AN ANALYSIS OF THE PRESIDENT'S

BUDGETARY PROPOSALS

FOR FISCAL YEAR 1999

MARCH 1998

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 the appendixes are fiscal years.

Some figures in this report indicate periods of recession by using shaded vertical bars. The bars extend

from the peak to the trough of the recession.

Unemployment rates throughout the report are calculated on the basis of the civilian labor force.

The tables showing CBO's estimate of the effects of the President's budgetary proposals do not include

the effects of his requests for 1998 supplemental appropriations that were made after the budget was submitted.

Numbers in the text and tables of this report may not add to totals because of rounding.
This study and other CBO publications 

are available at CBO's Web site.

http://www.cbo.gov/

T

Preface

his analysis of the President's budget for fiscal year 1999 was prepared at the request

of the Senate Committee on Appropriations. It was produced by the staffs of the

Budget Analysis, Macroeconomic Analysis, and Tax Analysis divisions under the

supervision of Paul Van de Water, Robert Dennis, and Frank Sammartino. Jeff Holland wrote

the summary, Daniel Kowalski wrote Chapter 1 with assistance from Mark Booth and

Marjorie Miller, and John Peterson wrote Chapter 2. Appendix A was written by Jennifer

Winkler, and Appendix B was written by James Baumgardner, Sandra Christensen, and

Jeffrey Lemieux. The baseline revenue estimates were prepared under the direction of Richard

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 C.

Sherry Snyder supervised the editing of the report, and Kathryn Quattrone supervised

production. Major portions were edited by Leah Mazade and Christian Spoor. Melissa

Burman provided editorial assistance. The authors owe thanks to Marion Curry, Linda Harris,

Denise Jordan, Dorothy Kornegay, and Simone Thomas, who assisted in producing sections of

the report. Kathryn Quattrone prepared the report for publication, with assistance from

Martina Wojak-Piotrow. Laurie Brown prepared the electronic versions for CBO's World

Wide Web site.

June E. O'Neill

Director

March 1998

Contents

SUMMARY ix

ONE THE PRESIDENT'S BUDGETARY PROPOSALS 1

Spending Proposals 1

Revenue Proposals 10

Estimating Differences Between CBO 

and the Administration 14

Grants to State and Local Governments 16

TWO COMPARISON OF ECONOMIC FORECASTS 19

Real Growth and Unemployment 19

Inflation and Interest Rates 20

Income 22

APPENDIXES

A CBO Baseline Budget Projections 27

B The Administration's Medicare Buy-In Proposals 37

C Major Contributors to the Revenue and 

Spending Projections 45
vi AN ANALYSIS OF THE PRESIDENT'S BUDGETARY PROPOSALS March 1998

TABLES

S-1. CBO Estimate of the Effect on the Surplus or Deficit of 

the President's Budgetary Policies x

S-2. CBO Reestimate of the President's Budgetary Policies xii

1. CBO Estimate of the President's Budgetary Policies, 1998-2008 2

2. CBO Estimate of the President's Discretionary Spending 

Proposals Compared with the Limits on Discretionary 

Spending, 1999-2002 3

3. CBO Estimate of the President's Discretionary Spending 

Proposals for Fiscal Year 1999, by Function 6

4. CBO Estimate of Discretionary Outlays in the President's 

Budget Compared with Various Benchmarks 7

5. CBO Estimate of the Effect on Outlays of the President's 

Mandatory Spending Proposals 8

6. CBO Estimate of the President's Revenue Proposals 11

7. CBO Reestimate of the President's Budgetary Policies 15

8 CBO Estimate of the President's Discretionary Spending

Proposals for Grant Programs, by Function 17

9. Comparison of Economic Projections, 

Calendar Years 1998-2003 21

A-1. Program Continuations Assumed in the CBO Baseline 28

A-2. Changes in CBO Baseline Deficits or Surpluses

Since January 1998 29

A-3. The Budget Outlook Under Current Policies 30

A-4. CBO Baseline Budget Projections, Assuming Compliance 

with Discretionary Spending Caps 32

A-5. CBO Baseline Projections for Mandatory Spending 34

A-6. How Tight Are the Discretionary Caps? 35

A-7. CBO Projections of Interest Costs and Federal Debt 36
CONTENTS vii

B-1. Medicare Buy-In for People Ages 62 to 64 39

B-2. Medicare Buy-In for Displaced Workers Ages 55 to 61 43

FIGURE

1. Wages and Salaries Plus Corporate Profits 22

BOX

1. The President's Supplemental Appropriation Request

for the International Monetary Fund 5

A

Summary

s requested by the Senate Committee on Appropriations, the Congressional Budget Office

(CBO) has estimated the effects of the President's budget proposals for fiscal year 1999 using its

own economic and technical assumptions. CBO estimates that the President's policies will reduce projected

baseline surpluses for the total budget by $43 billion

between 1999 and 2003&and will temporarily dip the

budget back into red ink by a small amount in 2000.

Nonetheless, the overall picture is one of continuing

surpluses through 2003.

Yet the good news embodied in the projections by

both CBO and the Office of Management and Budget

could easily be reversed. If revenue growth this year is

just one-half of one percent lower than expected, the

budget could remain in deficit. Alternatively, continued

robust economic growth could push up estimated surpluses. In any case, deficits or surpluses over the next

several years that differ from current projections by

upward of $100 billion are entirely possible.

The President's Budgetary

Policies

CBO estimates that compared with its baseline projections, the policies outlined in the President's budget will

decrease the surplus in each year from 1999 through

2003. CBO also expects that surpluses under those

policies will turn out to be lower than projected by the

Administration. Nevertheless, the President's budget is

estimated to produce a $42 billion surplus in 2003.

CBO's Estimates of the President's 

Policy Proposals

The President's plan would reduce the surpluses projected by CBO under current policies by $43 billion

over the 1999-2003 period (see Summary Table 1). In

1998, though, the President's proposals would increase

the surplus by nearly $1 billion.

The President's budget was designed to offset increases in spending for some programs with increases

in revenues and decreases in spending for other programs. However, CBO estimates that net increases in

spending will exceed additional revenues by between $5

billion and $16 billion a year over the five-year period.

Under the President's proposals, total revenues

would exceed the CBO baseline by $12 billion in 1999

and $18 billion by 2003. The net boost in revenues

stems mostly from assumed new revenues from tobacco

companies totaling $65 billion through 2003. The budget, however, does not specify the policies that might be

implemented to raise that $65 billion. Because there

are a number of ways to achieve that end, the Joint

Committee on Taxation, which estimates the effects of

proposed changes to the tax code, simply accepted the

Administration's totals. In addition, the budget proposes cumulative tax reductions of about $24 billion

through 2003 (such as an increase in the child and dependent care tax credit), which are offset by revenue

increases of $26 billion (for example, repealing the

ability of certain multinational firms to expand their use

of foreign tax credits and thereby decrease their federal

tax payments) and other initiatives worth about $12

billion.
x AN ANALYSIS OF THE PRESIDENT'S BUDGETARY PROPOSALS FOR FISCAL YEAR 1999 March 1998

CBO estimates that the increases in spending proposed in the President's budget will outstrip the revenues intended to cover the new programs. In particular,

CBO estimates that discretionary spending proposed by

the President will increase outlays above CBO's baseline by $90 billion from 1999 through 2003, and proposals related to mandatory programs will boost outlays by $28 billion over the same period. In total, the

President's proposals would increase spending by $118

billion over five years (not including additional debtservice costs).

Under the President's policies, discretionary outlays

would rise from $558 billion in 1998 to $573 billion in

Summary Table 1.

CBO Estimate of the Effect on the Surplus or Deficit of the President's Budgetary Policies

(By fiscal year, in billions of dollars)

Total,

1999-

1998 1999 2000 2001 2002 2003 2003

CBO Surplus Projections 8 9 1 13 67 53 n.a.

Effect on the Surplus of the

President's Budgetary Policies

Revenues

Tobacco-related 0 10 12 13 15 16 65

Tax incentives a -3 -4 -5 -5 -6 -24

Revenue offsets a 4 5 5 5 6 26

Other a 1 3 3 3 2 12

Total a 12 15 17 18 18 80

Outlays

Discretionary a -12 -15 -15 -27 -22 -90

Mandatory

Tobacco-related activities 0 -3 -4 -5 -5 -5 -22

Reduce class size in schools 0 a -1 -1 -1 -2 -5

Repeal VA smoking decision 0 a 1 2 3 4 10

Other 1 -2 -2 -3 -2 -2 -10

Subtotal 1 -5 -6 -6 -6 -5 -28

 Total 1 -17 -20 -21 -32 -27 -118

Total Effect of Policies 1 -5 -5 -4 -14 -9 -38

Debt Service a a a -1 -1 -2 -4

Total Effect on the Surplus 1 -5 -6 -5 -16 -11 -43

Surplus or Deficit (-) Under the President's

Budgetary Policies as Estimated by CBO 8 4 -5 8 51 42 n.a.

SOURCES: Congressional Budget Office; Joint Committee on Taxation.

NOTES: VA = Department of Veterans Affairs; n.a. = not applicable.

a. Less than $500 million.
SUMMARY xi

1999&an increase of less than 3 percent but $12 billion

above the statutory caps on such spending. Discretionary spending would continue to grow in the President's

budget, reaching $598 billion in 2003.

Among the Administration's initiatives for mandatory spending are proposals to allow certain groups of

people who do not currently have access to employeror government-sponsored health insurance to purchase

Medicare coverage. Although CBO makes somewhat

different assumptions about participation rates and

costs per person than the Administration does, it generally concurs with the Administration's estimate that the

provisions would have a small net budgetary impact.

Net costs to the federal government would be held

down by the high cost of the specified premiums and

the stringency of the eligibility criteria, both of which

severely limit the number of people who are likely to

take advantage of the proposals.

Although the hike in net spending resulting from

the President's proposals reduces projected baseline

surpluses, CBO still estimates surpluses for each year

(except for 2000) through 2003 under the President's

policies. From an expected level of $8 billion in 1998,

the surplus is projected to rise to $51 billion in 2002

before falling in 2003.

CBO's Estimates Compared with Those

of the Administration

Although the pattern in the bottom line suggested by

CBO's analysis of the President's budget is roughly

similar to that estimated by the Administration, the surpluses that CBO projects are smaller. In addition, CBO

estimates a small deficit in 2000. The Administration

projected that by 2003 the surplus would reach $83

billion, whereas CBO's estimate of the surplus in that

year is about half that size (see Summary Table 2).

Variations between CBO and the Administration in

estimating the deficit or surplus arise from baseline differences as well as differences in estimates of the effect

of the President's policy proposals. In 1999 and 2000,

variations in policy estimates are larger; however, from

2001 through 2003, baseline differences account for the

major share of the discrepancy in the two projections.

Baseline Differences. The greatest differences between the two sets of current-policy projections are on

the outlay side. The largest of those differences is in

estimates of Medicare spending. The Administration

expects that total outlays for Medicare over the next six

years (including premiums paid to the government by

Medicare beneficiaries) will be $50 billion lower than

CBO projects, largely because the Administration believes that policies enacted in last year's Balanced Budget Act will produce more savings than CBO had estimated. Indeed, Medicare alone accounts for around

half of each year's difference in projected baseline outlays.

In addition, higher projections by CBO of inflation

compared with those of the Administration push up

estimates of spending for programs affected by cost-ofliving increases (such as Social Security and Civil Service Retirement). Moreover, higher estimated unemployment and interest rates boost spending on unemployment insurance and net interest on the public debt,

respectively. Overall, though, the Administration's assumptions about the performance of the economy over

the next six years are not very different from CBO's.

In 1998, CBO's estimate of revenues is significantly higher than that of the Administration, mostly as

a result of recent information about receipts for this

year that was not available at the time of the Administration's (or CBO's January 1998) forecast. From 1999

through 2003, however, differences between CBO's and

the Administration's revenue estimates under current

policies are relatively small.

Differences in Policy Estimates. Almost all of the

differences in policy estimates relate to the outlay side

of the budget&and mostly to discretionary spending.

CBO estimates that annual outlays for defense spending and subsidized housing, among other discretionary

programs, will be higher under the President's proposed

levels of funding than the Administration has estimated.

The major difference in mandatory outlays comes

from the savings produced by repealing the recent ruling of the Department of Veterans Affairs that nicotine

dependence can be considered a service-related disease

for purposes of compensation. The Administration estimates that costs over the 1999-2003 period will be $7

billion higher under current policies than CBO projects
xii AN ANALYSIS OF THE PRESIDENT'S BUDGETARY PROPOSALS FOR FISCAL YEAR 1999 March 1998

Summary Table 2.

CBO Reestimate of the President's Budgetary Policies (By fiscal year, in billions of dollars)

1998 1999 2000 2001 2002 2003

Deficit (-) or Surplus Under the

President's Budgetary Policies 

as Estimated by the Administration -10 10 9 28 90 83

Baseline Differences

Revenues 22 9 5 1 -1 -2

Outlays

Discretionary 5 a -1 -1 -1 2

Mandatory -1 6 9 16 23 31

Subtotal 4 6 9 15 23 34

Totalb 18 3 -4 -15 -24 -36

Differences in Estimates of Proposed Policies

Revenues a -1 a a -1 -1

Outlays

Discretionary a 7 7 4 11 a

Mandatory -1 1 3 1 3 4

Subtotal -1 8 10 6 14 4

Totalb 1 -9 -9 -6 -15 -5

All Estimating Differences

Total Differencesb 18 -6 -13 -20 -39 -41

Deficit (-) or Surplus Under the 

President's Budgetary Policies 

as Estimated by CBO 8 4 -5 8 51 42

SOURCE: Congressional Budget Office.

a. Less than $500 million.

b. Reductions in the surplus are shown with a negative sign.

and therefore shows $7 billion more in savings from

repealing the decision.

CBO's Revised Baseline

In the course of preparing its annual analysis of the

President's budget, CBO typically updates its baseline

projections to take account of new information from the

President's budget and other sources. The revised

March projections then usually become the baseline for

the budget resolution.

CBO's new March projections are not materially

different from those issued in its January 1998 report,

The Economic and Budget Outlook: Fiscal Years

1999-2008. The only major change since January is an

increase in revenues from 1998 through 2000 to reflect

more rapid inflows into the Treasury than either CBO

or the Administration had anticipated. That change,
SUMMARY xiii

however, is enough to shift CBO's projections from

small annual deficits to small annual surpluses during

those years. CBO expects that the budget surplus for

this year will be nearly $8 billion. Assuming that current policies do not change and that the economy stays

on the anticipated course, surpluses are projected to rise

eventually to $138 billion in 2008.

Both federal spending and revenues are expected to

total around $1.7 trillion this year&or approximately

20 percent of gross domestic product. Under CBO's

baseline assumptions, projected outlays as a percentage

of GDP fall gradually to 18.3 percent by 2008. Revenues decline to 19.3 percent of GDP by 2003 and remain at that level through 2008.

T

Chapter One

The President's Budgetary Proposals

he spending policies proposed in the President's

budget for fiscal year 1999 would boost outlays

by a net $123 billion (including debt service)

over the 1999-2003 period, the Congressional Budget

Office (CBO) estimates. Over the same period, the 1

President's policies would increase revenues by $80

billion. About three-fourths of the increase in outlays,

$90 billion, would result from higher discretionary

spending&the one-third of federal spending that is subject to annual appropriations by the Congress. The

President's proposals for discretionary spending exceed

the statutory limits on discretionary outlays by a total of

$64 billion through 2002.

The Office of Management and Budget (OMB)

estimates that the President's budget would not change

the budgetary outlook over the next five years because

its proposed revenue increases would offset the net increase in spending. CBO, by contrast, estimates that

the outlay proposals would cost a net $42 billion more

through 2003 than OMB predicts&which, combined

with small differences in the estimates of revenue proposals, leaves $43 billion in new spending to be financed from budget surpluses.

Spending Proposals

By CBO's estimate, federal spending would rise from

$1.7 trillion in 1998 to $2.0 trillion in 2003 under the

President's plan, an average increase of 3.5 percent a

year. As a share of gross domestic product (GDP), outlays would remain at 20 percent in 1999&the same

level projected for 1998&before beginning a descent to

19.1 percent by 2002 (see Table 1). Two factors would

cause most of the decline in spending as a percentage of

GDP: slow growth in discretionary spending and a reduction in net interest costs. (The government's net

interest expenses will decline because the stock of outstanding federal debt will begin to decrease as the total

budget's bottom line moves from deficit to surplus.) In

the other direction, mandatory spending&primarily for

Medicare and Medicaid&would continue to rise as a

share of the nation's output.

Beyond the five-year budget horizon, that trend of

increasing health care expenditures is expected to continue. In addition, Social Security outlays are expected

to begin rising modestly as a share of GDP as the baby

boomers approach retirement and experience higher

disability rates. Nevertheless, the projected budget surplus would continue to rise&primarily because discretionary spending would be held in check under the Administration's assumptions and net interest expenses

would decline further.

Discretionary Spending

Discretionary spending is subject to statutory caps

through 2002 on both budget authority and outlays.

For fiscal year 1999, the law establishes three categories for discretionary spending: defense, nondefense,

and spending to reduce violent crime. For 2000, it

combines defense and nondefense spending into a single discretionary category while retaining the violent

crime reduction category. For 2001 and 2002, the law

folds all three types of spending into one discretionary

1. That figure is relative to CBO's baseline, which assumes that current

laws remain unchanged and that discretionary outlays are held to the

levels of the existing spending caps for 1999 through 2002 and grow

at the rate of inflation thereafter.
2 AN ANALYSIS OF THE PRESIDENT'S BUDGETARY PROPOSALS FOR FISCAL YEAR 1999 March 1998

Table 1.

CBO Estimate of the President's Budgetary Policies, 1998-2008 (By fiscal year)

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

In Billions of Dollars

Revenues 1,680 1,751 1,799 1,863 1,948 2,026 2,124 2,227 2,333 2,446 2,560

Outlays

Discretionary

Defense 269 270 273 272 280 290 298 308 312 317 328

Nondefense 288 303 306 307 307 308 311 315 322 329 337

Subtotal 558 573 580 579 587 598 608 623 634 646 664

Mandatory

Social Security 376 392 409 428 449 471 496 522 551 582 614

Medicare 197 208 219 240 246 271 292 325 331 366 393

Medicaid 101 108 115 122 131 141 152 165 179 194 210

Other 277 301 325 342 357 374 389 411 423 435 460

Subtotal 951 1,009 1,067 1,132 1,183 1,257 1,329 1,423 1,483 1,577 1,678

Offsetting receipts -82 -83 -87 -92 -105 -98 -104 -110 -116 -122 -128

Net interest 245 247 243 237 231 227 222 216 210 202 193

Total 1,671 1,747 1,803 1,855 1,897 1,983 2,056 2,152 2,211 2,303 2,407

Surplus or Deficit (-) 8 4 -5 8 51 42 68 75 121 142 153

Debt Held by the Public 3,774 3,785 3,803 3,810 3,774 3,747 3,694 3,634 3,528 3,399 3,260

As a Percentage of Gross Domestic Product

Revenues 20.1 20.1 19.8 19.6 19.6 19.5 19.5 19.5 19.5 19.5 19.5

Outlays

Discretionary

Defense 3.2 3.1 3.0 2.9 2.8 2.8 2.7 2.7 2.6 2.5 2.5

Nondefense 3.4 3.5 3.4 3.2 3.1 3.0 2.8 2.8 2.7 2.6 2.6

Subtotal 6.7 6.6 6.4 6.1 5.9 5.7 5.6 5.4 5.3 5.2 5.1

Mandatory

Social Security 4.5 4.5 4.5 4.5 4.5 4.5 4.5 4.6 4.6 4.6 4.7

Medicare 2.4 2.4 2.4 2.5 2.5 2.6 2.7 2.8 2.8 2.9 3.0

Medicaid 1.2 1.2 1.3 1.3 1.3 1.4 1.4 1.4 1.5 1.5 1.6

Other 3.3 3.5 3.6 3.6 3.6 3.6 3.6 3.6 3.5 3.5 3.5

Subtotal 11.4 11.6 11.7 11.9 11.9 12.1 12.2 12.4 12.4 12.6 12.8

Offsetting receipts -1.0 -1.0 -1.0 -1.0 -1.1 -0.9 -1.0 -1.0 -1.0 -1.0 -1.0

Net interest 2.9 2.8 2.7 2.5 2.3 2.2 2.0 1.9 1.8 1.6 1.5

Total 20.0 20.0 19.8 19.5 19.1 19.1 18.8 18.8 18.5 18.4 18.3

Surplus or Deficit (-) 0.1 a a 0.1 0.5 0.4 0.6 0.7 1.0 1.1 1.2

Debt Held by the Public 45.1 43.4 41.8 40.1 38.0 36.0 33.9 31.8 29.5 27.1 24.8

Memorandum:

Gross Domestic Product

(Billions of dollars) 8,369 8,729 9,097 9,499 9,933 10,405 10,909 11,431 11,973 12,539 13,129

SOURCE: Congressional Budget Office.

a. Less than 0.05 percent.
CHAPTER ONE THE PRESIDENT'S BUDGETARY PROPOSALS 3

Table 2.

CBO Estimate of the President's Discretionary Spending Proposals Compared with the Limits 

on Discretionary Spending, 1999-2002 (By fiscal year, in billions of dollars)

1999 2000 2001 2002

Budget

Authority Outlays

Budget

Authority Outlays

Budget

Authority Outlays

Budget

Authority Outlays

Statutory Limits from OMB's 

Sequestration Preview Report

Defense 271.6 266.6 * * * * * *

Nondefensea 255.5 289.3 * * * * * *

Violent crime reduction 5.8 5.0 4.5 5.6 * * * *

Overall discretionaryb * * 532.5 559.1 541.8 564.1 550.8 560.3

Combined Limits 532.8 560.9 537.0 564.7 541.8 564.1 550.8 560.3

Adjustments to the Limits Under

Current Law for the President's

Proposals

Defense 0 0 * * * * * *

Nondefense 3.7c 0.8c * * * ** *

Violent crime reduction 0 0 0 0 * * * *

Overall discretionaryb * * 0.6 1.2c 0.6 1.3 0.6 1.2

Combined Adjustments 3.7 0.8 0.6 1.2 0.6 1.3 0.6 1.2

Statutory Limits Under the

President's Proposals 

as Estimated by CBO

Defense 271.6 266.6 * * * * * *

Nondefense 259.1 290.1 * * * * * *

Violent crime reduction 5.8 5.0 4.5 5.6 * * * *

Overall discretionaryb * * 533.1 560.4 542.4 565.4 551.4 561.6

Combined Limits 536.5 561.6 537.6 565.9 542.4 565.4 551.4 561.6

Discretionary Spending Under

the President's Proposals

as Estimated by CBO

Defense 272.0 270.2 * * * * * *

Nondefense 267.6 298.2 * * * * * *

Violent crime reduction 5.8 5.0 4.5 5.4 * * * *

Overall discretionaryb * * 541.5 574.3 553.6 578.7 560.3 586.9

Combined Spending 545.4 573.4 546.0 579.6 553.6 578.7 560.3 586.9

Amount Spending Is Over or

Under (-) Limits

Defense 0.4 3.6 * * * * * *

Nondefense 8.5 8.2 * * * * * *

Violent crime reduction 0 d 0 -0.2 * * * *

Overall discretionaryb * * 8.4 13.9 11.3 13.3 8.9 25.3

Combined Spending 8.9 11.8 8.4 13.7 11.3 13.3 8.9 25.3

SOURCE: Congressional Budget Office.

NOTE: OMB = Office of Management and Budget; * = not applicable.

a. Does not include conversion of Department of Transportation obligation limitations to discretionary budget authority.

b. This category comprises defense and nondefense spending in fiscal year 2000, plus violent crime reduction spending in 2001 and 2002.

c. The President proposes legislation to permit a cap adjustment for nondisability determinations of eligibility in the Supplemental Security Income

program. If the proposal was adopted, the nondefense budget authority limit for 1999 would be increased by $50 million, and the outlay limits

would be increased by $46 million for 1999 and $4 million for 2000.

d. Less than $50 million.
4 AN ANALYSIS OF THE PRESIDENT'S BUDGETARY PROPOSALS FOR FISCAL YEAR 1999 March 1998

category, so the limits apply to total discretionary

spending. By law, the discretionary spending limits are

adjusted periodically to account for specific changes,

such as the enactment of emergency appropriations.

To compare the President's budgetary proposals for

discretionary spending with the caps, CBO first had to

determine what the spending caps would be if those

proposals were enacted. Current law requires adjusting

the caps for the effect of proposed 1999 emergency

appropriations, as well as for the full budgetary effect

of appropriations for certain purposes specified in the

law (including ensuring compliance with the earned

income tax credit, conducting additional reviews to determine the eligibility of certain beneficiaries under the

Social Security Act, and paying U.S. arrearages to international organizations). Those adjustments increase

the cap on budget authority by $3.7 billion for 1999

and by about $600 million for each subsequent year

through 2002 (see Table 2 on the previous page). The

required increases in the outlay cap total $800 million

for 1999 and more than $1.2 billion a year for 2000

through 2002.

After making those adjustments, CBO concluded

that the Administration's proposed discretionary spending exceeds the caps in every year between 1999 and

2002. For 1999, the Administration's appropriation

proposals exceed the budget authority cap by almost $9

billion and the outlay limit by nearly $12 billion. Over

the four-year period, the President's proposed budget

authority exceeds the caps by a total of more than $37

billion, and outlays surpass the caps by $64 billion.2

CBO's estimates do not include the effects of the

President's requests for supplemental 1998 appropriations that were transmitted after the budget was submitted. The most significant requested item is almost $18

billion in budget authority for the International Monetary Fund (IMF). However, enactment of that proposal

would not affect CBO's estimates of discretionary outlays for 1999 through 2002 because no outlays flow

from IMF budget authority. (See Box 1 for a further

discussion of the President's IMF request.)

The President's budget mentions two alternatives

for raising discretionary spending to the recommended

levels without breaching the spending limits, but it does

not propose either one. The first alternative would include legislative language that increases revenues or

reduces mandatory spending in appropriation bills.

Under current law, OMB would count the effects of

such language in the coming year against that year's

spending and would raise the caps on discretionary

spending to account for the effects in future years. Under the second alternative, the Administration would

seek legislation specifically authorizing the use of tax

increases or spending cuts to offset increased discretionary spending.

According to the budget, the Administration would

finance its discretionary spending increases with revenues from the anticipated tobacco settlement and the

reinstatement of the Superfund tax, as well as with reductions in mandatory spending. Using increased revenues to offset increased discretionary spending is contentious. CBO believes that the Balanced Budget and

Emergency Deficit Control Act of 1985 does not permit

that practice&even if the legislation that increases revenues is included in an appropriation bill. CBO's interpretation of the law is that increases in revenues can

only be used to offset increases in mandatory spending.

OMB, however, does not agree with that interpretation.

And since OMB determines compliance with the discretionary spending caps, it could permit the appropriations committees to make such changes in order to offset increased spending and achieve compliance with the

caps. Use of that technique could raise the permitted

levels of discretionary spending well above the current

limits.

The bulk of the Administration's proposed increase

in 1999 spending occurs in what the budget calls three

Funds for America. Those new funds are merely presentational devices that repackage current nondefense

research, environmental, and transportation spending

and add new spending. The existing mechanisms for

enforcing the discretionary spending limits would not

be changed to give special treatment to that spending; it

would be treated as nondefense discretionary spending

for the purposes of calculating whether a sequestration

2. The President's proposals exceed CBO's baseline for discretionary

spending by a slightly greater amount, because the baseline assumes

that spending is held to the level of the current caps, not the caps adjusted under current law for the various proposals discussed above.
CHAPTER ONE THE PRESIDENT'S BUDGETARY PROPOSALS 5

(an across-the-board cancellation of budgetary resources) was required.

In all, the discretionary budget authority that the

President proposes for 1999 is $17 billion, or 3.3 percent, higher than the amount enacted for 1998. The

largest increases in budget authority are $3.4 billion for

defense and $3.3 billion to create a reserve for emergencies and other spending needs (see Table 3). The

increase in defense, however, would represent only a

1.3 percent rise from 1998 funding, less than the expected rate of inflation. Other substantial increases are

proposed for community and regional development

(principally for disaster relief) and for education and

training (largely for an increase from $3,000 to $3,100

in the maximum Pell grant for undergraduate students).

By CBO's estimate, outlays in 1999 would be $16

billion, or 2.8 percent, higher than in the current year.

The largest growth would occur in the budget functions

for education and training, allowances for emergencies

and other needs, the administration of justice, and inBox 1.

The President's Supplemental Appropriation Request for the International Monetary Fund

The International Monetary Fund (IMF) aims to promote

trade and financial stability by lending reserve assets to

countries whose domestic currencies are threatened by

sharp declines in the foreign exchange markets. The

amount of loan assistance that the IMF can provide is

limited by the size of its resources&namely, the pool of

currencies and other internationally accepted assets that

member countries pay into the fund. Those subscription

amounts are specified in the countries' assigned quotas.

In view of the significant growth of international trade

and finance, the governors of the IMF adopted a resolution last year proposing a 45 percent increase in member

quotas. 

The President has requested $17.9 billion in supplemental 1998 budget authority for the IMF, consisting

of $14.5 billion for the United States' quota increase and

$3.4 billion for a backup line of credit for the fund. The

expanded authority to lend would support an IMF initiative, the New Arrangements to Borrow, that would make

more reserve assets available in case the resources provided by member quotas prove inadequate.

U.S. quota subscriptions involve an exchange of

monetary assets between the Treasury and the IMF. The

United States turns over one form of internationally acceptable money and, in return, receives rights to draw

international reserves from the IMF pool. The IMF has

asked that the United States pay its quota increase in the

form of special drawing rights (a currency created by the

IMF for the use of its members), which the United States

would ultimately buy from other IMF members. Only

one-quarter of that $14.5 billion quota increase, or about

$3.6 billion, would be transferred to the IMF in the form

of special drawing rights. The rest would be provided in

a letter of credit, which the IMF could draw on as

needed. Similarly, the $3.4 billion for the New Arrangements to Borrow, if approved by the Congress,

would not involve cash payments to the IMF unless circumstances threatened international economic stability.

Exchanges of monetary assets&which change the

composition but not the level of the government's holdings of cash&are not counted as budgetary outlays. Accordingly, increasing the United States' IMF quota

would not directly affect the budget surplus or deficit.

The $17.9 billion increase in resources would, however,

require an appropriation of budget authority by the Congress. Under the Balanced Budget and Emergency Deficit Control Act of 1985, the discretionary spending caps,

committee allocations, and budget ceilings can be adjusted so that no offsetting reductions in other discretionary spending would be required to accommodate the

requested IMF appropriation.

Although the U.S. quota increase will not affect the

budget surplus or deficit, it can affect the economy and

carries potential benefits and costs. The benefits stem

from helping the IMF serve as a lender of last resort.

Although individual governments might be able to perform a similar function, the IMF makes coordinated action easier. Analysts disagree about the likely effects of

that action, however. Much of the argument stems from

different views about how well international financial

markets work and how likely governments or international organizations are to introduce distortions in those

markets. To the extent that the IMF protects banks

against losses in foreign countries, it may create incentives for careless lending, resulting in harmful economic

consequences. Additional economic consequences, positive and negative, could stem from the variety of conditions that may be attached to IMF loans.
6 AN ANALYSIS OF THE PRESIDENT'S BUDGETARY PROPOSALS FOR FISCAL YEAR 1999 March 1998

come security. Those increases reflect the effect on

1999 outlays of appropriations enacted in prior years

(which explains why outlays rise in some of those functions by more than budget authority) as well as the

spending levels recommended by the President for

1999.

Under the President's budget, nondefense discretionary outlays would increase by $15 billion from

1998 to 1999. A portion of that increase ($9 billion) is

attributable to appropriations enacted in prior years and

will occur even if 1999 budget authority is frozen at

1998 levels; the rest is attributable to the first-year effect of the $14 billion in increased budget authority

proposed by the President. Total nondefense outlays in

1999 would be $1 billion higher than the amount

needed to preserve 1998 real resources (see Table 4).

Defense outlays, by contrast, would increase by

only $1 billion next year under the President's budget.

That figure represents the $1 billion decline in outlays

that will occur even if budget authority for defense is

frozen, offset by the $2 billion increase in outlays that

would result from the President's proposed $3 billion

increase in budget authority. At that rate, defense outlays would rise more slowly than inflation between

1998 and 1999.

Table 3.

CBO Estimate of the President's Discretionary Spending Proposals for Fiscal Year 1999, by Function

(In billions of dollars)

1998

(Enacted)

1999

(Proposed)

Change from

1998 to 1999

Budget Function

Budget

Authority Outlays

Budget

Authority Outlays

Budget

Authority Outlays

National Defense 268.6 269.2 272.0 270.2 3.4 1.0

International Affairs 19.1 18.7 20.2 18.9 1.1 0.3

General Science, Space, and Technology 17.9 17.6 18.5 18.1 0.5 0.4

Energy 2.8 3.9 3.6 3.7 0.7 -0.3

Natural Resources and Environment 23.2 22.2 22.8 22.7 -0.4 0.5

Agriculture 4.3 4.2 4.1 4.2 -0.2 -0.1

Commerce and Housing Credit 3.0 2.8 3.0 2.8 a a

Transportationb 13.7 40.0 13.8 41.0 a 1.1

Community and Regional Development 8.6 11.4 11.5 11.2 2.9 -0.2

Education, Training, Employment, and

Social Services 46.4 42.6 48.6 46.2 2.2 3.6

Health 26.4 25.3 27.5 26.3 1.2 1.1

Medicare 2.7 2.8 2.6 2.7 -0.1 -0.1

Income Security 32.2 40.6 33.2 42.3 1.0 1.7

Social Security 3.2 3.3 3.2 3.5 a 0.2

Veterans Benefits and Services 19.1 19.1 18.9 19.1 -0.2 0.1

Administration of Justice 24.2 21.5 25.8 24.7 1.6 3.2

General Government 12.5 12.4 13.0 12.6 0.4 0.2

Allowances for Emergencies and

Other Needs 0 0 3.3 3.3 3.3 3.3

Undistributed Offsetting Receipts 0 0 a a a a

Total 528.0 557.6 545.4 573.4 17.4 15.8

SOURCE: Congressional Budget Office.

a. Less than $50 million.

b. Does not include conversion of Department of Transportation obligation limitations to discretionary budget authority. 
CHAPTER ONE THE PRESIDENT'S BUDGETARY PROPOSALS 7

Mandatory Spending

The President is proposing changes in mandatory

spending that, according to CBO's estimate, would increase outlays by a total of $28 billion during the 1999-

2003 period compared with CBO's baseline projections

(see Table 5). That net increase results from a few major proposals and a multitude of smaller proposals that

would boost spending, partially offset by reductions in

spending and increases in fees.

Miscellaneous Tobacco-Related Activities. The largest proposed increase in mandatory spending ($22 billion over five years and almost $52 billion over 10

years) is for grants to state, local, and territorial governments that the Administration would include in any

Table 4.

CBO Estimate of Discretionary Outlays in the President's Budget Compared with Various Benchmarks

(By fiscal year, in billions of dollars)

1998 1999 2000 2001 2002 2003

Discretionary Outlays in the President's Budget

Defense 269 270 273 272 280 290

Nondefense 288 303 306 307 307 308

Total 558 573 580 579 587 598

Amount of Discretionary Outlays Needed to Preserve 1998 Real Resources 

Defense 269 275 284 286 297 306

Nondefense 288 302 311 320 329 338

Total 558 577 595 607 626 644

Discretionary Outlays Assuming Budget Authority Is Frozen at 1998 Levels

Defense 269 268 270 265 267 267

Nondefense 288 297 299 297 294 294

Total 558 565 569 562 561 561

Discretionary Outlays in the President's Budget

 Compared with the Amount Needed to Preserve 1998 Real Resources

Defense 0 -4 -11 -15 -17 -17

Nondefense 0 1 -5 -13 -22 -29

Total 0 -3 -15 -28 -39 -46

Discretionary Outlays in the President's Budget 

Compared with the Amount Assuming Budget Authority Is Frozen at 1998 Levels

Defense 0 2 3 7 13 23

Nondefense 0 6 7 10 12 15

Total 0 8 11 17 26 37

SOURCE: Congressional Budget Office.
8 AN ANALYSIS OF THE PRESIDENT'S BUDGETARY PROPOSALS FOR FISCAL YEAR 1999 March 1998

tobacco-related legislative package. Since the proposed

spending increase is largely unspecified, CBO has

adopted OMB's estimate of the cost.

Medicare. The President's Medicare proposals would

increase benefit payments by $7.9 billion over the

1999-2003 period, by CBO's estimate. Higher premiums from beneficiaries would offset $7.6 billion of that

spending, leaving a $300 million net increase in Medicare outlays.

Medicare Buy-In. A pair of new initiatives would allow people ages 62 to 64 without Medicaid or

employment-based health insurance and displaced

workers ages 55 to 61 who were previously covered by

employment-based insurance to buy Medicare coverage. CBO estimates that the premiums paid by those

people would not fully cover the $9.3 billion they

would cost the Medicare system during the 1999-2003

period, thus increasing net Medicare spending by $1.4

billion over that period. In addition, CBO estimates

that the Medicare buy-in proposals would lead to higher

Social Security costs (as people ages 62 to 64 retired

because of the availability of health insurance apart

from employment) and to higher tax receipts (as firms

cut back on health coverage for older employees).

Those effects would add $200 million to the cost of the

proposals by 2003. For an in-depth discussion of

CBO's estimate of those proposals, see Appendix B.

Fraud and Abuse Provisions. The President's budget

contains several proposals to improve compliance with

the Medicare program. They include assessing a fee on

providers to cover the cost of auditing and settling their

Medicare claims, as well as imposing new civil monetary penalties on physicians who falsely certify a beneficiary's need for mental health or hospice benefits and

on providers who participate in kickback schemes.

Table 5.

CBO Estimate of the Effect on Outlays of the President's Mandatory Spending Proposals

(By fiscal year, in billions of dollars)

1998 1999 2000 2001 2002 2003

Total,

1999-

2003

Total,

1999-

2008

Tobacco-Related Activitiesa 0 3.4 3.9 4.6 5.0 5.4 22.3 51.5

Medicare

Benefits 0 0.7 1.4 1.6 1.9 2.2 7.9 23.6

Premiums 0 -0.9 -1.3 -1.6 -1.8 -2.1 -7.6 -22.8

Subtotal 0 -0.1 0.1 0.1 0.1 0.1 0.3 0.7

Medicaid and State Children's Health Insurance 0 -0.1 -0.1 -0.2 -0.2 -0.2 -0.9 -2.1

Cancer Clinical Trials 0 0.2 0.3 0.3 0 0 0.8 0.8

Food Stamps 0 0.3 0.3 0.2 0.2 0.2 1.2 2.0

Educationb -0.6 0.1 0.6 1.2 1.7 2.0 5.6 21.5

Child Care Entitlement to States 0 0.5 0.6 0.6 0.6 0.8 3.2 13.5

Unemployment Insurance 0 0.1 0.1 1.0 0.7 0.5 2.4 5.3

Veterans' Benefits 0 -0.1 -0.6 -1.6 -2.6 -3.6 -8.5 -42.0

Other c 0.3 0.4 0.3 0.2 c 1.4 -2.9

Total -0.6 4.6 5.5 6.5 5.8 5.3 27.7 48.1

SOURCE: Congressional Budget Office.

a. The estimate is taken from the President's budget.

b. For one of the components of this group&the proposal to reduce class size in the primary grades&the estimate is taken from the President's

budget.

c. Less than $50 million.
CHAPTER ONE THE PRESIDENT'S BUDGETARY PROPOSALS 9

Medicare fines or overpayments would also be given

priority in bankruptcy cases. CBO estimates that those

provisions would improve the Health Care Financing

Administration's (HCFA's) ability to enforce compliance and increase its collection of penalties but would

not have a significant effect on spending.

Medicare as Secondary Payer. In cases in which

Medicare is the secondary payer, HCFA is responsible

for paying the claim amount minus the amount paid by

the primary insurer. Sometimes, however, HCFA unknowingly pays the primary insurer's share and must

track down the overpayment later. This proposal would

require private insurers to provide information that

would help HCFA determine before a claim is paid

whether another insurer is responsible for the beneficiary's primary payment. CBO estimates that the proposal would reduce Medicare spending by $400 million

from 1999 through 2003 and by $1.1 billion over 10

years.

Pharmaceuticals. The Administration proposes changing the method that Medicare uses to reimburse physicians and dialysis facilities for drugs they administer to

Medicare beneficiaries. Under the current method,

Medicare pays 95 percent of the average wholesale

price (AWP) of the drug. Under this proposal, it would

pay the national AWP, or the actual acquisition cost

(AAC) of the drug, or the median AAC of all claims for

that drug, whichever was lowest. Based on the experience of Medicaid's rebate program, CBO expects that

manufacturers would raise prices in response to this

policy. Nevertheless, the proposal would save an estimated $600 million over five years.

The budget would also reduce payments for the

drug Epogen, which is administered to patients with

end-stage renal disease, from $10 per 1,000 units to $9

per 1,000 units. That provision would save $100 million over the 1999-2003 period, CBO estimates.

Medicaid and State Children's Health Insurance.

The budget would increase spending for children's

health care by allowing states to conduct presumptive

checks of Medicaid eligibility at a broader range of

sites, permitting states to restore Medicaid benefits for

legal immigrant children, and increasing aid to U.S.

territories to purchase health insurance for children.

Those proposals would increase federal spending by

$800 million over five years. That cost would be more

than offset, however, by a proposed reduction in the

federal matching rate for Medicaid administrative expenses (from 50 percent to 47 percent), producing net

savings of $900 million through 2003 and $2.1 billion

over 10 years.

The budget would also add $25 million to expand

the use of a $500 million fund to help states determine

eligibility for people who lose welfare benefits but retain Medicaid eligibility. Because that proposal interacts with the proposed change in the federal matching

rate for administration, CBO estimates that adding $25

million to the fund would reduce federal administrative

spending by $14 million over five years while not increasing benefit costs.

Cancer Clinical Trials. The President would establish

a demonstration program for Medicare beneficiaries

that would pay the costs of patient care incurred as part

of federally sponsored cancer clinical trials. The demonstration program would run in 1999, 2000, and 2001

and would cost a total of $750 million.

Food Stamps. The budget proposes increases in eligibility for the Food Stamp program partly offset by

changes in administrative funding. The eligibility provisions would permit certain legal immigrants to receive benefits at a cost of $2 billion over five years. At

the same time, as with Medicaid, the federal matching

rate for administrative expenses would fall from 50

percent to 47 percent. That change would reduce federal costs by $900 million, CBO estimates, for a net

increase in federal Food Stamp spending of $1.2 billion

through 2003. CBO also estimates that state spending

would increase by $400 million over five years if the

matching rate declined.

Education. The President's major mandatory spending

proposals in the area of education are a new initiative to

reduce class size in the primary grades and changes to

the federal student loan programs for college students.

The initiative to reduce class size would involve grants

to the states. OMB estimates that the program would

cost more than $5 billion over five years and $17 billion over 10 years. Because the Administration has not

presented a concrete proposal for distributing those

grants, however, CBO cannot reestimate the cost of the

initiative and thus has adopted OMB's estimate.
10 AN ANALYSIS OF THE PRESIDENT'S BUDGETARY PROPOSALS FOR FISCAL YEAR 1999 March 1998

The numerous changes that the Administration is

proposing to the student loan programs include reducing the fees paid by borrowers, offering extended repayment options, eliminating the use of bankruptcy to

discharge student loan obligations, and recalling capital

advances from state guarantee agencies. CBO estimates that those provisions would increase mandatory

spending by about $500 million over the 1999-2003

period. (That figure does not include the effect of a

proposal to change the interest rate formula for student

loans that the Administration made after submitting its

budget.)

Child Care. The Administration proposes a substantial increase in mandatory grants to the states for child

care. CBO assumes that part of the increase will take

the form of higher levels for existing grants&in which

the federal government matches state funding for child

care&and part will take the form of new, unmatched

grants. Current law already provides escalating funding

levels for the existing grants, which states have not

fully drawn on. Consequently, CBO estimates that the

increase in those grants will not be tapped until 2003.

Before then, CBO estimates, states will take advantage

of only the unmatched grants, resulting in additional

federal outlays of $3.2 billion over five years, rising to

$13.5 billion over 10 years.

Unemployment Insurance. Under the President's proposals, the long-term unemployed would receive extended unemployment compensation if a state had an

unemployment rate of 7.5 percent (provided that rate

was at least 110 percent of the state's total unemployment rate for the same quarter in either of the past two

years). CBO estimates that costs would increase beginning in 2001 and would total $1.6 billion through 2003.

Other proposals for unemployment insurance include

mandatory funding for states' administrative activities

and the use of alternative base periods in determining

benefits. Those proposals would raise spending by an

additional $800 million through 2003.

Veterans' Benefits. The President would reverse a

1997 ruling by the Department of Veterans Affairs

(VA) that awarded compensation benefits to veterans

who have illnesses related to nicotine dependence.

CBO estimates that overturning that ruling legislatively

would save $10 billion over five years and $45 billion

over 10 years. The President's budget also proposes an

increase in education assistance for current service

members and their survivors, at a total cost of $1.5 billion over the 1999-2003 period, CBO estimates.

Other. Other proposals for mandatory spending&

which include raising the Environmental Protection

Agency's contributions to hazardous waste remediation,

increasing the Federal Housing Administration's ability

to participate in mortgage finance, and requiring banks

to pay the expenses of their regulators&would increase

outlays by a net $1.4 billion over the five-year budget

horizon.

Revenue Proposals

Following up on the substantial tax cuts that the Congress and President agreed to last year, the President

has proposed another, much more modest, set of cuts.

In the President's budget, the cost of those cuts would

be completely offset over the next 10 years through a

variety of proposals that would raise taxes (mostly on

certain businesses). The Administration's budget also

includes proposals that, on net, would significantly increase receipts, largely to finance specific spending programs. The bulk of those additional receipts would

come from unspecified tobacco legislation.

Provisions That Reduce Revenues

The proposed tax cuts include new and expanded credits for child care, credits for the purchase of energy-efficient vehicles and other items, expanded credits for the

construction of low-income housing, credits for investing in Puerto Rico, and new education benefits. CBO

and the Joint Committee on Taxation (JCT), which produced most of the revenue estimates, project that those

and other provisions would reduce federal revenues by

almost $24 billion over the next five years (see Table

6). The proposed tax cuts are only about one-sixth of 3

the size of those enacted last year in the Taxpayer Relief Act.

3. For a full set of revenue estimates, see Joint Committee on Taxation,

Estimated Budget Effects of the Revenue Provisions Contained in

the President's Fiscal Year 1999 Budget Proposal, JCX-14-98 (February 24, 1998). For detailed descriptions of the revenue proposals,

see Joint Committee on Taxation, Description of the Revenue Provisions Contained in the President's Fiscal Year 1999 Budget Proposal, JCS-4-98 (February 24, 1998).
CHAPTER ONE THE PRESIDENT'S BUDGETARY PROPOSALS 11

Credits for Child Care Expenses. The largest proposed revenue reduction in the President's budget involves expanding the personal tax credit related to expenses for child and dependent care. The credit is calculated as a percentage of qualifying expenses. Under

current law, qualifying expenses are capped at $2,400

for one dependent and $4,800 for two or more; in general, they cannot exceed a taxpayer's earnings (or the

earnings of the lower-earning spouse, in the case of a

married couple). The President's proposal would not

change those caps but would increase the maximum

credit rate from 30 percent to 50 percent. As a result,

the maximum credit would rise from $720 to $1,200

for families with one child and from $1,440 to $2,400

for families with two or more children. In addition, the

maximum rate would apply to taxpayers with income

up to $30,000, compared with up to $10,000 under current law. The minimum credit rate would remain at 20

percent, but that rate would apply to taxpayers earning

$59,000 or more rather than $28,000, as under current

law. The President's proposal would also index the dollar amounts for inflation after 2000. Together, those

changes would reduce revenues by about $5 billion

through 2003 and $12 billion through 2008.

Table 6.

CBO Estimate of the President's Revenue Proposals (By fiscal year, in billions of dollars)

Total, Total,

1998 1999 2000 2001 2002 2003 1999-2003 1999-2008

Provisions That Reduce Revenues

Child and dependent care 0 -0.3 -1.1 -1.2 -1.3 -1.4 -5.3 -13.2

Education benefits a -0.3 -0.7 -1.2 -1.2 -1.1 -4.6 -10.3

Energy-efficient purchases a -0.5 -0.6 -0.6 -0.9 -1.2 -3.7 -9.5

Targeted business incentives

Low-income housing 0 a -0.1 -0.2 -0.3 -0.5 -1.1 -5.1

Expiring provisions -0.2 -1.6 -1.2 -0.9 -0.5 -0.3 -4.5 -5.3

Puerto Rico investment 0 a -0.1 -0.1 -0.2 -0.5 -1.0 -9.6

Foreign dividends -0.1 -0.2 -0.2 -0.3 -0.3 -0.2 -1.2 -1.4

Other a -0.2 -0.4 -0.5 -0.4 -0.5 -2.0 -3.9

Subtotal -0.3 -3.2 -4.5 -5.0 -5.1 -5.8 -23.5 -58.4

Provisions That Increase Revenues

Export sales source a 0.8 1.8 1.9 2.0 2.2 8.6 22.3

Life insurance and annuitiesb 0 2.1 1.2 1.4 1.3 1.6 7.6 18.0

Estate and gift valuation 0 0 0.5 0.5 0.5 0.6 2.1 5.4

Other 0.2 1.3 1.6 1.6 1.5 1.5 7.4 16.5

Subtotal 0.2 4.1 5.0 5.3 5.4 5.8 25.6 62.2

Other Provisions That Affect Receipts

Tobacco legislationc 0 9.8 11.8 13.3 14.5 16.1 65.5 153.2

Superfund 0.2 1.6 1.3 1.3 1.3 1.3 6.9 14.1

Airport and Airway Trust Fundc 0 0 1.7 1.7 1.7 0.9 6.0 6.9

Other 0 -0.2 -0.2 a a -0.2 -0.5 -1.3

Subtotal 0.2 11.3 14.6 16.3 17.6 18.0 77.8 172.9

Total 0.1 12.2 15.1 16.6 17.9 18.1 79.9 176.6

SOURCES: Congressional Budget Office; Joint Committee on Taxation.

a. Less than $50 million.

b. For one of the components of this group&the proposal to modify the reserve rules for annuities&the estimate is taken from the President's budget.

c. The estimate is taken from the President's budget.
12 AN ANALYSIS OF THE PRESIDENT'S BUDGETARY PROPOSALS FOR FISCAL YEAR 1999 March 1998

The budget also proposes a new credit for businesses that incur child care expenses for their employees. The credit would cover 25 percent of qualified

expenses (including costs to acquire, construct, and

operate property used as part of a child care facility)

and would be capped at $150,000. JCT estimates that

the new credit would cost $500 million through 2003

and $1.5 billion through 2008.

Education Benefits. The Administration would allow

state and local governments to issue more than $20 billion in special bonds over the next few years to finance

certain public school construction projects. The federal

government would in effect pay the interest on those

bonds by providing income tax credits to the bondholders. They, in turn, would include the credit amount in

their taxable income just as if it were taxable interest.

For the most part, anyone could purchase those bonds.

By JCT's estimate, the proposal would reduce federal

revenues by $3 billion over five years.

Other education proposals&to extend by one year

(through June 1, 2001) the exclusion of employerprovided educational assistance from the recipient's

taxable income and to expand that exclusion to include

graduate education&would reduce revenues by an additional $1 billion over the next four years.

Credits for Energy-Efficient Purchases. The President proposes to provide tax credits for the purchase of

energy-efficient items, including certain vehicles,

homes, heating and air conditioning units, combined

heat and power units, circuit breaker equipment, and

equipment to recycle so-called greenhouse gases. All of

the credits would be temporary, with expiration dates

between the end of 2003 and 2010. The entire set of

credits would reduce revenues by $4 billion over five

years and almost $10 billion through 2008, with over

half of that amount coming from the credit for fuelefficient vehicles. That credit would total $4,000 for

vehicles with more than triple the base fuel efficiency of

vehicles in their class and $3,000 for vehicles with double the base fuel efficiency. It would be fully phased

out by 2010.

Targeted Business Incentives. Under the President's

budget, the quantity of low-income housing credits

available for states to allocate would expand by 40 percent starting in 1999. That expansion would lower revenues by $1 billion through 2003 and $5 billion

through 2008. Because individuals and corporations

claim the credit on their tax returns over a 10-year period, the revenue cost would mount through 2008 as

state governments allocated new credits each year.

The budget also proposes extending a variety of

credits and other tax benefits now scheduled to expire.

Most notably, the research and experimentation credit

(which expires on June 30, 1998) would be extended

for one year, at a revenue cost of $2 billion. In addition, the Generalized System of Preferences, which

provides duty-free status to many imports from qualifying countries, would be extended by more than three

years (to September 30, 2001), at a five-year revenue

cost of $1 billion. The work opportunity credit would

be extended for almost two years (to workers hired by

April 30, 2000), at a five-year cost of $800 million.

And the tax incentives for cleaning up polluted "brownfields" would be made permanent, at a five-year cost of

almost $500 million. Finally, the welfare-to-work

credit would be extended for one year, reducing revenues by $150 million.

In addition, the President's budget proposes making

permanent one of the two current Puerto Rico tax credits, both of which are scheduled to be phased out fully

by 2006. The "economic activity credit" for investment

in Puerto Rico was established in 1993 as an alternative

to the "income credit," which had proved to be a costly

way to create jobs in the territory. The income credit

was allowed to continue after 1993 in reduced form, but

both credits were phased out over a 10-year period in

1996 legislation. Reinstating the economic activity

credit would lower revenues by $1 billion over five

years and almost $10 billion through 2008. The revenue cost is concentrated in the later years of that period

because of the phaseout of the credit under current law.

In 2008, the cost would be nearly $3 billion.

The budget also proposes to reduce tax liability and

filing complexity for taxpayers who receive dividends

from investments in certain foreign corporations. The

proposal would allow recipients of dividends from corporations that are at least 10 percent, but not more than

50 percent, owned by U.S. shareholders&so-called

10/50 companies&to immediately use less restrictive

rules for claiming foreign tax credits. (Those less restrictive rules are currently scheduled to become available only for dividends paid out of earnings produced

after 2002.) The proposal would reduce the taxes of
CHAPTER ONE THE PRESIDENT'S BUDGETARY PROPOSALS 13

those dividend recipients by more than $1 billion

through 2003.

Other Revenue-Reducing Provisions. Among other

changes, the President proposes allowing terminated

employees to exclude their first $2,000 of severance

pay from taxable income under certain circumstances

and proposes creating a simplified pension plan for

small businesses. Those provisions would reduce revenues by an estimated $2 billion over five years.

Provisions That Increase Revenues

The budget also includes a substantial group of proposals that would increase revenues by approximately

enough to offset the costs of the revenue-reducing provisions. The proposals that would raise the bulk of the

revenues would cut back or eliminate certain tax preferences for businesses, such as tax benefits for multinational corporations and life insurance companies. (Additional proposals that raise receipts largely in order to

finance spending programs, such as proposed tobacco

receipts, are addressed in the next section.)

Export Sales Source. The budget would repeal a tax

benefit under which U.S. multinational corporations can

report some of their income from exports as foreign

income, even if those exports were manufactured in the

United States and the income was not subject to foreign

taxes. That treatment allows certain multinationals to

increase their use of foreign tax credits and decrease

their federal tax payments. Repealing the provision

would raise almost $9 billion in revenues through 2003

and $22 billion through 2008. (This proposal was included in last year's Presidential budget and was rejected by the Congress.)

Life Insurance and Annuities. The President proposes raising nearly $8 billion over five years and $18

billion over 10 years from different segments of the life

insurance industry. One proposal would reduce the future reserve deductions that life insurance companies

can take for their annuity contracts. According to the

Administration, that proposal would increase revenues

by almost $5 billion over five years. JCT was unable to

reestimate that figure, so it has adopted OMB's estimate. Other provisions would further restrict the tax

benefit for business-owned life insurance policies, raising $2 billion over five years, and limit the scope of

preferential asset exchanges, raising almost $1 billion

over the same period.

Estate and Gift Valuation. Another proposal in the

President's budget would restrict the use of valuation

discounts for gifts of minority interests in family limited partnerships or similar entities. That proposal

would increase estate tax revenues by more than $2

billion over five years and $5 billion over 10 years.

Other Revenue-Raising Provisions. Among other

changes, the budget proposes repealing the use of the

"lower of cost or market" inventory accounting method,

the ability of certain taxpayers to claim losses prematurely, and the use of foreign tax credits by oil and gas

companies for payments to foreign governments that,

arguably, more closely resemble royalties or rents. The

three proposals each would raise between $1 billion and

$2 billion over five years. In addition, the budget

would raise a similar amount of revenue by reinstating

through 2008 the excise tax of 5 cents per barrel on

domestic crude oil and on imported oil and petroleum

products. (That tax had been in effect until January 1,

1995.) As before, revenues from that tax would be

dedicated to the trust fund that pays for cleaning up oil

spills.

Other Provisions That Affect Receipts

The budget includes several other proposed sources of

receipts, such as unspecified receipts from tobacco legislation, reinstated excise and corporate income taxes

that finance the Superfund program, and restructured

excise taxes that finance certain airport and airway

spending. Those sources would bring in around $78

billion in receipts over five years, with the majority

coming from unspecified tobacco legislation.

Tobacco. The President's budget assumes a substantial amount of receipts from tobacco legislation&$65

billion through 2003 and over $150 billion through

2008&but offers no specific proposals to achieve them.

Nevertheless, CBO has adopted the Administration's

estimate of those receipts because policies could be put

in place that would bring about such an increase.

Superfund. The President proposes to reinstate taxes

dedicated to the Hazardous Substance Superfund trust

fund that expired in 1995. They include the excise tax
14 AN ANALYSIS OF THE PRESIDENT'S BUDGETARY PROPOSALS FOR FISCAL YEAR 1999 March 1998

on producers and importers of petroleum and certain

chemicals and the small additional income tax levied on

all corporations. Those taxes, which would expire at

the end of 2008, would raise about $7 billion over the

five-year budget horizon.

Airport and Airway Trust Fund. The budget includes $6 billion in receipts through 2003 from an unspecified policy that would entirely fund the Federal

Aviation Administration through user fees. The fees

would replace the existing taxes earmarked for the Airport and Airway Trust Fund. The Administration plans

to propose specific legislation later; in the meantime,

CBO has adopted the Administration's estimate of the

proposal.

Other Receipt Provisions. Most notably, the President's budget proposes enacting the recommendations

of the Advisory Commission on Consumer Protection

and Quality in the Health Care Industry. Those recommendations include requiring health plans to improve

their disclosure of information, enhancing access to

certain types of health care providers, and adding appeal procedures for enrollees. Because those additional

services would raise health care costs, employees would

end up receiving a greater share of their income in the

form of nontaxable benefits for health insurance, and

tax receipts would fall. The current estimate assumes a

revenue loss of $1.5 billion over five years, but that

figure could change when detailed legislative language

becomes available. Other proposals that would increase receipts include encouraging states to raise unemployment insurance taxes and requiring the Federal

Reserve to charge banks for the cost of examinations.

Estimating Differences

Between CBO and 

the Administration

CBO's estimate of the total budgetary effect of the

President's proposals differs somewhat from OMB's.

CBO estimates that adoption of the budget as submitted would lead to smaller surpluses than the Administration expects and even a tiny deficit in 2000 (see

Table 7). By 2003, the surplus would be about half of

what the Administration is projecting. Those differences occur for two reasons: because CBO and OMB

project different costs or savings for some of the President's proposals and, to a greater extent, because the

two agencies are measuring the effects of those proposals against slightly different baselines. (For more information about CBO's baseline budget projections, see

Appendix A.)

Differences in baselines&that is, in projections of

what outlays and revenues would be in the absence of

policy changes&account for about 60 percent of the

cumulative difference in estimates. CBO's baseline

projects higher outlays than the Administration's in

each year from 1998 to 2003 and higher revenues in

1998 through 2001. Although differences in economic

forecasts play some role, CBO's higher revenue projections result almost entirely from different assumptions

about noneconomic, or technical, factors. Most of the

technical differences occur in 1998, reflecting new information about government receipts in the months

since the Administration prepared its forecast. By contrast, over three-fourths of CBO's higher outlay projections can be attributed to economic factors. CBO projects slightly higher inflation and interest rates than the

Administration, which leads to greater estimates of

spending for retirement programs and interest on the

public debt. In fact, $13 billion of the $22 billion difference in outlays for 2003 that is attributable to economic factors results from higher Social Security costof-living adjustments and federal interest payments.

The largest technical difference in baseline outlays

between CBO and OMB occurs in the Medicare program. CBO is not as sanguine as the Administration

that policies enacted in last year's Balanced Budget Act

will be effective in curbing Medicare spending. As a

result, it projects $50 billion more in spending for that

program through 2003. Some of that difference is offset by CBO's lower outlay projections for Social Security ($14 billion lower than OMB's over five years), for

the Food Stamp program ($6 billion lower), and for

veterans' compensation ($5 billion lower). CBO is projecting lower outlays than the Administration largely

because of different assumptions about caseloads.

Differences in the estimated costs or savings of the

policies in the President's budget also make a substantial difference in estimates of the budget's bottom line.

Economic differences come into play only with CBO's

estimate for the proposal to mandate payment of ex-
CHAPTER ONE THE PRESIDENT'S BUDGETARY PROPOSALS 15

Table 7.

CBO Reestimate of the President's Budgetary Policies (By fiscal year, in billions of dollars)

1998 1999 2000 2001 2002 2003

Deficit (-) or Surplus Under the 

President's Budgetary Policies 

as Estimated by the Administration -10 10 9 28 90 83

Baseline Differences

Revenues

Economic 7 8 1 -3 -8 -6

Technical 15 1 4 4 7 4

Total 22 9 5 1 -1 -2

Outlays

Discretionary (Technical) 5 a -1 -1 -1 2

Mandatory

Economic 1 7 10 12 17 22

Technical -1 -1 a 4 7 10

Subtotal -1 6 9 16 23 31

Total 4 6 9 15 23 34

Total Baseline Differencesb 18 3 -4 -15 -24 -36

Differences in Estimates of Proposed Policies

Revenues (Technical) a -1 a a -1 -1

Outlays

Discretionary (Technical)

Defense 0 4 3 1 7 a

Nondefense a 4 3 4 4 a

Subtotal a 7 7 4 11 a

Mandatory

Economic aaa1aa

Technical -1 1 3 a 3 4

Subtotal -1 1 3 1 3 4

Total -1 8 10 6 14 4

Total Policy Differencesb 1 -9 -9 -6 -15 -5

All Estimating Differences

Total Differencesb 18 -6 -13 -20 -39 -41

Deficit (-) or Surplus Under the 

President's Budgetary Policies 

as Estimated by CBO 8 4 -5 8 51 42

SOURCE: Congressional Budget Office.

a. Less than $500 million.

b. Reductions in the surplus are shown with a negative sign.
16 AN ANALYSIS OF THE PRESIDENT'S BUDGETARY PROPOSALS FOR FISCAL YEAR 1999 March 1998

tended unemployment benefits if a state's total unemployment rate is 7.5 percent or higher (and other conditions are met). CBO expects a higher rate of unemployment than OMB and thus considers it more likely

that extended benefits will be triggered.

Technical differences in policy estimates are most

pronounced in the area of discretionary spending. They

stem largely from differences in CBO's and OMB's assumptions about how fast programs spend money. The

largest technical difference in mandatory programs involves the proposal to repeal the VA's ruling that nicotine dependence is a service-related disability. CBO

projects $7 billion less in savings through 2003 because it estimates that there will be fewer beneficiaries

initially. CBO also expects $1.7 billion less in savings

from the Administration's proposed changes to the student loan programs. That difference stems largely from

the provision that would eliminate bankruptcy as a way

to discharge student loan obligations. OMB expects

that eliminating the bankruptcy option would make borrowers more inclined to pay their debts; CBO believes

that people who would file for bankruptcy to escape

student loans would simply default on their obligations

if the Administration's proposal was enacted. In the

opposite direction, CBO expects $6.1 billion lower

spending over five years for the child care entitlement,

largely because it does not believe that states will be

eager to match federal funds.

Grants to State and Local

Governments

CBO estimates that the federal government will transfer

about $250 billion to state, local, and tribal governments through various grant programs in the current

fiscal year. Although most budget functions include at

least some spending for grants, that spending is highly

concentrated in four functions&health; income security;

education, training, employment, and social services;

and transportation. In the first three, federal grants primarily support payments to or services for individuals.

Outlays for grants in those functions (about $200 billion) account for over 80 percent of total grant spending

this year. The Medicaid program alone accounts for

about 40 percent of that total, with $101 billion of estimated grant outlays in 1998. Another 11 percent ($28

billion) will support transportation programs. Those

grants primarily fund infrastructure projects, particularly the construction of highways, mass transit systems, and airports.

If the President's budget was enacted as submitted,

outlays for grants would total $269 billion in 1999, by

CBO's estimate. That grant spending would include

$109 billion for discretionary programs and $160 billion for mandatory programs such as Medicaid. The

President's budget proposes little change in discretionary spending for grants but much more significant

changes in mandatory grant programs.

In the discretionary budget categories, 1999 budget

authority for grants would rise by only about $2 billion,

or less than 3 percent, from this year's level (see Table

8). (Changes in budget authority present a much

clearer picture of the President's policy proposals for

discretionary programs than changes in outlays do, because annual changes in outlays tend to reflect past

funding actions as well as current decisions.) In only

two functions&community and regional development,

and education and training&would the proposed increases exceed $1 billion. Those increases are partly

offset by $400 million decreases in grants for the administration of justice and general government. Just as

the President's proposed changes are dispersed among

the remaining budget functions, they are widely dispersed among the programs within those functions.

Most of the increase in community and regional

development stems from the President's request for a

$2 billion increase in budget authority for the disaster

relief account. That account receives additional budget

authority sporadically, often with the stipulation that it

cannot be obligated unless it is released by the President as an emergency requirement. Except for that request, total discretionary budget authority for grant programs would be virtually unchanged between 1998 and

1999.

The increased budget authority for grants in the

education, training, employment, and social services

function flows primarily to programs for children and

families. The largest proposed increase in this function

is for state education grants that support programs for

disadvantaged students. The President proposes boosting the budget authority for those grants by $600 million next year, to $8.5 billion. Other programs in this
CHAPTER ONE THE PRESIDENT'S BUDGETARY PROPOSALS 17

Table 8.

CBO Estimate of the President's Discretionary Spending Proposals for Grant Programs, by Function

(By fiscal year, in billions of dollars)

Budget Function

1998

Budget Authority

(Enacted)

1999

Budget Authority

(Proposed)

Change from

1998 to 1999

Energy 0.2 0.2 0.1

Natural Resources and Environment 3.9 3.7 -0.2

Transportation 0.6 0.3 -0.3

Community and Regional Development 6.7 8.9 2.2

Education, Training, Employment, and Social Services

Education for disadvantaged students 7.9 8.5 0.6

Training and employment services 3.7 4.0 0.3

Children and families services 5.4 5.6 0.2

Other 12.7 12.6 -0.1

Subtotal 29.7 30.8 1.0

Health 4.8 4.8 0

Income Security 25.2 25.3 0.1

Administration of Justice 4.8 4.3 -0.4

General Government 1.0 0.6 -0.4

Other 1.0 0.9 -0.1

Total 77.8 79.8 2.0

SOURCE: Congressional Budget Office.

function that would get significant increases in funding

include programs that provide training and employment

services and services to children and families. The

President would raise budget authority for those categories of programs by $300 million and $200 million,

respectively.

The President's policy proposals for entitlements

and other mandatory programs would increase spending

for grants by a much larger amount&over $4 billion in

1999 and about $34 billion over the 1999-2003 period.

That additional spending would primarily support a

limited number of initiatives in health and education.

The most significant ones were discussed in more detail

in the section on the President's mandatory spending

proposals (and are shown in Table 5 on page 8). As

noted there, the single largest proposed increase in

mandatory spending is for unspecified grants to state,

local, and territorial governments that the Administration would include in any tobacco-related legislation.

As with discretionary programs, the largest increases for specific mandatory grant programs would

benefit state and local education and other programs for

children. They include an initiative to reduce class size

in the primary grades (costing $5 billion over five

years) and an increase in the child care entitlement to

states (of $3.2 billion over five years). The President 4

also proposes increasing grants to states for unemployment insurance by $2.4 billion through 2003.

4. In addition, the President's proposed tax credits for purchasers of certain school construction bonds, discussed on page 12, would provide

significant benefits to state and local governments.
18 AN ANALYSIS OF THE PRESIDENT'S BUDGETARY PROPOSALS FOR FISCAL YEAR 1999 March 1998

Not all of the proposed changes in mandatory grant

programs would benefit states, however. States would

lose a total of $1 billion in payments under the Medicaid program as a result of the President's proposal to

reduce the matching rate for administrative expenses

from 50 percent to 47 percent.
T

Chapter Two

Comparison of Economic Forecasts

he Administration's economic assumptions for

the next six years differ little from those of the

Congressional Budget Office, although the differences have noticeable effects on estimated surpluses

in the later years of the projections. The variations in

economic assumptions result in estimates by CBO of

surpluses that differ by less than $10 billion from those

projected by the Administration for 1998 through 2000.

In 2003, however, the Administration's economic assumptions lead to an estimated surplus that is almost

$30 billion greater than the one resulting from CBO's

assumptions.

CBO is projecting more rapid growth than the Administration during 1998 and 1999, but the Administration's projections beyond the near term are slightly

more optimistic than the CBO forecast. The Administration projects stronger real growth after 1999, and its

projections of inflation, long-term interest rates, and the

unemployment rate are lower than CBO's throughout

the projection period. The Administration also assumes

that incomes that are subject to federal taxation constitute a higher proportion of gross domestic product than

does CBO.

Compared with the Administration's and CBO's

projections, the most recent Blue Chip consensus forecast indicates somewhat stronger growth and higher

interest rates, on average, over the next six years, as

well as lower inflation in the near term. Real growth is

0.2 percentage points higher in the Blue Chip forecast

than in CBO's, and Blue Chip interest rates in the projection period are 0.2 to 0.4 percentage points higher.

In addition, because the consensus estimates took into

account the recent sharp drop in petroleum prices,

which occurred after the government agencies had completed their forecasts, the consensus projects lower inflation for this year. The Blue Chip forecast does not

indicate a lower underlying rate of inflation, however,

because the inflation rates projected for subsequent

years are higher than for 1998.

Real Growth and 

Unemployment

The Administration and CBO are projecting almost the

same average rate of growth for real GDP, but in the

CBO forecast, growth is slightly stronger in the near

term and correspondingly weaker, on average, in the

later years of the projection period. In addition, CBO

assumes that such growth is consistent with a higher

average level of unemployment than the level assumed

by the Administration.

Both the Administration's and CBO's projections of

real growth and unemployment are influenced by their

estimates of potential GDP. Potential GDP is an estimate of the level of output that can be maintained without risking an increase in the underlying rate of inflation. Thus, the growth of potential GDP is an estimate

of the sustainable growth rate of the economy.

The Administration and CBO both estimate that

the level of potential GDP is currently below the actual

level of GDP; that is, resources are now being used at a

high rate, which carries the risk that inflation will increase. With the unemployment rate at 4.6 percent&the
20 AN ANALYSIS OF THE PRESIDENT'S BUDGETARY PROPOSALS FOR FISCAL YEAR 1999 March 1998

lowest it has been in 24 years&labor markets are quite

tight, and the capacity utilization rate for manufacturing

is at a level that in the past has been associated with a

pickup in inflation.

The two agencies differ in their assumptions about

the inflationary implications of the current unemployment rate, however. The CBO forecast assumes that

the risk of higher inflation will remain as long as the

unemployment rate is below 5.8 percent; in other

words, CBO assumes that the nonaccelerating inflation

rate of unemployment (NAIRU) is 5.8 percent. In contrast, the Administration assumes that a steady rate of

inflation is compatible with an unemployment rate of

5.4 percent. The experience of the past two and a half

years, during which the rate of unemployment fell far

below 5.8 percent without, as yet, any indication of an

increase in the underlying rate of inflation, has led

many economists to believe that the NAIRU is, indeed,

lower than 5.8 percent. Most economists, as well as the

Administration and CBO, partially discount recent experience, attributing the absence of higher inflation to

temporary factors, such as falling prices for imports,

that will not prevail in the long run. The Administra- 1

tion, however, apparently puts slightly greater weight

on recent experience than does CBO&and therefore

assumes a lower NAIRU. Estimates of the NAIRU by

private-sector economists vary widely, with most falling between 5.0 percent and 6.2 percent.

Both the Administration and CBO forecast an unemployment rate of about 5.0 percent for this year and

next, up from February's rate of 4.6 percent. But their

projections drift apart in subsequent years because of

their differing assumptions about the NAIRU. The differences in the unemployment projections are consistent

with the different rates of growth of real GDP between

1999 and 2003 (see Table 9).

Growth during 1997 was much greater than CBO's

estimate of potential growth, and expectations are that

the rate of growth during the first half of this year will

continue to be faster than CBO's estimate of the growth

of potential output. Continued strength in personal

consumption is likely to keep demand strong. Growth

in real disposable income averaged 3.7 percent during

1997, and real consumption grew by 3.8 percent. The

surge in employment and wages that spurred the growth

in personal income last year has continued into the initial months of this year at the same time that consumer

inflation has eased, primarily because of a sharp drop in

the price of petroleum. Real growth in consumption

appears likely to be over 3 percent for the first half of

1998.

By the second half of this year, however, CBO anticipates that growth will slow. The effects of the

Asian crisis are expected to dampen demand for U.S.-

produced goods, and investment is likely to shrink in

concert with that slowdown. Those developments

would slow employment growth and ultimately reduce

the growth of personal consumption as well.

The probability of a slowdown by the end of this

year is strengthened by the Federal Reserve's concern

about inflation. If the rate of growth of the economy

does not moderate&if the effects of the Asian crisis on

trade are smaller than anticipated or if they are offset by

stronger-than-expected domestic demand&the Federal

Reserve may feel it necessary to take monetary action

to slow the economy and forestall an increase in inflation in 1999.

The Administration's forecast also indicates a slowing of growth this year, although the decline occurs

somewhat sooner than the CBO forecast indicates. The

Administration's forecast, like CBO's, cites the reduction in foreign demand for U.S. goods and a decline in

the growth of investment as the causes of the slower

growth. In its forecast, CBO puts more weight than

does the Administration on the possibility of continued

strong growth in demand this year.

Inflation and Interest Rates

The Administration's assumptions about the rate of inflation, whether measured by the consumer price index

or the implicit GDP deflator, are lower than CBO's

throughout the next six years. The difference in the two

sets of inflation assumptions largely reflects the difference in assumptions for the NAIRU. CBO's analysis

indicates tighter labor markets and stronger near-term

growth than the Administration assumes, and CBO is

1. See Economic Report of the President (February 1998); and Congressional Budget Office, The Economic and Budget Outlook: Fiscal

Years 1999-2008 (January 1998).
CHAPTER TWO COMPARISON OF ECONOMIC FORECASTS 21

Table 9.

Comparison of Economic Projections, Calendar Years 1998-2003

Forecast Projected

1998 1999 2000 2001 2002 2003

Nominal GDP (Billions of dollars)

CBO 8,461 8,818 9,195 9,605 10,046 10,529

Administration 8,430 8,772 9,142 9,547 9,993 10,454

Blue Chip 8,449 8,833 9,248 9,692 10,177 10,696

Nominal GDP (Percentage change)

CBO 4.7 4.2 4.3 4.5 4.6 4.8

Administration 4.3 4.1 4.2 4.4 4.7 4.6

Blue Chip 4.5 4.5 4.7 4.8 5.0 5.1

Real GDP (Percentage change)

CBO 2.7 2.0 1.9 2.0 2.1 2.3

Administration 2.4 2.0 2.0 2.2 2.4 2.4

Blue Chip 2.7 2.2 2.2 2.2 2.4 2.5

Implicit GDP Deflator (Percentage change) a

CBO 2.0 2.2 2.3 2.4 2.4 2.5

Administration 1.9 2.0 2.2 2.2 2.2 2.2

Blue Chip 1.8 2.3 2.4 2.6 2.5 2.5

Consumer Price Index (Percentage change) b

CBO 2.2 2.5 2.7 2.8 2.8 2.8

Administration 2.1 2.2 2.3 2.3 2.3 2.3

Blue Chip 1.9 2.5 2.7 2.7 2.8 2.7

Unemployment Rate (Percent)

CBO 4.8 5.1 5.4 5.6 5.8 5.9

Administration 4.9 5.1 5.3 5.4 5.4 5.4

Blue Chip 4.8 5.0 5.3 5.5 5.6 5.4

Three-Month Treasury Bill Rate (Percent)

CBO 5.3 5.2 4.8 4.7 4.7 4.7

Administration 5.0 4.9 4.8 4.7 4.7 4.7

Blue Chip 5.1 5.2 5.1 5.2 5.1 5.1

Ten-Year Treasury Note Rate (Percent)

CBO 6.0 6.1 6.0 5.9 5.9 5.9

Administration 5.9 5.8 5.8 5.7 5.7 5.7

Blue Chip 5.8 6.0 6.0 6.1 6.1 6.1

Taxable Income (Billions of dollars) c

CBO 6,688 6,906 7,147 7,426 7,732 8,080

Administration 6,670 6,920 7,188 7,474 7,798 8,132

SOURCES: Congressional Budget Office; Office of Management and Budget; Capitol Publications, Inc., Blue Chip Economic Indicators (March 10,

1998).

NOTE: Percentage change is year over year.

a. The implicit GDP deflator is virtually the same as the GDP price index.

b. The consumer price index for all urban consumers.

c. Taxable personal income plus corporate profits before tax. Blue Chip does not forecast taxable income.
0

52

54

56

58

60

62

64

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

Percentage of GDP

Actual Proj.

OMB

CBO

22 AN ANALYSIS OF THE PRESIDENT'S BUDGETARY PROPOSALS FOR FISCAL YEAR 1999 March 1998

therefore more concerned about the possibility of higher

inflation over the next few years. The differences between the agencies in their assumptions about inflation

do not affect the budget projections in the first few

years of the forecast, but they contribute to the differences in projected surpluses for 2002 and 2003.

CBO forecasts slightly higher interest rates over

the next two years than does the Administration, but the

interest rate projections are virtually identical for subsequent years. Again, because CBO considers an increase in inflation more likely than the Administration

does, its near-term forecast reflects the possibility that

the Federal Reserve might tighten monetary policy later

this year. The CBO forecast of higher interest rates

over the next two years is one of the reasons that CBO's

projection of the surplus is slightly smaller than that of

the Administration for 1999.

Income

Budget forecasts are affected not only by the size of

total output and the income generated in producing that

output but also by the projected distribution of income

among the various income categories. Corporate profits and wages and salaries are the most important income categories for revenue projections because they

are effectively taxed at the highest rates. Other categories, such as dividends, interest income, proprietors'

income, and rental income, are taxed at lower effective

rates because most of those kinds of income are not

subject to payroll taxes. Moreover, some of the income

under those categories goes to tax-exempt entities (for

example, pension funds) or is imputed income, which

does not show up on tax returns. In addition, compliance problems reduce the effective tax rate on proprietors' incomes.

The combined share of GDP that corporate profits,

wages, and salaries account for has grown rapidly since

1993 (see Figure 1). Both the Administration and CBO

project that the combined share has peaked, but the Administration indicates only a slight decline over the next

six years, whereas CBO projects a more significant retrenchment. For 1998, the Administration's projection

of the combined income share is virtually the same as

CBO's; however, by 2003 the Administration's estimate

is higher by 0.6 percentage points.

One reason that CBO projects a decline in the combined share of profits, wages, and salaries is that overall income is assumed to grow more slowly than overall

output, or GDP. In principle, the output and income

measures should be identical, but in practice they differ

because they use different data sources. Income growth

has far exceeded output growth for the past three years,

leaving the measure of total income about $100 billion

greater than the measure of output at the end of 1997.

CBO assumes that the difference will shrink as a percentage of GDP, implying that overall income will grow

more slowly than GDP in the projection.

The share of profits, wages, and salaries also declines in the CBO forecast because CBO assumes that

the share of GDP allocated to the consumption of fixed

capital increases. (Consumption of fixed capital is also

called depreciation&the wear and tear on business

equipment and structures.) Rapid growth in investment

over the past four years has increased the capital stock,

resulting in higher levels of depreciation. Since depreciation is deducted against profits¬ taxed&the projected increase in its share depresses the share of GDP

accounted for by profits, wages, and salaries.

Figure 1.

Wages and Salaries Plus Corporate Profits

SOURCES: Congressional Budget Office; Department of Commerce, Bureau of Economic Analysis; Office of Management and Budget.

NOTE: Corporate profits are the profits of corporations, adjusted to

remove the distortions in depreciation allowances caused by

tax rules and to exclude capital gains on inventories.
CHAPTER TWO COMPARISON OF ECONOMIC FORECASTS 23

CBO's income projections also reflect potential

effects of the business cycle. Although CBO is not

forecasting that a recession will occur in a particular

year, the projections assume that the likelihood that a

recession will occur some time in the next six years is

greater than the likelihood that the current boom will

continue for the same period. The share of profits,

wages, and salaries has generally been lower during a

recession and the early years of a recovery than it has

been in the last half of an expansion. As a result, the

higher probability of recession that CBO assumes lowers the average income share in its projection.

Appendixes

T

Appendix A

CBO Baseline Budget Projections

hroughout this report, the Administration's proposals are contrasted with the Congressional

Budget Office's baseline estimates of the budget. Those estimates show the path of revenues and

spending if current laws and policies remain unchanged.

They are not forecasts of what will actually occur, since

policymakers will undoubtedly seek to alter current priorities. But CBO's current-policy estimates serve as

handy yardsticks for gauging the potential impact of

proposed changes&those advocated in the President's

budget as well as in competing packages.

The Baseline Concept

CBO's baseline projections follow some general rules.

Revenues and entitlement programs (such as Social

Security and Medicare) continue on their course until

the Congress changes the laws that underpin them&

laws that define taxable income and set tax rates, benefit formulas, eligibility, and so forth. For those categories of the budget, therefore, the baseline represents

CBO's best estimate of what will happen in accordance

with current law. In the case of programs with outlays

of more than $50 million in the current year, the Balanced Budget and Emergency Deficit Control Act of

1985 directs CBO to assume that the programs continue even when their authorization expires (see Table

A-1 for the budget authority and outlays associated

with the continuation of expiring programs).

Discretionary programs, unlike entitlement programs, are funded anew each year through the appropriation process. Discretionary programs encompass

nearly all spending for defense and international affairs,

as well as many domestic programs&for space, energy,

highway and airport grants, environmental protection,

and health research, to name just a few&and the salaries and expenses of government agencies. Caps on

total discretionary budget authority and outlays have

been in place since 1991, and new limits on discretionary spending through 2002 were included in the Balanced Budget Act of 1997. The law specifies three separate sets of caps for that spending in 1998 and 1999:

one for defense, one for violent crime reduction, and

one for other nondefense, noncrime expenditures. In

2000, the number of sets narrows to two&a violent

crime reduction spending cap and a cap for all other

discretionary spending. In 2001 and 2002, a single cap

covers all discretionary budget authority and outlays.

CBO's baseline assumes compliance with the caps

through 2002, which, as explained below, will force

trade-offs among many competing programs. After the

caps expire in 2002, the baseline assumes that discretionary spending grows at the rate of inflation.

The budget includes two other categories of spending: offsetting receipts, which encompass Medicare

insurance premiums and similar fees and collections,

and net interest, which basically reflects the government's interest payments on the national debt. CBO's

baseline for offsetting receipts represents the agency's

best estimate of the amount that the government will

collect under current laws and policies. Net interest,

rather than being directly controlled by policymakers, is

driven by market interest rates and the outstanding

stock of federal debt held by the public. As a result,

CBO estimates such spending based on its projections

of those two determinants.
28 AN ANALYSIS OF THE PRESIDENT'S BUDGETARY PROPOSALS FOR FISCAL YEAR 1999 March 1998

Table A-1.

Program Continuations Assumed in the CBO Baseline (By fiscal year, in billions of dollars)

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Commodity Credit Corporation Funda

Budget authority n.a. n.a. n.a. n.a. n.a. 4.5 4.5 4.5 4.5 4.5 4.5

Outlays n.a. n.a. n.a. n.a. n.a. 4.5 4.5 4.5 4.5 4.5 4.5

Transportation Programs Controlled

by Obligation Limitationsb

Budget authority n.a. 30.9 30.9 30.9 30.9 30.9 30.9 30.9 30.9 30.9 30.9

Outlays n.a. 0 0 0 0 0 0 0 0 0 0

Transportation Programs Not Subject

to Annual Obligation Limitations

Budget authority n.a. 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6

Outlays n.a. 0.1 0.3 0.5 0.5 0.6 0.6 0.6 0.6 0.6 0.6

Family Preservation and Support

Budget authority n.a. n.a. n.a. n.a. 0.3 0.3 0.3 0.3 0.3 0.3 0.3

Outlays n.a. n.a. n.a. n.a. 0.1 0.3 0.3 0.3 0.3 0.3 0.3

Rehabilitation Services and

Disability Research

Budget authority n.a. 0.3 2.7 2.7 2.8 2.9 3.0 3.0 3.1 3.2 3.3

Outlays n.a. 0.2 2.0 2.6 2.8 2.9 2.9 3.0 3.1 3.2 3.3

Food Stamps

Budget authority n.a. n.a. n.a. n.a. n.a. 26.9 27.9 28.8 29.8 30.8 31.9

Outlays n.a. n.a. n.a. n.a. n.a. 26.4 27.9 28.8 29.8 30.8 31.8

Child Nutrition

Budget authority n.a. 0.4 0.4 0.5 0.5 0.5 0.5 0.6 0.6 0.6 0.6

Outlays n.a. 0.3 0.4 0.4 0.5 0.5 0.5 0.6 0.6 0.6 0.6

Contingency Fund for State

Welfare Programs c

Budget authority n.a. n.a. n.a. n.a. 0.2 0.2 0.2 0.2 0.2 0.2 0.2

Outlays n.a. n.a. n.a. n.a. 0.2 0.2 0.2 0.2 0.2 0.2 0.2

Child Care Entitlements to States

Budget authority n.a. n.a. n.a. n.a. n.a. 2.7 2.7 2.7 2.7 2.7 2.7

Outlays n.a. n.a. n.a. n.a. n.a. 2.5 2.7 2.7 2.7 2.7 2.7

Temporary Assistance for Needy Families

Budget authority n.a. n.a. n.a. n.a. n.a. 16.7 16.8 16.8 16.8 16.8 16.8

Outlays n.a. n.a. n.a. n.a. n.a. 17.3 17.6 17.7 17.8 17.8 17.8

Veterans' Compensation

Budget authority n.a. 0.3 0.8 1.4 2.0 2.7 3.5 4.7 5.2 5.7 7.1

Outlays n.a. 0.3 0.8 1.3 2.0 2.7 3.5 4.7 5.2 5.7 7.1

Total

Budget authority n.a. 32.6 35.4 36.1 37.3 89.0 91.0 93.2 94.8 96.4 99.0

Outlays n.a. 1.0 3.5 4.9 6.1 57.8 60.7 63.1 64.9 66.4 69.0

SOURCE: Congressional Budget Office.

NOTE: n.a. = not applicable.

a. Agriculture commodity price and income supports under the Federal Agriculture Improvement and Reform Act of 1996 (FAIR) generally expire

after 2002. Although permanent price support authority under the Agricultural Adjustment Act of 1938 and the Agricultural Act of 1949 would then

become effective, section 257(b)(2)(ii) of the Balanced Budget and Emergency Deficit Control Act of 1985 requires that the baseline assume

continuation of the FAIR provisions.

b. Authorizing legislation provides contract authority, which is counted as mandatory budget authority. However, because spending is subject to

obligation limitations specified in annual appropriation acts, outlays are considered discretionary.

c. Supplements the Temporary Assistance for Needy Families block grant by providing matching amounts to states that reach certain unemployment

or Food Stamp thresholds and maintain 100 percent of historical state spending on block-grant programs.
APPENDIX A CBO BASELINE BUDGET PROJECTIONS 29

Table A-2.

Changes in CBO Baseline Deficits or Surpluses Since January 1998 (By fiscal year, in billions of dollars)

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

January 1998 Baseline Deficit (-)

or Surplus -5 -2 -3 14 69 54 71 75 115 129 138

Changes

Revenues 15 10 5 a a a a a a a a

Outlays

Discretionary aaaaaaaaaaa

Mandatory aa124121aaa

Net interest 1 a -1 -1 -1 -1 -1 a a a a

Subtotal 2 -1 a 1 3 1 1 1 a a a

Total 13 11 5 -1 -3 -1 -1 -1 a a a

March 1998 Baseline Surplus 8 9 1 13 67 53 70 75 115 130 138

SOURCE: Congressional Budget Office.

a. Less than $500 million.

Baseline Projections

In January, CBO published its baseline projections in

The Economic and Budget Outlook: Fiscal Years

1999-2008, which described the key factors that influence the federal government's revenues, spending, and

deficit or surplus. Since that report was issued, CBO

has revised its projection for 1998 from a $5 billion

deficit to an $8 billion surplus. If that estimate proves

correct, it will be the first time that the federal budget

has been in balance since 1969. CBO has also revised

its estimates for 1999 and 2000 from projections of

small deficits to projections of small surpluses. The

estimates for 2001 and beyond have changed very little

(see Table A-2). 

The Congressional Budget Office generally divides

revisions to its estimates into three categories: economic, legislative, and technical (whatever does not fall

into the first two categories). Because CBO has not

updated its economic forecast and no new legislation

has affected projections since January, all changes to

the baseline are technical ones. The technical revisions 1

stem from new information that came to light through

late February, much of it contained in the President's

budget and supporting documents.

CBO has changed its January projections of deficits for 1998 through 2000 to surpluses largely because

revenues this year have been coming in faster than expected. Additional revenues of $15 billion in 1998,

$10 billion in 1999, and $5 billion in 2000 are projected. In 1998, a $2 billion increase in outlays partially offsets the additional revenues.

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 underlying trends in

the budget can rely on that earlier publication.

Although the total deficit or surplus&simply the

difference between total revenues and spending&is the

most common measure of the deficit, there are several

other ways analysts can measure how the government's

1. On February 25, the Congress overrode a Presidential line-item veto

from the fall of 1997 and ordered the release of $287 million for military construction projects in fiscal year 1998. That action is not reflected in the baseline because CBO had completed its estimates before

that date.
30 AN ANALYSIS OF THE PRESIDENT'S BUDGETARY PROPOSALS FOR FISCAL YEAR 1999 March 1998

spending compares with its revenues. Table A-3 displays several measures of the gap between spending

and revenues.

One measure&the standardized-employment deficit

or surplus&removes cyclical economic fluctuations and

certain financial transactions when calculating a deficit

or a surplus. Cyclical economic factors are removed

because they can obscure fundamental trends in the

budget. Certain financial transactions, such as outlays

for deposit insurance, merely represent an exchange of

assets and have no macroeconomic effect. Current projections show a sizable difference between the total deficit and the standardized-employment deficit over the

Table A-3.

The Budget Outlook Under Current Policies (By fiscal year)

Actual

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

In Billions of Dollars

Baseline Total Deficit (-) or Surplusa -22 8 9 1 13 67 53 70 75 115 130 138

Standardized-Employment

Deficit (-) or Surplusb -80 -47 -48 -32 1 52 58 76 96 113 130 146

On-Budget Deficit (Excluding Social

Security and Postal Service) -103 -92 -104 -121 -117 -72 -94 -88 -96 -64 -59 -59

Memorandum:

Off-Budget Surplus

Social Security 81 101 113 123 129 138 148 158 170 179 189 197

Postal Service c -1 c c 1 0 0 0 0 0 0 0

Total 81 100 113 122 130 138 148 158 170 179 189 197

Deficit (-) or Surplus If Discretionary

Spending Was Frozen at the 2002

Level from 2003 to 2008 -22 8 9 1 13 67 69 104 127 188 224 256

As a Percentage of GDP

Baseline Total Deficit (-) or Surplusa -0.3 0.1 0.1 d 0.1 0.7 0.5 0.6 0.7 1.0 1.0 1.1

On-Budget Deficit (Excluding Social

Security and Postal Service) -1.3 -1.1 -1.2 -1.3 -1.2 -0.7 -0.9 -0.8 -0.8 -0.5 -0.5 -0.5

SOURCE: Congressional Budget Office.

a. Assumes that discretionary spending grows with inflation after 2002.

b. These numbers exclude outlays for deposit insurance and offsetting receipts from spectrum auctions. They also reflect shifts in the timing of

revenue collections as well as adjustments for fiscal years in which there are 11 or 13 monthly payments for various entitlement programs instead

of the usual 12.

c. Less than $500 million.

d. Less than 0.05 percent
APPENDIX A CBO BASELINE BUDGET PROJECTIONS 31

next few years, a period in which CBO estimates that

actual gross domestic product will exceed potential

GDP. But that gap is expected to narrow as the difference between actual and potential GDP diminishes.

Another measure&the on-budget deficit or surplus&is rooted in legislation that granted special, offbudget status to the Social Security trust funds and to

the Postal Service. The fiscal picture looks noticeably

different if those off-budget programs are excluded

from the deficit or surplus. In isolation, the Social Security trust funds run large surpluses because payroll

taxes for the program currently exceed its benefits and

administrative expenses. In addition, the trust funds

receive income from interest on their investments in

Treasury securities and from the taxes paid on Social

Security benefits. (The interest payments take the form

of intragovernmental transactions.) In 1998, Social

Security income is expected to exceed benefits and administrative payments by $101 billion; by 2008, the

surplus in the trust funds is expected to climb to $197

billion, mainly as a result of growing interest income.

Consequently, even though CBO's new baseline shows

total budget surpluses throughout the projection period,

the on-budget measure indicates continuing deficits.

Because Social Security spending and income are so

substantial, any measure of the budget that excludes

Social Security payroll taxes and benefits provides an

incomplete picture of the government's role in the economy and its effect on credit markets.

Federal government revenues by source and outlays

by broad category, both in dollar terms and in relation

to GDP, are presented in Table A-4. Spending for

entitlements and other mandatory programs, by far the

largest spending category, is expected to be $951 billion this year and is growing fast. Fueling that growth

are expenditures for Social Security, Medicare, and

Medicaid, which together account for around threequarters of all mandatory outlays (see Table A-5).

In its baseline projections, CBO assumes that

policymakers will continue to abide by the discretionary

spending limits that are set by law through 2002. Separate caps apply to 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 implications for particular programs; instead, accounts within each cap are

forced to compete for resources. From 1999 through

2002, the caps on outlays are more stringent than those

on budget authority, given the current mix of discretionary programs. Preserving resources next year at the

1998 level adjusted for inflation would cause budget

authority to exceed the discretionary cap by $17 billion

and outlays to exceed it by $16 billion (see Table A-6).

Future decisions are likely to be more painful&even a

freeze on total discretionary spending at the current

level would result in outlays that were $1 billion over

the caps in 2002.

Interest costs are a significant portion of the federal

budget&about 15 percent of all federal spending today.

Under CBO's baseline scenario, which assumes stable

interest rates throughout the projection period, interest

payments will decline to 8 percent of federal outlays by

2008. In dollar terms, net interest will fall from $245

billion in 1998 to $194 billion in 2008. Measured as a

percentage of GDP, interest costs are expected to decline from 2.9 percent this year to 1.5 percent by 2008

(see Table A-4).

Debt held by the public is the amount of money

that the federal government has borrowed&by selling

securities&to finance all of the deficits (less any surpluses) accumulated over time. Since 1969, the Treasury has sold ever-increasing amounts of securities to

finance continuing deficits, thereby causing the debt

held by the public to climb from year to year. As a result of the budget surpluses that CBO is projecting, the

current baseline forecast reflects a changing scenario

for that category of debt (see Table A-7). Debt held by

the public is projected to decline from $3.8 trillion in

1998 (45 percent of GDP) to $3.3 trillion in 2008 (25

percent of GDP).

Gross federal debt counts debt issued to government accounts as well as debt held by the public. The

government accounts consist mostly of trust funds, the

largest of which are the Social Security and federal civilian employee retirement funds. Because the Treasury handles investments by trust funds and other government accounts, their purchases and sales of securities do not flow through the credit markets. Hence, interest on those securities is considered simply an

intragovernmental transfer. CBO expects gross federal

debt to be $5.5 trillion in 1998. As trust fund balances

accumulate in subsequent years, gross federal debt will

continue to grow, reaching an estimated $7.1 trillion by

2008.
32 AN ANALYSIS OF THE PRESIDENT'S BUDGETARY PROPOSALS FOR FISCAL YEAR 1999 March 1998

Table A-4.

CBO Baseline Budget Projections, Assuming Compliance with Discretionary Spending Caps (By fiscal year)

Actual

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

In Billions of Dollars

Revenues

Individual income 737 783 792 810 840 886 922 974 1,027 1,083 1,143 1,207

Corporate income 182 197 200 200 200 203 209 216 224 232 241 250

Social insurance 539 573 600 625 651 679 710 743 781 817 856 892

Other 120 127 147 149 155 161 167 173 177 181 187 191

Total 1,579 1,680 1,738 1,784 1,847 1,930 2,008 2,105 2,208 2,314 2,426 2,540

On-budget 1,187 1,262 1,300 1,326 1,369 1,432 1,487 1,559 1,634 1,712 1,796 1,882

Off-budget 392 417 438 458 477 498 521 546 574 601 630 658

Outlays

Discretionary

Defense 272 269 267 284 286 297 306 316 329 336 343 357

Nondefense 277 288 295 311 320 329 338 348 357 368 379 391

Unspecified reductionsa 0 0 0 -31 -43 -66 -68 -71 -77 -78 -79 -87

Subtotal 548 558 561 565 564 560 576 592 609 626 643 661

Mandatory Spending 896 951 1,004 1,060 1,123 1,176 1,250 1,322 1,417 1,477 1,570 1,672

Offsetting Receipts -87 -82 -82 -85 -91 -103 -97 -101 -107 -113 -119 -126

Net interest 244 245 247 243 237 230 226 221 215 209 202 194

Total 1,601 1,672 1,730 1,782 1,833 1,863 1,954 2,035 2,134 2,199 2,297 2,402

On-budget 1,291 1,355 1,405 1,447 1,486 1,504 1,581 1,647 1,729 1,777 1,856 1,942

Off-budget 311 317 325 335 347 359 373 388 404 422 441 461

Deficit (-) or Surplus -22 8 9 1 13 67 53 70 75 115 130 138

On-budget -103 -92 -104 -121 -117 -72 -94 -88 -96 -64 -59 -59

Off-budget 81 100 113 122 130 138 148 158 170 179 189 197

Debt Held by the Public 3,771 3,774 3,781 3,793 3,795 3,743 3,706 3,651 3,591 3,491 3,375 3,251

Memorandum:

Gross Domestic Product 7,972 8,369 8,729 9,097 9,499 9,933 10,405 10,909 11,431 11,973 12,539 13,129

(Continued)
APPENDIX A CBO BASELINE BUDGET PROJECTIONS 33

Table A-4.

Continued

Actual

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

As a Percentage of Gross Domestic Product

Revenues

Individual income 9.3 9.4 9.1 8.9 8.8 8.9 8.9 8.9 9.0 9.0 9.1 9.2

Corporate income 2.3 2.4 2.3 2.2 2.1 2.0 2.0 2.0 2.0 1.9 1.9 1.9

Social insurance 6.8 6.8 6.9 6.9 6.9 6.8 6.8 6.8 6.8 6.8 6.8 6.8

Other 1.5 1.5 1.7 1.6 1.6 1.6 1.6 1.6 1.5 1.5 1.5 1.5

Total 19.8 20.1 19.9 19.6 19.4 19.4 19.3 19.3 19.3 19.3 19.3 19.3

On-budget 14.9 15.1 14.9 14.6 14.4 14.4 14.3 14.3 14.3 14.3 14.3 14.3

Off-budget 4.9 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0

Outlays

Discretionary

Defense 3.4 3.2 3.1 3.1 3.0 3.0 2.9 2.9 2.9 2.8 2.7 2.7

Nondefense 3.5 3.4 3.4 3.4 3.4 3.3 3.2 3.2 3.1 3.1 3.0 3.0

Unspecified reductionsa 0 0 0 -0.3 -0.4 -0.7 -0.7 -0.7 -0.7 -0.7 -0.6 -0.7

Subtotal 6.9 6.7 6.4 6.2 5.9 5.6 5.5 5.4 5.3 5.2 5.1 5.0

Mandatory Spending 11.2 11.4 11.5 11.7 11.8 11.8 12.0 12.1 12.4 12.3 12.5 12.7

Offsetting Receipts -1.1 -1.0 -0.9 -0.9 -1.0 -1.0 -0.9 -0.9 -0.9 -0.9 -0.9 -1.0

Net Interest 3.1 2.9 2.8 2.7 2.5 2.3 2.2 2.0 1.9 1.7 1.6 1.5

Total 20.1 20.0 19.8 19.6 19.3 18.8 18.8 18.7 18.7 18.4 18.3 18.3

On-budget 16.2 16.2 16.1 15.9 15.6 15.1 15.2 15.1 15.1 14.8 14.8 14.8

Off-budget 3.9 3.8 3.7 3.7 3.7 3.6 3.6 3.6 3.5 3.5 3.5 3.5

Deficit (-) or Surplus -0.3 0.1 0.1 b 0.1 0.7 0.5 0.6 0.7 1.0 1.0 1.1

On-budget -1.3 -1.1 -1.2 -1.3 -1.2 -0.7 -0.9 -0.8 -0.8 -0.5 -0.5 -0.5

Off-budget 1.0 1.2 1.3 1.3 1.4 1.4 1.4 1.4 1.5 1.5 1.5 1.5

Debt Held by the Public 47.3 45.1 43.3 41.7 39.9 37.7 35.6 33.5 31.4 29.2 26.9 24.8

SOURCE: Congressional Budget Office.

a. These reductions represent the cuts that would be needed to comply with the statutory caps in 2000 through 2002 and the effects of those cuts

projected into the future. In 1999, the law specifies separate cuts for defense and nondefense (including cuts for violent crime) outlays.

b. Less than 0.05 percent.
34 AN ANALYSIS OF THE PRESIDENT'S BUDGETARY PROPOSALS FOR FISCAL YEAR 1999 March 1998

Table A-5.

CBO Baseline Projections for Mandatory Spending (By fiscal year, in billions of dollars)

Actual

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Means-Tested Programs

Medicaid 96 101 108 115 123 131 141 152 165 179 194 210

Child Health Insurance a 1 3 4 4 4 4 4 4 4 4 5

Food Stamps 23 21 22 23 25 26 27 28 29 30 31 32

Supplemental Security Income 27 27 29 30 32 33 35 37 43 42 40 46

Family Supportb 17 18 21 22 23 23 24 24 25 25 25 25

Veterans' Pensions 3 3 3 3 3 3 4 4 4 4 4 4

Child Nutrition 8 9 9 10 10 11 11 12 12 13 14 14

Earned Income Tax Creditc 22 22 25 26 27 28 28 29 29 30 30 31

Student Loans 4 4 4 4 5 5 5 5 5 5 5 6

Other 4 4 5 5 6 6 6 7 7 8 8 9

Total 203 210 229 243 256 270 285 302 323 339 356 382

Non-Means-Tested Programs

Social Security 362 376 391 409 428 449 471 495 522 551 582 614

Medicare 208 218 231 244 268 277 306 330 367 377 417 448

Subtotal 570 594 622 652 695 726 777 826 889 928 999 1,063

Other Retirement and Disability

Federal civiliand 46 48 50 52 55 58 61 64 68 72 76 80

Military 30 31 32 33 34 36 37 38 39 40 41 42

Other 4 5 5 5 5 5 5 5 5 5 5 6

Subtotal 81 84 87 91 95 98 103 107 112 117 122 128

Unemployment Compensation 21 20 22 24 26 28 29 31 32 33 35 36

Deposit Insurance -14 -5 -4 -3 -2 -1 -1 -1 -1 -1 -1 -1

Other Programs

Veterans' benefitse 19 21 21 23 24 25 27 28 32 31 31 34

Farm price and income supports 676655555555

Social services 5 5 5 6 6 6 6 6 6 6 6 6

Credit reform liquidating accounts -10 -6 f -5 -6 -6 -6 -6 -6 -6 -6 -6

Other 17 22 14 24 24 25 25 24 24 24 24 25

Subtotal 37 48 47 52 53 55 57 57 61 60 60 64

Total 694 741 775 817 867 906 965 1,020 1,093 1,138 1,214 1,290

All Mandatory Spending

Total 896 951 1,004 1,060 1,123 1,176 1,250 1,322 1,417 1,477 1,570 1,672

SOURCE: Congressional Budget Office.

NOTE: Spending for benefit programs shown above generally excludes administrative costs, which are discretionary. Spending for Medicare also

excludes premiums, which are considered offsetting receipts.

a. The State Children's Health Insurance Program was created as part of the Balanced Budget Act of 1997.

b. Includes Temporary Assistance for Needy Families, Family Support, Aid to Families with Dependent Children, Job Opportunities and Basic Skills,

Contingency Fund for State Welfare Programs, Child Care Entitlements to States, and Children's Research and Technical Assistance.

c. Includes outlays from the child credit enacted in the Taxpayer Relief Act of 1997.

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

e. Includes veterans' compensation, readjustment benefits, life insurance, and housing programs.

f. Less than $500 million.
APPENDIX A CBO BASELINE BUDGET PROJECTIONS 35

Table A-6.

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

1999 2000 2001 2002

Budget Authority

Capsa 533 537 542 551

Amount Needed to Preserve 1998

Real Resources

Defense 277 286 295 303

Domestic and international 266 276 285 294

Violent crime reduction 6 6 6 6

Total 549 568 585 604

Amount over or under (-) caps 17 31 44 53

Amount Needed to Freeze 1998 Dollar

Resources

Defense 269 269 269 269

Domestic and international 256 256 256 256

Violent crime reduction 6 6 6 6

Total 530 530 530 530

Amount over or under (-) caps -3 -7 -12 -21

Outlays

Capsa 561 565 564 560

Amount Needed to Preserve 1998

Real Resources

Defense 275 284 286 297

Domestic and international 297 306 314 323

Violent crime reduction 5 5 6 6

Total 577 595 607 626

Amount over or under (-) caps 16 30 43 66

Amount Needed to Freeze 1998 Dollar

Resources 

Defense 268 270 265 267

Domestic and international 293 294 292 289

Violent crime reduction 5 5 6 6

Total 565 569 562 561

Amount over or under (-) caps 4 4 -2 1

SOURCE: Congressional Budget Office.

NOTE: Amounts needed to preserve 1998 real resources include adjustments for inflation of about 3 percent a year. Amounts needed to freeze 1998

dollar resources include no adjustment for inflation. There are no discretionary caps after 2002.

a. The caps reflect discretionary spending limits as specified by the Office of Management and Budget in the sequestration preview report included

in the President's budget.
36 AN ANALYSIS OF THE PRESIDENT'S BUDGETARY PROPOSALS FOR FISCAL YEAR 1999 March 1998

Table A-7.

CBO Projections of Interest Costs and Federal Debt (By fiscal year)

Actual

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Net Interest Outlays (Billions of dollars)

Interest on Public Debt

(Gross interest)

a 356 365 372 377 380 383 388 394 400 406 411 416

Interest Received by Trust Funds

Social Security -41 -46 -53 -59 -65 -72 -79 -87 -96 -105 -115 -126

Other trust fundsb -64 -67 -66 -69 -71 -73 -75 -78 -80 -82 -84 -87

Subtotal -105 -113 -119 -128 -136 -145 -155 -165 -176 -188 -200 -212

Other Interestc -7 -7 -6 -6 -7 -7 -8 -8 -9 -9 -10 -10

Total 244 245 247 243 237 230 226 221 215 209 202 194

Federal Debt at the End of the Year (Billions of dollars)

Gross Federal Debt 5,370 5,523 5,707 5,906 6,100 6,253 6,428 6,594 6,762 6,898 7,026 7,145

Debt Held by Government Accounts

Social Security 631 732 845 967 1,097 1,235 1,383 1,541 1,711 1,890 2,079 2,277

Other accountsb 968 1,017 1,081 1,145 1,208 1,274 1,340 1,402 1,460 1,517 1,571 1,617

Subtotal 1,599 1,748 1,925 2,113 2,305 2,509 2,722 2,943 3,171 3,407 3,651 3,894

Debt Held by the Public 3,771 3,774 3,781 3,793 3,795 3,743 3,706 3,651 3,591 3,491 3,375 3,251

Debt Subject to Limitd 5,328 5,482 5,667 5,867 6,062 6,217 6,394 6,562 6,732 6,869 7,000 7,119

Federal Debt as a Percentage of GDP

Debt Held by the Public 47.3 45.1 43.3 41.7 39.9 37.7 35.6 33.5 31.4 29.2 26.9 24.8

SOURCE: Congressional Budget Office.

NOTE: Projections of interest and debt assume that discretionary spending will equal the statutory caps that are in effect through 2002 and will grow

at the rate of inflation in succeeding years.

a. Excludes interest costs of debt issued by agencies other than the Treasury (primarily the Tennessee Valley Authority).

b. Principally Civil Service Retirement, Military Retirement, Medicare, unemployment insurance, and the Highway and the Airport and Airway Trust

Funds.

c. Primarily interest on loans to the public.

d. Differs from the gross federal debt primarily because most debt issued by agencies other than the Treasury is excluded from the debt limit.
T

Appendix B

The Administration's Medicare

Buy-In Proposals

he President's budget contains two proposals

intended to increase health insurance coverage

by expanding the federal Medicare program.

First, the Administration proposes to allow certain people ages 62 to 64 to purchase Medicare coverage. To

the extent that premiums paid at those ages did not

cover the cost of the additional benefits provided, participants would have to pay an additional premium

from ages 65 to 84. Second, the Administration proposes to allow displaced workers ages 55 to 61 to purchase Medicare coverage. Under the Administration's

proposal, the government would not attempt to recover

the cost of adverse selection in that program.1

In both programs, costs to the federal government

would be held down by the high cost of the specified

premiums and the stringency of the eligibility criteria.

The Congressional Budget Office estimates that by

2003, only 6 percent of people ages 62 to 64 and 0.1

percent of people ages 55 to 61 would be eligible and

choose to participate. If the premiums were reduced or

the eligibility requirements were relaxed, participation

in the programs could be greater and federal costs could

be higher. Changes in assumptions about how people

would respond to the new programs could also significantly affect the cost estimates.

Medicare Buy-In for People

Ages 62 to 64

The Administration proposes to allow people ages 62

to 64 to enroll voluntarily in Medicare. Enrollment

would be limited to people who do not have

employment-based health insurance or Medicaid, and

they would have to enroll as soon as they were eligible.

Events that would qualify people for enrollment would

include turning age 62 or losing employment-based

health insurance under certain circumstances between

ages 62 and 64.

Medicare premiums under the buy-in would be paid

in two parts, both of which would be updated annually:

o Premiums paid before age 65 would be set at a rate

that would reflect the average expected cost of benefits if everyone ages 62 to 64 participated in the

buy-in&about $310 a month in 1999 (plus an additional $6 a month for administrative costs). Premiums would be adjusted for geographic variation in

Medicare costs.

o Premiums paid at age 65 and thereafter would be

set to recapture for the government the extra benefits Medicare would pay as a result of risk selection. Those premiums would be based on the estimated difference between the pre-65 premium and

the higher average costs of people who would

choose to participate. Enrollees would continue to

pay post-65 premiums until they reached age 85.

1. The description and analysis of the Administration's proposals are

based on information available to the Congressional Budget Office in

late February.
38 AN ANALYSIS OF THE PRESIDENT'S BUDGETARY PROPOSALS FOR FISCAL YEAR 1999 March 1998

To help reduce adverse risk selection, the President's

plan would limit enrollment opportunities, prohibit

reenrollment, and require buy-in participants who

dropped Medicare before age 65 to pay the full post-65

premium for the year in which they dropped coverage.

Potential enrollees would decide whether to purchase coverage based on their comparison of the price

of Medicare and the price of the private insurance available to them. The Medicare price is the pre-65 premium, which would be paid during the buy-in years,

plus an amount that represents enrollees' perceptions of

the present value of the post-65 premiums. If the price

for the Medicare buy-in was perceived to be $350 a

month, for example, most people who could obtain

other coverage for less than $350 a month would decline to enroll. People who otherwise would have to

pay more than $350, however, would be more likely to

sign up for Medicare. Assuming that Medicare's costs

under the buy-in would be related to the prices people

faced in the private market, covering the likely enrollees

in this example would cost more than $350 a month. If

the price was raised, the composition of enrollment

would change as well. Some people who could obtain

private coverage for less&those who would be the least

expensive to cover&would drop out, and the average

cost of covering the remaining people would rise.

The Congressional Budget Office's estimate assumes that potential enrollees would heavily discount

the extra premiums they would face after turning 65.

As a result, they would base their decision to purchase

Medicare on a price not much higher than the pre-65

premium alone. Under that assumption, and the assumption that Medicare's pre-65 premiums would be

about 33 percent less than the private premiums that

people of average risk would be charged for a comparable package of benefits, CBO estimates that 320,000

people would participate in 1999; 390,000 in 2003;

and almost 500,000 in 2008. The estimate assumes

that adverse selection would be a relatively limited

problem and that the post-65 premiums would allow

the program to cover its costs over the expected lifetime

of each cohort of participants.

CBO estimates that Medicare costs for people who

enrolled in 1999 would average about $389 a month,

about 25 percent more than the pre-65 premium of

$310. To recapture that difference, Medicare would

add about $10 a month to participants' Part B premiums for each year they participated in the buy-in.

Those purchasing Medicare for all three years of the

buy-in period starting in 1999 would pay an additional

$31 a month from ages 65 to 84.

Budgetary Impact and Comparison

with the Administration's Estimate

CBO estimates that the Medicare buy-in for people

ages 62 to 64 would raise outlays for Medicare benefits

by $8.9 billion over the 1999-2003 period. Pre-65 premiums would total $7.3 billion, and post-65 premiums

would amount to $0.2 billion (see Table B-1). The net

increase in Medicare spending would be $1.3 billion,

roughly the same as the Administration's estimated net

cost of $1.4 billion over five years. Of the 320,000

people who would participate in 1999, two-thirds

would otherwise have purchased private individual coverage, and about 30 percent would have been uninsured.

The remainder would consist of people induced to retire

because of the buy-in option.

CBO's estimates of the net cost of the buy-in are

similar to the Administration's, although CBO's estimates of participation are higher. Overall, CBO concluded that participants would cost about 45 percent

more than the average cost of the entire newly eligible

group and about 25 percent more than the pre-65 premiums they would pay. The Administration estimated

that participants would cost about 50 percent more than

their pre-65 premiums. CBO's estimate of net costs per

participant is lower for two reasons: it reflects the fact

that some high-cost people in the eligible age group

would already have Medicare because of a disability,

and secondarily, it assumes higher estimated participation and slightly lower adverse selection. Reflecting the

larger gap between the costs of coverage and pre-65

premiums, the Administration estimated that post-65

premiums would initially be about $14 a month for

each year of participation&higher than CBO's estimate

of $10 a month.

Like the Administration, CBO assumed that approximately 1 percent of people ages 62 to 64 would

retire if they could obtain health insurance through the

Medicare buy-in. As a result, Social Security benefits

would increase by about $0.2 billion a year. CBO further assumed that employers' coverage of retirees would

fall by about 10 percent as a result of the buy-in, reduc-
APPENDIX B THE ADMINISTRATION'S MEDICARE BUY-IN PROPOSALS 39

ing employers' costs and thereby increasing federal tax

revenues slightly. The estimate also includes additional

costs to Medicaid for the post-65 premiums. In total,

CBO estimates that the proposal would cost $1.9 billion over the 1999-2003 period.

Basis of the Estimate

CBO's estimates of federal costs for the buy-in proposal for people ages 62 to 64 were based on several

sources: population projections made by the Social

Table B-1.

Medicare Buy-In for People Ages 62 to 64 (By fiscal year, in billions of dollars)

1999 2000 2001 2002 2003

Total,

1999-2003

Direct Spending

Medicare Outlays

Benefits 1.0 1.7 1.8 2.1 2.3 8.9

Premiums

Pre-65 -0.9 -1.3 -1.5 -1.7 -1.9 -7.3

Post-65 0 a a -0.1 -0.1 -0.2

Subtotal -0.9 -1.4 -1.5 -1.7 -2.0 -7.6

Outlays Net of Premiums 0.1 0.3 0.3 0.3 0.3 1.3

Social Security Benefit Payments 0 0.2 0.2 0.2 0.2 0.7

Medicaid Outlays 0 b b b b b

Total 0.1 0.5 0.5 0.5 0.5 2.0

Revenues

Corporate Profits and Other Taxes 0 b b b b 0.1

Total Cost of the Medicare Buy-In for People Ages 62 to 64

Total 0.1 0.5 0.5 0.4 0.4 1.9

Memorandum (Calendar year):

Participation 320,000 330,000 350,000 370,000 390,000

Pre-65 Monthly Premium (Dollars)c 310 326 346 368 394

Pre-65 Estimated Monthly Cost of 

 Those Participating (Dollars) 389 407 431 456 486

Post-65 Monthly Premium per Year 

 of Participation (Dollars) 10 10 11 11 11

SOURCE: Congressional Budget Office.

NOTE: The estimate assumes that the buy-in would become available on January 1, 1999. The Administration’s estimate assumes that it would

become available on July 1, 1999.

a. Offsetting receipts of less than $50 million.

b. Outlays or revenues of less than $50 million.

c. Premiums shown are for benefit costs only, to be comparable with the premiums reported by the Administration. An allowance for administrative

costs would increase those premium amounts by about 2 percent each year (making the 1999 pre-65 premium equal to $316 a month).
40 AN ANALYSIS OF THE PRESIDENT'S BUDGETARY PROPOSALS FOR FISCAL YEAR 1999 March 1998

Security Administration, the March 1997 Current Population Survey (CPS), and Medicare claims and administrative data. 

Eligibility. Population projections by the Social Security Administration indicate that 6.3 million people will

be ages 62 to 64 in 1999. Of that number, about 13

percent will already have Medicare because of a disability or renal disease, and another 10 percent will have

Medicaid or other public coverage. Thus, only about

77 percent of all people ages 62 to 64&or 4.8 million

people&would be potentially eligible for the buy-in.

Of those people, 1.6 million would be immediately eligible because they are uninsured or have only private

individual insurance. The other 3.2 million would not

be immediately eligible because they have employmentsponsored insurance, but they would become eligible if

they lost that coverage.

Participation. Using the Current Population Survey,

CBO estimated participation in the buy-in for four distinct types of people.

o Those who lack insurance coverage (about 1 million people in 1999). CBO assumed that among

this group, people in poor health with high income

(greater than three times the poverty level) and residing in states without community rating in the

individual insurance market would all participate in

the buy-in. For the remainder, the probability of 2

participation was assumed to depend on the percentage reduction in the price of insurance (the

price of the buy-in relative to the price in the private individual market). Overall, about 9 percent 3

of this group would participate in the buy-in.

o Those who purchase individual heath insurance

in the private market (600,000 people). The more

these people would save in insurance premiums by

switching to Medicare, the more likely they would

be to do so. Even if the Medicare premium was the

same as the private premium, CBO assumed that

10 percent would switch to the buy-in because of

the greater assurance of its continued availability at

affordable prices. CBO further assumed that the

probability of participation would increase by 10

percentage points for each additional $10 difference in premiums, up to a maximum of 80 percent

participation. Finally, CBO assumed that 20 percent of those in the private insurance market would

not switch regardless of the amount they could

save. Under these assumptions, about 35 percent

of this group would take advantage of the buy-in.

o Those who are working and covered by

employment-based insurance (1.8 million people).

CBO assumed that 1 percent of this group would

be induced to retire because of the buy-in option.4

All of those retirees would participate in the buy-in.

o Retirees whose employers currently offer retiree

health insurance (1.5 million people). This group

is expected to diminish in number in the coming

years, and the buy-in option would accelerate that

decline. In the absence of the buy-in, people in this

group who no longer had access to employmentbased insurance would either purchase individual

coverage in the private market or remain uninsured

until they became eligible for Medicare. CBO used

logistic regression to predict who would purchase

individual coverage and who would remain uninsured. Using the methods described above, CBO

then determined the probability that people would

participate in the buy-in. By 2003, an estimated 3

percent of this group would take advantage of the

buy-in.

Premiums. The price individuals face in the private

insurance market would vary based on their health status, the insurance regulations in their state, the level of

medical costs in their state, and the administrative costs

of the private insurance. Medicare's buy-in premium in

a given year would vary by only one factor&the level of

medical costs in the state.

Under CBO's projections of Medicare costs, the

pre-65 Medicare premium in 1999 would average $310

a month for benefit costs, plus an estimated 2 percent&

or $6 a month&for administrative costs. However, the 2. Under pure community rating, everyone pays the same premium, regardless of age or health status. Under modified community rating,

premiums may vary by age group but not by health status.

3. See Congressional Budget Office, Behavioral Assumptions for Estimating the Effects of Health Care Proposals, CBO Memorandum

(November 1993).

4. See J. Gruber and B. Madrian, "Health Insurance Availability and the

Retirement Decision," American Economic Review, vol. 85, no. 4

(September 1995), pp. 938-948.
APPENDIX B THE ADMINISTRATION'S MEDICARE BUY-IN PROPOSALS 41

actual premium that participants paid would vary by

geographic area. CBO made adjustments for differences among states' Medicare costs based on the 1997

AAPCC. (The AAPCC is the adjusted average per capita cost of Medicare in a county; values for states were

calculated as a weighted average of county values.) In

addition to the pre-65 premium, CBO estimated an

amount to reflect participants' perception of the additional costs they would incur for the post-65 premiums

for which they would be liable in later years. That perceived amount was estimated as the present value (at

the start of the buy-in year) of the post-65 premiums

they would pay for that buy-in year, using a 30 percent

discount rate and the expected remaining lifetime for a

65-year-old person. In estimating the post-65 premium, CBO assumed that people participating in the

buy-in would have mortality rates similar to other people their age.

Medicare Costs. Based on Medicare claims data,

CBO estimates that people who would be newly eligible for Medicare under the buy-in proposal would cost

the program about 85 percent of the average cost of

everyone ages 62 to 64 if they all enrolled. About 13

percent of all people in the eligible age group are already enrolled in Medicare because of a disability or

renal disease, and that excluded group is a relatively

costly one. Nevertheless, the average cost to Medicare

for participants in the buy-in is expected to exceed the

pre-65 premium by about 25 percent because of adverse selection among those eligible to participate.

Uncertainties in the Estimate. One of the most important areas of uncertainty is the extent to which eligible people would discount the post-65 premiums for

which they would be liable if they participated in the

buy-in. The two-part premium structure is designed to

prevent the rising premiums and declining enrollment

(termed a "death spiral") that would otherwise tend to

develop. Medicare would be the insurer of last resort,

because private insurers (except in the few states with

community rating and guaranteed issue) could selectively enroll the healthier members of the group eligible

for the buy-in. If the pre-65 premium was set to cover

fully the costs of people expected to select the buy-in

option, it would steadily increase relative to premiums

in the private market, leading to declining participation

and ever greater adverse selection for the buy-in plan.

The two-part premium structure would avoid a death

spiral only if buy-in participants heavily discounted the

post-65 premiums, so that the cost they perceived for

the buy-in option was not much higher than the pre-65

premium.

CBO's estimates assume that individuals would

discount future premiums much more heavily than the

rate the government pays to borrow funds. If, however,

they used the same discount rate as the government (6

percent), participation would be much lower and net

costs would be higher&$2 billion from 1999 through

2003 (see the table below). If individuals took no account of future premiums (that is, they had an infinite

discount rate), participation would be higher and net

costs would be slightly lower because there would be

less adverse selection.

 Alternative

Assumptions

1999

Participation

Medicare

Costs,

1999-2003

(Billions

of dollars)

CBO Estimate 320,000 1.3

Individuals’ 

Discount Rate

6 percent 160,000 2.0

Infinite 360,000 1.1

Difference in 

Premium Between

Medicare and 

Private Insurance 

for People of 

Average Risk

20 percent 170,000 2.1

45 percent 420,000 0.7

Changes in other assumptions could also affect the

estimates significantly. For example, if the premiums

that people of average risk would be charged for comparable individual insurance in the private market exceeded Medicare premiums by 20 percent instead of the

assumed 33 percent, participation in the buy-in would

be much lower but net costs would be higher because of

greater adverse selection. Conversely, if private premiums exceeded Medicare premiums by a greater amount,

participation would be higher and costs would be lower.
42 AN ANALYSIS OF THE PRESIDENT'S BUDGETARY PROPOSALS FOR FISCAL YEAR 1999 March 1998

Medicare Buy-In for Displaced

Workers Ages 55 to 61

The Administration also proposes to allow a limited

number of workers ages 55 to 61 (and their spouses)

who lose health insurance because of a job loss to buy

in to the Medicare program. Unlike the buy-in for people ages 62 to 64, this program would be available only

to people who met several eligibility requirements related to losing their job. Those requirements include

having received employment-based health insurance

coverage for the 12 months before losing their job, being eligible for unemployment insurance benefits, and

exhausting the 18 months of continued coverage that is

available under the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA).5

Premiums for the buy-in for displaced workers

would be set at $400 a month per person in 1999 and

would be updated annually. CBO assumed that updates

would reflect the growth of costs per capita in the

Medicare program. Premiums would also be adjusted

for geographic differences in costs. By design, premiums would not fully cover the costs of the program.

Budgetary Impact and Comparison

with the Administration's Estimate

The combination of stringent eligibility requirements

and relatively high premiums would result in limited

participation&about 18,000 full-year-equivalents in

2003. Those most likely to enroll would be people with

medical expenditures that were higher than average for

their age. Over the 1999-2003 period, Medicare costs

would increase by almost $470 million, and premium

collections would total about $340 million. The net

increase in Medicare outlays would be about $130 million over that period (see Table B-2). The proposal

would also encourage a small number of additional

workers to seek unemployment insurance, raising federal outlays for unemployment compensation by an estimated $9 million over five years.

The Administration estimated that Medicare costs

for workers ages 55 to 61 would amount to $1.4 billion

and that premium collections would total $1.2 billion

between 1999 and 2003. According to the Administration, the net increase in Medicare spending under the

buy-in would be about $160 million, based on estimated enrollment that would rise to 80,000 in 2003.

Basis of the Estimate

The Survey of Income and Program Participation

(SIPP)&with its monthly information on respondents'

work status, receipt of unemployment insurance, and

health insurance coverage&was used to estimate the

number of people who would participate in the program.

Eligibility. Using the SIPP data, CBO directly estimated the number of people who would meet the eligibility rules for unemployment insurance and a year of

health insurance coverage before losing their job.

Those data also provided information on the frequency

of use of COBRA coverage by people who would meet

other eligibility requirements for the program and the

extent of other insurance coverage. CBO assumed that

people with access to less expensive coverage, such as

employment-based insurance with a contribution from

an employer, would not purchase Medicare for $400 a

month. SIPP also provided evidence on the distribution

of hospital use and physician visits by the eligible population; that information was used to estimate the costs

of people likely to participate in the buy-in.

Participation. About 1 million people ages 55 to 61

are estimated to become eligible for unemployment insurance in a typical year. Only about half of them

would meet the requirement of having employmentbased insurance throughout their last 12 months of

work. Furthermore, most of them would continue to

have access to less expensive health insurance coverage

after separating from their job. Thus, fewer than

190,000 workers annually would meet the requirement

for unemployment insurance, have had enough insur5. CBO used those eligibility rules for its estimates, based on information

received in February from the Office of Management and Budget.

Proposed legislation recently released by the Administration, however,

incorporates less restrictive requirements for prior coverage. In particular, any "creditable coverage" (as defined in the Health Insurance

Portability and Accountability Act of 1996) would count toward the

requirement for 12 months of prior coverage, provided the worker had

been enrolled in the employer's plan at the time of separation. Thus,

COBRA coverage would count toward the 12-month requirement

rather than being a separate, additional requirement. Those looser

requirements would increase CBO's estimates of coverage and costs.
APPENDIX B THE ADMINISTRATION'S MEDICARE BUY-IN PROPOSALS 43

ance on their previous job, and have gone through a

period in which they had no access to less expensive

coverage.

Of the eligible people who might be interested in

enrolling in Medicare, about 80 percent would have

worked at a firm of 20 or more employees. They would

therefore be required to purchase COBRA coverage

through their former employer for 18 months before

being allowed to buy in to Medicare. The vast majority

of workers in those circumstances either do not choose

COBRA coverage at all or do not remain on COBRA

for very long; therefore, they would not become eligible

for the Medicare buy-in. Although workers from small

firms do not have access to COBRA coverage, most of

them would not purchase individual insurance at market

rates.

People eligible to enroll in Medicare would also

consider the options available to them in the private

market for individual insurance. The $400 Medicare

monthly premium would be about 50 percent higher

than the expected Medicare cost of the average person

ages 55 to 61. Therefore, people with average or relatively good health for their age would probably opt for

private coverage rather than pay for the Medicare displaced workers program. In states with relatively

strong community-rating laws, the Medicare buy-in

would be even less desirable compared with private

coverage.

Medicare Costs. Risk selection would result in net

costs of about $130 million over the 1999-2003 period.

The displaced workers (and spouses) who would

choose the buy-in would tend to be relatively high

health risks who could not obtain a less expensive policy in the marketplace. That selection would result in a

pool of participants whose average costs exceeded the

$400 buy-in premium, resulting in net costs to Medicare.

Table B-2.

Medicare Buy-In for Displaced Workers Ages 55 to 61 (By fiscal year, in millions of dollars)

1999 2000 2001 2002 2003

Total,

1999-2003

Medicare Outlays

Benefits 13 71 102 127 152 465

Premiums -9 -51 -74 -92 -110 -337

Outlays Net of Premiums 4 20 28 35 42 128

Unemployment Compensation 0 2 2 3 3 9

Total Cost 4 21 30 37 45 137

Memorandum (Calendar year):

Full-Year-Equivalent Participation 2,000 10,000 14,000 16,000 18,000

Monthly Premium (Dollars) 400 420 447 475 508

Estimated Monthly Cost of Those

 Participating (Dollars) 552 580 617 656 702

SOURCE: Congressional Budget Office.

NOTE: CBO’s estimates are based on information about the program’s eligibility rules received in February from the Office of Management and

Budget. Those rules would require displaced workers to have been enrolled in their employer’s health plan for at least 12 months before

losing their job and, in addition, to have exhausted their 18 months of COBRA coverage. Proposed legislation recently released by the

Administration, however, incorporates less restrictive requirements for prior coverage. Although 12 months of previous health insurance

coverage would still be required, COBRA coverage would count toward that requirement. Those looser requirements would increase CBO’s

estimates of coverage and costs.

T

Appendix C

Major Contributors to the

Revenue and Spending Projections

he following Congressional Budget Office analysts prepared the revenue and spending projections in this

report:

Revenue Projections

Mark Booth Corporate income taxes, Federal Reserve System earnings, excise taxes

Noah Meyerson Social insurance taxes

Larry Ozanne Capital gains realizations

John Sabelhaus Estate and gift taxes

Sean Schofield Excise taxes

Alyssa Trzeszkowski Customs duties, miscellaneous receipts

David Weiner Individual income taxes

Spending Projections

Defense, International Affairs, and Veterans’ Affairs

Valerie Barton Military retirement, veterans’ education

Shawn Bishop Veterans’ health care, military health care

Kent Christensen Defense (military construction, base closures)

Jeannette Deshong Defense (military personnel, NATO expansion, and other international 

 agreements)

Sunita D’Monte International affairs (conduct of foreign affairs and information exchange

activities), veterans’ housing

Raymond Hall Defense (Navy weapons, missile defenses, atomic energy defense)

Charles Riemann Veterans' compensation and pensions

Dawn Sauter Intelligence programs and defense acquisition reform

JoAnn Vines Defense (tactical air forces, bombers)

Joseph Whitehill International affairs (development, security, international financial institutions)
46 AN ANALYSIS OF THE PRESIDENT'S BUDGETARY PROPOSALS FOR FISCAL YEAR 1999 March 1998

Health

Tom Bradley Medicare Part A, managed care

Jeanne De Sa Medicaid, State Children's Health Insurance Program

Cynthia Dudzinski Public Health Service, Medicare

Anne Hunt Public Health Service, Medicare

Jennifer Jenson Public Health Service, Medicare

Jeffrey Lemieux Medicare Part B, federal employee health benefits, national health expenditures

Dorothy Rosenbaum Medicaid, State Children's Health Insurance Program

Human Resources

Sheila Dacey Child support enforcement, Temporary Assistance for Needy Families

Deborah Kalcevic Education

Josh O'Harra Human resources

Justin Latus Education, foster care, child care

Carla Pedone Housing assistance

Eric Rollins Federal Civilian Retirement, Supplemental Security Income

Dorothy Rosenbaum Social services, food stamps, child nutrition

Kathy Ruffing Social Security

Christi Hawley Sadoti Unemployment insurance, training programs

Natural and Physical Resources

Gary Brown Water resources, other natural resources, regional development

Kim Cawley Energy, pollution control and abatement

Clare Doherty Transportation

Rachel Forward Commerce, spectrum auction receipts, credit unions, Universal Service Fund

Mark Grabowicz Justice, Postal Service

Kathleen Gramp Energy, science and space

Victoria Heid Conservation and land management, Outer Continental Shelf receipts

David Hull Agriculture

Craig Jagger Agriculture

James Langley Agriculture

Kristen Layman Transportation, Indian affairs, disaster assistance

Mary Maginniss Deposit insurance, legislative branch

Susanne Mehlman Justice, Federal Housing Administration and other housing credit

David Moore Spectrum auction receipts

Deborah Reis Recreation, water transportation, community development

John Righter General government

Philip Webre Universal Service Fund

Other

Janet Airis Appropriation bills

Edward Blau Authorization bills

Jodi Capps Appropriation bills

Betty Embrey Appropriation bills

Kenneth Farris Computer support

Mary Froehlich Computer support
APPENDIX C MAJOR CONTRIBUTORS TO THE REVENUE AND SPENDING PROJECTIONS 47

Vernon Hammett Computer support

Jeffrey Holland Net interest on the public debt

Daniel Kowalski Credit programs, other interest

Catherine Mallison Appropriation bills

Alex Roginsky Computer support

Robert Sempsey Appropriation bills

Stephanie Weiner Budget projections, historical budget data

Jennifer Winkler National income and product accounts, civilian agency pay