Associate Director for Economic Analysis Jeffrey R. Kling's presentation to the National Lieutenant Governors Association

1. The Federal Budget Outlook and
Aid to States
Presentation to the National Lieutenant Governors Association
Jeffrey R. Kling
Associate Director for Economic Analysis
March 21, 2012
CONGRESSIONAL BUDGET OFFICE 1

2. Deficits or Surpluses, 1972 to 2011
(Percentage of GDP)
4
2
0
-2
-4
Deficit for 2011:
-6 8.7% of GDP
-8
-10
-12
1972 1977 1982 1987 1992 1997 2002 2007
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3. What Policy Assumptions Underlie the Baseline and the
Alternative Fiscal Scenario?
Baseline Projections: Generally, current law.
Alternative Fiscal Scenario:
- All expiring tax provisions (other than the payroll tax reduction) are
extended.
- The alternative minimum tax (AMT) is indexed for inflation after 2011.
- Medicare’s payment rates for physicians’ services are held constant at
current level.
- The automatic spending reductions required by the Budget Control
Act do not take effect (although the original caps on discretionary
appropriations remain in place).
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4. Deficits or Surpluses, Actual and Projected
(Percentage of GDP)
4
Actual Projected
2
0
-2
CBO's Baseline
Projection
-4
-6
Alternative
-8 Fiscal Scenario
-10
-12
1972 1977 1982 1987 1992 1997 2002 2007 2012 2017 2022
Estimates from CBO’s Updated Budget Projections: Fiscal Years 2012 to 2022 (March 2012).
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5. Federal Debt Held by the Public
(Percentage of GDP)
140
Actual Projected
120
Alternative
Fiscal
100 Scenario
80
60
CBO's
Baseline
40 Projection
20
0
1940 1950 1960 1970 1980 1990 2000 2010 2020
Estimates from CBO’s Updated Budget Projections: Fiscal Years 2012 to 2022 (March 2012).
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6. Components of the Federal Budget as Shares of GDP:
1972-2011 Average and 2022 Projection Under the
Alternative Fiscal Scenario
(Percentage of GDP)
30
1972-2011 Average
25 24.3
2022 Projection Under the
21.0
Alternative Fiscal Scenario
20
17.9 18.5
15
12.8
11.4
10
7.3 7.8
5.9
5 3.7 3.0
2.2
0
Social Security and All Other Net Interest Total Outlays Total Revenues Deficit
Major Federal Programs
Health Care Programs
Estimates from CBO’s Updated Budget Projections: Fiscal Years 2012 to 2022 (March 2012).
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7. Selected Tax Expenditures Providing Support for State
and Local Governments
Percentage of GDP
Percent
2012 2015
Change
Deductibility of Property
}
Taxes on Owner-Occupied
Homes
Deductibility of
Nonbusiness State and
Local Taxes Other than on
0.6 0.8 +36%
Owner-Occupied Homes
Exclusion of Interest on
State and Local Bonds
Source: Joint Committee on Taxation. The temporarily higher exemption amounts that have limited the impact of the AMT since
2001 expired at the end of December 2011; if relief from the AMT were extended, the amounts shown here would be slightly
higher.
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8. Federal Grants-in-Aid to State and Local Governments
(Percentage of GDP)
4
Actual Projected
ARRA
3
Average, 1972-2011
2
1
0
1972 1977 1982 1987 1992 1997 2002 2007 2012 2017 2022
Note: Preliminary estimates using the framework of the National Income and Product Accounts, including grants-in-aid and
excluding most transportation spending. ARRA = American Recovery and Reinvestment Act (the source of the increase in 2009
and 2010).
8
CONGRESSIONAL BUDGET OFFICE

9. Projected Federal Spending Aiding State and Local
Governments, by Type of Aid
(Percentage of GDP)
4
Discretionary Aid Other Mandatory Aid Medicaid & CHIP
3
2
1
0
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
Note: Preliminary estimates using the framework of the National Income and Product Accounts, including grants-in-aid and capital
transfers (most transportation spending). Derived from CBO’s March 2012 baseline projections of federal expenditures. CHIP =
Children’s Health Insurance Program.
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10. Projected Spending on Medicaid and CHIP
Percentage of GDP
Percent
2012 2022 Change
}
Medicaid
Children’s Health
1.7 2.5 +47%
Insurance Program
Estimates from CBO’s Updated Budget Projections: Fiscal Years 2012 to 2022 (March 2012). Amounts do not include the state
share of spending on these programs.
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11. Projected Spending on Selected Income Security Programs
Percentage of GDP
Percent
2012 2022 Change
}
Child Nutrition
Programs
Temporary Assistance
to Needy Families
SNAP Administration 0.8 0.5 -35%
Foster Care and
Permanency
Child Support
Enforcement
Estimates from CBO’s Updated Budget Projections: Fiscal Years 2012 to 2022 (March 2012).
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12. How will the Budget Control Act (BCA) Affect Federal
Spending?
The BCA established caps on certain types of discretionary funding, called
for a process to achieve additional deficit reduction, and set up automatic
enforcement procedures. The BCA:
 Limits cuts in most Medicare benefits to 2 percent;
 Exempts many mandatory programs—including Social Security,
and Medicaid, CHIP, SNAP, child nutrition, and other income
security programs;
 Exempts most transportation programs; and
 Cuts most defense and nondefense discretionary programs—
including education, housing and others.
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13. Sequestration of Discretionary Programs in 2013
Under current law for 2013, cuts for most discretionary programs
will be achieved by automatically canceling a portion of their
budgetary resources (in an action known as sequestration) starting in
January of that year.
 Cuts will be across-the-board, proportional reductions in
budgetary resources for most discretionary programs in the
appropriations bills for 2013.
 Cuts are scheduled to occur regardless of the amount of
funding that Congress chooses to appropriate for 2013.
CBO projects that nondefense discretionary spending will be 5
percent lower in 2013 than if discretionary funding grew from 2012
amounts at the rate of inflation.
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14. Cap Reductions for Discretionary Programs from
2014 to 2021
Automatic cuts will be achieved by lowering the caps on discretionary
budget authority as specified in the Budget Control Act.
Appropriations committees and Congress will then decide how to
allocate funding within those newly reduced caps.
CBO projects that nondefense discretionary spending will be 10
percent lower in 2021 than if discretionary funding grew from 2012
amounts at the rate of inflation.
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15. Nondefense Discretionary Spending in CBO’s Baseline
Percentage of GDP
Percent
2012 2022 Change
}
Transportation
Education
Housing 4.1 2.6 -35%
Other Programs
Not Aiding States
Estimates from CBO’s Updated Budget Projections: Fiscal Years 2012 to 2022 (March 2012).
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16. Nondefense Discretionary Spending, Actual and
Projected
(Percentage of GDP)
6
Actual Projected
5
Funding Grows at
the Rate of Inflation
4
3 Lowest Level over the
1972-2011 Period: 3.2%
CBO's Baseline
2 Projection
1
0
1972 1977 1982 1987 1992 1997 2002 2007 2012 2017 2022
Estimates from CBO’s Updated Budget Projections: Fiscal Years 2012 to 2022 (March 2012).
CONGRESSIONAL BUDGET OFFICE 16