The Economic and Budget Outlook: Fiscal Years 1995-1999

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THE ECONOMIC AND BUDGET OUTLOOK:
FISCAL YEARS 1995-1999
January 1994

NOTES

Unless otherwise indicated, all years referred to in Chapter 1 are calendar years and all years in Chapter 2 are fiscal years.

Some figures in this report indicate periods of recession using shaded vertical bars. The bars extend from the peak to the trough of the recession.

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.

Preface

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 with respect to fiscal policy. In accordance 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. Joyce Manchester wrote the chapter. Thomas Loo carried out the economic forecast and projection. Robert Arnold, Douglas Elmendorf, Victoria Farrell, Douglas Hamilton, Adrienne Kearney, Kim Kowalewski, Thomas Loo, Joyce Manchester, Angelo Mascaro, Frank Russek, Matthew Salomon, John Sturrock, and Christopher Williams provided comments and background analysis. Derek Briggs, Laurie Brown, Blake Mackey, and Michael Simpson provided research assistance.

The baseline outlay projections were prepared by the staff of the Budget Analysis Division under the supervision of C.G. Nuckols, Paul N. Van de Water, James Horney, Michael Miller, Charles Seagrave, and Robert Sunshine. The revenue estimates were prepared by the staff of the Tax Analysis Division under the supervision of Rosemary D. Marcuss and Richard A. Kasten. Kathy A. Ruffing and Richard A. Kasten wrote Chapter 2. The appendixes were written by James Horney (Appendix A), Kathy A. Ruffing (Appendix B), Leslie C. Griffin (Appendix C), Jeffrey Holland (Appendix D), Karin Carr (Appendix E), and Joyce Manchester (Appendix F). James Horney wrote the summary of the report.

An early version of the economic forecast underlying this report was discussed at a meeting of CBO's Panel of Economic Advisers. Members of this panel are Michael Boskin, Barry Bosworth, Robert Dederick, Martin Feldstein, Stanley Fischer, Benjamin Friedman, Lyle E. Gramley, Robert Hall, Lawrence Klein, Robert Lawrence, John Makin, Burton Malkiel, Rudolph Penner, William Poole, Paul Samuelson, Charles Schultze, Robert Solow, James Tobin, Murray Weidenbaum, and Janet Yellen. David Blanchflower, William Brown, Sherry Glied, Marvin Kosters, and Charles Lieberman attended as guests. Despite the considerable assistance afforded by these outside advisers, they are not responsible for any errors in the analyses in this document.

Paul L. Houts supervised the editing and production of the report, assisted by Sherry Snyder. Major portions were edited by Paul L. Houts, Sherry Snyder, Sherwood D. Kohn, Leah Mazade, and Christian Spoor. The authors owe thanks to Marion Curry, Dorothy Kornegay, Linda Lewis, and L. Rae Roy, who assisted in the preparation of the report. Michael Simpson of the Macroeconomic Analysis Division produced the figures. Kathryn Quattrone and Martina Wojak-Piotrow prepared the report for final publication.

Robert D. Reischauer
Director
January 1994

Contents

SUMMARY

ONE - THE ECONOMIC OUTLOOK

CBO's Economic Forecast for 1994 and 1995
Federal, State, and Local Governments: Fiscal Stance Will Restrain Growth Slightly
The Business Sector: Investment Will Continue to Be Strong
Households: Expenditures Should Be Buoyant
Foreign Economies: Slow Growth Implies Lower U.S. Net Exports
Monetary Policy: The Federal Reserve Will Probably Let Short-Term Rates Rise
Projections for 1996 Through 1999
Comparisons with Other Forecasts and Projections
Risks to CBO's Economic Forecast

TWO - THE BUDGET OUTLOOK

The Deficit Outlook
How Has the Budget Outlook Changed Since September?
The Spending Outlook
The Revenue Outlook
Recent Trends in Tax Progressivity

APPENDIXES

A - Sequestration Preview Report for Fiscal Year 1995
B - An Analysis of Congressional Budget Estimates
C - How the Economy Affects the Budget
D - The Federal Sector of the National Income and Product Accounts
E - Historical Budget Data
F - Real Hourly Earnings
G - Major Contributors to the Revenue and Spending Projections

TABLES

S-1. Comparison of Forecasts for 1994 and 1995

S-2. Medium-Term Economic Projections

S-3. CBO Deficit Projections

S-4. Changes in CBO Deficit Projections

1-1. The CBO Forecast for 1994 and 1995

1-2. The Fiscal Policy Outlook

1-3. Economic Outlook for Calendar Years 1994 Through 1999

1-4. Economic Outlook for Fiscal Years 1994 Through 1999

1-5. Comparison of Forecasts for 1994 and 1995

1-6. Comparison of Projections for 1996 Through 1999

2-1. CBO Deficit Projections

2-2. CBO Projections of Trust Fund Surpluses

2-3. Changes in CBO Deficit Projections Since September

2-4. CBO Projections of Outlays by Category, Assuming Compliance with Discretionary Spending Caps

2-5. How Tight Are the Discretionary Caps?

2-6. CBO Baseline Projections for Mandatory Spending, Excluding Deposit Insurance

2-7. CBO Baseline Projections for Deposit Insurance

2-8. CBO Baseline Projections for Offsetting Receipts

2-9. CBO Baseline Projections for Interest Costs and Federal Debt

2-10. CBO Baseline Projections for Revenues, by Source

2-11. Effect of Extending Tax Provisions That Have Recently Expired or Will Expire in 1994 Through 1999

A-1. CBO Estimates of Discretionary Spending Limits, Changes in the Deficit, and the Maximum Deficit Amount for Fiscal Years 1994 Through 1998

A-2. CBO Estimates of Discretionary Spending Limits for Fiscal Years 1994 Through 1998

A-3. Budgetary Effects of Direct Spending and Receipt Legislation Enacted Since the Budget Enforcement Act

A-4. CBO Estimate of the Maximum Deficit Amount for Fiscal Year 1995

B-1. Comparison of 1993 Budget Resolution with Actual Outcomes

B-2. Sources of Differences Between Actual Budget Totals and Budget Resolution Totals for Fiscal Year 1993

B-3. Sources of Differences Between Actual Budget Totals and First Budget Resolution Estimates for Fiscal Years 1980-1993

C-1. Effects on CBO Budget Projections of Selected Changes in Economic Assumptions

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. Standardized-Employment Deficit and Related Series, Fiscal Years 1956-1993

E-2. Revenues, Outlays, Deficits, and Debt Held by the Public, Fiscal Years 1962-1993 (In billions of dollars)

E-3. Revenues, Outlays, Deficits, and Debt Held by the Public, Fiscal Years 1962-1993 (As a percentage of GDP)

E-4. Revenues by Major Source, Fiscal Years 1962-1993 (In billions of dollars)

E-5. Revenues by Major Source, Fiscal Years 1962-1993 (As a percentage of GDP)

E-6. Outlays for Major Spending Categories, Fiscal Years 1962-1993 (In billions of dollars)

E-7. Outlays for Major Spending Categories, Fiscal Years 1962-1993 (As a percentage of GDP)

E-8. Discretionary Outlays, Fiscal Years 1962-1993 (In billions of dollars)

E-9. Discretionary Outlays, Fiscal Years 1962-1993 (As a percentage of GDP)

E-10. Outlays for Entitlements and Other Mandatory Spending, Fiscal Years 1962-1993 (In billions of dollars)

E-11. Outlays for Entitlements and Other Mandatory Spending, Fiscal Years 1962-1993 (As a percentage of GDP)

FIGURES

S-1. Baseline Deficits

1-1. The Economic Forecast and Projection

1-2. Standardized-Employment Deficit

1-3. Investment in Producers' Durable Equipment

1-4. Real Net Corporate Cash Flow

1-5. Number of Households Headed by People Ages 25 to 34 and Ages 45 and Over

1-6. Interest Rate on Conventional Mortgages

1-7. Housing Affordability Index

1-8. Velocity of M2

1-9. Inflation Indicators and Inflation

1-10. Closing the Gap: GDP Versus Potential GDP

1-11. Nonaccelerating Inflation Rate of Unemployment

1-12. Labor Force Participation Rates

2-1. The Deficit Outlook

2-2. Outlays by Category as a Share of GDP

2-3. Deposit Insurance Spending

2-4. Revenues by Source as a Share of GDP

2-5. Effective Federal Tax Rates in Selected Years, 1977-1994, by Income Group

2-6. Marginal Tax Rate on Earnings in 1994, Including Payroll and Income Taxes, for a One-Earner Couple with Two Children

B-1. Differences Between Actual Deficit and Deficit in First Budget Resolution

D-1. A Comparison of NIPA and Budget Deficits, Fiscal Years 1980-1999

F-1. Measures of Real Wages

BOXES

1-1. Revisions in the Measure of Unemployment

1-2. The NAIRU

2-1. The Ten-Year Budget Outlook

2-2. Federal Civilian Employment

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TABLES

S-1.	Comparison of Forecasts for 1994 and 1995
S-2.	Medium-Term Economic Projections
S-3.	CBO Deficit Projections
S-4.	Changes in CBO Deficit Projections
1-1.	The CBO Forecast for 1994 and 1995
1-2.	The Fiscal Policy Outlook
1-3.	Economic Outlook for Calendar Years 1994 Through 1999
1-4.	Economic Outlook for Fiscal Years 1994 Through 1999
1-5.	Comparison of Forecasts for 1994 and 1995
1-6.	Comparison of Projections for 1996 Through 1999
2-1.	CBO Deficit Projections
2-2.	CBO Projections of Trust Fund Surpluses
2-3.	Changes in CBO Deficit Projections Since September
2-4.	CBO Projections of Outlays by Category, Assuming Compliance with Discretionary Spending Caps
2-5.	How Tight Are the Discretionary Caps?
2-6.	CBO Baseline Projections for Mandatory Spending, Excluding Deposit Insurance
2-7.	CBO Baseline Projections for Deposit Insurance
2-8.	CBO Baseline Projections for Offsetting Receipts
2-9.	CBO Baseline Projections for Interest Costs and Federal Debt
2-10.	CBO Baseline Projections for Revenues, by Source
2-11.	Effect of Extending Tax Provisions That Have Recently Expired or Will Expire in 1994 Through 1999
A-1.	CBO Estimates of Discretionary Spending Limits, Changes in the Deficit, and the Maximum Deficit Amount for Fiscal Years 1994 Through 1998
A-2.	CBO Estimates of Discretionary Spending Limits for Fiscal Years 1994 Through 1998
A-3.	Budgetary Effects of Direct Spending and Receipt Legislation Enacted Since the Budget Enforcement Act
A-4.	CBO Estimate of the Maximum Deficit Amount for Fiscal Year 1995
B-1.	Comparison of 1993 Budget Resolution with Actual Outcomes
B-2.	Sources of Differences Between Actual Budget Totals and Budget Resolution Totals for Fiscal Year 1993
B-3.	Sources of Differences Between Actual Budget Totals and First Budget Resolution Estimates for Fiscal Years 1980-1993
C-1.	Effects on CBO Budget Projections of Selected Changes in Economic Assumptions
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.	Standardized-Employment Deficit and Related Series, Fiscal Years 1956-1993
E-2.	Revenues, Outlays, Deficits, and Debt Held by the Public, Fiscal Years 1962-1993 (In billions of dollars)
E-3.	Revenues, Outlays, Deficits, and Debt Held by the Public, Fiscal Years 1962-1993 (As a percentage of GDP)
E-4.	Revenues by Major Source, Fiscal Years 1962-1993 (In billions of dollars)
E-5.	Revenues by Major Source, Fiscal Years 1962-1993 (As a percentage of GDP)
E-6.	Outlays for Major Spending Categories, Fiscal Years 1962-1993 (In billions of dollars)
E-7.	Outlays for Major Spending Categories, Fiscal Years 1962-1993 (As a percentage of GDP)
E-8.	Discretionary Outlays, Fiscal Years 1962-1993 (In billions of dollars)
E-9.	Discretionary Outlays, Fiscal Years 1962-1993 (As a percentage of GDP)
E-10.	Outlays for Entitlements and Other Mandatory Spending, Fiscal Years 1962-1993 (In billions of dollars)
E-11.	Outlays for Entitlements and Other Mandatory Spending, Fiscal Years 1962-1993 (As a percentage of GDP)

FIGURES

S-1.	Baseline Deficits
1-1.	The Economic Forecast and Projection
1-2.	Standardized-Employment Deficit
1-3.	Investment in Producers' Durable Equipment
1-4.	Real Net Corporate Cash Flow
1-5.	Number of Households Headed by People Ages 25 to 34 and Ages 45 and Over
1-6.	Interest Rate on Conventional Mortgages
1-7.	Housing Affordability Index
1-8.	Velocity of M2
1-9.	Inflation Indicators and Inflation
1-10.	Closing the Gap: GDP Versus Potential GDP
1-11.	Nonaccelerating Inflation Rate of Unemployment
1-12.	Labor Force Participation Rates
2-1.	The Deficit Outlook
2-2.	Outlays by Category as a Share of GDP
2-3.	Deposit Insurance Spending
2-4.	Revenues by Source as a Share of GDP
2-5.	Effective Federal Tax Rates in Selected Years, 1977-1994, by Income Group
2-6.	Marginal Tax Rate on Earnings in 1994, Including Payroll and Income Taxes, for a One-Earner Couple with Two Children
B-1.	Differences Between Actual Deficit and Deficit in First Budget Resolution
D-1.	A Comparison of NIPA and Budget Deficits, Fiscal Years 1980-1999
F-1.	Measures of Real Wages

BOXES

1-1.	Revisions in the Measure of Unemployment
1-2.	The NAIRU
2-1.	The Ten-Year Budget Outlook
2-2.	Federal Civilian Employment