AN ANALYSIS OF THE PRESIDENT’S

BUDGETARY PROPOSALS

FOR FISCAL YEAR 1998

MARCH 1997

The Congress of the United States

Congressional Budget Office
NOTES

Unless otherwise indicated, all years referred to in Chapter 2 and Appendix B are

calendar years, and all years in other chapters and Appendix A are fiscal years.

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.
T

Preface

his analysis of the President's budget for fiscal year 1998 was prepared at the request

of the Senate Committee on Appropriations. It was produced by the staffs of the

Budget Analysis, Macroeconomic Analysis, and Tax Analysis divisions under the

supervision of Paul Van de Water, Robert Dennis, and Rosemary D. Marcuss. James Horney

wrote Chapter 1, Juann Hung wrote Chapter 2, Daniel Kowalski wrote Chapter 3, and Richard

Kasten wrote Chapter 4. Appendix A was written by Jeffrey Holland, and Appendix B was

written by John Peterson and James Horney, with assistance from Laurie Brown. The baseline

revenue estimates were prepared under the direction of Richard Kasten. The estimates of the

President's revenue proposals were prepared by the Joint Committee on Taxation. The principal contributors to the revenue and spending estimates and analyses are listed in Appendix C.

Paul L. Houts supervised the editing and production of the report. Major portions were

edited by Paul L. Houts, Sherwood Kohn, and Christian Spoor. Marlies Dunson provided

editorial assistance. The authors owe thanks to Marion Curry, Linda Harris, Denise Jordan,

Dorothy Kornegay, and Simone Thomas, who assisted in producing sections of the report.

Kathryn Quattrone and Jill Sands prepared the entire report for publication.

June E. O'Neill

Director

March 1997

Contents

ONE SUMMARY AND INTRODUCTION 1

The President’s Basic Budgetary Policies 1

The President’s Alternative Budgetary Policies 5

CBO’s Revised Baseline 7

TWO ECONOMIC ASSUMPTIONS 9

Real GDP Growth 10

Unemployment 11

Inflation 12

Interest Rates 14

Incomes 15

Conclusion 17

THREE THE PRESIDENT’S SPENDING PROPOSALS 19

The President’s Basic Spending Proposals 19

The President’s Alternative Spending Proposals 31

FOUR THE PRESIDENT’S REVENUE PROPOSALS 35

Tax Relief for Middle-Income Families 35

Other Tax Reductions 41

Provisions Reinstating Expired Taxes 42

Other Provisions That Would Increase Revenues 42

APPENDIXES

A CBO Baseline Budget Projections 47

B Comparing the Accuracy of Forecasts by CBO

and the Clinton Administration 57

C Major Contributors to the Revenue and

Spending Projections 71
vi AN ANALYSIS OF THE PRESIDENT’S BUDGETARY PROPOSALS March 1997

TABLES

1. CBO Estimate of the Effect on the Deficit of the

President’s Basic Budgetary Policies 2

2. CBO Reestimate of the President’s Basic

Budgetary Policies 4

3. Estimate of the President’s Alternative Policies to

Eliminate the Deficit Under CBO Assumptions 5

4. CBO Estimate of the Effect on the Deficit of the

President’s Alternative Budgetary Policies 6

5. Comparison of Economic Projections,

Calendar Years 1996-2002 10

6. CBO Estimate of the President’s Basic Spending

Proposals 20

7. Comparison of CBO’s Estimate of the President’s

Discretionary Spending Proposals with the Limits for 1998 21

8. Discretionary Spending for 1998 Under the President’s

Proposals 22

9. Discretionary Outlay Levels as Estimated by CBO 25

10. CBO Estimate of the President’s Basic Mandatory 

Spending Proposals 26

11. CBO Estimate of the President’s Medicare Proposals 27

12. CBO Estimate of the President’s Medicaid Proposals 30

13. Estimate of the President’s Alternative Spending

Proposals to Eliminate the Deficit Under

CBO Assumptions 32

14. CBO Estimate of the President’s Alternative Spending

Proposals 33

15. CBO Estimate of Revenues Under the President’s

Proposals 36

16. Comparison of Revenue Estimates of the President’s

Proposals 37
CONTENTS vii

17. Comparison of Revenue Estimates of the President’s

Provisions That Would Reduce Revenues 38

18. Comparison of Revenue Estimates of the President’s

Provisions That Would Increase Revenues 43

A-1. Changes in CBO Deficit Projections Since January 48

A-2. CBO Deficit Projections 49

A-3. CBO Baseline Budget Projections, Assuming Compliance

with Discretionary Spending Caps 50

A-4. CBO Baseline Projections of Mandatory Spending,

Including Deposit Insurance 53

A-5. CBO Baseline Projections of Federal Debt and

Interest Costs 54

A-6. Changes in the Deficit Resulting from the Economic

Effects of Balancing the Budget by 2002 55

B-1. Administration and CBO Current-Policy Deficit Projections 60

B-2. Accuracy of Administration and CBO Economic

Assumptions Since 1993, by Economic Indicator 61

B-3. Administration and CBO Projections of Nominal

GDP Growth 62

B-4. Administration and CBO Projections of Real

GDP Growth 63

B-5. Administration and CBO Projections of Growth

in the GDP Price Index 64

B-6. Administration and CBO Projections of CPI-U Inflation 65

B-7. Administration and CBO Projections of Incomes 66

B-8. Administration and CBO Projections of the

Unemployment Rate 67

B-9. Administration and CBO Projections of the

Three-Month Treasury Bill Rate 68

B-10. Administration and CBO Projections of the

Ten-Year Treasury Note Rate 69
viii AN ANALYSIS OF THE PRESIDENT’S BUDGETARY PROPOSALS March 1997

FIGURES

1. Difference Between the Growth of the CPI-U

and the GDP Price Index 14

2. Incomes 14

3. Labor Income 15

4. Wages and Salaries as a Share of Labor Income 15

5. Capital Income 16

6. Corporate Profits as a Share of Capital Income 16

BOXES

1. Projections of the Difference Between the Growth of

the CPI and the Growth of the GDP Price Index 13

2. Budgetary Effects of the President’s Proposals for

the District of Columbia 23

3. Status of the Hospital Insurance Trust Fund Under

the President’s Medicare Proposals 28
O

Chapter One

Summary and Introduction

n February 6, 1997, the President submitted to

the Congress a budget for fiscal year 1998.

The Administration estimates that, if the economy performs as it expects, the basic policies proposed

in the budget will produce a surplus of $17 billion in

2002. The President has also proposed an alternative

set of budgetary policies to eliminate the deficit in 2002

under the more cautious Congressional Budget Office

(CBO) assumptions. Under those alternative policies,

some proposed tax cuts would "sunset," or expire, at

the end of calendar year 2000, and spending would be

held significantly below the levels of the President's

basic policies in fiscal years 2001 and 2002.

As requested by the Senate Committee on Appropriations, CBO has estimated the effects of the President's budgetary proposals using its own economic and

technical assumptions. CBO estimates that a deficit of

$69 billion would remain in 2002 under the President's

basic policy proposals. The alternative policies proposed by the President were designed to eliminate exactly any size deficit that CBO might project under the

basic policies. Under those policies, the proposed alternative level of discretionary spending hinges on estimates that CBO makes during the current budget cycle.

After CBO estimates the deficit, taking into account the

other alternative policies, the Administration will adjust

the proposed level of discretionary spending for 2001

and 2002 so that it is just low enough to ensure that any

remaining deficit estimated for 2002 would be eliminated under CBO's assumptions.

In addition to estimating the President's budget,

CBO has made some small revisions in the baseline

budget projections published in its January report, The

Economic and Budget Outlook: Fiscal Years 1998-

2007. CBO has revised its estimate of the deficit for

1997 downward from $124 billion to $115 billion because of lower projected spending. But beyond 1997, it

has made only small revisions in projected deficits. As

discussed in Chapter 3 of the January report, such projections are highly uncertain. Unanticipated swings in

the economy&or an unexpected event such as the savings and loan crisis of the late 1980s and early

1990s&could lead to deficits that are much higher or

lower than CBO projects even if policies are unchanged.

CBO estimates that balancing the budget in 2002

would produce changes in the economy&lower interest

rates, slightly higher real growth, and an increase in the

share of national income represented by corporate profits. Those changes would produce a fiscal dividend of

$34 billion in 2002. Under CBO's projections that include the fiscal dividend, $153 billion in policy savings

(including associated debt-service reductions) would be

needed in 2002 to produce a balanced budget in that

year. Those projections provide the starting point for

CBO's analysis of the budget, since the President's budget is intended to eliminate the deficit in 2002.

The President's Basic 

Budgetary Policies

CBO estimates that the basic policies specified in the

President's budget would save $84 billion in 2002

&compared with its projections of the deficit under cur-
2 AN ANALYSIS OF THE PRESIDENT'S BUDGETARY PROPOSALS FOR FISCAL YEAR 1998 March 1997

rent policies that include the fiscal dividend&and would

reduce the deficit in that year to $69 billion (see

Table 1).

CBO's Estimate of the President's 

Policy Proposals

Although collectively the President's policies reduce the

deficit in most years, a number of his proposals would

increase the deficit. In 1998, in fact, the net effect of

the President's policies is to push the deficit of $24 billion above the baseline level.

Under the President's proposals, revenues would be

$10 billion lower in 1998 than is anticipated under current policies. In addition, CBO estimates that discretionary spending proposed by the President would exceed CBO's baseline level by $9 billion. Proposed new

initiatives in Medicaid would increase spending in 1998

Table 1.

CBO Estimate of the Effect on the Deficit of the President's Basic Budgetary Policies

(By fiscal year, in billions of dollars)

Total,

1997 1998 1999 2000 2001 2002 1998-2002

CBO Deficit Projections,

Including Fiscal Dividend 115 121 145 159 142 153 n.a. a

Effect on the Deficit of the

President's Budgetary Policies

Revenuesb

Reductions 1 21 21 22 27 28 120

Increases -1 -11 -16 -17 -18 -19 -81

Subtotal c 10 5 5 10 9 39

Outlays

Discretionary c 9 -3 -13 -29 -42 -79

Mandatory c 5 -6 -17 -26 -46 -90

Subtotal 1 13 -8 -29 -55 -89 -168

Total, policies 1 23 -3 -24 -46 -79 -129

Debt service c 1 1 c -2 -5 -4

Total Effect on the Deficit 1 24 -2 -24 -47 -84 -133

Deficit Under the President's Budgetary

Policies as Estimated by CBO 116 145 142 135 95 69 n.a.

SOURCE: Congressional Budget Office.

NOTES: The estimates in this table exclude alternative policies to eliminate the deficit under CBO asssumptions.

n.a. = not applicable.

a. The projections assume both balanced budget economic assumptions and discretionary spending that increases with inflation, subject to the

statutory cap for 1998.

b. Reductions in revenues are shown with a positive sign because they increase the deficit. The revenue estimates differ somewhat from those

published by the Joint Committee on Taxation (JCT). CBO has used Administration estimates for two proposals that the JCT was unable to

estimate because the proposals had not been specified by the time CBO finished its estimate of the budget&a new aviation fee system and a taxincentive program for the District of Columbia. CBO's estimates also include additional fee proposals and exclude a proposal that would affect only

outlays. In addition, the estimates assume that tax cuts specified in statutory language to sunset in 2000 are extended permanently.

c. Less than $500 million.
CHAPTER ONE AN ANALYSIS OF THE PRESIDENT'S BUDGETARY PROPOSALS FOR FISCAL YEAR 1998 3

by $2 billion. Expanded health care coverage for children and a new program to provide health insurance for

unemployed workers would cost $3 billion in 1998.

Relaxing provisions in last year's welfare reform legislation that affect Supplemental Security Income and

Food Stamps would increase spending for those two

programs by $2 billion and $1 billion, respectively.

Additional spending for education and training, including more than $1 billion for a new program to help fund

school construction, would raise the deficit by about $2

billion. Those deficit-increasing proposals would be

partially offset by $3 billion in Medicare savings and

$2 billion in savings in other mandatory programs.

As estimated by CBO (and for most of the revenue

proposals, by the Joint Committee on Taxation), the

$84 billion in deficit reduction in 2002 is composed of:

o Savings of $42 billion from reducing discretionary

spending below the level of the 1998 caps adjusted

for inflation.

o Net savings of $46 billion in mandatory spending,

of which $29 billion comes from Medicare and $12

billion from auctioning additional parts of the electromagnetic spectrum.

o A $9 billion increase in the deficit on the revenue

side of the budget, the result of $28 billion in tax

cuts partially offset by $19 billion in tax increases,

including $7 billion from user fees that would replace aviation excise taxes that expired last December. That estimate assumes that the tax cuts specified in the statutory language to sunset at the end of

2000 would not expire, but instead would be extended permanently.

o Debt-service savings of $5 billion in 2002.

Under the President's basic policies, discretionary

outlays would rise to $553 billion in 1998 and $572

billion in 2002. Projected outlays for 1998, which represent an increase above the $534 billion spent in 1996

and the estimated $549 billion in 1997 spending, are

more than $25 billion higher than the discretionary

spending assumed for 1998 in last year's budget resolution. Projected outlays in 2002 under the President's

proposals would be almost $50 billion (8 percent) below the level needed to keep pace with inflation but almost $60 billion above the amount assumed in the budget resolution.

CBO's Reestimate of the 

Administration's Baseline Projections

CBO's estimated deficit of $69 billion in 2002 under

the President's policies stands in sharp contrast to the

surplus of $17 billion that the Administration estimates. About 70 percent, or $60 billion, of that $86

billion discrepancy stems from differences between

CBO's and the Administration's estimates of the deficit

under current policies (see Table 2). Compared with

recent years, estimates of spending for Medicare and

Medicaid do not contribute much to the baseline differences between the Administration and CBO&only

about $2 billion separates the two agencies' projections

of combined Medicare and Medicaid spending in 2002

under current law.

Although the Administration’s economic projections are similar to CBO’s projections that incorporate

the effects of balancing the budget, slight differences in

economic outlook account for more than the $60 billion

difference in the baseline projections of the deficit in

2002. The Administration projects nominal gross domestic product (GDP) that is some $80 billion higher in

2002 than CBO's projection&a very small difference in

a $10 trillion economy. CBO assumes higher unemployment rates, but that largely reflects differences in

projected GDP and has relatively little independent effect on overall budget outlays. The two agencies differ

a bit on inflation and interest rates, and each of those

differences has some budgetary effect. But from a budgetary standpoint, the most significant difference in

economic assumptions involves shares of national income: the Administration assumes a slightly higher

percentage of GDP in categories that tend to produce

revenues, such as wage and salary disbursements and

corporate profits.

CBO's Reestimate of Policy Proposals

Reestimates of the effect of the President's proposed

policy changes account for the remaining $27 billion

difference in deficit projections in 2002. Differences in

estimates of the savings from the President’s proposals
4 AN ANALYSIS OF THE PRESIDENT'S BUDGETARY PROPOSALS FOR FISCAL YEAR 1998 March 1997

for discretionary spending are relatively small (CBO

estimates $1 billion less in savings). Most of the $21

billion reestimate of proposals affecting mandatory

spending (including offsetting receipts) stems from two

estimates: the estimate of the President's Medicare proposals (CBO estimates that they will save $6 billion

less in 2002 than the Administration assumes) and the

estimate of the proposed auction by the Federal ComTable 2.

CBO Reestimate of the President's Basic Budgetary Policies (By fiscal year, in billions of dollars)

1997 1998 1999 2000 2001 2002

Deficit Under the President's Basic

Budgetary Policies as Estimated 

by the Administration 126 121 117 87 36 -17

Baseline Reestimates

Economic Differences

Revenues 8 17 25 35 40 46 a

Outlays c 4 11 15 17 23 b

Subtotal 8 22 36 50 57 68 b

Technical Differences

Revenues -11 -11 -15 -13 -14 -15

Outlays -10 4 -6 6 -5 6 b

Subtotal -21 -7 -22 -7 -19 -9 b

Total Baseline Differences -13 15 15 43 38 60

Policy Reestimates

Revenues 1 3 4 1 4 5 a

Outlays

Discretionary 1 1 5 -1 7 1

Mandatory c 5 2 5 10 21

Subtotal 1 7 7 4 17 22

Total Policy Differences 3 10 10 5 21 27

All Reestimates

Total Differences -10 25 25 48 59 86

Deficit Under the President's Basic

Budgetary Policies as Estimated by CBO 116 145 142 135 95 69

SOURCE: Congressional Budget Office.

NOTE: The estimates in this table exclude alternative policies to eliminate the deficit under CBO assumptions.

a. Reductions in revenues are shown with a positive sign because they increase the deficit.

b. These amounts reflect a revised allocation of estimated debt-service effects between economic differences and technical differences since CBO’s

Preliminary Analysis of the President’s Budgetary Proposals for Fiscal Year 1998 was published on March 3, 1997. Total differences between the

baselines are unchanged.

c. Less than $500 million.
CHAPTER ONE AN ANALYSIS OF THE PRESIDENT'S BUDGETARY PROPOSALS FOR FISCAL YEAR 1998 5

munications Commission of additional portions of the

electromagnetic spectrum (CBO estimates that the auctions will bring in $11 billion less in 2002 than the Administration does). 

Accounting for the remaining $5 billion reestimate

of proposed mandatory savings are estimates of a number of proposals (including some that increase spending

and others that reduce spending), as well as the debtservice costs linked to all the reestimates. According to

CBO and the Joint Committee on Taxation, the President's tax proposals will reduce revenues by $5 billion

more in 2002 than the Administration estimates (both

estimates assume that certain proposed tax cuts do not

expire at the end of calendar year 2000).

The President's Alternative

Budgetary Policies

The President's budget briefly mentions an alternative

set of policies that are designed to eliminate the deficit

in 2002 under CBO's slightly less optimistic economic

and technical assumptions. (If actual budgetary outcomes are less favorable than CBO estimates, the President's proposal does not call for savings to be increased even more to ensure that the deficit would still

be eliminated.) That alternative set of policies includes

all of the policies detailed in the President's budget submission plus additional policies that would be in effect

only if CBO's assumptions are used in the budget process. Those additional policies were outlined in supplemental information provided by the Administration after the budget was submitted. 

If CBO's assumptions are used for budget planning, the President would allow most of his tax cuts to

sunset at the end of calendar year 2000. The Joint

Committee on Taxation estimates that ending those tax

cuts would increase revenues in 2002 by $24 billion

above the level that would result if the tax cuts are kept

in place (see Table 3).

In addition, the President's alternative policies include a 2.25 percent across-the-board cut in mandatory

spending programs that would reduce Medicare spending in 2002 by $6 billion, Medicaid spending by $3 billion, and other nonexempt mandatory spending by

$1 billion. The alternative policies also include a proposal to limit cost-of-living increases for federal benefit

programs (excluding Social Security) to 0.46 percent in

2002 (CBO projects an increase of 3 percent under current law). CBO estimates that the proposal would save

$3 billion in 2002. The Administration also proposes a

contingent fee on television broadcasters that would be

assessed in 2002 if proceeds from the proposed auction

of the analog broadcast spectrum are less than the

amount included in the budget. CBO estimates that

proceeds from the sale will fall $9 billion short of the

Administration's estimated $15 billion, requiring that

$9 billion in fees be levied on holders of broadcast licenses in 2002.

 Finally, the Administration would reduce discretionary spending in 2001 and 2002. The size of the cut

would be determined by the amount of additional savings needed to eliminate the deficit in 2002 under

CBO's assumptions. To produce the savings needed to

Table 3.

Estimate of the President's Alternative Policies 

to Eliminate the Deficit Under CBO Assumptions

(By fiscal year, in billions of dollars)

2001 2002

Revenues -3 -24 a

Outlays

Discretionary -14 -20

Mandatory

Medicare 0 -6

Medicaid 0 -3

Fee on broadcasters 0 -9

Cost-of-living adjustments 0 -3 b

Other 0 -1

Subtotal 0 -23

Total, policies -17 -67

Debt Service c -2

Total Effect on 

the Deficit -17 -69

SOURCE: Congressional Budget Office.

a. Increases in revenues are shown with a negative sign because

they reduce the deficit.

b. Exempts the cost-of-living adjustment for Social Security beneficiaries.

c. Less than $500 million.
6 AN ANALYSIS OF THE PRESIDENT'S BUDGETARY PROPOSALS FOR FISCAL YEAR 1998 March 1997

eliminate the deficit under its assumptions, CBO estimates that discretionary outlays in 2002 would have to

be $20 billion below the President's basic proposals.

That amount would require a cut in budget authority in

2001 and 2002 of about 4 percent from the level in the

President's basic policies, roughly twice as large as the

2.25 percent reduction estimated by the Administration.

Debt-service savings of $2 billion in 2002 would provide the remaining deficit reduction required to eliminate the deficit under CBO's assumptions.

Table 4.

CBO Estimate of the Effect on the Deficit of the President's Alternative Budgetary Policies

(By fiscal year, in billions of dollars)

Total,

1997 1998 1999 2000 2001 2002 1998-2002

CBO Deficit Projections,

Including Fiscal Dividend 115 121 145 159 142 153 n.a. a

Effect on the Deficit of the President's

Alternative Budgetary Policies

Revenuesb

Reductions 1 21 21 24 24 5 95

Increases -1 -11 -16 -17 -18 -19 -81

Subtotal c 10 5 7 6 -14 14

Outlays

Discretionary c 9 -3 -13 -43 -62 -112

Mandatory c 5 -6 -17 -26 -70 -113

Subtotal 1 13 -8 -29 -69 -132 -224

Total, policies 1 23 -4 -23 -62 -146 -211

Debt service c 1 1 c -2 -7 -7

Total Effect on the Deficit 1 24 -2 -22 -64 -153 -218

Deficit Under the President's

Alternative Budgetary Policies

as Estimated by CBO 116 145 142 137 78 0 n.a.

SOURCE: Congressional Budget Office.

NOTES: The estimates in this table include alternative policies to eliminate the deficit under CBO assumptions.

n.a. = not applicable.

a. The projections assume both balanced budget economic assumptions and discretionary spending that increases with inflation, subject to the

statutory cap for 1998.

b. Reductions in revenues are shown with a positive sign because they increase the deficit. The revenue estimates differ somewhat from those

published by the Joint Committee on Taxation (JCT). CBO has used Administration estimates for two proposals that the JCT was unable to

estimate because the proposals had not been specified by the time CBO finished its estimate of the budget&a new aviation fee system and a taxincentive program for the District of Columbia. CBO's estimates also include additional fee proposals and exclude a proposal that would affect

only outlays.

c. Less than $500 million. 
CHAPTER ONE AN ANALYSIS OF THE PRESIDENT'S BUDGETARY PROPOSALS FOR FISCAL YEAR 1998 7

The total savings in various categories produced

under the President's alternative set of policies are substantially higher than under his basic policies. For instance, under the President's alternative policies, projected revenues would be $14 billion higher in 2002

than they would be under current law, and mandatory

spending would be pared by $70 billion below the baseline levels (see Table 4). Discretionary spending in

2002 under the alternative policies would total $553

billion.

CBO's Revised Baseline

In conjunction with its analysis of the President's budget, CBO has revised its baseline projections to take into account new information gleaned from the President's budget and other sources. Other than a $9 billion

reduction in the estimated deficit for 1997, the changes

in the projections are quite small. The economic assumptions on which the projections are based have not

changed. The only legislation enacted since CBO's January baseline that affects the budget is a bill signed into

law on February 28 that reinstated aviation excise

taxes. However, because CBO had completed its baseline before that date, the additional $2.7 billion in revenues is not reflected in the revised baseline. In addition,

no change has been made in projected mandatory

spending for health programs. CBO's revised baseline

projects a deficit of $115 billion in 1997, although the

aviation tax legislation enacted after the baseline was

completed would lower that amount to $112 billion.

T

Chapter Two

Economic Assumptions

he Administration's economic projections for

the 1997-2002 period, which incorporate the

effects of its budget proposals, are similar to

the alternative projections of the Congressional Budget

Office, which assume a balanced budget by 2002.

(CBO's baseline economic projections are not comparable because they assume that current budgetary policies

do not change.) Both agencies project that real gross

domestic product will grow at a moderate pace of just

over 2 percent, inflation will remain subdued on average, and interest rates will decline and stay below their

1996 levels. The Administration's projection of nominal GDP is only about $80 billion higher than CBO's in

2002&a small difference in a $10 trillion economy (see

Table 5).

On the whole, the differences in economic assumptions between the two official forecasts are well within

the normal range of error in medium-term forecasts.

From a budgetary perspective, however, it is significant

that CBO projects slightly higher inflation as measured

by the consumer price index (CPI), a more modest decline in long-term interest rates, and a somewhat lower

share of wages, salaries, and corporate profits in GDP

than does the Administration. The differences in those

three indicators account for a major part of the difference between the Administration’s and CBO’s projections of the deficit in 2002. CBO also assumes a higher

unemployment rate, although the unemployment rate

alone does not have a large impact on budget projections.

If one looks back over previous official economic

forecasts, CBO’s record of accuracy has been slightly

better than that of previous administrations. The record

of comparisons between CBO’s economic forecasts and

those of the current Administration is less conclusive.

The forecasts were made so recently that only a few

comparisons with actual data are possible. However,

the ultimate test of an official economic forecast is in

the deficit projections derived from it: on that basis,

CBO’s projections have been closer to the mark than

the Administration's in seven out of the 10 possible

comparisons (see Appendix B).

For the next five years, the differences between the

forecasts of the two agencies and those of private forecasts (reflected by the Blue Chip consensus) tend to be

small and without systematic pattern. On the whole,

CBO’s projections are closer to the Blue Chip consensus for CPI inflation and interest rates, whereas the Administration’s forecasts are closer to the consensus for

nominal GDP growth. (The Blue Chip does not project

wage and salary incomes.) The Blue Chip is an average

of private forecasts, comprising about 50 forecasts for

1997 and a smaller number for subsequent years.

Comparisons between official forecasts and the Blue

Chip consensus must be made cautiously because the

consensus is not necessarily a coherent forecast&just

the average of forecasts that make disparate assumptions. More important, the fiscal policy assumptions of

the Blue Chip forecasters vary, and it is unlikely that

many of them assume balanced budget policies. The

relatively pessimistic fiscal policy assumptions of the

private forecasters probably help to account for the

consensus interest rates being considerably above those

of both CBO and the Administration. The Blue Chip

consensus was prepared about three months after the

CBO and Administration forecasts, and thus embodies

more recent information than either of the official fore-
10 AN ANALYSIS OF THE PRESIDENT’S BUDGETARY PROPOSALS FOR FISCAL YEAR 1998 March 1997

casts (see Table 5). For example, the recent announcement of high GDP growth in the last quarter of 1996

caused the Blue Chip participants to revise upward

their expected growth rates for 1997.

Real GDP Growth

In building its projection of real growth, the Administration assumes a 2.3 percent growth rate of potential

output, whereas CBO assumes that the growth of potential output will be about 2.3 percent only through

1998 and then slow to 2.1 percent by 2002. The differences between the two forecasts of real GDP growth are

small: CBO projects slightly faster real growth in 1997

and 1998, but marginally slower growth farther down

the road. 

The two agencies' projections of the components of

overall real growth are also very similar. Growth in

nonfarm business output can be broken down into two

parts: the growth in total hours worked and the growth

in labor productivity. On the basis of demographic

trends, both agencies assume that the labor force will

grow at an average annual rate of 1.1 percent through

2002, down from the 1.6 percent average over the

1981-1990 period. The two projections agree that

Table 5.

Comparison of Economic Projections, Calendar Years 1996-2002

Estimated Forecast Projected a

1996 1997 1998 1999 2000 2001 2002

Nominal GDP (Billions of dollars)

CBO 7,570 7,918 8,282 8,688 9,110 9,550 10,008

Administration 7,577 7,943 8,313 8,717 9,153 9,610 10,087

Blue Chip 7,580 7,958 8,328 8,724 9,175 9,649 10,137

Real GDP (Percentage change)

CBO 2.3 2.3 2.1 2.2 2.2 2.2 2.1

Administration 2.3 2.2 2.0 2.2 2.3 2.3 2.3

Blue Chip 2.4 2.6 2.1 2.1 2.5 2.4 2.3

GDP Price Index (Percentage change)

CBO 2.1 2.3 2.5 2.6 2.6 2.6 2.6

Administration 2.2 2.5 2.6 2.6 2.6 2.6 2.6

Blue Chip 2.1 2.2 2.5 2.6 2.6 2.7 2.7

Consumer Price Index (Percentage change)b

CBO 2.9 2.9 2.9 3.0 3.0 3.0 3.0

Administration 2.9 2.7 2.7 2.7 2.7 2.7 2.7

Blue Chip 3.0 2.9 3.0 3.0 3.0 3.2 3.1

Civilian Unemployment Rate (Percent)

CBO 5.4 5.3 5.6 5.8 5.9 6.0 6.0

Administration 5.4 5.3 5.5 5.5 5.5 5.5 5.5

Blue Chip 5.4 5.4 5.5 5.9 5.9 5.7 5.5

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

SOURCES: Congressional Budget Office; Office of Management and Budget; Eggert Economic Enterprises, Inc., Blue Chip Economic Indicators

(March 10, 1997); Department of Commerce, Bureau of Economic Analysis; Department of Labor, Bureau of Labor Statistics; Federal

Reserve Board.

NOTES: Percentage change throughout is year over year.

GDP = gross domestic product.
CHAPTER TWO ECONOMIC ASSUMPTIONS 11

hours worked will grow at an average of 1.2 percent a

year through 2002. In view of the investment boom in

recent years, both agencies also expect labor productivity to rise to its trend growth rate of 1.2 percent a year

over the 1996-2002 period.

Unemployment

Both the Administration and CBO forecast that unemployment will edge down from last year's 5.4 percent to

5.3 percent in 1997, but their projections begin to diverge in 1998. The Administration assumes that unemployment will stabilize at about 5.5 percent after 1997,

whereas CBO projects that it will rise gradually to 6

percent in 2002. The difference between the unemployment projections reflects in part the different assumptions made by the two agencies about the level of the

nonaccelerating inflation rate of unemployment

(NAIRU). The Administration assumes the NAIRU to

be 5.5 percent, whereas CBO assumes it to be 5.8 percent. In addition, CBO assumes that the average gap

between the civilian unemployment rate and the

NAIRU during the projection period will be the same as

the historical average of about 0.2 percentage points.

That assumption takes into account the possibility of

recessions during the forecast period. The AdministraTable 5.

Continued

Estimated Forecast Projected a

1996 1997 1998 1999 2000 2001 2002

Three-Month Treasury Bill Rate (Percent)

CBO 5.0 5.0 5.0 4.6 4.2 3.9 3.9

Administration 5.0 5.0 4.7 4.4 4.2 4.0 4.0

Blue Chip 5.1 5.2 5.2 5.0 5.0 5.2 5.2

Ten-Year Treasury Note Rate (Percent)

CBO 6.4 6.2 6.1 5.8 5.5 5.5 5.5

Administration 6.5 6.1 5.9 5.5 5.3 5.1 5.1

Blue Chip 6.4 6.5 6.5 6.4 6.4 6.5 6.5

Nominal Income (Billions of dollars)

Wage and salary disbursements

CBO 3,628 3,799 3,953 4,131 4,321 4,521 4,730

Administration 3,628 3,808 3,982 4,168 4,374 4,590 4,810

Corporate profitsc

CBO 634 650 669 684 712 750 781

Administration 652 676 714 757 796 816 849

Nominal Income (Percentage of GDP)

Wage and salary disbursements

CBO 47.9 48.0 47.7 47.6 47.4 47.3 47.3

Administration 47.9 47.9 47.9 47.8 47.8 47.8 47.7

Corporate profitsc

CBO 8.4 8.2 8.1 7.9 7.8 7.9 7.8

Administration 8.6 8.5 8.6 8.7 8.7 8.5 8.4

a. The Blue Chip forecast was prepared several months later than the other forecasts. Thus, the Blue Chip data for 1996 are actual.

b. Consumer price index for all urban consumers (CPI-U).

c. Corporate profits reported are book, not economic, profits.
12 AN ANALYSIS OF THE PRESIDENT’S BUDGETARY PROPOSALS FOR FISCAL YEAR 1998 March 1997

tion assumes that, on average, the actual unemployment

rate will not deviate from the NAIRU. The higher unemployment rate projected by CBO, however, largely

reflects differences in projected GDP and has relatively

little independent effect on overall budget outlays.

On the basis of the recent behavior of inflation and

unemployment, some economists have argued that most

estimates of the NAIRU (roughly between 5.5 percent

to 6 percent) are too high and that the NAIRU has declined in recent years. CBO believes the evidence is

against a decline in the NAIRU. For one thing, a structural change in the NAIRU would probably take place

gradually. But the relationship between unemployment

and inflation deteriorated abruptly, beginning in mid1995. CBO examined that issue in its most recent economic and budget volume.1

Inflation

Both the Administration and CBO expect that overall

inflation will remain mild through 2002, although the

Administration's assumption for CPI inflation is

slightly more optimistic than CBO's. In terms of the

GDP price index, CBO takes a slightly more benign

view of inflation (2.4 percent) for 1997 and 1998 than

does the Administration (2.6 percent), but agrees with

the Administration that inflation will average about 2.6

percent a year from 1999 through 2002. CBO's forecast of CPI inflation, however, is persistently higher

than that of the Administration. CBO projects CPI inflation at 2.9 percent in 1997 and 1998, rising slightly

to 3 percent through 2002. The Administration projects that CPI inflation will edge down to 2.7 percent in

1997 and average that rate thereafter. 

One would expect a small difference in assumptions about inflation to have little effect on projections

of the general deficit, since the difference should have

largely offsetting effects on outlays and revenues. In

practice, however, for a given rate of increase in the

GDP price index, a higher CPI inflation rate will give

rise to a larger deficit. That is because taxable income

is closely related to growth in nominal GDP, which is in

turn linked to growth in the GDP price index, whereas

personal income tax brackets and indexed budget programs (such as Social Security, Supplemental Security

Income, and Military and Civil Service Retirement) are

tied to CPI inflation. A rise in the growth of the CPI in

relation to the GDP price index would hold down revenues by keeping a larger percentage of households in

lower marginal tax brackets but increase outlays of indexed federal programs, thereby deepening the deficit.

The difference between CPI inflation and inflation in

the GDP price index&often referred to as the "wedge"

&thus affects deficit projections. In general, the larger

the projected wedge between the two inflation measures, the worse will be the projected deficit. 

The wedge between the two inflation measures has

averaged about 0.5 percentage points since 1989. During 1996, that wedge widened even further to 0.8 percentage points. The wedge has persisted because of

differences in the coverage, weighting, source data, and

aggregation of the two inflation measures. The GDP

price index includes many goods and services&most

notably investment goods&that are not included in the

CPI, and the prices of the items not included in the CPI

have tended to grow less rapidly than the prices included in the CPI over the last 20 years. The weighting

of individual items also differs. For example, medical

care and computers carry greater weight in the GDP

price index, whereas petroleum prices have a greater

weight in the CPI. The source data also differ for a few

categories that are included in both indexes. In particular, the GDP price index for hospital and physician

prices uses producer price index source data, not the

data for those series compiled for the CPI. Finally, the

CPI is a fixed-weighted index and the GDP price measure, a chain-type index, has varying weights.

The drop in petroleum prices in late 1985 and early

1986 affected the CPI more than the GDP price index,

causing the wedge to be negative in 1986 (see Figure

1). Similarly, the temporary increase in petroleum

prices in late 1990 caused the wedge to increase. The

1996 increase in the wedge stems primarily from an

acceleration in the drop in computer prices, an increase

in petroleum prices, and the combined effect of a general slowing of the growth of medical care prices and

milder growth of medical prices in the producer price

index data than in that of the CPI.

Both CBO and the Administration project that CPI

inflation will exceed growth in the GDP price index. 1. Congressional Budget Office, The Economic and Budget Outlook:

Fiscal Years 1998-2007 (January 1997), p. 4.
CHAPTER TWO ECONOMIC ASSUMPTIONS 13

Box 1.

Projections of the Difference Between the Growth of the CPI and the Growth of the GDP Price Index

The difference between the Congressional Budget Office's

(CBO’s) and the Administration's projection of the

$wedge# between the consumer price index (CPI) inflation

and growth in the gross domestic product (GDP) price

index can be attributed to three major factors.

About one-third of the 0.3 percentage-point difference

is caused by different estimates of the underlying historical trend in the wedge. CBO based its estimate on the

pattern between 1989 and the third quarter of 1996, when

it averaged 0.5 percentage points. The Administration

appears to have relied more on the pattern between 1991

and the third quarter of 1996, when it averaged just under

0.4 percentage points (see Figure 1). CBO believes it is

inappropriate to use 1991 data without also including

those for 1990 because the negative values of the wedge

in 1991 were caused in large measure by the decline in

petroleum prices from their 1990 spike. Another reason

for assuming a slightly higher base trend in the wedge is

CBO's expectation that the high rates of inflation in medical care that prevailed during the late 1980s and early

1990s will not fully return. For most of the late 1980s

and early 1990s, inflation in medical care was much

higher than the average inflation of other prices. That

difference tended to dampen the wedge because medical

care prices weighed heavier in the GDP price index.

However, inflation in medical care sank toward the average CPI inflation rate in 1995 and 1996 and permitted the

wedge to widen, although its effect on the wedge in 1995

was offset by other factors such as the drop in petroleum

prices. CBO anticipates that inflation in medical care will

rise slightly over the forecast period, but not to the high

rates of the late 1980s and early 1990s. Therefore, the

contribution of medical prices to the size of the wedge

should be slightly higher in the projections than it was

during the last 10 years. 

An additional one-third of the difference between

CBO and the Administration stems from assumptions

about substitution bias. When the prices of some goods

rise more quickly than others prices, consumers often substitute cheaper goods for those that have become more

expensive. As consumers make those substitutions, their

consumption basket changes and the share of goods that

have faster-growing prices will shrink. The CPI inflation

rate will therefore tend to overstate the true increase in the

average cost of living because it measures inflation based

on the weights of the market basket that prevailed in the

base period. That overestimation of the growth in the cost

of living is referred to as substitution bias. Inflation in the

GDP price index is less prone to substitution bias because

it is based on weights that vary as the market basket

changes. CBO assumes a slight upward drift in the

growth of the CPI in relation to the GDP price index because of substitution bias, and the Administration does

not factor in any increase. CBO's estimate of the increase

in the bias is 0.1 percentage points of the 0.3 percentagepoint difference in the wedge for the 1997-2002 period.

Part of the remaining third is caused by different assumptions about the effect of the technical change in the

CPI that occurred in mid-1996. At that time, the Bureau

of Labor Statistics (BLS) changed the way new items

were brought into the sample. The Administration assumed that change would depress CPI growth in relation

to the GDP price index in 1997 and subsequent years by

0.04 percentage points, whereas CBO assumed that the

change would make no significant difference for the projection of the wedge.

For those reasons, differences in projected wedges

occur even though the two agencies do have similar views

about the following aspects of inflation projections:

 CBO and Administration forecasts agree on the net

effect of two technical alterations in the CPI already

announced by the BLS. The two are (1) a modification of the procedure for measuring price changes for

hospital care that took place in January 1997, and (2)

the rebenchmarking of the CPI&recalculating the CPI

using the average weights of the 1993-1995 period to

replace the average weights of the 1982-1984 period

&that will take place beginning in January 1998.

Both agencies assume that the combined effect of

those two technical changes in the CPI will dampen

CPI inflation by the end of 1998 by about 0.2 percentage points. Compared with CBO, the Administration

attributes more of that change to the modification of

procedures for measuring hospital prices and less to

the rebenchmarking. But the sum of the Administration's assumed effect of the changes is the same as

CBO's.

 Neither agency’s forecast incorporates Boskin Commission recommendations that are not already in the

plans of the BLS. The Boskin Commission, a group

appointed by the Senate Finance Committee to study

the appropriateness of using the CPI as a cost-of-living

index, reported that the CPI consistently overstates the

increase in the cost of living. The commission felt that

the overstatement was most likely between 0.8 percentage points and 1.6 percentage points per year. The

commission made a number of recommendations to the

BLS, such as changing the way price quotes should be

combined, which it felt would make the CPI better

reflect changes in the cost of living. But neither

agency included any estimates of possible future

changes to the CPI that have not already been announced by the BLS.
1985 1987 1989 1991 1993 1995 1997

-1.5

-1.0

-0.5

 0

 0.5

 1.0

 1.5

 2.0

Percentage Points

Average, 1989-1996a

Average, 1991-1996 a

1960 1970 1980 1990 2000

 0

52

54

56

58

60

62

Percentage of GDP

Actual Proj.

14 AN ANALYSIS OF THE PRESIDENT’S BUDGETARY PROPOSALS FOR FISCAL YEAR 1998 March 1997

Figure 1.

Difference Between the Growth of the CPI-U 

and the GDP Price Index

SOURCES: Congressional Budget Office; Department of Labor,

Bureau of Labor Statistics; Department of Commerce,

Bureau of Economic Analysis.

NOTES: The CPI-U is the consumer price index for all urban consumers.

GDP = gross domestic product.

a. Averages are based on data through the third quarter of 1996.

Nevertheless, CBO's projection of the inflation wedge

is noticeably greater than the Administration's throughout the 1997-2002 period (see Box 1). CBO projects

that the inflation wedge will return to about 0.4 percentage points after 1997. That projection is very close to

the Blue Chip average. By contrast, the Administration

predicts that the wedge will narrow sharply to 0.1 percentage points in 1998 and stay at that rate through

2002. 

Interest Rates

Both the Administration and CBO assume that moves

to balance the budget will reduce nominal as well as

real (inflation-adjusted) interest rates. Over the long

term, the two agencies' projections of interest rates are

broadly similar. From a budgetary perspective, however, it is significant that CBO's projections of nominal

short-term rates are higher than the Administration's

over the short term and that its projections of long-term

nominal rates are higher over the long term. 

CBO's projections of the short-term rates exceed

the Administration's by about 0.3 percentage points in

1998 and 1999, although they fall slightly below the

Administration's after 2000. CBO's projections of the

long-term rates are higher than the Administration's by

an average of about 0.2 percentage points over the

1997-2000 period; they become higher by 0.4 percentage points over the 2001-2002 period. 

 Although those differences in nominal interest

rates are modest, they play a significant role in explaining the difference in the deficit projections of the two

agencies. On the outlay side, higher nominal interest

rates will increase government interest payments. On

the revenue side, because the corporate sector owes

more debt than it owns financial assets, higher nominal

interest rates will increase corporate interest payments,

thereby tending to lower corporate profits. Because

corporate profits are subject to higher effective marginal tax rates than private interest income, the decrease

in revenues from lower corporate profits will be only

partially offset by an increase in revenues from higher

interest income. (The effective marginal tax rate on a

given component of income represents the amount of

additional tax collected from each additional dollar of

Figure 2.

Incomes (Sum of wages and salaries and

corporate book profits)

SOURCES: Congressional Budget Office; Department of Commerce, Bureau of Economic Analysis.

NOTES: The figure shows a four-quarter centered moving average

of incomes as a percentage of GDP.

GDP = gross domestic product. 
1960 1970 1980 1990 2000

 0

62

63

64

65

66

Percentage of GDP

Actual Proj.

1960 1970 1980 1990 2000

 0

74

76

78

80

82

Percentage of Labor Income

Actual Proj.

CHAPTER TWO ECONOMIC ASSUMPTIONS 15

Figure 3.

Labor Income

SOURCES: Congressional Budget Office; Department of Commerce, Bureau of Economic Analysis.

NOTES: Labor income is the sum of wages and salaries, other labor

income (employers’ contributions to health insurance premiums, pensions, life insurance, workers' compensation,

and unemployment insurance), employers' contributions to

social insurance, and three-fourths of proprietors' income.

The figure shows a four-quarter centered moving average

of labor income as a percentage of GDP.

GDP = gross domestic product. 

income. Interest income is subject to relatively low effective marginal tax rates because some of it accrues to

tax-exempt entities such as pension funds.) Because

only a modest portion of long-term debts is rolled over

each year, the budgetary effects of the differences in

projected short-term rates show up much more quickly

than those of projected long-term rates. 

Incomes

The size of national output can be measured by GDP,

which is the sum of all the output produced, or by gross

domestic income (GDI), which is the sum of all incomes generated in producing that output. Estimates of

future deficits are affected not only by the size of total

output and income but by the projected distribution of

income among various categories. Corporate profits

and wages and salaries are the most important income

categories for revenue projections because they are effectively taxed at the highest marginal rates. Dividends, like interest income, are taxed at a lower effective rate because they are not subject to payroll taxes

and some of them accrue to tax-exempt entities such as

pension funds. The effective tax rate on proprietors'

income is also lower than that on profits, in part because of compliance problems.

The combined share of corporate profits, wages,

and salaries in GDP has risen noticeably since 1991

(see Figure 2). Both CBO and the Administration project that this recent trend will be reversed during the

1997-2002 period. But CBO projects a more noticeable decline in the combined income share than does the

Administration. For 1997, the Administration's projection of the total income share is 0.3 percentage points

higher than CBO's. By 2002, the Administration's projection becomes 1 percentage point higher than that of

CBO. 

CBO's projections of declining income shares are

based on two main assumptions. First, they take into

account the possibility of both recessions and economic

booms, weighting them appropriately. That assumption lowers the projected shares of GDP represented by

Figure 4.

Wages and Salaries as a Share of Labor Income

SOURCES: Congressional Budget Office; Department of Commerce, Bureau of Economic Analysis.

NOTE: Labor income is the sum of wages and salaries, other labor

income (employers’ contributions to health insurance premiums, pensions, life insurance, workers' compensation, and

unemployment insurance), employers' contributions to social

insurance, and three-fourths of proprietors' income. The

figure shows a four-quarter centered moving average of the

wage and salary share of labor income.
1960 1970 1980 1990 2000

 0

23

24

25

26

27

28

29

Percentage of GDP

Actual Proj.

1960 1970 1980 1990 2000

 0

15

20

25

30

35

40

45

Percentage of Capital Income

Actual Proj.

16 AN ANALYSIS OF THE PRESIDENT’S BUDGETARY PROPOSALS FOR FISCAL YEAR 1998 March 1997

Figure 5.

Capital Income

SOURCES: Congressional Budget Office; Department of Commerce, Bureau of Economic Analysis.

NOTES: Capital income is the sum of corporate profits, interest

payments by business, depreciation, rental income, and

one-fourth of proprietors' income. The figure shows a

four-quarter centered moving average of capital income

as a percentage of GDP.

GDP = gross domestic product. 

profits and wages and salaries because recessions tend

to depress both shares. In addition, CBO assumes that

GDP shares of wages and salaries as well as of corporate profits will resume their historical trends over time.

CBO makes two assumptions about the trend of the

GDP share of wages and salaries. The first is that an

unusually fast growth of GDI in relation to GDP during

the past two years will be partially reversed. In theory

those two measurements should be equal, but in practice they tend to differ because they are based on different data. The rise of labor income as a share of GDP

over the last two years reflects in part the unusually fast

growth of GDI, which rose about 1 percentage point

faster than GDP over the last two years. If GDI now

returns to a more normal relationship to GDP, labor

income as a share of GDP is also likely to return to a

lower level (see Figure 3). Second, CBO assumes that

the share of total labor compensation that takes the

form of nontaxable benefits will rise consistent with its

long-term trend; that is, the share of labor income from

wages and salaries will decline throughout the projection period (see Figure 4). That assumption is based on

the view that the recent decline in the share of nonwage

compensation reflects a one-time shift of the private

sector to managed health care and is unlikely to continue at the same pace in the future. 

The Congressional Budget Office's forecast that the

shares of corporate profits will decline is based on several assumptions. First, the GDP share of total capital

income&the sum of corporate profits, interest income,

depreciation, rental income, and proprietor's income

&will stay roughly unchanged after 1998 (see Figure

5). Second, proprietors' income as a share of capital

income will rise continuing its 15-year upward trend.

Third, corporate interest payments will rise, despite the

projected drop in interest rates, as growth in corporate

debt (which has been unusually slow over the last six

years) returns to its historical pattern. Fourth, depreciation will increase because of the investment boom in

recent years. Taken together, those assumptions imply

that corporate profits&gross profits minus depreciation

and interest payments&will decline somewhat as a

share of capital income and GDP over the next two

years (see Figure 6).

Although the differences in projected income shares

are modest, they translate into a growing divergence in

terms of dollar level over time. The Administration's

Figure 6.

Corporate Profits as a Share of Capital Income

SOURCES: Congressional Budget Office; Department of Commerce, Bureau of Economic Analysis.

NOTE: Capital income is the sum of corporate profits, interest payments by business, depreciation, rental income, and

one-fourth of proprietors' income. The figure shows a fourquarter centered moving average of the profit share of capital income.
CHAPTER TWO ECONOMIC ASSUMPTIONS 17

projection of income in the two most important categories exceeds CBO's by about $35 billion in 1997; the

difference grows to about $150 billion in 2002. Such a

difference is important for budget projections, but it

remains small in relation to likely projection errors.

From 1996 through 2002, the Administration expects

the combined incomes to grow 32 percent, and CBO

expects a growth of 29 percent, an insignificant difference.

Conclusion

The Administration's economic assumptions do not

differ widely from those of CBO. In most respects, the

difference lies well within the usual margin of error.

Nevertheless, the Administration's economic assumptions produce a somewhat more optimistic outlook for

the budget than CBO's. Such an outcome is certainly

possible, but so is an outcome of economic assumptions that are more pessimistic than CBO's. CBO's

projections are thus the more prudent ones to use for

budget plans.

P

Chapter Three

The President’s Spending Proposals

resident Clinton's 1998 budget offers two sets

of revenue and spending proposals. Under the

economic and technical assumptions of the Administration, the basic set of policies yields a modest

budget surplus in 2002. The alternative set of budgetary proposals is designed to reach balance in 2002 under the slightly less optimistic economic and technical

assumptions of the Congressional Budget Office. 

CBO estimates that the President's basic set of

spending policies would reduce spending by a net $168

billion over the 1998-2002 period (relative to projections that assume that discretionary outlays for 1998

are held to the levels of the existing spending cap and

grow with inflation thereafter). The largest spending

reductions are found in the Medicare program, the nation's health care program for the elderly and disabled,

followed closely by discretionary spending, the onethird of federal spending that is subject to annual appropriations by the Congress. Medicare savings

amount to $82 billion, and discretionary savings are set

at $79 billion, for a total of $160 billion of the $168

billion in net outlay reductions that the President proposes. Other savings of $45 billion are largely offset

by new spending initiatives such as providing health

insurance for children and the unemployed and rolling

back benefit restrictions in the Food Stamp and Supplemental Security Income programs that were enacted as

part of last year's welfare reform package.

The President's alternative spending proposals reduce spending by an additional $57 billion in 2001 and

2002 combined, yielding a total net decrease in outlays

of $224 billion over the 1998-2002 period. Under the

set of alternative policies, the largest spending cuts

come from discretionary spending (a total of $112 billion over five years), followed by reductions in the

Medicare program ($88 billion over five years). In addition, a new fee would be imposed on television broadcasters to eliminate any difference between actual receipts from auctioning certain portions of the electromagnetic spectrum and the amount budgeted by the

Administration (estimated by CBO at $9 billion for

2002).

The President’s Basic 

Spending Proposals

Federal spending will increase from $1.6 trillion in

1997 to $1.9 trillion in 2002 under the President's plan.

As a percentage of gross domestic product, outlays will

increase to 20.8 percent in 1998 (up from 20.7 percent

in 1997) before beginning their descent to 19.5 percent

in 2002 (see Table 6). The bulk of that decline in

spending as a percentage of GDP is attributable to very

slow growth in discretionary spending. Mandatory

spending (other than net interest) rises as a share of the

nation's output despite policies to achieve budgetary

balance.

Discretionary Spending for 1998

Under current law, discretionary spending is subject to

caps on both budget authority and outlays. (Budget

authority confers the ability to commit the government

to pay money, and outlays are the money paid to meet
20 AN ANALYSIS OF THE PRESIDENT’S BUDGETARY PROPOSALS FOR FISCAL YEAR 1998 March 1997

Table 6. 

CBO Estimate of the President's Basic Spending Proposals (By fiscal year)

1997 1998 1999 2000 2001 2002

In Billions of Dollars

Discretionary

Defense 268 266 264 269 270 278

Nondefense 281 288 295 298 298 294

Subtotal 549 553 559 567 567 572

Mandatory

Social Security 363 381 399 420 441 464

Medicare 209 224 239 257 266 289

Medicaid 99 107 115 121 129 138

Other 239 270 283 303 308 321

Subtotal 909 981 1,036 1,100 1,144 1,211

Offsetting Receipts -83 -85 -82 -85 -90 -103 a

Net Interest 248 253 259 257 253 251

Total 1,623 1,703 1,772 1,839 1,874 1,931

As a Percentage of Gross Domestic Product

Discretionary

Defense 3.4 3.2 3.1 3.0 2.9 2.8

Nondefense 3.6 3.5 3.4 3.3 3.2 3.0

Subtotal 7.0 6.8 6.5 6.3 6.0 5.8

Mandatory

Social Security 4.6 4.7 4.7 4.7 4.7 4.7

Medicare 2.7 2.7 2.8 2.9 2.8 2.9

Medicaid 1.3 1.3 1.3 1.3 1.4 1.4

Other 3.1 3.3 3.3 3.4 3.3 3.2

Subtotal 11.6 12.0 12.1 12.2 12.1 12.2

Offsetting Receipts -1.1 -1.0 -1.0 -0.9 -1.0 -1.0 a

Net Interest 3.2 3.1 3.0 2.9 2.7 2.5

Total 20.7 20.8 20.6 20.4 19.9 19.5

Memorandum:

Gross Domestic Product

(In billions of dollars) 7,830 8,186 8,584 9,003 9,439 9,892

SOURCE: Congressional Budget Office.

a. Includes asset sales.
CHAPTER THREE THE PRESIDENT’S SPENDING PROPOSALS 21

those commitments.) Separate caps apply to spending

from the Violent Crime Reduction Trust Fund

(VCRTF) and other general-purpose spending. Those

caps expire at the end of fiscal year 1998.

CBO calculates that outlays flowing from the budget authority proposed by the President would exceed

the estimated 1998 outlay limit on general-purpose discretionary spending by $6.1 billion. The VCRTF outlays, by contrast, fall $1.3 billion below their cap. Budget authority as proposed by the Administration is comfortably within the limit on general-purpose spending,

and is equal to the budget authority cap for VCRTF

spending (see Table 7). The Administration estimates

that its discretionary spending proposals will not exceed either the budget authority limit or the outlay cap.

CBO has adjusted the current statutory levels of the

cap to reflect changes that the Administration proposes

in calculating the discretionary spending limits. The

Table 7.

Comparison of CBO's Estimate of the President's Discretionary Spending Proposals 

with the Limits for 1998 (In millions of dollars)

Budget

Authority Outlays

Statutory Limits from OMB’s Sequestration Preview Report

General-purpose limits 528,280 541,501

Violent Crime Reduction Trust Fund limits 5,500 4,904

Combined Limits 533,780 546,405

Adjustments to the General-Purpose Limits

Current-law adjustments 6,390 1,338

Proposed adjustments 1,036 930

Total Adjustments 7,426 2,268

Statutory Limits as Estimated by CBO Under Presidential Policy

General-purpose limits 535,706 543,769

Violent Crime Reduction Trust Fund limits 5,500 4,904

Combined Limits 541,206 548,673

Discretionary Spending as Estimated by CBO

General-purpose spending 531,609 549,847

Violent Crime Reduction Trust Fund spending 5,500 3,592

Combined Spending 537,109 553,439

Amount Over or Under (-) Limits

General-purpose spending -4,097 6,078

Violent Crime Reduction Trust Fund spending 0 -1,312

Combined Spending -4,097 4,766

SOURCE: Congressional Budget Office.

NOTE: OMB = Office of Management and Budget.
22 AN ANALYSIS OF THE PRESIDENT’S BUDGETARY PROPOSALS FOR FISCAL YEAR 1998 March 1997

largest adjustment to the budget authority limits under

the President's proposals is the result of his request for

a $5.8 billion reserve of contingent emergency appropriations for Presidential response to disasters. The

Office of Management and Budget would count as new

budget authority only the amounts actually released by

the President and would adjust the cap accordingly.

CBO counts the entire amount of contingent emergency

appropriations when they are appropriated by the Congress and adjusts the cap by that amount. Outlays,

however, are not expected to flow from those appropriations until 1999. Other adjustments required under

current law include the 1998 effect on outlays of proposed 1997 emergency supplemental appropriations

Table 8.

Discretionary Spending for 1998 Under the President's Proposals (In billions of dollars)

Proposed 1998

Enacted Discretionary Proposed Discretionary Less Enacted 1997

Spending for 1997 Spending for 1998 Discretionary Spending

Budget Budget Budget

Authority Outlays Authority Outlays Authority Outlays

Defense 265.8 267.5 266.4 265.8 0.5 -1.7

International 18.1 19.2 23.0 19.3 4.9 0.1 a

Domestic

General science, space,

and technology 16.6 17.0 16.4 17.0 -0.2 0

Energy 4.3 4.9 4.7 5.1 0.4 0.2

Natural resources and

environment 21.5 21.5 22.4 21.1 0.9 -0.5

Agriculture 4.2 4.2 4.1 4.2 0 0

Commerce and housing credit 2.8 2.8 3.2 3.1 0.4 0.3

Transportation 13.8 36.9 13.5 37.5 -0.3 0.5

Community and regional

development 9.3 11.7 16.7 11.1 7.4 -0.7 b

Education, training, 

employment, and 

social services 42.4 40.3 46.5 43.2 4.0 2.8

Health 25.0 23.8 25.3 24.8 0.3 1.0

Medicare 2.6 2.7 2.8 2.7 0.2 0

Income security 26.6 40.9 32.9 41.8 6.3 1.0 c

Social Security 3.5 3.4 3.3 3.4 -0.2 0.1

Veterans' benefits 18.9 19.3 18.8 19.4 -0.2 0.1

Adminstration of justice 22.9 20.4 24.4 22.2 1.5 1.8d

General government 11.8 11.9 12.8 12.0 1.0 0.1

Subtotal 226.2 261.8 247.8 268.3 21.6 6.5

Total 510.1 548.5 537.1 553.4 27.0 4.9

SOURCE: Congressional Budget Office.

a. Principally loans to the International Monetary Fund.

b. Primarily funds for disaster relief.

c. Largely subsidized housing renewals.

d. Reflects outlays from Violent Crime Reduction Trust Fund appropriations enacted in previous years.
CHAPTER THREE THE PRESIDENT’S SPENDING PROPOSALS 23

Box 2.

Budgetary Effects of the President's Proposals for the District of Columbia

The financial and administrative problems of the District of Columbia have attracted considerable national

attention in recent years. In response to those problems,

the Administration's budget proposes that the federal

government assume additional responsibility for several

functions currently provided by the District in exchange

for ending the annual federal payment to the District.

Discretionary Spending. The federal government currently makes an annual payment to the District of Columbia. For fiscal year 1997, the federal payment is

$719 million, which includes $660 million in general

assistance, $52 million in contributions to the District's

retirement system, and $7 million in other assistance.

The Administration's plan would eliminate the annual

federal payment beginning in 1998 and replace it with

funding for several D.C. services, including its courts,

prisons, and individual income and payroll tax collections. Putting the President's proposal in place would

result in discretionary outlays that are approximately

$900 million lower over the 1998-2002 period than

continuing to provide the District with an annual payment of $712 million.

The Tax Incentive Program. The budget includes

$300 million in tax incentives for the District over the

1998-2002 period. One-sixth of that total would go to a

new District of Columbia Economic Development Corporation that would allocate a total of $95 million in tax

breaks for District business investments. The corporation would also have authority to issue tax-exempt private activity bonds to finance businesses in certain areas

of the District. Eligible businesses in the District would

also receive jobs tax credits and liberalized deduction

provisions for certain equipment costs. 

Medicaid. The Administration proposes to increase the

federal government's share of Medicaid spending for the

District by having the federal government pay the minimum allowable state match in addition to the federal

match that it currently pays. Under this proposal, the

District will be responsible for paying the maximum 30

percent share that localities can be required to pay in

states that receive a 50 percent federal match. The total

share of Medicaid borne by the federal government

would increase to 70 percent from its current level of 50

percent. The proposal would increase federal outlays by

$900 million over the 1998-2002 period.

Pensions. Under the President's budget, the federal

government would assume responsibility for the District's existing pension plans for law enforcement officers, firefighters, teachers, and judges. The District

would close out those plans and transfer their assets and

liabilities to the federal government at the beginning of

fiscal year 1998. As of October 1, 1996, the plans had

$7.6 billion in liabilities but held only $3.7 billion in

assets.

Although the pension proposal would add $3.9 billion to the federal government's unfunded liabilities, it

would initially have no effect on the deficit, which generally reflects the federal government's cash flows. Until the assets of the plans run out, payments to beneficiaries would be made from those assets, including the

cash received from investing and selling the assets.

When those assets are exhausted&probably shortly after

fiscal year 2007&the federal government would begin

to pay the remaining pension benefits out of general revenues. Annual outlays at that time would be between

$700 million and $800 million.

and funding for additional reviews to determine the eligibility of beneficiaries required under legislation enacted last year.

In addition to those increases in the caps required

under current law, the President proposes that certain

existing and new fees counted as revenues be used to

increase discretionary spending through an adjustment

to the caps. Examples of those fees include existing

State Department passport and visa fees and proposed

Food and Drug Administration user fees. CBO estimates that those proposals would add more than $900

million in 1998 budget authority and more than $800

million in outlays. Other proposed adjustments include

additional spending on reviews of eligibility for Unemployment Insurance and housekeeping items such as

reclassifying the expenses of the Federal Reserve Board

as discretionary spending instead of as an offset to revenues generated by Federal Reserve earnings. 

In total, the President's proposed 1998 discretionary budget authority is $27 billion higher than was en-
24 AN ANALYSIS OF THE PRESIDENT’S BUDGETARY PROPOSALS FOR FISCAL YEAR 1998 March 1997

acted for fiscal year 1997. Outlays flowing from that

increase in budget authority are $4.9 billion higher than

anticipated for the current year (see Table 8 on page

22). The biggest bump in outlays is found in the education, training, employment, and social services function,

and reflects the President's education initiatives&the

largest being his proposed increase from $2,700 to

$3,000 in the maximum Pell grant for undergraduate

students. That total also reflects the Administration's

plan to restructure the federal government's budgetary

relationship with the District of Columbia, which is

discussed in more detail in Box 2 on page 23.

Discretionary Spending After 1998

The priorities reflected in the President's budget cannot

be compared with CBO's baseline projections because

the baseline includes unspecified spending reductions to

ensure compliance with the discretionary spending

caps. Accordingly, CBO's analysis in this section uses

its calculations of discretionary spending that are not

constrained by those caps. 

The President's discretionary proposals yield total

outlays that are somewhat higher than those that result

from a spending freeze at 1997 levels of discretionary

budget authority, and yet they are below those that are

necessary to adjust 1997 budget authority fully for the

effects of inflation. For 1998 and 1999, the Administration spends somewhat more than the midpoint between a freeze and full compensation for the effects of

inflation, and spends at about the midpoint for 2000

and 2001. For 2002, outlays proposed by the President

are $34 billion higher than the level suggested by a

freeze, but are $49 billion lower than the level that is

necessary to adjust spending authority for inflation (see

Table 9).

The increases in discretionary spending largely accrue on the nondefense side of the ledger sheet, at least

until 2002. Nominal defense outlays decline slightly in

the near term, then remain level for 2000 and 2001.

Even though outlays increase in 2002, the increase in

2002 in contrast to 1997 levels is less for defense than

for nondefense programs. Defense overall receives $77

billion less than is necessary to offset the effects of inflation. That decline in purchasing power is greater

than the decline in purchasing power received by

nondefense spending.

The President's request for defense spending is

similar to the levels contained in last year's Congressional budget resolution. For the 1998-2001 period,

the President's proposal seeks defense outlays that are

only $3 billion lower than called for in the budget resolution. The Administration's plan slightly boosts those

outlays compared with the Congress's plan for 2002.

For defense and nondefense combined, however, the

1998 budget proposal spends a cumulative total of

$211 billion more on discretionary programs than

would be allowed under the 1997 budget resolution in

1998 through 2002. Of that amount, $206 billion benefits nondefense programs.

Mandatory Spending

CBO estimates that the President's basic spending proposals for mandatory spending will decrease the deficit

by a net $90 billion over the 1998-2002 period. Reductions in the growth of Medicare and Medicaid&the government's health care programs for the elderly and poor

&account for $89 billion of that decline. Cuts in other

programs and receipts from the sales of government

assets largely offset mandatory spending initiatives proposed by the President&principally, expanded health

insurance coverage for unemployed workers and their

families and the rollback of welfare reform (see Table

10).

Medicare. Under current policies, CBO projects that

gross mandatory spending for Medicare will increase

from $209 billion in 1997 to $314 billion in 2002, an

average annual increase of 8.5 percent (see Table 11 on

page 27). Net mandatory spending, which takes into

account premiums paid by Medicare beneficiaries, will

increase at an average annual rate of 8.8 percent.

CBO's baseline projections of Medicare spending are

virtually the same as those of the Administration. 

The budget contains many proposals intended to

reduce the growth of spending in Medicare. Those proposals for savings reduce Medicare outlays by $99 billion over the 1998-2002 period. At the same time, the

Administration is proposing to expand some benefits,

increasing costs by $17 billion during that period. On

balance, CBO estimates that the President's basic proposals would lower Medicare spending by $82 billion

over five years and slow the growth of net Medicare

spending to 6.6 percent a year. The depletion of the
CHAPTER THREE THE PRESIDENT’S SPENDING PROPOSALS 25

Table 9.

Discretionary Outlay Levels as Estimated by CBO (By fiscal year, in billions of dollars)

Total, 

1997 1998 1999 2000 2001 2002 1998-2002

CBO Reestimate of the President's Budget

Defense 268 266 264 269 270 278 1,346

Nondefense 281 288 295 298 298 294 1,473

Total 549 553 559 567 567 572 2,819

CBO Projections Assuming

No Discretionary Spending Caps in 1998 and Adjusting for Inflation

Defense 268 270 276 287 289 301 1,423

Nondefense 281 288 296 304 312 321 1,520

Total 549 558 572 591 601 621 2,943

CBO Projections Assuming Discretionary Budget Authority Is Frozen at 1997 Levels

Defense 268 265 265 267 261 264 1,322

Nondefense 281 282 279 277 275 274 1,387

Total 549 547 544 544 536 538 2,709

Congressional Budget Resolution for Fiscal Year 1997

Defense 265 264 267 271 270 270 1,341

Nondefense 274 263 258 255 246 245 1,267

Total 539 527 525 525 516 514 2,608

CBO Reestimate Compared with

CBO Projections Assuming No Discretionary Spending Caps in 1998 and Adjusting for Inflation

Defense 0 -4 -13 -18 -19 -23 -77

Nondefense 0 0 -1 -6 -14 -26 -48

Total 0 -4 -13 -24 -33 -49 -124

CBO Reestimate Compared with

CBO Projections Assuming Discretionary Budget Authority Is Frozen at 1997 Levels

Defense 0 1 -1 2 9 14 24

Nondefense 0 6 16 20 22 21 86

Total 0 7 16 22 31 34 110

CBO Reestimate Compared with

Congressional Budget Resolution for Fiscal Year 1997

Defense 3 2 -3 -2 0 8 5

Nondefense 7 25 37 43 51 50 206

Total 10 26 34 41 51 58 211

SOURCE: Congressional Budget Office.
26 AN ANALYSIS OF THE PRESIDENT’S BUDGETARY PROPOSALS FOR FISCAL YEAR 1998 March 1997

Medicare Hospital Insurance Trust Fund would also be

prevented throughout CBO's 10-year projection horizon

(see Box 3 on page 28).

CBO's estimate of the savings that result from the

budget's basic Medicare proposals is $19 billion lower

than the Administration's. CBO estimates that the

President's proposed expansions of benefits would cost

$4 billion more and that the proposed reductions would

save $15 billion less than the Administration assumes.

CBO's estimate of reductions in payments to fee-forservice providers is $11 billion smaller than the Administration's, and its estimate of savings in payments to

managed care plans is $4 billion less. 

Over half of the savings in the President's proposals would stem from curtailing payments to providers

of health care services in Medicare's fee-for-service

sector. The President proposes limiting growth in aggregate payments to physicians to the rate of growth in

national income, adjusted for changes in the number of

beneficiaries. That limit would slightly reduce the rate

of growth compared with current law. Increases in payments to hospitals for both inpatient care and outpatient

care would be limited through changes in the formulas

used to adjust reimbursement rates. Caps on the number of residents per hospital would limit growth in

spending for graduate medical education. Prospective

payment mechanisms for skilled nursing facilities and

providers of home health care would be established to

slow the growth of spending in those sectors. New

competitive payment mechanisms for laboratory services and suppliers of durable medical equipment are

proposed; the budget would ensure that those mechanisms reduced payment rates by at least 20 percent.

Overall, payments to fee-for-service providers would be

pared by an estimated $53 billion over the 1998-2002

period.

Another $30 billion in savings would arise from

reduced payments to risk-based health maintenance

organizations (HMOs). Because payments to HMOs

are linked to spending in the fee-for-service sector,

much of that reduction would result from slowing the

growth in payments to fee-for-service providers. In

addition, the budget proposes to reduce the HMO payment rate from 95 percent to 90 percent of Medicare's

adjusted average per capita cost (AAPCC) beginning in

2000.

The Administration further proposes to remove

payments for disproportionate share hospitals (DSH)

Table 10.

CBO Estimate of the President's Basic Mandatory Spending Proposals

(By fiscal year, in billions of dollars)

Total,

1997 1998 1999 2000 2001 2002 1998-2002

Medicare 0 -3 -10 -18 -22 -29 -82

Medicaid a 2 2 -1 -4 -6 -7

Health Insurance 0 3 3 3 4 1 14

Supplemental Security Income a22222 9

Food Stamps a11111 5

Education and Training 02232c 9

Spectrum Auctions 0 0 -3 -4 -6 -12 -24

Other a -2 -2 -2 -2 -5 -13

Total a 5 -6 -17 -26 -46 -90

SOURCE: Congressional Budget Office.

NOTE: The estimates in this table exclude alternative policies to eliminate the deficit under CBO asssumptions.

a. Less than $500 million.
CHAPTER THREE THE PRESIDENT’S SPENDING PROPOSALS 27

and graduate medical education from the AAPCC.

That change would reduce average payment rates by an

additional 5 percent. Removing those special payments

from the AAPCCs would have little net budgetary impact, however, because the funds would be returned

directly to DSH and teaching hospitals based on the

Table 11.

CBO Estimate of the President's Medicare Proposals (By fiscal year, in billions of dollars)

Average Annual

Rate of Growth,

Total, 1997-2002

1997 1998 1999 2000 2001 2002 1998-2002 (Percent)

CBO Baseline

Benefit Payments 208.8 227.0 248.2 273.0 285.6 313.7 1,347.5 8.5 a

Premiums -20.2 -21.4 -22.4 -23.4 -24.5 -25.6 -117.4 4.8

Total 188.6 205.5 225.7 249.5 261.1 288.1 1,230.0 8.8 b

Proposed Changes

Benefit Payments

Payments to fee-forservice providers 0 -3.0 -7.6 -11.4 -14.2 -16.7 -52.9 n.a.

Payments to HMOs 0 -0.9 -2.9 -6.7 -8.2 -11.1 -29.9 n.a.

Additional benefits 0 1.2 3.0 3.8 4.5 5.0 17.5 n.a.

Other changes 0 -0.2 -1.9 -2.0 -2.1 -2.3 -8.5 n.a. c

Subtotal 0 -2.9 -9.4 -16.3 -20.1 -25.1 -73.8 n.a.

Premiums 0 0.2 -0.6 -1.4 -2.2 -3.8 -7.8 n.a.

Total 0 -2.8 -10.0 -17.7 -22.3 -28.8 -81.6 n.a.

CBO Estimate of the President’s Proposals

Benefit Payments 208.8 224.0 238.8 256.7 265.5 288.7 1,273.7 6.7 a

Premiums -20.2 -21.2 -23.0 -24.8 -26.7 -29.4 -125.2 7.7

Total 188.6 202.8 215.7 231.8 238.8 259.3 1,148.5 6.6 b

Memorandum:

SMI Premium (In dollars)

Under current law 43.80 45.80 47.10 48.50 50.00 51.50 n.a. n.a.

Under proposals 43.80 45.80 49.50 52.50 55.90 61.20 n.a. n.a.

SOURCE: Congressional Budget Office.

NOTES: The estimates in this table exclude alternative policies to eliminate the deficit under CBO assumptions.

n.a. = not applicable; HMOs = health maintenance organizations; SMI = Supplementary Medical Insurance.

a. Includes mandatory administrative expenses.

b. Excludes discretionary administrative expenses.

c. Primarily the extension of secondary-payer provisions enacted in the Omnibus Budget Reconciliation Act of 1993.
28 AN ANALYSIS OF THE PRESIDENT’S BUDGETARY PROPOSALS FOR FISCAL YEAR 1998 March 1997

Box 3.

Status of the Hospital Insurance Trust Fund

Under the President's Medicare Proposals

Under current law, the Congressional Budget Office (CBO) estimates that the Hospital Insurance

(HI) Trust Fund will be depleted by the end of

2001. CBO estimates that enacting the Administration's policies would maintain a positive balance

in the HI trust fund through at least the end of

2007. The Administration's policies have two

components: a reduction in the growth of spending

and a transfer of spending for certain home health

visits from the HI program to the Supplementary

Medical Insurance (SMI) program. The transfer

would have no impact on total Medicare spending,

but it would help avoid depletion of the HI trust

fund. 

Under the Administration's proposal, the HI

program would retain responsibility for the first

100 visits in an episode of home health care following a hospital stay of at least three days. SMI

would pay for all other home health visits&about

65 percent of the total. Home health visits would

not be subject to coinsurance or the SMI deductible

and would not be included in calculating the SMI

premium. After taking account of the Administration's proposal to reduce payments to home health

providers, CBO estimates that $86 billion in

spending will be shifted from HI to SMI over the

1998-2002 period. Without the proposed shift of

home health spending, the Hospital Insurance Trust

Fund would be depleted in 2003 under the President's remaining proposals.

number of HMO enrollees served. (Those direct payments are included under payments to fee-for-service

providers in Table 11.)

The Administration's proposal would also narrow

the gap between counties with high and low payment

rates by phasing in a blend of local and price-adjusted

national rates by 2002, and by setting a minimum payment rate of $350 per month. It would guarantee that

no county's payment rate in 1998 and 1999 was cut

from its level in the previous year. However, counties

with high payment rates would face reductions from

current-law levels to finance increases to counties with

low payment rates. The budget includes a computation

to ensure that the hold-harmless provision and the $350

floor on payment rates do not increase overall federal

payments to HMOs. The new payment rates would be

updated annually by the growth in national Medicare

spending per capita, with a minimum update of 2 percent a year, beginning in 2000.

The Administration's proposal also contains several

features intended to make HMOs more attractive to

beneficiaries. It would allow Medicare to contract with

additional types of plans (including preferred provider

organizations and provider-sponsored networks), establish an annual open-enrollment period, provide beneficiaries with standardized comparative materials about

plans, and guarantee that medigap coverage would be

available at community rates for beneficiaries choosing

to disenroll from a Medicare HMO.

CBO estimates that the Administration's proposal

would not significantly increase or decrease enrollment

in managed care plans. Some elements of the proposal

&such as using a coordinated enrollment period and

contracting with new types of plans&would tend to expand the managed care program. But enhancing the

benefits package in fee-for-service Medicare and reducing HMO payments relative to those in the fee-for-service sector would discourage enrollment.

The largest expansion of benefits proposed by the

President would reduce the out-of-pocket cost of Supplementary Medical Insurance (SMI) beneficiaries for

services provided in hospital outpatient departments.

Under current law, the effective coinsurance rate paid

by beneficiaries for those services is much higher than

the 20 percent rate applied to other SMI benefits. The

reason for the difference is that the coinsurance rate is

based on hospital charges rather than on Medicare's

allowed payments, which generally are lower. As part

of its proposal to restructure payments for hospital outpatient services, the Administration proposes to phase

in a reduction in the coinsurance rate for services provided in hospital outpatient departments from the

nearly 50 percent projected under current law in 1998

to 20 percent by 2007. That provision would cost $7

billion over the 1998-2002 period&and more than $10

billion a year by 2007 when fully phased in.

In addition, the President proposes increased coverage of preventive services. The budget would provide

Medicare coverage for annual screening mammography

and would waive cost sharing for both screening and
CHAPTER THREE THE PRESIDENT’S SPENDING PROPOSALS 29

diagnostic tests. Screening tests for detecting colorectal

cancer would be covered, as would training and supplies for managing diabetes. Reimbursement rates

would be increased for administering Medicare-covered

preventive injections. Respite care of up to 32 hours a

year would be provided for the families of Medicare

beneficiaries with Alzheimer's disease or other severe

mental impairments. Those new benefits would increase Medicare spending&net of any savings attributable to avoided illness&by about $7.5 billion over the

1998-2002 period.

The Administration also proposes to reduce the

penalty for late enrollment. Under current law, people

who do not enroll in the SMI program on turning 65

pay a premium that is 10 percent higher for each year

that they delay enrollment and are not covered by a

group health insurance plan. Reducing that penalty

would encourage people to enroll in the program who

would not have done so otherwise. Medicare costs

would increase by $3 billion over the 1998-2002 period, principally because the additional premiums paid

by those people cover would only 25 percent of the additional benefits.

Under the President's proposals, premiums paid by

beneficiaries would increase relative to current law.

Such premiums now cover 25 percent of spending for

Supplementary Medical Insurance. Under current law,

however, SMI premiums may increase by no more than

the Social Security cost-of-living adjustment after

1998, and the share of costs covered by premiums will

then begin to shrink by about 1 percentage point a year.

The Administration would maintain the share of SMI

spending covered by premiums at 25 percent after

1998. In conjunction with other proposals in the budget, that change would boost receipts by $8 billion over

the 1998-2002 period. Premium receipts would grow

by 8 percent a year, up from 5 percent a year under current law. In 2002, the projected SMI monthly premium

would be $61.20 under the Administration's proposal

compared with $51.50 projected under current law.

Medicaid. CBO projects that federal outlays for Medicaid will grow from $99 billion in 1997 to $144 billion

in 2002 under current law&an average annual increase

of just under 8 percent (see Table 12). Medical assistance payments, the largest component of spending, are

projected to rise from about $84 billion in 1997 to

$123 billion by 2002. 

The President's basic budget includes proposals

that would produce savings in Medicaid, as well as several measures that would increase Medicaid spending.

The net effect of those policies is to reduce Medicaid

spending by $7.5 billion over the 1998-2002 period

compared with current law. In addition, the budget

makes a number of proposals that increase the flexibility of states in administering the Medicaid program.

Although CBO's baseline projections for Medicaid are

slightly higher than those of the Administration, CBO

and the Administration have similar estimates of the

President's proposals. 

The President's budget would achieve savings in

Medicaid by placing caps on federal payments to states

for each beneficiary and by limiting the growth in those

caps to slightly more than the rate of economic growth

per person. Separate caps would be established for the

four main groups of people eligible for Medicaid&the

aged, disabled, children, and other low-income adults&

but states whose average spending for one group was

below the cap could apply the savings to other groups.

CBO estimates that the per capita caps would save $9

billion over the 1998-2002 period&with most of the

savings occurring in the last two years.

The President also proposes to limit Medicaid's

payments to disproportionate share hospitals to $10

billion in 1998, $9 billion in 1999, and $8 billion in

2000 and thereafter. That change would save $17 billion over the 1998-2002 period compared with current

law. The savings are partly offset by almost $3 billion

in supplemental payments for federally qualified health

centers, rural health clinics, and other purposes.

The President's budget would expand Medicaid

spending in several ways. First, the budget proposal

would add more children to the program by allowing

states to guarantee at least 12 months of continuous

eligibility after a child becomes eligible for Medicaid.

It would also increase Medicaid enrollment among children who are already eligible for benefits as a by-product of giving states grants to expand children's health

insurance coverage. CBO estimates that those changes

would cost $6 billion over the 1998-2002 period. Second, the budget proposes to repeal provisions in last

year's welfare reform law that removed certain legal

aliens and disabled children from the Medicaid rolls.
30 AN ANALYSIS OF THE PRESIDENT’S BUDGETARY PROPOSALS FOR FISCAL YEAR 1998 March 1997

Reinstating those beneficiaries would cost $7 billion

over five years. Finally, other changes in Medicaid

&including the effects on Medicaid of the Administration's proposals for Medicare&would increase costs by

$3 billion over the 1998-2002 period.

Other Health Insurance Proposals. The President's

budget would create three new federal grants to states

for the purpose of expanding health insurance coverage.

First, the budget would provide nearly $10 billion over

the 1998-2001 period for programs providing health

Table 12.

CBO Estimate of the President's Medicaid Proposals (By fiscal year, in billions of dollars)

Average Annual

 Rate of Growth,

Total, 1997-2002

1997 1998 1999 2000 2001 2002 1998-2002 (Percent)

CBO Baseline

Federal Outlays 98.6 105.3 113.6 122.9 132.8 143.8 618.4 7.8

Proposed Changes

Savings Proposals

Per capita cap 0 0 -0.2 -1.5 -2.9 -4.7 -9.3 n.a. a

Reductions in

DSH payments 0 -0.3 -2.1 -3.8 -4.7 -5.6 -16.6 n.a. b

Supplemental payments 0 0 1.0 0.8 0.6 0.4 2.8 n.a. c

Subtotal 0 -0.3 -1.3 -4.6 -7.0 -9.9 -23.1 n.a.

New Initiatives

Children’s health 0 1.0 1.1 1.1 1.2 1.3 5.7 n.a.

Retain benefits for

disabled children d 0.1 0.2 0.2 0.2 0.2 1.0 n.a.

Retain benefits for

certain aliens 0.1 0.9 1.0 1.1 1.3 1.6 5.8 n.a.

Payments to the

District of Columbia 0 0.1 0.2 0.2 0.2 0.2 0.9 n.a.

Other proposals 0 d 0.4 0.5 0.6 0.8 2.2 n.a.

Subtotal 0.1 2.1 2.8 3.1 3.5 4.1 15.6 n.a.

Total 0.1 1.8 1.5 -1.5 -3.5 -5.8 -7.5 n.a.

CBO Estimate of the President’s Proposals

Federal Outlays 98.8 107.1 115.2 121.4 129.3 138.0 610.9 7.0

SOURCE: Congressional Budget Office.

NOTES: The estimates in this table exclude alternative policies to eliminate the deficit under CBO assumptions.

n.a. = not applicable; DSH = disproportionate share hospital.

a. Assumes a per capita growth rate equal to the growth of gross domestic product per capita plus 2 percentage points in 1997 and 1998,

1.5 percentage points in 1999, and 0.5 percentage points in 2000 and thereafter.

b. Assumes DSH payments would be limited to $10 billion in 1998, $9 billion in 1999, and $8 billion in 2000 and thereafter.

c. Assumes that supplemental payments for federally qualified health centers, rural health clinics, and other purposes would total $2.8 billion.

d. Less than $50 million.
CHAPTER THREE THE PRESIDENT’S SPENDING PROPOSALS 31

insurance to certain unemployed workers and their families. The budget includes no funding for those grants

in 2002. (CBO also estimates that those grants would

increase Unemployment Insurance costs by $1 billion

during the duration of the grant program since the

availability of health insurance will increase the average

length of unemployment. That amount is not included

in the $10 billion figure given above.) Second, grants

of $750 million a year would be made available to expand health insurance coverage among children. As

noted above, CBO estimates that the resulting outreach

efforts would also generate additional costs for the

Medicaid program. Finally, $25 million a year would

be devoted to helping to establish health insurance purchasing cooperatives. In total, those three grants would

cost $14 billion over the next five years.

Supplemental Security Income. The President's proposed changes to the Supplemental Security Income

(SSI) program would exempt aliens who became disabled after entering the United States from the new restrictions on SSI and Medicaid benefits contained in

last year's welfare reform legislation. In addition, the

President proposes to extend from five to seven years

the period that refugees and asylees may receive SSI

benefits after being admitted to the United States. Because of the difficulty in establishing the onset of disability for immigrants and because determining disability for the aged is problematic, CBO estimates that

nearly all aliens who would otherwise be barred from

SSI disability benefits and two-thirds of the aged would

be able to secure eligibility for SSI benefits under this

proposal. The two proposals would increase SSI

spending by $9 billion over the 1997-2002 period. 

Education and Training. The President's major mandatory spending proposals in the education and training

areas are a new initiative to provide interest subsidies to

certain school districts so that they can increase their

level of improvements to infrastructure and a temporary, five-year initiative to use the Americorps and college work-study programs to provide tutoring services

to children in grades K-3. In addition, the budget requests mandatory appropriations of $0.8 billion in

1998, $1.0 billion in 1999, and $1.2 billion in 2000 for

state and local governments to help long-term welfare

recipients obtain jobs. 

Electromagnetic Spectrum Auctions. The authority

of the Federal Communications Commission (FCC) to

conduct auctions of the electromagnetic spectrum expires in 1998. The President proposes extending and

expanding the authority of the FCC to conduct spectrum auctions during the 1998-2002 period. OMB estimates that additional auctions would raise $36 billion

over that period; CBO, however, estimates that those

auctions would raise only $24 billion. 

CBO expects that prices for additional spectrum

will not hold firm in future auctions. Although CBO's

estimated prices for the spectrum reflect adjustments

for inflation, CBO expects that the price of FCC licenses will fall as more spectrum is brought to the market. Three factors support that conclusion. First, an

increase in the supply of licenses will depress prices.

Second, a regulatory trend permitting current licensees

to put their spectrum to the most profitable use will

reduce demand for new licenses. Third, new technologies that increase the information-carrying capacity of

the spectrum will further depress demand. The differences in price largely account for the difference in savings estimates for the President's proposals. 

The President’s Alternative

Spending Proposals

The President's budget briefly mentions an alternative

set of proposals that are designed to result in a balanced

budget estimate in 2002 under CBO's current economic

and technical assumptions. The spending components

of that plan would reduce outlays by an additional $14

billion in 2001 and $43 billion in 2002 relative to

CBO's estimate of the budget's basic proposals (see

Table 13).

The President's alternative spending proposals add

four components to his basic spending proposals. First,

it directs an across-the-board cut of 2.25 percent that

would reduce Medicare spending in 2002 by $6 billion,

Medicaid spending by $3 billion, and other nonexempt

mandatory spending by $1 billion. Second, cost-of-living increases for federal benefit programs (excluding

Social Security) would be limited to 0.46 percent in

2002 instead of the 3 percent projected under current

law. CBO estimates that the proposal would save $3

billion in 2002. Third, a fee on television broadcasters

would be assessed in 2002 in the amount of the short-
32 AN ANALYSIS OF THE PRESIDENT’S BUDGETARY PROPOSALS FOR FISCAL YEAR 1998 March 1997

Table 13.

Estimate of the President's Alternative 

Spending Proposals to Eliminate the Deficit 

Under CBO Assumptions 

(By fiscal year, in billions of dollars)

Outlays 2001 2002

Discretionary -14 -20

Mandatory

Medicare 0 -6

Medicaid 0 -3

Fee on broadcasters 0 -9

Cost-of-living adjustments 0 -3 a

Other 0 -1

Subtotal 0 -23

Total -14 -43

SOURCE: Congressional Budget Office.

a. Exempts the cost-of-living adjustment for Social Security beneficiaries.

fall between the amount anticipated by the budget for

certain spectrum auctions in that year and actual receipts; CBO expects that the fee must generate $9 billion. Last, the Administration proposes that discretionary spending levels be reduced in both 2001 and 2002

to wipe out the remaining deficit. 

The Administration proposes that the magnitude of

the supplemental discretionary spending cut equal the

additional savings needed to eliminate the deficit in

2002 under CBO's current economic and technical assumptions. CBO estimates that discretionary outlays

would need to be $20 billion below the levels of the

President's basic proposals for 2002 to achieve the savings necessary to eliminate the deficit. Achieving that

level of outlay reductions would require cuts in budget

authority of $22 billion in 2001 and $23 billion in

2002. Those amounts represent a cut in budget authority of about 4 percent from the level of the President's

basic policies, significantly larger than the 2.25 percent

the Administration has suggested might suffice. 

Total spending would still increase in 2001 and

2002 under the President's alternative proposals (see

Table 14). Nondefense discretionary spending, by contrast, will decrease in nominal terms in each of those

years.
CHAPTER THREE THE PRESIDENT’S SPENDING PROPOSALS 33

Table 14. 

CBO Estimate of the President's Alternative Spending Proposals (By fiscal year)

1997 1998 1999 2000 2001 2002

In Billions of Dollars

Discretionary

Defense 268 266 264 269 263 268

Nondefense 281 288 295 298 290 284

Subtotal 549 553 559 567 554 553

Mandatory

Social Security 363 381 399 420 441 464

Medicare 209 224 239 257 266 282

Medicaid 99 107 115 121 129 135

Other 239 270 283 303 308 316

Subtotal 909 981 1,036 1,100 1,144 1,197

Offsetting Receipts -83 -85 -82 -85 -90 -113 a

Net Interest 248 253 259 257 253 248

Total 1,623 1,703 1,772 1,839 1,860 1,885

As a Percentage of Gross Domestic Product

Discretionary

Defense 3.4 3.2 3.1 3.0 2.8 2.7

Nondefense 3.6 3.5 3.4 3.3 3.1 2.9

Subtotal 7.0 6.8 6.5 6.3 5.9 5.6

Mandatory

Social Security 4.6 4.7 4.7 4.7 4.7 4.7

Medicare 2.7 2.7 2.8 2.9 2.8 2.9

Medicaid 1.3 1.3 1.3 1.3 1.4 1.4

Other 3.1 3.3 3.3 3.4 3.3 3.2

Subtotal 11.6 12.0 12.1 12.2 12.1 12.1

Offsetting Receipts -1.1 -1.0 -1.0 -0.9 -1.0 -1.1 a

Net Interest 3.2 3.1 3.0 2.9 2.7 2.5

Total 20.7 20.8 20.6 20.4 19.7 19.1

Memorandum:

Gross Domestic Product

(In billions of dollars) 7,830 8,186 8,584 9,003 9,439 9,892

SOURCE: Congressional Budget Office.

a. Includes asset sales.

F

Chapter Four

The President’s Revenue Proposals

or the third year, the Administration has proposed a number of tax cuts and a long list of tax

increases that would offset some of the tax reduction. Reimposing trust fund taxes that have expired

would yield about half of the increased revenues. The

Administration has proposed that the largest tax cuts

expire ("sunset") at the end of 2000 if Congressional

Budget Office assumptions are used for budget planning by the Congress. In that case, the Administration

proposes fast-track procedures to reinstate the tax cuts

for one year at a time if actual deficits for 2000 and

2001 turn out to be lower than CBO currently estimates. This chapter provides estimates of the President's forecast revenue proposals with and without sunset provisions.

If the President's proposals are enacted and the tax

cuts are permanent, CBO estimates that revenues would

grow from $1.507 trillion this year (excluding $2.7 billion in revenues from the February 28 temporary extension of aviation taxes) to $1.862 trillion in 2002&$9

billion lower than projections under current law in that

year. As a percentage of gross domestic product, revenues are projected to fall from 19.3 percent in 1997 to

18.8 percent in 2002&with most of the reduction

caused by shifts in the forecast for income shares rather

than by the proposals (see Tables 15 and 16).

The net revenue losses from the proposals would

grow after 2002, mostly because of the expanded individual retirement accounts (IRAs). In the years from

1998 through 2002, the net revenue loss would be $39

billion. In the following five years, the revenue loss

would be nearly $90 billion. In the early years, the revenues generated when taxpayers switch from existing

IRAs to the new IRAs proposed by the Administration

would offset some of the revenue loss. That revenue

results from speeding up taxes that would have been

paid in later years on withdrawals from existing IRAs.

Moving those payments forward contributes to the

growing revenue loss in later years.

Under the Administration's alternative budget proposal that includes expirations of the major tax cuts,

revenues would be $1.885 trillion in 2002&$14 billion

higher than under current law&or 19.1 percent of GDP.

The Joint Committee on Taxation (JCT) estimated

the Administration's revenue proposals except for those

involving fees, customs duties, and unemployment

taxes, which CBO calculated. JCT and CBO esti- 1

mated that the revenue loss from the President's proposals would be greater than the Administration estimates&$5 billion greater in 2002. The largest difference is in the IRA proposal.

Tax Relief for MiddleIncome Families

As in 1995 and 1996, the major initiative in the President's budget is to reduce taxes for middle-income fam1. For a full set of revenue estimates, see Joint Committee on Taxation,

Estimated Budget Effects of the Revenue Provisions Contained in

the President's Fiscal Year 1998 Budget Proposal, JCX-8-97 (February 27, 1997). For detailed descriptions of the revenue proposals, see

Joint Committee on Taxation, Description of the Revenue Provisions

Contained in the President's Fiscal Year 1998 Budget Proposal,

JCX-6-97 (February 10, 1997). 
36 AN ANALYSIS OF THE PRESIDENT’S BUDGETARY PROPOSALS FOR FISCAL YEAR 1998 March 1997

ilies. The Administration proposes to provide tax relief

through a nonrefundable tax credit for each child under

13, a set of tax incentives for education and training,

and expanded benefits for saving through IRAs. None

of the proposals would help low-income families that

have no income tax liabilities, and all would limit the

benefits to families below certain income levels. The

JCT estimates that those proposals together would cost

$106 billion through 2002, or $82 billion if all three

proposals sunset at the end of 2000 (see Table 17).

Tax Credit for Families with 

Children Under Age 13

The Administration proposes a nonrefundable tax

credit for each dependent child under the age of 13.

Taxpayers with adjusted gross income (AGI) under

$60,000 would be eligible for the full credit. The credit

is phased out for taxpayers with AGIs of between

$60,000 and $75,000. Taxpayers with AGIs of over

$75,000 would not be eligible for the credit. For those

who are eligible, the credit amount would be $300 for

tax years 1997 through 1999. Beginning in tax year

2000, the credit amount would be raised to $500. Beginning in 2001, the credit and beginning of the phaseout range would be indexed for inflation. A permanent

credit would cost $11.3 billion in 2002.

The President's proposal is similar to a tax credit

for dependent children proposed in the American Family Tax Relief Act (sponsored by Senators William V.

Roth and Trent Lott). The $500 credit in the American

Family Tax Relief Act differs, however, in several ways

from the President's plan. First, the value of the credit

would begin immediately in 1997 at $500. Second, it

would be available for dependent children under the age

of 18. Third, the credit would be phased out beginning

at AGIs of $110,000 for joint returns and $75,000 for

single returns over a $20,000 range. Thus, joint returns

with AGIs of over $130,000 and single returns with

AGIs of over $95,000 would not be eligible for the

credit. Fourth, the credit amount and the phaseout

ranges would not be indexed for inflation. Finally, the

legislation would create a permanent credit&at a cost of

$20.2 billion in 2002.

Table 15.

CBO Estimate of Revenues Under the President's Proposals (By fiscal year)

1997 1998 1999 2000 2001 2002 a

In Billions of Dollars

Total Revenues

With sunset 1,507 1,557 1,630 1,702 1,782 1,885

Without sunset 1,507 1,557 1,630 1,704 1,779 1,862

Memorandum:

Gross Domestic Product 7,830 8,186 8,584 9,003 9,438 9,892

As a Percentage of Gross Domestic Product

Total Revenues

With sunset 19.3 19.0 19.0 18.9 18.9 19.1

Without sunset 19.3 19.0 19.0 18.9 18.8 18.8

SOURCE: Congressional Budget Office.

a. Does not include $2.7 billion in revenues from temporary reinstatement of the Airport and Airway Trust Fund taxes enacted on February 28, 1997.
CHAPTER FOUR THE PRESIDENT’S REVENUE PROPOSALS 37

Tax Incentives for Education 

and Job Training

The Administration's education proposals include five

tax benefits to subsidize the cost of higher education.

The largest of those benefits are the Hope Scholarship

tuition tax credit, which is proposed for the first time,

and the education and job training tax deduction, first

proposed in 1995. The budget shows those proposals

as permanent. Yet the Administration has indicated

that they will sunset at the end of 2000 if CBO assumptions are used for budget planning.

According to the JCT estimates, if the Administration's proposals to encourage postsecondary education

are permanent, they would lower revenues by $43 billion through 2002. If the credit and deduction expire at

the end of 2000, the revenue loss would fall to $36 billion. The Administration estimates revenue losses

without a sunset to be $5 billion lower through 2002,

although the JCT estimates a smaller revenue loss by

2002.

Hope Scholarship Tuition Tax Credit. The Administration proposes creating a nonrefundable tax credit for

educational expenses incurred during the first two years

of postsecondary education. Taxpayers could claim the

credit for the year in which expenses were paid; expenses financed by loans would qualify for the credit in

the year incurred, not the period over which the loan is

repaid. Qualifying students must attend a program

leading to a recognized educational credential on at

least a half-time basis, not have been convicted of a

federal or state felony involving illegal drugs, not be a

nonresident alien, and achieve at least a B- average during the first year to qualify for a second year's tax

credit.

The credit would apply only to out-of-pocket tuition and fees and would be subject to an annual maximum of $1,500 per student, indexed for inflation after

1998. Expenses for meals, lodging, student activities,

health care, transportation, books, and other living expenses would not qualify for this credit. Moreover, the

maximum value of the credit would be reduced for students by any federal educational aid, such as a Pell

grant, that they might receive. Thus, students receiving

the average Pell grant of just over $1,500 would not

qualify for the credit. Deducting educational expenses

under other provisions of the tax code would also disqualify the student for the credit. 

The credit would phase out for taxpayers with a

modified adjusted gross income of between $50,000

and $70,000 ($80,000 and $100,000 for joint tax returns). In addition to the usual components of AGI,

modified AGI includes taxable Social Security benefits

and otherwise excludable income earned outside the

United States and would be calculated before the proTable 16.

Comparison of Revenue Estimates of the President's Proposals 

(By fiscal year, in billions of dollars)

Total,

1997 1998 1999 2000 2001 2002 1997-2002

CBO/JCT

With sunset 0.2 -10.1 -5.0 -6.7 -6.5 14.3 -13.7

Without sunset 0.2 -10.1 -5.0 -5.0 -9.6 -9.4 -38.9

Administration 1.6 -7.0 -1.4 -3.7 -5.5 -4.9 -20.8

Difference Without Sunset -1.4 -3.1 -3.6 -1.3 -4.1 -4.6 -18.1

SOURCES: Congressional Budget Office; Joint Committee on Taxation; Office of Management and Budget.

NOTE: JCT = Joint Committee on Taxation.
38 AN ANALYSIS OF THE PRESIDENT’S BUDGETARY PROPOSALS FOR FISCAL YEAR 1998 March 1997

Table 17.

Comparison of Revenue Estimates of the President's Provisions That Would Reduce Revenues

(By fiscal year, in billions of dollars)

Total,

1997 1998 1999 2000 2001 2002 1997-2002

Provide Tax Credit for Dependent Children

CBO/JCT

With sunset a -8.9 -7.7 -8.1 -9.8 0 -34.5

Without sunset a -8.9 -7.7 -8.0 -11.4 -11.3 -47.4

Administration -0.7 -9.9 -6.8 -8.6 -10.4 -10.4 -46.7

Provide Tax Incentives for Education and Training

CBO/JCT

With sunset -0.2 -7.5 -8.9 -10.6 -8.4 a -35.7

Without sunset -0.2 -7.5 -8.9 -9.1 -8.9 -8.5 -43.2

Administration -0.2 -4.7 -6.9 -8.6 -8.9 -9.4 -38.6

Expand Individual Retirement Accounts

CBO/JCT

With sunset a -2.3 -1.5 -2.4 -3.2 -2.2 -11.5

Without sunset a -2.3 -1.5 -2.4 -4.0 -5.7 -15.9

Administration 0 -1.5 -0.5 -0.8 -1.2 -1.7 -5.5

Subtotal: Tax Relief for Middle-Income Families

CBO/JCT

With sunset -0.3 -18.6 -18.1 -21.1 -21.4 -2.2 -81.7

Without sunset -0.3 -18.6 -18.1 -19.5 -24.3 -25.6 -106.4

Administration 0 -16.0 -14.2 -17.9 -20.4 -21.4 -90.8

Total of Other Provisions That Would Reduce Revenues

CBO/JCT

With sunset -0.5 -2.5 -2.6 -2.8 -2.7 -2.5 -13.5

Without sunset -0.5 -2.5 -2.6 -2.8 -2.9 -2.9 -14.1

Administration -0.6 -2.8 -2.8 -2.6 -2.4 -2.3 -13.5

Total of All Provisions That Would Reduce Revenues

CBO/JCT

With sunset -0.7 -21.1 -20.7 -23.9 -24.1 -4.7 -95.3

Without sunset -0.7 -21.1 -20.7 -22.3 -27.2 -28.5 -120.5

Administration -1.4 -18.8 -16.9 -20.5 -22.9 -23.7 -104.3

SOURCES: Congressional Budget Office; Joint Committee on Taxation; Office of Management and Budget.

NOTE: JCT = Joint Committee on Taxation.

a. Less than $50 million.
CHAPTER FOUR THE PRESIDENT’S REVENUE PROPOSALS 39

posed deduction for educational expenses. Phaseout

ranges would be indexed for inflation after 2001.

Tax Deduction for Education and Job Training.

The Administration also proposes a deduction for qualified expenses for postsecondary education. Taxpayers

would be allowed to deduct the expenses of education

and training for themselves, their spouses, or their dependents. The maximum deduction would be $5,000 in

1997 and 1998, and $10,000 in 1999 and thereafter.

The deduction would be phased out over the same income ranges as the credit proposal. Taxpayers need not

itemize to claim that deduction.

Students in their first two years of school will have

to choose between the credit and the deduction. Because the inflation-indexed credit would exceed 15 percent of the maximum deduction, taxpayers in the 15

percent bracket would gain more from the credit, even

after the deduction limit is raised to $10,000. Taxpayers in the 28 percent bracket would elect the credit if

their eligible expenses were not more than $5,357 (in

1998 dollars). With higher expenses, the deduction

would reduce the liability of taxpayers more than the

credit.

Families with multiple students would face a more

complicated decision. Because such a family could take

the credit for one student and the deduction for another,

the optimal choice would depend on total qualifying

expenses, the division of those expenses among family

members, and the family's marginal tax rate. The difficulties inherent in determining whether to take the

credit or deduction would complicate an already complex tax return. The B- average requirement for the

credit in the second year would make administering the

credit difficult.

At current levels of enrollment, about 60 percent of

the students eligible to claim the deduction would come

from families with incomes under $50,000. Because

students from higher-income families tend to have

higher tuition expenses on average, the 40 percent of

students from families with incomes of $50,000 or

more would claim about 50 percent of the total deductions. However, most students in their first two years

of postsecondary study would benefit more from the

credit. In 1996, the average tuition payment (net of

financial aid) was estimated to be about $3,000, and

only about one in seven students spent more than

$5,000. For students from higher-income families with

higher tax rates, and hence greater tax savings, the deduction would be more valuable.

Some of the benefits from both the credit and the

deduction would go to schools if they took advantage of

the tax savings to raise tuition without increasing the

after-tax cost to students. Research on previous increases in federal educational assistance has shown

only a weak link between increased aid and higher tuition levels. Because the proposed credit and deduction

would be available to most students, however, schools

could raise tuition without making many students worse

off.

Because both the credit and the deduction would

have to be taken in the year in which educational expenses are paid, students who finance their own education with loans and have low incomes while they are in

school would receive few or no tax benefits. Neither

option would do them much good while they are in

school and have little or no tax liability, and neither

option would be available to them later when they are

working and paying back loans. Allowing students

credits or deductions for repaying principal and interest

later on student loans would treat them equally but

would also add to the cost of the proposal. 

Because both the credit and the deduction would be

phased out for taxpayers over a relatively narrow range

of income, the proposal would significantly increase

marginal tax rates for eligible families who have income in that range. The phaseout of the deduction, for

example, would increase the marginal rate for a family

in the 28 percent bracket by 14 percentage points if

their expenses were larger than the maximum deduction

that their income allows. The phaseout of the credit

would add 7.5 percentage points per student to the marginal tax rates of affected families. 

Other Educational Proposals. The Administration

also proposes three smaller tax incentives to promote

postsecondary education. Those incentives would expand the exclusion from income of student loans forgiven for students who work in certain occupations,

extend through 2000 the exclusion from income of

employer-provided educational assistance and reinstate

the exclusion for graduate education, and provide a new

tax credit for training expenses of small businesses.
40 AN ANALYSIS OF THE PRESIDENT’S BUDGETARY PROPOSALS FOR FISCAL YEAR 1998 March 1997

Expanded Individual Retirement 

Accounts

The Administration proposes to expand eligibility for

deductible individual retirement accounts, establish new

"Special IRAs," and allow penalty-free withdrawals

from regular IRAs for certain qualified purposes. All

of the IRA provisions would expire in 2000 under the

alternative budget proposal. 

Extend Eligibility for Deductible Individual Retirement Accounts. Under current law, a taxpayer may

make a tax-deductible contribution to an IRA of up to

$2,000 a year, but not more than his or her total earnings. A couple filing a joint return can contribute up to

$2,000 for each spouse, but the contribution cannot

exceed the couple's combined earnings. If the taxpayer

or the taxpayer's spouse is an active participant in an

employer-sponsored retirement plan, the $2,000 limit is

reduced by $1 for every $5 of income in excess of

$40,000 for a couple and $25,000 for a single taxpayer.

Thus, couples with an income of $50,000 or more, and

singles with an income of $35,000 or more, cannot

make deductible contributions. If taxpayers cannot

make fully deductible contributions because their income exceeds those limits, they can nevertheless contribute to a nondeductible IRA, retaining the same overall limit on contributions. 

Investment income in an IRA is tax-exempt while it

accrues. But a taxpayer must include in taxable income

the full amount of withdrawals from an account (withdrawals from a nondeductible IRA are included in taxable income only insofar as they exceed the original

contributions). An additional 10 percent penalty generally applies to withdrawals made before age 591⁄2. Exceptions to the 10 percent penalty apply to withdrawals

for medical expenses in excess of 7.5 percent of income

and medical insurance premiums of the unemployed.

The Administration proposes to double the income

limits and phaseout ranges for deductible contributions

in two steps. For 1997, 1998 and 1999, the income

phaseout range for joint returns would be $70,000 to

$90,000 and $45,000 to $65,000 for single returns.

Starting in 2000, the phaseout range for joint returns

would be $80,000 to $100,000, and for single returns it

would be $50,000 to $70,000.

The $2,000 IRA contribution limit would be indexed for inflation occurring after 1997. Current law

imposes a limit of $9,500 for salary deferrals to 401(k)

plans or similar arrangements. Under the proposal, the

sum of the taxpayer's contributions to IRAs and the

salary deferrals could not exceed the limit.

Establish Special IRAs. The Administration also proposes to establish new Special IRAs. Taxpayers who

are eligible for regular deductible IRAs could choose to

contribute an amount up to the limit to either a deductible or a Special IRA. Contributions to a Special IRA

would not be tax-deductible, but taxpayers could withdraw contributions and earnings that remained in the

account for a least five years without any tax or penalty.

Earnings taken out before they had been in the account

for five years would be subject to income taxes. An

additional 10 percent penalty would also apply unless

the money withdrawn was used for the purposes described below. Taxpayers eligible for Special IRAs

could transfer balances in deductible IRAs to Special

IRAs without penalty, but those transfers would be subject to tax. Transfers made before January 1, 1999,

could be included in taxable income, spread evenly over

four years.

The current form of nondeductible IRAs would be

repealed. Thus, taxpayers who could not contribute to

deductible or Special IRAs (because their incomes were

too high and they participated in a pension) would no

longer be able to contribute to IRAs.

Allow Penalty-Free Withdrawals for Certain Expenditures. The Administration proposes to allow

penalty-free withdrawals of funds from a regular IRA

as well as funds held in a Special IRA less than five

years if the money is used to pay for postsecondary education, buy a first home, cover living costs if unemployed, or pay for catastrophic medical expenses. All

of those expenses for the taxpayer, spouse, and dependents are eligible. For some types of withdrawals, expenses for nondependent children, grandchildren, parents, or grandparents will also be eligible. Penalty-free

withdrawals are already allowed for catastrophic medical expenses of the taxpayer and the taxpayer's dependents.

Other Proposals. The main features of the Administration's proposal are similar to those of other proposals

introduced in recent years, but important differences
CHAPTER FOUR THE PRESIDENT’S REVENUE PROPOSALS 41

remain. For example, the American Family Tax Relief

Act (S. 2) would also expand eligibility, introduce Special IRAs, and expand allowable withdrawals. Unlike

the Administration’s proposal, however, S. 2 would

entirely phase out income limits on contributors and

exempt its qualifying withdrawals from both income

and penalty taxes, but would not allow withdrawals for

general uses before age 591⁄2.

Effect on Revenues and Saving. The revenue loss

from expanding IRA eligibility and introducing Special

IRAs would grow rapidly over the decade after enactment. Moreover, it becomes substantially higher when

the IRA provisions continue after 2000. Even if the

provisions expire, the revenue loss continues to grow

because of the steady accrual of earnings on expanded

contributions made during 1997 through 2000. Allowing taxpayers to shift existing IRA balances to Special

IRAs adds to the rapid growth of the revenue loss in

later years. The Joint Committee on Taxation estimates

that if the proposal does not expire, it will reduce revenues by $16 billion through 2002 and by $67 billion

through 2007. If it does expire, the loss through 2002

would be $12 billion and $35 billion through 2007.

The Administration estimates a substantially

smaller revenue loss. Assuming the proposal does not

expire, the Administration estimates that the proposal

would reduce revenues by $6 billion through 2002 and

by $21 billion through 2007. Those estimates show a

similarly rapid growth rate through 2007, but are about

one-third the size of the corresponding estimates by the

Joint Committee on Taxation. The difference in size

stems largely from different assumptions about how

much taxpayers would contribute and what portion of

the contributions would be shifted from saving that otherwise would have been deposited in taxable accounts.

The uncertainty about the level of contributions arises

both from the novel provisions in the proposal and

from questions about how far the recent expansion of

opportunities for saving in 401(k) plans and related

arrangements would reduce IRA contribution rates below those between 1982 and 1986, the last time IRAs

were widely available. 

Estimates of the revenue effects from Special IRAs

include some revenue gains in the early years as taxpayers transfer funds from regular IRAs, pay taxes on

those transfers, and deposit the after-tax proceeds in the

new accounts. Because Special IRAs offer the advantage of penalty-free withdrawals much sooner then regular IRAs, some taxpayers would be willing to make

the transfer, trading a front-loaded account for a backloaded account. The revenue increase represents an

acceleration of taxes that would have been paid in the

future and thus a corresponding revenue loss outside

the projection period in the budget.

In addition to the effect from accelerating future

revenues into the budget period, the long-term revenue

losses from Special IRAs will grow over time. Special

IRAs differ from ordinary taxable accounts because

earnings on contributions are never taxed. Since it

would take some time for funds to build up in Special

IRAs, the revenue loss would be small initially but

would grow as funds accumulated. By contrast, the

initial revenue loss is greater from deductible IRAs because taxpayers are making tax-deductible contributions, but that loss grows more slowly because some of

that initial loss is recouped later when taxpayers withdraw from those accounts. 

Revenue losses result from IRAs because taxes

would have been paid on annual investment earnings if

those funds had been saved in taxable accounts. If the

funds contributed to IRAs would have been spent instead, there are no revenue losses.

Other Tax Reductions

The Administration has proposed a number of other

proposals that would reduce revenues. Together they

would lower revenues by about $14 billion through

2002. 

Three of the proposals would extend existing tax

provisions that are scheduled to expire this year. The

Generalized System of Preferences, which expires May

31, 1997, affords nonreciprocal tariff preferences to

approximately 145 developing countries. The Administration proposes to extend the program through September 30, 2007. The extension, along with other tariff

reductions, would reduce revenues by about $3 billion

through 2002. The Administration also proposes to

extend the tax credit for research expenses for an additional year, through May 31, 1998, reducing revenues

by about $2 billion. The work opportunity tax credit

would be extended for a year, to September 30, 1998,
42 AN ANALYSIS OF THE PRESIDENT’S BUDGETARY PROPOSALS FOR FISCAL YEAR 1998 March 1997

and expanded to include some Food Stamp recipients.

Employers who hire those recipients would be able to

receive the credit through September 30, 2000. The

credit would be supplemented with a new welfare-towork tax credit. Together, the proposals related to

wage credits for hiring low-income workers would

cause a drop in revenues of about $1 billion.

Other proposals would expand current tax preferences. A new proposal to exclude up to $500,000 of

capital gains from each sale of an owner-occupied home

would reduce revenues by nearly $3 billion through

2002. Additional proposals would expand tax incentives in distressed areas, increase the size of closely

held businesses eligible for special estate tax treatment,

make the new economic activity credit for Puerto Rico

more generous, and add computer software to the list of

exports eligible for special tax treatment.

Provisions Reinstating

Expired Taxes

The Administration has proposed a long list of tax increases to offset the proposed revenue-reducing provisions. Taken together, revenue-increasing provisions

would boost revenues by about $80 billion through

2002 (see Table 18). About half of the additional revenues would come from reinstating taxes that have expired in the last few years. The Administration recommended reimposing the same taxes in 1996. The taxes

would be restored through 2007. 

Reinstating aviation taxes accounts for $33 billion

of the additional revenues. The Administration proposes to reinstate the Airport and Airway Trust Fund

taxes, which consist of a 10 percent ticket tax and taxes

on international departures, cargo, and fuel. Those

taxes expired December 31, 1996. (A bill extending

the taxes through the end of fiscal year 1997 was enacted on February 28, 1997&too late to be reflected in

the numbers in this report.) The second step of the proposal is to replace the ticket tax with a system of fees,

beginning in fiscal year 1999. The estimate presented

here for 1998 reflects extending current law plus $300

million from a new, still-unspecified fee. The Administration has not specified the replacement fee system,

and so CBO has used Administration estimates for

1999 and later years.

The Administration also proposes to reinstate the

Superfund environmental tax on corporate taxable income and the three Superfund excise taxes. Those

taxes expired at the end of 1995. The receipts would

be deposited in the Hazardous Substance Superfund

and used to clean up hazardous waste sites. Reinstating

those taxes would add $6.4 billion to revenues through

2002. Furthermore, the Administration proposal reinstates the Oil Spill Liability excise tax, which expired

at the end of 1994, and the Leaking Underground Storage Tank excise taxes, which expired at the end of

1995.

Other Provisions That Would

Increase Revenues

Most of the remaining revenue increases proposed by

the President result from modifying the tax treatment of

corporations and investors. Those same proposals were

offered in 1996. Several new proposals replace provisions proposed last year and subsequently enacted.

Those enacted provisions include disallowing interest

deductions for corporate-owned life insurance, reducing

the possessions tax credit, equalizing the treatment of

the bad debt of thrift institutions and commercial

banks, and tightening provisions affecting expatriates

and foreign trusts. 

The President's proposals affecting the treatment of

the foreign income of businesses would increase revenues by $12 billion through 2002. The largest increase,

about $8 billion, would come from a new proposal.

That proposal would limit the amount of income that

exporters can classify as foreign-source income, thus

reducing the amount of usable foreign tax credits.

Other proposals, repeated from last year, would limit

the use of foreign tax credits to reduce previous years'

taxes and change the treatment of income from foreign

oil and gas extraction.

The President's proposals for financial products,

which are also repeated from last year, would raise $6.6

billion through 2002. The largest increase would come
CHAPTER FOUR THE PRESIDENT’S REVENUE PROPOSALS 43

from changing the rules for taxpayers who sell part of

their holdings of an asset. Under the proposal, taxpayers would be required to calculate capital gains using

the average cost of their holdings. Under current law,

taxpayers can reduce their gains by selling the assets

purchased at the highest cost. Other proposals would

reduce the dividends-received deduction for some corporations and limit interest deductions.

Table 18.

Comparison of Revenue Estimates of the President's Provisions That Would Increase Revenues 

(By fiscal year, in billions of dollars)

Total,

1997 1998 1999 2000 2001 2002 1997-2002

Total of Provisions That Would Reinstate Expired Taxes

CBO/JCT 0.7 6.9 8.2 8.2 8.4 8.6 40.9 a

Administration 2.4 7.1 8.4 8.5 8.7 8.9 44.0

Total of Foreign Provisions

CBO/JCT b 1.2 2.5 2.6 2.8 2.9 12.0

Administration 0 1.0 1.8 2.0 2.2 2.3 9.4

Total of Provisions Relating to Financial Products

CBO/JCT b 1.2 1.1 1.4 1.4 1.4 6.6

Administration 0.1 1.1 1.4 1.6 1.7 1.7 7.6

Total of Accounting Provisions

CBO/JCT b 0.3 0.5 0.5 0.5 0.5 2.2

Administration 0.1 0.5 0.6 0.7 0.7 0.5 3.1

Total of Other Corporate Tax Reforms

CBO/JCT 0.2 0.8 1.2 1.4 1.1 0.9 5.5

Administration 0.5 1.1 1.1 1.3 1.2 1.2 6.4

Total of Other Provisions That Would Increase Revenues

CBO/JCT b 0.8 2.2 3.1 3.4 4.7 14.2

Administration b 1.0 2.1 2.7 2.9 4.3 13.0

Total of All Provisions That Would Increase Revenues

CBO/JCT 0.9 11.1 15.7 17.2 17.6 19.0 81.5

Administration 3.0 11.8 15.6 16.8 17.4 18.9 83.5

SOURCES: Congressional Budget Office; Joint Committee on Taxation; Office of Management and Budget.

NOTE: JCT = Joint Committee on Taxation.

a. The Administration proposes that aviation excise taxes be repealed effective October 1, 1998, and replaced with cost-based user fees. Because

the user fee proposal has yet to be specified, CBO has accepted OMB's estimate beginning in fiscal year 1999. The estimate does not reflect the

temporary extension of the aviation taxes enacted on February 28, 1997.

b. Less than $50 million.
44 AN ANALYSIS OF THE PRESIDENT’S BUDGETARY PROPOSALS FOR FISCAL YEAR 1998 March 1997

In addition, a proposed limitation in the use of

current-year losses to reduce prior-year taxes would add

$3.5 billion to revenues through 2002. Modifications

to inventory rules would raise about $2 billion. Other

modifications to the corporate income tax would raise

an additional $2 billion in revenues.

The remaining proposed tax and fee increases add a

further $14 billion to revenues. About half of those

revenues would be in the form of Federal Unemployment Tax Act (FUTA) taxes. A FUTA surtax that was

first enacted in 1976 is scheduled to expire at the end of

1998. The Administration proposes to extend that surtax through 2007 and retain those receipts by allowing

the federal trust fund to accumulate larger balances.

The Administration also proposes a speed up in the

deposit of state and federal unemployment taxes, starting in 2002. That proposal would move $1.3 billion

into 2002, with almost no effect on revenues in subsequent years and no effect at all on tax liabilities. Other

proposals would raise the retirement contributions of

federal employees and provide for continuous levies by

the Internal Revenue Service on the federal benefit payments of delinquent taxpayers until those debts have

been fully paid.
Appendixes

T

Appendix A

CBO Baseline Budget Projections

hroughout this report, the Administration's proposals are contrasted with the Congressional

Budget Office's (CBO's) baseline estimates of

the budget. Those estimates show the path of revenues

and spending if current laws and policies remain unchanged. They are not forecasts of what will actually

occur, since policymakers will undoubtedly seek to alter

current priorities. But CBO's current-policy estimates

serve as handy yardsticks for gauging the potential impact of proposed changes&those advocated in the President's budget as well as in competing packages.

CBO compared the President's budget to its baseline and made additional adjustments for the economic

effects of balancing the budget. Credible legislative

changes intended to balance the budget would produce

lower interest rates and slightly higher growth than under the baseline economic scenario, thereby producing a

fiscal dividend. The projections including the fiscal

dividend, which show how much tax and spending policies must be changed to eliminate the deficit, are presented at the end of this appendix.

The Baseline Concept

CBO's baseline projections follow some general rules.

Revenues and entitlement programs (such as Social

Security and Medicare) continue on their course until

the Congress changes the laws that underpin them&

laws that define taxable income and set tax rates, benefit formulas, eligibility, and so forth. For those categories of the budget, therefore, the baseline represents

CBO's best estimate of what will happen in the absence

of any changes to current laws.

Discretionary programs, unlike entitlement programs, are funded anew each year through the appropriation process. Discretionary programs encompass

nearly all spending for defense and international affairs,

as well as many domestic programs&for space, energy,

highway and airport grants, environmental protection,

and health research, to name just a few&and the salaries and expenses of government agencies. The Budget

Enforcement Act of 1990 set caps on total discretionary

spending for 1991 through 1995, and the Omnibus

Budget Reconciliation Act of 1993 extended them

through 1998. CBO's baseline assumes compliance

with the caps in 1998&which, as explained below, will

force trade-offs among many competing programs. No

law specifies caps after 1998, so CBO produced two

alternative projections of discretionary spending for the

years beyond that. One set of baseline projections preserves discretionary spending at the same real level as

in 1998, increasing it by around 3 percent a year to account for inflation. The other set assumes that discretionary spending is frozen at the 1998 dollar level with

no increases for inflation.

The budget includes two other categories of spending: offsetting receipts, which encompass Medicare insurance premiums and similar fees and collections, and

net interest, which basically reflects the government's

interest payments on the national debt. CBO's baseline

for offsetting receipts represents the agency's best estimate of the amount that the government will collect

under current laws and policies. Net interest is driven

by market interest rates and future deficits rather
48 AN ANALYSIS OF THE PRESIDENT’S BUDGETARY PROPOSALS FOR FISCAL YEAR 1998 March 1997

Table A-1.

Changes in CBO Deficit Projections Since January (By fiscal year, in billions of dollars)

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

January 1997 Baseline Deficit 124.2 119.7 147.2 171.3 167.2 188.4 201.6 219.3 253.7 265.6 278.0

Technical Changes

Revenues 0.4 0.4 0.4 0.4 0.3 0.1 c c c -0.1 -0.1 a b

Outlays

Discretionary 1.7 1.5 1.5 1.6 1.6 1.7 1.7 1.8 1.8 1.9 1.9

Mandatory

Social Security -1.0 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1

Student loans -2.0 0.6 0.3 0.1 -0.1 -0.2 -0.1 -0.2 -0.3 -0.3 -0.4

Food Stamps -1.0 -0.8 -0.6 -0.3 b b -0.1 -0.1 -0.1 -0.1 -0.1

FCC spectrum auctions -3.0 1.7 1.9 0.3 0 0 0 0 0 0 0

Net interest -0.6 -0.6 -1.0 -1.2 -1.1 -1.1 -0.9 -0.7 -0.3 0.3 0.9

All other -3.8 -0.3 -0.9 0.4 -1.2 -1.2 -0.2 0.1 0.7 1.0 -2.4

Subtotal, mandatory -11.3 0.5 -0.4 -0.9 -2.5 -2.6 -1.5 -1.0 -0.1 0.8 -2.1

Total, outlays -9.6 2.0 1.1 0.7 -0.8 -1.0 0.2 0.8 1.7 2.7 -0.2

Total Technical Changes -9.1 2.4 1.5 1.1 -0.6 -0.9 0.2 0.8 1.7 2.6 -0.3 b

March 1997 Baseline Deficit 115.1 122.1 148.7 172.4 166.6 187.5 201.8 220.1 255.4 268.1 277.7 b

SOURCE: Congressional Budget Office.

NOTE: FCC = Federal Communications Commission.

a. Reductions in revenues are shown with a positive sign because they increase the deficit.

b. Does not include $2.7 billion in revenues from temporary reinstatement of the Airport and Airway Trust Fund taxes enacted on February 28, 1997.

b. Less than $50 million.

than being directly controlled by policymakers, so CBO

estimates net interest spending based on its projections

of those two determinants.

Baseline Projections

In January, CBO published its baseline projections in

The Economic and Budget Outlook: Fiscal Years

1998-2007, which described the key factors that drive

the federal government's revenues, spending, and deficit. Since that report, CBO has revised its deficit projection for 1997 downward by $9 billion; however,

without much additional information about future years,

the projections for 1998 and beyond have changed very

little (see Table A-1). 

The Congressional Budget Office generally divides

revisions to its estimates into three categories: economic, legislative, and technical (whatever does not fall

into the first two categories). Because CBO has not

updated its economic forecast, and no new legislation

has affected deficit projections since January, all

changes to the baseline are technical ones. The techni- 1

cal revisions stem from new information that came to

light through late February, much of which was contained in the President's budget and supporting documents.

The only significant changes in the baseline are for

estimates of fiscal year 1997 outlays. CBO lowered its

estimate of the 1997 deficit for three main reasons:

1. On February 28, the President signed into law a bill reinstating aviation excise taxes through the end of fiscal year 1997. That action,

which will raise $2.7 billion in revenues, is not reflected in the baseline

because CBO completed its estimates before that date.
APPENDIX A CBO BASELINE BUDGET PROJECTIONS 49

Table A-2.

CBO Deficit Projections (By fiscal year)

Actual

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

In Billions of Dollars

Baseline Total Deficit

Discretionary spending grows 

with inflation after 1998 107 115 122 149 172 167 188 202 220 255 268 278

Discretionary spending is 

frozen at the 1998 level 107 115 122 128 133 99 99 89 81 90 69 42

Standardized-Employment Deficita

Discretionary spending grows 

with inflation after 1998 125 145 131 145 156 166 178 192 210 230 255 282

Discretionary spending is 

frozen at the 1998 level 125 145 131 124 117 98 90 79 70 65 56 47

On-Budget Deficit (Excluding 

Social Security and Postal Service)

Discretionary spending grows 

with inflation after 1998 174 193 201 238 268 265 291 311 334 376 395 410

Discretionary spending is 

frozen at the 1998 level 174 193 201 216 229 198 203 198 194 210 196 175

Memorandum:

Deposit Insurance -8 -12 -4 -3 -1 b b -1 -1 -1 -1 -1

FCC Spectrum Auctions b -10 -7 -2 -1 b 0 0 0 0 0 0

Timing of Payments -5 0 0 0 8 -8 0 0 0 14 1 -16

Cyclical Deficit -4 -8 3 8 9 10 10 11 11 12 12 13

Off-Budget Surplus

Social Security 66 79 81 88 94 98 104 109 114 120 127 133

Postal Service 1 -1 -3 1 1 1 b 0 0 0 0 0

Total 67 78 79 89 96 99 104 109 114 120 127 133

As a Percentage of Gross Domestic Product

Baseline Total Deficit

Discretionary spending grows 

with inflation after 1998 1.4 1.5 1.5 1.7 1.9 1.8 1.9 2.0 2.0 2.3 2.3 2.2

Discretionary spending is 

frozen at the 1998 level 1.4 1.5 1.5 1.5 1.5 1.1 1.0 0.9 0.7 0.8 0.6 0.3

Standardized-Employment Deficita,c

Discretionary spending grows 

with inflation after 1998 1.7 1.9 1.6 1.7 1.7 1.8 1.8 1.9 1.9 2.0 2.2 2.3

Discretionary spending is 

frozen at the 1998 level 1.7 1.9 1.6 1.4 1.3 1.0 0.9 0.8 0.6 0.6 0.5 0.4

SOURCE: Congressional Budget Office.

NOTES: Caps on discretionary spending are set by law through 1998. The first projection assumes that discretionary spending increases at the rate

of inflation after 1998. The second projection assumes that discretionary spending remains frozen in dollar terms at the level of the 1998

cap.

FCC = Federal Communications Commission.

a. Excludes the cyclical deficit, deposit insurance, FCC spectrum auctions, and timing adjustments. Also incorporates technical revisions since

January 1997.

b. Less than $500 million.

c. Expressed as a percentage of potential gross domestic product.
50 AN ANALYSIS OF THE PRESIDENT’S BUDGETARY PROPOSALS FOR FISCAL YEAR 1998 March 1997

o The Federal Communications Commission resolved problems that threatened to delay until next

year the issuing of licenses and recording of payments for past spectrum auctions. That change

increased CBO's projections of offsetting receipts

in 1997 by $3 billion.

o Spending patterns through the first four months of

the fiscal year have led CBO to expect that Social

Security and the Food Stamp program will each

spend $1 billion less in 1997 than previously anticipated.

Table A-3.

CBO Baseline Budget Projections, Assuming Compliance with Discretionary Spending Caps (By fiscal year)

Actual

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

In Billions of Dollars

Revenues

Individual income 656 676 708 740 777 817 857 900 947 994 1,042 1,096

Corporate income 172 179 184 187 189 193 198 205 213 223 234 245

Social insurance 509 534 553 578 604 630 659 687 717 749 784 820

Other 115 117 122 128 134 141 146 151 156 161 167 172 a

Total 1,453 1,507 1,566 1,633 1,705 1,781 1,860 1,943 2,033 2,127 2,227 2,333

On-budget 1,086 1,119 1,164 1,211 1,263 1,320 1,378 1,440 1,509 1,579 1,652 1,731

Off-budget 367 388 403 422 442 461 482 503 524 549 575 602

Outlays

Discretionary

Defense 266 268 270 276 287 289 301 310 319 332 339 345

Domestic and international 267 279 285 292 299 307 316 325 334 345 355 366

Violent Crime Reduction 

Trust Fund 1 2 3 4 5 5 5 5 5 6 6 6

Unspecified reductions 0 0 -13 -10 -11 -4 -7 -7 -7 -10 -6 -3 b

Subtotal 534 549 545 562 579 597 615 633 652 672 693 715

Mandatory spending 858 909 976 1,036 1,111 1,161 1,239 1,311 1,390 1,491 1,572 1,655

Offsetting receipts -73 -83 -84 -77 -78 -81 -84 -87 -89 -92 -95 -99

Net interest 241 248 252 260 266 271 278 288 300 311 325 341

Total 1,560 1,622 1,689 1,782 1,877 1,947 2,048 2,145 2,253 2,383 2,495 2,611

On-budget 1,260 1,312 1,365 1,449 1,531 1,585 1,670 1,751 1,843 1,954 2,047 2,141

Off-budget 300 310 324 333 346 362 378 394 410 428 448 469

Deficit 107 115 122 149 172 167 188 202 220 255 268 278

On-budget deficit 174 193 201 238 268 265 291 311 334 375 395 410

Off-budget surplus 67 78 79 89 96 99 104 109 114 120 127 133

Debt Held by the Public 3,733 3,864 4,004 4,167 4,353 4,534 4,735 4,949 5,179 5,445 5,722 6,011

Memorandum:

Gross Domestic Product 7,485 7,829 8,182 8,576 8,991 9,421 9,870 10,334 10,815 11,315 11,835 12,379

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

SOURCE: Congressional Budget Office. 
APPENDIX A CBO BASELINE BUDGET PROJECTIONS 51

o The Department of Education has announced plans

to record a $3 billion reduction in the estimated

subsidy costs of outstanding student loans (that reduction is partially offset by other changes that increase projected loan costs).

In addition, CBO's estimates of discretionary

spending have increased by nearly $2 billion in each

year through 2007 because of adjustments in the discretionary spending caps based on the official levels reported by the Office of Management and Budget.

Table A-3.

Continued

Actual

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

As a Percentage of Gross Domestic Product

Revenues

Individual income 8.8 8.6 8.6 8.6 8.6 8.7 8.7 8.7 8.8 8.8 8.8 8.9

Corporate income 2.3 2.3 2.2 2.2 2.1 2.0 2.0 2.0 2.0 2.0 2.0 2.0

Social insurance 6.8 6.8 6.8 6.7 6.7 6.7 6.7 6.7 6.6 6.6 6.6 6.6

Other 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.4 1.4 1.4 1.4 a

Total 19.4 19.2 19.1 19.0 19.0 18.9 18.8 18.8 18.8 18.8 18.8 18.8

On-budget 14.5 14.3 14.2 14.1 14.0 14.0 14.0 13.9 14.0 14.0 14.0 14.0

Off-budget 4.9 5.0 4.9 4.9 4.9 4.9 4.9 4.9 4.8 4.8 4.9 4.9

Outlays

Discretionary

Defense 3.6 3.4 3.3 3.2 3.2 3.1 3.0 3.0 3.0 2.9 2.9 2.8

Domestic and international 3.6 3.6 3.5 3.4 3.3 3.3 3.2 3.1 3.1 3.0 3.0 3.0

Violent Crime Reduction 

Trust Fund c c c 0.1 0.1 0.1 0.1 0.1 0.1 c c c

Unspecified reductions 0 0 -0.2 -0.1 -0.1 c -0.1 -0.1 -0.1 -0.1 -0.1 c b

Subtotal 7.1 7.0 6.7 6.6 6.4 6.3 6.2 6.1 6.0 5.9 5.9 5.8

Mandatory spending 11.5 11.6 11.9 12.1 12.4 12.3 12.6 12.7 12.9 13.2 13.3 13.4

Offsetting receipts -1.0 -1.1 -1.0 -0.9 -0.9 -0.9 -0.9 -0.8 -0.8 -0.8 -0.8 -0.8

Net interest 3.2 3.2 3.1 3.0 3.0 2.9 2.8 2.8 2.8 2.8 2.7 2.8

Total 20.8 20.7 20.6 20.8 20.9 20.7 20.7 20.8 20.8 21.1 21.1 21.1

On-budget 16.8 16.8 16.7 16.9 17.0 16.8 16.9 16.9 17.0 17.3 17.3 17.3

Off-budget 4.0 4.0 4.0 3.9 3.9 3.8 3.8 3.8 3.8 3.8 3.8 3.8

Deficit 1.4 1.5 1.5 1.7 1.9 1.8 1.9 2.0 2.0 2.3 2.3 2.2

On-budget deficit 2.3 2.5 2.5 2.8 3.0 2.8 3.0 3.0 3.1 3.3 3.3 3.3

Off-budget surplus 0.9 1.0 1.0 1.0 1.1 1.0 1.1 1.1 1.1 1.1 1.1 1.1

Debt Held by the Public 49.9 49.4 48.9 48.6 48.4 48.1 48.0 47.9 47.9 48.1 48.4 48.6

a. Does not include $2.7 billion in revenues from temporary reinstatement of the Airport and Airway Trust Fund taxes enacted on February 28, 1997.

b. The amount that spending would need to be reduced to meet the cap on discretionary outlays in 1998 and the effects of that reduction on CBO’s

discretionary totals in later years.

c. Less than 0.05 percent.
52 AN ANALYSIS OF THE PRESIDENT’S BUDGETARY PROPOSALS FOR FISCAL YEAR 1998 March 1997

The remaining tables in this appendix update some

of the most widely used information in CBO's January

report. Because the revisions are relatively minor, readers seeking a fuller explanation of underlying trends in

the budget can rely on that earlier publication.

Much of the concern about the budget stems from

the size of the federal deficit; Table A-2 on page 49

displays several measures of that gap. The most commonly used measure is simply the difference between

total revenues and spending. As explained above, CBO

produces two projections of that difference&one assuming that discretionary spending grows at the rate of

inflation after 1998 and the other assuming that such

spending is frozen at the 1998 level.

Participants in the budget debate often use other

measures of the deficit as well&in particular, the

standardized-employment, or structural, deficit. That

measure shows the underlying deficit by removing cyclical effects (the weakened revenues and extra benefit

spending that result when the economy operates below

its potential) and other temporary factors. With the

economy continuing on a solid footing, the distinction

between the structural deficit and the conventionally

measured deficit is less important now than during periods of economic slowdown.

Spending and receipts for a few large programs are

generally tracked separately; chief among them are Social Security and the Postal Service (both of which are

off-budget under different statutory provisions). Despite their special status, those programs loom large

enough in the revenue and spending totals that any

measure of the budget that omits them yields a distorted

picture of the government's drain on credit markets and

its role in the economy.

Federal government revenues by source and outlays

by broad category, both in dollar terms and in relation

to the country's gross domestic product (GDP), are presented in Table A-3 on pages 50 and 51. Spending for

entitlements and other mandatory programs, by far the

largest spending category, will reach $900 billion this

year and is growing fast. Fueling that growth are expenditures for Social Security, Medicare, and Medicaid,

which together account for around three-quarters of all

mandatory outlays (see Table A-4).

In its baseline projections, CBO assumes that

policymakers will continue to abide by the discretionary

spending limits set in law through 1998. Separate caps

apply to budget authority (the authority to commit

funds, the basic currency of the appropriation process)

and outlays (actual spending); the stricter constraint

governs. For general-purpose discretionary accounts,

the caps have no implications for particular programs

but rather force a competition for resources. The cap

on budget authority for 1998 is large enough that the

Congress could theoretically preserve budget authority

at this year's level adjusted for inflation&but doing so

would leave outlays $13 billion above their cap. Even

if the Congress froze discretionary spending at this

year's level, the cap would require an additional $2 billion cut in outlays. The Violent Crime Reduction Trust

Fund is also subject to a cap on outlays, but it does not

constrain projected spending.

Interest costs are a significant portion of the federal

budget&about 15 percent of all federal spending today.

Under CBO's assumption of stable interest rates

throughout the projection period, if discretionary spending increases with inflation, interest payments will decline to 13 percent of federal outlays by 2007. In dollar

terms, net interest will rise steadily from $241 billion in

1996 to $341 billion in 2007 (see Table A-5). Debt

held by the public is projected to swell during that period from $3.7 trillion to $6 trillion. Measured as a

percentage of GDP, however, interest costs are expected to decline from 3.2 percent this year to 2.8 percent in 2007, and debt held by the public will stabilize

at about 48 percent of GDP.

The Fiscal Dividend

Policy changes that would significantly reduce the size

of the budget deficit can be expected to have an impact

on the larger economy, lowering interest rates and stimulating economic growth. Those economic changes

would in turn boost revenues, reduce outlays, and ultimately reduce the size of the deficit by more than the

amount of the policy changes. The extra measure of

deficit reduction induced by those economic feedbacks

is called the fiscal dividend. To help legislators and the

public more realistically assess the magnitude of the
APPENDIX A CBO BASELINE BUDGET PROJECTIONS 53

Table A-4.

CBO Baseline Projections of Mandatory Spending, Including Deposit Insurance 

(By fiscal year, in billions of dollars)

Actual

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Means-Tested Programs

Medicaid 92 99 105 114 123 133 144 156 169 183 199 216

Food Stamps 25 24 24 26 27 29 29 30 31 32 33 34 a

Supplemental Security Income 24 27 26 28 33 30 35 37 40 46 45 44

Family Support 18 20 22 22 23 23 23 23 24 24 24 25

Veterans' Pensions 3 3 3 3 4 3 4 4 4 4 4 4

Child Nutrition 8 8 8 9 9 10 10 11 11 12 12 13

Earned Income Tax Credit 19 21 22 22 23 24 25 26 27 28 29 30

Student Loans 4 c 3 4 4 4 4 4 4 4 4 4 b

Other 4 4 4 5 5 5 6 6 7 7 8 8

Total 196 206 218 233 251 260 279 297 316 340 358 378

Non-Means-Tested Programs

Social Security 347 363 381 399 420 441 464 487 512 539 568 598

Medicare 191 209 227 248 273 286 314 339 368 410 438 464

Subtotal 538 572 608 648 692 726 777 827 881 949 1,005 1,062

Other Retirement and Disability

Federal civilian 44 46 48 51 54 56 59 63 66 70 75 79 d

Military 29 30 31 32 33 34 35 37 38 39 40 42

Other 5 4 4 4 5 5 5 5 5 5 5 5

Subtotal 77 81 84 87 92 96 100 104 109 114 120 126

Unemployment Compensation 23 23 24 26 28 29 30 32 33 34 36 37

Deposit Insurance -8 -12 -4 -3 -1 c c -1 -1 -1 -1 -1

Other Programs

Veterans' benefits 17 18 20 21 23 20 22 23 23 25 24 23 e

Farm price supports 567775555555

Social services 5 5 5 5 6 6 6 6 6 6 6 6

Credit reform liquidating 

accounts -9 -8 -6 -6 -6 -6 -5 -6 -6 -6 -6 -6

Other 14 19 19 18 20 24 25 23 24 24 24 25

Subtotal 32 40 46 45 49 49 52 52 53 55 54 53

Total 662 703 758 804 860 900 960 1,014 1,074 1,151 1,213 1,277

Total

All Mandatory Spending 858 909 976 1,036 1,111 1,161 1,239 1,311 1,390 1,491 1,572 1,655

SOURCE: Congressional Budget Office.

NOTE: Spending for benefit programs shown above generally excludes administrative costs, which are discretionary. Spending for Medicare also

excludes premiums, which are considered offsetting receipts.

a. Includes nutrition assistance to Puerto Rico.

b. Formerly known as guaranteed student loans.

c. Less than $500 million.

d. Includes Civil Service, Foreign Service, Coast Guard, other retirement programs, and annuitants' health benefits.

e. Includes veterans' compensation, readjustment benefits, life insurance, and housing programs.
54 AN ANALYSIS OF THE PRESIDENT’S BUDGETARY PROPOSALS FOR FISCAL YEAR 1998 March 1997

policy changes needed to attain a particular amount of

deficit reduction, CBO has prepared economic and budgetary projections that incorporate those dynamic feedback effects.

Incorporating the fiscal dividend into CBO's baseline projections would reduce the amount of deficit reduction needed to balance the budget in 2002 from

$188 billion to $153 billion (see Table A-6). About

Table A-5.

CBO Baseline Projections of Federal Debt and Interest Costs (By fiscal year)

Actual

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Net Interest Outlays (Billions of dollars)

Interest on Public Debt

(Gross Interest) 344 359 368 380 390 400 412 426 442 457 475 492 a

Interest Received by 

Trust Funds

Social Security -37 -43 -48 -53 -58 -64 -69 -76 -82 -89 -97 -104

Other trust funds -61 -63 -61 -60 -59 -58 -56 -54 -51 -47 -43 -37 b

Subtotal -97 -106 -109 -113 -117 -121 -125 -130 -133 -137 -139 -141

Other Interest -5 -6 -7 -7 -7 -8 -8 -8 -9 -10 -10 -10 c

Total 241 248 252 260 266 271 278 288 300 311 325 341

Federal Debt, End of Year (Billions of dollars)

Gross Federal Debt 5,182 5,433 5,683 5,954 6,243 6,522 6,818 7,119 7,429 7,758 8,090 8,424

Debt Held by Government 

Accounts

Social Security 550 629 710 798 892 990 1,094 1,204 1,318 1,438 1,565 1,697

Other government 

accounts 899 940 969 989 997 998 989 967 932 875 803 716 b

Total 1,449 1,569 1,679 1,787 1,889 1,989 2,083 2,171 2,249 2,313 2,367 2,413

Debt Held by the Public 3,733 3,864 4,004 4,167 4,353 4,534 4,735 4,949 5,179 5,445 5,722 6,011

Debt Subject to Limit 5,137 5,390 5,643 5,914 6,203 6,482 6,778 7,079 7,389 7,718 8,050 8,384 d

Federal Debt as a Percentage of Gross Domestic Product

Debt Held by the Public 49.9 49.4 48.9 48.6 48.4 48.1 48.0 47.9 47.9 48.1 48.4 48.6

SOURCE: Congressional Budget Office.

NOTE: Projections of interest and debt assume that discretionary spending is adjusted for inflation up to the statutory caps that are in effect through

1998. All discretionary spending other than spending from the Violent Crime Reduction Trust Fund is assumed to equal the caps in 1998

and to grow from that level at the rate of inflation in later years.

a. Excludes interest costs of debt issued by agencies other than the Treasury (primarily the Tennessee Valley Authority).

b. Principally Civil Service Retirement, Military Retirement, Medicare, unemployment insurance, and the Highway and the Airport and Airway Trust

Funds.

c. Primarily interest on loans to the public.

d. Differs from the gross federal debt primarily because most debt issued by agencies other than the Treasury is excluded from the debt limit.
APPENDIX A CBO BASELINE BUDGET PROJECTIONS 55

$27 billion of that reduction can be attributed to interest rates that would be 70 basis points (0.7 percentage

points) lower than projected in the baseline, and $5 billion would result from higher revenues associated

with slightly greater growth in GDP. For a more detailed discussion of the economic and budgetary implications of balancing the budget, see Chapter 4 of

CBO's January report.

Table A-6.

Changes in the Deficit Resulting from the Economic Effects of Balancing the Budget by 2002

(By fiscal year, in billions of dollars)

Total,

1997 1998 1999 2000 2001 2002 1997-2002

CBO Baseline Deficit 115 122 149 172 167 188 n.a.

Change Resulting from Lower

Interest Rates

Outlays

Net interest 0 a -2 -8 -15 -20 -45

Other a a a a a a a

Revenuesb

Federal Reserve earnings 0aa123 6

Shift in income shares a a -1 -3 -6 -9 -19

Subtotal a a -2 -10 -19 -27 -58

Change Resulting from Higher

Gross Domestic Product a -1 -2 -3 -4 -5 -14

Change in Debt Service a a a -1 -2 -3 -5

Total Effect on the Deficit a -1 -4 -13 -24 -34 -77

Deficit Including Fiscal Dividend 115 121 145 159 142 153 n.a.

SOURCE: Congressional Budget Office.

NOTE: n.a. = not applicable.

a. Less than $500 million.

b. Revenue reductions are shown as positive because they increase the deficit.

S

Appendix B

Comparing the Accuracy of Forecasts

by CBO and the Clinton Administration

ince taking office, the Clinton Administration

has produced four multiyear economic forecasts

and current-services budget projections that can

be compared with projections by the Congressional

Budget Office (CBO). The four sets of projections provide a total of 10 forecasts to measure against actual

results (the projection made in early 1993 can be evaluated for four years, 1993 through 1996; the projection

from early 1994 can be evaluated for three years, 1994

through 1996; and so on).

In those 10 forecasts, CBO generally proved more

accurate than the Administration in projecting the size

of the deficit: it more accurately forecast seven of the

10 yearly deficits (see Table B-1). By contrast, the record for the two institutions' forecasts of individual

macroeconomic variables was more mixed (see Table

B-2). In general, CBO had more success forecasting

the growth rate of nominal gross domestic product

(GDP), inflation in the GDP price index and the consumer price index (CPI), and long-term interest rates.

For its part, the Administration was more accurate in

predicting real (inflation-adjusted) GDP growth and the

total amount of incomes (corporate profits plus workers' wages and salaries).

Because only a small number of forecasts are available for comparison and the differences between the

two institutions' numbers are not large, such a comparison is of limited use in evaluating their relative accuracy even for the one- to four-year horizons examined

here. Still less can be gleaned from this comparison

about which institution's current forecasts for 2002 are

likely to prove more accurate.

Comparing the Accuracy of

Deficit Projections

Typically, the Administration produces two sets of budget projections: one assuming that current policies continue without change, and another incorporating the

effects of the policies proposed in the President's budget submission to the Congress. A comparison of the

Administration and CBO must use the Administration's

current-policy projections because they are produced

using the same principle as CBO's baseline budget projections (that no changes are made in policies).

The alternative&comparing the Administration's

estimate of the deficit that includes the effects of the

President's proposals (the deficit highlighted in the

President's budget) with CBO's current-policy baseline

deficit&would be misleading. For example, assume

that CBO projected a deficit of $200 billion under current laws and policies, whereas the Administration projected a deficit of $150 billion if the President's policies

were enacted or $250 billion if no policy changes occurred. If the President's policies were not enacted but

the deficit turned out to be $170 billion, it would not be

appropriate to conclude that the Administration's estimate of $150 billion was closer to the actual deficit
58 AN ANALYSIS OF THE PRESIDENT’S BUDGETARY PROPOSALS FOR FISCAL YEAR 1998 March 1997

than CBO's $200 billion estimate. For that reason, the

comparisons made here use the current-policy budget

projections of both institutions.

Since President Clinton took office, the Administration and CBO have produced 10 forecasts of the

yearly deficit for fiscal years 1993 through 1996. As

noted above, CBO was closer to the mark in seven of

them. However, all of the differences between its errors

and the Administration's were small, amounting to $13

billion or less in each case (see Table B-1). All 10

forecasts, both by CBO and the Administration, projected higher deficits than actually came to pass.

One reason both institutions erred on the high side

is that policy changes enacted after the forecasts were

issued had the net effect of reducing the deficit. For

instance, in the spring of 1993 CBO projected that the

deficit would be $279 billion in fiscal year 1996, and

the Administration projected that it would be $290 billion. The actual deficit in 1996 was $107 billion,

meaning that CBO's projection was too high by $172

billion and the Administration's by $183 billion. However, CBO estimates that $83 billion of the reduction in

the 1996 deficit resulted from policy changes contained

in the Omnibus Budget Reconciliation Act of 1993,

which was enacted several months after those projections were made. Changes in policies also affected the

accuracy of subsequent projections, although by lesser

amounts.

Because changes in policies contribute equally to

both CBO's and the Administration's errors, they do not

affect the comparisons between the two institution's

projections made in this analysis.

Comparing the Accuracy of

Economic Projections

Comparing economic forecasts is hampered to some

extent by differences in assumptions about fiscal policy. The Administration's forecasts assume that the

President's proposed policies will be adopted. CBO's

forecasts, as mentioned above, assume the continuation

of current policy. However, for the forecast horizons

used here (one to four years ahead), the small differences in policy assumptions are unlikely to affect the

results of the comparison. 

CBO and the Administration publish projections

for a number of important macroeconomic indicators:

growth of nominal GDP, growth of real GDP and the

GDP price index, growth of the CPI, the total amount

of corporate profits and wage and salary disbursements,

the unemployment rate, and interest rates on threemonth Treasury bills and 10-year Treasury notes. Not

all of those indicators are independent&for example,

the projections for nominal GDP are based on the projections for real GDP and the GDP price index. Also,

CBO produces separate projections for corporate profits and for wage and salary disbursements, but because

they have similar implications for budget projections, it

combines the two into a single measure of incomes.

In early 1996, the federal government changed the

way it officially measures real GDP and the GDP price

index; as a result, some of the forecasts for those indicators cannot be directly compared with the actual measure. In addition, the comparison of income forecasts is

limited because the Administration did not publish such

a forecast in its April 1993 projections.

Overall, between 1993 and 1996, CBO's forecasting record was more accurate than the Administration's

for nominal GDP growth, for inflation as measured by

both the GDP price index and the CPI, and for longterm interest rates (see Table B-2). The Administration

was more accurate in forecasting real GDP growth and

the sum of corporate profits and wages and salaries.

Both institutions made similar errors in forecasting the

unemployment rate and short-term interest rates. (See

Tables B-3 through B-10 for comparisons for those

eight macroeconomic indicators.)

At first glance, CBO's smaller error in forecasting

nominal GDP growth but larger error in forecasting

wage and salary disbursements and corporate profits

appears contradictory. How could the Congressional

Budget Office have a more accurate estimate of nominal GDP but a less accurate estimate of important income categories that form part of GDP? The answer

stems from an extraordinarily large difference between

the growth of overall incomes and the growth of output

in 1995 and 1996. Income growth exceeded output

growth by 1 percentage point in both of those years.
APPENDIX B COMPARING THE ACCURACY OF FORECASTS BY CBO AND THE CLINTON ADMINISTRATION 59

Conceptually, the two measures of economic activity&income and output&are the same, but differences

occur because the Commerce Department uses different

sources of data to calculate them. The difference between the two measures is referred to as the statistical

discrepancy, and it cannot be forecast. CBO's errors in

forecasting incomes closely match the statistical discrepancy. Because CBO based its forecast for the 1

growth of incomes on its forecast for the growth of output, it underestimated the former in 1995 and 1996

even though it quite accurately forecast the latter.

1. See Congressional Budget Office, The Economic and Budget Outlook: An Update (August 1996), Appendix A.
60 AN ANALYSIS OF THE PRESIDENT’S BUDGETARY PROPOSALS FOR FISCAL YEAR 1998 March 1997

Table B-1.

Administration and CBO Current-Policy Deficit Projections (By fiscal year, in billions of dollars)

1993 1994 1995 1996

Published Projections

Administration, April 1993 310 297 283 279

CBO, March 1993 302 287 284 290

Administration, February 1994 * 235 177 178

CBO, January 1994 * 223 171 166

Administration, February 1995 * * 189 201

CBO, January 1995 * * 176 207

Administration, March 1996 * * * 154

CBO, April 1996 * * * 144

Actuals

Deficit 255 203 164 107

Errorsa

Administration, April 1993 55 94 119 172

CBO, March 1993 47 84 121 183

Administration, February 1994 * 31 13 71

CBO, January 1994 * 20 7 59

Administration, February 1995 * * 25 94

CBO, January 1995 * * 12 100

Administration, March 1996 * * * 46

CBO, April 1996 * * * 37

SOURCES: Congressional Budget Office; Office of Management and Budget.

NOTE: * = not applicable.

a. Projected deficits minus actual deficits. Errors include the effects of legislation enacted after the projections.
APPENDIX B COMPARING THE ACCURACY OF FORECASTS BY CBO AND THE CLINTON ADMINISTRATION 61

Table B-2.

Accuracy of Administration and CBO Economic Assumptions Since 1993, by Economic Indicator

Tie or

Administration Near-Tie

CBO Forecast Forecast (Difference of Number of

Closer to Closer to 0.1 percentage Forecasts

Actual Actual point or less) Compared

Nominal GDP Growth 7 0 3 10

Real GDP Growth 1 4 2 7a

GDP Price Index Growth 4 0 3 7a

CPI-U Inflation 5 1 4 10

Incomes 1 3 2 6 b c d

Unemployment Rate 2 2 6 10

Three-Month Treasury Bill Rate 4 4 2 10

Ten-Year Treasury Note Rate 5 0 5 10

SOURCE: Congressional Budget Office.

NOTE: GDP = gross domestic product; CPI-U = consumer price index for all urban consumers.

a. Official measures of real GDP and the GDP price index changed in early 1996, which reduced the number of forecasts available for comparison

by three.

b. Wages and salaries plus corporations' book profits.

c. Difference in errors of $10 billion or less.

d. The Administration's projections published in 1993 did not include incomes, which reduced the number of forecasts available for comparison by

four.
62 AN ANALYSIS OF THE PRESIDENT’S BUDGETARY PROPOSALS FOR FISCAL YEAR 1998 March 1997

Table B-3.

Administration and CBO Projections of Nominal GDP Growth (By calendar year, in percent)

1993 1994 1995 1996

Published Projections

Administration, April 1993 5.7 6.2 6.0 5.7

CBO, January 1993 5.2 5.4 5.3 5.0

Administration, February 1994 * 5.7 5.7 5.7

CBO, January 1994 * 5.6 5.5 5.4

Administration, February 1995 * * 5.7 5.5

CBO, January 1995 * * 5.8 4.6

Administration, March 1996 * * * 5.1

CBO, May 1996 * * * 4.6

Actuals

Nominal GDP Growth 4.9 5.8 4.6 4.4

Errorsa

Administration, April 1993 0.8 0.4 1.4 1.3

CBO, January 1993 0.3 -0.4 0.7 0.6

Administration, February 1994 * -0.1 1.1 1.3

CBO, January 1994 * -0.2 0.9 1.0

Administration, February 1995 * * 1.1 1.1

CBO, January 1995 * * 1.2 0.2

Administration, March 1996 * * * 0.7

CBO, May 1996 * * * 0.2

SOURCES: Congressional Budget Office; Office of Management and Budget; Department of Commerce, Bureau of Economic Analysis.

NOTE: GDP = gross domestic product; * = not applicable.

a. Forecasts minus actuals.
APPENDIX B COMPARING THE ACCURACY OF FORECASTS BY CBO AND THE CLINTON ADMINISTRATION 63

Table B-4.

Administration and CBO Projections of Real GDP Growth (By calendar year, in percent)

1993 1994 1995 1996

Published Projections

Administration, April 1993 3.1 3.3 2.9 a

CBO, January 1993 2.8 3.0 2.9 a

Administration, February 1994 * 3.1 2.8 a

CBO, January 1994 * 2.9 2.7 a

Administration, February 1995 * * 2.8 a

CBO, January 1995 * * 3.1 a

Administration, March 1996 * * * 2.2

CBO, May 1996 * * * 2.0

Actuals

Real GDP Growth

In 1987 dollars 3.1 4.1 3.2 a b

In chained 1992 dollars * * * 2.4

Errorsc

Administration, April 1993 0 -0.8 -0.3 a

CBO, January 1993 -0.3 -1.1 -0.3 a

Administration, February 1994 * -1.0 -0.4 a

CBO, January 1994 * -1.2 -0.5 a

Administration, February 1995 * * -0.4 a

CBO, January 1995 * * -0.1

Administration, March 1996 * * * -0.2

CBO, May 1996 * * * -0.4

SOURCES: Congressional Budget Office; Office of Management and Budget; Department of Commerce, Bureau of Economic Analysis.

NOTE: GDP = gross domestic product; * = not applicable.

a. The Bureau of Economic Analysis discontinued the 1987-dollar GDP series in 1995. Thus, in 1996 there was no actual value to compare with the

projection.

b. Because the Bureau of Economic Analysis did not publish 1987-dollar GDP data for the fourth quarter of 1995, this figure incorporates a CBO

estimate for that quarter.

c. Forecasts minus actuals.
64 AN ANALYSIS OF THE PRESIDENT’S BUDGETARY PROPOSALS FOR FISCAL YEAR 1998 March 1997

Table B-5.

Administration and CBO Projections of Growth in the GDP Price Index (By calendar year, in percent)

1993 1994 1995 1996

Published Projections

Administration, April 1993 2.5 2.9 3.0 a

CBO, January 1993 2.4 2.4 2.3 a

Administration, February 1994 * 2.6 2.8 a

CBO, January 1994 * 2.7 2.7 a

Administration, February 1995 * * 2.8 a

CBO, January 1995 * * 2.6 a

Administration, March 1996 * * * 2.8

CBO, May 1996 * * * 2.6

Actuals

GDP Price Index

In 1987 dollars 2.2 2.1 1.7 a b

In chained 1992 dollars * * * 2.1

Errorsc

Administration, April 1993 0.3 0.8 1.3 a

CBO, January 1993 0.2 0.3 0.6 a

Administration, February 1994 * 0.5 1.1 a

CBO, January 1994 * 0.6 1.0 a

Administration, February 1995 * * 1.1 a

CBO, January 1995 * * 0.9 a

Administration, March 1996 * * * 0.7

CBO, May 1996 * * * 0.5

SOURCES: Congressional Budget Office; Office of Management and Budget; Department of Labor, Bureau of Labor Statistics.

NOTE: GDP = gross domestic product; * = not applicable.

a. The Bureau of Economic Analysis discontinued the 1987-dollar GDP series in 1995. Thus, in 1996 there was no actual value to compare with the

projection.

b. Because the Bureau of Economic Analysis did not publish 1987-based price data for the fourth quarter of 1995, this figure incorporates a CBO

estimate for that quarter.

c. Forecasts minus actuals.
APPENDIX B COMPARING THE ACCURACY OF FORECASTS BY CBO AND THE CLINTON ADMINISTRATION 65

Table B-6.

Administration and CBO Projections of CPI-U Inflation (By calendar year, in percent)

1993 1994 1995 1996

Published Projections

Administration, April 1993 3.1 3.1 3.3 3.3

CBO, January 1993 3.0 2.7 2.7 2.7

Administration, February 1994 * 2.8 3.2 3.3

CBO, January 1994 * 2.7 3.0 3.1

Administration, February 1995 * * 3.1 3.2

CBO, January 1995 * * 3.1 3.4

Administration, March 1996 * * * 2.8

CBO, May 1996 * * * 2.8

Actuals

CPI-U Inflation 3.0 2.6 2.8 2.9

Errorsa

Administration, April 1993 0.1 0.5 0.5 0.4

CBO, January 1993 0 0.1 -0.1 -0.2

Administration, February 1994 * 0.2 0.4 0.4

CBO, January 1994 * 0.1 0.2 0.2

Administration, February 1995 * * 0.3 0.3

CBO, January 1995 * * 0.3 0.5

Administration, March 1996 * * * -0.1

CBO, May 1996 * * * -0.1

SOURCES: Congressional Budget Office; Office of Management and Budget; Department of Labor, Bureau of Labor Statistics.

NOTE: CPI-U = consumer price index for all urban consumers; * = not applicable.

a. Forecasts minus actuals.
66 AN ANALYSIS OF THE PRESIDENT’S BUDGETARY PROPOSALS FOR FISCAL YEAR 1998 March 1997

Table B-7.

Administration and CBO Projections of Incomes (By calendar year, in billions of dollars)

1994 1995 1996

Published Projections

Administration, February 1994 3,769 3,973 4,191

CBO, January 1994 3,759 3,949 4,149

Administration, February 1995 * 3,973 4,182

CBO, January 1995 * 4,013 4,180

Administration, March 1996 * * 4,257

CBO, May 1996 * * 4,189

Actuals

Incomes 3,773 4,029 4,271

Errorsa

Administration, February 1994 -4 -56 -80

CBO, January 1994 -14 -80 -122

Administration, February 1995 * -56 -89

CBO, January 1995 * -16 -91

Administration, March 1996 * * -14

CBO, May 1996 * * -82

SOURCES: Congressional Budget Office; Office of Management and Budget; Department of Commerce, Bureau of Economic Analysis.

NOTES: Incomes represent corporations' book profits plus wage and salary disbursements. No comparisons are possible for forecas ts made in

1993 because the Administration did not include forecasts of incomes in its April 1993 projections.

* = not applicable.

a. Forecasts minus actuals.
APPENDIX B COMPARING THE ACCURACY OF FORECASTS BY CBO AND THE CLINTON ADMINISTRATION 67

Table B-8.

Administration and CBO Projections of the Unemployment Rate (By calendar year, in percent)

1993 1994 1995 1996

Published Projections

Administration, April 1993 6.9 6.4 6.1 5.9

CBO, January 1993 7.1 6.6 6.2 6.0

Administration, February 1994 * 6.5 6.1 5.9

CBO, January 1994 * 6.4 6.1 5.9

Administration, February 1995 * * 5.8 5.9

CBO, January 1995 * * 5.5 5.7

Administration, March 1996 * * * 5.7

CBO, May 1996 * * * 5.8

Actuals

Unemployment Rate 6.9 6.1 5.6 5.4

Errorsa

Administration, April 1993 0 0.3 0.5 0.5

CBO, January 1993 0.2 0.5 0.6 0.6

Administration, February 1994 * 0.4 0.5 0.5

CBO, January 1994 * 0.3 0.5 0.5

Administration, February 1995 * * 0.2 0.5

CBO, January 1995 * * -0.1 0.3

Administration, March 1996 * * * 0.3

CBO, May 1996 * * * 0.4

SOURCES: Congressional Budget Office; Office of Management and Budget; Department of Labor, Bureau of Labor Statistics.

NOTE: * = not applicable.

a. Forecasts minus actuals.
68 AN ANALYSIS OF THE PRESIDENT’S BUDGETARY PROPOSALS FOR FISCAL YEAR 1998 March 1997

Table B-9.

Administration and CBO Projections of the Three-Month Treasury Bill Rate (By calendar year, in percent)

1993 1994 1995 1996

Published Projections

Administration, April 1993 3.7 4.3 4.7 4.8

CBO, January 1993 3.1 3.7 4.4 4.7

Administration, February 1994 * 3.4 3.8 4.1

CBO, January 1994 * 3.5 4.3 4.6

Administration, February 1995 * * 5.9 5.5

CBO, January 1995 * * 6.2 5.7

Administration, March 1996 * * * 4.9

CBO, May 1996 * * * 4.9

Actuals

Three-Month Treasury Bill Ratea

New issue 3.0 4.3 5.5 5.0

Secondary market 3.0 4.2 5.5 5.0

Errorsb

Administration, April 1993 0.7 0 -0.8 -0.2

CBO, January 1993 0.1 -0.5 -1.1 -0.3

Administration, February 1994 * -0.9 -1.7 -0.9

CBO, January 1994 * -0.7 -1.2 -0.4

Administration, February 1995 * * 0.4 0.5

CBO, January 1995 * * 0.7 0.7

Administration, March 1996 * * * -0.1

CBO, May 1996 * * * -0.1

SOURCES: Congressional Budget Office; Office of Management and Budget; Federal Reserve Board.

NOTE: * = not applicable.

a. The Administration projects the new-issue rate, whereas CBO projects the secondary-market rate.

b. Forecasts minus actuals.
APPENDIX B COMPARING THE ACCURACY OF FORECASTS BY CBO AND THE CLINTON ADMINISTRATION 69

Table B-10.

Administration and CBO Projections of the Ten-Year Treasury Note Rate (By calendar year, in percent)

1993 1994 1995 1996

Published Projections

Administration, April 1993 6.7 6.6 6.5 6.5

CBO, January 1993 6.7 6.6 6.6 6.5

Administration, February 1994 * 5.8 5.8 5.8

CBO, January 1994 * 5.8 6.0 6.1

Administration, February 1995 * * 7.9 7.2

CBO, January 1995 * * 7.7 7.0

Administration, March 1996 * * * 5.6

CBO, May 1996 * * * 6.1

Actuals

Ten-Year Treasury Note Rate 5.9 7.1 6.6 6.4

Errorsa

Administration, April 1993 0.8 -0.5 -0.1 0.1

CBO, January 1993 0.8 -0.5 0 0.1

Administration, February 1994 * -1.3 -0.8 -0.6

CBO, January 1994 * -1.3 -0.6 -0.3

Administration, February 1995 * * 1.3 0.8

CBO, January 1995 * * 1.1 0.6

Administration, March 1996 * * * -0.8

CBO, May 1996 * * * -0.3

SOURCES: Congressional Budget Office; Office of Management and Budget; Federal Reserve Board.

NOTE: * = not applicable.

a. Forecasts minus actuals.

T

Appendix C

Major Contributors to the

Revenue and Spending Projections

he following Congressional Budget Office analysts prepared the revenue and spending projections in this

report:

Revenue Projections

Mark Booth Corporate income taxes, Federal Reserve System earnings, excise taxes

Peter Ricoy Social insurance taxes, estate and gift taxes

Sean Schofield Excise taxes

David Weiner Individual income taxes

Stephanie Weiner Customs duties, miscellaneous receipts, social insurance taxes

Spending Projections

Defense, International Affairs, and Veterans’ Affairs

Valerie Barton Military retirement, veterans’ education

Shawn Bishop Veterans’ health care, military health care

Kent Christensen Defense (military construction, base closures)

Jeannette Deshong Defense (Army weapons, mobility forces, intelligence programs, personnel)

Sunita D’Monte International affairs (conduct of foreign affairs and information exchange

activities), veterans’ housing

Raymond Hall Defense (Navy weapons, missile defenses, atomic energy defense)

Mary Helen Petrus Veterans' compensation, pensions

JoAnn Vines Defense (tactical air forces, bombers)

Joseph Whitehill International affairs (development, security, international financial institutions)
72 AN ANALYSIS OF THE PRESIDENT’S BUDGETARY PROPOSALS FOR FISCAL YEAR 1998 March 1997

Health

Tom Bradley Medicare Part A, managed care

Cynthia Dudzinski Public Health Service, Medicare

Anne Hunt Public Health Service, Medicare

Jennifer Jenson Public Health Service, Medicare

Jeffrey Lemieux Medicare Part B, federal employee health benefits, national health expenditures

Robin Rudowitz Medicaid

Human Resources

Wayne Boyington Civil Service Retirement, Social Security, Pension Benefit Guarantee

Corporation

Sheila Dacey Aid to Families with Dependent Children, child support enforcement

Christie Hawley Unemployment insurance, training programs

Deborah Kalcevic Education

Justin Latus Education, foster care, child care

Carla Pedone Housing assistance

Dorothy Rosenbaum Social services, food stamps, child nutrition

Kathy Ruffing Supplemental Security Income, Social Security

Natural and Physical Resources

Perry Beider Spectrum auction receipts

Gary Brown Water resources, other natural resources

Kim Cawley Energy, pollution control and abatement

Elizabeth Daley Community and regional development, disaster assistance

Clare Doherty Transportation

Rachel Forward Commerce, spectrum auction receipts, credit unions

Mark Grabowicz Justice, Postal Service

Kathleen Gramp Energy, science and space

Victoria Heid Conservation and land management, Outer Continental Shelf receipts

David Hull Agriculture

Craig Jagger Agriculture

James Langley Agriculture

Mary Maginniss Deposit insurance, legislative branch

Karen McVey Transportation

Susanne Mehlman Justice, Federal Housing Administration, mortgage guarantees

David Moore Spectrum auction receipts

Deborah Reis Recreation, water transportation

John Righter General government

Other

Janet Airis Appropriation bills

Edward Blau Authorization bills

Jodi Capps Appropriation bills

Betty Embrey Appropriation bills

Kenneth Farris Computer support

Mary Froehlich Computer support
APPENDIX C MAJOR CONTRIBUTORS TO THE REVENUE AND SPENDING PROJECTIONS 73

Vernon Hammett Computer support

Sandra Hoffman Computer support

Jeffrey Holland Net interest on the public debt

Daniel Kowalski Credit programs, other interest

Catherine Mallison Appropriation bills

Robert Sempsey Appropriation bills

Michael Simpson National income and product accounts, historical budget data

Jennifer Winkler Budget projections, civilian agency pay