Review of the CBO’s Annual Report to Congress

In September the Congressional Budget Office (CBO) published The Budget and Economic Outlook: An Update (“The Update” references the September 2008 report).  The piece is developed to provide US Congress with a basis for comparison of current legislation to the proposed changes in tax law and spending allocations.  The report is developed in accordance to section 202(e) of the Congressional Budget Act of 1974; the CBO is instructed not to make recommendations, to simply report impartial analysis.  In addition to the annual report, the CBO publishes monthly results.  While the CBO may not be able to explicitly make recommendations, implicitly the CBO recommends that congress reign in spending, increase receipts, or both with the following statement regarding the long-term outlook, “Over the long term, the budget remains on an unsustainable path.” 

The Update paints a grim picture for the United States in terms of both the budget and economic outlook; two items that cannot be viewed in isolation.  The Update predicted a FY2008 deficit of $407B, which was actually $455B per the November 2008 Monthly Budget Review, verse $161B in 2007.  The deficit widened in 2008 as expenditures rose 8.3% year-over-year with flat revenue.  The revenue was flat primarily due to the February 2008 stimulus package.  Absent the rebates and depreciation tax credits, revenue would have increased 2.5%, lagging the growth in outlays.  The deficit is expected to remain greater than $400B (~3% of GDP) through 2009.

Absent a few years in the last 1990’s and early 2000’s, the United States has been effectively running deficits since the 1970.  The CBO’s An Analysis of the President’s Budgetary Proposals for Fiscal Year 2009 saw an end to this deficit spending, forecasting a net surplus of $0.3T over the ten year period ending 2018; unfortunately, The Update in September was in sharp contrast with an estimated aggregate deficit of $2.3T for the same period.  $1.0T of which is related to revised forecasts of outlays for defense spending in Iraq and Afghanistan; an additional $850B is a result of a downward revision in economic projections.  Outlays during the upcoming decade are forecasted in excess of the historical 40 year average of 20.6% of GDP.  While outlays are anticipated to rise during the period, receipts are anticipated rise as well from 17.3% of GDP in 2008 to 20% in 2012, resulting in a reduction in the annual deficit.

The unsustainable path is exacerbated by the aging US population.  Outlays for the foreseeable future will be categorized in three forms, Mandatory, Discretionary, and Net Interest; in Camelot not only would it only rain at night, but Net Interest would be a receipt.  Mandatory Outlays are established based on eligibility rules and benefit levels which are set in law (Medicare, Medicaid, Social Security, etc).  Mandatory outlays are the largest source of increases in outlays; healthcare costs are expected to increase from 4.6% of GDP in 2008 to 6.0% in 2018, a 30% increase over the decade.  Healthcare costs are expected to continue to explode to 12% by 2050.  Less substantially, Social Security is expected to increase from 4.3% of GDP to 5.0% by the end of the forecast period.  Over the near term, the CBO anticipates spikes in outlays for deposit insurance, unemployment, food stamps, and other payments related to the current economic recession.

Discretionary outlays are set a new each year in accordance to appropriations acts.  Discretionary expenditures are divided into defense (59% of discretionary) and non-defense (41%).  As noted earlier, defense spending was revised upward by $1.0T over the forecast period as a result of a nearly $0.1T increase in the 2009 budget, which was anticipated to continue annually during the forecasted period.  Discretionary outlays are subject to sharp swings and are difficult to forecast with substantial uncertainty in the composition of Congress and Presidential Suite.  The Update projects Net interest to jump 17% over the next year, which was developed prior to the passage of the Emergency Economic Stabilization Act of 2008.  The Update projected the national debt balance at $9,568B at the end of 2008, growing to $10,247B by the end of FY2009.  After recent treasury auctions totaling roughly $1.0T in prior three months, the US debt burden has swelled to $10,618B as of November 14, 2008.  The increased debt burden with further add to the previously forecasted 6.4% annual growth in net interest outlays reported in The Update. 

With forecasted increases in outlays, receipts will need to increase to narrow the projected deficit.  The projected deficits begin to fall in 2012 with the expiration of many tax provisions set in the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and Jobs And Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) as of December 31, 2010.  Absent Congressional action to extend the provisions regarding capital gains, dividends, and ordinary income, statutory rates will increase for the 2011 tax year.  The elimination of such provisions will increase receipts to roughly 20% of GDP in 2012 and individual tax receipts will increase from 8.2% to 10.9% by 2018.  Over the prior decade capital gains has increased as a percent of receipts substantially, absent the dramatic decline in financial markets, this increase would be expected to continue until the expiration of the temporary decrease in capital gains rate to 15%.  Depressed asset prices and an increased statutory rate will decrease the level of receipts from capital gains. 

The November 7, 2008 Monthly Budget Review provided preliminary insight on the US post-TARP.  October 2008 saw receipts decline $13B with a $63B increase in outlays, resulting in a $77B increase in the monthly deficit year-over-year.  Included in the $63B increase in outlays was $17B related to TARP.  The CBO is reporting TARP payments based on the net present value of the Government’s investment in the troubled institutions.  The Government disbursed $115B in October, which according the CBO has a net present value of $98B, thus a $17B outlay. 

With the overall macroeconomic environment worsening, unemployment at 7.5% verse a predicted 6%, rising national debt burden, and evaporating consumer confidence, the likelihood of budget surpluses in the near-term are increasingly unlikely.  The unsustainable path of budget deficits and ballooning debt burden will continue to weigh on US citizens and global citizens.  Parents are no lot saving for their children’s education; instead they are borrowing against their children’s future income.