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Wednesday, November 27, 2013

The Federal Budget: Issues for FY2014 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.” Recent economic turmoil put strain on the federal budget due to declining revenues and increasing spending levels. Subsequently, policies enacted to restrain spending, along with an improving economy, have put the federal budget on a more sustainable path in the near term. In FY2013, the U.S. government spent $3,454 billion (20.8% of GDP) and collected $2,774 billion in revenue (16.7% of GDP), resulting in a budget deficit of $680 billion (4.1% of GDP).

The Obama Administration released its FY2014 budget on April 10, 2013. Under the proposals in the President’s budget, the deficit is estimated at $744 billion (4.4% of GDP) in FY2014. The FY2014 budget contains a policy agenda that largely focuses on providing additional stimulus to create jobs, increasing infrastructure investment, and providing additional funding for early childhood education programs. The President’s budget also proposes new deficit reduction aimed at replacing the Budget Control Act’s (BCA’s) automatic spending reduction process. These proposals include additional tax revenues generated by limiting deductions on higher-income households and ensuring that higher-income households pay a minimum percentage of their income in taxes. On the spending side, the proposals include reductions in health spending, certain mandatory programs, and lowering of the BCA’s discretionary spending caps. The budget also contains a proposal to use the chained consumer price index (CPI) for the purposes of calculating annual increases in certain federal benefits and for the indexation of tax brackets.

On March 21, 2013, the House agreed to a budget resolution by a vote of 221-207. The resolution  provided for a deficit of $528 billion, or 3.2% of GDP in FY2014. By FY2023, the budget is  projected to reach a surplus of $7 billion. The budget proposal contained several policy changes affecting spending, including removing the BCA’s additional spending reductions set to affect  defense discretionary spending and reallocating them to non-defense discretionary spending. The budget resolution also contains reconciliation instructions to eight committees to find further deficit reduction totaling $8 billion over 10 years.

On March 23, 2013, the Senate agreed to a budget resolution by a vote of 50-49. The resolution provided a deficit of $693 billion, or approximately 4.2% of GDP in FY2014. By FY2023, the deficit is projected to fall to $566 billion or 2.7% of GDP. The budget resolution proposes revising the BCA’s statutory caps on discretionary spending and replacing the automatic spending reductions with other deficit reduction, including some reductions to the current BCA caps. The budget resolution contains reconciliation instructions to the Senate Finance Committee to increase revenues by $975 billion between FY2013 and FY2023.

On October 1, 2013, the federal government experienced a funding gap and partial shutdown, which ended on October 17, 2013. As part of the negotiations related to the passage of the Continuing Appropriations Act, the House and Senate agreed to go to conference on the FY2014 budget resolution.

CBO, GAO, and the Administration agree that the current mix of federal fiscal policies is unsustainable in the long term. Under their projections, putting the federal budget on a sustainable long-term path requires an agreement on additional deficit reduction, which may include increases in revenues or changes to large spending programs or both. This report will be updated as events warrant.

Date of Report: November 6, 2013
Number of Pages: 25
Order Number: R43068
Price: $29.95

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