The Budget for Fiscal Year 2008






Prepared for Members and Committees of Congress



On February 5, 2007, President Bush presented his fiscal year (FY) 2008 budget to Congress. The
President’s budget predicted a deficit of $239 billion for FY2008 and a steady improvement of
the federal government’s fiscal position, including a surplus of $61 billion in FY2012, the last
year projected. Major proposals included large defense supplementals for FY2007 and FY2008,
extensions of the expiring tax cuts, limited increases in domestic discretionary spending, and
limited increases in defense spending after FY2008. The Administration also proposed a
temporary halt to the expanding reach of the Alternative Minimum Tax (AMT) in FY2007 and
FY2008. Medicare and Medicaid were expected to grow more slowly. The Administration’s July
2007 Mid-Session Review showed little change in the budget outlook for FY2008 through
FY2012, although higher health outlays and war costs increased the expected FY2008 deficit
slightly.
The FY2008 budget also discussed long-term fiscal problems. According to the longer-term
projections from the Administration, the Congressional Budget Office (CBO), and the
Government Accountability Office (GAO), the impending retirement of the baby boom
generation and rising health care costs will substantially expand spending over the coming
decades on federal programs serving the elderly, such as Medicare, Social Security, and Medicaid.
The long-term growth of outlays, if left unchanged or if not offset by new revenues, could
overwhelm the government’s ability to finance its obligations.
In January 2007, the CBO released baseline projections of future budget outcomes under current
law. CBO projected a FY2008 deficit of $98 billion, a $170 billion surplus in FY2012, and a $249
billion surplus in FY2017. The baseline assumes the large tax cuts enacted in the first half of the
decade expire as scheduled, real discretionary spending is fixed, and the Alternative Minimum
Tax is unchanged.
The House and Senate adopted separate versions of the FY2008 budget resolution in March 2007,
which would allow more domestic spending than the Administration request and extend some
expiring tax cuts with conditions. The House and Senate adopted a conference agreement
(H.Rept. 110-153) on May 17, with a projected FY2008 deficit of $252 billion. By mid-July, the
House and Senate Committees on Appropriations had approved most of the 12 regular
appropriations bills. At the end of FY2007, the House had passed all 12 appropriations bills and
the Senate had passed four. The Senate passed three more appropriations bills in October. The
President had said he would veto other appropriations bills. At the end of FY2007, Congress
passed the first (H.J.Res. 52) of four continuing resolutions (H.R. 3222, H.J.Res. 69, H.J.Res. 72),
which in sequence, funded government operations until the end of the calendar year. On
November 8, Congress approved the Labor-HHS-Education bill (H.R. 3043, S. 1710), which the
President vetoed, and Defense bill (H.R. 3222, P.L. 110-116), which he signed. On December 19,
Congress passed an omnibus bill (H.R. 2764) that incorporated the 11 remaining regular
appropriations bills. On December 26, the President signed the Consolidated Appropriations Act
of FY2008 (P.L. 110-161), which provided $555 billion in discretionary budget authority. This
report will not be updated.






Background and Analysis................................................................................................................1
The Current Situation......................................................................................................................1
Budget Totals...................................................................................................................................2
Budget Estimates and Proposals...............................................................................................3
CBO Projections.................................................................................................................3
Administration Projections and Proposals..........................................................................4
CBO Scoring of FY2008 Appropriations Bills...................................................................5
Congressional Budget Resolutions.....................................................................................7
Projections of a Federal Surplus in FY2012.......................................................................7
Issues Regarding Budget Projections........................................................................................8
Accuracy and Statistical Bias in Budget Forecasts...................................................................8
Budget Action..................................................................................................................................9
Outlays........................................................................................................................................... 10
Administration Projections......................................................................................................10
CBO Current-Law Baseline Projections.................................................................................13
Federal Outlays and Congressional Resolutions.....................................................................14
Trends in Outlays by Category of Spending...........................................................................15
Receipt s ....................................................................................................................... .................. 17
Administration Revenue Projections.......................................................................................17
CBO Revenue Projections.......................................................................................................19
Federal Revenues and Congressional Resolutions..................................................................20
Revenue Projections in Historical Perspective........................................................................20
Deficits and Surpluses...................................................................................................................21
Administration Deficit Projections..........................................................................................22
CBO Deficit Projections.........................................................................................................23
Deficits in Congressional Budget Legislation.........................................................................23
Comparing Projections of Federal Deficits and Surpluses......................................................24
The Longer Run.............................................................................................................................25
Figure 1. Outlays by Type, FY2000-FY2012................................................................................15
Figure 2. Outlays, FY2000-FY2017..............................................................................................16
Figure 3. Receipts by Type, FY2000-FY2012...............................................................................19
Figure 4. Receipts, FY2000-FY2017............................................................................................21
Figure 5. Deficits(-) or Surpluses, FY2000-FY2017.....................................................................24
Table 1. Budget Estimates and Proposals for FY2008....................................................................2





Table 2. Final 302(b) Allocations and CBO Estimates for FY2008 Appropriations.......................6
Table 3. Outlays for FY2006-FY2012 and FY2017.......................................................................11
Table 4. Receipts for FY2006-FY2012 and FY2017.....................................................................17
Table 5. Surpluses/Deficits(-) for FY2006-FY2012 and FY2017.................................................22
Author Contact Information..........................................................................................................26






The Bush Administration, in accordance with the statutory requirement that the President present
a budget proposal by the first Monday in February, released The Budget of the U.S. Government, 2
Fiscal Year 2008 on February 5, 2007. The full set of budget documents (Budget, Appendix,
Analytical Perspectives, Historical Tables, as well as several other supplemental budget
documents) contains extensive and detailed budget information, including estimates of the budget
without the proposed policy changes (known as “current service baseline” estimates), historical
budget data, detailed budget authority, outlay and receipt data, selected analysis of specific 3
budget-related topics, and the Administration’s economic forecast. The budget documents
contain general and specific descriptions of the Administration’s policy proposals and
expectations from FY2007 through FY2012, as well as limited information on budget policies for
FY2012 through FY2017. The documents also discuss long-term fiscal issues facing the nation
and provide historical data on previously enacted appropriations, past outlays and revenues, and
other budget items.
The congressional budget process, which includes the annual budget resolution and
appropriations bills, begins once the Administration submits its budget to Congress. As Congress
deliberates over the budget, the Administration often revises its proposals as it interacts with
Members of Congress and as national and international economic conditions change.

Congress adopted the conference report (H.Rept. 110-153; S.Con.Res. 21) on the FY2008 budget
resolution on May 17, 2007. The House and Senate Appropriation Committees began considering
the FY2008 appropriation bills shortly afterwards. By late July, all twelve regular appropriation
bills for FY2008 had cleared the House Appropriations Committee and, except for the defense
bill, the Senate Appropriation Committee. By August 5, the House had passed all twelve regular
appropriations bills. The Senate passed the Homeland Security bill in July and three others in
mid-September, but failed to pass the remaining eight by September 30, the end of FY2007. In
October, the Senate passed the defense appropriations and Commerce-Justice-Science
appropriations bills.
On September 26, the House passed a continuing resolution (H.J.Res. 52) to fund the government
until November 16, which the Senate passed the following day. The President signed the
continuing resolution on September 29 (P.L. 110-92). On November 8, Congress approved the
Labor-HHS-Education bill (H.R. 3043, S. 1710), which the President vetoed, and Defense bill
(H.R. 3222, P.L. 110-116) that provided $459 billion in non-emergency budget authority, which

1 Philip Winters, who has retired from CRS, wrote a previous version of this report.
2 The Budget and Accounting Act of 1921 requires the President to submit a budget to Congress each year. Current law
(31 U.S.C. 1105(a)) requires the President to submit a budget no earlier than the first Monday in January, and no later
than the first Monday in February.
3 Current services baseline estimates, and baseline estimates in general, provide a neutral measure against which to
compare proposed policy changes and are not designed to predict likely future budget outcomes. In general, they
project current policy, which includes future changes in law, over the next five to 10 years. Their construction generally
follows instructions provided in the Balanced Budget and Emergency Deficit Control Act of 1985 and the
Congressional Control and Impoundment Act of 1974.





he signed. The President had said he would veto nearly all of the appropriation bills that reached
the House or Senate floor, either because they exceeded requested funding levels or because of
policy disagreements. These veto threats may have complicated the appropriations process.
The defense bill included extended funding for government operations from November 16 until
December 14. On December 14, Congress passed another funding continuation (H.J.Res. 69) to
December 21, which the President signed. On December 19, Congress passed an omnibus
appropriations bill (H.R. 2764) that incorporated 10 remaining regular appropriations bills into 4
the State-Foreign Operations appropriations bill and a fourth continuing resolution (H.J.Res. 72).
On the same day, Congress passed a fourth continuing resolution, which the President signed two
days later (P.L. 110-149), that funded government operations through the end of the calendar year.
On December 26, the President signed the omnibus measure, entitled the Consolidated
Appropriations Act of FY2008 (P.L. 110-161), which provided $555 billion in discretionary
budget authority.

Table 1 contains budget estimates for FY2008 from CBO, the Administration (the Office of
Management and Budget, OMB), and Congress. Estimated budget totals can vary due to differing
underlying economic, technical, and budget-estimating assumptions and techniques, as well as
differences in policy assumptions. Minor differences in underlying assumptions, which may
generate small short-term discrepancies, can produce wide divergences in projected long-term
budget paths. Budget estimates produced by the President, CBO, Congress, or by others, should
be expected to change as new data arrive or as economic conditions change.
Table 1. Budget Estimates and Proposals for FY2008
(in billions of dollars)
Receipts Outlays Deficit (-)
CBO, BEO Baseline, 1/07 2,720 2,818 -98
OMB, FY08 Budget Proposals, 2/07 2,662 2,902 -239
OMB, Budget, CSB, 2/07 2,714 2,752 -38
SBC, Budget Res. 3/16/07 2,678 2,927 -249
CBO Est. of Pres. Budget 3/21/07 2,679 2,905 -226
CBO Baseline, Revised 3/21/07 2,720 2,833 -113
Senate Budget Res., S.Con.Res. 21 3/23/07a 2,678 2,927 -249
House Budget Res., H.Con.Res. 99 3/29/07 2,720 2,933 -213
Conf. Agreement, S.Con.Res. 21 5/17/07 2,685 2,937 -252
Mid-Session Review 7/11/07 2,659 2,918 -258
CBO, Budget Update, 8/23/2007 2,771 2,925 -155
Source: CRS.

4 For details, see CRS Report RL34298, Consolidated Appropriations Act for FY2008: Brief Overview, by Robert
Keith.





Note: Outlays minus receipts may not equal deficit due to rounding.
BEO—The Budget and Economic Outlook, CBO.
CSB—The Administration’s current services baseline.
SBC—Senate Budget Committee.
a. Calculated from the engrossed version of S.Con.Res. 21.
CBO’s first budget report for FY2008 contained budget baseline and economic projections for
FY2007 through FY2017. The report estimated an FY2008 baseline deficit of $98 billion, down
from the estimated FY2007 baseline deficit of $172 billion. The CBO baseline showed a FY2012
surplus of $170 billion and a projected $249 billion surplus in FY2017.
CBO baseline projections are computed using certain assumptions set by law. These assumptions
typically yield higher revenue estimates and projections of slower growth of discretionary
spending relative to scenarios that independent forecasters consider likely. Three key assumptions
incorporated in CBO baseline projections are that discretionary spending remains constant in
inflation-adjusted terms, the 2001 and 2003 tax cuts fully expire after 2010 (as current law
specifies), and the “patch” to the alternative minimum tax (AMT), which expired at the end of
calendar year 2006, will lapse. After 2010 when most of the tax cuts from 2001 and 2003 expire,
according to baseline projections, receipts grow substantially. The assumption that these tax cuts
expire and that growth in discretionary spending is zero in real terms explains most of the
declining deficit and the surpluses that emerge over the 10-year baseline forecast window. Unless
major policy changes are made, federal deficits are expected to grow rapidly beyond the 10-year
forecast window. In large part those future deficits would result from the retirement of the baby
boom generation and growing health care costs.
CBO’s report includes the estimated budgetary effects on revenues and outlays of selected
policies omitted from baseline estimates. These include, among a few others, estimates of the
budgetary effects of making the 2001 and 2003 tax cuts permanent, indexing the AMT for
inflation to limit its expanding coverage, increasing discretionary appropriations at the rate of
growth of gross domestic product (GDP), and freezing total discretionary appropriations at the
level provided in FY2007. The first two reduce expected receipts, the third increases expected
outlays, and the last reduces outlays.
In March 2007, CBO released its analysis of the President’s budget proposals based on its
economic and budget models. CBO forecast slightly higher revenues and smaller outlays,
implying a FY2008 deficit of $226 billion, somewhat smaller than $239 billion deficit in the 5
President’s budget. By FY2012, CBO projected that the President’s proposals would produce a
deficit of $31 billion, rather than the $61 billion surplus the Administration’s expected. This
difference in forecasts is largely due to the uncertainty of medium-term projections. For the five

5 The overall small change in revenues obscures much larger increases and decreases in the components of the changes
that CBO shows in its report An Analysis of the President’s Budgetary Proposals for Fiscal Year 2008 (see Table 1-4
on p. 7).





years 2008 through 2012, CBO’s cumulative deficit estimate based on the President’s proposals
was $790 billion, while the President’s budget had a cumulative net deficit estimate for the same
period of $514 billion. Economic forecast and assumptions used in the President’s budget yielded
larger revenues and somewhat larger outlays than CBO’s reestimates of the President’s proposals.
President Bush’s FY2008 budget called for extending and making permanent most of the 2001
and 2003 tax cuts, as well as extending other expiring tax provisions. The President’s proposals
would reduce estimated receipts by almost $600 billion between FY2008 and FY2012 relative to
the baseline, and by an estimated $1.9 trillion between FY2008 and FY2017, apart from higher 6
debt-service costs resulting from the change.
Administration proposals, according its own estimates, would reduce mandatory spending by $96
billion over five years and by $309 billion over 10 years. Proposed policy changes include both
spending reductions and some increases—termed “augmentations” by the Administration. The
budget includes a cost estimate of $637 billion over 10 years for proposed personal accounts for
Social Security. The Administration estimates its proposals affecting mandatory spending,
including indirect effects and the outlay effects of tax proposals, would yield five-year savings of
$59 billion and 10-year increases of $359 billion. Much of that projected increase is due to the
proposed introduction of personal Social Security accounts.
The Administration’s budget provided limited information for years beyond FY2012. The budget
includes estimates of the cumulative proposed revenue changes and proposed mandatory
spending changes for the periods FY2008 through FY2012 and FY2008 through FY2017, but
these projections omit data for the individual years after FY2012. Estimates for other components
of the budget or for budget totals beyond FY2012 were also omitted.
The President proposed eliminating, reducing, or reforming about 141 programs. Many of these
proposals, which would affect both discretionary and mandatory spending programs, were also 7
proposed last year. According to Administration estimates, those policy changes would cut $22
billion of budget authority in FY2008 compared to FY2007.
The Administration’s Mid-Session Review (MSR) released in July featured the same proposals as 8
the President’s FY2008 budget issued in February. Administration estimates showed some
deterioration in the FY2008 budget outlook since February. In particular, the MSR FY2008
deficit estimate was $19 billion higher than the February estimate. A mix of technical reestimates,
economic changes, and minor policy differences account for the changes. Slightly over one-half
of the increase in the cumulative five-year deficit estimate, which jumped from $514 billion in the
February outlook to $651 billion in the MSR, was due to unexpectedly fast growth in Medicare
and Medicaid spending. Rising health care prices and hospital patient volumes were largely
responsible for the faster Medicare and Medicaid spending rates.

6 The Administration’s current services baseline estimates incorporate some of the Administration’s policy proposals,
such as the extension of the 2001 and 2003 tax cuts. The effect of the Administration’s proposals in this report are
taken from OMB tables measuring the full effect of the policy changes.
7 These were issued February 12, 2007, a week after other budget documents were released.
8 Office of Management and Budget, Mid-Session Review, July 11, 2007, available at http://www.whitehouse.gov/omb/
budget/fy2008/pdf/08msr.pdf.





CBO estimates the spending totals for discretionary appropriations legislation according to the
specifications of budget legislation, a process usually known as “scoring.” A summary of the 9
CBO analysis of FY2008 appropriations is presented in Table 2. For each category
corresponding to a regular appropriations bill, CBO estimates new budget authority and outlays 10
for non-emergency and emergency spending, along with a comparison with 302(b) allocations.
Emergency spending is generally treated differently than nonemergency spending in budget 11
legislation.
FY2008 appropriations legislation, according to CBO, provided a total of $932,847 million in
nonemergency discretionary budgetary authority, essentially matching the President’s request 12
(aside from emergency spending) for $932.8 billion.

9 Original CBO table available at http://www.cbo.gov/budget/approps/approps.pdf.
10 For an explanation of the role of 302(b) allocations in the budget process, see CRS Report RS20095, The
Congressional Budget Process: A Brief Overview, by James V. Saturno, and CRS Report 98-721, Introduction to the
Federal Budget Process, by Robert Keith.
11 In particular, as CBO notes,Sec. 204 of the concurrent resolution on the budget for fiscal year 2008 (S.Con.Res.
21), amounts designated as emergencies shall not count for purposes of Sec. 302(b) of the Congressional Budget Act.”
12 CBO, Analysis of the President’s Budgetary Proposals for FY2008, Mar. 2007, Table 1-6.




Table 2. Final 302(b) Allocations and CBO Estimates for FY2008 Appropriations
(millions of current dollars)
Estimated Discretionary Spending House Senate
302(b) Allocation 302(b) Allocation
Non-Emergencies Emergencies Total
Short Title BA Outlays BA Outlays BA Outlays BA Outlays BA Outlays
Agriculture 18,817 20,027 18,825 20,072 18,093 19,528 1,490 3,086 19,583 22,614
Commerce, Justice, Science 53,551 55,318 54,000 54,500 51,803 53,441 286 432 52,089 53,873
Defense 459,332 475,980 459,332 475,164 459,332 475,164 86,830 76,329 546,162 551,493
Energy and Water 31,603 32,774 32,273 33,229 30,888 32,340 0 559 30,888 32,899
Financial Services 21,434 21,665 21,278 21,243 20,599 20,903 250 -12 20,849 20,891
Homeland Security 36,262 38,247 36,022 40,168 34,852 38,028 5,610 2,012 40,462 40,040
iki/CRS-RL33915Interior and Environment 27,598 28,513 27,150 28,574 26,555 28,052 800 1,158 27,355 29,210
g/wLabor/HHS 151,748 148,174 150,153 147,683 144,841 146,292 444 560 145,285 146,852
s.orLegislative Branch 4,024 4,042 4,051 4,178 3,970 4,008 0 22 3,970 4,030
leak
Military Construction and Veterans Affairs 64,745 54,832 64,745 55,021 60,213 52,232 3,692 4,060 63,905 56,292
://wikiState, Foreign Operations 34,243 33,351 34,243 33,516 32,800 32,841 2,385 3,053 35,185 35,894
http
Transportation, HUD 50,738 114,528 50,981 115,050 48,901 114,350 3,173 1,388 52,074 115,738
Total 954,095 1,029,097a 953,053 1,028,398 932,847 1,017,179 104,960 92,647 1,037,807 1,109,826
Total Minus Defense 494,763 553,117 493,721 553,234 473,515 542,015 18,130 16,318 491,645 558,333
Source: CBO. See text for notes. Items may not sum to totals due to rounding.
a. Includes a $1.65 billion 302(b) allocation in outlays for the full committee.





Non-defense discretionary budget authority, which totaled $473,515 million, was slightly higher
than the $459,332 million in defense discretionary budget authority provided by FY2008 Defense
Appropriations Act. The McConnell Amendment to the Consolidated Appropriations Act for
FY2008 included an additional $70 billion in emergency funding for wars in Iraq and 13
Afghanistan.
On March 16, 2007, the Senate Budget Committee (SBC) reported the Senate budget resolution
(S.Con.Res. 21). This resolution specified expenditures and revenues that would yield a FY2008
deficit estimated at $249 billion, $10 billion more than the estimated deficit for the President’s 14
proposal. The budget resolution was projected to yield a $132 billion surplus in FY2012.
Revenue and outlay levels proposed in the Senate budget resolution differed substantially in some
areas from those proposed by the President. In particular, the Senate proposed higher levels of
discretionary spending than the President. Yet the resolution would extend tax cuts slated to
expire, so long as the revenues lost by their continuation were offset. The FY2008 totals in both
the SBC-reported resolution and versions passed by the Senate on March 23 were almost
identical, although the amendments adopted by the Senate during its deliberations on the budget
resolution reduced the expected FY2012 surplus to $1 billion.
The House Budget resolution (H.Con.Res. 99), reported by the House Budget Committee and
passed by the House, was expected to yield a FY2008 deficit of $213 billion and a FY2012
surplus of $153 billion. Like the Senate resolution, the House resolution required offsets to extend
the expiring tax cuts.
All of the proposals, the President’s, the House, and the Senate, foresee a balanced budget in
FY2012, although those forecasts are based on some assumptions that inspire skepticism among 15
independent analysts. The Administration, the House, and the Senate all assume for budgetary
scoring purposes that funding for military operations after FY2008 will be minimal or
nonexistent. Outlays would be much higher were these war costs included in projections. These
proposals also all assume a sharply larger portion of middle-income taxpayers will become
subject to the Alternative Minimum Tax (AMT) after FY2008, even though in recent years
Congress and the President have agreed to annual fixes to limit the AMT’s reach. Assuming that
AMT fixes will no longer continue boosts estimated tax revenues. The President’s budget
assumes little or no growth in discretionary spending over the five years, while historically,
discretionary outlays have been more likely to grow at the same rate as the overall economy. The
House and Senate budget resolutions assume that the 2001 and 2003 tax cuts will expire unless

13 For additional details regarding the Consolidated Appropriations Act for FY2008, see CRS Report RL34298,
Consolidated Appropriations Act for FY2008: Brief Overview, by Robert Keith.
14 The House and Senate Budget Committees generally use CBO budget baseline estimates and economic assumptions
in creating the annual budget resolution.
15 For a detailed independent analysis of the current budget outlook, see Alan Auerbach, Jason Furman, and William
Gale, “Still Crazy After All These Years: Understanding the Budget Outlook,” working paper, April 27, 2007,
available at http://www.econ.berkeley.edu/~auerbach/AFG%20paper.pdf.






the cost of extending them is offset through other revenue gains or spending reductions. This
provides a large jump in tax revenues after 2010.
Budget projections are inherently uncertain. Two measures of the quality of economic forecasts
are statistical unbiasedness, meaning that average forecast errors over time are close to zero, and 16
accuracy, meaning that forecast errors should be small. Budget forecasts, unlike most other
types of economic forecasts, are constructed in order to estimate the incremental costs of policy
changes (i.e., scoring) in a consistent manner. If policy changes do occur, actual budget outcomes
will then differ from baseline estimates. Technical factors and changes in economic conditions
also affect budget forecasts. In recent years, OMB and CBO have provided some measures of the
accuracy and statistical unbiasedness of their forecasts.
Budget projections depend on models that reflect assumptions about the structure of the economy,
expected tax and program changes, and how these interact, along with other factors that affect the
budget. Changed economic conditions, such as faster or slower economic growth, higher or lower
inflation, or changes in spending and tax policies, affect budget estimates and projections. In
addition, technical components of the budget models may change as the structure of the economy
evolves and as econometric techniques advance.
Budget estimates depend in part on some stable trends, such as population demographics. For
instance, many baby boomers will retire in the next decade, leading to higher spending for
Medicare and Social Security. Estimating the growth in these beneficiary populations eligible for
these programs is relatively straightforward. Budget estimates also depend on factors that are
difficult to predict, such as future productivity growth and business cycles. Some factors that
affect the federal revenues, such as financial market trends, can be extremely volatile.
Small changes in economic conditions, such as GDP growth, can produce large changes in the
budget estimates. According to CBO estimates, a persistent 0.1% decrease in the real GDP growth
rate would increase the deficit, including interest costs, by $61 billion cumulatively over a five-
year period and by $273 billion over 10 years. Faster GDP growth would decrease the deficit or
increase a surplus. In addition, new government policies also affect budget estimates. For
example, extending military operations in Iraq or Afghanistan or allowing tax cuts to lapse would
also change the budget outlook.
The President’s FY2008 budget includes some measures of the accuracy and statistical bias of 17
previous forecasts. This analysis examines why Administration February 2005 budget estimates
differed from actual results for FY2006.

16 There may be a tradeoff between statistical unbiasedness and accuracy because some statistically biased methods
may generate forecasts with greater accuracy. Also, other properties of forecasts may be important, such as predicting
turning points in economic trends. For a nontechnical discussion of economic forecasting, see Peter Kennedy, A Guide rd
to Econometrics, 3 ed., Boston: MIT Press, 1992, ch. 17, pp. 268-277.
17 Budget of the U.S. Government: Analytical Perspectives, ch. 20,Comparison of Actual to Estimated Totals,”
available at http://www.whitehouse.gov/omb/budget/fy2008/pdf/apers/dimensions.pdf.






The accuracy of forecasts generally declines as the forecast window extends to later years 18
because more policy and economic changes can occur in the interim. OMB analyzed a quarter
century of February budget estimates of the deficit, and estimated the standard deviation for the
current fiscal year was $71 billion. The standard deviation for the corresponding five-years-ahead
forecast was estimated at $289 billion, about four times larger. OMB then computed upper and 19
lower bounds for deficit projections using those standard deviations. The gap between these
upper and lower bounds at the end of a five-year period was over $1.1 trillion, suggesting that the
Administration’s $61 billion point estimate for the FY2012 surplus, like all five-years-ahead
forecasts of fiscal balance, is very imprecise.
CBO has analyzed the track record of its budget estimates extensively, and now routinely
includes information about the forecast accuracy of its baseline projections in its budget 20
publications. CBO also provides detailed explanations of why its projections differ from OMB 21
projections.

The Senate Budget Committee (SBC) reported its version of the FY2008 budget resolution
(S.Con.Res. 21) on March 16, 2007. The Senate began its debate on the resolution on March 21
and after adopting some amendments and rejecting others, passed it on March 23. The House
Budget Committee (HBC) reported (H.Rept. 110-99) its version of the FY2008 budget resolution
on March 23. The House debated the resolution, rejecting three amendments, and passed it on
March 29. The general direction outlined in the two resolutions is similar—additional domestic
spending and accommodating the Administration’s war funding request. Both resolutions would
put into place rules requiring offsets to new tax cuts or mandatory spending increases to keep the
changes deficit neutral.
After lengthy informal discussions about the FY2008 budget resolution, both the House and
Senate appointed conferees in early May to resolve the remaining differences between the House
and Senate versions. The conference announced an agreement on May 16, which the House and
Senate adopted (H.Rept. 110-153) on May 17, 2007. The conference agreement set FY2008
discretionary spending at $954 billion, which was more than $20 billion above the President’s
non-emergency discretionary spending request.
The adoption of the conference report on the budget resolution for FY2008 set the level of
discretionary spending and was followed by the Appropriations Committees work to draft the
FY2008 appropriations bills. The House Appropriations Committee cleared its first (of 12)
regular appropriations bills in early June with the Senate Appropriations Committee following in

18 A standard deviation measures the average size of forecast errors. See Budget of the U.S. Government: Analytical
Perspectives, p. 336.
19 The upper and lower bounds were computed assuming that forecast errors for different years are statistically
independent and are normally distributed. If those assumptions are valid, 90% of forecasts should fall within those
bounds on average.
20 CBO, “The Uncertainty of Budget Projections: A Discussion of Data and Methods,” March 2006.
21 CBO, “Comparing Budget and Accounting Measures of the Federal Government’s Fiscal Condition, December
2006.






mid-June. By mid-July, the House and Senate Committees on Appropriations had approved most
of the 12 regular appropriations bills.
At the end of FY2007, the House had passed all 12 appropriations bills and the Senate had passed
four. The Senate passed three more appropriations bills in October. On November 8, Congress
approved the Labor-HHS-Education bill (H.R. 3043, S. 1710), which the President vetoed, and
Defense bill (H.R. 3222), which the President signed. The President has indicated that he would
veto most of the remaining appropriations bills due to policy disagreements and spending levels.
During the last week of FY2007, Congress passed a continuing resolution (H.J. Res 52) to fund
government operations until November 16, which the President signed on September 29 (P.L.

110-92). On November 8, Congress approved the Labor-HHS-Education bill (H.R. 3043, S.


1710), which the President vetoed, and the Defense bill (H.R. 3222, P.L. 110-116), which he
signed. The Defense Appropriations Act of 2008 contained an extension of funding for
government operations from November 16 until December 14. On December 14, Congress passed
another continuing resolution (H.J.Res. 69) that extended funding for another week, which the
President signed (P.L. 110-137) on the same day.
On December 19, Congress passed an omnibus appropriations bill (H.R. 2764) that incorporated

10 remaining regular appropriations bills into the State-Foreign Operations appropriations bill.


On the same day Congress also passed a fourth continuing resolution (H.J.Res. 72), which the
President signed two days later (P.L. 110-149), that funded government operations through the
end of the calendar year. The President signed the Consolidated Appropriations Act of FY2008 22
(P.L. 110-161) on December 26, which provided $555 billion in discretionary budget authority.

The Administration’s budget proposed FY2008 outlays of $2,902 billion, about $84 billion above
the CBO baseline. Both the Administration and CBO have issued projections of future federal
outlays. In addition, the budget resolutions passed by House and Senate Budget Committees,
which reflect Congress’s priorities, specify future paths for spending and revenues. Table 3
summarizes these projections.
The Administration’s FY2008 budget proposed $2,902 billion in outlays, rising to $3,246 billion
in FY2012, the last year shown in the President’s budget. The proposals would boost funding for
defense and homeland security spending in FY2007 and FY2008, hold most non-defense, non-
homeland security discretionary spending to an average 1% annual increase, and slow the growth
in some mandatory programs slightly, including Medicare and Medicaid. Total mandatory
spending, however, would increase under the proposals. In FY2012, the Administration would 23
raise spending by nearly $30 billion to fund personal accounts for Social Security. The
Administration’s proposals, if adopted, would raise outlays by $118 billion (4.2%) above the

22 For details, see CRS Report RL34298, Consolidated Appropriations Act for FY2008: Brief Overview, by Robert
Keith.
23 OMB, Mid-Session Review, July 11, 2007, Table S-5, p. 26.






Administration’s revised FY2007 outlay estimate, and would increase total outlays by 16.6%
between FY2007 and FY2012.
Table 3. Outlays for FY2006-FY2012 and FY2017
(in billions of dollars)
FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2017
CBO Baseline, 1/07 2,655a 2,714 2,818 2,926 3,038 3,179 3,234 4,034
President’s FY08 Budget, 2/07 2,784 2,902 2,985 3,049 3,157 3,246
President’s FY08 CSB, 2/07 2,735 2,752 2,866 2,973 3,116 3,201
SBC, Budget Res. 3/16/07 2,750 2,927 3,041 3,088 3,198 3,229
CBO Est. of Pres. Budget 3/21/07 2,747 2,905 3,002 3,046 3,156 3,205 4,094
CBO Baseline, Revised 3/21/07 2,719 2,833 2,944 3,058 3,202 3,250 4,067
Senate Budget Res. 3/23/07 2,745 2,927 3,041 3,093 3,201 3,234
House Budget Res. 3/29/07 2,751 2,933 3,051 3,106 3,217 3,252
Conf. Agreement S.Con.Res. 21 2,752 2,937 3,052 3,106 3,218 3,255
5/17/07
Mid-Session Review 7/11/07 2,779 2,918 3,016 3,078 3,184 3,267
CBO Budget & Econ. Update 2,735 2,925 3,071 3,205 3,359 3,415 4,268
8/23/07
Treasury, FY07 Budget Results, 2,731
10/07
Source: CRS.
CSB—The Administration’s current services baseline.
SBC—Senate Budget Committee.
a. Actual outlays for FY2006.
The proposed level of outlays, $2,902 billion, exceeds the Administration’s FY2008 current 24
services baseline ($2,752 billion) by $150 billion (5.5%). For FY2008, almost all of the increase
comes from the Administration’s proposed additional funding for the Administration-labeled
security activities, which comprise spending for defense, homeland security, and foreign affairs.
Most of the proposed additional security funding is for the wars in Iraq and Afghanistan. The
budget also proposes an $8 billion increase (1.8%) for non-security discretionary spending and a
$10 billion (0.7%) reduction in mandatory spending compared to baseline levels. The
Administration’s budget shows a $7 billion (2.8%) increase in net interest payments from baseline
levels in FY2008 due to increased federal borrowing.

24 OMB’s 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 by
OMB assumes that federal pay adjustment assumptions reflect the (usual) first full pay period in January start of pay-
compatibility-adjusted raises rather than October 1, that emergency spending is not extended, and that the debt service
(interest payment) changes are included in the baseline. These modifications reduced the reported current services
baseline outlay estimate by approximately $41 billion in FY2008 and by $84 billion in FY2012.






The overall $118 billion increase in outlays from FY2007 to FY2008 is due to many factors,
including automatic cost-of-living adjustments in many federal programs, growth in populations
eligible for program benefits, policy changes, and higher costs due to inflation of goods and
services bought by the federal government.
The Administration’s proposals would reduce outlays from 20.2% of GDP in FY2007 to 20.0% of
GDP in FY2008. Between FY1966 and FY2006, outlays averaged 20.6% of GDP. By FY2012,
the Administration’s projections showed outlays falling to 18.3% of GDP, lower than in any year
since FY1960. The Administration projected a fall of 0.7% of GDP in non-defense discretionary
spending over the five years. Defense spending was projected to fall by 1.1% of GDP over the
same period. Mandatory programs increase their share of GDP by 0.3%, while net interest falls by
0.2% of GDP. Both Medicare and Medicaid are expected by the Administration to grow slightly
as percentages of GDP, despite proposals to trim their growth.
The President’s budget would increase defense spending by 6.0% from FY2007 ($569 billion) to
FY2008 ($603 billion), incorporating the two-year, $140 billion requested supplemental for
military actions overseas (which Congress passed and became law on May 25, 2007; P.L. 110-
28). By FY2012, according to Administration projections, defense spending will drop to $546
billion.
For FY2008, the Administration’s proposed level of non-defense discretionary spending exceeds
the current services baseline estimate by $19 billion. Over the five years, the current services
estimates for non-defense discretionary outlays grows by an average 0.7% annually, while the
Administration’s proposed levels fall by an average 0.7% annually. The Administration’s budget
showed non-defense discretionary spending falling from $511 billion in FY2007 and FY2008 to
$493 billion in FY2012. As shares of GDP, the fall is substantial, dropping from 3.7% of GDP in
FY2007 to 3.5% of GDP in FY2008 to 2.8% of GDP in FY2012. If these levels are achieved,
non-defense discretionary spending would be smaller as a percentage of GDP in FY2012 than in
any year since FY1962. How the Administration planned to achieve these reductions was largely
unspecified.
Mandatory spending in the President’s budget grows by 4.2% ($62 billion) from FY2007 to
FY2008. The budget included proposals to reduce, from baseline levels, mandatory outlays by
$10 billion in FY2008. The reductions would be achieved by slowing the growth of selected
mandatory spending activities such as Medicare and Medicaid, among others. The effort would
reduce total mandatory spending from baseline levels over the five years by almost $60 billion.
By comparison, mandatory spending over the same period is projected to total $1,100 billion.
Mandatory spending would remain the largest broad category of federal spending, growing from
$1,465 billion in FY2007 to $1,527 billion in FY2008 and to $1,923 billion in FY2012. The
budget showed it growing from 10.5% of GDP in FY2008 to 10.8% of GDP in FY2012.
The President’s FY2008 budget showed net interest outlays rising by $22.1 billion from FY2007
to FY2008. Federal debt has grown rapidly in recent years, and under the Administration’s
proposals, will continue to grow. Higher debt, absent sharp drops in interest rates, requires higher
net interest payments. Proposed net interest outlays in FY2008 exceed the Administration’s
FY2008 current services baseline estimate by $7.8 billion. The Administration’s policy proposals
would raise FY2012 net interest outlays almost $30 billion above its current services net interest
outlay estimate. According to Administration estimates, net interest payments as a percentage of
GDP will show little change throughout the five years, ranging between 1.6% of GDP and 1.8%
of GDP.






CBO’s August 2007 baseline projections for FY2007-FY2017 showed outlays rising from 19.9%
of GDP in FY2007 to 20.8% of GDP in FY2008, before easing back to 20.0% of GDP in
FY2012. The baseline projections put FY2017 outlays at 20.3% of GDP. Because CBO current-
law baseline estimates assume that discretionary spending does not change in real terms as the
economy grows, many analysts believe it understates likely future growth in discretionary
spending. According to CBO projections, federal outlays would grow by an additional $1.55
trillion over the FY2008-FY2017 period were discretionary spending to grow at the same rate as
the economy. On the other hand, if discretionary spending were fixed at FY2007 levels over the
same period, federal outlays would drop by $1.65 trillion.
Defense spending, according to CBO baseline estimates, will rise from $547 billion in FY2007 to
$599 billion in FY2008. The level of FY2007 defense outlays, which serves as the starting point 25
for baseline projections, includes regular and supplemental funding. CBO’s baseline
assumptions, in which total discretionary spending increases at the rate of inflation, show defense
spending rising to $684 billion in FY2012 and to $773 billion in FY2017. Defense spending as a
percentage of GDP is projected to fall gradually over the 10-year period. CBO’s baseline puts
defense spending at 4.0% of GDP in FY2007 and 4.2% of GDP in FY2008. It would then fall to
3.9% of GDP in FY2012 and to 3.6% of GDP in FY2017. Alternative scenarios, in which troops
would be withdrawn from Iraq and Afghanistan, show lower spending trajectories. CBO projects
that withdrawing all but 30,000 troops deployed to Iraq, Afghanistan, and related operations by
2010 would reduce projected discretionary spending and interest costs by about $1.25 trillion
over the period FY2008-FY2017. A less drastic reduction, withdrawing all but 75,000 troops
deployed to Iraq, Afghanistan, and related operations by 2013, would, according to CBO
projections, save about $750 billion in projected discretionary spending and interest costs over the
period FY2008-FY2017.
CBO projects non-defense discretionary spending will rise from $495 billion in FY2007 to $521
billion in FY2008, to a projected $555 billion in FY2012, and to $619 billion in FY2017. Non-
defense discretionary spending as a percentage of GDP, according to CBO baseline projections,
will fall from 3.6% of GDP in FY2007 to 3.2% of GDP in FY2012, and to 2.9% of GDP in
FY2017. Because current-law baseline projections are based on the assumption that discretionary
spending does not grow in real terms while the economy is projected to continue growing, both
the CBO and Administration projections show discretionary spending’s relative size shrinking 26
over time.
The CBO mandatory spending baseline projects an increase from $1,457 billion in FY2007 to
$1,553 billion in FY2008. Mandatory spending, according to CBO projections, will increase to
$1,883 billion by FY2012 and to $2,598 billion by FY2017. Mandatory spending as a share of
GDP, according to CBO baseline projections, will remain little changed, moving from 10.6% in

25 The addition of supplemental defense and other appropriations since the March 2007 CBO baseline projections cause
an increase of over a trillion dollars in projected discretionary spending over the FY2008-FY2017 period. See CBO,
The Budget and Economic Outlook: An Update, August 2007, p. 14.
26 CBO and OMB baselines use different methods to project discretionary spending. In particular, OMB does not
extend all discretionary spending. In addition, war expenditures are treated differently by CBO and OMB. For details,
see CBO, The Budget and Economic Outlook: An Update, August 2007, Box B-1.






FY2007 to 10.8% in FY2012. At the end of the 10-year time frame, CBO projections show
mandatory spending reaching 12.1% of GDP in FY2017.
CBO’s August 2007 baseline estimates show net interest growing from $235 billion in FY2007 to
$253 billion in FY2008, an increase of $18 billion. The CBO baseline projections foresee smaller
deficits in later years, which would slow the federal debt’s growth. Projected surpluses in FY2012
and after would reduce federal debt, thus lowering net interest payments. Projected net interest
payments peak at $292 billion in FY2012, then ease back to $278 billion in FY2017. Net interest
as a share of GDP, according to August 2007 CBO projections, will hold nearly steady around

1.7% until FY2012, before falling gradually to 1.3% of GDP in FY2017.


The Senate Budget Committee’s FY2008 budget resolution (S.Con.Res. 21; March 16) proposed
outlays of $2,927 billion for FY2008, which would rise to $3,229 billion in FY2012. This amount
included defense funding matching the President’s request for FY2008, although the level of
domestic spending exceeded the amount the Administration proposed. On March 23, the Senate
passed the resolution with several amendments. Outlays over the five years, however, were close
to the committee’s version. The House Budget Committee reported its version of the FY2008
budget resolution (H.Con.Res. 99) on March 23. The House passed the resolution with no
changes on March 29. The resolution would provide $2,933 billion in outlays in FY2008, rising
to $3,252 billion in FY2012.
The May 17, 2007, conference agreement included $2,937 billion in FY2008 outlays, including
money the President requested for the ongoing military operations overseas. Projected outlays
rise to $3,255 billion in FY2012.






Figure 1. Outlays by Type, FY2000-FY2012
(percent of GDP)
Figure 1 shows spending by category as 12%
percentages of GDP from the
Administration’s July 2007 Mid-Session
Review. These data differ little from those in 10%
the President’s February 2007 budget.
The figure shows actual outlays for defense, 8%Mandatory
non-defense, mandatory, and net interest National Defense
spending from FY2000 through FY2006 and Nondefense
the Administration’s proposals from FY2007 6%Net Interest
though FY2012. According to those
proposals, defense and non-defense spending
as a share of GDP will decline over the five-4%
year period FY2007-FY2012, while
mandatory spending is projected to increase.
2%
The downturn in defense and non-defense
discretionary spending relative to GDP after 7/2007
FY2008 depends on the Administration’s 0%
assumptions that non-defense discretionary 2000200220042006200820102012
spending falls after 2007 and that no


additional spending is provided for the ongoing military operations overseas after FY2008
beyond the Administration’s FY2009 $50 billion “placeholder.”
The President’s proposed limited reductions in mandatory spending from current service baseline
levels keep mandatory spending as a share of GDP stable. The FY2012 introduction of private
Social Security accounts proposed by the President would lift mandatory spending relative to
GDP above the current services level.




Figure 2 shows four alternative paths for
outlays as a percentage of GDP through Figure 2. Outlays, FY2000-FY2017
FY2017: (percent of GDP)
• the President’s FY2008 25%Average, FY1966-FY2006
budget proposal (February Actuals, FY2000-FY2006

2007), 24%Alternative Estimate (1/07)


CBO Reestimates (3/07)
• the President’s revised 23%OMB Feb 2007
proposal (Mid-Session OMB Jul 2007
Review, July 2007), 22%
• an alternative outlook derived 21%
from CBO data (March

2007), and 20%


• the March 2007 CBO 19%
reestimate of the President’s
original FY2008 proposals. 18%
The Administration’s outlook runs through 17%
FY2012, while the CBO outlook runs through
FY2017. The figure includes actual outlays as 16%
a percentage of GDP for FY2000 through 15%7/2007
FY2006 and average (FY1966-FY2006)
outlays as a share of GDP. 2000200520102015


The President’s proposed outlays fall sharply after FY2007, a result of the Administration’s
proposals to reduce discretionary spending, both defense and non-defense, and to moderate the
rate of growth in some mandatory programs. By FY2012, spending would be just below its level
as a percentage of GDP in FY2000. Outlays in the Mid-Session Review (MSR) are all slightly
above those in the February budget, a difference mostly due to reestimation rather than policy
changes.
The alternative estimate, based on CBO-estimated policy alternatives to the current-law baseline,
incorporates two important assumptions that directly affect outlays. First, discretionary
appropriations grow at the same rate as the overall economy, in contrast to the baseline
assumption that discretionary spending is constant in real terms. Second, the number of troops
deployed in Iraq and Afghanistan as well as other anti-terror activities is assumed to fall to 75,000
by FY2013. Both of these assumptions increase outlays above the baseline projections, increasing
the deficit (or reducing a possible future surplus), increasing federal debt and subsequent net
interest payments. The alternative estimate includes these higher net interest payments. In
addition, the alternative estimate for outlays includes the outlay effects of the changes that occur
in the alternative estimate for receipts, which is described in more detail in the next section. These
outlay effects, for the most part, reflect higher net interest payments. According to the alternative
estimate, outlays as a percentage of GDP grow over the 10 years, rising to 21.1% of GDP in
FY2017.





The future path of federal receipts, as projected by the Administration and CBO, is summarized in
Table 4. Because economic conditions strongly affect federal revenue streams, forecasts of
federal receipts beyond the immediate short term are necessarily imprecise.
Table 4. Receipts for FY2006-FY2012 and FY2017
(in billions of dollars)
FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2017
CBO Baseline, 1/07 2,407a 2,542 2,720 2,809 2,901 3,167 3,404 4,284
President’s FY08 Budget, 2/07 2,540 2,662 2,798 2,955 3,104 3,307
President’s FY08 CSB 2/07 2,550 2,714 2,831 3,008 3,151 3,348
SBC, Budget Res. 3/16/07 2,538 2,678 2,826 2,959 3,183 3,361
CBO Est. of Pres. Budget 3/21/07 2,533 2,679 2,787 2,877 3,007 3,174 4,084
CBO Baseline, Revised 3/21/07 2,542 2,720 2,810 2,901 3,167 3,405 4,284
Senate Budget Res. 3/23/07 2,538 2,678 2,825 2,959 3,130 3,235
House Budget Res. 3/29/07 2,542 2,720 2,810 2,901 3,167 3,405
Conf. Agreement, S.Con.Res. 21 2,538 2,685 2,817 2,907 3,123 3,296
5/17/07
Mid-Session Review 7/11/07 2,574 2,659 2,803 2,954 3,095 3,300
CBO Budget & Econ. Update 2,577 2,771 2,855 2,950 3,225 3,477 4,378
8/23/07
Treasury, FY07 Budget Results, 2,568
10/07
Source: CRS.
CSB—The Administration’s current services baseline.
SBC—Senate Budget Committee.
a. Actual receipts for FY2006.
The last few fiscal years have seen unexpectedly rapid growth in receipts (in current dollars) from
year to year that neither OMB nor CBO expect to continue. Receipts grew by 5.5% from FY2003
to FY2004, by 14.5% from FY2004 to FY2005, and by 11.8% from FY2005 to FY2006. These
increases followed three years of falling receipts, from FY2000 through FY2003. Receipts rose
from 16.3% of GDP in FY2004, the lowest level for receipts since FY1959, to 18.4% of GDP in
FY2006. OMB’s MSR showed little variation in receipts as a share of GDP over the five-year
window FY2008-FY2012, ranging between 18.4% of GDP (FY2008) and 18.7% of GDP
(FY2012). CBO’s baseline showed receipts rising once the 2001 and 2003 tax cuts expire,
reaching 19.8% of GDP in FY2012.
Receipts rise, in current dollars, by 4.8% ($122 billion) from FY2007 to FY2008 under the
Administration’s FY2008 budget proposal. Over the five-year forecast, receipts rise by $767






billion, over 30%. The President’s proposals would extend and make permanent most of the tax
cuts scheduled to expire between now and FY2012. Receipts as a percentage of GDP fall from
18.5% in FY2007 to 18.3% in FY2008 and then remain stable through FY2011. By FY2012
receipts rise to 18.6% of GDP, when the Administration predicts an upward bump in individual
and corporate income taxes.
The Administration estimated that making the 2001 and 2003 tax cuts permanent would reduce
cumulative receipts by $374 billion from baseline levels between FY2008 and FY2012 and by
$1,617 billion between FY2008 and FY2017. The effect of these and the other Administration
proposals for receipts would reduce receipts from baseline levels by an estimated $599 billion in 27
the first five years and by $1,854 billion over 10 years. The budget included proposed relief
from the expanding coverage of the Alternative Minimum Tax (AMT) through FY2008 (at an
estimated cost of $48 billion in that year), but not in subsequent years.
Figure 3 shows receipts from the President’s July 2007 Mid-Session Review by type for FY2007
through FY2012. These estimates are very close to those in the February budget documents.
Actual receipts as a percentage of GDP are shown for FY2000 through FY2006.
Excise and other receipts were both less than 1% of GDP for all years shown. Corporate income
taxes, after rising through FY2006, decline slowly and stabilize near 2% of GDP under the
Administration’s projection. Social Insurance receipts remain stable from FY2006 through
FY2012. Individual income taxes, having fallen from over 10% of GDP in FY2000 to 7% of GDP
in FY2004, regain some of their lost share under the Administration’s proposals, but remain about

1% of GDP below their FY2000 level.


The Administration’s proposals included extending the current relief from the alternative
minimum tax (AMT) for FY2007 and FY2008. A growing proportion of middle-class taxpayers
will be subject to the AMT unless a sequence of temporary AMT fixes or a permanent change in 28
the structure of the AMT is enacted. The FY2008 budget estimated that temporary AMT “fixes”
would cost $9.1 billion in FY2007 and $47.9 billion in FY2008. CBO estimated that indexing
AMT thresholds for inflation would cost on average about $55 billion a year over the next 10
years. Although the President’s budget called for limiting the growing reach of the AMT, it
omitted estimates of the five-year cost of such a fix. Omitting these estimates, in effect, increases
the Administration’s post-FY2008 estimates of federal receipts by $50 billion to $60 billion a year 29
above what they would be with an AMT fix.

27 The proposed reductions do not reduce receipts from current levels over time. See Table 4.
28 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 in the 109th Congress, both
by Gregg A. Esenwein.
29 See CRS Report RS21817, The Alternative Minimum Tax (AMT): Income Entry Points and Take Back” Effects, by
Steven Maguire.






As shares of GDP, total receipts in the
President’s budget are expected to remain Figure 3. Receipts by Type, FY2000-
near their 40-year (FY1966-FY2006) average FY2012
of 18.3% throughout the five years (percent of GDP)
forecasted. CBO’s baseline revenue estimates
(revised, March 2007), which exclude the 12%Individual
extension of the 2001 and 2003 tax cuts, are Social Insurance
larger, rising to over 19.8% of GDP in CorporateOther
FY2012 and to 20.1% of GDP in FY2017. 10%Excise
8%
CBO’s January 2007 budget report estimated
that extending the expiring provisions of the 6%
major tax cuts passed in 2001 and 2003
would reduce revenues from CBO baseline 07
levels by an estimated $418 billion over the 4%/20
first five years and by $1,937 billion over 10 7
years. Extending all the tax cuts that expire
over the 10-year period would reduce 2%
revenues, again from CBO baseline levels, by
$870 billion in the first five years and by
$3,178 billion over the full 10 years of the 300%
forecast. CBO estimated that limiting the 2000200220042006200820102012
expanding coverage of the AMT alone would


reduce revenues by $280 billion over five years and by $570 billion over 10 years excluding
additional interest costs.
CBO’s March 2007 budget report, which analyzed the President’s FY2008 policy proposals,
projected slightly lower revenues than the President’s budget in all but one (FY2008) of the five
years in the budget. Differences in economic assumptions underlying the Administration and
CBO estimates produced most of the revenue differences, particularly in the last three years.
Technical components of the estimates balanced the effect of economic changes in the first two
years of the estimates, producing only small changes in the revenue estimates.
CBO’s estimates of the President’s revenue policy proposals were cumulatively $479 billion 31
smaller than CBO’s cumulative revenue baseline estimates over five years. The President’s
budget projected cumulative revenues of $14,826 billion over the five years, and CBO’s
reestimates put cumulative revenues at $14,524 billion, 2% less. CBO’s March report presented
revised revenue baseline estimates that differed only slightly from CBO’s January estimates.
Modifying CBO’s baseline revenue estimates and projections by using its alternative policy
estimates produces slower growth in receipts, both in dollars and as shares of GDP, than in CBO’s

30 CBO lists almost 100 expiring provisions between FY2007 and FY2017. Almost all of them would reduce revenues.
See Table 4-10 in CBOs report, The Budget and Economic Outlook: Fiscal Years 2008-2017, January 2007, available
at http://www.cbo.gov/showdoc.cfm?index=7731&sequence=0.
31 CBO’s reestimates allow a comparison of the CBO baseline and the Administration proposals because both are
derived from the same underlying economic and budget estimating assumptionsonly the policy assumptions differ.




baseline. The alternative estimate assumes the extensions of all expiring tax cuts, an annual
adjustment to the AMT to halt its expanding coverage, and the interaction effect of the extensions 32
and the AMT. AMT reform would interact with the extension of the 2001 and 2003 tax cuts,
producing greater revenue losses than the two changes separately.
These policy assumptions show receipts falling as a percentage of GDP to approximately 17.5%
by FY2012, where they remain through FY2017. CBO estimates that the alternative revenue
assumptions would produce $70 billion less revenue in FY2008 than the baseline. By FY2012,
the alternative revenue projection falls $389 billion short of baseline revenues and in FY2017, the
alternative lies $560 billion below the baseline projection (all in current dollars).
The House and Senate budget resolutions do not incorporate extending expiring tax provisions
without offsetting their cost. The instructions in the budget resolutions by the House and Senate,
although different, generally require that revenue changes need offsets, either revenue increases
or mandatory spending reductions, to keep the deficit from growing or a surplus from falling. The
conference agreement (H.Rept. 110-153; May 17) included the ability to extend some of the
expiring tax cuts, if certain conditions are met, and to offset revenue losses relative to baseline
levels.
Figure 4 shows the level of historical and projected federal receipts as a percentage of GDP.
Actual receipts are shown for FY2000 through FY2006. Projections are shown for CBO’s January
and March 2007 budget reports and for the President’s February 2007 budget submission for
FY2008 and the July Mid-Session Review (MSR). Federal receipts averaged 18.3% of GDP over
the 41-year period FY1966-FY2006. This level is depicted by a horizontal line.

32 CBO analysis of alternative policies includes an estimate of this joint effect.






The four estimates shown remain fairly close
through FY2009, and three remain close Figure 4. Receipts, FY2000-FY2017
through FY2010. CBO’s revenue reestimate (percent of GDP)
and the President’s revenue estimates are
similar through FY2012. CBO’s reestimate 25%Average, FY1966-FY2006
extends through FY2017, with receipts rising 24%Actuals, FY2000-FY2006
to slightly above 19% of GDP in FY2017. Alternative Estimate (1/07)
CBO Reestimates (3/07)
The Administration’s revenue estimates, in 23%OMB Feb 2007
both the February budget and the July MSR, 22%OMB Jul 2007
show little variation over the five years
covered, with a slight rise in the last year. 21%
Over the five years, OMB’s MSR projects
slightly larger receipts than the February 20%
budget. Both of the OMB sets of estimates
assume the tax cuts are extended and that an 19%
adjustment to the AMT expansion occurs only
through FY2008. 18%
The alternative projection, based on CBO 17%
data from its January budget report, which
assumes the tax cuts are extended and that the 16%
expanding coverage of the AMT is limited, 7/2007
shows receipts falling as a share of GDP after 15%
FY2008 and remaining fairly constant after 2000200520102015
FY2011.



Deficits occur when Congress and the President enact policies that cause federal spending to
exceed federal receipts. Deficits increase government debt held by the public, generally
increasing net interest payments. Surpluses occur when federal receipts exceed outlays, which 33
reduces federal debt held by the public. This can, in turn, reduce net interest payments. Many
economists believe that running surpluses when economic growth is strong has desirable
macroeconomic effects. The federal government last ran a surplus in FY2001, which amounted to
$128 billion or 1.3% of GDP. Table 5 summarizes Administration and CBO projections of federal
deficits and surpluses.
The actual FY2007 total deficit, $163 billion, was slightly below CBO’s January estimate, and
well below the Administration’s estimate in the FY2008 budget. The FY2007 on-budget deficit,
which excludes a large Social Security surplus and a small Postal Service surplus, was $344
billion.

33 Very small surpluses might not reduce debt held by the public in some circumstances.




Table 5. Surpluses/Deficits(-) for FY2006-FY2012 and FY2017
(in billions of dollars)
FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2017
CBO Baseline, 1/07 -248a -172 -98 -116 -137 -12 170 249
President’s FY08 Budget, 2/07 -244 -239 -187 -94 -54 61
President’s FY08 CSB 2/07 -185 -38 -35 34 35 147
SBC, Budget Res. 3/16/07 -212 -249 -215 -129 -14 132
CBO Est. of Pres. Budget 3/21/07 -214 -226 -215 -169 -149 -31 -10
CBO Baseline, Revised 3/21/07 -177 -113 -134 -157 -35 155 217
Senate Budget Res. 3/23/07 -212 -249 -216 -134 -71 1
House Budget Res. 3/29/07 -209 -213 -241 -205 -50 153
Conf. Agreement, S.Con.Res. 21 -214 -252 -235 -199 -95 41
5/17/07
Mid-Session Review 7/11/07 -205 -258 -213 -123 -89 33
CBO Budget & Econ. Update -158 -155 -215 -255 -134 62 109
8/23/07
Treasury, FY07 Budget Results, -163
10/07
Source: CRS.
CSB—The Administration’s current services baseline.
SBC—Senate Budget Committee.
a. Actual FY2006 deficit.
The President’s February budget proposed a deficit of $239 billion for FY2008, and a small
surplus ($61 billion) in FY2012 (-1.6% of GDP and 0.3% of GDP respectively). The
Administration’s current service baseline estimates, which assume no policy changes, showed
surpluses appearing in FY2010, two years earlier than the budget reaches a surplus.
The five-year deficit outlook in the Administration’s July 2007 Mid-Session Review differed
minimally from that put forth in the February budget. The FY2007 deficit fell slightly while the
FY2008 deficit grew slightly compared to the estimates in the President’s FY2008 budget. The
MSR deficit estimates in subsequent years remain slightly larger than those in the original budget.
The MSR shows the budget reaching a small surplus in FY2012, just 0.2% of GDP, marginally
smaller than the Administration’s original estimated surplus of 0.3% of GDP.
Reaching the budget’s deficit reduction goals during the next five years, according to the
Administration, requires strict limits on the growth in total discretionary spending and slower
growth of entitlement spending. Some of the President’s proposals would increase spending or






reduce receipts, requiring larger spending reductions in other areas of the budget, since the 34
Administration has opposed using tax increases to reduce the deficit.
According to CBO’s January 2007 baseline estimates, the federal deficit is projected to fall, both
in dollar terms and as a percentage of GDP, through FY2011. Surpluses are projected to appear
from FY2012 through FY2017. CBO, by law, must use assumptions for baseline projections that
some analysts consider optimistic. On the revenue side, the baseline assumes the lack of a fix to
the expanding coverage of the AMT and, as required by current law, the expiration of the 2001
and 2003 tax cuts at the end of calendar year 2010. These would boost revenues considerably
compared to restricting AMT expansion and extending the tax cuts. On the spending side,
discretionary spending is assumed to grow at the rate of inflation, which is at a slower rate than it
has grown recently, and mandatory spending grows with eligible populations and cost-of-living
adjustments. Some projections using alternative assumptions show a less optimistic fiscal outlook
than the path of shrinking deficits and future surpluses depicted by CBO baseline projections.
Substituting a selection of alternative scenarios for policy assumptions used in the January CBO
baseline produces a growing deficit from FY2007 through FY2017. These selected alternative
policies limit the growing coverage of the AMT, extend the 2001 and 2003 tax cuts, and increase
discretionary spending at the rate of GDP growth (see the CBO-based alternative estimate in
Figure 5). Under these alternative policies, the deficit would increase from an estimated 1.7% of
GDP in FY2008 to 2.3% of GDP in FY2012, and to 3.6% of GDP in FY2017.
A March 2007 CBO analysis of the President’s policies using CBO’s economic and budget-
estimating models put the FY2008 deficit at 1.6% of GDP, matching the Administration’s
February projection. CBO, however, projected larger deficits than the Administration for
subsequent years. In FY2012, CBO projected a small deficit (0.3% of GDP), whereas the
Administration projected a small surplus.
The House- and Senate-passed budget resolutions included FY2008 deficits similar to the deficit
in the President’s budget (see Table 5). By FY2012, the Senate resolution had a surplus of
slightly below $1 billion and the House resolution had a surplus of $153 billion. The difference
between the surpluses in the two resolutions is due to different assumptions about future policy.
The conference agreement on the budget resolution (S.Con.Res. 21; H.Rept. 110-153) had a
deficit of $252 billion in FY2008, becoming a surplus of $41 billion in FY2012.
Figure 5 shows deficit or surplus estimates as shares of GDP for FY2007 through FY2017. The
actual surpluses and deficits as shares of GDP are shown for FY2000 through FY2006.

34 The Administration’s current services baseline estimate, which assumes current policy, projects smaller deficits than
the President’s proposed budget. The cumulative five-year deficit would be smaller without the President’s proposed
policy changes than with them.






For the years through FY2017, the data are taken from the estimates and projections by CBO and
OMB in their budget reports for FY2008. The 40-year (FY1966-FY2006) average deficit (2.3%
of GDP) is also shown.
The President’s policy proposals assumed additional spending for defense in FY2007 and
FY2008, tight controls on domestic discretionary spending, a slight slowing in the growth of
Medicare and Medicaid spending, no additional AMT relief after FY2008, and the creation of
personal accounts for Social Security in FY2012.
The proposed defense budget, however, only includes a minimal “placeholder” in FY2009 for the
costs of wars in Iraq and Afghanistan, and makes no assumptions about war funding in
subsequent years. Administration projections show a rapid decline in the deficit as a share of
GDP, with a slight surplus appearing in FY2012.
CBO and OMB deficit projections are shown Figure 5. Deficits(-) or Surpluses, FY2000-
in Figure 5. OMB projections extend through FY2017
FY2012, while CBO projections extend (percent of GDP)
through FY2017. CBO baseline projections
and OMB projections show an improving 5%Average, FY1966-FY2006
federal fiscal situation, with projected deficits Actuals, FY2000-FY2006
falling in proportion to the economy. 4%Alternative Estimate (1/07)
CBO Reestimates (3/07)
On the other hand, a CBO projection based on 3%OMB Feb 2007
alternative policy assumptions shows a steady 2%OMB Jul 2007
deterioration in the federal government’s
fiscal conditions. Some prominent economists 1%
contend that these alternative assumptions
provide a more realistic view of future fiscal 350%
trends. The alternative CBO deficit
projection grows rapidly from FY2012 -1%
through FY2017, when the deficit reaches -2%
3.6% of GDP, the same level reached in
FY2004. This line moves downward in -3%
Figure 5, depicting a fiscal outlook less
optimistic than OMB and CBO baseline -4%
projections. 7/2007
-5 %
20 00 20 05 2 01 0 2 01 5



35 See Alan Auerbach, Jason Furman, and William Gale, “Still Crazy After All These Years: Understanding the Budget
Outlook,” working paper, April 27, 2007, available at http://www.econ.berkeley.edu/~auerbach/AFG%20paper.pdf.





OMB, CBO, and GAO agree that over a longer time period, one beginning in this decade and
lasting far into the century, the current mix of federal fiscal policies is unsustainable. The nation’s
aging population, combined with health care costs that seem likely to continue rising faster than
per capita GDP, raises spending in federal programs for the elderly to such an extent that the
government faces constantly rising deficits and “a federal debt burden that ultimately spirals out
of control.... Although the timing of deficits and resulting debt build up varies depending on the 36
assumptions used, ... we are on an unsustainable fiscal path.”
Keeping future federal outlays at 20% of GDP, approximately its current share, and leaving fiscal
policies unchanged, according to CBO projections, would require drastic reductions in all
spending other than that for Medicare, Social Security, and Medicaid. A former CBO Acting
Director stated that, “by 2030 ... spending for those programs [Medicare, Social Security, and
Medicaid] is projected to reach roughly 15 percent of GDP.... If that increase happened ..., the rest
of the budget would have to be cut by more than half” to keep overall spending close to 20% of 37
GDP.
A CBO report on the long-term fiscal outlook concluded that
over the next half-century, the United States will confront the challenge of conducting its
fiscal policy in the face of the retirement of the baby-boom generation.... Under current
policies, the aging of the population is likely to combine with rapidly rising health care costs
to create an ever-growing demand for resources to finance federal spending for mandatory
programs, such as Medicare, Medicaid, and Social Security.... Attaining fiscal stability in the
coming decades will probably require substantial reductions in the projected growth of 38
spending and perhaps also a sizable increase in taxes as a share of the economy.
The Administration indicated similar concerns about the outlook for the budget over the long term
in the President’s FY2008 budget.
The current structure of the Federal Government’s major entitlement programs will place a
growing and unsustainable burden on the budget in the long-term.... By 2050, spending on
these three entitlement programs [Social Security, Medicare, and Medicaid] is projected to
be more than 15 percent of GDP, or more than twice as large as spending on all other 39
programs combined, excluding interest on the public debt.
The Social Security, Medicare, and Medicaid programs present different challenges to the long-
term fiscal position of the federal government. Estimates of the long-term fiscal gap between
Social Security (OASDI) outlays and revenues as a proportion of long-term GDP are generally
much smaller than estimates of long-term fiscal gap between Medicare (HI, Part B, and Part D) 40
outlays and revenues. These long-term estimates of fiscal imbalances are especially sensitive to

36 GAO, The Nation’s Long-Term Fiscal Outlook: Jan. 2007 Update, GAO-07-510R, p.1.
37 CBO, The ABCs of Long-Term Budget Challenges, Directors Conference on Budget and Accounting for Long-Term
Obligations, Opening Remarks by Donald B. Marron, Acting Director, December 8, 2006, p. 2.
38 CBO, The Long-Term Budget Outlook, December, 2005, p. 1.
39 OMB, Budget of the United States Government for Fiscal Year 2008, Feb. 2007, p. 16.
40 For a detailed discussion of long-term projections, see CRS Report RL33623, Long-Term Measures of Fiscal
Imbalance, by D. Andrew Austin.






changes in assumptions regarding productivity growth and interest rates. Some analysts willing to
make more felicitous assumptions about productivity growth present a more optimistic long-term 41
outlook for Social Security.
Spending projections for Medicare and Medicaid are sensitive to changes in medical inflation. In
past years, many projections that medical inflation would slow have turned out to be overly 42
optimistic.
Unexpected events, such as the hurricanes in 2005 or an economic downturn, can change the
short-term budget outlook. The interplay of policy, demographics, and medical care costs,
however, will in large part determine the long-term budget outlook. The retirement of the baby
boom generation, which will rapidly expand the population eligible for federal programs serving
the elderly, along with continuing increase in health care costs will put enormous pressure on the
federal budget. Without policy changes, these programs could overwhelm the rest of the budget.
Not only will the programs themselves be stressed, but their growth could easily limit the
government’s flexibility in meeting its obligations or new needs as well as overwhelm the
economy’s ability to provide the resources needed for the expanded programs.
D. Andrew Austin
Analyst in Economic Policy
aaustin@crs.loc.gov, 7-6552


41 Dean Baker, “Social Security Byte: Trustees Assumptions Still More Pessimistic Than CBO,” Center for Economic
and Policy Research, April 23, 2007. Available at http://www.cepr.net/
index.php?option=com_content&task=view&id=1139&Itemid=138.
42 The 2004 Technical Review Panel on the Medicare Trustees Reports, “Review of the Assumptions and the Methods
of the Medicare Trustees Financial Projections,” December 2004, contended that assuming medical costs per
beneficiary will grow 1% a year faster than GDP was reasonable. Actual Medicare costs per beneficiary, however, have
risen at a faster pace. See Table V.B1 from 2007 Annual Report of The Boards of Trustees of the Federal Hospital
Insurance and Federal Supplementary Medical Insurance Trust Funds, available at http://www.cms.hhs.gov/
ReportsTrustFunds/downloads/tr2007.pdf.