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CBO — Estimated Impact of the American Recovery and Reinvestment Act on Employment and Economic Output in 2014

February 24, 2015 Comments off

Estimated Impact of the American Recovery and Reinvestment Act on Employment and Economic Output in 2014
Source: Congressional Budget Office

In February 2009, in response to significant weakness in the economy, lawmakers enacted the American Recovery and Reinvestment Act (ARRA). The legislation’s numerous spending and revenue provisions can be grouped into several categories according to their focus:

  • Providing funds to states and localities—for example, by raising federal matching rates under Medicaid, providing aid for education, and increasing financial support for some transportation projects;
  • Supporting people in need—such as by extending and expanding unemployment benefits and increasing benefits under the Supplemental Nutrition Assistance Program (formerly the Food Stamp program);
  • Purchasing goods and services—for instance, by funding construction and other investment activities that could take several years to complete; and
  • Providing temporary tax relief for individuals and businesses—such as by raising exemption amounts for the alternative minimum tax, adding a new Making Work Pay tax credit, and creating enhanced deductions for depreciation of business equipment.

When ARRA was being considered, the Congressional Budget Office and the staff of the Joint Committee on Taxation estimated that it would increase budget deficits by $787 billion between fiscal years 2009 and 2019. CBO now estimates that the total impact over the 2009– 2019 period will amount to nearly $840 billion. By CBO’s estimate, close to half of that impact occurred in fiscal year 2010, and more than 95 percent of ARRA’s budgetary impact was realized by the end of December 2014.

CBO — Projected Costs of U.S. Nuclear Forces, 2015 to 2024

February 23, 2015 Comments off

Projected Costs of U.S. Nuclear Forces, 2015 to 2024
Source: Congressional Budget Office

CBO estimates that over the 2015–2024 period, the Administration’s plans for nuclear forces would cost $348 billion, an average of about $35 billion a year, and an amount that is close to CBO’s December 2013 estimate of $355 billion for the 2014–2023 period. (Both estimates are given in nominal dollars; that is, they include the effects of inflation.) Although the two estimates of total costs are similar, projected costs for nuclear programs of both the Department of Defense (DoD) and the Department of Energy (DOE) have changed. Over the next 10 years, CBO estimates, DoD’s costs would total $227 billion, which is about $6 billion (or 3 percent) more than the 10-year estimate published in 2013, and DOE’s would total $121 billion, which is about $13 billion (or 9 percent) less than CBO’s 2013 estimate.

This report describes the major differences between the two sets of estimates. The cost projections have risen for some categories of expenses but have declined for others. One might expect the total to increase because the current estimate spans a 10-year period that begins and ends one year later than the estimate published in December 2013 (2015–2024, compared with 2014–2023 for the December 2013 estimate) and thus includes one later year of development in modernization programs (development costs typically increase, or ramp up, as a program proceeds). Nevertheless, budget-driven delays in several programs, including a three-year delay for the new cruise missile and its nuclear warhead and longer delays in some programs for extending the useful lives of nuclear warheads, have reduced the costs projected for the next decade.

CBO — The Long-Term Costs of Major Health Care Programs: Fiscal Implications and Projection Methods (presentation)

February 18, 2015 Comments off

The Long-Term Costs of Major Health Care Programs: Fiscal Implications and Projection Methods
Source: Congressional Budget Office

Presentation by CBO’s Deputy Assistant Director for Health, Jessica Banthin, Ph.D., to the Joint Network on the Fiscal Sustainability of Health Systems, Organisation for Economic Co-operation and Development in Paris, France.

CBO — The Taxation of Social Security Benefits

February 18, 2015 Comments off

The Taxation of Social Security Benefits
Source: Congressional Budget Office

About 60 million people received Social Security benefits in 2014, CBO estimates. Up to 85 percent of a recipient’s benefits are subject to the individual income tax, depending on the recipient’s overall income. CBO estimates that income taxes on Social Security benefits totaled $51 billion in 2014, an amount that will be credited to the Social Security and Medicare trust funds after the tax returns for 2014 have been filed and analyzed. (CBO expects that those taxes will account for only about 4 percent of the tax revenues received by those trust funds, which receive the other 96 percent of their tax revenues from payroll taxes.)

About half of all Social Security beneficiaries owed some income tax on their benefits in 2014, CBO estimates. Of total Social Security benefits received last year, 6½ percent were owed in income taxes, with smaller percentages owed by many beneficiaries and much larger percentages owed by high-income beneficiaries. Because of legislation and changes in the economy, the share of benefits subject to tax has risen over the past several decades.

Like Social Security, defined benefit pensions typically augment retirees’ income by paying out specified benefits whose size is related to the retirees’ past earnings. However, the share of benefits that is taxed is generally smaller for Social Security than for defined benefit pensions. That difference is minimal for high-income taxpayers but large for low- and moderate-income taxpayers.
See also: Effect of Taxing Social Security Benefits by Income Class Estimated for Tax Year 2014

CBO’s Economic Forecasting Record: 2015 Update

February 17, 2015 Comments off

CBO’s Economic Forecasting Record: 2015 Update
Source: Congressional Budget Office

For nearly four decades, the Congressional Budget Office has prepared economic forecasts that underlie the agency’s projections for the federal budget and cost estimates for proposed federal legislation. In particular, forecasts of output, inflation, interest rates, and income play a significant role in the agency’s budgetary analysis; for example, projections of wages and salaries are used to forecast individual income tax receipts.

CBO regularly evaluates the quality of its economic forecasts by comparing them with the economy’s actual performance and with forecasts by the Administration (as published in the annual budget documents prepared by the Office of Management and Budget) and the Blue Chip consensus—an average of about 50 private-sector forecasts. Such comparisons may indicate the extent to which imperfect information and analysis might have caused CBO to “miss” patterns or turning points in the economy. They also may identify areas where CBO has tended to make larger errors than other analysts.

This report evaluates CBO’s macroeconomic forecasts over two-year and five-year horizons. The periods used for the evaluations differ by variable and by forecast horizon, depending on the availability of the needed data.

Why CBO Projects That Actual Output Will Be Below Potential Output on Average

February 13, 2015 Comments off

Why CBO Projects That Actual Output Will Be Below Potential Output on Average
Source: Congressional Budget Office

Overall economic activity often is measured as the market value of the economy’s total output of goods and services—the nation’s gross domestic product (GDP). For many reasons, GDP rises in some periods and falls in others, but those fluctuations occur around a rising path that is determined by growth in three particular factors in the economy: labor, capital, and productivity. The maximum sustainable output of the economy given those factors is defined by CBO as potential output, or potential GDP. (Analyses of potential output, including CBO’s, focus on the quantity of output, adjusted to remove the effects of inflation.) Potential GDP is not the nation’s productive maximum, as would occur if all factors in the economy were employed to their fullest extent, but rather it is the maximum output that can be achieved over a prolonged period without straining productive capacity and thus increasing the risk that inflation will rise above the Federal Reserve’s goal.

GDP has never equaled potential output for a sustained period. Instead, there usually is a gap (expressed as a percentage of GDP) between the economy’s actual and potential output. Typically, that gap is negative during economic recessions and early in subsequent recoveries, when actual output is less than potential (see figure below). The gap has been positive, however—and in some cases substantially so—during later phases of economic expansions. CBO’s estimate of the output gap provides a measure of the slack or the overheating in the economy, and that assessment in turn can provide useful information to policymakers as they consider the economic consequences of various actions.

CBO — Transitioning to Alternative Structures for Housing Finance

February 9, 2015 Comments off

Transitioning to Alternative Structures for Housing Finance
Source: Congressional Budget Office

This report examines various mechanisms that policymakers could use to attract more private capital to the secondary mortgage market. The report also addresses how those mechanisms could be combined in different ways to help the market make the transition to a new structure during the coming decade. CBO analyzed transition paths to four alternative structures that involve choices about whether the government would continue to guarantee payment on mortgages and MBSs and, if so, what form and prices those guarantees would have. Under those different structures, the government’s activities would range from providing full or partial guarantees for a large share of the mortgage market to playing a minimal role in a largely private market (except perhaps during a financial crisis). Any transition to a new type of secondary market would also require decisions about what to do with the existing operations, guarantee obligations, and investment holdings of Fannie Mae and Freddie Mac.

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