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Monday, April 9, 2012

The Federal Budget: Issues for FY2013 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 FY2011, the U.S. government spent $3,598 billion (24.1% of GDP) and collected $2,302 billion in revenue (15.4% of GDP), resulting in a budget deficit of $1,296 billion (8.7% of GDP). The FY2012 deficit is currently estimated at $1,079 billion (7.0% of GDP).

The Obama Administration released its FY2013 budget on February 13, 2012. In FY2013, the President’s budget projects that the deficit will reach $901 billion. Budget deficits are projected throughout the 10-year budget window. The President’s budget proposes a variety of short-term tax and spending measures aimed at job creation, largely drawn from the American Jobs Act submitted to Congress in September 2011. These proposals amount to nearly $350 billion in additional spending and tax cuts, including immediate funding for roads, rails, and runways; aid to states and local governments for teachers and first responders; school modernization; and a full-year extension of the Social Security payroll tax reduction and unemployment benefits.

In August 2011, the Budget Control Act of 2011 (BCA) placed limits on spending via discretionary spending caps and included provisions for additional spending cuts in the amount of $1.2 trillion. In January 2013, the additional cuts are scheduled to take effect via an automatic process. In his FY2013 budget, President Obama proposes replacing the automatic cuts with prescribed spending cuts and tax increases. The largest of these proposals includes allowing the 2001/2003/2010 tax cuts for singles making over $200,000 and households making over $250,000 to expire; savings generated from changes to Medicare, Medicaid, agriculture, and other mandatory programs; and placing caps on spending on Overseas Contingency Operations (OCO).

The FY2013 budget also included other tax proposals including changes in the estate tax parameters, limits to the value of itemized deductions for married taxpayers with incomes over $250,000 and single taxpayers with incomes over $200,000, and eliminating various tax expenditures. The Administration also released a framework for corporate tax reform, which included a reduction in the corporate tax rate combined with an elimination of certain corporate tax expenditures. The Administration is committed to reform that would not add to the deficit.

On March 21, 2012, the House Budget Committee reported the budget resolution (H.Con.Res. 112, 112th Congress) by a vote of 19-18. The resolution provided for revenue levels of $2,734 billion and outlays of $3,530 billion in FY2013 for a deficit of $797 billion, or approximately 5.0% of GDP. By FY2022, the deficit is projected to fall to $287 billion or 1.2% of GDP. Like the President’s budget proposal, the House budget resolution specifies a replacement of the BCA’s automatic cuts. The budget resolution replaces the majority of the cuts in FY2013 with $261 billion in deficit reduction over 10 years to be achieved via reconciliation.

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.

Date of Report: March 27, 2012
Number of Pages: 24
Order Number: R42362
Price: $29.95

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