Is the 2014 Budget Meeting Expectations?
The Congressional Budget Office (CBO) is set to update its budget and economic projections tomorrow, laying out the fiscal picture for the next ten years. We already know that the FY 2014 deficit is likely to be around $500 billion, close to where CBO had it in their last budget forecast in April. With ten months having been completed in the fiscal year, we can see how the actual data compares to their April forecast by seeing how growth in various programs and revenue sources has come in compared to CBO's expectations. While this exercise won't necessarily show the full picture of what will happen to CBO's outlook for the next ten years, it could illustrate areas where current year data may lead CBO to revise their estimates.
Overall, both spending and revenue through the first ten months of the fiscal year have grown slower than CBO expected. Revenue has fallen shorter of expectations than spending though, meaning that if these growth rates held up through the end of the year, the 2014 deficit would be about $15 billion higher than CBO predicted. Below the table, we look in depth at a few of the specific categories of spending and revenue that so far have differed from CBO's forecast.
|Projections vs. Actual Totals in FY 2014|
|Full-Year Projected Growth||Ten-Month Actual Growth||Percentage Difference||Annualized Difference|
|Individual Income Taxes||+5.0%||+4.9%||-0.1%||-$1 billion|
|Social Insurance Taxes||+9.0%||+9.0%||0%||$0 billion|
|Corporate Income Taxes||+28.5%||+14.6%||-13.9%||-$40 billion|
|Other Revenue||+11.6%||+13.6%||+2.0%||+$5 billion|
|Total Revenue||+9.2%||+7.9%||-1.3%||-$35 billion|
|Net Interest||+2.9%||+5.0%||+2.1%||+$5 billion|
|Social Security||+4.6%||+4.7%||+0.1%||+$1 billion|
|Unemployment Insurance||-34.0%||-33.8%||+0.2%||$0 billion|
|All Other Spending||+1.8%||+1.6%||-0.2%||-$5 billion|
|Total Spending*||+2.0%||+1.4%||-0.6%||-$20 billion|
Source: CBO, CRFB calculations
*Spending numbers adjust for timing shifts
Corporate Tax Revenue
In the last few years, revenue has been on the rise from the continuing economic recovery, legislative changes, and expiring tax provisions. Overall revenue increased from 15.2 percent of GDP to 16.7 percent between 2012 and 2013, and it is expected to reach 17.6 percent this year. However, revenue in nominal dollars through the first ten months of this year compared to the same time period last year is only up 7.9 percent, lower than the 9.3 percent growth CBO anticipated for FY 2014.
The main culprit is corporate taxes, where growth has only been about half as much as CBO thought -- 14.6 percent actual growth versus 28.5 percent projected. That this source was expected to increase significantly is no surprise with the expiration of the tax extenders -- much of which went to businesses -- but clearly growth has not met the jump CBO expected. If this growth rate held up for the rest of the year, corporate revenue would come in nearly $40 billion lower than CBO thought. This data plus the wave of inversions that have been attempted or completed in recent months may lead CBO to lower their estimates of corporate receipts.
We have closely documented the extraordinarily slow growth of Medicare spending, which is only in part due to temporary or phased-in cuts from legislation. Growth so far this year has only been 1.6 percent compared to a CBO projected rate of 4.2 percent, a difference that for the full year would represent almost $15 billion. However, spending growth has been picking up in the last few months, so this difference may narrow by the end of the year. If CBO expects the slower growth to hold up, it could lead to downward revisions in future years if the agency sees the difference as part of a longer-term trend, adding to the $900 billion revision CBO has made to federal health care spending since 2011. Notably, this slower-than-expected growth has not also translated to Medicaid, where CBO's projections have been incredibly accurate.
Discretionary spending usually isn't a big source of revisions in budget forecasts unless there is legislation involved. With caps on appropriated spending through 2021, changes in economic variables don't have much effect on this category of spending since the maximum budget authority lawmakers can appropriate in these years is set by law. Thus, the major source of revisions come from how fast agencies actually spend out the money they are appropriated. This variable may explain defense spending's slightly lower-than-expected spending, with outlays declining by 5.8 percent this year versus the 4.8 percent decline expected, a difference of $5 billion. This difference may be related to the Afghanistan drawdown plan announced in May or other reasons. It is also quite possible that the difference will disappear since agencies tend to ramp up spending near the end of the fiscal year.
These 2014 trends are not necessarily set in stone since outlays and revenue can flow asymmetrically throughout the year, but it gives us an idea of where some of CBO's revisions may come from. Of course, this analysis does not take into account potential methodological changes for projecting future years or changes in economic projections, which can affect a wide variety of programs and revenue streams. But we will see soon enough where CBO sees the budget going over the next decade.