Revised January 29, 2002

The New CBO Projections: What Do They Tell Us?
by Richard Kogan, Robert Greenstein, and Joel Friedman

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The new projections the Congressional Budget Office released today are far less optimistic than the projections CBO issued only 12 months ago. CBO now projects that over the ten-year period from 2002 to 2011, the surpluses in the total budget will be $4.0 trillion smaller — and the debt $4.2 trillion higher — than it projected last January. The new CBO figures also show that the tax cut of last June is the largest single factor in the ten-year, $4.0 trillion deterioration of the surplus, accounting for 41 percent of it.

Table 1
Why the Ten-Year Surplus Has Shrunk by $4.0 Trillion

Cumulative deficits and surpluses in the total budget surplus, 2002-2011, in trillions of dollars
trillions % of total changes
CBO's projected ten-year, cumulative surplus, January 2001 5.6
Legislation enacted last year, including resulting increases in interest -2.4 -60%
tax cut -1.7 -41%
programs funded through annual appropriations -0.7 -18%
(defense) (-0.4) (-10%)
(non-defense, including homeland security) (-0.1) (-8%)
all other legislation -0.1 -1%
Results of a new economic forecast, including resulting increases in interest -0.9 -23%
Results of new "technical" estimates, including resulting increases in interest -0.7 -16%
Total changes in the ten-year projection -4.0 -100%
CBO's projected ten-year, cumulative deficits/surpluses (net), January 2002 1.6
Source: CBO, January 2002. Distribution of interest increases among legislation by CBPP, using CBO's methodology for calculating interest. May not add due to rounding.

New CBO Data Show What Would Happen If the Tax Cut is Made Permanent

To make the cost of last year’s tax-cut legislation appear to fit within budget constraints, Congress wrote a series of "sunsets" into that legislation. Some tax-cut provisions expire as early as the end of 2004. All remaining provisions of the legislation expire at the end of 2010.

No one really expects that these tax cuts will all die. In developing its budget projections, however, the Congressional Budget Office follows longstanding rules requiring it to assume that all of the tax cuts would expire. Fortunately, CBO also provided information on how the budget projections would be affected if the tax cut were extended.

• The CBO data show that if all of the provisions of the tax law were extended, the total budget surplus would be smaller, while the deficits outside Social Security would be larger. In particular, the budget outside Social Security would be in deficit in each year through 2011 and would show an overall deficit of $1.1 trillion over the 10-year period from 2002 to 2011.

• With all provisions of the tax cut extended, the tax cut’s cost would total $2.0 trillion over this period (including the additional interest costs). The tax cut would account for nearly half — 46 percent — of the deterioration in the total budget surplus for the 2002-2011 period.

• The proportion of the deterioration of the surplus that was caused by the tax cut would rise with each passing year, reaching 63 percent in 2011. In other words, by 2011, the tax cut would account for nearly two-thirds of the deterioration of the surplus that year, or almost twice as much as all other factors combined. The figures for 2011 are significant, since they give the best picture of the permanent impact the tax cut would have on the nation’s finances if the tax-cut provisions were all made permanent.

Table 1 above shows the reasons that CBO's projected ten-year surplus for 2002-2011 is now $4.0 trillion smaller than it was last year. (For each item, the higher interest payments associated with legislation or with economic and technical revisions to CBO's projection are included in calculating the item's cost. This is done for two reasons. First, higher interest payments are a necessary and automatic consequence of legislation (such as tax cuts or spending increases) and of estimating changes (such as the revenue reductions caused by the recession). Second, an apples-to-apples comparison requires either including interest in every case or excluding it in every case; it is invalid to compare the cost of two items, excluding interest in one case and excluding it in the other. For a more thorough discussion of the traps to avoid when discussing the new CBO figures, see the appendix at the end of analysis.)

CBO Projections Likely To Overstate Surpluses
Because They Leave Out Large Costs That Are Very Likely To Occur

The new CBO baseline estimates are a projection of future expenditures and revenues, calculated according to a set of rules. These projections are the basic benchmark for assessing the fiscal impact of proposed and actual changes in policy. But they do not necessarily provide the most realistic assessment of the future fiscal outlook. By following the baseline rules, the new CBO projections present a rosier picture of the future than is likely to occur.

The rules require CBO to estimate the future cost of annually appropriated programs — discretionary, or non-entitlement, programs — by assuming that their funding levels in the future will equal their funding levels in the most recent year, growing only enough to cover inflation. As a result the baseline projections do not take into account the significant increases in defense and homeland security expenditures that are certain to be proposed and enacted.

Moreover, the baseline rules require CBO to estimate revenue collections and entitlement expenditures based on enacted laws, even if those laws are scheduled to expire or are virtually certain to be changed. So even if an expiring tax provision has strong bipartisan support, has repeatedly been extended in previous years, and is virtually certain to be extended again, CBO is required to project that the provision will expire.

In October 2001, the chairmen and ranking members of the House and Senate Budget Committees released an analysis that highlighted program expansions and tax reductions, most of which have strong bipartisan support, that are not included in the CBO baseline projections. The major items on the list included:

  • Enactment of a farm bill;
  • Extension of an array of expiring tax provisions that are routinely extended, such as the research and experimentation tax credit;
  • Extension of the provisions in last year's tax-cut measure, all of which artificially expire in 2010;
  • Provision of relief for the individual Alternative Minimum Tax, without which the number of taxpayers subject to the AMT will explode from just over 1 million today to 35 million by the end of the decade; and
  • a Medicare prescription drug benefit.

The cost of these various legislative changes — from increases for defense and homeland security to enactment of a farm bill and extension of expiring tax provisions and of much or all of last year's tax-cut bill — is likely to be in excess of $1 trillion over ten years. In fact, the impact on the budget is likely to exceed substantially $1 trillion when the associated interest costs are added. Because the new CBO projections do not reflect any of these costs, they are likely to overstate projected surpluses by a substantial margin.


Three Mistakes To Avoid In Analyzing the New CBO Projections

Although CBO's new report provides a table showing how and why the projected surplus changed from last January to this January, some readers may misunderstand CBO's figures. This analysis describes the possible distortions that policymakers, journalists, and the public should avoid as they seek to understand what happened to the projected $5.6 trillion surplus. There are three main traps for the unwary.

Table 2
Adjusting the Budget Window
Jan. 2001 CBO projection, 2002-2011 $5.6 trillion
Reduction in the projected 2002-2011 surplus from all causes -4.0
Resulting 2002-2011 surplus 1.6
Change budget window: remove estimate for 2002 but add estimate for 2012 +0.7
Jan. 2002 projection, 2003-2012 2.3
May not add due to rounding

Table 2, shows that CBO’s new projection of $2.3 trillion in cumulative surpluses over ten years is not directly comparable to last year’s projection of $5.6 trillion in ten-year surpluses, because the two projections do not cover the same time period.

Changing the budget window by dropping estimates for 2002 and adding projections for 2012 make the ten-year picture look $0.7 trillion better, as shown above. But adding a projected, large surplus for 2012 is unrealistic, both because the figure for 2012 is so far in the future and because that figure is based on the assumption that the entire tax cut will expire. As CBO’s testimony points out, "over half [the $2.3 trillion, ten-year] total comes from the surpluses projected for 2011 and 2012 — the last two years of the projection period and therefore the most uncertain. The surpluses for those years also reflect the scheduled expiration in December 2010 of the tax cuts enacted last June."

The third trap that can lead to misapplication of the CBO numbers occurs when someone includes the resulting increase in interest payments when measuring the effect on the surplus of some budget changes — such as the reduction in revenues and increase in expenditures that has occurred because of the recession — but then excludes the resulting interest increases when measuring the effects of other budgetary changes such as the tax cut. Such inconsistent treatment of interest payments leads to invalid, apples-to-oranges comparisons when assessing the relative impact of various factors on the change in the surplus.

The last point is especially significant given the figures in CBO's report. Through confusion or an attempt to "spin" the data, someone is bound to assert that the combined economic and technical reestimates that CBO shows in its January 23 testimony — and later in its formal report, due January 31 — are larger than the tax cut and therefore constitute the largest "single" cause of the $4.0 trillion deterioration in the 2002-2011 surplus. Such a person would assert that the tax cut cost $1.3 trillion over ten years while the economic and technical reestimates together cost $1.6 trillion. But the comparison not valid. As CBO makes abundantly clear, the $1.3 trillion figure for the tax cut excludes the increase in interest payments that the tax cut necessarily generates, while the $1.6 trillion figure for the economic and technical reestimates includes the increase in interest payments generated by those reestimates. On an apples-to-apples basis, the tax cut is larger: the tax cut costs $1.7 trillion including increased interest, while the combined reestimates cost $1.6 trillion including interest.(1) (Furthermore, the economic and technical reestimates are not really a "single" cause. The economic reestimates are driven by changes in CBO's economic forecast, whether caused by the recession or by other changes in CBO's view of future economic growth, interest rates, and the like. Technical reestimates, in contrast, do not derive from changes in the economic forecast.)

Alternatively, excluding interest in both cases, the tax cut costs $1.3 trillion while the combined economic and technical reestimates cost $1.1 trillion.

Either way, the tax cut is the largest single reason that CBO's ten-year budget projections have deteriorated so dramatically.

End Notes:

1. That the economic and technical reestimates in CBO's report include the higher interest payments that those reestimates engender is evident from the testimony. CBO notes: "Changes in the economic outlook since January 2001 account for another $929 billion decline in the 10-year surplus. About three-quarters of that total reflects lower revenue projections, mostly resulting from the substantially weaker economic growth expected in the near term and the slightly lower average growth rates projected for the following several years. Much of the rest of the decline attributable to the economic outlook represents additional debt-service costs resulting from the reduction in anticipated revenues. Technical changes—those not driven by new legislation or by changes in CBO's economic forecast—have reduced the projected 10-year surplus by a total of $660 billion since last January. As with the economic changes, revenues account for over 75 percent of the technical changes, and debt service accounts for much of the rest. The technical changes to revenues stem primarily from revised projections of capital gains realizations and adjustments for lower-than-expected tax collections in recent months" (emphasis added). CBO uses the term "debt service" to refer to the increased interest payments on the debt . See CBO, The Budget and Economic Outlook: Fiscal Years 2003-2012, Testimony before the Senate Budget Committee, January 23, 2002, available at