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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(e) of the Congressional Budget Act of 1974 for CBO to submit periodic reports to the Committees on the Budget with respect to fiscal policy and to provide five-year baseline projections of the federal budget. In accordance with CBO's mandate to provide objective and impartial analysis, the report contains no recommendations.

The economic outlook presented in Chapter 2 was prepared by the Macroeconomic Analysis Division under the direction of Robert Dennis. Ufuk Demiroglu, Kim J. Kowalewski, and John F. Peterson wrote the chapter and Appendix E. John F. Peterson, Robert Arnold, and Eric Warasta carried out the economic forecast and projections. Douglas Hamilton, Juann Hung, Mark Lasky, Angelo Mascaro, Preston Miller, Shinichi Nishiyama, Benjamin Page, Frank Russek, Matthew Salomon, Robert Shackleton, John Sturrock, and Christopher Williams contributed to the analysis. John McMurray and Eric Warasta provided research assistance.

The baseline spending projections were prepared by the staff of the Budget Analysis Division under the supervision of Robert Sunshine, Peter Fontaine, Janet Airis, Thomas Bradley, Kim Cawley, Paul Cullinan, and Jeffrey Holland. The revenue estimates were prepared by the staff of the Tax Analysis Division under the supervision of Thomas Woodward, Mark Booth, and David Weiner. The budget outlook described in Chapter 1 was written by Sandy Davis and Laurie Pounder. Mark Booth and Thomas Woodward wrote Chapter 3, and Barry Blom and Felix LoStraco wrote Chapter 4, with assistance from Kathleen Gramp, Jeanne De Sa, and Eric Rollins. Robert Dennis wrote Chapter 5 with assistance from many people in the Budget, Tax, and Macroeconomic Analysis Divisions. Frank Russek, Matthew Salomon, and John McMurray carried out the computations for Figure 5-1, and Mark Lasky prepared the recession scenario. Felix LoStracco wrote Appendix A; Takako Tsuji wrote Appendixes B, C, and F; and Barry Blom wrote Appendix D. Jennifer Smith coordinated the revision of the glossary. Jeffrey Holland wrote the summary of the report.

CBO's Panel of Economic Advisers commented on an early version of the economic forecast underlying this report. Members of the panel are Alan J. Auerbach, Michael Boskin, Barry P. Bosworth, John Cogan, Robert Dederick, William C. Dudley, Martin Feldstein, Robert J. Gordon, David Hale, Robert E. Hall, N. Gregory Mankiw, Allan Meltzer, William Niskanen, William D. Nordhaus, June E. O'Neill, Rudolph Penner, James Poterba, Robert Reischauer, Alice Rivlin, Joel Slemrod, John Taylor, and Martin B. Zimmerman. Although those outside advisers provided considerable assistance, they are not responsible for the contents of this report.

John Skeen, Leah Mazade, Christian Spoor, and Christine Bogusz edited the volume. Marion Curry, Linda Lewis Harris, Dorothy Kornegay, and Simone Thomas assisted in the preparation of the report. Kathryn Quattrone prepared the volume for final publication, and Annette Kalicki prepared the electronic versions for CBO's Web site.
 

Dan L. Crippen
Director
January 2001
 
 

SUMMARY

ONE - THE BUDGET OUTLOOK

• The Baseline Concept
• Recent Changes to the Budget Outlook
• The Outlook for Federal Debt
• Federal Funds and Trust Funds
• Comparing CBO's and the Clinton Administration's Baseline Projections
• The Expiration of Budget Enforcement Procedures

TWO - THE ECONOMIC OUTLOOK

• The Growth of the Economy's Potential to Produce
• CBO's Medium-Term Projections
• Recent Economic Developments
• CBO's Short-Term Forecast

THREE - THE REVENUE OUTLOOK

• Individual Income Taxes
• Corporate Income Taxes
• Social Insurance Taxes
• Excise Taxes and Other Sources of Revenue
• The Stock Market and CBO's Revenue Projections
• Expiring Tax Provisions

FOUR - THE SPENDING OUTLOOK

• Discretionary Spending
• Entitlements and Other Mandatory Spending
• Offsetting Receipts
• Net Interest
• Proceeds Earned on the Balance of Uncommitted Funds

FIVE - THE UNCERTAINTY OF BUDGET PROJECTIONS

• The Accuracy of CBO's Past Budget Projections
• Alternative Future Trends
• The Budgetary Effects of a Recession

APPENDIXES

A - Sequestration Preview Report for Fiscal Year 2002
B - How Changes in Assumptions Can Affect Budget Projections
C - Budget Resolution Targets and Actual Outcomes: Fiscal Years 1980 Through 2000
D - The Federal Sector of the National Income and Product Accounts
E - CBO's Economic Projections for 2001 Through 2011
F - Historical Budget Data
G - Major Contributors to the Revenue and Spending Projections

GLOSSARY
 

TABLES
S-1.	The Outlook for the Budget Under Current Policies
S-2.	Changes in CBO's Projections of the Surplus Since July 2000
S-3.	CBO's Economic Projections for Calendar Years 2001-2011
1-1.	The Budget Outlook Under Current Policies
1-2.	CBO's Baseline Budget Projections
1-3.	Changes in CBO's Projections of the Surplus Since July 2000
1-4.	CBO's Projections of Debt Held by the Public and Net Indebtedness at the End of the Year
1-5.	CBO's Projections of Net Indebtedness at the End of the Year Under Alternative Scenarios for Debt Reduction
1-6.	CBO's Projections of Gross Federal Debt at the End of the Year
1-7.	Trust Fund Surpluses
1-8.	Comparison of CBO's Baseline with OMB's Current-Services Baseline
2-1.	CBO's Economic Projections for Calendar Years 2001-2011
2-2.	Change in Projections of Growth Over the Past Five Years
2-3.	Key Assumptions in CBO's Projection of Potential GDP
2-4.	Comparison of CBO's Current and Previous Economic Projections for Calendar Years 2001-2010
2-5.	Comparison of CBO's and the Clinton Administration's Economic Projections for Calender Years 2001-2011
2-6.	CBO's Forecast for 2001 and 2002
2-7.	Comparison of CBO and Blue Chip Forecasts for Calender Years 2001 and 2002
3-1.	Changes in CBO's Projections of Revenues Since July 2000
3-2.	CBO's Projections of Revenues
3-3.	Shares of Growth of Individual Income Tax Liabilities in Excess of Growth of GDP, by Source, Tax Years 1995-1998
3-4.	Actual Revenues in Fiscal Year 2000, by Source, Compared with CBO's January 2000 Projections
3-5.	CBO's Projections of Individual Tax Receipts and the Tax Base
3-6.	Actual and Projected Capital Gains
3-7.	CBO's Projections of Corporate Income Tax Receipts and the Tax Base
3-8.	CBO's Projections of Social Insurance Tax Receipts and Tax Base
3-9.	CBO's Projections of Social Insurance Tax Receipts, by Category
3-10.	CBO's Projections of Excise Tax Receipts, by Category
3-11.	CBO's Projections of Other Sources of Revenue
3-12.	Effect of Extending Tax Provisions That Will Expire Before 2011
4-1.	CBO's Baseline Budget Projections of Outlays
4-2.	Average Annual Rate of Growth in Outlays
4-3.	Defense and Nondefense Discretionary Outlays, Fiscal Years 1991-2001
4-4.	CBO's Projections of Discretionary Spending Under Alternative Paths
4-5.	CBO's Projections of Mandatory Spending
4-6.	Sources of Growth in Mandatory Spending
4-7.	Program Continuations Assumed in CBO's Baseline
4-8.	CBO's Projections of Offsetting Receipts
4-9.	CBO's Projections of Federal Interest Outlays and Proceeds from Uncommitted Funds
5-1.	Average Difference Between CBO's Budget Projections and Actual Outcomes Since 1981, Adjusted for Legislation
5-2.	Key Economic Variables Under Alternative Scenarios
5-3.	Budget Surpluses Under Alternative Scenarios
5-4.	Illustrative Recession Scenario
5-5.	Budget Surpluses in a Recession
A-1.	CBO's Estimates of Discretionary Spending Limits for Fiscal Years 2001 and 2002
A-2.	CBO's Estimates of Discretionary Spending Compared with the Statutory Caps for Fiscal Year 2002
A-3.	Budgetary Effects of Direct Spending or Receipt Legislation Enacted Since the Budget Enforcement Act of 1997
B-1.	Estimated Effects on CBO's Budget Projections of Selected Economic Changes
B-2.	Estimated Effects on CBO's Baseline of Increasing Discretionary Budget Authority by $10 Billion in 2002
B-3.	Estimated Savings in Net Interest from Increasing the Surplus by $10 Billion
C-1.	Comparison of Budget Resolution Targets and Actual Budget Totals, Fiscal Year 2000
C-2.	Sources of Differences Between Budget Resolution Targets and Actual Budget Totals, Fiscal Year 2000
C-3.	Sources of Differences Between Budget Resolution Targets and Actual Budget Totals, Fiscal Years 1980-2000
D-1.	Relationship of the Budget to the Federal Sector of the National Income and Product Accounts
D-2.	Projections of Baseline Receipts and Expenditures Measured by the National Income and Product Accounts
E-1.	CBO's Year-by-Year Economic Projections for Calendar Years 2001-2011
E-2.	CBO's Year-by-Year Economic Projections for Fiscal Years 2001-2011
F-1.	Deficits, Surpluses, Debt, and Related Series, Fiscal Years 1961-2000
F-2.	Standardized-Budget Deficit or Surplus and Related Series, Fiscal Years 1961-2000 (In billions of dollars)
F-3.	Standardized-Budget Deficit or Surplus and Related Series, Fiscal Years 1961-2000 (As a percentage of potential GDP)
F-4.	Revenues, Outlays, Deficits, Surpluses, and Debt Held by the Public, Fiscal Years 1962-2000 (In billions of dollars)
F-5.	Revenues, Outlays, Deficits, Surpluses, and Debt Held by the Public, Fiscal Years 1962-2000 (As a percentage of GDP)
F-6.	Revenues by Major Source, Fiscal Years 1962-2000 (In billions of dollars)
F-7.	Revenues by Major Source, Fiscal Years 1962-2000 (As a percentage of GDP)
F-8.	Outlays by Major Spending Category, Fiscal Years 1962-2000 (In billions of dollars)
F-9.	Outlays by Major Spending Category, Fiscal Years 1962-2000 (As a percentage of GDP)
F-10.	Discretionary Outlays, Fiscal Years 1962-2000 (In billions of dollars)
F-11.	Discretionary Outlays, Fiscal Years 1962-2000 (As a percentage of GDP)
F-12.	Outlays for Entitlements and Other Mandatory Spending, Fiscal Years 1962-2000 (In billions of dollars)
F-13.	Outlays for Entitlements and Other Mandatory Spending, Fiscal Years 1962-2000 (As a percentage of GDP)
FIGURES
S-1.	CBO's Projections of Federal Debt, Uncommitted Funds, and Net Indebtedness
S-2.	Uncertainty in CBO's Projections of the Total Budget Surplus Under Current Policies
1-1.	Debt Held by the Public as a Share of GDP, Fiscal Years 1940-2000
1-2.	Composition of Debt Held by the Public, Fiscal Years 2000, 2006, and 2011
2-1.	The Economic Forecast and Projections
2-2.	Labor Productivity in the Nonfarm Business Sector
2-3.	Prices for Computers Bought by Businesses
2-4.	Business Fixed Investment
2-5.	Prices for Imports, Excluding Petroleum and Computers
2-6.	Total Factor Productivity
2-7.	Gross Domestic Product
2-8.	Real Interest Rates
2-9.	Income Shares and Depreciation
2-10.	The S&P 500 Index of Stock Prices
2-11.	Home Sales and Affordability
2-12.	Nominal Trade Deficit
2-13.	Employment Cost Indexes for Wages and Benefits
3-1.	Annual Growth of Federal Revenues and GDP, Fiscal Years 1960-2011
3-2.	Total Revenues as a Share of GDP for Fiscal Years 1944-2011
3-3.	Revenues, by Source, as a Share of GDP for Fiscal Years 1960-2011
3-4.	Effective Tax Rate on Individual Income, Tax Years 1990-1998
4-1.	Major Components of Spending as a Percentage of GDP, Fiscal Years 1962-2000
4-2.	Nondefense Discretionary Spending, by Category, Fiscal Year 2001
4-3.	CBO's Baseline Projections of Federal Medicaid Spending, Fiscal Years 2001-2011
5-1.	Uncertainty in CBO's Projections of the Total Budget Surplus Under Current Policies
BOXES
1-1.	A Freeze in Discretionary Spending
1-2.	Budgetary Treatment of Government Purchases of Private Securities
2-1.	A Change in How CBO Calculates the Capital Input in Its Growth Model
2-2.	The Recent Slowdown in Manufacturing
2-3.	Recent Developments in Energy Markets
3-1.	Tax Bases and Tax Liability
4-1.	Auctions of Spectrum Licenses Are Likely to Yield Higher Proceeds

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