The Outlook for Fiscal Policy

Peter R. Orszag and
Peter R. Orszag Vice Chairman of Investment Banking, Managing Director, and Global Co-Head of Healthcare - Lazard
William G. Gale
William G. Gale The Arjay and Frances Fearing Miller Chair in Federal Economic Policy, Senior Fellow - Economic Studies, Co-Director - Urban-Brookings Tax Policy Center

February 14, 2005


The new budget projections released by the Congressional Budget Office (2005) provide an opportunity to assess fiscal policy in the first four years of the Bush administration and to discuss prospects for the next four years and beyond. This report examines the baseline CBO projections, adjusts the official data in ways that more accurately reflect the current trajectory of tax and spending policies, and discusses some of the implications. We reach the following principal conclusions:

The CBO now projects a 10-year baseline deficit of $855 billion in the unified budget for fiscal 2006 to 2015. The budget outside of Social Security faces a baseline deficit of $3.4 trillion.

Over the first four years of the Bush administration, the 10-year fiscal outlook deteriorated by $8.2 trillion. In January 2001 the unified baseline for 2002 to 2011 projected a surplus of $5.6 trillion. The baseline for the same period now projects a deficit of $2.6 trillion.

About two-thirds of the deterioration in the official baseline figures is due to lower revenues and onethird is due to higher spending. Specifically, the decline can be attributed to legislated tax cuts (29 percent), other declines in revenue (37 percent), legislated spending increases (29 percent) and other changes in spending (4 percent). Revenue declines have also accounted for the vast share of the decline in actual budget outcomes (as opposed to 10-year projections) between 2000 and 2005. Tax revenue has fallen dramatically since 2000, and is now an extremely low share of gross domestic product (GDP) relative to its average value between 1960 and 2000. Spending has risen somewhat since 2000, but nonetheless remains significantly below its average level between 1960 and 2000.