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October 1983, 
Vol. 65, No. 8
Posted 1983-10-01

The Critical Role of Economic Assumptions in the Evaluation of Federal Budget Programs

by Keith M. Carlson

Keith M. Carlson examines the extent to which economic assumptions are responsible for the differences between President Reagan’s initial March 1981 budget and the January 1983 budget. The analysis focuses on the budget projections for fiscal 1986. In March 1981, the fiscal 1986 deficit was projected at $21 billion. In the January 1983 budget, this projection was revised upward to $203 billion without a proposed contingency tax plan. This change represents the net effect of deliberate changes in fiscal policy and changes in the economic assumptions underlying the projected receipt expenditure patterns. If analysts wish to determine the extent to which policy changes are responsible for this changed projection, the effect of changes in economic assumptions on the deficit must be identified. To identify this effect, Carlson recalculated the March 1981 budget on the basis of assumptions used in the January 1983 budget. He found that the changes in the budget estimates for fiscal 1986 that occurred between March 1981 and January 1983 were primarily influenced by revised economic assumptions and economic developments in 1982 that were considerably different from those foreseen in 1981. Consequently, changes in discretionary fiscal policy played a minor role in accounting for the sizable jump in the projected deficit for 1986.