• The Committee-reported resolution assumes $2.7 billion in net discretionary funds in 2004 for the Transportation Security Administration (TSA). This is $279 million less than the 2003 level. The reduction is due to one time start-up costs and equipment purchases that were necessary in 2003. Additionally, TSA collects and spends nearly $2.1 billion in aviation passenger security fees and airline security fees. All of the TSA's activities are designated as homeland security.

• For the Office of Domestic Preparedness (ODP) the Mark assumes $3.6 billion in net discretionary funds in 2004. The ODP provides firefighters, emergency medical services, emergency management agencies, and law enforcement personnel with the training and equipment needed to respond to a terrorist attack. The 2004 Committee-reported resolution is $2.5 billion more than the 2003 level because, in 2003, the enacted level provides monies for these purposes in other programs. Only a very small portion of this money is for non-homeland security activities.

United States Coast Guard

• The agency receives $5.6 billion in net discretionary funds in the Committee-reported resolution. This is $500 million, or 9.7 percent, more than the 2003 level. The U.S. Coast Guard's nonhomeland security funding includes activities such as search and rescue missions, environmental protection, and domestic fisheries law enforcement.

Emergency Preparedness and Response Division

• This Division receives a net total (mandatory and discretionary) of $4.2 billion under the Committee-reported resolution and is focused on helping the nation to prepare for, mitigate the effects of, respond to, and recover from major domestic disasters, both natural and manmade, including incidents of terrorism. The efforts of this Division represent the first attempt of the federal government to fully coordinate its approach to disaster management.

• Homeland security funding in this Division includes monies to maintain the Strategic National Stockpile of drugs and vaccines in order to be able to respond to a bioterrorist attack, as well as a new proposal, called Project BioShield, for $890 million in mandatory spending in 2004 to aid in the development of biodefense countermeasures through their purchase from pharmaceutical companies. • Funds in this Division that are designated for nonhomeland security activities include disaster relief, a new pre-disaster hazard mitigation program, and a program to correct, update, and distribute digitally the nation's flood insurance rate maps.

Citizenship and Immigration Services

• This bureau will receive $235 million in discretionary funding (all for activities not related to homeland security) under the Committee-reported resolution and will make decisions on applications seeking a wide range of benefits for both temporary and permanent immigration status in the United States. In addition, the bureau will collect and spend nearly $1 billion from an immigration examinations fee. The bureau is continuing to implement an initiative to

handle backlogs that will attempt to ensure that there is a no more than six-month processing standard for all immigration applications.

Homeland Security Spending Not In The Department of Homeland Security

According to OMB, the President's 2004 budget assumes $9.6 billion for nondefense homeland security activities in agencies outside the Department of Homeland Security. This funding represents one-third of the total net discretionary BA for homeland security activities governmentwide. The Committee-reported resolution assumes the President's request for these activities for 2004. Some of the highlights for this funding include:

• Nearly $4 billion in homeland security spending has been requested for the Department of Health and Human Services. A portion of this funding is assumed to be appropriated to the Public Health and Social Services Emergency Fund for the Centers for Disease Control (CDC) for upgrading state and local and CDC capacity and for the Health Resources and Services Administration (HRSA) for hospital preparedness. In addition, money is requested for the National Institutes of Health for research and other activities.

• The President has requested more than $2 billion in the Department of Justice for homeland security activities related to federal law enforcement. The largest portion of these funds are for counterterrorism efforts at the Federal Bureau of Investigation and the Bureau of Alcohol, Tobacco, Firearms and Explosives.

• More than $1 billion is requested for homeland security activities at the Department of Energy. This money is largely for security at nuclear weapons facilities.

II. ECONOMICS

The Committee reported resolution is built upon CBO's assumptions about the future path of the U.S. economy. CBO prepares economic forecasts for 2003 and 2004, which reflect the current state of the economy and relative position in the business cycle.

I: ECONOMIC OVERVIEW

From the end of the summer through the fall, the U.S. economy entered a soft patch. Industrial Production declined in four of the final five months of 2002. Employment on non-farm payrolls declined by 38,000 jobs during the three months ended in December. State and local governments, which account for 12 percent of GDP, reported budget shortfalls totaling more than $17.5 billion in November. In addition, oil prices increased by almost $4 per barrel in the second half of last year.

Some retailers were hoping for a robust Christmas shopping season to boost their fortunes. However, the lateness of the Thanksgiving holiday reduced the number of days available to shoppers, and Christmas sales came in lower than projected.

As such, economic growth during the fourth quarter slowed dramatically. GDP increased just 1.4 percent in the fourth quarter, down from a 4 percent annualized pace in the prior period. Most

of the slowdown can be attributed to a 22 percent annualized drop in the production of motor vehicles and parts. On the positive side, business investment increased for the first time in more than two years, increasing 4.6 percent as a result of continued strength in equipment and software.

Going forward, there exists a great deal of uncertainty surrounding the geopolitical outlook. These risks are reflected in the recent volatility of the stock market and the elevated level of corporate yield spreads. Concerned consumers and businesses could continue to react to the uncertainty of an impending war by spending and investing less. Nevertheless, there are also reasons for optimism. The Federal Reserve's monetary policy is currently accommodative and Congress is likely to enact a moderate amount of stimulus.

II: COMPARISON OF ADMINISTRATION AND CBO ECONOMIC

ASSUMPTIONS

Including associated interest costs, changes to the economic outlook from the January 2001 baseline have reduced OMB's 2003 surplus projection by $284 billion and the 2002-11 surplus projection by $3,174 billion. For CBO, changes to the economic outlook from that same baseline have reduced the 2003 surplus projection by $339 billion and the 2002-11 surplus projection by $2,716 billion. The economic changes referred to above also include the impact of technical re-estimates. CBO's economic assumptions are roughly in line with OMB and the private sector. OMB estimates a 2003 baseline budget deficit of $264 billion versus CBO's estimate of a $246 billion budget deficit.

Growth

OMB and CBO expect the recovery to continue this year following the recession that started almost two years ago. The Administration and Congress differ in their 2003 forecast of real GDP by 0.4 percentage points. CBO forecasts that GDP will grow 2.5 percent in 2003, slightly less than both Blue Chip and OMB. Each expects the economy to grow 2.6 percent and 2.9 percent, respectively. However, OMB's and CBO's forecasts converge in 2004 and remain virtually the same through 2008. During the six-year period 2003 to 2008, OMB projects annual economic growth to average 3.3 percent. CBO's projection is just 0.1 percentage point lower. Inflation

Both OMB and CBO anticipate inflation to rise moderately this year as economic growth picks up, thereby reducing excess capacity and potentially restoring some pricing power to producers. CBO forecasts CPI inflation to reach its five-year average of 2.3 percent in 2003, dip slightly in 2004 and plateau at 2.5 percent in 2006 and beyond. Though differing in its path, Blue Chip's forecast of annual average inflation between 2003 and 2008 roughly matches CBO's at 2.4 percent. OMB is slightly more optimistic on inflation than CBO or Blue Chip. OMB projects that the CPI will increase 2.2 percent this year, and will reach its current five-year average by 2008.