September 3, 2002

THE NEW Congressional Budget Office FORECAST AND
THE REMARKABLE DETERIORATION OF THE SURPLUS
by Robert Greenstein

The material in this summary is discussed in somewhat greater detail and with additional data in “An Examination of Recent Budget and Economic Projections by the Congressional Budget Office."

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                    In January 2001, the Congressional Budget Office projected a surplus for the ten-year period 2002 through 2011 of $5.6 trillion.  Some 20 months later, on August 27, 2002, CBO issued its latest ten-year forecast.  CBO now projects substantial deficits in the near term and a net surplus over the same ten-year period of only $336 billion.

 

Why the Surplus Has Shrunk by $5.3 Trillion Since January 2001

            There has been considerable public confusion about the relative roles that last year’s tax cut, increases in spending, and the downturn in the economy have played in causing the disappearance of surpluses and the reemergence of deficits.  The table presents the causes of the deterioration of the surplus, based on the new CBO data.

Change in Projected Surpluses since January 2001

 

Reduction in surplus due to various factors, in billions of dollars

Proportion of the deterioration that each factor accounts for

Surpluses projected in January 2001 for 2002-2011

5,610

 

Changes in the actual or projected economy*

-793

15%

Changes due to reestimates of “technical” factors*

-1,528

29%

Cost of legislation enacted to date:

 

 

 

Last year’s tax cut

-1,648

31%

 

Defense, homeland security, and international programs

-830

16%

 

Domestic appropriations (except homeland security)

-193

4%

 

Farm bill

-108

2%

 

“Stimulus” bill

-100

2%

 

all other tax and spending legislation

-75

1%

Total reduction in the projected surplus

-5,274

100%

Surpluses currently projected for 2002-2011

336

 

Source: CBPP calculations from CBO data.  Figures may not add due to rounding.  All figures include debt service costs caused by the policy change or reestimate in question.  (See box)

As these figures indicate, a large share of the deterioration of the surplus stems from economic and technical reestimates.  Virtually all of the deterioration that is represented by these reestimates results from lower estimates of projected revenues.  The technical and economic reestimates consist almost entirely of downward reestimates of revenues, not upward reestimates of spending for government programs.

The Treatment of Interest Payments in This Analysis

             Whenever Congress enacts a tax cut or a program increase, or whenever costs increase for other reasons (such as an unexpected revenue shortfall), the surplus will be smaller than previously projected.  As a result, the debt will be higher than projected, and the Treasury will consequently have to pay more interest on the debt than previously projected.

            In this analysis, we follow the standard practice of attributing CBO’s estimate of increased interest payments to the events that caused those increased payments, such as the tax cut, program funding increases, and the downward revenue reestimates made for technical or economic reasons.  The Office of Management and Budget used the same approach in its July Mid-Session review in estimating the costs of last year’s tax cut.

The bulk of these downward revenue reestimates are reestimates for “technical” rather than economic reasons and are not a result of the recession.  CBO now projects that for any given level of the U.S. economy, the amount of federal tax revenue that the economy will generate is significantly lower than CBO previously thought.  The revenue forecasting methods that underlay last year’s budget projections — and last year’s budget and tax decisions —are now considered to have been decidedly too optimistic.

 

The Role of Congress and the Administration

Congress and the Administration are not directly responsible for the deterioration in the surplus caused by economic and technical factors, although they could have adopted less rosy estimates last year or left a larger margin for error.  Congress and the Administration do bear responsibility, however, for the deterioration caused by legislation.

In the two areas that together account for 84 percent of the deterioration for which Congress and the Administration are responsible — the tax cut and the increases in spending for defense, homeland security, and international programs — the Administration is currently proposing additional action.  The Administration has requested further tax cuts and spending increases in these areas.

Interest Payments and the National Debt

            CBO’s projections of the publicly held debt and interest payments on the debt also have changed radically since January 2001.

 

Projected by CBO in January, 2001

Projected by CBO in August, 2002

Level of publicly held Treasury debt in 2011

none*

$3.2 trillion

Net cost of interest payments, 2002 through 2011

$0.6 trillion

$1.9 trillion

* except for a small amount of Treasury debt that could not be conveniently redeemed, such as series E savings bonds.

Most of the increases in government spending that CBO now projects, relative to its projections of January 2001, represent increases in expenditures for interest payments on the debt that are a result of the sharp reductions in projected revenue collections.  Since revenue collections will be lower, the surpluses will be smaller, and less debt will be paid off.  And since the amount of debt on which interest payments must be made consequently will be higher, the interest payments will be significantly larger.

Some have sought to use the increase in interest costs to support claims that the surplus has shrunk because of a “spending explosion;” they have compared the projection of total federal spending — including interest payments — that CBO issued in January 2001 to the current projection and noted a substantial increase.  This, however, is a serious misuse of data; increases in interest costs that are due to tax cuts and downward reestimates of revenues cannot be represented as being increases in spending caused by Congressional action to boost funding for government programs.  In fact, increases in interest costs caused by tax cuts and downward revenue reestimates are responsible for more of the overall increase in federal “spending” since January 2001 than all of the increases in federal programs combined, including the increases in defense, homeland security, domestic appropriations, and farm programs.

            Finally, CBO’s new projections suggest that OMB’s “mid-session” budget estimates released in July 2002 are too optimistic.  The CBO projections differ from OMB’s by more than $900 billion over ten years.  Some 98 percent of the difference stems from OMB’s rosier view of future revenue collections.