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The Standardized Budget: Details of the Projections [i] (April 2001)

handle is hein.congrec/cbo0682 and id is 1 raw text is: The Standardized Budget: Details of the Projections APRIL 2001 NOTE Numbers in the tables may not add up to totals because of rounding. On January 31, 2001, the Congressional Budget Office (CBO) released The Budget and Economic Outlook: Fiscal Years 2002-2011. That document reports CBO's most recent projections of federal revenues, outlays, and surpluses over that period. Some policy analysts use an adjusted version of the budget balance known as the standardized budget surplus (or deficit), which is a measure of the budget balance that includes adjustments in order to better focus on how changes in the budget might affect the growth of the total demand for goods and services by changing government saving. That concept, known as fiscal stimulus or restraint, is usually defined as the annual change in the standardized budget measured as a percentage of potential gross domestic product (GDP). The standardized budget attempts to exclude the effect that cyclical movements in the economy may have on the budget, and CBO's current version of the standardized budget also contains other adjustments for factors such as capital gains taxes and federal interest payments to improve the measure's ability to reveal the budget's effect on total demand. The standardized budget has its lirItations, however, in measuring the federal budget's impact on the economy. The measure shows trends in federal government saving, but those trends are only one of the ways in which fiscal policy affects demand and the economy. Other important influences include fiscal policy's effects on incentives for private individuals to work and to save, but those incentives are not reflected at all in the standardized budget. Moreover, the standardized budget gives only a partial view even of the effect of the budget on total demand. Changes in private saving may partly offset changes in government saving if some people think their future tax liabilities are affected by how much the government saves. Moreover, the standardized budget reflects the budget balance as a whole and not the different components of the budget, although those different components probably affect demand in different ways: for example, a tax cut for wealthy individuals may largely be saved and thus not affect their consumption very much, while increases in spending on roads and bridges show up directly in the economy dollar for dollar. Fiscal stimulus must be used with care. Fiscal stimulus means an increase in total demand achieved through a reduction in government saving. Such a stimulus may be appropriate when the economy is not using all of its productive capacity, though many economists are skeptical of using fiscal policy as an anticyclical measure because it is much less nimble than monetary policy and risks adding to demand when a cyclical upswing is already under way. Furthermore, even if fiscal stimulus may be appropriate for a time, a fiscal policy that remains stimulative for too long may reduce the growth potential of the economy by lowering national saving. Fiscal stimulus thus can have quite different implications for growth in the short run and in the long run. Despite its limitations, the standardized budget can help in fiscal planning. By removing many temporary fluctuations in the budget surplus, it facilitates discerning budgetary trends. For that reason, some analysts, including those who advocate budgetary targets such as balancing the budget on average over the business cycle, find the standardized budget a useful way to monitor fiscal

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