The Budget for Fiscal Year 2004

CRS Report for Congress
The Budget for Fiscal Year 2004
Updated November 1, 2004
Philip D. Winters
Analyst in Government Finance
Government and Finance Division

Congressional Research Service ˜ The Library of Congress

The Budget for Fiscal Year 2004
Summary
The Administration (Office of Management and Budget; OMB) and the
Congressional Budget Office (CBO) released their final official estimates for fiscal
year (FY) 2004 on July 30, 2004 and on September 7, 2004 respectively. OMB put
the FY2004 deficit estimate at $445 billion, above the $307 billion deficit estimate
in the original budget (February 2003), but below the FY2004 deficit estimate of
$521 billion included in the FY2005 budget (February 2004). CBO’s September
2004 baseline deficit estimate of $422 billion was larger than its January 2003
estimate of $145 billion and below its March 2004 estimate of $477 billion. The
actual deficit for the year was $413 billion (pending revision).
The original proposals from the President (February 2003) included speeding
up and making permanent many of the tax cuts enacted over the last two years, along
with new tax proposals for economic stimulus, tax incentives, and expiring tax
provisions.
CBO’s first FY2004 budget report (January 31, 2003) estimated the baseline
deficit at $145 billion deficit for FY2004. The baselines incorporate existing policy;
they do not reflect possible or likely policy changes.
Congress adopted the conference report on the FY2004 budget
resolution(H.Rept. 108-71, H.Con.Res. 95) on April 11, which contained
reconciliation instructions for a tax cut. On May 23, Congress adopted the
conference report on the tax cut(H.Rept. 108-126; H.R. 2; an 11-year, $350 billion
tax cut) based on the reconciliation in the budget resolution. It became law (P.L.

108-27) on May 28.

Both OMB’s and CBO’s mid-year budget reports (July and August 2003
respectively) showed substantial increases in the deficit estimate for FY2004.
Changes in policy, a slowly recovering economy, and other factors produced the
growth in the estimated deficit. The Administration’s July estimates did “not reflect
... expected but undetermined additional costs arising from ongoing operations in
Iraq, extending beyond 2003” (OMB Mid-Session Review, July 15, 2003, p.1). Over
80% of the increase in CBO’s baseline deficit estimate resulted from spending bills
and tax cuts adopted between March and August 2003.
In the fall of 2003, Congress bogged down in passing the 13 regular
appropriation bills. Three had become law at the start of the new fiscal year; another
three were enacted by Thanksgiving. The remaining seven were bundled into an
omnibus measure, H.R. 2673, which the House passed on December 8 and the Senate
adopted on January 22, 2004. It became law (P.L. 108-199) on January 23. Congress
passed the fifth in a series of continuing resolutions (CRs) on appropriations (P.L.
108-185; December 16, 2003) that was in effect through January 31, 2004, to fund
activities not otherwise funded.
This report will be updated as events warrant.

Contents
Background and Analysis...........................................1
The Current Situation...............................................1
Budget Totals.....................................................2
Budget Proposals and Estimates..................................2
Uncertainty in Budget Projections.................................6
Budget Action....................................................8
Outlays .........................................................11
R ecei pt s ........................................................15
Deficits and Surpluses.............................................18
CBO’s Alternative Policies Not Included in the Baseline..............21
The Longer Run..............................................21
The Budget and the Economy.......................................22
For Additional Reading............................................23
CRS Products................................................23
List of Tables
Table 1. Budget Estimates for FY2004.................................3
Table 2. Outlays for FY2003-FY2008 and FY2013......................12
Table 3. Receipts for FY2002-FY2008 and FY2013......................16
Table 4. Surpluses/Deficits(-) for FY2004-FY2008 and FY2013............19

The Budget for Fiscal Year 2004
Background and Analysis
Presidents generally submit their budget proposals for the upcoming fiscal year
(FY) early in each calendar year. The Bush Administration released its FY2004
budget (The Fiscal Year 2004 Budget of the U.S. Government) on February 3, 2003.
The multiple volumes contained general and specific descriptions of the
Administration’s policy proposals and expectations for the budget for FY2004 and
for the years through FY2008, with information on the revenue changes through
FY2013 and a section on long-term fiscal issues facing the nation. The full set of
budget documents (Budget, Appendix, Analytical Perspectives, Historical Tables,
among several others) contain extensive and detailed budget information, including
estimates of the budget without the proposed policy changes (current service baseline
estimates), historical budget data, detailed outlay and receipt data, selected analysis
of specific budget related topics, and the Administration’s economic forecast. In
addition to its presentation of the Administration’s proposals, the budget documents
are an annual basic reference source for federal budget information.
The Administration’s annual budget submission is followed by congressional
action on the budget. This usually includes the annual budget resolution,
appropriations, and, possibly, a reconciliation bill (or bills). During the months of
deliberation on budget legislation, the Administration often revises its original
proposals because of interactions with Congress and changing circumstances in the
economy and the world.
The Current Situation
The Treasury released final budget totals for FY2004 on October 14, 2004, with
the release of the Final Monthly Treasury Statement of Receipts and Outlays of the
United States Government. For FY2004, receipts were $1,880 billion, outlays were
$2,292 billion, and the deficit was $413 billion. Receipts in FY2004 were larger than
in the previous year for the first time since FY2001. Outlays continued growing,
rising 5% above the FY2003 level ($2,159 billion). The deficit increased from its
FY2003 level in dollars (by $35 billion), and remained almost unchanged as a
percentage of gross domestic product (GDP), rising from 3.5% in FY2003 to an
estimated 3.6% of GDP in FY2004. These numbers are likely to undergo some
revision by the time they appear in the President’s FY2006 budget documents,
expected to be released in early February 2005.
In the spring of 2004, the President requested a $25 billion reserve fund to
support operations in Afghanistan and Iraq. After amending the request, Congress

adopted it as part of the FY2005 Defense appropriation, making the funds available
immediately (in FY2004).
Budget Totals
Table 1 contains budget estimates for FY2004 from the Congressional Budget
Office (CBO), the Administration (the Office of Management and Budget, OMB),
the revisions produced by OMB and CBO throughout the year, as they became
available, the results of congressional budget deliberations, and the actual totals for
the year. Differences in totals from the various sources and times occur because of
differing underlying economic, technical, and budget-estimating assumptions and
techniques as well as differences in policy assumptions. Most policy generated dollar
differences between the Administration and congressional proposals or assumptions
for an upcoming fiscal year are often relatively small compared to the budget as a
whole (and sometimes almost nonexistent). These small differences may grow,
sometimes substantially, producing widely divergent budget paths over time. Budget
estimates should be expected to differ over time from those originally presented by
the President or Congress.
The war on terrorism, the 2001 recession and the slow economic recovery (until
it speeded up in the fall of 2003), changes in policies (tax cuts; spending increases),
and changes in the technical assumptions underlying budget-economic relationships,
have all contributed to the deterioration in the budget outlook since early 2001.
Under current policies, and even more so under policies proposed in the President’s
FY2005 budget, there is little expectation that the budget will reach balance over the
next 10 years.
Budget Proposals and Estimates
CBO’s first budget report for FY2004, the Budget and Economic Outlook:
Fiscal Years 2004-2013 (January 2003), contained baseline estimates and projections¹
for FY2003 through FY2013. CBO’s report showed that, under baseline
assumptions, the budget would remain in deficit through FY2006 ($16 billion) before
showing a small surplus in FY2007. The baseline showed small surpluses beginning
in FY2007 and would grow rapidly in FY2011 through FY2013 as revenues increase
quickly with the (then) scheduled expiration (by the end of calendar year 2010) of the
tax reductions from the Economic Growth and Tax Relief Reconciliation Act of 2001
(EGTRRA; P.L. 107-16, June 2001). Extending the expiring tax cuts would delay
the return of surpluses, by reducing receipts, until at least FY2008 and would have
much slower growth in the surplus over the subsequent years.

¹ Baseline estimates provide a foundation from which to measure proposed policy changes.
They extrapolate current policies and other specified conditions into the future based on
expectations of future economic conditions, other factors that affect the budget, and rules
set by Congress that CBO must follow in creating baseline estimates. They are not meant
to predict future budget outcomes. Because they continue existing policy, the baseline
estimates repeat spending that was intended for only one year and exclude generally
expected but not-yet-enacted policy changes.

Table 1. Budget Estimates for FY2004
(in billions of dollars)
^Receipts^O^utlays^Defi^ci^t(-)/^Surplus
^Act^ual^f^o^r^FY²⁰⁰⁰^$2,025^$1,789^$236
^Act^ual^f^o^r^FY²⁰⁰¹^1,991^1,864¹²⁷
^Act^ual^f^o^r^FY²⁰⁰²^1,853^2,011^-158
^Act^ual^f^o^r^FY²⁰⁰³^1,782^2,157^-374
^C^B^O^B&^{E O}^u^t^l^ook^{, Bas}^e^lⁱⁿ^{e, 1/}^31/⁰³^2,054^2,199^-¹⁴⁵
^O^M^{B, Bu}^dg^et^{, 2/}^3/⁰³^1,922^2,229^-³⁰⁷
^O^M^{B, Bu}^dg^et^{, C}^u^rren^t^S^e^rvⁱ^ces^{, 2/}^3/⁰³^2,031^2,189^-¹⁵⁸
^C^B^O^R^e^vⁱ^s^e^{d Bas}^e^lⁱⁿ^{e, 3/}^7/⁰³^2,024^2,224^-²⁰⁰
^C^B^O^Es^tⁱ^m^at^es^of^t^h^{e Pres}ⁱ^d^en^t^’^s^Polⁱ^cⁱ^e^s^,^3/^7/⁰³^1,907^2,245^-³³⁸
^H^o^u^s^{e F}^Y^{2004 Bu}^dg^et^R^e^s^o^l^u^tⁱ^oⁿ^,^3/^21/⁰³^1,908^2,232^-³²⁴
^S^eⁿ^a^t^e^F^Y^{2004 Bu}^dg^et^R^e^s^o^l^u^tⁱ^oⁿ^,^3/^26/⁰³^1,958^2,246^-²⁸⁷
^C^oⁿ^f^eren^{ce F}^Y^{2004 Bu}^dg^et^R^e^s^o^l^u^tⁱ^oⁿ^,^4/^11/⁰³^1,883^2,268^-³⁸⁵
^O^M^{B Mi}^d-^S^e^s^sⁱ^on^R^e^vⁱ^ew^{, 7/}^15/⁰³^1,797^2,272^-⁴⁷⁵
^O^M^{B Mi}^d-^S^e^s^sⁱ^on^R^e^vⁱ^ew^{, Bas}^e^lⁱⁿ^{e, 7/}^15/⁰³^1,794^2,252^-⁴⁵⁸
^C^B^O^U^pdat^e^{, Bas}^e^lⁱⁿ^{e, 8/}^26/⁰³^1,825^2,305^-⁴⁸⁰
^C^B^O^B&^{E O}^u^t^l^ook^{, Bas}^e^lⁱⁿ^{e, 1/}^26/⁰⁴^1,817^2,294^-⁴⁷⁷
^O^M^{B, Bu}^dg^et^f^o^{r F}^Y^{2005, 2/}^2/⁰⁴^1,798^2,319^-⁵²¹
^C^B^O^R^e^vⁱ^s^e^{d Bas}^e^lⁱⁿ^{e, 3/}^8/⁰⁴^1,817^2,295^-⁴⁷⁷
^C^B^O^Es^tⁱ^m^at^{e of}^Presⁱ^d^en^t^’^s^Polⁱ^cⁱ^e^s^,^3/^8/⁰⁴^1,816^2,295^-⁴⁷⁸
^S^eⁿ^a^t^e^{, F}^Y^{05 Bu}^dg^et^R^e^s^o^l^u^tⁱ^oⁿ^S^.^C^oⁿ^.^R^e^s^.^{95, 3/}^5/⁰⁴^1,817^2,295^-⁴⁷⁷
^H^o^u^s^{e, F}^Y^{05 Bu}^dg^et^R^e^s^o^l^u^tⁱ^oⁿ^H^.^C^oⁿ^.^R^e^s^.^{393, 3/}^19/⁰⁴^1,818^2,295^-⁴⁷⁷
^C^oⁿ^f^{., F}^Y^{05 Bu}^dg^et^R^e^s^o^l^u^tⁱ^oⁿ^S^.^C^oⁿ^.^R^e^s^.^{95, 5/}^19/^04*^1,821^2,338^-⁴⁷⁴
^O^M^{B, Mi}^d-^S^e^s^sⁱ^on^R^e^v^.^7/^30/⁰⁴^1,874^2,319^-⁴⁴⁵
^C^B^O^U^pdat^e^9/^7/⁰⁴^1,871^2,293^-⁴²²
^Act^ual^f^o^r^FY²⁰⁰⁴^1,880^2,292^-413
^*^T^h^e^c^onf^e^r^eⁿ^c^e^r^e^por^{t (}^H^.R^e^p^{t. 108-}⁴⁹⁸⁾^pa^s^s^e^{d the}^H^ous^e^on^Ma^y^19,^2004,^but^ha^s^y^e^{t to be}^c^ons^ide^r^e^dⁱⁿ
^the^Se^na^te^.
^B^&^{E O}^u^tlook^—^T^h^e^Budge^{t and Ec}^onom^ic^O^u^tlook^{, CBO}^..
President Bush’s FY2004 budget called for additional tax cuts and both
increased and decreased spending (as measured against OMB’s baseline estimates)
depending on the activity. The proposed policy changes raised the FY2004 deficit
to $307 billion from OMB’s baseline deficit estimate of $158 billion. OMB’s current
service baseline estimate moved into a small ($5 billion) surplus in FY2006 while the
President’s proposals would produce a projected deficit of $201 billion in that year.
The proposals would keep the budget in deficit through (at least) FY2008, the last
year of the Administration’s estimates.²
The Administration’s budget did not include any cost estimates for the (then
future) war in Iraq, expected but unspecified additions to homeland security funding,
or for non-war defense related spending. On March 24, 2003, the President asked

² The long-run outlook for government policies existing at the time of the budget submission
(that are found in the budget, p. 41) indicate that, without substantial changes from existing
policies, the budget is likely to remain in deficit through much of this century.

Congress for a $75 billion supplemental appropriation for FY2003, some of which
would produce outlays in FY2004.
The Administration argued that its proposed tax cuts were needed to boost the
lagging economy and that the acceleration of economic growth resulting from the tax
cuts would lead to the recovery of much of the lost revenue over future years. In
contrast, the President’s Council of Economic Advisors, in its annual report stated,
Although the economy grows in response to tax reductions (because of higher
consumption in the short run and improved incentives in the long run), it is
unlikely to grow so much that lost tax revenue is completely recovered by the³
higher level of economic activity.
Both OMB’s and CBO’s original FY2004 budget documents were produced
prior to the completion of final work on the FY2003 appropriations. This forced both
agencies to estimate the (discretionary) spending levels Congress would approve and
that the President would agree to for FY2003. The year-to-year budget comparisons
suffered from this uncertainty.
CBO’s March report, An Analysis of the President’s Budgetary Proposals for
Fiscal Year 2004 recalculated the Administration’s FY2004 budget proposal using
CBO’s assumptions and budget estimating methods.⁴ These recalculations produced
results similar to those in the President’s budget, with little cumulative difference in
the projections. CBO estimated a cumulative deficit of $1.2 trillion under the
President’s policies over the five years (FY2004-FY2008) compared to the
Administration’s estimate of $1.1 trillion.⁵ CBO’s 10-year projections of the
Administration’s proposals (CBO extrapolated the President’s policies over the
second five years) showed larger deficits (or smaller surpluses) compared to the
CBO’s own revised (March) baseline in each of the years covered. CBO estimated
that about two-thirds of the increases in the deficits in its reestimates of the
President’s proposals (excluding higher net interest costs) resulted from the lower
revenues that would occur from the adoption of the President’s tax cut proposals.
The March 2003 revised CBO baseline (incorporating the effects of the
Consolidated Appropriations Resolution FY2003 (CAR 2003, P.L. 108-7, February
20) increased the projected baseline deficit by $47 billion in FY2003 and by $55
billion in FY2004 over the January estimates. CBO attributed $22 billion of the $55
billion increase in the deficit in FY2004 to legislative changes since January (almost
all from CAR 2003). The remainder of the increase was attributed to technical
changes.

³ Council of Economic Advisers, Economic Report of the President. Feb. 2003. pp. 57-58
⁴ The CBO report came out before the adoption of the FY2003 supplemental appropriations
(P.L. 108-11, April 6) and therefore did not include any effect that legislation would have
on FY2004's outlays and deficit.
⁵ Ibid., p. 1.

Over the 10-year period covered in the March CBO report, CBO wrote,
For the 2004-2013 period, CBO has reduced its projection of the cumulative
surplus by $446 billion [dropping it from $1,336 billion to $891 billion], nearly
three-quarters of which derives from enactment of the omnibus appropriation act⁶
in February.
The deterioration in the budget outlook between January 2003 and March 2003
resulted in CBO’s revised baseline estimate pushing back the budget’s return to
surplus by one year, from FY2007 to FY2008.
The FY2004 House budget resolution (H.Con.Res. 95; March 21) included the
President’s request for a $726 billion economic stimulus tax cut (only a portion of
the total tax cut outlined in the resolution was included in reconciliation instructions).
The Senate-passed resolution (S.Con.Res. 23; March 26) contained reconciliation
instructions for a $350 billion tax cut. The conference agreement on the resolution
(H.Con.Res. 95; H.Rept. 108-71; April 11) included different reconciliation
instructions for the relevant House and Senate committees. The House instructions
included tax cuts of $550 billion; the Senate instructions included tax cuts of $350
billion. The resolution’s deficit was $385 billion in FY2004, becoming a small, $10
billion surplus in FY2012 and rising to a surplus of $37 billion in FY2013 (assuming
the expiration of the tax cuts by 2010). The reconciliation legislation that Congress
passed (the Jobs and Growth Tax Relief Reconciliation Act; P.L. 108-27; May 23,

2003) contained $350 billion in tax cuts (and a small amount of spending increases)

over the period FY2003 through FY2013.
The mid-year budget reports from OMB (July 2003, Mid-Session Review) and
CBO (August 2003, The Budget and Economic Outlook: An Update) projected larger
deficits for FY2004 and subsequent years than they had in their respective earlier
budget reports in 2003. OMB estimated that the FY2004 deficit would rise to $475⁷
billion, $168 billion above its January 2003 estimate. Policy changes that differed
from those originally proposed by the President produced $73 billion of the change.
The largest share, $95 billion, resulted from differences in the economic and
technical assumptions underlying the two projections. These changes raised the
estimated cumulative deficit for FY2004 through FY2008 by $372 billion above the
cumulative amount in the earlier estimate.
CBO’s August 2003 report raised the FY2004 baseline deficit to $480 billion,
$280 billion larger than its March estimate. Legislative changes (tax cuts and
spending increases) raised the estimated deficit by $227 billion, while economic and
technical revisions raised it by another $52 billion. The five-year (FY2004-FY2008)
projected cumulative deficit increased by $1,083 billion between CBO’s March and
August estimates, from $362 billion to $1,445 billion. CBO’s ten-year projection for

⁶ Congressional Budget Office, An Analysis of the President’s Budgetary Proposals for
FY2004, March 2003, p. 3.
⁷ OMB’s current services baseline deficit rose from $158 billion in January to $458 billion
in July. The report showed the cumulative deficit for the five years (FY2004-FY2008)
rising to $949 billion from the cumulative deficit in January of $114 billion.

FY2004 through FY2013, included a cumulative change in its deficit projections,
between March and August, of an estimated $2,287, moving the budget balance from
an estimated cumulative surplus of $891 billion in March 2003 to an estimated
cumulative deficit of $1,397 billion. The August estimate incorporated (as did the
March estimate) the assumed expiration of most of the recently adopted tax cuts. It
also included the assumed continuation of all the spending increases adopted since
March, including the FY2003 supplementals (P.L. 108-11 and P.L. 108-69), that are
unlikely to be repeated annually throughout the forecast period.
Neither OMB’s nor CBO’s summer 2003 projections reflected, particularly in
the years after FY2004, the effect of likely policy changes, such as modifications to
the Alternative Minimum Tax (AMT), the costs of the ongoing efforts in Iraq and
Afghanistan, the possible repeal of the scheduled expirations of the tax cuts, and the
possible adoption of a Medicare drug benefit. The budgetary cost of these policy
changes is very large over time and could, according to CBO estimates, add another
$1 trillion to $3 trillion to the cumulative deficit over the FY2004 through FY2013
period. (See pages 11-14 in the Update for CBO’s discussion of budget projections
under alternative scenarios.) CBO’s baseline projections indicated that the budget
has a fundamental imbalance that will not be remedied by full economic recovery.
The projections imply that only through policy changes that cut spending and/or
increase revenues can the deficit be made to shrink and surpluses be restored.
The appropriation process bogged down in the fall of 2003. Three of the 13
regular appropriations were enacted by the start of the fiscal year. Another three
became law before Congress recessed for the year (after Thanksgiving 2003). A
series of continuing resolutions (CRs) on appropriations were adopted from the
beginning of the fiscal year (October 1, 2003) through the fifth (and final) CR, which
became law (P.L. 108-84; H.J.Res. 79) on November 22, 2003, and provided funding
through January 31, 2004. Congress put together an omnibus appropriation bill of
the seven remaining appropriation bills (they were combined in the Agriculture
appropriation, H.R. 2673). The House passed the conference report (H.Rept. 108-
401) on the appropriation on December 8, 2003; the Senate cleared the conference
report on January 22, 2004. It became law (P.L. 108-199) with the President’s
signature on January 23.
Uncertainty in Budget Projections
All budget estimates and projections are inherently uncertain. Their dependence
on assumptions that are themselves subject to substantial variation over short time
periods makes budget estimates and projections susceptible to fairly rapid and
dramatic changes. The last couple of years have demonstrated this volatility. The
original proposals and estimates for FY2002, made in early 2001, dramatically
changed over the 20 to 21 months of congressional and presidential action on the
budget. (The budget estimates in the OMB and CBO budget documents for five to
10 years in the future are subject to even greater variability.) The early 2001
estimates for FY2002 estimated a surplus of $231 billion to $313 billion. The year
ended on September 30, 2002 with a deficit of $158 billion. The September 2001
terrorist attacks on the United States, the legislation adopted in response, the bursting
of the stock market bubble, the weak economy, and a shift in critical underlying
budget relationships, all contributed to a large change in the year’s budget outcome

from the originally proposed or estimated amounts. There is little reason to expect
this volatility to be greatly diminished in the current or future budget projections.⁸
Information in chapter 5 (The Uncertainties of Budget Projections) of CBO’s
budget report, The Budget and Economic Outlook: Fiscal Years 2004-2013 (January
2003), discussed how significantly the budget outcome can be altered by changes in
economic and related technical factors that underpin the budget estimates.⁹ The
chapter included optimistic and pessimistic alternative scenarios to its baseline
projection. The optimistic scenario assumes that favorable economic and budget
conditions continue throughout the forecast, that the increase in productivity persists,
and that mandatory spending is lower than in the baseline. The pessimistic scenario
assumes that less favorable economic and budget conditions occur, that the economy
grows more slowly, and that mandatory spending is higher than in the baseline. The
optimistic scenario produces a cumulative surplus $3 trillion larger than the baseline,
while the pessimistic scenario produces a cumulative deficit $3 trillion below the
baseline estimate, both over the FY2004 through FY2013 period.
The President’s FY2004 budget (February 2003) includes, in the section,
“Charting a Course for the Federal Budget,” the statement that “... five-year
projections are fraught with uncertainty. The ... error in projecting the surplus or
deficit since 1982 ... has been a $90 billion average absolute forecasting error for the
first year alone. A 90-percent confidence range for 2008 would stretch all the way
from a $281 billion surplus to a $661 billion deficit, a range of nearly $1 trillion.”¹⁰
Budget projections are very dependent on the underlying assumptions about the
direction of the economy and expected future government policy and how these
interact along with other factors (such as changing demographics) that affect the
budget. Any deviation from the underlying assumptions used in the budget estimates,
such as faster or slower economic growth, higher or lower inflation, differences from
the existing or proposed spending and tax policies, or changes in the technical
components of the budget models can, and usually do, have substantial effects on
moving the budget outcomes away from the earlier budget estimates and projections.

⁸ Some things are known with relative certainty about the direction of future budgets.
Demographics can partly determine the shape of future budgets. The upcoming retirement
of the baby boom generation will rapidly drive higher the spending for Social Security and
Medicare as well as other federal spending or tax breaks for the elderly in the next decade.
Because almost all those that will become eligible for these benefits are alive today,
estimating the growth in these programs is relatively straightforward.
⁹ CBO’s FY2005 budget report (The Budget and Economic Outlook: Fiscal Years 2005-

2014, Jan. 2004) included a similar chapter in Appendix A.

¹⁰ Office of Management and Budget. Budget of the U.S. Government for FY2004, Feb. 3,

2003, p. 28.

Budget Action
CBO and the Administration released their first budget reports for FY2004, in
late January and early February 2003, respectively. CBO’s report provided baseline
estimates for fiscal years 2003 through 2013. OMB’s documents provided estimates
for FY2004 through FY2008 with a few instances of cumulative estimates for fiscal
years 2004 through FY2013 (these were limited to revenues and provided almost no
data for the individual fiscal years after FY2008). The President’s budget also
provided current services baseline estimates for the same years.
The Joint Committee on Taxation released its estimates of the revenue effects
in the President’s proposals on March 4, 2003. They showed 10-year (FY2004-
FY2013) revenue reductions of $1,535 billion. (The President’s budget estimated its
revenue proposals would reduce receipts by $1,307 billion over the 10 years.) In
mid-March 2003, CBO released its report, An Analysis of the President’s Budgetary
Proposals for FY2004, which used the Joint Committee on Taxation’s tax estimates
(modified) as the basis for its analysis of the revenue effects of the President’s
proposals. CBO’s estimate showed the proposals reducing receipts by $1,455 billion
over the same 10 years.
The House and Senate Budget Committees adopted their own, differing,
versions of the FY2004 budget resolution (H.Con.Res. 95; S.Con.Res. 23) in mid-
March 2003. The House, after the Republican leadership had to modify the
committee-passed resolution to assure enough support for passage, passed (215-212)
its version on March 21. It contained reconciliation instructions for a $550 billion,
multi-year tax cut.
The Senate spent more than a week considering its resolution. After adopting
and rejecting numerous amendments, the Senate adopted the resolution on March¹¹
26. One of the amendments adopted limited the size of the reconciliation tax-cut
to $350 billion over 11 years (from the committee-adopted level of $698 billion). The
resolution moved to a conference committee April 1, 2003. The conference reported
its agreement on April 10 (H.Rept. 108-71). The agreement included different tax
cut reconciliation instructions for the House and Senate. The House reconciliation
instructions included tax cuts (over 11 years) of up to $550 billion. The Senate
reconciliation instructions limited it to tax cuts of $350 billion. Without other
constraints, this would have allowed a $550 billion tax cut to emerge from a
conference on the tax cut legislation. The $550 billion would have been protected
from a Senate filibuster by the reconciliation rules. To make sure the budget
resolution conference report could clear the Senate, the Senate leadership agreed that
any eventual tax cut legislation would not exceed $350 billion. The House and
Senate passed the conference report on April 11, 2003.
The House Ways and Means Committee reported the reconciliation tax cut
legislation (H.R. 2; H.Rept. 108-94) on May 8. The legislation provided for the $550

¹¹ The Senate substituted the text of its resolution, S.Con.Res. 23, for the text of the House-
passed resolution, H.Con.Res. 95.

billion tax cut included in the House version of the conference agreement on the
budget resolution. The House passed the bill on May 9.
The Senate Finance Committee reported its initial version of the $350 billion
reconciliation tax cut (S. 2; no report) on May 9. Rules on reconciliation legislation
sent the bill back to the Finance Committee. The Committee re-reported the
legislation, now S. 1054 (again, no report) on May 13. The Senate adopted the
legislation (with the $350 billion tax cut limit) on May 15, after substituting the text
of S. 1054 for that of H.R. 2.
On May 23, after extensive leadership negotiations between the House and
Senate, an agreement was reached resolving the differences between the two versions
of the tax-cut legislation (the Jobs and Growth Tax Relief Act of 2003). It provided
$350 billion in cumulative tax cuts and small spending increases from FY2004
through FY2013. The agreement was formalized by the conference committee’s
report (H.Rept. 108-126) on May 22. The House adopted the agreement in the early
morning hours of May 23. The Senate adopted it before noon on May 23. The
legislation included the automatic expiration of many of the new tax cuts within 1 or
2 years to fit within the $350 billion 11-year tax cut. The President signed the
legislation into law (P.L. 108-27) on May 28, 2003.
On July 7, 2003, the President requested a second supplemental of $1.9 billion
for FY2003. A portion of the request, $984 million, cleared Congress (H.R. 2859)
in late July and became law (P.L. 108-69) on August 8. Most of the spending
(outlays) from this legislation would occur in FY2004 and subsequent years.
Work on the appropriations for FY2004 began in the spring of 2003 and
continued through the summer. When Congress returned after its summer recess in
September 2003, the House had passed 11 of the 13 regular appropriations and the
Senate had passed 4. None of the appropriations had become law. By September 9,
the House had passed its versions of all the appropriations. The Senate had passed
seven of the appropriations by the end of September. Three of the appropriations
cleared Congress and were signed into law by the President as the new fiscal year
began on October 1, 2003. Congress adopted (on September 25) and the President
signed (on September 30) the first in a series of continuing resolutions (CRs) on
appropriations (P.L. 108-84; H.J.Res. 69) for FY2004. The CR was necessary to
avoid a lapse in funding for the activities in the still-to-be-enacted 10 appropriations.
The CR ran through October 31, 2003.
As October progressed, Congress continued its efforts to complete action on the
13 regular appropriations for FY2004. By the end of the month, the Senate had
adopted nine appropriations (two more than at the beginning of the month). One
more had gone through conference (Interior), but no more had become law.
A second CR, running through November 7 (P.L. 108-104; October 31, 2003),
became necessary as Congress’ ongoing attempt to finish its work on the FY2004
appropriations continued. As with the second CR, the appropriations work was
unfinished as the November 7 deadline approached. A third CR (P.L. 108-107;
November 7, 2003), provided funding through November 21.

Again, as time ran out on the third CR, Congress remained mired in conflict
over the remaining appropriations. By November 21, the Senate had passed its
versions of 12 of the 13 appropriations.¹² A total of four appropriations had become
law and two more had been sent to the President. In an effort to assure passage of the
remaining appropriations, Congress began working on an omnibus appropriation for
the year that was initially expected to contain the 5 remaining regular appropriations.
Four that were not expected to pass individually — Commerce, Justice, State; the
District; Labor, HHS, Ed; and VA, HUD — were added to Agriculture (H.R. 2673).
The omnibus expanded to include the other remaining two, Foreign Operations and
Transportation-Treasury, after their enactment as separate bills became less certain.
In a post-Thanksgiving session, the House passed the legislation on December 8.
The Senate, meeting the next day, deferred its consideration of the omnibus until
January 2004. Some members of Congress had suggested that if the omnibus fails to
pass the Senate, Congress would have adopted a CR for the rest of the fiscal year,
providing FY2003 spending levels for these activities in FY2004.
The ongoing delays in completing the work on appropriations resulted in the
need for a fourth CR. On November 21, 2003, Congress passed the fourth CR
(H.J.Res. 79), which provided funding through January 31, 2004,. The President
signed it into law (P.L. 108-135) on November 22. A fifth CR (P.L. 108-185),
containing special provisions for two programs (under the Federal Housing
Administration and the Federal Aviation Administration), but otherwise unchanged
from the fourth CR and included the same January 31, 2004 end date, became law on
December 16.
Earlier, during the second half of October, Congress considered the President’s
requested $87 billion supplemental appropriations, mostly for Iraq and Afghanistan.
The House and Senate cleared the supplemental (H.R. 3289; S. 1689) on October 17,
and sent it to conference. Various contentious provisions in the legislation
lengthened the negotiations and prompted a veto threat from the Administration. The
differences were resolved, resulting in the $87.5 billion supplemental appropriation
clearing Congress on November 9. The President signed the legislation into law on
November 6 (P.L. 108-106).
Just before Congress broke for Thanksgiving, it passed, and the President signed
on December 8, changes to Medicare (P.L. 108-173; the Medicare Prescription Drug,
Improvement, and Modernization Act of 2003) that would add an estimated (at that
time) $400 billion to the program’s cost over the next ten years.
On January 22, 2004, after additional delay, the Senate passed the omnibus
appropriation bill, which the President promptly signed on January 23, 2004 (P.L.

108-199).

The January 2004 revised estimates from CBO changed little from the August
2003 estimates, dropping the deficit from $480 billion in August 2003 to $477 billion
in January 2004. The President’s FY2005 budget boosted the estimated deficit for

¹² The House had passed its versions of all the appropriations before mid-September; the
Senate had cleared 7 by the end of September and an eighth by the end of October.

FY2004 to $521 billion from the $475 billion in the July 2003 Mid-Session Review.¹³
CBO’s March 2004 budget report (An Analysis of the President’s Budgetary
Proposals for Fiscal Year 2005) left its FY2004 baseline deficit estimate unchanged
at $477 billion.
The FY2005 budget resolutions passed by the House (H.Con.Res. 393) and
Senate (S.Con.Res. 95) included revised budget numbers for FY2004. In both
resolutions, the deficit had risen to $477 billion from $385 billion in the FY2004
budget resolution (H.Con.Res. 95). The conference report on the budget resolution
contained a modified deficit target of $474 billion for FY2004. The House adopted
the conference report on the budget resolution (H.Rept. 108-495; S.Con.Res. 95) on
May 19, 2004; the Senate did not act on the conference report.
The Administration’s May 2004 request for a reserve fund of $25 billion for
Afghanistan and Iraq was eventually incorporated into the FY2005 Defense
appropriations. The legislation would allow the funds to be used immediately, if
needed. The appropriation cleared Congress on July 22, 2004 and was signed into
law by the President on August 5 (P.L.108-287).
Congress also passed (September 7, 2004; H.R. 5005) and the President signed
(September 8, 2004; P.L. 108-303) an emergency supplemental appropriation for
FY2004 in response to the August and September hurricanes in Florida. (Additional
supplemental appropriations for disaster relief were adopted in early FY2005.)
The Treasury released final budget numbers for FY2004 on October 14, 2004,
in the Final Monthly Treasury Statement of Receipts and Outlays of the United States
Government.
Outlays
The Administration’s FY2004 budget (February 2003) proposed $2,229 billion
in outlays for FY2004, rising to $2,711 billion in FY2008, the last year forecast in
the President’s budget. The current services baseline in the President’s budget
(estimates of what future outlays would be if policies remained unchanged over the
forecast period) showed outlays of $2,189 billion in FY2004 growing to $2,541
billion in FY2008.
The Administration’s proposals, if adopted as proposed, would have raised
outlays $89 billion above the Administration’s proposed FY2003 level and $40
billion above its FY2004 current services baseline outlay estimate. The difference
between the current services baseline outlay estimate and the proposed outlay amount
for FY2004 measures the “cost” of the Administration’s proposed policies. The year-
to-year change (the $89 billion increase) combines the effects of policy changes from

¹³ The Administration arbitrarily reduced receipts by $20 billion, thereby increasing the
deficit by $20 billion, in its February 2004 budget for “revenue uncertainty ... and have been
made in the interest of cautious and prudent forecasting.” OMB, Budget of the United States
Government for FY2005, Analytical Perspectives, p. 239, February 2004.

year to year with the relatively automatic growth in large parts of the budget. These
increases include cost-of-living adjustments, growth in populations eligible for
program benefits, and inflation driven increases. The President’s budget did not
include estimated costs of any (at that time, possible future) conflict with Iraq for
either FY2003 or FY2004.
Table 2. Outlays for FY2003-FY2008 and FY2013
(in billions of dollars)
^FY²⁰⁰²^FY²⁰⁰³^FY²⁰⁰⁴^FY²⁰⁰⁵^FY²⁰⁰⁶^FY²⁰⁰⁷^FY²⁰⁰⁸^FY²⁰¹³^a
^C^B^O^A^d^jus^t^e^d^B^a^s^e^line^,^1/31/03^$2,011^$2,121^$2,199^$2,298^$2,³⁸⁷⁸^$2,4795^{$2,583 $3,167}
^P^r^e^s^ideⁿ^t’^s^{F04 B}^udg^e^t^{, 2/3/03}^2,140^2,229^2,343^2,464^2,576^2,711^—
^P^r^esi^d^en^t^’^{s F}^Y⁰⁴^Cu^rren^t^S^e^rvi^ces,^2/3/03^2,131^2,189^2,276^2,348^2,440^2,541^—
^C^B^O^R^e^vⁱ^s^e^{d B}^a^s^e^line^,^3/03^2,¹³⁷^2,224^2,328^2,417^2,513^2,621^3,215
^C^B^O^Es^{t. of}^the^P^r^e^s^ideⁿ^t’^s^P^o^lic^ie^s^,^3/03^2,143^2,245^2,370^2,491^2,606^2,739^3,452
^H^ous^e^FY^{2004 B}^udg^e^t^R^e^s^o^{lution, 3/}^21/03^2,143^2,232^2,337^2,450^2,556^2,675^3,335
^Se^na^te^FY^{2004 B}^udg^e^t^R^e^s^o^{lution, 3/}^26/03^2,148^2,246^2,372^2,491^2,607^2,734^3,338
^C^onf^e^r^eⁿ^c^e^FY^{2004 B}^udg^{. R}^e^s^.^4/11/⁰³^2,182^2,268^2,375^2,494^2,607^2,737^3,387
^O^M^B^MSR^7/15/03^2,212^2,272^2,338^2,452^2,573^2,706^—
^O^M^B^MSR^,^B^a^s^e^line^,^7/15/03^2,²¹⁰^2,252^2,304^2,377^2,481^2,587^—
^C^B^O^U^pda^te^{, B}^a^s^e^line^,^8/26/03^2,157^a^2,305^2,404^2,501^2,624^2,761^3,422
^C^B^O^B^&^{E O}^u^tlook^{, B}^a^s^e^line^,^1/26/⁰⁴^—^2,294^2,411^2,525^2,652^2,783^3,457
^O^M^B^,^B^udg^e^t^f^o^r^FY^{2005, 2/2/04}^—^2,319^2,400^2,473^2,592^2,724^—
^C^B^O^R^e^vⁱ^s^e^{d B}^a^s^e^line^,^3/8/04^—^2,295^2,413^2,528^2,659^2,791^3,473
^C^B^O^Es^tim^a^t^e^of^P^r^e^s^’^s^P^o^lic^ie^s^,^3/8/04^—^2,295^2,384^2,482^2,593^2,722^3,429
^Se^na^te^{, FY}^{05 B}^udg^e^t^R^e^s^o^{lution S.C}^on.R^e^s^.^—^2,295^2,367^2,469^2,582^2,698^—
^{95, 3/5/04}
^H^ous^e^,^FY^{05 B}^udg^e^t^R^e^s^o^{lution H}^.^C^on.R^e^s^.^—^2,295^2,406^2,492^2,591^2,712^—
^{393, 3/19/04}
^C^onf^{., FY}^{05 B}^udg^e^t^R^e^s^o^lution^—^2,338^2,405^2,479^2,602^2,725^—
^S.C^on.R^e^s^.^{95, 5/19/04*}
^O^M^B^,^Mid-^Se^s^sⁱ^{on R}^e^v^.^7/30/04^—^2,319^2,423^2,500^2,623^2,762^—
^C^B^O^U^pda^te^9/7/04^—^2,²⁹³^2,442^2,577^2,714^2,849^3,547
^A^c^tua^l^f^o^r^FY²⁰⁰⁴^—^2,293^—^—^—^—^—
^a^.^A^c^tua^l^outla^y^s^f^o^r^FY^{2002 a}^{nd FY}^2003.
^*^T^he^c^onf^e^r^eⁿ^c^e^r^e^por^{t (}^H^.R^e^p^{t. 108-}⁴⁹⁸⁾^pa^s^s^e^{d the}^H^ous^e^{on Ma}^y^{19, 2004, but ha}^s^y^e^{t to be}^c^ons^ide^r^e^d^{in the}^Se^na^te^.
^B^&^{E O}^u^tlook^—^T^h^e^Budge^{t and Ec}^onom^ic^O^u^tlook^{, CBO.}
^EP^P^—^C^B^O^’^s^e^s^tim^a^t^e^s^of^the^P^r^e^s^ideⁿ^t’^s^pr^opos^a^l^s^.
Total outlays, in the President’s budget, were projected to grow at an average
annual rate of 5.0% between FY2004 and FY2008. Broad categories of spending
(budget functions) showed varying rates of growth. The health budget function
increased at an annual average rate of 7.9%, the Medicare function increased at an
annual average rate of 7.8%, and net interest increased at an annual average rate of^14,15

9.6% over these years. These three functions accounted for over 53% of the total

¹⁴ Budget functions combine, “budget data according to the major purpose served” rather
than by agency or program. OMB, Budget of the U.S. Government for FY2004, Analytical
Perspectives, p. 463.
¹⁵ The Energy budget function has an even higher rate of increase, growing by an annual
(continued...)

outlay increase in the President’s budget during this period. All of the other fifteen
budget functions have a lower annual growth rate than that of total outlays.¹⁶ The
relatively low growth in some budget functions (agriculture 0.8%, education,
training, employment, and social services 1.2%, general government 1.2%, and
natural resources and environment 1.5%), growth that is lower than the expected rate
of inflation, will reduce these functions’ spending, both in real terms and as shares
of total spending.
The January 2003 CBO baseline, which, like the Administration’s current
services baseline estimates, assumed no changes from existing government policy,
forecast FY2004 outlays of $2,199 billion, FY2008 outlays of $2,583 billion, and,
because CBO’s estimates extended through FY2013, FY2013 outlays of $3,167
billion.¹⁷ As should be expected, the CBO baseline estimates were similar to the
Administration’s current services baseline estimates for the same years (FY2004-
FY2008).
The revisions in CBO’s March 2003 report raised estimated FY2004 baseline
outlays by $25 billion, to $2,224 billion (mostly because of the inclusion of the
effects of adopting the Consolidated Appropriations Resolution, 2003 (P.L. 108-7))
in February 2003. Each of the subsequent year’s outlays were larger in the CBO
March estimates than they were in CBO’s January baseline.
CBO’s March estimates of the President’s policy proposals raised outlays $16
billion above the FY2004 amount proposed by the Administration. By FY2008,
CBO’s reestimates pushed total outlays to $2,739 billion, $28 billion higher than in
the Administration’s budget. For the same years covered by the President’s budget,
FY2004-FY2008, CBO’s reestimates raised outlays close to $30 billion a year above
the Administration’s estimates (except for the $16 billion difference in FY2004). By
FY2013, the Administration’s outlay proposals, under the CBO reestimates, reached
$3,279 billion.
The House- and Senate-passed budget resolutions contained different levels of
spending for FY2004 and subsequent years and differences in the components of that
spending. The House resolution included $2,232 billion in outlays for FY2004,
while the Senate amount was $2,246 billion, less than a 1% difference. By FY2013,
the House resolution had outlays of $3,289 billion and the Senate resolution had
outlays of $3,338 billion, a 1.5% difference. The House included instructions to cut
spending in a wide selection of many mandatory programs, stating that there should
be enough “waste, fraud, and abuse” in the programs affected to avoid diminishing

¹⁵ (...continued)
average rate of 18.3%, but since it only makes up 0.04% of total outlays in FY2004 and

0.07% of outlays in 2008, it has little effect on the overall change in outlays.

¹⁶ The two budget functions, “allowances,” and “undistributed offsetting receipts,” were
excluded from the total number of functions.
¹⁷ These projections followed very similar rules as those used by the Administration to
produce its current services baseline estimates. CBO and OMB used different budget
models and a number of different underlying assumptions, which generated much of the
difference in the two estimates.

their effectiveness. The Senate resolution restricted growth in non-defense, non-
homeland security discretionary spending in the second five years of the period.
The conference report on the FY2004 budget resolution (H.Rept. 108-71)
included outlays of $2,268 billion in FY2004 and $3,387 billion in FY2013. In
addition, the conference agreement required most of the authorizing committees in
the House and Senate to report the amount of “waste, fraud, and abuse” within the
programs under their jurisdiction to their respective Budget Committees by
September 2003 (very few did).
The July 2003 Mid Session Review (MSR), reflecting the legislation adopted
since the February budget release, raised FY2004 current services baseline outlays
to $2,252 billion from the original baseline outlays of $2,189 billion, a 3% increase.
Outlays under the Administration’s policy proposals, some of which had been
modified since the original proposal, grew to $2,272 billion from the originally
proposed $2,229 billion, a 2% increase. Some of the change resulted from the
differences between the legislation adopted by Congress and what the President
originally proposed. Outlays under the proposals in the MSR reached $2,706 billion
in FY2008, slightly below the amount originally projected ($2,711 billion).
CBO’s August 2003 baseline raised estimated baseline outlays by $81 billion
from its March baseline estimates ($2,224 billion) to $2,305 billion for FY2004, an
almost 4% increase. By FY2008, baseline outlays would rise to $2,761 billion, $140
billion above the March estimates. The effects of legislation adopted since March
2003 accounted for $92 billion of the increases in FY2004 estimated outlays; $54
billion of the $92 billion change came from legislated increases in defense spending.
The January 2004 CBO budget report (for FY2005) revised FY2004 baseline
outlay estimates, reducing them to $2,294 billion, $11 billion below the August 2003
estimates. The expectations of better economic conditions produced most of the
improvement. In subsequent years (FY2005-FY2013), the January estimates were
slightly larger than the August estimates. The Administration’s FY2005 budget
proposal (February 2004) included revised estimates (and proposals) for FY2004
outlays. The budget raised FY2004 outlays to $2,319 billion, $65 billion higher than
the Administration’s previous estimate in July 2003.
The unfinished appropriations at the time that CBO and OMB released their
reports, early in 2004, for FY2005, increased the uncertainty about the level of
spending in FY2004 and subsequent years. Senate action was needed on the omnibus
appropriation conference report (H.R. 2673; H.Rept. 108-401; the House passed it
on December 8, 2003) containing the remaining 7 regular appropriations for FY2004.
The activities funded by these 7 appropriations were funded in January 2004 by the
fifth (and final) continuing resolution on appropriations (P.L.108-185; H.J.Res. 82)
for FY2004.
Legislation adopted during 2004 had little effect in changing the FY2004 outlay
estimates between March 2004 and the release of actual totals in October 2004.

Receipts
The Administration’s FY2004 budget included proposals for tax cuts that the
Administration claimed would boost the economic recovery, and to speed up and
make permanent many of the tax changes enacted over the last two years. The
Administration divided its revenue proposals over FY2004-FY2008 period into an
economic growth package ($390 billion in reductions over FY2004-FY2008); tax
incentives ($72 billion); tax simplification (which would increase receipts by $13
billion); extending expiring tax provisions ($40 billion); and miscellaneous changes
(which would increase receipts by $2 billion). The total proposal would reduce
receipts from current services baseline levels by $493 billion between FY2004 and¹⁸
FY2008 and by $1,461 billion between FY2004 and FY2013. According to the
Administration’s budget, these changes would slow the overall growth in receipts but
would not stop them. The President’s FY2004 budget showed receipts growing from
$1,922 billion in FY2004 to $2,521 billion in FY2008.
CBO’s January 2003 baseline included FY2004 receipt estimates of $2,054
billion, using a somewhat different set of underlying assumptions than what the
Administration had used for its current service baseline estimates. The CBO
estimates also assumed that the automatic expiration of the tax cuts of EGTRRA
would occur as scheduled. The reversion to previous tax law under the baseline
assumptions, particularly after 2010 (calendar year), produced a large increase in
projected revenues in the following fiscal years. In FY2010, extending the tax cuts
produces total estimated receipt that are $32 billion below the baseline estimates; in
FY2011, the level of receipts would be an estimated $156 billion below the baseline
estimates; and by FY2013, they would be an estimated $260 billion below the
baseline estimates. CBO estimated that extending all the EGTRRA tax provisions
that are set to expire before FY2013 would reduce cumulative revenues over the
FY2004-FY2013 period by $785 billion (from cumulative baseline revenues of¹⁹
$27,923 billion).
CBO’s March 2003 revised baseline estimated revenues fell by $20 billion to
$30 billion below the January baseline for the years FY2004 through FY2006, after
which the January and March baseline estimates were very similar. CBO attributed
the change to technical factors. The CBO revenue estimates of the President’s
proposals were somewhat less than the amounts in the President’s budget ($15 billion
to $30 billion) for fiscal years 2004 through 2006. For subsequent years, CBO’s

¹⁸ These estimates are from the Treasury’s General Explanations of the Administration’s
Fiscal Year 2004 Revenue Proposals. The President’s budget showed a $441 billion
revenue reduction (from baseline estimates) for the FY2004-FY2008 period and a $1,307
billion reduction for the FY2004-FY2013 period. The Treasury’s estimates were produced
after the release of the President’s budget reflecting modifications to the proposals and
adjustments to the estimates. See also the CRS Report RS21420, President Bush’s 2003 Tax
Cut Proposal: A Brief Overview, and the CRS Issue Brief IB10110, Major Tax Issues in the^th

108 Congress for more information on the proposals.

¹⁹ This estimate does not include the higher interest payments resulting from the larger
deficits or smaller surpluses occurring over this period that increases public debt.

estimates of the President’s revenue proposals exceeded the amounts the
Administration projected.
Table 3. Receipts for FY2002-FY2008 and FY2013
(in billions of dollars)
^FY²⁰⁰²^FY²⁰⁰³^FY²⁰⁰⁴^FY²⁰⁰⁵^FY²⁰⁰⁶^FY²⁰⁰⁷^FY²⁰⁰⁸^FY²⁰¹³^a
^C^B^O^A^d^jus^t^e^d^B^a^s^e^line^,^1/31/03^$1,853^$1,922^$2,054^$2,225^$2,370^$2,505^$2,648^$3,674
^P^r^e^s^ideⁿ^t’^s^{F04 B}^udg^e^t^{, 2/3/03}^1,836^1,922^2,135^2,263^2,398^2,521^—
^P^r^esi^d^en^t^’^{s F}^Y⁰⁴^Cu^rren^t^S^e^rvi^ces^2/3/03^1,867^2,031^2,235^2,352^2,469^2,593^—
^C^B^O^R^e^vⁱ^s^e^{d B}^a^s^e^line^,^3/7/03^1,891^2,024^2,205^2,360^2,504^2,647^3,674
^C^B^O^Es^{t. of}^the^P^r^e^s^ideⁿ^t’^s^P^o^lic^ie^s^,^3/7/03^1,856^1,907^2,100^2,273^2,433^2,573^3,350
^H^ous^e^FY^{2004 B}^udg^e^t^R^e^s^o^{lution, 3/}^21/03^1,855^1,908^2,107^2,282^2,444^2,587^3,372
^Se^na^te^FY^{2004 B}^udg^e^t^R^e^s^o^{lution, 3/}^26/03^1,865^1,959^2,154^2,321^2,479^2,620^3,497
^C^onf^e^r^eⁿ^c^e^FY^{2004 B}^udg^{. R}^e^s^.^4/11/⁰³^1,835^1,883^2,082^2,277^2,441^2,586^3,424
^O^M^B^MSR^7/15/03^1,756^1,797^2,033^2,215^2,360^2,480^—
^O^M^B^MSR^,^B^a^s^e^line^,^7/15/03^1,⁷⁵⁶^1,794^2,063^2,267^2,403^2,525^—^a
^C^B^O^U^pda^te^{, B}^a^s^e^line^,^8/26/03^1,782^1,825^2,064^2,276^2,421^2,564^3,634
^C^B^O^B^&^{E O}^u^tlook^{, B}^a^s^e^line^,^1/26/⁰⁴^—^1,817^2,049^2,256^2,385^2,506^3,441
^O^M^B^,^B^udg^e^t^f^o^r^FY^{2005, 2/2/04}^—^1,798^2,036^2,206^2,351^2,485^—
^C^B^O^R^e^vⁱ^s^e^{d B}^a^s^e^line^,^3/8/04^—^1,817^2,050^2,255^2,384^2,505^3,439
^C^B^O^Es^tim^a^t^e^of^P^r^e^s^’^s^P^o^lic^ie^s^,^3/8/04^—^1,816^2,027^2,211^2,351^2,470^3,151
^Se^na^te^{, FY}^{05 B}^udg^e^t^R^e^s^o^{lution, 3/}^12/04^—^1,817^2,026^2,217^2,359^2,481^—
^H^ous^e^,^FY^{05 B}^udg^e^t^R^e^s^o^{lution, 3/}^25/04^—^1,818^2,030^2,221^2,351^2,477^—
^C^onf^{., FY}^{05 B}^udg^e^t^R^e^s^o^lution^—^1,821^2,027^2,235^2,383^2,503^—
^S.C^on.R^e^s^.^{95, 5/19/04*}
^O^M^B^,^Mid-^Se^s^sⁱ^{on R}^e^v^.^7/30/04^—^1,874^2,091^2,239^2,391^2,534^—
^C^B^O^U^pda^te^9/7/04^—^1,871^2,094^2,279^2,406^2,531³⁴⁷¹
^Ac^{tual for}^FY2004^—^1,878^—^—^—^—^—
^a.^A^c^t^u^al^recei^p^t^{s f}^o^{r F}^Y^{2002 a}^{nd FY}^2003.
^*^T^he^c^onf^e^r^eⁿ^c^e^r^e^por^{t (}^H^.R^e^p^{t. 108-}⁴⁹⁸⁾^pa^s^s^e^{d the}^H^ous^e^{on Ma}^y^{19, 2004, but ha}^s^y^e^{t to be}^c^ons^ide^r^e^d^{in the}^Se^na^te^.
^B^&^{E O}^u^tlook^—^T^h^e^Budge^{t and Ec}^onom^ic^O^u^tlook^{, CBO.}
^EP^P^—^C^B^O^’^s^e^s^tim^a^t^e^s^of^the^P^r^e^s^ideⁿ^t’^s^pr^opos^a^l^s^.
The House (H.Con.Res. 95) and Senate (S.Con.Res. 23) budget resolutions both
contained revenue reductions, but differed in size. The House included an estimated
$698 billion revenue reduction over 11 years (FY2003-FY2013), closely matching
the President’s tax cut proposals. The Senate included reconciliation instructions for
a tax cut of no more than $350 billion. Additional components of the President’s
original tax proposals were incorporated in the Senate resolution, but not in the
reconciliation instructions. The conference on the budget resolution produced
separate tax cut reconciliation instructions for the House Ways and Means
Committee and the Senate Finance Committee. Reconciliation instructions required
the Ways and Means Committee to reduce receipts by $550 billion ($535 billion in
tax cuts and $15 in increased outlays) over the 11-year period. The Finance
Committee was instructed to reduce taxes by no more than $350 billion.
Soon after the House adopted the conference report (H.Rept. 108-71) on the
budget resolution (April 11), the Senate indicated that no eventual tax cut legislation
exceeding $350 billion would be presented to the Senate. Many House members,
expecting the larger tax cut amount ($550 billion) to eventually emerge from a
conference committee on the tax cut legislation, were unhappy with the Senate’s
internal agreement.

The Committee on Ways and Means reported (H.Rept. 108-94) out the
reconciliation bill, H.R. 2 (the Jobs and Growth Reconciliation Tax Act of 2003),
costing $550 billion, including some increased outlays, on May 8. The House passed
it on May 9. The Committee on Finance reported S. 2 (with no written report), its
version of the reconciliation bill, on May 9. It contained revenue reductions of $350
billion and some increases in outlays. Procedural issues required the Committee on
Finance to report, again with no written report, a new bill (S. 1054) containing
essentially the same contents as S. 2. The Committee reported the bill on May 13.
The Senate, after substituting the text of S. 1054 for the text of H.R. 2, passed the
$350 billion reconciliation bill on May 15.
On May 22, after extensive Republican leadership discussions about the
reconciliation bill, a compromise was reached on an estimated $350 billion multi-
year tax cut. The conference committee on the legislation endorsed the agreement
and reported (H.Rept. 108-126) the modified H.R. 2 on May 22. The Housed passed
the bill in the very early hours of May 23. The Senate passed the bill before noon on
May 23. The President signed it into law (P.L. 108-27, the Jobs and Growth Tax
Relief Reconciliation Act or JGTRRA) on May 28.²⁰
OMB’s July 2003 mid-year budget report (the Mid-Session Review — MSR)
estimated that the JGTRRA would reduce FY2004 receipts by $138 billion (from
baseline estimates). Over the period FY2004 through FY2008, OMB estimated that
the law would actually increase receipts (compared to the Administration’s original
proposals, since the original proposal included a larger tax cut) by $48 billion.
The law included the expiration of the tax changes by the end of 2005, with a
reversion to previous law. CBO’s August 2003 budget report (The Budget and
Economic Outlook: An Update — Update) estimated that JGTRRA would lower
receipts in FY2004 by $135 billion from CBO’s baseline estimate (the law would
also increase outlays by $12 billion). Over the FY2004 through FY2008 period,
CBO estimated that JGTRRA would reduce receipts (compared to CBO’s baseline,
which did not include the Administration’s original tax cut proposal) by $264
billion.²¹
The next budget report from CBO in January 2004 (the Budget and Economic
Outlook: Fiscal Years 2005-2014) reduced FY2004 baseline receipts slightly below
its previous estimate from August 2003 and reduced estimated receipts in subsequent
years by larger amounts. The $8 billion smaller estimate for FY2004 became a $58
billion smaller estimate by FY2008 and a $193 billion smaller estimate by FY2013
(compared to the August 2003 estimates). For FY2004, CBO attributed the reduction

²⁰ Most of the major provisions of the legislation are scheduled to expire after calendar year
2004 or after calendar year 2008. These expirations kept the budgetary change from
exceeding the $350 billion limit set by the agreement. Extending the provisions through

2013 would raise the estimated cost of the legislation, compared to the baseline estimates,

close to $1 trillion over the 11 years.
²¹ Because most of the provisions were designed to expire after FY2005, CBO estimated that
the 10-year cost of the tax cut would be only slightly larger, by $7 billion, to $271 billion,
than the five-year cost, $264 billion.

to underlying technical components of the estimates; for most of the subsequent
years, CBO attributed the reductions to changes in the economic outlook.
The President’s budget for FY2005 (February 2004) called for extending and
making permanent many of the expiring tax changes and had slightly larger receipts
(by $4 billion) for FY2004 than in its previous estimates from July 2003. The
February 2004 estimates had smaller receipts for FY2006 through FY2008 than in
the July 2003 estimate.
The CBO March 2004 report analyzing the President’s FY2005 budget
proposals (An Analysis of the President’s Budgetary Proposals for Fiscal Year 2005)
did not change the FY2004 baseline revenue estimate. The baseline revenue
estimates and projections in subsequent years were slightly larger than those in
CBO’s January report.
The tax legislation adopted later in the year to extend at least some of the
expiring tax cuts had little or no effect on FY2004 receipts. The July 2004 Mid-
Session Review (MSR) from OMB and the early September Budget and Economic
Outlook: An Update from CBO estimated higher receipts for FY2004 (by $76 billion
and $54 billion respectively) than they had in their previous reports. Both OMB and
CBO attributed most of the net change in FY2004 (from their earlier 2004 reports)
receipts to changes in underlying economic assumptions and technical reestimates
rather than the effects of legislation.
Actual receipts for FY2004 (from the Treasury, October 14, 2004) were $1,880
billion, less than a $10 billion increase from either the OMB or CBO estimates in
their respective mid-year budget reports. The number is likely to be slightly revised
by the time it appears in the President’s FY2006 budget, expected in February 2005.
Deficits and Surpluses
Surpluses and deficits are the residuals left after Congress and the President set
policies for spending and receipts. Surpluses reduce federal debt held by the public
which leads to lower net interest payments; deficits increase government debt held
by the public, increasing net interest payments (assuming no change in interest rates).
Reducing the deficit and eventually reaching a balanced budget or generating and
keeping a surplus (the government had its first surplus in 30 years in FY1998) was
a major focus of the budget debates in the late 1980s and throughout the 1990s. The
President’s FY2004 budget proposals included a deficit of $307 billion in FY2004.
CBO’s March 2003 estimates of the President’s proposals had a deficit of $338
billion in FY2004.
CBO’s January 2003 baseline estimates showed the budget returning to surplus
in FY2007, with it growing through FY2013. CBO’s March 2003 revisions
increased the near-term deficits and slowed, by one year, the emergence of a surplus.
The growth in the surplus, especially after FY2010, would be boosted substantially,
in the baseline estimates, by the scheduled expiration of the 2001 tax cut at the end
of 2010.

Table 4. Surpluses/Deficits(-) for FY2004-FY2008 and FY2013
(in billions of dollars)
^FY^{2002 FY}²⁰⁰³^FY²⁰⁰⁴^FY²⁰⁰⁵^FY²⁰⁰⁶^FY²⁰⁰⁷^FY²⁰⁰⁸^FY²⁰¹³
^C^B^O^A^d^jus^t^e^d^B^a^s^e^line^,^1/31/03^-^$158^a^-^$199^-^$145^-^$73^-^$16^$26^$65^$508
^P^r^e^s^ideⁿ^t’^s^{F04 B}^udg^e^t^{, 2/3/03}^-³⁰⁴^-³⁰⁷^-²⁰⁸^-²⁰¹^-¹⁷⁸^-¹⁹⁰^—
^P^r^e^s^ideⁿ^t’^s^FY^{04 C}^u^r^r^e^{nt Se}^r^v^ic^e^s^2/3/03^-²⁶⁴^-¹⁵⁸^-⁴⁰⁵²⁹⁵¹^—
^C^B^O^R^e^vⁱ^s^e^{d B}^a^s^e^line^,^3/7/03^-²⁴⁶^-²⁰⁰^-¹²³^-⁵⁷^-⁹²⁷⁴⁵⁹
^C^B^O^Es^{t. of}^the^P^r^e^s^ideⁿ^t’^s^P^o^lic^ie^s^,^3/7/03^-²⁸⁷^-³³⁸^-²⁷⁰^-²¹⁸^-¹⁷³^-¹⁶⁶^-¹⁰²
^H^ous^e^FY^{2004 B}^udg^e^t^R^e^s^o^{lution, 3/21/03}^-²⁸⁸^-³²⁴^-²³⁰^-¹⁶⁸^-¹¹¹^-⁸⁷³⁷
^Se^na^te^FY^{2004 B}^udg^e^t^R^e^s^o^{lution, 3/26/03}^-²⁸²^-²⁸⁷^-²¹⁸^-¹⁶⁹^-¹²⁸^-¹¹⁴¹⁵⁹
^C^onf^e^r^eⁿ^c^e^FY^{2004 B}^udg^{. R}^e^s^.^4/11/03^-³⁴⁷^-³⁸⁵^-²⁹⁴^-²¹⁷^-¹⁶⁶^-¹⁵¹³⁷
^O^M^B^MSR^7/15/03^-⁴⁵⁵^-⁴⁷⁵^-³⁰⁴^-²³⁸^-²¹³^-²²⁶^—
^O^M^B^MSR^,^B^a^s^e^line^,^7/15/03^-⁴⁵⁵^-⁴⁵⁸^-²⁴¹^-¹¹⁰^-⁷⁸^-⁶²^—
^C^B^O^U^pda^te^{, B}^a^s^e^line^,^8/26/03^-³⁷⁴^a^-⁴⁸⁰^-³⁴¹^-²²⁵^-²⁰³^-¹⁹⁷²¹¹
^C^B^O^B^&^{E O}^u^tlook^{, B}^a^s^e^line^,^1/26/04^—^-⁴⁷⁷^-³⁶²^-²⁶⁹^-²⁶⁷^-²⁷⁸^-¹⁶
^O^M^B^,^B^udg^e^t^f^o^r^FY^{2005, 2/2/04}^—^-⁵²¹^-³⁶⁴^-²⁶⁸^-²⁴¹^-²³⁹^-²³⁷
^C^B^O^R^e^vⁱ^s^e^{d B}^a^s^e^line^,^3/8/04^—^-⁴⁷⁷^-³⁶³^-²⁷³^-²⁷⁴^-²⁸⁶^-³⁴
^{CBO Estim}^a^t^e^of^P^r^e^s^{’s P}^o^lic^ie^{s, 3/8/04}^—^-⁴⁷⁸^-³⁵⁸^-²⁷¹^-²⁴²^-²⁵²^-²⁷⁸
^Se^na^te^FY^{05 B}^udg^e^t^R^e^s^o^{lution 3/12/04}^—^-⁴⁷⁷^-³³⁸^-²⁵²^-²²³^-²¹⁸^—
^H^ous^e^,^FY^{05 B}^udg^e^t^R^e^s^o^{lution, 3/21/04}^—^-⁴⁷⁷^-³⁷⁷^-²⁷¹^-²⁴⁰^-²³⁵^—
^C^onf^{., FY}^{05 B}^udg^e^t^R^e^s^o^lution^—^-⁴⁷⁴^-³⁶⁷^-²⁵⁵^-¹⁹⁴^-¹⁸⁶^—
^S.C^on.R^e^s^.^{95, 5/19/04*}
^O^M^B^,^Mid-^Se^s^sⁱ^{on R}^e^v^.^7/30/04^—^-⁴⁴⁵^-³³¹^-²⁶¹^-²³³^-²²⁸^—
^C^B^O^U^pda^te^9/7/04^—^-⁴²²^-³⁴⁸^-²⁹⁸^-³⁰⁸^-³¹⁸^-⁷⁵
^Ac^{tual for}^FY2004^—^-⁴¹³^—^—^—^—^—
^a^.^A^c^tua^l^de^fⁱ^c^{it f}^o^r^FY^{2002 a}^{nd FY}^2003.
^*^T^he^c^onf^e^r^eⁿ^c^e^r^e^por^{t (}^H^.R^e^p^{t. 108-}⁴⁹⁸⁾^pa^s^s^e^{d the}^H^ous^e^{on Ma}^y^{19, 2004, but ha}^s^y^e^{t to be}^c^ons^ide^r^e^d^{in the}^Se^na^te^.
^B^&^{E O}^u^tlook^—^T^h^e^Budge^{t and Ec}^onom^ic^O^u^tlook^{, CBO.}
^EP^P^—^C^B^O^’^s^e^s^tim^a^t^e^s^of^the^P^r^e^s^ideⁿ^t’^s^pr^opos^a^l^s^.
^No^t^e^:^T^h^{e CBO b}^a^selⁱⁿ^{es a}^s^s^u^me^,^a^s^r^e^q^uⁱ^r^e^d^b^y^t^h^{e b}^a^selⁱⁿ^{e co}ⁿ^s^t^r^u^c^tⁱ^oⁿ^ru^l^e^s,^t^h^at^b^ecau^{se i}^t^exi^s^t^sⁱⁿ^cu^rren^t^l^a^w^,^al^l^o^f^t^he
^sⁱ^gⁿ^if^ic^aⁿ^t^ta^x^c^u^ts^a^dopte^d^{in the}^la^s^t^s^e^v^e^ra^{l y}^e^a^r^s^w^{ill e}^x^pire^by^the^e^{nd of}^(c^a^l^e^nda^{r) 2010, the}^r^e^b^y^produc^ing^the^s^u^rplus^{es i}ⁿ
^FY^2013.
The House Budget Committee’s reported FY2004 budget resolution would
move the budget into surplus in FY2010; the Senate Budget Committee’s budget
resolution moved the budget into surplus in FY2013. The House- and Senate-passed
budget resolutions amended the two committee’s original resolutions, showing the
budget moving back into surplus in FY2012. The conference report on the budget
resolution (H.Rept. 108-71) had a deficit of $385 billion for FY2004, a $151 billion
deficit in FY2008, and a small $10 billion surplus in FY2012.
The summer 2003 budget reports from OMB (MSR) and CBO (Update) raised
the expected deficit estimates for FY2004 and subsequent years. The MSR’s current
services baseline deficit estimate was $458 billion for FY2004, falling to $62 billion
in FY2008. The baseline had a cumulative deficit (FY2004-FY2008) of $949 billion.
The Administration estimated that under its policies, a deficit of $475 billion in
FY2004, falling to $226 billion in FY2008 ((the last year in the Administration’s
estimates). The proposals would create an estimated cumulative deficit of $1,456
billion (FY2004-FY2008), $506 billion larger than the sum of the baseline deficit
estimates for those years. The Administration’s MSR deficit estimates did not

include “what the Administration has previously indicated are expected but
undetermined additional costs arising from the ongoing operations in Iraq, extending
beyond 2003.”²² (The President asked for and got from Congress, in the fall of 2003,
an $87.5 billion supplemental appropriation mostly for the ongoing operations in
Afghanistan and Iraq.) Implementing the President’s proposals would raise each
year’s deficit above the baseline and leave very uncertain whether or not the budget
would return to surplus after FY2008.
CBO’s summer 2003 baseline estimates raised the deficit estimate to $480
billion in FY2004, falling to $197 billion in FY2008 (and becoming a surplus of
$211 billion in FY2013 after the scheduled expiration of various tax cuts at the end
of 2010). The cumulative (FY2004-FY2008) baseline deficit was $1,445 billion in
the CBO report. The 10-year period, FY2004-FY2013, had a cumulative baseline
deficit of $1,397 billion (smaller than the five-year cumulative deficit because of the
forecast return to surpluses in the second five-year period).
The January 2004 CBO baseline estimates for the FY2005 budget cycle
included revised deficit estimates for FY2004 through FY2014. CBO estimated the
baseline deficit for FY2004 at $477 billion. The deficits in subsequent years were
larger than CBO had estimated in August 2003, with the budget never returning to
surplus throughout the period. (The CBO March 2004 revisions slightly increased
deficits throughout the projection period beginning in FY2005.)
The Administration’s FY2005 budget (February 2004) included larger deficit
estimates for FY2004 and subsequent years that reflected the effects of the
Administration’s policy proposals. The budget included a FY2004 deficit estimate
of $521 billion, up from the $475 billion level in the July 2003 Mid-Session Review.
The Administration arbitrarily reduced its FY2004 revenue estimate by $20 billion
in the budget, thereby raising the FY2004 deficit by $20 billion. CBO’s March 2004
estimates of the President’s proposals produced a deficit of $477 billion for FY2004.
Although the President’s budget estimated that the deficit would fall to $237 billion
in FY2009, half the amount that the Administration expects in FY2004, almost all
of the reduction occurs between FY2004 and FY2006. After FY2006, the deficit, in
dollars, changes very little through FY2009, the last year of detailed projections in
the Administration’s budget.
In addition to the reestimates the President’s proposals, CBO’ March 2004
report included updated baseline estimates. There was no change in CBO’s FY2004
baseline deficit from the one in January 2004. The March baseline deficit estimates
for subsequent years were somewhat larger than they had been in CBO’s January

2004 budget report.

The 2004 mid-year reports from OMB (July 30) and CBO (September 7)
contained smaller deficit estimates for FY2004 than had their earlier (2004) budget
reports. OMB estimated that the deficit would be $445 billion for FY2004 while
CBO estimated that the deficit would be $422 billion (the actual deficit as reported
by the Treasury in October was $413 billion). CBO attributed much of the deficit

²² OMB, Mid-Session Review, July 15, 2003, p.1.

reduction since its March report to higher receipts than expected earlier, mostly from
the effect of changed economic conditions and technical changes. Neither legislation
nor any changes in outlays had much effect on these final deficit estimates.
CBO’s Alternative Policies Not Included in the Baseline
CBO’s summer report (August 2003) also included estimates of the “budgetary
effects of policy alternatives not included in CBO’s baseline.” The alternatives
include policies that have a high probability of being enacted or seriously debated.
They included extending expiring tax provisions, the reform of the alternative
minimum tax (AMT), Medicare reform — including a prescription drug benefit
(which had not yet been adopted), and increasing discretionary spending at the
growth rate of nominal GDP or at the average rate of discretionary spending growth
from FY1998 through FY2003. The alternatives are all fairly costly, running from
$112 billion for AMT reform for FY2004 through FY2008 to $608 billion for
increasing discretionary spending at its recent historical growth rate for the same
years.
During the 10 years, FY2004-FY2013, these costs become much larger, ranging
from $400 billion for both AMT and Medicare reform, to $1,564 billion to extend the
expiring provisions, to $2,833 billion for increasing discretionary spending at the
recent historical rate. Combining these effects (and excluding the cost of increasing
discretionary spending at the rate of nominal GDP growth) with the baseline deficit
estimate and projection raises the FY2004 deficit to $510 billion, the FY2008 deficit
to $577 billion, and, instead of becoming a $161 billion surplus in FY2012, the
alternatives produce a deficit of $765 billion in that year and a deficit of $826 billion
in FY2013. Under these alternative policies, the cumulative deficit for FY2004
through FY2008 rises from $1,455 billion in the baseline to $2,577 billion under the
alternatives. For the 10 year period, FY2004 through FY2013, the cumulative deficit
rises from $1,397 billion in the baseline to $6,193 billion with the alternatives
included. Adoption of these alternative policies moves the budget further into deficit
with no indications of it moving towards balance.
The Longer Run
Over a longer period, one running decades into this century, the Administration
indicated (in its FY2004 budget) that it expects, under existing policies and
assumptions, large and continually growing deficits beginning sometime in the next
decade. The retirement of the baby boom generation, beginning in large numbers
within 15 years, will rapidly drive up spending on Social Security, Medicare, and
other programs for the elderly, doubling these collective programs’ size as a
percentage of GDP. Their growth under current policy will raise the deficit (or
reduce the surplus, if there is one) and put a severe strain on both the budget and the
economy. The tax cuts and spending increases of the last few years intensified the
already existing long-term budget pressure.

The Budget and the Economy
The budget and the economy affect each other unequally. Small economic
changes have a more significant effect on the budget than the effect of large policy
changes on the economy. The worse-than-expected recent economic conditions that
lasted into 2003 played a substantial role, directly or indirectly, in the deterioration
of the budget outlook over those years and affected the outlook for FY2004.
After FY2004, the budget projections (from 2003) assumed that the economy
has returned to its normal rate of growth. Under policies that are in fiscal balance,
a return to normal economic growth should reduce or eliminate a deficit or produce
a surplus. The budget balance, using CBO’s August 2003 alternative assumptions,
does not improve over the next several years. This implies that the budget has an
underlying fiscal imbalance, that the current policies of the government are producing
outlays that are too large or receipts that are too small to produce a balanced budget
or one in surplus during periods of normal economic growth.
The positive budget outlook forecast in early 2001 was substantially based on
the favorable future economic conditions that were then expected along with policies
that would continue producing surpluses. The outlook continued the overall
improvement in the budget situation since the early 1990s. Much of the
improvement had come from strong and sustained economic growth (and the rest
from policy changes to reduce the deficit). When those favorable economic
conditions faltered, as they did in 2001, so did the string of positive forecasts of the
budget outlook. What good economic conditions give, bad economic conditions can
take away. The unexpectedly lengthy economic weakness into 2003, the start of a
recession in March 2001, the lengthy fall in the stock market, the policy responses
to the September 2001 terrorist attacks, along with negative changes in the technical
components of the budget estimates, raised outlays, reduced receipts (beyond policy
changes), and eliminated the previously expected surpluses.
The FY2004 presidential budget documents and CBO’s January 2003 budget
report included information of the expected economic outlook and the budget’s
sensitivity to changes in selected economic variables. Both reports included tables
showing the budget’s sensitivity to changes in selected economic variables (it was
found in chapter 2 of the Analytical Perspectives volume of the President’s FY2004
budget and in chapter 5 of CBO’s January 2003 budget report). The effects of the
variables are generally symmetrical. A higher rate of real economic growth (than
assumed in the budget proposal) has approximately the same effect on the budget as
same-sized lower rate of economic growth has, but in the opposite direction. If a 1%
lower rate of economic growth reduces the surplus (or increases the deficit) by $30
billion in FY2004 (from the OMB table; Table 2-6, p. 32, The Budget of the United
States Government, Fiscal Year 2004, Analytical Perspectives), a 1% higher than
expected rate of economic growth would reduce the deficit (or increase the surplus)
by approximately $30 billion. Changes in other variables generally have smaller
effects on the budgetary balance than changes in real GDP. Sustained changes in the
underlying economic variables tend to produce larger changes in the budget numbers
than the effect of a one or two year change.

For Additional Reading
U.S. Congressional Budget Office. The Budget and Economic Outlook: Fiscal
Years 2004-2013. Washington, GPO, January 31, 2003.
——An Analysis of the President’s Budgetary Proposals for Fiscal Year 2004.
Washington, GPO, March 2003.
——The Budget and Economic Outlook: An Update, Washington, GPO, August 26,

2003.

——Budget Options. Washington, GPO, March 6, 2003.
——The Budget and Economic Outlook: Fiscal Years 2005-2014. Washington,
GPO, January 26, 2004.
——An Analysis of the President’s Budgetary Proposals for Fiscal Year 2005.
Washington, GPO, March 2004.
U.S. Council of Economic Advisors. The Economic Report of the President.
Washington, GPO, February 2003.
——The Economic Report of the President. Washington, GPO, February 2004.
U.S. Office of Management and Budget. The Budget of the United States
Government for Fiscal Year 2004. Washington, GPO, February 3, 2003.
——Fiscal Year 2004 Mid-Session Review, Washington, GPO, July 15, 2003.
——The Budget of the United States Government for Fiscal Year 2005.
Washington, GPO, February 2, 2004.
CRS Products
CRS Electronic Briefing Book, Taxation,
[ http://www.congress.gov/brbk/html/ebtx r1.shtml]
CRS Report RL30973. 2001 Tax Cut: Description, Analysis, and Background, by
David L. Brumbaugh, Jane G. Gravelle, Steven Maguire, Louis Alan Talley, and
Bob Lyke.
CRS Issue Brief IB10110. Major Tax Issues in the 108th Congress, Coordinated by
David Brumbaugh.
CRS Report RS21420. President Bush’s 2003 Tax Cut Proposal: A Brief Overview,
by David Brumbaugh.

CRS Report RL31907. Tax Cut Bills in 2003: A Comparison, by David Brumbaugh
and Don Richards.
CRS Report RS21684. FY2004 Consolidated Appropriations Act: Reference Guide,
by Robert Keith.
CRS Report RS21126. Tax Cuts and Economic Stimulus: How Effective Are the
Alternatives?, by Jane Gravelle.
CRS Report RS21136. Government Spending or Tax Reduction: Which Might Add
More Stimulus to the Economy?, by Marc Labonte.
CRS Report RL31134. Using Business Tax Cuts to Stimulate the Economy, by Jane
Gravelle.
CRS Report RL30839. Income Tax Cuts, the Business Cycle, and Economic
Growth: A Macroeconomic Analysis, by Marc Labonte and Gail Makinen.
CRS Report RL31414. Baseline Budget Projections: A Discussion of Issues, by
Marc Labonte.
CRS Report RL31235. The Economics of the Federal Budget Deficit, by Brian W.
Cashell.
CRS Report 95-543. The Financial Outlook for Social Security and Medicare, by
Geoffrey Kollmann and Dawn Nuschler.
CRS Report RL30708. Social Security, Saving, and the Economy, by Brian W.
Cashell.
CRS Report 98-720. Manual on the Federal Budget Process, by Robert Keith and
Allen Schick.
CRS Report RL30297. Congressional Budget Resolutions: Selected Statistics and
Information Guide, by Bill Heniff Jr.
CRS Report 98-511. Consideration of the Budget Resolution, by Bill Heniff Jr.