The Congressional Budget Office (CBO) plays a central role in the federal budgetary process, as forecasts of major economic variables issued by this institution influence future revenues and economic welfare of the country. From this perspective, inaccurate forecasts are likely to distort economic and budgetary picture due to the fact that they have a direct impact on macroeconomic conditions and stability. That is why it is essential to review the process and understand the specificities of budgetary forecasting.
Therefore, this paper aims at investigating the peculiarities of the CBO forecasting procedures. Specific attention will be paid to such details as analyzing CBO projects for ten-year periods with a focus on the accuracy of forecasts as well as the existing relationship between budget baseline and budgetary forecasting. At the same time, one of the objectives of this paper is the estimation of critiques of the CBO work regarding budgetary forecasting issued by both outside analysts and the Congressional Budget Office’s officials.
Ways to Analyze CBO Projects
Before analyzing CBO projects issued for a ten-year period, it is essential to review forecasted and actual figures of a projected and actual deficit or surplus. The latest available data for the mentioned period is that retrieved from 1998-2008 forecasts. According to this project, a surplus was forecasted throughout the period. Nevertheless, reviewing annual reports put out by the Congressional Budget Office reveals the following findings: a surplus during the first four years of the mentioned period and deficit during the other six years. In most cases, the difference between projected and actual figures is drastic, thus raising questions regarding the accuracy of budgetary forecasts put out by the CBO.
It is essential to note that CBO projects should be analyzed from the perspective of the primary elements of the forecasts. The major constituents, which should be mentioned, are unified budget, off-budget, and on-budget. All of them can be connected to both deficits and surpluses. These elements refer to budgetary activities and accounts. That said, the unified budget is a term used for describing differences or similarities between on-budget and off-budget, i.e. combined totals of outlays related to the two (Office of Management and Budget, 2014). As for the off-budget, it consists of all budgetary activities, which are performed by Social Security trust funds. Some of them include disability and age insurances. Moreover, Postal Services transactions are as well considered to be off-budget activities. The rest of the operations and accounts are known as on-budget activities (Office of Management and Budget, 2014).
Still, when estimating the accuracy of the CBO budgetary forecasting, it is critical to assume that there is a great variety of difficulties related to the forecasting process, which might affect the accuracy and contribute to the existence of drastic discrepancies in planned and actual figures. First and foremost, the forecasts are based on numerous factors, which are not always regulated by Congress or statistical agencies and sometimes can be complicated to forecast. For instance, it is almost impossible to foresee environmental or industrial incidents, which have a direct influence on macroeconomic stability, thus undermining the accuracy of issued forecasts. It is as well imperative to keep in mind that most factors, which are the elements of forecasting, are indicated as desirable, i.e. planned. So, this statement can be used for explaining differences with actual deficits (Congress of the United States, 2011). This challenge is aggravated by the fact that forecasts are long-term so that even serial correlations of forecast errors cannot guarantee their total elimination. Finally, it is challenging to foresee policy alterations, especially regarding social sectors such as healthcare, which are one of the aspects of budgetary forecasts (Congress of the United States, 2010).
Budget Baseline and Its Relationship to Budgetary Forecasting
When estimating CBO budgetary forecasting, it is essential to mention the existing relationship between budget baseline and forecasting. To begin with, a baseline developed by the Congressional Budget Office is the projection of spending and revenues designed under the assumption that tax laws and budget rules will remain unchanged during the reporting period (Congress of the United States, 2011). In other words, the budget baseline is a series of predictions regarding the operation of the economy and the evolution of the budget under current legislation (Congressional Budget Office, n.d.).
The budget baseline is as well seen as a starting point for criticizing the forecasting process and outcomes of the CBO. It is often chosen by outside analysts who assess the forecasting performance of the institution. At the same time, they are likely to estimate the factors, which are included in Congressional Budget Office projections. That said, researchers review the accuracy of forecasts by viewing inflation and unemployment rates, healthcare spending, gross domestic product viewed as a determinant of economic growth rate, revenues gained from taxes, etc.
These factors are chosen as input data for different functions and models aimed at testing the accuracy of CBO forecasts (Krol, 2014). Based on this approach, it is claimed that government agencies involved in forecasting, such as the Congressional Budget Office, are often biased. That is why their projections are often unreliable (Krol, 2014). Researchers state that these institutions are commonly too optimistic when it comes to estimating the evolution of budget (Krol, 2014). It means that most projections are either “under projecting the size of the deficit or overprojecting the size of the surplus” (Kliesen & Thorton, 2012, p. 22), which in both cases leads to distortions of the overall budget and economic picture.
To sum up, in most cases, outside analysts are too harsh when it comes to estimating the accuracy of CBO forecasts. However, it is essential to note that these critics rarely recognize the fact that budget baselines issued by the institution are developed under the assumption that laws and regulations would remain unchanged, and no significant policy changes would be introduced. It means that relevant assessments should incorporate policy changes and budget baselines as well as actual figures of the major economic variables included in Congressional Budget Office projections.
CBO Critiques of Its Own Forecasting Work
Except for the outside analysts, CBO itself often critiques its own forecasting work and accuracy of its budgetary forecasts. CBO officials themselves recognize that it is challenging to guarantee the accuracy of organization’s forecasts. They motivate it by stating that it is complicated to assess all factors, which are included in projections. In addition, it is even more difficult to assess changes in spending and revenues resulting from alterations of laws and regulations. From this perspective, the institution faces significant challenges when it comes to finding the causes of errors in projections, which might be related to both unexpected and unforeseen implications of law alterations or the introduction of new policies as well as some errors in initial forecasts (Congressional Budget Office, n.d.).
Still, it is essential to note that CBO works on coping with the challenge of questioning the accuracy of the issued forecasts. In order to overcome the problem, this institution seeks cooperation with and consultations of outside experts (Congressional Budget Office, n.d.). Moreover, Congressional Budget Office reviews projections and puts out revised versions of forecasts every once in a while. These reports usually provide different projections. However, the officials of the organization claim that they are more accurate because they incorporate changes in the regulations such as social spending (Congressional Budget Office, 2016). Finally, the institution works of widening the base of indicators, included in projections. As for now, more that 60 factors are estimated, even though primary attention is paid to unemployment rate, volume of real gross domestic product, inflation, and interest rates (Congressional Budget Office, 2016). However, some more time is needed to discover whether the influence of this innovation is positive or negative, as more effort and resources are required in order to enhance accuracy of a comprehensive analysis.
Conclusion
To sum up, it is essential to note that regardless of numerous questions related to the accuracy and quality of projections issued by the Congressional Budget Office as well as harsh critics of its performance, this institution remains one of the central agencies, which puts out middle- and long-term forecasts. Due to the fact that the organization constantly works on improvement of published forecasts, its significance should not be underestimated and its role in the American economic forecasting should not be ignored.
References
Congress of the United States. (2010). A preliminary analysis of the President’s budget and an update of the CBO’s budget and economic outlook. Washington, DC: The Congress of the United States.
Congress of the United States. (2011). An analysis of the President’s budgetary proposals for fiscal year of 2011. Washington, DC: The Congress of the United States.
Congressional Budget Office. (2016). The budget and economic outlook: 2016 to 2026.Web.
Congressional Budget Office. (n.d.). Processes. Web.
Kliesen, K. L., & Thorton, D. L. (2012). How good are the government’s deficit and debt projections and should we care? Federal Reserve Bank of St. Louis Review, 94(1), 21-39.
Krol, R. (2014). Forecast bias of government agencies. Cato Journal, 34(1), 99-112.
Office of Management and Budget. (2014). Fiscal year 2014: Analytical perspectives. Washington, DC: U.S. Government Printing.