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Excerpts of Qualifiers
and Assumptions by Section
The following are excerpts of qualifiers and assumptions taken
directly from the CBO’s Budget and Economic Outlook: Fiscal Years 2002-2011. The excerpts are to highlight the numerous
qualifiers and assumptions throughout the report. The following excerpts are not intended to be
a substitute for reading the report; however, it will identify some of the
issues addressed by the CBO.
Summary Economic Outlook Revenue Spending Uncertainties
Summary
Excerpt
2001 CBO Report: Summary Section # 1
Assuming that the economy follows the
path described in this report,…surpluses are projected
to rise in the future, approaching $889 billion in 2011 and accumulating to
$5.6 trillion over the 2002-2011 period.
Excerpt
2001 CBO Report: Summary Section # 2
How is it, then, that budget projections are
getting better when the economy seems to be getting worse?
Excerpt
2001 CBO Report: Summary Section # 3
Over the longer term, however, budgetary pressures
linked to the aging and retirement of the baby-boom
generation threaten to produce record deficits and unsustainable levels
of federal debt.
Excerpt
2001 CBO Report: Summary Section # 4
The baseline projections presented in this report
represent the midrange of possible outcomes for the economy and the budget,
Excerpt
2001 CBO Report: Summary Section # 5
But considerable uncertainty surrounds those
projections for two reasons.
Excerpt
2001 CBO Report: Summary Section # 6
Moreover, projections that are quite
different from the baseline also have some significant probability of coming to
pass.
Excerpt
2001 CBO Report: Summary Section # 7
the budget might fall
into deficit in 2006, even without policy changes.
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The Economic Outlook
Excerpt
2001 CBO Report: Economic Outlook Section # 1
lower
interest rates will set the stage for spending to grow more quickly next year.
Excerpt
2001 CBO Report: Economic Outlook Section # 2
Significant uncertainty
surrounds that short-term forecast.
Excerpt
2001 CBO Report: Economic Outlook Section # 3
The primary negative risk is that
the current slowdown might turn into a recession.
Excerpt
2001 CBO Report: Economic Outlook Section # 4
Although forecasters widely
anticipated that economic activity would slow, the deceleration has been
surprisingly rapid.
Excerpt
2001 CBO Report: Economic Outlook Section # 5
CBO has raised its projections of
both potential and actual GDP over the past few years in response to the
investment boom of the late 1990s
Excerpt
2001 CBO Report: Economic Outlook Section # 6
by
the increasing belief that acceleration in the growth of information
technology--which was a major force behind the investment boom of the late
1990s--will continue to stimulate investment over the next decade
Excerpt
2001 CBO Report: Economic Outlook Section # 7
Wage and salary disbursements and
corporate profits are particularly important because they produce the most tax
revenues
Excerpt
2001 CBO Report: Economic Outlook Section # 8
The fact that more highly taxed
categories of income make up a greater share of GDP in the current economic outlook
than last July also leads to a more favorable budget projection.
Excerpt
2001 CBO Report: Economic Outlook Section # 9
spending
by businesses on structures, equipment, and software--known as business fixed
investment (BFI)--weakened in the second half of 2000 after a strong showing in
the first half
Excerpt
2001 CBO Report: Economic Outlook Section # 10
market
values of major U.S. corporations, fell at an annual rate of 17 percent between
June and December of last year
Excerpt
2001 CBO Report: Economic Outlook Section # 11
consumers and
businesses will curtail their spending much more than CBO assumes, leading to a
recession this year
Excerpt
2001 CBO Report: Economic Outlook Section # 12
The primary negative risk is that
the current slowdown might turn into a recession. Although forecasters widely
anticipated that economic activity would slow, the deceleration has been
surprisingly rapid.
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The Revenue Outlook
Excerpt 2001 CBO Report: Revenue Section # 1
Revenues are expected to grow more slowly than
GDP (nominal) through 2007 and then faster than GDP through 2011
Excerpt 2001 CBO Report: Revenue Section # 2
as a share of GDP,
revenues rose from 18.1 percent in 1994 to a post-World War II high of 20.6
percent in 2000--a level exceeded only once, in 1944
Excerpt 2001 CBO Report: Revenue Section # 3
The growth of receipts remains at about that rate
through 2007 but as a percentage of GDP continues to fall, to 20.2 percent.
After 2007, the growth of receipts is expected to rise, to 5.4 percent in 2011,
and to increase relative to GDP, reaching 20.4 percent by the end of the
projection period.
Excerpt 2001 CBO Report: Revenue Section # 4
Individual income tax
receipts, bolstered primarily by higher
realizations of capital gains and increases in the effective tax rate, have
fueled the rapid growth of revenues relative to GDP over the past few years.
Excerpt 2001 CBO Report: Revenue Section # 5
higher nominal income
raises the average effective tax rate as the number of taxpayers affected by
the alternative minimum tax (AMT) increases and growth in real income subjects
more income to higher marginal tax rates.
Excerpt 2001 CBO Report: Revenue Section # 6
Individual income taxes account for most of the
recent rise in revenues as a percentage of GDP. From 1993 to 1998, those
receipts averaged growth of more than 10 percent a year. In fiscal year 1999,
partly because of the tax cuts enacted in the Taxpayer Relief Act of 1997, they
slowed to their lowest rate of increase since 1992. But in fiscal year 2000,
they jumped more than 14 percent, reaching their highest share of GDP ever.
Excerpt 2001 CBO Report: Revenue Section # 7
From 1994 to 2000, however, the annual
growth of those receipts surpassed that of the economy for reasons unrelated to
new tax legislation. In fact, in 1998 and 1999, receipts increased as a
percentage of GDP despite new tax breaks concerning children and education.
Excerpt 2001 CBO Report: Revenue Section # 8
Capital gains realizations, which are not
included in either GDP or taxable personal income, account for a large part of
the growth in AGI
Excerpt 2001 CBO Report: Revenue Section # 9
Increases in real income for taxpayers
generally placed more income into higher tax brackets. That phenomenon alone
accounted for more than half of the increase in income tax liabilities relative
to GDP
Excerpt 2001 CBO Report: Revenue Section # 10
it is difficult to
isolate the role of the extraordinary rise in the stock market. The potential
role of the stock market in boosting individual income taxes
Excerpt 2001 CBO Report: Revenue Section # 11
Capital gains realizations are notoriously
difficult to predict.
Excerpt 2001 CBO Report: Revenue Section # 12
in 2001 individual
income tax receipts as a percentage of GDP are projected to reach a new peak
Excerpt 2001 CBO Report: Revenue Section # 13
In 1999, corporate income tax receipts as a
percentage of GDP slipped as profit growth slowed. But in 2000, receipts as a
share of GDP rebounded as profits grew strongly again.
Excerpt 2001 CBO Report: Revenue Section # 14
Projections of corporate income tax receipts
are always subject to a great deal of uncertainty
Excerpt 2001 CBO Report: Revenue Section # 15
The surge in revenues in the late 1990s was
fueled by phenomena that are only imperfectly understood.
Excerpt 2001 CBO Report: Revenue Section # 16
In addition, if the market failed to supply
option income for employees, firms would likely replace at least some with
other forms of compensation
Excerpt 2001 CBO Report: Revenue Section # 17
The factors known to have driven the recent
surge in revenues are not assumed to continue as they have over the past few
years. But they are not assumed to go away completely either and are projected
to continue contributing to revenues over the projection period.
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The Spending Outlook
Excerpt 2001 CBO Report: Spending Section # 1
Under CBO's baseline, projected real growth in
the economy outstrips the growth in federal spending,
Excerpt 2001 CBO Report: Spending Section # 2
CBO's baseline depicts the path of
discretionary spending in accordance with the Deficit Control Act, which states
that current spending should be assumed to grow with
inflation in the future
Excerpt 2001 CBO Report: Spending Section # 3
CBO estimates that mandatory spending (net of
offsetting receipts) will continue to grow faster than the economy--at a rate
of 6.0 percent a year--led by the spending for the two major health care
programs, Medicare and Medicaid, which are projected to grow at an average
annual rate of 7.2 percent and 8.6 percent,
Excerpt 2001 CBO Report: Spending Section # 4
Although total discretionary outlays were
virtually unchanged from 1991 through 1996, defense spending declined 3.6 percent,
while nondefense spending rose 4.7 percent.
Excerpt 2001 CBO Report: Spending Section # 5
Over the past few years, the Congress and the
President have used a number of tactics--including advance appropriations,
obligation and payment delays, emergency designations, and specific legislative
direction--to boost discretionary spending while statutorily complying with the
limits.
Excerpt 2001 CBO Report: Spending Section # 6
Since the Deficit Control Act requires
CBO to use those inflation factors and to assume that current policies remain
in place, the baseline projection is not a prediction
of future outcomes but rather a reference point for assessing policy changes.
Excerpt 2001 CBO Report: Spending Section # 7
Since the size of the projected surpluses is very
sensitive to assumptions about discretionary spending, CBO has calculated four
alternative scenarios for such spending during the 2002-2011 period.
Excerpt 2001 CBO Report: Spending Section # 8
spending for
entitlements and other mandatory programs has more than doubled since
1985--rising faster than both nominal growth in the economy and the rates of
inflation. CBO's baseline projections expect that trend to continue.
Excerpt 2001 CBO Report: Spending Section # 9
Automatic increases in benefits account for
more than one-third of the growth in entitlement programs.
Excerpt 2001 CBO Report: Spending Section # 10
The general baseline concept for
mandatory spending is to project budget authority and outlays in accordance
with current law.
Excerpt 2001 CBO Report: Spending Section # 11
the Deficit Control Act
directs CBO to assume that the programs continue when their authorization
expires
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The Uncertainty of Budget Projections
Excerpt 2001 CBO
Report: Uncertainty Section # 1
But considerable uncertainty
surrounds those projections for two reasons.
Excerpt 2001 CBO
Report: Uncertainty Section # 2
Figure 5-1 is intentionally somewhat fuzzy
because the uncertainties are themselves estimates.
Excerpt 2001 CBO
Report: Uncertainty Section # 3
As this report was being prepared,
the economy appeared to be weakening more than previously expected,
Excerpt 2001 CBO
Report: Uncertainty Section # 4
Economists are usually unable to
forecast the turning points of business cycles--and indeed do not have a good
record in recognizing them in the first months after they have occurred.
Excerpt 2001 CBO
Report: Uncertainty Section # 5
Thus, the short-term outlook for the economy,
and hence for the budget, is particularly uncertain when the business cycle may
be approaching a turning point.
Excerpt 2001 CBO
Report: Uncertainty Section # 6
The longer-term outlook is also unusually
hard to discern at present.
Excerpt 2001 CBO
Report: Uncertainty Section # 7
Baseline projections are meant to serve
as a neutral reference point for evaluating policy changes,
Excerpt 2001 CBO
Report: Uncertainty Section # 8
Misestimates of revenues have generally
been larger than misestimates of outlays
Excerpt 2001 CBO
Report: Uncertainty Section # 9
Both recessions and booms can be a
problem for revenue projections--as noted earlier, predicting turning points is
one of the most difficult challenges facing economic forecasters.
Excerpt 2001 CBO
Report: Uncertainty Section # 10
Thus, the range of uncertainty around CBO's
projections must include the possibility that the "new economy" is no
more than a temporary increase in productivity growth, as well as the possibility
that it is even more robust than CBO's baseline economic projections assume.
Excerpt 2001 CBO
Report: Uncertainty Section # 11
The baseline economic assumptions reflect
recent favorable developments for the budget, including the extraordinary
growth in productivity, the rise in income and capital gains realizations
relative to GDP, and the concentration of income growth among people with
higher tax rates
Excerpt 2001 CBO
Report: Uncertainty Section # 12
Although those baseline assumptions
appear reasonable given the available data, other assumptions are clearly
possible and also reasonable.
Excerpt 2001 CBO
Report: Uncertainty Section # 13
The pessimistic trend scenario reverses
most of the assumptions of the optimistic scenario and assumes that the economy
reverts in many respects to its situation before 1996.
Excerpt 2001 CBO
Report: Uncertainty Section # 14
The Social Security Administration assumes
much lower labor force participation than CBO does in its projections; if those
assumptions proved accurate, they would worsen the 10-year budget outlook by
reducing the sustainable growth of the economy.
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