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CBO — Updated Budget Projections: Fiscal Years 2013 to 2023
Updated Budget Projections: Fiscal Years 2013 to 2023
Source: Congressional Budget Office
If the current laws that govern federal taxes and spending do not change, the budget deficit will shrink this year to $642 billion, CBO estimates, the smallest shortfall since 2008. Relative to the size of the economy, the deficit this year—at 4.0 percent of gross domestic product (GDP)—will be less than half as large as the shortfall in 2009, which was 10.1 percent of GDP.
Because revenues, under current law, are projected to rise more rapidly than spending in the next two years, deficits in CBO’s baseline projections continue to shrink, falling to 2.1 percent of GDP by 2015. However, budget shortfalls are projected to increase later in the coming decade, reaching 3.5 percent of GDP in 2023, because of the pressures of an aging population, rising health care costs, an expansion of federal subsidies for health insurance, and growing interest payments on federal debt. By comparison, the deficit averaged 3.1 percent of GDP over the past 40 years and 2.4 percent in the 40 years before fiscal year 2008, when the most recent recession began. During the next 10 years, both revenues and outlays are projected to be above their 40-year averages as a percentage of GDP (see figure below).
CBO — How Does Growth in the Cost of Goods and Services for the Elderly Compare to That for the Overall Population?
How Does Growth in the Cost of Goods and Services for the Elderly Compare to That for the Overall Population?
Source: Congressional Budget Office
As discussed in earlier blog posts, our colleague Jeffrey Kling testified yesterday about changing the measure used to index Social Security, other federal programs, and the tax code for inflation. Currently, the tax code and many federal spending programs are indexed to one of two versions of the consumer price index (CPI): the consumer price index for all urban consumers (CPI-U) or the consumer price index for urban wage earners and clerical workers (CPI-W). Some proposals would switch to using the chained CPI, an alternative measure that grows more slowly than either the CPI-U or CPI-W (which produce similar estimates of inflation) and that many analysts consider to be a more accurate measure of the cost of living for the average person. However, increases in the chained CPI may understate growth in the cost of living for some groups.
In particular, the CPI reflects prices paid for the goods and services purchased by an average household, not by any specific individual or by the average person in certain age groups, income groups, or other categories. Therefore, most people experience price changes that are either higher or lower than reported in the CPI. Computing changes in the cost of living separately for each person would not be feasible, but different indexes could be calculated for subgroups of the population or for different policy purposes. For example, the purchasing patterns of disabled Social Security beneficiaries presumably differ, on average, from those of elderly Social Security beneficiaries, which provides a rationale for indexing Disability Insurance benefits differently from Old-Age and Survivors Insurance benefits.
The possibility that the cost of living may grow at a different rate for the elderly than for the rest of the population is of particular concern in choosing a price index for Social Security COLAs because Social Security benefits are the main source of income for many older people. BLS computes an unofficial index that reflects the purchasing patterns of older people, called the experimental CPI for Americans 62 years of age and older (CPI-E). Since 1982 (the earliest date for which that index has been computed), annual inflation as measured by the CPI-E has been 0.2 percentage points higher, on average, than inflation as measured by the traditional CPI-U or the CPI-W. However, since December 2007, when the most recent recession began, inflation as measured by the CPI-E has generally been lower than inflation as measured by the CPI-U or CPI-W (see the figure below).
CBO — The Army’s Ground Combat Vehicle Program and Alternatives
The Army’s Ground Combat Vehicle Program and Alternatives
Source: Congressional Budget Office
CBO compares the Army’s plan for the GCV with four options and finds that, although no option would meet all of the Army’s goals, all are likely to be less costly and pose a smaller risk of delay than CBO expects for the Army’s plan.
How Has CBO’s Estimate of the Net Budgetary Impact of the Affordable Care Act’s Health Insurance Coverage Provisions Changed Over Time?
How Has CBO’s Estimate of the Net Budgetary Impact of the Affordable Care Act’s Health Insurance Coverage Provisions Changed Over Time?
Source: Congressional Budget Office
When the ACA and other proposals that led up to that legislation were being considered by the Congress in 2009 and 2010, CBO and JCT prepared estimates of those proposals’ budgetary effects over the 2010–2019 period. In the estimate prepared in March 2010, CBO and JCT projected that the provisions of the ACA related to health insurance coverage would cost the federal government $788 billion between 2010 and 2019. The latest projections extend the original ones by four years, corresponding to the shift in the regular 10-year projection period since 2009, and the estimated cost of the ACA’s insurance coverage provisions between 2013 and 2023 is $1,329 billion. However, the projections for each given year have changed little, on net, since March 2010—as shown in the figure.
How Have CBO’s Projections of Spending for Medicare and Medicaid Changed Since the August 2012 Baseline?
Source: Congressional Budget Office
In its most recent baseline projections, CBO reduced its estimates of spending for the Medicare and Medicaid programs compared with its estimates in the August 2012 baseline. For the 2013–2022 period, projected spending for those programs is now $382 billion (or 3½ percent) below the agency’s estimates in August 2012.
CBO makes revisions to its baseline to reflect three kinds of developments—enacted legislation, updates to its economic forecast, and other, technical changes. In the case of Medicare and Medicaid, the downward adjustments since August reflect mostly technical changes—totaling $373 billion; legislative and economic changes accounted for just $9 billion.
CBO — Growth in Means-Tested Programs and Tax Credits for Low-Income Households
Growth in Means-Tested Programs and Tax Credits for Low-Income Households
Source: Congressional Budget Office
The federal government devotes roughly one-sixth of its spending to 10 major means-tested programs and tax credits, which provide cash payments or assistance in obtaining health care, food, housing, or education to people with relatively low income or few assets. Those programs and credits consist of the following:
- Medicaid,
- The low-income subsidy (LIS) for Part D of Medicare (the part of Medicare that provides prescription drug benefits),
- The refundable portion of the earned income tax credit (EITC),
- The refundable portion of the child tax credit (CTC),
- Supplemental Security Income (SSI),
- Temporary Assistance for Needy Families (TANF),
- The Supplemental Nutrition Assistance Program (SNAP, formerly called the Food Stamp program),
- Child nutrition programs,
- Housing assistance programs, and
- The Federal Pell Grant Program.
As shown in this report and an accompanying infographic, in 2012, federal spending on those programs and tax credits totaled $588 billion. (Certain larger federal benefit programs, such as Social Security and Medicare, are not considered means-tested programs because they are not limited to people with specific amounts of income or assets.)
Total federal spending on those 10 programs (adjusted to exclude the effects of inflation) rose more than tenfold—or by an average of about 6 percent a year—in the four decades since 1972 (when only half of the programs existed). As a share of the economy, federal spending on those programs grew from 1 percent to almost 4 percent of gross domestic product (GDP) over that period. (For ease of presentation, this report frequently uses the term “programs” to encompass both the spending programs and the tax credits.)
CBO — Macroeconomic Effects of Alternative Budgetary Paths
Macroeconomic Effects of Alternative Budgetary Paths
Source> Congressional Budget Office
Federal debt held by the public now exceeds 70 percent of the nation’s annual output (gross domestic product, or GDP) and stands at a higher percentage than in any year since 1950. Under an assumption whereby current laws generally remain unchanged, federal debt will be 77 percent of GDP in 2023, CBO projects. Such a large amount of federal debt will reduce the nation’s output and income below what would occur if the debt was smaller, and it raises the risk of a fiscal crisis (in which the government would lose the ability to borrow money at affordable interest rates). Moreover, the aging of the population and rising health care costs will tend to push debt even higher in the following decades.
In addition, those projections of debt under current law incorporate scheduled changes in policies that will serve to restrain the growth of debt. For example, under current law, some significant tax provisions will expire at the end of this year or in later years, increasing revenues; automatic spending cuts included in the Budget Control Act of 2011 and modified in the American Taxpayer Relief Act of 2012 will go into effect on March 1, 2013; and Medicare’s payment rates for physicians’ services will fall in January 2014. If future legislation prevented those changes from taking effect and did not make other policy changes with offsetting budgetary effects, federal debt would be considerably higher than the amount projected under current law.
To aid lawmakers in assessing the macroeconomic effects of possible changes in tax and spending policies, this report describes the effects of three alternative budgetary paths: one with deficits that are greater than those projected under current law and two with deficits that are smaller. Those paths are purely illustrative and do not represent recommendations by CBO.
CBO — The Budget and Economic Outlook: Fiscal Years 2013 to 2023
The Budget and Economic Outlook: Fiscal Years 2013 to 2023
Source: Congressional Budget Office
Economic growth will remain slow this year, CBO anticipates, as gradual improvement in many of the forces that drive the economy is offset by the effects of budgetary changes that are scheduled to occur under current law. After this year, economic growth will speed up, CBO projects, causing the unemployment rate to decline and inflation and interest rates to eventually rise from their current low levels. Nevertheless, the unemployment rate is expected to remain above 7½ percent through next year; if that happens, 2014 will be the sixth consecutive year with unemployment exceeding 7½ percent of the labor force—the longest such period in the past 70 years.
If the current laws that govern federal taxes and spending do not change, the budget deficit will shrink this year to $845 billion, or 5.3 percent of gross domestic product (GDP), its smallest size since 2008. In CBO’s baseline projections, deficits continue to shrink over the next few years, falling to 2.4 percent of GDP by 2015. Deficits are projected to increase later in the coming decade, however, because of the pressures of an aging population, rising health care costs, an expansion of federal subsidies for health insurance, and growing interest payments on federal debt. As a result, federal debt held by the public is projected to remain historically high relative to the size of the economy for the next decade. By 2023, if current laws remain in place, debt will equal 77 percent of GDP and be on an upward path, CBO projects.
CBO — Private-Sector Mandates in Federal Legislation
Private-Sector Mandates in Federal Legislation
Source: Congressional Budget Office
Federal laws and regulations sometimes require nonfederal entities to expend their resources to carry out national policies. The Unfunded Mandates Reform Act of 1995 (UMRA), enacted as Public Law 104-4, defines many of those requirements as federal mandates. The law aims to ensure that Members of Congress receive information about the potential effects of mandates as they consider proposed legislation and that federal agencies take information about mandates into account as they weigh proposed regulations.
To that end, UMRA requires CBO, at certain points in the legislative process, to assess the cost of mandates that would apply to state, local, and tribal governments or to the private sector; it also requires most federal agencies to estimate those costs and other effects in the course of promulgating regulations to implement such mandates. This report describes CBO’s role in assessing the impact of private-sector mandates during the legislative process and provides information about the private-sector mandates that have become law during the past decade.
CBO — Unemployment Insurance in the Wake of the Recent Recession
Unemployment Insurance in the Wake of the Recent Recession
Source: Congressional Budget Office
The unemployment insurance (UI) system is a partnership between the federal government and state governments that provides a temporary weekly benefit to qualified workers who lose their job and are seeking work. The amount of that benefit is based in part on a worker’s past earnings. CBO estimates that UI benefits totaled $94 billion in fiscal year 2012 (when the unemployment rate was 8.3 percent, on average), a substantial increase over the $33 billion paid out in fiscal year 2007 (when the unemployment rate was 4.5 percent, on average).
Far more workers were laid off in 2008 and 2009 than in 2006 and 2007. The number of workers who lost their job and started receiving UI benefits peaked at 14.4 million in 2009, whereas an average of roughly 8 million laid-off workers started receiving benefits in each fiscal year from 2004 to 2007. Having so many more workers eligible for unemployment benefits would have substantially increased the number of recipients in the absence of any change in UI policies, but federal policies also were changed in ways that further expanded the number of UI recipients.
In particular, the periods for which eligible workers can receive UI benefits have been repeatedly extended during the recent recession and its aftermath. Regular UI benefits generally last up to 26 weeks. Additional weeks of benefits have been provided through the creation of the temporary Emergency Unemployment Compensation (EUC) program in 2008 and through modifications to the extended benefits (EB) program. The EUC program currently provides up to 47 weeks of additional benefits (depending on a state’s unemployment rate) after regular UI benefits have been exhausted. The EB program provides up to 20 weeks of benefits to certain eligible workers who have exhausted their EUC benefits (temporary changes in law have made it easier for states to qualify to provide extended benefits and have made the funding for the EB program entirely federal).
The benefits the three programs provide—at a total cost over the past five years of roughly $520 billion—have allowed households to better maintain their consumption while household members are unemployed. Under current law, the temporary benefits that have been provided in recent years are set to expire at the end of December 2012.
CBO — Economic Effects of Policies Contributing to Fiscal Tightening in 2013
Economic Effects of Policies Contributing to Fiscal Tightening in 2013
Source: Congressional Budget Office
Substantial changes to tax and spending policies are scheduled to take effect in January 2013, significantly reducing the federal budget deficit. According to CBO’s projections, if all of that fiscal tightening occurs, real (inflation-adjusted) gross domestic product (GDP) will drop by 0.5 percent in 2013 (as measured by the change from the fourth quarter of 2012 to the fourth quarter of 2013)—reflecting a decline in the first half of the year and renewed growth at a modest pace later in the year. That contraction of the economy will cause employment to decline and the unemployment rate to rise to 9.1 percent in the fourth quarter of 2013. After next year, by the agency’s estimates, economic growth will pick up, and the labor market will strengthen, returning output to its potential level (reflecting a high rate of use of labor and capital) and shrinking the unemployment rate to 5.5 percent by 2018.
Output would be greater and unemployment lower in the next few years if some or all of the fiscal tightening scheduled under current law—sometimes called the fiscal cliff—was removed. However, CBO expects that even if all of the fiscal tightening was eliminated, the economy would remain below its potential and the unemployment rate would remain higher than usual for some time. Moreover, if the fiscal tightening was removed and the policies that are currently in effect were kept in place indefinitely, a continued surge in federal debt during the rest of this decade and beyond would raise the risk of a fiscal crisis (in which the government would lose the ability to borrow money at affordable interest rates) and would eventually reduce the nation’s output and income below what would occur if the fiscal tightening was allowed to take place as currently set by law.
In August, CBO presented estimates of the budgetary and economic outcomes that would occur under current law and under an “alternative fiscal scenario” that represents a continuation of many long-standing policies and thus a significant reduction in the amount of fiscal tightening next year. To provide additional information about the sources of that tightening and its effects, this report presents estimates of the budgetary and economic impact of the main changes to current law that would occur under that alternative scenario, as well as estimates of the impact of eliminating various other components of fiscal tightening scheduled for 2013.
In order to focus on the short-term impact of policy decisions, the analysis in this report is based on the assumption that the fiscal tightening would be removed and current policies maintained for two years and that the tightening provided by current law would occur thereafter.
See also: Choices for Deficit Reduction
CBO — As the Population Ages, Social Security’s Spending Is Projected to Outpace Its Tax Revenues
As the Population Ages, Social Security’s Spending Is Projected to Outpace Its Tax Revenues
Source: Congressional Budget Office
CBO estimates that in fiscal year 2012, spending for Social Security totaled $773 billion, equal to about 5 percent of gross domestic product and one-fifth of federal spending. As more members of the baby-boom generation retire and the U.S. population grows older in the coming decades, Social Security outlays are projected to grow more rapidly than the economy and more rapidly than the program’s dedicated tax revenues.
Over the next 10 years, outlays will exceed dedicated tax revenues by about 10 percent, on average. That gap will grow larger in the 2020s, and by 2030, Social Security outlays will be about 6 percent of gross domestic product and will exceed dedicated tax revenues by about 20 percent. As a result, under current law, resources available to the Social Security program will become insufficient to pay full benefits in about 20 years, CBO projects.
Today CBO released The 2012 Long-Term Projections for Social Security: Additional Information, which expands upon CBO’s projections of the Social Security program’s finances that were included in CBO’s The 2012 Long-Term Budget Outlook, published in June.
CBO Releases a Report on the Taxation of Capital and Labor Through the Self-Employment Tax
CBO Releases a Report on the Taxation of Capital and Labor Through the Self-Employment Tax
Source: Congressional Budget Office
Today CBO released a report, The Taxation of Capital and Labor Through the Self-Employment Tax.
The Self-Employment Contributions Act (SECA) tax is paid mainly by certain small business owners. That tax on sole proprietors and owners of partnerships is often characterized as one that parallels the Federal Insurance Contributions Act (FICA) tax that employers and employees pay to fund Social Security and Medicare. The two taxes, CBO concludes, are not really parallel in the way that they tax capital income and labor income. (For people who are not self-employed, interest, dividends, rents, and capital gains are capital income, and wages and benefits are labor income.) The differences in the treatment of capital and labor income may prompt people to make choices that they would not otherwise make about self-employment or the organizational form of a business, thereby reducing the efficient allocation of resources.
CBO finds that:
- Approximately 40 percent of the SECA tax base derives from capital income and 60 percent from labor income. The FICA tax base, in contrast, derives entirely from labor income.
- More than half of the labor income of self-employed people is not included in the SECA tax base. In contrast, virtually all of the labor income of employees is taxable under FICA.
CBO analyzed three options that would modify the SECA tax base by either reducing the share of capital income or increasing the share of labor income it includes. No option by itself would accomplish both of those objectives when applied to both sole proprietorships and partnerships, but one option would do so if applied only to partnerships.
CBO — Options for Modernizing Military Weather Satellites: Working Paper 2012-11
Options for Modernizing Military Weather Satellites: Working Paper 2012-11
Source: Congressional Budget Office
Over the next several years, the Department of Defense (DoD) will launch the last of its weather satellites, which it uses to plan military operations and generate weather forecasts. Long-running efforts to develop replacements for those satellites encountered schedule and cost difficulties, and in December 2011, the Congress directed DoD to cancel its latest program and to prepare for a follow-on program. DoD’s plans now call for a new development effort, but it has not yet determined the capabilities it wants in that satellite. In this paper, the Congressional Budget Office (CBO) examines three different satellite design concepts that DoD might consider and compares the cost and capability of those designs. The paper also discusses alternative approaches that DoD might take, such as fielding single instruments on several small satellites instead of several instruments on a single satellite and foregoing a new generation of military weather satellites altogether and instead relying on other sources for weather data.
CBO — Letter to the Honorable John Boehner providing an estimate for H.R. 6079, the Repeal of Obamacare Act
Letter to the Honorable John Boehner providing an estimate for H.R. 6079, the Repeal of Obamacare Act
Source: Congressional Budget Office
CBO and the staff of the Joint Committee on Taxation (JCT) have estimated the direct spending and revenue effects of H.R. 6079, the Repeal of Obamacare Act, as passed by the House of Representatives on July 11, 2012. H.R. 6079 would repeal the Affordable Care Act (ACA), with the exception of one subsection that has no budgetary effect. This estimate reflects the spending and revenue projections in CBO’s March 2012 baseline as adjusted to take into account the effects of the recent Supreme Court decision regarding the ACA.
For various reasons discussed in the report, the estimated budgetary effects of repealing the ACA by enacting H.R. 6079 are close to, but not equivalent to, an estimate of the budgetary effects of the ACA with the signs reversed.
CBO — Medicare’s Payments to Physicians: The Budgetary Impact of Alternative Policies Relative to CBO’s March 2012 Baseline
Medicare’s Payments to Physicians: The Budgetary Impact of Alternative Policies Relative to CBO’s March 2012 Baseline
Source: Congressional Budget Office
Medicare’s payment rates for physicians’ services are scheduled to be reduced by 27 percent in 2013, CBO estimates, under the provisions of law known as Medicare’s Sustainable Growth Rate (SGR) mechanism. The SGR mechanism consists of expenditure targets, which are established by applying a growth rate (calculated by formula) to spending for physicians’ services and certain related services in a base period, and annual adjustments to the payment rates, which are designed to bring spending in line with the expenditure targets over time. (For further discussion of the SGR, see the appendix of Changes in Payments to Physicians.) In each of the past several years, legislation has been enacted to override the SGR and to either maintain or increase those payment rates when they were otherwise scheduled to decrease.
The attached tables show CBO’s estimates of the budgetary impact over the 2013–2022 period of various alternative policies for modifying the payment rates that are scheduled to take effect under the SGR mechanism. The options in the tables are listed in three categories: “cliff” options, “clawback” options, and others. (See the descriptions of those terms in the attached document; both “cliff” and “clawback” approaches have been adopted since the Congress began overriding scheduled reductions in physician payment updates in 2003.)
The estimates in the tables are relative to CBO’s March 2012 baseline, which is used for Congressional scorekeeping purposes. Both the scorekeeping baseline and the estimates of the impact of the policy options are likely to change when the final rule setting the physician fee schedule for 2013 is issued by the Administration in early November.
CBO Releases Report on Policy Options for the Social Security Disability Insurance Program
CBO Releases Report on Policy Options for the Social Security Disability Insurance Program
Source: Congressional Budget Office
The Social Security Disability Insurance (DI) program has expanded rapidly during the past few decades, and CBO projects that, under current law, future spending for the program will significantly exceed the revenues dedicated to it.
In a study prepared at the request of the Ranking Member of the Senate Budget Committee, CBO has examined a variety of potential modifications to the DI program. CBO has also prepared an infographic summarizing the application process for DI, the number of beneficiaries and benefits paid under the program, and policies regarding disabled people in other countries.
Alleviating the financial pressures on the DI program would require a substantial increase in revenues for the program, a substantial decrease in the program’s costs, or some combination of those two approaches. Options to increase revenues are straightforward but limited: DI taxes paid (through the Social Security Payroll tax) by employers or employees must rise, or some other source of funding must be used. In contrast, options for reducing costs are both more complex and more numerous: For example, the components of the formula that is used to calculate DI benefits could be altered, as could one or more of the rules used to help determine eligibility for the program. Alternatively, policymakers might want to increase spending for the program by providing greater amounts of support to certain disabled workers or their dependents. CBO in conjunction with the staff of the Joint Committee on Taxation has estimated the budgetary effects of a variety of such modifications to the DI program.
CBO Projects That DoD’s Future Defense Plans Will Cost More Than DoD Estimates
CBO Projects That DoD’s Future Defense Plans Will Cost More Than DoD Estimates
Source: Congressional Budget Office
In most years, the Department of Defense (DoD) provides to the Congress a five-year plan, called the Future Years Defense Program (FYDP), along with its budget request for the coming year. Because decisions made in the near term can have consequences for the defense budget well beyond that period, CBO regularly examines—at the request of the Senate Budget Committee—the programs and plans in DoD’s FYDP and projects their budgetary impact over the long term.
Today’s study—the latest in CBO’s annual series—analyzes the budgetary impact of the 2013 FYDP (which provides plans for fiscal years 2013 to 2017) through 2030. The FYDP describes the department’s “base” budgetary plan for its normal activities, such as manning, training, and equipping the military, and excludes overseas contingency operations, such as the war in Afghanistan.
CBO projects that DoD’s plans will cost $123 billion, or 5 percent, more to execute through 2017 than DoD estimates. CBO also projects that the cost of DoD’s plans will exceed the limits established in the Budget Control Act. For most categories of DoD’s budget, costs under CBO’s projections are higher than under the department’s estimates. Historically, the costs of providing health care, paying military and civilian personnel, and developing and buying weapons have been higher than DoD’s planning estimates.
CBO — The 2012 Long-Term Budget Outlook
The 2012 Long-Term Budget Outlook
Source: Congressional Budget Office
Over the past few years, the federal government has been recording budget deficits that are the largest as a share of the economy since 1945. Consequently, the amount of federal debt held by the public has surged. By the end of this year, CBO projects that the federal debt will reach roughly 70 percent of gross domestic product (GDP), the highest percentage since shortly after World War II.
Whether that debt will continue to grow in coming decades will be affected by long-term demographic trends (particularly the aging of the population), economic developments, and policymakers’ decisions about taxes and spending.
CBO — Assessing the Short-Term Effects on Output of Changes in Federal Fiscal Policies
Assessing the Short-Term Effects on Output of Changes in Federal Fiscal Policies (PDF)
Source: Congressional Budget Office
Changes in federal fiscal policies can have both short-term and long-term effects on output. The Congressional Budget Office’s analysis of the short-term effects focuses on the impact on the demand for goods and services. That impact can be decomposed into direct effects and indirect effects: Direct effects consist of changes in purchases of goods and services by federal agencies and by the people and organizations who are recipients of federal payments or payers of federal taxes; indirect effects enhance or offset the direct effects. The indirect effects can be summarized by a demand multiplier, defined as the total change in gross domestic product per dollar of direct effect on demand. This paper presents the ranges of demand multipliers that CBO uses in its analyses and reviews evidence on the size of those multipliers.
