COMMITTEE FOR A RESPONSIBLE FEDERAL BUDGET

Memo to: Board and Members

From: Carol Cox Wait
Co-Chairmen Date: March 21, 2001
Bill Frenzel
Timothy Penny SUBJECT: BUDGET ISSUE UPDATE
CBO RE-ESTIMATES OF PRESIDENT’S BLUEPRINT and
Directors HOUSE BUDGET COMMITTEE ACTION
Roy L. Ash The Congressional Budget Office this week released a partial re-estimate of
Thomas L. Ashley
Nancy Kassebaum Baker
the policies contained in Blueprint for New Beginnings, the budget framework
Charles Bowsher document that the President sent to Congress on February 28th.
Jim Cooper
James Exon Also this week, the House Budget Committee reported the Congressional
Willis Gradison Budget Resolution for FY 2002. The House expects to complete action on the
William H. Gray, III
budget next Wednesday.
Jim Jones
Robert S. Kerr, Jr.
James T. Lynn The Senate is expected to take up the budget the week of April 2. The Senate
James T. McIntyre, Jr. Committee may or may not mark-up the resolution. Chairman Domenici
W. Henson Moore probably will not schedule a mark-up unless he expects a majority of
Howard Moskof Committee Members to vote for a resolution compatible with the President’s
Marne Obernauer, Jr.
June O’Neill
budget Blueprint. On April 1, all budget resolutions previously introduced and
Leon Panetta referred to the Budget Committee will be discharged. If there is no resolution
Rudolph G. Penner reported from the Committee, the Majority Leader may call up the discharged
Peter G. Peterson resolution of his choice—and that resolution will enjoy the privileged status of
Robert Reischauer one reported from the Committee under the Budget Act.
John J. Rhodes
Alice M. Rivlin
Jim Slattery The table at page 4 compares the numbers in the Administration Blueprint to
John W. Snow the CBO re-estimates and the House Budget Committee reported resolution.
Elmer Staats The Democrats introduced an amendment in committee, but they have not
David A. Stockman released sufficient detail for us to include that amendment in our comparisons.
Paul A. Volcker
Carol Cox Wait
Joseph R. Wright, Jr.
There are two significant differences between the House Chairman’s Mark and
the President’s Blueprint: the timing of the tax cut and energy exploration in
Senior Advisors Alaska. These differences should make the resolution more acceptable to
Henry Bellmon some Democrats.
Robert N. Giaimo
Robert S. Strauss Ten-year aggregate receipts are essentially the same in the HBC reported
resolution and the President’s Blueprint. But the HBC proposes to cut
taxes about twice as much as the President in FY 2002 (which begins
Carol Cox Wait September 1) and about 25% more in FY 2003.
President
The HBC resolution does not address the question of energy exploration in
Alaska. Chairman Nussle says that the budget is not the place to have that
debate.

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The table at page 5 compares the Administration’s proposed allocation of resources across
broad categories within the budget to CBO baseline projections. The table shows a whopping
$1.4 trillion over ten years that the Blueprint does not allocate to any specific spending or tax
policy. The contingency reserve averages about $20 billion per year in 2002-2004, shrinks in
2005 and goes negative for a couple of years thereafter. In 2008-2011 contingency funds plus
“excess balances” grow into the hundreds of billions per year. Sixty four percent (64%) of
projected surpluses, sixty-nine percent (69%) of revenue losses due to tax cuts; and seventy
two percent (72%) of unallocated resources are concentrated in the last five years of the budget
projections.

Unbelievably Large Numbers

We are concerned that using ten-year aggregates to describe surplus projections and policy
changes does little to illuminate budget debates and may prove to be downright misleading.

The numbers that Congress and the President must deal with in the current budget debate are
literally mind-boggling.

The Non-Social Security, Non-Medicare surplus in 2002 and every year thereafter is larger
than the entire budget of the State of California which, in turn, is 56% larger than the New
York State budget (next largest to California).

The amounts that the President proposes to spend each year for his Helping Hand
prescription drug program are equal to the total budget of the State of Connecticut.

The table at page 6 illustrates the growth in discretionary spending since implementation of
the Congressional Budget Act. Putting aside the Reagan defense build-up and the growth
in non-defense spending in the last five years, the President’s proposed increases are as
large as any of the historical comparisons.

For the first time in more than twenty years, I don’t know what budget policies I would adopt if
somebody made me queen for a day.

In part that is due to uncertainty about the economy. It seems unlikely that surplus projections
will go down very much, if at all, when we get new numbers this summer. If there is a change,
any short term reductions likely will be offset by higher estimates in the out-years. And it is by
no means certain that the short-term estimates will go down. But a deep, prolonged economic
downturn could change that.

And there seems to be no strong correlation between public service needs and proposed
spending increases/tax cuts. There is no objectively or analytically right level of public spending
or taxation. But folks are talking about percent growth and multiples of the President’s
proposals rather than what will contribute to sustainable economic growth and/or what is
needed to fund specific priorities and programs.

Long-Term Reforms

It makes sense to deploy some part of near-term surpluses to help fund transitions in Social
Security reform, Medicare reform and/or tax reform. But there is no consensus around such
reforms. We cannot sensibly fund transitions until we know what the new systems will be and
what it will take to get from here to there.

Committee for a Responsible Federal Budget—Budget Issue Update

CBO Re-Estimates and House Action on the Budget Resolution page 2
In the final instance, we must reduce statutory Social Security and Medicare benefits in future
years and/or increase taxes a lot. There is much discussion of individual accounts or investing
a portion of current surpluses in private equities/debt instruments—proposing to close some of
the gap through investment returns. But few want to discuss the kinds of benefit changes that
will be needed to avoid huge tax increases and/or mega-deficits once the baby boom generation
retires. And arbitrage will not solve the problem.

Notwithstanding the recent Trustees’ report, Medicare will experience negative cash flows within
a decade—and Social Security not much later. The financial crisis arises when outlays exceed
receipts—no matter how large the trust fund balances we may be carrying on the books at that
time. Redressing the imbalance will require adjustments in benefits and/or taxes. Those
adjustments best should be phased in over a long period of time. But do not expect much
progress on that front this year.

Tax reform means different things to different individuals and groups. And the tax changes
under consideration this year could make a system that already is impossibly complex even
more so.

Focus on the Near-Term

Focus on the budget numbers one year at a time. Give more weight to the 3-year estimates
than the 5-year projections. Discount heavily both surplus projections and policies due to go into
effect in the second five years. Ten-year estimates are useful to discourage policymakers from
enacting new policies first effective one year after the “budget window”; and they are useful to
help us understand budget trends.

But we have to look at policy change one year at a time. Policy changes in the budget year are
the only changes Congress and the President control directly. This year’s changes are built into
the baseline in the out-years. The out-year costs may be greater or less than anticipated due to
inflation, growth or any number of technical factors. Very small changes in the budget year can
make very large differences over time. For example, increasing discretionary spending 1%
above the baseline would increase spending $359 billion over ten years.

We can be reasonably certain—in the absence of an uprising such as was caused by

catastrophic health insurance for the elderly—that new spending programs and tax cuts enacted
this year will remain on the books for a while. On the other hand, does anyone really believe
that spending and tax policies will remain unchanged for a decade?

Policy changes this year will affect surplus projections for the out-years, as will changes in the
economy. Changes in the medium- to long-term outlook may trigger policy changes in future
years. Policies that are not due to go into effect until five years or more into the future could
change before they affect anybody in any real way.

Oddly, all of this may make this year’s budget debate seem easy. It isn’t hard to increase
spending and cut taxes. This debate is about spending increases v tax cuts. Republicans and
Democrats, the Administration and Congress almost certainly will find a way to use any and all
on-budget surpluses for tax cuts and spending increases. The debate is not really about how
much debt to retire. Congress and the President almost certainly will use all Social Security (and
maybe Medicare) surpluses to retire debt. Gridlock might drive Treasury to buy back larger
amounts of debt held by the public—but we do not anticipate gridlock this year.

Committee for a Responsible Federal Budget—Budget Issue Update

CBO Re-Estimates and House Action on the Budget Resolution page 3
House Budget Committee Compared to President's Budget Framework
fiscal years--$ in billions--totals may not add due to rounding

2001 2002 2003 2004 2005 2006 Total 2002-06 Total 2002-2011
P(F) P(CBO) HBC P(F) P(CBO) HBC P(F) P(CBO) HBC P(F) P(CBO) HBC P(F) P(CBO) HBC P(F) P(CBO) HBC P(F) P(CBO) HBC P(F) P(CBO) HBC
Total Outlays 1856 1857 1857 1959 1941 1941 2012 2004 2007 2071 2074 2086 2164 2166 2176 2221 2222 2237 10,427 10,407 10,447 22,929 22,906 23,004
Total Receipts 2137 2134 2129 2190 2205 2168 2258 2277 2260 2339 2354 2344 2436 2437 2437 2528 2519 2521 11,751 11,792 11,730 26,362 26,267 26,248
Surplus 281 278 272 231 264 227 246 272 253 268 280 259 273 270 261 307 297 285 1,325 1,383 1,284 3,433 3,261 3,244
Off Budget 157 na 156 171 na 171 193 na 188 211 na 202 237 na 222 252 na 238 1,064 na 1,021 2,591 na 2,491
On-Budget/
Contingency 124 na 116 60 na 56 53 na 64 57 na 57 36 na 39 55 na 47 261 na 263 842 na 753

Mandatory Outlays 1207 na 1206 1267 1249 1258 1304 1296 1300 1344 1349 1361 1413 1418 1428 1452 1456 1471 6,780 6,768 6,818 15,110 15,094 15,212
Net Interest 206 na 205 188 181 182 175 167 170 161 152 155 144 133 138 127 117 122 795 750 767 1,127 1,044 1,092
All Other 1001 na 1001 1079 1068 1076 1129 1129 1130 1183 1197 1206 1269 1285 1290 1325 1339 1349 5,985 6,018 6,051 13,982 14,050 14689

Discretionary 649 na 646 692 692 684 708 708 708 727 725 725 751 748 748 769 766 766 3,647 3,639 3,631 7,819 7,812 7,791
Outlays
Defense 300 na 301 319 320 320 322 326 326 333 334 334 347 347 347 354 355 355 1,675 1,682 1,682 na na 3,614
Non-Defense 349 na 344 373 372 364 386 382 382 394 391 391 404 400 400 415 411 411 1,972 1,956 1,948 na na 4,177

Legend

P(F) President's Budget Framework

P(CBO) Partial Re-Estimates by CBO

Notes

CBO estimates of the President's budgetary proposals are based on Blueprint for New Beginnings, February 28, 2001. It does not reflect any changes in Administration policies that may have been made since that publication.

The new Administration does not expect to submit to Congress until April comprehensive budget documents and extensive detail that could affect CBO re-estimates.

CBO cannot re-price the Administration's proposed Immediate Helping Hand, nor the tax cut proposal. They simply do not have enough information.

As they have done in similar situations in years past, CBO used the Administration's estimates of those proposals.

CBO did re-estimate discretionary outlays by function, based on the amounts of budget authority contained in the Blueprint.

Committee for a Responsible Federal Budget—Budget Issue Update page 4

CBO Re-Estimates and House Action on the Budget Resolution
President's FY 2002 Budget Framework compared to CBO Baseline Projections January 2001
fiscal years--$ in billions
Actual Projections Totals
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2002-06 2002-11

Total Surplus CBO January 2001 313 359 397 433 505 573 635 710 796 889 2007 5610

Discretionary Outlays
CBO Baseline January 2001 682 710 730 751 766 782 804 825 844 867 3639 7761
President's FY 2002 Budget Framework 692 708 727 751 769 787 811 834 861 880 3647 7820
President +/- CBO Base 10 -2 -3 0 6 5 7 9 17 13 11 62

Mandatory Outlays
CBO Baseline January 2001 887 951 1032 1142 1226 1322 1416 1516 1620 1737 5238 12849
President's FY 2002 Budget Framework 900 966 1040 1153 1235 1336 1432 1535 1640 1760 5294 12997
President Mandatory Policies + CBO Base 13 15 8 11 9 14 16 19 20 23 56 148

Net Interest
CBO Baseline January 2001 179 163 142 116 90 72 65 58 53 51 690 989
President's FY 2002 Budget Framework 187 170 150 128 113 101 92 85 78 74 748 1177
Pres +/- CBO 8 7 8 12 23 29 27 27 25 23 58 189

President's Proposed Revenue Reductions 31 66 99 133 170 193 209 226 243 250 499 1620
Tax cut as a percent of non-SS, non-Medicare Surplus 29 50 63 60 62 61 56 51 47 32 56 49

Non SS, Non Medicare Surplus— 106 132 155 220 273 316 374 444 520 785 886 3325
CBO January 2001*

Reduction in Debt Held by the Public--President 227 232 252 257 294 328 181 125 71 50 1049 2017

Contingency Fund** 20 27 17 4 -10 -9 4 17 32 56 58 158

Contingency Fund Plus Excess Balances 182 291 407 517 0 1397

* Total Surplus minus Social Security and Medicare Trust Fund Surpluses
** The Framework Document does not break out contingency funds, so this number is really "all other"--CBO Baseline Surplus, minus, the incremental cost of
the Administration's Proposals for Discretionary, Mandatory, Net Interest and Debt Reduction/Excess Balances.

Note: This whole Chart is sort of “apples and oranges”. The starting point is the CBO January Baseline. The numbers for Administration policies are from the
President’s Blueprint. Nonetheless, we believe this to be a pretty good illustration of the President’s policy proposals compared to current laws and policies.

Committee for a Responsible Federal Budget—Budget Issue Update page 5

CBO Re-Estimates and House Action on the Budget Resolution
Increases in Federal Discretionary Spending--Fiscal Years--$ in Billions

Actual Projections
1976-80 1981-85 1986-90 1991-95 1996-00 2001-05

Defense
current dollars 44.7 95.1 26.3 -46.1 25.2 54.8
constant dollars 14.1 71.5 1.7 -78.5 8.3 49.6
percent of GDP -0.3 1.2 -1 -1.7 -0.5 0.4

Domestic
current dollars 50.6 9 34.4 58.1 54.3 63.5
constant dollars 42.8 -25.8 14.8 33.8 65.1 57.5
percent of GDP 0.2 -1 -0.1 0.1 na 0.5

Note: CRFB computed the constant dollar amounts for FY 2001-05 based on CBO estimates of the GDP price index.

Committee for a Responsible Federal Budget—Budget Issue Update page 6

CBO Re-Estimates and House Action on the Budget Resolution