Federal fiscal programs.

Dobbs, David T. ; Ziemer, Richard C.

Federal Fiscal Programs

THE fiscal year 1988 budget, continuing the fiscal course of recent years, proposes to alter the scope and scale of Federal programs and to change the Federal Government's role in agriculture, education, and housing and with State and local governments. The budget, submitted to Congress in late January (a preliminary budget had been submitted in early January), reflects the impact of the Tax Reform Act of 1986. To bring the deficit within the limits mandated for fiscal years 1986-91 by the Balanced Budget and Emergency Deficit Control Act of 1985, the budget proposes substantial reductions from current services outlays--that is, outlays that would take place without policy changes. The reductions are to be implemented by program reductions, terminations and rescissions, credit reforms, management improvements, and sales of loans and physical assets. National defense outlays and social security benefits continue to increase.

The budget proposes to broaden the tax base for certain taxes, to implement administrative actions to improve tax collections, and to introduce or increase a variety of fees--such as Coast Guard fees, inspection fees, and customs fees--to be paid by users and beneficiaries of Federal services.

National defense outlays increase 5.5 percent in 1988; in real terms, according to the administration, the increase is 1.8 percent. Nondefense outlays decline 0.9 percent in 1988; in real terms, the decline is 4.4 percent. The largest proposed reduction is for agriculture, and the largest proposed increase is for social security. A large increase in a category of receipts that is a direct offset to outlays in the budget--called undistributed offsetting receipts--is proposed for 1988.

Economic assumptions

According to the administration, "A likely improvement in the merchandise trade balance, resulting from the 35 percent fall in the value of the dollar relative to other major currencies since February 1985, is the main factor arguing for a pickup in real GNP growth in 1987-1988.' In addition, the Council of Economic Advisers states that monetary policy "must continue to tread cautiously between the risk of inadequate money and credit creation that would jeopardize economic expansion in the short run, and the risk of excessive monetary growth that would reignite inflation and seriously damage economic performance in the long run.' Other economic assumptions underlying the fiscal year 1988 budget are shown in table 1.

GNP in constant dollars is forecast to increase 3.2 percent from the fourth quarter of 1986 to the fourth quarter of 1987 and 3.7 percent to the fourth quarter of 1988. Prices, as measured by the GNP deflator, are expected to increase somewhat faster in 1987 than in 1986, largely reflecting higher oil prices. Prices are expected to increase 3.6 percent over the four quarters of 1987 and at about the same rate over the quarters of 1988. Strong growth in employment is expected to continue, leading to a decline in the unemployment rate to 6.5 percent by the fourth quarter of 1987 and to 6.2 percent by the fourth quarter of 1988.

For 1987, the Council based the real GNP increase (fourth quarter to fourth quarter) on the following assessment. Personal consumption expenditures are expected to increase 2.3 percent, down from 4.0 percent in 1986. According to the Council, "the relatively low personal saving rate in 1986 suggests that households may wish to hold growth of consumption spending below that of disposable personal income in order to restore personal saving rates to more normal levels. Moreover, the boost to real disposable personal income, and hence to real consumption spending, from the sharp decline in oil prices in 1986, is unlikely to be repeated in 1987.' Residential investment--with housing starts of 1.8 million--is expected to increase 1.5 percent, down sharply from 9.8 percent in 1986, because "high vacancy rates and the effects of tax reform may inhibit growth of multifamily housing construction.' Nonresidential fixed investment is expected to increase 2.5 percent in contrast to a 5.4 percent decline in 1986, reflecting in part lower interest rates and rising corporate profits. With continued growth of domestic sales and improvement in net exports, inventories are expected to accumulate at a faster pace. Net exports, according to the Council, after accounting for a 0.7 percentage point reduction in GNP growth in 1986, are expected to add a similar amount in 1987. Federal purchases of goods and services decline 2.5 percent, compared with a 1.8-percent increase in 1986; the decline reflects the administration's program to reduce the deficit. State and local purchases are expected to increase 2.7 percent, compared with 4.6 percent in 1986.

Unified budget

The unified budget deficit decreases from $173.2 billion in fiscal year 1987 to $107.8 billion in fiscal year 1988 (table 2 and chart 2). Of the $65.4 billion decline in the deficit, $24.4 billion is the result of an assumed decline in the current services budget deficit and $41.1 billion is the result of administration deficit-reduction proposals.

Receipts increase $74.2 billion--or 8.8 percent--in 1988, to $916.6 billion. Receipts in 1987 are $842.4 billion, up 9.5 percent from 1986. Proposed legislation and administrative actions increase receipts $6.1 billion in 1988. The largest proposed increases are $2.4 billion as a result of more effective collection of taxes under various Internal Revenue Service initiatives and $1.6 billion from the extension of medicare hospital insurance coverage to State and local government employees not currently covered by social security. Other proposals include repeal of exemptions from the gasoline and other highway excise taxes, extending social security coverage to inactive duty earnings of armed forces reservists, increasing industry contributions to the railroad pension fund, and increasing user and regulatory fees.

Outlays increase $8.7 billion--or 0.9 percent--in 1988, to $1,024.3 billion. Outlays in 1987 are $1,015.6 billion, up 2.6 percent from 1986. The 1988 increase is the net result of $30.9 billion in increases and $22.2 billion in decreases. Table 3 shows the change in unified budget outlays by function; two functions--national defense and social security--account for 87 percent of the $30.9 billion of increases. The $22.2 billion in decreases is the result of proposals to cut, terminate, or restrain increases in nondefense outlays except for social security benefits. The largest decline--$4.8 billion --is for agriculture as a result of a decision not to make advance payments of agricultural subsidies in 1988 as was done in 1987. An exceptionally large increase in undistributed offsetting receipts in 1988 is the result of proposals to sell the naval petroleum reserves and Amtrak and to auction Federal Communications Commission licenses for use of mobile radio frequencies.

Current services estimates

Current services estimates show what receipts and outlays would be without policy changes. In concept, they are neither recommended amounts nor forecasts; they are a base with which administration or congressional proposals can be compared. The level of receipts generally assumes that tax changes occur as scheduled under current law. The level of outlays generally is that needed to maintain ongoing Federal programs and activities in real terms. The major exception is for national defense, for which the current services level of outlays is defined to be the same as the administration's unified budget proposal.

Unified budget receipts in 1988 are $6.1 billion higher than current services receipts, reflecting the administration's proposals to increase receipts as previously discussed (table 4). Unified budget outlays are $36.2 billion lower than current services outlays; proposed program reductions ($39.0 billion) exceed program increases ($2.7 billion).

The largest program reduction-- $5.2 billion--is for medicare and is largely due to proposals to expand the principle of paying fixed, predetermined prices for medical services to physicians whose practices are based in hospitals and increasing the medicare premium to 35 percent of cost for new enrollees. A number of proposals, including reform of the civil service retirement system and discontinuing meals served in schools and child care centers to children from families with income above 185 percent of the poverty level, reduce income security $4.7 billion. The administration is proposing a variety of changes--such as prohibiting inclusion of closing costs in Federal Housing Administration (FHA) mortgages, limiting the size of single-family FHA mortgages, and increasing mortgage fees--to lower outlays for mortgage credit and deposit insurance by $4.2 billion. Proposals to reduce financial assistance for college students and to eliminate vocational education contribute to the $4.1 billion reduction in education programs. The administration also proposes to sell the naval petroleum reserves and Amtrak, reducing current services outlays $3.5 billion. Proposals to introduce or increase user fees contribute $3.2 billion to the reduction. These include charges for Coast Guard inspections and search and rescue services, for meat and poultry inspection, and extending an ad valorem tax on imports to those with American-made components.

Federal sector

BEA has prepared estimates of the Federal sector on the national income and product account (NIPA) basis consistent with the unified budget estimates (table 2). Estimates of the Federal sector are integrated conceptually and statistically with the rest of the NIPA's and differ in several respects from the unified budget. Unlike the unified budget, they exclude financial transactions, such as loans, and record several categories of receipts and expenditures on a timing basis that is different from the budget. (For a more detailed discussion of the differences, see the February 1980 SURVEY OF CURRENT BUSINESS.) Table 5 shows the relation between unified budget receipts and NIPA receipts, and table 6 shows the relation between unified budget outlays and NIPA expenditures.

Federal receipts on the NIPA basis are $968.1 billion in fiscal year 1988, up $93.5 billion from 1987 (chart 3). The increase is the result of a $92.3 billion increase due to higher tax bases and a $1.2 billion increase due to tax law changes (table 7). The tax law changes are the net result of a $12.6 billion decrease due to the Tax Reform Act of 1986, a $7.6 billion increase due to higher social security tax rates and bases, and a $6.2 billion increase due to proposed legislation. The Tax Reform Act reduces personal tax and nontax receipts $13.1 billion and increases corporate profits tax accruals $0.3 billion. (A detailed discussion of the Tax Reform Act will appear in the March SURVEY.) Proposed revenue initiatives account for the proposed increases in personal and corporate taxes. Repeal of the gasoline and other highway excise tax exemptions, increased customs user fees, and other regulatory and user fees account for the proposed increase in indirect business tax and nontax accurals. Expansion of medicare hospital insurance coverage to State and local government employees not currently covered by social security accounts for most of the proposed increase in contributions for social insurance.

Federal expenditures on the NIPA basis are $1,088.6 billion in 1988, up $28.1 billion from 1987 (chart 4 and chart 5). Table 8 highlights the major factors that contribute to recent changes in Federal expenditures. The largest increase in 1988--$11.1 billion --is for social security benefits, including $5.9 billion for cost-of-living adjustments. "Other' national defense purchases increase $6.6 billion. These two increases combined account for 63 percent of the increase in total expenditures. Pay raises add $8.0 billion to purchases of goods and services, medicare transfer payments to persons increase $3.7 billion, and net interest paid increases $2.0 billion. Partly offsetting these increases are declines in grants-in-aid to State and local governments (the declines in 1987 and 1988 and a decline in 1982 are the only declines in grants-in-aid since World War II), in purchases of agricultural commodities by the Commodity Credit Corporation, and in purchases of military hardware.

The large change in wage accruals less disbursements is the result of a provision in the continuing resolution for fiscal year 1987 that permanently shifted the payday for many military personnel from the last of the month to the first of the following month, effective September 30, 1987. This provision results in a one-time $2.0 billion savings in fiscal year 1987 national defense outlays and in total unified budget outlays. In NIPA purchases, however, wages and salaries are recorded on a when-earned basis--that is, when the services are rendered-- and, therefore, this shift in the payday does not affect wages and salaries in national defense purchases because the services were rendered in 1987. However, the most appropriate measure of Federal Government expenditures and fiscal position for economic analysis is one that reflects the shift in payday. In the NIPA's, this measure is derived by a wage accruals less disbursements entry.

Table 9 shows the relation between national defense outlays in the unified budget and national defense purchases on the NIPA basis. In 1988, outlays, which are measured on a checks-issued basis, increase more than purchases, which are recorded on a delivery basis. The larger increase in outlays reflects, in part, the 1987 payday shift just discussed, which reduces outlays in 1987 but has no effect on purchases. The larger increase in outlays also reflects no change in procurement spending and a decline in deliveries--particularly for the B-1 bomber, the C-5B cargo plane, and the Peacekeeper (MX) missile.

Quarterly pattern.--Table 10 shows the major factors that affect the quarterly pattern of receipts and expenditures through fiscal year 1988. The Federal deficit increases in the first quarter of 1987 as the Tax Reform Act of 1986 reduces personal tax and nontax receipts. The deficit declines substantially in the second quarter as personal taxes rebound--reflecting capital gains provisions of the tax act--and subsidies less the current surplus of government enterprises decline --reflecting a large drop in agricultural subsidies. Thereafter, the deficit declines steadily. Receipts reflect the pattern of enacted and proposed tax changes and the administration's projected quarterly pattern of wages and profits. Expenditures reflect the pattern of proposed legislation and selected other items, such as Federal employee pay raises and cost-of-living adjustments in social security and Federal employee retirement benefits.

Cyclically adjusted deficit.--Measures of the cyclically adjusted budget are estimates of what the budget 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. Two measures of the cyclically adjusted budget, one based on a "middle expansion' trend GNP and one based on a 6-percent unemployment rate trend GNP, are shown in table 11.

As measured using cyclical adjustments based on middle-expansion trend GNP, the Federal sector of the NIPA's was in deficit in calendar year 1985. The deficit widened in 1986, but declines in 1987 to approximately the 1985 level. In 1987 and 1988, the quarterly pattern of the cyclically adjusted deficit is very similar to the pattern in the NIPA deficit. It peaks in the first quarter of 1987 and shows a substantial decline in the second quarter. It is stable for the rest of calendar year 1987 and declines in 1988.

The cyclically adjusted budget based on middle-expansion trend GNP is associated with a middle-expansion trend unemployment rate of 7.4 percent. The cyclically adjusted deficit based on a 6-percent unemployment rate is lower, but follows the same quarterly pattern.

Table: 1.--Economic Assumptions Underlying the Fiscal Year 1988 Budget

Table: 2.--Federal Government Receipts and Expenditures

Table: 3.--Unified Budget Outlays by Function

Table: 4.--Relation of Current Services Budget to Unified Budget

Table: 5.--Relation of Federal Government Receipts in the National Income and Product Accounts to the Unified Budget

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

Table: 7.--Sources of Change in Federal Government Receipts, NIPA Basis

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

Table: 9.--Relation of National Defense Purchases in the National Income and Product Accounts to National Defense Outlays in the Unified Budget.

Table: 10.--Federal Government Receipts and Expenditures, NIPA Basis

Table: 11.--Cyclically Adjusted Surplus or Deficit (-), NIPA Basis

Photo: CHART 2 Federal Fiscal Position: Surplus or Deficit (-)

Photo: CHART 3 Federal Government Receipts, NIPA Basis

Photo: CHART 4 Changes in Federal Government Expenditures, NIPA Basis

Photo: CHART 5 Federal Government Expenditures, NIPA Basis