Baseline 101: Anticipating CBO's Updated Budget Outlook

The Congressional Budget Office (CBO) will release its 2018 Budget and Economic Outlook on April 9, which is likely to project sustained trillion-dollar deficits and rapidly-rising debt levels. The report will update CBO's "baseline" and explain the agency's ten-year projection of federal taxes, spending, deficits, debt, and economic activity under current law.

CBO's baseline is an important tool for policymakers, which we explain in more detail below. For a more general understanding of what CBO does, check out our short primer.

• What is the CBO baseline?
• What information does CBO's baseline present?
• How is the baseline constructed?
• Why is it called a baseline?
• Where does CBO get its projections from? How often is it right?
• Why does the CBO baseline only measure current law?
• What should we look for in this baseline?
• Where can I read more?

What is the CBO baseline?

Several times per year, CBO issues a "budget baseline" that projects revenue, spending, deficits, and debt – at a detailed account-by-account and source-by-source level – over a ten-year period. The baseline is not meant to be a prediction of what will happen, but rather is meant to 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 based only on laws currently in place – regardless of 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 generally assumes Congress will extend annual appropriations bills (and grow them with inflation) year after year, continue certain temporary spending programs, allow most programs facing trust fund exhaustion to continue spending when resources are exhausted, and regularly increase the debt limit.

What information does CBO's baseline present?

CBO's baseline contains two key elements: budget projections and economic projections. The budget portion shows how much will be spent by each federal program, with a particular emphasis on major programs that are not appropriated annually (mandatory programs). CBO also projects the amount of revenue that will be brought in by taxes, tariffs, fees, and other sources.

On the economic side, CBO mainly projects how the economy will likely change based on current conditions. The agency estimates several economic measures such as Gross Domestic Product (GDP), unemployment, various inflation measures, and interest rates on U.S. Treasury notes. Many of these measures are key to making budget projections.

The baseline includes the effects on both the budget and the economy of all legislation and certain administrative actions since the last baseline (last published in June 2017).

How is the baseline constructed?

For the most part, the baseline is built from the bottom up – CBO constructs ten-year forecasts for nearly every spending program 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. CBO receives its revenue estimates from the Joint Committee on Taxation (JCT).

All budgetary projections are 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 economic forecast, CBO includes the effects of the business cycle on top of longer-term economic potential. Over the second five years and beyond, CBO assumes a steady business cycle rather than trying to project booms and busts.

Why is it called a baseline?

While CBO's projections do provide important insights on the direction of policy, they are also an integral part of the policymaking process. CBO's baseline serves as a benchmark against which all legislative proposals are measured. In estimating the effect of a tax or spending change – or a regulatory change with fiscal impacts – CBO will compare its projections of spending and revenue under the proposal to its "baseline" projections. Legislation that results in higher deficits than those under CBO's baseline is scored as "costing" money, while legislation resulting in lower deficits is scored as saving money. Generally, legislation is scored off of CBO's March baseline (April baseline this year) – though throughout the year CBO makes certain adjustments for legislative and regulatory changes.

Where does CBO get its projections from? How often is it right?

CBO's forecasts are based on public, private, and administrative data run through sophisticated models that incorporate historical experience and predicted future outcomes, incorporating any scheduled changes in law and any scheduled or predicted changes in regulations, economic conditions, individual and business behavior, and policy adjustments by local, state, and national governments (other than the federal government). They also require careful judgements of how particular programs or tax measures will be utilized. These forecasts are built in consultation with experts representing a wide variety of perspectives.

CBO's projections are not meant to be predictions, and rarely do outcomes exactly match the forecasts. Rather, CBO's projections are intended to represent the middle of an extremely broad range of possible outcomes. No matter how good the data or models, no agency has a crystal ball to allow for a perfect understanding of the future.

That being said, CBO's record shows that its projections tend to be more accurate than other forecasters – particularly when controlling for the fact that CBO's projections must assume no changes at the federal level. The agency releases regular reports reviewing how its projections compared to outcomes, including explanations when differences are substantial. A few of those reports are listed in the additional readings below.

Why does the CBO baseline only measure current law?

The Balanced Budget and Emergency Deficit Control Act of 1985, the Budget Enforcement Act of 1990, and the Budget Control Act of 2011 all require CBO to construct its baseline based on current law – even if lawmakers are unlikely to stick with current law.

The use of current law is important for at least two reasons. First, it allows CBO to accurately measure the marginal impact of new legislation. And second, it allows CBO to remain neutral in its view of what future policy should look like – CBO does not make policy recommendations nor try to predict the future.

While the CBO baseline relies on current law, it does often present one or multiple alternative scenarios to help the public and policymakers better understand future likely outcomes. For example, CBO's coming report may include an alternative scenario that assumes various expiring tax cuts are continued and the recent budget deal is extended.

What should we look for in this baseline?

The national debt is at a post-war record high and rising unsustainably. This has only been made worse by the recent tax and spending bills enacted by Congress, which CBO and JCT have estimated would add at least $1.8 trillion to the debt combined. We have published our estimates of what we think CBO is likely to say: trillion-dollar deficits will return next year, debt will be on a path to exceed the size of the economy within the decade, and the federal government will be spending nearly $1 trillion on interest. Congress will have added more than $2 trillion to the debt since CBO's last baseline, and the baseline may even highlight an alternative scenario that could spell debt increases of an additional $3.5 trillion over the decade if various policies are extended.

Another theme we'll be looking for is CBO's analysis of the economic effects of the tax bill. JCT has already estimated that the tax bill will increase GDP by 0.8 to 0.9 percent throughout most of the ten-year window, with the effect diminishing to 0.1 to 0.2 percent by the end of the decade after most of the individual tax cuts expire. This baseline will represent CBO's first accounting of the tax bill's macroeconomic effects (implicit in its economic forecast).

Where Can I Read More?

• Congressional Budget Office – How CBO Prepares Baseline Budget Projections
• Congressional Budget Office – How CBO Produces Its 10-Year Economic Forecast
• Congressional Budget Office – CBO’s Economic Forecasting Record: 2017 Update
• Congressional Budget Office – An Evaluation of CBO's Past Outlay Projections
• Committee for a Responsible Federal Budget – Updating the U.S. Budget Outlook (our estimates of what CBO will say)
• Committee for a Responsible Federal Budget – A Short Primer on the Congressional Budget Office

***

The CBO baseline is an important tool for policymakers to use to measure the effects of proposed legislation. We hope lawmakers will pay special attention to the seriousness of the fiscal situation that CBO's baseline is likely to lay out.