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![handle is hein.taxfoundation/iretcgadv0068 and id is 1 raw text is: z
July 22, 1998 No. 71
ARE CBO BUDGET PROJECTIONS
STILL UNDERSTATED?
Confronted with a torrent of tax dollars, the
Congressional Budget Office (CBO) has revised its
surplus projections upward
several times in 1998. In
January, the CBO had f the CBOpr
projected a $5 billion deficit growth wo
for 1998 but surpluses of nominal GDP
$127 billion for 1998-2003 and 2003 sirp
$655 billion for 1998-2008. In $167 billion
March, the CBO changed its $ .. ..
1998 forecast to an $8 billion c t
surplus but added only $11 2008 s rp
billion to projected surpluses $570 billion g
for all subsequent years. In 11-year total
May, as tax revenues than $2.1 trill
continued to pour into
Washington, the CBO upped
its 1998 forecast to a $43-$63 billion surplus, raised
its 1999 forecast to a $30-$40 billion surplus, but
said it expected the changes for years beyond then
to be smaller amounts. In its July budget update,
the CBO projects a $63 billion surplus for 1998, an
$80 billion surplus for 1999, a $583 billion surplus
for 1998-2003, and a $1,611 billion surplus for
1998-2008. These are enormous numbers, but they
may still be too low.
For several years, federal revenues have
climbed substantially more rapidly than nominal
gross domestic product (GDP). Between fiscal
years 1995 and 1998, for example, nominal GDP
oiecte
luts
gr-ea
ects
luts
ireatei
[sio r
ion.
growth averaged 5.3% annually while revenue
growth topped that by 3 percentage points yearly,
averaging 8.3% annually; for fiscal year 1998 alone,
nominal GDP is expected to increase 5.2% while
revenues jump 8.7%. The CBO's projections,
however, assume that this pattern is suddenly about
to reverse itself. According to the CBO, revenues
will increase only slightly more rapidly than
nominal GDP in 1999, considerably more slowly
than nominal GDP in fiscal years 2000, 2001, 2002,
and 2003, and generally no faster than nominal GDP
in subsequent years.
If the CBO had projected that revenue growth
would merely match nominal GDP growth, the
1998-2003 surplus would be $167 billion greater
than it currently projects and the 1998-2008 surplus
would be $570 billion greater,
boosting the 11-year total to
d that rvenue more than $2.1 trillion.
itth 1998- The surpluses currently
wh o 19id 9b8e being projected indicate that
it policymakers now have a
ter than i major opportunity to reform
nd the 1998- the troubled U.S. tax system in
v o i id be ways that would substantially
boosting the reduce both its inefficiencies
lus] to more and its complexity. If the
actual surpluses prove to be
_higher, the opportunity to
make positive tax changes
would be even greater. Unfortunately, unreasonably
low CBO projections may deter policymakers from
acting on this opportunity.
Another consideration for policymakers is that,
except for a brief period during World War II,
federal revenues have never commandeered a larger
share of GDP than they are now (20.5%). It is only
by postulating that revenues will suddenly grow
more slowly than GDP that the CBO can project a
reduction in the revenue-GDP ratio without the need
for a tax cut. If the historical relationship holds and
taxes are not reduced, the government will be
setting new records every year in the share of
Institute for
Research on the
Economics of
Taxation
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