The Budget for Fiscal Year 2006

CRS Report for Congress
The Budget for Fiscal Year 2006
Updated October 23, 2006
Philip D. Winters
Analyst in Government Finance
Government and Finance Division

Congressional Research Service ˜ The Library of Congress

The Budget for Fiscal Year 2006
The Treasury provided final budget totals for fiscal year (FY) 2006 — the deficit
was $248 billion, receipts were $2,407 billion, and outlays were $2,654 billion — on
October 11, 2006. The deficit was much lower than earlier estimates because
receipts were much higher than earlier estimates. The deficit fell from $319 billion
in FY2005, but is expected to rise again in FY2007. The actual deficit was $140
billion below the deficit proposed in the President’s FY2006 budget (February 2005).
This one-year drop in the deficit has not improved the long-term budget outlook.
Early in the FY2006 budget process, the House (H.Con.Res.95) and Senate
(S.Con.Res.18) adopted their respective budget resolutions for FY2006 on March 17,
2005. After extensive leadership discussions, a conference reached agreement
(H.Rept. 109-62) on April 28; both chambers adopted the resolution later that day.
The conference agreement included reconciliation instructions for mandatory
spending reductions, tax reductions, and an increase in the statutory debt limit.
Congress passed three continuing resolutions (CRs) on appropriations during
the fall and early winter of 2005, to fund otherwise unfunded activities. It needed the
time to complete action on the regular appropriation bills for FY2006. The last two
cleared Congress on December 21, almost three months after the start of FY2006.
The Senate (S. 1932, November 3, 2005) and the House (H.R. 4241, November
18) each passed spending reduction reconciliation bills (of $35 billion and $50 billion
from baseline estimates over five years, respectively). A conference agreement
(H.Rept 109-362) of approximately $40 billion in reductions was reached on
December 19, and, after some difficulties, cleared Congress on February 1, 2006.
The President signed it into law (P.L.109-171) on February 8.
After extended deliberations, Congress cleared a $70 billion revenue reduction
reconciliation bill on May 11, 2006. The President signed it on May 17 (P.L.109-
222). The net effect of the two adopted reconciliation bills would raise the deficit in
FY2006 and over the next five years above baseline estimates.
In mid-March 2006, the House passed a $92 billion supplemental appropriation
(H.R. 4939) for FY2006 for overseas military activity and additional hurricane
recovery efforts. The Senate passed an amended bill, raising funding to almost $110
billion, on May 4. A conference agreement set the funding at $94.5 billion (June 8).
Congress cleared it and the President signed it into law(P.L.109-234) on June 15.
In the final estimates from OMB (July 2006) and CBO (August 2006) before the
end of FY2006, higher receipts reduced the estimated deficits in both (OMB, $296
billion; CBO $260 billion). These were over $100 billion below OMB’s February

2006 estimate and $70 billion below CBO’s March 2006 baseline estimate.

This report will be updated as events warrant.

Background and Analysis...........................................1
The Current Situation...............................................1
Budget Totals.....................................................2
Budget Estimates and Proposals..................................3
Uncertainty in Budget Projections.................................6
Budget Action....................................................8
Outlays .........................................................11
R ecei pt s ........................................................17
Deficits (and Surpluses)............................................21
The Longer Run..................................................24
The Budget and the Economy.......................................25
For Additional Reading............................................25
CRS Products................................................26
List of Figures
Figure 1. Uncertainty in CBO’s Projections of the Surplus or Deficit Under
Current Policies...............................................7
Figure 2. Outlays, FY2000-FY2015..................................13
Figure 3. Receipts, FY2000-FY2015..................................19
Figure 4. Surplus/Deficit (-), FY2000-FY2015.........................22
List of Tables
Table 1. Budget Estimates for FY2006.................................2
Table 2. Outlays for FY2004-FY2010 and FY2015......................11
Table 3. Receipts for FY2004-FY2010 and FY2015......................17
Table 4. Surpluses/Deficits(-) for FY2004-FY2010 and FY2015...........21

The Budget for Fiscal Year 2006
Background and Analysis
Presidents submit their budget proposals for the upcoming fiscal year (FY) early
in each calendar year. The Bush Administration released its FY2006 budget (The
Budget of the U.S. Government, Fiscal Year 2006) on February 7, 2005. The
FY2006 release of the multiple volumes of the budget contained general and specific
descriptions of the Administration’s policy proposals and expectations for the budget
for FY2006 through FY2010. It included a section on long-term fiscal issues facing
the nation and provides limited information on the revenue and mandatory spending
changes after 2010. The full set of budget documents (Budget, Appendix, Analytical
Perspectives, Historical Tables, among several others) contained extensive and
detailed budget information, including estimates of the budget without the proposed
policy changes (current service baseline estimates), historical budget data, detailed
budget authority, outlay and receipt data, selected analysis of specific budget-related
topics, and the Administration’s economic forecast.1 In addition to its presentation
of the Administration’s proposals, the budget documents are an annual reference
source for federal budget information, including enacted appropriations.
The Administration’s annual budget submission is followed by congressional
action on the budget. This usually includes the annual budget resolution,
appropriations, and, possibly, a reconciliation bill (or bills) as required by the budget
resolution. Over the course of deliberation on the budget, the Administration often
revises its original proposals as it interacts with Congress and as conditions change
in the economy and the world.
The Current Situation
The Treasury released final budget total for FY2006 on October 11, 2006. The
deficit was $248 billion, well below the Administration’s original estimate ($390
billion) in its FY2006 budget (February 2005) or OMB’s more recent July 2006
estimate of $296 billion. Substantially higher receipts ($2,407 billion) than
previously estimated produced most of the fall in the deficit. The Administration had
originally expected FY2006 receipts to be $2,178 billion (February 2005). The

1 Current services baseline estimates, and baseline estimates in general, are not meant to be
predictions of future budget outcomes but instead are designed to provide a neutral measure
against which to compare proposed policy changes. In general, they project current policy
and enacted future changes into the future. Discretionary spending is increased by the rate
of inflation. Their construction generally follows instructions in the Balanced Budget and
Emergency Deficit Control Act of 1985 (DCA) and the Congressional Control and
Impoundment Act of 1974.

Administration was expecting receipts to be $2,285 billion in February 2006. By
July 2006, OMB’s receipt estimate had risen to $2,400 billion. Outlays for FY2006
were $2,654 billion, larger than originally proposed by the President for FY2006
($2,568 billion), but below the revised level in the FY2007 budget ($2,709 billion;
February 2006).
Budget Totals
Table 1 contains budget estimates for FY2006 from CBO and the
Administration (the Office of Management and Budget, OMB); revisions produced
by both during the year as they become available; and data from congressional budget
deliberations. Differences in totals result from differing underlying economic,
technical, and budget-estimating assumptions and techniques, as well as differences
in policy assumptions. The policy-generated dollar differences for an upcoming
fiscal year can be relatively small compared to the budget as a whole. These small
differences may grow over time, sometimes substantially, producing widely divergent
future budget paths. Budget estimates are generally expected to change over time
from those originally proposed or estimated by the President, CBO, or Congress.
Table 1. Budget Estimates for FY2006
(in billions of dollars)
ReceiptsOutlaysDeficit (-)/Surplus
CBO, BEO Baseline, 1/05................$2,212$2,507$-295
OMB, Budget Proposals, 2/05.............2,1782,568-390
OMB, Budget, Current Services Baseline, 2/052,1782,539-361
CBO, Revised Baseline, 3/05..............2,2122,510-298
CBO, EPP 3/05........................2,2102,542-332
House Budget Resolution, 3/05............2,1952,571-376
Senate Budget Committee, 3/05...........2,1972,559-362
Senate FY06 Budget Resolution 3/05.......2,1932,562-368
Conf. Rept. Budget Resolution 4/28/05......2,1952,577-383
OMB MSR 7/13/05.....................2,2732,613-341
CBO Update, Baseline, 8/15/05............2,2802,595-314
CBO, BEO, Baseline, 1/06...............2,3122,649-337
OMB, Budget Proposals, 2/06.............2,2852,709-423
OMB, Budget, Current Services Baseline, 2/062,3012,669-367
CBO, Revised Baseline 3/06..............2,3132,648-336
CBO, EPP 3/06........................2,3042,675-371
Senate FY2007 Budget Resolution 3/06.....2,3032,675-372
House FY2007 Budget Resolution 5/06.....2,3032,675-372
OMB MSR 7/06........................2,4002,696-296
CBO Update, Baseline, 8/06..............2,4032,663-260
Actual Amounts........................2,4072,654-248
BEO The Budget and Economic Outlook, CBO.
EPP — CBOs estimates of the Presidents proposals.
CSB — The Administrations current services baseline.
MSR — OMBs Mid-Session Review.
Update CBOs The Budget and Economic Outlook: An Update.

Budget Estimates and Proposals
CBO’s first budget report for FY2006, the Budget and Economic Outlook:
Fiscal Years 2006-2015 (January 2005), contained baseline estimates and projections
for FY2005 through FY2015. The report estimated a FY2006 deficit of $295 billion
(down from the estimated FY2005 deficit of $368 billion). By FY2010, the baseline
deficit estimate had fallen to $189 billion. Under the baseline assumptions, CBO:
increases discretionary spending at the rate of inflation; does not include extending
the 2001 and 2003 tax cuts after 2010; and allows the alternative minimum tax
(AMT) relief to expire as currently scheduled. The effects of these assumptions
increase receipts in the near-term (because of the reversion of the AMT to previous
law) and increase receipts by substantial amounts after FY2010 when most of the tax
cuts from 2001 and 2003 expire under current law. The result of the assumptions
that CBO must follow likely understates the size and persistence of the deficit over
the next 10 years.
The CBO baseline assumptions showed the budget remaining in deficit through
FY2011 ($80 billion) followed by surpluses through FY2015 ($141 billion). The
reduction in the deficit after calendar year 2010, leading to the surpluses, is largely
explained by the required inclusion of the expiration of major tax cuts in the baseline
estimates, producing a rapid increase in revenues.
CBO’s budget reports generally include the estimates (including higher or lower
debt-service costs) of selected policies not included in the baseline estimates. They
usually reflect possible future policy, such as making the tax cuts permanent, fixing
the expanding coverage of the AMT, or changing the rate of discretionary spending
growth. In CBO’s January 2005 report, making the tax cuts permanent increased the
five-year (FY2006-FY2010) cumulative deficit (including higher debt-service costs)
by $156 billion, and by a cumulative $1.9 trillion over the 10-year period, FY2006-
FY2015). CBO’s estimate of reforming the alternative minimum tax produced a
$218 billion five-year cumulative increase in the deficit and a $503 billion increase
over 10 years (FY2006-FY2015). If discretionary spending were to grow at the rate
of GDP, rather than at the rate of inflation, the five-year cumulative deficit would
increase by $378 billion and the 10-year cumulative deficit would increase by $1.7
trillion. Freezing discretionary appropriations at the FY2005 level would reduce the
five-year cumulative deficit by $294 billion and the 10-year cumulative deficit by
$1.3 trillion.
President Bush’s FY2006 budget called for extending and making permanent
most of the tax cuts adopted in 2001 and 2003. The budget showed this reducing
receipts by $53 billion between FY2006 and FY2010 and by $1.1 trillion between
FY2006 and FY2015 (these estimates do not include the resulting higher debt-service
costs resulting from the change). The Administration’s total receipt proposals, which
include other revenue changes, would reduce five-year receipts by $106 billion and

10-year receipts by $1.3 trillion.

The Administration’s budget again used a slightly modified set of assumptions
to produce the OMB current services baseline estimates, moving the proposed and
baseline estimates somewhat closer together. Instead of following the traditional
method of constructing baseline estimates, the Administration’s FY2006 current

services baseline assumed the extension of certain tax provisions (that by current law
are scheduled to expire), excluded the future cost of one-time events, and included
a timing adjustment to the calculation of federal pay increases. For FY2006, the
differences produced an Administration current services baseline deficit estimate $9
billion smaller than the traditional baseline estimate. By FY2010, the
Administration’s estimated baseline deficit was $16 billion smaller than the
traditional baseline deficit estimate.
The Administration’s budget provided a limited amount of information for the
years beyond FY2010. The budget did include estimates of the cumulative proposed
revenue changes and proposed mandatory spending changes for the periods FY2006
through FY2010 and FY2006 through FY2015, but it contained no information for
the individual years after FY2010.
The President’s budget included a list of 150 discretionary program eliminations
or reductions. According to Administration documentation, these changes would
produce approximately $11 billion in budget authority (not outlay) savings in
FY2006. The documentation did not indicate the size of the outlay savings that
would result from the reduced budget authority.
CBO’s March 2005 report analyzed the President’s policy proposals using
CBO’s own underlying assumptions and budget estimating methods. The analysis
produced smaller deficits in the first couple of years of the five year period in the
President’s budget and somewhat larger deficits in the later years. CBO extrapolated
the policy proposals through FY2015, finding the budget remaining in deficit
throughout the period. In CBO’s estimates and projections, the deficit falls as a
percentage of GDP from an estimated 2.6% of GDP in FY2006 to approximately

1.3% of GDP in FY2012, where it remains through FY2015.

The House-passed budget resolution (H.Con.Res. 95) closely followed the
President’s budget. The Senate passed budget resolution (S.Con.Res. 18) deviated
from the House resolution by including smaller mandatory spending cuts in
reconciliation instructions, larger tax cuts in reconciliation instructions, and a higher
discretionary spending cap. The Senate made these changes to the Senate Budget
Committee’s reported resolution. The changes moved the House- and Senate-passed
resolutions further apart, making reaching an agreement difficult and time
The conference agreement on the budget resolution passed by the House and
Senate on April 28, 2005, included revenues of $2,195 billion, outlays of $2,577
billion, and a deficit of $383 billion. The resolution also included three
reconciliation instructions that would, over five years, reduce mandatory spending
(with the sources of the savings spread among several committees of jurisdiction in
the House and Senate) by $35 billion, reduce total revenues by $70 billion, and raise
the debt limit to $8.965 trillion. Over the five years covered by the budget resolution,
its proposals would produce larger deficits than would have occurred without the
included policy changes. CBO’s March 2005 baseline deficit estimate was $298
billion while the resolution had a proposed deficit of $383 billion. Under the budget
resolution proposals, the cumulative five-year deficit (for FY2006 through FY2010)
was $1,797 billion; under CBO’s March baseline (no policy changes), the five-year

cumulative deficit was $1,232 billion, more than $550 billion smaller than the
amounts proposed in the budget resolution.
The July 13, 2005 OMB release of the Mid-Session Review had reduced deficits
in FY2006 and subsequent years (through FY2010) because of the higher than
expected receipts flowing into the Treasury in 2005. CBO’s August 2005 Update
had a similar pattern of changed deficit estimates. CBO expected less persistence in
the higher receipts and no long-term improvement in the budget outlook (compared
to its March budget report).
The federal response to the devastation caused by Hurricane Katrina and the
lesser damage from Hurricane Rita has produced, and will continue to produce a
substantial, but uncertain, budgetary responses in FY2006 and likely into FY2007.
The higher spending has already added tens of billions of dollars to spending and the
deficit in FY2006.
The revised budget data for FY2006 from the CBO and OMB budget reports for
FY2007 showed higher deficit estimates (compared to the July and August 2005
estimates). Enacted legislation, changes in expected economic conditions, and
technical modifications all contributed to the changes in the budget estimates.
OMB’s February 2006 revisions show receipts $12 billion higher than in its July
2005 estimate and outlays $96 billion larger than its July estimate. CBO’s new
estimates show FY2006 receipts $32 billion larger than its August 2005 estimate and
its outlays $54 billion larger than its August outlay estimate. According to CBO’s
January 2006 report, legislation adopted since its August 2005 report increased the
deficit by $41 billion while changes to CBO’s economic forecast reduced the deficit
by $21 billion. Technical changes increased the deficit by $2 billion. The net effect
for CBO was a $23 billion increase in the estimated deficit for FY2006.
CBO released revised baseline estimates and its estimates of the
Administration’s policy proposals in March 2006. For FY2006, CBO’s revised
baseline estimates were almost unchanged from its January 2006 estimates. CBO’s
estimates of the President’s proposals (his proposed policy modifications to the
FY2006 budget contained in his FY2007 budget submission) showed higher receipts
and lower outlays and a smaller deficit than was shown in the Administration’s
FY2007 budget from February 2006. However, this deficit estimate was larger than
the CBO baseline deficit estimate for FY2006.
In July 2006, OMB published its Mid-Session Review (for the FY2007 budget
cycle) which included revised budget data for FY2006. Substantially higher than
previously expected receipts reduced the FY2006 deficit estimate from the
Administration’s $423 billion deficit estimate in February to $296 billion in July.
The higher receipts seem to have come from increased corporate income taxes and
non-withheld individual income taxes. With little time left in FY2006 (it ends on
September 30, 2006), final budget totals for FY2006 are likely to be similar to the
estimates in the MSR. CBO’s August 2006 budget report (The Budget and Economic
Outlook: An Update) showed a similar improvement in the deficit (to $260 billion)
for FY2006. As with the MSR, the reduced deficit resulted from higher receipts
rather than reduced outlays. CBO’s report did not show any improvement in the
longer-term budget outlook.

The Treasury provided final budget data for FY2006 on October 11, 2006, in the
Final Monthly Treasury Statement of Receipts and Outlays of the United States
Government (September 2006). Small revisions to these numbers can be expected
when they appear in the President’s FY2008 budget documents in February 2007.
Uncertainty in Budget Projections
All budget estimates and projections are inherently uncertain. Their dependence
on assumptions that are themselves subject to substantial variation over short time
periods makes budget estimates and projections susceptible to fairly rapid and
dramatic changes.2 Small changes in economic conditions (from those used in the
estimates), particularly the rate of GDP growth, can produce large changes in the
budget estimates. According to CBO, a persistent 0.1% increase in the growth rate
of real GDP (beginning in January 2006) would reduce the deficit (including interest
costs) by $58 billion cumulatively over a five-year period. This change would reduce
the cumulative deficit by $272 billion over the next 10 years. Reductions in the rate
of growth would increase the deficit by similar amounts over the same time periods.
Figure 1 is from CBO’s January 2006 Budget and Economic Outlook. CBO
indicates that the most likely deficit or surplus outcomes (as percentages of GDP),
through FY2011, are clustered in the center of the figure, in the darkest area. The
lighter shades indicate the less likely outcomes. The distance from the top to the
bottom of the image in the chart (the fan) represents the range within which CBO
predicts that the deficit (or surplus) has a 90% chance of occurring. In FY2011 this
ranges from a surplus of almost 5% of GDP to a deficit of approximately 6% of GDP.
The President’s (FY2007) budget included a chapter in the Analytical
Perspectives volume titled “Comparison of Actual to Estimated Totals.” The chapter
examined the causes of the changes from the initial budget estimates for FY2005
(early in 2004) through the actual results for that year (end of September 2005). Like
the CBO information, this provides another example of the uncertainty surrounding
budget estimates. The chapter included a chart based on historical experience that
indicates the possible range of surplus or deficit outcomes with a 90% certainty. The
range for the current year and following year (which the Administration calls the
budget year) rise from $260 billion to $535 billion.3 By five years beyond the current
year, the range within which the surplus or deficit has a 90% chance of falling
exceeds $1.1 trillion.

2 Some things are known with certainty about the direction of future spending and receipts.
Demographics can partly determine the shape of future budgets. In the next decade, the
growing retirements in the baby boom generation will rapidly drive higher the spending for
Social Security and Medicare as well as other federal spending or tax breaks for the elderly.
Because virtually all those who will become eligible for these benefits are alive today,
estimating the growth in the populations eligible for these programs is relatively
3 The current year is the fiscal year we are in: 2006. The budget year is the year that the
President’s budget covers — 2007 — and that Congress will pass legislation to implement.

Figure 1. Uncertainty in CBO’s Projections of the Surplus or Deficit
Under Current Policies

Source: Chart and note (below) created by CBO; from The Budget and Economic Outlook:
FY2007-FY2016, January 2006, p. 17.
Note: This figure, calculated on the basis of CBO’s forecasting track record, shows the estimated
likelihood of alternative projections of the budget deficit or surplus under current policies. The
baseline projections ... fall in the middle of the darkest area of the figure. Under the assumption that
tax and spending policies will not change, the probability is 10 percent that actual deficits or surpluses
will fall in the darkest area and 90 percent that they will fall within the whole shaded area.
Actual deficits or surpluses will be affected by legislation enacted in future years, including decisions4
about discretionary spending. The effects of future legislation are not reflected in this figure.
Budget projections are very dependent on the underlying assumptions about the
direction of the economy, expected future government policy, and how these interact,
along with other factors (such as changing demographics) that affect the budget. Any
deviation from the assumptions used in the budget estimates, such as faster or slower
economic growth, higher or lower inflation, differences from the expected or
proposed spending and tax policies, or changes in the technical components of the
budget models can have substantial effects on the budget estimates and projections.
Budget Action
CBO and the Administration released their first budget reports for FY2006, in
late January and early February 2005, respectively. CBO’s report provided baseline
estimates for FY2005 through FY2015. The CBO baseline estimates, following the
instructions mandated by law, did not include any estimated cost for ongoing
operations in Afghanistan and Iraq after FY2005 or any estimates of the
4 CBO. Budget and Economic Outlook for Fiscal Years 2007 to 2016, January 2006, p. 17.

Administration’s proposed, but undefined, change in Social Security. The estimates
assumed that the tax cuts adopted over the Administration’s first term will expire in
2010 as required by current law and that the Alternative Minimum Tax (AMT) will
revert to its previous incarnation when the temporary relief provisions expire at the
end of FY2005.
OMB’s documents provided estimates for FY2005 through FY2010 with a few
instances of cumulative estimates for FY2006 through FY2015 (these were limited
to revenues and mandatory spending and provided no data for the individual fiscal
years after FY2010). The budget also lacked detailed data on program or account
spending beyond FY2005. The Analytical Perspectives volume of the President’s
budget provided the Administration’s current services baseline estimates for the years
through FY2010.
On March 4, 2005, CBO provided its preliminary estimates of the President’s
2006 budget. These estimates take the policies in the Administration’s budget and
recalculate their effect using CBO’s underlying assumptions and budget estimating
methods. CBO’s estimates produced smaller deficits than the Administration for
FY2005 through FY2007. They were essentially the same in FY2008 and were larger
than the Administration’s deficits in FY2009 and FY2010. The full CBO report (An
Analysis of the President’s Budgetary Proposals for Fiscal Year 2006, March 2005)
contained more details, an extended discussion of CBO’s calculations, CBO’s
estimates of the President’s proposals, and revised baseline estimates.
During the week of March 7, 2005, both the House and Senate Budget
Committees adopted their respective versions of the budget resolution for FY2006
(H.Con.Res. 95; S.Con.Res. 18), on party-line votes. Both resolutions followed the
general outline of the Administration’s proposals: constraining discretionary
spending; cutting the growth of some entitlement programs; and extending or making
permanent various tax cuts, and some additional tax reduction. The House and
Senate adopted their resolutions on March 17. The House, after defeating several
substitutes, adopted the budget resolution as approved by the HBC. The Senate, after
debate and a number or amendments, including increasing the size of the tax cut
covered by the reconciliation instructions, reducing the mandatory spending cuts
(from baseline estimates), and increasing the discretionary spending caps, adopted
its budget resolution.
Resolving some of the differences between the House and Senate resolution
became more difficult than initially hoped. By the end of April, the House and
Senate leadership had reached an agreement on the FY2006 budget resolution. A
conference committee reported (H.Rept. 109-62) the agreement on April 28, 2005,
which was quickly (on the same day) adopted by the House and Senate. The House
and Senate committees affected by the resolution’s three sets of reconciliation
instructions (reducing mandatory spending, reducing revenues, and raising the debt
limit) are scheduled to report during September 2005. (In September, the
congressional leadership pushed the reporting date for the reconciliation legislation
into late October, responding to demands on Congress as it attempted to finish the
FY2006 appropriations, responded to Hurricane Katrina, and the Senate held
hearings on a new Chief Justice.)

By July 4, 2005, the House had passed all 11 of its regular appropriation bills
for FY2006. The Senate had passed three of its twelve regular appropriation bills.
The Senate continued considering its appropriation bills through the rest of the
summer. At the end of July, two appropriations bills (Interior and the Legislative
Branch) cleared Congress and were signed by the President.
In September, the Senate resumed its consideration of its remaining
appropriation bills. By mid-September, the outlook for the timely adoption of the
regular appropriations remained unclear. Speculation was widespread that at least
one continuing resolution on appropriations (a CR) would be needed at the beginning
of FY2006. The differences in the number, coverage, and amounts in the regular
appropriation bills for the House and Senate seems to have complicated the already
difficult process of adopting the annual appropriations.
During the last week of September, the Appropriation Committees indicated that
a CR would be needed. The CR that emerged (P.L.109-77; H.J.Res. 68) would run
through November 18, 2005, with funding levels varying by spending category.
Congress passed, and the President signed, the CR on September 30, 2005.
By early November 2005, four regular appropriations had become law with the
expectation that most of the rest would be adopted fairly shortly. Another CR
became necessary as November 18th approached with two regular appropriations still
not enacted. The second CR (P.L.109-105) cleared Congress on November 18 and
ran through December 17.
A third CR (P.L.109-128; December 18) became necessary as Congress
continued to struggle to pass the final two appropriation bills. The third CR ran
through December 31. As the Christmas holidays approached, Congress cleared, on
December 21, the the final two regular appropriations for the President’s
consideration (he signed them). One of the two, the Defense appropriation bill,
included selected rescissions of approximately $10 million and an across-the-board
1% rescission in FY2006 discretionary budget authority, excluding discretionary
authority available to the Department of Veterans Affairs and the administrative
expenses related to Social Security.
The Senate adopted its first reconciliation bill (S. 1932, the Deficit Reduction
Omnibus Reconciliation Act of 2005) on November 3, cutting mandatory spending
from baseline estimates by approximately $35 billion over five years. The House,
after extensive tweaking by the House leadership, passed its spending reconciliation
bill (H.R. 4241, the Deficit Reduction Act of 2005) on November 18, cutting
mandatory spending by $50 billion (from baseline levels) over five years.
A conference report (H.Rept.109-362) on the spending reduction reconciliation
bill (S. 1932) was filed at 1 a.m. on December 19. At 6 a.m. that same morning, the
House had passed the agreement. The Senate began considering the conference
report on December 20. The Senate upheld points of order against several sections
of the legislation, effectively rejecting the conference report. The Senate then agreed
to the House amendment to S. 1932 with a further amendment on December 21. The
changes sent the bill back to the House for further action. The House adopted the

Senate changes on February 1, 2006 and sent the legislation to the White House. The
President signed the bill into law (P.L. 109-171) on February 8, 2006.5
On November 18, the Senate passed a revenue reducing reconciliation bill (S.
2020, the Tax Relief Act of 2005). The bill would extend or make permanent
existing tax cuts and reduce revenues from baseline levels by an estimated $58
billion over five years. The House passed its five-year, $56 billion revenue reducing
reconciliation bill (H.R. 4297, the Tax Relief Extension Reconciliation Act of 2005)
on December 8. The Senate took up the House bill, amended it, passed it on
February 2, 2006, and sent it back to the House. The House- and Senate-appointed
conferees resolved the differences on May 9, 2006 (H.Rept. 109-455). The House
(On May 10) and the Senate (on May 11) passed the conference agreement. The
President signed the bill into law (P.L. 109-222) on May 17. The legislation would
reduce revenues by an estimated $70 billion over five years (from FY2006 through
The net effect of the spending and revenue reducing reconciliation bills would
increase the cumulative five-year deficit by billions of dollars above what it would
have been without the legislation.
The House, at the request of the Administration, adopted a $92 billion
supplemental appropriation bill (H.R. 4939) for FY2006 on March 19, 2006. The bill
would provide additional funding for military activities in Iraq and Afghanistan and
hurricane recovery, along with a number of other smaller items. The Senate, after
amending the bill and raising its funding to almost $110 billion, passed it on May 4,
2006. A conference committee to resolve the differences between the House and
Senate versions of the bill proved difficult. The President threatened to veto any bill
exceeding his request. The committee reported an agreement (H.Rept. 109-494)
providing $94.5 billion on June 8, 2006. The House passed the agreement on June

13. The Senate passed it and the President signed it (P.L.109-234) on June 15.

The Senate adopted its version of the FY2007 budget resolution (S.Con.Res.
83), containing revised budget numbers for FY2006, on March 16, 2006. The House
Budget Committee adopted its version of the FY2007 budget resolution (H.Con.Res.
376), also with revisions to the FY2006 budget, on March 29. After an extended
delay, the House passed its budget resolution on May 18. Significant differences in
the two resolutions, along with time constraints, have discouraged expectations of
any eventual agreement between the House and Senate on the FY2007 budget
The Administration’s FY2006 budget proposed $2,568 billion in outlays for
FY2006, rising to $3,028 billion in FY2010, the last year shown in the President’s
budget. The Administration’s proposals, if adopted, would have raised outlays by

5 A drafting error in the legislation resulted in the House and Senate passing nonidentical
bills. The legislation may need to be revisited to resolve the issue.

$83 billion (3.6%) above the Administration’s FY2005 outlay estimate and by 17.9%
from FY2006 to FY2010.
Table 2. Outlays for FY2004-FY2010 and FY2015
(in billions of dollars)
FY2004 FY2005 FY2006 FY2007 FY2008 FY2009 FY2010 FY2015
CBO Baseline, 1/05..........2,292 a2,4252,5072,6182,7432,8692,9963,706
Presidents FY06 Budget, 2/05.........2,4792,5682,6562,7582,8833,028
Presidents FY06 CSB, 2/05...........2,4432,5392,6502,7702,8973,048
CBO, Revised Baseline, 3/05...........2,4442,5382,6213,7312,8602,9873,777
CBO, EPP 3/05.....................2,4512,5422,6292,7422,8722,9993,796
House FY06 Budget Resolution, 3/05....2,4512,5712,6352,7432,8642,987
Senate Budg. Comm. Budg. Res., 3/05...2,4552,5592,6512,7552,8742,999
Senate FY06 Budget Resolution 3/05....2,4552,5622,6582,7602,8803,007
Conf. Rept. Budget Resolution 4/05......2,4552,5772,6442,7502,8732,995
OMB MSR 7/13/05..................2,4722,6132,6612,7502,8883,063
CBO Update 8/15/05.................2,4732,5952,7212,8602,9973,1343,905
CBO, BEO, Baseline, 1/06.............2,472 b2,6492,7322,8572,9843,1053,839
OMB, Budget Proposals, 2/06.......... 2,7092,7702,8142,9223,061
OMB, Budget, CSB, 2/06............. 2,6692,7012,7982,9253,050
CBO, Revised Baseline 3/06........... 2,6482,7262,8492,9683,0993,822
CBO, EPP 3/06..................... 2,6752,7662,8202,9063,0173,812
Senate FY2007 Budget Res.3/06........ 2,6752,7952,8432,9233,030
House FY2007 Budget Res. 5/06........ 2,6752,7712,8252,9143,022
OMB MSR 7/06..................... 2,6962,7982,8472,9293,053
CBO Update, Baseline 8/06............ 2,6632,8012,9453,0793,2173,979
Actual Outlays for FY2006............ 2,654
a. Actual outlays for FY2004.
b. Actual outlays for FY2005
BEO Budget and Economic Outlook
EPP — CBOs estimates of the Presidents proposals.
CSB — The Administrations current services baseline.
MSR — OMBs Mid-Session Review.
Update CBOs The Budget and Economic Outlook: an Update.
Measured against the Administration’s FY2006 current services baseline outlay
estimates, the proposed level of outlays grow by $29 billion (1.1%). The difference
between the current services baseline outlay estimate and proposed outlays for
FY2006 indicates the “cost” of the Administration’s proposed policies. The year-to-
year change (the $83 billion increase) combines the “costs” of policy changes from
year to year with the relatively automatic growth in large parts of the budget. These
automatic increases include cost-of-living adjustments, growth in populations eligible
for program benefits, and inflation driven cost of goods and services bought by the

As it did in last year’s budget, the
Administration modified some of theDiscretionary and Mandatory
underlying policy assumptions increasing itsSpending
current services baseline estimates for
FY2006.6 The modifications had a relativelyThe President’s budget includes, in its
minor effect on the current services outlayglossary, the general definition of
estimates this year. discretionary spending as “budgetary
resources ... provided in appropriation
The President’s budget did not includeacts.” Mandatory spending is defined
the estimated costs of ongoing action inas “spending controlled by laws other
Afghanistan or Iraq after the end of FY2005than appropriations acts.”
(except for outlays flowing from theCurrently, discretionary spending
supplemental appropriation theproduces 38% of total outlays (42% of
Administration proposed for FY2005 — seetotal discretionary spending is for
below). Although unknown, the amount isdefense) and mandatory spending,
unlikely to be zero. This implies that theincluding net interest, produces the
Administration’s initial outlay estimate forother 62% (net interest is
FY2006 (and for the following years) isapproximately 8% of total outlays).
smaller than actual outlays will be, even if
the estimates for the remaining parts of theDiscretionary spending is not
budget are accurate. A week after thecompletely discretionary and
budget became available, the Administrationmandatory spending is not completelymandatory. All government activities
proposed, on February 14, 2005, an $82require some discretionary spending to
billion supplemental appropriation (budgetpay salaries and other operating
authority) mostly for these costs.expenses of the government. The laws
Approximately $35 billion of this willunderlying mandatory.. spending can
become outlays in FY2005 and $25 billionbe changed by Congress, altering the
in FY2006, with the remaining being spentnature of the programs, how much
in following years. Although this producesthey spend, and how they are funded.

some outlays for the war on terror in
FY2006, the Administration is expected to
request another supplemental (although when is unclear) specifically for FY2006.
As shares of gross domestic product (GDP), the Administration’s proposals
showed outlays falling from 19.9% of GDP in FY2006 to 19.0% of GDP in FY2010.
CBO’s estimate of the President’s outlay proposals (March 2004) showed the shares
falling from 19.7% of GDP in FY2006 to 19.0% of GDP in FY2010, before rising
to 19.3% of GDP in FY2015. These outlays-as-shares-of-GDP are below both the
average from FY1980 through FY2004 (21.0% of GDP) or the average from FY1990
through FY2004 (20.2% of GDP). CBO’s baseline estimates showed outlays falling
from 19.5% of GDP in FY2006 to 19.0% of GDP in FY2010 and sliding slightly to
6 The current services baseline estimates, like CBO’s baseline estimates, are designed to
provide “a neutral benchmark against which policy proposals can be measured.” For
outlays, the modified baseline used this year assumes emergencies are one-time only, that
federal pay adjustment assumptions reflect the (usual) January 1 start of inflation adjusted
raises rather than October 1, and the debt service (interest payment) changes resulting from
these (and revenue related) modifications are included in the baseline.

18.9% of GDP in FY2015. Using two of CBO’s alternative scenarios for spending
— assuming the phase-down of activities in Iraq and Afghanistan over a number of
years and that total discretionary spending increases at the rate of nominal GDP
growth (rather than the rate of inflation), outlays as shares of GDP would rise from

20.1% of GDP in FY2006 to 21.0% of GDP in FY2015.

Figure 2 shows baseline outlays from CBO’s FY2007 (in early 2006) budget
update (August 2006), an alternative estimate based on data in the CBO report,
CBO’s estimates of the President’s February 2006 policy proposals (March 2006),
and OMB’s outlay estimates from its July 2006 Mid-Session Review. In addition,
average outlays for the FY1965 through FY2005 period (20.5%) are also shown. The
FY2000-FY2005 data are the actual amounts for those years. The data are in
percentages of GDP.
CBO’s baseline outlays slowly decline (unsteadily) as a share of GDP through
the period before settling just under 20% of GDP. After an upward bump in outlays
in FY2006, CBO’s analysis of the
Administration’s proposals showedFigure 2. Outlays, FY2000-FY2015

outlays falling until FY2012 before(as percentages of GDP)
climbing to just over 19% of GDP in21%
FY2015. The Administration’s
proposed constraints on non-defense20%
discretionary spending and some
limited slowing in mandatory19%
spending growth produced most of
the drop in CBO’s estimates of the
Administration’s proposals. Both18%
CBO’s baseline and its estimates ofActuals, FY2000-FY2005
OMB policy proposals leave outlays17%Alternative Estimate
below their FY2006 outlay level andCBO Baseline
below the FY1965-FY2005 outlay16%CBO Reestimates of OMB
average throughout the forecastOMB MSR
period. The alternative estimate,Average, FY1965-FY2005
based on CBO’s August 200615%
estimates, incorporates the
assumption that discretionary14%8/2006
spending will grow faster than in the2000200520102015
baseline, that there will be phased
reduction in spending for military
activities in Iraq and Afghanistan, and that these (and other policy differences) will
increase net interest payments. Beginning in FY2010, outlays in the alternative
estimate rise almost steadily to nearly 21% of GDP in FY2015, above the FY1965-7
FY2005 outlay average.
7 The alternative estimate includes the associated higher interest payments resulting from
larger deficits because of the higher spending. For consistency with the following two
sections, the alternative estimate also includes the higher debt servicing costs associated
with the alternative, and lower, receipt estimates shown in Figure 3.

The House and Senate FY2006 budget resolutions (H.Con.Res. 95; S.Con.Res.
18; Spring 2005) and the conference agreement held total outlay growth to less than
5% from FY2005 to FY2006. For the period FY2005 through FY2010, the
resolutions showed outlays growing at a 3.8% to 4.1% annual rate. These outlay
totals included, in the Allowances function, $50 billion in budget authority and $32
billion in outlays for FY2006 (that is expected to used for the global war on terror).8
No additional funding was assumed or provided for the war on terror in the budget
resolutions in subsequent years.
The reduction proposed for discretionary spending (and non-defense
discretionary spending in particular) in the budget resolution conference agreement
differs markedly from the growth in mandatory spending and total outlays. Total
outlays grow at an average annual rate of 3.8% between FY2006 and FY2010.
Mandatory spending grows at an average annual rate of 6.1% (even with the
reduction in mandatory spending proposed in the reconciliation instructions).9 Total
discretionary spending over the period would actually fall at an average annual rate
of 0.3%. Discretionary defense spending would grow at an average annual rate of
3.1%, even without assumptions about future spending for operations in Iraq and
Afghanistan or the global war on terror. Since defense discretionary spending grows,
non-defense discretionary spending must fall fairly rapidly for total discretionary
spending to fall, and it does. Non-defense discretionary spending falls at an average
annual rate of 3.5% from FY2006 to FY2010. The proposed reduction in non-
defense discretionary spending would cut it both per capita and as a percentage of
The two resolutions and the conference agreement included reconciliation
instructions to slow (barely) growth in mandatory spending between FY2006 and
FY2010. The House instructions were for $69 billion in savings while the Senate
included $17 billion in mandatory spending savings. The conference agreement
included $35 billion in mandatory savings for the FY2006 through FY2010 period.
The conference agreement also included a discretionary spending cap for the
House of $917 billion in outlays ($843 billion in budget authority) for FY2006,
similar to the discretionary spending levels included in the House and Senate
versions of the budget resolution for FY2006. The cap did not include the $50
billion allowance that is expected to become a defense supplemental appropriation
sometime during the year.

8 The effect of the supplemental in FY2005 and the one allowed for in FY2006 boosts
defense budget authority and outlays in those two years compared to the amounts in
subsequent years through FY2010. The result is a peak in defense funding in FY2006
followed by reductions in defense funding. Excluding the additional funding in FY2005 and
FY2006, defense spending would grow slowly throughout the five-year period.
9 Between FY2006 and FY2010, the budget resolution shows cumulative mandatory
spending totaling $9.068 trillion. The $34 billion five-year reduction in mandatory spending
in the reconciliation instructions is 0.37% (a little over one third of one percent) of
cumulative mandatory spending over the period.

The Administration’s Mid-Session Review (MSR; OMB; July 13, 2005)
increased the FY2006 outlay estimates by $46 billion over the President’s outlay
estimates in the FY2006 budget in February. Most of the increase ($37 billion) came
from additional war funding; the rest was a combination of small policy changes and
the effect of technical and economic revisions on outlays. The inclusion of the
Administration’s proposed Social Security policy changes (the proposed personal or
private accounts) raised the new outlay estimates above the Administration’s
previous estimates, beginning in FY2009. As has been the Administration’s practice,
the MSR did not include any estimates for future costs for the operations in Iraq and
Afghanistan. Such costs, which are likely to occur in future years, will raise outlays
in those years above the levels shown in the MSR.
CBO’s mid-year Update (August 2005) revised FY2006 outlays upward by $84
billion, most of which reflected the adoption of the defense supplemental earlier in
2005. Because the baseline rules require CBO to assume the repetition of the
supplemental each year in its forecast, outlays in all the years were larger than in the
March 2005 CBO baseline estimates. CBO estimates using alternative assumption
that reduce funding for Iraq and Afghanistan and the war on terror over a period of
time, produced 10-year cumulative outlay estimates that were $705 billion smaller
(including interest savings) than the cumulative 10-year baseline estimates.
Congress passed a continuing resolution on appropriations (P.L.109-77;
H.J.Res. 68; CR) as FY2005 ended, September 30, 2005. The CR funded
governmental activities through November 18, 2005, that were not already funded
by permanent authority or by an FY2006 regular appropriation. The CR funded most
activities at the lower of the House- or Senate-passed appropriation, or the FY2005
rate of spending. A second CR (P.L.109-105), lasting through December 17, was
adopted as the first one expired. Two of the regular appropriations remained
unfinished. After adopting a third CR (P.L. 109-128; H.J.Res 72), which the
President signed on December 18, 2005, Congress cleared the final two regular
appropriation bills for FY2006 just before Christmas. (The FY2006 defense
appropriations contained, in addition to defense appropriations and authorization, a
reallocation in Hurricane Katrina recovery funds, emergency funding for avian flu
preparedness, and an $8.5 billion across-the-board discretionary spending cut.)
Both the House and Senate passed spending reduction reconciliation bills (H.R.
4241 and S. 1932 respectively) in November. They would produce a net reduction
in spending, from baseline levels, in a selection of mandatory spending programs of
between $35 billion and $50 billion over five years. The reductions would be
approximately $5.5 billion in FY2006. The bills included spending increases as well
as spending reductions and differed substantially from each other. The conference
report (H.Rept. 109-362; December 19) would reduce mandatory spending by
approximately $40 billion over five years. The House passed the conference report
on December 21, 2005. On December 21, the Senate, after supporting points of order
against sections of the conference report, rejected the conference report. On the same
day, the Senate agreed to the House amendment to S. 1932 with a further amendment
containing the conference agreement minus the provisions that violated the Senate
point of order. The House agreed to the Senate amendment on February 1, 2006,
early in the second session of the 109th Congress. The cleared legislation was signed
by the President on February 8, 2006 (P.L. 109-171).

The Congressional Budget Office and the Administration released revised outlay
estimates for FY2006 with their respective budget reports for FY2007. The
President’s FY2007 had revised FY2006 total outlays of $2,709 billion, $95 billion
higher than the Administration’s estimate in its Mid-Session Review in July 2005 (of
$2,613 billion). Much of the increase in estimated outlays resulted from the
supplementals for military activities in Iraq and Afghanistan and expected spending
for hurricane relief and recovery. CBO’s baseline outlay estimate for FY2006 rose
from $2,595 billion in August 2005 to $2,649 billion in January 2006. Most of
CBO’s increase came from legislative changes, essentially the same ones as the
Administration cited.
The Administration’s revisions for FY2006 included a proposed supplemental
for the war on terror and additional recovery from the summer of 2005 hurricane
damage. The House passed a supplemental appropriation (HR. 4939) that followed
the President’s proposal and would add approximately $95 billion to FY2006 budget
authority. The Senate modified the House bill, adding funds for additional domestic
spending, and passed the almost $110 billion plus bill on May 4, 2006. The
conference on the bill reached agreement in early June providing almost $95 billion
in additional budget authority. The President signed the agreement on June 15, 2006
The July 2006 MSR reduced outlay estimates by approximately $12 billion
below (less than a 0.5% decline) the Administration’s February 2006 outlay
estimates. OMB attributed almost all the change to non-policy causes. The MSR
also showed outlays falling as a percentage of GDP from 20.6% of GDP in FY2006
to 18.8% of GDP in FY2011. Non-defense, non-homeland security discretionary
spending would fall from 3.8% of GDP in FY2006 to 2.6% of GDP in FY2011, an
amount well below historical levels. Even defense spending would fall over the
period, from 3.9% of GDP to 2.9% of GDP. Achieving these reductions would
require a reversal in the pattern of spending since FY2000 (see Figure 2) and
possibly unprecedented constraints and reductions in discretionary spending. The
Administration’s outlay estimates would reduce discretionary spending, as a
percentage of GDP, in real terms, and as measured per capita, to their lowest levels
since World War II.
CBO’s August 2006 Update raised FY2006 baseline outlays by $14 billion, a
combination of higher spending coming from legislation and lower spending coming
from changed technical assumptions. The changes had little effect on FY2006
outlays as a percentage of GDP (raising them from 20.2% to 20.3%). Over the period
covered by the CBO projections, FY2006 through FY2016, outlays would be larger
in each year by as much as 0.8% of GDP.
Final outlay numbers for FY2006 were $2,654 billion, $182 billion larger than
in FY2005 and $86 billion above the President’s original request (February 2005).
They were smaller than the Administration’s outlay estimates made in 2006.

The Administration’s FY2006 budget proposed extending and making
permanent many of the tax cuts adopted in the first term that otherwise would expire
(as required by law), mostly in 2010. The change, incorporated in the
Administration’s receipt proposals, produced relatively little change from the
Administration’s baseline estimates. Much of the budgetary effect of making the tax
cuts permanent would not occur until after FY2010, the last year shown in the
budget. The Administration estimated that making the cuts permanent would reduce
receipts by $53 billion between FY2006 and FY2010 and by $1.0 trillion between
FY2011 and FY2015. CBO’s estimate of these proposals put the cost at $143 billion
for the FY2006 through FY2010 period and $1.5 trillion for the FY2011 through
FY2015 period.10
Table 3. Receipts for FY2004-FY2010 and FY2015
(in billions of dollars)
FY2004 FY2005 FY2006 FY2007 FY2008 FY2009 FY2010 FY2015
CBO Baseline, 1/05..........1,880 a2,0572,2122,3572,5082,6622,8063,847
Presidents FY06 Budget, 2/05.........2,0532,1782,3442,5072,6502,821
Presidents FY06 CSB 2/05............2,0532,1782,3472,5182,6682,841
CBO, Revised Baseline, 3/05...........2,0572,2132,3572,5082,6622,8073,847
CBO, EPP 3/05.....................2,0572,2102,3502,4922,6252,7703,540
House, FY06 Budget Resolution, 3/05....2,0572,1952,3312,4962,6352,784
Senate Budg. Comm. Budg. Res., 3/05...2,0572,1972,3522,4962,6382,792
Senate, FY06 Budget Resolution 3/05....2,0572,1932,3432,4832,6232,775
Conf. Agree. Budget Resolution 4/05....2,0572,1952,3312,4962,6352,784
OMB MSR 7/13/05..................2,1402,2732,4282,5882,7272,893
CBO Update 8/15/05.................2,1422,2802,3962,5262,6752,8173,848
CBO, BEO, Baseline, 1/06.............2,154 b2,3122,4612,5982,7432,8833,912
OMB, Budget Proposals, 2/06.......... 2,2852,4162,5902,7142,878
OMB, Budget, CSB, 2/06............. 2,3012,4442,5972,7292,901
CBO, Revised Baseline 3/06........... 2,3132,4612,5982,7432,8833,913
CBO, EPP 3/06..................... 2,3042,4312,5852,7122,8523,608
Senate FY2007 Budget Res.3/06........ 2,3032,4332,5932,7352,870
House FY2007 Budget Res. 5/06........ 2,3032,4222,5902,7232,869
OMB MSR 7/06..................... 2,4002,4592,6592,7722,930
CBO Update, Baseline 8/06............ 2,4032,5152,6722,7752,8903,922
Actual Receipts for FY2006............ 2,407
a. Actual receipts for FY2004.
b. Actual receipts for FY2005.
BEO Budget and Economic Outlook.
EPP — CBOs estimates of the Presidents proposals.
CSB — The Administrations current services baseline.
MSR — OMBs Mid-Session Review.
Update CBOs The Budget and Economic Outlook: an Update.

10 These amounts from CBO do not include the outlay effects (usually interest costs
associated with larger deficits) of the extensions.

Under the initial request, receipts would grow from an estimated $2,178 billion
in FY2006 to $2,821 billion in FY2010. The increases continue the dollar growth
in receipts that began in FY2004, following three years of dollar declines in receipts
(FY2001 through FY2003). Receipts reached their highest level (since World War
II) both in dollars ($2,025 billion) and as a percentage of GDP (20.9% of GDP) in
FY2000. By FY2003, receipts had fallen for three years in a row in both dollars (to
$1,782 billion) and as a percentage of GDP (to 16.4%), with that share of GDP being
lower than in any year since FY1955. Receipts grew to $1,880 billion, but fell to
16.3% of GDP in FY2004. The Administration estimated receipts of $2,053 billion
(16.8% of GDP) in FY2005, exceeding FY2000 receipts in dollars, and $2,178
billion (16.9% of GDP — still below recent averages) in 2006 (later estimates raised
these amounts).
The Administration’s proposals did not include extending the current relief from
the alternative minimum tax (AMT) after the end of FY2005. Without a further
extension, a growing number of middle-class taxpayers will find themselves subject
to the AMT.11 CBO estimated (January 2005) that providing extended or permanent
AMT relief would reduce receipts by $198 billion between FY2006 and FY2010 and
by $395 billion between FY2006 and FY2015. Without some adjustment to the
AMT, it will recapture much of the tax reduction provided in the 2001 and 2003 tax
cut s . 12
The CBO baseline and OMB’s proposed and baseline estimates are fairly similar
from FY2006 through FY2010. Under both baselines, receipts rise from 16.8% of
GDP in FY2005 to between 17.8% (CBO) and 17.7% of GDP (OMB) in FY2010.
CBO’s baseline, which assumed the scheduled expiration of the tax cuts, extended
the projections through FY2015. In the CBO baseline, receipts rise rapidly after
FY2010 (the year the tax cuts expire) and reach 19.6% of GDP in FY2015.
Using CBO’s January 2005 estimates of alternative revenue policies — to
extend the tax cuts and to reform the alternative minimum tax (AMT) — results in
a much slower growth in receipts in dollars and as shares of GDP.13 Receipts still
rise as a percentage of GDP, but much more slowly than in the President’s proposal
or CBO’s baseline. By FY2010, the alternative receipts have risen to $2,727 billion
and 17.3% of GDP. By FY2015, the alternative estimated receipts rise to $3,508
billion and 17.9% of GDP.
CBO’s March 2005 estimates of the President’s revenue proposals (using
CBO’s underlying assumptions and budget model) produced numbers similar to

11 For discussions of the AMT issue, see CRS Report RL30149, The Alternative Minimum
Tax for Individuals; and CRS Report RS22100, The Alternative Minimum Tax for
Individuals: Legislative Initiatives and Their Revenue Effects, both by Gregg A. Esenwein.
12 See CRS Report RS21817, The Alternative Minimum Tax (AMT): Income Entry Points
and “Take Back” Effects, by Gregg A. Esenwein, for more information on the interaction
of the AMT and the tax cuts.
13 CBO indicates that combining the reform of the AMT and the tax extenders produces an
interactive effect that makes the combined loss greater than the sum of the two estimates

those in the President’s budget (a bit larger in the early years and a bit smaller in the
later years of the FY2006 to FY2010 period).
The House and Senate budget resolutions followed the lead of the President’s
budget and included tax cuts or other tax changes for the period FY2006 through
FY2010. The resolutions did not address the expiration of the tax cuts in 2010. The
House resolution included $106 billion in revenue reductions over five years, $45
billion of which were included in reconciliation instructions. The Senate, in
amending the resolution as presented by the Senate Budget Committee, increased the
five-year revenue reduction to $129 billion (from $70 billion), all of which was to be
included within reconciliation instructions.
The conference agreement on the budget resolution included five-year revenue
reductions of almost $106 billion, $70 billion of which fell under reconciliation
instructions. The FY2006 $11 billion tax reduction under reconciliation (in the
budget resolutions) would not be large enough (by an estimated $5 billion) to
accommodate all of the tax breaks that expire that year. Among those tax breaks
expiring is the relief from the Alternative Minimum Tax (AMT) for many (and
growing) middle-class taxpayers. The House Ways and Means Committee and the
Senate Finance Committees will determine what is included and excluded from the
tax cut reconciliation bill that each Chamber will initially consider. Whether a
separate tax cut bill, continuing or extending other expiring tax cuts, will be
introduced is uncertain.
Figure 3 uses data from the CBO FY2007 budget reports of March and August
2006 and OMB’s July 2006 MSR. The data show receipts as percentages of GDP for
fiscal years 2000 through 2015
(projected; the data for FY2000-Figure 3. Receipts, FY2000-FY2015

FY2005 are the actual levels).
Average actual receipts for FY1965(as percentages of GDP)21%
through FY2005 are included in the
figure (the horizontal line at 18.2%
of GDP). The CBO baseline20%
estimate and CBO’s reestimates of
the President’s proposals (from the19%
FY2007 budget) follow similar (but
separate) paths through FY2010. 18%
CBO’s baseline assumed that, as
required by current law, the 2001 and17%
2003 tax cuts expire after 2010 and
that there is no fix to the future16%Actuals, FY2000-FY2005
expansion in coverage of the AMT.CBO Baseline
These assumptions raise receipts15%OMB MSRCBO Reestimates of OMB
rapidly after FY2010, to 19.6% ofAlternative Estimate
GDP in FY2015 (more than 1½Average, FY1965-FY20058/200
percentage points of GDP). The14%
Administration’s policy assumed the2000200520102015
tax cuts would be extended, resulting
in receipts varying around 18% of

GDP after the decline in share from FY2006 to FY2007. The alternative estimate
used CBO’s August 2006 alternative scenarios that assume the tax cuts are extended
and that the AMT relief is adjusted annually. This alternative outlook for receipts
showed them slowly falling after FY2006 (18.3% of GDP) to approximately 17.5%
of GDP, where they stay for the rest of the period.14 Average receipts over the
FY1965-FY2005 period (18.2% of GDP) are larger than either the CBO reestimate
of the President’s policy proposals or the alternative estimate (except in FY2006)
throughout the period shown.
The President’s FY2007 budget (February 2006), like his FY2006 budget,
assumed that the 2001 and 2003 tax cuts would be made permanent, but the effect
on receipts of making them permanent shows little effect until after FY2010. The
budget would extend the alternative minimum tax (AMT) relief only through
FY2007. If Congress and the President continue adjusting the Alternative Minimum
Tax (AMT) to provide relief to middle-class taxpayers in subsequent years, receipts
will be smaller in future years than shown in the budget.
The tax reduction reconciliation bills adopted by the Senate (S. 2020) and the
House (H.R. 4297) late in 2005 would reduce FY2006 revenues by between $6
billion and $11 billion and by between $56 billion and $70 billion over five years.
The Senate substituted the text of its bill for that of the House bill, adopting the
amended version of H.R. 4297 on February 2, 2006. The House and Senate had
appointed conferees by mid-February 2006. The conferees reported an agreement on
May 9, 2006. It would reduce revenues by $70 billion over five years. Congress sent
the legislation to the President who signed it on May 17, (P.L. 109-222).
The Senate-passed FY2007 budget resolution (S.Con.Res. 83; March 16, 2006)
had receipts of $2,303 billion for FY2006, $10 billion below CBO’s March 2006
baseline but almost $110 billion higher than in the FY2006 budget resolution
(H.Con.Res. 95). The House Budget Committee’s version of the FY2007 budget
resolution (H.Con.Res. 376; March 29, 2006) also showed receipts of $2,303 billion
for FY2006. (The House passed its resolution on May 18.)
The Administration’s July 2006 MSR had FY2006 receipts of $2,400 billion,
$115 billion (5.0%) larger than it had estimated receipts in February 2006. Almost
all of the increased receipt estimate resulted from changes in economic assumptions
and technical reestimates rather than policy changes. OMB stated that increased
individual and corporate income taxes produced most of the total receipt estimate
increases. The updated estimates raised the growth in receipts between FY2005 and
FY2006 from 6.1% in the February 2006 to 11.4% in the MSR. The update also
reduced the growth in estimated receipts between FY2006 and FY2007 from 5.7%
in February to 2.4%. In general, the components of receipts grow by significant
percentages between FY2005 and FY2006, but grow by much smaller amounts or
actually shrink between FY2006 and FY2007, according to data in the MSR.

14 By FY2015, CBO’s baseline and the alternative estimate are almost 2% of GDP and over
$400 billion apart.

CBO’s August 2006 budget report included similar FY2006 receipts to those in
OMB’s MSR. It also reported a large, unexpected surge in receipts during FY2006,
and for the same reasons as cited by OMB (income taxes, both corporate and
individual). After FY2006, the CBO’s baseline receipt estimates and OMB’s receipt
estimates diverge, with CBO’s estimates being larger (through FY2011) than OMB’s.
Final receipts for FY2006 were $2,407 billion, $253 billion above FY2005
receipts and $230 billion larger than the President’s original request (February 2005).
They were also larger than any subsequent estimate made by OMB or CBO (see
Table 3). Individual income taxes were 12.6% larger than they were in FY2005 and
corporate income taxes were 27.2% larger. A surge in corporate profits and non-
withheld income produced much of the growth in income taxes. (Most analysts do
not expect the rapid growth in federal receipts to continue.)
Deficits (and Surpluses)
Deficits and surpluses are the residuals left after Congress and the President set
policies for spending and receipts. Surpluses, in which receipts are greater than
outlays, reduce federal debt held by the public, which can lead to lower net interest
payments (among other effects). Deficits, in which outlays exceed receipts, increase
government debt held by the public, generally increasing net interest payments
(assuming no change in interest rates). Reducing the deficit and eventually reaching
a balanced budget or generating and keeping a surplus (the government had its first
surplus in 30 years in FY1998) was a major focus of the budget debates in the late

1980s and throughout the 1990s.

The President’s FY2006 budget proposals (February 2005) had estimates of the
FY2006 deficit falling to $390 billion (3.0% of GDP) from an FY2005 deficit of
$427 billion (3.5% of GDP). The deficit would fall to an estimated $207 billion
(1.3% of GDP) in FY2010. The President’s budget indicated that its policies, if
adopted, would halve the deficit as a percentage of GDP by the end of FY2010. This
goal would likely not be reached if additional AMT relief is implemented, additional
defense supplementals are adopted, or non-defense discretionary spending grows
rather than falls after FY2006.
Achieving the Administration’s deficit reduction proposals would require, over
five years, strict limits on the growth in domestic discretionary spending, a modest
reduction (from baseline estimates) in some entitlements, slowing defense spending
growth, and letting AMT relief to lapse after 2005. The proposals included some
revenue-reducing tax cuts, increasing other changes needed to reduce the deficit.15
An inability to hold to these spending and revenue levels, a task that has proven
difficult in the past, would result in larger deficits than those expected in the
President’s budget.

15 The Administration’s current services baseline estimate, which assumes current policy,
had smaller deficits in each year through FY2009 (and the same sized deficit in FY2010)
than the President’s proposed budget. The cumulative five-year deficit would be smaller
without the President’s proposed policy changes than with them.

Table 4. Surpluses/Deficits(-) for FY2004-FY2010 and FY2015
(in billions of dollars)
FY2004 FY2005FY2006FY2007FY2008FY2009FY2010FY2015
CBO Baseline, 1/05.........-412a-368-295-261-235-207-189141
Presidents FY06 Budget, 2/05........-427-390-312-251-233-207
Presidents FY06 CSB 2/05...........-390-361-303-251-229-207
CBO Revised Baseline 3/05...........-365-298-268-246-219-201122
CBO EPP 3/05.....................-394-332-278-250-246-229-256
House FY06 Budget Resolution, 3/05...-394-376-304-247-229-203
Senate Budg. Comm. Budg. Res., 3/05..-397-361-299-258-236-208
Senate, FY06 Budget Resolution, 3/05..-397-368-315-277-257-232
Conf. Agree. Budget Resolution 4/05...-398-383-313-254-238-211
OMB MSR 7/13/05.................-333-341-233-162-162-170
CBO Update 8/15/05................-331-314-324-335-321-317-57b
CBO, BEO, Baseline, 1/06............-318 -337-270-259-241-22273
OMB, Budget Proposals, 2/06......... -423-354-223-208-183
OMB, Budget, CSB, 2/06............ -367-257-201-196-149
CBO, Revised Baseline 3/06.......... -336-265-250-224-21691
CBO, EPP 3/06.................... -371-335-236-194-165-204
Senate FY2007 Budget Res.3/06....... -372-363-260-197-160
House FY2007 Budget Res.. 5/06...... -372-348-235-191-153
OMB MSR 7/06.................... -296-339-188-157-123
CBO Update, Baseline 8/06........... -260-286-273-304-328-56
Actual Deficit for FY2006............ -248
a. Actual deficit for FY2004.
b. Actual deficit for FY2005.
BEO Budget and Economic Outlook
EPP — CBOs estimates of the Presidents proposals.
CSB — The Administrations current services baseline.
MSR — OMBs Mid-Session Review.
Update CBOs The Budget and Economic Outlook: An Update.
CBO’s March 2005 estimates of the President’s proposals put the FY2005
deficit at $394 billion (3.2% of GDP) and the FY2006 deficit at $332 billion (2.6%
of GDP). Both are below the deficits for those years proposed in the budget. CBO’s
reestimated deficits are below the Administration’s deficits through FY2008 and
larger than the Administration’s deficit estimates in FY2009 and FY2010. CBO
extended its projections of the President’s policies through FY2015 (the President’s
budget estimates ended with FY2010).
The House and Senate FY2006 budget resolutions, in following the
Administration’s lead, showed declining deficits throughout the five years covered
by the resolution. The conference agreement on the resolution followed the same
pattern. The differences among these deficit estimates were slight (see Table 4). The
conference agreement set a FY2006 deficit of $383 billion (3.0% of GDP) falling to
$211 billion (1.1% of GDP) in FY2010.

Figure 4 shows deficit estimates as shares of GDP for FY2000 through FY2015
based on actual data (for FY2000-FY2005) and data from CBO’s March and August16
2006 budget reports and OMB’s July 2006 MSR. The CBO baseline deficit
estimate is the combination of the baseline receipt and outlay estimates. The CBO
baseline requires the assumption that the 2001 and 2003 tax cuts expire (as currently
scheduled) in 2010, that there are no future adjustments to lessen the expanding
coverage of the AMT, that there are adjustments to non-defense discretionary
spending for inflation, and that the supplemental adopted in 2006 is repeated
annually. Under these assumptions, the CBO August baseline deficit fell to almost

0% of GDP in FY2012, and stayed there.

CBO’s estimates of the President’s policies (in his FY2007 budget, February
2006) showed the deficit falling from FY2006 to FY2010, to near 1% of GDP, and
remaining near 1% of GDP through FY2015. The President’s budget had estimates
through FY2011; CBO extended the
projections through FY2015. TheFigure 4. Surplus/Deficit (-),
Administration’s proposal to makeFY2000-FY2015

the tax cuts permanent has little(as percentages of GDP)
effect on the deficit estimates until-5%
after FY2010. Both CBO’s baseline-4%
and its estimates of the President’s
policies show the deficit falling-3%
below the average deficit (2.3% of
GDP) over the FY1965-FY2005-2%
-1 %
The July 2006 OMB MSR
showed deficits falling steadily as a0%
share of GDP after FY2007 (seeActuals, FY2000-FY2005
Figure 4). After a drop from1%Alternative Estimate
FY2005 to FY2006, the deficit (as aCBO Reestimates of OMBOMB MSR
percentage of GDP) rises in FY2007.2%CBO Baseline
After FY2007, the Administration’sAverage, FY1965-FY2005
July 2006 budget report showed the3%
deficit falling steadily as a share of4%8/2006
GDP through FY2011. The2000200520102015
Administration’s estimate assumed
almost no additional funding for
military operations in Iraq and Afghanistan, no further relief from expanding
alternative minimum tax coverage, and almost no growth in discretionary spending.
If these assumptions do not hold (many analysts do not believe they accurately
predict future policy), the deficit will be larger.
The alternative baseline in Figure 4 used selected estimates of alternative
policies created by CBO (that reflect faster discretionary spending growth, extending
the expiring tax cuts, retaining relief from the AMT, and incorporating increased debt
16 Note that in the chart, increasing deficits move up while decreasing deficits (or increasing
surpluses) move down.

servicing costs). Under these assumptions, the deficit estimates remained between

2% and 3% of GDP throughout the period and show a growing trend after FY2012.

Under the alternative estimate, the deficit never falls below the FY1965-FY2005
average deficit during the 10-year period.
Earlier, the Administration’s FY2007 budget (February 2006) repeated the
assertion that the deficit will be halved by FY2009 as a percentage of GDP compared
to the estimate for the FY2004 deficit produced in February 2004. To achieve this
result, discretionary spending must be held almost constant in dollars (excluding
defense and homeland security), no relief can be provided from the expanding
coverage of the AMT beyond FY2007, legislation would be needed to restrain
mandatory spending, and no additional supplemental funding is assumed for the war
on terror (or anything else) after FY2007. The July 2006 MSR, using most of the
same assumptions as the FY2007 budget, had the deficit fall from -2.3% of GDP in
FY2006 to -0.7% of GDP in FY2011. Many analysts questioned the realism of the
underlying policy assumptions that the Administration used to achieve the future
reduction in the deficit.
The Senate-passed budget resolution for FY2007 (S.Con.Res. 83; March 16,
2006) included a revised FY2006 deficit of $372 billion, $11 billion below the deficit
in the FY2006 budget resolution. The House-passed FY2007 budget resolution
(H.Con.Res. 376; May 18, 2006) had the same amount for the deficit for FY2006 as
in the Senate-passed FY2007 resolution.
The actual deficit for FY2006 was $248 billion, $70 billion below the FY2005
deficit and $142 billion below the Administration’s original FY2006 proposal
(February 2005). It was also well below most deficit estimates produced by OMB
and CBO during 2005 and 2006. The most recent OMB and CBO budget estimates
show the deficit rising in FY2007. After that, OMB shows the deficit falling
(because of assumed future policy change while CBO shows it growing through
FY2010 under current policies. Most longer-run projections show the deficit growing
steadily unless current policies are changed substantially.
The Longer Run
Over a longer time period, one beginning in the next decade and lasting for
decades into future, CBO indicates (in its January 2005 budget documents) that it
expects, under existing policies and assumptions, that demographic pressures will
produce large and persistent deficits. CBO states
In the decades beyond CBO’s projection period, the aging of the baby-boom
generation, combined with rising health care costs, will cause a historic shift in
the United States’ fiscal situation....
Driven by rising health care costs, spending for Medicare and Medicaid is
increasing faster than can be explained by the growth of enrollment and general
inflation alone. If excess cost growth continued to average 2.5 percentage points
in the future, federal spending for Medicare and Medicaid would rise from 4.2
percent of GDP today to about 11.5 percent of GDP in 2030....

Outlays for Social Security as a share of GDP are projected to grow by more than
40 percent in the next three decades under current law: from about 4.2 percent
of GDP to more than 6 percent....
Together, the growing resource demands of Social Security, Medicare, and
Medicaid will exert pressure on the budget that economic growth alone is
unlikely to alleviate. Consequently, policymakers face choices that involve
reducing the growth of federal spending, increasing taxation, boosting federal17
borrowing, or some combination of those approaches.
The Administration indicated similar concerns about the outlook for the budget
over the long term but tied much of its discussion to the President’s proposed reforms
to Social Security. Less was said about Medicare and Medicaid.
The short-term budget outlook can change when it is buffeted by economic or
policy changes. The long-term budget outlook is expected to be dominated by the
expansion of the population eligible for Social Security, Medicare, Medicaid, and
other programs for the elderly as the baby boom generation begins retiring in large
numbers. The steady price increases experienced by the health programs, if
unchanged, could begin to dominate future budget debates. Not only will these
programs be affected, but their constant growth will put great stress on the rest of the
budget, the government’s ability to finance its obligations, and the ability of the
economy to provide the resources needed. The tax cuts, spending increases, and
policy changes of the last few years have not produced the difficult fiscal future, but
they appear to have made an already difficult situation more difficult.
The Budget and the Economy
The budget and the economy affect each other unequally. Small economic
changes have a more significant effect on the budget than the effect large policy
changes generally have on the economy. The worse-than-previously-expected
economic conditions that lasted from 2001 into 2003, played a minor role, directly
and indirectly, in the deterioration of the budget outlook over those years. CBO
expects continued economic growth during calendar years 2005 and 2006, which
should result in higher revenues and lower spending than would occur if the
economy were to grow at a slower rate. Because there is no way of predicting the
timing of economic ups and downs, especially as estimates run into the future, CBO
projects that GDP will grow at a rate close to potential GDP for the period 2007
through 2015.18
Under governmental policies that are in fiscal balance, a return to normal
economic growth (growth close to that of potential GDP) should reduce or eliminate
a deficit or produce a surplus. In both the President’s budget and in CBO’s budget
reports, the budget under current policies experiences a shrinking deficit, but does not

17 CBO, The Budget and Economic Outlook: Fiscal Years 2006-2015, Jan. 2004, pp. 10-11.
18 Potential GDP represents an estimate of what GDP would be if both labor and capital
were as fully employed as is possible.

move into surplus throughout the forecast period. Under CBO’s alternative policies,
the deficit grows as a percentage of GDP; it does not shrink or disappear during a
period of expected normal economic growth. This result implies that the budget,
particularly if using the alternative assumptions, has a basic fiscal imbalance that
cannot be eliminated by economic growth. To produce a balanced budget or one in
surplus requires spending reductions or tax increases.
For Additional Reading
U.S. Congressional Budget Office. The Budget and Economic Outlook: Fiscal Years

2006-2015. Washington, January 25, 2005.

——. An Analysis of the President’s Budget Proposals for Fiscal Year 2006.
Washington, March 2005.
——. The Budget and Economic Outlook: An Update. Washington, August 2005.
——. The Long-Term Budget Outlook. Washington, December 2005.
U.S. Council of Economic Advisors. The Economic Report of the President.
Washington, GPO, February 2005.
U.S. Office of Management and Budget. The Budget of the United States
Government for Fiscal Year 2006. Washington, GPO, February 7, 2005.
——. The Fiscal Year 2006 Mid-Session Review. Washington, July 2005.
CRS Products
CRS Report RL32791, Congressional Budget Actions in 2005, by Bill Heniff, Jr.
CRS Report RL33132, Budget Reconciliation Legislation in 2005, by Robert Keith.
CRS Report RS22322, Taxes and Fiscal Year 2006 Budget Reconciliation: A Brief
Summary, by David Brumbaugh.
CRS Report RS21992, Extending the 2001, 2003, and 2004 Tax Cuts, by Gregg
CRS Report RL30149, The Alternative Minimum Tax for Individuals, by Gregg
CRS Report RS22100, The Alternative Minimum Tax for Individuals: Legislative
Initiatives and Their Revenue Effects, by Gregg Esenwein.
CRS Report RL30839, Tax Cuts, the Business Cycle, and Economic Growth: A
Macroeconomic Analysis, by Marc Labonte and Gail Makinen.

CRS Report RS21756, The Option of Freezing Non-defense Discretionary Spending
to Reduce the Budget Deficit, by Gregg Esenwein and Philip Winters.
CRS Report RL30239, Economic Forecasts and the Budget, by Brian W. Cashell.
CRS Report RL31235, The Economics of the Federal Budget Deficit, by Brian W.
CRS Report RL31414, Baseline Budget Projections: A Discussion of Issues, by
Marc Labonte.
CRS Report 98-560, Baselines and Scorekeeping in the Federal Budget Process, by
Bill Heniff, Jr.
CRS Report RS20095, The Congressional Budget Process: A Brief Overview, by
James V. Saturno.
CRS Report RL30297, Congressional Budget Resolutions: Selected Statistics and
Information Guide, by Bill Heniff Jr.
CRS Report RS21752, Federal Budget Process Reform: A Brief Overview, by Bill
Heniff, Jr. and Robert Keith.
CRS Report 98-720, Manual on the Federal Budget Process, by Robert Keith and
Allen Schick.
CRS Report RL30708, Social Security, Saving, and the Economy, by Brian W.