FY2011 Budget Proposals and Projections
Released: 2010-09-01T00:00:00

Summary: This report provides an overview of major budget estimates and projections for the FY2011 federal budget cycle. The report presents and compares budget projections calculated by the Obama Administration's Office of Management and Budget (OMB) and the Congressional Budget Office (CBO). In addition, the report discusses major budgetary issues.

The congressional budget process usually begins once the Administration submits its budget to Congress. The Senate Budget Committee passed a version of a budget resolution (S.Con.Res. 60) in April, and the House adopted a deeming resolution (H.Res. 1500; H.Res. 1493) in July.

The current economic climate continues to pose major challenges to policymakers shaping the FY2011 federal budget. Although the economy has shown some signs of recovery from an economic recession that many economists consider the most severe since the Great Depression, unemployment remains at high levels. While the U.S. economy grew at an annual rate of 5.0% in the last quarter of 2009 in inflation-adjusted terms, after falling sharply in the last quarter of 2008 and the first quarter of 2009, annualized growth was 3.7% in the first quarter of 2010 and 1.6% in the second quarter. The national unemployment rate stood at 9.5% in July 2010 and is projected to decline slowly. Weakness in residential and commercial real estate, high household debt levels, and fiscal challenges facing state and local governments may contribute to a long and slow economic recovery. The recession and the prospect of a slow recovery have strongly affected budget estimates and projections. OMB issued updated budget projections in July 2010, and CBO issued a budget baseline update in August 2010.

Federal spending tied to means-tested social programs has risen due to rising unemployment, while federal revenues are falling as individuals' incomes drop and corporate profits sink. Federal revenues fell 17% between FY2007 and FY2009. Estimated costs of federal interventions in financial markets have fallen since late 2008 and early 2009, although fiscal risks associated with mortgage giants Fannie Mae and Freddie Mac remain. Federal deficits, according to OMB and CBO projections, will likely remain high relative to historic norms over the next few years. Long-run fiscal challenges have received renewed attention as the ratio of federal debt held by the public to GDP, which compares the accumulation of federal debt (excluding intragovernmental debt) to the size of the economy as a whole, reached 53% at the end of FY2009 and, according to OMB and CBO estimates, will exceed 60% at the end of FY2010

The Obama Administration released its FY2011 budget proposals on February 1, 2010. The Administration featured policy initiatives targeted at speeding up economic recovery, reducing the unemployment rate, implementing health insurance reform, overhauling financial regulation, and stabilizing housing markets and the automobile industry. The Administration also proposed a three-year freeze in non-security discretionary spending, which currently comprises about 15% of total federal outlays. The Administration's Mid Session Review, released on July 23, 2010, estimated that FY2010 revenues would be $33 billion lower, outlays would be $118 billion lower, and deficits would be $84 billion lower than estimates issued in February. CBO issued updated estimates on August 19, 2010.

This report will be updated as warranted.


paragraphs: The federal budget outlines spending levels for government programs and how that spending will be funded, reflecting the policy priorities of Congress and the President. This report provides an overview of major budget estimates and projections for the FY2011 federal budget cycle. The report presents and compares budget projections calculated by the Obama Administration's Office of Management and Budget (OMB) and the Congressional Budget Office (CBO). In addition, the report discusses selected major budgetary issues.
subsections: section_title: Overview of the FY2011 Budget Cycle
paragraphs: The congressional budget process, which includes the annual budget resolution and appropriations bills, usually begins once the Administration submits its budget to Congress. As Congress deliberates over the budget, the Administration often revises its proposals as it interacts with Members of Congress and as national and international economic conditions change.
subsections: section_title: Economic Conditions Present Continuing Budget Challenges
paragraphs: The economy continues to post major challenges to policymakers shaping the FY2011 federal budget. The economic recession, which many economists consider the most severe American recession since the Great Depression, has strongly affected budget estimates and projections. The U.S. economy shrank at an annual real (i.e., inflation-adjusted) rate of 6.8% in the last quarter of 2008, the biggest fall since 1982, followed by a 4.9% fall in annual-rate terms in the first quarter of 2009. While real GDP grew at an estimated annual rate of 5.0% in the fourth quarter of 2009, perhaps signaling the end of the recession, growth in 2010 has been slow relative to many other economic recoveries. Estimates put real annualized growth in the first quarter of 2010 at 3.7% and only 1.6% for the second quarter. While financial markets by mid-2009 have stabilized significantly, the chairman of the Federal Reserve Board recently described the state of the economy as "unusually uncertain." While the economy is showing some signs of recovery, the national unemployment rate, which was 9.5% in July 2010, is projected to decline slowly. CBO estimates that the national unemployment rate will not recede to the 5% level until 2014. Some economists have become increasingly worried about the possibility of a "double-dip" recession, which would complicate existing budgetary challenges, although many forecasters do not predict a "double-dip."

Federal spending tied to means-tested social programs has risen due to elevated levels of unemployment, while federal revenues are projected to fall as individuals' incomes drop and corporate profits sink. Total federal revenues fell 17% between FY2007 and FY2009, and corporate income tax receipts fell even more sharply. CBO estimated in August 2010 that federal revenues will stabilize in FY2010, increasing from $2,105 billion in FY2009 (14.8% of GDP) to $2,143 billion in FY2010 (14.6% of GDP), and are projected to rebound somewhat in FY2011 to $2,648 billion (17.5% of GDP). Federal deficits, however, will likely be high relative to historic norms in FY2011, according to OMB and CBO projections. While federal deficits, according to CBO current-law baseline projections, will fall to 2.5% of GDP in FY2014, many budget experts consider the baseline assumptions, which were set in budget enforcement legislation, overly optimistic (see discussion in next section for details). In the later years of the current 10-year baseline budget window, federal deficits are projected to rebound, in large part due to the retirement of baby boomers and rising health care costs.

The federal government responded to the economic slowdown with an array of policy responses unprecedented in recent decades, including fiscal stimulus in the form of new spending and tax cuts. The federal government and the Federal Reserve also expanded or initiated major loan programs. As the economy recovers, the federal government and Federal Reserve plan to shrink or discontinue those programs as financial markets return to a more normal state. Some federal interventions, such as the Troubled Assets Relief Program, are now expected to cost far less than previous estimates, but the federal government may still face substantial credit risks associated with the takeovers of AIG, Fannie Mae, Freddie Mac, and large holdings in automobile manufacturers. Furthermore, the federal government could face new fiscal challenges if economic recovery falters or if financial turmoil reemerges.

section_title: FY2011 Budget Submission
paragraphs: The Obama Administration released its FY2011 budget submission on February 1, 2010. The Administration featured policy initiatives targeted at speeding up economic recovery, reducing the unemployment rate, enacting health insurance reform, overhauling financial regulation, and stabilizing housing markets and the automobile industry. The Mid Session Review was released on July 23, 2010.

On February 18, 2010, President Obama set up the National Commission on Fiscal Responsibility and Reform, which was charged with finding ways to "improve the fiscal situation in the medium term and to achieve fiscal sustainability over the long run." The commission is slated to issue a report on December 1.

On April 22, the Senate Budget Committee passed its FY2011 budget resolution ( S.Con.Res. 60 ). As of the date of this report, however, neither the House nor the Senate had agreed to a budget resolution. On July 1, 2010, the House, by adopting H.Res. 1500 , was considered to have agreed to a "deeming" resolution ( H.Res. 1493 ), which serves some of the purposes of a budget resolution. In particular, deeming resolutions provide a basis for ongoing budget enforcement.

section_title: Budget Estimates, Proposals, and Projections
paragraphs:  Table 1 contains budget estimates for FY2011 from CBO and the Administration (the Office of Management and Budget, OMB). House and Senate Budget Committees are expected to issue their own budget totals in a budget resolution that reflects congressional funding priorities.

Budget estimates and projections vary due to differing underlying economic, technical, and budget-estimating assumptions and techniques, as well as differences in policy assumptions. Minor differences in underlying assumptions, which may generate small short-term discrepancies, can produce wide divergences in projected long-term budget paths. In addition, the extraordinary nature of federal responses to financial turmoil and economic recession have complicated some scoring issues. Budget estimates issued by the President, CBO, or by others, should be expected to change as new data arrive or as economic conditions change.

CBO current-law baseline projections are computed using assumptions set forth in budget enforcement legislation. The CBO baseline projections are not intended to serve as a prediction of what budget outcomes are most plausible or likely. Rather, the CBO baseline projections are designed to serve as a budgeting tool, which is used to determine how legislative changes would increase or decrease the federal deficit. 

CBO baseline projections typically yield estimates of higher growth in revenue and slower growth of discretionary spending relative to scenarios that independent forecasters consider likely. CBO baseline projections presume that

discretionary spending remains constant in inflation-adjusted terms; the 2001 and 2003 tax cuts expire after FY2010 (as current law specifies); the existing "patch" to the alternative minimum tax (AMT), which currently applies to tax year 2009, would lapse; emergency unemployment benefits will not be extended; and cuts scheduled for Medicare physician services (Part B) as a result of "sustainable growth rate" calculations will not be delayed or cancelled.

After FY2010, according to baseline projections, the expiration of most of the tax cuts from 2001 and 2003 would increase federal receipts. The assumption that these tax cuts expire and that growth in discretionary spending is zero in real terms explains much of the declining deficits that emerge over the 10-year CBO baseline forecast window and in the OMB BEA (Budget Enforcement Act) baseline. The Joint Committee on Taxation estimates that

indexing the AMT to inflation for FY2010-FY2020 would cost $584 billion and extending tax cuts enacted in 2001 and 2003 (mainly EGTRRA and JGTRRA) would cost $2,465 billion over the FY2011-FY2020 period.

Beyond the end of the current 10-year forecast window, federal deficits are expected to grow rapidly, largely because of growing health care costs and the retirement of the baby boomers, unless major policy changes are made.

CBO's first budget report for the FY2011 budget cycle, released in January 2010, contained current-law budget baseline and economic projections for FY2011 through FY2020. This CBO report projected a FY2011 current-law baseline total deficit of $980 billion, significantly smaller than the estimated FY2009 ($1,414 billion) and FY2010 ($1,349) deficits, but far larger than the FY2008 deficit ($459 billion). 

CBO's January report also included estimated budgetary effects of selected policies on revenues and outlays. Those projections, which are based on assumptions that differ from current-law baseline conventions, can be used to assess costs of alternative policies. These alternative policy proposals interact in important ways, so that the costs of enacting two of these proposals may differ significantly from the sum of the costs of implementing each proposal separately. In particular, the effects of indexing the AMT and the extension of the 2001 and 2003 tax cuts interact in significant ways. 

On March 5, 2010, CBO published a preliminary analysis of the President's FY2011 proposals. CBO issued a more detailed analysis on March 24, which incorporated legislative changes made before mid-March 2010, although the projections of budget aggregates were only slightly changed. The March CBO budget projections do not reflect enactment of either the Hiring Incentives to Restore Employment Act (HIRE; P.L. 111-147 ) or the Patient Protection and Affordable Care Act ( P.L. 111-148 ).

Administration proposals, according to CBO analysis, would lead to larger federal deficits over the 10-year FY2011-FY2020 budget window than those projected by the Obama Administration, in large part because CBO projects that the economy would grow more slowly than does OMB. CBO and OMB projections of gross domestic product (GDP) are presented in Table 11 . A section following that table discusses some technical challenges of budget forecasting.

section_title: Projections of Federal Revenues
paragraphs: Administration and CBO projections of the future path of federal receipts are summarized in Table 2 . Because economic conditions strongly affect federal revenue streams, forecasts of federal receipts beyond the short term are necessarily imprecise. Economic recession caused federal receipts to fall sharply in FY2008 and FY2009. Federal revenues fell 17% between FY2007 and FY2009. Receipts in FY2010 are expected to reflect renewed economic growth, and a modest rebound is expected in FY2011. 

Corporate tax receipts and capital gains receipts can be especially sensitive to cyclical economic conditions. Asset values and corporate profits—and thus federal corporate income tax and capital gains revenues—typically recover more quickly after economic downturns than lagging indicators such as unemployment.

Several major legislative initiatives enacted in the past two years included tax provisions that had significant effects on federal revenues. The American Recovery and Reinvestment Act of 2009 introduced a temporary Making Work Pay tax credit, included a one-year AMT patch, and altered rules affecting business depreciation and the treatment of cancelled debts. The Children's Health Insurance Program Reauthorization Act of 2009 ( P.L. 111-3 ) raised certain tobacco taxes to help fund the expansion of the State Children's Health Insurance Program (CHIP). 

Updated CBO and OMB estimates predict that federal revenues as a share of GDP in FY2010 (14.6%) will be slightly less than in FY2009 (14.8%). The CBO baseline forecast for FY2011 expects economic recovery to boost federal revenues to 17.5% of GDP. At the end of the 10-year budget window, federal revenues are projected to be just over one-fifth of GDP (21.0% in FY2020). All projections shown in Table 2 project that FY2011 revenues will exceed FY2010 revenues.

section_title: Federal Outlays
subsections: section_title: Outlays and Budget Authority
paragraphs: Many budget documents also report spending in terms of budget authority, which specifies what federal agencies can legally spend. Budget authority has been compared to funds deposited into a checking account, which then can be used for specified federal purposes. Congress often sets time limits on the availability of budget authority, although some accounts contain "no-year" funds that do not automatically expire. Federal agencies with available budget authority can obligate funds by signing contracts, hiring employees, or by entering into other binding agreements. Until the federal government disburses funds to make purchases, however, no outlays occur. Outlays will not increase until those funds are actually disbursed. Budget authority that is not obligated, aside from "no-year" funds, expires once the period of availability ends.

Outlay data are more convenient for assessing the macroeconomic effects of the federal budgets, while analysts focusing on specific federal programs typically rely on budget authority figures. Appropriations legislation is generally framed in terms of budget authority, because Congress can control the amount of funds made available for specific purposes. The timing of federal outlays, on the other hand, often depends on administrative decisions of federal program officials, made within bounds set by Congress. This report focuses on outlays, rather than budget authority, in order to highlight broader effects of the federal budget on the economy.

section_title: Federal Outlay Projections
paragraphs:  Table 3 summarizes Administration and CBO projections of future federal outlays (i.e., disbursed federal funds). Federal spending is projected to account for about a quarter of the U.S. economy in FY2011. In FY2008, federal spending accounted for just over one-fifth (20.9%) of the U.S. economy, nearly equal to its average share of gross domestic product (GDP) since FY1962.

The Administration's budget submission calls for FY2011 outlays of $3,834 billion (25.1% of GDP), $166 billion above the March 2010 CBO baseline. Those baseline projections show outlays rising from $3,537 billion in FY2010 to $3,668 billion in FY2011. CBO estimates that outlays under the President's budget plans would total $3,802 billion in FY2011 and $3,722 billion in FY2012.

The Obama Administration outlay projections include an estimate of future disaster costs, which is not included in either discretionary or mandatory spending projections. These estimates, shown in Table 4 , serve as budgetary "plugs" rather than projections of disaster costs in particular years. Thus, for both the OMB projections reflecting the President's budget proposals and the OMB current policy baseline, estimated future disaster costs would need to be added to discretionary outlays, mandatory outlays, and net interest in order to equal total outlays. 

section_title: Discretionary Outlays
paragraphs: Discretionary spending is provided and controlled through appropriations acts, which fund many of the activities commonly associated with such federal government functions as running executive branch agencies, congressional offices and agencies, and international operations of the government. Essentially all spending on federal wages and salaries is discretionary.

 Table 5 presents projections of discretionary outlays. While discretionary spending was the largest category of federal spending until the mid-1970s, mandatory spending in FY2010 (13.1% of GDP) accounted for about 4% more of GDP than discretionary spending (9.3% of GDP) according to August 2010 CBO estimates. Discretionary spending will decline to just 7.0% of GDP in FY2020, according to CBO baseline projections, which assume that discretionary spending is held constant in inflation-adjusted terms.

Discretionary spending over the next several fiscal years is projected to decrease in inflation-adjusted terms. The Obama Administration has called for a three-year freeze on non-security discretionary spending. The Obama Administration essentially defines "security" spending as funding for the Department of Defense, the Department of Energy's National Nuclear Security Administration, the Department of Homeland Security, the Department of Veterans Affairs, the Department of State, and international food aid programs. The Obama Administration has proposed moving funding for some Pell Grants, which are aimed at post-secondary education students that meet certain eligibility and financial need requirements, from discretionary spending to mandatory spending.

section_title: Mandatory Outlays
paragraphs: Mandatory spending includes federal government spending on entitlement programs and the Supplemental Nutrition Assistance Program (SNAP; formerly Food Stamps) as well as other budget outlays controlled by laws other than appropriation acts. Entitlement programs such as Social Security and Medicare make up the bulk of mandatory spending. Other mandatory spending programs include Temporary Assistance for Needy Families (TANF), Supplemental Security Income (SSI), unemployment insurance, some veterans' benefits, federal employee retirement and disability, and the earned income tax credit (EITC). 

 Table 6 summarizes projections of mandatory outlays. According to August 2010 CBO baseline estimates, mandatory outlays will total $2,085 billion (13.8% of GDP) in FY2011 and $1,971 billion (12.5% of GDP) in FY2012.

Most of the costs of federal interventions that responded to financial turmoil in 2007 and 2008 were classified as mandatory, which pushed mandatory spending to $2,112 billion (14.8% of GDP) in FY2009. Stabilization of financial markets is expected to lead to lower mandatory spending totals in the next few years. Rising entitlement program costs, however, are projected to lead to significant increases in mandatory spending in later years.

section_title: Deficits
paragraphs: Deficits occur when Congress and the President enact policies that cause federal spending to exceed federal receipts. Deficits increase government debt held by the public, generally increasing net interest payments. Surpluses occur when federal receipts exceed outlays, which reduces federal debt held by the public. This can, in turn, reduce net interest payments. 

Governments run deficits for several reasons. By running short-run deficits, governments can avoid raising taxes during economic downturns, helping households to smooth consumption over time. Running deficits can stimulate aggregate demand in the economy, giving policy makers a valuable fiscal policy tool that can help support macroeconomic stability. Long-run deficits allow transfers of economic resources from younger to older generations, enabling older generations to enjoy anticipated benefits of future economic growth, but also may be used to impose large burdens on future generations.

Deficits can seriously harm national economies. Governments can spend more than they collect in revenues by printing money, which can cause inflation, or by borrowing. In the short run, fiscal overstimulation leads to inflation. In the long term, deficits either reduce capital investment, which retards economic growth, or increase foreign borrowing, which swells the share of national income going abroad. In the long run, governments that fail to repay borrowers, at least to the extent of stabilizing the ratio of government debt to gross domestic product, risk default and bankruptcy.

 Table 7 summarizes Administration and CBO projections of total federal deficits. Long-term CBO and OMB projections both show substantial increases in budget deficits in the years after FY2020. These deficits result from a projected gap between rising federal outlays and revenues. The growth of health care spending, as well as demographic changes, plays an important part of those fiscal trends. The federal government last ran a surplus in FY2001, which amounted to $128 billion or 1.3% of GDP.
subsections: section_title: On-Budget Deficits and Off-Budget Surpluses
paragraphs: The total federal deficit (or surplus) is the sum of the off-budget and on-budget deficits or surpluses. The U.S. Postal Service net profits or losses and Social Security revenues net of beneficiary payments are by law considered off-budget entities. 

 Table 8 summarizes projections of on-budget deficits. The on-budget deficit is estimated to decline to $1,154 billion (7.6% of GDP) in FY2011 according to CBO August 2010 baseline projections. None of the projections show an on-budget surplus within the next 5 or 10 years. 

 Table 9 summarizes projections of off-budget surpluses, which mainly comprise Social Security surpluses. Since FY1985, Social Security surpluses have led to off-budget surpluses, which has reduced the size of the total deficit. High unemployment rates and other effects of economic recession have lowered inflows of payroll taxes, pushing off-budget surpluses below previously expected levels.

section_title: Federal Debt
paragraphs: Gross federal debt is the sum of debt held by the public and intragovernmental (IG) debt. IG debt is the amount owed by the federal government to other federal agencies, which the U.S. Treasury is obligated to pay at some future time. The Social Security and Medicare trust funds, which by law must be invested in federal securities, are the largest components of IG debt. IG debt also includes dozens of other federal trust funds.

Debt held by the public is the total amount the federal government has borrowed from the public and remains outstanding. This measure is generally considered to be the most relevant in macroeconomic terms because it is the amount of debt sold in credit markets. Table 10 shows various projections of debt held by the public.

Congress sets a ceiling on federal debt, which was raised twice in 2009 and once in early 2010. On February 17, 2009, the American Recovery and Reinvestment Act of 2009 ( H.R. 1 , P.L. 111-5 ) increased the debt limit to $12,104 billion. 

The FY2010 budget resolution ( S.Con.Res. 13 ) recommended policies that would lead to a debt subject to limit of $13,233 billion at the end of FY2010, a level that would require an increase in the statutory debt limit. The House's adoption of the conference report on the FY2010 budget resolution ( S.Con.Res. 13 ) on April 29, 2009, triggered the automatic passage of H.J.Res. 45 to raise the debt limit to $13.029 trillion. In August 2009, Treasury reportedly said that the debt limit would be reached in mid-October, although it later stated that the limit would not be reached until mid or late December 2009. H.R. 4314 , passed by the House on December 16, 2009, and by the Senate on December 24, raised the debt limit to $12.394 trillion when the President signed the measure ( P.L. 111-123 ) on December 28. On January 28, the Senate passed an amended version of H.J.Res. 45 , which the House passed on February 4 and the President signed on February 12 ( P.L. 111-139 ), raising the federal debt limit to $14.294 trillion.

Federal debt held by the public rose sharply from 40.8% of GDP at the end of FY2008 to 53.0% at the end of FY2010. That ratio, according to the August 2010 CBO baseline, is projected to rise to 66.1% at the end of FY2011. CBO's analysis of the President's FY2011 budget proposals suggests that ratio would reach 84.3% of GDP at the end of FY2020. 

section_title: Economic Projections and Economic Recovery
paragraphs: Budget projections of the Administration and CBO are strongly influenced by expectations of the future health of the U.S. economy. The recent economic recession has also highlighted links between the federal budget and the economy. Budgetary projections for FY2011 and beyond depend in large part on how robust economic recovery is expected to be. The timing and strength of the economic recovery from the current recession will likely have major effects on the federal budget. In particular, changes in the expected path of the U.S. economy would affect future revisions of CBO baseline estimates of federal outlays and revenues. On the one hand, a faster-than-expected recovery would imply projections for higher federal revenues and lower outlays on certain "automatic stabilizer" programs whose spending increases when household incomes fall, which would lead to lower baseline projections of federal deficits. On the other hand, a slower or weaker-than-expected recovery would tend to increase projected federal deficits. 

The current economic recession, as noted above, has been much deeper than many economic forecasters anticipated in 2007 and 2008. For instance, the U.S. economy contracted at an annualized real rate of 6.8% in the last quarter of 2008 and 4.9% in the first quarter of 2009, according to Commerce Department estimates, a sharper decline than many economists had expected. Estimates for the fourth quarter of 2009, which put annualized GDP growth at 5.0%, seemed to signal an end of the economic recession. More recent economic data indicate a slow and uncertain period of economic recovery. According to Commerce Department estimates, the economy grew at an annualized real rate of 3.7% in the first quarter of 2010 and only 1.6% in the second quarter. Given that in past years population growth has been about 1% per year, higher rates of economic growth would be necessary to reduce unemployment and raise living standards significantly. 

Most economists expect unemployment rates to remain elevated for the medium term. Unemployment rates have remained at high levels, with the national unemployment rate standing at 9.5% in July 2010. Unemployment rates are typically a lagging indicator, meaning that unemployment rates during recessions have stayed high even as other indicators of economic activity have showed signs of recovery. CBO estimates that the national unemployment rate will not recede to the 5% level until 2014.

Many economic forecasters remain concerned about the medium-term strength of the economy for several reasons. State and local governments still face daunting fiscal problems, and many have exhausted rainy-day funds that cushioned them at the beginning of the recession. Interest-sensitive industries such as housing construction and automobile manufacturing that have helped spark past economic recoveries are considered unlikely to help economic recovery much in the near future. Many households are carrying high debt loads relative to historical levels and have suffered significant capital losses in housing and other investment, which may dampen private consumption for some time. Foreclosure rates are expected to continue at high levels, and concerns about the commercial real estate sector lead some to worry about the solvency of banks with substantial exposure to that sector. Finally, the financial services sector may face continuing challenges in coming years. For these reasons, many economists expect recovery from this recession to be more gradual than the economic rebound after shallower recessions in the past two decades. Forecasting turning points in economic trends, however, is difficult for technical and substantial reasons that are discussed in the next section. Table 11 presents forecasts of gross domestic product (GDP), which measures the size of the economy.

section_title: Issues Regarding Budget Projections
paragraphs: Budget projections depend on models that reflect assumptions about the structure of the economy, expected tax and program changes, and how these interact, along with other factors that affect the budget. Changed economic conditions, such as faster or slower economic growth, higher or lower inflation, or new spending and tax policies, affect budget estimates and projections. In addition, technical components of the budget models may change as the structure of the economy evolves and as econometric techniques advance. In particular, major recessions can alter the structure of an economy in significant ways, making models based on historical data less reliable.

Budget forecasts, unlike most other types of economic forecasts, are constructed in order to estimate the incremental costs of policy changes (i.e., scoring) in a consistent manner. If policy changes do occur, actual budget outcomes will then differ from baseline estimates. Technical factors and changes in economic conditions also affect budget forecasts. In recent years, OMB and CBO have provided information about how past forecasts have varied from actual results.

CBO has analyzed the track record of its budget estimates extensively and now routinely includes information about its forecast record of baseline projections in its budget publications. CBO also provides detailed explanations of why its projections differ from OMB projections. CBO routinely provides a breakdown of economic, legislative, and technical factors responsible for divergences between past forecasts and actual outcomes. 

Making accurate budget projections is inherently difficult. Reliable forecasting depends on the stability of trends. Some trends, such as population demographics, are highly predictable. For instance, many baby boomers will retire in the next decade, leading to higher spending for Medicare and Social Security. Estimating the growth in the beneficiary populations eligible for these programs is relatively straightforward. Budget estimates also depend on factors that are difficult to predict, such as future productivity growth and business cycles. Some factors that affect federal revenues, such as financial market trends, can be extremely volatile.

Making budget estimates and projections for the FY2011 budget cycle is especially challenging for several reasons. The economy is starting to recover from a painful recession that differs from recent downturns in important ways. The economy could emerge from the recession transformed in ways that may take time to understand fully. Continuing turmoil in financial markets makes forecasting interest rates, which affect the costs of many federal programs and debt servicing, difficult. Forecasting economic recoveries, even for milder downturns, is difficult. The Obama Administration has proposed major program initiatives in many policy areas. Estimating the budgetary effects of major changes is more difficult than estimating effects of incremental changes. 

Even in less tumultuous times, small changes in projected economic growth trajectories can lead to large budgetary consequences, especially for longer time horizons. Small changes in economic conditions, such as GDP growth, can produce large changes in the budget estimates. According to CBO estimates, a persistent 0.1% decrease in the real GDP growth rate would increase a deficit, including interest costs, by $61 billion cumulatively over a five-year period and by $273 billion over 10 years. Faster GDP growth would decrease deficits. 
subsections: section_title: Accuracy and Statistical Bias in Budget Forecasts
paragraphs: Budget projections are inherently uncertain. Two measures of the quality of economic forecasts are statistical unbiasedness and accuracy . Statistical unbiasedness means that average forecast errors over time are close to zero. An unbiased forecasting method may be of little use if forecast errors are large. Accuracy means that forecast errors are small, meaning that outcomes are close to predictions. Some forecasting methods may sacrifice unbiasedness in order to gain greater accuracy. Most forecasters, as far as possible, strive to make projections that are both unbiased and accurate.

Presidential budget requests in recent years have included measures that can be used to assess the accuracy and statistical bias of previous forecasts. Forecasts diverge from actual results because of legislative changes, unforeseen economic factors, and other factors. Current-law baseline projections will diverge from actual results when laws change, either expanding, constricting, or eliminating current programs, or by creating new programs. Projections that presume a president's policy proposals are enacted diverge from actual results if those policies are not enacted as proposed. 

Since FY1982, OMB February deficit projections for the upcoming budget year underestimated the total deficit by $55 billion. Changes in legislation accounted for most of that divergence. The standard deviation of Administration budget year deficit/surplus estimates was $233 billion for the same period FY1982-FY2009. A standard deviation measures the average size of forecast errors. The standard deviation for the corresponding four-years-ahead forecast was $343 billion. The accuracy of forecasts generally declines as the forecast window extends to later years because more policy and economic changes can occur in the interim.

OMB used its standard deviation estimate to compute upper and lower bounds for deficit projections. In the FY2011 budget submission, OMB estimated the FY2015 federal deficit would be 3.9% of GDP, with an upper bound of 10.4% of GDP and a lower bound of a 2.6% surplus. If the statistical assumptions underlying that calculation were valid, the actual FY2015 deficit should fall within the upper and lower bounds with a 90% probability. The spread between the upper and lower bounds indicates the estimated precision of the five-years-ahead deficit forecast.


Question-summary annotations: questions: question: What are the lingering economic issues?
answer: The current economic climate continues to pose major challenges to policymakers shaping the FY2011 federal budget. Although the economy has shown some signs of recovery from an economic recession that many economists consider the most severe since the Great Depression, unemployment remains at high levels.

question: How has economic growth in America been trending?
answer: While the U.S. economy grew at an annual rate of 5.0% in the last quarter of 2009 in inflation-adjusted terms, after falling sharply in the last quarter of 2008 and the first quarter of 2009, annualized growth was 3.7% in the first quarter of 2010 and 1.6% in the second quarter.
child_questions: question: How does the unemployment rate align with economic growth?
answer: While the U.S. economy grew at an annual rate of 5.0% in the last quarter of 2009 in inflation-adjusted terms, after falling sharply in the last quarter of 2008 and the first quarter of 2009, annualized growth was 3.7% in the first quarter of 2010 and 1.6% in the second quarter. The national unemployment rate stood at 9.5% in July 2010 and is projected to decline slowly.

question: What factors are causing a long and slow economic recovery?
answer: Weakness in residential and commercial real estate, high household debt levels, and fiscal challenges facing state and local governments may contribute to a long and slow economic recovery. The recession and the prospect of a slow recovery have strongly affected budget estimates and projections.

questions: question: How has federal spending tied to means-testing been changing?
answer: Federal spending tied to means-tested social programs has risen due to rising unemployment, while federal revenues are falling as individuals' incomes drop and corporate profits sink.

question: How have costs of federal intervention been changing?
answer: Estimated costs of federal interventions in financial markets have fallen since late 2008 and early 2009, although fiscal risks associated with mortgage giants Fannie Mae and Freddie Mac remain.

question: How has federal deficits been changing?
answer: Federal deficits, according to OMB and CBO projections, will likely remain high relative to historic norms over the next few years.
child_questions: question: How are federal deficits influencing long run fiscal challenges?
answer: Long-run fiscal challenges have received renewed attention as the ratio of federal debt held by the public to GDP, which compares the accumulation of federal debt (excluding intragovernmental debt) to the size of the economy as a whole, reached 53% at the end of FY2009 and, according to OMB and CBO estimates, will exceed 60% at the end of FY2010