Table Of Content

CONGRESS OF THE UNITED STATES CONGRESSIONAL BUDGET OFFICE The Budget and Economic Outlook: Fiscal Years 2010 to 2020 The Unemployment Rate (Percent) 12 Actual Projected 10 8 6 4 2 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Debt Held by the Public and Net Interest Payments (Percentage of GDP) 4 80 Actual Projected Debt Held by the Public (Right scale) 3 60 Net Interest (Left scale) 2 40 1 20 0 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 JANUARY 2010 Report Documentation Page Form Approved OMB No. 0704-0188 Public reporting burden for the collection of information is estimated to average 1 hour per response, including the time for reviewing instructions, searching existing data sources, gathering and maintaining the data needed, and completing and reviewing the collection of information. 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No. 4095 CBO The Budget and Economic Outlook: Fiscal Years 2010 to 2020 January 2010 The Congress of the United States O Congressional Budget Office Notes The economic forecast was completed on December 8, 2009, and estimates of 2009 values shown in the text and tables are based on information that was available by that date. Numbers in the text and tables may not add up to totals because of rounding. Unless otherwise indicated, years referred to in describing the economic outlook are calendar years, and years referred to in describing the budget outlook are federal fiscal years (which run from October 1 to September 30). Some of the figures have shaded bars that indicate the duration of recessions. The National Bureau of Economic Research establishes the dates on which recessions begin and end but has not yet done so for the end of the most recent recession, which is shown as having ended in the second quarter of calendar year 2009. Supplemental data for this analysis are available on the Congressional Budget Office’s Website (www.cbo.gov). CBO Preface T his 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 that CBO submit to the Committees on the Budget periodic reports about fiscal policy and its 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 Peter Fontaine, Theresa Gullo, Holly Harvey, Janet Airis, Tom Bradley, Kim Cawley, Jeffrey Holland, Sarah Jennings, Leo Lex, Kate Massey, and SamPapenfuss. The revenue estimates were prepared by the staff of the Tax Analysis Division under the supervision of Frank Sammartino, David Weiner, and Mark Booth, with assistance from the Joint Committee on Taxation. (A detailed list of contributors to the spending and revenue projections appears in AppendixG.) The economic outlook presented in Chapter2 was prepared by CBO’s Macroeconomic Analysis Division under the direction of Robert Dennis, Kim Kowalewski, and John Peterson. Robert Arnold and Christopher Williams produced the economic forecast and projections. David Brauer, Juan Contreras, Naomi Griffin, Juann Hung, Mark Lasky, Joe Mattey, BenjaminPage, Frank Russek, DavidTorregrosa, Steven Weinberg, and Susan Yang contrib- uted to the analysis. Holly Battelle and Priscila Hammett provided research assistance. An early version of CBO’s economic forecast was discussed at a meeting of the agency’s Panelof Economic Advisers. At that time, members of the panel were Henry J. Aaron, MartinN. Baily, Richard Berner, Martin Feldstein, Kristin J. Forbes, Robert J. Gordon, Robert E. Hall, Jan Hatzius, Douglas Holtz-Eakin, Simon Johnson, Anil Kashyap, LawrenceKatz, Laurence H. Meyer, William D. Nordhaus, Rudolph G. Penner, AdamS.Posen, James Poterba, Alice Rivlin, Nouriel Roubini, Diane C. Swonk, and StephenP. Zeldes. John Haltiwanger and Aysegul Sahin 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. Barry Blom wrote Chapter1, with assistance from JaredBrewster, Jeffrey Holland, and David Newman. Robert Arnold wrote Chapter2, with assistance from Kim Kowalewski, John Peterson, and David Torregrosa. Christina Hawley Anthony wrote Chapter3, with assistance from Santiago Vallinas and Jared Brewster. CBO PREFACE MarkBooth wrote Chapter4, with assistance from Grant Driessen, Barbara Edwards, ZacharyEpstein, Pamela Greene, and Joshua Shakin. Christina Hawley Anthony and JeffreyHolland wrote AppendixA. AmberMarcellino wrote AppendixB, with assistance from Mark Booth. Santiago Vallinas wrote AppendixC. Jared Brewster wrote AppendixD. Holly Battelle compiled AppendixE, and Amber Marcellino compiled AppendixF. SantiagoVallinas and ChayimRosito produced the glossary. Christine Bogusz, Chris Howlett, Kate Kelly, Loretta Lettner, and John Skeen edited the report, with assistance from Leah Mazade and Sherry Snyder. Maureen Costantino designed the cover and prepared the report for publication, with assistance from Jeanine Rees. LennySkutnik printed the initial copies, Linda Schimmel handled the print distribution, andSimone Thomas and Annette Kalicki prepared the electronic version for CBO’s Website(www.cbo.gov). Douglas W. Elmendorf Director January 2010 CBO Contents Summary xi 1 The Budget Outlook 1 A Review of 2009 3 CBO’s Baseline Projections for 2010 5 CBO’s Baseline Projections for 2011 to 2020 9 Changes in CBO’s Baseline Since August 2009 10 Uncertainty and Budget Projections 14 Federal Debt Held by the Public 18 The Long-Term Budget Outlook 20 2 The Economic Outlook 23 Factors Affecting Economic Growth Through 2014 27 Factors Affecting Labor Markets Through 2014 34 Factors Affecting Inflation Through 2014 36 The Outlook for 2015 to 2020 37 The Outlook for Income Through 2020 40 Comparison with CBO’s August 2009 Forecast 41 Comparison with Other Forecasts 44 3 The Spending Outlook 47 Mandatory Spending 51 Discretionary Spending 63 Net Interest 70 4 The Revenue Outlook 75 Sources of Revenues 76 Current Projections 77 Effects of Expiring Tax Provisions 91 CBO VI THE BUDGET AND ECONOMIC OUTLOOK: FISCAL YEARS 2008 TO 2018 A The American Recovery and Reinvestment Act of 2009 95 B Changes in CBO’s Baseline Since August 2009 99 C How Changes in Economic Projections Can Affect Budget Projections 109 D Trust Funds and Measures of Federal Debt 115 E CBO’s Economic Projections for 2009 to 2020 121 F Historical Budget Data 125 G Contributors to the Revenue and Spending Projections 139 Glossary 143 CBO CONTENTS THE BUDGET AND ECONOMIC OUTLOOK: FISCAL YEARS 2010 TO 2020 VII Tables S-1. CBO’s Baseline Budget Outlook xii S-2. CBO’s Economic Projections for Calendar Years 2009 to 2020 xv 1-1. Projected Deficits and Surpluses in CBO’s Baseline 2 1-2. Average Annual Rates of Growth in Revenues and Outlays Since 1999 and as Projected in CBO’s Baseline 4 1-3. CBO’s Baseline Budget Projections 8 1-4. Changes in CBO’s Baseline Projections of the Deficit Since August 2009 11 1-5. Budgetary Effects of Selected Policy Alternatives Not Included in CBO’s Baseline 16 1-6. Holders of Federal Debt Held by the Public, 2004 and 2009 19 1-7. CBO’s Baseline Projections of Federal Debt 21 2-1. CBO’s Economic Projections for Calendar Years 2009 to 2020 24 2-2. Key Assumptions in CBO’s Projection of Potential Output 39 2-3. CBO’s Current and Previous Economic Projections for Calendar Years 2009 to 2019 42 2-4. Comparison of CBO and Blue Chip Consensus Economic Forecasts for Calendar Years 2009 to 2011 44 2-5. Comparison of Federal Reserve and CBO Forecasts for Calendar Years 2009 to 2012 45 3-1. CBO’s Baseline Projections of Outlays 48 3-2. Average Annual Rates of Growth in Outlays Since 1999 and as Projected in CBO’s Baseline 50 3-3. CBO’s Baseline Projections of Mandatory Spending 52 3-4. Sources of Growth in Mandatory Outlays 61 3-5. CBO’s Baseline Projections of Offsetting Receipts 63 3-6. Costs for Mandatory Programs That CBO’s Baseline Assumes Will Continue Beyond Their Current Expiration Dates 64 3-7. Growth in Discretionary Budget Authority, 2009 to 2010 67 3-8. Defense and Nondefense Discretionary Outlays, 1985 to 2010 68 3-9. Nondefense Discretionary Funding, 2009 to 2010 69 3-10. CBO’s Projections of Discretionary Spending Under Selected Policy Alternatives 72 3-11. CBO’s Baseline Projections of Federal Interest Outlays 74 CBO