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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(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 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 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. Christopher Williams wrote the chapter with contributions from Robert Arnold, Adrienne Kearney, and Frank Russek. Matthew Salomon carried out the economic forecast and projections. Robert Arnold, Laurie Brown, Douglas Elmendorf, Victoria Farrell, Douglas Hamilton, Adrienne Kearney, Kim Kowalewski, Joyce Manchester, Angelo Mascaro, Frank Russek, and Matthew Salomon provided background analysis and comments. Derek Briggs, Laurie Brown, John Romley, and Jennifer Wolfson provided research assistance.

The baseline outlay projections were prepared by the staff of the Budget Analysis Division under the supervision of 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. Kathy A. Ruffing wrote Chapter 2, and James Horney wrote the summary of the report. The appendixes were written by James Homey (Appendix A), Kathy Ruffing (Apppendix B), Bryan Grote (Appendix C), Jeffrey Holland (Appendix D), and Karin Carr (Appendix E).

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, 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, and Murray Weidenbaum. Wynn V. Bussmann, Robert Crandall, William Gale, Edward Gramlich, Nicholas Lardy, Jonathan Skinner, and David Wyss attended as guests. Despite the considerable assistance afforded by these outside advisers, the analysis in this report does not necessarily reflect their views, nor are they responsible for any errors.

Paul L. Houts supervised the editing and production of the report, with the assistance of Sherry Snyder. Major portions were edited by Paul L. Houts, Leah Mazade, and Sherry Snyder. Christian Spoor provided editorial and production assistance. The authors owe thanks to Marion Curry, Dorothy Kornegay, and L. Rae Roy, who assisted in the preparation of the report. Kathryn Quattrone prepared the report for final publication.

Robert D. Reischauer
Director
January 1995
 
 

SUMMARY

ONE - THE ECONOMIC OUTLOOK

• The State of the Economy
• CBO's Forecast for 1995 and 1996
• Risks to the CBO Forecast
• Comparison of the Forecast with the Blue Chip and the CBO Summer Forecasts
• CBO's Projections for 1997 Through 2000

TWO - THE BUDGET OUTLOOK

• The Deficit Outlook
• Changes in the Budget Outlook Since August
• The Spending Outlook
• The Revenue Outlook
• The Budget Outlook Through 2005

APPENDIXES

A - Sequestration Preview Report for Fiscal Year 1996
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 - Major Contributors to the Revenue and Spending Projections

GLOSSARY
 

Tables
S-l.	Comparison of Forecasts for 1995 and 1996
S-2.	The Economic Forecast and Projections
S-3.	CBO Deficit Projections
S-4.	Changes in CBO Deficit Projections
S-5.	Illustrative Deficit Reduction Path
1-1.	The CBO Forecast for 1995 and 1996
1-2.	The Fiscal Policy Outlook
1-3.	Comparison of Forecasts for 1995 and 1996
1-4.	The Economic Forecast and Projections for Calendar Years 1995 Through 2000
1-5.	The Economic Forecast and Projections for Fiscal Years 1995 Through 2000
2-1.	CBO Deficit Projections
2-2.	CBO Projections of Trust Fund Surpluses
2-3.	Changes in CBO Deficit Projections Since August 1994
2-4.	How Tight Are the Discretionary Caps?
2-5.	Three Scenarios for Discretionary Spending and the Deficit
2-6.	CBO Projections of Outlays by Category, Assuming Discretionary Inflation After 1998
2-7.	CBO Baseline Projections for Mandatory Spending
2-8.	Sources of Growth in Mandatory Spending
2-9.	Outlays for Deposit Insurance in the CBO Baseline
2-10.	CBO Baseline Projections for Offsetting Receipts
2-11.	CBO Baseline Projections for Interest Costs and Federal Debt
2-12.	CBO Baseline Projections for Revenues, by Source
2-13.	Effect of Extending Tax Provisions That Have Recently Expired or Will Expire in 1995 Through 2000
2-14.	The Budget Outlook Through 2005 With Discretionary Inflation After 1998
2-15.	The Budget Outlook Through 2005 Without Discretionary Inflation After 1998
A-1.	CBO Estimates of Discretionary Spending Limits for Fiscal Years 1995 Through 1998
A-2.	Budgetary Effects of Direct Spending and Receipt Legislation Enacted Since the Budget Enforcement Act
B-1.	Comparison of the CBO March 1993 Baseline, the 1994 Budget Resolution, and Actual Outcomes for Fiscal Year 1994
B-2.	Sources of Differences Between Actual Budget Totals, CBO March 1993 Baseline Projections, and the Budget Resolution for Fiscal Year 1994
B-3.	Sources of Differences Between Actual Budget Totals and First Budget Resolution Estimates for Fiscal Years 1980 Through 1994
C-1.	Effects on CBO Budget Projections of Selected Changes in Economic Assumptions
C-2.	Effects on CBO Budget Projections of a Change in Inflation, Keeping Discretionary Spending Level After 1998
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 1956-1994
E-2.	Revenues, Outlays, Deficits, and Debt Held by the Public, Fiscal Years 1962-1994 (In billions of dollars)
E-3.	Revenues, Outlays, Deficits, and Debt Held by the Public, Fiscal Years 1962-1994 (As a percentage of GDP)
E-4.	Revenues by Major Source, Fiscal Years 1962-1994 (In billions of dollars)
E-5.	Revenues by Major Source, Fiscal Years 1962-1994 (As a percentage of GDP)
E-6.	Outlays for Major Spending Categories, Fiscal Years 1962-1994 (In billions of dollars)
E-7.	Outlays for Major Spending Categories, Fiscal Years 1962-1994 (As a percentage of GDP)
E-8.	Discretionary Outlays, Fiscal Years 1962-1994 (In billions of dollars)
E-9.	Discretionary Outlays, Fiscal Years 1962-1994 (As a percentage of GDP)
E-10.	Outlays for Entitlements and Other Mandatory Spending, Fiscal Years 1962-1994 (In billions of dollars)
E-ll.	Outlays for Entitlements and Other Mandatory Spending, Fiscal Years 1962-1994 (As a percentage of GDP)
Figures
S-l.	Comparison of CBO Projections With and Without Discretionary Inflation After 1998
S-2.	Comparison of CBO Deficit Projections
1-1.	The Economic Forecast and Projections
1-2.	The GDP Gap: GDP Versus Potential GDP
1-3.	Inflation and Tightening in the Labor Market
1-4.	Household Payments on Debt
1-5.	Consumer Spending on Motor Vehicles
1-6.	New Orders for Producers' Durable Equipment
1-7.	Relative Output and Net Exports
1-8.	The Exchange Rate
1-9.	Housing Affordability Index
1-10.	Change in Investment in Inventories
1-11.	Real Short-Term Interest Rates
1-12.	GDP and Potential GDP
2-1.	The Federal Deficit
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
B-l.	Differences Between Actual Deficit and Deficit in First Budget Resolution
EM.	A Comparison of NIP A and Unified Budget Deficits, Fiscal Years 1980-2000
Boxes
1-1.	Fiscal Policy and the Goal of a Balanced Budget
1-2.	The Currency Crisis in Mexico
2-1.	The CPI as a Measure of the Change in the Cost of Living
2-2.	The Debt Limit

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