The FY2011 Federal Budget

Congressional research reportAug 4, 2010

Ask Donna

What actually matters in this document.

Text

Mindy R. Levit

Analyst in Public Finance

August 4, 2010

Congressional Research Service

7-5700

www.crs.gov

R41097

CRS Report for Congress

Prepared for Members and Committees of Congress

The FY2011 Federal Budget

Summary

While considering the FY2011 budget, Congress faces very large budget deficits, rising costs of

entitlement programs, and significant spending on overseas military operations. In FY2008 and

FY2009, the enactment of financial intervention and fiscal stimulus legislation helped to bolster

the economy, though it increased the deficit. While GDP growth has returned in recent quarters,

unemployment remains elevated and government spending on “automatic stabilizer” programs,

such as unemployment insurance and income support, remains higher than historical averages.

Between FY2000 and FY2009, federal spending accounted for approximately 20% of the

economy (GDP) and federal revenues averaged 18% of GDP. In FY2009, the U.S. government

spent almost $3.5 trillion (25% of GDP) and collected $2.1 trillion in revenue (15% of GDP).

Between FY2008 and FY2009, outlays increased by $535 billion, while revenues fell by $419

billion. The deficit in FY2009 was $1,413 billion, or 9.9% of GDP, sharply higher than deficits in

recent years.

The current economic climate poses a challenge to policymakers shaping the federal budget.

Numerous actions taken by the federal government in FY2008 and FY2009 have had major

effects on the budget, including two major economic stimulus measures and a variety of programs

within the Federal Reserve, Treasury, and Federal Deposit Insurance Corporation (FDIC). The

impact of this legislation, along with any additional legislation enacted, will influence deficit

levels in FY2010 and beyond. The final costs of federal responses to this turmoil will depend on

the pace of economic recovery, how well firms with federal credit guarantees weather future

financial shocks, and government losses or gains on its asset purchases.

While many economists concur on the need for short-term fiscal stimulus despite adverse impact

on the deficit, concerns remain about the federal government’s long-term fiscal situation. Rising

costs of federal health care programs and baby boomer retirements present further challenges to

fiscal stability. Operating these programs in their current form may pass substantial economic

burdens to future generations.

The Obama Administration released its FY2011 budget on February 1, 2010. The main policy

initiatives emphasized in the President’s Budget include the creation of a fiscal commission

tasked with improving the fiscal stability over the long term, other deficit-reduction proposals,

ongoing economic recovery, and a continuation of health care reform, clean energy, and education

initiatives.

On April 22, 2010, the Senate Budget Committee reported the FY2011 budget resolution

(S.Con.Res. 60) by a vote of 12-10. The resolution provided for revenue levels of $1,838 billion

and outlays of $3,191 billion in FY2011 for a deficit of $1,260 billion, or approximately 8.4% of

GDP. On July 1, 2010, the House adopted a budget enforcement resolution (H.Res. 1493), which

established top line discretionary spending levels for FY2011 for House appropriators.

This report provides an historical overview of the budget trends through the most recently

completed fiscal year (2009). It discusses major budgetary challenges over the past several fiscal

years given the current economic conditions and provides an in-depth discussion of the FY2011

budget process. Finally, it provides context for the issues facing the country’s federal budget over

the long term. This report will be updated as events warrant.

Congressional Research Service

The FY2011 Federal Budget

Contents

Overview ....................................................................................................................................1

Budget Cycle ........................................................................................................................1

Revenues, Outlays, and Deficits for FY2009 .........................................................................2

Trends...................................................................................................................................4

Federal Spending ............................................................................................................4

Federal Revenue .............................................................................................................6

Deficits, Debt, and Interest ....................................................................................................6

Federal Deficits...............................................................................................................6

Federal Debt and Debt Limit ...........................................................................................7

Net Interest .....................................................................................................................8

Budgeting in Tough Economic Times ..........................................................................................8

Federal Response to Economic and Financial Market Turmoil...............................................8

Changing Budgetary Impact of Major Financial Interventions and Economic

Recovery Programs ......................................................................................................9

Budget Deficit Estimates for FY2010.................................................................................. 11

Healthcare Legislation .................................................................................................. 12

FY2010 Supplemental Legislation................................................................................. 12

Budget Baseline Projections ................................................................................................ 13

Budget Fiscal Year 2011...................................................................................................... 14

Obama Administration FY2011 Budget ......................................................................... 14

Congressional Consideration of the FY2011 Budget Resolution .................................... 16

Considerations for Congress...................................................................................................... 17

Short-Term Considerations.................................................................................................. 17

General Budget Issues......................................................................................................... 17

CBO Budget Documents ............................................................................................... 18

Budget Transparency..................................................................................................... 18

Budget Enforcement Measures...................................................................................... 19

Long-Term Considerations .................................................................................................. 19

Figures

Figure 1. Total Outlays and Revenues as a Percentage of GDP, FY1970-FY2010.........................3

Figure 2. Outlays by Type as a Percentage of GDP, FY1990-FY2020 ..........................................5

Contacts

Author Contact Information ...................................................................................................... 21

Acknowledgements................................................................................................................... 21

Congressional Research Service

The FY2011 Federal Budget

he federal budget is central to Congress’s ability to exercise its “power of the purse.”

Federal budget decisions express Congress’s priorities and reinforce Congress’s influence

on federal policies. Making budgetary decisions for the federal government is an

enormously complex process and requires balancing competing goals.1 Recent economic turmoil

has strained the federal budget as a result of declining revenues and increasing spending levels.

As recovery continues, the budget process will allow the President and Congress to negotiate and

refine spending plans for the nation’s fiscal priorities over the longer term.

The federal government faces very large budget deficits, rising costs of entitlement programs, and

significant spending on overseas military operations. The enactment of financial intervention and

fiscal stimulus legislation in FY2008 and FY2009 helped to bolster the economy, though it

increased the budget deficit. These federal interventions and policy responses, unprecedented in

recent decades, helped stimulate economic activity and reduced dislocation in financial markets,

but also exposed the federal government to credit risks.

While GDP growth has returned in recent quarters, unemployment remains elevated and

government spending on “automatic stabilizer” programs, such as unemployment insurance and

income support, remains higher than historical averages.2 This suggests that the recession’s

effects on the budget will likely linger for several more fiscal years.

In addition to the current challenges, concerns remain about the federal government’s long-term

fiscal situation. The rising costs of federal health care programs and the effects of the baby boom

generation’s retirement present serious challenges to future fiscal stability. Operating these

programs in their current form may pass on substantial economic burdens to future generations,

which may require significant government action and public sacrifice at levels greater than those

needed to counteract the recent economic downturn.

Overview

Budget Cycle

A single year’s budget cycle takes roughly three calendar years from initial formation by the

Office of Management and Budget (OMB) until final audit.3 The executive agencies begin the

budget process by compiling detailed budget requests in the calendar year before the President’s

budget submission. Many agencies start working on their budgets during the spring and

summer—about a year and a half before the fiscal year begins. OMB oversees the development of

these agency requests. The President, by law, must submit a budget, which is based on OMB’s

work, by the first Monday in February.4

For more information, see CRS Report 98-721, Introduction to the Federal Budget Process, by Robert Keith.

U.S. Department of Commerce, Bureau of Economic Analysis, “Gross Domestic Product: Fourth Quarter 2009

(Advanced Estimate),” press release BEA 10-02, January 29, 2010, available at http://www.bea.gov/newsreleases/

national/gdp/2010/txt/gdp4q09_adv.txt.

CRS Report 98-325, The Federal Fiscal Year, by Bill Heniff Jr.

The contents of the Presidential budget submission are governed by U.S. Code, Title 31, Sec. 1105.

Congressional Research Service

The FY2011 Federal Budget

Congress typically begins formal consideration of the budget resolution once the President

submits his budget request. The budget resolution sets out a plan, agreed to by the House and

Senate, that establishes the framework for subsequent budget legislation. Because the budget

resolution is a concurrent resolution, it is not sent to the President for approval.

House and Senate Appropriations Committees and their subcommittees typically begin reporting

discretionary spending bills after the budget resolution is agreed upon. Appropriations

Committees review agency funding requests and propose levels of budget authority (BA).

Appropriations acts passed by Congress set the amount of BA available for specific programs and

activities. Authorizing committees, which control mandatory spending, and committees with

jurisdiction over revenues also play important roles in budget decision making.

During the fiscal year, which begins on October 1, Congress and OMB oversee the execution of

the budget. Once the fiscal year ends on the following September 30, the Treasury Department

and the Government Accountability Office (GAO) begin year-end audits.

Revenues, Outlays, and Deficits for FY2009

Between FY2000 and FY2009, federal spending has accounted for approximately 20% of the

economy (as measured by gross domestic product—GDP) and federal revenues averaged 18% of

GDP. In FY2009, the U.S. government spent almost $3.5 trillion and collected $2.1 trillion in

revenue.5 Between FY2008 and FY2009, outlays increased by $535 billion while revenues fell by

$419 billion (in nominal terms), leading to the upward and downward spikes in outlays and

revenues, respectively, shown in Figure 1.

U.S. Congressional Budget Office, Historical Tables, available at http://www.cbo.gov/budget/historical.shtml.

Congressional Research Service

The FY2011 Federal Budget

Figure 1.Total Outlays and Revenues as a Percentage of GDP, FY1970-FY2010

Source: CBO, Historical Tables, available at http://www.cbo.gov/budget/historical.shtml; Budget Projections,

available at http://www.cbo.gov/budget/budproj.shtml. Figures for FY2010 are estimated.

The annual differences between revenue (i.e., taxes and fees) that the government collects and

outlays (i.e., spending) result in the budget deficit (or surplus).6 The total deficit in FY2009 was

$1,413 billion, or 9.9% of gross domestic product (GDP), sharply higher than deficits in recent

years. While large by historical standards, the FY2009 deficit was somewhat smaller than many

analysts had originally forecasted at the start of FY2009 because several of the economic

recovery programs, which, cost less than anticipated. 7

The total deficit, according to some budget experts, gives an incomplete view of the government’s

fiscal condition because it includes Social Security surpluses (which are held in Treasury trust

funds until used to pay future benefits). 8 Excluding off-budget items (Social Security benefits

paid net of Social Security payroll taxes collected and the U.S. Postal Service’s net balance) the

on-budget FY2009 federal deficit was $1,551 billion.

Most economists use data on federal outlays to track larger budget trends, while most program analysts use budget

authority to track changes in specific program areas.

For further explanation of the changing costs of these programs, see the section of this report titled, “Changing

Budgetary Impact of Major Financial Interventions and Economic Recovery Programs.”

Currently, the Social Security program collects more through the payroll tax than is needed to pay out current

benefits, thus generating a surplus in the Social Security Trust Fund. By law, surplus dollars are required to be invested

in non-marketable Treasury securities. From an overall budget perspective, these surpluses are used to offset other

federal spending, thereby decreasing the current budget deficit while increasing the amount of Treasury securities held

in the Trust Fund.

Congressional Research Service

The FY2011 Federal Budget

Trends

Federal Spending

Budget enforcement legislation divides federal outlays into discretionary and mandatory

spending, as well as net interest.9 Discretionary spending is controlled by annual congressional

appropriations acts. Mandatory spending encompasses spending on entitlement programs and

spending controlled by laws other than annual appropriation acts. Net interest comprises the

government’s interest payments on debt held by the public, offset by small amounts of interest

income the government receives from certain loans and investments. Total outlays rose from

20.7% of GDP in FY2008 to 24.7% of GDP in FY2009.

Entitlement programs such as Social Security, Medicare, and Medicaid make up the bulk of

mandatory spending.10 Other mandatory spending programs include Temporary Assistance to

Needy Families (TANF), Supplemental Security Income (SSI), unemployment insurance,

veterans’ benefits, federal employee retirement and disability, SNAP (formerly Food Stamps), and

refundable tax credits, such as the Earned Income Tax Credit (EITC). Congress sets eligibility

requirements and benefits for entitlement programs, rather than appropriating a fixed sum each

year. Therefore, if the eligibility requirements are met for a specific mandatory program, outlays

are made automatically.11

Over the past 40 years, mandatory spending has taken up a larger and larger share of the federal

budget. In 1962, before the creation of Medicare and Medicaid, less than 30% of all federal

spending was mandatory. By FY2009, mandatory spending had grown to 60% of total outlays,

with Social Security, Medicare, and the federal share of Medicaid alone comprising almost 41%

of all federal spending.

As Figure 2 shows, mandatory spending, which equaled 11.0% of GDP in FY2008, totaled

14.7% of GDP in FY2009. TARP spending, costs linked to the federal conservatorship of Fannie

Mae and Freddie Mac, and certain provisions of the American Recovery and Reinvestment Act of

2009 (ARRA), accounted for much of this increase in mandatory spending. Under current law,

CBO projects that FY2020 mandatory spending will total 13.3% of GDP, incorporating a return to

economic stability but the beginning of long-term growth in entitlement spending.

For more information on trends in discretionary and mandatory spending, see CRS Report RL34424, Trends in

Discretionary Spending, by D. Andrew Austin and Mindy R. Levit and CRS Report RL33074, Mandatory Spending

Since 1962, by D. Andrew Austin and Mindy R. Levit.

For more information see CRS Report RS20129, Entitlements and Appropriated Entitlements in the Federal Budget

Process, by Bill Heniff Jr.

Mandatory spending is controlled by established parameters for government commitments in permanent law, such as

Social Security benefit levels and eligibility requirements. Once these laws have been established, mandatory funding

for most programs must be included in annual appropriations bills as the appropriations committees must provide the

budget authority needed to meet the commitment. Unlike discretionary spending, changes to mandatory funding levels

can only be made through changes in the authorizing legislation.

Congressional Research Service

The FY2011 Federal Budget

Figure 2. Outlays by Type as a Percentage of GDP, FY1990-FY2020

Source: CBO, Historical Tables, available at http://www.cbo.gov/budget/historical.shtml and Budget Projections,

January 2010, available at http://www.cbo.gov/budget/budproj.shtml. Data for FY2010 are estimates and data for

FY2011-FY2020 are projections.

Discretionary spending as a share of GDP rose from 6.3% of GDP in FY2000 to 8.7% of GDP in

FY2009 (see Figure 2), increasing 4.5% a year on average in real terms. The share of

discretionary spending as a proportion of total federal outlays rose from 34.4% in FY2000 to

35.2% in FY2009. On average, from FY2000 to FY2009, defense discretionary outlays grew

5.3% per year in real terms, largely due to operations in Iraq and Afghanistan, while real nondefense discretionary outlays grew 3.6% per year.

By FY2020, according to CBO’s baseline projections (which assume that discretionary spending

remains constant in real terms), discretionary spending will fall to 6.7% of GDP, close to its levels

in the late 1990s.12 Net interest payments accounted for 1.3% of GDP in FY2009 and are

estimated to rise to 3.2% of GDP in FY2020.13

Because discretionary spending represents slightly more than one-third of total federal outlays,

some budget experts contend that any significant reductions in federal spending must include

mandatory spending cuts. Other budget and social policy experts contend that cuts in mandatory

spending would cause substantial disruption to many households because mandatory spending

The assumption that discretionary spending will remain constant in real terms is at odds with the historical growth

rate of discretionary spending, leading to projections which often understate discretionary spending levels. For more

information, see the section titled “Budget Baseline Projections” later in this report.

U.S. Congressional Budget Office, Historical Tables, available at http://www.cbo.gov/budget/historical.shtml.

Congressional Research Service

The FY2011 Federal Budget

funds important parts of the social safety net. Nevertheless, there is widespread agreement that

action is needed to bring down anticipated high debt and deficit levels to restore long-term fiscal

health.14

Federal Revenue

Individual income taxes have long been the largest source of federal revenues, followed by social

insurance (payroll) taxes. Federal individual and corporate income tax revenues typically track

broader trends in the economy. In FY2008, individual income tax revenues totaled $1,146 billion

(7.9% of GDP), comprising about 45% of total federal revenues. In FY2009, difficult economic

conditions and the tax relief provisions of ARRA led individual income tax revenue to fall to

$915 billion (6.4% of GDP). Corporate income tax revenues fell from $304 billion in FY2008 to

$138 billion in FY2009. Federal revenues from other sources fell as well, although much less

dramatically.15 It is likely that revenues will remain depressed in FY2010. The longer-term

revenue outlook depends on the speed of economic recovery and the legislative actions of

Congress on certain expiring tax provisions and potential tax reform.16

Deficits, Debt, and Interest

The federal government’s fiscal stance is often gauged by the annual budget deficit. The budget

deficit, however, may give a partial and potentially misleading picture of the government’s longterm fiscal condition. 17 Annual budget deficits or surpluses determine, over time, the level of

federal debt and affect the growth of interest payments to finance the debt.

Federal Deficits

Differences between revenues and outlays determine whether or not the budget is in surplus or

deficit. Occasional deficits, in and of themselves, are not necessarily problematic. Deficit

spending can allow governments to smooth outlays and taxes to shield taxpayers and program

beneficiaries from abrupt economic shocks in the short term. Persistent deficits, however, lead to

growing levels of federal debt that may lead to higher interest payments, tax increases, or

spending cuts, and may also have adverse macroeconomic consequences in the long term.18

Deficit projections for the next several fiscal years are high relative to historic standards. The

deficit reached its peak in FY1943 at 30.3% of GDP. After WWII, deficits remained relatively

low until the mid-1980s. In FY1985, the deficit reached 6.0% of GDP. The FY2009 total deficit

was $1,413 billion (9.9% of GDP), the largest in proportion to GDP since FY1945.19

In various reports, the Congressional Budget Office, the Government Accountability Office, and the Administration

agree that the federal government’s budget is on an unsustainable path. For more information, see the section of this

report titled, “Long-Term Considerations.”

U.S. Congressional Budget Office, Historical Tables, available at http://www.cbo.gov/budget/historical.shtml.

For more information, see CRS Report RL34425, Expiration and Extension of the Individual Income Tax Cuts

Enacted in 2001 Through 2008, by Maxim Shvedov and CRS Report R40414, Tax Reform: An Overview of Proposals

in the 111th Congress, by James M. Bickley.

See CRS Report RL33623, Long-Term Measures of Fiscal Imbalance, by D. Andrew Austin.

Committee for a Responsible Federal Budget, Good Deficit / Bad Deficit, April 2009.

U.S. Office of Management and Budget, Budget for Fiscal Year 2011, Historical Tables, Table 1-3, available at

(continued...)

Congressional Research Service

The FY2011 Federal Budget

Federal Debt and Debt Limit

Gross federal debt is composed of debt held by the public and intragovernmental debt.20

Intragovernmental debt is the amount owed by the federal government to other federal agencies,

to be paid by the Department of the Treasury. This amount largely consists of money contained in

trust funds, such as Social Security, that has been invested in federal securities as required by

law. 21 Debt held by the public is the total amount the federal government has borrowed from the

public and remains outstanding. This measure is generally considered to be the most relevant in

macroeconomic terms because it is the debt sold in credit markets.

Changes in debt held by the public generally track the movements of the annual on-budget

deficits and surpluses. Whether or not the movements of gross federal debt will follow those of

debt held by the public depends on how intragovernmental debt changes. 22 Higher debt levels

could slow investment and lower economic growth.23

Congress sets a ceiling on federal debt through a legislatively established limit that helps

Congress assert its constitutional prerogative to control spending. The debt limit also imposes a

form of fiscal accountability that compels Congress and the President to take visible action, in the

form of a vote authorizing a debt limit increase, to allow further federal borrowing when nearing

the statutory limit. The debt limit, however, can hinder the Treasury’s ability to manage the

federal government’s finances when the amount of federal debt approaches this ceiling. In those

instances, the Treasury has had to take unusual and extraordinary measures to meet federal

obligations.24 While the debt limit has never caused the federal government to default on its

obligations, it has caused inconvenience and uncertainty in Treasury operations at times.

At the end of FY2009, federal debt subject to limit was approximately $11,853 billion, of which

$7,544 billion was held by the public. CBO estimates that debt held by the public will reach

$8,797 billion at the end of FY2010, with debt subject to limit totaling $13,260 billion.25 The debt

limit was most recently raised on February 12, 2010 (P.L. 111-139), and currently stands at

$14,294 billion. 26

(...continued)

http://www.whitehouse.gov/omb/budget/fy2011/assets/hist.pdf.

Gross federal debt is also referred to as total debt or total public debt outstanding. Intragovernmental debt is also

referred to as intragovernmental holdings or debt held by federal government accounts.

U.S. Office of Management and Budget, Budget of the U.S. Government, Fiscal Year 2009, Analytical Perspectives,

Feb. 2008, p. 408.

In FY2009, the increase in the deficit was larger than that of debt held by the public due to the nature of the

obligations incurred as a result of the government conservatorship of Fannie Mae and Freddie Mac and the TARP

program. For a larger discussion of why this occurred, see the section titled “Changing Budgetary Impact of Major

Financial Interventions and Economic Recovery Programs” later in this report.

For more information, see CRS Report RL34712, Ebbs and Flows of Federal Debt, by Mindy R. Levit.

General Accountability Office, Debt Ceiling: Analysis of Actions Taken During the 2003 Debt Issuance Suspension

Period, GAO-04-526, May 20, 2004.

U.S. Congressional Budget Office, The Budget and Economic Outlook: Fiscal Years 2010 to 2020, Tables D-2,

available at http://www.cbo.gov/ftpdocs/108xx/doc10871/01-26-Outlook.pdf.

For further details, see CRS Report RL31967, The Debt Limit: History and Recent Increases, by D. Andrew Austin

and Mindy R. Levit.

Congressional Research Service

The FY2011 Federal Budget

Net Interest

In FY2009, the United States spent $187 billion, or 1.3% of GDP, on net interest payments on the

debt.27 Since FY1970, the U.S. spent an average of 2.2% of GDP on interest payments. What the

government pays in interest depends on market interest rates as well as on the size and

composition of the federal debt. Currently, low interest rates have held net interest payments as a

percentage of GDP below the historical average despite increases in borrowing to finance the

deficit. Some economists, however, have expressed concern that federal interest costs could rise

sharply once the economy recovers, resulting in future strain on the budget.28

Budgeting in Tough Economic Times

The current economic climate poses another major challenge to policymakers shaping the federal

budget. Numerous actions taken by the federal government in FY2008 and FY2009 have had

major effects on the budget. Federal spending tied to means-tested social programs has also been

increasing due to rising unemployment, while federal revenues have fallen as individuals’

incomes drop and corporate profits sink. Additional legislative action and the pace of economic

recovery could continue to impact deficit levels.

Federal Response to Economic and Financial Market Turmoil

The federal government has responded to financial turmoil with an extraordinary set of measures,

including two major economic stimulus measures and a variety of programs within the Federal

Reserve, Treasury, and Federal Deposit Insurance Corporation (FDIC). In February 2008,

Congress enacted a $152 billion package (P.L. 110-185, Economic Stimulus Act of 2008) to

stimulate consumption by sending refunds to taxpayers and letting firms depreciate their capital

more quickly.

Another effort to jump-start economic growth came in the form of a second stimulus package

signed into law by President Obama on February 17, 2009. The American Recovery and

Reinvestment Act of 2009 (ARRA; P.L. 111-5) included provisions that are now estimated to total

$862 billion in increased discretionary and mandatory spending and reduced tax revenue over the

FY2009-FY2019 period. 29 ARRA contains support for state and local governments in the form of

increased transportation project, Medicaid, and school funding, funding for health care

information technology, extended unemployment benefits, as well as tax cuts and rebates among

other provisions.30

U.S. Congressional Budget Office, Historical Tables, Tables F-5 and F-6, available at http://www.cbo.gov/budget/

historical.shtml.

Carmen M. Reinhart and Kenneth S. Rogoff, “The Aftermath of Financial Crises,” American Economic Review, vol.

99 (2009), no. 2; Alan Auerbach and William Gale, “The Economic Crisis and the Fiscal Crisis: 2009 and Beyond,”

Tax Policy Center working paper, February 2009, available at http://www.taxpolicycenter.org/UploadedPDF/

411843_economic_crisis.pdf.

The original cost estimate for ARRA was increased by $75 billion due to revised estimates of outlays for income

security programs (unemployment insurance and SNAP program) and a higher participation rates in the Build America

Bonds program. U.S. Congressional Budget Office, The Budget and Economic Outlook: Fiscal Years 2010 to 2020,

January 2010, Appendix A, available at http://www.cbo.gov/ftpdocs/108xx/doc10871/01-26-Outlook.pdf.

For more information on the provisions of ARRA, see CRS Report R40537, American Recovery and Reinvestment

(continued...)

Congressional Research Service

The FY2011 Federal Budget

In addition to these stimulus efforts, various governmental bodies, through legislative and

existing authority, engaged in numerous financial stability programs. The federal government

placed government-sponsored enterprises Fannie Mae and Freddie Mac into conservatorship in

September 2008, thereby gaining temporary authority to provide unlimited funds if necessary to

help them remain solvent. In October 2008, Congress passed the Emergency Economic

Stabilization Act of 2008 (EESA; P.L. 110-343), which authorized the Treasury Secretary to use

$700 billion (subject to certain congressional restrictions and notifications) to purchase troubled

assets through the Troubled Assets Relief Program (TARP). As part of this program, Treasury

purchased preferred shares from banks, assisted AIG and the domestic automakers, and provided

other assistance to financial institutions. The Federal Reserve created a panoply of lending

facilities, to provide financial institutions with loans in exchange for various types of collateral.

The FDIC has used its standing authority to resolve failed banks and administer the federal

guarantees on individual deposits, in addition to carrying out a broad guarantee program on debt

issued by banks and supporting joint interventions in large banks. 31

In response to this financial instability, Congress enacted the Dodd-Frank Wall Street Reform and

Consumer Protection Act (P.L. 111-203) on July 21, 2010.32 This legislation, which contains

various provisions under a new regulatory umbrella, has minimal budgetary impact and is

therefore beyond the scope of this report.33

Changing Budgetary Impact of Major Financial Interventions and Economic

Recovery Programs

The size, variety, and complexity of federal responses to financial and economic turmoil present

many challenges to budget analysis. The ultimate costs of these responses will depend on how the

economy performs, how well firms with federal credit guarantees weather future financial shocks,

and whether or not government funds are ultimately repaid. Estimating how much these responses

will cost the federal government is difficult, both for conceptual and operational reasons. As a

result, estimates of the costs of some of these programs have already changed significantly.

The distinction between outlays and budget authority is important to understanding the budgetary

consequences of federal responses to economic and financial turmoil. Outlays are disbursed

federal funds. Budget authority, as determined by what Congress appropriates, is what federal

agencies can legally spend. Budget authority has been compared to funds deposited into a

checking account, which then can be used for federal spending. Until the federal government

disburses funds to make purchases, however, no outlays occur.

This distinction is especially important in understanding the impact of ARRA on the budget

deficit over the next several fiscal years. The programmatic costs of ARRA consisted of roughly

one-quarter revenue reduction measures and three-quarters increased outlays. Outlay measures

(...continued)

Act of 2009 (P.L. 111-5): Summary and Legislative History, by Clinton T. Brass et al.

For further details on these actions, see CRS Report R41073, Government Interventions in Response to Financial

Turmoil, by Baird Webel and Marc Labonte.

For more information, see CRS Report R41350, The Dodd-Frank Wall Street Reform and Consumer Protection Act:

Issues and Summary, coordinated by Baird Webel.

U.S. Congressional Budget Office, H.R. 4173, Dodd-Frank Wall Street Reform and Consumer Protection Act, June

29, 2010, available at http://www.cbo.gov/ftpdocs/116xx/doc11601/hr4173amendment.pdf.

Congressional Research Service

The FY2011 Federal Budget

can affect the budget deficit more slowly than revenue or transfer measures due to the time it

takes between obligation of funds and actual spending (or outlays) on specific projects or

programs. For example, if an individual receives extended unemployment benefits under the

provisions of ARRA, the budgetary cost to the government would be incurred almost immediately

upon the benefit being issued to the individual. However, if a state receives a grant to fund a

transportation project, which may take five years to complete, the entire grant amount will be

obligated immediately while the budgetary impact will be felt in each of the five years as outlays

are made until the project is completed. 34

Estimating the precise budgetary impact of programs like TARP and the government’s

conservatorship of Fannie Mae and Freddie Mac (also known as government sponsored

enterprises or GSEs) is difficult for different reasons. Early amounts of TARP funds were used to

purchase preferred equity stakes in major banks. EESA requires those equity purchases to be

recorded in the budget in the year acquired on a net present value basis with an adjustment for

market risk, so that the future sale of those equity stakes would offset much of the cost of

acquiring them. 35 Over time, improved market conditions, lower estimates of the amount of TARP

authority needed, and bank repurchases of stock sold to the government have decreased the

impact of the program on the budget deficit. Other assets that have been acquired through TARP

are treated similarly.

Differences also exist in the cost estimates of OMB and CBO due to the use of alternative

assumptions and interpretations of budget concepts. OMB estimates TARP outlays on a net

present value basis over the FY2009-FY2019 period at $127 billion (excluding administrative

costs and interest effects). CBO estimates the value of these net present value outlays at $109

billion (excluding administrative expenses) over the FY2009-FY2019 period.36 The deficit impact

of this program only tells part of the story. TARP purchases have had a different impact on the

level of federal debt than they have had on the deficit. Though the impact of TARP on the deficit

for the FY2009-FY2019 period is now estimated by CBO to be $109 billion in net costs over the

period, as discussed above, outlays by Treasury have been significantly greater than that. As of

the end of FY2009, Treasury had disbursed $365.1 billion.37 In order to finance these outlays, the

Treasury had to sell debt to the public. Taking this and other adjustments into account, the

increase in federal debt held by the public exceeded the deficit in FY2009. However in FY2010,

CBO estimates that the increase in the federal debt held by the public will be lower than the

deficit. 38

Estimating the cost of the aid given to the GSEs, in budgetary terms, is also complex. Unlike

TARP, no legislation stipulated the precise methodology with which to use when accounting for

the budgetary impact of these interventions. Prior to conservatorship, federally chartered Fannie

Mae and Freddie Mac were considered non-governmental entities, which essentially meant that

The budgetary impact of the Economic Stimulus Act of 2008 was different from ARRA’s in that it was

comparatively small and was composed, in large part, of stimulus checks sent to taxpayers. Because rebate checks were

dispersed relatively quickly, the impact on the deficit from this legislation was largely incurred in FY2008.

Mandated by Section 123 of the Emergency Economic Stabilization Act (P.L. 110-343).

U.S. Congressional Budget Office, Report on the Troubled Asset Relief Program—March 2010, March 2010, Table

1, available at http://www.cbo.gov/ftpdocs/112xx/doc11227/03-17-TARP.pdf.

U.S Treasury, Troubled Assets Relief Program Monthly 105(a) Report—September 2009, October 9, 2009, p. 3,

available at http://financialstability.gov/latest/reportsanddocs.html.

U.S. Congressional Budget Office, The Budget and Economic Outlook: Fiscal Years 2010 to 2020, January 2010,

Table 1-7.

Congressional Research Service

The FY2011 Federal Budget

their balance sheets were not included in budget totals. Subsequent to the Treasury Secretary

taking control of these entities through conservatorship, CBO determined that they were now part

of the government and should be reflected in the federal budget. At that point, CBO began

recording these costs on a net cash flow basis, similar to what is used to calculate TARP’s

budgetary impact. OMB, however, takes a different approach and records cash outlays to the

GSEs in the budget but does not include any additional amount to account for market risk. These

differences led to big discrepancies in budgetary impact since OMB only records liabilities as

they occur, while CBO accounts for future shortfalls on these financial commitments now.

The differences between the accounting methodologies used by OMB and CBO lead to divergent

effects on the budget. CBO recorded a subsidy cost of $291 billion in FY2009. OMB placed the

budgetary cost for the GSE intervention in FY2009 at $95.6 billion in cash outlays. Over the

FY2010-FY2019 period, OMB projects that cash outlays to the GSEs will total an additional $65

billion. Over the same period, CBO projects a subsidy cost of $99 billion.39 OMB has faced

criticism for its methodology as some argue that they do not account for the full budgetary cost of

the program. Once the fiscal year ends, CBO uses the figures recorded by OMB.

Budget Deficit Estimates for FY2010

The CBO baseline estimates the FY2010 budget deficit at $1,368 billion or 9.4% of GDP, slightly

lower than the FY2009 deficit of $1,413 billion (9.9% of GDP).40 The deficit is projected to be

slightly lower than that of FY2009 due to an anticipated decline in federal aid to the financial

sector, offset by increases in outlays from ARRA, income support programs, and net interest.

Though revenues are expected to increase slightly, the slow pace of economic recovery will

continue to hold receipts well below their historical average.

Under the President’s Budget, deficit estimates for FY2010 amount to $1,556 billion or 10.6% of

GDP. This is larger than CBO’s baseline deficit estimate due to differences in assumptions used as

well as the inclusion of the impact of certain legislation not yet enacted. Some of these proposals

include indexing the alternative minimum tax to inflation, the inclusion of a jobs initiatives and

other temporary recovery measures, preventing a reduction in Medicare physician payments, tax

cuts for families and businesses, and additional spending on overseas contingency operations. 41

On July 23, 2010, OMB released its Mid-Session Review, which provided updated estimates of

the FY2010 spending, revenue, and deficit levels. The Administration now estimates that the

FY2010 deficit will total $1,471 billion or 10% of GDP, about $84 billion less than what was

estimated in February. The change in the deficit estimate is due to lower than anticipated federal

outlays of about $118 billion, primarily for unemployment compensation, deposit insurance, and

non-defense discretionary spending. Revenue collections in FY2010 are also estimated to be

For more information on these accounting methodologies, see U.S. Congressional Budget Office, CBO’s Budgetary

Treatment of Fannie Mae and Freddie Mac, January 2010, available at http://www.cbo.gov/ftpdocs/108xx/doc10878/

01-13-FannieFreddie.pdf and U.S. Office of Management and Budget, The Budget for Fiscal Year 2011, Analytical

Perspectives, pp. 346-358, available at http://www.whitehouse.gov/omb/budget/fy2011/assets/topics.pdf.

U.S. Congressional Budget Office, An Analysis of the President’s Budgetary Proposals for Fiscal Year 2011, March

2010, Table 1-1.

U.S. Office of Management and Budget, Budget for Fiscal Year 2011, The Budget, Tables S-2 and S-7.

Congressional Research Service

The FY2011 Federal Budget

about $33 billion less than estimated in February.42 The changes in the budget deficit estimate

primarily result from revisions in economic factors, rather than changes in policy.

Healthcare Legislation

Congress acted on one of the Obama Administration’s major budgetary initiatives by enacting the

Patient Protection and Affordable Care Act (PPACA; P.L. 111-148) and the Health Care and

Education Reconciliation Act of 2010 (HCERA; P.L. 111-152), which were signed into law on

March 23 and March 30, 2010, respectively. Among other provisions, this legislation established

a mandate for most U.S. residents to obtain health insurance, set up insurance exchanges,

expanded Medicaid, and imposed various tax code changes.43 Together, the spending and revenue

measures contained in the PPACA and HCERA are estimated to increase the deficit by $6 billion

in FY2010, but are projected to reduce the deficit by $143 billion over the FY2010-FY2019

period. 44 The Administration believes that health care reform is critical to economic recovery and

stabilizing the federal government’s long-run fiscal condition.45 Additional legislative action

affecting health care programs may be necessary over the long term.

FY2010 Supplemental Legislation

Supplemental appropriations complicate the budget process, specifically when it comes to

comparing baseline budget forecasts due to the terms of budget enforcement conventions. CBO’s

baseline presumes that discretionary spending levels will continue as enacted for the following

fiscal years in real (i.e., inflation adjusted) terms. If baseline projections are made before

Congress enacts supplemental legislation, the baseline is likely to understate the likely cost of

discretionary spending in future years. If the baseline projections are made after enactment of

supplemental legislation and supplemental funding is lower in future years, then they could

overstate the deficit estimates in future years. A measure to extend temporarily the period of

eligibility for certain direct assistance benefits has already been enacted. Notable measures on

war funding, job creation, and longer-term benefit extensions are now being considered by

Congress.

War Funding46

Thus far, Congress has provided a total of $135.6 billion in FY2010 funding for overseas

contingency operations, including $128.8 billion for the Defense Department, $4.8 billion for the

State Department and USAID, and $2.0 billion for the VA. FY2009 funding levels for overseas

U.S. Office of Management and Budget, Budget for Fiscal Year 2011, Mid-Session Review, Table 1 and pp. 4-5.

For more information and a comprehensive list of CRS reports on this issue, see “Comprehensive Descriptions of the

Patient Protection and Affordable Care Act” at http://www.crs.gov/Pages/subissue.aspx?cliid=3746&parentid=13.

Of the total budget deficit impact over the FY2010-FY2019 period, $124 billion in net reductions derives from the

health care and revenue provisions, while the remaining $19 billion in net reductions derives from the education

provisions contained in HCERA. U.S. Congressional Budget Office, H.R. 4872, Reconciliation Act of 2010 (Final

Health Care Legislation), March 20, 2010, available at http://www.cbo.gov/ftpdocs/113xx/doc11379/

AmendReconProp.pdf.

U.S. Office of Management and Budget, Budget for Fiscal Year 2011, The Budget, p. 11.

For more information, see CRS Report RL33110, The Cost of Iraq, Afghanistan, and Other Global War on Terror

Operations Since 9/11, by Amy Belasco.

Congressional Research Service

The FY2011 Federal Budget

contingency operations totaled $155.1 billion. With his budget, President Obama included a

request for an additional $35.1 billion in FY2010 supplemental funding for these operations. On

July 29, 2010, the President signed the Supplemental Appropriations Act, 2010 (P.L. 111-212),

which included the funding that he requested for overseas contingency operations, as well as

funding for FEMA disaster relief, activities related to the Deepwater Horizon Oil spill, and other

measures.47

Hiring Incentives to Restore Employment Act and Other Measures

On December 16, 2009, the House passed the Jobs for Main Street Act (H.R. 2847), which

provided approximately $154 billion in funding for infrastructure investment, public service jobs,

and emergency relief for families.48 The Senate passed a scaled-down version of this legislation,

titled Hiring Incentives to Restore Employment Act, on February 24, 2010, that would provide

tax credits for hiring and retaining unemployed workers, extend a tax provision in ARRA related

to expensing for small businesses, and reauthorize certain transportation authorities. A modified

version of the Senate bill was agreed to and was signed by the President on March 18, 2010 (P.L.

111-147). Together, the spending and revenue measures in the modified bill would increase the

deficit by $4.5 billion in FY2010, but are projected to reduce the deficit by $0.7 billion over the

FY2010-FY2020 period. 49

In subsequent legislation, the President signed the Temporary Extension Act of 2010 on March 2,

2010 (H.R. 4691, P.L. 111-144), which provided an extension of some direct assistance

provisions including unemployment benefits and COBRA subsidies, along with an increase in

Medicare payments to physicians and certain revenue raisers. Subsequent legislation extended the

eligibility period for unemployment compensation and Medicare physician payment increases

through November 30, 2010 (P.L. 111-157 and P.L. 111-205; P.L. 111-192).50

Budget Baseline Projections

Given the increasing calls for attention on the country’s fiscal health and in light of the current

economic conditions and long term outlook, future projections of budget deficit levels are

garnering even greater attention. Due to the nature of projections, slight changes in assumptions

can lead to large effects in outyear totals. Therefore, it is important to understand what projections

include and assume.

CBO computes baseline projections using assumptions set out in budget enforcement

legislation.51 Forecasts based on these assumptions typically yield higher revenue estimates and

For more information, see CRS Report R41232, FY2010 Supplemental for Wars, Disaster Assistance, Haiti Relief,

and Other Programs, coordinated by Amy Belasco.

For more information, see CRS Report R41053, Jobs for Main Street Act: Education, Training and Direct Assistance

Provisions, coordinated by Karen Spar.

U.S. Congressional Budget Office, CBO Estimate of the Statutory Pay-As-You-Go Effects for an Amendment to the

Senate Amendment to the House Amendment to the Senate Amendment to H.R. 2847, March 4, 2010, available at

http://www.cbo.gov/ftpdocs/112xx/doc11275/hr2847HPaygo.pdf.

For more information, see CRS Report RL33362, Unemployment Insurance: Available Unemployment Benefits and

Legislative Activity, by Katelin P. Isaacs, Julie M. Whittaker, and Alison M. Shelton and CRS Report R40907,

Medicare Physician Payment Updates and the Sustainable Growth Rate (SGR) System, by Jim Hahn.

While some budget enforcement legislation constraining the computation of CBO baseline estimates has expired,

(continued...)

Congressional Research Service

The FY2011 Federal Budget

slower growth of discretionary spending relative to scenarios independent forecasters consider

likely. More specifically, CBO baseline projections incorporate three legislatively mandated

assumptions: that discretionary spending remains constant in inflation-adjusted terms, that the

2001 and 2003 tax cuts fully expire after 2010 (as current law specifies), and that one-year

“patches” to the alternative minimum tax (AMT) will lapse even though past Congresses have

extended AMT patches year after year. However, CBO does provide projections of these costs

separately from its baseline. In addition to these legislative assumptions, macroeconomic

assumptions, namely the point at which CBO expects the recession to end and the speed of the

recovery, will also affect the baseline estimates and projections, especially given the current

economic climate.

Baseline projections showed substantial growth in receipts after 2010, when most of the tax cuts

from 2001 and 2003 expire. Federal deficits are expected to grow rapidly beyond the 10-year

forecast window unless major policy changes are made, however, largely because of increased

outlays due to rapidly growing health care costs and baby boomer retirements.

Budget Fiscal Year 2011

The Obama Administration released its FY2011 budget on February 1, 2010. Congress began its

consideration of the FY2011 budget after receiving the President’s budget request.

Obama Administration FY2011 Budget

The Administration’s FY2011 budget contains six volumes: (1) The Budget; (2) Historical Tables;

(3) Analytical Perspectives; (4) Appendix; (5) Terminations, Reductions, and Savings; and (6)

Supplemental Materials.52 These documents lay out the Administration’s projections of the fiscal

outlook for the country, along with spending levels proposed for each of the federal government’s

departments and programs. The Historical Tables volume also provides significant amounts of

budget data, much of which extends back to 1962 or earlier.

Consistent with the presentation of the FY2010 budget, the Obama Administration provided three

separate deficit projections.53 First, OMB projected a Budget Enforcement Act (BEA) baseline,

using methods that mirror those CBO uses to project its current-law baseline. The BEA baseline

assumes that discretionary spending remains constant in real (i.e., inflation-adjusted) terms, the

2001 and 2003 Bush Administration tax cuts expire at the end of 2010, and that the alternative

minimum tax (AMT) will not be “patched.”54 Many budget analysts believe such projections

offer an overly rosy scenario of the long-term budget picture. Under this scenario, the FY2011

deficit is projected to total $912 billion.

(...continued)

CBO has continued to follow those legislative guidelines.

The President’s budget proposals can be found on the OMB website at http://www.whitehouse.gov/omb/budget/. The

Supplemental Materials include the Federal Credit Supplement, the Object Class Analysis, the Balances of Budget

Authority, and the Public Budget Database.

For details of these projections, see U.S. Office of Management and Budget, Budget for Fiscal Year 2011, The

Budget, Tables S-1 (Proposed Budget) and S-7 (BEA Baseline and Current Policy).

The tax cuts were enacted in the Economic Growth and Taxpayer Relief Act of 2001 (EGTRRA; P.L. 107-16) and

the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA; P.L. 108-27).

Congressional Research Service

The FY2011 Federal Budget

The Obama Administration also projected a Current Policy Baseline, which in its view, provides a

more transparent and realistic reflection of the federal government’s current fiscal situation. They

use this methodology as a base for understanding how new policy choices affect the fiscal

outlook, essentially replacing the current BEA baseline. The Administration’s Current Policy

Baseline assumes that the 2001 and 2003 tax cuts will be extended, that the alternative minimum

tax (AMT) will be “patched” to reflect the 2009 parameter, and that certain Medicare physician

payments will not be cut. This baseline also includes an adjustment for the conversion of Pell

Grants from discretionary to mandatory spending. The deficit under this scenario is projected to

reach $1,145 billion in FY2011.

The final deficit projection, the Proposed Budget, illustrates the impact on the budget outlook if

all of the policies of the Obama Administration are implemented. In FY2011, the Administration

projects that the deficit would reach $1,267 billion. Both the Current Policy Baseline and the

Proposed Budget project deficits throughout the 10-year budget window, with deficits peaking in

FY2010. Under the Proposed Budget, the deficit would fall from 8.3% of GDP in FY2011 to

3.6% of GDP by FY2018, before rising to 4.2% of GDP in FY2020.55

In his budget for FY2011, President Obama also presented a wide-ranging policy agenda. The

main policy initiatives he emphasized include the creation of a fiscal commission tasked with

improving the fiscal stability over the long term; other deficit reduction proposals; ongoing

economic recovery; and clean energy and education initiatives.

Fiscal Commission

President Obama’s priorities included the creation of a fiscal commission tasked with balancing

the budget excluding net interest payments by FY2015. (This is also referred to as a primary

deficit of zero.) The commission’s recommendations would lead to annual budget deficits of

roughly 3% of GDP, the projected amount of interest payments in FY2015. Obama’s proposed

budget, which does not take into account any potential recommendations of the fiscal

commission, recommends deficit levels averaging 4.5% of GDP over the FY2011-FY2020

period. This means that, on average, the commission would need to recommend spending

decreases, tax increases, or some combination of each, totaling 1.5% of GDP. After FY2020, the

policy changes needed to balance the budget, excluding net interest, will likely be higher as

health care costs continue to rise.

By executive order, President Obama created the 18-member commission on February 18, 2010.

The commission comprises 12 sitting members of Congress, appointed by Senate and House

leaders, and 6 additional members appointed by the President. The recommendations of the

commission must be submitted to Congress by December 1, 2010, with 14 out of 18 votes needed

to report recommendations.56

U.S. Office of Management and Budget, Budget for Fiscal Year 2011, The Budget, Tables S-1.

President of the United States, Executive Order 13531—National Commission on Fiscal Responsibility and Reform,

February 18, 2010, available at http://www.whitehouse.gov/the-press-office/executive-order-national-commissionfiscal-responsibility-and-reform. See also http://www.fiscalcommission.gov/.

Congressional Research Service

The FY2011 Federal Budget

Other Deficit Reduction Proposals

In addition to the fiscal commission discussed above, the FY2011 President’s Budget also

includes other deficit reduction measures, including a freeze in non-security discretionary

spending over the next three fiscal years, a fee imposed on the financial services industry over at

least the next 10 years to cover the cost of TARP, and other tax proposals aimed at increasing

revenue.57 Some of the Administration’s tax proposals include closing the “carried interest”

loophole, allowing lower tax rates on households earning more than $250,000 to expire, and

reforming the taxation of international income. Together, these proposals are aimed at cutting the

deficit in half by the end of the President’s current term.

Ongoing Economic Recovery and Other Initiatives

As the economy continues to recover, job creation, strengthening the middle class, and providing

recovery assistance to rural and urban communities are top Administration priorities to restore

economic growth. Education, clean energy, and infrastructure, including major investments in

urban and rural communities, are targeted sectors for job creation. The Administration also

specifies initiatives to provide assistance to small businesses by ensuring their access to credit and

eliminating certain taxes on investments. Other specific research and development funding is also

provided in the areas of science, biomedical research, and space exploration.

Funding for various infrastructure and energy initiatives is included as part of the President’s jobcreation proposals. These initiatives for a new energy economy include investing in a smart,

energy-efficient, and reliable electric grid, a clean-energy future, and science research and

development funding to address energy independence and climate change. Some funding for

these initiatives was also contained in ARRA.

Finally, the President is proposing to increase outlays for education and training with the goal of

developing a more skilled and productive labor force. Funding will be provided at both the

federal level as well as via grants to state and local governments for individual programs such as

Head Start and aid for higher education. Additional outlays for education and training purposes

are earmarked for infrastructure investment and research and development. Funding for

education-related jobs and an expansion of early childhood education programs was also provided

for in ARRA.

Congressional Consideration of the FY2011 Budget Resolution

The House and Senate Budget Committees are responsible for formulating and reporting an

annual budget resolution. The budget committees typically develop the budget resolution as they

receive information and testimony from various sources, such as the Administration, CBO, and

congressional committees with jurisdiction over spending and revenues. The timetable

established in the Congressional Budget Act directs the Senate Budget Committee to report a

budget resolution by April 1, and for the House and Senate to reach final agreement on a budget

resolution by April 15.58

For more information on the President’s proposal to freeze non-security discretionary spending, see CRS Report

R41174, Impact on the Federal Budget of Freezing Non-Security Discretionary Spending, by Mindy R. Levit.

For more information on the congressional budget process, see CRS Report RS20368, Overview of the

(continued...)

Congressional Research Service

The FY2011 Federal Budget

On April 22, 2010, the Senate Budget Committee reported the budget resolution (S.Con.Res. 60)

by a vote of 12-10. The resolution provided for revenue levels of $1,838 billion and outlays of

$3,191 billion in FY2011 for a deficit of $1,260 billion, or approximately 8.4% of GDP. By

FY2015, the deficit is projected to fall to $545 billion or 3.0% of GDP. The resolution includes a

freeze of non-security discretionary spending at the FY2010 levels between FY2011-FY2013,

similar to what was proposed in the President’s budget. Spending levels for FY2011 also include

an additional cut of $4 billion to security spending, targeted at international affairs. The Senate

budget resolution achieves greater deficit reduction, relative to the President’s budget, by

requiring offsets for certain tax provisions.

The Senate resolution also contains reconciliation instructions to the Senate Finance Committee,

directing them to report legislation within their jurisdiction that would reduce the deficit by $2

billion over the FY2010 to FY2015 period. If reported, reconciliation legislation is considered

under expedited procedures on the House and Senate floor. The Senate has not taken any further

action on the budget resolution.

On July 1, 2010, the House adopted a budget enforcement resolution (H.Res. 1493), which

established a top line discretionary spending level for FY2011 for House appropriators of $1,314

billion. The measure also contained other budget enforcement provisions.

Considerations for Congress

Congress faces ongoing budgetary challenges in FY2011 with both short-run and long-run budget

priorities that may conflict in critical ways. In the short term, economic issues may dominate

policy debates, creating pressure for higher deficit spending. In the long term, increasing federal

health care costs are expected to keep mandatory spending rising.

Short-Term Considerations

Although economic growth returned in the third and fourth quarters of 2009, signaling a possible

end to the economic recession, conditions remain weak due to budget challenges facing state and

local governments, high levels of consumer debt, and continuing weakness in many real estate

markets. Most economists expect unemployment rates to remain elevated for the medium term.

As discussed above, Congress may choose to enact more stimulus in response to the state of the

economy, which may add to the budget deficit in FY2011 and beyond.

General Budget Issues

Congress may wish to consider some general budgeting issues beyond these short term

considerations.

(...continued)

Congressional Budget Process, by Bill Heniff Jr.

Congressional Research Service

The FY2011 Federal Budget

CBO Budget Documents

The Congressional Budget Office (CBO) provides data and analysis to Congress throughout the

budget and appropriations process. Each January, CBO issues a Budget and Economic Outlook

that contains current-law baseline estimates of outlays and revenues. In March, CBO typically

issues an analysis of the President’s budget submission with revised baseline estimates and

projections. In late summer, CBO issues an updated Budget and Economic Outlook with new

baseline projections.

In these documents, CBO sets a current-law baseline as a benchmark to evaluate whether

legislative proposals would increase or decrease outlays and revenue collection. Baseline

estimates are not intended to predict likely future outcomes, but to show what spending and

revenues would be if current law remained in effect. CBO typically evaluates the budgetary

consequences of legislative proposals and the Joint Committee on Taxation (JCT) evaluates the

consequences of revenue proposals.

CBO also releases other periodic publications focusing on the future fiscal health of the United

States. In their publication, The Long-Term Budget Outlook, CBO makes projections on the state

of the federal budget to FY2083. They discuss spending and revenue levels and the related issues

that they expect will arise under different policy assumptions. In their Budget Options volumes,

they provide specific policy options and the impact they will have on spending and revenues over

a 10-year budget window. They also provide arguments for and against enacting each policy.

Budget Transparency

The budget, reflecting the size and complexity of the federal government, is complicated and

detailed. The budget books that OMB compiles provide an enormous amount of information, and

other budget data reported by federal agencies provide even more detail on federal spending

plans. The Federal Funding Accountability and Transparency Act of 2006 (P.L. 109-282) included

several measures to increase the accessibility of budget information. For example, as a result of

that act, OMB now runs the USAspending.gov website, which provides detailed information on

federal spending. Some, however, have raised concerns about the quality of those data.59

Moreover, it is not clear that those data are thoroughly coordinated with other federal budgeting

data systems.

Congress and the President have undertaken additional efforts in an attempt to improve

transparency in light of the large amounts of spending currently occurring as a result of economic

stabilization efforts and federal financial interventions. Websites, such as Recovery.gov, were

launched to track stimulus spending. The Congressional Oversight Panel was established in the

Emergency Economic Stabilization Act to oversee TARP spending. Despite this, criticisms

remain and requests for greater transparency continue.

In certain cases, despite the large amount of data provided by OMB and other government

agencies, it can be difficult to answer relatively simple budget questions. Critics maintain that the

federal government in general and OMB in particular should take steps to make data on federal

spending even more transparent to taxpayers and more useful to policymakers. Even as the

For more information, see CRS Report RL34718, The Federal Funding Accountability and Transparency Act:

Implementation and Proposed Amendments, by Garrett Hatch.

Congressional Research Service

The FY2011 Federal Budget

President’s budget mentions “a new tracking tool” to provide daily updates on spending by

agency, Congress wants to consider requiring these changes to provide more organized and

transparent budget data to citizens and to itself.60

Budget Enforcement Measures

The Budget Enforcement Act and other budget enforcement legislation was widely credited for

laying the groundwork for the federal government’s surpluses between FY1998-FY2001. One of

the components of this group of legislation, statutory PAYGO, which effectively was terminated

in December 2002, discouraged the enactment of new mandatory spending and revenue

legislation that is not deficit neutral (i.e., legislation that would cause, or increase, a deficit or

reduce a surplus) due to the threat of sequestration.61 President Obama’s budget included various

proposals for budget process reform; perhaps the most significant proposal from the perspective

of budget enforcement was a proposal to reinstate statutory PAYGO procedures.62 In February

2010, the House and Senate once again enacted statutory PAYGO, similar to what was in effect in

the 1990s and early 2000s (Title I of P.L. 111-139). While PAYGO procedures do not facilitate

reducing existing deficit levels, they may help to keep deficit levels from increasing due to

legislative action. Critics note, however, that the new statutory PAYGO procedures allow for the

enactment of legislation in several “current policy” areas that could boost deficit levels

significantly. 63

Long-Term Considerations

Annual budget deficits or surpluses are not always the best indication of long-term fiscal stability.

Most economists agree that, under certain conditions, running a budget deficit may be necessary

to provide economic stimulus or pull an economy out of recession. A large budget deficit in a

single year, in itself, does not necessarily indicate a longer-term problem. The federal

government, however, faces serious long-term budget challenges. Some measures of fiscal

solvency in the long term indicate that, under current policy, the U.S. may face a major future

crisis, specifically as it relates to rising health care costs and the likely impact on governmentfinanced health care spending.

CBO, GAO, and the Administration agree that the current mix of federal fiscal policies is

unsustainable in the long term. The nation’s aging population, combined with rising health care

costs per beneficiary, seems likely to keep federal health costs rising faster than per capita GDP.

CBO projected in June 2010 that under current policy, federal spending on Medicare and

Medicaid would grow from 5.5% of GDP today to about 10% of GDP in 2035, and to more than

17% by 2080.64 The 2010 Economic Report of the President also called the trajectory of future

U.S. Office of Management and Budget, Budget for Fiscal Year 2011, The Budget, p. 44.

See CRS Report RL34300, Pay-As-You-Go Procedures for Budget Enforcement, by Robert Keith.

Office of Management and Budget, Budget of the United States Government, Fiscal Year 2011, Analytical

Perspectives, Feb. 1, 2009 (see Chapter 13, “Budget Process,” pp. 143-155).

The PAYGO legislation enacted by the House and Senate exempts the extension of certain spending and revenue

measures, including a five-year fix to scheduled cuts to Medicare physician reimbursement rates, a two-year fix to

prevent the Alternative Minimum Tax from hitting more taxpayers and to restore the Estate Tax to 2009 rates and

exemptions, and a permanent extension of middle-class tax cuts.

U.S. Congressional Budget Office, The Long-Term Budget Outlook, June 2010, p. 7 and “Supplemental Material.”

Congressional Research Service

The FY2011 Federal Budget

federal spending on Medicare and Medicaid unsustainable.65 GAO’s recent long-term fiscal

simulations, under an alternative policy scenario, projected debt held by the public as a share of

GDP to exceed the post World War II historical high in about 10 years.66

Keeping future federal outlays at 20% of GDP, approximately its current share, and leaving fiscal

policies unchanged, according to CBO projections, would require drastic reductions in all

spending other than that for Medicare, Social Security, and Medicaid, or reigning in the costs of

these programs. Under the extension of current policy, CBO estimates that the nation’s current

fiscal gap, a present-value measure of fiscal imbalance for a given time period, would reach 0.7%

of GDP over the next 75 years. This means that an immediate and permanent reduction in

spending, increase in revenues, or a combination of spending cuts and revenue increases

amounting to 0.7% of GDP would be needed to make the government’s debt the same size

(relative to the size of the economy) at the end of that period as it was at the beginning. Under an

alternative fiscal scenario, which incorporates some policy changes that are widely expected to

occur and that policymakers have regularly made in the past, the fiscal gap reaches 8.7% of

GDP.67 This indicates that an immediate and permanent reduction in spending, increase in

revenues, or a combination of spending cuts and revenue increases amounting to 8.7% of GDP

would be needed to make the government’s debt the same size (relative to the size of the

economy) at the end of that period as it was at the beginning. 68 Enacting policies to close the

fiscal gap under either scenario would likely require significant changes in major entitlement

programs as these programs are projected to be responsible for the majority of the long-term

growth in federal spending. 69

As the economic recovery continues, Congress may focus more effort on balancing the budget

and reining in the debt. This would require less spending, increases in revenue collections, fasterthan-average economic growth, or a combination of these things. Many economists agree that

having some federal debt is a good thing because it builds credit which allows for more favorable

borrowing terms. It encourages investment within the country because federal debt is seen as

relatively low-risk and safe. Debt is not free, however, and requires interest payments that can

strain budgets if debt levels and interest rates are high. High debt levels could limit the

government’s flexibility in meeting its obligations or in responding to emerging needs of its

citizens. Ultimately, failing to take action to reduce the projected growth in the debt potentially

might lead to future insolvency or government default.70

Council of Economic Advisors, Economic Report of the President, February 2010, pp.140.

Government Accountability Office, The Federal Government’s Long-Term Fiscal Outlook: Fall 2009 Update (GAO10-137SP), October 15, 2009, pp.1.

The alternative fiscal scenario includes things like the extension of certain expiring tax provisions, the continued

indexation of AMT to inflation, and Medicare physician payment rates growing with the Medicare economic index. For

a complete description of the assumptions included in the extended baseline and alternative fiscal scenarios, see U.S.

Congressional Budget Office, The Long-Term Budget Outlook, June 2010, Table 1-1.

U.S. Congressional Budget Office, The Long-Term Budget Outlook, June 2010, Table 1-3.

U.S. Congressional Budget Office, The Long-Term Budget Outlook, June 2010, p. 8.

Recent trends in the credit default swap market imply an increased, albeit still small, market perception of the

likelihood of default on certain Treasury securities. In past years, Treasury securities were typically regarded as riskfree. See Alan Auerbach and William Gale, “The Economic Crisis and the Fiscal Crisis: 2009 and Beyond: An

Update,” Tax Policy Center working paper, September 2009, available at http://www.brookings.edu/~/media/Files/rc/

papers/2009/06_fiscal_crisis_gale/06_fiscal_crisis_gale_update.pdf.

Congressional Research Service

The FY2011 Federal Budget

Author Contact Information

Mindy R. Levit

Analyst in Public Finance

mlevit@crs.loc.gov, 7-7792

Acknowledgements

Some of the information in this report was drawn from CRS Report R40088, The Federal Budget: Current

and Upcoming Issues, by D. Andrew Austin and Mindy R. Levit.

Congressional Research Service

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.