The Budget and Economic Outlook

By Altig, David E.; Meyer, Brent | Economic Trends, March 2007 | Go to article overview

The Budget and Economic Outlook


Altig, David E., Meyer, Brent, Economic Trends


02.09.07

"This week President Bush released his proposal for government spending, taxation, and borrowing for fiscal years 2008-2017. Congress will now have its say, and the final fate of those proposals awaits the outcome of the political push and pull that defines our democracy. As part of that process, the Congressional Budget Office (CBO) will eventually provide projections of the budgetary impact of the president's proposals, as well as the budget resolutions that eventually clear Congress. But we can get some preliminary hints by looking at some of the CBO's baseline estimates, released on January 24, of what things look like under current law.

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"Current law," of course, is not a completely unambiguous concept. Certain expenditures--classified as "discretionary," and accounting for roughly 40 percent of all federal spending--must be approved annually, so the CBO has to make some assumption about how spending in that category will grow. Because discretionary spending includes defense and security-related outlays, this is particularly difficult in the current environment. Following past practice (which was previously mandated by law), the CBO's baseline projections assume that discretionary spending grows at the rate of inflation after the current fiscal year (2007):

In fact, the president's budget proposal calls for an average annual growth rate in total discretionary spending of just over 3 percent from 2007 through 2012, versus the 1.8 percent annual inflation rate assumed by the CBO (measured by the chain-weighted gross domestic product price index).

To get an idea of what difference this makes, we can look to the CBO's projections of the government's surplus under the alternative assumptions that discretionary spending is frozen at 2007 levels or that discretionary spending grows at the rate of nominal gross domestic product (GDP):

Mandatory spending--which includes Social Security, Medicare, and Medicaid expenditures--is, of course, the bigger part of the spending picture.

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