BUDGET POLICY AND FISCAL RISK:

IMPLICATIONS FOR DEFENSE

Dennis S. Ippolito

September 2001
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ii
FOREWORD

Critics often charge that the major revision o

military strategy which took place after the collapse 

Soviet Union was budget-driven rather than str

driven. Partially in response to this, the current str

review, led by Secretary of Defense Rumsfeld, is inten

be “strategy-driven.” Even so, the defense budget re

one of the central shaping features of U.S. national se

and national military strategy. To understand w

possible in terms of defense transformation, one mus

have a firm grasp of the budgetary context of str

decisions.

In the monograph that follows, Dr. Dennis Ippolit

of the leading experts on the American defense b

assesses this context. He shows that defense will conti

compete with domestic programs for that portion 

budget allocated to discretionary spending, and argue

this is a competition in which defense needs have not 

especially well in the past and may not in the fut

accurate, this assessment will have tremen

implications for defense transformation. The leaders 

Army and the Department of Defense must therefore 

their transformation strategies within fiscal realities

The Strategic Studies Institute is pleased to offe

study to enhance understanding of the defense pla

and budgeting process and problems.

DOUGLAS C. LOVELACE, JR

Director

Strategic Studies Institute

iii
BIOGRAPHICAL SKETCH OF THE AUTH

DENNIS S. IPPOLITO is the Eugene McElvaney Pro

of Political Science and Chairman of the Departm

Political Science at Southern Methodist University (

Prior to joining the faculty at SMU in 1982, he taught 

University of Virginia and at Emory University. Pro

Ippolito’s recent books on the federal budget include B

Policy and the Future of Defense and Uncertain Leg

Federal Budget Policy from Roosevelt through Reaga

has presented annual lectures at the U.S. Army 

College since 1990.

iv
SUMMARY

The fate of defense budgets is closely tied to th

composition, and balance of the federal budget. Ov

past decade, efforts to reduce the relative level of f

spending and to eliminate deficits yielded disproport

cuts in defense. Now that the federal budget is in su

and expected to remain so for the next decade, the pro

for more adequate defense funding appear more posi

The reality, however, is that fiscal constraints ha

disappeared. For the immediate future, defense w

competing with domestic programs for the approxim

one-third of the budget allocated to discretionary spe

This is a competition in which defense needs have no

especially well in the past and where future outcom

problematical at best.

More important in terms of defense planning, how

is the long-term budget outlook. Unless current f

retirement and healthcare entitlements are scaled 

substantially, the margin to support discretionary spe

will begin to shrink dramatically after 2010. The U

States, like other advanced democracies, is f

demographic changes that could generate enor

spending pressures in 10-20 years. The challenge, he

elsewhere, is to minimize fiscal risk by ensuring that 

decisions made today produce budgets that are flexib

sustainable over time.

The purpose of this monograph is to provide a 

perspective for short-term and long-term de

budgeting. The budget outlook for the federal governm

more complex than current surplus projections 

suggest. That complexity needs to be appreciated by d

leaders and planners.

v
BUDGET POLICY AND FISCAL RISK:

IMPLICATIONS FOR DEFENSE

INTRODUCTION

Over the past decade, the federal government’s 

outlook has been transformed. During the early 

budget deficits were widely viewed as not just a c

problem but a growing one.

1

 From 1990 to 1994, a

deficits averaged almost $250 billion, or nearly 4 perc

gross domestic product (GDP), but by FY 2000, the b

was in surplus by more than $235 billion, and 

surpluses of more than $5.6 trillion for FY 2002-201

recently been projected.

2

Many other advanced democracies have improved 

fiscal balances in recent years, but the shift toward b

balance and public debt reduction has been espe

pronounced in the United States.

3

 Mult

deficit-reduction agreements enacted in 1990, 199

1997 have reduced discretionary spending to histori

and raised revenue levels to peacetime highs.

4

 As a re

these policy changes and unusually favorable eco

conditions, the United States has ushered in a new 

surplus budgeting.

The budget policy debates of George W. B

administration will therefore take place in a 

environment very different from that of his predece

Rather than struggling to balance current budget

administration and Congress must decide how to min

long-term fiscal risks—in effect, how to allocate sur

among debt reduction, tax cuts, and spending inc

without exacerbating the formidable entitlement fina

problems that loom on the horizon.

5

 These pro

represent the critical backdrop for today’s budg

deliberations.

Although budget projections for the coming decad

become much more favorable over the past few yea

1
post-2010 outlook has actually worsened. The inter

between demographic trends—notably, increased lon

and population aging—and the federal retiremen

healthcare commitments now in place will begin to ge

extreme spending pressures in 10 to 20 years. Accord

the General Accounting Office’s (GAO) latest 

simulations, “demographics will overwhelm the s

and drive us back into escalating deficits and debt,” 

these commitments are changed.

6

 Fiscal sustaina

therefore depends upon entitlement reform. Reform 

necessary to preserve budgetary flexibility, by en

that adequate margins will be available to support d

and other essential national needs. Fiscal constraint

forced defense to absorb a disproportionate share 

deficit-reduction burden over the past decade. While 

constraints have eased, they could soon reemerge and 

serious threat to long-term defense planning.

The search for sustainable and flexible budget po

likely to be challenging. That search should begin w

clear understanding of the recent past. Hist

perspectives on how the deficit problem was create

how it has been solved are an essential compon

prudent decisionmaking for the future.

THE DEFICIT-DEBT DYNAMIC

Budget deficits and federal debt are not m

inventions. The United States carried a very large d

its constitutional inception, and, from that point 

several decades ago, debt levels were closely tied to 

and recessions (see Figure 1). Wartime deficits pro

high debt accumulations, which were then reduced th

post-war surpluses. Economic recessions occasi

interrupted this downward trend in peacetime debt 

and the combined effects of the Great Depression and 

War II generated debt levels that were unusually 

Protracted peacetime deficits, however, were fairly rar

the 1960s.

2
3
The Social Welfare Shift.

During the 1960s, the size and composition of the f

budget began to change in ways that undermined 

control. The Johnson administration’s Great S

initiatives greatly expanded federal social w

commitments, and the budget began to shift 

discretionary programs, particularly defense, to man

entitlements. Since spending for the latter could 

easily controlled or changed, the federal governmen

faced unanticipated and atypical deficit and debt pro

The fiscal gap between spending and revenues contin

grow during peacetime and essentially regardl

economic conditions. A similar pattern had emerg

other countries, where “decisions made in the 1960

1970s to create and enlarge public programs” p

impossible to reverse when budgets moved into d

Like the United States, these countries encoun

unprecedented peacetime deficits.

The fiscal contrasts between the pre- and post

welfare shifts are sharp. During the 1950s, de

spending was well over half the budget, but deficits 

quite small. Even during the Korean War, deficits 

minimized by retrenchments in nondefense spen

From the 1960s through the 1980s, the defense-GDP 

plummeted and revenue levels rose, but deficits an

soared (see Table 1). During the 1980s, when man

spending peaked, cumulative deficits totaled $1.6 tr

and the public debt ratio increased by 50 percent.

9

Structural Deficits.

The emergency and cyclical deficits the governme

dealt with through much of our history were esse

self-correcting. Once wartime conditions ended o

economy recovered, budgets moved back into balanc

debt ratios fell. The deficits that appeared from the 

through the 1980s, however, were structural, caus

policy imbalances between spending and revenue 

4
The structural, or standardized-employment, d

measure removes “the influence of [economic] cy

factors from the budget.”

10

 The size of this deficit repr

the “policy gap” between spending and revenues.

Structural deficits began to emerge during the 

1960s, but their severity rose sharply during the Reag

(see Table 2). Attempts to reduce these structural d

were frustrated by continuing disagreements over spe

and tax policy during the course of the Reagan presi

President Reagan was committed to a substantial red

in the relative level of federal spending and to a s

budgetary resources from nondefense to defense prog

Indeed, the budget program that he proposed to Cong

1981 resembled, in its size and composition, pre

Society federal budget policy.

11Congress supp

Reagan’s defense buildup but rejected the administra

proposed retrenchments in entitlement programs

inevitable result was continued high levels of f

spending.

On the revenue side, the Reagan administ

sponsored the Economic Recovery Tax Act (ERTA) of 

one of the largest tax reductions in modern his

Congressionally-initiated tax increases followed in 

5

 Annual Average Percentage of GDP

 Spending Receipts Deficits

Fiscal Defense Nondefense

Years 

 ------------------------------------------------------------------------------------------

1950-59 10.4% 7.2% 17.2% -0.4%

1960-69 8.7 9.9 17.8 -0.8

1970-79 5.8 14.2 17.9 -2.1

1980-89 5.8 16.5 18.3 -3.9

 --------------------------------------------------------------------------------------------

Source: Historical Tables, Budget of the United States Government, 

Year 2002,Washington: U.S. Government Printing Office, 2001, pp

23-24, 45-49.

Table 1. Federal Spending, Receipts, an

Deficits as a Percentage of GDP, Fiscal Yea

1950-89.
1983, and 1984, but aggregate revenue levels stil

substantially lowered as a result of the Reaga

program.

13

 Revenue-GDP ratios during the 1980s ave

approximately 18 percent annually. These revenue 

were slightly higher than historical revenue trend

they were far too low to finance the competing spe

priorities of the 1980s. From 1981-1989, defense o

went up by nearly $150 billion, while social w

spending rose by $180 billion. As a result, annua

outlays averaged more than 22 percent of GDP ov

period, and deficit-GDP ratios were extremely high.

The GRH Experiment.

Unable to resolve this budgetary impasse by 

means, the Reagan administration and Congress agr

experiment with “automatic” deficit reduction

Balanced Budget and Emergency Deficit Control 

1985, popularly known as Gramm-Rudman-Hollings 

for its Senate sponsors, established deficit ceiling

required the budget to be brought into balance over a 

period. If the President and Congress failed to en

6

 In Current Dollars (Billions) As a Percentage of GD

 Budget Structural Budget Structu

Fiscal Year Deficit Deficit Deficit Deficit

 ------------------------------------------------------------------------------------

1981 $ - 79 $ - 17 -2.6% -0.5%

1982 -128 - 52 -4.0 -1.5

1983 -208 -120 -6.0 -3.3

1984 -185 -144 -4.8 -3.7

1985 -212 -177 -5.1 -4.2

1986 -221 -212 -5.0 -4.8

1987 -150 -155 -3.2 -3.3

1988 -155 -127 -3.1 -2.5

1989 -152 -115 -2.8 -2.1

 ------------------------------------------------------------------------------------

Source: The Budget and Economic Outlook, Fiscal Years 2002-20

Washington: U.S. Congressional Budget Office, 2001, p. 139.

Table 2. Budget Deficits vs. Structural Def

Fiscal Years 1981-89.
budget that complied with the ceiling for a given year

mandated automatic spending cuts, or sequesters, to r

the deficit by the required amount.

14

 These sequestra

however, could only be applied to certain typ

spending—essentially discretionary programs, w

formula apportioning cuts between defense and nond

on a roughly equal basis. Large entitlements were 

(social security) or partially (medicare and med

exempted. Tax policy, and revenue levels, were en

excluded from GRH coverage.

The GRH approach was admittedly unworka

massive deficit reduction became necessary, since n

defense nor nondefense programs could feasibly abso

required sequesters. In fact, GRH proponents assume

the prospect of damaging cuts in important programs 

force the executive branch and Congress to negotiate 

balanced and comprehensive deficit-reduction mea

These assumptions were never tested under Reag

successful constitutional challenge to the enforc

mechanism under GRH forced Congress to redraft the 

legislation in 1987 and to extend the balanced-b

deadline to 1993.

15

 The deficit ceilings for the final ye

the Reagan presidency were sufficiently high to 

serious compliance problems. Under Reagan’s succ

however, the deficit problem took a sudden and unex

turn for the worse, forcing George H. Bush an

Democratic-controlled 101st Congress either to ab

deficit reduction or to enact politically costly adjustme

tax and spending policies.

DEFICIT REDUCTION I: GEORGE H. BUSH

President Bush assigned a very high priority to 

reduction. On February 8, 1989, he presented hi

budget program to Congress and pledged to “work wi

Congress, to form a special leadership group, to negot

good faith, to work day and night” to cut the deficit 

percent . . . and meet the targets set forth i

7
Gramm-Rudman-Hollings law.”

16

 Bush reiterate

opposition to new taxes, consistent with his controv

campaign pledge, but offered the Democratic-cont

Congress two important concessions. He agreed in ad

to “a one-year freeze in the military budget” and to se

increases in a number of social welfare programs.

17

This more conciliatory approach did not eas

partisanship that had dominated budget policy d

under Reagan. The administration and Con

negotiated a $28 billion deficit-reduction plan, but Co

failed to enact most of the package. Long delays on b

legislation actually led to a small GRH sequestrat

October 1, 1989, at the beginning of the 1990 fiscal ye

the time that appropriations and reconciliation legis

had finally been enacted, moreover, most of the antic

deficit reduction had disappeared. Baseline defic

fiscal years 1991-1993 remained above $140 billion

though the GRH deficit targets mandated that the b

be balanced over this same period.

18

The Bush administration’s fiscal 1991 budge

submitted to Congress on January 29, 1990, an

Omnibus Budget Reconciliation Act (OBRA 1990)

centerpiece of the largest deficit-reduction packa

history"—was signed into law on November 5.

1

intervening 9 months were tumultuous, as the eco

deteriorated, the deficit ballooned, the Persian Gulf 

exploded, and congressional Republicans deserted Bu

crucial budget legislation. The GRH deficit ceiling 

1991 was $64 billion, and the administration’s or

budget promised to meet this goal—and to balan

budget by 1993—"without raising taxes."

20

 By March 

however, the projected deficit had risen to $130 bil

Over the next few months, the economic and bud

outlook continued to worsen. Congressional Budget 

(CBO) estimates issued in June put the baseline def

FY 1991 at over $230 billion, and the FY 1992 estima

even higher.

22

 With deficits of such magnitude, 

sequestration was not a realistic option. Neither defen

8
nondefense programs could absorb the huge c

estimated at 25-40 percent for FY 1991 alone—necess

bring the deficit down to the GRH ceiling.

23

On May 6, 1990, President Bush acknowledged t

alternative to GRH was urgently needed and i

congressional leaders to negotiate a bipar

deficit-reduction agreement with “no preconditio

Negotiations then stalled for 7 weeks, as Democrats in

that Bush explicitly endorse a tax increase as an ess

part of any plan to reduce the deficit. After Bush agr

do so, the 1990 budget summit began in earnest. 

months later, agreement was reached on a $500 b

5-year deficit-reduction plan. This plan had two 

components: (1) spending reductions and tax increa

lower baseline deficits over a multiyear period; a

budget process controls to prevent legislative action

would diminish these deficit savings. For fiscal 

1991-1995, statutory ceilings on budget authorit

outlays were set for defense and nondefense discret

programs. In addition, legislation increasing entitle

or reducing revenues in any fiscal year was required 

deficit-neutral.

25

 Separate sequestration controls wo

triggered if either the discretionary spending limits 

revenue-entitlement procedures were violated.

On the policy side, this initial agreement was 

balanced in terms of administration and congres

Democratic priorities. The tax increases tha

administration agreed to did not raise marginal ra

individual income, and, in order to protect discret

domestic programs, Democratic negotiators acc

substantial entitlement cutbacks. Both sides conc

that defense would supply all of the required discret

spending savings for at least 3 years, but additional d

transfers to domestic programs were prohibited.

These policy compromises, however, failed to s

conservative Republicans and liberal Democrats 

House, who teamed together to defeat the b

9
agreement in its first congressional test on October 5

this defeat, the Bush administration decided to allo

Democratic leadership to formulate a new budget pa

that could pass the House and Senate. A revised b

resolution was quickly passed, and Congress then app

a budget reconciliation bill to implement the Demo

deficit-reduction program. This program, however

quite different from the previous budget agree

Revenue increases were larger, and much heavi

burdens, including higher marginal rates, were impo

upper-income taxpayers. Entitlement savings were s

reduced. Of the approximately $480 billion in 5-year 

reduction, only $75 billion came from entitlement

mandatory spending, compared to $190 billi

discretionary spending savings.

26

In sum, the 1990 OBRA legislation was a policy v

for congressional Democrats. The administration’

success was in persuading Congress to retain mu

budget process controls. Discretionary spending cap

pay-as-you-go (PAYGO) limits on revenues 

entitlements were the main enforcement provisions 

this new approach to deficit reduction, and these 

features were incorporated into the Cl

administration’s deficit-reduction program 3 years la

The impact of the 1990 law on budget deficit

obscured by the economic slowdown that continued th

1991 and 1992. When OBRA 1990 was enacted, for exa

the deficit for FY 1993 was expected to be approxim

$215 billion. The actual deficit during FY 1993 in

reached $290 billion. Thus, when the Cl

administration took office, deficit levels were even 

than they had been during the Reagan presidency

structural deficits were expected to continue indefin

DEFICIT REDUCTION II: BILL CLINTON

During the 1992 campaign, Bill Clinton had pled

cut the deficit in half during his first term. After Clint

10
the battle for his economic stimulus package in Feb

1993, the administration decided to adopt a straightfo

approach to deficit reduction, calling for $500 bill

revenue increases and spending savings over a 

period. Revenue increases were the most prominent 

the Clinton program, and Republican opposition to 

increases was fierce. OBRA 1993 passed the Hous

Senate in early August by the narrowest of margin

against unanimous Republican opposition in 

chambers.

27

OBRA 1993 was more heavily weighted toward rev

than OBRA 1990. The revenue provisions in OBRA 

were expected to yield $240 billion over 5 years, wi

increases affecting high-income taxpayers—a top ma

rate of 39.6 percent and increased med

taxes—accounting for more than $140 billion. Discret

spending caps, extended through 1998, continued to b

tight (see Table 3). As with OBRA 1990, the 

deficit-reduction agreement avoided major entitl

reforms, thus extending the differential treatm

discretionary and mandatory spending programs. For 

years 1991-1998, discretionary spending growt

limited to $25 billion. Over this same period, the man

spending baseline incorporated growth of more than 

billion. As a percentage of GDP, discretionary spendin

expected to fall below 7 percent, while mandatory pro

were projected to rise to 13 percent.

28

DEFICIT REDUCTION III: CLINTON AND THE

REPUBLICANS

Deficit projections issued after OBRA 1993 was en

were not particularly encouraging, since the deficit ba

remained at about $200 billion from 1995 through 

with a subsequent rise to nearly $360 billion in 2003.

of the factors that exacerbated budget policy battles ov

remainder of Clinton’s first term was the failure of 

early forecasts to capture the better-than-exp

11
improvement in the deficit outlook under the 1990 an

budget plans. The other factor was a surprising Repu

victory in the 1994 mid-term elections that elevated 

reduction to even greater prominence. After nar

failing to pass a constitutional balanced-b

amendment in 1995, the Republican-controlled 

Congress enacted a balanced-budget program to elim

the deficit by 2002.

30

 This program produced an esp

bitter and prolonged confrontation with Clinton in lat

and early 1996. In the wake of that confrontat

chastened Republican leadership joined the C

administration in formulating a bipartisan bala

budget agreement.

12

 OBRA 1990

 Mandatory Discretionary

 Fiscal Year Spending Baseline Spending Cap

--------------------------------------------------------------------------------------

 1991 $562 $521

 1992 632 526

 1993 687 536

 1994 731 536

 1995 776 541

 OBRA 1993

 Mandatory Discretionary

 Fiscal Year Spending Baseline Spending Cap

--------------------------------------------------------------------------------------

 1994 $808 $542

 1995 855 542

 1996 901 548

 1997 969 547

 1998 1035 547

--------------------------------------------------------------------------------------

Source: The Economic and Budget Outlook: Fiscal Years 1992-96,

Washington: U.S. Congressional Budget Office, 1991, p. 82; The Econ

and Budget Outlook: An Update, Washington: U.S. Congressional Bu

Office, September 1993, p. 26.

Table 3. Mandatory and Discretionary Spen

under OBRA 1990 and OBRA 1993

(in billions of dollars).
The 1995-1996 Shutdown.

During the summer of 1995, the congress

Republican leadership pressed forward on two budget 

fronts—a multiyear balanced-budget reconcil

package and appropriations bills for FY 1996

Republican reconciliation measure was quite differe

its policy mix and fiscal goals, from the 1990 and 

reconciliation initiatives.

31

 The Republican plan con

large tax cuts, estimated at $245 billion for fiscal 

1996-2002. The balanced budget it promised in 200

therefore contingent on unusually deep spending 

including unprecedented and controversial savings 

entitlements. The nearly $900 billion in baseline spe

reductions that Congress approved on November 20, 

included $270 billion from medicare, $160 billion 

medicaid, and more than $80 billion from means-tes

low-income) welfare entitlements. The only 

entitlement unaffected by the Republican plan was 

security. Since the Republicans also wanted to raise d

budgets, proposed cuts in discretionary spending 

aimed exclusively at domestic programs. This pa

budget balance posed a direct challenge to the 

priorities of the Clinton administration and congres

Democrats, and Clinton responded by vetoing the b

reconciliation bill on December 6.

Over this same period, Republicans were mount

effort to force discretionary domestic spending belo

caps that had been set under the 1993 deficit-red

agreement. Fiscal 1995 appropriations had been enac

1994, when the Democrats still controlled Congress, 

Republican leadership pushed through resc

legislation to reduce previously-approved spending by 

than $16 billion. The proposed cuts were sharpe

domestic programs that represented Democratic prio

The first FY 1995 rescission bill was vetoed on June 

the President signed a compromise measure on July 

13
For FY 1996 appropriations, however, the Repub

wanted to impose even deeper cuts and to couple th

policy riders affecting environmental and other regula

abortion restrictions, and domestic agency opera

Protracted and divisive congressional debates over 

spending and policy issues took place on every do

appropriations bill. When the 1996 fiscal year beg

October 1, only two appropriations measures—m

construction and legislative branch operations—had 

sent to the President. The remaining 11 bills were s

threatening a government-wide shutdown. This thre

temporarily averted by a 6-week continuing resolutio

Clinton signed on September 30, but 10 appropriation

were still blocked when this first continuing reso

expired on November 13. Negotiations on a s

continuing resolution broke down, and a 6-day gover

shutdown ensued. After Republicans agreed to drop 

preconditions for a second continuing resolution, a 4

extension was agreed to on November 20. When this s

resolution expired on December 15, six appropriation

still had not been passed, and budget talks betwee

administration and Republican leaders collapsed. A s

shutdown, affecting nine cabinet departments and 

200,000 employees, was triggered.

Over the next 3 weeks, the political fallout from 

second shutdown decisively favored Clinton

congressional Republicans returned in January 

anxious to avoid further erosion in their public suppor

shutdown was ended on January 6, and a ser

continuing resolutions was enacted until the last of t

1996 appropriations bills was eventually passed on Ap

When it was finally over, the FY 1996 appropriation

had produced two government shutdowns, 14 cont

resolutions, and an overwhelming consensus tha

Republican budget strategy had been a political dis

Republicans had managed to impose only modest c

domestic programs, while Clinton had successfully b

their reconciliation initiative, had refused to comm

14
administration to any alternative balanced-b

program, and had won the battle for public opinion.

The fiscal 1997 budget cycle reflected Cli

strengthened position and growing Republican w

about the upcoming elections. All of the FY 

appropriations bills were enacted on schedule, an

administration won most of the disputes over do

spending levels and policy riders. Discretionary o

increased by nearly $15 billion from 1996-1997, wi

greater share of the increase allocated to domestic 

than defense programs.

The 1997 Balanced Budget Agreement.

Republicans managed to retain control of the Hou

Senate in the 1996 elections, and Republican leaders 

105th Congress renewed their pledge to balance the b

by 2002. This time, however, they offered to work wi

Clinton administration on a compromise balanced-b

framework. Talks between White House and congres

representatives began in early February and 

concluded on May 15. This bipartisan agreemen

approved by Congress in its FY 1998 budget resolutio

implemented in two budget-reconciliation measure

were signed into law on August 5.

The 1997 reconciliation package was decidedly m

particularly in comparison to the 1996 legislation 

Clinton had vetoed. Republicans secured a net tax cut 

billion over 5 years along with $260 billion in deficit s

from both discretionary programs and entitlements.

3

offsets for new spending that Clinton and congres

Democrats had insisted upon, net deficit reductio

estimated at only $127 billion for fiscal years 1998

Moreover, the combination of tax cuts and new spe

was actually expected to increase the baseline def

more than $20 billion in FY 1998.

33

 Baseline deficits 

then begin to drop very gradually, with the bud

surplus by $32 billion in 2002.

15
The Aftermath.

When the 1997 reconciliation bills were signed, 

was considerable skepticism about the prospec

actual—as opposed to projected—balanced budg

Before long, however, it became clear that the b

outlook was improving much more dramatically than 

the most optimistic forecasters had believed po

Instead of a $60 billion deficit in FY 1998, the b

registered a $70 billion surplus, and projected defic

the next several years have given way to larger and 

surpluses (see Table 4). For fiscal years 1998-2002, 

deficit-surplus “improvements” will likely average 

than $235 billion per year.

These improvements have occurred without add

policy retrenchments. In fact, legislative actions taken 

the 1997 budget agreement was signed have inc

baseline spending and reduced surpluses.

35

 Rather 

policy effects, the changed budget outlook reflect

primary factors: (1) revenues have grown much, 

16

 September 1997 Actuals or

 Fiscal Baseline Current Ch

 Year Projections Estimates

--------------------------------------------------------------------------------------

 1998 -$57 +$69 

 1999 -52 +124 

 2000 -48 +236 

 2001 (est.) -36 +281 

 2002 (est.) +32 +313 

--------------------------------------------------------------------------------------

Source: The Economic and Budget Outlook: An Update, Washington: 

Congressional Budget Office, 1997, p. x; The Budget and Economic O

look: Fiscal Years 2002-2011, Washington: U.S. Congressional Budge

Office, 2001, pp. 4, 142.

Table 4. Post-Balanced Budget Agreeme

Deficit (-)/Surplus (+) Projections vs. Actua

Surpluses, Fiscal Years 1998-2002

(in billions of dollars).
faster than projected; and (2) mandatory spending ha

much more slowly than expected. The revenue impa

been the more important, accounting for approximat

percent of the deficit-surplus improvement from 1998

and for about one-half of the surplus growth expecte

the next few years.

36

 Analysts attribute this revenue 

to stronger-than-expected economic growth and to ch

in the types or characteristics of income.

37

 On the spe

side, lower-than-expected inflation has reduced the g

rates in indexed entitlements, while medicare pr

savings have been much higher than policymakers ass

(or intended) in 1997.

The positive budget outlook now in place also re

however, the cumulative effects of policy adjustment

the past decade. Between 1990 and 2000, for examp

deficit-surplus change was $457 billion, or 6.3 perc

GDP. As shown in Table 5, the policy-based factor

accounted for this change were the higher tax 

(especially for individual income) put in place in 199

1993 and, on the spending side, the massive post-Col

defense cutbacks that reduced the level and altere

distribution of discretionary spending. The discret

spending-GDP ratio dropped by almost 30 percen

result of the discretionary spending caps in place duri

1990s, with almost all of this decline absorbed by de

The combination of defense cuts, interest savings 

lower deficits, and the elimination of deposit insu

outlays previously needed to fund savings and 

insolvencies, more than offset a slightly higher GDP 

for entitlement programs.

The policy components of deficit reduction, then

consisted of higher taxes and reduced defense spendin

former are partly accidental, since policymakers d

intend to raise revenues to their current levels. With r

to defense, however, the decisions of the past decade 

been deliberate in direction and clear-cut in effect. 

the Republican takeover of Congress in 1995 pro

moderated the Clinton administration’s initial p

17
transfer funding from defense to domestic progra

substantial reallocation of discretionary spendin

nevertheless taken place. Defense outlays, in cu

dollars, increased by $22 billion from 1995 to 2000; ov

same period, discretionary domestic spending ro

nearly $50 billion. More important, real spendi

defense has fallen by 30 percent since the end of th

War.

38

The debate over how to allocate surpluses, then, 

with the tax and defense issues. Whether tax levels a

high involves political and economic policy judgm

18

 FY 1990 = -$221 FY 2000 = +$236

 Revenues = 18.0% GDP Revenues = 20.6% 

 Outlays = 21.8% Outlays = 18.2% 

 Deficit = -3.9% Surplus = +2.4% 

 FY 1990 FY 2000 Cha

Revenues 18.0% GDP 20.6% GDP +2.6% 

 Individual 8.1 10.2 (+2.1

 Corporation 1.6 2.1 (+0.5) 

 Payroll 6.6 6.6 (+0.0

 Other 1.6 1.6 (+0.0) 

Outlays 21.8% 18.2% -3.6

 Disc. Defense 5.2 3.0 (-2.2)

 Disc. Nondefense 3.5 3.3 (-0.3) 

 Mandatory

 Programmatic 9.9 10.5 (+0.6) 

 Deposit Insurance 1.0 0.0 (-1.0) 

 Net Interest 3.2 2.3 (-0.9)

 22.8 19.1 -3.8 

 Offsetting Receipts -1.0 -0.8 +0.2 

 21.8 18.2 -3.6 

--------------------------------------------------------------------------------------

Source: The Budget and Economic Outlook, Fiscal Years 2002-2011,

Washington: U.S. Congressional Budget Office, 2001, pp. 142-151.

Table 5. Components of Deficit Reductio

Fiscal Years 1990-2000

(in billions of dollars and percent of GDP)
Whether defense budgets are too low is certainly a po

judgment as well, but there are tangible consider

about the forces and funding needed to support the na

security strategy. There is compelling evidence that d

has been underfunded for quite some time and 

substantial increases are needed to sustain and mod

the nation’s military forces. According to the CB

example, the FY 2000 defense budget was more tha

billion below the level required to “keep defense forc

‘steady state’.”

39

 While the CBO analysis conclude

underfunding affected most categories in the d

budget, the shortfall in procurement was espe

large—a sustaining budget estimate of $90 b

compared to the $53 billion in FY 2000 appropriation

With the large surpluses now projected for the 

decade, the fiscal framework within which defense bu

are determined should be more favorable than it was d

the 1990s, and President George W. Bush has assig

high priority to funding defense at more generous 

Nevertheless, this new fiscal environment is not en

positive. Surplus projections are encouraging bu

guaranteed. In addition to the inherent uncertain

5-year or 10-year forecasts, policy decisions 

substantially alter revenue and spending growth can 

budget balances very quickly. For the long term, the 

problems are more serious. Budgetary pressures 

current entitlement commitments will begin to acce

making it difficult to preserve adequate discret

spending margins. The defense budget, in sum, is lik

remain vulnerable to fiscal, as well as political, constra

THE UNCERTAINTIES IN BUDGET PROJECT

An immediate concern is that surplus projections 

future, like deficit forecasts of the recent past, may 

illusory. Whether surpluses are realized, and how 

those surpluses turn out to be, will depend on ho

economy behaves, how benefit programs actually wor

19
how Congress and the President change the revenu

spending policies currently in place. The surplus tot

the next decade can change markedly depending 

complex interactions among these controllabl

uncontrollable factors.

Economic and Technical Assumptions.

Budget projections are based upon economi

technical assumptions that are subject to consid

uncertainty. Rates of economic growth, inflation

productivity directly and indirectly affect federal spe

and revenues, and unanticipated changes in these eco

variables can substantially change even short-term b

forecasts. These effects become even more pronoun

forecasting periods lengthen. Errors in econ

assumptions have caused considerable inaccurac

previous budget forecasts, and the prospects for 

errors remain high. The CBO, for example, acknowle

“50 percent chance that such errors will cause 

projection of the total budget surplus for the coming 

year to miss the actual outcome by more than 0.9 per

GDP (or $97 billion). . . .”

41

 For its 5-year projectio

potential error is more than 1.8 percent of GDP, or 

$250 billion.

42

Budget projections also incorporate assumptions 

policy, and the baselines used in these projections a

that current policies will not be changed. Regardl

policy changes, however, revenue and spending esti

are far from precise. Over the past several years, rev

have been underestimated by very large amounts, rev

an earlier pattern of revenue overestimates. 

1981-2001, the average absolute difference betw

5th-year revenue projection and actual rev

levels—adjusted for any subsequent legisl

changes—was 11.5 percent, or more than 2 perc

GDP.

43

 Outlay estimating errors have typically 

smaller than revenue errors, particularly for out

20
Nevertheless, the average difference between o

projected 5 years ahead and actual spending has be

percent over the past 2 decades.

44

 In addition, spe

estimates have been especially susceptible to err

medicare, medicaid, and some means-tested entitl

programs that account for a growing share of 

budgets.

The baseline surplus projections for FY 2002-201

more than $3.1 trillion for “on-budget” accounts, that 

spending and revenues other than social security. 

reversion to pre-1996 trends in key economic var

(such as GDP growth and productivity), person

liabilities as a share of taxable income, and medica

medicaid spending could eliminate projected sur

after 2003 and yield cumulative deficits of $525 billio

the next 8 years.

45

 Conversely, more favorable econom

policy assumptions more than double the estim

baseline surpluses. In view of these uncertainties, th

has cautioned that “the outlook for the budget can b

described not as the single row of numbers . . . but as a 

probabilities around those numbers.”

46

Discretionary Spending Decisions.

An additional unknown is posed by future dec

about discretionary spending. Surplus projections a

that discretionary spending outlays will grow only 

rate of inflation. If the President and Congress w

adhere to this baseline for the next decade, discret

outlays would increase by $220 billion, from $646 bil

FY 2001 to $866 billion in FY 2011.

47

 Inflatio

adjustments, however, allow zero real growth and 

result in a further decline in the discretio

spending-GDP ratio, from 6.3 percent in 2001 to 5.1 p

in 2011. A decline this severe is highly unrealistic

most policy analysts agree that even the current 6.3 p

ratio cannot adequately fund the defense programs n

place and the nondefense spending priorities in area

21
as education, transportation, and health researc

training. There is also widespread congressional supp

raising discretionary spending growth to much h

levels. The cost implications, however, are substantia

10-year cost of the discretionary spending baseline is 

trillion.

48

 If discretionary spending simply grows 

same rate as GDP, the additional cost is over $900 b

The principal fiscal constraint on discretionary spe

is that sustained levels of real growth greatly r

projected surpluses, although this effect builds slow

several years before beginning to accelerate. This d

impact helps to explain the recent enthusiasm for bo

discretionary spending. Congress and the Cl

administration at first complied with the Balanced B

Agreement’s discretionary spending caps, but 

surpluses began to appear, compliance ended. Alt

discretionary spending will remain cappe

approximately $560 billion through FY 2002, the cap

been breached by growing amounts—$15 billion in 

$50 billion in 2000, $80 billion in 2001, and an esti

$110 billion in 2002.

49

 If discretionary spending grow

rapidly when the caps expire, outyear costs will begin 

into projected surpluses, and fiscal constraints will 

tighten.

The political constraint affecting discretionary spe

is the competition between defense and nonde

programs. As shown in Table 6, defense has been 

poorly in this competition for quite some time. Wheth

current Bush administration can arrest this sh

arguable. While President Bush may be more incline

Bill Clinton to shift budgetary resources to defense, h

undoubtedly face strong congressional opposition 

defense buildup that comes at the expense of do

programs. Indeed, the strong bipartisan support th

emerged in Congress for increasing domestic discret

spending suggests that defense may be fortunate to r

a proportional share of discretionary growth.

22
The Policy Mix.

The broad policy options for using projected sur

include retiring publicly-held debt, financing tax cu

spending increases, or implementing some combina

these three. The Bush administration and Congress 

pledged to commit the off-budget, or social security, p

of the total surplus to debt reduction. The approxim

$2.5 trillion in off-budget surpluses projected for th

decade would permit the federal government to 

virtually all of its publicly-held debt.

50

 The debt h

government accounts—i.e., the social security 

funds—would then rise by a roughly equivalent amo

On-budget surpluses, by comparison, are availa

finance tax cuts and spending initiatives, but 

surpluses can be quickly depleted as the outyear eff

reduced taxes or additional spending multiply. A 

benchmark for these effects is provided by the ba

23

 Defense Outlays Nondefense Outlays Tot

 In As a Percentage In As a Percentage Discreti

 Billions of Total Billions of Total Outlay

Fiscal of Discretionary of Discretionary billio

Year Dollars Outlays Dollars Outlays dolla

---------------------------------------------------------------------------------------------

1991 $320 60% $214 40% $53

1992 303 57 232 43 53

1993 292 54 249 46 54

1994 282 52 262 48 54

1995 274 50 272 50 54

1996 266 50 269 50 53

1997 272 49 277 51 54

1998 270 49 284 51 55

1999 275 48 300 52 57

2000 295 48 322 52 61

2001(est.) 301 47 345 53 64

---------------------------------------------------------------------------------------------

Source: The Budget and Economic Outlook, Fiscal Years 2002-2011

Washington: U.S. Congressional Budget Office, 2001, p. 75. 

Table 6. Defense and Nondefense Discretio

Outlays, Fiscal Years 1991-2001.
on-budget surplus projected for 2011—$558 billion 

percent of GDP. The $1.35 trillion, 10-year tax cu

Congress passed in May 2001 will reduce the 2011 s

by more than 1 percent of GDP.

51

 On the spending 

holding constant the current discretionary spending

ratio through 2011 subtracts an additional 1.2 pe

Thus, the projected surplus for 2011 would be redu

two-thirds, without any additional tax cuts or spe

increases. Since the list of other pending spending dem

is long and costly—e.g., a prescription drug bene

medicare—additional encroachments on the ba

surplus are probably inevitable.

The flexibility promised by large on-budget surp

then, disappears very quickly when permanent tax cu

permanent spending increases are implemented. The 

administration’s FY 2002 budget acknowledge

problem and proposes to deal with it through a $1.4 t

reserve fund for additional needs and contingencies ov

next 10 years.

52

 In order to create this reserve, howev

administration must convince Congress to ex

extremely strong control over current spending. Und

Bush plan, discretionary spending would be allowed t

by less than 3 percent annually after 2003, and man

spending would have to be reduced by more than 

trillion under the current policy baseline from 2002-2

The reserve fund proposal therefore underscores the c

point that future surpluses do not eliminate the ne

current budgetary tradeoffs. If the administratio

Congress want to preserve budgetary flexibility—eit

accommodate new programs or to provide a hedge a

estimating uncertainties—they must agree to limit c

spending growth.

These considerations notwithstanding, budg

margins potentially available for defense are larger 

surplus scenarios than under the deficit-redu

constraints of the 1990s. It is unlikely, for example

defense will continue to decline in real terms, but it m

difficult to reverse this decline quickly and perman

24
The administration’s 2002 budget program, for exa

allows several years to bring real defense outlays back 

levels in place in 1994-1995.

54

 If the 2001 Quadr

Defense Review and the Defense Department’s in

strategic reviews demonstrate the need for consid

larger budget allocations, this timetable would need 

shortened, at which point the outyear implication

defense buildup would become more pronounced and 

contentious.

How well defense fares in the competition for ava

funds over the next decade will be determined, in larg

by political factors. The Bush administration must b

to articulate a credible national strategy and to in

defense against domestic spending demands that hav

immediate and tangible political benefits. Congres

support will have to be organized at the several stages 

annual budget process—budget resolutions, authori

bills, and appropriations bills. Unless the partisa

ideological balance in Congress were to shift decisiv

favor of defense over the next several years

congressional budget process will almost certainly 

small, incremental changes. Then, in the not-too-d

future, the fiscal environment could become less hosp

to defense and other discretionary spending requirem

making it even more difficult to sustain real growth.

THE POST-2010 OUTLOOK

The long-term budget outlook is dominated by pro

growth rates for federal retirement and healt

programs—notably social security, medicare, and med

These three programs currently account for approxim

7.5 percent of GDP, more than double the GDP ra

years ago. Over the next decade, retirement and heal

entitlements are expected to grow moderately, to just 

9 percent of GDP, but growth rates for social securi

especially for medicare and medicaid will then be

climb much more rapidly. Under “midrange assump

25
spending for these programs would exceed 12 perc

GDP in 2020 and then rise to nearly 17 percent by 204

Figure 2).

55

 With revenue baselines at approximat

percent of GDP, funding these entitlements would 

policymakers with two options—either to reduce all 

spending to a steadily narrowing GDP margin or 

deficits. (Raising revenues well above 20 percent of G

generally viewed as infeasible, in terms of ne

economic effects as well as political consideration

upper limits of “acceptable” tax levels in the United 

are considered to be wartime emergencies, bu

revenue-GDP level even during World War II 

exceeded 21 percent.)

The starting point for these sobering projecti

current policy, with the cost escalations a funct

population aging and healthcare requirements

demographic trends are clear-cut—the baby

26

Figure 2. Spending for Social Security

Medicare, and Medicaid under CBO’s

Midrange Assumptions.
generation will begin to reach retirement age around 

and this expanding pool of retirees will also have long

expectancies than past generations. Costs per retir

expected to increase as a consequence of more ye

receiving benefits and, with respect to healthcare, fro

greater intensity of demand for healthcare services a

the very elderly.

Population aging also means there will be fewer w

to support these retirees. There are now approximat

workers per social security beneficiary, compared to 

recently as 1960.

56

 By 2040, however, the old-a

dependency, ratio is projected to fall to 2.1 worke

beneficiary. As spending for social security and me

begins to grow very rapidly, payroll tax revenues t

this growth will lag well behind. By about 2016, accord

current projections, social security and medicare pay

will exceed revenues, and accumulated trust fund sur

would be depleted by 2029 for medicare and 2038 for 

security.

57

Using social security surpluses to retire ex

publicly-held debt does reduce net interest obligation

improves budget flexibility for a time, but the long

budget outlook cannot be fundamentally changed if c

retirement and healthcare commitments are maint

After 2010, larger and larger shares of federal rev

would be absorbed by social security, medicare

medicaid. Unless offsetting reductions were made 

other spending programs, deficit and debt problems 

reemerge. If, for example, discretionary spending 

simply to be maintained at baseline levels—i.e., inf

adjustments but no real growth—the fiscal gap be

revenues and outlays would become extremely larg

lead to unsustainable debt levels over time.

58

These long-term scenarios illustrate the potentia

checks on discretionary spending and on the 

remaining means-tested and nonmeans-tested entitl

programs. The current GDP share for these various ty

27
spending is approximately 9.5 percent. Once the retir

and healthcare entitlements climb above 10 percent o

the budgetary margin for all other spending will be

shrink. By 2030, the projected margin is less than 5 p

of GDP.

59

 By 2050, social security, medicare, and me

would, by themselves, be well over 20 percent of GD

The uncertainties in short-term projections obv

apply to the long-term budget outlook, bu

demographics that drive the latter are formidable. 

absence of retrenchments that greatly reduce the ra

projected growth in social security, medicare, and med

the funding requirements for these programs 

eventually eliminate any budgetary flexibility. Flexib

sustainable budget policy therefore depends upon 

changes that lower the relative burdens of retireme

healthcare entitlements.

60

Concerns about future budget policy, then, 

immediate relevance. Even though entitlement fina

problems do not become severe until after 2010, re

that would reduce the benefits available under existi

must give future retirees sufficient time to adjust.

6

adjustment period is particularly important for 

security reforms, such as privatization or retireme

increases, that would affect virtually all f

beneficiaries.

62

The necessity for reform is also unrelated to the s

trust fund balances that social security will accum

over the next 10 years. When social security benefits 

to exceed payroll tax receipts, the government mus

the difference through higher taxes, through borrow

by reducing other spending. The trust fund surpluses 

social security’s claim on budgetary reso

stronger—since the government “owes” money to the 

funds for the securities being held—but the actual fu

satisfy that claim must be provided when benefits are 

28
CONCLUSION

The fiscal problems posed by retirement and heal

entitlements are not confined to the United S

Demographic trends in most of the advanced democ

will make it extremely difficult for them to mainta

social welfare systems now in place and to fund 

needed programs without excessive deficits or exc

taxation.

63

 These deficit and tax options, moreove

probably more limited than in the past. 

internationalization of financial markets has created 

incentives to avoid deficit and debt financing, 

globalization has made tax systems more competit

country’s ability to impose higher tax rates th

economic competitors is constrained by the gr

mobility of capital and skilled labor and by the atte

effects on productivity and growth.

64

The fiscal challenge for the United States is arg

less severe than that faced by its major eco

competitors. Its demographic problems are not qu

serious, and its social welfare system is compara

narrow. At the same time, the United States has d

requirements that are unique, and these requirement

to be taken into account as the President and Co

shape future budgets. The immediate problems ar

understood. Underfunding of defense programs und

Clinton administration has compromised readines

especially, modernization. Redressing these deficie

while accommodating the Bush administration’s pro

missile defense system and other new initiatives, 

require substantial real growth in defense budgets 

extended period.

The FY 2002 budget plan submitted by the 

administration and the corresponding congressional b

resolution adopted this spring contain “placeh

numbers for defense, with funding levels almost flat 

terms over the next decade. Once the administ

completes its defense strategy review, a revise

29
presumably larger defense program will be propos

fiscal years 2003-2011. The President’s determinat

have “our defense vision . . . drive our defense bud

certainly justified, but the severity of potential fu

problems is daunting.

65

If, for example, the strategy and programs now in 

under the 1997 Quadrennial Defense Review 

reaffirmed, defense funding requirements could exce

current placeholder budgets by more than $200 billio

the next decade.

66

 If, on the other hand, a different st

is pursued, these funding shortfalls could be reduce

tradeoffs, however, would inevitably include subst

reductions in force levels—Army divisions, Navy c

battle groups, and Air Force fighter wings—and a 

selective program of weapons modernization. Without 

tradeoffs, and a diminished regional war capability

budgetary reductions cannot be realized. In add

defense needs do not disappear in 2011. If long-term 

flexibility is not protected, the nation’s ability to 

defense at needed levels will eventually be impaired

The deficit-debt dynamic that the federal gover

encountered after the 1960s was caused b

unexpectedly high costs of expanded social w

entitlements. That dynamic has been brought 

control, at least for the immediate future, through d

cuts and tax increases. The entitlement financing pro

however, remains unresolved, and unless mean

reforms are enacted fairly soon, spending pressure

become more concentrated and more intense. Ade

budgetary margins to fund discretionary programs, n

defense, will not be available. For the defense comm

the decisions that the President and Congress 

regarding defense budgets over the next several yea

be extremely important. The long-term prospec

defense, however, will be shaped by broader decision

determine the composition of future spending budge

30
During the Cold War, when the Soviet threat wa

and immediate, defense funding was volat

well-developed and widely-supported national m

strategy could not insulate defense from comp

budgetary pressures. In the post-Cold War world, the 

is less urgent, the strategic consensus is weake

competing budgetary needs are more politically p

Despite budget surpluses, defense remains vulnera

short-term political fluctuations and long-term 

trends.

ENDNOTES

1. From the end of World War II through 1960, there wer

budget surpluses and seven deficits. Over the next 3 decades, the 

was in deficit in all but 1 year (FY 1969). Publicly-held debt 

30-year period rose from $237 billion to $2.4 trillion. By the time 

budget was again balanced in FY 1998, the debt had climbed 

trillion. See Historical Tables, Budget of the United States Gove

Fiscal Year 2002, Washington: U.S. Government Printing Offic

pp. 21-22, 116.

2. The Budget and Economic Outlook: Fiscal Years 200

Washington: U.S. Congressional Budget Office, 2001, p. xiv.

3. See James D. Savage, “Budgetary Collective Action Pr

Convergence and Compliance under the Maastricht Tre

European Union,” Public Administration Review, V

January/February 2001, pp. 43-51.

4. Discretionary spending, which includes defense and no

welfare domestic programs, is determined by annual congre

appropriations. Mandatory spending, which includes social 

entitlement programs, is governed by laws other than approp

acts (e.g., entitlement authorizations) and continues until and 

these laws are changed. Mandatory spending also includes net 

outlays. In the early 1960s, discretionary spending was ne

percent of GDP; the current level is just over 6 percent. Over th

period, mandatory spending levels have roughly doubled—

percent of GDP to 12 percent. Since FY 2000, revenues have be

above 20 percent of GDP, the highest levels since World War II

31
5. See Long-Term Budget Issues: Moving from Balancing the 

to Balancing Fiscal Risk, Washington: U.S. General Accounting 

February 2001.

6. Ibid., p. 1.

7. Deficit Reduction: Experiences of Other Nations, Wash

U.S. General Accounting Office, December 1994, p. 28.

8. On the nondefense spending patterns during World Wa

Korea versus those during Vietnam, see Dennis S. Ippolito, Un

Legacies: Federal Budget Policy from Roosevelt through R

Charlottesville: University Press of Virginia, 1990, pp. 167-169

9. In 1980, publicly-held federal debt was 26 percent of GD

years later, the level was 42 percent. Historical Tables, Fisc

2002, p. 116.

10. The Economic and Budget Outlook: Fiscal Years 200

Washington: U.S. Congressional Budget Office, 1999, p. 154.

11. See Fiscal Year 1982 Budget Revisions, Washingto

Government Printing Office, 1981, pp. 124-125.

12. The individual and corporate tax reductions under ERT

estimated at $750 billion for fiscal years 1981-1986.

13. Tax increases passed during 1982-1984 trimmed the 

reductions by about one-third. The other major tax bill of the 

presidency, the Tax Reform Act of 1986 (TRA), greatly lowered 

marginal rates on individual and corporation income but also r

or modified numerous tax preferences. TRA net revenue effec

expected to be deficit-neutral. Ippolito, Uncertain Legacies, pp. 

14. The deficit ceilings under GRH I were: FY 1986 = $172 

FY 1987 = $144; FY 1988 = $108; FY 1989 = $72; FY 2000 = $36; F

= $0.

15. Under GRH II, the revised deficit ceilings were: FY 1988 

billion; FY 1989 = $136; FY 1990 = $100; FY 1991 = $64; FY 199

FY 1993 = $0.

16. Congressional Quarterly Almanac, 1989, Wash

Congressional Quarterly, 1990, p. 10-C.

17. Ibid., p. 12C.

32
18. The Economic and Budget Outlook: Fiscal Years 199

Washington: U.S. Congressional Budget Office, 1990, p. xxii.

19. This was President Bush’s description at the signing cer

Congressional Quarterly Almanac, 1990, Washington: Congre

Quarterly, 1991, p. 166.

20. Budget of the United States Government, Fiscal Yea

Washington: U.S. Government Printing Office, 1990, p. 3.

21. An Analysis of the President’s Budgetary Proposals fo

Year 1991, Washington: U.S. Congressional Budget Office, 1990, 

22. The Economic and Budget Outlook: An Update, Wash

U.S. Congressional Budget Office, July 1990, p. xiii.

23. Ibid., p. 56.

24. Congressional Quarterly Almanac, 1990, p. 130.

25. The pay-as-you-go (or PAYGO) procedure require

legislation enacted in any year that reduced revenues below the r

baseline be completely offset by revenue increases or man

spending reductions. Similarly, legislation increasing man

spending above the baseline had to be offset by reductions in ma

programs or by revenue increases. If these offsets were not e

automatic sequesters in mandatory spending were triggered.

26. The Economic and Budget Outlook: Fiscal Years 199

Washington: U.S. Congressional Budget Office, 1991, p. xvii.

27. The vote was 218-216 in the House. In the Senate, Vice Pr

Al Gore cast the tie-breaking 51-50 vote.

28. The Economic and Budget Outlook: An Update, Wash

U.S. Congressional Budget Office, September 1993, p. 27.

29. Ibid., p. 26.

30. The House passed HJ Res 1—the Balanced-B

Constitutional Amendment—by a vote of 300-132. The Senate v

65-35, two votes short of the required two-thirds majority.

31. Congressional Quarterly Almanac, 1995, Wash

Congressional Quarterly, 1996, pp. 2-44, 2-58.

33
32. Congressional Quarterly Almanac, 1997, Wash

Congressional Quarterly, 1998, p. 2-27.

33. The Economic and Budget Outlook: An Update, Wash

U.S. Congressional Budget Office, September 1997, p. x.

34. For the various critiques of the agreement, see Da

Palazzolo, Done Deal? The Politics of the 1997 Budget Agreeme

York: Chatham House, 1999, pp. 198-204.

35. The Budget and Economic Outlook: Fiscal Years 2002-2

xv.

36. See The Budget and Economic Outlook: An Update, Wash

U.S. Congressional Budget Office, July 2000, p. 7.

37. Ibid.

38. Constant dollar defense outlays dropped from $362 bi

1991 (in FY 1996 dollars) to $270 billion in 2000. Historical 

Fiscal Year 2002, p. 124.

39. Budgeting for Defense: Maintaining Today’s F

Washington: U.S. Congressional Budget Office, September 200

40. Ibid., p. xii.

41. The Budget and Economic Outlook: Fiscal Years 2002-2

93.

42. Ibid.

43. Ibid., p. 96.

44. Ibid.

45. Ibid., pp. 99-100.

46. Ibid., p. 93.

47. Ibid., p. 77.

48. For fiscal years 2002-2011. Ibid.

49. Based on the $667 billion discretionary spending cap 

concurrent budget resolution Congress has enacted for FY 200

34
50. The Budget and Economic Outlook: Fiscal Years 2002-2

2-3.

51. The GDP estimate for 2011 is approximately $17 trilli

Bush administration’s original $1.6 trillion tax cut would h

baseline revenues by approximately $215 billion, or 1.3 percent 

in 2011.

52. Budget of the United States Government, Fiscal Yea

Washington: U.S. Government Printing Office, 2001, p. 7.

53. See ibid., p. 240, for the Bush program totals. The curren

baseline is provided in The Budget and Economic Outlook: Fisca

2002-2011, p. 80.

54. During the 1980s, real defense outlays climbed from $246 

to $370 billion. The post-Cold War defense reductions in real sp

during the early 1990s cut outlays below $300 billion in 1994 

$283.5 billion in 1995. The initial defense budget proposa

President Bush would bring real spending for defense to $287 b

2005 and 2006. Historical Tables, Fiscal Year 2002, p. 124.

55. The Long-Term Budget Outlook, Washington

Congressional Budget Office, 2000, p. 3. For an explanation of m

assumptions, see pp. 12-13.

56. Ibid., p. 1.

57. These projections are contained in the 2001 Report of th

Security and Medicare Boards of Trustees. Congressional Qu

Weekly Report, Vol. 59, March 24, 2001, p. 665.

58. The Long-Term Budget Outlook, p. 10.

59. Long-Term Budget Issues, p. 10.

60. Ibid., p. 18.

61. For an examination of social security and medicare 

proposals, see Budget Options, Washington: U. S. Congressional 

Office, February 2001, pp. 28-40.

62. The retirement age for social security is scheduled to be 

from 65 to 67, with a phase-in period from 2003 to 2027

retirement benefits will be reduced from 80 percent to 70 percen

benefits over this period.

35
63. See Vito Tanzi and Ludger Schuknecht, Public Spendin

20th Century, Cambridge: Cambridge University Press, 2000.

64. Ibid., pp. 252-253.

65. President Bush’s address to a joint session of Cong

February 27, 2001. Congressional Quarterly Weekly Report, V

March 3, 2001, p. 498.

66. Estimates of budgetary shortfalls for current strate

programs vary. Recent Congressional Budget Office analyse

placed the strategy-funding mismatch at approximately $25-40 

annually. The Center for Strategic and Budgetary Assessme

independent policy research organization has issued a series of 

with roughly similar assessments. A much larger, and therefo

controversial, estimate was reported by the Center for Strate

International Studies (CSIS) in 1999. Its analysis of funding sh

for the Clinton defense program was $100 billion per year for fisc

2001-2005, with substantially larger funding gaps thereafter. 

2001-2020, the CSIS placed the funding requirements for e

programs at 4.0 percent of GDP. See Daniel Goure and Jef

Ranney, Averting the Defense Train Wreck in the New Mille

Washington: CSIS, 1999, pp. xiv, 124.

36
U.S. ARMY WAR COLLEGE

Major General Robert R. Ivany

Commandant

*****

STRATEGIC STUDIES INSTITUTE

Director

Professor Douglas C. Lovelace, Jr.

Director of Research

Dr. Steven Metz

Author

Dr. Dennis S. Ippolito

Director of Publications

Ms. Marianne P. Cowling

Publications Assistant

Ms. Rita A. Rummel

*****

Composition

Mrs. Christine A. Williams