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Tuesday, October 25, 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 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). In October 2011, CBO estimated the FY2011 deficit at $1,298 billion, nearly equal to the FY2010 deficit in dollar terms but slightly lower as a percentage of GDP (8.6%).

Congress enacted and the President signed, on April 15, 2011, the Department of Defense and Full-Year Continuing Appropriations Act, 2011 (P.L. 112-10), which completed action on the FY2011 regular appropriations acts. Prior to the enactment of this legislation, the federal government had been operating on a series of seven continuing resolutions (CRs) since the beginning of the fiscal year.

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. On the spending side, the FY2012 budget 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, a three-year proposal to pay for the indexation of the AMT “patch” for inflation, and some details on corporate tax reforms. The President also proposes a fee on the financial services industry over at least the next 10 years to recoup the cost of TARP.

Separately, on April 6, 2011, the House Budget Committee reported its budget resolution (H.Con.Res. 34, 112th Congress) by a vote of 22-16. The resolution provided for revenue levels of $2,533 billion and outlays of $3,529 billion in FY2012 for a deficit of $995 billion, or approximately 6.3% of GDP. By FY2021, the deficit is projected to fall to $385 billion or 1.6% of GDP. The budget resolution was agreed to by the House on April 15, 2011, by a vote of 235-193.

Along with Congress, 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: October 13, 2011
Number of Pages: 24
Order Number: R41685
Price: $29.95

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