Federal fiscal programs.

Wakefield, Joseph C.

Federal Fiscal Programs

THE fiscal year 1991 budget, like its recent predecessors, calls for reductions from baseline outlays - that is, outlays that would take place without policy changes - to bring the deficit within the mandated limits of the Balanced Budget and Emergency Deficit Control Act of 1985 (as amended). The outlay reductions - which are not as deep as those in earlier budgets - are to be implemented by program reductions, terminations and recisions, management improvements, and sales of loans and physical assets.

To increase receipts, the budget proposes to lower the capital gains tax (increasing individual income taxes in the short run as taxpayers realize more capital gains), to implement management reforms to improve tax collections, to extend social security and medicare coverage to all State and local government employees (increasing social insurance contributions), to extend the telephone excise tax, and to introduce or increase a variety of fees - such as customs fees and airport and airway fees - to be paid by users and beneficiaries of Federal services.

The budget shows that national defense outlays increase 2.4 percent in 1991. (In real terms, according to the administration, national defense outlays decline 2.1 percent.) Outlays for the procurement of military hardware decline 2.0 percent in 1991, double the decline in 1990. The largest increase - 15.6 percent - is for the category "atomic energy and other defense-related activities." Nondefense outlays increase 3.2 percent in 1991. (In real terms, nondefense outlays decline 1.0 percent.) A large increase is proposed in the category of receipts that are a direct offset to outlays - called undistributed offsetting receipts.

Economic assumptions

According to the Economic Report of the President, the administration's economic assumptions are for "continued healthy economic growth and high levels of resource utilization, with inflation low and declining in later years." The report states that "economic policies and developments during 1989, particularly the containment of inflation, have set the stage for continued strong growth."

Real GNP is forecast to increase 2.6 percent from the fourth quarter of 1989 to the fourth quarter of 1990 and 3.3 percent to the fourth quarter of 1991 (table 1). Real GNP increased 2.7 percent during 1989, or 1.9 percent when adjusted for effects of the drought in late 1988. The Council of Economic Advisers, in describing the outlook for 1990 in the Economic Report, noted that the economy was affected by a number of disruptive events in late 1989. In September, Hurricane Hugo hit South Carolina, and in October, the Loma Prieta earthquake hit northern California. In addition, a strike at a major aircraft manufacturer halted work for most of October and November, and exceptionally cold weather in December may have reduced economic activity. The Council states that estimates indicate that the "strike alone subtracted nearly one-half percentage point from fourth-quarter growth in real GNP." The Council also states that the recovery from these recovery notwithstanding, "growth is expected to be relatively slow early in 1990 and then is expected to gain momentum later in the year."

Table : Table 1 - Economic Assumptions Underlying the Fiscal Year 1991 Budget

 Calendar Year
 Actual Estimates
 1988 1989 1990 1991
 Billions of dollars

GNP:

 Current dollars 4,881 5,236 5,583 6,002
 1982 dollars 4,024 4,144 4,244 4,379

Incomes:

 Personal income 4,065 4,424 4,701 5,039
 Wages and salaries 2,429 2,626 2,805 3,022
 Corporate profits before taxes 307 303 360 421
 Percent change from preceding
 year

GNP in current dollars:

 Annual average 7.9 7.3 6.6 7.5
 Fourth quarter 7.5 6.7 7.0 7.6

GNP in 1982 dollars:

 Annual average 4.4 3.0 2.4 3.2
 Fourth quarter 3.4 2.7 2.6 3.3

GNP deflator:

 Annual average 3.3 4.2 4.1 4.2
 Fourth quarter 4.0 4.0 4.2 4.1

Consumer Price Index:(1)

 Annual average 4.0 4.8 3.9 4.0
 Fourth quarter 4.2 4.4 4.1 4.0
 Percent

Unemployment rate:(2)

 Annual average 5.4 5.2 5.4 5.3
 Fourth quarter 5.3 5.3 5.4 5.2

Insured unemployment rate:(3)

Annual average 2.1 2.1 2.2 2.1

Interest rate:(4)

 91-day Treasury bills 6.7 8.1 6.7 5.4
 10-year Treasury notes 8.8 8.5 7.7 6.8

The rate of inflation is expected to edge up slightly in 1990: The GNP deflator is forecast to increase 4.2 percent (fourth quarter to fourth quarter), compared with 4.0 percent in 1989. Increases in food and energy prices, which caused much of the fluctuation in the rate of inflation in 1989, are expected to be modest in 1990.

The Council states that "in line with moderate real growth, little change is expected in the rate of capacity utilization and the rate of unemployment. This will reduce upward pressure on prices caused by sectoral capacity bottlenecks and tightening labor markets." The unemployment rate is expected to increase slightly to 5.4 percent by the fourth quarter of 1990. The level of employment is expected to increase 1.2 million for the year, and the interest rate for 91-day Treasury bills is expected to decline to 6.7 percent.

For 1990, the Council based the real GNP increase (fourth quarter to fourth quarter) on the following assessment. Personal consumption expenditures and nonresidential fixed investment are expected to increase about the same as in 1989 - 2.4 percent and 4.2 percent, respectively. The continued growth in nonresidential fixed investment is expected because "the need for further capacity will continue to stimulate growth in investment, particularly for equipment." Residential investment is expected to increase 5.1 percent, in contrast to a 6.1-percent decline in 1989. According to the Council, "further declines in interest rates and a rebound from slow housing production in 1989 are expected to stimulate housing construction in 1990. Housing starts are projected to average 1.5 million units at an annual rate by the fourth quarter of 1990." Inventory investment is not expected to add to growth of real GNP in 1990 as it did in 1989. In 1989, inventory investment was largely due to the replenishment of farm stocks following the drought and to the accumulation of motor vehicle inventories, particularly in the fourth quarter; farm inventory investment is expected to be more modest in 1990. According to the Council, "as in 1989, improvements in real net exports are expected to be smaller and more gradual over the near term, relative to the strong gains in 1987 and 1988." Nonetheless, net exports are expected to contribute to real GNP growth. Federal Government purchases of goods and services are expected to decline 2.7 percent, compared with 3.0-percent decline in 1989. According to the Council, the 1990 decline reflects "a continued commitment to deficit reduction." State and local government purchases are expected to increase 2.0 percent, slightly slower than in 1989.

Baseline estimates

Baseline estimates show what receipts and outlays would be without policy change. In concept, they are neither recommended amounts nor forecasts; they are bases with which administration or congressional proposals can be compared. In recent years, administration budgets presented two sets of baseline estimates - those for current services and those required by the Balanced Budget and Emergency Control Act of 1985 (as amended and commonly known as Gramm-Rudman-Hollings or GRH). To alleviate confusion resulting from various baseline estimates, the fiscal year 1991 budget presents a single set of baseline estimates. This baseline conforms to GRH requirements and can be used to determine whether automatic spending reductions are necessary to meet the 1991 deficit target set by GRH. The level of receipts generally assumes that tax changes occur as scheduled under current law, and the level of outlays is generally that needed to maintain ongoing Federal programs and activities in real terms. The estimates are based on the same economic assumptions as those underlying the budget.

Budget receipts are $13.9 billion higher than baseline receipts, reflecting the administration proposals to increase receipts, as previously mentioned (table 2). Budget outlays are $7.7 billion lower than baseline outlays. This estimate reflects an anomaly to satisfy a GRH requirement to exclude expired programs from the baseline. The baseline, therefore, assumes that the food stamp program, which is scheduled to expire at the end of fiscal year 1990, will not be renewed. The budget includes a renewal of the program. After adjusting the baseline to include the food stamp program, budget outlays are $22.8 billion lower than baseline outlays; proposed program reductions ($25.2 billion) exceed proposed program increases ($2.4 billion).

Table : Table 2. - Relation of Baseline Budget to the Budget

 [Billions of Dollars]
 Fiscal Year
 1990 1991
 Receipts
Baseline estimate 1,072.8 1,156.3

Plus: Proposed legislation:

 Reduce the capital gains tax .5 4.9
 Management reforms .1 2.5

Extend social security coverage to State

and local government employees not

participating in a retirement program 2.1

Extend medicare hospital insurance

coverage to State and local government

employees 1.7

Extend and modify collection of telephone

 excise tax 1.6
 Stabilize payroll tax deposit rules .9
 Other .2 .2
Equals: The budget 1,073.5 1,170.2
 Outlays
Baseline estimate 1,194.8 1,241.0

Plus: Proposed program increases:

 Food stamps 15.2
 Commerce and housing credit 2.4
 General science, space, and technology 1.4
 Other 1.0

Proposed program reductions:

 Medicare -5.5
 National defense -3.2
 Farm income stabilization -2.5
 Income security -2.3
 Energy -1.5
 Transportation -1.0
 Health -.7
 Net interest -.7

Undistributed offsetting receipts:

Federal Communication Commission

 fees -2.3
 Sale of major assets -1.3
 Lease of naval petroleum reserve -1.0
 Other -.6
 Other -2.6
Equals: The Budget 1,197.2 1,233.3

The largest program increase - $1.4 billion - is for general science, space, and technology and reflects the administration proposal to increase spending for basic research, the space shuttle program, a space station, and exploration, including a mission to Mars.

The largest program reduction - $5.5 billion - is for medicare and reflects proposals to reduce payments for hospital capital costs, medical education, and outpatient services. National defense outlays are reduced $3.2 billion by proposals to reduce the number of military personnel, to eliminate weapons systems, and to implement management reforms. Proposals to reduce reliance on price-support payments and to enforce the cap on such payments contribute to the reduction in spending for farm income stabilization. A proposal to eliminate the January 1991 cost-of-living adjustment for Federal retirees and their option to withdraw contributions in a lump sum reduces spending for income security. A number of proposals - including the use of competitive bidding to sell certain Federal Communication Commission radio licenses, the sale of parts of various power marketing administrations, and the lease of the naval petroleum reserve - increase undistributed offsetting receipts.

The budget estimates

The budget deficit decreases from $123.8 billion in fiscal year 1990 to $63.1 billion in fiscal year 1991 (table 3 and chart 1). Of the $60.7 billion decrease in the deficit, $37.3 billion is the result of an assumed decline in the baseline budget deficit, and $23.4 billion is the result of the administration's deficit-reduction proposals.

Table : Table 3. - Federal Government Receipts and Expenditures

 [Billions of dollars]
 Fiscal year
 Actual Estimates
 1989 1990 1991
 Budget
Receipts 990.7 1,073.5 1,170.2
Outlays 1,142.6 1,197.2 1,233.3
 Surplus or deficit (-) -152.0 -123.8 -63.1

National income and product

 accounts
Receipts 1,046.4 1,128.3 1,239.3
Expenditures 1,175.6 1,246.5 1,287.7
 Surplus or deficit (-) -129.2 -118.2 -48.4

Cyclically adjusted surplus or

deficit (-) -187.7 -162.8 -103.6

Sources: The Budget of the United States Government Fiscal Year 1991, and the Bureau of Economic Analysis.

Receipts increase $96.7 billion - or 9.0 percent - in 1991, to $1,170.2 billion. Receipts in 1990 are $1,073.5 billion, up 8.4 percent from 1989. Administration proposals increase receipts $13.9 billion in 1991. The largest increase is $4.9 billion as a result of lowering the capital gains tax. Extending social security and medicare coverage to all State and local employees increases receipts $3.8 billion, and management reforms increase receipts $2.5 billion.

Outlays increase $36.1 billion - or 3.0 percent - in 1991, to $1,233.3 billion. Outlays in 1990 are $1,197.2 billion, up 4.8 percent from 1989. The 1991 increase is the net result of $51.5 billion in increases and $15.4 billion in decreases. Table 4 shows budget outlays by function: Four functions - national defense, social security, net interest, and medicare - account for over one-half of the increase in total outlays. The largest increase - $16.3 billion - is for social security and includes $7.3 billion for a 3.9-percent cost-of-living adjustment, effective January 1, 1991. The largest decline - $5.5 billion - is for commerce and housing credit; it is due to declines in spending by the Bank Insurance Fund - the successor to the Federal Deposit Insurance Corporation - and the Federal Savings and Loan Insurance Corporation Resolution Fund (see "NIPA Treatment of the Bailout of Thrift Institutions" in the December 1989 SURVEY OF CURRENT BUSINESS for a description of these funds).

Federal sector

BEA has prepared estimates of the Federal sector on the national income and product accounts (NIPA) basis that are consistent with the budget estimates (table 3). Estimates of the Federal sector, which are integrated conceptually and statistically with the rest of the NIPA's, differ in several respects from the budget estimates. Unlike those in the budget, these estimates exclude financial transactions, such as loans, and they record several categories of receipts and expenditures on a timing basis different from that of the budget. (For a more detailed discussion of the differences, see Government Transactions, Methodology Paper Series MP-5, listed on the inside back cover.) Table 5 shows the relation between budget receipts and NIPA receipts, and table 6 shows the relation between budget outlays and NIPA expenditures. Table 5 - Relation of Federal Government Receipts

in the National Income and Product Accounts to the Budget.

 [Billions of dollars]
 Fiscal year
 1989 1990 1991
Budget receipts 1,142.6 1,197.6 1,233.3
 Less: Coverage differences 2.0 2.2 2.4

Plus: Netting differences:

Contributions to government

 employees retirement funds 41.7 45.0 48.3
 Other 20.1 20.1 23.9
 Timing differences:
 Corporate income tax -6.8 -4.7 -1.9
 Federal and State
 unemployment insurance
 taxes .6 -.3 -.4
 Withheld personal income tax
 and social security
 contributions 2.5 -2.3 1.4
 Excise taxes -.4 -.6 .1
 Other
 Miscellaneous

Equals: Federal Government receipts,

NIPA's 1,046.4 1,128.3 1,239.3

Table 6 - Relation of Federal Government Expenditures in the National Income and Product Accounts to the Budget

 [Billions of dollars]
 Fiscal year
 1989 1990 1991
Budget outlays 1,142.6 1,197.2 1,233.3

Less: Coverage differences:

 Geographic 6.0 6.3 6.5
 Other -.4 .2 -2.8
 Financial transactions:
 Net lending 12.4 11.2 11.0
 Other 11.1 8.9 8.6
 Net purchases of land:
 Outer Continental Shelf -.9 -.6 -.9
 Other .4 .4 -1.1

Plus: Netting differences:

 Contributions to government
 employees retirement funds 41.7 45.0 48.3
 Other 20.1 20.1 23.9
 Timing differences:
 National defense purchases -.3 5.0 .4
 Other 2.8 3.5 .4
 Miscellaneous .1

Equals: Federal Government

expenditures, NIPA's 1,175.6 1,246.5 1,287.7

Federal receipts on the NIPA basis are $1,239.3 billion in fiscal year 1991, up $111.0 billion from 1990 (chart 2). The 1991 increase is the result of an $88.7 billion increase due to higher tax bases and a $22.3 billion increase due to tax changes (table 7). The increase due to tax changes is largely accounted for by social security rate and base increases and by proposed legislation. The proposal to reduce the capital gains tax increases personal tax and nontax receipts. Proposed legislation, including permanently extending the telephone excise tax (which expires December 31, 1990) and auctioning certain Federal Communication Commission radio licenses, increases indirect business tax and nontax accruals. The proposal to extend social security and medicare hospital coverage to all State and local government employees increases contributions for social insurance.

Table 7. - Sources of Change in Federal

Government Receipts, NIPA Basis

 [Billions of dollars]
 Change from
 preceding fiscal year
 1989 1990 1991
Total receipts 81.6 81.9 111.0
 Due to tax bases 78.3 70.4 88.7
 Due to tax changes 3.3 11.5 22.3

Medicare Catastrophic Coverage Act of

1988 1.6 -1.7 .1

Omnibus Budget Reconciliation Act of

 1989 .7 4.3 .9
 Social security(1) 1.0 8.3 7.6
 Proposed legislation .6 13.7
 Personal tax and nontax receipts 44.2 38.4 44.0
 Due to tax bases 44.2 37.8 40.2
 Due to tax changes .6 4.4

Omnibus Budget Reconciliation Act of

 1989 .1 .1
 Proposed legislation .5 4.3
 Corporate profits tax accruals 5.5 11.9 20.5
 Due to tax bases 4.8 10.7 20.6
 Due to tax changes .7 1.2 -.1

Omnibus Budget Reconciliation Act of

 1989 .7 1.2 .8
 Proposed legislation -.9
 Indirect business tax and nontax accruals .6 2.2 7.0
 Due to tax bases .6 -.2 1.4
 Due to tax changes 2.4 2.9

Omnibus Budget Reconciliation Act of

 1989 2.3 -.5
 Proposed legislation .1 6.1
 Contributions for social insurance 31.3 29.4 39.4
 Due to tax bases 28.7 22.1 27.0
 Due to tax changes 2.6 7.3 12.4

Medicare Catastrophic Coverage Act

of 1988 1.6 -1.7 .1

Omnibus Budget Reconciliation Act of

 1989 .7 .5
 Social security(1) 1.0 8.3 7.6
 Proposed legislation 4.2

(1.) Consists of social security rate and base changes since 1988.

Federal expenditures on the NIPA basis are $1,287.7 billion in 1991, up $41.2 billion from 1990 (charts 3 and 4). Table 8 highlights the major factors that contribute to recent changes in Federal expenditures. The largest increase in 1991 - $15.8 billion - is for social security, including $10.2 billion for cost-of-living adjustments. Within purchases. Federal employee pay raises add $4.5 billion, and purchases by the National Aeronautics and Space Administration add $3.3 billion; partly offsetting these increases is a $3.2 billion decline in purchases of military hardware. Grants-in-aid to State and local governments for public assistance increase $5.8 billion. Net interest paid declines $1.1 billion, and an increase in the Postal Service surplus more than accounts for the decline in subsidies less the current surplus of government enterprises.

Table 8 - Sources of Change in Federal Government Expenditures, NIPA Basis

 [Billions of dollars]
 Change from
 preceding fiscal year
 1989 1990 1991
Total expenditures 71.6 70.9 41.2
 Purchases of goods and services 21.9 19.3 10.2
 Military hardware 1.5 .8 -3.2
 Pay raises(1) 3.7 4.7 4.5
 National defense 2.5 3.3 3.2
 Nondefense 1.2 1.4 1.3
 Commodity Credit Corporation 9.6 3.7 .3

National Aeronautics and Space

 Administration 2.0 .9 3.3
 Other 5.1 9.2 5.3
 National defense 1.4 1.0 1.6
 Nondefense 3.7 8.2 3.7
 Transfer payments 28.9 36.5 22.8
 Social security 13.1 15.5 15.8
 Medicare 8.1 11.0 2.5
 Military and civilian pensions 2.3 3.7 1.1
 Unemployment benefits .5 2.7 .3
 Other 4.9 3.6 3.1

Grants-in-aid to State and local

 governments 7.2 10.8 9.8
 Public assistance 4.6 6.9 5.8
 Highways -.5 .3
 Education 1.0 .4 1.5
 Other 2.1 3.2 2.5
 Net interest paid 19.6 7.6 -1.1

Subsidies less current surplus of

 government enterprise -6.0 -3.3 -.5
 Commodity Credit Corporation -4.9 -1.3 .1
 Agriculture subsidies -1.0 -5.3 2.0
 Housing 1.2 1.8 1.5
 Postal Service -.1 1.1 -1.2
 Other -1.2 .4 -2.9

(1.) Consists of pay raises beginning with January 1989.

Table 9 shows the relation between national defense outlays in the budget and national defense purchases on the NIPA basis. In 1991, outlays, which are recorded on a checks-issued basis, increase more than purchases, which are recorded on a delivery basis.

Quarterly pattern - Table 10 shows the major factors that affect the quarterly pattern of receipts and expenditures through fiscal 1991. Receipts reflect the pattern of enacted and proposed legislation and the administration's projected quarterly pattern of wages and profits. Expenditures reflect the pattern of proposed legislation and selected other items, mainly pay raises for Federal employees and cost-of-living adjustments in social security and Federal employee retirement benefits. Table 9. - Relation of National Defense Purchases

in the National Income and Product Accounts to

National Defense Outlays in the Budget.

 [Billions of dollars]
 Fiscal year
 Actual Estimates
 1989 1990 1991
National defense outlays in the budget 303.6 296.3 303.3
 Department of Defense, military 294.9 286.8 292.1
 Military personnel 80.7 75.3 78.8
 Operation and maintenance 87.0 86.1 88.3
 Procurement 81.6 80.9 79.3
 Aircraft 27.6 27.2 26.7
 Missiles 10.1 9.5 9.7
 Ships 10.6 11.1 11.0
 Weapons 8.8 8.4 8.2
 Ammunition 2.0 2.3 1.8
 Other 22.6 22.5 22.0

Research, development, test, and

 evaluation 37.0 36.5 37.0
 Other 8.6 7.0 8.5

Atomic energy and other defense-related

 activities 8.7 9.6 11.1
Plus: Military assistance purchases .6 .5 .6

Less: Grants-in-aid and net interest paid

 Timing difference 3.0 -5.0 -.4
 Other adjustments -3.3 -7.8 -7.0
Equals: National defense purchases, NIPA's 304.4 307.5 309.1

The Federal deficit, which was virtually flat through 1989, declines sharply in the first quarter of 1990 as receipts increase more than expenditures. The first-quarter increase in receipts - $65.4 billion - includes a social security base and tax rate increase and the initial effects of the Omnibus Budget Reconciliation Act of 1989. Thereafter, the deficit continues to decline steadily as increases in receipts outpace increases in expenditures.

Cyclically adjusted deficit. - Cyclically adjusted receipts, expenditures, and surplus or deficit are estimates of what these measures would be if the economy were moving along a trend GNP path - a path free from cyclical fluctuations - rather than along its actual path. Consequently, cyclical fluctuations in the economy do not affect cyclically adjusted budgets.

As measured using cyclical adjustments based on a 6-percent unemployment rate trend GNP, the Federal sector of the NIPA's was in deficit in calendar year 1988 (table 11). The deficit increased in 1989 but is expected to decline in 1990. In 1990 and 1991, the cyclically adjusted deficit follows a pattern similar to that of the NIPA deficit, although at a higher level. It declines sharply in the first quarter of 1990 and continues to decline steadily through the third quarter of 1991.

Table 11. - Cyclically Adjusted Surplus or Deficit

(-), NIPA Basis

[Billions of dollars; quarters at seasonally adjusted annual rates]

 Based on 6-percent unemployment
 rate trend GNP
 Level Change

Calendar year

1988 -172.5 -13.0
1989 -187.3 -14.8
1990 -145.8 41.5

Quarters

1988:

 I -173.1 5.9
 II -168.0 5.1
 III -150.8 17.2
 IV -198.1 -47.3

1989:

 I -185.2 12.9
 II -183.3 1.9
 III -184.3 -1.0
 IV -196.5 -12.2

1990:

 I -165.0 31.5
 II -155.1 9.9
 III -134.8 20.3
 IV -128.4 6.4

1991:

 I -114.1 14.3
 II -96.7 17.4
 III -75.2 21.5