The Budget and Economic Outlook: An Update

Abstract

The budget deficit expected for this year has grown and the surpluses anticipated for the coming decade have diminished under the Congressional Budget Office's (CBO's) new baseline projections. A sharp decline in tax revenues coupled with double-digit growth in spending will produce a deficit of about $157 billion in fiscal year 2002, CBO estimates. If current tax and spending policies are maintained, deficits are likely to persist for a few years before giving way to small surpluses. Between 2003 and 2009, those annual deficits and surpluses would generally equal less than 1 percent of the nation's gross domestic product (GDP) and roughly balance out. For the 10-year period from 2003 through 2012, CBO's baseline projects a total surplus of $1.0 trillion. However, most of that amount would be realized after 2010, when the tax cuts enacted last year are scheduled to expire. CBO constructs its baseline according to rules specified in law. Basically, those rules involve extending current laws and policies into the future and estimating their effect on the budget. The resulting baseline projections serve as a neutral benchmark that lawmakers can use to measure the effects of proposed changes in revenue and spending policies. Those projections should be viewed cautiously, however. They are not intended to be a forecast of future outcomes. Indeed, actual budget figures will almost certainly differ from CBO's baseline projections because of future economic developments, legislative actions, and technical errors in estimating.

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