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The Standardized and Cyclically Adjusted Budgets: Updated Estimates [i] (September 2002)

handle is hein.congrec/cbo0719 and id is 1 raw text is: The Standardized and Cyclically Adjusted Budgets: Updated Estimates In August 2002, the Congressional Budget Office (CBO) released its updated baseline projections of federal revenues, outlays, surpluses, and deficits for the next 10 years.0 Those projections show that the federal budget has gone from a surplus of $236 billion in 2000 to a deficit of about $157 billion in 2002 and that, if current policies continue, it is likely to show a deficit of $145 billion in 2003. The size of the budget surplus or deficit reflects temporary factors, such as the effects of the business cycle or of one- time shifts in the timing of federal spending and tax receipts, as well as the longer lasting impact of legislation, such as the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and the Job Creation and Worker Assistance Act of 2002 (JCWAA). To help separate out those factors, this report presents updated estimates of two adjusted budget measures. Those measures are the cyclically adjusted surplus or deficit (which filters out the effects of the business cycle) and the standardized- budget surplus or deficit (which removes the effects of the business cycle and other factors). By those measures, roughly one-third of the projected decline in the total surplus between 2000 and 2003 results from automatic stabilizers--the automatic response of the budget to the business cycle. Most of the remaining two-thirds is attributable to legislative action: primarily EGTRRA, JCWAA, and increases in discretionary spending (including emergency appropriations enacted in response to the terrorist attacks of September 11). The largest increase in the deficit during that period occurs in 2002. Legislation accounts for roughly half of that increase, and automatic stabilizers for about one-quarter. The rest results from a variety of factors, including unusually large tax refunds this year (stemming from overpayment of estimated and withheld taxes in 2001) and, most likely, weakness in tax payments on capital gains realizations. The year-to-year changes in the standardized and cyclically adjusted budgets suggest that fiscal stimulus (a reduction in government saving that increases total demand) during the recent recession was unusual in both its magnitude and timing. During some past periods of recession, by contrast, the passage of stimulative measures was delayed, resulting in fiscal restraint during the recession and stimulus that began only after the recovery was under way. Why Adjust Measures of the Total Surplus or Deficit? Despite some limitations, both conceptual and empirical, budget measures that separate out cyclical and other temporary factors are useful in a number of ways. For example, some analysts use those measures to determine whether fiscal policy is providing stimulus to short-term growth. Others use them to discern underlying trends in government saving. More generally, those measures provide an estimate of the extent to which changes in the budget are caused by normal movements of the business cycle and thus are likely to prove temporary. Drops in revenues and increases in outlays occur automatically during a cyclical downturn and then correct themselves in a cyclical upturn. Those changes are called automatic stabilizers because they help even out cyclical swings in the overall level of demand for goods and services, adding to demand during recessions and reducing it during booms. The cyclically adjusted surplus or de fcit shows the underlying

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