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98012: The Budget for Fiscal Year 1999Philip D. Winters Updated August 28, 1998 CONTENTSSUMMARY LEGISLATION The FY1999 budget year is likely to be in surplus by between $55 billion (Office of Management and Budget (OMB), May 26, 1998) and $80 billion (Congressional Budget Office (CBO), July 15, 1998). The President's original budget for FY1999 proposed a surplus of $9.5 billion for FY1999. The Senate-passed budget resolution (S.Con.Res. 86; April 2, 1998) contained an $8.4 billion surplus; the House-adopted budget resolution (H.Con.Res. 284; June 5, 1998) contained a $34 billion surplus for the year. Almost all of the budget estimates made earlier in the year (1998) have been superseded. The revised numbers show much larger revenues, smaller outlays, and a substantially larger surplus than the earlier estimates. The continuing and unusually strong economy combined with an extraordinary surge in revenues have resulted in the very positive budget outlook for FY1999. The Senate Budget Committee reported its version of the FY1999 budget resolution (S.Con.Res. 86; S.Rept. 105-170) on March 20, 1998. On April 2, 1998, after a week of debate, the Senate adopted the resolution, essentially unchanged. It follows the budget agreements of last year. The Senate resolution contained a surplus of $8.4 billion in FY1999 and a surplus in each of the subsequent years covered by the budget resolution. It also contained room for a $30 billion 5-year tax cut as long as the reductions were offset by lower spending or increases in other revenues. The resolution included language to reserve any potential tobacco settlement receipts for medicare and reserve budget surpluses for social security reforms. The House Budget Committee (HBC) had a more difficult time producing a budget resolution. The resolution was eventually agreed to on May 22, 1998, well past the normal deadline. The resolution generally follows the budget agreement for FY1999, but calls for additional discretionary spending cuts and selected tax cuts in the out-years. It has also stirred much more controversy than the Senate resolution. The resolution, slightly modified, passed the House on June 5. No conference to resolve differences between the House and Senate versions of the FY1999 budget resolutions began before the congressional adjournment in early August. Some analysts have speculated that Congress will not produce a budget resolution this year. In the meantime, the House and Senate appropriation committees have begun producing the appropriation bills for FY1999. As of the adjournment, 11 had passed the House, 8 had passed the Senate, and one was through conference. Although current estimates show growing surpluses through FY2008, longer range forecasts (from CBO, among others) indicate that, without substantial changes to some current policies, the government's deficit will grow at unsustainable rates in the middle of the 21st century. The budget estimates are highly sensitive to economic conditions among other factors. Relatively small changes in the economic forecast can have substantial effects on budget estimates. The House adopted its version of the budget resolution for FY1999 (H.Con.Res. 284) on June 5, 1998. The Senate had passed its version of the resolution (S.Con.Res. 86) on April 2, 1998. Both resolutions show the government with modest budget surpluses in FY1999 and subsequent years, but with substantial differences in proposed spending and tax changes. A conference to resolve the House-Senate differences remains unscheduled and uncertain. In the meantime, both the House and Senate have begun passing the annual appropriation bills for FY1999. The Office of Management and Budget (OMB) released its Mid-session Review of the 1999 budget on May 26, 1997, showing a surplus of $54 billion for FY1999. The Congressional Budget Office (CBO) produced a preliminary update to their budget estimates (July 15, 1998) showing a surplus of $80 billion for FY1999. Continued extraordinarily favorable economic conditions as well as the continuing surge in federal receipts has increased the estimated surplus for the year from those made earlier this year. These anticipated surpluses -- there is likely to be one in FY1998 also -- come 4 years earlier than was anticipated by the Balanced Budget Act of 1997 (BBA; P.L. 105-33) was adopted last year. Presidents generally submit their budget proposals for the upcoming fiscal year (FY) early in the calendar year. For FY1999, the Administration released its budget documents in early February 1998. The documents contained the Administration's policy proposals and expectations for the budget not only for FY1999, but for following 5 to 10 years as well (the FY1999 budget contained projections through FY2003 with the budget totals projected through FY2008). In addition, the documents contained all types of related information and data including estimates of the budget without any proposed policy changes (current services estimates), historical budget data, detailed outlay and receipt data, selected analysis of specific budget related topics, and the Administration's economic forecast. The budget documents are an annual basic reference source for federal budget information in addition to their use as a transmitter of the Administration's policy proposals. The Administration's submission is followed by congressional action on the budget. This includes, in addition to extensive hearings, the annual budget resolution, appropriations, and, in some years, a reconciliation bill or bills. During the months of deliberation on budget related legislation, the Administration's original budget proposals are often modified, not only by differences in policy outlook between the President and Congress, but by changing circumstances in the economy and the world. Budget TotalsTable 1, on the next page, contains various budget estimates for FY1999 from the Congressional Budget Office (CBO), the Administration (OMB), and, when available, the same data from the House and Senate and subsequent reports from CBO and OMB. Differences (and sometimes similarities) in budget totals occur because of differing underlying economic, technical, and budget-estimating assumptions and techniques as well as differences in policy proposals or policy actions. Most of the policy differences among the proposals in any one year are often small although they may have large implications over time. As the year and the budget debate progress, budget totals should be expected to change. Table 1. Budget Proposals and Estimates for FY1999 (in billions of dollars)
Budget ReportsThe Congressional Budget Office released the first of its regular budget reports for FY1999 on January 28, 1998 (The Economic and Budget Outlook: Fiscal Years 1999- 2008). The Administration presented the President's budget on February 2, 1998 (The Budget of the United States Government for fiscal year 1999). CBO released a preliminary report, An Analysis of the President's Budgetary Proposals for Fiscal Year 1999 on March 4, 1998. The full report was released later in March. OMB released its mid-session review of the 1999 budget (MSR99) in May this year, much earlier than the usual time of July or August. CBO's mid-year report is expected in August. CBO released a preliminary economic and budget outlook update on July 15, 1998. Congressional Budget ActionNumerous committees began preliminary work on various aspects of the FY1999 budget early in the year. This work intensified with the release of the President's budget in early February. The BBA adopted in 1997, if adhered to, generally sets the parameters for the FY1999 budget, leaving details and the question of what to do with the unexpected surplus and any revenues from a potential tobacco settlement as the centers of the FY1999 budget debate. Having established the general direction of the FY1999 budget in the BBA has not seemed to speed the adoption of the budget legislation as many had hoped. The Senate Budget Committee (SBC) reported (S.Rept. 105-170) its version of the FY1999 budget resolution (S.Con.Res. 86) on March 20, 1998. The budget totals for the committee's proposal differ little from those of the Administration for FY1999 (although the differences between the CBO reestimate of the President's budget and the committee's recommendations are somewhat larger; see Table 1), although the mix of proposed policy changes between the two plans does differ. Among other items of difference, the Administration wanted to use any revenues from a tobacco settlement (chances of which have now seem to have faded) for various spending programs while the committee would reserve any receipts for the medicare trust fund. The committee recommendation also provided room for a $30 billion tax cut, as long as it would be deficit-neutral, that is, would be offset by other revenues or spending reductions. The resolution would reserve the expected surpluses for social security reform. For FY1999, the resolution proposed receipts of $1,738.4 billion, outlays of $1,730.0 billion, and a surplus of $8.4 billion. The SBC revenues and outlays for FY1999 are each 0.2% smaller than the Administration's proposed levels. The budget resolution revenues are 0.7% smaller and outlays are 0.9% smaller than the preliminary reestimates from CBO of the Administration's budgetary proposals . The policies proposed in the SBC budget resolution make less than a 0.5% change from either baseline outlays or revenues for FY1999. Both outlays and revenues grow by 3.5% from FY1998 to FY1999 in the SBC budget resolution. The Senate passed the resolution, essentially intact, on April 2. Subsequent discussions among members of the leadership indicated a desire for some additional changes to the resolution, possibly during what was at the time an expected future conference with the House. These changes include an increase in the possible tax reduction and the use of a reconciliation bill later in the summer to cover tax changes. The House Budget Committee (HBC) finally agreed to a budget resolution (H.Con.Res. 284; H.Rept. 105-555) on May 22. The resolution contained larger discretionary spending reductions and tax cuts, especially in the years after FY1999, than either the Administration or the Senate proposed. These controversial proposal's prospects made adoption of the resolution uncertain in the House. After more changes to the proposals in the resolution, the House approved the resolution on June 5, 1998, after rejecting 2 alternative resolutions. Expectations of a conference to resolve the House and Senate differences on the budget resolution have faded as time passes without one being scheduled. In the absence of congressional adoption of a budget resolution for FY1999, the appropriation committees began action on the 13 regular appropriation bills. Eleven have passed the House, 8 have passed the Senate, and one has cleared conference and the House. None have cleared Congress. The FY1999 Budget ProposalsThe Administration's initial proposal contained relatively small policy changes to federal receipts and outlays for FY1999. Receipts would grow 0.7% from no-policy- change levels (the current services estimate) and outlays show a less than 0.1% increase in FY1999. The BBA from 1997 established generalized overall budget levels for the fiscal years 1998 through 2002. Although not keeping the Administration from making any changes to policy, it does seem to have somewhat constrained the size of the changes. Some of the Administration's proposals, such as using possible revenues from a potential tobacco settlement to offset the costs of higher discretionary spending have brought charges of breaking last year's budget agreement. From FY1998 to FY1999, the Administration's budget proposals show total outlays rising 3.9% and receipts rising 5.1%. As percentages of GDP, outlays remain constant from FY1998 to FY1999 at 20%. Receipts rise from 19.9% in FY1998 to 20.1% in FY1999, with both percentages a higher share of GDP than any other year since World War II. During the period covered by the President's budget, FY1998 through FY2003, the deficit will turn into a surplus (subsequent estimates have boosted the size and onset of the surpluses). The original budget showed the deficit for FY1998 at $10 billion, but becoming a $10 billion surplus in FY1999 and remaining in surplus through FY2003. The cumulative surplus for the fiscal years 1999 through 2003 is almost $220 billion. The May OMB MSR99 shows a cumulative surplus for the same period of $495 billion. If the Administration did not plan on using some new revenues as offsets for additional spending, the annual and cumulative surplus could be even higher. If the surplus is allowed to exist, that is policies are not changed to diminish it through higher spending or lower revenues, the amount of debt held by the public will shrink over time by approximately the size of the surpluses. Since 1990, discretionary spending has been subject to various spending caps. Over the years the caps have been modified and some limited flexibility is designed into them for minor adjustments for specific reasons. The President's budget has proposed increases in mostly nondefense discretionary spending for FY1999 and beyond that would be offset by a combination of new revenues and the extension of some existing but expiring taxes. But the amounts are relatively small. Cumulative spending for nondefense discretionary spending for FY1999 through FY2003 will be $1,518 billion including the $56 billion in increased spending proposed by the Administration over the 5 years. This is 3.8% higher than what nondefense discretionary spending would have been without this additional spending. The Administration proposed a cumulative $22.9 billion revenue increase from new, higher existing, and extended user fees over the FY1999 through FY2003 period, of which $2.3 billion would come in FY1999. User fees are defined as "fees, charges, and assessments levied on a class directly benefitting from, or subject to regulation by, a government program or activity...." (OMB. Budget of the United States Government for FY1999, Analytical Perspectives. p. 79.). They include park entrance fees, meat inspection fees, flood insurance premiums, and the proceeds from Tennessee Valley Authority power sales. The fees are divided between those that directly offset the spending activities they are designed to support (they are deposited in the appropriation accounts) and those that are deposited in receipt accounts. The collections deposited in the receipt accounts are further divided between those that are offsetting collections and those that are not offsetting collections (these are treated as general revenues). Of the proposed increases over FY1999 through FY2003, $10.2 billion would be used as offsets to spending and $12.7 billion would be deposited in receipt accounts. The proposed increase represents a 2.9% increase over existing fees during this period. A table on page 82 of the Analytical Perspective volume of the President's FY1999 budget document contains details of the proposed increases in user fees. The Administration proposed increasing receipts through policy changes a net $81.5 billion over the FY1999 through FY2003 period. The overall increase covers both tax reductions and tax increases. The largest single change is the Administration's assumption that a settlement with the tobacco companies will generate $65.5 billion in new receipts during the FY1999 through FY2003 period (at least some of the proposed increase in discretionary spending over this period depends on these additional receipts). The President's budget shows a total of $24.2 billion in revenue reductions through "tax relief and extend[ing] expiring provisions" and $23.0 billion in higher revenues through the elimination of "unwarranted benefits and [the] adopt[ion] of other revenue measures." Another $82.6 billion in revenue increases falls under the category of "other provisions that affect receipts" and includes the $65.5 billion in tobacco settlement monies. CBO's report on the President's budget, An analysis of the President's budget proposals for fiscal year 1999, re-estimated the Administration's proposals using CBO's economic outlook and budget estimating methods. The result was generally smaller surpluses (and one deficit) for the years 1998 through 2003 than contained in the Administration's budget. The differences result from two components: the differences between the Administration's and CBO's baseline estimates for these years; and the differences between their respective estimates of the effects of the proposed policies. In general, the differences in the underlying estimates, the baselines, were greater than the differences in the two set of estimates of the proposed policies. Overall, the greater differences, especially in the years after 1999, are found in outlays, not revenues. In FY1999, CBO estimates revenues would be $8 billion higher than the Administration projects and outlays will be $14 billion higher, resulting in a surplus $6 billion smaller ($4 billion rather than $10 billion, as reestimated by CBO) than proposed by the Administration. For the fiscal years 1998 through 2003, the Administration's proposed cumulative $210 billion in surpluses; the CBO re-estimate puts the cumulative surplus for these years at $108 billion (the MSR99 puts the cumulative surplus for all these years at $534 billion, indicating quite an improvement in the budget outlook just since March 1998). Although the rhetoric surrounding the President's budget from supporters and opponents may make the proposed changes sound like they are large, they are actually, compared to the size of the overall budget, relatively small. As such, they are likely to be too small to have any measurable effect on economic conditions. OutlaysThe Administration's budget showed outlays rising from $1,668 billion in FY1998 to $1,733 billion in FY1999 (a 3.9% increase) . They will continue increasing to $1,945 billion in FY2003 and to $2,307 billion in FY2008 (only budget totals are shown through FY2008 in the President's budget). Overall growth in outlays will be 12.2% from FY1999 through FY2003. Within the overall increase nondefense discretionary spending will grow only 2.0% during the period, even with the Administration's proposed spending increases. Medicaid, at the other extreme, will grow 32.9% over the same period. Because the proposed surpluses will shrink the debt held by the public, in addition to the expectation of essentially constant interest rates, net interest outlays will fall 8.8% during the forecast period. CBO's reestimate of the Administration's budget proposal has outlays rising by 4.5% from FY1998 to FY1999, from $1,671 billion to $1,747 billion. They will continue growing to $1,983 billion in FY2003, a somewhat larger amount than the Administration indicates. Overall growth during the FY1999 through FY2003 period is put at 13.5% by CBO for the Administration's proposals. For components of the budget, the percentage increases range from 1.7% for nondefense discretionary spending to 30.6% for medicaid. Net interest would fall 8.1% during the FY1999 through FY2003 period. Table 2. Outlays for FY1997-2003 (in billions of dollars)
The budget resolution proposal (S.Con.Res. 86) as passed by the Senate contains outlay numbers that, given the overall size of the budget, are not very different from those of the Administration (either as reestimated by CBO or the Administration's own numbers). The resolution increases total outlays from $1,672.0 billion in FY1998 to $1,730.0 billion in FY1999, a 3.5% increase. Total outlays will grow during the FY1999 through FY2003 period, reaching $1,948.6 billion in FY2003, a 12.6% increase over FY1999. The budget resolution has nondefense discretionary spending actually falling over the budget period by 1.7% (from $294.5 billion in FY1999 to $289.4 billion in FY2003). Net interest also falls, dropping by 8.8% over the period. Medicaid increases 30.6% over the period, the same as the CBO reestimates of the Administration numbers and the CBO baseline. As percentages of gross domestic product (GDP), the Administration expects outlays will continue to fall from their recent peak of 22.6% in FY1991, dropping to 20.0% of GDP in both FY1998 and FY1999. The Administration projects that outlays will drop to 18.8% of GDP in FY2003. Even at 20% of GDP in FY1998 and FY1999, outlays will be a smaller share of the economy than at any time since 1974. CBO's reestimates also put outlays at 20.0% of GDP in FY1999 and show them falling to 19.1% of GDP in FY2003. The revised CBO baseline (March 4, 1998) estimates that outlays will be 19.8% of GDP in FY1999 (that is with no changes in policy from FY1998) and will fall to 18.8% of GDP in FY2003. Outlays as a percentage of GDP in the budget resolution from the SBC closely follow the shares in the CBO baseline estimates The Administration outlay proposals included an increase in domestic discretionary spending with offsets from extended and new revenues (to maintain deficit neutrality). As part of this relatively small initiative, the Administration proposed creating three "Funds for America." They would have almost no new activities within them, only expansions of existing federal programs. The three funds, the Research Fund, the Environmental Resources Fund, and the Transportation Fund, reshuffle existing federal activities into funds without making any actual changes to the activities. The budget documents are not clear on whether or not the rearrangement will have any actual effect on the funding or operation of these activities. The administration of the activities or programs would not change and neither would their funding. The funding for the activities would come mostly from where it does now, the general fund, with the prospect of some additional funding from the proposed increases in revenues (what the Administration calls offsets). Within the Environment Resources Fund, the Administration proposes increases for the national parks, water quality, and hazardous waste sites. The Administration proposes increases for the National Science Foundation and the National Institutes of Health in the Research Fund. Little or no specific spending increases are proposed for transportation or infrastructure within the Transportation Fund. The Senate version of the FY1999 budget resolution proposal does not support many of the Administration's proposals to increase domestic discretionary spending. In most instances, the budget resolution follows the dictates of the BBA of 1997 and the baseline estimates. ReceiptsThe Administration's budget showed receipts rising by $84.8 billion from FY1998 to FY1999, a 5.1% year-to-year increase. By FY2003, the budget shows receipts at $2,028.2 billion, a $285.5 billion and a 16.4% increase from FY1999. As shares of GDP, receipts will rise from 19.9% in FY1998 to 20.1% in FY1999 before falling to 19.6% in FY2003. Over this whole period, receipts will remain a larger percentage of GDP than in all but a handful of years since WWII. CBO's reestimates of the Administration's revenue proposals showed them increasing 4.5% from FY1998 to FY1999 (from $1,680 billion to $1,751 billion). They increase to $2,026 billion in FY2003, a 15.7% increase from FY1999. As shares of GDP, the reestimates remain at 20.1% of GDP in FY1998 and FY1999 before falling to 19.5% of GDP in FY2003. The CBO revised baseline revenue estimates remain slightly smaller than the reestimates of the Administration's proposals. They rise from $1,680 billion in FY1998 to $1,738 billion in FY1999 and to $2,008 billion in FY2003. This is an increase of 15.5% from FY1999 to FY2003, not much different than the reestimate. The Senate's budget resolution matches CBO's baseline numbers. The committee's accommodation of a $30 billion tax reduction is expected to be offset, either by additional revenues or by spending reductions. Any additional revenue from a possible tobacco settlement would be used for medicare financing and not for tax reductions (or spending increases). The President's proposal for changes in receipts were divided into three categories. The first would, according to the Administration, provide tax relief and extend expiring provisions and reduce receipts $3.2 billion in FY1999 and $24.2 billion from FY1999 through FY2003 (as measured against current services estimates). The second category would, again according to the Administration, eliminate unwarranted benefits and adopt other revenue measures and would increase receipts by $4.3 billion in FY1999 and by $23.0 billion from FY1999 through FY2003. The third category was just called "other provisions that affect receipts" and would increase receipts by $11.8 billion in FY1999 and by $82.6 billion over the FY1999 through FY2003 period. The net effect of the proposed increases and decreases is a $12.9 billion (policy induced) increase in FY1999 and an $81.5 billion increase during the FY1999 through FY2003 period. These changes are from what receipts would have been without the policy changes. These proposed policy changes in receipts are less than 1% of cumulative federal revenues over the 5-year period. Table 3. Receipts for FY1997-2003 (in billions of dollars)
The greatest tax-relief or extension-of-expiring-provisions proposal was to increase and simplify the child and dependent care tax credit (reducing receipts by $5.1 billion over 5 years). This was followed closely by the proposal to provide incentives for public school construction (reducing receipts by $5.0 billion over 5 years). Extending the research and experimentation (R& E) tax credit would reduce receipts by $1.8 billion over 5 years. The increased receipts from the proposed elimination of "unwarranted benefits" and the adoption of other revenue measures focused mostly on provisions aimed at business or individuals with high incomes. The largest, estimated to increase receipts by $6.6 billion over 5 years, was for replacing sales-source rules with activity-based rules, a proposal that would restrict a tax subsidy for exports. The second largest, bringing in an estimated $4.6 billion in receipts over 5 years, would modify the reserve rules for annuity contracts. Under the "other" category, is the $65.5 billion in new receipts from the potential tobacco legislation settlement. This is obviously the major single source of new income for the government included in the President's budget. The Administration also expected an additional $6.0 billion in receipts over 5 years from converting airport and airway trust fund taxes to a cost-based user fee system. Under the rules for budget accounting, additional receipts, above the baseline, come from reinstating expired tax provisions such as the Superfund excise taxes and an environmental tax imposed on corporate taxable income. The Senate budget resolution leaves the specific tax law changes to the tax writing committees. The budget resolution reserves any additional federal receipts from a possible tobacco settlement to supporting the medicare trust fund. It also provides room for $30 billion in tax cuts over 5 years if they are offset by mandatory spending reductions or revenue raisers. The resolution proposes cumulative FY1999 through FY2003 revenues that are $70.5 billion less than the Administration's proposal. This is 0.75% less than the cumulative Administration revenues for the period. The HBC resolution would eliminate, through spending offsets, the so-called marriage penalty. Deficits/SurplusesReducing the deficit and eventually reaching a balanced budget or even a surplus (as now seems very likely and much sooner than originally expected) is and has been a major focus of the budget debate for many years. This year's Administration's budget proposed a budget surplus for FY1999 (which now seems much too small) was the first proposed surplus in almost 30 years. The budget will move from an Administration-estimated deficit of $10.0 billion in FY1998 to a surplus of $9.5 billion in FY1999 (subsequent estimates have pushed the first surplus since FY1969 into FY1998). Under the Administration's original proposal, the government would continue having surpluses through FY2003, when the surplus would reach $82.8 billion. The longer range outlook through FY2008 from the Administration, shows continuing surpluses, reaching $258 billion in FY2008 in that year alone. CBO's initial estimate for FY1999 shows a small deficit in FY1999 (-$2 billion) with surpluses beginning in FY2001 ($14 billion) and increasing through FY2008, when the surplus would reach $129 billion. Revised CBO baseline estimates from March 1998 show surpluses in both FY1998 ($8 billion) and in FY1999 ($9 billion), rising to $53 billion in FY2003, and to $138 billion in FY2008. These March estimates included re-estimates of the Administration's budgetary proposals. These put the surplus at $4 billion in FY1999, with a dip back into deficit (of $5 billion) in FY2000, before surpluses resume in FY2001 and reach $42 billion in FY2003. Subsequent CBO preliminary updates from July 15, 1998, increase the surplus for FY1999 to $80 billion, for FY2003 to $136 billion and for FY2008 to $251 billion. The SBC budget resolution report had surpluses for the entire FY1998 through FY2003 period. Under its proposals, the surplus would be $8.9 billion in FY1999, rising to $58.7 billion in FY2003. The committee's proposal would reserve any surplus for Social Security reform rather than for additional spending to "create or expand domestic programs." The resolution as passed by the Senate followed the committee's recommendations. The HBC budget resolution contains similar surpluses for each of the years. Subsequent discussions may lead to some modification of the resolution's expected effects on the deficit/surplus. The President proposed reserving the use of the surplus "pending Social Security reform," which was left undefined. The Administration's intention seems to be to reduce the chances that the expected surpluses will be whittled away for tax cuts or spending increases instead of debt reduction. The practical effect, since the government will not hold these "reserves" as cash, is a reduction in the debt held by the public. The Administration is somewhat inconsistent in its position since it is proposing modestly higher receipts, which would increase the surplus, but then not reserving them for the Social Security reform. Instead, it is applying at least some of the additional receipts as offsets to its higher spending proposals. Table 4, below, contains the deficit and surplus proposals and estimates from CBO and the Administration for the years 1997 through 2003. Table 4. Deficits (-) and Surpluses for FY1997-FY2003 (in billions of dollars)
The deficit has dropped substantially since the early 1990s, both in dollars and as a percentage of GDP. After climbing over $200 billion in FYs 1990 through 1994 with a peak of $290 billion in FY1992, the deficit fell to $107 billion in FY1996 and to $22 billion in FY1997. The first federal surplus in 30 years is now expected to occur in FY1998. As a percentage of GDP, the deficit has fallen from its most recent peak of 4.9% in FY1992 to 1.4% in FY1996 and 0.3% of GDP in FY1997. CBO expects the surplus to be 0.8% of GDP in FY1998 and 0.9% of GDP in FY1999. (The deficit reached 6.3% of GDP in FY1983, a post-World War II peak.) Although a portion of the deficit reduction resulted from the many and varied policy changes adopted since the early 1990s, much of the recent drop is due to steady, strong economic growth and substantially higher than expected revenues. If the economic problems of much of the rest of the world move to the United States and slow the economy, they will be reflected in negative effects on the budget. A slowing of our economic growth would diminish the size of the surpluses expected in the next few years and, if large enough, turn them into deficits. A focus on shaping the budget choices to achieve a specific deficit or surplus may distort some of the government's budget choices. The deficit and surplus are residuals of the budget process. In the abstract, the President and the Congress decide how much money they want to spend and how much they want to raise in receipts and any difference between these amounts is the deficit or surplus. The deficit or surplus can be jolted, either up or down, from its planned amount by unanticipated events (such as a large natural disaster) or conditions (such as an economic downturn or strong economic growth) over which there is little direct governmental control. When the deficits got as large as they did in the recent past, Congress and the President may find themselves adjusting receipts and outlays to try to reduce the deficit. The Budget and The EconomyThe budget and the economy affect each other. The relationship is an unequal one, with the economy shoving and pushing around the budget with every economic twinge while even relatively large changes in the budget, as measured by policy-induced changes in the size of the deficit, may bounce off the economy with little consequence. The dollar value of the proposed change in the government's balance in the President's budget for FY1999 is a $12.1 billion move into surplus (as measured against the baseline estimate). This is unlikely to have any measurable effect on an expected $8.7 trillion economy in FY1999; the change is only 0.14% of GDP for that year. Since much of the improvement in the budget situation since the early 1990s resulted from generally better than expected economic growth, one should remain aware that what the economy gives (lower deficits and now likely surpluses) it can also take away. Unexpected changes in the economy, such as relatively slower economic growth or even a mild recession can reverse much of the improved budget outlook. As CBO points out in its report An analysis of the President's budgetary proposals for fiscal year 1999: a preliminary report, "...the good news embodied in the projections by both CBO and the Office of Management and Budget could easily be reversed. If revenue growth this year is just one-half of one percent lower than expected, the budget could remain in deficit. Alternatively, continued robust economic growth could push up estimated surpluses. In any case, deficits or surpluses over the nest several years that differ from current projections by upwards of $100 billion are entirely possible." (p. 1) The economy during FY1998 and FY1999 is expected to grow from $8.348 trillion to $8.685 trillion (OMB January 1998 estimate). The net policy changes for FY1999, that is the changes the Administration is proposing from current services estimates -- a $0.8 billion increase in outlays, a $12.9 billion increase in receipts and a $12.1 billion move from deficit to surplus -- are, compared to the size of GDP for that year, very, very small (0.01%, 0.15% and 0.14% of GDP for FY1999, respectively). The chances therefore seem very slim that policy changes this small, when spread over a year, will have any measurable influence on the economy. Even if the entire FY1999 through FY2003 period is examined, the extent of the proposed policy changes during that period are small in relation to the size of the economy over the same period. For these 5 years (FY1999-FY2003), GDP is projected to total $47,389 billion. The Administration's policy proposals amount to $190 billion in higher surpluses than baseline estimates and are 0.40% of cumulative GDP over the 5 years. Total outlay reductions for the period are 0.23% of cumulative GDP and receipts increases for the period are 0.17% of cumulative GDP for this period. These policy-caused net changes in the budget variables seem much too small by themselves to have much if any measurable effect, either positive or negative, on economic conditions over this period. There are tables in the Clinton Administration's initial budget documents for FY1999 (February 1998) and in the CBO Budget and Economic Outlook report (January 1998) that present the general effect of economic changes on the budget. The tables contain estimates that show that changes in economic growth produce the most significant effect on the budget. Lower growth increases federal spending from those programs that respond to higher joblessness and earlier retirements and the other events that follow an economic downturn. Lower growth decreases federal receipts as those losing their jobs pay lower taxes and business profits turn down, also resulting in lower tax receipts. Other information in these tables indicates the effects of higher or lower unemployment, higher or lower interest rates, and higher or lower inflation rates. These relationships also work in the opposite direction. Faster than expected economic growth increases federal receipts and reduces both federal spending and the deficit from what would have occurred without the faster economic growth. The documents do not contain similar tables on the effect of budgetary changes on the economy. They do discuss, however, in general terms how the budget can affect the economy, and the Administration states how it believes its policy proposals will speed up the economy and contribute to higher long-term rates of growth. Measuring Budgetary ChangeMuch of the budget discussion in any year centers on the changes in the budget numbers: outlays will increase by so much; revenues will grow by this percentage; and spending for farmers or children or health care will rise or fall some number of dollars. But unless one knows the base from which the change is being measured, one cannot be sure what the changing numbers represent. There are several common ways of measuring changes in the budget; each can be useful and each provides different information. Many individuals are inclined to measure change on a year-to-year basis, that is, from last year to this year or this year to next year. The data are easy to obtain and provide an indication of the dollar change in federal spending or receipts. Another method of measuring change is by comparing proposed policies against budget baselines or current services estimates. The baseline and current services estimates are specialized estimates generated by CBO and OMB, respectively, that attempt to calculate the dollar level of receipts and outlays in the future if there are no changes to existing federal policy. This involves adjusting this year's total receipt and outlay levels for inflation, population growth, and any other factors that may, in a sense, automatically affect the budget levels. These estimates make an attempt to determine what today's level of governmental goods and services and benefits would cost tomorrow. The estimates take into account the natural growth in mandatory spending from expanding eligible populations and automatic cost-of-living increases, sometimes adjusting discretionary spending for inflation, estimate future receipts based on current law and economic expectations, and make other adjustments as necessary to conform the estimates to current policy. The baseline and current services estimates provide a method of isolating the effect of proposed policy changes on federal activities from the effects on the budget of the economy and population change. Year-to-year measures of budgetary change obscure the cause of the change in receipts or outlays. Without knowing the reason for the change in receipts or outlays, controlling the change may prove difficult. Another method of measuring change is to compare the total proposed change (from a baseline) over a period of years to a different proposal for the same activity or to the total amount of money that would be spent or raised over the same period. Measurements can also be made of receipts, outlays, or the deficit as percentages of GDP over time. These ratios provide a measure of how substantial a portion of the economy the federal budget is absorbing and how that portion is changing over time. H.Con.Res.
284 (Kasich) S.Con.Res.
86 (Domenici) CONGRESSIONAL HEARINGS, REPORTS, AND DOCUMENTSU.S. Congress. Senate. Committee on the Budget. Concurrent resolution on the budget for FY1999; report to accompany S.Con Res. 86. March 20, 1998. Washington, U.S. Govt. Print. Off., 1998. (105th Congress, 2nd session. S.Rept. 105-170). FOR ADDITIONAL READINGU.S. Congressional Budget Office. The Economic and Budget Outlook: Fiscal Years 1999-2008. Washington, U.S. Govt. Print. Off., January 28, 1998. ---- Long-term Budgetary Pressures and Policy Options. Washington, U.S. Govt. Print. Off., May 1998. ---- The Economic and Budget Outlook for Fiscal Years 1999-2008: A Preliminary Report. Washington, U.S. Govt. Print. Off., January 7, 1998. ---- An Analysis of the President's Budgetary Proposals for Fiscal Year 1999, Preliminary Report for the Senate Committee on Appropriations. March 4, 1998. ---- An Analysis of the President's Budgetary Proposals for Fiscal Year 1999. Washington, U.S. Govt. Print. Off., March 4, 1998. ---- The Economic and Budget Outlook for Fiscal Years 1999-2008: A Preliminary Update. Washington, U.S. Govt. Print. Off., July 15, 1998. U.S. Office of Management and Budget. Budget of the United States Government, FY1999. Washington, U.S. Govt. Print. Off., February 2, 1998. (multiple volumes) ---- Mid-session review of the 1999 budget. Washington, U.S. Govt. Print. Off., May 26, 1998 U.S. Council of Economic Advisors. Economic Report of the President. Washington, U.S. Govt. Print. Off., February 1998. CRS Issue Briefs CRS Issue Brief 93034. Welfare Reform, by Vee Burke. (Updated regularly) CRS Reports CRS Report 94-76 E. A Balanced Budget Constitutional Amendment: Economic Issues, by William Cox. CRS Report 98-199 C. Budget FY1999: A Chronology with Internet Access, by Mary Bley. CRS Report 98-96 (pdf) E. Budget Surpluses: Economic Effects of Using Them for Debt Repayments, Tax Cuts, or Spending, by William Cox. CRS Report 98-346 E. Budget Surpluses: Economic & Budget Effects of Using Them for Debt Repayments, Tax Cuts, or Spending, by William Cox. |
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