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Analytical PerspectivesBUDGET OF THE U. S. GOVERNMENT

Fiscal Year 2018

Office of Management and Budget

U.S. GOVERNMENT PUBLISHING OFFICE, WASHINGTON 2017

THE BUDGET DOCUMENTSBudget of the United States Government, Fiscal

Year 2018 contains the Budget Message of the President,information on the President’s priorities, and summarytables.

Analytical Perspectives, Budget of the UnitedStates Government, Fiscal Year 2018 contains anal-yses that are designed to highlight specified subject ar-eas or provide other significant presentations of budgetdata that place the budget in perspective. This volumeincludes economic and accounting analyses; informationon Federal receipts and collections; analyses of Federalspending; information on Federal borrowing and debt;baseline or current services estimates; and other techni-cal presentations.

The Analytical Perspectives volume also has supple-mental materials that are available on the internet atwww.budget.gov/budget/Analytical_Perspectives and onthe Budget CD-ROM. These supplemental materials in-clude tables showing the budget by agency and accountand by function, subfunction, and program.

Appendix, Budget of the United StatesGovernment, Fiscal Year 2018 contains detailed in-formation on the various appropriations and funds thatconstitute the budget and is designed primarily for theuse of the Appropriations Committees. The Appendixcontains more detailed financial information on individ-ual programs and appropriation accounts than any of theother budget documents. It includes for each agency: theproposed text of appropriations language; budget sched-ules for each account; legislative proposals; narrative ex-planations of each budget account; and proposed generalprovisions applicable to the appropriations of entire agen-

cies or group of agencies. Information is also provided oncertain activities whose transactions are not part of thebudget totals.

ELECTRONIC SOURCES OF BUDGETINFORMATION

The information contained in these documents is avail-able in electronic format from the following sources:

Internet. All budget documents, including documentsthat are released at a future date, spreadsheets of manyof the budget tables, and a public use budget databaseare available for downloading in several formats from theinternet at www.budget.gov/budget. Links to documentsand materials from budgets of prior years are also pro-vided.

Budget CD-ROM. The CD-ROM contains all of theprinted budget documents in fully indexed PDF formatalong with the software required for viewing the docu-ments.

The Internet and CD-ROM also include many of thebudget tables in spreadsheet format, and supplementalmaterials that are part of the Analytical Perspectives vol-ume. It also includes Historical Tables that provide dataon budget receipts, outlays, surpluses or deficits, Federaldebt, and Federal employment over an extended time pe-riod, generally from 1940 or earlier to 2018 or 2022.

For more information on access to electronic versionsof the budget documents (except CD-ROMs), call (202)512-1530 in the D.C. area or toll-free (888) 293-6498. Topurchase the Budget CD-ROM or printed documents call(202) 512-1800.

GENERAL NOTES

1. All years referenced for budget data are fiscal years unless otherwise noted. All yearsreferenced for economic data are calendar years unless otherwise noted.

2. At the time of this writing, only one of the annual appropriations bills for 2017 had beenenacted (the Military Construction and Veterans Affairs Appropriations Act), as well asthe Further Continuing and Security Assistance Appropriations Act, which provided 2017discretionary funding for certain Department of Defense accounts; therefore, the programsprovided for in the remaining 2017 annual appropriations bills were operating under acontinuing resolution (Public Law 114-223, division C, as amended). For these programs,references to 2017 spending in the text and tables reflect the levels provided by thecontinuing resolution.

3. Detail in this document may not add to the totals due to rounding.

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TABLE OF CONTENTS

List of Charts and Tables �� iii

Introduction

1� Introduction ��3

Economic Assumptions and Interactions with the Budget

2� Economic Assumptions and Interactions with the Budget ��9

3� Long-Term Budget Outlook��19

4� Federal Borrowing and Debt ��27

Performance and Management

5� Social Indicators ��45

6� Building and Using Evidence to Improve Government Effectiveness ��55

7� Strengthening the Federal Workforce ��59

Budget Concepts and Budget Process

8� Budget Concepts ��69

9� Coverage of the Budget ��93

10� Budget Process ��99

Federal Receipts

11� Governmental Receipts ��115

12� Offsetting Collections and Offsetting Receipts ��121

Federal Receipts

13� Tax Expenditures ��127

Special Topics

14� Aid to State and Local Governments ��171

15� Strengthening Federal Statistics ��185

16� Information Technology ��191

17� Federal Investment ��197

18� Research and Development ��203

19� Credit and Insurance��209

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20� Budgetary Effects of the Troubled Asset Relief Program ��231

21� Federal Drug Control Funding ��241

Technical Budget Analyses

22� Current Services Estimates ��245

23� Trust Funds and Federal Funds ��257

24� Comparison of Actual to Estimated Totals ��271

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*Available on the Internet at http://www.whitehouse.gov/omb/budget/Analytical_Perspectives/ and on the Budget CD-ROM

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LIST OF CHARTS AND TABLES

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LIST OF CHARTS AND TABLES

LIST OF CHARTS

2–1� Range of Uncertainty for the Budget Defecit ��18

3-1� Comparison of Publicly Held Debt ��19

3-2� Comparison of Annual Surplus/Defecit ��20

3-3� Alternative Productivity and Interest Assumptions ��21

3-4� Alternative Health Care Costs ��22

3-6� Alternative Revenue Assumptions ��23

3-5� Alternative Discretionary Assumptions ��23

3-7� Long Term Uncertainties ��24

7–1� Changes from 1975 to 2016 in Employment/Population by Sector ��60

7–2� Masters Degree or Above by Year for Federal and Private Sector ��62

7–3� High School Graduate or Less by Year for Federal and Private Sectors ��63

7–4� Average Age by Year for Federal and Private Sectors ��63

7–5� Pay Raises for Federal vs� Private Workforce ��64

8–1� Relationship of Budget Authority to Outlays for 2018 ��81

16–1� Trends in Federal IT Spending ��191

16–2� IT Portfolio Summary ��192

16–3� Number of Investments by Percentage of IT Spending, 2018 ��193

16–4� CIO Risk Ratings for Investments ��193

16–5� IT Spending by Category ��194

16–6� Digital Projects in Production to Which Digital Experts have Contributed ��195

19–1� Face Value of Federal Credit Outstanding ��226

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LIST OF TABLES

Economic Assumptions and Interactions with the Budget

Economic Assumptions and Interactions with the Budget 2–1� Economic Assumptions �� 11 2–2� Comparison of Economic Assumptions in the 2017 and 2018 Budgets �� 12 2–3� Comparison of Economic Assumptions �� 13 2–4� Sensitivity of the Budget to Economic Assumptions �� 16 2–5� Forecast Errors, January 1982-Present �� 17 2–6� Differences Between Estimated and Actual Surpluses or Deficits for

Five-Year Budget Estimates Since 1986 �� 18

Long-Term Budget Outlook 3–1� Debt Projections in 25 Years Under Alternative Budget Scenarios �� 22 3–2� Intermediate Actuarial Projections for OASDI And HI, 2016 Trustees’ Reports �� 24 3–3� Intermediate Actuarial Projections for OASDI And HI �� *

Federal Borrowing and Debt 4–1� Trends in Federal Debt Held by the Public and Interest on the

Debt Held by the Public �� 28 4–2� Federal Government Financing and Debt �� 30 4–3� Debt Held by the Public Net of Financial Assets and Liabilities �� 34 4–4� Agency Debt �� 36 4–5� Debt Held by Government Accounts �� 37 4–6� Federal Funds Financing and Change in Debt Subject to Statutory Limit �� 40 4–7� Foreign Holdings of Federal Debt �� 41

Performance and Management

Social Indicators 5–1� Social Indicators �� 47 5–2� Sources for Social Indicators �� 51

Strengthening the Federal Workforce 7–1� Federal Civilian Employment in the Executive Branch �� 61 7–2� Total Federal Employment �� 62 7–3� Personnel Pay and Benefits �� 65 7–4� Occupations of Federal and Private Sector Workforces �� 66


Budget Concepts Budget Calendar �� 71 8–1� Totals for the Budget and the Federal Government �� 76

Coverage of the Budget 9–1� Comparison of Total, On-Budget, and Off-Budget Transactions �� 94

Budget Process 10–1� Program Integrity Discretionary Cap Adjustments, including Mandatory Savings �� 101 10–2� Mandatory and Receipt Savings from Other Program Integrity Initiatives �� 103

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10–3� Discretionary Pell Funding Needs �� 108

Federal Receipts

Governmental Receipts 11–1� Receipts by Source—Summary �� 116 11–2� Effect of Budget Proposals �� 119 11–3� Receipts by Source �� *

Offsetting Collections and Offsetting Receipts 12–1� Offsetting Collections and Offsetting Receipts from the Public �� 122 12–2� Summary of Offsetting Receipts by Type �� 123 12–3� Gross Outlays, User Charges, Other Offsetting Collections and Offsetting

Receipts from the Public, and Net Outlays �� 124 12–4� Offsetting Receipts by Type �� *

Federal Receipts

Tax Expenditures 13–1� Estimates of Total Income Tax Expenditures for Fiscal Years 2016-2026 �� 130 13–2A� Estimates of Total Corporate Income Tax Expenditures for

Fiscal Years 2016-2026 �� 135 13–2B� Estimates of Total Individual Income Tax Expenditures for

Fiscal Years 2016–2026 �� 140 13-3� Income Tax Expenditures Ranked by Total Fiscal Year 2017-2026 Projected

Revenue Effect �� 145 13–4� Present Value of Selected Tax Expenditures for Activity in Calendar Year 2016 �� 149

Special Topics

Aid to State and Local Governments 14–1� Trends in Federal Grants to State and Local Governments �� 173 14–2� Federal Grants to State and Local Governments—Budget Authority and Outlays �� 175 14–3� Summary of Programs by Agency, Bureau, and Program �� * 14–4� Summary of Programs by State �� * 14–5�–39� 2016 Budget State-by-State Tables �� *

Strengthening Federal Statistics 15–1� 2016-2018 Budget Authority for Principle Statistical Agencies �� 189

Information Technology 16–1� Federal IT Spending �� 191 16–2� FY 2018 IT Spending by Agency �� 192

Federal Investment 17–1� Composition of Federal Investment Outlays �� 198 17–2� Federal Investment Budget Authority and Outlays: Grant and Direct

Federal Programs �� 200

Research and Development 18–1� Total Federal R&D Funding by Agency at the Bureau or Account Level �� 203

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18–2� Federal Research and Development Spending �� 206

Credit and Insurance 19–1� Estimated Future Cost of Outstanding Direct Loans and Loan Guarantees �� 227 19–2� Direct Loan Subsidy Rates, Budget Authority, and Loan Levels, 2016-2018 �� 228 19–3� Loan Guarantee Subsidy Rates, Budget Authority, and Loan Levels, 2016-2018 �� 229 19–4� Summary of Federal Direct Loans and Loan Guarantees �� 230 19–5� Reestimates of Credit Subsidies on Loans Disbursed Between 1992-2016 �� * 19–6� Face Value of Government-Sponsored Lending �� * 19–7� Lending and Borrowing by Government-Sponsored Enterprises (GSEs) �� * 19–8� Direct Loan Transactions of the Federal Government �� * 19–9� Guaranteed Loan Transactions of the Federal Government �� *

Budgetary Effects of the Troubled Asset Relief Program 20–1� Change in Programmatic Costs of Troubled Asset Relief Program �� 231 20–2� Troubled Asset Relief Program Current Value �� 232 20–3� Troubled Asset Relief Program Effects on the Deficit and Debt �� 234 20–4� Troubled Asset Relief Program Effects on the Deficit and Debt Calculated

on a Cash Basis �� 234 20–5� Troubled Asset Relief Program Reestimates �� 235 20–6� Detailed TARP Program Levels and Costs �� 236 20–7� Comparison of CBO and OMB TARP Costs �� 237

Federal Drug Control Funding 21–1� Drug Control Funding FY 2016—FY 2018 �� 241


Current Services Estimates 22–1� Category Totals for the Baseline �� 245 22–2� Summary of Economic Assumptions �� 248 22–3� Baseline Beneficiary Projections for Major Benefit Programs �� 249 22–4� Impact of Regulations, Expiring Authorizations, and Other Assumptions in the Baseline * 22–5� Receipts by Source in the Projection of Adjusted Baseline �� 250 22–6� Effect on Receipts of Changes in the Social Security Taxable Earnings Base �� 250 22–7� Change in Outlay Estimates by Category in the Baseline �� 251 22–8� Outlays by Function in the Baseline �� 252 22–9� Outlays by Agency in the Baseline �� 253 22–10� Budget Authority by Function In the Baseline �� 254 22–11� Budget Authority by Agency in the Baseline �� 255 22–12� Current Services Budget Authority and Outlays by Function, Category, and Program �� *

Trust Funds and Federal Funds 23–1� Receipts, Outlays and Surplus or Deficit by Fund Group �� 258

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23–2� Comparison of Total Federal Fund and Trust Fund Receipts to Unified Budget Receipts, Fiscal Year 2016 �� 260

23–3� Income, Outgo, and Balances of Trust Funds Group �� 262 23–4� Income, Outgo, and Balance of Major Trust Funds �� 263 23–5� Income, Outgo, and Balance of Selected Special Funds �� 269

Comparison of Actual to Estimated Totals 24–1� Comparison of Actual 2016 Receipts with the Initial Current Services Estimates �� 271 24–2� Comparison of Actual 2016 Outlays with the Initial Current Services Estimates �� 272 24–3� Comparison of the Actual 2016 Deficit with the Initial Current Services Estimate �� 273 24–4� Comparison of Actual and Estimated Outlays for Mandatory and Related

Programs Under Current Law �� 274 24–5� Reconciliation of Final Amounts for 2016 �� 275

Detailed Functional Tables 25–1� Budget Authority and Outlays by Function, Category and Program �� *

Federal Budget by Agency and Account 26–1� Federal Budget by Agency and Account �� *

California Bay-Delta Federal Budget Crosscut Report �� **


**Available on the Internet at http://www.whitehouse.gov/omb/budget/Analytical_Perspectives only

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INTRODUCTION

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1. INTRODUCTION

The Analytical Perspectives volume presents analyses that highlight specific subject areas or provide other sig-nificant data that place the President’s 2018 Budget in context and assist the public, policymakers, the media, and researchers in better understanding the budget. This volume complements the main Budget volume, which presents the President’s budget policies and priorities, and the Budget Appendix volume, which provides ap-propriations language, schedules for budget expenditure accounts, and schedules for selected receipt accounts.

Presidential budgets have included separate analyti-cal presentations of this kind for many years. The 1947 Budget and subsequent budgets included a separate section entitled “Special Analyses and Tables” that cov-ered four, and later more, topics. For the 1952 Budget, the section was expanded to 10 analyses, including many

subjects still covered today, such as receipts, investment, credit programs, and aid to State and local governments. With the 1967 Budget this material became a separate volume entitled “Special Analyses,” and included 13 chap-ters. The material has remained a separate volume since then, with the exception of the Budgets for 1991–1994, when all of the budget material was included in one vol-ume. Beginning with the 1995 Budget, the volume has been named Analytical Perspectives.

Several supplemental tables as well as several longer tables that were previously published within the vol-ume are available at http://www.budget.gov/budget/Analytical_Perspectives and on the Budget CD-ROM. These tables are shown in the List of Tables in the front of this volume with an asterisk instead of a page number.

OVERVIEW OF THE CHAPTERS

Economic and Budget Analyses

Economic Assumptions and Interactions with the Budget. This chapter reviews recent economic develop-ments; presents the Administration’s assessment of the economic situation and outlook; compares the economic assumptions on which the 2018 Budget is based with the assumptions for last year’s Budget and those of other forecasters; provides sensitivity estimates for the effects on the Budget of changes in specified economic assump-tions; and reviews past errors in economic projections.

Long-Term Budget Outlook. This chapter assesses the long-term budget outlook under current policies and under the Budget’s proposals. It focuses on 25-year projections of Federal deficits and debt to illustrate the long-term impact of the Administration’s proposed policies, and shows how alternative long-term budget assumptions af-fect the results. It also discusses the uncertainties of the long-term budget projections and discusses the actuarial status of the Social Security and Medicare programs.

Federal Borrowing and Debt. This chapter analyzes Federal borrowing and debt and explains the budget es-timates. It includes sections on special topics such as trends in debt, debt held by the public net of financial as-sets and liabilities, investment by Government accounts, and the statutory debt limit.

Management

Social Indicators. This chapter presents a selection of statistics that offers a numerical picture of the United States and illustrates how this picture has changed over time. Included are economic, demographic and civic, socioeconomic, health, security and safety, and environ-mental and energy statistics.

Building and Using Evidence to Improve Government Effectiveness. This chapter discusses evidence and its role in improving government programs and policies. It articulates important principles and practices including building and using a portfolio of evidence, developing a learning agenda, building an evidence infrastructure, and making better use of administrative data.

Strengthening the Federal Workforce. This chapter presents summary data on Federal employment and compensation, and discusses the initial approach the Administration is taking with Federal human capital management.


Budget Concepts. This chapter includes a basic descrip-tion of the budget process, concepts, laws, and terminology, and includes a glossary of budget terms.

Coverage of the Budget. This chapter describes activi-ties that are included in budget receipts and outlays (and are therefore classified as “budgetary”) as well as those activities that are not included in the Budget (and are therefore classified as “non-budgetary”). The chapter also defines the terms “on-budget” and “off-budget” and in-cludes illustrative examples.

Budget Process. This chapter discusses proposals to improve budgeting and fiscal sustainability within indi-vidual programs as well as across Government.

Federal Receipts

Governmental Receipts. This chapter presents infor-mation on estimates of governmental receipts, which consist of taxes and other compulsory collections. It in-cludes descriptions of tax-related legislation enacted in

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the last year and describes proposals affecting receipts in the 2018 Budget.

Offsetting Collections and Offsetting Receipts. This chapter presents information on collections that offset outlays, including collections from transactions with the public and intragovernmental transactions. In addition, this chapter presents information on “user fees,” charges associated with market-oriented activities and regulatory fees. A detailed table, “Table 12–4, Offsetting Receipts by Type” is available at the Internet address cited above and on the Budget CD-ROM.

Tax Expenditures. This chapter describes and pres-ents estimates of tax expenditures, which are defined as revenue losses from special exemptions, credits, or other preferences in the tax code.

Special Topics

Aid to State and Local Governments. This chapter presents crosscutting information on Federal grants to State and local governments. The chapter also includes a table showing historical grant spending, and a table with budget authority and outlays for grants in this Budget. Tables showing State-by-State spending for major grant programs are available at the Internet address cited above and on the Budget CD-ROM.

Strengthening Federal Statistics. This chapter discuss-es the vital role of the Federal government’s statistical agencies and programs in generating data that citizens, businesses, and governments need to make informed deci-sions. This chapter also provides examples of innovative developments and applications throughout the Federal statistical community and highlights 2018 Budget propos-als for the Government’s principal statistical programs.

Information Technology. This chapter addresses Federal information technology (IT), highlighting ini-tiatives to improve IT management through modern solutions to enhance service delivery. The Administration will engage agencies with PortfolioStat reviews of IT in-vestments, advancing modernization and cost reduction through the Data Center Optimization Initiative, use of shared services, migrations to cloud-computing, and leveraging Federal buying power. Digital experts will continue to transform many of the Government’s highest impact programs, while cybersecurity will be strength-ened through the Continuous Diagnostics and Mitigation (CDM) program, and developing new strategies to meet emerging threats.

Federal Investment. This chapter discusses Federally-financed spending that yields long-term benefits. It presents information on annual spending on physical capital, research and development, and education and training.

Research and Development. This chapter presents a crosscutting review of research and development funding in the Budget.

Credit and Insurance. This chapter provides cross-cutting analyses of the roles, risks, and performance of Federal credit and insurance programs and Government-sponsored enterprises (GSEs). The chapter covers the major categories of Federal credit (housing, education,

small business and farming, energy and infrastructure, and international) and insurance programs (deposit in-surance, pension guarantees, disaster insurance, and insurance against terrorism-related risks). Five addi-tional tables address transactions including direct loans, guaranteed loans, and Government-sponsored enter-prises. These tables are available at the Internet address cited above and on the Budget CD-ROM.

Budgetary Effects of the Troubled Asset Relief Program. The chapter provides special analyses of the Troubled Asset Relief Program (TARP) as described in Sections 202 and 203 of the Emergency Economic Stabilization Act of 2008, including information on the costs of TARP activity and its effects on the deficit and debt.

Federal Drug Control Funding. This chapter displays enacted and proposed drug control funding for Federal de-partments and agencies.

Note: Previous Analytical Perspectives volumes includ-ed a “Homeland Security Funding Analysis” chapter, and provided additional detailed information on the Internet address cited above and on the Budget CD-ROM. P.L. 115–31 eliminated the statutory reporting requirement for this information. Therefore, this information is not included in this year’s Budget and it will not be included in future Budgets.


Current Services Estimates. This chapter presents es-timates of what receipts, outlays, and the deficit would be if current policies remained in effect, consistent with the baseline rules in the Balanced Budget and Emergency Deficit Control Act of 1985 (BBEDCA). Two detailed tables addressing factors that affect the baseline and pro-viding details of baseline budget authority and outlays are available at the Internet address cited above and on the Budget CD-ROM.

Trust Funds and Federal Funds. This chapter provides summary information about the two fund groups in the budget—Federal funds and trust funds. In addition, for the major trust funds and certain Federal fund programs, the chapter provides detailed information about income, outgo, and balances.

Comparison of Actual to Estimated Totals. This chap-ter compares the actual receipts, outlays, and deficit for 2016 with the estimates for that year published in the 2016 Budget, published in February 2015.

The following materials are available at the Internet address cited above and on the Budget CD-ROM:

Detailed Functional Table

Detailed Functional Table. Table 25–1, “Budget Authority and Outlays by Function, Category, and Program,” displays budget authority and outlays for major Federal program categories, organized by budget function (such as health care, transportation, or national defense), category, and program.

Federal Budget by Agency and Account

The Federal Budget by Agency and Account. Table 26–1, “Federal Budget by Agency and Account,” displays

1. INTRODUCTION 5

budget authority and outlays for each account, organized by agency, bureau, fund type, and account.

The following report is available at the Internet ad-dress cited above:

California Bay-Delta Federal Budget Crosscut

California Bay-Delta Federal Budget Crosscut. The California Bay-Delta interagency budget crosscut report

includes an estimate of Federal funding by each of the participating Federal agencies to carry out its responsi-bilities under the California Bay-Delta Program, fulfilling the reporting requirements of section 106 of Public Law 108-361.

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ECONOMIC ASSUMPTIONS AND INTERACTIONS WITH THE BUDGET

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2. ECONOMIC ASSUMPTIONS AND INTERACTIONS WITH THE BUDGET

This chapter presents the economic assumptions that underlie the Administration’s Fiscal Year 2018 Budget.1 It describes the recent performance of the U.S. economy, explains the Administration’s projections for key mac-roeconomic variables, compares them with forecasts prepared by other prominent institutions and discusses the uncertainty inherent in producing an eleven-year forecast.

After contracting by more than 4 percent over 2007 to 2009, the United States economy has experienced stable but only relatively modest growth, especially when com-pared with past recoveries. From the trough in the second quarter of 2009, it took about two years for the economy to recover its previous output peak, much longer than in the other recoveries since World War II. Over the first three years of recoveries from previous postwar recessions, av-erage output growth was a little over 5 percent annually. In the first three years following the most recent reces-sion, average annual growth was only about 2.3 percent.

The disappointing recovery is motivating this Administration’s aggressive economic strategy, which entails policies aimed at reforming the tax code and the regulatory framework. In addition, the Administration will introduce policies to encourage domestic energy de-velopment and investments in infrastructure, reform the health care system, negotiate more attractive trade agreements, and reduce (and eventually eliminate) Federal budget deficits. Such actions should encourage investment by American firms, stimulate productivity growth, and slow the expected decline in the labor force participation rate, leading to stronger growth in output and putting more Americans to work.

This chapter proceeds as follows:• The first section reviews the performance of the U.S.

economy since the publication of the 2017 Budget, examining a broad array of economic outcomes.

• The second section provides a detailed exposition of the Administration’s economic forecast for the 2018 Budget, discussing how a number of macroeconomic variables are expected to evolve over the years 2017 to 2027.

• The third section compares the forecast of the Ad-ministration with those prepared by the Congressio-nal Budget Office, the Federal Open Market Com-mittee of the Federal Reserve, and the Blue Chip panel of private sector forecasters.

• The fourth section discusses the sensitivity of the Administration’s projections of Federal receipts and

1 Economic performance is discussed in terms of calendar years. Bud-get figures are discussed in terms of fiscal years.

outlays to fluctuations in the main macroeconomic variables discussed in the forecast.

• The fifth section considers the errors and possible biases2 in past Administration forecasts, compar-ing them with the errors in forecasts produced by the Congressional Budget Office and the Blue Chip panel.

• The sixth section combines results on the sensitiv-ity of the budget deficit to economic assumptions with information on past accuracy of Administra-tion forecasts to provide a sense of the uncertainty associated with the Administration’s forecast of the budget balance.

Recent Economic Performance3

The U.S. economy continued to exhibit subdued growth throughout 2016. In the fourth quarter of 2016, real Gross Domestic Product (GDP) was 2.0 percent higher than it had been in the fourth quarter of the preceding year. This came on the heels of real GDP growing at a 1.9 per-cent rate over the four quarters of 2015, and an average growth rate of 2.1 percent (fourth quarter-on-fourth quar-ter) since 2010. Among the demand components of GDP, real consumer spending accounted for most of the growth in 2016, with consumption of nondurables and services contributing 1.5 percentage points and consumption of durable goods contributing a further 0.7 percentage point, on a fourth quarter-over-fourth quarter basis. Gross pri-vate domestic investment and government consumption and gross investment made only minor positive contribu-tions to growth, while net exports had a negative impact. On the supply side, weak productivity growth limited overall growth during 2016, as it has over the past sev-eral years. Over the four quarters of 2016, real output per hour in the nonfarm business sector grew by only 1.1 percent, well below the long run average of 2.1 percent during the post-World War II period.

Labor Markets—Labor markets improved in 2016 across a broad array of metrics. The unemployment rate continued to decline, falling from 5.0 percent at the end of 2015 to 4.7 percent at the end of 2016, and further to 4.4 percent in April of 2017, below the long-term average of 5.8 percent. During the first three months of 2017, the labor force participation rate averaged 63.0 percent, up from 62.7 percent in 2015 and and 62.8 percent in 2016. Although the participation rate has stabilized somewhat

2 As discussed later in this chapter, “bias” here is defined in the sta-tistical sense and refers to whether previous Administrations’ forecasts have tended to make positive or negative forecast errors on average.

3 The statistics in this section are based on information available in early May 2017.


following a steep decline since 2000, it is expected to fall further as the baby boom generation continues retiring in large numbers. The proportion of the labor force employed part-time for economic reasons has fallen to 3.3 percent in April 2017, well below its peak of over 6.0 percent dur-ing the Great Recession. Furthermore, the proportion of the labor force unemployed for longer than 27 weeks has fallen to 1.0 percent from a peak of nearly 4.4 percent.

In spite of these improvements, several metrics suggest that the economy has not regained the ground it had lost. Compared with the last business cycle peak at the end of 2007, the proportion of the labor force working part-time for economic reasons and the proportion unemployed for more than 27 weeks are still elevated, as are the shares of the working-age population only marginally attached to the labor force or too discouraged to look for work. The labor force participation rate among men aged 20 years old or older has fallen faster than that of the popula-tion as a whole, and the same is true of those who have only a high school diploma. Real average hourly wages for production and nonsupervisory workers have grown more slowly than real output since the end of 2007. At the end of 2016, the employment-to-population ratio for Americans aged between 25 and 34 years old was still a full percentage point below where it was at the start of the Great Recession. Even among workers older than 25 with a bachelor’s degree or higher, the unemployment rate has stopped falling and remains above the rates seen before the recession started.

Housing—The housing market continued to bolster the broader economy in 2016. House prices, as measured by the Federal Housing Finance Agency’s (FHFA) pur-chase-only index, were 6.2 percent higher in December 2016 than in December 2015, while the S&P-Case Shiller price index (another closely watched measure) estimated the appreciation at 5.5 percent. Higher house prices help fortify household balance sheets and support personal consumption expenditures. They also encourage further activity in the housing sector. Residential fixed invest-ment increased 1.1 percent over the four quarters of 2016. The number of housing starts rose from an annual rate of less than 1.2 million in December 2015 to nearly 1.3 mil-lion in December 2016, or a 9.9 percent increase. Building permits increased 2.2 percent over the same period.

Some weakness still remains in the housing market, however. As of February, while the FHFA index was about 8.0 percent higher than its pre-crisis peak, the S&P-Case Shiller index had only barely regained its previous apex. Homeownership rates have steadily declined since the re-cession began and were near an all-time low at the end of 2016.

Consumption—Consumer spending was a primary driver of growth in 2016, and at close to 70 percent of the economy, it is essential to overall growth. Consumption growth was spread over a number of different categories, including motor vehicles and parts (8.6 percent over the four quarters of 2016), furnishings and household equip-ment (6.1 percent), recreational goods and vehicles (11.3 percent), food and beverages (4.9 percent), and medical care (4.7 percent).

Investment—Disappointingly, growth in nonresiden-tial fixed investment was negative in 2016. A 3.8 percent decline in spending on equipment over the four quarters of 2016 offset a modest (1.9 percent) increase in spend-ing on structures and a more robust (4.3 percent) rise in intellectual property products. Growth in overall private investment (residential and nonresidential) has been be-low its postwar average in each of the last three years. Such weakness is likely to be problematic for future pro-ductivity growth.

Government—Overall demand from the government added modestly to GDP in 2016, with the State and lo-cal sector driving growth in this component. Government consumption and gross investment rose by 0.2 percent over the four quarters of 2016, with 0.4 percent growth coming from State and local governments. Federal pur-chases, in contrast, were negative. The Federal deficit edged up to 3.2 percent of GDP in fiscal year 2016, the first increase since the end of the Great Recession. While deficits might be expected to lead to higher interest rates and subsequent crowding out of private investment, the low interest rate environment that has obtained in recent years has mitigated this potentially negative force.

Monetary Policy—After holding nominal interest rates near zero for seven years, the Federal Open Market Committee of the Federal Reserve raised the target range for the federal funds rate by 25 basis points at the end of 2015. After a moderate pause, the Federal Reserve con-tinued normalization of monetary policy, with a 25 basis point increase in December 2016 and another in March 2017. In its March policy statement, the FOMC cited “solid” job gains and expectations for continued strength-ening of labor markets, as well as rates of inflation around the 2.0 percent target, as reasons for tightening policy. Similarly, the yield on the 10-year Treasury note has also increased recently, from an average of 1.6 percent in the third quarter of 2016 to an average of 2.4 percent during the first quarter of 2017.

Oil and Gas Production—After reaching a post-fi-nancial crisis peak above $100 per barrel, crude oil prices began to tumble in mid-2014. They continued to fall in 2015 and bottomed out around $30 in early 2016. Prices have since rebounded, rising above the $50 mark in late 2016. Higher oil prices act as a kind of tax on consum-ers’ purchasing power, so their net decline from $100 per barrel in early 2014 to just above $50 per barrel recently has effectively raised disposable incomes, which has sup-ported consumer spending. With new technology such as hydraulic fracturing, U.S. oil producers have emerged as important swing producers in global oil markets, helping to lower prices and moderate price fluctuations. Domestic production of crude oil averaged about 8.9 million barrels per day in 2016, up from 7.5 million barrels per day in 2013, although slightly down from 9.4 million barrels per day in 2015. The decline from 2015 reflects the decline in oil prices. Production of natural gas has experienced a qualitatively similar path, with production averaging about 72.3 billion cubic feet per day in 2016, down 2.5 percent from 2015 production levels, but still 9.1 percent higher than in 2013.

2. ECONOMIC ASSUMPTIONS AND INTERACTIONS WITH THE BUDGET 11

External Sector—Although real exports grew by 1.5 percent over the four quarters of 2016, real imports grew by an even faster 2.6 percent. As a result, net exports be-came slightly more negative in 2016, coming in at -$563.0 billion, compared with -$540.0 billion in 2015. Worldwide, 2016 was a weak year for economic growth. The growth rate of real GDP was below 2 percent in all of the oth-er G-7 countries, according to International Monetary Fund (IMF) data.4 Many large emerging market coun-tries (with the exception of India) have experienced lower growth rates in recent years, while countries such as Brazil and Russia have gone through deep recessions.

4 The other G-7 countries are Canada, France, Germany, Italy, Japan, and the United Kingdom.

These developments, as well as a strengthening dollar, have contributed to the soft performance of U.S. exports. Looking ahead, it is possible that faster global growth and better trade agreements will help U.S. export perfor-mance to improve.

Economic Projections

The Administration’s economic forecast is based on information available at the end of February 2017 and includes projections for a number of important macroeco-nomic variables. The forecast is used to inform the Fiscal Year 2018 Budget and rests on the central assumption that all of the President’s policy proposals will be enacted.

Table 2–1. ECONOMIC ASSUMPTIONS 1 (Calendar Years, Dollar Amounts In Billions)

Actual Projections

2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027

Gross Domestic Product (GDP)

Levels, Dollar Amounts in Billions:Current Dollars �� 18037 18566 19367 20237 21197 22253 23379 24563 25806 27111 28483 29924 31439Real, Chained (2009) Dollars �� 16397 16660 17045 17458 17928 18452 19005 19576 20163 20768 21391 22033 22694Chained Price Index (2009=100), Annual Average �� 110�0 111�4 113�6 115�9 118�2 120�6 123�0 125�5 128�0 130�5 133�1 135�8 138�5

Percent Change, Fourth Quarter over Fourth Quarter:Current Dollars �� 3�0 3�5 4�4 4�5 4�9 5�1 5�1 5�1 5�1 5�1 5�1 5�1 5�1Real, Chained (2009) Dollars �� 1�9 1�9 2�3 2�5 2�8 3�0 3�0 3�0 3�0 3�0 3�0 3�0 3�0Chained Price Index (2009=100) �� 1�1 1�6 2�0 2�0 2�0 2�0 2�0 2�0 2�0 2�0 2�0 2�0 2�0

Percent Change, Year over Year:Current Dollars �� 3�7 2�9 4�3 4�5 4�7 5�0 5�1 5�1 5�1 5�1 5�1 5�1 5�1Real, Chained (2009) Dollars �� 2�6 1�6 2�3 2�4 2�7 2�9 3�0 3�0 3�0 3�0 3�0 3�0 3�0Chained Price Index (2009=100) �� 1�1 1�3 1�9 2�0 2�0 2�0 2�0 2�0 2�0 2�0 2�0 2�0 2�0

Incomes, Billions of Current DollarsDomestic Corporate Profits �� 1702 1684 1806 1859 1928 1972 2033 2086 2154 2228 2311 2452 2581Employee Compensation �� 9693 10102 10556 11037 11572 12171 12801 13466 14169 14909 15698 16497 17339Wages and Salaries �� 7855 8189 8551 8950 9384 9880 10387 10922 11489 12085 12725 13371 14066Other Taxable Income (2) �� 4290 4385 4587 4785 5025 5325 5669 5990 6314 6628 6938 7253 7545

Consumer Price Index (All Urban) (3):Level (1982–1984 = 100), Annual Average �� 237�0 240�0 246�2 251�8 257�5 263�3 269�3 275�4 281�6 288�0 294�5 301�1 307�9Percent Change, Fourth Quarter over Fourth Quarter �� 0�4 1�8 2�5 2�3 2�3 2�3 2�3 2�3 2�3 2�3 2�3 2�3 2�3Percent Change, Year over Year �� 0�1 1�3 2�6 2�3 2�3 2�3 2�3 2�3 2�3 2�3 2�3 2�3 2�3

Unemployment Rate, Civilian, PercentFourth Quarter Level �� 5�0 4�7 4�5 4�4 4�7 4�7 4�8 4�8 4�8 4�8 4�8 4�8 4�8Annual Average �� 5�3 4�9 4�6 4�4 4�6 4�7 4�8 4�8 4�8 4�8 4�8 4�8 4�8

Federal Pay Raises, January, PercentMilitary (4) �� 1�0 1�3 2�1 1�9 NA NA NA NA NA NA NA NA NACivilian (5) �� 1�0 1�3 2�1 2�1 NA NA NA NA NA NA NA NA NA

Interest Rates, Percent91-Day Treasury Bills (6) �� * 0�3 0�8 1�5 2�1 2�6 2�9 3�0 3�0 3�1 3�1 3�1 3�110-Year Treasury Notes �� 2�1 1�8 2�7 3�3 3�4 3�8 3�8 3�8 3�8 3�8 3�8 3�8 3�8

1 Based on information available as of end of Febuary 20172 Rent, interest, dividend, and proprietors’ income components of personal income3 Seasonally adjusted CPI for all urban consumers4 Percentages apply to basic pay only; percentages to be proposed for years after 2018 have not yet been determined�5 Overall average increase, including locality pay adjustments� Percentages to be proposed for years after 2018 have not yet been determined�6 Average rate, secondary market (bank discount basis)* 0�05 percent or less


The Administration’s projections are reported in Table 2-1 and summarized below.

Real GDP—In the near term, real GDP is expected to grow faster than in recent years, with a 2.3 percent growth rate in 2017 and a 2.5 percent rate in 2018, on a fourth quarter-over-fourth quarter basis. The Administration’s policies for simplifying taxes, cutting regulation, building infrastructure, reforming health care, boosting domestic energy production and eliminating deficits are expected to improve the supply side of the U.S. economy to allow these growth rates. As for demand, lower taxes and an ex-pected pick up in global growth in 2017 and 2018 should bolster demand for American goods and services.

Long-Run Growth—In the longer term, the rate of growth in GDP is expected to increase gradually to 3.0 percent by 2020, and the Administration expects it to re-main at that pace for the duration of the forecast window. The Administration projects a permanently higher trend growth rate as a result of its productivity-enhancing policies, such as tax reform, infrastructure investments, reductions in regulation, and a greatly improved fiscal outlook. Expected GDP growth of 3.0 percent per year is slightly below the average growth rate seen in the post-World War II period.

Unemployment—As of April 2017, the unemployment rate stood at 4.4 percent. The Administration expects the

unemployment rate to stay low over the next several years, with an annual average of 4.4 percent in 2018. After that, the forecast assumes that it will gradually rise back toward 4.8 percent, a rate roughly consistent with stable inflation. Theory suggests that when the unemployment rate is at this rate, pressures on inflation are broadly in balance, threaten-ing neither excessive inflation nor deflation.

Interest Rates—As growth increases, the Administration expects that interest rates will begin to rise to values more consistent with historical experience. The rate on the 91-day Treasury bill is expected to increase gradually from 0.8 per-cent in 2017 to 3.1 percent in 2024. The interest rate on the 10-year Treasury note is expected to rise in a similar fash-ion, from 2.7 percent in 2017 to 3.8 percent in the long run. Economic theory suggests that real GDP growth rates and interest rates are positively correlated, so interest rates are likely to be propelled higher by the stronger growth that the Administration anticipates.

Inflation—Since the onset of the financial crisis, inflation, whether measured by the GDP price index, the Consumer Price Index (CPI), or the price index for Personal Consumption Expenditures (PCE), has been subdued compared with the post-World War II average. This observation holds even when looking at the “core” indexes that exclude volatile food and energy prices. The Administration expects CPI inflation to rise to 2.5

Table 2–2. COMPARISON OF ECONOMIC ASSUMPTIONS IN THE 2017 AND 2018 BUDGETS (Calendar Years, Dollar Amounts In Billions)

2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026

Nominal GDP:2017 Budget Assumptions 1 �� 18780 19626 20466 21363 22287 23258 24272 25329 26428 27576 287732018 Budget Assumptions �� 18566 19367 20237 21197 22253 23379 24563 25806 27111 28483 29924

Real GDP (2009 Dollars):2017 Budget Assumptions 1 �� 16839 17273 17694 18108 18524 18950 19386 19832 20288 20754 212322018 Budget Assumptions �� 16660 17045 17458 17928 18452 19005 19576 20163 20768 21391 22033

Real GDP (Percent Change)2:2017 Budget Assumptions 1 �� 2�7 2�5 2�4 2�3 2�3 2�3 2�3 2�3 2�3 2�3 2�32018 Budget Assumptions �� 1�6 2�3 2�4 2�7 2�9 3�0 3�0 3�0 3�0 3�0 3�0

GDP Price Index (Percent Change)2:2017 Budget Assumptions 1 �� 1�6 1�8 1�9 2�0 2�0 2�0 2�0 2�0 2�0 2�0 2�02018 Budget Assumptions �� 1�3 1�9 2�0 2�0 2�0 2�0 2�0 2�0 2�0 2�0 2�0

Consumer Price Index (All-Urban; Percent Change)2:2017 Budget Assumptions �� 1�5 2�1 2�1 2�3 2�2 2�3 2�3 2�3 2�3 2�3 2�32018 Budget Assumptions �� 1�3 2�6 2�3 2�3 2�3 2�3 2�3 2�3 2�3 2�3 2�3

Civilian Unemployment Rate (Percent)3:2017 Budget Assumptions �� 4�7 4�5 4�6 4�6 4�7 4�7 4�8 4�9 4�9 4�9 4�92018 Budget Assumptions �� 4�9 4�6 4�4 4�6 4�7 4�8 4�8 4�8 4�8 4�8 4�8

91-Day Treasury Bill Rate (Percent)3:2017 Budget Assumptions �� 0�7 1�8 2�6 3�1 3�3 3�4 3�4 3�3 3�3 3�2 3�22018 Budget Assumptions �� 0�3 0�8 1�5 2�1 2�6 2�9 3�0 3�0 3�1 3�1 3�1

10-Year Treasury Note Rate (Percent)3:2017 Budget Assumptions �� 2�9 3�5 3�9 4�1 4�2 4�2 4�2 4�2 4�2 4�2 4�22018 Budget Assumptions �� 1�8 2�7 3�3 3�4 3�8 3�8 3�8 3�8 3�8 3�8 3�8

1 Adjusted for July 2016 NIPA Revisions2 Calendar Year over Calendar Year3 Calendar Year Average* 0�05 percent or less

2. ECONOMIC ASSUMPTIONS AND INTERACTIONS WITH THE BUDGET 13

percent in 2017 (on a fourth quarter-over-fourth quar-ter basis), before settling down to 2.3 percent in the long run. The GDP price index is forecast to rise to 2.0 percent in 2017 (on a fourth-quarter-over-fourth-quarter basis) and maintain that rate throughout the forecast window.

Changes in Economic Assumptions from Last Year’s Budget—Table 2-2 compares the Administration’s forecast for the 2018 Budget with that from the 2017 Budget, submitted by the previous Administration. The most notable difference is the upward revision to medi-um- and longer-term GDP growth. Compared with the previous forecast, the Administration expects much faster output growth, as a result of its policies designed to boost

productivity and labor force participation. These include deregulation, tax reform, an improved fiscal outlook, in-ducements for infrastructure investment, and health care reform, which should boost investment and bolster the incentives to save. The Administration’s expectations for inflation differ little from the previous forecast, except for the slight boost in CPI inflation in 2017 and 2018 due to higher demand. The forecast for the unemployment rate is also broadly similar, although the Administration’s projections have the unemployment rate dropping to a trough of 4.4 percent, lower than was previously expected, and it has a slightly lower estimate of the unemployment rate at which inflation pressures are broadly balanced. On 91-day Treasury bills, the Budget’s terminal rate is

Table 2–3. COMPARISON OF ECONOMIC ASSUMPTIONS (Calendar Years)

2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027

Nominal GDP:2018 Budget �� 18566 19367 20237 21197 22253 23379 24563 25806 27111 28483 29924 31439CBO �� 18563 19352 20114 20838 21565 22381 23261 24182 25143 26142 27181 28258Blue Chip �� 18570 19336 20221 21099 21973 22883 23831 24843 25872 26943 28059 29222

Real GDP (Year-over-Year):2018 Budget �� 1�6 2�3 2�4 2�7 2�9 3�0 3�0 3�0 3�0 3�0 3�0 3�0CBO �� 1�6 2�3 2�0 1�7 1�5 1�8 1�9 1�9 1�9 1�9 1�9 1�9Blue Chip �� 1�6 2�1 2�4 2�1 2�0 2�0 2�0 2�1 2�0 2�0 2�0 2�0

Real GDP (Fourth Quarter-over-Fourth Quarter):2018 Budget ��

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