The Federal Budget: Sources of the Movement from Surplus to Deficit

Publication Date: December 2006

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Banking and finance

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Abstract:

The federal budget moved from a surplus of $128 billion in 2001 to a deficit of $413 billion in 2004. In 2006, the deficit equaled $248 billion. This report compares the actual budget balance from 2001 to 2006 to the projection made by the Congressional Budget Office (CBO) in January 2001 to determine what factors caused the budget to move from surplus to deficit. Actual results differed from CBO's projection for three reasons: legislative policy changes, economic changes, and technical changes. Over the past six years as a whole, legislative changes accounted for about sixtenths of the cumulative shift from projected surplus to deficit. The largest legislative changes that increased the deficit were the tax cuts enacted between 2001 and 2004 and the increase in military spending in Iraq and Afghanistan.

The economic slowdown increased the size of the deficit from 2001 to 2003. Since then, the economy has had almost no effect on the deficit. Actual economic growth in recent years has been nearly identical to what CBO projected before the tax cuts were passed. This casts doubt on the claim that the tax cuts partly paid for themselves by boosting economic growth. Overall, economic changes accounted for about one-tenth of the cumulative shift to deficit over the past six years.

Technical changes to the projections occur when actual results turn out to be different from the non-economic assumptions that are the basis of the projections for mandatory spending and revenues. Technical changes accounted for about three-tenths of the cumulative shift to deficit over the past six years. Large technical changes point to the significant uncertainty behind budget projections, even over short periods of time.

Legislative reductions in revenue and increases in spending since 2001 have been large enough that even if economic and technical changes had been zero (that is, even if CBO's projection had been perfectly accurate), the budget would still have been in deficit from 2003 to 2006. Nor has the decline in the deficit since 2004 been attributable to legislative changes, which have continued to rise in cost over this period. This report will be updated annually.