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What Is a Current-Law Economic Baseline 1 (June 2005)

handle is hein.congrec/cbo10321 and id is 1 raw text is: A series ofissue summaries from the Congressional Budget Office JUNE 2, 2005 What Is a Current-Law Economic Baseline? The Congressional Budget Office (CBO) produces fore- casts for the U.S. economy twice each year.' Unlike other forecasters, CBO is required to produce a very specific kind of forecast-called a current-law economic base- line-because CBO's forecast must be consistent with the conventions of a baseline for the federal budget. In partic- ular, CBO's economic baseline assumes that future fiscal policy will evolve on the basis of current law. The requirement that CBO's economic baseline must embody current law can explain some of the differences between CBO's and other forecasters' predictions for the economy. Comparisons between CBO's and other fore- casts may be misleading if that distinction is overlooked. Differences resulting from policy assumptions are more likely to be apparent in specific aspects of the economic baseline, such as taxable income shares, than in the aggre- gate variables, such as the overall growth of gross domes- tic product (GDP). Defining a Current-Law Economic Baseline CBO's current-law economic baseline represents CBO's best estimate of the path of the economy over a 10-year horizon based on the assumption that current legislation determining policy remains the same. Specifically, CBO refers to the first two years of the baseline as its economic forecast, as distinct from the subsequent eight years of economic projection. CBO is required to use certain rules to interpret current law over that horizon and then to as- sess the implications of current law for the economic forecast and projection. For much federal spending-including the major expen- ditures for Social Security, Medicare, and Medicaid-the 10-year projection is based on the laws governing eligibil- ity and benefits. Similarly, revenues reflect the tax code. 1. CBO's most recent forecast was published in Congressional Bud- get Office, The Budget and Economic Outlook: Fiscal Years 2006 to 2015 (January 2005). The way in which CBO translates that framework into 10-year paths for those budget outlays and for its revenue projections is governed by section 257 of the Balanced Budget and Emergency Deficit Control Act of 1985 (1985 Act) and by some conventions (see Table 1). A significant share of federal spending, however, is gov- erned by annual appropriations; thus, strictly speaking, the provisions of current law can be projected only for that year. Procedures for projecting expenditures beyond the one-year horizon of the current appropriation also are specified in section 257 of the 1985 Act.2 Current law is not the same as current policy. Indeed, some laws specify changes in policy over time. Current law, for example, implies that certain key tax rates will change over time.3 How Do Fiscal Policy Assumptions Affect CBO's Economic Outlook? In addition to making a budget baseline interpretation of current law, CBO also assesses the implications of current law for economic variables such as output, prices, wages, profits, and interest rates. CBO's treatment of the eco- nomic impact of policy over the first two years, in its forecast, differs conceptually and analytically from that over the remaining eight years, in its projection. Fiscal Policy Effects over the Short-Term Horizon Over the initial two years of the horizon, CBO allows the path of economic output to differ from the economy's underlying potential. Hence, assumptions about fiscal policy may affect the level of economic activity by boost- ing or restraining aggregate demand. The actual impact of current fiscal policy on the economy will depend on 2. 2 U.S.C. § 907. 3. Further details on how CBO assembles its current-law baseline are explained every year in The Budget andEconoric Outlook.

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