On July 18, 2000, the Congressional Budget Office (CBO) released The Budget and Economic Outlook: Fiscal Years 2001-2010--An Update, which presents CBO's latest projections of federal revenues and outlays over that period. In preparing the economic forecast that underlies those projections, CBO considers whether the movements in the budget balance caused by legislation and other factors are restraining or stimulating short-term economic growth. The fiscal policy measure CBO uses for that purpose is the annual change in an adjusted version of the budget balance--specifically, the change in the standardized-budget surplus (or deficit). This supplement to the update provides projections of the standardized budget through fiscal year 2010 as well as updated historical calculations (see Tables 1 through 6 later in this document).

As in the July update, these standardized-budget projections are calculated under three variants of CBO's baseline, each of which reflects a different assumption about discretionary spending. The "inflated" variation assumes that discretionary spending grows at the rate of inflation after 2000. The "freeze" variation pegs discretionary budget authority to the level enacted for the current year plus amounts already enacted for 2001. The "capped" variation assumes that discretionary spending equals CBO's estimates of the statutory caps through 2002 and grows at the rate of inflation thereafter.

In calculating the standardized budget, CBO makes several types of adjustments. First, it adjusts revenues and outlays to remove the effects of the business cycle. During economic downturns, revenues automatically fall as income declines, and outlays automatically increase as unemployment rises. Because of those cyclical effects, changes in the actual, or unadjusted, budget surplus can give misleading signals about the stance of fiscal policy. Other adjustments by CBO remove the budgetary effects of factors that have no impact on short-term growth, such as sales of assets and changes by a day or two in the timing of receipts or outlays that effectively shift them from one fiscal year to another.

Beginning this year, CBO's calculations of the standardized budget incorporate several new adjustments.⁽¹⁾ For the 1996-2000 period, the most important ones are the following:

• Estimates of capital gains tax collections have been removed from the calculations because large fluctuations in those taxes can distort measures of how the budget affects short-term economic growth.

 
• Estimates of the inflation component of federal interest payments are now excluded because that part of the payments is simply an early return of principal to bondholders and is likely to be saved rather than spent.

 
• Estimates of large changes in withheld taxes that are not matched by changes in tax liabilities are now largely excluded because for the majority of consumers, such changes are not likely to have much effect on their spending. The size of the effect depends on how many consumers either have liquidity constraints (are unable to finance additional consumption with credit or savings) or behave as if they do for other reasons. Estimates of the effects of liquidity constraints vary considerably. CBO's fiscal measure assumes that liquidity-constrained consumers and those with similar behavior account for 30 percent of all consumption.

For next year, CBO projects that the stance of fiscal policy will be somewhat restrictive unless discretionary spending is held to the current cap. If that occurs, the dampening effect of fiscal policy on short-term growth will be roughly as strong as in 2000.

Under all three variations of CBO's baseline, the projected improvement in the standardized-budget surplus over the next decade is substantial. A significant decline relative to potential GDP in both discretionary spending and real (inflation-adjusted) interest payments is largely responsible for the rosier outlook (see Table 3). And even if discretionary spending grows at the rate of inflation, real economic growth will reduce that spending as a share of potential GDP from 6.4 percent in 2000 to 5.2 percent in 2010. Other variants of the baseline, which assume less discretionary spending, imply larger declines in those outlays relative to potential GDP.

Table 3. Details of the Standardized-Budget Surplus Under Alternative Versions of CBO's Baseline,  Fiscal Years 1996-2010 (As a percentage of potential gross domestic product)
			Actual					Projected
			1996	1997	1998	1999		2000	2001	2002	2003	2004	2005	2006	2007	2008	2009	2010
Revenues
	Budget		18.7	19.3	20.1	20.3		21.2	21.1	20.9	20.6	20.4	20.3	20.2	20.1	20.0	20.0	20.0
		Cyclical adjustment	0.3	0.1	-0.2	-0.4		-0.9	-0.9	-0.8	-0.6	-0.4	-0.3	-0.2	-0.1	*	*	*
		Other adjustments	-0.7	-0.9	-1.0	-1.1		-1.1	-0.9	-0.9	-0.8	-0.7	-0.7	-0.7	-0.7	-0.6	-0.6	-0.6
		Standardized	18.3	18.5	18.9	18.9		19.2	19.2	19.2	19.2	19.2	19.3	19.3	19.3	19.3	19.4	19.4
Mandatory Spending  Less Offsetting Receipts
	Budget		10.1	9.9	9.9	10.0		10.0	9.9	9.8	9.9	10.0	10.1	10.1	10.1	10.3	10.4	10.6
		Cyclical adjustment	*	*	0.1	0.1		0.1	0.1	0.1	0.1	*	*	*	*	*	*	*
		Other adjustments	0.2	0.4	0.2	0.1		0.1	*	0.1	0.1	*	-0.1	0.1	0.1	*	*	*
		Standardized	10.3	10.3	10.2	10.2		10.2	10.0	10.0	10.0	10.1	10.1	10.2	10.2	10.3	10.5	10.6
Discretionary Spending
	Cyclical adjustments		6.9	6.7	6.5	6.4		6.4	6.4	6.2	6.1	5.9	5.8	5.7	5.5	5.4	5.3	5.2
	Other adjustments		6.9	6.7	6.5	6.4		6.4	6.2	5.9	5.6	5.3	5.1	4.8	4.6	4.4	4.2	4.0
	Standardized		6.9	6.7	6.5	6.4		6.4	5.8	5.4	5.3	5.2	5.0	4.9	4.8	4.7	4.6	4.5
Interest Payments Less  Earnings from Excess Cash
	Budget
		Inflated baseline	3.1	3.0	2.8	2.6		2.4	2.2	1.9	1.6	1.3	1.0	0.8	0.5	0.3	*	-0.2
		Freeze baseline	3.1	3.0	2.8	2.6		2.4	2.2	1.9	1.5	1.2	0.9	0.6	0.3	*	-0.3	-0.6
		Capped baseline	3.1	3.0	2.8	2.6		2.4	2.2	1.8	1.5	1.1	0.8	0.5	0.3	*	-0.3	-0.6
	Inflation adjustment
		Inflated baseline	-0.9	-0.8	-0.5	-0.6		-0.9	-0.7	-0.6	-0.5	-0.4	-0.3	-0.3	-0.2	-0.1	*	*
		Freeze baseline	-0.9	-0.8	-0.5	-0.6		-0.9	-0.7	-0.6	-0.5	-0.4	-0.3	-0.2	-0.1	*	0.1	0.2
		Capped baseline	-0.9	-0.8	-0.5	-0.6		-0.9	-0.7	-0.6	-0.5	-0.4	-0.3	-0.2	-0.1	*	0.1	0.2
	Standardized
		Inflated baseline	2.2	2.1	2.3	1.9		1.5	1.4	1.3	1.1	0.9	0.7	0.5	0.4	0.2	*	-0.1
		Freeze baseline	2.2	2.1	2.3	1.9		1.5	1.4	1.3	1.0	0.8	0.6	0.4	0.2	*	-0.2	-0.4
		Capped baseline	2.2	2.1	2.3	1.9		1.5	1.4	1.2	1.0	0.8	0.6	0.4	0.2	*	-0.2	-0.4
Total Surplus
	Budget
		Inflated baseline	-1.4	-0.3	0.8	1.4		2.5	2.7	3.0	3.1	3.2	3.3	3.6	3.9	4.0	4.2	4.4
		Freeze baseline	-1.4	-0.3	0.8	1.4		2.5	2.8	3.3	3.6	3.8	4.1	4.6	5.0	5.3	5.6	6.0
		Capped baseline	-1.4	-0.3	0.8	1.4		2.5	3.3	3.8	4.0	4.1	4.3	4.6	4.9	5.0	5.3	5.5
	Cyclical adjustment		0.4	*	-0.3	-0.5		-1.0	-1.1	-0.9	-0.6	-0.4	-0.3	-0.2	-0.1	*	*	*
	Other adjustmentsa
		Inflated baseline	*	-0.4	-0.7	-0.6		-0.3	-0.2	-0.4	-0.4	-0.4	-0.3	-0.5	-0.6	-0.6	-0.6	-0.7
		Freeze baseline	*	-0.4	-0.7	-0.6		-0.3	-0.2	-0.4	-0.4	-0.4	-0.3	-0.5	-0.6	-0.6	-0.7	-0.8
		Capped baseline	*	-0.4	-0.7	-0.6		-0.3	-0.2	-0.4	-0.4	-0.4	-0.4	-0.6	-0.7	-0.7	-0.7	-0.8
	Standardized
		Inflated baseline	-1.0	-0.6	-0.1	0.3		1.1	1.4	1.7	2.1	2.3	2.7	3.0	3.2	3.4	3.6	3.7
		Freeze baseline	-1.0	-0.6	-0.1	0.3		1.1	1.5	2.0	2.6	3.0	3.5	3.9	4.3	4.6	4.9	5.2
		Capped baseline	-1.0	-0.6	-0.1	0.3		1.1	2.0	2.6	3.0	3.2	3.6	3.9	4.1	4.3	4.6	4.7
SOURCES: Congressional Budget Office; Department of Commerce, Bureau of Economic Analysis.
NOTES: The cyclical adjustments to revenues are negative when actual GDP exceeds potential GDP. By contrast, the cyclical adjustments to mandatory spending are positive when the unemployment rate is less than the nonaccelerating inflation rate of unemployment. The cyclical adjustments to the budget surplus equal the cyclical adjustments to revenues minus the cyclical adjustments to mandatory spending.
* = less than 0.05 percent.
a. This category includes timing adjustments that affect discretionary spending but are not shown above. Table 4 provides details of the "other adjustments" category.

In the case of revenues, the standardized-budget estimates rise slightly from 19.2 percent of potential GDP in 2000 to 19.4 percent in 2010. That growth occurs despite a projected decline in actual (unadjusted) revenues--from 21.2 percent to 20 percent--over that same period. The projections of standardized-budget revenues exclude capital gains taxes and changes in revenues attributable to the business cycle, both of which depress projected revenue growth relative to potential GDP. At the same time, the projections include three factors that boost the growth of individual income taxes and thus help to offset the projected decline in other revenue categories (mainly corporate taxes) as shares of potential output. First, effective tax rates rise over time as growth in real incomes push taxpayers into higher tax brackets--an effect known as real bracket creep. Second, higher nominal income raises the number of taxpayers subject to the alternative minimum tax, whose rate brackets are not indexed for inflation; that phenomenon also pushes up effective tax rates. Third, CBO's revenue projections assume that taxable retirement income grows faster than potential GDP. Consequently, taxes on that income rise relative to potential output.

Table 4. Other Adjustments to the Standardized-Budget Surplus Under Alternative Versions of CBO's Baseline, Fiscal Years 1996-2010
		Actual					Projected
		1996	1997	1998	1999		2000	2001	2002	2003	2004	2005	2006	2007	2008	2009	2010
In Billions of Dollars
Revenues
	Capital gains	-51	-71	-82	-91		-98	-94	-91	-89	-87	-87	-87	-88	-89	-91	-94
	Timing	0	1	4	-5		-4	4	0	0	0	0	0	0	0	0	0
	Other	0	0	-8	0		0	0	0	0	0	0	0	0	0	0	0
Mandatory Outlays
	Deposit insurance	-8	-14	-4	-5		-3	*	*	1	*	*	*	-1	-2	-1	-1
	Asset sales	-4	-5	-10	-3		-4	-4	-5	-4	-4	-4	-3	-3	-4	-3	-3
	Spectrum auctions	*	-11	-3	-2		-1	-4	-6	-4	-1	-1	-1	-1	*	0	0
	Timing	-5	0	0	0		0	3	-3	0	0	11	-5	-5	0	0	0
Interest Payments
(Adjustment for Inflation)
	Inflated baseline	69	68	43	55		81	73	65	56	46	39	32	24	15	4	-7
	Freeze baseline	69	68	43	55		81	73	65	55	44	36	27	17	5	-8	-24
	Capped baseline	69	68	43	55		81	73	64	53	41	33	24	13	1	-12	-26
Discretionary Outlays
(Adjustment for Timing)
	Inflated baseline	-2	0	0	0		-2	2	0	0	0	3	*	-3	0	0	0
	Freeze baseline	-2	0	0	0		-2	2	0	0	0	2	0	-2	0	0	0
	Capped baseline	-2	0	0	0		-2	2	0	0	0	3	*	-3	0	0	0
As a Percentage of Potential GDP
Revenues
	Capital gains	-0.7	-0.9	-1.0	-1.0		-1.0	-0.9	-0.9	-0.8	-0.7	-0.7	-0.7	-0.7	-0.6	-0.6	-0.6
	Timing	0	**	**	-0.1		**	**	0	0	0	0	0	0	0	0	0
	Other	0	0	-0.1	0		0	0	0	0	0	0	0	0	0	0	0
Mandatory Outlays
	Deposit insurance	-0.1	-0.2	-0.1	-0.1		**	**	**	**	**	**	**	**	**	**	**
	Asset sales	**	-0.1	-0.1	**		**	**	**	**	**	**	**	**	**	**	**
	Spectrum auctions	**	-0.1	**	**		**	**	-0.1	**	**	**	**	**	**	0	0
	Timing	-0.1	0	0	0		0	**	**	0	0	0.1	**	**	0	0	0
Interest Payments
(Adjustment for Inflation)
	Inflated baseline	0.9	0.8	0.5	0.6		0.9	0.7	0.6	0.5	0.4	0.3	0.3	0.2	0.1	**	**
	Freeze baseline	0.9	0.8	0.5	0.6		0.9	0.7	0.6	0.5	0.4	0.3	0.2	0.1	**	-0.1	-0.2
	Capped baseline	0.9	0.8	0.5	0.6		0.9	0.7	0.6	0.5	0.4	0.3	0.2	0.1	**	-0.1	-0.2
Discretionary Outlays
(Adjustment for Timing)
	Inflated baseline	**	0	0	0		**	**	0	0	0	**	**	**	0	0	0
	Freeze baseline	**	0	0	0		**	**	0	0	0	**	0	**	0	0	0
	Capped baseline	**	0	0	0		**	**	0	0	0	**	**	**	0	0	0
SOURCES: Congressional Budget Office; Department of Commerce, Bureau of Economic Analysis.
NOTE: * = less than $500 million; ** = less than 0.05 percent.

Table 5. The Standardized-Budget Deficit or Surplus and Related Series, Fiscal Years 1956-1999 (In billions of dollars)
	Budget Deficit (-) or Surplus		Cyclical Adjustmenta		Other  Adjustmentsb		Standardized-Budget
							Deficit (-) or Surplus			Revenues		Outlays
1956	4		*		7		11			73		62
1957	3		*		6		10			79		69
1958	-3		*		4		1			78		78
1959	-13		-1		2		-11			77		88
1960	*		*		*		*			90		90
1961	-3		6		1		3			97		94
1962	-7		2		1		-4			99		104
1963	-5		2		*		-4			106		110
1964	-6		-1		1		-6			109		115
1965	-1		-4		2		-4			111		115
1966	-4		-13		3		-14			116		130
1967	-9		-12		*		-21			132		153
1968	-25		-11		5		-31			139		171
1969	3		-15		*		-11			162		173
1970	-3		-6		2		-7			177		184
1971	-23		2		10		-11			186		197
1972	-23		*		4		-20			200		220
1973	-15		-14		8		-21			214		234
1974	-6		-10		18		2			251		249
1975	-53		20		31		-2			296		298
1976	-74		24		14		-37			308		344
1977	-54		12		28		-13			356		369
1978	-59		-3		29		-33			389		421
1979	-41		-12		37		-17			443		460
1980	-74		14		44		-16			516		532
1981	-79		24		39		-16			606		622
1982	-128		55		23		-50			647		698
1983	-208		81		8		-119			646		765
1984	-185		30		12		-143			672		815
1985	-212		15		20		-178			722		899
1986	-221		8		*		-213			747		960
1987	-150		8		-15		-157			809		966
1988	-155		-9		36		-129			868		997
1989	-152		-19		55		-116			937		1,054
1990	-221		-9		109		-121			990		1,112
1991	-269		45		72		-152			1,064		1,216
1992	-290		68		40		-183			1,125		1,308
1993	-255		62		15		-178			1,174		1,352
1994	-203		39		28		-136			1,255		1,391
1995	-164		24		7		-133			1,338		1,471
1996	-107		27		-2		-82			1,428		1,510
1997	-22		4		-32		-50			1,516		1,566
1998	70		-22		-60		-11			1,620		1,632
1999	124		-45		-51		28			1,695		1,666
SOURCE: Congressional Budget Office.
NOTE: * = less than $500 million.
a. The cyclical adjustment is positive when cyclical conditions are temporarily depressing revenues and raising outlays.
b. Consists of deposit insurance, receipts from auctions of licenses to use portions of the electromagnetic spectrum, timing adjustments, asset sales, adjustments for certain changes in the amount of taxes overwithheld, adjustments for temporary tax changes, the inflation component of federal interest payments, tax receipts from capital gains, and contributions from allied nations for Operation Desert Storm (which were received in 1991 and 1992).

Table 6. The Standardized-Budget Deficit or Surplus and Related Series, Fiscal Years 1956-1999 (As a percentage of potential GDP)
	Budget Deficit (-) or Surplus		Cyclical Adjustmenta		Other  Adjustmentsb		Standardized-Budget
							Deficit (-) or Surplus		Revenues		Outlays
1956	1.0		*		1.6		2.6		17.7		15.1
1957	0.8		*		1.4		2.2		17.8		15.6
1958	-0.6		*		0.8		0.2		16.7		16.5
1959	-2.6		-0.1		0.5		-2.2		15.6		17.8
1960	0.1		-0.1		0.1		*		17.4		17.4
1961	-0.6		1.0		0.1		0.5		17.8		17.3
1962	-1.2		0.4		0.1		-0.8		17.2		18.0
1963	-0.8		0.3		-0.1		-1.6		17.5		18.1
1964	-0.9		-0.2		0.2		-0.9		17.1		18.0
1965	-0.2		-0.7		0.2		-0.6		16.4		17.0
1966	-0.5		-1.8		0.4		-1.9		16.1		18.0
1967	-1.1		-1.6		*		-2.7		17.0		19.7
1968	-3.0		-1.4		0.6		-3.7		16.6		20.3
1969	0.4		-1.6		*		-1.2		17.7		19.0
1970	-0.3		-0.6		0.2		-0.7		17.7		18.4
1971	-2.1		0.2		0.9		-1.0		17.1		18.1
1972	-2.0		*		0.3		-1.7		16.9		18.6
1973	-1.2		-1.1		0.6		-1.6		16.8		18.4
1974	-0.4		-0.7		1.3		0.1		17.7		17.6
1975	-3.3		1.2		1.9		-0.1		18.3		18.4
1976	-4.1		1.3		0.8		-2.0		17.2		19.3
1977	-2.7		0.6		1.4		-0.7		17.8		18.5
1978	-2.7		-0.1		1.3		-1.5		17.6		19.0
1979	-1.6		-0.5		1.5		-0.7		17.9		18.6
1980	-2.7		0.5		1.6		-0.6		18.6		19.2
1981	-2.5		0.8		1.2		-0.5		19.4		19.9
1982	-3.7		1.6		0.7		-1.5		18.9		20.3
1983	-5.6		2.2		0.2		-3.2		17.6		20.8
1984	-4.7		0.8		0.3		-3.7		17.1		20.8
1985	-5.1		0.3		0.5		-4.3		17.3		21.5
1986	-5.0		0.2		*		-4.8		16.9		21.7
1987	-3.2		0.2		-0.3		-3.3		17.3		20.6
1988	-3.1		-0.2		0.7		-2.6		17.4		20.0
1989	-2.9		-0.4		1.0		-2.2		17.5		19.7
1990	-3.9		-0.2		1.9		-2.1		17.3		19.5
1991	-4.4		0.7		1.2		-2.5		17.5		20.0
1992	-4.5		1.1		0.6		-2.8		17.5		20.4
1993	-3.8		0.9		0.2		-2.6		17.4		20.1
1994	-2.9		0.6		0.4		-1.9		17.8		19.7
1995	-2.2		0.3		0.1		-1.8		18.1		19.8
1996	-1.4		0.4		*		-1.0		18.3		19.4
1997	-0.3		*		-0.4		-0.6		18.5		19.1
1998	0.8		-0.3		-0.7		-0.1		18.9		19.0
1999	1.4		-0.5		-0.6		0.3		18.9		18.5
SOURCE: Congressional Budget Office.
NOTE: * = less than 0.05 percent.
a. The cyclical adjustment is positive when cyclical conditions are temporarily depressing revenues and raising outlays. b. Consists of deposit insurance, receipts from auctions of licenses to use portions of the electromagnetic spectrum, timing adjustments, asset sales, adjustments for certain changes in the amount of taxes overwithheld, adjustments for temporary tax changes, the inflation component of federal interest payments, tax receipts from capital gains, and contributions from allied nations for Operation Desert Storm (which were received in 1991 and 1992).

1. The new adjustments are the subject of a recent CBO memorandum, The Standardized Budget: Revised Historical Estimates (June 2000).