OMB Watch :: Tax and Budget Staff Notes :: September 3, 2003

Half of 2004 Deficit Deterioration Due to Revenue-Reduction Legislation

John S. Irons, OMB Watch

The Congressional Budget Office (CBO) is currently estimating a baseline $401 billion deficit for 2003 and a $480 billion deficit for 2004. In March, just six months ago, the CBO’s baseline indicated a much smaller $246 billion deficit for 2003 and a $200 billion deficit for 2004.

For 2004, this represents a $279 billion deterioration in the budget outlook (see Table 1). A detailed breakdown of the CBO data shows that 48% of the budget deterioration that occurred between March and August was due to legislative changes affecting revenue (see Table 2). At just over 16 percent of gross domestic product, revenue is now at its lowest level in 40 years.[1]

In addition, only 14% of the deterioration for 2004 was due to changes in non-military expenditure legislation (see Table 3). Defense spending was responsible for 19%, and the remainder was due to technical changes. Economic changes accounted for none of the deterioration.

As the decade progresses, the baseline projection shows that technical revisions and outlays become progressively more important factors; however, the baseline does not include extending provisions of the 2001 and 2003 tax legislation that are set to expire in future years. Tables 4 and 5 show the estimates once these and other likely legislative changes are included.[2]

When these changes are included, over the next ten years, revenue reduction legislation accounts for 37% of the increase in the budget deficit. In addition, 30% of the deterioration is due to changes in non-defense expenditure legislation, and 22% is due to changes in defense spending. Economic changes accounted for none of the deterioration (and actually helped by a small amount). The remainder was due to technical changes.

Figures 1 shows the breakdown for the 2004 baseline; and Figure 2 shows the 2004-2013 periods assuming the tax provisions have been extended, and other likely legislation is enacted.