CONGRESS OF THE UNITED STATES

CONGRESSIONAL BUDGET OFFICE MARCH 1988

An Analysis of the President's

Budgetary Proposals for Fiscal Year 1989

Prepared at the Request of the

Senate Committee on Appropriations
AN ANALYSIS OF THE PRESIDENT'S

BUDGETARY PROPOSALS

FOR FISCAL YEAR 1989

The Congress of the United States

Congressional Budget Office

For sale by the Superintendent of Documents, U.S. Government Printing Office

Washington, D.C. 20402
NOTES

Unless otherwise indicated, all years referred to in this report are fiscal years.

Dashes in tables indicate amounts less than $50 million.

Details in the text and tables of this report may not add to totals because of

rounding.

The source of data concerning the President's budget is the Office of Management and Budget. The source of other data, unless otherwise noted, is the

Congressional Budget Office.

To facilitate comparison with the CBO baseline, allowances for the President's proposed civilian pay raises in 1990 through 1993 have been distributed among the individual budget functions, and the effects of the Administration's proposals for credit reform have been excluded.

The Balanced Budget and Emergency Deficit Control Act of 1985 is referred to

in this volume more briefly as the Balanced Budget Act. The Balanced

Budget and Emergency Deficit Control Reaffirmation Act of 1987 is referred

to more briefly as the Balanced Budget Reaffirmation Act.
PREFACE

This analysis of the President's budget for fiscal year 1989 was prepared at the request of the Senate Committee on Appropriations. The

report discusses the President's policy proposals in terms of changes

from the Congressional Budget Office (CBO) baseline budget projections for 1989 through 1993. It provides estimates of the budgetary

impact of the Administration's proposals using CBO's economic

assumptions and technical estimating methods.

This report was prepared by the staffs of the Budget Analysis,

Fiscal Analysis, and Tax Analysis Divisions under the supervision of

James L. Blum, Jacob S. Dreyer, and Rosemary D. Marcuss,

respectively. Paul N. Van de Water was responsible for Chapter I;

John Sabelhaus for Chapter II; Rosemary D. Marcuss for Chapter HI;

Michael A. Miller for Chapter IV; Charles E. Seagrave and Robert A.

Sunshine for Chapter V; and Kathy A. Ruffing for Appendix A.

Principal contributors are listed in Appendix B.

Paul L. Houts supervised the editing and production of the report,

assisted by Nancy H. Brooks. Major portions were edited by Amanda

Balestrieri, Francis S. Pierce, and Sherry Snyder. The authors wish to

thank Linda Brockman, Cindy Cleveland, Marion Curry, Janice

Johnson, Rae Roy, Simone Thomas, and Emma Tuerk for typing the

many drafts. Kathryn Quattrone prepared the report for publication.

James L. Blum

Acting Director

March 1988

CONTENTS

I SUMMARY AND INTRODUCTION 1

CBO Budget Estimates 3

The Administration's Budget

Program 7

H A COMPARISON OF

ECONOMIC ASSUMPTIONS 13

The Short-Run Outlook 13

Medium-Term Projections 16

HI THE ADMINISTRATION'S

REVENUE PROPOSALS 21

CBO Reestimates 21

Revenue Proposals 26

IV THE ADMINISTRATION'S

DEFENSE BUDGET 33

Defense Funding Levels 33

CBO Reestimates 35

Major Defense Proposals 39

V THE ADMINISTRATION'S

NONDEFENSE BUDGET 59

Human Resources Programs 59

Natural Resources, Infrastructure,

and Other Government Services 62

Other Nondefense Spending 64

Details by Budget Function 65
vi ANALYSIS OF PRESIDENT'S BUDGET March 1988

150 International Affairs 66

250 General Science, Space,

and Technology 70

270 Energy 72

300 Natural Resources and

Environment 76

350 Agriculture 80

370 Commerce and Housing

Credit 83

400 Transportation 88

450 Community and Regional

Development 91

500 Education, Training,

Employment, and

Social Services 95

550 Health 99

570 Medicare 102

600 Income Security 108

650 Social Security 115

700 Veterans Benefits

and Services 117

750 Administration of Justice 120

800 General Government 123

900 Net Interest 125

920 Allowances 127

950 Undistributed Offsetting

Receipts 129

APPENDIXES

A Baseline Budget Projections 135

B Major Contributors to the Revenue

and Spending Estimates 139
CONTENTS

TABLES

I-1 CBO and Administration Estimates of the

Administration's Budget Program 4

1-2 Effects of CBO Economic Assumptions on

Estimates of the Administration's Deficit 5

1-3 CBO Reestimates Resulting from Different

Technical Assumptions 6

1-4 The Administration's Deficit Reduction

Program as Estimated by CBO 7

1-5 CBO Estimates of the Administration's

Budget Program 10

II-l Comparison of Administration, CBO, and

Blue Chip Short-Run Economic Forecasts 15

n-2 Comparison of Administration and CBO

Economic Assumptions, 1988-1993 17

IH-1 Administration and CBO Estimates

of Administration Revenues,

by Major Source 22

HI-2 CBO Reestimates of Administration

Budget Revenues 23

ni-3 Revenue Proposals in the

Administration's 1989 Budget 27

IV-1 Major Spending Proposed in

Administration's 1989 Budget

for Function 050: National Defense 34

IV-2 Major Spending Changes Proposed in

Administration's 1989 Budget for

Function 050: National Defense 36
viii ANALYSIS OF PRESIDENT'S BUDGET March 1988

IV-3 Annual Real Growth in Defense

Spending Authority 37

IV-4 Reestimates of the President's 1989

Request for Function 050:

National Defense 39

IV-5 Summary of Active Forces 41

IV-6 Requested Strength Levels for

Military Personnel 42

IV-7 Nominal Changes in Operation

and Maintenance 45

IV-8 Nominal Changes in Procurement 48

IV-9 Program Terminations in the

Administration's 1989 Budget 49

IV-10 Selected Program Changes in the 1989

Request for Aircraft Procurement 51

IV-11 Selected Program Changes in the 1989

Request for Other Missiles, Torpedoes,

and Weapons Procurement 53

IV-12 Nominal Changes in Research,

Development, Test, and Evaluation 55

V-l CBO Estimates of the Administration's

Proposals in Nondefense Spending

(In billions of dollars) 60

V-2 CBO Estimates of the Administration's

Proposals in Nondefense Spending

(In percentage differences from

the CBO baseline) 61

A-l CBO Baseline Budget Projections 136
CONTENTS

A-2 Revisions to the CBO Baseline

Since February 1988 137

FIGURES

1-1 Federal Deficit Projections and Targets 2

II-l Comparison of Administration, CBO,

and Blue Chip Economic Assumptions 19

BOXES

1-1 Social Security in the Budget 9

V-l The Budget Summit and Differences in

CBO and Administration Estimates 103

CHAPTER I

SUMMARY AND INTRODUCTION

The Congressional Budget Office (CBO) estimates that the federal

deficit under Administration policies would be $165 billion in 1989,

$157 billion in 1990, and $109 billion in 1993. These figures are

considerably higher than the Administration's own estimates~$130

billion in 1989, $104 billion in 1990, and $23 billion in 1993. Most of

the differences between the CBO and Administration estimates reflect

assumptions about the future of the economy. CBO foresees less rapid

real growth, higher inflation, and higher interest rates than does the

Administration.

The Administration's 1989 deficit estimate of $130 billion appears

to fall below the statutory target of $136 billion. But excluding $10

billion in asset sales, which may not be counted as savings under the

terms of the Balanced Budget Reaffirmation Act, the Administration's

estimate would be $140 billion. The budget also exceeds the deficit

targets in 1990 through 1993 under both CBO and Administration

assumptions, as shown in Figure 1-1.

CBO analyzes the Administration's budget in terms of changes

from the CBO baseline, which projects the course of the budget on the

assumption that current taxing and spending policies continue

unchanged. CBO reestimates, or reprices, the Administration's budget using CBO's economic and technical estimating assumptions and

methods. The differences between the baseline projections and the

CBO estimate of the budget measure the effects of the Administration's proposed policy changes. CBO estimates that the Administration's proposals would reduce the deficit by $12 billion in 1989, $13 billion in 1990, and $29 billion in 1993.

CBO's baseline budget deficits rise from $150 billion in 1987 to

$161 billion in 1988 and $177 billion in 1989, before dropping to $170

billion in 1990. These baseline projections update those published last

month in CBO's annual report, The Economic and Budget Outlook:

Fiscal Years 1989-1993. The revisions are described in Appendix A.
2 ANALYSIS OF PRESIDENT'S BUDGET March 1988

As in past years, the baseline budget projections assume that

revenues, offsetting receipts, and entitlement spending are projected

according to the laws now on the statute books. Defense and nondefense discretionary appropriations are assumed to be held constant

in real terms. This year, CBO has made minor changes in its baseline

to make it identical to the budget base specified in the Balanced Budget Reaffirmation Act.

Figure 1-1.

Federal Deficit Projections and Targets

200

175

150

125

100

75

50

25

Billions of Dollars

CBO Baseline

T

CBO Estimate of

Administration Program

Administration

Estimate

Balanced Budget Act Target

I

1988 1989 1990 1991

Fiscal Years

1992 1993

SOURCE: Congressional Budget Office; Office of Management and Budget.

NOTE: Totals include Social Security, which is off-budget (see Box 1-1 on page 9).
CHAPTER I SUMMARY AND INTRODUCTION 3

CBO BUDGET ESTIMATES

CBO's estimates of the deficit exceed the Administration's figures by

$15 billion in 1988, $36 billion in 1989, and increasing amounts in

later years. In 1989, $25 billion of the $36 billion in reestimates is

attributable to differing economic assumptions, and $11 billion stems

from technical estimating differences. In 1991 through 1993, virtually all of the reestimates are economic (see Table 1-1).

Effects of Economic Assumptions

CBO and Administration economic assumptions are compared in

Chapter n. CBO's assumptions of lower real economic growth and

higher interest rates tend to increase the estimated deficits, while its

assumption of higher inflation tends to lower them, as shown in Table

1-2. Lower real economic growth holds down tax receipts, while

raising outlays for Unemployment Insurance and related programs.

CBO's real growth assumption adds to the deficit in the President's

budget by amounts growing from $7 billion in 1988 to $12 billion in

1989 and $67 billion in 1993. Higher interest rates raise debt service

costs by $2 billion in 1988, $13 billion in 1989, and $52 billion in 1993.

Differences in inflation assumptions have little effect on the deficit estimates for the first few years, but CBO's higher inflation rates

reduce the estimated deficits by $7 billion in 1991, $17 billion in 1992,

and $33 billion in 1993. In the long run, faster inflation increases

most revenue sources (by increasing taxable incomes and consumption) but raises only some outlay categories (primarily indexed benefit

programs, Medicare, and Medicaid). CBO bases its estimates of

defense and nondefense discretionary appropriations on the dollar

amount of the Administration's request; it does not increase the

request to take account of CBO's higher assumed inflation rates. If

CBO's assumptions about inflation prove correct, these appropriations

will buy fewer real goods and services than the Administration currently anticipates.
4 ANALYSIS OF PRESIDENT'S BUDGET March 1988

TABLE 1-1. CBO AND ADMINISTRATION ESTIMATES OF

THE ADMINISTRATION'S BUDGET PROGRAM

(By fiscal year, in billions of dollars)

1988 1989 1990 1991 1992 1993

Estimates

Revenues

Administration

CBO

Outlays

Administration

CBO

Deficit

Administration

CBO

909

899

1,056

1,060

147

161

965

955

1,094

1,120

130

165

Differences in

Revenues

Technical

Economic

Total

Outlays

Technical

Economic

Total

Deficit

Technical

Economic

Total

-3

-7

-10

1

3

4

4

10

15

-2

-8

-10

9

17

26

11

25

36

1,044

1,038

1,148

1,195

104

157

Estimates

2

-8

-6

14

33

46

12

41

53

1,124

1,113

1,204

1,253

79

140

-1

-11

-12

1

48

49

2

59

61

1,190

1,182

1,241

1,313

51

131

a/

-9

-8

6

66

72

5

75

80

1,258

1,262

1,281

1,371

23

109

2

2

4

1

88

90

a/

86

86

SOURCE: Congressional Budget Office; Office of Management and Budget.

NOTE: Totals include Social Security, which is off-budget,

a. Less than $500 million.
CHAPTER I SUMMARY AND INTRODUCTION 5

Effects of Technical Assumptions

Technical reestimates increase the estimated 1989 deficit by $11

billion, comprising $2 billion in lower revenues and $9 billion in

higher outlays (see Table 1-3). Of the outlay differences, only a small

portion involves discretionary accounts. Roughly $0.5 billion is in

national defense programs, and slightly less than $0.5 billion is in

nondefense discretionary appropriations. The nondefense discretionary differences are small because the Administration generally

elected to use CBO estimates for these accounts. CBO's 1989 outlay

estimates for deposit insurance, Medicare, and income security programs are each $2 billion higher than the Administration's. Finally,

CBO expects a total of $4 billion in lower proceeds from asset sales and

loan prepayments.

Many of the same technical factors that increase the 1989 deficit

also add to outlays in 1990. In addition, CBO believes that the first

TABLE 1-2. EFFECTS OF CBO ECONOMIC ASSUMPTIONS ON

ESTIMATES OF THE ADMINISTRATION'S DEFICIT

(By fiscal year, in billions of dollars)

1988 1989 1990 1991 1992 1993

Lower Real

Economic Growth

Higher Interest Rates

Higher Inflation a/

7

2

_1

12

13

_k

20

23

_i2

34

32

_£Z

51

41

-17

67

52

-33

Total Economic

Reestimates 10 25 41 59 75 86

SOURCE: Congressional Budget Office.

NOTE: The figures include the changes in debt service costs caused by different borrowing.

a. Any effect of inflation on interest rates is included in the previous line.

b. Less than $0.5 billion.
6 ANALYSIS OF PRESIDENT'S BUDGET March 1988

auction for drilling rights in the Arctic National Wildlife Refuge

(ANWR) could not occur before 1991; the Administration assumes

that, if the Congress acts this year, leasing could begin in 1990. By

increasing the deficit, the technical reestimates also increase interest

costs by $2 billion in 1990. After 1990, technical reestimates are small

in total.

TABLE 1-3. CBO REESTIMATES RESULTING FROM DIFFERENT

TECHNICAL ASSUMPTIONS (By fiscal year,

in billions of dollars)

1988 1989 1990 1991 1992 1993

Revenues -3 -2 2 -1 a/

Outlays

National defense

Nondefense discretionary

appropriations

Arctic National Wildlife

Refuge leasing

Farm price supports

Deposit insurance

Postal Service

Medicare

Income security

Net interest

Asset sales and

prepayments

Other

Total Outlays

Total Technical Reestimates

2

-1

—

-1

-1

a/

1

a/

2

-1

_§/

1

4

1

§/

—

a/

2

a/

2

2

§/

4

_§/

9

11

§/

-3

2

a/

1

1

2

3

2

3

_;!

14

12

1

-2

-2

-1

a/

-3

2

4

1

a/

a/

1

2

§/

§/

1

-2

a/

-1

1

3

2

a/

_2

6

5

-1

1

-1

-2

-1

-3

a/

5

1

a/

_1

1

§/

SOURCE: Congressional Budget Office,

a. Less than $0.5 billion.
CHAPTER I SUMMARY AND INTRODUCTION 7

THE ADMINISTRATION'S BUDGET PROGRAM

CBO's baseline projections provide a benchmark against which the

Administration's budget program can be measured. Because the

baseline and the CBO estimate of the budget employ the same economic and technical assumptions, differences between the two are

solely the result of proposed policy changes. The Administration's

budget would cut the projected deficits only modestly. CBO estimates

that the Administration's budget proposals would reduce the 1989

deficit to $165 billion-$12 billion below the baseline level of $177

billion. The amount of deficit reduction grows to $13 billion in 1990,

$19 billion in 1991, and $29 billion in 1993, as shown in Table 1-4.

TABLE 1-4. THE ADMINISTRATION'S DEFICIT REDUCTION

PROGRAM AS ESTIMATED BY CBO

(By fiscal year, in billions of dollars)

1989 1990 1991 1992 1993

CBO Baseline Deficit 177 170 159 154 139

Policy Changes

Revenues a/ -1 -1 -1 -1 -1

National Defense -1 b/ 1 3 5

Nondefense Discretionary

Spending -2 -2 -8 -12 -16

Entitlements and Other

Mandatory Spending -3 -6 -6 -6 -6

Offsetting Receipts 1 b/ -4 -4 -6

Asset Sales and Prepayments -6 -3 b/ b/ b/

Net Interest b/ -1 -2 -4 -5

Total Policy Changes -12 -13 -19 -23 -29

Deficit, President's Budget

as Estimated by CBO 165 157 140 131 109

SOURCE: Congressional Budget Office.

a. Revenue increases are shown with a negative sign because they reduce the deficit.

b. Less than $0.5 billion.
8 ANALYSIS OF PRESIDENT'S BUDGET March 1988

The Administration's revenue proposals would reduce the deficit

by about $1 billion per year. Additional revenues would be generated

by requiring all state and local government employees to pay the

Medicare tax and by repealing the scheduled reduction in airport and

airway tax rates. Proposals for more favorable tax treatment of

research and experimentation spending, mutual fund expenses, and

higher education savings bonds would reduce revenues.

For defense and nondefense discretionary spending, the Administration budget is guided by the appropriation caps contained in the

Omnibus Budget Reconciliation Act of 1987 (Public Law 100-203).

The CBO baseline projections do not reflect the 1989 savings from

these caps, because these savings are not yet enacted. Instead, the

baseline assumes 1989 appropriations based on the 1988 amounts

adjusted for inflation of roughly 4 percent. The caps, in contrast, allow

increases in budget authority of only 2.5 percent for defense and 2.0

percent for nondefense programs. By adhering to the appropriation

caps, the Administration budget reduces defense outlays by $1 billion

and nondefense discretionary spending by $2 billion in 1989 compared

with the baseline.

After 1989, defense budget authority in the Administration's

request would grow by 1 percent per year in real terms, based on CBO

economic assumptions. The Administration claims a higher rate of

real defense growth because of its lower inflation rate. CBO estimates

that defense outlays would be close to the baseline amount in 1990 and

would exceed the baseline by $1 billion in 1991 and $5 billion in 1993.

Nondefense discretionary savings would remain at about $2 billion in

1990 and would grow to $8 billion in 1991 and $16 billion in 1993.

The Administration proposes few changes in entitlement and

other mandatory programs. Entitlement reductions total $3 billion in

1989 and $6 billion per year thereafter. About a third of the reductions would be in Medicare, where the Administration proposes to

lower reimbursement to health care providers. Reductions are also

proposed in Guaranteed Student Loans, Medicaid, and rehabilitation

services. The Administration proposes no changes in Social Security

benefits (see Box 1-1).
CHAPTER I SUMMARY AND INTRODUCTION 9

BOXI-1

SOCIAL SECURITY IN THE BUDGET

CBO's analysis of the 1989 budget focuses on total revenues, outlays, and

the deficit. The totals include the activities of the Old-Age, Survivors, and

Disability Insurance (OASDI) trust funds, which were taken off-budget by

the Balanced Budget Act of 1985. The Balanced Budget Act nevertheless

requires that the total deficit be used when calculating required deficit

reductions. The total deficit also determines the federal government's

borrowing needs.

CBO's estimates of on- and off-budget revenues, outlays, and the deficit under the Administration's budgetary proposals are shown below. The

projected decline in the total deficit from $161 billion in 1988 to $109 billion in 1993 stems entirely from growing surpluses in Social Security. The

on-budget deficit remains near $200 billion every year. The Administration is proposing no changes in Social Security benefits or taxes.

1987 1988 Projections

Actual Base 1989 1990 1991 1992 1993

On-Budget

Revenues

Outlays

Deficit

Revenues

Outlays

Surplus

Revenues

Outlays

Deficit

641

811

170

213

194

20

854

1,005

150

658

857

199

696

907

211

754

970

216

Off-Budget

(Social Security)

240

203

38

899

1,060

161

259 283

213 225

46 58

Total

955

1,120

165

1,038

1,195

157

806

1,016

210

307

237

70

1,113

1,253

140

854

1,067

212

327

246

81

1,182

1,313

131

909

1,116

207

353

255

98

1,262

1,371

109

SOURCE: Congressional Budget Office.
10 ANALYSIS OF PRESIDENT'S BUDGET March 1988

TABLE 1-5. CBO ESTIMATES OF THE ADMINISTRATION'S

BUDGET PROGRAM (By fiscal year)

1988 1989 1990 1991 1992 1993

In Billions of Dollars

Revenues

Individual income

Corporate income

Social insurance

Other

Total

Outlays

National defense

Nondefense discretionary spending

Entitlements and other

mandatory spending

Net interest

Offsetting receipts

Additional asset sales

Total

Deficit

Debt Held by the Public

Revenues

Individual income

Corporate income

Social insurance

Other

Total

Outlays

National defense

Nondefense discretionary spending

Entitlements and other

mandatory spending

Net interest

Offsetting receipts

Additional asset sales

Total

Deficit

Debt Held by the Public

390

98

331

79

899

287

176

501

152

-56

a/

1,060

161

2,046

As a

8.3

2.1

7.1

1.7

19.2

6.1

3.8

10.7

3.2

-1.2

b/

22.7

3.4

43.7

414

106

354

81

955

295

191

532

166

-58

-6

1,120

165

2,211

Percent of

8.3

2.1

7.1

1.6

19.2

5.9

3.8

10.7

3.3

-1.2

-0.1

22.5

3.3

44.4

454

117

383

84

1,038

306

201

567

184

-61

-3

1,195

157

2,367

GNP

8.5

2.2

7.2

1.6

19.5

5.8

3.8

10.7

3.4

-1.2

-0.1

22.4

2.9

44.4

493

124

410

85

1,113

321

198

605

196

-67

a/

1,253

140

2,504

8.7

2.2

7.2

1.5

19.6

5.6

3.5

10.6

3.4

-1.2

b/

22.0

2.5

44.0

532

128

435

87

1,182

335

204

644

200

-70

a/

1,313

131

2,634

8.7

2.1

7.2

1.4

19.4

5.5

3.3

10.6

3.3

-1.2

b/

21.6

2.2

43.3

573

132

467

90

1,262

351

206

688

203

-76

a/

1,371

109

2,743

8.8

2.0

7.2

1.4

19.4

5.4

3.2

10.6

3.1

-1.2

b/

21.1

1.7

42.2

SOURCE: Congressional Budget Office.

NOTE: Totals include Social Security, which is off-budget.

a. Less than $0.5 billion.

b. Less than 0.05 percent of GNP.
CHAPTER I SUMMARY AND INTRODUCTION 11

Proposed changes in offsetting receipts would increase outlays by

$1 billion in 1989, have little net effect in 1990, and reduce outlays by

$4 billion in 1991 and $6 billion in 1993. The 1989 increase results

primarily from a proposal to reclassify certain customs user fees as

revenues rather than as offsetting receipts. Additional receipts would

be garnered over the five-year period through raising beneficiary

premiums for Supplementary Medical Insurance (Part B of Medicare),

increasing Postal Service payments for employee retirement, and

leasing rights to drill for oil in the Arctic National Wildlife Refuge.

Asset sales account for $6 billion, or half, of the 1989 deficit

reduction. Slightly more than $3 billion derives from the prepayment

or sale of loans made by the Rural Electrification Administration and

other agencies. Sale of the Naval Petroleum Reserves and the Alaska

Power Marketing Administration would yield somewhat less than $3

billion. Proposed asset sales contribute $3 billion to deficit reduction

in 1990 and little thereafter.

Chapters HI, IV, and V describe the Administration's revenue,

defense, and nondefense spending proposals—as well as CBO's reestimates-in more detail. If enacted, these proposals would have only a

small effect on the composition of revenues and outlays. Table 1-5 on

the preceding page shows CBO's estimates of the Administration's

budget program by major tax source and spending category. The numbers differ little from the CBO baseline projections, which are shown

in Appendix A.

CHAPTER II

A COMPARISON OF

ECONOMIC ASSUMPTIONS

Economic assumptions play an important role in budget estimates.

For example, estimates of future tax receipts depend on assumptions

about the growth of the economy. Estimates of federal outlays depend

on assumptions about unemployment, inflation, and other factors.

Assumptions about interest rates have become increasingly key, since

the cost of servicing the federal debt now makes up a large part of total

expenditures.

The importance of economic assumptions was dramatized in 1987,

when turbulence in financial markets raised concern about the shortterm strength of the U.S. economy. Rising interest rates in late

spring, and the October stock market crash, led forecasters to revise

their projected GNP growth rates downward. Other economic assumptions important in forecasting the budget deficit were also reexamined, including the future paths of interest rates, inflation, and

unemployment.

Moreover, the turbulence in financial markets led to a sharp divergence of views among forecasters about the future course of the

economy. Since the stock market crash, forecasters have become more

pessimistic on average.

THE SHORT-RUN OUTLOOK

After last October, both CBO and the Administration revised downward their estimates of near-term GNP growth, as did most private

forecasters. CBO projects 1.8 percent real growth in 1988, and the

Administration 2.4 percent, as compared with the 3.8 percent real

growth experienced in 1987 (see Table II-l). CBO expects very slow

growth in the first part of 1988, followed by more rapid growth later in
14 ANALYSIS OF THE PRESIDENT'S BUDGET March 1988

the year. This pattern is close to the average of forecasts in the Blue

Chip survey of forecasts. I/ The Administration expects the economy

to grow at a more consistent rate of 2.0 percent to 2.5 percent

throughout the year. The slow growth in the first half of 1988 projected by both CBO and the Blue Chip consensus is just above the 1.0

percent rate below which the Balanced Budget Act allows budget sequestration to be set aside.

In 1989, most forecasters see an upturn in the economy. CBO expects GNP to grow by 2.6 percent, somewhat less than the Administration forecast of 3.5 percent, but above the Blue Chip consensus of

2.2 percent. CBO's economic forecasts and projections are described in

detail in its publication, The Economic and Budget Outlook: Fiscal

Years 1989-1993 (February 1988).

Growth Factors

CBO and the Administration have similar views about the composition of real growth in 1988. Improvement in the real trade

balance—that is, real net exports—is projected to be the largest

contributor to economic growth in 1988. Over half of the growth in the

Administration forecast is projected to come from that source, and

even more in the CBO forecast. CBO and the Administration also

agree that inventory accumulation will not contribute to growth as it

has for the last few years. Consumer spending fell sharply in real

terms in the fourth quarter of 1987. Both CBO and the Administration expect real consumer spending to grow between the fourth

quarter of 1987 and the fourth quarter of 1988, but not at the rapid

pace experienced in recent years (until the fourth quarter of 1987). In

its forecast for fixed investment, the Administration is more optimistic than CBO. The Administration also sees less of a slowdown in

real government purchases.

1. Eggert Economic Enterprises, Inc., Blue Chip Economic Indicators (March 10,1988).
CHAPTER n A COMPARISON OF ECONOMIC ASSUMPTIONS 15

TABLE II-l. COMPARISON OF ADMINISTRATION, CBO, AND

BLUE CHIP SHORT-RUN ECONOMIC FORECASTS

(By calendar year)

Actual Forecast

1987 1988 1989

Fourth Quarter to Fourth Quarter

(Percent change)

Real GNP

Administration 3.8 2.4 3.5

CBO 3.8 1.8 2.6

Blue Chip 3.8 1.8 2.2

Nominal GNP

Administration 7.2 6.4 7.3

CBO 7.2 5.7 6.9

Blue Chip 7.2 5.5 6.7

Consumer Price Index a/

Administration 4.5 4.3 3.9

CBO 4.5 4.9 4.8

Blue Chip 4.5 4.1 4.7

Calendar Year Averages

(Percent)

Three-Month Treasury

Bill Rate

Administration 5.8 5.3 5.2

CBO 5.8 6.2 6.7

Blue Chip 5.8 5.9 6.4

Ten-Year Government

Note Rate

Administration 8.4 8.0 7.4

CBO 8.4 9.3 9.5

Blue Chip b/ 8.4 8.8 9.0

Civilian Unemployment Rate

Administration c/ 6.1 5.8 5.6

CBO 6.2 6.2 6.1

Blue Chip 6.2 6.0 6.1

SOURCE: Congressional Budget Office; Office of Management and Budget; Eggert Economic

Enterprises, Inc., Blue Chip Economic Indicators (March 10, 1988). The CBO forecast is

based on preliminary 1987 fourth-quarter data published in January 1988; the February

revisions were small and are not included.

a. Consumer Price Index for urban wage earners and clerical workers.

b. Blue Chip does not project a 10-year note rate. The values shown here are based on the Blue Chip

projection of the AAA bond rate, adjusted by CBO to reflect the estimated spread between AAA

bonds and 10-year government notes.

c. The Administration's projection is for the total labor force, including armed forces residing in the

United States, while the CBO and Blue Chip projections are for the civilian labor force excluding

armed forces. In recent years, the unemployment rate for the former has tended to be 0.1 to 0.2

percentage points below the rate for the civilian labor force alone.
16 ANALYSIS OF THE PRESIDENT'S BUDGET March 1988

Inflation

The forecasts differ significantly with respect to inflation. CBO expects inflation to increase slightly in the near term, from the 4.5 percent increase in the Consumer Price Index (CPI) observed in 1987 to

4.9 percent in 1988, while the Administration and the Blue Chip consensus expect inflation to come down slightly in 1988, to 4.3 percent

and 4.1 percent, respectively. In 1989, the Blue Chip forecasters expect the economy to pick up, and inflation to rise along with it to 4.7

percent. The Administration, on the other hand, expects inflation to

continue downward in 1989, to 3.9 percent. CBO expects inflation to

remain at 4.8 percent in 1989, reflecting the assumption that the fall

in the dollar will generate higher import and consumer prices.

Interest Rates

CBO expects three-month Treasury bill rates to rise from 5.8 percent

in 1987 to 6.2 percent in 1988, and 6.7 percent in 1989. The Blue Chip

agrees with the direction of the movement, but its consensus levels for

1988 and 1989 are 30 basis points below CBO's projection. The Administration sees three-month Treasury bill yields falling to 5.3 percent in 1988, and 5.2 percent in 1989. CBO projects long-term interest

rates 130 basis points above the Administration's forecast in 1988, and

210 basis points higher in 1989. In large part, this difference reflects

the Administration's view that inflation rates will fall in 1987 and

beyond, and that the improvement will be reflected in investors'

long-term expectations.

MEDIUM-TERM PROJECTIONS

Neither CBO nor the Administration attempts to forecast the economy

beyond the end of 1989. In making their projections for the period

1990 through 1993 (shown in Table II-2), both organizations rely on

historical experience.
CHAPTER H A COMPARISON OF ECONOMIC ASSUMPTIONS 17

TABLE II-2. COMPARISON OF ADMINISTRATION AND CBO ECONOMIC

ASSUMPTIONS, 1988-1993 (By calendar year)

Economic

Variable

Nominal GNP

(Billions of dollars)

Administration

CBO

Real GNP

(Percent change,

year over year)

Administration

CBO

Consumer Price Index aJ

(Percent change,

year over year)

Administration

CBO

GNP Deflator

(Percent change,

year over year)

Administration

CBO

Three-Month

Treasury Bill

Rate (Percent)

Administration

CBO

Ten- Year Government

Note Rate (Percent)

Administration

CBO

Civilian

Unemployment Rate

(Percent)

Administration b/

CBO

Tax Bases

Wage and salary

disbursements

Administration

CBO

Actual

1987

4,486

4,486

2.9

2.9

3.6

3.6

3.0

3.0

5.8

5.8

8.4

8.4

6.1

6.2

2,213

2,213

1988

4,779

4,744

2.9

2.3

4.3

4.5

3.5

3.4

5.3

6.2

8.0

9.3

5.8

6.2

2,344

2,344

1989

5,113

5,068

3.1

2.6

4.1

4.9

3.8

4.1

5.2

6.7

7.4

9.5

5.6

6.1

2,502

2,512

1990

5,481

5,414

3.5

2.6

3.6

4.6

3.6

4.1

5.0

6.6

6.8

9.0

5.4

6.0

2,676

2,690

1991

5,850

5,782

3.4

2.6

3.2

4.4

3.2

4.1

4.5

6.4

6.0

8.4

5.3

5.9

2,858

2,876

1992

6,207

6,179

3.3

2.7

2.7

4.4

2.7

4.1

4.0

6.1

5.0

7.8

5.2

5.9

3,040

3,075

1993

6,548

6,606

3.2

2.7

2.2

4.4

2.2

4.1

3.5

5.9

4.5

7.4

5.2

5.8

3,212

3,289

Other personal income c/

Administration

CBO

Corporate Profits d/

Administration

CBO

1,533

1,533

273

273

1,634

1,623

310

281

1,743

1,739

353

327

1,845

1,857

406

358

1,948

1,981

448

379

2,041

2,113

471

392

2,131

2,251

492

408

SOURCES: Congressional Budget Office; Office of Management and Budget.

a. Consumer Price Index for urban wage and clerical workers.

b. The Administration's projection is for the total labor force, including armed forces residing in the United States, while the CBO

projection is for the civilian labor force excluding armed forces. In recent years, the unemployment rate for the former has tended

to be 0.1 to 0.2 percentage points below the rate for the civilian labor force alone.

c. Other personal income is personal income iess wage and salary disbursements.

d. Corporate profits reported are book, not economic, profits.
18 ANALYSIS OF THE PRESIDENT'S BUDGET March 1988

CBO's Method

CBO bases its medium-term projections of GNP on projections of gross

domestic product (GDP), which differs from GNP by excluding the net

income earned by U.S. residents on overseas assets. Using information on labor market trends, CBO calculates a path for GDP growth

estimated to be consistent with nonaccelerating inflation. The levels

of GDP on this path are referred to as "potential" GDP. In the CBO

forecast, actual GDP is specified to approach the potential level over

the medium term. Since the potential growth rate of GDP for the next

five years is about 2.5 percent per year, actual GDP growth is projected to be stronger than 2.5, so as to close the gap between actual and

potential. Because U.S. net international indebtedness is likely to rise

for some years to come, the flow of net income from assets overseas is

expected to decline. Hence, the growth of GNP should trail slightly

behind the growth in GDP over the medium term (1990 through 1993),

averaging 2.6 percent to 2.7 percent.

Comparison of Projections

The Administration's medium-term projections are based on longterm trends and on its views of the implications of its policy proposals.

The Administration projects stronger real GNP growth after 1989, at

rates of 3.2 percent to 3.5 percent per year, which are from one-half to

one percentage point higher than the CBO projections, and 0.2 to 1.5

percentage points above the consensus (see Figure n-1). The Administration's projections for levels of nominal GNP are slightly above

CBO's for most of the medium term, but never more than 2 percent

higher. The CBO projections for nominal GNP approach those of the

Administration, and by 1993 the CBO nominal GNP level is higher.

As in the short-run outlook, the Administration projects lower

inflation than does CBO after 1989: both CPI inflation and the rate of

change in the GNP deflator rise slightly in 1988 and 1989, then fall

steadily to rates of 2.2 percent per year in 1993. CBO assumes a

constant inflation rate of 4.1 percent after 1989, close to the historical

average of 4.3 percent since 1950, though a little below CBO's shortterm forecast for the end of 1989 (see Figure II-l).
CHAPTER A COMPARISON OF ECONOMIC ASSUMPTIONS 19

Figure 11-1.

Comparison of Administration, CBO, and Blue Chip

Economic Assumptions

Real GNP Growth

History

I I

Forecast

Administration

CPI Inflation

History

Administration

 N x

I I I I I

1985 1987 1989 1991 1993 1985 1987 1989 1991 1993

Three-Month Treasury Bills

5 -

I I I I I I I

12

10

Ten-Year Government Notes

History

I I

Forecast

Blue Chip a/

Administration^

1985 1987 1989 1991 1993 1985 1987 1989 1991 1993

SOURCE: Congressional Budget Office; Office of Management and Budget; Eggert Economic

Enterprises, Inc., Blue Chip Economic Indicators (March 10,1988).

a. 6/ue Chip does not project a ten-year note rate. The values shown here are based on the

Blue Chip projection of the AAA bond rate, adjusted by CBO to reflect the estimated spread

between AAA bonds and ten-year government notes.
20 ANALYSIS OF THE PRESIDENT'S BUDGET March 1988

The Administration and CBO both project lower interest rates by

the end of 1993. As shown in Figure II-1, the Administration's

interest-rate projections for 1989 through 1993 start at lower levels

and decrease faster than the CBO projections. By the end of 1993, the

Administration projects the 10-year government bond rate to be at 4.5

percent, while CBO projects the rate at 7.4 percent. These patterns

are consistent with expectations about future inflation. Both CBO

and the Blue Chip consensus expect higher inflation than the Administration, and this is reflected in higher interest rates.

The Tax Base

The differences between the Administration's and CBO's economic

assumptions are reflected in their projections of the tax base from

which federal revenues are drawn. In the CBO forecast, as economic

growth slows, the share of GNP going to wage and salary disbursements rises, consistent with historical experience. Real wages outpace

productivity gains through 1993, and therefore wage and salary

disbursements remain relatively high—above the Administration's

projection. Corporate profits in the CBO projection are lower than in

the Administration's, partly because of higher interest rates and

partly because of the higher share of income going to wages.
CHAPTER III

THE ADMINISTRATION'S

REVENUE PROPOSALS

Using its own economic assumptions and estimation procedures, the

Congressional Budget Office projects that the President's budget

program would result in revenues of $955 billion in 1989 and $1,038

billion in 1990. Budget revenues are projected to increase at an average rate of 6.7 percent per year over the 1991-1993 period, reaching

$1,262 billion in 1993. They are projected to grow from 19.2 percent of

GNP in 1989 to 19.4 percent in 1993, the same shares projected by the

Administration (see Table HI-1). The CBO estimates are $10 billion

lower than the Administration estimate for 1989 and $6 billion lower

for 1990. New revenue proposals are of small budget significance: proposed tax increases and the reclassification of customs user fees as

revenues are offset for the most part by proposed tax reductions. The

proposals add $0.5 billion to revenues in 1989, $1.3 billion in 1991,

and $0.6 billion in 1993.

The proposals discussed in this chapter involve taxes and fees that

are classified as revenues in the unified budget. Other user fee proposals are discussed in Chapter V.

CBO REESTIMATES

Roughly 90 percent of the difference between CBO's and the Administration's budget revenue estimates is directly attributable to different assumptions about the economy. In each year through 1992,

the effects of CBO's lower real growth assumption prevail, resulting in

revenue estimates that are lower than the Administration's. In 1993,

CBO's higher inflation assumption results in higher CBO revenue

estimates for that year. Other assumptions are sometimes referred to

as technical, and mostly concern the behavior of government agencies

and trust funds and the reaction of taxpayers to changing tax law.

These assumptions hold down CBO's revenue projections relative to
22 ANALYSIS OF THE PRESIDENT'S BUDGET March 1988

TABLE III-l. ADMINISTRATION AND CBO ESTIMATES OF

ADMINISTRATION REVENUES, BY MAJOR SOURCE

(By fiscal year, in billions of dollars)

Revenue Source 1988 1989

Administration

Individual

Income Taxes

Corporate

Income Taxes

Social Insurance

Taxes and

Contributions

On-budget

Off-budget a/

Excise Taxes

Other

Total Revenues

Percent of GNP

393.4

105.6

91.6

239.9

35.3

43.3

909.2

19.3

412.4

117.7

96.1

258.5

35.2

44.8

1990 1991 1992 1993

Estimates

448.9

129.3

100.1

282.4

36.1

47.2

964.7 1,044.1

19.2 19.3

490.5

140.6

104.0

306.0

34.7

48.7

1,124.4

19.5

524.4

148.8

108.1

324.9

34.1

49.6

1,189.9

19.4

557.5

153.8

113.4

346.7

34.7

51.9

1,258.1

19.4

CBO Estimates

Individual

Income Taxes

Corporate

Income Taxes

Social Insurance

Taxes and

Contributions

On-budget

Off-budget a/

Excise Taxes

Other

Total Revenues

Percent of GNP

390.1

98.2

90.9

240.3

34.3

45.0

898.8

19.2

414.5

105.5

95.1

259.0

34.1

46.6

954.8 1

19.2

453.6

117.2

99.4

283.2

34.8

49.3

,037.6

19.5

493.0

124.0

103.5

306.8

33.4

51.9

1,112.7

19.6

531.5

127.6

108.0

327.4

32.7

54.4

1,181.6

19.4

572.9

131.8

114.1

353.0

33.2

56.8

1,261.9

19.4

SOURCE: Office of Management and Budget, Budget of the United States Government for Fiscal Year

1989 (February 1988), and Congressional Budget Office revenue estimates.

a. Off-budget revenues consist of those from federal Old-Age, Survivors, and Disability Insurance

(OASDI) trust funds.
CHAPTER in THE ADMINISTRATION'S RE VENUE PROPOSALS 23

Administration estimates in 1988, 1989, and 1991 by small amounts

and raise CBO's revenue projections in 1990, 1992, and 1993 (see

Table DI-2).

Differences in Economic Assumptions

Compared with the Administration's economic assumptions, CBO's

assumptions are characterized by slower economic growth and higher

inflation and interest rates. CBO's projections for nominal GNP are

lower than the Administration's through 1992. By 1993, the cumulative effects of higher inflation outweigh those of the slower output

growth, putting CBO's nominal GNP above the Administration

estimate for the year. (The two sets of economic assumptions are

compared in more detail in Chapter EL)

TABLE III-2. CBO REESTIMATES OF ADMINISTRATION BUDGET

REVENUES (By fiscal year, in billions of dollars)

1988 1989 1990 1991 1992 1993

Revenues as

Estimated by the

Administration a/ 909.2 964.7 1,044.1 1,124.4 1,189.9 1,258.1

CBO Reestimates

Economic -7.4 -8.0 -8.3 -10.7 -8.7 2.1

Other -3.0 -1.9 1.8 -1.0 0.4 1.7

Total -10.4 -9.9 -6.5 -11.8 -8.3 3.8

Revenues as

Estimated

by CBO a/ 898.8 954.8 1,037.6 1,112.7 1,181.6 1,261.9

SOURCE: Office of Management and Budget, Budget of the United States Government for Fiscal Year

1989 (February 1988), and Congressional Budget Office revenue estimates.

a. Revenues include payroll tax receipts of the federal Old-Age, Survivors, and Disability Insurance

(OASDI) trust funds, which are off-budget.

82-607 - 88 - 2 : QL 3
24 ANALYSIS OF THE PRESIDENT'S BUDGET March 1988

The largest discrepancy in tax bases occurs in corporate profits.

The slowdown in growth projected by CBO produces flat profits in

1988, leaving them well below Administration estimates in 1989.

CBO expects the profit share of GNP to be lower in 1988 and 1989

than assumed by the Administration, and this difference widens over

the projection period. CBO's projected taxable profits are almost 10

percent below the Administration estimate in 1989 and close to 20 percent below by 1993. These differences reduce corporate income taxes

in the CBO estimate by $8 billion in 1989 and more than $20 billion in

1993. The slower economic growth and higher interest rates projected

by CBO also reduce capital gains, a component of the individual income tax base excluded from the National Income and Product Accounts. As a result, CBO revenue estimates are lower by several billion dollars per year.

Other significant differences between the CBO and Administration tax bases tend to increase the CBO revenue estimate relative to

the Administration estimate. CBO projects higher wage and salary

income than does the Administration, despite its lower nominal GNP

path through 1992. This raises income and payroll tax revenues above

Administration estimates by increasing amounts over the period.

Higher projected imports raise CBO estimates of customs duties above

the Administration's by $350 million in 1989, $600 million in 1990,

and more than $1 billion each year from 1991 through 1993. CBO's

higher interest rates boost projected Federal Reserve System profits

above the Administration level, adding almost $2 billion to CBO

revenues in 1989 and almost $6 billion in 1993.

Differences in Other Assumptions

Other assumptions have a relatively minor effect on the CBO estimate of the President's budget. They place CBO revenues $1.9 billion

below the Administration estimate in 1989, $0.3 billion of which

results from a deficit-neutral reclassification of customs user fees as

revenues by the Administration. These assumptions result in budget

revenue reestimates of $2 billion or less per year after 1989, adding to

the CBO reestimate in three years and reducing it in one year (see

Table HI-2).
CHAPTER m THE ADMINISTRATION'S REVENUE PROPOSALS 25

The largest difference in the estimate of 1989 revenues resulting

from an alternative assumption about a trust fund, rather than from

the economic assumptions discussed above, is CBO's assumption of

lower target balances in the combined federal-state Unemployment

Insurance system. CBO projects trust fund balances in accordance

with guidelines suggested by the General Accounting Office in 1987

and projects state tax rates that will achieve these balances. The

Administration projects balances above the suggested range,

requiring higher tax rates. The lower rates projected by CBO result in

revenues $1.3 billion lower than Administration revenues in 1989. By

1993, the difference between the two revenue estimates is $2.6 billion.

In 1989, different assumptions about the revenue effects of provisions of recent legislation, in particular the Tax Reform Act of 1986,

increase CBO individual income tax revenues and lower corporate

income taxes relative to Administration estimates. Taken together,

these differences raise CBO income tax estimates $0.5 billion above

Administration estimates in 1989. After 1989, CBO's estimates of

greater revenue gains from individual provisions that broaden the income tax base are the cause of larger positive income tax reestimates

through 1993.

Another assumption with a significant effect on the revenue

estimates, especially after 1990, is that the Federal Reserve System's

average yield on its holdings of Treasury securities is more responsive

to changes in interest rates over time, regardless of the level of

interest rates. CBO projects that a greater share of the Federal

Reserve System's portfolio will mature after 1990 and will be replaced

by securities with lower yields. This assumption holds CBO's revenue

estimate below the Administration's by only a small amount in 1989,

$1 billion in 1991, and about $2 billion in 1993.

In most cases, CBO's reestimates of the effect of the President's

proposals on revenues were minor. The one exception is the

reestimate of the President's proposal to delay future pay increases for

federal employees by three months and adjust the rates each year.

This proposal is discussed in Chapter V. CBO assumes that the

adjustment will have no effect on revenues, an assumption CBO

employs for proposals to adjust the compensation of only one subgroup

within the labor force at large. The Administration, on the other
26 ANALYSIS OF THE PRESIDENT'S BUDGET March 1988

hand, assumes that the pay adjustment will reduce income and payroll

tax revenues by about $1 billion per year beginning in 1990.

REVENUE PROPOSALS

CBO estimates that the President's revenue proposals would add

small amounts of revenue, raising tax receipts by $0.5 billion in 1989,

$1.3 billion in 1991, and $0.6 billion in 1993 (see Table IH-3). This

estimate differs only slightly from the Administration's. It is roughly

$150 million lower than the Administration estimate in 1989, slightly

higher in 1990 through 1992, and slightly lower in 1993. CBO has

higher revenue estimates for 1990 through 1992 because it does not

share the Administration's view that the proposed federal pay cap will

have a negative effect on revenues. For Administration proposals

other than the federal pay cap, CBO estimates a slightly smaller increase in revenues than does the Administration.

The President proposes to establish a permanent research and

experimentation (R&E) credit, change R&E allocation rules for tax

purposes, establish a permanent exemption for mutual fund

shareholder expenses, initiate higher education savings bonds,

establish a credit to shareholders for taxes paid on U.S. source income

by foreign corporations, modify oil and gas depletion rules, and change

the basis of a customs user fee. CBO estimates that these proposals

will reduce revenues by $1.7 billion in 1989 and $13.9 billion over the

1988-1993 period.

The President proposes to offset these revenue reductions by

requiring Medicare contributions from all state and local government

employees, repealing the scheduled reduction in airport and airway

tax rates, and initiating or extending fees. CBO estimates that these

provisions will raise revenues by $1.5 billion in 1989 and by $16.8

billion over the 1988-1993 period.

In addition, the Administration proposes to reclassify the customs

user fee enacted in the Omnibus Budget Reconciliation Act of 1986 as

a revenue rather than an offsetting collection on the outlay side of the
CHAPTERIH THE ADMINISTRATION'S REVENUE PROPOSALS 27

TABLE III-3. REVENUE PROPOSALS IN THE ADMINISTRATION'S

1989 BUDGET (By fiscal year, in billions of dollars)

1988

Cumulative

1988-1993

1989 1990 1991 1992 1993 Changes

CBO Baseline

Revenues

Proposed Changes

898.5

Establish permanent

R&E credit n.a.

Change R&E

allocation rules -0.4

Establish permanent

mutual fund shareholder expense

exclusion 0

Initiate higher

education savings

bonds a/ n.a.

Repeal windfall

profit tax 0

Require Medicare

contributions of

all state and

local employees c/ n.a.

Repeal reduction in

airport and

airway taxes d/ n.a.

Reclassify customs

user fee as

a revenue 0.7

Change basis and

extend customs

user fee d/

Other

Total

n.a.

n.a.

0.3

President's Budget

Revenues as

Estimated

by CBO 898.8

954.2 1,036.4 1,111.4 1,180.6 1,261.3

-0.4 -0.8 -1.0 -1.2 -1.4 -4.8

-0.6 -0.7 -0.7 -0.8 -0.9 -4.1

-0.4 -0.5 -0.6 -0.7 -0.9 -3.1

b/ -0.1 -0.2 -0.3 -0.4 -1.0

00000 0

1.5 1.9 1.9

0.9

0.8 0.8

1.6

2.0

1.8

2.0 9.2

1.9 6.1

e/ n.a. n.a. 2.4

-0.2 -0.2 0.4 0.4 0.4 0.7

-0.1 _b/ -0.1 -0.1 -0.2 -0.4

0.5 1.3 1.3 1.0 0.6 4.9

954.8 1,037.6 1,112.7 1,181.6 1,261.9

SOURCE: Congressional Budget Office revenue estimates.

NOTE: n.a. = not applicable.

a. Proposal would reduce outlays, producing a net deficit increase ranging from $7 million in 1989 to

$128 million in 1993.

b. Revenue decrease of less than $50 million.

c. Proposal would increase outlays by about $45 million over the 1989-1993 period.

d. Net of income and payroll tax effects.

e. Revenue increase of less than $50 million.
28 ANALYSIS OF THE PRESIDENT'S BUDGET March 1988

budget. This proposal will add to tax receipts but will have no effect

on the deficit. The President also proposes to repeal the windfall profit

tax, which CBO expects will have no effect on revenues. CBO estimates that the proposals will add a total of $4.9 billion to receipts from

1988 through 1993, only $0.1 billion higher than the Administration

estimate. When outlay effects of the proposals are included, CBO estimates that the proposals will increase the deficit by $0.2 billion in

1989, but that their overall effect will be to reduce the deficit by $3.2

billion over the 1988-1993 period.

Research and Experimentation Credit

The President proposes to make permanent the tax credit for research

expenditures that is scheduled to expire at the end of 1988. The

proposed credit rate and qualified expenditures are the same as under

current law. The credit allows businesses to reduce their tax liability

by 20 percent of the amount by which current research expenses

exceed average expenditures over the preceding three years: the

credit therefore covers increasing research expenditures only.

Legislation extending the credit was introduced in the Senate and the

House last session, but no action was taken. Both CBO and the

Administration estimate that the proposal will reduce tax receipts by

$0.4 billion in 1989 and by $4.8 billion from 1989 through 1993.

Research and Experimentation Allocation Rules

Spending on research and experimentation not only is eligible for the

tax credit but also can be deducted from current income like other

business expenses. The President proposes to alter the rules governing allocation of research expenses between domestic and foreign

source income. The proposal is to increase the minimum share of expenses undertaken in the United States that can be allocated to U.S.

source income for tax purposes from 30 percent to 67 percent. (The

Tax Reform Act of 1986 had allowed a temporary 50 percent minimum

allocation, but that provision has expired.) The change in the allocation rule converts domestic source income into foreign source income. Because the foreign tax credit can be used only to offset the U.S.

tax on foreign source income, the conversion would allow additional

foreign tax credits to be used to reduce U.S. tax payments on world-
CHAPTER HI THE ADMINISTRATION'S REVENUE PROPOSALS 29

wide income. A similar provision passed the House last year in the

reconciliation bill but was dropped in conference. Both CBO and the

Administration estimate that the proposal will reduce tax receipts by

$0.6 billion in 1989 and by $4.1 billion over the 1988-1993 period.

Mutual Fund Shareholder Expense Exclusion

The Tax Reform Act of 1986 required that certain fees charged to the

shareholder in a publicly traded mutual fund be included in the gross

income of the shareholder. The Omnibus Budget Reconciliation Act of

1987 delayed the effective date of this provision until 1988. The

President proposes to repeal the provision. If the provision were to

remain in effect, these expenses would be includable in miscellaneous

expenses for tax purposes. Miscellaneous expenses are deductible,

however, only to the extent that they exceed 2 percent of adjusted

gross income. Both CBO and the Administration estimate that repeal

would reduce tax receipts by $0.4 billion in 1989 and by $3.1 billion

over the 1988-1993 period.

Higher Education Savings Bonds

The President proposes to allow the interest on U.S. savings bonds to

be tax exempt if the proceeds of the bond are used to pay certain

college and vocational school costs. At present, taxation of the interest

on these bonds is deferred until redemption. Eligibility for the tax

exemption would be phased out for higher-income taxpayers, based on

their income at the time the bond is redeemed. Similar legislation was

introduced in the Senate last session. CBO estimates the revenue

reduction to be about $20 million in 1989, rising to $0.4 billion in

1993, and totaling $1.0 billion from 1989 through 1993. The

Administration estimates a revenue reduction of $0.5 billion over the

five-year period. Partial substitution of these bonds for other

government bonds will reduce federal government interest payments.

CBO estimates that revenue reduction will exceed outlay reduction,

producing a $0.3 billion increase in the deficit in 1989 through 1993.
30 ANALYSIS OF THE PRESIDENT'S BUDGET March 1988

Repeal of Windfall Profit Tax

The President proposes repeal of the crude oil windfall profit tax,

which is currently scheduled to be phased out by the end of 1993.

Little or no liability for the windfall profit tax was incurred last year,

following the significant drop in oil prices in 1986. CBO estimates

that no future liability will be incurred through 1993, based on

current oil price projections. Repeal would therefore have no effect on

revenues. The Administration estimates that repeal would reduce

total revenues by $87 million over the 1988-1993 period, based on its

higher projected oil prices. CBO agrees that repeal of the windfall

profit tax would reduce future receipts if prevailing oil prices prove to

be higher than those now projected by CBO. The Senate version of the

Omnibus Trade and Competitiveness Act of 1987, which is now in

conference, includes a provision repealing the tax.

World oil prices are subject to influences that make onceand-for-all resolution of future price movements impossible. Oil market developments may lead market specialists and other informed observers to revise their oil price projections upward from current levels.

CBO's future baseline estimates for the windfall profit tax will reflect

the changing market conditions. Therefore, CBO may project positive

windfall profit tax liabilities in a future budget baseline; in fact,

positive liabilities for 1988 through 1992 were projected by CBO as recently as August 1987.

State and Local Government Employee Medicare Contributions

As he did last year, the President proposes that one-quarter of state

and local government employees—those hired before April 1,

1986—and their employers not now contributing to the Hospital

Insurance (HI) portion of the Medicare system be required to do so.

The majority of the employees not contributing are nonetheless

eligible for Medicare benefits through spouses' employment or other

jobs held outside state and local government. CBO estimates that,

under the proposal, payroll taxes would increase by $1.5 billion in

1989 and $9.2 billion over the 1989-1993 period. These estimates are

about $0.2 billion per year lower than the Administration estimates.

Benefits would be boosted by about $45 million over the same period,
CHAPTER in THE ADMINISTRATION'S REVENUE PROPOSALS 31

according to CBO estimates. The bulk of the increase in benefits

flowing from the extension of coverage would occur in later years.

A similar proposal was introduced in the Senate in the last two

sessions of the Congress in the form of amendments to the Omnibus

Budget Reconciliation Acts of 1986 and 1987, but the provisions were

dropped before passage. State and local government employees hired

after March 31, 1986, are not affected by the proposal because they

were covered under HI in the Consolidated Budget Reconciliation Act

of 1985.

Repeal of Scheduled Reduction in Airport and Airway Tax Rates

The President proposes that airport and airway tax rates be extended

at current rates through 1993 to prevent reduction in these rates by

one-half in 1990 as projected under current tax law. The Airport and

Airway Improvement Amendments of 1987 extended aviation taxes at

current rates through 1989 and specified that most of the rates would

be halved on January 1, 1990, if obligations for airport grants-in-aid

and appropriations for Federal Aviation Administration facilities,

equipment, and research in 1988 and 1989 have not averaged 85

percent of their authorized amounts. CBO and the Administration

project that appropriated and obligated amounts will fall short of the

threshold, triggering the reduction in rates. CBO estimates that

extension of the taxes at current rates will increase airport and airway

taxes by $6.1 billion over the 1990-1993 period, an amount which is

almost the same as the Administration estimate.

Customs User Fee Adjustments

The President proposes to reclassify the ad valorem customs user fee

enacted in the Omnibus Budget Reconciliation Act of 1986 as a

revenue rather than an offset in an expenditure account. CBO

estimates that this would move $0.8 billion in receipts to the revenue

side of the budget in 1989 and $2.4 billion in 1988 through 1991. The

fee is scheduled to expire at the end of 1990. This accounting change

would be deficit neutral.
32 ANALYSIS OF THE PRESIDENT'S BUDGET March 1988

The President also proposes to extend the fee through 1993 and

change its basis, beginning in 1989, from the value of the imported

good to the cost of customs processing. This adjustment is proposed as

a requirement for compliance with the General Agreement on Tariffs

and Trade. CBO estimates that these two changes, taken together,

will reduce customs duties receipts by $0.2 billion in 1989 and $0.3

billion in 1990. After 1990, extension of the fee adds $0.5 billion to

customs duties per year through 1993. The net revenue effect, after

income and payroll tax offsets, is a revenue reduction of $0.2 billion

per year in 1989 and 1990 and a revenue increase of $0.4 billion per

year beginning in 1991.

Other

The President proposes to initiate marine fishing license fees and a fee

for Federal Emergency Management Agency regulation of nuclear

power plants, and to increase the share of Nuclear Regulatory Commission (NRG) costs recovered through user fees. (The President's

budget treats the NRG fee receipts as revenues. CBO counts them as

offsetting collections on the outlay side of the budget in accordance

with language enacted as part of the continuing resolution for 1988

appropriations, Public Law 100-202.) The President also proposes to

establish a credit to shareholders for taxes paid on U.S. source income

by foreign corporations, modify oil and gas depletion rules, and for the

sixth year, to increase the District of Columbia government contributions to the Civil Service Retirement System. The CBO baseline

assumes extension of Leaking Underground Storage Tank and Vaccine Injury Compensation trust fund taxes at current rates through

1993, but the President's budget does not contain comparable assumptions. Expiration of these taxes would reduce revenues slightly in

1990 through 1993. CBO estimates that these other proposals and

adjustments will decrease tax receipts by $0.4 billion over the

1988-1993 period.
CHAPTER IV

THE ADMINISTRATION'S

DEFENSE BUDGET

The President's budget for fiscal year 1989 proposes $299.5 billion in

budget authority for the national defense function, the amount agreed

to in the budget summit (see Table IV-1). The Administration's

estimate for 1989 defense outlays is $294.0 billion, which also equals

the level specified in the budget summit agreement.

The proposed budget authority level for 1989 is $33 billion below

the level requested last year in the Administration's biennial request,

and $8 billion below CBO's baseline projection. Compared with 1988

appropriations, it represents an increase of $8 billion or 2.8 percent,

which is less than projected inflation. After 1989, however, the

Administration proposes increases in budget authority that would

slightly exceed the projected rate of inflation.

The proposed defense budget includes some force reductions from

those planned a year ago, as well as a variety of stretch-outs, cancellations, and accelerations in the development and procurement of

major weapons systems. A $1 billion increase is proposed for the

Strategic Defense Initiative (SDI), which remains a high priority in

the Administration's budget.

DEFENSE FUNDING LEVELS

For the last several years, the total defense budget has been discussed

in real terms; that is, the debate has focused on how the budget

changes after adjustments for inflation are made. These changes can

be seen most clearly by comparing the President's budget with the

CBO baseline.

The CBO baseline projects that defense funding will grow by no

more and no less than the amounts necessary to cover inflation each
34 ANALYSIS OF THE PRESIDENT'S BUDGET March 1988

TABLE IV-1. MAJOR SPENDING PROPOSED IN ADMINISTRATION'S

1989 BUDGET FOR FUNCTION 050: NATIONAL

DEFENSE (By fiscal year, in billions of dollars)

Account 1988 1989 1990 1991 1992 1993

Budget Authority

Military Personnel

Operation and

Maintenance

Procurement

RDT&E a/

Military Construction

Other-DoD

Subtotal-DoD

Other Defense

Administration's 1989

Budget as ReestimatedbyCBO

76.1

80.7

81.0

36.7

5.4

3.3

283.2

8.3

291.4

78.4

85.6

80.0

38.2

5.7

2.8

290.8

8.7

299.5

80.1

89.2

85.3

40.0

6.0

6.7

307.3

9.1

316.4

80.7

92.8

91.1

42.0

6.3

11.4

324.3

9.4

333.7

80.9

96.4

98.0

44.0

6.6

16.1

342.0

9.6

351.6

81.0

100.1

105.6

45.9

6.9

20.8

360.3

9.9

370.2

Outlays

Military Personnel

Operation and

Maintenance

Procurement

RDT&E a/

Military Construction

Other-DoD

Subtotal-DoD

Other Defense

Administration's 1989

Budget as ReestimatedbyCBO

75.3

80.0

80.9

33.7

5.4

4.0

279.3

8.1

287.5

78.3

83.1

80.7

35.6

5.1

3.3

286.0

8.5

294.5

80.1

86.9

81.3

37.3

5.5

6.5

297.5

8.9

306.4

80.7

90.5

84.7

39.1

5.7

11.0

311.7

9.2

321.0

80.8

94.0

88.3

41.0

6.0

15.7

326.0

9.5

335.5

81.0

97.6

92.6

42.8

6.4

20.4

340.8

9.8

350.6

SOURCE: Compiled by Congressional Budget Office based on data supplied by the Office of Management and Budget.

a. Research, development, test, and evaluation.
CHAPTER IV THE ADMINISTRATION'S DEFENSE BUDGET 35

year during the 1989-1993 period. The budget exceeds the baseline by

$1.6 billion over the five-year period, because the Administration's

request would more than make up for real decline in 1989 by growth

in the out-years (see Table IV-2). Based on CBO's economic assumptions, defense budget authority in the Administration's proposal

would decline by 2 percent in real terms in 1989, but would grow by an

average of about 1 percent in each of the following years through 1993.

(This is a somewhat lower rate of real growth than the Administration

claims because CBO projects a higher inflation rate over the

1989-1993 period. See Chapter II of this report.)

Even though 1989 is the fourth consecutive year of real decline in

the defense budget, the request for 1989 is still 40 percent higher than

actual budget authority for 1980. Table IV-3 illustrates the pattern of

real growth from 1981 to 1989 in the appropriation categories used by

the Congress. Annual funding has been steadiest for military

personnel; operation and maintenance (O&M); and research, development, test, and evaluation (RDT&E). Funding for procurement, military construction, family housing, and other accounts has been much

more variable. Real spending authority for these accounts has grown

by 17 percent or more a third of the time, but it has fallen with equal

frequency.

In the out-years, real growth would be more evenly distributed in

the Administration's budget proposals. Again, procurement funding

is an exception; between 1990 and 1993 it averages about 3 percent

annual real growth, while all other accounts average about 1 percent.

CBO REESTIMATES

The purpose of CBO reestimates is to provide a technical appraisal of

the budgetary impact of Administration policies. For some programs,

this can include a reestimate of both budget authority and outlays.

For defense programs, however, it usually involves only outlays. The

Congressional Budget Office does not usually reestimate budget authority, since defense spending is viewed as discretionary and since

the total amount of budget authority requested is as much a matter of

policy as are the constituent programs.
36 ANALYSIS OF THE PRESIDENT'S BUDGET March 1988

TABLE IV-2. MAJOR SPENDING CHANGES PROPOSED IN

ADMINISTRATION'S 1989 BUDGET FOR

FUNCTION 050: NATIONAL DEFENSE

(By fiscal year, in billions of dollars)

Cumulative

Changes 1989

CBO Baseline 307.5

Proposed Changes

Military personnel -0.9

Operation and

maintenance 1.1

Procurement -7.4

RDT&E a/ -0.4

Military construction

Other-DoD -0.6

Subtotal -8.1

Other Defense 0.1

Total Changes -8.0

Administration's 1989

Budget as ReestimatedbyCBO 299.5

1990

Budget

320.4

0.1

1.8

-5.8

-0.1

0.1

-0.2

-4.2

0.2

-4.0

316.4

1991

Authority

333.4

0.7

2.7

-3.6

0.4

0.2

-0.2

0.3

0.3

333.7

1992

347.2

0.7

3.5

-0.5

0.6

0.2

-0.1

4.5

-0.1

4.4

351.6

1993

361.4

0.5

4.3

3.2

0.9

0.2

-0.1

9.0

-0.2

8.8

370.2

Five- Year

Changes

1.2

13.5

-14.0

1.3

0.8

-1.3

1.5

0.1

1.6

Outlays

CBO Baseline 295.4

Proposed Changes

Military personnel -0.9

Operation and

maintenance 0.8

Procurement -0.3

RDT&E a/ -0.2

Military construction

Other-DoD -0.3

Subtotal -0.9

Other Defense 0.1

Total Changes -0.8

Administration's 1989

Budget as ReestimatedbyCBO 294.5

306.3

-

1.6

-1.2

-0.2

0.1

-0.3

-

0.1

0.1

306.4

319.6

0.6

2.4

-1.8

0.1

0.1

-0.3

1.3

0.1

1.4

321.0

332.6

0.7

3.3

-1.5

0.5

0.2

-0.2

2.9

..

2.9

335.5

345.7

0.5

4.0

-0.3

0.7

0.3

-0.1

5.0

-0.2

4.8

350.6

0.9

12.1

-5.1

0.9

0.8

-1.2

8.3

8.4

SOURCE: Compiled by Congressional Budget Office based on data supplied by the Office of Management and Budget,

a. Research, development, test, and evaluation.
CHAPTER IV THE ADMINISTRATION'S DEFENSE BUDGET 37

When programs or proposals are reestimated in isolation of the

total request, however, CBO often has different estimates. For example, the Administration has proposed changes in the Davis-Bacon

Act and the Service Contract Act, which require the payment of

prevailing wages on most construction and other government

contracts,, If enacted, the proposal would reduce budget authority by

about $310 million in 1989 according to Administration estimates, but

by only $149 million according to CBO estimates. In another example,

the Administration estimates the cost of civilian pay raises to be

higher than CBO does, but CBO is not reestimating the pay raise

allowance because it is at the Administration's discretion to request

whatever amounts it believes are needed.

TABLE IV 3. ANNUAL REAL GROWTH IN DEFENSE SPENDING

AUTHORITY (By fiscal year, in percent change)

Account 1981 1982 1983 1984 1985 1986 1987 1988 1989

Military Personnel

Operation and

Maintenance

Procurement

RDT&E

Military Construction

Family housing

Subtotal,

Department of

Defense-- Military

Other Defense

Total

2

9

25

13

39

21

13

18

13

2

6

25

14

38

4

12

16

12

2

5

17

10

-12

20

7

24

8

2

5

3

14

-3

-5

5

6

5

1

6

6

10

17

5

6

9

6

2

-4

-6

7

-7

-6

-2

-4

-2

2

3

-8

3

-5

8

-2

a/

-2

a/

-3

-3

-1

3

a/

-2

a/

-2

a/

2

-8

-1

1

-2

-2

2

-2

SOURCE: Congressional Budget Office.

NOTE: The figures shown in this table adjust budget authority for transfers and rescissions of

unobligated balances. They are conceptually similar to total obligational authority. The

1986 column incorporates the reductions made under the Balanced Budget Act.

a. Less than 0.5 percent.
38 ANALYSIS OF THE PRESIDENT'S BUDGET March 1988

Given the Administration's budget proposals, CBO estimates that

outlays for defense programs will total $294.5 billion in 1989—$0.5

billion higher than the outlay total in the Administration's budget

and the budget summit. This difference should not be viewed as

significant; it is well within the normal statistical error of outlay

estimating. Outlays under the Administration's program could be

higher or lower than CBO estimates by billions of dollars. Since total

defense budget authority has been relatively stable since 1985,

however, the range of error in current estimates is probably less than

$6 billion or plus or minus 1 percent.

Table IV-4 shows that CBO has higher outlay estimates than the

Administration in some categories and lower estimates in others. In

making its outlay estimates, CBO uses historical spendout rates,

including an allowance for estimated lapses—appropriations that will

never be spent. There is much room for error in estimating how much

of an appropriation will be spent in a given year and how much will

never be spent; in many cases, these are analytic judgments over

which people can differ. For each of the categories shown in the table,

CBO has attempted to have the probability of underestimating outlays equal to that of overestimating them.

CBO's higher estimate for 1989 is rooted in its higher estimate for

1988. As Table IV-4 shows, CBO estimates that outlays in 1988 will

total about $287.5 billion—$2.1 billion more than does the Administration. This estimate is consistent with recent reports from the

Department of Treasury. According to these reports, 1987 outlays

were $1.5 billion higher than CBO previously estimated, and very

strong defense spending had taken place in the first four months of the

fiscal year. A year-over-year extrapolation for 1988 shows outlays

totaling about $294 billion for just the Defense Department's portion

of the defense function, while time-series projections show an amount

slightly higher than that.

Finally, the Administration will propose legislation that would increase the Secretary of Defense's authority to transfer funds between

accounts and would broaden the foreign currency fluctuation account

so that it could receive expired funds from all DoD accounts and provide funds for military personnel. These proposals are discussed in

more detail below in the section on operation and maintenance. If

these proposals are enacted, outlays would increase by about $2.6 bil-
CHAPTER IV THE ADMINISTRATION'S DEFENSE BUDGET 39

lion in 1988 to about $290 billion (budget authority would also increase-by about $1.6 billion-since the transfer of expired spending

authority would be treated as a reappropriation).

MAJOR DEFENSE PROPOSALS

The Administration's priorities in its defense budget are military pay,

readiness, and efficient weapons acquisition. To fund these priorities,

the Administration has emphasized reductions in force structure, weapons cancellations and deferrals, reduced research and development,

and lower personnel strengths. The Administration often characterTABLE IV-4. REESTIMATES OF THE PRESIDENT'S 1989 REQUEST

FOR FUNCTION 050: NATIONAL DEFENSE

(By fiscal year, outlays in billions of dollars)

Account 1988 1989 1990 1991 1992 1993

President's 1989 Budget 285.4 294.0 306.2 320.2 335.4 351.3

Reestimates

Military personnel -0.1 0.4 0.5 0.5 0.5 0.5

Operation and maintenance -0.4 0.4 0.2 -0.3 0.0 -0.1

Procurement 1.7 0.9 0.7 2.2 1.2 0.3

RDT&Ea/ 0.6 -0.7 -0.9 -1.2 -1.2 -1.3

Military construction -0.1 -0.6 -0.4 -0.5 -0.4 -0.2

Family housing -0.1 -0.2 -0.3 -0.2 -0.2 -0.1

Other 0.5 0.4 O3 0,2 CU 0.1

Total Reestimates 2.1 0.5 0.2 0.8 0.1 -0.7

President's 1989 Budget

as Estimated by CBO 287.5 294.5 306.4 321.0 335.5 350.6

SOURCE: Congressional Budget Office.
40 ANALYSIS OF THE PRESIDENT'S BUDGET March 1988

izes its current request for 1989 in terms of changes from its request of

a year ago. But this report focuses on a comparison of the Administration's proposals with the CBO baseline, which is a projection of

1988 appropriations in real terms. This chapter, therefore, often compares the Administration's defense proposals for 1989 with 1988 program and funding levels.

Table IV-5 illustrates the importance of reference points when discussing increases and cuts in the defense budget. The force reductions

stressed by the Administration are shown in the fourth column of the

table, which shows changes from last year's proposals for 1989. Sealaunched ballistic missiles (ICBMs), Air Force and Marine Corps tactical aircraft, nuclear attack submarines, and other warships are reduced from the Administration's biennial request. In comparison to

1988, however, some of the same forces show increases (see the third

column); sea-launched ICBMs, Marine Corps tactical aircraft, and nuclear attack submarines are shown in greater numbers than 1988. In

the case of just one force component, the 656 sea-launched ICBMs currently planned for 1989 represent a cut of 8 missiles from last year's

plan for 1989 and an increase of 32 from the current plan for 1988.

The following sections of this chapter discuss the Administration's

program and priorities in more detail, and each contains a table

showing the changes in the 1989 request from the CBO baseline and

from last year's request for 1989.

Military Personnel

Military personnel appropriations fund the pay and allowances of

members of the active and reserve forces. The Administration has

requested $2.3 billion more for 1989 than was appropriated for these

accounts in 1988—though about $0.9 billion less than the CBO

baseline—for a total of $78.4 billion. This amount includes the cost of

the Administration's proposal to raise military pay by 4.3 percent

effective January 1,1989. It does not, however, include $54 million as

the cost of a proposed bonus for Air Force pilots choosing to stay in the

service. Nor does it include cuts in officer strength that are required

by law for 1989 and 1990; the cuts for 1989 would reduce the request

by about $100 million.
CHAPTER IV THE ADMINISTRATION'S DEFENSE BUDGET 41

TABLE IV-5. SUMMARY OF ACTIVE FORCES

(By fiscal year, in numbers)

Change

Change from

from Previous

Category 1988 1989 1988 to 1989 1989 Plan

Strategic Forces

Land-Based ICBMs 1000 1000 0 0

Strategic Bombers 372 372 0 0

Sea-Launched ICBMs 624 656 32 -8

Strategic Interceptors 36 36 0 0

General Purpose Forces

Army Divisions 18 18 0 0

Marine Corps Divisions 33 0 0

Air Force Tactical Aircraft 1,762 1,746 -16 -28

Navy Tactical Aircraft 758 792 34 34

Marine Corps Tactical Aircraft 334 341 7 -10

Naval Forces

Aircraft carriers 14 14 0 0

Battleships 34 1 0

Nuclear attack submarines 96 99 3 -2

Other warships 204 200 -4 -18

Amphibious assault ships 62 65 3 0

Airlift and Sealift Forces

C-5 Aircraft

Other Air Force Aircraft

Navy and Marine Corps

Tactical Support Aircraft

Ships

98

812

92

61

110

804

92

61

12

-8

0

0

0

0

0

0

SOURCE: Compiled by Congressional Budget Office based on data supplied by the Department of

Defense.

NOTE: Aircraft are in terms of primary aircraft authorized.
42 ANALYSIS OF THE PRESIDENT'S BUDGET March 1988

The $0.9 billion savings from the CBO baseline occur for several

reasons related to personnel levels and compensation policies. The

baseline assumes that the number of people in the military are the

same--on average-as now on duty. But the Administration's request

would reduce average strength by about 13,000 active-duty people; at

the same time, it would offset this reduction with an increase in average strength of about 5,000 reserve personnel (see Table IV-6). (In

terms of end-of-year strength, another common measure of personnel

levels, the Administration proposes almost no change in either active

or reserve levels. It has, however, reduced 1988 personnel levels from

those authorized under current law.) This reduction in active-duty

strength saves about $255 million, while the increase in the reserves

TABLE IV-6. REQUESTED STRENGTH LEVELS FOR MILITARY

PERSONNEL (By fiscal year, in percents, and average

personnel levels in thousands)

Service

1989

Request

(Thousands

of people)

Change

from 1988

People Percent

Change from

Previous Request

People Percent

Army

Navy

Marine Corps

Air Force

Subtotal

764

592

197

579

2,132

Active

-5

7

-1

-15

-13

Reserves

-1

1

a/

^2

-1

-17

-4

-3

-22

-46

-2

-1

-1

-2

Full-time

Part-time

Subtotal

Total

71

1.067

1,138

3,270

1

4

5

-8

2

a/

a/

§/

-5

-51

-56

-102

-6

-5

-5

-3

SOURCE: Compiled by Congressional Budget Office based on data supplied by the Department of

Defense.

a. Less than 0.5 percent.
CHAPTER IV THE ADMINISTRATION'S DEFENSE BUDGET 43

would cost about $65 million. Compared with last year's request, this

request represents a greater reduction in total military personnel—about 102,000 people measured in average strength.

The President's budget would raise military pay by 4.3 percent

effective January 1,1989, at a total cost of about $2.2 billion. For the

1989-1993 period, the request calls for pay raises averaging 4.3

percent compared with 4.0 percent for the CBO baseline. The President's request and the CBO baseline have two other differences aside

from the pay raise percentage. The Administration would provide the

pay raise in January instead of October, and it would not require any

"absorption"; the CBO baseline assumes about 15 percent absorption.

(Absorption refers to the practice of requiring federal agencies to fund

some portion of higher pay costs out of existing appropriations instead

of the Congress's providing additional funding to cover the full cost.)

Taken together, the percentage increase, the timing, and the absorption rate cause the Administration's proposal for military pay costs to

be a net $2.4 billion over the CBO baseline for the 1989-1993 period.

The Administration hopes to persuade the Congress to repeal a

current law calling for reductions in the numbers of officers relative to

enlisted personnel. As a result, the request includes about $100 million for higher officer strengths than, in fact, current law allows. In

the authorization bill for 1987, the Congress called for officer

strengths to be reduced—relative to enlisted strengths—by 6 percent by

the end of 1989. The legislation reflected a view that growth in the officer corps was poorly justified and contributed to "redundant headquarters and overblown staffs." The Department of Defense (DoD) has

argued, however, against the officer reductions on grounds of its needs

for combat readiness and compliance with other laws pertaining to

personnel management. Consequently, in its authorization bill for

1988, the Congress adhered to its goal, but granted DoD an additional

year to achieve the reductions. DoD will submit a report to the Congress in March 1988, reiterating its position that the law should be

repealed. I/

1. For an analysis of this issue, see Congressional Budget Office, "Reducing the Size of the Military

Officer Corps: Effects on Promotions and Accessions," Staff Working Paper, February 1988.
44 ANALYSIS OF THE PRESIDENT'S BUDGET March 1988

Operation and Maintenance

The operation and maintenance (O&M) accounts fund a wide range of

activities—some directly related to force operations, such as training

exercises, weapons maintenance, supplies, and other logistical support. O&M also funds personnel support activities that are only indirectly related to force readiness-for example, training of individual

members (apart from training in units), medical care, and military

base or community services.

Overall, new budget authority would grow by about 2 percent in

real terms in 1989. All O&M programs share in the real growth,

except for reserve forces, which show a decline (see Table IV-7 where

differences from the CBO baseline approximate differences in real

terms). In contrast, the Administration's current O&M request falls

short of its plan of a year ago in almost every program.

The Air Force's O&M budget request accounts for more than half

of the overall growth in O&M from CBO baseline levels. The Air

Force will operate only 16 fewer tactical aircraft in 1989 than in 1988,

despite realigning its force structure to 36 equivalent tactical air

wings instead of 38 wings. Even with this force reduction and a cut of

14,646 in average active-duty personnel levels, the Air Force's operation and maintenance budget would grow by over 5 percent in 1989,

or $1.2 billion in real terms.

The Navy's request for O&M is slightly below the CBO baseline.

At the same time, active-duty average personnel levels rise by 7,425

people and forces show a net increase over 1988 levels. The Navy proposes retiring eight frigates, but also proposes operating an additional

battleship, three more attack submarines, three more amphibious

assault ships, and four more other warships. The Navy is restructuring its air forces to have one fewer air wing, while actually operating

34 more aircraft overall.

The O&M requests for the Army and Marine Corps also show

slight decreases from the CBO baseline, and both show declines in

active-duty military personnel levels as well-5,223 for the Army and

698 for the Marine Corps. The Army's force structure would also be

reduced slightly: a light infantry brigade would be deactivated, and

450 utility helicopters would be eliminated from the force.
CHAPTER IV THE ADMINISTRATION'S DEFENSE BUDGET 45

Moreover, the Administration has requested appropriations to

employ about 1,102,000 civilians, most of whom are funded by O&M.

This amount represents a decrease of nearly 1 percent from the baseline and a reduction of 2 percent compared with the Administration's

previous request. The request also seeks a civilian pay raise of 2 percent to be effective January 1, 1989. This is the same pay raise

granted to both military and civilian personnel in 1988, but is smaller

than the 4.0 percent raise assumed in the CBO baseline. The reduction in strength saves about $140 million compared with the CBO

baseline, and the pay raise reduction saves about $0.7 billion.

TABLE IV-7. NOMINAL CHANGES IN OPERATION AND

MAINTENANCE (By fiscal year, in billions of dollars

of budget authority and percent changes)

Activity

1989

Request

(Dollars)

Change from

CBO Baseline

Dollars Percent

Change from

Previous Request

Dollars Percent

Strategic Forces 4.8

General Purpose

Forces 24.8

Intelligence and

Communications 8.4

Airlift and Sealift 1.7

Reserve Forces 6.6

Central Supply and

Maintenance 21.3

Training, Medical,

and Other 14.0

Administration

and Associated

0.3

0.7

0.2

0.1

-0.3

a/

6

3

2

8

-5

§/

a/

-0.7

-2.4

-0.7

-0.1

-0.7

0.2

-0.8

-12

-9

-8

-7

-10

-1

-5

Activities

Support of

Other Nations

Special Operations

Forces

Total

3.5

0.3

0.4

85.6

0.2

0.1

1.1

5

1

18

1

-0.1

0.0

0.4

-5.3

-2

2

b/

-6

SOURCE: Compiled by Congressional Budget Office based on data supplied by the Department of

Defense.

a. Less than 0.5 percent.

b. New category.
46 ANALYSIS OF THE PRESIDENT'S BUDGET March 1988

The Administration has two legislative proposals that, because of

unforeseen events like recent unfavorable changes in the exchange

rate, would allow funds from other DoD accounts to be extensively

transferred into the operation and maintenance accounts. CBO estimates that these proposals would raise outlays in 1988 by about $2.6

billion. Foreign currency fluctuations affect the O&M accounts more

than any other defense accounts, since O&M funds the costs of overseas bases. (Military personnel costs are also affected because servicemen may receive an overseas stationing allowance.) One of the Administration's proposals would raise the general transfer authority accorded the Secretary of Defense from $1.5 billion to $4.0 billion. With

this authority, the DoD could transfer funds from the slow-spending

procurement accounts into the faster-spending O&M and military

personnel accounts.

The second proposal centers on a revolving fund the Congress

established in 1979 to ease the adjustment to currency fluctuations.

The fund can be drawn down by the O&M accounts when the dollar

depreciates, but is replenished by O&M when the dollar appreciates.

Because the current balance in the revolving fund is very low, the Administration is seeking legislation that would allow DoD's expired

unobligated balances to be transferred to the revolving funds for subsequent withdrawal, not only by the O&M accounts but also by the

military personnel accounts. A similar proposal is being made for a

currency fluctuation account for military construction.

This second proposal would raise both budget authority and

outlays in 1988 and later years. It would raise outlays because funds

that would never be spent in the original account would be spent in

O&M. (For example, under current law, DoD loses the authority to

obligate and spend some procurement funds after a certain number of

years, but under this proposal DoD would be given a second opportunity to spend the funds after they had been transferred to the foreign currency revolving fund.) This proposal would also raise budget

authority in all years as funds are "reappropriated" from their original purpose to the new purpose of capitalizing the revolving fund for

foreign currency fluctuations.
CHAPTER IV THE ADMINISTRATION'S DEFENSE BUDGET 47

Procurement

The procurement accounts fund the purchase of weapons and other

equipment. The weapons purchased in these accounts include new

ships, aircraft, missiles, and combat vehicles such as tanks. The procurement accounts also fund major modification or weapons improvement programs, as well as spare and repair parts. Other purchases

include trucks, bridging equipment, radios, and satellites. As shown

in Table IV-8, the procurement accounts decline by 8 percent, or about

$7.4 billion from 1988 in real terms. This request would be the fourth

consecutive year of real decline in procurement budget authority; still,

the increases between 1981 and 1985 were great enough that procurement in 1989 would be 50 percent higher in real terms than in 1980.

Compared with the request for 1988, this year's procurement request includes a mixture of program cancellations, stretch-outs, and

accelerations. The Administration would cancel some programs because it does not consider them to be affordable—for example, the

Army's remotely piloted surveillance vehicle called Aquila, the

Copperhead laser-guided projectile, and improvements to Minuteman

HI missiles that would allow better penetration of enemy airspace.

Other weapons would be canceled because the Administration

considers alternatives more effective. For example, the Navy would

upgrade a current version of the A-6 attack aircraft rather than buy a

new version of the same aircraft—the A-6F—and the Air Force would

charter aircraft instead of buying the C-27. The Administration

includes only $200 million in development funds in its budget for the

small ICBM popularly called Midgetman; this amount would keep the

program going despite the Administration's opposition to it, and

essentially would leave the program up to the next Administration.

Finally, against its preferences but because of a Congressional ban on

testing, the Administration would cancel the ASAT, an antisatellite

program (see Table IV-9).

The budget also includes a number of stretch-outs and accelerations, as is common in annual requests. For some weapons, the Administration proposes buying fewer quantities in 1989 than in 1988;

quantities are reduced for five major aircraft programs, nine missile or

rocket systems, and the M-l tank. Other weapons would be purchased

at higher rates in 1989, including four aircraft programs and four-
48 ANALYSIS OF THE PRESIDENT'S BUDGET March 1988

TABLE IV-8. NOMINAL CHANGES IN PROCUREMENT

(By fiscal year, in billions of dollars of budget authority

and percent changes)

1989

Request

Activity (Dollars)

Aircraft

Support and

Other Equipment a/

Other Missiles,

Torpedoes,

and Weapons

Shipbuilding and

Conversion

Communications and

Electronic

Equipment

Spares and

Repair Parts

Vehicles,

All Types b/

Ammunition,

Munitions,

and Related

Equipment c/

Modifications

Ballistic Missiles

Total

17.4

16.5

9.2

9.1

6.8

5.7

4.3

4.2

4.0

2.7

80.0

Change from

CBO Baseline

Dollars

3.9

-3.8

1.0

-7.7

-0.5

0.4

-0.3

-0.1

0.1

-0.3

-7.4

Percent

29

-19

13

-46

-7

7

-7

-2

3

-11

-8

Change from

Previous Reauest

Dollars

2.7

-7.1

-1.9

-2.7

-2.6

-0.5

-0.5

-0.8

-0.3

-1.0

-14.6

Percent

19

-30

-17

-23

-27

-8

-10

-16

-7

-28

-15

SOURCE: Compiled by Congressional Budget Office based on data supplied by the Department of

Defense.

a. Includes National Guard and Reserve equipment.

b. Includes Army weapons and tracked combat vehicles, but excludes all Navy, National Guard, and

Reserve vehicles, which are included in the category of Support and Other Equipment.

c. Excludes Navy purchases of air-launched ordnance, which is included in the category of Support and

Other Equipment.
CHAPTER, IV THE ADMINISTRATION'S DEFENSE BUDGET 49

TABLE IV-9. PROGRAM TERMINATIONS IN THE ADMINISTRATION'S

1989 BUDGET (Budget authority, in millions of dollars)

Previous

Weapon 1988 1989 Plan

Army Programs

Aquila Remotely Piloted Vehicle 0 238

Anti-Tactical Missile 22 86

EH-60 Helicopter 7 57

120mm Mortar 0 24

M-198 Howitzer 0 20

Copperhead Laser-Guided Projectile 118 106

Navy Programs

A-6F Aircraft a/ 0 983

Naval Airship 25 62

Anti-Radiation Seeker 14 17

High Frequency Anti-Jam Radio b/ 52

5-inch Guided Projectile 0 0

Skipper Laser-Guided Bomb 39 37

Air Force Programs

ASAT Space Defense System 148 784

Midgetman ICBM 682 2,350

Minuteman III Penetration Aids b/ 130

C-27 Aircraft 0 70

AGM130 Rocket-Powered Bomb 1 122

Airborne Command Post Replacement 0 14

Total 1,055 5,153

SOURCE: Compiled by Congressional Budget Office based on data supplied by the Department of

Defense.

a. The budget refers to this program as "remanufactured A-6E."

b. Costs are not available at this time.
50 ANALYSIS OF THE PRESIDENT'S BUDGET March 1988

teen missile systems or torpedoes. Production slowdowns can add to

unit costs, since fixed costs are spread over fewer systems and economies of larger-scale production go unrealized; production accelerations can have the opposite effects. Generally, however, the effects of

production rates on unit costs vary widely for weapons systems. The

costs of some systems appear to be relatively insensitive to production

rates; at the same time, other systems show significant savings when

produced at higher rates.

The following sections discuss the procurement proposals in more

detail. The sections on aircraft, missile, and vehicle procurement

highlight some of the wide variations in unit costs that can be attributed to some combination of production rates and other program

changes—for example, procurement of an improved weapon.

Aircraft. The largest single category of procurement in 1989 will be

aircraft, although fewer aircraft would be purchased than in any year

since 1978. In 1988, the Department of Defense will buy about 660

aircraft, but in 1989 the number would fall to 617 (not counting

purchases of the B-2A or Stealth bomber, which are classified). Four

programs would be purchased at higher rates in 1989, and all of them

show declines in unit cost; the most expensive of these four—the C-17

airlift aircraft—would see a declining unit cost of 25 percent, since the

Air Force would buy four airplanes in 1989 compared with two in 1988

(see Table IV-10). Four of the five aircraft purchased in lower numbers in 1989 show unit cost increases, the largest of which occurs in

the EA-6B-a Navy aircraft with computer-controlled electronic warfare capability—where unit costs increase 41 percent. Unit costs for

the F/A-18 and the F-15 both increase by 13 percent. Nine aircraft

and helicopters show no change in numbers bought; five of them have

unit cost increases and four unit cost decreases. Because of a qualitative change in the program, the Air Force's F-16 fighter is 26 percent more expensive in 1989 than it was in 1988.

Support Equipment. The second largest single activity within the defense procurement accounts for 1989 is support and other procurement. Its large absolute and relative size stems from several factors:

"other procurement" is itself a large category; moreover, all major

weapons systems require general and sometimes specialized equipment for maintenance and test purposes. CBO has included defense
CHAPTER IV THE ADMINISTRATION'S DEFENSE BUDGET 51

TABLE IV-10. SELECTED PROGRAM CHANGES IN THE 1989

REQUEST FOR AIRCRAFT PROCUREMENT

(By fiscal year, in billions of dollars of budget authority

and percents)

Program

1989 Request

Quantity

Percent Changes

from 1988

Dollars Quantity Unit Cost

Increases

E-6A Aircraft

RC-12 Aircraft

C-17 Aircraft

T-45TS Aircraft

7

6

4

24

364

106

1,108

429

133

100

100

100

-17

-23

-25

-50

Decreases

MC-130H Aircraft

EA-6B Aircraft

F/A-18 Aircraft

F-15 Aircraft

AH-64 Helicopter

4

9

72

36

72

227

511

2,359

1,506

891

-43

-25

-14

-14

-6

11

41

13

13

-2

No Changes

F-16 Aircraft

SH-60F(CVASW)

Helicopter

AV-8B Aircraft

F-14 Aircraft

SH-60B Helicopter

UH-60 Helicopter

CH/MH-53E Helicopter

E-2C Aircraft

Civil Air Patrol Aircraft

180

18

24

12

6

72

14

6

38

3,705

386

568

910

121

495

208

355

1

0

0

0

0

0

0

0

0

0

26

17

13

10

4

-5

-6

-12

-68

SOURCE: Compiled by Congressional Budget Office based on data supplied by the Department of

Defense.
52 ANALYSIS OF THE PRESIDENT'S BUDGET March 1988

agency purchases and procurement of equipment for the National

Guard and Reserves in this category. These purchases include everything from photographic equipment and vehicles to training devices,

missiles, and aircraft. Budget details were not available to permit a

breakout of the data. While not part of all weapons systems, support

equipment is an important part of all weapons programs. In real

terms, funding requested for this category is about 19 percent ($3.8

billion) lower than in 1988.

Missiles. The Administration requests about $9.2 billion to purchase

an assortment of tactical and strategic missiles and torpedoes—one of

four categories of weapons that have real growth in 1989. The total

number of air-to-air, air-to-surface, and surface-to-air missiles would

remain at about the same level as in 1988, but fewer surface-tosurface missiles would be purchased primarily because of cutbacks in

an Army rocket system. Of the 14 weapons in the other missile and

torpedo category showing higher production rates in 1989, 10 have

lower unit costs (see Table IV-11). Five of the nine missile or rocket

programs with lower production rates show higher unit costs.

Shipbuilding and Conversion. The Navy is requesting $9.1 billion to

construct new ships and to modify or convert older ships. This amount

is substantially less than was appropriated for 1988, but last year's

appropriation contained about $6.3 billion for two nuclear-powered

aircraft carriers. This year's request contains $8.9 billion for the

construction of 17 new ships, including $2.2 billion for three AEGIS

destroyers, $1.6 billion for two Los Angeles-class attack submarines,

$1.5 billion for the SSN-21 (the lead ship of a new class of attack submarines), and $1.4 billion for a Trident ballistic missile submarine.

The Navy seeks $0.2 billion in advance funding to extend the service

life of a conventionally powered aircraft carrier, the U.S.S. Constellation, and to modernize two oil-bearing ships.

Communications Equipment. The funding request for communications and electronic equipment ranges from radios for tactical forces to

fleet ballistic missile support equipment. After adjustments for inflation, funding requested for this category is 7 percent lower than in

1988. The largest single program is the Army's Mobile Subscriber

Equipment (MSE)--field telephones-which accounts for £1.0 billion of
CHAPTER IV THE ADMINISTRATION'S DEFENSE BUDGET 53

TABLE IV-11. SELECTED PROGRAM CHANGES IN THE 1989

REQUEST FOR OTHER MISSILES, TORPEDOES, AND

WEAPONS PROCUREMENT (By fiscal year, in billions of

dollars of budget authority and percents)

1989 Request

Quantity Dollars

Percent Changes

from 1988

Quantity Unit Cost

ALWT Torpedo

AMRAAM: Missile

(Air Force)

Chaparral Missile

MK-48 ADCAP Torpedo

HARM Missile (Navy)

Stinger Missile (Army)

Phoenix Missile

Stinger Missile

(Marine Corps)

Dragon Missile

(Marine Corps)

Standard Missile

(Medium Range)

Patriot Missile

Harpoon Missile

RAM Missile

Tomahawk Missile

Increases

140 199

1,470

368

261

1,307

6,750

560

3,115

5,950

1,635

815

138

260

510

Hellfire Missile (Navy) 200

Maverick Missile (Navy) 731

HARM Missile (Air Force) 893

Sparrow Missile (Air Force) 354

MLRS Rocket System 48,000

TOW Missile

(Marine Corps) 2,585

Sidewinder Missile

(Air Force) 760

HAWK Missile

(Marine Corps) 467

IIR Maverick (Air Force) 2,540

831

61

443

306

243

466

145

10

701

858

177

53

733

Decreases

9

83

223

56

416

28

48

140

270

No Change

775

268

202

161

71

61

60

40

40

25

14

11

8

7

-86

-58

-46

-37

-33

-24

-21

-11

-6

-84

-69

-38

-34

-8

6

-23

8

-15

-7

-19

3

4

-24

37

-13

5

1

32

-6

-4

22

-8

Hellfire Missile (Army)

TOW 2 Missile (Army)

5,000

12,000

181

149

0

0

4

-13

SOURCE: Compiled by Congressional Budget Office based on data supplied by the Department of

Defense.
54 ANALYSIS OF THE PRESIDENT'S BUDGET March 1988

a $6.8 billion request. The MSE request is about the same as last year,

though the Army's programs in general are about $0.3 billion lower.

Navy and Air Force programs total about $0.2 billion below 1988,

while Marine Corps programs receive a small amount of real growth.

Spare Parts. Funding for spare and repair parts programs would

increase about 7 percent in real terms over 1988. A proposed increase

in funding for Air Force aircraft and missile spares would be partially

offset by a decrease for Navy aircraft and missile spares.

Vehicles. Funding for procurement of vehicles—primarily for the

Army and Marine Corps—would fall by about 7 percent or $0.3 billion

in real terms. In this category, DoD buys all kinds of vehicles from

trucks and other wheeled support vehicles to tanks and other tracked

combat vehicles; consequently, it is not easily summarized. The Army

would buy 100 fewer M-l or Abrams tanks for a total of 545 in 1989,

and the Marine Corps would buy its first lot of M-ls with a purchase of

14 tanks. Procurement of Bradley Fighting Vehicles would decline by

only five units. The Army would buy 80 vehicles designed to recover

other vehicles damaged in battle, a system last purchased in 1986.

Finally, the Army would not buy any field artillery ammunition

carriers after buying 48 last year.

Ammunition. Like spare parts procurement, ammunition procurement is sometimes considered to be a readiness activity. The 1989

request would decrease departmentwide ammunition procurement by

about 2 percent in real terms, largely because of planned termination

of the Army's Copperhead laser-guided projectile. The Army's program includes $66 million for chemical weapons, and the Air Force

and Navy programs contain about $100 million for a chemical

weapon-the BIGEYE bomb.

Weapons Modifications. The budget for weapons modifications would

increase by about 3 percent in real terms in 1989. Modifications of

major weapons result both in small programs aimed at improving the

reliability or maintainability of parts of a weapon and in large-scale

programs that add new capabilities to existing weapons or extend

their useful lives. The planned real growth in Army and Air Force

aircraft modifications is partially offset by reductions in modifications

of Navy aircraft.
CHAPTER IV THE ADMINISTRATION'S DEFENSE BUDGET 55

Ballistic Missiles. Procurement of ballistic missiles in 1989 would

total $2.7 billion—the smallest amount of all categories shown in Table

IV-8-representing a real decline of about 11 percent or about $0.3

billion. While the number of missiles would be the same in 1989 as in

1988, the decline in funding results from an expected reduction in the

unit prices for Trident IE and MX missiles.

Research, Development, Test, and Evaluation

Research, development, test, and evaluation (RDT&E) funding is

usually the first commitment to a weapons acquisition program, and it

continues through the early stages of production. The Administration

is seeking funds to sustain RDT&E funding at a 13 percent share of

the total DoD budget-the same share as in 1987 and 1988. While real

growth has averaged 9 percent since 1980, the 1989 RDT&E budget of

$38.2 billion represents a real decrease in budget authority of $0.4 billion, or 1 percent below 1988 baseline levels.

Three of the activities in the RDT&E account would experience

real growth, while three others would experience real decline (see

Table IV-12). A 4 percent decrease would take place in the technology

TABLE IV-12. NOMINAL CHANGES IN RESEARCH, DEVELOPMENT,

TEST, AND EVALUATION (By fiscal year, in billions of

dollars of budget authority and percent changes)

1989

Request

Activity (Dollars)

Technology Base

Advanced Technology

Development

Strategic Programs

Tactical Programs

Intelligence and

Communications

Defensewide Mission

Support

Total

3.3

6.5

6.5

13.1

4.5

4.3

38.2

Change from

CBO Baseline

Dollars

-0.1

0.9

-1.1

0.4

-0.6

0.1

-0.4

Percent

-4

15

-14

3

-11

2

-1

Change from

Previous Reauest

Dollars

-0.4

-2.0

-2.7

-0.7

-0.4

0.1

-6.0

Percent

-10

-23

-29

-5

-8

2

-14

SOURCE: Compiled by Congressional Budget Office based on data supplied by the Department of

Defense.

82-607 - QL 3
56 ANALYSIS OF THE PRESIDENT'S BUDGET March 1988

base, in which basic research is conducted in areas involving physical,

mathematical, environmental, engineering, biomedical, and behavioral sciences. Advanced technology development would grow about

15 percent, largely because of a proposed $4.5 billion request (a $1 billion increase) for the Strategic Defense Initiative. Whereas programs

like SDI explore emerging technologies that have potential applications for defense, the request for RDT&E calls for a 14 percent real

decrease in those strategic programs that have already passed these

early developmental stages. The decrease in strategic programs is

primarily caused by changes in classified programs, as well as a $0.5

billion reduction in the Trident n missile system, a $0.5 billion reduction in the small ICBM, and a $0.1 billion reduction in the B-1 bomber

program.

The 3 percent growth in tactical programs for 1989 results from

increases in a number of programs, the largest of which include the

Navy's classified programs and the P-3 modernization program ($0.1

billion), the Air Force's Advanced Tactical Fighter ($0.2 billion), the

Army's Light Armed Scout helicopter ($0.1 billion), and the advanced

anti-tank weapon system ($0.1 billion). These and other increases are

partially offset by reductions in the A-6 aircraft ($0.2 billion), joint

tactical fusion program ($0.2 billion), attack submarine development

($0.1 billion), and many other programs. The decrease of 11 percent in

intelligence and communications activities would be partially offset

by a 2 percent increase in defensewide programs (that is, programs

with many and diverse applications). The reduction in intelligence

and communications programs is primarily the result of changes in

classified programs.

Other Accounts

For fiscal year 1989, the Administration requests $5.7 billion for a

variety of weapons and personnel programs funded in military construction accounts. This amount represents an increase of $389 million over the fiscal year 1988 budget~an inflation-adjusted increase of

about 1 percent. The Administration's request for military construction would fund many projects within the United States and overseas,

including Navy Strategic Homeporting ($220 million), the Strategic

Defense Initiative ($90 million), and the Light Infantry Divisions in

New York and Alaska ($214 million).
CHAPTER IV THE ADMINISTRATION'S DEFENSE BUDGET 57

Like O&M and the military personnel accounts, the military

construction accounts spend significant amounts overseas and are

therefore affected by exchange rate fluctuations. The Administration

proposes to transfer expired military construction and family housing

funds to the foreign currency fluctuation account for these programs

(see the section on operation and maintenance for an explanation of

how a foreign currency fluctuation account works). The proposal

would raise 1988 budget authority and outlays by about $150 million,

since funds that are currently not available would be spent.

The budget for the Department of Energy contains $8.1 billion for

defense activities for fiscal year 1989, an increase of over $300 million

from the previous year. The activities funded in the defense function

include the development and production of nuclear weapons as well as

the production of nuclear materials. An increase of about $200 million

for materials production accounts for much of the increase over last

year's level.

CHAPTER V

THE ADMINISTRATION'S

NONDEFENSE BUDGET

The President's proposals would result in nondefense outlays of $825

billion in 1989, an increase of 7 percent over the 1988 level and about

1 percent, or $10 billion, below the CBO baseline. Over the four subsequent years, growth in nondefense spending would average about 5.5

percent per year, about 0.5 percent below the growth in baseline each

year. Total reductions in nondefense spending over the 1989-1993

period would be $99 billion relative to the CBO baseline.

The proposed domestic savings are much smaller than the

President has requested in recent budget submissions. In both the

1987 and 1988 budgets, Presidential requests would have reduced

domestic spending by more than $300 billion compared with CBO's

baseline over a five-year period.

HUMAN RESOURCES PROGRAMS

Spending for human resources programs will account for over twothirds of nondefense outlays in 1988. Under the President's proposals,

outlays for such programs would continue to grow steadily through

1993, by an average of 6.8 percent per year. This growth rate is lower

than the 7.2 percent annual growth rate in the CBO baseline. The

resulting savings relative to the baseline would total $41 billion from

1989 through 1993, a 1 percent reduction. All human resources functions are targeted for reductions. (The dollar savings for each function

are summarized in Table V-l; percentage reductions are in Table V-2.)

Medicare (function 570) is targeted for the largest dollar reductions in any nondefense program~$14.6 billion over the five-year

period. The Administration proposes to lower payments to hospitals

for medical education, reduce payments to physicians and suppliers,
60 ANALYSIS OF PRESIDENT'S BUDGET March 1988

TABLE V-l. CBO ESTIMATES OF THE ADMINISTRATION'S

PROPOSALS IN NONDEFENSE SPENDING

(By fiscal year, in billions of dollars)

Increase or Decrease (-) in

Outlays Relative to CBQ Baseline

Total

Budget Function 1989 1993 1989-1993

Above Baseline Over Five Years

Natural Resources, Infrastructure,

and Other Government Services

General Science, Space,

and Technology (250) 1.5 5.4 19.5

Administration of Justice (750) 1.3 0.8 5.3

Subtotal 2.8 6.2 24.8

Below Baseline Over Five Years

Human Resources

Education, Training, Employment,

and Social Services (500) -0.8 -4.1 -10.3

Health (550) -0.5 -1.7 -5.0

Medicare (570) -1.0 -5.2 -14.6

Income Security (600) -0.3 -1.1 -3.8

Social Security (650) -- -0.5 -1.4

Veterans Benefits and Services (700) -0.5 -1.2 -5.7

Subtotal -3.2 -14.0 -40.6

Natural Resources, Infrastructure,

and Other Government Services

International Affairs (150) -0.4 -1.8 -4.2

Energy (270) -1.3 -1.2 -3.8

Natural Resources and

Environment (300) - -4.1 -9.9

Agriculture (350) -1.6 -2.1 -9.9

Commerce and Housing Credit (370) -2.2 -3.1 -12.0

Transportation (400) -0.9 -4.0 -12.8

Community and Regional

Development (450) -0.7 -2.6 -8.1

General Government (800) -0.1 -- -0.3

Subtotal -7.4 -18.6 -61.2

Other

Net Interest (900) -0.2 -5.0 -11.9

Allowances (920) -- -0.1 -0.2

Undistributed Offsetting Receipts (950) -2.3 -2.2 -10.3

Subtotal -2.5 -7.2 -22.4

Total -10.3 -33.6 -99.4
CHAPTER V THE ADMINISTRATION'S NONDEFENSE BUDGET 61

TABLE V-2. CBO ESTIMATES OF THE ADMINISTRATION'S

PROPOSALS IN NONDEFENSE SPENDING

(By fiscal year, in percentage differences from the

CBO baseline)

Percentage Increase or

Decrease (-) in Outlays

Relative to CBO Baseline

Total

Budget Function 1989 1993 1989-1993

Above Baseline Over Five Years

Natural Resources, Infrastructure,

and Other Government Services

General Science, Space,

and Technology (250) 12.8 41.8 32.2

Administration of Justice (750) 15.1 7.4 10.8

Below Baseline Over Five Years

Human Resources

Education, Training, Employment,

and Social Services (500) -2.2 -10.4 -5.4

Health (550) -1.0 -2.4 -1.6

Medicare (570) -1.2 -3.8 -2.6

Income Security (600) -0.2 -0.7 -0.5

Social Security (650) -0.0 -0.2 -0.1

Veterans Benefits and Services (700) -1.9 -3.8 -3.7

Natural Resources, Infrastructure,

and Other 'Government Services

International Affairs (150) -2.4 -9.0 -5.0

Energy (270) -28.1 -26.8 -16.8

Natural Resources and

Environment (300) -0.3 -22.3 -11.3

Agriculture (350) -7.0 -12.9 -10.0

Commerce and Housing Credit (370) -22.9 -93.8 -40.4

Transportation (400) -3.2 -12.6 -8.6

Community and Regional

Development (450) -10.3 -35.6 -22.9

General Government (800) -1.1 0.4 -0.6

Other

Net Interest (900) -0.1 -2.4 -1.2

Allowances (920) a/ §/ a/

Undistributed Offsetting

Receipts (950) b/ 6.0 4.8 5.0

a. Baseline is zero.

b. Offsetting receipts rise, decreasing the deficit.
62 ANALYSIS OF PRESIDENT'S BUDGET March 1988

and raise SMI premiums. Other federal spending on Health (550)

would be reduced $5.0 billion, primarily through regulatory initiatives in Medicaid and constraining the growth in Public Health Service funding to 1 percent per year from 1989 through 1993.

The Administration also targets Education, Training, Employment, and Social Services (500) and Veterans Benefits and Services

(700) for five-year reductions of $10.3 billion and $5.7 billion, respectively. Several social service programs would be frozen at their 1988

levels, and education grant programs would be frozen after 1989,

when funding would be increased above baseline levels. The President's budget requests an extension of the current loan origination fee

in the VA's home loan guaranty program, assumes additional loan

sales, and requests funding for the Veterans Medical Care program

below baseline levels.

Social Security (650) and Income Security (600) are slated for reductions of less than 1 percent over the period. In Social Security, no

benefit reductions are proposed, but administrative expenses would be

held below the baseline. In Income Security, funding for the LowIncome Home Energy Assistance Program would be frozen at about 80

percent of its 1988 appropriation level from 1989 through 1993. The

Administration is also requesting welfare reform, which CBO estimates will increase costs by $0.9 billion over the projection period.

NATURAL RESOURCES, INFRASTRUCTURE,

AND OTHER GOVERNMENT SERVICES

Net spending on natural resources, infrastructure, and other government services currently accounts for less than one-sixth of nondefense

outlays, or an estimated $121 billion in 1988. Under CBO baseline

assumptions, spending for these programs and activities is expected to

be about $134 billion in 1989 and to remain roughly constant at that

level through 1993. The lack of growth in baseline spending over the

1989-1993 period occurs largely because projected growth in most discretionary spending is offset under current law by declining net

outlays in a number of programs, including farm price supports and

thrift insurance.
CHAPTER V THE ADMINISTRATION'S NONDEFENSE BUDGET 63

The President's budget proposals would reduce spending below

the baseline in these areas by about 4 percent in 1989 and by about 5

percent through 1993. (In contrast, proposals in last year's budget

would reduce spending in these functions by 15 percent below the

baseline over the next five years.) Outlay savings would be about $5

billion in 1989 and about $36 billion over the five-year period. By

1993, outlays would be reduced to approximately the 1988 level.

The sharpest reductions are proposed for Commerce and Housing

Credit (370), with outlay reductions relative to the CBO baseline

totaling $12 billion over five years. The Administration would eliminate loans for small business assistance and for low-income rural

housing (to be replaced in part by housing vouchers), and would reduce lending to finance construction of housing for the low-income

elderly or handicapped. In addition, the Postal Service would have to

raise rates to cover various costs that are now federally subsidized. On

the other hand, large increases would be provided to the Census

Bureau to carry out the decennial census.

Spending for Community and Regional Development (450) would

be reduced by almost a quarter, or $8 billion, relative to the CBO baseline over five years. Appropriations for Community Development

Block Grants would be reduced, while Urban Development Action

Grants and a variety of other grant and loan programs for both urban

and rural areas would be terminated.

Other functions are also targeted for significant reductions.

Energy (270) outlays would be reduced by $4 billion, or 17 percent,

over the 1989-1993 period relative to the CBO baseline, largely by the

elimination of Rural Electrification Administration (REA) loans and

from the sale and prepayment of existing REA loans. Conservation

and research funding would be held below baseline levels, while

spending would be increased for the Strategic Petroleum Reserve and

nuclear waste disposal.

Spending for Natural Resources and Environment (300) programs

would be reduced by about $10 billion, or 11 percent, below baseline

levels over five years. Funding for the conservation reserve and for

the Hazardous Substance Superfund would be increased, but spending

would be below the CBO baseline for most other programs involving

the environment, land management, recreation, and water and other
64 ANALYSIS OF PRESIDENT'S BUDGET March 1988

natural resources. Agriculture (350) outlays would also be reduced by

about $10 billion through 1993, largely by gradually eliminating farm

ownership and operating loans, phasing out subsidized crop insurance,

and reducing funding for agricultural research and services.

Transportation (400) spending would be $13 billion, or 9 percent,

below the baseline during the five years. Reductions in outlays for

mass transit, highways, and Amtrak would be partially offset by increased spending for the air traffic control system and the Coast

Guard. Outlays for International Affairs (150) would be $4 billion

below the baseline from 1989 through 1993, with most activities

limited to growth at half the projected rate of inflation and no increase

in aid to Israel and Egypt. The budget for General Government (800),

with only minor cuts overall, includes reductions in payments to

states, counties, and the District of Columbia, offset by increased

outlays for federal buildings, the legislative branch, and other

activities. Internal Revenue Service outlays would be approximately

at baseline levels over five years.

Planned spending for functions 250 and 750 is above the baseline.

General Science, Space, and Technology (250) is targeted for by far the

greatest percentage increase in the budget, with outlays almost $20

billion, or 32 percent, above the baseline over the 1989-1993 period.

The proposed space station and Superconducting Super Collider account for much of the increase, but funding above the baseline is also

projected for space shuttle operations and National Science Foundation research programs. Additional spending for federal prisons and

judicial activities bring outlays for Administration of Justice (750)

above baseline levels by about 11 percent over five years, with expenditures for federal law enforcement roughly equal to the baseline

through 1991 and below it thereafter.

OTHER NONDEFENSE SPENDING

The President's proposals for allowances, undistributed offsetting

receipts, and net interest would result in net outlay reductions of $22

billion, relative to the baseline, over five years. Undistributed Offsetting Receipts (950) would be increased by about $10 billion, largely

as a result of increased Postal Service payments to the Civil Service
CHAPTER V THE ADMINISTRATION'S NONDEFENSE BUDGET 65

Retirement Trust Fund, and the sale of the naval petroleum reserves

and two power marketing administrations. Allowances (920) includes

savings of $0.2 billion over five years, resulting from the Administration's proposal to increase the threshold for contracts covered by

the Davis-Bacon Act and the Service Contract Act. Finally, outlays

for Net Interest (900) would be reduced by about $12 billion over the

1989-1993 period, primarily because of the lower deficits estimated for

the President's policies.

DETAILS BY BUDGET FUNCTION

The President's proposals for nondefense spending are discussed in

more detail, by budget function, on the following pages. To facilitate

comparisons with the CBO baseline, two types of adjustments have

been made to the various functions—for credit reform and for pay

allowances.

The President's budget includes a proposal to modify the budgetary presentation and the funding mechanism for credit programs

in order to reflect more accurately their cost to the government. The

present value of a credit subsidy would be charged to any agency

making or guaranteeing loans, and funds would be appropriated to

cover the estimated subsidy. Only the subsidies would appear in the

agency accounts, while the actual cash flows would be reflected in

centralized revolving funds in a new budget function (870). This

change would not affect the deficit, but would result in different budget authority and outlays in affected accounts and functions. While

CBO has urged the adoption of some form of credit reform, the CBO

baseline cannot incorporate such changes until they are enacted into

law. Therefore, in order to measure the President's proposals against

the baseline, the credit reform adjustments were removed from the

budget and the functional totals were modified to be con-sistent with

the current budget system.

The President's budget also includes allowances for pay raises in

function 920 in 1990 through 1993. In the CBO baseline, such increases are reflected in the individual functions. In the following

tables, the allowances for pay raises in the budget have been allocated

to the individual functions.
66 ANALYSIS OF PRESIDENT'S BUDGET March 1988

FUNCTION 150: INTERNATIONAL AFFAIRS

PROPOSED MAJOR SPENDING CHANGES

(By fiscal year, outlays in billions of dollars)

Item

Cumulative

Five-Year

1989 1990 1991 1992 1993 Changes

CBO Baseline

Proposed Changes

Foreign military sales

Multilateral development

banks

Public Law 480

Other

Total

President's 1989 Budget

as Estimated by CBO a/

President's 1989 Budget a/

CBO Reestimates

16.6 16.4 16.5 17.0 17.4

-0.1 -0.2 -0.4 -0.5 -0.5

0.0

-0.1

-0.1

-0.4

0.1

-0.1

-0.1

0.2

-0.2

-0.3

0.2

-0.2

-0.6

0.2

-0.3

-0.9

-0.4 -0.7 -1.1 -1.6

16.2 16.0 15.8 15.9 15.9

13.3 13.1 16.2 16.1 16.1

2.9 2.9 -0.4 -0.2 -0.3

-1.7

0.6

-1.0

-2.1

-4.2

5.0

a. Excludes the Administration's proposals for credit reform; includes allowance for pay raises in 1990

through 1993.

Proposed Policy Changes

The Administration's proposals for spending in the international affairs function are below CBO's baseline in all years. The request includes an increase in spending of 2 percent for 1989, consistent with

the budget summit agreement, and of only half the projected rate of

inflation in 1990 through 1993. Within the overall decrease in real

resources, some programs fare better than others.

Foreign Military Sales Financing. Foreign military sales financing

includes foreign military sales (FMS) credits and military assistance

grants-financing to enable foreign countries to buy U.S. military

equipment and services. The request is for a slight real increase in
CHAPTER V THE ADMINISTRATION'S NONDEFENSE BUDGET 67

budget authority for the two accounts in 1989 and growth at half the

rate of inflation in 1990 through 1993. The request would, however,

reduce the faster-disbursing military assistance grants while increasing FMS credits, thus lowering estimated outlays in 1989 by $61

million but increasing them slightly over the five-year period.

Financing for Israel and Egypt would be frozen over the five-year

period. Since these two countries draw upon their financing faster

than the program as a whole, estimated outlays for FMS are $1.7 billion below the CBO baseline.

All FMS credits are requested as forgiven loans-that is, no

repayment is required. FMS credits would be grants in everything

except name. This shift to grants is estimated to lower interest receipts in budget function 900 by $0.1 billion over the next five years.

It has no effect on the international affairs function because of the

long grace period on principal repayments.

Multilateral Development Banks. The United States negotiates with

other donor countries with regard to the funding levels for the

multilateral development banks. Agreements for replenishing the

resources of these institutions usually cover a number of years. The

Administration is requesting authorization for new replenishments

for the general capital of the World Bank and the African Development Fund. It is requesting funding for all scheduled contributions

and subscriptions of capital due in 1989, and funding of arrearagesscheduled funding denied in the 1988 appropriation bill-in 1990.

Because of the slow disbursement rates and changes in the mix of

funding, there would be no increase in outlays from baseline levels in

1989 but a $0.6 billion increase over the next five years.

Public Law 480 and Other Programs. Spending for these two categories would be below baseline levels by $3.1 billion over the next five

years. Nearly one-third of the reduction would be in the Public Law

480 food-aid program, which would be cut by 9 percent in 1989.

Spending for bilateral economic assistance programs of the Agency for

International Development would be cut by $0.8 billion over the next

five years. Credit program levels of the Export-Import Bank would increase by a nominal 2 percent, but the President is not requesting

appropriations for the bank's tied-aid program.
68 ANALYSIS OF PRESIDENT'S BUDGET March 1988

The Administration is proposing increases over the next five years

in two areas. Spending increases of $0.3 billion over the next five

years for radio transmitter construction by the Board for International

Broadcasting and the United States Information Agency would expedite completion of three major projects. After a one-year deferral of

new construction funding for State Department embassy security, the

Administration is requesting increases in spending totaling $0.3 billion over the next five years.

CBO Reestimates

Foreign Military Sales Refinancing. CBO estimates that collections

from refinancing FMS loans with new guarantees, as authorized by

the FMS debt reform program contained in the fiscal year 1988 continuing resolution, will be below the Administration's estimates by

$2.3 billion in 1989 and $2.9 billion in 1990, but $0.3 billion higher in

1991 through 1993. The regulations governing this program will not

be promulgated until late March, so both the Administration and CBO

estimates are highly speculative. CBO believes, however, that the

economic benefit to the few debtor countries that can take advantage

of the refinancing program will lead to its completion in 1988.

The FMS refinancing program also affects the CBO estimate of

the Guarantee Reserve Fund. The GRF is an account designed to cover late and rescheduled payments on guaranteed FMS loans financed

by the Federal Financing Bank. The Administration assumes that

several countries that have been chronically late in their payments or

have rescheduled the payments of their FMS loans to the U.S. government will refinance their loans through the new guarantee program

and stay current with their payments to private lenders. The Administration estimates this will reduce net claim payments by $0.3 billion

in 1989 and $2.2 billion over the next five years. CBO does not assume

any refinancing from these countries, thus eliminating these savings.

Export-Import Bank. The Administration estimates loan prepayments to the Eximbank of $0.5 billion in 1989. While the Eximbank

has $2.4 billion in loan assets in highly credit-worthy countries, these

loans are exclusively to private borrowers and carry interest rates of

8.0 percent to 8.375 percent. CBO does not believe these borrowers

will find it economically advantageous to refinance the loans.
CHAPTER V THE ADMINISTRATION'S NONDEFENSE BUDGET 69

Exchange Stabilization Fund. The President's budget estimates interest income for the Exchange Stabilization Fund from its holdings of

U.S. securities only. CBO estimates interest income on net equity, regardless of whether it is held in U.S. or foreign-denominated securities, resulting in an additional $0.2 billion of interest income in 1989

and $1.1 billion through 1993. Neither CBO nor the Administration

makes an estimate of gains or losses from exchange fluctuations.
70 ANALYSIS OF PRESIDENT'S BUDGET March 1988

FUNCTION 250: GENERAL SCIENCE.

SPACE, AND TECHNOLOGY

PROPOSED MAJOR SPENDING CHANGES

(By fiscal year, outlays in billions of dollars)

Item 1989 1990 1991 1992 1993

Cumulative

Five-Year

Changes

CBO Baseline

Proposed Changes

National Aeronautics and

Space Administration

Department of Energy

(General science)

National Science

Foundation

Total

President's 1989 Budget

as Estimated by CBO a/

President's 1989 Budget a/

CBO Reestimates

11.5 11.8 12.1 12.4 12.9

1.2

0.3

0.1

1.5

2.7

0.5

0.2

3.3

3.5

0.5

0.3

4.3

3.9

0.6

0.5

5.1

4.0

0.6

0.8

5.4

15.2

2.4

1.9

19.5

13.0 15.1 16.4 17.5 18.2

13.1 15.2 16.9 17.6 18.1

-0.1 -0.1 -0.5 -0.1 0.1 -0.7

a. Includes allowance for pay raises in 1990 through 1993.

Proposed Policy Changes

The President's proposals for function 250 would increase spending by

32 percent above the CBO baseline from 1989 through 1993; the 1989

appropriation request is 29 percent above that for 1988. All programs

in this function-the National Science Foundation (NSF), Department

of Energy (DOE) general science programs, and the space programs of

the National Aeronautics and Space Administration (NASA)—would

receive sizable increases.

Two major projects account for over half of the increase relative to

the baseline: NASA's space station and the DOE's Superconducting
CHAPTER V THE ADMINISTRATION'S NONDEFENSE BUDGET 71

Super Collider (SSC). The spending levels for these two projects are

$10.7 billion above the baseline over five years. The President's budget includes a three-year advance appropriation request for the space

station: $967 million for 1989, $2.1 billion for 1990, and $2.9 billion

for 1991. For the SSC, the President requests $363 million in new

budget authority for 1989, and proposes a total of $2.5 billion from

1989 through 1993.

Funding for NASA's space flight, control, and data communications activities would also receive a significant increase under the

President's budget. The proposed spending levels for this program are

$4.3 billion (or 19 percent) above the baseline from 1989 through 1993.

Most of this increase is earmarked for shuttle operations and the

purchase of expendable launch vehicles.

Proposed spending for NSF programs is 20 percent above baseline

levels for this period. The budget would increase funding for all NSF

programs, including basic research on science, engineering, and mathematics, and science and engineering education activities. Included in

the 1989 request for the NSF is $150 million to establish science and

engineering centers at major research centers around the country; this

request would provide five years of funding for these centers.

CBO Reestimates

CBO estimates that outlays in 1991 would be $500 million less than

estimated in the budget, because of differing projections of spending

rates for shuttle operations. Other estimating differences are small.
72 ANALYSIS OF PRESIDENT'S BUDGET March 1988

FUNCTION 270: ENERGY

PROPOSED MAJOR SPENDING CHANGES

(By fiscal year, outlays in billions of dollars)

Item 1989 1990 1991 1992 1993

Cumulative

Five-Year

Changes

CBO Baseline

Proposed Changes

4.8 4.8 4.4 4.2 4.6

Rural electrification

Conservation

Energy R&D

Sale of naval petroleum

reserves and power marketing administrations a/

Strategic Petroleum Reserve

Nuclear waste disposal

Other

Total

President's 1989 Budget

as Estimated by CBO b/

President's 1989 Budget b/

CBO Reestimates

-1.7

--

-0.1

—

0.4

-

0.1

-1.3

3.4

3.1

0.4

-1.2

-0.2

-0.1

0.6

0.4

0.1

—

-0.2

4.6

4.5

0.1

-1.5

-0.2

-0.1

0.7

0.3

0.2

0.1

-0.3

4.1

4.3

-0.2

-1.8

-0.3

—

0.8

0.4

0.2

—

-0.7

3.5

3.8

-0.3

-2.1

-0.3

-0.2

0.8

0.3

0.2

—

-1.2

3.4

3.5

-0.2

-8.3

-1.1

-0.4

2.9

1.8

0.9

0.3

-3.8

-0.2

a. The receipts from the proposed sale of the naval petroleum reserves and the Alaska and Southeastern

power marketing administrations are shown in function 950. Outlays in function 270 would increase,

relative to the baseline, after the proposed asset sales, because these assets would no longer generate

receipts for the government.

b. Excludes the Administration's proposals for credit reform; includes allowance for pay raises in 1990

through 1993.

Proposed Policy Changes

The President is proposing substantial cuts in energy programs, which

would reduce outlays to 28 percent below the CBO baseline in 1989.

Outlay savings would total $1.3 billion in 1989 and $3.8 billion over

the 1989-1993 period. These savings are net of losses in receipts that

would result from the proposed sale of the naval petroleum reserves
CHAPTER V THE ADMINISTRATION'S NONDEFENSE BUDGET 73

and the Alaska and the Southeastern power marketing administrations, and include outlay savings associated with prepayments and

sales of Rural Electrification Administration (RE A) loans. Excluding

the outlay effects of all these asset sales, outlay savings would total

about $3.1 billion from 1989 through 1993.

Rural Electrification. By far the largest savings in this function

would occur in activities of the REA. The President proposes to stop

making new federal loans to rural electric and telephone cooperatives

after 1988, and to discontinue appropriations to the revolving fund

that administers such loans. Instead, privately financed loans would

be partially guaranteed by the federal government. In addition,

borrowers could prepay existing REA loans under favorable terms.

Any loans refinanced with private funds would receive only partial

federal guarantees. The President also proposes to sell a portion of

REA's loan portfolio each year, beginning in 1989. CBO estimates

that total savings for these REA proposals would be $8.3 billion over

the 1989-1993 period—$4.6 billion from the program reductions and

$3.7 billion from loan sales and prepayments.

Conservation. Conservation spending in the budget is $1.1 billion, or

58 percent, below CBO baseline levels over five years. About $0.7

billion of this reduction would result from cuts in grants to states for

energy conservation programs, with the remainder from reductions in

conservation research and development activities.

Energy Research and Development. Under the President's proposed

budget, federal efforts in energy research and development for fossil,

solar, clean coal, and other energy technologies would be reduced by

about $0.4 billion, or about 3 percent below baseline levels over the

1989-1993 period. The Administration believes that the government's

role in energy research and development should be limited to basic

research and long-term or high-risk projects. Partially offsetting the

research and development savings is the President's proposal to

implement the recommendations of the U.S. and Canadian Special

Envoys on Acid Rain, which would add $1.8 billion in budget authority in the form of advance appropriations for clean coal technology

over the 1990-1992 period. This proposal would increase spending by

about $0.4 billion above the baseline level over the 1990-1993 period.
74 ANALYSIS OF PRESIDENT'S BUDGET March 1988

Naval Petroleum Reserves and Power Marketing Administrations.

Income from the sale of the naval petroleum reserves and the Alaska

and the Southeastern power marketing administrations appears in

budget function 950 and is estimated to total $4.8 billion over the

1989-1990 period. These savings would be partially offset, however,

by an increase in outlays in function 270, because these assets would

no longer generate receipts for the government. In 1991, when all the

proposed sales would be completed, the net loss of receipts would be

$0.7 billion, and similar losses would occur in subsequent years. Over

the five-year period, outlays in this function would increase relative to

the CBO baseline by $2.5 billion because of the loss of receipts from

the sale of the naval petroleum reserves, and by $0.4 billion because of

the sale of the two power marketing administrations.

Strategic Petroleum Reserve. The President proposes to increase the

rate of fill for the Strategic Petroleum Reserve (SPR) from the current

rate of 50,000 barrels per day to at least 100,000 barrels per day, if the

Administration's proposal to sell the naval petroleum reserves is also

adopted. Increasing the fill rate would increase the five-year outlays

for the SPR by $1.8 billion, raising them 70 percent above the CBO

baseline. Under the President's budget, the SPR would reach the

planned fill level of 750 million barrels by the end of 1993, about 6

years earlier than at the current rate of fill.

Nuclear Waste Disposal. The President's request for disposal of

nuclear waste would result in additional spending of about $0.9

billion, or 44 percent, above the CBO baseline over the five-year period. The Nuclear Waste Policy Amendments Act of 1987 radically

changed the nuclear waste program by authorizing the construction of

a monitored retrievable storage facility, selecting the Yucca Mountain

site in Nevada as the only site to be evaluated for the first repository,

terminating all site-specific second repository work, and authorizing

payments to Nevada. The President's request for this program is

based on opening the first repository in 2003. However, the detailed

schedule for implementing the 1987 amendments is not yet available.

Other. The President proposes to increase fees charged by the Nuclear

Regulatory Commission from 45 percent of the agency's budget to 55

percent. Over the five-year period, this proposal would increase receipts by $0.5 billion.
CHAPTER V THE ADMINISTRATION'S NONDEFENSE BUDGET 75

CBO Reestimates

CBO's estimates of net outlays for function 270 under the President's

budget proposals are below the Administration's estimates by $0.2

billion over the 1989-1993 period. The most significant estimating difference involves REA prepayments. The budget assumes that REA

borrowers would prepay approximately $1.2 billion in loans in 1989.

CBO estimates that such prepayments would total only $0.7 billion,

because CBO projects that interest rates will be higher than assumed

in the budget and therefore that fewer borrowers would choose to

refinance, Also, the Administration considers Nuclear Regulatory

Commission fees to be revenues, while CBO treats these fees as offsetting collections pursuant to the continuing resolution for 1988 appropriations (Public Law 100-202). CBO's treatment results in lower

outlays and revenues (by about $1.3 billion over the five-year period),

but has no net effect on the deficit.
76 ANALYSIS OF PRESIDENT'S BUDGET March 1988

FUNCTION 300: NATURAL RESOURCES AND

ENVIRONMENT

PROPOSED MAJOR SPENDING CHANGES

(By fiscal year, outlays in billions of dollars)

Item

Cumulative

Five-Year

1989 1990 1991 1992 1993 Changes

CBO Baseline

Proposed Changes

Water resources

Conservation and land

management

Conservation reserve

ANWR mineral receipts

Other

Recreational resources

Pollution control and

abatement

Construction grants

Superfund

Other

Other natural resources

Total

President's 1989 Budget

as Estimated by CBO a/

President's 1989 Budget a/

CBO Reestimates

16.3 17.1 17.5 18.0 18.4

-0.1 -0.2 -0.5 -0.8 -1.1

0.7

—

-0.3

-0.2

——

-0.1

0.8

—

-0.6

-0.4

-0.2

0.2

—

-0.2

-0.5

0.8

-1.6

-0.7

-0.4

-0.5

0.4

-0.1

-0.3

-3.0

0.7

—

-0.8

-0.5

-0.9

0.6

-0.1

-0.3

-2.2

0.7

-1.0

-0.9

-0.6

-1.2

0.6

-0.2

-0.4

-4.1

16.2 16.6 14.5 15.8 14.3

16.0 14.8 16.0 14.3 15.2

0.2 1.7 -1.5 1.6 -0.8

-2.7

3.7

-2.6

-3.4

-2.1

-2.8

1.7

-0.4

-1.4

-9.9

1.1

a. Includes allowance for pay raises in 1990 through 1993.

Proposed Policy Changes

The President's budget proposes spending levels for natural resources

and the environment that are below the CBO baseline in all years,

with total outlay savings of about $9.9 billion over the 1989-1993

period. Relative to the baseline, outlay savings for all natural re-
CHAPTER V THE ADMINISTRATION'S NONDEFENSE BUDGET 77

sources spending would be $48 million in 1989. Funding for most

activities in this function would be held below baseline levels, with the

notable exception of hazardous waste removal ("Superfund").

Water Resources. The President is seeking a $6 million increase in

discretionary budget authority over 1988 levels for water resources.

This amount reflects a 2 percent increase ($74 million) in funding for

water resource development by the Bureau of Reclamation and the

Army Corps of Engineers, and a 38 percent ($71 million) decrease in

funding for water conservation programs carried out by the Soil Conservation Service.

The total proposed funding level of $4.3 billion is 4 percent below

the CBO baseline for 1989, with first year outlay savings of $137

million. Over the 1989-1993 period, the President's budget would

result in outlay savings relative to the baseline of $2.7 billion.

Conservation and Land Management. The 1989 discretionary budget

authority in the President's budget for conservation and land

management activities reflects an increase of $0.4 billion above 1988

levels, and $0.2 billion above the CBO baseline, resulting primarily

from proposed funding increases for the conservation reserve. Excluding the conservation reserve, the budget calls for a 10 percent

decrease from 1988 to 1989 in discretionary spending authority for all

other conservation and land management activities, including the

Bureau of Land Management, the Forest Service, and the Soil Conservation Service.

From 1989 through 1993, the President's budget would decrease

outlays relative to the baseline by $2.3 billion-an amount that reflects proposed leasing of federal lands for oil and gas exploration and

production in the Arctic National Wildlife Refuge (ANWR) after 1990.

Excluding the conservation reserve and proposed leasing of ANWR,

outlay savings in conservation and land management programs would

be $0.3 billion in 1989, and $3.4 billion over the 1989-1993 period.

Costs of the conservation reserve are paid from two sources: appropriations (shown in this function) and generic certificates redeemable for cash or agricultural commodities (resulting in Commodity

Credit Corporation outlays in function 350). Under the President's

budget, the conservation reserve would be funded by $1.9 billion in
78 ANALYSIS OF PRESIDENT'S BUDGET March 1988

discretionary budget authority through the Agricultural Stabilization

and Conservation Service (ASCS) and $300 million of generic certificates. These funds will be used to enter an additional 12 million acres

of land into the reserve in 1989 and to make rental payments on contracts from previous years. The baseline includes $1.1 billion in

discretionary budget authority through ASCS for the conservation

reserve, as well as $1.0 billion in generic certificates to achieve the

same program level. While proposed appropriations for the conservation reserve are above the CBO baseline for all years, the assumed use

of generic certificates is less and total spending in the budget is at

approximately the baseline level through 1993.

Recreational Resources. The President's budget reflects net funding

cuts in 1989 budget authority for recreational programs of about 20

percent below the CBO baseline. The requested reductions would

result in outlay savings of over $0.2 billion in 1989. Savings would be

achieved primarily from large cuts in spending for acquisition of

recreational lands (a cut of 87 percent) and construction of recreational facilities (reduced 82 percent). After 1989, these programs

would be maintained at the proposed 1989 level. Outlay savings from

these cuts and smaller reductions in operating or grant programs

would total about $2.1 billion over the five-year period.

Environmental Resources. In 1989, requested appropriations for

environmental programs would be about 9 percent below the CBO

baseline, resulting in about $31 million in outlay savings for the year.

Requested funding would continue to fall through 1993, when it would

be about 32 percent below the baseline. Five-year cumulative outlay

savings would be nearly $1.5 billion.

Estimated outlay savings are net of proposed spending increases

for the Superfund program that are about 43 percent above the CBO

baseline. The requested funding would increase outlays through 1993

by $1,7 billion, but these increases would be more than offset by the

proposed phaseout of the wastewater treatment construction grants

program, which would result in five-year savings relative to the CBO

baseline of nearly $2.8 billion. Other proposals, including cuts for

EPA operating programs, would yield further net savings of about

$0.4 billion through 1993.
CHAPTER V THE ADMINISTRATION'S NONDEFENSE BUDGET 79

Other Natural Resources. The President proposes to decrease

spending on other natural resources by $1.4 billion relative to the

CBO baseline from 1989 through 1993. The majority of these

spending reductions come from the operations, research, and facilities

of the National Oceanic and Atmospheric Administration, which

would be reduced by $0.9 billion over the five years. The Administration also proposes to sell all assets related to the Bureau of Mine's

helium operations.

CBO Reestimates

CBO estimates that outlays under the President's proposals would be

$1.1 billion higher over the five-year period than estimated in the

budget. These reestimates result partly from different estimates of

spending rates for ongoing programs, but about $0.8 billion of the

increase stems from a different estimate of receipts that would result

from opening ANWR to oil and gas exploration and development.

CBO estimates that if the Congress acts in fiscal year 1988 to open

ANWR to such activity, the first auction for drilling rights could not

occur before 1991. The President assumes that leasing would begin in

1990. CBO also projects lower bonuses from competitive bidding than

does the Administration.

82-60? - 88 - 4 .: QJ.
80 ANALYSIS OF PRESIDENT'S BUDGET March 1988

FUNCTION 350: AGRICULTURE

PROPOSED MAJOR SPENDING CHANGES

(By fiscal year, outlays in billions of dollars)

Item 1989 1990 1991 1992 1993

Cumulative

Five-Year

Changes

CBO Baseline

Proposed Changes

Agricultural Credit

Insurance Fund

Federal crop insurance

Commodity Credit Corp.

(Conservation Reserve)

Other

Total

President's 1989 Budget

as Estimated by CBO §/

President's 1989 Budget a/

CBO Reestimates

22.6 22.1 20.2 17.5 16.0

-0.6

-0.8

-0.2

-0.7

-0.1

-0.9

-0.3

-0.7

-0.2

-0.8

-0.5

-0.6

-0.3

-0.7

-0.6

-0.4

-0.4

-0.6

-0.6

-1.6 -2.0 -2.1 -2.1 -2.1

21.0 20.1 18.1 15.4 14.0

21.7 19.6 18.7 17.6 16.2

-0.7 0.5 -0.7 -2.2 -2.2

-2.9

-0.9

-3.8

-2.2

-9.9

-5.3

a. Excludes the Administration's proposals for credit reform; includes allowance for pay raises in 1990

through 1993.

Proposed Policy Changes

The Administration is proposing to reduce spending on agriculture by

reducing direct loans to farmers provided through the Farmers Home

Administration (FmHA), phasing out the federal subsidy for crop

insurance, and reducing funding for agricultural research and services. Total programmatic savings relative to the CBO baseline would

be $6 billion over the 1989-1993 period. In addition, the budget

includes greater appropriations and less use of generic certificates

than assumed in the baseline to fund the conservation reserve. As a

result, outlays for the Commodity Credit Corporation (CCC) in this

function are $3.8 billion below the CBO baseline over five years. The
CHAPTER V THE ADMINISTRATION'S NONDEFENSE BUDGET 81

reduction is largely offset by greater outlays for the conservation

reserve in function 300.

Agricultural Credit Insurance Fund. The President would continue to

shift emphasis from government direct loans to federal guarantees of

private loans, with total estimated savings of $2.9 billion over five

years relative to the CBO baseline. For 1989, the President proposes a

limit on direct loans of $500 million. This limit would decline by

$100 million annually until 1992 when direct loans would be eliminated, except for emergency disaster loans.

Crop Insurance. The President again proposes reducing the federal

role in providing crop insurance by eliminating subsidies for premiums paid by farmers and for administrative expenses over a fiveyear period beginning in 1990. This would be accomplished through

substantial increases in farmers' premiums, followed by privatization

of crop insurance services. Estimated savings would total $0.9 billion

over the 1989-1993 period.

Other Agricultural Programs. The President proposes to eliminate

the Temporary Emergency Food Assistance Program and to provide

1989 funding below 1988 levels for the Extension Service, the

Agricultural Research Service, the Cooperative State Research Service, and the Animal and Plant Health Inspection Service. The estimated savings from these five programs would total $1.9 billion over

the 1989-1993 period relative to the CBO baseline.

The President also proposes to reduce by $2 billion the current annual minimum of $5.5 billion in loans that are to be guaranteed by the

federal government to finance foreign purchases of U.S. farm products. The President's proposal would not reduce guaranteed loan activity relative to the CBO baseline, since the baseline assumes that

guarantees for fiscal years 1988 through 1993 will be at a level

comparable to that used in 1987 and thus well below the current

minimum.

The President's budget promises legislation to change the price

support program for sugar. The Administration has not announced

the details of its proposal, which would be aimed at making the program more market-oriented with no impact on the budget.
82 ANALYSIS OF PRESIDENT'S BUDGET March 1988

CBO Reestimates

CBO estimates that agriculture outlays under the President's budget

for 1989 would be $0.7 billion lower than the Administration's estimate, with most of the difference in the CCC's price support program.

CBO estimates that CCC outlays would be $0.5 billion lower than the

Administration's estimate in 1989, because CBO's assumptions regarding 1988 crop market conditions are slightly more optimistic.

For 1990 through 1993, CBO outlay reestimates are also primarily a result of differences in CCC estimates. For 1990, CBO's CCC

estimates exceed the Administration's by $0.4 billion. Most of this difference is caused by CBO's assumption that paid land diversions in

feed grains would be continued for the 1990 and later crops, whereas

the Administration assumes they will not. Differences in later years

reflect a combination of more optimistic market conditions and CBO's

assumption that target prices decline at a faster rate than is assumed

in the Administration's estimates.
CHAPTER V THE ADMINISTRATION'S NONDEFENSE BUDGET 83

FUNCTION 370: COMMERCE AND HOUSING CREDIT

PROPOSED MAJOR SPENDING CHANGES

(By fiscal year, outlays in billions of dollars)

Item

Cumulative

Five-Year

1989 1990 1991 1992 1993 Changes

CBO Baseline

Proposed Changes

FmHA's Rural Housing

Insurance Fund

Postal Service

SBA business loans

Other

Total

President's 1989 Budget

as Estimated by CBO a/

President's 1989 Budget a/

CBO Reestimates

9.4 7.7 4.3 5.1 3.3

-1.7

-0.1

-0.5

„

-2.2

-1.5

0.5

-0.6

1.0

-0.6

-1.8

-1.0

0.1

-0.2

-3.0

-2.0

-0.8

—

-0.4

-3.2

-2.0

-0.7

—

-0.3

-3.1

-9.0

-2.2

-0.9

0.1

-12.0

7.2 7.1 1.3 1.9 0.2

5.1 5.3 3.9 2.6 2.6

2.1 1.8 -2.6 -0.7 -2.4 -1.7

a. Excludes the Administration's proposals for credit reform; includes allowance for pay raises in 1990

through 1993.

Proposed Policy Changes

The Administration's proposal would terminate or reduce a number of

programs that currently support commerce or housing activities, and

would require agencies to increase user fees or to sell assets to recover

a greater portion of their costs. These changes would reduce outlays

by about $2 billion in 1989, and by $12 billion through 1993.

Rural Housing Programs. Over the next five years, almost 75 percent

of the outlay reductions in this function would involve activities of the

Farmers Home Administration's (FmHA) Rural Housing Insurance

Fund. Beginning in 1989, the President proposes to eliminate the

current low-income rural housing assistance programs. Most of this
84 ANALYSIS OF PRESIDENT'S BUDGET March 1988

assistance is provided in the form of reduced interest rates for

mortgage loans to low-income households or to developers of lowincome rental housing. FmHA's current supplemental rental payments program would also be eliminated. These programs would be

replaced by housing vouchers that would pay part of the rental costs of

low-income households (this new program would appear in budget

function 600). According to Administration estimates, the funding

sought in the budget would assist an estimated 21,200 households; by

comparison, the baseline funding levels are estimated to be sufficient

to provide in each year about 23,000 home-ownership loans and

funding for about 15,500 rental units. The President's programmatic

proposals would lower outlays in this function by about $0.7 billion in

1989 and by a total of $9.0 billion for the years 1989-1993 relative to

the CBO baseline.

The President's budget also includes a proposal for the sale to the

public in 1989 of $1.75 billion of direct loans previously made by

FmHA. It is expected that these financial assets would be sold back to

the federal government without any recourse. The sale of these loans

would reduce federal outlays by an estimated $0.9 billion in 1989.

Forgone loan repayments and interest receipts over the next five or six

years would almost totally offset the 1989 savings.

Postal Service. The President is proposing to increase Postal Service

payments to the Civil Service Retirement fund to cover the full cost of

providing cost-of-living adjustments (COLAs) to Postal Service

annuitants. Because the Postal Service is already required to increase

its retirement payment in 1989, the President would allow the increased 1989 contribution for the cost of COLAs to be made in 1990,

along with the 1990 payment; subsequent payments would be made on

an annual basis. These payments, totaling about $3.6 billion over the

next five years, are intragovernmental transactions and would be

reflected as offsetting receipts in function 950. To recover these costs,

the Postal Service would increase postal rates, resulting in net savings

to the federal government.

The President is again proposing to eliminate the subsidy for

revenue forgone, with the exception of the portion of the subsidy that

covers free mail for the blind and for overseas absentee voters. This

payment compensates the Postal Service for revenues lost as a result

of reduced postage rates for certain classes of mailers—primarily
CHAPTER V THE ADMINISTRATION'S NONDEFENSE BUDGET 85

nonprofit organizations, newspapers with a small circulation, and

libraries. Rather than burden taxpayers with support for these subsidies, the President would eliminate eligibility for certain mailers

and maintain the subsidy for the remaining groups by increasing

rates for other classes of mail. These changes would reduce appropriations by $0.5 billion in 1989, and by $2.8 billion over the 1989-

1993 period.

If these proposals are enacted, CBO estimates that the price of

first-class postage would increase to 29 cents rather than 28 cents

beginning in fiscal year 1991, as assumed in the baseline. Such an

increase would generate an additional $5.2 billion in revenue relative

to the baseline in 1991 through 1993. The combination of proposals

affecting the Postal Service would result in increased net savings in

this function of $2.2 billion, and increased receipts in function 950 of

$3.6 billion, for a net spending reduction of about $5.8 billion relative

to the baseline over the five-year period.

Small Business Administration. The Administration would end the

Small Business Administration's (SBA's) direct loans for small business assistance, but would continue to provide guarantees of privately

originated loans of $3.6 billion annually. However, the President

would increase fees for certain guarantee loan programs, as well as

fees for administrative purposes. The Administration would sell the

entire portfolio of loans to development companies, as well as a sufficient number of general business loans to raise $140 million in both

1989 and 1990. Net proceeds from the asset sales over the five-year

period are expected to be about $0.5 billion, in addition to programmatic savings in the business programs of $0.4 billion over the

five-year period relative to the CBO baseline.

Other Commerce and Housing Credit Programs. Currently, the

Department of Housing and Urban Development makes direct loans to

nonprofit sponsors to finance the construction of housing for lowincome elderly or handicapped residents. For 1988, the Congress has

appropriated $566 million in direct loan authority, an amount

estimated to be sufficient to finance the construction of over 11,000

units. The President has proposed funding of $350 million for 1989 to

assist about 6,800 units. This level of assistance is projected for each

year through 1993. The Administration's program reductions would

not reduce federal outlays in 1989, but would save about $0.5 billion
86 ANALYSIS OF PRESIDENT'S BUDGET March 1988

during the five-year projection period relative to the baseline. Savings

would also be obtained by eliminating trade adjustment assistance to

firms-a program administered by the International Trade Administration-and by imposing a travel promotion fee on airlines and

cruise ships for transportation of passengers to the United States.

On the other hand, the budget includes spending increases for the

Census Bureau to fund the 1990 decennial census. For 1989, the

President proposes to increase funding for periodic censuses and programs by $221 million over the 1988 level. Because the baseline is

based on 1988 appropriations, increased for inflation, it does not

reflect the substantial costs of the decennial census. As a result, the

budget includes outlays of $1 billion above the baseline in 1990 for the

census. The President also proposes to increase funding for the

Securities and Exchange Commission and the Commodity Futures

Trading Commission to strengthen their enforcement and market

surveillance activities.

CBO Reestimates

The President's 1989 budget for the first time treats as outlays all

notes issued in assistance agreements by the Federal Deposit Insurance Corporation (FDIC) and the Federal Savings and Loan Insurance

Corporation (FSLIC). These promissory notes are viewed as a way to

liquidate the agency's obligations, while preserving cash. Outlays

equal to the value of the note will be reflected when a note is issued,

while subsequent payments on the note will no longer be counted as

outlays. CBO projects that the total amount of assistance, both cash

and notes, provided by the FSLIC and the FDIC to problem

institutions will exceed the amounts estimated in the budget by $2.3

billion in 1989, $0.6 billion in 1990, and $0.5 billion in 1991. These

estimates assume that problems in the real estate and energy

markets, particularly in the Southwest, will continue for the next

several years, and that the FSLIC and the FDIC will need to provide

more assistance than assumed in the President's budget. CBO expects

thrift insurance outlays to be lower than the Administration's estimates in 1992 and 1993.

CBO's estimates of Postal Service outlays are lower than the

Administration's, particularly in the 1991-1993 period, for several
CHAPTER V THE ADMINISTRATION'S NONDEFENSE BUDGET 87

reasons. The Administration's figures do not incorporate postal rate

increases to finance its proposals to increase Postal Service contributions to the retirement fund, or the additional revenue required as a

result of shifting the cost of subsidies for preferred rate mailers from

the taxpayer to the ratepayer. In addition, the Administration's figures do not reflect the large year-to-year swings in net operating

income that result from periodic rate increases. Over the 1989-1993

period, CBO's estimates of Postal Service outlays are about $5.2 billion below the Administration's.

CBO's estimates of net outlays for the Federal Housing Administration (FHA) are $0.2 billion less than the Administration's in 1989

and 1990, but greater in later years. Over the 1989-1993 period, CBO

estimates that net FHA outlays will be $1.3 billion higher than

assumed in the budget, largely because CBO expects the amount of

claims paid annually to decline less rapidly over the next few years

than does the Administration.
88 ANALYSIS OF PRESIDENT'S BUDGET March 1988

FUNCTION 400: TRANSPORTATION

PROPOSED MAJOR SPENDING CHANGES

(By fiscal year, outlays in billions of dollars)

Item

Cumulative

Five-Year

1989 1990 1991 1992 1993 Changes

CBO Baseline

Proposed Changes

Mass transit

Federal-aid Highways

Amtrak

FAA operations, facilities,

and equipment

Coast Guard operations

and acquisitions

Other

28.0

-0.6

-0.1

-0.5

0.1

0.2

—

28.8

-1.0

-0.7

-0.6

0.3

0.3

-0.1

29.8

-1.3

-1.3

-0.7

0.4

0.4

-0.2

30.6

-1.5

-1.7

-0.7

0.5

0.4

-0.3

31.7

-1.8

-2.0

-0.7

0.5

0.4

-0.4

-6.2

-5.9

-3.2

1.7

1.7

-0.9

Total

President's 1989 Budget

as Estimated by CBO a/

President's 1989 Budget a/

CBO Reestimates

-0.9 -1.9 -2.7 -3.4 -4.0 -12.8

27.1 26.9 27.1 27.2 27.7

27.3 27.6 27.6 27.6 27.4

-0.2 -0.7 -0.4 -0.4 0.2 -1.5

a. Excludes the Administration's proposals for credit reform; includes allowance for pay raises in 1990

through 1993.

Proposed Policy Changes

The Administration's proposal would reduce transportation spending

below the CBO baseline in all years, with total savings of $12.8 billion

over the 1989-1993 period. The budget includes a 5 percent cut in

1989 budget authority ($1.5 billion), relative to the CBO baseline,

resulting in first-year outlay savings of $0.9 billion.

Ground Transportation. Reductions in spending for ground transportation, particularly mass transit, would account for most of the

outlay savings in this function. The Administration proposes to limit
CHAPTER V THE ADMINISTRATION'S NONDEFENSE BUDGET 89

budget authority for transit programs to $1.5 billion annually,

compared with 1988 budget authority of $3.3 billion. All but $128

million (for the Washington, B.C., transit system) would be financed

from the transit account of the Highway Trust Fund, including

spending for administration, planning, and research. This reduced

transit program would provide grants to states and localities entirely

by formula, with capital assistance going to all areas but with

operating assistance restricted to small cities and rural areas. The

Administration would place funding for interstate transfer grants for

transit projects under the Federal-aid Highways obligation ceiling.

Outlay savings for transit programs would total $6.2 billion over the

1989-1993 period.

The budget also includes reductions in the Federal-aid Highways

program, which would be achieved by further reducing the obligation

ceiling below the 1988 level and including currently exempt demonstration projects under the ceiling. Total annual obligations from the

highway account of the Highway Trust Fund would be limited to the

account's estimated average annual tax receipts. Under this proposal,

total obligations for Federal-aid Highways in 1989 would be

$12.6 billion--$0.9 billion below the CBO baseline and $0.4 billion

below estimated 1988 obligations. The difference relative to the baseline would increase in future years, with total outlay savings of $5.9

billion over the five years.

As in previous years, the Administration proposes to eliminate all

subsidies for Amtrak, reducing outlays over the five years by

$3.2 billion.

Air Transportation. Aviation is targeted for significant funding

increases in 1989. Most of this increase would be used to modernize

and improve the air traffic control system. Under the President's

budget, spending authority for Federal Aviation Administration

(FAA) facilities and equipment would be increased from $1.1 billion in

1988 to $1.6 billion in 1989-a 44 percent increase-and would average

$1.6 billion from 1990 through 1993. Additional funds for FAA

operations would be used to hire more air traffic controllers, safety

inspectors, and security personnel. The Administration proposes to

derive 43 percent of the funds for FAA operations from the Airport and

Airway Trust Fund in 1989, and approximately 75 percent for 1990

through 1993, compared with just over 25 percent in 1988.
90 ANALYSIS OF PRESIDENT'S BUDGET March 1988

Water Transportation. The President's proposals for water transportation programs would increase funding by 18 percent above the

CBO baseline in 1989, resulting in additional outlays of about

$0.2 billion in that year. Total additional outlays for water transportation programs would be about $1.7 billion through 1993.

Most of the increases would be for the U.S. Coast Guard (USCG),

whose funding would be 14 percent above the baseline in 1989. In

subsequent years, USCG operating programs would receive modest

annual increases, while proposed funding for long-term acquisition

and construction activities would continue to be funded at levels well

above the CBO baseline.

CBO Reestimates

CBO estimates that spending under the Administration's policies

would be $1.5 billion lower over the five-year period than estimated in

the budget. In general, these reestimates result from different assumptions about spending rates. CBO's estimates of outlays for mass

transit programs are almost $3 billion less than the Administration's

over the five-year period, largely because CBO anticipates slower

spending from obligated and unobligated balances.
CHAPTER V THE ADMINISTRATION'S NONDEFENSE BUDGET 91

FUNCTION 450: COMMUNITY AND REGIONAL

DEVELOPMENT

PROPOSED MAJOR SPENDING CHANGES

(By fiscal year, outlays in billions of dollars)

Item

Cumulative

Five-Year

1989 1990 1991 1992 1993 Changes

CBO Baseline

Proposed Changes

Community Development

Block Grants

Other community development programs

Rural Development

Insurance Fund

Other regional development programs

Disaster programs

6.7

—

-

-0.2

-0.1

-0.3

7.1

-0.2

-0.1

-0.1

-0.3

-0.5

6.9

-0.4

-0.2

-0.1

-0.5

-0.2

7.1

-0.6

-0.3

-0.2

-0.8

-0.1

7.4

-0.7

-0.4

-0.3

-1.0

-0.2

-1.9

-1.1

-1.0

-2.8

-1.2

Total

President's 1989 Budget

as Estimated by CBO a/

President's 1989 Budget a/

CBO Reestimates

-0.7 -1.2 -1.5 -2.0 -2.6 -8.1

6.0 5.9 5.4 5.1 4.8

6.0 6.2 5.5 5.5 5.1

-0.3 -0.2 -0.3 -0.3 -1.0

a. Excludes the Administration's proposals for credit reform; includes allowance for pay raises in 1990

through 1993.

Proposed Policy Changes

As in previous budgets, the 1989 budget proposes major reductions in

spending on community and regional development. Many of the

programs within this function would be eliminated, while others are

slated for large reductions. Total savings relative to the CBO baseline

are estimated to be $8.1 billion over the 1989-1993 period, a reduction

of about 23 percent in spending in this function. The President's

proposals are based on the view that many of the benefits of these
92 ANALYSIS OF PRESIDENT'S BUDGET March 1988

programs are local in nature, and that the costs therefore should be

borne locally.

Community Development. About $3.1 billion of the five-year savings

relative to the CBO baseline is in community development programs,

which are aimed at urban areas. The budget would reduce funding for

Community Development Block Grants (CDBGs) from the 1988 appropriation of $2.88 billion to $2.63 billion annually through 1993. In

addition, the President would terminate the Urban Development

Action Grant (UDAG) program, beginning with a $50 million rescission in 1989 of recaptured funds. Five-year savings would total $1.9

billion for the CDBG program and $0.6 billion for UDAGs, relative to

the CBO baseline. Other programs that would be terminated in 1989

are CDBG Section 108 guaranteed loans, Section 312 rehabilitation

loans, and Rental Housing Development Grants (HoDAGs). The

Administration is also proposing to reduce funding for Rental Rehabilitation Grants from $200 million in 1988 to $150 million in 1989

through 1993. This would result in $0.2 billion in savings from the

CBO baseline over five years.

Area and Regional Development. The President's budget proposals for

area and regional development programs, which are largely aimed at

rural areas, would result in savings of $3.8 billion relative to the CBO

baseline—a decrease from baseline levels of about 25 percent over the

1989-1993 period.

The Administration is proposing to shift activity in the Rural

Development Insurance Fund (RDIF) from direct loans to guaranteed

loans by phasing out direct loans and increasing loan guarantees.

(Direct loans for water and waste disposal and other community

facilities would be reduced from $426 million in 1988 to zero by 1992.)

The limitation on loan guarantee commitments would remain constant at $96 million from 1988 to 1989, and then increase by $100

million a year through 1992. RDIF outlay savings over five years

would total $1.0 billion relative to the CBO baseline.

The Administration would terminate new grant and loan activity

of the Economic Development Administration and the Appalachian

Regional Commission in 1989, saving $1.0 billion over five years

relative to the CBO baseline. Several smaller rural development

programs administered by the Farmers Home Administration would
CHAPTER V THE ADMINISTRATION'S NONDEFENSE BUDGET 93

also be terminated in 1989. Another $1.0 billion in five-year outlay

reductions would be obtained by cutting spending for the Bureau of

Indian Affairs, Tennessee Valley Authority programs not related to

power, and rural water and waste disposal grants.

Lending activities of the Rural Telephone Bank (RTB) would be

limited each year to $177 million, the 1988 appropriated floor; also,

beginning in 1989, the federal government would no longer purchase

RTB capital stock and the RTB would set aside funds to repurchase

the accumulated stock at the end of 1995. The President also proposes

allowing RTB borrowers to prepay their loans without penalty beginning in 1989. CBO estimates this proposal would not result in

savings until 1991, and would produce net receipts between 1991 and

1993 of about $0.5 billion.

Disaster Relief. About $1.2 billion of the five-year savings relative to

the CBO baseline is achieved through disaster assistance programs.

The President is proposing to sell the disaster loan portfolio of the

Small Business Administration (SBA) over five years beginning in

1989. In addition, the Administration would raise the interest rate on

such loans to the Treasury rate plus 1 percent, and would limit SBA

disaster loans to those borrowers unable to obtain credit elsewhere.

These proposals for the SBA program would result in an outlay

reduction, of $0.9 billion over five years relative to the CBO baseline.

Finally, the President's budget assumes that the National Flood

Insurance Fund (NFIF) will be reauthorized upon its expiration on

September 30,1989. The baseline assumes expiration of the program,

which would end premium income to the fund, although the insurance

policies previously issued would remain in force for up to three years.

The budget, like the CBO baseline, assumes premium increases of 10

percent in 1988 and 5 percent in 1989, intended to make the program

actuarially sound. Reauthorization of the NFIF would result in fiveyear outlay savings of $0.8 billion relative to the CBO baseline.

The savings that result from the SBA and NFIF proposals are

partially offset by increases in spending relative to the CBO baseline

for the Federal Emergency Management Agency.
94 ANALYSIS OF PRESIDENT'S BUDGET March 1988

CBO Restimates

CBO estimates slightly lower outlays in each of the years from 1989

through 1993 than does the Administration. The reestimates primarily reflect lower projected disbursements from previous years'

CDBG appropriations and larger prepayments of RTB loans than

assumed in the budget.
CHAPTER V THE ADMINISTRATION'S NONDEFENSE BUDGET 95

FUNCTION 500: EDUCATION, TRAINING, EMPLOYMENT.

AND SOCIAL SERVICES

PROPOSED MAJOR SPENDING CHANGES

(By fiscal year, outlays in billions of dollars)

Item

Cumulative

Five-Year

1989 1990 1991 1992 1993 Changes

CBO Baseline

Proposed Changes

Elementary and

secondary education

Higher education

Student aid

Guaranteed Student

Loans

College housing

asset sales

Other

Arts and humanities

Training and employment

Social services

Total

President's 1989 Budget

as Estimated by CBO a/

President's 1989 Budget a/

CBO Reestimates

35.9 37.3 38.2 39.3 39.8

-0.1

0.1

-0.2

-0.2

-0.1

—

-0.1

-0.2

-0.8

-0.2

0.3

-0.3

..

-0.1

-0.1

0.1

-0.4

-0.6

-0.4

0.1

-0.5

-0.2

-0.1

—

-0.6

-1.8

-0.8

-0.2

-0.5

-0.3

-0.2

-0.1

-0.9

-3.0

-1.2

-0.4

-0.5

-0.4

-0.2

-0.4

-1.1

-4.1

-2.6

-0.2

-1.8

-0.3

-1.1

-0.6

-0.5

-3.2

-10.3

35.1 36.6 36.4 36.4 35.6

34.9 36.4 36.2 35.4 35.4

0.2 0.3 0.1 1.0 0.2 1.7

a. Excludes the Administration's proposals for credit reform; includes allowance for pay raises in 1990

through 1993.

Proposed Policy Changes

Spending for job training, employment, social service, and education

programs in 1989 would be $0.8 billion below CBO's baseline

projection of $35.9 billion. By 1993, spending would decline by $4.1
96 ANALYSIS OF PRESIDENT'S BUDGET March 1988

billion, or 10 percent. In comparison with the President's most recent

budgets, these reductions are modest.

Elementary and Secondary Education. In 1989, the President's

budget would increase overall funding for elementary and secondary

education programs by 3.6 percent over 1988, a marginal reduction

from the CBO baseline projection which inflates spending in future

years. The President would then freeze the 1989 request levels,

lowering spending by $1.2 billion in 1993, a reduction of 10 percent.

Some programs would be funded at levels above CBO's baseline in

1989, while others would be cut. As part of his reauthorization

proposals for the Elementary and Secondary Education Act, the

President would increase 1989 funding above the CBO baseline for

programs such as Compensatory Education (Chapter 1), School

Improvement (Chapter 2), Drug-Free Schools, Magnet Schools, and

Adult Education. Most of the other elementary and secondary education programs would receive less than full inflation adjustments in

1989 or would be frozen at 1988 levels. Impact Aid "b" grants would

again be eliminated, accounting for most of the $0.1 billion decline in

1989 outlays.

Higher Education. In sharp contrast to his 1988 budget, the President

proposes to expand student grants in 1989. Offsetting this increase,

spending on other higher education programs would be reduced by

increasing federal collections on defaulted loans, lowering federal

default cost liabilities, and reducing or freezing funding. Overall,

spending would be reduced from the CBO baseline by 4 percent in

1989 and 13 percent by 1993.

Student grant funding would be increased by $555 million over

the CBO baseline in 1989, raising outlays by $0.1 billion in 1989. The

maximum Pell grant award would be raised by $100 to $2,300.

Eligibility for Pell grants and other student aid would be expanded by

excluding parents' home equity from the formula used to determine

eligibility. Partially offsetting this increase would be a requirement

that all recipients of federal student aid have a high school diploma.

The President's 1989 funding for student grants would be frozen in

1990 through 1993, causing reduced outlays by 1992.

The President proposes the same changes in program eligibility

for Guaranteed Student Loans (GSL) as for student grants. These
CHAPTER V THE ADMINISTRATION'S NONDEFENSE BUDGET 97

changes would expand the number of student loans and increase the

average loan size. Offsetting this increase, the Administration proposes to extend the current Internal Revenue Service (IRS) offset

program that expires in June 1988. This program allows the IRS to

collect and return to the program any tax refund owed to people who

have defaulted on their federal student loans. Over the next five

years, these collections are expected to offset GSL program costs by an

estimated $1.0 billion. In addition, student loan default costs would be

reduced by changing the federal liability from almost 100 percent to

80 percent; lenders and guarantee agencies would thus have to

assume additional liability.

In 1989, the President proposes to sell more college housing and

facilities loans. Approximately $500 million of loan assets are to be

sold, with proceeds totaling an estimated $230 million.

Arts arid Humanities. Arts and humanities programs, which

currently account for federal spending of $1.5 billion, would be

reduced below CBO's baseline by approximately 2 percent in 1989 and

over 13 percent in 1993. The proposed reductions include eliminating

funding for public telecommunications, reducing support for public

libraries, and freezing spending at 1988 levels for public broadcasting

and the federal foundations for the arts and humanities.

Training and Employment. The President's budget once again

proposes to increase funding in 1989 for employment and training, but

this increase is offset in later years by freezing or reducing funding

levels for the current Job Training Partnership Act (JTPA) programs.

As in 1988, the President's budget proposes a single discretionary

program to serve dislocated workers—those who have worked for

several years and whose jobs have been eliminated. This program

would replace the Trade Adjustment Assistance cash benefits and

training programs, and the JTPA dislocated worker program. Budget

authority of $980 million-13 percent higher than the CBO baseline

estimate for the existing programs—is requested in 1989. The Administration also proposes to replace the Summer Youth program with

one that could be run either as a summer or as a year-round program

at the discretion of localities.

Also, in 1989, the Administration would end funding of the Work

Incentive program (WIN), which would be included in the Admin-
98 ANALYSIS OF PRESIDENT'S BUDGET March 1988

istration's proposed new work/welfare program in the Aid to Families

with Dependent Children program (see function 600).

Social Services. For 1989, the President proposes only marginal

reductions from the current spending level of $9.1 billion for social services; by 1993, the reduction would be 12 percent. Most of this reduction results from lower funding requests for discretionary programs.

Once again, the President proposes phasing out by 1993 the Community Services Block Grant program. In 1989, funding for Head

Start, a range of service programs for older Americans, and a number

of child welfare programs is frozen at 1988 levels. In 1990 through

1993, funding requests for these programs grow more slowly than

CBO's baseline. With the exception of proposing to reduce and eventually eliminate the cost-of-living adjustment for vocational rehabilitation grants, there are no proposed changes to entitlement programs,

although the President would not reauthorize the expiring Foster

Care Independent Living program.

CBO Reestimate

The CBO reestimates of the President's budget occur mainly in the

GSL program. CBO projects higher interest rates than the Administration and thus higher interest subsidies in the program, which

account for $0.6 billion of the reestimates in most years. Offsetting

these increases are lower GSL program costs and higher estimated

savings from the Administration's proposal to reduce the federal liability in the case of loan defaults.

In addition, estimated costs for interim assistance to states for the

legalization of unauthorized aliens are higher in CBO's baseline,

particularly in 1992, when there is an upward reestimate of $0.8 billion. Funding for costs associated with the legalization of unauthorized aliens was appropriated in the Immigration Reform Act of 1986,

in the amount of $1 billion a year in 1988 through 1991. How quickly

this money is spent depends on state costs associated with the aliens

who are legalized. CBO estimates that such costs will grow slowly and

total only $0.2 billion in 1988, leaving unspent funds available to the

states in 1992. The Administration, on the other hand, estimates that

the full 1988 appropriation will be spent in 1988.
CHAPTER V THE ADMINISTRATION'S NONDEFENSE BUDGET 99

FUNCTION 550: HEALTH

PROPOSED MAJOR SPENDING CHANGES

(By fiscal year, outlays in billions of dollars)

Item

Total

President's 1989 Budget

as Estimated by CBO a/

President's 1989 Budget a/

CBO Reestimates

Cumulative

Five-Year

1989 1990 1991 1992 1993 Changes

CBO Baseline

Proposed Changes

Medicaid

Public Health Service

Other

49.4 54.9

-0.4 -0.5

-0.1

60.0

-0.5

-0.3

-0.1

65.9

-0.5

-0.7

-0.1

72.2

-0.6

-1.0

-0.1

-2.5

-2.1

-0.4

-0.5 -0.6 -0.9 -1.3 -1.7 -5.0

48.9 54.3 59.1 64.6 70.5

47.8 52.4 56.5 61.1 65.6

1.2 1.9 2.6 3.5 4.9 14.1

a. Excludes the Administration's proposals for credit reform; includes allowance for pay raises in 1990

through 1993.

Proposed Policy Changes

The President requests few changes in the health area, in contrast to

the many cuts proposed in previous budgets. The President asked for

five-year reductions of more than $25 billion in his 1987 budget and

for reductions of almost $38 billion in his 1988 budget. This year's

proposals would reduce health spending by less than $5 billion in the

1989-1993 period.

Medicaid. No legislative initiatives are proposed for Medicaid. The

budget, however, contains regulatory changes that would reduce

Medicaid outlays by $0.4 billion in 1989 and $2.5 billion through 1993.

These regulatory initiatives emphasize ambulatory surgery and preadmission testing, reduce funding for the development of Medicaid

management information systems, and tighten eligibility rules per-
100 ANALYSIS OF PRESIDENT'S BUDGET March 1988

taining to asset holdings. Most of these regulations would leave states

with broad discretion as to whether and how to implement them.

Public Health Service. The Administration would slow the rate of

growth in Public Health Service (PHS) funding to about 5 percent in

1989, dropping to just over 1 percent in 1990 through 1993. PHS

funding has increased by 50 percent since 1983, an annual average

increase of 10 percent. Slowing the growth rate would result in

savings over five years of $2.1 billion below the CBO baseline. The

reduction would affect most programs, with the notable exception of

activities related to Acquired Immune Deficiency Syndrome (AIDS).

The President requests an increase of nearly 40 percent in AIDS

funding in 1989, a total of $1.3 billion. The request for AIDS funding

rises to almost $1.5 billion by 1993.

The President again proposes to eliminate most grants for the

education of health professionals and almost all funding for the

construction of Indian health facilities. The federal government

would guarantee only 80 percent of the value of Health Education

Assistance Loans and would reduce new guarantees by two-thirds,

which was also suggested last year. Other recurring proposals include

phasing out the National Health Service Corps and selling assets in

both the Health Maintenance Organization and Medical Facilities

loan programs.

CBO Reestimates

CBO has reestimated the President's budget request upward by $1.2

billion in 1989 and $14.1 billion over the 1989-1993 period. Nearly all

of this upward change occurs in the Medicaid program.

CBO's Medicaid baseline in 1989 is $1.5 billion higher than the

Administration's estimate of current services because of differing

assumptions about the underlying rate of growth in the Medicaid

program, combined with the effects of recent legislation. CBO's

Medicaid baseline increases by 12.1 percent from 1988 to 1989, while

the Administration's increases by only 6.5 percent. Medicaid grew by

9.8 percent from 1986 to 1987 and is projected to grow by 11.2 percent

from 1987 to 1988. CBO's baseline grows slightly more rapidly than

in the recent past because federal legislation has expanded the
CHAPTER V THE ADMINISTRATION'S NONDEFENSE BUDGET 101

number of people eligible for Medicaid and because a number of states

have recently expanded their programs.

In the aggregate, CBO's estimates of savings from the President's

regulatory proposals, which increase from $0.4 billion in 1989 to $0.6

billion in 1993, are similar to the Administration's estimates, which

increase from $0.4 billion in 1989 to $0.8 billion in 1993.
102 ANALYSIS OF PRESIDENT'S BUDGET March 1988

FUNCTION 570: MEDICARE

PROPOSED MAJOR SPENDING CHANGES

(By fiscal year, outlays in billions of dollars)

Item

Cumulative

Five-Year

1989 1990 1991 1992 1993 Changes

CBO Baseline

Proposed Changes

Reduce Reimbursements to Providers

Medical education

Physician payments

Supplier payments

Subtotal

Add to Beneficiary Costs

(SMI premiums)

Miscellaneous Proposals

Total

President's 1989 Budget

as Estimated by CBO a/

President's 1989 Budget a/

CBO Reestimates

87.0 98.2 109.7 122.6 136.7

-1.0

-0.2

-0.2

-1.4

0.1

0.2

-1.0

-1.1

-0.4

-0.3

-1.7

-0.3

0.2

-1.7

-1.2

-0.4

-0.3

-1.9

-1.0

0.3

-2.7

-1.3

-0.5

-0.4

-2.2

-2.0

0.3

-3.8

-1.4

-0.6

-0.5

-2.4

-3.1

0.3

-5.2

-5.8

-2.1

-1.7

-9.6

-6.3

1.3

-14.6

86.0 96.4 107.0 118.8 131.4

84.0 93.7 104.0 115.8 128.0

1.9 2.8 3.0 3.0 3.4 14.1

a. Includes allowance for pay raises in 1990 through 1993.

Proposed Policy Changes

The President's proposed changes in Medicare would reduce spending,

relative to the CBO baseline, by $1.0 billion in 1989 and $14.6 billion

over the five-year projection period. These changes would amount to a

3 percent reduction in projected Medicare spending through 1993. The

Administration is proposing these further reductions because, according to its estimates, the savings from the Omnibus Budget Reconciliation Act of 1987 (OBRA-87) fell $1.2 billion short of the savings tar-
CHAPTER V THE ADMINISTRATION'S NONDEFENSE BUDGET 103

gets set at the budget summit last fall. (The differences between CBO

and Administration estimates of the savings in OBRA-87 are

discussed in the box below.)

BOX v-i

THE BUDGET SUMMIT AND DIFFERENCES

IN CBO AND ADMINISTRATION ESTIMATES

The budget summit agreement of October 1987 set two-year savings

targets for Medicare totaling $5.5 billion-$2.0 billion in 1988 and $3.5

billion in 1989. The Congressional Budget Office estimates that the

Medicare provisions of the Omnibus Budget Reconciliation Act of 1987

(OBRA-87) would exceed those targets with savings of $2.1 billion in 1988

and $3.8 billion in 1989, a total of $5.9 billion. The Administration,

however, estimated total savings of $4.3 billion—$1.2 billion below the

targets in the budget summit agreement. Based on the apparent shortfall

in savings, the Administration has included savings proposals for

Medicare in its budget.

Although the estimates by CBO and the Administration differ for a

number of the Medicare provisions in OBRA-87, the net effect of these

individual differences is small with the exception of changes in the update

factor used to increase hospital reimbursements under Medicare.

OBRA-87 set specific update factors for 1988 and 1989. CBO estimated

savings of $1.7 billion from these update factors; the Administration's

estimate was $0.4 billion. The $1.3 billion difference is explained by

differences in the base from which the savings were calculated. CBO

assumed that without legislative action the update factors would have

been increased in 1989 by the increase in an index of the costs of goods and

services used by hospitals, but the Administration assumed that the

update would be only one-half of this increase. Since CBO's base contained

a larger increase than the Administration's, CBO's estimate of savings

from limiting the increase was larger.

The budget summit set savings targets for Medicare, but did not

determine the base from which these savings were to be measured,

creating an irreconcilable difference between the CBO and Administration

estimates for 1988 and 1989. Because OBRA-87 set hospital updates at the

total increase in the index of costs of hospitals' goods and services

beginning in 1990, this difference in the base should not arise in the future

for the update factor. Other differences in the base, however, could cause

the CBO and Administration estimates to differ.
104 ANALYSIS OF PRESIDENT'S BUDGET March 1988

Reducing Reimbursements to Providers. The President's budget

includes several proposals to reduce reimbursements to providers.

Relative to CBO's baseline, these proposals would reduce outlays by

$9.6 billion over the next five years.

The budget includes five-year savings of $5.8 billion that would

result from lowering reimbursement for the direct and indirect costs of

medical education in hospitals with teaching programs. Direct costs of

medical education include payments for residents' and teachers'

salaries, classroom expenses, and associated overhead. The proposed

change in direct payments would reduce the expenses that a. hospital

could claim by excluding all classroom-related education costs of

intern and residency programs. This change would save an estimated

$60 million in 1989 and $440 million over the projection period,

according to both CBO and the Administration. Indirect payments

compensate for the costs of the greater number of tests and procedures

prescribed by interns and residents. Hospitals are compensated

through an adjustment in their prospective payments based on the

ratio of interns and residents to the number of beds in the hospital.

The President's proposal, as estimated by CBO, would reduce the

current indirect teaching adjustment from 7.70 percent to 4.05 percent

for each 0.1 percentage point in the ratio, saving an estimated $900

million in 1989 and $5.3 billion over the five-year period relative to

the CBO baseline. The Administration's comparable estimates are

$920 million in 1989 and $6.8 billion over the next five years.

The President's budget proposes to reduce reimbursements for

selected physician services and for certain categories of durable medical equipment and supplies. CBO estimates that this change would

save about $3.8 billion over the five-year projection period; the Administration estimate is $3.5 billion. Many of these proposals reflect the

deeper cuts the Administration supported during the conference on

OBRA-87.

The Administration continues to target certain physician services

that have been identified by the Physician Payment Review Commission as overpriced. In OBRA-87, payments for all overpriced procedures were reduced by 2 percent. The law also reduced, on a

sliding-scale basis, charges that are above 85 percent of the national

average prevailing charge for the overpriced procedures. The President's budget proposes a further reduction of 5 percent in payments for
CHAPTER V THE ADMINISTRATION'S NONDEFENSE BUDGET 105

all such procedures, saving an estimated $53 million in 1989 and $505

million through 1993. The Administration's comparable estimates

are $25 million and $360 million. In addition, OBRA-87 requires the

Secretary of Health and Human Services to establish fee schedules for

radiologists and anesthesiologists by January 1, 1989. The Administration proposes to delay implementation of these fee schedules for one

year and to reduce payments to radiologists and anesthesiologists by

10 percent in 1989. The reduced payment levels would then be used as

the basis for the fee schedule established in 1990. CBO estimates this

proposal would save $156 million in 1989 and $1.5 billion over the

five-year projection period. Administration estimates are $105 million and $1.2 billion, respectively. A minor proposal affecting physician reimbursement would save about $95 million over five years.

Beginning in 1989, durable medical equipment and oxygen

supplies will be reimbursed according to a fee schedule established by

OBRA-87. The fee schedule for long-term rental items will be based

on charges submitted by suppliers for 1986, increased by the Consumer Price Index (CPI). The President's budget proposes instead to base

the fee schedule on the amount Medicare "allowed" for the item in

1986 increased by the CPI. Because of the difference between submitted and Medicare-allowed charges, CBO estimates this proposal

would save $95 million in 1989 and $855 million over five years. The

Administration estimates savings of $80 million and $720 million. In

addition, payments for oxygen equipment and supplies were reduced 5

percent by OBRA-87; the Administration proposes a further reduction

of 5 percent, which CBO estimates could save $20 million in 1989 and

$185 million over five years, with similar savings estimated by the

Administration.

Medical suppliers' payments under Medicare would be further reduced by two other proposals in the President's budget. One proposal,

which would limit reimbursement to suppliers of home dialysis products to the same rate received by dialysis treatment facilities, would

save an estimated $55 million in 1989 and $585 million through 1993.

Administration estimates are similar for this proposal. The other

proposal would reduce reimbursement to suppliers of enteral products

and equipment by establishing a national fee schedule based on

wholesale and retail prices, saving about $20 million in 1989 and $120

million over the next five years. The Administration estimates

savings of $25 million in 1989 and $245 million through 1993.
106 ANALYSIS OF PRESIDENT'S BUDGET March 1988

Adding to Beneficiary Costs. Under current law, premiums will be

set at 25 percent of program costs through 1989 and will increase by

the Social Security cost-of-living adjustment (COLA) in future years.

According to CBO estimates, Supplementary Medical Insurance (SMI)

spending will increase faster than the COLA, so that beneficiary premiums will decline over time as a proportion of program costs. By

1993, estimated premiums will cover only 20 percent of program costs.

Under the budget proposal, enrollees would pay a premium based on

25 percent of annual program costs, thereby generating additional

offsetting receipts of $6.9 billion over the projection period, according

to CBO estimates. The Administration projects $6.7 billion in additional offsetting receipts for the same period. The table below shows

the monthly premiums as estimated by CBO and the Administration;

the estimates for the President's budget reflect savings from the budget's other Medicare proposals.

Estimated Monthly Premiums

(By calendar year, in dollars)

1989 1990 1991 1992 1993

CBO Baseline 27.10 28.30 29.70 31.00 32.40

Administration (Current law) 28.00 29.20 30.40 31.50 32.50

President's 1989 Budget as

Estimated by CBO 26.70 29.30 32.80 36.50 40.70

President's 1989 Budget 27.70 30.50 34.00 36.70 41.20

Miscellaneous Proposals. Other proposals in the budget would cost

$1.3 billion over the projection period. The Administration has

requested about $250 million per year to increase budgets for contractors who process Medicare claims. Medicare outlays would also

increase by $55 million through 1993 because the President proposes

to include state and local employees hired before March 31, 1986, in

the Medicare program. The revenue estimates for this proposal are

discussed in Chapter HI. The President also proposes to save $66

million over five years by increasing the effectiveness of recently

enacted legislation that makes Medicare the secondary payer for the

working elderly and disabled and their dependents who elect to take

advantage of employer-provided health insurance.

The 1989 budget estimates do not reflect any reform in

catastrophic health insurance, but the Administration supports the
CHAPTER V THE ADMINISTRATION'S NONDEFENSE BUDGET 107

enactment of legislation on such insurance, consistent with the provisions of the Senate-passed Medicare Catastrophic Protection Act

(H.R. 2470). The major provisions of that bill would limit beneficiaries' out-of-pocket expenses for hospital and physician copayments

to $2,030 in 1989; phase in a benefit beginning in 1990 that would

cover 80 percent of reasonable costs of certain prescription drugs

above a $600 deductible; provide unlimited coverage of inpatient hospital stays and expand benefits for home health care and skillednursing facilities; and finance the new benefits with an additional flat

monthly premium as well as a supplemental income-related premium

on SMI enrollees who have an income tax liability of $150 or more.

Conference on the Senate- and House-passed versions of H.R. 2470 is

expected this spring.

CBO Reestimates

CBO reestimates raise the President's Medicare budget by $1.9 billion

in 1989 and by $3.4 billion in 1993. These differences represent about

2 percent and 3 percent, respectively, of total Medicare spending in the

President's budget in those years. About one-half of the difference in

the estimates results from different economic assumptions. The Administration's lower projected inflation rates lead to lower projected

price increases for hospital and physician services, and the lower projected COLA for Social Security reduces their estimated premium receipts. The remaining differences result from different technical assumptions concerning underlying growth rates in the medical sector.
108 ANALYSIS OF PRESIDENT'S BUDGET March 1988

FUNCTION 600: INCOME SECURITY

PROPOSED MAJOR SPENDING CHANGES

(By fiscal year, outlays in billions of dollars)

Item

Cumulative

Five-Year

1989 1990 1991 1992 1993 Changes

CBO Baseline

Proposed Changes

Family support payments

Low-income energy

assistance

Housing assistance

Nutrition

Trade Adjustment

Assistance

Other

139.0

0.2

-0.4

—

-0.1

-0.1

-0.1

147.1

0.3

-0.5

— -0.1

-0.1

-0.2

155.2

0.3

-0.5

-0.1

-0.1

-0.1

-0.2

163.3

0.4

-0.6

-0.1

-0.2

-0.1

-0.3

173.3

0.5

-0.7

-0.2

-0.3

-0.1

-0.4

1.7

-2.6

-0.3

-0.7

-0.5

-1.2

Total

President's 1989 Budget

as Estimated by CBO a/

President's 1989 Budget a/

CBO Reestimates

-0.3 -0.5 -0.8 -1.0 -1.1 -3.8

138.7 146.6 154.4 162.3 172.2

135.6 140.6 146.5 152.3 158.0

3.1 6.1 7.9 10.0 14.1 41.1

a. Includes allowance for pay raises in 1990 through 1993.

Proposed Policy Changes

The President's proposals would reduce outlays for income security

programs $3.8 billion, or 0.5 percent, below the CBO baseline over the

1989-1993 period. Past budgets have proposed much larger reductions,

generally of more than $30 billion. The budget differs from past

budgets by proposing no changes in retirement and disability benefits,

Food Stamps, and the Pension Benefit Guaranty Corporation. The

major proposals in this function are the Administration's welfare

reform proposal, which CBO estimates will result in increased
CHAPTER V THE ADMINISTRATION'S NONDEFENSE BUDGET 109

outlays, and a proposal to reduce funding for the Low-Income Home

Energy Assistance Program (LIHEAP).

Family Support Payments to States. The President has adopted the

Republican-sponsored welfare reform bills--H.R. 3200 and S. 1655~as

his legislative proposal in the Aid to Families with Dependent

Children (AFDC) and Child Support Enforcement (CSE) programs.

The proposal would require many AFDC recipients to participate in

education, work, or training programs; mandate the states to make a

number of improvements in their CSE programs, such as using

guidelines to set amounts of child support orders and requiring child

support payments by absent parents to be withheld from their

paychecks; require a minor mother to live with her mother; and

expand waivers that would allow the states to modify their programs

for low-income families. The proposal differs significantly from the

welfare reform bill passed by the House (H.R. 1720). That bill expands

the AFDC program by mandating the AFDC-Unemployed Parent

program in all states, by increasing the allowable deductions from

earnings, and by raising the federal match rate for increases in

payments made by states. The bill also includes many of the same

changes in the CSE program as the President's proposal, as well as a

work-related program for AFDC recipients.

The total cost of the President's proposal over five years is

estimated by CBO to reach $0.9 billion, whereas the Administration

estimates savings of $0.2 billion. (These estimates include the effects

of the President's proposal on all affected programs, even those in

other budget functions, as shown in the following table.) While CBO

shows higher savings for the CSE reforms, much higher costs are

shown for the AFDC program requiring many benefit recipients to

work or train. The President's work-related proposal authorizes $500

million in 1989 and such sums as are necessary thereafter (replacing

Work Incentive (WIN) program funding and open-ended spending in

AFDC on work programs); requires states to meet participation rate

standards that rise from 15 percent of recipients required to register

for work programs in 1989, to 30 percent in 1993, and to 70 percent in

1997 and beyond; requires registration for families with children over

the age of six months not otherwise excused; and matches state

spending- -including spending on education and training-at existing

average rates.
110 ANALYSIS OF PRESIDENT'S BUDGET March 1988

COST AND SAVINGS OF WELFARE REFORM, 1989-1993

(Five-year changes in outlays, in billions of dollars)

CBO Administration

Total Cost (+) or Savings (-) 0.9 -0.2

AFDC Work-Related Programs

Costs

New program 3.1 2.6

Existing AFDC work programs -0.7 -0.6

Existing WIN programs

(Function 500) -0.5 ;OJ>

Total 1.9 1.4

Savings

AFDC and Food Stamps -0.3 -0.9

Medicaid (Function 550) a/ -0.1 ^5

Total -0.3 -1.3

Net Cost 1.6 0.1

Other Provisions

Savings

AFDC, CSE, and Food Stamps -0.5 -0.3

Medicaid (Function 550) a/ -0.2

Net Savings -0.6 -0.3

Costs or Savings by Budget Function

Function 500 -0.5 -0.5

Function 550 -0.2 -0.5

Function 600 1.7 0.8

a. In the President's budget, Medicaid savings are shown in function 600.

For the work-related program, estimated federal costs are $1.9

billion over five years, while estimated federal savings as families

leave welfare or have their welfare benefits reduced as a result of the

work program are only $0.3 billion. Costs are reduced by ending WIN

funding and existing spending on work programs in AFDC; savings

include those in the AFDC, Food Stamp, and Medicaid programs. The

Administration shows somewhat lower costs-$1.4 billion--but markedly higher savings-$1.3 billion. According to the Administration,

the work program shows net savings by 1992, even though participation rates, and therefore costs, are rising throughout the 1989-1993
CHAPTER V THE ADMINISTRATION'S NONDEFENSE BUDGET 111

period. Usually, savings lag spending on work programs and build up

only gradually.

The CBO estimates are based in general on the recent studies of

AFDC work programs in Arkansas, California, Maryland, and

Virginia undertaken by the Manpower Demonstration Research

Corporation. Nonetheless, estimated effects of the work proposal are

very uncertain. The proposal's required participation rates would

result in 600,000 full-year participants in 1993, or 2.4 million

participants in a three-month program, which would be more in line

with current lengths of stay in state work programs. The three-month

program by 1993 would therefore include 60 percent of the 3.9 million

families on the program in any month. To accommodate this many

participants, states would probably reduce their spending for each

participant significantly, but the exact amount of such a reduction is

uncertain. As spending per participant declined and participants

were recycled through work programs, welfare savings would also

decline, but by an uncertain amount.

Low-Income Home Energy Assistance Program. The Administration

requests $1.2 billion for the Low-Income Home Energy Assistance

Program in 1989 and in subsequent years. This funding level is $0.3

billion below the 1988 appropriation and $0.4 billion below the CBO

baseline for 1989. The total outlay savings relative to the CBO baseline for 1989 through 1993 are $2.6 billion, a 30 percent reduction.

The Administration expects that states will use funds from oil

overcharge settlements to supplement the decreased federal funding

of LIHEAP. To date states have received $3.3 billion in oil overcharge

settlements, and they may expect to receive an estimated $1.3 billion

in additional settlements. States may distribute these oil overcharge

funds among LIHEAP and other energy-related programs. They have

allocated over half of the money received so far and given LIHEAP

less than 20 percent of these funds. LIHEAP has already spent $0.2

billion of its allocated money to supplement federal LIHEAP funding.

If states continued to allocate and spend the remaining oil overcharge

funds as they have in the past, they would fall short of supplementing

the five-year $2.6 billion reduction by more than $2 billion. In

addition, the distribution of oil overcharge settlements to the states is

determined by the courts and can differ significantly from the federal

distribution to states of LIHEAP funds. If LIHEAP funds were

82-607 - 88 - 5 : QL 3
112 ANALYSIS OF PRESIDENT'S BUDGET March 1988

distributed in the same manner as past oil overcharge settlements,

some states' grants would increase by 100 percent while others would

decrease by over 33 percent.

Housing Assistance. The President has requested $8 billion in budget

authority for 1989 to fund the Department of Housing and Urban

Development's (HUD) low-income rental assistance programs, a $1.5

billion cut from the CBO baseline for 1989. Once again, the

Administration proposes to provide five-year vouchers rather than the

more traditional fifteen- to twenty-year rental assistance contracts.

The shift to shorter-term vouchers would allow assistance for an estimated 108,000 additional households, including 100,000 vouchers,

7,000 rental units for the elderly and handicapped, and 1,000 Indian

public housing units. The CBO baseline assumes the continuation of

1988 appropriations and program mixes and includes funding for

about 76,000 additional units, including 45,000 vouchers, 11,000 units

for the elderly and handicapped, and about 4,800 public housing units.

The President's proposal would save $0.8 billion in outlays from 1989

through 1993.

The budget proposals would radically change the provision of

low-income housing assistance in rural areas. Direct federal housing

loans would be replaced with a voucher system based on the system

currently operated by HUD. In addition, the President would terminate funding for four smaller rural housing programs. These proposals would add a five-year total of $0.5 billion to function 600 outlays, but these costs would be more than offset in function 370.

Nutrition. The President's proposal would reduce funding for the

Emergency Food and Shelter program to one-third below the CBO

baseline, saving $0.2 billion over five years. This program provides

grants to voluntary organizations that assist the homeless. The

budget also proposes freezing funding for Nutrition Assistance for

Puerto Rico in 1990 through 1993, saving a total of $0.2 billion

relative to CBO's baseline. An additional $0.3 billion reduction is proposed for nutrition programs intended for the elderly, Indians, women,

infants, and children.

Trade Adjustment Assistance. The President again proposes eliminating the Trade Adjustment Assistance program for workers who

lose their jobs because of import competition. The proposal would save
CHAPTER V THE ADMINISTRATION'S NONDEFENSE BUDGET 113

an estimated $0.5 billion from 1989 through 1993. The Administration requests funding for a new and comprehensive program to provide

training services for dislocated workers and other workers. Funds for

this new program are included in function 500 (Education).

Other. The President's request for Refugee Assistance in 1989 is 20

percent below the 1988 appropriation and would reduce outlays $0.5

billion below the CBO baseline through 1993. The President's requests for administrative funds for several programs are also below

the CBO baseline. Finally, the budget discusses a proposal to privatize the Railroad Retirement pension plan, but the proposal is not

reflected in the budget accounts and its details are not yet specified.

CBO Reestimates

CBO reestimates raise the President's budget by $41 billion over the

five-year period. Nearly one-half of the reestimates reflect different

economic assumptions-mainly CBO's assumption of greater cost-ofliving adjustments and higher unemployment rates. Technical reestimates total $21 billion over the projection period, or 51 percent of the

total CBO reestimates.

The largest technical reestimate—totaling $5.5 billion over the

five-year period-occurs in the Family Support Payments to States

account, which includes the AFDC and CSE programs. About threequarters of the technical reestimate comes from differences in current

service baselines, and one-quarter from differences in estimates of

legislative proposals.

Most of the reestimate of Family Support Payments reflects different assumptions about the rate at which states will increase AFDC

benefit payments. CBO assumes that benefits per family will rise at

an average annual rate of 3.5 percent, which is lower than increases in

most recent years but higher than the increase in 1987. The Administration uses a rule of thumb that ties benefit increases to a portion of

the rise in the consumer price index (CPI). When the CPI is rising at a

modest rate, as in the projected period, the estimated rise in benefit

payments is quite low. In addition, CBO estimates that the federal

government will collect fewer of the fiscal sanctions that are levied on

the states for errors in excess of 3 percent in AFDC benefit payments.
114 ANALYSIS OF PRESIDENT'S BUDGET March 1988

Fiscal sanction collections are less than the Administration's because

collections are assumed to begin only in 1990 and because only

two-thirds of sanctions are assumed to be collected as a result of legal

review.

The reestimate of legislative savings is primarily for the Administration's proposed work requirement for AFDC recipients, as discussed earlier.

The second major technical reestimate is a $5.1 billion, five-year

increase in unemployment compensation, which represents a 6 percent increase over the Administration's estimate of unemployment

outlays through 1993. The CBO estimate is higher because CBO

projects that more people will receive benefits, and that the average

period covered by these benefits will be longer.

CBO's reestimate of the refundable portion of the Earned Income

Tax Credit (EITC), counted as a budget outlay, adds $3.0 billion to

spending over the 1989-1993 period. Most of this difference is offset in

the revenue estimates, which assume a smaller credit against taxes

owed. CBO's reestimate for the entire EITC is $0.9 billion higher than

the Administration's estimate over the 1989-1993 period. Remaining

technical reestimates total $7.2 billion over the five-year period, and

are distributed among several entitlement programs.
CHAPTER V THE ADMINISTRATION'S NONDEFENSE BUDGET 115

FUNCTION 650; SOCIAL SECURITY

PROPOSED MAJOR SPENDING CHANGES

(By fiscal year, outlays in billions of dollars)

Item 1989 1990 1991 1992 1993

Cumulative

Five-Year

Changes

CBO Baseline

Proposed Changes

President's 1989 Budget

as Estimated by CBO a/

President's 1989 Budget a/

CBO Reestimates

234.0 251.3 268.3 285.4 302.8

-0.2 -0.3 -0.4 -0.5 -1.4

234.0 251.1 268.0 285.0 302.3

233.8 248.5 263.5 277.3 290.5

0.2 2.6 4.5 7.8 11.8 26.9

a. Includes allowance for pay raises in 1990 through 1993.

Proposed Policy Changes

The Administration proposes no changes in Social Security benefits

and revenues, but requests a 7.1 percent increase in the limitation on

administrative expenses (LAE) for the Social Security Administration

for 1989. The budget maintains the LAE at its 1989 level through

1993. Five-year savings total $1.4 billion relative to CBO's baseline,

although some of this difference is artificial. When the administrative

expenses in the Supplemental Security Income program are included

(they are also included under the Social Security Administration's

LAE, but are reflected in function 600), the Administration's request

nearly equals CBO baseline in 1989 and is $0.8 billion lower between

1990 and 1993.

CBO Reestimates

CBO has reestimated the President's budget request upward by a total

of $26.9 billion over the next five years. The use of CBO's economic

assumptions raises estimated outlays, while technical reestimates
116 ANALYSIS OF PRESIDENT'S BUDGET March 1988

generally reduce outlays. The economic reestimates relate to

differences in cost-of-living adjustments (COLAs). CBO's projected

COLAs remain in the 4 percent to 5 percent range through 1993,

compared with the Administration's projection of decreasing COLAs.

These differences in COLA assumptions cause significant reestimates

of the President's budget because an increase of one percentage point

in the COLA would raise Social Security spending for calendar year

1989 by $2.2 billion. (An additional $0.8 billion would result in other

programs such as Veterans Compensation and Pensions, Supplemental Security Income, and Military and Civilian Retirement.)

Social Security Cost-of-Living Adjustments

Assumed by CBO and the Administration

(In percents)

1989 1990 1991 1992 19J3

CBO 4.5 4.9 4.6 4.4 4.4

Administration 4.2 4.0 3.6 3.1 2.6

CBO's technical reestimates decrease projected spending in the

Old-Age and Survivors Insurance (OASI) program, but increase

spending in the Disability Insurance (DI) program. The growth in

OASI spending is lower because of smaller retroactive benefit payments, lower real wage growth that in turn leads to smaller average

OASI benefits for new beneficiaries, and smaller increases in the

number of elderly beneficiaries. On the other hand, DI spending increases more rapidly because of the greater number of people receiving disability benefits, although the difference between the CBO

and Administration estimates narrows somewhat after 1991. The

combined OASI and DI technical reestimates reduce projected Social

Security costs by $2.0 billion over the next five years.
CHAPTER V THE ADMINISTRATION'S NONDEFENSE BUDGET 117

FUNCTION 700: VETERANS BENEFITS AND SERVICES

PROPOSED MAJOR SPENDING CHANGES

(By fiscal year, outlays in billions of dollars)

Item 1989 1990 1991 1992 1993

Cumulative

Five-Year

Changes

CBO Baseline

Proposed Changes

Loan guaranty

Origination fee

Loan sales

Medical care

Other

Total

President's 1989 Budget

as Estimated by CBO a/

President's 1989 Budget a/

CBO Reestimates

28.6 30.3 31.0 31.9 32.8

0

0.2

0.3

—

-0.2

-1.0

-0.3

-Q.l

-0.3

-0.5

-0.3

-0.1

-0.3

-0.4

-0.3

-0.1

-0.3

-0.4

-0.4

-0.1

-0.5 -1.5 -1.2 -1.2 -1.2

28.1 28.8 29.9 30.7 31.5

28.7 29.7 30.5 31.3 31.9

-0.6 -0.9 -0.6 -0.6 -0.4

-1.1

-2.5

-1.5

-0.5

-5.7

-3.2

a. Excludes the Administration's proposals for credit reform; includes allowance for pay raises in 1990

through 1993.

Proposed Policy Changes

The changes proposed in the President's 1989 budget for veterans'

benefits and services are minor, except for changes in the home loan

guaranty program and in medical care services for veterans.

Loan Guaranty Revolving Fund. The President's 1989 budget

assumes an extension of the authority of the Veterans Administration

(VA) to charge a fee of 1 percent of the mortgage principal on all

guaranteed and direct loans made under the VA's home loan guaranty

program,, Under current law, this authority will expire after September 30,1989. CBO estimates that collections of these fees would offset
118 ANALYSIS OF PRESIDENT'S BUDGET March 1988

the fund's outlays by $225 million in 1990, increasing to $295 million

in 1993.

Before 1988, the VA routinely sold direct loans held by the revolving fund with full recourse to the government in the event of

default. Beginning in 1989, the Office of Management and Budget

will no longer allow agencies to offer recourse provisions on loan sales.

Under the provisions of Public Law 100-136 and Public Law 100-198,

the VA can sell loans without recourse in 1988 and 1989, but will be

required to resume offering recourse on sales occurring after September 30, 1989. The President's budget assumes that the law will be

amended to allow the continuation of nonrecourse sales through 1993.

The budget also proposes to sell all loans in the VA's portfolio of

direct loans. The routine sales of direct loans discussed above involve

recently closed loans for which payments are current. The loans held

in the portfolio previously have been considered unavailable for sale

because of poor documentation or delinquencies, or because the loan is

old and carries a low interest rate. Even though the sale of the portfolio would not require Congressional action, it is a significant policy

change and therefore is not included in the CBO baseline.

Medical Care. The appropriations requested in the President's budget

for 1989 through 1993 are nearly $1.7 billion lower than the budget

authority projected in the CBO baseline. The CBO baseline reflects

inflation and pay increases that are calculated according to the formula specified by Public Law 100-119, the Balanced Budget Reaffirmation Act. The President's request appears to assume that some of

these inflationary increases will be absorbed, but does not specify how

the costs will be offset.

Compensation. The compensation program is not indexed by law, but

historically its benefits have been increased for inflation each year

through legislation. The President's budget proposes to index the

benefits permanently. Because the CBO baseline includes these outyear inflation increases as specified in the Balanced Budget Act, the

President's proposal has no cost relative to the baseline.

Other. The President's budget contains several other legislative proposals with minor budgetary effects. The Administration proposes to

restrict the payment of burial plot allowances to the survivors of
CHAPTER V THE ADMINISTRATION'S NONDEFENSE BUDGET 119

veterans with service-connected disabilities or low incomes, thereby

saving about $26 million a year. The authority for loans from the

Education Loan Fund would be repealed, but the effect of this change

would be minimal because fewer than 20 loans are expected in 1989

and later years. Proposals for the VA Medical Care program include

an increase in per diem payments to state homes as well as expanded

authority to reimburse nurses for tuition expenses. These two

changes would cost approximately $23 million a year.

CBO Reestimates

There are two major technical reestimates of 1988 spending: CBO assumes that supplemental appropriations will be required to cover the

cost-of-living adjustment (COLA) in the compensation program and

higher-than-anticipated costs in the Loan Guaranty Revolving Fund.

The President's budget shows deficits for 1988 in both of these accounts, but does not request supplemental to cover them.

In 1989 through 1993, the President assumes significantly lower

COLAs for the compensation and pensions programs than are reflected in the CBO baseline (see function 650). Under CBO economic

assumptions, outlays from these programs would be $1.6 billion higher through 1993 than under the Administration's assumptions. In

addition to the economic difference, CBO's outlay estimate for the pensions program is approximately $1.5 billion below the President's

estimates for 1989 through 1993. CBO's analysis indicates that the

caseload of the pension program established by Public Law 95-588

should peak in the near future and then begin to decline, whereas the

Administration is projecting a continued increase.

CBO also anticipates lower participation and training rates under

the Montgomery GI Bill (formerly known as the New GI Bill), which

account for a downward reestimate of $0.9 billion over five years in

the readjustment benefits account, the Education Benefits Fund, and

Department of Defense contributions. Finally, an expectation of lower

default rates than assumed by the VA causes the CBO estimate of

spending from the Loan Guaranty Revolving Fund to be about $1.6

billion below VA estimates through 1993.
120 ANALYSIS OF PRESIDENT'S BUDGET March 1988

FUNCTION 750: ADMINISTRATION OF JUSTICE

PROPOSED MAJOR SPENDING CHANGES

(By fiscal year, outlays in billions of dollars)

Item 1989 1990 1991 1992 1993

Cumulative

Five-Year

Changes

CBO Baseline

Proposed Changes

Federal prison system

The Judiciary

Customs user fees

Office of Justice Programs

Other

Total

President's 1989 Budget

as Estimated by CBO a/

President's 1989 Budget a/

CBO Reestimates

8.5 8.9 10.0 10.5 10.9

0.2

0.3

0.8

-0.1

0.1

1.3

0.4

0.3

0.8

-0.1

0.1

1.5

0.5

0.4

-0.2

0.1

0.8

0.6

0.4

0

-0.2

0.7

0.5

0

-0.2

-0.2

0.9 0.8

9.8 10.4 10.9 11.3 11.7

9.9 10.5 10.8 11.3 11.7

-0.1 -0.1 -- 0.1 0.1

2.4

1.9

1.7

-0.7

5.3

a. Includes allowance for pay raises in 1990 through 1993.

Proposed Policy Changes

The President's proposed spending levels for administration of justice

are $3.6 billion (8 percent) higher than the CBO baseline for the 1989-

1993 period. The increase results from higher spending for prisons

and judicial activities, which is partially offset by reductions for

justice assistance and law enforcement. In addition, the Administration is proposing to reclassify certain customs fees as revenues, which

would have the effect of increasing both outlays and revenues by a

total of $1.7 billion over the 1989-1991 period.

Federal Prison System. The largest spending increase in this function

is for federal prisons. The President's proposal would raise spending

on the federal prison system by almost $2.4 billion, or 46 percent,
CHAPTER V THE ADMINISTRATION'S NONDEFENSE BUDGET 121

above the CBO baseline from 1989 through 1993. Under the President's budget, spending authority for buildings and facilities in the

federal prison system would be increased from $202 million in 1988 to

$437 million in 1989, an increase of 116 percent. Most of this increase

would be for construction of new prisons and the expansion and renovation of existing facilities. Spending authority for the entire federal

prison system would be increased by about 50 percent in 1989.

The Judiciary. Spending by the Judiciary would be approximately

$1.9 billion, or about 25 percent, above the baseline level from 1989

through 1993. The budget proposes a major increase in spending

authority in 1989, and would increase spending at close to the baseline

rate of growth in subsequent years. Most of this increase would be for

the courts of appeals, district courts, and other judicial services.

Customs User Fees. Under legislation to be transmitted, the President's budget would reclassify the ad valorem tax portion of customs

user fees (commonly known as OBRA fees) as revenues. Currently,

these fees are classified as offsetting receipts under the requirements

of the Budget Reconciliation Act of 1987 (Public Law 100-203).

Because of this reclassification, spending levels in the President's budget are $1.7 billion higher than the baseline.

Office of Justice Programs. Once again, the President proposes to

terminate! several programs within the Department of Justice's Office

of Justice Programs (OJP), including the Office of Juvenile Justice

and Delinquency Prevention and the state and local drug grants.

These terminations would result in spending levels for OJP that total

$700 million less than the baseline from 1989 through 1993.

Other. Spending on law enforcement activities would decline under

the President's proposals by $314 million relative to the CBO baseline

from 1989 through 1993. Spending is roughly equal to the baseline in

1989, 1990, and 1991, but declines thereafter, falling $195 million (3

percent) below the baseline by 1993. Spending for the Immigration

and Naturalization Service is above the baseline each year, while

spending for the Drug Enforcement Administration and the Federal

Bureau of Investigation increases for 1989 and 1990 but falls below

the baseline in subsequent years. Spending for law enforcement

programs in the Treasury Department, including the Customs Service

and the Secret Service, is below the baseline each year. The Presi-
122 ANALYSIS OF PRESIDENT'S BUDGET March 1988

dent's budget also assumes reauthorization of the Crime Victims

Fund, which would otherwise expire after 1989.

CBO Reestimates

The CBO reestimate of the President's budget displays the passenger

fee portion of customs user fees (commonly known as COBRA fees) as

offsetting receipts, while the President's budget displays them as

revenues.
CHAPTER V THE ADMINISTRATION'S NONDEFENSE BUDGET 123

FUNCTION 800: GENERAL GOVERNMENT

PROPOSED MAJOR SPENDING CHANGES

(By fiscal year, outlays in billions of dollars)

Item

Cumulative

Five-Year

1989 1990 1991 1992 1993 Changes

CBO Baseline

Proposed Changes

Payments to states

and counties

Payments to the District

of Columbia

Federal Buildings Fund

Other

Total

President's 1989 Budget

as Estimated by CBO a/

President's 1989 Budget a/

GBO Reestimates

9.8 10.7 10.7 10.8 11.1

-0.1

-0.1

0.1

-0.1

-0.3 -0.3 -0.3 -0.3

-0.1

0.2

0.2

-0.1

0.2

0.1

-0.2

0.3

0.1

-0.1 -0.1

-0.2

0.5

9.7 10.7 10.6 10.7 11.1

9.5 10.4 10.3 10.3 10.8

0.2 0.3 0.2 0.4 0.3

-1.2

-0.7

1.1

0.5

-0.3

1.5

a. Includes allowance for pay raises in 1990 through 1993.

Proposed Policy Changes

The President's budget includes funding for general government

activities that would result in outlays $0.3 billion below the CBO

baseline over the 1989-1993 period. The largest savings would be

from changes in payments to states and counties from federal mineral

and timber receipts. States' and counties' share of such receipts is

calculated currently as a percentage of gross, not net, receipts. These

shares vary from program to program, but most are between 25

percent and 50 percent. The President proposes to reduce the amount

of such receipts distributed to state and local governments by

calculating their share after deducting collection costs. CBO

estimates that this proposal would result in savings to the federal
124 ANALYSIS OF PRESIDENT'S BUDGET March 1988

government of about $0.3 billion per year, and five-year savings of

$1.2 billion by 1993.

The budget request for payments to the District of Columbia is

below the CBO baseline in each year, dropping from the $550 million

provided in 1988 to $485 million by 1993. The 1989 request of $525

million would hold basic assistance payments to their 1988 level of

$431 million and would provide funding for retirement contributions,

St. Elizabeth's Hospital transfer payments, and inauguration expenses at levels authorized under current law. No specific request has

been included for compensation for federal use of the District's water

and sewers. The President's budget would result in payments to the

District that are $0.7 billion below the baseline through 1993.

These decreases are largely offset by proposed increases in

spending in other areas. The President proposes to increase spending

from the Federal Buildings Fund for building construction, acquisition, and repair projects. Additional spending for these activities

would exceed the baseline by $1.1 billion over the five-year period.

Outlays for the legislative branch and for other general government

activities would also be above the baseline, by about $0.5 billion over

the 1989-1993 period. Finally, the President proposes to continue

funding for new Internal Revenue Service (IRS) employees hired

during 1988. IRS outlays would be approximately at baseline levels

over the five years.

CBO Reestimates

The budget assumes that additional efforts to identify and sell surplus

federal property would raise about $0.7 billion through 1993. Past

attempts by the Administration to sell property fell substantially

short of stated goals, and the lengthy process of declaring property as

surplus makes drastic increases in the inventory of salable surplus

property unlikely. CBO therefore estimates that surplus property

sales will remain at recent historical levels, resulting in higher net

outlays for the function than were estimated in the budget. CBO's

estimate of outlays for a number of other programs, based on historical

spending patterns, is also higher than in the budget.
CHAPTER V THE ADMINISTRATION'S NONDEFENSE BUDGET 125

FUNCTION 900: NET INTEREST

PROPOSED MAJOR SPENDING CHANGES

(By fiscal year, outlays in billions of dollars)

Item

Cumulative

Five-Year

1989 1990 1991 1992 1993 Changes

CBO Baseline

Proposed Changes

Interest on the public debt

Education bonds

Other interest

Total

President's 1989 Budget

as Estimated by CBO

President's 1989 Budget

CBO Reestimates

165.9 184.8 197.9 203.4 208.1

-0.5

0.3

-0.2

-1.6

-0.1

0.6

-1.1

-2.8

-0.1

0.9

-4.4

-0.2

1.1

-6.3

-0.3

1.5

-2.1 -3.5 -5.0

165.7 183.7 195.8 199.9 203.1

151.6 156.1 158.8 151.0 141.5

14.1 27.6 37.0 48.9 61.5

-15.6

-0.7

4.4

-11.9

189.1

Proposed Policy Changes

The Administration's spending and revenue proposals lead to smaller

deficits than contained in the CBO baseline projections, and reduce

the government's need to borrow. Under the Administration's deficit

reduction program, debt held by the public is $11 billion lower than

the baseline at the end of 1989, and $95 billion lower at the end of

1993. The resulting savings in debt service-small at first-grow to $6

billion by 1993.

Small savings in interest costs stem from the Administration's

proposal to allow tax-exempt savings for education (see Chapter HI).

The government's interest expense would decrease, since the proposal

would boost the demand for savings bonds and lessen the need to sell

marketable securities at higher interest rates. The net effect of this
126 ANALYSIS OF PRESIDENT'S BUDGET March 1988

proposal, however, is to increase the deficit, since the expected revenue loss exceeds the small savings in net interest.

Additional proposals in the Administration's budget reduce the

government's interest receipts by $290 million in 1989, $560 million

in 1990, and $1.5 billion in 1993. These interest reductions stem from

proposals that reduce lending levels for certain federal programs, such

as the Farmers Home Administration and the Small Business Administration; waive penalties due the Federal Financing Bank when

certain loans made by the Farmers Home Administration are prepaid;

and require sales of loan assets from agency portfolios.

CBO Reestimates

Reestimates of the Administration's net interest spending total $14.1

billion in 1989, $27.6 billion in 1990, and $61.5 billion in 1993. These

differences arise chiefly from higher interest rates and higher deficits

assumed by CBO. Other technical estimating differences are small.

CBO's assumption of higher interest rates leads to a $133 billion

reestimate of the President's net interest outlays over the five-year

period. These reestimates grow from $12 billion in 1989, when CBO

short-term interest rate projections are 1.3 percentage points above

the Administration's projections and longer-term projections are 2.1

percentage points higher, to $41 billion in 1993, when the interest rate

differentials are 2.2 percentage points and 3.0 percentage points higher, respectively.

Another $60 billion in reestimates over the five-year period

results from higher deficits than contained in the President's budget.

Because of other reestimates to revenues and outlays, CBO projects

that the federal government's borrowing needs would be higher than

forecast by the Administration. Additional interest costs from this

borrowing grow from $3 billion in 1989 to $22 billion in 1993.
CHAPTER V THE ADMINISTRATION'S NONDEFENSE BUDGET 127

FUNCTION 920: ALLOWANCES

PROPOSED MAJOR SPENDING CHANGES

(By fiscal year, outlays in billions of dollars)

Item 1989 1990 1991 1992 1993

Cumulative

Five-Year

Changes

CBO Baseline

Proposed Changes

President's 1989 Budget

as Estimated by CBO a/

President's 1989 Budget a/

CBO Reestimates 0

000 0

-0.1 -0.1 -0.1

-0.1 -0.1 -0.1

-0.1 -0.1 -0.1

000 0

-0.2

a. Excludes allowance for pay raises in 1990 through 1993.

Proposed Policy Changes

The allowances function contains an initiative by the Administration

to raise the applicable minimum contract size covered under the

Davis-Bacon Act and the Service Contract Act to $100,000 for all

federal agencies except the Department of Defense (DoD). (The proposal to raise the threshold for DoD contracts is contained in function

050.) Both acts currently require that prevailing local wages be paid

to workers hired by contractors involved in all federally funded or

assisted projects above certain thresholds-$2,000 for Davis-Bacon and

$2,500 for Service Contract. Increasing the minimum contract size for

non-Do!) agencies to $100,000 would allow contractors on smaller

projects to pay lower wages in some cases. The Administration's budget assumes a reduction of $50 million in annual budget authority,

resulting in outlay reductions of $48 million in 1989 and $247 million

over the 1989-1993 period.
128 ANALYSIS OF PRESIDENT'S BUDGET March 1988

CBO Reestimates

There are no reestimates in this function. For discretionary funding

programs, CBO assumes the budget request. CBO estimates, however, that the proposed changes in the two acts would reduce needed

funding by $41 million annually, saving $167 million in outlays over

the next five years.
CHAPTER V THE ADMINISTRATION'S NONDEFENSE BUDGET 129

FUNCTION 950: UNDISTRIBUTED OFFSETTING RECEIPTS

PROPOSED MAJOR SPENDING CHANGES

(By fiscal year, outlays in billions of dollars)

Item 1989 1990 1991 1992 1993

Cumulative

Five-Year

Changes

CBO Baseline

Proposed Changes

Employer share, employee

retirement

Sale of the naval

petroleum reserves a/

Sale of power marketing

admi nistrations a/

Spectrum fees

Total

President's 1989 Budget

as Estimated by CBO

President's 1989 Budget

CBO Reestimates

-37.9 -39.4 -41.3 -43.2 -45.2

0.3

-2.5

-0.1

0

-0.6

-0.8

-1.4

-0.3

-0.9

0

0

-0.3

-1.4

0

0

-0.3

-1.9

0

0

-0.3

-4.5

-3.3

-1.5

-1.0

-2.3 -3.1 -1.2 -1.6 -2.2 -10.3

-40.2 -42.5 -42.5 -44.8 -47.3

-41.0 -42.2 -42.7 -45.3 -47.7

0.8 -0.3 0.2 0.5 0.3 1.6

a. The receipts from the proposed sale of the naval petroleum reserves and the Alaska and Southeastern

power marketing administrations shown here would increase outlays in function 270, relative to the

baseline, because these assets would no longer generate receipts for the government.

Proposed Policy Changes

The budget includes new measures for increasing undistributed

offsetting receipts by about $10 billion over the 1989-1993 period. The

President is proposing changes that would increase certain agency

contributions for employee retirement. He is also proposing to sell the

government's interests in the naval petroleum reserves (NPRs) and in

two of the five power marketing administrations (PMAs)—the Alaska

and Southeastern PMAs. CBO estimates that these asset sales, if

carried out, could bring in about $4.8 billion in receipts to the government by 1993, though lost income that would have been generated by
130 ANALYSIS OF PRESIDENT'S BUDGET March 1988

the NPRs and the Alaska and Southeastern PMAs would total $2.9

billion over the 1989-1993 period. The President also proposes to collect fees for the rights to use communications frequencies.

Employer's Share of Employee Retirement. Agency contributions to

employee retirement programs are intragovernmental payments that

are paid out of the individual program accounts and recorded as offsetting receipts in function 950. The President proposes to increase

U.S. Postal Service payments for employee retirement beginning in

1990. The President's pay raise proposals would decrease agency payments in 1989 and 1990, but increase payments after 1990 relative to

the CBO baseline.

The President would require the U.S. Postal Service to make

additional payments to the Civil Service Retirement Trust Fund to

pay for postal retirees' cost-of-living adjustments (COLAs). The 1990

payment would cover the cost of both the 1989 and 1990 COLAs for

postal retirees. This proposal would increase agency payments by a

total of $3.6 billion over the 1990-1993 period, largely derived from

increased postal rates that would be necessitated by this proposal.

The President requests higher military pay raises than were included in the CBO baseline, but delays their payment for three

months. The President also proposes lower civilian pay raises and delays payment until January of each year. Taken together, these pay

proposals would reduce the employer share of employee retirement by

$0.3 billion in 1989, but would increase such agency contributions by

about $0.9 billion over the 1989-1993 period.

Naval Petroleum Reserves. The government owns approximately 78

percent of the Elk Hills oil field, known as NPR-1, and 100 percent of

the much smaller Teapot Dome oil field, known as NPR-3. Selling

these interests would raise federal receipts by an estimated $3.3 billion by 1990. The selling price depends to a great extent on the timing

of these sales and the private market's expectations of future oil

prices. Selling the reserves would reduce net income from oil sales by

about $2.5 billion from 1990 through 1993 and by additional amounts

thereafter.

Power Marketing Administrations. The President recommends

selling two of the five PMAs in the Department of Energy: the Alaska
CHAPTER V THE ADMINISTRATION'S NONDEFENSE BUDGET 131

PMA and the Southeastern PMA. These agencies sell and transmit

the electricity produced at federal dams. CBO estimates that the

government could receive about $1.5 billion from sales of these two

PMAs by the end of 1990, which would be partially offset by lost income (in the energy function) of approximately $0.4 billion over the

1990-1993 period and additional amounts in subsequent years.

Both CBO and the Administration estimate sales receipts of $100

million for the Alaska PMA and $1.4 billion for the Southeastern

PMA. Potential receipts from selling the two PMAs are very uncertain, because of the differing values of these assets to prospective

buyers, and because of the uncertain impact of the sale on federal tax

revenues.

Spectrum Fees. The President proposes to charge a fee for the right to

transmit and receive information over the radio frequency spectrum.

No charge would be applied to mass media, public safety, or amateur

services. The budget does not provide details of the proposal for spectrum fees, but the Administration estimates that it would gen-erate

additional annual receipts of $250 million beginning in 1990.

CBO Reestimates

The President's budget projects receipts from the Outer Continental

Shelf (OCS) that are $1.8 billion greater through 1993 than those estimated by CBO. The budget assumes that the Supreme Court will rule

in favor of the federal government in a dispute with Alaska over OCS

receipts held in escrow; it also assumes higher levels of production and

prices for oil and gas. CBO assumes that the OCS receipts in escrow

would be split evenly between Alaska and the federal government.

The budget includes receipts from the sale of the NPRs of $3.2

billion in 1989 and $0.3 billion in 1990, for a total of $3.5 billion. CBO

estimates receipts of $2.5 billion in 1989 and $0.8 billion in 1990, for a

total sale amount of $3.3 billion. CBO assumes that 75 percent of the

sale receipts would be obtained in 1989; the budget assumes that over

90 percent of the receipts would occur in 1989. The reestimate of sales

receipts for the NPRs assumes lower oil prices than the budget.

APPENDIXES

APPENDIX A

BASELINE BUDGET PROJECTIONS

Baseline budget projections show the levels of revenues, outlays, and

deficits that are expected to result during the next five years if current

budgetary policies remain unchanged. They provide a useful starting

point for analyzing the changes in national priorities recommended by

the President and their dollar effect on budget totals. Throughout this

volume, revenue changes and spending recommendations in the

President's budget are compared with CBO's baseline projections.

Table A-l summarizes the CBO baseline projections of revenues,

outlays, deficits, and debt. The budget estimates are consistent with

the economic assumptions described in Chapter n. For revenues and

for entitlement programs such as Social Security, the baseline is projected according to current laws. Many other federal government

programs-including defense programs and many nondefense activities such as space, transportation, and health research—are funded

annually in appropriation acts. For these activities, the baseline

assumes that future appropriations are adjusted to reflect inflation.

Estimates of offsetting receipts are consistent with current laws and

policies, and net interest projections reflect the assumed interest rates

and deficits.

The federal government's deficit in 1987 was $150 billion, but as

Table A-l shows, the deficit is expected to increase in both 1988 and

1989 unless there are further changes in budgetary policies. The

deficit declines slowly after 1989, reaching $139 billion in 1993. To a

large extent, these year-to-year fluctuations reflect the transitional effects of the Tax Reform Act of 1986, as well as various one-time outlay

savings (such as asset sales) enacted in recent years. CBO's earlier

report, The Economic and Budget Outlook: Fiscal Years 1989-1993,

described in detail the dynamics of revenues and spending under current budgetary policies.

During the past month, CBO has revised its baseline budget

projections to reflect additional information, much of which became
136 ANALYSIS OF THE PRESIDENT'S BUDGET March 1988

TABLE A-l. CBO BASELINE BUDGET PROJECTIONS (By fiscal year)

1988 1989 1990 1991 1992 1993

In Billions of Dollars

Revenues

Individual income

Corporate income

Social insurance

Other

Total

Outlays

National defense

Nondefense discretionary spending

Entitlements and other

mandatory spending

Net interest

Offsetting receipts

Total

Deficit

Debt Held by the Public

Revenues

Individual income

Corporate income

Social insurance

Other

Total

Outlays

National defense

Nondefense discretionary spending

Entitlements and other

mandatory spending

Net interest

Offsetting receipts

Total

Deficit

Debt Held by the Public

390

99

331

79

898

287

176

500

152

-56

1,059

161

2,046

As a

8.3

2.1

7.1

1.7

19.2

6.1

3.8

10.7

3.2

-1.2

22.6

3.4

43.7

415

107

352

80

954

295

193

536

166

-59

1,131

177

2,222

Percent of

8.3

2.1

7.1

1.6

19.1

5.9

3.9

10.7

3.3

-1.2

22.7

3.6

44.6

455

119

381

82

1,036

306

203

573

185

-61

1,206

170

2,391

GNP

8.5

2.2

7.1

1.5

19.5

5.7

3.8

10.8

3.5

-1.2

22.6

3.2

44.9

495

126

408

83

1,111

320

207

610

198

-64

1,271

159

2,547

8.7

2.2

7.2

1.5

19.5

5.6

3.6

10.7

3.5

-1.1

22.3

2.8

44.8

533

130

433

84

1,181

333

215

650

203

-67

1,335

154

2,700

8.8

2.1

7.1

1.4

19.4

5.5

3.5

10.7

3.3

-1.1

22.0

2.5

44.4

575

134

465

87

1,261

346

222

694

208

-70

1,400

139

2,838

8.8

2.1

7.2

1.3

19.4

5.3

3.4

10.7

3.2

-1.1

21.5

2.1

43.7

SOURCE: Congressional Budget Office.

NOTE: Totals include Social Security, which is off-budget.
APPENDIX A BASELINE BUDGET PROJECTIONS 137

available with the release of the Administration's budget. In the

aggregate, these revisions are small, adding to the deficit by an average of $3 billion a year. Table A-2 summarizes the changes to CBO's

earlier projections.

The major change in revenue projections stems from assumptions

about airport and airways taxes and affects fiscal years after 1989. As

noted in Chapter HI, legislation enacted last year provided that most

TABLE A-2. REVISIONS TO THE CBO BASELINE

SINCE FEBRUARY 1988

(By fiscal year, in billions of dollars)

Original Baseline

Changes

Airport and airway taxes

Other

Total

Revised Baseline

Original Baseline

Changes

Deposit insurance

Other

Total

Revised Baseline

Original Baseline

Changes

Revised Baseline

1988

897

—

1

1

898

1,055

4

1

5

1,059

157

4

161

1989

Revenues

953

--

1

1

954

Outlays

1,129

2

a/

2

1,131

Deficit

176

1

177

1990

1,036

-1

1

a/

1,036

1,203

a/

2

3

1,206

167

2

170

1991

1,112

-2

1

-1

1,111

1,269

al

1

1

1,271

158

2

159

1992

1,181

-2

1

-1

1,181

1,332

al

3

2

1,335

151

3

154

1993

1,262

-2

1

-1

1,261

1,396

-

4

4

1,400

134

5

139

SOURCE: Congressional Budget Office,

a. Less than $500 million.
138 ANALYSIS OF THE PRESIDENT'S BUDGET March 1988

aviation tax rates will be halved on January 1, 1990, if airport and

airway spending fails to reach certain thresholds. CBO's earlier estimates assumed extension of all trust fund taxes at current rates. This

change makes the baseline projections consistent with the President's

budget and lowers revenues by $1 billion to $2 billion a year after

1989. Other revenue revisions are small, raising revenues by about $1

billion a year. The near-term revisions to outlays stem largely from

an accounting change. In its 1989 budget, the Administration counts

as outlays certain promissory notes issued by the Federal Deposit Insurance Corporation (FDIC) and the Federal Savings and Loan Insurance Corporation (FSLIC). This change mirrors the budgetary treatment of FDIC demand notes, which have been counted in budget outlays since the 1988 budget. The change raises outlays by $4 billion in

1988 and $2 billion in 1989. Other revisions affect a wide variety of

spending programs and are small in the aggregate.
APPENDIX B

MAJOR CONTRIBUTORS TO THE

REVENUE AND SPENDING ESTIMATES

The following analysts prepared the revenue and spending estimates

in this report:

Revenue Estimates

Mark Booth Corporate income taxes,

Federal Reserve System earnings

Jon Hakken Windfall profit tax

Richard Kasten Individual income taxes

Jeffrey Miller Excise taxes

Kathleen O'Connell Individual income taxes,

estate and gift taxes

Marianne Page Customs duties,

miscellaneous receipts

Linda Radey Social insurance contributions,

excise taxes

Frank Sammartino Individual income taxes

Spending Estimates

Defense and International Affairs

Eugene Bryton Defense

Kent Christensen International affairs

Ray Hall Defense

Barbara Hollinshead Defense

William Myers Defense

Amy Plapp Defense

Joseph Whitehall International affairs

Ben Wolters Defense
140 ANALYSIS OF THE PRESIDENT'S BUDGET March 1988

Spending Estimates (continued)

Human Resources

Paul Cullinan

Richard Curley

Carmela Dyer

Alan Fairbank

Holly Harvey

Deborah Kalcevic

Jean Kayser

Julia Isaacs

Donald Muse

Michael Namian

Janice Peskin

Michael Pogue

Kathleen Shepherd

Social Security

Supplemental Security Income,

veterans' education

Public Health Service,

federal retirement

Hospital Insurance

Supplementary Medical Insurance

Education

Health programs

Food Stamps, child nutrition

Medicaid, Medicare

Social services

Aid to Families with Dependent

Children, child support

enforcement

Unemployment Insurance,

training programs

Veterans' benefits

Natural and Physical Resources

Kim Cawley

Carol Cohen

Douglas Criscitello

Peter Fontaine

Theresa Gullo

James Hearn

Hsin-Hui Hsu

Mary Maginniss

Eileen Manfredi

Energy

Community and regional

development

Commerce, disaster relief and

insurance

Energy, Farm Credit System

Water resources, conservation, and

land management

General government, Agricultural

Credit Insurance Fund, Outer

Continental Shelf receipts

Agriculture

Postal Service, deposit insurance,

Small Business Administration

Agriculture
APPENDIX B MAJOR CONTRIBUTORS 141

Spending Estimates (continued)

Natural and Physical Resources (continued)

Marjorie Miller

Andrew Morton

Deborah Reis

Mitchell Rosenfeld

Brent Shipp

Michael Sieverts

Transportation, Federal

Housing Administration

Agriculture

Recreation, pollution control,

water transportation

Air transportation, justice

Housing and mortgage credit

Science and space, justice,

other natural resources

Other

Janet Airis

Edward Blau

Paul Christy

David Elkes

Betty Embrey

Kenneth Farris

Danila Girerd

Glen Goodnow

Vernon Hammett

Sandra Hoffman

Richard Krop

Fritz Maier

Roy Meyers

Kathy Ruffing

Robert Sempsey

Robert Seiler

JeffSwersey

KarlaTrujillo

Paula Williams

Appropriation bills

Appropriation bills

Other interest

National Income and

Product Accounts

Appropriation bills

Computer support

Credit analysis

Authorization bills

Computer support

Computer support

Civilian agency pay

Computer support

Budget process

Treasury borrowing,

interest, and debt

Appropriation bills

Budget process

Computer support

Appropriation bills

Computer support

o