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Unless otherwise indicated, all years referred to in Chapters 1 and 3 are calendar years and all years in Chapters 2 and 4 are fiscal years. Some figures in this report indicate periods of recession by using shaded vertical bars. The bars extend from the peak to the trough of the recession. Unless otherwise indicated, CBO baseline projections assume that discretionary spending is adjusted for inflation. In the projections, spending from the Violent Crime Reduction Trust Fund (VCRTF) in 1998 through 2007 is equal to the level appropriated for 1997, adjusted for inflation. Because general-purpose discretionary spending (all discretionary spending other than that from the VCRTF) at the 1997 level adjusted for inflation would exceed the statutory cap on such spending in 1998, projected general-purpose spending is set equal to the cap in 1998 and is assumed to increase at the rate of inflation from the 1998 cap level in 1999 through 2007. Unemployment rates throughout the report are calculated on the basis of the civilian labor force. Numbers in the text and tables of this report may not add to totals because of rounding. National income and product account (NIPA) data shown
in the tables do not incorporate the revised data for the third quarter of 1996 that
were released on December 20, 1996.
In the print version of this report, the estimates of the standardized-employment deficit and related series were incorrectly reported in the "Fiscal Policy" section of Chapter One, in Tables 1-2, F-1, F-2, and F-3, and in Figure 2-1. This electronic version contains correct text, tables, and figures. The last two sentences of the "Comparison with Private Forecasts" subsection of Chapter One and the first sentence of Appendix C have also been corrected in this electronic version. |
This volume is one of a series of reports on the state of the economy and the budget that the Congressional Budget Office (CBO) issues each year. It satisfies the requirement of section 202(f) of the Congressional Budget Act of 1974 for CBO to submit periodic reports to the Committees on the Budget on fiscal policy and to provide five-year baseline projections of the federal budget. In keeping with CBO's mandate to provide objective and impartial analysis, the report contains no recommendations.
The analysis of the economic outlook presented in Chapter 1 was prepared by the Macroeconomic Analysis Division under the direction of Robert Dennis and John F. Peterson. Matthew Salomon wrote the chapter. John Peterson carried out the economic forecast and projections. Robert Arnold, Laurie Brown, Sandra Cannon, Edward Gamber, Douglas Hamilton, Juann Hung, Kim Kowalewski, Angelo Mascaro, Benjamin Page, Frank Russek, Matthew Salomon, Kent Smetters, John Sturrock, and Christopher Williams provided comments and background analysis. Ken Fears, Timothy Lasocki, and Michael Wolosin provided research assistance.
The baseline outlay projections were prepared by the staff of the Budget Analysis Division under the supervision Paul N. Van de Water, Robert Sunshine, Paul Cullinan, Peter Fontaine, James Horney, Michael Miller, and Murray Ross. The revenue estimates were prepared by the staff of the Tax Analysis Division under the supervision of Rosemary D. Marcuss and Richard Kasten. Jeffrey Holland wrote Chapter 2. Edward Gamber and James Horney wrote Chapter 3. John Peterson and Daniel Kowalski wrote Chapter 4. Daniel Kowalski wrote Appendix A; Sandy Davis and James Horney wrote Appendix B; Jennifer Winkler wrote Appendixes C and I; Michael Simpson wrote Appendixes D, E, and F; Murray Ross wrote Appendix G; and Jeffrey Lemieux wrote Appendix H. James Horney wrote the summary of the report.
At a recent meeting, CBO's Panel of Economic Advisers discussed an early version of the economic forecast underlying this report. Members of that panel are Robert Barro, Michael Boskin, Barry P. Bosworth, Robert Dederick, Rudiger Dornbusch, Martin Feldstein, Robert J. Gordon, Lyle E. Gramley, Robert E. Hall, Marvin Kosters, Anne Krueger, N. Gregory Mankiw, Allan Meltzer, Rudolph Penner, James Poterba, Robert Reischauer, Sherwin Rosen, Joel Slemrod, John Taylor, and James Tobin. Lincoln Anderson and Edward McKelvey attended as guests. Despite the considerable assistance afforded by those outside advisers, they are not responsible for any errors in the analyses in this document.
Paul L. Houts supervised the editing of this report.
Major portions were edited by Paul L. Houts, Sherwood D. Kohn, Sherry Snyder,
and Christian Spoor. In addition to editing several appendixes, Marlies
Dunson provided editorial assistance during the production of the report.
The authors owe thanks to Marion Curry, Dorothy Kornegay, and Linda Lewis
Harris, who assisted in the preparation of the report. Kathryn Quattrone
and Jill Sands prepared the total report for final publication.
June E. O'Neill
Director
January 1997
THREE - UNCERTAINTY IN BUDGET PROJECTIONS
FOUR - ECONOMIC AND BUDGETARY IMPLICATIONS OF BALANCING THE BUDGET
APPENDIXES
A - Sequestration Preview Report for Fiscal Year 1998
B - Procedural Constraints on the Budget
C - An Analysis of Congressional Budget Estimates
D - How
the Economy Affects the Budget
E - The Federal Sector of the National Income and Product Accounts
F - Historical Budget Data
G - Medicare Projections
H - CBO Projections of National Health Expenditures Through 2007
I - Major Contributors to the Revenue and Spending Projections
| TABLES | |
| S-1. | Economic Projections for Calendar Years 1997 Through 2007 |
| S-2. | CBO Baseline Deficit Projections |
| S-3. | Changes in CBO Deficit Projections Since May |
| 1-1. | Economic Projections for Calendar Years 1997 Through 2007 |
| 1-2. | Measures of Fiscal Policy Under Baseline Assumptions |
| 1-3. | Comparison of CBO and Blue Chip Forecasts for 1997 and 1998 |
| 1-4. | Accounting for Growth in Real GDP |
| 1-5. | Economic Projections for Fiscal Years 1997 Through 2007 |
| 2-1. | CBO Deficit Projections |
| 2-2. | Changes in CBO Deficit Projections |
| 2-3. | CBO Revenue Projections |
| 2-4. | Effect of Extending Tax Provisions That Expired in 1997 or Will Expire Before 2007 |
| 2-5. | CBO Outlay Projections, Assuming Compliance with Discretionary Spending Caps |
| 2-6. | Nondefense Discretionary Spending, Fiscal Year 1997 |
| 2-7. | How Tight Are the Discretionary Caps in 1998? |
| 2-8. | Two Scenarios for Discretionary Spending and the Deficit |
| 2-9. | CBO Baseline Projections for Mandatory Spending, Including Deposit Insurance |
| 2-10. | Sources of Growth in Mandatory Spending |
| 2-11. | CBO Projections of Offsetting Receipts |
| 2-12. | CBO Projections of Federal Debt and Interest Costs |
| 2-13. | Trust Fund Surpluses in the CBO December 1996 Baseline |
| 4-1. | Illustrative Path of Deficit Reduction |
| 4-2. | Balanced Budget and Baseline Projections of Selected Economic Variables |
| 4-3. | Economic Effects of Balancing the Budget by 2002, as Estimated in January 1997 and May 1996 |
| 4-4. | Changes in Budget Aggregates Resulting from the Economic Effects of Balancing the Budget by 2002 |
| 4-5. | Changes in the Deficit Resulting from the Economic Effects of Balancing the Budget by 2002 |
| 4-6. | Savings from Freezing Discretionary Spending at the Level of the 1998 Cap in Relation to Total Policy Savings in CBO's Illustrative Path |
| A-1. | CBO Estimates of Discretionary Spending Limits for Fiscal Years 1997 and 1998 |
| A-2. | Budgetary Effects of Direct Spending or Receipt Legislation Enacted Since the Budget Enforcement Act |
| C-1. | Comparison of the CBO April 1995 Baseline, the 1996 Budget Resolution, and Actual Budget Totals for Fiscal Year 1996 |
| C-2. | Sources of Differences Between the CBO April 1995 Baseline, the 1996 Budget Resolution, and Actual Budget Totals for Fiscal Year 1996 |
| C-3. | Sources of Differences Between Actual Budget Totals and Budget Resolution Estimates, Fiscal Years 1980-1996 |
| D-1. | Effects of Selected Economic Changes on CBO Budget Projections |
| D-2. | Effects on Budget Projections of a Change in CBO's Projection of Inflation, Assuming Discretionary Spending Remains Level |
| E-1. | Relationship of the Budget to the Federal Sector of the National Income and Product Accounts |
| E-2. | Projections of Baseline Receipts and Expenditures Measured by the National Income and Product Accounts |
| F-1. | Deficits, Debt, and Related Series, Fiscal Years 1956-1996 |
| F-2. | Standardized-Employment Deficit and Related Series, Fiscal Years 1956-1996 (In billions of dollars) |
| F-3. | Standardized-Employment Deficit and Related Series, Fiscal Years 1956-1996 (As a percentage of potential GDP) |
| F-4. | Revenues, Outlays, Deficits, and Debt Held by the Public, Fiscal Years 1962-1996 (In billions of dollars) |
| F-5. | Revenues, Outlays, Deficits, and Debt Held by the Public, Fiscal Years 1962-1996 (As a percentage of GDP) |
| F-6. | Revenues by Major Source, Fiscal Years 1962-1996 (In billions of dollars) |
| F-7. | Revenues by Major Source, Fiscal Years 1962-1996 (As a percentage of GDP) |
| F-8. | Outlays for Major Spending Categories, Fiscal Years 1962-1996 (In billions of dollars) |
| F-9. | Outlays for Major Spending Categories, Fiscal Years 1962-1996 (As a percentage of GDP) |
| F-10. | Discretionary Outlays, Fiscal Years 1962-1996 (In billions of dollars) |
| F-11. | Discretionary Outlays, Fiscal Years 1962-1996 (As a percentage of GDP) |
| F-12. | Outlays for Entitlements and Other Mandatory Spending, Fiscal Years 1962-1996 (In billions of dollars) |
| F-13. | Outlays for Entitlements and Other Mandatory Spending, Fiscal Years 1962-1996 (As a percentage of GDP) |
| G-1. | Medicare Mandatory Outlays |
| G-2. | Mandatory Outlays for Medicare Benefits, by Sector |
| G-3. | Outlays for Fee-for-Service Medicare Benefits, by Type of Service |
| H-1. | National Health Expenditures for Selected Calendar Years, by Source of Funds |
| H-2. | Projections of National Health Expenditures Through 2007, by Source of Funds |
| H-3. | Changes to CBO Projections of the Average Annual Rate of Growth in Major Components of National Health Spending |
| H-4. | Projections of Private Insurance Premiums |
| H-5. | Health Insurance Primary Coverage, Calendar Years 1996-2007, by Type of Coverage |
| FIGURES | |
| S-1. | Actual and Projected Deficits |
| S-2. | The Deficit as a Percentage of GDP |
| S-3. | The Standardized-Employment Deficit as a Percentage of Potential GDP |
| S-4. | Debt Held by the Public as a Percentage of GDP |
| S-5. | Discretionary Outlays Under Various Assumptions |
| S-6. | Deficits Under Alternative Assumptions About the Growth of Potential GDP |
| S-7. | Deficits Under Alternative Cyclical Projections of the Economy |
| S-8. | The Fiscal Dividend and an Illustrative Path to a Balanced Budget |
| 1-1. | The Economic Forecast and Projections |
| 1-2. | Inflation and Tightening in the Labor Market |
| 1-3. | The Personal Saving Rate |
| 1-4. | Population That Is 25 to 34 Years Old |
| 1-5. | New Orders for Nondefense Capital Goods and Investment in Producers' Durable Equipment |
| 1-6. | Interest Payments by Businesses as a Share of Cash Flow |
| 1-7. | Ratio of Real Business Inventories to Sales |
| 1-8. | Current-Account Deficit as a Percentage of GDP |
| 1-9. | Measures of the Standardized-Employment Deficit |
| 1-10. | The GDP Gap: GDP Versus Potential GDP |
| 2-1. | The Federal Deficit |
| 2-2. | Outlays and Revenues as a Percentage of GDP |
| 2-3. | Revenues by Source as a Share of GDP |
| 2-4. | Outlays by Category as a Share of GDP |
| 2-5. | Rate of Growth in Medicaid Outlays from Previous Fiscal Year |
| 2-6. | Debt Held by the Public as a Percentage of GDP |
| 3-1. | Alternative Growth Rates of Potential GDP |
| 3-2. | Deficits Under Alternative Economic Assumptions |
| 3-3. | GDP and Potential GDP |
| 3-4. | Optimistic Alternative |
| 3-5. | Pessimistic Alternative with a Recession in 1998 |
| 3-6. | Pessimistic Alternative with a Recession in 2000 |
| C-1. | Differences Between Actual Deficits and Deficits in Budget Resolutions, Fiscal Years 1980-1996 |
| E-1. | A Comparison of NIPA and Unified Budget Deficits, Fiscal Years 1980-2007 |
| G-1. | Receipts, Outlays, and End-of-Year Balance of Medicare's Hospital Insurance Trust Fund |
| G-2. | Cumulative Contributions to Growth in Medicare Spending |
| G-3. | Medicare Enrollment |
| H-1. | Components of National Health Spending as a Share of GDP |
| H-2. | Growth in Private Health Insurance Premiums |
| H-3. | Excess of Growth in Private Health Insurance Premiums over GDP |
| BOXES | |
| 1-1. | Measuring Fiscal Stance |
| 2-1. | Declining Deficits: 1992-1996 |
| 2-2. | Universal Telephone Service |
| 2-3. | Budgetary Effects of Potential Overstatements in the Consumer Price Index |
