONES spending.
LOU KERR
JIM KOLBE
JAMES MCINTYRE, JR. Through 2021, CBO estimates deficits of nearly $9.5 trillion as compared
DAVID MINGE the $7.2 trillion estimated by OMB. The difference stems primarily from
MARNE OBERNAUER, JR. two sources. First, OMB relies on more optimistic economic and technical
JUNE O’NEILL
PAUL O’NEILL assumptions, resulting in nearly $1.3 trillion less in baseline deficits.
RUDOLPH PENNER Secondly, OMB’s estimates incorporate $777 billion (including interest) in
PETER PETERSON
unspecified savings to offset several years of “doc fixes” and finance
ROBERT REISCHAUER
ALICE RIVLIN transportation spending. The remaining difference stems from different
CHARLES ROBB estimates of various policies.
MARTIN SABO
ALAN K. SIMPSON
GENE STEUERLE
Fig. 1: Factors explaining different deficit levels (billions)
DAVID STOCKMAN 2012-2021
JOHN TANNER Deficits in President’s Budget (OMB) $7,202
LAURA TYSON Different Economic and Technical Assumptions in Baseline* $1,272
PAUL VOLCKER Exclusions of Unspecified Offsets in Budget $777
CAROL COX WAIT Different Cost Estimates of Policy Proposals $219
DAVID M. WALKER Deficits in President’s Budget (CBO) $9,470
JOSEPH WRIGHT, JR. *This also incorporates a small amount of legislative changes in the baseline.
SENIOR ADVISORS
ELMER STAATS This analysis reinforces the importance of comprehensive reform which
ROBERT STRAUSS addresses not only domestic discretionary spending, but also tackles
defense spending, slows the growth in entitlement spending, and reforms
the tax code. Failure to address all areas of the budget will make it nearly
impossible to bring our medium and long-term fiscal situation under
control.

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 Budget Projections

Under CBO’s estimate of the President’s budget, deficits would reach $1.4 trillion (9.5
percent of GDP) in 2011 and $1.1 trillion (7.4 percent of GDP) in 2012. By 2015, deficits
would fall to a low of 4.1 percent of GDP – as the economy recovers, rescue measures
wind down, and some of the President’s deficit reduction policies phase in – but will rise
again thereafter, reaching 4.9 percent of GDP by 2021. These estimates are considerably
higher than OMB’s, which show deficits holding fairly constant at around 3 percent of
GDP for the latter half of the decade.

Spending under CBO’s estimates will never fall below 23 percent of GDP, and will
exceed 24 percent by the end of the budget window. This is nearly 1 percent of GDP
higher than OMB’s estimates, and substantially above historical averages of less than 21
percent of GDP. Revenues, meanwhile, are projected to rise from 14.8 percent of GDP
this year to 19 percent by 2016 and 19.3 percent by 2021. This would put revenues
modestly above historical averages (just over 18 percent of GDP), but somewhat below
OMB’s estimates of 20 percent of GDP by 2021.

Fig. 2: Differences in Projections for the President’s Budget Proposal (Billions)

2012-
Fiscal Year 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
2021
REVENUE
2012 Budget (CBO) 14.8% 16.2% 17.7% 18.6% 18.9% 19.0% 19.1% 19.1% 19.2% 19.2% 19.3% 18.7%
2012 Budget (OMB) 14.4% 16.6% 17.9% 18.7% 19.1% 19.3% 19.5% 19.6% 19.8% 19.9% 20.0% 19.0%
Baseline (CBO) 14.8% 16.3% 18.8% 19.9% 20.1% 20.0% 20.3% 20.4% 20.5% 20.7% 20.8% 19.9%
Baseline (BEA) 14.4% 16.7% 18.7% 20.0% 20.0% 20.1% 20.5% 20.7% 21.0% 21.1% 21.3% 20.0%
OUTLAYS
2012 Budget (CBO) 24.3% 23.6% 23.2% 23.0% 23.0% 23.4% 23.4% 23.4% 23.8% 24.0% 24.2% 23.5%
2012 Budget (OMB) 25.3% 23.6% 22.5% 22.4% 22.3% 22.6% 22.5% 22.5% 22.8% 23.0% 23.1% 22.7%
Baseline (CBO) 24.7% 23.3% 23.1% 23.0% 23.1% 23.5% 23.4% 23.3% 23.7% 23.9% 24.0% 23.5%
Baseline (BEA) 25.0% 23.3% 22.6% 22.6% 22.6% 22.8% 22.7% 22.7% 22.9% 23.1% 23.3% 22.9%
DEFICITS (Percent of GDP)
2012 Budget (CBO) 9.5% 7.4% 5.5% 4.4% 4.1% 4.4% 4.3% 4.3% 4.7% 4.8% 4.9% 4.8%
2012 Budget (OMB) 10.9% 7.0% 4.6% 3.6% 3.2% 3.3% 3.0% 2.9% 3.0% 3.1% 3.1% 3.7%
Baseline (CBO) 9.8% 7.0% 4.3% 3.1% 3.0% 3.4% 3.1% 2.9% 3.2% 3.2% 3.2% 3.6%
Baseline (BEA) 10.6% 6.6% 3.8% 2.6% 2.6% 2.8% 2.2% 1.9% 1.9% 2.0% 2.0% 2.8%
Deficits ($ billions)
2012 Budget (CBO) $1,399 $1,081 $692 $513 $538 $635 $590 $585 $665 $710 $729 $6,737
2012 Budget (OMB) $1,645 $1,101 $768 $645 $607 $649 $627 $619 $681 $735 $774 $7,205
Baseline (CBO) $1,480 $1,100 $704 $533 $551 $659 $617 $610 $696 $739 $763 $6,971
Baseline (BEA) $1,593 $1,036 $643 $463 $496 $552 $460 $417 $438 $472 $488 $5,465

With spending at high and growing levels and revenues failing to keep up, the
President’s budget is expected to cause the national debt to expand substantially. Under
CBO’s estimate, the debt will grow from about 69 percent of GDP at the end of 2011 (and
only 36 percent back in 2007), to nearly 80 percent of GDP in 2016 and over 87 percent by
2021.

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Committee for a Responsible Federal Budget │2

 These projections are substantially worse than OMB’s estimate that debt will stabilize at
below 77 percent through the decade, and if allowed to occur would bring the debt to
potentially dangerous levels. Stabilizing the debt as a share of the economy should be
considered the absolute minimum of what we must do. It would be far more preferable
to reduce the debt-to-GDP levels to below 60 percent.

Fig. 3: Debt Held by the Public (Percent of GDP)

90%

80%

70%

60%

50%

Budget (CBO) Current Law (CBO)

40% Fiscal Commission Budget (OMB)
Current Law (OMB)

30%
20

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20

20

20

20

20

20

20

20

20

20

20

20

20

20

20
05

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Policy Changes

Relative to current law, CBO projects that the President’s budget will add $2.7 trillion to
the deficit, compared to $1.7 trillion estimated by OMB. Among the most costly
proposals are an extension of the 2001/03/10 tax cuts for those making under $250,000
and continued AMT patches ($3,102 billion over ten years), continued doc fixes ($298
billion), new spending on transportation ($213 billion), the continuation of the American
Opportunity Tax Credit for college students ($90 billion), and the permanent extension
of the R & E tax credit ($88 billion).

Among the largest deficit-reducing policies includes a limitation on the size of itemized
deductions for higher earners ($293 billion), reforms to the international tax system ($133
billion), and a variety of measures to reduce health care spending ($48 billion). The
President’s non-security discretionary freeze and the assumption that war spending will
cost $50 billion a year also contribute to deficit reduction, leading to about $948 billion
less in discretionary spending.

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Committee for a Responsible Federal Budget │3

 Fig. 4: Ten Year Deficit Impact of Policy Changes in the President’s Budget
OMB CBO
Current Law Deficit $5,465 $6,737
Extend 2001/2003/2010 Tax Cuts for Income below $250,000 and
$3,194 $3,102
Continue AMT Patches*
Extend the American Opportunity Tax Credit $94 $90
Extend Research & Experimentation Credit $106 $88
Other Tax Cuts for Individuals and Businesses $73 $89
Limit Itemized Deductions to Pay for 3-year AMT Patch ($321) ($293)
Financial and Energy Taxes ($100) ($94)
Reform U.S. international tax system ($129) ($133)
Reform Unemployment Taxes ($61) ($47)
Other Tax Changes ($161) ($82)
Sub-Total, Tax Changes $2,695 $2,720

Spending Proposals
Enact Doc Fixes $370 $298
Specified Health Spending Reductions ($62) ($48)
Reduce Fraud and Abuse (Program Integrity Measures) ($69) ($22)
Discretionary Changes (Includes $50 Billion War Spending Plug) ($1,190) ($948)
~
Increase Transportation Spending $241 $213
Other Spending Changes $86 $1
Sub-Total, Spending ($624) ($506)

Unspecified Deficit Reduction

Unspecified Measures to Offset Doc Fixes ($315) n/a
Unspecified Measures to Fully Finance Transportation Spending ($328) n/a
Not
Sub-Total, Unspecified ($643) #
Counted

Net Interest Changes $311 $519

Change in Deficit $1,739 $2,733

Deficit under President's Budget $7,205 $9,470

*Includes taxation of capital gains and dividends at a 20% rate on income above $250,000 a year.
~
Includes Pell Grant adjustments and baseline transportation funding.
#
CBO does not score these changes since they lack specificity.

The $1 trillion difference between CBO’s and OMB’s deficit reduction estimates is
largely the result of the so-called “magic asterisks” in the President’s budget. The
President’s budget assumes doc fixes will be fully offset without identifying these offsets
beyond the first two years, and that unspecified “bipartisan financing” will be available
to pay for existing and new transportation spending. Including interest, we estimate
these measures total around $777 billion. OMB and CBO are also working off of different
discretionary baselines, resulting in less “savings” for the President’s discretionary path.

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Committee for a Responsible Federal Budget │4

 In addition, the two scoring agencies have different estimates (and in some cases
classifications) for a large number of policy proposals.

Conclusion

Unfortunately – but not unsurprisingly – CBO’s estimate of the President’s budget

shows that we are on a dangerous fiscal path, even if we enact the deficit-reducing
policies proposed in the budget. This demonstrates, quite clearly, that the debt cannot be
stabilized by simply freezing non-security discretionary spending and identifying a few
opportunities to raise revenue and reduce spending in a relatively painless way.

Real fiscal reforms will require looking at all areas of the budget – reducing defense
spending and cutting tax expenditures, but most importantly addressing the long-term
growth of Social Security, Medicare, and Medicaid. Though the President’s budget takes
some important steps to reduce spending, it fails to truly tackle any of these areas.

In the coming weeks and months, the President has an opportunity to take on these
tough issues in a meaningful way. Today, a bipartisan group of 64 Senators sent
President Obama a letter encouraging him to do just that. The President should heed
this call and work with Members of both parties to bring the debt under control. The
nation’s future depends on it.

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Committee for a Responsible Federal Budget │5