An Analysis of the Administration's Deficit Reduction Goal

Publication Date: March 2005

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Banking and finance

Type:

Abstract:

The Bush Administration has set a goal of halving the deficit between FY2004 and FY2009. The Administration proposes to reduce the deficit from an originally forecasted $521 billion (4.5%) in FY2004 to $233 billion (1.5% of GDP) in FY2009.

The Administration can meet its deficit reduction goal if the following assumptions made in its FY2006 budget proposal occur. First, alternative minimum tax (AMT) relief is allowed to expire so that the AMT would take back most of the current reduction in the regular income tax for a large number of taxpayers. Second, discretionary spending falls from 8.2% of GDP to a historically low 6.1% of GDP. Third, spending on military operations abroad will be negligible by FY2009. Finally, the cost of creating individual accounts for Social Security as proposed by the Administration is not included in the budget.

CRS has constructed a modified baseline budget which, arguably, provides a "best guess" of the path of future deficits if current policy is extended. Under this alternative, the deficit is projected to rise to $425 billion in FY2009. Thus, the Administration's proposed FY2009 deficit is the result of budgetary savings of $192 billion compared to a baseline constructed by CRS reflecting current policy. This report will not be updated. The Administration's FY2005 budget proposal set a goal of halving the deficit between FY2004 and FY2009. This goal was reiterated in its FY2006 budget proposal. To analyze how the Administration plans to meet its goal of halving the federal budget deficit, this report explains how the Administration's FY2006 budget differs from current policy using a modified baseline budget constructed by CRS. The Congressional Budget Office (CBO) estimates a baseline budget based on simple rules prescribed by law. CRS has constructed a baseline budget incorporating alternative assumptions that arguably provides a "better guess" of the probable path of the federal budget when current policy is extended. CRS modified the CBO baseline by assuming that discretionary spending (excluding supplementals) will remain constant as a percentage of gross domestic product (GDP), that military operations in Iraq and Afghanistan will continue until FY2008, that expiring tax provisions will be extended,