Federal Budget Estimates for Fiscal Year 2007

ON February 6, 2006, the President submitted the Federal Budget of the U.S. Government, Fiscal Year 2007 to Congress.1 For fiscal year 2007, the Federal budget projects a $354.2 billion deficit, a $68.9 billion decrease from the $423.2 billion deficit that is projected for fiscal year 2006. The fiscal

The budget is presented on a "unified budget" basis, in effect, an administrative or cash basis. It is effectively a financial plan for the government. Based on that proposed budget, the Bureau of Economic Analysis (BEA) annually prepares estimates of Federal Government current receipts and expenditures. These translated estimates are consistent with the national income and product accounts (NIPAs), which are designed to broadly measure output and income from production (see the box "NIPA Estimates of the Federal Sector and the Federal Budget Estimates"). Because the estimates of receipts and expenditures are based on the budget estimates, they carry the same assumptions about unemployment, inflation, long-term interest rates, and other variables.3

This analysis thus provides a way to gauge the effects of the Federal budget on various aggregate measures of U.S. economic activity, such as the Federal government's impact on national saving. The results of this analysis include the following:

* NIPA net Federal Government saving for fiscal year 2007 is projected to be -$369.9 billion, a $14.1 billion increase from net Federal Government saving of -$383.9 billion that is projected for fiscal year 2006.

* Proposed legislative and program changes would add $97.5 billion to the Federal budget deficit in fiscal year 2007; the increase mainly reflects a proposed appropriation to continue funding for the global war on terror and a proposed extension of the alternative minimum tax relief for individuals.

The rest of this article consists of four sections. First, the budget estimates are summarized, and the effects of the major legislative proposals and program changes on the budget are reviewed. Second, the budget projections and the NIPA estimates are compared. Third, annual and quarterly NIPA estimates for fiscal years 2006 and 2007 that are based on the budget are presented. Fourth, the methodology used to translate budget projections into the NIPA framework is explained.

The Budget Estimates

According to the President's budget proposal, Federal budget receipts in fiscal year 2007 are projected to increase $130.4 billion, to $2,415.9 billion (table 1). Federal budget receipts in fiscal year 2006 are estimated to be $2,285.5 billion, $131.6 billion more than receipts in fiscal year 2005. The deceleration is accounted for by the following: A continued decline in corporation income taxes, which would decrease $16.6 billion in 2007 after decreasing $1.2 billion in 2006; a downturn in estate and gift taxes, which would decrease $3.8 billion after increasing $2.8 billion; a deceleration in miscellaneous receipts, which would increase $5.7 billion after increasing $9.8 billion; and a deceleration in social insurance taxes and contributions, which would increase $43.0 billion after increasing $47.0 billion. The deceleration in budget receipts in 2007 is tempered by an acceleration in individual income taxes, which would increase $98.8 billion after increasing $70.4 billion in 2006.

Federal budget outlays in fiscal year 2007 are projected to increase $61.4 billion, to $2,770.1 billion (table 2). Federal budget outlays in fiscal year 2006 are estimated to be $2,708.7 billion, a $236.5 billion increase. The deceleration in 2007 is accounted for by downturns in outlays for the following functions: Community and regional development; national defense; education, training, employment, and social services; natural resources and environment; and energy. An acceleration in "undistributed offsetting receipts" and a deceleration in outlays for net interest, income security, and health also contributed to the deceleration.

Budget outlays for community and regional development would decrease $23.9 billion in 2007 after increasing $25.8 billion in 2006. For national defense, budget outlays would decrease $8.5 billion after increasing $40.6 billion. For education, training, employment, and social services, budget outlays would decrease $22.1 billion after increasing $12.1 billion. For natural resources and environment, budget outlays would decrease $1.7 billion after increasing $4.7 billion. For energy, budget outlays would decrease $1.6 billion after increasing $2.2 billion.

"Undistributed offsetting receipts" would increase $22.0 billion after increasing $7.1 billion. Budget outlays for net interest would increase $27.3 billion after increasing $36.1 billion. For income security, budget outlays would increase $6.6 billion after increasing $14.8 billion. For health, budget outlays would increase $12.2 billion after increasing $18.2 billion.

Proposed legislative and program changes

The budget for fiscal year 2007 proposes changes in legislation and in programs that would increase the Federal deficit by $56.1 billion in fiscal year 2006 and by $97.5 billion in fiscal year 2007 (table 3).4

Receipts. If proposed legislation is enacted, receipts would decrease $16.0 billion in fiscal year 2006 and $28.1 billion in fiscal year 2007, relative to the currentservices baseline.5

* A proposal to extend the amount of the alternative minimum tax (AMT) exemption and the use of nonrefundable personal tax credits to offset both the regular tax and the AMT, which expired at the end of the 2005 tax year, would reduce receipts $13.7 billion in fiscal year 2006 and $20.5 billion in fiscal year 2007.

* A proposal to permanently extend the 20-percent tax credit for qualified research and experimentation expenses that are above specified amounts would reduce receipts $2.1 billion in 2006 and $4.6 billion in 2007.

* A proposal to provide enhanced expense-related tax benefits for small businesses would reduce receipts $2.5 billion in 2007. The annual investment expenditures for qualifying property that business taxpayers are allowed to expense would be increased to $200,000. The amount that is eligible to be expensed would be reduced by the amount of the qualifying investment that exceeds $800,000.

* A proposal to provide a deduction for high-deductible health insurance premiums to individuals who do not itemize their deductions would reduce receipts by $2.5 billion in 2007.

* A proposal to expand health savings accounts through several proposed changes would reduce receipts by $2.0 billion in 2007.

* A proposal to expand tax-free savings by replacing Individual Retirement Accounts (IRAs) with Lifetime Savings Accounts (LSAs) and Retirement Savings Accounts (RSAs) would increase receipts $4.8 billion in 2007.6

Receipts proposals that are included in the currentservices baseline would increase receipts $0.1 billion in fiscal year 2006 and would decrease receipts $0.5 billion in fiscal year 2007 (table 3).

* A proposal to permanently extend the repeal of estate taxes and generation-skipping transfer taxes would reduce receipts $0.2 billion in 2006 and $1.1 billion in 2007.7

* A proposal to permanently extend the reduced tax rate on dividends would increase receipts $0.3 billion in 2006 and $0.6 billion in 2007.8

Outlays. The budget for fiscal year 2007 would increase total outlays $40.2 billion in fiscal year 2006 and $69.4 billion in fiscal year 2007, relative to the currentservices baseline.9 The increase in outlays in 2007 reflects the following:

* Outlays for national defense would increase $61.4 billion, reflecting a $55.9 billion increase in anticipated funding for the global war on terror. Proposed changes in discretionary spending on military operations and maintenance, on military personnel, and on procurement would also contribute to the increase in national defense outlays.

* Outlays for allowances would increase $5.5 billion, reflecting anticipated funding for supplemental hurricane relief.

* Outlays for health programs would increase $4.5 billion reflecting the net effects of proposals for increases and decreases in Medicaid and in other mandatory and discretionary health programs.

The increases in outlays would be partly offset by increases in "undistributed offsetting receipts" and by decreases in Medicare, in education, training, employment, and social services, and in several other functions.

The adjustments to the baseline requirements of the Budget Enforcement Act would reduce current-services baseline outlays by $48.6 billion in fiscal year 2007 (table 3).

* Outlays for national defense, international aid, and disaster assistance would decrease $45.4 billion in order to exclude emergency funding from the baseline for years after the year of enactment.

* Outlays would decrease $2.1 billion in order to correct the overstatement of the cost related to Federal pay raises in the baseline.10

The Budget Estimates and the NIPA Estimates

BEA adjusts the Federal budget's estimates of receipts and outlays in order to prepare estimates of Federal Government current receipts and expenditures that are consistent with NIPA concepts and methods.

Receipts

For fiscal year 2007, the NIPA estimate of current receipts would exceed the Federal budget estimate of receipts by $104.7 billion as a result of netting and grossing, coverage, and timing adjustments (table 4).11 Netting and grossing adjustments would add $120.8 billion to the budget estimate. "Other" netting and grossing adjustments-which include adjustments for Federal Government payments to the Old-Age, Survivors, and Disability Trust Funds-would add $61.9 billion, and adjustments for payments for supplementary medical insurance premiums would add $55.4 billion. Timing adjustments would add $24.6 billion, most of which is accounted for by timing on corporate income and timing on income and employment tax withholdings. Coverage adjustments would subtract $40.6 billion. Coverage adjustments for capital transfers received, which consists of estate and gift taxes, would subtract $23.5 billion.

Expenditures

For fiscal year 2007, the NIPA estimate of Federal Government current expenditures would exceed the Federal budget estimate of outlays by $120.4 billion (table 5). Netting and grossing adjustments would add $120.8 billion to the budget estimate. Timing adjustments would add $13.0 billion. And coverage adjustments would subtract $13.5 billion. Coverage adjustments for capital transfers paid-which includes capital grants to state and local governments, businesses, and persons-would subtract $55.6 billion, and adjustments for Federal employee retirement plan transactions would add $40.7 billion.

For fiscal year 2007, the NIPA estimate of national defense consumption expenditures would exceed the budget estimate of national defense outlays by $22.5 billion (table 6). The estimates differ mainly because of the NIPA treatment of retirement funds for military and civilian employees and the addition of consumption of fixed capital.

Net saving and the budget deficit

For fiscal year 2007, the NIPA estimate of net Federal Government saving is -$369.9 billion; the comparable Federal budget estimate is -$354.2 billion (table 7). The difference reflects coverage and timing adjustments. The coverage adjustments reduce both NIPA current receipts and NIPA current expenditures, and the timing adjustments raise both NIPA current receipts and NIPA current expenditures. Netting and grossing adjustments affect NIPA current receipts and NIPA current expenditures equally, so these adjustments do not affect net Federal Government saving.

Annual and Quarterly NIPA Estimates

Fiscal year 2007 NIPA estimates

On a NIPA basis, net Federal Government saving would increase $14.1 billion in fiscal year 2007 after decreasing $42.0 billion in fiscal year 2006 (table 7 and chart 1). The upturn results from a larger deceleration in Federal Government current expenditures than in Federal Government current receipts.

Receipts. Total Federal Government current receipts would increase $150.7 billion after increasing $179.5 billion (table 8 and chart 2). The deceleration results from a deceleration in the tax base that would increase receipts $162.5 billion. (The estimates of the tax base are based on the administration's economic assumptions and do not include the effects of proposed legislation.)

In current tax receipts, personal current taxes would accelerate, increasing $103.9 billion after increasing $74.6 billion; the acceleration is accounted for by an acceleration in the tax base. Taxes on production and imports would accelerate, increasing $4.9 billion after increasing $3.8 billion. Taxes on corporate income would turn down, decreasing $12.8 billion after increasing $15.9 billion; the downturn reflects a downturn in the tax base.

Contributions for government social insurance would increase $55.0 billion after increasing $54.9 billion, reflecting a slight acceleration in the tax base. Current transfer receipts would decelerate, increasing $0.7 billion after increasing $26.7 billion; the 2007 deceleration results from the proposed 2006 increase in transfer payments from business, reflecting the impact of settlement payments from the National Flood Insurance Program in 2005.12 The current surplus of government enterprises would decrease $1.7 billion after decreasing $0.1 billion.

Expenditures. Total Federal Government current expenditures would increase $136.6 billion in fiscal year 2007 after increasing $221.4 billion in fiscal year 2006 (table 9 and chart 3). The deceleration results from a deceleration in consumption expenditures, which would increase $5.9 billion after increasing $58.6 billion.

National defense consumption expenditures would decelerate, increasing $0.4 billion after increasing $38.2 billion. Nondefense consumption expenditures would decelerate, increasing $5.5 billion after increasing $20.4 billion. Current transfer payments would decelerate, increasing $97.6 billion after increasing $118.9 billion.

Government social benefits to persons would increase $98.5 billion after increasing $102.2 billion.The deceleration is mostly attributable to downturns in benefits for food stamps and "other social benefits to persons."

Grants-in-aid to state and local governments would increase $5.5 billion after increasing $12.0 billion. The deceleration is mostly attributable to downturns in grants for health and hospitals, for housing and community services, and for education.

"Other current transfer payments to the rest of the world" would turn down, decreasing $6.5 billion after increasing $4.6 billion. Federal interest payments would decelerate, increasing $32.3 billion after increasing $37.2 billion. Subsidies would decelerate, increasing $0.9 billion after increasing $6.7 billion; the deceleration is primarily attributable to a deceleration in agricultural subsidies.

Investment. Total Federal Government gross investment would increase $1.6 billion to $113.3 billion in fiscal year 2007. In fiscal year 2006, gross investment would increase $7.5 billion to $111.7 billion (table 10). This deceleration is mostly accounted for by a deceleration in gross investment for national defense.

Other items. Capital transfer receipts would turn down, and capital transfer payments would decelerate (table 10). Net borrowing would turn up, increasing $29.1 billion after decreasing $48.1 billion (table 10).13

Quarterly pattern

BEA prepares seasonally adjusted quarterly NIPA estimates of Federal Government current receipts and current expenditures that are consistent with the Federal budget estimates (table 10).

The quarterly estimates presented here are extrapolated from the preliminary estimates for the fourth quarter of 2005, which were released on February 28, 2006. In general, because of the limited information available to estimate quarterly patterns, the estimates should be viewed as approximations that will be superseded by more reliable quarterly estimates that are published in NIPA table 3.2.14

Receipts. The NIPA estimates of current receipts reflect the quarterly pattern of estimates that would result from enacted and proposed legislation, based on the administration's projected pattern of wages. The NIPA estimates also reflect BEA's methodology for deriving quarterly estimates of income tax payments and of "final settlements less refunds."15

Expenditures. The NIPA estimates of current expenditures reflect the quarterly pattern that would result from enacted and proposed legislation that would adjust pay for Federal Government employees and that would provide cost-of-living increases in Social security and other programs.

Net saving. Net Federal Government saving decreased from -$298.3 billion in the first quarter of 2005 to -$333.0 billion in the fourth quarter. In the first quarter of 2006, net saving is projected to decrease, reflecting a projected increase in current expenditures that would exceed the increase in current receipts. The increase in current expenditures stems from projected increases in government social benefits that reflect a substantial increase in Medicare due to the prescription drug benefit program that began in January 2006 and in defense consumption expenditures. In the second and third quarters of 2006, net saving is projected to decrease; national defense consumption expenditures are projected to increase. In the fourth quarter of 2006, net saving is projected to increase because increases in current receipts are expected to more than offset increases in current expenditures; national defense consumption expenditures are projected to decline.

In the first quarter of 2007, net Federal Government saving is projected to increase as a result of an increase in current receipts that more than offsets an increase in current expenditures. The projected increase in current receipts is attributable to increases in personal current tax receipts and in contributions for government social insurance. The projected increase in current expenditures results from an increase in social benefits for Medicare, primarily due to the increases in the prescription drug benefit program, and from an increase in other benefit programs as a result of costof-living adjustments. In the second and third quarters of 2007, net saving is projected to increase, reflecting increases in current receipts that more than offset the increases in current expenditures. The increases in current receipts are accounted for by increases in personal current taxes and contributions for government social insurance.

Investment. Gross government investment increased from $100.7 billion in the first quarter of 2005 to $115.7 billion in the fourth quarter, driven mostly by increases in national defense gross investment. In the first quarter of 2006, gross government investment is projected to decrease; it is projected to increase in the second quarter, to remain relatively unchanged in the third quarter, then to increase slightly in the fourth quarter. In first quarter of 2007, gross government investment is projected to remain relatively unchanged; it is projected to increase slightly in the second quarter and to decrease slightly in the third quarter. The quarterly pattern for investment primarily reflects the pattern of defense investment.

Capital transfer receipts and payments. Capital transfer receipts increased from $24.9 billion in the first quarter of 2005 to $25.8 billion in the fourth quarter. In the first and second quarters of 2006, these receipts are projected to increase, and they are then projected to decrease in the third and fourth quarters.

Capital transfer payments decreased from $80.0 billion in the first quarter of 2005 to $65.3 billion in the fourth quarter. In the first quarter of 2006, these payments are projected to begin trending up.

Net borrowing. This measure increased from $357.4 billion in the first quarter of 2005 to $389.2 billion in the fourth quarter. In 2006, net borrowing is projected to peak at $505.8 billion in the third quarter and to decline in each quarter through the end of 2007.

Translation of Budget Data into a NIPA Framework

BEA uses a detailed analytical process to translate Federal budget receipts and outlays into a NIPA framework.

Receipts

Fiscal year budget data for receipts are supplemented by information on the effects of budget proposals from the Department of the Treasury's Office of Tax Analysis and by information in the budget's Appendix.16 These data are analyzed for their effects on the following major components of the NIPA Federal Government current receipts: Current tax receipts, contributions for government social insurance, income receipts on assets, current transfer receipts, and current surplus of government enterprises. Quarterly projections are based on the economic assumptions from the Federal budget. When monthly and quarterly NIPA estimates are released, these initial quarterly projections of receipts are reevaluated and revised to incorporate newly available data from the Department of the Treasury.

Outlays

Fiscal year budget outlays are organized by appropriation in the Federal budget's Appendix. These data and supplemental data from the Office of Management and Budget are used to allocate Federal budget outlays to the following NIPA categories: Current transfer payments, interest payments, subsidies, and consumption expenditures and gross investment.17 The quarterly projections are mainly derived by interpolation from fiscal year projections.

When the quarterly NIPA estimates are released, the fiscal year relationships derived from the budget data are used to allocate the spending that is detailed in the Monthly Treasury Statement of Receipts and Outlays of the United States Government.(TM) Supplemental data are also used. A detailed reconciliation of defense consumption expenditures and gross investment with outlays is prepared, using extensive financial, delivery, and other information from the Department of Defense. In order to prepare seasonally adjusted estimates of nondefense consumption expenditures and gross investment, data from the budget are used to extrapolate portions of nondefense expenditures (for durable goods, for "other nondurable goods," for "other services," and for equipment) for which there are no quarterly source data. These extrapolated estimates incorporate quarterly data for certain expenditures, such as those for construction from the Census Bureau and for compensation from the Office of Personnel Management and the Bureau of Labor Statistics.

Updated estimates

The initial quarterly projections of Federal Government receipts and expenditures will likely differ from later estimates. The initial estimates are based on budget data, which feature various economic assumptions about the budget year. These estimates are then updated during the year as new laws are enacted, as actual spending occurs, as economic conditions change, and as more source data become available.