The President's FY 2017 Budget Series

CBO Estimates Economic Effects of the President's Final Budget

In addition to producing its own estimate of the budgetary effects of the President's budget, CBO typically estimates the economic effects of the budget as well, in essence producing a dynamic score of the President's proposals. This year's Macroeconomic Analysis of the President's Budget draws a similar conclusion as the previous few: the labor supply effect of immigration reform increases the size of the economy somewhat while other factors on net slightly reduce it, leaving higher Gross National Product (GNP) overall but lower GNP per capita. Overall, the budget would increase real GNP per 1 percent on average over the next ten years (and by about 2.5 percent in the last year), but GNP per capita would be about 0.7 percent lower over the same time period. Dynamic effects not already accounted for would increase deficits by $32 billion over ten years.

It's worth noting that CBO's previous estimate of the President's budget already incorporated the effect of immigration reform on labor supply (from increased population) into its numbers, finding $101 billion of deficit reduction over ten years as a result. The economic analysis incorporates more indirect effects of the increased labor supply, specifically that the larger labor force would increase the return to capital, which in turn would increase productivity by 0.7 percent in 2026. The increased return to capital would, however, also raise interest rates on federal debt.

Other factors would hurt economic growth. In particular, the budget's net tax increases, which are larger than in years past, would raise marginal tax rates by around 3 percent on labor income and around 3.5 percent on capital income when the increases are fully phased in. CBO also finds that the budget's investments would reduce economic growth in the short term, particularly since the increased higher education spending would encourage people to drop out of the labor force and attend school. Most of the investments' effects on productivity would occur beyond the ten-year window.

Breaking Down CBO's Analysis of the President's Budget

The Congressional Budget Office (CBO) released its own estimate of the FY 2017 President's budget yesterday, a document that includes a 16-page report and several supplemental analyses. Our report on CBO's analysis breaks down the key budgetary takeaways, namely that while the budget does include substantive deficit reduction, it does not do enough to bring debt down as a share of GDP.

CBO Releases Its Own Take on the President's Budget

The Congressional Budget Office (CBO) today released its analysis of the Fiscal Year 2017 President's budget, finding that under the President's policies, the debt would rise slightly from today's post-World War II record-high 75 percent of Gross Domestic Product (GDP) to 77.4 percent by 2026. This is a significant improvement from CBO's current law baseline, which projects debt will rise to nearly 86 percent of GDP, but is worse than the Office of Management and Budget's (OMB) estimate that the President's budget would stabilize the debt at about 75 percent of GDP. Regardless which numbers are correct, it is clear the budget does too little to put the debt on a sustainable downward path.

CBO's projection of rising debt under the President's budget is driven by annual deficits, which would decline over the next two years but then rise nearly continuously thereafter. Under the President's budget, CBO estimates deficits would fall from 2.9 percent of GDP ($529 billion) in 2016 to 1.9 percent ($383 billion) by 2018 before rising to 2.7 percent of GDP ($585 billion) by 2020 and 3.5 percent of GDP ($972 billion) by 2026. Trillion-dollar deficits would likely return by 2027.

Viewing the President's Budget Through a CBO Lens

The President’s Budget relies on assumptions from the Office of Management and Budget (OMB), but we estimate that when it is estimated by the Congressional Budget Office (CBO), debt would be slightly lower but on a more upward path.

CBO typically weighs in on the budget using their own budget projections and estimates of the President's policies. Sometimes these estimates vary wildly if the budget uses a lot of magic asterisks or very favorable economic assumptions, but CBO and OMB have generally been close in recent years. We predict that they will be similarly close this year.

To construct the estimate, we used CBO's January budget projections and OMB's estimates of the cost of all the budget's policies, only adjusting the policy estimates for the different baselines CBO and OMB use to calculate the sequester. OMB's estimate of the President's budget shows debt jumping from 74 percent of GDP in 2015 to 76.5 percent in 2016 before falling slightly to 75 percent and stabilizing at that level in the last few years.

Our estimate of what CBO would say shows debt jumping to only 75.6 percent in 2016, then falling to a low of 73.7 percent in 2021 before rising slightly to 74.5 percent by 2026. These different paths reflect the difference in CBO's and OMB's baselines: OMB projects higher debt in the near term but CBO projects a less favorable path of debt in later years.

Why the President's Last Budget Will Matter

With the release of the President's FY 2017 budget, it is common for reporters and observers to say that the budget is dead on arrival on Capitol Hill or ultimately won't matter. The sentiment is understandable considering that Republicans control Congress, and there is little prospect for major legislation this year, but it misses the mark a bit. There are a few different ways that the President's budget can still be relevant even if they are less high-profile than Congress agreeing to pass major parts of the President's agenda.

For one, President's budgets are relevant each fiscal year in appropriations negotiations. Especially in recent years, when the government has been funded in one fell swoop in omnibus bills, the budget serves as a starting point for appropriators who have to consider many issues at the same time and can fall back on budgets that agencies across the government have developed over many months. This will definitely be the case this year, since the budget does not change the spending caps that will be in effect for FY 2017, so appropriators will likely be working off the same overall funding levels the President used.

But even mandatory spending and tax policy changes can be adopted under circumstances that would not seem politically favorable to them. For example, many policies proposed by former President George W. Bush in his final budget (FY 2009) were adopted by lawmakers even though they were for the most part enacted during the Democratic-controlled 111th Congress. Specifically, they used many of President Bush's health care savings policies to offset the cost of the Affordable Care Act. And among policies that have not been enacted, there are still others that continue to show up in President Obama's current budget.

The list below shows policies in President Bush's FY 2009 budget that were subsequently enacted or proposed by President Obama in the FY 2017 budget (this includes partial policies or ones that are very similar in concept). Both the legislation they were included in and the budgetary effect originally estimated in the FY 2009 budget (where available) are in parentheses. Note that this does not include extensions of temporary policies, which would include things like the 2001/2003 tax cuts and several tax extenders.

What's New in the President's FY 2017 Budget

The final budget of the Obama Presidency continues a mix of long-standing policies (including a few that have been in all eight budgets) and policies that are finding their way into the budget for the first time. With regards to new policies, some were previewed during the State of the Union address last month, while others have been laid out in the weeks since then. Here's a rundown of some of the major new proposals in the President's budget.

Business Tax Reform

In his past three budgets, President Obama had proposed a revenue-neutral reserve fund for business tax reform, which included several corporate tax changes amounting to a net tax increase that would offset a reduction in the corporate tax rate to 28 percent. This year, the President has largely maintained the policies that were included in the reserve fund but is now dedicating the $549 billion of revenue to deficit reduction to pay for the business tax cuts in last year's tax deal.

Clean Transportation Investments

The President's budget includes several proposals to tackle climate change, the most ambitious being a $312 billion over ten years clean transportation investment plan. The proposal includes $200 billion for transportation projects including subways, buses, rail, and the TIGER grant program (part of this funding reflects a previous budget proposal to increase surface transportation spending by $116 billion). Another $100 billion would go to state and local governments for clean infrastructure projects. Finally, $20 billion would go to clean transportation research for things like self-driving cars, electric vehicle charging stations, and clean energy airplanes. These policies would be paid for with another new policy in the President's budget: a $10.25 per barrel oil tax. This tax comes on top of a pre-existing policy to reinstate Superfund taxes, which include a 9.7 cent per barrel oil tax.

Medicare Advantage Competitive Bidding

CRFB Publishes Paper on President's FY 2017 Budget

President Obama released his final budget proposal yesterday, and we released a short paper that analyzes its major policy proposals. This budget would stabilize the debt and use increased tax revenue to pay for new proposals, retroactively pay for December's costly tax extenders package, and deficit reduction. As we explain:

The President's budget should be commended for not only responsibly paying for new initiatives, but identifying significant deficit reduction to stabilize the debt.  Preventing the debt from growing faster than the economy is an important first step to achieving sustainable fiscal policy.

Unfortunately, the President's budget does not go far enough in terms of actually reducing the debt from its current record-high levels, nor does it sufficiently address the long-term growth of entitlement spending, particularly Social Security.

As CRFB President Maya MacGuineas noted in a statement, "This budget is neither fiscally aspirational nor irresponsible."

Read the full paper here

Five Takeaways from the President's Final Budget

Moments ago, President Obama released the final budget of his presidency. In the coming hours, days, and weeks, CRFB will be publishing analysis of the Fiscal Year (FY) 2017 budget. Below, we start with five quick takeaways. Based on our first look, the President's budget includes:

1. A Stable Debt, But at Record High Levels

Under the President's budget, debt held by the public will grow from almost $13.7 trillion today to $21.3 trillion by the end of 2026. Yet as a share of the economy – the measure generally preferred by economists – debt under the President's budget is projected to remain relatively stable at about 75 percent of Gross Domestic Product (GDP). Stabilizing the debt is an important first step to putting it on a sustainable path and is certainly an improvement over current law, under which (according to the Office of Management and Budget's adjusted baseline) debt will rise to just under 88 percent of GDP. Yet even under the President's budget, debt would remain the highest it has been in American history other than around World War II at nearly twice the historic average over the past 50 years.

Preview of the President's Budget

The President has released a preview of the spending priorities in his FY17 budget, most of which are new although some were proposed in previous years. We collected a list of all the items in the preview, as well as other materials that the President released last week. Stay tuned to our blog for updates on the President’s Budget once it’s released tomorrow at 11 a.m.  

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