The Cyclically Adjusted Federal Budget and Federal Debt: Revised and Updated Estimates

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1 Federal Resee Bank St. Louis By THOMAS M. HOLLOWAY The Cyclically Adjusted Federal Budget and Federal Debt: Revised and Updated Estimates 1 HE cyclically adjusted budget is an estimate what the Federal budget would be after removing the responses receipts and expenditures to economic fluctuations. The uses the cyclically adjusted budget and the methods to measure it have been discussed in several earlier BEA publications. 1 This article presents revised and updated estimates the cyclically adjusted budget, cyclically adjusted debt, and. The revisions are primarily due to the comprehensive revisions the national income and product accounts (NIPA's) that became available in December The first section focuses on how the NIPA revisions affect the estimates. The second section presents revised and updated estimates the cyclically adjusted budget and debt, based on middle-expansion. The final section presents revised and updated estimates a variant the cyclically adjusted budget, based on - percent. Effects the NIPA revisions The NIPA revisions affect the estimates the cyclically adjusted budget in three important ways. First, because cyclically adjusted receipts and expenditures are derived by subtracting estimates the cyclical responses from actual receipts NOTE. Frank de Leeuw collabod on the conceptual work underlying the revised and updated estimates. Jane S. Reeb and Ivy D. Dunson assisted in preparing the estimates. 1. See Frank de Leeuw and Thomas M. Holloway, "Cyclical Adjustment the Federal Budget and Federal Debt," SURVEY OF CURRENT BUSINESS 3 (December 1983): 25-4 and Thomas M. Holloway, Cyclical Adjustment the Federal Budget and Federal Debt: Detailed Methodology and Estimates, Bureau Economic Analysis staff paper no. 4 (Washington, DC: U.S. Government Printing Office, ). and expenditures, revisions in the actual measures result in a dollar-fordollar change in the corresponding cyclically adjusted measures, ceteris paribus. 2 The same methodological approach applies to the income components wages and salaries, corpo prits, etc. used to estimate cyclically adjusted tax bases. Because the way the cyclically adjusted tax bases are used in the model, the net effect on cyclically adjusted receipts revisions in the actual income components is much smaller than the effect revisions in actual receipts. The second way the NIPA revisions affect the estimates is through. Trend the reference path from which cyclical fluctuations are measured depends on actual constant-dollar. In the case middle-expansion, geometric means actual for each middle expansion are connected to form the series. In the case -percent, regression results based on actual are used to construct the series. In both cases, NIPA revisions affect the s, the gaps between actual and, and the cyclical adjustment corresponding to the gaps. The third way the NIPA revisions affect the estimates is through reestimated regression equations. The most important regression equations include those used to estimate cyclically adjusted income components, cyclical tax elasticities, and the cyclical adjustment net interest paid. In most cases, the specifications the regression equations were not changed; however, partly as a result the NIPA revisions, some the equations 2. The methodological approach is referred to as the "gross-up method." It is described in detail in Frank de Leeuw, Thomas M. Holloway, Darwin G. Johnson, David S. McClain, and Charles A. Waite, "The High- Employment Budget: New Estimates, ," SURVEY (November 198): 15-1, Table 1. Revisions in Estimates the Cyclically Adjusted Surplus or Deficit Based on Middle-Expansion Trend, Selected Quarters [Billions ; seasonally adjusted annual s] 198:1 197: I : I : I Revised surplus or deficit (-) Previously published surplus or deficit,(-) Revision Source revision Data revisions Reestimated equations were respecified to improve their performance. An example a respecified equation is the one used to estimate the cyclical adjustment net interest paid. Chart 4 shows the revised and previously published estimates the cyclically adjusted surplus or deficit as percentages middle-expansion. The chart illusts that there is little difference between the two series in most s. Table 1 shows the sources the revisions in selected s when there is a noticeable difference in chart 4. In the table, "data revisions" reflect the first two ways the NIPA revisions affect the cyclically adjusted surplus or deficit; "reestimated equations" reflect the third way. In all s, data revisions are the major source revision. The reestimated equations are sometimes more important for specific categories receipts and expenditures than is suggested by the net effect on the surplus or deficit An example occurs in the second. Reestimated equations caused decreases in cyclically adjusted receipts and expenditures about $2 billion and $1 billion, respectively. The net effect on the deficit was a $ billion increase

2 Federal Resee Bank St. Louis 12 SURVEY OF CURRENT BUSINESS Cyclically Adjusted Surplus or Deficit, Trend It i i 1 > ill I > i.h'i.t I'M tif i J > t.t I ill i.j; M.. 11 i huh t i \\ til t t It i rt i it I n 1 r ( I I t i 11 u t 1t t1'- Ml lit t I t..n I nil f u I j i t.i.f i..h i fj NOTE. Cyclical adjustment based on middle-expansion. U.S. Department Commerce, Bureau Economic Analysis Revised estimates based on middle-expansion Table 2 shows revised estimates middle-expansion and the companion middle-expansion. The growth s in middle-expansion are lower than those previously published because the revised growth s in actual constant-dollar are lower. 4 The table also shows the gap and the gap. These gaps play a key role in determining the size and sign the cyclical adjustment to the actual budget. A positive gap is associated with a positive adjustment to actual receipts in estimating cyclically adjusted receipts; a positive gap is associated with a positive adjustment to actual expenditures in estimating cyclically adjusted expenditures. The cyclically adjusted budget based on these s and gaps is shown in table 3. The table shows receipts, expenditures, and the surplus or deficit in billions and as percentages. The table also decomposes changes in the cyclically adjusted budget into those resulting from the and those resulting from changes 4. The middle-expansion growth s by period were revised for from 3 to 3 percent, for from 4. to percent, for -77 from 2 to 2 percent, for -81 from 2 to 2 percent, and for from 2 to 2 percent.. The revised estimates confirm several points that had been apparent in the previously published estimates: Starting in the fourth, the deficit-to- ratio matched or exceeded the ratio in all previous s except for the second The rise in the deficit-to- ratio in recent years has been the result a decline in the receipts-to- ratio in combination with an increase in the expenditures-to- ratio. The tend to move the budget toward surplus. With the deceleration, the magnitude these declined in recent years from those in the late 197's and early 198's. The rise in the cyclically adjusted deficit-to- ratio contributed to a rise in the cyclically adjusted debt-to- ratio. In earlier articles, it was suggested that the debt-to- ratio has important on macroeconomic developments. Specifically, an increase in the cyclically adjusted debt-to- ratio is associated with an increase in interest s and a decline in the capital-output ratio. 5. In the second 1975, the Tax Reduction Act 1975 caused a sharp one- decline in receipts and resulted in the increase in the deficit.. See de Leeuw and Holloway, "Cyclical Adjustment the Federal Budget and Federal Debt," pp Also see Frank de Leeuw and Thomas M. Holloway, "The Measurement and Significance the Cyclically Adjusted Federal Budget and Debt," Journal Money, Credit, and Banking 17 (May 1985): Changes in the cyclically adjusted debt-to- ratio are related to cyclically adjusted receipts and expenditures in the following way: 7 E T, A Z _ Y ~Y~ Y ~y~ where: D = cyclically adjusted Federal debt held by the public at the end the period; Y middle-expansion in current ; E cyclically adjusted expenditures; T = cyclically adjusted receipts; L = Federal direct loans at the end the period; Z = other debt-deficit discrepancy items equal to the change in debt minus the deficit minus the change in loans (AD - (E - T) - AL); 8 g = the growth Y, which is AY7 7. Using the definitions in the text following equation (1) and letting the numerical subscripts represent time lags, the debt-to- ratio can be factored as follows: / D A FF-! F-iF (D-iV AD) F-! - D-! (F-! + AF) PH YY-, AF F \ F From the definitions the variables, AD = E - AL + Z; substituting for AD gives: E T AL -(^>- F YF F the equ#ti*>n shown in the text. 8. The other discrepancy items include net purchases land, timing differences between NIPA and unified budget receipts, and changes in U.S. Treasury operating cash. A complete list the items is shown in table 1 de Leeuw and Holloway, "Cyclical Adjustment the Federal Budget and Federal Debt," p. 39.

3 Federal Resee Bank St. Louis The first two terras on thef right- discrepancy items between the NIPA in on the denominator hand side involve receipts afnd ex- Federal sector deficit and the change the debt-to- ratio, penditures and together represent the in debt. The final term, referred to as Table 4 shows the terms equation deficit-to- ratio. The next two the " growth factor," basi- (D and the changes in the cyclically terms involve direct loans cally measures the growth adjusted debt-to- ratio annually Table 2. Trend and Actual Unemployment Rate and I I HI 1959: I I9: I I 191: I I 192: I I. 193: I 194: I. 1 QRFi- T 19: I I 197- I Unemployment Middleexpansion (1) (2) ' (1) - (2) (3) _ i ' ^ Billions : s at seasonally adjusted annual s Middle-expansion 1,47 1,5. 1,558. 1,593 1, 1,83 1,74 1,8 1,87. 1,937 2,11 2,87 2,1 2,249 2,334 2,423. 2,51 2, 2,77 2,74 2,817 2,889 2,93 3,37 3,112 3,189 3,2 3,33 3,47 3,479 3,553 1,459. 1,47 1,482 1,493 1,55 1,517 1,528. 1,53 1,545 1,553 1,51 1,571 1,58 1,589 1,598. 1,7. 1,1. 1,25 1,34 1,48. 1,2. 1,7. 1,9 1,74 1,7 1,733 1,748. 1,72 1,777 1,792 1,87 1,823 1,841. 1,858 1,87 1,893 1,9 1,928 1,94 1,9 1,983 2, 2,2 2,39 2,58 2,77 2,97 2,11 2, 2,15 2,17 2,197 1 (5) ,18 1,11 1,211 1,327. 1,483 1,7 1,821 1,994 2,193 2,44 2,734 3,8 3,337 3,535 3,71 3, Actual in () 1,49 1,52 1,551 1,539 1,29 1,5 1,78 1,799 1,873 1,973 2,87 2,28 2,271 2,3 2,423 2,41 2,484 2,8 2,744 2,729 2,95. 2,82 2,958 3,115 3,192 3,187 3,248 3,1. 3,277 3,492. 3,57. 1,49 1,485 1,5 1,518 1,515 1,5 1,523 1,54 1,553 1,552 1,51 1,537 1,5 1,514 1,55. 1,58 1, 1,37. 1,29 1,43 1,71 1, 1,8 1,54 1,71 1,92 1,71 1,75 1,777 1,79 1,8 1,81 1,834 1,8. 1,892 1,9 1,948 1,95 1,985 1,993 2,3 2, 2,99 2,147 2,19 2,195 2,218 2,9 2,24 2,255 2,287 2,3 - () x 1 (7) HI 199: I I 197: I 1971: 1-1 I - I : I 1975: I - I. i I : I 198: I 1981: I I : I I I.. Unemployment Actual Middleexpansion (1) Actu- y al (2) (1) - (2) (3) o ^ _ i o' Billions : s at seasonally adjusted annual s Middle-expansion 2,217 2,238 2,259 2,28 2,3 2,323 2,345 2,37 2,389 2,411 2,434 2,45 2,479 2,53 2,52 2,55 2,574. 2,598 2,18 2,35 2,52. 2,8 2,8. 2,73 2,72 2,737 2,755 2,772 2,79 2,844 2,82 2,88 2,898 2,91 2,93. 2,954 2,973 2,991 3,9 3,28 3,4 3, 3,84 3, 3,1 3,141 3,1 3,18. 3,199 3,219 3,238 3,258 3,275 3,293. 3,31 3,327 3,345 3,32 3,38 3,398 3,41. 3,434. 3,452. 3,47 3,488 3,5 3,525 3,54 3,52 3,581 (5) ,1 1,27 1,49 1,7 1,1 1,129 1,155 1,178 1,197 1,2 1,24 1,273. 1,37 1,343. 1,384. 1,41 1,451. 1,59 1,51. 1,1 1,4 1,92 1,735. 1,7. 1,8 1,837 1,881 1,92. 1,97 2,12 2,1 2, 2,18 2,1 2,28 2,347 2,414 2,479. 2,544 2,1 2,9 2,77 2,85. 2,957. 3,24. 3,18 3,184 3,25 3,37 3,372. 3,42. 3,41 3,5 3,55 3,1. 3,79 3,733 3,788 3,843 3,89 3,944 3,993 4,4 Actual in () 2,327 2,3 2,385 2,383. 2,41 2,419 2,433 2,423 2,48 2,4 2,435 2,41 2,478 2,478 2,491 2,491. 2,54 2,595 2, 2,71 2,734. 2,741. 2,738 2,72 2,74 2,755 2,719 2,95 2,42 2,9 2,71 2,752 2,84 2,81 2,828 2,85 2,89. 2,942 3, 2,994 3,2 3,115 3,142 3,181 3,181 3,178 3,2 3,21 3,233 3,157. 3,159 3,199 3,21 3,25 3,24 3,219. 3,1 3,179 3,154 3,159 3,19 3,259 3,33 3,357 3,449 3,492 3,51 3,51 3,547 3,55 3,584 3,59 _ () X 1 (7) ' ' -

4 Federal Resee Bank St. Louis 14 SURVEY OF CURRENT BUSINESS for An addendum to the table presents the debt-to- ratio. Chart 5 shows ly estimates the cyclically adjusted receipts- and expenditures-to- ratios, and the debt-to- ratio. Table 5 shows ly estimates actual debt, cyclically adjusted debt, and the cyclically adjusted debt-to- ratio. The revised estimates confirm several Table 3. Cyclically Adjusted Federal and [Billions ; s at seasonally adjusted annual s] points that had been apparent in the previously published estimates: The debt-to- ratio declined during most s from , was relatively flat from -82, then Surplus or deficit ( ) P 1955: I I 195: I I I I.. I I HI I9- I I I : I I 193: I I 194- I I I 19: I I g i r _ i o' i J p Preliminary.

5 Federal Resee Bank St. Louis SURVEY OF CURRENT BUSINESS 15 increased every starting with the third. The debt-to- ratio declined or remained flat during many s when the cyclically adjusted budget was in deficit (i.e., when the expenditures line is above the receipts line in chart 5). Given conditions at 1985 levels, a cyclically adjusted deficit-to- Table 3. Cyclically Adjusted Federal and Continued [Billions ; s at seasonally adjusted annual s] ratio about 1 percent would halt the increase in the cyclically adjusted debt-to- ratio. At 1985 levels, that implies about a $48 billion cyclically adjusted deficit. Surplus or deficit ( ) 197- I I 198: I 199:1 I 197: I ' 1971: I : I... :1 : I 1975: I I - I. : I. I I I - I I 198: I I : I 1983: I I - I I I I» i , i ^8-4 4 i i , g " Preliminary.

6 Federal Resee Bank St. Louis 1 SURVEY OF CURRENT BUSINESS Table 4. -Relationship Cyclically Adjusted and to Changes in the Ratio Debt Held by the Public at Par Value to Trend : Trend * I9 Year p Minus: receipts Plus: change in direct loans _ ^ - Plus: other debt-deficit discrepancy items Equals: change in debt Minus: growth factor Equals: change in debt-to- ratio Addendum: debt-to- ratio p Preliminary. 1. Federal debt held by the public includes holdings by the Federal Resee. 2. Includes such items as net purchases land, timing differences between NIPA and unified budget receipts, and changes in U.S. Treasury operating cash. A complete, list the items is shown in table 1 de Leeuw and Holloway, "Cyclical Adjustment the Federal Budget and Federal Debt," p Revised estimates based on -percent A variant the cyclically adjusted budget is based an a series associated with a constant -percent. Table shows, for , estimates the -percent variant and the underlying measures -percent. 9 Compared with the revised and updated estimates the cyclically adjusted budget based on middle-expansion, the deficit-to- ratio the -percent variant was higher in the early 197's, about the same in -75, then lower in all subsequent years. The difference has been about percentage point in recent years. The pattern the differences followed the pattern the differences between the middle-expansion and. percent. 9. The growth in constant-dollar -percent is derived with regression estimates and is 3 percent for , 3. percent for -81, and 2 percent for Table 5. Actual and Cyclically Adjusted Federal Debt Held by the Public at Par Value [Billions, seasonally adjusted] End year and Actual debt Cyclically adjusted debt based on middleexpansion End year and Actual debt Cyclically adjusted debt based on middleexpansion End year and Actual debt Cyclically adjusted debt based on middleexpansion 1955: I I 195: I I 1958: I 1959: I I9- I 191: I 192: I 193- I 194: I 195: I : I I : I I 198: I I 199: I 197: I I HI I : I : I 1975: I HI - I HI ' I I I I - I I 198- I I I I ' I I 1983' I I ' I I 1985' I I p ,37 1,14 1,14 1,173. 1,21 1,27 1,317 1,371. 1,4 1,477 1,51 1, ,48 1,79 1,97 1,9 1,193 1,241. 1,294 1,33 1,42. 1,441 1, p Preliminary. 1. Includes holdings by the Federal Resee.

7 17 SURVEY OF CURRENT BUSINESS CHARTS Cyclically Adjusted Federal,, and Debt Held by the Public at Par Value, Trend 1 r $'r^:^^ C^H^^i^iKvSlf^gijg^ t %>:; ; ^Wj^^w/?;^ ' \ y \ i ' /x~-;vv v /! - * v V>-^S^^^ :'-::^lf^^^ #\ 25 2 ^:f:^jj^^ ; : :: 15 ^^"l^m'b^li^fli^-liff B^^l f irfst^ffl "d \' I tit..r^rt:i.t'ri i4 & f 1-V u 11 'i 1>ii -1' t41.i...i 1 ft t i. i-'i T ll:^, i {^ ri,i.vi l il.tv'f NOTE. Cyclical adjustment based on middle-expansion. U.S. Department Commerce, Bureau Economic Analysis Table. Cyclically Adjusted Federal and Based on - Unemployment Rate Trend [Billions ; s at seasonally adjusted annual s] percent percent Sur plus or defi cit ( > percent unem ployment -percent P ,9 1,12 1,193 1,31 1,484. 1,79 1,837 2, 2,23 2,499 2,8 3,15 3,425 3,28 3,81 4,7 2, 2,483 2,58 2,57. 2,74 2,83 2,914 3, 3,88 3,18. 3,273 3,353 3,424 3,497 3,57 3,47 197:1 I 1971: I I - I i (\ 19 g ,1 1,1 1,38 1,4 1,93. 1,114 1,9 1,11 1,179 1,24 1,23 1,259 1,29 1,334 1,377 1,48 1,45 1,512 1,55 1,15 1,52 1,7 1,745 1,778 1,814 1,854 1,9 2,37 2,39 2,4 2,431 2,452. 2,472 2,49 2,51 2,53 2,557 2,579 2,1 2,23 2,4 2,8 2,9 2,7 2,73 2,759 2,779 2,8 2,82 2,841 2,8 2,882 2,93 2,92 2,94 TV : I - I 1975: I - I I p Preliminary. Digitized for FRASER Federal Resee Bank St. Louis qq -i q -i ' o L 18 - ' I HI. 1978:1... : I 198: I I 1981:1 I... :1 1983: I HI : I... p percent ,27 percent Surplus or deficit (-) percent percent 1,94 1,999 2,38 2,89 2,5 2,23 2,259 2,323 2,393 2,4 2,534. 2,3 2,77 2,759 2,842. 2,94 3,37 3, 3,19 3,28 3,33 3,395 3,41 3,51 3,553 3,599 3, 3,71 3,777 3,833 3,889 3,945 3,99 4,49 4,99 4,154 2,97 2,989 3,11 3,33 3,55 3,77 3,1. 3,1 3,145 3,18 3,191 3,214 3,238 3,21 3,28 3,39 3,32 3,344 3,32 3,379 3,397 3,41 3,433 3,451 3,49 3,488 3,5 3,525 3,543 3,52 3,581 3, 3,19 3,38 3,5 3,7