A Short Primer on the Congressional Budget Office
With the House and Senate recently undergoing oversight hearings of the Congressional Budget Office (CBO), it's helpful to remember what CBO is and how exactly it came about. This blog seeks to explain a few basic questions about CBO, its origin, why it's a vital part of the budget process, and how it goes about scoring legislation and forecasting budget and economic outcomes.
- What is CBO?
- Why is CBO important?
- What is the CBO Baseline and how is it constructed?
- How does CBO estimate the cost of legislation?
- What role does CBO play in the budget process?
- Does CBO score tax legislation?
- How does CBO score health care legislation?
- Can everyone access CBO's models and data used to come up with the estimates and the baseline?
- Where can I find CBO's budget reports and cost estimates?
The Congressional Budget Office was established by the 1974 Budget Act to serve as a nonpartisan scorekeeper that estimates the effects of legislation on the federal budget. Prior to its creation, Congress had to rely on the White House's Office of Management and Budget (OMB) for fiscal analysis of its proposals; by creating CBO, Congress could have its own neutral arbiter of the President's proposals as well as their own.
Though CBO technically answers to the budget committees, it is effectively an independent legislative agency. Its primary role is to issue projections of federal spending, revenue, deficits, and debt and then use this "baseline" as a neutral benchmark to score the budgetary implications of legislative proposals. In addition to issuing baselines and official cost estimates of legislation, CBO also provides technical assistance to legislators and budget writers, publishes detailed economic and program-by-program budgetary projections, re-estimates the President's budget using their own models and assumptions, reports on the nation's long-term fiscal outlook, regularly offers options to reduce the deficit and adjust various tax and spending program, and issues numerous reports on a variety of economic and budgetary topics.
CBO does not offer any explicit policy recommendations, nor do they endorse or oppose any legislative proposals.
During the legislative process, CBO plays the vital role as the neutral scorekeeper. Just as baseball players don't call their own balls and strikes, CBO ensures that policymakers are all negotiating from a common set of facts and numbers – not each using their own estimates.
CBO's estimates are generated by a highly regarded team of economists and analysts using some of the most sophisticated models in the world. And perhaps most importantly, CBO is a truly nonpartisan institution whose estimates and scores are viewed as unbiased and objective.
CBO's unbiased and thorough modeling allows Congress to exercise its power of the purse without relying on the executive branch's estimates and assistance (or lack thereof). CBO also provides a vital role in enforcement as its scores and estimates are used to ensure Members of Congress don't violate various budgetary rules meant to curb increases in the deficit.
What is the CBO Baseline and how is it constructed?
Several times per year, CBO issues a "budget baseline" that projects taxes and spending over a ten-year period. CBO's baseline is not meant to be a prediction of what will happen but rather is meant provide a neutral benchmark against which to measure the effects of future legislation.
The CBO baseline is generally based on current law, meaning it projects what would happen if all revenue and outlays occur based only on laws currently in place – regardless of what is likely to happen or what Congress may intend to do. However, CBO's current law concept sometimes deviates from a strict interpretation of current law – for example, the baseline effectively assumes Congress will extend annual appropriations bills (and grow them with inflation) year after year, continue certain temporary spending authorizations, allow most programs facing trust fund exhaustion to continue spending when resources are exhausted, and regularly increase the debt limit.
For the most part, the baseline is built from the bottom up – CBO constructs ten-year forecasts for nearly every spending programs and every part of the tax code. These projections are based on current and historic spending and predictions of future changes in prices, costs, eligibility, composition, behavioral responses, and other factors – as well as any changes in laws or regulations that may occur over time.
All budgetary projections are made in part based on CBO's economic forecasts, which analyze short-term and long-term trends in employment, prices, wages, interest rates, consumption, investment, income, labor, capital, productivity, and other factors. In the first five years of its forecast, CBO's economic assumptions combine projected changes in economic potential with predictions over the course of the business cycle; in the second five years, it assumes a steady business cycle rather than trying to project booms and busts. CBO's economic assumptions also incorporate possible policy feedback resulting from various current-law policies incorporated in its baseline.
How does CBO estimate the cost of legislation?
Generally, CBO "scores" the cost of legislation by estimating the effect it might have on revenue and spending relative to the CBO baseline. For example, if a program was projected to cost $100 billion over ten years under CBO's baseline and would cost $90 billion under new legislation, that legislation would be scored as saving $10 billion. CBO staff employ a number of different models to help them make cost estimates and attempt to collect the best data and research available to help design those models and determine possible inputs.
CBO scores are inherently uncertain but are designed to represent the central estimate among a range of possible outcomes. Estimates also aim to measure the complete impact of legislation on the federal budget; this includes any interactions a change might have with other parts of the budget or tax code and the fiscal impact of any changes the proposal may cause to individual, business, or state and local government behavior.
Because CBO scores account for behavioral changes, they are not purely "static" in nature. However, conventional CBO scores focus on "microdynamic" effects of individual behavior and do not account for the possible impact of legislation on the macro-economy (for example, on unemployment or gross domestic product). Increasingly, though, CBO has begun to provide macrodynamic scores – which account for changes to the economy and the effects of those changes on the budget – when possible.
What role does CBO play in the budget process?
When it comes to the development of congressional budget resolutions, CBO generally plays an advisory role – supplying the budget committees with estimates that can be used to help construct their budget. When it comes to the President's budget, CBO generally provides a re-estimate based on their own scores and assumptions. When possible, CBO also conducts and publishes a macroeconomic analysis of the President's budget, which features an estimate of how full enactment of the President's policy proposals would impact the greater economy.
Outside of budget resolutions, CBO is also charged with providing Congress with an estimate of the budgetary effects of appropriations legislation. Although appropriations bills are not "scored" in the traditional sense – appropriations do not follow the same rules as legislation that changes tax or spending policies – CBO estimates the outlay effects of budget authority assigned by appropriations bills. CBO also advises Congress on sequestration, though the agency is not tasked with enforcing it.
Does CBO score tax legislation?
Though CBO makes revenue projections, generally they rely on the Joint Committee on Taxation (JCT) to estimate the effect of specific revenue bills. JCT's estimates are then incorporated into CBO's overall scores. When legislation includes both tax and spending components, as is often the case, CBO and JCT may work together to develop a score. Importantly, all of JCT's tax legislation estimates are based on CBO's revenue baseline, so the two agencies are both vital to the process of estimating tax legislation.
How does CBO score health care legislation?
CBO's process for scoring health care legislation is similar to how it evaluates other pieces of legislation, but with the addition of simulating health insurance coverage. Health care is a particularly difficult issue to model; how many people are covered, the cost of premiums, and behavioral decisions regarding how people choose to get coverage all greatly affect government spending and revenues, and they all interact with one another. Like all other cost estimates, health care scores represent the central point estimate of a wide range of estimates.
Because the budgetary effects of the Affordable Care Act (ACA or "Obamacare") and subsequent legislative proposals to change it and/or repeal it differ greatly depending on how they affect insurance coverage, CBO developed its health coverage model over several years to try to estimate how many individuals under 65 (the Medicare eligibility age) would get coverage under Medicaid, using premium subsidies, or through employer-sponsored insurance, and how many would remain uninsured. Each of these factors contributes either directly to federal expenditures (in the case of Medicaid and premium subsidies), revenues (in the case of premium subsidies and employ-sponsored insurance), and in premium changes based on the overall risk pool and regulations underlying insurance coverage.
Can everyone access CBO's models and data used to come up with estimates and the baseline?
CBO generally does not publish its models, but CBO Director Keith Hall has said the agency is looking into publishing various computer models to help promote greater transparency. Some of the data used in cost estimates and baseline construction is sensitive and too confidential too be released widely, but CBO does release as much data as possible to help outside groups and the public to better understand where its estimates come from. For instance, with each baseline update, CBO publishes spreadsheets of its underlying spending, revenue, economic, and overall budget numbers. CBO also publishes the underlying data for figures in many of its reports and cost estimates as well.
Where can I find CBO's budget reports and cost estimates?
Each cost estimate is posted on CBO's website, typically after a committee has approved it or if it is under consideration by Congress in accordance with rules that require a score. Cost estimates are available here. CBO also publishes many of its past and current recurring reports – including its budget and economic outlook, its analysis of the President's budget, and long-term outlook – in reverse chronological order. These recurring reports can be found here.
Additionally, CRFB publishes regular analyses that break down CBO's reports and cost estimates in easier-to-digest formats. CRFB's regular breakdowns of CBO's reports can be found here. Many of CRFB's analyses of cost estimates can be found here, and others will be available via CRFB's blog The Bottom Line as they are published.
As CBO oversight hearings continue and Congress evaluates the budget process, it is important to keep in mind the invaluable work that this nonpartisan institution delivers every day.
For more information on CBO, you can read the following products they've recently published: