An Ana lysis of the

President's Budgetary Proposals

for Fiscal Year 1983

FEBRUARY 1982

Prepared at the Request of the Senate Committee on Appropriations

CONGRESS OF THE UNITED STATES CONGRESSIONAL BUDGET OFFICE

AN ANALYSIS OF

THE PRESIDENT'S BUDGETARY PROPOSALS

FOR FISCAL YEAR 1983

The Congress of the United States

Congressional Budget Office
NOTES

Unless otherwise indicated, all years referred to in

this report are fiscal years.

Details in the text and tables of this report may not

add to totals because of rounding.
ERRATA Sheet

AN ANALYSIS OF THE PRESIDENT'S BUDGETARY PROPOSALS FOR

FISCAL YEAR 1983

Page xxv: In Summary Table 7, the 1982 estimate for the debt subject to

limit should be $1,143.0 billion (not $1,430.0 billion).

Page 74; The last line on this page is missing. It should read: "support

basic research in all science and engineering disciplines. For

fiscal"

Page 77; In the last sentence of the third paragraph, the Administration's estimate of commercial sales should be $2.0 billion (not

$2.1 billion).

Page 86; The third stub up from the bottom in the table should read

"Free Stock" (not Tree Stock).

Page 110; The last sentence of the fourth paragraph should read: "This

would increase projected program costs in 1984 and 1985 by

$279 million and $364 million."

Page 133; In the table for Function 750: Administration of Justice, the

1984 figure for the President's budget reestimated should be

$4,571 million (not $4,600 million).

Page 141; The last two sentences in the final paragraph should read:

"The deficits resulting from the CBO reestimates (excluding

the induced interest costs) exceed the Administration's estimates by about $12.5 billion in 1982, $26.1 billion in 1983,

$38.1 billion in 1984, and $54.3 billion in 1985 (excluding offbudget reestimates). The interest outlays resulting from these

higher levels of deficit financing rise from about $0.7 billion in

1982 to about $14.5 billion in 1985, as shown in the table at

the start of this function."

PREFACE

This analysis was prepared at the request of the Senate Committee on

Appropriations to provide Members an overview of the President's budgetary

proposals for fiscal year 1983. The report describes the problem of chronic

budget deficits faced by the federal government under existing tax laws and

current spending programs and the Administration's proposals for dealing

with this problem. It discusses the economic outlook and the assumptions

used for the February budget.

This report also presents the Congressional Budget Office's reestimates of the budgetary impact of the Administration's proposals based on

alternative economic assumptions and on CBO's technical estimating

methods and programmatic assumptions. Finally, the report analyzes in

some detail the major budget increases proposed for national defense

programs.

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

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

William J. Beeman, and James M. Verdier, respectively. Robert L. Faherty,

Patricia H. Johnston, Francis S. Pierce, and Johanna Zacharias edited the

manuscript. It was typed for publication by Barbara Bakari, Gwen Coleman,

Dorleen Dove, Susie Fominaya, Betty Jarrells, Thelma L. Jones, Brice

McDaniel, Paula Spitzig, and Nancy Wenzel.

Alice M. Rivlin

Director

February 1982

111

CONTENTS

PREFACE iii

SUMMARY xiii

CHAPTER I. THE ADMINISTRATION'S PROPOSALS .. . 1

The Budget Outlook Under

Current Policies 1

The Administration's Budget Proposals .. . 5

The Credit Budget 29

CHAPTER II. THE ADMINISTRATION'S ECONOMIC

ASSUMPTIONS 33

Economic Developments in 1981 33

Comparison of Administration and

CBO Forecasts for 1982 and 1983 . . . . 34

The Prospects for Growth Through 1987 .. . 37

Conclusion 41

CHAPTER III. CBO REVENUE REESTIMATES 43

Differences in Economic Assumptions. .. . 44

Technical Estimating Differences 48

CHAPTER IV. CBO OUTLAY REESTIMATES 55

Differences in Economic Assumptions. . . . 57

Technical Estimating Differences 62

Unevaluated Administration

Savings Estimates 64

Outlay Reestimates by Major Function .. . 65
CONTENTS (CONTINUED)

CHAPTER V. THE ADMINISTRATION'S DEFENSE

BUDGET 157

Defense Budget Growth

in Perspective 158

Growth in Forces, Major Purchases,

and Development 160

Risks of Underpr icing 169

Potential Reductions 173

APPENDIX. MAJOR CONTRIBUTORS TO THE

PREPARATION OF THIS REPORT . . . . 181

VI
TABLES

TABLE 1. THE BUDGET OUTLOOK UNDER

CURRENT POLICIES 3

TABLE 2. ESTIMATED REVENUE LOSSES RESULTING FROM

THE ECONOMIC RECOVERY TAX ACT OF 1981 . 4

TABLE 3. THE ADMINISTRATION'S PROPOSED DEFICIT

REDUCTIONS MEASURES 6

TABLE 4. THE ADMINISTRATION'S REVENUE

INCREASE PROPOSALS 8

TABLE 5. COMPOSITION OF REVENUES 10

TABLE 6. COMPOSITION OF OUTLAYS 13

TABLE 7. OUTLAYS FOR BENEFIT PAYMENTS

FOR INDIVIDUALS 17

TABLE 8. PROPOSED REDUCTIONS IN BENEFIT

PAYMENTS FOR INDIVIDUALS 18

TABLE 9. OUTLAYS FOR DIRECT GRANTS TO

STATE AND LOCAL GOVERNMENTS ... . 20

TABLE 10. OUTLAYS FOR OTHER FEDERAL OPERATIONS . . 22

TABLE 11. GROSS OUTLAYS FOR OTHER

FEDERAL OPERATIONS 23

TABLE 12. OUTLAYS OF OFF-BUDGET FEDERAL ENTITIES . . 24

TABLE 13. NET OUTLAYS OF THE

FEDERAL FINANCING BANK 26

TABLE 14. ESTIMATES OF DEBT SUBJECT

TO STATUTORY LIMIT 28

TABLE 15. TOTAL CREDIT BUDGET 30

TABLE 16. CHANGES IN THE 1983 CREDIT BUDGET TOTALS . 31

TABLE 17. COMPARISON OF ADMINISTRATION

AND CBO FORECASTS 34

TABLE 18. COMPARISON OF ADMINISTRATION AND

CBO LONG-RUN ECONOMIC ASSUMPTIONS . . 38

vii
TABLES (Continued)

TABLE 19.

TABLE 20.

TABLE 21.

TABLE 22.

TABLE 23.

TABLE 24.

TABLE 25.

TABLE 26.

TABLE 27.

TABLE 28.

TABLE 29.

TABLE 30.

TABLE 31.

TABLE 32.

CBO REESTIMATES OF ADMINISTRATION

BUDGET REVENUES

ADMINISTRATION BUDGET REVENUES

AND CBO REESTIMATES, BY SOURCE . . .

CBO REVENUE REESTIMATES,

BY SOURCE, BASED ON CBO

TECHNICAL ESTIMATING DIFFERENCES . .

REVENUE REESTIMATES BASED ON THE EFFECTS

OF ECONOMIC RECOVERY TAX ACT . . .

CBO REESTIMATES OF THE

ADMINISTRATION'S SPENDING PROPOSALS .

OUTLAY REESTIMATES BASED ON

CBO'S BASELINE ECONOMIC ASSUMPTIONS .

OUTLAY REESTIMATES BASED ON CBO'S

PESSIMISTIC ECONOMIC ASSUMPTIONS . .

CBO TECHNICAL OUTLAY REESTIMATES . . .

UNEVALUATED ADMINISTRATION

SAVINGS ESTIMATES

THE ADMINISTRATION'S DEFENSE BUDGET . .

SUMMARY OF MAJOR FORCES, MANPOWER,

AND PROCUREMENT LEVELS

ADMINISTRATION'S NAVY SHIPBUILDING

PROGRAM FOR 1983-1987 . . .

COMPARISON OF CARTER AND

REAGAN ADMINISTRATION AIRCRAFT

ACQUISITION PLANS, BY SERVICE . .

COMPARISON OF CARTER AND

REAGAN ADMINISTRATION PLANS TO

ACQUIRE STRATEGIC AND THEATER

NUCLEAR MISSILES, BY SERVICE . .

44

45

50

51

57

60

61

62

65

159

162

163

164

166

Vlll
TABLES (Continued)

TABLE 33.

TABLE 34.

TABLE 35.

TABLE 36.

TABLE 37.

TABLE 38.

TABLE 39.

COMPARISON OF CARTER AND

REAGAN ADMINISTRATION PLANS

TO ACQUIRE TACTICAL MISSILES ... .

COMPARISON OF CARTER AND

REAGAN ADMINISTRATION PLANS TO

ACQUIRE ARMORED COMBAT VEHICLES . .

PROPOSED FUNDING AND PERCENT OF REAL

GROWTH FOR READINESS ITEMS, BY SERVICE

COMPARISON OF CBO AND

ADMINISTRATION INFLATION

ASSUMPTIONS FOR DEFENSE PURCHASES

MAJOR WEAPONS SYSTEMS COST

GROWTH PER UNIT

MAJOR WEAPONS SYSTEMS COST

GROWTH IN THE 1983 PROGRAM . .

COMPARISON OF THE PRESIDENT'S

DEFENSE BUDGET WITH

ALTERNATIVE BUDGET PROJECTIONS

167

168

169

170

171

172

176

IX

FIGURES

CBO BASELINE BUDGET PROJECTIONS

Page

FIGURE 1. 2

FIGURE 2. FEDERAL BUDGET DEFICIT AS

A PERCENTAGE OF GNP 5

FIGURE 3. MAJOR SOURCES OF FEDERAL REVENUES .. . 12

FIGURE 4. PROPOSED CHANGE IN OUTLAYS

BETWEEN 1982 AND 1985 1*

FIGURE 5. THE COMPOSITION OF FEDERAL SPENDING .. . 15

FIGURE 6. FEDERAL DEBT 27

FIGURE 7. COMPONENTS OF NET FEDERAL CREDIT . .. . 32

FIGURE 8. COMPARISON OF MA30R

ECONOMIC ASSUMPTIONS 39

FIGURE 9. PERCENT CHANGE IN THE VELOCITY OF

MIB FROM TWO YEARS EARLIER 42

FIGURE 10. CBO OUTLAY REESTIMATES 55

FIGURE 11. BUDGET AUTHORITY FOR THE

DEPARTMENT OF DEFENSE 160

FIGURE 12. NATIONAL DEFENSE OUTLAYS

AS A PERCENTAGE OF

TOTAL OUTLAYS AND OF GNP 161

FIGURE 13. PERCENTAGE OF DEFENSE OUTLAYS

RESULTING FROM CURRENT AND

PRIOR YEAR BUDGET AUTHORITY . 175

XI

SUMMARY

The budget deficit for fiscal year 1982 is now expected to exceed

$100 billion. The sharp rise from previously estimated levels can be

attributed largely to the current economic recession, which was not

anticipated in last year's budget estimates by either the Administration or

the Congress. The economy is expected to recover during 1982 and to move

upward thereafter. But budget deficits are projected to increase steadily

for the foreseeable future, even after economic recovery, unless existing

tax and spending policies change.

The President's 1983 budget contains proposals—mostly affecting

spending policies—to reduce projected deficits during the next three years

by $239 billion. According to Administration estimates, adoption of these

proposals would result in only marginal reductions in the budget deficit from

the record high level of 1982. The Administration anticipates deficits of

$92 billion in 1983, $83 billion in 198*, and $72 billion in 1985, all substantially above the 1981 level of $58 billion.

The Congressional Budget Office (CBO) has analyzed the President's

budgetary proposals and finds that revenues are likely to be slightly lower

than projected by the Administration and outlays significantly higher.

Hence, even if the President's proposals are adopted, CBO estimates that

the budget deficit will climb steadily from an estimated $111 billion in 1982

to $121 billion in 1983, $129 billion in 198*, and $1*0 billion in 1985.

Furthermore, there is the possibility that the budget deficits could be even

larger, if tight credit conditions produce a weaker economy than assumed by

either the Administration or CBO.

THE BUDGET OUTLOOK UNDER CURRENT POLICIES

Under existing law, the future growth in federal revenues will be

sharply reduced from rates experienced over the past decade as a result of

the tax cuts contained in the Economic Recovery Tax Act of 1981. Without

further cuts in spending, budget outlays will grow at a faster rate than

revenues. Consequently, without steps to raise revenues or to lower the

growth in spending, the budget deficit will continue to grow.

This budget outlook is portrayed clearly by both the CBO baseline

budget projections and the Administration's projection of current services

xiii
(which includes the Administration's defense spending proposals). These

projections are shown in Summary Table 1.

SUMMARY TABLE 1. THE BUDGET OUTLOOK UNDER CURRENT

POLICIES (By fiscal year, in billions of dollars)

1981 1982 Projections

Actual Estimate 1983 198* 1985

CBO Baseline Projections

Revenues 602 631 652 701 763

Outlays 660 7*0 809 889 971

Deficit 58 109 157 188 208

Administration Current Services

Baseline with Proposed Defense

Spending Growth a/

Revenues

Outlays

Deficit

599

657

58

626

728

101

653

799

146

70*

869

165

778

9*6

168

a/ The President's 1983 budget has reclassified certain social insurance

contributions as offsetting collections to spending, thereby reducing

both revenues and outlays but leaving unchanged the deficit.

The budget deficit under baseline assumptions is projected by CBO as

almost doubling between 1982 and 1985, from $109 billion to $208 billion.

The Administration's projections also show a sharp rise in the budget deficit

during this period, although not quite so much as CBO's, largely because of

different economic assumptions. In the absence of tax increases or spending

reductions, the CBO projections show the deficit rising to 5.0 percent of

GNP in both 198* and 1985; the Administration's show it rising to

4.3 percent of GNP in 198* and *.0 percent in 1985. The last time the

budget deficit was this large relative to GNP was in 1976 when it was

4.0 percent as a result of the 197* recession.

xiv
THE ADMINISTRATION'S BUDGETARY PROPOSALS

President Reagan's budget for fiscal year 1983 recommends outlays of

$757.6 billion, revenues of $666.1 billion, and a unified budget deficit of

$91.5 billion. The main features of the President's 1983 budget include:

o No change in the scheduled individual income tax cuts enacted in

1981, but some significant increases in corporate taxes;

o Rapid real growth in defense spending;

o Further reforms in entitlement programs, but no reductions in

Social Security benefits;

o Additional cuts in discretionary nondefense spending programs;

and

o Substantial savings from various management initiatives.

Total revenues under the Administration's proposals would increase by

27 percent from an estimated $627 billion in 1982 to $797 billion in 1985.

Outlays would grow by only 20 percent, from an estimated $725 billion in

1982 to $869 billion in 1985. Net spending by off-budget entities—primarily

the Federal Financing Bank and oil purchases for the strategic petroleum

reserve—is projected to decline from an estimated $20 billion in 1982 to

$11 billion by 1985. As shown in Summary Table 2, the total budget deficitincluding off-budget entities—would decline by 30 percent from $118 billion

in 1982 to $83 billion in 1985. Relative to GNP, however, the reduction in

the total deficit would be larger—falling from 3.8 percent in 1982 to

2.0 percent in 1985. The federal debt subject to statutory limit is projected

to grow from $1.0 trillion at the end of fiscal year 1981 to $1.5 trillion by

the end of 1985.

The Administration's Budget Deficit Reduction Program

The Administration's proposals to reduce the size of the federal deficit

from the levels indicated by current policies are concentrated largely on the

spending side of the budget. As shown in Summary Table 3, almost

80 percent of the deficit reduction proposals over the next three years are

calculated as reductions in outlays from the Administration's projected

current services baseline. The biggest share of the outlay reductions—

40 percent—would be accomplished largely through the appropriation

process by holding back increases or cutting nondefense discretionary

xv
programs. Another 29 percent of these outlay reductions are to be achieved

through legislative proposals to reform entitlement programs, primarily

Medicare, Medicaid, food stamps, and Aid to Families with Dependent

Children (AFDC). No entitlement reforms for Social Security are proposed

in the President's budget.

SUMMARY TABLE 2. THE ADMINISTRATION'S BUDGET ESTIMATES

(By fiscal year, in billions of dollars)

Administration Estimates

Budget Component Actual

1981 1982 1983 198* 1985

Revenues

Outlays

Unified budget

Off-budget entities

Total Outlays

Deficit (-)

Unified budget

Off-budget entities

Total Deficit

Debt Subject to Limit

599.3 626.8 666.1 723.0

657.2

21.0

678.2

-57.9

-21.0

725.3

19.7

745.0

-98.6

-19.7

757.6

15.7

773.3

-91.5

-15.7

805.9

14.3

820.2

-82.9

-14.3

796.6

879.4

-71.9

-11.0

-78.9 -118.3 -107.2 -97.2 -82.8

998.8 1,130.0 1,254.3 1,368.7 1,482.0

An estimated 28 percent of outlay savings would be achieved through

various management initiatives, such as accelerated leasing of Outer

Continental Shelf (OCS) lands, the sale of surplus or underused federal

property, improved debt collection procedures, and further restraint on

increases in federal pay. Fully two-thirds of these management initiatives

would reduce net outlays by increasing receipts that are recorded on the

spending side of the budget. Finally, proposed increases in user fees that

would be counted as offsetting receipts make up the remaining 3 percent of

the proposed outlay savings.

xvi
Only a little more than 20 percent of the Administration's deficit

reduction proposals involve revenue increases. About 75 percent of the

increases during 1983-1985 would come in corporate income taxes, and

would substantially offset the corporate tax reduction enacted in the

Economic Recovery Tax Act (ERTA) for that period. No proposals are made

in the February budget to delay or eliminate any of the scheduled rate

reductions in individual income taxes that also were enacted in ERTA.

SUMMARY TABLE 3. THE ADMINISTRATION'S DEFICIT REDUCTION

PROPOSALS (By fiscal year, in billions of

dollars) a/

1983 1984 1985 Total Percent

Revenues

Tax revisions 7.2 13.5 13.5 34.1 14.3

Increases in user fees 1.3 1.4 1.6 4.3 1.8

Improved tax collection

and enforcement 5.5 5.5 4.7 15.7 6.5

Entitlement reform -1.1 -1.0 -1.0 -3.1 -1.3

Subtotal 12.8 19.4 18.8 51.0 21.3

Outlays

Entitlement savings 12.8

Management initiatives 14.8

Increases in user fees 1 . 2

Reductions in discretionary

and other programs 14.2

Subtotal 43.0

Total Reductions a/ 55.9

18.1

18.5

2.1

26.1

64.7

84.1

23.8

19.2

2.2

35.3

80.5

99.3

54.7

52.5

5.5

75.6

188.3

239.3

22.8

22.0

2.3

31.6

78.7

100.0

a/ Reductions are calculated by the Administration as changes from a

projected current services baseline (see Summary Table 1).

Defense Spending Proposals

The President's February budget includes a 1982 program supplemental

appropriation request of $2.6 billion for the Defense Department, and

xvn

90-395 0-82- 2
proposes a further increase of $44 billion in national defense appropriations

for 1983. The Administration's 1983 budget for national defense programs

totals $263 billion in new budget authority. Further large increases in

defense appropriations are projected for 1984 and 1985. Measured in

constant (fiscal year 1983) dollars, these projected increases for national

defense appropriations for 1983-1985 would mean an average real growth of

9.2 percent per year using the Administration's economic assumptions.

Overall, the President's 1983 budget reflects relatively small funding

increases for forces and manpower, and large increases to acquire new

weapons for future force expansion and modernization. The most significant

new policy proposal is the Administration's plan to increase the size of the

naval fleet from 514 ships to over 600.

Restructuring of the Federal Budget

The President's budget proposals would dramatically affect the

relative composition of federal spending. Outlays for national defense

would increase by 56 percent in the next three years—from $187.5 billion in

1982 to $292 billion in 1985. The share of the budget allocated to national

defense would rise sharply from 26 percent in 1982 to 34 percent in 1985.

Direct federal payments to individuals, which include Social Security,

Medicare, and federal employee retirement benefits, would increase by

$57 billion between 1982 and 1985—maintaining their relative share of the

budget at about 42 percent. Net interest costs are also projected to rise

during the next three years and would claim another 11 percent of total

outlays in 1985, the same share as estimated for 1982.

All other federal spending would be reduced by 25 percent—about

$37 billion—between 1982 and 1985. As shown in Summary Table 4,

payments for individuals made through state and local governments—which

include Medicaid and AFDC—would be cut back in 1983 from 1982 levels and

then allowed to grow slightly in 1984 and 1985. Outlays for other grants to

states and localities would be reduced steadily from about $50 billion in

1982 to $41 billion in 1985. Net outlays for "all other federal programs"

would have the sharpest cutback, falling by more than one-half, from an

estimated $54 billion in 1982 to $25 billion in 1985. This decline, however,

masks a projected 60 percent increase in offsetting receipts from the sale of

OCS leases, surplus federal property, and other sources. Gross outlays for

this sector would be cut back in 1983 by about 15 percent but then held

approximately level in current dollars during 1984 and 1985.

xvni
SUMMARY TABLE 4. RELATIVE COMPOSITION OF THE UNIFIED

BUDGET (By fiscal year)

Administration Estimates

Budget Component

National Defense

Payments for Individuals

Direct

Through states and

localities

Other Grants

Net Interest

Other Federal Programs

Total

Actual

1981

159.8

276.7

39.9

54.8

68.7

57.4

657.2

1982

Outlays

187.5

310.1

41.5

49.6

83.0

53.6

725.3

1983

in Billions of

221.1

328.3

37.6

43.7

96.4

30.6

757.6

1984

Dollars

253.0

345.4

40.0

41.8

98.7

27.1

805.9

1985

292.1

367.5

42.3

41.1

100.8

24.6

868.5

Percent Change

National Defense

Payments for Individuals

Direct

Through states and

localities

Other Grants

Net Interest

Other Federal Programs

Total

17.6

16.8

16.9

-4.3

31.0

-4.5

14.0

17.4

12.1

3.9

-9.3

20.8

-6.5

10.4

17.9

5.9

-9.5

-11.9

16.1

-43.0

4.5

14.4

5.2

6.4

-4.4

2.4

-11.2

6.4

15.4

6.4

5.9

-1.7

2.1

-9.2

7.8

CBO ANALYSIS OF THE PRESIDENT'S BUDGET

The Congressional Budget Office's analysis of the President's February

budget finds that revenues would be slightly lower than estimated by the

Administration for 1983-1985 and budget outlays would be higher. This

finding results from CBO's technical analysis of the Administration's budget

xix
estimates and a substitution of CBO's economic assumptions for the

Administration's. The CBO budget reestimates are shown in Summary

Table 5.

SUMMARY TABLE 5. CBO BUDGET REESTIMATES (By fiscal year, in

billions of dollars)

1982 1983 1984 1985

CBO Technical Reestimates

Revenues 4.3 -5.2 -13.0 -15.6

Outlays

Unified budget 12.2 19.9 22.1 23.0

Off-budget entities 0.6 0.8 0.9 1.1

CBO Baseline Economic Assumptions

Revenues -3.4 -0.8 5.6 -4.9

Outlays 1.2 3.2 16.4 24.2

Total Reestimates

Revenues 0.9 -6.0 -7.4 -20.5

Outlays

Unified budget 13.5 23.1 38.5 47.2

Of f-budget entities 0.6 0.8 0.9 1.1

These reestimates produce a dramatic increase in the budget deficit,

as shown in Summary Table 6 and as portrayed graphically in Summary

Figure 1. Under CBO's technical and economic reestimates, the unified

budget deficit rises from $111 billion in 1982 to $140 billion by 1985, almost

twice the level projected by the Administration. Over the three-year

period, 1983 to 1985, CBO estimates that the President's budgetary

proposals would result in budget deficits that exceed the Administration's

estimates by more than $140 billion. Almost $100 billion, or about

70 percent, of these higher deficits results from technical estimating

differences. Another $44 billion results from using CBO's baseline economic

assumptions instead of the Administration's.

xx
SUMMARY TABLE 6. UNIFIED BUDGET DEFICITS (By fiscal year, in

billions of dollars)

1982 1983 1984 1985

President's February Budget

Deficit with CBO's

Technical Reestimates

Deficit with CBO's Technical

Reestimates and Baseline

Economic Assumptions

98.6 91.5 82.9 71.9

106.5 116.6 118.1

111.1 120.6 128.9 139.6

CBO Technical Reestimates

CBO's technical analysis of the Administration's budget estimates

suggests that revenues may be overestimated in the February budget by

about $5 billion in 1983, $13 billion in 1984, and $16 billion in 1985. The

technical reestimates for revenues result mainly from different estimates of

the revenue effects of the Economic Recovery Tax Act. On the outlay side,

CBO's technical reestimates suggest larger differences, averaging more than

$20 billion during 1983-1985. The major differences involve the cost of

farm price supports, the rate of spending for defense procurement

activities, likely receipts to be derived from the proposed accelerated

leasing of OCS lands, and net interest costs. These four areas account for

three-fourths of all the differences in CBO's technical reestimates for 1983-

1985 outlays.

CBO Economic Reestimates

The economic forecasts of both the Administration and CBO are in

close agreement for 1982. Real gross national product (GNP) is projected to

rise by about 3 percent over the four quarters of the year, and the

unemployment rate is expected to be in the neighborhood of 8X2 percent at

year's end. The forecasts of inflation and short-term interest rates are also

similar in 1982.

In 1983, however, the Administration forecast for inflation and real

growth is more optimistic than CBO's. While both forecasts imply virtually

xxi
the same expansion of nominal GNP, the Administration looks for real GNP

to grow by 5.2 percent over the four quarters of 1983, and for inflation (as

measured by the GNP deflator) to fall to a rate of 5.5 percent. CBO

expects real GNP to grow by about 1J4 percentage points less than the

Administration does in 1983, and the GNP deflator to rise by about

1K2 percentage points more. The slower growth expected by CBO is largely

the consequence of higher interest rates in its forecast, which would dampen

the recovery in economic activity.

Summary Figure 1.

Budget Deficits

250

200

150

100

50

CBO Baseline Projections

Administration Estimates

i i CBO Reestimates

i 1

98.6

71.9

1982 1983 1984

Fiscal Years

1985

The Administration's economic assumptions for 198* and beyond are

also more optimistic than CBOfs (see Summary Figure 2). Compared with

CBO's baseline assumptions, the Administration projects higher real growth

and sharper declines in inflation, unemployment, and interest rates.

xxn
Summary Figure 2.

Comparison of Major Economic Assumptions

Real

Economic

Growth I 4

5

I 2

1976

Consumer

Price

Inflation

14

110

5

1

6

1976

Unemployment

Rate 8

1976

Three-Month

Treasury

Bill Rate

15

12

9

6

3

1976

Administration

CBO Baseline

CBO Pessimistic

Alternative

I I

1981 1987

1981 1987

I 4

1981 1987

Projected

I

1981

Calendar Years

1987

SOURCES: For historical data, Department of Commerce, Bureau of Economic Analysis; Department of Labor,

Bureau of Labor Statistics; and Federal Reserve System, Board of Governors. For projections,

Congressional Budget Office and Office of Management and Budget.

XX111
The Administration's real growth assumptions for 1984-1987 are near

the upper end of historical experience. In comparable four-year periods

following previous postwar recoveries, real growth averaged 3.4 percent a

year and ranged between 2.0 and 5.2 percent a year. The Administration

assumes an average rate of growth of 4.6 percent a year between 1984 and

1987. CBO, in its baseline projections, assumes an average annual growth

rate of 3.5 percent.

As shown in Summary Table 5, the effect of the somewhat less

optimistic CBO baseline assumptions with respect to real growth, inflation,

unemployment, and interest rates would be to raise unified budget outlays

by $1 billion in 1982, $3 billion in 1983, over $16 billion in 1984, and

$24 billion in 1985. Over the entire four-year period, budget outlays would

be $45 billion higher than projected by the Administration. Revenues, on

the other hand, would be very close to the Administration's estimates

because of the similar assumptions about nominal GNP.

The Administration's Budget Reestimated

The CBO economic and technical reestimates assume that all of the

President's legislative proposals for taxes and spending are approved by the

Congress, and also that the Administration is successful in meeting most of

its targets for revenue increases and outlay savings from various

management initiatives. CBO has not been able to develop its own

independent estimates for outlay savings from several of the management

initiatives, particularly those that are clearly targets and not allocated to

agency accounts. Based on past history, the unallocated targets for

reduction of waste, fraud, and abuse; for improved debt collection; and for

the sale of surplus or underused federal property appear to be very

optimistic.

Summary Table 7 shows the effect on the Administration's budget of

CBO's technical reestimates and of substituting CBO's baseline economic

assumptions for the Administration's economic assumptions. Under CBO's

pricing of the Administration's budgetary proposals, revenues would grow by

less than 25 percent between 1982 and 1985, rising from an estimated

$628 billion to $776 billion. Unified budget outlays would grow at

approximately the same rate as revenues during this period, rising by

24 percent from $739 billion in 1982 to $916 billion in 1985.

The unified budget deficit rises from $111 billion in 1982 to

$140 billion in 1985. When net outlays of off-budget federal entities are

included, the total deficit rises from $131 billion in 1982 to more than

xxiv
$1.0 trillion at the end of 1981 to more than $1.6 trillion at the end of 1985,

or by more than 60 percent.

SUMMARY TABLE 7. THE ADMINISTRATION'S BUDGET REESTIMATED

(By fiscal year, in billions of dollars)

CBO Estimates

Revenues

Outlays

Unified budget

Off -budget entities

Total Outlays

Deficit (-)

Unified budget

Off-budget entities

Total Deficit

Debt Subject to Limit

Actual

1981

599.3

657.2

21.0

678.2

-57.9

-21.0

-78.9

998.8

1982

627.7

738.8

20.2

759.0

-111.1

-20.2

-131.3

1,430.0

1983

660.1

780.7

16.5

797.2

-120.6

-16.5

-137.1

1,297.1

1984

715.6

844.5

15.2

859.7

-128.9

-15.2

-144.1

1,458.4

1985

776.1

915.7

12.0

927.7

-139.6

-12.0

-151.6

1,640.5

MAJOR RISKS

Several risks are inherent in the Administration's budget proposals.

One is that the Administration may have underpriced its projected defense

appropriation requests. CBO has identified two major elements of concern

in this regard. First, inflation may not decline as rapidly as assumed in the

Administration's budget estimates. This would require additional funds to

complete the Administration's plans for defense purchases. Otherwise,

higher than anticipated inflation could cause a scaling back of purchases to

stay within available funds. CBO's reestimates of the President's budget did

not adjust the Administration's proposed budget authority for defense

XXV
programs for the higher inflation contained in CBO's baseline economic

assumptions. If this were done, $61 billion in additional appropriations

would be needed during the next five years to achieve the same real growth

in defense spending as proposed by the Administration.

Second, the real cost of defense purchases has grown in recent yearsaveraging about 3& percent per year since 1975. This has occurred for a

variety of reasons, including program changes (such as new specifications

for weapons or revised production schedules) and underestimates of real

resources (such as manufacturing hours and materials costs). If the

Administration is unable to curb this cost growth, further funds would be

needed to meet its defense procurement objectives. If the 3& percent

average annual cost growth continues, for example, CBO estimates that an

additional $48 billion in new budget authority will be required to fund major

weapons procurement during 1983-1987.

A second risk is that it will be very difficult to achieve lower deficits

in the next few years if the major effort is focused primarily on the

spending side of the budget. The sharp increases proposed for national

defense programs, the rising outlays for Social Security and other benefit

payments indexed for inflation, and the growing net interest costs place

enormous pressure on the remaining portion of the budget. As shown in

Summary Figure 3, these other federal outlays are projected to shrink

steadily. The difficulty of finding still further significant reductions in this

area of the budget is very great.

A more fundamental risk is the uncertainty in the economic outlook.

The Administration's program implies a strong fiscal stimulus in 1982 and

1983. The large budget deficits projected in this report would result in a

marked increase in Treasury borrowing that would put further upward

pressure on interest rates. At the same time, the Federal Reserve's targets

for monetary growth may act as a brake on economic growth during the next

few years. Given the combination of monetary and fiscal policies and the

projected economic recovery, high interest rates next year seem likely--

although the level is hard to predict because this policy combination of a

tight monetary policy and a stimulative fiscal policy is virtually without

precedent. Nevertheless, there is a significant risk that the outcome could

be even weaker growth than projected by either the Administration or CBO.

Since budget estimates are very sensitive to economic assumptions,

policymakers must be prepared for the possibility of developments markedly

different from those assumed by both the Administration and CBO. To

xxvi
illustrate the sensitivity of the budget to economic assumptions, CBO also

has reestimated the President's February budget using a more pessimistic

set of economic assumptions. In the CBO pessimistic alternative

assumptions, portrayed in Summary Figure 2, real growth averages only

2.0 percent in 1984-1987, unemployment remains at about 8X2 percent

throughout the period, the rate of inflation remains above 7 percent until

the end of the period, and short-term interest rates fall very slowly.

Summary Figure 3.

Federal Budget Outlays

1,000

1970 1975 1980

Fiscal Years

SOURCE: Budget of the United States Government, Fiscal Year 1983, Table 22, p. 9-61.

1985

Under this more pessimistic set of assumptions, growth in nominal

incomes would be somewhat less and federal revenues would be lower by

about $25 billion during 1982-1985 than projected by the Administration.

The effect on outlays, however, would be much greater. By 1985, outlays

would be over $50 billion higher than projected by the Administration, and

over $100 billion higher for the entire four-year period. The effect of using

the CBO pessimistic economic assumptions would be to raise the estimated

level of the budget deficit under the Administration's proposals to

$132 billion in 1983, $155 billion in 1984, and $184 billion in 1985 (see

Summary Table 8).

xxvn
SUMMARY TABLE 8. UNIFIED BUDGET DEFICITS UNDER CBO

PESSIMISTIC ECONOMIC ASSUMPTIONS (By

fiscal year, in billions of dollars)

1982 1983 1984 1985

President's February Budget

Deficit with CBO

Technical Reestimates

Deficit with CBO Technical

Reestimates and Pessimistic

Economic Assumptions

98.6 91.5 82.9 71.9

106.5 116.6 118.1

112.7 132.1 154.9 183.6

XXV 111
AN ANALYSIS OF

THE PRESIDENT'S BUDGETARY PROPOSALS

FOR FISCAL YEAR 1983

CHAPTER I. THE ADMINISTRATION'S PROPOSALS

The federal government's budget, in the absence of major policy

changes, faces large and growing deficits. This year, the deficit will

probably exceed $100 billion for the first time. By 1985, it could top

$200 billion.

The President's 1983 budget contains a lengthy list of spending

reductions and a shorter list of tax increases designed to close the deficit

gap. To allow substantial increases in spending for national defense,

spending for nondefense programs (other than Social Security) would be cut

sharply. The Administration also recommends large reductions in

off-budget federal spending and in federal credit activities.

This chapter depicts the budget situation under current policies, using

both Congressional Budget Office (CBO) and Administration projections, and

explains how that situation came about. It then reviews the Administration's revenue and spending proposals, using the Administration's own

figures. The chapter concludes with discussions of the Administration's

proposals for federal off-budget spending, debt, and credit. The later

chapters present CBO's estimates of revenues and spending under the

Administration's policies, using CBO's own economic assumptions and

estimating methods.

THE BUDGET OUTLOOK UNDER CURRENT POLICIES

While the budget deficit for 1981 was $58 billion, the 1982 deficit is

now expected to exceed $100 billion under current policies. This sharp rise

in the deficit can be attributed largely to the recession, which was not

anticipated in last year's budget estimates. Although most economic

forecasters expect that the economy will begin to recover later this year

and move into a period of continued growth, budget projections show rising

deficits under existing tax laws and current spending policies. This growing

deficit gap is illustrated in Figure 1, which shows the CBO baseline budget

projections through 1985.

Both the CBO baseline budget projections and the Administration's

current services baseline (which includes the Administration's defense

spending proposals) tell the same story. Under both sets of baseline

projections, shown in Table 1, federal revenues would grow at an average

annual rate several percentage points below the expected rate of growth of
Figure 1.

CBO Baseline Budget Projections

1,200

1,100

1,000

900

800

700

600 -

Baseline Outlays

1981 1982 1983

Fiscal Years

1984 1985

SOURCE: Congressional Budget Office.

the economy. Both CBO and the Administration assume that the gross

national product (GNP) will grow by an average rate of between 10.5 and

11 percent during the next three years. The CBO baseline projections show

revenues growing at an average annual rate of 6.5 percent between 1982 and

1985--somewhat less than the Administration's baseline projections of

7.5 percent.

Baseline outlays, as projected by both CBO and the Administration,

would grow at a faster rate than revenues. The CBO projections show total

outlays rising from an estimated $740 billion in 1982 to $971 billion in 1985.

This represents an average growth rate of 9.5 percent a year, or 3 percentage points above the CBO projected growth in baseline revenues. The

Administration projects a similar growth in baseline out lays--9.2 percent a

year—that exceeds its baseline revenue projections by almost 2 percentage

points.

The budget deficit under baseline assumptions is projected by CBO to

almost double between 1982 and 1985--rising from $109 billion to

$208 billion. The Administration's baseline projections also show a sharp

rise in the budget deficit, although not quite as much as those of CBO,
TABLE 1. THE BUDGET OUTLOOK UNDER CURRENT POLICIES (By

fiscal year, in billions of dollars)

Actual

1981

Estimate

1982

1983

Projections

1984 1985

CBO's Baseline

Revenues

Outlays

Deficit

603

660

58

631

740

109

652

809

157

701

889

188

763

971

208

Administration's Current Service Baseline a/

Revenues b/

Outlays b/

Deficit

599

657

58

626

728

101

653

799

146

704

869

165

778

946

168

SOURCES: Congressional Budget Office, Baseline Budget Projections for

Fiscal Years 1983-1987 (February 1982), p. 9; Budget of the

United States Government, Fiscal Year 1983 (February 1982),

p. 3-8.

a/ Includes proposed defense spending growth.

b/ The Administration's 1983 budget has reclassified certain social

insurance contributions as offsetting collections to spending, thereby

reducing both revenues and outlays but leaving the deficit unchanged.

The CBO figures reflect the previous classification.

largely because of different economic assumptions. In the absence of tax

increases or spending reductions, CBOfs baseline projections show the deficit

rising to 5.0 percent of GNP in both 1984 and 1985. The Administration's

baseline projections show the deficit rising to 4.3 percent of GNP in 1984

and 4.0 percent in 1985. The last time the budget deficit was this large was

in 1976, as a result of the 1974-1975 recession.

These baseline projections are quite different from those of the past.

In previous baseline projections, revenues grew faster than outlays, and the

3

90-395 0-82- 3
budget began to show a surplus within two or three years. Projected

revenues grew more rapidly than the economy, because inflation and

economic growth pushed individuals into higher income tax brackets. Projected outlays, on the other hand, grew more slowly than GNP, because most

spending was assumed merely to keep pace with inflation.

In the new baseline projections, revenues grow less rapidly than the

economy. The projected lower revenue growth results primarily from the

individual and corporation income tax cuts enacted in the Economic

Recovery Tax Act of 1981 (ERTA). As shown in Table 2, federal revenues

will be as much as $189 billion lower in 1985 than they would have been had

the 1981 Tax Act not been enacted. The effect of the Tax Act will be to

reverse the trend of a growing federal tax burden. Between 1976 and 1981,

federal revenues rose from 18.2 percent to 21.0 percent of GNP. Under the

current tax law, both the CBO and the Administration project a decline in

revenues relative to GNP, to under 19 percent by 1985.

TABLE 2. ESTIMATED REVENUE LOSSES RESULTING FROM THE

ECONOMIC RECOVERY TAX ACT OF 1981 (By fiscal year, in

billions of dollars)

1981 1982 1983 1984 1985

CBO Estimates

Administration Estimates

2

*

39

38

95

92

148

139

189

177

SOURCES: Congressional Budget Office, Baseline Budget Projections for

Fiscal Years 1983-1987, p. 25; Budget of the United States

Government, Fiscal Year 1983, p. 4-10.

*Less than $500 million.

The price of this reduction in the tax burden is the widening gap

between revenues and outlays. Figure 1 shows graphically that revenues

under prior tax law would have been sufficient virtually to eliminate the

projected deficits by 1985. Under current law, however, the deficits are

projected to grow.
THE ADMINISTRATION'S BUDGET PROPOSALS

The Administration's 1983 budget includes a package of measures

designed to reduce the federal deficit gradually over the next few years. If

these proposals are adopted, the Administration projects that the deficit

would decline from 3.2 percent of GNP in 1982 to 2.7 percent in 1983,

2.2 percent in 1984, and 1.7 percent in 1985. In the absence of such policy

changes, the deficit by 1985 would widen to 4 or 5 percent of GNP, as shown

in Figure 2.

Figure 2.

Federal Budget Deficit as a Percentage of GNP

Actual | Projected

CBO Baseline

Projections^.,*

Administration I

Current Services8

I I I

1970 1975 1980 1985

Fiscal Years

a

 Includes Administration defense spending proposals.

SOURCES: Budget of the United States Government, Fiscal Year 1983, p. 3-8,and Table 21, p. 9-60;

Congressional Budget Office, Baseline Budget Projections for Fiscal Years 1983-1987

(February 1982).

The Administration's budget and the proposed deficit reduction

measures represent a continuation of the policies that the Administration

recommended, and that were in large part enacted, last year. Defense

appropriations would grow rapidly. The major individual income tax

reductions passed in 1981 would be left in place. Revenues would be

modestly increased compared to the baseline, primarily through the elimination of tax provisions benefiting a few specific industries and through the

improved collection of existing taxes. The proposed revenue increases and
spending reductions total $242 billion over the 1982-1985 period (see

Table 3). Of this amount, revenue increases comprise $50 billion, or about

one-fifth, and spending reductions constitute the remaining four-fifths.

TABLE 3. THE ADMINISTRATION'S PROPOSED DEFICIT REDUCTION

MEASURES (By fiscal year)

1982 1983 1984 1985

In Billions of

Administration's Baseline Deficit with

Proposed Defense Spending Growth

Less: Proposed Revenue Increases

Proposed Spending Reductions

Total Deficit Reduction Measures

Plus: Proposed Spending Increases

Administration Deficit Target

Administration's Baseline Deficit with

Proposed Defense Spending Growth

Administration's Deficit Target

SOURCE: Budget of the United States

101

*

-3

-3

*

99

As a

3.3

3.2

146

-13

-43

-56

2

92

Percent

4.2

2.7

Dollars

165

-19

-65

-84

2

83

of GNP

4.3

2.2

Government, Fiscal Year

168

-18

-81

-99

3

74

4.0

1.7

1983,

p. 3-8.

*Less than $500 million.

The spending reductions proposed by the Administration do not touch

Social Security cash benefits, the single largest nondefense spending

program, or interest costs on the national debt, which depend on the level of

debt outstanding and on market interest rates and cannot be directly

affected by policy changes. As a result, the proposed spending reductions
would cut deeply into federal grants to state and local governments and into

spending on the day-to-day domestic operations of the federal government.

Revenue Proposals

The Administration's revenue proposals, listed in Table 4, would

increase revenues by about $13 billion in fiscal year 1983 and by roughly

$18 billion in 1985, according to Administration estimates. Extension of the

highway trust fund taxes beyond their current expiration date, already

assumed in Administration and CBO baseline revenues, would yield an

additional $4 billion in 1985. About $5 billion a year would come from

legislative proposals to improve tax collection and enforcement by accelerating corporate tax payments, increasing staffing at the Internal Revenue

Service, and instituting tax withholding on interest and dividends. Roughly

$14 billion a year by 1985 would come from proposals characterized by the

Administration as eliminating tax abuses and removing obsolete incentives.

These include repeal of business energy tax credits, tighter rules for

long-term contracts, cutbacks in the use of tax-exempt bonds for private

purposes, modifications in the tax treatment of life insurance companies,

increased taxes on commercial and industrial real estate construction, and a

new minimum tax on corporations. The remaining revenue increases would

be derived from reinstating and increasing several airport and airway trust

fund taxes—including those on general aviation gasoline and jet fuel and on

airline passenger tickets—and by requiring federal civilian employees to pay

the hospital insurance portion of the Social Security payroll tax.

The Administration's tax proposals are heavily weighted toward

increases in corporation income taxes, which account for about threequarters of the net tax increases proposed for the 1983-1985 period. They

amount to roughly $15 to $16 billion a year by 1985, and substantially offset

the corporate tax reductions enacted in the Economic Recovery Tax Act.

The proposed corporate tax increases amount to about 75 percent of the

ERTA corporate tax reductions for 1984 and almost 60 percent of those for

the 1983-1985 period, based on Administration estimates of ERTA revenue

reductions. The proposed increases amount to 19 percent of the Administration estimates of total corporate taxes in 1984, and nearly 17 percent of

their estimates of corporate taxes for the 1983-1985 period.

The distribution of the additional corporate tax burden, however,

would be different from the distribution of the corporate tax savings from

ERTA. The proposal to end completed contract accounting would affect

primarily the defense, construction, and heavy machinery industries; the

proposal to repeal business energy tax credits could have a significant

impact on the paper industry; limits on tax-exempt revenue bonds would
TABLE ^. THE ADMINISTRATION'S REVENUE INCREASE PROPOSALS

(By fiscal year, in biliions of dollars)

Tax Revisions

Completed contract accounting

Business energy tax credits

Tax-exempt revenue bonds

Modified coinsurance

Construction period interest

and taxes

Corporate minimum tax

Subtotal

Improved Tax Collection and

Enforcement

Withholding on interest

and dividends

Acceleration of corporate

tax payments

Internal Revenue Service

staff increases

Subtotal

Enterprise Zones

Airport and Airway Trust Fund

Railroad Retirement

Federal Employee Hospital

Insurance Taxes

Other

Total

SOURCES: Budget of the United

1982 1983

3.3

0.1

-0.2

1.1

0.5

2.3

7.2

2.0

1.4

0.2 2.1

0.2 5.5

— —

0.1 1.2

-1.7

0.6

* 0.1

0.3 12.8

States Government,

1984

5.0

0.4

0.3

2.2

1.1

4.6

13.5

1.3

1.7

2.4

5.5

-0.1

1.4

-1.8

0.8

0.1.

19.3

Fiscal Year

1985

3.2

0.6

1.1

2.5

1.0

5.1

13.5

1.4

0.9

2.4

4.7

-0.5

1.5

-1.9

0.9

0.1

18.3

1983,

p. 4-16, and the U.S. Department of the Treasury.

*Less than $50 million.

8
affect firms with geographically dispersed facilities, and steel, paper, and

chemical industry users of pollution control bonds; limits on modified

coinsurance would affect only the life insurance industry; requiring capitalization of construction period interest and taxes would affect primarily

corporations that construct their own offices, stores, and warehouses; and

the corporate minimum tax could have a significant effect on the oil and gas

industry, exporters, mining companies, banks, and others, depending on

its terms.

Some of these industries did comparatively well under ERTA, and

some did not. While measurement of the relative corporate tax savings

under ERTA is somewhat controversial, a just-published analysis suggests

that the tax savings on construction machinery, general industrial equipment, and trucks, buses, and trailers are quite significant, while industrial

and commercial buildings received less favorable treatment. \J In terms of

particular industries, the analysis suggests that petroleum refining, transportation services, motor vehicles, mining, and pulp and paper did especially

well, while agriculture, services and trade, and utilities did less well.

The Administration's budget also contains two proposals that would

reduce revenues. The first would authorize the establishment of 75

enterprise zones over the three-year period from 1984 to 1986. Businesses

locating in designated depressed areas would receive special tax incentives

and relief from regulation, designed to increase investment and employment. This would reduce federal revenues by about $0.5 billion, rising to

over $1 billion a year by 1987, assuming that no more than 75 zones were

established. The second revenue-reducing item is the proposal to eliminate

the federal railroad retirement system and replace it with a combination of

Social Security and an industry-run pension plan. This would reduce federal

receipts by $1.7 billion in 1983 and $1.9 billion in 1985, although federal

outlays would be reduced by a slightly greater amount.

The Administration's revenue projections, in total and by major

component, are shown in Table 5. Total budget receipts rise from

$626.8 billion in 1982 to $796.6 billion in 1985--an increase of about

8.3 percent a year. Social insurance contributions rise more rapidly—about

9.8 percent a year--in part as a result of the Social Security tax rate

increase scheduled for 1985. Individual income taxes, on the other hand,

because of the scheduled tax rate cuts, grow by only 6.6 percent a year.

Corporate income tax payments fall sharply in 1982, because of the

recession, but grow rapidly during the next two years, as the economy

recovers.

JY Council of Economic Advisers, Economic Report of the President

(February 1982), pp. 122-25.
TABLE 5. COMPOSITION OF REVENUES (By fiscal year)

Actual

1981

Administration Estimates

1982 1983 1984 1985

In Billions of Dollars

Individual Income Taxes

Corporation Income Taxes

Social Insurance Taxes and

Contributions

Excise Taxes

Other Taxes and Receipts

Total Budget Receipts

285.9

61.1

182.7

40.8

28.7

599.3

298.6

46.8

206.5

43.0

31.9

626.8

304.5 322.9

65.3 83.7

222.5 242.5

41.7 41.5

32.1 32.4

666.1 723.0

362.0

88.2

273.1

40.8

32.5

796.6

Percent Change

Individual Income Taxes

Corporation Income Taxes

Social Insurance Taxes and

Contributions

Excise Taxes

Other Taxes and Receipts

Total Budget Receipts

Individual Income Taxes

Corporation Income Taxes

Social Insurance Taxes and

Contributions

Excise Taxes

Other Taxes and Receipts

Total Budget Receipts

17.1

-5.4

15.8

67.9

9.1

15.9

47.7

10.2

30.5

6.8

4.8

100.0

4.4

-23.4

13.0

5.4

11.1

4.6

Percent

47.6

7.5

32.9

2.0 6.0

39.5 28.2

7.7 9.0

-3.0 -0.5

0.6 0.9

6.3 8.5

Share of Total Receipts

45.7 44.7

9.8 11.6

33.4 33.5

6.9 6.3 5.7

5.1

100.0

4.8 4.5

100.0 100.0

12.1

5.4

12.6

-1.7

0.3

10.2

45.4

11.1

34.3

5.1

4.1

100.0

SOURCE: Budget of the United States Government, Fiscal Year 1983,

pp. 4-2, 9-48.

10
These tax changes represent for the most part a continuation of the

trends of the past 10 or 12 years. Social insurance taxes, as shown in

Figure 3, have grown as a federal revenue source from 23 percent of the

total in 1970 to 31 percent in 1980, and would reach 34 percent of revenues

by 1985. Individual income taxes have represented a relatively constant

share of revenues—47 percent in 1970, 44 percent in 1975, 47 percent in

1980, and 45 percent projected for 1985. And corporation income taxes

have declined relatively as a source of income to the federal government—

17 percent in 1970, 15 percent in 1975, 12 percent in 1980, and 11 percent in

1985.

Spending Proposals

The Administration's budget proposals continue the basic themes

introduced last March. Total real federal spending is to be reduced in 1983,

with more spent on national defense and less on nondefense programs.

Budget outlays in current dollars are projected to rise from $725.3 billion in

1982 to $868.5 billion in 1985 (see Table 6), for an average increase of

6.2 percent a year. This constitutes a sharp reduction from recent growth

rates—17.4 percent in 1980 and 14.0 percent in 1981. Including off-budget

entities, total federal outlays are estimated to grow by 5.7 percent a year.

Since inflation, as measured by the GNP deflator, averages about

5.4 percent over the 1982-1985 period in the Administration's projection,

real federal outlays would grow hardly at all under the Administration's

program.

Although total federal spending would remain roughly constant in real

terms over the next three years, individual categories of spending are

projected to grow or contract sharply, as pictured in Figure 4. Defense

spending would rise most rapidly—from $187.5 billion in 1982 to

$292.1 billion in 1985—an average rate of increase of 15.9 percent a year.

Social Security outlays would increase from $154.6 billion to $202.3 billion

over the 1982-1985 period—an average annual increase of 9.4 percent.

Benefit payments to individuals, other than for Social Security, would

fall in 1983 and grow only slowly in 1984 and 1985, as a result of benefit

cutbacks proposed by the Administration. The average growth rate in these

other benefit payments would be only 1.8 percent a year--about one-third

of the average rate of inflation. Net interest costs are projected to rise at

an annual rate of 6.7 percent as the government budget continues to be in

deficit. The remainder of nondefense spending, particularly grants to state

and local governments, would bear the brunt of the Administration's budget

reduction measures. Over the 1982-1985 period, this category of outlays

would fall by more than one-third in current dollars and by almost one-half

in real terms.

11
Figure 3.

Major Sources of Federal Revenues

1970

1980

Individual Income Taxes

Corporation Income Taxes

1975

1985

Administration Estimates

Social Insurance Taxes

Excise Taxes

Other

Taxes and

Receipts

NOTE: Details may not add to 100 percent because of rounding.

SOURCE: Budget of the United States Government, Fiscal Year 1983, p. 4-2, and Table 18,

pp. 9-48 and 9-49; and data from the Office of Management and Budget.

12
TABLE 6. COMPOSITION OF OUTLAYS (By fiscal year)

Actual

1981

Administration Estimates

1982 1983 1984 1985

In Billions of Dollars

National Defense

Social Security

Other Payments to Individuals

Net Interest

Other Nondefense

Unified Budget Outlays

Off -Budget Federal Entities

Total Outlays

159.8

138.0

178.6

68.7

112.1

657.2

21.0

678.2

187.5

154.6

196.9

83.0

103.3

725.3

19.7

745.0

221.1 253.0

173.5 188.5

192.3 196.8

96.4 98.7

74.3 69.0

757.6 805.9

15.7 14.3

773.3 820.2

292.1

202.3

207.6

100.8

65.8

868.5

11.0

879.4

Percent Change

National Defense

Social Security

Other Payments to Individuals

Net Interest

Other Nondefense

Unified Budget Outlays

Off -Budget Federal Entities

Total Outlays

17.6

17.8

15.9

31.0

-4.4

14.0

47.5

14.8

17.4

12.0

10.2

20.8

-7.9

10.4

-6.3

9.9

17.9 14.4

12.2 8.6

-2.3 2.3

16.1 2.4

-28.1 -7.1

4.5 6.4

-20.3 -9.0

3.8 6.1

15.4

7.3

5.5

2.1

-4.6

7.8

-23.3

7.2

Percent Share of Unified Budget

National Defense

Social Security

Other Payments to Individuals

Net Interest

Other Nondefense

Unified Budget Outlays

24.3

21.0

27.2

10.5

17.1

100.0

25.9

21.3

27.1

11.4

14.2

100.0

29.2 31.4

22.9 23.4

25.4 24.4

12.7 12.2

9.8 8.6

100.0 100.0

SOURCE: Budget of the United States Government, Fiscal Year

33.6

23.3

23.9

11.6

7.6

100.0

1983,

pp. 3-21, 3-23, 9-61.

13
Figure 4.

Proposed Change in Outlays Between 1982 and 1985

National Defense

Social Security

Other Payments to

Individuals

Net Interest

-37.5

T T

104.6

47.7

Other Nondefense

I

-100 -50 0 +50

Billions of Dollars

SOURCE: Budget of the United States Government, Fiscal Year 1983, p. 3-21.

+100 +150

As a result of such disparate growth rates, the composition of federal

spending would be sharply altered over the next three years, as illustrated in

Figure 5. By 1985, defense spending would represent 34 percent of the

budget—an increase from its 1975 and 1980 levels of 26 and 24 percent,

repectively, but less than the 1970 level of 40 percent. The share of the

budget devoted to benefit payments for individuals, which grew from

32 percent to 46 percent between 1970 and 1975, would remain roughly

constant at about 47 percent of the total. Net interest would grow from

9 percent of the total in 1980 to 12 percent in 1985. The remainder of the

budget, which accounted for 20 to 21 percent of the budget from 1970 to

1980, would shrink to 8 percent by 1985.

National Defense. The Administration requests, as it did last year,

large increases in spending for national defense. Budget authority would

rise by $44 billion in 1983. This represents a real increase of 13.1 percent

under the Administration's economic assumptions. Over the 1982-1985

period, defense outlays would grow by $104.6 billion, or by 9.2 percent a

year in real terms.

14
Figure 5.

The Composition of Federal Spending

1970

1980

National Defense

Payments for Individuals

1975

1985

Administration Proposals

Other Grants

Net Interest

All Other

SOURCE: Budget of the United States Government, Fiscal Year 1983, Table 22, p. 9-61.
The Administration argues that spending increases of this size are

necessary to provide an adequate level of defense. Its defense plan provides

for, among other things, the acquisition of a new bomber (the B-l), the

development of an advanced technology (Stealth) bomber to be operational

in the early 1990s, the development and procurement of the MX missile, the

continued deployment of Trident ballistic missile submarines, and the

acquisition of 149 additional ships. These and other Administration defense

proposals are analyzed in detail in Chapter V.

Benefit Payments for Individuals. Projected outlays for benefit

payments for individuals are shown in Table 7. The Administration is

proposing substantial cuts in this category of spending. While it is not now

proposing any changes in Social Security cash benefits, it is recommending

that physician and hospital reimbursement rates under the hospital insurance

program (Part A of Medicare) be reduced and that federal civilian

employees be required to pay the hospital insurance portion of the Social

Security payroll tax. The budget also assumes, but does not propose,

extension of the provision enabling the three major Social Security trust

funds to borrow from each other. Under the Administration's economic

assumptions, these changes would ensure the solvency of Social Security for

the next several years. They would not be sufficient to prevent cash flow

problems, however, under a more pessimistic forecast. A recently formed

National Commission on Social Security Reform is to examine the financial

situation of the Social Security system and report its recommendations by

January 1983.

The remaining proposals for cuts in benefit payments are aimed at

federal employee benefits and at the means-tested programs, as shown in

Table 8. The periodic cost-of-living adjustments in retirement benefits for

civilian and military employees of the federal government would be limited

to the lower of the percentage increase in federal pay or the increase in the

Consumer Price Index. In addition, as noted earlier, Social Security and a

private rail industry pension would replace the present federal railroad

retirement system.

The proposed cuts in the means-tested programs would affect many of

the same programs that were cut during 1981. In Medicaid, most of the

President's proposals would increase the states' share of the cost while

lowering the federal share; Medicaid beneficiaries would also be required to

make small copayments in order to receive services. In food stamps and aid

for families with dependent children (AFDC), work requirements would be

strengthened, benefit reductions resulting from additional income would be

increased, and federal payments for administrative costs would be reduced.

In guaranteed student loans, the needs test would be made more stringent,

and the fee for taking out a loan would be increased. Most of these changes

16
TABLE 7. OUTLAYS FOR BENEFIT PAYMENTS FOR INDIVIDUALS (By

fiscal year, in billions of dollars)

Actual

1981

Administration Estimates

1982 1983 1984 1985

Social Insurance Programs

Social Security (OASDI)

Railroad retirement

Medicare

Unemployment compensation

Civil Service retirement

and disability

Veterans1 compensation and

readjustment benefits

Other

Subtotal

139.6 156.6 173.5 188.5 202.3

5.3 5.3

42.5 49.5 55.3 61.2 68.3

19.7 25.2 22.6 19.8 18.0

17.7 19.4 21.1 22.4 23.9

10.8 11.5 11.9 12.0 12.3

11.8 12.6 15.1 15.4 15.8

247.4 280.1 299.5 319.3 340.7

Means- Tested Programs

Guaranteed student loans

and other education

Medicaid

Food stamps

Other food and

nutrition programs

Housing

Supplemental security income

Assistance payments (AFDC)

Veterans' pensions

Other

Subtotal

Total

6.2

16.8

11.3

4.9

6.8

7.2

8.5

3.8

3.8

69.3

316.7

6.3

17.8

11.2

4.2

8.1

7.9

8.1

3.9

4.0

71.5

351.6

5.7

17.0

9.6

4.1

8.5

8.9

5.5

4.0

3.1

66.4

365.9

4.3

18.6

9.7

4.2

8.9

7.8

5.5

4.1

2.9

66.0

385.3

3.9

20.4

10.0

4.3

9.4

8.6

5.5

4.2

2.8

69.1

409.8

would concentrate program benefits on families with little or no other

income, while reducing the extent to which transfer payments would be

available to supplement low or moderate earnings.

The Administration's proposed cuts in means-tested benefits are also

an integral part of its plan to transfer full responsibility for the AFDC and

food stamp programs to the states. In exchange, it proposes that the federal

17
TABLE 8. PROPOSED REDUCTIONS IN BENEFIT PAYMENTS FOR

INDIVIDUALS (By fiscal year, in billions of dollars)

1982 1983 1984 1985

Direct Payments to Individuals

Medicare 0.3 2.5 5.1 7.8

Supplemental security income 0.1 0.3. 0.5 0.7

Federal employee retirement

and disability — 0.7 1.*

Railroad retirement — 2.0 2.2

Food stamps 0.3 2.4 2.8

Guaranteed student loans 0.2 0.8 1.1

Other --- 0.3 0.6

Subtotal 0.9 9.0 13.7

Indirect Payments through State and

Local Governments

Medicaid 0.3 2.0 2.3 3.7

Assistance payments program (AFDC) 0.2 1.2 1.1 1.1

Child nutrition — 0.3 0.4 0.5

Other — 0.4 0.6 0.7

Subtotal 0.5 3.9 4.4 6.0

Total Reductions 1.4 12.8 18.1 23.8

SOURCE: Budget of the United States Government, Fiscal Year 1983,

p. 3-9.

NOTE: These figures represent the difference between the Administration's proposal and its current services baseline.

government take full responsibilty for Medicaid. The Administration

estimates that this exchange would save the states more than $2 billion in

1984. The savings would be contingent, however, upon enactment of the

cuts in AFDC and food stamps and upon the increase in state Medicaid costs

described above. Without any program changes, CBO estimates that the

states would lose $1.5 billion under the swap. Neither a federal cost nor a

savings, however, is reflected in the published budget figures.

Direct Grants to State and Local Governments. Grants to state and

local governments accounted for $95 billion in federal government outlays in

18
fiscal year 1981. Of this amount, $40 billion represented benefit payments

to individuals made through state and local governments; these indirect

payment grants were discussed in the previous section of this chapter.

Direct grants to state and local governments totaled $55 billion.

Spending for direct grants was substantially reduced during the first

session of the 97th Congress. The Omnibus Reconciliation Act of 1981

(Public Law 97-35) reduced authorized spending for sewage treatment plant

construction grants, limited obligations for federal-aid highways, and

decreased authorizations for urban mass transportation. Existing grant

programs in the areas of community development, elementary and secondary

education, community services, and social services were combined into new

block grants and their funding reduced. Finally, and largest in dollar terms,

appropriations under the Comprehensive Employment and Training Act were

halved in 1982 and not authorized in later years.

The Administration proposes further substantial reductions in grants

for 1983 and later years, as shown in Table 9. New grant consolidations are

proposed for vocational and adult education, education for the handicapped,

employment and training, rehabilitation services, child welfare services, and

welfare administration. Funding for these new consolidated grants would be

less than that for the predecessor programs, and funding for the block grants

enacted last year and for other grants would also be reduced. Under the

Adminstration's program, grant outlays would decline to $44 billion in 1983,

$42 billion in 1984, and $41 billion in 1985.

Most of the grants that would be reduced during the 1983-1985 period

would be terminated by fiscal year 1988 as part of the Administration's new

federalism initiative. One major element of that initiative—the swap of

responsibility for certain public assistance programs between federal and

state governments—has already been discussed. The second part—called

the turnback component—consists of the transfer of responsibility from the

federal government to the states of over 40 programs, along with the

resources with which the states may finance them. The states would have

the choice of continuing to carry out the programs that the federal

government gives up, modifying them, or discontinuing them. The plan's

details are described by the Administration as a framework for discussion.

Specific legislative proposals are to be developed after extensive consultation with Members of Congress and state and local officials.

The new federalism proposal reflects the Administration's concept

that state and local governments should have full responsibility for local

transportation, community development and capital investment, general

education, social service delivery, and cash assistance to the nonelderly

needy. The federal government would be involved only in programs deemed

19

90-395 0-82- 4
TABLE 9. OUTLAYS FOR DIRECT GRANTS TO STATE AND LOCAL

GOVERNMENTS (By fiscal year, in billions of dollars)

Energy Conservation Grants

Environmental Protection Agency

Construction Grants

Other Natural Resources and

Environment

Agriculture

Highway Grants

Urban Mass Transportation Fund

Airport Grants

Community Development Grants

Urban Development Action Grants

Rental Rehabilitation Grants

Area and Regional Development

Elementary, Secondary, and

Vocational Education

Training and Employment

Social Services

Combined Welfare Administration

General Revenue Sharing

Other General Purpose Fiscal

Assistance

Other

Actual

1981

0.5

3.9

1.1

0.8

9.1

3.8

0.5

4.0

0.4

—

1.2

6.6

8.0

6.2

—

5.1

1.6

2.0

Administration Estimate

1982

0.5

4.0

1.1

0.9

8.2

3.7

0.5

4.0

0.5

—

1.0

6.7

4.2

6.1

—

4.6

1.7

1.9

1983

0.2

3.4

0.8

0.9

8.2

3.1

0.4

3.4

0.6

—

0.8

5.1

2.0

4.8

1.7

4.6

2.0

1.7

1984

0.1

2.8

0.7

0.9

8.2

2.9

0.5

3.2

0.5

0.1

0.5

4.2

2.7

4.8

1.7

4.6

2.2

1.2

1985

—

2.7

0.7

0.9

8.3

2.9

0.6

3.5

0.5

0.1

0.3

3.6

2.3

4.8

1.7

4.6

2.5

1.1

Total 54.8 49.6 43.7 41.8 41.1

20
to be of national significance, such as education for the handicapped and the

disadvantaged and interstate highways. This new division of responsibilities,

the Administration argues, would encourage diversity among state and local

governments, give individuals paying for services more voice in deciding

whether and how they should be provided, and make governments more

accountable for their actions. The Administration also contends that

"income redistribution is not a compelling justification in the 1980s for

Federal taxing and spending programs. It is the Administration's view that

the Federal Government can do more to provide lasting assistance to the

disadvantaged by assuring strong and less inflationary economic growth than

through income transfer programs." 2/

Other Federal Operations. Other federal operations include foreign

aid, loans and subsidies to individuals and businesses, research and development activities, construction and acquisition of certain physical assets, and

other general operating expenses of the federal government. Proprietary

receipts from the public, including rents and royalties from mineral leasing

and timber sales, as well as various user charges, also fall in this category.

For 1982, the Administration's budget shows a decrease of almost

$4 billion in outlays for other federal operations. This reflects the shift off

budget of oil acquisition expenditures for the strategic petroleum reserve,

as well as a $1 billion allowance for unspecified reductions in fraud, waste,

and abuse. Excluding these two items, the Administration's estimate of

1982 outlays for this category is about the same as the 1981 figure. The

proposed budget for 1983, however, shows a drastic decline of $23 billion in

net outlays, with continued reductions in the later years (see Table 10).

The outlay reductions fall into four basic categories. The largest

outlay decrease, relative to the 1982 estimates, is not from spending

changes, but rather from increases in receipts and collections. Over

$10 billion stems from a planned acceleration in the leasing of Outer

Continental Shelf (OCS) lands, which the Administration estimates would

almost triple bonus bids in 1983. Proposed user fees account for $1 billion

of the outlay reduction in 1983 and $2 billion in 1984 and 1985. The new

fees would include levies on users of inland waterways and deep draft

harbors, commercial and recreational boatmen, electric utilities that

generate radioactive wastes, recipients of loans guaranteed by the Veterans

Administration, and visitors to the National Parks and other federal

recreational facilities.

21 Economic Report of the President, p. 92.

21
TABLE 10. OUTLAYS FOR OTHER FEDERAL OPERATIONS (By fiscal

year, in billions of dollars)

Gross Outlays a/

Rents and Royalties on the

Outer Continental Shelf

New User Fees

Other Proprietary Receipts

and Postal Service Payment

for Employee Retirement

Administrative Initiatives

Asset Purchases by the

Federal Financing Bank

Total (Net Outlays)

Actual

1981

89

-10

—

-11

—

-11

57

Administration Estimate

1982

83

-8

--

-14

-2

-5

54

1983

71

-18

-1

-15

-5

-1

31

1984

72

-18

-2

-17

-8

»

27

1985

71

-18

-2

-18

-9

*

25

*Less than $500 million.

a/ This figure is an approximation. The figures are understated to the

extent that they are net of offsetting collections that are credited to

program accounts and not to distinct receipt accounts. Also, the

figures include the effects of certain asset transactions, loan repayments, and other factors that can distort the gross spending figures.

The 1983 budget also includes $5 billion in outlay reductions attributable to a number of administrative actions. Of this, $3 billion are

unspecified savings resulting from reductions in fraud, waste, and abuse,

more effective debt collection, and increased sales of excess federal

property. These unspecified savings are projected to rise to $7 billion by

1985.

The remainder of the savings in this category is to be achieved by

reductions in gross program outlays. These are projected to decline from

$83 billion in 1982 to $71 billion in 1983--a drop of 15 percent—and to

remain roughly level in 198* and 1985. About $7 billion of this drop occurs

in nondiscretionary programs, largely in the farm price support programs of

the Commodity Credit Corporation (see Table 11). Among discretionary

22
TABLE 11. GROSS OUTLAYS FOR OTHER FEDERAL OPERATIONS (By

fiscal year, in billions of dollars)

. . i Administration Estimate

1982 1983 198* 1985

Energy 11.0 7.3 5.7 5.9 6.1

Natural Resources and Environment 10.8 10.9 10.2 10.1 10. *

Education, Training, Employment,

and Social Services 4.2 4.3 3.7 3.2 3.3

Farmers Home Administration

Credit Programs 10.9 7.* 4.2 3.* 3.5

Other Credit Programs a/ 5.9 4.3 3.5 2.5 1.9

International Affairs 11.9 11.9 12.8 13.2 13.9

Space Program 4.9 5.3 6.1 6.1 5.8

Federal Aviation Administration 2.7 2.6 3.0 3.3 3.7

Law Enforcement Activities 2.* 2.5 2.7 2.7 2.8

Internal Revenue Service 2.* 2.6 2.9 3.0 3.2

Farm Price Supports 3.6 5.8 1.* 1.7 1.3

Other Nondiscretionary Programs b/ 1.1 -0.9 -2.7 -2.5 -3.3

Other 16.8 18.9 18.0 19.6 18.6

Total 88.6 82.9 71.5 72.2 71.2

NOTE: These figures are CBO approximations based on data from the

Office of Management and Budget. Allowances for pay raises have

been distributed to the appropriate program.

a/ Includes the Export-Import Bank, the GNMA special assistance

functions fund, housing for elderly and the handicapped under the

Department of Housing and Urban Development, Small Business Administration business and disaster loans, and the Central Liquidity Facility.

b/ Includes the Federal Savings and Loan Insurance Corporation fund, the

~ Federal Deposit Insurance Corporation, the Veterans Administration

loan guarantee revolving fund, and settlements of railroad litigation.

23
programs, the largest cuts are targeted for energy, natural resources,

environment, education, and credit activities. These are offset to some

extent, however, by proposed spending increases for foreign security assistance, the space program, the air traffic control system, law enforcement

activities, and the Internal Revenue Service.

Off-Budget Outlays

The Administration's budget also contains new estimates for

off-budget outlays and the federal debt. Off-budget outlays are those of

certain federal entities whose spending has been excluded from the unified

budget totals. These outlays must be added to the unified budget deficit,

however, to derive the total federal deficit that must be financed. When

off-budget outlays are financed by Treasury borrowing, the additional debt

is subject to the statutory debt limit.

A new off-budget entity was created in 1981, when the Congress

removed from the budget the appropriation for acquiring oil for the

Strategic Petroleum Reserve. The Postal Service fund was given off-budget

status in 1974. Except for these two programs, the outlays of the

off-budget federal entities are incurred for carrying out federal loan

programs. As shown in Table 12, the Federal Financing Bank (FFB) accounts

TABLE 12. OUTLAYS OF OFF-BUDGET FEDERAL ENTITIES (By fiscal

year, in billions of dollars)

Actual

1981

Administration Estimates

1982 1983 1984 1985

Federal Financing Bank 21.0 16.2 12.1 11.0 7.8

Strategic Petroleum Reserve —- 2.8 2.8 2.3 2.2

Postal Service Fund 0.1 0.6 0.7 0.9 0.8

Rural Electrification and

Telephone Revolving Fund * — — — —

Rural Telephone Bank 0.1 0.2 0.2 0.2 0.2

U.S. Railway Association -0.3 -0.1 * — —

Synthetic Fuels Corporation — — — — —

Total 21.0 19.7 15.7 14.3 11.0

*Less than $50 million.

24
for most of these outlays. The FFB's outlays do not come from programs

that the FFB operates itself. Instead, the FFB assists other programs within

the government by purchasing their outstanding loans (loan assets) or

purchasing obligations that they have guaranteed.

When the FFB buys loan assets, it in effect converts direct loans that

have already been made by another agency into off-budget direct loans of

the FFB. If the selling agency is in the budget, its loan asset sales reduce

net budget outlays. Also, when the FFB purchases newly originated

guaranteed loans, it has the effect of converting loan guarantees that are

not recorded in the budget totals into direct federal loans outside the

budget.

As part of its effort to limit the growth of federal credit, the

Administration proposes to reduce substantially the outlays of the Federal

Financing Bank. FFB outlays are projected to fall from $21.0 billion in 1981

to $16.2 billion in 1982, $12.1 billion in 1983, and $7.8 billion by 1985. The

1982 and 1983 decreases are primarily the result of reduced purchases of

Farmers Home Administration (FmHA) loan assets by the FFB. Net

purchases of FmHA loan assets fall from $10.9 billion in 1981 to $1.1 billion

in 1983 (see Table 13). Net FFB disbursements of direct loans guaranteed by

other agencies will remain stable in 1982, 1983, and 1984, as reductions in

loans to the Student Loan Marketing Association and the Rural Electrification Administration offset increases in foreign military sales credit. Most

major categories of direct loans decline by 1985.

Federal Debt

Early in fiscal year 1982, the federal debt subject to statutory limit

exceeded $1 trillion. By the end of fiscal year 1985, according to Administration estimates, the debt will reach almost $1.5 trillion. The increase in

debt from the beginning of 1982 to the end of 1985 represents an average

annual increase of about 14 percent--only slightly higher than the projected

increase in the gross national product over this period. Debt as a

percentage of GNP in 1985 will, therefore, be little changed from its 1981

level. In fact, as Figure 6 illustrates, the ratio of debt to GNP has remained

relatively constant since the early 1970s.

The Congress customarily has placed statutory limitations on federal

debt, and estimates of federal debt are included in the Congressional budget

resolutions. The current limitation—$1,079.8 billion--was enacted on

September 30, 1981, and expires on September 30, 1982. Federal debt

subject to limit totaled $1,039.3 billion at the end of January 1982 and is

expected to reach the statutory ceiling by May. The Administration's

25
TABLE 13. NET OUTLAYS OF THE FEDERAL FINANCING BANK (By

fiscal year, in billions of dollars)

Purchases of Agency Loan Assets

Rural Electrification Administration

Farmers Home Administration

Subtotal

Direct Loans (Purchases of Agency

Guaranteed Loans)

Foreign military sales credit

Rural Electrification Administration

Energy Research and Technology

Administration

Low -rent public housing

Student Loan Marketing Association

Small Business Administration

Tennessee Valley Authority

Other

Subtotal

Interest, Transfer of Surplus,

and Administrative Expenses

Total

Actual

1981

0.7

10.9

11.5

1.9

3.9

*

0.8

2,0

0.1

0.2

0.5

9.4

0.1

21.0

Administration Estimates

1982

0.6

5.4

6.0

2.7

4.3

0.5

1.2

0.7

0.2

0.2

0.4

10.2

16.2

SOURCES: Budget of the United States Government,

1983

0.5

1.1

1.7

3.7

4.1

0.9

1.0

—

0.2

0.3

0.2

10.4

12.1

1984

0.4

0.2

0.6

4.2

3.6

1.0

1.4

—

0.2

0.2

-0.2

10.4

11.0

Fiscal Year

1985

0.5

0.2

0.6

3.0

3.3

0.8

-0.1

—

0.2

0.3

-0.3

7.2

7.8

1983,

pp. 8-168-172; and the Office of Management and Budget.

*Less than $50 million.

26
Figure 6.

Federal Debt

Federal Debt, End of Year

£,UUU

1,800

1,600

1,400

| 1,200

Q

o 1,000

1

| 800

600

400

200

0

—

—

—

-

_

-

- p.

I 1

1970

— »^» ^w

III 1 1

1972

*••"•

WH

1974

Actual Administration

Estimates —

—

r^~i

•*»•— ~~

j"«^TM

p*vw^

,—

—

-

:

-

-

-

1976 1978 1980 1982 1984

Fiscal Years

50

40

30

20

10

Federal Debt as a Percentage of GNP

Actual

J I I I I I

Administration

Estimates

J I

1970 1972 1974 1976 1978

Fiscal Years

1980 1982 1984

SOURCE: Budget of the United States Government, Fiscal Year 1983, Table 21, p. 9-60.

27
budget estimates that debt subject to limit will reach $1,130.0 billion, or

$50.2 billion above the current limitation, by the end of fiscal year 1982.

For 1983, the budget projects another increase of $124.3 billion in federal

debt subject to limit.

Four elements enter into the calculation of the amount by which the

statutory debt limit must be changed: the unified budget deficit or surplus,

the investment of trust fund surpluses in federal securities, the deficit of

off-budget federal entities, and various means of financing other than

borrowing. Table 14 shows the estimates for these elements underlying the

public debt levels projected by the Administration. Even if the unified

budget were balanced, the debt subject to limitation would increase because

of the investment of trust fund surpluses in federal debt securities and

because of the deficit of the off-budget entities.

TABLE 14. ESTIMATES OF DEBT SUBJECT TO STATUTORY LIMIT (By

fiscal year, in billions of dollars)

Actual

1981

Administration Estimates

1982 1983 1984 1985

Debt Subject to Limit

(beginning of year) 908.7 998.8 1,130.0 1,254.3 1,368.7

Increase in Debt Subject

to Limit

Unified budget deficit 57.9 98.6 91.5 82.9 71.9

Trust fund surplus 6.8 12.5 15.4 17.9 31.3

Deficit of off-budget

federal entities 21.0 19.7 15.7 14.3 11.0

Means of financing (other

than borrowing) and

other adjustments 4.3 0.4 1.6 -0.7 -0.8

Total Increase 90.1 131.2 124.3 114.4 113.3

Debt Subject to Limit

(end of year) 998.8 1,130.0 1,254.3 1,368.7 1,482.0

28
THE CREDIT BUDGET

The credit budget, instituted in 1980, attempts to bring together and

focus attention on the new lending activities of the federal government. It

records estimates by program of new direct loan obligations and new loan

guarantee commitments. The credit budget totals are based on gross levels

of activity, without offsets for repayments. Guaranteed loan totals are

based on the full amount of the loan, even if the amount covered by the

guarantee is less than the total.

During its first session, the 97th Congress took a number of actions to

control the federal credit budget. Limitations were included in appropriation bills for 40 percent of direct loans and 70 percent of loan guarantees.

Language in the Continuing Appropriations Resolution (Public Law 97-92)

specified that these limitations should also be taken as target levels that

should be met unless there were insufficient qualified borrowers. This

stipulation was included to prevent administrative reductions in the credit

budget. In response, the Administration has submitted proposals to reduce a

number of 1982 limitations as part of its proposed 1983 budget.

The Administration believes that the rapid growth of federal credit

activity has adversely affected the nation's productivity by channeling funds

to less productive borrowers and has increased pressures on interest rates in

the private market. It is, therefore, proposing that the credit budget for

1983 be limited to an increase of 3 percent above the revised 1982 level. Its

proposed credit budget for 1983 totals $147.3 billion—$49.0 billion in new

direct loan obligations and $98.4 billion in new loan guarantee commitments.

The 1983 request for direct loans is 13 percent below the revised 1982

request, while the request for primary loan guarantees is 13 percent above

the revised 1982 request. Table 15 provides a comparison of the 1981 actual

credit budget and the Administrations1 proposals for 1982 and 1983.

Table 16 shows the Administration's major changes in the 1983 credit

budget. The only major growth in direct loans is for international security

assistance, primarily foreign military sales credit, which will increase by

$1.0 billion as part of the Administration's program to increase military

assistance to strategically important nations. The Administration proposes

a $2.6 billion reduction in direct loans through the Farmers Home Administration, including major decreases in direct loans for rural housing.

Commodity Credit Corporation (CCC) loans are projected to decrease by

$2.0 billion, on the assumption of improved market conditions for farmers.

The reduction of $4 million for direct loans of the Small Business Administration would eliminate this program entirely.

29
TABLE 15. TOTAL CREDIT BUDGET (By fiscal year, in billions of dollars)

. . - Administration Estimates

1981

 1982 1983

Direct Loan Obligations

On Budget

Off Budget

Total

Less: FFB Sales of Loan Assets

New Direct Loan Obligations

New Loan Guarantees

Less: Secondary Loan Guarantees

40.9

31.5

72.4

-15.2

57.2

152.7

-44.1

39.9

29.6

69.5

-13.2

56.4

166 . 1

-48.7

31.8

25.5

57.3

-8.3

49.0

161.4

-38.4

Guaranteed Loans Held as

Direct Loans

Federal Financing Bank -30.3 -28.5 -24.7

Government National Mortgage

Association -1.8 -1.9 —

Primary Guarantees 76.5 87.1 98.4

Credit Budget Total 133.7 143.4 147.3

The projected increases in loan guarantees are largely the result of the

expected improvement in the housing market. Growth is anticipated in the

guaranteed loan programs of the Federal Housing Administration (FHA) and

the Veterans Administration. An increase of $1.5 billion in guaranteed loans

for public housing is also projected, as a result of prior-year commitments.

Decreases in guaranteed loans are proposed for the Farmers Home Administration, the Rural Electrification Administration, and the Small Business

Administration.

30
TABLE 16. CHANGES IN THE 1983 CREDIT BUDGET TOTALS (In billions

of dollars)

Credit Budget Totals for 1982

Major Program Changes

Export- Import Bank

Farmers Home Administration

Rural Electrification Administration

Small Business Administration

Low-income public housing

International security assistance

CCC price supports

FHA fund

Veterans' housing

Other

Total Program Changes

Credit Budget Totals for 1983

SOURCE: Budget of the United States

Direct Loan

Obligations

56.4

-0.6

-2.6

-0.4

-0.4

-0.5

1.0

-2.0

-0.1

*

-1.8

-7.4

49.0

Government,

Guaranteed

Loan

Commitments

87.1

—

-0.6

-0.5

-0.3

1.5

0.8

—

6.4

2.9

1.0

11.3

98.4

Fiscal Year 1983,

p. 3-25.

*Less than $50 million.

As the result of both the reductions in the credit budget proposed by

the Administration and increased repayments, net credit extended is estimated to decrease by 6 percent between 1982 and 1983. Figure 7 provides

an historical perspective on the components of net federal lending. The

1983 decrease will be only the second reduction since 1974, when federal

credit activities began to expand at an accelerated rate.

31
Figure 7.

Components of Net Federal Credit, Fiscal Years 1972-1983

Billions of Dollars

70

Direct LoansOff-Budget Agencies

Direct LoansOn-Budget Agencies

1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982b 1983b

Fiscal Years

a

 Primary guarantees: excluding secondary guarantees and guaranteed loans acquired by on-and off-budget agencies.

b

 Estimates

SOURCE: Budget of the United States Government, Fiscal, Year 1983, Special Analysis F, Federal

Credit Programs.

32
CHAPTER II. THE ADMINISTRATION'S ECONOMIC ASSUMPTIONS

Both the Congressional Budget Office and the Administration

anticipate an end to the current recession early in 1982, with a resumption

of moderate growth and a continued slowing of inflation. While the

recovery projected by the Administration is not particularly strong

compared with earlier cyclical recoveries, its projections through 1987 are

more optimistic than those of most economic forecasters, including CBO. \J

In CBO's view, tight credit conditions are likely to limit economic growth.

In fact, there is a risk that the clash between restrictive money growth and

fiscal stimulus will lead to higher interest rates and weaker growth than

forecast by either CBO or the Administration.

ECONOMIC DEVELOPMENTS IN 1981

The performance of the economy in 1981 was mixed. Economic

growth was weak; measured from fourth quarter to fourth quarter, real GNP

increased a scant 0.7 percent during 1981 while the unemployment rate rose

to 8 1/2 percent by year's end. On the other hand, inflation slowed

significantly in 1981; measured from fourth quarter to fourth quarter, the

growth in the Consumer Price Index (CPI) slowed from a rate of

12.5 percent in 1980 to a rate of 9.5 percent in 1981.

The sluggish growth in 1981 resulted largely from very tight credit

conditions. 2/ Inflation slowed mainly because of bountiful farm output,

which resulted in relatively modest food price increases, because of the glut

in world oil markets, which stabilized energy prices, and because of the

appreciation of the dollar in foreign exchange markets, which reduced prices

of imported goods. The developments in food and fuel were largely

unexpected by forecasters a year ago. Accordingly, most forecasters,

including the Administration and CBO, have modified their projections for

1982 and 1983 to show lower real growth and/or lower inflation than

previously expected.

\J Congressional Budget Office, The Prospects for Economic Recovery

(February 1982).

2J The Federal Reserve's policies in 1981 are analyzed in The Prospects

for Economic Recovery, pp. 39-49.

33
COMPARISON OF ADMINISTRATION AND CBO FORECASTS FOR 1982

AND 1983

The Administration and CBO forecasts are in close agreement for

calendar year 1982 (see Table 17). They see output in constant dollars rising

by about 3 percent over the four quarters of the year, and unemployment in

the neighborhood of 8 1/2 percent at year's end. The forecasts are also in

close agreement for inflation and short-term interest rates.

TABLE 17. COMPARISON OF ADMINISTRATION AND CBO FORECASTS

(By calendar year)

1982 1983

Gross National Product (GNP)

Current dollars (percent change,

fourth quarter over fourth quarter)

President's February budget 10.4 11.0

CBO baseline 10.3 11.1

Constant (1972) dollars (percent change,

fourth quarter over fourth quarter)

President's February budget 3.0 5.2

CBO baseline 2.8 3.9

Prices

GNP deflator (percent change,

fourth quarter over fourth quarter)

President's February budget 7.2 5.5

CBO baseline 7.2 6.9

Consumer Price Index (percent change,

fourth quarter over fourth quarter)

President's February budget 6.6 5.1

CBO baseline 6.* 7.2

Unemployment Rate (percent,

fourth quarter)

President's February budget 8.* 7.6

CBO baseline 8.7 7.6

Interest Rate (91-day Treasury bills,

percent, annual average)

President's February budget 11.7 10.5

CBO baseline 12.0 13.2
In 1983, however, the Administration's forecast for inflation and

growth is more optimistic than CBO's. The Administration looks for real

GNP to expand by 5.2 percent, and for inflation (as measured by the GNP

deflator) to fall to a rate of 5.5 percent. The unemployment rate in the

Administration's forecast falls to 7.6 percent by the fourth quarter of next

year and, for the year as a whole, the three-month Treasury bill rate is

expected to average 10.5 percent.

By contrast, CBO expects real GNP to grow by about 1 1/2 percentage

points less than the Administration in 1983, and the GNP deflator to rise

about 1 1/2 percentage points more. 3/ Short-term interest rates average

2 3/4 percentage points higher over the year, while the unemployment rate

falls to the same level as in the Administration's forecast. This latter

result, despite different rates of economic expansion in the two forecasts,

may be caused by assumed patterns of productivity growth during the

recovery.

The slow growth expected by CBO for 1983 is largely the consequence

of higher real rates of interest in its forecast that serve to dampen the

recovery in economic activity. The key factors behind the CBO forecast of

a modest further deceleration of inflation are:

o Wage demands will soften in the face of slack labor markets, but

the reduction in labor costs will probably be limited once the

recovery is well underway.

3/ As measured by the CPI, the two forecasts of inflation are similar in

1982 but diverge in 1983. The Administration expects a CPI increase of

6.6 percent in 1982, slowing further in 1983 to 5.1 percent, measured

from fourth quarter to fourth quarter. CBO, on the other hand, expects

6.4 percent in 1982 and 7.2 percent in 1983. A detailed comparison of

these CPI inflation forecasts is not possible given the absence of

comparative detail on individual prices used to construct the CPI. The

1983 increase reflected in the CBO forecast does not, however,

represent an assumed intensification of underlying inflationary

pressures. Rather, it reflects assumed patterns of change in oil prices

and in mortgage rates between 1982 and 1983. CBO assumes that

energy cost and mortgage interest cost movements will hold down the

increase in the CPI below the underlying rate of inflation in 1982 but

not in 1983. Thus, by 1983, CBO's forecast of the CPI reflects more

modest expectations of the reduction in the inflation rate.

35

90-395 0-82- 5
o The cyclical increase in labor productivity growth is more likely to

affect profits than prices.

o The supply-inducing effects of the 1981 tax act will probably build

slowly, in part because of high real interest rates.

Short-Run Forecast Risk. At present, the key element of uncertainty

in the CBO forecast is the prospective course of monetary policy. The CBO

forecast for 1982 and 1983 assumes growth in the monetary aggregates at

the upper ends of the current target ranges. Given the historical relationship between money and nominal GNP, and the CBO view that inflation will

decelerate slowly, the assumed Federal Reserve policy implies that real

growth during the cyclical recovery period will be less than normal as the

result of continued high levels of interest rates. There is considerable

chance, moreover, that economic growth will be much weaker than projected by CBO, especially if the Federal Reserve limits money growth more

severely than assumed.

In addition, high federal deficits will result in a marked increase in

Treasury borrowing in the CBO forecast, putting further upward pressure on

interest rates. As the recovery gets under way, the conflict between the

stimulative fiscal policy and a tight monetary policy could push interest

rates to high levels. The outcome is very difficult to predict because this

policy combination has no historical precedent. However, there is a distinct

possibility of even weaker growth than that projected by either the

Administration or CBO.

The general rise in interest rates since late November 1981 is most

unusual during a recession and represents a significant risk to the forecast in

the months ahead. If interest rates do not moderate soon, the projected

upturn in economic activity could be delayed. The rise in long-term interest

rates since the passage of the tax act, for example, has probably offset

much of the reduction in capital costs brought about by the Accelerated

Cost Recovery System. Continued high interest rates would bear heavily on

residential construction, autos, and other durable goods industries. Tight

credit conditions are hitting the economy hardest in those very sectors

where fiscal policy is seeking to promote increases in the supply of

productive resources and capacity. If this situation persists, little supply

response can be expected from the Administration's program, even over the

medium term. Indeed, a prolonged period of slack characterized by low

rates of capacity utilization and diminished employment opportunities could

actually discourage capital formation and inhibit labor supply growth,

thereby severely limiting the economy's productive potential. Finally, if

tight credit conditions persist, more and more businesses will find

themselves in financial distress.

36
THE PROSPECTS FOR GROWTH THROUGH 1987

The Administration's economic assumptions for the 1984-1987 period

are also more optimistic than CBO's (see Table 18 and Figure 8). The

projections beyond 1983 are not forecasts of probable economic outcomes

but, rather, are assumptions. The Administration's long-range assumptions

are, in its words, "projections consistent with the economic policy objectives

of the Administration." CBO's baseline assumptions, on the other hand, are

projections of what appears to be an attainable improvement in economic

conditions. 4/

Real Growth. The Administration assumes an average rate of growth

of 4.6 percent a year between 1984 and 1987. CBO, on the other hand,

assumes an average growth rate of 3.5 percent. In comparable four-year

periods following previous postwar recoveries, real growth has averaged

3.4 percent a year, and ranged between 2.0 and 5.2 percent. 5/ Real growth

in the 1984-1987 period could be higher than the average of historical

experience for three reasons.

o The fiscal stimulus over this period will be sizable;

o The gap between current and potential production is very large,

according to most estimates, meaning that there is little chance

that the economy will reach its capacity limits quickly even if real

growth is rapid; and

o Some of the 1981 tax act's features could provide a substantial

boost to supply over a period of several years, increasing the

economy's capacity limits.

t*l The Administration's description is from Budget of the United States

Government, Fiscal Year 1982 (January 1981), p. 2-4. CBO's longrange assumptions are described in The Prospects for Economic

Recovery, p. 58.

5/ If the business cycle trough is assumed to occur sometime during the

first half of this year, as most forecasters now predict, the 1984-1987

period represents a four-year period beginning roughly two years after

a business cycle trough as designated by the National Bureau of

Economic Research.

37
TABLE 18. COMPARISON OF ADMINISTRATION AND CBO LONG-RUN ECONOMIC

ASSUMPTIONS (By calendar year)

1982 1983 1984 1985 1986 1987

Gross National Product (GNP)

Current dollars (percent change,

year to year)

President's February budget

CBO baseline

Pessimistic alternative

Constant (1972) dollars (percent

change, year to year)

President's February budget

CBO baseline

Pessimistic alternative

Prices

GNP deflator (percent change,

year to year)

President's February budget

CBO baseline

Pessimistic alternative

Consumer Price Index (percent

change, year to year)

President's February budget

CBO baseline

Pessimistic alternative

Unemployment Rate (percent,

annual average)

President's February budget

CBO baseline

Pessimistic alternative

Interest Rate (91 -day Treasury

bills, percent, annual average)

President's February budget

CBO baseline

Pessimistic alternative

"Real" Interest Rate a/

President's February budget

CBO baseline

Pessimistic alternative

8.1

7.5

7.3

0.2

-0.1

-0.3

7.9

7.5

7.6

7.3

7.5

7.6

8.9

8.9

8.9

11.7

12.0

13.0

3.8

4.5

5.4

11.5

11.9

11.1

5.2

4.4

3.0

6.0

7.3

7.9

6.0

6.9

7.6

7.9

8.0

8.5

10.5

13.2

14.3

4.5

5.9

6.4

10.2

10.4

9.8

5.0

3.6

2.1

5.0

6.6

7.5

4.6

6.9

8.0

7.1

7.4

8.4

9.5

11.3

12.7

4.5

4.7

5.2

9.7

9.7

9.2

4.7

3.5

2.0

4.7

6.0

7.1

4.8

6.4

7.6

6.4

7.2

8.5

8.5

9.4

10.8

3.8

3.4

3.7

9.2

9.4

8.9

4.4

3.5

2.0

4.6

5.7

6.7

4.6

6.0

7.2

5.8

6.9

8.5

7.0

8.7

10.1

2.4

3.0

3.4

9.0

9.1

8.5

4.3

3.5

2.0

4.5

5.4

6.4

4.5

5.7

6.9

5.3

6.7

8.5

5.5

8.1

9.4

1.0

2.7

3.0

NOTE: The Administration's assumptions include the presumed effects of its new budget

initiatives. The CBO economic assumptions are based on estimates of current

policy taxes and spending.

a/ "Real" interest rates are defined here as the 91-day Treasury bill rate minus the rate

of inflation as measured by the GNP deflator.

38
Figure 8.

Comparison of Major Economic Assumptions

Real

Economic

Growth I 4

.C

o

i 2

1976

Consumer

Price

Inflation 1

14

10

6

2

1976

Unemployment

Rate

4 -

1976

Three-Month

Treasury

Bill Rate

1976

Administration

CBO Pessimistic

Alternative

1981 1987

1981 1987

1981 1987

1981

Calendar Years

1987

SOURCES: For historical data. Department of Commerce, Bureau of Economic Analysis; Department of Labor,

Bureau of Labor Statistics; and Federal Reserve System, Board of Governors. For projections,

Congressional Budget Office and Office of Management and Budget.

39
There are, however, a number of reasons why one might expect growth to be

lower than the average of the postwar experience.

0 Inflation may remain stubbornly persistent as the result of "sticky"

wage behavior;

o Interest rates are likely to remain high, in real terms, relative to

the postwar average;

o Trend growth in productivity may remain low relative to postwar

experience; and

o Supply shocks of the sort that wracked the economy in the 1970s

could recur.

There is no sure way of predicting the net outcome of all these factors

during the decade, particularly since typical cyclical comparisons may not

be applicable to the current recovery period. In the interests of prudent

budgeting, the Congress may want to consider what the effects would be on

the budget if economic growth were weaker than projected by CBO. For

this reason, CBO has constructed a pessimistic alternative projection in

which inflation is higher and productivity growth is lower than in the CBO

baseline (see Table 18 and Figure 8).

Monetary Policy, Interest Rates, and the Deficit. Tight credit

conditions may be the most serious impediment to economic growth during

the next several years. On October 6, 1979, the Federal Reserve adopted

new operating procedures aimed at achieving greater control over the

long-run growth of the monetary aggregates. The objective was a gradual

reduction in the growth of money and credit in order to reduce inflation. In

the light of this policy objective, the question arises whether the realized

rates of money growth in future years will permit sustained rapid increases

in real economic activity. Ultimately, the answer to this question will be

determined by three factors:

o The rate of money growth;

o The effective limit on nominal GNP growth resulting from money

growth and the rate of money velocity growth; 6/

6/ Velocity may be defined as the number of times an average dollar in the

money supply is used to finance transactions over a given period of

time. Its rate of growth is thus simply the difference between growth

rates in nominal GNP and growth in the monetary aggregate.

40
o The actual rate of inflation which, given the ceiling on nominal

GNP, will determine how much room is left for real GNP growth.

The Administration assumes a further gradual but steady reduction in

the growth of Ml to a rate of about 3 1/2 percent in 1986. 7/ Given the

Administration's assumed rates of nominal GNP growth, the implied rates of

Ml velocity growth are displayed in Figure 9. The rates of Ml velocity

growth through 1986 implied by the Administration's economic assumptions

are very high by historical standards. 8/

Past experience suggests that such high rates of Ml velocity growth

are associated with high interest rates. Furthermore, the CBO

reestimates of the President's budget through 1985 suggest that federal

borrowing will be significant in each year even if the Administration's

proposals are adopted. This will place still more upward pressure on interest

rates. Of course, if the Federal Reserve permitted somewhat more rapid

but still declining rates of money growth, the potential velocity (and

interest rate) constraint on real growth would be eased, leaving more room

for a greater expansion in economic activity. Nevertheless, the assumption

of high velocity growth raises the possibility that the strong economic

growth assumed by the Administration will not materialize.

CONCLUSION

There is a serious risk that the Administration's economic assumptions

will prove to be too optimistic. If so, the budget deficits will be larger than

projected by the Administration, even if all of its budget proposals are

enacted. Moreover^ CBO's technical reestimates of the revenue and

spending levels associated with the Administration's programs, presented in

7/ In the Economic Report of the President (February 1982, p. 206), the

Council of Economic Advisers states: "From the fourth quarter of 1979

to the fourth quarter of 1980, Ml (currency plus checkable deposits)

grew at a 7.3 percent annual rate. The Administration assumes a

gradual but steady reduction in the growth of money to one-half that

rate by 1986."

8/ It is possible, of course, that high rates of Ml velocity growth could be

sustained as long as financial practices aimed at economizing on money

balances continue to grow over time. To what extent this will happen,

particularly if real interest rates fall (which would reduce incentives to

adopt more sophisticated money management techniques) is very much

an open question.
subsequent chapters, also raise the prospect of much higher budget deficits.

The projections of high deficits for the foreseeable future is a matter of

serious concern, particularly because they are only partially the result of

the recession. Such deficits would not only increase the risk of a serious

clash between monetary and fiscal policy during the next few years; they

would also crowd out private investment and this, in time, would adversely

affect long-run economic growth.

Figure 9.

Percent Change in the Velocity of M1B from Two Years Earlier

5

cc

I'

\

/ Implicit in the

/ Administration's

Economic

Assumption

I I I

1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986

Calendar Years

SOURCES: Federal Reserve System, Board of Governors; U.S. Department of Commerce, Bureau of

Economic Analysis; Executive Office of the President, Office of Management and Budget.
CHAPTER III. CBO REVENUE REESTIMATES

According to the Congressional Budget Office's analysis of the

President's February budget revenue estimates, unified budget receipts

could be slightly higher than projected by the Administration in 1982, but

lower in subsequent years, ranging from $6.0 billion less in 1983 to

$20.5 billion less in 1985.

CBO's reestimates of revenues for the 1982-1985 period are lower than

those of the Administration for two reasons:

o CBO's less optimistic economic assumptions, and

o Differences in technical estimating.

Economic conditions could be less favorable than those assumed by the

Administration. The revenue reestimates attributable to the differences

between the Administration's economic assumptions and the CBO baseline

economic forecast and longer-run assumptions are small, amounting to a net

reduction in revenues of about $3.5 billion over the 1982-1985 period.

Reestimation using the CBO baseline economic assumptions causes a reduction in revenues of about $3 billion in 1982 and $1 billion in 1983, an

increase of about $6 billion in 1984, and a reduction of about $5 billion in

1985. If more pessimistic economic assumptions were used instead of the

baseline assumptions, revenues would be reduced by about $4 billion in 1982,

$3 billion in 1983, $1 billion in 1984, and $16 billion in 1985.

CBO's preliminary technical analysis of the Administration's budget

estimates suggests that revenues could be about $4 billion higher than

projected by the Administration in 1982, but lower in subsequent years, by

amounts ranging from about $5 billion in 1983 to $16 billion in 1985.

A potential third reason for reduced revenues over the 1982-1985

period would be the failure of the Administration's new tax proposals to

provide the estimated net increases. Two factors could contribute to this

shortfall: the Congress might not approve the legislative changes required

to implement these proposals; or, if approved, the new proposals might not

produce as much revenue as the Administration now predicts.
Since the Administration has provided only limited information on its

new tax proposals, CBO could not develop independent estimates of their

revenue effects. (See Chapter I for a brief discussion of these proposals.)

This chapter presents CBOfs reestimates of the President's budget revenues

generated by substituting CBOfs baseline economic assumptions for those of

the Administration and using CBO's technical estimating methods. The CBO

reestimates, which are summarized in Table 19, assume that all of the

President's new tax proposals are approved by Congress and that these

initiatives provide the revenue increases specified by the Administration.

Table 20 presents the Administration's revenue estimates and the CBO

reestimates by source.

TABLE 19. CBO REESTIMATES OF ADMINISTRATION BUDGET REVENUES (By fiscal year, in billions of dollars)

1982 1983 1984 1985

President's February Budget 626.8 666.1 723.0 796.6

Preliminary CBO Reestimates

Different economic assumptions

Technical differences

Total Reestimates

President's Budget Reestimated

-3.4

4.3

0.9

627.7

-0.8

-5.2

-6.0

660.1

5.6

-13.0

-7.4

715.6

-4.9

-15.6

-20.5

776.1

DIFFERENCES IN ECONOMIC ASSUMPTIONS

Revenue estimates are highly sensitive to economic assumptions. In

particular, revenue estimates depend upon assumptions about wages and

salaries and other income from dividends, interest, rental property, and

unincorporated businesses; corporate profits; inflation; and interest rates.

Since the individual income tax system is progressive, revenue estimates depend upon assumptions about the relative effects of productivity

increases and inflation on incomes, as well as upon assumptions about the

aggregate level of income. Because individual income taxes are such an

important source of revenue, accounting for almost 48 percent of total

revenues in 1981, slight changes in assumptions about personal income can

have significant effects on revenue projections.
TABLE 20. ADMINISTRATION BUDGET REVENUES AND CBO REESTIMATES, BY SOURCE (By fiscal year, in billions of dollars)

Individual Income Taxes

Corporate Income Taxes

Social Insurance Taxes a/

Excise Taxes

Windfall profit taxes

Other excise taxes

Other

Total

Individual Income Taxes

Corporate Income Taxes

Social Insurance Taxes a/

Excise Taxes

Windfall profit taxes

Other excise taxes

Other

Total

1982

Administration Budget

298.6

46.8

206.5

24.1

18.9

32.0

626.8

CBO Reestimates

300.0

50.5

205.0

22.9

18.6

30.7

627.7

1983

304.5

65.3

222.5

21.2

20.4

32.1

666.1

306.2

59.8

222.0

20.9

20.1

31.1

660.1

IK*

322.9

83.7

242.5

20.0

21.5

32.4

723.0

318.6

77.9

244.3

20.8

20.9

33.0

715.6

1985

362.0

88.2

273.1

19.0

21.7

32.5

796.6

346.9

77.8

275.7

20.4

21.3

34.0

776.1

a/ These revenue estimates exclude supplemental medical insurance

~ premiums and voluntary enrollee premiums for medicare coverage.

These premiums, which were previously included in revenues, are shown

in the February budget as offsets against outlays. The amounts

involved range from $3.9 billion in 1982 to $5.3 billion in 1985.
While the corporate income tax structure is also progressive, progressivity is a less important factor in the estimation of corporate revenues.

Corporate income taxes, however, are sensitive to assumptions about

investment as well as to assumptions about corporate profits.

Social insurance tax estimates depend upon assumptions about wages

and salaries, employment, and inflation. Inflation assumptions are important for the estimation of Social Security taxes since the maximum taxable

wage for these taxes is indexed for inflation. Windfall profit tax estimates

are particularly sensitive to assumptions about oil prices, as Federal

Reserve payments estimates are to assumptions about interest rates.

Estimates of customs duties and of excise taxes other than windfall profit

taxes are more generally responsive to assumptions about the overall level

of economic activity.

Unexpected changes in economic conditions can have significant

effects on revenue projections. Weakening economic conditions alone are

accountable for a $31 billion downward revision since March 1981 in the

Administration's estimate of total revenues for fiscal year 1982.

CBO forecasts a slight drop in economic output and a decline in the

rate of inflation in 1982, while the Administration projects a slight increase

in economic output and a somewhat smaller decline in the rate of inflation.

For 1983 and subsequent years, CBO assumes lower real growth and higher

inflation in each year than does the Administration. Interest rates are

higher throughout the period under the CBO assumptions.

CBOfs assumptions of lower real growth and higher inflation over the

period combine to provide projected levels of GNP that are quite close to

those of the Administration. Since individual and corporate income taxes,

which accounted for almost 60 percent of total revenues in 1981, are most

sensitive to nominal incomes, these differences in economic assumptions

have relatively minor effects on revenue estimates. Therefore, CBO

projects total revenues only $3.5 billion below the Administration's estimate

for the 1982-1985 period.

Reestimates Based on CBO Baseline Economic Assumptions

CBO assumes lower personal income than does the Administration in

every year except 1984, when CBO's income level is higher. These income

differences lower the CBO reestimates of individual income taxes relative

to the Administration's estimates by about $3 billion in 1982 and $5 billion in

1983, raise CBO's reestimate by less than $1 billion in 1984, and lower CBO's

reestimate by about $7 billion in 1985.

46
CBO's reestimates of corporate income taxes based on economic

assumptions result from different assumptions about the level of corporate

profits from current production and about the level of business activity,

which affects the amount of depreciation deductions and investment credits

taken by corporations. In 1982 and 1983, CBO assumes higher corporate

profits than does the Administration, which raises the CBO reestimates of

Corporate income taxes above the Administration's by more than $2 billion

in 1982 and $4 billion in 1983. In 1984, the difference in estimates of profits

is insignificant. In 1985, CBO assumes lower profits than does the

Administration, which lowers the CBO reestimate of corporate income taxes

below the Administration's estimate by about $5 billion.

CBO's assumption of lower levels of business activity results in smaller

amounts of depreciation deductions and investment credits, and thus raises

CBO's reestimates of corporate income taxes relative to the Administration's estimates. The increases in revenues due to these assumptions grow

from about $0.3 billion in 1982 to about $3.7 billion in 1985. Over

60 percent of this increase in revenues is attributable to the accelerated

cost recovery provisions of the Economic Recovery Tax Act of 1981.

Social Security taxes dominate the differences in estimates of social

insurance taxes attributable to economic assumptions. CBO assumes lower

wages and salaries than does the Administration in 1982 and 1983. These

differences reduce the CBO estimates of Social Security taxes below the

Administration's by about $2 billion in 1982 and $1 billion in 1983. In 1984

and 1985, the situation is reversed—CBO assumes higher wages and salaries,

raising the CBO estimates of Social Security taxes above those of the

Administration by about $2 billion in each year.

Lower CBO oil price assumptions reduce the CBO estimate of windfall

profit taxes relative to the Administration's estimates by $0.9 billion in both

1982 and 1983. By 1984, the oil price differential narrows, lowering the

CBO windfall tax estimate by only $0.1 billion. By 1985, the CBO assumes

oil prices slightly above those of the Administration but not by enough to

affect significantly the estimate of windfall taxes in that year.

The largest reestimate of other taxes based on economic assumptions

is attributable to the consistently higher CBO interest rate assumptions.

These raise the CBO estimates of Federal Reserve System payments above

the Administration's in each year. This differential grows from $0.2 billion

in 1982 to $1.7 billion in 1985.
Reestimates Based on Pessimistic Economic Assumptions

In developing its baseline economic assumptions, CBO prepared two

alternative sets of economic assumptions, one optimistic and the other

pessimistic. CBOfs optimistic alternative assumed higher economic growth,

lower unemployment, and lower rates of inflation than did the baseline. The

Administration's economic assumptions are somewhat similar to this optimistic alternative. The pessimistic alternative assumed lower real growth,

higher unemployment, and higher rates of inflation than did the baseline.

If economic conditions were to be closer to those in the CBO

pessimistic alternative, CBO reestimates of Administration budget receipts

would place revenues below those estimated by the Administration in each

year of the 1982-1985 period. Lower individual and corporate incomes

would decrease total income taxes by slightly over $33 billion for the period.

These revenue reductions would be partially offset by increases in excise

taxes and Federal Reserve payments, both of which would be higher because

of the assumption of higher prices and interest rates in the pessimistic

economic alternative.

Substituting the CBO pessimistic assumptions for the Administration

economic assumptions would lower net revenues by $4.3 billion in 1982,

$3.2 billion in 1983, $0.7 billion in 1984, and $16.3 billion in 1985. For the

entire period, total revenues would be about $24 billion below the Administration's estimates.

TECHNICAL ESTIMATING DIFFERENCES

Revenue estimation involves procedures and models which analyze a

large amount of data in addition to the economic variables discussed above.

For example, estimation of individual income taxes requires information

about the portion of personal income that is subject to tax and about the

distribution of income across the tax brackets, in addition to data on

aggregate income levels. Estimation of corporate income taxes requires

information about the distribution of investment between equipment and

structures, about the average tax life for each category of investment, and

about the amount of used capital purchased each year, in addition to data on

aggregate corporate profits. All of the differences from such assumptions

are included in the total differences not explained by quantifiable economic

assumptions, called technical estimating differences.
Without specific information about these types of assumptions, it is

not possible to identify how much of the remaining differences in revenue

estimates between the Administration's budget and the CBO reestimates are

due to each assumption. In this discussion, the reestimates attributable to

specific assumptions are identified.

CBO's revenue reestimates based on technical estimating differences

account for $29.5 billion of the estimated potential revenue shortfall over

the 1982-1985 period, or almost 90 percent of the total. The revenue

reestimates based on technical factors discussed here are divided into two

types:

o Those resulting from the estimation of the revenue effects of some

of the provisions of the recently enacted Economic Recovery Tax

Act of 1981 (ERTA), and

o Those resulting from other technical procedures and assumptions.

Technical reestimates of ERTA provisions mostly affect individual and

corporate income taxes. Other technical differences arise from varying

assumptions about the timing of tax payments and taxpayer behavior other

than that related to ERTA and, to a lesser degree, from differences in

estimating procedures. Although these other differences affect all types of

taxes, they account for most of the technical differences in the reestimates

of the nonincome taxes. This section first discusses the reestimates related

to ERTA and then analyzes the reestimates from other technical factors.

Total CBO technical differences from both ERTA and other factors are

summarized in Table 21.

Economic Recovery Tax Act

Estimates of the revenue effects of the Economic Recovery Tax Act

require assumptions about the distribution of income and investment and

about the economic and taxpaying behavior of affected individuals. In this

analysis, revenue reestimates attributable to such assumptions are classified

as technical reestimates.

Other reestimates of the revenue effects of ERTA are directly

attributable to the differences in economic assumptions that are discussed

above. Table 22 summarizes the CBO revenue reestimates based on the

effects of ERTA, distinguishing between those attributable to technical

estimating differences and those attributable to economic assumptions.
TABLE 21. CBO REVENUE REESTIMATES, BY SOURCE, BASED ON CBO

TECHNICAL ESTIMATING DIFFERENCES (By fiscal year, in

billions of dollars)

1982 1983 1984 1985

Individual Income Taxes

Corporate Income Taxes

Social Insurance Taxes

4.8

1.1

0.2

6.7

-10.7

0.1

-4.9

-7.9

0.1

-8.1

-9.1

0.4

Excise Taxes (including

Windfall Profit Taxes) -0.6 0.2 0.3 1.0

Federal Reserve Payments -1.2 -1.5 -0.6 0.2

Other a/ a/ a/ a/

Total 4.3 -5.2 -13.0 -15.6

a/ Less than $50 million.

CBO's estimates of revenue reductions attributable to ERTA are

larger in each year than are the Administration's. Relative to prior law,

CBOfs estimates range from a revenue reduction of $39.0 billion in 1982 to

$189.2 billion in 1985. The Administration's estimates range from a reduction of $38.3 billion in 1982 to $176.7 billion in 1985.

CBO's reestimates of the revenue effects of ERTA that are attributable to technical factors lower CBO's revenue projections below the

Administration's by growing amounts each year, from $1.4 billion in 1982 to

$12.1 billion in 1985. The largest technical estimating differences occur in

the provisions for across-the-board reductions in individual income tax

rates; the indexing of individual income tax brackets, zero bracket amounts,

and personal exemption; and the Accelerated Cost Recovery System

(ACRS).

Technical differences in the estimation of the across-the-board rate

reductions are most significant in 1984 when the CBO estimate of individual

income taxes is over $5 billion below the Administration's estimate. This

differential narrows to about $3 billion in 1985. The technical estimating

differences for the indexing provisions, which go into effect in 1985, lower

50
TABLE 22. REVENUE REESTIMATES BASED ON THE EFFECTS OF

ECONOMIC RECOVERY TAX ACT (By fiscal year, in billions

of dollars)

1982 1983 1984 1985

Differences from Technical Factors

Rate cuts -0.4 -0.7 -5.2 -3.2

Indexing — — — -3.4

Accelerated Cost Recovery System

Individual a/ -0.3 -0.2 -0.3

Corporate -0.9 -3.3 -3.1 -4.1

Other a/ -0.8 -1.1 -1.1

Subtotal, Technical Differences -1.4 -5.1 -9.6 -12.1

Differences from Economic Assumptions

(CBO Baseline)

Rate cuts 0.3 1.1 -0.2 1.0

Indexing — — — -3.8

Accelerated Cost Recovery System

Individual 0.1 0.2 0.3 0.5

Corporate 0.2 0.6 1.3 2.5

Other a/ -0.1 -0.4 -0.6

Subtotal, Economic Differences 0.6 1.7 0.9 -0.4

Total -0.7 -3.4 -8.6 -12.5

a/ Less than $50 million.

the CBO estimate of individual income taxes by another $3 billion below the

Administration's estimate for that year. For the effects of ACRS on

individual income taxes, these differences reduce the CBO revenue estimates below the Administration's estimates by $0.3 billion or less each year.

Net technical differences attributable to all of the other individual income

tax provisions of ERTA raise the CBO revenue estimates above the

Administration's by about $1 billion or less in each year. The total net

effect of the technical estimating differences for ERTA raises CBO's

reestimates of individual income taxes above those of the Administration by

about $0.4 billion in 1982, and $0.1 billion in 1983, and lowers the reestimates below those of the Administration by about $4.3 billion in 1984 and

$6.6 billion in 1985.

51

90-395 0-82- 6
For corporate income taxes, technical factors related to the estimation of the revenue effects of ERTA reduce CBO estimates below the

Administration's by about $1 billion in 1982 and by slightly more than

$5 billion annually from 1983 to 1985. Almost 70 percent of these differences are attributable to estimates of the accelerated cost recovery

provisions of the act. In 1985, the total technical reestimates of ERTA's

effects on corporate taxes are equivalent to fully 8 percent of CBO's

estimate of total corporate income taxes under current law.

Other Technical Estimating Differences

Net technical differences from CBO assumptions about the timing of

tax payments and other taxpayer behavior, unrelated to ERTA, are quite

small, less than 1 percent of revenues annually from 1982 to 1985. These

considerations combine to raise CBO's revenue reestimates above the

Administration's by $5.7 billion in 1982 and to lower them by growing

amounts thereafter, from $0.1 billion less in 1983 to $3.5 billion less in 1985.

For income taxes, these differences are partly attributable to assumptions about the timing of tax collections. For example, based on receipts

for the first quarter of fiscal year 1982, CBO has assumed a large

overpayment of corporate income taxes this year compared to liabilities.

This overpayment may have been caused, in part, by uncertainty about the

effects of recent requirements for the prompt payment of taxes and of

other recent tax changes. CBO also assumes that more than half of the

1982 overpayments will be offset by refunds in 1983, which would cause

corporate taxes to be smaller than liabilities in that year. The Administration also may have assumed a longer time lag between changes in corporate

tax liability and related adjustments in payments during the 1983-1985

period.

The net effect of these technical estimating differences unrelated to

ERTA raise the CBO estimates of corporate income taxes above those of

the Administration in 1982 by about $2 billion. For 1983 through 1985, these

factors reduce the CBO estimates of corporate income taxes below the

Administration's by between about $3 billion to $5 billion annually. Such

technical factors as the timing of tax payments and the distribution of

income across tax brackets raise the CBO estimates of individual income

taxes above the Administration's by over $4 billion in 1982 and over

$6 billion in 1983, and reduce the CBO estimates by small amounts in 1984

and 1985.

52
CBOf

s technical reestimates raise the estimates of social insurance

taxes by amounts ranging from $0.1 billion to $0.4 billion per year because

of CBO!s inclusion of federal employee pay raises beyond 1982, which raises

federal employee retirement taxes, and because of increased health insurance refunds resulting from a recent court decision, which are included in

the Administration's estimates but not in CBO's.

CBO's reestimates of windfall profit taxes tend to be higher than the

Administration's, in part, because of technical differences in assumptions

about the rate at which domestic oil may be reclassified as incremental

tertiary oil for purposes of the tax. CBO assumes a slower rate of

reclassification of oil as tertiary oil, which is taxed at a lower rate. These

assumption differences raise CBO windfall profit tax estimates above the

Administration by about $0.6 billion in 1983, $0.9 billion in 1984, and

$1.4 billion in 1985. Differences in technical estimation methods lower CBO

net reestimates of excise taxes, other than windfall profit taxes, below

those of the Administration by amounts ranging from $0.3 billion to

$0.6 billion per year.

All remaining significant technical estimating differences are attributable to different methods used to estimate Federal Reserve payments.

CBO identifies as differences due to economic assumptions only those

differences estimated to result from different levels of interest rates.

Therefore, technical differences include differences because of other

assumptions, which might be considered economic or partially economic, but

which cannot be estimated without information about the Administration's

assumptions. These include assumptions about the extent to which the

Federal Reserve's portfolio management will keep earnings high by retaining

medium and long-term securities acquired at peak interest rates. Such

differences cause CBO estimates to be lower than the Administration's by

$1.2 billion in 1982, $1.5 billion in 1983, $0.6 billion in 1984, and higher than

the Administration by $0.2 billion in 1985.

53

CHAPTER IV. CBO OUTLAY REESTIMATES

The Congressional Budget Office's analysis of the President's February

budget spending estimates suggests that unified budget outlays could be

much higher than the Administration projects, by amounts ranging from at

least $13 billion in 1982 to $47 billion or more in 1985.

One reason why outlays may be higher than the Administration

projects is that its budget estimates seem to understate probable expenditures. CBO has made a technical analysis of the Administration's estimates.

The preliminary results of this analysis suggest that outlays may have been

underestimated by about $12 billion in 1982 and by over $20 billion in each

of the next three years (see Figure 10). For the entire 1982-1985 period,

CBO's technical reestimates would add more than $75 billion to the

Administration's projections of outlays.

Figure 10.

CBO Outlay Reestimates

1,000

900

Jj

5 800

e

B

o

55

00

700

600

With CBO Pessimistic

Economic Assumptions

With CBO Baseline

Economic Assumptions

With CBO Technical

Reestimates

Administration

February Budget

657.2

1981 1982 1983

Fiscal Years

1984 1985

55
A second reason why outlays could be higher is that the economy may

fail to perform as the Administration assumes it will. Under CBO's baseline

economic forecast and longer-run assumptions, total outlays over the 1982-

1985 period would be higher by about $45 billion--$l billion in 1982,

$3 billion in 1983, over $16 billion in 1984, and $24 billion in 1985. The

adjustments to the Administration's estimates resulting from the use of

CBO's baseline economic assumptions are not as large as those resulting

from the technical reestimates in any year except 1985. Under CBO's

alternative set of pessimistic economic assumptions, however, outlays could

be higher than projected by the Administration by at least $12 billion in

1983, $35 billion in 1984, and more than $55 billion in 1985.

A third reason for higher outlays in 1983-1985 is that the Administration may not be successful in meeting all of its savings targets for various

management initiatives, such as improved debt collection procedures and

disposal of surplus federal property. CBO has not been able to develop its

own independent estimates of the results of such initiatives, but believes

many of the Administration's estimates to be very optimistic.

Finally, the Administration is proposing significant spending reductions

that require legislative action, especially for entitlement programs. The

Congress may not approve all of these proposals. Also, the Administration

has projected savings from a major reform of health care financing that has

not yet been developed and is already greatly delayed.

This chapter provides CBO's reestimates of the President's budget

proposals, showing the outlay differences that could result from the first

two reasons. The reestimates are divided into two categories: (1) those that

result from substituting CBO's economic assumptions for the Administration's, and (2) those that result from using CBO's technical estimating

methods and from other factors. The reestimates using CBO baseline

economic assumptions and technical estimating methods are summarized in

Table 23. They assume that all of the President's legislative proposals are

approved by the Congress and that the Administration is successful in

meeting most of its targets for savings from management initiatives--in

short, they make no adjustments based upon the third and fourth reasons

given above.

The next two sections of the chapter discuss the two categories of

differences involved in the outlay reestimates. A third section provides a

brief discussion of the various Administration budget estimates that CBO

was unable to evaluate because of lack of specific supporting documentation

or other details. This includes over $7 billion of savings to be achieved in

1985 from planned management initiatives. The remainder of the chapter

details the CBO outlay reestimates for each major function of the budget.

56
TABLE 23. CBO REESTIMATES OF THE ADMINISTRATION'S SPENDING

PROPOSALS (By fiscal year, in billions of dollars)

1982 1983 1984 1985

President's February Budget 725.3 757.6 805.9 868.5

Preliminary CBO Reestimates

Different economic assumptions

Technical reestimates

Total Reestimates

President's Budget Reestimated

1.2

12.2

13.5

738.8

3.2

19.9

23.1

780.7

16.4

22.1

38.5

»..»

24.2

23.0

47.2

915.7

DIFFERENCES IN ECONOMIC ASSUMPTIONS

Economic conditions have major effects on federal budget outlays.

About 30 percent of federal spending is directly indexed for inflation

through automatic cost-of-living adjustments (COLAs). Social Security is

the largest indexed program, accounting for 21 percent of total outlays in

1981. Other directly indexed programs include retirement benefits for

federal civilian and military employees, veterans' pensions, railroad retirement benefits, and Supplemental Security Income benefits. Medicare and

Medicaid costs, while not directly indexed for inflation, increase over time

with the rising costs of medical care. The costs of certain other benefit

programs, such as unemployment insurance and food stamps, vary with

changes in the level of unemployment in the economy. Finally, the cost of

servicing the federal debt depends on the level of interest rates. In sum, the

economic variables having the largest effects on federal outlays are prices,

unemployment, and interest rates.

The Congressional Budget Office recently published its baseline

economic forecast for calendar years 1982-1983, together with longer-run

economic assumptions for 1984-1987.]Y The Administration's assumptions,

which are explained in the President's February budget, are briefly discussed

in Chapter II of this report. The following paragraphs describe the differences in these assumptions for the three variables that affect spending

estimates--prices, unemployment, and interest rates.

17 See Congressional Budget Office, The Prospects for Economic Recovery

(February 1982).

57
Prices

Both the Administration and CBO project a further slowing of inflation

over the next several years. The projected patterns of price increases differ

somewhat, however, and CBO projects a more gradual decline in the rate of

inflation than does the Administration. Federal outlays are particularly

sensitive to annual COLAs for Social Security and other indexed benefit

programs.

The Administration and CBO have identical assumptions for the 1982

and 1983 cost-of-living adjustments for Social Security benefits, but CBO is

projecting COLAs for 1984 and 1985 that are about two percentage points

higher than assumed for the Administration's budget estimates.

Annual Social Security COLAs (Percent)

1982 1983 1984 1985

Administration 8.1 6.5 4.8 4.8

CBO 8.1 6.5 7.2 6.5

The Social Security COLA adjustments that are made in July of each

year are based on the percentage increase in the Consumer Price Index for

urban wage earners and clerical employees (CPI-W), measured from the first

quarter of the preceding year to the first quarter of the current year.

In CBO!s baseline projections, it is assumed that the Social Security

COLAs will diminish in 1982 and 1983, increase again in 1984, and then

resume their downward trend. The explanation for this pattern lies in

developments in the CPI-W assumed by CBO for preceding calendar years.

o World oil prices are assumed to remain constant through the end of

1982, and then to increase at about the overall U.S. rate of

inflation thereafter. Oil prices constitute about one-seventh of the

CPI-W, either directly or through their impact on the costs of

production of other goods and services.

o Mortgage interest rates are expected to decline through 1982, and

then to stabilize in 1983. CBO assumes that house prices will rise

enough in 1982 to offset this reduction in mortgage interest costs.

Since homeownership costs have a weight of about one-quarter in

the CPI-W, movements in interest rates and house prices can

affect COLAs substantially.

58
Both of these factors tend to hold down the growth of the CPI-W in

calendar year 1982 but not in 1983. Consequently, the Social Security

COLA of July 1984 is projected to exceed that of July 1983. Nevertheless,

the underlying rate of inflation, which is driven primarily by wage costs, is

expected to be on a steadily declining trend throughout the projection

period; therefore, with no further special factors operating, the COLA

adjustments should resume their downward movement after 1984.

Unemployment and Interest Rates

For unemployment and interest rates, the Administration forecast and

the CBO baseline forecast for 1982 are quite similar. The forecasts and

assumptions also show similar patterns for 1983-1985—a declining unemployment rate, and falling interest rates (after 1983 in the case of the CBO

assumptions). For each variable, however, CBO projects a more gradual

change than does the Administration. As a result, these two variables are

somewhat higher in the CBO baseline assumptions for 1983-1985 than in the

Administration's assumptions.

The difference in the unemployment rate assumptions is largest in

1985. The Administration's budget estimates assume an unemployment rate

of 6.4 percent in that year, whereas the CBO baseline assumptions project

an unemployment rate of 7.2 percent. For 91-day Treasury bill rates, the

differences range from 2.7 percentage points in calendar year 1983 to

1.8 percentage points in 1984 and 0.9 percentage points in 1985.

CBO Baseline Assumptions

The implications for budget outlays of the differences in the Administration and CBO baseline economic assumptions are shown in Table 24.

Use of the CBO economic assumptions has little effect on outlays the first

two years, adding only $1.2 billion in 1982 and $3.2 billion in 1983--mostly

as a result of higher interest rates projected by CBO.

For 1984 and 1985, the outlay impact of CBO's baseline assumptions is

much larger. Projected outlays in 1984 are raised by over $16 billion and in

1985 by $24 billion. The largest increases again are for interest costs. The

higher interest rates projected by CBO add approximately $10 billion to

outlays in 1984 and $7 billion to outlays in 1985. The higher budget deficits

resulting from the application of CBO's economic assumptions to the

Administration's budget estimates add another $2.5 billion in interest costs

in 1984 and almost $5 billion in 1985.

59
TABLE 24. OUTLAY REESTIMATES BASED ON CBO'S BASELINE ECONOMIC ASSUMPTIONS (By fiscal year, in billions of dollars)

1982 1983 1984 1985

Interest Costs

Higher interest rates

Higher budget deficits

Social Security and Other

Benefits Indexed to the CPI

Other Benefits Affected

by Inflation

Unemployment Compensation

and Related Benefits

Total

0.9 1.4

0.3 0.9

a/

0.1

0.9

1.2 3.2

9.8

2.5

1.4

0.9

1.7

16.4

6.6

4.7

6.8

2.2

4.0

24.2

a/ Less than $50 million.

The higher COLAs projected by CBO in 1984 and 1985 for Social

Security and other indexed benefits add about $1 billion to 1984 outlays and

close to $7 billion to 1985 outlays. The impact of the higher COLAs for

1984 is not fully felt until 1985. Other benefits affected by inflation—

largely Medicare and Medicaid—also show somewhat higher outlays under

CBO economic assumptions than projected by the Administration. The

increase is relatively small in 1983 and 1984, but reaches nearly $2 billion by

1985.

The more slowly declining unemployment rate in CBO's baseline

economic assumptions would raise projected federal outlays by approximately $1 billion in 1983, $2 billion in 1984, and over $4 billion in 1985. The

bulk of these increased outlays is for unemployment insurance benefits.

Outlays for food stamps, Aid to Families with Dependent Children (AFDC),

and Medicaid are also somewhat higher.

60
Pessimistic Alternative

In developing its baseline economic assumptions, CBO prepared two

sets of alternative assumptions--one more optimistic than the baseline

assumption, the other more pessimistic. The Administration's economic

assumptions are similar to the optimistic alternative. The pessimistic

alternative takes account of the potential risks to the economy of a tight

monetary policy combined with a stimulative fiscal policy. In this latter

economic scenario, the three variables of inflation, unemployment, and

interest rates are uniformly higher than in the CBO baseline assumptions

(see Chapter II). If the economy were to follow the path of the CBO

pessimistic alternative, outlays under the President's budgetary proposals

would be much higher than estimated by the Administration, particularly in

1984 and 1985. As shown in Table 25, this alternative adds $12 billion to

outlays in 1983, $36 billion in 1984, and $57 billion in 1985. For the entire

1982-1985 period, total outlays would be higher than the Administration's by

over $100 billion.

TABLE 25. OUTLAY REESTIMATES BASED ON CBO'S PESSIMISTIC ECONOMIC ASSUMPTIONS (By fiscal year, in billions of dollars)

1982 1983 1984 1985

Interest Costs

Higher interest rates 1.5 6.9 19.1 19.1

Higher budget deficits 0.4 2.1 6.1 12.3

Social Security and Other

Benefits Indexed to

theCPI — 0.2 3.0 11.5

Other Benefits Affected

by Inflation — 0.2 1.8 3.8

Unemployment Compensation

and Related Benefits — 2.9 5.9 10,2

Total 1.9 12.3 36.0 56.8

61
The CBO pessimistic assumptions demonstrate how sensitive the

federal budget has become to interest rates. Higher interest rates would

add $47 billion to federal outlays over the 1982-1985 period, accounting for

almost one-half of the total increase under the pessimistic alternative. The

remaining $60 billion of the increase can be attributed in roughly equal

shares to higher inflation, higher unemployment, and higher budget deficits.

TECHNICAL ESTIMATING DIFFERENCES

Technical estimating differences between the Administration and CBO

arise from the use of different assumptions about how quickly appropriated

funds will be disbursed, from different programmatic assumptions, and from

other factors. For 1982-1985, these technical estimating differences are

quite large. The use of CBO estimating methods and programmatic

assumptions increases the Administration's outlay estimates by about 2 percent in each year, beginning with about $12 billion in 1982 and averaging

over $20 billion for each of the next three years. Over the entire period,

these technical differences add more than $75 billion to total outlays. The

major CBO technical reestimates are for defense procurement activities,

farm price supports, net interest costs, and offsetting receipts from leasing

Outer Continental Shelf (OCS) lands, as shown in Table 26.

TABLE 26. CBO TECHNICAL OUTLAY REESTIMATES (By fiscal year, in

billions of dollars)

Major Program 1982 1983 1984 1985

Defense Procurement

Defense Operations

Farm Price Supports

Medicare

Social Security

Net Interest

OCS Offsetting Receipts

Other (net)

Total

2.9

0.5

5.1

1.0

0.9

0.9

1.0

12.2

1.4

1.6

5.6

0.4

0.9

3.7

5.2

1.1

19.9

2.6

-0.3

2.7

1.0

1.2

8.2

4.8

2.0

22.1

2.8

-0.6

2.4

1.0

-0.2

13.5

3.2

0.9

23.0

The CBO technical reestimates for defense procurement and defense

operations result mainly from different assumptions about how quickly

62
appropriated funds spend out over time. CBO's spending rate assumptions

are derived from analyses of historical spending patterns, with particular

emphasis on recent spending trends. CBO staff carefully monitor the

monthly Treasury statements of actual outlays and consult with defense

agency personnel to obtain the latest information on spending patterns.

CBO's outlay estimates proved closer to the actual level for fiscal year 1981

than did the Administration's, and spending in the first quarter of 1982 has

been consistent with CBO's estimate for the current fiscal year.

The CBO technical reestimate for farm price supports is based on

more recent information about the outlook for farm production and commodity prices than was available for the Administration's budget estimates.

The outlook has changed dramatically in the last two months, resulting in a

substantial increase in the demand for government crop loans. The

reestimate also reflects the Administration's voluntary set-aside program

for wheat and feed grains, which was announced too late to be included in

the February budget estimates.

The technical reestimate for Medicare reflects different assumptions

about the utilization of hospital and physician services by the eligible

population, hospital costs, and administrative costs of private contractors

who process benefit claims. Both the Administration and CBO have

underestimated Medicare spending in the past, as costs have continued to

increase rapidly.

The CBO technical reestimate for Social Security benefits results

mainly from the use of different assumptions about the growth in the

number of beneficiaries. CBO staff carefully monitor program data on

beneficiary population trends and other cost factors, and base their estimates on the most recent data available. The reestimate for Social Security

is less than 1 percent of total program costs—well within the range of

estimating error for this program.

The technical reestimate for net interest largely reflects the cost of

servicing the higher deficit levels that would result from using CBO's

technical reestimates for both revenues and outlays. The increased interest

cost resulting from these higher deficits rises from $2.8 billion in 1983 to

$9.9 billion in 1985.

The technical reestimate for OCS offsetting receipts reflects CBO's

preliminary analysis of the Administration's proposed accelerated leasing

program for Outer Continental Shelf oil- and gas-bearing lands. Based on

actual experience to date with this program, discussions with industry

experts, and the outlook for world oil prices, CBO believes that the

February budget estimates are overly optimistic about the likely level of

63
receipts to be derived from the accelerated program. A recent lease sale of

Gulf of Mexico offshore lands produced less receipts than CBO expected,

and the outlook for 1982 receipts is now much lower than previously

estimated. The accelerated program should produce greater receipts, but

the prospects for 1983 and beyond are very uncertain at this point.

CBO has also reestimated outlays of off-budget federal entities to

take account of projected higher loan asset sales to the Federal Financing

Bank (FFB). This technical reestimate adds over $500 million to projected

FFB net outlays in 1982, almost $800 million in 1983, over $900 million in

1984, and more than $1 billion in 1985.

UNEVALUATED ADMINISTRATION SAVINGS ESTIMATES

The Congressional Budget Office has been unable to evaluate some of

the Administration's outlay estimates, mainly because of a lack of information. Estimated savings from several proposed management initiatives, for

example, cannot be evaluated until they have been carried out. These

include the prevention of waste, fraud, and abuse in unspecified programs;

improved debt collection; and the sale of surplus federal property. The

Administration projects savings from these initiatives at $7.0 billion by

1985, a target that appears optimistic in light of past experience.

Spending estimates sometimes reflect estimating biases, which may be

either upward or downward depending upon the kinds of policies being

advocated. For example, all administrations tend to overestimate outlays

for new programs. The Administration's outlay estimates for the new

hazardous substance response trust fund are a case in point (see Function

300 reestimates). On the other hand, federal agencies also tend to

overestimate the savings to be achieved through administrative or other

economies. This would appear to be the case for many of the management

initiatives included in the February budget estimates, especially the unallocated targets in Functions 920 (allowances) and 950 (undistributed offsetting

receipts). Since no supporting information is available for these initiatives,

CBO has not been able to make an independent evaluation.

The President's February budget also includes estimated savings from

future legislative proposals not yet developed. For example, savings of

nearly $2 billion in 1984 and over $4 billion in 1985 are included for health

care financing reforms in the Medicare programs. Similar estimates were

included in the Administration's budget projections last year, but a specific

legislative proposal has not yet been developed. CBO has no basis,

therefore, for evaluating the accuracy of these estimates.
Table 27 provides a list of the savings estimates in the President's

February budget that CBO was unable to evaluate and, therefore, did not

include in its technical reestimates. They are described in more detail in

the function-by-function discussion that follows.

TABLE 27. UNEVALUATED ADMINISTRATION SAVINGS ESTIMATES (By

fiscal year, in billions of dollars)

Function and Program 1982 1983 1984 1985

Health (550)

Reform of health care

financing (future legislation) — — -2.0 -4.1

Other health care

program savings — -0.4 -0.4 -0.5

Allowances (920)

Prevention of fraud,

waste, and abuse -1.0 -1.0 -1.0 -1.0

Undistributed debt

collection — -1.0 -1.0 -2.0

Undistributed Offsetting

Receipts (950)

Disposition of federal

surplus property — -1.0 -4.0 -4.0

Total -1.0 -3.4 -8.4 -11.5

OUTLAY REESTIMATES BY MAJOR FUNCTION

This section provides further details on the CBO technical analysis of

the Administration's outlay estimates for fiscal years 1982-1985 for each

major functional category of the budget. The reestimates for different

economic assumptions were derived by using CBO's baseline assumptions.

65
FUNCTION 050: NATIONAL DEFENSE

(Outlays in millions of dollars)

1982 1983 1984 1985

President's February Budget 187,497 221,068 252,969 292,075

Preliminary CBO Reestimates

Different economic assumptions

Retired pay

Technical reestimates

Operations

Procurement

All other, net

Total, Reestimates

President's Budget Reestimated

—

466

2,950

-100

3,316

190,813

-28

1,583

1,403

-1,120

1,838

222,906

168

-306

2,587

-632

1,817

254,786

510

-635

2,753

-664

1,964

294,039

EXPLANATION OF PRELIMINARY CBO REESTIMATES

Different Economic Assumptions

Retired Pay. The costs of military retired pay benefits rise automatically with increases in the Consumer Price Index. The cost-of-living

adjustment (COLA) for 1982—8.7 percent—is already known based on actual

data through December 1981. CBO and the Administration have similar

COLA assumptions for 1983, but CBO projects higher COLAs for 198* and

1985, as shown below. The use of CBO's COLA assumptions adds

$650 million in outlays over the 1983-1985 period.

Annual Military Retired Pay COLAs (Percent)

1982 1983 198* 1985

Administration 8.7 6.6 4.9 4.8

CBO 8.7 6.3 7.2 6.6

66
Technical Reestimates

The Administration and CBO use comparable methods to estimate

defense outlays. Computations for 1982 and 1983 are based on accountlevel detail, and subsequent years1

 estimates are based on title-level

aggregations consistent with the 1982-1983 analysis. The resulting

projections may differ because of factors not easily measured—for example,

the outlay impacts of economic conditions and acquisition policies.

The historical spending rates used by both CBO and the Administration

actually may understate future spending rates. Factors indicating possible

spending rate increases include:

o Greater use of multiyear procurement;

o Greater economic production levels;

o The slowdown in the economy, especially in commercial aviation,

prompting more immediate action on defense contracts;

o Faster progress payments to ease contractors1 needs for working

capital and to induce earlier deliveries; and

o Shorter lead times on materials and components used in weapon

systems production.

Last year there were large technical estimating differences between

the Administration and CBO for defense outlays. Although these

differences persist, they have narrowed considerably, largely because the

Administration raised its estimates to reflect actual experience. The

estimating differences that remain primarily reflect different judgments

about the timing of outlays, such as how quickly procurement funds will be

disbursed for major weapon systems and when the effect of a large

supplemental appropriation bill for operations will appear. Using 1981

estimates as a test case, CBO had a better track record than the

Administration for procurement and operations activities. Actual 1981

outlays for each of these activities were within $0.2 billion of CBO's

estimates, but about $1.0 billion apart from the Administration's estimates.

Operations. CBO estimates that outlays for operations and

maintenance (O&M) and for the revolving and management funds will exceed

Administration estimates by $0.5 million in 1982 and $1.6 million in 1983.

CBO estimates for these accounts are derived from historical outlay rates

that proved to be very accurate for 1981. For 1982, actual operations

outlays for the first four months of the year are consistent with CBO's

higher estimate for the entire year.

67

90-395 0-82- 7
The CBO estimate for 1983 is based on the same spendout rates used

in its analysis for 1981 and 1982. In addition, CBO expects that enactment

of the proposed 1982 supplemental will occur late in the year—as was the

experience in 1981—causing most of the outlays to occur in 1983. The

Administration's estimates, in contrast, assume earlier enactment of the

proposed supplemental, with most of the spending occurring in 1982. This

difference in assumptions raises CBO's estimate for 1983 outlays about

$358 million over the Administration's (in 1982, it has the opposite effect by

$469 million).

Also, CBO expects that 1983 appropriations to the revolving funds will

disburse at the average rate for O&M purchases (about 76 percent in the

first year), and that usual revolving fund transactions will net to zero,

consistent with general cash management goals. The Administration, on the

other hand, outlays revolving fund appropriations at 100 percent, but this

higher estimate is more than offset by its lower estimates for other

activities not requiring appropriations.

For 1984 and 1985, CBO estimates are lower than the Administration's

for reasons that are somewhat harder to discern. The effects of changes in

program mix are less evident within operation and maintenance accounts.

Most categories of O&M spending appear to increase, but the absence of any

clear criteria for separating fast-spending from slow-spending programs

prevents decisive outlay analysis. Consequently, CBO uses essentially the

same outlay rates for the outyears as for 1981, 1982, and 1983. One possible

explanation for the outyear estimating differences is that CBO adjusts the

rate downward to reflect a somewhat greater proportion of slower-spending

purchases in the outyears and the outlay impact of unused or lapsing budget

authority.

Between 1977 and 1980, the Defense Department had average annual

lapses of about $99 million in O&M accounts; in 1981, O&M lapses totaled

about $332 million. Lapses represent funds that were not obligated and

therefore will not be spent; they represent a floor for total unexpended

funds because some obligations are never liquidated. CBO's outlay rates for

O&M accounts assume that about 1 percent of budget authority is never

spent; this assumption recognizes an annual phenomenon that would otherwise raise outlays.

Procurement. Procurement outlays have grown in line with in CBO's

estimates of March 1981; for the first three months of fiscal year 1982, they

68
have exceeded CBO estimates by about $100 million, averaging $3.4 billion

per month. The Administration's estimate for 1982, $41.3 billion, implies

average monthly outlays of $3.4 billion, or no growth between now and the

end of 1982. Its estimate for 1983, $55.1 billion, implies average monthly

outlays of $4.6 billion, 33.4 percent higher than in 1982. CBO assumes that

procurement outlays will grow gradually following the sharp increases in

appropriations in 1980 and 1981. Consequently, CBO believes that the

Administration's estimates for 1982 are too low; the implicit growth rate is

too irregular to be consistent with historical data and the implementation of

the approved procurement program.

Actual procurement obligations for the 12-month period ending in

November 1981 averaged $4.0 billion per month. As a result, procurement

outlays should rise to about $4 billion per month at the end of 1982. This

would produce a 1982 average of $3.7 billion per month, or $0.3 billion

higher than estimated by the Administration. The Administration's obligation plans call for $4.8 billion per month in 1982 growing to $6.7 billion per

month in 1983. CBO estimates that 1983 outlays will grow to average about

$4.7 billion per month, only slightly higher than the Administration estimates. Consequently, the estimating difference for 1983 procurement

outlays is relatively small.

The CBO outlay estimates for 1984 and 1985 assume that the mix of

spending programs for procurement activities will be consistent with the

programs for 1982 and 1983, as shown in the following table. The

Administration's goal of a 600-ship Navy does not necessarily mean that the

slow-spending shipbuilding account will receive a significantly increasing

share of future procurement budget authority; other expensive programs will

be competing with shipbuilding for budget authority, including: the

MX missile, B-l bomber, improved strategic command and control, tracked

combat vehicles (for example, M-l tanks and Fighting Vehicles), and

tactical aircraft for an additional four Air Force air wings, an additional

two carrier air wings, and continued modernization of current forces.

If the Administration continues a relatively higher priority for spare

parts and support equipment programs than was the case in recent years,

overall spending rates will exceed the historical average. Outlays for spare

parts programs will not be faster than for major end items when the spare

parts programs are only big enough to fund initial provisioning. However,

when the programs expand to make up for past shortfalls in replenishment

spares, as in the 1982 budget, one can expect these spare parts programs to

be executed well ahead of the major end-item program. The CBO estimates

do not anticipate an acceleration in outlay rates for this shift in program

composition; to that extent, CBO's projections may underestimate procurement outlays.

69
CBO Outlay Estimates For Defense Procurement Based on the President's

February Budget Authority Request

1982 1983 1984

Billions

Budget

Outlays

1981

1982

1983

1984

1985

1986

Authority (BA)

from

and prior BA

BA

BA

BA

BA

BA

1987 BA

Total Outlays a/

65.7

35.9

8.4

0

0

0

0

0

44.3

89.5

21.5

24.6

10.5

0

0

"0

0

56.5

101

8

19

32

12

72

.9

.3

.7

.1

.5

0

0

0

.6

1985 1986 1987

of Dollars

125

4

6

26

38

15

91

.5

.1

.7

.2

.3

.7

0

0

.0

142

2

3

9

30

48

17

111

.8

.3

.3

.4

.5

.0

.8

0

.3

155

0

1

5

10

37

54

19

129

.1

.3

.7

.3

.0

.9

.6

.1

.0

Percent

Implicit Outlay Rates

from New BA for

1982

1983

1984

1985

1986

1987

12.9 37.8

11.7

30

35

12

.0

.9

.3

10

29

37

12

.0

.3

.6

.5

4

10

29

38

12

.9

.5

.9

.2

.5

2

5

9

30

38

12

.4

.9

.8

.2

.3

.3

a/ Details may not add to totals because of rounding.

70
All Other, Net, CBO estimates lower outlays than the Administration

for most remaining categories of defense spending. The CBO estimate for

military retired pay shows less growth in the annuitant population, consistent with past CBO estimates. The Administration has lowered its

estimates of retired pay from levels projected last year to come closer to

CBO's projections. The Administration's outlay estimate for the 1982 pay

raise appears to be based on a combined outlay rate for military personnel

and O&M to include slower spending purchases; CBO uses a higher rate, one

pertaining to pay only, causing its estimate to be about $230 million higher

in 1982 and lower by the same amount in 1983. The remaining differences

arise from different analytical interpretations of historical spending data.

The CBO reestimates for these other national defense programs are

summarized in the following table.

CBO Technical Reestimates for Other Defense Programs (By fiscal year, in

millions of dollars)

1982 1983 1984 1985

Military Personnel

Retired Pay

RDT&E

Military Construction

Family Housing

Pay Raises

Other

-18

—68

-162

-172

230

-46

-49

-142

-330

-461

47

-230

45

-75

-249

-76

-232

—

—

—

-125

-290

223

-472

—

—

—

Total -100 -1,120 -632 -664

71
FUNCTION 150: INTERNATIONAL AFFAIRS

(Outlays in millions of dollars)

1982 1983 1984 1985

President's February Budget 11,074 11,968 12,323 12,990

Preliminary CBO Reestimates

Different economic assumptions

Export-Import Bank 15 8 16 27

Exchange Stabilization Fund -22 -43 -70 -41

Technical reestimates

Export-Import Bank -17 -221 249 -60

Exchange Stabilization Fund 135 179 172 174

Foreign military sales credit -5 88 -51 -87

Public Law 480 food aid -138 -14

Other 6! — — —

Total Reestimates 29 -3 316 13

President's Budget Reestimated 11,103 11,966 12,639 13,003

EXPLANATION OF PRELIMINARY CBO REESTIMATES

Different Economic Assumptions

Estimated outlays by the Export-Import Bank and the Exchange

Stabilization Fund are sensitive to interest-rate assumptions. Higher

interest rates increase the cost of the Export-Import Bank's borrowing to

finance its loans, but also result in greater interest income for the Exchange

Stabilization Fund on its holdings of U.S. securities. The net effect of

CBO's higher interest-rate assumptions, therefore, is quite small for these

two programs.

Technical Reestimates

Export-Import Bank. The Bank has restricted new loans on aircraft to

newer-generation commercial jets. The 1982 loan commitments may

include a large nuclear power project. Payments made on these contracts

will be lower than the average historical disbursement pattern for Bank

loans. The effect of this change in program mix will be to lower outlays in

1983 from the level estimated in the budget, but to raise outlays in 1984 as

disbursements slip from one year into the next.

72
Exchange Stabilization Fund, The Secretary of the Treasury is

authorized to use the resources of the Exchange Stabilization Fund and

foreign exchange and other instruments of credit and securities in matters

regarding orderly exchange management. Funds not being used in exchange

transactions are invested in interest-bearing U.S. securities. Estimated

negative outlays are interest earnings on those U.S. securities.

The Administration's estimate is based on an opening balance of $3.1

billion. In November, $1.5 billion of the securities were used to repay the

Treasury for advances to the Fund on drawings from the International

Monetary Fund, thereby lowering the principal of securities held and the

estimated interest income. The Administration's February budget estimates

for 1982-1985 do not reflect the lower balance of securities held by the

fund. As a result, the February budget overestimates interest income by the

fund during this period.

Foreign Military Sales Credit. The President is requesting an expanded direct credit sales program to assist friendly countries with the

purchase of defense articles and services. The direct credits may be tied to

particular procurement cases or provided as cash-flow financing of all sales

cases for a country. Funds provided as cash-flow financing are fully

disbursed in the fiscal year provided, whereas credits tied to new sales cases

take up to five years to be spent.

Over one-half of the proposed direct credits for 1983-1985 are

expected to be used for cash-flow financing. If this is done, 1983 outlays

are underestimated in the February budget and overestimated for 1984 and

1985. The CBO reestimate assumes that there will be $900 million in cashflow financing provided in each of these three years.

Public Law 480 Food Aid. The February budget estimate for 1982

assumes full disbursement of all new funds appropriated for this fiscal year

plus all of the unspent balances carried over from the previous year.

Historically, there has been a lag between the obligation of funds for this

program and their payment, which results in obligated but unspent balances

at the end of each year on the order of $140 million. The Administration

has not provided any rationale to suggest that this historical pattern will not

continue in 1982. Accordingly, CBO believes that the Administration has

overestimated 1982 outlays by $138 million.

Other. A number of minor estimating differences for other programs

in this function for 1982 result from the use of different spending rate

assumptions. The CBO reestimate for these programs represents the

difference between its previous scorekeeping tabulations and the Administration's latest estimates.

73
FUNCTION 250: GENERAL SCIENCE, SPACE, AND TECHNOLOGY

(Outlays in millions of dollars)

1982 1983 1984 1985

President's February Budget 6,942 7,633 7,779 7,379

Preliminary CBO Reestimates

Different economic assumptions

Technical reestimates

General science

National Science Foundation

NASA space flight

NASA space science

Other

Total Reestimates

President's Budget Reestimated

-34

-8

54

38

12

62

7,004

— — —

7,633 7,779 7,379

EXPLANATION OF PRELIMINARY CBO REESTIMATES

Different Economic Assumptions

This function has no reestimates resulting from different economic

assumptions.

Technical Reestimates

General Science. The President proposes to transfer the Department

of Energy's General Science and Research Activities program to the

Department of Commerce's Energy Research and Technology Administration. In so doing, the Administration's latest budget estimates imply that

1982 spending will accelerate nearly 10 percent from previously estimated

levels. The CBO reestimates assume that the rate of spending will not

change with the proposed reorganization.

National Science Foundation. The National Science Foundation's

Research and Related Activities account is the principal source of grants to
year 1982, the latest Administration budget estimates indicate unusually

high outlays in this account from prior-year contractual obligations.

Although CBO anticipates an acceleration of spending out of prior-year

obligations, it assumes a somewhat slower rate than the Administration's.

NASA Space Flight. This program incorporates the development,

production, and operation of the Space Shuttle; the procurement and

operation of the Spacelab for use with the Shuttle; and the development and

procurement of expendable vehicles to launch satellites and planetary

exploration spacecraft. CBO estimates that 1982 outlays for this program

will be approximately $55 million greater than the Administration's expectations. CBO sees greater outlays associated with maintaining the delivery

schedule of the second orbiter "Challenger" and faster spending associated

with shuttle operations. This program is evolving from its development,

test, and production stage into its operations phase. (The two flights

planned for Columbia during fiscal year 1982 are scheduled to be the final

flights in the shuttle's developmental stage.) As the program becomes

operational, CBO estimates that spending will accelerate. The flow of

actual outlays to date supports this.

NASA Space Science. This program includes funds for the physics and

astronomy, planetary exploration, life sciences, and space and terrestrial

applications programs of the National Aeronautics and Space Administration. Among the specific development projects funded are the space

telescope, the gamma ray observatory, the Spacelab payload, Explorer, and

the Galileo mission to 3upiter. CBO estimates outlays for this account to be

$39 million more than the Administration's projections. This difference

stems from CBO's expectations of greater costs for the development of

these projects and from the Administration's use of spending rates inconsistent with the previous fiscal year's experience and with actual outlays to

date.

75
FUNCTION 270: ENERGY

(Outlays in millions of dollars)

1982 1983 „ 1984 1985

President's February Budget 6,413 4,215 3,807 3,756

Preliminary CBO Reestimates

Different economic assumptions

Technical reestimates

Fossil energy

Energy supply

Uranium enrichment

Naval Petroleum Reserves

Energy production

Departmental administration

Other

Total Reestimates

President's Budget Reestimated

— _ —

131

158

46

-97

-80

1

159

6,572

_ _ _

230

9

45

-138

-68

72

—150

4,364

_ _. ..

41

-3

20

-175

-32

55

—-94

3,713

_ .. _

-17

-103

-20

-146

-4

-1

-29—1

3,465

EXPLANATION OF PRELIMINARY CBO REESTIMATES

Different Economic Assumptions

This function has no reestimates resulting from different economic

assumptions.

Technical Reestimates

Fossil Energy. CBO estimates that outlays for fossil energy programs

will be $131 million higher than estimated by the Administration in 1982 and

$230 million higher in 1983. CBO!s analysis indicates that more than $600

million in obligated balances and $195 million in unobligated balances were

available to be spent at the beginning of fiscal year 1982. An additional

$417 million was appropriated in 1982 for fossil energy programs. CBO's

estimate assumes that spending from these balances and the 1982 appropriation will occur at rates consistent with historical spending patterns. The

76
Administration's estimate assumes spending from prior-year obligations at a

rate much slower than experienced by the program in recent years. The

Administration's estimates also apparently assume a deferral of $45 million

that is not specified in the February budget and has not yet been transmitted to the Congress. CBO's reestimate does not reflect the possible

deferral. CBO's analysis reveals that without future deferrals or rescissions

the estimated outlays projected by the Administration for these programs

will be difficult to achieve.

Energy Supply. CBO believes that the Administration underestimated

outlays for solar, nuclear, and other nonfossil energy programs by $158

million in 1982. The CBO reestimate assumes that a substantial portion of

the approximately $1.6 billion in obligated balances incurred before 1982

will be disbursed during 1982. This assumption is based on information

provided by the Department of Energy (DOE) concerning spending patterns

for the nonconstruction energy supply programs indicating that more than 90

percent of all obligations will be disbursed within two years of obligation.

Funds for construction programs are projected to spend over three years,

with the largest proportion of spending occurring in the second year. The

Administration's estimates of outlays reflect a rate of spending from prior

obligations slower than the program has experienced in the past.

Uranium Enrichment. CBO's estimate of outlays for uranium enrichment exceeds the Administration's estimate by approximately $45 million in

both 1982 and 1983. The difference results from CBO's lower estimate of

uranium enrichment revenues, based on information provided by the Administration and an analysis of previous revenue projections. The Administration has consistently overestimated these revenues. Its July and September

estimates for revenue from commercial sales totaled nearly $2.2 billion for

1983. In July, CBO had projected revenues of approximately $2.1 billion for

1983. The Administration now projects revenues from commercial sales of

approximately $2.1 billion, near the CBO estimate.

Naval Petroleum Reserves (NPR). Receipts from the sale of

petroleum products are estimated by CBO to be $97 million higher in 1982

than estimated by the Administration. CBO's estimate is based on an oil

price for NPR-1 oil of approximately $30.70 per barrel in 1982 and a

windfall profits tax payment of approximately $520 million. CBO believes

that the Administration overestimated the payment for the windfall profits

tax and thus underestimated NPR receipts. Using the Administration's

estimates for total oil revenue from the reserves, and assuming a base price

of $12.81 per barrel of oil, CBO estimates the windfall profits tax payment

at approximately 35 percent of the revenue from oil sales, or $550 million in

1982. This is almost $90 million less than estimated by the Administration.

Therefore, net receipts from the NPR would increase by $90 million in 1982.

77
Energy Production, Based on information provided by the Administration and an analysis of program activity at the Naval Petroleum

Reserves, CBO estimates that outlays in 1982 will be $80 million less than

projected by the Administration. The Administration projects faster

spending of new obligations in 1982 than in the last several years and thus

projects outlays of $294 million, twice the level experienced in 1981. CBO

projects slower spending because of the proportion of construction activity

under this account. Based on information provided by the Department of

Energy concerning construction activity, CBO assumes that outlays will

reflect the time needed to complete a construction activity once it has been

commissioned. This results in a large proportion of outlays occurring after

the year in which construction begins. Outlays would reach the levels

projected by the Administration only if construction activity were completed at a rate faster than that which has occurred at the reserves in the

past.

Departmental Administration. The Administration's projected outlays

are below the level that would be expected to result from the amounts

appropriated and from the prior balances in this account. The level of

unspent obligated balances that would be maintained throughout fiscal years

1983-1987 is inconsistent with both past trends and the mix of activities in

the account. CBO's estimate assumes that the $198 million in prior balances

at the start of fiscal year 1982 will be spent by 1984, and that program

spending will follow historical patterns. As a result, CBO's outlay estimate

is $72 million higher than the President's in 1983 and $55 million higher in

1984.

78
FUNCTION 300: NATURAL RESOURCES AND ENVIRONMENT

(Outlays in millions of dollars)

1982 1983 1984 1985

President's February Budget 12,626 9,911 8,359 7,732

Preliminary CBO Reestimates

Different economic assumptions — — — —

Technical reestimates

EPA construction grants -20 350 480 150

Hazardous substance response

trust fund -55 -89 -90 -84

Offsetting receipts, primarily

from onshore mineral leasing

and sale of timber

Other

Total Reestimates

President's Budget Reestimated

322

-75

172

12,799

324

19

604

10,515

400

78

868

9,227

574

18

658

8,390

EXPLANATION OF PRELIMINARY CBO REESTIMATES

Different Economic Assumptions

This function has no reestimates resulting from different economic

assumptions.

Technical Reestimates

EPA Construction Grants. CBO has reestimated upward outlays for

Environmental Protection Agency (EPA) construction grants in 1983 to 1985,

because the Administration estimates do not adequately reflect the likely

spending in those years from previous years1 obligations. The construction

grants program provides funds to states and municipalities to plan, design,

and construct wastewater treatment facilities. Once obligated, grant

awards for construction are spent over several years, frequently taking

seven or more years to be entirely expended. Projects usually have small

79
outlays in the first year after funds have been obligated, with the bulk of

outlays falling between the second and fifth years after obligation. Consequently, large changes in obligational authority for the program do not

result in immediate changes in outlays. The President's budget, however,

projects a sharp decline in outlays only one year after a corresponding drop

in obligations.

The Administration estimates that only $3.4 billion will be obligated in

1982, and projects that obligations will drop further to $2.4 billion in 1983

and to $2.0 billion in 1984 and 1985. The February budget estimates also

show a rapid decline in outlays from the estimated $4 billion level in 1982,

with outlays dropping to $2.8 billion by 1984. Based on past experience, and

in view of the large size of obligated balances from previous years1

appropriations, a more gradual decline in outlays is likely, which is reflected

in CBO's reestimate.

Hazardous Substance Response Trust Fund. The CBO outlay estimates

for the hazardous substance response trust fund, commonly known as the

"Superfund," are substantially lower than the Administration's for 1982

through 1985. CBO believes that the Administration has assumed unrealistically high obligation and outlay rates for this new and controversial

program. Money in the Superfund is to be spent primarily for short-term

response to uncontrolled releases of hazardous substances posing an immediate health or safety threat and for longer-term cleanup action at

hazardous waste sites (such as Love Canal).

Most new programs start slowly; yet administration budgets typically

overestimate how quickly funds will be spent. For this new program, $75

million was provided in 1981 budget authority, of which $40 million was

obligated and only $8 million was spent. Experience to date suggests that

the very process of obligating funds—determining which sites warrant

remedial action—will be lengthy. There are over 10,000 potential sites, and

differences are sure to arise regarding which most merit federal remedial

action. Once sites have been chosen, site evaluation and project design and

construction will likely take three or more years to complete. Thus, outlays

will occur gradually over a few years once funds are obligated. The

Administration has assumed that obligations in 1982 and 1983 will equal

1982 and 1983 budget authority levels and that 95 percent of obligations will

be spent within two years of obligation. The CBO reestimate assumes

slower rates of obligations and outlays that are more in line with new

programs.

Offsetting Receipts. The offsetting receipts in this function are

derived mainly from the sale of timber on public lands and onshore mineral

leasing, and appear in the budget primarily in subfunctions 300 and 302.

80
Historically, the Administration's estimate for function 300 offsetting

receipts has been overly optimistic. In fact, in three of the past four years,

the President's original budget estimate has been higher than the actual

amount received and has been modified upward in January of the following

year. The overestimates ranged from 3 to 7 percent above the actuals in

the original budget requests for those years, and grew to between 5 and 22

percent over the actuals during the mid-year review. In fiscal year 1981,

CBO's estimating methods for these receipts resulted in a January estimate

that was about $160 million (or 7 percent) closer to actual receipts than the

Administration's.

In fiscal year 1982, the Administration is projecting that function 300

receipts will grow by 49 percent, or $1,109 million, over the 1981 actual

receipts of $2,283 million. If this increase occurs, it would be the largest

increase ever, both in magnitude and as a percentage of the previous year's

actual total. Of this increase, approximately $400 million is expected from

the sale of timber by the Forest Service (FS), and approximately $700

million from increased receipts by the Department of the Interior (DOI),

primarily from onshore mineral leasing. CBO's estimate of FS timber

receipts in fiscal year 1982 is $127 million lower than the Administration's

because of lower timber price assumptions. In addition, the CBO estimate

for DOI receipts is approximately $195 million below the agency's. A large

portion of this reestimate can be explained by actual receipts in January

from offerings in the National Petroleum Reserve—Alaska (NPRA).

Receipts realized were approximately $100 million less than anticipated by

DOI. The remainder of CBO's reestimate for DOI receipts stems from lower

timber and oil and gas price assumptions.

The estimate in the President's budget for fiscal year 1983 represents

an additional increase of $664 million, or 20 percent, over the 1982 estimate

for these receipts. Virtually all of the increase (92 percent) is expected to

result from timber receipts; the volume of timber cut and the price received

for this timber are anticipated to increase concurrently by 25 percent.

Information from the agency indicates that these increases are expected

because of pending expiration of existing contracts and increased activity in

new housing construction. CBO also anticipates that these factors will

produce large increases in timber harvest, but projects more moderate price

increases consistent with historical timber price patterns. Thus, in fiscal

year 1983, the CBO estimate for FS timber receipts is approximately $324

million below the Administration's.

The President's five-year budget projections include increases in

function 300 receipts of $665 million in fiscal year 1984. This large increase

is expected partly as a result of increases in price and volume of timber cut.

In addition, DOI receipts in that year are expected to grow significantly

81
because of large increases in onshore mineral receipts from increased coal

production and renegotiation of coal royalty contracts. CBO expects that

increases in receipts as a result of these factors will be more moderate, and

continues to project lower timber prices in that year. Thus, CBOfs estimate

of receipts in 1984 is $400 million lower than the Administration's.

For 1985, the Administration projects an increase of $574 million as a

result of continued renegotiation of coal leases, continued growth in the

volume of coal to be mined, and large natural gas price increases after the

scheduled January 1, 1985, price decontrol. Although CBO anticipates that

increased receipts will result from these factors, CBO's estimate remains

$575 million below the Administration's, largely because of a slower

anticipated rate of response to the changes mentioned.

These technical reestimates of receipts will cause reestimates in

function 850--where payments to states resulting from timber and mineral

leasing receipts appear in the budget.

Other. CBO also has a number of smaller technical reestimates for

programs in this function. The Administration has estimated 1982 outlays

for the urban park and recreation fund at $64 million. This program was

initiated in 1979 to provide grants to cities for improving deteriorated park

and recreation facilities. Funded projects involve construction, and larger

ones are likely to take three to four years to complete. Obligations for

grants in 1979 through 1981 were nil, $57 million, and $66 million,

respectively. Total outlays in those years were $200,000, $4 million, and

$18 million. Based on obligations to date and the length of time needed to

complete funded projects, CBO has estimated a more gradual rate of

spending. As a result, CBO estimates outlays for this program to be $25

million lower than the Administration estimates in 1982, and $20 million

higher in 1984.

CBO has also reestimated downward by $39 million the Administration's 1982 outlay estimate for EPA's salaries and expenses account because

the Administration has assumed a 95 percent first-year outlay rate. In

recent years, this rate has not exceeded 90 percent.

82
FUNCTION 350: AGRICULTURE

(Outlays in millions of dollars)

1982 1983 1984 1985

President's February Budget 8,633 4,494 5,090 4,586

Preliminary CBO Reestimates

Different economic assumptions

Technical reestimates

Farm price supports

Agricultural credit

Other

Total Reestimates

President's Budget Reestimated

—

5,052

66

-45

5,072

13,705

—

5,563

177

5,740

10,234

2,681

36

2,717

7,807

2,422

122

2,544

7,130

EXPLANATION OF PRELIMINARY CBO REESTIMATES

Different Economic Assumptions

This function has no reestimates resulting from different economic

assumptions.

Technical Reestimates

Farm Price Supports. CBO estimates that Commodity Credit Corporation (CCC) outlays for farm price supports and related programs will be

$11.4 billion in 1982 and $7.4 billion in 1983. These amounts exceed the

Administration's February budget estimates by $5.1 billion and $5.6 billion,

respectively. CBO's estimates are based on the most recent production

assessment and reflect the deteriorating outlook for exports resulting from

political tensions with the Soviet Union and an embargo on exports to

Poland. The recent announcements of 1982 crop planting restrictions and

increased support levels have also been incorporated.

As shown in the following table, 60 percent of 1982 outlays are

expected to be for wheat, feed grain, and cotton programs; in 1983 these

83

90-395 0-82- 8
programs account for 53 percent of estimated CCC outlays. Record

harvests and low farm prices result in direct deficiency payments to be

made to producers and increase the demand for commodity loans. Of these

commodity loans, $6.3 billion in 1982 and $1.* billion in 1983 are loans and

storage payments for wheat and feed grain placed in the farmer-owned

reserve where they are likely to stay until corn prices rise more than 27

percent and wheat prices 25 percent. Storage payments must be continued

on grain in the reserve until prices increase to the release level; these

payments are estimated to be $600 million annually.

CBO Estimates of Major CCC Program Expenditures (In millions of dollars)

1982 1983 1984 1985

Wheat

Feed grain

Cotton

Dairy

Interest

Other

Total

1,817

5,223

950

1,907

1,370

84

11,351

1,231

2,070

629

1,972

1,300

180

7,382

491

847

214

1,814

1,200

345

4,911

450

418

153

1,695

1,100

302

4,118

Dairy outlays reflect continuing growth in production in spite of

reduced increases in dairy price supports. Net government removals of

dairy products remain about 10 percent of production in 1982 and 1983.

Because the expenditures for dairy supports are outright purchases, no

offsetting receipts are expected.

Net interest outlays are those interest payments owed the Treasury

from the use of permanent borrowing authority, now at 14 percent, to fund

commodity support programs less interest paid by farmers on commodity

loans and storage facility loans and by users of export credits. Interest on

direct payments to producers, cumulative dairy purchases, and administration and operating expenses comprise part of the net interest estimate. In

addition are interest owed on grain reserve loans, which farmers are not

required to pay after the first year, and interest paid on loans of com-
modities such as tobacco, which were made in previous years at rates well

below current borrowing costs.

The large increases in CBOfs estimate of CCC outlays above the

President's February budget arise because the Administration had to prepare

its budget estimates during the conference on the 1981 farm bill. Not only

do these estimates not incorporate the most recent production estimates,

they predate the imposition of martial law in Poland and the subsequent

embargo on exports. Next to the Soviet Union, Poland is the largest Eastern

Bloc customer for U.S. grain exports. Under the embargo, 1982 feed grain

export estimates have declined 325 million bushels. More than $800 million

in reserve loans will be spent if the entire decrease in exports is placed in

the farmer-owned reserve. In addition, the Secretary of Agriculture

announced in 3anuary a program for the 1982 crops that requires a 15

percent set-aside of wheat, cotton, and rice acreage and a 10 percent setaside of feed grain acreage as a condition for receiving increased price

supports. For wheat, the loan rate is increased 35 cents per bushel and the

reserve loan rate 50 cents per bushel; for corn, the rate is up 15 cents to

$2.55 per bushel and the reserve loan rate up 35 cents to $2.90 per bushel.

The set-aside requirement will reduce eligibility for price supports in 1983

below the unrestricted program available in 1982; however, even with

modest participation, 395 million bushels are projected to enter the reserve

and net commodity lending is estimated to be $2.1 billion, while deficiency

payments and reserve storage costs are estimated to be $1.4 billion.

The greatest difference between the CBO and Administration estimates is in the estimates of crop and dairy production underlying program

costs. The President's budget estimates of CCC outlays are based upon 1981

crop conditions estimated in the August 1981 crop reports. As a result, they

do not reflect the considerable revisions that have been made in crop

estimates as reported in the February 1982 U.S. Department of Agriculture

(USDA) World Agricultural Supply and Demand Estimates. These changes

and their impact on farm price supports are discussed in the following

sections.

Commodity Loan Programs

The most significant change in relation to outlay estimates is the onebillion-bushel increase in the farmer-owned corn grain reserve. In August,

the Department of Agriculture forecast an increase in the reserve to 250

million bushels, and the Administration's total CCC outlay estimate is

consistent with that forecast. By February 3, 1982, however, 958 million

bushels had actually been placed in the reserve and the department

increased its estimates to 1,250 million bushels for the year, a fourfold

increase (see the following table). For each bushel a farmer places in the

85
reserve, he receives a $2.55 loan plus a $0.265 storage payment. Based on

the USD A estimate of 1,250 million bushels entering the reserve, and on the

assumption that each farmer receives $2.82 for each bushel placed in the

reserve, corn loan outlays for 1982 will be at least $3.5 billion dollars.

These corn loans cannot be redeemed by farmers unless the farm price of

corn averages above $3.15 per bushel. This is $0.67 per bushel higher than

the season average farm price forecast by the Department of Agriculture

for fiscal year 1982. Nor is it likely that much of this corn will be redeemed

by farmers during fiscal year 1983 either.

Supply and Demand Estimates for Corn

August February Percent

1981 1982 Change

Area Planted (millions of acres) 84.3 84.2 0

Area Harvested (millions of acres) 74.1 74.6 +1

Yield per Acre (bushels) 104.3 109.9 +5

Production (millions of bushels) 7,735 8,201 +6

Domestic use 5,025 5,035 0

Exports 2,450 2,175 -11

Total Use 7,475 7,210 -4

Farmer-Owned Reserve Stocks 250 1,250 +500

CCC Inventory Stock 225 315 +140

Tree Stock 802 461 -43

Total Ending Stock 1,277 2,026 +59

Estimated Average Farm Price

(dollars per bushel) 2.95 2.48 -16

SOURCE: World Agricultural Supply and Demand Estimates Approved by

the U.S. Department of Agriculture World Agricultural Outlook Board.

As of February 3, 1982, in addition to the 958 million bushels farmers

had placed in the corn farmer-owned reserve, 713 million bushels of corn

had been pledged for nine-month nonrecourse loans. For each bushel put

under loan, a farmer receives $2.40. During January, the CCC was charging

interest of 12.25 percent on these nine-month nonrecourse loans. Therefore,

86
for a farmer to redeem his loan at the end of the nine-month loan period, he

must repay the $2.40 plus nine months1 interest at 12.25 percent, which

means a total redemption cost of $2.62 per bushel. The average price

received by farmers for corn during January was $2.40 per bushel; therefore,

unless a farmer needs the corn to feed livestock or to meet other sales

commitments, he has very little economic incentive to redeem these corn

loans. As a result, most of the 713 million bushels of corn under nine-month

loans are likely to move into the farmer-owned reserve. If 75 percent of

those bushels move into the reserve, which lends farmers $2.81 per bushel as

opposed to the current market price of $2.40 per bushel, the farmer-owned

reserve could reach 1,490 million bushels while corn loans outstanding would

total $4.2 billion. Farmers are only required to pay the interest cost on

farmer-owned reserve loans for the first year of the loan. Subsequently, the

CCC continues to pay $0.265 per bushel storage cost and the interest for the

second and third years of the loan. In 1983 and 1984, the storage cost per

year would be $395 million and interest could cost $588 million per year, if

the reserve was 1,490 million bushels.

Similar changes in outlook affect the other feed grains. For example,

the August crop estimate did not project that sorghum would enter the

farmer-owned grain reserve. As of February 3, 1982, farmers had placed

191 million bushels in the reserve and 59 million more bushels were pledged

for nine-month nonrecourse loans. With the current estimated farmerowned sorghum reserve at 225 million (see the following table) and a

potential of 300 million bushels, the outlay estimates for the 1982 farmerowned sorghum grain reserve range between $600 million and $800 million.

Supply and Demand Estimates for Sorghum

Yield per Acre (bushels)

Production (millions of bushels)

Domestic use

Exports

Total Use

Farmer-Owned Reserve Stock

Total Ending Stock

August

1981

61.1

833

461

325

786

0

91

February

1982

64.1

880

411

275

686

225

303

Percent

Change

+5

+6

-11

-15

-13

+333

Estimated Average Farm Price

(dollars per bushel) 2.70 2.30 -1

SOURCE: World Agricultural Supply and Demand Estimates Approved by

the U.S. Department of Agriculture World Agricultural Outlook Board.

87
Although the wheat crop estimates have not been revised substantially

between August and February, an increase of 11 percent in the farmerowned wheat reserve affects estimated outlays. Farmers receive $3.50 per

bushel for each bushel placed into the reserve plus an additional $0.265 per

bushel for storage. As a result of an additional 50 million bushels being

placed into the reserve, estimated outlays increase by $188 million.

Supply and Demand Estimates for Wheat

August February Percent

1981 1982 Change

Area Planted (millions of acres) 88.8 88.9

Area Harvested (millions of acres) 80.7 80.9 —

Yield per Acre (bushels) 34.1 34.5 +1

Production (millions of bushels) 2,750 2,793 +2

Domestic use 882 872 -1

Exports 1,825 1,850 +1

Total Use 2,707 2,722 +1

Farmer-Owned Reserve Stocks 475 525 +11

CCC Inventory Stock 185 185

Free Stock 376 352 -6

Total Ending Stock 1,036 1,062 +3

Estimated Average Farm Price

(dollars per bushel) 3.75 3.70 -1

SOURCE: World Agricultural Supply and Demand Estimates Approved by

the U.S. Department of Agriculture World Agricultural Outlook Board.

The most recent information relating to wheat outlays is the USDA

plantings report released on December 22, 1981, on the 1982 winter wheat

crop. According to that report, farmers seeded 66.255 million acres for

winter wheat last fall to be harvested this spring. This is the largest

acreage seeded to winter wheat since records were begun in 1909. Winter

wheat production for fiscal year 1983, based on the condition of the crop as

of January 1, 1982, is forecast at a record high of 2.13 billion bushels. This

88
estimate was made before the Secretary of Agriculture announced a

voluntary 15 percent acreage reduction program on January 29, 1982. This

acreage reduction is required for eligibility for government price support

loans, target price protection, and the farmer-owned grain reserve program.

CBO estimates that only 35 percent of U.S. wheat producers will participate

in the program because of the lateness of the final set-aside announcement

and a historical unwillingness to plow up already-planted crops.

Deficiency Payments

Using the crop production estimates contained in the August crop

report, the Department of Agriculture forecast no deficiency payments in

fiscal year 1982. However, as a result of actual crop size and reestimated

data, there have been and will be additional deficiency payments. The

national weighted average market price for the first five months of the

wheat marketing year was $3.66 per bushel, $0.15 below the target price of

$3.81 per bushel; as a result, payments of approximately $400 million have

been made to eligible wheat producers. The weighted average national

market price for barley for the first five months of the marketing year was

$2.49 per bushel, $0.11 cents below the target price, and total outlays to

eligible barley producers are estimated to be $50 million dollars. As of

February, it is projected that $200 million will be paid in deficiency

payments to eligible sorghum producers, $22 million to eligible rice producers, and $530 million to eligible cotton producers. Therefore, a total of

$1.2 billion will be paid in fiscal year 1982 in deficiency payments that were

not expected based on the August crop report.

Dairy Program

CBO estimates of dairy supply, demand, and program costs, as shown

in the following table, are based upon USDA reports of production, cow

numbers, heifer replacements, the milk-feed price ratio, and commercial

use. When the August estimates were developed, these reports supported

the analysis that discontinuing the level of dairy support price increases that

had prevailed in the past would lead to an adjustment in supply and demand

that would result in reduced government purchases. By July 1981, the rate

of increase in milk production had declined from March's increase of 4.4

percent over the previous year to 2.57 percent. The milk-feed price ratio

had declined from 1.42 in March to 1.36 in June, below the profitability

threshold of 1.4. Also, commercial disappearance had increased 6.2 percent

over the previous year in the second quarter of 1981 and increased again

during the month of July. For these reasons, CBO and the Administration

projected that supply and demand would move into balance over the next

five years, so that decreasing outlays would be needed for dairy price

supports.

89
CBO Dairy Supply and Demand Estimates

Production (billions of pounds)

Commercial use

Removals

Support Price (dollars per cwt)

Net Support Outlays

(millions of dollars)

August

1981

131.2

122.6

8.7

13.10

987

February

1982

135.82

121.6

14.3

13.10

1,907

Percent

Change

+3.5

-8

+64.4

+93.2

In February's analysis, CBO estimates indicate that the adjustment

will not begin in 1982 even though the support price has not been increased

since October 1, 1981. Through December 1981, milk production increases

had climbed to 3.2 percent, and the milk-feed price ratio had risen to 1.58

because of low crop prices. Milk cow numbers had not decreased in their

gains over the previous year since July. The July cattle inventory of dairy

replacement heifers showed an annual increase of 5.9 percent and declining

utility cow prices indicate a reluctance to cull the dairy herd. This leads to

projections of continued increases in production in 1983 and beyond but at

declining rates as feed grain prices rise with the expected return of normal

weather and harvests. Commercial disappearance increased only 0.7 percent in the fourth quarter of 1981, more in line with per capita consumption

trends. Commercial use is expected to continue to increase 1 to 2 percent

in 1983 and after. As a result of February's analysis, net removals are

projected to decrease from 14.3 billion pounds of milk equivalent in 1982 to

10.8 billion pounds in 1985. The decline in removals is partially offset by

the increase in price supports, causing projected dairy expenditures to

decline to $1,700 million in 1985.

CCC Outlays to Date

As of February 12, 1982, CCC has net outlays of almost $8.9 billion in

fiscal year 1982, of which $3.3 billion is for nine-month loans that could be

redeemed within the fiscal year. Dairy outlays were $260 million through

December 1981, above the $175 million in December 1980. The peak dairy

purchase months of March through August are yet to come.

90
The following table shows monthly and cumulative CCC outlays to

date. The November crop report, which contained realistic assessments of

1981 crop production, coincided with the sudden increase in loan demand

that resulted from the large harvest.

CCC Actual Monthly Net Outlays for Fiscal Year 1982 (In millions of

dollars)

Month

October

November

December

January

Actual

Outlays

789

1,748

2,803

3,175

Cumulative

789

2,537

5,340

8,515

February 12, 1982 390 8,882

In addition to the above actual monthly outlays, the CCC is committed

to pay interest on borrowings from the Treasury of approximately $1.4

billion before the end of the 1982 fiscal year. During February, the CCC

will also spend an additional $750 million in sorghum, rice, and cotton

deficiency payments. At the end of February 1982, the CCC will have made

or have been committed to make outlays of $11 billion, of which $7.7 billion

are not likely to be redeemed or offset by sales.

Agricultural Credit. CBO reestimates of agricultural credit insurance

outlays principally reflect differing estimates of disaster loans. Following a

1981 record of $5.1 billion, the Administration assumes program levels of

$1.6 billion in 1982 and $1.5 billion in 1983. CBO calculates a five-year

average, equal to $2,940 million, and increases that average by the

estimated inflation rate from 1982 to 1987. The new constraints on

eligibility, deductible losses, higher interest rates mandated in the Reconciliation Act of 1981 and the availability of federal crop insurance reduce

this projected average to $2.15 billion in 1982 and $2.3 billion in 1983,

increasing to $2.6 billion in 1985. Asset transactions with the Federal

Financing Bank (FFB) mask the increased estimate of disaster lending.

Higher outlays for disaster loans will be included in reestimated FFB

activity.

91
Other Subfunction 352, For 1982, CBO's estimates of outlays from

previous years' obligations differ from those of the Administration. Most of

these differences are in accounts where expenditures are mainly for

personnel and operating expenses that largely spend in the year they are

obligated.

92
FUNCTION 370: COMMERCE AND HOUSING CREDIT

(Outlays in millions of dollars)

1982 1983 1984 1985

President's February Budget 3,265 1,591 1,298 -516

Preliminary CBO Reestimates

Different economic assumptions

Technical reestimates

FSLIC

Postal Service

FDIC

SB A business loans

Payments to copyright owners

CFTC user fees

Other

Total Reestimates

President's Budget Reestimated

—

226

215 —116

-62

10

505

3,770

93

—

137

-22

20—8

1,799

—

76

160

-22

21—4

1,512

169

450

200

-22

79—7

281

EXPLANATION OF PRELIMINARY CBO REESTIMATES

Different Economic Assumptions

This function has no reestimates resulting from different economic

assumptions.

Technical Reestimates

FSLIC. The Federal Savings and Loan Insurance Corporation (FSLIC)

fund provided more than $1.2 billion in 1980 and $0.9 billion in 1981 for

assistance to member savings and loan (S&L) institutions. For the last two

years, the net worth of many S&Ls has declined as short-term interest rates

paid on deposits exceeded the earnings from long-term deposits, resulting in

an estimated ratio of reserves to total industry savings deposits below 1.25

percent at the end of calendar year 1981.

93
Within the last two years, the FSLIC has been changing the type of

assistance it provides to problem institutions. This has helped to slow down

budget outlays even though the number of problem institutions has continued

to grow. The current approach includes allowing interstate mergers, often

packaging undesirable S&Ls with those in more favorable markets; revising

accounting procedures to encourage the sale of mortgage loans and other

assets; creating a new market instrument that improves the net worth of

S&Ls while allowing the FSLIC to make only semiannual interest payments,

rather than large, immediate cash outlays; and making contributions to

institutions rather than acquiring assets.

Nonetheless, the outlay estimates provided by the Administration

appear to be too low primarily because of relatively optimistic interest rate

assumptions. The Administration is assuming that obligations will be more

than 5300 million lower in 1982 than in 1981, although the number of

problem institutions and the size of their assets continue to increase. At

the same time, fees from assessments are expected to decline from 1981 to

1982 by approximately $65 million. While it is not possible to estimate

precisely, CBO assumes that a greater number of failures are likely to

occur, and that the cash outlays needed to resolve these problems will

exceed the Administration's estimates by $226 million in 1982, $93 million in

1983, $76 million in 1984, and $169 million in 1985. These estimates are

consistent with the CBO baseline projections for fiscal years 1982 through

1985.

Postal Service. The 1982 payment to the Postal Service in the

February budget incorrectly shows the President's September request of

$619 million rather than $834 million, which is the amount provided in the

continuing resolution for 1982. CBO understands that the Administration

may request a rescission for the Postal Service in 1982, but none has been

transmitted to date.

FDIC. While it is likely that continued assistance to mutual savings

banks will be required from the Federal Deposit Insurance Corporation

(FDIC), in general the banking industry is not suffering to the same degree

as S&Ls from an earnings squeeze because of high interest rates. In

addition, the FDIC has a portfolio approximately twice the size of the

FSLIC ($12.7 billion versus $6.3 billion), which is expected to increase as

earnings grow each year. Furthermore, by reducing rebates on insurance

premiums, outlays can be more easily controlled. As with the FSLIC, the

trend is to spread out payments for losses over time, thus minimizing

federal outlays.

CBO has reestimated the Administration's 1985 net outlays upward by

$450 million. While the Administration's outlay estimates for the FDIC vary
from year to year in 1981-1984 by no more than about $50 million to $200

million, they jump by $800 million from 1984 to 1985 because of an

anticipated payment on a note coming due in 1985. Based on an analysis of

the bank concerned, it seems unlikely that the entire amount will be paid as

currently scheduled, and some refinancing will be required.

SBA Business Loans. Outlay estimates for the business loan and

investment fund of the Small Business Administration (SBA) have been

revised upward by amounts ranging from $116 million in 1982 to $200 million

in 1985, primarily because of different assumptions regarding repurchases of

guaranteed loans and increased collections.

Each year since 1979, the Administration's estimates regarding disbursements for repurchases of guaranteed loans have been understated. SBA

currently assumes that 18.6 percent of all loans guaranteed will default,

whereas CBO assumes a default of 21.8 percent (with a net of 70 percent

charged off), which is more consistent with historical trends.

In addition, the Administration's February budget estimates assume

that an additional $35 million in 1982 and $110 million in 1983 (and each

year thereafter) will be collected as a result of an improved debt collection

program. The SBA will concentrate on improving liquidation efforts by

retraining staff and legal counsel, updating information regarding data

collection, and reassigning some existing personnel to this function. Nonetheless, given the state of the economy (and particularly of small businesses), CBO assumes that SBA receipts will be somewhat lower. It seems

unlikely that the agency will be able to increase its collection efforts by

over 35 percent without additional resources allocated specifically for this

purpose.

Payments to Copyright Owners. Receipts from cable television

stations and juke-box licenses are disbursed to copyright owners through this

appropriation. The February budget estimates incorrectly assume that all

collections to date will be disbursed in 1982. The distributions of 1978 and

1979 cable TV collections remain unresolved in the courts, and hearings on

1980 and 1981 distributions have not even begun and are likely to take more

than a year to resolve. Consequently, CBO estimates that $18 million

rather than $80 million will be spent for this purpose in 1982.

CFTC. While the Administration has proposed user fees to recover the

cost of the regulatory activities of the Commodity Futures Trading Commission (CFTC), no estimate was included in its budget request. Consistent

with the intent of the Administration, CBO has included these offsetting

receipts as estimated in Major Themes and Additional Budget Details.

95
FUNCTION 400: TRANSPORTATION

(Outlays in millions of dollars)

1982 1983 1984 1985

President's February Budget 21,228 19,628 18,752 19,418

Preliminary CBO Reestimates

Different economic assumptions

Technical reestimates

Rail programs

Urban mass transportation

Other

Total Reestimates

President's Budget Reestimated

_ _ •»

-i

23

84

105

21,333

_ _ —

-47

-247

-29—4

19,335

mm — —

65

134

—199

18,951

_ _ «•

49

109

158

19,576

EXPLANATION OF PRELIMINARY CBO REESTIMATES

Different Economic Assumptions

This function has no reestimates resulting from different economic

assumptions.

Technical Reestimates

Rail Programs. Excepting Amtrak, the major rail programs involve

heavy construction that requires several years from commitment of funds

through design stages to project completion. The major estimating differences between CBO and the Administration are explained by differing

assumptions about the time required between the appropriation of funds and

project completion. The Administration is generally overly optimistic about

construction schedules, assuming a shorter spend-out period. This has been

the case most clearly in the Northeast Corridor project, for which OMB has

overrestimated annual outlays by as much as 230 percent over the past few

years. CBO!s estimates have been consistently more accurate. By assuming

slower obligation rates and construction schedules consistent with actual

experience, CBOfs 1982 and 1983 outlay estimates are below OMB!s figures

96
by a total of $62 million. These estimating differences are much less than

in the past, as OMB has moved closer to CBO's assumptions.

For the rail rehabilitation program, CBO estimates that outlays will be

$21 million higher than OMB in 1982 and $29 million lower in 1983. OMB

has apparently used conflicting assumptions about how quickly various years1

appropriations will be spent. While it uses an unusually slow spending rate

for earlier appropriations, it assumes that most of the new 1982 funds will

be spent within two years. The program's history indicates that four or

more years is required for commitment of funds and completion of rail

rehabilitation projects. CBO has applied this spending rate to both the

balance of funds from previous years and to the 1982 appropriations.

Other notable estimating differences come in the Amtrak and the rail

service assistance accounts. For Amtrak, CBO assumes a slightly slower

delivery of capital equipment, based on an historical record of equipment

delivery delays. The OMB projection of rail service assistance outlays does

not, for an unknown reason, include approximately $40 million in funds that

have been, or are expected to be, obligated by the end of 1983. This

explains CBO's higher outlay estimate for 1984.

Urban Mass Transportation. The CBO reestimates of outlays for urban

mass transportation grants result from the use of different assumptions

about how quickly appropriated funds will spend. CBO expects that spending

will not depart significantly from historical patterns in 1982 and 1983, but

thereafter will change as a result of a shift in program mix and direction

proposed by the Administration.

At the end of January 1982, the urban mass transportation fund had a

total balance of approximately $870 million of unobligated funds and $7,791

million of obligated funds. The obligated funds were for capital construction projects and the purchase of rolling stock (light and heavy rail cars and

buses). CBO expects these obligated funds to spend at historical rates that

are slightly faster than assumed by the Administration. CBO assumes that

spending of new funds starting in 1984 will be faster than recent experience.

The Administration proposes to direct capital assistance grants to modernization and rehabilitation of existing systems and to provide increased

funding for buses; these have quicker disbursements than the current

program mix. In addition, out of the total program level, funds are set aside

for the Washington, D.C., Metro system, an ongoing construction program.

The older established systems have generally spent federal funding faster

than the smaller systems or totally new systems. Another reason (though on

a much smaller scale) that new funds will spend faster is that; in the

research and development area, the Administration plans to direct efforts

on short-term solutions to immediate problems rather than on long-term

research.

97
Other, In fiscal year 1982, CBO estimates that outlays for other

programs included in this function will be $84 million higher than the

Administration estimate. The CBO estimate is higher primarily in two

areas--federal-aid highways, where CBO is $41 million higher than the

Administration, and Federal Aviation Administration operations, where CBO

is $30 million higher. Both of the higher estimates are based on CBO's

spending assumptions, which reflect recent historical outlay experience. In

each case, the outlay difference is small (0.5 percent and 1.4 percent)

compared with the program's total outlays.

98
FUNCTION 450: COMMUNITY AND REGIONAL DEVELOPMENT

(Outlays in millions of dollars)

1982 1983 1984 1985

President's February Budget 8,366 7,263 6,663 6,856

Preliminary CBO Reestimates

Different economic assumptions

Technical reestimates

Disaster relief

Flood insurance

Disaster loans

Other

Total Reestimates

President's Budget Reestimated

_ _ _

44

25

50

-18

101

8,467

_ _ _

42

29

201

-5

277

7,540

«. _ _

78

76

317

10

481

7,144

...

76

100

428

1

605

7,461

EXPLANATION OF PRELIMINARY CBO REESTIMATES

Different Economic Assumptions

This function has no reestimates resulting from different economic

assumptions.

Technical Reestimates

The Administration has requested or projected the need for approximately $1.2 billion in 1983, 1984, and 1985 for the federal flood insurance,

disaster loan, and disaster relief grant programs. This is approximately $1.1

billion below the CBO baseline projection for these programs over the

period. In general, the Administration has assumed optimistic levels for

these programs below the average experience in recent years, has not taken

into account the impact of inflation on program resources, and has made

optimistic assumptions about the annual performance of each program.

Although the Administration has the authority to raise insurance premiums,

to refuse to declare disasters, and to seek loan repayments aggressively,

CBO does not expect the net impact of these changes to be as large as

projected by the Administration.

99

90-395 0-82- 9
Disaster Relief, The Administration's budget estimate for the disaster

relief program administered by the Federal Emergency Management Agency

assumes that the program will accrue and retain large obligated balances in

1982 and 1983. In addition, the Administration projects extremely optimistic program levels for 1984 and 1985. The CBO estimate reflects the

assumption that obligated balances will be withdrawn faster than assumed

by the Administration and that inadequate program funding in 1984 and

beyond will result in a faster than normal drawdown of new obligations by

state recipients of program funds.

Flood Insurance. The Administration's estimate for this program

includes estimates for losses and adjustments that are optimistic compared

with the history of the program. Although the Administration has taken

several measures to reduce the cost of the program, CBO assumes that

average annual losses and total insurance in force will grow faster than

premiums can be adjusted for the forseeable future.

Disaster Loans. The Administration's estimates for the Small Business

Administration's disaster loan program assume a sharp reduction in the

demand for disaster loans, which will result in significant net receipts over

the 1982-1985 period. The CBO estimate assumes the Administration's

requested loan limitation in 1983, but notes that the proposed lending level

of $440 million could be $100 to $300 million below demand depending upon

the incidence of disasters and the public's response to 1981 program

changes. In 1982 to 1985, CBO has assumed that demand for loans will

result in the obligation and outlay of all available resources of the fund.

100
FUNCTION 500: EDUCATION, TRAINING, EMPLOYMENT, AND SOCIAL SERVICES

(Outlays in millions of dollars)

1982 1983 1984 1985

President's February Budget 27,770 21 ,552 19,266 17,791

Preliminary CBO Reestimates

Different economic assumptions

Guaranteed student loans 29 301 602

Technical reestimates

Elementary and secondary

education -320

Student financial assistance 9

Guaranteed student loans 139 503 552 225

Employment service 211

Total Reestimates 68 1 , 084 1 , 277 665

President's Budget Reestimated 27,839 22,636 20,543 18,456

EXPLANATION OF PRELIMINARY CBO REESTIMATES

Different Economic Assumptions

The economic factor affecting outlays for the Guaranteed Student

Loan (GSL) program is the short-term interest rate. The table below shows

the assumptions of the Administration and CBO for the 91-day Treasury bill

rates by fiscal year. A one-percentage-point increase in the average

Treasury bill rate would add over $200 million to program obligations in

1982 and almost $300 million in 1985. Since outlays lag behind obligations,

the resulting outlay increases are spread over two years.

101
91-Day Treasury Bills (In percent, fiscal year average)

1982 1983 1984 1985

Administration

CBO

11.6

11.8

11.1

13.0

9.6

12.2

8.9

9.9

Technical Reestimates

Elementary and Secondary Education, The February budget

estimates 1982 outlays for the education for the handicapped programs at a

higher level than actual spending to date would indicate. CBO has

reestimated outlays for this program in 1982 downward by $174 million. In

addition, the February budget uses a spending rate in 1982 for the vocational

and adult education programs similar to the new spending rate associated

with the 1983 block grant proposal. Since 1982 funds are not consolidated,

CBO has assumed the historical spending rates will still apply. This results

in $146 million lower outlays in 1982, $121 million higher outlays in 1983,

and $64 million higher outlays in 1984.

Student Financial Assistance. The Administration has used a higher

spending rate for the aggregate of all student assistance programs in 1983,

including Pell grants, than recent experience would indicate. CBO has

adjusted outlays for the student assistance programs to incorporate

historical spending patterns.

Guaranteed Student Loans. CBO's estimate of outlays for the

President's request for the GSL program exceeds the Administration's

estimates each year in the 1982-1985 period. In 1982, CBO's estimate is

$139 million higher than the Administration's. About $60 million of this

difference relates to assumptions about when the President's legislative

proposals will be implemented. Administration estimates assume

implementation of all loan proposals in April 1982. Consistent with the 1981

experience, CBO has assumed that the President's proposals will be enacted

102
in 3uly 1982. This enactment schedule would permit the increase in the

origination fee to be implemented in the final quarter of fiscal year 1982.

All other programmatic changes would become effective in October 1982.

The remainder of the outlay difference in 1982, approximately $70 million,

relates to the relationship between obligations and outlays in the final

quarter of the fiscal year. Historically, obligations in the final quarter of

the year outlay in the next fiscal year. This implies that program savings in

the last quarter of the year will not produce outlay savings until the next

year. CBO's estimates assume a continuation of this historical relationship.

The Administration's estimates do not reflect fully the lag between program

obligations and outlays.

In 1983, CBO shows outlays for the President's request approximately

$500 million above Administration estimates. Approximately $200 million

of this difference is explained by the assumed delay in the implementation

of the President's legislative proposals, as discussed above. An additional

$100 million of the difference relates to assumed differences in loan

volume. CBO generally expects lower loan volume than the Administration.

Lower volumes result in smaller savings as a result of increasing the

origination fee and the insurance premiums. Finally, approximately $200

million of the difference relates to estimates of the distribution of the loan

volume. The federal government pays interest subsidies on the guaranteed

loans while students are in school and during a short grace period after

graduation. Thereafter, the student is responsible for interest payments and

the costs to the government fall; a smaller government subsidy continues

until the loan is repaid. CBO anticipates a higher proportion of total loan

volume in the in-school status than does the Administration. CBO uses a

cohort analysis to track the amount of loan volume receiving the higher

subsidies. The Administration apparently uses a more aggregative

technique.

CBO also estimates a larger proportion of total volume in the inschool status in the outyears than does the Administration. This appears to

be a significant factor in explaining the higher CBO estimates in 198* and

1985.

Employment Service. The February budget does not include a 1982

supplemental appropriation of $211 million for the Employment Service

requested by the Administration, nor a recently submitted amendment

requesting an additional $283 million for the Employment Service in 1983.

The CBO technical reestimates correct the February budget estimates for

these changes.

103
FUNCTION 550: HEALTH

(Outlays in millions of dollars)

1982 1983 1984 1985

President's February Budget 73,437 78,105 84,917 93,539

Preliminary CBO Reestimates

Different economic assumptions

Hospital insurance — 34 400 828

Medicaid — 78 420 923

Technical reestimates

Hospital insurance — 230 551 225

Supplementary medical insurance — 137 405 812

Medicaid -193 20 -182 -647

Total Reestimates -193 499 1,594 2,141

Unevaluated Administration Estimates (---) (362) (2,355) (4,560)

President's Budget Reestimated 73,245 78,604 86,511 95,680

EXPLANATION OF PRELIMINARY CBO REESTIMATES

Different Economic Assumptions

Hospital Insurance. The hospital insurance program's costs reflect

hospitals' costs of providing care. As hospitals pay more for food, fuel,

equipment, and other supplies, the cost of the hospital insurance program

rises. For each 1 percent increase in the price of these nonlabor inputs,

which constitute about 35 percent of hospitals' costs, program spending

grows roughly $100 million annually. Since the CBO economic assumptions

include higher rates of inflation than the assumptions underlying the

President's budget estimates, the CBO estimates of outlays for hospital

insurance are higher than the Administration's in 1983-1985.

104
Medicaid. The costs of the Medicaid program are sensitive to both

the rate of inflation and the unemployment rate. As prices rise, the cost of

medical services increases, including the cost of physician services,

hospitalization, and nursing home care. As the unemployment rate rises,

more people become eligible for Medicaid assistance, thereby increasing the

costs of the program.

In 1983, the economic differences are small because the

Administration's and CBO's economic assumptions regarding the CPI and

unemployment are similar. In 1984 and 1985, however, CBO has projected

higher increases in prices than the Administration. In addition, the small

difference between CBO's and the Administration's assumed unemployment

rate widens in 1985, thus increasing the estimated economic differences

even further. The higher inflation rates projected by CBO account for over

80 percent of the reestimates due to differences in economic assumptions.

Technical Reestimates

Hospital Insurance. The CBO technical reestimate for the hospital

insurance component of Medicare results from different projections of

hospital utilization rates, costs per day of hospitalization, and

administrative costs for contractors who process claims for reimbursement

under the program. The first two factors account for the bulk of the CBO

reestimates.

The CBO baseline projections for hospital insurance embody higher

rates of hospitalization for enrollees than assumed by the Administration for

its February budget estimates, as shown in the table below. CBO's

projections assume that hospital utilization will increase at the average

annual rate experienced from 1973 to 1978, a rate well below the

unexpectedly large increases of the last two years.

Annual Hospital Days per Aged Enrollee

Actual Projections

1981 1982 1983 1984 1985

Administration 4.187 4.163 4.190 4.194 4.216

CBO 4.187 4.223 4.258 4.295 4.331

105
In addition, the CBO technical reestimates reflect a different pattern

of increases in the cost of a day of hospital care. As displayed below, CBO

projects diminishing increases in daily hospital costs, partly because of the

declining inflation rate forecast by the Administration. The

Administration's projected increases fall initially, but turn up again in 1985.

This reversal, coupled with CBO's continued higher utilization rate, largely

explains the drop in CBO's technical reestimate from 1984 to 1985.

Change in Hospital Cost per Day under the Administration's Economic

Assumptions (Percent change)

Administration

CBO

Average

Annual

Increase

1977-1981

13.2

13.2

Projections

1982 1983 1984 1985

14.3 12.9 11.8 12.4

14.6 13.1 11.6 11.3

CBO's technical reestimates also assume continued increases in the

costs of administering this program. The President's budget, on the other

hand, assumes a slight decline. In spite of productivity gains, administrative

costs have risen over 17 percent annually since 1977, as shown in the table

below. Because CBO has not yet been able to evaluate the budgetary

impact of the reductions in the federal work force assumed in the

President's budget, CBO's projections assume increases only in the budget

for Medicare's contractors. The estimates reflect continued increases in the

contractor budget at the 8.3 percent average annual rate experienced since

1977.

106
Medicare Administrative Costs (In millions of dollars)

Average

Annual

Increase

1977 1978 1979 1980 1981 (percent)

Hospital Insurance 301 451 452 494 566 17.1

Supplementary Medical Insurance 475 504 555 593 668 8.9

Contractor Costs (505) (536) (576) (642) (694) 8.3

Both the Administration and CBO underestimated spending in the

hospital insurance program in 1981. Generally, however, CBOfs estimates

were closer to the mark. For example, CBO!s January 1981 estimate of

1981 outlays was more than $400 million higher than the Administration's

figure, but almost $1.2 billion below actual spending for the year. As

recently as the September budget, the Administration underestimated

outlays by $600 million, while CBOfs comparable estimate fell short by $200

million.

Supplementary Medical Insurance. The CBO technical reestimates

for the second component of Medicare, supplementary medical insurance,

result from different projections of the use of physicians1 services by the

eligible population and of administrative costs. Administration and CBO

assumptions about physicians1 fees are similar.

The Administration's February budget estimates assume slower

growth in the use of physicians' services than assumed by CBO in its baseline

projections. As shown in the table below, CBO assumes a relatively slow

decline in the use of these services from the high rate currently observed to

a rate consistent with earlier program experience.

107
Projected Increases in Use of Physicians1

 Services (Percent change)

Administration a/

CBO

Estimated

Average

Annual

Increase

1977-1981

5.2

5.2

Projections

1982 1983 1984 1985

8.2 5.4 4.6 4.4

8.2 6.5 6.0 5.2

a/ The figures shown as the Administration's projections are weighted

averages of separate projections for aged and for disabled enrollees

provided by the Administration.

CBO!s technical reestimates also assume that the cost of

administering this program will continue to rise through 1985. The

President's budget, on the contrary, assumes a slight decline. As shown in

an earlier table, however, administrative costs rose 8.9 percent annually

from 1977 to 1981 despite substantial productivity gains during that period.

CBO's estimates of administrative costs assume continued increases in the

contractor budget at the 8.3 percent average annual rate experienced since

1977.

Medicaid. The CBO technical reestimates for Medicaid flow from

CBO's smaller projected growth rate of Medicaid expenditures in 1982,

different levels of projected savings resulting from the 1981 reconciliation

act, and lower projected savings for the Administration's proposed

legislation included in the February budget.

108
CBO Technical Reestimates for Medicaid (In millions of dollars)

1982 1983 1984 1985

Existing Law

Proposed Legislation

Total

-159

-34

-193

58

-38

20

-461

279

-182

-1,011

364

-647

CBO projects a smaller growth rate for the Medicaid program in 1982

than the Administration. This smaller rate is consistent with the current

fiscal year's spending pattern. The Treasury statements for the first quarter

of fiscal year 1982 show only $4,113 million in outlays for the Medicaid

program, indicating that increases in Medicaid spending are slowing down.

This represents a growth rate of one percentage point less than the previous

year's growth rate for the first quarter of the fiscal year. In addition,

discussions with state officials indicate that they are making efforts to

restrain Medicaid spending because of current fiscal conditions. California

is attempting to contain costs through changes in eligibility, benefits, and

rates. New York has already made several program changes this year in an

effort to hold down costs.

CBO also estimates different levels of projected savings for program

changes made in the 1981 reconciliation act. One of the provisions of this

act established a reduction in federal Medicaid payments to each state.

However, a state is entitled to receive a supplemental adjustment to this

reduction if total federal Medicaid funding of the state's program in a year

falls below a specified target level. The supplemental adjustment for the

1982 reduction will be awarded in 1983, so that awards will lag one year

behind the reduction. CBO's projected lower growth rate in 1982 results in

more states falling below the specified target level. Thus, CBO's estimate

of the supplemental adjustment payments to be awarded in 1983 is higher

than the Administration's estimate.

109
Once a state exceeds the target level, however, it would be very

difficult not to continue to exceed the target in subsequent years, because

target rates are cumulative from year to year. A state would have to

decrease spending in subsequent years to compensate for previous years'

growth. This would be quite difficult and therefore the supplemental

adjustment payments should decrease over time as fewer states will be able

to qualify for these payments. The Administration shows an increase in

these payments over time.

In addition, the Administration shows no savings as a result of the

flexibilities given to the states in the 1981 reconciliation act. The

flexibilities were established to provide states with greater latitude in

operating their programs. For example, the flexibilities allow states to

determine hospital reimbursement rates and to purchase laboratory services

competitively for their Medicaid recipients. The states must submit waiver

requests for many of the flexibilities. At present, 42 states have submitted

waiver requests relating to specific provisions of the 1981 reconciliation

act. Furthermore, discussions with state officials indicate that efforts are

being made to achieve savings in this area, and in 1983 and beyond such

savings should be realized.

CBO estimates lower savings for the proposed legislation in the

budget than the Administration. A small portion of this reestimate in the

Medicaid program is the result of CBO's reestimate of the savings in the Aid

to Families with Dependent Children (AFDC) program. CBO shows no

estimated savings from the Administration's legislative proposals in the

AFDC program in 1982 and slightly reduced savings in 1983. Therefore, the

estimated impact of these AFDC proposals on the Medicaid program is

eliminated in 1982 and adjusted in 1983.

CBO also reestimated the impact of proposed legislation on the level

of supplemental adjustment payments. The proposed legislation will

substantially slow program growth to a point at which more states are

estimated to qualify for these payments. This would increase projected

program costs in 1983 and 1984 by $279 million and $364 million.

Finally, CBO has made no further reestimates of the Administration's

legislation proposals or regulatory changes in the Medicaid program, because

there is no legislative or regulatory language available at this time. As such

language becomes available, CBO will examine the proposals more closely.

110
UNEVALUATED ADMINISTRATION SAVINGS

The President's budget includes substantial savings in Medicare from

both administrative and legislative proposals that are undeveloped at this

time. Because the details of the proposals are not available, CBO has been

unable to evaluate the savings from them assumed in the budget.

President's Budget Savings in Medicare from Undeveloped Proposals (In

millions of dollars)

1982 1983 1984 1985

Reform Health Care Financing

(Future Legislation) — --- -1,950 -4,100

Improve Contractor Utilization

Review Activities (Administrative

Savings) — -362 -405 -460

Total — -362 -2,355 -4,560

The health care financing reforms to be proposed are intended to

strengthen market forces in health care. The Administration's March 1981

budget included savings from similar future legislation known as the

competition proposal. Savings included from that proposal were $0.5 billion

in 1983, $1.6 billion in 1984, and $3.7 billion in 1985. Thus, in the current

budget, savings have grown by $0.4 billion in both 1984 and 1985, although

implementation of the proposal has been delayed. Moreover, the savings in

the current budget are in addition to savings of $850 million in 1984 and

$950 million in 1985 from a proposed 2 percent reduction in reimbursements

to hospitals, itself billed as an interim measure until the financing reforms

are enacted. Together these assumed savings represent reductions of 4.3

percent and 6.7 percent from projected Medicare spending under existing

law in 1984 and 1985, respectively. To achieve savings of such magnitude as

early as assumed in the budget, the strengthening of market forces would

have to include some combination of large benefit reductions and shifts of

costs to beneficiaries or providers.

Ill
The Administration attributes the savings from the utilization

reduction initiative to two activities: intensified efforts by Medicare's

contractors to reduce waste in the provision and use of health services (that

is, stepped-up medical and reasonable charge review), and what the

Administration describes as "a similar effort in the private sector recently

announced by a coalition of health providers, health insurers, business, and

labor." CBO has not been able to obtain from the Administration details

about either activity nor any substantiation of the estimated savings

included in the President's budget. Based on discussions to date, however, it

would appear that the estimated savings from this proposed initiative are

optimistic.

112
FUNCTION 600: INCOME SECURITY

(Outlays in millions of dollars)

1982 1983 198* 1985

President's February Budget 250,870 261,736 274,808 290,122

Preliminary CBO Reestimates

Different economic assumptions

Social Security and SSI

Unemployment compensation

Food stamps and AFDC

Technical reestimates

Social Security (OASDI)

Civil Service Retirement

Unemployment compensation

Food stamps

Child nutrition

Supplemental Security Income

Assistance payments (AFDC)

Energy assistance

Total Reestimates 1

President's Budget Reestimated 252

—

—

—

95*

225

-239

2*5

2*5

-122

—123

,430

,300

73—6

105

920

332

-27

298

130

-180

243

2,55—7

264,293

1,237

1,498

293

1,178

448

311

-255

115

-134

179

4,87—0

279,678

5,920

3,445

1,054

-210

612

463

-395

-165

328

11,05—2

301,174

EXPLANATION OF PRELIMINARY CBO REESTIMATES

Different Economic Assumptions

Outlays in income security programs are sensitive to changes in

economic conditions, most notably increases in prices and changes in

unemployment levels. Both CBO and the Administration show improving

economic conditions over the forecast period. However, the economic

recovery reflected in CBO's economic assumptions is not as rapid as that in

the Administration's assumptions. CBO assumes higher cost-of-living

adjustments (COLAs) in indexed programs beginning in 198* and higher rates

of unemployment beginning in 1983.

Social Security and SSI. Social Security and Supplemental Security

Income (SSI) benefits are automatically adjusted each year for increases in

the cost of living as measured by the Consumer Price Index. The 1982 and

113
1983 COLAs assumed by CBO for these programs are the same as those of

the Administration. CBO's assumed COLAs exceed the Administration's by

2.4 percentage points in 1984 and by 1.7 percentage points in 1985, resulting

in the upward reestimate of outlays.

The Old Age and Survivors Insurance (OASI) program accounts for

most of the reestimate, as shown in the table below. The Disability

Insurance (DI) and Supplemental Security Income programs also contribute

to the reestimate.

Effects on OASDI and SSI of Different COLAs (Outlays in millions of

dollars)

1982 1983 1984 1985

Old Age and Survivors Insurance — — 1,050 5,056

Disability Insurance — — 146 641

Supplemental Security Income — — 41 223

Although the program is currently indexed to the CPI, no economic

reestimate is shown for Civil Service Retirement because the President's

budget proposes to limit future COLAs to the lesser of the change in the

CPI or the general schedule pay increase for federal employees. Under

CBO's baseline economic assumptions, the projected COLAs will exceed the

federal pay raise in each year.

Unemployment Compensation. CBO's projection of the rate of

unemployment exceeds the Administration's by 0.2 percentage points in

fiscal years 1983 and 1984 and by 0.6 percentage points in fiscal year 1985.

Unemployment compensation is very sensitive to differences in assumed

unemployment rates. By 1985, CBO's estimate of unemployment

compensation is above the Administration's by $3,445 million. A small part

of this difference is explained by CBO's higher assumed rates of inflation.

Food Stamps and Aid to Families with Dependent Children (AFDC).

The food stamp and AFDC programs are sensitive to changes in both

unemployment rates and rates of inflation. When unemployment rates rise,

participation increases in both programs, especially in food stamps. When

rates of inflation rise, average payments per recipient rise: in food stamps

114
because allotments are automatically indexed to the Department of

Agriculture Thrifty Food Plan and in AFDC because some states are

mandated or choose to increase payments as prices rise.

Because of the differences in economic assumptions, CBO's estimates

of food stamp outlays are $50 million higher than the Administration's in

fiscal year 1983 and $719 million higher in 1985, as shown in the table

below. CBO's higher assumed unemployment rate explains all of the

reestimate in 1983 and 40 percent of the reestimate in 1985. Higher prices

explain the remaining 60 percent in 1985. In AFDC, CBO's estimated

outlays are $55 million higher than the Administration's in 1983 and $335

million higher in 1985. Higher prices explain about 60 percent of the

difference in 1983 and 70 percent in 1985.

Effects on Food Stamps and AFDC of Different Economic Assumptions

(Outlays in millions of dollars)

1982 1983 1984 1985

Food Stamps --- 50 134 719

AFDC _^ _55 159 335

Total Economic Reestimate --- 105 293 1,054

Technical Reestimates

Social Security. The Old Age and Survivors Insurance (OASI) and

Disability Insurance (DI) programs are very large, with combined outlays in

1981 totaling $139.6 billion. Consequently, even a minor difference in

technical reestimates can cause a large difference in outlays in absolute

terms. Many of the technical reestimates in Social Security discussed below

are minor.

The CBO technical reestimate of OASI shows slightly higher outlays

throughout the 1982-1985 period, as presented in the table below. This

reestimate is only 0.6 percent of total OASI outlays. The DI technical

reestimate is proportionately somewhat larger, but it is still less than 2

percent of program outlays. Sources of the technical reestimates of OASI

and DI are discussed, in turn, below.

115
CBO Technical Reestimate of OASI and DI (Outlays in millions of dollars)

1982 1983 198* 1985

Old Age and Survivors Insurance 858 MO 799 275

Disability Insurance 96 482 379 -485

Total Technical Reestimate 95* 922 1,178 -210

In OASI, CBO's technical reestimate of the President's budget

reflects primarily a slightly higher estimate of the number of beneficiaries.

CBO is projecting approximately 100,000 to 125,000 more retired workers on

average over the course of fiscal year 1982 than is the Administration. This

difference represents less than 0.5 percent of all retired workers. In 1983

and 198*, CBO's estimated number of recipients averages about 150,000

more than the Administration's estimate. By 1985, these differences have

narrowed with the sustained improvement in the economy.

CBO's method of forecasting recipients differs from the

Administration's in several technical respects. Most importantly, it takes

into account the effect of the economy on retirement decisions. Some

individuals may find retirement an acceptable alternative to worsening labor

market conditions, resulting in a greater number of retirements than if labor

market conditions were better.

A rise in outlays above what the Administration is estimating for

1982 is substantiated by recent data on benefit payments. Benefit payments

typically rise from month to month over the course of the fiscal year. For

example, the monthly increase averaged $*0 million in 1981, based on

Treasury data. Recent Social Security Administration (SSA) data show

monthly increases of $*0-60 million for the first five months of 1982. Yet

the Administration's 1982 estimates indicate little, if any, monthly rise in

benefit payments during the remainder of 1982. In contrast, CBO's

estimates assume a $20 million average monthly increase over the

remainder of the year. (The $20 million monthly increase is low by

historical standards because of the effects of the 1981 reconciliation act.)

In DI, a technical reestimate^ has brought the Administration's

numbers in line with CBO's published baseline budget projections. It is

difficult to identify all of the technical factors contributing to the

difference in outlays between CBO and the Administration. Several

important factors can be identified: differences in savings from

management initiatives and differences in numbers of beneficiaries.

116
In its 1982 budget, the Administration proposed to tighten the

management of the DI program by searching for and terminating all

disability beneficiaries who do not meet the program's current disability

criteria. These continuing disability investigations are being maintained as

a management initiative in the 1983 budget. They are to be in addition to

those mandated in the 1980 Disability Amendments, as well as those planned

under current law. Sorting out these effects is difficult, but CBO estimates

that this proposal can save $110 million in fiscal year 1982 and $833 million

in 1985 in benefit payments from the DI trust fund, as compared with the

Administration's estimated savings of $370 million in 1982 and $1,210

million in 1985. Thus, CBO's estimates of savings are lower by about $250

million to $375 million, respectively.

CBO is assuming a much lower number of terminations than the

Administration as the result of the continuing disability investigations.

Based on an error rate of 15 percent (determined by the General Accounting

Office) and recent reversal rates in denied cases, CBO estimates that

ultimately 115,000 additional beneficiaries will be terminated and kept off

the rolls to obtain these savings. The Administration assumes that the

number terminated will be approximately twice this level.

As to the number of beneficiaries, CBO's projections show somewhat

higher numbers in fiscal years 1982-1984 and a lower number in 1985.

Projections of beneficiaries are subject to considerable uncertainty. In the

last year, the number of DI beneficiaries has declined sharply for reasons

that are not clear. However, 1982 data from the Monthly Treasury

Statements for the fiscal year to date show a flow of cash benefit payments

that appears to be consistent with the CBO reestimate.

CBO's methodology assumes that, as labor market conditions

deteriorate, many disabled workers will find DI benefits an attractive

alternative to diminishing labor market prospects. Although the impact of

labor market conditions acts to increase the estimated number of

beneficiaries relative to the Administration's estimates, this increase is

partially offset by effects of the 1977 and 1980 Social Security legislation,

the 1981 reconciliation act, and other administrative actions. These effects

are not available on a disaggregated basis from SSA.

By 1985, however, CBO's projected number of beneficiaries is below

the Administration's. This reflects, in part, shifts in demographics: the

number of people in the age groups most likely to become disabled is

projected to decline over the next few years. The number of people aged 50

to 64 is projected to decline after 1982, while the rate of increase of those

aged 60 to 64 is projected to slow dramatically beginning in 1984.

117
Civil Service Retirement, CBO projects Civil Service Retirement

outlays above the President's budget throughout the 1982-1985 period. The

higher outlays reflect higher refunds paid to separated government

employees and higher annuity payments, as shown in the table below.

Components of CBOfs Technical Reestimate for Civil Service Retirement

(Outlays in millions of dollars)

1982 1983 1984 1985

Refunds

Annuities

Total Technical Reestimate

130

95

225

104

228

332

158

290

448

217

395

612

Refunds paid to separated government employees have averaged $74

million per month so far in fiscal year 1982. The Administration's annual

estimate averages $41 million each month. CBO's incorporation of later

data on refund payments results in $130 million of the higher 1982 outlays in

Civil Service Retirement.

In 1983 to 1985, about one-third of CBO's higher outlays reflects

higher projected refund payments. CBO's projection of refunds reflects the

historical growth in these payments. As illustrated in the table below, the

President's budget shows no growth in projected refund payments in these

years. In fact, the Administration's estimate of $428 million a year in

refunds for 1983 to 1985 represents a slight decrease from actual 1981

payments. With the Administration's proposal to reduce federal

employment, refunds to separated government employees are not likely to

decline from 1981 to 1983.

In addition to higher refund payments, CBO also projects higher

outlays for annuities in all years. CBO's projections are based on outlays

through the first quarter of fiscal year 1982, cash disbursements for annuity

payments, and the Administration's most recent actuarial estimates for the

growth in the program. Relying upon the Administration's most recent

growth assumptions for annuities and actual benefits to date, CBO's

annuitant outlays exceed the President's budget by $95 million in 1982 and

by $395 million in 1985.

118
Refunds to Separated Government Employees from the Civil Service

Retirement Fund (In millions of dollars)

Average Annual

Percentage

Growth,

1977-1981 1982 1983 1984 1985

Administration

CBO

12.7

12.7

493

623 a/

428

532

428

586

428

645

a/ CBO's 1982 estimate incorporates actual refunds to date.

Unemployment Compensation. The technical reestimate of

unemployment trust fund outlays can be analyzed in terms of differences in

the projected number of weeks of unemployment compensation being paid

and in the expected increase in the average weekly benefit amount. The

table below compares the Administration's and CBO's estimates of weeks of

unemployment compensated and of average weekly benefits. Both sets of

estimates are based upon the Administration's economic assumptions.

Unemployment Compensation: Weeks Compensated and Average Benefits

1982 1983 1984 1985

Weeks Compensated

(in millions)

Administration

CBO

Average Weekly Benefits

(in dollars)

Administration

CBO

211.62

202.87

107.36

110.64

181.74

175.99

113.48

116.86

151.32

148.34

118.79

123.32

132.47

129.14

122.92

129.69

NOTE: Based on the Administration's economic assumptions.

119
Because of the flow of unemployment insurance claimants into and

out of employment, it is more useful to speak of weeks of compensated

unemployment rather than numbers of beneficiaries. For reasons that are

not completely understood, the insured unemployment rate has been

diverging from the total unemployment rate for the past year. The insured

unemployment rate is the number of persons currently claiming state

unemployment compensation benefits divided by the level of covered

employment in a recent historical period. This phenomenon has resulted in

fewer persons actually drawing weeks of compensation than would be

expected from past experience during periods of high unemployment.

Because of this, CBO projects fewer weeks of compensation being paid than

does the Administration even at the same unemployment rate.

On the other hand, the Administration's estimates assume a rate of

increase in average weekly benefits below recent experience, even after

taking into account the lower wage and price increases it expects. The

fiscal year 1982 average benefit amount projected by the Administration is

at approximately the same level as the actual average for the first quarter.

In recent years, the first quarter's average benefit has been lower than that

for the following three quarters by about $5.00.

The first of these two conflicting differences is stronger in 1982 and

1983 and results in technical reestimates that lower the level of outlays.

The second is more influential in 1984 and 1985; as a consequence, it

reinforces the economic differences and increases outlays.

The Administration is proposing legislation that would further

dramatically diminish the size of two auxilliary unemployment compensation

programs: trade adjustment assistance (TAA) and unemployment compensation for ex-service members (UCX). All TAA beneficiaries who are

not enrolled in approved training as of July 1, 1982, would be eliminated

from cash benefit assistance. As a result, the income transfer component of

this program would be eliminated by 1984. CBO estimates $16 million more

will be spent in 1982, primarily based upon the pattern of expenditures thus

far in the fiscal year. The UCX legislation would eliminate from program

eligibility those future potential beneficiaries who are barred from

reenlistment rights. Based upon Defense Department enlisted personnel

separation data, CBO believes that the number of claimants the

Administration is projecting is too low in 1982 and 1983. Thus, CBO

estimates the Administration's UCX outlays upward by $20 million and $17

million in these years.

Food Stamps. Technical reestimates of food stamp outlays result

from differences between CBO and the Administration in estimates of the

current policy baseline and in estimated effects of proposed legislation on

program cost. The following table shows these components of the

technical reestimate.

120
Components of CBO's Technical Reestimate of the Food Stamp Program

(Outlays in millions of dollars)

1982 1983 1984 1985

Current Policy Baseline

Proposed Legislation

Total Technical Reestimate

0

245

245

-162

460

298

-130

-125

-255

-267

-128

-395

The downward technical reestimate of the current policy baseline in

1983 through 1985 results primarily from differences in projection methods.

The Administration's forecast includes less of a decrease in program

participation in response to economic recovery than does the CBO forecast.

By 1985, the Administration's current policy projection of participation

exceeds CBO's by 5 percent, or nearly one million people. The

Administration includes a factor in its projection method that acts like a

time trend and contributes to increases in participation levels through time.

This is one of several reasons that the Administration's current policy

baseline exceeds CBO's estimate. Sufficient detail on the Administration's

forecasting techniques is not available to make a complete analysis of the

differences.

A reestimate of savings from proposed legislation explains much of

the difference between the CBO and the Administration estimates. The

entire 1982 technical reestimate of $245 million reflects a reestimate of

proposed legislative savings. The Administration has assumed that four of

the major proposals requiring legislation would be effective on July 1, 1982.

It has not made clear how much time will be needed to issue regulations, to

allow states to prepare to make the changes, and to implement the changes.

For these four proposals, implementation requires the review of over 7

million case files. Previous experience indicates that a period of at least

four to five months is required following enactment of legislation to allow

for full implementation. Enactment of the Administration's latest

legislative proposals is not likely to occur in time to realize savings during

fiscal year 1982.

CBO also does not include full savings during the first months of

fiscal year 1983 to allow time for full implementation of the proposed

changes. This accounts for $70 million of the $460 million technical

121
reestimate of proposed legislation. The remainder is a $390 million

reestimate of savings in the Administration's legislative proposals, for two

reasons. The first is that the Administration has not subtracted the costs of

the food stamp program in territories other than Puerto Rico in its budget

estimates. The proposal to replace the food stamp program and other

nutrition programs in these areas with a block grant starting in 1983 would

reduce food stamp outlays by about $45 million. The second involves the

Administration's proposal on "erroneous payments." In this proposal, the

federal government will no longer have responsibility for erroneous benefits

in excess of 3 percent in fiscal year 1983, 2 percent in 1984, and 1 percent

in 1985. CBO's estimate of the effects of this proposal differs from the

Administration's with respect to when the savings would be realized. The

Administration has assumed that error rates will be at the target levels in

each year. If this were to occur, savings would be realized during the

current year rather than during the year following when actual error rates

are known and states are assessed for erroneous benefits in excess of the

target levels. CBO feels that dramatic improvements in rates of error due

to overpayment or ineligible participation such as assumed by the

Administration are not possible and that much of the outlay savings,

especially in the first few years following enactment, will result from state

assessments rather than actual reductions in errors. This difference in

assumed timing of savings accounts for all but a small portion of the

remaining 1983 technical reestimate.

The 1984 and 1985 differences due to reestimates of proposed

legislation of -$125 million and -$128 million result, in part, from including

projected current policy outlays from the food stamp program in the

territories in the estimate of savings due to proposed legislation. Also, the

redistribution of erroneous payments from earlier years adds to 1984 and

1985 savings.

Child Nutrition. The technical reestimate of $245 million in fiscal

year 1982 results from differences in projected numbers and types of meals

served in the school breakfast and national school lunch programs and

differences in assumed spending patterns from current year budget

authority.

In the school breakfast program, CBO has projected 600 million meals

during fiscal year 1982, a decline from the 1981 level of 652 million, while

the Administration forecasts an increase to 675 million meals. Early

participation data from this school year indicate nearly a 10 percent decline

in program participation from the same period last year. CBO believes that

this drop in breakfasts served will be maintained throughout the year. This

difference accounts for a downward reestimate of the President's budget of

$35 million.

122
In the school lunch program, CBO and the Administration project

similar numbers of total lunches but a different mix of meals among

reimbursement categories. The Administration assumes that about 39

percent of lunches will be served to needy children in the highest

reimbursement rate category. CBO projects that about 42 percent of

lunches will be served in this category, a proportion that is consistent with

early program data. This difference causes an upward reestimate of $85

million.

The remainder of the reestimate ($195 million) is due to differences

in the assumed rate of spending of current year budget authority. The

Administration assumes that 84 percent of budget authority will be spent

during the current year, while CBO assumes a 91 percent rate. Actual

spending patterns during the past several years show that more than 90

percent of budget authority has been spent during the current year.

Reestimates in 1983 and beyond are based only on these differences in

assumed spending patterns. The Administration has included a proposal in

the budget that will cause the Child Nutrition account to be no longer

considered an entitlement.

Supplemental Security Income. The technical reestimate for SSI

results from differences between CBO and the Administration in the current

policy baseline and in estimated effects of proposed legislation. The

following table shows these components of the technical reestimate.

Components of CBO's Technical Reestimate of SSI (Outlays in millions of

dollars)

1982 1983 1984 1985

Current Policy Baseline

Proposed Legislation

Total Technical Reestimate

-122

-122

-217

38

-179

-200

66

-13*

-262

97

-165

The current policy baseline of CBO is lower than the Administration's

because of lower projected recipient levels. CBO projects about 0.1 million

fewer recipients than the Administration in fiscal year 1983 and 0.2 million

fewer in fiscal year 1985 (see the table below). Applications for SSI dropped

123

90-395 0-82-1 0
sharply and unexpectedly during the last half of 1981. Demographic factors

explain some of this drop. The cohorts now aged 50-59 and 60-6*, those

most at risk of disability, have,declined recently or are expected to exhibit

reduced rates of growth over the next few years. Persons in these cohorts

were born in the period spanning World War I and the depression. CBO has

incorporated this drop in applications in its projections, while the

Administration has not yet done so.

Projections of the Number of SSI Recipients (Average monthly number in

millions)

1981 a/ 1982 1983 198* 1985

Administration

CBO

3.7

3.7

3.7

3.6

3.6

3.5

3.6

3.5

3.6

3.4

a/ Actual.

The President's budget includes eight proposals estimated to save

$286 million in 1983 and $708 million by 1985. CBO has reduced these

savings to reflect the lower projected application and recipient levels

discussed above. CBO's estimated savings are $97 million below the

Administration's by fiscal year 1985.

Assistance Payments. Assistance payments include AFDC, child

support enforcement, and the AFDC portion of the combined welfare

administration proposal. In assistance payments, the technical reestimate

reflects differences with the Administration in both the current policy

baseline and in savings from proposed legislation. These differences are

shown in the table below.

Technical differences between CBO and the Administration in the

current policy baseline result from differences in numbers of recipients,

average payments per recipient, and savings from the 1981 reconciliation

act. As shown in the table below, these differences are partially offsetting.

12*
Components of CBCVs Technical Reestimate of Assistance Payments

(Outlays in millions of dollars)

1982 1983 198* 1985

Current Policy Baseline

Number of recipients a/

Average payment b/

1981 reconciliation act

Subtotal

Proposed Legislation

Total Technical Reestimate

-325

35

89

-201

201

—

-175

33

342

200

43

243

-250

86

343

179

179

-250

222

356

328

328

a/ Estimated.

b/ The difference in average payment per recipient is estimated;

Administration estimates are not available. Other unexplained

differences in the current policy baseline are included here.

The models that CBO and the Administration use to project AFDC

recipients differ in a number of technical respects. For example, they

differ in the lag structure relating recipient levels to changes in

unemployment rates and in the inclusion of other factors that might offset

unemployment rate effects. Differences in projected recipient levels are

shown in the table below. In fiscal year 1982, CBO projections show

recipient levels well below the Administration's. Excluding the effects of

the 1981 reconciliation act on recipient levels, CBO shows fewer recipients

throughout the period. Much of this difference is because the

Administration assumes a larger current increase in recipients from a given

rise in the unemployment rate. Recipients in the most recent month for

which data are available (November 1981) were 10.7 million, below CBO's

estimate of 10.8 million for the fiscal year. Unemployment would have to

cause an unusually sharp rise in recipients in the remainder of the year to

more than offset the large declines in recipients in and after January 1982

that will result from the implementation of the 1981 reconciliation

act provisions.

125
Projections of the Number of AFDC Recipients (Average monthly number

in millions)

1981 a/ 1982 1983 198* 1985

Administration

CBO

Difference

11

11

.1

.1

0

11.

10.

-0.

0

8

3

10.

10.

+0.

6

7

1

10. 4 b/ 10.

10. ^ 10.

* -0.

3 b/

2

1

* Less than 50,000.

a/ Actual.

b/ Estimates provided by the Social Security Administration.

Projections by CBO and the Administration of average payments also

differ. Before the last few years, average payments per recipient increased

at a rate similar to the rate of increase in the CPI during the preceding

year. However, rates of increase in average payments have recently fallen

well below rates of increase in the preceding year's CPI. In fiscal year 1981,

for example, the increase was about one-half that of the CPI. At the same

time, the annual rate of increase in average payments has not fallen below

51/2 percent during the last five years. CBOfs projection ranges from 5.0

to 6.1 percent a year, following recent experience. The Administration's

projection is below CBO's by around two percentage points; this reflects

only in part the Administration's lower CPI increases.

CBO shows lower savings from the 1981 reconciliation act throughout

the period. In fiscal year 1982, CBO shows savings of about $650 million as

compared with the Administration's $750 million; the Administration has

recently lowered its estimated 1982 savings by more than $300 million.

Beyond 1982, CBO shows savings of about $850-900 million a year. The

Administration's savings are about $350 million a year higher. The major

reason for CBO's lower savings is its assumption that the reconciliation act

reductions in earnings disregards will reduce the work effort of recipients.

Lower savings are also shown for the Administration's proposed

legislation. Proposed cuts in AFDC (and child support enforcement) are

again sizable, totaling $1.3 billion in 1983. Because these proposals are

extensive and not yet fully specified, CBO's only reestimate at this time is

126
the deletion of $201 million in 1982 savings and a reduction of $43 million in

1983 savings as a result of expected implementation delays. A recent

survey of states by the American Public Welfare Association found that at

least 21 states applied for full or partial waivers of the 1981 reconciliation

act's October 1 implementation date because of the need for legislative

action to remove state law impediments, lawsuits, and/or administrative

complications. An assumed July enactment date for the proposed legislation

again makes implementation before October improbable, and is likely to

delay implementation in 1983 in some states.

Energy Assistance. The CBO technical reestimates include the

recently passed 1982 supplemental appropriation of $123 million for energy

assistance, which was not requested by the Administration nor included in

t he Febr uar y budget.

127
FUNCTION 700: VETERANS' BENEFITS AND SERVICES

(Outlays in millions of dollars)

1982 1983 198* 1985

President's February Budget 24,155 24,383 25,584 26,948

Preliminary CBO Reestimates

Different economic assumptions

Compensation and Pensions

Technical reestimates

Compensation

Pensions

National Service Life Insurance

Readjustment benefits

Medical care

Total Reestimates

President's Budget Reestimated

—

-35

-305

—17

-73

-396

23,760

—

21

-505

-31

-145

73

-587

23,796

18

84

-576

-73

-192

-73—9

24,845

333

164

-631

-74

-218

-42—6

26,522

EXPLANATION OF PRELIMINARY CBO REESTIMATES

Different Economic Assumptions

Compensation and Pensions, The veterans1 pension program

established by Public 'Law 95-588 is indexed for inflation in the same manner

as Social Security. While the compensation program is not indexed by law,

it has historically received legislated cost-of-living increases each year,

effective October 1 and usually equal to the percentage increase in pension

benefits the previous June. The Administration's February budget assumes

that annual cost-of-living increases will be provided for compensation

benefits based on projected increases in the Consumer Price Index. Under

CBO's economic assumptions, cost-of-living adjustments for these two

programs in 198^ and 1985 would be somewhat higher than projected by

the Administration.

Technical Reestimates

Compensation. Although the CBO estimate of compensation outlays

is $35 million below the Administration's estimate for 1982, CBO estimates

exceed those of the Administration by increasing amounts in 1983-1985.

128
The differences result from small and partially offsetting variances in the

estimates of average benefits to veteran and survivor recipients. CBO

assumes that the average compensation benefit to veterans will increase

faster than estimated by the Veterans Administration (VA). This is expected

to occur because of the worsening of the disabilities of these veterans as

their average age increases. The effects of this phenomenon are partially

offset by CBO's projection of slower growth in average benefits payable to

survivor cases than assumed by the VA. The total number of dependent

surviving children is falling, as many of them become too old to qualify as

dependents. The number of new cases with dependent children is not

sufficient to replace the age-related terminations, since the number of

service-connected deaths during peacetime is low. This depresses the

average number of dependents per case and, thus, the average benefit level.

The differences in the estimates, however, are quite small; in 1985 the

technical reestimate represents only slightly more than 1 percent of total

anticipated program costs.

The President's 1983 budget also contains a legislative proposal to

eliminate unemployability benefits to compensation recipients who also

receive other federal disability or retirement benefits. The VAfs estimate

of the savings from this proposal, $282.5 million in 1984, is considerably

lower than CBO would expect, based on the description of the proposal in

the budget. CBO will be unable to develop an alternative estimate,

however, until legislative language is available for the proposed amendment.

Pensions. The large technical reestimate in pension outlays results

primarily from the substantially slower growth rate in the CBO projection of

average benefits to Public Law 95-588 pension recipients than the growth

rate reflected in the Administration's projection.

Projections of Average Benefit Levels For Public Law 95-588 Pension (In

dollars)

1982 1983 1984 1985

Administration Projection

Veterans 4,736 4,854 4,946 5,032

Survivors 3,254 3,286 3,330 3,366

CBO Projection

Veterans 4,076 4,104 4,127 4,190

Survivors 2,899 3,009 3,139 3,304

129
Few data are available on the components of the Administration's

estimates, particularly in the out years. However, the disparity in the

projections of average benefit amounts is believed to result from different

assumptions about the types of cases that will be added to the Public

Law 95-588 rolls in future years and about the impact these cases will have

on overall benefit levels.

CBO expects average benefit levels in current dollars to increase

very slowly because of a decline in real average benefits resulting from a

recent change in the mix of Public Law 95-588 pension accessions. Before

1981, the majority of added cases were those transferring their entitlement

from the Public Law 86-211 pension. Transfer cases have generally had

very low non-pension incomes and, therefore, have received relatively high

benefits under the new pension program. In 1981, the balance tipped and the

largest number of cases added to the rolls were new cases who had never

before received a VA pension. These new cases tend to have higher

nonpension incomes and, thus, receive lower than average pension benefits.

Since the Public Law 95-588 pension is a fairly new program with a rapidly

growing caseload, the impact on real average benefit levels (calculated in

constant 1980 dollars) of the cases added to the rolls in any year is quite

significant, as can be seen in the following table.

Cases and Real Average Monthly Benefits Under Public Law 95-588

Pension (Number in thousands, benefits in dollars)

Cases Added During Year

Cases in Current

Payment Status

at Start of Year

Cases Transferring Cases Not Previously

From P.L. 86-211 Receiving Pension

1980

1981

1982 est.

1983 est.

1984 est.

1985 est.

Number

230

427

525

598

659

714

Average

Monthly

Benefits

282

265

270

253

241

234

Number

143

66

47

18

10

7

Average

Monthly

Benefits

264

275

255

240

228

215

Number

90

102

125

163

185

203

Average

Monthly

Benefits

217

218

216

214

211

207

NOTE: The effects of cost-of-living increases have been removed from

actual and projected average benefit levels to show more clearly

the trend in real average benefits.

130
The effect of this phenomenon is obvious in a comparison of actual

average benefit levels in 1980 and 1981. Despite a 14.3 percent

cost-of-living adjustment in June 1980 and an 11.2 percent adjustment in

June 1981, the average benefit of Public Law 95-588 survivors increased by

only 2.4 percent and the level for veterans by a mere 0.2 percent. The

impact of new cases on the average benefit will diminish in the future as

each year's new cases become a smaller proportion of the total caseload.

However, the impact is unlikely to decline as fast as VA estimates

would indicate.

National Service Life Insurance (NSLI). The CBO technical

reestimate results from a lower CBO projection of outlays for new policy

loans, as shown in the following table.

Outlays for NSLI Policy Loans (In millions of dollars)

1982 1983 1984 1985

Administration

CBO

96.4

96.4

124.2

93.5

163.3

90.7

161.9

88.0

The Administration's estimate of outlays for policy loans reflects an

increasing level of loan activity, despite the fact that the number of policies

in force is expected to decline from 3,378,000 in 1982 to 3,101,000 in 1985.

In addition, the decline in interest rates projected by both the

Administration and CBO should exert further downward pressure on the loan

level. As interest rates drop, the cost of borrowing elsewhere decreases

relative to the loss of insurance coverage that results from borrowing

against the policy.

Readjustment Benefits. The CBO estimate of outlays for these

benefits is slightly higher than the Administration's estimate in 1982 but

lower by a growing margin in 1983-1985. This is largely attributable to

different projections of the number of veterans training under the G.I. Bill.

The number of veterans in training increased unexpectedly by 75,000

in the fall of 1981. This increase is believed to have resulted from the

impact of the previous year's 10 percent increase in benefit rates,

exaggerated by the sharp rise in the unemployment rate. Since no future

increases are proposed by the President for education benefits, and since

both CBO and the Administration are forecasting a steady decline in the

unemployment rate, the CBO projection of outlays for readjustment benefits

131
reflects a reemergence of the normal downward program trend after 1982.

The Administration's projection, however, shows a lasting decrease in the

rate of program decline, which would be inconsistent with

historical experience.

Medical Care. The CBO technical reestimate of medical care outlays

results from different assumptions regarding the speed with which

appropriated funds will be spent. CBO expects a somewhat slower

expenditure of the 1982 appropriation for this account consistent with

historical experience. The CBO reestimate, therefore, lowers 1982 outlays

and raises 1983 outlays by the same amount.

132
FUNCTION 750: ADMINISTRATION OF JUSTICE

(Outlays in millions of dollars)

1982 1983 1984 1985

President's February Budget 4,521 4,592 4,571 4,500

Preliminary CBO Reestimates

Different economic assumptions — — — —

Technical reestimates -29 8 — —

Total Reestimates -29 8

President's Budget Reestimated 4,492 4,600 4,600 4,500

EXPLANATION OF PRELIMINARY CBO REESTIMATES

Different Economic Assumptions

This function has no reestimates resulting from different economic

assumptions.

Technical Reestimates

CBO has a number of relatively minor technical reestimates in this

function that result primarily from the use of different assumptions about

spending rates, especially spending from obligated balances. The net effect

of these reestimates is quite small.

133
FUNCTION 800: GENERAL GOVERNMENT

(Outlays in millions of dollars)

1982 1983 1984 1985

President's February Budget 5,146 5,008 5,210 4,886

Preliminary CBO Reestimates

Different economic assumptions

Technical reestimates

Legislative Branch

Federal Buildings Fund

Other

Total Reestimates

President's Budget Reestimated

-47

-107

-7

-161

4,985

—

—42

—42

5,050

—

—51

—51

5,261

—

—88

—88

4,974

EXPLANATION OF PRELIMINARY CBO REESTIMATES

Different Economic Assumptions

This function has no reestimates resulting from different economic

assumptions.

Technical Reestimates

Legislative Branch. The CBO 1982 outlay estimate for the Legislative

Branch is nearly $50 million below the estimate contained in the Administration's budget. This difference is the result of different assumptions about

how quickly funds appropriated in 1982 will be disbursed and the level of

1982 outlays from previous years' appropriations. CBO expects somewhat

slower spending based on recent actual experience with these appropriations. Estimating differences are negligible in 1983 through 1985.

Federal Buildings Fund. The CBO outlay estimates for this revolving

fund are based on the fund's past spending patterns. In 1982, the Administration estimates positive outlays of $2.8 million; CBO's estimate is for

negative outlays of -$104 million. Over the past several years, this fund has

134
never shown positive outlays at the end of the fiscal year and CBO does not

expect this spending pattern to change.

An examination of previous estimates for this account reveals the

difficulty the Administration has experienced in developing outlay estimates. In each year but one between 1976 and 1981, net outlays were lower

than initially estimated in the President's January budget submission for

that year. In all but two years, actual outlays were also significantly lower

than revised estimates contained in the President's budget submission

released in January of the current year. The following table compares

actual outlays with the Administration's original estimate for each year

contained in the President's annual budget submission and the revised

estimate contained in the budget submission of the following January. The

final two lines show the difference between actual outlays and the estimates

of the two relevant January budget submissions.

Federal Buildings Fund: Differences Between Administration Budget Estimates and Actual Outlays, 1976-1981 (In millions of dollars)

1976 1977 1978 1979 1980 1981

Original Estimate -98 -10 17 -5 -138 -14

Revised Estimate 35 6 1 -127 -146 -12

Actual Outlays -105 -122 -165 -56 -54 -154

Difference A (actual

outlays minus

original estimate) -7 -112 -182 -51 84 -140

Difference B (actual

outlays minus

revised estimate) -140 -128 -166 71 92 -142

For 1983-1985, CBO estimates that net outlays from this fund will

continue to be negative, but less so than projected in the President's

February budget. Receipts and reimbursements received by the fund are

expected to increase significantly as a result of planned increases in

standard user charges beginning in 1983, but CBO expects that service costs

will rise somewhat faster than projected by the Administration.

135
FUNCTION 850: GENERAL PURPOSE FISCAL ASSISTANCE

(Outlays in millions of dollars)

1982 1983 1984 1985

President's February Budget 6,417 6,686 6,788 7,090

Preliminary CBO Reestimates

Different economic assumptions

Technical reestimates

BLM, Misc. Perm. Approp.

Forest Service, Perm. Approp.

Other

Total Reestimates

President's Budget Reestimated

mm _ <••

-123

—-17

-140

6,277

_ .. ~

-228

-48

-27—5

6,410

— — _

-224

-123

-34—7

6,441

_ . mm

-356

-163

-51—9

6,571

EXPLANATION OF PRELIMINARY CBO REESTIMATES

Different Economic Assumptions

This function has no reestimates resulting from different economic

assumptions.

Technical Reestimates

Bureau of Land Management, Miscellaneous Permanent Appropriations. Payments are made to state and local units of government based on

percentages of the federal government's receipts from revenue-producing

activities on certain federal lands. More than 80 percent of the payments

made through this account are for federal receipts from bonuses, royalties,

and rentals under the Mineral Leasing Act. Under the provisions of this act,

Alaska receives 90 percent of federal receipts from minerals activity on

public lands in that state; the other states receive 50 percent. The balance

of federal receipts for these activities are deposited in the Land and Water

Resources Reclamation Fund and the miscellaneous receipts of the

Treasury.

136
Approximately 20 percent of the payments made through this account

are payments to counties in Oregon and California. These payments

represent 50 percent reimbursement for federal receipts resulting from the

sale of timber on grant lands located in the counties.

The CBO 1982 estimate of mineral leasing receipts is nearly $200

million lower than the Administration's latest estimate. These receipts are

recorded as offsetting outlays in function 300. In later years, CBO's

estimates for mineral leasing receipts generally reflect a more moderate

increase than that estimated for the February budget. The CBO estimates of

mineral leasing payments to localities reflect the lower receipt estimates

discussed in function 300. The 1982 estimate is approximately 35 percent

lower than the President's.

The CBO estimates for the sale of timber are also lower than those of

the Administration. CBO's estimated increases in timber prices in function

300 are more moderate in 1982 and 1983 than OMB's estimates. In 1984

through 1985, CBO's estimated rate of increase in timber receipts remains

fairly constant, but OMB's diminishes. Therefore, the size of the difference

between OMB and CBO receipt estimates, and the corresponding estimates

for payments to counties, are smaller in 1984 and 1985, partially offsetting

the larger differences for mineral leasing payments.

The balance of this account represents smaller payments to state and

local governments for a variety of activities on federal lands within those

jurisdictions. Overall, CBO estimates 1985 payments to state and local

governments as increasing by more than 50 percent above the 1981 level.

The Administration estimates a 235 percent increase.

Forest Service, Permanent Appropriations. Payments are made to

state and local entities for reimbursement of revenues received by the

federal government for activities on property owned by the Department of

Agriculture that lies within the local jurisdiction. An annual payment is also

made to the state of Minnesota for distribution to certain counties. This

payment is equal to 0.75 percent of the appraised value of Superior National

Forest lands located in those counties. Most of the payments, however,

represent 25 percent of funds received from national forests for timber

sales. Because the 1982 payment is based on actual 1981 receipts, CBO and

OMB have the same estimates for this account in 1982. The CBO estimates

for 1983 through 1985 are lower than those of the Administration. This is

because CBO's timber receipt estimates in function 300 are lower than the

Administration's as a result of different assumptions about the price and

volume of timber sales. The estimate of payments to the states for Forest

Service lands reflects CBO's assumptions regarding timber receipts, with a

one-year lag.

137
FUNCTION 900: INTEREST

(Outlays in millions of dollars)

1982 1983 1984 1985

President's February Budget 99,095 112,536 116,185 119,726

Preliminary CBO Reestimates

Different economic assumptions

Interest on the public debt 1,143 1,749 9,418 6,543

IRS refunds — — 270 373

Interest from off-budget

agencies -50 -44 -63 -142

Tax and loan accounts -141 -239 -281 -197

Technical reestimates

Interest on the public debt 1,064 4,292 5,791 6,652

Interest from off-budget

agencies 7 -208 662 555

Effects of higher deficits

Different economic assumptions 287 928 2,530 4,661

Technical reestimates 439 2,833 6,197 9,864

Total Reestimates 2,750 9,311 24,524 28,309

President's Budget Reestimated 101,845 121,847 140,709 148,035

EXPLANATION OF PRELIMINARY CBO REESTIMATES

Different Economic Assumptions

Interest on the Public Debt, CBO interest rate assumptions are higher

than those of the Administration in all fiscal years. Higher rates cause

higher interest outlays both for financing current deficits and for

refinancing existing debt. Average interest rates can be estimated by

making certain assumptions about the composition of new financing and

refinancing among various marketable Treasury issues (bills, notes, and

bonds). Assuming no difference in the composition of new financing,

average rates for the Administration and CBO assumptions are shown in the

table below.

138
Interest Rates on Net New Financing (Fiscal year averages)

1982 1983 1984 1985

Administration

CBO

12.4

12.7

12.4

12.7

10.6

12.1

9.9

10.1

CBO isolates the impact of higher interest rates by incorporating

Administration projections of the total public debt level. The CBO

reestimate for interest on the public debt is highest in fiscal year 1984,

when the difference between interest rates is most pronounced. Higher

interest rates in one year also carry over into future years, since the

government must continue to pay interest on longer-term securities issued

during previous years.

IRS Refunds. CBOfs assumed higher interest rates also lead to higher

outlays for interest on IRS refunds. The statutory interest rate for accruals

in a particular calendar year is equal to the average prime rate charged by

commercial banks during the preceding September, rounded to the nearest

whole percent. Interest payments are a function of the statutory rates for

the current year and previous years. The Administration and CBO forecasts

for September 1982 are sufficiently close that the rounded interest rates for

calendar year 1983 are equal. By September 1983, the forecasts differ

sufficiently to produce different statutory rates and different estimates of

interest costs beginning in fiscal year 1984. The Administration projects the

statutory rate to be 12 percent in calendar year 1985, while CBO projects it

to be 14 percent. The outlay differences in 1984 are smaller than those in

1985, since the 1984 refunds accrue interest at the same statutory rates for

a longer period than do the 1985 refunds.

Interest from Off-Budget Agencies. The higher interest rates assumed

by CBO reduce outlays (increase offsetting receipts) for interest from

off-budget agencies. This interest consists almost entirely of that received

from the Federal Financing Bank (FFB). FFB borrowing from the Treasury

primarily includes long-term notes and bonds. While the FFB has over

$100 billion of borrowings from the Treasury, most of the portfolio's interest

rates were determined in past years. Differences in interest receipts

because of different interest rate assumptions result only from net new

borrowing from the Treasury and borrowing to refinance expiring securities.

139

90-395 0-82-1 1
CBO's average long-term rates are higher over the projection period,

resulting in higher receipts from the FFB. The difference in estimated

receipts increases in later years, as more net new borrowing and refinancing

occur at CBOfs assumed interest rates. In 1982, CBO projects $50 million

more in receipts, and this difference increases to $142 million in 1985.

Tax and Loan Accounts. CBOfs projected higher interest rates also

lead to lower outlays (higher offsetting receipts) for interest on tax and loan

accounts. The major portion of the government's cash operating balance is

held in the tax and loan accounts at commercial banks throughout the

country. The accounts earn interest at the federal funds rate, which is

subject to daily fluctuation. Both the Administration and CBO forecasts of

the federal funds rate depend on the projected 91-day Treasury bill rate.

With higher projected Treasury bill rates, CBO estimates higher interest

receipts from the tax and loan accounts.

Interest Rates on Tax and Loan Accounts (Fiscal year averages)

1982 1983 198* 1985

Administration a/ 11.4

CBOb/ 13.5

11.1

14.8

9.6

14.0

8.8

11.7

a/ 91-day Treasury bill rate.

b/ Estimated federal funds rate based on 91-day Treasury bill rate.

Technical Reestimates

Interest on the Public Debt. Part of this technical reestimate results

from making outlays for interest on the public debt consistent with the

Administration's published unified budget deficit figures. The deficits

assumed by the Administration in estimating interest costs were lower than

those ultimately incorporated in the budget.

The other part of CBO's technical reestimate reflects a higher level of

interest payments to trust funds that hold government securities. CBO's

estimating methodology is based on an examination of historical patterns of
redemption of securities held by these trust funds. CBO assumes less

refinancing of the long-term securities held by these trust funds, thus giving

greater weight to current high interest rates and less weight to projected

lower rates. Since this outlay is almost entirely an intragovernmental

transaction, this portion of CBO's technical reestimate in function 900 is

offset in subfunction 952 (interest received by certain trust funds).

Interest from Off-Budget Agencies. The Administration's interest

calculation uses levels of lending and repayment activity that do not

correspond to its published figures for off-budget accounts. The CBO

reestimate corrects for this by using the published data. The reestimate

also reflects consistency with CBO reestimates of FFB lending and repayment activity.

Effects of Higher Deficits

New financing requirements are projected to be higher because of

CBO economic and technical reestimates of revenues and of other outlays

(both on- and off-budget). This causes higher budget deficits and, therefore, higher outlays for interest on the public debt. The deficits resulting

from the CBO reestimates (excluding the induced interest costs) exceed the

Administration's estimates by about $11.6 billion in 1982, $24.6 billion in

1983, $37.3 billion in 1984, and $53.1 billion in 1985. The interest outlays

resulting from these higher levels of deficit financing rise from about

$0.4 billion in 1982 to $9.9 billion by 1985, as shown in the table presented

at the start of this function.

141
FUNCTION 920: ALLOWANCES

(Outlays in millions of dollars)

1982 1983 1984 1985

President's February Budget

Preliminary CBO Reestimates

Different economic assumptions

Technical reestimates

Civilian agency pay raises

Total Reestimates

Unevaluated Administration Estimates

Fraud, waste, and abuse

Debt collection

President's Budget Reestimated

-624 -1,257 -191 -369

71 556 564

71 556 564

(1,000) (1,000) (1,000) (1,000)

(—) (1,000) (1,000) (2,000)

-624 -1,186 365 195

EXPLANATION OF PRELIMINARY CBO REESTIMATES

Different Economic Assumptions

This function has no reestimates resulting from different economic

assumptions.

Technical Reestimates

Civilian Agency Pay Raises* The Administration's February budget

estimates assume pay raises of 5 percent for all federal white- and

blue-collar employees in each of the next three years. The estimates also

assume a reduction in the federal civilian agency work force of approximately 75,000 full-time equivalent positions over the 1982-1984 period.

The pay raise cost figures provided by the Administration do not

reflect the full cost of the anticipated pay adjustments for fiscal years 1983

through 1985. As can be seen in the table below, the Administration's

estimate falls significantly short of CBO's full cost estimate, raising the

possibility that the Administration is assuming partial absorption of pay

142
raise costs, or that the payroll savings associated with proposed work force

reductions are being placed in function 920. If, in fact, the latter is true,

the saving would be double counted, since it is already contained in various

accounts throughout the budget. For the sake of comparison, the table also

provides CBO pay raise cost estimates assuming absorption rates of

70 percent (the level proposed by the Administration for 1982) and

40 percent (the average of the absorption rates actually adopted by the

Congress over the last 10 years). The CBO reestimate of the Administration's budget is based on the assumption of 40 percent absorption in

1983-1987. While CBO's work force and pay rate adjustment assumptions

are consistent with those used by the Administration, its 1982 payroll figure

is approximately $2 billion higher than the Administration's. This results in

an upward adjustment in the pay raise cost estimates of approximately

$60 million in 1983, $160 million in 1984, and $240 million in 1985.

A Comparison of Administration and CBO Pay Raise Cost Estimates (In

millions of dollars)

Fiscal

Year

1983

1984

1985

Administration

743

1,809

3,331

CBO at

Full Cost

1,405

2,986

4,645

CBO with

70 Percent

Absorption

371

1,899

3,508

CBO with

40 Percent

Absorption

814

2,365

3,895

UNEVALUATED ADMINISTRATION ESTIMATES

Fraud, Waste, and Abuse

The Administration's allowance estimates for the 1982-1985 period

also contain $1 billion in annual savings from the elimination of fraud,

waste, and abuse. According to the President's budget, these savings are

expected to result from the vigorous program of the Inspectors General to

uncover wrongdoing and inefficiency in various government activities. The

Administration claims that savings will also result from increased cooperation between the Inspectors General and agency Assistant Secretaries for

Management.

CBO has not reestimated the Administration's projections of the

savings assumed to result from the reduction of fraud, waste, and abuse, but

143
believes they are optimistic for two reasons. First, while the Administration asserts that an additional savings of $1 billion a year can be achieved

through a more vigorous program of auditing and oversight, in most cases it

has not provided for the additional personnel necessary to handle the

increased workload. This can be seen in the following table, which provides

a comparison of 1982 and 1983 staffing levels for a number of major

Inspectors General offices. In each case, the Administration projects little

or no change in the office's level of staffing for 1983. This raises serious

doubts about the ability of the Inspectors General to perform the job asked

of them by the Administration.

Offices of Inspectors General—Full-Time Staffing Levels

Department or Agency 1982 1983

Department of Agriculture 889 889

Department of Education (proposed

Foundation for Educational Assistance) 292 292

Department of Health and Human Services 1,024 1,026

General Services Administration 509 499

A second reason CBO believes the allowance target is optimistic is

that the Administration is already claiming savings from the elimination of

fraud, waste, and abuse in various spending accounts throughout the

budget—assistance payments, health care services, and Pell grants being

notable examples. Since the budget estimates for these programs already

reflect savings expected to result from the elimination of fraud, waste, and

abuse, CBO believes that the additional savings estimated in function 920

will be difficult to achieve.

Debt Collection

The Administration has estimated savings of $13 billion (excluding tax

receipts) in the period 1983-1987 as a result of improved debt collection

procedures. Of this amount, $5 billion has been distributed to agency

accounts within several functions of the budget. The undistributed balance

is reflected in function 920.
The improved debt collection is to be achieved through both administrative and legislative initiatives. The administrative remedies planned by

the Administration include examination and improved effectiveness of loan

origination and servicing, better training for collections officials, faster and

more effective litigation, and utilization of new tools and techniques—one

of which is the contracting of certain debt collection functions to the

private sector. Legislative proposals outlined in the Administration's budget

include contracting for use of private-sector debt collection agencies,

assessment of interest, penalties, and administrative charges on nontax

debts, granting authority to refer credit information on delinquent debtors

to credit bureaus, and requiring credit applicants to furnish their Social

Security numbers to the government.

Both the General Accounting Office (GAO) and the Justice Department issued regulations in the Federal Claims Collection Standards in April

1979, which were soon followed by Treasury Department regulations,

requiring agencies to charge interest and penalties on delinquent debt.

According to the January 1981 report of the OMB Debt Collection Project,

few agencies have adhered to these regulations. It is clear that the federal

government has been lax in its debt collection efforts in the past.

The following table compares several debt collection estimates. The

first column shows delinquent debt owed to the government as of

September 30, 1981. The second column is CBO's estimate of the portion of

that debt that was over 90 days delinquent on that date. The next column

presents the Administration's 1983 estimates for those savings that have

been distributed to agency accounts. (It does not include the additional

$1 billion in undistributed allowances that the Administration allocates to

function 920.) Finally, the table shows GAO's estimates of savings that

could be achieved over several years (generally covering at least a four-year

period).

The Administration's 1983 and 1984 estimates are the same for each

agency except those for the Department of Housing and Urban Development, which increase to $150 million in 1984. The Administration estimate

of $5,050 million in collections over five years appears optimistic but

feasible when compared with the GAO collection estimates. The GAO paper

on debt collection stresses, however, the need for maximum availability of

resources and management tools, and states that current resources are

insufficient. If resources are diverted from other activities, as suggested by

the Administration, agencies will incur opportunity costs as effort in other

programs is diminished. CBO's cost estimate of S. 1249, the Debt Collections Act of 1981, estimated that collection costs of $0.7 billion would be

associated with the collection of $1.9 billion in delinquent debt. Under the

bill's provisions, this would result in a net savings of $1.2 billion over a

period of four and one-half years.

145
Debt Collection Estimates (In millions of dollars)

Department

or Agency

CBO ot Delinquent

a/ Delinquencies

§/

 Aged 90 Days b/

Estimate of

Fiscal Year

1983 Savings

GAO Estimate of

Savings Over

Several Years c/

Department of Agriculture 1,976 1,646

Department of Commerce 244 237

Department of Defense 226 93

Department of Education 2,976 2,553

Department of Energy 115 60

Department of Health

and Human Services 2,000 2,000

Department of Housing

and Urban Development 1,293 1,293

Department of the Interior 59 43

Department of Labor 305 272

Department of State 12 12

Department of

Transportation 141 138

National Aeronautics and

250

30

35

225

35

155

125

25

75

5

675-1,150

N/A

105-129

800-1,800

N/A

170-540

362-633

N/A

466-559

N/A

N/A

Space Administration

Veterans Administration

Agency for International

Development

Small Business

Administration

All Other d/

Total

*

1,042

77

1,698

255

12,419

*

913

53

1,499

193

11,005

25

150

35

175

—

1,350

N/A

340-640

N/A

900-1,300

N/A

3,918-6,751

*Less than $500 million.

N/A = Not available.

a/ As of September 30, 1981. Supplied by the Office of Management and Budget.

b/ This estimate is based on the percentage of each agency's debt that was over 90 days

delinquent on September 30, 1979. Actual 1981 data are not yet available.

c/ Derived from Enclosure IV of a Memorandum prepared by the Office of the

Comptroller General, General Accounting Office, to Chairman 3ames R. Jones,

House Committee on the Budget, "Improved Administrative Practices Can Result in

Further Budget Reductions (PAD-81-69),'1 (March 1981). These estimates were based

on September 30, 1979, delinquency levels, which totaled approximately $10.9 billion

for all departments and agencies other than the Department of the Treasury.

d/ Debts owed to the Treasury Department have been excluded because more than

90 percent of Treasury Department delinquencies are owed to the Internal Revenue

Service, which has its own unique debt collection activities and programs.
Based on both the GAO and CBO estimates of debt collection

activities, CBO believes that the Administration may be able to achieve the

savings allocated to agencies, but that the additional $4 billion in undistributed savings estimated by the Administration over the 1983-1985 period

appears to be optimistic. Moreover, unless significant new resources are

allocated to the debt collection effort, it is doubtful that agencies will be

able to realize the savings estimated by the Administration.

1*7
FUNCTION 950: UNDISTRIBUTED OFFSETTING RECEIPTS

(Outlays in millions of dollars)

1982 1983 1984 1985

President's February Budget -31,502 -43,474 -48,245 -50,043

Preliminary CBO Reestimates

Different economic assumptions

Interest rates -56 -372 -57 -466

Technical reestimates

Employer's share, employee

retirement 390 253 -57 -291

Interest received by certain

trust funds -637 -3,233 -4,446 -3,578

Outer Continental Shelf receipts 900 5,200 4,800 3,200

Total Reestimates 597 1,847 240 -1,135

Unevaluated Administration Estimates

Federal surplus property disposition (---) (1,000) (4,000) (4,000)

President's Budget Reestimated -30 ,904 -41 ,627 -48 ,005 -51 , 178

EXPLANATION OF PRELIMINARY CBO REESTIMATES

Different Economic Assumptions

Interest Rates, Subfunction 952 consists of interest received on

securities held by certain federal government trust funds. CBO projects

higher interest rates than the Administration and, hence, larger offsetting

receipts by these trust funds. The trust funds invest almost entirely in

special issues of long-term securities, whose interest rates are typically

linked to average rates on some defined portion of outstanding marketable

long-term debt. These portfolios are largely fixed, but their composition

changes over time as the trust funds purchase new securities and refinance

expiring debt. Changes in trust fund interest receipts resulting from

different interest rate assumptions occur with a lag of about one year, as

the new purchases (and refinancing) gradually constitute a larger share of the

portfolio. Different long-term interest rate assumptions in fiscal year 1982

148
lead to a small reestimate in that year and a larger reestimate in fiscal year

1983. The Administration's and CBO's long-term interest rate assumptions

are similar in fiscal year 1983, leading to only a small reestimate in 1984.

Long-term interest rate assumptions for fiscal year 1984 and beyond diverge

more widely, producing $466 million in higher interest receipts for fiscal

year 1985.

Technical Reestimates

Employer's Share, Employee Retirement. The employer's share of

employee retirement is the federal government's contribution to its retirement plans. About 70 percent of the payments are made to the Civil Service

Retirement fund. The remaining payments are mostly to Social Security

trust funds. In 1983, the Administration has proposed legislation to cover

federal employees under Medicare. The estimated employer contributions

for this proposal are $619 million in 1983, $844 million in 1984, and

$933 million in 1985.

CBO estimates lower receipts than the Administration in 1982 and

1983 for the employer's share of employee retirement. Based on recent

information from the Postal Service and receipts to date, CBO estimates

Postal Service contributions to the Civil Service Retirement fund of

$1.8 billion in fiscal year 1982. In contrast, the Administration estimates

1982 payments of $2.2 billion—a 42 percent increase over the 1981 level.

Postal Service Contributions to Civil Service Retirement Fund (In millions of

dollars)

Actual Estimate

Administration

CBO

1980

1,489

1,489

1981

1,537

1,537

1982

2,188

1,751

1983

2,192

1,792

From 1980 to 1981, Postal Service contributions increased by about

3 percent. The CBO estimate of a 14 percent increase from 1981 to 1982

reflects recent Postal Service pay raises. CBO estimated 1981 Postal

Service contributions of $1.5 billion, while the Administration's estimate of

$1.7 billion exceeded actual 1981 payments by about $200 million.

149
From 1983 to 1985, CBO's estimates of lower Postal Service payments

are offset by increased receipts resulting from the federal pay raise. While

CBO includes the additional receipts from the Administration's 5 percent

federal pay raise assumption each year, the Administration includes receipts

only in 1982. Because of these additional receipts from the federal pay

raise, CBO estimates higher receipts than the Administration in 1984 and

1985.

Interest Received by Certain Trust Funds. This technical reestimate

is the counterpart of another technical reestimate discussed in function 900.

As noted in that earlier discussion, CBO assumes, based on historical data, a

somewhat slower pattern of redemptions of securities held by the trust

funds. This procedure accords greater weight to the relatively high interest

rates in current portfolios, and less weight to future purchases at declining

interest rates. The two reestimates are largely offsetting.

Outer Continental Shelf Receipts. CBO estimates that receipts from

leasing activities on the Outer Continental Shelf will be substantially lower

than the Administration estimates in fiscal years 1982-1985. CBO's

technical reestimates result largely from different projections of bonus

receipts from new lease sales and royalties received from leased lands. The

Administration and CBO also make different assumptions about the release

of bonus receipts held in escrow as a result of boundary disputes between

the federal government and certain states. The following table shows the

distribution of CBO's technical reestimate among these three factors.

Components of CBO's Technical Reestimate of OCS Receipts (In millions of

dollars)

1982 1983 1984 1985

Lower Bonus Receipts

Higher Rents and Royalties

No Escrow Releases

Total Reestimate

1,100

-200

—

900

4,000

-300

1,500

5,200

3,700

-400

1,500

4,800

1,900

-200

1,500

3,200

The Administration's and CBO's estimates of bonus receipts for 1982

and 1983 are based on assessments of the likely results of individual

scheduled lease sales. For 1984 and beyond, the estimates are aggregate

150
projections with no sale-by-sale detail. Three of the seven scheduled sales

for 1982 have been held, and the resulting receipts are included in CBO's

latest estimate. The February sale in the Gulf of Mexico was held after the

preparation of the Administration's latest estimates. The Administration's

and CBO's projections for bonus receipts are shown in the following table.

Projected Bonus Receipts from OCS Lease Sales (In millions of dollars)

Actual Projections

Administration

CBO

1980

2.2

2.2

1981

7.8

7.8

1982

4.5

3.4

1983

13.2

9.2

1984

12.9

9.2

1985

11.1

9.2

CBO's estimate of aggregate bonus receipts for 1982 is approximately

$1.1 billion lower than the Administration's estimate of $4.5 billion as a

result of different sale-by-sale bonus receipt estimates and different

assumptions regarding collection of bonus payments within the fiscal year

for sales occurring at the end of the year.

Both the Administration's and CBO's 1983-1985 bonus estimates are

high and unprecedented. The record level to date occurred in 1981, with

bonus receipts reaching $7.8 billion. The Administration's proposed accelerated schedule, however, will offer far more acreage than has been offered in

the past and will include for the first time certain frontier acreage in which

the industry has expressed interest.

The 1983 estimates include partial bonus payments for four sales—two

held at the end of fiscal year 1982 and two at the end of 1983—and the

entire payments from seven 1983 sales. Again, there are differences in the

Administration's and CBO's assumptions regarding timing of end-of-year

sales' bonus receipts as well as different estimates of receipts for the

various sales. Included in the Administration's 1983 bonus receipt estimate

are receipts for two sales of $5.6 billion and $3.2 billion (of the $6.5 billion

total estimated for that end-of-the-fiscal-year sale), both in the Gulf of

Mexico. Bonus receipts of this magnitude are greater than twice the record

bonus receipts for any sale. (Bonuses of $2.3 billion in September 1980 and

$2.4 billion in July 1981 were received for sales A62 and A66, respectively,

both in the Gulf of Mexico.) CBO has estimated total receipts for those

151
sales of $3.5 billion each. Acreage in the Gulf is generally considered

attractive by industry. The last two sales in that area, however, have

brought in relatively lower bonus receipts. (Sales 66 and 67 held in October

1981 and February 1982 yielded bonuses of $1.1 billion and $0.8 billion,

respectively.) This might indicate an unwillingness by industry to bid large

amounts for OCS leases under current economic conditions.

For 198* and 1985, the Administration has estimated declining bonus

receipts ($12.9 billion in 1983 and $11.1 billion in 198*). For purposes of

estimating future OCS receipts based on the new leasing schedule, CBO has

held the 1983 bonus estimate of $9.2 billion constant for 198* and 1985.

CBO's estimate of royalty receipts is higher than the Administration's

in every year, 1982 through 1985, as the net effect of higher gas (but lower

oil) price estimates for those years.

CBO's estimate differs from the Administration's with regard to

assumed releases of escrowed sums. Approximately $* billion are currently

in escrow accounts as a result of disputes between certain states and the

federal government regarding potential resource drainage from state lands

by lessees of federal OCS lands. In accordance with Section 8G of the OCS

Lands Act, when the federal government leases a tract within three to six

miles of the shore (an "8-G tract"), receipts must go into an escrow account

until a decision has been reached in court regarding adequate compensation

from federal royalties to reimburse states for lost resources. A release of

$3*8 million to the federal government of sums that had been in escrow

since 1956 will occur in 1982 as a result of a boundary dispute settlement in

January 1982. The Administration estimates that $1.5 billion from sums

escrowed for 8-G tracts will be released to the federal government in each

year from 1983 through 1985. Because these cases have moved slowly

through the courts, however, and decisions will likely be appealed once they

are made, CBO has assumed no releases in any year, 1983 through 1985.

Both the Administration's and CBO's estimates for OCS receipts are

subject to a wide margin of possible error. Various factors may result in

lower bonus bids by industry. First, the proposed accelerated leasing

schedule, which is not due to be formally in place until spring, may not be

implemented exactly as introduced, or without delay. Various factors,

including an October 1981 court decision regarding the existing schedule

(promulgated by former Secretary of the Interior Cecil Andrus in July 1980),

delayed the planned submission of a final proposed schedule by Interior

Secretary James Watt from early calendar year 1982 to spring 1982.

Opposition to parts of the schedule by states, environmental advocates, and

other interested parties may result in further modification of the proposed

schedule. Lease sale 73 off California, scheduled for January 1983 under

152
the new leasing schedule (and for May 1983 under the old schedule), is likely

to be postponed as a result of delays in tract selection because of

environmental controversy. Environmental issues, long a stumbling block

for lease sales off California, promise to surface with regard to certain

Alaska tracts as well. Other objections have been voiced regarding Alaskan

areas in which commercial fishing occurs. If lease offerings are not

modified to reflect concerns of this type, industry wary of litigation may bid

moderately for these controversial tracts.

Bonus bids will also respond to oil and gas prices and interest rates.

Much of the area to be offered in the revised schedule is frontier acreage

with little or no drilling experience to substantiate the magnitude and

location of oil and gas reserves. Many of the areas are in deep water, far

offshore, or in areas with harsh seasonal weather. As a result, industry will

be forced to incur greater risks and exploration and drilling costs than in the

past. Unless oil and gas prices are rising steadily, industry may not believe

the additional risk and expense are worthwhile. In addition, interest

rates—as long as they are high—will temper the size of bonus bids.

Alternatively, it is possible that, as the cost of capital rises or remains high,

companies will find that taking over another company is altogether a

cheaper and more attractive means of replacing reserves than leasing on the

OCS. Given the various factors that may result in low bonus bids by

industry, CBO believes its more conservative estimate of bonus bids to be

more realistic than the Administration's.

UNEVALUATED ADMINISTRATION ESTIMATES

Federal Surplus Property Disposition

The Administration's February budget estimates include anticipated

receipts of $1 billion in fiscal year 1983 and $4 billion in both 1984 and 1985

through the sale of surplus property. This proposal is in addition to

significant increases in estimated receipts included in function 800 for the

disposal of excess real property controlled by the General Services Administration (GSA).

The most important aspect of this proposal is the Administration's plan

to establish a Real Property Review Board to oversee federal property

acquisition, utilization, and disposal practices. This board would identify

unnecessary and underutilized federal property and encourage its disposal.

The Administration's receipt estimates for this activity include $1 billion in

receipts from GSA surplus property in 1983. In fiscal years 1984 and 1985,

$2 billion each year is attributed to GSA and $2 billion to the Army Corps of

Engineers and the Departments of Agriculture and the Interior. Under

current procedures, it takes GSA an average of 18 months to dispose of

153
surplus property. GSAf

s estimated annual receipts from this activity, which

are recorded in function 800, already have been estimated to increase from

$18 million in fiscal year 1981 to more than $250 million in 1983 and future

years. Based on past experience, estimates of additional receipts of

$5 billion over the 1983-1985 period from GSA disposal activities would

appear to be very optimistic.

Because of the time involved in identifying and declaring property

surplus, and because the Corps of Engineers and the Departments of

Agriculture and the Interior do not have programs in place to facilitate this

volume of property disposal, CBO believes that an estimate of significant

receipts from surplus property disposition activity in those departments is

also very optimistic.

15*
OUTLAYS OF OFF-BUDGET FEDERAL ENTITIES

(Outlays in millions of dollars)

1982 1983 1984 1985

President's February Budget 19,689 15,701 14,285 10,950

Preliminary CBO Reestimates

Different economic assumptions — — — —

Technical reestimates

Federal Financing Bank 552 776 931 1,082

Total Reestimates

President's Budget Reestimated

552

20,241

776

16,477

931

15,216

1,082

12,032

EXPLANATION OF PRELIMINARY CBO REESTIMATES

Different Economic Assumptions

There are no reestimates for off-budget entities resulting from

different economic assumptions.

Technical Reestimates

The CBO reestimate of net outlays for the Federal Financing Bank

(FFB) is the result of the reestimate to the Agricultural Credit Insurance

Fund (Function 350). CBO assumes that net lending from the ACIF in the

disaster loan program will result in additional loan asset sales to the FFB.

This increase in sales will require additional borrowing from the Treasury

and will result in additional net FFB outlays.

155

90-395 0-82-1 2

CHAPTER V. THE ADMINISTRATION'S DEFENSE BUDGET

The President's 1983 budget projects rapid real growth in defense

spending over the next five years. As a consequence, the defense share of

the federal budget would climb steadily. Defense spending relative to the

size of the economy would also grow, but would still remain below past

levels of peacetime spending.

The Administration's defense budget proposes close to a doubling of

annual appropriations over the next five years. New budget authority for

national defense is projected to increase from $263 billion in 1983 to $408

billion in 1987, for a five-year total of approximately $1.7 trillion. In real

terms, measured in constant 1983 dollars, this represents an average annual

real growth of 7.4 percent using Administration assumptions about future

rates of inflation.

Despite the fact that the Administration has requested a significant

increase in resources for national defense, the Administration may in fact

have underestimated projected funding for its program. Two major elements of this risk are the possibilities of higher inflation and of higher real

cost growth than the Administration has assumed. For example, on the basis

of CBO economic assumptions, maintaining the real growth assumed by the

Administration for 1983-1987 would require additional budget authority of

about $61 billion. Moreover, defense purchases have experienced significant

cost growth in real terms in recent years. Recent Department of Defense

(DoD) data suggest that real cost growth since 1975 for major weapons

systems alone has averaged 3.5 percent per year. If such cost growth

continues, the Administration's 1983-1987 funding estimates just to procure

major weapons systems would have to be increased by a total of about

$48 billion. Together, these items would increase aggregate 1983-1987

outlays for national defense by $62 billion.

This chapter discusses defense budget trends, proposed force structure

changes, and the risks of underpricing. To illustrate the point that initial

outlay effects of defense budget authority reductions can be relatively small

and that realizing the total outlay savings typically requires several years,

the last section of the chapter briefly examines the structure of 1983

defense outlays.

157
DEFENSE BUDGET GROWTH IN PERSPECTIVE

The Administration's defense budget for 1983-1987 is summarized in

Table 28. The President has requested 1983 defense appropriations of $263

billion, a $44 billion or 20 percent increase over the 1982 estimated level.

The February budget also includes a $2.6 billion supplemental appropriation

for defense programs for fiscal year 1982.

Further large increases in defense appropriations are projected for

1984-1987. New budget authority to be provided through annual appropriations would rise to $291 billion in 1984, 5338 billion in 1985, $375 billion in

1986, and $408 billion in 1987. Together with the requested 1983 appropriations, this represents close to a $1.7 trillion defense program over the next

five years. This is almost $900 billion more for national defense funding

than was provided by the Congress during the past five years (1978-1982). In

real terms, this represents a 50 percent increase in defense appropriations

over the next five years (1983-1987) in comparison to the past five years.

Figure 11 portrays graphically the proposed rapid real growth in future

Department of Defense appropriations.

Over the 1983-1987 period, Administration estimates of defense

outlays would total $1.5 trillion. This represents a real increase of over 44

percent over total 1978-1982 outlays. In dollar terms, this is the largest

peacetime five-year increase in defense outlays since World War II.

Relative to the total economy, Administration data indicate that the

national defense function would increase from 6.1 percent of GNP in 1982 to

7.3 percent in 1986 and 1987. Figure 12 shows the post-World War II trends

for defense outlays as a share of GNP and of total federal outlays. Over the

1983-1987 period, the Administration's proposed defense outlays would

average 6.9 percent of GNP. This is higher than the average for the

preceding five years, 1978-1982, during which the average defense share of

GNP was 5.4 percent. It is lower, however, than the 10 percent average for

several years following the Korean War.

Relative to total federal unified budget outlays, national defense

outlays from 1978 to 1982 were about 25 percent—the lowest share since

World War II. The Administration's 1983 budget indicates that this share

would increase to about 37 percent by 1987--a level last reached in 1971. In

the post-World War II period, national defense as a percent of unified budget

outlays exceeded 37 percent each peacetime year from 1954 to 1970.

158
TABLE 28. THE ADMINISTRATION'S DEFENSE BUDGET (By fiscal year,

in billions of dollars)

Administration Estimates

Actual

1981 1982 1983 1984 1985 1986 1987

Department of DefenseMilitary

Operations

Procurement

Other

Subtotal, DoD

Other National

Defense

Total

58

48

72

178

4

182

.2

.0

.2

A

.0

.4

62

65

85

214

4

218

.7

.7

.7

.1

.8

.9

Budget Authority

70.3

89.5

97.7

257.5

5.6

263.0

73.8

101.9

109.0

284.7

6.4

291.0

Outlays

83

125

122

330

7

338

.1

.5

.3

.9

.1

.0

92

142

131

366

8

374

.4

.8

.6

.8

.0

.9

101.0

155.1

143.8

399.9

8.5

408.4

Department of DefenseMilitary

Operations

Procurement

Other

Subtotal, DoD

Other National

Defense

Total

52

35

68

156

3

159

.0

.2

.9

.1

.7

.8

60

41

81

182

4

187

.5

.3

.0

.8

.7

.5

67.2

55.1

93.6

215.9

5.2

221.1

72.4

70.0

104.6

247.0

6.0

253.0

80

88

116

285

6

292

.5

.3

.7

.5

.6

.1

89

106

127

324

7

331

.8

.9

.3

.0

.7

.7

98.5

119.4

138.1

356.0

8.2

364.2

Source: Office of Management and Budget.

159
Figure 11.

Budget Authority for the Department of Defense

350

300

Actual Projected

=e

a

250

i 200

150

n r I I I I I I I I I I I I I I I I I I I I I I

1955 1960 1965 1970 1975 1980

Fiscal Years

SOURCE: CBO calculations based on data from the Department of Defense.

1985

GROWTH IN FORCES, MAJOR PURCHASES, AND DEVELOPMENT

In the short term, major changes are slated for the strategic nuclear

forces and for general-purpose naval forces. Major strategic force changes

for 1983 are the retirement of three squadrons of B-52D strategic bombers

and eight Titan II intercontinental ballistic missile launchers, to be offset by

delivery of one Trident submarine and deployment of 50 Minuteman III

missiles in place of 50 Minuteman II missiles. In naval forces, there is to be

a substantial increase in ships in 1983, with the planned delivery of the first

reactivated battleship, plus increases in cruisers, destroyers, frigates, and

nuclear attack submarines. In the longer term, major planned increases in

force structure are consistent with the Administration goal of expanding

Navy resources from the current 514 ships to over 600 ships by 1992.

160
Figure 12.

National Defense Outlays as a Percentage of Total Outlays and of GNP

100

80

60

40

20

Actual

Outlays as a Percentage

of Total Federal Outlays

Outlays as a

Percentage of GNP

i i I

Projected

\ \

1950 1955 1960 1965 1970

Fiscal Years

1975 1980 1985

SOURCES: For historical data, Department of Defense; for projections, Budget of the United States

Government, Fiscal Year 1983.

The procurement budget for 1983 would rise over the 1982 level of

$65.7 billion in budget authority by $2* billion--54 percent of the total

$44 billion proposed defense increase in budget authority. The Administration's $89.5 billion program for 1983 contains 26.4 percent real growth over

1982 and is more than double the level of $43.6 billion projected by the

previous Administration for 1983. Similarly, proposed 1983 research and

development budget authority would increase by $4.2 billion over 1982

levels. This represents a real increase of 14.6 percent according to the

Administration's economic assumptions and 12.8 percent using CBO's

economic assumptions.

The Administration's 1983 budget stresses investment in major weapons systems, with 43 percent of the total budget allocated for the development and production of weapons systems, compared to 39 percent in 1982.

The percentage is projected to increase each year, reaching 47 percent in

1987. Funding for Navy shipbuilding has real growth of 89 percent, with

orders for two nuclear-powered aircraft carriers, two Trident submarines,

and 21 other ships. The 1983 shipbuilding budget is the first installment of a

five-year, 149-ship acquisition plan costing $85 billion, leading to a 600-ship

Navy. A total of 654 aircraft would be procured in 1983, 33 more than 1982

161
and 48 percent more than planned for 1983 by the previous Administration.

Major programs just getting under way include the second-year order of

seven B-l bombers, part of a $29 billion, 100-aircraft program, and the

initial order of 50 C-5N cargo aircraft, part of a $4.6 billion program. The

Administration has chosen to follow a "two strategic bomber" concept and is

developing the so-called "Stealth" bomber to be operational in the early

1990s. In 1983, the Administration plans to procure 852 strategic and

theater nuclear missiles. Table 29 summarizes major force, manpower, and

procurement levels for 1982 and 1983.

TABLE 29. SUMMARY OF MA3OR FORCES, MANPOWER, AND PROCUREMENT LEVELS (By fiscal year, in units)

1982 1983

Forces

Strategic bomber squadrons 25 22

Land-based intercontinental ballistic missiles 1,052 1,044

Sea-based intercontinental ballistic missiles 544 568

Active divisions 19 19

Major warships 369 385

Tactical airwings 41 42

Manpower

Active duty endstrength (personnel in thousands) 2,110 2,148

Civilian endstrength (personnel in thousands) 1,033 1,035

Procurement

Navy ships 24 25

Aircraft 621 654

Strategic and theater nuclear missiles 675 852

Tactical missiles 27,699 53,984

Armored vehicles 1,509 3,000

SOURCE: Compiled by CBO from data supplied by the Department of

Defense.

The Administration has developed an ambitious shipbuilding and conversion program. As Table 30 shows, this plan calls for 149 ships to be

162
constructed, converted, modified, or leased between 1983 and 1987. The

CBO estimates that more than $85 billion in Shipbuilding and Conversion

(SCN) funds will be needed over the next five years to finance this plan. At

an annual average of $17 billion, this is roughly double the level of SCN

funds of recent years. At least a similar level of SCN funds will be needed

in 1988 to ensure that the required 600-plus ships are available in the early

1990s.

A decision to fund two nuclear carriers in 1983 implies a commitment

to 15 carrier battle groups and over 600 deployable ships. Beyond the large

financial commitments this implies, it could also limit future operational

decisions, because less money might be available to fund other forces before

1989 or 1990.

TABLE 30. ADMINISTRATION'S NAVY SHIPBUILDING PROGRAM FOR

1983-1987 (By fiscal year, in units procured)

1983 1984 1985 1986 1987 Total

Trident Submarines

Nuclear Carrier Ships

Other Major Warships a/

Amphibious Ships

Frigates

Mine Warfare

Auxiliaries

Total

2

2

7

1

2

4

7

25

1

—

7

2

2

5

6

23

1

—

10

2

2

5

9

29

1

—

10

2

3

5

12

33

1

—

14

3

3

5

13

39

6

2

48

10

12

24

47

149

SOURCE: Compiled by CBO from data supplied by the Department of

Defense.

a/ Includes Service Life Extension Program for one conventional carrier in

1983, 1985, and 1987.

163
Supporting and defending each carrier battle group require additional

ships, aircraft, and weapons. The CBO estimates that the acquisition cost

of one carrier battle group is over $13 billion in 1983 budget authority. Of

all carrier battle group components, the production of carriers requires the

longest lead time; supporting ships and aircraft require less lead time. The

additional costs of some of these elements are reflected in the 1983-1987

program. Additional funding will be required after 1987.

Aircraft

The Carter Administration's January 1981 plan for aircraft orders for

1982 and 1983 contained 780 aircraft. As a result of modifications to the

1982 budget, plus expanded order levels in 1983, total aircraft orders for the

two years are now projected at 1,275. The largest single recipients of these

increases are the Navy and Marine Corps, whose orders increase 94 percent.

Air Force orders rise 65 percent. Overall, this increase of 495 aircraft for

the two years is 63 percent higher than the level planned in January 1981,

but it is a reduction of 96 aircraft from this Administration's first plans of

March 1981. Table 31 shows the aircraft acquisition plan of the previous

Administration (January 1981) as compared with the plans submitted by the

current Administration.

TABLE 31. COMPARISON OF CARTER AND REAGAN ADMINISTRATION AIRCRAFT ACQUISITION PLANS, BY SERVICE (By

fiscal year, in units procured)

President's Program President's Program

for 1982 for 1983

January March February January March February

1981 1981 1982 1981 1981 1982

Budget Revisions Budget Budget Revisions Budget

(Carter) (Reagan) (Reagan) (Carter) (Reagan) (Reagan)

Army

Navy/Marine Corps

Air Force

Total

86

121

130

337

110

283

254

647

127

287

207

621

145

175

123

443

179

339

206

724

156

288

210

654

SOURCE: Compiled by CBO from data supplied by the Department of

Defense.
Aside from the number of aircraft ordered, the start of two major new

aircraft procurement programs distinguishes this Administration's plan

markedly from that of the previous Administration.

o The first eight orders in 1982-1983 for 100 B-1B strategic nuclear

bombers, with an initial operational capability of 1986, at a total

cost estimated by the Administration at more than $29 billion. The

major strategic bomber decision is to acquire the B-1B now and to

develop the so-called "Stealth" bomber (also called the Advanced

Technology Bomber, or ATB) for deployment in the early 1990s.

o The first two orders of 50 C-5N transport aircraft at a total cost

of at least $4.6 billion. The major airlift decision is to abandon the

CX(C-17) aircraft now, in favor of the C-5N.

In addition to these two new programs, the Administration has decided

to increase significantly the total purchases, or "buys," of several other

aircraft. For example, the F-15 fighter aircraft buy is increased by 610, the

F-16 buy is increased by 937, and the KC-10 tanker buy is increased by 44.

The impact of these increased buys will be felt both in the near and outyear

periods, as the size of the annual orders rises and as production extends for

several years.

The Administration's decision to acquire 44 additional new KC-10

tanker aircraft, while continuing to re-engine 300 KC-135 tanker aircraft,

will yield a significant improvement in aerial tanker support capability plus

some increase in airlift capability.

Missiles

Long range missile programs are greater than 1982 levels and equal to

or greater than the levels projected by the previous Administration. An

exception is the Army's Pershing II missile, for which the current Administration proposes to slow production in both 1982 and 1983 (see Table 32).

The MX missile is the only major new program in this area, with

$4.5 billion in 1983 to continue development and initial production of nine

missiles. Late in 1986, the first 40 of 100 MX missiles are to be initially

deployed in existing Minuteman silos. Research will proceed on the longterm basing options, which include deep underground basing, continuous

patrol aircraft, and ballistic missile defense. Since the indecision on

long-term basing creates great uncertainty about the ultimate cost of the

program, total basing costs may not be fully reflected in the Administration

program.

165
TABLE 32. COMPARISON OF CARTER AND REAGAN ADMINISTRATION PLANS TO ACQUIRE STRATEGIC AND THEATER

NUCLEAR MISSILES^ BY SERVICE (By fiscal year, in units

procured)

President's Program

for 1982

President's Program

for 1983

January March February January March February

1981 1981 1982 1981 1981 1982

Budget Revisions Budget Budget Revisions Budget

(Carter) (Reagan) (Reagan) (Carter) (Reagan) (Reagan)

Army

Navy

Air Force

Total

39

120

494

653

39

160

494

693

21

160

494

675

134

135

569

838

134

165

569

868

91

192

569

852

SOURCE: Compiled by CBO from data supplied by the Department of

Defense.

Unlike its plans for other weapons programs, the current Administration's 1983 program to purchase tactical missiles is not significantly

different from that projected by the previous Administration. The proposed

1983 procurement plan for both the Air Force and the Navy is substantially

lower than the 1983 program projected in January 1981 by the previous

Administration, while that for the Army and Marine Corps is higher (see

Table 33).

Armored Vehicles

Armored combat vehicles include tanks, fighting vehicles, light armored personnel carriers, and ancillary armored recovery vehicles. The

Administration's armored combat vehicle program emphasizes acquisition of

two "families" of vehicles:

o Heavy combat vehicles dedicated for use by Army forces in Europe

commited to NATO; and

166
TABLE 33. COMPARISON OF CARTER AND REAGAN ADMINISTRATION PLANS TO ACQUIRE TACTICAL MISSILES, BY

SERVICE (By fiscal year, in units procured)

President's Program

for 1982

President's Program

for 1983

January March February January March February

1981 1981 1982 1981 1981 1982

Budget Revisions Budget Budget Revisions Budget

(Carter) (Reagan) (Reagan) (Carter) (Reagan) (Reagan)

Army

Navy

Marine Corps

Air Force

Total

17,102

2,622

561

2,030

22,315

19,274

3,456

3,806

3,986

30,522

17,896

2,810

3,542

3,451

27,699

41,970

3,733

370

7,296

53,369

46,350

3,898

370

7,796

58,414

42,243

2,982

2,773

5,986

53,984

SOURCE: Compiled by CBO from data supplied by the Department of

Defense.

o Light armored vehicles for both the Army and the Marine Corps to

strengthen the Rapid Deployment Force, primarily for deployment

in the Middle East.

The major 1982 change with respect to heavy combat vehicles is the

continued buildup in production levels of the new M-l tank and its

companion fighting vehicle (notwithstanding steadily escalating unit cost

estimates and criticism about the technical performance of the vehicles).

The fiscal year 1983 budget contains the first Army order of 258 light

armored vehicles, plus second-year Marine Corps orders for 134 vehicles.

The highly transportable light armored vehicle is a joint Army-Marine Corps

effort to select an "off-the-shelf" vehicle for rapid delivery. As shown in

Table 34, the Administration plans significant growth in armored vehicle

procurement, compared with 1982 and previous plans for 1983.

Readiness Procurement

Readiness procurement programs include the spare parts, support

equipment, and munitions necessary in peacetime to keep military forces

167
TABLE 34. COMPARISON OF CARTER AND REAGAN ADMINISTRATION PLANS TO ACQUIRE ARMORED COMBAT VEHICLES,

BY SERVICE (By fiscal year, in units procured)

President's Program President's Program

for 1982 for 1983

January March February January March February

1981 1981 1982 1981 1981 1982

Budget Revisions Budget Budget Revisions Budget

(Carter) (Reagan) (Reagan) (Carter) (Reagan) (Reagan)

Army

Marine Corps

Total

1,033

102

1,135

1,500

102

1,602

1,415

94

1,509

1,054

226

1,280

1,582

226

1,808

2,698

302

3,000

SOURCE: Compiled by CBO from data supplied by the Department of

Defense.

ready for combat and to sustain their operation once combat begins. In past

years, funding for readiness has often been traded off for aircraft, tanks,

and ships. Both the current and previous Administrations made a commitment to raise funding levels for readiness.

As shown in Table 35, the funding level for readiness, when compared

to the growth in funding for high-priced items, suggests that, the Air Force

may have reduced readiness funding in favor of major new weapons—notably

aircraft and strategic missiles. Although the Air Force has experienced

significant improvements in spare parts and support equipment between

1981 and 1982, data reflect a real decline of 15 percent for these items

between 1982 and 1983. The Air Force also will experience a 24.8 percent

decline in munitions funding in these years. The growth in Army and Navy

spare parts and support equipment is primarily the result of increased

funding for aircraft parts and equipment. The increase in Navy/Marine

Corps ammunition reflects 100 percent nominal growth in funding for

Marine Corps ammunition, which may be the result of a one-time investment in prepositioned ammunition.

168
TABLE 35. PROPOSED FUNDING AND PERCENT OF REAL GROWTH

FOR READINESS ITEMS, BY SERVICE (By fiscal year, in

billions of dollars, and in percents)

Percent of

1982 1983 Real Growth

Spare Parts and Support Equipment

Army 0.7 1.0 39.3

Navy/Marine Corps 3.2 3.8 12.1

Air Force 6.1 5.7 -15.0

Subtotal 10.0 10.6 -2.8

Munitions

Army 2.3 2.6 0.3

Navy/Marine Corps 1.1 1.4 14.9

Air Force 1.1 0.9 -24.8

Subtotal 4.5 4.9 -1.8

Total 14.5 15.5 -2.5

SOURCE: Compiled by CBO from data supplied by the Department of

Defense.

RISKS OF UNDERPRICING

Despite the fact that the Administration has requested significant

increases in national defense funding, there is some risk that it may have

underestimated the future costs of its program. The possibilities of higher

inflation and higher real cost growth are the two main components of this

risk. These two elements are discussed in this section. A third risk is that

there may be significant additional expenditures needed to carry out the

Administration's program. This factor is not discussed here because it is not

quantifiable. The earlier MX discussion provided an example, however, in

noting that the basing costs of the MX are probably not fully reflected in

the Administration's program.

Potential Underestimation of Inflation

Under CBO's baseline economic assumptions, inflation rates would not

subside as much as assumed for the February budget estimates. Higher than

169
anticipated inflation could cause a scaling back of defense purchases to stay

within available funds. Alternatively, additional funds would be needed to

complete the Administration's plans for weapons procurement and other

purchases. Using CBO's inflation assumptions for defense purchases requires

increases of about $1.5 billion in budget authority in 1983 and a total of

$61 billion more by 1987. About 65 percent of this increase would be

allocated to investment programs; the remainder would affect operations.

The difference between the Administration and CBO inflation assumptions

for defense purchases varies from roughly 1.1 percent to 1.9 percent over

the projection period (see Table 36). The annual distribution of the

$61 billion figure is shown in Table 39 at the end of the chapter.

TABLE 36. COMPARISON OF CBO AND ADMINISTRATION INFLATION

ASSUMPTIONS FOR DEFENSE PURCHASES (By fiscal year,

budget authority deflators in percents)

1983 1984 1985 1986 1987

CBO Assumptions

Administration's Assumptions

7.2

6.1

7.7

5.8

7.3 6.9

5.5 5.4

6.9

5.2

SOURCES: Congressional Budget Office and Department of Defense.

Real Cost Growth in Weapon Systems

Defense purchases have experienced significant real cost growth in

recent years. This has occurred for a variety of reasons, including program

changes (such as new specifications or revised production schedules) and

underestimates of real resources (such as manufacturing hours and material

costs). Although sufficient data are not available to estimate the full

extent of this risk, it is possible to illustrate the effects on proposed major

defense procurement funding. Recent DoD data indicate that real cost

growth since 1975 in major weapons systems alone has averaged 3.5 percent

per year (see Table 37). If the Administration's attempts to curb this cost

growth fail and current trends continue, the Administration's estimates for

major weapons systems procurement from 1983 to 1987 would have to be

increased by a total of about $48 billion. Together, a $61 billion increase in

budget authority under CBO inflation assumptions and this $48 billion

170
increase in budget authority for potential real cost growth in major weapons

procurement would increase national defense 1983-1987 budget authority by

$109 billion and outlays by $62 billion.

TABLE 37. MAJOR WEAPONS SYSTEMS COST GROWTH PER UNIT (In

percents)

Dates of Reports

March

March

December

December

1975

1976

1977

1978

Annual

Growth

Rate

3.7

3.0

3.3

3.6

Dates of Reports

March

December

September

December

1979

1979

1980

1980

Annual

Growth

Rate

3.4

3.6

3.7

3.9

SOURCES: Milton A. Margolis, "Improving Cost Estimating in the Department of Defense," Concepts, vol. 4, no. 2 (Spring 1981), p. 8

(data are derived from DoD Selected Acquisition Reports); and

Stephen Gross, "Program Cost Growth in the Department of

Defense as of December 31, 1980," (paper prepared by the Air

Force Data Services Center, undated).

NOTE: These rates are adjusted to exclude the impact of quantity

changes and inflation.

Recognizing the cost growth problem in major weapons systems, the

Administration has undertaken a number of initiatives to restrain it. So far,

these actions seem to have had little effect. The evidence presented below

shows that real cost growth persisted at substantial levels during the first

year of this Administration.

Table 38 provides cost growth data on 48 weapons systems by comparing costs as initially projected by the Administration in March 1981

against estimates contained in the 1983 budget. The table shows the

approximate amount of real cost growth in major systems and notes that the

defense program has absorbed a net amount of about $2.7 billion of cost

growth since last year.

171

90-395 0-82-1 3
TABLE 38. MA3OR WEAPONS SYSTEMS COST GROWTH IN THE 1983

PROGRAM (In millions of dollars and in percents)

Procurement

Unit Cost

Weapons System March 1981

HARM Missile,

Air Force

Pershing II Missile

Phoenix Missile

AH -64 Helicopter

TR- 1 Aircraft

Sparrow Missile,

Navy

AV-8B Aircraft

HARM Missile,

Navy

E-2C Aircraft

Patriot Missile

A-6E Aircraft

Standard Missile

(RIM 66C)

SH-2F Helicopter

P-3C Aircraft

Standard Missile

(RIM 67B)

CH-53E Helicopter

Sparrow Missile,

Air Force

Cost Impact of 18 Other

0.31

2.49

1.13

9.94

25.18

0.14

28.34

0.61

40.33

1.58

24.15

0.62

7.99

42.83

0.63

18.30

0.12

Systems

Cost Impact of 13 Other Systems

Total Impact of 48 Systems

Procurement Cost Impact

Unit Cost Percent on

February 1982 Increase 1983 Budget

0.78

5.48

2.31

17.18

38.85

0.20

39.67

0.85

56.13

2.14

31.88

0.82

10.51

55.83.

0.81

23.46

0.15

Showing Unit Price

Showing Unit Price

152

120

104

73

54

42

40

39

39

35

32

32

32

30

29

28

25

Increases

Decreases

97

272

127

347

55

40

204

50

95

211

62

30

45

78

67

57

39

1,554

-704

2,725

SOURCE: Compiled by CBO from data supplied by the Department of

Defense.

172
Another measure of cost growth is the number of weapon systems

reported in the DoD Selected Acquisition Report (SAR) that have reached

the cost ceilings imposed by the Nunn Amendment to the fiscal year 1982

Defense Authorization bill. The Nunn Amendment requires special reports

to the Congress when the total unit costs of a SAR weapons system exceed

by more than 15 percent the unit cost reported in the March 1981 SAR. The

following 13 systems reflect total system unit cost increases of more than

25 percent over the past 10 months: SSN-688 nuclear attack submarine,

F-14, Sparrow missile (Navy and Air Force versions), Trident I missile,

five-inch guided projectile (SAL), F-15, F-16, Defense Satellite Communications System, Roland missile system, Patriot missile, Pershing II missile,

and AH-64 helicopter. Three systems reflect total system unit cost

increases of greater than 15 percent but less than 25 percent: FFG-7 guided

missile frigate, Phoenix missile, and Maverick missile.

POTENTIAL REDUCTIONS

Much of the initial debate about the Administration's budget request

has focused on the issue of reducing proposed national defense outlays. The

variety of defense programs affords a wide range of potential options for

spending reductions. Typically, many options produce initial outlay savings

equal to only a fraction of the program cost reduction in the long run. The

following classification of the source of defense outlays helps to illustrate

this problem.

o 32 percent ($72 billion) of national defense outlays for 1983 result

from budget authority for 1982 (including proposed supplemental)

and earlier years.

o 62 percent ($138 billion) of 1983 outlays relate to proposed 1983

budget authority to pay active duty and retired military and

civilian defense personnel; to support defense activities at 1982

levels; and to continue ongoing modernization, development, and

construction programs.

o 6 percent ($13 billion) of 1983 outlays result from 1983 budget

authority for new activities, including new modernization programs

and higher pay for defense personnel.

Excepting 1982 supplemental, to make any reduction in the $72 billion

of 1983 outlays from prior-year budget authority requires cancellation,

delay, or termination of programs already approved and, in many cases,

already under contract. The preponderance of programs in this category

represent fully funded investments that expend appropriations over several

173
years. This characteristic, plus the fact that penalty costs are often

incurred when the Administration has to cancel or modify existing

contracts, means that 1983 outlay savings would be only a fraction of the

ultimate outlay reductions from cutting such programs.

Similar problems affect the other two categories. For example, if

none of the $89.5 billion budget authority requested for weapons systems

procurement were appropriated in 1983, outlays in that year would decline

by less than $11 billion, because so much of the budget authority will be

spent after 1983, when most production occurs (see Function 050, Chapter

IV). In general, to achieve a high proportion of 1983 outlay savings from

cutting the Administration's 1983 request would usually require trimming

personnel levels, pay increases (such as the proposed allowance for an

October 1, 1982 federal pay raise), and relatively short lead time purchases

such as fuel, ammunition, and maintenance-related items that affect

readiness rather than modernization.

This condition will worsen in the future if the Administration program

is enacted. The share of outlays from prior-years1 funding in each years1

projected outlays would rise steadily from 30 percent in 1982 to 41 percent

in 1987 (see Figure 13). Thus, by approving programs with a larger

modernization component, the Congress risks an outyear dilemma

characterized by intensified competition for resources between modernization and readiness needs. If future defense budgets fall short of the real

growth targets assumed here, the increasing share of the outlays required to

finance previous years1 programs will only further limit Congress's flexibility

to establish or readjust priorities in defense programs.

To illustrate the outlay savings from average funding reductions,

Table 39 provides calculations of savings from reduced real growth levels.

The lower-growth options begin with a 1982 base that includes Congressional

actions to date, plus supplemental for pay raises and military retired pay.

Excluding all but the retired pay portion of the program supplemental saves

$0.8 billion in 1983 alone. The Administration's estimates include annual

real growth for budget authority as high as 12.3 percent (1982 to 1983) and

as low as 2.3 percent (1986 to 1987), for an annual average of 6.1 percent

(1982 to 1987). Compared to the Administration proposal, providing a

steady 7 percent in annual real growth in budget authority would achieve

savings between 1983 and 1987, because cumulatively, the program would be

reduced and some outlays that occur earlier, when more real growth is

concentrated in 1983, would be pushed beyond 1987. Greater outlay savings

would accrue from holding annual real growth to 3 percent--$10 billion in

1983 and $157 billion for the 1983-1987 period (see Table 39). To achieve

more than $10 billion savings in 1983 could mean little or no real growth in

budget authority. For example, cutting the 1982 defense supplemental and
the entire increase in national defense budget authority above the 1982

enacted level would save $8 billion and $55 billion in 1982 and 1983 budget

authority, respectively, and about $21 billion in 1983 outlays. Denying

military and civilian pay raises would increase 1983 outlay savings to

$24 billion.

Figure 13.

Percentage of Defense Outlays Resulting from Current and

Prior Year Budget Authority

100

80 —

60 —

40 —

20 —

• Prior Year

Budget Authority

•Current Year

Budget Authority

1982 1983 1984 1985

Fiscal Years

SOURCE: Congressional Budget Office.

1986 1987

The outlay savings shown in Table 39 assume proportional reductions in

all spending categories other than pay. The first-year savings

rate--37 cents for every dollar of budget authority—reflects reductions in

operations and investment that save about 75 cents and 12 cents, respectively, for every budget authority dollar; reducing personnel and pay raises

would increase 1983 savings.

175
TABLE 39. COMPARISON OF THE PRESIDENT'S DEFENSE BUDGET WITH ALTERNATIVE BUDGET PROJECTIONS (In billions of dollars)

1982 1983 1985

BA BA BA BA O

President's Budget

with CBO Technical

Reestimates a/ 218.2 190.8 263.2 222.9 290.8 254.6 337.7 293.5

Options (President's

request with CBO

inflation assumptions) b/ 218.2 190.8 264.7 223.1 296.1 257.2 349.0 300.3

7 % real growth c/ 216.0 190.2 247.1 216.3 283.1 246.1 323.9 282.8

5 % real growth c/ 216.0 190.2 242.4 214.6 272.6 240.7 306.0 272.0

3 % real growth c/ 216.0 190.2 237.8 212.9 262.4 235.5 288.9 261.6

Differences from the President's Request

President's Request

with CBO Inflation

Assumptions

7 % real growth

5 % real growth

3 % real growth

1

-2.2 -0.6 -16

-2.2 -0.6 -20

-2.2 -0.6 -25

.5

.1

.8

.4

0

-6

-8

-10

.2

.6

.3

.0

5

-7

-18

-28

.3

.7

.2

.4

2

-8

-13

-19

.6

.5

.9

.1

11

-13

-31

-48

.3

.8

.7

.8

6.8

-10.7

-21.5

-31.9

(Continued)

SOURCE: Congressional Budget Office

a/ These estimates are based on the President's request with adjustments for CBO

technical reestimates to budget authority (BA) and outlays (O); they are based on the

Administration's economic assumptions. Budget authority differs from Administration estimates mainly because CBO anticipates lower growth in the military retiree

population; secondly, Congressional scorekeeping conventions require that CBO count

the $343 million shipbuilding reappropriation contained in the 1982 supplemental act

as 1983 budget authority instead of 1982.

176
TABLE 39. (Continued)

1986 1987 1983-1987 Total

BA O BA O BA O

President's Budget

with CBO Technical

Reestimates a/ 374.5 334.5 408.1 372.3 1,674.3 1,477.8

Options (President's

request with CBO

inflation assumptions) b/ 392.4 346.7 433.5 390.7 1,735.7 1,518.0

7 % real growth c/ 369.0 325.5 420.5 371.5 1,643.6 1,442.2

5 % real growth c/ 342.2 307.6 382.7 344.8 1,545.9 1,379.7

3 % real growth c/ 316.9 290.6 347.6 319.8 1,453.6 1,320.4

Differences from

President's Request

with CBO Inflation

Assumptions

7 % real growth

5 % real growth

3 % real growth

17.9

-5.5

-32.3

-57.6

the President's Request

12.2

-9.0

-26.9

-43.9

25.4

12.4

-25.4

-60.5

18.4

-0.8

-27.5

-52.5

61.4

-30.7

-128.4

-220.7

40.2

-35.6

-98.1

-157.4

b/ These estimates include additions to the President's program consistent with CBO's

less optimistic inflation assumptions and more extensive application of specialized

defense inflation estimates.

c/ These estimates assume that the reductions from the President's program will come

mainly from the nonpay parts of the budget; assuming personnel or pay reductions

would increase the outlay savings, but relatively little growth in the President's

program occurs in these areas.

177

APPENDIX

APPENDIX. MAJOR CONTRIBUTORS TO THE PREPARATION OF

THIS REPORT

Members of the Budget Analysis, Fiscal Analysis, and Tax Analysis

Divisions were major contributors to this report. The individuals who helped

prepare the analyses for each chapter are listed below:

Chapter and Section

Chapter I.

Benefit Payments

for Individuals

Other Federal

Operations

Credit

Chapter II.

Chapter III.

Chapter IV.

National Defense (050)

International Affairs (150)

Analyst

Paul N. Van de Water

Charles Seagrave

Robert Sunshine

Richard Emery

Lloyd Atkinson

Nick Khouri

Joe Ritter

Frank S. Russek, Jr.

John Straka

Stephen Zeller

Valerie Amerkhail

Rosemary Marcuss

James Nelson

Kathleen O'Connell

James Blum

Michael A. Miller

Thomas Phillips

Joseph C. Whitehill

Telephone

Number

226-2880

226-2820

226-2860

226-2835

226-2778

226-2750

226-2771

226-2766

226-2778

226-2753

226-2684

226-2683

226-2689

226-2693

226-2800

226-2840

226-2840

226-2840

181
Chapter and Section

General Science, Space,

and Technology (250)

Energy (270)

Natural Resources and

Environment (300)

Agriculture (350)

Commerce and Housing

Credit (370)

Transportation (400)

Community and Regional

Development (450)

Education, Training, Employment, and Social Services (500)

Health (550)

Income Security (600)

Veterans1 Benefits and

Services (700)

Administration of Justice (750)

General Government (800)

Analyst

Steven C. Martin

Kathleen Gramp

Jeffrey Nitta

Debra Goldberg

Anne Hoffman

Joseph Arata

Howard Conley

Mary Maginniss

Brent Shipp

Allen Kraus

Patrick McCann

Allen Kraus

Linwood Lloyd

Deborah Kalcevic

Stacey Sheffrin

Malcolm Curtis

Hinda Ripps

Stephen Chaikind

Richard Hendrix

Roger Hitchner

Janice Peskin

Stephen Pollak

Stacey Sheff rin

Kathleen Shepherd

Steven C. Martin

Judith Walker

Telephone

Number

226-2860

226-2860

226-2860

226-2860

226-2860

226-2860

226-2860

226-2860

226-2860

226-2860

226-2860

226-2860

226-2860

226-2820

226-2820

226-2820

226-2820

226-2820

226-2820

226-2820

226-2820

226-2820

226-2820

226-2820

226-2860

226-2860

182
Chapter and Section

General Purpose Fiscal

Assistance (850)

Interest (900)

Allowances (920)

Undistributed Offsetting

Receipts (950)

Chapter V.

Analyst

Judith Walker

Anthony W. Korkunis

Kathy Ruffing

Charles Essick

Judith Walker

Anne Hoffman

Anthony W. Korkunis

Kathy Ruffing

Stacey Sheffrin

Judith Walker

C.G. Nuckols

Edward A. Swoboda

Julia Doherty

Patrick Haar

Barbara Hollinshead

Alice Hughey

Michael A. Miller

William P. Myers

Thomas Phillips

Telephone

Number

226-2860

226-2880

226-2880

226-2880

226-2860

226-2860

226-2880

226-2880

226-2820

226-2860

226-2800

226-2840

226-2840

226-2840

226-2840

226-2840

226-2840

226-2840

226-2840

183

U.S. GOVERNMENT PRINTING OFFICE : 1982 0 - 90-395