An Ana lysis of the

President's Budgetary Proposals

for Fiscal Year 1984

FEBRUARY 1983

Prepared at the Request of the Senate Committee on Appropriations

CONGRESS OF THE UNITED STATES CONGRESSIONAL BUDGET OFFICE

AN ANALYSIS OF

THE PRESIDENT'S BUDGETARY PROPOSALS

FOR FISCAL YEAR 1984

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.

Details in the text and tables of this report may not

add to totals because of rounding.
PREFACE

This analysis of the President's budget for fiscal year 1984 was

prepared at the request of the Senate Committee on Appropriations. The

report describes the problem of large and growing budget deficits faced by

the federal government under existing tax laws and current spending

policies. It discusses how the Administration's proposals would reduce these

projected deficits over the next five years.

This report includes the Congressional Budget Office's preliminary

reestimates of the budgetary impact of the Administration's proposals using

CBO's economic assumptions and technical estimating methods. The report

analyzes in some detail the major tax changes proposed by the Administration as well as the major spending increases proposed for defense programs

and reductions in domestic programs. Finally, the report also discusses the

economic outlook and the assumptions used for the President's budget.

This report was prepared by the staff of the Budget Analysis, Fiscal

Analysis, and Tax Analysis Divisions under the supervision of James L. Blum,

William J. Beeman, and James M. Verdier, respectively. Principal contributors are listed in an appendix.

Robert L. Faherty supervised the editing and production of the report,

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

Johnston, Francis S. Pierce, and Johanna Zacharias. Thelma L, Jones

coordinated production of the report. The final manuscript was prepared for

publication by Barbara Bakari, David Bashore, Debra Blagburn, Linda

Brockman, Gwen Coleman, Mechita O. Crawford, Dorleen Dove, Suzie

Fominaya, Shirley Hornbuckle, Dorothy J. Kornegay, and Nancy Wentzel.

Alice M. Rivlin

Director

February 1983

111

CONTENTS

Page

CHAPTER 1. SUMMARY AND INTRODUCTION 1

The Budget Under Current Policies 1

The Administration's Budget Program 4

CBO Budget Estimates 7

CHAPTER II. THE ADMINISTRATION'S ECONOMIC ASSUMPTIONS

AND FISCAL POLICY 13

The Economic Outlook Under the Administration's

Program 13

Issues in the Economic Outlook 15

Structural Deficits in the Longer Run 17

CHAPTER HI. THE ADMINISTRATION'S REVENUE PROPOSALS

AND ESTIMATES 21

The President's Revenue Proposals 25

Baseline Revenue Estimates 41

Reduced Sensitivity of Revenues to Economic

Growth 48

Tax Expenditures ..'. 50

CHAPTER IV. THE ADMINISTRATION'S DEFENSE BUDGET 53

Defense Budget Growth in Perspective 53

Real Growth in Defense Spending in the 1984

Appropriation Request 59

Changes from the 1983-1987 Defense Plan for

Fiscal Year 1984 70

Changes from Current Policy 79

Potential Reductions 83
CONTENTS (Continued)

Page

CHAPTER V. THE ADMINISTRATION'S DOMESTIC BUDGET 89

Entitlements and Other Mandatory Spending 94

Nondefense Discretionary Spending 118

Net Interest 134

Offsetting Receipts 136

CBO Outlay Reestimates 139

APPENDIX. MAJOR CONTRIBUTORS TO THE PREPARATION OF

THIS REPORT 149

VI
FIGURES

FIGURE 1-1. FEDERAL BUDGET DEFICIT UNDER CURRENT

POLICIES 3

FIGURE 1-2. ADMINISTRATION'S BUDGET PROGRAM 5

FIGURE 1-3. OUTLAY CATEGORIES AS PERCENTAGES OF GNP ... 9

FIGURE II-l. STANDARD-EMPLOYMENT DEFICIT AS A PERCENTAGE

OF STANDARDIZED GNP 18

FIGURE II-2. FEDERAL DEBT HELD BY THE PUBLIC AS A

PERCENTAGE OF GNP 19

FIGURE III-l. FEDERAL REVENUES AS A PERCENTAGE OF GNP

UNDER THE ADMINISTRATION PROGRAM AND

CURRENT POLICIES 24

FIGURE IV-1. DEFENSE DEPARTMENT BUDGET, FISCAL YEARS 1984

AND 1988 (BUDGET AUTHORITY) 55

FIGURE IV-2. BUDGET AUTHORITY FOR NATIONAL DEFENSE

(IN CONSTANT 1984 DOLLARS) 56

FIGURE IV-3. REAL GROWTH IN NATIONAL DEFENSE

(BUDGET AUTHORITY) 57

FIGURE IV-4. NATIONAL DEFENSE OUTLAYS AS A PERCENTAGE

OF GNP 57

FIGURE IV-5. COMPARISON OF ADMINISTRATION DEFENSE

PROGRAM AND CURRENT POLICIES

(BUDGET AUTHORITY) 79

FIGURE IV-6. COMPOSITION OF NATIONAL DEFENSE OUTLAYS ... 85

vn

CHAPTER I. SUMMARY AND INTRODUCTION

The Administration's budget proposal for fiscal year 1984 contains a

number of tax increases and spending reductions designed to reverse the

trend of growing federal deficits. At the same time, the Administration

proposes to increase defense spending more rapidly than assumed in the

First Concurrent Resolution on the Budget for Fiscal Year 1983. The

Congressional Budget Office (CBO) estimates that the net effect of these

changes would be to reduce projected deficits by $332 billion over the next

five years. Nevertheless, the deficit in 1988 would still remain at a high

level—$159 billion, or 3.3 percent of the gross national product (GNP). Of

this amount, about $100 billion would persist even if the economy were to

resume operating at a high-employment level.

THE BUDGET UNDER CURRENT POLICIES

CBO projects that, if current spending and taxing policies were to

continue unchanged, the federal budget deficit would grow from $194 billion

in fiscal year 1983 to $200 billion in 1984, $210 billion in 1985, and $268

billion in 1988. As a percentage of GNP, the deficit would decline only

slightly--from 6.1 percent in 1983 to 5.6 percent by 1988.

These baseline budget projections, which are preliminary revisions of

those published earlier this month, assume no change in current tax laws.

J7ln instances of federal spending mandated by law, as is the case for Social

Security benefits and other entitlement programs, the existing laws are

assumed to remain unchanged, and future spending is assumed to respond to

economic conditions and other influences in the same way as in the past. In

instances of federal spending that is discretionary and subject to annual

appropriations, the CBO baseline projections generally assume that the 1983

appropriation levels will be maintained, with future increases to keep pace

with inflation. For national defense programs, the projections assume the

spending levels specified in last year's Congressional budget resolution, as

extrapolated by CBO.

1. See Congressional Budget Office, Baseline Budget Projections for

Fiscal Years 1984-1988 (February 1981):
TABLE 1-1. THE BUDGET OUTLOOK UNDER CURRENT POLICIES

(By fiscal year, in billions of dollars)

1983 Projections

Base 198* 1985 1986 1987 1988

Revenues

CBO baseline 606 654 718 774 827 882

OMB current services 598 649 713 781 849 927

Outlays

CBO baseline 800 853 928 1,000 1,075 1,150

OMB current services a/ 806 880 966 1,052 1,141 1,227

Deficit

CBO baseline

OMB current services

194

208

200

232

210

253

226

271

248

292

268

300

Differences in Deficit Projections

Policy Differences

National defense * -12 -16 -22 -32 -39

Other * -3 -4 -3 -3 -5

Subtotal * -15 -20 -25 -35 -44

Economic and Technical

Differences

Total Difference

-14

-14

-17

-32

-23

-43

-20

-45

-9

-44

12

-32

* Less than $500 million.

SOURCES: The CBO baseline figures are preliminary revisions of those

appearing in Congressional Budget Office, Baseline Budget

Projections for Fiscal Years 1984-1988 (February 1983). The

OMB current services figures are taken from Budget of the

United States Government, Fiscal Year 1984 (January 1983).

a. Includes the Administration's February 1982 defense proposals.
Figure 1-1.

Federal Budget Deficit Under Current Policies

300

ra

"o

Q 250

200

OMB Current Services

with Administration's

1983 Defense Proposals

OMB Current Services

with 1983 Budget

Resolution Defense

Targets

J_ I J_

CBO Baseline

J_ I

1983 1984 1985 1986 1987 1988

Fiscal Years

SOURCES: Budget of the United States Government, Fiscal Year 1984; and Congressional Budget Office.

As shown in Table 1-1, the current services budget projections of the

Office of Management and Budget (OMB) present the same picture of large

and growing deficits as do CBO's baseline projections. In the OMB

projection, the deficit under current policies would rise from $208 billion in

1983 to $300 billion by 1988. Most of the difference between the CBO

baseline and the OMB current services projections is attributable to

different assumptions about current spending policy for defense.

The OMB current services projections for defense assume the levels of

defense spending requested by the Administration in its 1983 budget, while

the CBO baseline projections assume the defense spending levels provided in

the 1983 Congressional budget resolution. This, together with other smaller

policy differences, causes the two projections of outlays to diverge by $15

billion in 1984 and $44 billion by 1988. The remaining, and smaller, portion

of the difference results from different economic and technical

assumptions.

Figure 1-1 depicts the CBO baseline and OMB current services deficit

projections. It also shows the OMB projections adjusted to incorporate the
budget resolution defense targets and otherwise to put them on the same

conceptual basis as the CBO figures. With adjustments made to account for

the differences in policy assumptions, CBO shows slightly lower deficits

than OMB in the 1983-1987 period and a slightly higher deficit in 1988. This

pattern reflects a more optimistic CBO forecast of economic growth in the

early years and more pessimistic assumptions for the latter part of the

period.

THE ADMINISTRATIONS BUDGET PROGRAM

The Administration's budget program is designed to reduce the deficits

that would result from a continuation of current policies, as well as to

provide further large increases in defense spending. The major elements of

the program are depicted in Figure 1-2 and listed in Table 1-2. CBO

estimates that the Administration's budget program would reduce projected

deficits by $332 billion over the next five years.

Tax increases proposed by the Administration total $201 billion over

the 1984-1988 period. Of this increase, about 60 percent—$117 billionwould result from a contingency tax plan. The contingency taxes consist of

an income tax surcharge and an excise tax on oil. These contingency taxes

would go into effect in fiscal year 1986 if the projected budget deficit

exceeds 2.5 percent of GNP, if the economy is growing, and if the

Administration's other deficit reduction measures are enacted.

Another $50 billion in additional tax revenues would result from

adoption of the recommendations of the National Commission on Social

Security Reform. These include increases in the Social Security payroll and

self-employed tax rates, taxation of half of Social Security benefits for

upper-income taxpayers, and extension of coverage to include all employees

of nonprofit institutions and new federal civilian employees. Finally,

various other proposed tax increases and reductions would, on balance,

produce $33 billion more in revenues from 1984 to 1988. (Revenue

estimates and tax proposals are detailed in Chapter III.)

Proposed outlay reductions total $131 billion over the 1984-1988

period. This reduction is the net effect of $75 billion in increased spending

for national defense and $206 billion in nondefense spending cuts. (The

defense and nondefense portions of the budget are examined in Chapters IV

and V.) The proposed reductions in nondefense spending consist of:

o $17 billion in lower net spending resulting from the National

Commission's Social Security financing plan. This consists of $22

billion in reduced Social Security benefits stemming from a six-
Figure 1-2.

Administration's Budget Program

26

24

Q_

Z

£ 22

20

18

Baseline Outlays

CBO Estimate of

Administration Program Deficit

1983 1984 1985 1986

Fiscal Years

1987

Cumulative Savings 1984-1988

(Billions of Dollars)

$17

$74

$61

$25

$30

$206 Social

{ Security

:

:

:Entitlements::

:

x

JMondefensejil

Discretional

$131

r Net////

 / / / / / / / ^//Spending///

$75

Outlays

$201

/Contingency

/ / -*- ~. / Tax Planx

Social Security

I l l

1988

'<<•:•:•:< Other:':-:':':':':

$117

$50

$33

Revenues

SOURCE: Congressional Budget Office.
TABLE 1-2. CBO ESTIMATE OF ADMINISTRATION'S BUDGET PROGRAM

(By fiscal year, in billions of dollars)

Cumulative

1985 1986 1987 1988 Five-Year

Total

CBO Baseline Deficit

Proposed Changes

Revenues

Contingency tax plan

Social security plan

Other, net

Subtotal

Outlays

National defense

Social Security plan

Other entitlements

Nondefense discretionary spending

Offsetting receipts

Net interest

Subtotal

Total Policy Changes

President's Budget

as Estimated by CBO

200 210 226 248 268

-8 -5

-3 -5

-11 -11

3

-3

-6

-5

-2

Til

-24

5

-3

-12

-7

-4

-1

-23

-33

-37

-8

-7

-52

12

-4

-16

-11

-5

^28

-79

-39 -41

-9 -20

-8 -11

-57 -71

2*

-4

-19

-17

-6

-10

-31

32

-4

-21

-21

-8

-15

-38

-87 -109

176 177 147 160 159

1,152

-117

-50

-33

-201

75

-17

-74

-61

-25

-30

-131

-332

820

month delay in cost-of-living adjustments, partly offset by

liberalizations in Supplemental Security Income and by other benefit

changes.

o $74 billion in reductions in entitlement programs other than Social

Security. The largest reductions are in spending for Medicare,

including increased copayment charges and changes in the hospital

payment system. Cost-of-living adjustments in various pension

programs would be delayed or reduced. Reductions are also

proposed in farm price supports and various means-tested programs.
Under the Administration's proposals, outlays for non-Social

Security entitlements would still rise from an estimated $221 billion

in 1983 to about $270 billion by 1988, but their projected growth

under CBOfs baseline would be cut nearly in half.

o $61 billion in lower nondefense discretionary spending. This includes

lower federal pay raises, a freeze on most human resources

programs, broad reductions in transportation and natural resource

programs, and cuts in aid to business and commerce. Only basic

federal government operations and assistance to foreign

governments remain largely unscathed. Relative to CBOfs baseline

projections, which allow spending to keep pace with inflation, the

projected growth of nondefense discretionary outlays would be

reduced by 50 percent over the next five years.

o $25 billion in increased offsetting receipts. This reflects higher

premium charges for Supplementary Medical Insurance (Part B of

Medicare), increased federal agency payments for employee retirement and health benefits, and a number of new user fees.

o $30 billion in reduced interest costs. This results largely from

reductions in projected levels of debt caused by other deficit reduction measures. Even so, net interest outlays would rise from

$87 billion in 1983 to $116 billion by 1988 on account of continued

deficit financing.

In the aggregate, the foregoing revenue and outlay changes would reduce the

deficit by $109 billion in fiscal year 1988, but a deficit of $159 billion would

still remain.

The Administration's budgetary program would also significantly

redirect the pattern of federal government spending, as shown in Table 1-3.

Total budget outlays would rise by $312 billion between 1983 and 1988. Of

this amount, $176 billion—56 percent—would be devoted to national defense.

As depicted in Figure 1-3, defense spending would rise from 6.7 percent of

GNP in 1983 to 8.1 percent of GNP in 1988—the level it reached in the

Vietnam War year of 1970. In contrast, nondefense discretionary spending

would decline to 3.4 percent of GNP, well below its 1970 level of 4.5

percent. Spending for entitlements and other mandatory programs would

also decline significantly as a fraction of GNP.

CBO BUDGET ESTIMATES

CBOfs estimates of the budget picture under Administration policies

differ less from OMBfs estimates than they have in recent years, although
TABLE 1-3. CBO ESTIMATES OF ADMINISTRATION SPENDING

PROGRAM BY MAJOR CATEGORIES (By fiscal year)

1983 1984 1985 1986 1987 1988

In Billions of Dollars

National Defense

Entitlements and Other

Mandatory Spending

Nondefense Discretionary

Spending

Net Interest

Offsetting Receipts

Total Budget Outlays

214

385

145

87

-31

801

245

386

147

96

-33

840

282

403

152

105

-38

905

322

430

156

110

-44

973

358

458

160

114

-46

1,044

390

492

163

116

-48

1,113

National Defense

Entitlements and Other

Mandatory Spending

Nondefense Discretionary

Spending

Net Interest

Offsetting Receipts

Total Budget Outlays

As a Percent of GNP

6.7 7.0 7.* 7.8 8.0 8.1

12.0 11.0 10.6 10.* 10.3 10.3

4.5

2.7

-1.0

4.2

2.7

-1.0

4.0

2.7

-1.0

3.8

2.7

-1.1

3.6

2.6

-1.0

3.4

2.4

-1.0

25.1 24.0 23.7 23.5 23.* 23.2

there still are noticeable differences. In the aggregate, most of these

differences derive from small variations in economic forecasts and

assumptions. The remainder result from technical estimating factors.

Overall, the CBO estimates suggest that the budget deficits in 1983-1985

would be somewhat lower than the Administration projects. For 1987-1988,

on the other hand, CBO projects somewhat higher deficits under the

Administration's plan.
Figure 1-3.

Outlay Categories as Percentages of GNP

National Defense

Entitlements and

Other Mandatory Spending

12

10

8

6

4

2

n

-

-

—

-

lip

iilll

iiii

•

•S:S:&:

:£:':'::&

:

£

•I-XvX'X'

1111

111

III

$px:$

mm

11XvX-X-1X mm

:?:£:-::

-

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-

\e.

10

8

6

4

2

n

—

-

-

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-

vXvX'X'

^^

HI

ij^p

H

•$•$•$•$•

1

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x$x&x

ill!

KII

•XvXvX*

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|:|:|:|:|:§:i:|:

XvXvXv

mm*

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_

-

-

—

-

1980 1983 1988

1

 Actual ' Estimate CBO AdminBase- istration

line Program

Nondefense Discretionary Spending

\L

10

6

4

2

n

— —

-

-

-

$i£x::$

:-x$x$x

:$:::

:

x

:

:

:

:

:

:

::i:i:i:i::?x

mm<wm

III

mm

x|xjx|xX

-

%?:?:!§

#:£:&:

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:•:•:•:•:•:•:•:•:

::j:j:j:j:j:j:::j

iil:i

_

X:Mx?:

mm ':•:':':•:' — XvXvXv .'•.*.'•.•!•.

-

1970 1980 1983 1988

1

 Actual ' Estimate CBO AdminBase- istration

line Program

12

10

8

1970 1980 1983 1988

Actual ' Estimate CBO AdminBase- istration

line Program

Net Interest

1970 1980

1

 Actual

1983 1988

Estimate CBO AdminBase- istration

line Program

15-966 0-83- 2
TABLE 1-4. THE BUDGET OUTLOOK UNDER ADMINISTRATION

POLICIES (By fiscal year, in billions of dollars)

Revenues

Administration

CBO estimate

Outlays

Administration

CBO estimate

Deficit

Administration

CBO estimate

Revenues

Economic

Technical

Total

Outlays

Economic

Technical

Total

Deficit

Economic

Technical

Total

1983

estimate 598

606

estimate 805

801

estimate 208

195

Differences

*

9

9

-2

-2

-4

-2

-11

-13

1984

660

665

848

841

189

176

1985

724

728

918

905

194

177

1986

842

826

990

973

148

147

1987

916

884

1,058

1,044

142

160

1988

1,010

954

1,127

1,113

117

159

in Projections

2

3

5

-9

1

-8

-11

-2

-13

3

1

4

-9

-4

-13

-13

-5

-18

-7

-10

-16

-11

-6

-17

-5

4

*

-21

-12

-33

-12

-2

-14

9

9

18

-40

-17

-57

-14

*

-14

26

17

43

Less than $500 million.

10
The current CBO economic forecast (detailed in Chapter II) is slightly

more optimistic in the near term than is the Administration's. For 1983 to

1985, CBO projects stronger GNP in both current and constant dollars, lower

unemployment, lower inflation, and lower interest rates. These factors

result in higher revenues and lower outlays than the Administration projects.

Using CBO's economic assumptions, the deficit would be lower by $2 billion

in 1983, $11 billion in 1984, and $13 billion in 1985, as shown in Table 1-4.

In later years, however, CBO assumes less rapid economic growth than

does the Administration. Along with the assumption of continued lower

inflation, this factor causes the CBOfs revenue projections to fall below

those of the Administration after 1985. CBOfs outlay projections are lower,

too, because lower inflation holds down spending for both cash and in-kind

benefit programs. By 1987 and 1988, however, the reduction in outlays is

not enough to offset the lower revenues. The difference between CBO and

Administration economic assumptions adds $9 billion to the deficit

projection in 1987 and $26 billion in 1988.

The largest technical estimating difference between the CBO and

Administration budget estimates involves the oil excise tax, which is part of

the contingency tax plan mentioned above. Although the President's budget

calls for a $5 per barrel tax on oil consumption, the budget estimates are

based on a $7 per barrel tax. CBO therefore estimates that the actual

contingency tax plan would raise about $9 billion less per year than reported

in the budget, or $27 billion less over the duration of the tax (1986-1988).

Other technical differences between CBO and Administration estimates are relatively small. These technical estimating differences are

discussed in more detail in chapters of this volume on revenues, defense

spending, and the domestic budget.

11

CHAPTER H. THE ADMINISTRATION'S ECONOMIC ASSUMPTIONS AND

FISCAL POLICY

The economic projections of CBO and the Administration for the next

five years are quite similar. In fact, the Administration's short-run forecast

for 1983 is slightly less optimistic than that of CBO, in contrast to the case

in previous years. Both the Administration and CBO expect economic

recovery to begin in 1983 and to be of moderate strength by historical

standards. Unemployment falls only gradually in both forecasts, and

inflation remains near current levels throughout the five-year projection

period. In later years, the Administration's projections of growth in real

GNP and inflation are slightly higher than CBOfs while unemployment is

slightly lower.

Even with the projected recovery, however, the budget outlook is for

high and steadily rising federal deficits, assuming no changes in tax or

spending policies. The Administration's 1984 budget proposes several

measures to reduce these projected deficits by amounts rising from $24

billion in 1984 to $109 billion in 1988, as discussed in Chapter I. If enacted,

these measures would change the thrust of federal fiscal policy by

significantly reducing projected "structural11 deficits. While it is difficult to

estimate the short-term economic impact of the proposals, over the longer

run they should help to reduce interest rates and promote economic growth.

THE ECONOMIC OUTLOOK UNDER THE ADMINISTRATION'S PROGRAM

The Adminstration's forecast for 1983 shows real growth of 3.1

percent (on a fourth-quarter-to-fourth-quarter basis), while inflation stays

near 5 percent, unemployment averages a postwar record annual level of

10.7 percent, and the three-month Treasury bill rate averages 8.0 percent

(see Table II-1). By contrast, CBO!s forecast shows 4.0 percent growth in

real GNP on a fourth-quarter-to-fourth-quarter basis, while inflation,

unemployment, and interest rates are all slightly lower than in the

Administration forecast. \J

The Administration estimates for 1984-1988 are not a forecast but

rather represent a growth path based on assumptions that are "consistent

1. For a detailed discussion of CBO's forecast, see Congressional Budget

Office, The Outlook for Economic Recovery (February 1983).

13
TABLE II-1. COMPARISON OF ADMINISTRATION AND CBO ECONOMIC PROJECTIONS

(By calendar year)

1983 1984 1985 1986 1987 1988

1982:4 to

1983:4

1983:4 to

1984:4

Percent Change (year-to-year)

Gross National Product (GNP)

Current dollars

Administration

CBO

Constant ( 1972) dollars

Administration

CBO

Prices

GNP Deflator

Administration

CBO

Consumer Price Index

Administration

CBO

6.7

6.8

1.4

2.1

5.2

4.6

4.9

3.8

9.3

9.6

3.9

4.7

5.2

4.7

4.6

4.6

9.1

9.0

4.0

4.1

4.9

4.7

4.6

4.7

8.8

8.1

4.0

3.7

4.6

4.3

4.6

4.1

8.7

7.6

4.0

3.5

4.5

3.9

4.5

3.9

8.6 8.8

7.4 8.9

4.0 3.1

3.5 4.0

4.4 5.6

3.8 4.7

4.4

3.7

9.2

9.6

4.0

4.7

5.0

4.6

——

Percent (annual rate)

Unemployment Rate a/

Administration

CBO

Interest Rate (91 -day

Treasury bill)

Administration

CBO

"Real" Interest Rate b/

Administration

CBO

10.7

10.6

8.0

6.8

2.8

2.2

9.9

9.8

7.9

7.4

2.7

2.7

8.9

9.0

7.4

7.2

2.5

2.5

8.1

8.4

6.8

6.6

2.2

2.3

7.3

8.0

6.5

6.1

2.0

2.2

6.5

7.5

6.1

5.9

1.7

2.1

~

—

——

——

a. The unemployment rate predicted by the Administration is for the entire labor force, while that

predicted by CBO excludes military workers. Adjusting for this definitional difference involves

increasing the Administration's figures by roughly 0.1 percentage point.

b. "Real" interest rates are defined here as the 91-day Treasury bill rate minus the rate of inflation as

measured by the GNP deflator.
with the policy objectives of the administration" for reducing unemployment

and inflation and sustaining real growth. 2/ These assumptions call for

constant 4 percent growth in real GNP, with inflation slowing to the V/2

percent range. Unemployment is projected to decline steadily to about 6X2

percent by 1988, close to the Administration's "high employment" benchmark

of 654 percent. The longer-range CBO projection shows slightly slower

growth in the outyears, though the figures are close to the Administration's.

The overall similarity in the forecasts is emphasized by the fact that the

expected levels of real GNP in 1988 are nearly the same.

ISSUES IN THE ECONOMIC OUTLOOK

Cutting the budget deficit in a period of economic weakness like the

present poses dilemmas for policymakers. On the one hand, large deficits

persisting after the economy is on the upswing may cause interest rates to

rise and crowd out private investment borrov/ing. This could slow

productivity growth and exacerbate inflation in later years. This outlook,

together with uncertainty about the course of both monetary and fiscal

policy, may be holding up long-term interest rates now, since these rates are

sensitive to expected future financial conditions. If this is true, large

expected deficits may be slowing the recovery in housing, investment, and

other interest-sensitive sectors of the economy.

On the other hand, cutting deficits at a time when the economy is just

emerging from recession might delay recovery by reducing current and

expected incomes of households and businesses, thereby weakening

aggregate demand and GNP.

While reducing the current deficit may not be desirable, enacting large

reductions that would be effective in future fiscal years might greatly

improve the economic outlook. Such changes would minimize short-term

direct reductions in incomes, but might at the same time stimulate current

investment and other interest-sensitive spending by reducing long-term

interest rates. The Administration's proposals conform broadly to this

guideline: no measures materially affect 1983, but later cuts are large

enough to reduce the deficit substantially. No one can predict the program's

economic impact with confidence—the Administration, for example,

provides no indication of what the outlook would be without these

measures--but it seems likely to improve the overall outlook, especially in

the longer run.

2. Budget of the United States Government, Fiscal Year 1984, p. 2-8.
The Role of Monetary Policy

The Administration's budget documents say nothing about the assumed

behavior of monetary policy. At the time those documents were released,

the Federal Reserve had not yet made its annual February announcement of

strategies and targets for monetary policy in 1983, and there was unusual

uncertainty about the central bank's plans. CBO and others believe,

however, that during the next months the Federal Reserve will attempt to

ensure, insofar as possible, that a moderate economic recovery occurs. _3/

This might serve to offset, at least in part, any short-term retarding effect

of reduced deficits on economic recovery: the Federal Reserve might adjust

its targets for short-term money growth so as to improve chances of

sustaining the recovery. ±1 The same might be true if the recovery

appeared stronger than expected—that is, the Federal Reserve might take

steps to slow it down, fearing that an overly rapid expansion would be

inflationary.

While it is difficult to estimate the economic impact of the budget

proposals, they appear to increase the likelihood that CBO's projection of

economic growth and improvements in inflation and unemployment will be

realized. Quite apart from this, however, CBO expects that the Federal

Reserve may try to steer the economy along roughly the course entailed in

the CBO projections, offsetting any significant effects of budget policy.

For those reasons, CBO's baseline forecast would not be significantly

different if it incorporated the Administration's budget proposals.

3. For a detailed discussion of the prospective strategy of the Federal

Reserve, see Congressional Budget Office, The Outlook for Economic

Recovery (February 1983), pp. 78-81.

4. If the central bank expected the impact of a fiscal change to be

restrictive, it might not offset it if the bank's own overriding concern

was to promote further reductions in inflation rather than steady

economic recovery. Even if it is concerned with encouraging

recovery, however, the Federal Reserve may fail to offset deficit

reductions if it employs expectational economic analysis. In some

forms, this analysis implies that budget cuts might have little

restrictive impact because they would reduce the public's expectations

of future inflation. Reduced inflationary expectations, according to

this line of thought, might help maintain economic growth.

16
TABLE 11-2. CBO PROJECTIONS OF STANDARD-EMPLOYMENT DEFICIT

WITH AND WITHOUT PASSAGE OF THE ADMINISTRATION'S

PROPOSED REDUCTIONS (Unified Budget basis)

1983 1984 1985 1986 1987 1988

Billions of Dollars

CBO Baseline 72 96 125 155 187 218

With Proposed Reductions 72 71 91 72 97 106

As a Percent of Standardized GNP

CBO Baseline

With Proposed Reductions

2.0

2.0

2.5

1.9

3.1

2.2

3.6

1.7

4.0

2.1

4.4

2.1

STRUCTURAL DEFICITS IN THE LONGER RUN

The Administration's proposed reductions in longer-term "structural"

deficits should aid economic recovery by reducing interest rates and the

tendency for government borrowing to crowd out business borrowing. Table

II-2 shows CBOfs estimates of one istructural deficit measure—the "standardemployment" deficit—both before and after the Administration's proposed

reductions. The standard-employment deficit is an estimate of how the

deficit would look if the economy were strong enough to keep the

unemployment rate at 6 percent. It provides a way of removing the effects

of fluctuations in the economy on the budget. Before the Administration's

program is taken into account, this deficit measure is projected to reach 4.4

percent of GNP in 1988, a postwar record. Assuming passage of all proposed

cuts and implementation of the contingency tax proposals in 1986-1988, this

deficit measure falls to 2.1 percent of GNP, which is close to the range of

recent experience (see Figure II-1). 5/ Correspondingly, the federal debt

5. GNP has been standardized in these estimates to be consistent with

the 6 percent assumed unemployment rate that underlies the

"standard-employment" deficit figures.

17
Figure 11-1.

Standard-Employment Deficit as a Percentage of Standardized GNP

CBO Estimate of

Administration

Program

-1

-2

I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I

1960 1965 1970 1975

Fiscal Years

1980 1985

SOURCE: Congressional Budget Office.

NOTE: Forecast reflects unified budget deficit standardized at 6 percent unemployment.

held by the public grows significantly more slowly as a percentage of GiNP

under the Administration's proposals than in CBO!s baseline projectipn (see

Figure II-2). Many analysts would argue that reductions of this magnitude

would significantly lessen the crowding out of private investment. 6/ For

this reason, financial markets may well react favorably and long-term

interest rates may fall if the Administration's full program is enacted, and if

its proposed contingency tax increases are expected to take effect.

CBO estimates that the contingency tax proposals of themselves would

reduce the structural deficit by about one-fifth in 1986-1988. Because they

6. For detailed discussion of alternative quantitative criteria to guide

reductions in structural deficits, see Congressional Budget Office, The

Outlook for Economic Recovery, pp. 61-71.

18
Figure 11-2.

Federal Debt Held by the Public as a Percentage of GNP

60

50

40

30

Actual ' Projected

I

CBO Baseline^ —

CBO Estimate of

Administration

Program —

1955 1960 1965

SOURCE: Congressional Budget Office.

1970 1975

Fiscal Years

1980 1985

are contingent on the enactment of other proposals, however, the financial

markets may not be convinced that the tax increases will take effect as

planned. No one knows what the political outlook will be in 1985, or what

unforeseen economic contingencies may have arisen by then, when the taxes

are provisionally scheduled to take effect. More concrete and definite

measures to reduce expected deficits might be more effective in improving

expectations in financial markets.

19

CHAPTER III. THE ADMINISTRATION'S REVENUE

PROPOSALS AND ESTIMATES

The Administration's budget proposes revenues of $659.7 billion for

1984, rising to $1,010.3 billion by 1988 (see Table III-l). The budget includes

net increases from proposed new tax legislation of about $11 billion in both

1984 and 1985—attributable mainly to the revenue portions of the proposals

of the National Commission on Social Security Reform—followed by much

larger increases in 1986-1988, mainly from proposed contingency tax increases. These contingency taxes—a 5 percent surcharge on individual and

corporate income tax liabilities and a $5 per barrel tax on imported and

domestic oil—would raise $46 billion in 1986 and $51 billion in 1988,

according to Administration estimates. In combination with other smaller

tax changes proposed by the Administration, these provisions would raise

taxes as a percentage of GNP from 18.9 percent in 1984 to 20.6 percent in

1988, close to the post-World War II high of 20.9 percent reached in 1981.

Without these proposed tax increases, revenues in 1988 would be 18.9

percent of GNP, according to Administration estimates.

CBO's reestimates of the revenue side of the budget are relatively

minor, especially in the near term. CBO estimates that revenues under

current law will be $4 billion to $5 billion higher than the Administration

estimates in 1984 and 1985, but lower after that—by $7 billion in 1986 and

$44 billion in 1988 (see Table IH-2). Almost all of these differences arise

from differences in economic assumptions: CBO assumes higher rates of

real economic growth than the Administration in 1983-1985, and somewhat

lower in 1986-1988. Technical estimating differences are small in each

year, pushing CBO's estimate above or below the Administration's by $l-$3

billion in 1984-1987, and $8 billion below in 1988.

CBO has reestimated four of the Administration's tax proposals,

reducing the estimated revenue gain by $9-$12 billion a year from 1986 to

1988 (see Table HI-2). Most of the difference is in the proposed $5 per

barrel contingency oil tax. The Administration estimates the revenue gain

at $29-$30 billion a year from 1986 to 1988, but this is the amount that

would be gained from a $7 per barrel tax. CBO estimates that about $9

billion less a year would be raised by a $5 per barrel tax. CBO also

estimates that the proposed 5 percent individual income tax surcharge would

raise about $2.2 billion less than the Administration's estimate over the

1986-1988 period. While the budget says that the surcharge is to cover

corporate as well as individual taxes, the budget includes only the effects of

21
TABLE HI-1. ADMINISTRATION AND CBO ESTIMATES OF ADMINISTRATION

BUDGET REVENUES, BY SOURCE (By fiscal year, in billions of dollars)

1983 1984 1985 1986 1987 1988

Individual Income Taxes

Corporate Income Taxes

Social Insurance Taxes

and Contributions

Excise Taxes

Windfall profit taxes

Other a/

Other

Total

Percent of Administration

GNP

Administration Estimates

285.2 295.6 317.9 358.6 395.7

35.3 51.8 60.5 74.0 84.0

210.3 242.9 275.5 304.9 330.3

13.8

23.5

29.4

12.2

28.1

29.1

11.3

29.5

29.6

10.5

64.4

29.6

9.8

66.5

30.0

86.7

370.2

9.2

67.4

30.6

597.5 659.7 724.3 841.9 916.3 1,010.3

18.7 18.9 19.0 20.3 20.3 20.6

Individual Income Taxes

Corporate Income Taxes

Social Insurance Taxes

and Contributions

Excise Taxes

Windfall profit taxes

Other a/

Other

Total

Percent of CBO GNP

285.8

40.3

212.1

14.4

23.4

30.2

606.3

19.0

294.8

55.6

243.3

13.5

28.4

28.9

664.5

19.0

CBO

317.0

64.9

275.5

12.2

29.6

29.2

728.4

19.1

> Estimates

358.8

72.7

302.2

10.3

52.7

28.9

825.6

19.9

386.3

81.7

323.7

9.6

54.1

28.4

883.8

19.8

416.5

86.3

358.3

9.0

55.1

28.4

953.5

19.9

a. The Administration's budget estimates include the revenue gain from a $7 per barrel

fee on oil. The contingency tax actually proposed by the Administration is a $5 per

barrel fee. Therefore, the CBO estimates include the estimated revenue gain from a

$5 per barrel fee, which is expected to raise about $9 billion less per year than is

shown in the Administration's budget.

22
TABLE III-2. CBO REESTIMATES OF ADMINISTRATION REVENUE PROJECTIONS (By

fiscal year, in billions of dollars)

1983 1984 1985 1986 1987 1988

President's 1984 Budget 597.5 659.7 724.3 841.9 916.3 1,010.3

CBO Reestimates of

Existing Law

Economic assumptions a/ 2.0 3.9 -5.7 -18.8 -36.0

Technical reestimates 8.8 2.7 0.5 -1.4 -3.1 -8.3

Subtotal, existing law 8.8 4.7 4.4 -7.0 -22.0 -44.3

CBO Reestimates of Administration Revenue Proposals

Economic assumptions — a/ -0.6 -0.9 -2.1 -4.2

Technical reestimates --- a/ 0.2 -8.4 -8.5 -8.3

Subtotal, revenue proposals --- 0.1 -0.4 -9.3 -10.6 -12.4

Total Reestimates 8.8 4.8 4.1 -16.3 -32.6 -56.7

President's 1984 Budget

as Estimated by CBO 606.3 664.5 728.4 825.6 883.8 953.5

a. Less than $50 million.

an individual surcharge. Finally, CBO's estimate of the revenue gain from

the Social Security Commission proposals is somewhat below the

Administration estimate, while CBO's estimate of the revenue gain from

higher Civil Service Retirement contributions is somewhat above the

Administration's.

In addition to the contingency, Social Security, and Civil Service

Retirement tax increases, the Administration has proposed a number of

smaller tax changes aimed primarily at achieving nontax goals. These

include a cap on the amount of employer-paid health insurance that can be

23
excluded from taxation; tuition tax credits and tax-exempt savings accounts

for education expenses; a jobs tax credit for the long-term unemployed; a

variety of special tax incentives for investment in enterprise zones; and

proposals to help Caribbean Basin countries. Taken together, these proposals would raise a net total of $1.8 billion in 1984 and $8.4 billion in 1988.

The first part of this chapter analyzes the revenue proposals in the

Administration's budget and some possible alternatives; the second compares

the CBO estimates of receipts under existing tax law to those of the

Administration. In broad terms, as shown in Figure IH-1, the Administration

Figure IH-1.

Federal Revenues as a Percentage of GNP Under the

Administration Program and Current Policies

21

20

Administration Program

CBO Estimate of Administration Program

19

"

 — ~~ OMB Current Services

CBO Baseline

18

v> I

1984 1985 1986 1987 1988

Fiscal Years

SOURCES: Budget of the United States Government, Fiscal Year 1984; and Congressional

Budget Office.

NOTE: The revenues for the Administration program and for OMB current services are shown as

a percentage of GNP as forecast by the Administration , whereas the revenues for the CBO

estimate of the Administration program and for the CBO baseline are shown as a percentage of GNP as forecast by CBO.

and CBO estimates both of revenues under current law (current services or

baseline revenues) and of the effects of the Administration's program as a

whole, are very similar in 1984 and 1985. Beginning in 1986, however, CBO's
estimate of baseline revenues drops below the Administration's current

services estimate, reflecting mainly CBOfs lower growth rate assumptions.

CBO!s estimate of the revenue gain from the new proposals in the

Administration program is also lower in 1986-1988, reflecting mainly CBO's

estimate of lower collections from the $5 per barrel oil tax.

THE PRESIDENT'S REVENUE PROPOSALS

The 1984 budget was written against a backdrop of very large federal

deficits for the entire forecast and projections period. The revenue

proposals thus seek for the most part to increase receipts. The revenue

increases would come mainly from contingency taxes—$46.0 billion in 1986

and $51.4 billion in 1988 (see Table III-3). These taxes would go into effect

in 1986 only if the deficit was large and the economy was growing at that

time, and if the Congress had passed the Administration's deficit reduction

measures. All the Administration's proposals combined would increase

federal revenues to 18.9 percent of GNP in 1984, 19.0 percent in 1985, and

20.6 percent in 1988, according to Administration estimates (see Table III1). Without the contingency taxes, 1988 revenues would be much less—19.6

percent of GNP. These ratios compare to a post-World War II high of 20.9

percent in 1981, and an average of 18.6 percent in the 1960s and 18.9

percent in the 1970s.

If revenue measures are chosen to close part of the budget gap, two

factors must be considered. First, because the deficit is projected to be

large throughout the budget planning period and beyond, and because tax

revenues now grow significantly more slowly as the economy expands (as is

demonstrated later in this chapter), the long-term yield of revenue proposals

is especially important. Second, it is essential that revenue measures

themselves not slow the economy, especially in the early stages of recovery,

or blunt economic incentives to work, save, and invest.

The revenue proposals in the budget are analyzed in the following

sections.

Contingency Taxes

The budget contains a contingency tax plan that would take effect in

fiscal year 1986 only if the Administration forecasted on July 1, 1985, that

the deficit for 1986 would exceed 2.5 percent of GNP; if the economy was

growing; and if the Congress had passed the Administration's deficit

reduction measures. The contingency tax plan consists of two parts: an

individual and corporate income tax surtax and an excise tax on petroleum.

25

15-966 0-83- 3
TABLE III-3. ADMINISTRATION AND CBO ESTIMATES OF REVENUE

CHANGES FROM ADMINISTRATION PROPOSALS (By fiscal

year, in billions of dollars)

Proposal 198* 1985 1986

Administration

Bi-Partisan Social

Security Plan

Contingency Tax Plan

Income tax surtax

Petroleum excise tax

Taxation of Health

Insurance Premiums

Higher Education Tax

Incentive

Tuition Tax Credit

Jobs Tax Credit

Enterprise Zone

Tax Incentives

Caribbean Basin

Initiative

Contributions to Civil

Service Retirement

Other

Subtotal

8.2

—

2.3

a/

-0.2

-0.2

-0.1

a/

1.2

a/

11.2

5.8

—

4.4

-0.1

-0.5

-0.2

-0.4

a/

2.3

a/

11.3

8.9

17.4

28.6

6.0

-0.2

-0.8

-0.1

-0.8

a/

2.1

a/

61.3

1987

Estimates

10.7

19.0

30.0

8.0

-0.3

-0.8

a/

-1.1

a/

1.9

a/

67.5

1988

22.3

21.4

30.0

10.7

-0.4

-0.8

a/

-1.1

a/

1.7

a/

83.9

(Continued)

26
TABLE III-3. (Continued)

Proposal 1984 1985

Administrative Action b/ -0.3 -0.3

Total 10.9 11.0

1986 1987 1988

-0.3 -0.3 -0.3

61.0 67.3 83.6

Percent of Administration

GNP 0.3 0.3 1.5 1.5 1.7

Addendum: CBO Reestimates

Bi-Partisan Social

Security Plan 8.2 5.2 8.1 9.2 19.7

Contingency Tax Plan

Income tax surtax — —

Petroleum excise tax c/ — —

Contributions to Civil

Service Retirement

Net Change from CBO

Reestimates

Reestimated Total for

All Administration

Proposals

Percent of CBO GNP

SOURCES: Budget of

1.2

0.1

10.9

0.3

the United

2.5

-0.4

10.6

0.3

17.3

19.8

2.5

-9.3

51.7

1.2

States Government,

18.4

21.0

2.5

-10.6

56.6

1.3

Fiscal Year

19.9

21.0

2.4

-12.4

71.1

1.5

1984, and

Congressional Budget Office.

a. Less than $50 million.

b. The effect of the proposed October 1983 federal employee pay freeze

on federal employee retirement contributions.

c. 3oint Committee on Taxation and CBO estimate.

27
The combined yield of the taxes is intended to be approximately 1 percent

of GNP; they would remain in effect for up to three years. (The budget

does not say what, if anything, would cause the contingency taxes to last for

less than three years.)

The proposal has the advantage of establishing the intent to raise

taxes, but postponing the increases to a date when the economy would be

stronger. On the other hand, the contingency tax plan depends on forecasts

of both the deficit and GNP. Because such forecasts are often unreliable

and always controversial, the triggering of the contingency taxes could be

the subject of much uncertainty and dispute. But perhaps more important,

the temporary contingency taxes might not be the best solution for what

appears to be a continuing budget problem. Both the CBO and the

Administration estimates indicate that the deficits will be substantial even

after several years of economic growth. The Administration projects the

1988 budget deficit, if all of its spending reduction proposals are adopted

but not counting the contingency tax revenues, at 3.4 percent of GNP

(excluding off-budget spending). Thus in 1989, after the contingency taxes

expired, the deficit would still be a serious problem. CBOfs analysis later in

this chapter shows that faster growth within a reasonable range will not

narrow the deficit appreciably from the revenue side. It would seem

inadvisable to enact temporary taxes for 1986-1988 when the evidence

indicates that the need for additional revenue will not end in the foreseeable

future, absent spending reductions substantially greater than those proposed

by the Administration.

Any tax increase could be repealed in the future if economic growth

closed the budget gap more rapidly than expected. The advantage of putting

such a tax increase firmly and immediately on the books is that it would

reassure the financial markets that future federal credit demands will not

become burdensome. This would reduce, to some degree at least, upward

pressure on interest rates.

The Surtax. The first part of the contingency tax plan is a 5 percent

surtax on individual and corporate income tax liabilities. It would increase

revenues by $17.4 billion in 1986, $19.0 billion in 1987, and $21.4 billion in

1988, according to Administration projections.

There is some uncertainty about the exact nature of the Administration^ proposed surcharge. The budget describes it as

 Ma surcharge on

individuals and corporations approximately equivalent to 1% of taxable

income," while the Treasury Department fact sheet describes it as

 ffa

surcharge of 5% on taxes paid by individuals and corporations." The revenue

projections in the Administration budget, however, include a 5 percent

surcharge on only individual income taxes. CBO estimates that the yield

28
from this individual surcharge will be $0.1 billion less than the Administration estimates in 1986, $0.6 billion less in 1987, and $1.5 billion less in 1988,

reflecting the lower projected CBO growth rates and incomes in those years.

If a 5 percent surtax on corporate income tax liabilities was added to this,

CBO estimates that about $3 billion more would be collected in 1986, and

about $4 billion more in both 1987 and 1988. If the corporate surcharge was

applied to taxes owed before deduction of investment and foreign tax

credits (as was done with the Vietnam War surcharge), the revenue gain

could be as much as twice as high.

An individual surtax can be calculated as a percentage of tax liability

(as in the budget proposal) or as a percentage of income. The latter would

place a relatively lighter burden on taxpayers with the highest incomes.

Whatever its design, an individual surtax increases effective marginal tax

rates, thus discouraging work, saving, and investment. The Administration's

proposed surtax, for "example, would increase the top marginal rate on

individuals from 50 to 52.5 percent. A corporate surtax would likely have an

even greater adverse impact on investment, because corporations usually

invest large shares of their after-tax income. (Of course, corporations could

adjust by reducing their dividend payments and increasing their borrowing,

but this would reduce investment resources elsewhere in the economy.)

Unless a corporate surtax accompanied the individual surtax, however, some

would argue that the additional tax burden bore too heavily on households.

If the Congress decided to replace the contingency tax plan with

unconditional and permanent tax increases, there could be several alternatives to the surtax. Some tax increase options and their estimated additions

to revenues are shown in Table III-4. A simple tax rate increase might be

more attractive than a permanent surtax, because the surtax would add a

stage to the tax computation process while the rate increase would not.

One option would be repeal of the 1983 10 percent rate cut. This would

raise $30 billion in 1984 and $40 billion in 1988, compared to about $20

billion in 1988 for the proposed 5 percent surtax. Alternatively, the 1983

tax cut could be reduced to 5 percent, yielding half of the additional

revenue of outright repeal. Another alternative would be to defer the tax

cut in whole or in part until a later year.

Another option would be to cap the 1983 tax cut at $700 per joint

return; this would have the effect of limiting the implicit tax increase to

couples with incomes greater than about $50,000, and somewhat less for

single persons. The cap option would raise far less revenue than repeal,

however—$6 billion in 1984 and $9 billion in 1988. Repealing or reducing the

1983 tax cut would have the disadvantage of increasing tax revenues in the

near term, when the economic recovery might still be fragile.

29
TABLE III-4. ESTIMATED REVENUE GAINS FROM MAJOR TAX INCREASE

OPTIONS (By fiscal year, in billions of dollars)

Option

Repeal July 1, 1983

Rate Reduction

Cap Third-Year Tax Rate

Cut at $700

Repeal Indexing

Some Possible BaseBroadening Options

Tax some employer-paid

health insurance

Eliminate deductibility

of state and local

sales taxes

Limit nonbusiness, noninvestment interest

deductions to $10,000

Tax the accrued interest

on life insurance

reserves

Repeal net interest

exclusion

Eliminate income

averaging

Lengthen building depreciation period to 20 years

Require full basis adjustment for the investment

tax credit

Cumulative

Five-Year

1984 1985 1986 1987 1988 Increase

30 33 35 38 40 177

6778 9 3 7

6 17 28 40 90

30

28

2 6

1

3 4

a/ 2

a/ 1

et Office,

7

3

4

4

2

Reducing

8

3

5

6

4

the

9

4

5

8

5

Deficit:

31

11

21

19

12

Spending and

Revenue Options (February 1983), Chapter X and Appendix A. Assumes

January 1, 1984, effective dates. Numbers may not add to totals

because of rounding.

a. Less than $0.5 billion.

30
Yet another option would be to repeal the provision for indexing

income taxes in 1985 and later years. Indexing would have the advantage of

preventing unlegislated, automatic tax increases brought about by inflation,

but it would widen the deficit correspondingly. The recent slowdown of

inflation may make the need for indexing seem less urgent than was

originally thought. The revenue gain from repealing indexing would be

greatest if the economy grew rapidly, and least if the economy was sluggish;

thus it would act as a brake on an overheated economy while not retarding a

sluggish one. Repeal of indexing would not increase taxes until 1985, and

thus would not impair the current recovery; it would raise $6 billion in 1985

and $40 billion in 1988. Alternatively, indexing could be postponed one or

several years, rather than repealed outright.

Several income tax base-broadening steps might be substituted for a

general surtax. These are also listed in Table III-4-, and discussed in detail

in CBO's Reducing the Deficit: Spending and Revenue Options (February

1983). Such base broadening would have the disadvantage of concentrating

the tax increase on certain specific groups, but might also make the tax

system more equitable and neutral with regard to different economic

activities. One option, taxing part of employer-paid medical insurance

premiums, is included in the Administration's budget proposal and is

described later in this chapter. Other options, taken from the larger list in

Reducing the Deficit, include limiting the deductibility of nonbusiness,

noninvestment interest; taxing the accrued interest on life insurance

reserves; repealing the net interest exclusion; eliminating income averaging;

eliminating the deductibility of state and local sales taxes; lengthening the

building depreciation period to 20 years; and requiring a full basis adjustment for the investment tax credit. Combining several of these basebroadening steps could raise as much revenue as the proposed surtax.

The Petroleum Excise Tax. The Administration's budget proposal

includes a temporary contingency tax on consumption of imported and

domestic oil. Although the budget specifies a $5 per barrel tax, the revenue

estimates in the budget are based on a $7 tax, not a $5 tax. A $5 tax would

raise approximately $9 billion less per year than estimated in the budget, or

$27 billion less over the life of the tax (see Table HI-3). (This revenue

shortfall could, of course, be made up in some other way within the

contingency tax program.) If the $5 tax took effect on October 1, 1985, it

would raise an estimated $62 billion in revenue over the 1986-1988

period. \J To the extent that consumer prices were increased by the tax,

1. Gross collections would be $83 billion before offsetting reductions in

receipts from individual and corporate income and gasoline excise

taxes. Possible offsets from higher outlays are not included.

31
part of the revenue would be offset by increased outlays in programs

sensitive to changes in consumer prices, such as Social Security.

An oil tax would have certain effects that might be desirable from an

energy policy standpoint. To the extent that it was shifted onto consumers,

the tax would reduce the demand for oil, and therefore U.S. dependence on

imported oil. In addition, it would increase incentives for the development

of alternative energy sources (such as coal, natural gas, or solar energy), as

well as raise the payback from conservation efforts by consumers. To the

extent that it reduced petroleum imports, it would also limit the economic

costs of any future supply disruption. In this context, a permanent tax

would be more effective, because consumers would be more likely to change

their behavior if they knew the tax was not temporary.

An oil tax would distort the relative prices of different fuels for

consumers and could produce some economic inefficiencies. For example, it

might lead New Englanders to switch from fuel oil to natural gas or coal for

home heating, even though the economic costs of these fuels in that area

are higher than for oil. This suggests that an ad valorem (percentage-ofprice) tax on all energy consumption might be preferable to a tax solely on

oil. For example, a 3 percent tax on all energy consumption would raise

about the same amount (about $60 billion over 1986-1988) as a $5 per barrel

oil tax, but it would not distort relative fuel prices. (The $5 per barrel tax

is equivalent to a 17 percent ad valorem tax, assuming a $30 per barrel

price.) In addition, a broad-based tax would tend to even out the regional

variations in tax burdens that would result from a tax limited to oil.

The inefficiencies and distortions of a tax limited to oil may be a price

worth paying for greater energy independence, however. In addition, a

broad-based energy tax would not be without economic distortions. While it

would be neutral among fuels, it would still distort the choice between

energy-intensive goods and other goods. An ad valorem tax may also be

more difficult to administer, since the "value11 of a product grows at each

stage of production and distribution, and may be difficult to determine

precisely at some stages.

The current state of the oil market makes it attractive to impose an

oil tax now rather than waiting until 1985 because declining oil prices would

offset part (or all) of the tax. A $5 per barrel tax in the near term would

thereby prevent the price of oil from falling as much as it would otherwise,

preserving part of the energy conservation price incentives that currently

exist. If part of the tax was absorbed by producers, the price of oil products

would not rise by the full amount of the tax. So long as the market

remained soft, the federal government would divert to itself part of the gain

from high oil prices currently received by foreign as well as domestic

32
producers. By waiting until 1985 to impose the tax, the government might

lose the short-run opportunity of passing on a larger share of the tax to

foreign suppliers, since the market could be tighter by then.

The advantages of imposing an energy tax now may be outweighed by

its effect on economic recovery. However, an energy tax would probably do

less to impair recovery than an income tax increase of the same size, since

part of the energy tax would initially be absorbed by foreign oil producers.

If an energy tax was intended to provide revenues on a long-term basis, it

should probably be an ad valorem tax. A tax fixed in terms of dollars per

barrel of oil would tend to fall as a percentage of GNP as prices rose over

time.

Tax Treatment of Health Insurance Premiums

The Administration proposes that, effective January 1, 1984, employees be required to include in their taxable income employer-paid health

insurance premiums in excess of $175 per month for family plans and $70

per month for single plans. Employer-paid premiums established in collective bargaining agreements would be exempted until expiration of the

agreements, but no longer than the end of 1985. The maximum amount not

subject to tax would be raised each year by the rate of increase of the

Consumer Price Index for wage earners (CPI-W).

The CBO and the Administration both estimate that this proposal

would bring in $1.7 billion in additional income tax revenue and $0.6 billion

in additional payroll tax revenue in 1984, rising to $10.7 billion from both

sources combined by 1988 (see Table III-3). The estimate includes the

effects of temporarily exempting union contracts, which reduces income tax

revenue by $0.4 billion and payroll tax revenue by $0.1 billion in 1984.

These estimates assume adoption of the recommendations of the National

Commission on Social Security Reform; payroll tax revenue would be about

$30 million lower in the absence of this assumption.

Taxing employer-paid health insurance premiums as proposed would

affect about 20 percent of all households in 1984, if there were no

exemptions. The delayed coverage of union contracts would reduce the

number of households affected in that year, but an increasing percentage of

households would be affected in years after that, because premiums are

expected to rise more rapidly than the ceiling. In 1984, affected households

with incomes between $10,001 and $15,000 would pay an average of $193 in

additional taxes, and affected households with incomes between $50,001 and

$100,000 would pay $371.

33
The revenue gain could be increased by lowering the amount of

employer-paid premium that is excluded from tax. For example, taxing

employer payments for health insurance that exceed $150 per month for

family coverage and $60 per month for single coverage would yield $0.7

billion more in income tax revenue and $0.3 billion more in payroll tax

revenue in 1984 than the Administration proposal. The ceiling could be

lowered even further if more revenue was desired, but continued exclusion

of some minimum level of employer-paid health insurance premium might be

advisable to encourage provision of a basic set of health benefits by

employers.

Both tax-policy and health-policy arguments have been made for

taxation of employer-paid health insurance premiums. Exclusion of employer-paid premiums benefits persons with higher incomes, both because

they tend to have larger employer-paid health insurance premiums and

because they are .in higher marginal tax brackets. The average 1983 tax

benefit for all households with incomes between $10,001 and $15,000 per

year is estimated to be $83, while that for all households with incomes

between $50,001 and $100,000 is estimated to be $622. 2/ Moreover, the

exclusion leads to what many consider to be overly extensive health

coverage, which has expanded use of health care services unnecessarily and

driven up their prices.

Opponents of taxing any portion of employer-paid health insurance

argue that present health insurance coverage is not excessive and that

changing the current policy would result in less insurance coverage; this

might, in turn, cause some people to forgo needed medical care. Also, they

argue that a uniform ceiling would have uneven effects, since a given

employer contribution purchases 'differing levels of coverage depending on

several factors, such as the regional and demographic characteristics of the

work force.

Jobs Tax Credit for the Long-Term Unemployed

The Administration proposes to extend the Federal Supplemental

Compensation (FSC) program and to modify it by adding a tax credit for new

employers of FSC recipients. The credit could be applied against either the

employer's Unemployment Insurance (UI) payroll tax or his federal income

tax, with the employer's wage and salary expense deduction reduced by the

2. Congressional Budget Office, Controlling Medical Care Costs Through

Market Forces (May 1982), p. 27.
amount of the credit. The tax credit would be available as a series of

vouchers issued to eligible recipients, and would be equal to one-half of the

person's weekly FSC benefit for each week of new employment, up to the

amount of the recipient's FSC entitlement. The average FSC benefit

currently is about $120 per week, and benefits are paid for up to 16 weeks;

the average credit would thus be about $60 per week for up to 32 weeks.

Although the Administration's proposal calls for FSC cash benefits to be

provided only through September 30, 1983, the voucher program would

continue until April 1, 1984. After September 30, individuals who would

have qualified for cash benefits if that part of the program had continued

would continue to be eligible for vouchers in equivalent amounts. As long as

the individual was hired before April 1, 1984, the employer would still be

eligible for the credit. The proposal is estimated to reduce revenues by $0.2

billion a year in 1984 and 1985, and by smaller amounts from 1986-1988 (see

Table HI-3).

Use of a voucher system based on FSC would allow targeting of this

employment stimulus on certain long-term jobless persons with substantial

work histories. Assistance to these UI recipients, however, could come at

the expense of other jobless persons who would not: be eligible to receive the

wage subsidy. This could occur either because workers with vouchers would

be hired instead of other jobless persons when employment expanded, or

because workers with vouchers would be hired to replace other employees.

In addition, because UI recipients often have considerable work experience,

they might later return to their previous jobs or take better jobs when they

became available, having used the voucher only to obtain interim employment. Even this interim employment might be better for both the worker

and the government than continued unemployment, however.

An existing employment tax credit--the Targeted Jobs Tax Credit

(TJTC)--also provides income tax reductions for some employers who hire

certain jobless persons. The potential amount of the TJTC tax reduction--

$3,000 in the first year and $1,500 in the second—is larger than that in the

new tax credit proposed by the Administration, which would average out to

less than $2,000 for one year ($60 per week for 32 weeks = $1,920). 3J

However, the target groups served by the TJTC include primarily unskilled

workers whose value to an employer may be less than that of the more

experienced FSC recipients, so that a smaller tax credit might be appropriate. Nonetheless, the TJTC has not been very effective in stimulating

3. This does not take into account in either case the requirement that the

employer's deduction for wage and salary expenses be reduced by the

amount of the credit, which reduces the amount of the tax savings.

35
employment, and larger tax reductions might be necessary to generate

program use by large numbers of employers. The Administration's tax credit

proposal could potentially be used by more employers, however, because UI

payroll tax payments are made by nearly all employers, while many do not

have sufficient income to owe income taxes.

Because the voucher program would be new and unfamiliar, there is

some question whether it could be fully implemented by its scheduled April

1, 1983, starting date, even if the enabling legislation were passed quickly.

Further, employers and those who administer it may be reluctant to gear up

fully to use a program that is scheduled to last for only one year. In the

case of the TJTC, it took several months before the availability of the

credit was known to many employers, and even longer before they started to

use it.

A problem inherent in the use of employment tax credits is that the

persons responsible for hiring in large firms are often not in close touch with

those who prepare the tax returns. Thus, even if an employment tax credit

could significantly reduce an employer's tax liability, it might not translate

into increased hiring of eligible workers. Others have proposed that the

employment stimulus be in the form of a direct cash grant that could be

more closely associated with the hiring process. This could increase use of

the stimulus while retaining the same cost per worker. As discussed at the

end of this chapter in the section dealing with tax expenditures, certain

adjustments have to be made to either the tax credit or the direct grant to

make certain they are of equal value to the recipient and equal cost to the

government.

Tax Incentives for Higher Education

To encourage saving for college education expenses, the Administration is proposing to exempt from taxation the earnings of special education

accounts. Under the proposal, a separate account could be set up for each

dependent child, and contributions would be permitted up to $1,000 per child

per year for children under 18 years of age. The $1,000 contribution limit

would decline for contributors with adjusted gross incomes above $40,000

and reach zero for those with incomes of $60,000 and above. The account

must be used for payments directly to a university or college for tuition,

room, or board; it must be for study toward an undergraduate degree; and it

must be spent before the student reaches age 25. If the account meets

these conditions, its interest earnings would never be taxed.

The main revenue loss from these education savings accounts (ESAs)

lies in the future. The Administration estimates negligible revenue losses in

36
1984 and only $0.4 billion in 1988. However, the annual revenue losses can

be expected to grow rapidly for the first 10 to 20 years as savings

accumulate in these accounts. The delay of revenue losses is advantageous

given the large deficits forecast for the near term, but the long-run losses

need to be considered as well.

The ESA would offer a higher return than is now available to parents

who save in their own accounts for their children's college education. For

example, a typical family with a $30,000 income using an ESA could make

an 18 percent smaller annual contribution to savings and still end up with

the same amount after 18 years, assuming an 8 percent market interest

rate.

Under existing law, parents can also use trusts or gifts to minors to set

up savings accounts in their children's names. Earnings in these accounts

are taxable to the child, and the child pays no tax until his or her interest

earnings exceed the $1,000 personal exemption. With an 8 percent interest

rate, the child could hold $12,500 before earning $1,000 in interest income.

Trusts and gifts to minors are more flexible in their uses than ESAs, so many

families may prefer to use them first. But with costs for many colleges well

in excess of $12,500, families with the resources to save more than that per

child could benefit from ESAs.

A number of bills have been proposed in the Congress that would

provide tax-favored accounts for education. Compared to the Administration's proposal, most of them would allow greater flexibility in funding and

spending, and also make the initial contribution tax deductible. This last

feature means that a typical $30,000-a-year family contributing to one of

these accounts would receive a tax saving in the year of the contribution

equal to almost a quarter of the amount contributed; those in higher tax

brackets would receive higher tax savings. The deduction for contributions

would substantially increase the revenue loss compared to the Administration's proposal, particularly in the years immediately after enactment. The

Congressional proposals eventually recoup a portion of the revenue loss by

including the parents' contributions and the interest from the account in the

taxable income of the offspring—for example, one-tenth of the amount

yearly from ages 25 to 34. Even with this ten-year recapture, the revenue

loss from the typical family's account is almost 80 percent larger than that

under the Administration's proposal (or the equivalent tax reduction currently available through trusts or gifts).

Table IH-5 compares alternative savings accounts for a typical family,

assuming for purposes of the comparison a common goal of saving $1,000 by

the time college starts. The family of four with $30,000 of income is

assumed to open a college savings account at the birth of a child and to

37
make equal contributions annually for 18 years. The table shows that at an

8 percent interest rate the annual contribution necessary to reach $1,000 in

the parents1 taxable account is $30.02. In the Administration's ESA, the

required contribution is $24.72, or 18 percent less; in the prototype

Congressional ESA, it is $19.03 (taking into account the tax savings from the

deduction).

TABLE III-5. THE COST OF SAVING $1,000 FOR COLLEGE FOR A

TYPICAL FAMILY UNDER ALTERNATIVE TAX TREATMENTS (In dollars) a/

Annual Family Deposit

Annual Tax Saving from

Deductibility of Deposit

Parent

Taxable

Savings b/

30.02

Trusts and

Administration

ESAb/

24.72

Prototype

Congressional ESA b/

24.72

5.69

Net Annual Outlay

Life-Time Subsidy (present

value of forgone tax)

30.02

None

24.72

53.60

19.03

95.29

a. See text for family characteristics and savings period. Calculations

assume 8 percent market interest rate and discount rate. Parents are

in 23 percent tax bracket; child until 18 pays no tax and from ages 25

to 34 is in the 15 percent tax bracket.

b. Parent Taxable Savings receive no special tax reductions from current

law. Trusts and Administration ESA have tax-exempt earnings. The

prototype Congressional ESA has deductible contributions, tax-exempt

earnings, and $100 per year added to child's taxable income from ages

25 to 34.

The bottom line of the table gives the lifetime subsidy from the

forgone taxes per $1,000 of accumulated savings. The $53.60 subsidy for the

Administration ESA comes entirely from forgone taxes on earnings. The

larger subsidy on the prototype Congressional ESA includes an additional

$57.56 loss from permitting contributions to be deducted, offset by a $15.87

gain from including the account in the child's income. The subsidy rises in

each case with the family's marginal tax rate.

38
In terms of the overall tax structure, tax-favored savings accounts

erode the base of the income tax, thereby requiring higher tax rates on

income from other capital and from labor. These accounts can be viewed

as a step toward a consumption tax because they exempt one more form of

savings from tax. While a number of families might shift savings into such

accounts, the net increase in saving would probably be small because

eligibility and contribution limits are restrictive.

National Commission on Social Security Reform Proposals

The President's budget includes the outlay reduction and tax increase

proposals of the National Commission on Social Security Reform. CBO's

estimate of the 1984-1988 revenue increase is $50'.4 billion, $5.6 billion less

than the Administration's estimate, mainly because the CBO economic

forecast assumes a somewhat lower level of wages and salaries in the 1986-

1988 period (see Tables III-3 and III-6). 4/

Other Proposals

The Administration proposed several other tax policy changes, as

listed in Table HI-3. An increase in federal employee contributions to the

civil service retirement fund would raise $1.2 billion in 1984 and greater

amounts in subsequent years. CBO's estimate of the revenue gain from this

proposal is higher than the Administration's by about $0.2 billion in 1985 and

$0.7 billion in 1988 (see Table IH-3). About one-quarter of the difference is

due to CBO's higher pay raise assumptions from 1985 through 1988, and

about three-quarters to differences between CBO and Administration

assumptions about how new employees will be affected by changes in Civil

Service Retirement and Social Security. The enterprise zone and tuition tax

4. The CBO estimate shown in Table III-6 is somewhat lower than that

appearing in Reducing the Deficit; Spending and Revenue Options

(February 19831^ The reason is that CBO now assumes, as does the

Administration, that income tax revenues will be reduced as a result

of the proposed increases in payroll taxes. (The employer share of the

payroll tax increase is assumed to be passed on to employees in the

form of lower wages, thereby reducing employee taxable incomes.)

Further, CBO has reestimated the revenue gain from including all new

federal employees in the system. These factors reduce the previous

CBO estimate of the unified budget impact of the commission

proposals by $6.0 billion over the 1984-1988 period.

39
TABLE III-6. ESTIMATES OF THE REVENUE EFFECTS OF THE NATIONAL

COMMISSION ON SOCIAL SECURITY REFORM PROPOSALS

(By fiscal year, in billions of dollars)

Proposals 1984 1985 1986 1987

Cumulative

Five-Year

1988 Increase

Include All Non-Profit

Institutions in the System a/

Income tax offset

Include All New Federal

Employees in the System a/

Accelerate FICA/OASDI Tax

Rate for Calendar Years

1984 and 1988

Income tax offset

Individual income tax

credit for 1984 payroll

tax increase

Raise the SECA/OASDI Tax

Rate to the Combined

Employer-Employee Rate a/

Income tax offset (deduction for half of tax)

Tax 50% of OASDI Benefits

with Thresholds of $20,000

(single) <5c $25,000 (joint)

1.1 1.7 2.0 2.3 2.9 9.9

-0.1 -0.2 -0.2 -0.3 -0.4 -1.2

0.1 0.2 0.3 0.5 0.6 1.7

6.4 2.3 0.0 0.0 10.3 19.0

-0.8 -0.1 0.0 0.0 -1.3 -2.2

0.0 -4.3 0.0 0.0 0.0 -4.3

1.0 3.0 2.9 3.1 3.5 13.7

-0.5 -1.5 -1.5 -1.6 -1.8 -6.8

1.2 4.2 4.9 5.6 6.4 22.4

Total Increase in Social Security

Trust Fund Revenues 9.7 11.5 10.1 11.5 23.7

Total Loss in Income

Tax Revenues

Reduced Contributions to

Civil Service Retirement b/

Total Increase in Unified

Budget Revenues

-1.5 -6.1 -1.7 -1.9 -3.4

-0.1 -0.2 -0.3 -0.5 -0.6

8.2 5.2 8.1 9.2 19.7

66.6

-14.6

-1.7

50.4

a. Estimates include proposed increase in OASDI payroll tax rates.

b. Assumes contributions of new federal employees to Social Security will result

in commensurate reductions in contributions to civil service retirement.
credit proposals closely follow versions considered in the previous Congress.

The Caribbean Basin initiative is limited to two narrow provisions and would

have very limited revenue consequences.

BASELINE REVENUE ESTIMATES

The preceding sections have dealt only with the Administration's

proposals for changes in the tax law. This section compares CBOfs

"baseline" estimates of revenues that would be raised under current law to

the Administration's "current services" estimates. The two estimates are

conceptually the same; they both assume that present airport and airway

taxes will be extended at current rates beyond the scheduled expiration date

of December 31, 1987, but that existing law will remain otherwise unchanged throughout the 1983-1988 period. All scheduled increases and

reductions in taxes are assumed to go into effect as scheduled.

As shown in Table HI-7, CBO's current law estimate for 1983—$606

billion—is almost $9 billion higher than the Administration's. CBO's

estimate remains about $4 to $5 billion higher in 1984 and 1985, and then

moves below the Administration's estimate by increasingly large amounts in

1986-1988, falling $44 billion below the Administration's $927 billion estimate in 1988. As shown in the table, most of the differences between CBO

and the Administration in the early years of the projection period are due to

technical differences in estimating procedures and assumptions, while most

of those in the later years are due to different assumptions about the

economy. All of the differences are relatively small, however—less than

1 percent of total revenues in three of the six years, and less than 5 percent

in 1988, the year with the largest difference.

Different Economic Assumptions

As discussed in Chapter II, CBO's economic projections are somewhat

different from the Administration's, with CBO assuming higher real growth

in 1983-1985, and lower real growth in 1986-1988. These different assumptions about economic growth are reflected in the levels of taxable personal

income and corporate profits—the major determinants of projected revenues—in the CBO and Administration economic projections (see Table HI-8).

The relationships are not exact in 1983-1985: CBO has slightly lower levels

of taxable personal income in 1983 and 1984, although the wage and salary

component is higher than the Administration's in each of the years, and

CBO's corporate profits are slightly lower in 1983 and 1985. CBO assumes

lower income levels than does the Administration in 1986-1988, corresponding to the pattern of GNP growth.

41

15-966 0-83- 4
TABLE III-7. CBO AND ADMINISTRATION ESTIMATES OF REVENUES UNDER

EXISTING TAX LAW (By fiscal year, in billions of dollars)

1983 1984 1985 1986 1987 1988

Administration Current

Services Estimates a/ 597.5 648.8 713.3 780.9 849.1 926.7

Sources of Reestimates

Different economic

assumptions

Technical differences

CBO Baseline (Revised) a/

b/

8.8

606.3

2.0

2.7

653.6

3.9

0.5

717.7

-5.7

-1.4

773.9

-18.8

-3.1

827.1

-36.0

-8.3

882.4

Addendum

Administration Current

Services Revenues as

Percentage of Administration GNP 18.7 18.6 18.7 18.8 18.8 18.9

CBO Baseline Revenues as

Percentage of CBO GNP 19.0 18.7 18.8 18.7 18.5 18.4

a. Assumes extension of airport and airway trust fund taxes in 1988; this adds $2.6

billion to 1988 revenues.

b. Less than $50 million.

The levels of taxable income and profits are not the only determinants

of revenue estimates, of course. The assumed timing of tax collections has

a significant effect, as do other technical aspects of the estimating

procedures. These technical differences are discussed in general terms

below. The most significant economic and technical differences in the

major revenue sources are then discussed in more detail.

Technical Differences

CBO and the Administration use different procedures for estimating

individual and corporate income taxes, windfall profit taxes, and several

other taxes. For the most part, estimation procedures differ because CBO
TABLE III-8. ECONOMIC ASSUMPTIONS OF PARTICULAR IMPORTANCE FOR REVENUE ESTIMATES (Calendar year averages, in billions of dollars)

1983 1984 1985 1986 1987 1988

Taxable Personal Income

CBO 2,268 2,1+56 2,658 2,857 3,061 3,278

Administration 2,278 2,466 2,653 2,863 3,114 3,378

Wages and salaries

component

CBO 1,649 1,783 1,925 2,074 2,229 2,395

Administration 1,640 1,780 1,921 2,090 2,281 2,483

Corporate Profits Before

Tax

CBO

Administration

168

177

221

206

244

246

283

296

305

316

318

329

Domestic Refiners1 Acquisition Cost of Crude Oil (in

dollars per barrel)

CBO

Administration

30

31

.85

.00

32.

31.

15

96

32

33

.60

.73

33

35

.42

.64

34

37

.72

.61

36.00

39.68

and the Department of the Treasury have different data and analytical tools

available to them. CBO has emphasized close coordination of its economic

forecasting and revenue estimating efforts, with detailed translation of

revenue collections data into the type of data that is used for economic

forecasting. Historical data on the relationships between trends in the

economy and revenue collections can then be used more readily to project

future relationships, thereby maximizing consistency between projections of

federal government revenues and conditions in other sectors of the

economy.
The Treasury Department, by contrast, is required to make detailed

estimates of the effects on current tax collections of a wide variety of

specific tax law changes. This requires a great deal of information on and

analysis of tax collections within single years, with somewhat less emphasis

on projections of changes in collections over time in response to changing

economic conditions. There is also less opportunity for close coordination of

Treasury revenue estimating efforts with Administration economic forecasting, since a number of agencies outside the Treasury participate in formulating the Administration economic projections. These differences in

approach will continue to lead to differences between CBO and Administration revenue estimates, especially in the later years of the projection period

when small differences in economic forecasts may begin to cumulate into

larger differences in revenue estimates.

In addition to utilizing formal estimation procedures, both CBO and

the Administration assess daily and monthly tax collections data as they are

made available. Since actual tax liabilities cannot be observed, current tax

collections may be consistent with a range of potential tax liabilities. This

is especially true for individual and corporate income taxes, where variations in payment patterns occur frequently, even in the absence of significant legislated changes such as those recently enacted. Differing interpretations of recent tax payment patterns are reflected in CBO and Administration estimates of current-year revenues. The combinations of formal

and informal data-analyzing procedures developed by CBO and by the

Treasury Department generate revenue estimates that are generally close

when common economic assumptions are used, but minor differences persist.

Economic and Technical Differences by Source

Differences between the CBO and Administration current law estimates by tax source due to different economic assumptions, as mentioned

above, generally result in higher CBO revenues in 1983-1985, and lower CBO

revenues from 1986-1988 (see Table III-9). Differences between current law

estimates due to technical estimating differences also generally result in

higher CBO revenues in 1983-1985 and lower revenues in 1986-1988 (see

Table IH-10). As discussed below, however, the reasons for these technical

differences are varied.

Individual Income and Social Insurance Taxes. Individual income taxes

and social insurance taxes and contributions are based directly on personal

income. Taken together, these taxes accounted for over 80 percent of total

federal revenues collected in fiscal year 1982.
TABLE III-9. CBO REVENUE REESTIMATES ATTRIBUTABLE TO ECONOMIC ASSUMPTIONS, BY SOURCE (By fiscal year, in

billions of dollars)

Source 1983 198* 1985 1986 1987 1988

Individual Income Taxes -0.9 -2.* +0.3 +0.1 -7.2 -21.3

Corporate Income Taxes -0.2 +3.8 +*.7 -0.5 -1.7 +0.5

Social Insurance Taxes

and Contributions +1.9 +0.9 +0.3 -2.1 -5.8 -10.2

Windfall Profit Taxes -0.1 +0.7 -0.2 -1.8 -2.3 -2.8

Other -0.7 -1.0 -1.1 -1.* -1.9 -2.3

Total a/ +2.0 +3.9 -5.7 -18.8 -36.0

NOTE: CBO estimates less Administration estimates,

a. Less than $50 million.

Individual income taxes depend primarily on the level of taxable

personal income, the largest component of which is wages and salaries.

Social insurance taxes and contributions, which are payroll taxes, depend

primarily on the level of wages and salaries. Since the CBO wage and salary

assumptions, following the pattern of its GNP assumptions, are higher than

the Administration assumptions in 1983-1985 and lower thereafter (see

Table III-8), CBO's estimates of social insurance taxes and contributions also

follow this pattern (see Table III-9).

CBO estimates of the other component of taxable personal income,

nonwage income, are enough below the Administration assumptions in 1983

and 198* to put CBOfs total taxable personal income below the Administration assumptions in these years. 2/ These lower CBO estimates of nonwage

income do not affect social insurance estimates at all, but nonwage income

5. Nonwage taxable income comprises proprietors1 income, personal

interest income, personal dividend income, and rental income.
TABLE 111-10. CBO REVENUE REESTIMATES ATTRIBUTABLE TO

TECHNICAL ASSUMPTIONS, BY SOURCE (By fiscal year,

in billions of dollars)

Source 1983 1984 1985 1986 1987 1988

Individual Income Taxes +1.5 +1.5 -0.9 -2.3 -4.2 -9.5

Corporate Income Taxes +5.2 a/ -0.3 -1.2 -1.1 -1.4

Social Insurance Taxes

and Contributions -0.1 -0.5 -0.2 -0.2 +0.1 +0.3

Windfall Profit Taxes +0.7 +0.6 +1.1 +1.6 +2.1 +2.5

Other +1.4 +1.1 +0.9 +0.7 a/ -0.3

Total 8.8 2.7 0.5 -1.4 -3.1 -8.3

NOTE: CBO estimates less Administration estimates,

a. Less than $50 million.

makes up over one-fourth of the base used to calculate individual income

taxes. These lower levels of nonwage income tend to reduce the CBO

estimates of individual income taxes below the Administration estimates in

these earlier years, even though CBO wage and salary levels are slightly

higher. By 1986-1988, CBO wage and salary levels are lower as well. The

largest difference in personal income-based revenue estimates occurs in

1988 when the CBOfs lower income path brings the CBO estimate of the

total individual income and social insurance taxes slightly more than $31

billion below the Administration estimate (see Table HI-9).

For the most part, technical differences between CBO and Administration estimates of individual income and social insurance taxes are quite

small, both in absolute terms and relative to the total amount of revenues

46
raised (see Table 111-10). However, for 1986-1988 CBOf

s estimation procedures lead to individual income tax estimates lower than the Administration's. The Administration projects a larger response of taxes to income

growth in this period than it projects for 1984 and 1985, while CBO projects

a stable pattern of response. Given the assumptions of moderate economic

growth and moderate rates of inflation by both CBO and the Administration,

relatively stable effective individual income tax rates seem more likely for

1986-1988 than rising ones.

Corporate Income Taxes. Corporate income taxes depend primarily on

economic assumptions about corporate profits and the level of investment

(which determines the amounts of depreciation deductions and investment

tax credits available to reduce corporate taxes). CBO's corporate profit

assumptions are higher than the Administration's in 1984 and lower by

increasing amounts in 1985-1988. CBO expects business investment to grow

more slowly than the Administration assumes, and to account for a smaller

share of GNP in each year. CBO's lower levels of investment reinforce the

effects of its higher profits in 1984, raising CBO's estimate of corporate tax

collections above the Administration's in 1984 (and in 1985 because of the

lags between corporate tax accruals and actual collections). In subsequent

years the effects of the profit and investment assumptions are largely

offsetting, with CBO's lower profits tending to pull tax collections down

relative to the Administration, while its lower investment assumptions tend

to push collections up.

The only large technical estimating difference between CBO and the

Administration occurs in 1983. This difference, which puts the CBO

estimate about $5 billion above the Administration's, results in part from

the Administration's assumption that the high penalty interest rate imposed

last year brought in an unusually large volume of "back taxes" that will

reduce corporate income tax payments this year. CBO agrees that this is

quite possible, but chooses not to include the assumption in its baseline

estimates for 1983. Technical differences between the CBO and Administration corporate income tax estimates in other years are significant, but

mostly offsetting.

Windfall Profit Taxes. In 1988, CBO projects an average domestic

refiner acquisition cost of crude oil almost $4, or 9 percent, below the

Administration's (see Table III-8). CBO's assumption of a lower oil price

path beginning in 1985 reduces its estimates of windfall profit taxes below

the Administration estimates by increasing amounts over the 1985-1988

period.

47
These differences in windfall profit tax estimates because of oil price

assumptions are offset in part by a technical factor—CBO's assumption that

some eligible tier-one oil will not be reclassified as lower-taxed incremental

tertiary oil. This slower rate of reclassification is assumed to occur

because, in certain circumstances, the cost to the producer of reclassifying

is greater than the potential tax reduction.

Economic and technical differences between the CBO and Administration estimates of other tax sources are quite small, only about $1-2 billion

per year, and mostly offsetting.

REDUCED SENSITIVITY OF REVENUES TO ECONOMIC GROWTH

The present tax structure has significantly reduced the sensitivity of

revenues to different levels of economic growth. In July 1981, for example,

before the Economic Recovery Tax Act of 1981 (ERTA) was enacted, CBO

projected that current law revenues would increase from 21.4- percent of

GNP in 1981 to 23.9 percent of GNP in 1986, using the optimistic economic

assumptions of the first budget resolution for 1982. 6/ This year, by

contrast, CBO's projection shows current law revenues dropping somewhat

as a percentage of GNP over the 1983-1988 period under both the high- and

low-growth alternatives to the baseline revenue projections. 7j

Thus, even though both CBO and the Administration are assuming

moderate rates of economic growth that could conceivably be exceeded over

the 1983-1988 period, the revenue share of GNP would not be sufficiently

increased by any feasible overall economic performance to make a significant dent in projected budget deficits. There are two major reasons for this

reduced sensitivity of revenues to changes in economic conditions:

o Starting in 1985, the individual income tax exemptions and rate

brackets will be indexed to the rate of inflation. As a result, real

tax revenues will no longer increase solely because of increases in

the price level; rather, they will increase only at a rate very slightly

higher than the rate of real income growth. Therefore, individual

6. Congressional Budget Office, Baseline Budget Projections: Fiscal

Years 1982-1986 (July 1981), p. 10.

7. Congressional Budget Office, Baseline Budget Projections for Fiscal

Years 1984-1988 (February 1983), p. 16.
income tax revenues will grow much more slowly relative to the size

of the economy than they did in the late 1970s and early 1980s.

o Corporate income tax revenues are now less sensitive to economic

conditions because of the expansion of the investment tax credit and

accelerated depreciation in ERTA. Economic upswings typically

increase corporate profits more than in proportion to total income,

but under the liberalized provisions of ERTA, capital cost recovery

deductions and investment tax credits will increase at an even

faster rate if investment shows its usual relationship to economic

growth, and will provide greater tax reductions when inflation is

moderate. As a result, corporate tax liabilities can be expected to

grow more slowly than before as the economy recovers.

For these changes in the tax structure to be outweighed, yielding

revenue growth comparable to recent experience as the economy expands, it

would be necessary for major changes in the economy to occur that would

increase taxable income as a share of GNP. Such changes are unlikely,

however. There is little evidence to suggest that the nontaxable parts of

GNP—primarily depreciation, employee fringe benefits, and indirect business taxes (mostly excise taxes)—will grow any more slowly than in recent

years, and thus allow the taxable share of GNP to expand. Accordingly, the

revenue outlook for the coming years under any given forecast of economic

growth shows lower receipts than recent experience would suggest.

The effects of these two major structural changes in the tax system

can be illustrated by calculating the revenue share of GNP that would result

if economic growth over the 1983-1988 period were to produce:

o Increases in taxable personal income each year higher than those

experienced in all but one year during the entire post-World War II

period (ranging from 13.3 to 13.5 percent per year);

o Comparable increases in corporate profits (with the profits assumed

to be paid out in dividends rather than used for investment, in order

to maximize tax collections); and

o No significant increase in inflation above the levels assumed by the

Administration (to maximize the real growth share of personal

income increases, and thus produce higher collections from an

inflation-indexed income tax).

Even with these assumptions (which are unrealistic but are extremely

favorable to revenue growth), revenues under existing law would rise to only
19.6 percent of GNP by 1988, only 1.2 percentage points above the 1988

CBO baseline share and only 0.7 percentage points above the Administration's 1988 current services share. In short, significant reduction in

projected budget deficits from the tax side will require changes in current

tax law.

TAX EXPENDITURES

As required by the 1974 Budget Act, the Administration's 1984 budget

contains a list of current tax expenditures. Tax expenditures are revenue

losses from provisions in the tax code that provide incentives for particular

kinds of activities or that give selective tax relief to certain groups of

taxpayers. Examples are the tax credit for the elderly, the partial exclusion

of capital gains income, and the investment tax credit for certain types of

equipment.

Although the process of defining which provisions in the tax code are

normal and which are special—and therefore tax expenditures—is sometimes

ambiguous, the annual lists of tax expenditures prepared by the Treasury and

the lists prepared for the Congress by the Joint Committee on Taxation and

the Congressional Budget Office have generally been in agreement. The tax

expenditure budgets prepared by the Administration in 1982 and 1983,

however, omit 13 provisions included in the most recent JCT/CBO listing

(published March 8, 1982) and include one provision omitted from the

JCT/CBO listing for definitional reasons. 55/ The Administration argues that

the omitted provisions are not properly classified as tax expenditures. The

largest omissions are those dealing with business depreciation.

In the Administration budgets submitted in 1982 and this year, the tax

expenditure budget presented in Special Analysis G has included estimates

of the "outlay equivalent" for each tax expenditure, as well as the usual

revenue loss estimate. The outlay equivalent is the amount of direct outlay

subsidy that would have to be provided to recipients in order for that subsidy

to be equivalent in value to the subsidy provided through a given tax

expenditure provision. The outlay equivalent is normally larger than the

8. The provision included by the Administration but not by JCT/CBO was

income of trusts to finance supplemental unemployment benefits under

the "Exclusion of other employee benefits" heading. For a list of

provisions not included by the Administration, see Congressional

Budget Office, Tax Expenditures; Budget Control Options and FiveYear Budget Projections for Fiscal Years 1983-1987 (November 1982),

p. 20.

50
revenue loss, since it is assumed that the recipient of an outlay subsidy

would have to pay taxes on the amount of the direct subsidy. These taxes

would reduce the value of the subsidy to the recipient. Most tax subsidies,

by contrast, are not themselves subject to tax. The amount of the tax

credit for home insulation, for example, is not treated as taxable income to

the recipient, although a similar direct grant would be.

A tax subsidy can, in effect, be made subject to tax in a number of

ways, thereby assuring that the tax subsidy and a taxable direct grant are

equivalent. As is the case with the existing targeted jobs tax credit and the

Administration's proposed jobs tax credit for the long-term unemployed, a

tax credit could be made taxable by subtracting the amount of the credit

from the amount the employer may deduct for wages paid. Similarly, the

investment tax credit for machinery and equipment could be made equivalent to a taxable direct grant by reducing the amount of depreciation

otherwise allowed by the amount of the credit '(depreciation is now reduced

by half the amount of the credit as a result of the Tax Equity and Fiscal

Responsibility Act of 1982). Alternatively, a direct grant could be made

equivalent to a nontaxable tax subsidy by increasing its size by the amount

of tax that would be due on it, or explicitly exempting it from tax.

The outlay equivalent concept is most useful when the Congress is

choosing between a tax subsidy and an alternative direct grant subsidy.

When instead the choice is between keeping a tax subsidy or eliminating it,

the usual revenue loss estimate is more relevant. Although the revenue loss

estimates in the tax expenditure budget do not show the exact amount of

revenue that would be gained if a provision was eliminated, since they do

not take into account transitional effects, possible interactions with other

parts of the tax code, and possible offsetting behavioral effects, they are a

more reliable guide to the revenue cost of tax expenditures than are the

outlay equivalent estimates.

51

CHAPTER IV. THE ADMINISTRATION'S DEFENSE BUDGET

The Administration's fiscal year 1984 budget proposes rapid real

growth in defense spending over the next five years. New budget authority

for national defense is projected to increase from $281 billion in 1984 to $433

billion in 1988, for a five-year total of about $1.8 trillion. This represents

average annual real growth of 6.8 percent, using Administration assumptions

about future rates of inflation. As a consequence, the defense share of the

federal budget would climb steadily. Defense spending relative to the size

of the economy would also grow, regaining the levels of the early 1970s.

The Administration's current defense budget plan is similar to the one

proposed last year, although funding levels are somewhat lower. Budget

authority is $11 billion less for 1984 and $55 billion less over the 1984-1988

period, mainly because pay raises, cost-of-living adjustments (COLA), and

inflation estimates are lower. The Administration's plan also cuts previously

planned purchases of ships, missiles, and aircraft. These reductions,

however, are offset somewhat by funding increases for readiness activities.

The Administration's 1984 defense budget is higher than the targets

set by the Congress in its First Concurrent Resolution on the Budget for

Fiscal Year 1983. Compared to CBO's national defense baseline projections

for 1984-1988, which are based on the 1983 Congressional budget resolution,

the Administration's budget represents an increase of $81 billion in budget

authority and $75 billion in outlays. In effect, the Administration budget

substitutes reductions in pay raises, COLAs, and inflation assumptions for

program reductions implicit in the resolution.

Despite recent revisions in defense procurement policies, defense

purchases have experienced significant real cost growth again this year.

CBO analysis shows that unit cost growth for 60 weapons systems has

increased the 1984 budget by about $2.6 billion.

DEFENSE BUDGET GROWTH IN PERSPECTIVE

The Administration's defense budget for 1984-1988 is summarized in

Table IV-1 and Figure IV-1. The Administration requests 1984 budget

authority of $280.5 billion—a $35 billion, or 14 percent, increase over the

53
TABLE IV-1. THE ADMINISTRATION'S DEFENSE BUDGET (By fiscal year,

In billions of dollars)

Actual

1982

Administration Estimates

1983 1984 1985 1986 1987 1988

Department of

Defense-Military

Operations

Procurement

Other

Subtotal, DoD

Other National

Defense

Total

Real Growth

(year to year in

percents)

Department of

Defense-Military

Operations

Procurement

Other

Subtotal, DoD

Other National

Defense

Total

Real Growth

(year to year in

percents)

Budget Authority

66.9 67.2 76.8 85.5 96.0 106.6 115.7

64.5 80.3 94.1 119.6 136.4 150.4 170.3

82.4 91.9 102.5 116.5 124.0 131.3 138.3

213.8 239.4 273.4 321.6 356.4 388.3 424.3

5.0 6.0 7.1 8.4 8.4 8.7 8.4

218.7 245.5 280.5 330.0 364.8 397.0 432.7

12.0 7.3 10.2 11.2 5.2

Outlays

3.7 3.8

60.4 64.8 72.6 82.2 92.1 102.0 111.5

43.3 55.2 68.2 85.9 103.7 117.5 131.4

79.2 88.9 97.8 109.4 119.1 126.1 134.1

182.9 208.9 238.6 277.5 314.9 345.6 377.0

4.5 5.9 6.7 7.8 8.1 8.7 8.0

187.4 214.8 245.3 285.3 323.0 354.3 385.6

7.7 9.8 10.3 9.6 7.7 4.5 3.7

SOURCE: Office of Management and Budget.

54
Figure IV-1.

Defense Department Budget, Fiscal Years 1984 and 1988

(Budget Authority)

Researc

and

DevelooplViilita

mentConstrucj;

ion an

Procurement

::: 34%::::::::

Operations and

Maintenance

26%

Military

Personnel

Operations and

Maintenance

^260/o

Re

tired/ Military

Pay / Personnel

5%

1984

SOURCE: Budget of the United States Government, Fiscal Year 1984.

1988

1983 estimated level. The January budget also proposes $1.6 billion for

supplemental appropriations and $650 million in rescissions for defense

programs in 1983.

Further large increases in defense appropriations are planned for 1985-

1988. New budget authority would rise to $330 billion in 1985, $365 billion

in 1986, $397 billion in 1987, and $433 billion in 1988. Together with the

requested 1984 budget authority, this represents almost a $1.8 trillion

defense program over the next five years. This is nearly $900 billion more

for national defense than the Congress provided during the past five years

(1979-1983)—or, in real terms, a 49 percent increase. Figure IV-2 portrays

the proposed rapid real growth in the level of future Department of Defense

(DoD) appropriations. Figure IV-3 shows the year-to-year real growth rates

planned by the Administration.

55
Figure IV-2.

Budget Authority for National Defense (In Constant 1984 Dollars)

350

300

| 250

o

Q

CJ

§200

"75

IZ

°150

c

o

m

100

50

0

Actual I Projected

1955 1960 1965 1970 1975 1980

Fiscal Years

SOURCE: CBO calculations based on data from the Department of Defense.

1985 1988

Relative to the total economy, the Administration estimates that

defense spending would increase from 6.7 percent of GNP in 1983 to 7.9

percent in 1988. Figure IV-4 shows the post-World War II trend for defense

outlays as a share of GNP. Over the 1984-1988 period, the Administration's

proposed defense outlays would average 7.6 percent of GNP. This is higher

than the average 5.8 percent of GNP for the preceding five years. It is

lower, however, than the 10 percent average for several years following the

Korean War.

56
Figure IV-3.

Real Growth in National Defense (Budget Authority)

14

12

10

I 8

E

I 6

Actual I Projected

I

1980 1981 1982 1983 1984 1985

Fiscal Years

1986 1987 1988

SOURCE: CBO calculations based on data from the Office of Management and Budget.

Figure IV-4.

National Defense Outlays as a Percentage of GNP

14

12

10

Actual Projected

1950 1955 1960 1965 1970 1975 1980 1985 1988

Fiscal Years

SOURCES: For historical data, Department of Defense; for projections, Budget of the United States

Government, Fiscal Year 1984.

57

15-966 0-83- 5
TABLE IV-2. SUMMARY OF MAJOR U.S. FORCES AND MANPOWER

(By fiscal year)

1983 1984

Active Forces (in units)

Strategic bomber aircraft 297 297

Land-based intercontinental ballistic missiles 1,043 1,034

Sea-based intercontinental ballistic missiles 568 616

Army and Marine Corps divisions 19 19

Naval fleet 434 443

Tactical air squadrons 167 172

Manpower (personnel in thousands)

Active duty end strength 2,127 2,165

Civilian end strength 1,056 1,072

SOURCE: Compiled by CBO from data supplied by the Department of

Defense.

Relative to total federal unified budget outlays, national defense

outlays from 1979 to 1983 were about 25 percent—the lowest share since

World War II. The Administration's 1984 budget proposes to increase this

share to about 31 percent by 1988—a level last reached in 1972. In the postWorld War II period, national defense as a percent of unified budget outlays

exceeded 31 percent each peacetime year from 1954 to 1972.

The growth in the defense budget, according to the Administration, is

necessary to meet the Soviet Union and Warsaw Pact threat. The Defense

Department asserts that, even after including the efforts of our Allies, the

Soviet Union and Warsaw Pact nations have both out-produced and out-spent

the United States in military capability. JY

Short term changes planned for U.S. strategic nuclear forces, tactical

air forces, and general purpose naval forces are shown in Table IV-2. Major

strategic force changes for 1984 are the retirement of nine Titan II

intercontinental ballistic missile launchers, which will be offset by the

JY Statement of the Secretary of Defense Caspar W. Weinberger before

the Senate Armed Services Committee on February 1, 1983.

58
delivery of two Trident submarines. Tactical air forces will increase by five

squadrons—three for the Navy and one each for the Marine Corps and Air

Force. For naval forces, a net increase of nine ships is planned for the

active fleet in 1984.

In the longer term, major planned increases in force structure are

designed to meet the Administration's goal of expanding Navy resources

from the current 434 active and 72 reserve ships to over 600 ships by the

early 1990s. The Air Force is also projected to expand from its present

level of approximately 41 tactical and air defense air wings to about 44 by

1988. The Administration's five-year plan for land forces includes continued

force modernization through the acquisition of heavy and light armored

vehicles as well as attack and assault-support helicopters.

The next section of this chapter discusses the Administration's 1984

appropriations request in terms of real growth in budget authority as well as

the Administration's procurement plan for major weapons. The second

section describes the revisions in the Administration's current defense plan

compared to the five-year defense plan that the Administration submitted in

February 1982. A third section compares the Administration's defense

budget with the Administration's previous five-year plan and the national

defense targets in the First Concurrent Resolution on the Budget for Fiscal

Year 1983. To illustrate the point that initial outlay effects of defense

budget authority reductions can be relatively small and that realizing the

total outlay savings from such cuts typically requires several years, the last

section briefly examines the structure of 1984 defense outlays.

REAL GROWTH IN DEFENSE SPENDING IN THE 1984 APPROPRIATION

REQUEST

The 1984 defense appropriation request submitted by the President

represents substantial real growth (measured in constant fiscal year 1984

dollars) of $25.2 billion--a 10.2 percent real increase above appropriations

enacted for 1983. In dollar terms, the largest real increases in 1984 budget

authority are for procurement ($7.7 billion), research, development, test,

and evaluation ($5.8 billion), and operations and maintenance ($5.8 billion).

Together, these categories account for over three-quarters of the real

growth in the 1984 defense budget. A significant share of the growth in all

these appropriation categories would fund strategic programs.

In percentage terms, the largest real growth rates are 196.6 percent

for the revolving funds, which triple in terms of budget authority; 24.5

percent for research, development, test, and evaluation (RDT&E)j and 22.3

percent for military construction. Defense real growth from 1983 to 1984 is

summarized by appropriation categories in Table IV-3.

59
TABLE IV-3. REAL GROWTH IN DEFENSE BUDGET BY APPROPRIATION CATEGORIES

(Budget authority and outlays by fiscal year, in billions of dollars)

1983

Enacted

Category Appropriations

Department of Defense

Military

Military personnel

Budget authority 45.5

Outlays 45.3

Retired personnel

Budget authority 16.2

Outlays 16.1

Operations & Maintenance

Budget authority 66.3

Outlays 64.6

Procurement

Budget authority 80 . 3

Outlays 55.2

RDT&E

Budget authority 22 . 8

Outlays 21.4

Military construction

Budget authority 4.5

Outlays 4 . 1

Family housing

Budget authority 2.5

Outlays 2 . 4

Revolving funds

Budget authority 0.9

Outlays 0.1

Other DoD

Budget authority -0.5

Outlays -0.5

Subtotal

Budget authority 238 . 4

Outlays 208.8

Atomic Energy Defense

Activities

Budget authority 5.7

Outlays 5.5

Defense Related Activities

Budget authority 0.4

Outlays 0 . 4

Total

Budget authority 244 . 5

Outlays 214.7

President's

Budget

Request

47.9

47.7

16.8

16.8

74.0

71.7

94.1

68.2

29.6

26.3

5.8

4.4

2.8

2.6

2.8

1.0

-0.5

-0.1

273.4

238.6

6.8

6.4

0.3

0.3

280.5

245.3

1984

Real

Budget

Billions

of

Dollars

2.1

0.6

5.8

7.7

5.8

1.1

0.2

1.9

£/

25.2

0.8

-0.1

26.0

Growth in

Authority a/

Percents b/

4.7

3.8

8.6

8.9

24.5

22.3

6.6

196.6

-2.4

10.2

13.5

-14.6

10.2

SOURCE: Compiled by CBO from data supplied by the Department of Defense, and CBO.

a. Real growth computed using CBO economic assumptions for purchases and retired pay

with the President's pay raise assumptions.

b. Individual percentage calculations are not weighted and therefore are not additive.

c. Less than $50 million.
Procurement Plans

Under the Administration's defense budget, procurement

appropriations would increase by about $7.7 billion in real terms from 1983

to 1984. Increases are proposed in the following areas: aircraft and missiles,

including strategic systems such as the MX (Peacekeeper) missile, B-l

bomber and tactical air-to-surface and surface-to-surface missiles; light

armored vehicles; readiness and sustainability items, such as spare and

repair parts and ammunition; modifications of existing equipment; and

investment in communications, electronics, vehicles, and other support

equipment. The increases within proposed procurement programs are

partially offset by several reductions, principally the proposed shipbuilding

program. Real increases in procurement plans are discussed in this

subsection; real cost growth is discussed later.

Aircraft. Table IV-4 shows planned aircraft purchases for the period

1983-1985. The budget proposes buying 44 more aircraft for 1984 than in

1983. Requested purchases of AH-64 attack helicopters would increase by

64 aircraft, although 12 fewer UH-60 assault-support helicopters and 11

fewer other aircraft would be purchased. Except for increases in AV-8B

attack aircraft, requested purchases of Navy and Marine Corps aircraft in

1984 are relatively unchanged from the levels funded for 1983. The most

significant changes in the Air Force are the projected increases for F-15,

B-1B, and C-5 aircraft, with offsetting decreases for A-10 and E-3A

aircraft.

The plan for 1985 proposes 200 more aircraft than the projected levels

in 1984. Nearly 50 percent of- the proposed increase would fund Navy and

Marine Corps aircraft purchases, primarily AV-8B and other aircraft such as

trainers and transports. In 1985 the Air Force plans to purchase more F-15,

B-1B, C-5B, and E-3A aircraft than it proposes for 1984. Also, Army orders

for AH-64 helicopters for 1985 would increase over the projected 1984 level.

Missiles. Projected purchases of all strategic and theater nuclear

missiles for 1984 would decline by 109 missiles, below the quantities funded

for 1983. As shown in Table IV-5, large net reductions in proposed Air Force

strategic and theater nuclear missile procurement are offset partially by

proposed increases in Army and Navy missile procurement. The initial

production of the Army's Pershing II missiles would begin in 1984. The

Pershing II program was scheduled to start production in 1983, but the

Congress denied production funding because of test failures and other

technical problems. The first successful test firing of Pershing II occurred

on January 21, 1983. Navy proposed purchases of missiles would increase by

56 percent over the numbers funded for 1983. Significantly increased orders

for Tomahawk would be offset somewhat by a reduction in the Trident I

61
TABLE IV-4. AIRCRAFT ACQUISITION PLANS, BY SERVICE (By fiscal

year, in units procured)

Aircraft Type 1983 198* 1985

Army

AH-64 helicopter

UH-60 helicopter

Other aircraft

Subtotal

Navy/Marine Corps

F/A-18 aircraft

F-14 aircraft

AV-8B aircraft

A-6E aircraft

EA-6B aircraft

CH-53E helicopter

SH-60B helicopter

Other aircraft

Subtotal

Air Force

F-16 aircraft

F-15 aircraft

A- 10 aircraft

B-1B aircraft

KG- 10 aircraft

E-3A aircraft

C-5B aircraft

TR-1 aircraft

Other aircraft

Subtotal

Total

48

96

23

167

84

24

21

8

6

11

27

91

272

120

39

20

7

8

2

1

5

17

219

658

112

84

12

208

84

24

32

6

6

11

21

97

281

120

4_8_

10

8

....

4

5

18

213

702

144

78

18

240

92

24

48

6

6

11

18

169

374

120

72

-_

34

8

3

10

5

36

288

902

SOURCE: Compiled by CBO from data supplied by the Department of

Defense.

62
program. Table IV-5 also shows that the proposed 1984 procurement

program for Air Force strategic and theater nuclear missiles would decline

by 267 missiles. Projected changes include the cancellation of previous

plans to buy air-launched cruise missiles and increased purchases of groundlaunched cruise missiles and MX missiles.

TABLE IV-5. STRATEGIC AND THEATER NUCLEAR MISSILE ACQUISITION PLANS, BY SERVICE (By fiscal year, in units procured)

Missile Type 1983 1984 1985

Army

Pershing II

Navy

Trident I

Tomahawk

Subtotal

Air Force

MX

Air-launched cruise missile

Ground-launched cruise missile

Harpoon

Subtotal

Total

62

51

113

330

84

4l4

527

95

52

124

176

418

104

353

353

37

120

50

207

664

SOURCE: Compiled by CBO from data supplied by the Department of

Defense.

The procurement plan for 1985 includes 246 more missiles, or a 59

percent increase over proposed orders in 1984. Projected purchases include

increases in Tomahawk and MX and the first order of 50 Harpoon missiles

for the Air Force B-52 sea-control mission.

The Administration's proposed plan for tactical missiles includes the

acquisition of four groups of missiles:

63
o Air-to-air missiles, which include Air Force and Navy versions of

Sparrow and Sidewinder, the Navy Phoenix, and the Air Force

advanced medium range air-to-air missile (AMRAAM);

o Air-to-surface missiles, which include Army and Navy purchases

of Hellfire, and Air Force and Navy versions of Maverick and

high-speed anti-radiation missiles (HARM), as well as purchases of

a new missile-launched laser-guided bomb (LLGB) for the Navy;

o Surface-to-air missiles, which include the Army Patriot, Navy

Rolling Airframe missile (RAM), and Marine Hawk as well as

purchases of Stinger for the Army, Marines, and Air Force; and

o Surface-to-surface missiles, which include Army and Marine purchases of TOW anti-tank missiles (which can also be used as airto-surface missiles) as well as Navy purchases of Harpoon and

Standard missiles.

Table IV-6 shows that the number of tactical missile purchases in 1984

are projected to increase by roughly 9,700 missiles over the numbers funded

for 1983. Proposed increases in purchases of air-to-surface missiles and

surface-to-surface missiles would be partially offset by decreases in air-toair missiles and surface-to-air missiles.

The plan proposed for 1985 includes a 21 percent increase, or about

8,100 more tactical missiles than the total plan for 1984. Increases for airto-surface, surface-to-air, and surface-to-surface missiles would be

partially offset by decreases for air-to-air missiles.

Armored Vehicles. Armored combat vehicles include tanks, fighting

vehicles, Light Armored Personnel Carriers, and ancillary Armored

Recovery Vehicles. The Administration's armored combat vehicle program

emphasizes acquisition of two "families" of vehicles (see Table IV-7):

o Heavy combat vehicles dedicated for use by Army forces in Europe

commited to NATO; and

o Light Armored Vehicles for both the Army and the Marine Corps to

support the heavy combat vehicles committed to NATO and to

strengthen the Rapid Deployment Force, primarily for deployment

in the Middle East.

The major 1984 change for heavy combat vehicles is a reduction of 135

M-l tanks from the purchases funded for 1983. Proposed quantities for the

tank's companion fighting vehicles would remain at the 1983 funded level of
TABLE IV-6. TACTICAL MISSILE ACQUISITION PLANS, BY TYPE AND

SERVICE (By fiscal year, in units procured)

Missile Type 1983 1984 1985

Air-to-Air Missiles

Navy

Air Force

Subtotal

Air-to-Surface Missiles

Army

Navy

Air Force

Subtotal

Surface-to-Air Missiles

Army

Navy/Marine Corps

Air Force

Subtotal

Surface-to-Surface Missiles

Army

Navy

Marine Corps

Subtotal

Total

1,228

3,085

4,313

3,971

172

1,029

5,172

2,543

1,771

4,314

12,000

1,372

1,000

14,372

28,171

1,335

2,705

4,040

5,351

614

2,885

8,850

2,033

1,106

108

3,247

18,000

1,520

2,200

21,720

37,857

2,549

224

2,773

6,026

2,438

6,601

15,065

3,425

1,424

108

4,957

18,000

2,140

3,028

23,168

45,963

SOURCE: Compiled by CBO from data supplied by the Department of

Defense.

600, however. The 1984 budget contains for the first time in a number of

years an Army order for 652 Light Command Post Carriers. The budget also

proposes increased quantities of Field Artillery Ammunition Support Vehicles and "off-the-shelf" Light Armored Vehicles, but reduced purchases of

Armored Personnel Carriers.

The plan for 1985 includes about 600 fewer armored vehicles than the

total requested for 1984. The proposed plan includes increases in Fighting

65
TABLE IV-7. ARMORED COMBAT VEHICLE ACQUISITION PLANS, BY

TYPE AND SERVICE (By fiscal year, in units procured)

Vehicle Type 1983 198* 1985

Heavy Combat Vehicles

Army

M-l Tanks 855 720 720

Fighting Vehicles 600 600 830

Subtotal 1,455 1,320 1,550

Light Armored Vehicles

Army

M-l 13 Armored Personnel Carriers 520 400

Light Command Post Carriers — 652 —

Field Artillery Amunition Support

Vehicles 5* 217 27*

M-88A1 Medium Recovery Vehicles 180 180 199

LAV-25 Light Armored Vehicles 36 176 257

Light Armored Recovery Vehicles — — 2*

Subtotal 790 1,625 75*

Marines

Light Armored Vehicle

Total

134

2,379

113

3,058

117

2,421

SOURCE: Compiled by CBO from data supplied by the Department of

Defense.

Vehicles and Light Armored Vehicles, but no planned purchases of Light

Command Post Carriers or Armored Personnel Carriers.

Readiness Procurement. Readiness procurement programs include the

spare and repair parts, support equipment, facilities, and munitions necessary to keep military forces ready for combat in peacetime and to sustain

their operation once combat begins. In past years, funding for readiness has

often been traded off for procurement of aircraft, tanks, and ships. Both

the current and previous Administrations are committed to raise funding

levels for readiness.

66
As shown in Table IV-8, the proposed funding level for readiness items

in 1984 would increase by about $4 billion over the level funded for 1983.

Similarly, the planned level for 1985 expenditures is about $7 billion higher

than the 1984 total. In each year, proposed funding for spare parts, support

equipment, and facilities would receive the larger share of the increase.

TABLE IV-8. PROPOSED FUNDING FOR READINESS ITEMS (By fiscal

year, in billions of dollars)

Readiness Category 1983 1984 1985

Spare Parts, Support Equipment,

and Facilities 11.5 15.2 20.2

Munitions a/ 3.3 4.0 5.9

Total 14.8 19.2 26.1

SOURCE: Compiled by CBO from data supplied by the Department of

Defense.

a. Navy ammunition was included in ordinance support equipment and

aviation support equipment in the budget documentation.

Ships. The Administration has developed an ambitious shipbuilding and

conversion program. As Table IV-9 shows, this plan calls for 145 ships to be

constructed, converted, modified, or leased between 1984 and 1988.

The budget for shipbuilding and conversion declines from $16.2 billion

in 1983 to $12.7 billion in 1984. The budget for 1984 contains a net increase

of six ships from the revised 1983 budget request (see Table IV-9). The

proposed funding difference is attributable to increases in less expensive

auxiliaries, mine warfare, and amphibious ships, as well as one attack

submarine which are offset by reductions of more costly ships in

198^—namely two nuclear carriers, one Service Life Extension Program

carrier, and one battleship.

67
TABLE IV-9. ADMINISTRATION'S NAVY SHIPBUILDING PROGRAM FOR

1984-1988 (By fiscal year, in units procured)

Planned

Ship Type

Trident Submarines

Nuclear Carrier Ships

Other Warships a/

Amphibious Ships b/

Mine Warfare and Patrol

Ships

Auxiliaries b/

Total

Funded

1983

1

2

7

1

3

3

17

1984

1

—

6

2

5

9

23

1985

1

—

10

2

4

9

26

1986

1

—

8

4

8

10

31

1987

1

—

12

5

4

10

32

1988

1

1

13

7

4

7

33

Total

1984-

1988

5

1

49

20

25

45

145

SOURCE: Compiled by CBO from data supplied by the Department of

Defense.

a. Includes Service Life Extension Program for one conventional carrier

in 1983, 1985 and 1987.

b. Includes planned reactivations and conversions.

Research and Development (R&D)

The Administration's 198* appropriations request for R&D is spread across nearly all defense elements, but is concentrated in strategic programs. Major increases are for the Trident II missile, MX missile, Air

Force Strategic Communications, and Army Ballistic Missile Defense .

68
Operations and Maintenance

The proposed real increase of $5.8 billion in 1984 for operations and

maintenance (O&M) appropriations would support higher levels of activity.

Among the military services, the Navy shows the largest gain in proposed

funds (though the smallest percent change), with a combined Navy and

Marine Corps real budget authority increase of $1.5 billion, or 6.6 percent.

Much of this increase would be applied to depot maintenance and the

support necessary to sustain a planned increase to annual ship operations of

over 50 thousand hours at sea, or 5 percent more than proposed for 1983.

The Air Force program shows real increases of almost $1.5 billion, mainly to

fund space support programs, logistics programs, and operations support for

about 80 thousand added flying hours—an increase of about 3 percent over

the plan funded for 1983. The proposed $1.4 billion, or 8.6 percent, real

increase in Army G&M appropriations primarily reflects the costs of

continuing the Army modernization program and improvements in unit and

individual training.

Military Personnel

A $2.5 billion increase to military personnel appropriations consists of

four large adjustments and numerous smaller changes. A rise in troop

strength and an increase in the length of service time of military personnel

account for $1.1 billion. Adjustments to permanent-change-of-station costs

amount to $400 million. Enacted legislation to pay unemployment

compensation to ex-military personnel results in the need for an additional

$200 million, while the Administration's request for enlistment/reenlistment

bonuses is up by $188 million.

Other Accounts

The $1 billion proposed real increase in military construction from

1983 to 1984 results, in part, from the continuation of the facilities

modernization program begun in 1981. The addition of new weapons

systems, notably MX and Trident, explains part of the increase.

During 1982, the Congress directed the Department of Defense (DoD)

to purchase from DoD's revolving funds the additional inventory associated

with the authorized expansion of forces and activity levels of the four

military services. This has resulted in a $1.9 billion real increase from 1983

to 1984. Of the $2.8 billion requested for the revolving and management

fund accounts in 1984, $2.3 billion is to replenish and expand the peacetime

inventory and $0.5 billion represents additions to the war reserve.

69
All categories of atomic energy defense accounts—namely, weapons

research, development, test, and production, weapons materials production

and waste management, naval reactor development, and other research

programs—were increased in 1984 over the levels funded for 1983 by a total

of $0.8 billion in real terms, or 13.5 percent.

CHANGES FROM THE 1983-1987 DEFENSE PLAN FOR FISCAL YEAR 1984

The Administration's fiscal year 1983 budget, submitted in February

1982, reflected its first complete analysis of defense requirements. These

requirements were embodied in a five-year defense plan covering 1983-1987.

The Congress set lower spending targets for national defense for 1983-1985

in its budget resolution for 1983 and provided lower 1983 appropriations for

defense than proposed by the President. These reductions and other

circumstances prompted the Administration to revise its five-year defense

plan this year.

This section discusses the changes in this year's defense plan relative

to the plan of a year ago. The discussion of the projected funding changes is

limited primarily to fiscal year 1984. Whenever possible, the changes to last

year's proposed forces, personnel levels, and purchases, beyond 1984 are also

discussed.

As shown in Table IV-10, the 1984 budget reflects a reallocation of

proposed funds for 1984 from procurement, pay, and military construction

(about $18.5 billion) to other activities, primarily cost growth in weapons

purchases, research and development (R&D) and spare parts purchases

(about $8.0 billion).

This reallocation of funds represents a shifting of priorities. Proposed

modernization, through investment in weapons production and facility

construction, would be slowed in favor of increased readiness and future

systems development and in response to the escalating unit cost of major

weapons.

Program Decreases

The largest reductions are for purchases, which decline by roughly

$10 billion in 1984, mainly because fewer weapons would be purchased under

the Administration's new plan.

Aircraft. As shown in Table IV-11, this year's defense program

proposes 93 fewer aircraft purchases for 1984, thereby saving about $3 bil70
TABLE IV-10. ADMINISTRATION CHANGES TO NATIONAL DEFENSE

BUDGET FOR 1984 BETWEEN FEBRUARY 1982 AND

JANUARY 1983 (Budget authority in billions of dollars)

Administration Proposal

1984 Budget (January 1983)

1983 Budget (February 1982)

Total Net Change

Decreases:

Purchases

Quantities of major weapons purchases -7.0

Other purchases -3.4

Pay raises and retired pay -6.9 a/

Construction of facilities -1.2

Subtotal, decreases -18.5

Increases

Costs of major weapons purchases 2.6

Research and development 2.1

Spare parts purchases by stock funds 2.0

Costs of military personnel 0.4

Nuclear materials costs 0.4

Other 0.5

Subtotal, increases 8.0

Total Net Change -10.5

SOURCE: Compiled by CBO from data supplied by the Department of

Defense.

a. Pay raise data adjusted to reflect annualization of 1983 pay raise.

lion in budget authority for 1984. Proposed purchases of combat aircraft for

the Navy and Air Force would be 44 and 17 fewer in 1984, respectively. Air

Force procurement planning data indicate that 266 aircraft should be

procured in 1984 to sustain the 41 tactical and air defense air wings now

planned for 1984. Because these reductions limit proposed procurement to

only 168 fighter and attack aircraft in 1984, the Defense Department does

not propose procuring enough aircraft to sustain its existing Air Force

71
tactical and air defense forces, and therefore would not be able to begin its

proposed increase in the number of air wings. Navy and Air Force aircraft

planned procurement would also be smaller in 1985. Army AH-64 helicopter

procurement would increase in both 1984 and 1985.

TABLE IV-11. CHANGES IN ADMINISTRATION PLANS FOR AIRCRAFT

PROCUREMENT BETWEEN FEBRUARY 1982 AND

JANUARY 1983 (By fiscal year, in units procured)

Aircraft Type 1984 1985

Combat Aircraft

Army

AH-64 16 19

Navy

F/A-18

F-14

Other

Air Force

B-l

F-15

F-5

Other Aircraft

Total

-12

-6

-26

--

-12

-5

-48

-93

-16

-6

-10

-2

-24

—

1

-38

SOURCE: Compiled by CBO from data supplied by the Department of

Defense.

Missiles. Reduced procurement of missiles would save roughly $2 billion in budget authority for 198*. As shown in Table IV-12, the MX, the

Trident I, Tomahawk, and air launched cruise missile—four of the six

strategic missile systems being procured—would be reduced in both 1984 and

1985. This year's plan proposes buying nearly 8,000 fewer tactical missiles

in 198* compared to last year. Many systems would be reduced, but the

largest planned decreases are for Sparrow, Maverick, and Stinger. The

72
Administration's new plan for the Air Force proposes nearly 4,000 fewer

missile purchases for 1985, mainly Sparrows, Mavericks, and Stingers. These

reductions would be offset by proposed increases in purchases of Navy

tactical missiles, such as the Missile Launched Laser Guided Bomb and TOW.

TABLE IV-12. CHANGES IN ADMINISTRATION PLANS FOR MISSILE

PROCUREMENT BETWEEN FEBRUARY 1982 AND

JANUARY 1983 (By fiscal year, in units procured)

Missile Type 1984 1985

Strategic

Navy

Trident I -20 -30

Tomahawk -188 5

Air Force

MX (Peacekeeper) -26 -19

Air launched cruise missile (ALCM) -440 -480

Subtotal, Strategic -674 -524

Tactical

Army -2,791 -620

Navy/Marine Corps -1,969 3,527

Air Force -3,045 -3,828

Subtotal, Tactical -7,805 -921

Total -8,479 -1,445

SOURCE: Compiled by CBO from data supplied by the Department of

Defense.

Ships. The current shipbuilding plan for 1984 proposes four fewer ships

for new construction than were proposed in last year's plan. This would save

about $1 billion in budget authority in 1984. For 1984-1987, the latest

shipbuilding plan cuts 21 from the number of ships to be built. Table IV-13

shows this reduction by category of ship.

Last year's shipbuilding plan was presented as the level of construction

needed to meet the goal of a modern navy of 600-plus ships with 15 carrier

73

15-966 0-83- 6
TABLE IV-13. ADMINISTRATION CHANGES FOR NEW CONSTRUCTION

IN NAVY SHIPBUILDING PLAN, 1984-1987, BETWEEN

FEBRUARY 1982 AND 3ANUARY 1983 (In units procured)

Ship Type 198* 1984-1987

Cruisers -- -3

Destroyers ~ -3

Frigates -2 -10

Attack Submarines — 1

Mine Warfare — 1

Support -2 -7

Total -* -21

SOURCE: Compiled by CBO from data supplied by the Department of

Defense.

battle groups by 1990. This goal may still be achievable with the revised

shipbuilding plan. The pace of modernization will be much slower, however,

particularly for major warships.

Tanks. Proposed purchases of M-l tanks have been reduced by 360

tanks in both 198* and 1985. This reduction would save about $900 million

in 198*. Because a heavy division has approximately 360 tanks, the impact

of this reduction could be to delay modernization of two heavy divisions.

Other Purchases. The Administration's current plan proposes reduced

appropriations of about $1 billion from last year for planned equipment

purchases including ammunition and tracked vehicles. Additional reductions

in planned purchases, amounting to at least $2 billion, cannot be identified

from available budget documents.

Pay Reductions. The Administration's previous national defense plan

proposed pay increases for 198* of about 5 percent for civilians and 7.6

percent for military personnel. The Administration now proposes no pay

raises for 198*, which, in combination with the cap on 1983 pay raises,

would save about $6 billion. In addition, the Administration's current budget

reduces pay for military retirees to reflect enacted legislation that reduced

1983 cost-of-living adjustments (COLAs) for retirees under age 62 and the

Administration's proposal to eliminate the potential COLA for 198*.

Construction. Future military construction programs have been reduced by about $1.2 billion from the $7.0 billion projected by the Adminis7*
tration in February 1982. This decrease represents a scaling down of plans

for modernization of troop facilities.

Program Increases

Cost Growth in Weapons Purchases. A significant change in the 1984

budget is an increase in the price of major weapons systems. CBOfs

preliminary analysis of 60 major systems in the Administration's budget

indicates that they have increased by a net $2.6 billion in 1984. These

increases reflect higher estimates of costs per unit in real terms, after

adjustments for inflation.

Defense purchases have experienced significant real cost growth in

recent years. This has occurred for a variety of reasons, including program

changes (such as new specifications or revised production schedules) and the

underestimation of real resources required, such as manufacturing hours,

material, and labor costs. After recognizing the cost-growth problem in

major weapons systems, the Administration instituted a number of acquisition initiatives to restrain it. Sufficient data is not available to evaluate

fully the success of these initiatives. The data presented below, however,

shows that real cost growth has continued for many major weapons systems

during the second year of this Administration.

Table IV-14 provides cost-growth data on 60 major weapons systems by

comparing 1984 unit costs as initially projected by the Administration in

February 1982 against estimates contained in the current 1984 budget. The

table shows a net cost growth of $2.6 billion since last year, compared with

an increase of $2.7 billion for 48 systems in CBO!s analysis of the 1983

budget.

One reason for this growth in unit costs is that the Administration's

procurement strategy for 1984 involves decreases in planned order levels for

many systems. The planned purchases for 22 of the 60 reviewed major

systems are lower than planned a year ago. As shown in Table IV-15, all of

these systems experienced unit price increases. Table IV-15 also shows four

other systems, which would be purchased in increasing quantities and would

experience the expected real declines in their procurement unit

costs. Historically, reduced levels of annual purchases have been associated with increased costs because production levels become less economical

and because the shift of production from earlier to later years raised costs

as a result of inflation. The changes made to the 1984 budget since

February 1982 appear inconsistent with the Administration's announced goal

of cost saving through more economical production rates. Rather than

cancel an entire weapons system, reductions in acquisition quantities have

historically been used to reduce procurement cost in the current budget

75
TABLE IV-14. MAJOR WEAPONS SYSTEMS COST CHANGES IN THE 1984 PROGRAM

BETWEEN FEBRUARY 1982 AND JANUARY 1983

(In millions of dollars and percents)

Procurement

Unit Cost

Weapon System February 1982

Laser Maverick

Missile, Navy

MX Missile

SH-60B Helicopter

Tomahawk Missile

C-5 Aircraft

Sparrow Missile, Navy

TH-57 Helicopter

Harm Missile, Navy

IR Maverick Missile,

Air Force

Patriot Missile

GLCM Missile

EA-6B Aircraft

Sparrow Missile,

Air Force

Trident Submarine

Phoenix Missile

Stinger Missile,

Army

Light Armored Vehicle,

Marine Corps

Cost Effect of 18 Other

Cost Effect of 25 Other

0.14

57.38

16.45

1.95

205.00

0.16

1.10

0.62

0.10

1.45

3.86

51.50

0.14

1,533.80

1.00

0.08

0.60

Systems Showing

Systems Showing

Procurement

Unit Cost Percent a/

January 1983 Change

0.27

102.59

26.14

2.88

286.53

0.22

1.50

0.84

0.13

1.89

5.03

66.60

0.18

1,848.00

1.19

0.09

0.69

Unit Price Increases

Unit Price Decreases

95

79

59

47

40

40

37

35

32

30

30

29

26

20

20

16

16

Total Impact of 60 Systems

Cost Impact

on

1984 Budget a/

22

1,221

203

115

326

44

8

50

84

229

140

91

38

314

57

20

11

674

-1,098

2,554

SOURCE: Compiled by CBO from data supplied by the Department of Defense.

a. Percent change and cost impact were calculated prior to rounding procurement

unit costs.
TABLE IV-15. CHANGE IN QUANTITY AND PROCUREMENT UNIT COST

OF SELECTED WEAPONS IN THE ADMINISTRATION'S

1984 ACQUISITION PLANS BETWEEN FEBRUARY 1982

AND JANUARY 1983 (In percents)

Quantity

Weapon System Change

Decreasing Quantity and Increasing Cost

Patriot missile

Stinger missile, Army

Hellfire missile

M-l tank

A-6E aircraft

F-14 aircraft

F/A-18

SH-60B helicopter

Trident I missile

Tomahawk missile

Sparrow missile

Sidewinder missile

Phoenix missile

HARM missile, Navy

Laser Maverick missile, Navy

Light Armored Vehicle, Marine Corps

Captor torpedo system

F- 15 aircraft

MX missile

Sparrow missile, Air Force

Maverick missile, Air Force

C-5 aircraft

Increasing Quantity and Decreasing Cost

AH-64 helicopter

AV-8B aircraft

Fighting vehicle

T-34C aircraft

-21

-54

-14

-33

-25

-20

-13

-67

-28

-60

-43

-22

-19

-8

-53

-20

-50

-20

-49

-52

-43

-60

17

7

8

36

Procurement

Unit

Cost

Change

30

16

9

10

6

4

1

59

14

47

40

14

20

35

95

16

15

6

79

26

32

40

-12

-6

-4

-6

SOURCE: Compiled by CBO from data supplied by the Department of

Defense.

77
year. The data in Table IV-15 suggest that this technique may have been

used for some of these weapons.

The most recent DoD study indicates that real cost growth between

1975 and 1980 in major weapons systems alone has averaged 3.5 percent per

year. 2/ If the Administrators attempts to curb this cost growth fail and

this trend continues, the Administration's estimates for major weapons

systems procurement from 1984 to 1988 would have to be increased by a

total of about $69 billion, or more quantities would have to be cut in future

years which would result in further increases in procurement unit costs.

Research and Development. The current R&D program for 198* shows

an increase of $2.1 billion over the program presented last year. Air Force

strategic programs constitute $1.5 billion of this increase. Included is about

$730 million more for an MX missile closely spaced basing (CSB) system,

compared with the less expensive interim basing plan of February 1982. The

balance of the increase is devoted to tactical programs of the Navy and the

Air Force.

Spare Parts Purchases. Since last year's budget submission, the

Administration plans to increase the peacetime inventory of spare parts.

This requires a funding increase for defense stock funds of $2.0 billion

compared to Administration estimates of a year ago. The Air Force stock

funds would receive $1.6 billion of this amount, the largest share of the

proposed increase, to support the weapons scheduled for delivery in 198*.

Military Personnel. Military personnel appropriations for 198* would

be $*00 million larger in the latest budget request than projected a year

earlier. Of this amount, $200 million would fund estimated payments of

unemployment compensation to persons leaving military service. The

remaining $200 million would fund higher estimates of costs for moving

expenses and other items.

Nuclear Materials. All categories of the atomic energy defense

account—namely weapons research; development, test, and production;

weapons materials production and waste management; naval reactor development; and other research programs—were increased over the previously

proposed 198* levels. The total increase is $*00 million.

2. Milton A. Margolis, "Improving Cost Estimating in the Department of

Defense," Concepts, vol. *, no. 2 (Spring 1981), p. 8 (data are derived

from DoD Selected Acquisition Reports); and Stephen Gross, "Program

Cost Growth in the Department of Defense as of December 31, 1980,"

(paper prepared by the Air Force Data Services Center, undated).

78
CHANGES FROM CURRENT POLICIES

Figure IV-5 shows that the Administration's 1984 defense budget can

be interpreted as a reduction or an increase, depending on what measure is

used as current policy. The latest budget is a reduction from the

Administration's 1982 projection for 1984, but an increase over the 1984

targets in the First Concurrent Resolution on the Budget for Fiscal Year

1983. 3/ This section focuses on changes when measured against previous

Administration and Congressional plans.

Figure IV-5.

Comparison of Administration Defense Program and

Current Policies (Budget Authority)

450

400

1 350

0

5 300

250

OMB Current Services

Administration

Program

I I I I I

1983 1984 1985 1986 1987 1988

Fiscal Years

SOURCES: Budget of the United States Government, Fiscal Year 1984; and Congressional Budget Office.

3. While the CBO baseline projections assume the defense spending levels

provided in the 1983 Congressional budget resolution, the OMB current

services projections assume the levels of defense spending requested

by the Administration in February 1982.

79
The Administration has assessed its new budget plan against its

current services estimates that include the funding request presented last

year for the Department of Defense-Military. As shown in Table IV-16, the

Administration's national defense budget would reduce 198* budget

authority by $11 billion and outlays by $8 billion; over five years the

reductions would total $55 billion in budget authority and $47 billion in

outlays.

TABLE IV-16. THE ADMINISTRATION'S NATIONAL DEFENSE BUDGET

FOR 1984-1988 COMPARED WITH ITS CURRENT

SERVICES ESTIMATES (By fiscal year, in billions of dollars)

1984 1985 1986 1987 1988 Total

Administration's Current

Services Estimates

Budget Authority 291.8 339.4 375.4 408.7 445.1 1,860.4

Outlays 253.7 293.4 332.2 364.7 396.6 1,640.6

Administration's Budget

Budget Authority 280.5 330.0 364.8 397.0 432.7 1,805.0

Outlays 245.3 285.3 323.0 354.3 385.6 1,593.5

Savings

Budget Authority

Outlays

11.3

8.4

9.4

8.1

10.6

9.2

11.7

10.4

12.4

11.0

55.4

47.1

SOURCE: Compiled by CBO from data supplied by the Office of Management and Budget.

In general, the Administration intends to achieve these savings without

jeopardizing previous initiatives for new force modernization and improved

readiness. Net savings are to be accomplished through such means as a pay

freeze in 1984, lower inflation estimates (including lower fuel prices), and

rescheduling of selected programs. For example, in 1984 the $11 billion in

savings can be traced to three sources. First, the Administration's plan of a

year ago anticipated that military pay would be increased by 8 percent in

1983 and 7.6 percent in 1984; the plan expected civilian pay raises of about

5 percent in each year. However, the actual 1983 pay raise was 4 percent

for all federal employees and the Administration now proposes no pay raise

80
for 1984, saving a combined $6 billion from last year's budget. Second, the

reduction of the 1983 COLAs for retirees under 62 in the Omnibus

Reconciliation Act of 1982, coupled with the Administration's proposal to

eliminate cost-of-living adjustments for military retirees in 1984, would

save about $1 billion from last year's budget. Finally, the Administration's

economic forecast calls for less inflation than it expected a year ago,

thereby saving about $4 billion in budget authority.

From the perspective of the Congress, however, the Administration's

current services estimates may not be the appropriate base from which to

assess the Administration's 1984 budget request. This different view could

arise because the current services estimates include a restoration of the

budgetary reductions implicit in the national defense targets set by the

Congress in the first budget resolution for fiscal year 1983. In that budget

resolution, the Congress reduced the Administration's defense budget

authority request by $13 billion and $16 billion for 1984 and 1985,

respectively—the final two years covered by the 1983 resolution.

CBO's baseline projections for national defense are consistent with the

defense targets in the first budget resolution for 1983, which covered only

the years 1983-1985. CBO estimated spending beyond 1985 by lowering

Administration spending targets by about 2 percentage points. That

reduction was the average real growth cut imposed by the budget resolution

relative to Administration spending plans for the 1983-1985 period. When

the Administration's budget for national defense, as reestimated by CBO is

compared with CBO's baseline projections, the Administration's program

represents an increase in budget authority of $2 billion in 1984 and a total of

$81 billion for the 1984-1988 period, as shown in Table IV-17. (CBO's

reestimates are discussed below.)

Thus, when compared to CBO's baseline for national defense, the

Administration's budget request appears to have restored $2 billion of the

$13 billion targeted for reduction by the Congress for 1984. The remaining

$11 billion of funding reductions result from repricing the pay raise, lower

COLAs, and lower inflation assumptions. In other words, despite the small

difference in 1984, the Administration's plan includes almost none of the

program reductions anticipated in the Congressional resolution and would

exceed the resolution even more if it were adjusted for the resolution's pay

and inflation assumptions. The program changes the Administration did

make to its previous plan for 1984 take the form of significant reallocation

of funds among programs, as discussed in the preceding section.

Finally, Table IV-18 shows the difference between the CBO and the

Administration estimates of the outlays from the Administration's 1984

program. These estimates assume Congressional approval of the $1.6 billion

81
TABLE IV-17. THE ADMINISTRATION'S NATIONAL DEFENSE BUDGET

AS REESTIMATED BY CBO FOR 1984-1988, COMPARED

WITH CBO!S BASELINE PROJECTIONS (By fiscal year, in

billions of dollars)

1984 1985 1986 1987 1988 Total

CBO Baseline

Budget Authority

Outlays

Administration's Budget

as Reestimated by CBO

Budget Authority

Outlays

Increases

Budget Authority

Outlays

278.3 322.4 350.0 373.0 398.0 1,721.7

242.1 277.7 310.0 333.0 358.0 1,520.8

280.2 329.6 364.3 396.4 432.1 1,802.6

244.7 282.3 321.6 357.5 389.8 1,595.9

1.9

2.6

7.2

4.6

14.3

11.6

23.4

24.5

34.1

31.8

80.9

75.1

SOURCE: Congressional Budget Office, Baseline Budget Projections for

Fiscal Years 1984-1988 (February 1983), pp. 42-46; and data

supplied by the Department of Defense.

supplemental for 1983 and the proposed rescission of $650 million of

previously appropriated budget authority, both of which are to be submitted

later.

On the basis of its analysis of historical spending patterns, CBO

estimates that outlays would be somewhat lower through 1986, but about $2

billion higher over the six-year period than the Administration estimates.

Budget authority would be the same, except for small differences in military

retirement pay caused, in part, by differences in economic assumptions.

The estimating differences are relatively small, no more than 1.1 percent in

any one year, and represent a narrowing of differences from a year ago.

The CBO and Administration estimates have tended to converge over time

because the Administration appears to have raised its estimates and CBO

has lowered its own.

82
TABLE IV-18. CBO REESTIMATES OF THE ADMINISTRATION'S

DEFENSE BUDGET IN OUTLAYS (By fiscal year, in billions

of dollars)

Total

Category 1983 198* 1985 1986 1987 1988 1983-1988

Administration's

Budget 214.8

CBO Reestimates

Economic

Technical

Procurement

Operations

All Other,

Net

Subtotal

Total Reestimates

a/

-0.1

0.2

-0.7

-0.5

-0.5

245.3

a/

-1.7

1.7

-0.6

-0.6

-0.6

285.3

a/

-3.4

0.4

0.1

-2.9

-3.0

323.0

-0.1

-1.8

0.4

0.1

-1.4

-1.5

354.3

-0.2

1.9

0.7

0.9

3.5

3.3

385.6

-0.3

3.5

0.7

0.3

4.5

4.2

1,808.3

-0.6

-1.7

4.1

0.1

2.5

1.8

CBO Reestimate

of Administration's

Budget 214.2244.7.282. 3 321.6 357.5 389.8 1,810.1

SOURCE: Budget of the United States Government, Fiscal Year 1984; and

Congressional Budget Office.

a. Less than $50 million.

POTENTIAL REDUCTIONS

Much of the current debate about the Administration's defense budget

request is motivated by efforts to reduce the 1984 deficit. It is important

to understand that funds for some defense programs are appropriated in one

year, but are spent over a number of years. Thus, a decision to cancel some

investment programs in the 1984 budget would produce only a small fraction

of outlay savings in 1984 compared with the total amount of funds

83
requested. The following breakdown of the source of defense outlays in the

1984 budget helps to illustrate this problem.

o 35 percent ($85 billion) of national defense outlays for 1984 result

from budget authority provided in 1983 (including proposed supplementals) and earlier years.

o 37 percent ($90 billion) of 1984 outlays relate to proposed 1984

budget authority to pay the active duty military and civilian

defense personnel, plus pensions for retired personnel.

o 14 percent ($35 billion) of 1984 outlays are for operating and

support costs, including training, logistics, and various personnel

support activities that sustain current force readiness.

o 14 percent ($35 billion) of 1984 outlays stem from 1984 budget

authority for modernization through new weapons procurement,

research and development, and military construction.

Reducing the $85 billion of 1984 outlays from prior-year budget

authority would require cancellation, delay, or termination of programs

already approved, often already under contract, and, in some cases, partially

manufactured. Substantial financial penalties could result if the government canceled orders for partially built weapons or if the rate of

production was substantially slowed. The preponderance of programs in this

category represent fully funded orders for major weapons systems and

construction that expend appropriations over several years. These characteristics mean that 1984 outlay savings would be only a small portion of the

ultimate outlay reductions from cutting such programs.

Similar problems affect other categories. For example, if none of the

$94.1 billion budget authority requested for weapons systems procurement

was appropriated in 1984, outlays in that year would decline by less than

$13 billion, because so much of the budget authority would be spent after

1984 when most production would occur. Thus, to achieve a high proportion

of 1984 outlay savings from the Administration's 1984 request would require

cuts other than those proposed for investments to improve future

modernization. Immediate effects could be obtained by trimming purchases

with relatively short order-to-delivery times, such as fuel, spare parts, and

depot maintenance, all of which would affect current readiness, or by

cutting personnel levels, which would reduce available forces.

Under the Administration's plan, the share of outlays from prior years1

funding would rise steadily from 34 percent in 1983 to 43 percent in 1988

(see Figure IV-6). Thus, by currently approving programs with a larger

84
Figure IV-6.

Composition of National Defense Outlays

1983 1984 1985 1986

Fiscal Years

1987 1988

SOURCE: Congressional Budget Office.

a

 Outlays from prior years' budget authority.

modernization component, the Congress risks an out-year dilemma characterized by intensified competition for resources between modernization and

readiness needs. If future defense budgets fall short of the real growth

targets assumed here, the portion of total outlays required to finance

previous years1 programs would increase. This shift would further limit the

Congress's flexibility to control defense outlays. It is not necessarily

undesirable that larger shares of total outlays result from prior years1

funding; what is important is that future outlay ceilings conform to

Congressional program priorities and balance between readiness,

modernization, and force growth.
In order to illustrate some of the choices that the Congress may have

if it wishes to reduce the 1984 defense budget, Table IV-19 shows some

options assuming fixed growth rates and specific program adjustments.

While these options illustrate the outlay impact of various approaches to

reducing the defense budget, they do not address a more difficult question

that the Congress faces: which specific programs and systems are to sustain

the reduced funding?

One set of options provides a fixed real growth rate for budget

authority and usually assumes reductions would be made proportionally

across defense purchases. These options establish a broad statement of

defense funding priority relative to other government functions without

providing much information concerning relative program emphasis within

the defense budget. Table IV-19 shows the savings relative to the

President's budget achieved by limiting real budget authority growth to 5

and 3 percent.

A second set of options could include a more deliberate approach to

program trade-offs and might involve substituting lower levels of real

growth for selected defense budget accounts. The Administration's budget

provides substantial real growth in most accounts and, in this sense,

emphasizes both readiness and modernization. CBO's baseline contains a

projection showing that real increases through 1988 in these accounts follow

from Congressional action on the 1983 budget, but to a lesser extent than in

the Administration's request. For example, CBO projects the need for 4

percent real growth by 1988 in military personnel and operations and

maintenance (O&M) to keep unit readiness at the levels funded in

1983. 4/ The President's budget shows about 27 percent real growth in these

accounts by 1988, with the corresponding increase in readiness. If one

judges readiness to be adequately funded in 1983, an option could contain a

modernization emphasis simply by keeping the President's program in all

areas except military personnel and O&M; such an option would save $107

billion in budget authority over the 1984-1988 period.

Similarly, CBO projects continued real growth (averaging about 4.5

percent annually for 1984-1988) in the procurement accounts consistent with

appropriations for strategic and tactical force modernization in 1983 .5/.

4. See Congressional Budget Office, Baseline Budget Projections for

Fiscal Years 1984-1988 (February 1983), p. 105 for a list of the force

levels supported by the military personnel and O&M projection.

5. See CBO, Baseline Budget Projections for Fiscal Years 1984-1988, p.

106 for a list of the investment programs funded by the CBO

projections.

86
TABLE IV-19. COMPARISON OF THE ADMINISTRATION'S DEFENSE

BUDGET WITH ALTERNATIVE BUDGET ASSUMPTIONS (By

fiscal year, in billions of dollars)

Spending Level

Administration's Request

Budget Authority

Outlays

1984

281

245

1985

330

285

1986

365

323

1987 1988

397

354

433

386

Cumulative

Five-Year

Savings

Savings Under Alternative Assumptions

5 Percent Real Growth

Budget Authority

Outlays

3 Percent Real Growth

Budget Authority

Outlays

Slower Readiness Growth

Budget Authority

Outlays

Slower Modernization Growth

Budget Authority

Outlays

14

5

19

7

8

7

2

1

31

17

42

23

16

16

16

6

33

25

52

36

23

21

22

10

28

23

55

40

29

22

27

12

23

22

60

47

32

25

28

16

129

92

228

153

107

91

94

45

SOURCE: CBO and data supplied by the Department of Defense.

87
The Administration proposes substantially more funding for procurementaveraging 10 percent real growth per year for 1984-1988. This increased

funding arises from changes in current programs and the out-year

procurement of weapon systems now in the earliest stage of development.

If one judges that continuation of current programs at current funding levels

is adequate for the next five years, an option with the Administration's

readiness initiatives and CBOfs baseline procurement projection might

provide the desired results in terms of savings and program balance.

Readiness emphasis would save $94 billion in budget authority for 1984-

1988.

All options discussed above entail rough approximations and much less

precision than is ultimately required in making specific funding decisions.

More detail and supporting analysis can be found in Chapter II of the CBO

report, Reducing the Deficit: Spending and Revenue Options (February

1983).

88
CHAPTER V. THE ADMINISTRATION'S DOMESTIC BUDGET

With significant increases proposed in national defense outlays, the

burden of spending restraint in the Administration's budget falls on domestic

programs. As estimated by CBO, total nondefense spending in fiscal year

1984, on the unified budget, is projected to reach $596 billion. This

represents an increase of just 1.5 percent above the 1983 estimate,

compared with the 14 percent nominal growth in outlays projected for

national defense. J7 Excluding net interest, 1984 nondefense outlays would

total $500 billion, the same as currently estimated for 1983. Because an

increase of 4.7 percent would be required to keep pace with inflation, the

Administration's 1984 budget implies a reduction in real nondefense spending

(excluding net interest) of close to 5 percent below the 1983 level. This

compares with 9-10 percent real growth in outlays for national defense for

1984 proposed by the Administration.

The 1984 budget continues the trends of the past few years. The rate

of increase in domestic spending has been significantly slowed by decisions

of the 97th Congress, through the reconciliation process, appropriations

restraint, and other legislative actions. These actions have reduced

nondefense outlays (excluding interest savings) by about $60 billion a year

below the level that would have resulted from maintaining 1981 spending

policies. Reductions of over $30 billion a year have been made in

entitlement programs, including cuts in farm price supports, Medicare,

Social Security, unemployment compensation, and the nutrition and income

assistance programs. Discretionary spending has also been reduced, by

about $26 billion a year, below the previous baseline levels. Consequently,

nondefense spending (excluding net interest), which grew at an average rate

of 13.8 percent per year from 1970 to 1981, will increase at a rate of only

5.1 percent per year from 1981 through 1988, under the Administration's

budget plan. In contrast, defense outlays grew at an annual rate of only 6.7

percent from 1970 to 1981, but will grow by over 15 percent per year from

1981 to 1984, and by over 12 percent annually from 1984 to 1988, under the

1. The Administration estimates that off-budget spending will decline

from $17 billion in 1983 to $14 billion in 1984. Thus, aggregate

domestic spending, both on and off budget, would grow by only $6

billion, or 1 percent, from 1983 to 1984. The Administration projects

off-budget outlays to decline to $9 billion by 1988.

89

15-966 0-83- 7
President's plan. As a result, nondefense spending (excluding net interest),

which accounted for over 67 percent of unified budget outlays in 1980,

would drop to 59 percent in 1984, and to 54 percent in 1988.

The spending reductions proposed by the Administration span all the

major categories of domestic spending--though some individual programs in

each category are held even or increased in real terms. The largest cuts

over the 1984-1988 period are in outlays for entitlements and other

mandatory activities, which are reduced below the CBO baseline by $9

billion in 1984 and by $91 billion over the five-year period (see Table V-l).

Reductions are also proposed for discretionary programs, totaling $5 billion

in outlays in 1984 and $61 billion from 1984 through 1988. The budget also

includes increases in offsetting receipts, which would reduce net spending by

$2 billion in 1984 and by $25 billion over the five-year period. CBO

estimates that savings in net interest costs resulting from the program

changes and reduced deficits would total $30 billion from 1984 to 1988. In

total, CBO estimates the Administration's domestic spending proposals

would reduce the baseline deficit by $15 billion in 1984 and by $206 billion

from 1984 to 1988.

The results of these reductions on the major components of the budget

are shown in Table V-2. Under the Administration's plan, the fastest rising

category of domestic expenditures would be outlays for Medicare and

Medicaid, which would increase at a rate of almost 12 percent per year,

growing from 2.4 percent of GNP in 1983 to 2.8 percent in 1988. These

programs would account for 42 percent of the $136 billion increase in

domestic spending from 1983 to 1988 under the President's budget

proposals--despite the fact that the Administration proposals are estimated

to reduce Medicare and Medicaid spending by $9 billion in 1988 and by more

than $29 billion from 1984 through 1988. Social Security expenditures would

rise at a much slower rate, about 6.4 percent per year--compared with

projected increases under current law of 6.7 percent annually. Thus, the

budget plan provides for a relatively small change in Social Security

spending--about $5 billion in 1988 and $22 billion from 1984 through 1988,

about a 2 percent reduction in outlays each year relative to the CBO

baseline. Even with these savings, Social Security outlays would increase by

$60 billion from 1983 to 1988, accounting for 44 percent of the growth in

domestic spending. The outlay increases for Social Security, Medicare, and

Medicaid combined, from 1983 to 1988, total $118 billion and represent 86

percent of the increase in domestic spending in that five-year period. Even

with such large growth in dollar terms, outlays for these programs would

remain unchanged as a percentage of GNP, at 7.5 percent.

The other major growth category is net interest, which would grow

from $87 billion in 1983 to $116 billion in 1988, an increase of about 6

90
TABLE V-l. CBO ESTIMATE OF DOMESTIC SPENDING REDUCTIONS

IN THE ADMINISTRATION'S 1984 BUDGET PLAN (By fiscal

year, in billions of dollars)

Cumulative

Five-Year

1985 1986 1987 1988 Changes

CBO Baseline Outlays -

Domestic Programs

Proposed Changes

Entitlements and Other

Mandatory Spending

Social Security

Medicare and Medicaid

Other entitlements and

mandatory spending

Nondefense discretionary

spending

Net interest

Offsetting receipts

Total Changes

President's Budget as

Estimated by CBO

611 650 690 742 793

-4

-2

-3

-5

*

-2

-15

-4

-4

-7

-7

-1

-4

-27

-4

-6

-11

-5

-5

-39

-5

-8

-17

-10

-6

-5

-9

-9 -10 -11

-21

-15

-8

-55 -69

-22

-29

-40

-61

-30

-25

-206

596 623 651 687 723

* Less than $500 million.

percent per year. CBO estimates that, under the larger baseline deficits

and without the policy changes implicit in the Administration's budget, net

interest costs would grow an average of 8.5 percent annually, to $131 billion

by 1988. Thus, the savings in other areas of the budget are projected to

reduce net interest costs by $15 billion in 1988, and by a total of $30 billion

from 1984 through 1988. As a result, net interest as a percentage of GNP

would decline from 2.7 percent in 1983 to 2.4 percent in 1988.

91
TABLE V-2. THE ADMINISTRATION'S DOMESTIC BUDGET AS

ESTIMATED BY CBO (By fiscal year)

1983 1984 1985 1986

Outlays in Billions of

Entitlements and Other

Mandatory Spending

Social Security benefits

Medicare and Medicaid

Other entitlements and

mandatory spending

Nondef ense Discretionary

Spending

Net Interest

Offsetting Receipts

Total

164

76

145

145

87

-31

587

174

84

128

147

96

-33

596

185

94

124

152

105

-38

623

Outlays as a

Entitlements and Other

Mandatory Spending

Social Security benefits

Medicare and Medicaid

Other entitlements and

mandatory spending

Nondefense Discretionary

Spending

Net Interest

Offsetting Receipts

Total

5.1

2.4

4.5

4.5

2.7

-1.0

18.4

5.0

2.4

3.7

4.2

2.7

-1.0

17.0

4.8

2.5

3.2

4.0

2.7

-1.0

16.3

197

105

128

156

110

-44

651

Percent

4.8

2.5

3.1

3.8

2.7

-1.1

15.7

1987

Dollars

210

118

130

160

114

-46

687

of GNP

4.7

2.7

2.9

3.6

2.6

-1.0

15.4

1988

224

133

135

163

116

-48

723

4.7

2.8

2.8

3.4

2.4

-1.0

15.1

92
Three other components of the budget grow more slowly or decline

under the President's proposals. Nondefense discretionary spending would

rise from $145 billion in 1983 to $163 billion in 1988, an average of 2.4

percent per year. Almost $6 billion of this increase is attributable to

highway spending resulting from the recently enacted Surface

Transportation Assistance Act of 1982 (Public Law 97-424). All other

discretionary spending is projected to increase by 8.5 percent, in total, from

1983 to 1988, an annual rate of 1.6 percent. Federal pay raises and

increases in retirement contributions account for most of this remaining

increase, and other spending remains virtually constant in the aggregate for

the five-year period. About $61 billion, or almost 30 percent of the savings

in the President's budget, relative to the baseline projections, fall in this

category—and 1988 outlays would be about 11 percent below the baseline

level. Consequently, nondefense discretionary spending would fall from 4.5

percent of GNP in 1983 to 3.4 percent in 1988.

Spending for entitlements and mandatory programs, other than Social

Security, Medicare, and Medicaid, will decline, under the Administration's

plan, from $145 billion in 1983 to $135 billion in 1988, dropping from 4.5

percent of GNP to 2.8 percent. A large part of this reduction is attributable

to projected changes in the economic environment. Gradually declining

unemployment is expected to result in a $7 billion drop in outlays for

unemployment compensation, and diminishing crop surpluses are projected

to make possible a $6.5 billion reduction in farm price support payments. In

addition, the President is proposing legislation that would save about $10

billion in 1988, and a total of $40 billion over the five-year period. The

largest legislative savings would be for farm price supports, federal

employee retirement and disability programs, and food stamps.

Growth in offsetting receipts will also result in declining net outlays

under the Administration plan. Normal growth, under current law, will

produce a $9 billion increase in receipts by 1988. In addition, the budget

plan includes a number of legislative initiatives that would add another $8

billion in receipts in 1988, and a total of $25 billion between 1984 and 1988.

Of this total, about $10 billion reflects increased intragovernmental

payments for the government's share of employee retirement contributions,

which are offset in discretionary spending and do not represent net savings.

In sum, offsetting receipts are projected to rise by over $17 billion from

1983 to 1988.

Each of these major spending categories will be discussed in more

detail in the remainder of the chapter.

93
ENTITLEMENTS AND OTHER MANDATORY SPENDING

Entitlement programs provide benefits to persons, businesses, or units

of government that meet eligibility requirements established in law. Social

Security is the largest single entitlement program with outlays constituting

about 20 percent of the entire federal budget. Other major entitlement

programs include civil service retirement and disability, railroad retirement,

and veterans1 compensation; Medicare and Medicaid; farm price supports;

Aid to Families with Dependent Children (AFDC), Supplemental Security

Income (SSI), food stamps, and veterans1 pensions; unemployment insurance;

guaranteed student loans and veterans1 readjustment benefits. Military

retirement, also an entitlement, is not included in this section but is covered

in Chapter IV on the defense budget.

Table V-3 shows outlays for entitlements and other mandatory

spending programs proposed in the Administration's budget. Proposed

spending in this category increases by $107.2 billion between 1983 and 1988.

The fastest growing programs are Medicare, Medicaid, and Social Security.

Medicaid and Medicare together grow by 76 percent and Social Security

grows by 37 percent. The programs showing the greatest decline are

unemployment insurance and farm price supports.

The Presidents budget proposes legislative initiatives in almost every

major entitlement program. It proposes to reduce spending from current

law levels in Social Security, Medicare, Medicaid, civil service retirement,

AFDC, food stamps, guaranteed student loans, child nutrition, farm price

supports, and other programs. As noted above, these legislative initiatives,

if enacted, would reduce entitlement spending from CBO!s baseline

projections by almost $9 billion in 1984 and by $91 billion in the 1984-1988

period. These savings are shown in Table V-4. Only in unemployment

insurance and in SSI are increases requested. The Administration proposes

to extend the federal supplemental compensation program for the latter half

of 1983 and to increase the income disregard in SSI to compensate partially

for requested reductions in Social Security. These proposals would add to

the legislative and administrative actions taken during the 97th Congress

that have already reduced baseline spending for entitlement and other

mandatory spending by $177 billion over the 1984 to 1988 period.

Proposals to reduce the growth in entitlement spending have been a

consistent theme of all three of the Reagan Administration's budgets and

represent a reversal of the policies and practices of the previous decade.

During the 1970s, entitlement spending grew from $65 billion in 1970 to

$267 billion in 1980, a fourfold increase.
TABLE V-3. PROPOSED OUTLAYS FOR ENTITLEMENTS AND OTHER

MANDATORY SPENDING PROGRAMS AS ESTIMATED BY

CBO (By fiscal year, in billions of dollars)

1983 1984 1985 1986 1987 1988

Social Security Benefits 164.2 173.5 184.8 197.2 210.2 224.4

Other Retirement and

Disability Programs 39.2 41.2 42.2 45.2 46.7 49.2

Medicare and Medicaid 75.9 83.8 94.2 105.1 118.5 133.4

Food Stamps, SSI, AFDC

and Veterans' Pensions

Unemployment Benefits

Farm Price Supports

Other a/

Total

33.

32.

18.

21.

385.

2

8

2

6

1

30

25

10

20

385

.7

.9

.0

.6

.7

31

24

8

17

403

.4

.6

.4

.7

.2

32.

24.

8.

17.

429.

3

2

6

1

8

33

24

8

17

458

.2

.0

.4

.4

.5

34.8

23.8

8.7

17.9

492.3

a/ A variety of programs providing educational assistance, nutrition

assistance, aid to state and local governments, and aid to certain

businesses.

Part of the growth in entitlement spending in the 1970s reflected

increasing prices. Many of the benefits are indexed directly to changes in

prices or respond more or less automatically to such changes. The growth in

entitlement programs in the 1970s, however, far exceeded the increase in

prices. Even after adjusting for price changes, entitlement spending grew at

an average annual rate of 6.9 percent between 1970 and 1980, or from 6.7

percent of GNP in 1970 to 10.5 percent in 1980. As a percent of the federal

budget, entitlement spending rose from 33 percent in 1970 to 47 percent in

1980.

This rapid real growth in the 1970s resulted in part from a natural

growth in eligible recipients, but also from program liberalization and

expansion. Some of the more important legislative changes during the 1970s
TABLE V-4. CBO ESTIMATE OF ADMINISTRATION'S PROPOSED

REDUCTIONS IN ENTITLEMENTS AND OTHER

MANDATORY SPENDING (By fiscal year, in billions of

dollars)

Cumulative

Five-Year

1984 1985 1986 1987 1988 Changes

CBO Baseline Outlays -

Entitlements and Other

Mandatory Spending

Proposed Changes

394.6 418.4 448.7 481.2 517.6

Total Changes

President's Budget as

Estimated by CBO

-21.7

29.2

Social Security -3.8 -4.2 -4.3 -4.5 -4.9

Medicare and Medicaid -2.5 -3.9 -5.6 -8.1 -9.1

Other retirement and

disability programs -0.7 -1.4 -1.8 -2.2 -2.5 -8.5

Food stamps, SSI, AFDC

and veterans1 pensions -1.0 -1.3 -1.4 -1.3 -1.2 -6.2

Farm price supports -0.4 -1.6 -2.2 -2.8 -3.0 -10.0

Other -0.4 -2.7 -3.7 -3.8 -4.5 -15.1

8.9 15.1 18.9 22.6 25.2 -90.8

385.7 403.2 429.8 458.5 492.3

included: 15, 10, and 20 percent increases in Social Security benefits in

1970, 1971, and 1972; the indexing of Social Security benefits to the CPI

(1975); the start of the SSI program (1974); the expansion of Medicare

eligibility to the disabled (1972); the mandating of the food stamp program

to all counties (1974); and the elimination of the food stamp purchase

requirement (1979).

The President's proposals would halve the real rate of growth in

entitlement spending over the five-year period, from about 2 percent per

year in constant dollars to about 1 percent. The President's legislative

proposals and recent trends in the major entitlement programs are discussed

in more detail below.

96
Social Security

The Old Age and Survivors Insurance (OASI) and Disability Insurance

(DI) programs are expected to pay benefits totaling $177.3 billion to 37

million retired and disabled workers, their dependents, and survivors during

fiscal year 1984. Outlays under existing law are estimated to increase 6.4

percent per year, with an average annual real growth rate of 1.8 percent.

The President's budget generally incorporates the recommendations of

the National Commission on Social Security Reform. The commission was

created in December 1981 to address the continuing deterioration of the

financial position of the OASI trust fund. Members were appointed by the

President, the [Majority Leader of the Senate, and the Speaker of the House

of Representatives. The bipartisan commission submitted its findings and

recommendations on January 20, 1983, and the recommendations were

quickly factored into the President's budget to meet the January 31st budget

release date. The estimated outlay impact of the commission's proposals

included in the President's budget for Social Security benefits are shown in

Table V-5.

TABLE V-5. PROPOSED FUNDING CHANGES FOR SOCIAL SECURITY

BENEFITS (By fiscal year, in billions of dollars)

Cumulative

Five-Year

1984 1985 1986 1987 1988 Changes

CBO Baseline Outlays 177.3 189.0 201.6 214.7 229.3

Proposed Changes

Six-month delay in

cost-of-living

adjustment -3.8 -4.2 -4.5 -4.7 -5.2 -22.4

Miscellaneous

Benefit Provisions 0.1 0.1 0.2 0.2 0.3 0.9

Total Changes -3.8 -4.2 -4.3 -4.5 -4.9 -21.7

President's Budget as

Estimated by CBO 173.5 184.8 197.2 210.2 224.4

97
The only major proposal that would reduce outlay growth affects the

cost-of-living adjustment (COLA). Currently, this adjustment is made to

the June payment, payable in July of each year, and is equal to the change

in the Consumer Price Index from the first quarter of the previous year to

the first quarter of the current year. The Presidents budget, following the

commission's recommendations, would delay this annual increase to the

December benefit amount payable in January. Further, beginning in January

1985, the increase would be determined on the basis of the growth in the

CPI from the third quarter of the previous year to the third quarter of the

current year.

The six-month delay in the COLA, combined with adjustment in the

indexing period, is estimated to save $1.7 billion in 1983, and $22.4 billion

during the next five years (1984-1988). The change would affect the benefit

payments of almost -all the 37 million recipients. In 1984, these COLA

adjustments would reduce the average yearly benefit from the baseline level

by approximately $110 per person, or 2 percent.

A number of other minor proposals in the President's budget would

mean, on balance, a small cost to the Social Security system. The largest of

these miscellaneous changes would increase the benefit rate for disabled

widows and widowers aged 50 to 59 to be the same as that for non-disabled

widows and widowers first claiming benefits at age 60. This is estimated to

cost $1 billion over the period. Other changes provide for increased benefits

for certain groups of divorced or surviving beneficiaries, and for decreased

benefits to persons with relatively short periods of work covered by Social

Security. Together, these provisions would have a negligible impact on the

budget.

Reducing benefits for all Social Security recipients, even by a small

amount, would be a departure from recent practice. The reductions in the

1981 reconciliation act, for example, were targeted at particular groups of

recipients: benefits for full-time college students between the ages of 18

and 22 and for parents of children aged 16 to 18 were phased out, the

minimum benefit was eliminated for new recipients, and the lump sum death

benefit was modified. Other efforts have focused on reducing the rate of

growth of the DI program. Following a provision of the disability

amendments of 1980, the Social Security Administration has been reviewing

all continuing disability cases to assure that the recipients are still disabled.

Partly as a result of these initiatives, the disability caseload has been falling

for almost two years.

Most of the commission's proposals in the budget address the trust

fund receipts. The proposals include taxing 50 percent of Social Security

98
benefits for recipients with adjusted gross incomes of at least $20,000 if

single and $25,000 for married couples filing jointly, increasing payroll

taxes, and extending coverage to newly hired federal civilian workers and all

employees of nonprofit organizations. Finally, the President's budget

includes a commission proposal to transfer from the general fund $20 billion

in 1983 for military wage credits and for benefit checks that were not

cashed in past years. These revenue proposals are shown in greater detail in

Chapter III.

The total impact on the OASDI trust funds from the reductions in trust

fund outlays and the increase in income over the 1984-1988 period is a

saving of $114 billion. The impact on the unified federal budget, however, is

far less. There are several reasons for this. First, payments from the

Treasury to the trust funds, such as interest payments on investments, are

income to the trust funds but not to the federal government as a whole.

Second, tax credits and tax deductions that offset some of the increases in

Social Security taxes lower the net revenue gain to the government. Third,

the budget shows new federal employees paying into Social Security. It is

the intent of the Administration that revenues not change as a result of

adding new federal employees to Social Security. The new employees are

expected to pay into the civil service trust fund the difference between the

civil service contribution for current employees and the Social Security tax.

Finally related changes in SSI, railroad retirement, SMI premiums, Medicaid,

and food stamps will affect the federal deficit without affecting the trust

funds. Table V-6 shows CBO's estimate of the unified budget impact of the

commission recommendations included in the President's budget. Over the

five-year period, 1984-1988, these proposals would reduce the projected

deficits by nearly $70 billion. Three quarters of the deficit would be

produced by increased revenues.

Other Retirement and Disability Programs

The federal government provides benefits to the retired or disabled

through several programs other than Social Security. Benefits are provided

to former federal employees through civil service retirement and disability.

Former railroad employees are compensated through the railroad retirement

program. Veterans with service-connected disabilities may qualify for

benefits from the veterans1 compensation program. Taken together, these

programs are expected to spend $39.2 billion in fiscal year 1983, and to

increase gradually to $49.2 billion by 1988 (Table V-3).

The President's budget contains several proposals for reducing outlay

growth in these programs from current law levels (see Table V-7).

99
TABLE V-6. ESTIMATED IMPACT OF THE NATIONAL COMMISSION

ON SOCIAL SECURITY REFORM'S PROPOSALS ON THE

UNIFIED BUDGET DEFICIT (By fiscal year, in billions of

dollars)

Cumulative

Five-Year

1984 1985 1986 1987 1988 Changes

Outlay Reductions

Social Security

COLA delay

Other proposals

Subtotal

Revenue Changes

Social Security revenue

increases

Loss in income tax

revenues

Subtotal

Total Reduction in

Budget Deficit

3.8 4.2 4.5 4.7 5.2 22.4

-0.9 -1.1 -1.0 -1.0 -1.2 -5.2

2.9 3.1 3.5 3.7 4.0 17.2

9.7 11.5 10.1 11.5 23.7 66.6

-1.6 -6.3 -2.0 -2.4 -4.0 -16.3

8.2 5.2 8.1 9.2 19.7 50.4

11.1 8.3 11.6 12.9 23.7 67.6

Civil Service Retirement. The President's budget includes proposals

for civil service legislation to reduce benefits for early retirement, change

the annuity calculation from the highest three years of earnings to the

highest five years, freeze the 1984 cost-of-living increase, and continue the

reduction in COLAs for optional retirees under age 62. These proposals

would produce savings of $5 billion from projected current law levels during

1984-1988. Also, the President's budget proposes to increase contributions

from employees1 salaries and matching employer contributions from the

current 7 percent to 9 percent in 1984 and to 11 percent in 1985.

While most of the outlay savings from the CBO baseline in 1984-1988

result from the COLA freeze, the most significant long-run change is the

reduction in benefits for early retirement. Currently, a worker with 30

100
TABLE V-7. PROPOSED FUNDING CHANGES FOR OTHER RETIREMENT AND DISABILITY PROGRAMS (By fiscal year, in

billions of dollars)

Cumulative

Five-Year

1984 1985 1986 1987 1988 Changes

CBO Baseline Outlays 41.9 43.6 47.0 48.9 51.7

Proposed Changes

Civil service retirement

and disability

Change annuity calculation and reduce benefits

for early retirement * -0.1 -0.1 -0.3 -0.4 -0.9

COLA change -0.3 -0.8 -0.9 -1.0 -1.1 -4.1

Railroad retirement — — — —• —

Veterans1 compensation

COLA change -0.2 -0.3 -0.3 -0.4 -0.5 -1.7

Retired commissioned health

officers, Foreign Service

retirement, Coast Guard

retirement, black lung,

and special benefits for

disabled coal miners

COLA change -0.1 -0.2 -0.2 -0.2 -0.2 -0.9

Other changes * * -0.3 -0.3 -0.3 -0.9

Total Changes -0.7 -1.4 -1.8 -2.2 -2.5 -8.5

President's Budget as

Estimated by CBO 41.2 42.2 45.2 46.7 49.2

* Less than $50 million.

101
years of service may retire at age 55 with full benefits. The Administration

proposes to phase in over ten years a 5 percent reduction in benefits for

each year a worker chooses to retire before age 65. Those 55 or older at

enactment would not be affected by this benefit reduction.

The President's budget continues the reductions in civil service

retirement outlays that have occurred since 1981. Most of the changes have

centered around the COLAs. Spending reductions during the 97th Congress

included replacing twice-a-year COLAs with an annual COLA based on

changes in the CPI, reducing the COLA for those under 62 in 1983-1985, and

delaying the COLA one month each year in 1983-1985.

The spending reductions of the 97th Congress as well as the President's

proposed cuts follow a period of rapid growth for federal retirement outlays.

Between 1970 and 1980, civil service retirement outlays increased from $2.8

billion to $14.7 billion, reflecting increases in COLAs and also a growth in

the number of recipients. Annuitants grew from about 1 million in 1970 to

1.7 million in 1980, while active employees remained at about 2.7 million.

Deductions from employees1 salaries accounted for 62 percent of outlays in

1970, but only about 24 percent in 1980. While employee contributions grew

from $1.7 billion in 1970 to $3.6 billion in 1980, reflecting the approximate

doubling of salaries that occurred over the decade, COLAs increased

average retirement benefits by about 125 percent.

In response to these changes in the balance of contributions and

outlays, the Administration proposes to increase employee and employer

contributions as well as to reduce benefits. Raising employer and employee

contributions to 11 percent of pay would bring contributions to about 27

percent of 1988 outlays, assuming all of the proposed savings legislation was

enacted. During the 1984-1988 period, federal employment is projected to

be relatively constant, with new workers being included in Social Security;

and annuitants are assumed to increase from about 1.9 million to 2.2 million.

Railroad Retirement. The railroad retirement program pays benefits

to retired and disabled railroad workers, their dependents and survivors. In

general, these benefits contain both a Social Security component and a

railroad pension component. The system is financed by a payroll tax on

railroad workers and by general fund transfers.

The President's budget proposes no legislative initiatives for railroad

retirement. Nevertheless, beneficiaries would receive a reduction in their

benefits. Because employment in the railroad industry has fallen nearly 20

percent over the past two years, the system faces a funding problem. Trust

fund revenues are insufficient to meet all the liabilities. Under provisions in

the railroad amendments of 1981, benefits must be reduced in the railroad

102
retirement pension portion of the program by an amount equal to the

projected unfinanced liability. The law also requires that the Social

Security portion of the benefit payment be paid in full. The estimated

amount by which railroad benefits must be reduced is $532 million in 1984,

$1,429 million in 1985, $777 million in 1986, $1,419 million in 1987, and $983

million in 1988. These estimated reductions are included in CBO!s baseline

projections.

Veterans1 Compensation. Veterans1 compensation payments are not

automatically adjusted under current law, but have historically received

cost-of-living increases on October 1 of each year equal to those given to

Social Security recipients in 3uly. The Administration proposes to delay

these benefit increases from October 1, 1983, to April 1, 1984. In addition,

it proposes to reduce the COLA to veterans who have disabilities rated at

less than 100 percent. Those with 60 to 90 percent disability ratings would

receive 85 percent of. the COLA, those with 40 to 50 percent ratings would

receive 60 percent of the COLA, and those with 10 to 30 percent ratings

would receive only 45 percent of the COLA. These proposals would reduce

projected spending for veterans' compensation by $1.7 billion during 1984-

1988.

Other Cost-of-Living Adjustments. The President's budget proposes to

reduce growth in outlays in several entitlement programs in which benefits

are automatically adjusted by increases in cost-of-living indexes. It would

freeze benefit increases for one year to persons receiving payments from

the Retired Commissioned Health Officers Fund, the Foreign Service

Retirement and Disability Fund, and the Coast Guard retirement programs.

In addition, beneficiaries of the black lung and the coal miners1 disability

funds would not receive cost-of-living-increases in 1984. These programs

are indexed to the federal GS-2 wage levels and the Administration has

proposed to freeze federal salaries. These proposals would save nearly $1

billion over the next five years.

Medicare and Medicaid

Medicare and Medicaid are the major entitlement programs that

provide federal funding for health services. Medicare, which includes the

Hospital Insurance (HI) and Supplementary Medical Insurance (SMI)

programs, covers hospital, physician, and other medical costs for persons

aged 65 and over, and for most disabled persons entitled to Social Security

cash benefits. Medicaid, through joint federal and state financing, pays for

health services for low-income persons. In total, Medicare and Medicaid

provide benefits to about 48 million people, at an estimated cost of $76

billion in 1983 (see Table V-3).

103
The costs of Medicare and Medicaid have been increasing at a 17

percent annual rate over the last ten years. Most of that growth is

attributable to rapidly rising medical care prices, which increased 9.5

percent annually during the period; some is explained by growth of program

enrollments; and the rest is due to increasing use of medical services. The

President's budget contains legislative proposals in the health area that

would slow the increases in federal spending for health care (see Table V-8).

The proposals in the budget would strengthen incentives for both individuals

and providers to act in ways that would restrain the increases in prices and

utilization. Under the President's proposals, Medicare and Medicaid

recipients would pay for a larger proportion of their benefits through higher

coinsurance, premiums, and deductibles. Beginning in 1986, payment rates

for hospital care would be fixed in advance, or prospectively, with hospitals

liable for their costs in excess of the rates. Reimbursable physicians1

charges would be frozen in 1984.

The proposed legislation continues the efforts of the Administration

and the Congress over the last two years to npoderate the growth in health

programs. But even if all of the President's proposals were to be enacted,

health expenditures would still continue to grow rapidly (see Table V-8).

From 1984 to 1988, Medicare and Medicaid spending is projected to grow 59

percent under the Administration's plan. In contrast, spending under current

law is projected to grow 65 percent over the five years.

Medicare. The 1984 budget proposals are consistent with the

Administration's intent to decelerate the rate of growth in federally-funded

medical care programs. CBO estimates that the Administration's proposed

legislation would save $26 billion from 1984 to 1988. The legislative

package would increase the cost of health care to Medicare beneficiaries

while also curbing the increase in reimbursement to providers. A major

proposal affecting beneficiaries would increase cost sharing for short-term

hospital stays. This would be offset somewhat by lower cost sharing for

catastrophic illness. In addition, Medicare beneficiaries could also expect

larger SMI premiums and slight delays in Medicare eligibility.

The major proposal affecting providers is the establishment of a

prospective reimbursement system to expand and extend the current limits

on hospital rates. In addition, physician fees would be frozen for one year.

Some physicians would pass their unreimbursed costs on to the patient, thus

increasing beneficiary costs, while others would not.

This legislative package follows $27 billion in cuts for the 1984-1988

period already enacted in both the reconciliation act of 1981 and TEFRA.

These cuts included transfers of Medicare's costs to both beneficiaries and

to providers. Deductibles for hospital care, other medical services, and

104
TABLE V-8. PROPOSED FUNDING CHANGES FOR MEDICARE AND

MEDICAID (By fiscal year, in billions of dollars)

1984

CBO Baseline Outlays 86.3

Proposed Changes

Medicare

Provider payment

reductions

Pay hospitals

prospectively

Freeze physicians'

fees

Benefit reductions

Alter hospital costsharing

Delay initial

eligibility

Other

Other

Medicaid

Mandate copayments

Reductions on payments

to states

Other

Total Changes

President's Budget as

Estimated by CBO

0

-0.9

-1.0

-0.2

-0.1

-0.1

-0.1

0

-0.1

-2.5

83.8

1985

98.1

0

-1.0

-1.5

-0.3

-0.1

-0.1

-0.2

-0.5

-0.1

-3.9

94.2

1986

110.6

-1.5

-1.2

-1.7

-0.3

-0.2

*

-0.2

-0.4

-0.1

-5.6

105.1

1987

126.6

-3.4

-1.4

-1.9

-0.4

-0.3

-0.1

-0.2

-0.5

*

-8.1

118.5

Cumulative

Five-Year

1988 Changes

142.5

-3.8

-1.6

-2.2

-0.4

-0.3

-0.1

-0.2

-0.6

0.1

-9.1

133.4

-8.7

-6.1

-8.3

-1.6

-1.0

-0.4

-0.9

-2.0

-0.4

-29.2

* Less than $50 million.

105

15-966 0-83- 8
premiums paid by enrollees for the medical insurance part of Medicare were

all increased. Payments to hospitals and for certain physicians1 services

were pared as well.

Despite the action of the last Congress, Medicare is still one of the

fastest growing programs in the budget. Medicare spending climbed more

than 15 percent in each of the last five years and is projected to rise 12.6

percent annually over the next five years, even with the enactment of the

President's legislative package. The growth in these costs has caused the HI

trust fund to fall to very low levels. Under CBO's baseline projections, the

balances in the HI trust fund fall to zero in fiscal year 1987. Even with the

Administration's budget proposals, the hospital insurance trust fund will

become depleted by the end of the decade.

Whether these proposals will significantly reduce the explosive rise of

medical care costs is unclear. The additional cost sharing proposed for short

hospital stays should depress utilization somewhat and exert downward

pressure on prices, but the proposed catastrophic coverage will have the

opposite impact. Today, 30 percent of Medicare dollars are spent on

delivering services to persons in their last year of life. This percentage

could increase under the Administration's proposals. Another uncertainty is

the reaction of hospitals to existing and proposed limits on Medicare

payments. While both the Administration and CBO have estimated large

savings from these limits, the actual savings will depend on many

unknowns—the stringency of enforcement, for example, as well as the

ability of hospitals to "game" the limits. Finally, the one-year freeze on

physicians' fees clearly will have little long-run impact on their rates of

increase, and may result in partially offsetting increases in use of

physicians' services.

Medicaid. Increases in federal Medicaid expenditures have moderated

considerably since the enactment of the 1981 reconciliation act. CBO

estimates that the savings from that legislation total $3.4 billion over the

1984-1988 period. The Medicaid cuts enacted in TEFRA, as well as the

proposed legislation in the President's 1984 budget, are modest in

comparison to those affecting Medicare.

The two major legislative proposals in this year's budget are the

expansion of the copayment legislation passed in TEFRA and the

continuation of the reductions in payments to states passed in the 1981

reconciliation act. The copayment proposal was introduced in the

President's 1983 budget. Last year, the Congress enacted a modified version

that allowed states to impose certain copayments. The President is again

proposing that these copayments be made mandatory. The other major

proposal is to continue the reductions in payments to states, which would

106
otherwise expire at the end of fiscal year 1984. CBO estimates that total

savings in Medicaid from the President's legislation would be $3.1 billion

from 1984 to 1988.

Major Means-Tested Transfer Programs

There are four major means-tested transfer programs outside of the

health area: Aid to Families with Dependent Children, food stamps,

Supplemental Security Income, and veterans1 pensions. These programs

provide the major governmental support to low-income families. They are

means-tested in that persons qualify for benefits only if their incomes and

resources fall below specified levels.

The AFDC program provides benefits to families with children who are

deprived of parental support by the absence of a parent. In 22 states, twoparent families with an unemployed parent are also eligible for benefits.

Financing of the program is partially by the federal government and

partially by state and local governments. The SSI program provides benefits

to the aged, blind, and disabled. It is fully federally financed, but most

states provide supplements to at least some beneficiaries. The food stamp

program provides food coupons to AFDC and SSI beneficiaries as well as to

other households that meet the income and resource tests. The veterans1

pension programs provide income support to needy war veterans who are

either over age 64 or disabled from causes unrelated to military service.

Low-income survivors of deceased war veterans are also eligible for

benefits, which are fully financed from federal funds.

Legislation proposed by the President would reduce outlays in the four

programs combined by $1.0 billion in fiscal year 1984 and $6.2 billion over

the 1984-1988 period (see Table V-9). These cuts represent a 3 percent

reduction in 1984 baseline outlays. They follow on large cuts from

legislative actions in 1981 and 1982, estimated to total $3.4 billion in 1984.

Nonetheless, program levels would remain considerably higher than in the

1970s.

Proposed legislative actions and past program trends differ

significantly among these four means-tested programs, as is discussed

below. Nonetheless, in all four programs, growth in the remainder of the

1980s should be considerably lower than in the 1970s.

Aid to Families with Dependent Children. Program cuts proposed in

the President's budget are again sizable. Preliminary estimates by CBO

show annual savings of $0.6 billion and savings for the 1984-1988 period of

$2.6 billion. These savings include proposed changes in the Child Support

107
TABLE V-9. PROPOSED FUNDING CHANGES FOR MAJOR MEANSTESTED TRANSFER PROGRAMS (By fiscal year, in billions

of dollars)

Cumulative

Five-Year

1984 1985 1986 1987 1988 Changes

CBO Baseline Outlays 31.7 32.7 33.7 34.5 36.1

Proposed Changes

AFDC and child

support enforcement -0.3 -0.5 -0.6 -0.6 -0.6 -2.6

Food stamps -1.1 -1.2 -1.2 -1.1 -1.0 -5.6

Supplemental security

income 0.5 0.5 0.5 0.5 0.5 2.4

Veterans1 pensions * -0.1 -0.1 -0.1 -0.1 -0.3

Total Changes -1.0 -1.3 -1.4 -1.3 -1.2 -6.2

Presidents Budget as

Estimated by CBO 30.7 31.4 32.3 33.2 34.8

* Less than $50 million.

Enforcement (CSE) program in addition to those in AFDC. The CSE

program enforces the support obligations owed by absent parents to their

children; collections of support for AFDC children offset AFDC

expenditures.

The President^ major proposals, most of which were also proposed in

last year's budget, are of three types: (1) a reduction in benefits to families

with incomes or lower shelter expenses that are not currently accounted for;

(2) mandating of job search and workfare for employable AFDC recipients;

and (3) altering of CSE collection procedures and federal matching to

improve the program's cost effectiveness.

108
The most controversial of these proposals would mandate job search

and workfare for employable AFDC recipients whose children are six or

older. Workfare requires recipients to "work off" their AFDC benefits;

typically, the required number of hours of work is the AFDC benefit divided

by the minimum wage. The CBO preliminary estimate of savings is

considerably below the Administration's. Reasons for this estimating

difference are unclear because details of the Administration's estimate,

which shows savings of about $0.4 billion more than its estimate for similar

legislation last year, have not been made available.

Any estimate of job search and workfare savings or costs is largely

speculative. Savings to the federal government arise because some AFDC

recipients lose benefits for refusing to participate in the job search and

workfare programs, some find jobs they would not otherwise have found or

find them more quickly, and some are deterred from even applying for

AFDC. Offsetting these savings are the costs of administering such

programs. There is no firm evidence yet available on whether savings

exceed costs for workfare and for many types of job search. Programs

initiated in the 1970s were often not cost-effective. A number of

demonstrations are currently under way in AFDC, but final evaluations are

not yet available and preliminary statistics are difficult to interpret. Even

when they are available, it may be difficult to generalize these findings to

all jurisdictions, with widely different approaches and sympathies to the

proposals. Moreover, job search and workfare are now available to states at

their option. It is possible that, if the states considered these proposals to

be cost-effective, many would adopt them without being required, in which

case little savings would arise from the proposed legislation.

If enacted, these proposed savings would add to the already sizable

savings in AFDC and CSE from 1981 and 1982 legislation. The savings in

1984 of the recently enacted legislation are estimated to be $1.3 billion. If

the new proposals are enacted, savings in 1984 would rise to $1.6 billion, or

16 percent of what outlays would have been in 1984 without the legislation.

Partly as a result of these legislative changes, but also because of the

assumed reduction in unemployment and the difficult financial situation of

the states, AFDC program trends are expected to be quite different in the

1980s as compared to the 1970s. The 1970s was a period of growth in

AFDC. The numbers of beneficiary families rose from 1.8 million in 1970 to

a peak of 3.8 million in 1981, partly from the trend of increasing

participation among eligible families that began in the 1960s and partly

from higher levels of unemployment. During the 1970s, average payments

per family also rose by about 5.6 percent a year in nominal terms. With

prices rising rapidly, however, average family payments declined sharply in

real terms. For example, the maximum monthly payment level for a family

109
of four fell from the 1970 level of $548 (in 1981 dollars) to the 3uly 1981

level of $394.

For the remainder of the 1980s, numbers of families receiving AFDC

are expected to remain steady at about 3.6 million, following declines from

recent legislation. In these years, effects on numbers of AFDC families

from falling unemployment rates are expected to be offset by sizable

projected increases in numbers of female-headed households, about onethird of whom receive AFDC. Average payments per family are expected to

rise by about 3.8 percent a year, more slowly than in the 1970s because of

the financial pressures on states.

Food Stamps. The President's budget contains legislative proposals

that would reduce food stamp program spending by modifying some aspects

of eligibility rules and the method of benefit calculation, making states

liable for a portion of benefit payments made in error, and delaying the

cost-of-living adjustment. States would also be required to conduct

workfare programs for food stamp program participants.

Most of the legislative savings would be achieved by reducing food

stamp benefits to participating households. Enactment of this legislation

would reduce the average household benefit by $7 to $8 monthly, or by about

7 percent. However, a substantial portion of the federal savings, nearly $0.5

billion during fiscal year 1984, would not result from reduced benefits but

rather from reductions in the federal reimbursement for state

administrative expenses or from direct billings to states under the proposal

to make states liable for payments made in error in excess of 3 percent of

all benefits. Costs incurred by states for the administration of the food

stamp program would also be increased by about $0.1 billion because of the

administrative expenses of operating the workfare programs.

The proposed changes would reduce food stamp outlays by about $1.1

billion in fiscal year 1984. Adding these savings to the estimated $2 billion

of 1984 food stamp spending reductions enacted by the 97th Congress results

in a 20 percent reduction in what spending for the program would have been

in the absence of recent and proposed legislative changes.

Between 1975, when food stamps became a national program, and

1982, program outlays increased from $4.6 billion to $11.0 billion. Spending

remained relatively constant between 1975 and 1978 because of declining

participation, which resulted from improved economic conditions, and

relatively small inflation adjustments in benefit levels. A major program

change in 1979 in combination with high rates of food price inflation and

increases in unemployment caused program spending to increase from $6.8

billion in 1979 to $11.3 billion in 1981. Despite continued increases in

110
unemployment, outlays fell to $11.0 billion in 1982 because of program

changes enacted during the 97th Congress.

Supplemental Security Income. In SSI, unlike the AFDC and food

stamp programs, legislative proposals in the President's budget would add to

program costs. The CBO preliminary estimates are that SSI outlays would

rise on balance by $0.5 billion a year and $2.4 billion over the 1984-1988

period from the proposals.

The legislative proposals include an increase in the disregard on OASDI

income from $20 to $50 a month; that is, an additional $30 of OASDI income

of SSI beneficiaries would be disregarded in calculating countable income

and SSI benefits. Hence, SSI benefits would rise for SSI beneficiaries with

OASDI income. This proposal was one of the recommendations of the

National Commission on Social Security Reform. Other changes proposed in

the President's budget would result in SSI savings. The largest savings would

arise from a six-month delay in the SSI cost-of-living adjustment.

As a result of these proposals, the current 1.6 million SSI beneficiaries

with OASDI income would receive higher incomes; the increased disregard

would more than offset the impact of the COLA delay. The remaining 1.8

million SSI beneficiaries, who typically have no other sources of income

outside of SSI, would receive lower incomes; the impact of the COLA delay

would not be offset by any increased benefits. In addition, the $50 disregard

proposal would enable certain low-income OASDI beneficiaries to become

newly eligible for SSI.

Because cuts in SSI as a result of 1981 and 1982 legislation were under

$0.1 billion a year, the SSI program would expand as a result of legislative

action taken in the last three years, if this year's proposed legislation is

enacted. Nonetheless, growth in the program in the 1980s is expected to

moderate considerably from that in the 1970s.

The SSI program was begun in 1974. Before then, aid to the aged,

blind, and disabled was provided under a federal-state matching program as

in AFDC today. After an initial buildup, numbers of beneficiaries declined

somewhat during the remainder of the 1970s, primarily because more of the

aged had other sources of income such as OASDI. Beginning in 1981, the

rate of decline picked up considerably, partly as a result of demographic

factors. Numbers of persons aged 50-59—those with the highest incidence

of disability—began to decline in 1980 and will continue to decline during

most of the decade. As a result, numbers of beneficiaries, which had

averaged 3.9 million in 1975 and 3.7 million in 1980, are expected to decline

to 3.1 million by 1988.

Ill
Growth in the program is expected to moderate not only because of

beneficiary trends but also because average payments per beneficiary are

estimated to grow less rapidly in the 1980s than in the 1970s. Payments in

SSI have automatic COLAs and, with an anticipated slowdown in price

increases, COLAs are expected to be considerably lower in the near future.

In the five years 1978-1982, SSI COLAs summed to 49.3 percent; in the five

years 1983-1987, COLAs are expected to sum to only 21.4 percent.

Veterans' Pensions. The President's proposal to delay for six months

all automatic cost-of-living adjustments would affect the pension program

established by the Veterans1 and Survivors1 Pension Improvement Act (Public

Law 95-588) of 1978, the largest of the veterans1 pension programs and the

only one indexed for inflation. Preliminary CBO estimates indicate that this

change would result in outlay savings of less than $0.1 billion a year. Total

savings from 1984 to 1988 are estimated at $0.3 billion.

As part of the budget reconciliation process of 1982, savings provisions

were enacted in veterans1 pensions that are expected to reduce expenditures

in 1984 by less than $0.1 billion. These savings, added to those anticipated

from the President's proposal, would bring the total savings in 1984 to $0.1

billion, or 3 percent of the outlays that would have been expected without

these amendments.

Even in the absence of further cost-reduction legislation, the trend in

pension outlays in the 1980s is expected to be the opposite of that

experienced in the 1970s, when outlays rose from $2.3 billion to $3.2 billion

between 1970 and 1978. The changed outlook for pensions is attributable to

the enactment of Public Law 95-588 in 1978—well before national attention

focused on controlling the growth of federal expenditures. This legislation

created a new pension program under which benefits are much more closely

targeted to financial need. Virtually all exclusions from income for the

purpose of calculating benefits and/or eligibility were eliminated, and

benefits were indexed for inflation. Despite the indexation of benefits,

which normally would be expected to increase costs over time, pension

outlays are now projected to drop from their 1982 level of $3.9 billion to

$3.5 billion in 1988, primarily as a result of the more restrictive eligibility

standards of the new program.

Unemployment Insurance

Unemployment Insurance spending has risen rapidly over the last two

years with the rise in the unemployment rate. Baseline spending is expected

to fall from $31 billion in 1983 to $24 billion in 1988 as the unemployment

situation improves.

112
The President's budget contains no legislative initiatives for 1984

through 1988. In 1983, however, the President is proposing a six-month

extension and modification of the Federal Supplemental Compensation

program.

Under the proposal, those in states with insured unemployment rates

(IUR) of 6 percent and above could receive up to 16 weeks of jobless

benefits; those in states with lURs between 4.5 percent and 6 percent could

receive up to 12 weeks of added benefits; those in the remaining states

could receive up to 8 weeks of added benefits.

Eligible persons could opt for a voucher, in place of the federal

supplemental benefit, to use as a wage subsidy equal to one-half the weekly

benefit amount for twice the number of weeks. Such a subsidy would take

the form of a credit to the employer's federal unemployment tax or federal

income tax. The Administration's preliminary estimate is that this proposal

would add $1.85 billion to outlays in fiscal year 1983. A more complete

discussion of this proposal is contained in Chapter III.

Farm Price Supports

Agricultural price supports provide price and income protection to

farmers. Expenditures are made through a number of agricultural

commodity programs designed to support and stabilize farm prices and

incomes. The programs use several tools, including commodity loans and

purchases, direct payments, and supply controls. The principal commodities

covered by these programs are wheat, corn and other feed grains, rice,

upland cotton, tobacco, peanuts, milk, and wool.

The President's primary legislative initiative is to freeze target prices

at the 1983 crop year levels mandated in the 1981 Agriculture Act. It is the

difference between target prices and market prices that determines the rate

at which deficiency payments will be made on each eligible farmer's crop

production. Freezing these levels is estimated to save $0.4 billion in fiscal

year 1984, and $10.0 billion during the 1984-1988 period (see Table V-10). In

addition, the President proposes to make the honey price support program

discretionary, modify the price support mechanism and eliminate the

allotment and quota system for extra-long-staple cotton, and expand the

commodities in the Commodity Credit Corporation inventory eligible for

donation.

This proposal comes at a time of rapidly rising farm support payments.

Outlays for agricultural price support programs rose sharply in 1982 to a

record $11.6 billion, nearly three times the 1981 level. This dramatic rise in

113
TABLE V-10. PROPOSED FUNDING CHANGES FOR FARM PRICE

SUPPORT PROGRAMS (By fiscal year, in billions dollars)

Cumulative

Five-Year

1984 1985 1986 1987 1988 Changes

CBO Baseline Outlays 10.4 9.9 10.8 11.2 11.7

Proposed Changes

Freeze target prices

at 1983 crop year levels -0.4 -1.6 -2.2 -2.8 -3.0 -10.0

President's Budget as

Estimated by CBO 10.0 8.4 8.6 8.4 8.7

spending reflected a sharp decline in farm prices resulting from large U.S.

crops and weak export demand.

Further increases in outlays, to $18.2 billion, are estimated for fiscal

year 1983 because of a continued growth in supplies relative to demand.

Large crop inventories were carried into the 1982 crop year. Then, despite

acreage reduction programs, feed grain production reached a record high

and wheat production fell only slightly from 1981. These large supplies

combined with declining exports are causing low crop prices. At the end of

the 1982 crop year, grain stocks will be about one-half of total annual use,

far in excess of adequate stock levels. Few of these stocks will be held free

of government control—about two-thirds of them will be in the farmerowned reserve and about one-fifth will be government-owned. Upland

cotton stocks at the end of crop year 1982 will also be excessive: about 70

percent of annual use, despite a 23 percent drop in cotton production. Also

included in 1983 outlays is $1.7 billion of interest paid to the Treasury

deferred from fiscal year 1982.

While remaining above past levels, 1984 outlays are projected to

decline by $8 billion. This decline will result from smaller harvests and

fewer commodities under price support loans, and may be attributed to the

reduced acreage programs required in the 1982 reconciliation act and the

President's payment-in-kind (PIK) program. The PIK program gives farmers

114
government-owned crops instead of cash to reduce planting more than

required under the 1982 reconciliation act. Also contributing to the decline

in 1984 outlays will be an $0.8 billion decrease in dairy program costs caused

by declining milk production and increased revenues from assessments

collected on milk marketings. The authorities to levy these assessments

were also provided in the 1982 reconciliation act.

Other Entitlement and Mandatory Spending

This residual category includes a variety of programs providing

educational assistance, nutrition assistance, aid to state and local

governments, and aid to certain businesses. The President's budget contains

a number of proposals to reduce spending from the baseline in this area (see

Table V-ll).

In three programs, the Administration's request holds funding at the

fiscal year 1983 level. The CBO baseline projections include increases in

funding to keep pace with inflation unless funding is constrained by

authorization levels.

General Revenue Sharing. The President's budget proposes funding

general revenue sharing at its 1983 level throughout the 1984-1988 period,

whereas the CBO baseline is increased each year for inflation. Holding

funding at the 1983 level would result in a 20 percent reduction in real

spending by 1988.

Foster Care and Other Family Services. The President's budget is

proposing to remove the entitlement status of foster care. Foster care and

other family services programs would be funded at 1983 levels throughout

the projection period.

Rehabilitation Services. The Administration is proposing to provide

greater state flexibility in the use of the funds. The funding is held constant

at 1983 levels throughout the five-year period.

In addition, the President's budget proposes legislation to reduce

spending below baseline in a variety of other programs.

Child Nutrition. The Administration is proposing changes that would

reduce spending by $0.3 billion in 1984. These savings would grow to $0.6

billion in 1988. Two-thirds of the savings result from creation of a General

Nutrition Assistance Grant to states, similar to one proposed last year, that

would replace the school breakfast, child care, and summer feeding

programs. Other proposals include a six-month delay in the cost-of-living

adjustment to reimbursement rates in the school lunch program, changing

115
TABLE V-11. PROPOSED FUNDING CHANGES FOR OTHER

ENTITLEMENTS AND MANDATORY PROGRAMS (By fiscal

year, in billions of dollars)

Cumulative

Five-Year

1984 1985 1986 1987 1988 Changes

CBO Baseline Outlays 21.0 20.4 20.8 21.2 22.4

Proposed Changes

Funding held at 1983 levels

General revenue sharing -0.2 -0.5 -0.7 -0.9 -1.2 -3.6

Rehabilitation services * -0.1 -0.2 -0.2 -0.3 -0.8

Foster care and

family services * -0.1 -0.1 -0.2 -0.2 -0.6

Other reductions

Child nutrition -0.3 -0.4 -0.4 -0.5 -0.6 -2.2

Government contributions

to employee

health insurance -0.1 -0.2 -0.5 -0.7 -0.9 -2.4

Guaranteed student

loans -0.1 -0.3 -0.3 -0.3 -0.3 -1.2

Pension benefits

guaranty corporation -0.1 -0.2 -0.2 -0.2 -0.3 -1.0

Other 0.4 -0.9 -1.3 -0.7 -0.7 -3.2

Total Changes -0.4 -2.7 -3.7 -3.8 -4.5 -15.1

President's Budget as

Estimated by CBO 20.6 17.7 17.1 17.4 17.9

* Less than $50 million.

116
the indexing procedure for reimbursement rates for meals served to children

from households with incomes between 130 percent and 185 percent of the

poverty line, and requiring applications for free and reduced-price meals to

be processed by local food stamp offices.

Government Contributions to Employee Health Insurance. The

President's budget proposal would require some current federal employees

and annuitants to pay an increasing share of the cost of their health

insurance. The proposal would calculate future government contributions to

employee health insurance by indexing the average contribution in 1983.

Individuals selecting less expensive plans would receive a rebate, while

individuals selecting more expensive plans would pay a larger share of their

premiums.

Guaranteed Student Loans. The President proposes two programmatic

changes in the guaranteed student loan (GSL) program effective July 1983.

Again this year, the President proposes eliminating the $30,000 family

income cap and limiting loan eligibility to assessed financial need. Second,

the President proposes increasing the 5 percent origination fee to 10 percent

for all graduate and professional students. In addition to these

programmatic changes, the Administration proposes that certain loan

advances to state agencies be returned to the federal government. The

President's request for similar changes last year was not considered by the

Congress.

Pension Benefit Guaranty Corporation. The severe recession of 1982

resulted in a large number of private pension plans terminating with assets

insufficient to cover their liabilities. Such plans are taken over by the

corporation, which assumes control of their assets, administers them

through a trust fund held by a private bank, and takes responsibility for

paying plan benefits. The large number of 1982 plan terminations caused

the corporation's deficit to grow from $130.5 million at the end of fiscal

year 1981 to $320 million at the end of 1982. Without an increase in the

premiums paid by ongoing covered plans, it is expected that the deficit

could reach $550 million by the end of 1984. The Administration is,

therefore, requesting Congressional approval of an increase in the singleemployer plan premium, as well as certain revisions in the single-employer

plan insurance program. The changes have been estimated by the

Administration to reduce 1984 outlays by $132 million. The specifics of the

Administration's proposal are not yet available.

Other. The other savings are spread across several programs. The

category also includes some savings that are offset in other spending

categories. Finally, the changes in the Government National Mortgage

Association's Management and Liquidation Functions Fund are discussed in

the assistance to business and commerce section on discretionary spending.

117
NONDEFENSE DISCRETIONARY SPENDING

This category includes the programs in the unified budget for which no

entitlement to benefits is established by law, thus enabling the Congress to

set spending levels at its discretion. All such programs are subject to

control through the appropriations process, either by the appropriation of

budget authority, the establishment of loan limitations or obligation

ceilings, or the provision of liquidating cash.

Unlike entitlement spending, outlays for discretionary programs

increased only slightly as a proportion of total outlays during the 1970s,

rising from about 22 percent in 1970 to about 24 percent in 1980. Since

then, spending growth in this category has been sharply restrained, with

outlays increasing a total of less than 4 percent over a three-year period.

As a result, discretionary programs represent only 18 percent of 1983

outlays, and real spending for such programs has declined by 16 percent

since 1980. The Administration's 1984 budget continues the policy of little

growth in this category, with outlays estimated to increase from $145 billion

in 1983 to $147 billion in 1984 and to $163 billion by 1988 (see Table V-12).

These represent increases of only 1.5 percent in 1984, and about 2.5 percent

annually from 1984 through 1988. If fully implemented, the budget would

result in a savings of $5 billion in 1984, and a total deficit reduction of $61

billion between 1984 and 1988, relative to the CBO baseline projections for

discretionary programs. As a consequence, spending for these programs

would be 3.4 percent below the baseline in 1984, and more than 11 percent

below by 1988. Outlays would fall to less than 15 percent of the budget by

1988.

This pattern of spending restraint has not been applied uniformly to all

types of discretionary spending. The President's budget includes proposed

increases in a number of areas, and decreases in others. As shown in

Table V-13, nondefense discretionary spending can be divided into six

general program subcategories. Of these, the Administration is proposing

real 1984 increases for two--federal government operations, and aid to

foreign governments and international organizations. The deepest cuts are

targeted for assistance to business and commerce, and real reductions are

also proposed for research and development, infrastructure, and benefits and

services to individuals. Relative to CBOfs baseline projections, which allow

spending to keep pace with inflation, the Administration's 1984 budget plan

would cut the projected growth of nondefense discretionary outlays by 50

percent over the next five years.

118
TABLE V-12. PROPOSED OUTLAYS FOR NONDEFENSE DISCRETIONARY SPENDING PROGRAMS AS ESTIMATED BY CBO

(By fiscal year, in billions of dollars)

1983 1984 1985 1986 1987 1988

Federal Government

Operations 22.1 23.4 23.8 24.2 24.5 24.9

Aid to Foreign Governments and International

Organizations 9.4 10.2 10.3 10.4 10.6 10.7

Transportation, Natural

Resources, and Other

Infrastructure 41.7 43.0 44.3 45.1 45.5 46.0

Research and

Development 17.2 17.6 17.7 17.4 17.4 16.9

Benefits and Services

to Individuals 47.5 46.5 46.7 47.5 48.0 48.8

Assistance to Business

and Commerce 7.4 5.8 5.7 5.4 4.7 4.4

Civilian Agency Pay

Raises and Increases

in Retirement

Contributions —- 0.9 4.0 6.3 8.7 11.1

Total 145.3 147.5 152.4 156.2 159.5 162.8

Federal Government Operations

These basic activities of the federal government, which account for

about 15 percent of nondefense discretionary spending, encompass primarily

the conduct of foreign affairs; the Coast Guard; the administration of Social

Security and Medicare; law enforcement, judicial, and regulatory activities;

the legislative branch; and the Internal Revenue Service. After an outlay

119
TABLE V-13. CBO ESTIMATE OF THE ADMINISTRATION'S PROPOSED

REDUCTIONS IN NONDEFENSE DISCRETIONARY SPENDING (By fiscal year, in billions of dollars)

Cumulative

Five-Year

198* 1985 1986 1987 1988 Changes

CBO Baseline OutlaysNondefense Discretionary

Programs 152.7 159.6 167.0 176.2 183.7

Proposed Changes

Federal Government

Operations 0.7 0.7 0.6 0.5 0.3 2.7

Aid to Foreign

Governments and

International

Organizations 0.1 -0.1 -0.3 -0.5 -0.6 -1.5

Transportation, Natural

Resources, and other

Infrastructure -1.8 -2.9 -3.5 -4.3 -5.1 -17.5

Research and

Development -0.1 -0.3 -1.2 -1.8 -3.1 -6.6

Benefits and Services

to Individuals -0.9 -3.* -5.3 -7.5 -9.3 -26.5

Assistance to Business

and Commerce -2.6 -1.6 -2.2 -4.5 -5.1 -16.0

Federal Pay Raises

and Retirement

Contributions -0.8 0.5 1.1 1.5 1.9 *.2

Total Changes -5.3 -7.2 -10.8 -16.7 -21.0 -61.2

President's Budget as

Estimated by CBO 1*7.5 152.* 156.2 159.5 162.8

120
increase of 14 percent in 1983, the President is proposing to continue real

growth in these programs. For 1984, the budget proposes a 7 percent

increase in budget authority, resulting in an estimated outlay increase of

$1.3 billion, or 5.8 percent. This represents an increase of over $0.7 billion

above the baseline level, with the largest increases targeted for the Federal

Bureau of Investigation, the Internal Revenue Service, the State Department, and the United States Information Agency (see Table V-14). Coast

Guard programs are maintained at about the baseline level, while proposed

funding for energy information, policy, and regulation activities is below the

1983 level.

TABLE V-14. PROPOSED FUNDING CHANGES FOR FEDERAL GOVERNMENT OPERATIONS (By fiscal year, in billions of

dollars)

Cumulative

Five-Year

1984 1985 1986 1987 1988 Changes

CBO Baseline Outlays

Proposed Changes

Federal Bureau of

Investigation

Internal Revenue

Service

Department of State

United States Information Agency

Energy information,

policy and

regulation

Other

Total Changes

President's Budget as

Estimated by CBO

22.7 23.1 23.6 24.1 24.6

0.2 0.1 0.1 0.1 0.1

0.2

0.1

0.3

0.1

0.3

0.2

0.3

0.2

0.3

0.2

0.1 0.2 0.3 0.3 0.3

-0.1 -0.1 -0.2 -0.2 -0.2

0.2 0.1 -0.1 -0.2 -0.4

0.7 0.7 0.6 0.5 0.3

23.4 23.8 24.2 24.5 24.9

0.6

1.4

0.8

1.2

2.7

121

15-966 0-83- 9
Aid to Foreign Governments and International Organizations

This category includes programs for development and security assistance, contributions to international organizations, and international monetary programs. Outlays for these activities have increased from $7.6 billion

in 1980 to a current estimate of $9.2 billion for 1983, with the largest

growth occurring in the economic support fund and foreign military sales

financing. Outlays for economic and financial assistance also increased

during this period, reflecting increased funding for these programs in the

late seventies.

The President's budget allows increased funding for foreign aid in

1984, with decreases in subsequent years, relative to the CBO baseline. The

1984 budget authority request for economic and financial assistance is

slightly above the CBO baseline projection, primarily because of the

substantial increase proposed for the International Development Association. This increase is offset by reductions in a number of other aid

programs, so that 1984 outlays are $0.1 billion below the baseline projection.

Additional savings of $1.4 billion are projected for 1985 through 1988,

largely because the Administration's budget plan provides no increases in

budget authority for those years (see Table V-15).

The largest 1984 increases are in funding for security assistance, for

which the President is also seeking $0.4 billion in 1983 supplemental

appropriations and $0.5 billion in additional 1983 off-budget direct loans for

financing foreign military sales. The supplemental include $250 million for

Lebanon, as well as funds previously requested but not provided in the

Continuing Appropriations Resolution. Military assistance programs administered by the Department of Defense represent the bulk of the security

assistance request. The largest single program is $4.4 billion requested in

1984 for foreign military sales guaranteed loans, provided off-budget by the

Federal Financing Bank; this represents an increase of $0.8 billion above the

$3.6 billion currently available for 1983 and $0.3 billion above the $4.1

billion level the President is now requesting for 1983. On-budget funding for

military assistance is also increased, by $0.4 billion over the CBO baseline in

1984. For 1984 through 1988, total security assistance outlays are projected

to match the baseline levels, with the increases in military assistance offset

by cuts in forgiven direct loans to Israel. The percentage of military

assistance provided as guaranteed loans is the same as in 1983, approximately 70 percent.

Current law for foreign military guarantees sales does not require the

appropriation of reserves for new loans, and none is requested for 1984, even

though a substantial proportion of the loans should be considered risky. The

proposed 1983 supplemental and 1984 guaranteed loan programs include over

122
TABLE V-15. PROPOSED FUNDING CHANGES FOR AID TO FOREIGN

GOVERNMENTS AND INTERNATIONAL ORGANIZATIONS

(By fiscal year, in billions of dollars)

Cumulative

Five-Year

1984 1985 1986 1987 1988 Changes

CBO Baseline Outlays 10.1 10.4 10.7 11.1 11.4

Proposed Changes

Economic and financial

assistance -0.1 -0.2 -0.3 -0.5 -0.4 -1.5

Security assistance _

and other 0.2 0.1 * -0.1 -0.2 *

Total Changes 0.1 -0.1 -0.3 -0.5 -0.6 -1.5

President's Budget as

Estimated by CBO 10.2 10.3 10.4 10.6 10.7

* Less than $50 million.

$1 billion in loans to 14 countries that are receiving balance-of-payments

assistance from the International Monetary Fund (IMF). Payments to the

Federal Financing Bank on rescheduled loans and defaults (late payments)

are made by the Guarantee Reserve Fund. Net payments by the Guarantee

Reserve Fund have been over $100 million per year since it was created in

1981, and are estimated to increase over the next five years. The

Administration's projections show the fund's balance falling below $750

million in 1984 and being exhausted in 1987, requiring new appropriations to

make payments on bad loans in 1988.

An agreement by the Interim Committee of the International Monetary Fund for an increase in the resources of the IMF was recently

announced. The agreement calls for an increase in quota subscriptions of

47.4 percent and an increase in the General Arrangements to Borrow (GAB)

to $19 billion. The U.S. share is estimated at $5.8 billion of the increased

123
quota subscription and $2.6 billion for the GAB. The increase in both the

quota and the GAB will require authorization and appropriation action. The

last subscription increase required the United States to pay 25 percent of

the quota subscription in Special Drawing Rights (SDRs), a monetary reserve

asset, and 75 percent in the form of a letter of credit. Dollars are

transferred to the IMF by drawing down the letter of credit or as loans

through the GAB. As the letter of credit is drawn down or funds loaned

through the GAB, the U.S. reserve position in the IMF, a liquid interestearning asset, is increased. Dollar transfers to the IMF are not treated as

net budget outlays, but they do affect the Treasury's cash position and

borrowing requirements.

Transportation, Natural Resources, and Other Infrastructure

About 30 percent of discretionary spending is devoted to the construction, operation, management, or maintenance of the physical resources that

make up the nation's infrastructure--including the major transportation

systems, pollution control facilities, forests, parks, public lands, water,

mineral and other natural resources, and community development projects.

Spending for these programs has been reduced significantly since 1981, and

1983 outlays will be about 5 percent below the 1981 level, a real reduction

of about 15 percent. The President is proposing to increase aggregate

infrastructure spending by about 2 percent per year between 1983 and 1988,

with the increase being focused almost entirely on two major areas--the

federal-aid highways program, and Federal Aviation Administration (FAA)

operations, facilities, and development activities (see Table V-16). Highway

spending is governed largely by the recently enacted Surface Transportation

Assistance Act of 1982 (Public Law 97-424), which sharply increased

spending authority from the Highway Trust Fund, to be supported by

increased gasoline taxes. Although the President is proposing slightly lower

obligation ceilings than provided in the act, outlays for grants to states

under the federal-aid highways program are estimated to increase from $8.4

billion in 1983 to $11.5 billion in 1984, and to $14.2 billion by 1988. 2/ FAA

spending is also projected to rise rapidly under the Administrations proposal, from $3.6 billion in 1983 to $4.1 billion in 1984, and to $5.4 billion by

1988. FAA spending authority from the Airport and Airways Development

Trust Fund was increased substantially by the 1982 tax bill (TEFRA), with

2. Since the baseline incorporates the spending levels in the Surface

Transportation Act of 1982, these do not appear as outlay increases in

Table V-16. The savings shown in the table reflect the Administration's

proposal to reduce the annual obligation ceilings established in the act.

124
TABLE V-16. PROPOSED FUNDING CHANGES FOR TRANSPORTATION,

NATURAL RESOURCES, AND OTHER INFRASTRUCTURE

(By fiscal year, in billions of dollars)

Cumulative

Five-Year

1984 1985 1986 1987 1988 Changes

CBO Baseline Outlays

Proposed Changes

Federal Aviation

Administration

Federal-aid highways

Mass transit

programs

Corps of Engineers

construction

Community & regional

development

Energy programs

Forest Service

Other

Total Changes

President's Budget as

Estimated by CBO

47.2 48.5 49.8 51.0

0.1 0.3 0.5 0.7 0.8

-0.3 -0.2 -0.2 -0.5 -1.0

-0.5 -1.0 -1.1 -1.3 -1.2

-0.4 -0.6 -0.6 -0.7 -0.7

-0.2 -0.2 -0.6 -1.0 -1.3

-0.1 -0.3 -0.3 -0.3 -0.3

-0.3 -0.2 -0.2 -0.2 -0.3

-0.2 -0.7 -0.9 -1.0 -1.0

-1.8 -2.9 -3.5 -4.3 -5.1

43.0 44.3 45.1 45.5 46.0

-17.5

large increases for grants-in-aid to airports and for development, procurement, and installation of improved air traffic control systems.

Under the President's budget plan, all other infrastructure spending

would decline from $29.7 billion in 1983 to $27.4 billion in 1984 and to $26.4

billion by 1988. These spending levels represent a reduction in spending of 5

percent in 1984 and 15 percent by 1988, relative to the CBO baseline

projection. The largest reduction relative to the baseline is for mass transit

programs, with outlay savings of about $5 billion over the five-year period.

This reflects primarily a 75 percent reduction in operating subsidies in 1984,

125
and elimination of such subsidies thereafter. Corps of Engineers construction activities are also held below the baseline level, with budget authority

reduced $0.6 billion in 198* and $3.2 billion over the five-year period. In

addition, spending reductions are proposed for community and regional

development activities, with budget authority below the baseline by $0.9

billion in 1984 and by $5.9 billion between 1984 and 1988; resulting outlay

savings on the unified budget are estimated to be $3.3 billion over the fiveyear period, with additional off-budget savings of $1.2 billion from the rural

development insurance fund (RDIF). Appalachian regional development

programs, the rehabilitation loan fund, the Economic Development Administration, and RDIF business loan guarantees would all be terminated, while

rural water and waste disposal grants and loans would be sharply reduced.

Funding for community development block grants and urban development

action grants (UDAG) would be held at about the 1983 level through 1988.

The President proposes to reduce 1984 spending below the 1983 level

for a wide array of other infrastructure programs including:

o Energy conservation grants;

o Forest Service activities;

o Land acquisition for parks, wilderness, and wildlife areas;

o Rail transportation;

o Environmental Protection Agency abatement control and compliance activities;

o National Oceanic and Atmospheric Administration programs.

These and other programs account for outlay savings totaling $0.7

billion in 1984 and $6.4 billion between 1984 and 1988, relative to the

baseline projections.

Research and Development

The largest programs in this area include aeronautical and space

activities of the National Aeronautics and Space Administration (NASA),

totaling almost $7 billion in 1983; health research (over $4 billion in 1983,

mostly at the National Institutes of Health); and energy research by the

Department of Energy (over $3 billion in 1983). Programs of the National

Science Foundation (NSF) and the Departments of Agriculture and Education

126
also fall in this group. In aggregate, outlays for these programs have

declined in real terms from 1981 to 1983, and the Administration is

proposing to continue this trend over the next several years (see

Table V-17). The President's budget includes $17.5 billion in budget

authority for 1984, 2.6 percent above the 1983 level, but 1.2 percent below

the baseline projection. Proposed funding for both NASA and NSF in 1984 is

above the baseline level, by 3 percent and 12 percent respectively, while all

other major research programs are reduced in real terms. The reduction in

energy research is concentrated in fossil and solar energy, while nuclearrelated research and development is increased in real terms. Funding for

health research is frozen at about the 1984 level through 1988, with total

outlays $2.4 billion, or 10 percent, below the baseline over the five-year

period. Beginning in 1986, NASA outlays under the President's budget plan

TABLE V-17. PROPOSED FUNDING CHANGES FOR RESEARCH AND

DEVELOPMENT (By fiscal year, in billions of dollars)

Cumulative

Five-Year

1984 1985 1986 1987 1988 Changes

CBO Baseline Outlays 17.7 18.0 18.6 19.2 20.1

Proposed Changes

National Science

Foundation 0.1 0.1 0.1 * -0.1 0.2

NASA 0.1 0.1 -0.4 -0.7 -1.6 -2.5

Department of

Energy -0.2 -0.2 -0.2 -0.2 -0.2 -1.0

Health -0.1 -0.2 -0.5 -0.7 -0.9 -2.4

Education, Agriculture,

and other * -0.1 -0.2 -0.2 -0.3 -0.8

Total Changes -0.1 -0.3 -1.2 -1.8 -3.1 -6.6

President's Budget as

Estimated by CBO 17.6 17.7 17.4 17.4 16.9

* Less than $50 million.

127
are below the baseline level, by a total of $2.7 billion through 1988,

primarily reflecting proposed reductions in spending for space-shuttle operations.

Benefits and Services to Individuals

Over 30 percent of nondefense discretionary spending is currently

devoted to providing benefits and services to individuals--including housing,

education, employment and job training, health services, legal aid, veterans1

hospitals, and assistance in paying energy costs. Spending for these

programs has been reduced since 1981, with 1983 outlays estimated to be

$0.5 billion, or 1.0 percent, below the 1981 level. The President is proposing

to hold spending in this category about 2 percent below the baseline level in

1984, and about 10 percent below the baseline for 1984 through 1988 in

total. This would produce a savings of $0.9 billion in 1984 and $26.5 billion

over the five-year period, the largest amount (and the second largest

percentage) of savings among the categories of discretionary spending used

in this analysis (see Table V-18).

Education Programs. More than one-third of the five-year savings are

projected in education programs. The President is proposing over $0.3

billion in rescissions for 1983, and 1984 budget authority $0.5 billion below

the 1983 request, a combined reduction of over 7 percent below the current

funding level. These savings would be obtained by sharply reducing funding

for bilingual and vocational education, terminating the Indian education

grant program, and eliminating certain grants to postsecondary institutions

that provide education support services to low-income students. Increasing

savings are projected in subsequent years, because funding for most programs is held at the 1984 level through 1988. As a result, the President's

1988 budget authority estimate is $4.0 billion, or 28 percent, below the

baseline projection for that year, with outlays $3.3 billion below the

baseline.

Employment and Training Programs are also targeted for significant

reductions from the 1983 program levels, with outlays in 1984 estimated to

be $0.8 billion, or 17 percent, below the baseline, and $0.4 billion below the

1983 level. The President is proposing to fund the Job Training Partnership

Act at $3.6 billion in 1984, $0.2 billion below the 1983 appropriation. He

would also eliminate the work incentive program. Funding for 1985 through

1988 is maintained at the 1984 level, resulting in 1988 outlays $1.6 billion,

or 30 percent, below the CBO baseline.

Housing Programs are also a significant source of projected savings in

the budget, reflecting the Administration's continuing efforts to restrain the

128
TABLE V-18. PROPOSED FUNDING CHANGES FOR BENEFITS AND

SERVICES TO INDIVIDUALS (By fiscal year, in billions of

dollars)

Cumulative

Five-Year

1984 1985 1986 1987 1988 Changes

CBO Baseline Outlays

Proposed Changes

Education programs

Employment and

training programs

Housing programs

Health programs

Social services

Legal Services

Corporation

Food and nutrition

programs

Veterans1 hospitals and

administration

Low-income energy

assistance and

other

Total Changes

President's Budget as

Estimated by CBO

47.4 50.1 52.8 55.5 58.1

-0.3 -1.3 -2.0 -2.7 -3.3

0.2 0.1 -0.3 -0.4 -0.4

.0.9 -3.4 -5.3 -7.5 -9.3

46.5 46.7 47.5 48.0 48.8

-9.6

0.7

0.5

0.1

0.4

-0.9

-0.3

-0.5

-0.*

-1.2

-0.8

-0.6

-0.6

-1.4

-1.8

-0.8

-0.7

-1.6

-2.6

-1.0

-0.8

-5.8

-5.1

-3.0

-2.9

0

0

0

.2

.1

.2

-0

-0

0

.3

.1

A

-0.

-0.

0.

3

2

6

-0

-0

0

.3

.2

.8

-0.

-0.

1.

3

3

1

-1.

-0.

3.

4

8

1

growth of federal housing subsidies. In addition to reducing the number of

additional units coming under payment, major structural changes are proposed for programs administered by both the Department of Housing and

Urban Development (HUD) and the Farmers Home Administration (FmHA).

Under these proposals, low-income rental assistance provided by HUD's

Section 8 program would be in the form of five-year certificates (vouchers)

rather than the 15-to-40-year contracts currently typical of the program.

Other proposals would increase tenant contributions to rent by requiring

129
that food stamps be counted as income and increasing the current 10

percent cap on annual tenant rent increases to 20 percent. As a result,

outlay savings would total $5 billion by 1988, with additional savings in later

years. The budget request would also virtually end FmHAfs low- and

moderate-income direct mortgage loan programs. State block grants are

proposed in their place. Projected rural housing insurance fund (RHIF) loan

activity in 1984, plus the proposed block grants, would result in obligations

of $1.2 billion, compared with $3.4 billion in 1983. The President's rural

housing proposals would produce net outlay savings of $12 billion from 1984

through 1988. Most of these would occur off budget, relative to the CBO

baseline projections, because the Administration is proposing to change

accounting procedures to eliminate the budgetary impact of RHIF asset

transactions with the Federal Financing Bank.

Health Programs. The President is also seeking savings in health

programs. The 1*84 budget authority request is more than $0.2 billion below

the 1983 level, and 11 percent below the CBO baseline. The largest

reductions are sought in health education and training programs and in

activities of the Indian Health Service. Most other programs are held at

about the 1983 level for 1984 through 1988, resulting in outlay savings of $3

billion over the five-year period, relative to the CBO baseline. As a result,

1988 budget authority and outlays would be about $1 billion, or more than 25

percent, below the baseline projection.

Social Services Programs. The budget includes additional outlay

reductions of 52.9 billion from 1984 through 1988 for social services

programs, largely by eliminating community services block grants that were

funded at $359 million in 1983. Most other social services programs are

maintained at about the 1983 level through 1988.

Legal Services Corporation. No 1984 funds are requested for the

Legal Services Corporation, which received $241 million in 1983, despite the

Administration's attempt to eliminate its funding last year. Termination of

the legal services program would save close to $300 million per year in

outlays, and a total of $1.4 billion between 1984 and 1988, relative to the

CBO baseline.

Food and Nutrition Programs. Another source of savings in this

category is food and nutrition programs, primarily the special supplemental

food program for women, infants, and children (WIC) and the commodity

supplemental food program. The budget estimates for these programs for

1984 through 1988 are maintained at the 1983 level, resulting in outlay

reductions of $50 million in 1984 and $0.8 billion in total through 1988,

relative to the CBO baseline.

130
Low-Income Home Energy Assistance. The remaining source of

savings is in low income home energy assistance. Almost $2.0 billion was

appropriated for these grants to states in 1983. The President is proposing

to reduce funding to $L3 billion in 1984, and to target the assistance to

states with the greatest need. With budget authority frozen at the 1984

level through 1988, real spending would be reduced by 47 percent in 1988.

Veterans1 Programs. The one general area in this category budgeted

for overall funding increases is the veterans1 programs. The budget

authority request for 1984 is $9.8 billion, compared with $9.1 billion in 1983.

The largest increases are for medical care (up $0.4 billion) and for

construction activities (up $0.3 billion), which are largely for increased

geriatric research and care and for construction of additional Veterans

Administration nursing homes, respectively. Construction spending between

1984 and 1988 is estimated to be $0.9 billion above the CBO baseline, while

medical care outlays under the President's budget would be $2.1 billion

above the baseline over the five-year period.

Assistance to Business and Commerce

The major federal activities in this area include the on-budget

payment to the Postal Service and programs of the Departments of

Agriculture and Commerce, the Government National Mortgage Association

(GNMA), the Small Business Administration (SBA), and the Export-Import

Bank. The Administration's proposed changes in these activities are the

source of the largest 1984 outlay reductions in the nondefense discretionary

category. However, the net savings from these program reductions are not

as large as the figures that appear in Table V-19. In particular, the outlay

decrease for the GNMA special assistance functions fund mortgage purchase

program is estimated to be $1.4 billion in 1984 and $4.7 billion in total by

1988. These figures reflect not only the proposed termination of the

program, and transfer of its assets and liabilities to HUD!s management and

liquidating functions fund, but also the proposed forgiveness of the large

debt owed to the Treasury. 3/ The latter action would eliminate substantial

intragovernmental interest payments from GNMA to the Treasury, which do

not affect the unified budget totals. Actual savings from termination of

this program are not significant until 1986, and are estimated to total about

$0.3 billion by 1988.

3. The management and liquidating functions fund is classified as nondiscretionary, and the impact on that fund of this change is included in the

"other" proposed changes category in Table V-ll.

131
TABLE V-19. PROPOSED FUNDING CHANGES FOR ASSISTANCE TO

BUSINESS AND COMMERCE (By fiscal year, in billions of

dollars)

Cumulative

Five-Year

1984 1985 1986 1987 1988 Changes

CBO Baseline Outlays 8.4 7.3 7.6 9.3 9.5

Proposed Changes

GNMA mortgage

purchase program -1.4 * -0.1 -1.5 -1.7

Payment to the

Postal Service -0.4 -0.6 -0.5 -0.5 -0.5

Small Business

Administration -0.5 -0.7 -0.8 -0.8 -0.9

Export-Import

Bank -0.1 -0.3 -0.5 -0.6 -0.7

Agriculture

programs -0.2 -0.3 -0.4 -0.6 -0.8

Other * 0.3 0.1 -0,5 -0.5

Total Changes -2.6 -1.6 -2.2 -4.5 -5.1 -16.0

President's Budget as

Estimated by CBO 5.8 5.7 5.4 4.7 4.4

* Less than $50 million.

The Administration is proposing to obtain further savings by reducing

the payment to the Postal Service to $400 million per year, beginning in

1984--which would result in savings relative to the baseline of $0.4 billion in

1984 and $2.5 billion between 1984 and 1988. This would require elimination

of the public service subsidy, and a reduction in revenue forgone subsidies

for nonprofit mailers. Program cuts are also proposed for the Small

Business Administration, including the elimination of most direct business

loans and a reduction in the amount of loan guarantees. These are

estimated to result in outlay savings of $0.2 billion in 1984 and $1.5 billion

in total by 1988. In addition, the budget projections for SB A disaster loan

132
net outlays are a total of $2.0 billion below the CBO baseline between 1984

and 1988, due in part to unrealistically low loan levels in view of historical

experience. The savings also reflect the President's proposal to extend the

existing provision excluding farmers from eligibility for SBA disaster loans.

The President is also proposing to constrain the lending activities of

the Export-Import Bank, by reducing the direct loan limit from $4.4 billion

in 1983 to $3.8 billion per year in 1984 through 1988. This would produce

outlay savings relative to the baseline of $2.1 billion over the five-year

period.

The largest reductions proposed by the President for discretionary

agriculture programs are in direct loans made to farmers from the agricultural credit insurance fund (ACIF). Loan obligations in the budget for

ACIF are frozen at about $4.0 billion per year from 1984 through 1988,

which is below the Administration's estimated $4.4 billion for 1983 and

below the baseline Jby a total of $5.4 billion from 1984 through 1988. Most

of this reduction is attributable to the proposed ceiling of $1.5 billion on

emergency disaster loans, and legislation will be proposed to allow the

Secretary of Agriculture to restrict the availability of emergency disaster

loans to areas where federal crop insurance is not available. The President

also proposes to eliminate interest subsidies for low-income limitedresource farmers. Estimated ACIF savings relative to the baseline are

about $1.4 billion on the unified budget, and about $4 billion off budget,

from 1984 through 1988. The other major reductions in agriculture

programs are in the Extension Service and the Animal and Plant Health

Inspection Service, for which proposed 1984 budget authority is 17 percent

and 19 percent, respectively, below the baseline, with total outlay savings of

about $0.4 billion each from 1984 through 1988.

Allowances for Federal Pay Raises and Retirement Contributions

Although the spending for the pay and benefits of federal employees is

recorded in the individual program accounts throughout the budget, an

allowance for future-year changes for civilian agencies is shown in aggregate in an allowance category. It has not been included in the total for the

categories of discretionary spending discussed previously. The Administration's budgeted allowances reflect two proposals affecting pay levels and

retirement contributions. The President is proposing not to grant federal

civilian and military employees a pay adjustment in fiscal year 1984, and to

limit the increases in future years to the average annual change in private

sector wages and salaries. CBO estimates that this action will reduce

outlays by approximately $1.7 billion in 1984 and by a total of $5.8 billion

through 1988 for all agencies other than the Department of Defense (see

Table V-20).

133
TABLE V-20. PROPOSED CHANGES IN ALLOWANCES FOR FEDERAL

PAY RAISES AND RETIREMENT CONTRIBUTIONS (By

fiscal year, in billions of dollars)

Cumulative

Five-Year

1984 1985 1986 1987 1988 Changes

CBO Baseline Outlays

Proposed Changes

Limitation on

pay raises

Increase in retirement

contributions

Total Changes

President's Budget as

Estimated by CBO

1.7 3.4 5.2 7.1 9.0

-1.7 -1.5 -1.1 -0.9 -0.6

0.9 2.0 2.2 2.4 2.5

-0.8 0.5 1.1 1.5 1.9

0.9 3.9 6.3 8.6 10.9

The President is also proposing to increase the amount federal workers and

their employing agencies must pay into the civil service retirement (CSR)

trust fund from the current 7 percent to 9 percent in 1984 and to 11 percent

in 1985. If enacted, this proposal would increase the CSR contributions

made by federal agencies by about $0.9 billion in 1984 and by $10.1 billion

between 1984 and 1988. These increases in agencies1 contributions would

have no net outlay effect, however, since the higher agency payments would

appear as an offsetting receipt elsewhere in the budget.

NET INTEREST

Net interest consists primarily of interest costs for that portion of the

federal debt held by the public, including the Federal Reserve System. It

also includes interest paid by the government on tax refunds, less interest

received from federal agencies and the public.

The government's interest costs have been growing rapidly in recent

years, reflecting increasing deficits and high interest rates. Outlays for net

134
TABLE V-21. PROPOSED NET INTEREST COSTS AS ESTIMATED BY

CBO (By fiscal year, in billions of dollars)

1983 1984 1985 1986 1987 1988

Interest on the

Public Debt 126.9 138.5 150.9 159.9 165.1 170.3

Interest Received by

Trust Funds -16.9 -19.0 -20.3 -22.7 -25.4 -28.1

Other Interest -22.7 -23.6 -25.7 -27.5 -25.6 -25.8

Total 87.3 95.9 104.9 109.8 114.1 116.3

interest have grown from $14 billion in 1970 to an estimated $87 billion in

1983. Under the Administration's budget plan, net interest would continue

climbing to $96 billion in 1984 and to $116 billion in 1988, an average annual

increase of 5.9 percent over the five-year period (see Table V-21). This

represents a reduction from the CBO baseline projections of $30 billion

between 1984 and 1988.

The President's budget would affect net interest in two major ways.

The largest impact would be from lower deficits relative to the baseline,

resulting in a lower public debt and smaller interest outlays. As shown in

Table V-22, CBO estimates that the total federal debt held by the public

would be about $365 billion lower at the end of 1988 under the President's

budget than under the baseline, reflecting the cumulative reductions in both

on- and off-budget deficits. Lower net interest outlays due to these deficit

reductions amount to about $1 billion in fiscal year 1984 and about $46

billion over the 1984-1988 period (see Table V-23).

These savings are partially offset by lower interest payments from

federal agencies, as a result of program reductions proposed by the

Administration. Most of this reduction would occur in intragovernmental

interest collections by the Treasury Department. A large number of budget

accounts have authority to borrow from the Treasury and pay interest on

these borrowings. The largest such intragovernmental interest payments are

currently received from the Commodity Credit Corporation, the GNMA

special assistance functions fund, and several Farmers Home Administration

programs. The Administration's program calls for reduced outlays by many

of these programs and, hence, a smaller volume of borrowing from the

135
TABLE V-22. PRO3ECTIONS OF DEBT HELD BY THE PUBLIC (By fiscal

year)

1983 1984 1985 1986 1987 1988

CBO Baseline 1,128

President's Budget as

Estimated by CBO 1,131

In Billions of Dollars

1,343 1,569 1,814 2,079

1,321 1,507 1,663 1,832

As a Percent of GNP

2,365

2,000

CBO Baseline

President's Budget as

Estimated by CBO

35.3

35.4

38.4

37.8

41.1

39.4

43.8

40.1

46.6

41.1

49.4

41.7

Treasury. Intragovernmental interest collections are also reduced by a

proposal to forgive future interest payments for two GNMA accounts (the

special assistance functions fund and emergency home purchase assistance).

All of these reductions in intragovernmental interest collections are offset

by outlay reductions elsewhere in the budget. The Administration's program

would also result in lower interest payments to the Treasury by the offbudget Federal Financing Bank as a result of lower off-budget lending. The

total reduction in interest receipts resulting from other program reductions

is about $1 billion in fiscal year 1984, and about $16 billion over the entire

-1988 period.

OFFSETTING RECEIPTS

This category consists of various federal government receipts that are

treated as deductions from outlays rather than as revenues. It includes

proprietary receipts from the public, largely for lease, sale, or royalty

payments for timber, power, or minerals. It also encompasses the receipts

from federal agencies1 payments (as an employer) for employee retirement

and health benefits. Table V-24 shows CBO's estimates of the offsetting

receipts that would result from the Administration's budget proposals for

1984-1988.

136
TABLE V-23. PROPOSED CHANGES IN NET INTEREST OUTLAYS AS

ESTIMATED BY CBO (By fiscal year, in billions of dollars)

Cumulative

Five-Year

1985 1986 1987 1988 Changes

CBO Baseline Outlays

Proposed Changes

Debt service savings

resulting from

lower deficits

Changes in interest

receipts due to

other program

changes

Total Changes

President's Budget as

Estimated by CBO

95.6 106.* 11*.3 123.6 131.1

-0.8 -3.5 -8.0 -14.0 -19.8 -46.1

1.1 2.0 3.5 4.4 5.1 16.1

0.3 -1.5 -4.5 -9.5 -14.8 -30.0

95.9 104.9 109.8 114.1 116.3

Offsetting receipts are estimated to be about $31 billion in 1983,

increasing to about $40 billion in 1988 under baseline assumptions. The

Administration's budget includes a number of proposals that would increase

receipts by $1.6 billion in 1984 and by a total of $25 billion between 1984

and 1988 (see Table V-25). About $12.5 billion of that amount, however, is

an increase in intragovernmental payments for employee retirement benefits, reflecting the proposed increase in the percent of salary paid by both

the government and the employee into the Civil Service Retirement fund.

Only that portion paid by the Postal Service, and thus covered by postal

rates, represents net additional receipts to the budget; that amount would

be about $250 million in 1984 and a total of $2.4 billion between 1984 and

1988.

137

15-966 0-83-1 0
TABLE V-24. PROPOSED OFFSETTING RECEIPTS AS ESTIMATED BY

CBO (By fiscal year, in billions of dollars)

1983 1984 1985 1986 1987 1988

Outer Continental Shelf

Rents and

Royalties -10.1

Other Mineral and Timber

Sales and Leases -3.8

Medicare Premiums -4.2

Employer Share,

Employee Retirement -8.0

Other

Total

-4.8 •••••••••••

-30.9

-8.8 -9.2 -13.4 -11.5 -11.2

.3.8 -4.1 -4.2

.4.7 .5.9 .7.4

-4.4 -4.5

-9.2 -11.4

-9.6 -12.1 -12.9 -13.5 -14.2

-6.4 -6.5 -6.6 -7.0 -7.1

•33.3 -37.8 -44.5 -45.5 -48.4

The Administration is also proposing a number of new or increased

user fees—the largest of which are for use of inland waterways ($0.2 billion

per year), deep-draft ports (an average of $0.3 billion per year), and certain

Coast Guard services (about $60 million annually). Several user fees were

approved by the 97th Congress, including increased gasoline taxes to finance

highway and transit programs, fees on electric utilities to finance nuclear

waste disposal, and increased airport and airway taxes to finance part of the

cost of the national aviation system. However, fees similar to the major

new fees included in the 1984 budget were proposed last year and were not

enacted.

The Administration's budget also includes additional receipts

reflecting the proposal to increase premiums for the Supplementary Medical

Insurance part of Medicare by 40 percent between January 1984 and January

1988. The added premiums are estimated to total $0.2 billion in 1985 and

$8.8 billion between 1985 and 1988. If the change is enacted, the average

aged enrollee's share of program costs would rise from 25 percent to 35

percent.

138
TABLE V-25. PROPOSED CHANGES IN OFFSETTING RECEIPTS (By fiscal year, in billions of dollars)

Cumulative

Five-Year

1985 1986 1987 1988 Changes

CBO Baseline Outlays -31.7 -34.2 -39.7 -39.0 -39.9

Proposed Changes

Increased payments for

employer share,

employee

retirement -1.0 -2.4 -2.6 -2.8 -3.0 -11.8

Transportation user

fees -0.5 -0.5 -0.6 -0.6 -0.7 -2.9

SMI premiums 0.3 -0.2 -1.3 -2.8 -4.5 -8.5

Land sales and

other -0.3 -0.3 -0.3 -0.3 -0.3 -1.5

Total Changes -1.6 -3.5 -4.8 -6.5 -8.4 -24.8

President's Budget as

Estimated by CBO -33.3 -37.8 -44.5 -45.5 -48.4

The other major increase in offsetting receipts is attributable to the

Administration's plan to sell public lands under the jurisdiction of the

Departments of Agriculture and the Interior for the purpose of reducing the

public debt. The proposed legislation would result in an estimated $0.2

billion in receipts in 1984 and a total of $1.4 billion by 1988, in addition to

the sales already contemplated by the General Services Administration.

CBO OUTLAY REESTIMATES

As part of its analysis of the President's budget, CBO has reestimated

the Administration's budget program to reflect CBO baseline economic

assumptions and technical estimating methods. The effect of these reestimates on nondefense outlays is summarized in Table V-26 and explained in

139
the remainder of this chapter. Most of the CBO reestimates result from the

use of different economic assumptions—notably lower interest rates and

lower prices. These different economic assumptions reduce estimated

nondefense outlays by an amount growing from $2.0 billion in 1983 to

$9.0 billion in 1984 and $14.1 billion by 1988. Technical estimating

differences affect outlay estimates by smaller amounts, ranging from

+$1.6 billion in 1984 to -$5.8 billion in 1987.

TABLE V-26. CBO REESTIMATES OF THE ADMINISTRATION'S NONDEFENSE SPENDING PROPOSALS (By fiscal year, in billions of dollars)

1983 1984 1985 1986 1987 1988

President's Budget 590.4 603.2 633.3 666.5 704.2 741.4

Preliminary CBO

Reestimates

Different economic

assumptions -2.0 -9.0 -9.4 -11.0 -11.7 -14.1

Technical reestimates -1.6 1.6 -1.0 -4.3 -5.8 -4.1

President's Budget as

Estimated by CBO 586.9 595.8 622.8 651.3 686.6 723.2

Differences in Economic Assumptions

Economic conditions have major effects on federal budget outlays.

About 30 percent of federal spending is directly indexed for inflation

through automatic cost-of-living adjustments (COLAs). Social Security is

the largest indexed program, accounting for 21 percent of total outlays in

1982. Other directly indexed programs include retirement benefits for

federal civilian and military employees, veterans1 pensions, railroad retirement benefits, and Supplemental Security Income benefits. Medicare and

Medicaid costs, while not directly indexed for inflation, increase over time

with the rising costs of medical care. The costs of certain other benefit

programs, such as unemployment insurance and food stamps, vary with

changes in the level of unemployment in the economy. Finally, the cost of

servicing the federal debt depends on the level of interest rates.

140
CBOf

s baseline economic assumptions are discussed in Chapter II, and

the differences between CBO and Administration assumptions are summarized in Table H-2. The effects of utilizing these CBO baseline economic

assumptions on nondefense spending estimates are shown in Table V-27.

The largest economic reestimate results from different interest rate

assumptions, with CBOfs assumed interest rates being lower than those of

OMB throughout the projections period. For calendar year 1983, CBO's

assumed 91-day Treasury bill rate is 1.3 percentage points lower than

OMBfs, and CBOfs assumed three- to five-year note rate is 0.7 percentage

points lower. In later years, the assumed bill rates are closer together, but

the differences in the longer maturities persist. CBO estimates that these

lower interest rates will reduce debt service costs by $1 billion in 1983,

$6 billion in 1984, and $12 billion in 1988. Other economic reestimates of

outlays and revenues will also result in lower debt levels, which will further

reduce interest outlays.

TABLE V-27. NONDEFENSE OUTLAY REESTIMATES BASED ON CBO!S

BASELINE ECONOMIC ASSUMPTIONS (By fiscal year, in

billions of dollars)

1983 1984 1985 1986 1987 1988

Interest Costs

Lower interest rates -1.1 -5.7 -6.6 -8.2 -10.5 -12.5

Different deficits -0.1 -0.6 -1.6 -2.2 -2.0 -0.9

Social Security and

Other Benefits Indexed

totheCPI -0.2 -1.8 -2.3 -2.6 -3.8 -5.7

Other Benefits Affected

by Inflation -0.2 -0.1 0.1 -0.3 -0.9 -1.9

Unemployment Compensation

and Related Benefits -0.7 -1.1 -0.4 0.4 1.9 3.0

Royalties from Offshore

Oil and Gas Leases 0.3 0.4 1.4 1.8 3.6 3.8

Total -2.0 -9.0 -9.4 -11.0 -11.7 -14.1

141
The inflation rates projected by CBO are slightly below the Administration's, particularly in 1983 and again in 1988. Hence, CBO's assumed

automatic cost-of-living adjustments in federal programs are lower than the

Administration's. For example, the 1983 Social Security COLA assumed by

CBO is 4.1 percent, while the Administration's is 5.1 percent. The CBO and

OMB assumptions for Social Security cost-of-living adjustments, which are

based on the percentage increase in the Consumer Price Index for urban

wage earners and clerical employees (CPI-W) from the first quarter of one

year to the next, are shown in the following table.

Annual Social Security Cost-of-Living Adjustments (Percent)

1983 1984 1983 1986 1987 1988

Administration 5.1 4.8 4.5 4.7 4.5 4.5

CBO 4.1 4.6 4.5 4.2 4.0 3.8

The lower COLAs projected by CBO for Social Security and other indexed

benefits reduce outlays by $1.8 billion in 1984 and $5.7 billion in 1988.

Other benefits affected by inflation also show reduced outlays under CBO

economic assumptions. The reduction is small until 1986 and 1987, when it

reaches $0.9 billion and $1.9 billion, respectively.

CBO assumes slightly lower unemployment rates than OMB early in

the projections period but slightly higher unemployment later on. The lower

rates in 1983 to 1985 contribute to reduced outlays compared with the

Administration. In 1984, the resulting reduction is $1.1 billion, almost

entirely in unemployment insurance benefits. In 1986 to 1988, however,

CBO's higher unemployment rates add to outlays—$3.0 billion in 1988—

partly offsetting the reductions because of interest rates and prices.

The final economic difference between CBO and OMB estimates is for

royalties from offshore oil and gas leases. These royalties are a set

percentage at the value of production and therefore vary with the level of

energy prices. Because CBO assumes generally lower oil and gas prices than

does the Administration, it also assumes lower royalty payments. The

magnitude of the CBO reestimate is small in the early years but grows as

more fields come into production. By 1988, CBO's estimate of royalty

payments is almost $4 billion lower than OMB's.

142
Technical Estimating Differences

Technical estimating differences between CBO and OMB are small for

nondefense spending in the aggregate, but there are a number of offsetting

pluses and minuses. The major technical reestimates are displayed in

Table V-28.

TABLE V-28. NONDEFENSE OUTLAY REESTIMATES BASED ON CBO!S

TECHNICAL ESTIMATING METHODS (By fiscal year, in

billions of dollars)

1983 1984 1985 1986 1987 1988

Mineral Receipts

Farm Price Supports

Medicare

Social Security

Unemployment Insurance

AFDC

Veterans' Compensation

and Pensions

Interest Costs

Estimating differences

Different deficits

OCS Receipts

Other, Net

Total

0.1

*

0.2

-1.0

-3.4

-0.1

0.2

-0.2

-0.4

1.4

1.6

-1.6

0.3

0.8

-0.7

-0.3

-1.8

0.5

-0.1

-0.1

-1.0

2.7

1.3

1.6

0.5

0.8

-1.4

-1.7

-0.9

0.6

-0.4

0.1

-1.3

1.6

1.1

-1.0

0.8

2.0

-0.8

-2.5

-0.9

0.7

-0.7

-1.3

-1.3

-1.8

1.5

-4.3

1.2

1.6

*

-3.5

-1.4

0.8

-1.1

-3.2

-0.7

-0.7

1.2

-5.8

1.4

1.4

1.0

-3.0

-1.6

1.0

-1.5

-4.8

0.2

0.1

1.4

-4.1

Less than $50 million.

CBO estimates that receipts from onshore mineral leases will be less

than the Administration projects. This stems primarily from lower projections of royalties to be collected from recovery of oil, natural gas, and coal

on federally owned lands. CBO assumes lower rates of production of oil and

coal than does the Administration, as well as generally lower gas and oil

prices.

Farm price support outlays are estimated to be above Administration

estimates because of different assumptions about participation in various

143
acreage reduction programs. Farmers participating in the payment-in-kind

program are already eligible for payments and commodity loans under other

acreage reduction programs; by participating in PIK, they receive noncash

incentives to reduce planting further. In 1984 and 1985, CBO expects less

acreage reduction than the Administration under PIK. The resulting larger

harvest causes a higher commodity loan volume than estimated by the

Administration. In 1986 through 1988, estimated supplies remain large,

holding prices down. CBO's estimates of participation in assumed acreage

reduction programs are greater than the Administration's, thereby

increasing spending for deficiency payments.

In Medicare, the technical reestimate reflects differing CBO and

Administration estimates of the effects of recently passed and newly

proposed legislation. CBO expects greater savings from the revamped limits

on reimbursable hospital costs, which were part of the Tax Equity and Fiscal

Responsibility Act. CBO also makes different assumptions about the effect

of proposed cost changes on beneficiaries1 use of'hospital services and about

the response of physicians to the proposed freeze on reimbursable charges.

The reestimates in Social Security and veterans1 compensation and

pensions result from generally lower CBO projections of the beneficiary

population. In Social Security, the difference represents 1 percent of

program costs or less.

The CBO technical reestimate in unemployment compensation is based

on continuation of the unusually low level of insured unemployment—the

number of unemployed who claim unemployment compensation—relative to

total employment. Last year, this divergence led to an overestimate of

unemployment compensation outlays by both the Administration and CBO.

The new CBO estimate reflects the recent relationship of insured to total

unemployment. As a result, fewer states are expected to have insured

unemployment rates high enough to trigger extended unemployment benefits, and fewer individuals are expected to collect both regular and extended

benefits than in the Administration's estimates. In addition, the CBO

estimate of extended benefits for 1983 is consistent with actual outlays

during the first quarter of the fiscal year, while the Administration's outlays

are well above the first quarter's rate.

The CBO technical reestimate for AFDC reflects different estimates

of savings from the Administration's legislative proposals as well as different estimates of benefit increases under current law. CBO shows about

$400 million lower savings per year for the job search/workfare proposals in

1984-1988 and lower savings for all proposals in 1984 because of assumed

implementation delays. In addition, CBO projects increasingly higher

144
benefit payments per family than does the Administration. CBOf

s projected

payment increases are well below actual increases in recent years, however,

because it is assumed that the financial problems of states will cause them

to restrain AFDC program outlays.

CBO and Administration estimating differences in the net interest

function are small, on balance, in the 1983-1985 period, although there are

some offsetting changes. In the later years, CBO estimates are lower than

the Administration's by increasing amounts, because CBO is more consistent

in its treatment of interest payments on special debt issues held by federal

government trust funds. These interest payments are recorded both as an

outlay (interest on the public debt) and as offsetting receipts (interest

received by certain trust funds) and, if estimated consistently, should have

essentially no effect on net interest costs. Additional differences in

interest costs result from the effect of other technical reestimates on debt

levels.

The technical reestimates of receipts from Outer Continental Shelf

(OCS) leases result from two factors. The reestimates for 1983 and 1984

derive from different projections of bonus receipts from new lease sales.

The Administration expects record per-sale bonus receipts from Gulf of

Mexico sales in 1983 and 1984. Based on recent past Gulf of Mexico sales

and current economic conditions, CBOfs estimates of bonuses for those sales

are less than record levels. CBO also assumes a later release of sums

currently in escrow accounts pending final judicial action. This reduces

receipts in 1984 and 1985 but increases them in 1986 and 1987.

145

APPENDIX

APPENDIX. MAJOR CONTRIBUTORS TO THE PREPARATION OF

THIS REPORT

Members of the Budget Analysis, Fiscal Analysis, and Tax Analysis

Divisions were major contributors to this report. The individuals who helped

prepare the analyses for each chapter are listed below:

Chapter I.

Analyst

Paul N. Van de Water

Telephone

Number

226-2880

Chapter II. Frederick C. Ribe

Frank S. Russek, Jr.

Patricia C. Kinslow

Martin Regalia

John W. Straka

226-2769

226-2766

226-2880

226-2777

226-2771

Chapter III. Rosemary Mar cuss

Joseph Minarik

Valerie Amerkhail

Willie Bradford

Thomas Buchberger

Robert Lucke

James Nason

Kathleen O!Connell

Larry Ozanne

Martha Smith

Bruce Vavrichek

226-2683

226-2685

226-2684

226-2688

226-2665

226-2635

226-2689

226-2693

226-2627

226-2678

226-2676

Chapter IV. C. G. Nuckols

Edward A. Swoboda

Eugene Bryton

Julia Doherty

Patrick Haar

Barbara Hollinshead

Michael A. Miller

William P. Myers

Jonathan Tyson

226-2800

226-2840

226-2840

226-2840

226-2840

226-2840

226-2840

226-2840

226-2840

149
Telephone

Analyst Number

Chapter V. Charles E. Seagrave 226-2820

Robert A. Sunshine 226-2860

Stephen Chaikind 226-2820

Hinda Ripps Chaikind 226-2820

Howard Conley 226-2860

Mary Ann Curtin 226-2860

Malcolm Curtis 226-2820

Charles Essick 226-2860

Debra Goldberg 226-2860

Kathleen Gramp 226-2860

Richard Hendrix 226-2820

Roger Hitchner 226-2820

Anne Hoffman 226-2860

Deborah Kalcevic 226-2820

Kathleen Kelly 226-2860

Carla Kruytbosch 226-2840

Linwood Lloyd 226-2860

Kelly Lukins 226-2820

Mary Maginniss 226-2860

Patrick McCann 226-2860

John Navratil 226-2820

Jeffrey Nitta 226-2860

Carmela Pena 226-2820

Janice Peskin 226-2820

Kathy A. Ruffing 226-2880

Stagey Sheffrin 226-2820

Kathleen Shepherd 226-2820

Brent Shipp 226-2860

Judith Walker 226-2860

Joseph C. Whitehill 226-2840

150