CBO 10-Year Budget Update Shows $5.6 Trillion Surplus Now Only $1.0 Trillion

The Congressional Budget Office’s (CBO) annual "Budget and Economic Outlook: An Update," released on August 27, reports federal budget deficits through the end of 2005 and a relatively modest 10-year total surplus and has added more fodder to the debate in Washington over who’s to blame for the $5.4 trillion drop in the 10-year surplus forecast since January 2001.

The Congressional Budget Office’s (CBO) annual "Budget and Economic Outlook: An Update," released on August 27, reports federal budget deficits through the end of 2005 and a relatively modest 10-year total surplus and has added more fodder to the debate in Washington over who’s to blame for the $5.4 trillion drop in the 10-year surplus forecast since January 2001.

The Congressional Budget Office’s (CBO) annual "Budget and Economic Outlook: An Update," released on August 27, reports federal budget deficits through the end of 2005 and a relatively modest 10-year total surplus and has added more fodder to the debate in Washington over who’s to blame for the $5.4 trillion drop in the 10-year surplus forecast since January 2001.

CBO’s January 2002 10-year budget forecast and its annual assessment of the President’s budget, released in March 2002 also included 10-year surplus estimates revised downward to take into account the combined effects of the $1.35 trillion tax cut enacted in June 2001, the slowed economy, and the costs of the post-September 11 recovery efforts.

This CBO analysis reports that the unemployment rate, currently at 5.9% will remain at or near 6% until the middle of 2003 and then will decrease somewhat, for an average rate of 5.3% for the period 2004-07. CBO’s forecasters expect the economy to grow at an average rate of 3.0% in 2003, and at 3.2% annually from 2004-07. But while including economic growth forecasts and unemployment rate estimates for the coming decade, the CBO report’s primary focus is on the reasons behind the further reductions in the surplus since its March 2002 report.

CBO’s report attributes the most recent $1.4 trillion drop in the 10-year surplus since March 2002, in equal parts, to lower-than-expected revenues and increased spending. A recent brief from the Center on Budget and Policy Priorities (CBPP) uses the CBO calculations to show that a decrease in projected revenue actually is responsible for 82 percent of the total drop in the 10-year budget surplus since January 2001. These estimates include the additional interest costs that accompanied the expansion of the deficit as revenue dropped, as well as the actual drop in revenue itself. The CBPP analysis highlights the huge jump from the January 2001 CBO estimate of $0.6 trillion in interest payments from 2002-11 to CBO’s estimate in its latest report of $1.9 trillion for the same period. CBPP also estimates that legislation enacted by Congress and the White House is responsible for $3 trillion of the total surplus lost since January 2001, with 56% of this coming from tax cuts, another 28% from increased defense, homeland security and international spending, and another 10% from domestic discretionary spending.

Though CBO’s report estimates a 10-year surplus of just over $1 trillion, the 5-year forecast shows a cumulative federal budget deficit of $229 billion. This is markedly different from the White House Office of Management and Budget’s (OMB) July 2002 5-year estimate of a $392 billion surplus. CBO attributes the difference to OMB’s more optimistic expectations for the economy’s rate of growth through 2005, CBO’s incorporation of additional spending included in the emergency supplemental appropriations bill enacted after the OMB report was released, and the associated interest costs on the increased debt resulting from the larger deficit.

OMB has worked to make the point that last year’s $1.35 trillion tax cut has played no role in reducing the surplus, citing this and other CBO reports indicating that the recession and necessary spending has taken the largest toll on the surplus. Many in the administration have even claimed that the tax cut has helped limit the damage of the economic slowdown. Now that the CBO 10-year forecast includes the years 2011 and 2012 – the first two years the tax cut will not be in effect after its scheduled expiration at the end of 2010 – however, we are able to see just what role the tax cut does play in the 10-year budget picture. Though CBO’s official forecast does not include the effects of extending the tax cuts provisions past their legislated expiration date in 2011, the report did include a separate analysis of indicating that the costs of extending the tax cuts would be very great. In 2011, the cost of extending last year’s tax cut would be $157 billion; in 2012, this would jump to $265 billion, for a total 10-year cost of nearly $555 billion. The great cost of extending the tax cut means that of the projected 10-year $1.0 trillion surplus, $845 billion comes in the last 2 years of the decade!

With so many numbers and letters circulating this month, from OMB and CBO, from the Democrats and the White House, it is understandable that many of us may feel a bit overwhelmed by the seemingly endless supply of information and absence of guidance on what to make of it all. It seems, though that a few conclusions are possible:

  1. It is likely we haven’t heard the last of the deficit blame game and this issue will remain heated as we move into the November elections.

  2. The prolonged timetable for the deficits also suggests that we will be hearing much more from so-called “deficit hawks” in both parties, who seem to agree with OMB Director Mitch Daniels’ words, “We have to control what we can control, and that is spending.” Perhaps the only point of contention will be around what type of spending needs to be controlled – the White House should be sure to read the full CBO report to be reminded that tax cuts cost a lot of money.

  3. Regardless of where blame for these deficits should be placed, we will need to move past this issue, recognize that we are now dealing with deficits, and figure out how to meet the country’s needs under these new circumstances.

  4. Specifically, the focus on decreasing spending at a time when the country’s needs are many has the potential for exacerbating the "investment gap," through which the forced compression of the country’s priorities list will lead to greater and more pressing needs in the future. It is precisely because of these needs that we cannot afford to allow a seemingly endless blame game or a reshuffling of numbers to distract us from addressing the spending needs of the country – a prescription drug benefit for our seniors, investments in the education and well-being of our children, maintaining Social Security as the system we can all depend on, health care, and environmental protection and … the list goes on and on, which is why we must begin this debate soon.

For more on one effort to address this issue by freezing the next rounds of tax cuts, see this related Watcher article.

back to Blog