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Monday, March 14, 2011

The Federal Budget: Issues for FY2011, FY2012, and Beyond

Mindy R. Levit
Analyst in Public Finance

The federal budget is central to Congress’s ability to exercise its “power of the purse.” Over the last several fiscal years the imbalance between spending and revenues has grown as a result of the economic downturn and policies enacted in response to financial turmoil. In FY2010, the last completed fiscal year, the U.S. government spent $3,456 billion (23.8% of GDP) and collected $2,162 billion in revenue (14.9% of GDP), resulting in a budget deficit of $1,294 billion (8.9% of GDP).

The CBO baseline estimates the FY2011 budget deficit at $1,480 billion or 9.8% of GDP and deficits throughout the 10-year budget window. The deficit is projected to be higher than that of FY2010 due to increases in mandatory spending and restrained growth in revenues as a result of the temporary payroll tax reduction. Under the President’s Budget, deficit estimates for FY2011 amount to $1,645 billion or 10.9% of GDP. This is larger than CBO’s baseline deficit estimate, primarily due to differences in assumptions used relating to funding levels for the remainder of the fiscal year.

Congress and the President have yet to complete action on any of the 12 FY2011 regular appropriations acts. As a result, the federal government has been operating on a series of five continuing resolutions since the beginning of the fiscal year. If further budget authority is not provided either through another continuing resolution or regular appropriations acts, a funding gap will occur for those projects and activities that are funded through annual appropriations acts.

The Obama Administration released its FY2012 budget on February 14, 2011. In FY2012, the President’s Budget projects that the deficit will reach $1,101 billion. Budget deficits are projected throughout the 10-year budget window.

In his budget for FY2012, President Obama presented his policy agenda. On the spending side, the proposal largely focused on a proposal to freeze non-security discretionary spending through FY2015 and increasing investments in various sectors. The budget proposal also included various tax proposals including the permanent extension of the 2001/2003/2010 tax cuts for families making less than $250,000, changes in the estate tax parameters, and a three-year proposal to pay for the indexation of the AMT “patch” for inflation. Details are also provided on ways to begin reforming the corporate tax, including lowering the corporate tax rate. Like the FY2011 budget proposal, the President also proposes a fee to be imposed on the financial services industry over at least the next 10 years to recoup the cost of TARP. Under the proposal, this fee would generate $30 billion by FY2021. Finally, the budget also emphasizes the goal of continued economic growth and job creation.

CBO, GAO, and the Administration agree that the current mix of federal fiscal policies is unsustainable in the long-term. The nation’s aging population, combined with rising health care costs per beneficiary, seems likely to keep federal health costs rising faster than per capita GDP. Keeping future federal outlays at 20% of GDP, or approximately at its historical average, and leaving fiscal policies unchanged, according to CBO projections, would require drastic reductions in all spending other than that for Medicare, Social Security, and Medicaid, or reigning in the costs of these programs. As the economic recovery continues, Congress may focus more effort on balancing the budget and reining in the debt. This would require less spending, increases in revenue collections, faster-than-average economic growth, or a combination of these things.

Date of Report: March 11, 2011
Number of Pages: 23
Order Number: R41685
Price: $29.95

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