The Budget and Economic Outlook: An Update

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The Budget and Economic Outlook: An Update
	September 2004

Cover Graphic

Notes
Unless otherwise indicated, all years referred to in describing the economic outlook are calendar years; otherwise, the years are federal fiscal years (which run from October 1 to September 30).

Numbers in the text and tables may not add up to totals because of rounding.

Some of the figures in Chapter 2 use shaded vertical bars to indicate periods of recession. A recession extends from the peak of a business cycle to its trough.

Data for real (inflation-adjusted) gross domestic product are based on chained 2000 dollars.

Preface

This volume is one of a series of reports on the state of the budget and the economy that the Congressional Budget Office (CBO) issues each year. It satisfies the requirement of section 202(e) of the Congressional Budget Act of 1974 for CBO to submit to the Committees on the Budget periodic reports about fiscal policy and to provide baseline projections of the federal budget. In accordance with CBO's mandate to provide impartial analysis, the report makes no recommendations.

The baseline spending projections were prepared by the staff of CBO's Budget Analysis Division under the supervision of Robert Sunshine, Peter Fontaine, Janet Airis, Thomas Bradley, Kim Cawley, Paul Cullinan, Jeffrey Holland, and Jo Ann Vines. The revenue estimates were prepared by the staff of the Tax Analysis Division under the supervision of Thomas Woodward, Mark Booth, and David Weiner. The analysts who contributed to those spending and revenue projections are listed in Appendix D.

The economic outlook presented in Chapter 2 was prepared primarily by the Macroeconomic Analysis Division under the direction of Robert Dennis. John F. Peterson, Robert Arnold, and Christopher Williams carried out the economic forecast and projections. David Brauer, Ufuk Demiroglu, Tracy Foertsch, Douglas Hamilton, Juann Hung, Kim Kowalewski, Mark Lasky, Angelo Mascaro, Shinichi Nishiyama, Benjamin Page, Frank Russek, Robert Shackleton, and Sven Sinclair contributed to the analysis. Tumi Coker, Adam Gordon, Brian Mathis, and Amrita Palriwala provided research assistance.

CBO's Panel of Economic Advisers commented on an early version of the economic forecast underlying this report. Members of the panel are Andrew B. Abel, Alan Blinder, Dan Crippen, William C. Dudley, Martin Feldstein, Robert J. Gordon, Robert E. Hall, Robert Glenn Hubbard, Lawrence Katz, Catherine L. Mann, Allan H. Meltzer, Laurence H. Meyer, William D. Nordhaus, June E. O'Neill, Rudolph G. Penner, James Poterba, Robert Reischauer, and Alice Rivlin. James Burkhard, Minxin Pei, and Jone-Lin Wang attended the panel's meeting as guests. Although CBO's outside advisers provided considerable assistance, they are not responsible for the contents of this report.

Jeffrey Holland wrote the summary. The staff of the Projections Unit and Mark Booth wrote Chapter 1. Mark Lasky was the lead author for Chapter 2. Gerard Trimarco wrote Appendix A, and Barry Blom and Frank Russek wrote Appendix B.

Christine Bogusz, Leah Mazade, John Skeen, and Christian Spoor edited the report. Marion Curry, Linda Lewis Harris, and Denise Jordan-Williams assisted in its preparation. Maureen Costantino took the photograph for the cover and prepared the report for publication, and Annette Kalicki produced the electronic versions for CBO's Web site.

Douglas Holtz-Eakin
Director
September 2004

CONTENTS

	Summary
1	The Budget Outlook A Look at 2004 Baseline Budget Projections for 2005 Through 2014 Uncertainty and Baseline Projections Budget Projections Under Alternative Scenarios Changes to the Budget Outlook Since March 2004
2	The Economic Outlook Overview of the Outlook CBO's Two-Year Forecast The Outlook Beyond 2005 Taxable Income Changes in the Economic Outlook Since January 2004
A	A Comparison of CBO's and OMB's Baselines Outlays Revenues
B	The Treatment of Federal Receipts and Expenditures in the National Income and Product Accounts Conceptual Differences Between the NIPAs' Federal Sector and the Federal Budget Differences in Accounting for Major Transactions Presentation of the Federal Government's Receipts and Expenditures in the NIPAs
C	CBO's Economic Projections for 2004 Through 2014
D	Contributors to the Revenue and Spending Projections

Tables

S-1.	CBO's Baseline Budget Outlook
S-2.	Changes in CBO's Baseline Projections of the Deficit Since March 2004
S-3.	CBO's Current and Previous Economic Projections for Calendar Years 2004 Through 2014
1-1.	Projected Deficits and Surpluses in CBO's Baseline
1-2.	CBO's Baseline Budget Projections
1-3.	CBO's Baseline Projections of Discretionary Spending and Homeland Security Spending
1-4.	CBO's Baseline Projections of Mandatory Spending, Including Offsetting Receipts
1-5.	CBO's Baseline Projections of Federal Interest and Debt
1-6.	The Budgetary Effects of Policy Alternatives Not Included in CBO's Baseline
1-7.	Changes in CBO's Baseline Projections of the Deficit Since March 2004
2-1.	CBO's Economic Projections for Calendar Years 2004 Through 2014
2-2.	CBO's Economic Forecast for 2004 and 2005
2-3.	Comparison of CBO's, Blue Chip's, and the Administration's Forecasts for Calendar Years 2004 and 2005
2-4.	Key Assumptions in CBO's Projection of Potential Output
2-5.	CBO's Current and Previous Economic Projections for Calendar Years 2004 Through 2014
A-1.	Comparison of CBO's September 2004 Baseline and OMB's July 2004 Current-Services Baseline
B-1.	Relationship of the Budget to the Federal Sector of the National Income and Product Accounts
B-2.	Projections of Baseline Receipts and Expenditures as Measured by the National Income and Product Accounts
C-1.	CBO's Year-by-Year Forecast and Projections for Calendar Years 2004 Through 2014
C-2.	CBO's Year-by-Year Forecast and Projections for Fiscal Years 2004 Through 2014

Figures

1-1.	Total Deficits and Surpluses as a Share of GDP, 1965 to 2014
1-2.	Uncertainty of CBO's Projections of the Budget Deficit or Surplus Under Current Policies
2-1.	Nonfarm Payroll Employment
2-2.	Private Investment and the Business Cycle
2-3.	Business Fixed Investment
2-4.	Real Personal Consumption Expenditures
2-5.	Labor Compensation
2-6.	Real Trade-Weighted Value of the U.S. Dollar
2-7.	Energy Prices
2-8.	The Consumer Price Index for Shelter
2-9.	The Employment Cost Index
2-10.	Interest Rates
2-11.	Total Factor Productivity
2-12.	Wages and Salaries

Boxes

1-1.	The Statutory Debt Limit
2-1.	How Much Slack Is Left in the Economy?