Budget and economic outlook: a 2014 update

Jan. 21, 2014
Editor’s Note: With each forecasting issue, I offer the Congressional Budget Office’s  assessment and projection for the coming year. Most accept the assumption that the CBO is nonpartisan in its analysis of the U.S. budget and economy. While you might disagree with their assumptions and projections, it is important that you recognize how the macro issues of the economy might have an impact on your business.

This report by CBO [Congressional Budget Office] presents an analysis of the proposals contained in the President’s budget request for fiscal year 2014. The analysis is based on CBO’s economic projections and estimating assumptions and models, rather than the Administration’s, and incorporates estimates by the staff of the Joint Committee on Taxation (JCT) for the President’s tax proposals.

In conjunction with analyzing the President’s budget, CBO has updated its baseline budget projections, which were previously issued in February 2013. Unlike its estimates of the President’s budget, CBO’s baseline projections largely reflect the assumption that current tax and spending laws will remain unchanged, so as to provide a benchmark against which potential legislation can be measured. Under that assumption, CBO estimates that the deficit would total $642 billion in 2013 and that the cumulative deficit over the 2014-2023 period would amount to $6.3 trillion.

The President’s budget request specifies spending and revenue policies for the 2014-2023 period and includes initiatives that would have budgetary effects in fiscal year 2013 as well. According to CBO’s and JCT’s estimates, enactment of the President’s proposals would, relative to CBO’s baseline, boost deficits between 2013 and 2015 but reduce them by increasing amounts from 2016 through 2023. In particular, the President’s policies would have the following consequences for the budget:

• The deficit in 2013 would equal $669 billion (or 4.2 percent of gross domestic product, GDP), $27 billion more than the amount projected in CBO’s baseline.

• In 2014, the deficit would increase slightly in nominal terms, to $675 billion (or 4.1 percent of GDP). That deficit would be $115 billion more than the shortfall projected for next year in CBO’s baseline. In 2015, the deficit would fall to $437 billion (or 2.5 percent of GDP) but remain $59 billion above the amount projected for that year in CBO’s baseline.

• In subsequent years, the deficit would decline further relative to GDP, reaching 2.2 percent in 2016 and 2.0 percent in 2017 and 2018, but then would increase again, remaining above 2 percent of GDP through 2023. Deficits in the 2016-2023 period would be smaller than the amounts in CBO’s baseline by between 0.1 percent and 1.4 percent of GDP each year (see chart).

• In all, deficits would total $5.2 trillion between 2014 and 2023 (or 2.4 percent of total GDP projected for that period), $1.1 trillion less than the cumulative deficit in CBO’s baseline.

• Federal debt held by the public would increase from 73 percent of GDP ($11.3 trillion) at the end of 2012 to 77 percent ($12.8 trillion) at the end of 2014. In each subsequent year, debt would decline as a percentage of GDP, reaching about 70 percent ($18.1 trillion) in 2023. In contrast, under the assumptions of CBO’s current-law baseline, debt held by the public would be rising relative to GDP after 2018 and would stand at about 74 percent of GDP ($19.1 trillion) in 2023.

The President’s budget contains a host of proposed changes to spending and revenue policies. By CBO’s estimate, those policy changes would boost revenues by $974 billion and reduce outlays (including interest), on net, by $172 billion, yielding a total of $1.1 trillion in deficit reduction over the 2014-2023 period relative to CBO’s current-law baseline. One major proposal involves the automatic procedures originally specified by the Budget Control Act of 2011 (Public Law 112-25). Those procedures took effect in March 2013 and are scheduled to reduce spending in subsequent years. The President proposes to cancel those scheduled reductions, which would boost outlays relative to the amount in the baseline by nearly $1 trillion over the next 10 years. That proposed change would be more than offset by other proposals that would reduce projected deficits. Among those other proposals, the ones with the largest budgetary impact are these:

• Less funding (relative to the amount in CBO’s baseline) for military operations in Afghanistan and for related activities (also known as overseas contingency operations). As specified in law, the baseline incorporates the assumption that funding for such operations and activities will total the amount provided in 2013 – $93 billion (with the effects of sequestration included) – each year through 2023 with increases to keep pace with inflation; the President’s budget, by comparison, includes a request for $92 billion for those operations and activities in 2014 and $37 billion in each year thereafter through 2021. Consequently, projected outlays for overseas contingency operations under the President’s proposal are $601 billion less over the 2014-2023 period than those in CBO’s baseline.

• A cap on the extent to which certain deductions and exclusions can reduce a taxpayer’s income tax liability, limiting the amount to no more than 28 percent of those deductions and exclusions. That change would increase revenues by a total of $493 billion over the next decade, JCT estimates.

• No additional funding designated as an emergency requirement after 2013. By contrast, as specified by law, CBO’s baseline incorporates the assumption that the $39 billion of such funding provided in the current year will continue in each year of the projection period, with adjustments for inflation. As a result, projected outlays from funding designated as an emergency requirement under the President’s proposal are $290 billion less through 2023 than those in CBO’s baseline.

• A proposed change to the way tax provisions and certain major benefit programs are indexed for inflation. That change would reduce deficits by an estimated $233 billion through 2023.

Other proposals in the President’s budget include some initiatives that would widen the deficit and some that would narrow it. Those other proposals would change revenues and noninterest outlays by amounts that sum to a net reduction in deficits of $407 billion over the 2014-2023 period ($382 billion in revenues and $26 billion in outlay reductions).

Because the President’s budget would decrease deficits relative to CBO’s baseline projections over the 10-year period, the amount of interest paid on the government’s debt would decline as well. In total, net interest outlays under the President’s budget would be $92 billion below the amounts projected in CBO’s current-law baseline over the 2014-2023 period.

Overall, CBO’s and the Administration’s deficit estimates under the President’s budget are significantly different for this year but similar for the following 10 years. For 2013, CBO’s estimate of the deficit is roughly $300 billion lower than the Administration’s estimate. Most of that difference stems from higher-than-expected tax payments over the past few weeks and recent announcements from Fannie Mae and Freddie Mac about payments that they expect to make to the Treasury. Between 2014 and 2023, the cumulative deficit, if the President’s proposals were enacted, would total $5.2 trillion, according to CBO’s projections, $76 billion (or 1.4 percent) less than what the Administration estimates. CBO’s and the Administration’s estimates of spending under the President’s budget are nearly identical in total: CBO projects just $3 billion more in outlays than the Administration does. However, CBO’s 10-year projections of revenues under the President’s budget are slightly higher than the Administration’s – by $79 billion (or 0.2 percent).