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AnAnalysis ofthe President's Budgetary Propo~sal

for Fiscal Year 1993

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AN ANALYSIS OF THE PRESIDENT'S BUDGETARYPROPOSALS FOR FISCAL YEAR 1993

The Congress of the United StatesCongressional Budget Office

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NOTES

Unless otherwise indicated, all years referred to in Chapter 2 are calendaryears, and all years in other chapters and Appendix A are fiscal years.

Unemployment rates throughout the report are calculated on the basis of thecivilian labor force.

Details in the text and tables of this report may not add to totals because ofrounding.

The source of data concerning President Bush's budget is the Office of Manage-ment and Budget. The source of other data, unless otherwise noted, is the Con-gressional Budget Office.

The Balanced Budget and Emergency Deficit Control Act of 1985 is referred toin this volume as Gramm-Rudman-Hollings. This act was amended by theOmnibus Budget Reconciliation Act of 1990, referred to in this volume asOBRA-90.

A glossary of economic and budget terms used in this report appears in Con-gressional Budget Office, The Economic and Budget Outlook: Fiscal Years1993-1997 (January 1992).

Preface

his analysis of the President's budget for fiscal year 1993 was prepared

at the request of the Senate Committee on Appropriations. The reportdiscusses the President's policies in terms of changes from the Con-

gressional Budget Office's (CBO's) baseline budget projections for 1993through 1997. It provides estimates of the budgetary impact of the Admin-istration's proposals using CBO's economic assumptions and technical esti-mating methods.

This report was prepared by the staffs of the Budget Analysis, TaxAnalysis, and Fiscal Analysis divisions under the supervision of C.G. Nuckols,Rosemary D. Marcuss, and Robert A. Dennis. Paul N. Van de Water wasresponsible for Chapter 1; John R. Sturrock for Chapter 2; Rosemary D.Marcuss and Eric J. Toder for Chapter 3; Michael A. Miller for Chapter 4;Charles E. Seagrave and Robert A. Sunshine for Chapter 5; and Kathy A.Ruffing for Appendix A. The revenue estimates were prepared under thedirection of Richard A. Kasten. The principal contributors to the revenue andspending estimates and analyses are listed in Appendix B.

Paul L. Houts supervised the editing and production of the report, withthe assistance of Sherry Snyder. Major portions were edited by Paul L. Houts,Sherry Snyder, Sherwood D. Kohn, and Roger Williams. Christian Spoorprovided editorial assistance during production. The authors owe specialthanks to Marion Curry, Janice Johnson, Dorothy Kornegay, Wendy Stralow,Denise Thomas, Simone Thomas, and Emma Tuerk, who typed the manydrafts. Kathryn Quattrone and Martina Wojak prepared the report for publi-cation.

Robert D. ReischauerDirector

March 1992

Contents

ONE INTRODUCTION AND SUMMARY

The Economic Outlook 2The Administration's Proposals 4Other Budgetary Issues 10Conclusion 13

TWO COMPARISON OF ECONOMIC FORECASTS 15

Short-Term Outlooks 15Medium-Term Projections 19Implications of the Administration's

Economic Program for Growth 25

THREE THE ADMINISTRATION'S REVENUEPROPOSALS 33

Revenue Estimates 33An Overview of the President's Tax Proposals 37An Examination of the Tax Proposals 40

FOUR THE ADMINISTRATION'S PROPOSALS FORDEFENSE AND INTERNATIONAL AFFAIRS 61

The Peace Dividend in the Administration'sDefense Budget 61

Comparisons with Cold War Defense Budgets 62The Budget Request for International Affairs 69CBO Reestimates of the Budget for Defense

and International Affairs 74

FIVE THE ADMINISTRATION'S DOMESTICPROPOSALS 79

250 General Science, Space, and Technology 81270 Energy 83300 Natural Resources and Environment 86350 Agriculture 89

vi ANALYSIS OF THE PRESIDENT'S BUDGET March 1992

370 Commerce and Housing Credit 92400 Transportation 97450 Community and Regional

Development 99500 Education, Training, Employment,

and Social Services 101550 Health 104570 Medicare 108600 Income Security III650 Social Security 117700 Veterans Benefits and Services 119750 Administration of Justice 123800 General Government 125900 Net Interest 128920 Allowances 131950 Undistributed Offsetting Receipts 133

APPENDIXES

A Baseline Budget Projections 139

B Major Contributors to the Revenue andand Spending Projections 151

CONTENTS vii

TABLES

1-1. CBO Estimates of the Deficit Under theAdministration's Policies 2

1-2. CBO Estimates of the Administration'sPolicy Proposals 3

1-3. CBO Estimates of the President's Budget 4

1-4. The Administration's Proposals for DomesticDiscretionary Spending in Fiscal Year 1993 7

1-5. The Administration's Pay-As-You-Go Proposals 9

1-6. Differences Between CBO and AdministrationEstimates of the Administration'sProposed Budget 11

2-1. Comparison of CBO, Administration, andBlue Chip Short-Run Economic Forecasts,Calendar Years 1990-1993 17

2-2. Comparison of CBO, Administration, andBlue Chip Economic Projections,Calendar Years 1991-1997 20

2-3. Comparison of Alternative Economic Projectionsby the Administration: Current Policy versusAdministration Policy 26

2-4. CBO Estimates of the Effects of theAdministration's Budgetary Program 28

3-1. Administration and CBO Estimates of theAdministration's Budget Revenues, byMajor Source 34

3-2. CBO Estimates of Revenue Proposals in theAdministration's 1993 Budget 35

3-3. CBO Reestimates of the Administration'sBudget Revenues 36

3-4. CBO/JCT and Administration Estimates ofIncentives for Saving and Investment 42

3-5. CBO/JCT and Administration Estimates ofTargeted Tax Incentives 46

viii ANALYSIS OF THE PRESIDENT'S BUDGET March 19N2

3-6. CBO/JCT and Administration Estimates ofIncrease in Personal Exemption for Children 54

3-7. CBO/JCT and Administration Estimates ofthe Excise Tax Proposal 55

3-8. CBO/JCT and Administration Estimates ofRevenue-Raising Proposals 56

3-9. CBO/JCT and Administration Estimates ofOther Proposals 60

4-1. Comparison of the Administration's Requestfor Defense and International Affairs withthe BEA Caps for 1993 62

4-2. Proposed Major Spending Changes in thePresident's Budget for Function 050,National Defense 64

4-3. Comparison of the President's Budget for 1997with an Average Cold War Budget,1975-1990, and the CBO Baseline 65

4-4. Summary of Forces and Manpower, 1990 and 1997 66

4-5. Proposed Major Spending Changes in thePresident's Budget for Function 150,International Affairs 70

4-6. CBO Reestimates of Proposed Spending in thePresident's Budget for Function 050,National Defense 75

4-7. CBO Reestimates of Proposed Spending in thePresident's Budget for Function 150,International Affairs 76

A-1. Changes in CBO Deficit Projections SinceJanuary 140

A-2. The Deficit Outlook Under Current Policies 141

A-3. Baseline Budget Projections, AssumingCompliance with Discretionary Spending Caps 142

A-4. CBO Baseline Projections for MandatorySpending, Excluding Deposit Insurance 144

A-5. Comparison of Discretionary Spending Levels 145

CONTENTS ix

A-6. CBO Projections of Trust Fund Surpluses 146

A-7. The Budget Outlook Through 2002 148

FIGURES

1-1. Federal Budget Deficit 12

2-1. Comparison of CBO's and the Administration'sEconomic Assumptions 22

BOXES

2-1. The Switch from GNP to GDP and Revisions tothe National Income and Product Accounts 16

4-1. The Administration's Rescission andSupplemental Proposals for 1992 63

4-2. Credit Reform Issues in International Affairs 73

Chapter One

Introduction and Summary

he Bush Administration's 1993 budget First, federal spending in recent years has

holds to the fiscal policy course set by been swelled by the cost of bailing out or clos-the 1990 budget agreement. The bud- ing hundreds of insolvent thrift institutions

get aims to meet the legal limits on discre- and commercial banks whose deposits are in-tionary spending for 1993 through 1995, as sured by the federal government. The costs ofwell as the pay-as-you-go requirement for deposit insurance are expected to remainrevenues and mandatory spending. The Con- enormous through 1993, drop sharply in 1994,gressional Budget Office (CBO), however, es- and turn negative in 1995, when proceedstimates that the Administration's proposals from selling the assets of previously failed in-will add small amounts to the deficit in some stitutions will exceed the spending required toyears, reduce it in others, and slow the accu- resolve new failures.mulation of federal debt by only $3 billionover the 1992-1997 period. Contributions from U.S. allies to help fi-

nance Operation Desert Storm represent aCBO projects that, under the Administra- second transitory item. Those contributions

tion's policies, the federal deficit will reach lower the deficit by $43 billion in 1991 and $5$372 billion in 1992, setting a new record for billion in 1992. The large year-to-year swingsthe second year in a row (see Table 1-1). In in deposit insurance spending and the U.S.relation to the size of the economy, the 1992 allies' contributions have little current effectdeficit will amount to 6.4 percent of gross do- on the economy or interest rates.mestic product (GDP), slightly exceeding theprevious postwar high reached in 1983. By Excluding deposit insurance and Desertthe mid-1990s, the deficit will drop to about Storm contributions, and assuming enactment$200 billion, or about 3 percent of GDP. of the Administration's proposals, the deficit

peaks at 5.3 percent of GDP in fiscal yearYet, the total deficit is not the most relevant 1992 and then declines gradually to about 3

measure for policy discussions. Its ups and percent in 1995 through 1997. But even thesedowns are affected by temporary factors that deficit estimates are not the most relevant be-obscure an underlying stability in federal fis- cause they contain a cyclical element thatcal policy. To appreciate the fundamental should be less troubling than a structural im-pattern, these temporary factors must be re- balance. The standardized-employment defi-moved from the figures. cit, which removes the cyclical component,

2 ANALYSIS OF THE PRESIDENT'S BUDGET March 1992

reaches a low of 2.6 percent of potential GDP overextended position of state and local gov-in 1996 and then starts to rise again. ernments, and the heavy debt burdens accu-

mulated by both households and businessesduring the 1980s.

CBO forecasts slightly more robust growthThe Economic Outlook in 1992 and 1993 than the Administration, but

the Administration assumes somewhat fasterCBO and the Administration show an unusual growth in the 1994-1997 period. CBO and theamount of agreement on the economic out- Administration, however, assume almost iden-look. Both see a recovery getting under way tical rates of increase in the implicit GDP de-this spring, and both expect this recovery to flator. Thus, CBO shows a slightly higher lev-be about half as strong as the average postwar el of nominal GDP in the short term but arebound. The recovery will be relatively weak marginally lower level of GDP and personalbecause the economy is still wringing out the incomes in the long run.structural imbalances that developed over thelast 15 years. Those include the excess com- The Administration is more optimistic thanmercial real estate that dots many large cities, CBO about the outlook for inflation andthe fragility of some financial institutions, t'Cie nominal interest rates. The Administration's

Table 1-1.CBO Estimates of the Deficit Under the Administration's Policies (By fiscal year, in billions of dollars)

1992 1993 1994 1995 1996 1997

In Billions of Dollars

Total Deficit 372 332 277 214 184 216

Deficit Excluding Deposit Insuranceand Desert Storm Contributions 312 263 244 230 228 245

Standardized-Employment Deficita 213 194 196 190 197 225

On-Budget Deficit (Excluding SocialSecurity and Postal Service) 425 396 353 301 282 326

As a Percentage of GDP

Total Deficit 6.4 5.3 4.2 3.0 2.5 2.8

Deficit Excluding Deposit Insuranceand Desert Storm Contributions 5.3 4.2 3.7 3.3 3.1 3.1

Standardized-Employment Deficita.b 3.5 3.0 2.9 2.7 2.6 2.8

On-Budget Deficit (Excluding SocialSecurity and Postal Service) 7.3 6.3 5.3 4.3 3.8 4.2

Memorandum:Gross Domestic Product 5,846 6,237 6,621 7,004 7,414 7,849

SOURCE: Congressional Budget Office.NOTE: Estimates are on a cash basis and exclude estimated accrual savings for deposit and pension insurance.

a. Excluding deposit insurance and Deseyt Storm contributions.

b. Shown as a percentage of potential GDP.

CHAPTER ONE INTRODUCTION AND SUMMARY 3

forecast of inflation, as measured by the later years. They would decrease the growthincrease in the consumer price index, is 0.3 rate, however, by a comparable amount inpercentage points lower than CBO's in 1992 1993 and beyond. In the longer term, the Ad-and 0.5 percentage points lower by 1997. The ministration's budget proposals would have atAdministration's assumptions for interest rates best only small effects on the federal deficit,fall below CBO's figures by similar amounts. saving and investment, and the growth of the

economy.The similarity between the two forecasts

may seem surprising, since CBO's forecast as- Because CBO's and the Administration'ssumes a continuation of current budgetary economic forecasts do not differ greatly inpolicies, whereas the Administration asserts 1992 and 1993, they lead to only small differ-that its forecast depends importantly on enact- ences in budget estimates :n those years. Inment of its budget and economic program. In 1994 and beyond, however, CBO assumesCBO's view, the Administration's program slightly less rapid growth and somewhatwould add some stimulus to the economy in higher inflation and interest rates. As a result,the short term, but on balance it would pro- CBO projects lower revenues, greater outlaysvide no appreciable boost over the long run. for benefit programs (chiefly those with auto-Some of the Administration's policies-- matic cost-of-living adjustments), and highernotably, the reduction in income tax withhold- interest costs than does the Administration.ing, the investment tax allowance, and the Chapter 2 discusses the economic outlook andcredit for first-time homebuyers- -could in- the economic impact of the Administration'screase the growth rate by half a percent or so proposals in more detail.in 1992 by moving spending forward from

Table 1-2.CBO Estimates of the Administration's Policy Proposals (By fiscal year, in billions of dollars)

1992 1993 1994 1995 1996 1997

CBO Baseline Deficita 368 336 267 203 189 236

Policy ChangesDiscretionary b -2 6 4 -11 -27Pay-as-you-go

Spending b -3 -5 -5 -8 -9Revenuesc 6 2 8 11 12 13

Subtotal 5 -1 3 6 4 4Other

Spending b -2 b -1 -1 -1Revenuesc b b 1 2 3 4

Subtotal -1 -2 1 1 2 3

Tota, 5 -4 10 11 -5 -20

President's Budget as Estimated by CBO 372 332 277 214 184 216

SOURCE: Congressional Budget Office.a. Assuming compliance with the discretionary spending limits.b. Less than $500 million.c. Reductions in revenues are shown with a positive sign because they increase the deficit.


with inflation. Under these assumptions,

The Administration's CBO projects that the baseline deficit wouldbe $336 billion in 1993, $267 billion in 1994,

Proposals and around $200 billion in the 1995-1997 pe-riod. (Appendix A summarizes the current

The budget baseline has traditionally served baseline budget projections, which incorporateas the benchmark against which the Adminis- minor revisions to those CBO released thistration's budget program is measured. For tax past January.)revenues and mandatory spending, the base-line generally assumes that laws now on the The policies proposed in the fiscal yearstatute books will continue. Through 1995, 1993 budget would have little effect on thediscretionary spending is constrained by limits outlook for the federal deficit. Table 1-2established in the Budget Enforcement Act of shows the Administration's budget proposals1990 (BEA). After 1995, the baseline assumes in the three major categories established bythat discretionary spending will just keep pace the Budget Enforcement Act--spending sub-

Table 1-3.CBO Estimates of the President's Budget (By fiscal year)

Category 1992 1993 1994 1995 1996 1997


RevenuesIndividual income 477 512 542 582 619 658Corporate income 91 108 122 125 129 131Social insurance 416 451 483 512 543 572Other 98 101 105 109 109 112

Total 1,082 1,171 1,252 1,327 1,399 1,474On-budget 778 843 902 955 1,003 1,054Off-budget 305 328 350 372 395 420

OutlaysDefense discretionary 312 293 285 284 287 291International discretionary 21 21 21 21 21 21Domestic discretionary 216 226 237 237 237 237

Subtotal 548 541 543 542 545 549

Mandatory spending,excluding deposit insurance 709 748 794 846 898 970

Deposit insurance 65 69 33 -16 -44 -29Net interest 201 214 232 246 262 279Offsetting receipts -69 -67 -72 -75 -77 -79Asset sales 0 -2 a -2 -1 a

Total 1,455 1,503 1,529 1,541 1,582 1,690On-budget 1,202 1,239 1,255 1,256 1,286 1,380Off-budget 252 264 274 285 297 310

Deficit 372 332 277 214 184 216On-budget deficit 425 396 353 301 282 326Off-budget surplus 52 64 76 87 99 110

Debt Held by the Public 3,054 3,386 3,666 3,886 4,077 4,301

(Continued)SOURCE: Congressional Budget Office.


ject to the discretionary caps, mandatory as-you-go proposals would add to the deficitspending and revenues subject to the pay-as- in all years but 1993 and would lead to a pay-you-go requirement, and other mandatory as-you-go sequestration even in 1993. Thatspending and revenues. CBO estimates that result would occur because of the Budget En-the Administation's proposed discretionary forcement Act's look-back provisions, whichspending would, in total, fall slightly below require that actions taken since the end of thethe legal limits in 1993 but, excluding unspe- last session of Congress that affect fiscal yearcified savings, would breach the limits in 1994 1992 be added to the 1993 figure on the pay-and 1995. as-you-go scorecard. In CBO's estimation,

this increase in the deficit for 1992 wouldThe Budget Enforcement Act requires that, amount to $5 billion. Other changes in man-

taken together, changes in receipts and in datory spending and revenues, primarily assetmandatory spending programs may not in- sales and administrative actions that are notcrease the deficit in any year. In CBO's esti- counted for purposes of pay-as-you-go, wouldmation, however, the Administration's pay- also affect the deficit by small amounts.

Table 1-3.Continued

Category 1992 1993 1994 1995 1996 1997


RevenuesIndividual income 8.2 8.2 8.2 8.3 8.3 8.4Corporate income 1.6 1.7 1.8 1.8 1.7 1.7Social insurance 71 7.2 7.3 7.3 7.3 7.3Other 1.7 1.6 1.6 1.5 1.5 1.4

Total 18.5 18.8 18.9 18.9 18.9 18.8On-budget 13.3 13.5 13.6 13.6 13.5 13.4Off-budget 5.2 5.3 5.3 5.3 5.3 5.3

OutlaysDefense discretionary 5.3 4.7 4.3 4.1 3.9 3.7International discretionary 0.4 0.3 0.3 0.3 0.3 0.3Domestic discretionary 3.7 3.6 3.6 3.4 3.2 3.0

Subtotal 9.4 8.7 8.2 7.7 7.4 7.0

Mandatory spending,excluding deposit insurance 12.1 12.0 12.0 12.1 12.1 12.4

Deposit insurance 1.1 1.1 0.5 -0.2 -0.6 -0.4Net interest 3.4 3.4 3.5 3.5 3.5 3.6Offsetting receipts -1.2 -1.1 -1.1 -1.1 -1.0 -1.0Asset sales 0 b b b b b

Total 24.9 24.1 23.1 22.0 21.3 21.5On-budget 20.6 19.9 19.0 17.9 17.3 17.6Off-budget 4.3 4.2 4.1 4.1 4.0 3.9

Deficit 6.4 5.3 4.2 3.0 2.5 2.8On-budget deficit 7.3 6.3 5.3 4.3 3.8 4.2Off-budget surplus 0.9 1.0 1.2 1.2 1.3 1.4

Debt Held by the Public 52.2 54.3 55.4 55.5 55.0 54.8

a. Less than S500 million.b. Less than 0.05 percent of GDP.


Table 1-3 shows CBO's estimates of the Ad- amount of available discretionary budget au-ministration's budget program by major tax thority is appropriated in 1993.source and spending category, as well as pro-jections of federal debt. Under the Adminis- Defense Discretionary Spending. The 1993tration's program, debt held by the public will defense budget is the first defense budget pre-swell from $2.7 trillion at the end of 1991 to pared since the Soviet Union disintegrated.$4.3 billion by 1997--an increase of 60 per- Compared with the previous budget (adjustedcent. for inflation), the 1993 budget requests $50

billion less in budget authority for defenseover the 1992-1997 period. The big question

Discretionary Spending facing the Congress and the country is, couldthe peace dividend be larger?

The Budget Enforcement Act established sep-arate dollar limits on defense, international, If the goal were to maintain real nondefenseand domestic discretionary spending for fiscal discretionary spending at 1992 levels and stayyear 1993. A single overall limit applies to to- within the total discretionary spending limits,tal discretionary spending in 1994 and 1995. additional reductions in defense would be re-

quired. Compared with the President's pro-The Administration proposes to hold disposal, defense budget authority would have to

cretionary spending authority $9.4 billion be- be cut an extra $14 billion in 1994, $19 billionlow the legal limits in 1993. Three-quarters of in 1995, and a total of $71 billion in thethis reduction would arise in the defense cate- 1994-1997 period. If the goal were to increasegory. CBO estimates that the Administra- real nondefense discretionary spending, de-tion's proposals for international and domes- fense would have to be cut even more.tic discretionary spending would exceed theoutlay limits in 1993, though in both cases the International Discretionary Spending. Theexcess is within the margin of error allowed by international affairs budget also reflects thethe Budget Enforcement Act. end of the Cold War. The Administration is

asking for an additional $550 million in 1992In 1994 and later years, the Administration funding to assist the states of Eastern Europe

would keep discretionary budget authority for and the former Soviet Union in their transi-each category roughly constant at the 1993 tion to democracy. In 1993, $900 million oflevel in nominal dollars. With inflation run- the proposed international affairs budgetning at about 31 percent a year, each type of would be directed toward former adversaries.discretionary spending would thus suffer the In addition, the domestic discretionary budgetsame real annual reduction. In addition, the will provide an estimated $500 million to pur-budget includes unspecified reductions in chase grain and other commodities in 1992domestic discretionary outlays of $7.6 billion and 1993, and the 1992 defense budget con-in 1994 and $4.6 billion in 1995. Based on re- tains $500 million for weapons destructioncent experience, however, CBO believes that and humanitarian aid.such savings are unlikely to occur withoutspecific policy proposals. Excluding the un- The Administration seeks appropriations ofspecified savings, CBO estimates that the Ad- $350 million above the current real level eachministration's proposals would exceed the dis- year for United Nations-sponsored peace-cretionary outlay limits by $6 billion in 1994 keeping activities, primarily in Yugoslavia, Eland $4 billion in 1995. The budget thus un- Salvador, and Cambodia. It has also renewedderscores a point that CBO has been making last year's request for the Enterprise for thefor some time--namely, that it will be ex- Americas Initiative--a program designed to in-tremely hard to satisfy the discretionary crease trade and investment within the West-spending caps in 1994 and 1995 if the full ern Hemisphere--and for a $12 billion in-


crease in the U.S. quota with the International Within the domestic discretionary category,Monetary Fund. a few areas would receive real increases,

whereas others would face particularly largeDomestic Discretionary Spending. The limits reductions. The Administration proposeson domestic discretionary spending for 1993 higher spending for science and space, the ad-require reductions of $6.4 billion in budget ministration of justice, Head Start, and a fewauthority and $6.8 billion in outlays compared general government programs. Some of thewith the real 1992 levels (see Table 1-4). In largest cuts would be made in grants to stateattempting to meet the outlay limit, the Ad- and local governments. The Administrationministration finds it has to hold budget au- would eliminate community services blockthority $1.9 billion below its limit. Even so, in grants, economic development assistance, andthe estimation of the Congressional Budget impact aid "b" grants. It would reduce fund-Office, domestic discretionary outlays would ing for mass transit, community developmentexceed the 1993 cap by $1.0 billion, block grants, low-income home energy assis-

Table 1-4.The Administration's Proposals for Domestic Discretionary Spending in Fiscal Year 1993(in billions of dollars)

CBO Baseline President's BudgetWithout Discretionary as Estimated

Capsa by CBO DifferenceBudget Budget Budget

Function Authority Outlays Authority Outlays Authority Outlays

General Science, Space, and Technology 17.9 16.9 18.4 17.1 0.5 0.3Energy 6.4 5.8 5.8 5.6 -0.6 -0.2Natural Resources and Environment 22.1 21.4 21.2 20.9 -0.9 -0.5Agriculture 4.6 4.5 4.2 4.3 -0.4 -0.2Commerce and Housing Credit 3.7 3.5 3.1 3.0 -0.6 -0.5Transportation 15.5 35.8 13.6 35.0 -1.9 -0.8Community and Regional Development 6.8 6.8 5.5 6.5 -1.3 -0.3Education, Training, Employment,

and Social Services 36.7 35.6 36.6 34.8 -0.1 -0.7Health 20.3 20.0 19.9 19.5 -0.4 -0.5Medicare 2.9 2.9 2.8 2.8 -0.1 -0.1Income Security 32.4 32.8 30.1 31.0 -2.2 -1.8Social Security 0 2.7 0 2.6 0 -0.1Veterans Benefits 16.5 16.3 16.5 16.1 -0.1 -0.3Administration of Justice 14.8 14.8 15.2 15.4 0.4 0.6General Government 12.2 12.4 12.2 12.6 b 0.2Allowances 0 0 -0.5 -0.4 -0.5 -0.4Undistributed Offsetting Receipts 0 0 -0.3 -0.3 -0.3 -0.3

Total 212.7 232.2 204.4 226.5 -8.4 -5.7

Domestic Discretionary Capsc 206.3 225.4 206.3 225.4 n.a. n.a.

Difference 6.4 6.8 -1.9 1.0 r.a. n.a.

SOURCE: Congressional Budget Office.

NOTE: n.a. = not applicable.

a. Excluding projection of emergencies.

b. Less than $50 million.

c. End-of-session limits as estimated by CBO.


tance, and housing assistance. Most of these changes in the insurance programs (see Tableproposals are simlar to those in previous 1-5 for CBO's version of the pay-as-you-gobudgets. scorecard).

The budget counts as reductions in discre- Spending Proposals. The Administration'stionary spending close to $2 billion in changes pay-as-you-go spending proposals would re-in mandatory spending or fees. Under the duce outlays by $2.7 billion in 1993, $5.5 bil-scorekeeping rules of the Budget Enforcement lion in 1994, and $8.9 billion in 1997. AboutAct, changes in direct spending and receipts 40 percent of these savings would be achievedare counted on the discretionary rather than in Medicare through a three-month delay inthe pay-as-you-go scorecard if they are in- the annual update of hospital payments, a re-cluded in appropriation bills. Almost $1.4 duction in payments for laboratory services,billion would come from new or increased and an increase in the physician insuranceuser fees, including fees for operating nuclear (Part B) premium for certain high-incomepower plants, Medicaid and Medicare certifi- beneficiaries. Other major proposals includecation, Food and Drug Administration re- permanently eliminating the option for aviews, veterans' medical care copayments, and lump-sum payment in Civil Service Retire-veterans' housing loan guarantees. In addi- ment, auctioning a portion of the electromag-tion, $0.6 billion in spending for grants to netic spectrum, and extending various cost-states to assist in legalizing undocumented saving provisions affecting veterans' benefits.aliens would be shifted from 1993 to 1994. The budget also assumes that customs userThe President also proposes to delay the 1993 fees will be continued beyond their scheduledpay raise for federal civilian employees by expiration in 1995.three months, thereby reducing required do-mestic discretionary appropriations by $0.5 CBO does not give the Administrationbillion. pay-as-you-go credit for its proposal to lease

the rights to explore and drill for oil and gasThe Administration claims $1.2 billion in in the Alaska National Wildlife Refuge be-

discretionary savings in 1993 and additional cause CBO believes that leasing the refugeamounts in later years for its proposal to lease (like leasing the NPR) is an asset sale. Butthe naval petroleum reserve (NPR) at Elk CBO estimates greater receipts than does theHills, California. These receipts would be Administration from the proposal to auctionpartially offset by the loss of the income that licenses and permits to use the electromag-the government would have received from netic spectrum.selling oil and gas from the NPR. In CBO'sview, however, leasing the NPR is an asset Revenue Proposals. The budget contains asale, the proceeds from which cannot be package of tax changes aimed at stimulatingcounted as savings for purposes of the Budget saving and investment. The major elements ofEnforcement Act. this package are reducing the tax rate on cap-

ital gains, establishing Flexible Individual Re-tirement Accounts, instituting a temporary tax

Pay-As-You-Go Proposals credit for first-time homebuyers, providing atemporary investment tax allowance, and ex-

The Administration proposes to pay for its tax tending certain expiring tax preferences, in-proposals through a variety of reductions in cluding the research and experimentation taxmandatory spending programs, including the credit and allocation rules. The Administra-accrued savings from changes in deposit and tion also proposes to increase by $500 the per-pension insurance. As explained below, how- sonal income tax exemption for dependentever, CBO believes that no pay-as-you-go say- children under age 18. The two largestings should be recorded for the proposed revenue-raising proposals in the budget are

CHAPTER ONE INTRODUCTION AND SUMMARY '

the extension of Medicare taxes and coverage $1.9 billion in 1993, and $12.6 billion in 1997.to all employees of state and local govern- Even larger reductions in revenues are likelyments and an increase in the contributions of in later years as a result of the proposal to ex-federal workers covered by the Civil Service clude the earnings on Flexible Individual Re-Retirement System. A number of smaller tirement Accounts from taxation. Includingrevenue-raisers are also included. Finally, the the effects of the increased exemption for chil-budget incorporates a reduction in income tax dren, the revenue loss over the the 1992-1997withholding; that change has already been car- period is estimated to total $51 billion.ried out by executive action.

For only one item--the proposal to reduceCBO and the Joint Committee on Taxation the tax rate on capital gains--does the CBO/

(JCT) estimate that the Administration's pay- JCT estimate differ significantly from that ofas-you-go revenue proposals would reduce the Administration. CBO/JCT and the Ad-governmental receipts by $5.5 billion in 1992, ministration concur that the proposal would

Table 1-5.The Administration's Pay-As-You-Go Proposals (By fiscal year, in billions of dollars)

1992 1993 1994 1995 1996 1997

SpendingMedicare a -1.2 -2.0 -2.6 -3.0 -3.5Civil Service Retirement 0 0 0 0 -2.1 -2.8Customs user fees 0 0 0 0 -0.7 -0.8Veterans' benefits 0 -0.6 -0.5 -0.6 -0.6 -0.7Spectrum auctions 0 0 -2.0 -1.6 -0.7 0Other -0.3 -0.9 -0.9 a -0.5 -1.2

Subtotal -0.4 -2.7 -5.5 -4.8 -7.7 -8.9

RevenuesProvide investment tax allowance -6.1 -1.6 3.6 1.0 0.8 0.6Establish Flexible Individual

Retirement Accounts 0 2.0 0.8 0.5 -0.8 -1.9Provide credit to

first-time homebuyers -0.3 -2.7 -2.5 -0.5 -0.1 aExclude portion of capital gains 0.8 3.7 -3.4 -5.7 -5.6 -5.2Extend expiring provisions -0.5 -1.9 -2.5 -2.2 -2.3 -2.7Extend Medicare taxes and coverage

to state and local employees 0.4 1.7 1.7 1.7 1.6 1.6Increase employee contributions

to Civil Service Retirement 0 0.4 1.0 1.1 1.0 1.0increase exemption for children 0 -3.4 -5.0 -5.0 -5.1 -5.3Other 0.2 -0.1 -1.9 -1.8 -1.4 -0.7

Subtotal -5.5 -1.9 -8.3 -10.9 -11.8 -12.6

Deficit 5.2 -0.7 2.8 6.1 4.2 3.7

Administration's Estimateb 4.8 0.3 -3.4 -1.5 -5.1 -2.6

DifferencesCBO reestimates a -1.5 3.6 7.6 7.8 6.2Classification differences 0.4 0.4 2.6 a 1.5 0.1

Total 0.3 -1.1 6.2 7.6 9.3 6.3

SOURCES: Congressional Budget Office; Joint Committee on Taxation; Office of Management and Budget.a. Less than $50 million.b. Excludes estimated accrual savings for deposit and pension insurance.


boost revenues in 1992 and 1993, when tax- pension insurance and to place a limit on thepayers respond with a burst of asset sales. annual growth of entitlement programs. AsThe Administration believes that the proposal explained below, CBO believes that the pro-would generate extra revenues in 1994, 1995, posed accrual accounting measures are not yetand 1996 as well. In contrast, CBO and the ready to be included in the budget. More-JCT believe that the proposal would reduce over, the Administration itself does not incor-revenues beginning in 1994. porate the entitlement cap in its own budget

estimates.As an alternative to some of its pay-as-you-

go proposals, the Administration indicatesthat it would be willing to consider modifying Deposit and Pension Insurancethe BEA to allow the projected reduction indefense outlays (below the level in the Ad- The Administration proposes to convert theministration's fiscal year 1992 budget) to off- budgetary accounting for deposit insuranceset the proposed increase in the personal ex- and the Pension Benefit Guaranty Corpora-emption. The Administration would make tion (PBGC) from a cash to an accrual basis.this step conditional on a commensurate re- In addition, the Administration recommends aduction in the discretionary spending caps number of program changes to reduce theand on an extension of the enforcement pro- government's long-run liability for depositvisions of the BEA until the budget is bal- and pension insurance. The Administrationanced. Obviously, to the extent that defense would allow banks to branch across statereductions are used to finance tax cuts, they lines, offer additional financial services, andare not available to protect domestic discre- become part of financial-services holdingtionary spending or to reduce the deficit. companies. The pension proposals include

raising required contributions for sponsors ofunderfunded single-employer pension plans,

CBO and Administration freezing the level of the federal guarantee forBudget Estimates chronically underfunded plans, and improving

the status of PBGC claims in bankruptcy pro-This year, unlike many others, CBO and the ceedings. The Administration's insuranceAdministration hold similar views of the bud- proposals would produce small changes inget outlook (see Table 1-6). CBO projects cash flows in the next few years, but theylower deficits in 1992 and 1993, but somewhat could create large immediate savings underbigger deficits thereafter. In the long run, the Administration's accrual accounting plan.these differences primarily reflect CBO's ex-pectations of less robust economic perfor- Clearly, cash-based accounting for insur-mance. Technical estimating disagreements ance programs provides incomplete informa-center on the effects of the President's pro- tion about the cost of these activities. Cashposals (notably the reduction of the tax rate flows for deposit insurance include the dis-on capital gains), spending for deposit insur- torting effects of outlays for acquiring assetsance, and the growth of Medicaid. and receipts from disposing of those assets.

Similarly, cash flows give the false impressionthat the government is earning profits frompension insurance.

Other Budgetary Issues Nevertheless, CBO concludes that theaccrual accounting measures the Administra-

CBO's estimates of the budget do not reflect tion proposes are not suitable to use in thethe Administration's proposals to adopt a budget at this time. First, without sufficientform of accrual accounting for deposit and justification, the Administration proposes to

CHAPTER ONE INTRODUCTION AND SUMMARY 1I

create different accrual concepts for deposit future savings to offset real current costs isinsurance and the PBGC. Second, the Ad- dubious budgetary policy. Moreover, sinceministration's methods for estimating accrued both bank and pension insurance are in-costs are very complicated, would be difficult tended to be self-financing, any savings areto replicate and carry out, and are not neces- likely to benefit the premium-payer moresarily the best way to estimate costs. than the taxpayer.

CBO believes that no pay-as-you-go savings The Administration's proposals for depositshould be recorded for the Administration's and pension insurance also contain a subtle,deposit and pension insurance proposals, re- but major, change in the primary source ofgardless of whether the proposed accounting funding for financial shortfalls. In the past,changes are enacted. Using highly uncertain the first step in covering deficiencies in these

Table 1-6.Differences Between CBO and Administration Estimates of the Administration's Proposed Budget(By fiscal year, in billions of dollars)

1992 1993 1994 1995 1996 1997

Administration's Estimate of the Deficit 400 350 212 194 181 188

CBO Reestimates ofPay-As-You-Go Proposalsa

Capital gains proposalb c c 6 6 6 5Other revenue proposalsb c -2 1 1 1 cOutlay proposals c 1 -3 1 1 1

Subtotal c -2 4 --8 6

Economic DifferencesRevenuesb -2 -2 5 13 19 21Benefit programs c 1 2 5 6 aNet interest -2 -2 -1 4 10 18

Subtotal -4 -3 7 21 35 47

Technical DifferencesRevenuesb -5 -2 -1 -4 2 -3Deposit insurance -15 -7 58 11 -23 4Medicaid -4 -5 -9 -13 -18 -24Proposed asset salesd 0 0 3 -2 1 cUnspecified discretionary savings 0 0 8 5 0 0Other outlays c c -4 -5 -2 c

Subtotal -24 -14 54 -9 -41 -24

Total -28 -18 65 20 2 29

Administration's ProposedDeficit as Estimated by CBO 372 332 277 214 184 216

Memoranda:Total Economic Reestimates -4 -3 7 21 35 46Total Technical Reestimates -24 -15 58 -1 -33 -18

SOURCES: Congressional Budget Office; Joint Committee on Taxation; Office of Management and Budget.a. The reestimates are almost wholly technical.b. Reductions in revenues are shown with a positive sign because they increase the deficit.c. Less than S500 million.d. Asset sales are ineligible for pay-as-you-go scoring.


programs has been to raise the level of premi- these as yet unrecognized insurance costs andurns. The Administration would replace this not used to pay for other budgetary initiatives.process with an annual mandatory appropria- Without such an exclusion, however, CBO willtion from the general fund to cover shortfalls, continue to use cash-based accounting forSuch a fundamental policy change should be proposed changes in pension insurance.debated on its own merits and should not behidden in a reform of budgetary accounting. Controlling Growth in

In CBO's view, the Budget Enforcement Entitlement SpendingAct effectively removed the cash flows associ-ated with deposit insurance from the pay- CBO's five-year budget projections indicateas-you-go calculations. Unless explicitly that, under current policies, the federal deficitchanged, this exclusion would continue to ap- is likely to start rising again as a percentage ofply under an accrual accounting system. GDP after 1996. Longer-run extrapolations

show this trend continuing. Excluding depositIdeally, the BEA should be amended to ex- insurance, the deficit is projected to climb

clude pension insurance, like deposit insur- from 3.1 percent of GDP in 1996 to 4.2 per-ance, from pay-as-you-go. The proposed cent in 2002 (see Figure 1-1).changes in the PBGC are designed to pay forexisting, but previously unrecognized, commit- That growth in the deficit is propelled byments of the federal government. Any savings the growth in mandatory spending, especiallyin pension insurance should be applied to for health care services. Excluding Social Se-

Figure 1-1.Federal Budget Deficit

Percentage of GDP7

6 % %

5

Deposit Insurance -and Desert StormExdu

2 Contributions

0 1 -

1990 1992 1994 1996 1996 2000 2002

Fiscal Year



curity, deposit insurance, and net interest, the abstract concept of an entitlement capmandatory spending could balloon from 7.3 cannot be turned into reality without squarelypercent of GDP in 1992 to 8.9 percent in addressing the problems of health care costs.2002. All of this growth is concentrated in Also, to the extent that access to health care isMedicare and Medicaid, which are projected improved, the cost problem will become evento soar from 3.4 percent of GDP in 1992 to more acute. The experience of the past two4.4 percent in 1997 and 5.9 percent in 2002. decades suggests that greater control over

health spending probably cannot be achievedTo check the growth in entitlements, the without significant changes in the health care

Administration proposes to place a limit, or system--changes that may limit desirable fea-cap, on the overall growth of mandatory pro- tures such as freedom to choose insurancegrams. If the Congressional reconciliation plans and providers, rapid access to new tech-process fails to eliminate any mandatory nologies and treatments, and sustained levelsspending above the limit, an automatic se- of research and development. The priorityquestration of mandatory programs would be the nation places on these other goals will de-triggered. Most mandatory programs that are termine how effectively cost containment isnow exempt, except Social Security, would be- pursued.come subject to this new sequestration, al-though it is not entirely clear how such a se-questration would work.

The proposal for a cap on growth in man- Conclusiondatory spending deserves two comments.First, experience with the fixed deficit targetsof the Gramm-Rudman- Hollings legislation Although the recession has made further

suggests that mechanical budget formulas can deficit reduction inadvisable this year, thepresent serious problems. In particular, the deficit should soon return to the top of therequired reductions can become so large that political agenda. Excluding deposit insurance,the threat of a sequestration to achieve them the deficit is likely to exceed $200 billion foris no longer credible. As an alternative to the the foreseeable future and move higher tow-entitlement cap, the BEA could be amended ard the end of the 1990s. Deficits of those

to require a specified amount of deficit magnitudes cripple economic growth by re-reduction--say, $35 billion to $50 billion a ducing national saving and capital formation.year--for a number of years, or until a target They also create a vicious cycle of more fed-deficit is reacheda eral borrowing and higher debt service costs,

which in turn make it even more difficult toSecond, as the figures cited earlier show, reduce the deficit. The Administration's fiscal

the problem of the growth in entitlement year 1993 budget does little to address thisspending is really a manifestation of the rapid fundamental fiscal problem and leaves itsrise in the cost and use of medical care. Thus, resolution to yet another year.

Chapter Two

Comparison of Economic Forecasts

he Administration's forecast for the na- ciably affect the average rate of growth

tion's economy is quite similar to that through 1997.of the Congressional Budget Office

(CBO). The Administration is slightly lessoptimistic about real gross domestic product(GDP) in the short term (1992 through 1993) Short-Term Outlooksand slightly more optimistic over the mediumterm (1994 through 1997). By 1997, the Ad- Both the Administration and CBO anticipateministration's projection of real GDP exceeds that an economic recovery will be under wayCBO's by 0.7 percent, a difference in the av- by the middle of 1992. Both expect the recov-erage rate of growth over six years of about ery to be moderate by historical standards0.1 percentage point a year. The Administra- (proceeding at about half the normal pace),tion's forecast of the inflation rate is close to providing a basis for sustainable growth withCBO's when measured by the GDP deflator, moderate and stable inflation in later years.but falls below CBO's when the consumer In detail, the Administration'i short-termprice index is used as a measure. The Ad- forecast is similar to that of CBO, althoughministration generally foresees lower interest slightly less optimistic. In any case, however,rates than does CBO in both the short and the differences betwee- the forecasts are smallmedium terms. in light of the normal uncertainty of fore-

casting. Both forecasts, moreover, are gener-Although the forecasts of the Administra- ally similar to the consensus of private eco-

tion and CBO are quite similar, they are nomic forecasters.based on very different premises. The Ad-ministration maintains that its forecast de- The Administration's outlook for growth ofpends critically on the enactment of its policy real GDP is similar to CBO's, but slightlyproposals. The Administration predicts that if weaker (see Box 2-I for a brief explanation ofcurrent policy continues instead, the growth GDP). The Administration's forecast is lowerrate of real GDP would be lower than it has than CBO's by 0.6 percentage points for 1992,forecast by 0.6 percentage points a year in and by 0.3 percentage points for 1993, on a1992 and 1993, and by an average of 0.4 per- fourth-quarter-to-fourth-quarter basis (seecentage points a year from 1994 through 1997. Table 2-1).1 Through 1993. the real rate ofBy contrast, CBO's forecast assumes that cur-rent policy continues. Moreover, althoughCBO concludes that adopting the Administra- 1. The Administration's economic projections discussed in

tion's policy could add modestly to growth in this chapter are those dated January 10, 1992. They

1992, it would do so by borrowing from differ slightly from preliminary economic projectionsmade in early December. on which the Administra-

growth in 1993, while adding little to growth tion's budget estimates are based.

in later years. Therefore it would not appre-


growth in the Administration's forecast aver- percent in 1991, as opposed to zero growthages 0.4 percentage points a year lower than forecast by CBO. (The actual decline forthat of CBO and more nearly matches the 1991 was 0.7 percent.)Blue Chip consensus forecast than doesCBO's. (The Blue Chip consensus forecast is The Administration and CBO agree morethe average of about 50 forecasts surveyed by closely on the short-term outlook for the ratesEggert Economic Enterprises, Inc.) of inflation and interest than for the growth of

real output. Both expect inflation and interestUntil recently, the Administration typically rates to rise slightly during the recovery be-

forecast somewhat stronger economic growth fore stabilizing. CBO predicts slightly higherthan did CBO, but it has not done so for the rates of inflation when measured by the con-last year. After the Balanced Budget Act sumer price index than does the Administra-(Gramm-Rudman-Hollings) was passed in tion. But the two outlooks for inflation differ1985, each of the six budgets released by the by no more than 0.3 percentage points inOffice of Management and Budget between either 1992 or 1993, and closely match the1985 and 1990 assumed stronger economic Blue Chip consensus as well. The Adminis-growth than did the corresponding CBO fore tration's and CBO's forecasts of interestcasts. Given the fixed deficit targets of rates--both long-term and short-term--alsoGramm-Rudman-Hollings, more optimistic closely parallel each other, and they bothforecasts promised easier attainment of the foresee lower long-term interest rates in 1993targets. But the Budget Enforcement Act of than does the Blue Chip forecast.1990 allowed the deficit targets to vary withchanges in the economic outlook, thereby Although differences between the forecastseliminating the advantage of optimistic fore- of the Administration and CBO are not al-casts. Last year was the first since Gramm- ways trivial, they are small when comparedRudman-Hollings was passed that the Admin- with the degree of uncertainty that normallyistration forecast lower economic growth than accompanies economic forecasts. For exam-did CBO, a decline in real gross national ple, the disparity between the forecasts of theproduct (GNP) on a calendar-year basis of 0.3 average growth of real GDP through 1993 is

Box 2-1.The Switch from GNP to GDP and Revisions to

the National Income and Product Accounts

Gross domestic product (GDP) replaced gross about 99.8 percent as large as GNP and growsnational product (GNP) in December 1991 as at nearly the same rate (on average, about 0.1the basic measure of total economic output in percentage point a year faster over the lastthe United States. GDP represents the value of decade).goods and services produced by factors ofproduction--land, labor, and capital--located in The Commerce Department switched tothe United States, whether the factors are pro- GDP as its basic measure of output at the samevided by U.S. residents or nonresidents. By time that it revised the national income andcontrast, GNP represents the value of goods and product accounts by redefining some conceptsservices produced by factors provided by U.S. and by using 1987 instead of 1982 as the baseresidents, whether the factors are located here or year for calculating real (constant dollar) values.abroad. Numerically, the two measures differ For brief discussions of the switch from GNP toprimarily because GNP includes income of resi- GDP and of the revisions, see Congressionaldents from property they own abroad and ex- Budget Office, The Economic and Budget Out-cludes income of nonresidents from property look: Fiscal Years 1993-1997 (Janu.,ry 1992),they own here. In the United States, GDP is pp. 5 and 19.

CHAPTER TWO COMPARISON OF ECONOMIC FORECASrS 17

Table 2-1.Comparison of CBO, Administration, and Blue Chip Short-RunEconomic forecasts, Calendar Years 1990-1993

Actual Estimated Forecast1990 1991 1992 1993

Fourth Quarter to Fourth Quarter (Percentage change)

Real GDPCBO -0.1 0.4 2.8 3.3Administration -0.1 0.4 2.2 3.0Blue Chip -0.1 0.4 2.3 3.1

Implicit GDP DeflatorCBO 4.2 3.0 3.1 3.2Administration 4.2 3.0 3.2 3.4Blue Chip 4.2 3.0 2.9 3.3

Consumer Price IndexaCBO 6.3 3.0 3.4 3.6Administration 6.3 3.0 3.1 3.3Blue Chip 6.3 3.0 3.3 3.7

Calendar-Year Average (Percent)

Civilian Unemployment RateCoo 5.5 6.7 6.9 64Administration 5.5 6.7 6.9 6.5Blue Chip 5.5 6.7 6.9 6.4

Three-Month Treasury Bill RateCBO 7.5 5.4 4.4 5.1Administration 7.5 5.4 4.1 4.9Blue Chip 7.5 5.4 4.1 5.0

Ten-Year Treasury Note RateCBO 8.6 7.9 7.1 7.1Administration 8.6 7.9 7.0 6.9Blue Chipb 8.6 7.9 7.1 7.6

Spread Between Ten-Year TreasuryNote Rate and Three-Month Treasury Bill Rate

CBO 1.0 2.5 2.7 2.0Administration 1.0 2.5 2.9 2.0Blue Chip 1.0 2.5 3.0 2.6

SOURCES: Congressional Budget Office; Office of Management and Budget; Eggert Economic Enterprises, Inc., Blue Chip EconomicIndicators (February 10, 1992).

NOTE: The CBO forecast is based on data available through December 1991 and does not reflect the fourth-quarter data for grossdomestic product or the consumer price index published in January 1992. The Blue Chip forecast is an average of 50 privateforecasters.

a. Represents the consumer price index for all urban consumers (CPI-U).

b. The Blue Chip does not project a 10-year note rate. The values shown here are based on the Blue Chip projection of the Aaa bondrate, adjusted by CBO to reflect the estimated spread between Aaa bonds and 10-year Treasury notes.

18 ANALYSIS OF THE PRESIDENT'S BUDGET March 1Q42

0.4 peicentage points. By comparison, CBO of households and businesses are being re-has estimated that about 2 percentage points trenched- -developments that are expected tois the normal range of uncertainty for a fore- set the stage for more balanced growth in thecast of the average rate of growth of real out- future.put over the succeeding two years. Thismeans that such forecasts will fall within 2 But other factors cited by the Administra-

percentage points of the average rate of real tion and CBO suggest that the recovery will

growth that actually transpires over the suc- probably be weaker than is typical. High va-

ceeding two years about 67 percent of the cancy rates in commercial real estate andtime. 2 Similarly, the differences between the multifamily housing, and a slowing of the rate

Administration's and CBO's forecasts of the of household formation, will make construc-

rates of inflation and interest are small when tion less influential than usual during the re-

compared with the normal range of uncer- covery. Cutbacks in defense spending and fis-

tainty that attends their forecasts. -al restraint by state and local governmentswill constitute a fiscal drag, a contrast to the

The similarity of forecasts by the Adminis- typical pattern of earlier recoveries that havetration and CBO reflects their substantial reflected more fiscal stimulus. Slow economicagreement on the current state of the econo- growth among U.S. trading partners will weak-my and its prospects. Both cite virtually the en demand for U.S. exports. Finally, interestsame factors: those now providing a founda- rates will remain higher than usual during thetion for recovery, those acting to moderate it, recovery because of the demands for invest-and those posing risks to it. ment arising principally from the integration

of Western Europe and the breakup of theThree factors provide a foundation for re- former Soviet bloc. All of the aforementioned

covery. First, interest rates have fallen sub- factors are expected to slow the recovery, but

stantially since the Federal Reserve took notto stop it.

strong action in the fourth quarter of 1991 to

ease monetary conditions. The interest rate In addition, the Administration and CBOon three-month Treasury bills fell by 1.4 per- cite several atypical features of the currentcentage points from September to January. state of the economy that pose risks to the re-Rates on long-term securities also fell by ap- covery. Conditions in credit markets remainpreciable, though smaller, amounts. Lower uncertain, with banks reported to be less will-interest rates reduce the carrying cost of debt ing than usual to lend to creditworthy bor-for households and businesses, making invest- rowers. Determining whether the collapse ofments in housing and capital goods more at- lending reflects weak credit demand or fol-tractive, although they also reduce household lows in part from financial restructuring com-income. plicates the task the Federal Reserve faces in

Second, the relatively low exchange value of determining the appropriate monetary policy.

the dollar will provide a mild stimulus to net At the same time, the conduct of monetaryexports by making U.S. goods relatively cheap policy is also c mplicated by the possibilityto foreigners and foreign goods relatively ex- that the economy's response to monetary ac-pensive to residents of the United States. tions may no longer follow its historical pat-Finally, both the Administration and CBO tern. Innovations in financial markets havenote that the financial and real estate sectors left the domestic demand for new housing lessare being restructured, and the debt positions sensitive than before to movements in interest

rates, whereas net exports are more sensitive.

2. These estimates are based on historical relationships The response of net expol Ls to changes in in-that provide a technical measure of the precision of a terest rates, however, takes longer and is lessforecast--the "standard error" of a forecast. The esti-mates also assume that such forecasts are accurate on easily discernible than the response of housingaverage, which historically has been true of both the construction.Administration's and CBO's foreLasts.

CHAPTER TWO COMPARISON OF ECONOMIC FORECASTS 19

Finally, consumer confidence remains low, The Outlook for Growth of Real GDPmuch lower than appears consistent withother economic indicators, such as personal Both the Administration and CBO base theirincome or unemployment. Consumption ac- projections on the assumption that the level ofcounts for two-thirds of output, so consumers output by 1997 will be governed, not by cycli-could stall the recovery if they cut back their cal factors, but by fundamental factors thatspending. determine the economy's capacity to produce.

The projections assume that output will growfast enough in the medium term to purge theeconomy of the remaining cyclical weakness

Medium-Term Projections that characterizes the forecasts for 1993. TheAdministration's more optimistic projections

Neither the Administration nor CBO attempts of the growth of output are accounted for by

to forecast cyclical fluctuations beyond 1993. more optimistic assumptions about the growth

Instead, projections are based on extrapola- of output per worker.

tion of trends in fundamental economic vari-ables. The Administration and CBO project CBO's Method of Projecting Real GDP in thethe paths of variables such as real output, in- Medium Term. CBO's projection of theflation, and interest rates based on the pro- growth of output in the medium term dependsjeered gap between their values at the end of on an estimate of potential output, which rep-1993 and their potential or long-run values resents a supply constraint for the economy.implied by projections of fundamental condi- Trying persistently to produce above potentialtions of supply--the levels of capital, labor, would lead to higher inflation rather than toand technology, sustainable increases in real output. Usuallythe economy operates somewhat below its po-

In general, the Administration's economic tential; historically, the gap between actualprojections for the medium term (1994 GDP and its potential has averaged about 0.6through 1997) would reduce the deficit slight- percentage points. CBO's projections assumely more than those of CBO for the following that real GDP will grow fast enough from thereasons (see Table 2-2 and Figure 2-1): end of 1993 to reach a level that is 0.6 percent

below its potential in 1997."o Growth of real GDP averages about 0.3

percentage points higher in the Admin- CBO's projection of potential real GDP de-istration's projections than in those of pends on projections of the growth rates ofCBO (about 2.9 percent for the Admin- the capital stock, the labor force, and totalistration compared with about 2.6 per- factor productivity--a measure of the growthcent for CBO). of real output that cannot be accounted for by

"o The rate of inflation (measured by the growth of capital and labor alone. Total fac-

consumer price index) projected by the tor productivity differs from the more familiar

Administration averages about 0.4 per- measure of labor productivity- -output percentage points lower than CBO's. hour worked--because total factor productivi-

ty takes account of growth of the capital stock"o Interest rates, especially long-term rates, as well as growth of hours worked. Total fac-

fall farther in the Administration's pro- tor productivity is, therefore, the more funda-jections than in CBO's. mental measure. Growth of total factor pro-

ductivity is commonly attributed to technical"o Nominal income contains more profits progress, although it may result from intan-

and other components that are taxed at gible factors other than technology, such asrelatively higher rates in the Adminis- organizational methods used in business ortration's projections than in CBO's. improvements in the skills of the work force.


Table 2-2.Comparison of CBO. Administration, and Blue Chip Economic Projections, Calendar Years 1991-1997

Estimated Forecast Projected1991 1992 1993 1994 1995 1996 1997

Nominal GDP(Billions of dollars)

CBO 5,674 5,931 6,337 6,714 7,104 7,520 7,961Administration 5,674 5,926 6,307 6,712 7,141 7,589 8,054

Real GDP(Percentage change, year over year)

CBO -0.7 1.6 3.6 2.7 2.5 2.6 2.6Administration -0.7 1.5 3.0 3.0 3.0 2.9 2.8Blue Chipa -0.7 1.6 3.2 2.9 2.3 2.3 2.5

GDP Deflator(Percentage change, year over year)

CBO 3.6 2.9 3.2 3.2 3.2 3.2 3.2Administration 3.6 2.9 3.3 3.3 3.3 3.2 3.2Blue Chipb 3.6 2.7 3.2 3.9 3.8 3.6 3.6

Consumer Price Indexc(Percentage change, year over year)

CBO 4.2 3.3 3.6 3.6 3.6 3.6 3.6Administration 4.2 3.0 3.3 3.2 3.2 3.2 3.1Blue Chip 4.2 3.2 3.7 4.1 4.0 3.9 3.8

Civilian Unemployment Rate (Percent)CBO 6.7 6.9 6.4 6.2 6.0 5.9 5.7Administration 6.7 6.9 6.5 6.1 5.8 5.4 5.3Blue Chip 6.7 6.9 6.4 5.8 5.8 5.7 5.7

Three-Month Treasury Bill Rate (Percent)CBO 5.4 4.4 5.1 5.2 5.4 5.5 5.6Administration 5.4 4.1 4.9 5.3 5.3 5.2 5.1Blue Chip 5.4 4.1 5.0 6.3 6.2 6.2 6.2

(Continued)

CBO derives its projection of the capital productivity in the nonfarm business sectorstock using a standard growth model. Nation- are projected independently of the growthal saving and borrowing from abroad deter- model. Following midrange projections of themine investment--that is, the increase in the Bureau of Labor Statistics, the underlying ratecapital stock. The model then allocates cap- of growth of the labor force is assumed to av-ital and labor among nonfarm business, gov- erage 1.3 percent a year over the mediumeminent, and smaller sectors, given assump- term. The underlying rate of growth of totaltions about government policy and the shares factor productivity in the nonfarm businessof the smaller sectors in output. A stable rate sector is expected to continue at the rate itof private saving is assumed, so that any varia- achieved in the 1980s--0.7 percent a year, ation in the national saving rate--and, there- rate that is slightly below its average since thefore, in the growth of the capital stock-- early 1960s.depends on government deficits.

Following the method described above,The underlying (cyclically adjusted) rates of CBO's projection of the growth rate of poten-

growth of the labor force and of total factor tial real GDP averages about 2.1 percent a


Table 2-2.Continued

Estimated Forecast Projected1991 1992 1993 1994 1995 1996 1997

Ten-Year Treasury Note Rate (Percent)ClO 7.9 7.1 7.1 7.1 7.1 7.1 7.1Administration 7.9 7.0 6.9 6.7 6.6 6.6 6.6glue Chipd 7.9 7.1 7.6 7.7 7.7 7.8 7.8

Nominal Income (Percentage of GDP)Wage and salary disbursements

C60 49.5 49.4 49.4 49.5 49.6 49.8 49.9Administration 49.5 49.7 49.7 49.7 49.7 49.7 49.7

Other personal incomeeCBO 35.7 36.0 35.7 35.9 36.2 36.3 36.5Administration 35.7 35.3 35.6 35.4 35.5 35.4 35.4

Corporate profitsfCBO 5.5 6.0 6.6 6.5 6.3 6.2 6.2Administration 5.5 5.8 6.7 6.8 6.9 6.9 6.9

SOURCES: Congressional Budget Office; Office of Management and Budget; Eggert Economic Enterprises, Inc., Blue Chip EconomicIndicators.

NOTE: The CBO forecast is based on data available through December 1991 and does not reflect fourth-quarter data for grossdomestic product or the consumer price index published in January 1992. The Blue Chip forecasts through 1993 are based ona survey of 50 private forecasters published on February 10, 1992. The Blue Chip projections from 1994 through 1997 arebased on a survey of 41 forecasters published on October 10, 1991.

a. The Blue Chip projections for 1994 through 1997 were made on the basis of gross national product (GNP) in constant 1982 dollars.

b. The Blue Chip projections for 1994 through 1997 were made on the basis of the implicit deflator for GNP given 1982 as the baseyear.

c. Consumer price index for all urban consumers (CPI-U).

d. The Blue Chip does not project a 10-year note rate. The values shown here are based on the Blue Chip projection of the Aaa bondrate, adjusted by CBO to reflect the estimated spread between Aaa bonds and 1 0-year Treasury notes.

e. Personal income less wage and salary disbursements.

f. Corporate profits reported are book, not economic, profits.

year from 1994 through 1997.3 The projec- ness sector of about 1.1 percent. Potential la-tion of accumulated capital reflects reductions bor productivity in the nonfarm business sec-in the deficit as a share of GDP, caused both tor is projected to grow faster than potentialby the recovery and budget discipline of the output per worker, largely because the aver-Budget Enforcement Act. The underlying age workweek is expected to shorten.growth rates of capital, labor, and total factorproductivity in the nonfarm business sector CBO then projects real GDP to reach aimply an underlying annual rate of growth of level 0.6 percent below its potential in 1997--potential real GDP per worker of 0.9 percent the average historical gap. Because the gapand of labor productivity in the nonfarm busi- between real GDP and its potential is forecast

to be 2.3 percent at the end of 1993, real GDPmust grow in the medium term about 0.5

3. This projection depends on provisional assumptions percentage points a year faster than its po-that CBO had to make because the Department ofCommerce has not yet published all of the revised tential to reach the average gap in 1997.series that CBO uses in constructing potential real Therefore, CBO projects that real GDP willGDP. See Congressional Budget Office, The Econom-ic and Budget Outlook: Fiscal Years 1993-1997 grow at an average rate of 2.6 percent a yearianuary 1992). pp. 22-23. in the medium term. Correspondingly, the


rates of growth of real GDP per worker and real GDP will grow at an annual pace of 2.9labor productivity (output per hour of work) percent, employment at 1.6 percent (the samein the nonfarm business sector are also pro- rate that CBO projects), and real GDP perjected to rise above their underlying rates--to worker at 1.3 percent--0.3 percentage points1.0 percent and 1.4 percent, respectively, faster than CBO's projection. The Adminis-

tration projects a closely related measure--Comparison of Real GDP Projected by CBO labor productivity in the nonfarm businessand the Administration. Growth of produc- sector--to grow at 1.6 percent a year. Thistivity accounts for the entire difference be- rate is slightly lower than the average rate oftween the Administration's and CBO's projec- 1.8 percent over the postwar period, but sig-tions of the growth of real GDP over the me- nificantly higher than the 1.0 percent rate ex-dium term. The Administration projects that perienced since the end of the 1960s.

Figure 2-1.Comparison of CBO's and the Administration's Economic Assumptions

Real GDP Growth CPI-U InflationPercent Percent5 5

Administration/ 4

1 3 -/ ...

Administration

-1 rI I I2I I I I I I-1 12

1990 1992 1994 1996 1998 1990 1992 1994 1996 1998

Three-Month Treasury Bills Ten-Year Treasury NotesPercent Percent

9 9CBO

7 C110 7I /5 Administration

5 -- $.-..--

Administration

3 I I I I I 3 I I I I

1990 1992 1994 1996 1998 1990 1992 1994 1996 1996

SOURCES: Congressional Budget Office; Office of Management and Budget.

NOTE: CPI-U = consumer price index for all urban consumers.


The Administration's projections of the GDP deflator, the consumer price index is notgrowth of labor productivity implicitly assume affected by changes in the composition of out-noticeably higher rates of capital accumula- put. Therefore, it constitutes a better measuretion or growth of total factor productivity than of pure price inflation.CBO foresees. (The Administration maintainsthat adoption of its budgetary program will in- CBO believes that the consumer price indexcrease the rate of growth, a judgment that is will continue to grow more rapidly than theaddressed below.) Given the historical experi- GDP deflator, largely because the two mea-ence of these factors, there appears to be little sures treat computers differently. The sharereason to expect a significantly higher rate of of GDP devoted to computers (now about 1.3growth of labor productivity than CBO pro- percent in real terms) is expected to continuejects. Nevertheless, the differences between rising, and the quality-adjusted price of com-the Administration's and CBO's projections of puters is expected to continue falling. But theproductivity growth and real output lie well weight given to computers in the consumerwithin the range of normal uncertainty for price index is both small and fixed, so the fallforecasts. in computer prices has little scope to retard

the growth of the index.

The Outlook for InflationThe Outlook for Interest Rates

The Administration is more optimistic thanCBO about the prospects for inflation. Both The Administration is more optimistic thananticipate that the rate of inflation will rise CBO about interest rates. It projects that thefrom its current level, which has been reduced interest rate on three-month Treasury billsby the recession. Still, both foresee a recovery will fall slightly over the medium term, where-that will be moderate enough to keep inflation as CBO expects the rate to rise steadily.from rising sharply. In CBO's view, the out- Therefore, although the Administratien's pro-look for stable inflation is enhanced by the jection is 0.1 percentage point higher thanfact that actual output is far below potential CBO's in 1994, it is 0.5 percentage pointsoutput. lower than CBO's by 1997. Over the medium

term, the Administration's projection of theProjections of the rate of growth of the bill rate averages about 0.2 percentage points

GDP deflator by the Administration and CBO lower than CBO's (see Table 2-2).are nearly identical, averaging 3.3 percent and3.2 percent, respectively, over the medium This difference in projections of short-termterm (see Table 2-2). But the Administration interest rates may reflect, in part, the Ad-expects the consumer price index to grow ministration's lower projection of the rate ofslightly more slowly hian the GDP deflator. growth of the consumer price index. Both theBy contrast, CBO and the Blue Chip project Administration and CBO project that the realthat the consumer price index will grow by an (inflation-adjusted) rate of interest on three-average of 0.4 percentage points, or 0.2 per- month Treasury bills in 1997 will be about 2centage points a year faster than the GDP de- percent. (CBO computes the real interest rateflator, over the medium term.4 Unlike the by subtracting the rate of inflation of the

4. The Blue Chip's medium-term projections of respec- dium term would closely match those of CBO. Theretive rates of inflation were made in October 1991. is no reason to suppose that the Blue Chip forecastersSince that time, the Blue Chip's forecasts of inflation would not continue to project faster growth in thein 1992 and 1993 have dropped by about 0.5 per- consumer price index than in the GDP deflator. (Thecentage points. If the Blue Chip's projections of infla- Blue Chip projections were made on the basis of thetion rates in the medium term also drop by the same GNP deflator, whose growth rate has been virtuallyamount, their respective average rates over the me- identical to that of the GDP deflator and is expected

to remain so.)


consumer price index from the nominal in- The Outlook for Nominalterest rate.) The real bill rate holds steady in Income and Its Componentsthe Administration's projections at about 2percent, and it rises steadily in CBO's projec- Projections of the size and distribution oftions from 1.6 percent in 1994 to 2 percent in nominal income affect deficit projections for1997. The higher rate of inflation projected two reasons: higher income implies higher taxfor the consumer price index by CBO, how- receipts, and different components of in-ever, leads to CBO's higher projection for the come--profits, wages and salaries, dividends,nominal bill rate. interest, and so forth--are taxed at different ef-

fective marginal rates. (The effective marginalCBO's projection of real interest rates is tax rate on a given component of income rep-

based on an assessment of supply and demand resents the amount of additional tax collectedfor funds. The domestic supply of funds, by from each additional dollar of such income.)itself, should act to lower the real interest Corporate profits and wages and salaries arerate. CBO expects the net national saving rate taxed at the highest effective marginal ratesto rise above its average for the 1986-1989 (about 30 percent); dividends and the incomeperiod by 0.6 percentage points. This increase of proprietors are taxed at about half thatshould occur partly because a growing portion rate. Interest and rental income are taxed atof the population will be at an age when their raen lnter arenal incme a re tdeven lower marginal rates (effectively zero inpersonal saving rates are high, but mostly be- the case of rental income).cause the growing economy and the require-ments of the Budget Enforcement Act should Effective marginal tax rates on various com-cause federal deficits to fall as a fraction of ponents of personal income differ for twoGDP. But increases in the demand for funds pnesofernaicmeifrfrtw

GDP.Butincease inthedemad fr fnds principal reasons. First, wages and salariesare expected to outweigh growth in the do- picplraos iswgsadslrearesi expected tom ofutweig growth win ase dare subject to both personal taxes and payrollmestic supply. Some of this growth will arise taxes. Second, other components are oftenfrom a demand for investment created by a defined differently for tax purposes than forgrowing economy, but most will be driven by purposes of the national income and productan increased world demand for investment accounts (NIPAs). For example, some mone-funds. These demands stem from develop- tary income from dividends and interest ac-ments in Europe--German unification and the crues to pension funds and other tax-exempteconomic integration of Western Europe--and organizations. In addition, some interest andto a lesser extent from construction needs in rental income reported by the NIPAs (mostthe former Communist bloc and reconstruc- notably the rental value of owner-occupiedtion needs in the Middle East in the aftermath homes) reprents uaxe of ine kindof the Persian Gulf War. homes) represents untaxed income in kind

rather than monetary income. Finally, thetaxable income of the self-employed is often

Botethat the Aieldmnstreadetien ad CO anc reduced by allowable deduct.ions that are notpate that the yield spread between the 10-year considered to be economic costs of business inTreasury note and the three-month Treasury the NIPAs.

bill will revert from its current value of nearly

3 percentage points to a more normal value of The Administration's projection of income1.5 percentage points by 1997. The spread and its components in the medium term fa-should narrow as participants in credit mar- vors deficit reduction slightly more thankets come to expect fairly stable short-term CBO's. In 1994, the Administration's andrates of interest to prevail in the future. CBO's projections of nominal GDP are virtu-Therefore, given their projections of bill rates, ally identical. By 1997, however, the Admin-both the Administration and CBO project istration's projection rises to $93 billion abovestable 10-year rates over the medium term-- CBO's (about 1.2 percent higher). In additionthe Administration at 6.6 percent, CBO at 7.1 to projecting a higher level of income, the Ad-percent.


ministration expects a greater share of income year in 1992 and 1993 and by an average ofto be taxed at the highest effective marginal 0.4 percentage points a year from 1994rates. During the medium term, the Admin- through 1997 (see Table 2-3). Such growthistration's projection of wages as a share of through 1993 would be lower than that fore-GDP holds steady at 49.7 percent, and CBO's cast by CBO and the Blue Chip consensus byrises from 49.5 percent to 49.9 percent. At an average of I percentage point and 0.7 per-the same time, the Administration's projection centage points a year, respectively.of corporate profits as a share of GDP aver-ages about 0.6 percentage points higher than Despite the strictures of the Budget En-CBO's, which--following a historical trend-- forcement Act, the Administration's programfalls from 6.5 percent in 1994 to 6.2 percent in would make federal fiscal policy behave much1997 (see Table 2-2). As a result, the Admin- as it usually has in response to a recession. Inistration projects the sum of wages and cor- the past, at or about the trough of a recession,porate profits as a share of GDP to be about spending was usually raised or taxes were cut0.6 percentage points higher than CBO's cor- to boost the economy. On average, fiscal au-responding projection. This amount slightly thorities have raised the standardized-employ-more than offsets CBO's projection of a high- ment deficit (a measure of the deficit thater share of nonwage personal income, removes the effects of the business cycle) by

0.8 percent of potential GDP between the yearThe rising share of profits in the Admin- preceding and the first year of a recovery.

istration's projection could be caused by a According to CBO's preliminary estimate, thecombination of several factors. First, higher standardized-employment deficit as a propor-growth tends to be associated with a higher tion of potential GDP would rise during ashare of profits, partly at the expense of other corresponding period by 0.3 percentage pointscomponent shares of taxable income. Second, under current policy and by 0.6 percentagelower interest rates reduce corporate interest points under the Administration's policy.expenses, leaving a higher share of capital in- (The difference includes reduced withholdingcome accruing as profits and a lower share ac- from paychecks that the Administration hascruing as interest income. Finally, increasing imposed by executive action.)the share of equity (and lowering the share ofdebt) in corporate capital structures wouldalso lead to lower interest expenses for corpo- Description of therations. Administration's Program

The Administration's program of tax andspending initiatives aims both to stimulate

Implications of the demand in the short term by providing in-o tcentives to accelerate private spending, and to

Administration's Economic enhance productivity in the longer term by

Program for Growth encouraging private saving and investment aswell as undertaking public investment.

The Administration states that unless its The Administration proposes three tax ini-budgetary program is adopted, growth would tiatives that would temporarily accelerate pri-fall significantly short of its forecast. The pro- vate spending:gram is intended to stimulate aggregate de-mand in the short term and to enhance pro- o Reduced personal income tax with-ductivity in the long term. Under current holding rates will act like a temporarypolicy, the Administration predicts that the tax cut for 1992. (Unlike the other taxannual rate of growth of real GDP would fall proposals--which would require passagebelow its forecast by 0.6 percentage points a


by the Congress--reduced withholding Proposals for permanent changes to the taxhas already been initiated by executive code that could enhance future productivityaction and therefore is considered apart by affecting private saving and investmentfrom the rest of the Administration's include:program in other chapters.)

o Excluding 45 percent of capital gains"o A temporary investment tax allowance from income (but exposing the excluded

would increase the rate at which busi- gains to the alternative minimum tax);nesses could depreciate equipment theybuy in 1992. o Establishing Flexible Individual Retire-

ment Accounts (FIRAs), the contribu-"o A temporary tax credit for a first-time tions to which would not be deductible,

home purchase would give new home- but the earnings of which could be with-buyers in 1992 a credit of 10 percent of drawn free of tax or penalty after seventhe cost of a home, up to a maximum of years;$5,000.

Table 2-3.Comparison of Alternative Economic Projections by the Administration:Current Policy versus Administration Policy

1992 1993 1994 1995 1996 1997

Fourth Quarter to Fourth Quarter(Percentage change)

Real GDPCurrent policy 1.6 2.4 2.5 2.6 2.5 2.4Administration policy 2.2 3.0 3.0 3.0 2.9 2.8

GDP DeflatorCurrent policy 3.3 3.4 3.3 3.3 3.2 3.2Administration policy 3.2 3.4 3.3 3.3 3.2 3.2

Calendar-Year Average(Percent)

Civilian Unemployment RateCurrent policy 7.1 6.9 6.7 6.3 5.8 5.6Administration policy 6.9 6.5 6.1 5.8 5.4 5.3

Three-Month Treasury Bill RateCurrent policy 4.2 5.1 5.5 5.5 5.4 5.3Administration policy 4.1 4.9 5.3 5.3 5.2 5.1

Ten-Year Treasury Note RateCurrent policy 7.2 7.3 7.1 7.0 7.0 6.9Administration policy 7.0 6.9 6.7 6.6 6.6 6.6

SOURCE: Office of Management and Budget, Budget of the United States Government: Fiscal Year 1993, Table 3-2.


" Allowing penalty-free withdrawals from o Research and development (R&D), andIRAs for educational and medical ex-penses or for a first-time home pur- o Human resource programs, such as edu-chase; and cation and training, preventive health

care, and anticrime and drug-abuse pro-"o Extending the 20 percent tax credit for grams.

qualified research and experimentation(R&E) spending (above a company- Increased spending for such programs, ifspecific base). sustained, could enhance productivity in the

longer term by contributing to the stock ofOther proposals to change taxes would have capital, the level of technology, and the health

little effect on saving or investment. Three and skills of the population. (Chapters 4 andthat have drawn prominent attention include 5 provide a more complete discussion of themodifying the alternative minimum tax for Administration's spending proposals.)corporations, the passive loss rule for realestate developers, and the sale-leaseback rule CBO's analysis of the Administration's pro-for pension funds and educational institutions gram is limited to the likely effects that themaking real estate investments. But the com- tax and spending proposals would have onbined reduction in taxes from these proposals real GDP during the next six years. There-would amount to less than 0.2 percent of total fore, proposals to reform the financial sector,income from business property, which would legal system, or regulatory structure, or toroughly translate into increased total demand negotiate market-expanding trade agreements,for investment of less than 0.01 percent of are not considered here. Furthermore, someGDP. (Modifying the sale-leaseback rule of the proposals either might generate littlewould not add to total investment demand; it effect on GDP until after 1997 or might servewould merely redirect funds from other in- purposes other than (or in addition to) in-vestment projects to real estate.) creasing GDP. For example, some human re-

source programs--such as Head Start orThe individual effects on the overall econo- Healthy Start--would have little effect on GDP

my of other tax proposals are unlikely to be through 1997, but could enhance both pros-significant during the next six years. The pects for the disadvantaged and productivityproposal with the largest effect on the deficit in the long term.over the next six years would increase the ex-emption for dependent children by $500 perchild, starting October 1, 1992 (amounting to Effects of the Administration'sa total of $24 billion through fiscal year 1997). Program in the Short TermBut, as a whole, the program would have littlepermanent effect on the deficit through 1997. The Administration's program would impart(Chapter 3 provides a more complete dis- more stimulus in 1992 than would currentcussion of the Administration's tax proposals.) policy, although the exact amount is uncer-

The Administration also maintains that tain. But the stimulus would begin to reverseitself during 1993. By 1993, or 1994 at thesome of its spending proposals would con- latest, real GDP would probably return to the

tribute to future productivity because they level it would have attained without the pro-

represent increased public investment. These gram' stimulus.

include: gram s stimulus.

Temporary factors would provide the prin-o Public infrastructure, cipal additional stimulus under the Adminis-

tration's program. Reduced withholding for


Table 2-4.CBO Estimates of the Effects of the Administration's Budgetary Program(Change from baseline in billions of dollars. by fiscal year)

1992 1"93 1994 1995 1996 1997 Total

Excluding Reduced Withholding

Revenues -5 -2 -9 -13 -15 -16 -60

Outlays -1 -7 a -2 -20 -36 -65

Deficit 5 -4 10 11 -5 -20 -5

Reduced Withholding

Revenues -14 -5 -1 -1 -1 -1 -24

Total

Deficit 19 1 11 11 -4 -19 19


a. Less than $500 million.

personal income taxes would act like a tern- lowering the cost of funds for some in-porary tax cut to provide households with an vestments. But CBO and others have esti-additional $21 billion in cash in calendar year mated that this stimulus would not appreci-1992 (unless people readjust their withholding ably raise the rate of growth. 5

rates). In addition, two temporary mea-sures--an investment tax allowance and a tax The temporary nature of the principal ele-credit for a first-time home purchase--would ments of the Administration's program makesprovide more stimulus in 1992 than they it difficult to determine their effective stimu-would if they were permanent. The tax pro- lus. First, conventional analysis indicates that,visions would stimulate the economy, not so unlike investment in machines or housing,much because they would encourage busi- consumption responds less to temporary taxnesses or households to buy more or bigger cuts than to permanent ones. Estimates varymachines or houses, but because the allow- widely, but suggest that the response of con-ances and credits would encourage them to sumers to a temporary cut may be about halfbuy now, instead of later, in order to take ad- of that to a permanent one. 6 Second, the restvantage of the temporary tax benefits. of the program would have to be passed

By contrast, the other features of the pro-gram would give only a nudge to demand. 5. See Congressional Budget Office, "Effects of Lower

Excluding the revenue effects of reduced with- Capital Gains Taxes on Economic Growth," CBO Paper(August 1990); and Brian W. Cashell and Jane G.

holding, the program would change the deficit Gravelle, "Potential Macroeconomic Effects of a Capital

too little to stimulate demand directly in any Gains Tax Cut," CRS Report for Congress (January 2,

significant way, either by raising federal 1W2).

spending directly or by raising net private in- 6. See Alan S. Blinder and Angus Deaton, "The Timecome through increased transfers or lowered Series Consumption Function Revisited." Brookings

Papers on Economic Activity (1985:2), pp. 465-521. Ataxes (see Table 2-4). The partial exclusion of more recent competing analysis suggests that a tem-

capital gains would initially encourage con- porary tax cut would provide more stimulus than apermanent one, but that a permanent cut would be less

sumption by increasing the value of existing stimulating than conventional analysis indicates.wealth, and would encourage investment by Simulations of the McKibbin-Sachs Global model of theworld economy contain this feature.


quickly to have the desired effect. Businesses way, the Administration's program wouldand households would not accelerate their in- essentially borrow growth in 1992 from growthvestments in machines or housing without bein 1993 or later.ing sure that they would receive the tax bene-fits. Third, some mechanism would have to In conclusion, the proposals do not lendbe devised that would enable new homebuyers themselves easily to conventional economicto use the tax credit to help make a down- analysis. Their assessment therefore dependspayment. (Half the credit would apply in more heavily than is usual on the judgments1993 against taxes for 1992 and the other half of market observers, which vary widely. CBOin 1994 against taxes for 1993.) Without such finds it plausible that the Administration'sa mechanism, the tax credit may not help program could add about one-half of a per-many new homebuyers who would not have centage point to growth in 1992, but con-bought anyway in 1992. (New homebuyers, cludes that any addition to growth in 1992however, could reduce the amount withheld would be largely reversed in 1993.from their paychecks to accumulate up to$2,500 in cash in 1992 against the credit.) Effects of the Administration's

Although the magnitude of the response in Program in the Medium Term1992 is uncertain, its eventual reversal is morepredictable. After 1992, the effects of the pro- In principle, several of the Administration'sgram would begin to wear off. Reduced with- proposals could raise productivity, but theyholding would no longer provide a significant would probably not have much effect in thestimulus. Even though withholding schedules next six years. The principal tax proposalswould remain below current rates (unless would partially exclude capital gains frompeople readjusted their withholding rates), income taxation, establish FIRAs, allow pen-higher take-home pay in 1993 would be nearly alty-free early withdrawals from IRAs, andoffset by reduced refunds (or increased tax permanently extend a tax credit for researchpayments) for the tax liabilities of 1992. and experimentation. The AdministrationTherefore, most of the stimulus provided by also maintains that its program would raisehigher take-home pay would not persist be- productivity in the longer term by raisingyond 1992. spending for public infrastructure and re-

Moreover, the aftereffects of the investment search and development.

tax allowance and the tax credit for first-time To be effective, such programs would needhomebuyers would begin to act adversely, to increase the rate of technological innova-Most of the stimulus from the provisions tion or raise saving to provide more capitalwould occur because businesses and first-time ter or rais e si tonprdetmore ca lhomeuyes wuldacclerae teirplaned per worker. Guided by standard theory, CBOhomebuyers would accelerate their planned calculates that it would require an increase inpurchases, moving them into 1992 from 1993 the national saving rate of one-half of a per-or later.7 But, in total, such purchases would tenta l saing rat of onh of aiper-fall from the level they would otherwise have centage point--a total of about $200 billion

over the next six years--to raise the rate ofattained in 1993 and later by roughly the same growth of real GDP by an average of 0.1 per-amount that they rose in 1992. In this case, centage point a year (assuming that output isthe positive stimulus would not only cease unaffected by the drop in aggregate demand).8after 1992, but would turn negative. In this

8. Raising the same amount of capital by borrowing or ab-sorbing investment from abroad, rather than by saving,

7. The investment tax allowance and tax credit for first- would also raise domestic output, but much of the ad-time homebuyers could continue to have some positive ditional income generated would accrue to the foreigneffects in early 1993. The proposals would apply to lenders or investors. As noted, in any case the Admin-machines or homes bought in 1992 and put into service istration's proposals would provide very little perma-or moved into before July 1, 1993. nent impetus to investment in capital.


If increases in capital accelerate innovation of holding assets more attractive. The taxand thereby contribute twice as much to in- credit for research and experimentation wouldcreases in output as standard theory implies, a not increase saving in itself, but could channeltotal of $100 billion of additional national say- more funds to R&E, which generates moreing over the next six years would be needed to benefits to society than it costs.10 This streamraise the average rate of growth by 0.1 perof extra returns to additional R&E would becentage point a year.9 But the Administra- equivalent to an addition to saving. Produc-tion's program seems unlikely to raise na- tive public investment for infrastructure andtional saving by more than that, and may raise R&D also constitutes a type of saving becauseit by far less. it represents public funds that are committed

to future use rather than being immediatelyHow Much Would the Administration's Pro- consumed.gram Add to National Saving? The mostdirect way that the program could affect na- CBO has considered the possible contribu-tional saving is through its effect on the defi- tions of the Administration's program tocit. Because the deficit subtracts from funds growth by estimating the total amount of ad-available to finance investment in private ditional saving that it would be likely to gen-capital, it represents dissaving when it fi- erate through 1997. The exercise does notnances government consumption. Other consider effects after 1997 or other merits thatthings being equal, raising the deficit reduces may recommend the proposals.national saving, whereas reducing the deficitraises national saving. In considering the pro- The partial exclusion of capital gains wouldgram's effect on the deficit through 1997, it is raise the after-tax rate of return on someappropriate to exclude the direct revenue ef- forms of saving; therefore, the effect of the ex-fects of reduced withholding because, al- clusion depends on how much saving wouldthough it affects the timing of tax payments, it respond to a change in its after-tax rate of re-does not affect tax liabilities. (Reduced with- turn. Using the results of a study that esti-holding will slightly raise interest costs, how- mates a response in the upper range of pub-ever, by requiring more borrowing to finance lished estimates, together with CBO's eco-spending during the period before the tax nomic projections, CBO calculates that theliability is settled.) But as Table 2-4 showed, partial exclusion of capital gains could in-when the effects of reduced withholding are crease private saving by about $25 billionexcluded, the Administration's program through 1997.11 (This calculation overstateswould, on balance, leave the deficit virtually the likely change in saving, given the results ofunaffected through 1997. Therefore, any ma- the study, because it does not consider theterial effect the program would have on na- negative effect on saving that the exclusiontional saving would depend on how it would would have by raising the value of existingaffect private saving and public investment, wealth, thereby inducing more consumption.)

Aside from any effect they would have on New provisions for Individual Retirementthe deficit, the proposals could raise national Accounts--FIRAs and penalty-free early with-saving. Both the partial exclusion of capitalgains and new provisions for IRAs couldincrease private saving by making some forms 10. For instance, see Edwin Mansfield and others. "Social

and Private Rates of Return from Industrial Innova-tions," Quarterly Journal of Economics. vol. 01 (May1977). pp. 221-240.

9. See George Hatsopolous, Paul R. Krugman, andLawrence H. Summers, "U.S. Competitiveness: Beyond H1. The study concludes that private saving rises by 0.4the Trade Deficit." Science (July 15, 1988). The percent for each 1 percent that the after-tax rate of re-implications of national saving for future living stan- turn to saving rises. See Michael J. Boskin, "Taxa-dards are discussed in Congressional Budget Office, The tion, Saving, and the Rate of Interest," Journal ofEconomic and Budget Outlook: Fiscal Years 1990-1994 Political Economy, vol. 86, no. 2, pt. 2 (1478). pp. S3-(January 1989), pp. 79-99. S27.


drawals from IRAs for qualified purposes-- highest estimate suggests that the proposalswould probably not have a major effect on could add $100 billion to saving through 1997,saving. Although total contributions to such the lower estimates that others have reportedaccounts might be large, a relatively small and the questionable applicability of the stud-portion seems likely to represent additional ies to the current proposals suggest that thesaving. Judging from experience, the addition result would t-- much smaller.to contributions could total $150 billionthrough 1997--perhaps $130 billion for FIRAs The tax credit for R&E would probablyand $20 billion for IRAs. (These figures are have no appreciable effect on growth over therough guesses made for this exercise. Gross next six years. Even if each dollar of thecontributions are considered because qualified credit corresponded to a dollar of additionalearly withdrawals would arguably finance in- R&E, only an additional $8 billion of R&Evestment rather than consumption.) But most would result.14 Furthermore, R&E usuallyof the additional contributions would prob- does not lead to marketable applications forably represent transfers of existing saving into several years. So, even if a dollar of R&Esuch accounts rather than additional saving, eventually adds as much to output as two or

three dollars of capital, the effects of theEstimates of the additional saving that IRAs credit would be negligible through 1997.

have induced in the past vary widely, but inthis case those at the lower end of the range When compared with current policy, theappear to be more reliable. One study found Administration's proposals for spending forthat about two-thirds of contributions to public infrastructure would not add appre-IRAs, as they existed from 1982 through 1986, ciably to growth. The amounts involved arerepresented additional saving. 12 The authors negligible, even if a dollar spent for produc-concluded that IRAs boosted saving so much tive public capital added twice as much tobecause, under the law at the time, they were output as a dollar spent for private capital.1 5

dedicated to saving for retirement, penalties The Administration proposes to spend $7 bil-were applied to early withdrawals, and con- lion less for nondefense infrastructure throughtributions were deductible from taxable in- 1997 than under current policy. 16 Evencome. But none of these conditions would though spending would shift to areas that haveapply to FIRAs, and the first two would nolonger apply to IRAs under the Administra-tion's proposals. Furthermore, other authors 14. Estimates of the revenue effects of the tax credit are

have found that IRAs, as they existed from well-founded because it has been in operation for twoyears o i a temporary basis. Preliminary evidence

1982 through 1986, had much smaller effects suggests that R&E spending is not responded

on saving. One study implied that about 30 markedly differently to the provisions of the currentcredit than to the provisions of an earlier credit,

percent of contributions to IRAs represented although the current version provides more incentive

additional saving; another found that, at most, to undertake additional R&E than did the earlierversion. For a discussion of the estimated response of4 percent did.13 Therefore, although the R&E spending to the earlier version, see Joseph J.Cordes. "Tax Incentives and R&D Spending: ARcview of the Evidence," Research Policy, vol. 18(June 1989), pp. 119-133.

12. Steven F. Venti and David A. Wise, "The Saving Ef-fect of Tax-Deferred Retirement Accounts: Evidence 15. For an exposition of this view. see David A. Aschauer.from the SIPP Data," in B. Douglas Bernheim and "Is Public Capital Pnrductive?" Journal of MonetaryJohn Shoven, eds.. National Saving and Economic Per- Economics, vol. 23 (1484), pp. 17;-2!. Most analysts,formance (Berkeley: University of California Press, however, estim.nne smaller effects than those Aschauer1991). finds. For a critical discussion and review of the

literature on Aschauer's hypothesis. see Congressional13. See Douglas H. Joines and James G. Manegold, "IRAs Budget Office. Htow Federal Spending for Infrastruc-

and Saving: Evidence from a Panel of Taxpayers," ture and Other Public Investments Affects the EconomyWorking Paper, University of Southern California (July 1991), pp. 23-31.(September 1991); and William G. Gale and John KarlScholz. "IRAs and Household Saving," Working 1. See Office of Management and Budget. Budget of thePaper. University of California at Los Angeles (April United States Government: Fiscal Year 1993. Table1")). 29-).


been identified in the past as productive, the compared with the 1992 budget request,shift would add little to measured growth. spending for the space station, Earth Observa-For example, spending for roads and air- tion System, and Superconducting Super Col-ports--the areas that have yielded the highest lider would be slightly cut or slowed, butestimated returns in the past--would be only spending for health research would be in-$3 billion higher through 1997 under the creased. This shift in spending could yieldAdministration's program than under current more direct benefits from federal R&D than ifpolicy. Furthermore, the return on roads and the shift did not occur. But the amounts in-airports is estimated by the value of time volved are too small, and the lag from re-saved by commuters and travelers, which does search and development to the market toonot appear in GDP. long, for the shift in spending to yield ap-

preciable ;esults in the medium term.Proposed changes in spending for R&D

would also add little, if at all, to growth Conclusion. The principal elements of thethrough 1997. Given the spending caps of the Administration's program would be unlikelyBudget Enforcement Act, budget authority for to raise national saving by more than a totalcivilian R&D would provisionally be frozen in of $100 billion over the next six years (andthe medium term at its proposed 1993 level. may easily raise it far less). If those elementsCompared with allowing the authority to grow could not raise saving by more than that, theyfrom its 1992 level to keep pace with inflation, could not raise the rate of growth through en-the Administration's program would increase hanced productivity by more than 0.1 per-the authority by $I billion in 1993, but de- centage point a year in the medium term--crease it by a total of $5 billion in the medium even under favorable conditions. That result,term. (The same calculation for defense re- together with CBO's assessment of the short-search and development would yield a short- term effects of the Administration's program,fall of $19 billion through 1997.) suggests that the program would fall far short

of raising growth by an average of one. half ofAt the same time, however, some R&D a percentage point a year through 1997, as the

spending might be shifted away from large Administration claims.projects that are not directly aimed at in-creasing output and toward areas that havebeen productive in the past. 17 For example,

17. For a discussion of estimates of the economic returnto federal spending for R&D, see CBO, How FederalSpending for Infrastructure and Other Public Invest-menu Affects the Economy, pp. 73-101.

Chapter Three

The Administration'sRevenue Proposals

he President's budget contains a large Taken together, the President's proposals

number of revenue proposals. Some reduce receipts in every year (see Table 3-2).are directed at stimulating the economy The President's proposed Flexible Individual

in the short run, others at increasing eco- Retirement Accounts (FIRAs) guarantee thatnomic growth in the long run. The President the trend of growing proposed reductionshas made many of the proposals before, but from present-law receipts, apparent in thethe Congress has not adopted them. Included CBO estimates for the 1993-1997 period, willin this group are the initiatives to liberalize continue in the years beyond 1997.Individual Retirement Accounts (IRAs) andreduce the tax on capital gains. The short- Present Policy and the President'srun stimulative initiatives include temporaryincentives to boost investment in plant and Withholding Reductionequipment and to spur the purchase ofhomes by first-time buyers. No new major Both the CBO and Administration baselinesrevenue-raising measure is offered. include the revenue effect of the speedup in

corporate income tax payments enacted inFebruary in the bill extending supplementalunemployment compensation benefits. Bothbaselines also include the reduction in per-sonal income tax receipts resulting from the

Revenue Estimates reduction in withholding rates put in place bythe President, effective March 1, 1992. With-holding by top-bracket taxpayers remains un-

The Congressional Budget Office (CBO) changed. The change in withholding is esti-estimates that total revenues under the Ad- mated to lower receipts by $14 billion thisministration's budget proposals would inyear, $5 billion in 1993, and about $1 billioncrease from $1,082 billion in 1992 to $1,171 per year thereafter.billion in 1993 and $1,474 billion in 1997.The CBO projections of revenues assuming CBO baseline revenues take account of theenactment of the President's proposals are effect of the Federal Reserve System's low-slightly higher than the Administration's pro- ered reserve ratio requirement for banks andjections for 1992 and 1993 but are lower be- other depository institutions. The President'sginning in 1994 (see Table 3-1). Most of the budget was released before the change was an-difference in estimates is for projected re- nounced and therefore does not take it intoceipts under present law and results from dif- account. The lower level of reserves will re-ferent economic forecasts. The other major duce Federal Reserve payments to the Trea-difference in estimating is for the President's sury and will raise corporate income and taxcapital gains proposal. liability.


Finally, CBO baseline revenues do not in- CBO's Reestimate of theclude the effect of the Administration's posi- Administration's Budget Revenuestion on tariff reduction in the Uruguay Round

of the General Agreement on Tariffs and CE10's reestimate of the Administration'sTrade. Therefore, the effect of the proposed budget revenues reflects differences in thereduction in tariffs that can be accomplished economic activity, incomes, and prices as-by executive action is removed from the Ad- sumed for 1992 through 1997. C1310's eco-ministration's baseline revenues (as pub- nomic forecast produces higher revenues inlished), and the reduction is shown as a pro- the near term, through 1993, but lower reve-posal.

Table 3-1.Administration and CBO Estimates of the Administration's BudgetRevenues, by Major Source (By fiscal year, in billions of dollars)

Revenue Source 1992 1993 1994 1995 1996 1997

Administration Estimates

Individual Income Taxes 478.7 515.2 562.5 602.8 643.8 677.5

Corporate Income Taxes 89.0 103.8 118.2 125.3 136.9 141.4

Social Insurance Taxes and Contributionson-budget 109.9 120.9 131.1 138.8 146.3 151.6off-budgeta 300.9 325.8 348.8 369.9 394.3 418.3

Excise Taxes 46.1 48.1 49.7 51.1 48.9 49.9

Other 51.0 51.6 52.8 54.5 56.6 57.9

Total 1,075.7 1,165.4 1,263.1 1,342.4 1,426.8 1,496.6As a Percentage of GDP 18.3 18.7 19.0 19.0 19.0 18.8

CBO Estimates

Individual Income Taxes 476.8 511.6 542.2 581.7 618.5 658.2

Corporate Income Taxes 91.4 107.5 122.1 125.0 128.8 130.8

Social Insurance Taxes and ContributionsOn-budget 111.3 122.7 132.4 140.1 147.5 152.9off-budgeta 304.5 328.1 350.3 371.8 395.3 419.5

Excise Taxes 46.5 48.8 50.3 51.4 49.0 49.9

Other 52.0 52.6 55.0 57.1 59.6 62.2

Total 1,082.5 1,171.2 1,252.2 1,327.2 1,398.6 1,473.6As a Percentage of GDP 18.5 18.8 18.9 18.9 18.9 18.8

SOURCES: Congressional Budget Office; Joint Committee on Taxation; Office of Management and Budget, Budget of the UnitedStates Government: Fiscal Year 1993.

a. Off-budget revenues consist of Old-Age, Survivors, and Disability insurance tax revenues.

CHAPTER THREE THE ADMINISTRATION'S REVENUE PROPOSALS 35

fues thereafter. The estimate by CBO and a quicker and more substantial recovery inthe Joint Committee on Taxation (JCT) of the profits this year followed by slower growth inlarger reduction in revenues from the pro- profits thereafter. This path produces higherposed capital gains exclusion depresses the corporate income tax revenues through 1994,CBO reestimate further after 1993. Other re- but lower revenues in later years. The eco-estimates of baseline receipts and budget pro- nomic forecasts have little effect on budgetposals are relatively small, proposals. The overall effect of different fore-

casts on the reestimate is to put CBO's reve-Differences in income forecasts dominate nue estimates above the Administration's by

the reestimates. CDO projects lower growth about $2 billion in 1992 and 1993 and thenin nominal and real personal income, which below the Administration's by amounts in-produces lower individual income and payroll creasing from $5 billion in 1994 to $21 billiontax receipts. For corporations, CBO projects in 1997 (see Table 3-3).

Table 3-2.CBO Estimates of Revenue Proposals in the Administration's1993 Budget (By fiscal year, in billions of dollars)

1992 1993 1994 1995 1996 1997

CBO Baseline BeforeWithholding Reduction 1,102.2 1,178.7 1,262.4 1,340.6 1,414.6 1,491.1

President's WithholdingReduction (Now in effect) -14.4 -5.2 -0.8 -0.7 -1.4 -1.2

ProposalsPay-As-You-Go Proposals

Provide investment tax allowance -6.1 -1.6 3.6 1.0 0.8 0.6Provide Flexible IRAs 0 2.0 0.8 0.5 -0.8 -1.9Provide credit to first-time homebuyers -0.3 -2.7 -2.5 -0.5 -0.1 aExclude portion of capital gains 0.8 3.7 -3.4 -5.7 -5.6 -5.2Extend expiring provisions -0.5 -1.9 -2.5 -2.2 -2.3 -2.7Expand Medicare coverage 0.4 1.7 1.7 1.7 1.6 1.6Increase employee contributions

to Civil Service Retirement b 0.4 1.0 1.1 1.0 1.0Other 0.2 -0.1 -1.9 -1.8 -1.4 -0.7

Subtotal -5.5 1.5 -3.3 -5.9 -6.7 -7.3

Increase exemption for children b -3.4 -5.0 -5.0 -5.1 -5.3

Total -5.5 -1.9 -8.3 -10.9 -11.8 -12.6

Other ProposalsProhibit double-dipping by thrifts 0.2 0.2 0.1 0.1 0.1 -0.1Implement Uruguay Roundc b -0.4 -1.2 -1.9 -2.7 -3.6

Total 0.2 -0.3 -1.0 -1.8 -2.7 -3.7

Total, Proposals -5.3 -2.2 -9.4 -12.8 -14.5 -16.3

President's Budget Revenuesas Estimated by CBO 1,082.5 1,171.2 1,252.2 1,327.2 1,398.6 1,473.6

SOURCES: Joint Committee on Taxation; Congressional Budget Office.

a. Loss of less than $50 million.

b. Not yet in effect.c. Administrative proposal.


The remaining influences on the baseline dominated by the reestimate of the proposedprojections are classified as technical. Reesti- exclusion for capital gains. CBO and the JCTmates of baseline revenues stemming from estimate that the President's capital gainstechnical assumptions are much smaller this proposal would reduce receipts by $15 billionyear than in the past. There is no one major over the 1992-1997 period, whereas the Ad-reestimate of this type. Taken together, tech- ministration estimates that it would increasenical factors raise CBO's baseline revenues receipts by $7 billion. This reestimate aloneabove the Administration's in every year ex- matches the scale of technical reestimates ofcept 1996 (see Table 3-3). the proposals overall for 1992 through 1997.

The assumption primarily responsible for theCBO reestimates of the President's tax pro- difference in estimates of the capital gains ex-

posals attributable to technical factors are clusion is the assumption by CBO and the

Table 3-3.CBO Reestimates of the Administration's Budget Revenues (By fiscal year, in billions of dollars)

1992 1993 1994 1995 1996 1997

Revenues as Estimated bythe Administration 1,075.7 1,165.4 1,263.1 1,342.4 1,426.8 1,496.6

CBO ReestimatesBaselinea

Economic 2.1 1.8 -5.0 -12.6 -18.9 -20.9Technical 4.7 2.2 0.5 3.9 -2.2 3.5

Total 6.8 4.0 -4.6 -8.7 -21.1 -17.4

Pay-As-You-Go ProposalsCapital gains exclusion

Economic b b b b b bTechnical 0.2 -0.1 -5.5 -6.0 -5.9 -5.0

Subtotal 0.2 -0.1 -5.5 -6.0 -5.9 -5.0

OtherEconomic 0.1 0.1 0.1 0.1 0.1 0.1Technical -0.2 2.1 -1.0 -0.7 -1.4 -0.4

Subtotal -0.1 2.2 -0.9 -0.6 -1.3 -0.4

Total 0.1 2.1 -6.4 -6.6 -7.2 -5.4

Other ProposalsEconomic 0 0 0 0 0 0Technical -0.2 -0.3 0.1 0.1 0.1 -0.2

Total -0.2 -0.3 0.1 0.1 0.1 -0.2

Total, Reestimates 6.8 5.9 -10.9 -15.3 -28.2 -23.0Economic 2.2 1.9 -4.9 -12.5 -18.8 -20.9Technical 4.6 3.9 -6.0 -2.7 -9.3 -2.1

Revenues as Estimated by CBO 1,082.5 1,171.2 1,252.2 1,327.2 1,398.6 1,473.6

SOURCES: Congressional Budget Office; Joint Committee on Taxation; Office of Management and Budget, Budget of the UnitedStates Government: Fiscal Year 1993 (January 1992).

NOTES: Revenues include payroll tax receipts of the Old-Age, Survivors, and Disability Insurance trust funds, which are off- budget.

a. The reduction in income tax withholding put in place by President Bush is assumed in both the CBO and Administration baselines.



JCT of an increase in realizations of capital households--the increase in the exemption forgains in reaction to the new exclusion that, dependents--provides tax relief for familieswhile substantial, is not as large as that with children. Other proposals that reduceassumed by the Administration. The proposal revenue include new and expanded incentivesis described below. CBO reestimates of other for investment and saving, targeted tax bene-budget proposals are small, fits for rental real estate and owner-occupied

housing, and new and extended targeted taxbenefits for other economic sectors and

Longer-Term Effects of the groups. The targeted tax benefits include in-

Administration's Proposals centives for research, employment of peoplefrom disadvantaged groups, investment and

Some of the Administration's proposals will employment in economically distressed areas,produce annual revenue losses in the long run investment in renewable energy, and benefitsthat are much larger than the annual losses for farmers, students, the self-employed, and

for 1992 through 1997. For example, CBO employees who use public transit.

and JCT estimate that the proposal to allow In many circumstances, narrowly targetedtaxpayers to establish new Flexible Individual benefits have been judged to be unfair: theyRetirement Accounts and to transfer money benef t axpayers to p e taxes thanto such accounts from existing IRAs in 1992 allow some taxpayers to pay lower taxes thantosuch accorease revenuexisting0.Rsiin 1992 others with the same income, and they reducewouldeconomic efficiency by encouraging people tothe 1992-1997 period. When taxpayers have eooi fiinyb norgn epetthe 992199 peiod Whe tapayrs ave select investments wvith relatively lower socialreached their desired level of assets in the selectivestmen ith reat lo socialFlexible Individual Retirement Accounts, productivity than others that do not receivehowevber, thedpropoal oetdiremuent A unes, tax benefits. But some of the proposals forhowever, the proposal could reduce revenues targeted tax relief in the budget arguably haveby between $7 billion and $17 billion annualeconomic grounds.ly, measured at 1992 levels of income. Theincrease in revenue in the early years occurs For example, an argument for extendingbecause taxpayers who transfer funds from ex- and making the credit for research and ex-isting IRAs to FIRAs will be required to re- perimentation expenditures permanent is thatport these transfers as taxable income and pay such expenditures have "spillover" effects thattax on the funds over a four-year period. c re s have gspieyoed ts thatThese tax payments represent a prepayment of eate productivity gains beyond those thatfutue tx labilty n echage fr eempion add to the profitability of firms conducting thefuture tax liability in exchange for exemption research. Some other proposals may warrantof more income in later years; in that ense, consideration on the grounds that, for somethey are equivalent to a loan from the taxpay-er to the government at a very high interest activities, current law imposes extremely strin-rate. In addition, the revenue loss from ex- gent (if not punitive) limits on the deduct-tending the low-income housing credit for 18 ibility of ordinary business costs. The pro-months will continue beyond 1997 because posals to provide relief from the limits on de-mtahpays reci cntinedieyond 10 years. ductibility of passive losses for those activelytaxpayers receive credits for 1involved in developing and managing real

estate and to make depreciation rules underthe corporate alternative minimum tax lessstringent attempt to remedy the problem. All

An Overview of the of these proposals, however, are narrow inscope, and even taken together, their effect on

President's Tax Proposals economic growth would at most be marginal.

The Administration's proposals claim a num-ber of objectives. The one direct tax cut for


Short-Term Economic Stimulus analysts are skeptical, however, about whethersaving would increase enough to raise the

Some of the President's proposals are aimed growth rate noticeably. For example, a CBOat providing immediate economic stimulus, review of eight empirical studies of the effectsthereby accelerating recovery from the current of a cut in the capital gains tax found no con-recession. These include the investment tax sensus among economists that a lower capitalallowance and the tax credit for first-time gains tax would raise saving and investmenthomebuyers, which are available only for enough to increase the gross national producttransactions between February 1, 1992, and significantly.Ithe end of the year. Because these tax in-centives are available only for 1992, their Another means by which a lower capitalmain effect will be to cause some businesses gains tax could increase growth is by chan-to accelerate purchases of equipment and neling more funds to venture capital. In-some households to accelerate home pur- vestors in new ventures typically receive a

chases that they had intended to make in 1993 larger fraction of their return in the form of

or later. The Administration's changes in capital gains, compared with interest andwithholding tables for individuals, which did dividends, than investors in bonds or equ*ty innot require legislation, are also intended to mature companies. Proponents of reducingshift demand from later years to 1992 by tem- the capital gains tax note that investment in

porarily increasing cash flow for households. enterprises financed by private venture capitalThe potential effects of these proposals on the firms increased dramatically after the cut in

economic recovery are assessed in Chapter 2. the capital gains tax in 1978. Some analysts,however, are skeptical that the capital gainscut caused the increase in venture capital,

Private Saving, Investment, pointing to data that show that most of the

and Economic Growth increase in financing for venture capital firmscame from investors (such as pension funds,corporations, and foreign investors) who wereA major goal of the revenue proposals in the noafetdirclbyheutntecptl

budgt i to romte conoic rowt byre- not affected directly by the cut in the capitalbudget is to promote economic growth by re- gains tax for individuals. 2

ducing the tax burden on saving and invest-

ment. The budget emphasizes the economic The proposals to allow expanded use ofbenefits of reducing the capital gains tax and IRAs and to create FIRAs would substantiallypromoting saving by expanding the use of increase the amount of saving done in theIndividual Retirement Accounts and intro- form of tax-advantaged accounts. Whetherducing a new tax-advantaged savings vehicle, they would increase total personal saving sig-the Flexible Individual Retirement Account. nificantly is, howeer, unclear. The proposals

might not increase saving much, in partThe proposal to reduce the capital gains tax because of limits on contributions to tax-

would directly benefit mainly high-income advantaged accounts. People who have al-taxpayers. CBO estimates that families in the ready accumulated more wealth than thetop quintile would receive 94 percent of the limits on annual contributions can receive thebenefit from the proposal, and families in the full tax benefit, at least for a time, by trans-top 1 percent would receive 50 percent of thebenefit.

1. Congressional Budget Office, "Effects of Lower CapitalGains Taxes on Economic Growth." CBO Paper

This tax cut could increase economic (August I9l').growth if it induces high-income families to

2. See Department of the Treasury, Report to Congress Onsave more or if changes in relative yields the Capital Gains Tax Reductions of 1978 (Septemberamong assets cause more savings to flow to 1985): and James Poterba, "Capital Gains Tax Policyinvestment with high rates of return. Many Toward Entrepreneurship." National Tax Journal

(September 1989).


ferring these accumulations to IRAs and especially in the context of permanent in-FIRAs. Similarly, people who are currently centives to save.saving more than the contribution limits canreceive the full tax benefit by depositing these The combined effect of the capital gains taxsavings in IRAs and FIRAs. cut and the expansion in the availability of

IRAs on national saving depends on how theEvidence of the effect of IRAs on saving revenue losses they produce are financed.

between 1982 and 1986 is mixed. Some CBO and the JCT estimate that the capitalstudies have concluded that the IRAs were gains tax cut will reduce revenues after thelargely funded from transfers of existing assets, first two years. In addition, as noted above,whereas others have concluded that a large the long-run revenue loss from the IRA andportion of IRA contributions represented new FIRA proposals will be much larger than thesaving, loss reported for the 1992-1997 period. If

these future revenue losses are not offset byAnalysts who believe IRAs increase total spending cuts or higher taxes, the resultingsaving, however, attribute much of the in- increase in the federal deficit will dampen anycrease in saving to features of IRAs that increase in national saving that a higher pri-would apply less to the ones proposed by the vate saving rate produces. If the private say-President than to current IRAs. Two of these ing response is small, the net effect may be tofeatures are the restriction of IRAs to saving reduce national saving in the long run.for retirement and the penalty on early with-drawals. Because these limits make IRAs lesslike other forms of saving, people may have Assistance to Familiesfinanced these accounts by reducing consump-tion instead of other saving. The proposals inthe budget broaden the purposes for which Another stated goal of the budget is to easethe accounts can be used and permit earlier the financial burden on families. The primarypenalty-free withdrawals. Those make the ac- proposal in the budget to promote this goal iscounts more like other forms of saving and in- the $500 increase in the dependent exemptioncrease the likelihood that more of the contri- for children. The Administration has also ar-butions to IRAs and FIRAs will represent gued that the expansion of IRAs and the in-transfers from other saving instead of reduced troduction of FIRAs will help families pre-consumption. pare for the future.

FIRAs and expanded IRAs are more likely The exemption for dependents reduces theto increase private saving over an extended tax burden on families with children by atime period than during the next few years. small amount. CBO estimates that the aver-Most people do not have sufficient accumula- age annual tax reduction for all families withtions of wealth or sufficient rates of ongoing children from the larger exemption is $114 orsaving to allow them to contribute the maxi- about 1.0 percent of total tax liability and 0.3mum amount to IRAs and FIRAs for more percent of after-tax income. Families withthan a few years. Eventually, the expanded children in the lowest income quintile receiveIRAs and FIRAs will increase the after-tax a much smaller average reduction--about $10return many people receive on their last dol- per family--because many of them do not paylar of net increase in saving. If saving re- income tax now and therefore do not benefitsponds positively to higher after-tax returns, from an increased exemption. Families withpeople will accumulate more wealth over their children in the second, third, and fourthlifetime and leave more to future generations. quintiles of the income distribution receiveMost empirical studies have found little or no the largest proportionate increase in after-taxresponse of saving to rates of return, but some income from the tax cut ($117 per family,analysts question the validity of these studies, $133 per family, and $165 per family,


respectively--or 0.5 percent, 0.4 percent, and ment. These incentives include the introduc-0.3 percent of after-tax income). tion of a temporary investment tax allowance

for machinery and equipment, a proposal toExpanding the availability of [RAs and liberalize slightly and to simplify depreciation

introducing FIRAs reduce the tax liability of rules under the corporate alternative mini-families who save through such accounts and mum tax, and a proposal to exclude from in-benefit those families even if the incentives do come 45 percent of capital gains realizationsnot induce them to increase total saving. Ex- on qualified assets for individual taxpayers.perience with universal IRAs between 1982and 1986 indicates, however, that most For individual savers, the Administration isfamilies did not contribute to IRAs, and those also proposing to introduce a new generalthat did had higher-than-average incomes. In purpose saving incentive, the Flexible In-1985, the peak year of IRA use, only 18 per- dividual Retirement Account, and to broadencent of taxpayers with earnings contributed to the purposes for which existing IRAs can beIRAs. The participation rate was much used. Major components of both proposalsgreater for the 8 percent of taxpayers with were included in the Administration's previ-earnings who reported an adjusted gross in- ous two budgets. The Administration is alsocome (AGI) of $50,000 or more. Among tax proposing a variety of modifications in the taxreturns reporting earnings, 63 percent with law to simplify the taxation of employer-AGI of more than $50,000 contributed to funded pensions.IRAs, compared with only 14 percent withAGI of less than $50,000. Adopt Temporary Investment Tax Allowance.

The Administration proposes to allow an up-front deduction of 15 percent of the purchaseprice of equipment acquired between Febru-

An Examination of' the ary 1, 1992, and January 1, 1993, if the equip-ment is placed in service before July 1, 1993.

Tax Proposals The investment tax allowance (ITA) would betaken in the year the equipment is placed in

Most of the President's proposals for revenues service. Taxpayers would be allowed to claimfall under the pay-as-you-go limits of the Bud- depreciation deductions on the remaining 85get Enforcement Act of 1990. Under these percent of the purchase price as under presentlimits, the net effect of changes in tax reve- law. The ITA would not be a preference un-nues and entitlement spending must not in- der the alternative minimum tax.crease the budget deficit. Two proposals notsubject to pay-as-you-go limits are discussed The allowance, which is like a loan fromat the end of the chapter. the government, would affect the cost of capi-

tal in much the same way as a small (about 1To ease discussion here, the nearly 40 pro- percent) investment tax credit. Because the

posals are grouped into six categories: incen- ITA is temporary, taxpayers with sufficienttives for saving and investment, targeted tax taxable income would have an incentive toincentives, personal income tax cuts, excise accelerate planned investments to take ad-taxes, revenue-raising proposals, and other vantage of the allowance. Thus, the ITAproposals. would provide a small temporary stimulus to

the economy in 1992, but at the expense ofinvestment in later years. In addition, because

Incentives for Saving and Investment the ITA is temporary, it would favor assetsthat can be purchased quickly, such as cars

The Administration is proposing a number of and computers, over major investments thatincentives to encourage saving and invest- require a longer lead time.


The JCT estimates that revenue loss from The exclusion would apply to all capitalthe ITA will total $7.7 billion in the first two assets except collectibles, such as art, antiques,years; this initial loss will be partially offset by and precious metals. Depreciation deductionsrevenue gains in 1994 through 1997 (see Table would be recaptured as ordinary income,3-4). The offset occurs because the extra de- which means that only the increase in salesductions that firms claim in 1992 would come price over the original cost of an asset wouldat the expense of reduced deductions in later be treated as a capital gain.years. Over the budget period, the revenueloss is estimated at $1.7 billion. Under the Administration's proposal, the

excluded portion of capital gains would beSimplify Alternative Minimum Tax Depre- considered a tax preference under the alterna-ciation. The Administration proposes to re- tive minimum tax (AMT). Because the maxi-move the special depreciation adjustment mum capital gains tax rate would be substan-used to compute adjusted current earnings tially below the AMT tax rate of 24 percent,(ACE) under the corporate alternative mini- the addition of this large preference itemmum tax. Under present law, corporations would more than double the number of in-subject to the alternative minimum tax must dividuals subject to the minimum tax. Thus,compute depreciation in three different ways the effective marginal tax rate on capital gainsfor certain depreciable assets. The proposal for many taxpayers would be 24 percent. Tax-would allow corporations to use the same payers who would be subject to the AMT atmethod to compute ACE as they use to com- current-law levels of realizations account forpute alternative minimum taxable income. It about 60 percent of realized gains. In ad-would reduce the cost of capital for certain dition, some taxpayers who increase their real-corporations slightly and would simplify their izations would also be affected by the AMT.tax calculation. The JCT estimates that the The result is that the AMT would sub-proposal would lose $1.4 billion over the bud- stantially diminish the effects on incentives ofget period (see Table 3-4). the capital gains tax reduction and would re-

quire a more complicated tax calculation forExclude 45 Percent of Long-Term Capital many taxpayers.Gains. For the fourth time, the Administra-tion has proposed tax relief for capital gains. The capital gains exclusion would apply toThe proposal would allow individuals to ex- capital gains realized after February 1, 1992.clude from their income a portion of the cap- The requirements for two- and three-yearital gain realized on qualified assets. The per- holding periods would be phased in overcentage excluded would increase with the three years. During the balance of 1992, allholding period: 15 percent for assets held one qualifying assets held for at least one yearto two years, 30 percent for assets held two to would be eligible for the 45 percent exclusion.three years, and 45 percent for assets held In 1993, assets held for at least two yearsthree years or more. The included portion of would be eligible for the 45 percent exclusion;the capital gain would be taxed as under cur- assets held for at least one year would receiverent law. Because tax rates on capital gains a 30 percent exclusion. The full sliding scaleare capped at 28 percent under current law, described above would take effect in 1994.the exclusion would imply tax rates for maxi- The phase-in of the requirement for an ex-mum capital gains on assets held more than tended holding period, by allowing the full 45three years of 15.4 percent for taxpayers in the percent exclusion for assets held less than28 percent and 31 percent tax brackets, and three years in 1992 and 1993, would avoid8.3 percent for taxpayers in the 15 percent discouraging sales of such assets during thebracket.


Table 3-4.CBO/JCT and Administration Estimates of Incentives for Saving and Investment(By fiscal year, in billions of dollars)

Proposal 1992 1993 1994 1995 1996 1997

Business Investment and Capital Gains

Adopt Temporary InvestmentTax Allowance

CBO/JCT -6.1 -1.6 3.6 1.0 0.8 0.6Administration -6.1 -1.6 3.5 0.9 0.8 0.6

Simplify Alternative MinimumTax Depreciation

CBO/JCT -0.2 -0.3 -0.3 -0.3 -0.2 -0.1Administration -0.2 -0.4 -0.4 -0.3 -0.2 -0.1

Exclude 45 Percent ofLong-Term Capital Gains

CBO/JCT 0.8 3.7 -3.4 -5.7 -5.6 -5.2Administration 0.6 3.8 2.1 0.3 0.3 -0.2

SubtotalCBO/JCT -5.5 1.8 -0.1 -5.0 -5.0 -4.7Administration -5.7 1.8 5.3 1.0 0.9 0.3

Individual Retirement Accounts (IRAs) and PensionsEstablish Flexible IRAs

CBO/JCT 0 2.0 0.8 0.5 -0.8 -1.9Administration 0.1 0.5 0.1 -0.4 -1.0 -2.1

Broaden Uses of Existing IRAsCBO/JCT -0.2 -0.3 -0.3 -0.2 -0.2 -0.2Administration a -0.2 -0.2 -0.2 -0.3 -0.2

Promote Retirement Saving and SimplifyTaxation of Pension Distributions

CBO/JCT 0.5 0.5 -0.9 -0.5 -0.2 0.2Administration 0.1 a a 0.3 0.4 0.4

Reform Underfunding of PensionsCBO/JCT b b b b b bAdministration c c -0.3 -0.4 -0.6 -0.8

SubtotalCBO/JCT 0.3 2.2 -0.7 -0.6 -1.8 -2.7Administration 0.2 0.3 -0.5 -0.8 -1.5 -2.7

Total

Incentives for Saving and InvestmentCBO/JCT -5.2 4.0 -0.8 -5.6 -6.8 -7.4Administration -5.5 2.2 4.8 0.2 -0.5 -2.4

SOURCES: Joint Committee on Taxation; Office of Management and Budget.

a. Less than $50 million.b. CBO has included the Administration's estimate.

c. Notyetineffect.


first two years of the budget period and thus $120,000 for couples filing joint returns. Aswould boost short-run receipts. with an IRA, contributions to a FIRA could

not exceed a person's earnings or the $2,500The JCT estimates that the proposal would contribution limit. Each member of a couple

raise $4.5 billion in revenues in 1992 and filing jointly, however, could contribute up to1993, because taxpayers would respond with a $2,500, provided the total contribution did notburst of asset sales in 1992, but thereafter exceed the couple's combined earnings. Forwould reduce revenues by $3 billion to $6 example, a couple in which one spousebillion a year (see Table 3-4). The Adminis- worked outside the home earning $30,000tration estimates that the proposal would raise could contribute up to $2,500 to accounts for$4.4 billion in 1992 and 1993 and thereafter each spouse for a total of up to $5,000. De-increase revenues by decreasing amounts end- pendents would be ineligible.ing in a small loss in 1997. The results pri-marily differ because JCT assumes that tax- New in this year's proposal is the provisionpayers are less responsive after the first year for penalty-free transfers of funds from IRAsto the changed capital gains tax rate than the to FIRAs. From February 1 through Decem-Administration assumes. ber 31, 1992, individuals could withdraw

funds from IRAs without paying the normalEstablish FIRAs. The President proposes 10 percent penalty tax as long as the amountsestablishing FIRAs to provide a general pur- were redeposited in FIRAs. The withdrawalspose savings incentive. FIRAs are identical to would be fully subject to income taxes, as arethe Family Savings Accounts the President other IRA withdrawals, but the income taxproposed in the 1991 and 1992 budgets. In owed on amounts transferred would be spreadaddition, this year's proposal would allow over four years. IRA balances attributable topeople to transfer funds without penalty from rollovers from qualified retirement plansexisting IRAs to FIRAs until the end of 1992. would be ineligible for transfer to a FIRA.

Under the proposal, taxpayers would be al- The six-year revenue estimate for FIRAslowed to make nondeductible contributions of includes two offsetting effects--one temporaryup to $2,500 annually to FIRAs. The invest- and one permanent--and greatly understatesment income in FIRAs would accumulate the long-run cost of the proposal. Transferstax-free. Withdrawals of investment income from existing IRAs to FIRAs raise revenueattributable to contributions left on deposit through 1995 because the amounts transferredfor at least seven years would also be tax-free. are included in income for tax purposes. TheWithdrawals of investment income attribut- revenue gain from transfers from IRAs is aable to contributions left on deposit between constant amount for four years and falls tothree and seven years would be included in zero afterward. The buildup of assets fromincome for tax purposes, but would not be contributions to FIRAs reduces revenue be-subject to a penalty. Withdrawals of invest- cause investment earnings in FIRAs are un-ment income attributable to contributions left taxed. The revenue loss from the buildup ofon deposit for less than three years would be assets is small initially, but increases rapidlytaxable and also subject to a 10 percent pen- because the stock of assets yielding tax-freealty. For all FIRAs, withdrawals of contribu- income grows much faster than contributions.tions would be tax-free because they were not Combining both effects, the net revenue effectdeductible at the time deposited. The propos- is positive in the first year, but declines rap-al would be effective starting in 1992. idly and eventually turns negative.

Eligibility to contribute to FIRAs would be The Administration shows revenues turninglimited to people with adjusted gross income negative in 1995 and estimates a cumulativebelow certain levels--S60,000 for single tax- revenue loss of $2.8 billion over the 1992-1997payers, $100,000 for heads of households, and period (see Table 3-4). The JCT shows reve-


nues turning negative in 1996 and a cumu- In the 1991 and 1992 budgets, the Presidentlative revenue gain of $0.6 billion over the proposed to permit penalty-free withdrawalsfive-year period because it assumes a larger for the purchase of a first home. Unlike thevolume of transfers from IRAs than does the current proposal, which is available for anyAdministration. The higher revenues the JCT first home, the previous proposals would haveestimates thus result entirely from a larger waived the penalty only for homes that costshift of tax payments from the future to the less than 110 percent of the median home1992-1997 period. price in an area.

In 1997, when the revenue gains from the Promote Retirement Saving and Simplify Tax-transfers are exhausted, both the JCT and the ation of Pension Distributions. The PresidentAdministration show the revenue losses from proposes seven modifications to the currentFIRAs increasing rapidly. These losses would tax treatment of pension plans. The proposalscontinue to increase until people are able to largely reduce the administrative burden ofreach their desired level of FIRA balances. providing pensions, particularly for small em-How much of the assets paying taxable inter- ployers, with the objective of encouragingest and dividends would ultimately be shifted more employers to offer pensions to their em-is uncertain. If people ultimately shift 10 per- ployees. The proposals have not appeared incent of their taxable financial assets to FIRAs, previous budgets, but they are similar to pro-the annual revenue loss in 1992 dollars would visions for pension simplification advanced bystabilize at about $7 billion. If people ulti- the Administration and Members of Congressmately shift 25 percent, the annual loss would in 1991.stabilize at about $17 billion.

The JCT estimates that these proposals willBroaden Uses of Existing IRAs. The President be essentially revenue neutral as a packageproposes to permit penalty-free withdrawals (see Table 3-4). By easing the requirementsfrom IRAs for medical and educational ex- for employers to offer pension plans, the pro-penses and for a down payment on a first posals should modestly increase their use, par-home purchase. Withdrawals for these pur- ticularly among small employers. Only aposes could be made from IRAs as of Febru- small increase in personal saving should beary 1, 1992. expected given the uncertainty about how

many firms will initiate pensions and the un-Penalty-free distributions would be allowed certain effect of pension coverage on personal

for medical expenses in excess of 7.5 percent saving. An additional benefit will be the re-of AGI. Penalty-free distributions for educa- duced burden of pension administration.tional expenses would be allowed up to theamount of expenditures for higher education Reduce Underfunding of Pensions. The Ad-and postsecondary vocational expenses. Fi- ministration proposes to increase the rate atnally, penalty-free withdrawals of up to which employers must reduce underfunding$10,000 would be allowed for the purchase of of their pension plans. The purpose of thea home by taxpayers who have not owned a proposal is to reduce the risk that under-home in the last three years. funded plans will ultimately be terminated

and become the liability of the Pension Bene-The JCT estimates that permitting penalty- fit Guaranty Corporation (PBGC). The

free withdrawals for education and medical PBGC insures payment to the beneficiaries ofexpenses and first-time home purchases would most benefits under defined benefit plans, andreduce revenues by $1.3 billion between 1992 the proposal for increasing funding is in-and 1997 (see Table 3-4). cluded with other proposals to limit future

liabilities of the PBGC (see Chapter 1).


Under the funding proposal, employers subject to per capita limits. The credit is naidwith underfunded pension plans will be re- out over 10 years and may have a presentquired to increase contributions to their plans value of up to 70 percent of construction andstarting in 1994. (The proposal does not ap- renovation costs of qualified housing that doesply to multiemployer plans.) The Adminis- not receive other federal subsidies. A re-tration assumes that businesses will pay these duced credit (30 percent of present value) ishigher contributions by reducing taxable available for subsidized housing and for thewages for employees, which in turn will re- purchase cost of existing housing that is re-duce income and payroll tax revenues. The habilitated.budget supplement shows these revenue lossesstarting at $0.3 billion in 1994 and reaching The proposal would extend the credit,$0.8 billion in 1997 (see Table 3-4). CBO has which is currently set to expire on June 30,adopted the Administration's estimate for this 1992, for 18 months through December 31,analysis. 1993. The revenue loss from this extension,

however, extends beyond the budget periodAlthough more rapid funding of pension because the credit is claimed over 10 years.

plans would reduce revenues in the immedi- The JCT estimates the revenue loss at $0.1ate future, the reduction is merely a speedup billion in 1993, growing to $0.4 bilfion perof revenue losses that are likely to result from year by 1997 (see Table 3-5).the eventual funding of already promised pen-sion benefits. Furthermore, the faster funding The revenue loss from an 18-month exten-should reduce future outlays by the PBGC by sion understates the long-term revenue cost ofreducing the amount of unfunded benefits as- a permanent low-income housing credit. Ifsumed by the PBGC in future pension plan the credit were fully used and in place forterminations. long enough that 10 years' worth of credits

were being paid each year, the cost could ex-ceed $3 billion per year.Targeted Tax IncentivesExtend Mortgage Revenue Bonds. The Ad-

The Administration is also proposing a wide ministration proposes to extend tax-exemptarray of tax provisions that affect more nar- mortgage revenue bonds (MRBs) for 18rowly defined economic sectors, groups of tax- months through December 31, 1993. MRBspayers, and activities. These include exten- have been in use since the mid-1970s. Thesions of tax incentives that are scheduled to Mortgage Revenue Bond Act of 1980 was theexpire in 1992 and new tax incentives, some of first piece of legislation to set any limits onwhich have appeared in previous budgets and their use and to subject them to an expirationothers that t: e Administration is proposing date. Since then, the bonds have been ex-for the first time this year. This section de- tended six times, with modifications. Thisscribes the proposed extensions first and then year is the first time that the Bush Admin-discusses the new provisions. istration has proposed extending them.

Extend Low-Income Housing Credit. The State and local governments use the pro-Administration proposes to extend the credit ceeds of MRBs to provide below-market fi-for certain expenditures made by owners of nancing for single-family homes. The loanslow-income housing projects. The credit was are targeted to first-time homebuyers withintroduced in 1986 and has been extended family income of less than 115 percent of thethree times. The credit applies to the depre- median family income for the area in whichciable costs incurred to provide low-income the residence is located. The purchase -iricehousing units, subject to limits on rent levels of the home may not exceed 90 percent ,)f theand the income of tenants. Designated state average purchase price of residences in thathousing agencies allocate credit authority area. MRBs are subject to limits on the vol-


Table 3-5.CBO/JCT and Administration Estimates of Targeted Tax Incentives(By fiscal year, in billions of dollars)

Proposal 1992 1993 1994 1995 1996 1997

Extensions

Extend the Low-Income Housing CreditCBO/JCT a -0.1 -0.2 -0.3 -0.3 -0.4Administration a -0.2 -0.3 -0.4 -0.4 -0.4

Extend Mortgage Revenue BondsCBO/JCT a -0.1 -0.1 -0.1 -0.1 -0.1Administration a a -0.1 -0.1 -0.1 -0.1

Extend Permanently the Research andExperimentation Credit


Extend the Research and ExperimentationAllocation Rules

CBO/JCT -0.1 -0.6 -0.2 0 0 0Administration -0.2 -0.5 -0.3 0 0 0

Extend Permanently theOrphan Drug Credit

CBO/JCT a a a a a aAdministration a a a a a a

Extend the Targeted Jobs CreditCBO/JCT a -0.1 -0.2 -0.1 a aAdministration -0.1 -0.2 -0.2 -0.1 a a

Extend Business Energy CreditsCBO/JCT a a a a a aAdministration a a a a a a

Extend Farmer BondsCBO/JCT a a a a a aAdministration a a a a a a

Extend the Health Insurance Deductionfor the Self-Employed

CBO/JCT -0.1 -0.2 -0.3 0 0 0Administration -0.1 -0.2 -0.3 0 0 0

SubtotalCBO/JCT -0.5 -1.9 -2.4 -2.1 -2.2 -2.6Administration -0.5 -1.9 -2.5 -2.2 -2.4 -2.6

(Continued)

SOURCES: Joint committee on Taxation; Office of Management and Budget.



Table 3-5.Continued

Proposal 1992 1993 1994 1995 1996 1997

New Provisions

Provide Passive Loss Relief for Real EstateCBO/JCT -0.1 -0.4 -0.4 -0.4 -0.5 -0.5Administration -0.I -0.4 -0.4 -0.4 -0.5 -0.6

Facilitate Real Estate Investmentsby Tax-Exempt Pension Funds andEducational Institutions


Fnact Tax Credit for First-TimeHomebuyers

CBO/JCT -0.3 -2.7 -2.5 -0.5 -0.1 aAdministration -0.2 -2.1 -2.5 -0.6 0.2 0.1

Allow Deduction for Loss on the Saleof a Principal Residence

CBO/JCT a -0.4 -0.4 -0.4 -0.4 -0.4Administration a -0.4 -0.4 -0.4 -0.4 -0.3

Establish Enterprise ZonesCBO/JCT 0 -0.1 -0.4 -0.8 -1.0 -1.0Administration 0 -0.1 -0.2 -0.3 -0.5 -0.8

Permit Deduction of Intereston Student Loans


Restore and Double the Adoption DeductionCBO/JCT a a a a a aAdministration a a a a a a

Expand the Public Transit Exclusionto $60 per Month

CBO/JCT a a a -0.1 -0.1 -0.1Administration a a a a a a

Revise Rules for Charitable ContributionsCBO/JCT a a -0.2 -0.2 -0.2 -0.2Administration a 0.1 0.1 0.1 0.1 0.2

SubtotalCBO/JCT -0.5 -3.9 -4.3 -2.8 -2.7 -2.6Administration -0.5 -3.3 -4.0 -2.4 -1.9 -2.3

Total

Targeted IncentivesCBO/JCT -1.0 -5.9 -6.7 -4.9 -5.0 -5.2Administration -1.0 -5.2 -6.5 -4.5 -4.3 -4.9


ume of tax-exempt bonds issued for private mestic operations and fewer to foreign opera-purposes. (Instead of issuing MRBs, state and tions, making domestic-source income lowerlocal governments may issue mortgage credit and foreign-source income higher. As a re-certificates to qualifying homebuyers. These suit, U.S. multinational corporations withcertificates provide the purchaser with a tax excess foreign tax credits can use their excesscredit equal to a portion of the home mort- credits to reduce the U.S. income tax they paygage interest payments.) on their worldwide income. The JCT esti-

mates that extending the statutory rules forThe JCT estimates that the revenue loss allocating R&E expenses would reduce reve-

from extending MRBs will amount to $0.5 nues by $0.6 billion in 1993 and by $0.9 bil-billion in 1992 through 1997 (see Table 3-5). lion in 1992 through 1997 (see Table 3-5).

Extend Permanently the Research and Experi- Extend Permanently the Orphan Drug Credit.mentation Credit. The Administration pro- The Administration proposes to make the or-poses to make the income tax credit for re- phan drug credit, which is scheduled to expiresearch and experimentation (R&E) expenses on June 30, 1992, permanent. The provisionpermanent; the credit is currently scheduled was originally enacted in 1983 and has sinceto expire for expenses paid after June 30, been extended three times.1992. The credit allows a business to reduceits tax liability by 20 percent of the amount by Drugs for treating rare diseases or condi-which its current R&E expenses exceed a base tions are commonly known as "orphan drugs"amount derived from its recent level of sales because the narrow demand for them discour-and the historical relationship between its ages the costly investment in clinical testingR&E expenses and level of sales. Qualifying that is necessary before the Food and DrugR&E expenses include the wages of employees Administration can approve their manufac-engaged in research and the costs of supplies ture and distribution. To encourage develop-used in research, as well as a portion of con- ment of the drugs, current law allows tax-tract research costs and certain computer payers to claim a nonrefundable tax credit ofcosts. The R&E credit first appeared as a 50 percent of the costs of clinical testing. Thetemporary four-year credit in the Economic credit covers the testing of drugs for such rareRecovery Tax Act of 1981, but it has been conditions as Huntington's disease, myo-extended and modified five times since then. clanus, Lou Gehrig's disease, Tourette's syn-The JCT estimates that making the R&E cred- drome, and Duchenne's dystrophy. Theit permanent would reduce revenues by $0.8 amount the taxpayer claims as a credit is not abillion in 1993 and by $7.8 billion in 1992 deductible business expense.through 1997 (see Table 3-5).

The Administration proposes to make theExtend the Research and Experimentation credit permanent on the grounds that clinicalAllocation Rules. The Administration pro- testing is long term and taxpayers should beposes to extend until December 31, 1993, the able to plan their activities knowing that thestatutory rules that U.S. multinational corpo- credit will be available. The Administrationrations use to allocate R&E expenses between has not previously proposed making the creditdomestic and foreign operations. The current permanent. The JCT estimates that the pro-statutory rules were enacted as part of the posal will cost less than $50 million throughTechnical and Miscellaneous Revenue Act of 1997 (see Table 3-5).1988 and have been extended three timessince then. The statutory rules superseded the Extend Targeted Jobs Credit. The PresidentTreasury regulations issued in 1977. Com- proposes to extend the targeted jobs taxpared with the regulations, the statutory rules credit--scheduled to expire on June 30,generally allow U.S. multinational corpora- 1992--to December 31, 1993. The Adminis-tions to allocate more R&E expenses to do- tration is proposing to extend the credit for


the second consecutive year. It was first en- Extend Farmer Bonds. The Administrationacted in the Revenue Act of 1978 and has proposes to extend to December 31, 1993, thesince been extended eight times, with modifi- use of tax-exempt, small-issue industrial devel-cations. opment bonds to make loans to first-time

farmers. The Administration did not proposeThe credit is available to employers for hir- extending small issue bonds for any purpose

ing economically disadvantaged individuals in previous years.from nine groups. Economically disadvan-taged youth are the largest group; others in- At present, small-issue bonds may be usedclude recipients of Supplemental Security In- to provide loans at below-market interest ratescome, summer youth employees, Vietnam vet- to construct manufacturing facilities or toerans, and former convicts, permit first-time farmers to acquire land and

equipment. (First-time farmers account for aThe credit is equal to 40 percent of the first relatively small share of these bonds.) The

$6,000 of qualified first-year wages (the maxi- bonds are subject to the overall state-by-statemum credit is $2,400 per individual). The limits on the volume of tax-exempt bonds forqualifying wages are limited to the first $3,000 all private activities. The proceeds of bondsfor economically disadvantaged summer youth for manufacturing facilities are limited toworkers, yielding a maximum credit of $1,200. individuals or entities with relatively smallThe credit is not available for wages paid be- capital investments. The proceeds of bondsyond the first year of employment, loaned to first-time farmers may not exceed

In order for employers to claim the credit, $250,000 per farmer. Under current law,th re r eono micllyerisadvantoai hed i divital small-issue bonds for all purposes are sched-the economically disadvantaged individual uled to expire on June 30, 1992. The Admin-

must be employed for at least 90 days (14 days istration would extend the use of the bonds

in the case of summer youth employees) or

complete at least 120 hours of work (20 in the for first-time farmers, but would permit theuse of the bonds for manufacturing facilitiescase ot summer youth employees). The em-

ployer's deduction for wages must be reduced to expire as scheduled.

by the amount of the credit claimed. The JCT estimates that extending the use of

The JCT estimates that extending the credit tax-exempt bonds for first-time farmers willfor 18 months would reduce revenues by $0.5 reduce revenues by less than $50 million in

billion in 1992 through 1997 (see Table 3-5). 1992 through 1997 (see Table 3-5).

Extend Business Energy Credits. The Ad- Extend Partial Deduction for Health Insur-ministration proposes to extend business en- ance Premiums for the Self-Employed. Theergy tax credits for solar and geothermal pro- Administration proposes to extend throughperties for 18 months, from June 30, 1992, to December 31, 1993, the provision that allowsDecember 31, 1993. The Energy Tax Act of self-employed people a deduction equal to 251978 created the credits, and they have since percent of the cost of providing health in-been extended six times. This year's budget surance for themselves and their families.marks the second time the Administration has The Congress first enacted the provision asproposed extending them. The 10 percent part of the Tax Reform Act of 1986. It hascredits are available for investments in equip- been extended three times--most recently byment that uses solar or geothermal energy for the Tax Extension Act of 1991--and is nowheating, cooling, or electricity generation. scheduled to expire after June 30, 1992. The

Administration proposed making the deduc-The JCT estimates that extending the cred- tion permanent in its budget for fiscal year

its for 18 months would reduce revenues by 1991, but proposed only a one-year extensionless than $100 million during the 1992-1997 in last year's budget. (The Administration'speriod (see Table 3-5). comprehensive health reform proposal would

50 ANALYSIS OF THE PRESIDENTrS BUDGET March 19'42

increase the deductible amount to 100 percent the real estate investments of these majorof premiums and make it permanent.) sources of investment capital at a time when

much real estate is in need of buyers.

The provision reduces the disparity betweenthe treatment of the self-employed and em- Investors in pension and education fundsployees whose employers provide group expect that these proposals will have only ahealth insurance. Employers can deduct the minor impact on the amount they invest incost of providing health insurance to their em- real estate. The JCT estimates that the reve-ployees, but the employees do not owe taxes nue losses will be less than $50 million peron the value of the insurance. Self-employed year (see Table 3-5).people, however, cannot deduct the cost oftheir own insurance as a business expense. Enact Tax Credit for First-Time Homebuyers.The JCT estimates that the extension would The Administration has proposed a temporaryreduce revenues by a total of about $0.6 bil- tax credit for first-time homebuyers. Thelion in 1992 through 1997 (see Table 3-5). credit would equal 10 percent of the purchase

price of the house, up to a maximum ofProvide Passive Loss Relief for Real Estate. $5,000. To qualify, the home would have toThe Administration proposes to allow tax- be purchased between February 1 and De-payers who actively participate in the rental of cember 31, 1992. Only half of the creditproperty they develop to deduct losses on could be claimed against 1992 taxes; the othersuch rentals against other income as well as half could be claimed against 1993 taxes. Theagainst income from other development ac- credit would not be refundable, but amountstivities. That provision would be an exception in excess of current liability could be used toto the passive loss rules enacted in 1986 that reduce income taxes during the next fivegenerally disallow the deduction of rental years.losses against other income. The proposalwould lower the cost of capital slightly for real The proposal defines first-time homebuyersestate developers, but would have a negligible as people who have not owned a home foreffect on real estate prices because it would three years. All buyers of a home would havenot affect most new investors in real estate. to be first-time buyers, and only one creditThere is a risk that passive loss exceptions could be claimed per home purchased.could lead to new tax shelters, as had prolife-rated before the 1986 Tax Reform Act was The JCT estimates that the credit would re-passed, especially if tax rates on capital gains duce revenues by $6.1 billion in the 1992-1997are reduced as proposed. However, because period (see Table 3-5). The estimate impliesthe proposal applies only to active developers that slightly more than I million taxpayers(not to limited partners in real estate de- would claim the credit.velopments), the scope for increased taxshelter activity is limited. The JCT estimates The intent of the credit is to stimulate thethe annual revenue loss at $0.4 billion in 1993, economy by accelerating home purchases intoincreasing slightly over time (see Table 3-5). 1992. Increased demand for both existing and

new homes would exert some upward pressureFacilitate Real Estate Investments by Tax- on housing prices, thereby stimulating someExempt Pension Funds and Educational Insti- new construction. Another objective is totutions. The President proposes to expand assist people in buying their first home. Theslightly the types of debt-financed real estate fraction of young people owning their owninvestments in which pension funds and edu- home declined in the 1980s. Factors that maycational institutions can invest without being have contributed to this decline were lowersubject to the unrelated business income tax. real earnings of young workers. high realThe proposal is intended to remove limits on mortgage interest rates, and a decline in the


value of tax benefits of ownership compared AGI of $50,000 who sells his or her home forwith renting. a loss of $10,000 would have a deductible loss

of $4,900 under the proposal. The deductionBoth the amount of purchases of new would be larger if other losses were claimed in

homes and the effect of the credit in stimu- the same year.lating additional purchases in 1992 are un-certain. The revenue estimates are consistent The proposal would also allow the portionwith an assumption that home purchases by of the loss not deducted to be added to thefirst-time buyers in 1992 will be of roughly the basis of the next home purchased, if one weresame magnitude as in 1988 and 1989. That purchased within the next two years. In thelevel of home purchases may be achieved, above example, the taxpayer could add $5,100however, without the credit because of low to the basis of a home purchased within twomortgage rates. If the credit causes home pur- years.chases by first-time buyers to increase sig-nificantly above the projected amount, it will The proposal would apply to principal resi-stimulate the economy in 1992, but the reve- dences sold on or after February 1, 1992. Fornue loss could be greater than expected. Even principal residences sold at a loss on or afterif the credit increases home purchases, most if January 1, 1991, the proposal would allownot all of that increase is likely to be offset by taxpayers to apply the entire loss to the basisreduced purchases in 1993 and later years. of homes purchased within two years of the

date of sale.The one historical precedent for the credit

is the new home credit in the Tax Reduction In support of the proposal, the Administra-Act of 1975. As part of an antirecessionary tion notes that, under current law, capitalpackage, the Congress enacted a temporary gains on sales of a principal residence arecredit of 5 percent of the purchase price, up added to income for tax purposes, but lossesto a maximum of $2,000, for new homes pur- are not deductible. Taxing gains while dis-chased between March 12, 1975, and Januarv allowing deduction of losses would, by itself,1, 1976, and for which constrwiction began be- create a bias against housing. In practice,fore March 26, 1975. Its pu:_ose was to re- however, most capital gains on home sales areduce the existing inventory of unsold new not taxed. Gains on the sale of a home can behomes. The credit reduced tax liability by deferred if another home of equal or greater$716 million for the 535,000 taxpayers who value is purchased within two years. In addi-used the credit. A CBO analysis of the credit tion, there is a one-time exclusion of $125,000found little or no effect on the inventory of of gains for people over age 55, and all gainsunsold new houses, new home sales, housing held until death permanently escape the in-starts, or employment in the construction income tax. Current law also favors investmentdustry the first six months it was available. 3 in housing over business assets by allowing the

deduction of mortgage interest and propertyAllow Deduction for Loss on the Sale of a taxes, even though the home does not gen-Principal Residence. The Administration pro- erate taxable income.poses to allow people who sell their homes ata loss to claim an itemized deduction as a ca- The proposal would provide some relief forsualty loss. Under current law, casualty losses people forced to sell homes for a loss. Be-are deductible to the extent each loss exceeds cause of inflation and real increases in home$100 and the sum of all losses exceeds 10 per- prices for many years, however, few taxpayerscent of AGI. For example, a taxpayer with an who sell homes would report a loss. As a

result, both the revenue loss of the proposaland any potential distortion of the allocation

3. Congreisional Budget Office. "An Analysis of the of anves tent is torti on T he allocationImpact of the $2.000 Home Purchase Tax Credit" of investment is limited. The JCT estimates a(November 20. 1975).


revenue loss of $0.4 billion in 1993 and $2.1 ceeds of home equity loans, on which interestbillion in 1992 through 1997 (see Table 3-5). payments are deductible, to finance education

expenses. The Administration's proposalEstablish Enterprise Zones. In order to en- would make deductible the financing of loanscourage investment in economically distressed for education available to taxpayers who dourban and rural areas, the Administration not own their own home. For homeowners,proposes to designate up to 50 enterprise the student loan would be included in a corn-zones over a four-year period and to provide bined ceiling of $100,000 for student loansthe following tax incentives: elimination of and home equity loans.the capital gains tax for tangible property lo-cated within enterprise zones and used in en- The JCT estimates that this provision wouldterprise zone businesses for at least two years; reduce income tax revenues by $0.3 billion inexpensing of equity investments in enterprise 1993 and about $2 billion over ihe 1992-1997zone corporations with assets of less than $5 period (see Table 3-5). The Administrationmillion; and a refundable 5 percent wage estimates a revenue loss that is almost twice ascredit on the first $10,500 earned by low- great, with larger differences in later years.income employees of businesses in enterprise The differences occur because the JCT as-zones (up to $525 per worker, with the credit sumes that interest costs fall mainly on stu-phasing out when the worker earns between dents, who generally do not itemize deduc-$20,000 and $25,000 of total annual wages). tions, whereas the Administration assumesProposals for enterprise zones have appeared that parents pay and could, therefore, deductin each of the President's previous budgets. the interest.

Some states have established enterprise Restore and Double the Adoption Deduction.zones and have reported consequent gains in The Administration proposes to restore theinvestment and employment. It is unclear, deduction for the costs incurred in adopting ahowever, how much employment in the zones child with special needs--for example, ais new instead of relocated employment. En- physical or mental handicap--effective Febru-terprise zones are much more likely to affect ary 1, 1992. This proposal has been in thethe location of investment than to contribute Administration's budget for the past threeto net new investment or employment. years. The Tax Reform Act of 1986 repealed

the deduction, and it was replaced with a pro-The JCT estimates that the revenue loss gram that reimburses families for these costs

from tax incentives in enterprise zones will (up to a limit). The proposal would permitamount to $3.3 billion from 1992 through the deduction from income of unreimbursed1997 (see Table 3-5). The Administration's adoption costs up to a maximum of $3,000 perestimate for the same period is a revenue loss child, double the maximum under pre-1986of $1.8 billion. law. Deducted costs that were subsequently

reimbursed would be counted as income inPermit Deduction of Interest on Student the year received. The JCT estimates that theLoans. The Administration proposes to allow proposal would reduce income tax revenuestaxpayers who itemize to deduct from taxable by less than $50 million over the i992-1997income the interest incurred on loans for period (see Table 3-5).education above the high school level afterJuly 1, 1992. Current law allows homeowners Expand the Public Transit Exclusion to $60to deduct qualified mortgage interest, in- per Month. The Administration proposes tocluding interest on home equity loans, al- increase the public transit exclusion from $21though taxpayers cannot deduct interest for per month to $60 per month. Under currentthat portion of home equity loans exceeding law, employer reimbursements of up to $21the lesser of $100,000 or their equity in their per month for employee expenses for com-residences. Homeowners can use the pro- muting by public transportation are treated as


a "de minimis" fringe benefit and, therefore, from any individual. Organizations must noware excluded from taxable income. If the re- report only contributions that exceed $5,000imbursement exceeds $21 per month, the en- for individual donors. The change would ap-tire reimbursement is included in taxable in- ply to contributions made on or after July 1,come. This exclusion, created in 1984, was set 1992.at $15 per month and was raised by regulationto $21 per month effective July 1, 1991, to The JCT estimates that the first two changesaccount for inflation since 1984. The pro- would reduce revenues by about $1.2 billionposal would exclude from taxable income re- over the 1992-1997 period, and the last changeimbursements of up to $60 per month even if would raise revenues by about $0.4 billionthe total reimbursement exceeds the limit of over the same period, yielding a net revenue$60 per month. The JCT estimates that ex- reduction of about $0.8 billion (see Tablepanding this exclusion would reduce revenues 3-5). In contrast, the Administration esti-by $0.2 billion from 1992 through 1.997 (see mates that the three provisions would increaseTable 3-5). revenues by about $0.6 billion over the six-

year period. The estimates differ because theRevise Rules for Charitable Contributions. Administration assumes the change in re-The Administration proposes three changes in porting requirements will yield a much greaterrules regarding charitable contributions, increase in compliance than does the JCT.First, it would make permanent and extend toall types of property the exclusion fromalternative minimum taxable income (AMTI) Personal Income Tax Cutsof the fair market value of charitable con-tributions of appreciated property. The Tax The only general cut in personal income taxesReform Act of 1986 eliminated the deduc- in the Administration's proposals is an in-tibility of the capital gain component of the crease in the personal exemption for depen-value of property donated to charities in cal- dent children.culating AMTI. Subsequent legislation re-moved that limitation with respect to contri- Increase the Exemption for Dependent Chil-butions of tangible personal property for tax dren. The personal exemption for dependentsyear 1991 and for tax year 1992 if contri- age 18 and under would be increased by $500butions are made before July 1, 1992. The under the Administration's proposal. Theproposed change would make that rule per- proposal is effective October 1, 1992, with themanent and broaden it to include intangible amount for the 1992 tax year prorated topersonal property and real property. That $125. The full $500 amount applies for taxchange would be effective for contributions years 1993 and beyond and is indexed tomade in 1992 or later years. changes in the consumer price index.

Second, the Administration proposes that Under current law, personal exemptions areall charitable deductions made after Decem- phased out for high-income taxpayers. There-ber 31, 1991, be allocated to U.S.-source in- fore, for these taxpayers, the benefit of the in-come. Currently, such deductions are allo- crease in the dependent exemption would becated in proportion to U.S.- and foreign-- limited until 1996 when this phaseout provi-source income. sion expires.

Third, the Administration would require The JCT estimates that the proposal wouldcharitable organizations with annual gross lose $3.4 billion in 1993 and would cost $23.8receipts of $25,000 or more to report to the billion over five years (see Table 3-6). TheInternal Revenue Service, as well as to budget document suggests that 18-year-oldsdonors, annual contributions in excess of $500 would not be eligible for the credit, but


subsequent supporting materials indicate that Revenue-Raising Proposalsthey would be eligible. The JCT estimate as-sumes 18-year-olds would not be eligible. The Administration's budget includes some

revenue-raising proposals. Those proposalswould increase employee taxes and contribu-

Excise Taxes tions to federal retirement; widen the scope ofand extend certain excise taxes and fees: and

The Administration is proposing to repeal the broaden the income tax base for individualsluxury tax on boats and airplanes and to pay and corporations. Altogether, the proposalsfor this by repealing the tax exemption for discussed in this section increase revenue bydiesel fuel in recreational boating. The Ad- $3.3 billion in 1993 and by $23.2 billion overministration is also proposing minor increases the 1992-1997 period.in certain excise taxes and fees, which are dis-cussed in the following section on revenue- Extend Hospital Insurance to All State andraising proposals. Local Government Workers. Under current

law, all workers of state and local govern-Repeal the Luxury Tax on Boats and Air- ments hired after March 31, 1986, are re-planes and Finance It by Repealing the Diesel quired to pay Medicare's Hospital InsuranceFuel Exemption. The Administration pro- (HI) taxes. The Administration's proposalposes repealing the current luxury tax equal to would extend HI coverage to all state and10 percent of the retail price over $100,000 for local government workers. The Administra-boats and $250,000 for airplanes, beginning tion has made the same proposal in its previ-February 1, 1992. (Exclusions apply to boats ous budgets.and airplanes that are used for business.) TheJCT estimates that this proposal would reduce The main rationale for the proposal is thatrevenues by about $0.2 billion over the 1992- the vast majority of currently exempt workers1997 period. To offset this revenue loss, the already qualify for Medicare benefits becauseAdministration proposes repealing the current either they have contributed to the system attax exemption for diesel fuel used in boats for other jobs or their spouses are coveredpleasure use, beginning July 1, 1992. The JCT through their own employment. Althoughestimates that repealing the diesel exemption more than 90 percent of state and local gov-would increase revenues by about $0.2 billion ernment workers receive Medicare benefits inover the estimation period. Thus, the two retirement, one-fourth of those who receiveproposals would be about revenue neutral benefits have not paid Medicare taxes while(see Table 3-7). working in government jobs. Therefore, they

Table 3-6.CBOIJCT and Administration Estimates of Increase in PersonalExemption for Children (By fiscal year, in billions of dollars)

Proposal 1992 1993 1994 1995 1996 1997

Increase the Personal Exemptionfor Dependent Children

CBO/JCT a -3.4 -5.0 -5.0 -5.1 -5.3Administration a -4.4 -4.6 -4.7 -5.0 -5.2


a. Not yet in effect.


receive Medicare benefits in return for a CBO estimates that the proposed increasessmaller amount of lifetime payroll taxes than in the CSRS employees' tax rate would raiseare paid by employees who work continuously $0.4 billion in 1993 and about $1.0 billionin covered employment. CBO estimates that each subsequent year (see Table 3-8). Over-mandatory HI contributions from all state and all, revenues would increase by $4.5 billion inlocal government workers, beginning July 1, 1992 through 1997.1992, would raise $1.7 billion in 1993 and $8.7billion in 1992 through 1997 (see Table 3-8). Conform the Compensation Base for RailroadOutlays for benefit payments would increase Retirement with Social Security. Undersomewhat, but only $0.1 billion of the in- current law, differences exist between corn-creased costs would occur by 1997. pensation included in the tax base for Rail-

road Retirement and Social Security, specifi-Increase Employees' Contributions to the Civil cally in sickness and accident disability pay-Service Retirement System. Currently, about ments made to an employee or dependent, re-one-third of the Civil Service Retirement Sys- muneration for service as a delegate of atem's (CSRS's) liabilities are unfunded. Most lodge, and noncash remuneration. The onlyemployees enrolled in CSRS and their em- difference that is expected to have an appre-ploying agency pay 7 percent of their base pay ciable effect on revenues is including sicknessinto the retirement system. The Administra- and disability payments in the Railroad Re-tion proposes for the first time to increase the tirement base. CBO estimates that bringingemployees' tax rate in two stages. CSRS em- the Railroad Retirement base into conformityployees' tax rate would increase by 1 percent- with the Social Security base, beginning Jan-age point on January 1, 1993, and again on uary 1, 1993, would increase revenues byJanuary 1, 1994. That increase would slightly about $70 million during the budget periodimprove the financial soundness of the fund. (see Table 3-8).

Some may consider this proposal unfair be- Expand the Communications Excise Tax.

cause it penalizes those employees who chose Under current law, local and toll telephone

to remain in CSRS when the Federal Employ- and teletypewriter communications services

ees' Retirement System (an alternative retire- are subject to a 3 percent tax. The Adminis-

ment program) was introduced. If employees tration proposes to expand the tax base to in-

were given another opportunity to switch, clude communications via digital transmis-

however, then the revenue gain from one rate sion and coin-operated telephones. Specifi-

increase would be reduced. cally, the 3 percent tax would apply to digitaltransmission of data over long-distance corn-

Table 3-7.

CBO/JCT and Administration Estimates of the Excise Tax Proposal (By fiscal year, in billions of dollars)

Proposal 1992 1993 1994 1995 1996 1997

Repeal Luxury Tax on Boatsand Airplanes and RepealDiesel Fuel Exemption



a. Less than $S0 million.


Table 3-8.CBO/JCT and Administration Estimates of Revenue-Raising Proposals(By fiscal year, in billions of dollars)

Proposal 1992 1993 1994 1995 1996 1997

Employee Taxes and Contributions

Extend Hospital Insurance to AllState and Local Government Workers

CBO/JCT 0.4 1.7 1.7 1.7 1.6 1.6Administration 0.3 1.6 1.5 1.5 1.5 1.5

Increase Employees' Contributionsto Civil Service Retirement System

CBO/JCT a 0.4 1.0 1.1 1.0 1.0Administration a 0.4 1.1 1.2 1.2 1.2

Conform the Compensation Base forRailroad Retirement with Social Security

CBO/JCT a b b b b bAdministration a b b b b b

SubtotalCBO/JCT 0.4 2.2 2.7 2.7 2.7 2.6Administration 0.3 2.0 2.6 2.8 2.8 2.8

Excise Taxes and Fees

Expand Communications Excise TaxCBO/JCT b b b b 0.1 0.1Administration b 0.1 0.1 0.1 0.1 0.1

Establish New Federal CommunicationsCommission Fees

CBO/JCT a 0.1 0.1 0.1 0.1 0.1Administration a 0.1 0.1 0.1 0.1 0.1

Extend Abandoned MineReclamation Fees

CBO/JCT a a a a 0.2 0.2Administration a a a a 0.2 n.3

SubtotalCBO/JCT b 0.1 0.1 0.1 0.3 0.3Administration b 0.2 0.2 0.2 0.4 0.4

(Continued)


Table 3-8.Continued

Proposal 1992 1993 1994 1995 1996 1997

Broadening the Income Tax Base for Individuals

Modify Taxation of AnnuitiesWithout Life Contingencies

CBO/JCT b 0.1 0.2 0.3 0.5 0.8Administration b 0.2 0.2 0.3 0.4 0.5

Change Effective Date onTaxation of Annuities

CBO/JCT b b b b b bAdministration b b b b b b

SubtotalCBO/JCT b 0.1 0.2 0.3 0.5 0.8Administration b 0.1 0.2 0.3 0.4 0.5

Broadening the Income Tax Base for Corporations

Conform Book and Tax Accountingfor Securities Dealers' Inventories


Repeal Tax Exemption for LargeCredit Unions


Disallow Interest Deductions forCorporate-Owned Ufe Insurance Loans


SubtotalCBO/JCT 0.3 1.0 1.3 1.5 1.6 1.7Administration 0.5 1.0 1.3 1.5 1.6 1.7

Total

Revenue-Raising ProposalsCBO/JCT 0.7 3.3 4.2 4.6 5.0 5.4Administration 0.8 3.4 4.3 4.7 5.1 5.4

SOURCES: Congressional Budget Office; Joint Committee on Taxation; Office of Management and Budget.a. Notyetineffect.


)8 ANALYSIS OF THE PRESIDENT'S BUDGET March 19'2

munication lines leased by private parties. In ment in the future. Frequently, repaymentaddition, the current exemption for local calls takes the form of monthly or other periodicfrom coin-operated telephones would be repayments. In life annuities, the periodicpealed. These provisions would be effective payments are guaranteed through the life ofJuly 1, 1992. The JCT estimates revenues the beneficiary, which makes the actual returnwould increase by $0.2 billion in 1992 through from the annuity uncertain. If the investor1997 (see Table 3-8). has a shorter-than-expected life span, a sub-

stantial portion of the principal can be lost; ifEstablish New FCC Fees. The Administration the investor lives longer than expected, theproposes establishing fees to cover certain op- total return can be substantial. Life annuitieserations of the Federal Communications Coin- are particularly valuable because they insuremission. Beginning in October 1992, the FCC that beneficiaries will not spend their savingswould have the authority to charge fees to before they die.cover costs of policymaking, rulemaking, andenforcement. At present, fees cover only the Under current law, annuity repayments areprocessing of applications. CBO estimates divided into two components--a return ofthat, net of income and payroll tax offsets, es- principal and investment income--with thetablishing the fees would increase revenues by division determined by the ratio of the an-about $50 million each year (see Table 3-8). nuity cost to the sum of the expected annuity

payments. The investment income is includedExtend Abandoned Mine Reclamation Fees. in taxable income. This treatment defers theAbandoned mine reclamation fees were ex- taxation of earnings on an investment in antended for three years in the Omnibus Budget annuity until the annuity payment begins, andReconciliation Act of 1990. They will expire it allows a relatively slow schedule of intereston September 30, 1995. The Administration payout.proposes extending the fees through fiscalyear 1997. The existing fee schedule would be Annuities without life contingencies areretained: 35 cents per ton on coal from sur- close substitutes for certificates of deposit andface mines, 15 cents per ton on coal from un- bonds. The deferral of taxation on annuities,derground mines, and 10 cents per ton of lig- however, reduces the effective tax rate onnite coal. These fees fund grants to states for these annuities relative to that on certificatesthe cleanup of abandoned mines. CBO esti- of deposit or bonds, which are taxed on an-mates that, net of income and payroll offsets, nual earnings. The President's proposalextending the fees would increase revenues by would remove the tax difference between$0.2 billion per year in 1996 and 1997 (see these similar investment vehicles by taxing theTable 3-8). annual earnings on annuities without sub-

stantial life contingencies, but would intro-Modify Taxation of Annuities Without Life duce a difference in treatment between an-Contingencies. The President proposes to tax nuities with and without substantial life con-annually the accruing earnings of certain tingencies.annuities. Annuities that have a substantiallife contingency--that, is those whose total The JCT estimates that the proposal willpayout is linked to the recipient's life span-- raise $1.9 billion in 1992 through 1997 (seewould not be affected by the proposal. Ex- Table 3-8).ceptions would also be allowed for pensionannuities and for annuities of structured Conform Book and Tax Accounting forsettlements. Securities Dealers' Inventories. The Adminis-

tration proposes to require securities dealersAnnuities are investment vehicles sold by to include in taxable income both unrealized

insurance companies. Investors make an ini- gains and losses on year-end securities inven-tial cash payment in return for a fixed repay- tories, ending the tax law's preferential treat-


ment whereby losses may be included in tax- a loan with the cash value of the policy as col-able income, but gains need not be. Under lateral. As with all whole life insurance poli-the tax-preferred inventory accounting cies, the buildup of investment income withinmethod called "lower of cost or market" a corporate-owned policy is exempt from tax,(LCM), currently available to all businesses, but a corporation can deduct the associateddealers' inventory gains are considered taxable loar,'s interest expense from its taxable in-income typically in the following year when come. In 1986, the Congress limited the sizethe securities are sold. of a loan that qualifies for the interest deduc-

tion to $50,000 per insured employee, but cor-The Administration's proposed treatment porations have responded by spreading

would deem that a sale is not necessary to smaller policies over more employees. Thetrigger tax recognition of a securities dealer's JCT estimates that this proposal would raisegains or losses on inventory. Under the pro- $2.8 billion over the 1992-1997 period (seeposal. all other industries would still be able Table 3-8).to use the LCM method of inventory account-ing because inventories of manufacturing andretail firms are more difficult to value at Other Proposalsmarket prices. Indeed, securities firms aloneare required to use market valuation for The President's budget includes a proposal forregulatory purposes. The JCT estimates that reducing tariffs, most of which can be ac-the proposal would raise $2.5 billion over the complished by executive action, but some of1992-1997 period (see Table 3-8). which requires legislative action. Tariff re-

duction accomplished by executive action isRepeal Tax Exemption for Large Credit not counted for pay-as-you-go purposes. InUnions. Credit unions are not subject to fed- addition, the Budget Enforcement Act of 1990eral income taxes and hence are treated more excludes from pay-as-you-go direct spendingfavorably than competing thrift institutions, and receipts resulting from "full funding of,such as savings and loan institutions and and continuation of, the deposit insurancemutual savings banks. The Administration commitment in effect on the date of en-proposes to repeal the tax exemption for large actment of the section." Consequently, CBOcredit unions--those with more than $50 mil- concludes that the proposal to prohibitlion in assets--and tax them like other thrift double-dipping by thrifts should be excluded.institutions. In 1985, the Reagan Adminis- The provision would affect deposit insurancetration proposed repealing the tax-exempt costs, but it would not alter the deposit insur-status for credit unions with more than $5 ance commitment.million in assets, and the Carter Adminis-tration proposed total repeal in the 1979 bud- Implement the Uruguay Round. The Presi-get. The JCT est.mates that the proposal dent's budget takes into account carrying outwould raise $2 billion in revenues in the the Administration's position on reducing tar-1992-1997 period (see Table 3-8). iffs in the Uruguay Round of the General

Agreement on Tariffs and Trade. Implementa-Disallow Interest Deductions for Corporate- tion would reduce customs duty receipts. TheOwned Life Insurance Loans. The Adminis- Uruguay Round of negotiations began in 1986tration proposes to disallow the deduction for and may conclude in 1992. Once a tradeinterest that corporations pay on loans se- agreement is reached, the agreed-upon tariffcured by the cash value of life insurance poli- reductions can be put in place through a com-cies. Corporations purchase whole life insur- bination of executive and legislative action.ance policies to protect against the death of The Omnibus Trade and Tariff Act of 1988their more important--and increasingly wider granted the President the authority to lowergroup of--employees. These purchases pro- certain tariffs by specified amounts. Furthervide a tax benefit when corporations take out tariff reduction requires legislative action and


is subject to pay-as-you-go requirements. The treatment called "double-dipping" that al-Administration's position on reducing tariffs lowed the acquirer to deduct taxable incomein the Uruguay Round included in the budget from a loss that was never incurred. Thewould require legislative action for a small FSLIC recognized the value of these tax bene-portion of the reduction; the bulk of the re- fits and negotiated to share them with theduction could be accomplished by executive acquirer.action. The Administration estimates that theproposed reduction of tariffs involving execu- The tax benefits were repealed in 1989, buttive action would reduce customs duty re- assets covered under earlier acquisitions haveceipts by $9.8 billion over the 1993-1997 pern- continued to receive the benefits. Many ofod and that requiring legislative action would these assets have yet to be sold and he taxreduce receipts by an additional $0.1 billion, benefits yet to be taken. The Internal Reve-(see Table 3-9). nue Service now holds that the benefits are

not allowed under current law, but it is un-Prohibit Double-Dipping by Certain Thrifts. clear whether the IRS would prevail in court.The Administration proposes legislation to The Administration proposes for the first timedeny certain tax benefits for pre-1989 acquisi- to clarify tax treatment by writing into lawtions of insolvent thrift institutions. In the that the losses reimbursed by the FSLIC arepast, the Federal Savings and Loan Insurance not deductible, effective March 4, 1991. TheCorporation (FSLIC) often guaranteed to re- JCT estimates that the proposal would raiseimburse the acquirer of an insolvent thrift for $0.5 billion in: evenues through 1997 (seeany subsequent capital losses on certain coy- Table 3-9). A part of the increase in revenuesered assets. Under a legal view widely held by would he effset by a reduction in offsetting re-some at the time, the acquirer did not have to ceipts of $0.2 billion (scored as increased out-include the FSLIC reimbursern -at in taxable lays) because the federal government wouldincome. However, the loss on the covered as- receive fewer payments in the form of taxsets was deductible against other taxable in- sharing from acquirers.come in the year of the sale--a combined

Table 3-9.CBO/JCT and Administration Estimates of Other Proposals(By fiscal year, in billions of dollars)

Proposal 1992 1993 1994 1995 1996 1997

Implement Uruguay Roundof the Multilateral TradeNegotiations

CBO/JCT a a a a a aAdministration b -0.4 -1.1 -1.9 -2.8 -3.7

Prohibit Double-Dipping byThrifts Receiving FederalFinancing Assistance

CBO/JCT 0.2 0.2 0.1 0.1 0.1 -0.1Administration 0.4 0.4 0.1 c c 0.1

TotalCBO/JCT 0.2 -0.3 -1.0 -1.8 -2.7 -3.7Administration 0.4 c -1.1 -1.9 -2.8 -3.5

SOURCES: Joint Committee on Taxation; Office of Management and Budget.a. CBO has included the Administration's estimate.

b. Not yet in effect.

c. Less than $50 million.

Chapter Four

The Administration'sProposals for Defense

and International Affairs

he Administration's budgets for defense dend--that is, for funds that can be redirected

and International affairs reflect the end to other purposes including domestic pro-of the Cold War. For 1993, the defense grams, tax cuts, and deficit reduction.

plan would take funding below the levelsagreed on in the 1990 budget summit; by In a sense, a substantial peace dividend has1997, defense would reach a level 18 percent already been achieved: the limits on defenselower than an average budget for the last one spending established in the 1990 budget agree-and a half decades of the Cold War. The ment for the 1991-1993 period, and those pro-change in the international affairs budget is posed by the President in last year's budget,evident from the economic, humanitarian, represent a substantial reduction from theand technical assistance programmed for level provided in 1990, the last year of theEastern Europe and the republics of the Cold War. For 1997, the President's 1992former Soviet Union. budget anticipated budget authority roughly

23 percent below the inflation-adjusted levelsThe Budget Enforcement Act (BEA) set of 1990; over the 1991-1997 period, spending

ceilings for discretionary programs, including would be some $410 billion below the 1990specific 1993 caps for defense and interna- baseline level.tional affairs programs. The Administration'sbudget would fund both of those functions at The key question now is, how much morelevels roughly 2.5 percent below the BEA can defense spending be reduced? In othercaps. In dollar terms, the reduction in budget words, what additional dividend might beauthority in defense is much larger--$6.8 bil- reaped after the failed coup, the disintegrationlion compared with $600 million for interna- of the Soviet Union, and the emergence of 15tional affairs (see Table 4-1). Although the independent republics?Congressional Budget Office estimates thatdefense outlays will fall below the BEA caps, By means of proposals to rescind a net $6.6it also estimates that outlays for international billion from 1992 funding and to scale downaffairs will exceed the caps. requests for the next five years by about $43

billion, the current defense request would in-crease the dividend by $50 billion. Of thesavings to be realized between 1993 and 1997,

The Peace Dividend in about $29 billion would come from endingthe Administration's only two programs--the B-2 bomber and the

Seawolf submarine (see Box 4-1 and TableDefense Budget 4-2). The remaining $14 billion would be

obtained primarily by cutting more than thatWith the end of the Cold War, many people amount in other purchases of weapons andlook to the defense budget for a peace divi- adding funds for operation and maintenance.


The Budget Enforcement Act dealt speci- age Cold War budget that prevailed over thefically with defense through 1993 only. For 1975-1990 period. That period begins at the1994-1995, the BEA provided a total amount spending trough following the Vietnam War,for discretionary spending; the allocation be- encompasses the peacetime buildup thattween defense and nondefense would be made ended in 1985, and continues through thein those years. If nondefense discretionary 1986-1990 retrenchment. The all-volunteerbudget authority were held at 1992 levels (in force was in effect, with its attendant costs,real terms) through 1995, reductions in de- throughout the period. In addition, thefense over this period would have to reach 1975-1990 weapons are comparable with the$57 billion to stay within the BEA limits, weapons of the 1990s, and so are their acquisi-That represents $33 billion in additional re- tion and operating costs. With full adjust-ductions compared with the $24 billion pro- ment for inflation, the average budget for thisposed by the Administration o~er this period, period would total about $307 billion in 1993Obviously, if nondefense discretionary pro- and $356 billion in 1997.grams were to grow in real terms within theBEA totals, the defense budget would have to The transition to the post-Cold War budgetabsorb an even greater reduction. will come gradually. By 1997, the Admin-

istration would reduce military personnel lev-els to about 1.6 million people--23 percent be-low the 1975-1990 average. But overall fund-

Comparisons with Cold ing would be only 18 percent lower (see Table4-3 on page 65). What explains that disparity?

War Defense Budgets The answer can be found in operation andmaintenance (O&M), a set of accounts de-

With the dissolution of the Warsaw Pact and voted to meeting everyday expenses, and inthe unraveling of the Soviet Union, the research, development, test, and evaluationAdministration's proposals would reduce the (RDT&E), accounts representing investmentdefense budget to levels lower than the aver- in new weapons.

Table 4-1.Comparison of the Administration's Request for Defense and InternationalAffairs with the BEA Caps for 1993 (In millions of dollars)

InternationalDefense Affairs

Discretionary Budget Authority

Caps as Determined by OMB 289,035 22,758

Administration's Request as Estimated by CBO 282,186 22,161

Difference 6,849 -597

Discretionary Outlays

Caps as Determined by OMB 296,824 20,591

Administration's Request as Estimated by CBO 293,462 21,086

Difference -3,362 495


NOTE: BEA = Budget Enforcement Act; OMB = Office of Management and Budget.

CHAPTER FOUR PROPOSALS FOR DEFENSE AND INTERNATIONAL AFFAIRS t3

Force Operations year. An independent board of actuaries esti-mates the appropriate charge for each pay-

In 1997, funding to operate forces would be ment to the military retirement trust fund.17 percent lower in real terms than it is this Beginning in 1994, the budget assumes thatyear and about 18 percent lower than the the actuaries will not charge DoD as much as1975-1990 average. Lower personnel levels it now does for the retirement contribution.obviously require less money. Although fund- The annual price is assumed to fall by almosting for O&M would fall at about the same $3 billion per year based on assumptionsrate as military strength compared with today, about pay raises and interest rates over theit would fall less than one-half as much as long term. The actuaries may not agree withmilitary strength compared with the 1975-1990 this estimating proposal.average. For a comparison of 1990 and 1997forces, see Table 4-4 on page 66. At first glance, this proposition would ap-

pear to reduce the deficit, but that will not beMilitary Personnel. The Administration pro- the case even if the actuaries prepare the esti-poses to cut funding for the military personnel mates as expected. The estimates would beaccounts somewhat more than it proposes to deficit neutral at best because forgone receiptsreduce personnel strength. Normally, one in the trust fund would cancel outlay savingswould expect costs to be proportional because in defense. But under the fixed caps of thethese accounts fund little other than mi tary BEA, that change could produce a greaterpay. Some of the extra dollar savings can be deficit--through the increased discretionarytraced to the Department of Defense's spending that results from the way effects on(DoD's) payments to cover the future costs of outlays are categorized. The DoD savings onretirement benefits as they are earned each

Box 4-1.The Administration's Rescission and

Supplemental Proposals for 1992

In addition to the request for 1993, the Ad- The Administration is also proposing addi-ministration is asking the Congress to rescind or tional funding for 1992 for environmental pro-cancel about $7.7 billion provided for 1992 and grams on DoD installations. The $1.1 billion inprior years. The details of the rescission pro- supplemental funds would aim at complyingposal have not been announced, but the Depart- with federal, state, and local environmental lawsment of Defense has categorized them as follows and regulations. Thus. the net effect of the(budget authority in billions of dollars): proposals for 1992 would be to reduce defense

funding below the Budget Enforcement ActFunding for programs that ceiling by $6.6 billion.have been terminated 4.1

Until the Administration forwards more de-Funding for programs in excess tails, it will be hard to interpret how DoD hasof requirements 2.2 grouped the rescission proposals. Presumably,

Funding for programs that do not the $3 billion provided in 1992 and previouscontribute to defense 0.4 years for Seawolf submarines will be rescinded.

Other programs that DoD considers marginallyFunding for programs that cannot useful will include items added by the Congressbe sustained 0.7 without a request from the Administration. The

Funding that cannot be effectively S1.9 billion appropriated to buy equipment forused in 1992 0.4 Reserve and National Guard components, as

well as funding for university research initia-Total 7.7 tives, could be among those items.


outlays are categorized as discretionary spend- deficit, the discretionary spending caps woulding, and the forgone trust fund receipts are have to be adjusted downward.considered mandatory. At this point, the pro-posed estimate would appear to be deficit As part of its regional defense strategy, theneutral. However, because the BEA sets a Administration seeks a balance between activecap for discretionary spending, the proposal and reserve forces. Just what that balancewould really make room for more discre- should be, however, has raised some contro-tionary spending--for which there would be versy. The budget would cut reserve forcesno offsetting change in the budget for man- less than was proposed a year ago, at least indatory accounts. To avoid an increase in the part because the Congress resisted last year's

Table 4-2.Proposed Major Spending Changes in the President's Budget for Function 050, National Defense(By fiscal year, in billions of dollars)

CumulativeFive-Year

1993 1994 1995 1996 1997 Savings

Budget Authority

President's 1992 Budget 288.4 289.4 292.8 295.2 300.6

Proposed ChangesMilitary personnel -0.3 -1.0 -1.4 -0.9 -1.2 -4.9Operation and

maintenance 3.1 1.3 1.8 2.4 3.1 11.7Procurement -11.3 -9.2 -10.4 -12.3 -12.9 -56.1RDT&E -1.6 0.1 0.9 1.4 1.8 2.6Atomic energy defense 0 -0 -0 -0 -0.1 -0.1Other defense 2.7 1.1 0.7 0 -0.6 3.8

Total -7.4 -7.8 -8.5 -9.5 -10.0 -43.1


Outlays


Proposed ChangesMilitary personnel -0.3 -1.0 -1.4 -0.9 -1.2 -4.9Operation and

maintenance 2.6 1.5 1.7 2.3 2.9 11.0Procurement -3.3 -6.0 -8.2 -9.6 -11.1 -38.2RDT&E -1.3 -0.6 0.4 1.0 1.5 1.0Atomic energy defense -0.1 -0.1 -0.1 0 -0.1 -0.4Other defense 0.5 0.9 1.5 1.3 0.2 4.3

Total -1.9 -5.3 -6.1 -6.0 -7.8 -27.1


SOURCES: Congressional Budget Office; Office of Management and Budget.

NOTES: This table shows the 1992 and 1993 budget requests as estimated by COO. The estimate of the 1992 request includes anadjustment for inflation lower than previously assumed.RDT&E = research, development, test, and evaluation.

CHAPTER FOUR PROPOSALS I-OR DEFENSE AND INTERNATIONAL AFFAIRS 65

proposals. Compared with 1992 levels, re- combat forces would comprise a relativelyserve strengths would be scaled back by about greater portion of Army divisions, carrier air18 percent, and active forces would be rough- wings, and other tactical air wings.ly 13 percent below today's levels. Neverthe-less, under the Administration's proposals, Operation and Maintenance. O&M accountsactive troop strength would fall by 23 percent pay to fuel, repair, and maintain weapons;and reserve strength by 7 percent, compared provide military personnel with medical care,with the 1975-1990 average. In other words, food, housing, and other support services; andthe reserves would constitute a larger share of maintain and operate bases worldwide. Thethe force in 1997 than they did over the 1975- accounts pay most of the civilians DoD em-1990 period and a slightly smaller share than ploys; in fact, 40 percent of all O&M fundingthey do today. As shown in Table 4-4, reserve goes for civilian salaries. O&M budgets pose

Table 4-3.Comparison of the President's Budget for 1997 with an Average Cold WarBudget, 1975-1990, and the CBO Baseline

Budget LessAverage the FollowingCold War (Percentage change)Budget CBO President's Cold War CBO

Category (1975-1990) Baselinea Budget Average Baselinea

Budget Authority (Billions of 1997 dollars)

Department of Defense--MilitaryOperations

Military personnel 103.9 94.6 75.6 -27 -20Operation and maintenance 99.0 105.8 90.2 -9 -15Family housing 3.7 4.3 3.7 -2 -15

Subtotal 206.7 204.7 169.5 -18 -17

InvestmentProcurement 95.9 75.7 63.1 -34 -17RDT&E 36.6 45.0 36.0 -2 -20Military construction 6.4 5.8 5.5 -14 -6

Subtotal 138.9 126.5 104.6 -25 -17

Other 1.9 3.0 0.5 -73 -83

Total 347.5 334.3 274.6 -21 -18

Other Defense 8.4 15.3 16.0 90 4

Total, National Defense 355.9 349.6 290.6 -18 -17

Manpower (Thousands)

MilitaryActive 2,105 1,865 1,626 -23 -13Reserve 987 1,120 920 -7 -18

Civilians 1,064 1,001 904 -15 -10

SO IRCES: Office of Management and Budget; Congressional Budget Office.NOTE: RDT&E = research, development, test, and evaluation.

a. The CBO baseline is either constrained to (kept within) the BEA caps or unconstrained. The unconstrained baseline adjusts theregular appropriations for 1992 for inflation each year through 1997. This table refers to the unconstrained baseline less theprojection of appropriation for operation Desert Storm.

h6 ANALYSIS 0FI HE PRESIDE-NI"S BUDGET March 1992

special problems because they fund such a nation abandoned conscription in favor of awide variety of functions. It is not always volunteer force, but pay is only part of a sol-clear, particularly in the out-years, what dier's compensation. DoD also compensateswould and would not be funded in a budget its troops with such in-kind support as medi-request. Even though force levels in 1997 will cal care, billeting, child care services, and basebe much lower than during the Cold War, or transportation. Raising the troops' standardeven now, at that point the Administration's of living in those ways uses O&M funds. Af-O&M funding would be only 9 percent lower ter certain thresholds have been passed, O&Mthan an average Cold War budget between cuts may end up being roughly proportional1975 and 1990. to strength cuts. (See discussion of base clo-

sures below.) Two other cost factors involveWhy should the cut in O&M be less than modern weapons and medical care: today's

that in other accounts? One explanation complex weapons may be more expensive tomight be found in the costs of an all-volunteer use in terms of fuel consumption and spareforce. Military pay rose dramatically as the parts; similarly, per capita medical care for

Table 4-4.Summary of Forces and Manpower, 1990 and 1997

Changes1990 1997a Number Percent

Forces

Army DivisionsActive 18 12 6 33Reserve 10 8b 2 20

Aircraft Carriers 15 12 3 20

Carrier Air WingsActive 13 11 2 1sReserve 2 2 0 0

Battle Force Ships 546 451 95 17

Tactical Fighter WingsActive 24 15 9 38Reserve 12 11 1 8

Strategic Bombers 268 180 88 33

Manpower (Thousands)

MilitaryActive 2,070 1,626 444 21Reserve 1,128c 920 208 18

Civilian 1,073 904 169 16

SOURCES: Congressional Budget Office based on data from the Department of Defense.

a. Planned forces for 1997 are assumed to be the same as those for 1995.

b. Includes two cadre divisions.

c. Does not include about 26,000 members of the Selected Reserve who were activated for Operation Desert Storm. They areincluded in the 1990 active manpower total.

CHAPTER FOUR PROPOSALS FOR DEFENSE AND INTERNATIONAL AFFAIRS 67

active and retired personnel, and their de- relatively plentiful. Moreover, any closing ofpendents, is more expensive nowadays. bases after 1997 may ultimately lower civilian

employment.Although one might expect the projected

changes in DoD's O&M and civilian expendi- Base Closures. Most of the savings from clos-tures to be roughly proportional, they are not. ing military bases come from lower personnelCompared with a Cold War budget between costs. So far there have been two rounds of1975 and 1990, civilian employment would decisionmaking in this area. About 120 in-decline much more than O&M funding, but stallations have been slated for closing, but tostill less than active troop strength. The larger date few major bases have been closed com-reduction in the number of civilians suggests pletely. The delay reflects in part the timethat support functions, particularly base op- needed to transfer activities to other places,erations and central logistics, would suffer and it may also explain why the civilian cutsmore than force and training programs. lag behind those in military personnel. More-Another possibility is that the Administration over, current law calls for two more rounds ofis moving toward substituting contract services discussions to decide which bases to close infor those the government supplies. 1993 and 1995.

Indeed, some of those changes may already The net, one-time costs of closing basesbe in place. A comparison with the uncon- generally appear in the budget for militarystrained CBO baseline projection for 1997 construction, but O&M accounts will eventu-reveals that O&M funding would be cut more ally realize most of the recurring savings. Thethan civilian employment (15 percent versus Congress has provided about $2.3 billion10 percent).' In fact, O&M funding decreases through 1992 to meet those one-time costs,at the same rate as active troop strength, but and the Administration is seeking anothercivilian employment decreases only 70 percent installment of $2.2 billion for 1993. Once theas fast. process of closing bases is complete, DoD ex-

pects annual savings to total more than $2 bil-Why is the O&M cut so much more in 1997 lion for rounds one and two. About 35,000

relative to the present? Although the answer civilian positions would be eliminated. Ofis far from clear, it can probably be traced to course, the next two rounds of closing basesthe buildup of the 1980s. During that period, will increase the annual dollar savings andDoD might have established a base level of reduce civilian employment even more.funding consistent with new weapons, a raisedstandard of living, and renewed emphasis on Family Housing. The family housing accounttraining and readiness. With that higher base, covers the costs of providing quarters "inthere was simply more to cut. But the kind" to active-duty military personnel.Administration's proposals for O&M would When service members do not receive housingremove relatively few civilians from the in kind, they receive instead pay supplementsbaseline. Perhaps to sustain force levels, the (in the military personnel accounts) that en-resources devoted to force operations and able them to secure housing in the com-training might be reduced by a relatively large munity. Compared with this year, funding foramount, and resources devoted to supporting family housing would be cut by the samethose forces--both weapons support and the proportion as acti've-duty personnel. Butsoldier's standard of living--would remain compared with the 1975-1990 average, funding

would drop only 2 percent, despite a 23 per-cent drop in the population served. One rea-

l. The CBO haseline is either kept within the BEA caps son for in mhe that the A nisrator unconstrained. rhe latter represents 192 funding son for this might be that the Administrationlevels adjusted for inflation. All references in this plans to provide people with governmentchapter to the ( BO haseline are to the unconstrained quarters instead of a housing allowance inversion, hut they exclude projections of Desert Stormappropriations their pay for private-sector housing.

68 ANALYSIS OF THE PRESIDENT'S BUDGET March 1'492

Investment in Weapons weapons would fall by about 17 percent, a bitmore than the reduction in forces. In the last

DoD could face a daunting modernization two years, DoD has stopped buying many

program after 1997, when scheduling calls for systems, including such weapons used in the

several expensive weapons to be bought for Persian Gulf War as the Abrams tank, Apache

the first time. In fact, CBO has projected helicopter, and F-15 aircraft. DoD has also

that, under last year's plan, a period of annual stopped purchasing the Peacekeeper (MX)

real growth will soon replace the current peri- missile and Trident submarine strategic sys-

od of annual real decline in defense funding. 2 tems, and it has canceled plans to buy next-

The Administration has now announced a generation stealth weapons- the Navy's Ad-

new acquisition strategy that will contribute to vanced Tactical Fighter and the A-12 attack

holding down the projected growth. aircraft. Most other weapons would be pur-chased in smaller numbers because there

DoD has chosen to concentrate on develop- would be fewer forces to use them.

ing weapons technology at the expense of pro-ducing weapons immediately. The new ap- Notwithstanding those major changes in

proach would continue to fund RDT&E, in- weapons programs, DoD still faces decisions

cluding research into manufacturing and op- about major weapons that could lead to

erational risks. It would, however, postpone growth in procurement funding. During the

the actual production of some new weapons next decade, DoD must decide whether to buy

until various technical risks are minimized weapons--and, if so, what kind--to modernize

and military threats demand their deploy- the Navy's attack submarines and tactical

ment. The Administration's budget proposals aircraft, the Army's fleet of armored vehicles,

show evidence of the differential emphasis on and the Air Force's fleet of tactical aircraft. If

RDT&E versus procurement. the new acquisition strategy precludes procur-ing many of those weapons, thereby creating

Procurement. The 1993 procurement budget older or smaller military forces, increases in

is marked by the cancellation of, or sharp re- procurement funding will not be needed. If

ductions in, some high-profile weapons. Pro- most of the new weapons are purchased, pro-

curement of the B-2 would be capped at 20 curement funds will have to rise above

aircraft instead of the 75 DoD has recently planned 1997 levels.

sought or the 132 in the original plan. Out-right cancellations and deferrals would simi- RDT&E. The Administration's defense bud-

larly lower the anticipated wave of moderni- get would provide nearly $40 billion a year

zation. For example, the Seawolf submarine between 1993 and 1997 for RDT&E of weap-

contract would be canceled, the Army would ons, although funding levels gradually de-

defer purchasing the new Comanche attack crease during this period. In 1997, the S36

helicopter and forgo a new air defense system, billion projected for those activities would be

and the Air Force would not buy the small about 20 percent below the amount projected

intercontinental ballistic missile known as in the CBO baseline--in other words, about 20

Midgetman. percent lower than today's funding in realterms. In 1997, however, RDT&E programs

Overall, procurement would be 34 percent would remain only 2 percent lower than the

lower in 1997 than the 1975-1990 Cold War 1975-1990 average. The relatively elevated

average--a cut exceeding that in military level of RDT&E funding can be traced

forces. Compared with this year, purchases of primarily to the Strategic Defense Initiative(SDI). At about S6 billion per year, SDIfunding would be much greater than averagefunding for strategic defenses between 1975

2. Congressional Budget Office. -Fiscal Implications of the and 1990.Administration's Proposed Base Force," CBO Staff

Memorandum (December 1991).


Other National Defense Programs

The atomic energy defense activities of the The Budget Request forDepartment of Energy dominate funding for International Affairsthe remaining national defense programs.During the Cold War, the nuclear weapons The Congress has been asked to consider atcomplex conducted research on materials and least two requests for international affairs.weapons, produced weapons, and engaged in One concerns regular appropriations for therelated activities. Most production was halted year in progress. Unable to forge a bill forin the late 1980s, when safety and environ- some international activities in 1992, the Con-mental issues came to light, and the funding gress passed a six-month continuing resolutionwas used for environmental restoration and to maintain foreign assistance programs andsafety measures. the Export-Import Bank (Eximbank) pending

a funding agreement. The Administration isIt is hard to make precise estimates of the also asking for $550 million in additional 1992

costs necessary to clean up the environment, funds to aid states of the former Soviet Union,the size of the problem has not yet been fully support international peacekeeping activities,

determined, and cures remain controversial and undertake other initiatives.

and elusive. The funding request for 1993 is

more than $500 million higher than last year's The second concerns the request for 1993,projection for 1993 and $900 million higher which includes estimates foi fiscal years 1994than the amount provided for 1992. through 1997. In 1993, budget authority for

international affairs would total $19.4 billion,There are many uncertainties in estimating or only 1 percent of all spending in the Presi-

cleanup costs. For example, the Energy De- dent' bude t (e a ble 4-5). Progam

partment plans to complete its cleanup by the de d aseTarl Programsyea 209; etthetecnolgy o teatman of funded annual ly- -discretio nary programs--

year 2019; yet, the technology to treat many of would receive $22.2 billion, and funding forthe department's unique waste streams does the so-called mandatory accounts would totalnot now exist, and plans for waste storage at a negative 52.8 billion, reflecting offsettingthe Waste Isolation Pilot Plant have been de- collections.layed by lawsuits. Moreover, responsibilitiesunder laws and agreements with other federal The estimates for fiscal years 1994 throughagencies, state and local governments, and Na- 1997 may be incomplete and therefore mis-tive Americans are not firm. On the brighter leading. The international affairs budgets ofside, some new methods of treatment are the last decade have typically included sup-bringing costs below what had been antici- plementals for the year in progress, increasespated. for the upcoming year. and real cuts there-

after. The five-year profile in the 1993 budgetThe Administration's budget proposals poal osntrpeetalsigpa o

would continue to provide a high level of probably does not represent a lasting plan forwoul cotine t prvidea hgh eve of international affairs. Indeed, for many pro-

funding for restoring the environment. After gra the p rojc Ins efor fisc al y rs 9an icrese o 25perent n 193, he ro- grams the projections for fiscal years 1994

an increase of 25 percent in 1993, the pro- through 1997 are frozen at the level requestedjected budget grows by 10 percent each year for 1993--a pattern reminiscent of previousthrough 1997. budget requests: the same approach has been

applied to domestic programs overall.


Table 4-5.Proposed Major Spending Changes in the President's Budget for Function 150.International Affairs (By fiscal year. in billions of dollars)

1992 1993 1994 1995 1996 1997

Budget Authority

CBO Basplinea 19.1 19.0 19.9 20.9 21.4 22.3

Policy ChangesAssistance to former Soviet Union 0.2 0.4 0 0 0 0Enterprise for the Americas

Loan modifications and Investment Fund 0.4 0.4 0.4 0.1 0.1 0Loan liquidating accounts -0.5 -0.3 -0.3 0.2 0.2 0.2

Peacekeeping 0.4 0.3 0.3 0.3 0.3 0.3International Monetary Fund quota increase 12.3 0 0 0 0 0Capital projects 0 0.1 0.1 0.1 0.1 0.1Food for Peace (P.L. 480) 0 -0.2 -0.3 -0.3 -0.4 -0.4Security assistance 0.5 -0.4 -0.6 -0.9 -1.1 -1.4Other 0 0.1 -0.3 -1.0 -1.6 -2.2

Total 13.2 0.4 -0.7 -1.4 -2.4 -3.4

President's 1993 Budgetas Estimated by CBO 32.3 19.4 19.3 19.5 19.1 18.8

Outlays

CBO Baselinea 17.3 17.1 17.9 18.6 19.3 20.2

Policy ChangesAssistance to former Soviet Union 0.1 0.2 0.1 0.1 0.1 0Enterprise for the Americas

Loan modifications and Investment Fund 0.3 0.3 0.4 0.1 0.1 0.1Loan liquidating accounts -0.S -0.3 -0.3 0.2 0.2 0.2

Peacekeeping 0.4 0.3 0.3 0.3 0.3 0.3Capital projects 0 0 0 0.1 0.1 0.1Food for Peace (P.L. 480) 0 -0.2 -0.2 -0.3 -0.3 -0.4Security assistance 0.1 0 -0.2 -0.6 -0.9 -1.1Other 0 0.1 0 -0.4 -0.9 -1.5

Total 0.2 0.4 0.1 -0.5 -1.4 -2.3


SOURCES: Office of Management and Budget; Congressional Budget Office.

a. The CBO baseline is either constrained to (kept within) the BEA caps or unconstrained. The unconstrained baseline adjusts eitherregular appropriations or the continuing resolution for 1992 for inflation each year through 1997. This table refers to the un-constrained baseline.


Although bilateral foreign aid is the best- ening security relationships, they now empha-known program in the international affairs size strengthening democracy and promotingbudget, it has competitors for funding. The market economies. In meeting these newState Department needs money to conduct goals, however, the Administration relies onforeign affairs. The United States also con- existing programs. Funding levels in the pro-tributes to international organizations and posed budget for most programs differ onlypeacekeeping activities. Such federal opera- marginally from current levels. The requesttions as the U.S. Information Agency pro- remains oriented toward the Middle East andmote information and exchange activities, and southern Europe. Nearly $5.3 billion in bud-Eximbank advances U.S. economic interests, get authority, almost 25 percent of the wholeThe 1993 request for discretionary funding in international affairs request, would continueinternational affairs is distributed as follows: to go to two ccuntries- -Israel and Egypt. An-

other $800 million would cover the costs toBudget Authority subsidize $1.1 billion in loans and grants to

(Billions of dollars) Greece, Turkey, and Portugal.

Foreign Aid 15.8State Department Aid to Eastern Europe and the States of the

and Other Agencies 2.9 Former Soviet Union. After the end of theInternational Organizations 1.4Information and Exchange 1.4 Cold War, the United States began to provideFinancial Programs 0.7 aid to Eastern Europe and the former Soviet

Union. In 1992, aid money has come fromTotal 22.2 both the international affairs and the defense

budgets, as well as through agricultural pro-grams on the domestic side of the budget. In

Foreign Aid 1993, the Administration proposes aid frominternational affairs and agriculture programs

Foreign aid represents 71 percent of the in- only. The table below provides details.ternational affairs function, or $15.8 billion.Of that, $8.4 billion is for development and Budget Authorityhumanitarian assistance programs, which are (Millions of dollars)

designed to promote economic development 1992 1993

and eliminate human suffering. In recent International Affairs

years, the United States has spent a relatively (Function 150)

small share of its gross national product Food for Peace (P.L. 480) 10 10Economic Support Fund 0 100

(GNP) on development assistance compared Humanitarian and

with certain other leading industrialized technical assistance 150a 350

countries. According to the Organization for Support for EasternEuropean democracies 400a 450

Economic Cooperation and Development, in Subtotal 560 910

1990, the latest year for which figures are Defense (Function 050)available, the United States spent more in Weapons destruction 400 0

dollar terms on development assistance than Humanitarian aid 100 0

did Japan or Germany, but those countriesspent more in relation to the size of their (Function 350)economies: 0.2 percent of GNP for the Subsidy cost of guarantees 490h 490h

United States, 0.3 percent for Japan, and 0.4 Total 1.550 1.400

percent for Germany.a. Proposed 1992 funding.

As the world has changed during the lastAthree years, have chestanged goasf the lb. No specific request has been made. The estimate

three years, so have the stated goals of the consists of S12 million for Eastern Europe and

U.S. foreign aid program. Instead of strength- S478 million for the former Soviet Union.


Most nonagricultural aid would be in the the Inter-American Development Bank. In-form of technical and humanitarian assistance. terest on the new debt may support environ-Funding enacted from 1992 defense appropri- mental activities in debtor countries. In addi-ations will assist with the destruction and non- tion, the proposal includes a complicated tri-proliferation of nuclear weapons, as well as angular sale of loan assets held by the Com-with humanitarian assistance. Proposed 1992 modity Credit Corporation and Eximbank;and 1993 funding from international programs purchasers of the loans would exchange themaims to relieve hardship and assist the transi- for equity or environmental considerations.tion to democracy.

The debt to be restructured consists pri-Agriculture-related assistance appears as marily of loans for development assistance

loan guarantees that enable countries to pur- bearing interest rates between 0.75 percentchase grain and other agricultural products. and 3 percent a year, with up to 37 years toThe levels in the table above represent the repay. The appropriation request representsestimated subsidy cost associated with the the difference between the Administration'sguarantees. The United States has pledged to estimate of the present value of the old loansprovide Eastern European countries with $1 and the present value of the new debt instru-billion in loan guarantees for agricultural ment that will replace them. That requestcommodities over five years. Annual esti- comes on the heels of other debt restructuringmates for this assistance are uncertain, in part in the so-called Paris Club, from which thebecause it is not known what level of as- Administration derives a two-price system forsistance the countries will use. The levels in making loans. The EAI and the two-pricethe table assume that $200 million will be system together raise important issues. Wasprovided annually, resulting in subsidy budget an appropriation required for the Paris Clubauthority of $12 million each year. rescheduling? How creditworthy are the af-

fected countries? (See Box 4-2.)The level of agricultural aid to the former

Soviet Union also remains uncertain. The In addition, the Administration's estimatesUnited States is providing new guarantees to make the loan modifications in the EAI ap-the former Soviet states only if they remain pear less expensive than they really are. Thecurrent on their interest and principal pay- Administration first assumes that paymentments for previous loans. The estimates in streams are drawn out beyond their due date.the table assume that guarantees totaling $2.5 The Administration then discounts the modi-billion will be issued in 1992, requiring sub- fied streams using risk factors that anticipatesidy budget authority of $478 million at a sub- not being paid on time. That underestimatessidy rate of 19 percent. Because specific plans the cost of loan modifications by more thanfor 1993 have not been announced, any esti- 50 percent through lowering the present valuemate for that year is highly uncertain. CBO twice for the same reason. Further, the modi-assumes that aid will continue at estimated fications will lower budget outlays in the year1992 levels. the loan is modified and raise them thereafter

as a result of the loss of receipts.Enterprise for the Americas. The Adminis-tration has renewed its request for the Enter- Peacekeeping Programs. The Administrationprise for the Americas Initiative (EAI)--a pro- has requested about $350 million annually ingram designed to increase trade and invest- additional funding for U.S. contributions toment within the Western Hemisphere. It is international peacekeeping activities spon-requesting budget authority of $900 million sored by the United Nations. The fundsfor fiscal years 1992 through 1995 to restruc- would pay the estimated U.S. assessments forture bilateral debt, and $500 million for fiscal peacekeeping, mainly in Yugoslavia, El Sal-years 1992 through 1996 to contribute to an vador, and Cambodia. But the size of theinvestment fund that will be administered by relevant forces has not been determined.


Thus, the amount of the U.S. contribution, International Monetary Fund. The IMF lendswhich equals about 30 percent of the total funds to countries having balance-of-paymentsfunding, is unknown. The press has quoted problems, provided the borrower enacts eco-State Department officials as saying that evcn nomic reforms. IMF funding comes fromthe amount requested may be insufficient for member countries, which exchange their de-current or planned peacekeeping. posits for an equivalent amount of other

monetary assets.

Other International Programs A review of IMF resources and objectives,

in which the Treasury Department partici-

The Administration's budget includes $12 pated, concluded that member nations need tobillion to meet the U.S. share of an increase increase their deposits--called quotas. The re-in the deposits of the International Monetary quest for 1992 contains $12.3 billion in budgetFund (IMF) in 1992. For the 1993-1997 peri- authority for the U.S. share of the IMF quotaod, the budget calls for a new $500 million increase. (The exact amount depends on ex-program for capital projects and also for the change rates once the funds have been pro-reduction of other programs, including Food vided to the IMF.) Transactions with the IMFfor Peace (Public Law 480) and security as- are considered exchanges of monetary assets,sistance. The 1993 requests for most other not part of expenditures or receipts; thus, noprograms approximate the levels in the CBO outlays are estimated for such transactions.baseline.

Box 4-2.Credit Reform Issues in International Affairs

Unlike the defense budget, the budget for inter- to loans that have not been rescheduled; that is,national affairs includes many credit programs if a country experiences balance-of-paymentsthrough which the federal government either problems, its unrescheduled loans would be re-makes or guarantees loans to private entities or paid first. Consequently, a loan that is not re-other governments. The federal budget was rescheduled would have one price and a resched-cently changed to display the upfront subsidy uled loan a lower price.costs of credit programs instead of their cashflows. The reform requires that the Congress The two-price system implies that the re-fund the subsidy explicitly and thus requires pro- scheduled loans enjoy a higher subsidy than thegrams to compete for funding based on their others. If the Paris Club's actions increase thelong-run cost to the taxpayer. subsidy, under the Credit Reform Act a Con-

gressional appropriation is required to cover theThe Administration's budget, however, adopts higher cost. But the Administration has not

a two-price system for loans to foreign countries requested such an appropriation. It claims in-that skews some estimates and implicitly favors stead that the rescheduling is an administrativecertain programs. The Administration is using a action to maximize the value of government as-method of estimating that produces substantially sets under the threat of imminent default;different values for practically identical loans, therefore, the argument goes, there is no loss inDebtor nations facing imminent default meet value. Without such a loss, there is no justifica-with creditor nations in what is called the Paris tion for a two-price system.Club to reschedule certain existing loans. Loansmade before a certain date are eligible for re- If loans are rescheduled because they arescheduling. According to the Administration, about to default, extending even more credit torescheduled loans are effectively subordinated the countries involved seems questionable.


Capital Projects. The budget requests $500million in budget authority over five years foras-yet-unspecified capital projects using U.S. CBO Reestimates oflabor and businesses to promote overseas de- the Budget for Defensevelopment. Given its worldwide scope, theproposed size of the fund is small. As one and International Affairsbenchmark, planned funding over the nextfive years scarcely exceeds the total the This section describes the differences betweenUnited States has spent and will need to CBO and Office of Management and Budgetspend to complete the new U.S. embassy coin- (OMB) estimates of outlays for defense andplex in Moscow. international affairs programs. For discretion-

ary programs, both sets of estimates assumePublic Law 480. The Food for Peace pro- that budget authority equals the amounts re-gram, popularly known as P.L. 480, is de- quested; the only differences result from cate-signed to provide concessional loan to for- gorizing among functions or between man-eign governments for the primary purposes of datory and discretionary. CBO and OMB canpromoting U.S. commodities, providing food have different estimates of budget authoritygrants in response to emergencies and for and outlays for mandatory programs. Never-other humanitarian relief, and aiding the theless, the objective is to measure the impactpoorest countries needing food. The Admin- of the President's policies on the deficit (out-istration's request for the program is $200 mil- lays).lion lower than the CBO baseline in 1993.The Administration justifies the reduction byciting lower estimated commodity prices for National Defensethe same level of shipments as in 1992. CBO,which has higher price estimates for com- For most accounts in the defense budget,modities shipped through the program, would CBO and OMB have identical estimates ofinterpret the Administration's funding request outlays. Table 4-6 summarizes the few esti-as a reduction in shipments. mating differences that exist, and the following

paragraphs discuss them.Security Assistance Programs. Funding forsecurity assistance--programs providing mili- CBO's estimates of defense outlays are low-tary and economic aid to U.S. allies--accounts er than the Administration's by about $1 bil-for nearly 50 percent of the foreign aid bud- lion in 1992. But CBO's 1993 estimate runsget. The $8 billion requested for 1992 exceeds about $900 million higher. The two biggestthe amount provided in the continuing resolu- differences occur in revolving and manage-tion by $500 million. For 1993, the Adminis- ment funds. First, CBO projects outlays fromtration is requesting $7.4 billion--$350 million the Defense Business Operations Fund to beless than a projection of the continuing re- $800 million lower in 1992 and $700 millionsolution for 1992. Less aid h,, been re- higher in 1993 than does DoD or OMB. Sec-quested in 1993 for both Pakistan and the ond, CBO's estimates of outlays in 1993 fromPhilippines, the latter cut reflecting the clos- the National Defense Stockpile Transactioning of Clark Air Force Base and a lower pay- Fund are 5400 million lower than OMB's.ment for the use of military facilities on theislands. (The navAl facility at Subic Bay is The Administration proposes to sell materi-expected to close in December 1992.) Coin- als from the National Defense Stockpile andpared with the CBO baseline, the increase use the proceeds for environmental restora-requested for 1992 and the reduction for 1993 tion at military facilities. Because asset salestogether have little effect on 1993 outlays. are involved, CBO sets the proceeds from the

CHAPTER FOUR PROPOSALS I-OR DEF-ENSE AND INTL RNATIONAL AFFAIRS 75

proposal apart from the request for appro- of discretionary spending are $200 million topriations; OMB did not do that. The effect is $300 million lower in 1995 through 1997.that CBO has a higher estimate of outlayssubject to the 1993-1995 BEA caps by about Foreign Aid. For fiscal years 1992 and 1993,$600 million per year. the Administration has lowered its outlay esti-

mates for a number of foreign aid accountsfrom a year ago--in particular, the Foreign

International Affairs Military Financing program, the EconomicSupport Fund, the Special Defense Acquisi-

CBO reestimates the Administration's inter- tion Fund, and bilateral assistance programs.national affairs requests in several programs, Through the first quarter of fiscal year 1992,including Food for Peace, other foreign aid, CBO has discerned no trend justifying such athe Eximbank, loan liquidating accounts, and slowdown in outlays, and CBO's 1992-1994 es-the Exchange Stabilization Fund. All reesti- timates therefore are higher than those of themates are technical in nature; that is, they do Administration.not involve different economic or legislativeassumptions (see Table 4-7). Public Law 480. Based partly on the spending

slowdown experienced in fiscal year 1991, theDiscretionary Programs. Compared with the Administration has estimated lower outlaysAdministration's estimates, CBO's estimates from new budget authority. CBO considersfor discretionary outlays are $500 million the 1991 slowdown to be not a new patternhigher in 1993. However, CBO's reestimates but the result of the reorganization required

Table 4-6.CBO Reestimates of Proposed Spending in the President's Budget for Function 050,National Defense (By fiscal year, outlays in billions of dollars)

1992 1993 1994 1995 1996 1997

President's 1993 Budget 307.3 291.4 283.4 283.2 286.3 289.3

CBO ReestimatesDepartment of Defense

Defense BusinessOperations Fund -0.8 0.7 0.1 0 0 0

Stockpile asset sales 0 0 -0.6 -0.6 -0.6 -0.6Other revolving funds outlays 0 -0.4 0.6 0.6 0.6 0.6Procurement -0.2 0.5 -0.1 -0.2 -0.1 0.1Operation and maintenance 0.1 0.1 a b a aOther a a a a a a

Subtotal -1.0 0.9 b -0.2 -0.1 0.1

Other Defense b b a b b b

Total -1.0 0.9 b -0.2 -0.1 0.1



a. Less than $50 million.b. Negative outlay of less than $50 million.


by statutory changes in the Food, Agriculture, cent. With lower budget authority, the bankConservation, and Trade Act of 1990. A slow- would lack the funds for 7.5 percent of its an-down is inconsistent with the Administration's ticipated loan volume.plan, announced last December, to accelerateobligations to stimulate the economy. Lower Mandatory Programs. CBO's estimates ofoutlays in fiscal year 1993 are an estimate of outlays for mandatory programs are $900 mil-recoveries of lapsing funds. lion lower than the Administration's in 1993

and $500 million to $700 million lower inEximbank Negative Subsidy Receipts. The 1994 through 1997.Administration is requesting authority tospend receipts collected in an Eximbank Loan Liquidating Accounts. The Adminis-Negative Subsidy Special Fund--a budget ac- tration has lowered its estimate of receipts andcount that accumulates funds when the pres- collections in the loan liquidating accounts,ent value of cash inflows exceeds that of cash using a method tied to risk factors developedoutflows. The budget's estimate of those re- for estimating the cost of new loans underceipts is inconsistent with OMB's guidelines credit reform. The lower estimates appear for(in Circular A-34) for the treatment of re- the P.L. 480 program, Eximbank, and bilat-ceipts from negative subsidy loans under cred- eral loans made by the Agency for Inter-it reform. The inconsistency occurs because national Development before 1992.the budget estimate assumes more receiptsthan the amount prescribed. CBO estimates In CBO's view, recent history suggests thatthat following the OMB guidelines would the Administration should have raised thelower the amount of budget authority in the estimates instead. The Administration mayprogram account by $76 million, or 10 per- have resisted that course because it wants to

Table 4-7.CBO Reestimates of Proposed Spending in the President's Budget for Function 1505International Affairs (By fiscal year, in billions of dollars)

1992 1993 1994 1995 1996 1997


CBO Reesti matesDiscretionary

Foreign aid 0.4 0.4 0.1 0 0 0Food for Peace (P.L. 480) 0.2 -0.1 0 0 0 0Export-Import Bank 0 -0.1 -0.1 -0.1 0 0Other -0.1 0.2 0 -0.1 -0.3 -0.2

Subtotal 0.5 0.5 0 -0.2 -0.3 -0.3

MandatoryLoan liquidating accounts -0.7 -0.6 -0.4 -0.3 -0.1 0Exchange Stabilization Fund -0.1 -0.3 -0.4 -0.4 -0.4 -0.5

Subtotal -0.8 -0.9 -0.7 -0.7 -0.5 -0.5

Total -0.3 -0.4 -0.7 -0.9 -0.9 -0.8




modify certain loans. Underestimating outlays economic forecast for the various foreign cur-makes the modifications look less costly than rency investments the fund holds. CBO's esti-they really are. mates of these receipts exceed the Administra-

tion's estimates by $100 million in 1992, $300Exchange Stabilization Fund. CBO estimates million in 1993, and about $400 million a yearinterest income for the Exchange Stabilization thereafter.Fund using interest rate assumptions from its

Chapter Five

The Administration'sDomestic Proposals

he President identifies selected savings student loans, farm price supports, family sup-

in the domestic arena that, in isolation, port, and food stamps), and two of the biggestwill help to trim the deficit modestly. entitlement programs (Social Security and

The Budget Enforcement Act of 1990 (BEA) Medicaid) emerge from the President's bud-erected a fence between two broad types of getary review virtually untouched.domestic spending: discretionary spending(which is controlled by annual appropria- As in previous budgets, the President againtions) and mandatory spending (controlled proposes to sell or lease various governmentmore indirectly, generally by changing under- assets: one of the naval petroleum reserves,lying laws governing eligibility and benefits). the Arctic National Wildlife Refuge, and theThe former is controlled by dollar caps. The Alaska Power Marketing Administration.latter is lumped together with federal reve- CBO has argued consistently that the pro-nues in a pay-as-you-go regime, which bars ceeds from these proposals do not belong onactions affecting these categories from adding the act's deficit reduction scorecard, whichto the deficit. specifically bars credit for asset sales.

Mandatory programs make up about two- Domestic discretionary spending makes upthirds of all federal spending and about four- only about one-sixth of the budget. Althoughfifths of domestic spending. The President's the President cites an overriding goal of con-proposals barely nick the growth in that cate- trolling domestic discretionary spending, thegory: mandatory programs other than net in- proposals do not fully comply with the disci-terest and deposit insurance are expected to pline required by 1990's Budget Enforcementgrow an average of about 6.9 percent a year Act. Decisions about funding for discretion-through 1997 under current policies versus ary programs are made one year at a time. Inabout 6.7 percent a year under the Adminis- 1993, caps set in the act will continue totration's proposals. In the near term, roughly govern domestic discretionary spending. CBOhalf of the President's savings in mandatory judges that the President's requested fundingspending come from Medicare and the rest for domestic programs satisfies the budgetfrom a sprinkling of other programs--chiefly authority cap but exceeds the outlay cap byfederal employees' health benefits, veterans' about $1 billion (within the margin of errorprograms, auctioning licenses to use portions permitted by the BEA). The Presidentof the electromagnetic spectrum, and others. accomplishes that by freezing total appropria-Later savings (in 1996 and 1997) come from tions at this year's levels, with just a fewextending some expiring provisions that affect favored areas (notably space, science, and theCivil Service Retirement and Customs Service justice programs) slated for increases and sev-user fees. Modest savings are spelled out for eral others (chiefly postal subsidies, transpor-several other entitlement programs (including tation, community and regional development,

80 ANALYSIS OF THE PRESIDENT'S BUDGET March i192

and fuel and housing assistance) marked for the baseline simply shows CBO's best estimateoutright cuts. of payments that would occur under current

laws. For discretionary programs, the base-In 1994 and 1995, however, the Administra- line for each individual function shows the

tion has yet to come to grips with the act's spending that would result if appropriations intough requirements. After 1993, domestic dis- real terms were kept constant at 1992's levelcretionary spending vies with international (that is, permitted to keep pace with infla-and defense spending under a single overall tion). CBO's baseline projection for total out-cap. Although the President proposes roughly lays assumes that discretionary outlays will beto freeze most domestic appropriations at constrained within the BEA's caps. There are1992's levels through 1997, that is not enough. literally thousands of ways the caps could beTo adhere to the caps in 1994 and 1995, the met, however, and a comparison with today'sAdministration must find more cuts--either in real spending levels is one useful way of high-defense or in domestic programs. lighting the possible trade-offs and the impli-

Chapter I sketched the President's major cations for particular programs. The discus-Chaper 1skechedthePresden's mjor sions also note major estimating differencesproposals using the broad categories- -discre- sions ano timatiniftrences

tionary, pay-as-you-go, and other spending-- between CBO and the Administration--dis-

that are central to the budget enforcement agreements that can stem from contrasting

process. This chapter details the Administra- fcors.

tion's proposals for 18 budget functions cov-

ering the domestic side of the budget. Eachfunction covers spending that addresses a par- Many domestic functions contain someticular national need, such as energy, agri- credit activity--that is, programs in which theculture, or health. (A few functions--such as government lends money directly or guaran-net interest--do not address national needs as tees loans extended by private lenders, oftenconventionally defined but are included for with maturities of a decade or more. Thecompleteness.)' A typical domestic function Budget Enforcement Act changed the bud-contains both discretionary and mandatory getary treatment of credit programs, address-spending. ing long-standing criticism that the focus on

near-term cash flows merely encouraged my-The key comparison made for each func- opic decisions. Now, costs of credit programs

tion is between the Administration's proposal are expressed in terms of subsidies. A subsidyand CBO's baseline, a comparison that high- is the value, in today's dollars, of all the fu-lights how the President wants to change to- ture cash flows that a loan or guarantee is ex-day's allocation of resources. The baseline--as pected to entail--or, in plain English, themore fully explained in Appendix A--depicts amount the government expects to lose on thethe path of spending if current laws and poli- transaction. Throughout this chapter, subsidycies remain unchanged. For mandatory pro- is the yardstick used whenever credit pro-grams (such as Social Security and Medicare), grams are discussed.

CHAPTER FIVE THE ADMINISTRATION'S DOMESTIC PROP'OSALS 81

Function 250: General Science, Space,and Technology

PROPOSED SPENDING CHANGES (By fiscal year, outlays in billions of dollars)

1992 1993 1994 1995 1996 1997

CBO Baseline Without Discretionary Caps 16.4 16.7 17.6 18.4 19.0 20.0

Proposed ChangesPay-As-You-Go

Superconducting SuperCollider Trust Fund 0 0.1 0.3 0.4 0.5 0.4

DiscretionaryDepartment of Energy 0 0.1 0.1 0.1 a -0.1National Science Foundation 0 0.2 0.3 0.3 0.2 0.1National Aeronautics and Space

Administration 0 a -0.2 -0.7 - 1.2 -1.8Department of Defense 0 a -0.1 -0.1 -0.1 -0.1

Subtotal 0 0.3 0.1 -0.5 -1.1 -1.8

Total 0 0.4 0.4 -0.1 -0.6 -1.4



CBO Reestimates a a -0.1 -0.1 -0.1 -0.1


Proposed Changes baseline by $365 million (24 percent) in 1993;the National Science Foundation, by $378

The 1993 budget seeks modest increases for million (14 percent); and the National Aero-

function 250. The proposed budget authority nautics and Space Administration, by $41 mil-

for 1993 would be $0.7 billion (4 percent) lion (0.3 percent).

above the CBO baseline, with a resulting in-crease in outlays of $0.4 billion (2 percent). Pay-As-You-Go Policy ChangesProposed budget authority for 1994 through1997 is frozen at the 1993 level, about $18.4 The Administration proposes to establish a

billion; outlays would increase slowly to about trust fund for the Superconducting Super Col-$18.6 billion by 1997. Both proposed budget lider (SSC) from which donations from non-

authority and outlays would be below the federal sources would be spent. This trustbaseline in 1995 through 1997. fund would provide $233 million in budget

authority and $93 million in outlays in 1993.All of the progiams in the function would In the following years, the trust fund would

receive a spending increase in 1993. Budget provide higher budget authority and outlays,

authority for the Department of Energy's gen- reaching $570 million in budget authority anderal science programs would be above the $500 million in outlays in 1996.

82 ANALYSIS OF I"iE PRESIDENT'S BUDGE F March 1992

Discretionary Policy Changes which the 1993 budget authority would be$278 million above the baseline.

The Department of Energy's SuperconductingSuper Collider would receive the largest in- The National Aeronautics and Space Ad-

crease in appropriations. The $650 million ministration (NASA) would receive a small

requested in 1993 would exceed the baseline increase in budget authority--S41 million--

by about $150 million, and the outlays would relative to the baseline in 1993. Although

be about $60 million above the baseline, some programs within NASA, such as the

Combined with the trust fund spending, total space station Freedom, would receive substan-

outlays for the SSC would be about $600 mil- tial increases, these increases would be offset

lion in 1993. by reductions or cancellations of other pro-grams, such as the Advanced Solid Rocket

Spending for the National Science Founda- Motor program.

tion (NSF) would again be raised. For 1993,the NSF appropriation would exceed thebaseline by $378 million, although $78 million

of this increase results from shifting a portion CBO Restimatesof the Antarctic research program out of theDepartment of Defense. Most of the fundingincrease would go to National Science Foun- CBO's outlay estimates are close to the Ad-dation research and related activities, for ministration's figures for all years.

CHAPTER FIVE THE ADMINISTRATION'S DOMESTIC PROPOSALS 83

Function 270: Energy


1992 1993 1994 1995 1996 1997



Power marketing reforms 0 0 -0.4 -0.4 -0.5 -0.5

DiscretionaryUranium enrichment 0 -0.2 -0.3 -0.3 -0.4 -0.2Strategic Petroleum Reserve 0 -0.1 -0.2 -0.2 -0.4 -0.5Fossil and energy supply R&D 0 a -0.1 -0.2 -0.3 -0.4Naval petroleum reserve 0 a -0.1 -0.2 -0.2 -0.2Nuclear waste disposal 0 0.1 0.1 0.1 0.1 0.1Other 0 a a -0.1 -0.1 -0.2

Subtotal 0 -0.2 -0.5 -0.9 -1.4 -1.4

Other ChangesLoss of naval petroleum

reserve and Alaska PMA receiptsb 0 0 0.5 0.6 0.5 0.5Rural electrification 0 -0.3 a a a a

Subtotal 0 -0.3 0.5 0.6 0.5 0.5

Total 0 -0.5 -0.4 -0.7 -1.3 -1.3



CBO Reestimates -0.2 0.4 -0.1 a a a


b. Receipts from the proposed lease of the naval petroleum reserve at Elk Hills. California, and from the proposed sale of theAlaska Power Marketing Administration (PMA) are shown in function 950. Outlays in function 271) would increase relative tothe baseline because the assets would no longer generate direct receipts to the government. (For Elk Hills. the governmentwould receive royalty payments after 19'93: those receipts are also shown in function 950).) The loss of receipts in function 271) isincluded here under "other changes" because CBO considers these proposals to he asset sales.

Proposed Changes (2) modifications of rural electrification loans,which higher outlays would offset in future

Under the President's budget, net spending on years. Despite these savings, net energy

energy programs would total about $5 billion spending is expected to increase by more thanenery pogras wuld ota abot $ bilion $1 billion from 1992 to 1993. primarily be-

in 1993, which is $0.5 billion below the pro-

jected baseline level. Most of this reduction cause of large planned increases in capital in-

would result from two proposals: (1) a new fee vestment by the Tennessee Valley Authority.

on nuclear utilities to offset some environ- Other energy proposals would have signifi-mental cleanup costs associated with the go%- cant budgetary effects after 1993--most nota-ernment's uranium enrichment program, and bly, power marketing repayment reforms and


no new funding to acquire oil for the Strategic tures for the SPR by 48 percent over the nextPetroleum Reserve (SPR). Outlay savings five years relative to the baseline. Most of therelative to the baseline would total $4.2 bil- reduction would occur because the Presidentlion over the 1993-1997 period, does not request any additional funding to

purchase oil for the reserve. The budget as-The above savings are net of losses in re- sumes purchases at an average rate of 25,000

ceipts that would result from the proposed barrels per day in 1993 and 1994, using ex-sale of the Alaska Power Marketing Admin- isting funds in the SPR oil account. At thisistration (PMA) and the proposed lease of the rate, existing funds would be spent before thenaval petroleum reserve at Elk Hills, Cali- end of 1995, and the SPR would hold aboutfornia (NPR-1). Those savings also include 600 million barrels of oil by 1997. By con-intragovernmental receipts for the proposed trast, the baseline would support purchasesmodification of rural electrification loans. Ex- averaging about 40,000 barrels per daycluding these transactions, outlay savings throughout the 1993-1997 period, whichwould total $6.1 billion from 1993 through would place 650 million barrels of oil in the1997. SPR by the end of 1997.

Fossil Energy and Energy Supply ResearchPay-As-You-Go Policy Changes and Development. The budget requests 1993funding for fossil energy that would be 33

PMA Repayment Reforms. The President is percent, or $157 million, below the baseline.again seeking to establish a fixed schedule for The 1993 request for energy supply researchagai sekingto stalisha fxed cheuleand development (R&D) is 4 percent abovethe interest and principal repayments that addvlpet(&)i ecn bvthe interesto and prinpalureaymntest tates the baseline, an increase of $129 million. Af-PMAs make to the Treasury. Interest rates

would be changed to the Treasury's cost of ter 1993, however, appropriations for R&DhPMA investment for both fossil energy and energy supply re-borrowing at the time each sercAwulibnfoznetshe193eeqes

went into service. These reforms would in- search would be frozen at the 1993 requestcrease the price of federally generated hydro- levels, resulting in estimated outlay savings ofpower and would increase offsetting receipts just under $1 billion, relative to the baseline,by $1.7 billion for fiscal years 1994 through over the 1993-1997 period.1997. CBO expects that the policy cannot be Nuclear Waste Disposal. The President's 1993fully carried out until 1994. request for this program is 38 percent, or $108

million, above the baseline level. This andsubsequent-year increases would result in

Discretionary Policy Changes program outlays that are 26 percent above thebaseline over the 1993-1997 period. Most of

Uranium Enrichment. The President pro- the increases are for expanded surface-basedposes to levy a new fee on operators of com- testing at Yucca Mountain. the candidate sitemercial nuclear reactors and to use the pro- for a waste repository. The budget assumes aceeds to offset appropriations for environ- volunteer site will be found for the monitoredmental cleanup activities in the uranium en- retrievable storage facility that the govern-richment program. The proposed fee of 0.33 ment plans to complete before it takes title tomill per kilowatt-hour of gross electricity gen- commercial nuclear waste in 1998.erated by each reactor would raise approxi-mately $0.2 billion per year. In addition, Other. The President proposes to reducespending would be held below baseline levels lending by the Rural Electrification Admin-in all years. istration (REA) to electric and telephone co-

)peratives. The proposal would eliminate theStrategic Petroleum Reserve. The President's 5 percent loans for telephone borrowers: itproposal for the SPR would reduce expendi- also would cut the 5 percent loans to electric

CHAPTER FIVE THE ADMINISTRAIrION'S DOMESTIC PROPOSALS 85

borrowers, reducing the loan level to 20 per- Elk Hills. In 1994, the proposed asset salecent below the baseline. Outlay savings in would result in a loss of receipts of SO.5 bil-1993 would amount to less than $10 million in lion, with similar losses in subsequent years.reduced subsidy costs, but would total about$230 million over the 1993-1997 period. After leasing Elk Hills, appropriations for

operating the reserve would no longer beThe President also requests $48 million of necessary, but the President proposes to use

subsidy authority in 1993 for modifications of some of these savings to establish a defenseREA loans. This authority would be used to petroleum inventory of 10 million barrels.ease repayment terms on existing loans, re- Savings from discontinued federal operationssuiting in an intragovernmental payment of of NPR-I, less amounts proposed for the in-S266 million from the nonbudgetary financing ventory, are shown in the discretionary cate-account to the REA liquidating account in gory and would total $0.7 billion over the1993. This receipt, however, would be offset 1993-1997 period.by forgone receipts in future years. Thechanges in the liquidating account would notbe scored in either the pay-as-you-go or thediscretionary category. CBO Reestimates

Other Changes CBO's estimates of net outlays for function

270 under the President's budget proposalsNaval Petroleum Reserve. The President pro- are above the Administration's estimates byposes to lease NPR-1 at the end of fiscal year $0.4 billion in 1993. Net reestimates in other1993. CBO considers this an asset sale and years are relatively small.thus does not include changes in NPR re-ceipts in pay-as-you-go scoring. Receipts The largest estimating difference involvesfrom the asset sale, including both bonus bid the pay-as-you-go proposal for PMA repay-receipts and federal royalties, appear in bud- ment reform. The budget assumes that PMAget function 950 and total an estimated $1.9 rates could be increased in time to collect anbillion over the 1993-1997 period. These say- additional $0.4 billion in power receipts forings would be partially offset, however, by an 1993. CBO estimates that such a large electricincrease in outlays in function 270 because the rate increase would require more time to im-government would no longer be collecting re- plement and that additional receipts could notceipts from selling oil and gas produced at be collected until 1994.


Function 300: Natural Resources and Environment


1992 1993 1994 1995 1996 1997



Corps of Engineers recreation fees a a a a a a

DiscretionaryWater resources 0 -0.3 -0.5 -0.7 -0.9 -1.1Conservation and land management 0 -0.2 -0.4 -0.6 -0.8 -1.0Recreational resources 0 a -0.1 -0.3 -0.4 -0.5Pollution control and abatement 0 0.1 a -0.3 -0.9 -1.6Other natural resources 0 -0.1 -0.2 -0.3 -0.4 -0.6

Subtotal 0 -0.5 -1.2 -2.2 -3.4 -4.9

Other ChangesLeasing the Arctic National Wildlife

Refuge (Alaska's share of proceeds)b 0 0 0 -0.8 -0.5 a

Total a -0.5 -1.2 -3.0 -3.9 -4.9



CBO Reestimates 0.3 0.4 1.4 -0.7 0.3 -0.2

a. Less than -50 million.

h. Projected receipts from leasing the Arctic National Wildlife Refuge would be split between the federal government and the stateof Alaska. The federal share of leasing receipts appears in function Q50. Alaska's share appears in function 3M0. and the proposedpayout to Alaska of its share of receipts is shown in function 800.

Proposed Changes Pay-As-You-Go Policy Changes

The President's proposals for natural resource The President's budget includes proposed new

and environmental programs would reduce recreation fees to be collected from people us-

outlays below the CBO baseline by $0.5 bil- ing facilities of the U.S. Army Corps of Engi-

lion in 1993 and by $13.6 billion over the neers. CBO estimates that this proposal would

1993-1997 period. Most of the savings would yield additional offsetting receipts of about $5million in 1992 and $20 million a year there-be obtained by holding discretionary appro- atr

priations at or below the 1992 level through- after.out the five-year period.

CHAPTER FIVE flt A[)MINIS IRAI-IONS D)OM-S [IC PROPOSALS S7

Discretionary Policy Changes lion less than the 1992 funding level and $194million, or 8 percent, below the CBO base-

The President is requesting 1993 appropria- line. Outlay savings would total about $10tions of $21.2 billion for discretionary natural million for the budget year. Most of the de-resource and environmental programs, $0.9 crease proposed for these programs would bebillion (4 percent) below the CBO baseline borne by multivear construction projects oflevel of $22.1 billion. Outlays in 1993 would the National Park Service and the Fish andbe about $0.5 billion (2 percent) below the Wildlife Service, which would be cut by $212baseline. million in the budget year. Additional outlay

savings would be achieved bs instituting newWater Resources. The President's 1993 ap- recreational user fees under the President'spropriation request for water resource pro- America the Beautiful initiative. CBO esti-grams totals $4.5 billion. This funding level is mates that the proposed fees would increase8 percent ($408 million) below the CBO base- federal receipts by about $34 million in 1993line in 1993 and would result in outlay savings and by $261 million over the 1993-1997 peri-of $276 million. These savings reflect de- od. In 1993, outlay savings from proposedcreases from baseline budget authority of 6 recreation fees and construction cuts would bepercent for the Army Corps of Engineers, 13 offset partially by increases in spending forpercent for the Bureau of Reclamation, and resource management and protection and for29 percent for the Soil Conservation Service. other recreational programs.Over the 1993-1997 period, budget authoritywould be $4 billion, or 15 percent, below Pollution Control and Abatement. The Pres-baseline levels; outlay savings would total $3.6 ident's 1993 budget for environmental pro-billion, grams results in outlays that are $53 million,

or about I percent, above the baseline. TheConservation and Land Management. The budget includes 1993 funding increases abovePresident is requesting 1993 appropriations baseline levels for a number of activities offor conservation and land management activi- the Environmental Protection Agency--includ-ties totaling $4.8 billion, which is $275 million ing cleanup of hazardous wastes (Superfund),(5 percent) below the baseline. Resulting out- research and development, and salaries andlays would be about $200 million below base- expenses. Over the 1993-1997 period, how-line levels. Funding for all major land man- ever, outlays would fall about $2.8 billion, oragement agencies would be below baseline 8 percent, below the baseline. The proposedlevels, including reductions of 13 percent for phaseout of the grant program for construc-land conservation activities carried out by the tion of wastewater treatment facilities wouldDepartment of Agriculture, 1 percent for the produce most of these savings--$l.9 billionForest Service, and 1 percent for the Bureau over five years. Appropriations for theseof Land Management. Over the 1993-1997 grants would increase from $2.4 billion inperiod, budget authority for all land manage- 1992 to $2.5 billion in 1993 and then fall toment agencies would be $3.4 billion, or 12 zero in 1997. Authorizations for this programpercent, below the baseline, and outlay sav- in the Clean Water Act currently end in 1994.ings would total $3.1 billion. The Adminis- The remaining savings after 1993 reflect antration is also proposing to collect holding assumed freeze on appropriations at 1993fees for hard-rock mining claims, which CBO levels.estimates would increase receipts by $41 mil-lion in 1993 and by about $36 million annu- Other Natural Resources. The Presidentally thereafter. proposes 1993 funding above the baseline for

the National Oceanic and Atmospheric Ad-Recreational Resources. The President's 1993 ministration's (NOAA's) construction andrequest for discretionary funding of recrea- operations, research, and facilities activities,tional programs is $2.2 billion, about $64 mil- financed partly with funds transferred from

88 ANALYSIS OF 17HE PRESIDENT'S BUDGEr March 1992

the Marine Navigation Trust Fund. Also, share of such receipts is shown in functionproposed reductions in spending for the De- 950. The overall effect of these transactionspartment of the Interior's Geological Service on the federal budget, net of payments toand Bureau of Mines would result in savings Alaska, would be receipts totaling $1.3 billionof $95 million in 1993 and $0.9 billion over in 1995 and 1996.the 1993-1997 period. In total, spending au-thority for other natural resource programswould be 5 percent below the baseline in1993, and outlay savings would be about $60million. CBO Reestimates

Other Changes CBO's estimates of outlays are above theAdministration's estimates by $0.4 billion in

The President proposes to share half the pro- 1993 and by $1.3 billion over the 1993-1997ceeds from selling oil and gas exploration and period, primarily reflecting different spendingdevelopment rights for the Arctic National rates for many accounts in the conservationWildlife Refuge (ANWR) with the state of and land management and pollution controlAlaska. CBO considers these transactions to programs. CBO also assumes that any actionbe asset sales because the sale of such rights by the Congress to open the ANWR to oil andwould result in the depletion of mineral re- gas exploration and development is likely tosources currently owned by the federal gov- occur later than the Administration assumes.ernment. Alaska's share of ANWR leasing Consequently, CBO assumes that the firstreceipts--which CBO estimates would total lease sale would occur in 1995 rather thanabout $800 million in 1995 and about $450 1994. CBO also projects that Alaska's sharemillion in 1996--is shown in function 300, and of bonus bids from competitive bidding wouldthe proposed payout of those receipts to the be about $0.8 billion lower than estimated bystate is shown in function 800. The federal the Administration over the 1993-1997 period.

CHAPTER FIVE 1111-. ADMINISTRAIION'S DOMI SlIC PROPOSALS a

Function 350: AgriculturePROPOSED SPENDING CHANGES (By fiscal year. outlays in billions of dollars)

1902 1993 1994 1995 1996 1997


Proposed ChangesPay-As-You-Go 0 -0.2 -0.1 a -0.1 a

DiscretionaryAgricultural Credit Insurance Fund 0 -0.1 -0.1 -0.1 -0.2 -0.2Other 0 -0.1 -0.3 -0 < -0.7 -0.9

Subtotal 0 -0.2 -0.4 -0. -0.8 -1.1

Other Changes 0 a a a a a

Total 0 -0.5 -0.5 -0.7 -0.9 -1 1



CBO Reestimates -1.8 -0.3 -0.4 -0.2 a 0.4

a. Less than S51) million.

Proposed Changes change in these programs--eliminating pay-ments for any producers who earn more than$100,000 per year in income from off-farmsources. Although the budget shows savings

CBO estimates that changes proposed by the in 19,Coume that show c ang nol

Administration would save $0.5 billion in ein 1992, CBO assumes that thcs change would

1993 and $3.6 billion over the 1993-1997 peri- ings would begin in 1993. This proposal

od relative to the CBO baseline. Agriculture would affect a relatively small number of

spending is projected to decline over this producers, and the amount of savings is un-

period, even under current law, because crop certain because farmers may restructure their

prices are expected to improve, resulting in f inan c t s e lowrte incores t hresholdsmaler irec pament tofarmrs-finances to stay below the incon-e threshold.

CBO estimates that this proposal would re-

duce deficiency payments by about S45 mil-lion per year once the program is fully in ef-

Pay-As-You-Go Policy Changes fect and would save about S200 million over

the 1993- 1997 period.Commodity Credit Corporation (CCC).About 60 percent of the spending in this Farm Credit System. The President proposesfunction is for price support activities of the to require the Farm Credit System to makeCCC, which are estimated to cost $8 billion to annual payments to the Financial Assistance$10 billion a year between 1993 and 1997. Corporation (FAC) to cover r- '.C's debt ser-The Administration is proposing only one vice obligations. Such debt wais issued to as-


sist system institutions experiencing financial Other Changesdifficulties. Under current law, FAC wouldpay off its debt and repay Treasury interest The Enterprise for the Americas Initiative.costs after 2006. The President's proposal As part of an initiative to reduce the debt ofwould result in savings of about $0.2 billion Latin American countries, the Administrationon a present-value basis. The budget would proposes to sell some of the debt that theserecord these estimated savings in 1993. countries owe to the Commodity Credit Cor-

poration. The sale would require additionalOther. The budget also includes a proposal to subsidy appropriations and outlays in functioneliminate the mandatory payments of $3 mil- 150, and would result in net receipts to thelion per year that the Cooperative State Re- CCC liquidating account in function 350,search Service makes to states. which makes and receives payments related to

previously guaranteed export loans. The salereceipts would be offset by smaller repay-

Discretionary Policy Changes ments in 1993 and subsequent years andwould not be counted for deficit reduction

Agricultural Credit Insurance Fund. The purposes. CBO estimates that this proposalFarmers Home Administration makes direct would produce net receipts in function 350 ofloans and loan guarantees to farmers to pur- $28 million in 1993 and $1 million in 1994,chase and operate farms. The President's followed by outlays of $32 million over thebudget would reduce the subsidy appropria- 1995-1997 period.tions necessary to make these loans by $0.1billion in 1993 relative to the baseline. About90 percent of this cut would result from a pro-posed 64 percent reduction in subsidies for di-rect operating loans. Reductions in other di- CBO Reestimatesrect loan programs would be partly offset byincreases in funding for loan guarantees. CBO's outlay estimates for agriculture pro-

grams are significantly lower than the Ad-Other Agriculture Programs. The President ministration's in 1992 and somewhat lower inis proposing to reduce funding for many ac- other years. The bulk of the difference is intivities of the Department of Agriculture be- CCC outlays.low 1992 levels and to freeze appropriations atthe 1993 levels in subsequent years. The CBO estimates CCC outlays to be lowerPresident's proposals would result in net than those forecast by the Administration byoutlay savings of about $0.1 billion in 1993 about $1.9 billion in 1992, $1.6 billion in 1993,and $2.5 billion over the 1993-1997 period and $2.1 billion over the 1994-1997 period.compared with the CBO baseline. Decreases These differences result in part from CBO'srelative to the baseline are slated for the Agri- projections of higher prices for wheat andcultural Stabilization and Conservation Ser- feed grains. Recent data on current com-vice, the Animal and Plant Health Inspection modity demand and on 1992 crop plantingsService, the Cooperative State Research Ser- for the major grains imply lower stocks andvice, the Agricultural Research Service, the higher prices than those estimated by the Ad-Extension Service, and the Foreign Agricul- ministration. Therefore, deficiency paymentstural Service. In contrast, increased funding is made in 1992 are likely to be lower and cropprovided for research on new uses of agri- loan repayments higher than the Adminis-cultural commodities and the development of tration projects. In addition, unlike CBO, thebiofuels. The President has also asked for au- Administration projects that unexpected ex-thority to levy user fees for grain inspection penses for working capital will total $1 bil-and agricultural marketing services, lion a year.


CBO estimates higher outlays both for Finally, CBO expects lower savings thanexisting export credit guarantees and for new does the Administration from the proposal tocredits. This difference amounts to $2 billion eliminate program payments for producersover the 1993-1997 period and occurs because whose off-farm income exceeds $100,000.CBO projects a higher subsidy cost for loan CBO assumes a greater degree of farm reor-guarantees extended to the republics of the ganization to avoid the payment threshold, re-former Soviet Union. sulting in estimated savings that are about $0.1

billion a year lower between 1994 and 1997.


Function 370: Commerce and Housing Credit

PROPOSED SPENDING CHANGES (By fiscal year, oudays in billions of dollars)

1992 1993 1994 1995 1996 1997

CBO Baseline Without Discretionary Caps 72.6 75.6 36.5 -13.8 -41.7 -25.1

Proposed ChangesPay-As-You-Go 0 0 0 0 0 0

DiscretionaryRural Housing Insurance Fund 0 -0.1 -0.2 -0.2 -0.3 -0.3Postal Service 0 -0.4 -0.4 -0.4 -0.4 -0.4Small Business Administration a -0.2 -0.3 -0.3 -0.3 -0.4Other a 0.1 0.1 a -0.2 -0.3

Subtotal 0.1 -0.5 -0.7 -0.9 -1.2 -1.4

Other ChangesPostal Service 0 0.3 0.1 0 -0.3 -0.1Banking reform 0 0 0 0 0 0

Total 0.1 -0.2 -0.6 -0.9 -1.5 -1.5

President's 1993 Budgetas Estimated by CBO 72.7 75.4 36.0 -14.7 -43.2 -26.6

a. Less than S50 million.

Proposed Changes receipts from selling the assets of the failedthrifts. CBO also estimates that net outlays ofthe Bank Insurance Fund (BIF) will declineUnder the Administration's budget, spending substantially from 1993's level of $17 billion.

for commerce and housing credit programs

would be below the baseline in each yearduring the 1993-1997 period, largely because Discretionary Policy Changesof proposed cuts in discretionary spendingprograms totaling $0.5 billion in 1993 and $4.7 Rural Housing Insurance Fund (RHIF). Thebillion over the five-year period, program change- proposed in the President's

budget are similar to those included in lastUnder baseline assumptions, total spending year's budget. Currently, the bulk of rural

in this function is projected to plummet from housing assistance is in the form of deeply$76 billion in 1993 to $37 billion in 1994. By subsidized direct loans to low-income house-1997, the function would show negative holds and developers of low-income rentaloutlays, or net receipts, of $25 billion. Spend- housing. The President would replace someing under the Administration's policy would of these direct loans with guarantees of privatefollow the same pattern. This dramatic de- loans. Low-income borrowers with guaran-cline in outlays will occur primarily because teed loans would receive federal subsidies thatspending for resolving failed savings and loan could reduce the effective interest rate an esti-institutions is expected to peak in 1993 at mated average of 3 percentage points. Otherabout $53 billion, and the government will borrowers would receive no assistance beyondthen begin to collect increasing amounts of the guarantee.


The budget includes a 1993 appropriation guaranteed would decline from $4.9 billion inrequest of $0.5 billion for rural housing sub- 1992 to $4.8 billion in 1993.sidies, which is estimated to support about$1.7 billion in single-family and multifamily Other. The Administration would achievelending, down from $2.2 billion in 1992. The savings of $55 million in 1993 and $318 mil-direct loan activity proposed by the President lion over five years by establishing a newfor 1993 is estimated to provide single-family transaction fee to be collected by the Com-assistance to about 7,400 households and to modity Futures Trading Commission. Re-fund 8,200 rental units. The Administration's quested 1993 appropriations of $371 millionloan guarantee program would assist an ad- for the Federal Housing Administration'sditional 13,100 borrowers. The budget pro- General and Special Risk Insurance Fundposals would reduce outlays for subsidies and programs--$115 million above the baseline--administrative costs by less than $0.1 billion in would raise outlays for these programs by $731993 and by about $1.0 billion over the 1993- million in that year. The significant increase1997 period relative to the baseline, in funding would be required because, based

on new data, the Administration has sub-These savings would be offset partially by stantially raised its estimate of the subsidy cost

additional spending for a proposed rental for these guarantees.voucher program for rural areas. This pro-gram would be similar to that operated by theDepartment of Housing and Urban Develop- Other Changesment. The budget includes (in function 600)annual funding of $140 million for vouchers, Postal Service (Off-Budget). The President iswhich could support an additional 5,000 to proposing to increase Postal Service payments6,000 units each year. to the Civil Service Retirement Fund (see

function 950) and to the Federal EmployeesPayment to the Postal Service. The President Health Benefits Fund (see function 550) dur-is proposing to terminate or restrict certain ing fiscal years 1993 through 1995. Thesepreferred postage rates, to increase the rates increases, totaling $0.3 billion annually andfor most preferred mailers, and to eliminate $0.9 billion over the next three years, are in-the portion of the appropriated subsidy that tragovernmental transactions and would be re-covers these preferred postage rates. Relative flected as receipts on the discretionary score-to the CBO baseline, these changes would card in functions 950 and 550, respectively.save $0.4 billion annually over the 1993-1997 The net effect in function 550 would be to re-period. duce the required general fund appropriation

to the Federal Employees Health BenefitsSmall Business Administration (SBA). About Fund. Including the cuts in postal subsidies$0.2 billion of the 1993 savings relative to the discussed above, the proposals in the budgetCBO baseline would be achieved through re- affecting the Postal Service would result induced appropriations for SBA loan subsidies reduced appropriations of $2.3 billion (inand administrative costs. The Administration functions 370 and 550) and increased receiptsproposes to convert all SBA direct lending to of $0.6 billion (in function 950), or a netguaranteed lending, except for certain direct spending reduction of about S2.9 billion (on-loans to minority-owned firms, and to in- budget) relative to the baseline over the five-crease the fees that are charged for several year period.types of loan guarantees. This proposal issimilar to those included in previous budgets. To recover these costs, the Postal Service isTotal 1993 subsidy appropriations would be likely to increase postal rates, resulting in net$88 million, well below the CBO baseline savings to the federal government. Rates forlevel of $279 million. Total loans made or preferred mailers affected by the proposal


would probably be raised in 1993. A rate in- are attributable to differing estimates forcrease to cover the additional costs for pay- spending on deposit insurance activities by thements to the Civil Service Retirement and Bank Insurance Fund and the ResolutionFederal Employees Health Benefits funds Trust Corporation (RTC).would be in addition to the 13 percent generalrate hike that CBO assumes would occur inFebruary 1994. Before that increase, net out- Pay-As-You-Go Reestimateslays of the Postal Service would rise by $0.4billion over the 1993-1994 period as a result Bank Insurance Fund. The Administrationof this proposal. Although the Administra- has estimated that its banking reform pro-tion is proposing to enact these changes in ap- posals would reduce BIF's cash outlays bypropriation bills, this amount would not be $7.8 billion in 1994, $11.7 billion in 1995, andscored as discretionary spending because the $6.6 billion in 1996, and would increase out-Postal Service is off-budget. The Postal Ser- lays by $7.8 billion in 1997. The Adminis-vice surplus or deficit would be unaffected tration believes that the proposals would re-once these additional costs are covered by duce the number and cost of bank failures byhigher rates. raising the earnings of banks, increasing their

Banking Reform Proposals. The President cost efficiency, diversifying their risk, and im-

again proposes to allow interstate banking and proving their ability to raise capital.

branching, to permit commercial ownership of CBO estimates that these proposals wouldbanks, and to authorize banks to affiliate with not have a significant impact on BIF spendinga broad range of financial firms through the over the next five years. Over the long term,formation of financial-services holding com- they should lead to a more diversified, morepanies. These proposals were originally made efficient, and more competiti%,e banking in-last year as part of a comprehensive banking dustry. But improved efficiencies are moreand deposit insurance reform package, but likely to result in lower costs to consumers ofwere not included in the Federal Deposit In- banking services than in higher profits tosurance Corporation Improvement Act of banks. Furthermore, the bank losses that BIF1991, which was enacted last fall. Although will have to cover during the next few yearsthe Administration has included estimated have already been incurred or would not besavings from these proposals in its pay-as-you- avoided by enacting the Administration's pro-go tabulations, CBO believes that the Budget posals. In fact, there could be additionalEnforcement Act of 1990 effectively removed losses in the short term because most geo-the effects of such proposals from the pay-as- graphic expansion is expensive and increasedyou-go calculations. Furthermore, as dis- competition may threaten the viability ofcussed below, CBO estimates that the Admin- some local banks. Consequently, CBO seesistration's proposals would have no significant no significant benefit to the Bank Insuranceeffect on the government's cash flows over the Fund over the 1992-1997 period.next five years.

Other Reestimates

CBO Reestimates Bank Insurance Fund. CBO differs signifi-cantly from the Administration not only in its

CBO estimates that outlays for this function assessment of the legislative proposals but alsowill be lower than the Administration projects in its projections of BIF spending under cur-by $14.8 billion in 1992 and $8.7 billion in rent law. The budget projects unprecedented1993, but higher by $47 billion over the fol- costs for case resolution over the next severallowing four years. Most of these variations years, particularly between 1992 and 1995.


The Administration estimates that bank losses tion. The fund makes payments to acquirerscovered by BIF during that period would total of failed thrifts, mostly to cover interest andabout $72 billion on failed assets of about principal payments on notes and to maintain$360 billion. CBO believes that the prospects yields or cover capital losses on assets pur-for the banking industry are less severe and chased from failed thrifts. The Congress ap-projects bank losses of $43 billion on failed propriated $15.9 billion in 1992 for the fundassets of $250 billion over the same period, to renegotiate the assistance agreements thatLargely as a result of these differences, CBO's were made final before 1989 in an effort to re-estimate of the fund's outlays is lower than duce the government's long-term costs. Thethe Administration's by $18.5 billion in 1992, President's budget assumes that $5.6 billion ofby $20.7 billion in 1993, and by another $3.5 this authority will not be used in 1992 andbillion over the following four years. that appropriations in 1993 will be needed to

replenish this lapsed authority. Because CBOResolution Trust Corporation. CBO expects expects that the agency will spend most of its

that about 500 more savings and loan institu- 1992 funding this year, its estimate of outlaystions will become insolvent through 1995 than is higher by $4.0 billion for 1992, but lower bydoes the Administration. Under CBO's base- $3.4 billion for 1993. Over the 1994-1997line projections, the RTC's cumulative losses period, CBO's estimate of outlays is $0.8 bil-will be about $150 billion, compared with the lion less than the Administration's, largely be-Administration's estimate of about $130 bil- cause of higher projected collections from as-lion. Both the Administration and CBO treat set sales.the funds necessary to meet the government'scommitment to insure deposits as mandatory, GNMA Mortgage-Backed Securities. At theand both assume that sufficient funds will be beginning of 1993, the Administration wouldprovided to allow the RTC to resolve the in- transfer the Government National Mortgageventory of failed thrifts. CBO expects that the Association's guarantee portfolios in goodRTC will need to continue closing or merging standing from the on-budget liquidating ac-sick thrifts through 1995, whereas the Admin- count to the nonbudgetary financing account,istration expects it to complete its caseload by regardless of when the guarantees were ori-1993. As a result, the most significant differ- ginated. The liquidating account would in-ence in outlays over the 1993-1997 period oc- clude only those portfolios that defaulted be-curs in 1994, when CBO expects that net out- fore October 1, 1992. This change would in-lays will exceed the Administration's estimate crease on-budget outlays by $2.2 billion inby $55 billion. 1993 and by small amounts in future years, re-

flecting the shift to the financing account ofCBO's estimates for net outlays in 1993 and Treasury securities that support the guarantee

1995 are higher than those estimated in the liabilities that would be transferred. CreditPresident's budget by $17 billion and $8 bil- reform procedures adopted in 1990, however,lion, respectively, largely because CBO pro- specify that the consequences of guarantees injects the closing of more insolvent thrifts and effect before October 1, 1991, should appearthe acquisition of more assets in the resolu- in the liquidatiag account. Therefore, CBOtion process. The additional spending for believes that this transaction does not prop-working capital is expected to generate future erly reflect credit reform procedures and hasoffsetting collections for the agency when the excluded it from its budget estimates.assets are sold. Thus, CBO's estimate of netoutlays in 1996 is lower than the Adminis- Postal Service. CBO's estimates of Postal Ser-tration's by $26 billion, vice outlays are different from the Adminis-

tration's primarily because the budget does

FSLIC Resolution Fund. This fund is charged not reflect the large year-to-year swings in netwith paying off the obligations incurred by the operating income that result from periodicFederal Savings and Loan Insurance Corpora- rate increases. CBO's estimate of Postal Ser-


vice outlays is $1.8 billion lower than the Ad- Insurance Fund will be greater than theministration's over the 1993-1997 period and Administration estimates in 1992 and each ofreflects a projected rate increase in fiscal year the next four years. These differences result1994. primarily from varying estimates of claims

from insurance commitments issued beforeOther. CBO estimates that outlays in the 1992. Over the 1992-1997 period, CBO's esti-credit liquidating account of the Federal mate of outlays in this account is $1.5 billionHousing Administration's Mutual Mortgage higher than the Administration's.

CBO REESTIMATES OF PROPOSED SPENDING IN FUNCTION 370 OFTHE PRESIDENT'S BUDGET (By fiscal year, outlays in billions of dollars)

1992 1993 1994 1995 1996 1997

President's 1993 Budget 87.5 84.1 -20.1 -23.2 -20.3 -31.8

CBO ReestimatesPay-As-You-Go Proposals

Bank Insurance Fund 0 0 7.8 11.7 6.6 -7.8

OtherBank Insurance Fund -18.5 -20.7 -4.8 -5.8 -2.5 9.6Resolution Trust Corporation -0.4 17.5 55.1 8.0 -26.4 aFSLIC Resolution Fund 4.0 -3.3 a a -0.4 -0.3GNMA -0.3 -2.5 -0.5 -0.5 -0.5 -0.5Postal Service 3 a -1.7 -2.0 a 1.9Other 0.3 0.4 0.2 -2.8 0.2 2.3

Subtotal -14.8 -8.7 48.3 -3.2 -29.5 12.9

Tow-l -14.8 -8.7 56.1 8.6 -22.9 5.2

President's 1993 Budgetas Estimated by CBO 72.7 75.4 36.0 -14.7 -43.2 -26.6



Function 400: Transportation


1992 1993 1994 1995 1996 1997



DiscretionaryMass transit 0 -0.4 -0.6 -0.8 -0.9 -1.1Federal-aid highways 0 -0.1 -0.7 -1.2 -1.7 -2.3Miscellaneous highway construction projects 0 -0.1 -0.3 -0.5 -0.6 -0.6Grants to Amtrak 0 -0.3 -0.3 -0.4 -0.4 -0.4Northeast Corridor Improvement Program 0 a -0.1 -0.2 -0.2 -0.2Federal Aviation Administration 0 a -0.1 -0.4 -0.7 -1.1Other a 0.1 -0.1 -0.3 -0.5 -0.7

Total a -0.8 -2.2 -3.7 -5.0 -6.4



CBO Reestimates -0.4 0.1 a 0.1 0.1 0.1


Proposed Changes annual obligation ceilings. Given the re-quested appropriations and obligation ceilings,

Outlays for transportation programs under the CBO estimates that total obligations for transitOutlys or ranporatio prgras uderthe programs in 1993 would be $3.0 billion, corn-

Administration's policies would be $0.8 bil- pared with $3.9 billion under the baseline.

lion lower than the CBO baseline in 1993. pae wih$.blio unrtebsln.lionelower avings resulth CBom b pseln i t 1Programs targeted for cuts include operatingThese savings result from proposals that subsidies for larger urban areas and capital

would limit 1993 discretionary budget au- subsidies prger threas dicrtal

thority to a level $1.9 billion (12 percent) be- subsidies provided through discretionary

low the baseline and that would hold down grants.

obligations for highway and transit programs Highway programs are also targeted forcontrolled by obligation ceilings. There are cuts. The Administration's proposal wouldno pay-as-you-go proposals in this function. limit total obligations for federal-aid highways

in 1993 to $19.2 billion--$2.2 billion above theGround Transportation. Reductions in estimated 1992 level, but $0.8 billion belowspending for ground transportation would the CBO baseline--resulting in outlay savingsaccount for almost all of the savings in this of $0.1 billion in 1993. The requested 1993function. The budget request for mass transit obligation ceiling would be higher than theprograms would result in outlays of $3.4 bil- baseline level, but the budget also incor-lion--$0.4 billion below the CBO baseline. porates a proposal to include under the ceil-

Annual obligations for these programs are ing several programs that are now exempt. In-

controlled by both annual appropriations and cluding previously exempt programs and


freezing the obligation ceiling at the 1993 level (2 percent) above the CBO baseline. Most offor subsequent years would save $6 billion this increase would be used to continue mod-over the five-year period. (Despite these cuts ernizing and improving the air traffic controlin obligations, CBO estimates that spending system. Spending authority for FAA facilitiesfor federal-aid highways under the Adminis- and equipment would be increased from $2.4tration's proposals would increase by 17 per- billion in 1992 to $2.7 billion in 1993, an in-cent over the 1992-1995 period, reflecting the crease of almost 13 percent and more thandelayed impact of increases in obligations be- $0.2 billion above the CBO baseline. The Ad-tween 1990 and 1992.) The proposal to eli- ministration proposes to derive 85 percent ofminate new fundii.g for miscellaneous ap- the funds for the FAA from the Airport andpropriated highway demonstration projects Airway Trust Fund over the 1993-1997 period,would reduce 1993 budget authority by $0.6 up from 75 percent in 1992.billion, saving $0.1 billion in outlays in thatyear. The savings on such projects over the Water Transportation. The President pro-five-year period would total $3.3 billion, poses 1993 appropriations for discretionary

water transportation programs of $3.0 billion,Additional savings would be achieved by 6 percent above the 1992 level. The proposed

reductions in funding for Amtrak subsidies, funding level is $38 million (about 1 percent)including subsidies for improvements to the above the CBO baseline for such programsNortheast Corridor, and by a proposal to de- and would result in additional outlays of $37lay the availability of 1993 capital assistance million. The increase is largely for operatingfor Amtrak until July of that year. The pro- expenses of the U.S. Coast Guard, offset byposals would reduce appropriations for Am- small cuts in other discretionary accounts.trak subsidies by $0.3 billion below the base-line and would eliminate all appropriationsfor the Northeast Corridor ($0.2 billion in1992). As a result, 1993 outlays would be re-duced by $0.4 billion compared with the CBO CBO Reestimatesbaseline.

CBO's estimates of spending under the Presi-Air Transpo-tation. Funding for aviation dent's policies are $0.4 billion lower than theprograms would be increased in 1993 and Administration's estimate in 1992 and $0.1would then be held constant over the 1994- billion higher in 1993. Most of the difference1997 period. The President's proposed spend- in 1992 is attributable to differing assumptionsing authority for the Federal Aviation Admin- about spending from budget authority fromistration (FAA) in 1993 is $0.6 billion, or 6 previous years for Coast Guard operating ex-percent, above the 1992 level and $0.2 billion penses. Other reestimates are relatively small.

CHAPTER FIVE TtlE AL)MINISTRAIION'S DOMESIIC PROPOSALS IN

Function 450: Community and Regional Development


1992 1993 1994 1995 1996 1997

CBO Baseline Without Discretionary Capsa 7.0 7.3 7.2 7.2 7.2 7T5


DiscretionaryCommunity development b b -0.3 -0.6 -0.8 -1.0Area and regional development b -0.2 -0.4 -0.6 -0.8 -0.9Disaster relief and insurance 0 -0.1 -0.1 -0.1 -0.1 -0.1

Total b -0.3 -0.8 -1.3 -1.7 -2.0



CBO Reestimates b b -0.1 0.1 0.1 0.3

a. Excludes projection of 1992 emergency appropriation of $800 million for disaster relief.


Proposed Changes spends at a relatively slow rate, the reductionwould not have a significant effect on outlaysin 1993, but would reduce outlays by $2.5 bil-

Under the President's proposals for corn- lion over the next five years. The President'smunity and regional development programs, budget also proposes eliminating the corn-both budget authority and outlays would fall

munity development loan guarantee programbelow the baseline. Budget authority would afe 9.

be about $6.2 billion for 1993, $1.4 billion be-low the CBO baseline. Outlays would fall be- Additional savings in community develop-low the baseline by about $0.3 billion in 1993 ment would result from eliminating supple-and would be about 17 percent below baseline mental assistance to the homeless and emer-levels over the 1993-1997 period. There are gency grants for community water assistance.no pay-as-you-go proposals in this function. The savings are offset somewhat by slight in-

creases in salaries and expenses and researchCommunity Development. The community and development activities of the Departmentdevelopment programs focus primarily on of Housing and Urban Development, and inhousing and economic development in urban funding for a number of independent housing

areas. As in previous years, the President agencies.

proposes to reduce funding for the Com-

munity Development Block Grant program in Area and Regional Development. Area and1993 and beyond. Appropriations would drop regional development programs primarilyfrom the 1992 level of $3.4 billion to $2.9 bil- fund rural economic development. The Presi-lion per year thereafter. Because the program dent has again proposed eliminating some of

t00 ANALYSIS OF THE PRESIDENT'S BUDGET March 1992

these programs and reducing funding for Department of Agriculture would be ar-others. The propose,! levels of budget au- ranged through the RTB. The President re-thority would resu" 'n outlay savings relative quests a direct loan authorization of $475 mil-to the baseline f $0.2 billion in 1993 and lion, which includes an authorization level ofnearly $3.0 billion over the 1993-1997 period. $60 million for low-interest loans for tele-

phone borrowers who would not qualify forThe President proposes to end the Econom- RTB loans under existing criteria.

ic Development Administration's economicdevelopment assistance and loan guarantee Proposed reductions in spending for Bu-programs, which would save $39 million rela- reau of Indian Affairs (BIA) programs wouldtive to the baseline in 1993 and $0.9 billion result in outlay savings of $0.1 billion for 1993over five years. in addition, the President relative to the CBO baseline. Funding for theseeks to reduce appropriations for the Appa- operation of Indian programs and BIA con-lachian Regional Commission development struction would be reduced by 13 percent inprograms and the Tennessee Valley Authority. 1993, relative to the baseline, resulting in out-These reductions would result in outlay sav- lay savings of $48 million for 1993 and $0.8ings of $15 million in 1993 and $0.5 billion billion for the 1993-1997 period. The Presi-over the 1993-1997 period, dent also proposes to discontinue the BIA di-

rect loan program and to increase the au-The budget includes no funding for the Ru- thorized amount for BIA loan guarantees.

ral Electrification Administration's distance The President's budget would reduce the

learning and medical link grants and for the a o n Pr opiat edf et tl em e o niFarmrs omeAdmiistatin's FmH's) amount appropriated for settlements of Indian

Farmers Home Administration's (FmHA's) claims, reflecting an estimate of fewer settle-rural community fire protection grants. It mnsi h etfsa er

provides reduced funding for FmHA water

and waste disposal grants. These proposals Disaster Relief and Insurance. As in lastwould result in outlay savings of $3 million in year's budget, the President proposes to limit1993 and $0.2 billion from 1993 through 1997. Small Business Administration disaster loansThese reductions are partially offset by slight to borrowers unable to obtain loans from pri-increases in funding for FmHA rural develop- vate lenders. In addition, the interest rate onment grants, the rural development loan pro- such disaster loans would be increased to thegram, and the Rural Telephone Bank (RTB). Treasury cost of borrowing. These proposals

would reduce outlays by $0.1 billion in 1993concinue agthe PuraDesdenoposesnto dis-e and by $0.6 billion over five years relative tocontinue the Rural Development Insurance thbaei.

Fund's loan guarantees for water and waste

disposal systems, but recommends increasingthe authorization for the fund's guarantees ofcommunity development loans. The Adminis-tration also proposes increases in the autho- CBO Reestimatesrized loan level and subsidy appropriation forRTB direct loans. Under the Administra- CBO's estimates of outlays for function 450tion's plan, all telephone loans made by the are very close to the Administration's.


Function 500: Education, Training,Employment, and Social Services


1992 1993 1994 1995 1996 1997



Guaranteed student loan programs -0.3 a -0.1 -0.1 -0.1 -0.1Foster care 0 a 0.1 0.1 0.1 0.1Trade Adjustment Assistance 0 a -0.1 -0.1 -0.1 -0.1

Subtotal -0.3 a -0.1 a a -0.1

DiscretionaryElementary and secondary education 0 -0.1 0.1 -0.2 -0.7 -1.3Student financial assistance 0 0.1 0.2 a -0.3 -0.5Training and employment 0 -0.1 -0.1 -0.5 -0.7 -1.1Social services 0 -0.6 0.5 -0.3 -0.4 -0.6Other a a a -0.1 -0.2 -0.4

Subtotal a -0.7 0.7 -1.1 -2.4 -3.9

Total -0.3 -0.7 0.6 -1.2 -2.5 -3.9



CBO Reestimates 0.6 -0.1 -0.6 -0.5 -0.6 -0.6


Proposed Changes 1993 and are frozen at the President's 1993request level from 1994 through 1997.

The President's proposals for education, jobtraining, employment, and social services Pay-As-You-Go Policy Changeswould reduce spending $0.7 billion, about 1percent, below CBO baseline projections in Guaranteed Student Loan Programs. The1993. By 1997, spending would fall $3.9 bil- President's 1993 budget calls for a number oflion below the CBO baseline, or about 7 per- changes to the guaranteed student loan pro-cent. In 1993, virtually all spending reduc- grams; these changes would reduce spendingtions result from spending cuts for discre- by an estimated $0.3 billion in 1992 but havetionary programs. With a few exceptions--the small effects on spending in 1993 and suc-Head Start program, some elementary and ceeding years. Annual borrowing limits in thesecondary education programs, and Pell Stafford Loan program would increase be-Grants--virtually all of the discretionary pro- tween $875 and $1,000 for most borrowers,grams are held at or below baseline levels in depending on the student's year in school.


Annual borrowing limits in the Supplemental under current law and would increase federalLoans for Students program would be in- outlays by a five-year total of $0.4 billion.creased by $2,000 for most undergraduate stu- Under the Administration's estimates, this re-dents and $6,000 for graduate students. CBO structuring would be budget neutral.estimates that approximately 1.2 million bor-rowers will increase their borrowing an aver- Trade Adjustment Assistance. As in recentage of $900 in 1993, raising loan volume by 9 years, the President proposes to eliminate thepercent. Less-than-half-time students would Trade Adjustment Assistance training pro-become eligible to participate in the guaran- grams (as well as cash payments in functionteed student loan programs under the Admin- 600). This proposal would affect approxi-istration's plan, raising participation and loan mately 20,000 people and save $0.1 billion avolume marginally. year after 1993. Savings in 1993 would be

smaller than in later years because peopleThe President also proposes to continue re- training during the week of September 30,

cent legislative efforts aimed at reducing fed- 1992, would continue to receive services.eral default costs. For 1992 and followingyears, the budget includes several provisionsthat could prevent defaults, increase default Discretionary Policy Changescollections, or lower federal default costs bysharing costs with state governments and Elementary and Secondary Education. Thelenders. After 1993, costs of the increased President requests an increase in budget au-loan volume would be more than offset by re- thority that is $0.3 billion, or about 2 percent,ductions in the loan subsidy as a result of above the CBO baseline projections in 1993.these measures. Under credit reform account- This increase accommodates two new initia-ing, and assuming enactment in 1992, the tives that would raise 1993 funding by a totalpresent value of the savings on loans out- of $664 million. The first initiative fundsstanding in 1992 would be shown as an outlay parental choice programs that would expandreduction in 1992. educational options for children from middle-

and low-income families. The second funds aFoster Care. The Administration proposes to variety of programs designed to help com-restructure Foster Care and Adoption Assis- munities achieve the national educational

tance fundamentally, without significantly goals by the year 2000. However, Impact Aidchanging total funding. A new capped en- grants to school districts for children whosetitlement for Child Welfare Services (CWS) of parents either work or live on federal prop-$1.3 billion in 1993 would replace the admin- erty would be eliminated, and other grantistrative and training portions of the existing programs would be pared. Outlays would beFoster Care and Adoption Assistance pro- $0.1 billion below the baseline in 1993 be-grams. Such a reform would reduce the cause cuts in Impact Aid payments would oc-paperwork and disputes clouding the current cur sooner than increased spending on newprocess for funding the administrative costs of initiatives.foster care. Troubled children and familiescould also benefit from the broader array of Student Financial Assistance. The President'sservices allowed under the proposed CWS budget includes $7.7 billion in federal fundinggrants. A key question is whether the pro- for student financial assistance, $0.6 billion orposed funding levels for the CWS grants over 8 percent above the baseline. More than halfthe next five years are higher or lower than of this increase--$332 million--covers fundingwhat states would otherwise have claimed shortfalls in past years in the Pell Grant pro-under the existing programs. CBO estimates gram. Within the remaining funding in-that the five-year total of $8.3 billion in Child creases, the President proposes to reallocateWelfare Services grants is 5 percent greater funds among student aid programs. In thethan administrative and training expenditures Pell Grant program, the maximum grant


would be increased by $1,300, to a total of services to low-income children of preschool$3,700. Also proposed is a new $170 million age. The program would be funded at $2.8Presidential Achievement Scholarship pro- billion in 1993. Adjusting average costs pergram for Pell Grant recipients who excel in child for inflation, Head Start services wouldtheir studies. Another $50 million in new reach 788,000 youngsters, a 166,000 increasefunding would help states improve the licens- over the expected participation in 1992. Theing of schools participating in the federal stu- President proposes to freeze Head Start fund-dent aid programs. These program increases ing at 1993 levels for 1994 through 1997.are partially offset by provisions that channelPell Grant funds to the neediest students, thus SLIAG grants go to states to pay for certaineliminating approximately 400,000 current costs of the legalization of undocumentedrecipients from the program. Student aid aliens required by the Immigration Reformcosts are further reduced by substantial cuts in and Control Act of 1986. The President pro-supplemental grants, work-study, and Perkins poses to rescind $823 million of SLIAG's al-loans and by elimination of state student in- ready appropriated 1993 funds and restorecentive grants. Funding is frozen at the 1993 those funds in 1994. This shift lowers 1993level for 1994 through 1997. outlays by $0.6 billion and increases 1994 out-

lays by an equal amount. California, the re-Training and Employment. Policy changes in cipient of approximately 60 percent of SLIAG1993 are minor in training and employment funds to date, is likely to be the most affectedprograms, although after 1993 most programs by the delayed funding.are frozen at the 1993 or 1994 level. In ad-dition, the Administration proposes to target Once again, the President proposes elimi-Job Training Partnership Act funds toward nating the Community Services Block Grantpeople who are most in need of training by program, reducing spending by $0.3 billion inreplacing the existing block grant and summer 1993.youth programs with separate year-round pro-grams for low-income adults and youth. Also,a new grant program--Youth OpportunitiesUnlimited--is proposed for fiscal years 1993through 1995 to provide comprehensive ser- CBO Reestimatesvices to youth living in high-poverty areas.

The CBO reestimates in this function areSocial Services. The President's budget pro- small and are made up of both economic andposes to increase Head Start funding by $530 technical changes. CBO's slightly higher pro-million (23 percent above the baseline) in jection of interest rates accounts for small up-1993, to shift $823 million of State Legaliza- ward reestimates in guaranteed student loantion Impact Assistance Grant (SLIAG) funds programs. However, CBO projects lowerfrom 1993 to 1994, and to end the Community growth in student loan volumes than the Ad-Services Block Grant program. Other ministration does, which leads to downwardchanges are modest. reestimates in the out-years. Reestimates are

also made for the Foster Care and AdoptionThe President's budget highlights the Head Assistance program and for discretionary edu-

Start program, which provides comprehensive cation programs.


Function 550: HealthPROPOSED SPENDING CHANGES (By fiscal year, outlays in billions of dollars)

1992 1993 1994 1995 1996 1997



Federal Employees Health Benefits 0 -0.1 a -0.1 -0.1 -0.1Other 0 a a -0.1 -0.1 -0.1

Subtotal 0 -0.1 a -0.1 -0.2 -0.2

DiscretionaryPublic Health Service a a -0.5 -0.8 -1.5 -2.3Federal Employees Health Benefits 0 -0.1 -0.1 -0.1 0 0Other a -0.4 -0.4 -0.5 -0.6 -0.7

Subtotal a -0.5 -1.1 -1.4 -2.1 -3.0

Other

Federal Employees Health Benefits 0 -0.1 -0.3 -0.5 -0.5 -0.6

Total a -0.7 -1.5 -2.0 -2.9 -3.8


a. Lems than S50 million.

Proposed Changes by $375 million over the 1993-1997 period.The plan would limit the amount providerscan bill for certain health services for retiredThe President's 1993 budget proposes modest erleswoaeoe g 5btaentcy

speningcut copard wih te CO bse- enrollees who are over age 65 but are not cov-spending cuts compared with the CBO base-

line, reducing health spending by $0.7 billion ered by Medicare. According to the proposal,

in 1993 and $3.8 billion in 1997. These allowed charges for physician services would

changes would reduce baseline spending by be limited to Medicare's maximum allowable

about 2.5 percent in 1997. The Federal Em- actual charge, reducing FEHB outlays as wellployees Healthrcenefits program 19. the Fd- as the out-of-pocket payments of annuitants.ployees Health Benefits program and the Pub- The proposal is estimated to save the govern-lie Health Service are targeted for the largest ment $85 million in 1993 and $95 million in

reductions, but Medicaid is left almost un- 1997.

touched.

Other. The President's 1993 budget includesa Medicaid proposal that would slightly re-

Pay-As-You-Go Policy Changes duce Medicaid spending; proposed changes totwo other programs would indirectly increase

Federal Employees Health Benefits. The Medicaid spending by small amounts. ThePresident's budget for the Federal Employees Medicaid proposal would enhance state au-Health Benefits (FEHB) program includes a thority to collect medical child support pay-pay-as-you-go proposal that would reduce ments through the Child Support Enforce-program spending by $85 million in 1993 and ment Agency and would also allow a custodial


parent to file directly with the noncustodial 1997. The President's request would put In-parent's insurer for reimbursement for a dian Health Service spending $0.1 billion be-child's medical payments. CBO estimates that low the CBO baseline in 1993 and $0.3 billionthis proposal would result in savings of $5 below in 1997.million in 1993, rising to $19 million in 1997.

The Administration's planned funding forOther proposed changes that would affect both the Centers for Disease Control (CDC)

Medicaid spending include changes to the and the Alcohol, Drug Abuse, and Mentalpension program of the Department of Vet- Health Administration (ADAMHA) is slightlyerans Affairs (function 700) and to the Aid to above the CBO baseline for 1993 and con-Families with Dependent Children program tinues the 1993 level through 1997. By 1997,(function 600). Together these changes would spending relative to the CBO baseline wouldresult in increased Medicaid spending of $77 be $0.2 billion lower for CDC and $0.3 billionmillion in 1993, reaching $104 million in 1997. lower for ADAMHA.

The Administration's request for researchDiscretionary Policy Changes programs of the National Institutes of Health

is 2 percent above the CBO baseline for fiscalPublic Health Service. The Administration's year 1993. The 1993 funding level would befunding level for the discretionary programs maintained from 1994 through 1997. In ad-of the Public Health Service would approxi- dition, the President's request would delay ob-mate CBO baseline levels in 1993 and main- ligations of $0.6 billion of each year's fundingtain the 1993 funding level from 1994 through in 1993 through 1997. These delays would1997. By 1997, spending would be reduced slow spending on a portion of each year'sbelow the CBO baseline by $2.3 billion, or 11 funding. The two changes result in savings ofpercent. $0.3 billion in 1994, compared with the CBO

baseline, growing to $1 billion in 1997.Within the Public Health Service, the Ad-

ministration would fund most of the programs Although the Administration intends to re-of the Health Resources and Services Admin- duce funding for the Food and Drug Admin-istration (HRSA) at baseline levels in 1993 istration (FDA), it would institute user feesand maintain the 1993 funding level from for submitting applications to market new1994 through 1997. As in previous budgets, products and assume the availability of otherthe Administration also proposes to eliminate existing fees; as a result, total FDA fundingmost of the HRSA's health professions' grant would approximately equal the CBO baseline.programs. Savings, compared with the CBO Under the proposal for user fees, which wasbaseline, would rise from $19 million in 1993 also in the previous two budgets, federal fund-to $358 million in 1997. ing would be 26 percent lower than CBO's

baseline in 1993, resulting in savings thatAs in the last 10 budgets, the Adminis- would increase from $0.2 billion in 1993 to

tration plans to cut funding for the construc- $0.4 billion in 1997.tion of Indian health facilities. The 1993funding request is 6 percent below the CBO Federal Employees Health Benefits. Thebaseline for 1993. Under the President's re- budget has proposed appropriation languagequest, spending for Indian health facilities to reduce federal spending for annuitants'would fall $6 million below the CBO estimate health benefits. Reductions would bein 1993 and $181 million below in 1997. The achieved by requiring the Postal Service to re-Administration also plans to decrease 1993 imburse the government for a certain portionfunding for the Indian Health Service by 7 of past payments for federal health benefitspercent, compared with the CBO baseline, for Postal Service annuitants. In a series ofand maintain the 1993 funding level through changes since 1986, the Congress has sought to


reduce the government's liability for paying remaining five plans, resulting in a drop in thethe government portion of FEHB premiums federal government's contribution of $231for these annuitants. The President's budget million in 1994 and $473 million in 1997.proposal would require the Postal Service tomake three lump-sum payments of $105 mil-lion in 1993 through 1995.

Other. The President's budget for Medicaid CBO Reestimateswould reduce federal spending for surveyingand certifying providers by funding these Medicaid. CBO's baseline for federal ex-activities through user fees collected from ser- penditures for Medicaid is $4.2 billion lowervice providers and depositing the fees in a re- than the President's in 1992 and $24.3 billionvolving fund. CBO estimates that this pro- lower in 1997. The difference stems largelyposal, which was included in the President's from differing assessments of state forecasts of1992 budget, would save $0.1 billion in each Medicaid spending. Although both the Ad-of the years from 1993 through 1997. ministration and CBO use state forecasts of

Medicaid expenditures in developing theirThe Administration's proposed funding Medicaid projections, each uses them differ-

level for Consumer and Occupational Health ently. The CBO Medicaid baseline is devel-and Safety programs is $0.2 billion below the oped using the states' current-year estimatesCBO baseline in 1993, with the 1993 funding to calibrate current-year spending for thelevel maintained through 1997. Spending CBO Medicaid projection model; CBO thenwould be $0.3 billion below the CBO baseline applies inflators representing the growth ofin 1993 and $0.6 below in 1997. prices, populations, and service intensity to

the current-year estimate to forecast spendingthroughout the projection period.

Other ChangesIn contrast, the Administration uses state

The President's budget for FEHB includes estimates of Medicaid spending as the startingseveral policy changes to be achieved by ad- point for its projections of Medicaid outlays,ministrative action. The plan would increase but it believes the state forecasts are systema-cost sharing for federal annuitants who are tically biased downward. In its estimates foralso Medicare beneficiaries by requiring co- fiscal years 1992 and 1993, the Administrationpayments for prescription drugs and limiting has adjusted the state forecasts upward by $4.4payments for physician services to the Medi- billion and $10.7 billion, respectively, to corn-care-allowed charge. Savings are estimated at pensate for the perceived underestimates of$75 million in 1993, rising to $155 million in Medicaid outlays by state offices. The Ad-1997. ministration then projects out-year spending

based on the adjusted state estimates for 1992In addition, the budget plan includes a and 1993. Because the Administration's esti-

change in the current policy of calculating the mates for 1992 and 1993 are significantly high-government's premium contribution based on er than CBO's, the resulting out-year projec-the average premium of the "big six" FEHB tions are higher. Moreover, in 1994 throughplans, including a proxy premium for the 1997, the Administration assumes that Medic-high-option Aetna plan that is no longer aid will grow by about 15 percent a year, butoffered. A temporary provision of the Omni- CBO projects an average increase in outlaysbus Budget Reconciliation Act of 1990 spe- of 12 percent a year.cified that a proxy premium be used in placeof the (high-option) Aetna premium for cal- Other. CBO's reestimates of the President'sculating the government's contribution. The budget for all other programs in function 550new formula would instead be based on the are small.



1992 1993 1994 1995 1996 1997



Technical 0 0.1 0.1 0.1 0.1 0.1

OtherTechnical

Medicaid -4.2 -4.9 -9.2 -13.5 -18.5 -24.4Other 0.3 0.4 0.1 0.3 0.4 -0.3

Subtotal -3.9 -4.5 -9.1 -13.2 -18.1 -24.6

Total -3.9 -4.4 -9.0 -13.1 -18.0 -24.6


108 ANALYSIS OF THE PRESIDENT'S BUDGET March 19"2

Function 570: MedicarePROPOSED SPENDING CHANGES (By fiscal year, outlays in billions of dollars)

1992 1993 1994 1995 1996 1997



Delay hospital update 0 -0.6 -1.0 -1.2 -1.1 -1.1Reduce payment for laboratory services 0 -0.3 -0.5 -0.7 -0.9 -1.2Reduce federal subsidy for high-

income beneficiaries a -0.1 -0.3 -0.5 -0.7 -0.9Other a -0.1 -0.2 -0.3 -0.3 -0.3

Subtotal a -1.2 -2.0 -2.6 -3.0 -3.5

DiscretionaryMedicare contractors and

HCFA administration 0 -0.1 -0.3 -0.4 -0.6 -0.7

Total a -1.3 -2.3 -3.0 -3.6 -4.2



CBO Reestimates -0.7 -0.1 -0.4 -0.6 -1.9 -2.9



The President's budget proposes to reduce Delay the Hospital Update. The President'sMedicare spending by $1.3 billion in 1993 and plan would delay the annual hospital paymentby $4.2 billion in 1997, compared with base- update from October 1 to January 1 eachline levels. Medicare baseline spending is year. The Administration states that this pro-projected to grow at an average annual rate of posal would put the hospital update on the11.3 percent from 1992 through 1997. The same payment cycle used for most otherAdministration's proposals would reduce this health providers. Under CBO's assumed ratesgrowth by 0.4 percentage points annually. of inflation, the proposals would reduce reim-Reductions are proposed in both the Hospital bursements to hospitals by about 1.5 percent aInsurance (HI) and Supplementary Medical year. CBO estimates that this one-time delayInsurance (SMI) portions of Medicare. In ad- would save $0.6 billion in 1993 and $1.1 bil-

dition, some Medicare enrollees would be re- lion in 1997.

quired to pay higher premiums.


Reduce the Payment for Laboratory Services. siderable uncertainty because the enforcementThe President's budget includes two proposals mechanisms have not yet been specified. Al-to revise the payment structure and slow the so, the costs associated with administering thisgrowth of spending for clinical laboratory proposal are estimated to be $25 million inservices. (From 1987 through 1991, spending 1992 and $50 million in each succeeding year.for independent clinical laboratory services These added administrative costs do not ap-increased at an average annual rate of 19 pear to have been included in the Adminis-percent.) The first proposal would lower the tration's request for Medicare administration.existing cap on fees from 88 percent to 76percent of the median amount charged by all Other Proposals. The budget includes threecarriers. The second proposal would give the other Medicare proposals. ReimbursementSecretary of Health and Human Services for anesthesia services would be paid at a(HHS) discretion when applying the update single fee regardless of whether the service isfactor for laboratory services. These updates provided by an anesthesiologist working alonecould be positive or negative for each service, or one supervising a certified registered nurseThe Administration's assumption of a freeze anesthetist (CRNA). This change would re-in the laboratory update for 1993 through duce the total payment when an anesthesiolo-1997 was used to estimate this proposal. The gist is supervising a CRNA. In addition, thesavings from the two proposals would be $0.3 proposal would lower payments to CRNAs.billion in 1993, increasing to $1.2 billion by Estimated annual savings from both changes1997. are $0.1 billion in 1993 and $0.2 billion in

1997.Reduce the Federal Medicare Subsidy forHigh-Income Beneficiaries. The President's Unlike previous budgets, this budget in-budget proposes raising the SMI premium for cludes only one proposal that would reducecertain high-income beneficiaries. The cur. payments to suppliers of durable medicalrent monthly premium, set by the Omnibus equipment. The President's budget proposalBudget Reconciliation Act of 1990, equals ap- would give the Secretary of HHS discretionproximately 25 percent of program costs. The when applying the update factor for items ofremaining 75 percent of SMI program costs durable medical equipment. These updatesare financed from general revenues. The could be positive or negative for each item ofPresident proposes to increase the SMI premi- equipment provided. Savings were estimatedum to 75 percent of program costs for benefi- based on the Administration's assumption thatciaries with annual income greater than the fee schedule update would be frozen in$100,000 for single beneficiaries and $125,000 1993 and 1994. CBO estimates annual savingsfor couples. This budget assumes an effective of $35 million in 1993 and $170 million bydate of April 1, 1992. The monthly premium 1997.paid by these higher-income enrollees wouldbe $104.10 in 1993, compared with $36.60 un- The President also proposes to include un-der current law. Around 875,000 benefici- der Medicare all state and local governmentaries could be required to pay the higher pre- employees hired before April 1, 1986. Mostmium by 1997 if they chose to continue their state and local employees already have HIenrollment in SMI. Versions of this proposal coverage, either through previous employmentwere considered and rejected both during the or through their spouses. This proposal1990 budget summit negotiations and in Con- would affect both revenues (see Chapter 3)gressional deliberations on last year's Presi- and outlays. Only the effect of the increaseddential budget. HI outlays is shown in function 570. Outlay

increases from this proposal are estimated atEstimated savings from this proposal are $3 million in 1993, rising to $50 million in

$45 million in 1992, increasing to $0.9 billion 1997. The Administration did not include theby 1997. These estimates are subject to con- effect on HI outlays in its budget.


Discretionary Policy Changes CBO Reestimates

Medicare Administration. The President's re- CBO's estimate of the Medicare program isquest for administrative funds for the Health lower than, though very close to, the Admin-Care Financing Administration is $0.1 billion istration's in 1992 through 1997. The differ-below the CBO baseline in 1993 and $0.7 bil- ences stem from different economic and tech-lion below in 1997. The request contains two nical estimating assumptions. The hospitalcomponents: a four-year freeze, and a change market basket update and the Medicare Eco-in the funding source for survey and certifica- nomic Index are the two major indices used totion activities from a general fund appropria- project Medicare spending. Wages are a largetion to user fees. The 1994-1997 request is part of both indices, and CBQ's projections offrozen at the 1993 level. User fee collections wage growth are lower than those of the Ad-are expected to raise $0.2 billion annually, ministration. CBO technical factors also re-

sulc in downward reestimates in the out-years,partially resulting from lower estimatedgrowth in the use of physician and laboratoryservices.


Function 600: Income SecurityPROPOSED SPENDING CHANGES (By fiscal year, outlays in billions of dollars)

1992 1993 1994 1995 1996 1997



Civil Service Retirement 0 0 0 0 -2.1 -2.8AFDC, Food Stamps, and Child

Support Enforcement 0 -0.2 -0.1 -0.1 -0.1 -0.2Trade Adjustment Assistance and other a -0.1 -0.2 -0.2 -0.2 -0.3

Subtotal a -0.3 -0.3 -0.3 -2.4 -3.2

DiscretionaryLow-income energy assistance 0 -1.2 -0.5 -0.6 -0.6 -0.7Program administration 0 a -0.1 -0.4 -0.6 -0.8Housing assistance a -0.1 0.2 a -0.2 0.5Child nutrition 0 -0.2 -0.2 -0.2 -0.3 -0.3Other 0 -0.4 -0.5 -0.7 -0.7 -0.8

Subtotal a -1.8 -1.2 -1.9 -2.4 -3.2

Total a -2.1 -1.5 -2.2 -4.8 -6.4

Public Health Service Retired Officers Fund(Transfer from function 500) 0 0.1 0.1 0.1 0.1 0.1



Proposed Changes day care homes. Funding reallocations, in-

cluding some funding increases, are proposed

The President's proposals would reduce out- for housing and nutrition programs.lays for income security programs by $2.1 bil-lion relative to CBO baseline levels in 1993(about 1 percent) and by $6.4 billion in 1997 Pay-As-You-Go Policy Changes(about 3 percent). Savings would total $17billion over five years. Two-fifths of the say- Civil Service Retirement. The President'sings would result from pay-as-you-go policy budget would eliminate the option of a lump-changes, most notably from eliminating the sum payment in Civil Service Retirement.optional lump-sum payment in Civil Service Current law will give federal employees re-Retirement. Outlays for low-income energy tiring after October 1, 1995, the option ofassistance and several other discretionary pro- withdrawing their contributions on retirementgrams would be lowered through a combi- in exchange for reduced annuity payments.nation of reduced funding levels and restric- Certain small groups of federal retirees aretions that delay obligations. Reimbursements already allowed to elect a lump-sum benefit.would be reduced for meals served in family The President's proposal would permanently


extend the current law's prohibitions on A third AFDC legislative proposal wouldlump-sum payments and would also eliminate limit assistance provided in the AFDC Emer-the option for those groups currently allowed gency Assistance program to 30 consecutiveit, effective October 1, 1995. CBO estimates days in a 12-month period. This limitationthat eliminating the lump-sum option for all would reduce federal funding to a number offederal employees would save $2.1 billion in states that use Emergency Assistance funds to1996 and $2.8 billion in 1997. These savings, cover emergencies for up to 12 consecutivehowever, would be offset in later years by months and would save an estimated $0.2 bil-higher annuity payments. lion over the 1993-1997 period.

AFDC, Food Stamps, and Child Support Three proposals would modify the ChildEnforcement. The President's proposed Support Enforcement (CSE) program. First,changes to these programs are modest, result- the Administration has expanded last year'sing in savings of $0.1 billion to $0.2 billion a proposal requiring food stamp recipients toyear and $0.7 billion over five years. Of the cooperate with CSE personnel to also includeseven policies discussed below, four were in- recipients of housing assistance. The secondcluded in last year's budget. change, identical to a proposal in last year's

budget, would mandate higher fees for CSETwo new policy proposals would increase services provided to families that are not re-

spending under the Aid to Families with De- ceiving AFDC. Third, a new performance-pendent Children (AFDC) and Food Stamp based incentive formula would reward statesprograms at the states' discretion. CBO as- for establishing paternities and child supportsumes that half the states would elect the two obligations. Net savings from these three pro-policy changes. The first proposal would al- posals are estimated to total $0.8 billion overlow families already on AFDC to accumulate five years.resources up to $10,000 without losing AFDCor food stamp eligibility. Current resource Finally, the Administration proposes a mi-limits are $1,000 in AFDC and $2,000 in the nor reduction in food stamp outlays in 1996Food Stamp program. Given the limited and 1997 by extending a 1990 farm bill pro-asset-generating ability of low-income families, vision due to expire in 1995. The provisionCBO estimates that this change would in- would reduce the ahare of overpayment col-crease the AFDC caseload by only 5,000 fami- lections retained by the states and increase thelies, increasing AFDC costs by less than $0.1 federal share of such collections by less thanbillion over the 1993-1997 period. $20 million annually.

The second proposal involves the Adminis- Trade Adjustment Assistance and Othertration's new Plan for Achieving Self-Support Proposals. As it has in recent years, the Presi-(PASS), which encourages entrepreneurial dent's budget proposes to eliminate the Tradeactivities among AFDC recipients. Under this Adjustment Assistance program for workersplan, states would disregard all income and who lose their jobs because of competitionresources associated with a family's approved from foreign imports. The proposal wouldself-employment plan when calculating eligi- save an estimated $0.1 billion annually andbility and benefits for AFDC and food stamps. would eliminate benefits for approximatelyAdministrative data and self-employment de- 24,000 workers in 1993.monstration projects suggest that fewer than1 percent of AFDC recipients would partici- The remaining pay-as-you-go policypate in PASS. With low participation exchanges affect nutrition programs, the Pensionpected, CBO estimates that the proposal Benefit Guaranty Corporation, and the Sup-would increase AFDC and food stamp costs plemental Security Income program. The Ad-by $0.1 billion over the five-year estimation ministration proposes a series of largely off-period, setting policy changes in child nutrition pro-

CHAPTER FIVE THE ADMINISTRATION'S DOMESTIC PROPOSALS 1[3

grams in order to shift more benefits to Discretionary Policy Changeslower-income children. Subsidies for mealsserved to children from families with income Low-Income Home Energy Assistance Thebetween 130 percent and 185 percent of the Administration requests $1.1 billion for thepoverty line would be increased by 25 cents Low-Income Home Energy Assistance Pro-for lunches and 20 cents for breakfasts. This gram (LIHEAP) in 1993, of which $0.8 billion.increase would be offset by a proposed 6 cent or 75 percent, would not be available for ob-reduction in subsidies for meals served to ligation until September 30, 1993. The CBOchildren from families with income above 185 baseline for 1993 includes a higher fundingpercent of the poverty line. Past budgets have level of $1.5 billion and no obligation delay.included similar proposals for child nutrition The combination of lower funding and de-programs. layed obligations reduces 1993 outlays under

the President's budget by $1.2 billion relativeProposals that would affect the Pension to the CBO baseline. The Administration

Benefit Guaranty Corporation (PBGC) in- proposes to hold LIHEAP funding constant atclude revising the funding requirements for $1.1 billion from 1993 through 1997, resultingsingle-employer plans, placing certain limits in a funding level that by 1997 falls to 60 per-on guaranteed benefits, enforcing the mini- cent of CBO's inflation-adjusted baseline.mum funding requirements, and changing thetreatment of PBGC claims in bankruptcy The Administration's proposed delay of ob-cases. On a cash basis, the Administration ligations extends a policy contained inestimates that these changes would have no LIHEAP's 1992 appropriation language,effect on federal outlays over the projection which states that over one-fourth of the 1992period, although they would produce savings appropriation cannot be obligated until afterin later years. CBO estimates that these September 30, 1992. The President's proposalchanges would have small near-term savings, to delay the majority of the 1993 appro-no more than $20 million a year. The priation is in part an adjustment for the 1992changes would also cause significant revenue delay, although the proportion of 1993 fundslosses, as discussed in Chapter 3. The Admin- proposed to be delayed is considerably higheristration proposes to convert PBGC from cash than was delayed in 1992.to accrual accounting and would give pay-as-you-go credit for its legislative proposals ($8.7 Program Administration. Outlays under thebillion in 1992). CBO has not included the President's proposed funding levels for ad-effects of this accounting change in its ministrative expenses for unemployment com-spending estimates and does not believe that pensation, Supplemental Security Income,any pay-as-you-go credit should be given, as food programs, and other income securitydiscussed in Chapter 1. programs are within $50 million of CBO

baseline levels in 1993, but fall to $0.8 billionFinally, the Administration has one legis- below CBO baseline levels in 1997. The

lative pay-as-you-go proposal affecting the growing stream of outlay savings relative toSupplemental Security Income (SSI) program. CBO's baseline is the result of the President'sThe proposal would allow the Social Security proposal to freeze most administrative pro-Administration to collect SSI overpayments by grams at the 1993 level; in contrast. the CBOreducing Social Security payments. This ac- baseline adjusts levels for inflation throughtion would reduce SSI outlays by an estimated 1997. The largest reduction in administr,'zive$34 million in 1993 and by $23 million in expenses is for unemployment compensation.1997. The amount that would be collected in1993 is more than would be collected in 1997 The President's request for administrati',ebecause of an existing backlog of uncollected expenses for SSI is highe, than the CBGoverpayments. baseline in both 1993 and 1994, with the re-


quested amounts dropping below the baseline reduce the public housing modernizationfrom 1995 through 1997 as the result of a pro- program, and to reduce or eliminate severalposed 1994-1997 freeze. The requested in- smaller housing programs.creases are in response to a higher rate ofdisability applications, which has increased The President also proposes to significantlythe average time for processing disability reallocate funding among three programsclaims. The President's request for 1993 authorized in the National Affordable Hous-would be even higher except for a proposal to ing Act of 1990. The Administration proposesfund part of the SSI program's administrative to increase funding for HOPE (Homeowner-expenses through a fee imposed on states that ship and Opportunity for People Everywhere)choose to have the Social Security Admin- grants, which enable some residents of publicistration administer their state supplemental housing and other low-income families to pur-payments. The fee, which the Administration chase their residences. Funding would also beis proposing in appropriation language for the increased for a program allowing HUD toLimitation on Administrative Expenses (LAE) offer various inducements to owners of low-account, would equal 1.67 percent of a state's income housing to maintain low-incomesupplementary payments and would be tenancy. Increases in these two programscredited directly to the LAE account. The would be largely offset by a reduction of moreamount collected from the states in 1993 than 50 percent in funding for the Home In-would be approximately $60 million, vestment Partnership Program, which pro-

vides funds to participating state and local ju-

Housing Assistance. For 1993, the President risdictions to increase the availability ofhas requested $20.3 billion for the housing low-income housing.assistance programs of the Department ofHousing and Urban Development (HUD) and Child Nutrition. The Administration's budgetthe Farmers Home Administration. This request for child nutrition programs includesfunding level is $1.5 billion below the baseline a proposal to reduce subsidies for m,'alslevel for 1993. Estimated outlays would fall served to children in family day care homesonly $0.1 billion below the baseline in the first unless the family day care home determinesyear, however, because of the multiyear na- that the children are from families with in-ture of many housing programs. Over the come at or below 185 percent of the poverty1993-1997 period, the President's budget pro- line. The estimated savings of between $0.2posals would reduce housing assistance out- billion and $0.3 billion a year would be scoredlays by $0.6 billion, a reduction of one-half of as a discretionary change, even though child1 percent below baseline levels, nutrition programs are entitlement programs,

because the change is proposed through ap-The President's request would shift funds propriation language.

among the various housing programs andwould make vouchers the principal means of Other. Under the President's proposals, out-providing rental assistance. The HUD pro- lays for the remaining income security pro-posal would fund 98,000 vouchers, compared grams fall $0.4 billion below CBO's baselinewith the 22,000 vouchers assumed in the CBO in 1993 and $3.1 billion below CBO's baselinebaseline. Emphasizing vouchers raises outlays over the five-year projection period. Thein the beginning of the five-year projection largest reduction is in the Refugee and En-period because appropriations for vouchers trant Assistance program, which would be cutare spent more rapidly than for other housing by almost 50 percent. The President also pro-programs. These increases in housing outlays poses a 1993-1997 freeze and an obligation de-would be offset by proposals to eliminate lay for the Child Care and Developmentfunding for public housing construction, to Block Grant program.


For 1993, the President proposes a modest resulting in further upward reestimates. Theincrease in the Special Supplemental Food reestimates are downward for a few programsProgram for Women, Infants, and Children because of lower projections for the consumer(WIC), but this increase is partially offset by price index for "food away from home" andreduced funding for the Commodity Supple- certain federal pay assumptions.mental Food, Emergency Food and Shelter,Elderly Nutrition, Food Distribution on In- CBO's technical reestimate of the Supple-dian Reservations, and Soup Kitchen pro- mental Security Income program lowers out-grams. Because the budget holds requests for lays by $1.4 billion in 1993 and by $2.9 billion1994 through 1997 at 1993 levels, outlays for in 1997. Most of the SSI reestimate resultsthese six nutrition programs fall $0.6 billion from differing assumptions about the numberbelow CBO baseline levels over five years. of SSI recipients. In 1993, CBO assumes a

slightly smaller number of blind or disabledbeneficiaries than the President's budget

Other Changes assumes. CBO is also lower than the Admin-istration in estimating the number of

The final change in function 600 would be a claimants who, as a result of the Supreme

transfer of about $0.1 billion annually from Court's decision in Sullivan v. Zebley, will

function 550 for payment of retirement bene- seek benefits that were denied in the past. In

fits for Public Health Service commissioned 1997, the difference in projected outlays re-

corps officers. Financing of the retirement suits from the Administration's higher esti-

fund would be changed from a pay-as-you-go mate of recipients in the base year and slightly

system to an accrual-basis system, but there higher estimated rates of growth in the re-

would be no change in benefit levels and no cipient population throughout the projectionnet change in outlays. period.

Estimates of the number of people receiv-ing unemployment compensation, foodstamps, and Aid to Families with Dependent

CBO Reestimates Children--three programs particularly sensi-tive to changes in unemployment rates--are

Pay-As-You-Go Reestimates. CBO's reesti- again uncertain this year. Caseload increases

mates of the pay-as-you-go proposals are in these programs in the past year were larger

small for 1993 through 1995. The positive re- than expected given current unemployment

estimates of $0.1 billion in both 1996 and 1997 rates. For the Food Stamp program, CBO re-

are largely the result of CBO's smaller esti- estimates outlays downward by between $1.1

mates of savings from the proposed elimina- billion and $1.5 billion annually because CBO

tion of the lump-sum benefit in Civil Service projects an earlier peak in the growth of the

Retirement. This difference reflects CBO's caseload than the Administration does. For

smaller estimate of the number of people both unemployment compensation and

electing the lump-sum benefit under current AFDC, CBO projects more recipients than

law. does the Administration, resulting in upwardoutlay reestimates.

Other Reestimates. CBO's economic reesti-mates increase spending in most programs CBO's reestimates for the child nutrition

because CBO projects higher inflation, result- programs result from lower assumptions about

ing in more rapid growth in indexed entitle- participation in the Child Care and Adult

ments. Also, CRO's projections for unem- Food program. Other reestimates are domi-

ployment rates are higher than the Admin- nated by negative reestimates in the earned

istration's projections in every year but 1993, income tax credit program.



1992 1993 1994 1995 1996 1997



Technical a a a a 0.1 0.1

OtherEconomic 0.3 0.3 0.7 1.8 2.7 3.4

TechnicalSupplemental Security Income -1.3 -1.4 -1.4 -2.0 -2.4 -2.9Food stamps -0.5 -1.2 -1.5 -1.4 -1.1 -1.1Unemployment compensation 0.4 0.7 0.7 0.9 1.2 1.2AFDC and child support a 0.3 0.6 0.8 1.0 1.4Child nutrition -0.1 -0.2 -0.3 -0.4 -0.4 -0.5Other -0.4 -0.4 -0.2 -0.7 -0.3 -0.1

Subtotal -2.0 -2.1 -2.1 -2.8 -2.1 -1.9

Total -1.7 -1.8 -1.4 -1.0 0.7 1.6


a. Less than $50 rmillion.


Function 650: Social SecurityPROPOSED SPENDING CHANGES (By fiscal year, outlays in billions of dollars)

1992 1993 1994 1995 1996 1997


Proposed ChangesDiscretionary

Administrative costs 0 -0.1 -0.1 -0.2 -0.3 -0.5

Other ChangesbEarnings test 0 0.1 0.1 a a aOther 0 a a a a a

Subtotal 0 0.1 0.1 a a a

Total 0 a 0.1 -0.1 -0.3 -0.5



b. Changes in Social Security benefits and revenues are not included under the general pay-as-you-go restrictions, but instead aresubject to separate rules in the Senate and the House.

Proposed Changes ing savings in discretionary spending. By1997, spending would fall $460 million below

The President's 1993 budget proposes only the CBO baseline.

minor changes in Social Security. The overall Because CBO is forecasting increases in thepolicy changes would modify program spend- number of DI applications over the projectioning by less than 0.1 percent over the next five period, the administrative funding in theyears. President's budget could result in significant

Administrative Costs. Funds for admin- increases in processing time for disability

istering the Old-Age and Survivors Insurance claims. The Social Security Administration's

(OASI) program and the Disability Insurance budget justification cites this as a possible

(Dl) program would increase under the Presi- problem even in 1993.

dent's request at approximately baseline rates Earnings Test. The Administration proposesbetween 1992 and 1993. CBO shows a small modest adjustments in the limits on exemptreduction below baseline levels for these pro- earnings for people ages 65-69 in 1993 andgrams' administrative expenses in 1993. This 1994, with the limits returning to the currentreduction is the result of an anomaly involv- law's levels in 1995. The exact increases haveing the distribution of the limitation on ad- not been specified except that they wouldministrative expenses for the Social Security total $1,000 in 1993 and 1994. However, theAdministration between the Social Security estimated additional benefit payments in theprograms and the Supplemental Security In- President's budget are consistent with a $500come program. During the 1994-1997 period, increase for both 1993 and 1994 on top ofthe President's plan would freeze administra- projected exempt amounts of $10,680 in 1993tive expenses at 1993 levels, resulting in grow- and $11,160 in 1994. CBO estimates that the


additional outlays from these increases would CBO's technical estimating assumptions in-total $235 million over the next five years. crease outlays by $0.3 billion in 1992 and

about $3.4 billion in 1997. Average monthlybenefits, after accounting for differences incost-of-living adjustments, are the largest ele-ment of the reestimate and amount to about

CBO Rmestimates $2.6 billion in 1997. That figure represents areestimate of about 0.7 percent, less than $5

CBO has reestimated the President's budget per month for the average beneficiary. CBOrequest upward by about $0.3 billion in 1992 predicts a slightly larger number of Socialand about $9.5 billion in 1997. CBO's projec- Security beneficiaries than does the Adminis-tions of higher inflation and the resulting tration--the net effect of a lower number ofhigher cost-of-living adjustments increase out- OASI recipients and a higher number of DIlays by $6.2 billion in 1997. recipients. Overall, this causes CBO to pro-

ject about $1.0 billion more in benefit pay-Social Security Cost-of-Living Adjustments ments than the Administration does over theAssumed by CBO and the Administration projection period. The remaining significant

(In percent, by fiscal year) source of reestimate is retroactive benefits,1993 1994 1995 1996 1997 which CBO projects at $0.1 billion to $0.4 bil-

lion a year higher than the President's budget.

CBO 3.2 3.7 3.6 3.7 3.6Admin-istration 3.0 3.2 3.2 3.2 3.2

CBO REESTIMATES OF PROPOSED SPENDING IN FUNCTION 650 OF

THE PRESIDENT'S BUDGET (By fiscal year, outlays in billions of dollars)

1992 1993 1994 1995 1996 1997


CBO ReestimatesEconomic

Cost-of-living adjustments 0 0.4 1.6 2.9 4.4 6.2

TechnicalAverage benefits adjusted

for inflation 0.2 0.4 0.8 1.4 2.0 2.6Number of beneficiaries a -0.1 a 0.2 0.3 0.6Retroactive benefits 0.1 0.2 0.3 0.4 0.3 0.1Other 0 a a a a a

Subtotal 0.3 0.6 1.2 1.9 2.6 3.4

Total 0.3 1.0 2.8 4.8 7.0 9.5


a. Less than $5) million.


Function 700: Veterans Benefits and Services


1992 1993 1994 1995 1996 1997



Pensions 0 -0.2 -0.2 -0.2 -0.2 -0.3Housing programs 0 -0.4 -0.1 -0.1 -0.1 -0.1Reimbursements, medical care 0 0 -0.2 -0.2 -0.2 -0.3Education programs 0 a a -0.1 -0.1 -0._1

Subtotal 0 -0.6 -0.5 -0.6 -0.6 -0.7

DiscretionaryHousing programs 0 -0.2 -0.2 -0.2 -0.1 -0.2Reimbursements, medical care 0 -0.1 -0.1 -0.1 -0.1 -0.1Medical care 0 a a -0.9 -1.6 -2.3General operating expenses 0 a a -0.1 -0.1 -0.2Other 0 a a -0.1 -0.2 -0.2

Subtotal 0 -0.3 -0.3 -1.3 -2.1 -3.0

Total 0 -0.9 -0.8 -1.9 -2.8 -3.7



Proposed Changes provisions of OBRA-90. The first provisionauthorizes the Department of Veterans Affairs(VA) to have access to Internal Revenue Ser-The President's 1993 budget includes more vice data for the purpose of verifying the in-

than 20 legislative proposals for veterans ce reportedpbypVApensioers. Une cu-

benefits and services. The combined effect of come reported by VA pensioners. Under cur-

these proposals would be to reduce spending September 30, 1992. Extending this authority

for function 700 over the 1993-1997 period by would save an estimated $344 million from

$10.1 billion (5.3 percent) relative to the CBO 1 ou gh 1997.

baseline. Almost all proposals would reduce

spending below baseline levels. Many would A second proposal would eliminate theextend sunset dates on savings provisions en- September 30, 1992, sunset date on a provi-acted in the Omnibus Budget Reconciliation sion that limits to $90 a month the pension forAct of 1990 (OBRA-90) or would restate pro- any unmarried or childless veteran who is

osals offered in last year's budget. receiving Medicaid coverage in a Medicaid-

approved nursing home. This change wouldaffect about 14,000 veterans a year and would

,y-As-You-Go PolicyaChanges save $739 million in pensions through 1997.Medicaid requires that any income above a

Pensions. The President proposes eliminating personal-needs allowance (generally $30 athe sunset clauses in two pension-related month) be used to defray nursing home costs


before Medicaid will pay the remaining costs. health insurers for the care of non-service-Therefore, Medicaid costs would rise as pen- connected conditions provided to insured ser-sion benefits are lowered. The net five-year vice-disabled veterans expires under currentsavings to the federal government from this law on September 30, 1993. Extending thisproposal would be $325 million, authority through 1997 would bring in an

estimated $200 million in additional insuranceHousing Programs. The President proposes reimbursements each year.several changes in the VA programs thatguarantee home loans to veterans. In the Education Programs. The AdministrationGuaranty and Indemnity program, greater proposes to limit vocational rehabilitationrestrictions would be placed on the multiple benefits to veterans with service-connecteduse of the loan guaranty benefit. Currently, a disabilities rated at 30 percent or higher.veteran who has paid off a guaranteed loan Approximately 1,200 veterans with disabilitiescan receive a second loan on the same basis as rated at 20 percent would become ineligible inthe first. The President's proposal would re- 1994, increasing to around 5,000 ineligible vet-quire a 10 percent down payment and a 2.5 erans in 1997. The option is estimated to savepercent origination fee for any subsequent use more than $75 million in the first five years.of the entitlement. (Under current law, thefee ranges from 0.5 percent to 1.25 percent A second proposal would require active-depending on the loan-to-value ratio.) duty service personnel who elect to participate

in the Montgomery GI Bill program to con-Approximately 15 percent of VA mortgage tribute $1,400 to the program over a 12-month

guarantees are used by individuals who have period, rather than the current required con-had their entitlement restored after paying off tribution of $1,200. This would restore thean earlier guaranteed loan. Thus, around benefits-to-contributions ratio to 9 to 1; the31,000 potential homebuyers would be af- ratio was reduced last year when benefits werefected by this proposal. About 4,600 (15 per- increased without a corresponding change incent) of them would be expected to obtain fi- the contribution level. Contributions wouldnancing from non-VA sources if the proposal be expected to increase by $155 million overwere enacted. The requirement of a 10 per- the 1993-1997 period under this proposal.cent down payment on second-use guaranteesis also estimated to reduce the foreclosure Compensation. The President's budget pro-rate on the affected loans by approximately 15 poses a 3 percent cost-of-living adjustmentpercent. (COLA) in the compensation program rates,

effective December 1, 1992. Because compen-Another propjsl would affect both the sation COLAs are assumed in both the CBO

Guaranty and lnAeinnity program and the and Administration baselines, this proposalLoan Guaranty program. The President again has no cost relative to those baselines.proposes to alter the agency's procedure onforeclosures. The effect of this proposalwould be to decrease VA payments on certaindefaults, and it is estimated to save $400 mil- Discretionary Policy Changeslion in 1993--when the effects on existingloans are scored--and approximately $90 mil- The President is proposing several changes i .lion a year thereafter. mandatory spending accounts that would Ib

made through amendments in appropriatioReimbursements for Medical Care. The language. Normally, changes to mandator,President's budget proposes to repeal the sun- accounts are subject to pay-as-you-go pro-set date on another prcvision of OBRA-90 re- cedures. However, because these changeslated to billing for services provided in VA would be effected through appropriation bills,medical facilities. The VA's authority to bill they are shown as discretionary proposals.


Housing Programs. The President is pro- quirement would generate savings of aroundposing to increase all fees for VA home loan $40 million annually.guarantees by 0.75 percentage points. Thischange would reduce the subsidy cost of such Finally, the President's budget authorityloans by around $155 million a year, for a request for medical care differs substantiallytotal savings over five years of $790 million, from the CBO baseline. The President's re-

quest for 1993 is more than $300 millionReimbursements for Medical Care. The above the baseline level, but the requests forPresident would extend two provisions of 1994 through 1997 are held virtually flat at theOBRA-90 that grant the VA the authority to 1993 level. Under this pattern of budget au-collect copayments from certain veterans re- thority, outlays would exceed the baseline byceiving VA medical care. Under present law, $280 million in 1993, then fall short bythese provisions would expire after 1992. One amounts increasing from $190 million in 1994provision would continue an increase in the to $2.3 billion in 1997. A reduction in outlayslevel of copayments levied against an esti- of the magnitude the President has proposedmated 10,000 admissions and 50,000 out- for 1997 would represent 13.5 percent of totalpatient visits each year. The second provision baseline outlays for VA medical care in thatwould continue the copayment on medication year.provided by the VA on an outpatient basis.Extending these two authorities is expected to General Operating Expenses. The President'sbring in nearly $300 million in copayment requested spending levels for administeringcollections over the next five years. veterans' benefits fall below the inflation-ad-

justed levels in the CBO baseline by increas-The President is also proposing a change in ing amounts between 1993 and 1997. By 1997,

appropriation language to require copay- a shortfall of $180 million, more than 18 per-ments of service-disabled veterans with dis- cent of the baseline total, is expected.abilities rated below 50 percent who are seek-ing care for non-service-connected conditions.Under this provision, copayments would benewly levied on an estimated 50,000 admis-sions to VA hospitals and 275,000 outpatient CBO Reestimatesvisits. This provision would increase collec-tions by more than $35 million in 1993 and Pay-As-You-Go Reestimates. CBO's reesti-$140 million over five years. mates of the Administration's pay-as-you-go

proposals are relatively small. The largest dif-Medical Care. The 1993 budget reflects sev- ference is in CBO's estimate of the savingseral policy changes in the medical care ac- from the Administration's proposals for VAcount that would result in a small net savings housing programs. CBO's estimate of the say-in 1993, a small net cost in 1994, and a large ings in 1993 is more than $200 million belowand growing net savings from 1995 through the Administration's estimate as a result of1997. The President is requesting 1993 appro- differences in estimated default costs for loanspriation language that would delay the avail- originated before 1992. Because the CBOability of $429 million in funds for equipment, baseline reflects lower default costs for these",nd, and structures until August 1, 1993. A loans than are projected by the Office of

ilar obligation delay has been included in Management and Budget, CBO's estimate ofery appropriation since 1990. This proposal the proposal's impact on those costs is lower.ould shift $260 million in outlays from 1993b1994. Under a second proposal, only vet- Other Reestimates. Differences in economic

crrans living more than 50 miles from a VA assumptions cause CBO's estimates of com-

facility would be reimbursed for travel ex- pensation and pension outlays to be $24 mil-penses to and from VA hospitals. This re- lion above the President's estimates in 1993,


with the difference growing to $355 million by weekend. Based on previous practice, CBO1997. The difference results from higher assumes that the VA will issue benefit checksCOLAs underlying CBO's estimates. (See to arrive on Friday, thereby moving onefunction 650 for CBO's and the Administra- month's outlays into the preceding fiscal year.tion's COLA assumptions.) Under this assumption, 13 months of benefits

will be outlaid in 1994, 12 months in 1995.In both the Guaranty and Indemnity pro- and 11 months in 1996. It appears that the

gram and the Loan Guaranty program, CBO's Administration's outlay estimates reflect a dif-estimate of average default costs on future and ferent timing.existing guaranteed loans is significantly lowerthan the Administration's estimate. As a In 1992, CBO's compensation baseline in-result, subsidy and outlay estimates are lower. eludes $115 million for the payment of eightBetween 1993 and 1997, CBO estimates Guar- months of benefits to certain incompetent vet-anty and Indemnity subsidies at $2.8 billion erans resulting from a recent court decision.less than the Administration does and Loan This decision enjoined the VA from with-Guaranty subsidies at $630 million less. holding compensation benefits from these vet-

erans in compliance with a provision ofThe differences between the CBO and OBRA-90. The effect of the injunction is not

OMB estimates of total benefits for the com- reflected in the President's budget.pensation and pension programs are relativelysmall; the differences in the outlay estimates, The remaining reestimdtes are small andhowever, are considerably larger. The first are in the areas of medical care, medical re-day of fiscal years 1994 and 1995 will fall on a imbursements, and readjustment benefits.



1992 1993 1994 1995 1996 1997


CBO ReestimatesPay-As-You-Go Proposals 0 0.2 -0.1 a a a

OtherEconomic

Cost-of-living adjustments 0 a 0.1 0.2 0.2 0.4

TechnicalHousing programs -0.3 -0.5 -0.6 -0.7 -0.7 -0.Compensation and pensions 0.3 0.4 0.8 0.1 0.1 0.Other 0.5 a 0.6 0.3 0.2

Subtotal 0.4 -0.1 0.9 -0.2 -0.4 -06

Total 0.4 0.1 0.9 a -0.2 -0.




Function 750: Administration of JusticePROPOSED SPENDING CHANGES (By fiscal year, outlays in billions of dollars)

1992 1993 1994 1995 1996 1997



Customs user fees 0 0 0 0 -0.7 -0.8

DiscretionaryLaw enforcement programs 0 a -0.1 -0.4 -0.8 -1.2The Judiciary

Original request a 0.3 0.6 0.9 1.3 1.8President's adjustment 0 0 -0.4 -0.8 -1.3 -1.9

Federal prison system 0 0.1 a -0.1 -0.2 -0.3Justice assistance 0 a -0.1 -0.2 -0.2 -0.2Other 0 0.1 a -0.1 -0.2 -0.3

Subtotal a 0.6 0.1 -0.6 -1.3 -2.0

Total a 0.6 0.1 -0.6 -2.0 -2.8



CBO Reestimates 0.2 0.5 0.2 0.3 0.2 0.2



The President's budget for administration of Customs User Fees. The President's budgetjustice increases spending above the baseline includes receipts from customs user fees be-in 1993 and holds spending for many pro- yond their scheduled expiration date in 1995.grams constant thereafter. The President's Extending these fees would yield a total of

budget proposes $15.8 billion in spending $1.5 billion in 1996 and 1997.

authority for 1993--an increase of $1.2 billion,or 8 percent, over 1992 spending authority.The President's proposals would result in net Discretionary Policy Changesoutlays that are $0.6 billion (4 percent) abovethe CBO baseline for 1993, but $4.7 billion, or Law Enforcement Programs. Law enforce-6 percent, below the baseline for the 1993- ment spending would be slightly above the1997 period. As a result of steady increases in baseline in 1993 under the proposals con-funding for programs and activities in this tained in the President's budget. Total budgetfunction, outlays in 1993 would be almost 60 authority for law enforcement would be aboutpercent above the 1990 level. $80 million, or I percent, above the CBO


baseline, with the largest increases targeted for of five new prisons. In contrast, the fundingthe Federal Bureau of Investigation, the Drug request for buildings and facilities is 25 per-Enforcement Administration, and the Immi- cent below the 1992 level. Also, the Admin-gration and Naturalization Service. Outlays istration is requesting authority to collect feesfor law enforcement would be about $40 mil- from prisoners equivalent to the first year'slion above the baseline in 1993 and about $2.5 cost of incarceration. These fees are esti-billion below the baseline over the following mated to bring in $48 million a year.four years, excluding the extended customsuser fees. Justice Assistance. Under the President's

proposals, spending for justice assistanceThe Judiciary. The budget submitted by the would be below the baseline each year. TheJudiciary includes a significant increase in 1993 appropriation request for the Office ofspending in 1993. Budget authority would Justice Programs would be $137 million (15total $2.8 billion compared with $2.4 billion in percent) below the baseline. The decrease1992, a 19 percent increase. Outlays would be would come primarily from juvenile justice$300 million, or 13 percent, above the CBO grants and grants to areas with a high inci-baseline for 1993 and about $5 billion above dence of drug trafficking.the baseline over the 1993-1997 period. Nor-mally, the President's budget includes the Ju- Other. Most other programs would be tar-diciary's request without change. This year, geted for increases in 1993 and held constanthowever, the Administration has adjusted the thereafter. The President would hold budget1994-1997 estimates downward, bringing them authority for the Legal Services Corporationclose to baseline levels. constant at the 1992 level, resulting in a re-

duction in spending of almost $200 millionFederal Prison System. The Administration is reltio the o ase fromi1993

requesting increased funding for the federal tive t9b7.

prison system that would result in outlays through 1997.

$121 million above the baseline in 1993. Thebudget assumes that funding is frozen at the1993 level over the following four years. Out-lays would fall below the baseline by close to$600 million over that period. Spending au- CBO Reestimatesthority for the system's operating expenseswould be $1.9 billion in 1993, an increase of CBO estimates that spending under thealmost $300 million (19 percent) from 1992. Administration's policies would be slightlyThe increase is intended to cover the costs of higher in each year than estimated in thea growing inmate population and the opening budget.


Function 800: General GovernmentPROPOSED SPENDING CHANGES (By fiscal year, outlays in billions of dollars)

1992 1993 1994 1995 19% 1997



Payment to Alaska from leasingArctic National Wildlife Refuge 0 0 0 0.8 0.5 a

Impact assistance to coastal communities 0 0 a a 0.1 0.1Subtotal 0 0 a 0.8 0.5 0.1

DiscretionaryLegislative branch

Original request 0 0.2 0.1 a -0.1 -0.2President's adjustment 0 -0.2 -0.2 -0.2 -0.2 -0.2

Internal Revenue Service 0 0.1 -0.1 -0.4 -0.7 -1.1Federal Buildings Fund 0 0.1 -0.1 -0.1 -0.3 -0.4Other 0 -0.1 -0.2 -0.3 -0.4 -0.5

Subtotal 0 0.2 -0.5 -1.0 -1.7 -2.4

Total 0 0.2 -0.5 -0.2 -1.2 -2.4



CBO Reestimates 0.2 0.1 -1.3 1.0 -0.1 0.1



Under the President's budget for 1993, spend- The budget includes two proposals that would

ing for discretionary general government ac- affect mineral leasing payments to states

tivities would increase by $0.2 billion above beginning in 1994. Alaska would be paid 50

baseline levels. Funding for most of these percent of receipts earned from leasing the

programs would be frozen at the 1993 level Arctic National Wildlife Refuge (ANWR).

over the 1994-1997 period, resulting in savings C10 estimates that the payments to Alaska

for discretionary programs of almost $6 billion would total $0.8 billion in 1995 and $0.5 bil-

during that period. These savings would be lion in 1996. In addition, the President's plan

partially offset by increases from pay-as-you- to share 12.5 percent of new royalties from oil

go proposals. and gas production on the Outer Continental


Shelf would result in payments to affected appropriation, increasing total IRS spendingcoastal states of $0.2 billion over the 1994- by $0.1 billion above baseline levels. The1997 period, budget assumes that funding remains at the

proposed 1993 level through 1997, resulting in

The budget also includes a proposal that future savings of more than $2 billion corn-the Administration would show as pay-as-you- pared with the baseline.go spending but CBO would not. Under cur-rent law, 1993 is the last year of funding for Federal Buildings Fund. The President's bud-compensation to Japanese-Americans de- get for construction, repair, leasing, and op-tained in camps during World War II. Al- eration of federal buildings would increasethough the $1.3 billion the Congress provided outlays overall by only $0.1 billion abovewas originally thought to be enough, addi- baseline levels. Nevertheless, a significant ex-tional amounts will be necessary to make pay- pansion of some of these activities is slated forments to all those entitled to receive compen- 1993. The President would increase fundingsation. The Budget Enforcement Act directs for construction and acquisition from $442that if an entitlement program such as this million in 1992 to $601 million, a 36 percentone will expire under existing law, then the increase, largely to acquire sites for futurebaseline should include sufficient amounts to buildings. In addition, funds for designingmake all payments required by law. There- these buildings would rise by 75 percent overfore, CBO's baseline includes the estimated 1992 levels.$250 million necessary to pay the uncom-pensated internees in 1993. The President's Other. Reductions in two other programsbudget, however, does not assume continua- would partly offset the overall increase in gen-tion of this program and shows the $250 mil- eral government programs. First, the Presi-lion in additional funding on the pay-as-you- dent proposes to freeze the federal payment togo scorecard. the District of Columbia for 1993 and beyond

at the 1992 level. In addition, the Presidentseeks to eliminate funding for any additional

Discretionary Policy Changes District programs. These proposals would re-sult in outlay savings of $34 million in 1993

Legislative Branch. The original budget sub- and $437 million over the 1993-1997 period.

mitted by legislative branch agencies requests The President also proposes to deduct 75 per-

a 14 percent increase over 1992 funding levels, cent of the costs of the mineral leasing pro-

Accounting for most of this increase is a 19 gram before making payments to states. This

percent jump for the House of Representa- proposal is estimated to save $43 million in

tives and a 10 percent boost for the General 1993 and $245 million over five years.

Accounting Office. Requests near baselinelevels for most other legislative branch agen-cies lower the overall rate of increase. Nor-mally, the legislative branch request is in-cluded in the President's budget without cBo Restimateschange. The President has nevertheless in-cluded an unspecified reduction of $0.2 bil- CBO's estimates of spending for most general

lion to bring the total legislative branch re- government programs are based on historical

quest back to baseline levels for 1993. patterns and differ only slightly from the Ad-ministration's estimates, but there are some

Internal Revenue Service. The President's exceptions. The Administration's estimate of

budget continues the effort to modernize the receipts from sales of surplus federal property

computer systems of the Internal Revenue is greater than CBO's by $0.2 billion in 1992

Service (IRS). Funding for this purpose in and by $0.1 billion each year thereafter. In

1993 would rise by 23 percent over the 1992 addition, CBO expects that the first payment


to Alaska from leasing the ANWR would be such payments would be about $0.8 billionmade in 1995 rather than in 1994 as the Ad- lower than the Administration estimates overministration projects. CBO also estimates that the 1994-1997 period.


Function 900: Net Interest


1992 1993 1994 1995 1996 1997

CBO Baselinea 201.0 214.0 231.8 246.1 261.5 279.7


Interest on IRS refunds -0.1 -0.4 -0.4 -0.4 -0.5 -0.5

Other ChangesDebt service 0.1 0.2 0.4 1.0 1.2 0.4Other b b -0.2 -0.3 -0.3 -0.3

Subtotal 0.1 0.1 0.2 0.8 0.9 0.1

Total 0.1 -0.3 -0.2 0.4 0.4 -0.4


a. Assumes compliance with discretionary spending caps.


Proposed Changes The largest component of net interest--payments on the public debt--is a function ofthe federal deficit and market interest rates

The President's budget contains only one and therefore cannot be controlled directly.pay-as-you-go proposal affecting net interest. As explained in Chapter 1, CBO estimatesUnder certain circumstances, the government that the Administration's policies would addpays interest on tax payments that must be to the deficit in most years. As a result, debtrefunded. Specifically, in the case of income service costs would exceed those in the base-

tax efudsthegovrnmet pys nteest line by amounts ranging from $0.1 billion in

beginning 45 days after the original due date. 1992 to $1.2nbillionin 1996.

Thus, taxpayers who file amended returns (for

which the original filing date has passed) typi-cally collect one or more years' worth of in-terest. Under the President's proposal, thegovernment would owe little or no interest to Federal Debtsuch filers so long as it processed theiramended returns promptly. The Administra- Debt held by the public grows each year bytion also proposes extending the 45-day roughly the amount of the federal deficit.interest-free processing period to certain re- Thus, the growth in federal debt slows gradu-funds not currently covered, such as those for ally through 1996 and picks up again in 1997.excise, estate, and gift taxes. The proposal As the table shows, debt held by the public iswould be effective in July 1992. In CBO's expected to leap from just over $3 trillion atestimation, it would reduce interest paid to the end of 1992 to $4.3 trillion at the end oftaxpayers by $50 million in the last quarter of 1997. The President's proposals hardly make1992 and by about $400 million to $500 mil- a dent in the rapid buildup of debt. As a per-lion per year thereafter. centage of gross domestic product, debt held

CHAPTER FIVE THE ADMINISTRATION'S DOMESI IC PROPOSALS 129

by the public is projected to rise from 52 per- with OMB's assumption that relatively high-cent in 1992 to around 55 percent in 1994 rate state and local government issues will bethrough 1997. redeemed rapidly and replaced with lower-

yielding instruments. Furthermore, CBO as-sumes that relatively more borrowing will oc-cur in the early part of each year, thereby ac-

CBO Reestimates cruing interest costs more quickly.

This function includes, as receipts, interest

Reestimates of the Administration's net in- that the Federal Financing Bank (FFB) earnsterest spending add $2.3 billion to outlays in on its loans to the Resolution Trust Corpora-1992, less than $50 million in 1993, and $15.8 tion and the Bank Insurance Fund. CBObillion in 1997. These differences stem mostly anticipates that the two deposit insurancefrom technical estimating differences in the agencies will together borrow more than OMBnear term and from higher interest rate as- assumes and thus create larger receipts of in-sumptions in 1995 through 1997. terest earnings for the FFB. Between 1992

and 1997, this difference (which is offset inAs discussed in Chapter 2, CBO assumes the budget in function 370) totals an addi-

generally lower interest rates from 1992 tional $11.3 billion. Smaller technical esti-through 1994 than does the Office of Manage- mating differences are attributed to other in-ment and Budget, but higher rates in 1995 tragovernmental interest accounts, interest tothrough 1997. By 1997, CBO's assumed in- and from credit financing accounts, and in-terest rates on all maturities are approximately terest on tax refunds.0.5 percentage points higher than the Admin-istration's estimates. These higher rates are As discussed in Chapter 1, CBO believesreflected in economic reestimates of $12.4 bil- that the Administration's deficit estimates arelion in 1997. too high in 1992 and 1993 and too low in 1994

through 1997. Thus, CBO estimates lowerTechnical reestimates to interest on the debt service costs through 1994 and higher

public debt add an average of more than $4 debt service costs thereafter. By 1997, CBO'sbillion per year to outlays. CBO disagrees reestimate boosts debt service by $3.7 billion.

CBO PROJECTIONS OF FEDERAL DEBT HELD BY THE PUBLIC (By fiscal year)

1992 1993 1994 1995 1996 1997


CBO Baselinea 3,049 3,385 3,656 3,865 4,061 4,304

President's Proposed Budgetas Reestimated by CBO 3,054 3.386 3.666 3.886 4077 4,301

Difference 5 1 10 21 16 -3


CBO Baselinea 52.2 54.3 55.2 55.2 54.8 54.8

President's Proposed Budgetas Reestimated by CBO 52.2 54.3 55.4 55.5 55.0 54.8


a. Assumes compliance with discretionary spending caps.



1992 1993 1994 1995 1996 1997


CBO ReestimatesEconomic

Net interest on public debt -2.1 -1.6 -0.5 3.1 7.6 12.5Other interest a a a a -0.1 -0.1

Subtotal -2.1 -1.6 -0.5 3.1 7.6 12.4

TechnicalNet interest on public debt 5.2 4.5 4.5 4.4 4.0 4.2Receipts from deposit insurance

agencies -0.8 -0.7 -1.8 -3.6 -2.9 -1.5Other 0.6 a -1.0 -1.6 -2.4 -2.9

Subtotal 5.0 3.8 1.7 -0.8 -1.3 -0.3

Debt Service -0.6 -2.2 -0.6 1.9 2.6 3.7

Total 2.3 a 0.6 4.3 8.9 15.8




Function 920: Allowances


1992 1993 1994 1995 1996 1997

CBO Baseline Without Discretionary Caps 0 0 0 0 0 0

Proposed ChangesDiscretionary

Davis-Bacon reform 0 -0.1 -0.1 -0.1 -0.1 -0.1Pay raise delay 0 -0.5 0 0 0 0Government contribution for proposed

Public Health Service commissioned corps 0 0.1 0.1 0.1 0.1 0.1

Total 0 -0.4 0 0 0 0

President's 1993 Budgetas Estimated by CBO 0 -0.4 0 0 0 0

President's 1993 Budget 0 -0.4 -7.6 -4.6 0 0

CBO Reestimates 0 0 7.6 4.6 0 0

Proposed Changes Department of Labor will issue regulations onthe use of helper workers. The department

Function 920 has traditionally been used to promulgated regulations on helpers in Febru-record proposed costs or savings that, for vari- ary 1991, but the 1991 supplemental appropri-ous reasons, cannot easily be allocated by ation contained language specifically prohibit-function or agency elsewhere in the budget. ing the Secretary of Labor from using anyUltimately, however, these items would have funds to carry out those regulations. The reg-to be reflected in appropriations for specific ulations would save $0.6 billion per year bybudget accounts. 1997.

As in last year's budget, the President pro- The President proposes to delay the 1993poses to modify the Davis-Bacon Act, a law pay adjustment for federal civilian employeesthat requires the payment of prevailing wages by three months. The Federal Employees Payon construction projects financed with federal Comparability Act of 1990 linked Generalfunds. The proposed changes would increase Schedule and other white-collar salary adjust-the minimum contract covered by Davis- ments to the annual increase in the Employ-Bacon from the current level of $2,000 to ment Cost Index. Salaries are adjusted each$250,000. This change is assumed to reduce January. The President's proposal would de-the required budget authority and outlays in lay the 1993 white-collar salary increase todomestic discretionary accounts by about $0.1 April 1993. Salary adjustments for each of thebillion annually. Proposed savings in national wage areas of the Federal Wage System (FWS)defense are incorporated in function 050. are staggered throughout the year; the Presi-

dent's proposal would delay the 1993 FWSThe President's appropriation requests in salary adjustments by three months. The pro-

other functions of the budget assume that the posal would save $460 million in 1993.

132 ANALYSIS OF ITHE PRESIDENT'S BUDGET March 1992

As discussed in function 550, the Presidentproposes new, accrual-based rules for fundingPublic Health Service retirement. The pro- CBO Reestimatesposal would require additional contributionsby several agencies on behalf of their workers, The Administration's budget includes unspe-amounting to about $100 million a year. The cified savings in discretionary spending inextra contributions are placed in this function; 1994 and 1995. Based on recent experience,the offsetting receipts are in function 950 of however, CBO believes that such savings arethe budget. unlikely to appear in the absence of specific

policy proposals. CBO has deleted the unspe-cified savings from its estimate of the Presi-dent's budget, increasing outlays by $7.6 bil-lion in 1994 and $4.6 billion in 1995.


Function 950: Undistributed Offsetting Receipts


1992 1993 1994 1995 1996 1997

CBO Baseline Without Discretionary Caps -39.1 -39.9 -39.5 -40.5 -41.3 -43.0


Spectrum auctions 0 0 -2.0 -1.6 -0.7 0

DiscretionaryEmployer's share of employee retirement 0 -0.3 -0.3 -0.3 -0.1 -0.1Spectrum auctions 0 0 0 -0.3 -0.2 0.1

Subtotal 0 -0.3 -0.3 -0.6 -0.3 a

Other ChangesLease of naval petroleum reserve

at Elk Hillsc 0 -1.2 -0.2 -0.2 -0.2 -0.2Lease of Arctic National Wildlife Refuge

(Federal share)b 0 0 0 -0.8 -0.5 aSale of Alaska PMAc 0 -0.1 0 0 0 0

Subtotal 0 -1.3 -0.2 -1.0 -0.6 -0.2

Total 0 -1.6 -2.5 -3.2 -1.6 -0.2

President's 1993 Budgetas Estimated by CBO -39.1 -41.5 -42.0 -43.7 -42.9 -43.2


b. Projected receipts from leasing the Arctic National Wildlife Refuge would be split between the federal government and the stateof Alaska, with the Alaskan share of leasing receipts shown in function 300 and the proposed payout of those receipts to the stateshown in function 800.

c. The receipts from the proposed lease of the naval petroleum reserve at Elk Hills, California, and from the proposed sale of theAlaska Power Marketing Administration (PMA) are shown in function 950. Outlays in function 270 would increase relative tothe baseline if these transactions are carried out, because the assets would no longer generate direct receipts to the government.

Proposed Changes frequencies. Additional proposals would af-fect the amounts agencies contribute to em-ployee retirement, which appear as receipts in

The budget includes measures that would this function. Most of these proposals areincrease undistributed offsetting receipts by similar to ones that appeared in previous

$1.6 billion in 1993. The President proposes year budgets.

to sell the rights to oil and gas production at years' budgets.

the naval petroleum reserve at Elk Hills,California (NPR-1), the rights to oil and gas Pay-As-You-Go Policy Changesexploration and development at the ArcticNational Wildlife Refuge (ANWR), and the Spectrum Auctions. The President proposesAlaska Power Marketing Administration to use competitive bidding to award all initial(PMA). The budget also includes a proposal licenses and new construction permits in-to auction the rights to use communications volving use of the electromagnetic spectrum.


In addition, the legislation proposed by the 1993-1997 period. These additional receiptsAdministration would require the Federal would offset higher spending in other budgetCommunications Commission (FCC) to free functions, thus resulting in no net budgetaryup 45 megahertz (MHz) of the electromag- impact.netic spectrum currently used by governmentagencies and open it for competitive biddingand assignment during the 1995-1997 period. Other ChangesThe FCC would move current commercialand federal government users from their CBO considers the proposed sale of produc-existing frequencies and auction the freed-up tion rights at NPR-1 and the ANWR to befrequencies for new commercial uses. CBO asset sales because the sale of such rightsestimates that this initiative would result in would deplete mineral resources currentlygross receipts of $5 billion over the 1994-1996 owned by the federal government. Under theperiod from auctioning about 220 MHz cur- Balanced Budget and Emergency Deficitrently planned for reassignment plus the 45 Control Act of 1985, the proceeds of non-MHz mandated by the Administration's legis- routine asset sales are not credited for deficitlative proposal. reduction purposes.

The Administration's proposal would re- Naval Petroleum Reserve. The Presidentquire appropriation action for auctioning 20 proposes to transfer the rights to produce oilMHz of the 45 MHz mandated by the bill. and gas at the government's Elk Hills, Cali-CBO therefore includes receipts of $4.3 bil- fornia, oil field to a private operator throughlion in the pay-as-you-go category and the re- a long-term lease. The buyer(s) of these rightsmaining $0.7 billion under discretionary say- would pay the government $1.2 billion in 1993ings. CBO estimates that relocating govern- and additional amounts over the 1994-1997ment users would cost $500 million over the period. Over a seven-year period, the state of1995-1999 period, $300 million of which California would receive 7 percent of thesewould occur between 1995 and 1997. These bonus payments. Starting in 1994, the federalexpenditures would be discretionary and government and California would sharewould partially offset the projected receipts in equally in royalties on future production,that spending category. which would be paid at a rate of 12.5 percent.

Discretionary Policy Changes CBO estimates that the federal share ofNPR-1 royalties and bonus payments would

Employer's Share of Employee Retirement. total $1.9 billion over the 1993-1997 period.The President's budget proposes to make the These receipts would be partially offset (inPostal Service pay for any remaining un- function 270) by a loss of about $1.3 billion infunded liability resulting from pre-1991 cost- net income that the government would other-of-living adjustments. These payments would wise receive over the five-year period fromincrease receipts by $210 million annually selling NPR-l products. The governmentfrom 1993 through 1995. would forgo additional net income in years

after 1997 as well. The President also pro-Another proposal would establish an accru- poses to use some of the royalty and bonus

al-based retirement system for commissioned payment receipts to establish a defensecorps officers of the Public Health Service. petroleum inventory of 10 million barrels.Under this proposal, increased employer con- Expenditures for the proposed inventory aretributions to the retirement system would included in function 270. They would totalraise receipts shown in function 950 by $98 about $100 million over the 1993-1997 periodmillion in 1993 and by $536 million over the and an additional $200 million after 1997.


Arctic National Wildlife Refuge. The Presi- The legislation proposed by the Administra-dent proposes opening the ANWR to exploration would require the FCC to auction newtion and drilling for oil and gas, and splitting licenses and construction permits, with somethe proceeds of ANWR lease sales evenly be- exceptions. CBO believes that this legislationtween the federal government and the state of would require the FCC to auction not onlyAlaska. CBO expects that lease sales would the 45 MHz specified in the President's re-occur in 1995 and 1996, with net federal quest, but also additional frequencies that thereceipts totaling $0.8 billion and $0.5 billion, FCC will make available through current pro-respectively. (Collection of the Alaskan share ceedings. (The Administration's estimate ap-of ANWR receipts is shown in function 300, pears to encompass only the 45 MHz.) CBOand the payment of those funds to the state is therefore estimates that the proposed legisla-shown in function 800.) tion would lead to earlier auctions than as-

sumed in the budget, and that the auctionsSale of Alaska Power Marketing Administra- would yield $2 billion in receipts in 1994.tion. The President proposes to sell the The President's budget does not project anyAlaska PMA at the end of 1993, yielding $85 auction receipts until 1995.million. This income would be partially offsetby the loss of income that the governmentwould receive if it kept the PMA. This loss Other Reestimateswould appear in function 270 and wouldamount to $44 million over the 1993-1997 Employer's Share of Employee Retirement.period and more in subsequent years. CBO's estimates of offsetting receipts for

agency contributions to retirement programsfor the government's civilian employees arelower than the Administration's estimates by

CBO Reestimates $0.2 billion in 1992; this difference increasesto $2.3 billion by 1997. CBO's estimates ofemployer contributions for military employees

CBO's estimates of the budgetary impacts of exceed the Administration's estimates by $1.3each of the proposals affecting this function billion in 1994, with the difference falling todiffer significantly from the Administration's, $0.9 billion by 1997.but the aggregate difference over the 1992-1997 period is less than $0.3 billion. CBO's estimates of agency retirement con-

tributions for civilian employees are lowerthan the Administration's estimates mainly

Pay-As-You-Go Reestimates because CBO's estimates reflect the budget'sproposed reductions in the number of civil-

Spectrum Auctions. The Administration ians working for the Department of Defenseestimates that the sale of licenses and permits (DoD) and the Administration's estimates dowould generate gross receipts of about $6.8 not.billion over the 1995-1997 period, and thatthe auction would entail discretionary costs of CBO's estimates of agency retirement con-$3.0 billion over the same period for relo- tributions for military employees are highercating government users. Thus, the budget because the Administration's request for fiscalincludes net receipts of $3.8 billion. By com- years 1994 through 1997 assumes a change inparison, CBO estimates that net receipts the long-term economic assumptions used towould total $4.7 billion over the 1994-1997 calculate the government's contribution rateperiod, of which $4.3 billion would count for for military retirement. This change wouldpay-as-you-go purposes. effectively lower DoD's contributions to the


retirement fund by about $2.8 billion each action is likely to occur later--by early inyear. Whether this change occurs will depend fiscal year 1993--and that the first lease saleon the decisions of an independent board of could not occur until 1995. CBO also projectsactuaries charged with evaluating the sound- that the federal share of bonus bids fromness of the military retirement fund. CBO's competitive bidding would be about $0.8 bil-estimates assume that the actuaries will revise lion less than the Administration projects overthe long-term assumptions, but only by about the 1993-1997 period.half as much as the Administration assumes.

Outer Continental Shelf. CBO's estimates ofArctic National Wildlife Refuge. The Presi- receipts from Outer Continental Shelf leasingdent proposes to open the ANWR to oil and are higher than the President's by $0.4 billiongas exploration and development, and as- in 1993 and by an average of $0.6 billion an-sumes that legislation would be enacted by nually from 1994 through 1997, primarilyJune 1992, with the first lease sale occurring because CBO assumes higher oil and gasin 1994. CBO assumes that any Congressional prices than the Administration does.



1992 1993 1994 1995 1996 1997

President's 1993 Budget -38.8 -41.6 -40.3 -42.0 -44.4 -45.0


Spectrum auctions 0 0 -2.0 -0.3 1.0 0.8

OtherEmployer's share of

employee retirement 0.2 0.5 -0.6 0.3 1.0 1.4Lease of Arctic National

Wildlife Refuge 0 0 1.3 -0.8 0.3 aOuter Continental Shelf -0.6 -0.4 -0.5 -0.6 -0.6 -0.6Other 0 0 0.2 -0.3 -0.2 0.1

Total -0.4 0.2 -1.6 -1.7 1.5 1.8

President's 1993 Budgetas Estimated by CBO -39.1 -41.5 -42.0 -43.7 -42.9 -43.2


Appendixes

Appendix A

Baseline Budget Projections

hroughout this volume, the Administra- grams encompass nearly all the defense and

tion's proposals are contrasted with the international affairs budgets and many domes-Congressional Budget Office's (CBO's) tic programs: space, energy, transportation,

baseline estimates of the budget. The base- environmental protection, health research,line shows the path of revenues and spending and salaries and expenses of civilian agencies,if current laws and policies remain un- to name just a few. The Budget Enforcementchanged. It is not a forecast of budget out- Act of 1990 (BEA) set multiyear caps on ap-comes, since policymakers will certainly seek propriations, both on budget authority (themany changes in priorities. But the baseline ability to obligate money) and on outlays (ac-is a handy yardstick for gauging the potential tual spending). Through 1993. separate capsimpacts of proposed changes--those advo- apply to three broad types of discretionarycated in the President's budget as well as in spending: defense, international, and domes-competing packages. tic. In 1994 and 1995, a single lid covers all

discretionary spending. CBO's baseline as-sumes compliance with these caps, which willBaseline projections follow long-established inexorably force trade-offs among many corn-

rules. Revenues and entitlement programs peting programs (see discussion below).

(like Social Security and Medicare) continue

on their course until the Congress changes the No discretionary spending caps are speci-laws that underpin them--laws setting tax rates fled after the Budget Enforcement Act expiresand taxable income, benefit formulas and eli- in 1995. The baseline projections simply pre-gibility, and so forth. For these categories, serve 1995's real spending levels in 1996 andtherefore, the baseline represents CBO's bestestiateof hat illhapen udercurent 1997, boosting them for inflation of about 3.4estimate of what will happen under currentpecn p ry a.laws. Any expiring provisions of law are as-sumed to expire as scheduled, with two im- A few categories of spending remain. Theportant exceptions. The baseline assumes that government has pledged to protect depositorsexcise taxes dedicated to trust funds (such as in banks and savings and loan institutions,the Airport and Airway Trust Fund), and any and the baseline for deposit insurance showslarge entitlement programs, will continue past the cost of meeting those promises. Offsettingtheir current expirations--two assumptions receipts, such as fees and collections, repre-that are explicitly stated in law. sent CBO's best estimate of sums collected

Unlike entitlement programs, discretionary under current laws and policies. And net in-Unlikamsare e untitement prram, dretar y throterest is not directly controlled by policy-

programs are funded anew each year through makers but is driven by market interest ratesthe appropriation process. Discretionary pro- and future deficits.


tions use to calculate estimated income tax

payments; this provision, though it affects the

Changes in the CBO Baseline timing of receipts, is nevertheless revenueneutral over the 1992-1996 period.

CBO's report, The Economic and Budget Out-look: Fiscal Years 1993-1997 (January 1992), Recent administrative actions have led

described the baseline projections in detail. CBO to drop its estimate of revenues by $15

Since then, CBO has made modest revisions billion in 1992, $6 billion in 1993, and small

to its baseline projections (see Table A-1). amounts in later years. The revision is almostwholly the result of the Administration's move

Only one piece of legislation has affected to reduce income taxes withheld from work-

the budget totals since January. A bill further ers' paychecks, a step that did not require leg-

extending unemployment benefits in the wake islation. Long-run effects are virtually nil be-

of the recession (P.L.102-244) boosts spend- cause lower collections in one year are offset

ing in 1992 and, by a smaller amount, in 1993. by shrunken tax refunds in the next. Another,The same act modifies the rules that corpora- smaller revision (amounting to less than $500

Table A-1.

Changes in CBO Deficit Projections Since January (By fiscal year, in billions of dollars)

1992 1993 1994 1995 1996 1997

January 1992 Estimate 352 327 260 194 178 226

Legislative Changes (Extensionof Unemployment Insurance)

Revenues 0 1 a -1 a 0Outlays 3 1 0 0 0 0Deficit 3 a a 1 a 0

Other Policy ChangesbRevenues -15 -6 -1 -1 -2 -2Outlays 0 0 0 0 0 0Deficit 15 6 1 1 2 2

Technical RevisionsRevenues a a a a a aOutlays

Discretionary programs 1 4 5 6 6 6Mandatory programs -3 -1 1 1 2 2

Subtotal -2 4 6 7 9 9

Deficit -2 4 6 7 9 9

Total 16 10 7 9 11 10

Current Estimate 368 336 267 203 189 236


NOTE: Projections include Social Security and the Postal Service, which are off-budget. Projections assume compliance with discre-tionary spending caps in the Budget Enforcement Act.


b. Change in individual income tax withholding tables and in required reserve ratios for commercial banks.

APPENDIX A BASELINE BUDGET PROJECTIONS 141

million a year) marks a recent reduction in ance purposes. In announcing new caps forthe reserves that banks and other depositing fiscal year 1993 and previewing those for laterinstitutions must set aside with the Federal years, OMB consistently adopted more gen-Reserve System, which affects corporate in- erous solutions than did CBO (in its own ad-come taxes and Federal Reserve earnings. visory report) on several contentious issues:

the size of a downward adjustment that wasTechnical revisions in outlays boost the required by unexpectedly low inflation, the

projected deficit. Extra spending in discre- amount of cuts required to comply with lasttionary programs reflects new, higher spend- year's highway bill, and the amount of elbowing caps that were published in conjunction room afforded for spending related to Opera-with the Administration's budget. The Budget tion Desert Storm. Altogether, OMB's moreEnforcement Act designated the Administra- generous interpretations allow $4 billion to $6tion's Office of Management and Budget billion a year more in discretionary spending(OMB) as the official scorekeeper for compli- than CBO assumed earlier. Because OMB's

Table A-2.The Deficit Outlook Under Current Policies (By fiscal year)

Actual1991 1992 1993 1994 1995 1996 1997

In Billions of DollarsTotal Deficit AssumingDiscretionary Caps 269 368 336 267 203 189 236

Deficit Excluding Deposit Insuranceand Desert Storm Contributions 246 307 267 235 219 233 265

On-Budget Deficit (Excluding Social

Security and Postal Service) 321 420 400 344 290 287 346

Standardized-Employment Deficita 172 209 198 186 180 202 245

Memoranda:Deposit Insurance 66 65 69 33 -17 -45 -29Desert Storm Contributions -43 -5 0 0 0 0 0Off-Budget Surplus

Social Security 54 53 65 76 86 98 110Postal Service -1 -1 -1 b 1 b -1

Total, Off-Budget Surplus 52 52 64 76 87 98 109


Total Deficit AssumingDiscretionary Caps 4.8 6.3 5.4 4.0 2.9 2.5 3.0

Deficit Excluding Deposit Insuranceand Desert Storm Contributions 4.4 5.3 4.3 3.5 3.1 3.1 3.4

Standardized-Employment Deficita, c 2.9 3.4 3.1 2.7 2.5 2.7 3.1


a. Excludes deposit insurance and Desert Storm contributions.


c. Shown as a percentage of potential GDP.


estimates will control the appropriation ing on deposit insurance. Stripping such fac-process, CBO now uses OMB's official caps. tors out of the totals helps to highlight theRevisions to mandatory programs are relative- government's underlying deficit (see Tablely small, changing outlays by $1 billion to $3 A-2). These temporary factors fade in impor-billion a year. tance. At the same time, the Budget Enforce-

ment Act's caps on discretionary spending callIn sum, the revisions to CBO's baseline for further belt-tightening in 1993 through

swell the deficit by $16 billion in 1992 and by 1995. Thus, the deficit dwindles before get-an average of $9 billion a year thereafter (see ting stuck at about 3 percent of gross domesticTable A-i). The resulting deficit falls through product (GDP) in mid-decade.mid-decade but then turns up again. AsCBO's January report explained more fully, Totals for the major revenue sources andtoday's record-breaking deficits stem partly spending categories are presented in Tablefrom temporary factors--namely, from the re- A-3. Because entitlement spending alone--cession, which depresses revenues and boosts largely fueled by the government's health carespending, and from the hemorrhage of spend- and retirement programs- -accounts for ap-

Table A-3.Baseline Budget Projections, Assuming Compliance with Discretionary Spending Caps (By fiscal year)

ActualCategory 1991 1992 1993 1994 1995 1996 1997


RevenuesIndividual income 468 476 513 556 596 633 673Corporate income 98 98 110 120 125 129 131Social insurance 396 415 449 480 509 540 570Other 92 98 102 106 110 111 115

Total 1,054 1,088 1,173 1,262 1,340 1,413 1,490On-budget 760 783 845 911 968 1,018 1.070Off-budget 294 305 328 350 372 395 420

OutlaysDefense discretionary 317 313 297 a a a aInternational discretionary 19 20 21 a a a aDomestic discretionary 196 215 225 a a a a

Subtotal 532 548 543 537 538 556 575

Mandatory spending,excluding deposit insurance 636 710 751 797 848 903 977

Deposit insurance 66 65 69 33 -17 -45 -29Net interest 196 201 214 232 246 262 280Offsetting receiptsb -108 -69 -67 -69 -73 -74 -77

Total 1,323 1,455 1.510 1,529 1,543 1,602 1,726On-budget 1,081 1,203 1.246 1,255 1,258 1,305 1,416Off-budget 242 252 264 274 285 297 310

Deficit 269 368 336 267 203 189 236On-budget deficit 321 420 400 344 290 287 346Off-budget surplus 52 52 64 76 87 98 109

(Continued)



proximately half of all federal spending, more sketch the implications of the discretionarydetail about this huge category is depicted in caps for budget totals.Table A-4.

One way to illustrate the policymakers' taskis to compare the caps with a path that keepsreal spending at today's levels. Table A-5shows how high discretionary spending

How Tight Are the Caps? levels--both budget authority and outlays--would climb if they preserved the amount and

By setting broad caps on discretionary spend- mix of discretionary spending in 1992. Be-ing, the BEA's drafters forced trade-offs cause of inflation, these amounts would growamong programs. There are literally thou- every year. But the law does not allow policy-sands of possible ways to comply with the makers to appropriate this much money. Incaps. CBO's baseline projections assume that 1993, the legislators must freeze domestic ap-policymakers will achieve compliance. CBO propriations at roughly the 1992 levels, whilecannot project how individual programs will chopping the defense budget from this year'sfare in the ensuing competition, but it can figure. Moreover, further rounds of cuts

Table A-3.Continued

ActualCategory 1991 1992 1993 1994 1995 1996 1997


RevenuesIndividual income 8.3 8.1 8.2 8.4 8.5 8.5 8.6Corporate income 1.7 1.7 1.8 1.8 1.8 1.7 1.7Social insurance 7.0 7.1 7.2 7.2 7.3 7.3 7.3Other 1.6 1.7 1.6 1.6 1.6 1 .5 1.5

Total 18.7 18.6 18.8 19.1 19.1 19.1 19.0On-budget 13.5 13.4 13.6 13.8 13.8 13.7 13.6Off-budget 5.2 5.2 5.3 5.3 5.3 5.3 5.3

OutlaysDefense discretionary 5.6 5.4 4.8 a a a aInternational discretionary 0.3 0.3 0.3 a a a aDomestic discretionary 3.5 3.7 3.6 a a a a

Subtotal 9.5 9.4 8.7 8.1 7.7 7.5 7.3

Mandatory spending,excluding deposit insurance 11.3 12.1 12.0 12.0 12.1 12.2 12.4

Deposit insurance 1.2 1.1 1.1 0.5 -0.2 -0.6 -0.4Net interest 3.5 3.4 3.4 3.5 3.5 3.5 3.6Offsetting receiptsb -1.9 -1.2 -1.1 -1.0 -1.0 -1.0 -1.0

Total 23.5 24.9 24.2 23.1 22.0 21.6 22.0On-budget 19.2 20.6 20.0 19.0 18.0 17.6 18.0Off-budget 4.3 4.3 4.2 4.1 4.1 4.0 4.0

Deficit 4.8 6.3 5.4 4.0 2.9 2.5 3.0On-budget deficit 5.7 7.2 6.4 5.2 4.1 3.9 4.4Off-budget surplus 0.9 0.9 1.0 1.2 1.2 1.3 1.4

a. Discretionary spending caps are specified by category through 1993 and in the aggregate for 1994 and 1995. Projections for 1996and 1997 assume that spending grows at the rate of inflation after 1995.

b. Includes contributions from allied nations for Operation Desert Storm.


Table A4.CBO Baseline Projections for Mandatory Spending,Excluding Deposit Insurance (By fiscal year, in billions of dollars)

Actual

1991 1992 1993 1994 1995 1996 1997

Means-Tested Prograrir

Medicaid 53 68 80 89 100 113 126Food Stampsa 20 23 23 23 23 24 25Supplemental Security Income 15 17 18 21 22 21 25Family Support 14 16 17 17 18 19 19Veterans' Pensions 4 4 4 4 4 4 4Child Nutrition 6 6 6 7 7 8 8Earned Income Tax Credit 5 7 8 9 12 12 13Stafford Loansb 5 2 3 3 3 3 3Other 2 3 3 3 4 4 4

Total 122 146 162 177 193 207 228

Non-Means-Tested Programs

Social Security 267 285 301 318 335 354 374Medicare 114 128 143 159 177 198 220

Subtotal 381 413 443 477 513 553 594

Other Retirement and DisabilityFederal civilianc 37 38 39 42 44 50 54Military 23 24 26 27 28 30 32Other 4 5 5 5 5 5 5

Subtotal 64 67 70 74 78 85 91

Unemployment Compensation 25 35 26 25 26 26 27

Other ProgramsVeterans' benefitsd 14 16 16 18 17 16 18Farm price supports 10 9 11 10 9 9 9Social services 6 5 6 5 5 5 5Credit reform liquidating accounts 0 9 5 2 -1 -8 -5Other 13 10 12 10 9 9 10

Subtotal 43 49 s0 44 39 32 37

Total 514 564 589 620 655 696 748

TotalAll Mandatory Spending,Excluding Deposit Insurance 636 710 751 797 848 903 977


NOTE: Spending for major benefit programs shown in this table includes benefits only. Outlays for administrative costs of mostbenefit programs are classified as nondefense discretionary spending, and Medicare premium collections as offsettingreceipts.

a. Includes nutrition assistance to Puerto Rico.

b. Formerly known as guaranteed student loans.

c. Indudes Civil Service, Foreign Service, Coast Guard, and other retirement programs, and annuitants' health benefits.

d. Includes veterans' compensation, readjustment benefits, life insurance, and housing programs.


Table A-S.Comparison of Discretionary Spending Levels (By fiscal year. in billions of dollars)

1992 1993 1994 1995 1996 1997

Amounts Required to Preserve Real Resourcesa

Budget AuthorityDefense 301 302 313 325 337 350Internationalb 21 21 22 23 24 25Domestic 204 213 220 228 242 256

Total 526 536 556 576 603 630

OutlaysDefense 313 307 311 319 329 341Internationalb 20 20 21 22 23 23Domestic 215 232 245 255 265 275

Total 548 560 578 596 617 639

Savings from Complying with Caps

Budget AuthorityDefense 0 -13 c c c cInternationalb 0 1 c c c cDomestic 0 -.6 c c c c

Total 0 -18 -44 -59 -68 -78

OutlaysDefense 0 -10 c c c cInternationalb 0 d c c c cDomestic 0 -_7 c c c c

Total 0 -17 -41 -58 -60 -64

Baseline Assuming Compliance with Caps

Budget AuthorityDefense 301 289 c c c cInternationalb 21 23 c c c cDomestic 204 206 c c c c

Total 526 518 511 517 535 553

OutlaysDefense 313 297 c c c cInternationalb 20 21 c c c cDomestic 215 225 c c c c

Total 548 543 537 538 556 575


a. Preserves 1992 real resources, except emergency appropriations.

b. The international caps would permit a slight increase in real resources in 1993.

c. Discretionary spending caps are specified by category through 1993 and in the aggregate for 1994 and 1995. Projections for 1996and 1997 assume that spending grows at the rate of inflation after 1995.

d. Less than $500 million.


will be required in 1994 and 1995. The cuts fund is also legally off-budget.) These off-will be painful even if they are not savage. By budget totals are shown in Table A-2. Econo-1995, total discretionary spending--in real mists and credit market participants focus ondollars--would be about 10 percent below the government's total finances, ignoring the1992 levels. As a percentage of GDP, it will on- and off-budget distinction. Social Securi-have slipped below 8 percent, the lowest share ty alone accounts for about one-fourth of gov-in decades. ernment revenues and one-fifth of spending.

No useful budget measures can overlook suchlarge flows.

The Social Security funds are merely theTrust Funds in the Projections largest of many federal trust funds. The major

funds and their surpluses are depicted inLegislation passed in 1983 formally placed the Table A-6. In the budget, trust funds serve atwo Social Security trust funds (Old-Age and purely bookkeeping role, tracking earmarkedSurvivors Insurance and Disability Insurance) collections and spending. The apparent sizeoff-budget. Both CBO and the Administra- of Social Security and other trust fund sur-tion comply with this law by displaying on- pluses has distorted budget debate. Specif-and off-budget totals separately. (Besides So- ically, some budget watchers maintain thatcial Security, the much smaller Postal Service trust funds mask the true deficit--their term

Table A-6.

CBO Projections of Trust Fund Surpluses (By fiscal year, in billions of dollars)

1992 1993 1994 1995 1996 1997

Social Security 53 65 76 86 98 110Medicare 14 11 9 9 7 4Military Retirement 13 12 10 10 9 8Civilian Retirementa 24 26 29 31 30 31Unemployment -15 -2 2 3 5 4Highway and Airport 2 2 b -1 -1 -1Otherc 3 2 2 2 2 2

Total Trust Fund Surplus 95 117 128 139 149 158

Federal Funds Deficitd -463 -454 -395 -342 -338 -395

Total Deficit -368 -336 -267 -203 -189 -236

Memorandum:Net Transfers from FederalFunds to Trust Funds 192 201 214 234 257 281


a. Civil Service Retirement, Foreign Service Retirement, and several smaller funds.


c. Primarily Railroad Retirement, employees' health insurance and life insurance, Hazardous Substance Superfund, and variousveterans' insurance trust funds.

d. Assumes that discretionary spending reductions are made in non-trust-fund programs.


for the federal funds deficit, which excludes CBO expects that, under current policies,trust funds. That is a misconception, for two revenues will barely outpace the growth incompelling reasons. GDP, climbing from 19.0 percent of GDP in

1997 to 19.1 percent in 2002. Personal in-First, all trust funds rely, to a greater or come taxes account for this slight rise.

lesser degree, on transfers from elsewhere inthe budget to generate their surpluses. (In a But spending grows faster than revenues.classic example, the Medicare Part B program Outlays grow by more than 1 percent of GDPfinances just one-fourth of its costs from pre- in the 1997-2002 period. Within the spendingmiums, simply counting on a general fund totals, some categories grow faster than GDPtransfer for all the rest, thereby posting a while others lag behind. The government'ssmall "surplus.") Such transfers swell the fed- big health care programs- -Medicare anderal funds deficit and the trust fund surplus by Medicaid--continue to soar, and together theyequal amounts but obviously do not change represent 5.9 percent of GDP in 2002 (versusthe total deficit or the government's borrow- 4.4 percent in 1997). Net interest outlays inching needs by one penny. As Table A-6 shows, up from 3.6 percent of GDP in 1997 to 3.8such transfers total roughly $200 billion a percent in 2002. Social Security benefits stayyear; without them, the trust funds would not just below 5 percent of GDP. In 2002, theshow surpluses. final year of this projection, the big demands

that the baby-boom generation will place onSecond, and more important, decisions Social Security and Medicare will still lie

about programs financed by trust funds are more than five years away. Most otherpart and parcel of overall decisions about the spending programs roughly preserve theiruse of economic resources. No major federal 1997 shares. A sole exception is discretionarygovernment program is self-supporting in any spending--defense, international, and domes-meaningful way. Every dollar of spending re- tic. These program areas are assumed, in thequires taxing (or borrowing from) someone baseline projections, merely to keep up withand granting benefits to others. Trust fund inflation once the Budget Enforcement Act'sstatus alone ought not to protect certain pro- caps expire in 1995. They therefore dwindlegrams in the competition for scarce resources gradually as a share of GDP, from 7.3 percentwhen other needs lack such a protective label. in 1997 to 6.7 percent in 2002.

As large deficits persist, the debt held bythe public soars to more than 59 percent ofGDP under current policies, up from 52 per-

The Ten-Year Budget Outlook cent today. Not since the mid-1950s (whennearly all the debt was left over from World

CBO generally does its baseline projections War [1) will the debt-to-GDP ratio have beenfor a five-year horizon. But budget forecast- so high.ers are often queried about the longer-runoutlook. Does the deficit eventually go away Economic assumptions are critical to theseof its own accord? The answer appears to be projections. For 1998 through 2002, CBOno. Under current policies, after the mid- posits that real economic growth continues at1990s the deficit is expected to start climbing about 2 percent a year. The unemploymentin dollar terms and--more worrisome--as a rate is about 5½ percent, down slightly frompercentage of GDP. A broad-brush view of the 1997 level. Short-term interest rates (asthe budget outlook through 2002 is presented measured by three-month Treasury bills) andin Table A-7. longer-term rates (such as 10-year Treasury


Table A-7.The Budget Outlook Through 2002 (By fiscal year)

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002


Revenues 1,088 1,173 1,262 1,340 1,413 1,490 1,578 1,665 1,755 i,851 1,953

OutlaysDiscretionary 548 543 537 538 556 575 596 618 640 663 687Mandatory

Social Security 285 301 318 335 354 374 395 418 441 466 492Medicare 128 143 159 177 198 220 244 271 301 335 372Medicaid 68 80 89 100 113 126 142 160 180 202 227Other 229 228 231 235 238 256 265 276 288 299 312

Subtotal 710 751 797 848 903 977 1,046 1,124 1,209 1,302 1,404

Deposit insurance 65 69 33 -17 -45 -29 -19 -14 -12 -10 -9Net interest 201 214 232 246 262 280 299 319 340 365 393Offsetting receiptsa -69 -67 -69 -73 -74 -77 -81 -85 -89 -94 -99

Total 1,455 1,510 1,529 1,543 1,602 1,726 1,843 1,962 2,089 2,226 2,376

Deficit 368 336 267 203 189 236 265 296 333 375 423

Deficit ExcludingDeposit Insuranceand Desert StormContributions 307 267 235 219 233 265 283 311 345 385 432

Debt Held by the Public 3,049 3,385 3,656 3,865 4,061 4,304 4,576 4,879 5,220 5,602 6,032


Revenues 18.6 18.8 19.1 19.1 19.1 19.0 19.0 19.1 19.1 19.1 19.1

OutlaysDiscretionary 9.4 8.7 8.1 7.7 7.5 7.3 7.2 7.1 7.0 6.8 6.7Mandatory

Social Security 4.9 4.8 4.8 4.8 4.8 4.8 4.8 4.8 4.8 4.8 4.8Medicare 2.2 2.3 2.4 2.5 2.7 2.8 2.9 3.1 3.3 3.5 3.6Medicaid 1.2 1.3 1.3 1.4 1.5 1.6 1.7 1.8 2.0 2.1 2.2Other 3.9 3.7 3.5 3.4 3.2 3.3 3.2 3.2 3.1 3.1 3.1

Subtotal 12.1 12.0 12.0 12.1 12.2 12.4 12.6 12.9 13.1 13.4 13.7

Deposit insurance 1.1 1.1 0.5 -0.2 -0.6 -0.4 -0.2 -0.2 -0.1 -0.1 -0.1Net interest 3.4 3.4 3.5 3.5 3.5 3.6 3.6 3.6 3.7 3.8 3.8Offsetting receiptsa -1.2 -1.1 -1.0 -1.0 -1.0 -1.0 -1.0 -1.0 -1.0 -1.0 -1.0

Total 24.9 24.2 23.1 22.0 21.6 22.0 22.2 22.5 22.7 23.0 23.3

Deficit 6.3 5.4 4.0 2.9 2.5 3.0 3.2 3.4 3.6 3.9 4.1

Deficit ExcludingDeposit Insuranceand Desert StormContributions 5.3 4.3 3.5 3.1 3.1 3.4 3.4 3.6 3.7 4.0 4.2

Debt Held by the Public 52.2 54.3 55.2 55.2 54.8 54.8 55.2 55.9 56.7 57.8 59.1


a. Includes contributions from allied nations for Operation Desert Storm.


notes) are also assumed to remain constant at economic growth and interest rates); others5.6 percent and 7.1 percent, respectively. In- are more narrowly budget-related--the out-flation chugs along at about 3.6 percent. look for a continued surge in use of medical

care, the size and timing of outlays for depositFive-year budget projections are highly un- insurance, and so forth. CBO's projections,

certain, and 10-year projections are even more uncertain though they are, nevertheless chal-so. Major uncertainties include assumptions lenge the comfortable notion that the deficitabout economic performance (chiefly real will eventually go away of its own accord.

Appendix B

Major Contributors to theRevenue and Spending Projections

T he following analysts prepared the revenue and spending projections in this report:

Revenue Proiections

Mark Booth Corporate income taxes, Federal Reserve System earningsLeonard Burman Individual income taxesMaureen Griffin Social insurance contributions, excise taxes, estate and gift taxesJon Hakken Corporate income taxesKatherine Johnson Excise taxes, NIPA receiptsLarry Ozanne Individual income taxesLinda Radey Excise taxesPearl Richardson Individual and corporate income taxesJohn Steil Customs duties, miscellaneous receiptsDavid Weiner Individual income taxesRoberton Williams Individual income taxes

Spending Projections

Defense and International Affairs

Eugene Bryton DefenseKent Christensen International affairsRaymond Hall DefenseBarbara Hollinshead DefenseWilliam Myers DefenseMary Helen Petrus DefenseAmy Plapp DefenseLisa Siegel DefenseJoseph Whitehill International affairs

Human Resources

Sandra Clark Child nutrition, veterans' compensation and pensionsPaul Cullinan Social SecurityCathy Ellman Civil Service Retirement, Railroad Retirement


Alan Fairbank Hospital InsuranceScott Harrison MedicareJean Hearne MedicaidLori Housman MedicareJulia Isaacs Food stamps, foster care, child careDeborah Kalcevic EducationJosh Leichter Social service programs, Head StartJeff Lemieux HealthCory Oltman Unemployment insurance, training programs,

veterans' educationPat Purcell Supplemental Security Income, MedicaidKathleen Shepherd Veterans' benefitsConnie Takata Public Health ServiceJohn Tapogna Aid to Families with Dependent Children, child

support enforcement

Natural and Physical Resources

Philip Bartholomew Deposit insuranceKim Cawley Energy, pollution control and abatementPatricia Conroy Community and regional development, general governmentPeter Fontaine EnergyMark Grabowicz Science and space, justiceTheresa Gullo Water resources, conservation, and land managementJames Hearn General government, Agricultural Credit Insurance Fund,

Outer Continental Shelf receiptsDavid Hull AgricultureThomas Lutton Deposit insuranceMary Maginniss Deposit insuranceEileen Manfredi AgricultureMarjorie Miller Transportation, Federal Housing AdministrationAndrew Morton AgricultureDeborah Reis Recreation, water transportationMitchell Rosenfeld Air transportation, justice, Postal ServiceBrent Shipp Housing and mortgage creditJohn Webb Commerce, disaster relief

Other

Janet Airis Appropriation billsEdward Blau Appropriation billsBetty Embrey Appropriation billsKenneth Farris Computer supportGlen Goodnow Authorization billsAlice Grant Appropriation billsLeslie Griffin Net interest on the public debtVernon Hammett Computer supportEllen Hays Other interest, creditSandra Hoffman Computer supportJeffrey Holland Net interest on the public debtRichard Krop Civilian agency pay, historical data

APPENDIX B MAJOR CONTRIBUTORS TO THE REVENUE AND SPENDING PROJECFIONS 153

Terri Linger Computer supportFritz Maier Computer supportKathy Ruffing Treasury borrowing, interest, and debtRobert Sempsey Appropriation billsJeff Swersey Computer support

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