Projecting the Surplus: A Discussion of Issues

Publication Date: March 2001

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Economics

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Abstract:

Budget surpluses are currently projected to sum to $5.6 trillion by the Congressional Budget Office (CBO) over the 10-year budget window. The CBO baseline that produces these results is a budget tool; it is not meant to be a "best guess" about future spending and taxation. It follows fairly mechanical rules about extending existing policy into the future and generates results using assumptions about future economic conditions and their interaction with existing policies. This report illustrates how highly sensitive the projected surplus is to relatively minor changes in underlying assumptions about policy or the economy.

Of the policy assumptions discussed, those concerning the rate of growth of discretionary spending have the largest effect on the size of the surplus. Baseline rules assume that discretionary spending grows at the rate of inflation. It has not grown this slowly since the early 1990s. CBO estimates that if discretionary spending rose at the rate of economic growth, outlays would rise by $906 billion more than the baseline over the 10-year forecast, and reduce the surplus by more than that amount due to higher interest costs.

Lower interest payments from falling debt account for about one-sixth of the on-budget surplus. But this assumes that the entire surplus is saved. If on-budget surpluses are not saved, higher interest payments would lower the projected surpluses by an estimated $624 billion.

The baseline assumes that various spending and tax programs, notably tax credits, will not be renewed when they expire. Many of these programs have been renewed several times. OMB estimates that renewing all expiring programs would reduce the surplus by $181 billion over the 10-year baseline.

The Alternative Minimum Tax (AMT) is not indexed for inflation, and tax credits will not be exempt from the AMT after 2001. Under current policy, these factors will increase the number of taxpayers paying the AMT from 1.3% in 2000 to an estimated 15.7% in 2010. Should Congress choose to counter these effects, it would lower tax revenues by an estimated $125 billion. An additional $192 billion in revenue reductions over 10 years would be necessary to counter the expanded coverage of the AMT resulting from parts of the proposed $1.6 trillion tax cut.

Much of the projected surplus is generated by the economic assumptions underlying the 10-year baseline. Changing those assumptions even slightly has a considerable effect on tax revenues and outlays. CBO generated an "optimistic" scenario which would nearly double the size of the on-budget surplus. Alternatively, its "pessimistic" scenario drops the on-budget portion of the budget into deficit.

Further, if the projected unfunded liabilities of the Social Security and Medicare programs, which occur beyond the baseline window, were accounted for, the budget would still be in deficit. In other words, saving the entire unified budget surplus is projected to be insufficient to meet all current policy obligations for future benefits. This report will be updated as events warrant.