AN ANALYSIS OF

THE PRESIDENT'S BUDGETARY PROPOSALS

FOR FISCAL YEAR 1979

Staff Working Paper

January 1978

CONGRESSIONAL BUDGET OFFICE

U.S. CONGRESS

WASHINGTON, D.C.

AN ANALYSIS OF THE

PRESIDENT'S BUDGETARY PROPOSALS

FOR FISCAL YEAR 1979

The Congress of the United States

Congressional Budget Office

Timlin I TV
in mm ni

NOTES

Unless otherwise indicated, all years referred to are

fiscal years. For 1976 and before, fiscal years ran from July 1

through June 30 and were referred to by the years in which

they ended. The Congressional Budget Act of 1974 changed

the fiscal year to begin on October 1 and end on September 30.

The interim between the old and new fiscal years, July 1

through September 30, 1976, is called the transition quarter;

fiscal year 1977 began on October 1, 1976.

Details in the text, tables, and figures of this report

may not add to totals because of rounding.
PREFACE

This report was prepared at the request of the House Committee on

Appropriations to assist Members and staff in preparing for overview

hearings on the federal budget on February 1 and 2. The analysis discusses

the economic outlook underlying the 1979 budget and the impact on fiscal

policy of the President's budgetary proposals. It also examines the major

features of the President's revenue and spending proposal and makes

comparisons with past trends and current policy as embodied in the Second

Concurrent Resolution on the Budget for Fiscal Year 1978.

The analysis was prepared by staffs of the CBO Budget Analysis,

Fiscal Analysis, and Tax Analysis Divisions under the supervision of James

Blum, William Beeman, and Charles Davenport. The production of the

report was supervised by Paula Spitzig, and it was typed for publication by

Sue Bailey, Barbara Bakari, Gwen Coleman, Angela Evans, Brice McDaniel,

Phyllis Nations, Paula Spitzig, and Deborah Vogt.

Alice M. Rivlin

Director

January 28, 1978

111

111

TABLE OF CONTENTS

PREFACE iii

SUMMARY vii

CHAPTER I. THE ADMINISTRATION'S FISCAL POLICY AND

THE ECONOMY 1

Fiscal Policy Changes in the Administration

Budget 1

A Comparison of Forecasts by the Administration

and CBO 5

Fiscal Impacts of Administration Proposals ... . 7

Longer-Run Considerations 8

CHAPTER II. FEDERAL REVENUES 11

The President's Tax Proposals 11

Effect on the Size and Distribution of

Tax Burdens 15

Tax Cuts, Social Security Taxes, and Inflation .. . 19

Some Possible Alternatives 19

CHAPTER III. FEDERAL SPENDING 25

Accuracy of Spending Estimates 26

Spending Trends 29

Changes from Current Policy 31

Federal Credit Activities 40

CHAPTER IV. THE BUDGET BY FUNCTION 43

National Defense 46

International Affairs 58

General Science, Space, and Technology 69

Energy 72

Natural Resources and Environment 77

Agriculture 84

Commerce and Housing Credit 89

Transportation 96

Community and Regional Development 103

TII uranium
11! JIM ill

CHAPTER IV. THE BUDGET BY FUNCTION (Continued)

Education, Training, Employment, and

Social Services Ill

Health 120

Income Security . . . ' 125

Veterans' Benefits and Services 137

Administration of Justice

General Government

General Purpose Fiscal Assistance 152

Interest 158

Allowances 161

Undistributed Offsetting Receipts 162

CHAPTER V. THE BUDGET OUTLOOK FOR 1980-1983 165

Economic Assumptions 166

Budget Implications of the

Economic Assumptions 167

Offsetting the Fiscal Drag 169

VI
SUMMARY

The President's budget for fiscal year 1979 recommends outlays of

$500.2 billion, receipts of $439.6 billion, and a budget deficit of

$60.6 billion. This essentially represents a continuation of present spending

policies with only a modest increase above current levels adjusted for

inflation. However, the President proposes a major reduction in taxes to

offset the effects of inflation and the recently legislated increases in social

security taxes, as well as to provide stimulation to the economy to sustain

the recovery from the 1974-1975 recession. The following table summarizes

the President's proposals for the budget totals.

FEDERAL BUDGET TOTALS:

DOLLARS

BY FISCAL YEARS, IN BILLIONS OF

Outlays

Receipts

Deficit (-)

Budget

Authority

1977

Actual

401.9

356.9

-45.0

465.2

1978

Second

Resolution

458.25

397.0

-61.25

500.1

Estimates

President's

Estimate

462.2

400.4

-61.8

502.9

1979

Request

500.2

439.6

-60.6

568.2

ECONOMIC OUTLOOK

According to the Administration, the outlook for the economy

without a change in fiscal and monetary policies is for continued gains in

output and employment during the first half of calendar year 1978, followed

by a considerable slowdown in growth during the second half of 1978 and

during 1979. This would leave unemployment above 6 percent in both years.

To maintain real growth in the 4.5 to 5 percent range, and to reduce

unemployment below 6 percent by the end of 1979, the President is proposing

tax cuts of $25 billion and spending increases of $6 billion from current

policy levels in fiscal year 1979.

vii

FITT
The Administration's forecasts of economic activity during the next

two years given their policy assumptions appear to be reasonable. If,

however, monetary policy is more restrictive, the fiscal stimulus could be

less and the outlook for the economy weaker than expected. The following

table compares the Administration's short-run economic forecast with CBO's

forecast including the effects of the President's tax and spending proposals.

COMPARISON OF ADMINISTRATION AND CBO ECONOMIC FORECASTS:

BY CALENDAR YEARS

CBO Forecast

Administration With Administration

Forecast Fiscal Policy Proposals

Economic Growth (percent

change in constant-dollar GNP)

1977 to 1978 it.7 3.9 to 4.9

1978 to 1979 4.8 3.5 to 4.9

Inflation (percent change

in the implicit price deflator)

1977 to 1978 6.1 5.9 to 6.9

1978 to 1979 6.2 6.3 to 7.3

Unemployment Rate

(percentage points)

1978 (4th quarter) 6.2 6.0 to 6.6

1979 (4th quarter) 5.8 5.7 to 6.3

The Administration's forecast of 4.7 percent real economic growth

from 1977 to 1978 and 4.8 percent growth from 1978 to 1979 is within the

CBO range, although at the high end of the range. The Administration's

forecast of 5.8 percent unemployment by the end of 1979 is also within the

CBO range, although at the low end. The Administration's forecast of

inflation during the next two years is slightly below the CBO range in 1979.

To achieve the Administration's growth target, it may be necessary to have

more budget stimulus and a somewhat larger budget deficit than proposed by

the President for fiscal year 1979.

vin
RECEIPTS

The President has proposed that federal taxes be reduced by

$25 billion in fiscal year 1979. This would be achieved by tax reductions of

$30 billion, mostly in individual and corporate income taxes, and tax

increases of $5 billion from various tax reform proposals. Most of the tax

reductions would take effect on October 1, 1978. The tax reforms generally

would not be effective until January 1, 1979, with several major reforms

being phased in over several years.

The largest reduction would be for individual income taxes which

would be lowered by $18.3 billion ($22.5 billion in tax cuts partially offset by

$4.2 billion in reforms). For corporations, $6.3 billion in tax cuts would be

offset by $1.1 billion in reforms, for a net corporate income tax reduction of

$5.1 billion. These reductions are in addition to the $8.3 billion reduction

that would result from extending the general temporary income tax cuts

enacted in 1977 (as assumed by current policy estimates). Telephone excise

and unemployment insurance taxes also would be reduced by $1.6 billion.

The President's budget also includes $1.1 billion in additional revenues

in fiscal year 1979 for the net impact of the energy tax measures included in

the Administration's energy plan submitted last April. Moreover, the budget

also incorporates several smaller revenue recommendations, including

waterway user charges and a crude oil excise tax to pay damages and clean

up costs of oil pollution. The net effect of all these proposals is to lower

1979 revenues by $24.3 billion from the Administration's current policy

estimate.

The President's income tax proposals would reduce taxes for most

individual taxpayers with incomes below $100,000 but the overwhelming bulk

of the reductions (94 percent) would be concentrated on those with incomes

below $30,000. Three-fourths of the net tax reduction would go to those

with incomes between $10,000 and $30,000, who make up 43 percent of all

taxpayers and pay 55 percent of current taxes.

The tax reductions proposed by the President (along with the

extension of the 1977 temporary reductions) would be more than enough to

offset the aggregate effects of higher social security taxes and inflationinduced increases in individual income taxes in both 1979 and 1980. By 1981,

however, the higher taxes resulting from inflation and the social security

increases are estimated to exceed the President's tax cuts by $3 billion, and

by $23 billion in 1983.

IX
SPENDING

The proposed budget for 1979 essentially represents a continuation of

present spending policy. Most of the spending increases are mandated by

law or actions already taken by the Congress. There are few new spending

initiatives. The budget contains only 5200 million in start up funds for

welfare reform, no funds for national health insurance which the

Administration expects to propose later this year, and no specific funds for a

new urban initiative to be proposed in early spring. Spending increases

above current policy levels are proposed for national defense, foreign aid,

strategic petroleum reserves and energy conservation, the President's energy

plan and education and manpower programs.

As shown in the table, the President's budget requests budget

authority of $568.2 billion in fiscal year 1979, 13 percent above the

President's estimate for 1978 and 4 to 5 percent above the current policy

estimates for 1979. This represents a sharp acceleration in growth for

budget authority, primarily for authority provided in annual appropriations.

A large part of this increase is to provide financing for programs after 1979.

TOTAL FEDERAL SPENDING: BY FISCAL YEAR, IN BILLIONS OF

DOLLARS

laTM c 4.- 4. 1979 Current

1978 Estimates 0 ,. ,c

1977

Actual

Current

Level

President's

Estimate

ruin_y/

CBO

Estimate

oer vi(_t;a

President's

Estimate

1979

Request

Authofit **65'

2

 ^IA 502'

9

Outlays 401.9 455.2 462.2 494.0 492.4 500.2

If the budget authority is provided as requested, the Administration's

outlay estimate of $500.2 billion for fiscal year 1979 appears to be attainable

in the light of past spending patterns. However, the budget estimate of

$462.2 billion for fiscal year 1978—which is $4 billion above the level

specified by the second budget resolution—appears to be too high. The

Congressional Budget Office and other analysts of federal spending estimate

that total outlays in 1978 will be in the $450 to $455 billion range. Thus, it

appears unlikely that the second resolution outlay ceiling for 1978 will be

exceeded.
The Congress may have problems adhering to the budget authority

ceiling specified in the second resolution. The CBO estimated current level

of $491.4 billion in budget authority, assuming enactment of the pending

supplemental appropriations bill (H.R. 9375) is $8.7 billion below the

$500.1 billion ceiling specified in the second budget resolution. However, the

Administration's estimate of 1978 budget authority already provided by the

Congress and included in the pending supplemental bill is 59 billion higher

than the CBO estimate. Furthermore, the second resolution assumes

provision of roughly $6 billion of budget authority in 1978 not requested by

the Administration. If the CBO estimate is raised to eliminate most of the

technical estimating differences in permanent budget authority, the second

resolution budget authority ceiling may have to be increased to accommodate both the President's and the Congress' additional program proposals

in 1978.

LONGER RUN BUDGET OUTLOOK

The President's longer run budget and economic goals include a

balanced budget in 1981, a reduction of unemployment to 4 percent by 1983

and a reduction in the rate of inflation to 4 percent, also by 1983. These

goals appear to be very optimistic and may not be achievable.

To achieve the desired reduction in unemployment without special

employment programs, such as public service jobs, economic growth in real

terms will have to average 4.5 to 5 percent for as many as five years. This

would represent sustained real growth for eight years, a feat not achieved

during peacetime in over a century. On the basis of past experience,

additional tax cuts or spending increases will be needed after 1979 to offset

the restrictive budget effects resulting from current policy revenues

growing faster than expenditures. These additional measures may have to

total more than $60 billion to achieve the President's economic growth

objectives. This would probably delay balancing the budget until at least

1983.

Finally, the President's inflation goal, while desirable, will be

particularly difficult to achieve simultaneously with a reduction of the

unemployment rate below 5 percent. The Administration has proposed a

program of voluntary wage-price guidelines for the private sector, but it is

too early at this stage to assess the impact of this proposal on the underlying

rate of inflation.

XI

'¥1II1T 1

CHAPTER I. THE ADMINISTRATION'S FISCAL POLICY AND THE

ECONOMY

With the fiscal stimulus proposed in its January budget, the

Administration forecasts an increase in real gross national product (GNP) of

4.7 percent from 1977 to 1978 and 4.8 percent from 1978 to 1979. That

forecast is at the optimistic end of the Congressional Budget Office (CBO)

forecast of economic growth, based on assumptions of fiscal policy that

include the Administration's budget proposals. In the absence of any such

fiscal or monetary stimulus, the CBO economic forecast indicates that the

pace of the expansion is likely to slow significantly in the last half of 1978

and 1979; the unemployment rate is likely to be only slightly lower at the end

of 1978 than in recent months and approximately unchanged from late 1978

to late 1979.

The Administration's fiscal proposals—including the energy program —

result in net reductions in revenues of approximately $25 billion and

increases in expenditures of approxmiately $6 billion, compared with the

CBO estimates of current policy.J/ The CBO analysis suggests that these

changes in fiscal policy, if enacted, would likely generate an additional 0.8

to 1.1 percentage points in real GNP by the end of calendar year 1979 and

cause unemployment to decline by 0.2 to 0.4 percentage points, compared

with the current policy baseline.

FISCAL POLICY CHANGES IN THE ADMINISTRATION BUDGET

The Administration's budget recommends outlays of $500.2 billion,

receipts of $439.6 billion, and a budget deficit of $60.6 billion. This

represents a small increase above current policy spending levels, but a

significant reduction in revenues from current policy.

I/ The CBO estimates of current policy expenditures and receipts for

fiscal year 1979 are included in the recently published report, Five-Year

Budget Projections: Fiscal Years 1979-1983, Technical Background,

January 1978. In that report, current policy outlays for fiscal year 1979

are estimated by CBO to be $494.0 billion. It is important to realize

that these estimates differ from the Administration's current services

levels because of differences in assumptions and estimating procedures,

as well as differences in the concepts.

in IITIT -i -
The departures from current policies recommended in the

Administration budget are summarized in Table 1, on a national income

accounts basis. National income and product estimates are used because

they are more appropriate for measuring economic impacts than the unified

budget concepts used elsewhere in this report. Individual income taxes

would be cut by an estimated $24.9 billion, including $5.7 billion for the

energy proposals. Corporate income taxes would be reduced by $6.4 billion,

including $1.6 billion for energy proposals. Energy excise taxes would add

$8.9 billion to revenues. Other tax changes account for a reduction of

$2.3 billion. Under spending changes, purchases of goods and services would

go up by $2.2 billion and transfers to persons by $1.5 billion. Grants to state

and local governments would be increased by about $2.2 billion from current

policy.

Tax Changes

The changes in personal taxes would include reductions effective in

withholding as of October 1, 1978, partly offset by increases because of

reform effective January 1, 1979. In addition, personal taxes would be cut by

rebates as part of the proposed energy program. Included in the October 1

changes would be tax credits of $240 per person rather than the current $750

deduction per person and the tax credit of $35, and cuts in tax rates ranging

up to 7 percentage points but averaging about 2 percentage points for each

bracket.

The personal tax increases, effective January 1, would result in part

from changes in rules governing itemized deductions—including repeal of

deductions for state and local gasoline and sales taxes—and the treatment of

capital gains and income from unemployment insurance benefits.

The cuts in business taxes would include:

o reducing the maximum corporate income tax rate by 3 percentage

points, effective in October 1978, and by an additional

1 percentage point beginning in January 1980;

o extending the investment tax credit of 10 percent to industrial and

utility structures effective retroactively to January 1978; and

o permitting the investment tax credit to offset up to 90 percent of

tax liabilities, instead of the current ceiling of 50 percent,

effective January 1979.
TABLE 1. DEPARTURES FROM CURRENT POLICY IN THE

ADMINISTRATION'S BUDGET ON A NATIONAL

INCOME ACCOUNTS BASIS a/: IN BILLIONS OF

DOLLARS

Fiscal Year 1979

Tax Changes

Individual income taxes -24.9

Tax reduction and reform -19.2

Energy proposals -5.7

Corporate income taxes -6.4

Tax reduction and reform -4.8

Energy proposals -1.6

Energy excise taxes 8.9

Other -2.3

Total -24.7

Spending Changes

Purchases of goods and services 2.2

Transfer payments to persons 1.5

Grants to state and local governments b/ 2.2

Total 5.9

SOURCES: The Budget of the United States Government, Fiscal YearJ979

and Congressional Budget Office, Five-Year Budget Projections;

Fiscal Years 1979-1983, Technical Background, January 1978.

a/ The estimates in this table follow national income and product budget

categories, which are more useful for measuring economic impacts

than the unified budget concepts used elsewhere in this report.

b/ Approximately $1.4 billion of the additional grants is allocated for

extension of temporary employment assistance at the current service

level. This extension is already included in the CBO baseline forecast

(discussed in the'CBO Report Sustaining Economic Expansion) so this

amount is not included in the impact estimates shown in Table 3.

irr
— HilLMllL

The proposal to extend the investment tax credit would be effective

retroactively as of January 1, 1978, while that permitting a larger share of

tax to be offset would become effective on January 1,1979. The retroactive

feature has been traditional for proposals affecting the investment tax

credit because otherwise businesses might substantially delay currently

planned investments to take advantage of future changes in tax laws.

Proposals that would raise business taxes include phasing out, over a

three year period, the special treatment of income from Domestic

International Sales Corporations and the differential tax treatment on

foreign earnings of business income not brought back to the United States.

In addition, business deductions for entertainment would be reduced, and

provisions permitting more rapid (than straightline) depreciation on most

real estate investments would be eliminated.

Other tax proposals include a reduction in the unemployment

insurance tax rate from 0.7 to 0.5 percent of employers taxable base, and

the elimination of the federal excise tax on telephone service.

The Administration's tax proposals do not include extension of the

new jobs credit that was part of the 1977 stimulus legislation. Under

current law, the new jobs credit is applicable only to 1977 and 1978.

Expenditure Changes

The Administration proposes increases in outlays of approximately

$5.9 billion for fiscal year 1979, compared with CBO estimated current

policy levels, with the principal increases in the areas of education, training,

and employment, defense, and energy. Some offsetting decrease are also

being proposed.

Under Administration proposals, the public service employment

program—which is being increased to 725,000 jobs in 1978 from about

300,000 in May 1977—would be held at the 725,000 level during fiscal year

1979, and the level of youth employment and training programs would be

increased. Additional authorization is also being sought for a new program

for subsidizing the training by the private sector of youths with severe

employment problems. The latter program, however, would not affect

outlays until the 1980 budget.

The new budget incorporates the Administration's energy and welfare

proposals made in 1977. The energy proposals would raise both tax receipts

and outlays for the 1979 budget, but with a sizable portion of the taxes
refunded via lower withholding. 2/ The welfare proposals would have only a

very small impact on outlays for fiscal year 1979, involving a pilot

employment program. The impact of the welfare proposals, however, would

be considerably larger in later budgets, when the proposed policy changes

would be implemented. 3/

COMPARISON OF ADMINISTRATION AND CBO ECONOMIC FORECASTS

CBO analyzed the outlook under current policy and then added its

estimates of the effects of the changes in fiscal policy proposed by the

Administration. The results, summarized in Table 2, indicate that the

Administration's forecast of 4.7 percent economic growth in real GNP from

1977 to 1978 and 4.8 percent from 1978 to 1979 is within the CBO range,

although it is at the high end of that range. The Administration's forecast of

5.8 percent unemployment by the end of 1979 is also within the CBO range,

although it is at the low end. Inflation, between 1978 and 1979, as measured

by the implicit price deflator, would be in the 6.3 to 7.3 percent range in the

CBO forecast; the Administration inflation forecast is slightly below that

range.

The CBO economic outlook under current policy, without the fiscal

stimulus proposals, includes a slowdown of economic expansion during 1978,

and sluggish development from the end of 1978 to the end of 1979.

Unemployment, under current policy, therefore, is expected to be only

slightly lower at the end of 1978 than the unemployment rates recorded in

recent months, and to remain essentially unchanged or edge up slightly

between 1978:4 and 1979:4. In the early months of 1978, expansion in real

GNP is apt to be fairly strong because of expected inventory accumulation.

But that source of strength is short-lived and more fundamental forces are

likely to slow the pace of the expansion.

One of the reasons behind the expected slowing in the economy is

that fiscal policy under current legislation becomes more restrictive because

of scheduled increases in social security taxes and the effect of inflation on

the progressive income tax structure, which causes effective income tax

rates to increase significantly.

2/ The impacts of th« Administration's energy proposals wer-e analyzed

in the Congressional Budget Office report, President Carter's Energy

Proposals; A Perspective, Staff Working Paper, June 1977.

3/ CBO is currently analyzing the Administration welfare proposals, and

a detailed report is forthcoming.

22-453 O - 78 - 2

11:[ Hill
TABLE 2. A COMPARISON OF FORECASTS BY THE ADMINISTRATION

AND CBO WITH ADMINISTRATION FISCAL PROPOSALS

CBO Forecast

Administration With Administration

Forecast Fiscal Policy Proposals

Economic Growth (percent change

constant-dollar GNP)

1977 to 1978 4.7 3.9 to 4.9

1978 to 1979 ' 4.8 3.5 to 4.9

Inflation (percent change

in the implicit price deflator)

1977 to 1978 6.1 5.9 to 6.9

1978 to 1979 6.2 6.3 to 7.3

Unemployment Rate

(percentage points)

1978 (4th quarter) 6.2 6.0 to 6.6

1979 (4th quarter) 5.8 5.7 to 6.3

SOURCES: The Budget of the United States Government, Fiscal Year 1979,

p. 31, and the Congressional Budget Office.

In addition, an analysis of the major components of demand do not

suggest a strong case for rapid expansion after mid-1978. Consumption—a

major component of demand—seems unlikely to increase as a share of

personal income, since the saving rate is already low by historical standards.

Single housing starts are already high and some potential weakness in that

sector may develop in late 1978 and 1979 as interest rates rise and funds

become less plentiful in the housing market. At this time, survey data

suggest that investment will show only moderate increases during 1978.

Moreover, the surplus in the budgets of state and local governments and the

deficit in the U.S. foreign trade sector act as substantial drags on purchasing

power in the economy.

Economic forecasts, such as those of the Administration and CBO,

are based on a number of critical assumptions. The CBO forecast assumes

that growth in the broadly defined money supply (M2) will be near the upper

end of the 6.5 to 9.0 percent target range announced by the Federal Reserve
Board. In addition, it assumes that retail food prices will increase

approximately 5 percent per year. If these assumptions are not accurate,

the forecast may be inaccurate as well.

FISCAL IMPACTS OF ADMINISTRATION PROPOSALS

The CBO estimates of the economic impact of the Administration's

fiscal proposals for the 1979 budget are summarized in Table 3. The changes

in taxes are estimated to raise real GNP by approximately 0.5 to

0.7 percentage points by 1979:4, compared with the baseline under current

policy; the changes in spending are expected to add another 0.3 to 0.5

percent to real GNP. Altogether, the stimulus to the economy would

increase real GNP by an estimated 0.8 to 1.1 percent and lower

unemployment by 0.2 to 0.4 percentage points. In addition, the

Administration's fiscal program would add about 0.9 to 1.1 percentage points

to the price level by 1979:4. The increase in the price level would result

primarily from the proposed excise taxes on energy usage.

These estimates of the impact of the Administration fiscal program

are applicable to economic conditions expected to prevail in 1978 and 1979,

and they are significantly affected by monetary policy. Specifically, the

estimates are based on the assumption that monetary authorities provide

banks with sufficient reserves to avoid stringent credit conditions. If

monetary policy were more accomodative, say, by causing interest rates not

to rise, the fiscal stimulus would be more powerful. If the path of money

growth were to be kept unchanged, however, the impact of the fiscal

stimulus could be less than shown in the table.

Changes in fiscal measures have quite different impacts on the

economy, depending on the particular type of change and the state of the

economy. For example, the proposed increases in government purchases are

likely to have a larger impact on output and employment than an equal loss

in a revenue from the proposed reductions in individual income taxes, if such

increases are actually implemented. However, it sometimes takes longer to

increase spending program levels, resulting in a shortfall between actual and

anticipated outlays. A predominant view on the timing of impacts is that

changes in business taxes—such as the tax cuts for business proposed by the

Administration—operate with longer lags than changes in individual taxes or

changes in government purchases. Further, the proposed change in the

investment tax credit probably has a larger impact on business investment

per dollar than the change in the corporate income tax rate. In addition, tax

cuts that lower costs—such as the proposed reduction in the unemployment

insurance tax, the elimination of the federal telephone excise tax, and the

111 •¥ I
.lillli

tax subsidies for investment—are likely to reduce inflationary pressures

compared with reductions in individual income taxes or increases in

government purchases, ff/

TABLE 3. CBO ESTIMATES OF THE ECONOMIC IMPACT OF

ADMINISTRATION FISCAL POLICY PROPOSALS, BY THE

FOURTH QUARTER OF 1979 a/

Impact on Real GNP (percent)

Tax changes 0.5 to 0.7

Spending changes 0.3 to 0.5

Total 0.8 to 1.1

Impact of Fiscal Program

on Unemployment Rate -0.2 to-0.4

Impact of Fiscal Program

on Price Level (percent) 0.9 to 1.1

a/ Relative to current policy baseline.

LONGER-RUN CONSIDERATIONS

It is also important to consider the implications of proposed changes

in the budget over a longer period of time. Projections of the impact of

fiscal proposals under fairly rigid assumptions about the path of the private

economy, provided by the Administration, suggest that the budget proposals

made in the 1979 budget would reduce revenues by $33 billion in 1983, and

increase expenditures by $37 billion.

It is important to bear in mind, however, that the future course of the

economy and the budget are interrelated. In particular the expected growth

in revenues depend heavily on the strength in the private economy, and in

turn, the strength of the economy depends, in part, on the budget.

On the basis of past experience with the strength of private demands

since World War II, it seems likely that substantial additional stimulus will

For a more detailed discussion of the economic impacts of different

fiscal measures see the forthcoming Congressional Budget Office

report, Understanding Fiscal Policy.
be needed after 1979 to offset the inertia exerted on the economy by the

tendency for current policy revenues to increase faster than current policy

expenditures (see Chapter V).

At this time, the longer-run projections to 1983 by the Administration

seem quite optimistic on the inflation front, given the rapid economic

growth assumed. The budget projects an inflation rate decrease by

approximately one-half percentage point per year after 1979, while the

unemployment rate is falling to 4.0 percent toward the end of 1983.

The Administration has proposed a program of voluntary wage-price

guidelines for the private sector, but it is too early at this stage to assess

the impact of this proposal on the underlying rate of inflation in the

economy.

HI IHT! I •
.._._LJ1L1L
CHAPTER II FEDERAL REVENUES

The President's tax reduction and reform proposals would reduce

taxes by substantial amounts over the next five years. Without additional

cuts beyond those proposed by the President, however, total federal receipts

as a percentage of the gross national product (GNP) are likely to exceed the

21 percent limit the President has set as a goal in the 1981-1983 period.

The tax cuts the President has proposed will be sufficient to offset

the aggregate effects of higher social security taxes and inflation-induced

increases in individual income taxes in 1979 and 1980. Starting around 1981,

however, already scheduled social security tax increases and higher taxes

resulting from inflation will more than offset the cuts the President has

proposed. For many individual taxpayers with incomes above $20,000, higher

social security and inflation taxes will begin to offset the Carter cuts even

before 1981.

THE PRESIDENT'S TAX PROPOSALS

As shown in Table 4, President Carter's tax proposals would reduce

taxes in 1979 by $25 billion, and would reduce 1983 taxes by nearly $35

billion. The net tax cut for individuals in 1979 would be $18.3 billion ($22.5

billion in tax reductions offset by $4.2 billion in revenue-raising reforms),

and the net tax cut for corporations would be $5.1 billion ($6.3 billion in

reductions offset by $1.1 billion in reforms). In addition, telephone excise

and unemployment insurance taxes would be reduced by $1.6 billion. \J

The President's tax proposals, with their calendar 1979 and 1983

revenue impacts, are shown in Table 5. Note that these calendar year

numbers are somewhat different from the fiscal year numbers shown in

Table 4.

if Tax liabilities for calendar year 1979 (the first full year of the tax cut)

would be somewhat different from the fiscal year 1979 tax collections

shown earlier. On a calendar year liabilities basis, for example, the

total net tax cut for 1979 comes to $24.5 billion rather than the $25

billion cited for fiscal year 1979. In addition, the President's package as

shown in Table 4 does not include the effects of permanently extending

some of the temporary tax cuts provided in the Tax Reduction and

Simplification Act of 1977. Extending these cuts would reduce taxes by

another $8.3 billion in fiscal year 1979, and $22.4 billion in fiscal year

1983. These additional tax reductions are already reflected in the

Congressional Budget Office estimates of current policy receipts.

11

Tn
J

TABLE *. SUMMARY OF REVENUE EFFECTS OF INCOME TAX REDUCTIONS,

TAX REFORMS, AND TELEPHONE EXCISE AND UNEMPLOYMENT

INSURANCE TAX REDUCTIONS: BY FISCAL YEARS, IN BILLIONS

OF DOLLARS a/

Telephone Excise and

Unemployment Insurance

Tax reductions

Total

1979 1980 1981 1982 1983

Individual Income Tax

Tax

Tax

Net

reductions

reforms

change

-22.

k.

-18.

5

2

3

-25.

7.

-18.

7

k

2

-29.

8.

-20.

2

9

3

-33.

10.

-22.

*

6

8

-38.

12.

-26.

5

3

2

Corporation Income Tax

Tax

Tax

Net

reductions

reforms

change

- 6.

1.

- 5.

3

1

1

- 9.

3.

- 2.

it

0

0

-11.

4.

- 1.

1

3

6

-11.

5.

- 1.

8

0

2

-12.

5.

- 1.

8

2

1

- 1.6 - 2.0 - 1.6 - 1.2 - 1.1

-25.0 -26.6 -28.6 -30.8 -3*.9

SOURCE: Department of Treasury.

a/ This table does not include the effects of the President's energy tax

proposals or his proposals for waterway user taxes, airport and airway

user taxes, and other smaller tax items. The totals are therefore different

from those in the receipts tables that appear, in the budget on pages 34,

35, 56, and elsewhere.

12
TABLE 5. EFFECT OF THE PRESIDENT'S TAX PROPOSALS ON CALENDAR

YEAR TAX LIABILITY, FOR 1979 AND 1983: IN MILLIONS

OF DOLLARS

1979 1983

General Tax Reductions

$240 credit and reduced tax rates -23,538 -40,110

Itemized Deduction Changes

Repeal gasoline tax deductions 862 1,456

Repeal sales tax deductions 2,477 4,184

Repeal miscellaneous tax deductions 569 961

Modify deductions for medical

and casualty expenses 1,909 2,898

Repeal political contributions

deductions 2 3

Tax Shelters and Other Individual

Tax Preferences

Repeal capital gains alternate tax 140 187

Individual real estate tax shelters 61 514

Taxation of unemployment benefits 212 214

Tax interest element of annuity contracts 12 80

Minimum tax change 284 380

Taxable bond option (individual) 197 2,218

Limit individual investment tax credits

to 90 percent of tax before credits 52 79

Tax qualified retirement plans and

employee death benefits 32 34

Business Tax Preferences

Corporate real estate shelters 40 335

Corporate family farm accounting 40 7

Bad debt reserves

Commercial banks 227

Mutual savings banks and

savings and loans 37 316

Credit unions 22 171

SOURCE: Department of the Treasury.

(Continued)

13
Ill

TABLE 5. (Continued)

1979 1983

Business Tax Preferences (continued)

Entertainment expenses 1,476 2,107

Taxable bond option (corporations) -15 -150

Phase out DISC over three years 664 1,751

Phase out deferral of tax on foreign

source income 88 897

At risk limitation (corporations) 14 6

Nondiscrimination rule for health and

group term life plans 32 36

Corporate Rate Reductions

Corporate tax rate reductions -5,965 -10,764

Investment Tax Credit Liberalizations

Increase investment tax credit

limit to 90 percent -882 -205

Extend 10 percent investment tax

credit to structures (corporations) -1,389 -2,268

Extend 10 percent investment tax

credit to structures (individuals) -54 -86

Full investment tax credit for pollution

abatement facilities -93 -144

Total individual -16,783 -26,988

Total corporate - 5,704 - 7,905

Subtotal tax reform -22,487 -34,893

Telephone Excise and Unemployment Taxes

Repeal telephone excise tax - 1,200

Reduce unemployment payroll tax rate - 850 - 1,050

Total -24,537 -35,943

SOURCE: Department of the Treasury.

14
EFFECT ON THE SIZE AND DISTRIBUTION OF TAX BURDENS

As shown in Table 6, budget receipts as a percentage of GNP would

increase from 19.* percent in 1979 to 21.9 percent in 1983 under current

policy. The Carter tax proposals would reduce receipts to 19.3 percent of

GNP in 1979 and 21.* percent in 1983, but the 1983 receipts would still

exceed the 21 percent limit President Carter has set as a goal.

TABLE 6. BUDGET RECEIPTS BY SOURCE: SELECTED FISCAL YEARS 1959-1983

Current Policy a/

1959 k/ 1969 1979 1983

President's Proposals

1959 b/ 1969 1979 1983

Percent of GNP

Indivifial Income Taxes

Corporation Income

Taxes

Social Insurance Taxes

and Contributions

Excise Taxes

Other

Total

7.

3.

2.

2.

0.

16.

8

7

5

2

6

7

9.

4.

4.

1.

1.

20.

7

1

4

7

0

8

8.7

2.8

6.3

0.8

0.9

19.4

10.5

3.0

6.7

1.0

0.8

21.9

7.8

3.7

2.5

2.2

0.6

16.7

Percent of Total

Individual Income Taxes

Corporation Income

Taxes

Social Insurance Taxes

and Contributions

Excise Taxes

Other

Total

SOURCE: The Budget of

46.

21.

14.

13.

3.

100.

5

9

8

4

4

0

46.

19.

21.

8.

4.

100.

5

5

3

1

6

0

44.6

14.4

32.2

4.2

4.5

100.0

47.8

13.6

30.5

4.5

3.7

100.0

the United States Government,

46.5

21.9

14.8

13.4

3.4

100.0

9.

4.

4.

1.

1.

20.

7

1

4

7

0

8

8.4

2.7

6.2

1.1

0.9

19.3

10.0

2.8

6.6

1.2

0.8

21.4

Receipts

46.

19.

21.

8.

4.

100.

5

5

3

1

6

0

Fiscal Year 1979,

43.2

14.2

32.3

5.8

4.5

100.0

PP. 33,

46.8

13.0

31.1

5.4

3.6

100.0

35, anc

477, unless otherwise specified.

a/ Includes extension of temporary tax reductions provided by the Tax Reduction and

Simplification Act of 1977, except for the countercyclical jobs tax credit. Also

incudes extension of expiring gasoline and airport and airway taxes.

b/ 1959 numbers as a percent of GNP were taken from Treasury Bulletin, February 1968,

p. 2, and The Budget of the United States Government, Fiscal Year 1979, p. 486. 1959

number as a percent of total receipts were taken from Treasury Bulletin, February

196S, p. 2.

15

'ITT 1 "T
The composition of budget receipts has changed substantially over the

last 20 years, with an increasingly larger share being accounted for by

payroll taxes, and an increasingly smaller share by corporation income taxes.

Social insurance or payroll taxes accounted for only 14.8 percent of total

receipts in 1959, while under both current policy and the President's

proposals they are expected to account for over 32 percent of total receipts

in 1979. The payroll tax share of total receipts is estimated to decline

slightly between 1979 and 1983 under both current policy and the President's

proposals.

Corporation income taxes accounted for 21.9 percent of total

receipts in 1959. By 1979, however, they are expected to account for only a

little more than 14 percent of total receipts under both current policy and

the President's proposals. The corporate income tax share is estimated to

fall even further by 1983, to 13.6 percent under current policy and 13.0

percent under the Carter proposals.

The individual income tax share of total receipts is estimated to

increase from 1979 to 1983 under both current policy and the President's

proposals, largely because of the impact of inflation under the progressive

individual income tax system. The individual income tax share is estimated

to be somewhat smaller in fiscal year 1983 under the Carter proposals,

however, increasing to 46.8 percent compared to 47.8 percent under current

policy.

Effect on Individual Tax Burdens

President Carter's tax reduction and reform proposals would result in

a net tax reduction for most individual taxpayers with incomes below

$100,000, but the overwhelming bulk of the reductions (94 percent) would be

concentrated on taxpayers with incomes below $30,000. The distribution of

the net tax reduction under the President's proposals is shown in Table 7. As

indicated there, 75 percent of the net reduction goes to taxpayers with

incomes between $10,000 and $30,000, who make up 43 percent of all

taxpayers and pay 55 percent of current income taxes.

The President's proposals would lower effective tax rates for the

average taxpayer in all income classes below $100,000 a year (see Table 8).

The effective tax rate for those in the $10,000 to $15,000 income class

would drop from 9.0 to 7.6 percent, for example, while the effective rate for

those in the $30,000 to $50,000 class would drop from 17.6 to 16.8 percent.

For those in income classes above $100,000, the average effective tax rate

would increase.

16
TABLE 7. DISTRIBUTION OF PRESIDENT'S PROPOSED TAX REDUCTIONS

AND REFORMS BY INCOME CLASS: 1976 LEVELS OF INCOME a/

Expanded Present Percent Amount Percent

Income Number of Percent Law Tax of Total of Tax of Total

Class b/ Returns of Total Liability Tax Reduction Tax

($000") (Thousands) Returns ($millions) Liability ($ millions) Reduction

Less than 5

5-10

10-15

15-20

20-30

30-50

50-100

100-200

200 and over

25,474

20,109

16,106

11,324

9,907

3,347

985

198

49

87,998

28.9%

22.9%

18.3%

13.4%

11.3%

3.8%

1.1%

0.2%

0.1%

100.0

141

8,227

18,071

23,009

32,778

22,017

16,492

8,084

6,476

135,293

0.1%

6.1%

13.4%

17.0%

24.2%

16.3%

12.2%

6.0%

4.8%

100.0

392

1,859

2,710

2,861

3,185

1,046

148

-177 c/

-362 c/

11,660

3.4%

15.9%

23.2%

24.5%

27.3%

9.0%

1.3%

-1.5%c/

-3.1% c/

100.0

SOURCE: Treasury Department.

a/ The Treasury Tax Model, upon which this table is based, has not yet been updated to

reflect 1978 income levels. The estimates for each income class are therefore based

on the average incomes, deductions, and credits for all taxpayers in that income

class in 1976. At 1978 income levels, taxpayers would be shifted into higher income

classes, and deductions and credits would generally be higher.

b/ Expanded income is a broader concept than the "adjusted gross income" concept that

appears on income tax returns and that the Treasury has used for tax analysis tables

in previous years. Expanded income includes the untaxed half of capital gains,

percentage depletion in excess of cost, depreciation in excess of straight line, and

other "tax preference" items included in the minimum tax; however, it excludes

investment interest up to the amount of investment income. It therefore comes

closer to "real" total economic income than does the usual adjusted gross income

figure.

c/ Tax increase.

17
TABLE 8. EFFECTIVE TAX RATES BY INCOME CLASS UNDER THE

PRESIDENT'S TAX REDUCTION AND REFORM PROPOSALS:

1976 LEVELS OF INCOME, a/, IN PERCENTS

Expanded

Income Class b/

($000)

Effective Tax Rate

Current

Law

President's

Proposals

Less than 5

5-1 0

10- 15

15 - 20

20 - 30

30 - 50

50 - 100

100 - 200

200 - over

0.2

5.5

9.0

11.2

13.8

17.6

24.4

29 ,5

30.0

12.4

- 0.4c/

4.3

7.6

9.8

12.5

16.8

24.

30.

31,

11.3

SOURCE: Treasury Department

a/ The Treasury Tax Model, upon which this table is based, has not yet

been updated to reflect 1978 income levels. The estimates for each

income class are therefore based on the average incomes, deductions,

and credits for all taxpayers in that income class in 1976. At 1978

income levels, taxpayers would be shifted into higher income classes,

and deductions and credits would generally be higher.

b/ Expanded income is a broader concept than the "adjusted gross income"

concept that appears on income tax returns and that the Treasury has

used for tax analysis tables in previous years. Expanded income

includes the untaxed half of capital gains, percentage depletion in

excess of cost, depreciation in excess of straight-line, and other "tax

preference" items included in the minimum tax; however, it excludes

investment interest up to the amount of investment income. It

therefore comes closer to "real" total economic income than does the

usual adjusted gross income figure.

c/ Tax refunds exceed tax liabilities.

18
Table 9 shows the average tax change, resulting from the President's

tax reduction and reform proposals, for a family of four in different income

classes. As indicated there, the largest percentage reduction in tax burdens

would go to those with incomes below $15,000, while the largest tax savings

in terms of actual dollars would go to those with incomes between $20,000

and $30,000.

TAX CUTS, SOCIAL SECURITY TAXES, AND INFLATION

The tax cuts proposed by President Carter (along with the extension

of 1977 tax cuts scheduled to expire in December 1978) would be more than

enough to offset the aggregate effects of higher social security taxes and

inflation-induced increases in individual income taxes in both 1979 and 1980.

Starting in 1981, however, the higher taxes resulting from inflation and

already scheduled social security tax increases are estimated to exceed the

Carter tax cuts by $2.7 billion, and by 1983 these tax increases are

estimated to exceed the tax cuts by $22.7 billion (see Table 10).

President Carter has stated in his budget that the anticipated effects

of higher social security taxes and inflation-induced income tax increases

"would be another reason to consider further tax reductions" in the 1981-

1983 period.

For many higher-income taxpayers, however, the effects of inflation

and increased social security taxes will more than offset the Carter tax cuts

even before 1981. As shown in Table 11, for a family of four with a 1979

income of $30,000, social security and inflation tax increases would exceed

the Carter tax cut by $224 in 1980. For a four-person family with a 1979

income of $40,000, social security tax increases alone would exceed the

Carter tax cut by $43 in 1979.

Families with lower incomes would do better under the Carter tax

proposals. For a family of four earning $10,000, social security and inflation

tax increases would not exceed the Carter tax cuts until 1983, and then by

only $80. A family earning $20,000 would come out ahead through 1980, and

would fall behind by only $6 in 1981 and $91 in 1982.

SOME POSSIBLE ALTERNATIVES

The President's tax reduction and reform proposals can obviously be

adjusted in a number of different ways, depending on the desired tax and

fiscal policy goals. In his Tax Message of January 21, however, the

19
TABLE 9. AVERAGE TAX CHANGE BY INCOME CLASS (JOINT

RETURN, TWO DEPENDENTS): 1976 LEVELS OF

INCOME a/

Expanded

Income

Class b/

($0001

Less than 10

10-15

15-20

20-30

30-50

50-100

100-200

200 and over

Average

Tax

Present

Law

(dollars)

9

867

1,739

3,117

6,287

16,336

40,885

127,666

Average

Tax

Under Average

Proposal Tax Change

(dollars) (dollars)

-79 c/

589

1,461

2,780

5,979

16,088

41,087

130,473

-88

-278

-278

-337

-308

-248

202

2,807

Percentage

Change

(percent)

-975.6

-32.1

-16.0

-10.8

-4.9

-1.5

0.5

2.2

SOURCE: Treasury Department.

a/ The Treasury Tax Model, upon which this table is based, has not yet

been updated to reflect 1978 income levels. The estimates for each

income class are therefore based on the average incomes, deductions,

and credits for all taxpayers in that income class in 1976. At 1978

income levels, taxpayers would be shifted into higher income classes,

and deductions and credits would generally be higher.

b/ Expanded income is a broader concept than the "adjusted gross income"

concept that appears on income tax returns and that the Treasury has

used for tax analysis tables in previous years. Expanded income

includes the untaxed half of capital gains, percentage depletion in

excess of cost, depreciation in excess of straight line, and other "tax

preference" items included in the minimum tax; however, it excludes

investment interest up to the amount of investment income. It

therefore comes closer to "real" total economic income than does the

usual adjusted gross income figure.

c/ Tax refund.

20
TABLE 10. IMPACT OF POTENTIAL TAX CHANGES: 1978-1983

1978 1979 1980 1981 1982 1983

New Tax Proposals in

Carter Budget:

Individual

Corporate

Excises a/

Other Items

Subtotal

Extension of Provisions Previously Scheduled to Expire:

Individual

Corporate

Excises

-1.7

-0.6

1.8

—

-0.5

—~

—

-23.9

-6.*

6.8

-0.8

-24.3

-7.2

-1.1

—

-26.5

-8.6

12.1

- 0.3

-23.3

-12.8

-2.6

4.5

-29.3

-9.6

15.3

-0.2

-23.7

-13.5

-4.2

5.7

-33.5

- 9.8

17.1

- 1.6

-27.8

-14.8

- 6.4

5.9

-39.6

-10.6

19.4

- 1.8

-32.6

-15.6

- 6.8

6.2

Subtotal

1977 Social Security Changes

(Public Law 95-216) b/

Increase in Individual Tax

Burdens because of Inflation c/

Total Change in Burden

Expected by Stated Year

- 8.3 -10.9 -12.0 -15.3 -16.2

3.4 8.8 16.4 23.5 26.5

6.0 14.0 22.0 33.0

-0.5 -23.2 -11.4 2.7 13.4

45.0

22.7

a/ New excise taxes consist mainly of energy items still pending in

conference. These collections will be largely rebated, so the fiscal

effect of the energy program will be small.

b/ Includes both employer and employee share.

c/ These CBO estimates reflect the added tax burden for individuals,

resulting from graduated taxation of inflation-caused income growth.

21

22-453 O - 18 - 3

T"
President warned against increasing the net tax cut by reducing or

eliminating the revenue-raising reforms he has proposed, saying:

fT]he full cuts in personal and corporate tax rates which I

recommend would not be desirable in the absence of

significant reform . .. . [pjiscal prudence will require

significantly reduced tax cuts for low- and middle-income

taxpayers if we cannot help finance the reductions I have

proposed through enactment of these revenue-raising reforms.

There has also been some discussion of an earlier effective date for

the tax cuts. The proposed individual and corporate tax cuts are not

scheduled to go into effect until October 1, 1978, the start of the 1979 fiscal

year. If they were to be put into effect earlier, it would be necessary to

pass a Third Concurrent Resolution on the Budget for Fiscal Year 1978 to

accommodate the additional revenue loss. (Although the proposed changes

in the investment tax credit would apply to investments made after January

1, 1978, this change is not expected to have any effect on fiscal 1978 tax

collections.)

CBO's forthcoming economic report 2/ discusses as one fiscal

stimulus option a $15 billion tax cut starting July 1, 1978. This earlier tax

cut is estimated to result in a small additional reduction in unemployment by

the end of calendar year 1978. This option has less stimulative effect in

1979, however, than other options that provide a larger $25 billion tax cut

starting on October 1. This change in policy from the second concurrent

resolution probably would be justified only if there were a pressing need for

additional stimulus in the latter part of calendar 1978.

2/ See the forthcoming Congressional Budget Office Economic Report,

Sustaining Economic Expansion.

22
TABLE 11. CHANGES IN INDIVIDUAL TAX BURDENS FOR

SELECTED REAL INCOMES RESULTING FROM CARTER

TAX PROPOSALS, SOCIAL SECURITY TAX INCREASES,

AND INFLATION (FOUR PERSON, ONE-EARNER

FAMILIES): IN 1979 DOLLARS

1979 1980 1981 1982 1983

$10,000

Equivalent income a/ 10,000 10,560 11,151 11,776 12,435

Tax reductions because of

Carter proposals -312 -313 -320 -320 -320

Increase in tax burden

because of inflation b/ — 77 164 254 350

1977 social security

changes c/ 8 8 39 47 50

Net Effect ^304 ^228 ^TTT ~^T9 ~~80

$20,000

Equivalent income a/ 20,000 21,120 22,303 23,552 24,871

Tax reduction because of

Carter proposals

Increase in tax burden

because of inflation b/

1977 social security

changes c/

Net Effect

-270

--

83

-187

-280

94

60

-126

-289

192

103

6

-300

297

94

91

-316

411

99

194

(Continued)

a/ 1979 incomes are increased by an assumed 5.6 percent annual rate of

inflation.

b/ Liabilities under 1977 tax law are at the same average tax rate as would

be imposed on the equivalent real income in 1979. This result could be

achieved by adjusting all individual credits, deductions, and bracket

coundaries in proportion to the change in prices reflected. Increased

tax burdens result from graduated taxation of inflation-caused increases

in income.

c/ Employee share only.

23
TABLE 11. (Continued)

1979 1980 1981 1982 1983

$30,000

Equivalent income a/ 30,000 31,680 33,454 35,328 37,306

Tax reduction because of

Carter proposals -322 -306 -289 -269 -247

Increase in tax burden

because of inflation b/ -- 177 364 569 838

1977 social security

changes c/ 260 353 595 658 706

Net effect ~^62 ~224 ~670 ~958 17297

$40,000

Equivalent income a/ 40,000 42,240 44,605 47,103 49,471

Tax reductions because of

Carter proposals

Increase in tax burden

because of inflation b/

1977 social security

changes c/

Net effect

-218

—

261

43

-186

284

353

451

-158

589

595

1,026

-116

949

658

1,491

-263

1,530

706

1,973

a/ 1979 incomes are increased by an assumed 5.6 percent annual rate of

inflation.

b/ Liabilities under 1977 tax law are at the same average tax rate as would

be imposed on the equivalent real income in 1979. This result could be

achieved by adjusting all individual credits, deductions, and bracket

coundaries in proportion to the change in prices reflected. Increased

tax burdens result from graduated taxation of inflation-caused increases

in income.

c/ Employee share only.

24
CHAPTER III. FEDERAL SPENDING

The budget proposed by the President for fiscal year 1979 essentially

represents a continuation of present spending policy. Most of the spending

increases are mandated by law or actions already taken by the Congress.

There are few new spending initiatives. The level of federal spending

relative to the size of the total economy would be reduced slightly,

consistent with the President's stated goal.

The President's budget estimates total outlays for 1979 at $500.2

billion. This is 9 percent above the $458 billion outlay level specified in the

Second Concurrent Resolution on the Budget for Fiscal Year 1978.

However, it is only a little more than 1 percent above the estimated current

policy outlay level of $494 billion for 1979—a level that assumes spending

policies embodied in the second resolution are extended one year, with

allowance for inflation, economic growth, and demographic change.

As shown in Table 12, the growth in total budget authority would be

greater in the President's budget than the growth in outlays. The budget

requests total budget authority of $568.2 billion for 1979, about 13 percent

above the level specified for 1978 in the second budget resolution, and over

4 percent above the estimated 1979 current policy level. This represents a

sharp acceleration of growth in budget authority. The 1978 estimates of

total budget authority are only 8 percent above the actual 1977 level,

largely because of the growth in permanent authority for such programs as

social security and interest on the public debt. For 1979, the President's

budget proposes a 12 percent increase in budget authority made available

through appropriations actions, compared to only a 3 percent growth in such

authority between 1977 and 1978. A large part of this increase is to provide

financing for programs after 1979.

This chapter evaluates the Administration's spending estimates and

provides a summary discussion of the President's spending proposals for

fiscal year 1979. Chapter IV provides further details of the President's

spending proposals, within each major functional category, representing

national needs. Chapter V discusses the outlook for the federal budgets for

1980 to 1983.

25

"1"
J ft]

TABLE 12. TOTAL FEDERAL SPENDING: BY FISCAL YEARS, IN

BILLIONS OF DOLLARS

1978 Estimates p

1979

 £urrent

Policy/Services i979

Actual Second President's CBO President's

 Re<?uest

Resolution Estimate Estimate Estimate

Budget

Authority

Outlays

465.2

401.9

500.1

458.25

502.9

462.2

544.3

494.0

538.3

492.4

568.2

500.2

ACCURACY OF SPENDING ESTIMATES

The Administration's estimate of total outlays for fiscal year 1979

appears to be reasonable in light of past trends. The Administration's

estimate of fiscal year 1978 outlays, however, appears to be too high, thus

continuing the trend of the past two years, when outlays estimated by the

President's budget have been considerably higher than actual outlays.

Outlays have been misestimated for a variety of reasons, including

errors in the underlying economic assumptions and unpredictable changes in

credit market conditions. The major source for misestimates of outlays,

which are widespread throughout the budget, is a pervasive and persistent

upward bias in agency estimates. This may result from a combination of the

natural optimism of agencies about their abilities to implement programs

and the conservative tendency of program managers to husband their

resources through most of the year to meet unanticipated needs or to avoid

overspending appropriations.

Both the Office of Management and Budget (OMB) and the Congressional Budget Office (CBO) have taken steps to improve the accuracy of

their outlay estimates. ]J The need for accurate outlay estimates has

!_/ For further details, see Office of Management and Budget, Overview of

the Current "State-of-the-Art" of Federal Outlay Estimating, Technical

Staff Paper, December 15, 1977, and Congressional Budget Office,

Estimates of Federal Budget Outlays, Staff Working Paper, January

1978.

26
increased with the enactment of the Congressional Budget Act of 1974.

Under this act, the Congress each year adopts binding limits on spending and

revenue legislation. The Congress is prohibited from considering any

legislation that would cause the spending total specified in the second or

subsequent budget resolution to be exceeded. Overestimates of outlays

could prevent the Congress from taking action on desirable spending items

because the Congressionally adopted outlay ceilings might be violated. Also,

the suspicion that outlays have been overestimated could lead some

Members of Congress to propose "spending the shortfall," thus undermining

the budgetary control discipline intended by the resolutions.

1978 Estimates

The President's 1979 budget estimates that outlays in fiscal year 1978

will total $462.2 billion, or $4 billion above the level specified by the second

budget resolution. The President's estimate assumes that outlays would

increase by 15 percent over the 1977 level, a rate of increase achieved only

once in the last 10 years. The second budget resolution for 1978 implies a

growth of 14 percent for total outlays, which is also high by historical

standards. During the past 10 years, federal outlays have grown at an

average annual rate of slightly below 10 percent.

It is likely that the Administration has overestimated outlays for

fiscal year 1978. The latest CBO scorekeeping estimate of the current level

of 1978 outlays, assuming enactment of the pending supplemental appropriations bill (H. R. 9375), is $455 billion. 2/ The concensus view of the

major New York banking and investment firms is that 1978 outlays will be

near $450 billion. These firms monitor federal spending on a daily, monthly,

and annual basis to guide their purchases and sales of government securities.

In recent years, the federal spending estimates by these firms have been

more accurate than the OMB estimates. The Conference Board's latest

estimates for fiscal year 1978 budget outlays are in the $450 to $455 billion

range. 3/

Actual spending during the first quarter of fiscal year 1978 was

$113.3 billion, or 14.5 percent above the rate for the comparable threemonth period in fiscal year 1977. This relatively high rate of spending

2_/ Congressional Budget Office, 1978 Congressional Budget Scorekeeping

Report No. 5, as of December 15, 1977, end of session.

3/ The Conference Board, The Federal Budget; Its Impact on the

Economy, No. 3 Fiscal 1978, November 1977.

27
1

occurred primarily because of an acceleration of outlays by the Commodity

Credit Corporation (CCC). Other budget outlays in the first quarter of 1978

were 12.1 percent above the level in the first quarter of 1977. If this rate

continues and the CCC outlays do not rise above the Administration's

estimate for the year, 1978 outlays would total $454 billion.

Thus, assuming no new major policy initiatives that would change the

spending assumptions of the second resolution, it seems highly unlikely that

1978 budget outlays could be as high as the level specified in the second

resolution or estimated in the President's 1979 budget. Rather, total outlays

for fiscal year 1978 will probably be $3 to $8 billion lower than the $458

billion resolution level, and $7 to $12 billion below the Administration's

latest estimate.

The Congress may, however, have problems adhering to the budget

authority ceiling specified in the second resolution for fiscal year 1978.

Assuming enactment of H.R. 9375, the current level of budget authority is

estimated by CBO to be $491 billion, about $9 billion less than the $500

billion level specified by the second budget resolution. The CBO estimate

includes provision for the October 1, 1977, payraises (with no absorption) and

supplemental appropriations for several entitlement programs. This

estimate will be revised during the next month to incorporate new

information provided in the President's 1979 budget.

It is highly likely that the CBO estimate of 1978 budget authority will

be raised by several billions of dollars, reflecting reestimates of spending

under permanent authority, such as higher than assumed foreign military

sales and CCC authority to spend public debt receipts. This upward revision

in the estimated current level of budget authority for 1978 will reduce the

room available for certain items assumed in the second budget resolution,

such as forward funding of CETA public service employment programs ($3.8

billion) and new energy spending initiatives (about $3 billion). Other upward

pressures on the 1978 budget authority level include the Administration's

request of $543 million in budget authority and outlays to settle states' prior

year claims under Title XX of the Social Security Act, and the Administration's proposal to participate in the Supplemental Financing Facility of

the International Monetary Fund (the U.S. share is about $1.7 billion, but the

Administration is requesting only $200 million in budget authority to cover

the contingency of an exchange loss), kj

4/ See Chapter IV for further details.

28
1979 Estimates

The President's budget estimate of $500.2 billion for total outlays in

fiscal year 1979 appears to be realistic in light of historical spending

patterns. Assuming that 1978 outlays will be in the $450 to $455 billion

range, the Administration's estimate for 1979 implies a growth of 10 to 11

percent, which is in line with growth rates of federal spending during recent

years.

The Congressional Budget Office will review carefully the Administration's spending estimates for 1979 and will provide the Appropriations and

Budget Committees with independent estimates where appropriate.

SPENDING TRENDS

During the past 10 years, federal outlays increased from $158 billion

in fiscal year 1967 to $402 billion in fiscal year 1977. As stated above, this

represents an average annual increase of slightly less than 10 percent. The

President's budget essentially would continue this rate of increase for fiscal

year 1979, correcting for the Administration's probable overestimate of

outlays in fiscal year 1978.

Real Growth

A large portion of the past growth in federal spending has been

attributable to the effects of inflation. Therefore, it is useful to set aside

these effects in analyzing budget trends. Measured in constant dollars, the

recent growth in federal spending has been significantly less than when

calculated in current prices. As shown in Table 13, total budget outlays in

real terms increased by only 28 percent between 1967 and 1977. When

measured in current prices, total budget outlays increased by 154 percent

during this period.

The annual real growth in federal spending has averaged 2.5 percent

during the past 10 years. Correcting for the probable Administration

overestimate of 1978 outlays, the President's budget for 1979 essentially

would continue the recent trend of real growth in federal spending.

Spending Relative to GNP

Another way to examine federal spending trends is to compare budget

outlays to the gross national product (GNP), the most widely used measure

29
TABLE 13. GROWTH IN BUDGET OUTLAYS: BY FISCAL YEAR

1978 Estimate ]q7q

1967 1974 1977 D +

CBO OMB

 Re<Juest

Total Budget Outlays

(in billions of dollars)

In current prices 158 270 402 455 462 500

In constant (1972) prices 212 232 272 288 293 297

Ratio of Federal Spending

to GNP (in percents)

In current prices 20.4 19.8 21.9 22.2 22.6 22.0

In constant (1972) prices 21.3 18.9 20.6 20.8 21.2 20.5

SOURCE: The Budget of the United States Government, Fiscal Year 1979,

and the Congressional Budget Office.

of the size of the economy. During the past 10 years, federal spending has

increased at a somewhat faster rate than the total economy. Consequently,

total budget outlays as a percent of GNP rose from 20.4 percent in fiscal

year 1967 to 21.9 percent in fiscal year 1977.

Most of the increase in this ratio occurred in fiscal year 1975, largely

as a result of the 1974-1975 recession. The effect of the recession was to

raise federal spending (for such programs as unemployment compensation,

food stamps, public service jobs, and welfare payments) and to lower GNP

from what it would have been under a higher employment economy. Federal

spending has continued at fairly high levels relative to GNP since fiscal year

1975, as part of the government's efforts to stimulate the economy.

The President's budget for 1979 would have the effect of holding

federal spending to about the same level relative to GNP—-22 percent—as

occurred in 1977. The President has stated that his goal is to eventually

limit federal spending to 21 percent of GNP.

Spending Mix

The major trend in the mix of federal spending during the past 10

years has been the rapid increase in the share of the budget allocated to

30
payments for individuals—such as social security, medicare and medicaid,

veterans' benefits, food stamps, and public assistance. As the same time,

the share of the budget allocated to national defense has fallen markedly.

Table 14 shows three measures of the change in budget composition between

1967 and 1977 and the effect of the President's estimates for 1978 and 1979.

The President's budget would halt the decline in the relative share of

the budget allocated to national defense and reduce slightly the share

allocated to payments for individuals. There would be little change in the

relative shares of the budget between 1978 and 1979. National defense

spending in fiscal year 1979 is estimated by the Administration to be $118

billion, or slightly less than 24 percent of total budget outlays, which is

almost the same proportion as in fiscal year 1977. This would provide for

some real growth in defense spending for the third year in a row. Prior to

1976, defense spending in real terms dropped by 35 percent over an eightyear period. The share of total outlays allocated to payments for individuals

is expected to decline from 45 percent of total outlays in 1977 to 43 percent

in 1979, largely as a result of reduced spending for unemployment

compensation.

CHANGES FROM CURRENT POLICY

In analyzing the President's spending proposals for fiscal year 1979, it

is useful to compare the budget to estimates of federal spending if current

policies were simply continued.

Special Analysis A of the 1979 budget provides the Administration's

estimates of the cost of current spending policies in 1979. The Congressional Budget Office has also published estimates of 1979 spending, as

implied by the policies assumed for the second budget resolution for 1978. 5_/

Although CBO and OMB used somewhat different assumptions about the

economy, the effects of inflation, and the treatment of pending legislation

(such as medicare and medicaid cost controls), the estimates of total current

policy spending for 1979 are quite similar. The difference between the two

estimates for total outlays, for example, is only three-tenths of 1 percent.

The differences are greater, however, for many functional categories of

spending. Tables 15 and 16 provide a comparison of the President's 1979

budget proposals with the OMB and CBO estimates of current services or

current policy spending by major functional categories.

5/ See Congressional Budget Office, Five-Year Budget Projections; Fiscal

Years 1979-1983, December 1977.

31
TABLE \H. COMPOSITION OF BUDGET OUTLAYS: BY FISCAL YEARS

1967 1974 1977

1978 1979

Estimate Estimate

In Billions of Dollars

National Defense

Payments for Individuals

Net Interest

All Other

Total

68.2

40.1

10.3

39.7

158.3

77.8 97.5

111.1 181.7

21.5 30.0

59.3 92.7

269.6 401.9

107.6

196.9

35.2

122.4

462.2

117.8

214.5

39.9

128.0

500.2

Percentage Distribution

National Defense

Payments for Individuals

Net Interest

All Other

Total

National Defense

Payments for Individuals

Net Interest

All Other

Total

SOURCE: The Budget of

43.1

25.3

6.5

25.1

100.0

8.8

5.2

1.3

5.1

20.4

the United

28.8 24.3

41.2 45.2

8.0 7.5

22.0 23.1

100.0 100.0

As a Percentage

5.7 5.3

8.2 9.9

1.6 1.6

4.3 5.0

19.8 21.9

States Government,

23.3

42.6

7.6

26.5

100.0

of GNP

5.3

9.6

1.7

6.0

22.6

23.6

42.9

8.0

25.6

100.0

5.2

9.4

1.8

5.6

22.0

Fiscal Year 1979,

Table 20.

32
TABLE 15. CURRENT POLICY/SERVICES ESTIMATES AND THE

PRESIDENT'S BUDGET PROPOSALS FOR FISCAL YEAR 1979

BUDGET AUTHORITY: BY FUNCTION, IN BILLIONS OF

DOLLARS

Current

Policy/Services

National Defense

International Affairs

General Science, Space,

and Technology

Energy

Natural Resources and Environment

Agriculture

Commerce and Housing Credit

Transportation

Community and Regional Development

Education, Training, Employment,

and Social Services

Health

Income Security

Veterans' Benefits and Services

Administration of Justice

General Government

General Purpose Fiscal Assistance

Interest

Allowances

Undistributed Offsetting Receipts

Total

CBO

127.0

9.6

5.2

8.1

13.5

5.1

5.5

15.5

9.4

27.3

52.0

197.8

21.0

4.0

3.9

9.4

46.6

1.3

-18.1

544.1

OMB

126.4

11.5

5.2

6.9

12.2

6.6

6.5

15.5

7.2

29.1

52.1

189.2

18.6

3.9

4.2

9.5

48.7

1.2

-16.0

538.3

President's

Request

128.4

13.8

5.2

9.5

12.7

7.2

6.6

18.6

7.7

33.6

52.6

190.9

19.1

4.1

4.4

16.6

49.0

4.2

-16.0

568.2

33
TABLE 16. CURRENT POLICY/SERVICES ESTIMATES AND THE

PRESIDENT'S BUDGET PROPOSALS FOR FISCAL YEAR 1979

OUTLAYS: BY FUNCTION, IN BILLIONS OF DOLLARS

Current

Policy/Services

National Defense

International Affairs

General Science, Space,

and Technology

Energy

Natural Resources and Environment

Agriculture

Commerce and Housing Credit

Transportation

Community and Regional Development

Education, Training, Employment,

and Social Services

Health

Income Security

Veterans' Benefits and Services

Administration of Justice

General Government

General Purpose Fiscal Assistance

Interest

Allowances

Undistributed Offsetting Receipts

Total

CBO

118.3

7.2

5 1 J • 1

8.7

13.2

7.0

3.7

17.1

10.1

27.8

47.7

160.2

20.7

4.0

3.9

9.4

46.6

1.4

-18.1

494.0

OMB

116.8

7.4

j5 • 1 i

7.6

12.0

5.5

3.1

17.1

8.5

29.4

50.3

159.2

18.9

4.1

4.2

9.5

48.7

1.1

-16.0

492.4

President's

Request

117.8

7.7

<5 i j • i

9.6

12.2

5.4

3.0

17.4

8.7

30.4

49.7

160.0

19.3

4.2

4.3

9.6

49.0

2.8

-16.0

500.2

34
The bulk of the proposed increase in federal spending in fiscal year

1979 over the current year is mandated by existing law, such as social

security benefits, or is the result of budget decisions already made by the

Congress, such as appropriations for defense procurement. Most of the

remaining portion of the proposed increase is to maintain the real purchasing

power of government purchases of goods and services. Table 17 provides

details on the CBO and OMB estimates of increases in outlays between 1978

and 1979.

TABLE 17. ESTIMATED INCREASES IN FEDERAL OUTLAYS UNDER

CURRENT POLICY FOR FISCAL YEAR 1979: BY MA3OR

PROGRAM, IN BILLIONS OF DOLLARS

CBO OMB

Estimate Estimate

Increases Mandated under Existing Law

Social security 10 11

Medicare and medicaid 5 6

Pay increases for federal employees 4 4

Net interest 4 k

Public assistance and other income supplements 3 a/

Retired military pay and civil service retirement 2 2

Defense purchases 2 3

Farm price supports -1 -3

SB A disaster loans a/ -1

Farmers Home Administration lending activities a/ -1

All other spending (net) 6 5

Subtotal 35 30

Further Adjustments for Inflation

Maintain 1978 level of defense purchases 2 2

Maintain 1978 level of grants and other , -

federal purchases

Cost-of-living increase for veterans' benefits 1 1

Subtotal 6 5

Total *1 35

a/ $500 million or less.

35

'W
The CBO and OMB estimates of increased spending in 1979 mandated

under existing law and fully adjusted for inflation are very similar except for

farm price supports, public assistance and other income supplements (such as

food stamps and supplemental security income), Small Business Administration disaster loans, and the Farmers Home Administration lending

activities.

The net effect of the new legislation (excluding extensions of existing

legislation) proposed in the President's budget would be to add less than $1

billion on a net basis to budget outlays in 1979. The new legislative

proposals, however, would add $12 billion in budget authority in 1979. The

major increase ($7 billion) is to provide interest subsidies of 35 to 40 percent

to states and localities for the issuance of taxable bonds instead of tax

exempt securities. Legislation is also proposed to contain medicare and

medicaid hospital costs and to reduce certain security benefits. This would

reduce 1979 outlays by $1.3 billion and, according to OMB estimates, lower

federal spending by $12 billion in 1983. Outlays for other legislative

proposals would rise from $1.6 billion in 1979 to $16.6 billion in 1983.

Table 18 lists the new legislative proposals included in the President's budget

that would affect 1979 spending.

TABLE 18. PRINCIPAL NEW LEGISLATIVE PROPOSALS INCLUDED IN

THE PRESIDENT'S 1979 BUDGET: BY FUNCTION, IN

MILLIONS OF DOLLARS a/

A

B

t

u

.

d

g

et

t

 Outlays Authority

 3

National Defense

Wage-board reform -136 -135

Retired military personnel and other legislation 69 69

Strategic stockpile sales -177 -177

Energy

Automobile fuel-efficiency tax refunds 500 500

Uranium enrichment charges -163 -163

Natural Resources and Environment

Oil pollution liability and compensation fund 180 50

a/ Changes from OMB estimates of the current services level in fiscal year

1979.

(Continued)

36
TABLE 18. (Continued)

A

B

t

u

,

d

S

et

+ Outlays Authority

 J

Agriculture

Price support and related programs

Transportation

Highway grant programs 551

Urban mass transit program 2,426

Education, Training, Employment,

and Social Services

New authorities under Title I of ESEA 400 28

Impacted school aid -76 -58

Child welfare services 85 64

Health

Medicare and medicaid cost containment -95 -724

Adolescent health services and pregnancy fi0 _0

prevention

Income Security

Social security benefit reductions 15 -644

Unemployment tax rate reduction -200

Crude oil equalization tax refund 1,333 1,333

School lunch and other nutrition programs -217 -216

Operating subsidy for financially troubled 7^ „

FHA projects

Veterans' Benefits and Services

Compensation cost-of-living and ^-t 395

pension improvements

Readjustment benefits -100 -100

Medical care insurance reimbursement -142 -142

General Purpose Fiscal Assistance

Taxable municipal bond option 7,094 99

Mineral impact loan assistance 40 40

Allowances

Wage-board reform -47 -45

Total 12,373 246

The President's budget requests an increase of $17.4 billion in budget

authority above the OMB estimated current services level for fiscal year

37

22-453 O - 78 - 4

IT
1979 under existing legislative authority. This would add an estimated $7.5

billion in outlays in 1979. Some of the major proposals included in the

President's request are:

o increased spending for defense programs, emphasizing further

modernization and expansion of U.S. military capabilities, particularly for U.S. NATO efforts;

o increases for foreign economic assistance programs;

o substantial increases for the strategic petroleum reserve and

energy conservation programs;

o forward funding of 1980 programs for impacted school aid,

vocational rehabilitation, and human development for the aged;

o deletion of emergency farm disaster loans under the Small

Business Act;

o no new starts or cancellations for water resources projects; and

o continued funding for 725,000 public service jobs, and a new

private sector jobs initiative.

Table 19 provides a summary of the proposed 1979 increases above current

services levels, by major function. Further details on the President's

proposals are provided in Chapter IV of this report.

Major New Social Initiatives

The Administration expects to submit legislation for national health

insurance during this year. However, since this legislation will not affect

federal spending before 1981, no funding is provided in the 1979 budget for

this major new initiative.

The Administration is also planning to submit proposals in the early

spring on a major new urban re vital ization initiative. No specific funds are

included in the 1979 budget for this initiative, although the budget does

provide for an increase in funds for various programs that aid urban areas.

Also, the allowance for contingencies in the 1979 budget is larger than for

previous years.

The budget assumes that the President's welfare reform proposal will

be enacted this year, and provides $200 million in start-up funds in fiscal

38
TABLE 19. PROPOSED CHANGES FROM CURRENT SERVICES FOR

FISCAL YEAR 1979 UNDER EXISTING LEGISLATIVE

AUTHORITY: BY FUNCTION, IN MILLIONS OF DOLLARS

A

B

t

u

.

d

S

et

t

 Outlays Authority

 3

National Defense

Department of Defense—Military 1,954 957

Atomic energy and other defense-related activities 349 275

International Affairs

Foreign economic and financial assistance 1,978 233

Other programs 330 49

Energy

Strategic petroleum reserve 1,769 1,079

Other programs 583 636

Natural Resources and Environment

Water resources -243 -225

Other programs 560 400

Agriculture 150 -72

Commerce and Housing Credit 100 -143

Transportation 47 283

Community and Regional Development

SBA disaster loans -150 -82

Economic development assistance 245 62

Other programs 398 185

Education, Training, Employment,

and Social Services

Advance funding for impact aid and human

development services 2,036

Employment and training assistance 873 522

Other programs 1,132 448

Health 554 75

Income Security

Housing assistance 441 84

Other programs 271 234

Veterans' Benefits and Services 308 215

Administration of Justice 260 155

General Government 145 90

Allowances

Contingencies for other requirements 3,000 1,700

All Other 319 310

Total 17,409 7,470

SOURCE: Special Analyses, The Budget of the United States Government,

Fiscal Year 1979, Special Analysis A.

39
.1.

year 1979. The President's 1979 budget estimates that the total additional

costs of the Administration's welfare reform proposal in fiscal year 1982—

the first full year of operations—will be $9 billion. The Congressional

Budget Office, however, estimates that the net cost to the federal budget of

the Administration's proposal would be $17 billion in 1982. The CBO

estimate of $42 billion for total program costs is $3 billion higher than

estimated by the Administration, largely because of the use of different

economic and demographic assumptions and different data bases. CBO also

estimates that the savings to be achieved by program consolidations and

offsets in other federal costs will be $5 billion less than estimated by the

Administration. Table 20 compares the Administration and CBO cost

estimates for the President's welfare reform proposal.

TABLE 20. COMPARISON OF CBO AND ADMINISTRATION COST

ESTIMATES FOR THE PRESIDENT'S WELFARE REFORM

PROPOSAL: FISCAL YEAR 1982, IN BILLIONS OF DOLLARS

CBO Administration

Welfare Reform Program Costs

Cash payments

3obs program

Earned income tax credit

Subtotal

Savings in Other Federal Costs

Net Budget Impact

28.1

11.5

2.6

42.3

24.9

17.4

26.0

9.9

3.0

38.8

30.0

8.8

FEDERAL CREDIT ACTIVITIES

The President's 1979 budget provides more information than usual

about federal credit activities. The budget also indicates that the

Administration will propose to the Congress this year a set of procedures for

achieving better control over credit programs.

Federal lending and loan guarantees are a large and growing means of

providing government services. The total volume of new loans and loan

40
guarantees by the federal government, including off-budget entities such as

the Federal Financing Bank, are expected to be $98 billion in fiscal year

1979, which is 28 percent above the actual level of new loans in fiscal year

1977. This will bring the total level of outstanding loans and loan guarantees

at the end of fiscal year 1979 to $360 billion.

While plans for direct and guaranteed loans under individual federal

credit programs are reviewed each year during the budget process, there is

no systemmatic mechanism in the Congress or the Executive Branch for

reviewing the volume of total federal credit activity. Consequently, there is

no systemmatic way to consider the resource allocation effects of loans and

loan guarantees, nor the reasonableness of the total volume. In order for the

government to make efficient allocations of resources and effective fiscal

policy, it must exercise control over federal credit activities in a manner

similar to other spending activities.

Some of the basic elements likely to be included in the Administration's proposals for achieving better control over federal activities are

listed here. 6/

o The President would review the plans for federal credit activities

during the annual budget process. He would establish overall

ceilings on the volume of new loans and loan guarantees, based on

an analysis of the impact of federal lending activity on the

allocation of available resources, the general economy, and

financial markets.

o The President would propose and request Congressional approval

of limitations in annual appropriations acts on the amounts of new

direct loans and loan guarantees for each program.

o The Congress would establish similar controls in its budget

process, including ceilings on aggregate lending activity in the

annual budget resolutions.

6/ For a detailed analysis of the impact of federal loan guarantees and an

analysis of options for exercising more effective control, see the

forthcoming study of loan guarantees prepared by the Congressional

Budget Office for the Senate Budget Committee.

CHAPTER IV. THE BUDGET BY FUNCTION

This chapter discusses the President's spending proposals for fiscal

year 1979 in each major functional category. The functional classification is

used as the basis for discussing national budget priorities in the deliberations

by the Congress on the annual budget resolutions.

In keeping with the requirement of Section 601 of the Congressional

Budget Act of 1974, the functional classifications presented in the

President's 1979 budget have been refined to provide a sharper focus on

national needs, agency missions, and major programs. The most significant

changes to the budget functions used for the 1978 budget requests and

resolutions are listed here.

o Energy has been established as a separate function (270). Energy

programs previously were included with natural resources and

environment programs (function 300).

o Transportation programs alone now constitute function 400.

These programs previously were grouped with commerce and

housing credit programs, which have been established as a

separate function (370).

o Military assistance programs have been shifted from the national

defense function (050) to the international affairs function (150).

o The health function has been restructured to identify more clearly

the major missions in the health area.

Several functional and subfunctional titles have been changed to clarify the

major needs and missions being served by various federal programs. All

revisions in the functional classifications were made in close consultation

with the Appropriations and Budget Committees of both Houses of Congress,

as required by the budget act.

The Congressional Budget Office (CBO) estimates of 1978 spending

and 1979 current policy levels shown in the tables presented in this chapter

have been adjusted to the new functional classifications. The CBO 1978

estimates are derived from the fifth CBO scorekeeping report for 1978,

which provided estimates of the level of federal spending that would result

from Congressional actions taken as of December 15, 1977, the end of the

43

'¥"
first session of the 95th Congress. These estimates include the conference

agreement on the Supplemental Appropriations, 1978 (H. R. 9375), as well as

estimates of entitlement authority and other mandatory items requiring

further appropriation action. \J

The CBO estimates of 1979 current policy spending are derived from

the CBO budget projections report issued in December 1977. These

estimates are based on the Second Concurrent Resolution on the Budget for

Fiscal Year 1978, and include discretionary adjustments for inflation. The

Office of Management and Budget (OMB) current services spending

estimates in general do not include discretionary adjustments for inflation,

except for Department of Defense programs. The CBO current policy

estimates for 1979 also include spending for legislation items anticipated in

the 1978 second budget resolution but not yet enacted, such as cost controls

for the medicare and medicaid programs. The OMB 1979 current services

estimates omit all proposed and pending legislation. The economic

assumptions underlying the CBO and OMB current policy and current

services estimates also differ slightly. 2/

The CBO 1978 spending and 1979 current policy estimates will be

revised during February to reflect the new information on federal spending

patterns contained in the President's 1979 budget, as well as possible

changes in the underlying economic assumptions. These revised estimates

will be used by the Budget Committees in formulating the first budget

resolution for 1979.

Finally, it should be noted that, in the "1978 President's Estimate"

column in the following tables, the cost of the October 1, 1977, payraise is

shown in the allowances function rather than distributed by function and

J7 For further details, see Congressional Budget Office, 1978 Congressional Budget Scorekeeping Report, Report No. ~5 (as of

December 15, 1977, end of session).

2/ For further details, see Congressional Budget Office, Five-Year Budget

Projections; Fiscal Years 1979-1983, December 1977, Five-Year Budget

Projections: Fiscal Years 1979-1983, Technical Background, January

1978, and Office of Management and Budget, Special Analyses, Budget

of the United States Government, Fiscal Year 1979, "Special Analysis

A, Current Services Estimates," January 23, 1978.
program, as is done in the President's 1978 budget proposals. The cost of the

anticipated federal employee payraise for October 1, 1978, is shown in the

allowances function in both sets of 1979 estimates.

It also should be noted that the estimates shown in the tables are in

millions of dollars.
NATIONAL DEFENSE (FUNCTION 050)

This function includes programs in Department of Defense—Military

that provide for the pay and allowances for military personnel, the

maintenance of forces, construction of appropriate military facilities,

research and development, and the procurement of support and major

combat equipment. It also provides funding for atomic energy defense

activities and various defense related activities such as the Intelligence

Community Staff, Renegotiation Board, and Selective Service System.

Function Totals

1977

1978 Estimates

1979 Current

Policy/Services

1979

Actual CBO President,s CBO President's

 Rec?uest

Estimate Estimate Estimate Estimate

Authorit

 110»*32 118

»

3

^

2

 117,813 127,307 126,384 128,439

Outlays 97,501 107,842 107,626 118,523 116,794 117,779

The military assistance programs that comprised subfunction 052 in

the fiscal year 1978 budget have been transferred to the 150 function in the

fiscal year 1979 budget. Three additional programs in the Department of

Energy have been transferred to the 053 subfunction from other functions.

These are addressed below in the discussion of atomic energy defense

activities.

The $128,439 million fiscal year 1979 budget authority request for

function 050 is an increase of about $10.1 billion over the fiscal year 1978

CBO estimate. It represents a 1.6 percent growth over the Administration's

current services estimate but less than 1 percent growth over the CBO

current policy estimates.

46
The principal reason for this different assessment of growth stems

from the different economic assumptions and deflators used by CBO and the

Administration. The CBO projects an aggregate defense purchase deflator

of 8 percent and a pay increase of 7.3 percent for fiscal year 1979. The

Administration projects a purchase deflator of 6 percent and a pay increase

of 6 percent. To the extent that inflation and government payraises exceed

6 percent in fiscal year 1979, the Defense program is underfunded.

Military Personnel

1977

Actual

1978 Estimates

1979 Current

Policy/Services

1979

CBO President's CBO President's

 Recluest

Estimate Estimate Estimate Estimate

Authority

 26'118 26'056 26'065 27'772 2M?9 27'211

Outlays 25,715 25,609 25,615 27,420 27,122 26,866

From fiscal year 1978 to fiscal year 1979 military personnel

appropriations increased by a total of $1,146 million. This is less than the

amount CBO estimates to be necessary to cover inflation. These accounts

include decreases of 20,000 in active military end strengths and 14,000 in the

reserves. The savings that are achieved from this decline in end-of-year

strengths are offset by three main new initiatives. One of these extends

overseas travel and transportation benefits to dependents of junior enlisted

personnel, which is estimated to cost $102.9 million. Another new initiative

is lump-sum bonus payments, costing $57 million. This would provide

payment of reenlistment bonuses on a lump-sum basis rather than on an

installment plan. The third new initiative costing $7.3 million substitutes a

24-month overseas tour for first term Army bachelors for the current 36-

month tour. Other savings are achieved by reducing permanent change of

station (PCS) travel (-$36.8 million) and active duty longevity or average

years of service (-$34.7 million). There is a $10 million cost associated with

grade creep.

47
Retired Pay, Defense

10-70 c „• ^ 1979 Current

1978 Estimates D .. lc

1977 Policy/Services

Actual

 CBO President's CBO President's

 Re^uest

Estimate Estimate Estimate Estimate

Authorit

 8'238 9'103 9'2

^°

 9'935 10»^9

 10,1*9

Outlays 8,216 9,105 9,211 9,933 10,122 10,122

The 1978 supplemental budget request includes $230 million for fiscal

year 1978 military retired pay. This is approximately $137 million more than

the request anticipated by CBO, primarily because of different estimates of

the net growth in the retired population. The request for fiscal year 1979

anticipates a net increase of 43,000 members to the retirement rolls and

other increases due to cost-of-living adjustments that occur twice during the

year.

This account funds the retirement benefits paid during the fiscal year

to all military personnel who will have retired before the end of that year; it

does not anticipate the retirement costs of current military personnel in the

future. The military retirement benefits earned during fiscal year 1979

amount to about $7 billion; that amount does not currently appear anywhere

in the budget request. However, the budget proposes to:

o provide by law for an independent assessment of annual accrued

retirement and unfunded liability;

o establish a trust fund from which to pay military retirees;

o fund accrued military retirement benefits in the military

personnel appropriations;

o provide for appropriation of funds to liquidate the present

unfunded liability; and

o display accrued costs in the national defense function and the

payments to retirees in the income security function.
This proposal plus alternatives that would provide for long term

retirement savings through longer military careers and lower personnel

turnover are discussed in recent CBO papers. 3_/

Operation and Maintenance

1978 Estimates

1977

1979 Current

Policy/Services

1979

Actual CBQ president,s CBQ President,s Request

Estimate Estimate Estimate Estimate

Authority32'

108 33'510 33'935 36'297 36'399 37'376

Outlays 30,587 32,310 32,560 35,898 35,655 36,454

The fiscal year 1979 request for operation and maintenance contains

approximately $1.5 billion for anticipated inflation and another $1.0 billion

for program growth. Approximately $130 million of program growth is for

the transportation of ammunition to Europe, prepositioning of materiel, and

force structure additions to the U.S. Army forces in Europe. The remaining

program growth is due to increases in unit training and weapons system

operations (to include about $100 million in reserve forces) as well as support

programs and contractual services. Civilian strength is projected to decline

by about 13,000 to 1,008,000; 6,000 of the decline would be made up through

contractual services while 4,200 is due to an accounting change with respect

to indirect hire foreign nationals.

3/ Congressional Budget Office, The Military Retirement System: Options

for Change, Budget Issue Paper for FY 1979, January 1978. Also

Congressional Budget Office, Retirement Accounting Changes; Budget

and Policy Impacts, Background Paper April 1977.

IT I
.1 1.

A legislative proposal to reform the wage board pay system would

result in an estimated savings of $136 million in fiscal year 1979 and $2.0

billion over 1979-1983 most of which would be in operation and maintenance.

For more detail, see the discussion pertaining to allowances.

Legislation will be resubmitted to end dual compensation of federal

employees who serve in the National Guard or Reserves. Civilian pay during

active military service will be only the amount necessary to assure no loss of

take-home pay, saving $30 million in fiscal year 1979.

Procurement, Total

1977

Actual

1978 Estimates

CBO

Estimate

President's

Estimate

1979 Current

Policy/Services

CBO President's

Estimate Estimate

1979

Request

-+ 27,922 30,035 29,545 32,389 31,954 31,928 Authority ' ' ' '

Outlays 18,178 21,760 21,552 24,996 24,072 24,208

Overall, procurement represents a real decline in budget authority of

1.4 percent when the fiscal year 1979 request is compared with the fiscal

year 1979 CBO current policy estimate.

The level of funding in millions of current dollars varies significantly

from service to service, as shown in the following table.

Procurement Funding

(in millions of dollars)

Army

Navy/Marine Corps

Air Force

Defense Agencies

Total

FY 1978

5,198

14,112

10,397

328

30,035

FY 1979

6,637

13,919

11,091

281

31,928

Change

1,439

-193

694

-47

1,893

50
Although the Army and Marine Corps are equipped with similar

weapons and equipment, it appears that the defense funding priorities in

fiscal year 1979 reflect an emphasis on the Army's NATO role.

Procurement, Army

Major increases in the Army are concentrated in communications and

electronics equipment (56 percent), aircrafts (H percent), missiles (34

percent) and ammunition (30 percent), with less increase in weapons and

tracked combat vehicles (6 percent). The increase in communications and

electronics equipment reflects added funds for most types of equipment with

a concentration in tactical electronic support equipment. The increase in

funds for aircraft results from the buildup in fiscal year 1979 of the Blackhawk helicopter production. Missile procurements funds increase as a result

of a rise in procurement of surface-to-air missiles.

Tank procurement in fiscal year 1979 is lower than in fiscal year 1978

(-$148 million). The fiscal year 1979 program contains the first production

orders for the new XM-1 tank, as well as continued orders for the older M-60

tank at a level of production lower than in fiscal year 1978. Procurement of

other tracked combat vehicles is slightly higher than in fiscal year 1978

despite deferral of initial production of the Infantry Fighting Vehicle (IFV).

Procurement, Navy/Marine Corps

Navy/Marine Corps procurement declines almost 9 percent in real

terms from fiscal year 1978 to fiscal year 1979. Real increases are budgeted

for Aircraft Procurement (7 percent) and Other Procurement (16 percent),

while sharp real declines are budgeted in Shipbuilding and Conversion (25

percent) and Procurement, Marine Corps (21 percent).

Although the total number of aircraft ordered in fiscal year 1979

declines slightly from the fiscal year 1978 program, total dollars increase in

fiscal year 1979 largely because of the high start-up costs ($351 million)

associated with the initial production of the F-18 aircraft. There are also

large increases ($170 million) budgeted for modification of aircraft.

51
A comparison of the ship procurement programs shows:

Fiscal Fiscal Year

Year 1978 1979 Request

Fleet Ballistic missile submarines 2 1

Other warships 11 9

Auxiliaries 5 5

Total ships 18 15

Approximately half of the real decline between fiscal year 1978 and

fiscal year 1979 in Shipbuilding and Conversion (25 percent) is attributable to

the proposed order of one Trident submarine in fiscal year 1979 compared

with two Trident submarines ordered in fiscal year 1978. The order of a

single Trident in fiscal year 1979 does not represent a policy change as it is

consistent with the long-term program of a 1-2-1-2 annual buying pattern.

Overall, it appears that the fiscal year 1979 Navy procurement

program reflects a reduction in F-14 aircraft to accomodate the new F-18

aircraft, a shift away from the acquisition of large surface ships and the

rejection of the policy of the previous Administration calling for a large

increase in surface Navy ship orders in fiscal year 1979.

Procurement, Marine Corps shows a large real decline (21 percent) in

budget authority from the fiscal year 1978 program. Budget authority

declines for weapons and combat vehicles, guided missiles and support

vehicles.

The only area where an increase occurs in fiscal year 1979 over fiscal

year 1978 is in communications and electronics where there are large

increases primarily associated with night vision devices ($40.0 million) and

radar sets ($38 million).

52
Procurement, Air Force

Overall, Air Force procurement shows little net change in real terms

between fiscal year 1978 and 1979. Increased aircraft procurement (2

percent) is offset by a 12 percent real depline in missile procurement,

primarily as a result of completion of the Minuteman Force Modernization

Program. Procurement of the first two Advanced Tanker Cargo Aircraft

($157 million) accounts for over half of the growth in the Aircraft

Procurement account.

Procurement, Defense Agencies

The reduction in the fiscal year 1979 procurement program of the

Defense Agencies is due primarily to a reduction in classified programs.

Research, Development, Test, and Evaluation

1978 Estimates

1977

1979 Current

Policy/Services

1979

Actual CBQ President,s CBO president's

 Re^uest

Estimate Estimate Estimate Estimate

a +u • + 10,439 11,347 11,338 12,271 Authority ' ' ' '

Outlays 9,795 10,621 10,714 11,732

12,020 12,468

11,600 11,861

The fiscal year 1979 Research, Development, Test, and Evaluation

(RDT&E) program reflects overall real growth in budget authority of about

1.6 percent when compared to the fiscal year 1979 CBO current policy

estimate.

Budget authority increases in research and exploratory development

($203 million), management and support ($181 million), advanced development

($810 million), and operational systems development ($395 million) are

53

22-453 O - 78 - 6

' 1T~T'
_1

partially offset by a decline in engineering development (-$458 million). The

increase in advanced development is attributable to increases in programs

such as the division air defense gun ($59 million), space shuttle ($45 million),

and aerospace ocean surveillance ($37 million). The MX strategic missle

remains in advanced development with funding programed to increase from

$134 million in 1978 to $158 million in 1979. The decline in engineering

development occurs primarily because of the cancellation of the B-1 bomber

development (-$338 million) and the fact that the F-16 and F-18 aircraft are

past their peak level of development funding (-$240 million).

The real increases in budget authority for research, exploratory

development, and advanced development appear to reflect a continuation of

the policy evident since fiscal year 1977 of increasing the level of activity in

the basic, more generalized type of research and development as opposed to

the development of specific weapons.

Approximately $75 million of additional budget authority would be

required in fiscal year 1979 to offset credit in fiscal year 1978 for the

recoupment of R&D costs associated with foreign military sales

reimbursements. Effective in fiscal year 1979 the recoupments of these

"sunk costs" will be credited directly to the Treasury rather than being made

available as new obligational authority in the research and development

accounts.

Military Construction

1978 Estimates p

1979

 ,

C

"

rrent

1977 Policy /Services

Actual

 CBO President's CBO President's

 Request

Estimate Estimate Estimate Estimate

Authority2'

20* !'632 1'633 !'m 1>909 2'677

Outlays 1,914 2,083 1,919 1,719 1,941 1,976

54
Military construction in the fiscal year 1979 request is about $0.9

billion above the CBO current policy projections which was based on a fiscal

year 1978 program that resulted from a partial moratorium on domestic new

construction. The fiscal year 1979 construction program includes facilities

to reinforce NATO mainly, hardened aircraft shelters and command and

control centers, forward storage facilities for prepositioned materiel, and

alternative runways for airfields. These facilities amount to approximately

25 percent of the fiscal year 1979 request. Other parts of the request

address medical facilities, the space shuttle program, and various pollution

abatement and energy conservation projects.

Allowances

1978 Estimates

1977

1979 Current

Policy/Services

1979

Actual CBO President,s CBO President's

 Recluest

Estimate Estimate Estimate Estimate

Budget

Authority

Outlays

2,673

2,593

2,161

2,161

2,756

2,763

2,371

2,353

2,305

2,288

The Administration's fiscal year 1979 budget allowance for payraises

assumes a 6 percent general schedule raise, a 3.4 percent wage board

payraise, and a 12 percent reallocation of the military payraise to the

quarters allowance as was done for fiscal year 1978. The CBO estimate for

this allowance assumes a 7.3 percent general schedule and wage board raise

and the same 12 percent reallocation of the military raise.

The 3.4 percent wage board raise is the result of a legislative

proposal to reform the pay system by revising the step structure in each pay

grade, by repealing the Monroney amendment, which requires the use of outof-area wage data in federal wage surveys under certain conditions, by

changing the night shift differential to a fixed amount per hour rather than

the percentage now used, and by broadening the wage surveys to include

state and local governments. Passage of this legislation would result in an

55
average 3.4 percent payraise instead of the higher percent projected under

current law for a savings of $136 million in fiscal year 1979 and $2.0 billion

over five years.

Atomic Energy Defense Activities

n +• + 1979 Current

1977 Estimates Policy/Services

Actual

 CBO President's CBO President's

 Rec>uest

Estimate Estimate Estimate Estimate

Budget 2 Og9 2 512 2 M2 2?25 2 663 2,829

Authority ' ' '

Outlays 1,936 2,319 2,308 2,600 2,446 2,536

In the fiscal year 1979 budget three programs are to be funded in this

subfunction that are funded in other functions in fiscal year 1978; they are

inertial confinement fusion, intelligence and arms control, and nuclear

materials security and safeguards, for a total of $0.2 billion. The remaining

$2.6 billion are for naval reactor development, weapons activities, and

special materials production, which is a net increase of about $0.2 billion or

8 percent over the CBO current policy estimate for these three programs.

The CBO estimates shown in the table are adjusted for the change in budget

presentation.

56
Other National Defense

1978 Estimates

1977

Actual

1979 Current

Policy /Services

CBO President's CBO

Estimate Estimate Estimate Estimate

1979

President's

 Rec*uest

Budget

Authority

Outlays

1,315 1,473

1,160 1,442

1,384

1,585

1,418

1,463

1,440

1,472

1,495

1,468

The fiscal year 1979 budget request for family housing totals $1.5

billion, of which about $0.1 billion is for construction projects and $1.4 billion

for operation and maintenance. There are no major changes in the other

accounts that make up this area (i.e., revolving and management funds and

other miscellaneous accounts of DoD-Military, all of Defense-Related

Activities (subfunction 054), and the accounts for offsetting receipts).

57
_1

INTERNATIONAL AFFAIRS (FUNCTION 150)

The international affairs function includes foreign economic and

financial assistance, military assistance, activities associated with the

conduct of foreign affairs, foreign information and exchange activities, and

international financial programs. The budget for 1979 brings military

assistance into the function, making its budget treatment consistent with

the appropriations process.

Function Totals

1977

1978 Estimates

1979 Current

Policy/Services

1979

Actual CBQ President,s CBO president's

 Rec*uest

Estimate Estimate Estimate Estimate

Budget

Authority

Outlays

6,587

4,831

6,504

6,774

11,069

6,716

9,627

7,152

11,493

7,408

13,801

7,690

The $13.8 billion request for fiscal year 1979 represents an increase

of $2.7 billion over the President's estimate for fiscal year 1978, and an

increase of $4.2 billion over the CBO current policy estimate for fiscal year

1979. Three programs, contributions to international financial institutions,

the Export-Import Bank and the foreign military sales trust fund, account

for much of the growth in the request for fiscal year 1979. In addition, some

programs for which funds were appropriated or requested for fiscal year

1978, such as the balance of payments loan for Portugal, and U.S.

participation in the Supplementary Financing Facility of the International

Monetary Fund, are replaced in the request for fiscal year 1979 by increases

in bilateral development assistance.

58
Security Supporting Assistance

1977

Actual

Budget . 75g

Authority

 1»'*J

Outlays 1,062

1978 Estimates

CBO

Estimate

2,219

1,786

President's

Estimate

2,219

1,813

1979 Current

Policy/Services

CBO

Estimate

2,348

2,021

President's

Estimate

1,854

1,666

1979

Request

1,854

1,666

NOTE:CBO's estimates in this table include funds for the Middle-East

Special Requirements Fund, and U.N. Forces in Cypress.

Security supporting assistance provides economic aid to selected

countries of importance to U. S. foreign policy objectives. Of the $2.2

billion appropriated for 1978, $1.7 billion went to Middle Eastern countries

($1.5 billion to Israel and Egypt), $0.3 billion for a balance-of-payments loan

to Portugal, and the $0.2 billion balance went to other countries,

predominately those in southern Africa. The 1979 request of $1.9 billion is

an amount sufficient to continue programs at roughly 1978 levels, with the

exception of the loan to Portugal.

Bilateral Development Assistance: Functional Development Assistance, the

Sahel Development Program, and the Operating Expenses of the Agency for

International Development

1978 Estimates

1977

1979 Current

Policy/Services

1979

Actual CBQ President,s CBO president's

 Re^uest

Estimate Estimate Estimate Estimate

Budget

Authority

Outlays 707 947

1,194

959

1,267

1,038

1,327

1,072

1,613

1,162

59

IT
The functional development assistance program supports the efforts

of less developed countries to meet the fundamental needs of their people,

through programs emphasizing food and nutrition, population planning,

health, education, and other development activities. The request for fiscal

year 1979 of $1,262 million represents an increase of 35 percent, or

$331 million, over the level appropriated for fiscal year 1978. Because a

balance of unobligated authority exists to finance program activity during

fiscal year 1978, the increase in budget authority from fiscal year 1978 to

fiscal year 1979 is estimated only to maintain the level of programming for

fiscal year 1978. That level of activity, however, represents an increase of

55 percent above the actual level of obligations incurred during fiscal year

1977.

The International Development and Food Assistance Act of 1977

authorizes the appropriation of $200 million for the U.S. portion of a

multinational effort to increase food self-sufficiency and living standards in

the Sahelian region of Africa. Fifty million dollars was appropriated for

fiscal year 1978 to support U.S. participation in that effort. The budget

requests the appropriation of an additional $90 million for fiscal year 1979.

The request for fiscal year 1979 of $261 million for the operating

expenses of the Agency for International Development represents an

increase of $42 million above the level requested for fiscal year 1978.

Public Law 480 Food Aid

_ _

Actual CBO President,s CBQ President,s

Estimate Estimate Estimate Estimate

Budget

Authority

Outlays

1,169

850

923

928

923

1,068

545

948

806

1,069

806

1,069

60
The Agricultural Trade Development and Assistance Act of 1954, as

amended, authorizes the appropriation of funds to cover the costs of the

concessional sales and commodity disposition programs authorized by that

act. If amounts appropriated are greater than actual net program costs

(outlays), the excess is used to finance future program costs and reduce

future appropriations requests. By the end of fiscal year 1977,

appropriations had exceeded costs by $408 million. This amount may be used

to finance program costs in fiscal years 1978 and 1979.

CBO's estimates of outlays for fiscal years 1978 and 1979 are

$261 million less than the President's estimates. Because the appropriation

for fiscal year 1978 has already been enacted, the CBO estimate of the

budget authority required to finance fiscal year 1979 program costs is $261

million less than the amount requested for fiscal year 1979.

Contributions to International Financial Institutions

id-TM n +• * 1979 Current

1978 Estimates n .. ,<.

1977 Policy/Services 1979

Actual /^n^ n -j 4.1 /~n/~* n -j +1 Request CBO President's CBO President's

 M

Estimate Estimate Estimate Estimate

Budget \ L\L

Authority '

Outlays 875

1,926

854

1,926

838

1,954

748

1,926

844

3,505

909

The $3.5 billion request for fiscal year 1979, which exceeds both the

CBO current policy level and the level appropriated for fiscal year 1978 by

$1.6 billion, reaffirms the Administration's policy—previously demonstrated

by the Administration's request for appropriations of $2.6 billion for fiscal

year 1978--to support strongly multilateral development assistance

programs. The request reflects a departure from recent policy, however, by

including amounts requested, but not appropriated, for previous years. In

the recent past, rather than including such amounts in the budget year

request, supplemental appropriations have been sought for the current year

to restore those amounts.

61
The request for fiscal year 1979, therefore, includes $2.7 billion for

scheduled contributions and capital subscriptions, and $0.8 billion for

contributions and capital subscriptions for which funds were requested but

not appropriated for fiscal years 1977 and 1978. The request, together with

the levels appropriated for fiscal year 1978, is described in the following

table.

Fiscal Year 1979

Fiscal

Year

1978 Scheduled Requested a/ Total

International Bank

for Reconstruction

and Development

International Development

Association

International Finance

Corporation

Inter-American Development

Bank

Asian Development Bank

African Development Fund

Total

(Paid in

(Callable

380.0

800.0

38.0

480.0

217.5

10.0

1,925.5

1,103.7

821.8

523.0

1,175.0

33.4

650.0

263.6

25.0

2,670.0

1,566.1

1,103.9

143.0

375.0

6.6

264.0

46.1

—

834.6

562.5

272.1

665.9

1,550.0

40.0

914.0

309.6

25.0

3,504.6

2,128.6)

1,376.0)

a/ These estimates were also requested for 1977 and 1978, but were not

appropriated.

62
The request for fiscal year 1979 includes $1.4 billion in callable

capital subscriptions and $1.9 billion for contributions to the concessional

affiliates of the banks, such as the International Development Association

and the Special Fund for Operations of the Inter-American Development

Bank. Callable capital, which serves as a guarantee of the institutions'

borrowing in private markets, has never been drawn and is estimated not to

outlay. Contributions to the soft loan affiliates of the banks, once made,

are committed for particular development projects. The institutions will

actually draw the funds from the U.S. Treasury, however, as required for the

projects. Outlays from these contributions, therefore, occur over a period

of years, with a relatively small percentage falling in fiscal year 1979. As a

consequence, outlays during fiscal year 1979 from the request of $3.5 billion

are estimated to equal only $0.9 billion.

Military Assistance

1978 Estimates p

1979

 £urrent

1977 Policy /Services

Actual

 CBO President's CBO President's

 RecJuest

Estimate Estimate Estimate Estimate

?

udSet

. 676

Authority

Outlays 494

616

551

589

457

670

557

541

465

541

465

The budget for fiscal year 1979 transfers the military assistance

category from the national defense budget function to the international

affairs budget function. The new category in the international affairs

function includes grant military assistance, international military education

and training, foreign military sales credits, a number of expiring programs

and offsetting receipts (such as, interest and principal payments associated

with military sales credits). The foreign military sales trust fund, which was

included in the military assistance category in the national defense function,

has been transferred to a separate category within the international affairs

function.

63
The request for fiscal year 1979 is $129 million less than the CBO

current policy estimate and $75 million less than the current CBO estimate

for fiscal year 1978 (CBO's estimate for fiscal year 1978 reflects amounts

actually appropriated for fiscal year 1978; the President's estimate for that

year includes a proposed recission of $40 million for grant military

assistance, a proposed supplemental of $5 million for foreign military sales

credits and makes minor adjustments to the estimates of offsetting

receipts). In fiscal year 1978, funds for grant military assistance were

requested and appropriated in support of the pending defense cooperation

agreements with Greece and Turkey. The request for fiscal year 1979,

however, includes no funds for grant military assistance in support of these

agreements. Depending on the timing of Congressional approval of the

agreements, $80 to $120 million of additional funds for grant military

assistance may be sought for fiscal year 1979.

Advances, Foreign Military Sales

lavs c +• + 1979 Current 1978 Estimates n ,. ,c

1977 Policy/Services 1979

Actual CBO President.s CBO President's

 Recluest

Estimate Estimate Estimate Estimate

Budget o 625

Authority '

Receipts -9,369

Net Budget

Authority -744

6,916

-8,800

-1,884

11,100

-8,700

2,400

10,282

-9,891

391

12,300

-9,200

3,100

12,300

-9,200

3,100

Outlays 8,210 8,800 8,500 9,625 9,500 9,500

Receipts -9,369 -8,800 -8,700 -9,891 -9,200 -9,200

Net

Outlays -1,159 -- -200 -266 300 300

64
Budget authority and outlays associated with the foreign military

sales trust fund are net amounts; they equal trust fund obligations less trust

fund receipts, and trust fund disbursements less trust fund receipts,

respectively. Trust fund obligations, receipts, and outlays flow from sales

acceptances, and are estimated as a function of the level of new

acceptances. Because the actual level of new acceptances depends on

events beyond the control of the U.S. government, new acceptances are

difficult to estimate. Therefore, estimates of trust fund obligations,

receipts, and outlays are surrounded by considerable uncertainty.

Implicit in the budget estimates for fiscal year 1979 are levels of new

acceptances for fiscal years 1978 and 1979 of $13.2 billion and $13.6 billion.

The levels implicit in the CBO current policy projection for fiscal year 1979

are $10.5 billion and $11.1 billion, respectively. Obligations are generally

incurred in the trust fund prior to the receipt or disbursement of funds from

the trust fund; hence, the greater levels of new acceptances implicit in the

budget estimate cause the budget estimate of net budget authority to

exceed the CBO current policy estimate by $2.7 billion. The budget

estimate of net outlays reflects the intent of the managers of the trust fund

to draw down the balance of cash in the trust fund over the next few years

to a level more consistent with quarterly cash requirements for sales cases.

This decision is not reflected in the CBO current policy estimate.

The Export-Import Bank

1978 Estimates p £urrent

1977 Policy/Services

Actual

 CBO President's CBO President's

 Rec?uest

Estimate Estimate Estimate Estimate

A - 829 377 660 Authority

Outlays 340 221 196 469 391
Bank activities during fiscal year 1978 will be supported by the

balance of unobligated authority that accumulated during fiscal year 1977;

no budget authority is estimated to be required for fiscal year 1978. In

fiscal year 1979, however, direct credit authorizations are estimated to

increase by $0.9 billion, the change in the level of net guarantee and

insurance authorizations is estimated to increase by $1.1 billion, and the

unobligated balance will have been depleted. As a consequence, budget

authority of $660 million is estimated to be required.

Budget authority and outlays depend on the levels of credit

authorizations, guarantee and insurance authorizations, credit cancellations

and repayments, and bank net income. Because the levels of authorizations

and cancellations are strongly influenced by decisions and events beyond the

control of the U.S. government, they are difficult to estimate.

The assumptions underlying the CBO estimate for fiscal year 1978

differ slightly from those used in the budget estimate~CBO assumes a lower

cancellation rate than that used in the budget estimate. As a consequence,

the CBO current policy estimate for fiscal year 1979 assumes a smaller

balance of unobligated authority carried forward from fiscal year 1978 into

fiscal year 1979 and, therefore, exceeds the Administration's current

services estimate. The estimated increases in the levels of credit,

guarantee, and insurance authorizations cause the Administration's estimate

for fiscal year 1979 to exceed the current services estimate; however,

because of the difference in the estimate of the unobligated balance

available for fiscal year 1979, the Administration's estimate still falls short

of the CBO current policy estimate.

Each of the estimates for fiscal year 1979 is contingent upon the

enactment of legislation extending the operating authority of the ExportImport beyond September 30, 1978.

U.S. Participation in the Supplementary Financing Facility of the

International Monetary Fund (IMF)

Actual CBO President,s CBO president's

 Rec>uest

Estimate Estimate Estimate Estimate

Budget

Authority 200 - -

Outlays - - - - -

66
The administration has requested a supplemental of $200 million for

fiscal year 1978 to support U.S. participation in the Supplementary

Financing Facility of the IMF. This temporary facility would augment the

resources of the IMF and permit it to assist member countries with severe

balance of payments problems. U.S. participation in the facility would

involve making available to the IMF the equivalent of up to 1,450 million

Special Drawing Rights (about $1.75 billion). The IMF would draw on these

funds, if and when needed, to meet drawings by member countries from the

facility. In exchange for funds provided to the facility, the U.S. would

receive a reserve claim on the IMF, which could be redeemed upon

demonstration of balance of payments need, or could be sold to other

members of the IMF.

In the opinion of the Administration, U.S. participation would involve

an exchange of assets—upon the transfer of funds from the U.S. Treasury to

the IMF, the international monetary reserves of the U.S. would be increased

by the amount of resources transferred—and, therefore, no appropriation is

sought to finance participation in the facility. The $200 million requested

for fiscal year 1978 would serve as a reserve to cover possible dollar losses

that might result from participation in the facility if the dollar were to

appreciate in value. No outlays would result from the $200 million unless

the U.S. incurs a loss because of the appreciation of the dollar.

The Appropriations and Budget Committees have expressed concern

that U.S. participation in the facility be brought within the budgetary and

appropriations process. H.R. 9214 (as ordered reported by the House

Committee on Banking, Currency and Housing), authorizes U.S. participation

in the special facility but provides that "the authority of the Secretary (of

the Treasury) to enter into agreements making resources available under this

Act shall be limited to such extent or in such amounts as are provided in

advance in appropriations Acts." Under consideration are the use of a

limitation on the level of program activity, which would be included in an

appropriation bill but would stop short of the actual appropriation of funds,

and full appropriation of funds in support U.S. participation in the facility.

If funds were appropriated, full participation in the facility could require the

appropriation of about $1.75 billion. Outlays would occur as funds were

drawn by the IMF or repaid to the U.S. Treasury. No reasonable basis exists,

however, to estimate the magnitude or timing of these flows.

67
Other Programs

1978 Estimates

1977

1979 Current

Policy/Services

1979

Actual CBQ President,s CBO President,s Request

Estimate Estimate Estimate Estimate

Budget

Authority

Outlays

1,535

1,662

1,509

1,486

1,619

1,584

1,622

1,639

1,562

1,601

1,722

1,716

The request for fiscal year 1979 for other programs in the

International Affairs function is slightly greater than the CBO current policy

estimate for those programs. The budget, however, includes requests for

supplemental appropriations for fiscal year 1978, in addition to

supplemental for increased pay costs, of over $100 million for programs in

this category. The largest such request is one of $64 million for

Contributions to International Organizations and Programs.

Foreign information and exchange programs are reorganized with the

creation of the International Communication Agency. The reorganization,

which consolidates existing programs in the State Department's Bureau of

Educational and Cultural Affairs and the United States Information Agency,

has little effect on the levels of funding for such activities.

68
GENERAL SCIENCE, SPACE, AND TECHNOLOGY (FUNCTION 250)

This function includes the government's general science and basic

research programs (administered primarily by the National Science Foundation and the Department of Energy) and the space programs of the National

Aeronautics and Space Administration (NASA).

Function Totals

1977

1978 Estimates

1979 Current

Policy/Services

1979

Actual CBO President's CBO President's

 Re<3uest

Estimate Estimate Estimate Estimate

Budget

Authority

Outlays

4,576

4,677

4,842

4,707

4,848

4,703

5,247

5,057

5,199

5,039

5,216

5,077

The President's budget request for fiscal year 1979 represents a

8 percent increase in budget authority over the fiscal year 1978 appropriation. This level of funding is slightly less than the CBO current policy

estimate for fiscal year 1979, and thus represents a slight reduction in the

amount of real resources devoted to this area. There are also some changes

in emphasis and several new projects. The major policy change indicated in

the President's request involves the space shuttle program, for which NASA

has elected to build only four space shuttle orbiters, instead of the five

originally planned.

69

22-453 O - 78 - 5

TT
General Science and Basic Research

1978 Estimates

1977

1979 Current

Policy/Services

1979

Actual

Budget

 1 135 Authority

 1

»

1

-"

Outlays 1,077

CBO

Estimate

1,265

1,157

President's

Estimate

1,265

1,190

CBO

Estimate

1,369

1,328

President's

Estimate

1,349

1,264

Request

1,367

1,275

An 8 percent increase is requested by the President for basic research

activities, consisting primarily of the programs of the National Science

Foundation (NSF). This increase of $103 million over the 1978 appropriation

is very close to the current policy level of funding, as estimated by both

CBO and the Administration. Emphasis continues to be placed on projects

related to the physical sciences, astronomical and earth sciences, and plant

sciences.

Space Program—National Aeronautics and Space Administration

1978 Estimates

1977

1979 Current

Policy/Services

1979

Actual

Budget

 3 441 Authority *'TML

Outlays 3,600

CBO

Estimate

3,583

3,550

President's

Estimate

3,583

3,513

CBO

Estimate

3,878

3,729

President's

Estimate

3,850

3,775

Request

3,849

3,802

The President proposes a 7 percent increase in the space program

budget in fiscal year 1979—a level slightly below the CBO current policy

estimate. The program, administered by NASA, encompasses three basic

70
activities—research and development, construction of facilities, and research and program management. The President's request includes a 9

percent increase ($257 million) in research and development, with an

emphasis on space science and applications. The budget for research and

program management increases 8 percent from fiscal year 1978, while the

proposed funding for construction of facilities is down 39 percent. This

decrease is substantially offset by a proposed increase in NASA construction

funds for aeronautics, which falls within function 400. Several actions by

NASA, while not significantly affecting this budget request, may have

important impacts on future year budgets. NASA plans to initiate several

long-term projects, including the earth radiation budget satellite system and

the solar polar mission. NASA has also elected to rely on four space shuttle

orbiters rather than the five initially planned. While this will result in cost

savings in future years, there is no major impact on the fiscal year 1979

budget, because the fifth orbiter was still in the preliminary development

stages.

71
ENERGY (FUNCTION 270)

This new function represents the federal government's expenditures,

primarily through the Department of Energy, in the area of energy research

and development, production and distribution, emergency preparedness,

conservation, and regulation.

Function Totals

,,7S

Actual

Budget

Authority *>y/e>

Outlays 4,152

CBO

Estimate

8,03*

6,824

President's

Estimate

8,533

7,831

CBO

Estimate

8,101

8,748

President's

Estimate

6,854

7,582

Request

9,545

9,634

The proposed budget authority for 1979 includes a 19 percent increase

in funding for energy programs over the amounts currently appropriated for

fiscal year 1978. The President is proposing major increases for the

strategic petroleum reserve and conservation activities. In addition, several

shifts in emphasis are evident that reflect the President's national energy

plan as submitted to the Congress in April 1977.

Nuclear Energy Supply

1978 Estimates p

1979

 £urrent

1977 Policy/Services

Budget

Authority

Outlays

Actual

2,324

1,859

CBO

Estimate

1,941

2,173

President's

Estimate

1,950

2,337

CBO

Estimate

1,947

2,271

President's

Estimate

*/

a/

Request

1,403

1,890

a/ The President's current services estimate for energy supply is $3,062

~ million in budget authority and $4,258 million in outlays. The

nuclear/non-nuclear split is not available at this time.

72
The President's fiscal year 1979 budget request for nuclear energy

supply activities is $538 million below the 1978 appropriation. This decrease

reflects a redirection of the breeder reactor and fuel cycle research and

development programs and an increase in expected uranium enrichment

receipts. The Administration is proposing a reduced base technology effort

for the liquid metal fast breeder reactor and is again recommending the

cancellation of the demonstration plant at Clinch River, resulting in a $150

million decrease from the 1978 funding level. An increase of $51 million is

requested for the nuclear research and applications program, consistent with

the national energy plan objective to develop advanced nuclear systems that

minimize the risks of international proliferation. Funding for the fuel cycle

research and development program is proposed to decrease $38 million, with

an emphasis on the evaluation of fuel processing alternatives to facilitate

development of a nuclear non-proliferation policy.

The 1979 budget request for uranium enrichment activities will allow

continuation of the gas centrifuge enrichment plant projects. The President

projects that net 1979 expenditures for uranium enrichment activities will

be $432 million below 1978 levels because of the proposed legislation

mandating increased prices for uranium enrichment services ($163 million)

and a higher demand for those services ($269 million). Current policy for

pricing is presently computed on a cost recovery basis that includes

research, plant construction, and operating expenses, but not taxes and

insurance costs necessary for private industry.

Non-Nuclear Energy Supply and Receipts

1978 Estimates

1977

1979 Current

Policy/Services

1979

Actual CBO president's CBO President's

 Request

Estimate Estimate Estimate Estimate

Budget

Authority

Outlays

1,279

1,407

1,446

1,452

1,369

1,847

1,543

2,053

a/

a/

1,466

2,223

a/ The President's current services estimate for energy supply is $3,062

million in budget authority and $4,258 million in outlays. The

nuclear/non-nuclear split is not available at this time.

73
J_

This category includes all non-nuclear energy supply research,

development, production, and demonstration of the Department of Energy,

and energy supply expenses and receipts for the power administrations and

the naval petroleum reserves. It also includes activities of the U.S.

Geological Survey in the exploration and development of the Alaskan

petroleum reserve, energy research programs of the Environmental Protection Agency, and the Rural Electrification Administration's loan program.

The 1979 budget request is 1 percent above the CBO estimate for fiscal year

1978 and 5 percent below the CBO current policy estimate for 1979,

primarily reflecting a projected increase in offsetting receipts. An

estimated $856 million in receipts for power marketing and naval petroleum

reserves sales are included in the 1979 budget request, and a slightly smaller

amount is included in the CBO current policy estimate. Excluding the

impact of the receipts, the President's request represents a 5 percent

increase in spending in this area over the current estimate for 1978.

Funding increases are requested for coal liquefaction and advanced research

($39 million), geothermal resource development ($24 million), and biomass

energy development ($6 million).

Energy Conservation

1977

Actual

Budget

Authority

Outlays 143

1978 Estimates

CBO

Estimate

693

420

President's

Estimate

842

601

1979 Current

Policy/Services

CBO

Estimate

750

608

President's

Estimate

484

363

1979

Request

1,510

1,402

This category represents the Department of Energy's conservation

activities and encompasses programs for technology development, efficiency

standards, grants to states, and proposed legislation for automobile fuelefficiency tax refunds. The President's basic fiscal year 1979 budget request

is $317 million above current 1978 appropriations for conservation programs,

an increase of 46 percent. Almost half of this increase ($138 million) is for

the low-income weatherization grant program. The other major increase

($71 million) is for energy audits and energy-efficient capital improvement

grants for schools, hospitals, and local government buildings.

74
In addition, as proposed legislation under the President's energy plan,

the budget includes a request for $150 million in fiscal year 1978 and $500

million in fiscal year 1979 for refunds of gas-guzzler tax revenues as an

incentive for the purchase of fuel-efficient vehicles. This request would

have no net effect on the budget, since the provision is designed to rebate

all taxes collected; however, the outlays would be scored under function 270.

(The Congressional Budget Office discusses this Administration proposal in a

recent staff working peper, entitled President Carter's Energy Proposals; A

Perspective June 1977. The gas-guzzler tax approved by the House of

Representatives would result in a lower collection of revenues (an estimated

$100 million in fiscal year 1979) with no rebates and therefore no outlays.

The Senate version of the energy bill has no provision for a tax on fuelinefficient automobiles, and instead doubles the penalties for violation of

automobile fuel economy standards.

Strategic Petroleum Reserve

1977

Actual

1978 Estimates

1979 Current

Policy/Services

1979

CBQ President,s

 CBO President's

 Recluest

Estimate Estimate Estimate Estimate

^UM&tl

Authority

 J

Outlays 123

3,182

2,148

3,595

2,273

3,087

3,102

2,485

2,205

4,255

3,284

The President's 1979 budget request provides full funding for the

second 250 million barrels of oil scheduled to be stored by the end of

calendar year 1980, and includes $100 million for site construction for the

third 250 million barrels. This reflects the Administration's commitment to

develop a 1 billion barrel reserve by 1985. The budget request also includes

$415 million in fiscal year 1978 and $425 million in fiscal year 1979 for

increased oil costs attributable to the proposed crude oil equalization tax.

The 1979 CBO current policy estimate of budget authority is probably

understated, because it does not adequately reflect the longer than

anticipated lead time for oil acquisition.

75
Other Energy Activities

1978 Estimates D £urrent

1977 Policy/Services

Actual £BO president's CBO President's

 Rec?uest

Estimate Estimate Estimate Estimate

Budget 6gg

Authority

Outlays 621

772

631

777 774

773 714

822

756

911

835

These activities include energy policy, information, and regulation

programs of the Department of Energy and the Nuclear Regulatory

Commission, and miscellaneous offsetting receipts. The 1979 budget request

of $911 million is $139 million above the 1978 CBO estimate, an increase of

18 percent. The major increase ($158 million) is for the Department of

Energy's administrative, regulatory, and information expenses. Efforts

would be directed toward resolving the backlog of regulatory cases, auditing

the major oil refiners, and collecting data on energy supply and consumption.

Also, increased funding is requested for an expanded decontamination and

decommissioning program. These increases are partially offset by a

projected increase of $69 million in offsetting receipts.

The requested increase of $50 million for the Nuclear Regulatory

Commission reflects the funding of safety-related research facilities needed

by the commission to substantiate regulatory standards and procedures.

Also, the inspection program would change to provide full-time inspectors

for nuclear reactors in the late stages of construction or operation.

76
NATURAL RESOURCES AND ENVIRONMENT (FUNCTION 300)

The purpose of the programs within this function is the conservation

and management of the nation's natural resources and the environment. The

major activities include water resources management, conservation and land

management, pollution control and abatement, and maintenance and

development of recreational areas.

Function Totals

1977

Actual

1979 Current

Policy/Services

1978 Estimates

CBQ President,s CBO

Estimate Estimate Estimate Estimate

1979

Request

Budget 9ft57

Authority *'"'

Outlays 10,000

12,476

11,613

12,792

11,924

13,547

13,236

12,153

11,987

12,664

12,221

The budget authority proposed by the President for this function is

only 1.5 percent, or $188 million, above the current appropriation for fiscal

year 1978. This results in a decrease in real resources devoted to this

function, since the Presidential request is almost $900 million less than the

CBO current policy estimate for fiscal year 1979.

Major budget authority increases include $145 million in recreational

resources, $325 million for pollution control and abatement activities, and

$120 million for other natural resources. Program decreases include $390

million for water resource programs and $370 million for conservation and

land management programs.

77
JL

Corps of Engineers—Construction, General

1978 Estimates

1977

1979 Current

Policy/Services

1979

Budget

Authority

Outlays

Actual

1,430

1,321

CBO

Estimate

1,524

1,327

President's

Estimate

1,494

1,390

CBO

Estimate

1,648

1,430

President's

Estimate

1,394

1,480

Request

1,274

1,362

The request for 1979 budget authority for this account represents a

$220 million decrease from 1978 and a $374 million decrease from the CBO

current policy estimate for 1979. These cuts will result in delays in

advanced engineering and design studies for eight projects, and will provide

no additional funds for 15 projects on which design has already been started.

In addition, 21 projects now under construction will be delayed because of

the lower funding level proposed in fiscal year 1979. Most of these resulting

delays will be less than a year.

For fiscal year 1978, the President's estimate of budget authority

reflects a transfer of $30 million to other Corps of Engineers' accounts for

salary increases.

Other Water Resources

1978 Estimates

1977

1979 Current

Policy/Services

1979

Actual

Budget - 235

Authority '

Outlays 1,923

CBO

Estimate

2,161

2,170

President's

Estimate

2,177

2,237

CBO

Estimate

2,328

2,358

President's

Estimate

2,131

2,139

Request

2,011

2,034

78
The request for new budget authority for 1979 for other water

resources projects totals $317 million less than the CBO current policy

estimate for 1979 and $150 million less than the current appropriation for

fiscal year 1978. Most of the decrease is for activities of the Corps of

Engineers and the Bureau of Reclamation. The Corps will delay completion

an average of 18 months for eight segments of the flood control program for

the Mississippi River and its tributaries, because of cuts in 1979 and

anticipated lower levels of funding in later years.

The Bureau of Reclamation is currently experiencing delays in the

construction of two major projects—the Auburn Dam in California for a

review of geologic conditions, and the Garrison diversion project in North

Dakota, because of unresolved legal questions. If these problems are

resolved, additional funds may be requested for the Bureau. For Bureau of

Reclamation and Corps of Engineers construction projects, the President is

proposing that all new projects be fully funded after they are authorized.

Currently, projects are funded in phases.

Conservation of Agricultural Lands

1978 Estimates

1977

Actual

1979 Current

Policy/Services

CBO President's CBO

Estimate Estimate Estimate Estimate

1979

President's

 Rec*uest

Budget

Authority

Outlays

641

468

534

532

534

670

567

504

512

456

388

432

This category includes the conservation activities of the Agricultural

Stabilization and Conservation Service (ASCS) and the Soil Conservation

Service (SCS), which are designed to protect and maintain the long-term

productive capacity of the nation's rural lands. The budget request for these

programs is $146 million (37 percent) below the 1978 appropriation and $179

million (46 percent) below the CBO current policy estimate for 1979. This

proposed decrease in budget authority is the result of a proposed reduction

in cost sharing assistance to farmers, largely because of the termination of

special drought programs. Most of the decrease occurs in the ASCS

agricultural conservation program. The requested appropriation of $100

million for this program is $126 million below the 1978 level, and $136

million below the CBO current policy estimate for 1979. In addition, this

program will be consolidated with the Great Plains conservation program of

the Soil Conservation Service in 1979.

79
Management of National Forest and Forestry Research

1978 Estimates

1977

Actual

1979 Current

Policy/Services

CBO President's CBO

Estimate Estimate Estimate Estimate

1979

President's

 Rec>uest

Budget

Authority

Outlays

1,234

1,109

1,366

1,208

1,599

1,479

1,482

1,387

1,450

1,385

1,570

1,407

This category is composed of all of the programs of the Forest

Service, with the exception of the construction and operation of recreation

facilities, permanent appropriations, and highland scenic highway accounts.

In fiscal year 1978, $204 million in supplemental funds are requested for

firefighting. In fiscal year 1979 a comparable amount is included in the

President's budget request for the forest protection and utilization program

of the Forest Service. Adjusting for the firefighting funds, the budget

request for this program in fiscal year 1979 is approximately $60 million

below the 1978 appropriation level and $114 million below the CBO current

policy estimate. This represents a 7 percent decrease in funding for this

program and is the major component of the 2 percent overall decrease in

budget authority requested for this category.

Management of Public Lands

1978 Estimates

1977

Actual

1979 Current

Policy/Services

CBO President's CBO

Estimate Estimate Estimate Estimate

1979

President's

 Re^uest

Budget

Authority

Outlays

340

367

334

321

371

351

357

342

367

344

386

382

80
This category includes all the programs of the Bureau of Land

Management (BLM), except for payments in lieu of taxes, mineral impact

loan assistance, and permanent indefinite accounts. The budget request for

these programs represents a 16 percent increase over the current appropriation for fiscal year 1978, and an 8 percent increase over the CBO 1979

current policy estimate. As in the case of the Forest Service, this increase

is deceptive. The President is requesting a $27 million supplemental

appropriation in fiscal year 1978 to increase capability for emergency

prevention and suppression of fires and for rehabilitation of burned lands; a

similar sum is included in the 1979 budget request. When this difference is

considered, the 1979 budget request is only 4 percent above the President's

estimate for 1978 and close to the 1979 CBO current policy estimate.

Land and Water Conservation Fund

1 Q77 W-IAV-JT/ «J^L vxv^to * Q7Q

Actual

 CBO President's CBO President's

 Rec*uest

Estimate Estimate Estimate Estimate

Budget

Authority

Outlays

561

344

630

499

656

472

682

563

630

520

755

554

The Bureau of Outdoor Recreation administers the land and water

conservation fund, which provides the resources for acquisition of federal

and state recreation areas. The grants-in-aid available to the states can

also be used for land development purposes. The President is proposing a

$125 million increase in budget authority over the $630 million currently

appropriated for fiscal year 1978. Although this represents an increase of

approximately 20 percent, the proposed level is $150 million less than the

authorization level contained in Public Law 95-42, which amended the Land

and Water Conservation Fund Act of 1965. The higher authorization level of

Public Law 95-42 was proposed to clear the backlog of federal projects

authorized prior to the convening of the 95th Congress.

81
EPA Construction Grants

1978 Estimates

1977

1979 Current

Policy/Services

1979

Actual CBO President,s CBO President's

 Re1uest

Estimate Estimate Estimate Estimate

Budget

Authority

Outlays

1,980

3,529

4,500

4,380

4,500

4,135

5,000

5,288

4,500

4,660

4,500

4,660

The $4.5 billion construction grants program of the Environmental

Protection Agency (EPA) comprises over 80 percent of that agency's

proposed budget authority for fiscal year 1979. The program provides 75

percent federal grants to state and local agencies for the construction of

sewer treatment facilities. The amount proposed by the President is $500

million less than the authorization level contained in the recently enacted

1977 amendments to the Federal Water Pollution Control Act.

The fiscal year 1978 budget authority for this program is contained in

the pending supplemental bill (H.R. 9375). The lack of funding for many

states has severely slowed obligation levels during the first part of fiscal

year 1978, resulting in net obligations of only $71 million in the first

quarter. Consequently, the CBO outlay estimates for fiscal years 1978 and

1979 may be too high.

National Oceanic and Atmospheric Administration (NOAA)—Operations,

Research, and Facilities

1978 Estimates

1977

1979 Current

Policy/Services

1979

Actual c president,s CBO President,s Request

Estimate Estimate Estimate Estimate

Budget

Authority

Outlays

584

510

607

527

607

593

655

626

625

635

661

654

82
The 1979 budget authority request for NOAA operations, research,

and facilities is $661 million—an increase of $54 million over the fiscal year

1978 level and $6 million over the CBO 1979 current policy estimate. NOAA

plans increased activity in such areas as basic environmental services,

studies concerning the effects of ocean dumping, and the climatology

program.

Other Natural Resources and Environmental Programs

1978 Estimates D

1979

 £urrent

1977 Policy/Services

Actual CBO president's CBO President's

 Recluest

Estimate Estimate Estimate Estimate

Authority

Outlays

454

429

820

649

854

597

828

738

544

368

1,119

736

This category contains programs of the Environmental Protection

Agency, U.S. Fish and Wildlife Service (USFWS), National Park Service,

National Oceanic Atmospheric Administration, Bureau of Indian Affairs,

Bureau of Mines, and U.S. Geological Survey. It also includes all offsetting

receipts in function 300.

For fiscal year 1979, the President is proposing to increase funding

for these programs by $264 million. Included in this increase is proposed

legislation of $180 million in budget authority for an oil pollution liability

and compensation fund. This fund, administered by the Coast Guard, would

be utilized for cleanup of oil spills. The proposed legislation would also

establish liability for owners and operators of sources of oil discharges.

In addition, as a result of the Surface Mining Control and

Reclamation Act of 1977, the Office of Surface Mining Reclamation and

Enforcement was established in 1978. The budget request for this program

in fiscal year 1979 is $109 million—an increase of $41 million over the 1978

appropriation, and $36 million over the CBO current policy estimate for

1979. These funds are to be appropriated from receipts generated by fees

levied on coal production and deposited in the general fund.

The President is also proposing a $127 million increase to EPA's

operating budget, emphasing increases in air and toxic substances programs.

Other major increases include $65 million for the U.S. Fish and Wildlife

Service and $30.5 million for the Bureau of Mines.

83
AGRICULTURE (FUNCTION 350)

This function includes programs that provide farm income security, as

well as agricultural research and services. With the exception of the

proposed Israel-United States binational agricultural research and development fund, all programs are administered by the Department of Agriculture.

Function Totals

1978 Estimates D

1979

 £urrent

1977 Policy/Services 19?9

Actual CBO president's CBO President's

 Recluest

Estimate Estimate Estimate Estimate

Budget

Authority '

Outlays 5,526

2,084

8,073

3,720

9,066

5,127

7,028

6,574

5,511

7,197

5,433

The major program in this function is agricultural price supports and

related activities, administered by the Commodity Credit Corporation

(CCC). Price support outlays constituted less than 70 percent of total

function 350 outlays in fiscal year 1977, but this proportion is expected to

rise to about 80 percent in fiscal years 1978 and 1979.

Other accounts of major importance in this function are the

Agricultural Credit Insurance Fund, the Federal Crop Insurance Fund, and

the Agricultural Stabilization and Conservation Service.
CCC—Price Support and Related Programs

1978 Estimates £urrent

1977 Policy/Services

Actual CBO President's CBO President's

 Rec*uest

Estimate Estimate Estimate Estimate

Budget

Authority

Outlays

899

3,809

524

6,458

2,071

7,299

3,418

5,322

5,005

4,258

5,500

4,276

Budget authority levels for the Commodity Credit Corporation are

largely dictated by obligations and outlays each year. Budget authority is

derived from two sources: annual appropriations to pay administrative

expenses and restore realized losses, and contract authority. The CCC has

the authority to borrow up to $14.5 billion from the Treasury. As new

borrowings are made, they are charged as contract (and budget) authority.

For fiscal year 1978, the CBO current estimate includes only the $524

million already appropriated. The CCC plans to use $17 million in new

Treasury borrowings for additional staff to administer the price support

programs.

The corporation also expects to borrow $1.5 billion from the Treasury

because of sharply increased program levels, resulting in total budget

authority of $2.1 billion. For fiscal year 1979, the corporation is requesting

a $991 million appropriation. In addition, the CCC projects that $4 billion of

new Treasury borrowings will be necessary to meet program obligations.

This level will, however, breach the current $14.5 billion limitation on

borrowings. Therefore, legislation will be proposed to increase the

borrowing authority of the corporation.

Outlays for price support and related programs are expected to

increase in fiscal year 1978 compared to fiscal year 1977. Both poor market

conditions and the higher support rates mandated by the Food and

Agriculture Act of 1977 (Public Law 95-113) are contributory factors. The

85

22-453 O - 78 - 1
Administration recently announced changes in the short-term export credit

and feed grain programs; these changes have been included in its estimate of

1978 outlays. The CBO fiscal year 1978 estimate of $6.5 billion has not yet

been adjusted to include outlays for an additional $200 million in short-term

export credits and $550 million in grain sorghum and barley deficiency

payments. With these changes, the CBO estimate of outlays in fiscal 1978 is

very close to the President's estimate of $7.3 billion. For fiscal year 1979,

CBO has projected $5.3 billion in outlays, as opposed to the President's $4.3

billion. Two assumptions account for most of the difference. The President

has assumed both higher market prices and a lower rate of set-aside program

participation than has CBO. Both the Administration and CBO have assumed

normal weather.

Agricultural Credit Insurance Fund

1978 Estimates D

1979

 £urrent

1977 Policy/Services

Actual CBQ president's CBO President's

 Recluest

Estimate Estimate Estimate Estimate

Budget

 141 165 Authority

 1V1 lbj

Outlays 393 142

165

183

211

215

144 144

-188 -388

Budget authority for the Agricultural Credit Insurance Fund of the

Farmers Home Administration is appropriated to restore realized losses in

previous years. In fiscal year 1979, the President is requesting budget

authority of $144 million—$21 million less than in fiscal year 1978.

Outlays for this account are extremely volatile, and bear little

relationship to the level of program activity. Outlays are the result of

administrative and loan subsidy costs, as well as financial transactions with

the Federal Financing Bank (FFB). Transactions with the FFB are fully at

the discretion of the Administration. A decision to to sell accumulated

loans to the FFB lowers outlays, while a decision to hold loans raises outlays.

86
In fiscal year 1977, the combination of a large volume of disaster

loans, together with a decision to hold rather than to sell loans during the

last quarter, resulted in outlays of nearly $400 million. In fiscal year 1978,

both the President and CBO estimate outlays somewhat below administrative and subsidy costs, reflecting some net loan sales. In fiscal year 1979,

the CBO estimate reflects administrative and subsidy costs only. It is

neutral with respect to financial transactions. The President's 1979 current

services estimate assumes heavy selling of paper held over from the previous

two fiscal years. The Administration's fiscal year 1979 outlay estimate is

$200 below its current services figure because of the expiration of the

emergency livestock loan program on September 30, 1978.

Other Farm Income Stabilization and Offsetting Receipts

1978 Estimates p

1979

 .

1977 Policy/Services

Actual £BO president's CBO President's

 Re1uest

Estimate Estimate Estimate Estimate

Authority

 30°

Outlays 272

217

305

292

370

238

250

215

224

271

286

Most of the changes within the remaining farm income stabilization

accounts are attributable to the Federal Crop Insurance Corporation (FCIC)

and the Agricultural Stabilization and Conservation Service (ASCS). The

FCIC attempts to administer an actuarially sound program of crop

insurance. The corporation has a capital stock of $150 million, of which

$130 million has been issued. The Administration plans to ask for the

remaining $20 million in fiscal year 1978. In addition, legislation is proposed

to raise the authorized capital stock level to $200 million. Neither the

President nor CBO anticipate that any of the added $50 million will be

required to meet obligations through fiscal year 1979, assuming normal

weather conditions.

87
Outlays for the crop insurance program have been unusually high in

fiscal years 1977 and 1978 because of drought in the Midwest and Southeast.

The lower outlay estimates for fiscal year 1979 reflect the assumption of

normal weather during crop year 1978.

The ASCS administers agricultural price support and related programs, the agricultural conservation program, and several smaller programs.

Because of heavy activity in the price support programs, the Administration

is requesting a $57 million supplemental appropriation to fund additional

personnel in fiscal year 1978. The President's budget assumes that the heavy

workload will continue into fiscal year 1979, and that commensurate funding

will be required.

Agricultural Research and Services

1978 Estimates

1977

1979 Current

Policy/Services

1979

Actual CBQ President,s CBO President's

 Rec*uest

Estimate Estimate Estimate Estimate

Budget

Authority

Outlays

1,08*

1,052

1,178

1,168

1,192

1,21*

1,260

1,2*1

1,210

1,217

1,282

1,259

The budget authority requested for agricultural research and services

is $9* million above the President's fiscal year 1978 estimate, an increase of

about 8 percent, and slightly higher than the CBO current policy estimate

for fiscal year 1979. The President's fiscal year 1979 request is about $70

million higher than his current services estimate, largely because of the

proposed $*0 million Israel-United States binational agricultural research

and development fund.

88
COMMERCE AND HOUSING CREDIT (FUNCTION 370)

Most of the programs in this function are designed to ensure an

adequate supply of credit to meet the nation's housing and credit needs.

These programs include the mortgage insurance and purchase activities of

the Department of Housing and Urban Development (HUD) and the

Department of Agriculture, the thrift deposit insurance activities of the

federal government, and many of the direct loan and loan guarantee

programs of the Small Business Administration. In addition, the function

includes funding for the Postal Service for many of the activities of the

Department of Commerce, and for a number of other independent agencies.

Function Totals

1977

1978 Estimates

1979 Current

Policy/Services

1979

Actual CBO President's CBO President's

 Request

Estimate Estimate Estimate Estimate

Budget

Authority

Outlays

5,481

-31

5,111

3,323

5,3*2

3,488

5,461

3,736

6,491

3,106

6,597

2,969

The President has requested $6.6 billion in budget authority for fiscal

year 1979, an increase of more than 23 percent over his estimate for 1978.

Most of this increase is attributable to a proposal to fund $1.5 billion of the

loan purchase activity of the Government National Mortgage Association

(GNMA) from new budget authority rather than from recaptured authority as

has generally been the case in the past. (This also accounts for much of the

difference between the President's 1979 request and the CBO current policy

estimate.) Increases are also proposed for the elderly and handicapped

housing program of the Department of Housing and Urban Development, the

Postal Service, and the Bureau of the Census. These increases are partially

offset, however, by substantial reductions in the budget authority required

to support the activities of the Federal Housing Administration fund and the

rural housing insurance fund (RHIF).

89

1"
The President estimates fiscal year 1979 outlays of $3.0 billion for

the function, about $0.5 billion less than 1978. While most program activity

levels are projected to increase in fiscal year 1979, the associated higher

outlays are more than offset by projected lower default levels in the

mortgage insurance funds, by increased income to the thrift deposit

insurance funds, and by an increase in the sale of certificates of beneficial

ownership by the RHIF. The unusually low outlays in 1977 are attributable

to the economic recovery. During that year, GNMA had net negative

outlays of $1.1 billion and the Federal Home Loan Bank Board recovered

$1.5 billion of loans advanced to member institutions in previous years. In

addition, $143 million in surplus revenue (not included in the tables that

follow) was returned to the Treasury by the Federal Financing Bank.

Rural Housing

1978 Estimates p

1979

 Current

1977 Policy/Services

Actual CBO president's CBO President's

 Rec?uest

Estimate Estimate Estimate Estimate

Budget

Authority

Outlays

522

99

466

435

746

455

635

607

337

-103

448

-92

Financial assistance for rural housing is provided by the Farmers

Home Administration through direct grants, insured subsidized loans, and

rental assistance payments. The President is proposing a major increase in

direct grants, from $28 million in fiscal year 1978 to $54 million in 1979.

Insured loans and rental assistance payments are proposed to increase

consistent with current policy. The mix of loans is proposed to change, with

low-income housing assistance increasing 17 percent while moderate-income

housing assistance decreases by 24 percent. The President's estimates of

budget authority and outlays for fiscal year 1979 are substantially below

1978 levels because he projects large sales of loans in 1979 by the rural

housing insurance fund. The President has revised his estimate of borrowing

authority to be used by the fund in fiscal year 1978, increasing it by about

$280 million.

90
Legislation will be submitted for a new home ownership program to

assist very low-income families in cases where home ownership is more cost

effective than existing programs. The estimated 1979 cost is $6 million.

Federal Housing Administration Fund

1978 Estimates p £urrent

1977 Policy/Services

Actual CBO president's CBO President's

 Recluest

Estimate Estimate Estimate Estimate

Budget

Authority

Outlays

661

492

705

650

555

407

675

622

555

407

451

221

Outlays from the FHA fund are the result of losses sustained on

defaulted insured mortgages. The budget authority to support these outlays

can come from current appropriations or borrowing authority. For fiscal

year 1979, the President is requesting an appropriation of $352 million and

proposes using $99 million in borrowing authority, resulting in estimated

budget authority of $104 million below the Administration's estimates for

1978, and outlays $186 million below. The Administration estimates much

lower losses in fiscal years 1978 and 1979 than have occurred in the past.

These lower fund outlays result largely from two proposals designed to

reduce defaults and to enhance the salability of HUD-acquired multifamily

mortgages and properties. The President is requesting a one-time

supplemental appropriation to provide $24.3 million in fiscal year 1978 for

additional rent supplement assistance; for fiscal year 1979, the President is

proposing a new operating subsidies program to assist HUD-insured and

HUD-owned multifamily projects. HUD estimates that these proposals, if

enacted, would reduce losses of the FHA fund by $300 million. In addition,

HUD expects the availability of financing from GNMA's tandem programs to

further stabilize the lower-income assisted housing market—the main source

of the FHA fund's past losses.

91
Government National Mortgage Association (GNMA)

1978 Estimates D

1979

 £urn:

nt

1977 Policy/Services

Actual

 CBO President's CBO President's

 Rec*uest

Estimate Estimate Estimate Estimate

Budget

Authority

 u

Outlays -1,082

8

-264

7 8

40 -118

1,507

332

1,507

333

For fiscal year 1979, the President is requesting the release of $2.0

billion in loan purchase authority for the GNMA special assistance functions

fund. This is about the same level of activity currently estimated for fiscal

year 1978. The fiscal year 1978 authority was provided from recaptured

authority and required no new budget authority. In 1979, however, the

Administration proposes using only $0.5 billion of recaptured authority,

resulting in a net request of $1.5 billion in additional budget authority. (The

CBO current policy estimates assumed the funding of 1979's special

assistance activity entirely from recaptured authority.) The President

projects outlays in fiscal year 1979 to increase to $333 million, $293 million

over fiscal year 1978, and a level considerably above the CBO current policy

estimate. These differences result from a projected decrease in asset sales

in 1979. The thrust of GNMA's 1978 activity and its proposed 1979 activity

is towards assisting moderate and low-income multifamily housing. GNMA

estimates that $0.5 billion of loan purchase authority will be used in fiscal

year 1978 to assist moderate-income unsubsidized housing in distressed

urban areas, and $1.5 billion will be used to further assist HUD-insured

section 8 projects. These levels of activity are proposed to continue in

fiscal year 1979.

92
Housing for the Elderly or Handicapped

1978 Estimates

 1979 urrent

Policy/Services JQTM

Actual

 CBO President's CBO President's

 Re^uest

Estimate Estimate Estimate Estimate

Budget

Authority

Outlays

850

4

750

420

750

335

814 750

767 713

800

713

This program provides direct loans at Treasury borrowing rates for

housing designed for the elderly or handicapped. (Housing developed under

this program generally receives section 8 assistance as well.) The

President's request for $800 million in budget authority for fiscal year 1979

is $50 million above the 1978 appropriation, and is expected to finance

25,000 units, slightly more than the 23,600 units projected for fiscal year

1978. HUD projects no increases in the per-unit costs while the CBO

estimates contain allowances for inflation.

Thrift Insurance

1978 Estimates D

1979

 £urrent

1977 Policy/Services

Actual CBQ president's CBO President's

 Rec?uest

Estimate Estimate Estimate Estimate

Budget .

Authority ~~~ ~~~

Outlays -2,785 -856 -769 -1,387 -1,450 -1,448

This category includes the Federal Deposit Insurance Corporation, the

Federal Home Loan Bank Board, and the National Credit Union Administration. The negative outlays result primarily from the thrift deposit insurance

activities of these agencies and the budget estimates depend greatly on

economic assumptions. The President's estimates for fiscal year 1979

assume a strong economy and no unusual outlays because of failing financial

institutions. The President is also proposing a rescission of $10 million of

budget authority, previously provided the Federal Home Loan Bank Board

and associated with the construction of a new headquarters building.

93
Postal Service

1978 Estimates p

1979

 Current

1977 Policy/Services ]9?9

Actual CBQ President's CBO President's

 Re<Juest

Estimate Estimate Estimate Estimate

Budget

Authority

 z'266

Outlays 2,267

1,696

1,696

1,787

1,787

1,736

1,736

1,830

1,830

1,830

1,830

The U.S. Postal Service budget request for 1979 represents a

continuation of the basic financing arrangements established by the 1970

Postal Reorganization Act. 4/ A supplemental increase of over $90 million

is sought for fiscal year T978 to cover increased amounts of revenue

foregone because of rate changes proposed for implementation June 1, 1978.

The request for fiscal year 1979 includes $844 million for revenue foregone,

an increase of $134 million over the amount currently appropriated for 1978,

and over $40 million above the total requested for 1978.

Other Advancement and Regulation of Commerce

1977

Actual

Budget

Authority

 1>J1^

Outlays 1,114

1978 Estimates

CBO

Estimate

1,489

1,240

President's

Estimate

1,507

1,233

1979 Current

Policy/Services

CBO

Estimate

1,593

1,509

President's

Estimate

1,511

1,377

1979

Request

1,561

1,412

The President has requested an appropriation of $54 million more

than the fiscal year 1978 program level, including a proposed $18 million

supplemental. This represents an increase of 3.6 percent, and is slightly less

kj For further details, see Congressional Budget Office, Financing Postal

Operations: Alternative Approaches and their Budgetary Implications,

Background Paper No. 5, March 25, 1976.

94
than the CBO current policy estimate for fiscal year 1979. The most

substantial increases are $114.5 million to prepare for the 1980 decennial

census of population and housing, and $30 million to implement the 1978

survey of registration and voting. Smaller increases of $13 million, to

develop federal standards for computer utilization, and $2 million, to

establish the new National Telecommunications and Information Administration, are also included. The Office of Minority and Business Enterprise

(OMBE) will receive a budget increase of $11 million for program and

business development. While over $3 billion of new commitments for

guaranteed loans has been included in the budget request for the Small

Business Administration (SBA), the proposed budget authority for the

programs of the SBA (excluding disaster loans) is $183 million less than the

1978 funding level.

95
TRANSPORTATION (FUNCTION 400)

Function 400 includes most of the programs of the Department of

Transportation (DOT), as well as the activities of a number of independent

agencies related to transportation.

Function Totals

1977

Actual

1978 Estimates

1979 Current

Policy/Services

CBO President's CBO

Estimate Estimate Estimate Estimate

1979

President's

 RecJuest

Budget

Authority

 10'363

Outlays 14,636

15,003

15,931

14,996

16,158

15,510

17,061

15,549

17,116

18,573

17,399

Despite the increase in budget authority from fiscal year 1978 to

1979, there has been relatively little increase proposed in the funding levels

for transportation activities. The budget authority increase reflects the

President's proposal to terminate the contract authority of the Urban Mass

Transportation Administration (UMTA), and to convert UMTA funding to an

annual appropriation. The overall program levels for transportation

activities are projected to grow by less than 1 percent relative to the 1978

level. The largest program increases include $119 million for activities of

the Federal Aviation Administration, $117 million for Coast Guard activities, and $227 million for the Federal Railroad Administration, with most of

the increased rail funding for the railroad rehabilitation and improvement

program.

96
Federal Highway Administration

1978 Estimates

1977

1979 Current

Policy/Services

1979

Actual CBQ President,s CBO president's

 Rec*uest

Estimate Estimate Estimate Estimate

Budget

Authority

Outlays

3,756

6,131

7,164

6,779

7,178

6,891

7,360

7,246

7,317

7,551

7,855

7,536

This aggregation comprises all the federal highway programs administered by the Federal Highway Administration (FHwA). Total FHwA

obligations in fiscal year 1979 are projected to be $8.1 billion, compared to

the 1978 level of $8.2 billion (assuming enactment of the President's

legislative programs). Obligations of $7.8 billion for the federal-aid highway

program are being projected in the Administration's legislative proposal,

which would restructure presently authorized, discrete highway programs

into fewer and broader categories. The major increases include $250 million

for the interstate system and $270 million for the bridge reconstruction and

replacement program. (The proposed spending level for the interstate

system, while higher than the fiscal year 1978 amount, is $125 million below

the previously authorized level for 1979.) The four major categories of the

modified program would be the interstate system, the primary road program,

the small urban and rural program, and the urban program. Within these

programs, transfers would be allowed at the discretion of the state and local

authorities. Included in the Administration proposal is an emphasis on

consolidating federal highway and public transportation planning assistance

programs and the proposal to adopt uniform federal matching shares for

highway and public transportation. A 90 percent federal share is proposed

for all other state projects and highway and public transportation projects

that are substituted for interstate system segments, and an 80 percent share

is recommended for all other highway projects. (The federal share is already

80 percent for public transportation projects.) The increased federal share

(from 70 to 80 percent) for all other highway projects is not reflected in any

increase in the proposed program level, despite the fact that the change in

share will result in fewer projects being funded with the same amount of

federal dollars.

97

'IT
Rail Transportation

1978 Estimates "T9 £urrent

1977 Policy/Services

Actual

 CBO President's CBO President's

 Rec*uest

Estimate Estimate Estimate Estimate

Budget

Authority

Outlays

1,104

1,676

1,854

1,728

1,880

1,795

1,836

1,800

1,648

1,854

1,736

1,825

The category encompasses the programs of the United States Railway

Association (USRA) and the Federal Railroad Administration (FRA), including the Northeast Corridor improvement program, grants to Amtrak, and the

rail rehabilitation and improvement program. The President's request for

fiscal year 1979 is $118 million less than the 1978 funding level, primarily

because of a decrease of $289 million in funds for the purchase of Conrail

securities. Fiscal year 1979 budget authority for this program is $136

million appropriated in advance; this is the final component of the $2.026

billion provided through 1979 by Public Law 94-252, a supplemental

appropriations bill approved on March 30, 1976. This decrease is partially

offset by an increase of $55 million for the Northeast Corridor improvement

program. (The Administration estimate is based on an assumption that all

funds provided for in the Northeast Corridor in fiscal years 1977 and 1978

will be obligated before fiscal year 1979, despite the relatively slow

obligation rate to date.) The $279 million request for the railroad

rehabilitation and improvement program in 1979 represents a $79 million

increase over the 1978 funding level, despite the slow rate of obligations this

program has experienced. The 1979 request, when added to existing funds, is

sufficient to cover all the applications presently received by the Administration for the purchase of redeemable preference shares from railroads. The

Administration is also requesting $660 million for grants to Amtrak, an

increase of $13.5 million over the fiscal year 1978 appropriation, excluding

the pending supplemental. These funds are to be used primarily for

operating grants. (These are indications that the Administration may seek

additional funds for Amtrak at a later time.)

98
Urban Mass Transportation

1978 Estimates

1977

1979 Current

Policy/Services

1979

Actual CBQ president's CBO President's

 Re3uest

Estimate Estimate Estimate Estimate

Budget

Authority

 3W

Outlays 2,000

551

2,172

551

2,179

519

2,254

458

1,991

2,884

2,311

This grouping includes funds for the Urban Mass Transportation

Administration (UMTA) and the Washington Metropolitan Area Transit

Authority (WMATA). The 1979 request reflects the changes to the federal

mass transit assistance program to be proposed in the Administration's new

highway/mass transit authorization bill. It will be proposed that the existing

$6.4 billion in contract authority be terminated on September 30, 1978, and

that funding thereafter be provided through annual appropriations. Of the

$2.9 billion budget authority requested, approximately $2.4 billion is

attributable to the proposed new funding procedure. The new budget

authority request includes approximately $400 million for interstate transfer

funds projected for transit use. This request does not include any funds for

the Washington Metro system, which may be requested at a later date and

could total $200 to $300 million.

Federal Aviation Administration

1978 Estimates

1977

1979 Current

Policy/Services

1979

Actual CBO President's CBO President's

 Re<luest

Estimate Estimate Estimate Estimate

Budget

Authority

 2'56* 2'680

Outlays 2,369 2,556

2,689

2,656

2,877

2,835

2,884

2,865

3,094

2,877

99
This category includes Federal Aviation Administration (FAA)

operations, facilities, engineering and development, and grants-in-aid for

airports. The President's request for fiscal year 1979 is $414 million above

the current appropriation for 1978, an increase of 15 percent. It also

exceeds both current policy and current services estimates by over 7

percent. The largest increase is $206 million for FAA operations, an

increase of 11 percent. Another large increase is $162 million in the

facilities and equipment account (from the airport and airway trust fund).

This increase reflects a fully-funded flight service station automation

program ($146 million of the $162 million) and a fully-funded radio range

system replacement program. A third major increase is $35 million for the

grants-in-aid for airports program, reflecting contract authority already

available.

The President's budget also contains a projected decrease in receipts

to the airport and airway trust fund totalling approximately $340 million.

This reduction reflects the proposed legislation to reduce the airline

passenger ticket tax and waybill tax by 2 percentage points, so that air

carriers may use those fare revenues in a noise abatement program. No

additional outlays from the fund are projected for this purpose.

Aeronautical Research and Technology

1978 Estimates

1977

Actual

1979 Current

Policy/Services

1979

CBO President's CBO President's

 Request

Estimate Estimate Estimate Estimate

Budget

Authority

Outlays

378

344

444

413

432

397

480

441

544

476

522

466

This category includes the research and program management,

construction of facilities, and research and development accounts of the

National Aeronautics and Space Administration (NASA). The President's

100
budget request represents a 21 percent increase over the fiscal year 1978

appropriation, and is 9 percent over the CBO current policy estimate for

1979. The largest increase ($38 million) is for construction activities related

to NASA's aeronautical activities.

Water Transportation

1978 Estimates

1977

Actual

1979 Current

Policy/Services

1979

President,s CBO president's

 RecJuest

Estimate Estimate Estimate Estimate

Budget

Authority

Outlays

1,683

1,749

1,905

1,894

1,874

1,866

2,005

2,079

1,958

1,928

2,042

1,946

Included in this subfunction are programs of the Department of

Commerce (the Maritime Administration), the Department of Transportation

(Coast Guard), and the Federal Maritime Commission. The President's

request for fiscal year 1979 is slightly above the CBO current policy

estimate and is $137 million above the 1978 appropriation, an increase of

about 7 percent. Increases in the Coast Guard accounts are for full funding

of three new bridge replacement and alteration starts, replacement of two

medium-range-endurance cutters, and procurement of twelve additional

medium-range surveillance aircraft at full funding. The Maritime Administration request reflects an increase in ship construction subsidy of $22

million over the current appropriation of $135 million to finance construction of six new ships, including two liquefied natural gas container ships.

The President projects total construction subsidy obligations of $279 million,

including $122 million from prior budget authority. This compares to an

obligation level of $242 million estimated for fiscal year 1978. Total 1979

obligations for operating-differential subsidies are estimated to be $306

million, compared to $309 million in 1978.

101

22-453 O - 78 - (

'T
The projected level of activity of the federal ship financing fund is

expected to bring the amount of outstanding guarantees, insurance, and

commitments to a total of $7.6 billion by the end of fiscal year 1978. Since

this will place the program at or close to the existing ceiling, the

Administration will propose legislation to raise the ceiling.

Other Transportation

1977 _

Actual £BO president's CBO President's

 RecJuest

Estimate Estimate Estimate Estimate

Budget

Authority

Outlays

295

367

405

389

392

374

433

406

740

451

440

438

This category includes the programs of the National Highway Traffic

Safety Administration, the Office of the Secretary of Transportation, the

Research and Special Programs Directorate of DOT, the Interstate Commerce Commission, and the Civil Aeronautics Board. The Administration

request for fiscal year 1979 is $35 million above the 1978 level, an increase

of 9 percent. The President's proposals include an increase of $15 million

for the state and community safety grant program, directed toward the

hiring of additional police personnel to enforce the 55 mile-per-hour speed

limit. In addition, a $2.8 million increase is included for grants-in-aid to

state agencies for the states' natural gas pipeline safety programs.

102
COMMUNITY AND REGIONAL DEVELOPMENT (FUNCTION 450)

This function includes programs for community and regional development and disaster relief administered by the Department of Housing and

Urban Devlopment (HUD), the Department of Commerce, the Department of

Agriculture, and other agencies. The community development block grant

program and the local public works program of the Economic Development

Administration (EDA) account for 50 percent of estimated outlays in this

function for fiscal year 1979. Further budget requests are expected in the

spring as part of the President's urban initiative.

Function Totals

1978 Estimates D

1979

 ,

C

Q

urrent

1977 Policy/Services 19/9

Actual

 CBO President's CBO President's

 Rec*uest

Estimate Estimate Estimate Estimate

Budget

Authority

 U'**Z

Outlays 6,375

8,361

10,363

8,941

9,917

9,392

10,068

7,404

8,694

7,908

8,861

The President's fiscal year 1979 request for the community and

regional development function is $7.9 billion in budget authority, which is

$1.5 billion below the CBO fiscal year 1979 current policy estimate. A

major difference is that the latter assumes that SBA will continue to make

disaster loans to farmers at fiscal year 1978 levels, while the President

proposes that SBA end its disaster loan program for farmers; CBO current

policy assumes an fiscal year 1979 appropriation of $1.5 billion, while the

President requests $190 million. The President's fiscal year 1979 request

contains increases for the HUD rehabilitation loan program ($40 million

increase in activity level), and for the basic economic development program

of EDA ($244 million). The President is also requesting 1978

supplemental of $117 million for EDA and of $150 million for disaster

relief. The local public works program (LPW) of EDA received a $6.0 billion

appropriation as a one-time stimulus measure in fiscal year 1977, which

accounts for the substantial decrease in budget authority in 1978.

103
Community Development Program

1978 Estimates

1977

1979 Current

Policy/Services

1979

Actual CBO president's CBO President's

 Recluest

Estimate Estimate Estimate Estimate

Budget

Authority

Outlays

3,248

2,089

4,000

2,535

4,000

2,584

4,262

3,244

4,000

2,793

4,150

2,803

The President is requesting the appropriation of the full authorization

amount of $3,750 million for the basic community development block grant

program and $400 million for the urban development action grant program

(UDAG). This represents an increase of $150 million from the fiscal year

1978 level for the basic program, and the same level as in fiscal year 1978

for UDAG. The CBO fiscal year 1979 outlay estimates, which are over $300

million higher than the President's, are partially based on the assumption

that the increase in the spending rate from fiscal year 1977 to fiscal year

1978 will continue into fiscal year 1979. Both of these programs have been

considered by the Administration for increases as part of the forthcoming

urban initiative.

Section 312 Rehabilitation Loans

1978 Estimates

1977

1979 Current

Policy/Services

1979

Actual CBQ president's CBO President's

 Recluest

Estimate Estimate Estimate Estimate

Budget

Authority

Outlays

50

41

0

43

0

43

19

38

45

54

95

85

The President is requesting an appropriation of $95 million for section

312 loans for the rehabilitation of residential and commercial properties.

104
This represents an increase in obligation level of $40 million over the fiscal

year 1978 level, from $90 million to $130 million. No appropriations were

necessary in 1978, since available authority and receipts were adequate to

support the projected obligation level. In order to achieve desired program

levels in 1979, however, the President has requested budget authority of $95

million to supplement $35 million in receipts. The number of loan

reservations is estimated to increase from 6,800 in fiscal year 1978 to

10,000 in fiscal year 1979.

Other Community Development

1978 Estimates D

1979

 ,

C

c

urrent

1977 Policy/Services

Actual

 CBO President's CBO President's

 Re<*uest

Estimate Estimate Estimate Estimate

Budget

Authority

Outlays

671

1,396

636

1,197

699

1,415

674

901

655

1,114

707

1,103

The President's budget contains proposed new legislation for an urban

extension service program for fiscal year 1979, with a funding request for

$10 million. The purpose of the program is to facilitate communications

among local governments in dealing with urban problems, and to improve

local problem solving capability. The President's budget also contains an

increased request for HUD community development, salaries and expenses.

The President requests budget authority of $170 million for salaries and

expenses (in this function), compared to an OMB current services estimate

of $156 million, and a CBO current policy estimate of $158 million. He is

requesting a $20 million appropriation for the urban homesteading program,

a level $5 million over OMB current services; the status of the program is

being changed in fiscal year 1979 from a demonstration project to an

ongoing program.

105
Local Public Works

1978 Estimates

1977

1979 Current

Policy/Services

1979

Actual CBO president's CBO President's

 Recluest

Estimate Estimate Estimate Estimate

Budget , n.

Authority

 6'000

Outlays 585

0

2,800

4

2,304

0

1,920

0

2,001

11

2,011

Except for a $4 million fiscal year 1978 supplemental request, and an

$11 million fiscal year 1979 request, both for administration of the program,

there are no additional funds requested for the local public works program.

This program was enacted in two parts in fiscal year 1977: $2 billion as of

October 1, 1976, and an additional $4 billion enacted May 13, 1977 as part of

the economic stimulus program. To date, funds from the first appropriation

have been spent at approximately the rate expected, while spending from

the $4 billion is starting very slowly. This slow spending to date is not yet

incorporated in the CBO outlay estimate for fiscal years 1978 and 1979. As

a result, the CBO fiscal year 1978 outlay estimate is currently $500 million

above the President's 1978 outlay estimate.

Economic Development Assistance Programs

1978 Estimates

1977

Actual

1979 Current

Policy/Services

1979

CBO President's CBO President's

 Request

Estimate Estimate Estimate Estimate

Budget

390 Authority

Outlays 297

383

339

500 416

382

382

337

627

399

106
The President's budget for EDA's basic economic development

assistance program contains a fiscal year 1978 supplemental request for

$117 million, and a requested increase from the proposed fiscal year 1978

program level of an additional $127 million for fiscal year 1979. The

supplemental request includes $43 million for the basic program, and $74

million for expansion of the trade adjustment program. Urban areas receive

most of the proposed funding increase, as EDA appears to be aiming towards

a policy of equal aid to urban and rural areas in this program. The

President's budget also presents plans to use $100 million from EDA's

economic development revolving fund as a set-aside to cover defaults of

guaranteed loans to firms in the steel industry. This will allow steel

companies access to credit and enable them to continue to operate in areas

of high unemployment. The $100 million would leverage $500 million in

loans. The President's budget assumes no default on these loans and

therefore estimates no outlays.

Other Regional Development

1978 Estimates

1977

1979 Current

Policy/Services

1979

Actual CBQ President,s CBO President's

 Recluest

Estimate Estimate Estimate Estimate

Budget

Authority

Outlays

1,839

1,333

1,566

1,508

1,814

1,544

1,992

1,454

1,694

1,363

1,795

1,453

For fiscal year 1978, the CBO estimate for the rural development

insurance fund (RDIF) of the Farmers Home Administration (FmHA) differs

from the President's estimate by $206 million in budget authority. The

Administration estimates a requirement of $214 million of permanent,

indefinite authority to spend public debt receipts. The budget authority for

the permanent part of this account is to a large part dependent upon the

projected asset transactions for this program and is determined administratively. The CBO estimate of $8 million in borrowing authority for RDIF was

based on an earlier Administration estimates for this program.

107
The President's fiscal year 1979 request for the Appalachian Development Programs is $20 million greater than the 1978 program level in this

function. This increase is for the Appalachian development highway systems

program and for area development projects.

No funding is requested in fiscal year 1979 for the coastal energy

impact program because available authority is adequate to fund estimated

activity level. CBO current policy assumes a $115 million annual obligation

level in fiscal year 1978 and beyond, however, demand for loans under

present eligibility requirements has been low, and is not expected to

increase greatly unless requirements change.

The Bureau of Indian Affairs (BIA) provides services such as aid to

tribal government and social services, as well as management of tribal lands

and administration of programs with funds under this function. The

President has requested $858 million for fiscal year 1979. This request is an

8 percent increase over fiscal year 1978, and is 2 percent above the CBO

current policy estimate for 1979. No major initiatives or new programs have

been identified. The BIA budget at the aggregate level (including accounts

other than the 452) increased an average of 9 percent from fiscal year 1978

to fiscal year 1979.

SBA Disaster Loan Fund

1978 Estimates

1977

Actual

1979 Current

Policy/Services

CBO President's CBO

Estimate Estimate Estimate Estimate

1979

President's Request

Budget

Authority

Outlays 184

1,515

1,515

1,515

1,195

1,528

1,524

340

632

190

550

The President's fiscal year 1979 request for the SBA disaster loan

program of $190 million in budget authority represents a decrease of $1.3

billion from the 1978 level. The fiscal year 1978 program consisted of

approximately 80 percent physical disaster loans to farmers. The President

108
will propose legislation to limit the authority to make disaster loans to

farms to the Farmers Home Administration (FmHA) of the Department of

Agriculture. FmHA presently makes such loans and has more stringent

eligibility requirements than SBA. The President's fiscal year 1979 request

assumes that SBA will no longer make such disaster loans to farmers. The

CBO fiscal year 1979 current policy estimate assumes the continuance of

the fiscal year 1978 loan obligation level. Differences in fiscal year 1978

outlay estimates are because of differences in estimated demand for SBA

physical disaster loans to farmers. CBO estimates that a large number of

loans will be approved early in the fiscal year and thus allow for

disbursement before the end of the year.

Funds Appropriated to the President for Disaster Relief

1978 Estimates D

!

?

79

 £urrent

1977 Policy/Services

Actual

 CBO President's CBO President's

 Re^uest

Estimate Estimate Estimate Estimate

Budget

Authority

Outlays

300

294

150

236

300

375

384

357

150

225

200

284

The President's fiscal year 1979 budget includes a $150 million

supplemental request for disaster relief in 1978. To a large extent, these

funds will provide disaster relief for disasters which occurred in fiscal year

1977. In some cases, the funds will reimburse federal agencies that have

already incurred the costs of disaster relief. The CBO fiscal year 1979

current policy number of $384 million is based on a historical average of

obligations in the disaster relief program. The President's estimate of $200

million is $184 million below what would be required if disaster relief is

necessary at the historical average for this program.

109
Other Disaster Relief and Insurance

1977

Actual

Budget

Authority

Outlays 156

,97S Estates ^££55.

CBO

Estimate

110

189

President's CBO

Estimate Estimate

109 117

116 248

President's

Estimate

138

175

1979

Request

133

173

The largest program in this group is the flood insurance program of

HUD's Federal Insurance Administration. Differences in fiscal year 1979

outlay estimates apparently stem from different assumptions about payments on insurance claims.

110
EDUCATION, TRAINING, EMPLOYMENT, AND SOCIAL SERVICES

(FUNCTION 500)

This function provides federal funds for all levels of education, and

for training, employment, and labor services, as well as other social

services. Approximately one quarter of the funds in this function support

education programs and another quarter support social services programs

that are administered primarily by the Department of Health, Education and

Welfare. The remaining 50 percent cover training and employment accounts

of the Department of Labor.

Function Totals

1978 Estimates .

1977 Policy/Services

Actual

 CBO President's CBO President's

 Rec*uest

Estimate Estimate Estimate Estimate

Budget 3Q 37,

Authority

 JiU'JJ//

Outlays 20,985

22,137

26,899

22,806

27,434

27,306

27,840

29,090

29,377

33,604

30,421

Several major proposals in this function account for the increase of

$11 billion in budget authority and $3.5 billion in outlays. Of the increase in

budget authority, approximately 20 percent occurs because of real growth,

another 20 percent responds to inflation, with the remainder for proposals

for forward funding included in the President's request. Funds are requested

to improve basic educational skills of the disadvantaged, to expand access to

higher education for lower income students, and to help reduce the

immediate financial burden of higher education for middle-income families.

In addition, funds are requested to expand employment and training

programs for youth and to continue 725,000 public service jobs through fiscal

year 1979. Furthermore, the President proposes to redirect employment and

training assistance toward individuals and areas of greatest need.

Ill
Elementary, Secondary, and Vocational Education (Current Law)

1978 Estimates

1977

Actual

1979 Current

Policy/Services

CBO President's CBO President's

Estimate Estimate Estimate Estimate

1979

Request

Budget

Authority

Outlays

6,265

5,078

6,680

5,995

6,686

5,673

7,250

6,574

6,686

6,436

7,368

6,513

In fiscal year 1979, the Administration is requesting an increase in

budget authority of $700 million over the fiscal year 1978 program levels for

elementary, secondary, and vocational education. These additional funds are

for new initiatives that would expand educational opportunities to

disadvantaged and handicapped students.

While the President's current services budget remains essentially

constant over the fiscal year 1978 level, the CBO current policy estimate

shows that an increase of $570 million is needed if the current group of

programs are to keep pace with inflation. Because selective increases over

current services have been requested by the President, some programs are

scheduled to receive real funding increases—such as ESEA Title I, bilingual

education, and Indian education—while others would experience real

decreases in funding—including vocational education, support and innovative

grants, and school libraries.

Since these education programs are forward funded, outlays primarily

reflect funding levels from prior years. The fiscal year 1979 CBO current

policy estimate is comparable to the OMB estimate, since both incorporate a

major downward reestimate in 1978 spending. This change has been

reflected in the President's 1978 figures, but not in the CBO 1978 figures.

Reestimates to be done by CBO in February will incorporate the adjustment.

112
Elementary, Secondary, and Vocational Education (Proposed Legislation)

Actual CBQ president's CBO President's

 Recluest

Estimate Estimate Estimate Estimate

Budget __ __ __ __ __ 1Q76

Authority '

Outlays — — ~ ~ — -30

In addition to the $700 million in additional funds for elementary and

secondary programs under current law, the President has proposed several

pieces of new legislation that would add $1.1 billion to the 1979 budget. A

$400 million increase is proposed for programs under Title I of the

Elementary and Secondary Education Act. These funds would be used to

improve the basic educational skills of disadvantaged children through a

special grant program for districts with high concentrations of children from

low-income families. The outlay impact in fiscal year 1979 is expected to

be only $28 million, because of low first year spendout experience in the

program.

The Administration has also proposed changes in the impact aid

program that would have a net effect of increasing budget authority by $676

million in fiscal year 1979. One proposal would gradually reform the

program beginning in that year. While no details of these reforms have been

specified, a savings in 1979 of $76 million in budget authority and $58

million in outlays is anticipated by the Administration. In addition, $752

million in forward funding for 1980 is requested in 1979.

113
Higher Education (Current Law)

1978 Estimates D

1979

 £urrent

Policy/Services 1979

Actual ' ' Re<^

uest

president's CBO President's

Estimate Estimate Estimate Estimate

Budget

Authority

Outlays

3,765

3,104

4,078

3,511

4,301

3,789

4,589

3,952

4,544

4,286

4,588

4,289

The fiscal year 1978 President's higher education estimate includes a

supplemental request for the Guaranteed Student Loan program of $224

million. These funds would be used primarily to finance interest payments

and special allowances on guaranteed loans. The major impact on outlays

would occur in fiscal year 1979.

The fiscal year 1979 higher education budget request is $287 million

higher than the fiscal year 1978 estimate. The major increase, again, is the

Guaranteed Student Loan program, which accounts for $227 million of this

amount. The basic grants program only provides for increases of $17 million

in budget authority. Obligations, however, are projected to increase by over

$150 million. This increase is the net result of three factors: rising family

incomes, which decrease the number of recipients in the existing programs;

raising the maximum grant to $1,800, and increasing the deduction for assets

to $25,000.

The proposed budget also requests $50 million for reconstruction and

renovation grants to help post-secondary institutions meet the requirements

of Section 504 of the Vocational Rehabilitation Act of 1978, which requires

that architectural barriers for handicapped students be removed.

The President's budget also includes additional funds for higher

education in Allowance for Contingencies to deal with the issue of helping

middle-income families as an alternative to adopting tax credits for college

education expenses. While the proposal and the specific dollar amounts have

not yet been completed, a dollar range between $500 and $700 million has

been indicated by the Administration. Existing programs, new legislation or

a combination of the two might also be used to accomplish this goal.

114
General Education and Research

1978 Estimates

1977

1979 Current

Policy/Services

1979

Actual CBQ President,s CBQ President,s Request

Estimate Estimate Estimate Estimate

Budget

Authority

Outlays

1,078

927

1,195

1,118

1,221

1,164

1,289

1,207

1,251

1,187

1,338

1,247

The President's estimate for fiscal year 1978 includes $16 million for

proposed supplemental, $11 million of which is for the Corporation of

Public Broadcasting. In addition, the Administration proposes to increase

the funds for general education programs by $100 million over the fiscal

year 1978 level. The increases in this request are for the additional salary

and expense monies reflected under current services and increases for the

Library of Congress and the National Foundation for the Arts and

Humanities. There is also an $11 million legislative proposal for special

projects under the Office of Education.

Employment and Training Assistance

1978 Estimates

1977

1979 Current

Policy/Services

1979

Actual

 CBO President's CBO President's

 Rec'uest

Estimate Estimate Estimate Estimate

DUdget

Authority

-l

J

'

Outlays 3,291 5,044 4,852 5,184

3,980 4,853

4,878 5,400

115
Employment and training assistance (ETA) consists of Titles I through

IV of the Comprehensive Employment and Training Act of 1973. ETA also

includes the recently enacted Youth Employment and Demonstration

Projects Act of 1977, which continued the young adult conservation corps

(YACC) and created the youth employment demonstration programs (YEDP),

youth incentive entitlement pilot projects (YIEPP), and youth employment

and training program (YETP).

The Administration's current services estimate for fiscal year 1979

includes only $247 million in outlays for Title II. This reflects a shift to

Title VI of the 125,000 public service employment jobs previously in Title II

(see temporary employment assistance). The CBO current services estimate

included close to $1.1 billion for the 125,000 jobs in Title II. In comparing

CBO and Administration current services estimates, without Title II, the

difference is that the Administration assumes a higher spending level in

youth programs.

The President requests $873 million more in budget authority and

$522 million more in outlays for fiscal year 1979. The increased budget

authority includes $200 million for welfare reform demonstration projects,

$400 million for private sector initiatives, and $273 for youth programs. The

increase in estimated outlays is divided between $250 million for private

sector initiatives, $125 million for welfare reform demonstration projects,

and $273 million for youth programs.

Temporary Employment Assistance

1079 n *• + 1979 Current

1977 1978 Estimates yPolicy/Services

Actual

 CBO President's CBO President's

 Rec*uest

Estimate Estimate Estimate Estimate

Authority

 6'8

*

7

 ~ " 1'

383 5>955 5>955

Outlays 2,340 4,412 4,765 3,599 5,955 5,955

116
Temporary employment assistance (Title VI of the Comprehensive

Employment and Training Act) provides grants to states and localities to

create temporary jobs for primarily long-term unemployed workers. With

the funds provided by the Economic Stimulus Appropriations Act of 1977,

enrollment in Title VI is expected to reach 600,000 before the end of fiscal

year 1978. The Administration proposes to continue the 600,000 public

service job level in fiscal year 1979, and to shift the financing of 125,000

public service jobs from GET A Title II to Title VI. The Administration is not

requesting any new budget authority in 1978 to provide forward funding for

the 1979 program. The second budget resolution for 1978, however, assumed

that $3.8 billion in budget authority would be appropriated to provide such

forward funding.

The CBO current policy estimate for 1979 assumed that Title VI is a

countercyclical program and that the number of jobs financed would phase

out coincidently with improvement in the national economy. The recent rise

in enrollment levels in Title VI, however, suggests that the program is not

likely to respond immediately to a change in the unemployment sitution.

CBO will revise its estimate upwards to account for the lagged response in

the program.

Social Services

1977

1978 Estimates

1979 Current

Policy/Services

1979

Actual CBQ president's CBO President's

 Recluest

Estimate Estimate Estimate Estimate

Budget

Authority

Outlays

2,730

2,551

2,750

2,749

2,519

2,703

2,709

1,709

2,578

2,578

2,863

2,842

Grants for social services consist of the matching federal state grant

program (Title XX), as well as some smaller programs, such as child welfare

and state and local training. In fiscal year 1973, a statutory ceiling of $2.5

billion was placed on the Title XX programs.

117

22-453 O - 78 - !
The major difference between CBO current policy and Administration

current services estimates concerns the 1977 appropriation of $200 million

above the Title XX ceiling for day care services. In estimating budget

authority, CBO assumes that $200 million will continue to be authorized in

fiscal years 1978 and 1979, while the Administration does not. The 1979

request, however, does include the additional $200 million. Also, the

President's request includes $85 million for a new initiative in child welfare

services which was not included in either the CBO current policy estimate or

the President's current services estimate.

Human Development Services

1978 Estimates

1977

1979 Current

Policy/Services

1979

Actual CBO President,s CBO president's

 Re<'uest

Estimate Estimate Estimate Estimate

Budget

Authority

Outlays

1,383

1,379

1,500

1,454

1,546

1,463

1,603

1,565

1,542

1,532

2,913

1,597

NOTE: These figures do not include the Head Start Program, which is

included in subf unction 501, Elementary, Secondary and Vocational

Education.

Human development services include the Administration for Children,

Youth, and Families, the Administration on Aging, and the Administration

for Handicapped Individuals. The current services estimate for these

programs provides for no growth over the 1978 levels. CBO current policy

projects an increase of $103 million in order to maintain the same program

levels that exist in fiscal year 1978. Thus, the President is, in real terms,

recommending a decrease in the on-going human development programs.

There is, however, a large difference between the President's request

and the Administration's current services estimate for budget authority.

This occurs almost entirely because of a proposal for advance funding ($1.3

billion) for fiscal year 1980 for vocational rehabilitation and aging programs.

118
Other Employment and Training Programs in Function 500

1978 Estimates

1977

Actual

1979 Current

Policy/Services

1979

CBO President's CBO President's

 Recluest

Estimate Estimate Estimate Estimate

Budget

Authority

Outlays

2,419

2,315

2,555

2,614

3,089

3,036

2,856

2,870

2,555

2,525

2,649

2,607

The other Department of Labor programs in function 500 are

community services employment for older Americans, grants to states for

unemployment insurance and employment services, and program

administration for employment and training assistance. This category also

includes various salary and expense accounts for the Department of Labor,

and program administration for the social services program.

The President's current services estimate for fiscal year 1979

represents a $547 million decrease from 1978 levels. This amount results

from a lump sum payment made to the states in fiscal year 1978 for

retroactive claims. Thus, net of the $547 million, the current services

estimate indicates no increase in funds over 1978. The CBO current policy

projection indicates that a $301 million increase would be needed to

maintain the same level of real services as in 1978 and, therefore, the OMB

estimate represents a decrease in those services.

The difference of $82 million in outlays between the Administration's

current services estimate for fiscal year 1979 and the President's request

occurs because of $35 million estimated outlays for a proposed employment

opportunities program, and the remainder of $47 million in outlays spread

among salaries and expense accounts in the function.

119
HEALTH (FUNCTION 550)

This function includes programs for health care services, health

research, education and training of health care personnel, and consumer and

occupational health and safety activities administered by the Department of

Health, Education, and Welfare and other agencies. Medicare and medicaid

account for over 80 percent of all health outlays.

Function Totals

1977

1978 Estimates

1979 Current

Policy/Services

1979

Actual

 CBO President's CBO President's

 Request

Estimate Estimate Estimate Estimate

Budget W36g 46 332

Authority ' '

Outlays 38,785 44,422

46,304

44,195

51,213

50,446

52,085

50,306

52,604

49,677

The President's fiscal year 1979 request for this function represents a

14 percent increase in budget authority over the fiscal year 1978 estimate.

Of this $6.3 billion rise over last year, $5.5 billion are for increases in the

medicare and medicaid programs, with the remaining monies spread

throughout the discretionary programs in the function. While outlays are

projected to grow at the same rate, all but $450 million of this amount is for

medicare and medicaid.

Medicare (Current Law)

1978 Estimates

1977

Actual

1979 Current

Policy/Services

CBO President's CBO

Estimate Estimate Estimate Estimate

1979

President's

 Request

Budget 22

Authority "•'*' "^^

Outlays 21,549 25,782

27,481 30,893 31,703 31,703

25,611 30,058 30,039 29,397 a/

a/ Includes the savings attributed to the cost-containment proposal.

120
The medicare program, which includes both the hospital insurance

(HI) and supplementary medical insurance (SMI) trust funds, is projected on a

current services basis to rise in both budget authority and outlays above

fiscal year 1978 levels. HI is expected to increase in budget authority and

outlays by $3.5 and $3.0 billion respectively, while SMI is projected to grow

by $0.8 and $1.4 billion. While increases in HI outlays are principally a

function of a continuing rise in the price of hospital services (15.7 percent

from 1978 to 1979), growth in both the population served and the utilization

also contribute. Fiscal year 1979 SMI outlays are a function of growth in the

price of medical services, in the number of beneficiaries, and in utilization,

although utilization increases are a much more significant factor in SMI than

in HI. Increases in budget authority for SMI are a function of rising outlays

and, for HI, are primarily attributable to the projected growth in payroll tax

receipts. Variance between the CBO current policy estimate of budget

authority for HI and the President's current services figure is a result of

the differences both in the economic assumptions used to calculate receipts

and in the estimate of the impact of the Social Security Amendments of

1977 (Public Law 95-216), which changes the proportion of payroll tax

receipts going to the HI trust fund.

Differences between the President's request for medicare outlay and

the current services level for fiscal year 1979 are attributable to the

hospital cost-containment proposal which was introduced last year. This

proposal and its projected impact will be discussed later.

Medicaid

1978 Estimates

1977

1979 Current

Policy/Services

1979

Actual CBQ president's CBO President's

 Re(iuest

Estimate Estimate Estimate Estimate

Budget 1Q 229

Authority

 W'ZZ*

Outlays 9,713

10,699

10,863

10,699

10,851

11,732

11,732

12,065

12,065

11,952

11,952

The fiscal year 1979 current services estimate for medicaid

represents a $1.2 billion (11 percent) increase over the President's fiscal

year 1978 estimate. Growth in this program is attributable principally to

increases in medical prices, although some marginal growth is assumed in

both the number of beneficiaries and in utilization. Differences between

121
CBO current policy projections for fiscal year 1979 and current services

estimates occur because of assumptions regarding the number of recipients

and utilization. While both assume similar growth in medical prices as they

affect medicaid, CBO projects a decrease of 0.5 percent in recipient totals

and no change in utilization during fiscal year 1979. The CBO assumption

for a decrease in recipients is based both on recent trends and on projections

that both the overall SSI and AFDC caseloads will decline during that period.

Utilization projections are based on the fact that, over the last four years,

real utilization per recipient has remained fairly constant and, if anything,

has declined slightly.

The President's 1979 request for medicaid is $113 million below the

current services level. This decline is the result of a variety of legislative

proposals included in the budget. Among those that would increase costs are

the reintroduction of the child health assessment program (which would cost

a projected $263 million), the inclusion of coverage for all low-income

pregnant women ($118 million), an increase in ceilings and federal matching

for Puerto Rico and other territories ($32 million), and an improvement in

coverage for migrants ($8 million). Offsetting these are the impact of costcontainment on medicaid (-$100 million), improved quality control on

eligibility (-$399 million), and a medicaid/medicare common audit procedure

(-$35 million). While the last two savings proposals are possible under

current law, the Administration intends to offer legislation to both mandate

and clarify these programs. Also, though the Administration projects a

savings of almost $400 million from the quality control program, it is

difficult to see how this level of savings is feasible. A decrease of almost

one million recipients would be required to achieve a $400 million savings

and, given the fact that quality control measures are already in effect for

both the AFDC and SSI programs, similar efforts in medicaid would probably

not lead to a reduction of this magnitude in that program.

Cost-Containment

10-70 c _• * 1979 Current

1977 1978 Estimates Policy/Services

Actual

 CBO President's CBO President's

 Re<^uest

Estimate Estimate Estimate Estimate

Budget

Authority

Outlays - -120 -40 -1,629 - -724

122
The Administration proposed a cost-containment measure in the first

session of this Congress. Under this, a cap on total hospital revenues would

be established. This cap would be based on a formula that would allow for

overall inflation and specific growth in the hospital sector. Savings are

calculated on the basis of the difference between hospital reimbursement

for medicare and medicaid, under current law and with the cap on revenues.

It is difficult to fully account for the large variance between CBO estimates

of the savings and those of the Administration; no documentation was

provided as to how the President's figures were calculated. However,

differences in base year totals for hospital expenditures, projected rates of

growth in hospital costs, overall economic assumptions, and the effect of

exceptions to the cap that is provided for in the proposal would account for

the bulk of these differences.

Other Health Programs

lo-To c „• * 1979 Current

1977 1978 Estimates Policy/Services

Actual

 CBO President's CBO President's

 Re(*uest

Estimate Estimate Estimate Estimate

Budget

Authority

Outlays

7,382

7,513

8,012

7,67*

8,179

7,630

8,473

8,553

8,202

8,099

8,816

8,207

Included in this category are the major HEW discretionary programs

for health services, research, education, and training. In addition, the

Occupational Health and Safety Administration, the Consumer Products

Safety Commission, the Mine Safety and Health Administration, and the

Animal and Plant Health Inspection Services are also included.

There is a $271 million difference between the CBO current policy

estimate for 1979 and that of the President because the CBO estimate is

based on total 1978 budget authority inflated to maintain the same real level

of services, while the President's estimate does not include increases

necessarily tied to inflation and does include cutbacks in some programs.

For example, the National Institute of Health (NIH) budget authority request

in 1979 is 1.4 percent above the 1978 level, and only one program within the

agency—the National Institute of Child Health and Human Developmentshows an increase significantly above normal inflationary pressures. Thus, in

123
real terms, the President's aggregate current services request for NIH has

not kept pace with inflation.

A major cutback in current services occurs in the Health Resources

Administration. A decrease of $202 million in 1979 budget authority is

requested. All of this decrease is in the Health Professions Education and

Nurse Training Fund programs and results from an administration policy to

begin concentrating on the distribution rather than the overall supply of

health care professionals.

The President's 1979 request shows an increased budget authority of

$614 million over the OMB current services estimate. Out of this,

$447 million covers forward funding of programs in the Health Services

Administration.

The net increase for all other new initiatives in the President's

request for 1979 is $167 million. The major new legislative proposal in this

category is the $60 million budget authority proposal for the Adolescent

Health Services, and Pregnancy Prevention Program, which will now be

located in the Office of the Assistant Secretary of Health. It should also be

noted that the Health Statistics and Health Maintenance Organization

programs have been moved to this office. In addition, over $68 million in

new budget authority is requested for a major expansion of existing

programs providing health and related services to adolescents. These

program initiatives are located throughout a number of agencies in HEW and

include increased funding for community health centers, family planning

programs, and health education.

Finally, with the exception of the transfer of the Mine Enforcement

and Safety Administration to the Department of Labor, the request for

programs in the consumer and occupational health area are increased to

maintain the same level of services in real terms.

124
INCOME SECURITY (FUNCTION 600)

This function is the largest in the federal budget; it includes more

than one third of all federal outlays. Within the function, social security is

the largest single program; social security outlays represent almost 65

percent of income security outlays and some 20 percent of the outlays in the

entire federal budget. Other major programs in the function include:

federal employee retirement and disability insurance, unemployment

compensation, aid to families with dependent children, supplemental

security income, food stamps, child nutrition and related programs, and

housing assistance. The President proposes adding a new program to the

function in fiscal year 1979, the crude oil equalization refund.

Function Totals

1978 Estimates p

1979

 ,

C

"

rrent

1977 Policy/Services

Actual

 CBO President's CBO President's

 Rec^uest

Estimate Estimate Estimate Estimate

Authorit

 168

»

566 17V41 180,364 197,778 189,168 190,855

Outlays 137,004 145,514 147,624 160,211 159,181 160,024

Currently, growth in the income security area results primarily from

the automatic adjustment of benefits for inflation. In several of the major

programs, benefit increases are tied by law to increases in the consumer

price index (CPI) or other indexes of consumer prices. Automatic indexing is

currently required in social security, federal employee retirement and

disability insurance, supplemental security income and food stamps.

Benefits in the aid to families with dependent children also rise with prices,

but do so as a result of annual state legislation or state law providing for

indexing. In addition, benefits to new retirees in the social security program

and to recipients of unemployment compensation rise with increases in

wages.

While expenditures also tend to rise with increases in the eligible

populations, this effect is mitigated in fiscal year 1979 by the improved

economic conditions that will actually reduce the number of recipients in

unemployment insurance and other programs where eligibility is sensitive to

economic conditions.

125

22-453 O - 78 - 10
The President is proposing a number of legislative initiatives for

fiscal year 1979 in the income security area. In addition, the President is

proposing a major welfare reform initiative, the program for better jobs and

income. While this proposal would have only a limited impact on the fiscal

year 1979 budget, the budgetary implications are considerably more

important in future years and are discussed in Chapter III of this report.

Social Security Trust Funds (OASDI): Existing Law

1977

1978 Estimates

1979 Current

Policy/Services

1979

Actual

 CBO President's CBO President's

 Rec*uest

Estimate Estimate Estimate Estimate

Authority81'

169 90

»

661

 89,722 102,229 101,515 101,515

Outlays* 85,068 94,769 104,599 105,102 105,102

NOTE: Estimates shown are for the social security trust funds and include

intragovernmental transfers to railroad retirement. The estimates

are consistent with those on page 348 of the President's budget.

The budget for the old age, survivors and disability insurance (OASDI)

trust funds indicates that outlays are expected to continue to exceed

revenues and budget authority through 1979. As a result of the Social

Security Amendments of 1977 (Public Law 95-216), however, the deficit is

expected to be narrowed in 1979 and eliminated in 1980. The newly

legislated increases in tax rates and the tax base will raise budget authority

starting in 1979, while other provisions of the new law will, on balance,

result in lower outlays starting in 1978.

The small divergence (half of one percent) between the CBO and

Administration estimates of outlays in 1979 can be attributed partly to the

lower cost-of-living increase for beneficiaries assumed by CBO at the time

of the estimate, and partly to differences in estimating methodologies. CBO

and Administration estimates of budget authority differ largely because of

varying projections of total wages and salaries in covered employment.

126
Social Security: (OASDI) Proposed legislation

1977

 S ima GS

 Policy/Services

Actual

 CBO President's CBO President's

 Rec*uest

Estimate Estimate Estimate Estimate

Budget . 5

Authority

Outlays — -- -40 — ~ -644

The Administration is proposing legislation that is expected to lead to

a reduction in outlays of $644 million in 1979. Included in this legislation

will be a request to limit the amount going to dependent children who

remain in school past the age of 18 to the amount they could obtain in the

basic educational opportunity grants (BEOGS) program. Another proposal is

to eliminate the minimum benefit for new beneficiaries and to freeze the

minimum benefit for current recipients. (The Social Security Amendments

of 1977, Public Law 95-216, did curb the minimum by freezing the benefit,

but only for new beneficiaries.) This new proposal is estimated to reduce

OASDI outlays by $40 million in 1978 and $254 million in 1979.

Two other legislative proposals would adjust the timing of payments

and reduce outlays. For those who delay in applying for benefits,

retroactive payments would be limited to three months instead of twelve. A

saving of $121 million is estimated, although if the effect were to induce

more prompt filing for benefits, outlays might not fall significantly.

Another provision would move the start of benefits for new retirees to the

month after the month in which eligibility was met (outlay reduction of $138

million).

The small increase in budget authority occurs because of the

additional interest on the proposed savings.

127
Civil Service Retirement and Disability Trust Fund

1978 Estimates

1977

1979 Current

Policy/Services

1979

Actual CBO president's CBO President's

 Recluest

Estimate Estimate Estimate Estimate

Budget . , ^oft 17 O SI 17 £7£ IS 7X0 a/ 1Q 9k9 1Q 7/l9 . ., .. lo.toU ll *i.JJ l/.D/D lo./OU a; 17.Zt^ 17. ifi

Authority ' ' ' ' - '

Outlays 9,564 10,881 10,896 12,125 12,164 12,164

a/ Adjusted by $783 million to remove the effects of the anticipated fiscal

year 1979 payraise.

Outlays for the civil service retirement and disability trust fund are

projected to increase about $1.3 billion over fiscal year 1978. This increase

reflects continued growth in the number of beneficiaries ($1.6 million in

fiscal year 1979) and semi annual increases in benefits which are tied to the

CPI. Budget authority, representing income to the civil service and other

retirement funds, is estimated by the Administration to increase $1.5 billion

over fiscal year 1978. This increase does not include any anticipated

payraise which may occur in fiscal year 1979. Future pay raises increase

both the employer and employee contributions and the amortization

payments to cover the associated increase in fund liability.

The major difference in budget authority estimates in fiscal years

1978 and 1979 is the higher covered payroll assumed by the Administration.

The payraise has been removed from the CBO budget authority estimate for

fiscal year 1979 for comparability to the Administration estimate. The

payraise would add $783 million in budget authority under the CBO

assumptions. Outlay differences are negligible.

The Administration proposes that a commission be established to

examine the interrelationships of civil service and other government and

private pension plans.

128
Unemployment Compensation Subfunction

1978 Estimates

1977

Actual

1979 Current

Policy/Services

CBO President's CBO

Estimate Estimate Estimate Estimate

1979

President's

 Rec*uest

Budget .,„„

Authority

 16'857

Outlays 15,258

14,562

11,492

15,360

12,360

14,541

11,426

17,232

11,821

17,027

11,827

The unemployment compensation subfunction (603) is composed of

two accounts. The unemployment trust fund account (UTF), which finances

the separate state unemployment insurance systems as well as the railroad

unemployment insurance program, and the federal unemployment benefit

account (FUBA), which pays benefits to unemployed federal employees, exservicemen, and other recipients.

Differences between the CBO and Administration estimates for

unemployment compensation occur because of differences in statistical

models used for projections and in economic and demographic assumptions.

The President is proposing legislation to decrease the federal

unemployment tax rate from 0.7 percent to 0.5 percent on January 1, 1979.

This change will reduce revenues to the unemployment trust fund by $600

million in fiscal year 1979. This loss in revenues will mean that the

unemployment trust will not have the funds to repay a $400 million advance

from the general fund that was scheduled for repayment during fiscal year

1979. The net impact of this legislation on fiscal year 1979 budget authority

is -$200 million (-$600 million resulting from the reduced revenues and $400

million resulting from the cancellation of the repayment). Since the

repayment is an intragovernmental transfer, there are no overall outlay

implications of the legislation.

129

1
Supplemental Security Income (SSI): Existing Law

1978 Estimates

1977

1979 Current

Policy/Services

1979

Actual

 CBO President's CBO President's

 Rec*uest

Estimate Estimate Estimate Estimate

Budget

Authority

Outlays

5,895

5,297

5,250

5,689

5,250

5,974

6,069

6,031

5,715

5,555

5,715

5,555

Federal outlays for SSI recipients are increasing primarily because

monthly basic benefit levels increase automatically with changes in the CPI.

The total number of federal SSI recipients has been relatively constant in

recent months.

The increase in SSI outlays in fiscal year 1978 and the decrease shown

in fiscal year 1979 in the Administration's estimates are a result of recent

legislation. Public Law 95-216, passed December 20, 1977, requires that if

the day regularly designated for the delivery of benefit checks falls on a

Saturday, a Sunday, or a legal public holiday, the benefit checks will be

mailed on the first preceding work day. SSI checks are usually mailed on the

first day of the month. Since October 1, 1978, is a Sunday, October 1978

checks will be mailed on Friday, September 29. This means that 13 monthly

payments will be included in fiscal year 1978 totals and only 11 months of

outlays will be included in fiscal year 1979. The CBO estimates did not take

account of this provision in Public Law 95-216.

There are no proposed legislative changes in SSI that influence the

fiscal year 1979 budget; however, the President's welfare reform proposal

would consolidate SSI into the better jobs and income program beginning

July 1, 1981.

130
AFDC and Other Assistance Programs

1977 TM»*TM> P^Ss 1979

Actual

 CBO President's CBO President's

 Rec*uest

Estimate Estimate Estimate Estimate

Authority

 6'306 M86 6'541

 ^ 6'^5 6'

823

 ^ 6'

8

^

6

 ^

Outlays 6,351 6,368 6,711 a/ 6,445 6,823 b/ 6,846 b/

a/ Includes $27 million in Administrative expenses not in the CBO estimates,

b/ Includes $32 million in Administrative expenses not in the CBO estimates.

The President's estimates of AFDC expenditures reflect the

Administration's projection of the caseload, which falls to and remains at

11.0 million recipients in both fiscal years 1978 and 1979 (down from 11.2

million recipients in fiscal year 1977). This contrasts with the CBO

projection of the beneficiaries, which declines to 10.8 million recipients in

fiscal year 1978 and 10.7 million recipients in fiscal year 1979. The lower

level of beneficiaries, along with a somewhat lower average benefit level,

results in a lower estimate of outlays by CBO.

The Administration has legislative proposals for fiscal year 1979 that

have a net cost of $23 million. These include a proposal to improve the

emergency assistance program (cost of $125 million) to help individuals

affected by a national or regional disaster, including an energy emergency

caused by extreme cold or drastic increases in energy prices.

The President's proposals also include a measure to replace the

current method of itemizing work expenses, with a standard work expense

disregard of 15 to 25 percent of gross earnings, the percentage to be chosen

by the states (saving $119 million). This proposal contrasts with one reported

by the Senate Finance Committee in H.R. 7200, which would raise the

standard income disregard from $30 to $60 (for those employed full time)

but would eliminate the work expense disregard, except for a small

allowance for child care expenses (saving $190 million). Other budgetary

proposals by the President include liberalizing AFDC benefits for Guam,

131
Puerto Rico, and the Virgin Islands (cost of $26 million), extending federal

matching for child support enforcement in non-AFDC cases (cost of $12

million), and eliminating incentive payments to states and localities in

interstate collection cases (saving $21 million).

The President's welfare reform proposal would consolidate AFDC into

the better jobs and income program beginning July 1, 1981.

Food Stamp Program

c +• + 1979 Current

1977 Estimates Policy/Services

Actual

 C o President's c President's

 Rec*uest

Estimate Estimate Estimate Estimate

Budget

Authority

Outlays

5,506

5,399

5,619

5,312

5,618

5,655

6,185

6,143

5,779

5,748

5,779

5,748

The President's fiscal year 1979 budget request for the food stamp

program reflects no new legislative initiatives, but does assume

implementation of regulations under the new food stamp law (Public Law 95-

113) during the latter part of fiscal year 1978. The Administration's 1978

outlay estimates appear to assume earlier implementation of the regulations

than does CBO, leading to higher 1978 outlay estimates. Administration

estimates for fiscal year 1979 (which are $395 million lower than those of

CBO) assume an average participation of 18.0 million persons per month,

reflecting a slight increase over the 17.7 million in fiscal year 1978. CBO

estimates for fiscal year 1979 show a lower level of participation,

approximately 16.8 million, but higher average benefits, reflecting increased

food price inflation. The total value of food stamps issued in fiscal year

1979 is estimated by CBO to be approximately $5,726 million, compared to

the Administration's estimate of $5,391 million.

The President's welfare reform proposal would consolidate food

stamps into the better jobs and income program beginning July 1, 1981.

132
Subsidized Housing

1978 Estimates

1977

1979 Current

Policy/Services 1979

Actual CBQ president,s CBQ President,s Request

Estimate Estimate Estimate Estimate

Budget 2g Q34

Authority ^>(J^

Outlays 2,491

31,600

3,122

31,612

3,104

33,922

4,463

24,361

3,595

24,791

3,671

Almost all of the budget authority in this category represents

activity in the Department of Housing and Urban Development's (HUD)

Section 8 and public housing programs. Under the President's proposal, HUD

will have $31.1 billion in budget authority available for use in fiscal year

1979 to subsidize an estimated 400,000 additional units of lower-income

housing. This is about 20,000 units more than HUD is currently estimating

for fiscal year 1978. In addition to the $24.7 billion in new budget authority

requested for these programs in fiscal year 1979, HUD expects to carry over

$6.4 billion in unused 1978 authority. HUD projects the $6.4 billion will not

be needed in fiscal year 1978 because of a shift in activity to programs with

shorter contract terms. The HUD budget program for fiscal year 1979

continues this shift with shorter contract terms and, in addition, assumes no

increase in the per-unit subsidy costs from 1978 to 1979. The CBO current

policy estimate for fiscal year 1979 assumes a longer average contract term

and increasing costs.

The large difference between the President's fiscal year 1979 outlay

estimate and the CBO current policy estimate stems from substantially

different assumptions concerning the program mix of units under subsidy and

the per-unit subsidy cost. The President's budget states that emphasis will

be shifted towards renovation of old buildings rather than the building of

new units. This will result in lower per unit costs than those assumed by

CBO.

133
Operating Subsidies and Other Assisted Housing

1978 Estimates

1977

1979 Current

Policy/Services

1979

Actual

 CBO President's CBO President's

 Re

«

uest

Estimate Estimate Estimate Estimate

Budget

Authority

Outlays

596

467

685

578

685

675

724

658

717

680

803

739

Operating subsidies have long been provided to owner/operators of

public housing projects. These subsidies are intended to cover all

project operating costs. For fiscal year 1979, the President is requesting

$729 million for this program, an increase of $44 million over the 1978

funding level, approximating the CBO current policy estimate. In addition,

the President's 1979 request includes $74 million in budget authority, and

$52 million in outlays for a new program to provide operating subsidies to

HUD-insured projects experiencing financial troubles. This additional

subsidy is expected to reduce mortgage defaults on these projects.

Child Nutrition and Related Programs (Existing Law)

1978 Estimates

1977

1979 Current

Policy/Services

1979

Actual

 CBO President's CBO President's

 Request

Estimate Estimate Estimate Estimate

Budget

Authority

Outlays

3,369

3,129

3,364

3,480

3,395

3,585

3,297

3,627

3,438

3,548

3,681

3,744

The fiscal year 1979 budget request reflects significant changes in

the programs. A $308 million increase in the women, infants, and children

(WIC) program more than doubles the current level. A small portion of this

134
increase results from transferring the supplemental commodity program to

WIC. Exactly what form the WIC expansion will take has not been detailed

at this time.

Child Nutrition (Proposed Legislation)

1978 Estimates Current

1977 Policy/Services

Actual

 CBO President's CBO President's

 Re1uest

Estimate Estimate Estimate Estimate

Budget 2)7

Authority

Outlays — — — -- — -216

The fiscal year 1979 budget request proposes the elimination of the

special milk program in all schools that operate the national school lunch

program. Milk is already a required component in both the lunch and

breakfast programs. This proposal has been made in previous years and has

been rejected before by the Congress. In addition, the Administration

proposes to modify the cost-of-iiving increases for subsidies to children from

non-needy families. Future increases in federal spending will target more on

the needy children and the needy areas.

Fuel Efficiency Tax Refund: Proposed Legislation

10-70 c 4.- * 1979 Current

1977 1978 Estimates Policy/Services

Actual

 CBO President's CBO President's

 Recluest

Estimate Estimate Estimate Estimate

Budget ,,7 . ,„

M j.tT -j. ~~ — ~ ID/ — — - imjjj Authority '

Outlays - - 167 -- - 1,333

135
As part of the Administration's energy legislation, individuals will

receive a refund from the crude oil equalization tax in the form of either

reductions in their federal income tax or direct payments from the Internal

Revenue Service.

Remaining Programs in Function 600

1978 Estimates

1977

1979 Current

Policy/Services

1979

Actual

 CBO President's CBO President's

 Rec^uest

Estimate Estimate Estimate Estimate

Budget ii 354

Authority '

Outlays 3,980

4,261

3,849

4,505

3,935

4,803

4,694

4,346

4,145

4,325

4,155

A number of programs have been grouped into this category. The

largest in dollar terms is railroad retirement. Other programs grouped into

this category include special benefits for disabled coal miners, the judiciary

trust funds, and Cuban refugee assistance.

136
VETERANS' BENEFITS AND SERVICES (FUNCTION 700)

This function provides a variety of benefitsand services to veterans

and their families and survivors. These benefits include compensation to

veterans for service-incurred disabilities and to the survivors of veterans

dying in service, income assistance for needy veterans disabled from causes

not related to military service, education benefits for recently discharged

veterans, medical care for disabled and elderly veterans, and loan

guarantees for veterans wishing to purchase homes. Virtually all veterans'

benefits are administered by the Veterans' Administration.

Function Totals

1977

Actual

1979 Current

Policy/Services

1978 Estimates

CBO President,s CBO

Estimate Estimate Estimate Estimate

1979

Request

Budget 19 Q69

Authority

 1"fUM

Outlays 18,038

19,359

19,3*0

18,836

18,698

20,103

19,915

18,587

18,889

19,07*

19,257

The President's budget proposes increases in 1979 for veterans'

compensation and pensions and for hospital and medical care for veterans.

Reduced funding is proposed for readjustment benefits primarily because of

the decline in the number of eligible veterans. The budget also does not

provide for any further cost-of-living adjustment for readjustment benefits.

The Administration is proposing legislation to obtain reimbursement from

health insurers for treatment of insured veterans for nonservice-connected

disabilities at VA hospitals.

137
Compensation and Pensions

1978 Estimates p

1979

 £urrent

1977 Policy /Services

Actual £BO president's CBO President's

 Recluest

Estimate Estimate Estimate Estimate

Budget

Authority

Outlays

8,983

9,000

9,590

9,536

9,606

9,564

10,001

9,939

9,577

9,586

9,998

9,981

The veterans' compensation and pensions programs, unlike nearly all

other entitlement programs, are not indexed to keep pace with inflation.

Although in recent years cost-of-living increases have been applied to both

of these programs each year, under current law the increases must be

legislated by Congress annually. It should be noted in regard to the above

table, that the CBO current policy estimate assumes annual cost-of-living

legislation, while the President's current services estimate does not. The

cost of the President's legislative proposals is included in the 1979 request

column.

The President is proposing legislation for the compensation program

that would increase rates by 5.8 percent (as of October 1, 1978) and would

extend housebound allowances to recipients of dependency and indemnity

compensation. Legislation is also being proposed for the pension program,

although the details of the proposal have not yet been released. It is

expected that the proposal will be somewhat similar to the pension reform

bills (H.R. 10173 and S. 2384) now under consideration by the House and

Senate Veterans' Affairs Committees. However, it is unlikely that the $111

million included in the budget for pension legislation would be sufficient to

cover a full year's cost of a major restructuring of this program.

138
Readjustment Benefits

1978 Estimates

1977

1979 Current

Policy/Services

1979

Actual

 CBO President's CBO President's

 Request

Estimate Estimate Estimate Estimate

Budget

Authority

Outlays

3,984

3,700

3,231

3,856

2,648

3,102

3,347

3,711

2,119

2,708

2,019

2,608

The number of veterans receiving readjustment benefits is expected

to decline from 1.8 million in fiscal year 1977 to 1.1 to 1.2 million in fiscal

year 1979. The President's budget for 1979 does not provide for any

adjustment for inflation that occurs during 1978. The Administration also

proposes that correspondence and flight training be dropped for an estimated

saving of $100 million in 1979.

The CBO current policy estimate for 1979 assumes that the Congress

will provide a cost-of-living increase of 6.1 percent for readjustment

benefits effective October 1, 1978. The GI Bill Improvements Act of 1977

(Public Law 95-202) enacted last November, provided a 6.6 percent cost-ofliving increase. The CBO 1978 and 1979 cost estimates will be reduced to

reflect recent data on unit costs, but not to the levels estimated by the

Administration because of somewhat higher estimates for the number of

veterans receiving training.

Hospital and Medical Care (Current Law)

1978 Estimates

1977

Actual CBO

Estimate

President,s

Estimate

1979 Current

Policy/Services

CBO

Estimate

president's

Estimate

1979

Request

a *u •* 5,074 5,429 5,451

Authority ' ' '

Outlays 4,708 5,285 5,242

5,580

5,510

5,630

5,684

5,937

5,899

139
The President's fiscal year 1979 outlay estimate for the veterans'

hospital and medical care programs is $657 million above the 1978 level.

This increase is largely composed of a $560 million increase in outlays for

the medical care account, which results primarily from the VA's intention to

increase staff to patient ratios and to open 15 new alcohol and drug abuse

treatment units. There is also an increase in outlays of $103 million for

major projects construction, which will be directed towards construction of

two replacement hospitals, three new nursing care units, and two outpatient

clinics.

Hospital and Medical Care (Proposed Legislation)

1977

Actual CBO President,s CBO p^sident's

 Re1uest

Estimate Estimate Estimate Estimate

Bud§et

 - 142

Authority

Outlay — — — « ~ -142

Several legislative proposals are included in the President's fiscal

year 1979 request which would have a net savings of $142 million. These

proposals include legislation to provide professional mental and

psychological readjustment services for Vietnam Era veterans ($9.9 million),

to require reimbursement to the VA by private insurers for the cost of

medical treatment to veterans for nonservice-connected disabilities (-$120

million), to contract with community agencies for the treatment of drug and

alcohol abuse patients ($2.4 million), to limit travel reimbursement (-$38.5

million), and to extend the Physicians and Dentists Pay Comparability Act

($3.9 million).

140
All Other Veterans' Programs

1977

Actual

2"$** 1,028 Authority

Outlays 630

1978 Estimates

CBO

Estimate

1,109

663

President's

Estimate

1,131

790

1979 Current

Policy/Services

CBO

Estimate

1,175

755

President's

Estimate

1,261

911

1979

Request

1,262

911

The major accounts included in this category are the veterans'

housing assistance and burial benefits programs and the general operating

expenses account. The President proposes no major changes to these

accounts for fiscal years 1978 and 1979.

22-453 O - 78 - 11
ADMINISTRATION OF JUSTICE (FUNCTION 750)

Function 750 includes activities of the Federal Bureau of

Investigation, the Immigration and Naturalization Service, the Drug Enforcement Administration, the Federal Prison System, the Law Enforcement

Assistance Administration, the Customs Service, the Legal Services Administration, the Equal Employment Opportunity Commission and the

Judiciary.

Function Totals

1977

1978 Estimates

1979 Current

Policy/Services

1979

Actual CBO president's CBO President's

 Rec!uest

Estimate Estimate Estimate Estimate

Budget

Authority

Outlays

3,601

3,600

3,738

3,8*5

3,768

3,896

4,015

4,035

3,884

4,056

4,144

4,211

The President's 1979 budget request is based on a redirection of

resources in law enforcement efforts, immigration administration, federal

correctional activities, and an increase in the effectiveness of the Equal

Employment Opportunity Commission and the Office of Civil Rights in the

Department of Health, Education and Welfare (HEW). The budget request

for fiscal year 1979 represents al l percent increase in budget authority

over the fiscal year 1978 appropriation. The request is 3 percent more than

the CBO current policy estimate for fiscal year 1979, and would therefore

slightly increase the real resources devoted to this area. The major

increases are made in the areas of civil rights, legal services, and federal

correctional facilities. New major program initiatives in these agencies

include increased law enforcement directed towards organized crime,

increased enforcement of immigration laws, reorganization of the Equal

Employment Opportunity Commission, and the construction and increased

use of minimum security federal prison facilities.

142
Federal Law Enforcement and Prosecution

1978 Estimates

1977

1979 Current

Policy/Services

1979

Actual CBQ President,s CBO president's

 Re<*uest

Estimate Estimate Estimate Estimate

Budget

Authority

Outlays

1,685

1,673

1,787

1,788

1,827

1,831

1,919

1,917

1,898

1,899

2,015

2,011

The President's 1979 budget request for law enforcement and

prosecution activities is $190 million above his estimate for fiscal year

1978~an increase of over 10 percent. The amount requested exceeds the

CBO current policy estimate by $96 million, with the largest differences

proposed for the Immigration and Naturalization Service ($12 million), the

Customs Service ($19 million), the Equal Employment Opportunity Commission ($28 million), and the Office of Civil Rights in HEW ($36 million). The

increases for the Immigration and Naturalization Service and the Customs

Service combined are to be directed toward improved enforcement at the

border and points of entry, increased enforcement of immigration laws, and

the fulfillment of the President's major policy initiatives directed at

undocumented aliens. The growth in budget authority for the Equal

Employment Opportunity Commission and the Office of Civil Rights reflects

the extensive reorganization aimed at more efficient processing of discrimination charges and increased investigation to correct discriminatory

patterns. Part of this request is to sustain the growth in activities of both

agencies that may be generated if anticipated supplemental appropriations

of $40 million are granted in fiscal year 1978. Reductions in this area

include a proposed decrease in FBI personnel and resources directed toward

domestic intelligence, military deserters, and other areas in which state and

local governments have developed enforcement capabilities. As a result, the

requested appropriation for the FBI is only $556 million—5 percent above the

fiscal year 1978 appropriation.

143
Federal Litigation and Judicial Activities

1978 Estimates

1977

Actual

1979 Current

Policy/Services

CBO President's CBO

Estimate Estimate Estimate Estimate

1979

President's

 Rec^uest

Budget

Authority

Outlays

863

842

1,002

997

1,004

942

1,077

1,071

1,042

1,042

1,133

1,118

This subfunction includes all judicial activities and federal litigation,

both civil and criminal, of the Department of Justice. The President is

proposing an increase of $131 million in funding for these activities, 13

percent above the fiscal year 1978 level and 5 percent above the CBO

current policy estimate. The major increase above current policy in this

area is for the Legal Services Corporation. With a $255 million request for

fiscal year 1979, this represents a 15 percent increase in real resources for

legal services over the CBO current policy level. Further details on the

implications of such increases in legal services for the nation are discussed

in a recent CBO publication. Jf

5/ Congressional Budget Office, The Legal Services Corporation,

Budgetary Issues and Alternative Federal Approaches, July 1977.

144
Law Enforcement Assistance

1978 Estimates D^

79

 £urrent

1977 Policy/Services

Actual

 CBO President's CBO President's

 Rec*uest

Estimate Estimate Estimate Estimate

l->l4UgV.I. 759

Authority

Outlays 848

657

769

657

815

703

751

659

819

651

717

For fiscal year 1979, the President's request of $641 million reflects a

slight drop in resources for the Law Enforcement Assistance Administration

(LEAA) compared with the fiscal year 1978 level of $646 million.

Nevertheless, because there are substantial unobligated balances available in

1978, the proposed funding level for 1979 represents a substantial decline in

program activity. The President projects total obligations of $642 million by

LEAA In fiscal year 1979, compared to $812 million in 1978.

Other Administration of Justice

1978 Estimates -

1

?.79 £urrent

1977 Policy/Services

Actual

 CBO President's CBO President's

 Rec

»

uest

Estimate Estimate Estimate Estimate

Budget

Authority

Outlays

295

237

292

291

280

308

310

296

285

296

345

365

This category includes the administration and construction of federal

correctional facilities and activities, and the general offsetting receipts for

function 750. The $315 million request in budget authority in fiscal year

145
1979 for federal prison activities represents a 21 percent increase over

fiscal year 1978 budget authority and a 13 percent increase over the CBO

current policy level for fiscal year 1979. A large part of this increase will

be directed toward relief of overcrowding of prison facilities by opening

several new minimum security facilities and shifting some prisoners from

maximum or medium security facilities to more relaxed environments.

146
GENERAL GOVERNMENT (FUNCTION 800)

The programs in this function are designed to carry out the

administrative responsibilities of the federal government through the

Legislative Branch, the White House, and the Executive Office of the

President. The collection of revenues, management of federal property,

oversight of civilian personnel, and the administration of certain trust

territories are also included in this function.

Function Totals

1977

1978 Estimates

1979 Current

Policy/Services

1979

Actual CBQ President's CBO President's

 Re<?uest

Estimate Estimate Estimate Estimate

Budget

Authority

Outlays

3,761

3,265

3,518

3,688

3,645

3,717

3,877

3,903

3,992

3,991

4,170

4,113

The President's request of $4.2 billion for fiscal year 1979 is $652

million, or 19 percent, above the current appropriation for fiscal year 1978,

and $293 million, or 8 percent, above the CBO current policy estimate for

fiscal year 1979. The major increases occur in the Legislative Branch ($109

million), the Internal Revenue Service ($211 million), and other Treasury

Department central fiscal operations ($145 million).

147
Legislative Branch

1978 Estimates p1?

79

1977 Policy/Services

Actual

 CBO President's CBO President's

 Rec>uest

Estimate Estimate Estimate Estimate

Budget

Authority

Outlays 841

832

913

869

862

893

960

913

914

941

941

The President's fiscal year 1979 request is $109 million, or 13

percent, over the current CBO estimate for fiscal year 1978. One of the

major reasons for this growth is the President's request for a 22 percent

increase ($23 million) in Senate salaries over the fiscal year 1978

appropriation, and a 28 percent ($16 million) increase in budget authority for

joint items. For fiscal year 1979, the President has estimated that outlays

for the Congressional printing and binding account will decrease from the

estimated 1978 level of $61 million to $39 million, even though an increase

of 3 percent has been requested for budget authority. The CBO current

policy projections assumed that outlays for this activity would increase.

For fiscal year 1978, the President is requesting a supplemental of

$33 million for the construction of an extension to the new Senate office

building. No outlays from this supplemental have been included by the

President in either fiscal year 1978 or fiscal year 1979. The CBO estimates

do not include any new budget authority for this account, in either fiscal

year.

148
Internal Revenue Service

1978 Estimates

1977

1979 Current

Policy/Services

1979

Actual CBQ president's CBO President's

 Rec*uest

Estimate Estimate Estimate Estimate

Budget

Authority

Outlays

1,758

1,741

1,809

1,813

1,848

1,846

1,944

1,922

1,922

1,920

2,020

2,012

Two accounts of the Internal Revenue Service have been included in

this group—the accounts, collection and taxpayer service, and the compliance activities. The President has requested a $15 million supplemental in

fiscal year 1978 for such things as modernizing the IRS computer system,

and additional appropriations of $21 million for 1978 and $29 million for

1979 to administer and carry out the tax provisions contained in the

President's energy legislation. (The CBO estimates do not include any

additional funds for these purposes.) The proposed fiscal year 1979 funding

level for these two accounts, excluding the proposed supplemental, is $182

million above the fiscal year 1978 level—an increase of 10 percent. This

represents an increase of 3 percent over the CBO current policy estimate

for fiscal year 1979.

Other Central Fiscal Operations

1978 Estimates

1977

Actual

1979 Current

Policy/Services

CBO President's CBO

Estimate Estimate Estimate Estimate

1979

President's

 Rec*uest

Budget

205 Authority

Outlays 189

213

214

261

263

230

221

351

348

358

355

149
The President has requested supplemental totalling $29 million in

fiscal year 1978 for two Department of Treasury accounts to compensate

banks for maintaining tax and loan accounts and issuing and redeeming

savings bonds. The Administration's 1979 request reflects a continuation of

this compensation program at a funding level of $86 million. The CBO

estimates for both fiscal years 1978 and 1979 for these accounts do not

include this provision because no money has yet been appropriated for this

purpose. One other major difference between CBO and the President is in

the offsetting receipts for central fiscal operations. The Administration is

currently estimating that receipts from charges for administrative expenses

of the Social Security Act will be $165 million in fiscal year 1978 ($21

million lower than the CBO estimate), and that the receipts will decrease

even further, to $141 million, in fiscal year 1979. This represents a 24

percent decrease from the CBO current level estimates for fiscal year 1978,

and a decrease of 15 percent from the President's estimate for that year.

Other General Government

1978 Estimates

1977

Actual

1979 Current

Policy/Services

CBO President's CBO

Estimate Estimate Estimate Estimate

1979

President's

 Recluest

Budget

Authority

 7Z/

Outlays 494

664

748

667

746

810

800

806

809

851

805

This grouping represents the central personnel management, executive direction and management, and other administrative activities of the

federal government. The President has proposed the establishment of an

Office of Administration within the Executive Office of the President, and

is requesting $4 million in fiscal year 1978 and $7 million in fiscal year 1979

for this purpose. One of the major reasons for the $184 million, or 28

percent, increase in the President's 1979 request from the fiscal year 1978

level is the change in budget authority for the federal buildings fund from a

-$75 million in 1978 (a rescission of existing budget authority) to zero in

1979. As they did in the fiscal year 1978 budget, the administration has

again requested $23 million for a new Government Printing Office building;

150
CBO has not included any funds for this purpose in its estimates either in

1978 or 1979. The President's request for 1979 also includes a 16 percent

($22 million) increase in funds for the administration of territories and the

Trust Territory of the Pacific Islands. The only other significant change in

this function is in the estimate of mineral receipts which go into the Alaska

native fund. OMB has estimated that receipts will decline in fiscal year

1979, from $94 million to $87 million. The CBO estimate assumed that

these receipts would increase to $115 million in fiscal year 1979.

151
GENERAL PURPOSE FISCAL ASSISTANCE (FUNCTION 850)

This function includes the general revenue sharing programs, antirecession financial assistance, payments in lieu of taxes, broad-purpose

shared revenues, and payments and loans to the District of Columbia. The

general revenue sharing and antirecession financial assistance programs

account for approximately 85 percent of the outlays.

Function Totals

1978 Estimates

1977

1979 Current

Policy/Services

1979

Actual

Budget 9 - 2

Authority '

Outlays 9,499

CBO

Estimate

9,596

9,737

President's

Estimate

9,691

9,860

CBO

Estimate

9,336

9,391

President's

Estimate

9,493

9,492

Request

16,632

9,636

Almost all of the increase in budget authority from 1979 current

services to 1979 budget request is attributable to the President's proposed

legislation for a taxable municipal bond option. The other proposed

legislation is mineral impact loan assistance.

General Revenue Sharing Trust Fund

1977

Actual

Budget , ,„

Authority

 6'655

Outlays 6,760

1978 Estimates

CBO

Estimate

6,855

6,814

President's

Estimate

6,855

6,827

1979 Current

Policy/Services

CBO

Estimate

6,855

6,862

President's

Estimate

6,855

6,852

1979

Request

6,855

6,852

152
President Carter recommends full funding of the general revenue

sharing program, which was extended in 1976 through fiscal year 1980. The

authorization level is $6.855 billion in fiscal years 1978 through 1980.

Anti-recession Financial Assistance Fund

1978 Estimates

1977

1979 Current

Policy/Services

1979

Actual

 CBO President's CBO President's

 Re^uest

Estimate Estimate Estimate Estimate

Budget

Authority

Outlays

1,570

1,699

MOO

1,550

1,400

1,573

1,040

1,040

1,040

1,050

1,040

1,050

This program makes funds available to state and local governments

experiencing high levels of unemployment. Funding levels are determined on

a quarterly basis automatically, using a formula tied to the national rate of

unemployment. Authorization for the current program expires at the end of

fiscal year 1978.

The budget includes a request for fiscal year 1979 of $1,040 million in

budget authority and $1,050 million in outlays for this program. While the

Administration notes that it has left room in the budget for an extension of

the program, it indicates that the program is still under review and that a

decision concerning its future has not yet been made.

It should be noted that the President's request for fiscal year 1979 is

substantially higher than the $740 million that would be required if the

program is extended without change and if unemployment rates were to

follow the assumptions made in the President's budget. The following table

shows estimates of outlays by quarter using the Administration's projection

of unemployment rates. (The CBO current services estimate of 1979 outlays

was 1,040 million based on assumed unemployment rates of 6.6, 6.5, 6.4 and

6.3 in the relevant quarters.)

153
Fiscal Year

Quarter

78:1

78:2

78:3

78:4

79:1

79:2

79:3

79:*

80:1

"80:2

Relevant

Calendar Year

Quarter

77:2

77:3

77:4

78:1

78:2

78:3

78:4

79:1

79:2

79:3

Relevant

Calendar Quarter

Unemployment

Statistics (percent)

7.1

6.9

6.6

6.4

6.3

6.3

6.2

6.0

6.0

5.9

Quarter Costs

(in millions)

455

395

305

245

215

215

185

125

125

— — —

Amajor consideration in evaluating this program is the ability of the

program to meet its objectives. In a recent General Accounting Office

(GAO) study, there was a challenge made to the program's effectiveness in

stimulating the economy. 6/ By using the absolute levels of unemployment

rather than the changes in unemployment rates, the distribution of the

allocations is oriented to those states and localities affected by a long-term

decline rather than a recession. If the intent of the program is to provide

assistance for areas experiencing long-term economic problems, then,

according to the GAO study, the program should be designed more

specifically to solve those problems in order to be more effective.

Taxable Municipal Bond Option

President Carter proposes legislation that provide state and local

governments with the option of issuing taxable rather than tax-exempt

bonds. According to the Administration, the proposed legislation is designed

to lower the state and local government's costs of borrowing by reducing the

supply of tax-exempt bonds (and consequently lowering their interest rates),

and will supposedly make it easier for municipalities to finance their

activities. This latter effect occurs because tax exempt organizations such

6/ General Accounting Office, Anti-recession Assistance—An Evaluation,

PAD 78-20, November 29, 1977.

154
as pension funds or foundations currently do not invest in tax exempt

municipal securities because their low interest rates might be interested in

taxable bonds bearing higher rates.

If this proposal is enacted, the Treasury would provide a subsidy

payment of 35 percent of the net interest cost for bonds issued on a taxable

basis in fiscal year 1979 and 1980, and 40 percent for the years after that.

Budget authority of $7.1 billion is requested in fiscal year 1979 in support of

this proposal. This represents the total obligations of the federal

government to pay interest subsidies over the life of the municipal bond.

For this estimate, the Administration assumed that $5.5 billion in short-term

taxable bonds and $8.8 billion in long term taxable bonds would be issued in

fiscal year 1979. Short-term bonds were assumed to have an average life of

10 years and an interest rate of 7.2 percent. The life of long-term bonds

was assumed to be 22 years at an interest rate of 8.4 percent.

The Administration estimates outlays in fiscal year 1979 at $99

million. The outlays represent less than a full year's cost for two reasons.

First, it was assumed that bonds will be issued continuously throughout the

year and therefore on average would not accrue a full year's worth of

interest. Second, it was assumed that the interest payments would be on a

semiannual basis.

It is expected that the federal government will incur a net loss if this

proposal is enacted, since the subsidy will exceed the anticipated increase in

revenues. For fiscal year 1979, estimated outlays are $99 million, while the

estimated increase in unified budget receipts is $23 million. By fiscal year

1983, the estimated outlays grow to $2.2 billion and the increase in receipts

is $1.5 billion. A possible hidden cost in this proposal may result if taxable

municipal bonds become competitive with corporate and Treasury securities.

This may exert upward pressure on interest rates and increase the cost of

Treasury borrowing.

The Administration assumes that if the proposed legislation is passed,

40 percent of municipal bonds issued in 1979 would be taxable in fiscal year

1979. The percentage is assumed to rise to 50 percent in fiscal year 1980

and then gradually decline to 25 percent. The assumed percentages may be

overly optimistic. In fiscal year 1979, it is unlikely that the market will

respond fast enough to the new option of taxable municipal bonds. In

addition, it is unlikely that the interest rates assumed by the Administration

are high enough to convince as many investors to enter the taxable

municipal market as assumed. As a result, given the assumptions about

timing and interest rates used by the Administration, budget authority and

outlays for fiscal years 1979-1983 are probably overestimated. On the other

155
hand, if the Administration were to try to achieve the market percentages

discussed above, interest rates would probably have to be higher than

assumed and costs would probably rise above the official estimate.

Mineral Impact Loan Assistance

The proposed legislation provides loans for states who face major

demands for public facilities and services such as schools and hospitals

because of mineral development on federal lands. The loans are designed to

assist states in advance of increasing local tax rates, or before distribution

of mineral receipts that are designed to offset some of the costs of the new

facilities. The interest rate assumed for the loans would be the current

Treasury rate. The request for budget authority and outlays for fiscal year

1979 is $40 million.

Other General Purpose Fiscal Assistance

1977

Actual

1978 Estimates

1979 Current

Policy/Services

CBO President's CBO President's

Estimate Estimate Estimate Estimate

1979

Request

Budget

Authority

Outlays

1,049

1,043

1,341

1,373

1,437

1,461

1,441

1,490

1,59S

1,589

1,603

1,593

Approximately $88 million of the proposed increase in funding from

the President's 1978 estimate to the 1979 budget request for general purpose

fiscal assistance is for the District of Columbia. (It should be noted that the

President's budget transfers loans for capital outlays and loans for the

stadium sinking fund and related offsetting receipts for the District of

Columbia from function 450 to function 850.) There is also an increase in

"the Forest Service permanent appropriations because of an increase in

timber sales, increased payments for the construction of forest roads, and

the effect of new legislation concerning sale area betterment payments.

The current policy estimates are probably too low because the assumed level

of timber sales is too low.

156
The remainder of the increase in other general purpose fiscal assistance is distributed between the accounts that make payments to states or

territories based on receipts and taxes collected from activities in those

jurisdictions.

The New York City seasonal financing loan authority is scheduled to

expire June 30, 1978. Under this program, short-term loans of up to $2.3

billion are provided to the city to ease cash flow problems stemming from

the mismatch in timing between revenue collections and expenditure

obligations within a year. A major issue to be decided is whether additional

federal assistance is required to meet New York City's credit needs after

1978, thereby avert another fiscal crisis. The budget does not include any

provision for an extension of federal assistance, but the President has

indicated that the situation is being monitored closely, and that new

legislation may yet be proposed. Among the alternatives the Congress will

be asked to consider are an extension of the seasonal loan program, and

provision of federal guarantees of long-term borrowing by, or on behalf of,

New York City. It should be noted that an extension of this program would

essentially have no budget impact since loans are repaid in the same year

that they are made.

157

22-453 O - 78 - 12
INTEREST (FUNCTION 900)

The interest function has two major components: interest on the

public debt and other interest. Interest on the public debt is the cost of

borrowing to finance the public debt. Other interest is composed mostly of

offsetting receipts that reflect on- and off-budget agency interest payments

to the Treasury for loans outstanding.

Function Totals

1977

1978 Estimates

1979 Current

Policy/Services

1979

Actual CBO president's CBO President's

 Re<luest

Estimate Estimate Estimate Estimate

Budget 3g Q92

Authority

 3S'°yZ

Outlays 38,092

42,384

42,385

43,841

43,841

46,772

46,772

48,691

48,691

48,991

48,991

In fiscal year 1977, budget authority and outlays for the interest

function were $38.1 billion. Estimates by the President and CBO for fiscal

years 1978 and 1979 differ, mainly because of diverging estimates of

interest on publicly-held debt. In fiscal year 1978 the CBO estimate is $1.5

billion lower than the President's. In fiscal year 1979 the difference widens

to $2.2 billion.

Interest on the Public Debt

1978 Estimates

1977

1979 Current

Policy/Services

1979

Actual CBO president's CBO President's

 Rec*uest

Estimate Estimate Estimate Estimate

Outlays 41,900 47,400

48,600 52,100

48,600 52,100

55,100 55,400

55,100 55,400

158
Interest on the public debt is composed of interest payments to

federal agencies (such as trust funds) as well as to the public. Debt held by

federal agencies is in the form of special issues, and approximately 95

percent of the interest on special issues is transferred to government trust

funds; these payments have historically been offset in function 950. CBO

and OMB estimates for interest on special issues are virtually identical.

However, the estimates of the interest on publicly-held debt are not as close

and account for the difference in the estimates of interest on the public

debt. The estimates for interest on publicly-held debt vary mainly because

of different assumptions in the amount that publicly-held debt will increase.

OMB estimates that publicly-held debt will increase in fiscal year 1978 by

$71.7 billion while CBO assumes that it will increase $52.9 billion. The

smaller deficit assumed by CBO for fiscal year 1978 largely accounts for the

differences in the amount of publicly held debt. The CBO estimate of

interest on publicly-held debt was within $3 million of the actual total as

reported by the Monthly Treasury Statement for December 1977. 7J Both

CBO and OMB appear to have overestimated first quarter spending for

interest on special issues. If the CBO estimate appears to be too high,

however, the budget impact will be negligible, since lower outlays in

function 900 will be offset by lower offsetting receipts in function 950. This

is not necessarily true of the President's estimates because the anticipated

interest received by trust funds in function 950 does not appear to be

consistent with the estimate for interest on special issues. This is discussed

further in the section on function 950.

Other Interest

la-re c 4.- * 1979 Current

1978 Estimates D ,. ,c

.g77 Policy/Services

1979

Actual CBO president's CBO President's

 Recluest

Estimate Estimate Estimate Estimate

uuugci - or\o

Authority ~ '

Outlays -3,808

-5,016

-5,015

-4,759

-4,759

-5,328

-5,328

-6,409

-6,409

-6,409

-6,409

7/ For a discussion of the CBO model for interest on the public debt, see

Congressional Budget Office, Estimating Outlays for Interest on the

Public Debt, Technical Analysis Paper, October 1977.

159
For other interest, the CBO estimate reflects a rate of change in

fiscal year 1978 comparable to that incurred in fiscal year 1977. By

historical standards the President's offsetting receipts estimates for fiscal

year 1978 appear to be too low. On the other hand, the CBO receipts

estimates for fiscal year 1979 appear to be too low.

160
ALLOWANCES (FUNCTION 920)

Civilian Agency Payraises

1978 Estimates

1977

1979 Current

Policy/Services

1979

Actual

 CBO President's CBO President's

 Re<*uest

Estimate Estimate Estimate Estimate

Budget

Authority

Outlays

1,131

1,224

1,153

1,1*1

1,256

1,359

1,197

1,1*5

1,150

1,100

The President's current services estimate for fiscal year 1979

assumes a 6 percent average increase for civilian agency payraises. The

Administration supports legislation pending before the Congress to change

statutory features of the federal wage system (FWS) that cause departures

from the basic prevailing rate principle and result in wage board employees

earning more than their private sector counterparts. The Carter budget

request assumes enactment of the legislation, which is estimated to save $*5

million from the fiscal year 1979 wage board payroll. The variance between

CBO estimates and Administration estimates in fiscal year 1979 occurs

because of differences in assumptions about the size of the federal payroll

and anticipated payraises (CBO assumes a 7.3 percent payraise in fiscal year

1979). The difference in fiscal year 1978 primarily represents the absorption

assumed by the Administration and not assumed by CBO.

The federal personnel management project has recommended

legislative changes to split the general schedule into two parts. The new

clerical/technical service would require salaries to be determined on a local

basis. In addition, the Civil Service Commission is considering extending the

comparability base to include fringe benefits. No budgetary impact was

recommended for fiscal year 1979 for either project.

Contingencies

President Carter's fiscal year 1979 request for contingencies for

other requirements is $3 billion in budget authority and $1.7 billion in

outlays. This request is higher than last year's budget request of $1.75

billion in budget authority and $1.5 billion in outlays. The allowance for

contingencies was specified as containing funds to provide aid to students in

middle-income families. It could also be used for potential future

initiatives, such as programs for urban areas.

161
UNDISTRIBUTED OFFSETTING RECEIPTS (FUNCTION 950)

This function is composed of intragovernmental and proprietary

receipts that cannot be reasonably assigned to any other single function.

Intragovernmental receipts are payments from one part of the government

to another; proprietary receipts come from the public. The following table

shows estimates for the three major programs in this function. Budget

authority and outlays are identical for all three.

Function Totals

1978 Estimates D

1979

 /

C

_

urrent

1977 Policy/Services

Actual CBO president's CBO President's

 Recluest

Estimate Estimate Estimate Estimate

Employer Share, Employee Retirement

_4}548 -4,836 -5,024 -5,257 -5,157 -5,157

Interest Received by Trust Funds

-8,131 -9,100 -8,595 -10,000 -9,060 -9,064

OCS Rents and Royalties

-2,374 -3,400 -2,000 -3,100 -1,800 -1,800

Function Totals

-15,053 -17,336 -15,619 -18,357 -16,017 -16,021

Employer Share, Employee Retirement

This program consists of government contributions to federal

employee retirement plans, (Civil Service, social security, and so forth).

Program growth in fiscal year 1978 is the result of federal payraises and the

increased contribution rate for the federal government contribution to social

162
security (5.85 percent in fiscal year 1977 compared to 6.05 percent in fiscal

year 1978). Any net change in federal employment will also affect the

estimates. The Administration estimate for fiscal year 1978 is probably

more accurate than the CBO estimate, having been produced when

information on fiscal year 1977 actuals was available. For fiscal year 1979

the Administration's estimate of receipts is too low by $100-$200 million

because it does not reflect the effects of expected fiscal year 1979

payraises.

Interest Received by Trust Funds

This program represents the income the trust funds earn on their

investments in public debt securities. Historically, approximately 95

percent of the interest on special issues is paid to trust funds (see function

900). The CBO estimate of interest received by trust funds is consistent

with its estimate of interest on special issues; that is, interest received by

trust funds is 95 percent of the interest on special issues. As indicated in

function 900, the CBO and OMB estimates for interest on special issues are

virtually identical ($9.6 billion). If the historical relationship were used, the

Administration's estimate of interest received by trust funds would be -$9.1

billion, the same as CBO's. However, their estimate is -$8.6 billion. This

inconsistency apparently occurs because the agencies calculate interest

received by trust funds for the Administration, and the agencies do not take

into account OMB's estimate of interest on special issues.

OCS Rents and Royalties

Rents and royalties on the Outer Continental Shelf (OCS) are derived

from the sale of leases of OCS lands and the royalties from mineral

production of OCS. The Department of the Interior has scheduled four sales

in fiscal year 1978, and five sales in fiscal year 1979. Scheduled sales have

often been delayed, however, because of litigation, administrative problems,

and procedural delays. The Administration accounts for this by weighting

the value of the sale by a probability that the sale will be held. CBO

assumes that some sales will be delayed past the fiscal year, and does not

include the values of these sales in its estimate. It does include the total

value of the sales still assumed occurring within the fiscal year. In addition,

the Administration uses an historical average receipt per acre to determine

receipts until specific information about the sale is available. (Generally,

the specific information is only available shortly before the sale.) CBO

projects each sale individually, based on the available information at the

163
time. Factors considered in the estimate include such things as potential

reserves, future prices, costs of production, and the time required in

production. The characteristics of each sale can vary considerably. Because

of the uncertainty surrounding the schedule and the value of lease sales,

these estimates are highly speculative.

It was projected in August 1977 that, if the Outer Continental Shelf

Lands Act Amendments of 1977 (H.R. 1614 and S.9) were enacted at that

time, the CBO estimate would change by $375 million in fiscal year 1978 (to

-$2.8 billion). Because of delay in passage, however, this estimate is subject

to change.
CHAPTER V. THE BUDGET OUTLOOK FOR 1980-1983

The goals that the President and the Congress may wish to pursue

through the budgetary process cannot be achieved in a single year. Changing

the scope and direction of government programs or eliminating the budget

deficit can be accomplished only gradually. The federal budget is so large,

and its momentum so immense, that there is very little the President or the

Congress can do to make the budget next year look much different from that

of this year. Over a longer time period, however, significant changes can be

made in the size and composition of the federal budget.

To achieve better control over the direction of the federal budget and

to improve the government's ability to make major changes in the allocation

of resources, the President has directed the Office of Management and

Budget (OMB) to establish a multiyear budget planning system. Beginning

with the fiscal year 1980 budget, agencies will prepare their budget requests

within a three-year planning period. The budget year amounts included in

the President's 1979 budget and the detailed long-range projections for 1980

to 1983 summarized in the budget will be the starting point for the

Administration's multiyear budget process.

The Congressional Budget Office (CBO), in a February 1977 report to

the Congress on advance budgeting, advocated that the Congress move to a

multiyear basis for setting budget targets. J_/ Since then, CBO has been

working with the Budget Committees to help devise a means for formulating

budget resolutions on a multiyear basis. A possible starting point for the

Budget Committees is the five-year budget projections prepared each year

by CBO shortly after the start of the fiscal year. 2/

This chapter discusses the longer-run budget outlook for 1980 to 1983,

based on the current spending policies assumed in the Second Concurrent

Resolution on the Budget for Fiscal Year 1978 and on the President's budget

proposals for fiscal year 1979. The basis for the discussion will be the

\J Congressional Budget Office, Advance Budgeting; A Report to the

Congress, February 14, 1977.

21 See, for example, Congressional Budget Office, Five-Year Budget

Projections; Fiscal Years 1979-1983, December 1977.

165
recent CBO budget projections for 1979-1983 and the OMB budget

projections for 1980-1983 contained in the 1979 budget.

ECONOMIC ASSUMPTIONS

Inflation, unemployment, and other levels of economic activity

have major effects on federal revenues and outlays. In order to develop

budget projections, therefore, explicit assumptions must be made about

economic trends over the next several years. Table 21 shows the major

economic assumptions underlying both the CBO current policy projections of

the second budget resolution for 1978 and the OMB projections of the

President's budget proposals for fiscal year 1979.

TABLE 21. MAJOR ECONOMIC ASSUMPTIONS FOR BUDGET

PROJECTIONS: BY CALENDAR YEARS

1979 1980 1981 1982 1983

Gross National Product (GNP)

Current dollar GNP

(in billions of dollars)

CBO projections 2,334 2,582 2,854 3,156 3,465

OMB projections 2,335 2,587 2,858 3,133 3,400

Real GNP (in billions

of 1972 dollars)

CBO projections 1,468 1,538 1,612 1,688 1,751

OMB projections 1,467 1,537 1,614 1,690 1,761

Growth rate of real GNP

CBO projections 4.7 4.8 4.8 4.7 3.7

OMB projections 4.8 4.8 5.0 4.7 4.2

Unemployment Rate (percent)

CBO projections 6.2 5.7 5.2 4.7 4.5

OMB projections 5.9 5.4 5.0 4.5 4.1

Consumer Price Index

(percent change)

CBO projections 6.0 5.7 5.5 5.7 5.9

OMB projections 6.1 5.7 5.2 4.7 4.2

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The CBO and OMB budget projections are based on very similar

assumptions about the rate of real growth of the economy over the next

several years. Under both projections, the unemployment rate is expected

to decline, although the OMB projections assume the decline will be greater

than do the CBO projections. The rate of inflation under the CBO

projections would remain at or close to 6 percent throughout the five-year

period, whereas the OMB projections assume that the rate of inflation will

fall to 4 percent by the end of 1983. The President's 1979 budget recognizes

that the OMB assumptions about a decline in both the unemployment rate

and the rate of inflation may not be realistic. The budget document notes

that the 1983 unemployment target of 4 percent, while desirable, will be

particularly difficult to reach simultaneously with the achievement of a

lower rate of inflation. 3/

The economic assumptions for 1980 through 1983 should not be

construed as forecasts of how the economy is likely to behave. Rather, they

should be viewed as two of many possible long-run targets for the economy.

The assumed growth rates could be described as optimistic, but not

unrealistic. The average rate of growth sustained since World War II has

been 3.3 percent. During 1961 to 1966, the economy grew at an average

rate of 5.4 percent. The assumed inflation rates, particularly for the OMB

projections, might also be described as optimistic.

BUDGET IMPLICATIONS OF THE ECONOMIC ASSUMPTIONS

The budget implications of these economic assumptions are shown in

Table 22. The differences in the CBO and OMB projections occur primarily

because of (1) the inclusion of the President's 1979 budget proposals in the

OMB projections, (2) somewhat different economic assumptions, and (3)

different treatment of the effects of inflation on federal spending.

3/ The Budget of the United States Government, Fiscal Year 1979,

page 32.

167
TABLE 22. FIVE-YEAR PROJECTIONS OF RECEIPTS AND OUTLAYS:

BY FISCAL YEARS, IN BILLIONS OF DOLLARS

1979 1980 1981 1982 1983

Budget Receipts

CBO current policy 460 528 606 692 777

OMB current services 464 529 608 686 759

President's 1979 tax proposals -24 -23 -24 -28 -33

OMB projections 440 505 584 658 726

Budget Outlays

CBO current policy 494 528 563 603 651

OMB current services 492 529 552 582 613

President's 1979 spending proposals 8 14 23 31 37

OMB projections 500 543 575 612 650

Under the CBO current policy projections, budget receipts would

increase at a rate of 14 percent per year from $460 billion in fiscal year

1979 to $777 billion in fiscal year 1983. OMB estimates that total receipts

would grow at a little over 13 percent per year, rising from $464 billion in

fiscal year 1979 (assuming extension of the 1977 temporary tax provisions)

to $759 billion in 1983. The effect of the President's 1979 tax proposals

would be to lower total revenues by $24 billion in fiscal year 1979 and by $33

billion in fiscal year 1983.

CBO projects that current policy outlays would rise from $494 billion

in fiscal year 1979 to $651 billion in 1983, or about half the annual rate for

receipts. Assuming no adjustment for inflation where not explicitly required

by law, OMB projects current policy outlays at $492 billion in fiscal year

1979, rising to $613 billion in fiscal year 1983. Adding the effects of the

President's 1979 spending proposals, OMB projects that budget outlays would

rise to $650 billion in fiscal year 1983. This is essentially the same level of

outlays as projected by CBO, adjusting all federal spending for inflation and

assuming that inflation remains at roughly 6 percent throughout the fiveyear period.

168
OFFSETTING THE FISCAL DRAG

These CBO and OMB budget projections, however, are not consistent

with the economic growth objectives set in the second budget resolution for

1978 or the President's 1979 budget, given present trends in monetary policy

and nonfederal demands. If the federal budget were actually set at these

projected levels over the next several years, it would exert a restrictive

influence on the economy because, with rising incomes and continued

inflation, federal receipts grow much faster than the outlays put back into

the economy in the form of wages, purchases, and benefit payments.

Thus, if the level of unemployment is to be lowered significantly during

the next five years through sustained economic growth in the 4.5 to 5.0

percent range annually, the government will have to counteract this

restrictive effect (sometimes called "the fiscal drag") by cutting taxes or

raising spending relative to the levels under current policy. The President's

tax reduction proposals and spending increases from current policy levels in

fiscal year 1979 essentially counteract the restrictive effects of a current

policy budget, as discussed in more detail in Chapter I. As will be

demonstrated below, however, additional tax cuts and/or spending increases

will likely be required in 1980 to 1983 to achieve the economic objectives

assumed in Table 21.

The estimated size of the tax cuts or spending increases needed to keep

the economy growing at the desired rate depends to a great extent on the

strength of the nonfederal sectors of the economy. The vitality of private

consumption, business investment, state and local government spending, and

net exports cannot be predicted accurately. Some additional economic

assumptions must be made. To illustrate the requirement for further tax

cuts or spending increases, rough estimates have been made assuming one

possible scenario for the growth in nonfederal demand, in which nonfederal

demand is stronger than the average of the post-World War II years, but

somewhat weaker than the peak period of 1961-1966. ^/

Projected Deficits

As discussed above, if the economy were to follow the Administration

growth path or the CBO path, receipts would rise faster than outlays,

exerting a drag on the economy that would itself tend to reduce economic

kj For further details, see Congressional Budget Office, Five-Year Budget

Projections; Fiscal Years 1979-1983, December 1977.

169
growth. Assuming moderate nonfederal demand, approximately how much

would taxes have to be cut or expenditures increased to offset the drag and

keep the economy on the target growth path?

Rough answers to this question are shown in Table 23. The current

policy margin indicates the excess of receipts over outlays that would

develop under current policies if the CBO economic path were realized,

while the current services margin reflects the excess of receipts over

outlays if the Administration's economic path were realized. The fiscal drag

offset refers to the approximate amount that taxes would have to be cut or

spending increased to keep the economy growing at the rates under the

assumptions stated above. J/ (Note that the offset for the OMB projections

has two parts. One part is contained in the fiscal year 1979 proposed

budget; the second part would have to be submitted in later budgets or

budget amendments.) As long as the margin is less than the fiscal drag

offset, the budget would remain in deficit. For example, in fiscal year 1981,

the margin in the OMB projections would be $56 billion. The required fiscal

drag offset, however, would be $97 billion, which means that the deficit

would be $41 billion.

Using CBO assumptions, the budget would still be in deficit in fiscal

year 1983. Under the Administration's assumptions, the budget would be in

deficit in fiscal year 1982 and achieve a surplus in fiscal year 1983. It

appears unlikely under either set of assumptions that the federal budget will

be in balance by fiscal year 1981, the President's goal. The Administration

appears to recognize this possibility. In his economic report to the

Congress, the President notes that balancing the budget by 1981 might

require foregoing the further tax reductions beyond fiscal year 1979 that are

needed to reach his goal of high employment.

In Table 23, the projected deficit declines more rapidly for the OMB

projections than for the CBO projections for two reasons. First, the

Administration assumes lower inflation rates, which means that the current

dollar GNP target is lower than it is in the CBO assumptions. Consequently,

in current dollar terms less fiscal stimulus is required to reach the target.

The second reason is that OMB assumes that the composition of federal

spending is more stimulative than in the CBO projections. For example, for

the OMB projections, the proportion of federal spending for federal

purchases is higher.

The budget projections shown in Table 23 are by no means the only

possible outcome. If monetary policy becomes more expansionary, if a

5/ The precise amount would depend on the specific stimulus measures

employed, as described in the last paragraph of this chapter.

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TABLE 23. FIVE-YEAR BUDGET PROJECTIONS: BY FISCAL YEARS, IN

BILLIONS OF DOLLARS

1979 1980 1981 1982 1983

CBO Projections

Current policy margin _4 ,

(from Table 22) "3* ~ *3 88 126

Fiscal drag offset ,- 61 „ .„ ..

(tax cuts or spending increases)

Budget Deficit (-) or Surplus -67 -61 -49 -39 -19

OMB Projections

Current services margin

(from Table 22)

Fiscal drag offset (tax cuts and

spending increases proposed in

1979 budget)

Further tax cuts or spending

increases required

Budget Deficit (-) or Surplus

-29 -

32 a/ 37

7 a/ 23

-68 a/ -60

56

47

50

-41

104

59

66

-21

146

70

66

10

a/ An additional $5 to $10 billion in tax cuts may be required for fiscal

year 1979 in order to reach the Administration's growth target. This

would make the fiscal year 1979 deficit between $66 and $71 billion.

For the purposes of this table the additional stimulus needed was

assumed to be $7 billion.

business investment boom develops spontaneously, or if growth in economic

activity in the rest of the world stimulates exports from the United States,

the need to offset the fiscal drag in a current policy or current services

budget could be less than shown above. This, in turn, could lead to a more

rapid decline in the budget deficit than shown here. On the other hand, if

the economy were subject to shocks of the kind it experienced in the early

1970s, or if business investment fails to grow sufficiently, more expansionary policies and an increasing budget deficit might be needed to reach

the output and employment goals discussed earlier.

171
Furthermore, even if the assumptions about the performance of the

nonfederal sectors turn out to be correct, the dollar amount of the fiscal

action required to offset the fiscal drag of a current policy or current

services budget could vary substantially, depending on which items in the

budget are altered to meet the needs of fiscal policy. Generally speaking,

increased purchases of goods and services have more impact per budget

dollar on output and employment than broadly based tax changes or changes

in benefit payment programs. Specially designed tax changes, such as the

investment tax credit, can have powerful effects on output and jobs after a

lag of one or two years. 6/ Thus, it may be possible to design a specific

fiscal policy that would have the effect of balancing the budget before 1983.

6/ This subject will be discussed more fully in the forthcoming Congressional Budget Office report, Understanding Fiscal Policy.

172