March 4, 2005

Honorable Thad Cochran
Chairman
Committee on Appropriations
United States Senate
Washington, DC 20510

Dear Mr. Chairman:

As you requested, the Congressional Budget Office (CBO), with contributions from the Joint Committee on Taxation, has analyzed the President's budget submission for fiscal year 2006. This letter and the attached tables summarize the main results of CBO's work; a report of the full analysis, including CBO's assessment of the macroeconomic effects of the President's proposals, will be published on March 15.
 

Fiscal Years 2005 and 2006

CBO estimates that under the President's policies, the deficit will be $394 billion in 2005, which equals 3.2 percent of gross domestic product (GDP). (By comparison, the deficit in 2004 was $412 billion, or 3.6 percent of GDP.) Included in the deficit estimate for 2005 are outlays of $32 billion that would result from the President's recent request for supplemental appropriations, mostly for military activities in Iraq.

For 2006, the deficit under the President's budget would total $332 billion, in CBO's estimation (see Table 1)--but the President's request for that year omits additional funds to continue U.S. military operations in Iraq and Afghanistan. As a result, CBO's estimate of the President's 2006 request reflects only outlays for activities resulting from the 2005 supplemental request (a total of $82 billion in budget authority) and from appropriations enacted for previous years. Additional funding to maintain those operations at about the same level as that expected for 2005 would add about $40 billion to the deficit in 2006, bringing it to between $370 billion and $375 billion, or 2.9 percent of GDP.⁽¹⁾
 

The Outlook for the 2006-2015 Period

Under the President's budget, the deficit would decline further--to 2.0 percent of GDP--in 2007 and then drop to 1.3 percent by 2015. Those percentages reflect neither significant spending for military activities in Iraq and Afghanistan nor the potential budgetary impact of the President's proposal to provide individual investment accounts under the Social Security program. The President's budget provides no details regarding other possible changes in the Social Security program. Without that information, it is difficult to estimate the accounts' impact because those changes would affect participation in the accounts. (CBO will discuss the President's Social Security proposal more fully in its March 15 report.)

Over the 10-year period from 2006 through 2015, deficits would total $2.6 trillion under the President's budget--$1.6 trillion higher than CBO's current baseline projection of the cumulative deficit.⁽²⁾ Over the next few years, debt held by the public would grow to 39 percent of GDP, up slightly from 37 percent of GDP at the end of 2004; it would then gradually fall back to that level by 2015.

Under the President's budgetary proposals, revenues would rise from 16.8 percent of GDP this year to 17.1 percent in 2006 (see Table 2); by 2015, revenues would reach 18 percent of GDP. Outlays would peak at 20 percent of GDP this year if the President's proposals were enacted and then fall to a share of around 19 percent annually. From 2005 through 2015, spending for entitlements and other mandatory programs under the President's policies would grow faster than nominal GDP (5.9 percent annually versus 4.9 percent), whereas discretionary outlays would increase at an average annual rate of 1.2 percent a year.
 

Discretionary Spending

By CBO's estimates, the President's budget proposes about $843 billion in discretionary budget authority for 2006 (see Table 3).⁽³⁾ If supplemental budget authority of $82 billion is enacted, total discretionary budget authority for 2005 will be $922 billion. The total for 2005 also includes $11.5 billion of supplemental appropriations for disaster relief enacted in October 2004. If supplemental appropriations for 2005 were excluded from the comparison, discretionary budget authority under the President's budget would grow by about 1.7 percent, or $14 billion, from 2005 to 2006 (see Table 4). Defense appropriations would grow by 4.4 percent, but funding for nondefense activities would decline--except for most homeland security programs. However, total budget authority for homeland security would drop by $1.5 billion as a result of two factors: funding for Project Bioshield, which received $2.5 billion in 2005 but is not slated to receive additional money in 2006; and a proposed increase in fees charged by the Transportation Security Administration, which would boost offsetting collections by about $1.7 billion in 2006. For the years 2007 through 2010, the President has proposed average annual increases of 3.4 percent in defense funding and would essentially freeze nondefense spending other than that for homeland security.
 

Impact of the President's Proposals

The President's budgetary proposals would add $30 billion to the deficit that CBO currently projects for 2005, mainly as a result of the proposed supplemental appropriations (see Table 5). Over the 2006-2010 period, the cumulative deficit would rise by $104 billion under the President's policies relative to CBO's baseline projections. Higher defense spending during those years would be largely offset by lower nondefense spending; however, tax policies--such as those extending the reduced rates on dividends and capital gains that were enacted in 2003 and extending the research and experimentation credit--would reduce revenues by nearly $100 billion.

Over the 2006-2015 period, the President's proposals would increase the total deficit by an estimated $1.6 trillion. Under the assumptions incorporated in CBO's baseline, deficits are projected to turn into small surpluses by 2012; under the President's policies, deficits would continue throughout the 10-year period. Revenues under those policies for the 10 years would be more than $1.4 trillion below the baseline's levels, primarily because of the proposal to extend certain expiring provisions of tax legislation enacted in 2001 and 2003. Discretionary spending would be $77 billion below the baseline, but proposals affecting mandatory spending would increase the cumulative deficit from 2006 through 2015 by $16 billion. (Additional spending in the President's budget for refundable tax credits would be mostly offset by higher premiums paid to the Pension Benefit Guaranty Corporation, by reductions in outlays for Medicaid, and by other savings in mandatory programs.) Debt-service costs on additional borrowing would add another $237 billion to the cumulative deficit.
 

Recent Changes in CBO's Baseline

In conjunction with its analysis of the President's budget, CBO typically updates its baseline projections to take into account new information from the budget and other sources. Those changes are almost exclusively technical; legislative changes since January have been minimal, and CBO has not updated its economic assumptions. CBO now projects that under the rules governing baseline projections, which assume the continuation of current tax and spending policies, the cumulative deficit for the 2006-2015 period will total nearly $1 trillion--an increase of $125 billion from the projections that CBO published in January (see Table 6).

Much of that change stems from a rise of $70 billion in CBO's estimate of spending for Medicare over the 2006-2015 period, which is primarily attributable to revised estimates of the cost of the prescription drug program (Part D of Medicare). CBO has increased its projection of net spending for Part D over the period by $54 billion; about $36 billion of that amount is expected through 2013, the time frame covered by CBO's original estimate of the cost of the Medicare Modernization Act. Changes in the estimated net cost of the basic benefits account for somewhat more than half of the total revision and changes in the cost of the low-income subsidy account for the rest of the increase in projected Part D spending. Those changes reflect both a refinement of CBO's estimating methods and provisions in the final rules governing formulary requirements and eligibility for the low-income subsidy that differ from those CBO had anticipated on the basis of legislative language. (CBO will provide additional details on its estimates of spending under Part D of Medicare in its March 15 report.)

Sincerely,

Douglas Holtz-Eakin
 

Attachments

Identical letter sent to the Honorable Robert C. Byrd
 

Table 4.