CONGRESS OF THE UNITED STATES

CONGRESSIONAL BUDGET OFFICE

An Analysis of

the President's Budgetary Proposals

for Fiscal Year 1995

Prepared at the Request of the Senate Committee on Appropriations

.V—,,

°^W'^

AN ANALYSIS OF THE PRESIDENT'S

BUDGETARY PROPOSALS FOR FISCAL YEAR 1995

The Congress of the United States

Congressional Budget Office
NOTES

Unless otherwise indicated, all years referred to in Chapter 2 are calendar years,

and all years in other chapters and Appendix A are fiscal years.

Unemployment rates throughout the report are calculated on the basis of the

civilian labor force.

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

rounding.
Preface

T

his analysis of the President's budget for fiscal year 1995 was prepared at the

request of the Senate Committee on Appropriations. The report discusses the

President's policies in terms of changes from the Congressional Budget Office's

(CBO's) baseline budget projections for 1995 through 1999. It provides estimates of the

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

and technical estimating methods.

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

Analysis, and Tax Analysis divisions under the supervision of C.G. Nuckols, Robert

Dennis, and Rosemary D. Marcuss. James Horney wrote Chapter 1, with contributions

by Richard A. Kasten, Kathy A. Ruffing, and Paul N. Van de Water. Chapter 2 was

written by Adrienne Kearney, with research assistance from Laurie Brown. Michael

Miller wrote Chapter 3, and Kathy A. Ruffing wrote Appendix A. The baseline revenue

estimates were prepared under the direction of Richard A. Kasten. The estimates of the

President's revenue proposals were prepared by the Joint Committee on Taxation. The

principal contributors to the revenue and spending estimates and analyses are listed in

Appendix B.

Paul L. Houts supervised the editing and production of the report. Major portions

were edited by Paul L. Houts, Sherwood D. Kohn, and Leah Mazade. Christian Spoor

provided editorial assistance during production. The authors owe thanks to Marion Curry,

Janice M. Johnson, Linda Lewis, and L. Rae Roy, who assisted in the preparation of the

report. Kathryn Quattrone and Martina Wojak-Piotrow prepared the report for final

publication.

Robert D. Reischauer

Director

April 1994

Contents

ONE

TWO

THREE

APPENDIXES

A

B

THE PRESIDENT'S BUDGETARY PROPOSALS

Deficit Projections 1

Discretionary Spending 5

Nondiscretionary Spending 11

Revenues 14

The Administration's

Health Proposal 14

COMPARISON OF ECONOMIC FORECASTS

Short-Term Outlook 19

Medium-Term Projections 24

Economic Implications of

Health Care Reform 27

Effect of CBO's Economic

Projections on the

Administration's Budget 27

THE ADMINISTRATION'S DEFENSE BUDGET

Priorities in the Current Request 29

The Risk of Higher Inflation 31

The Risk of Not Cutting

Infrastructure 33

Future Adjustments to the

Defense Budget 34

CBO Baseline Budget Projections 37

Major Contributors to the Revenue

and Spending Projections 47

19

29
vi AN ANALYSIS OF THE PRESIDENT'S BUDGETARY PROPOSALS April 1994

TABLES

1. CBO' s Estimates of the President's

Budgetary Proposals 2

2. CBO's Estimates of the President's

Budgetary Proposals Excluding Health 4

3. CBO's Reestimates of the President's

Budgetary Proposals Excluding Health 6

4. The Administration's Proposals for

Discretionary Spending in Fiscal Year 1995 10

5. Estimates of Changes in the President's

Budgetary Proposals for Mandatory

Spending and Offsetting Receipts 12

6. Estimated On-Budget and Social Security

Effects of the Administration's Health

Proposal 16

7. Comparison of Congressional Budget

Office, Administration, and Blue Chip

Short-Run Economic Forecasts,

Calendar Years 1992-1995 20

8. Comparison of Federal Reserve,

Congressional Budget Office, and

Administration Economic Projections

for 1994 21

9. Comparison of Congressional Budget

Office, Administration, and Blue Chip

Economic Projections, Calendar Years

1993-1999 22

10. Growth in Labor Productivity in the

Nonfarm Business Sector 27

11. Effects of CBO's Economic Projections

on Estimates of the Administration's

Budget 28

12. The President's Budget for National

Defense for the 1995-1999 Period as

Estimated by CBO 30
CONTENTS VII

13.

14.

A-l.

A-2.

A-3.

A-4.

A-5.

A-6.

Estimated Increases in the GDP Deflator

Estimated Pay Raises for Military and

Civilian Employees

Changes in CBO Baseline Deficit

Projections

CBO Baseline Deficit Projections

CBO Baseline Budget Projections,

Assuming Compliance with Discretionary

Spending Caps

CBO Baseline Projections for Mandatory

Spending, Excluding Deposit Insurance

How Tight Are the Discretionary Caps?

The Budget Outlook Through 2004

32

33

38

39

40

43

44

45

FIGURES

1.

2.

Comparison of Congressional Budget

Office and Administration Economic

Assumptions

Quarterly Real Short-Term Interest Rates

25

26

BOXES

1.

2.

Budget Enforcement Act Scorekeeping Rule 3

The President's Proposals for Civilian

Personnel

Chapter One

The President's Budgetary Proposals

T

he budget for fiscal year 1995 submitted by

President Clinton carries on the fiscal policy

established last August by the Omnibus

Budget Reconciliation Act of 1993 (OBRA-93).

The Congressional Budget Office (CBO) projects

that under current policies-which have changed

little since last August—the deficit will be about

$180 billion in fiscal years 1995 and 1996 and

gradually grow to $213 billion in 1999. Adopting

the Administration's budgetary proposals (excluding

its health proposal) would not substantially affect

anticipated deficits. CBO estimates that, in general,

deficits under the policies set forth in the budget

that the President submitted to the Congress would

be slightly lower than those in CBO's current policy

baseline; the largest reduction, in 1999, would be

less than $7 billion. Total outlays (excluding deposit insurance) in the President's budget would

grow at a rate of less than 4 percent in 1995-the

third year in a row that outlays have increased by

less than 5 percent. In the previous 10 years, outlays grew at an average annual rate exceeding 6

percent. The relatively slow rate of growth in total

outlays in 1995 is in large part the result of continued restraint of discretionary spending—total discretionary outlays will increase by less than 0.5 percent

in 1995.

Overall, CBO's estimates of deficits under the

policies reflected in the President's budget are little

different from the Administration's: they are lower

by $7 billion in 1994 and higher by less than $10

billion a year in 1995 through 1999.

Deficit Projections

CBO projects that under current policies the deficit

will decline from $228 billion in fiscal year 1994 to

$180 billion in 1995 and 1996 before climbing to

$213 billion in 1999 (see Table 1). These baseline

projections assume that discretionary spending will

not exceed the limits in the Balanced Budget and

Emergency Deficit Control Act of 1985 (Balanced

Budget Act) for fiscal years 1995 through 1998 and

will grow at the same rate as inflation in 1999.

They also assume no change in current policies

affecting mandatory spending or revenues. The

current projections reflect small increases in deficits

from the baseline projections released in January

1994 in CBO's The Economic and Budget Outlook:

Fiscal Years 1995-1999. Those changes include the

effects of legislation enacted on February 12, 1994,

to provide relief for victims of the California earthquake (the Emergency Supplemental Appropriations

Act of 1994, P.L. 103-211) as well as revisions

resulting from new information. (The current projections and changes from the January baseline are

detailed in Appendix A.)

CBO estimates that if the policies proposed by

the Administration were adopted (other than the

Administration's proposal to reform the nation's

health care system), they would result in deficits

little different from CBO's revised baseline deficits.

(The Administration's health proposal is discussed

later in this chapter.) This outcome is hardly surprising because the President's budget was intended

to comply with the discretionary spending limits of

the Balanced Budget Act and, except for the provisions included in the health proposal, the budget

proposes only a few relatively minor changes in

laws affecting mandatory spending or revenues.

Under the Administration's policies, CBO estimates that the deficit would be lower than the current baseline projection in 1994, 1996, 1997, and

1999 and higher than the baseline in 1995 and

1998. In only one year would the difference exceed

$5 billion-in 1999, when the deficit would be re-
2 AN ANALYSIS OF THE PRESIDENT'S BUDGETARY PROPOSALS April 1994

duced by nearly $7 billion below the baseline level.

The reduction in 1999 is the result of continued

restraint in discretionary spending in the President's

budget in that year compared with CBO's baseline

Table 1.

assumption that discretionary outlays will

the rate of inflation after the discretionary

pire at the end of 1998.

CBO's Estimates of the President's Budgetary Proposals (By fiscal year, in

April Baseline Deficit Projections8

President's Budgetary Proposals

Excluding Health

Outlays

Discretionary1'

Federal employee retirement offsets

Other mandatory and offsetting receipts

Net interest

Total

Revenues'1

Total Deficit Effect"

Deficits Under the President's

Budgetary Proposals as Estimated

by CBO and Excluding Health"

Administration's Health Proposal

Deficit effect

Debt service

Total

Deficits Under the President's

Budgetary Proposals as Estimated

by CBO and Including Health

1994

227.8

0

0

-0.4

c

-0.4

0

-0.4

227.4

0

0

0

227.4

1995

179.5

3.1

0.5

-0.2

0.1

3.5

-0.5

3.0

182.5

-10.2

-0.3

-10.5

172.0

1996

179.9

-5.1

1.1

0.7

0.1

-3.3

C

-3.3

176.6

1.2

-0.5

0.7

177.2

billions of

1997

191.6

-3.5

1.6

0.7

C

-1.2

0.1

-1.2

190.4

19.5

c

19.5

209.9

dollars)

1998

187.2

0.8

2.1

1.0

0.1

4.0

0.3

4.3

191.5

32.0

1.5

33.5

225.0

grow at

caps ex1999

212.7

-11.0

2.6

1.6

c

-6.8

0.3

-6.5

206.2

21.5

3.1

24.6

230.7

SOURCES: Congressional Budget Office; Joint Committee on Taxation.

a. Assumes compliance with the discretionary spending limits of the Balanced Budget and Emergency Deficit Control Act of 1985.

b. Adjusted to reflect enacted supplemental appropriations and rescissions in the Emergency Supplemental Appropriations Act of 1994 (P.L.

103-211).

c. Less than $50 million.

d. Reductions in revenues are shown with a positive sign because they increase the deficit.
CHAPTER ONE THE PRESIDENT'S BUDGETARY PROPOSALS 3

The health proposal that is part of the President's budget would have a more significant effect

on federal spending and revenues than the other

proposals in the budget. CBO estimates that enactment of the health proposal would reduce the deficit

by $10 billion in 1995, when proposed increases in

tobacco taxes would have taken effect but not most

spending increases. In subsequent years, the deficit

would be higher because the additional spending

required to carry out the proposal would exceed the

revenues proposed to pay for it.

CBO's estimates of deficits, spending by category, and revenues under the President's budgetary

proposals (excluding health) are shown in Table 2.

As in the baseline, deficits decline to about $180

billion before rising to more than $200 billion in

1999. As a percentage of gross domestic product

(GDP), deficits are stable at about 2.4 percent after

1995-down from 3.4 percent in 1994. Although

revenues are more or less constant as a percentage

of GDP throughout the 1994-1999 period, total outlays decline from 22.3 percent of GDP in 1994 to

21.4 percent in 1999. Mandatory spending grows

relative to the economy during the period-from

12.1 percent of GDP to 12.8 percent-while discretionary spending declines. By 1999, total discretionary spending will equal just 6.5 percent of

GDP—down from 8.2 percent in 1994 and from an

average of about 10 percent during the 1980s. Defense discretionary spending under the President's

budget will decline from 4.2 percent of GDP in

1994 to 3.0 percent in 1999. Domestic discretionary spending will fall from 3.7 percent to 3.2 percent.

CBO has adjusted its estimates of the President's budget to reflect enactment of the Emergency

Supplemental Appropriations Act of 1994. That act

included emergency supplemental funding for relief

for victims of the California earthquake and other

disasters that was not part of the President's budget.

In addition, the legislation rescinded some funds

previously appropriated for fiscal year 1994 and

provided nonemergency supplemental appropriations. CBO's estimates of the President's budget

include these enacted rescissions and supplemental

(emergency and nonemergency) in place of those

proposed in the President's budget. CBO's estimates also reflect previously appropriated contingent

funds released after the President's budget was completed (through February 18, 1994).

CBO's Reestimates of

the President's Budget

CBO's estimates of the President's budget (excluding the Administration's health proposal) are not

substantially different from the Administration's

estimates (see Table 3 on page 6). Except for 1994,

when CBO estimates that the deficit under the

President's policies would be $7 billion less than

the Administration has calculated, CBO's projections of the deficit are slightly higher than those of

the Administration. The reestimates of the budget

are small by historical standards, although the total

CBO deficit reestimate is slightly larger than last

year's, when the Administration adopted CBO's

economic assumptions as the basis for preparing the

President's budget. The Administration's economic

assumptions this year are, for the most part, similar

to CBO's, but the Administration's assumptions of

lower interest rates in most years and higher inflation tend to reduce its estimates of the deficit (see

Chapter 2). These reductions are offset to a large

extent by CBO's more optimistic technical estimating assumptions.

Under CBO's assumptions, discretionary outlays

would be higher than the Administration's estimates

in the 1995-1999 period but lower in 1994. Part of

the difference between the two sets of estimates is

due to enactment of the Emergency Supplemental

Appropriations Act of 1994, which was not reflected in the President's budget or the Administration's estimates but is included in CBO's reestimate.

Total outlays from mandatory spending and offsetting receipts, according to CBO, would be lower in

every year but 1997, because CBO's lower baseline

spending-in part the result of its lower inflation

forecast—generally offsets its estimate that legislation proposed in the President's budget would increase spending rather than reduce it, as the Administration asserts. For the first time in several years,

the differences between CBO's and the Administration's estimates of spending for deposit insurance

are not counted in double-digit billions, reflecting

the improved health of financial institutions, reduced demands for federal funds to merge or close
4 AN ANALYSIS OF THE PRESIDENT'S BUDGETARY PROPOSALS April 1994

insolvent institutions, and the diminished volatility CBO's estimates of revenues under the Presiof net spending. CBO estimates that spending for dent's policies (which differ only slightly from

net interest will be substantially higher than the current law) are similar to the Administration's

Administration projects because CBO forecasts estimates. CBO's forecast of lower inflation rehigher interest rates than the Administration. duces anticipated revenues, but this reduction is

Table 2.

CBO's Estimates of the President's Budgetary Proposals Excluding Health (By fiscal year)

Revenues

Individual income

Corporate income

Social insurance

Other

Total

On-budget

Off-budget

Outlays

Discretionary

Defense

International

Domestic

Subtotal

Mandatory

Deposit insurance

Net interest

Offsetting receipts

Total

On-budget

Off-budget

Deficit

On-budget deficit

Off-budget surplus

Debt Held by the Public

Memorandum:

Gross Domestic Product

1994

In

547

128

468

107

1,251

910

341

280

21

246

547

801

-3

201

-68

1,478

1,198

280

227

288

60

3,464

6,637

1995

Billions of Dollars

596

130

499

113

1,339

978

360

272

21

257

549

847

-12

214

-77

1,521

1,231

291

182

252

70

3,653

7,006

1996

635

133

526

118

1,411

1,031

380

262

21

263

546

898

-14

230

-72

1,587

1,284

303

177

253

76

3,840

7,386

1997

667

138

551

122

1,479

1,080

399

257

21

268

545

964

-6

241

-75

1,669

1,354

315

190

275

84

4,044

7,780

1998

707

144

578

127

1,556

1,136

419

257

21

272

550

1,030

-5

252

-80

1,747

1,420

327

192

284

92

4,251

8,185

1999

747

148

604

131

1,630

1,190

440

258

21

277

555

1,102

-4

264

-82

1,836

1,497

339

206

307

100

4,473

8,597

(Continued)
CHAPTER ONE THE PRESIDENT'S BUDGETARY PROPOSALS 5

offset in most years by assumed higher effective income tax rates that increase the estimates. Reestimates of the relatively minor revenue proposals included in the budget (excluding revenue provisions

included in the Administration's health proposal) are

quite small.

Discretionary Spending

Total discretionary budget authority proposed in the

President's budget (adjusted for the enacted suppleTable 2.

Continued

Revenues

Individual income

Corporate income

Social insurance

Other

Total

On-budget

Off-budget

Outlays

Discretionary

Defense

International

Domestic

Subtotal

Mandatory

Deposit insurance

Net interest

Offsetting receipts

Total

On-budget

Off-budget

Deficit

On-budget deficit

Off-budget surplus

Debt Held by the Public

1994

As a

8.2

1.9

7.1

1.6

18.8

13.7

5.1

4.2

0.3

3.7

8.2

12.1

-0.1

3.0

-1.0

22.3

18.0

4.2

3.4

4.3

0.9

55.1

1995

Percentage

8.5

1.9

7.1

1.6

19.1

14.0

5.1

3.9

0.3

3.7

7.8

12.1

-0.2

3.0

-1.1

21.7

17.6

4.1

2.6

3.6

1.0

52.1

1996

of GDP

8.6

1.8

7.1

1.6

19.1

14.0

5.1

3.5

0.3

3.6

7.4

12.2

-0.2

3.1

-1.0

21.5

17.4

4.1

2.4

3.4

1.0

52.0

1997

8.6

1.8

7.1

1.6

19.0

13.9

5.1

3.3

0.3

3.4

7.0

12.4

-0.1

3.1

-1.0

21.5

17.4

4.0

2.4

3.5

1.1

52.0

1998

8.6

1.8

7.1

1.6

19.0

13.9

5.1

3.1

0.3

3.3

6.7

12.6

-0.1

3.1

-1.0

21.3

17.3

4.0

2.3

3.5

1.1

51.9

1999

8.7

1.7

7.0

1.5

19.0

13.8

5.1

3.0

0.2

3.2

6.5

12.8

a

3.1

-1.0

21.4

17.4

3.9

2.4

3.6

1.2

52.0

SOURCE: Congressional Budget Office,

a. Less than 0.05 percent.
6 AN ANALYSIS OF THE PRESIDENT'S BUDGETARY PROPOSALS April 1994

Table 3.

CBO's Reestimates of the President's Budgetary Proposals Excluding Health

(By fiscal year, in billions of dollars)

Deficits Under the President's Budgetary

Proposals as Estimated by the Administration

Reestimates of Outlays

Discretionary outlays

Supplemental estimates

Other proposals

Subtotal, Discretionary Outlays

Mandatory outlays and offsetting receipts

Baseline

Economic differences

Technical differences

Subtotal

Proposed legislation

Subtotal, Mandatory Outlays

and Offsetting Receipts

Deposit insurance

Net interest

Economic differences

Technical differences

Subtotal, Net Interest

Total, Outlays

Reestimates of Revenues6

Baseline

Economic differences

Technical differences

Subtotal

Proposed legislation

Total, Revenues

Total Deficit Reestimates

Deficits Under the President's Budgetary

Proposals as Estimated by OBO

Memorandum:

Total Economic Differences

Total Technical Differences

1994

234.8

1.5

-4.8

-3.3

-0.7

0.1

-0.6

0.2

-0.4

-0.1

-1.0

-1.3

-2.3

-6.1

-0.6

-0.8

-1.4

a

-1.3

-7.4

227.4

-2.3

-5.1

1995

176.1

4.7

2.1

6.8

-0.8

-3.2

-4.1

0.6

-3.5

-1.0

1.0

-0.5

0.5

2.9

1.0

2.4

3.4

a

3.4

6.4

182.5

1.2

5.1

1996

173.1

2.5

-0.9

1.6

-1.5

a

-1.5

1.3

-0.2

-2.8

6.5

-1.4

5.2

3.8

5.0

-5.3

-0.3

a

-0.3

3.5

176.6

10.1

-6.6

1997

180.8

0.8

0.2

0.9

-3.2

3.0

-0.2

1.3

1.2

0.1

8.6

-2.0

6.6

8.8

12.0

-11.2

0.9

-0.1

0.8

9.6

190.4

17.5

-7.9

1998

187.4

0.5

1.6

2.1

-3.8

1.8

-2.0

1.8

-0.2

0.1

11.0

-4.0

7.0

9.0

21.8

-26.7

-4.9

a

-4.8

4.1

191.5

29.0

-24.9

1999

201.2

0.7

0.3

1.0

-5.6

-0.9

-6.5

2.8

-3.7

-0.3

15.2

-6.5

8.7

5.7

33.8

-34.5

-0.7

0.1

-0.7

5.0

206.2

43.4

-38.4

SOURCE: Congressional Budget Office.

a. Less than $50 million.

b. Reductions in revenues are shown with a positive sign because they increase the deficit.
CHAPTER ONE THE PRESIDENT'S BUDGETARY PROPOSALS 7

mental appropriation bill) would be well below

CBO's capped baseline in every year through 1999.

CBO's analysis indicates that discretionary outlays

would also be below the baseline in 1996, 1997,

and 1999 but would be above it in 1995 and 1998.

Because baseline discretionary spending is equal to

CBO's estimated end-of-session spending limits for

each year under the Balanced Budget and Emergency Deficit Control Act, the outlay cap would be

exceeded in 1995 and 1998 according to CBO's

estimates. The Administration has calculated that

1995 discretionary outlays in the President's budget

would be almost exactly equal to the spending limit

(a scant $10 million below), but CBO estimates that

spending would exceed the cap by $3.1 billion.

Estimating Differences for

Discretionary Outlays for 1995

There are three reasons for the difference between

the Administration's and CBO's estimates of total

outlays for discretionary programs in 1995. First,

CBO estimated that outlays from discretionary proposals in the budget other than proposed supplementals or rescissions of 1994 budget authority

would be $2.1 billion higher than the Administration had calculated. About one-third of this difference lies in estimates of the General Services

Administration's Federal Buildings Fund and another account related to facilities for federal agencies; the rest is the result of smaller reestimates in

numerous programs.

Second, the Administration calculated that together the rescissions and nonemergency supplemental appropriations proposed in the President's

budget would cut discretionary outlays by more than

$1.2 billion. The Congressional Budget Office,

however, estimated that the net reduction in outlays

resulting from the rescissions and nonemergency

supplemental actually enacted in the Emergency

Supplemental Appropriations Act was less than $0.8

billion-almost $0.5 billion less than the reduction

that the President's budget assumed.

Box 1.

Budget Enforcement Act Scorekeeping Rule 3

The Budget Enforcement Act of 1990 (BEA)

amended the Balanced Budget and Emergency Deficit Control Act of 1985 to establish new controls on

spending and revenue legislation It instituted two

separate systems of control—one for discretionary

spending and another for mandatory spending and

revenues. Under the procedures established by the

BEA, discretionary spending is limited by annual

caps on budget authority and outlays. If enacted

discretionary appropriations for any year exceed

either cap, an across-the-board cut of those appropriations lowers discretionary spending to the cap level.

Mandatory spending and revenues are controlled

by pay-as-you-go (PAYGO) procedures. Under the

PAYGO procedures, the Office of Management and

Budget (OMB) and the Congressional Budget Office

(CBO) track all mandatory spending or revenue

legislation enacted since the BEA. If all such legislation together has the effect of increasing the deficit, spending for nonexempt mandatory programs is

cut by the amount of the deficit increase.

Despite the separate control mechanisms, changes

in mandatory spending can affect the enforcement of

the discretionary limits, and appropriations for discretionary accounts can enter into the PAYGO calculations. The statement of managers accompanying

the conference report on the BEA (House Report

101-964) contains a set of scorekeeping rules to

guide OMB, CBO, and the House and Senate Budget

Committees in carrying out the BEA procedures.

Scorekeeping rule 3-the so-called fingerprint rule--

states that substantive changes in mandatory spending made in appropriation bills will be scored as

discretionary. This rule is intended to assign responsibility for any BEA violation to those who caused

the violation. Following the lead of OMB and the

House and Senate Budget Committees, CBO has

complied with scorekeeping rule 3 and an extension

of the rule that holds that an appropriation for a

discretionary account provided in an authorizing bill

should be included on the PAYGO scorecard. Because the legislative language of the BEA clearly

puts all changes in revenues on the PAYGO side of

the ledger, CBO does not believe that the scorekeeping rule can be further extended to allow increases in revenues provided in appropriation bills to

be counted as offsets to discretionary spending.
8 AN ANALYSIS OF THE PRESIDENT'S BUDGETARY PROPOSALS April 1994

Finally, the Administration assumed that $0.5

billion in new revenues would be generated by new

or increased fees to be enacted in appropriation acts

and that those revenues would be counted as offsets

to discretionary spending for purposes of complying

with the spending limits. CBO believes that the

Balanced Budget Act does not allow revenue increases to be counted as offsets to discretionary

spending in determining compliance with the caps,

even if the revenue increases are the result of provisions contained in appropriation acts (see Box 1 on

page 7). CBO includes the effect of these proposed

changes in its estimate of revenues under the President's budgetary proposals.

Box 2.

The President's Proposals for Civilian Personnel

President Clinton's budget limits the growth of federal civilian payrolls on two fronts: by reducing the

number of civil servants and by curtailing the pay

raises that they would receive. Because neither

aspect of this two-pronged plan is fully spelled out

in the President's budgetary proposals, no precise

budgetary effects can be attached. Nevertheless, the

plan's broad shape is clear.

The Administration estimates that full-time-equivalent (FTE) employment in the executive branch of

government will be 2.084 million in fiscal year

1994, down from 2.134 million in 1993.1 (These

totals exclude employees of the Postal Service and

the legislative and judicial branches.) The Administration wants to trim FTE employment to 2.037

million in 1995 and to 1.903 million in 1999. Attaining this last goal would enable the Administration to claim that it had met the National Performance Review's goal of cutting federal employment

by 252,000, measured against a base (roughly, the

number of people that the new Administration

thought could have been employed in 1993) of 2.155

million.

Not surprisingly, many of the reductions in employment would occur in the Department of Defense.

Between 1994 and 1999, the number of civilian

employees of the Pentagon would drop by about

120,000, or 14 percent (continuing a trend that began

around 1990), and the number of employees of other

agencies would fall by about 60,000, or about 5

percent.

Recently enacted legislation requires somewhat

steeper reductions in the executive branch work

force than were assumed in the President's budget.

The Federal Workforce Restructuring Act of 1994

(P.L. 103-226), signed on March 30, limits FTE

employment in 1999 to 1.882 million, about 20,000

less than the Administration had assumed. That

legislation will also help agencies to achieve the

required reductions by permitting them to offer the

lower of $25,000 or normal severance pay to employees who resign or retire-an approach that is

widely viewed as not just more humane but more

efficient than a reduction in force.2 The Defense

Department has had similar authority since 1993.

The President's budget for 1995 also assumes pay

raises that are less than half as generous as those

that would be payable under current law. Current

law provides for two types of raises for civil servants: an across-the-board raise tracking the national

increase in the employment cost index minus onehalf of a percentage point, plus a locality increase,

which varies by area and is designed to gradually

narrow estimated gaps between federal and nonfederal pay scales. The initial round of local salary

surveys found that, on average, federal salaries

lagged 26 percent behind those for comparable jobs

in the private sector. CBO estimates that across-theboard pay raises in 1995 through 1999 under current

law would average about 2.9 percent and locality increases about 2.3 percent, for a combined raise of

more than 5 percent. The President's budget assumes a total increase of 1.6 percent in 1995 and

average increases of 2.4 percent in 1996 through

1999. The Administration is silent about whether

these increases would be paid across the board or

whether they would differ by locality. It has promised to consult with the Congress on this matter.

The FTE concept automatically adjusts for the presence of

part-time or seasonal workers and is thus a better way to

measure employment than a simple head count or "snapshot."

2. Congressional Budget Office, Reducing the Size of the Federal Civilian Work Force (December 1993).
CHAPTER ONE THE PRESIDENT'S BUDGETARY PROPOSALS 9

Proposed Discretionary Spending

Compared with CBO's Uncapped

Baseline

Compliance (or near compliance) with the discretionary spending limits of the Balanced Budget Act

in 1995 through 1998 requires a substantial reduction in appropriations below CBO's uncapped baseline-the amount needed, after adjusting for inflation, to maintain the level of funding enacted for

1994 (excluding emergency funding, which is assumed to meet one-time needs). CBO estimates that

the President's budgetary proposals for discretionary

spending (excluding the Administration's health

proposal) would total $162 billion in budget authority below the uncapped baseline amounts for the

1995-1999 period. Reductions that the President's

budget specifies in discretionary funding for defense

account for $136 billion of this amount. (See Chapter 3 for a discussion of the President's proposals

for defense spending.)

An additional $15 billion in cuts is included in

the Allowances section of the budget; these cuts

represent reductions—such as assumed savings from

reforming procurement practices-that were not

assigned to specific accounts. According to budget

amendments submitted by the Administration, some

of these savings are proposed for the Department of

Defense and other agencies that administer defense

spending-implying that there should be cuts in

defense as well as nondefense accounts to achieve

the assumed savings (see Chapter 3). The remaining reductions are widely distributed among nondefense programs. Because the great bulk of expenditures for federal personnel are discretionary, the

Administration's plans to reduce the number of

executive branch employees and constrain pay raises

over the next five years will help achieve the proposed reductions in discretionary spending (see

Box 2). If the savings from trimming personnel are

less than the Administration assumes and discretionary spending is not increased, less funding will be

available for nonpersonnel purposes.

In 1995, the budget proposes total discretionary

budget authority that is $4.0 billion below the uncapped baseline and $12.9 billion above the amount

needed to freeze funding at the 1994 level without

adjusting for inflation. Proposed cuts in defense

below the uncapped baseline equal $5.2 billion plus

the portion of the $1.2 billion in cuts carried in the

Allowances section that is ultimately applied to

defense programs. The President's budget for international programs essentially equals the uncapped

baseline; the budget proposes a real increase-above

the uncapped baseline—for domestic discretionary

programs. The proposed increase in domestic funding totals $1.1 billion if all of the reductions carried

in the Allowances function are assumed to come

from domestic accounts; it is larger to the extent

those savings come from defense spending. Table 4

shows the level of discretionary spending for fiscal

year 1995 proposed in the budget for each functional category compared with CBO's uncapped

baseline for the function. For this table the baseline

has been adjusted to remove from each function any

projected 1995 funding that resulted from extrapolating 1994 emergency appropriations.

As Table 4 indicates, the aggregate increase in

budget authority for domestic discretionary programs is not equally distributed. Funding for a

number of budget functions and programs is cut

below the baseline to allow increases for others.

For instance, proposed funding for the General

Science, Space, and Technology function is nearly 5

percent below the baseline, largely as a result of

cuts in the Department of Energy's general science

and research activities and reductions in funding for

the National Aeronautics and Space Administration.

The Natural Resources and Environment function is

also cut about 5 percent below the baseline, with

reductions in funding for water resources activities

of the Department of Agriculture and the Army

Corps of Engineers and land management and conservation programs of the Forest Service and other

agencies. Funding cuts for other functions are

smaller in percentage terms.

The largest increase in 1995 funding above the

baseline-16 percent-is for the Administration of

Justice function. This expansion reflects funding

for the President's proposed crime bill, including an

increase of more than $2 billion for criminal justice

assistance to state and local governments. The budget also boosts funding for salaries and expenses

related to the operation of Federal courts and prisons, but this is partially offset by reduced funding

for prison construction and federal law enforcement
10 AN ANALYSIS OF THE PRESIDENT'S BUDGETARY PROPOSALS April 1994

activities. The President's budget proposes to raise

the level of funding for Community and Regional

Development by nearly 10 percent, almost entirely

the result of $800 million for new project-based

community development grants. The increase for

Education, Training, Employment, and Social Services is smaller as a percentage of baseline

funding—about 7 percent—but represents the largest

increase in dollars. The $2.9 billion increase includes $683 million in additional funding for the

Summer Youth and Dislocated Worker programs,

$230 million more for the National Service

program, and $558 million more for Children and

Family Services—primarily for the Head Start program. The President's budget also proposes to

expand funding for the General Government funcTable 4.

The Administration's Proposals for Discretionary Spending in Fiscal Year 1995

(In billions of dollars)

Category

CBO Baseline

Without

Discretionary Caps8

Budget

Authority Outlays

President's Budget

as Estimated

bvCBO

Budget

Authority Outlays

President's Budget

Minus

CBO Baseline

Budget

Authority Outlays

Defense 269.5 273.2 264.3 271.7

International 20.9 20.9 20.9 20.9

Domestic

General science, space,

and technology 18.1 17.8 17.3 17.2

Energy 6.6 6.4 6.4 6.5

Natural resources and environment 22.4 22.0 21.4 21.4

Agriculture 4.5 4.5 4.2 4.3

Commerce and housing credit 3.5 3.3 3.7 3.5

Transportation 15.4 39.7 15.4 39.2

Community and regional

development 8.4 12.0 9.2 12.1

Education, training, employment,

and social services 41.2 39.9 44.1 40.5

Health 22.8 22.4 22.4 22.0

Medicare 3.1 3.1 3.0 3.0

Income security 34.4 38.2 32.8 37.1

Social Security 0 2.9 0 2.6

Veterans'benefits 18.5 18.4 17.9 17.7

Administration of justice 15.7 15.9 18.3 17.0

General government 12.7 13.1 13.5 13.5

Allowances 0 0 -1.2 -1.0

Subtotal, Domestic0 227.3 259.7 228.4 256.6

Total, Discretionary

Spending 517.7 553.8 513.6 549.2

-5.2

b

-0.8

-0.2

-1.1

-0.3

0.2

b

0.8

2.9

-0.4

-0.1

-1.6

0

-0.5

2.6

0.8

-1.2

1.1

-4.0

-1.5

b

-0.6

0.1

-0.6

-0.2

0.2

-0.5

-4.6

SOURCE: Congressional Budget Office.

a. Adjusted to remove from each function any 1995 funding that results from extrapolating 1994 emergency appropriations.

b. Less than $50 million.

c. Includes all proposed reductions carried in function 920 in the President's budget.
CHAPTER ONE THE PRESIDENT'S BUDGETARY PROPOSALS 11

tion by 7 percent in order to provide additional

funds for construction and acquisition of new federal buildings to replace space that is currently being leased.

In general, CBO's estimate of discretionary

outlays in the President's budget represents spending that will occur if the budget authority requested

for each discretionary account is appropriated, rather

than the effects of carrying out discretionary program policies that may be described in the budget.

For instance, the budget proposes to reduce discretionary budget authority by more than $12 billion

over the 1995-1999 period as a result of savings

that the Administration asserts can be achieved by

reforming federal procurement practices. The budget carries these reductions as a lump sum in the

Allowances function, but the Administration has

provided the Congress with amended budget

requests indicating how these reductions should be

distributed by agency. CBO's analysis of reform

legislation proposed last year (S. 1587) suggests that

savings from reforming procurement are highly

uncertain. However, CBO gives full credit for the

claimed savings in its estimate of the budget because the budget proposes that appropriations be

reduced by a specified amount, regardless of the

amount actually saved by reforming procurement

practices. Thus, even if reform fails to reduce the

costs of purchasing the level of goods assumed in

the budget by as much as the Administration believes it will, savings will still be achieved because

the lower level of appropriations will force a reduction in the amount of goods purchased.

Nondiscretionary Spending

Aside from the Administration's health proposal, the

President's 1995 budget proposes relatively few

changes in law affecting spending that is not controlled by annual appropriation action. This category comprises mandatory spending (including

spending for deposit insurance), offsetting receipts,

and net interest payments. CBO estimates that the

President's budgetary proposals would increase nondiscretionary spending (other than net interest) by

more than $11 billion above the CBO baseline over

the 1994-1999 period.

Proposed Nondiscretionary Spending

Compared with CBO's Baseline

The biggest change in this category triggered by the

President's budgetary proposals-the loss of almost

$8 billion in receipts of federal employee retirement

trust funds-comes from proposed changes in discretionary spending rather than amendments to current

law governing those receipts. Under current law,

agencies must contribute a specified percentage of

each employee's salary to the retirement trust funds.

Because the payments are generally made out of

salary and expense accounts that are annually appropriated, they are largely categorized as discretionary

spending. The offsetting receipts deposited in the

trust funds are counted as mandatory negative budget authority and outlays.

The President's budget proposes to reduce the

number of federal civilian employees below this

year's level over the next five years and to hold pay

raises for employees below the rates required under

current law (see Box 2 on page 8). Both of these

actions will reduce total employee salaries and

correspondingly lower payments to the retirement

trust funds. The reduction in contributions to the

trust funds helps the Administration hold down total

discretionary spending, but it also shows up on the

mandatory side of the budget as a loss of offsetting

receipts, which is equivalent to an increase in mandatory spending. (Of course, trimming the federal

work force also reduces the long-term liabilities of

the trust funds, which will show up as lower outlays

sometime after 1999.)

Other proposals affecting mandatory programs

and offsetting receipts reduce spending slightly in

1994 and 1995 while increasing outlays by more

than $3 billion over the entire 1994-1999 period

(see Table 5). A proposal to expand the crop insurance program to provide additional assistance to

farmers who suffer crop losses as a result of natural

disasters-forgoing the current practice of providing

assistance through ad hoc emergency legislation to

deal with a specific disaster-produces the largest

increase in mandatory spending, about $1 billion a

year by 1998. Other major proposals include new

mandatory spending from the Nuclear Waste Fund

that totals $1.0 billion over five years, changes in

Pension Benefit Guaranty Corporation premiums
12 AN ANALYSIS OF THE PRESIDENT'S BUDGETARY PROPOSALS April 1994

and funding requirements that would save $1.7

billion in 1995 through 1999, and a new program to

subsidize U.S.-flag cargo vessels that would cost

$0.5 billion over five years but would be offset by

an increase of $0.1 billion a year in tonnage fees.

The budget also proposes asset sales—of the Alaska

Power Administration and of rights to produce

Naval Petroleum Reserve oil—that would produce

offsetting receipts of $1.4 billion over five years.

The proceeds from the asset sales would be offset,

however, by an approximately equal amount of lost

income that would have been generated by these

assets.

The President's budget does not include any

proposals relating to welfare reform or the General

Agreement on Tariffs and Trade (GATT). The

costs of welfare reform are uncertain because the

Administration's plan is still being developed.

Based on preliminary information, the implementaTable 5.

Estimates of Changes in the President's Budgetary Proposals for

Mandatory Spending and Offsetting Receipts (By fiscal year, in billions of dollars)

1994 1995 1996 1997 1998 1999

New Farm Disaster Relief Program

Pension Benefit Guaranty Corporation

0.3 0.8 0.9 1.0

SOURCE: Congressional Budget Office.

NOTE: The figures in the table exclude the effects of the Administration's health proposal and federal employee retirement offsets.

a. Less than $50 million.

1.1

Reforms

Nuclear Waste Fund

Maritime Administration Operating

Differential Subsidy

Tonnage Fees

Hardrock Mineral Royalties

Extend Family Preservation and Support

Multifamily Property Disposition

Asset Sales

Forgone Receipts from Asset Sales

Other

Total

0

0

0

-0.1

0

0

-0.4

0

0

0.1

-0.4

-0.1

a

0.1

-0.1

0

0

0

-0.4

0

-0.1

-0.2

-0.3

0.2

0.1

-0.1

a

0

0

-0.3

0.4

-0.1

0.7

-0.5

0.2

0.1

-0.1

-0.1

0

0

-0.3

0.4

a

0.7

-0.5

0.3

0.1

-0.1

-0.1

0

0

-0.3

0.4

0.1

1.0

-0.5

0.3

0.1

-0.1

-0.1

0.2

0

a

0.3

0.2

1.6
CHAPTER ONE THE PRESIDENT'S BUDGETARY PROPOSALS 13

tion of GATT is likely to reduce revenues by

roughly $13 billion over five years, which under

pay-as-you-go rules must be offset by enacting

spending reductions or increases in other revenues

before the final sequestration report for each affected year.

CBO's Reestimates of

Nondiscretionary Spending

CBO's estimates of the effects of proposed changes

to mandatory programs and offsetting receipts in the

President's budget over the 1994-1999 period are $8

billion higher than the Administration's estimates.

The most expensive proposal-the new farm disaster

assistance program—was also subject to the largest

CBO reestimate. CBO estimated somewhat higher

spending for the proposed new program than did the

Administration in every year except 1999. But the

major part of the difference arose because the Administration counted savings of $0.5 billion in 1995

and $1.0 billion a year in 1996 through 1999 from

repeal of the Secretary of Agriculture's current authority to provide disaster relief to some farmers.

Because this authority has never been used, CBO

does not include any spending under it in the baseline and does not count any savings from its repeal.

As a result, CBO estimates that the new policy will

increase spending by more than $4.1 billion over

five years. In contrast, the Administration estimates

net savings of more than $0.6 billion.

Another substantial reestimate involves the

savings in the U.S. Enrichment Corporation Fund.

The Administration estimates that proposed reforms

will produce savings of $1.1 billion over five years.

CBO estimates that the proposals will generate no

savings. Other reestimates of proposed policies

produced smaller differences than this one and the

difference in the estimates for farm disaster assistance.

CBO's estimate of total outlays for mandatory

programs and offsetting receipts under current law

is below the Administration's estimate by a total of

$14.8 billion over the 1994-1999 period. A significant portion of this net reestimate stems from the

$4.5 billion in spending for emergency farm disaster

assistance that the Administration built into its baseline; the CBO baseline, in contrast, assumes no

outlays for the disaster assistance that would be

allowed under current law. CBO estimates that

Medicare spending under current law during this

period would be $6.7 billion higher than the Administration expects but that Medicaid spending would

be $4.3 billion less than the Administration anticipates. CBO's current-law estimate of the cost of

benefits in a number of programs such as Food

Stamps, Supplemental Security Income, and civil

service and military retirement is $12.1 billion

lower than the Administration's. Almost half of

that difference is the result of a lower inflation

forecast; the rest stems from a variety of technical

estimating differences. Lower inflation also pushes

CBO's estimate of baseline Social Security spending

below the Administration's by $8.2 billion. That

reduction is partially offset, however, by other factors that increase CBO's estimate by $3.7 billion

compared with that of the Administration-a small

reestimate compared with total spending for Social

Security.

CBO's baseline estimate of spending for

veterans' programs is lower than the Administration's by $9.0 billion, of which $0.5 billion is the

result of CBO's lower inflation assumption. The

remaining difference is largely the result of CBO's

assumption that the number of veterans receiving

compensation and pension benefits is smaller and

declining more rapidly than the Administration

projects.

CBO's estimate of net spending for the Federal

Housing Administration's mutual mortgage and

cooperative housing insurance fund and other credit

reform liquidating accounts related to housing is

$10 billion higher than the Administration's. Different assumptions about defaults, recoveries, debt

redeemed, and a number of other factors that affect

liquidating accounts are responsible for the difference between the two estimates.

CBO estimates that receipts from the Federal

Communications Commission's auction of rights to

part of the electromagnetic spectrum will be $5

billion less than the Administration projects. Although there is a good deal of uncertainty about the

exact amount that the auction will generate, CBO

believes that competitive pressures are likely to hold
14 AN ANALYSIS OF THE PRESIDENT'S BUDGETARY PROPOSALS April 1994

bids below the level that the Administration assumes. Other smaller reestimates—some higher,

some lower—were also made by CBO.

Both CBO and the Administration estimate that

aggregate collections by deposit insurance agencies

(largely from premiums and the disposal of assets

that those agencies hold) will exceed the spending

needed to close additional insolvent institutions in

every year through 1999. Compared with previous

years, the difference between CBO's and the Administration's baseline estimates of net deposit

insurance spending is small-CBO's estimate is $4.0

billion lower over the 1994-1999 period. The President's budget did not include any proposals that

would affect deposit insurance.

CBO's estimate of net interest under the policies

of the President's budget is $25.7 billion higher

than the Administration's estimate over the 1994-

1999 period. CBO's forecast that interest rates after

1994 will be higher than the Administration assumes pushes up projected net interest spending by

$33.7 billion. An additional $7.7 billion reestimate

of interest costs can be attributed to the increase in

estimated deficits and borrowing that results from

using CBO's economic assumptions. These reestimates are partially offset-CBO's interest projections

are lowered by $15.7 billion-by reestimates attributable to differences between CBO's and the Administration's assumptions and projection methods

relating to intermediate-term securities and to reductions in estimated deficits and borrowing that result

from using CBO's technical assumptions.

Revenues

CBO's estimate of revenues under the policies of

the President's budget is quite similar to the Administration's. In total over the 1994-1999 period,

CBO's estimate is only $3 billion higher (see Table

3 on page 6). The proposals in the President's budget to change laws affecting revenues-other than

the revenue provisions that are part of the health

proposal—are quite minor. Adopting all of the proposals would change revenues by no more than $0.5

billion in any year; the net change over the 1994-

1999 period would be only $0.1 billion. CBO's and

the Administration's estimates of the total effect of

the proposals differ by less than $0.1 billion in each

year.

CBO's baseline estimate of revenues under

current law is also quite similar to the Administration's. The two estimates are within $5 billion of

each other in all years, and in three years the difference is less than $1 billion. CBO's estimate for

1994 is $1 billion higher than the Administration's,

and its 1995 estimate is $3 billion lower. Economic

differences are small until 1996, but CBO's forecast

of GDP is $33 billion lower than the Administration's in fiscal year 1996, with the difference growing to $154 billion in 1999 (see Chapter 2). If all

other assumptions and projection techniques were

the same, these differences in the economic forecast

would cause CBO's revenue projections to be $34

billion below the Administration's in 1999. But

differences in the methods used to project income

tax revenues lead to offsetting differences in the

estimates. A variety of small technical differences

combine to produce higher revenues from individual

income taxes in CBO's projections than in the Administration's estimates for the same level of income. In addition, because CBO assumes that a

larger share of the growth in profits accrues to

taxpaying firms, it estimates higher revenues from

corporate income taxes than does the Administration

for the same level of income.

The Administration's

Health Proposal

The President's budget submission for 1995 incorporates the Administration's proposal to create a

universal entitlement to health insurance and to slow

the rate of growth of spending for health care. This

section summarizes the impact of the proposal on

national health expenditures and the federal budget.

A more detailed discussion can be found in CBO's

An Analysis of the Administration's Health Proposal

(February 1994), which also examines the proposal's budgetary treatment, its effect on the economy, and other considerations concerning its implementation. Because the Administration's proposal

and many other health reform plans would not be

fully implemented within the usual five-year estimating period, CBO has provided estimates through

2004. This longer time horizon and the sweeping

nature of the proposed changes, however, necessarily make the estimates less precise than usual.
CHAPTER ONE THE PRESIDENT'S BUDGETARY PROPOSALS 15

The Administration's health proposal would

redesign the current system of financing for health

care for people under age 65 while building on the

system's existing employer base. All employers

would be required to pay premiums on behalf of

their employees, and all individuals and families--

except people receiving Aid to Families with Dependent Children and Supplemental Security Income, and others with very low income—would be

required to pay at least part of their premiums.

Subsidies would be available to help employers and

low-income families meet these obligations and

would also be available to retired people ages 55

to 64.

To strengthen the demand side of the health

care marketplace, the proposal would establish regional purchasing alliances through which most

people under age 65 would obtain coverage for

health care. Consumers would normally have access to a choice of health plans of different types--

including at least one fee-for-service plan-that

would be offered through the alliance in the area in

which they lived. All plans would offer a standard

package of benefits, which would be slightly more

generous than the average plan currently offered by

employers. To lower the rate of growth of health

care spending, the proposal would establish a complex mechanism for limiting the growth of premiums for the standard benefit package.

The proposal would also expand several federal

programs and institute new ones. Important among

these provisions are coverage of prescription drugs

for Medicare beneficiaries, the provision of wraparound health care benefits for low-income children,

and a new program to provide home- and community-based services for severely disabled people.

Financing for the premium subsidies and programmatic expansions would come from a variety

of sources. They would include several new revenue measures, increases in income and payroll tax

receipts generated by the change in the mix of employee compensation that would occur under the

proposal, reductions in the costs of the Medicare

and Medicaid programs, and assessments on premiums. States would also make maintenance-of-effort

payments to alliances, reflecting their reduced obligations for Medicaid under the proposal.

Once the Administration's proposal was fully

implemented, it would significantly reduce the projected growth of national health expenditures. Its

provisions for covering the uninsured, providing

better coverage for many people who already have

insurance, and establishing a new federal program

of home- and community-based care for the severely disabled would increase the demand for

health care services. But the limits on the growth

of health insurance premiums and the reductions in

the Medicare program would hold down spending

for health. For the first few years after the proposal

was in place, the increases in spending would exceed the decreases, and the proposal would raise

national health expenditures above the levels in the

baseline. From 2000 on, however, national health

expenditures would fall below the baseline by increasing amounts. By 2004, CBO projects that total

spending for health would be $150 billion-or 7

percent—below where it would be if current policies

and trends continued. National health expenditures

in 2004 would represent 19 percent of GDP--5

percentage points above the current level but more

than a percentage point below the baseline.

The effects of the proposal on the federal budget deficit show a similar pattern (see Table 6).

The increase in the deficit is estimated to reach

slightly more than $30 billion in 1998, the first year

in which all states would be participating in the

system, and then begin to fall. It would rise again

because of increases in the generosity of the standard benefit package that would occur in 2001 and

the extension of subsidies to state and local governments as employers in 2002. By 2004, however,

the estimated effects on the deficit would be negligible.

In the President's 1995 budget, the Administration estimates that its health proposal would reduce

the deficit by $38 billion in 2000 and by $59 billion

cumulatively over the 1995-2000 period. (The Administration has not provided estimates for later

years.) In contrast, CBO estimates that the proposal

would increase the deficit by $10 billion in 2000

and by a total of $74 billion over the six-year

period. The difference between these estimates is

small, however, compared with the uncertainty

surrounding the budget projections.
16 AN ANALYSIS OF THE PRESIDENT'S BUDGETARY PROPOSALS April 1994

Table 6.

Estimated On-Budget and Social Security Effects of the Administration's Health Proposal

(By fiscal year, in billions of dollars)

1996 1997 1998 1999 2000 2001 2002 2003 2004

Outlays

Subsidy Payments

Subsidies for employers

Subsidies for families

State maintenanceof-effort payments

Subtotal

Medicare

Drug benefit

Program savings

Offset for employed

beneficiaries

Other changes

Subtotal

Medicaid

Discontinued coverage

Premium limits and DSH cuts

Other changes

Subtotal

Long-Term Care Benefit

Supplemental Services

for Children

Medical Education

Public Health Service

Department of Defense

Department of Veterans Affairs

Federal Employees

Health Benefits

WIC Program

Other Administrative and

Start-Up Costs

Social Security

Assessment for Medical

Education

Total, Outlays

5

6

_^2

9

6

-7

-1

J_

a

-2

-1

J_

-2

5

a

1

2

-1

a

a

a

1

a

_iL

15

17

20

-6

30

15

-12

-2

1

2

-7

-5

2

-10

8

1

3

3

-2

a

a

1

2

a

_£

36

44

54

-16

82

16

-19

-6

1

-8

-19

-14

4

-28

12

2

4

3

-2

-4

-3

1

1

1

.16

54

55

67

-20

102

17

-28

-8

2

-16

-27

-20

1

-46

16

2

6

2

-3

-5

-3

1

1

2

.18

50

58

70

-20

108

19

-37

-8

2

-24

-31

-24

1

-54

20

2

6

2

-3

-5

-4

1

1

2

.18

43

67

77

-21

123

21

-45

-8

2

-30

-34

-28

1

-62

28

2

6

2

-3

-5

-5

1

1

2

_^9

51

81

83

-22

142

23

-54

-9

2

-38

-38

-33

1

-71

37

3

7

2

-3

-5

-6

1

1

2

^

61

92

89

-23

158

25

-65

-9

2

-47

-43

-39

1

-81

40

3

7

2

-3

-5

-7

1

1

2

-10

60

102

95

-24

173

28

-77

-10

2

-57

-48

-45

1

-92

40

3

7

2

-4

-5

-8

1

1

2

-10

53
CHAPTER ONE THE PRESIDENT'S BUDGETARY PROPOSALS 17

Table 6.

Continued

1996 1997 1998 1999 2000 2001 2002 2003 2004

Revenues

Income and Payroll Taxes

on Additional Income

Increase in the Excise Tax

on Tobacco

Assessment on Corporate

Alliance Employers

Extension of Medicare HI Tax

Exclusion of Health Insurance

from Cafeteria Plans

Assessment on Employers

for Retiree Subsidies

Deduction of Health Insurance

for the Self-Employed

Other Changes

Total, Revenues

Total Effect

a 1

11 11

1 2

2 2

0 1

0 0

-1 -1

-§ .2

14 17

1 20

4

11

2

2

2

3

•2

j.

22

Deficit

32

8 12

11 10

2 1

2 1

3 4

5 5

-2 -2

J_ __1

29 33

21 10

16

10

1

1

5

2

-3

_2

35

16

22

10

1

1

6

0

-3

J>

40

22

28

10

1

1

7

0

-3

_3

46

14

34

10

1

1

7

0

-3

_3

53

a

SOURCES: Congressional Budget Office; Joint Committee on Taxation.

NOTES: DSH = disproportionate share hospitals; WIC = Special Supplemental Food Program for Women, Infants, and Children; HI =

Hospital Insurance.

The Administration's proposal would reduce the deficit by $10 billion in 1995.

The figures in the table include changes in authorizations of appropriations and in Social Security that would not be counted for payas-you-go scoring under the Budget Enforcement Act of 1990.

a. Less than $500 million.

Chapter Two

Comparison of Economic Forecasts

T

he economic forecasts of the Congressional

Budget Office and the Clinton Administration for the 1993-1999 period are similar

(see Tables 7 and 9). Moreover, with the exception

of long-term interest rates, both forecasts resemble

the consensus of private forecasters recently surveyed by the Blue Chip Economic Indicators.1

 The

CBO and Administration forecasts differ slightly in

their outlooks for inflation and interest rates, however. For both the short and medium terms, the

CBO outlook indicates slightly higher interest rates

and lower inflation. Although these differences

appear to be minor, they have marked implications

for the budget deficit projections. When CBO's

economic assumptions are substituted for those of

the Administration, the deficit projections are higher

in every year except 1994 and amount to a cumulative difference of $99 billion over the 1994-1999

projection period.

The Administration's economic forecast embodies the effects of the 1995 budget proposal (excluding health care reform), whereas CBO's forecast and

medium-term assumptions are based upon current

law. Because the proposed policy changes do not

affect revenues and outlays significantly, however,

the differences in the fiscal policy assumptions

should not affect a comparison of the projections.

Short-Term Outlook

Both CBO and the Administration expect the U.S.

economy to expand at an annual rate of nearly 3

percent (on a fourth-quarter-to-fourth-quarter basis)

through 1995; both forecasts anticipate small declines in the unemployment rate and a rise in shortterm interest rates.2

The most noticeable difference between CBO

and Administration forecasts is in the outlook for

short-term interest rates. CBO projections show

slightly higher three-month Treasury bill rates over

the 1994-1995 period. The forecast of a higher

interest rate, in combination with the projections of

steady inflation by CBO and the Administration,

indicate that real (inflation-adjusted) interest rates

are expected to rise. CBO's rationale for this rise in

real rates is based on the current policy objectives

of the Federal Reserve and future conditions in the

capital market. To dampen future inflationary pressures, policymakers will probably allow short-term

real rates to rise as the economy continues to grow.

Moreover, CBO expects that there will be some

upward pressure on real interest rates in the capital

market because the supply of domestic savings will

be more than offset by higher federal borrowing and

an increase in the demand for capital, both domestic

and foreign.

Since the forecast was made, economic data

have shown an unexpectedly strong growth in real

gross domestic product of 7.0 percent in the fourth

quarter of 1993. The unusually high growth rate at

1. Eggert Economic Enterprises, Inc., Blue Chip Economic Indicators

(April 10, 1994).

2. The Bureau of Labor Statistics changed the way it conducts the

unemployment survey as of January 1994 [see Congressional

Budget Office, The Economic and Budget Outlook: Fiscal Years

1995-1999 (January 1994), p. 9]. The change raises the level of

the unemployment rate by about 0.4 percentage points. The new

measure is used here for the forecast years; the CBO and Administration forecasts, which were based on the previous methodology, have been adjusted upward by 0.4 percentage points in an

attempt to make them comparable with recently released data.
20 AN ANALYSIS OF THE PRESIDENT'S BUDGETARY PROPOSALS April 1994

Table 7.

Comparison of Congressional Budget Office, Administration, and

Blue Chip Short-Run Economic Forecasts, Calendar Years 1992-1995

Actual Estimated* Forecast

1992 1993 1994 1995

Fourth Quarter to Fourth Quarter (Percentage change)

Nominal GDP

CBO 6.7 4.9 5.7 5.4

Administration 6.7 5.0 5.8 5.6

Blue Chip 6.7 5.5 5.7 5.8

Real GDPb

CBO 3.9 2.3 2.8 2.7

Administration 3.9 2.3 3.0 2.7

Blue Chip 3.9 3.2 3.0 2.7

Consumer Price Index0

CBO 3.1 2.7 2.9 3.0

Administration 3.1 2.8 3.0 3.2

Blue Chip 3.1 2.7 3.0 3.4

Calendar Year Averages (Percent)

Civilian Unemployment Rated

CBO

Administration

Blue Chip

Three-Month Treasury Bill Rate6

CBO

Administration

Blue Chip

Ten-Year Treasury Note Rate

CBO

Administration

Blue Chip/

7.4

7.4

7.4

3.4

3.5

3.4

7.0

7.0

7.0

6.8

6.8

6.8

3.0

3.0

3.0

5.9

5.9

5.9

6.8

6.9

6.4

3.5

3.4

3.7

5.8

5.8

6.3

6.5

6.5

6.1

4.3

3.8

4.3

6.0

5.8

6.6

SOURCES: Congressional Budget Office; Office of Management and Budget (OMB); Eggert Economic Enterprises, Inc., Blue Chip

Economic Indicators (April 10, 1994).

NOTE: The CBO and OMB forecasts are based on data available through December 1993 and do not reflect the fourth-quarter data for gross

domestic product (GDP). The Blue Chip forecast is an average of 50 private forecasters.

a. The Blue Chip forecast was prepared three months later than the other forecasts, so the Blue Chip data for 1993 are actual.

b. Based on constant 1987 dollars.

c. The consumer price index for all urban consumers (CPI-U).

d. The Bureau of Labor Statistics changed the method for conducting the unemployment survey in January 1994, and the change increased

the measured unemployment somewhat. The CBO and Administration forecasts for 1994 and 1995 are consistent with the old, pre-1994,

methodology. The forecast tables reported here have been adjusted upward 0.4 percentage points to make the forecasts comparable with

currently published figures. Data for 1992 and 1993, shown in italics, use pre-1994 methodology.

e. CBO and Blue Chip project the secondary market rate for three-month Treasury bills, while OMB projects the auction average rate.

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

of the Aaa bond rate, adjusted by CBO to reflect the estimated spread between Aaa bonds and 10-year Treasury notes.
CHAPTER TWO COMPARISON OF ECONOMIC FORECASTS 21

Table 8.

Comparison of Federal Reserve, Congressional Budget Office,

and Administration Economic Projections for 1994

Federal Reserve8 CBO Administration

Fourth Quarter to Fourth Quarter (Percentage change)

Nominal Gross Domestic Product

Real Gross Domestic Product

Consumer Price Index

5.50 to 6.00

3.00 to 3.25

About 3

5.7

2.8

2.9

5.8

3.0

3.0

Civilian Unemployment Rate

Average Level, Fourth Quarter

6.50 to 6.75 6.6 6.8

SOURCES: Congressional Budget Office; Office of Management and Budget; Board of Governors of the Federal Reserve System, Monetary

Policy Report to the Congress Pursuant to the Full Employment and Balanced Growth Act of 1978 (February 1994).

a. The Federal Reserve figures are the ranges-known as the central tendency-that include the majority of the forecasts of Federal Open

Market Committee members and other Federal Reserve Bank presidents.

the end of 1993 represents (1) a sizable increase in

spending on producers' durable equipment, which

grew at an annual rate of 26 percent during the

fourth quarter, compared with 10 percent in the

third quarter; (2) an increase in demand for U.S.

exports, which in turn increased the net export component of total demand much more than anticipated;

and (3) a 15 percent increase in spending for consumer durables-more than double its growth in the

third quarter.

Although the economy's recent surge embodied

some strong fundamentals, CBO does not anticipate

that this spell of rapid growth will presage similarly

rapid growth throughout 1994. The Southern California earthquake and adverse winter weather cut

into economic activity in the first quarter. Economic growth this year will be dampened by

slightly more restrictive fiscal policy. The Omnibus

Budget Reconciliation Act of 1993 imposed higher

tax rates on high-income individuals and will slow

the growth of federal expenditures. Moreover, continued weakness in the economies of some of its

major trading partners is likely to moderate economic activity in the United States. More specifically,

several countries have assigned high priority to containing growing public debt and budget deficits despite their current recessionary environment; in all

likelihood, this restraint abroad will limit demand

for U.S. exports in 1994.3

Monetary policy is also likely to be less accommodative this year. In early February, a time when

concerns about future inflation were rising, the Federal Reserve lifted the federal funds rate by 25 basis

points. This was followed by a further rise of 25

basis points in the funds rate in late March. These

actions were generally anticipated in both CBO's

and the Administration's forecasts. The rise signalled a major turning point in the policy of the

Federal Reserve, which has been relatively accommodative during the past five years. The change in

policy probably foreshadows further increases in

short-term interest rates as the economic expansion

in the United States continues.

3. For the Group of Seven industrialized countries (Canada, France,

Germany, Italy, Japan, the United Kingdom, and the United

States) combined, the Organization for Economic Cooperation and

Development predicts that, on average, fiscal policy will be as

restrictive as that of the United States. Also note that while a

stimulative fiscal package has been accepted in Japan, the recovery is expected to be gradual, since the stimulus is primarily based

on an income tax cut that is temporary and financing decisions

have been postponed until the end of 1994.
22 AN ANALYSIS OF THE PRESIDENT'S BUDGETARY PROPOSALS April 1994

Table 9.

Comparison of Congressional Budget Office, Administration, and Blue Chip Economic

Projections, Calendar Years 1993-1999

Estimated8 Forecast Projected

1993 1994 1995 1996 1997 1998 1999

Nominal GDP (Billions of dollars)

CBO 6,370 6,730 7,099 7,483 7,880 8,287 8,700

Administration 6,371 6,736 7,118 7,522 7,950 8,400 8,870

Real GDPb

(Percentage change, year over year)

CBO 2.8 2.9 2.7 2.7 2.7 2.6 2.5

Administration 2.8 3.1 2.8 2.7 2.6 2.6 2.5

Blue Chip 3.0 3.6 2.8 2.6 2.5 2.4 2.8

GDP Deflator (Percentage change)

CBO 2.6 2.7 2.7 2.6 2.5 2.5 2.5

Administration 2.6 2.6 2.8 2.9 3.0 3.0 3.0

Blue Chip 2.6 2.3 2.9 3.2 3.2 3.1 3.1

Consumer Price Index0

(Percentage change, year over year)

CBO 3.0 2.7 3.0 3.1 3.1 3.1 3.1

Administration 3.0 2.8 3.2 3.3 3.3 3.4 3.4

Blue Chip 3.0 2.8 3.3 3.4 3.5 3.4 3.4

Civilian Unemployment Rate (Percent)d

CBO

Administration

Blue Chip

6.8

6.8

6.8

6.8

6.9

6.5

6.5

6.5

6.2

6.3

6.3

6.0

6.2

6.1

6.1

6.1

5.9

6.1

6.1

5.9

6.0

SOURCES: Congressional Budget Office; Office of Management and Budget (OMB); Eggert Economic Enterprises, Inc., Blue Chip Economic Indicators (March 10, 1994).

NOTE: GDP = gross domestic product.

a. The Blue Chip forecast was prepared two month later than the other forecasts, so the Blue Chip data for 1993 are actual.

b. Based on constant 1987 dollars.

(Continued)

The Federal Reserve's forecast for this year is

compatible with the near-term outlook delineated by

the Administration and CBO forecasts (see Table

8). The Federal Reserve predicts only slightly

higher real growth than does CBO or the Administration. At the same time, the Administration's

forecast for unemployment in the comparable 1994

fourth quarter is just outside the Federal Reserve's

upper boundary at 6.8 percent, while CBO's forecast of 6.6 percent is in the middle of the Fed's

range.4 Moreover, the Federal Reserve's projection

for inflation has been lowered somewhat to "about

3" percent from the "3 to 3.5" percent given in July

1993.

4. The unemployment rates predicted by the Administration and

CBO for the fourth quarter of 1994 were 6.4 and 6.2, respectively,

on a prerevision basis. Both numbers were adjusted upward by

0.4 percentage points to make them roughly comparable to the

Federal Reserve's forecast, which is based on the new methodology of the Bureau of Labor Statistics.
CHAPTER TWO COMPARISON OF ECONOMIC FORECASTS 23

Table 9.

Continued

Estimated8

1993

Forecast

1994 1995 1996

Projected

1997 1998 1999

Three-Month Treasury Bill Rate (Percent)*

CBO 3.0 3.5 4.3 4.6 4.6 4.7 4.7

Administration 3.0 3.4 3.8 4.1 4.4 4.4 4.4

Blue Chip 3.0 3.5 4.0 4.3 4.4 4.4 4.3

Ten-Year Treasury Note Rate (Percent)

CBO 5.9 5.8 6.0 6.1 6.2 6.2 6.2

Administration 5.9 5.8 5.8 5.8 5.8 5.8 5.8

Blue Chip1 5.9 6.0 6.2 6.6 6.4 6.3 6.4

Nominal Income (Percentage of GDP)

Wage and salary disbursements

CBO

Administration

Other personal income9

CBO

Administration

Corporate profitsh

CBO

Administration

48.4

48.4

36.1

36.1

7.0

7.0

48.8

48.4

36.1

36.1

7.0

7.5

49.0

48.3

36.4

36.2

6.6

7.5

49.0

48.3

36.7

36.3

6.4

7.4

48.9

48.4

37.0

36.4

6.3

7.2

48.9

48.5

37.4

36.6

6.2

7.1

48.8

48.4

37.7

36.7

6.1

7.1

c. Consumer price index for all urban consumers (CPI-U).

d. The Bureau of Labor Statistics changed the unemployment survey in January 1994. The CBO and Administration forecasts for 1994

through 1999 originally used 1993 methodology. The forecast tables reported here have been adjusted upward 0.4 percentage points to

make the forecasts comparable with currently published figures. Data for 1993, shown in italics, use pre-1994 methodology.

e. CBO and Blue Chip project the secondary market rate for three-month Treasury bills, while OMB projects the auction average rate.

f. The Blue Chip does not project a 10-year note rate. The values shown here are based on the Blue Chip projection of the Aaa bond rate,

adjusted by CBO to reflect the estimated spread between Aaa bonds and 10-year Treasury notes.

g. Personal income less wage and salary disbursements.

h. Corporate profits reported are book, not economic, profits.

The recent behavior of long-term interest rates,

however, may indicate that financial markets anticipate more rapid acceleration of inflation than the

Federal Reserve, Administration, and CBO forecasts

indicate. Ten-year Treasury note rates, which averaged below 5.8 percent during January, rose to

roughly 7 percent by early April. Inflationary expectations have probably been building since late

last year. As previously mentioned, the data for the

fourth quarter of 1993 and the first quarter of 1994

indicate that the economy is stronger than previously anticipated, despite severe winter weather. In

addition, commodity price indexes have been rising

steadily. This information increases the possibility

that, by 1995, the economy will approach the point

at which significant supply bottlenecks will appear.

Inflation, it is feared, could then jump into the 4

percent to 5 percent range, just as it did in 1989.

Several factors indicate that inflation is likely to

remain low in the near term, however. Oil prices in

the first quarter of 1994 are about 10 percent lower
24 AN ANALYSIS OF THE PRESIDENT'S BUDGETARY PROPOSALS April 1994

than they were in the last half of 1993. Lower oil

prices will dampen the rise in input prices and contain price pressures in finished goods. Moreover,

although fourth-quarter growth moved the economy

closer to the limits of its capacity, CBO estimates

that the GDP gap, a summary measure of the degree

of excess capacity, will remain large enough to keep

inflation steady even though economic growth remains close to 3 percent.5

 In addition, CBO expects

that there will be enough slack in the labor markets

during the forecast period to keep unit labor costscompensation growth adjusted for productivity

gains-from rising rapidly. Furthermore, it is likely

that more people will choose to enter the labor force

as employment continues to grow. Faster growth of

the labor force will slow the decline in the unemployment rate and curtail inflationary pressures from

the labor market. Last, low inflation abroad will

help to restrain U.S. inflation by keeping prices of

imported goods low and holding down domestic

price increases for U.S. goods.

Apart from inflationary expectations, other

factors probably played a role in the rise in longterm rates. Long-term interest rates rose in early

February against the backdrop of a monetary policy

move by the Federal Reserve. The Federal

Reserve's policy was apparently designed to

dampen inflation expectations and long-term rates,

but in fact, 10-year rates rose about three-fourths of

a percentage point in almost two months after the

policy action. The further increase in rates by the

Federal Reserve in late March did little to allay

these expectations.

At the same time, there has been a surge in

long-term interest rates in Europe and Japan in

1994, even though economic conditions there differ

from those in the United States. Some financial

market analysts suggest that this unexpected behavior in the bond markets could have been the result

of a massive sell-off by U.S. investors who originally invested abroad to capture higher yields when

U.S. rates were low. Other analysts believe that

some combination of economic uncertainties and

political tensions created uneasiness that resulted in

the sell-off. Among the contributing factors were

rapid growth in the German money supply; uncertainty about U.S. inflation and future Federal Reserve actions; the debt-financed fiscal stimulus in

Japan that is expected to put upward pressure on

long-term rates; trade frictions between the United

States and Japan; and political uncertainties in Mexico, North Korea, China, and Russia.

Medium-Term Projections

The Administration and CBO outlooks for real GDP

growth and unemployment are virtually identical for

the 1996-1999 period.6 Both forecasts indicate that

real GDP will grow at an average annual rate of

about 2.6 percent, while unemployment is expected

to decline only slightly from the levels forecast for

1995 (see Table 9 and Figure 1).

The significant differences in the medium-term

projections lie in the outlook for inflation-adjusted

interest rates. CBO predicts that inflation will average 3.1 percent over the 1996-1999 period, and the

Administration projects that inflation will average

3.4 percent. CBO's interest rate projections, by

contrast, are about 0.4 percentage points higher than

those of the Administration. Consequently, the Administration's projections for interest rates, adjusted

for inflation, are significantly lower than CBO's

projections, which tends to lower the estimated deficits for the medium term. If the Administration

projected higher nominal interest rates—high enough

to result in inflation-adjusted rates similar to those

projected by CBO-its deficit projections would be

more than $20 billion greater by 1999.

Interest Rates Adjusted for Inflation

Real short-term rates, approximated by the difference between the three-month Treasury bill rate and

the average annual growth in the consumer price

It should be noted, however, that estimates of the GDP gap are

highly uncertain. See Congressional Budget Office, The Economic

and Budget Outlook: Fiscal Years 7995-7999, pp. 17-20.

6. The medium-term projections of CBO, the Administration, and the

Blue Chip consensus do not attempt to forecast cyclical fluctuations beyond 1995. These projections are based on long-run

trends extrapolated from recent developments.
CHAPTER TWO COMPARISON OF ECONOMIC FORECASTS 25

Figure 1.

Comparison of Congressional Budget Office and Administration

Economic Assumptions

Real GDP Growth CPI Inflation

4.0

3.5

3.0

2.5

CBO

Administration

4.0

3.5

3.0

2.5

Pwcsnt

Administration

1992 1994 1996 1998 2000 1992 1994 1996 1998 2000

Three-Month Treasury Bills Ten-Year Treasury Notes

Psroont Percent

CBO

Administration

CBO

Administration

1992 1994 1996 1998 2000 1992 1994 1996 1998 2000

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

NOTE: GDP = gross domestic product; CPi = consumer price index for all urban consumers.

index over the following quarter, are relatively low

and widely expected to rise. Neither CBO nor the

Administration, however, expects real short-term

rates to rise to the heights that prevailed in the mid1980s. CBO estimates that real short-term rates will

be 0.6 percentage points higher in the 1998-1999

period than the Administration's estimate.

Several factors suggest that short-term real rates

will generally be higher in the next decade than

they were during the 1953-1982 period when they

averaged 1 percent (see Figure 2).7 Most important,

despite the progress in deficit reduction embodied in

OBRA-93 and the President's budget, the deficit

will still bulk larger in relation to GDP than it did

in the 1950s, 1960s, and 1970s. In those years, the

total federal deficit averaged just 1.1 percent of

GDP, but by both CBO's and the Administration's

7. This period is chosen for reference in order to facilitate comparison with the discussion of inflation-adjusted interest rates in the

Economic Report of the President (February 1994), p. 81.
26 AN ANALYSIS OF THE PRESIDENT'S BUDGETARY PROPOSALS April 1994

projections, the deficit will average 2.5 percent of

GDP over the next six years. The higher federal

borrowing comes, moreover, out of a domestic capital pool that reflects substantially lower private saving. Gross saving by businesses and households

averaged 17.3 percent of GDP between 1953 and

1982, but fell sharply in the mid-1980s and has recently been averaging about 15.8 percent of GDP.

The continued high level of government borrowing,

combined with low private saving, suggests some

upward pressure on interest rates compared with the

1953-1982 period.

Some analysts note, however, that since the

United States operates in an international capital

market, its interest rates can be dampened by international sources of financing. On examination, this

offset is unlikely to be large. World interest rates

are likely to be substantially higher in the mid1990s, when the European countries and Japan are

likely to have recovered from their current economic difficulties. CBO has long anticipated that

world capital demands, driven by development

needs in Germany, Eastern Europe, and the former

Soviet Union, are likely to increase. The North

American Free Trade Agreement is also likely to

encourage capital investment in Mexico, although

Figure 2.

Quarterly Real Short-Term Interest Rates

"^1960 1960 1970 1980 1990

SOURCE: Congressional Budget Office.

NOTE: The real short-term rate equals the three-month Treasury

bill rate minus the next quarter's consumer price index.

this demand will be small in relation to the size of

the world capital market.

None of these factors are easily quantifiable, but

all point to higher interest rates (in relation to inflation) in the 1990s than in the 1953-1982 period.

Moreover, this earlier time period may be somewhat

misleading as a standard of comparison; it includes

a substantial period in the 1970s when real shortterm interest rates fell below zero—the result of a

combination of stimulative monetary policy and inflation that frequently exceeded expectations (see

Figure 2). Few analysts would expect a return to

such an extended period of negative real rates when

the economy is expanding, and even fewer would

advocate it. A more prudent projection, therefore,

would set real short-term rates at a level somewhat

above those prevailing in the 1953-1970 period,

when real rates on short-term Treasury bills averaged 1.3 percent.

Labor Productivity and Unit

Labor Costs

The medium-term projections of CBO and the Administration for labor productivity growth are virtually identical, a major reason for the similarity of

real growth projections (see Table 10). Accelerating

from the 1970s and 1980s, productivity will grow at

an average annual rate of 1.4 percent from the third

quarter of 1990 to the fourth quarter of 1999, according to CBO's projections, and will return to its

long-term trend. This rate of growth is associated

in part with a surge in investment in plant and

equipment that CBO believes will be the wellspring

of economic growth for the next few years. Investment will be stimulated primarily by corporate restructuring and the need to innovate. Besides the

gains in manufacturing, recent anecdotal evidence

suggests that accelerating investment will enhance

productivity in services such as communications,

insurance, banking, and finance.

Many economists believe that gains in productivity have held inflation in check during the past

two years. An increase in the growth of productivity, given wage growth, implies a smaller rise in

unit labor costs; because unit labor costs account for

approximately two-thirds of total production ex-
CHAPTER TWO COMPARISON OF ECONOMIC FORECASTS 27

Table 10.

Growth in Labor Productivity in the Nonfarm

Business Sector (In percent)

Period

Average Annual

Growth Rate

Actual Growth

1960:11 to 1973:IV

1973:IV to 1981:111

1981:111 to 1990:111

1960:11 to 1990:111

2.3

0.6

0.9

1.5

Projected Growth: 1990:111 to 1999:IV

Congressional Budget Office

Administration

1.4

1.5

SOURCES: Congressional Budget Office; Department of Labor,

Bureau of Labor Statistics.

NOTE: 1960:11, 1973:IV, 1981:111, and 1990:111 are National Bureau of Economic Research cyclical peaks.

penses in the United States, they can help hold

down price pressures in the economy. Although

total compensation per hour (wages, salaries, and

benefits) grew by 3.6 percent in 1993, unit labor

costs grew by only 2.1 percent because of the offsetting gain of 1.6 percent in productivity growth.

Economic Implications of

Health Care Reform

The Administration's health care reform proposal

was not accounted for in either CBO or Administration economic projections. CBO believes that the

main effect on the economy during the next few

years could come from the proposal's excise tax on

cigarettes and other tobacco products, applied in the

fourth quarter of 1994. The tax could cause a onetime increase in the level of the consumer price index of approximately 0.6 percent, temporarily raising inflation. Although the Administration's economic projections generally predict higher inflation

than those of CBO, the effect of this tax increase

does not appear in the Administration's forecast for

1995.

Additional effects that could have an impact on

the total economy as early as 1996 are difficult to

quantify. Eventually, the proposal would cut total

business spending on health insurance, but the effects would be uneven and some firms would face

cost increases.8 Since the firms that face cost increases might not be able to reduce the nominal

wages of their workers, their prices could be slightly

higher for a time. Moreover, the incentives of the

plan would encourage some workers to leave the

labor force. This reduction in labor supply would

reduce actual and potential output over the longer

term, but only by very small amounts. In CBO's

best judgment, the net effects of the Administration's health plan on the economic projections are

small. Thus, the projections over the medium term

will not be materially affected.

Effect of CBO's Economic

Projections on the

Administration's Budget

Other economic assumptions can have a significant

impact on budget deficit projections. When CBO's

economic assumptions are substituted for those of

the Administration, the estimated deficits are increased in every year except 1994 (see Table 11).

The difference between the CBO and Administration deficit projections is primarily the result of

disparities in inflation and interest rate assumptions.

CBO's lower inflation forecast decreases taxable

incomes and tax revenues. Moreover, lower inflation projections decrease outlays for benefits that

are influenced by cost-of-living adjustments. These

inflation effects do not offset each other, however.

See Congressional Budget Office, An Analysis of the Administration's Health Proposal (February 1994).
28 AN ANALYSIS OF THE PRESIDENT'S BUDGETARY PROPOSALS April 1994

CBO's higher interest rate projections result in a net

increase in outlays from higher interest costs in financing government expenditures and servicing the

debt. The combination of lower receipts and higher

outlays, therefore, adds $99 billion to the deficits

over the 1994-1999 period.

Table 11.

Effects of CBO's Economic Projections on Estimates of the Administration's

Budget (Differences by fiscal year, in billions of dollars)

Revenues8

Outlays

Benefit programs

1994

-1

-1

1995

1

-1

1996

5

-2

1997

12

-3

1998

22

-4

1999

34

-6

Cumulative

Six-Year

Change

73

-16

Net interest

Due

Due

to higher interest rates

to additional debt-

-1 1

service costs _b J)

Deficit

Total -2

-2

b

1

6

_b

5

10

8

J.

5

17

9

_g

7

29

11

A

10

43

34

_8

26

99

SOURCE: Congressional Budget Office.

a. Revenue losses are shown as positive because they increase the deficit.

b. Less than $500 million.
Chapter Three

The Administration's Defense Budget

T

he budget request for 1995 represents the

Clinton Administration's effort to match

financial resources with its strategy for

national security in the post-Cold War world. It

comes on the heels of former Defense Secretary Les

Aspin's Bottom-Up Review of force requirements.

To fund that force, the Administration's defense

budget calls for appropriations totaling $264 billion

for 1995. Outlays in 1995 would total about $272

billion—an amount that exceeds the appropriation

request because much of the outlay total reflects

past appropriations that have been at higher levels.

Most of the transition to the lower force levels

of the Bottom-Up Review will be accomplished by

1996 when the force will consist of 1,496,000 active-duty troops, declining to 1,453,000 in 1999. In

nominal terms, budget authority would bottom out

at $253 billion in 1997 before returning to a level of

$266 billion in 1999-which is about 10 percent

lower than in 1995 after adjusting for inflation.

Outlays would level off at about $257 billion for the

three years from 1997 through 1999, again reflecting the pattern of budget authority in previous

years.

The current budget plan has two clear risks: that

inflation will be higher than planned and that anticipated savings from base closings and other cuts in

infrastructure will not materialize. Moreover, the

defense budget contains reductions in budget authority and outlays that remain to be specified in future

budgets.

Priorities in the

Current Request

The Administration points to readiness as its top

priority in the defense budget, and it also assigns a

high priority to science and technology programs

designed to keep the qualitative advantage enjoyed

by U.S. weaponry. Consequently, operation and

maintenance (O&M) and research, development,

test, and evaluation (RDT&E) are the only major

portions of the defense budget receiving more

money than is needed to cover the costs of inflation

in 1995. After 1995, the plan calls for substantial

increases in funding for weapons purchases.

Maintaining Readiness

Readiness is a term reserved for programs that

contribute to the immediate effectiveness of weapons and forces.1

 It involves such activities as the

training provided to individuals and units as well as

the resources committed to keeping existing weapons in working order. The O&M accounts incur

most of these costs, but O&M is not synonymous

with readiness. For example, building maintenance

For more information, see Congressional Budget Office, "Trends

in Selected Indicators of Military Readiness, 1980 Through 1993,"

CBO Paper (March 1994).
30 AN ANALYSIS OF THE PRESIDENT'S BUDGETARY PROPOSALS April 1994

and environmental programs do not contribute to

readiness despite their overall value. Nevertheless,

the Administration strives to enhance readiness

through its budget for 1995 by requesting $3.3 billion, or about 4 percent, more in real terms than the

1994 budget for O&M programs.

As shown in Table 12, the growth in O&M

funding would come to a halt in 1996. In fact,

these accounts would suffer real declines through

1999, since nominal funding is nearly frozen

through 1998 and grows a bit more in 1999, but by

less than the expected costs of inflation. The Administration does not expect this funding restraint in

O&M to cause any shortfall in readiness as measured by the time military forces spend using or

maintaining their equipment. Rather, the Administration expects to achieve substantial savings from

cutting forces, closing bases, and reducing other elements of the Department of Defense's (DoD's)

infrastructure funded through O&M accounts.

Technological Superiority

The fortunes of the Defense Department's RDT&E

accounts generally indicate the priority given to

improving the overall quality of U.S. weaponry. In

Table 12.

The President's Budget for National Defense for the 1995-1999 Period as

Estimated by CBO (By fiscal year, in billions of dollars)

Discretionary Account 1994 1995 1996 1997 1998 1999

Budget Authority

Military Personnel

Operation and Maintenance

Procurement

RDT&E

Other Discretionary Programs

Future Adjustments

President's 1995 Budget as

Estimated by CBO

70.8

88.0

44.5

34.8

23.6

0

261.5

70.5

92.9

43.3

36.2

21.5

Q

264.3

66.2

88.0

48.4

34.8

24.9

-6.4

255.9

65.7

88.0

49.8

32.1

22.3

-5.4

252.6

66.1

88.5

57.1

30.9

21.6

-5.0

259.2

67.3

90.6

60.1

30.2

20.7

-3.3

265.7

Military Personnel

Operation and Maintenance

Procurement

RDT&E

Other Discretionary Programs

Future Adjustments

President's 1995 Budget as

Estimated by CBO

71.0

88.3

60.8

35.5

24.2

0

279.8

Outlays

70.3

88.4

55.1

36.1

21.8

0

271.7

66.2

88.4

49.3

35.2

22.3

0.2

261.6

65.5

87.6

48.7

33.4

22.8

-1.0

257.0

65.9

87.9

49.9

31.7

23.1

-1.4

257.1

67.0

89.6

52.8

30.6

23.2

-5.1

258.1

SOURCE: Congressional Budget Office.

NOTE: RDT&E = research, development, test, and evaluation.
CHAPTER THREE THE ADMINISTRATION'S DEFENSE BUDGET 31

1995, total growth in RDT&E funding would outpace inflation by about $0.5 billion, or slightly more

than 1 percent. This increase is about evenly split

between pure science and technology and research

into ballistic missile defenses (BMD); both programs would receive $0.3 billion more than is necessary to cover inflation—about 4 percent in real

growth for science and technology and about 11

percent for BMD. Funding for all other RDT&E

programs would suffer a real decline of about 1 percent in 1995.

Like O&M funding, the relative priority enjoyed

by RDT&E accounts would erode in 1996 and every year through 1999. By 1999, funding would

total $30.2 billion, or 25 percent less in real terms

than the $34.8 billion provided for 1994. By 1999,

the change in emphasis within total RDT&E funding would be more dramatic; science and technology programs would continue to receive 4 percent

more than the inflation-adjusted 1994 level, while

BMD would be 5 percent lower, and all other

RDT&E would be 36 percent lower.

Purchases of Weapons

The budget for purchases of new weapons dips in

1995 for the 10th straight year, but it recovers in

1996 and exceeds the inflation-adjusted 1994 level

by $9 billion in 1999. As the number of divisions,

ships, and air wings has fallen, DoD has had more

weapons than it needs for post-Cold War threats.

Consequently, it can defer purchases of new equipment. The Administration's plan would replace

obsolete equipment selectively. The modernization

program is most evident in the plan for aircraft procurement for the Navy and Air Force, shipbuilding,

Air Force space programs, and upgrades to Abrams

tanks.

The procurement budget also aims at preserving

the industrial capacity of the United States to produce critical items. The Administration cites the

capability to produce nuclear-powered ships in its

request to use $3.7 billion to build an aircraft carrier; it also wants $3 billion through 1999 for 19

cargo ships in further recognition of industrial as

well as mobility needs. Other critical items for

which production capabilities would be preserved

include tracked combat vehicles, such as Bradley

Fighting Vehicles and Abrams tanks, and ammunition.

Procurement Reform

The Administration's overall budget anticipates

savings of $0.7 billion in 1995 and $3 billion a year

by 1999 from changing the way the federal government buys things. Drawing on the National Performance Review led by Vice President Gore, the

Administration seeks to "reinvent" federal procurement practices, which affect the Defense Department far more than any other agency and almost as

much as the rest of the government combined.

Nevertheless, the original budget request did not

show savings for any particular agency; rather, the

amounts that the Administration expects to save

from procurement reform are left undistributed in a

consolidated account in function 920. Recently,

however, the Administration indicated that procurement reform would lower its request for DoD by

$315 million. The amendment for 1995 distributes

to DoD almost 45 percent of the expected savings

and suggests that in 1999 DoD's budget authority

could be about $1.4 billion lower.

Still, the budgetary effects of procurement reform are most uncertain. The Congressional Budget

Office is unable to estimate the savings from recent

and wide-ranging proposals to change laws affecting

government contracts, including negotiations, administration, reporting, and product development.

Clearly, changes that lead to greater use of commercial items (in contrast to items designed to federal specifications) and to less onerous demands on

the accounting systems of contractors would offer

budgetary savings. The amount of savings, however, has escaped objective measurement by the

Congressional Budget Office and other institutions.

The Risk of Higher

Inflation

Inflation stands as the most obvious threat to the

viability of the current defense budget and the
32 AN ANALYSIS OF THE PRESIDENT'S BUDGETARY PROPOSALS April 1994

forces it would support. A year ago, the Administration and CBO projected that inflation over the

1995-1999 period would average about 2.2 percent.

Now, both expect inflation as measured by the

implicit GDP deflator to be a bit higher over that

period-2.5 percent a year for the CBO forecast and

3.0 percent a year for the Administration's (see

Table 13). The cost to defense programs of the

Administration's new inflation forecast is about $20

billion over the five years.

Yet despite the new estimates of inflation, the

Administration has held its total defense budget

down instead of revising a real program that may

have to be further revised each year as the inflation

projections change. Not using the new assumptions

now has a cost to programs in 1995, but fortunately

the first year's cost is relatively small-about $0.4

billion.

Federal pay policies pose another price-related

risk to the DoD budget. Last year, the Administration proposed to freeze federal salaries—both military and civilian—in 1994 and to reduce the future

rates of increase relative to current law. The Congress, however, insisted that pay not be frozen in

1994, forcing other defense programs to bear the

costs-about $1.8 billion in 1994 and more than $2

billion a year thereafter.

A similar risk looms for 1995 through 1999 as

the Administration proposes to hold military and

civilian pay raises below those called for under

current law (see Table 14). DoD's budget includes

just enough money to provide its employees with an

across-the-board pay raise equal to the change in the

employment cost index less 1.5 percentage points.

That amount is less than what current law provides

for across-the-board raises by 1 full percentage

point each year.

Moreover, as discussed in Chapter 1, current

law holds that civilian employees receive localitybased raises designed to close the gap gradually

between federal and nonfederal salary levels. The

Administration's budget includes funds for salary

growth, but does not distinguish between across-theboard and locality pay raises. If the Congress adheres to current law only on across-the-board pay

raises, then DoD would need about $13.9 billion

more. Adhering to current law also on locality pay

would add another $12.1 billion. If the additional

funding was not available, DoD would have to cut

back on other expenses.

Table 13.

Estimated Increases in the GDP Deflator (By fiscal year, in percentage change)

1995 1996 1997 1998 1999

Administration and CBO Estimates

of a Year Ago

Current CBO Estimates

Current Administration Estimates

2.3

2.7

2.8

2.3

2.6

2.9

2.2

2.5

3.0

2.2

2.5

3.0

n.a.

2.5

3.0

SOURCES: Congressional Budget Office and the Department of Defense.

NOTE: n.a. = not available.
CHAPTER THREE THE ADMINISTRATION'S DEFENSE BUDGET 33

The Risk of Not Cutting

Infrastructure

The second risk to the Administration's plan is that

DoD will not be able to reduce its infrastructure as

quickly as it is planning. Funding to meet infrastructure costs are found mostly in the O&M accounts, where most readiness activities are also

funded. Infrastructure costs for this purpose are

defined as the costs of bases and other support activities that do not change as force levels change,

much as business overhead does not readily change

with the volume of sales.

Failure to realize the expected savings in infrastructure may threaten funding for readiness. For

example, each year the Congress promotes readiness

by funding force operating tempos (optempo) such

as flying hours for aircraft and steaming days for

ships. In the Army, optempo is often expressed in

terms of how many miles each tank could be

driven, and for 1994 the Congress funded an

optempo of 800 miles per tank. Nevertheless, other

demands on its funding within the O&M account

have forced the Army to cut its tank use to 620

miles. The plan for the 1995-1999 period calls for

returning to 800 miles a tank a year, but that plan,

like the 1994 plan, could be jeopardized by a failure

to reduce infrastructure that causes the Army to

restrict optempo.

How much are the expected savings? In 1999,

the Administration's estimate for O&M falls short

of the 1994 level by about $10 billion in real terms.

The force reductions of the Bottom-Up Review explain about half of this reduction, and the remainder

can be attributed to expected savings in infrastructure.

Table 14.

Estimated Pay Raises for Military and Civilian Employees (By fiscal year, in percentage change)

1995 1996 1997 1998 1999

Current Administration Policy

Current Law

CBO estimates

Administration estimates

Current Administration Policy

Across-the-Board Pay Raises

for Military Personnel

1.6

2.6

2.6

2.2

3.0

3.2

2.5

3.2

3.5

Across-the-Board and Locality

Pay Raises for DoD Civilians

1.6 2.2 2.5

2.5

3.0

3.5

2.5

2.5

2.8

3.5

2.5

Current Law

CBO estimates8

Administration estimates

4.7

n.a.

4.9

n.a.

5.2

n.a.

5.1

n.a.

5.0

n.a.

SOURCES: Congressional Budget Office and the Department of Defense.

NOTE: n.a. = not available.

a. These figures are weighted averages for various locations and employee categories.
34 AN ANALYSIS OF THE PRESIDENT'S BUDGETARY PROPOSALS April 1994

Can the Defense Department find these savings?

The evidence is mixed. DoD is now conducting the

first three of four rounds of base closings. For the

first two rounds, DoD is realizing O&M savings

that overall are about 15 percent less than it estimated near the beginning of each round (the first

round is saving more than expected, but the second

round is saving less). The one-time costs of closing

bases, borne elsewhere in DoD's budget, are running higher than expected. The jury is still out for

both rounds, and the final results could be better or

worse. Yet the first two rounds of base closures

clearly demonstrate the uncertainty over savings

estimates. Perhaps the Administration will pursue

rounds three and four more vigorously and achieve

greater savings sooner, but even then the savings

offered by base closures alone may be insufficient

to meet DoD's goals for infrastructure.

Whether the bases are closed or not, the effect

on the budget may be much the same if DoD can

lower its civilian payroll. Savings in O&M from

closing bases stem primarily from lower employment of civilians (about one out of four DoD civilians works in a base support function.) In 1999,

DoD would employ 129,000 fewer civilians than in

1994, and about 80,000 of these may serve in positions related to bases and other infrastructure, the

rest being attributable to force reductions. Moreover, DoD's plan calls for achieving nearly 40 percent of the total cut projected for 1999-about

50,000 people-in 1995.

Recent experience suggests that DoD may be

able to reduce its payroll as planned; in 1993, its

payroll fell by nearly 70,000 civilians. If attrition

alone is an inadequate device for managing the

work force in terms of skills, hierarchy, and involuntary job loss, then DoD may also use separation

incentives through 1997 to meets its goals.

Future Adjustments to

the Defense Budget

The five-year plan for the defense budget actually

exceeds what the Administration has pegged as the

Pentagon's slice of the fiscal pie except for what it

calls "future adjustments." DoD's financial blueprint, which is shown in Table 12, calls for unspecified reductions of $20.1 billion in budget authority

and $7.3 billion in outlays in the four years from

1996 through 1999.

The amount of budget authority approximates

the total funding necessary to cover the change in

inflation estimates, but the adjustments would occur

in the wrong years. The difference in inflation

assumptions would start out small in 1996 at about

$2 billion in budget authority and grow to about

$7.5 billion in 1999, as the costs of the assumptions

of higher prices cumulate. By contrast, the Administration's "future adjustments" to budget authority

start at $6.4 billion in 1996 and dwindle to $3.3

billion in 1999. Clearly, the future adjustments to

budget authority indicate funding problems beyond

the question of inflation estimates.

The future adjustments that the Administration

expects to make to outlays show an apparent imbalance with the future adjustments to budget authority. First, the reduction in 1996 budget authority is

paired with a slight increase in outlays for that year.

Second, by 1998 the reduction in budget authority

accumulates to about $17 billion, while the outlay

adjustments add to only $2 billion for that periodan abnormally low number.

How will these future adjustments affect current

priorities if the Administration adheres to its totals

in budget authority and outlays for DoD? First, the

increases in budget authority planned for weapons

procurement could be cut back, with the effect of

retarding plans to equip forces with new weaponry

and sustain DoD's industrial base. But even then,

there would still be room for programs generating

immediate outlays such as O&M and RDT&E. By

trading slow-spending budget authority for fastspending budget authority, both targets can be met.

Although weapons purchases could tumble by as

much as $30 billion through 1999, more money

could be available for readiness and technology

programs funded in O&M and RDT&E, which

could increase by $12 billion and $2 billion, respectively, over the five years. Alternatively, the cuts in

procurement could lead to higher pay raises for

military and civilian employees if the Congress

chose to continue with current law.
Appendixes

Appendix A

CBO Baseline Budget Projections

T

hroughout this study, the Administration's

proposals are contrasted with the Congressional Budget Office's (CBO's) baseline

estimates of the budget. The baseline shows the

path of revenues and spending if current laws and

policies remain unchanged. It is not a forecast of

budget outcomes, since policymakers will certainly

seek to alter current priorities. But the baseline is a

handy yardstick for gauging the potential impacts of

proposed changes-those advocated in the President's budget as well as in competing packages.

The Baseline Concept

Baseline projections follow long-established rules.

Revenues and entitlement programs (like Social

Security and Medicare) continue on their course

until the Congress changes the laws that underpin

them-laws that define taxable incomes and set tax

rates, benefit formulas and eligibility, and so forth.

For these categories, therefore, the baseline represents CBO's best estimate of what will happen in

the absence of any changes to current laws.

Unlike entitlement programs, discretionary programs are funded anew each year through the appropriation process. Discretionary programs encompass nearly all spending for defense and international affairs plus many domestic programs:

space, energy, highway and airport grants, environmental protection, health research, and the salaries

and expenses of civilian agencies, to name just a

few. The Budget Enforcement Act of 1990 set caps

on aggregate spending for these programs for the

1991-1995 period, and the Omnibus Budget Reconciliation Act of 1993 imposed caps through 1998.

CBO's baseline assumes compliance with the caps,

which, as explained below, will force trade-offs

among many competing programs. No law specifies caps after 1998. Thus, the baseline projections

for 1999 simply preserve discretionary spending at

the same real level as in 1998, boosting it by about

3 percent solely for inflation.

Three categories of spending remain. The federal government has pledged to protect depositors in

banks and savings and loan institutions, and the

baseline for deposit insurance shows the net cost of

meeting those promises. The category labeled offsetting receipts, which encompasses Medicare insurance premiums and similar fees and collections,

represents CBO's best estimate of the amounts that

the government will collect under current laws and

policies. The last category is net interest, which is

driven by market interest rates and future deficits

rather than being directly controlled by policymakers; CBO estimates such spending consistent

with its projections of those two fundamental determinants.

Baseline Projections

In January 1994, CBO published its baseline projections in The Economic and Budget Outlook: Fiscal

Years 1995-1999 and described the key factors that

drive the federal government's revenues, spending,

and deficit. Over the next two months, CBO revised its baseline projections modestly in the face of

legislation and new information, and those revisions

raise projected deficits in every year (see Table

A-l). The California earthquake spurred additional

funding for discretionary programs. A supplemental
38 AN ANALYSIS OF THE PRESIDENT'S BUDGETARY PROPOSALS April 1994

appropriation, plus the release of previously approved funds that were contingent on the occurrence

of such an emergency, will boost spending by an

estimated $2 billion to $5 billion a year through

1996 and by smaller amounts thereafter. Because

this aid is labeled an emergency and hence will be

accommodated through an upward revision to the

discretionary spending caps, CBO includes it here;

the formal adjustment to the caps will not appear

until the next Office of Management and Budget

(OMB) sequestration report in August 1994.

Technical revisions stem not from legislation

but from new information that came to light through

late February, much of it contained in the President's budget and supporting documents. One such

revision reflects the decision by the Student Loan

Marketing Association, nicknamed Sallie Mae, to

repay some of its remaining debt to the government

two years ahead of schedule. Because this collection is a receipt to the Treasury, CBO has pruned its

projections of outlays by $3 billion in 1994 but

upped them by an equal amount in 1996. (Sallie

Mae apparently elected to pay off even more of its

debt in March, after CBO had completed its baseline projections and the House and Senate had

started work on their budget resolutions; those extra

repayments are not reflected here.)

Other revisions to spending are scattered. New

information about spending plans and likely proceeds from liquidations has led CBO to revise its

Table A-1.

Changes in CBO Baseline Deficit Projections (By fiscal year, in billions of dollars)

1994 1995 1996 1997 1998 1999

January Baseline Deficit

Policy Changes (Discretionary spending)

Technical Revisions

Student loan liquidating account

Deposit insurance

Postal Service

Civil service retirement benefits

Military retirement contributions

Other mandatory spending and

offsetting receipts

Discretionary spending

Net interest

SOURCE: Congressional Budget Office,

a. Less than $500 million.

223

3

171

5

-3 a

1 -1

a 1

a a

a a

1

1

a

2

a

1

166

2

3

a

1

1

1

1

2

2

182

a

a

a

1

1

1

1

2

3

180

a

204

a

a a

-1 a

a a

1 1

1 1

1 1

2 2

3 3

Total

Total Changes

March Baseline Deficit

1

5

228

4

9

180

12

14

180

9

9

192

7

7

187

8

8

213
APPENDIX A CBQ BASELINE BUDGET PROJECTIONS 39

estimates of net spending by two deposit insurance will be smaller than CBO had earlier assumed),

agencies, the Resolution Trust Corporation and the higher costs for civil service retirement, and smaller

Bank Insurance Fund, by small and roughly offset- receipts for military retirement. Upward revisions

ting amounts. CBO now expects a larger deficit for of as much as $2 billion a year in discretionary

the Postal Service Fund (as hikes in postage rates spending fundamentally reflect CBO's switch to the

Table A-2.

CBO Baseline Deficit Projections (By fiscal year)

Actual

1993 1994 1995 1996 1997 1998 1999

In Billions of Dollars

Total Deficit Assuming Discretionary Caps 255 228 180 180 192 187 213

Deficit Excluding Deposit Insurance 283 231 192 194 198 192 216

Standardized-Employment Deficit8 215 183 154 163 172 172 199

On-Budget Deficit (Excluding Social

Security and Postal Service) 300 288 249 256 275 279 312

Memorandum:

Deposit Insurance -28 -3 -12 -14 -6 -5 -4

Off-Budget Surplus

Social Security 46 62 70 75 84 92 99

Postal Service -1 -2 -1 1 b -1 b

Total, Off-Budget Surplus 45 60 69 76 84 91 100

Hospital Insurance Surplus 4 5 7 5 b -5 -13

As a Percentage of GDP

Total Deficit Assuming Discretionary Caps 4.0 3.4 2.6 2.4 2.5 2.3 2.5

Deficit Excluding Deposit Insurance 4.5 3.5 2.7 2.6 2.5 2.3 2.5

Standardized-Employment Deficit*0 3.3 2.7 2.2 2.2 2.2 2.1 2.3

SOURCE: Congressional Budget Office.

a. Excludes cyclical deficit and deposit insurance.

b. Less than $500 million.

c. Expressed as a percentage of potential GDP.
40 AN ANALYSIS OF THE PRESIDENT'S BUDGETARY PROPOSALS April 1994

caps published by OMB in the President's budget~a

switch that acknowledges that OMB's figures, not

CBO's, are ultimately used in enforcing compliance

with the caps. Finally, net interest outlays are larger,

chiefly because other revisions warrant an upward

adjustment in CBO's estimates of future borrowing

and hence debt-service costs. All told, technical

revisions add to deficits by an average of $7 billion

a year in 1994 through 1999.

The remaining tables in this appendix update

some of the most widely used information in CBO's

January report. Because the revisions are relatively

minor, readers seeking a fuller explanation of unTable A-3.

CBO Baseline Budget Projections, Assuming Compliance

with Discretionary Spending Caps (By fiscal year)

Actual

1993 1994 1995 1996 1997 1998 1999

In Billions of Dollars

Revenues

Individual income

Corporate income

Social insurance

Other

Total

On-budget

Off-budget

Outlays

Discretionary

Defense

International

Domestic

Unspecified reductions

Subtotal

Mandatory

Deposit insurance

Net interest

Offsetting receipts

Total

On-budget

Off-budget

Deficit

On-budget deficit

Off-budget surplus

510

118

428

98

1,154

842

312

292

22

228

0

542

762

-28

199

-67

1,408

1,142

267

255

300

45

547

128

468

107

1,251

910

341

280

21

246

0

547

802

-3

201

-68

1,478

1,198

280

228

288

60

596

130

499

113

1,338

978

360

273

21

260

-8

546

847

-12

214

-77

1,518

1,227

291

180

249

69

635

133

526

118

1,411

1,031

380

277

21

267

-15

551

897

-14

230

-72

1,591

1,287

303

180

256

76

668

138

551

122

1,479

1,080

399

283

22

273

-30

549

963

-6

241

-76

1,670

1,355

315

192

275

84

708

144

578

126

1,556

1,136

420

291

22

282

-45

549

1,028

-5

252

-82

1,743

1,415

328

187

279

91

748

148

604

130

1,630

1,190

440

298

23

290

-46

566

1,100

-4

264

-85

1,843

1,503

340

213

312

100

(Continued)
APPENDIX A CBO BASELINE BUDGET PROJECTIONS 41

derlying trends in the budget can rely on that earlier

publication.

Clearly, much of the concern about the budget

stems from the sheer size of the federal deficit, and

Table A-2 on page 39 displays several alternative

measures of this gap. The most commonly used

measure of the deficit is simply the difference between total revenues and spending. But participants

in the budget debate often cite other measures as

well-most usefully, the standardized-employment or

structural deficit. This figure shows what is left

after removing the cyclical deficit—that is, the weakened revenues and extra benefit spending that result

Table A-3.

Continued

Actual

1993 1994 1995 1996 1997 1998 1999

As a Percentage of GDP

Revenues

Individual income

Corporate income

Social insurance

Other

Total

On-budget

Off-budget

Outlays

Discretionary

Defense

International

Domestic

Unspecified reductions

Subtotal

Mandatory

Deposit insurance

Net interest

Offsetting receipts

Total

On-budget

Off-budget

Deficit

On-budget deficit

Off-budget surplus

8.1

1.9

6.8

1.6

18.3

13.4

5.0

4.6

0.3

3.6

0

8.6

12.1

-0.4

3.2

-1.1

22.4

18.1

4.2

4.0

4.8

0.7

8.2

1.9

7.1

1.6

18.8

13.7

5.1

4.2

0.3

3.7

0

8.2

12.1

-0.1

3.0

-1.0

22.3

18.1

4.2

3.4

4.3

0.9

8.5

1.9

7.1

1.6

19.1

14.0

5.1

3.9

0.3

3.7

-0.1

7.8

12.1

-0.2

3.0

-1.1

21.7

17.5

4.2

2.6

3.6

1.0

8.6

1.8

7.1

1.6

19.1

14.0

5.1

3.8

0.3

3.6

-0.2

7.5

12.1

-0.2

3.1

-1.0

21.5

17.4

4.1

2.4

3.5

1.0

8.6

1.8

7.1

1.6

19.0

13.9

5.1

3.6

0.3

3.5

-0.4

7.1

12.4

-0.1

3.1

-1.0

21.5

17.4

4.1

2.5

3.5

1.1

8.6

1.8

7.1

1.5

19.0

13.9

5.1

3.5

0.3

3.4

-0.6

6.7

12.6

-0.1

3.1

-1.0

21.3

17.3

4.0

2.3

3.4

1.1

8.7

1.7

7.0

1.5

19.0

13.8

5.1

3.5

0.3

3.4

-0.5

6.6

12.8

a

3.1

-1.0

21.4

17.5

4.0

2.5

3.6

1.2

SOURCE: Congressional Budget Office,

a. Less than 0.05 percent of GDP.
42 AN ANALYSIS OF THE PRESIDENT'S BUDGETARY PROPOSALS April 1994

when the economy operates below its potential.

With the recovery on a solid footing, the distinction

between the structural deficit and the conventionally

measured deficit becomes less and less relevant.

Spending and receipts for a number of large

programs are often tracked separately; chief among

them are Social Security and the Postal Service

(both of them off-budget under different statutory

provisions) and Medicare's Hospital Insurance. The

narrowly defined surpluses (or deficits) of these

programs are depicted in Table A-2. Despite these

programs' special status, they loom so large in the

revenue and spending totals that any measure of the

budget that omits them yields a distorted picture of

the government's drain on credit markets and its

role in the economy.

Federal government revenues by source and

outlays by broad category, both in dollar terms and

in relation to gross domestic product (GDP), are

presented in Table A-3 on page 40. Spending for

entitlements and other mandatory programs, by far

the largest major spending category, tops $800

billion a year and is growing fast. Table A-4 displays more information about this huge cluster of

programs.

In its baseline projections, CBO assumes that

policymakers will continue to abide by the discretionary spending limits set in law through 1998.

Separate caps apply to both budget authority (the

authority to commit funds, the basic currency of the

appropriation process) and outlays (actual spending);

the stricter constraint governs. The caps have no

unique implications for particular programs but

rather force a bruising competition for resources. A

glance confirms that the outlay constraint will be

tougher to satisfy than the budget authority constraint in the 1995 budget cycle. As Table A-5 on

page 44 suggests, a virtual freeze on appropriations

at this year's levels will be required to comply with

the outlay caps in 1995, even though such a choice

would seem to leave much of the permissible budget authority unused. Specifically, the cap on outlays—estimated at $546 billion-is far below the

$554 billion that would be spent if real appropriations remained at this year's level and barely above

the $543 billion in outlays that would result if appropriations were strictly frozen across the board.

According to CBO's projections, under current

policies the deficit excluding deposit insurance is

virtually flat in 1995 through 1998 but then jumps

in 1999, the last year of the baseline. That spurt is

not an aberration. By 1998, discretionary outlays,

in dollar terms, will have been virtually frozen for

six years in a row. But the caps on discretionary

spending expire after 1998. If the programs governed by the caps then resume growing-even if

they grow no faster than is needed to keep pace

with inflation-the deficit is likely to climb, not just

in 1999 but in later years as well (see Table A-6 on

page 45).

Long-range budget projections are highly uncertain because no one can foresee the path of the

economy or such important trends as growth in

health care spending. CBO's long-run extrapolations thus contain considerably less detail than its

five-year projections, which are required under the

Congressional budget process. Nevertheless, CBO's

broad-brush overview suggests that after 1998-in

the absence of concerted action by policymakersthe deficit is likely to continue climbing both in

dollar terms and, more worrisomely, as a percentage

of GDP. Sustained growth in the two big health

care programs, Medicare and Medicaid, is the major

reason, as they mount steadily from 3.7 percent of

GDP today to 6.3 percent of GDP in 2004. Most

other spending programs, along with federal revenues, are expected to be roughly flat as a percentage

of GDP over the 10-year period. The exception,

discretionary spending, drops precipitously (relative

to GDP) through 1998. In 1999 and beyond, its fall

is less steep and is no longer sufficient to overcome

the steady upward pressure from health-related

spending.
APPENDIX A CBO BASELINE BUDGET PROJECTIONS 43

Table A-4.

CBO Baseline Projections for Mandatory Spending, Excluding Deposit Insurance

(By fiscal year, in billions of dollars)

Actual

1993 1994 1995 1996 1997 1998 1999

Means-Tested Programs

Medicaid

Food Stampsa

Supplemental Security Income

Family Support

Veterans' Pensions

Child Nutrition

Earned Income Tax Credit

Student Loans

Other

Total, Means-Tested Programs

Social Security

Medicare

Subtotal

Other Retirement and Disability

Federal civilian6

Military

Other

Subtotal

Unemployment Compensation

Other Programs

Veterans' benefits0

Farm price supports

Social services

Credit reform liquidating accounts

Other

Subtotal

Total, Non-Means-Tested Programs

All Mandatory Spending,

Excluding Deposit Insurance

76

25

21

16

4

7

9

2

3

162

Non-Means-Tested

302

143

445

39

26

4

69

35

17

16

5

2

11

51

600

Total

762

86

25

25

17

3

7

11

2

3

180

96

26

24

18

3

7

15

2

3

196

108

27

24

18

3

8

18

2

4

212

121

28

29

19

3

8

20

2

4

234

135

29

32

20

3

9

21

2

4

254

151

30

35

20

3

9

22

2

5

277

Programs

318

160

478

40

26

5

71

27

18

11

6

-1

13

46

622

802

335

177

512

42

27

5

74

24

17

7

6

-1

11

41

651

847

352

195

547

44

29

5

78

25

16

8

6

-4

10

35

685

897

370

216

585

46

30

5

81

25

18

8

6

-5

10

37

729

963

388

238

626

49

32

5

86

26

18

8

6

-5

10

37

774

1,028

408

263

671

51

35

4

90

27

19

9

5

-6

8

36

824

1,100

SOURCE: Congressional Budget Office.

NOTE: Outlays for most of the benefit programs shown above do not include administrative costs, which are classified as domestic discretionary spending. Outlays for Medicare do not include premium collections, which are classified as offsetting receipts.

a. Includes nutrition assistance to Puerto Rico.

b. Includes Civil Service, Foreign Service, Coast Guard, and other retirement programs, and annuitants' health benefits.

c. Includes veterans' compensation, readjustment benefits, life insurance, and housing programs.
44 AN ANALYSIS OF THE PRESIDENT'S BUDGETARY PROPOSALS April 1994

Table A-5.

How Tight Are the Discretionary Caps? (By fiscal year, in billions of dollars)

1995 1996 1997 1998

Discretionary Caps8

Amount Needed to Preserve

1994 Real Resources

Budget Authority

518 519 530 533

Defense

International

Domestic

Total

Amount over or under (-) caps

Amount Needed to Freeze

1994 Dollar Resources

Defense

International

Domestic

Total

Amount over or under (-) caps

Discretionary Capsa

Amount Needed to Preserve

1994 Real Resources

Defense

International

Domestic

Total

Amount over or under (-) caps

Amount Needed to Freeze

1994 Dollar Resources

Defense

International

Domestic

Total

Amount over or under (-) caps

SOURCE: Congressional Budget Office.

NOTE: Amounts needed to preserve 1994 real resources in

269

21

227

518

-1

260

20

220

501

-17

Outlays

546

273

21

260

554

8

267

21

255

543

-4

elude adjustme

278

22

240

540

20

260

20

225

506

•13

551

277

21

267

565

15

264

20

255

539

-11

nts for inflation of about 3 pen

287

22

248

557

27

260

20

226

507

-22

549

283

22

273

578

30

261

21

255

536

-12

:ent a year

295

23

261

579

45

260

20

232

513

-21

549

291

22

282

595

45

261

20

256

537

-13

. Amounts needed to

a.

freeze 1994 dollar resources include no adjustment for inflation. Both paths include the budget authority necessary to renew

expiring contracts for subsidized housing.

The estimated caps are based on those published in Office of Management and Budget, "Budget Enforcement Act Preview Report," in

Budget of the United States Government: Analytical Perspectives (February 1994), as modified by CBO for expected adjustments.
APPENDIX A CBO BASELINE BUDGET PROJECTIONS 45

Table A-6.

The Budget Outlook Through 2004 (By fiscal year)

1994 1995 1996 1997

In Billions of

Revenues

Outlays

Discretionary

Mandatory

Social Security

Medicare

Medicaid

Civil Service and

Military Retirement

Other

Subtotal

Deposit insurance

Net interest

Offsetting receipts

1,251

547

318

160

86

62

176

802

-3

201

-68

1,338

546

335

177

96

65

174

847

-12

214

-77

1,411

551

352

195

108

68

174

897

-14

230

-72

1,479

549

370

216

121

71

185

963

-6

241

-76

1998

Dollars

1,556

549

388

238

135

74

192

1,028

-5

252

-82

1999

1,630

566

408

263

151

79

199

1,100

-4

264

-85

2000

1,706

584

429

290

168

82

206

1,175

-2

276

-88

2001

1,783

602

450

320

186

86

212

1,255

-2

291

-92

2002

1,868

621

473

354

206

90

219

1,342

-1

307

-95

2003

1,958

640

497

391

227

94

226

1,436

-1

325

-99

2004

2,054

660

523

434

250

99

233

1,538

-1

345

-104

Total

Deficit

Deficit Excluding

Deposit Insurance

Debt Held by the Public

Revenues

Outlays

Discretionary

Mandatory

1,478 1,518 1,591 1,670 1,743 1,843 1,945 2,054 2,173 2,300 2,439

228 180 180 192 187 213 240 271 305 343 385

231 192 194 198 192 216 242 273 306 344 386

3,465 3,653 3,846 4,055 4,260 4,492 4,751 5,041 5,366 5,728 6,132

As a Percentage of GDP

18.8 19.1 19.1 19.0 19.0 19.0 18.9 18.9 18.8 18.8 18.8

8.2 7.8 7.5 7.1 6.7 6.6 6.5 6.4 6.3 6.1 6.0

Social Security

Medicare

Medicaid

Civil Service and

Military Retirement

Other

Subtotal

Deposit insurance

Net interest

Offsetting receipts

Total

Deficit

Deficit Excluding

Deposit Insurance

Debt Held by the Public

4.8

2.4

1.3

0.9

2.6

12.1

-0.1

3.0

-1.0

22.3

3.4

3.5

52.2

4.8

2.5

1.4

0.9

2.5

12.1

-0.2

3.0

-1.1

21.7

2.6

2.7

52.1

4.8

2.6

1.5

0.9

2.4

12.1

-0.2

3.1

-1.0

21.5

2.4

2.6

52.1

4.8

2.8

1.6

0.9

2.4

12.4

-0.1

3.1

-1.0

21.5

2.5

2.5

52.1

4.7

2.9

1.7

0.9

2.4

12.6

-0.1

3.1

-1.0

21.3

2.3

2.3

52.1

4.7

3.1

1.8

0.9

2.3

12.8

a

3.1

-1.0

21.4

2.5

2.5

52.3

4.8

3.2

1.9

0.9

2.3

13.0

a

3.1

-1.0

21.6

2.7

2.7

52.7

4.8

3.4

2.0

0.9

2.2

13.3

a

3.1

-1.0

21.7

2.9

2.9

53.3

4.8

3.6

2.1

0.9

2.2

13.5

a

3.1

-1.0

21.9

3.1

3.1

54.1

4.8

3.8

2.2

0.9

2.2

13.8

a

3.1

-1.0

22.1

3.3

3.3

55.0

4.8

4.0

2.3

0.9

2.1

14.1

a

3.2

-0.9

22.3

3.5

3.5

56.1

SOURCE: Congressional Budget Office,

a. Less than 0.05 percent of GDP.

Appendix B

Major Contributors to the

Revenue and Spending Projections

T

he following analysts prepared the revenue and spending projections in this report:

Revenue Projections

Mark Booth Corporate income taxes, Federal Reserve System earnings

Maureen Griffin Social insurance contributions, excise taxes, estate and gift taxes

Matthew Melillo Excise taxes, national income and product account receipts

Linda Radey Excise taxes

Melissa Sampson Customs duties, miscellaneous receipts

David Weiner Individual income taxes

Spending Projections

Defense, International Affairs, and Veterans1 Affairs

Elizabeth Chambers Military retirement, defense

Kent Christensen Defense

Christopher Duncan International affairs

Victoria Fraider Veterans' benefits, defense

Raymond Hall Defense

William Myers Defense

Mary Helen Petrus Veterans' compensation and pensions

Amy Plapp Defense

Kathleen Shepherd Veterans' benefits

Lisa Siegel Defense

Joseph Whitehill International affairs
48 AN ANALYSIS OF THE PRESIDENT'S BUDGETARY PROPOSALS April 1994

Human Resources

Wayne Boyington

Paul Cullinan

Alan Fairbank

Scott Harrison

Jean Hearne

Lori Housman

Julia Isaacs

Deborah Kalcevic

Lisa Layman

Jeffrey Lemieux

Cory Oltman

Pat Purcell

Dorothy Rosenbaum

Connie Takata

John Tapogna

Natural and Physical Resources

Michael Buhl

Kim Cawley

Patricia Conroy

Peter Fontaine

Mark Grabowicz

Theresa Gullo

James Hearn

David Hull

Mary Maginniss

Eileen Manfredi

Ian McCormick

Susanne Mehlman

David Moore

John Patterson

Deborah Reis

Judith Ruud

Brent Shipp

John Webb

Aaron Zeisler

Other

Janet Airis

Edward Blau

Jodi Capps

Karin Carr

Betty Embrey

Kenneth Farris

Civil Service Retirement, Railroad Retirement

Social Security

Hospital Insurance

Medicare

Medicaid

Medicare

Food stamps, foster care, child care

Education

Medicare

Federal employee health benefits

Unemployment insurance, training programs

Supplemental Security Income, Medicaid

Social service programs, Head Start

Public Health Service

Aid to Families with Dependent Children, child

support enforcement

General government, Postal Service

Energy, pollution control and abatement

Community and regional development, natural resources,

general government

Energy, Outer Continental Shelf receipts

Science and space, justice

Water resources, conservation, land management

General government, deposit insurance

Agriculture

Deposit insurance

Agriculture

Agriculture

Justice, Federal Housing Administration

Spectrum auction receipts

Transportation

Recreation, water transportation

Deposit insurance

Housing and mortgage credit

Commerce, disaster relief

Deposit insurance

Appropriation bills

Appropriation bills

Appropriation bills

Budget projections, historical data

Appropriation bills

Computer support
APPENDIX B MAJOR CONTRIBUTORS TO THE REVENUE AND SPENDING PROJECTIONS 49

Glen Goodnow Authorization bills

Leslie Griffin Budget projections, civilian agency pay

Vernon Hammett Computer support

Ellen Hays Other interest, credit programs

Sandra Hoffman Computer support

Jeffrey Holland Net interest on the public debt, national income

and product accounts

Deborah Keefe Computer support

Terri Linger Computer support

Fritz Maier Computer support

Kathy Ruffing Treasury borrowing, interest, and debt

Robert Sempsey Appropriation bills




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