24 Nov This assignment is less about you doing budgetary forecasting and more about understanding how it is done by the Congressional Budget Office (CBO) and how that forecasting is used to analy
This assignment is less about you doing budgetary forecasting and more about understanding how it is
done by the Congressional Budget Office (CBO) and how that forecasting is used to analyze the federal
budget and, additional, how analysts outside the CBO examine the work of the CBO. The CBO
budgetary projections have a tremendous impact on how we look future government spending. What
you want to do is actually several different things within the paper you are writing.
GUIDELINES FOR THIS ASSIGNMENT
1) minimum of five to six pages
2) FIRST, take a close look at the data sheet I prepared which shows you how the CBO projected the
federal budget deficit (or surplus) for ten years and what it actually was. From this develop an
understanding of how you begin to analyze what the CBO projects for a ten-year period. NOTICE, that
in that data I address the following: UNIFIED BUDGET, OFF BUDGET, ON BUDGET (terms you
should develop an understanding about). So, what do you think about the degree of accuracy of CBO
forecasting? I always wonder why when you see CBO projections discussed on a TV news show, there
never is a discussion of the difficulties associated with the accuracy of budgetary forecasting.
3) Address BASELINE or BUDGET BASELINE. Make sure you can explain this and its relationship
to budgetary forecasting. I have given you a variety of readings that examine BASELINE so you can
begin to notice that this is often the starting point for how outside analysts examine and critique CBO
budgetary forecasting. You will notice that in some of the readings CBO forecasting is shown in
relationship to–or contrast to–other forecasting that is being done. NOTICE, what types of factors go
into forecasting (for example, inflation rate as CPI, unemployment rate, economic growth rate as GDP,
revenue from income taxes, from withholding taxes, gas prices, health care spending, etc.). SO, the range
of factors that are needed to be eventually proven to be accurate that, cumulatively, contribute to the
degree of accuracy in budgetary forecasting is incredibly complex. You can begin to imagine that good
forecasting requires that you constantly go back and examine all the parts that make up the whole.
4) Finally, there is a CBO publication in which they examine their forecasting. Go over this publication
carefully so you can see how they critique their own work
Congressional Budget Office
THE ECONOMIC AND BUDGET OUTLOOK:
Summary Table 4. CBO Baseline Budget Projections, Assuming Compliance with Discretionary Spending Caps (By fiscal year) Actual
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Deficit (-) or Surplus -22 63 80 79 86 139 136 154 170 217 236 251
On-budget deficit (-)
or surplus -103 -41 -37 -46 -45 1 10 a 5 44 55 64
Off-budget surplus 81 104 117 125 131 138 146 154 165 173 181 186
Cernik notes here
The TOTAL deficit in ACTUAL 1997 was -$22 billion (the -$103 billion and the +$81 billion come to -$22 billion).
The -$22 billion is known as the UNIFIED BUDGET. The ON-BUDGET is all expenses WITHOUT Social Security.
The OFF-BUDGET is the Social Security Trust Fund. So, the Social Security Trust Fund money helped to bring
down the UNIFIED BUDGET’S deficit. There was a surplus (not a deficit) in the Social Security Trust Fund, which
means that through your withholding taxes being taken out of your paycheck going into the Social Security Trust
Fund, the Federal Government had money left over after sending your grandmother her monthly Social Security
check. That leftover money was used toward helping to reduce the overall Federal Government’s budgetary deficit
(the UNIFIED BUDGET).
Why break down the Federal Government budget this way? Because by seeing the UNIFIED BUDGET, OFF-
BUDGET, ON-BUDGET you can get a sense of the importance of the Social Security Trust Fund.
Where did I get the following actual deficit or surplus amounts for each of the Fiscal Years? From the annual reports
titled, “The Budget and Economic Outlook: An Update,” put out by the CBO.
1998 $69 Billion
1999 $124 Billion
2000 $236 Billion
2001 $127 Billion
2002 -$158 Billion
2003 -$375 Billion
2004 -$412 Billion
2005 -$318 Billion
2006 -$248 Billion
2007 -$161 Billion
2008 -$459 Billion
SOURCE: TAX POLICY CENTER
The Federal Budget: The CBO Baseline
Underlying data: download
In an update to its FY2008-18 Budget and Economic Outlook, the Congressional Budget Office
(CBO) forecasts a $357 billion deficit for baseline FY2008. It projects that the deficit will
decline steadily over the next few years, become a surplus of $105 billion in 2012, and improve
further to a $202 billion surplus in 2018. These projected surpluses, if they materialize, will
combine with economic growth to shrink federal debt held by the public from 37 percent of GDP
in 2007 to 24 percent by 2018.
CBO’s baseline is not a projection of what spending and revenue will actually be. Rather, under
congressional budget rules, the baseline assumes no change in tax law and limits the projected
growth of discretionary spending. As a result, it omits many budget items Congress will likely
enact: supplemental appropriations to pay for the war in Iraq, the War on Terror, and disaster
relief, continued relief from the alternative minimum tax, extension of the 2001-06 tax cuts
beyond their current expiration after 2010, and renewal of expiring provisions of the tax code.
CBO’s projections also constrain the growth of discretionary spending (spending authorized by
annual legislation) to the rate of inflation. Under that limitation, discretionary spending would
decline from 7.6 percent of GDP in 2007 to 6.1 percent of GDP by 2018.
CBO does provide estimates of how its baseline would change if it relaxed the strict
assumptions used for the official baseline. Alternative assumptions include 1) discretionary
spending grows at the same rate as nominal GDP, 2) 2001 and 2003 tax cuts are extended
beyond 2010, 3) expiring tax provisions are extended indefinitely, and 4) relief from the
alternative minimum tax (AMT) is provided. Under those assumptions, which some people
view as more likely to occur, the federal budget remains in deficit throughout the ten-year
budget window and grows to nearly 4 percent of GDP in 2018.
Even with the unrealistic assumptions underlying its baseline, CBO forcefully warns that rapidly
growing entitlement spending will consume an ever-larger share of the federal budget. In
particular, it projects annual spending growth rates over the 2009-2018 period of 6 percent for
Social Security and between 7 and 8 percent for Medicare and Medicaid, both more than double
the growth rates of federal revenue the economy as a whole. The different growth rates mean
that, over time, an ever-rising share of the budget will go to pay for health and retirement
Robert Book, Contributor
I cover news on health care policy
PHARMA & HEALTHCARE
2/07/2013 @ 7:21PM |1,174 views
Health Care in the New CBO Forecast
Robert Book, Contributor
Earlier this week, the Congressional Budget Office (CBO) released an updated federal budget
outlook for the next 10 year “budget window.” Included in this report were some telling
revisions to the previous baseline projection for the effects of the Affordable Care Act (ACA).
The first thing to note is that they have increased the number of people projected to be uninsured,
and at the same time reduced the projected federal revenue from the penalty for not having
How is this possible? Recent regulations issued by the administration have restricted access to
health insurance subsidies, but at the same granted exemptions to the penalty for more categories
of people who cannot qualify for those subsidies. For example, an IRS regulation clarified that
employers are obligated to offer coverage only to their employees, but not to their employees’
families. However, the language of the health reform law makes it clear that if the employee has
the ability to get employer-sponsored coverage for himself or herself only, the rest of the family
is not eligible for subsidized exchange coverage, and may end up being uninsured because they
are unable to afford the full, unsubsidized premium. In this case, the IRS exempts the rest of a
family in this situation from having to pay the penalty for not having insurance.
The CBO also forecasts a further decrease in the number of people obtaining health care through
their employers. Six months ago, they projected that 4 million people would lose employer-based
coverage, and now the projection is 7 million. This reflects, in part, an extension of the slightly
lower income tax rates beyond 2012, which slightly reduces the tax advantage of employment-
based insurance. Of course, many health reform watchers (including this author) think this
estimate is wildly optimistic, since it doesn’t take into account the either the incentives for
employers to drop their health plans, or the survey data indicating that a large number of
employers plan to consider doing just that.
Of course, it remains to be seen if these projections will be close to reality. Many factors could
affect the accuracy of these projections, mostly by altering the underlying assumptions. For
example, people might realize that with the absence of exclusions for pre-existing conditions, it
might make financial sense for healthy people to wait to enroll in health coverage until they
“need” it. For most people, paying the penalty will be cheaper than paying the premium, and
staying healthy for just a few years could be enough come out ahead (even if one has to pay out
of pocket for care until the next enrollment period).
Also, employers might realize that in some circumstances, it will be to their mutual benefit to
drop their employer-sponsored plan. If the premium subsidies – which depend on income and
family size – are higher than the employer penalty (fixed at $2,000 per full-time employee) plus
the tax advantage of employer-sponsored coverage – then it will be to their mutual advantage for
the employer to drop coverage, pay the penalty, and split the difference with the employees. For
employers with a large proportion of medium- and low-income, low-tax-bracket employees, this
is quite likely to be the case.
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