The Budget for Fiscal Year 2009

The Budget for Fiscal Year 2009
Updated September 11, 2008
D. Andrew Austin
Analyst in Economic Policy
Government and Finance Division

The Budget for Fiscal Year 2009
Summary
On February 4, 2008, President Bush sent his fiscal year (FY) 2009 budget to
Congress. The President’s budget predicted a deficit of $407 billion for FY2008 and
$410 billion for FY2009, up from $162 billion in FY2007. The Congressional
Budget Office (CBO) estimated the FY2008 deficit would total $396 billion if the
President’s proposals were enacted, about $39 billion more than the current-law
baseline. CBO projected that the President’s proposals would generate a FY2009
deficit of $342 billion. Tax rebates and business investment incentives enacted in the
Economic Stimulus Act of 2008 (P.L. 110-185), which passed in January, will push
up the FY2008 deficit by an estimated $152 billion. CBO estimated the on-budget
deficit, which excludes Social Security surpluses, for the President’s budget
proposals would reach $592 billion in FY2008 and $525 billion in FY2009. Budget
and economic estimates issued later in 2008 have been less optimistic.
In February, the Administration foresaw a steady improvement in federal
finances, including a surplus of $29 billion in FY2013, the last year projected. The
FY2013 on-budget deficit was projected at $201 billion. These projections omitted
costs of wars in Afghanistan and Iraq beyond FY2008 aside from a $70 billion
supplemental request. Federal deficits are projected to rise rapidly after FY2020.
Major Administration proposals include extending expiring tax cuts, limiting
domestic discretionary spending, and halting the expanding reach of the alternative
minimum tax (AMT) for calendar 2008, but not for later years. Medicare and
Medicaid were expected to grow more slowly than in recent years.
The FY2009 budget also discusses long-term fiscal problems. According to
longer-term projections from the Administration, CBO, and the Government
Accountability Office (GAO), the impending retirement of the baby boom generation
and rising health care costs will substantially expand spending on Medicare, Social
Security, and Medicaid over the coming decades. The long-term growth of outlays,
if left unchanged or if not offset by new revenues, could overwhelm the
government’s ability to finance its obligations.
September 2008 CBO baseline projections, which incorporate costs of the
Economic Stimulus Act and legislation affecting housing policy, veterans’ benefits,
and unemployment benefits, show a $407 billion deficit in FY2008, a $147 billion
deficit in FY2013, and a $135 billion deficit in FY2018. CBO baseline projections
assume that key tax cuts enacted in 2001 and 2003 (as well as some others) expire
as scheduled, real discretionary spending is fixed, and the AMT is unchanged.
On March 7, 2008, the House and Senate Budget Committees introduced budget
resolutions (S.Con.Res. 70 and H.Con.Res. 312). The House passed its budget
resolution on March 13 by a 212 to 207 vote. The Senate passed its version the next
day. The budget conference report, H.Rept. 110-659, was filed on May 20. The
Senate passed the S.Con.Res. 70 conference report on June 4, 2008, and the House
passed it the next day. This report will be updated as legislative conditions warrant.

Contents
Overview ........................................................1
Budget Totals.....................................................2
Outlays and Budget Authority....................................3
Budget Estimates and Proposals..................................3
CBO Baseline Projections...................................3
CBO Analysis of the President’s Budget........................5
Administration Projections and Proposals.......................5
CBO Scoring of FY2009 Appropriations Bills...................6
Projections of a Federal Surplus in FY2012.....................6
Issues Regarding Budget Projections...............................6
Accuracy and Statistical Bias in Budget Forecasts....................7
Congressional Budget Action........................................8
Conference Negotiations and Agreement...........................9
Outlays ..........................................................9
CBO Current-Law Baseline Projections............................9
Discretionary Defense Outlays...............................11
Nondefense Discretionary Spending..........................12
Mandatory Spending......................................12
Administration Projections.....................................12
Spending on Defense and Security...........................13
Non-defense or “Non-Security” Discretionary Spending..........14
Mandatory Spending......................................15
Net Interest..............................................15
Trends in Outlays by Category of Spending........................15
Outlays By Function..........................................19
R ecei pt s ....................................................21
Administration Revenue Projections..............................21
Administration Revenue Proposals...........................22
CBO Revenue Projections......................................23
Revenue Projections in Historical Perspective......................24
Federal Revenues By Type.....................................26
Deficits and Surpluses.............................................27
Administration Deficit Projections...............................28
CBO Deficit Projections.......................................28
March 2008 Baseline Projections............................28
September 2008 Baseline Projections.........................29
On-Budget Deficits...........................................29
The Longer Run..................................................30

List of Figures
Figure 1. Outlays By Type As a Percentage of GDP, FY1990-FY2018.......16
Figure 2. Outlays As a Percentage of GDP, FY1990-FY2018..............18
Figure 3. Estimated FY2008 Federal Outlays By Function As Share of Total..20
Figure 4. Revenue Data and Projections As a Percentage of GDP,
FY1990-FY2018 .............................................25
Figure 5. Federal Revenues By Type As a Percentage of GDP,
FY1990-FY2018 .............................................26
List of Tables
Table 1. Budget Estimates and Proposals for FY2009.....................3
Table 2. Outlays for FY2007-FY2013 and FY2018......................10
Table 3. Discretionary Spending Projections Under Alternative Assumptions.11
Table 4. Receipts for FY2007-FY2013 and FY2018......................21
Table 5. Estimated Costs of Selected Revenue Policy Alternatives..........24
Table 6. Total Surpluses/Deficits(-), FY2007-FY2013 and FY2018.........27
Table 7. On-Budget Deficits, FY2007-FY2013 and FY2018...............29

The Budget for Fiscal Year 2009
Overview
The Bush Administration released The Budget of the U.S. Government, Fiscal
Year 2009 on February 4, 2008.¹ The full set of budget documents (Budget,
Appendix, Analytical Perspectives, Historical Tables, as well as several other
supplemental budget documents) contains detailed budget information, including
estimates of the budget without the proposed policy changes (known as “current
service baseline” estimates), historical budget data, detailed budget authority, outlay
and receipt data, selected analysis of specific budget-related topics, and the
Administration’s economic forecast.² The budget documents outline the
Administration’s policy proposals and expectations from FY2008 through FY2013.
The documents also discuss long-term fiscal issues facing the nation and provide
historical data on previously enacted appropriations, past outlays and revenues, and
other budget items.
The Administration foresees a steady improvement of the federal government’s
fiscal position, including a surplus of $29 billion in FY2013, the last year projected,
although the FY2013 on-budget deficit, which excludes Social Security surpluses,
is projected at $201 billion. Administration projections omit all costs of wars in
Afghanistan and Iraq beyond FY2008 aside from a $70 billion supplemental request.
Federal deficits are projected to rise rapidly after FY2020. Major Administration
proposals include extensions of the expiring tax cuts, limited increases in domestic
discretionary spending, and halting the expanding reach of the alternative minimum
tax (AMT) for calendar 2008, but not for later years. Medicare and Medicaid are
expected to grow more slowly than in recent years.
The congressional budget process, which includes the annual budget resolution
and appropriations bills, begins once the Administration submits its budget to
Congress. As Congress deliberates over the budget, the Administration often revises
its proposals as it interacts with Members of Congress and as national and
international economic conditions change.

¹ The Budget and Accounting Act of 1921 requires the President to submit a budget to
Congress each year. Current law (31 U.S.C. 1105(a)) requires the President to submit a
budget no earlier than the first Monday in January, and no later than the first Monday in
February.
² Current services baseline estimates, and baseline estimates in general, provide a neutral
measure against which to compare proposed policy changes and are not designed to predict
likely future budget outcomes. In general, they project current policy, which includes future
changes in law, over the next 5 to 10 years. Their construction generally follows
instructions provided in the Balanced Budget and Emergency Deficit Control Act of 1985
and the Congressional Control and Impoundment Act of 1974.

On March 7, 2008, the House and Senate Budget committees reported budget
resolutions (S.Con.Res. 70 and H.Con.Res. 312). The House passed its budget
resolution on March 13 by a 212 to 207 vote, and the Senate passed its version in the
early hours of March 14 by a 51 to 44 vote. In each chamber, a large number of
amendments were considered before adoption to budget resolutions. Both
resolutions include a one-year alternative minimum tax (AMT) fix.
The House agreed to an amended version of S.Con.Res. 70 on May 14 without
objection, which laid the groundwork for a conference committee. The budget
conference report, H.Rept. 110-659, was filed on May 20.³ The next day, the House
cleared the way for consideration of the conference agreement by passing H.Res.
1214. On June 4, 2008, the Senate passed the S.Con.Res. 70 conference report on
a 48-45 vote, and the House passed it the next day on a 214-210 vote. House passage
of the FY2009 budget resolution automatically passed and transmitted to the Senate
legislation (H.J.Res. 92) to raise the debt limit.
Budget Totals
Table 1 contains budget estimates for FY2009 from CBO, the Administration
(the Office of Management and Budget, OMB), and Congress (House and Senate
Budget Committees). Estimated budget totals can vary due to differing underlying
economic, technical, and budget-estimating assumptions and techniques, as well as
differences in policy assumptions. Minor differences in underlying assumptions,
which may generate small short-term discrepancies, can produce wide divergences
in projected long-term budget paths. Budget estimates issued by the President, CBO,
Congress, or by others, should be expected to change as new data arrive or as
economic conditions change.
The economic slowdown caused by financial turmoil and rising commodity
prices that started in the third quarter of 2007 has continued to affect budget
estimates and projections. Early in 2008, CBO predicted that economic growth
would slow in calendar year 2008 and recover in 2009. The President’s budget
acknowledged economic challenges, but predicted strong growth in both 2008 and
2009. Over the course of 2008, the economy weakened according to many measures
such as employment, although other measures such as economic growth and
household consumption did not slow as much as some had expected. As a result of
the deepening of the economic slowdown, OMB and CBO in summer 2008 adjusted
forecasts of revenues downwards and outlays upwards. CBO’s September 2008
baseline estimate for FY2009 revenues ($2.817 trillion) was $97 billion below its
January figure ($2.720 trillion), while the September baseline estimate for outlays
($3.158 trillion) was $143 billion above the January estimate ($3.015 trillion).

³ The conference report is available at [http://frwebgate.access.gpo.gov/cgi-bin/getdoc.
cgi?dbname =110_cong_reports&docid=f:hr659.110.pdf].

Table 1. Budget Estimates and Proposals for FY2009
(in billions of dollars)
ReceiptsOutlaysDeficit (-)
CBO, BEO Baseline, 1/082,8173,015-198
OMB, FY08 Budget Proposals, 2/082,7003,107-407
OMB, Budget, CSB, 2/082,8152,993-178
CBO Analysis of FY09 Budget, 3/08^a2,6993,041-342
CBO Rev. Baseline, 3/08^a2,7922,999-207
HBC, 3/07/082,7233,063-340
SBC, 3/07/082,7103,076-366
Conf., 5/20/082,7253,066-340
OMB, Mid Session Review, 7/082,6512,942-482
CBO Update, 9/082,7203,158-438
^Source:^OMB^,^C^B^{O, HB}^C^,^SB^C^.
^No^tes:^Ou^tlay^s^mⁱⁿ^u^s^receipts^m^a^yⁿ^o^{t equ}^a^{l def}ⁱ^cits^du^{e to rou}ⁿ^dⁱⁿ^g^.
^{a. L}^e^t^t^e^{r t}^o^S^eⁿ^.^By^{rd, March}^{3, 2008.}
^BEO^—^T^h^{e Budget}^{and Econom}ⁱ^c^O^u^t^l^ook^{, C}^B^O.
^CSB^{— T}^h^{e A}^d^mⁱⁿⁱ^str^a^tioⁿ^’^{s Cu}^r^r^en^{t Ser}^v^{ices B}^a^selin^e.
^HB^C^{— Hou}^s^{e B}^u^dg^{et C}^o^m^m^ittee
^SB^{C — Sen}^a^{te B}^u^d^g^{et Co}^m^m^ittee
^C^oⁿ^f^—^C^oⁿ^f^eren^{ce report}^H^.^R^e^pt^{. 110-}⁶⁵⁹
Outlays and Budget Authority
Spending in Table 1 is shown in terms of outlays, which are federal funds
disbursed in a given time period. Many budget documents also report spending in
terms of budget authority, which reflects the amount of money federal agencies are
legally allowed to spend. Budget authority has been compared to funds deposited
into a checking account, which then can be used for federal purposes. Outlay data
are more convenient for assessing the macroeconomic effects of the federal budgets,
while analysts focusing on specific federal programs typically rely on budget
authority figures. Appropriations legislation is generally framed in terms of budget
authority, because Congress can control the amount of funds made available for
specific purposes. The timing of federal outlays, on the other hand, often depends
on administrative decisions of federal program officials, made within bounds set by
Congress. This report focuses on outlays, rather than budget authority, in order to
highlight broader effects of the federal budget on the economy.
Budget Estimates and Proposals
CBO Baseline Projections. CBO’s first budget report for the FY2009
budget cycle, released in January 2008, contained current-law budget baseline and
economic projections for FY2008 through FY2018.⁴ This report projected a FY2009
current-law baseline deficit of $198 billion, up slightly from the FY2007 deficit of
$162 billion. This projection, however, assumed that AMT relief would lapse and

⁴ U.S. Congress, Congressional Budget Office, The Budget and Economic Outlook: Fiscal
Years 2008 to 2018. January 2008, available at [http://www.cbo.gov/ftpdocs/89xx/
doc8917/01-23-2008_BudgetOutlook.pdf]. CBO calls totals for the current fiscal year
“estimates” and calls totals for future years “projections.”

that the FY2009 costs of wars in Iraq and Afghanistan would be a little less than
costs in FY2008. That CBO baseline projection showed a surplus of $87 billion
emerging in FY2012 that was expected to rise to $223 billion in FY2018.
CBO baseline projections are computed using certain assumptions set by law.⁵
These assumptions typically yield higher revenue estimates and projections of slower
growth of discretionary spending relative to scenarios that independent forecasters
consider likely. Three key assumptions incorporated in CBO baseline projections are
that discretionary spending remains constant in inflation-adjusted terms; the 2001 and
2003 tax cuts fully expire after 2010 (as current law specifies); and the “patch” to the
alternative minimum tax (AMT), which currently applies to tax year 2007, would
lapse. After 2010, when most of the tax cuts from 2001 and 2003 expire, according
to baseline projections, receipts grow substantially. The assumption that these tax
cuts expire and that growth in discretionary spending is zero in real terms explains
most of the declining deficit and the surpluses that emerge over the 10-year baseline
forecast window. Nonetheless, unless major policy changes are made, federal
deficits are expected to grow rapidly beyond the 10-year forecast window, largely
because of rapidly growing health care costs and the retirement of the baby boomers.
CBO’s January report also included estimated budgetary effects of selected
policies on revenues and outlays.⁶ These included estimates of the costs of making
the 2001 and 2003 tax cuts permanent and indexing the AMT for inflation to limit
its expanding coverage. CBO also presented projections based on assumptions that
differ from current-law baseline assumptions. One alternate projection assumed that
discretionary appropriations increase at the rate of growth of gross domestic product
(GDP), which leads to faster growth of outlays relative to the baseline. Another
alternative projection assumed that total discretionary appropriations would be frozen
at FY2008 levels, yielding slower growth in outlays relative to the baseline.
Estimated cost savings for troop reductions are also reported: reducing troops
deployed to Iraq, Afghanistan, and other Global War on Terror postings to 75,000 by
FY2013 would reduce outlays (including borrowing costs) by $250 billion over the
FY2009-FY2013 period relative to baseline levels.
In February 2008, CBO issued an update of its economic projections due to new
evidence of slower economic activity, interest rate cuts and other actions taken by the
Federal Reserve, and the economic stimulus package.⁷ The revised estimates showed
slightly faster economic growth in FY2008 due to fiscal stimulus measures, but
slightly slower growth in FY2009, when those measures lapse. The cost of the

⁵ CBO’s role is set forth in Title II of the Congressional Budget and Impoundment Control
Act of 1974 (P.L. 93-344) and the Balanced Budget and Emergency Deficit Control Act of
1985 (P.L. 99-177). While the portions of the latter act that affect the baseline expired in
September 2006, CBO has not changed how it constructs baseline projections.
⁶ Ibid., Table 1-5.
⁷ U.S. Congress, Congressional Budget Office, Letter to Sen. Kent Conrad, Chairman of the
Senate Budget Committee, February 15, 2008, available at [http://www.cbo.gov/ftpdocs/

89xx/doc8979/EconForecast_ConradLetter.1.1.shtml ]

economic stimulus package and slower economic growth imply increases in federal
budget deficits in the short-run.
CBO Analysis of the President’s Budget. At the beginning of March⁸

2008, CBO published a preliminary analysis of the President’s FY2009 Budget.

This analysis included the effects of the Economic Stimulus Act of 2008 (P.L.
110-185), which was projected to raise the FY2008 budget deficit by $152 billion
and the FY2009 deficit by $16 billion. In addition, forecasts reflected lower interest
rates, which helped increase projected economic growth rates and reduce borrowing
costs. CBO estimated smaller short-run deficits than OMB, largely due to lower
estimates of defense costs. On the other hand, CBO projected slightly higher deficits
in later years.
Administration Projections and Proposals. President Bush’s FY2009
budget proposed a permanent extension of most of the 2001 EGTRRA and 2003
JGTRRA tax cuts, as well as extending other expiring tax provisions.⁹ When
borrowing costs are included, the President’s proposals would raise the deficit by a
projected $692 billion between FY2009 and FY2013 relative to the baseline, and by
$2.7 trillion between FY2009 and FY2017, according to Administration estimates.¹⁰
The Administration’s proposals, according to its own estimates, would reduce
mandatory spending by $96 billion over 5 years and by $309 billion over 10 years.
Proposed policy changes include both spending reductions and some increases —
termed “augmentations” by the Administration. The budget included a cost estimate
of $637 billion over 10 years for proposed personal accounts for Social Security. The
Administration estimated its mandatory spending proposals, including indirect effects
and the outlay effects of tax proposals, would yield 5-year savings of $59 billion and
a 10-year increase in spending of $359 billion. The proposed introduction of
personal Social Security accounts is responsible for most of that projected increase.
The Administration’s budget provided limited information for years beyond
FY2013. The budget included estimates of the cumulative proposed revenue changes
and proposed mandatory spending changes for the periods FY2009 through FY2013
and FY2009 through FY2018, but these projections omitted data for individual post-
FY2013 years. Estimates for other components of the budget or for budget totals
beyond FY2013 were also omitted.
The President proposed elimination or major reductions in 151 programs, which
the Administration maintains would save $18 billion of budget authority in FY2009
compared to FY2008. Many of these proposals, affecting both discretionary and

⁸ U.S. Congress, Congressional Budget Office, Letter to Sen. Robert Byrd, March 3, 2008,
available at [http://www.cbo.gov/ftpdocs/90xx/doc9015/03-03-Byrd_Letter.pdf].
⁹ Economic Growth and Tax Relief Reconciliation Act of 2001 (P.L. 107-16) and Jobs and
Growth Tax Relief Reconciliation Act of 2003 (P.L. 108-27).
¹⁰ The Administration’s current services baseline estimates incorporate some of the
Administration’s policy proposals, such as the extension of the 2001 and 2003 tax cuts. The
effects of the Administration’s proposals in this report are estimated by CBO.

mandatory spending programs, were also proposed last year, when elimination or
major reductions were proposed for 141 programs.
CBO Scoring of FY2009 Appropriations Bills. CBO estimates the
spending totals for discretionary appropriations legislation according to the
specifications of budget legislation, a process usually known as “scoring.” For each
category corresponding to a regular appropriations bill, CBO estimates new budget
authority and outlays for non-emergency and emergency spending, along with a¹¹
comparison with 302(b) allocations. Emergency spending is generally treated
differently than non-emergency spending in budget legislation.¹²
Projections of a Federal Surplus in FY2012. Both the CBO baseline
projections and Administration forecasts show a budget surplus in FY2012, which
would be the first surplus since FY2001. Independent analysts note these forecasts
are based on assumptions chosen for the specific purpose of budgetary scorekeeping,
rather than on assumptions meant to generate predictions of likely future outcomes.¹³
For example, funding for military operations after FY2009 is omitted for budgetary
scoring purposes. Projected future outlays would be far higher were these war costs
included in projections. These proposals also all assume a sharply larger portion of
middle-income taxpayers will become subject to the alternative minimum tax (AMT)
after calendar 2007, even though in recent years Congress and the President have
agreed to annual fixes to limit the AMT’s reach. Assuming that AMT fixes lapse
boosts estimated tax revenues. The President’s budget proposes no real growth in
discretionary spending over the five years, while historically, discretionary outlays
have been more likely to grow at the same rate as the overall economy.
Issues Regarding Budget Projections
Budget projections depend on models that reflect assumptions about the
structure of the economy, expected tax and program changes, and how these interact,
along with other factors that affect the budget. Changed economic conditions, such
as faster or slower economic growth, higher or lower inflation, or new spending and
tax policies, affect budget estimates and projections. In addition, technical
components of the budget models may change as the structure of the economy
evolves and as econometric techniques advance.
Budget forecasts, unlike most other types of economic forecasts, are constructed
in order to estimate the incremental costs of policy changes (i.e., scoring) in a
consistent manner. If policy changes do occur, actual budget outcomes will then

¹¹ For an explanation of the role of 302(b) allocations in the budget process, see CRS Report
RS20095, The Congressional Budget Process: A Brief Overview, by James V. Saturno, and
CRS Report 98-721, Introduction to the Federal Budget Process, by Robert Keith.
¹² In recent years, budget resolutions have specified that “emergency” funding shall not
count for purposes of Sec. 302(b) of the Congressional Budget Act.
¹³ For a detailed independent analysis of the current budget outlook, see Alan Auerbach,
Jason Furman, and William Gale, “Still Crazy After All These Years: Understanding the
Budget Outlook,” working paper, April 27, 2007, available at
[ h t t p : / / www.econ.ber kel ey.edu/ ~auer b ach/ AFG% 20paper .pdf ] .

differ from baseline estimates. Technical factors and changes in economic conditions
also affect budget forecasts. In recent years, OMB and CBO have provided
information about how past forecasts have varied from actual results.
CBO has analyzed the track record of its budget estimates extensively and now
routinely includes information about its forecast record of baseline projections in its
budget publications.¹⁴ CBO also provides detailed explanations of why its
projections differ from OMB projections.¹⁵ CBO routinely provides a breakdown of
economic, legislative, and technical factors responsible for divergences between past
forecasts and actual outcomes. The FY2009 budget documents contain an OMB
analysis of the divergence between the Administration’s February 2006 budget
estimates and actual results for FY2007. Differences are decomposed into (1)
legislative and administrative changes, (2) changed economic conditions, and (3)
technical factors.
Budget estimates depend in part on some stable trends, such as population
demographics. For instance, many baby boomers will retire in the next decade,
leading to higher spending for Medicare and Social Security. Estimating the growth
in these beneficiary populations eligible for these programs is relatively
straightforward. Budget estimates also depend on factors that are difficult to predict,
such as future productivity growth and business cycles. Some factors that effect
federal revenues, such as financial market trends, can be extremely volatile.
Small changes in economic conditions, such as GDP growth, can produce large
changes in the budget estimates. According to CBO estimates, a persistent 0.1%
decrease in the real GDP growth rate would increase a deficit, including interest
costs, by $61 billion cumulatively over a 5-year period and by $273 billion over 10
years. Faster GDP growth would decrease deficits.¹⁶ In addition, new government
policies also affect budget estimates. For example, extending military operations in
Iraq or Afghanistan or allowing tax cuts to lapse would also change the budget
outlook.
Accuracy and Statistical Bias in Budget Forecasts
Budget projections are inherently uncertain. Two measures of the quality of
economic forecasts are statistical unbiasedness, meaning that average forecast errors
over time are close to zero, and accuracy, meaning that forecast errors should be
small.¹⁷ An unbiased forecasting method may be of little use if forecast errors are

¹⁴ U.S. Congress, Congressional Budget Office, “The Uncertainty of Budget Projections: A
Discussion of Data and Methods,” March 2006.
¹⁵ U.S. Congress, Congressional Budget Office, “Comparing Budget and Accounting
Measures of the Federal Government’s Fiscal Condition,” December 2006.
¹⁶ Slower economic growth would also reduce a budget surplus.
¹⁷ There may be a tradeoff between statistical unbiasedness and accuracy because some
statistically biased methods may generate forecasts with greater accuracy. Also, other
properties of forecasts may be important, such as predicting turning points in economic
(continued...)

large. On the other hand, some forecasting methods may sacrifice unbiasedness in
order to gain greater accuracy. Most forecasters try to produce projections that are
both unbiased and accurate, as far as possible.
The President’s FY2009 budget includes measures that can be used to assess the
accuracy and statistical bias of previous forecasts.¹⁸ The accuracy of forecasts
generally declines as the forecast window extends to later years because more policy
and economic changes can occur in the interim.¹⁹ OMB has analyzed February
budget estimates of the deficit since FY1982 and estimated the standard deviation of
$70 billion for the current fiscal year and $140 billion for the budget year estimate.
The standard deviation of Administration budget year deficit/surplus estimates for
the period FY1994-FY2001was $77 billion and $237 billion for the period FY2002-
FY2007.²⁰ The standard deviation for the corresponding four-years-ahead forecast
was $284 billion, about four times larger.
OMB used its standard deviation estimate to compute upper and lower bounds
for deficit projections.²¹ The gap between these upper and lower bounds at the end
of a five-year period was over $1.1 trillion, suggesting that the Administration’s $29
billion point estimate for the FY2013 surplus, like all five-years-ahead forecasts of
fiscal balance, is imprecise.
Congressional Budget Action
On March 7, 2008, the House and Senate Budget Committees reported budget
resolutions (S.Con.Res. 70 and H.Con.Res. 312). The House passed an amended
version of its budget resolution on March 13 by a 212 to 207 vote, and the Senate
approved its version, also including amendments, in the early hours of March 14 by
a 51 to 44 vote. In both chambers, a large number of amendments were considered.
Both budget resolutions included a one-year fix for the AMT in tax year 2008. The
House resolution included reconciliation instructions that would offset the cost of the
AMT fix, while the Senate resolution omitted offsets for the AMT fix. According
to media reports, the House resolution contained $25.4 billion more (including cap

¹⁷ (...continued)
trends. For a nontechnical discussion of economic forecasting, see Peter Kennedy, A Guide^rd
to Econometrics, 3 ed., Boston: MIT Press, 1992, ch. 17, pp. 268-277.
¹⁸ Office of Management and Budget, Budget of the U.S. Government: Analytical
Perspectives, ch. 20, “Comparison of Actual to Estimated Totals,” available at
[ h t t p : / / www.whi t e house.go v/ omb/ budget / f y2008/ pdf / a per s / d i mensi ons.pdf ] .
¹⁹ A standard deviation measures the average size of forecast errors. See Office of
Management and Budget, Budget of the U.S. Government: Analytical Perspectives, p. 336.
²⁰ CRS calculation based on OMB data.
²¹ The upper and lower bounds were computed assuming that forecast errors for different
years are statistically independent and are normally distributed. If those assumptions are
valid, about 90% of forecasts should fall within those bounds on average.

adjustments and advance funding) in non-emergency discretionary budget authority
than the $991.6 billion figure requested by the President for FY2009.²²
The Senate budget resolution called for $21.8 billion in non-emergency
discretionary budget authority above the level requested by the President. The Senate
version presumes the key 2001 and 2003 tax cuts, including the 10% tax bracket and
the child tax credit, would be extended beyond their scheduled 2010 expiration date.
The Senate resolution also included a $35 billion economic stimulus package.
Approval of House and Senate budget resolutions cleared the way for negotiations
for a conference agreement. After several weeks of negotiation between House and
Senate budget committees, the House agreed to an amended version of S.Con.Res.
70 on May 14 without objection, paving the way for a conference committee. The
conference report (H.Rept. 110-659) was filed on May 20, and on the next day, the
House approved H.Res. 1214, passed on a 220 to 199 vote, clearing the way for
consideration of the conference agreement.
Conference Negotiations and Agreement
After several weeks of negotiation between House and Senate Budget
Committees, the House agreed to an amended version of S.Con.Res. 70 on May 14
without objection, paving the way for a conference committee. The conference
report (H.Rept. 110-659) was filed on May 20, and on the next day, the House
approved H.Res. 1214, passed on a 220 to 199 vote, clearing the way for
consideration of the conference agreement. On June 4, 2008, the Senate passed the
S.Con.Res. 70 conference report on a 48-45 vote, and the House passed it the next
day on a 214-210 vote. House passage of the FY2009 budget resolution
automatically passed and sent to the Senate a resolution (H.J.Res. 92) to raise the
debt limit to $10.615 billion.
Outlays
The Administration’s budget proposed FY2009 outlays of $3,107 billion, about
$92 billion above the CBO baseline. Both the Administration and CBO have issued
projections of future federal outlays. In addition, the budget resolutions passed by
House and Senate Budget Committees, which reflect Congress’s priorities, specify
future paths for spending and revenues. Table 2 summarizes these projections.
CBO Current-Law Baseline Projections
CBO’s January 2008 baseline projections for FY2008-FY2018 showed outlays
rising from 20.2% of GDP in FY2008 to 20.4% of GDP in FY2009, before falling
to 19.3% of GDP in FY2013. Revised baseline projections issued in March 2008
estimated FY2008 outlays would be 20.4% of GDP and that FY2009 outlays would
be 20.3% of GDP.

²² CQ House Action Reports, No. 110-8/May 20, 2008.

Table 2. Outlays for FY2007-FY2013 and FY2018
(in billions of dollars)
^FY²⁰⁰⁷^FY²⁰⁰⁸^FY²⁰⁰⁹^FY²⁰¹⁰^FY²⁰¹¹^FY²⁰¹²^FY²⁰¹³^FY²⁰¹⁸
CBO Baseline, 1/082,731^a2,8733,0153,1483,2993,3553,5244,325
President’s FY09 Budget, 2/082,9313,1073,0913,1713,2223,399 —
President’s FY09 CSB, 2/082,9002,9933,0653,2073,2893,464 —
CBO Analysis of FY09 Budget, 3/08^b2,9333,0413,0823,1693,2153,3634,224
CBO Rev. Baseline, 3/08b2,9033,0003,1303,2943,3583,5304,354
HBC, 3/07/082,9333,0633,1483,2633,3013,459 —
SBC, 3/07/082,9473,0763,1433,2553,2893,441 —
Conf., 5/20/082,9363,0663,1483,2593,2943,462 —
OMB, MSR, 7/082,7302,9423,1333,0943,1873,2303,410 —
CBO Update, 9/082,7292,9553,1583,3123,5023,5773,766 4,680
^Source:^OMB^,^C^B^{O, HB}^C^,^SB^C^.
^No^tes:
^{a. A}^c^tu^{al ou}^tlay^s^f^o^{r F}^Y^{2007. R}^eceipts^f^o^{r later y}^ears^{are es}^tim^{ated or proj}^ected.
^{b. L}^e^t^t^e^{r t}^o^S^eⁿ^.^By^{rd, March}^{3, 2008.}
^CSB^{— A}^d^mⁱⁿⁱ^str^a^tioⁿ^’^{s Cu}^r^r^en^{t Ser}^v^{ices B}^a^selin^e.
^HB^C^{— Hou}^s^{e B}^u^dg^{et C}^o^m^m^ittee
^SB^{C — Sen}^a^{te B}^u^d^g^{et Co}^m^m^ittee
^C^oⁿ^f^—^C^oⁿ^f^eren^{ce report}^H^.^R^e^pt^{. 110-}⁶⁵⁹
^MSR^{— Mid Ses}^sⁱ^on^R^e^vⁱ^ew
CBO’s baseline assumptions, in which total discretionary spending increases at
the rate of inflation, imply that projected discretionary spending falls as a percentage
of GDP over time. Because CBO current-law baseline estimates assume that
discretionary spending stays fixed in real terms as the economy grows, many analysts
believe it understates likely future growth in discretionary spending. Table 3
summarizes the costs of discretionary spending under different assumptions.
According to September 2008 CBO projections, federal outlays (aside from the
costs of wars in Iraq and Afghanistan) would grow by an additional $295 billion over
the FY2009-FY2013 period were discretionary spending to grow at the same rate as
the economy. On the other hand, if discretionary spending were fixed at FY2008
levels over the same period, federal outlays would drop by $420 billion relative to
baseline trends.

Table 3. Discretionary Spending Projections
Under Alternative Assumptions
(in billions of current dollars)
Estimated Total Cost,
FY2009-FY2013
Policy AlternativeEffect onDebt Service
Def i ci t / Surpl us Cos t s
Before Debt Costs
Increase Regular Discretionary
Appropriations at the Rate of Nominal-324-26
GDP Growth (Jan. 2008 BEO)
Freeze Total Discretionary
Appropriations at FY2008 Level31628
(Jan. 2008 BEO)
Increase Discretionary Appropriations
Other Than Those Related to Activities in-275-20
Iraq and Afghanistan at the Growth Rate
of Nominal GDP (Sept. 2008 Update)
Freeze Total Discretionary
Appropriations at FY2008 Level 38634
(Sept. 2008 Update)
^Source:^CB^O^.
^BEO^—^Bu^dg^et^an^{d Econ}^omⁱ^c^O^u^t^l^ook
^U^pdat^e^—^Bu^dg^et^an^{d Econ}^omⁱ^c^O^u^t^l^ook^:^Aⁿ^U^pdat^e
^No^tes:^Neg^a^tiv^{e n}^u^m^bersⁱⁿ^{dicate larg}^{er def}ⁱ^cits^.
Discretionary Defense Outlays.
The CBO Baseline and Discretionary Defense Spending. Interpreting
CBO’s projection of future discretionary defense spending requires some background
on how those projections are constructed. CBO’s projections of future discretionary
defense spending are based on enacted budget authority for discretionary defense
programs for the current fiscal year, adjusted for inflation. The spending in the
baseline projection can change significantly during the course of the year because of
the enactment date of supplemental appropriations for war-related activities.²³ In
recent years, Congress has provided some funding for wars in Iraq and Afghanistan
near the start of the fiscal year, but has enacted the majority of the funding later in the
year. Thus, the baseline projections prepared by CBO in January and March contain
only a portion of the funding that may ultimately be provided in that fiscal year.
Those projections will understate expenditures for war if the number of deployed
forces and the operational tempo remained unchanged from current levels.

²³ For example, the addition of supplemental defense and other appropriations since the
March 2007 CBO baseline projections caused an increase of over a trillion dollars in
projected discretionary spending over the FY2008-FY2017 period. See U.S. Congress,
Congressional Budget Office, The Budget and Economic Outlook: An Update, August 2007,
p. 14.

CBO Projections of Discretionary Defense Spending. Discretionary
defense spending, according to January 2008 CBO baseline projections, will rise
from $549 billion in FY2007 to $572 billion in FY2008. Those CBO projections
also show discretionary defense spending rising to $645 billion in FY2013 and to
$723 billion in FY2018. Discretionary defense spending, 4.0% of GDP in FY2007,
would fall to 3.6% of GDP in FY2013 and to 3.2% of GDP in FY2018 according to
CBO baseline projections.
Alternative Defense Scenarios. CBO has also projected the budgetary
effects of reducing the number of troops deployed to Iraq and Afghanistan, and
elsewhere in the war on terrorism. In the first alternative scenario, all but 30,000
deployed troops to Iraq, Afghanistan, and related operations would be withdrawn by
2010, reducing projected discretionary spending and interest costs relative to the
current-law baseline by about $425 billion over the period FY2009-FY2018. In the
second alternative scenario, forces would be withdrawn more slowly — declining to
75,000 troops by 2013, which would add about $225 billion in projected
discretionary spending and interest costs over the period FY2009-FY2018 relative
to the current-law baseline. As noted above, the outlays in the January 2008 baseline
were based on an extrapolation of the $86.8 billion in budget authority provided for
war-related activities in 2008 as of January of that year.
Nondefense Discretionary Spending. CBO projects nondefense
discretionary spending will rise from $493 billion in FY2007 to $520 billion in
FY2008, to a projected $571 billion in FY2013, and to $637 billion in FY2018.
Non-defense discretionary spending as a percentage of GDP, according to CBO
baseline projections, will fall from 3.6% of GDP in FY2007 to 3.2% of GDP in
FY2013, and to 2.8% of GDP in FY2018. Because current-law baseline projections
are based on the assumption that discretionary spending does not grow in real terms
while the economy is projected to continue growing, both the CBO and
Administration projections show discretionary spending shrinking over time relative
to GDP.²⁴
Mandatory Spending. The March 2008 CBO mandatory spending baseline
projects an increase from $1,577 billion in FY2008 to $1,664 billion in FY2009.
Mandatory spending, according to CBO projections, will increase to $2,031 billion
by FY2013 and to $2,725 billion by FY2018. Mandatory spending as a share of
GDP, according to CBO baseline projections, will change little, moving from 11.1%
in FY2008 to 11.2% in FY2013. At the end of the 10-year time frame, CBO
projections show mandatory spending edging up to 12.2% of GDP in FY2018.
Administration Projections
The Administration’s FY2009 budget proposed $3,107 billion in outlays, rising
to $3,399 billion in FY2013, the last year shown in the President’s budget.

²⁴ CBO and OMB baselines use different methods to project discretionary spending. In
particular, OMB does not extend all discretionary spending. In addition, war expenditures
are treated differently by CBO and OMB. For details, see U.S. Congress, Congressional
Budget Office, The Budget and Economic Outlook: An Update, August 2007, Box B-1.

The proposals would boost funding for defense and homeland security spending
in FY2008 and FY2009 and would hold growth in nondefense, non-homeland
security discretionary spending below 1% a year, implying a slight decrease in real
terms. The Administration proposed measures to slow the growth of Medicare and
Medicaid and other mandatory programs slightly. Total mandatory spending,
however, would increase under the proposals. The Administration also proposed
spending $30 billion in FY2013 to fund personal Social Security accounts.²⁵
The proposed level of FY2009 outlays, $3,015 billion, exceeded the
Administration’s FY2009 current services baseline ($2,993 billion) by $114 billion
(3.8%).²⁶ Proposed FY2009 mandatory spending would be $18 billion below
baseline. The Administration’s budget showed net interest payments increasing from
$260 billion in FY2009 to $300 billion in FY2009 due to increased federal
borrowing.
The Administration’s proposals would increase outlays to 20.7% of GDP in
FY2009, up from 20.0% of GDP in FY2007. Between FY1966 and FY2006, outlays
averaged 20.6% of GDP. By FY2012, the Administration’s projections show outlays
falling to 18.5% of GDP, lower than in any year since FY1966.
The overall $176 billion increase in outlays from FY2008 to FY2009 is due to
many factors, including automatic cost-of-living adjustments in many federal
programs, growth in populations eligible for program benefits, increased spending
on military and veterans’ programs, policy changes, and higher costs due to inflation
of goods and services bought by the federal government.
Spending on Defense and Security. For FY2009, almost all of the
increase in discretionary spending comes from what the Administration calls
“security” activities, which comprise spending for defense, homeland security, and
foreign affairs. Most of the proposed additional security funding is for the wars in
Iraq and Afghanistan. Medium-term projections, however, show a decrease in
defense spending, mostly due to the omission of post-FY2009 war costs. National
defense spending, which OMB projects will reach 4.0% of GDP in FY2009, is
projected to fall to 3.2% of GDP in FY2013.²⁷

²⁵ Office of Management and Budget, Budget of the U.S. Government, February 2008, Table
S-6, p. 154
²⁶ OMB’s current services baseline estimates, like CBO’s baseline estimates, are designed
to provide “a neutral benchmark against which policy proposals can be measured.” For
outlays, the modified baseline assumptions used by OMB reflects that federal pay raises and
adjustments begin with the first full pay period in January, as has been usual in recent years,
rather than October 1 date reflected in the Budget Enforcement Act (BEA), and that
emergency spending is not extended (as opposed to the BEA assumption that it is). These
modifications lowered the FY2009 current services baseline outlay estimate by $54 billion
and FY2013 projection by $114 billion.
²⁷ General Mike Mullen, Chairman of the Joint Chiefs of Staff, noted in an interview that
the defense budget was now “just under 4% of GDP,” and stated that “I would see that in
the future as an absolute floor.” New York Times, October 22, 2007. Transcript available
(continued...)

Congress approved $86.8 billion in supplemental funding for FY2008. An
additional $102.5 billion requested by the Administration has not been approved.²⁸
In addition, the Administration has requested $70 billion in emergency supplemental
funding for FY2009.²⁹ On May 15, 2009, the House approved a military construction
appropriations bill (H.R. 2642) that would provide supplemental appropriations for
FY2008 and FY2009. On May 22, the Senate approved an amended version of the
bill that would provide $99.5 billion for FY2008 and $65.9 billion in FY2009 in
supplemental appropriations to fund military operations in Iraq and Afghanistan.³⁰
Some analysts also note that while the Department of Defense accounts for the
bulk of spending in the functional category of national defense, that category includes
some Department of Energy programs as well as certain mandatory spending, such
as contributions to military retirement programs.³¹ The Administration estimated
spending on the national defense function will total $603.7 billion in FY2008 and
proposes spending $670.7 billion in FY2009.
Non-defense or “Non-Security” Discretionary Spending. The
Administration proposed $393.0 billion in net “non-security” discretionary budget
authority for FY2009 and for subsequent years until FY2013, just slightly above the
enacted FY2008 level of $392.7 billion (not counting $104.4 billion in supplemental³²
and emergency funds enacted for FY2008). Holding “non-security” discretionary
budget authority constant implies a proposed cut in real terms equal to the inflation³³
rate, which CBO projects to run about 2% from FY2009 through FY2013.
The Administration proposed $482 billion in “non-security” discretionary
outlays, just slightly above the estimated FY2008 level of $481 billion. According
to Administration projections, “non-security” discretionary spending will decline
sharply after FY2009, reaching $429 billion in FY2013.

²⁷ (...continued)
at [http://www.nytimes.com/2007/10/22/washington/22mullen-text.html]
²⁸ U.S. Dept. of Defense, Office of the Assistant Secretary for Defense (Public Affairs),
Press Release 90-08, “FY2009 Department of Defense Budget Released,” available at
[http://www.defenselink.mil/comptroller/defbudget/fy2009/2009_Budget_Rollout_Relea
se.pdf].
²⁹ Testimony of Secretary of Defense Robert M. Gates, in U.S. Congress, House Armed
Services Committee, 110^th Cong., 2^nd sess., February 6, 2008, available at
[http://armedservices.house.gov/ pdfs/FC020608/Gates_T estimony020608.pdf]
³⁰ See CRS Report RL34451, Second FY2008 Supplemental Appropriations for Military
Operations, International Affairs, and Other Purposes, by Stephen Daggett, et al.
³¹ Fred Kaplan, “What’s Really in the U.S. Military Budget? Much More Than the
Oft-Cited $515.4 Billion,” Slate, February 4, 2008, available at [http://www.slate.com/id/

2183592/].

³² The Administration defines “Security” funding as spending for the Department of
Defense, government-wide Homeland Security activities, and International Affairs.
³³ CBO projects an average percentage change in the GDP price index just less than 2% per
year and an average percentage change in the Consumer Price Index just over 2% per year
over the FY2009-FY2013 period. See CBO Letter to Sen. Byrd, March 3, 2008, Table 6.

Future federal health care spending is expected to remain close to the 5.3% of
GDP projected for FY2009, although many analysts expect health care prices and
costs to rise faster than GDP in the future. Federal spending on Medicare (net of
beneficiary premiums) and Medicaid accounted for 4% of GDP in 2007. CBO
current-law projections show that share rising to 7% in 2025, 12% in 2050, and 19%
in 2082.³⁴ Thus, federal spending on Medicare and Medicaid in 2082 is projected to
take up about roughly the same proportion of GDP as total federal government
spending took up in the late 1990s.
Mandatory Spending. Mandatory spending in the President’s budget would
grow by 5.5% ($1,551 billion) from FY2008 to FY2009 ($1,636 billion). According
to the Administration, mandatory programs will increase from $1,636 billion in
FY2009 (10.9% of GDP) to $2,034 billion in FY2013 (11.2% of GDP). The budget
included proposals to reduce mandatory outlays from baseline levels by $17.1 billion
in FY2009, with larger reductions in later years. The reductions would be achieved
by slowing the growth of selected mandatory spending activities such as Medicare
and Medicaid, among others. The Administration estimated that these measures
would reduce total mandatory spending from baseline levels over the five-year period
FY2009-FY2013 by $178 billion. By comparison, mandatory spending over the
same period is projected to total over $9 trillion. The Administration’s mandatory
spending reductions would thus cut about 2% from mandatory spending over
FY2009-FY2013. Even if those cuts were enacted, mandatory spending would
remain the largest broad category of federal spending.
Net Interest. The President’s FY2009 budget showed net interest outlays
rising from $244 billion in FY2008 to $260 billion in FY2009, as growing federal
debt outweighs the effects of lower interest rates. Federal debt has grown rapidly in
recent years, and under the Administration’s proposals, will continue to grow.
Higher debt, even with lower interest rates, is projected to require higher net interest
payments in the future. Proposed net interest outlays in FY2009 exceed the
Administration’s FY2009 current services baseline estimate by $3 billion. The
Administration’s policy proposals would raise FY2013 net interest outlays $18
billion above their current services estimate. According to Administration estimates,
net interest payments will run about 1.7% of GDP over the five-year period.
Trends in Outlays by Category of Spending
Figure 1 shows spending trends by category as percentages of GDP. The figure
shows actual outlays for defense, nondefense, mandatory, and net interest spending
from FY2000 through FY2007; estimated amounts for FY2008; and the
Administration’s proposals from FY2009 though FY2013. According to those
proposals, defense and nondefense discretionary spending as a share of GDP will
decline over the five-year period FY2008-FY2013, while mandatory spending is
projected to increase.

³⁴ U.S. Congress, Congressional Budget Office, The Long-Term Outlook for Health Care
Spending, November 2007, available at [http://www.cbo.gov/ftpdocs/87xx/doc8758/

11-13-LT -Health.pdf].

CRS-16
Figure 1. Outlays By Type As a Percentage of GDP, FY1990-FY2018

ⁱ^{ki/CRS-RL34419}
^g/w
^s^.or
^le^ak
^://wiki
^h^ttp
^OMB^an^d^C^B^O.
^{Data to}^th^{e r}ⁱ^g^h^t^o^f^th^{e v}^e^r^{tical lin}^{e r}^e^p^r^esen^{t CB}^{O cu}^r^r^en^t-^la^w^bas^e^lin^{e es}^tim^ates^{or proj}^ection^s^{. Vertical ax}^is^s^h^ow^s^perceⁿ^t^ag^{e of}^GDP^.

The downturn in defense and nondefense discretionary spending relative to GDP
after FY2009 depends on the Administration’s assumptions that nondefense
discretionary spending falls after 2008 and that no additional spending is provided
for the ongoing military operations overseas after FY2009.
The President’s proposed limited reductions in mandatory spending from current
service baseline levels keep mandatory spending as a share of GDP stable. The
proposed introduction of private Social Security accounts in FY2013 would lift
mandatory spending relative to GDP above the current services level.
Figure 2 shows historical data on outlays since FY1990 and five sets of
projections of outlays as a percentage of GDP through FY2018:
^!the President’s FY2009 budget proposal (February 2008),
^!OMB’s Current Service Baseline (February 2008),
^!a March 2008 preliminary CBO analysis of the President’s FY2009
proposals, and
^!the January 2008 and March 2008 CBO baselines.
The Administration’s outlook runs through FY2013, while the CBO outlook
runs through FY2018. The figure includes actual outlays as a percentage of GDP for
FY2000 through FY2007 and average (FY1966-FY2007) outlays as a share of GDP.
The President’s proposed outlays fall sharply after FY2009, a result of the
Administration’s proposals to reduce discretionary spending, both defense and
nondefense, and to moderate the rate of growth in some mandatory programs. By
FY2012, spending as a percentage of GDP would be at the same level as in FY2001.
In FY2011 and later years, according to CBO projections, the President’s spending
levels (which omit war costs in those years) run about 1% of GDP lower than
current-law baseline projections.
An alternative CBO estimate incorporates two important assumptions that
directly affect outlays. First, discretionary appropriations grow at the same rate as
the overall economy, in contrast to the baseline assumption that discretionary
spending is constant in real terms. Second, the number of troops deployed in Iraq
and Afghanistan as well as other anti-terror activities is assumed to fall to 75,000 by
FY2013. Both of these assumptions increase outlays above the current-law baseline
projections, increasing the deficit (or reducing a possible future surplus), increasing
federal debt and subsequent net interest payments. The alternative estimate includes
these higher net interest payments. In addition, the alternative estimate for outlays
includes the outlay effects of the changes that occur in the alternative estimate for
receipts, which is described in more detail in the next section. These outlay effects,
for the most part, reflect higher net interest payments.

CRS-18
Figure 2. Outlays As a Percentage of GDP, FY1990-FY2018

ⁱ^{ki/CRS-RL34419}
^g/w
^s^.or
^le^ak
^://wiki
^h^ttp
^O^M^{B an}^{d C}^B^O^.^Poiⁿ^t^s^f^o^{r F}^Y^2008-^F^Y^{2018 are proj}^ectⁱ^oⁿ^s^.
^H^o^ri^zon^t^al^lⁱⁿ^{e at}^20.2%^repres^en^t^s^av^erag^{e ov}^{er F}^Y^1990-^F^Y^{2007. V}^e^rtⁱ^cal^axⁱ^s^s^h^ow^s^percen^t^a^g^e^of^G^D^P^.

Outlays By Function
Federal spending can be classified by superfunction, function, and subfunction
of government. Superfunctions are National Defense, Human Resources, Physical
Resources, and Other Functions. Functional breakdowns of federal spending reflect
resources directed towards particular goals and cut across usual bureaucratic
boundaries. For example, the National Defense function (and superfunction)
includes spending by parts of the Department of Energy as well as the Department
of Defense outlays, which comprise the bulk of National Defense outlays. Other
Department of Energy outlays fall within the Physical Resources superfunction. In
some cases, such as spending on Coast Guard patrols in major ports that support
commerce, recreation, and national security, outlays are not easily and neatly divided
between subfunction.
Figure 3 shows FY2008 outlays by function as estimated by the Administration.
National defense, at an estimated 22.4% of FY2008 outlays, accounts for the largest
share of federal spending. Social Security and Medicare are the next largest
functional categories.

CRS-20
Figure 3. Estimated FY2008 Federal Outlays By Function As Share of Total

Natural resources and Community and regional Administration of justice
environmentdevelopment1.5%Education, training,
1.1%0.6%employment, and social
ser v icesAg r icultur e

0.6%

Commerce and housing3.0%
0.3%EnergyGeneral government
ⁱ^{ki/CRS-RL34419}0.1%
^g/w 0.7%
^s^.or Veterans
^le^ak 2.8%
Transportation
^://wiki2.5%General science, space,
^h^ttpHealthand technology

9.2%0.9%

Social Security
Income security19.9%

12.4%

International affairs
1.3%Net interest

7.9%

Medicare
13.0%National defense

22.4%

Receipts
Administration and CBO projections of the future path of federal receipts are
summarized in Table 4. Because economic conditions strongly affect federal
revenue streams, forecasts of federal receipts beyond the immediate short term are
necessarily imprecise.
Table 4. Receipts for FY2007-FY2013 and FY2018
(in billions of current dollars)
^FY²⁰⁰⁷^FY²⁰⁰⁸^FY²⁰⁰⁹^FY²⁰¹⁰^FY²⁰¹¹^FY²⁰¹²^FY²⁰¹³^FY²⁰¹⁸
CBO Baseline, 1/082,568^a2,6542,8172,9073,1823,4423,5854,548
President’s FY09 Budget, 2/082,5212,7002,9313,0763,2703,428 —
President’s FY09 CSB 2/082,6622,8152,9543,1103,3013,454 —
CBO Est. of Pres. Budget 3/3/08^b2,5372,6992,9003,0403,2153,3424,297
HBC, 3/7/082,5462,7232,9393,2143,4793,617 —
SBC, 3/07/082,5392,7102,9343,2053,4663,600 —
Conf., 5/20/082,5422,7252,9383,1863,3163,472 —
OMB, MSR, 7/08 2,553 2,651 2,916 3,084 3,288 3,439 —
CBO Update, 9/082,5482,7202,8813,1783,4513,6194,546
^So^u^r^{ce: OMB}^,^C^B^{O, HB}^C^,^SB^C^.
^No^tes:
^{a. A}^c^tu^{al ou}^tlay^s^f^o^{r F}^Y^{2007. R}^eceipts^f^o^{r later y}^ears^{are es}^tim^{ated or proj}^ected.
^{b. L}^e^t^t^e^{r t}^o^S^eⁿ^.^By^{rd, March}^{3, 2008.}
^CSB^{— A}^d^mⁱⁿⁱ^str^a^tioⁿ^’^{s Cu}^r^r^en^{t Ser}^v^{ices B}^a^selin^e.
^HB^C^{— Hou}^s^{e B}^u^dg^{et C}^o^m^m^ittee
^SB^{C — Sen}^a^{te B}^u^d^g^{et Co}^m^m^ittee
^C^oⁿ^f^—^C^oⁿ^f^eren^{ce report}^H^.^R^e^pt^{. 110-}⁶⁵⁹
^MSR^{— Mid Ses}^sⁱ^on^R^e^vⁱ^ew
The last few fiscal years have seen unexpectedly rapid growth in receipts, in part
due to strong economic growth. After three years of falling receipts from FY2000
through FY2003, federal receipts grew by 5.5% from FY2003 to FY2004, by 14.5%
from FY2004 to FY2005, and by 11.8% from FY2005 to FY2006. Receipts,
according to OMB, rose from 16.4% of GDP in FY2004, the lowest level for receipts
since FY1959, to 18.8% of GDP in FY2007.
Recent indications of slower economic growth are expected to slow the growth
of federal receipts, at least in the short run. Corporate tax receipts and capital gains
receipts can be especially sensitive to cyclical economic conditions. In addition, tax
provisions of the Economic Stimulus Act of 2008 will temporarily reduce federal
revenues’ share of GDP. Both CBO and OMB estimate that federal revenues as a
share of GDP will drop in FY2008 and will then gradually rise in the following years.
Administration Revenue Projections
Receipts rise, in current dollars, by 7.1% ($179 billion) from FY2008 to
FY2009 under the Administration’s FY2009 budget proposal. Over the five-year
forecast, receipts in nominal terms rise by $907 billion, a 36% increase over FY2008.

The President’s proposals would extend and make permanent most of the tax cuts
slated to expire at the end of calendar 2010 or before. Tax reductions in the
Administration’s economic stimulus proposals, according to OMB, will push federal
receipts, as a share of GDP, to 17.6% in FY2008. That share is then projected to rise
to 18.8% in FY2013.
Excise and other receipts were both less than 1% of GDP for all years shown.
The Administration projects that corporate income taxes, which rose to 2.7% of GDP
in FY2006 and FY2007, will decline slowly to 2.1% of GDP in FY2013. Social
insurance receipts, at 6.4% of GDP in FY2008, remain stable through FY2013. The
Administration projects that individual income taxes, having fallen from 10.3% of
GDP in FY2000 to 7.0% of GDP in FY2004, will rise to 9.4% of GDP in FY2013,
about 1% of GDP below their FY2000 level.
Administration Revenue Proposals. The Administration estimated that
making the 2001 and 2003 tax cuts permanent would reduce cumulative receipts by
$635 billion from baseline levels between FY2009 and FY2013 and by $2,076 billion
between FY2008 and FY2017.³⁵ Administration revenue proposals, apart from
proposals incorporated in the Administration baseline, would reduce receipts by an
estimated $228 billion in the first 5 years and by $233 billion over 10 years.
The budget also proposes a one-year fix to limit expansion of the AMT’s
coverage through calendar 2008 at an estimated cost of $46.7 billion. The AMT will
cover a rapidly growing proportion of middle-class taxpayers unless a sequence of³⁶
temporary AMT fixes or a permanent change in the AMT’s structure is enacted.
No fix for subsequent years was proposed, although Congress has passed and the
President has signed AMT fixes each year in recent years.
CBO estimates that indexing AMT thresholds for inflation would cost on
average $72.4 billion a year over the next 10 years, plus another $18.9 billion in debt
financing costs. Although the President’s budget called for limiting the growing
reach of the AMT, it omitted estimates of the five-year cost of such a fix. Omitting
these estimates, in effect, increases the Administration’s post-FY2009 estimates of
federal receipts substantially above what they would be with an AMT fix.
As shares of GDP, total receipts in the President’s budget are expected to remain
near their 40-year (FY1966-FY2007) average of 18.3% throughout the five-year
budget horizon. CBO’s baseline revenue estimates (revised, March 2008), which
exclude the extension of the 2001 and 2003 tax cuts, are larger, rising to 20.0% of
GDP in FY2012.

³⁵ For details, see FY2009 Budget of the U.S. Government, Analytic Perspectives, ch. 17,
Table 17-3.
³⁶ For discussions of the AMT issue, see CRS Report RL30149, The Alternative Minimum
Tax for Individuals, by Steven Maguire; and CRS Report RS22909, The Alternative^th
Minimum Tax for Individuals: Legislative Activity in the 110 Congress, by Steven Maguire
and Jennifer Teefy.

CBO Revenue Projections
The March 2008 CBO preliminary analysis of the President’s FY2009 policy
proposals projected slightly lower revenues in FY2008 than the President’s budget,
in part because the CBO estimate reflected recent fiscal stimulus legislation. In later
years, CBO revenue estimates of the Administration’s budget were very close to or
slightly above OMB projections.³⁷ CBO baseline revenue estimates released in
March 2008 were lower than January estimates, in large part due to the passage of the
Economic Stimulus Act of 2008. To a lesser extent, baseline revenue projections
changed due to changing economic conditions. CBO baseline revenue projections
show receipts rising once the 2001 and 2003 tax cuts expire, rising from 18.6% of
GDP in FY2010 to 20.0% of GDP in FY2012.
CBO also calculated revenue estimates and projections using alternative policy
assumptions. The alternative estimate assumes the extensions of all expiring tax
cuts, an annual adjustment to the AMT to halt its expanding coverage, and the
interaction effect of the extensions and the AMT. AMT reform would interact with
the extension of the 2001 and 2003 tax cuts, producing greater revenue losses than
the two changes separately. These alternative policies, according to CBO estimates,
would produce slower growth in receipts, both in dollars and as shares of GDP,
compared to CBO’s current-law baseline. Table 5 summarizes CBO estimates of the
five-year costs of selected revenue policies.
If the costs of permanently extending the EGTRRA and JGTRRA tax cuts,
which the Administration has proposed, were included in the baseline, a projected
future deficit would be larger by $692 billion, aside from financing costs, over the
five-year period FY2009-FY2013.³⁸ Similarly, indexing the AMT for inflation,
which Congress has done on a temporary basis in recent years, would raise the five-
year deficit projection by $313 billion. The costs of indexing the AMT and of³⁹
extending EGTRRA and JGTRRA tax cuts interact in important ways. Costs of the
EGTRRA and JGTRRA tax cuts would be much larger if the AMT did not cover as
many households.

³⁷ CBO’s reestimates allow a comparison of the CBO baseline and the Administration
proposals because both are derived from the same underlying economic and budget-
estimating assumptions — only the policy assumptions differ.
³⁸ If there were surpluses after the JGTRRA and EGTRRA extension, they would either be
smaller or would become deficits.
³⁹ See CRS Report RS21817, The Alternative Minimum Tax (AMT): Income Entry Points
and “Take Back” Effects, by Steven Maguire.

Table 5. Estimated Costs of
Selected Revenue Policy Alternatives
(in billions of current dollars)
Estimated Total Cost,
FY2009-FY2013
Policy AlternativeEffect onDebt Service
Def i ci t / Surpl us Cos t s
Before Debt Costs
Extend EGTRRA and JGTRRA-692-46
Index AMT for Inflation-313-45
Extend EGTRRA and JGTRRA and^a-1,153-100
Index AMT for Inflation
Extend Other Expiring Tax Provisions-149-16
^Source:^CB^O^,^Budget^{and Econom}ⁱ^c^O^u^t^l^ook^{, Jan}^u^a^ry^{2008, T}^a^bl^{e 1-}^5.
^No^tes:^Neg^a^tiv^{e n}^u^m^b^e^r^sⁱⁿ^dⁱ^{cate lar}^g^er^d^e^fⁱ^{cits. I}^t^em^{s m}^a^yⁿ^o^{t su}^m^to^to^{tals d}^u^{e to}^r^o^uⁿ^dⁱⁿ^g^.
^a.^S^u^m^of^C^B^O^-^es^tⁱ^m^at^{ed t}^o^t^a^l^cos^t^s^F^Y^2009-^F^Y^{2013 of}^ex^t^eⁿ^dⁱⁿ^g^EG^T^R^R^A^an^d^JG^T^R^R^A^,ⁱⁿ^dexⁱⁿ^g
^th^{e A}^M^T^f^o^{r in}^f^l^ation^,^an^{d th}^{e in}^teractiv^{e ef}^f^ect.^T^h^e^cos^t^of^th^{e in}^teractiv^{e ef}^f^{ect w}^a^s^es^tim^ated
^{at -}^{$148 billion}^,ⁿ^o^{t in}^clu^dⁱⁿ^g^{debt s}^e^rv^{ice cos}^t^s^of^-^{$9 billion}^ov^{er th}^{e period.}
Revenue Projections in Historical Perspective
Figure 4 shows the level of historical and projected federal receipts as a
percentage of GDP. Historical receipts are shown for FY2000 through FY2007. The
figure shows CBO baseline revenue projections from January and March 2008
budget reports, the President’s February 2008 budget submission for FY2009, a
March 2008 CBO analysis of the President’s revenue proposals, and the OMB
current service baseline. Federal receipts averaged 18.4% of GDP over the period
FY1990-FY2006, indicated by the horizontal line.
Revenue projections for the OMB Current Service baseline and the CBO
current-law baseline remain close through FY2010. Baseline projections for FY2008
computed before passage of the Economic Stimulus Act of 2008 show higher
revenues, of course, than later projections. CBO baseline estimates for FY2011 and
later years are substantially higher than projections of future revenue for the
President’s budget. CBO projects that receipts will rise to 20.3% of GDP in FY2018.

CRS-25
Figure 4. Revenue Data and Projections As a Percentage of GDP,
FY1990-FY2018

ⁱ^{ki/CRS-RL34419}
^g/w
^s^.or
^le^ak
^://wiki
^h^ttp
^OMB^an^d^C^B^O.
^{Vertical ax}^is^s^h^ow^s^percen^tag^e^of^GDP^.

Federal Revenues By Type
Figure 5 shows trends in federal revenue sources as a percentage of GDP since
FY1990 as well as OMB projections, which extend until FY2013, and CBO baseline
projections, which extend until FY2018. Federal revenue sources strongly affected
by cyclical economic conditions and major legislative changes, such as individual
and corporate income taxes, have varied sharply over time. Other revenue sources,
such as social insurance taxes, have been stable as a share of the economy.
Individual income taxes are the largest revenue source for the federal government,
followed by off-budget social insurance taxes. Social Security payroll (OASDI) taxes
comprise nearly all of the off-budget social insurance tax category.
Figure 5. Federal Revenues By Type As a Percentage of GDP,
FY1990-FY2018

^Source:^OMB^an^d^C^B^O.
^No^tes:^P^oⁱⁿ^{ts to}^th^{e r}ⁱ^g^h^t^o^f^v^e^r^{tical lin}^{e r}^e^p^r^esen^{t p}^r^o^j^ectioⁿ^s^{. T}^r^en^d^s^w^ith^h^o^llo^w^tr^ian^g^l^es^r^e^p^r^esen^t
^C^B^{O bas}^e^lin^{e proj}^ection^s^{. Vertical ax}^is^s^h^ow^s^percen^tag^e^of^GDP^.

Deficits and Surpluses
Deficits occur when Congress and the President enact policies that cause federal
spending to exceed federal receipts. Deficits increase government debt held by the
public, generally increasing net interest payments. Surpluses occur when federal⁴⁰
receipts exceed outlays, which reduces federal debt held by the public. This can,
in turn, reduce net interest payments. Many economists believe that running
surpluses when economic growth is strong and deficits when the economy is weak
helps dampen macroeconomic fluctuations. The federal government last ran a
surplus in FY2001, which amounted to $128 billion or 1.3% of GDP.
Long-term CBO and OMB projections both show substantial increases in budget
deficits in the years after FY2020. These deficits result from a projected gap between
rising federal outlays and revenues. The growth of health care spending, as well as
demographic changes, plays an important part of those fiscal trends.
Table 6 summarizes Administration and CBO projections of total federal
deficits and surpluses. The FY2007 total deficit, $162 billion, was well below the
Administration’s estimate in the FY2008 budget.
Table 6. Total Surpluses/Deficits(-), FY2007-FY2013 and FY2018
(in billions of current dollars)
^FY²⁰⁰⁷^FY²⁰⁰⁸^FY²⁰⁰⁹^FY²⁰¹⁰^FY²⁰¹¹^FY²⁰¹²^FY²⁰¹³^FY²⁰¹⁸
CBO Baseline, 1/08-162^a-219-198-241-117-8761223
President’s FY09 Budget, 2/08-410-407-160-954829 —
President’s FY09 CSB 2/08-238-231-200-50136136 —
CBO Rev. Baseline 3/08^b-357-207-213-9310570202
CBO Prelim. Est. of Pres. Budget 3/07^b-396-342-182-1290-2173
HBC, 3/7/08-583-536-416-275-60-86 —
SBC, 3/07/08-408-366-209-49177160 —
Conf., 5/20/08-394-340-210-732210 —
OMB, MSR, 7/08-162^a-389-482-178-1035829 —
CBO Update, 9/08-161^a-407-438-431-325-126-147-135
^Source:^OMB^,^C^B^{O, HB}^C^,^SB^C^.
^No^tes:
^{a. A}^c^t^u^al^F^Y^{2007 t}^o^t^a^l^defⁱ^ci^t^.
^b^.^CB^{O L}^e^tter^to^Sen^.^B^y^r^d
^CSB^{— T}^h^{e A}^d^mⁱⁿⁱ^str^a^tioⁿ^’^{s Cu}^r^r^en^{t Ser}^v^{ices B}^a^selin^e.
^HB^C^{— Hou}^s^{e B}^u^dg^{et C}^o^m^m^ittee,
^SB^{C — Sen}^a^{te B}^u^d^g^{et Co}^m^m^ittee
^C^oⁿ^f^—^C^oⁿ^f^eren^{ce report}^H^.^R^e^pt^{. 110-}⁶⁵⁹
MSR — Mid Session Review

⁴⁰ Very small surpluses might not reduce debt held by the public in some circumstances.

Administration Deficit Projections
The President’s February budget estimated the FY2008 deficit at $410 billion
(1.6% of GDP) and a small surplus of $29 billion in FY2013. The Administration’s
current service baseline estimates, which assume no policy changes, showed
surpluses appearing in FY2010, two years earlier than the budget reaches a surplus.
The dramatic increase in the FY2008 and FY2009 deficits compared to the FY2007
deficit is largely due to fiscal stimulus measures enacted to respond to weakening
economic conditions, higher military spending, and various legislative changes.
Reaching the budget’s deficit reduction goals during the next five years,
according to the Administration, requires strict limits on the growth in total
discretionary spending and slower growth of entitlement spending. Some of the
President’s proposals would increase spending or reduce receipts, requiring larger
spending reductions in other areas of the budget, since the Administration has
opposed using tax increases to reduce the deficit.⁴¹ If war costs, which are omitted
for post-FY2009 years in the President’s budget, continue at high levels, deficit
reduction efforts will face additional challenges.
CBO Deficit Projections
CBO, by law, must use assumptions for current-law baseline projections that
some analysts consider optimistic. Baseline revenue projections assume that
temporary fixes to halt the expanding coverage of the AMT expire at the end of 2008,
as current law specifies, and that the 2001 and 2003 tax cuts expire at the end of
2010. These assumptions boost revenues considerably compared to restricting AMT
expansion and extending the tax cuts. Baseline outlay projections assume that
discretionary spending will grow at the rate of inflation, which is at a slower rate than
it has grown recently, and that mandatory spending grows with eligible populations
and cost-of-living adjustments.
Some projections based on alternative assumptions depict a more pessimistic
fiscal outlook than the path of shrinking deficits and future surpluses indicated by⁴²
CBO current-law baseline projections.
March 2008 Baseline Projections. In March 2008, CBO released revised
current-law baseline projections, which incorporated costs of the Economic Stimulus
Act and superceded projections issued in January. The revised CBO current-law
baseline projections showed a FY2008 deficit of $357 billion, a $70 billion surplus
in FY2013, and a $202 billion surplus in FY2018. CBO current-law baseline
projections showed the federal deficit falling after FY2010, both in dollar terms and
as a percentage of GDP, through the end of the budget window in FY2018.
Surpluses were projected to appear from FY2012 through FY2017.

⁴¹ The Administration’s current services baseline estimate, which assumes current policy,
projects smaller deficits than the President’s proposed budget. The cumulative five-year
deficit would be smaller without the President’s proposed policy changes than with them.
⁴² See Auerbach, Furman, and Gale (2007) referenced at footnote 13.

The March 2008 CBO analysis estimated that the President’s budget proposals
would lead to a FY2008 deficit of $396 billion, $39 billion above the baseline level.
The CBO also projected that the President’s budget would generate a FY2009 deficit
of $342 billion, well above the revised baseline projection of a $207 billion FY2009
deficit.
September 2008 Baseline Projections. In September 2008, CBO released
updated budget and economic projections. The projected deficit for FY2008 rose
to $407 billion and $438 billion for FY2009. If Congress passes an AMT “patch,”
as it has in previous years, projected revenues would fall and projected deficits would
rise. The September 2008 projections also do not reflect any costs that may occur as
a result of the deprivatization of Fannie Mae and Freddie Mac.
On-Budget Deficits
The total federal deficit (or surplus) is the sum of the off-budget and on-budget
deficits or surpluses. The U.S. Postal Service net profits or losses and Social
Security revenues net of beneficiary payments are by law considered off-budget
entities. Since FY1985, Social Security surpluses have led to growing off-budget
surpluses, which has reduced the size of the total deficit. Table 7 summarizes
projections of on-budget deficits. No projection shows a surplus within the next 5
or 10 years. The FY2007 on-budget deficit, which excludes a large Social Security
surplus and a small Postal Service surplus, was $344 billion.
Table 7. On-Budget Deficits, FY2007-FY2013 and FY2018
(in billions of current dollars)
^FY²⁰⁰⁷^FY²⁰⁰⁸^FY²⁰⁰⁹^FY²⁰¹⁰^FY²⁰¹¹^FY²⁰¹²^FY²⁰¹³^FY²⁰¹⁸
CBO Baseline, 1/08-343.5^a-414-396-450-343-151-184-27
President’s FY09 Budget, 2/08-602-611-384-335-203-201 —
President’s FY09 CSB 2/08-431-382-344-336-236-267 —
CBO Rev. Baseline 3/08^b-592-525-375-346-236-269-121
CBO Prelim. Est. of Pres. Budget 3/07^b-553-403-421-320-133-174-44
HBC, 3/7/08-583-536-416-275-60-86 —
SBC, 3/07/08-605-562-416-276-61-84 —
Conf., 5/20/08-590-536-417-300-216-234 —
OMB, MSR, 7/08-343^a-574-663-378-321-168-172 —
CBO Update, 9/08-342^a-592-611-609-520-332-357-330
^Source:^OMB^,^C^B^{O, HB}^C^,^SB^C^.
^No^tes:
^{a. A}^c^t^u^al^F^Y^{2007 on}^-^b^u^d^g^e^t^defⁱ^ci^t^.
^b^.^CB^{O L}^e^tter^to^Sen^.^B^y^r^d
^CSB^{— T}^h^{e A}^d^mⁱⁿⁱ^str^a^tioⁿ^’^{s Cu}^r^r^en^{t Ser}^v^{ices B}^a^selin^e.
^HB^{C — Ho}^u^s^{e B}^u^d^g^{et Co}^m^m^{ittee, SB}^{C — Sen}^a^{te B}^u^d^g^{et Co}^m^m^ittee
^C^oⁿ^f^—^C^oⁿ^f^eren^{ce report}^H^.^R^e^pt^{. 110-}⁶⁵⁹
MSR — Mid Session Review

The Longer Run
OMB, CBO, and GAO agree that over a longer time period, one beginning in
this decade and lasting far into the century, the current mix of federal fiscal policies
is unsustainable. The nation’s aging population, combined with rising costs per
beneficiary for health care that seem likely to continue rising faster than per capita
GDP, raises spending in federal programs for the elderly to such an extent that the
government faces constantly rising deficits and a compounding federal debt burden.
CBO has concluded that “under any plausible scenario, the federal budget is on an⁴³
unsustainable path.”
Keeping future federal outlays at 20% of GDP, approximately its current share,
and leaving fiscal policies unchanged, according to CBO projections, would require
drastic reductions in all spending other than that for Medicare, Social Security, and
Medicaid. A former CBO Acting Director stated that, “by 2030 ... spending for those
programs [Medicare, Social Security, and Medicaid] is projected to reach roughly 15
percent of GDP.... If that increase happened..., the rest of the budget would have to⁴⁴
be cut by more than half” to keep overall spending close to 20% of GDP.
A CBO report on the long-term fiscal outlook concluded that
over the next half-century, the United States will confront the challenge of
conducting its fiscal policy in the face of the retirement of the baby-boom
generation.... Under current policies, the aging of the population is likely to
combine with rapidly rising health care costs to create an ever-growing demand
for resources to finance federal spending for mandatory programs, such as
Medicare, Medicaid, and Social Security.... Attaining fiscal stability in the
coming decades will probably require substantial reductions in the projected
growth of spending and perhaps also a sizable increase in taxes as a share of the⁴⁵
economy.
The Administration indicated similar concerns about the outlook for the budget
over the long term in the President’s FY2009 budget.
The current structure of the Federal Government’s major entitlement programs
will place a growing and unsustainable burden on the budget in the long-term....
By 2050, spending on these three entitlement programs [Social Security,
Medicare, and Medicaid] is projected to be more than 15 percent of GDP, or

⁴³ U.S. Congress, Government Accountability Office, The Nation’s Long-Term Fiscal
Outlook: January 2007 Update, GAO-07-510R, p.1.
⁴⁴ U.S. Congress, Congressional Budget Office, The ABCs of Long-Term Budget Challenges,
Director’s Conference on Budget and Accounting for Long-Term Obligations, Opening
Remarks by Donald B. Marron, Acting Director, December 8, 2006, p. 2.
⁴⁵ U.S. Congress, Congressional Budget Office, The Long-Term Budget Outlook, December

2007, p. 1.

more than twice as large as spending on all other programs combined, excluding⁴⁶
interest on the public debt.
The Social Security, Medicare, and Medicaid programs present different
challenges to the long-term fiscal position of the federal government. Estimates of
the long-term fiscal gap between Social Security (OASDI) outlays and Social
Security revenues as a proportion of long-term GDP are generally much smaller than
estimates of the long-term fiscal gap between Medicare (HI, Part B, and Part D)
outlays and revenues.⁴⁷ These long-term estimates of fiscal imbalances are especially
sensitive to changes in assumptions regarding productivity growth and interest rates.
Some analysts willing to make more felicitous assumptions about productivity⁴⁸
growth present a more optimistic long-term outlook for Social Security.
Spending projections for Medicare and Medicaid are sensitive to changes in
medical inflation. In past years, many projections that medical inflation would slow⁴⁹
have turned out to be overly optimistic.
Unexpected events, such as the hurricanes in 2005 or an economic downturn,
can change the short-term budget outlook. The interplay of policy, demographics,
and medical care costs, however, will in large part determine the long-term budget
outlook. The retirement of the baby boom generation, which will rapidly expand the
population eligible for federal programs serving the elderly, along with continuing
increases in health care costs, will put enormous pressure on the federal budget.
Without policy changes, these programs could overwhelm the rest of the budget. Not
only will the programs themselves be stressed, but their growth could easily limit the
government’s flexibility in meeting its obligations or new needs as well as
overwhelm the economy’s ability to provide the resources needed for the expanded
programs.

⁴⁶ Office of Management and Budget, Budget of the United States Government for Fiscal
Year 2008, February 2007, p. 16.
⁴⁷ For a detailed discussion of long-term projections, see CRS Report RL33623, Long-Term
Measures of Fiscal Imbalance, by D. Andrew Austin.
⁴⁸ Dean Baker, “Social Security Byte: Trustees Assumptions Still More Pessimistic Than
CBO,” Center for Economic and Policy Research, April 23, 2007. Available at
[ h t t p : / / www.c e p r . n e t/index.php?option=com_content&task=view&id=1139&It emid=138].
⁴⁹ The 2004 Technical Review Panel on the Medicare Trustees Reports, “Review of the
Assumptions and the Methods of the Medicare Trustees’ Financial Projections,” December
2004, contended that assuming medical costs per beneficiary will grow 1% a year faster than
GDP was reasonable. Actual Medicare costs per beneficiary, however, have risen at a faster
pace. See Table V.B1 from 2007 Annual Report of The Boards of Trustees of the Federal
Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds, available
at [http://www.cms.hhs.gov/ReportsTrustFunds/downloads/tr2007.pdf].