The Changing Budget Outlook: Causes and Implications
Posted: 21 Nov 2001
In this report, the authors trace the extent, causes, and implications of the recent rapid decline in short- and medium-term budget prospects. In May 2001, the Congressional Budget Office's baseline budget projected surpluses of $5.6 billion in the unified budget and $3.1 trillion outside of social security for fiscal years 2002 to 2011. By October 2001, each of those figures had fallen by about $3 trillion. Since fiscal 2002 did not begin until October 1, 2001, the figures imply that almost all of the non-social security surplus for the coming decade was used up before the decade even began.
Most of the decline in the 10-year surplus is due to the tax cut enacted last spring, including the associated increases in federal interest payments. New government spending on defense, security and recovery since the terrorist attacks in September, and economic and technical changes in the forecasts each account for about 20 percent of the changes. Added spending before the attacks accounts for only 4 percent of the increase.
The authors note that the rapidly deteriorating budget outlook has important implications for current and future policy debates. First, the budget impact of any stimulus plan needs to be limited. Second, while the bipartisan agreement not to use social security and Medicare trust funds for other programs was sensibly waived to combat terrorism, Congress needs to re-establish a set of workable and responsible budget rules and goals. Third, after the current debate on economic stimulus has subsided, the nation will find itself in a fundamentally altered budget situation that will require rethinking both the tax and spending side of the fiscal ledger. Thus, Congress should not do anything currently - such as accelerate the previously enacted tax cuts - that will make the needed future fiscal adjustments more difficult.
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