',' . -", ".' 

. CONGRBSSOF THE.tJNrrEDSTATHs . CONGRESSIONAL BUn<m OFF.ICE .. 

. .... " . AnAnalysisof . tke Presiden.t's Budgetary Proposals . forFlscalYear1993 . 

AN ANALYSIS OF THE PRESIDENT'S Bl'DGETARY 

PROPOSALS FOR FISCAL YEAR 1993 

The Congress of the United States 

Congressional Budget Office 
NOTES 

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

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

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

civilian labor force. 

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

rounding. 

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

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

in this volume as Gramm-Rudman-Hollings. This act was amended by the 

Omnibus Budget Reconciliation Act of 1990, referred to in this volume as 

OBRA-90. 

A glossary of economic and budget terms used in this report appears in Congressional Budget Office, The Economic and Budget Outlook: Fiscal Years 

1993-1997 (January 1992). 
Preface 

This analysis of the President's budget for fiscal year 1993 was prepared 

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

discusses the President's policies in terms of changes from the Congressional Budget Office's (CBO's) baseline budget projections for 1993 

through 1997. It provides estimates of the budgetary impact of the Administration's proposals using CBO's economic assumptions and technical estimating methods. 

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

Analysis, and Fiscal Analysis divisions under the supervision of C.O. Nuckols, 

Rosemary D. Marcuss, and Robert A. Dennis. Paul N. Van de Water was 

responsible for Chapter 1; John R. Sturrock for Chapter 2; Rosemary D. 

Marcuss and Eric J. Toder for Chapter 3; Michael A. Miller for Chapter 4; 

Charles E. Seagrave and Robert A. Sunshine for Chapter 5; and Kathy A. 

Ruffing for Appendix A. The revenue estimates were prepared under the 

direction of Richard A. Kasten. The principal contributors to the revenue and 

spending estimates and analyses are listed in Appendix B. 

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

the assistance of Sherry Snyder. Major portions were edited by Paul L. Houts, 

Sherry Snyder, Sherwood D. Kohn, and Roger Williams. Christian Spoor 

provided editorial assistance during production. The authors owe special 

thanks to Marion Curry, Janice Johnson, Dorothy Kornegay, Wendy Stralow, 

Denise Thomas, Simone Thomas, and Emma Tuerk, who typed the many 

drafts. Kathryn Quattrone and Martina Wojak prepared the report for publication. 

March 1992 

Robert D. Reischauer 

Director 

ONE 

TWO 

THREE 

FOUR 

FIVE 

Contents 

INTRODUCTION AND SUMMARY 

The Economic Outlook 2 

The Administration's Proposals 4 

Other Budgetary Issues 10 

Conclusion 13 

COMPARISON OF ECONOMIC FORECASTS 

Short-Term Outlooks 15 

Medium-Term Projections 19 

Implications of the Administration's 

Economic Program for Growth 25 

THE ADMINISTRATION'S REVENUE 

PROPOSALS 

Revenue Estimates 33 

An Overview of the President's Tax Proposals 37 

An Examination of the Tax Proposals 40 

THE ADMINISTRATION'S PROPOSALS FOR 

DEFENSE AND INTERNATIONAL AFFAIRS 

The Peace Dividend in the Administration's 

Defense Budget 61 

Comparisons with Cold War Defense Budgets 62 

The Budget Request for International Affairs 69 

eBO Reestimates of the Budget for Defense 

and International Affairs 74 

THE ADMINISTRATION'S DOMESTIC 

PROPOSALS 

250 General Science, Space, and Technology 81 

270 Energy 83 

300 Natural Resources and Environment 86 

350 Agriculture 89 

15 

33 

61 

79 
vi ANALYSIS OF THE PRESIDENT'S BUDGET 

APPENDIXES 

A 

B 

370 Commerce and Housing Credit 92 

400 Transportation 97 

450 Community and Regional 

Development 99 

500 Education, Training, Employment, 

and Social Services 101 

550 Health 104 

570 Medicare 108 

600 Income Security 111 

650 Social Security 117 

700 Veterans Benefits and Services 119 

750 Administration of Justice 123 

800 General Government 125 

900 Net Interest 128 

920 Allowances 131 

950 Undistributed Offsetting Receipts 133 

Baseline Budget Projections 139 

Major Contributors to the Revenue and 

and Spending Projections 151 

March 1992 
CONTENTS vii 

TABLES 

1-1. CBO Estimates of the Deficit Under the 

Administration's Policies 2 

1-2. CBO Estimates of the Administration's 

Policy' Proposals 3 

1-3. CBO Estimates of the President's Budget 4 

1-4. The Administration's Proposals for Domestic 

Discretionary Spending in Fiscal Year 1993 7 

1-5. The Administration's Pay-As-You-Go Proposals 9 

1-6. Differences Between CBO and Administration 

Estimates of the Administration's 

Proposed Budget 11 

2-l. Comparison of CBO, Administration, and 

Blue Chip Short-Run Economic Forecasts, 

Calendar Years 1990-1993 17 

2-2. Comparison of CBO, Administration, and 

Blue Chip Economic Projections, 

Calendar Years 1991-1997 20 

2-3. Comparison of Alternative Economic Projections 

by the Administration: Current Policy versus 

Administration Policy 26 

2-4. cao Estimates of the Effects of the 

Administration's Budgetary Program 28 

3-l. Administration and CBO Estimates of the 

Administration's Budget Revenues, by 

Major Source 34 

3-2. CBO Estimates of Revenue Proposals in the 

Administration's 1993 Budget 35 

3-3. CBO Reestimates of the Administration's 

Budget Revenues 36 

3-4. CBO/JCT and Administration Estimates of 

lncentives for Saving and Investment 42 

3-5. CBO/JCT and Administration Estimates of 

Targeted Tax Incentives 46 
V!!! ANALYSIS OF THE PRESIDENT'S BUDGET March 1992 

3-6. CBOIJCT and Administration Estimates of 

Increase in Personal Exemption for Children 54 

3-7. CBOIJCT and Administration Estimates of 

the Excise Tax Proposal 55 

3-8. CBO/JCT and Administration Estimates of 

Revenue-Raising Proposals 56 

3-9. CBO/JCT and Administration Estimates of 

Other Proposals 60 

4-l. Comparison of the Administration's Request 

for Defense and International Affairs with 

the BEA Caps for 1993 62 

4-2. Proposed Major Spending Changes in the 

President's Budget for Function 050, 

National Defense 64 

4-3. Comparison of the President's Budget for 1997 

with an Average Cold War Budget, 

1975-1990, and the CBO Baseline 65 

4-4. Summary of Forces and Manpower, 1990 and 1997 66 

4-5. Proposed Major Spending Changes in the 

President's Budget for Function 150, 

International Affairs 70 

4-6. CBO Reestimates of Proposed Spending in the 

President's Budget for Function 050, 

National Defense 75 

4-7. CBO Reestimates of Proposed Spending in the 

President's Budget for Function 150, 

International Affairs 76 

A-l. Changes in CBO Deficit Projections Since 

January 140 

A-2. The Deficit Outlook Under Current Policies 141 

A-3. Baseline Budget Projections, Assuming 

Compliance with Discretionary Spending Caps 142 

A-4. CBO Baseline Projections for Mandatory 

Spending, Excluding Deposit Insurance 144 

A-5. Comparison of Discretionary Spending Levels 145 
CONTENTS ix 

A-6. CBO Projections of Trust Fund Surpluses 146 

A-7. The Budget Outlook Through 2002 148 

FIGURES 

1-1. Federal Budget Deficit 12 

2-l. Comparison of CBO's and the Administration's 

Economic Assumptions 22 

BOXES 

2-l. The Switch from GNP to GOP and Revisions to 

the National Income and Product Accounts 16 

4-1. The Administration's Rescission and 

Supplemental Proposals for 1992 63 

4-2. Credit Reform Issues in International Affairs 73 

Chapter One 

Introduction and Summary 

The Bush Administration's 1993 budget 

holds to the fiscal policy course set by 

the 1990 budget agreement. The budget aims to meet the legal limits on discretionary spending for 1993 through 1995, as 

well as the pay-as-you-go requirement for 

revenues and mandatory spending. The Congressional Budget Office (CBO), however, estimates that the Administration's proposals 

will add small amounts to the deficit in some 

years, reduce it in others, and slow the accumulation of federal debt by only $3 billion 

over the 1992-1997 period. 

CBO projects that, under the Administration's policies, the federal deficit will reach 

$372 billion in 1992, setting a new record for 

the second year in a row (see Table 1-1). In 

relation to the size of the economy, the 1992 

deficit will amount to 6.4 percent of gross domestic product (GDP), slightly exceeding the 

previous postwar high reached in 1983. By 

the mid -1990s, the deficit will drop to about 

$200 billion, or about 3 percent of GDP. 

Yet, the total deficit is not the most relevant 

measure for policy discussions. Its ups and 

downs are affected by temporary factors that 

obscure an underlying stability in federal fiscal policy. To appreciate the fundamental 

pattern, these temporary factors must be removed from the figures. 

First, federal spending in recent years has 

been swelled by the cost of bailing out or closing hundreds of insolvent thrift institutions 

and commercial banks whose deposits are insured by the federal government. The costs of 

deposit insurance are expected to remain 

enormous through 1993, drop sharply in 1994, 

and turn negative in 1995, when proceeds 

from selling the assets of previously failed institutions will exceed the spending required to 

resolve new failures. 

Contributions from U.S. allies to help finance Operation Desert Storm represent a 

second transitory item. Those contributions 

lower the deficit by $43 billion in 1991 and $5 

billion in 1992. The large year-to-year swings 

in deposit insurance spending and the U.S. 

allies' contributions have little current effect 

on the economy or interest rates. 

Excluding deposit insurance and Desert 

Storm contributions, and assuming enactment 

of the Administration's proposals, the deficit 

peaks at 5.3 percent of GOP in fiscal year 

1992 and then declines gradually to about 3 

percent in 1995 through 1997. But even these 

deficit estimates are not the most relevant because they contain a cyclical element that 

should be less troubling than a structural imbalance. The standardized-employment deficit, which removes the cyclical component, 
2 ANALYSIS OF THE PRESIDENT'S BUDGET 

reaches a low of 2.6 percent of potential GOP 

in 1996 and then starts to rise again. 

The Economic Outlook 

CBO and the Administration show an unusual 

amount of agreement on the economic outlook. Both see a recovery getting under way 

this spring, and both expect this recovery to 

be about half as strong as the average postwar 

rebound. The recovery will be relatively weak 

because the economy is still wringing out the 

structural imbalances that developed over the 

last 15 years. Those include the excess commercial real estate that dots many large cities, 

the fragility of some financial institutions, the 

Table 1-1. 

March 1992 

overextended position of state and local governments, and the heavy debt burdens accumulated by both households and businesses 

during the 1980s. 

CBO forecasts slightly more robust growth 

in 1992 and 1993 than the Administration, but 

the Administration assumes somewhat faster 

growth in the 1994-1997 period. CBO and the 

Administration, however, assume almost identical rates of increase in the implicit GOP deflator. Thus, CBO shows a slightly nigher level of nominal GOP in the short term but a 

marginally lower level of GOP and personal 

incomes in the long run. 

The Administration is more optimistic than 

CBO about the outlook for inflation and 

nominal interest rates. The Administration's 

CBO Estimates of the Deficit Under the Administration's Policies (By fiscal year, in billions of dollars) 

1992 1993 1994 1995 1996 1997 

In Billions of Dollars 

Total Deficit 372 332 277 214 184 216 

Deficit Excluding Deposit Insurance 

and Desert Storm Contributions 312 263 244 230 228 245 

Standardized-Employment Deficita 213 194 196 190 197 225 

On-Budget Deficit (Excludin.g Social 

Security and Postal Service) 425 396 353 301 282 326 

As a Percentage of GDP 

Total Deficit 6.4 5.3 4.2 3.0 2.5 2.8 

Deficit Excluding Deposit Insurance 

and Desert Storm Contributions 5.3 4.2 3.7 3.3 3.1 3.1 

Standardized-Employment Deficita,b 3.5 3.0 2.9 2.7 2.6 2.8 

On-Budget Deficit (Excluding Social 

Security and Postal Service) 7.3 6.3 5.3 4.3 3.8 4.2 

Memorandum: 

Gross Domestic Product 5,846 6,237 6,621 7,004 7,414 7,849 

SOURCE: Congressional Budget Office. 

NOTE: Estimates are on a cash basis and exclude estimated accrual savings for deposit and pension insurance. 

a. Excluding deposit insurance and Desert Storm contributions. 

b. Shown as a percentage of potential GOP. 
CHAPTER ONE 

forecast of inflation, as measured by the 

increase in the consumer price index, is 0.3 

percentage points lower than CBO's in 1992 

and 0.5 percentage points lower by 1997. The 

Administration's assumptions for interest rates 

fall below CBO's figures by similar amounts. 

The similarity between the two forecasts 

may seem surprising, since CBO's forecast assumes a continuation of current budgetary 

policies, whereas the Administration asserts 

that its forecast depends importantly on enactment of its budget and economic program. In 

CBO's view, the Administration's program 

would add some stimulus to the economy in 

the short term, but on balance it would provide no appreciable boost over the long run. 

Some of the Administration's policies--

notably, the reduction in income tax withholding, the investment tax allowance, and the 

credit for first-time homebuyers--could increase the growth rate by half a percent or so 

in 1992 by moving spending forward from 

Table '-2. 

INTRODUCTION AND SUMMARY 3 

later years. They would decrease the growth 

rate, however, by a comparable amount in 

1993 and beyond. In the longer term, the Administration's budget proposals would have at 

best only small effects on the federal deficit, 

saving and investment, and the growth of the 

economy. 

Because CBO's and the Administration's 

economic forecasts do not differ greatly in 

1992 and 1993, they lead to only small differences in budget estimates in those years. In 

1994 and beyond, however, CBO assumes 

slightly less rapid growth and somewhat 

higher inflation and interest rates. As a result, 

CBO projects lower revenues, greater outlays 

for benefit programs (chiefly those with automatic cost-of-living adjustments), and higher 

interest costs than does the Administration. 

Chapter 2 discusses the economic outlook and 

the economic impact of the Administration's 

proposals in more detail. 

CBO Estimates of the Administration's Policy Proposals (By fiscal year, in billions of dollars) 

1992 1993 1994 1995 1996 1997 

CBO Baseline Deficita 368 336 267 203 189 236 

Policy Changes 

Discretionary b -2 6 4 -11 -27 

Pay-as-you-go 

Spending b -3 -5 -5 -8 -9 

Revenuesc 6 2 8 11 11 13 

Subtotal 5 -1 3 6 4 4 

Other 

Spending b -2 b -1 -1 1 

Revenuesc b b 1 ~ 3 4 

Subtotal -1 -2 1 1 2 "3 

Total 5 -4 10 11 -5 -20 

President's Budget as Estimated by CBO 372 332 277 214 184 216 

SOURCE: CongreSSional Budget Office. 

a. Assuming compliance with the discretionary spending limits. 

b. Less than $500 million. 

c. Reductions in revenues are shown with a positive sign because they increase the deficit. 
4 ANALYSIS OF THE PRESIDENT'S BUDGET 

The Administration's 

Proposals 

The budget baseline has traditionally served 

as the benchmark against which the Administration's budget program is measured. For tax 

revenues and mandatory spending, the baseline generally assumes that laws now on the 

statute books will continue. Through 1995, 

discretionary spending is constrained by limits 

established in the Budget Enforcement Act of 

1990 (BEA). After 1995, the baseline assumes 

that discretionary spending will just keep pace 

Table 1-3. 

March 1992 

with inflation. Under these assumptions, 

CBO projects that the baseline deficit would 

be $336 billion in 1993, $267 billion in 1994, 

and around $200 billion in the 1995-1997 period. (Appendix A summarizes the current 

baseline budget projections, which incorporate 

minor revisions to those CBO released this 

past January.) 

The policies proposed in the fiscal year 

1993 budget would have little effect on the 

outlook for the federal deficit. Table 1-2 

shows the Administration's budget proposals 

in the three major categories established by 

the Budget Enforcement Act--spending subCBO Estimates of the President's Budget (By fiscal year) 

Category 1992 1993 1994 1995 1996 1997 

In Billions of Dollars 

Revenues 

Individual income 477 512 542 582 619 658 

Corporate income 91 108 122 125 129 131 

Sodal insurance 416 451 483 512 543 572 

Other ~ -1Q1 105 109 109 112 

Total 1,082 1,171 1,252 1,327 1,399 1,474 

On-budget 778 843 902 955 1,003 1,054 

Off-budget 305 328 350 372 395 420 

Outlays 

Defense discretionary 312 293 285 284 287 291 

International discretionary 21 21 21 21 21 21 

Domestic discretionary 216 226 237 237 237 237 

Subtotal 548 541 543 542 545 549 

Mandatory spending, 

excluding deposit insurance 709 748 794 846 898 970 

Deposit insurance 65 69 33 -16 -44 -29 

Net interest 201 214 232 246 262 279 

Offsetting receipts -69 -67 -72 -75 -77 -79 

Asset sales __ 0-2 __ a a 

Total 1,455 1,503 1,529 1,541 1,582 1,690 

On-budget 1,202 1,239 1,255 1,256 1,286 1,380 

Off-budget 252 264 274 285 297 310 

Deficit 372 332 277 214 184 216 

On-budget deficit 425 396 353 301 282 326 

Off-budget surplus 52 64 76 87 99 110 

Debt Held by the Public 3,054 3,386 3,666 3,886 4,077 4,301 

--------------_ ... ------------_ ... _-------------------------------------------

(Continued) 

SOURCE: Congressional Budget Office. 
CHAPTER ONE 

ject to the discretionary caps, mandatory 

spending and revenues subject to the pay-asyou-go requirement, and other mandatory 

spending and revenues. CBO estimates that 

the Administation's proposed discretionary 

spending would, in total, fall slightly below 

the legal limits in 1993 but, excluding unspecified savings, would breach the limits in 1994 

and 1995. 

The Budget Enforcement Act requires that, 

taken together, changes in receipts and in 

mandatory spending programs may not increase the deficit in any year. In CBO's estimation, however, the Administration's payTable 1-3. 

Continued 

Category 1992 

[NTRODUCTlON AND SUMMARY 5 

as-you-go proposals would add to the deficit 

in all years but 1993 and would lead to a payas-you-go sequestration even in 1993. That 

result would occur because of the Budget Enforcement Act's look-back provisions, which 

require that actions taken since the end of the 

last session of Congress that affect fiscal year 

1992 be added to the 1993 figure on the payas-you-go scorecard. In CBO's estimation, 

this increase in the deficit for 1992 would 

amount to $5 billion. Other changes in mandatory spending and revenues, primarily asset 

sales and administrative actions that are not 

counted for purposes of pay-as-you-go, would 

also affect the deficit by small amounts. 

1993 1994 1995 1996 1997 

As a Percentage of GOP 

Revenues 

Individual income 8.2 8.2 8.2 8.3 8.3 8.4 

Corporate income 1.6 1.7 1.8 1.8 1.7 1.7 

Social insurance 7.1 7.2 7.3 7.3 7.3 7.3 

Other 1.7 1.6 1.5 ..u ..1A 

Total 18.5 18.8 18.9 18.9 18.9 18.8 

On-budget 13.3 13.5 13.6 13.6 13.5 13.4 

Off-budget 5.2 5.3 5.3 5.3 5.3 5.3 

Outlays 

Defense discretionary 5.3 4.7 4.3 4.1 3.9 3.7 

Internationa I discretionary 0.4 0.3 0.3 0.3 0.3 0.3 

Domestic discretionary 3.7 3.6 3.6 3.4 3.2 3.0 

Subtotal 9.4 8.7 8.2 7.7 7.4 7.0 

Mandatory spending, 

excluding deposit insurance 12.1 12.0 12.0 12.1 12.1 12.4 

Deposit insurance 1.1 1.1 0.5 -0.2 -0.6 -0.4 

Net interest 3.4 3.4 3.5 3.5 3.5 3.6 

Offsetting receipts -1.2 -1.1 -1.1 -1.1 -1.0 -1.0 

Asset sales _0 b b b b b 

Total 24.9 24.1 23.1 22.0 21.3 21.5 

On-budget 20.6 19.9 19.0 17.9 17.3 17.6 

Off-budget 4.3 4.2 4.1 4.1 4.0 3.9 

Deficit 6.4 5.3 4.2 3.0 2.5 2.8 

On-budget deficit 7.3 6.3 5.3 4.3 3.8 4.2 

Off-budget surplus 0.9 1.0 1.2 1.2 1.3 1.4 

Debt Held by the Public 52.2 54.3 55.4 55.5 55.0 54.8 

a. less than $500 million. 

b. less than 0.05 percent of GDP. 
6 ANALYSIS OF THE PRESIDENT'S BUDGET 

Table 1-3 shows CBO's estimates of the Administration's budget program by major tax 

source and spending category, as well as projections of federal debt. Under the Administration's program, debt held by the public will 

swell from $2.7 trillion at the end of 1991 to 

$4.3 billion by 1997 --an increase of 60 percent. 

Discretionary Spending 

The Budget Enforcement Act established separate dollar limits on defense, international, 

and domestic discretionary spending for fiscal 

year 1993. A single overall limit applies to total discretionary spending in 1994 and 1995. 

The Administration proposes to hold discretionary spending authority $9.4 billion below the legal limits in 1993. Three-quarters of 

this reduction would arise in the defense category. CBO estimates that the Administration's proposals for international and domestic discretionary spending would exceed the 

outlay limits in 1993, though in both cases the 

excess is within the margin of error allowed by 

the Budget Enforcement Act. 

In 1994 and later years, the Administration 

would keep discretionary budget authority for 

each category roughly constant at the 1993 

level in nominal dollars. With inflation running at about 3t percent a year, each type of 

discretionary spending would thus suffer the 

same real annual reduction. In addition, the 

budget includes unspecified reductions in 

domestic discretionary outlays of $7.6 billion 

in 1994 and $4.6 billion in 1995. Based on recent experience, however, CBO believes that 

such savings are unlikely to occur without 

specific policy proposals. Excluding the unspecified savings, CBO estimates that the Administration's proposals would exceed the discretionary outlay limits by $6 billion in 1994 

and $4 billion in 1995. The budget thus underscores a point that CBO has been making 

for some time--namely, that it will be extremely hard to satisfy the discretionary 

spending caps in 1994 and 1995 if the full 

March 1992 

amount of available discretionary budget authority is appropriated in 1993. 

Defense Discretionary Spending. The 1993 

defense budget is the first defense budget prepared since the Soviet Union disintegrated. 

Compared with the previous budget (adjusted 

for inflation), the 1993 budget requests $50 

billion less in budget authority for defense 

over the 1992-1997 period. The big question 

facing the Congress and the country is, could 

the peace dividend be larger? 

If the goal were to maintain real nondefense 

discretionary spending at 1992 levels and stay 

within the total discretionary spending limits, 

additional reductions in defense would be required. Compared with the· President's proposal, defense budget authority would have to 

be cut an extra $14 billion in 1994, $19 billion 

in 1995, and a total of $71 billion in the 

1994-1997 period. If the goal were to increase 

real nondefense discretionary spending, defense would have to be cut even more. 

International Discretionary Spending. The 

international affairs budget also reflects the 

end of the Cold War. The Administration is 

asking for an additional $550 million in 1992 

funding to assist the states of Eastern Europe 

and the former Soviet Union in their transition to democracy. In 1993, $900 million of 

the proposed international affairs budget 

would be directed toward former adversaries. 

In addition, the domestic discretionary budget 

will provide an estimated $500 million to purchase grain and other commodities in 1992 

and 1993, and the 1992 defense budget contains $500 million for weapons destruction 

and humanitarian aid. 

The Administration seeks appropriations of 

$350 million above the current real level each 

year for United ~ations-sponsored peacekeeping activities, primarily in Yugoslavia, El 

Salvador, and Cambodia. It has also renewed 

Last year's request for the Enterprise for the 

Americas Initiative--a program designed to increase trade and investment within the Western Hemisphere--and for a $12 billion in-
CHAPTER ONE 

crease in the U.S. quota with the International 

Monetary Fund. 

Domestic Discretionary Spending. The limits 

on domestic discretionary spending for 1993 

require reductions of $6.4 billion in budget 

authority and $6.8 billion in outlays compared 

with the real 1992 levels (see Table 1-4). In 

attempting to meet the outlay limit, the Administration finds it has to hold budget authority $1.9 billion below its limit. Even so, in 

the estimation of the Congressional Budget 

Office, domestic discretionary outlays would 

exceed the 1993 cap by $1.0 billion. 

Table 1-4. 

[NTRODUCTION AND SUMMARY 7 

Within the domestic discretionary category, 

a few areas would receive real increases, 

whereas others would face particularly large 

reductions. The Administration proposes 

higher spending for science and space, the administration of justice, Head Start, and a few 

general government programs. Some of the 

largest cuts would be made in grants to state 

and local governments. The Administration 

would eliminate community services block 

grants, economic development assistance, and 

impact aid lib" grants. It would reduce funding for mass transit, community development 

block grants, low-income home energy assisThe Administration's Proposals for Domestic Discretionary Spending in Fiscal Year 1993 

(In billions of dollars) 

CBO Baseline President's Budget 

Without Discretionary as Esti mated 

Ca~sa b~CBO Difference 

Budget Bud!:Jet Budget 

Function Authority Outlays Authority Outlays Authority Outlays 

General Science. Space, and Technology 17.9 16.9 18.4 17.1 0.5 0.3 

Energy 6.4 5.8 5.8 5.6 -0.6 -0.2 

Natural Resources and Environment 22.1 21.4 21.2 20.9 -0.9 -0.5 

Agriculture 4.6 4.5 4.2 4.3 -0.4 -0.2 

Commerce and Housing Credit 3.7 3.5 3.1 3.0 -0.6 -0.5 

Transportation 15.5 35.8 13.6 35.0 -1.9 -0.8 

Community and Regional Development 6.8 6.8 5.5 6.5 -1.3 -0.3 

Education, Training, Employment, 

and Social Services 36.7 35.6 36.6 34.8 -0.1 -0.7 

Health 20.3 20.0 19.9 19.5 -0.4 -0.5 

Medicare 2.9 2.9 2.8 2.8 -0.1 -0.1 

Income Security 32.4 32.8 30.1 31.0 -2.2 -1.8 

Social Security 0 2.7 0 2.6 0 -0.1 

Veterans Benefits 16.5 16.3 16.5 16.1 -0.1 -0.3 

Administration of Justice 14.8 14.8 15.2 15.4 0.4 0.6 

General Government 12.2 12.4 12.2 12.6 b 0.2 

Allowances 0 0 -0.5 -0.4 -0.5 -0.4 

Undistributed Offsetting Receipts 0 0 -0.3 -0.3 

Total 212.7 232.2 204.4 226.5 -8.4 -5.7 

Domestic Discretionary Capse 206.3 225.4 206.3 225.4 n.a. n.a. 

Difference 6.4 6.8 -1.9 1.0 n.a. n.a. 

SOURCE: Congressional Budget Office. 

NOTE: n.a. = not applicable. 

a. Excluding projection of emergencies. 

b. Less than $50 million. 

c. End-of-session limits as estimated by CBO. 
8 ANALYSIS OF THE PRESIDENT'S BUDGET 

tance, and housing assistance. Most of these 

proposals are similar to those in previous 

budgets. 

The budget counts as reductions in discretionary spending close to $2 billion in changes 

in mandatory spending or fees. Under the 

score keeping rules of the Budget Enforcement 

Act, changes in direct spending and receipts 

are counted on the discretionary rather than 

the pay-as-you-go scorecard if they are included in appropriation bills. Almost $1.4 

billion would come from new or increased 

user fees, including fees for operating nuclear 

power plants, Medicaid and Medicare certification, Food and Drug Administration reviews, veterans' medical care copayments, and 

veterans' housing loan guarantees. In addition, $0.6 billion in spending for grants to 

states to assist in legalizing undocumented 

aliens would be shifted from 1993 to 1994. 

The President also proposes to delay the 1993 

pay raise for federal civilian employees by 

three months, thereby reducing required domestic discretionary appropriations by $0.5 

billion. 

The Administration claims $1.2 billion in 

discretionary savings in 1993 and additional 

amounts in later years for its proposal to lease 

the naval petroleum reserve (NPR) at Elk 

Hills, California. These receipts would be 

partially offset by the loss of the income that 

the government would have received from 

selling oil and gas from the NPR. In CHO's 

view, however, leasing the NPR is an asset 

sale, the proceeds from which cannot be 

counted as savings for purposes of the Budget 

Enforcement Act. 

Pay-As-You-Go Proposals 

The Administration proposes to pay for its tax 

proposals through a variety of reductions in 

mandatory spending programs, including the 

accrued savings from changes in deposit and 

pension insurance. As explained below, however, CBO believes that no pay-as-you-go savings should be recorded for the proposed 

March 1992 

changes in the insurance programs (see Table 

1-5 for CBO's version of the pay-as-you-go 

scorecard). 

Spending Proposals. The Administration's 

pay-as-you-go spending proposals would reduce outlays by $2.7 billion in 1993, $5.5 billion in 1994, and $8.9 billion in 1997. About 

40 percent of these savings would be achieved 

in Medicare through a three-month delay in 

the annual update of hospital payments, a reduction in payments for laboratory services, 

and an increase in the physician insurance 

(Part B) premium for certain high-income 

beneficiaries. Other major proposals include 

permanently eliminating the option for a 

lump-sum payment in Civil Service Retirement, auctioning a portion of the electromagnetic spectrum, and extending various costsaving provisions affecting veterans' benefits. 

The budget also assumes that customs user 

fees will be continued beyond their scheduled 

expiration in 1995. 

CBO does not give the Administration 

pay-as-you-go credit for its proposal to lease 

the rights to explore and drill for oil and gas 

in the Alaska National Wildlife Refuge because CBO believes that leasing the refuge 

(like leasing the NPR) is an asset sale. But 

CBO estimates greater receipts than does the 

Administration from the proposal to auction 

licenses and permits to use the electromagnetic spectrum. 

Revenue Proposals. The budget contains a 

package of tax changes aimed at stimulating 

saving and investment. The major elements of 

this package are reducing the tax rate on capital gains, establishing Flexible Individual Retirement Accounts, instituting a temporary tax 

credit for first-time homebuyers, providing a 

temporary investment tax allowance, and extending certain expiring tax preferences, including the research and experimentation tax 

credit and allocation rules. The Administration also proposes to increase by $500 the personal income tax exemption for dependent 

children under age 18. The two largest 

revenue-raising proposals in the budget are 
CHAPTER ONE 

the extension of Medicare taxes and coverage 

to all employees of state and local governments and an increase in the contributions of 

federal workers covered by the Civil Service 

Retirement System. A number of smaller 

revenue-raisers are also included. Finally, the 

budget incorporates a reduction in income tax 

withholding; that change has already been carried out by executive action. 

CBO and the Joint Committee on Taxation 

(JCT) estimate that the Administration's payas-you-go revenue proposals would reduce 

governmental receipts by $5.5 billion in 1992, 

Table 1-5. 

INTRODUCTION AND SUMMARY 9 

$1.9 billion in 1993, and $12.6 billion in 1997. 

Even Larger reductions in revenues are Likely 

in later years as a result of the proposal to exclude the earnings on Flexible Individual Retirement Accounts from taxation. [ncluding 

the effects of the increased exemption for children, the revenue loss over the the 1992-1997 

period is estimated to total $51 billion. 

For only one item--the proposal to reduce 

the tax rate on capital gains--does the CBO/ 

JeT estimate differ significantly from that of 

the Administration. CBO/JCT and the Administration concur that the proposal wouLd 

The Administration's Pay-As-You-Go Proposals (By fiscal year, in billions of dollars) 

1992 1993 1994 1995 1996 1997 

Spending 

Medicare a -1.2 -2.0 -2.6 -3.0 -3.5 

Civil Service Retirement 0 0 0 0 -2.1 -2.8 

Customs user fees 0 0 0 0 -0.7 -0.8 

Veterans' benefits 0 -0.6 -0.5 -0.6 -0.6 -0.7 

Spectrum auctions 0 0 -2.0 -1.6 -0.7 0 

Other -0.3 -0.9 -0.9 a -0.5 -1.2 

Subtotal -0.4 -2.7 -5.5 -4.8 -7.7 -8.9 

Revenues 

Provide investment tax allowance -6.1 -1.6 3.6 1.0 0.8 0.6 

Establish Flexible Individual 

Retirement Accounts 0 2.0 0.8 0.5 -0.8 -1.9 

Provide credit to 

first-time homebuyers -0.3 -2.7 -2.5 -0.5 -0.1 a 

Exclude portion of capital gains 0.8 3.7 -3.4 -5.7 -5.6 -5.2 

Extend expiring provisions -0.5 -1.9 -2.5 -2.2 -2.3 -2.7 

Extend Medicare taxes and coverage 

to state and local employees 0.4 1.7 1.7 1.7 1.6 1.6 

Increase employee contributions 

to Civil Service Retirement 0 0.4 1.0 1.1 1.0 1.0 

Increase exemption for children 0 -3.4 -5.0 -5.0 -5.1 -5.3 

Other 0.2 -0.1 -1.9 -1.8 -1.4 -0.7 

Subtotal -5.5 -::-f9 ---:s.3 -10.9 -11.8 -12.6 

Deficit 5.2 -0.7 2.8 6.1 4.2 3.7 

Administration's Estimateb 4.8 0.3 -3.4 -1.5 -5.1 -2.6 

Differences 

CBO reestimates a -1.5 3.6 7.6 7.8 6.2 

Classification differences 0.4 0.4 2.6 __ a 1.5 0.1 

Total 0.3 -1.1 6.2 7.6 9.3 6.3 

SOURCES: Congressional Budget Office; Joint Committee on Taxation; Office of Management and Budget. 

a. Less than $50 million. 

b. Excludes estimated accrual savings for deposit and pension insurance. 
10 ANALYSIS OF THE PRESIDENT'S BlJDGET 

boost revenues in 1992 and 1993, when taxpayers respond with a burst of asset sales. 

The Administration believes that the proposal 

would generate extra revenues in 1994, 1995, 

and 1996 as well. In contrast, CBO and the 

JCT believe that the proposal would reduce 

revenues beginning in 1994. 

As an alternative to some of its pay-as-yougo proposals, the Administration indicates 

that it would be willing to consider modifying 

the BEA to allow the projected reduction in 

defense outlays (below the level in the Administration's fiscal year 1992 budget) to offset the proposed increase in the personal exemption. The Administration would make 

this step conditional on a commensurate reduction in the discretionary spending caps 

and on an extension of the enforcement provisions of the BEA until the budget is balanced. Obviously, to the extent that defense 

reductions are used to finance tax cuts, they 

are not available to protect domestic discretionary spending or to reduce the deficit. 

CBO and Administration 

Budget Estimates 

This year, unlike many others, CBO and the 

Administration hold similar views of the budget outlook (see Table 1-6). CBO projects 

lower deficits in 1992 and 1993, but somewhat 

bigger deficits thereafter. In the long run, 

these differences primarily reflect CBO's expectations of less robust economic performance. Technical estimating disagreements 

center on the effects of the President's proposals (notably the reduction of the tax rate 

on capital gains), spending for deposit insurance, and the growth of Medicaid. 

Other Budgetary Issues 

CBO's estimates of the budget do not reflect 

the Administration's proposals to adopt a 

form of accrual accounting for deposit and 

March 1992 

pension insurance and to place a limit on the 

annual growth of entitlement programs. As 

explained below, CBO believes that the proposed accrual accounting measures are not yet 

ready to be included in the budget. Moreover, the Administration itself does not incorporate the entitlement cap in its own budget 

estimates. 

Deposit and Pension Insurance 

The Administration proposes to convert the 

budgetary accounting for deposit insurance 

and the Pension Benefit Guaranty Corporation (PBGC) from a cash to an accrual basis. 

In addition, the Administration recommends a 

number of program changes to reduce the 

government's long-run liability for deposit 

and pension insurance. The Administration 

would allow banks to branch across state 

lines, offer additional financial services, and 

become part of financial-services holding 

companies. The pension proposals include 

raising required contributions for sponsors of 

underfunded single-employer pension plans, 

freezing the level of the federal guarantee for 

chronically underfunded plans, and improving 

the status of PBGC claims in bankruptcy proceedings. The Administration's insurance 

proposals would produce small changes in 

cash flows in· the next few years, but they 

could create large immediate savings under 

the Administration's accrual accounting plan. 

Clearly, cash-based accounting for insurance programs provides incomplete information about the cost of these activities. Cash 

flows for deposit insurance include the distorting effects of outlays for acquiring assets 

and receipts from disposing of those assets. 

Similarly, cash flows give the false impression 

that the government is earning profits from 

pension insurance. 

Nevertheless, CBO concludes that the 

accrual accounting measures the Administration proposes are not suitable to use in the 

budget at this time. First, without sufficient 

justification, the Administration proposes to 
CHAPTER ONE 

create different accrual concepts for deposit 

insurance and the PBGC. Second, the Administration's methods for estimating accrued 

costs are very complicated, would be difficult 

to replicate and carry out, and are not necessarily the best way to estimate costs. 

CBO believes that no pay-as-you-go savings 

should be recorded for the Administration's 

deposit and pension insurance proposals, regardless of whether the proposed accounting 

changes are enacted. Using highly uncertain 

Table 1-6. 

INTRODUCTION AND SUMMARY 11 

future savings to offset real current costs IS 

dubious budgetary policy. Moreover, since 

both bank and pension insurance are intended to be self-financing, any savings are 

likely to benefit the premium-payer more 

than the taxpayer. 

The Administration's proposals for deposit 

and pension insurance also contain a subtle, 

but major, change in the primary source of 

funding for financial shortfalls. In the past, 

the first step in covering deficiencies in these 

Differences Between CBO and Administration Estimates of the Administration's Proposed Budget 

(By fiscal year, in billions of dollars) 

1992 1993 1994 1995 1996 1997 

Administration's Estimate of the Deficit 400 350 212 194 181 188 

CBO Reestimates of 

Pay-As-You-Go Proposalsa 

Capital gains proposalb c c 6 6 6 5 

Other revenue proposalsb c -2 1 1 1 c 

Outlay proposa Is c 1 -3 1 1 1 

Subtotal c -2 4 8 8 "6 

Economic Differences 

Revenuesb -2 -2 5 13 19 21 

Benefit programs c 1 2 5 6 8 

Net interest -2 -2 -1 4 10 18 

Subtotal -4 -3 7 21 35 47 

Technical Differences 

Revenuesb -5 -2 -1 -4 2 -3 

Deposit insurance -15 -7 58 11 -23 4 

Medicaid -4 -5 -9 -13 -18 -24 

Proposed asset salesd 0 0 3 -2 1 c 

Unspecified discretionary savings 0 0 8 5 0 0 

Other outlays c c -4 -5 -2 c 

Subtotal -24 -14 54 -9 ~ -24 

Total -28 -18 65 20 2 29 

Administration's Proposed 

Deficit as Estimated by CBO 372 332 277 214 184 216 

Memoranda: 

Total Economic Reestimates -4 -3 7 21 35 46 

Total Technical Reestimates -24 -15 58 -1 -33 -18 

SOURCES: Congressional Budget Office; Joint Committee on Taxation; Office of Management and Budget. 

a. The reestimates are almost wholly technical. 

b. Reductions in revenues are shown with a positive sign because they increase the deficit. 

c. Less than $500 million. 

d. Asset sales are ineligible for pay-as-you-go scoring. 
12 ANALYSIS OF THE PRESIDENT'S BUDGET 

programs has been to raise the level of premiums. The Administration would replace this 

process with an annual mandatory appropriation from the general fund to cover shortfalls. 

Such a fundamental policy change should be 

debated on its own merits and should not be 

hidden in a reform of budgetary accounting. 

In CBO's view, the Budget Enforcement 

Act effectively removed the cash flows associated with deposit insurance from the payas-you-go calculations. Unless explicitly 

changed, this exclusion would continue to apply under an accrual accounting system. 

Ideally, the BEA should be amended to exclude pension insurance, like deposit insurance, from pay-as-you-go. The proposed 

changes in the PBGC are designed to pay for 

existing, but previously unrecognized, commitments of the federal government. Any savings 

in pension insurance should be applied to 

Figure 1-1. 

Federal Budget Deficit 

Percentage of GDP 

7 

6 

5 

3 

Total 

March 1992 

these as yet unrecognized insurance costs and 

not used to pay for other budgetary initiatives. 

Without such an exclusion, however, CBO will 

continue to use cash-based accounting for 

proposed changes in pension insurance. 

Controlling Growth in 

Entitlement Spending 

CBO's five-year budget projections indicate 

that, under current policies, the federal deficit 

is likely to start rising again as a percentage of 

GDP after 1996. Longer-run extrapolations 

show this trend continuing. Excluding deposit 

insurance, the deficit is projected to climb 

from 3.1 percent of GOP in 1996 to 4.2 percent in 2002 (see Figure 1-1). 

That growth in the deficit is propelled by 

the growth in mandatory spending, especially 

for health care services. Excluding Social Se-

---- --- ."."",...------

------- Deficit Excluding 

Deposit Insurance 

and Desert Storm 

""----.... _"' .... ~ 

2 

o 

1990 

Contributions 

1992 

SOURCE: Congressional Budget Office. 

1994 1996 1998 2000 2002 

Fiscal Year 
CHAPTER ONE 

curity, deposit insurance, and net interest, 

mandatory spending could balloon from 7.3 

percent of GDP in 1992 to 8.9 percent in 

2002. All of this growth is concentrated in 

Medicare and Medicaid, which are projected 

to soar from 3.4 percent of GDP in 1992 to 

4.4 percent in 1997 and 5.9 percent in 2002. 

To check the growth in entitlements, the 

Administration proposes to place a limit, or 

cap, on the overall growth of mandatory programs. If the Congressional reconciliation 

process fails to eliminate any mandatory 

spending above the limit, an automatic sequestration of mandatory programs would be 

triggered. Most mandatory programs that are 

now exempt, except Social Security, would become subject to this new sequestration, al ~ 

though it is not entirely clear how such a sequestration would work. 

The proposal for a cap on growth in mandatory spending deserves two comments. 

First, experience with the fixed deficit targets 

of the Gramm-Rudman-Hollings legislation 

suggests that mechanical budget formulas can 

present serious problems. In particular, the 

required reductions can become so large that 

the threat of a sequestration to achieve them 

is no longer credible. As an alternative to the 

entitlement cap, the BEA could be amended 

to require a specified amount of deficit 

reduction--say, $35 billion to $50 billion a 

year--for a number of years, or until a target 

deficit is reached. 

Second, as the figures cited earlier show, 

the problem of the growth in entitlement 

spending is really a manifestation of the rapid 

rise in the cost and use of medical care. Thus, 

INTRODUCTION AND SUMMARY 13 

the abstract concept of an entitlement cap 

cannot be turned into reality without squarely 

addressing the problems of health care costs. 

Also, to the extent that access to health care is 

improved, the cost problem will become even 

more acute. The experience of the past two 

decades suggests that greater control over 

health spending probably cannot be achieved 

without significant changes in the health care 

system--changes that may limit desirable features such as freedom to choose insurance 

plans and providers, rapid access to new technologies and treatments, and sustained levels 

of research and development. The priority 

the nation places on these other goals will determine how effectively cost containment is 

pursued. 

Conclusion 

Although the recession has made further 

deficit reduction inadvisable this year, the 

deficit should soon return to the top of the 

political agenda. Excluding deposit insurance, 

the deficit is likely to exceed $200 billion for 

the foreseeable future and move higher toward the end of the 1990s. Deficits of those 

magnitudes cripple economic growth by reducing national saving and capital formation. 

They also create a vicious cycle of more federal borrowing and higher debt service costs, 

which in turn make it even more difficult to 

reduce the deficit. The Administration's fiscal 

year 1993 budget does little to address this 

fundamental fiscal problem and leaves its 

resolution to yet another year. 

Chapter Two 

Comparison of Economic Forecasts 

T he Administration's forecast for the nation's economy is quite similar to that 

of the Congressional Budget Office 

(CBO). The Administration is slightly less 

optimistic about real gross domestic product 

(GOP) in the short term (1992 through 1993) 

and slightly more optimistic over the medium 

term (1994 through 1997). By 1997, the Administration's projection of real GOP exceeds 

CBO's by 0.7 percent, a difference in the average rate of growth over six years of about 

0.1 percentage point a year. The Administration's forecast of the inflation rate is close to· 

CBO's when measured by the GOP deflator, 

but falls below CBO's when the consumer 

price index is used as a measure. The Administration generally foresees lower interest 

rates than does CBO in both the short and 

medium terms. 

Although the forecasts of the Administration and CBO are quite similar, they are 

based on very different premises. The Administration maintains that its forecast depends critically on the enactment of its policy 

proposals. The Administration predicts that if 

current policy continues instead, the growth 

rate of real GOP would be lower than it has 

forecast by 0.6 percentage points a year in 

1992 and 1993, and by an average of 0.4 percentage points a year from 1994 through 1997. 

By contrast, CBO's forecast assumes that current policy continues. Moreover, although 

CBO concludes that adopting the Administration's policy could add modestly to growth in 

1992, it would do so by borrowing from 

growth in 1993, while adding little to growth 

in later years. Therefore it would not appreciably affect the average rate of growth 

through 1997. 

Short-Term Outlooks 

Both the Administration and CBO anticipate 

that an economic recovery will be under way 

by the middle of 1992. Both expect the recovery to be moderate by historical standards 

(proceeding at about half the normal pace), 

providing a basis for sustainable growth with 

moderate and stable inflation in later years. 

In detail, the Administration '" short-term 

forecast is similar to that of CBO, although 

slightly less optimistic. In any case, however, 

the differences between the forecasts are small 

in light of the normal uncertainty of forecasting. Both forecasts, moreover, are generally similar to the consensus of private economic forecasters. 

The Administration's outlook for growth of 

real GOP is similar to CBO's, but slightly 

weaker (see Box 2-1 for a brief explanation of 

GOP). The Administration's forecast is lower 

than CBO's by 0.6 percentage points for 1992, 

and by 0.3 percentage points for 1993, on a 

fourth-quarter-to-fourth-quarter basis (see 

Table 2-1).1 Through 1993, the real rate of 

1. The Administration's economic projections discussed in 

this chapter are those dated January 1{), 1992. They 

differ slightly from preliminary economic projections 

made in early December. on which the AdmInistration'S budget estimates are based. 
16 ANALYSIS OF THE PRESIDENT'S BUDGET 

growth in the Administration's forecast averages 0.4 percentage points a year lower than 

that of CBO and more nearly matches the 

Blue Chip consensus forecast than does 

CBO's. (The Blue Chip consensus forecast is 

the average of about 50 forecasts surveyed by 

Eggert Economic Enterprises, Inc.) 

Until recently, the Administration typically 

forecast somewhat stronger economic growth 

than did CBO, but it has not done so for the 

last year. After the Balanced Budget Act 

(Gramm-Rudman-Hollings) was passed in 

1985, each of the six budgets released by the 

Office of Management and Budget between 

1985 and 1990 assumed stronger economic 

growth than did the corresponding CBO forecasts. Given the fixed deficit targets of 

Gramm-Rudman-Hollings, more optimistic 

forecasts promised easier attainment of the 

targets. But the Budget Enforcement Act of 

1990 allowed the deficit targets to vary with 

changes in the economic outlook, thereby 

eliminating the advantage of optimistic forecasts. Last year was the first since GrammRudman-Hollings was passed that the Administration forecast lower economic growth than 

did CBO, a decline in real gross national 

product (GNP) on a calendar-year basis of 0.3 

March 1992 

percent in 1991, as opposed to zero growth 

forecast by CBO. (The actual decline for 

1991 was 0.7 percent.) 

The Administration and CBO agree more 

closely on the short-term outlook for the rates 

of inflation and interest than for the growth of 

real output. Both expect inflation and interest 

rates to rise slightly during the recovery before stabilizing. CBO predicts slightly higher 

rates of inflation when measured by the consumer price index than does the Administration. But the two outlooks for inflation differ 

by no more than 0.3 percentage points in 

either 1992 or 1993, and closely match the 

Blue Chip consensus as welL. The Administration's and CBO's forecasts of interest 

rates--both long-term and short-term--also 

closely parallel each other, and they both 

foresee lower long-term interest rates in 1993 

than does the Blue Chip forecast. 

Although differences between the forecasts 

of the Administration and CBO are not always trivial, they are small when compared 

with the degree of uncertainty that normally 

accompanies economic forecasts. For example, the disparity between the forecasts of the 

average growth of real GOP through 1993 IS 

Box 2-1. 

The Switch from GNP to GDP and Revisions to 

the National Income and Product Accounts 

Gross domestic product (GOP) replaced gross 

national product (GNP) in December 1991 as 

the basic measure of total economic output in 

the United States. GOP represents the value of 

goods and services produced by factors of 

production-oland, labor, and capital--Iocated in 

the United States, whether the factors are provided by C.S. residents or nonresidents. By 

contrast, GNP represents the value of goods and 

services produced by factors provided by U.S. 

residents, whether the factors are located here or 

abroad. Numerically, the two measures differ 

primarily because GNP includes income of residents from property they own abroad and excludes income of nonresidents from property 

they own here. In the United States, GOP is 

about 99.8 percent as large as GNP and grows 

at nearly the same rate (on average, about 0.1 

percentage point a year faster over the last 

decade). 

The Commerce Department switched to 

GOP as its basic measure of output at the same 

time that it revised the national income and 

product accounts by redefining some concepts 

and by using 1987 instead of 1982 as the base 

year for calculating real (constant dollar) values. 

For brief discussions of the switch from GNP to 

GDP and of the revisions, see Congressional 

Budget Office. The Economic and Budge{ Outlook: Fiscal Years 1993·1997 (January 1992). 

pp. 5 and 19. 
CHAPTER TWO COMPARISON OF ECONOMIC FORECASTS 17 

Table 2-1. 

Comparison of CBO. Administration. and Blue Chip Short-Run 

Economic Forecasts. Calendar Years 1990-1993 

Actual 

1990 

Estimated 

1991 

Fourth Quarter to Fourth Quarter {Percentage change} 

Real GOP 

CBO -0.1 0.4 

Administration -0.1 0.4 

Blue Chip -0.1 0.4 

Implicit GDP Deflator 

CBO 4.2 3.0 

Administration 4.2 3.0 

Blue Chip 4.2 3.0 

Consumer Price Indexa 

CBO 6.3 3.0 

Administration 6.3 3.0 

Blue Chip 6.3 3.0 

Calendar-Year Average (Percent) 

Civilian Unemployment Rate 

CBO 5.5 6.7 

Administration 5.5 6.7 

Blue Chip 5.5 6.7 

Three-Month Treasury Bill Rate 

CBO 7.5 5.4 

Administration 7.5 5.4 

Blue Chip 7.5 5.4 

Ten-Year Treasury Note Rate 

CBO B.6 7.9 

Administration B.6 7.9 

Blue Chipb B.6 7.9 

Spread Between Ten-Year Treasury 

Note Rate and Three-Month Treasury Bill Rate 

CBO 1.0 2.5 

Administration 1.0 2.5 

Blue Chip 1.0 2.5 

Forecast 

1992 1993 

2.B 3.3 

2.2 3.0 

2.3 3.1 

3.1 3.2 

3.2 3.4 

2.9 3.3 

3.4 3.6 

3.1 3.3 

3.3 3.7 

6.9 6.4 

6.9 6.5 

6.9 6.4 

4.4 5.1 

4.1 4.9 

4.1 5.0 

7.1 7.1 

7.0 6.9 

7.1 7.6 

2.7 2.0 

2.9 2.0 

3.0 2.6 

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

Indicators (February 10,1992). 

NOTE: The CBO forecast is based on data available through December 1991 and does not reflect the fourth·quarter data for gross 

domestic product or the consumer price index published in January 1992. The Blue Chip forecast is an average of 50 private 

forecasters. 

a. Represents the consumer price index for all urban consumers (CPI·U). 

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

rate, adjusted by CBO to reflect the estimated spread between Aaa bonds and 1 a·year Treasury notes. 
18 ANALYSIS OF THE PRESIDENT'S BUDGET 

0.4 percentage points. By comparison, CBO 

has estimated that about 2 percentage points 

is the normal range of uncertainty for a forecast of the average rate of growth of real output over the succeeding two years. This 

means that such forecasts will fall within 2 

percentage points of the average rate of real 

growth that actually transpires over the succeeding two years about 67 percent of the 

time.2 Similarly, the differences between the 

Administration's and CBO's forecasts of the 

rates of inflation and interest are small when 

compared with the normal range of uncertainty that attends their forecasts. 

The similarity of forecasts by the Administration and CBO reflects their substantial 

agreement on the current state of the economy and its prospects. Both cite virtually the 

same factors: those now providing a foundation for recovery, those acting to moderate it, 

and those posing risks to it. 

Three factors provide a foundation for recovery. First, interest rates have fallen substantially since the Federal Reserye took 

strong action in the fourth quarter of 1991 to 

ease monetary conditions. The interest rate 

on three-month Treasury bills fell by 1.4 percentage points from September to January. 

Rates on long-term securities also fell by appreciable, though smaller, amounts. Lower 

interest rates reduce the carrying cost of debt 

for households and businesses, making investments in housing and capital goods more attractive, although they also reduce household 

income. 

Second, the relatively low exchange value of 

the dollar will provide a mild stimulus to net 

exports by making U.S. goods relatively cheap 

to foreigners and foreign goods relatively expensive to residents of the United States. 

Finally, both the Administration and CBO 

note that the financial and real estate sectors 

are being restructured, and the debt positions 

2. These estimates are based on historical relationships 

that provide a technical measure of the precision of a 

forecast--the "standard error" of a forecast. The estimates also assume that such forecasts are accurate on 

average, which historically has been true of both the 

Administration'5 and CBO's forecasts. 

March 1992 

of householjs and businesses are being retrenched--developments that are expected to 

set the stage for more balanced growth in the 

future. 

But other factors cited by the Administration and CBO suggest that the recovery will 

probably be weaker than is typical. High vacancy rates in commercial real estate and 

multifamily housing, and a slowing of the rate 

of household formation, will make construction less influential than usual during the recovery. Cutbacks in defense spending and fiscal restraint by state and local governments 

will constitute a fiscal drag, a contrast to the 

typical pattern of earlier recoveries that have 

reflected more fiscal stimulus. Slow economic 

growth among U.S. trading partners will weaken demand for U.S. exports. Finally, interest 

rates will remain higher than usual during the 

recovery because of the demands for investment arising principally from the integration 

of Western Europe and the breakup of the 

former Soviet bloc. All of the aforementioned 

factors are expected to slow the recovery, but 

not to stop it. 

In addition, the Administration and CBO 

cite several atypical features of the current 

state of the economy that pose risks to the recovery. Conditions in credit markets remain 

uncertain, with banks reported to be less willing than usual to lend to creditworthy borrowers. Determining whether the collapse of 

lending reflects weak credit demand or follows in part from financial restructuring complicates the task the Federal Reserve faces in 

determining the appropriate monetary policy. 

At the same time, the conduct of monetary 

policy is also complicated by the possibility 

that the economy's response to monetary actions may no longer follow its historical pattern. Innovations in financial markets have 

left the domestic demand for new housing less 

sensitive than before to movements in interest 

rates, whereas net exports are more sensitive. 

The response of net exports to changes in interest rates, however, takes longer and is less 

easily discernible than the response of housing 

construction. 
CHAPTER TWO 

Finally, consumer confidence remains low, 

much lower than appears consistent with 

other economic indicators, such as personal 

income or unemployment. Consumption accounts for two-thirds of output, so consumers 

could stall the recovery if they cut back their 

spending. 

Medium-Term Projections 

Neither the Administration nor CBO attempts 

to forecast cyclical fluctuations beyond 1993. 

Instead, projections are based on extrapolation of trends in fundamental economic variables. The Administration and CBO project 

the paths of variables such as real output, inflation, and interest rates based on the projected gap between their values at the end of 

1993 and their potential or long-run values 

implied by projections of fundamental conditions of supply--the levels of capital, labor, 

and technology. 

In general, the Administration's economic 

projections for the medium term (1994 

through 1997) would reduce the deficit slightly more than those of CBO for the following 

reasons (see Table 2-2 and Figure 2-1): 

o Growth of real GDP averages about 0.3 

percentage points higher in the Administration's projections than in those of 

CBO (about 2.9 percent for the Administration compared with about 2.6 percent for CBO). 

o The rate of inflation (measured by the 

consumer price index) projected by the 

Administration averages about 0.4 percentage points lower than CBO's. 

o Interest rates, especially long-term rates, 

fall farther in the Administration's projections than in CBO's. 

o Nominal income contains more profits 

and other components that are taxed at 

relatively higher rates in the Administration's projections than in CBO's. 

COMPARISON OF ECONOMIC FORECASTS 19 

The Outlook for Growth of Real GDP 

Both the Administration and CBO base their 

projections on the assumption that the level of 

output by 1997 will be governed, not by cyclical factors, but by fundamental factors that 

determine the economy's capacity to produce. 

The projections assume that output will grow 

fast enough in the medium term to purge the 

economy of the remaining cyclical weakness 

that characterizes the forecasts for 1993. The 

Administration's more optimistic projections 

of the growth of output are accounted for by 

more optimistic assumptions' about the growth 

of output per worker. 

eRO's Method of Projecting Real GDP in the 

Medium Term. CBO's projection of the 

growth of output in the medium term depends 

on an estimate of potential output, which represents a supply constraint for the economy. 

Trying persistently to produce above potential 

would lead to higher inflation rather than to 

sustainable increases in real output. Usually 

the economy operates somewhat below its potential; historically, the gap between actual 

GDP and its potential has averaged about 0.6 

percentage points. CBO's projections assume 

that real GDP will grow fast enough from the 

end of 1993 to reach a level that is 0.6 percent 

below its potential in 1997. 

CBO's projection of potential real GDP depends on projections of the growth rates of 

the capital stock, the labor force, and total 

factor productivity--a measure of the growth 

of real output that cannot be accounted for by 

growth of capital and labor alone. Total factor productivity differs from the more familiar 

measure of labor productivity--output per 

hour worked--because total factor productivity takes account of growth of the capital stock 

as well as growth of hours worked. Total factor productivity is, therefore, the more fundamental measure. Growth of total factor productivity is commonly attributed to technical 

progress, although it may result from intangible factors other than technology, such as 

organizational methods used in business or 

improvements in the skills of the work force. 
20 ANALYSIS OF THE PRESIDENT'S BUDGET March 1992 

Table 2-2. 

Comparison of CBO, Administration, and Blue Chip Economic Projections, Calendar Years 1991-1997 

Estimated 

1991 

Forecast Projected 

1992 1993 1994 1995 1996 1997 

Nominal GDP 

(Billions of dollars) 

eBO 5,674 5,931 6t337 6,714 7,104 7,520 7,961 

Administration 5t674 5,926 6,307 6,712 7t 141 7t 589 8,054 

Real GDP 

(Percentage change, year over year) 

eBO -0.7 1.6 3.6 2.7 2.5 2.6 2.6 

Administration -0.7 1.5 3.0 3.0 3.0 2.9 2.8 

BlueChipa -0.7 1.6 3.2 2.9 2.3 2.3 2.5 

GDP Deflator 

(Percentage change, year over year) 

eBO 3.6 2.9 3.2 3.2 3.2 3.2 3.2 

Administration 3.6 2.9 3.3 3.3 3.3 3.2 3.2 

Blue Chipb 3.6 2.7 3.2 3.9 3.8 3.6 3.6 

Consumer Price Indexc 

(Percentage change, year over year) 

CBO 4.2 3.3 3.6 3.6 3.6 3.6 3.6 

Administration 4.2 3.0 3.3 3.2 3.2 3.2 3.1 

Blue Chip 4.2 3.2 3.7 4.1 4.0 3.9 3.8 

Civilian Unemployment Rate (Percent) 

CBO 6.7 6.9 6.4 6.2 6.0 5.9 5.7 

Administration 6.7 6.9 6.5 6.1 5.8 5.4 5.3 

Blue Chip 6.7 6.9 6.4 5.8 5.8 5.7 5.7 

Three-Month Treasury Bill Rate (Percent) 

eBO 5.4 4.4 5.1 5.2 5.4 5.5 5.6 

Administration 5.4 4.1 4.9 5.3 5.3 5.2 5.1 

Blue Chip 5.4 4.1 5.0 6.3 6.2 6.2 6.2 ... ----------- ... ------_ ...... _-_ .. _----- ... __ ...... --------------------_ ... _--------------

CBO derives its projection of the capital 

stock using a standard growth model. National saving and borrowing from abroad determine investment--that is, the increase in the 

capital stock. The model then allocates capital and labor among nonfarm business, government, and smaller sectors, given assumptions about government policy and the shares 

of the smaller sectors in output. A stable rate 

of private saving is assumed, so that any variation in the national saving rate--and, therefore, in the growth of the ca pi tal stock--

depends on government deficits. 

The underlying (cyclically adjusted) rates of 

growth of the labor force and of total factor 

(Continued) 

producti vity in the nonfarm business sector 

are projected independently of the growth 

model. Following midrange projections of the 

Bureau of Labor Statistics, the underlying rate 

of growth of the labor force is assumed to average 1.3 percent a year over the medium 

term. The underlying rate of growth of total 

factor productivity in the nonfarm business 

sector is expected to continue at the rate it 

achieved in the 1980s--0.7 percent a year, a 

rate that is slightly below its average since the 

early 1960s. 

Following the method described above, 

CBO's projection of the growth rate of potential real GDP averages about 2.1 percent a 
CHAPTER TWO COMPARISON OF ECONOMIC FORECASTS 2t 

Table 2-2. 

Continued 

Estimated Forecast Projected 

1991 1992 1993 1994 1995 1996 1997 

Ten-Year Treasury Note Rate (Percent) 

CBO 7.9 7.1 7.1 7.1 7.1 7.1 7.1 

Administration 7.9 7.0 6.9 6.7 6.6 6.6 6.6 

BlueChipd 7.9 7.1 7.6 7.7 7.7 7.8 7.8 

Nominal Income (Percentage of GDP) 

Wage and salary disbursements 

CBO 49.5 49.4 49.4 49.5 49.6 49.8 49.9 

Administration 49.5 49.7 49.7 49.7 49.7 49.7 49.7 

Other personal incomee 

CBO 35.7 36.0 35.7 35.9 36.2 36.3 36.5 

Administration 35.7 35.3 35.6 35.4 355 35.4 35.4 

Corporate profitsf 

CBO 5.5 6.0 6.6 6.5 6.3 6.2 6.2 

Administration 55 5.8 6.7 6.8 6.9 6.9 6.9 

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

Indicators. 

NOTE; The CBO forecast is based on data available through December 1991 and does not reflect fourth-quarter data for gross 

domestic product orthe consumer price index published in January 1992. The Blue Chip forecasts through 1993 are based on 

a survey of 50 private forecasters published on February 10. 1992. The Blue Chip projections from 1994 through 1997 are 

based on a survey of 41 forecasters published on October 10, 1991, 

a. The Blue Chip projections for 1994 through 1997 were made on the basis of gross national product (GNP) in constant 1982 dollars. 

b. The Blue Chip projections for 1994 through 1997 were made on the basis of the implicit deflator for GNP given 1982 as the base 

year. 

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

d. The Blue Chip does not project a 1 O-year note rate. The values shown here are based on the Blue Chip projection of the Aaa bond 

rate, adjusted by CBO to reflect the estimated spread between Aaa bonds and 1 O-year Treasury notes. 

e. Personal income less wage and salary disbursements. 

f. Corporate profits reported are book, not economiC, profits. 

year from 1994 through 1997.3 The projection of accumulated capital reflects reductions 

in the deficit as a share of GDP, caused both 

by the recovery and budget discipline of the 

Budget Enforcement Act. The underlying 

growth rates of capital, labor, and total factor 

productivity in the nonfarm business sector 

imply an underlying annual rate of growth of 

potential real GDP per worker of 0.9 percent 

and of labor productivity in the nonfarm busi3. This projection depends on provisional assumptions 

that CBO had to make because the Department of 

Commerce has not yet published all of the revised 

series that CBO uses in constructing potential real 

GOP, See Congressional Budget Office. The Economi(' and Budget Outlook: Fiscal Years 1993·1997 

(January 1992), pp, 22·23. 

ness sector of about 1.1 percent, Potential labor productivity in the nonfarm business sector is projected to grow faster than potential 

output per worker, largely because the average workweek is expected to shorten. 

CBO then projects real GDP to reach a 

level 0.6 percent below its potential in 1997--

the average historical gap. Because the gap 

between real GDP and its potential is forecast 

to be 2.3 percent at the end of 1993, real GDP 

must grow in the medium term about 0.5 

percentage points a year faster than its potential to reach the average gap in 1997. 

Therefore, CBO projects that real GDP will 

grow at an average rate of 2.6 percent a year 

in the medium term. Correspondingly, the 
22 ANALYSIS OF THE PRESIDENT'S BUDGET 

rates of growth of real GOP per worker and 

labor productivity (output per hour of work) 

in the nonfarm business sector are also projected to rise above their underlying rates--to 

1.0 percent and 1.4 percent, respectively. 

Comparison of Real GDP Projected by CBO 

and the Administration. Growth of productivity accounts for the entire difference between the Administration's and CBO's projections of the growth of real GDP over the medium term. The Administration projects that 

Figure 2-1. 

March 1992 

real GOP will grow at an annual pace of 2.9 

percent, employment at 1.6 percent (the same 

rate that CBO projects), and real GOP per 

worker at 1.3 percent--O.3 percentage points 

faster than CBO's projection. The Administration projects a closely related measure--

labor productivity in the nonfarm business 

sector--to grow at 1.6 percent a year. This 

rate is slightly lower than the average rate of 

1.8 percent over the postwar period, but significantly higher than the 1.0 percent rate experienced since the end of the 1960s. 

Comparison of CBO's and the Administration's Economic Assumptions 

Percent 

5 

3 

·1 

1990 

Percent 

9 

7 

5 

3 

1990 

Real GOP Growth 

Administration 

1992 1994 1996 

Three-Month Treasury Bills 

CBO 

I ------.. 

/ 

Administration 

1992 1994 1996 

1998 

1998 

Percent 

5 

4 

3 

2 

1990 

Percent 

9 

7 

5 

3 

1990 

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

NOTE: CPI·U = consumer price index for all urban consumers. 

CPI-U Inflation 

CBO 

~__ I 

\ ... ,' '--;-----". 

Administration 

1992 1994 1996 1998 

Ten-Year Treasury Notes 

CBO 

" I ~.=-~-~----,--------~---- ---.... _------_ .. 

/ 

Administration 

1992 1994 1996 1998 
CHAPTER TWO 

The Administration's projections of the 

growth of labor productivity implicitly assume 

noticeably higher rates of capital accumulation or growth of total factor productivity than 

CBO foresees. (The Administration maintains 

that adoption of its budgetary program will increase the rate of growth, a judgment that is 

addressed below.) Given the historical experience of these factors, there appears to be little 

reason to expect a significantly higher rate of 

growth of labor productivity than CBO projects. Nevertheless, the differences between 

the Administration's and CBO's projections of 

productivity growth and real output lie well 

within the range of normal uncertainty for 

forecasts. 

The Outlook for Inflation 

The Administration is more optimistic than 

CBO about the prospects for inflation. Both 

anticipate that the rate of inflation will rise 

from its current level, which has been reduced 

by the recession. Still, both foresee a recovery 

that will be moderate enough to keep inflation 

from rising sharply. In CBO's view, the outlook for stable inflation is enhanced by the 

fact that actual output is far below potential 

output. 

Projections of the rate of growth of the 

GOP deflator by the Administration and CBO 

are nearly identical, averaging 3.3 percent and 

3.2 percent, respectively, over the medium 

term (see Table 2-2). But the Administration 

expects the consumer price index to grow 

slightly more slowly than the GOP deflator. 

By contrast, CBO and the Blue Chip project 

that the consumer price index will grow by an 

average of 0.4 percentage points, or 0.2 percentage points a year faster than the GOP deflator, over the medium term.4 Unlike the 

4. The Blue Chip's medium-term projections of respective rates of inflation were made in October 1991. 

Since that time, the Blue Chip's forecasts of inflation 

in 1992 and 1993 have dropped by about 0.5 percentage points. If the Blue Chip's projections of inflation rates in the medium term also drop by the same 

amount, their respective average rates over the meCOMPARISON OF ECONOMIC FORECASTS 23 

GOP deflator, the consumer price index is not 

affected by changes in the composition of output. Therefore, it constitutes abetter measure 

of pure price inflation. 

CBO believes that the consumer price index 

will continue to grow more rapidly than the 

GOP deflator, largely because the two measures treat computers differently. The share 

of GOP devoted to computers (now about 1.3 

percent in real terms) is expected to continue 

rising, and the quality-adjusted price of computers is expected to continue falling, But the 

weight given to computers in the consumer 

price index is both small and fixed, so the fall 

in computer prices has little scope to retard 

the growth of the index. 

The Outlook for Interest Rates 

The Administration is more optimistic than 

CBO about interest rates, It projects that the 

interest rate on three-month Treasury bills 

will fall slightly over the medium term, whereas CBO expects the rate to rise steadily. 

Therefore, although the Administration's projection is 0.1 percentage point higher than 

CBO's in 1994, it is 0.5 percentage points 

lower than CBO's by 1997. Over the medium 

term, the Administration's projection of the 

bill rate averages about 0.2 percentage points 

lower than CBO's (see Table 2-2). 

This difference in projections of short-term 

interest rates may reflect, in part, the Administration's lower projection of the rate of 

growth of the consumer price index. Both the 

Administration and CBO project that the real 

(inflation -adjusted) rate of interest on threemonth Treasury bills in 1997 will be about 2 

percent. (CBO computes the real interest rate 

by subtracting the rate of inflation of the 

dium term would closely match those of eBO. There 

is no reason to suppose that the Blue Chip forecasters 

would not continue to project faster growth in the 

consumer price index than in the GDP deflator. (The 

Blue Chip projections were made on the basis of the 

GNP deflator, whose growth rate has been virtually 

identical to that of the GDP deflator and is expected 

to remain so.) 
24 ANALYSIS OF THE PRESIDENT'S BUDGET 

consumer price index from the nominal interest rate.) The real bill rate holds steady in 

the Administration's projections at about 2 

percent, and it rises steadily in CBO's proje~­

tions from 1.6 percent in 1994 to 2 percent ill 

1997. The higher rate of inflation projected 

for the consumer price index by CBO, however, leads to CBO's higher projection for the 

nominal bill rate. 

CBO's projection of real interest rates is 

based on an assessment of supply and demand 

for funds. The domestic supply of funds, by 

itself, should act to lower the real interest 

rate. CBO expects the net national saving rate 

to rise above its average for the 1986-1989 

period by 0.6 percentage points. T~is incre~se 

should occur partly because a growmg portIOn 

of the population will be at an age when their 

personal saving rates are high, but mostly .because the growing economy and the· reqUlrements of the Budget Enforcement Act should 

cause federal deficits to fall as a fraction of 

GDP. But increases in the demand for funds 

are expected to outweigh growth in the domestic supply. Some of this growth will arise 

from a demand for investment created by a 

growing economy, but most will be driven by 

an increased world demand for investment 

funds. These demands stem from developments in Europe--German unification and the 

economic integration of Western Europe--and 

to a lesser extent from construction needs in 

the former Communist bloc and reconstruction needs in the Middle East in the aftermath 

of the Persian Gulf War. 

Both the Administration and CBO anticipate that the yield spread between the lO-year 

Treasury note and the three-month Treasury 

bill will revert from its current value of nearly 

3 percentage points to a more normal value of 

1.5 percentage points by 1997. The. spread 

should narrow as participants in credIt markets come to expect fairly stable short-term 

rates of interest to prevail in the future. 

Therefore, given their projections of bill rates, 

both the Administration and CBO project 

stable lO-year rates over the medium term--

the Administration at 6.6 percent, CBO at 7.1 

percent. 

The. Outlook for Nominal 

Income and Its Components 

March 1992 

Projections of the size and distribution of 

nominal income affect deficit projections for 

two reasons: higher income implies higher tax 

receipts, and different components of income--profits, wages and salaries, dividends, 

interest, and so forth--are taxed at different effective marginal rates. (The effective marginal 

tax rate on a given component of income represents the amount of additional tax collected 

from each additional dollar of such income.) 

Corporate profits and wages and salaries are 

taxed at the highest effective marginal rates 

(about 30 percent); dividends and the income 

of proprietors are taxed at about half that 

rate. Interest and rental income are taxed at 

even lower marginal rates (effectively zero in 

the case of rental income). 

Effective marginal tax rates on various components of personal income differ for t-:v0 

principal reasons. First, wages and salanes 

are subject to both personal taxes and payroll 

taxes. Second, other components are often 

defined differently for tax purposes than for 

purposes of the national income and product 

accounts (NIP As). For example, some monetary income from dividends and interest accrues to pension funds and other tax-exempt 

organizations. In addition, some interest and 

rental income reported by the NIP As (most 

notably the rental value of owner-occupied 

homes) represents untaxed incorr,e in kind 

rather than monetary income. Finally, the 

taxable income of the self-employed is often 

reduced by allowable deductions that are not 

considered to be economic costs of business in 

the NIPAs. 

The Administration's projection of income 

and its components in the medium term favors deficit reduction slightly more than 

CBO's. In 1994, the Administration's and 

CBO's projections of nominal GDP are virtuaily identical. By 1997, however, the Administration's projection rises to $93 billion above 

CBO's (about 1.2 percent higher). In addition 

to projecting a higher level of income, the Ad-
CHAPTER TWO 

ministration expects a greater share of income 

to be taxed at the highest effective marginal 

rates. During the medium term, the Administration's projection of wages as a share of 

GOP holds steady at 49.7 percent, and CBO's 

rises from 49.5 percent to 49.9 percent. At 

the same time, the Administration's projection 

of corporate profits as a share of GOP averages about 0.6 percentage points higher than 

CBO's, which--following a historical trend--

falls from 6.5 percent in 1994 to 6.2 percent in 

1997 (see Table 2-2). As a result, the Administration projects the sum of wages and corporate profits as a share of GOP to be about 

0.6 percentage points higher than CBO's corresponding projection. This amount slightly 

more than offsets CBO's projection of a higher share of nonwage personal income. 

The rising share of profits in the Administration's projection could be caused by a 

combination of several factors. First, higher 

growth tends to be associated with a higher 

share of profits, partly at the expense of other 

component shares of taxable income. Second, 

lower interest rates reduce corporate interest 

expenses, leaving a higher share of capital income accruing as profits and a lower share accruing as interest income. Finally, increasing 

the share of equity (and lowering the share of 

debt) in corporate capital structures would 

also lead to lower interest expenses for corporations. 

Implications of the 

Administration's Economic 

Program for Growth 

The Administration states that unless its 

budgetary program is adopted, growth would 

fall significantly short of its forecast. The program is intended to stimulate aggregate demand in the short term and to enhance productivity in the long term. Under current 

policy, the Administration predicts that the 

annual rate of growth of real GOP would fall 

below its forecast by 0.6 percentage points a 

COMPARISON OF ECONOMIC FORECASTS 25 

year in 1992 and 1993 and by an average of 

0.4 percentage points a year from 1994 

through 1997 (see Table 2-3). Such growth 

through 1993 would be lower than that forecast by CBO and the Blue Chip consensus by 

an average of 1 percentage point and 0.7 percentage points a year, respectively. 

Despite the strictures of the Budget Enforcement Act, the Administration's program 

would make federal fiscal policy behave much 

as it usually has in response to a recession. In 

the past, at or about the trough of a recession, 

spending was usually raised or taxes were cut 

to boost the economy. On average, fiscal authorities have raised the standardized-employment deficit (a measure of the deficit that 

removes the effects of the business cycle) by 

0.8 percent of potential GOP between the year 

preceding and the first year of a recovery. 

According to CBO's preliminary estimate, the 

standardized-employment deficit as a proportion of potential GOP would rise during a 

corresponding period by 0.3 percentage points 

under current policy and by 0.6 percentage 

points under the Administration's policy. 

(The difference includes reduced withholding 

from paychecks that the Administration has 

imposed by executive action.) 

Description of the 

Administration's Program 

The Administration's program of tax and 

spending initiatives aims both to stimulate 

demand in the short term by providing incentives to accelerate private spending, and to 

enhance productivity in the longer term by 

encouraging private saving and investment as 

well as undertaking public investment. 

The Administration proposes three tax lnltiatives that would temporarily accelerate private spending: 

o Reduced personal income tax withholding rates will act like a temporary 

tax cut for 1992. (Unlike the other tax 

proposals--which would require passage 
26 ANALYSIS OF THE PRESIDENT'S BUDGET 

by the Congress--reduced withholding 

has already been initiated by executive 

action and therefore is considered apart 

from the rest of the Administration's 

program in other chapters.) 

o A temporary investment tax allowance 

would increase the rate at which businesses could depreciate equipment they 

buy in 1992. 

o A temporary tax credit for a first-time 

home purchase would give new homebuyers in 1992 a credit of 10 percent of 

the cost of a home, up to a maximum of 

$5,000. 

Table 2-3. 

March 1992 

Proposals for permanent changes to the tax 

code that could enhance future productivity 

by affecting private saving and investment 

include: 

o Excluding 45 percent of capital gains 

from income (but exposing the excluded 

gains to the alternative minimum tax); 

o Establishing Flexible Individual Retirement Accounts (FlRAs) , the contributions to which would not be deductible, 

but the earnings of which could be withdrawn free of tax or penalty after seven 

years; 

Comparison of Alternative Economic Projections by the Administration: 

Current Policy versus Administration Policy 

1992 1993 1994 1995 1996 1997 

Fourth Quarter to Fourth Quarter 

(Percentage change) 

Real GOP 

Current policy 1.6 2.4 2.5 2.6 2.5 2.4 

Administration policy 2.2 3.0 3.0 3.0 2.9 2.8 

GOP Deflator 

Current policy 3.3 3.4 3.3 3.3 3.2 3.2 

Administration policy 3.2 3.4 3.3 3.3 3.2 3.2 

Calendar-Year Average 

(Percent) 

Civilian Unemployment Rate 

Current policy 7.1 6.9 6.7 6.3 5.8 5.6 

Administration policy 6.9 6.5 6.1 5.8 5.4 5.3 

Three-Month Treasury Bill Rate 

Current policy 4.2 5.1 5.5 5.5 5.4 5.3 

Administration policy 4.1 4.9 5.3 5.3 5.2 5.1 

Ten-Year Treasury Note Rate 

Current policy 7.2 7.3 7.1 7.0 7.0 6.9 

Administration policy 7.0 6.9 6.7 6.6 6.6 6.6 

SOURCE: Office of Management and Budget. Budget of the United States Government: Fiscal Year 1993, Table 3-2. 
CHAPTER TWO 

o Allowing penalty-free withdrawals from 

IRAs for educational and medical expenses or for a first-time home purchase; and 

o Extending the 20 percent tax credit for 

qualified research and experimentation 

(R&E) spending (above a companyspecific base). 

Other proposals to change taxes would have 

little effect on saving or investment. Three 

that have drawn prominent attention include 

modifying the alternative minimum tax for 

corporations, the passive loss rule for real 

estate developers, and the sale-leaseback rule 

for pension funds and educational institutions 

making real estate investments. But the combined reduction in taxes from these proposals 

would amount to less than 0.2 percent of total 

income from business property, which would 

roughly translate into increased total demand 

for investment of less than 0.01 percent of 

GOP. (Modifying the sale-leaseback rule 

would not add to total investment demand; it 

would merely redirect funds from other investment projects to real estate.) 

The individual effects on the overall economy of other tax proposals are unlikely to be 

significant during the next six years. The 

proposal with the largest effect on the deficit 

over the next six years would increase the exemption for dependent children by $500 per 

child, starting October 1, 1992 (amounting to 

a total of $24 billion through fiscal year 1997). 

But, as a whole, the program would have little 

permanent effect on the deficit through 1997. 

(Chapter 3 provides a more complete discussion of the Administration's tax proposals.) 

The Administration also maintains that 

some of its spending proposals would contribute to future productivity because they 

represent increased public investment. These 

include: 

o Public infrastructure, 

COMPARISON OF ECONOMIC FORECASTS 27 

o Research and development (R&D), and 

o Human resource programs, such as education and training, preventive health 

care, and anticrime and drug-abuse programs. 

Increased spending for such programs, if 

sustained, could enhance productivity in the 

longer term by contributing to the stock of 

capital, the level of technology, and the health 

and skills of the population. (Chapters 4 and 

5 provide a more complete discussion of the 

Administration's spending proposals.) 

CBO's analysis of the Administration's program is limited to the likely effects that the 

tax and spending proposals would have on 

real GOP during the next six years. Therefore, proposals to reform the financial sector, 

legal system, or regulatory structure, or to 

negotiate market-expanding trade agreements, 

are not considered here. Furthermore, some 

of the proposals either might generate little 

effect on GOP until after 1997 or might serve 

purposes other than (or in addition to) increasing GOP. For example, some human resource programs--such as Head Start or 

Healthy Start--would have little effect on GOP 

through 1997, but could enhance both prospects for the disadvantaged and productivity 

in the long term. 

Effects of the Administration's 

Program in the Short Term 

The Administration's program would impart 

more stimulus in 1992 than would current 

policy, although the exact amount is uncertain. But the stimulus would begin to reverse 

itself during 1993. By 1993, or 1994 at the 

latest, real GOP would probably return to the 

level it would have attained without the program's stimulus. 

Temporary factors would provide the principal additional stimulus under the Administration's program. Reduced withholding for 
28 ANALYSIS OF THE PRESIDENT'S BUDGET March 1992 

Table 2-4. 

CBO Estimates of the Effects of the Administration's Budgetary Program 

(Change from baseline in billions of dollars, by fiscal year) 

1992 1993 1994 1995 1996 1997 Total 

Excluding Reduced Withholding 

Revenues -5 -2 -9 -13 -15 -16 -60 

Outlays -1 -7 a -2 -20 -36 -65 

Deficit 5 -4 10 11 -5 -20 -5 

Reduced Withholding 

Revenues -14 -5 -1 

Total 

Deficit 19 11 

SOURCE: Congressional Budget Office. 

a. less than $500 million. 

personal income taxes would act like a temporary tax cut to provide households with an 

additional $21 billion in cash in calendar year 

1992 (unless people readjust their withholding 

rates). In addition, two temporary measures--an investment tax allowance and a tax 

credit for a first-time home purchase--would 

provide more stimulus in 1992 than they 

would if they were permanent. The tax provisions would stimulate the economy, not so 

much because they would encourage businesses or households to buy more or bigger 

machines or houses, but because the allowances and credits would encourage them to 

buy now, instead of later, in order to take advantage of the temporary tax benefits. 

By contrast, the other features of the program would give only a nudge to demand. 

Excluding the revenue effects of reduced withholding, the program would change the deficit 

too little to stimulate demand directly in any 

significant way, either by raising federal 

spending directly or by raising net private income through increased transfers or lowered 

taxes (see Table 2-4). The partial exclusion of 

capital gains would initially encourage consumption by increasing the value of existing 

wealth, and would encourage investment by 

-1 -1 -1 -24 

11 -4 -19 19 

lowering the cost of funds for some investments. But CBO and others have estimated that this stimulus would not appreciably raise the rate of growth. 5 

The temporary nature of the principal elements of the Administration's program makes 

it difficult to determine their effective stimulus. First, conventional analysis indicates that, 

unlike investmen~ in machines or housing, 

consumption responds less to temporary tax 

cuts than to permanent ones. Estimates vary 

widely, but suggest that the response of consumers to a temporary cut may be about half 

of that to a permanent one.6 Second, the rest 

of the program would have to be passed 

5. See Congressional Budget Office. "Effects of Lower 

Capital Gains Taxes on Economic Growth," CBO Paper 

(August 1990); and Brian W. Cashell and Jane G. 

Gravelle. "Potential Macroeconomic Effects of a Capital 

Gains Tax Cut," CRS Report for Congress (January 2. 

1(92). 

6. See Alan S. Blinder and Angus Deaton. "The Time 

Series Consumption Function Revisited," Brookings 

Papers on Economic Activity (1985:2), pp. 465-521. A 

more recent competing analysis suggests that a temporary tax cut would provide more ~timulus than a 

permanent one, but that a permanent cut would be less 

stimulating than conventional analysis indicates. 

Simulations of the McKibbin-Sachs Global model of the 

world economy contain this feature. 
CHAPTER TWO 

quickly to have the desired effect. Businesses 

and households would not accelerate their investments in machines or housing without being sure that they would receive the tax benefits. Third, some mechanism would have to 

be devised that would enable new homebuyers 

to use the tax credit to help make a downpayment. (Half the credit would apply in 

1993 against taxes for 1992 and the other half 

in 1994 against taxes for 1993.) Without such 

a mechanism, the tax credit may not help 

many new homebuyers who would not have 

bought anyway in 1992. (New homebuyers, 

however, could reduce the amount withheld 

from their paychecks to accumulate up to 

$2,500 in cash in 1992 against the credit.) 

Although the magnitude of the response in 

1992 is uncertain, its eventual reversal is more 

predictable. After 1992, the effects of the program would begin to wear off. Reduced withholding would no longer provide a significant 

stimulus. Even though withholding schedules 

would remain below current rates (unless 

people readjusted their withholding rates), 

higher take-home pay in 1993 would be nearly 

offset by red uced refunds (or increased tax 

payments) for the tax liabilities of 1992. 

Therefore, most of the stimulus provided by 

higher take-home pay would not persist beyond 1992. 

Moreover, the aftereffects of the investment 

tax allowance and the tax credit for first-time 

homebuyers would begin to act adversely. 

Most of the stimulus from the provisions 

would occur because businesses and first-time 

homebuyers would accelerate their planned 

purchases, moving them into 1992 from 1993 

or later.7 But, in total, such purchases would 

fall from the level they would otherwise have 

attained in 1993 and later by roughly the same 

amount that they rose in 1992. [n this case, 

the positive stimulus would not only cease 

after 1992, but would turn negative. In this 

7. The investment tax allowance and tax credit for firsttime homebuyers could continue to have some positive 

effects in early 1993. The proposals would apply to 

machines or homes bought in 1992 and put into service 

or moved into before July I, 1993. 

COMPARISON OF ECONOMIC FORECASTS 29 

way, the Administration's program would 

essentially borrow growth in 1992 from growth 

in 1993 or later. 

In conclusion, the proposals do not lend 

themselves easily to conventional economic 

analysis. Their assessment therefore depends 

more heavily than is usual on the judgments 

of market observers, which vary widely. CBO 

finds it plausible that the Administration's 

program could add about one- half of a percentage point to growth in 1992, but concl udes that any addition to growth in 1992 

would be largely reversed in 1993. 

Effects of the Administration's 

Program in the Medium Term 

In principle, several of the Administration's 

proposals could raise productivity, but they 

would probably not have much effect in the 

next six years. The principal tax proposals 

would partially exclude capital gains from 

income taxation, establish FIRAs, allow penalty-free early withdrawals from IRAs, and 

permanently extend a tax credit for research 

and experimentation. The Administration 

also maintains that its program WOllid raise 

productivity in the longer term by raising 

spending for public infrastructure and research and development. 

To be effective, such programs would need 

to increase the rate of technological innovation or raise saving to provide more capital 

per worker. Guided by standard theory, CBO 

calculates that it would require an increase in 

the national saving rate of one-half of a percentage point--a total of about $200 billion 

over the next six years--to raise the rate of 

growth of real GDP by an average of 0.1 percentage point a year (assuming that output is 

unaffected by the drop in aggregate demand).8 

8. Raising the same amount of capital by borrowing or absorbing investment from abroad, rather than by saving, 

would also raise domestic output, but much of the additional income generated would accrue to the foreign 

lenders or investors. As noted, in any case the Administration's proposals would provide very little permanent impetus to investment in capital. 
30 ANALYSIS OF THE PRESIDENT'S BUDGET 

[f increases in capital accelerate innovation 

and thereby contribute twice as much to increases in output as standard theory implies, a 

total of $100 billion of additional national saving over the next six years would be needed to 

raise the average rate of growth by 0.1 percentage point a year.9 But the Administration's program seems unlikely to raise national saving by more than that, and may raise 

it by far less. 

How Much Would the Administration's Program Add to National Saving? The most 

direct way that the program could affect national saving is through its effect on the deficit. Because the deficit subtracts from funds 

available to finance investment in private 

capital, it represents dissaving when it finances government consumption. Other 

things being equal, raising the deficit reduces 

national saving, whereas reducing the deficit 

raises national saving. In considering the program's effect on the deficit through 1997, it is 

appropriate to exclude the direct revenue effects of reduced withholding because, although it affects the timing of tax payments, it 

does not affect tax liabilities. (Reduced withholding will slightly raise interest costs, however, by requiring more borrowing to finance 

spending during the period before the tax 

liability is settled.) But as Table 2-4 showed, 

when the effects of reduced withholding are 

excluded, the Administration's program 

would, on balance, leave the deficit virtually 

unaffected through 1997. Therefore, any material effect the program would have on national saving would depend on how it would 

affect private saving and public investment. 

Aside from any effect they would have on 

the deficit, the proposals could raise national 

saving. Both the partial exclusion of capital 

gains and new provisions for IRAs could 

increase private saving by making some forms 

9. See George Hatsopolous, Paul R. Krugman, and 

Lawrence H. Summers, "U.S. Competitiveness; Beyond 

the Trade Deficit." Science (July 15, L988). The 

implications of nationaL saving for future living standards are discussed in Congressional Budget Oftice, The 

Economic and Budget Outlook: Fiscal Years 1990-1994 

(January 1(89), pp. 79-99. 

March 1992 

of holding assets more attractive. The tax 

credit for research and experimentation would 

not increase saving in itself, but could channel 

more funds to R&E, which generates more 

benefits to society than it costs. to This stream 

of extra returns to additional R&E would be 

equivalent to an addition to saving. Productive public investment for infrastructure and 

R&D also constitutes a type of saving because 

it represents public funds that are committed 

to future use rather than being immediately 

consumed. 

CBO has considered the possible contributions of the Administration's program to 

growth by estimating the total amount of additional saving that it would be likely to generate through 1997. The exercise does not 

consider effects after 1997 or other merits that 

may recommend the proposals. 

The partial exclusion of capital gains would 

raise the after-tax rate of return on some 

forms of saving; therefore, the effect of the exclusion depends on how much saving would 

respond to a change in its after-tax rate of return. Using the results of a study that estimates a response in the upper range of published estimates, together with CBO's economic projections, CBO calculates that the 

partial exclusion of capital gains could increase private saving by about $25 billion 

through 1997. 11 (This calculation overstates 

the likely change in saving, given the results of 

the study, because it does not consider the 

negative effect on saving that the exclusion 

would have by raising the value of existing 

wealth, thereby inducing more consumption.) 

New provisions for Individual Retirement 

Accounts--FlRAs and penalty-free early withlO. For instance, see Edwin Mansfield and others, "Social 

and Private Rates of Return from Industrial Innova· 

tions," Quarterly Journal of Economics, vol. 91 (May 

L 977), pp. 221-240. 

1 L The study concludes that private saving rises by 0.4 

percent for each I percent that the after-tax rate of return to saving rises. See Michael J. Baskin, "Taxation, Saving •. and the Rate of Interest," lournal of 

Political Economy, vol. 86, no. 2. pt. :2 (1978), pp. S3-

S27. 
CHAPTER TWO 

drawals from lRAs for qualified purposes--

would probably not have a major effect on 

saving. Although total contributions to such 

accounts might be large, a relatively small 

portion seems likely to represent additional 

saving. Judging from experience, the addition 

to contributions could total $150 billion 

through 1997--perhaps $130 billion for FIRAs 

and $20 billion for IRAs. (These figures are 

rough guesses made for this exercise. Gross 

contributions are considered because qualified 

early withdrawals would arguably finance investment rather than consumption.) But most 

of the additional contributions would probably represent transfers of existing saving into 

such accounts rather than additional saving. 

Estimates of the additional saving that IRAs 

have induced in the past vary widely, but in 

this case those at the lower end of the range 

appear to be more reliable. One study found 

that about two-thirds of contributions to 

[RAs, as they existed from 1982 through 1986, 

represented additional saving.12 The authors 

concluded that IRAs boosted saving so much 

because, under the law at the time, they were 

dedicated to saving for retirement, penalties 

were applied to early withdrawals, and contributions were deductible from taxable income. But none of these conditions would 

apply to FIRAs, and the first two would no 

longer apply to IRAs under the Administration's proposals. Furthermore, other authors 

have found that [RAs, as they existed from 

1982 through 1986, had much smaller effects 

on saving. One study implied that about 30 

percent of contributions to TRAs represented 

additional saving; another found that, at most, 

4 percent did. 13 Therefore, although the 

l2. Steven F. Venti and David A. Wise. "The Saving Effect of Tax-Deferred Retirement Accounts: Evidence 

from the S[PP Data." in B. Douglas Bernheim and 

John Shoven. eds .. National Saving and Economic Performance (Berkeley: University of California Press. 

19q I}. 

13. Sec Douglas H. Joines and James G. Manegold. "tRAs 

and Saving: Evidence from a Panel of Taxpayers." 

Working Paper. University of Southern California 

(September 1991): and William G. Gale and John Karl 

Scholz. "IRAs and Household Saving," Working 

Paper. University of California at Los Angeles (April 

1990}. 

COMPARISON OF ECONOMIC FORECASTS 31 

highest estimate suggests that the proposals 

could add $100 billion to saving through 1997, 

the lower estimates that others have reported 

and the questionable applicability of the studies to the current proposals suggest that the 

result would be much smaller. 

The tax credit for R&E would probably 

have no appreciable effect on growth over the 

next six years. Even if each dollar of the 

credit corresponded to a dollar of additional 

R&E, only an additional $8 billion of R&E 

would result. 14 Furthermore, R&E usually 

does not lead to marketable applications for 

several years. So, even if a dollar of R&E 

eventually adds as much to output as two or 

three dollars of capital, the effects of the 

credit would be negligible through 1997. 

When compared with current policy, the 

Administration's proposals for spending for 

public infrastructure would not add appreciably to growth. The amounts involved are 

negligible, even if a dollar spent for productive public capital added twice as much to 

output as a dollar spent for private capital. 15 

The Administration proposes to spend $7 billion less for nondefense infrastructure through 

1997 than under current policy.16 Even 

though spending would shift to areas that have 

14. Estimates of the revenue effects of the tax credit are 

well-founded because it has been in operation for two 

years on a temporary basis. Preliminary evidence 

suggests that R&E spending has not responded 

markedly differently to the provisions of the current 

credit than to the provisions of an earlier credit. 

although the current version provides more incentive 

to undertake additional R&E than did the earlier 

version. For a discussion of the estimated response of 

R&E spending to the earlier version. see Joseph J. 

Cordes. "Tax Incentives and R&D Spending: A 

Review of the Evidence," Research Policy. vol. 18 

(June 198Q). pp. 119-133. 

15. For an exposition of this view, see David A, Aschauer, 

"Is Public Capital Productive?" Journal of Monetary 

Economics. vol. 23 (191N), pp. 177-200. Most analysts. 

however, estimate smaller effects than those Aschauer 

finds. For a critical discussion and review of the 

literature on Aschauer's hypothesis. see Congressional 

Budget Offlce, flow Federal Spending for fnJrastructure and Other Public Investments Affects the Economy 

(July 1(91), pp. 23-3\. 

16, See Office of Management and Budget. Budget of the 

United Stales Government: Fiscal Year 1993. Table 

29-9. 
32 ANALYSIS OF THE PRESIDENT'S BUDGET 

been identified in the past as productive, the 

shift would add little to measured growth. 

For example, spending for roads and airports--the areas that have yielded the highest 

estimated returns in the past--would be only 

$3 billion higher through 1997 under the 

Administration's program than under current 

policy. Furthermore, the return on roads and 

airports is estimated by the value of time 

saved by commuters and travelers, which does 

not appear in GOP. 

Proposed changes in spending for R&D 

would also add little, if at all, to growth 

through 1997. Given the spending caps of the 

Budget Enforcement Act, budget authority for 

civilian R&D would provisionally be frozen in 

the medium term at its proposed 1993 level. 

Compared with allowing the authority to grow 

from its 1992 level to keep pace with inflation, 

the Administration's program would increase 

the authority by $1 billion in 1993, but decrease it by a total of $5 billion in the medium 

term. (The same calculation for defense research and development would yield a shortfall of $19 billion through 1997.) 

At the same time, however, some R&D 

spending might be shifted away from large 

projects that are not directly aimed at increasing output and toward areas that have 

been productive in the past) 7 For example, 

17. For a discussion of estimates of the economic return 

to federal spending for R&D, see CBO, Haw Federal 

Spending jor lnfrastructure and Other Public lnves!-

men!!> Affects the Economy, pp_ 73-101. 

March 1992 

compared with the 1992 budget request, 

spending for the space station, Earth Observation System, and Superconducting Super Collider would be slightly cut or slowed, but 

spending for health research would be increased. This shift in spending could yield 

more direct benefits from federal R&D than if 

the shift did not occur. But the amounts involved are too small, and the lag from research and development to the market too 

long, for the shift in spending to yield appreciable results in the medium term. 

Conclusion. The principal elements of the 

Administration's program would be unlikely 

to raise national saving by more than a total 

of $100 billion over the next six years (and 

may easily raise it far less). If those elements 

could not raise saving by more than that, they 

could not raise the rate of growth through enhanced productivity by more than 0.1 percentage point a year in the medium term--

even under favorable conditions. That result, 

together with CBO's assessment of the shortterm effects of the Administration's program, 

suggests that the program would fall far short 

of raising growth by an average of one-half of 

a percentage point a year through 1997, as the 

Administration claims. 
Chapter Three 

The Administration's 

Revenue Proposals 

T he President's budget contains a large 

number of revenue proposals. Some 

are directed at stimulating the economy 

in the short run, others at increasing economic growth in the long run. The President 

has made many of the proposals before, but 

the Congress has not adopted them. Included 

in this group are the initiatives to liberalize 

Individual Retirement Accounts (IRAs) and 

reduce the tax on capital gains. The shortrun stimulative initiatives include temporary 

incentives to boost investment in plant and 

equipment and to spur the purchase of 

homes by first-time buyers. No new major 

revenue-raising measure is offered. 

Revenue Estimates 

The Congressional Budget Office (CBO) 

estimates that total revenues under the Administration's budget proposals would increase from $1,082 billion in 1992 to $1,171 

billion in 1993 and $1,474 billion in 1997. 

The CBO projections of revenues assuming 

enactment of the President's proposals are 

slightly higher than the Administration's projections for 1992 and 1993 but are lower beginning in 1994 (see Table 3-1). Most of the 

difference in estimates is for projected receipts under present law and results from different economic forecasts. The other major 

difference in estimating is for the President's 

capital gains proposal. 

Taken together, the President's proposals 

reduce receipts in every year (see Table 3-2). 

The President's proposed Flexible Individual 

Retirement Accounts (FIRAs) guarantee that 

the trend of growing proposed reductions 

from present-law receipts, apparent in the 

CBO estimates for the 1993-1997 period, will 

continue in the years beyond 1997. 

Present Policy and the President's 

Withholding Reduction 

Both the CBO and Administration baselines 

include the revenue effect of the speedup in 

corporate income tax payments enacted in 

February in the bill extending supplemental 

unemployment compensation benefits. Both 

baselines also include the reduction in personal income tax receipts resulting from the 

reduction in withholding rates put in place by 

the President, effective March 1, 1992. Withholding by top-bracket taxpayers remains unchanged. The change in withholding is estimated to lower receipts by $14 billion this 

year, $5 billion in 1993, and about $1 billion 

per year thereafter. 

CBO baseline revenues take account of the 

effect of the Federal Reserve System's lowered reserve ratio requirement for banks and 

other depository institutions. The President's 

budget was released before the change was announced and therefore does not take it into 

account. The lower level of reserves will reduce Federal Reserve payments to the Treasury and will raise corporate income and tax 

liability. 
34 ANALYSIS OF THE PRESIDENT'S BUDGET 

Finally, CBO baseline revenues do not include the effect of the Administration's position on tariff reduction in the Uruguay Round 

of the General Agreement on Tariffs and 

Trade. Therefore, the effect of the proposed 

reduction in tariffs that can be accomplished 

by executive action is removed from the Administration's baseline revenues (as pub 

lished), and the reduction is shown as a proposal. 

Table 3-1. 

March 1992 

CBO's Reestimate of the 

Administration's Budget Revenues 

CBO's reestimate of the Administration's 

budget revenues reflects differences in the 

economic activity, incomes, and prices assumed for 1992 through 1997. CBO's economic forecast produces higher revenues in 

the near term, through 1993, but lower reveAdministration and CBO Estimates ofthe Administration's Budget 

Revenues, by Major Source (By fiscal year, in billions of dollars) 

Revenue Source 1992 1993 1994 1995 1996 1997 

Administration Estimates 

Individual Income Taxes 478.7 515.2 562.5 602.8 643.8 677.5 

Corporate Income Taxes 89.0 103.8 118.2 125.3 136.9 141.4 

Social Insurance Taxes and Contributions 

On-budget 109.9 120.9 131.1 138.8 146.3 151.6 

Off-budgeta 300.9 325.8 348.8 369.9 394.3 418.3 

Excise Taxes 46.1 48.1 49.7 51.1 48.9 49.9 

Other 51.0 51.6 52.8 54.5 56.6 57.9 

Total 1,075.7 1,165.4 1,263.1 1,342.4 1,426.8 1,496.6 

As a Percentage of GDP 18.3 18.7 19.0 19.0 19.0 18.8 

CBO Estimates 

Individual Income Taxes 476.8 511.6 542.2 581.7 618.5 658.2 

Corporate Income Taxes 91.4 107.5 122.1 125.0 128.8 130.8 

Social Insurance Taxes and Contributions 

On-budget 111.3 122.7 132.4 140.1 147.5 152.9 

Off-budgeta 304.5 328.1 350.3 371.8 395.3 419.5 

Excise Taxes 46.5 48.8 50.3 51.4 49.0 49.9 

Other 52.0 52.6 55.0 57.1 59.6 62.2 

Total 1,082.5 1,171.2 1,252.2 1,327,2 1,398.6 1,473.6 

As a Percentage of GOP 18.5 18.8 18.9 18.9 18.9 18.8 

SOURCES: Congressional Budget Office; Joint Committee on Taxation; Office of Management and Budget, Budget of the United 

States Government: Fiscal Year 1993. 

a. Off-budget revenues consist of Old-Age, Survivors, and Disability Insurance tax revenues. 
CHAPTER THREE 

nues thereafter, The estimate by CBO and 

the Joint Committee on Taxation (JCT) of the 

larger reduction in revenues from the proposed capital gains exclusion depresses the 

CBO reestimate further after 1993. Other reestimates of baseline receipts and budget proposals are relatively small. 

Differences in income forecasts dominate 

the reestimates. CBO projects lower growth 

in nominal and real personal income, which 

produces lower individual income and payroll 

tax receipts. For corporations, CBO projects 

Table 3-2. 

THE ADMINISTRATION'S REVENUE PROPOSALS 35 

a quicker and more substantial recovery tn 

profits this year followed by slower growth in 

profits thereafter. This path produces higher 

corporate income tax revenues through 1994, 

but lower revenues in later years. The economic forecasts have little effect on budget 

proposals. The overall effect of different forecasts on the reestimate is to put CBO's revenue estimates above the Administration's by 

about $2 billion in 1992 and 1993 and then 

below the Administration's by amounts increasing from $5 billion in 1994 to $21 billion 

in 1997 (see Table 3-3). 

eBO Estimates of Revenue Proposals in the Administration's 

1993 Budget (By fiscal year, in billions of dollars) 

1992 1993 1994 1995 1996 1997 

eBO Baseline Before 

Withholding Reduction 1,102.2 1,178.7 1,262.4 1,340.6 1,414.6 1,491.1 

President's Withholding 

Reduction (Now in effect) -14.4 -5.2 -0.8 -0.7 -1.4 -1.2 

Proposals 

Pay-As-You-Go Proposals 

Provide investment tax allowance -6.1 -1.6 3.6 1.0 0.8 0.6 

Provide Flexible IRAs 0 2.0 0.8 0.5 -0.8 -1.9 

Provide credit to first-time homebuyers -0.3 -2.7 -2.5 -0.5 -0.1 a 

Exclude portion of capital gains 0.8 3.7 -3.4 -5.7 -5.6 -5.2 

Extend expiring provisions -0.5 -1.9 -2.5 -2.2 -2.3 -2.7 

Expand Medicare coverage 0.4 1.7 1.7 1.7 1.6 1.6 

Increase employee contributions 

to Civil Service Retirement b 0.4 1.0 1.1 1.0 1.0 

Other 0.2 -0.1 -1.9 -1.8 -1.4 -0.7 

Subtotal -5.5 1.5 -3.3 -5.9 -6.7 -7.3 

Increase exemption for children b -3.4 -5.0 -5.0 -5.1 -5.3 

Total -5.5 -1.9 -8.3 -10.9 -11.8 -12.6 

Other Proposals 

Prohibit double-dipping by thrifts 0.2 0.2 0.1 0.1 0.1 -0.1 

Implement Uruguay Roundc b -0.4 -1.2 -1.9 -2.7 -3.6 

Total 0.2 -0.3 -1.0 -1.8 -2.7 -3.7 

Total, Proposals -5.3 -2.2 -9.4 -12.8 -14.5 -16.3 

President's Budget Revenues 

as Estimated by eBO 1,082.5 1,171.2 1,252.2 1,327.2 1,398.6 1,473.6 

SOURCES: Joint Committee on Taxation; Congressional Budget Office. 

a. Loss of less than $50 million. 

b. Not yet in effect. 

c. Administrative proposal. 
36 ANALYSIS OF THE PRESIDENT'S BUDGET 

The remaining influences on the baseline 

projections are classified as technical. Reestimates of baseline revenues stemming from 

technical assumptions are much smaller this 

year than in the past. There is no one major 

reestimate of this type. Taken together, technical factors raise CBO's baseline revenues 

above the Administration's in every year except 1996 (see Table 3-3). 

CBO reestimates of the President's tax proposals attributable to technical factors are 

Table 3-3. 

March 1992 

dominated by the reestimate of the proposed 

exclusion for capital gains. CBO and the JCT 

estimate that the President's capital gains 

proposal would reduce receipts by $15 billion 

over the 1992-1997 period, whereas the Administration estimates that it would increase 

receipts by $7 billion. This reestimate alone 

matches the scale of technical reestimates of 

the proposals overall for 1992 through 1997. 

The assumption primarily responsible for the 

difference in estimates of the capital gains exclusion is the assumption by CBO and the 

CBO Reestimates of the Administration's Budget Revenues (By fiscal year, in billions of dollars) 

1992 1993 1994 1995 1996 1997 

Revenues as Estimated by 

the Administration 1,075.7 1,165.4 1,263.1 1,342.4 1,426.8 1,496.6 

CBO Reestimates 

Baselinea 

Economic 2.1 1.8 -5.0 -12.6 -18.9 -20.9 

Technical 4.7 2.2 0.5 3.9 -2.2 3.5 

Total 6.8 4.0 -4.6 -8.7 -21.1 -17.4 

Pay-As-You-Go Proposals 

Capital gains exclusion 

Economic b b b b b b 

Technical 0.2 -0.1 -5.5 -6.0 -5.9 -5.0 

Subtotal 0.2 =o.T -5.5 -6.0 -5.9 -5.0 

Other 

Economic 0.1 0.1 0.1 0.1 0.1 0.1 

Technical -0.2 2.1 -1.0 -0.7 -1.4 -0.4 

Subtotal -0.1 2.2 -0.9 -0.6 -1.3 -0.4 

Total 0.1 2.1 -6.4 -6.6 -7.2 -5.4 

Other Proposals 

Economic 0 0 0 0 0 0 

Technical -0.2 -0.3 0.1 0.1 0.1 -0.2 

Total -0.2 -0.3 0.1 0.1 0.1 -0.2 

Total, Reestimates 6.8 5.9 -10.9 -15.3 -28.2 -23.0 

Economic 2.2 1.9 -4.9 -12.5 -18.8 -20.9 

Technical 4.6 3.9 -6.0 -2.7 -9.3 -2.1 

Revenues as Estimated by CBO 1,082.5 1,171.2 1,252.2 1,327.2 1,398.6 1,473.6 

SOURCES: Congressional Budget Office; Joint Committee on Taxation; Office of Management and Budget, Budget of the United 

States Government: Fiscal Year 1993 (January 1992). 

NOTES: Revenues include payroll tax receipts of the Old-Age, Survivors, and Disability Insurance trust funds, which are off- budget. 

a. The reduction in income tax withholding put in place by President Bush is assumed in both the CBO and Administration baselines. 

b. Less than $50 million. 
CHAPTER THREE 

JeT of an increase in realizations of capital 

gains in reaction to the new exclusion that 

while substantial, is not as large as tha; 

assumed by the Administration. The proposal 

is described below. eBO reestimates of other 

budget proposals are small. 

Longer-Term Effects of the 

Administration's Proposals 

Some of the Administration's proposals will 

produce annual revenue losses in the long run 

that are much larger than the annual losses 

for 1992 through 1997. For example, eBO 

and JCT estimate that the proposal to allow 

taxpayers to establish new Flexible Individual 

Retirement Accounts and to transfer money 

to such accounts from existing IRAs in 1992 

would increase revenue by $0.6 billion over 

the 1992-1997 period. When taxpayers have 

reached their desired level of assets in the 

Flexible Individual Retirement Accounts 

however, the proposal could reduce revenue~ by between $7 billion and $17 billion annually, measured at 1992 levels of income. The 

increase in revenue in the early years occurs 

because taxpayers who transfer funds from existing [RAs to FIRAs will be required to report these transfers as taxable income and pay 

tax on the funds over a four-year period. 

These tax payments represent a prepayment of 

future tax liability in exchange for exemption 

of more income in later years; in that sense, 

they are equivalent to a loan from the taxpayer to the government at a very high interest 

rate. In addition, the revenue loss from extending the low-income housing credit for 18 

months will con tin ue beyond 1997 because 

taxpayers receive credits for 10 years. 

An Overview of the 

President's Tax Proposals 

The Administration's proposals claim a number of objectives. The one direct tax cut for 

THE ADMINISTRATION'S REVENUE PROPOSALS 37 

households--the increase in the exemption for 

dependents--provides tax relief for families 

with children. Other proposals that reduce 

revenue include new and expanded incentives 

for investment and saving, targeted tax benefits for rental real estate and owner-occupied 

housing, and new and extended targeted tax 

benefits for other economic sectors and 

groups. The targeted tax benefits include incentives for research, employment of people 

from disadvantaged groups, investment and 

.. 

employment in economically distressed areas ' mvestment 10 renewable energy, and benefits 

for farmers, students, the self-employed, and 

employees who use public transit. 

In many circumstances, narrowly targeted 

benefits have been judged to be unfair: they 

allow some taxpayers to pay lower taxes than 

others with the same income, and they reduce 

economic efficiency by encouraging people to 

select investments with relatively lower social 

productivity than others that do not receive 

tax benefits. But some of the proposals for 

targeted tax relief in the budget arguably have 

merit on tax policy or economic grounds. 

For example, an argument for extending 

and making the credit for research and experimentation expenditures permanent is that 

such expenditures have "spillover" effects that 

create productivity gains beyond those that 

add to the profitability of firms conducting the 

research. Some other proposals may warrant 

consideration on the grounds that, for some 

activities, current law imposes extremely stringent (if not punitive) limits on the deductibility of ordinary business costs. The proposals to provide relief from the limits on deductibility of passive losses for those actively 

involved in developing and managing real 

estate and to make depreciation rules under 

the corporate alternative minimum tax less 

stringent attempt to remedy the problem. All 

of these proposals, however, are narrow in 

scope, and even taken together, their effect on 

economic growth would at most be marginal. 
38 ANALYSIS OF THE PRESIDENT'S BUDGET 

Short-Term Economic Stimulus 

Some of the President's proposals are aimed 

at providing immediate economic stimulus, 

thereby accelerating recovery from the current 

recession. These include the investment tax 

allowance and the tax credit for first-time 

homebuyers, which are available only for 

transactions between February 1, 1992, and 

the end of the year. Because these tax incentives are available only for 1992, their 

main effect will be to cause some businesses 

to accelerate purchases of equipment and 

some households to accelerate home purchases that they had intended to make in 1993 

or later. The Administration's changes in 

withholding tables for individuals, which did 

not require legislation, are also intended to 

shift demand from later years to 1992 by temporarily increasing cash flow for households. 

The potential effects of these proposals on the 

economic recovery are assessed in Chapter 2. 

Private Saving, Investment, 

and Economic Growth 

A major goal of the revenue proposals in the 

budget is to promote economic growth by reducing the tax burden on saving and investment. The budget emphasizes the economic 

benefits of reducing the capital gains tax and 

promoting saving by expanding the use of 

Individual Retirement Accounts and introducing a new tax-advantaged savings vehicle, 

the Flexible Individual Retirement Account. 

The proposal to reduce the capital gains tax 

would directly benefit mainly high-income 

taxpayers. CBa estimates that families in the 

top quintile would receive 94 percent of the 

benefit from the proposal, and families in the 

top 1 percent would receive 50 percent of the 

benefit. 

This tax cut could increase economic 

growth if it induces high-income families to 

save more or if changes in relative yields 

among assets cause more savings to flow to 

investment with high rates of return. Many 

March 1 C)C)2 

analysts are skeptical, however, about whether 

saving would increase enough to raise the 

growth rate noticeably. For example, a CBa 

review of eight empirical studies of the effects 

of a cut in the capital gains tax found no consensus among economists that a lower capital 

gains tax would raise saving and investment 

enough to increase the gross national product 

significantly) 

Another means by which a lower capital 

gains tax could increase growth is by channeling more funds to venture capital. Investors in new ventures typically receive a 

larger fraction of their return in the form of 

capital gains, compared with interest and 

dividends, than investors in bonds or equity in 

mature companies. Proponents of reducing 

the capital gains tax note that investment in 

enterprises financed by private venture capital 

firms increased dramatically after the cut in 

the capital gains tax in 1978. Some analysts, 

however, are skeptical that the capital gains 

cut caused the increase in venture capital, 

pointing to data that show that most of the 

increase in financing for venture capital firms 

came from investors (such as pension funds, 

corporations, and foreign investors) who were 

not affected directly by the cut in the capital 

gains tax for individuals.2 

The proposals to allow expanded use of 

IRAs and to create FIRAs would substantially 

increase the amount of saving done in the 

form of tax-advantaged accounts. Whether 

they would increase total personal saving significantly is, however, unclear. The proposals 

might not increase saving much, in part 

because of limits on contributions to taxadvantaged accounts. People who have already accumulated more wealth than the 

limits on annual contributions can receive the 

full tax benefit, at least for a time, by transl. Congressional Budget Office, "Effects of Lower Capital 

Gains Taxes on Economic Growth," CBO Paper 

(August 19(0). 

2. See Department of the Treasury, Report to Congress on 

the Capital Gains Tax Reducuons of 1978 (September 

[(85); and James Poterba, "Capilal Gains Tax Policy 

Toward Entrepreneurship," NationaL Tax Journal 

(September I(89). 
CHAPTER THREE 

ferring these accumulations to IRAs and 

FIRAs. Similarly, people who are currently 

saving more than the contribution limits can 

receive the full tax benefit by depositing these 

savings in IRAs and FIRAs. 

Evidence of the effect of IRAs on saving 

between 1982 and 1986 is mixed. Some 

studies have conduded that the IRAs were 

largely funded from transfers of existing assets, 

whereas others have conduded that a large 

portion of IRA contributions represented new 

saving. 

Analysts who believe IRAs increase total 

saving, however, attribute much of the increase in saving to features of IRAs that 

would apply less to the ones proposed by the 

President than to current IRAs. Two of these 

features are the restriction of IRAs to saving 

for retirement and the penalty on early withdrawals. Because these limits make IRAs less 

like other forms of saving, people may have 

financed these accounts by reducing consumption instead of other saving. The proposals in 

the budget broaden the purposes for which 

the accounts can be used and permit earlier 

penalty-free withdrawals. Those make the accounts more like other forms of saving and increase the likelihood that more of the contributions to IRAs and FIRA~ will represent 

transfers from other saving instead of reduced 

consumption. 

FIRAs and expanded IRAs are more likely 

to increase private saving over an extended 

time period than during the next few years. 

Most people do not have sufficient accumulations of wealth or sufficient rates of ongoing 

saving to allow them to contribute the maximum amount to IRAs and FIRAs for more 

than a few years. Eventually, the expanded 

IRAs and FIRAs will increase the after-tax 

return many people receive on their last dollar of net increase in saving. If saving responds positively to higher after-tax returns, 

people will accumulate more wealth over their 

lifetime and leave more to future generations. 

Most empirical studies have found little or no 

response of saving to rates of return, but some 

analysts question the validity of these studies, 

THE ADMINISTRATION'S REVENUE PROPOSALS 39 

especially in the context of permanent incentives to save. 

The combined effect of the capital gains tax 

cut and the expansion in the availability of 

IRAs on national saving depends on how the 

revenue losses they produce are financed. 

CBO and the JCT estimate that the capital 

gains tax cut will reduce revenues after the 

first two years. In addition, as noted above, 

the long-run revenue loss from the IRA and 

FIRA proposals will be much larger than the 

loss reported for the 1992-1997 period. If 

these future revenue losses are not offset by 

spending cuts or higher taxes, the resulting 

increase in the federal deficit will dampen any 

increase in national saving that a higher private saving rate produces. If the private saving response is small, the net effect may be to 

reduce national saving in the long run. 

Assistance to Families 

Another stated goal of the budget is to ease 

the financial burden on families. The primary 

proposal in the budget to promote this goal is 

the $500 increase in the dependent exemption 

for children. The Administration has also argued that the expansion of IRAs and the introduction of FIRAs will help families prepare for the future. 

The exemption for dependents reduces the 

tax burden on families with children by a 

small amount. CBO estimates that the average annual tax reduction for all families with 

children from the larger exemption is $114 or 

about 1.0 percent of total tax liability and 0.3 

percent of after-tax income. Families with 

children in the lowest income quintile receive 

a much smaller average reduction--about $10 

per family--because many of them do not pay 

income tax now and therefore do not benefit 

from an increased exemption. Families with 

children in the second, third, and fourth 

quintiles of the income distribution receive 

the largest proportionate increase in after-tax 

income from the tax cut ($117 per family, 

$133 per family, and $165 per family, 
40 ANALYSIS OF THE PRESIDENT'S BUDGET 

respectively--or 0.5 percent, 0.4 percent, and 

0.3 percent of after-tax income). 

Expanding the availability of IRAs and 

introducing FIRAs reduce the tax liability of 

families who save through such accounts and 

benefit those families even if the incentives do 

not induce them to increase total saving. Experience with universal IRAs between 1982 

and 1986 indicates, however, that most 

families did not contribute to [RAs, and those 

that did had higher-than-average incomes. In 

t 985, the peak year of IRA use, only 18 percent of taxpayers with earnings contributed to 

IRAs. The participation rate was much 

greater for the 8 percent of taxpayers with 

earnings who reported an adjusted gross income (AGI) of $50,000 or more. Among tax 

returns reporting earnings, 63 percent with 

AG[ of more than $50,000 contributed to 

IRAs, compared with only 14 percent with 

AGI of less than $50,000. 

An Examination of the 

Tax Proposals 

Most of the President's proposals for revenues 

fall under the pay-as-you-go limits of the Budget Enforcement Act of 1990. Under these 

limits, the net effect of changes in tax revenues and entitlement spending must not increase the budget deficit. Two proposals not 

subject to pay-as-you-go limits are discussed 

at the end of the chapter. 

To ease discussion here, the nearly 40 proposals are grouped into six categories: incentives for saving and investment, targeted tax 

incentives, personal income tax cuts, excise 

taxes, revenue-raising proposals, and other 

proposals. 

Incentives for Saving and Investment 

The Administration is proposing a number of 

incentives to encourage saving and investMarch 1992 

ment. These incentives include the introduction of a temporary investment tax allowance 

for machinery and equipment, a proposal to 

liberalize slightly and to simplify depreciation 

rules under the corporate alternative minimum tax, and a proposal to exclude from income 45 percent of capital gains realizations 

on qualified assets for individual taxpayers. 

For individual savers, the Administration is 

also proposing to introduce a new general 

purpose saving incentive, the Flexible Individual Retirement Account, and to broaden 

the purposes for which existing [RAs can be 

used. Major components of both proposals 

were included in the Administration's previous two budgets. The Administration is also 

proposing a variety of modifications in the tax 

law to simplify the taxation of employerfunded pensions. 

Adopt Temporary Investment Tax Allowance. 

The Administration proposes to allow an upfront deduction of 15 percent of the purchase 

price of equipment acquired between February 1, 1992, and January 1, 1993, if the equipment is placed in service before July 1, 1993. 

The investment tax allowance (IT A) would be 

taken in the year the equipment is placed in 

service. Taxpayers would be allowed to claim 

depreciation deductions on the remaining 85 

percent of the purchase price as under present 

law. The IT A would not be a preference under the alternative minimum tax. 

The allowance, which is like a loan from 

the government, would affect the cost of capital in much the same way as a small (about 1 

percent) investment tax credit. Because the 

IT A is temporary, taxpayers with sufficient 

taxable income would have an incentive to 

accelerate planned investments to take advantage of the allowance. Thus, the IT A 

would provide a small temporary stimulus to 

the economy in 1992, but at the expense of 

investment in later years. In addition, because 

the ITA is temporary, it would favor assets 

that can be purchased quickly, such as cars 

and computers, over major investments that 

require a longer lead time. 
CHAPTER THREE 

The JCT estimates that revenue loss from 

the IT A will total $7.7 billion in the first two 

years; this initial loss will be partially offset by 

revenue gains in 1994 through 1997 (see Table 

3-4). The offset occurs because the extra deductions that firms claim in 1992 would come 

at the expense of reduced deductions in later 

years. Over the budget period, the revenue 

loss is estimated at $1.7 billion. 

Simplify Alternative Minim urn Tax Depreciation. The Administration proposes to remove the special depreciation adjustment 

used to compute adjusted current earnings 

(ACE) under the corporate alternative minimum tax. Under present law, corporations 

subject to the alternative minimum tax must 

compute depreciation in three different ways 

for certain depreciable assets. The proposal 

would allow corporations to use the same 

method to compute ACE as they use to compute alternative minimum taxable income. It 

would reduce the cost of capital for certain 

corporations slightly and would simplify their 

tax calculation. The JCT estimates that the 

proposal would lose $1.4 billion over the budget period (see Table 3-4). 

Exclude 45 Percent of Long-Term Capital 

Gains. For the fourth time, the Administration has proposed tax relief for capital gains. 

The proposal would allow individuals to exclude from their income a portion of the capital gain realized on qualified assets. The percentage excluded would increase with the 

holding period: 15 percent for assets held one 

to two years, 30 percent for assets held two to 

three years, and 45 percent for assets held 

three years or more. The included portion of 

the capital gain would be taxed as under current law. Because tax rates on capital gains 

are capped at 28 percent under current law, 

the exclusion would imply tax rates for maximum capital gains on assets held more than 

three years of 15.4 percent for taxpayers in the 

28 percent and 31 percent tax brackets, and 

8.3 percent for taxpayers in the 15 percent 

bracket. 

THE ADMINISTRATION'S REVENUE PROPOSALS 41 

The exclusion would apply to all capital 

assets except collectibles, such as art, antiques, 

and precious metals. Depreciation deductions 

would be recaptured as ordinary income, 

which means that only the increase in sales 

price over the original cost of an asset would 

be treated as a capital gain. 

Under the Administration's proposal, the 

excluded portion of capital gains would be 

considered a tax preference under the alternative minimum tax (AMT). Because the maximum capital gains tax rate would be substantially below the AMT tax rate of 24 percent, 

the addition of this large preference item 

would more than double the number of individuals subject to the minimum tax. Thus, 

the effective marginal tax rate on capital gains 

for many taxpayers would be 24 percent. Taxpayers who would be subject to the AMT at 

current-law levels of realizations account for 

about 60 percent of realized gains. In addition, some taxpayers who increase their realizations would also be affected by the AMT. 

The result is that the AMT would substantially diminish the effects on incentives of 

the capital gains tax reduction and would require a more complicated tax calculation for 

many taxpayers. 

The capital gains exclusion would apply to 

capital gains realized after February 1, 1992. 

The requirements for two- and three-year 

holding periods would be phased in over 

three years. During the balance of 1992, all 

qualifying assets held for at least one year 

would be eligible for the 45 percent exclusion. 

In 1993, assets held for at least two years 

would be eligible for the 45 percent exclusion; 

assets held for at least one year would receive 

a 30 percent exclusion. The full sliding scale 

described above would take effect in 1994. 

The phase-in of the requirement for an extended holding period, by allowing the full 45 

percent exclusion for assets held less than 

three years in 1992 and 1993, would avoid 

discouraging sales of such assets during the 
42 ANALYSIS OF THE PRESIDENT'S BUDGET March 1992 

Table 3-4. 

CBO/JCT and Administration Estimates of Incentives for Saving and Investment 

(By fiscal year, in billions of dollars) 

Proposal 1992 1993 1994 1995 1996 1997 

Business Investment and Capital Gains 

Adopt Temporary Investment 

Tax Allowance 

CBO/JCT -6.1 -1.6 3.6 1.0 0.8 0.6 

Adm i nistration -6.1 -1.6 3.5 0.9 0.8 0.6 

Simplify Alternative Minimum 

Tax Depreciation 

CBO/JCT -0.2 -0.3 -0.3 -0.3 -0.2 -0.1 

Administration -0.2 -0.4 -0.4 -0.3 -0.2 -0.1 

Exclude 45 Percent of 

Long-Term Capital Gains 

CBO/JCT 0.8 3.7 -3.4 -5.7 -5.6 -5.2 

Administration 0.6 3.8 2.1 0.3 0.3 -0.2 

Subtotal 

CBO/JCT -5.5 1.8 -0.1 -5.0 -5.0 -4.7 

Administration -5.7 1.8 5.3 1.0 0.9 0.3 

Individual Retirement Accounts (lRAs) and Pensions 

Establish Flexible IRAs 

CBO/JCT 0 2.0 0.8 0.5 -0.8 -1.9 

Administration 0.1 0.5 0.1 -0.4 -1.0 -2.1 

Broaden Uses of Existing IRAs 

CBO/JCT -0.2 -0.3 -0.3 -0.2 -0.2 -0.2 

Administration a -0.2 -0.2 -0.2 -0.3 -0.2 

Promote Retirement Saving and Simplify 

Taxation of Pension Distributions 

CBO/JCT 0.5 0.5 -0.9 -0.5 -0.2 0.2 

Administration 0.1 a a 0.3 0.4 0.4 

Reform Underfunding of Pensions 

CBO/JCT b b b b b b 

Administration c c -0.3 -0.4 -0.6 -0.8 

Subtotal 

CBO/JCT 0.3 2.2 -0.7 -0.6 -1.8 -2.7 

Administration 0.2 0.3 -0.5 -0.8 -1.5 -2.7 

Total 

Incentives for Saving and Investment 

CBOIJCT -5.2 4.0 -0.8 -5.6 -6.8 -7.4 

Administration -5.5 2.2 4.8 0.2 -0.5 -2.4 

SOURCES: Joint Committee on Taxation; Office of Management and Budget. 

a. Less than $50 million. 

b. CBO has included the Administration's estimate. 

c. Not yet in effect. 
CHAPTER THREE 

first two years of the budget period and thus 

would boost short-run receipts. 

The JCT estimates that the proposal would 

raise $4,5 billion in revenues in 1992 and 

1993, because taxpayers would respond with a 

burst of asset sales in 1992, but thereafter 

would reduce revenues by $3 billion to $6 

billion a year (see Table 3-4), The Administration estimates that the proposal would raise 

$4.4 billion in 1992 and 1993 and thereafter 

increase revenues by decreasing amounts ending in a small loss in 1997. The results primarily differ because JCT assumes that taxpayers are less responsive after the first year 

to the changed capital gains tax rate than the 

Administration assumes. 

Establish FIRAs. The President proposes 

establishing FIRAs to provide a general purpose savings incentive. FIRAs are identical to 

the Family Savings Accounts the President 

proposed in the 1991 and 1992 budgets. In 

addition, this year's proposal would allow 

people to transfer funds without penalty from 

existing IRAs to FIRAs until the end of 1992. 

Under the proposal, taxpayers would be allowed to make nondeductible contributions of 

up to $2,500 annually to FIRAs. The investment income in FIRAs would accumulate 

tax-free. Withdrawals of investment income 

attributable to contributions left on deposit 

for at least seven years would also be tax-free. 

Withdrawals of investment income attributable to contributions left on deposit between 

three and seven years would be included in 

income for tax purposes, but would not be 

subject to a penalty. Withdrawals of investment income attributable to contributions left 

on deposit for less than three years would be 

taxable and also subject to a lO percent penalty. For all FIRAs, withdrawals of contributions would be tax-free because they were not 

deductible at the time deposited. The proposal would be effective starting in 1992. 

Eligibility to contribute to FIRAs would be 

limited to people with adjusted gross income 

below certain ieveis--$60,000 for single taxpayers, $lOO,OOO for heads of households, and 

THE ADMINISTRA nON'S REVENUE PROPOSALS 43 

$120,000 for couples filing joint returns. As 

with an IRA, contributions to a FIRA could 

not exceed a person's earnings or the $2,500 

contribution limit. Each member of a couple 

filing jointly, however, could contribute up to 

$2,500, provided the total contribution did not 

exceed the couple's combined earnings. For 

example, a couple in which one spouse 

worked outside the home earning $30,000 

could contribute up to $2,500 to accounts for 

each spouse for a total of up to $5,000. Dependents would be ineligible. 

New in this year's proposal is the provision 

for penalty-free transfers of funds from IRAs 

to FIRAs. From February 1 through December 31, 1992, individuals could withdraw 

funds from IRAs without paying the normal 

lO percent penalty tax as long as the amounts 

were redeposited in FIRAs. The withdrawals 

would be fully subject to income taxes, as are 

other IRA withdrawals, but the income tax 

owed on amounts transferred would be spread 

over four years. IRA balances attributable to 

rollovers from qualified retirement plans 

would be ineligible for transfer to a FIRA. 

The six-year revenue estimate for FIRAs 

includes two offsetting effects--one temporary 

and one permanent--and greatly understates 

the long-run cost of the proposal. Transfers 

from existing IRAs to FIRAs raise revenue 

through 1995 because the amounts transferred 

are included in income for tax purposes. The 

revenue gain from transfers from IRAs is a 

constant amount for four years and falls to 

zero afterward. The buildup of assets from 

contributions to FIRAs reduces revenue because investment earnings in FIRAs are untaxed. The revenue loss from the buildup of 

assets is small initially. but increases rapidly 

because the stock of assets yielding tax-free 

income grows much faster than contributions. 

Combining both effects, the net revenue effect 

is positive in the first year, but declines rapidly and eventually turns negative. 

The Administration shows revenues turning 

negative in 1995 and estimates a cumulative 

revenue loss of $2.8 billion over the 1992-1997 

period (see Table 3-4). The JCT shows reve-
44 ANALYSIS OF THE PRESIDENT'S BUDGET 

nues turning negative in 1996 and a cumu-

[ative revenue gain of $0.6 billion over the 

five-year period because it assumes a larger 

volume of transfers from IRAs than does the 

Administration. The higher revenues the JCT 

estimates thus result entirely from a larger 

shift of tax payments from the future to the 

1992-1997 period. 

In 1997, when the revenue gains from the 

transfers are exhausted, both the JCT and the 

Administration show the revenue losses from 

FIRAs increasing rapidly. These losses would 

continue to increase until people are able to 

reach their desired level of FIRA balances. 

How much of the assets paying taxable interest and dividends would ultimately be shifted 

is uncertain. If people ultimately shift 10 percent of their taxable financial assets to FIRAs, 

the annual revenue loss in 1992 dollars would 

stabilize at about $7 billion. If people ultimately shift 25 percent, the annual loss would 

stabilize at about $17 billion. 

Broaden Uses of Existing IRAs. The President 

proposes to permit penalty-free withdrawals 

from IRAs for medical and educational expenses and for a down payment on a first 

home purchase. Withdrawals for these purposes could be made from IRAs as of February 1, 1992. 

Penalty-free distributions would be allowed 

for medical expenses in excess of 7.5 percent 

of AGI. Penalty-free distributions for educational expenses would be allowed up to the 

amount of expenditures for higher education 

and postsecondary vocational expenses. Finally, penalty-free withdrawals of up to 

$10,000 would be allowed for the purchase of 

a home by taxpayers who have not owned a 

home in the last three years. 

The JCT estimates that permitting penaltyfree withdrawals for education and medical 

expenses and first-time home purchases would 

reduce revenues by $1.3 billion between 1992 

and 1997 (see Table 3-4). 

March 1992 

In the 1991 and 1992 budgets, the President 

proposed to permit penalty-free withdrawals 

for the purchase of a first home. Unlike the 

current proposal, which is available for any 

first home, the previous proposals would have 

waived the penalty only for homes that cost 

less than 110 percent of the median home 

price in an area. 

Promote Retirement Saving and Simplify Taxation of Pension Distributions. The President 

proposes seven modifications to the current 

tax treatment of pension plans. The proposals 

largely reduce the administrativ.e burden of 

providing pensions, particularly for small employers, with the objective of encouraging 

more employers to offer pensions to their employees. The proposals have not appeared in 

previous budgets, but they are similar to provisions for pension simplification advanced by 

the Administration and Members of Congress 

in 1991. 

The JCT estimates that these proposals will 

be essentially revenue neutral as a package 

(see Table 3-4). By easing the requirements 

for employers to offer pension plans, the proposals should modestly increase their use, particularly among small employers. Only a 

small increase in personal saving should be 

expected given the uncertainty about how 

many firms will initiate pensions and the uncertain effect of pension coverage on personal 

saving. An additional benefit will be the reduced burden of pension administration. 

Reduce Underfunding of Pensions. The Administration proposes to increase the rate at 

which employers must reduce· underfunding 

of their pension plans. The purpose of the 

proposal is to reduce the risk that underfunded plans will ultimately be terminated 

and become the liability of the Pension Benefit Guaranty Corporation (PBGC). The 

PBGC insures payment to the beneficiaries of 

most benefits under defined benefit plans, and 

the proposal for increasing funding is included with other proposals to limit future 

liabilities of the PBGe (see Chapter 1). 
CHAPTER THREE 

Under the funding proposal, employers 

with underfunded pension plans will be required to increase contributions to their plans 

starting in 1994. (The proposal does not apply to multiemployer plans.) The Administration assumes that businesses will pay these 

higher contributions by reducing taxable 

. wages for employees, which in turn will reduce income and payroll tax revenues. The 

budget supplement shows these revenue losses 

starting at $0.3 billion in 1994 and reaching 

$0.8 billion in 1997 (see Table 3-4). CBO has 

adopted the Administration's estimate for this 

analysis. 

Although more rapid funding of pension 

plans would reduce revenues in the immediate future, the reduction is merely a speedup 

of revenue losses that are likely to result from 

the eventual funding of already promised pension benefits. Furthermore, the faster funding 

should reduce future outlays by the PBGC by 

reducing the amount of unfunded benefits assumed by the PBGC in future pension plan 

terminations. 

Targeted Tax Incentives 

The Administration is also proposing a wide 

array of tax provisions that affect more narrowly defined economic sectors, groups of taxpayers, and activities. These include extensions of tax incentives that are scheduled to 

expire in 1992 and new tax incentives, some of 

which have appeared in previous budgets and 

others that the Administration is proposing 

for the first time this year. This section describes the proposed extensions first and then 

discusses the new provisions. 

Extend Low-Income Housing Credit. The 

Administration proposes to extend the credit 

for certain expenditures made by owners of 

low-income housing projects. The credit was 

introduced in 1986 and has been extended 

three times. The credit applies to the depreciable costs incurred to provide low-income 

housing units, subject to limits on rent levels 

and the income of tenants. Designated state 

housing agencies allocate credit authority 

THE ADMINISTRATION'S REVENUE PROPOSALS 4S 

subject to per capita limits. The credit is paid 

out over 10 years and may have a present 

value of up to 70 percent of construction and 

renovation costs of qualified housing that does 

not receive other federal subsidies. A reduced credit (30 percent of present value) is 

available for subsidized housing and for the 

purchase cost of existing housing that is rehabilitated. 

The proposal would extend the credit, 

which is currently set to expire on June 30, 

1992, for 18 months through December 31, 

1993. The revenue loss from this extension, 

however, extends beyond the budget period 

because the credit is claimed over 10 years. 

The JCT estimates the revenue loss at $0.1 

billion in 1993, growing to $0.4 billion per 

year by 1997 (see Table 3-5). 

The revenue loss from an 18-month extension understates the long-term revenue cost of 

a permanent low-income housing credit. If 

the credit were fully used and in place for 

long enough that 10 years' worth of credits 

were being paid each year, the cost could exceed $3 billion per year. 

Extend Mortgage Revenue Bonds. The Administration proposes to extend tax-exempt 

mortgage revenue bonds (MRBs) for 18 

months through December 31, 1993. MRBs 

have been in use since the mid-1970s. The 

Mortgage Revenue Bond Act of 1980 was the 

first piece of legislation to set any limits on 

their use and to subject them to an expiration 

date. Since then, the bonds have been extended six times, with modifications. This 

year is the first time that the Bush Administration has proposed extending them. 

State and local governments use the proceeds of MRBs to provide below-market financing for single-family homes. The loans 

are targeted to first-time homebuyers with 

family income of less than 115 percent of the 

median family income for the area in which 

the residence is located. The purchase price 

of the home may not exceed 90 percent of the 

average purchase price of residences in that 

area. MRBs are subject to limits on the vol-
46 ANAL YSIS OF THE PRESIDENT'S BUDGET March 1992 

Table 3-5. 

CBO/JCT and Administration Estimates of Targeted Tax Incentives 

(By fiscal year, in billions of dollars) 

Proposal 1992 1993 1994 1995 1996 1997 

Extensions 

Extend the Low-Income Housing Credit 

CBO/JCT a -0.1 -0.2 -0.3 -0.3 -0.4 

Admi nistration a -0.2 -0.3 -0.4 -0.4 -0.4 

Extend Mortgage Revenue Bonds 

CBO/JCT a -0.1 -0.1 -0.1 -0.1 -0.1 

Administration a a -0.1 -0.1 -0.1 -0.1 

Extend Permanently the Research and 

Experimentation Credit 

CBO/JCT -0.2 -0.8 -1.4 -1.6 -1.8 -2.1 

Administration -0.2 -0.8 -1.4 -1.6 -1.8 -2.1 

Extend the Research and Experimentation 

Allocation Rules 

CBO/JCT -0.1 -0.6 -0.2 0 0 0 

Administration -0.2 -0.5 -0.3 0 0 0 

Extend Permanently the 

Orphan Drug Credit 

CBO/JCT a a a a a a 

Ad mi nistration a a a a a a 

Extend the Targeted Jobs Credit 

CBO/JCT a -0.1 -0.2 -0.1 a a 

Administration -0.1 -0.2 -0.2 -0.1 a a 

Extend Business Energy Cred its 

CBO/JeT a a a a a a 

Administration a a a a a a 

Extend Farmer Bonds 

CBO/JCT a a a a a a 

Administration a a a a a a 

Extend the Health Insurance Deduction 

for the Self-Employed 

CBO/JCT -0.1 -0.2 -0.3 0 0 0 

Ad ministration -0.1 -0.2 -0.3 0 0 0 

Subtotal 

CBO/JeT -0.5 -1.9 -2.4 -2.1 -2.2 -2.6 

Administration -0.5 1.9 -2.5 -2.2 -2.4 -2.6 

------------------------_ ..... _---- .......... _-------_ ..................... --_ ...... -... _------- ................ _-

(Contin ued) 

SOURCES: Joint Committee on Taxation; Office of Management and Budget. 

a. Less than $50 million. 
CHAPTER THREE THE ADMINISTRATION'S REVENUE PROPOSALS 47 

Table 3-5. 

Continued 

Proposal 1992 1993 1994 1995 1996 1997 

New Provisions 

Provide Passive Loss Relief for Real Estate 

CBO/JCf -0,1 -0.4 -0,4 -0.4 -0.5 -0.5 

Administration -0.1 -0.4 -0.4 -0,4 -0.5 -0.6 

Facilitate Real Estate Investments 

by Tax-Exempt Pension Funds and 

Educational Institutions 

CBO/JCf a a a a a a 

Administration a a a a a a 

Enact Tax Credit for First-Time 

Homebuyers 

CBO/JCf -0.3 -2.7 -2.5 -0.5 -0.1 a 

Administration -0.2 -2.1 -2.5 -0.6 0.2 0.1 

Allow Deduction for Loss on the Sale 

of a Principal Residence 

CBO/JCf a -0.4 -0.4 -0.4 -0.4 -0.4 

Administration a -0.4 -0.4 -0.4 -0.4 -0.3 

Establish Enterprise Zones 

CBO/JCf 0 -0.1 -0.4 -0.8 -1.0 -1.0 

Administration 0 -0.1 -0.2 -0.3 -0.5 -0.8 

Permit Deduction of Interest 

on Student Loans 

CBO/JCf -0.1 -0.3 -0.4 -0.4 -0.4 -0.4 

Administration -0.1 -0.4 -0.7 -0.7 -0.8 -0.9 

Restore and Double the Adoption Deduction 

CBO/JCf a a a a a a 

Administration a a a a a a 

Expand the Public Transit Exclusion 

to $60 per Month 

CBO/JCf a a a -0.1 -0.1 -0.1 

Administration a a a a a a 

Revise Rules for Charitable Contributions 

CBO/JCf a a -0,2 -0.2 -0.2 -0.2 

Administration a 0.1 0.1 0.1 0,1 0.2 

Subtotal 

CBO/JeT -0.5 -3.9 -4.3 -2.8 -2,7 -2.6 

Administration -0.5 -3.3 -4.0 -2.4 -1.9 -2.3 

Total 

Targeted Incentives 

CBO/JCf -1.0 -5,9 -6.7 -4.9 -S.O -5.2 

Administration -1.0 -S.2 -6.5 -4.5 -4.3 -4.9 
48 ANALYSIS OF THE PRESIDENT'S BUDGET 

ume of tax-exempt bonds issued for private 

purposes. (Instead of issuing MRBs, state and 

local governments may issue mortgage credit 

certificates to qualifying homebuyers. These 

certificates provide the purchaser with a tax 

credit equal to a portion of the home mortgage interest payments.) 

The JeT estimates that the revenue loss 

from extending MRBs will amount to $0.5 

billion in 1992 through 1997 (see Table 3-5). 

Extend Permanently the Research and Experimentation Credit. The Administration proposes to make the income tax credit for research and experimentation (R&E) expenses 

permanent; the credit is currently scheduled 

to expire for expenses paid after June 30, 

1992. The credit allows a business to reduce 

its tax liability by 20 percent of the amount by 

which its current R&E expenses exceed a base 

amount derived from its recent level of sales 

and the historical relationship between its 

R&E expenses and level of sales. Qualifying 

R&E expenses include the wages of employees 

engaged in research and the costs of supplies 

used in research, as well as a portion of contract research costs and certain computer 

costs. The R&E credit first appeared as a 

temporary four-year credit in the Economic 

Recovery Tax Act of 1981, but it has been 

extended and modified five times since then. 

The JCT estimates that making the R&E credit permanent would reduce revenues by $0.8 

billion in 1993 and by $7.8 billion in 1992 

through 1997 (see Table 3-5). 

Extend the Research and Experimentation 

Allocation Rules. The Administration proposes to extend until December 31, 1993, the 

statutory rules that U.S. multinational corporations use to allocate R&E expenses between 

domestic and foreign operations. The current 

statutory rules were enacted as part of the 

Technical and Miscellaneous Revenue Act of 

1988 and have been extended three times 

since then. The statutory rules superseded the 

Treasury regulations issued in 1977. Compared with the regulations, the statutory rules 

generally allow U.S. multinational corporations to allocate more R&E expenses to doMarch 1992 

mestic operations and fewer to foreign operations, making domestic-source income lower 

and foreign-source income higher. As a result, U.S. multinational corporations with 

excess foreign tax credits can use their excess 

credits to reduce the U.S. income tax they pay 

on their worldwide income. The JCT estimates that extending the statutory rules for 

allocating R&E expenses would reduce revenues by $0.6 billion in 1993 and by $0.9 billion in 1992 through 1997 (see Table 3-5). 

Extend Permanently the Orphan Dl'Ug Credit. 

The Administration proposes to make the orphan drug credit, which is scheduled to expire 

on June 30, 1992, permanent. The prOVISIon 

was originally enacted in 1983 and has since 

been extended three times. 

Drugs for treating rare diseases or conditions are commonly known as "orphan drugstl 

because the narrow demand for them discourages the costly investment in clinical testing 

that is necessary before the Food and Drug 

Administration can approve their manufacture and distribution. To encourage development of the drugs, current law allows taxpayers to claim a nonrefundable tax credit of 

50 percent of the costs of clinical testing. The 

credit covers the testing of drugs for such rare 

conditions as Huntington's disease, myoclanus, Lou Gehrig's disease, Tourette's syndrome, and Duchenne's dystrophy. The 

amount the taxpayer claims as a credit is not a 

deductible business expense. 

The Administration proposes to make the 

credit permanent on the grounds that clinical 

testing is long term and taxpayers should be 

able to plan their activities knowing that the 

credit will be available. The Administration 

has not previously proposed making the credit 

permanent. The JCT estimates that the proposal will cost less than $50 million through 

1997 (see Table 3-5). 

Extend Targeted Jobs Credit. The President 

proposes to extend the targeted jobs tax 

credit--scheduled to expire on June 30. 

1992--to December 31, 1993. The Administration is proposing to extend the credit for 
CHAPTER THREE 

the second consecutive year. It was first enacted in the Revenue Act of 1978 and has 

since been extended eight times, with modifications. 

The credit is available to employers for hiring economically disadvantaged individuals 

from nine groups. Economically disadvantaged youth are the largest group; others include recipients of Supplemental Security Income, summer youth employees, Vietnam veterans, and former convicts. 

The credit is equal to 40 percent of the first 

$6,000 of qualified first-year wages (the maximum credit is $2,400 per individual). The 

qualifying wages are limited to the first $3,000 

for economically disadvantaged summer youth 

workers, yielding a maximum credit of $1,200. 

The credit is not available for wages paid beyond the first year of employment. 

In order for employers to claim the credit, 

the economically disadvantaged individual 

must be employed for at least 90 days (14 days 

in the case of summer youth employees) or 

complete at least 120 hours of work (20 in the 

case of summer youth employees). The employer's deduction for wages must be reduced 

by the amount of the credit claimed. 

The JeT estimates that extending the credit 

for 18 months would reduce revenues by $0.5 

billion in 1992 through 1997 (see Table 3-5). 

Extend Business Energy Credits. The Administration proposes to extend business energy tax credits for solar and geothermal properties for 18 months, from June 30, 1992, to 

December 31, 1993. The Energy Tax Act of 

1978 created the credits, and they have since 

been extended six times. This year's budget 

marks the second time the Administration has 

proposed extending them. The 10 percent 

credits are available for investments in equipment that uses solar or geothermal energy for 

heating, cooling, or electricity generation. 

The JCT estimates that extending the credits for 18 months would reduce revenues by 

less than $100 million during the 1992-1997 

period (see Table 3-5). 

THE ADMINISTRATION'S REVENUE PROPOSALS 49 

Extend Farmer Bonds. The Administration 

proposes to extend to December 31, 1993, the 

use of tax-exempt, small-issue industrial development bonds to make loans to first-time 

farmers. The Administration did not propose 

extending small issue bonds for any purpose 

in previous years. 

At present, small-issue bonds may be used 

to provide loans at below-market interest rates 

to construct manufacturing facilities or to 

permit first-time farmers to acquire land and 

equipment. (First-time farmers account for a 

relatively small share of these bonds.) The 

bonds are subject to the overall state-by-state 

limits on the volume of tax-exempt bonds for 

all private activities. The proceeds of bonds 

for manufacturing facilities are Limited to 

individuals or entities with relatively small 

capital investments. The proceeds of bonds 

loaned to first-time farmers may not exceed 

$250,000 per farmer. Under current law, 

small-issue bonds for all purposes are scheduled to expire on June 30, 1992. The Administration would extend the use of the bonds 

for first-time farmers, but would permit the 

use of the bonds for manufacturing facilities 

to expire as scheduled. 

The JCT estimates that extending the use of 

tax-exempt bonds for first-time farmers will 

reduce revenues by less than $50 million in 

1992 through 1997 (see Table 3-5). 

Extend Partial Deduction for Health Insurance Premiums for the Self.Employed. The 

Administration proposes to extend through 

December 31, 1993, the provision that allows 

self-employed people a deduction equal to 25 

percent of the cost of providing health insurance for themselves and their families. 

The Congress first enacted the provision as 

part of the Tax Reform Act of 1986. It has 

been extended three times--most recently by 

the Tax Extension Act of 1991--and is now 

scheduled to expire after June 30, 1992. The 

Administration proposed making the deduction permanent in its budget for fiscal year 

1991, but proposed only a one-year extension 

in last year's budget. (The Administration's 

comprehensive health reform proposal would 
50 ANALYSIS OF THE PRESIDENT'S BUDGET 

increase the deductible amount to 100 percent 

of premiums and make it permanent.) 

The provision reduces the disparity between 

the treatment of the self-employed and employees whose employers provide group 

health insurance. Employers can deduct the 

cost of providing health insurance to their employees, but the employees do not owe taxes 

on the value of the insurance. Self-employed 

people, however, cannot deduct the cost of 

their own insurance as a business expense. 

The JeT estimates that the extension would 

reduce revenues by a total of about $0.6 billion in 1992 through 1997 (see Table 3-5). 

Provide Passive Loss Relief for Real Estate. 

The Administration proposes to allow taxpayers who actively participate in the rental of 

property they develop to deduct losses on 

such rentals against other income as well as 

against income from other development activities. That provision would be an exception 

to the passive loss rules enacted in 1986 that 

generally disallow the deduction of rental 

losses against other income. The proposal 

would lower the cost of capital slightly for real 

estate developers, but would have a negligible 

effect on real estate prices because it would 

not affect most new investors in real estate. 

There is a risk that passive loss exceptions 

could lead to new tax shelters, as had proliferated before the 1986 Tax Reform Act was 

passed, especially if tax rates on capital gains 

are reduced as proposed. However, because 

the proposal applies only to active developers 

(not to limited partners in real estate developments), the scope for increased tax 

shelter activity is limited. The JeT estimates 

the ann ual reven ue loss at $0.4 billion in 1993, 

increasing slightly over time (see Table 3-5). 

Facilitate Real Estate Investments by TaxExempt Pension Funds and Educational Institutions. The President proposes to expand 

slightly the types of debt-financed real estate 

investments in which pension funds and educational institutions can invest without being 

subject to the unrelated business income tax. 

The proposal is intended to remove limits on 

March i992 

the real estate investments of these major 

sources of investment capital at a time when 

much real estate is in need of buyers. 

Investors in pension and education funds 

expect that these proposals will have only a 

minor impact on the amount they invest in 

real estate. The JeT estimates that the revenue losses will be less than $50 million per 

year (see Table 3-5). 

Enact Tax Credit for First·Time Homebuyers. 

The Administration has proposed a temporary 

tax credit for first-time homebuyers. The 

credit would equal 10 percent of the purchase 

price of the house, up to a maximum of 

$5,000. To qualify, the home would have to 

be purchased between February 1 and December 31, 1992. Only half of the credit 

could be claimed against 1992 taxes; the other 

half could be claimed against 1993 taxes. The 

credit would not be refundable, but amounts 

in excess of current liability could be used to 

reduce income taxes during the next five 

years. 

The proposal defines first-time homebuyers 

as people who have not owned a home for 

three years. All buyers of a home would have 

to be first-time buyers, and only one credit 

could be claimed per home purchased. 

The JeT estimates that the credit would reduce revenues by $6.1 billion in the 1992-1997 

period (see Table 3-5). The estimate implies 

that slightly more than 1 million taxpayers 

would claim the credit. 

The intent of the credit is to stimulate the 

economy by accelerating home purchases into 

1992. Increased demand for both existing and 

new homes would exert some upward pressure 

on housing prices, thereby stimulating some 

new construction. Another objective is to 

assist people in buying their first home. The 

fraction of young people owning their own 

home declined in the 19805. Factors that may 

have contributed to this decline were lower 

real earnings of young workers, high real 

mortgage interest rates, and a decline in the 
CHAPTER THREE 

value of tax benefits of ownership compared 

with renting. 

Both the amount of purchases of new 

homes and the effect of the credit in stimulating additional purchases in 1992 are uncertain. The revenue estimates are consistent 

with an assumption that home purchases by 

first-time buyers in 1992 will be of roughly the 

same magnitude as in 1988 and 1989. That 

level of home purchases may be achieved, 

however, without the credit because of low 

mortgage rates. If the credit causes home purchases by first-time buyers to increase significantly above the projected amount, it will 

stimulate the economy in 1992, but the revenue loss could be greater than expected. Even 

if the credit increases home purchases, most if 

not all of that increase is likely to be offset by 

reduced purchases in 1993 and later years. 

The one historical precedent for the credit 

is the new home credit in the Tax Reduction 

Act of 1975. As part of an antirecessionary 

package, the Congress enacted a temporary 

credit of 5 percent of the purchase price, up 

to a maximum of $2,000, for new homes purchased between March 12, 1975, and January 

I, 1976, and for which construction began before March 26, 1975. Its purpose was to reduce the existing inventory of unsold new 

homes. The credit reduced tax liability by 

$716 million for the 535,000 taxpayers who 

used the credit. A CBO analysis of the credit 

found little or no effect on the inventory of 

unsold new houses, new home sales, housing 

starts, or employment in the construction industry the first six months it was available) 

Allow Deduction for Loss on the Sale of a 

Principal Residence. The Administration proposes to allow people who sell their homes at 

a loss to claim an itemized deduction as a casualty loss. Under current law, casualty losses 

are deductible to the extent each loss exceeds 

$100 and the sum of all losses exceeds 10 percent of AGI. For example, a taxpayer with an 

3. Congressional Budget Office, "An Analysis of the 

Impact of the $2.000 Home Purchase Tax Credit" 

(November 2n, 1975). 

THE ADMINISTRATION'S REVENUE PROPOSALS 51 

AGI of $50,000 who sells his or her home for 

a loss of $10,000 would have a deductible loss 

of $4,900 under the proposal. The deduction 

would be larger if other losses were claimed in 

the same year. 

The proposal would also allow the portion 

of the loss not deducted to be added to the 

basis of the next home purchased, if one were 

purchased within the next two years. In the 

above example, the taxpayer could add $5,100 

to the basis of a home purchased within two 

years. 

The proposal would apply to principal residences sold on or after February 1, 1992. For 

principal residences sold at a loss on or after 

January 1, 1991, the proposal would allow 

taxpayers to apply the entire loss to the basis 

of homes purchased within two years of the 

date of sale. 

In support of the proposal, the Administration notes that, under current law, capital 

gains on sales of a principal residence are 

added to income for tax purposes, but losses 

are not deductible. Taxing gains while disallowing deduction of losses would, by itself, 

create a bias against housing. In practice, 

however, most capital gains on home sales are 

not taxed. Gains on the sale of a home can be 

deferred if another home of equal or greater 

value is purchased within two years. In addition, there is a one-time exclusion of 5125,000 

of gains for people over age 55, and all gains 

held until death permanently escape the income tax. Current law also favors investment 

in housing over business assets by allowing the 

deduction of mortgage interest and property 

taxes, even though the home does not generate taxable income. 

The proposal would provide some relief for 

people forced to sell homes for a loss. Because of inflation and real increases in home 

prices for many years, however, few taxpayers 

who sell homes would report a loss. As a 

result, both the revenue loss of the proposal 

and any potential distortion of the allocation 

of investment is limited. The JCT estimates a 
52 ANALYSIS OF THE PRESIDENT'S BUDGET 

revenue loss of $0.4 billion in 1993 and $2.1 

billion in 1992 through 1997 (see Table 3-5). 

Establish Enterprise Zones. In order to encourage investment in economically distressed 

urban and rural areas, the Administration 

proposes to designate up to 50 enterprise 

zones over a four-year period and to provide 

the following tax incentives: elimination of 

the capital gains tax for tangible property located within enterprise zones and used in enterprise zone businesses for at least two years; 

expensing of equity investments in enterprise 

zone corporations with assets of less than $5 

million; and a refundable 5 percent wage 

credit on the first $10,500 earned by lowincome employees of businesses in enterprise 

zones (up to $525 per worker, with the credit 

phasing out when the worker earns between 

$20,000 and $25,000 of total annual wages). 

Proposals for enterprise zones have appeared 

in each of the President's previous budgets. 

Some states have established enterprise 

zones and have reported consequent gains in 

investment and employment. H is unclear, 

however, how much employment in the zones 

is new instead of relocated employment. Enterprise zones are much more likely to affect 

the location of investment than to contribute 

to net new investment or employment. 

The JCf estimates that the revenue loss 

from tax incentives in enterprise zones will 

amount to $3.3 billion from 1992 through 

1997 (see Table 3-5). The Administration's 

estimate for the same period is a revenue loss 

of $1.8 billion. 

Permit Deduction of Interest on Student 

Loans. The Administration proposes to allow 

taxpayers who itemize to deduct from taxable 

income the interest incurred on loans for 

education above the high school level after 

July 1, 1992. Current law allows homeowners 

to deduct qualified mortgage interest, including interest on home equity loans, although taxpayers cannot deduct interest for 

that portion of home equity loans exceeding 

the lesser of $100,000 or their equity in their 

residences. Homeowners can use the proMarch 1992 

ceeds of home equity loans, on which interest 

payments are deductible, to finance education 

expenses. The Administration's proposal 

would make deductible the financing of loans 

for education available to taxpayers who do 

not own their own home. For homeowners, 

the student loan would be included in a combined ceiling of $100,000 for student loans 

and home equity loans. 

The JCT estimates that this provision would 

reduce income tax revenues by $0.3 billion in 

1993 and about $2 billion over the 1992-1997 

period (see Table 3-5). The Administration 

estimates a revenue loss that is almost twice as 

great, with larger differences in later years. 

The differences occur because the JCT assumes that interest costs fall mainly on students, who generally do not itemize deductions, whereas the Administration assumes 

that parents pay and could, therefore, deduct 

the interest. 

Restore and Double the Adoption Deduction. 

The Administration proposes to restore the 

deduction for the costs incurred in adopting a 

child with special needs--for example, a 

physical or mental handicap--effective February 1, 1992. This proposal has been in the 

Administration's budget for the past three 

years. The Tax Reform Act of 1986 repealed 

the deduction, and it was replaced with a program that reimburses families for these costs 

(up to a limit). The proposal would permit 

the deduction from income of unreimbursed 

adoption costs up to a maximum of $3,000 per 

child, double the maximum under pre-1986 

law. Deducted costs that were subsequently 

reimbursed would be counted as income in 

the year received. The JCT estimates that the 

proposal would reduce income tax revenues 

by less than $50 million over the 1992- 1997 

period (see Table 3-5). 

Expand the Public Transit Exclusion to $60 

per Month. The Administration proposes to 

increase the public transit exclusion from $21 

per month to $60 per month. Under current 

law, employer reimbursements of up to $21 

per month for employee expenses for commuting by public transportation are treated as 
CHAPTER THREE 

a "de minimis" fringe benefit and, therefore, 

are excluded from taxable income. If the reimbursement exceeds $21 per month, the entire reimbursement is included in taxable income. This exclusion, created in 1984, was set 

at $15 per month and was raised by regulation 

to $21 per month effective July 1, 1991, to 

account for inflation since 1984. The proposal would exclude from taxable income reimbursements of up to $60 per month even if 

the total reimbursement exceeds the limit of 

$60 per month. The JCT estimates that expanding this exclusion would reduce revenues 

by $0.2 billion from 1992 through 1997 (see 

Table 3-5). 

Revise Rules for Charitable Contributions. 

The Administration proposes three changes in 

rules regarding charitable contributions. 

First, it would make permanent and extend to 

all types of property the exclusion from 

alternative minimum taxable income (AMTI) 

of the fair market" value of charitable contributions of appreciated property. The Tax 

Reform Act of 1986 eliminated the deductibility of the capital gain component of the 

value of property donated to charities in calculating AMTI. Subsequent legislation removed that limitation with respect to contributions of tangible personal property for tax 

year 1991 and for tax year 1992 if contributions are made before July 1, 1992. The 

proposed change would make that rule permanent and broaden it to include intangible 

personal property and real property. That 

change would be effective for contributions 

made in 1992 or later years. 

Second, the Administration proposes that 

all charitable deductions made after December 31, 1991, be allocated to U.S.-source income. Currently, such deductions are allocated in proportion to U.S.- and foreign--

source income. 

Third, the Administration would require 

charitable organizations with annual gross 

receipts of $25,000 or more to report to the 

Internal Revenue Service, as well as to 

donors, annual contributions in excess of $500 

THE ADMINISTRATION'S REVENUE PROPOSALS 53 

from any individual. Organizations must now 

report only contributions that exceed $5,000 

for individual donors. The change would apply to contributions made on or after July 1, 

1992. 

The JCT estimates that the first two changes 

would reduce revenues by about $1.2 billion 

over the 1992-1997 period, and the last change 

would raise revenues by about $0.4 billion 

over the same period, yielding a net revenue 

reduction of about $0.8 billion (see Table 

3-5). In contrast, the Administration estimates that the three provisions would increase 

revenues by about $0.6 billion over the sixyear period. The estimates differ because the 

Administration assumes the change in reporting requirements will yield a much greater 

increase in compliance than does the JCT. 

Personal Income Tax Cuts 

The only general cut in personal income taxes 

in the Administration's proposals is an increase in the personal exemption for dependent children. 

Increase the Exemption for Dependent Children. The personal exemption for dependents 

age 18 and under would be increased by $500 

under the Administration's proposal. The 

proposal is effective October 1, 1992, with the 

amount for the 1992 tax year prorated to 

$125. The full $500 amount applies for tax 

years 1993 and beyond and is indexed to 

changes in the consumer price index. 

Under current law, per<;onal exemptions are 

phased out for high-income taxpayers. Therefore, for these taxpayers, the benefit of the increase in the dependent exemption would be 

limited until 1996 when this phaseout provision expires. 

The JCT estimates that the proposal would 

lose $3.4 billion in 1993 and would cost $23.8 

billion over five years (see Table 3-6). The 

budget document suggests that 18-year-olds 

would not be eligible for the credit, but 
54 ANALYSIS OF THE PRESIDENT'S BUDGET 

subsequent supporting materials indicate that 

they would be eligible. The JeT estimate assumes 18-year-olds would not be eligible. 

Excise Taxes 

The Administration is proposing to repeal the 

lUxury tax on boats and airplanes and to pay 

for this by repealing the tax exemption for 

diesel fuel in recreational boating. The Administration is also proposing minor increases 

in certain excise taxes and fees, which are discussed in the following section on revenueraising proposals. 

Repeal the Luxury Tax on Boats and Airplanes and Finance It by Repealing the Diesel 

Fuel Exemption. The Administration proposes repealing the current luxury tax equal to 

10 percent of the retail price over $100,000 for 

boats and $250,000 for airplanes, beginning 

February 1, 1992. (Exclusions apply to boats 

and airplanes that are used for business.) The 

JeT estimates that this proposal would reduce 

revenues by about $0.2 billion over the 1992-

1997 period. To offset this revenue loss, the 

Administration proposes repealing the current 

tax exemption for diesel fuel used in boats for 

pleasure use, beginning July 1, 1992. The JeT 

estimates that repealing the diesel exemption 

would increase revenues by about $0.2 billion 

over the estimation period. Thus, the two 

proposals would be about revenue neutral 

(see Table 3-7). 

Table 3-6. 

March 1992 

Revenue-Raising Proposals 

The Administration's budget includes some 

revenue-raising proposals. Those proposals 

would increase employee taxes and contributions to federal retirement; widen the scope of 

and extend certain excise taxes and fees; and 

broaden the income tax base for individuals 

and corporations. Altogether, the proposals 

discussed in this section increase revenue by 

$3.3 billion in 1993 and by $23.2 billion over 

the 1992-1997 period. 

Extend Hospital Insurance to All State and 

Local Government Workers. Under current 

law, all workers of state and local governments hired after March 31, 1986, are required to pay Medicare's Hospital Insurance 

(HI) taxes. The Administration's proposal 

would extend HI coverage to all state and 

local government workers. The Administration has made the same proposal in its previous budgets. 

The main rationale for the proposal is that 

the vast majority of currently exempt workers 

already qualify for Medicare benefits because 

either they have contributed to the system at 

other jobs or their spouses are covered 

through their own employment. Although 

more than 90 percent of state and local government workers receive Medicare benefits in 

retirement, one-fourth of those who receive 

benefits have not paid Medicare taxes while 

working in government jobs. Therefore, they 

CBO/JCT and Administration Estimates of Increase in Personal 

Exemption for Children (By fiscal year, in billions of dollars) 

Proposal 1992 1993 1994 1995 1996 1997 

Increase the Personal Exemption 

for Dependent Children 

CBO/JeT a -3.4 -5.0 -5.0 -5.1 -5.3 

Administration a -4.4 -4.6 -4.7 -5.0 -5.2 

SOURCES: Joint Committee on Taxation; Office of Management and Budget. 

a. Not yet in effect. 
CHAPTER THREE 

receive Medicare benefits in return for a 

smaller amount of lifetime payroll taxes than 

are paid by employees who work continuously 

in covered employment. CBO estimates that 

mandatory HI contributions from all state and 

local government workers, beginning July 1, 

1992, would raise $1.7 billion in 1993 and $8.7 

billion in 1992 through 1997 (see Table 3-8). 

Outlays for benefit payments would increase 

somewhat, but only $0.1 billion of the increased costs would occur by 1997. 

Increase Employees' Contributions to the Civil 

Service Retirement System. Currently, about 

one-third of the Civil Service Retirement System's (CSRS's) liabilities are unfunded. Most 

employees enrolled in CSRS and their employing agency pay 7 percent of their base pay 

into the retirement system. The Administration proposes for the first time to increase the 

employees' tax rate in two stages. CSRS employees' tax rate would increase by 1 percentage point on January 1, 1993, and again on 

lanuary 1, 1994. That increase would slightly 

improve the financial soundness of the fund. 

Some may consider this proposal unfair because it penalizes those employees who chose 

to remain in CSRS when the Federal Employees' Retirement System (an alternative retirement program) was introduced. If employees 

were given another opportunity to switch, 

however, then the revenue gain from one rate 

increase would be reduced. 

Table 3·7. 

THE ADMINISTRATION'S REVENUE PROPOSALS 55 

CBO estimates that the proposed increases 

in the CSRS employees' tax rate would raise 

$0.4 billion in 1993 and about $1.0 billion 

each subsequent year (see Table 3-8). Overall, revenues would increase by $4.5 billion in 

1992 through 1997. 

Conform the Compensation Base for Railroad 

Retirement with Social Security. Under 

current law, differences exist between compensation included in the tax base for Railroad Retirement and Social Security, specifically in sickness and accident disability payments made to an employee or dependent, remuneration for service as a delegate of a 

lodge, and noncash remuneration. The only 

difference that is expected to have an appreciable effect on revenues is including sickness 

and disability payments in the Railroad Retirement base. CBO estimates that bringing 

the Railroad Retirement base into conformity 

with the Social Security base, beginning January 1, 1993, would increase revenues by 

about $70 million during the budget period 

(see Table 3-8). 

Expand the Communications Excise Tax. 

Under current law, local and toll telephone 

and teletypewriter communications services 

are subject to a 3 percent tax., The Administration proposes to expand the tax base to include communications via digital transmission and coin-operated telephones. Specifically, the 3 percent tax would apply to digital 

transmission of data over long-distance com-

(BO/JCT and Administration Estimates of the Excise Tax Proposal (By fiscal year, in billions of dollars) 

Proposal 1992 1993 1994 1995 1996 1997 

Repeal Luxury Tax on Boats 

and Airplanes and Repeal 

Diesel Fuel Exemption 

CBO/JeT a a a a a a 

Admi nistration a a a a a a 

SOURCES: Joint Committee on Taxation; Office of Management and Budget. 

a. Less than $50 million. 
56 ANALYSIS OF THE PRESIDENT'S BUDGET March 1992 

Table 3-8. 

CBO/JCT and Administration Estimates of Revenue-Raising Proposals 

(By fiscal year, in billions of dollars) 

Proposal 1992 1993 1994 1995 1996 1997 

Employee Taxes and Contributions 

Extend Hospital Insurance to All 

State and Local Government Workers 

CBO/JCT 0.4 1.7 1.7 1.7 1.6 1.6 

Administration 0.3 1.6 1.5 1.5 1.5 1.5 

Increase Employees' Contributions 

to Civil Service Retirement System 

CBO/JCT a 0.4 1.0 1.1 1.0 1.0 

Administration a 0.4 1.1 1.2 1.2 1.2 

Conform the Compensation Base for 

Railroad Retirement with Sodal Security 

CBO/JCT a b b b b b 

Administration a b b b b b 

Subtotal 

CBO/JCT 0.4 2.2 2.7 2.7 2.7 2.6 

Administration 0.3 2.0 2.6 2.8 2.8 2.8 

Excise Taxes and Fees 

Expand Communications Excise Tax 

CBO/JCT b b b b 0.1 0.1 

Administration b 0.1 0.1 0.1 0.1 0.1 

Establish New Federal Communications 

Commission Fees 

CBO/JCT a 0.1 0.1 0.1 0.1 0.1 

Administration a 0.1 0.1 0.1 0.1 0.1 

Extend Abandoned Mine 

Reclamation Fees 

CBO/JCT a a a a 0.2 0.2 

Administration a a a a 0.2 0.3 

Subtotal 

CBO/JCT b 0.1 0.1 0.1 0.3 0.3 

Administration b 0.2 0.2 0.2 0.4 0.4 -------------------------------------------------------------------------- (Continued) 
CHAPTER THREE THE ADMINISTRATION'S REVENUE PROPOSALS 57 

Table 3-8. 

Continued 

Proposal 

Modify Taxation of Annuities 

Without Life Contingencies 

CBO/JCT 

Administration 

Change Effective Date on 

Taxation of Annuities 

CBO/JCT 

Administration 

Subtotal 

CBO/JCT 

Administration 

1992 1993 1994 

Broadening the Income Tax Base for Individuals 

b 0.1 0.2 

b 0.2 0.2 

b b b 

b b b 

b 0.1 0.2 

b 0.1 0.2 

Broadening the Income Tax Base for Corporations 

Conform Book and Tax Accounting 

for Securities Dealers' Inventories 

CBO/JCT 0.1 0.4 0.5 

Administration 0.2 0.6 0.8 

Repeal Tax Exemption for Large 

Credit Unions 

CBO/JCT 0.1 0.3 0.4 

Administration 0.1 0.2 0.2 

Disallow Interest Deductions for 

Corporate-Owned Life Insurance Loans 

CBO/JCT 0.1 0.3 0.4 

Administration 0.1 0.3 0.4 

Subtotal 

CBO/JCT 0.3 1.0 1.3 

Administration 0.5 1.0 1.3 

Total 

Revenue-Raising Proposals 

CBO/JCT 0.7 3.3 4.2 

Administration 0.8 3.4 4.3 

1995 

0.3 

0.3 

b 

b 

0.3 

0.3 

0.5 

0.8 

0.4 

0.2 

0.6 

0.5 

1.5 

1.5 

4.6 

4.7 

SOURCES: Congressional Budget Office; Joint Committee on Taxation; Office of Management and Budget. 

a. Not yet in effect. 

b. Less than $50 million. 

1996 1997 

0.5 0.8 

0.4 0.5 

b b 

b b 

0.5 0.8 

0.4 0.5 

0.5 0.5 

0.8 0.8 

0.4 0.4 

0.2 0.2 

0.7 0.8 

0.6 0.7 

1.6 1.7 

1.6 1.7 

5.0 5.4 

5.1 5.4 
58 ANALYSIS OF THE PRESIDENT'S BUDGET 

munication lines leased by private parties. In 

addition, the current exemption for local calls 

from coin-operated telephones would be repealed. These provisions would be effective 

July 1, 1992. The JCT estimates revenues 

would increase by $0.2 billion in 1992 through 

1997 (see Table 3-8). 

Establish New FCC Fees. The Administration 

proposes establishing fees to cover certain operations of the Federal Communications Commission. Beginning in October 1992, the FCC 

would have the authority to charge fees to 

cover costs of policymaking, rulemaking, and 

enforcement. At present, fees cover only the 

processing of applications. CBO estimates 

that, net of income and payroll tax offsets, establishing the fees would increase revenues by 

about $50 million each year (see Table 3-8). 

Extend Abandoned Mine Reclamation Fees. 

Abandoned mine reclamation fees were extended for three years in the Omnibus Budget 

Reconciliation Act of 1990. They will expire 

on September 30, 1995. The Administration 

proposes extending the fees through fiscal 

year 1997. The existing fee schedule would be 

retained: 35 cents per ton on coal from surface mines, 15 cents per ton on coal from underground mines, and 10 cents per ton of lignite coal. These fees fund grants to states for 

the cleanup of abandoned mines. CBO estimates that, net of income and payroll offsets, 

extending the fees would increase revenues by 

$0.2 billion per year in 1996 and 1997 (see 

Table 3-8). 

Modify Taxation of Annuities Without Life 

Contingencies. The President proposes to tax 

annually the accruing earnings of certain 

annuities. Annuities that have a substantial 

life contingency--that, is those whose total 

payout is linked to the recipient's life span--

would not be affected by the proposal. Exceptions would also be allowed for pension 

annuities and for annuities of structured 

settlements. 

Annuities are investment vehicles sold by 

insurance companies. Investors make an initial cash payment in return for a fixed repayMarch 1992 

ment in the future. Frequently, repayment 

takes the form of monthly or other periodic 

payments. [n life annuities, the periodic 

payments are guaranteed through the life of 

the beneficiary, which makes the actual return 

from the annuity uncertain. If the investor 

has a shorter-than-expected life span, a substantial portion of the principal can be lost; if 

the investor lives longer than expected, the 

total return can be substantial. Life annuities 

are particularly valuable because they insure 

that beneficiaries will not spend their savings 

before they die. 

Under current law, annuity repayments are 

divided into two components- -a return of 

principal and investment income--with the 

division determined by the ratio of the annuity cost to the sum of the expected annuity 

payments. The investment income is included 

in taxable income. This treatment defers the 

taxation of earnings on an investment in an 

annuity until the annuity payment begins, and. 

it allows a relatively slow schedule of interest 

payout. 

Annuities without life contingencies are 

close substitutes for certificates of deposit and 

bonds. The deferral of taxation on annuities, 

however, reduces the effective tax rate on 

these annuities relative to that on certificates 

of deposit or bonds, which are taxed on annual earnings. The President's proposal 

would remove the tax difference between 

these similar investment vehicles by taxing the 

annual earnings on annuities without substantial life contingencies, but would introduce a difference in treatment between annuities with and without substantial life contingencies. 

The JeT estimates that the proposal will 

raise $l.9 billion in 1992 through 1997 (see 

Table 3-8). 

Conform Book and Tax Accounting for 

Securities Dealers' Inventories. The Administration proposes to require securities dealers 

to include in taxable income both unrealized 

gains and losses on year-end securities inventories, ending the tax law's preferential treat-
CHAPTER THREE 

ment whereby losses may be included in taxable income, but gains need not be. Under 

the tax-preferred inventory accounting 

method called "lower of cost or market" 

(LCM), currently available to all businesses, 

dealers' inventory gains are considered taxable 

income typically in the following year when 

the securities are sold. 

The Administration's proposed treatment 

would deem that a sale is not necessary to 

trigger tax recognition of a securities dealer's 

gains or losses on inventory. Under the proposal, all other industries would still be able 

to use the LCM method of inventory accounting because inventories of manufacturing and 

retail firms are more difficult to value at 

market prices. Indeed, securities firms alone 

are required to use market valuation for 

regulatory purposes. The JCT estimates that 

the proposal would raise $2.5 billion over the 

1992-1997 period (see Table 3-8). 

Repeal Tax Exemption for Large Credit 

Unions. Credit unions are not subject to federal income taxes and hence are treated more 

favorably than competing thrift institutions, 

such as savings and loan institutions and 

mutual savings banks. The Administration 

proposes to repeal the tax exemption for large 

credit unions--those with more than $50 million in assets--and tax them like other thrift 

institutions. In 1985, the Reagan Administration proposed repealing the tax-exempt 

status for credit unions with more than $5 

million in assets, and the Carter Administration proposed total repeal in the 1979 budget. The JCT estimates that the proposal 

would raise $2 billion in revenues in the 

1992-1997 period (see Table 3-8). 

Disallow Interest Deductions for CorporateOwned Life Insurance Loans. The Administration proposes to disallow the deduction for 

interest that corporations pay on loans secured by the cash value of life insurance policies. Corporations purchase whole life insurance policies to protect against the death of 

their more important--and increasingly wider 

group of--employees. These purchases provide a tax benefit when corporations take out 

THE ADMINISTRATION'S REVENUE PROPOSALS 59 

a loan with the cash value of the policy as collateral. As with all whole life insurance policies, the buildup of investment income within 

a corporate-owned policy is exempt from tax, 

but a corporation can deduct the associated 

loan's interest expense from its taxable income. In 1986, the Congress limited the size 

of a loan that qualifies for the interest deduction to $50,000 per insured employee, but corporations have responded by spreading 

smaller policies over more employees. The 

JCT estimates that this proposal would raise 

$2.8 billion over the 1992-1997 period (see 

Table 3-8). 

Other Proposals 

The President's budget includes a proposal for 

reducing tariffs, most of which can be accomplished by executive action, but some of 

which requires legislative action. Tariff reduction accomplished by executive action is 

not counted for pay-as-you-go purposes. In 

addition, the Budget Enforcement Act of 1990 

excludes from pay-as-you-go direct spending 

and receipts resulting from "full funding of, 

and continuation of, the deposit insurance 

commitment in effect on the date of enactment of the section." Consequently, CBO 

concludes that the proposal to prohibit 

double-dipping by thrifts should be excluded. 

The provision would affect deposit insurance 

costs, but it would not alter the deposit insurance commitment. 

Implement the Uruguay Round. The President's budget takes into account carrying out 

the Administration's position on reducing tariffs in the Uruguay Round of the General 

Agreement on Tariffs and Trade. lmplementation would reduce customs duty receipts. The 

Uruguay Round of negotiations began in 1986 

and may conclude in 1992. Once a trade 

agreement is reached, the agreed-upon tariff 

reductions can be put in place through a combination of executive and legislative action. 

The Omnibus Trade and Tariff Act of 1988 

granted the President the authority to lower 

certain tariffs by specified amounts. Further 

tariff reduction requires legislative action and 
60 ANALYSIS OF THE PRESIDENT'S BUDGET 

is subject to pay-as-you-go requirements. The 

Administration's position on reducing tariffs 

in the Uruguay Round included in the budget 

would require legislative action for a small 

portion of the reduction; the bulk of the reduction could be accomplished by executive 

action. The Administration estimates that the 

proposed reduction of tariffs involving executive action would reduce customs duty receipts by $9.8 billion over the 1993-1997 period and that requiring legislative action would 

reduce receipts by an additional $0.1 billion. 

(see Table 3-9). 

Prohibit Double-Dipping by Certain Thrifts. 

The Administration proposes legislation to 

deny certain tax benefits for pre-1989 acquisitions of insolvent thrift institutions. In the 

past, the Federal Savings and Loan Insurance 

Corporation (FSLlC) often guaranteed to reimburse the acquirer of an insolvent thrift for 

any subsequent capital losses on certain covered assets. Under a legal view widely held by 

some at the time, the acquirer did not have to 

include the FSLlC reimbursement in taxable 

income. However, the loss on the covered assets was deductible against other taxable income in the year of the sale--a combined 

Table 3-9. 

March 19C}2 

treatment called "double-dipping" that allowed the acquirer to deduct taxable income 

from a loss that was never incurred. The 

FSLIC recognized the value of these tax benefits and negotiated to share them with the 

acquirer. 

The tax benefits were repealed in 1989, but 

assets covered under earlier acquisitions have 

continued to receive the benefits. Many of 

these assets have yet to be sold and the tax 

benefits yet to be taken. The Internal Revenue Service now holds that the benefits are 

not allowed under current law, but it is unclear whether the IRS would prevail in court. 

The Administration proposes for the first time 

to clarify tax treatment by writing into law 

that the losses reimbursed by the FSLIC are 

not deductible, effective March 4, 1991. The 

JCT estimates that the proposal would raise 

$0.5 billion in revenues through 1997 (see 

Table 3-9). A part of the increase in revenues 

would be offset by a reduction in offsetting receipts of $0.2 billion (scored as increased outlays) because the federal government would 

receive fewer payments in the form of tax 

sharing from acquirers. 

CBO/JCT and Administration Estimates of Other Proposals 

(By fiscal year, in billions of dollars) 

Proposal 1992 1993 1994 1995 1996 1997 

Implement Uruguay Round 

ofthe Multilateral Trade 

Negotiations 

CBO/JeT a a a a a a 

Administration b -0.4 -1.1 -1.9 -2.8 -3.7 

Prohibit Double-Dipping by 

Thrifts Receiving Federal 

Financing Assistance 

CBO/JeT 0.2 0.2 0.1 0.1 0.1 -0.1 

Administration 0.4 0.4 0.1 c c 0.1 

Total 

CBO/JeT 0.2 -0.3 -1.0 -1.8 -2.7 -3.7 

Administration 0.4 c -1.1 -1.9 -2.8 -3.5 

SOURCES: Joint Committee on Taxation; Office of Management and Budget. 

a. CBO has included the Administration's estimate. 

b. Not yet in effect. 

c. Less than $50 million. 
Chapter Four 

The Administration's 

Proposals for Defense 

and International Affairs 

The Administration's budgets for defense 

and international affairs reflect the end 

of the Cold War. For 1993, the defense 

plan would take funding below the levels 

agreed on in the 1990 budget summit; by 

1997, defense would reach a level 18 percent 

lower than an average budget for the last one 

and a half decades of the Cold War. The 

cha~ge in the international affairs budget is 

evident from the economic, humanitarian, 

and technical assistance programmed for 

Eastern Europe and the republics of the 

former Soviet Union. 

The Budget Enforcement Act (BEA) set 

ceilings for discretionary programs, including 

specific 1993 caps for defense and international affairs programs. The Administration's 

budget would fund both of those functions at 

levels roughly 2.5 percent below the BEA 

caps. [n dollar terms, the reduction in budget 

authority in defense is much larger--$6.8 billion compared with $600 million for international affairs (see Table 4-1). Although the 

Congressional Budget Office estimates that 

defense outlays will fall below the BEA caps, 

it also estimates that outlays for international 

affairs will exceed the caps. 

The Peace Dividend in 

the Administration's 

Defense Budget 

With the end of the Cold War, many people 

look to the defense budget for a peace dividend--that is, for funds that can be redirected 

to other purposes including domestic programs, tax cuts, and deficit reduction. 

In a sense, a substantial peace dividend has 

already been achieved: the limits on defense 

spending established in the 1990 budget agreement for the 1991-1993 period, and those proposed by the President in last year's budget, 

represent a substantial reduction from the 

level provided in 1990, the last year of the 

Cold War. For 1997, the President's 1992 

budget anticipated budget authority roughly 

23 percent below the inflation-adjusted levels 

of 1990; over the 1991-1997 period, spending 

would be some $410 billion below the 1990 

baseline leveL 

The key question now is, how much more 

can defense spending be reduced? In other 

words, what additional dividend might be 

reaped after the failed coup, the disintegration 

of the Soviet Union, and the emergence of 15 

independent republics? 

By means of proposals to rescind a net 56.6 

billion from 1992 funding and to scale down 

requests for the next five years by about $43 

billion, the current defense request would increase the dividend by $50 billion. Of the 

savings to be realized between 1993 and 1997, 

about $29 billion would come from ending 

only two programs--the B-2 bomber and the 

Seawolf submarine (see Box 4-1 and Table 

4-2). The remaining $14 billion would be 

obtained primarily by cutting more than that 

amount in other purchases of weapons and 

adding funds for operation and maintenance. 
62 ANALYSIS OF THE PRESIDENT'S BUDGET 

The Budget Enforcement Act dealt specifically with defense through 1993 only. For 

1994-1995, the BEA provided a total amount 

for discretionary spending; the allocation between defense and nondefense would be made 

in those years. If nondefense discretionary 

budget authority were held at 1992 levels (in 

real terms) through 1995, reductions in defense over this period would have to reach 

$57 billion to stay within the BEA limits. 

That represents $33 billion in additional reductions compared with the $24 billion proposed by the Administration over this period. 

Obviously, if nondefense discretionary programs were to grow in real terms within the 

BEA totals, the defense budget would have to 

absorb an even greater reduction. 

Comparisons with Cold 

War Defense Budgets 

With the dissolution of the Warsaw Pact and 

the unraveling of the Soviet Union, the 

Administration's proposals would reduce the 

defense budget to levels lower than the averTable 4-1. 

March 1992 

age Cold War budget that prevailed over the 

1975-1990 period. That period begins at the 

spending trough following the Vietnam War, 

encompasses the peacetime buildup that 

ended in 1985, and continues through the 

1986-1990 retrenchment. The all-volunteer 

force was in effect, with its attendant costs, 

throughout the period. In addition, the 

1975-1990 weapons are comparable with the 

weapons of the 1990s, and so are their acquisition and operating costs. With full adjustment for inflation, the average budget for this 

period would total about $307 billion in 1993 

and $356 billion in 1997. 

The transition to the post-Cold War budget 

will come gradually. By 1997, the Administration would reduce military personnel levels to about 1.6 million people--23 percent below the 1975-1990 average. But overall funding would be only 18 percent lower (see Table 

4-3 on page 65). What explains that disparity? 

The answer can be found in operation and 

maintenance (O&M), a set of accounts devoted to meeting everyday expenses, and in 

research, development, test, and evaluation 

(RDT &E), accounts representing investment 

in new weapons. 

Comparison of the Administration's Request for Defense and International 

Affairs with the BEA Caps for 1993 (In millions of dollars) 

Defense 

Discretionary Budget Authority 

Caps as Determined by OMB 

Administration's Request as Estimated by CBO 

Difference 

Caps as Determined by OMB 

Administration's Request as Estimated by CBO 

Difference 

SOURCE: Congressional Budget Office. 

Discretionary Outlays 

289,035 

282,186 

6,849 

296,824 

293,462 

·3,362 

NOTE: BEA = Budget Enforcement Act; OMB Office of Management and Budget. 

International 

Affairs 

22,758 

22,161 

-597 

20,591 

21,086 

495 
CHAPTER FOUR PROPOSALS FOR DEFENSE AND INTERNATIONAL AFFAIRS 63 

Force Operations 

In 1997, funding to operate forces would be 

17 percent lower in real terms than it is this 

year and about 18 percent lower than the 

1975-1990 average. Lower personnel levels 

obviously require less money. Although funding for O&M would fall at about the same 

rate as military strength compared with today, 

it would fall less than one-half as much as 

military strength compared with the 1975-1990 

average. For a comparison of 1990.and 1997 

forces, see Table 4-4 on page 66. 

Military Personnel. The Administration proposes to cut funding for the military personnel 

accounts somewhat more than it proposes to 

reduce personnel strength. Normally, one 

would expect costs to be proportional because 

these accounts fund little other than military 

pay. Some of the extra dollar savings can be 

traced to the Department of Defense's 

(DoD's) payments to cover the future costs of 

retirement benefits as they are earned each 

year. An independent board of actuaries estimates the appropriate charge for each payment to the military retirement trust fund. 

Beginning in 1994, the budget assumes that 

the actuaries will not charge DoD as much as 

it now does for the retirement contribution. 

The annual price is assumed to fall by almost 

$3 billion per year based on assumptions 

about pay raises and interest rates over the 

long term. The actuaries may not agree with 

this estimating proposal. 

At first glance, this proposition would appear to reduce the deficit, but that will not be 

the case even if the actuaries prepare the estimates as expected. The estimates would be 

deficit neutral at best because forgone receipts 

in the trust fund would cancel outlay savings 

in defense. But under the fixed caps of the 

BEA, that change could produce a greater 

deficit--through the increased discretionary 

spending that results from the way effects on 

outlays are categorized. The 000 savings on 

Box 4-1. 

The Administration's Rescission and 

Supplemental Proposals for 1992 

In addition to the request for 1993, the Administration is asking the Congress to rescind or 

cancel about $7.7 billion provided for 1992 and 

prior years. The details of the rescission proposal have not been announced, but the Department of Defense has categorized them as follows 

(budget authority in billions of dollars): 

Funding for programs that 

have been terminated 

Funding for programs in excess 

of requirements 

Funding for programs that do not 

contribute to defense 

Funding for programs that cannot 

be sustained 

Funding that cannot be effectively 

used in 1992 

Total 

4.1 

2.2 

0.4 

0.7 

0.4 

7.7 

The Administration is also proposing additional funding for 1992 for environmental programs on 000 installations. The $1.1 billion in 

supplemental funds would aim at complying 

with federal, state, and local environmental laws 

and regulations. Thus. the net effect of the 

proposals for 1992 would be to reduce defense 

funding below the Budget Enforcement Act 

ceiling by $6.6 billion. 

Until the Administration forwards more details, it will be hard to interpret how 000 has 

grouped the rescission proposals. Presumably, 

the $3 billion provided in 1992 and previous 

years for Seawolf submarines will be rescinded. 

Other programs that 000 considers marginally 

useful will include items added by the Congress 

without a request from the Administration. The 

$1.9 billion appropriated to buy equipment for 

Reserve and National Guard components, as 

well as funding for university research initiatives, could be among those items. 
64 ANALYSIS OF THE PRESIDENT'S BUDGET 

outlays are categorized as discretionary spending, and the forgone trust fund receipts are 

considered mandatory. At this point, the proposed estimate would appear to be deficit 

neutral. However, because the BEA sets a 

cap for discretionary spending, the proposal 

would really make room for more discretionary spending--for which there would be 

no offsetting change in the budget for mandatory accounts. To avoid an increase in the 

Table 4-2. 

March 1992 

deficit, the discretionary spending caps would 

have to be adjusted downward. 

As part of its regional defense strategy, the 

Administration seeks a balance between active 

and reserve forces. Just what that balance 

should be, however, has raised some controversy. The budget would cut reserve forces 

less than was proposed a year ago, at least in 

part because the Congress resisted last year's 

Proposed Major Spending Changes in the President's Budget for Function 050, National Defense 

(By fiscal year, in billions of dollars) 

Cumulative 

Five-Year 

1993 1994 1995 1996 1997 Savings 

Budget Authority 

President's 1992 Budget 288.4 289.4 292.8 295.2 300.6 

Proposed Changes 

Military personnel -0.3 -1.0 -1.4 -0.9 -1.2 -4.9 

Operation and 

maintenance 3.1 1.3 1.8 2.4 3.1 11.7 

Procurement -11.3 -9.2 -10.4 -12.3 -12.9 -56.1 

RDT&E -1.6 0.1 0.9 1.4 1.8 2.6 

Atomic energy defense 0 -0 -0 -0 -0.1 -0.1 

Other defense 2.7 1.1 0.7 0 -0.6 3.8 

Total -7.4 -7.8 -8.5 -9.5 -10.0 -43.1 

President's 1993 Budget 281.0 281.6 284.3 285.7 290.6 

Outlays 

President's 1992 Budget 294.1 288.7 289.0 292.1 297.2 

Proposed Changes 

Military personnel -0.3 -1.0 -1.4 -0.9 -1.2 -4.9 

Operation and 

maintenance 2.6 1.5 1.7 2.3 2.9 11.0 

Procurement -3.3 -6.0 -8.2 -9.6 -11.1 -38.2 

RDT&E -1.3 -0.6 0.4 1.0 1.5 1.0 

Atomic energy defense -0.1 -0.1 -0.1 0 -0.1 -0.4 

Other defense 0.5 0.9 1.5 1.3 0.2 4.3 

Total -1.9 -5.3 -6.1 -6.0 -7.8 -27.1 

President's 1993 Budget 292.2 283.4 282.9 286.1 289.4 

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

NOTES: This table shows the 1992 and 1993 budget requests as estimated by CBO. The estimate of the 1992 request Includes an 

adjustment for inflation lower than previously assumed. 

RDT&E = research, development, test, and evaluation. 
CHAPTER FOUR PROPOSALS FOR DEFENSE AND INTERNATIONAL AFFAIRS 65 

proposals. Com pared with 1992 levels, reserve strengths would be scaled back by about 

18 percent, and active forces would be roughly 13 percent below today's levels. Nevertheless, under the Administration's proposals, 

active troop strength would fall by 23 percent 

and reserve strength by 7 percent, compared 

with the 1975-1990 average. In other words, 

the reserves would constitute a larger share of 

the force in 1997 than they did over the 1975-

1990 period and a slightly smaller share than 

they do today. As shown in Table 4-4, reserve 

Table 4-3. 

combat forces would comprise a relatively 

greater portion of Army divisions, carrier air 

wings, and other tactical air wings. 

Operation and Maintenance. O&M accounts 

pay to fuel, repair. and maintain weapons; 

provide military personnel with medical care, 

food, housing, and other support services; and 

maintain and operate bases worldwide. The 

accounts pay most of the civilians DoD employs; in fact, 40 percent of all O&M funding 

goes for civilian salaries. O&M budgets pose 

Comparison of the President's Budget for 1997 with an Average Cold War 

Budget, 1975-1990, and the CBO Baseline 

Category 

Average 

Cold War 

Budget 

(1975-1990) 

CBO 

Baselinea 

President's 

Budget 

Budget Authority (Billions of 1997 dollars) 

Department of Defense--Military 

Operations 

Military personnel 103.9 94.6 75.6 

Operation and maintenance 99.0 105.8 90.2 

Family housing 3.7 4.3 3.7 

Subtotal 206.7 204.7 169.5 

Investment 

Procurement 95.9 75.7 63.1 

RDT&E 36.6 45.0 36.0 

Military construction 6.4 5.8 5.5 

Subtotal 138.9 126.5 104.6 

Other 1.9 3.0 0.5 

Total 347.5 334.3 274.6 

Other Defense 8.4 15.3 16.0 

Total, National Defense 355.9 349.6 290.6 

Manpower (Thousands) 

Military 

Active 2,105 1,865 1,626 

Reserve 987 1,120 920 

Civilians 1,064 1,001 904 

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

NOTE: RDT&E = research, development, test, and evaluation. 

Budget Less 

the Following 

(Percentage change) 

Cold War CBO 

Average Baselinea 

-27 -20 

-9 -15 

-2 

-18 -17 

-34 -17 

-2 -20 

-14 

-25 -17 

·73 ·83 

-21 -18 

4 

·18 -17 

-23 ·13 

-7 18 

-15 -10 

a. The CBO baseline is either constrained to (kept within) the BEA caps or unconstrained. The unconstrained baseline adjusts the 

regular appropriations for 1992 for inflation each year through 1997. This table refers to the unconstrained baseline less the 

projection of appropriation for operation Desert Storm. 
66 ANALYSIS OF THE PRESIDENT'S BUDGET 

special problems because they fund such a 

wide variety of functions. It is not always 

clear, particularly in the out-years, what 

would and would not be funded in a budget 

request. Even though force levels in 1997 will 

be much lower than during the Cold War, or 

even now, at that point the Administration's 

O&M funding would be only 9 percent lower 

than an average Cold War budget between 

1975 and 1990. 

Why should the cut in O&M be less than 

that in other accounts? One explanation 

might be found in the costs of an all-volunteer 

force. Military pay rose dramatically as the 

Table 4-4. 

Summary of Forces and Manpower, 1990 and 1997 

1990 

Army Divisions 

Active 18 

Reserve 10 

Aircraft Carriers 15 

Carrier Air Wings 

Active 13 

Reserve 2 

Battle Force Ships 546 

Tactical Fighter Wi ngs 

Active 24 

Reserve 12 

Strategic Bombers 268 

Forces 

March [992 

nation abandoned conscription in favor of a 

volunteer force, but pay is only part of a soldier's compensation. 000 also compensates 

its troops with such in-kind support as medical care, billeting, child care services, and base 

transportation. Raising the troops' standard 

of living in those ways uses O&M funds. After certain thresholds have been passed, O&M 

cuts may end up being roughly proportional 

to strength cuts. (See discussion of base closures below.) Two other cost factors involve 

modern weapons and medical care: today's 

complex weapons may be more expensive to 

use in terms of fuel consumption and spare 

parts; similarly, per capita medical care for 

Changes 

1997a Number Percent 

12 6 33 

8b 2 20 

12 3 20 

11 2 15 

2 0 0 

451 95 17 

15 9 38 

11 1 8 

180 88 33 

Manpower (Thousands) 

Military 

Active 2,070 1,626 444 21 

Reserve l,128C 920 208 18 

Civilian 1,073 904 169 16 

SOURCES: Congressional Budget Office based on data from the Department of Defense. 

a. Planned forces for 1997 are assumed to be the same as those for 1995, 

b. Includes two cadre divisions. 

c. Does not Includ~ about 26,000 members of the Selected Reserve who were activated for Operation Desert Storm. They are 

included in the 1990 active manpower total. 
CHAPTER FOUR PROPOSALS FOR DEFENSE AND INTERNATIONAL AFFAIRS 67 

active and retired personnel, and their dependents, is more expensive nowadays. 

Although one might expect the projected 

changes in DoD's O&M and civilian expenditures to be roughly proportional, they are not. 

Compared with a Cold War budget between 

1975 and 1990, civilian employment would 

decline much more than O&M funding, but 

still less than active troop strength. The larger 

reduction in the number of civilians suggests 

that support functions, particularly base operations and central logistics, would suffer 

more than force· and training programs. 

Another possibility is that the Administration 

is moving toward substituting contract services 

for those the government supplies. 

Indeed, some of those changes may already 

be in place. A comparison with the unconstrained CBO baseline projection for 1997 

reveals that O&M funding would be cut more 

than civilian employment (15 percent versus 

10 percent).l In fact, O&M funding decreases 

at the same rate as active troop strength, but 

civilian employment decreases only 70 percent 

as fast. 

Why is the O&M cut so much more in 1997 

relative to the present? Although the answer 

is far from clear, it can probably be traced to 

the build u p of the 1980s. During that period, 

DoD might have established a base level of 

funding consistent with new weapons, a raised 

standard of living, and renewed emphasis on 

training and readiness. With that higher base, 

there was simply more to cut. But the 

Administration's proposals for O&M would 

remOve relatively few civilians from the 

baseline. Perhaps to sustain force levels, the 

resources devoted to force operations and 

training might be reduced by a relatively large 

amount, and resources devoted to supporting 

those forces--both weapons support and the 

soldier's standard of living--would remain 

I. The CBO baseline is either kept within the BEA caps 

or unconstrained. The lalter represents 1992 funding 

levels adjusted for inflation. All references in this 

chapter to the ( 80 baseline are to the unconstrained 

version, but they exclude projections of Desert Storm 

appropriations 

relatively plentifuL Moreover, any closing of 

bases after 1997 may ultimately lower civilian 

employment. 

Base Closures. Most of the savings from closing military bases come from lower personnel 

costs. So far there have been two rounds of 

decisionmaking in this area. About 120 installations have been slated for closing, but to 

date few major bases have been closed completely. The delay retlects in part the time 

needed to transfer activities to other places, 

and it may also explain why the civilian cuts 

lag behind those in military personnel. Moreover, current law calls for two more rounds of 

discussions to decide which bases to close in 

1993 and 1995. 

The net, one-time costs of closing bases 

generally appear in the budget for military 

construction, but O&M accounts will eventually realize most of the recurring savings. The 

Congress has provided about $2.3 billion 

through 1992 to meet those one-time costs, 

and the Administration is seeking another 

installment of $2.2 billion for 1993. Once the 

process of closing bases is complete, DoD expects annual savings to total more than $2 billion for rounds one and two. About 35,000 

civilian positions would be eliminated. Of 

course, the next two rounds of closing bases 

will increase the annual dollar savings and 

reduce civilian employment even more. 

Family Housing. The family housing account 

covers the costs of providing quarters "in 

kind II to active-duty military personnel. 

When service members do not receive housing 

in kind, they receive instead pay supplements 

(in the military personnel accounts) that enable them to secure housing in the community. Compared with this year, funding for 

family housing would be cut by the same 

proportion as active-duty personnel. But 

compared with the 1975-1990 average, funding 

would drop only 2 percent, despite a 23 percent drop in the population served. One reason for this might be that the Administration 

plans to provide people with government 

quarters Instead of a housing allowance in 

their pay for private-sector housing. 
68 ANALYSIS OF THE PRESIDENT'S BUDGET 

Investment in Weapons 

000 could face a daunting modernization 

program after 1997, when scheduling calls for 

)everal expensive weapons to be bought for 

the first time. In fact, CBO has projected 

that, under last year's plan, a period of annual 

real growth will soon replace the current period of annual real decline in defense funding.2 

The Administration has now announced a 

new acquisition strategy that will contribute to 

holding down the projected growth. 

000 has chosen to concentrate on developing weapons technology at the expense of producing weapons immediately. The new approach would continue to fund RDT&E, including research into manufacturing and operational risks. It would, however, postpone 

the actual production of some new weapons 

until various technical risks are minimized 

and military threats demand their deployment. The Administration's budget proposals 

show evidence of the differential emphasis on 

RDT&E versus procurement. 

Procurement. The 1993 procurement budget 

is marked by the cancellation of, or sharp reductions in, some high-profile weapons. Procurement of the B-2 would be capped at 20 

aircraft instead of the 75 DoD has recently 

sought or the 132 in the original plan. Outright cancellations and deferrals would similarly lower the anticipated wave of modernization. For example, the Seawolf submarine 

contract would be canceled, the Army would 

defer purchasing the new Comanche attack 

helicopter and forgo a new air defense system, 

and the Air Force would not buy the small 

intercontinental ballistic missile known as 

Midgetman. 

Overall, procurement would be 34 percent 

lower in 1997 than the 1975-1990 Cold War 

average--a cut exceeding that in military 

forces. Com pared with this year, purchases of 

2. Congressiunal Budget Office. "Fiscal Implications of the 

Administratiun's Propused Base Force," eBO Staff 

Memurandum (December ll)l)l). 

March 1992 

weapons would fall by about 17 percent, a bit 

more than the reduction in forces. [n the last 

two years, 000 has stopped buying many 

systems, including such weapons used in the 

Persian Gulf War as the Abrams tank, Apache 

helicopter, and F -15 aircraft. 000 has also 

stopped purchasing the Peacekeeper (MX) 

missile and Trident submarine strategic systems, and it has canceled plans to buy nextgeneration stealth weapons-the Navy's Advanced Tactical Fighter and the A-12 attack 

aircraft. Most other weapons would be purchased in smaller numbers because there 

would be fewer force~ to use them. 

Notwithstanding those major changes in 

weapons programs, 000 still faces decisions 

about major weapons that could lead to 

growth in procurement funding. During the 

next decade, DoD must decide whether to buy 

weapons--and, if so, what kind--to modernize 

the Navy's attack submarines and tactical 

aircraft, the Army's fleet of armored vehicles, 

and the Air Force's fleet of tactical aircraft. If 

the new acquisition strategy precludes procuring many of those weapons, thereby creating 

older or smaller military forces, increases in 

procurement funding will not be needed. If 

most of the new weapons are purchased, procurement funds will have to rise above 

planned 1997 levels. 

RDT&E. The Administration's defense budget would provide nearly $40 billion a year 

between 1993 and 1997 for RDT&E of weapons, although funding levels gradually decrease during this period. [n 1997, the $36 

billion projected for those activities would be 

about 20 percent below the amount projected 

in the CBO baseline--in other words, about 20 

percent lower than today's funding in real 

terms. In 1997, however, RDT&E programs 

would remain only 2 percent lower than the 

1975-1990 average. The relatively elevated 

level of RDT&E funding can be traced 

primarily to the Strategic Defense Initiative 

(SOT). At about $6 billion per year, SOl 

funding would be much greater than average 

funding for strategic defenses between 1975 

and 1990. 
CHAPTER FOUR PROPOSALS FOR DEFENSE AND INTERNATIONAL AFFAIRS 69 

Other National Defense Programs 

The atomic energy defense activities of the 

Department of Energy dominate funding for 

the remaining national defense programs. 

During the Cold War, the nuclear weapons 

complex conducted research on materials and 

weapons, produced weapons, and engaged in 

related activities. Most production was halted 

in the late 1980s, when safety and environmental issues came to light, and the funding 

was used for environmental restoration and 

safety measures. 

It is hard to make precise estimates of the 

costs necessary to clean up the environment; 

the size of the problem has not yet been fully 

determined, and cures remain controversial 

and elusive. The funding request for 1993 is 

more than $500 million higher than last year's 

projection for 1993 and $900 million higher 

than the amount provided for 1992. 

There are many uncertainties in estimating 

cleanup costs. For example, the Energy Department plans to complete its cleanup by the 

year 2019; yet, the technology to treat many of 

the department's unique waste streams does 

not now exist, and plans for waste storage at 

the Waste Isolation Pilot Plant have been delayed by lawsuits. Moreover, responsibilities 

under laws and agreements with other federal 

agencies, state and local governments, and Native Americans are not firm. On the brighter 

side, some new methods of treatment are 

bringing costs below what had been anticipated. 

The Administration's budget proposals 

would continue to provide a high level of 

funding for restoring the environment. After 

an increase of 25 percent in 1993, the projected budget grows by 10 percent each year 

through 1997. 

The Budget Request for 

International Affairs 

The Congress has been asked to consider at 

least two requests for international affairs. 

One concerns regular appropriations for the 

year in progress. Unable to forge a bill for 

some international activities in 1992, the Congress passed a six-month continuing resolution 

to maintain foreign assistance programs and 

the Export-Import Bank (Eximbank) pending 

a funding agreement. The Administration is 

also asking for $550 million in additional 1992 

funds to aid states of the former Soviet Union, 

support international peacekeeping activities, 

and undertake other initiatives. 

The second concerns the request for 1993, 

which includes estimates fOl fiscal years 1994 

through 1997. In 1993, budget authority for 

international affairs would total $19.4 billion, 

or only 1 percent of all spending in the President's budget (see Table 4-5). Programs 

funded annually--discretionary programs--

would receive $22.2 billion, and funding for 

the so-called mandatory accounts would total 

a negative $2.8 billion, reflecting offsetting 

collections. 

The estimates for fiscal years 1994 through 

1997 may be incomplete and therefore misleading. The international affairs budgets of 

the last decade have typically included supplementals for the year in progress, increases 

for the upcoming year, and real cuts thereafter. The five-year profile in the 1993 budget 

probably does not represent a lasting plan for 

international affairs. Indeed, for many programs the projections for fiscal years 1994 

through 1997 are frozen at the level requested 

for 1993--a pattern reminiscent of previous 

budget requests: the same approach has been 

applied to domestic programs overaLL. 
70 ANALYSIS OF THE PRESIDENT'S BUDGET March 1992 

Table 4-5. 

Proposed Major Spending Changes in the President's Budget for Function 150. 

International Affairs (By fiscal year, in billions of dollars) 

1992 1993 1994 1995 1996 1997 

Budget Authority 

CBO Baselinea 19.1 19.0 19.9 20.9 21.4 22.3 

Policy Changes 

Assistance to former Soviet Union 0.2 0.4 0 a a 0 

Enterprise for the Americas 

Loan modifications and Investment Fund 0.4 0.4 0.4 0.1 0.1 0 

Loan liquidating accounts -0.5 -0.3 -0.3 0.2 0.2 0.2 

Peacekeeping 0.4 0.3 0.3 0.3 0.3 0.3 

International Monetary Fund quota increase 12.3 0 a a 0 0 

Capital projects 0 0.1 0.1 0.1 0.1 0.1 

Food for Peace (P.L. 480) 0 -0.2 -0.3 -0.3 -0.4 -0.4 

Security assistance 0.5 -0.4 -0.6 -0.9 -1.1 -1.4 

Other 0 0.1 -0.3 -2.2 

Total 13.2 0.4 -0.7 -1.4 -2.4 -3.4 

President's 1993 Budget 

as Estimated by CBO 32.3 19.4 19.3 19.5 19.1 18.8 

Outlays 

CBO Baselinea 17.3 17.1 17.9 18.6 19.3 20.2 

Policy Changes 

Assistance to former Soviet Union 0.1 0.2 0.1 0.1 0.1 0 

Enterprise for the Americas 

Loan modifications and Investment Fund 0.3 0.3 0.4 0.1 0.1 0.1 

Loan liquidating accounts -0.5 -0.3 -0.3 0.2 0.2 0.2 

Peacekeeping 0.4 0.3 0.3 0.3 0.3 0.3 

Capital projects 0 0 0 0.1 0.1 0.1 

Food for Peace (P.L. 480) 0 -0.2 -0.2 -0.3 -0.3 -0.4 

Security assistance 0.1 0 -0.2 -0.6 -0.9 -1.1 

Other 0 0.1 0 -0.4 -0.9 

Total 0.2 0.4 0.1 -0.5 -1.4 -2.3 

President's 1993 Budget 

as Estimated by CBO 17.5 17.5 17.9 18.1 18.0 17.9 

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

a. The CBO baseline is either constrained to (kept within) the BEA caps or unconstrained. The unconstrained baseline adjusts either 

regular appropriations or the continuing resolution for 1992 for inflation each year through 1997. This table refers to the unconstrained baseline. 
CHAPTER FOUR PROPOSALS FOR DEFENSE AND INTERNATIONAL AFFAIRS 71 

Although bilateral foreign aid is the bestknown program in the international affairs 

budget, it has competitors for funding. The 

State Department needs money to conduct 

foreign affairs. The United States also contributes to international organizations and 

peacekeeping activities. Such federal operations as the U.S. Information Agency promote information and exchange activities, and 

Eximbank advances U.S. economic interests. 

The 1993 request for discretionary funding in 

international affairs is distributed as follows: 

Foreign Aid 

State Department 

Budget Authority 

(Billions of dollars) 

and Other Agencies 

International Organizations 

Information and Exchange 

Financial Programs 

Total 

Foreign Aid 

15.8 

2.9 

L4 

1.4 

0.7 

22.2 

Foreign aid represents 71 percent of the international affairs function, or $15.8 billion. 

Of that, $8.4 billion is for development and 

humanitarian assistance programs, which are 

designed to promote economic development 

and eliminate human suffering. In recent 

years, the United States has spent a relatively 

small share of its gross national product 

(GNP) on development assistance compared 

with certain other leading industrialized 

countries. According to the Organization for 

Economic Cooperation and Development, in 

1990, the latest year for which figures are 

available, the United States spent more in 

dollar terms on development assistance than 

did Japan or Germany, but those countries 

spent more in relation to the size of their 

economies: 0.2 percent of GNP for the 

United States, 0.3 percent for Japan, and 0.4 

percent for Germany. 

As the world has Changed during the last 

three years, so have the stated goals of the 

U.S. foreign aid program. Instead of strengthening security relationships, they now emphasize strengthening democracy and promoting 

market economies. In meeting these new 

goals, however, the Administration relies on 

existing programs. Funding levels in the proposed budget for most programs differ only 

marginally from current levels. The request 

remains oriented toward the Middle East and 

southern Europe. Nearly $5.3 billion in budget authority, almost 25 percent of the whole 

international affairs request, would continue 

to go to two countries--Israel and Egypt. Another $800 million would cover the costs to 

subsidize $1.1 billion in loans and grants to 

Greece, Turkey, and Portugal. 

Aid to Eastern Europe and the States of the 

Former Soviet Union. After the end of the 

Cold War, the United States began to provide 

aid to Eastern Europe and the former Soviet 

Union. In 1992, aid money has come from 

both the international affairs and the defense 

budgets, as well as through agricultural programs on the domestic side of the budget. In 

1993, the Administration proposes aid from 

international affairs and agriculture programs 

only. The table below provides details. 

Budget Authority 

(Millions of dollars) 

1992 1993 

International Affairs 

(Function 150) 

Food for Peace (P.L. 480) 1() 10 

Economic Support Fund 0 100 

Humanitarian and 

technical assistance 15011 350 

Support for Eastern 

European democracies 40011 450 

Subtotal 560 910 

Defense (Function (50) 

Weapons destruction 400 0 

Humanitarian aid 100 0 

Agriculture 

(Function 350) 

Subsidy cost of guarantees 490b 490b 

Total 1.550 l,400 

a. Proposed 1992 funding. 

b. No specific request has been made. The estimate 

consists of $ L2 million for Eastern Europe and 

$478 miUion for the former Soviet Union. 
72 ANALYSIS OF THE PRESIDENT'S BUDGET 

Most nonagricultural aid would be in the 

form of technical and humanitarian assistance. 

Funding enacted from 1992 defense appropriations will assist with the destruction and nonproliferation of nuclear weapons, as well as 

with humanitarian assistance. Proposed 1992 

and 1993 funding from international programs 

aims to relieve hardship and assist the transition to democracy. 

Agriculture-related assistance appears as 

loan guarantees that enable countries to purchase grain and other agricultural products. 

The levels in the table above represent the 

estimated subsidy cost associated with the 

guarantees. The United States has pledged to 

provide Eastern European countries with $1 

billion in loan guarantees for agricultural 

commodities over five years. Annual estimates for this assistance are uncertain, in part 

because it is not known what level of assistance the countries will use. The levels in 

the table assume that $200 million will be 

provided annually, resulting in subsidy budget 

authority of $12 million each year. 

The level of agricultural aid to the former 

Soviet Union also remains uncertain. The 

United States is providing new guarantees to 

the former Soviet states only if they remain 

current on their interest and principal payments for previous loans. The estimates in 

the table assume that guarantees totaling $2.5 

billion will be issued in 1992, requiring subsidy budget authority of $478 million at a subsidy rate of 19 percent. Because specific plans 

for 1993 have not been announced, any estimate for that year is highly uncertain. CBO 

assumes that aid will continue at estimated 

1992 levels. 

Enterprise for the Americas. The Administration has renewed its request for the Enterprise for the Americas Initiative (EAI)--a program designed to increase trade and investment within the Western Hemisphere. It is 

requesting budget authority of $900 million 

for fiscal years 1992 through 1995 to restructure bilateral debt, and $500 million for fiscal 

years 1992 through 1996 to contribute to an 

investment fund that will be administered by 

March 1992 

the Inter-American Development Bank. Interest on the new debt may support environmental activities in debtor countries. [n addition, the proposal includes a complicated triangular sale of loan assets held by the Commodity Credit Corporation and Eximbank; 

purchasers of the loans would exchange them 

for equity or environmental considerations. 

The debt to be restructured consists primarily of loans for development assistance 

bearing interest rates between 0.75 percent 

and 3 percent a year, with up to 37 years to 

repay. The appropriation request represents 

the difference between the Administration's 

estimate of the present value of the old loans 

and the present value of the new debt instrument that will replace them. That request 

comes on the heels of other debt restructuring 

in the so-called Paris Club, from which the 

Administration derives a two-price system for 

making loans. The EAI and the two-price 

system together raise important issues. Was 

an appropriation required for the Paris Club 

rescheduling? How creditworthy are the affected countries? (See Box 4-2.) 

In addition, the Administration's estimates 

make the loan modifications in the EAI appear less expensive than they really are. The 

Administration first assumes that payment 

streams are drawn out beyond their due date. 

The Administration then discounts the modified streams using risk factors that anticipate 

not being paid on time. That underestimates 

the cost of loan modifications by more than 

50 percent through lowering the present value 

twice for the same reason. Further, the modifications will lower budget outlays in the year 

the loan is modified and raise them thereafter 

as a result of the loss of receipts. 

Peacekeeping Programs. The Administration 

has requested about $350 million annually in 

additional funding for U.S. contributions to 

international peacekeeping activities sponsored by the United Nations. The funds 

would pay the estimated U.S. assessments for 

peacekeeping, mainly in Yugoslavia, EI Salvador, and Cambodia. But the size of the 

relevant forces has not been determined. 
CHAPTER FOUR PROPOSALS FOR DEFENSE AND INTERNATIONAL AFFAIRS 73 

Thus, the amount of the U.S. contribution, 

which equals about 30 percent of the total 

funding, is unknown. The press has quoted 

State Department officials as saying that even 

the amount requested may be insufficient for 

current or planned peacekeeping. 

Other International Programs 

The Administration's budget includes. $12 

billion to meet the U.S. share of an increase 

in the deposits of the International Monetary 

Fund (IMF) in 1992. For the 1993-1997 period, the budget calls for a new $500 million 

program for capital projects and also for the 

reduction of other programs, including Food 

for Peace (Public Law 480) and security assistance. The 1993 requests for most other 

programs approximate the levels in the CBO 

baseline. 

International Monetary Fund. The IMF lends 

funds to countries having balance-of-payments 

problems, provided the borrower enacts economic reforms. IMF funding comes from 

member countries, which exchange their deposits for an equivalent amount of other 

monetary assets. 

A review of IMF resources and objectives, 

in which the Treasury Department participated, concluded that member nations need to 

increase their deposits--called quotas. The request for 1992 contains $12.3 billion in budget 

authority for the U.S. share of the IMF quota 

increase. (The exact amount depends on exchange rates once the funds have been provided to the IMF.) Transactions with the IMF 

are considered exchanges of monetary assets, 

not part of expenditures or receipts; thus, no 

outlays are estimated for such transactions. 

Box 4·2. 

Credit Reform Issues in International Affairs 

Unlike the defense budget, the budget for international affairs includes many credit programs 

through which the federal government either 

makes or guarantees loans to private entities or 

other governments. The federal budget was recently changed to display the upfront subsidy 

costs of credit programs instead of their cash 

flows. The reform requires that the Congress 

fund the subsidy explicitly and thus requires programs to compete for funding based on their 

long-run cost to the taxpayer. 

The Administration's budget, however, adopts 

a two-price system for loans to foreign countries 

that skews some estimates and implicitly favors 

certain programs. The Administration is using a 

method of estimating that produces substantially 

different values for practically identical loans. 

Debtor nations facing imminent default meet 

with creditor nations in what is called the Paris 

Club to reschedule certain existing loans. Loans 

made before a certain date are eligible for rescheduling. According to the Administration, 

rescheduled loans are effectively subordinated 

to loans that have not been rescheduled; that is, 

if a country experiences balance-of-payments 

problems, its unrescheduled loans would be repaid first. Consequently, a loan that is not rescheduled would have one price and a rescheduled loan a lower price. 

The two-price system implies that the rescheduled loans enjoy a higher subsidy than the 

others. If the Paris Club's actions increase the 

subsidy, under the Credit Reform Act a Congressional appropriation is required to cover the 

higher cost. But the Administration has not 

requested such an appropriation. It claims instead that the rescheduling is an administrative 

action to maximize the value of government assets under the threat of imminent default; 

therefore, the argument goes, there is no loss in 

value. Without such a loss, there is no justification for a two-price system. 

If loans are rescheduled because they are 

about to default. extending even more credit to 

the countries Involved seems questionable. 
74 ANALYSIS OF THE PRESIDENTS BUDGET 

Capital Projects. The budget requests $500 

million in budget authority over five years for 

as-yet-unspecified capital projects using U.S. 

labor and businesses to promote overseas development. Given its worldwide scope, the 

proposed size of the fund is small. As one 

benchmark, planned funding over the next 

five years scarcely exceeds the total the 

United States has spent and will need to 

spend to complete the new U.S. embassy complex in Moscow. 

Public Law 480. The Food for Peace program, popularly known as P.L. 480, is designed to provide concessional loans to foreign governments for the primary purposes of 

promoting U.S. commodities, providing food 

grants in response to emergencies and for 

other humanitarian relief, and aiding the 

poorest countries needing food. The Administration's request for the program is $200 million lower than the CBO baseline in 1993. 

The Administration justifies the reduction by 

citing lower estimated commodity prices for 

the same level of shipments as in 1992. CBO, 

which has higher price estimates for commodities shipped through the program, would 

interpret the Administration's funding request 

as a reduction in shipments. 

Security Assistance Programs. Funding for 

security assistance--programs providing military and economic aid to U.S. allies--accounts 

for nearly 50 percent of the foreign aid budget. The $8 billion requested for 1992 exceeds 

the amount provided in the continuing resolution by $500 million. For 1993, the Administration is requesting $7.4 billion--$350 million 

less than a projection of the continuing resolution for 1992. Less aid has been requested in 1993 for both Pakistan and the 

Philippines, the latter cut reflecting the closing of Clark Air Force Base and a lower payment for the use of military facilities on the 

islands. (The naval facility at Subic Bay is 

expected to close in December 1992.) Compared with the CBO baseline, the increase 

requested for 1992 and the reduction for 1993 

together have little effect on 1993 outlays. 

March 1992 

CBO Reestimates of 

the Budget for Defense 

and International Affairs 

This section describes the differences between 

CBO and Office of Management and Budget 

(OMB) estimates of outlays for defense and 

international affairs programs. For discretionary programs, both sets of estimates assume 

that budget authority equals the amounts requested; the only differences result from categorizing among functions or between mandatory and discretionary. CBO and OMB can 

have different estimates of budget authority 

and outlays for mandatory programs. Nevertheless, the objective is to measure the impact 

of the President's policies on the deficit (outlays). 

National Defense 

For most accounts in the defense budget, 

CBO and OMB have identical estimates of 

outlays. Table 4-6 summarizes the few estimating differences that exist, and the following 

paragraphs discuss them. 

CBO's estimates of defense outlays are lower than the Administration's by about $1 billion in 1992. But CBO's 1993 estimate runs 

about $900 million higher. The two biggest 

differences occur in revolving and management funds. First, CBO projects outlays from 

the Defense Business Operations Fund to be 

$800 million lower in 1992 and $700 million 

higher in 1993 than does DoD or OMB. Second, CBO's estimates of outlays in 1993 from 

the National Defense Stockpile Transaction 

Fund are 5400 million lower than OMB's. 

The Administration proposes to sell materials from the National Defense Stockpile and 

use the proceeds for environmental restoration at military facilities. Because asset sales 

are involved, CBO sets the proceeds from the 
CHAPTER FOUR PROPOSALS FOR DEFENSE AND INTERNATIONAL AFFAIRS 75 

proposal apart from the request for appropriations; OMB did not do that. The effect is 

that CBO has a higher estimate of outlays 

subject to the 1993-1995 BEA caps by about 

$600 million per year. 

International Affairs 

CBO reestimates the Administration's international affairs requests in several programs, 

including Food for Peace, other foreign aid, 

the Eximbank, loan liquidating accounts, and 

the Exchange Stabilization Fund. All reestimates are technical in nature; that is, they do 

not involve different economic or legislative 

assumptions (see Table 4-7). 

Discretionary Programs. Compared with the 

Administration's estimates, CBO's estimates 

for discretionary outlays are $500 million 

higher in 1993. However, CBO's reestimates 

Table 4-6. 

of discretionary spending are $200 million to 

$300 million lower in 1995 through 1997. 

Foreign Aid. For fiscal years 1992 and 1993, 

the Administration has lowered its outlay estimates for a number of foreign aid accounts 

from a year ago--in particular, the Foreign 

Military Financing program, the Economic 

Support Fund, the Special Defense Acquisition Fund, and bilateral assistance programs. 

Through the first quarter of fiscal year 1992, 

CBO has discerned no trend justifying such a 

slowdown in outlays, and CBO's 1992-1994 estimates therefore are higher than those of the 

Administration. 

Public Law 480. Based partly on the spending 

slowdown experienced in fiscal year 1991, the 

Administration has estimated lower outlays 

from new budget authority. CBO considers 

the 1991 slowdown to be not a new pattern 

but the result of the reorganization required 

CBO Reestimates of Proposed Spending in the President's Budget for Function 050, 

National Defense (By fiscal year, outlays in billions of dollars) 

1992 1993 1994 1995 1996 1997 

President's 1993 Budget 307.3 291.4 2B3.4 283.2 286.3 289.3 

CBO Reestimates 

Department of Defense 

Defense Business 

Operations Fund -0.8 0.7 0.1 0 0 0 

Stockpile asset sales 0 0 -0.6 -0.6 -0.6 -0.6 

Other revolving funds outlays 0 -0.4 0.6 0.6 0.6 0.6 

Procurement -0.2 0.5 -0.1 -0.2 -0.1 0.1 

Operation and maintenance 0.1 0.1 a b a a 

Other ~ ~ ~ a ~ ~ 

Subtotal -1.0 0.9 b -0.2 -0.1 0.1 

Other Defense b b a b b b 

Total -1.0 0.9 b -0.2 -0.1 0.1 

President's 1993 Budget 

as Estimated by CBO 306.3 292.2 283.4 282.9 286.1 289.4 

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

a. Less than $50 million. 

b. Negative outlay of less than $50 million. 
76 ANALYSIS OF THE PRESIDENTS BUDGET 

by statutory changes in the Food, Agriculture, 

Conservation, and Trade Act of 1990. A slowdown is inconsistent with the Administration's 

plan, announced last December, to accelerate 

obligations to stimulate the economy. Lower 

outlays in fiscal year 1993 are an estimate of 

recoveries of lapsing funds. 

Eximbank Negative Subsidy Receipts. The 

Administration is requesting authority to 

spend receipts collected in an Eximbank 

Negative Subsidy Special Fund--a budget account that accumulates funds when the present value of cash inflows exceeds that of cash 

outflows. The budget's estimate of those receipts is inconsistent with OMB's guidelines 

(in Circular A-34) for the treatment of receipts from negative subsidy loans under credit reform. The inconsistency occurs because 

the budget estimate assumes more receipts 

than the amount prescribed. CBO estimates 

that following the OMB. guidelines would 

lower the amount of budget authority in the 

program account by $76 million, or 10 perTable 4-7. 

March 1992 

cent. With lower budget authority, the bank 

would lack the funds for 7.5 percent of its anticipated loan volume. 

Mandatory Programs. CBO's estimates of 

outlays for mandatory programs are $900 million lower than the Administration's in 1993 

and $500 million to $700 million lower in 

1994 through 1997. 

Loan Liquidating Accounts. The Administration has lowered its estimate of receipts and 

collections in the loan liquidating accounts, 

using a method tied to risk factors developed 

for estimating the cost of new loans under 

credit reform. The lower estimates appear for 

the PL. 480 program, Eximbank, and bilateral loans made by the Agency for International Development before 1992. 

In CBO's view, recent history suggests that 

the Administration should have raised the 

estimates instead. The Administration may 

have resisted that course because it wants to 

CBO Reestimates of Proposed Spending in the President's Budget for Function 150, 

International Affairs (By fiscal year, in billions of dollars) 

1992 1993 1994 1995 1996 1997 

President's 1993 Budget 17.8 18.0 18.6 18.9 18.8 18.7 

ceo Reesti mates 

Discretionary 

Foreign aid 0.4 0.4 0.1 0 0 0 

Food for Peace (P.L. 480) 0.2 -0.1 0 0 0 0 

Export-Import Bank 0 -0.1 -0.1 -0.1 0 0 

Other -0.1 0.2 ~ -0.1 -0.3 -0.2 

Subtotal 0.5 0.5 0 -0.2 -0.3 -0.3 

Mandatory 

Loan liquidating accounts -0.7 -0.6 -0.4 -0.3 -0.1 0 

Exchange Stabilization Fund -0.1 -0.3 -0.4 -0.4 -0.4 -0.5 

Subtotal -0.8 -0.9 -0.7 -0.7 -0.5 -0.5 

Total -0.3 -0.4 -0.7 -0.9 -0.9 -0.8 

President's 1993 Budget 

as Estimated by CBO 17.5 17.5 17.9 18.1 18.0 17.9 

SOURCES; Office of Management and Budget; Congressional Budget Office. 
CHAPTER FOUR PROPOSALS FOR DEFENSE AND INTERNATIONAL AFFAIRS 77 

modify certain loans. Underestimating outlays 

makes the modifications look less costly than 

they really are. 

Exchange Stabilization Fund. CBO estimates 

interest income for the Exchange Stabilization 

Fund using interest rate assumptions from its 

economic forecast for the various foreign currency investments the fund holds. CBO's estimates of these receipts exceed the Administration's estimates by $100 million in 1992, $300 

million in 1993, and about $400 million a year 

thereafter. 

Chapter Five 

The Administration's 

Domestic Proposals 

T he President identifies selected savings 

in the domestic arena that, in isolation, 

will help to trim the deficit modestly. 

The Budget Enforcement Act of 1990 (BEA) 

erected a fence between two broad types of 

domestic spending: discretionary spending 

(which is controlled by annual appropriations) and mandatory spending (controlled 

more indirectly, generally by changing underlying laws governing eligibility and benefits). 

The former is controlled by dollar caps. The 

latter is lumped together with federal revenues in a pay-as-you-go regime, which bars 

actions affecting these categories from adding 

to the deficit. 

Mandatory programs make up about twothirds of all federal spending and about fourfifths of domestic spending. The President's 

proposals barely nick the growth in that category: mandatory programs other than net interest and deposit insurance are expected to 

grow an average of about 6.9 percent a year 

through 1997 under current policies versus 

about 6.7 percent a year under the Administration's proposals. rn the near term, roughly 

half of the President's savings in mandatory 

spending come from Medicare and the rest 

from a sprinkling of other programs--chiefly 

federal employees' health benefits, veterans' 

programs, auctioning licenses to use portions 

of the electromagnetic spectrum, and others. 

Later savings (in 1996 and 1997) come from 

extending some expiring provisions that affect 

Civil Service Retirement and Customs Service 

user fees. Modest savings are spelled out for 

several other entitlement programs (including 

student loans, farm price supports, family support, and food stamps), and two of the biggest 

entitlement programs (Social Security and 

Medicaid) emerge from the President's budgetary review virtually untouched. 

As in previous budgets, the President again 

proposes to sell or lease various government 

assets: one of the naval petroleum reserves, 

the Arctic National Wildlife Refuge, and the 

Alaska Power Marketing Administration. 

CBO has argued consistently that the proceeds from these proposals do not belong on 

the act's deficit reduction scorecard, which 

specifically bars credit for asset sales. 

Domestic discretionary spending makes up 

only about one-sixth of the budget. Although 

the President cites an overriding goal of controlling domestic discretionary spending, the 

proposals do not fully comply with the discipline required by 1990's Budget Enforcement 

Act. Decisions about funding for discretionary programs are made one year at a time. [n 

1993, caps set in the act will continue to 

govern domestic discretionary spending. CBO 

judges that the President's requested funding 

for domestic programs satisfies the budget 

authority cap but exceeds the outlay cap by 

about $1 billion (within the margin of error 

permitted by the BEA). The President 

accomplishes that by freezing total appropriations at this year's levels, with just a few 

favored areas (notably space, science, and the 

justice programs) slated for increases and several others (chiefly postal subsidies, transportation, community and regional development, 
80 ANALYSIS OF THE PRESIDENT'S BUDGET 

and fuel and housing assistance) marked for 

outright cuts. 

[n 1994 and 1995, however, the Administration has yet to come to grips with the act's 

tough requirements. After 1993, domestic discretionary spending vies with international 

and defense spending under a single overall 

cap. Although the President proposes roughly 

to freeze most domestic appropriations at 

1<)92's levels through 1997, that is not enough. 

To adhere to the caps in 1994 and 1995, the 

Administration must find more cuts--either in 

defense or in domestic programs. 

Chapter 1 sketched the President's major 

proposals using the broad categories--discretionary, pay-as-you-go, and other spending--

that are central to the budget enforcement 

process. This chapter details the Administration's proposals for 18 budget functions covering the domestic side of the budget. Each 

function covers spending that addresses a particular national need, such as energy, agriculture, or health. (A few functions-osuch as 

net interest--do not address national needs as 

conventionally defined but are included for 

completeness.) . A typical domestic function 

contains both discretionary and mandatory 

spending. 

The key comparison made for each function is between the Administration's proposal 

and CBO's baseline, a comparison that highlights how the President wants to change today's allocation of resources. The baseline--as 

more fully explained in Appendix A--depicts 

the path of spending if current laws and policies remain unchanged. For mandatory programs (such as Social Security and Medicare), 

March 1992 

the baseline simply shows CBO's best estimate 

of payments that would occur under current 

laws. For discretionary programs, the baseline for each individual function shows the 

spending that would result if appropriations in 

real terms were kept constant at 1992's level 

(that is, permitted to keep pace with inflation). CBO's baseline projection for total outlays assumes that discretionary outlays will be 

constrained within the BEA's caps. There are 

literally thousands of ways the caps could be 

met, however, and a comparison with today's 

real spending levels is one useful way of highlighting the possible trade-offs and the implications for particular programs. The discussions also note major estimating differences 

between CBO and the Administration--disagreements that can stem from contrasting 

economic forecasts or from other, technical 

factors. 

Many domestic functions contain some 

credit activity--that is, programs in which the 

government lends money directly or guarantees loans extended by private lenders, often 

with maturities of a decade or more. The 

Budget Enforcement Act changed the budgetary treatment of credit programs, addressing long-standing criticism that the focus on 

near-term cash flows merely encouraged myopic decisions. Now, costs of credit programs 

are expressed in terms of subsidies. A subsidy 

is the value, in today's dollars, of all the future cash flows that a loan or guarantee is expected to entail--or, in plain English, the 

amount the government expects to lose on the 

transaction. Throughout this chapter, subsidy 

is the yardstick used whenever credit programs are discussed. 
CHAPTER FIVE THE ADMINISTRATION'S DOMESTIC PROPOSALS 81 

Function 250: General Science, Space, 

and Technology 

PROPOSED SPENDING CHANGES (By fiscal year, outlays in billions of dollars) 

CBO Baseline Without Discretionary Caps 

Proposed Changes 

Pay-As-You-Go 

Superconducting Super 

Collider Trust Fund 

Discretionary 

Department of Energy 

National Science Foundation 

National Aeronautics and Space 

Administration 

Department of Defense 

Subtotal 

Total 

President's 1993 Budget 

as Estimated by CBO 

President's 1993 Budget 

CBO Reestimates 

a. Less than $50 million. 

Proposed Changes 

The 1993 budget seeks modest increases for 

function 250. The proposed budget authority 

for 1993 would be $0.7 billion (4 percent) 

above the CBO baseline, with a resulting increase in outlays of $0.4 billion (2 percent). 

Proposed budget authority for 1994 through 

1997 is frozen at the 1993 level, about $18.4 

billion; outlays would increase slowly to about 

$18.6 billion by 1997. Both proposed budget 

authority and outlays would be below the 

baseline in 1995 through 1997. 

All of the programs in the function would 

receive a spending increase in 1993. Budget 

authority for the Department of Energy's general science programs would be above the 

1992 

16.4 

0 

0 

0 

0 

~ 

0 

0 

16.4 

16.4 

a 

1993 1994 1995 1996 1997 

16.7 17.6 IS.4 19.0 20.0 

0.1 0.3 0.4 0.5 0.4 

0.1 0.1 0.1 a -0.1 

0.2 0.3 0.3 0.2 0.1 

a -0.2 -0.7 1.2 -1.8 

_a -0.1 -0.1 -0.1 -0.1 

0.3 0.1 -0.5 -1.1 -1.8 

0.4 0.4 -0.1 -0.6 1.4 

17.0 lS.0 lS.3 lS.4 IS.6 

17.0 IS. 1 IS.4 18.4 lS.7 

a -0.1 -0.1 -0.1 -0.1 

baseline by $365 million (24 percent) in 1993; 

the National Science Foundation, by $378 

million (14 percent); and the National Aeronautics and Space Administration, by $41 million (0.3 percent). 

Pay-As-You-Go Policy Changes 

The Administration proposes to establish a 

trust fund for the Superconducting Super Col-

!ider (SSC) from which donations from nonfederal sources would be spent. This trust 

fund would provide $233 million in budget 

authority and $93 million in outlays in 1993. 

In the following years, the trust fund would 

provide higher budget authority and outlays, 

reaching $570 million in budget authority and 

$500 million in outlays in 1996. 
82 ANALYS[S OF THE PRESIDENT'S BUDGET 

Discretionary Policy Changes 

The Department of Energy's Superconducting 

Super Collider would receive the largest increase in appropriations. The $650 million 

requested in 1993 would exceed the baseline 

by about $150 million, and the outlays would 

be about $60 million above the baseline. 

Combined with the trust fund spending, total 

outlays for the SSC would be about $600 million in 1993. 

Spending for the National Science Foundation (NSF) would again be raised. For 1993, 

the NSF appropriation would exceed the 

baseline by $378 million, although $78 million 

of this increase results from shifting a portion 

of the Antarctic research program out of the 

Department of Defense. Most of the funding 

increase would go to National Science Foundation research and related activities, for 

March [992 

which the 1993 budget authority would be 

$278 million above the baseline. 

The National Aeronautics and Space Administration (NASA) would receive a small 

increase in budget authority--$41 million--

relative to the baseline in 1993. Although 

some programs within NASA, such as the 

space station Freedom, would receive substantial increases, these increases would be offset 

by reductions or cancellations of other programs, such as the Advanced Solid Rocket 

Motor program. 

eBO Reestimates 

CBO's outlay estimates are close to the Administration's figures for all years. 
CHAPTER FIVE THE ADMINISTRATION'S DOMESTIC PROPOSALS 83 

Function 270: Energy 

PROPOSED SPENDING CHANGES (By fiscal year, outlays in billions of dollars) 

1992 1993 1994 1995 1996 1997 

CBO Baseline Without Discretionary Caps 3.8 5.5 5.8 5.6 5.4 5.0 

Proposed Changes 

Pay-As-You-Go 

Power marketing reforms 0 0 -0.4 -0.4 -0.5 -0.5 

Discretionary 

Uranium enrichment 0 -0.2 -0.3 -0.3 -0.4 -0.2 

Strategic Petroleum Reserve 0 -0.1 -0.2 -0.2 -0.4 -0.5 

Fossil and energy supply R&D 0 a -0.1 -0.2 -0.3 -0.4 

Naval petroleum reserve 0 a -0.1 -0.2 -0.2 -0.2 

Nuclear waste disposal 0 0.1 0.1 0.1 0.1 0.1 

Other 0 __ a__ a -0.1 -0.1 -0.2 

Subtotal 0 -0.2 -0.5 -0.9 1.4 -1.4 

Other Changes 

Loss of naval petroleum 

reserve and Alaska PMA receiptsb 0 0 0.5 0.6 0.5 0.5 

Rural electrification 0 -0.3 __ a __ a__ a __ a 

Subtotal 0 -0.3 0.5 0.6 0.5 0.5 

Total 0 -0.5 -0.4 -0.7 -1.3 1.3 

President's 1993 Budget 

as Estimated by eBO 3.8 5.0 5.4 4.8 4.1 3.7 

President's 1993 Budget 4.0 4.6 5.5 4.8 4.0 3.7 

eBO Reestimates -0.2 0.4 -0.1 a a a 

a. Less than $50 million. 

b. Receipts from the proposed lease of the naval petroleum reserve at Elk Hills, California, and from the proposed sale of the 

Alaska Power Marketing Administration (PMA) are shown in function 950. Outlays in function 270 would increase relative to 

the baseline because the assets would no longer generate direct receipts to the government. (For Elk Hills. the government 

would receive royalty payments after 1993; those receipts are also shown in function 950.) The loss of receipts in function 270 is 

included here under "other changes" because CBO considers these proposals to be asset sales. 

Proposed Changes 

Under the President's budget, net spending on 

energy programs would total about $5 billion 

in 1993, which is $0.5 billion below the projected baseline level. Most of this reduction 

would result from two proposals: (1) a new fee 

on nuclear utilities to offset some environmental cleanup costs associated with the government's uranium enrichment program, and 

(2) modifications of rural electrification loans, 

which higher outlays would offset in future 

years. Despite these savings, net energy 

spending is expected to increase by more than 

$1 billion from 1992 to 1993, primarily because of large planned increases in capital investment by the Tennessee Valley Authority. 

Other energy proposals would have significant budgetary effects after 1993--most notably, power marketing repayment reforms and 
84 ANALYSIS OF THE PRESIDENT'S BUDGET 

no new funding to acquire oil for the Strategic 

Petroleum Reserve (SPR). Outlay savings 

relative to the baseline would total $4.2 billion over the 1993-1997 period. 

The above savings are net of losses in receipts that would result from the proposed 

sale of the Alaska Power Marketing Administration (PMA) and the proposed lease of the 

naval petroleum reserve at Elk Hills, California (NPR-l). Those savings also include 

intragovernmental receipts for the proposed 

modification of rural electrification loans. Excluding these transactions, outlay savings 

would total $6.1 billion from 1993 through 

1997. 

Pay-As-You-Go Policy Changes 

PMA Repayment Reforms. The President is 

again seeking to establish a fixed schedule for 

the interest and principal repayments that 

PMAs make to the Treasury. Interest rates 

would be changed to the Treasury's cost of 

borrowing at the time each PMA investment 

went into service. These reforms would increase the price of federally generated hydropower and would increase offsetting receipts 

by $1.7 billion for fiscal years 1994 through 

1997. CSO expects that the policy cannot be 

fully carried out until 1994. 

Discretionary Policy Changes 

Uranium Enrichment. The President proposes to levy a new fee on operators of commercial nuclear reactors and to use the proceeds to offset appropriations for environmental cleanup activities in the uranium enrichment program. The proposed fee of 0.33 

mill per kilowatt-hour of gross electricity generated by each reactor would raise approximately $0.2 billion per year. In addition, 

spending would be held below baseline levels 

in all years. 

Strategic Petroleum Reserve. The President's 

proposal for the SPR would reduce expendiMarch 1992 

tures for the SPR by 48 percent over the next 

five years relative to the baseline. Most of the 

reduction would occur because the President 

does not request any additional funding to 

purchase oil for the reserve. The budget assumes purchases at an average rate of 25,000 

barrels per day in 1993 and 1994, using existing funds in the SPR oil account. At this 

rate, existing funds would be spent before the 

end of 1995, and the SPR would hold about 

600 million barrels of oil by 1997. By contrast, the baseline would support purchases 

averaging about 40,000 barrels per day 

throughout the 1993-1997 period, which 

would place 650 million barrels of oil in the 

SPR by the end of 1997. 

Fossil Energy and Energy Supply Research 

and Development. The budget requests 1993 

funding for fossil energy that would be 33 

percent, or $157 million, below the baseline. 

The 1993 request for energy supply research 

and development (R&D) is 4 percent above 

the baseline, an increase of $129 million. After 1993, however, appropriations for R&D 

for both fossil energy and energy supply research would be frozen at the 1993 request 

levels, resulting in estimated outlay savings of 

just under $1 billion, relative to the baseline, 

over the 1993-1997 period. 

Nuclear Waste Disposal. The President's 1993 

request for this program is 38 percent, or $108 

million, above the baseline level. This and 

subsequent-year increases would result in 

program outlays that are 26 percent above the 

baseline over the 1993-1997 period. Most of 

the increases are for expanded surface-based 

testing at Yucca Mountain, the candidate site 

for a waste repository. The budget assumes a 

volunteer site will be found for the monitored 

retrievable storage facility that the government plans to complete before it takes title to 

commercial nuclear waste in 1998. 

Other. The President proposes to reduce 

lending by the Rural Electrification Administration (REA) to electric and telephone cooperatives. The proposal would eliminate the 

5 percent loans for telephone borrowers: it 

also would cut the 5 percent loans to electric 
CHAPTER FIVE 

borrowers, reducing the loan level to 20 percent below the baseline. Outlay savings in 

1993 would amount to less than $10 million in 

reduced subsidy costs, but would total about 

$230 million over the 1993-1997 period. 

The President also requests $48 million of 

subsidy authority in 1993 for modifications of 

REA loans. This authority would be used to 

ease repayment terms on existing loans, resulting in an intragovernmental payment of 

$266 million from the nonbudgetary financing 

account to the REA liquidating account in 

1993. This receipt, however, would be offset 

by forgone receipts in future years. The 

changes in the liquidating account would not 

be scored in either the pay-as-you-go or the 

discretionary category. 

Other Changes 

Naval Petroleum Reserve. The President proposes to lease NPR-1 at the end of fiscal year 

1993. CBO considers this an asset sale and 

thus does not include changes in NPR receipts in pay-as-you-go scoring. Receipts 

from the asset sale, including both bonus bid 

receipts and federal royalties, appear in budget function 950 and total an estimated $1.9 

billion over the 1993-1997 period. These savings would be partially offset, however, by an 

increase in outlays in function 270 because the 

government would no longer be collecting receipts from selling oil and gas produced at 

THE ADMINISTRATION'S DOMESTIC PROPOSALS 85 

Elk Hills. In 1994, the proposed asset sale 

would result in a loss of receipts of $0.5 billion, with similar losses in subsequent years. 

After leasing Elk Hills, appropriations for 

operating the reserve would no longer be 

necessary, but the President proposes to use 

some of these savings to establish a defense 

petroleum inventory of 10 million barrels. 

Savings from discontinued federal operations 

of NPR -1, less amounts proposed for the inventory' are shown in the discretionary category and would total $0.7 billion over the 

1993-1997 period. 

CBO Reestimates 

CBO's estimates of net outlays for function 

270 under the President's budget proposals 

are above the Administration's estimates by 

$0.4 billion in 1993. Net reestimates in other 

years are relatively small. 

The largest estimating difference involves 

the pay-as-you-go proposal for PMA repayment reform. The budget assumes that PMA 

rates could be increased in time to collect an 

additional $0.4 billion in power receipts for 

1993. CBO estimates that such a large electric 

rate increase would require more time to implement and that additional receipts could not 

be collected until 1994. 
86 ANALYSIS OF THE PRESIDENT'S BUDGET March 1992 

Function 300: Natural Resources and Environment 

PROPOSED SPE:"mING CHANGES (By fiscal year, outlays in billions of dollars) 

1992 1993 1994 1995 1996 1997 

CBO Baseline Without Discretionary Caps 20.5 21.5 22.6 23.4 24.1 24.8 

Proposed Changes 

Pay-As-You-Go 

Corps of Engineers recreation fees a a a a a a 

Discretionary 

Water resources 0 -0.3 -0.5 -0.7 -0.9 -1.1 

Conservation and land management 0 -0.2 -0.4 -0.6 -0.8 -1.0 

Recreational resources 0 a -0.1 -0.3 -0.4 -0.5 

Pollution control and abatement 0 0.1 a -0.3 -0.9 -1.6 

Other natural resources ~ -0.1 -0.2 -0.3 -0.4 -0.6 

Subtotal 0 -0.5 -1.2 -2.2 -3.4 -4.9 

Other Changes 

Leasing the Arctic National Wildlife 

Refuge (Alaska's share of proceeds)b 0 0 0 -0.8 -0.5 a 

Total a -0.5 -1.2 -3.0 -3.9 -4.9 

President's 1993 Budget 

as Estimated by CBO 20.5 21.0 21.4 20.4 20.2 19.9 

President's 1993 Budget 20.2 20.5 20.0 21.1 19.9 20.1 

CBO Reestimates 0.3 0.4 1.4 -0.7 0.3 -0.2 

a. Less than $50 million. 

b. Projected receipts from leasing the Arctic National Wildlife Refuge would be split between the federal government and the state 

of Alaska. The federal share of leasing receipts appears in function 95(), Alaska's share appears in function 300. and the proposed 

payout to Alaska of its share of receipts is shown in function 800. 

Proposed Changes 

The President's proposals for natural resource 

and environmental programs would reduce 

outlays below the CBO baseline by $0.5 billion in 1993 and by $13.6 billion over the 

1993-1997 period. Most of the savings would 

be obtained by holding discretionary appropriations at or below the 1992 level throughout the five-year period. 

Pay-As-You-Go Policy Changes 

The President's budget includes proposed new 

recreation fees to be collected from people using facilities of the U.S. Army Corps of Engineers. CBO estimates that this proposal would 

yield additional offsetting receipts of about $5 

million in 1992 and $20 million a year thereafter. 
CHAPTER FIVE 

Discretionary Policy Changes 

The President is requesting 1993 appropriations of $21.2 billion for discretionary natural 

resource and environmental programs, $0.9 

billion (4 percent) below the CBO baseline 

level of $22.1 billion. Outlays in 1993 would 

be about $0.5 billion (2 percent) below the 

baseline. 

Water Resources. The President's 1993 appropriation request for water resource programs totals $4.5 billion. This funding level is 

8 percent ($408 million) below the CBO baseline in 1993 and would result in outlay savings 

of $276 million. These savings reflect decreases from baseline budget authority of 6 

percent for the Army Corps of Engineers, 13 

percent for the Bureau of Reclamation, and 

29 percent for the Soil Conservation Service. 

Over the 1993-1997 period, budget authority 

would be $4 billion, or 15 percent, below 

baseline levels; outlay savings would total $3.6 

billion. 

Conservation and Land Management. The 

President is requesting 1993 appropriations 

for conservation and land management activities totaling $4.8 billion, which is $275 million 

(5 percent) below the baseline. Resulting outlays would be about $200 million below baseline levels. Funding for all major land management agencies would be below baseline 

levels, including reductions of 13 percent for 

land conservation activities carried out by the 

Department of Agriculture, 1 percent for the 

Forest Service, and 1 percent for the Bureau 

of Land Management. Over the 1993-1997 

period, budget authority for all land management agencies would be $3.4 billion, or 12 

percent, below the baseline, and outlay savings would total $3.1 billion. The Administration is also proposing to collect holding 

fees for hard-rock mining claims, which CBO 

estimates would increase receipts by $41 million in 1993 and by about $36 million annually thereafter. 

Recreational Resources. The President's 1993 

req uest for discretionary funding of recreational programs is $2.2 billion, about $64 milTHE ADMINISTRATION'S DOMESTIC PROPOSALS 87 

lion less than the 1992 funding level and $194 

million, or 8 percent, below the CBO baseline. Outlay savings would total about $10 

million for the budget year. Most of the decrease proposed for these programs would be 

borne by multiyear construction projects of 

the National Park Service and the Fish and 

Wildlife Service, which would be cut by $212 

million in the budget year. Additional outlay 

savings would be achieved by instituting new 

recreational user fees under the President's 

America the Beautiful initiative. CBO estimates that the proposed fees would increase 

federal receipts by about $34 million in 1993 

and by $261 million over the 1993- 1997 peri0d. In 1993, outlay savings from proposed 

recreation fees and construction cuts would be 

offset partially by increases in spending for 

resource management and protection and for 

other recreational programs. 

Pollution Control and Abatement. The President's 1993 budget for environmental programs results in outlays that are $53 million, 

or about 1 percent, above the baseline. The 

budget includes 1993 funding increases above 

baselin~ levels for a number of activities of 

the Environmental Protection Agency--including cleanup of hazardous wastes (Superfund), 

research and development, and salaries. and 

expenses. Over the 1993-1997 period, however, outlays would fall about $2.8 billion, or 

8 percent, below the baseline. The proposed 

phaseout of the grant program for construction of wastewater treatment facilities would 

produce most of these savings--$1.9 billion 

over five years. Appropriations for these 

grants would increase from $2.4 billion in 

1992 to $2.5 billion in 1993 and then fall to 

zero in 1997. Authorizations for this program 

in the Clean Water Act currently end in 1994. 

The remaining savings after 1993 ret1ect an 

assumed freeze on appropriations at 1993 

levels. 

Other Natural Resources. The President 

proposes 1993 funding above the baseline for 

the National Oceanic and Atmospheric Administration's (NOAA's) construction and 

operations, research, and facilities activities, 

financed partly with funds transferred from 
88 ANALYSIS OF THE PRESIDENT'S BUDGET 

the Marine Navigation Trust Fund. Also, 

proposed reductions in spending for the Department of the Interior's Geological Service 

and Bureau of Mines would result in savings 

of $95 million in 1993 and $0.9 billion over 

the 1993-1997 period. In total, spending authority for other natural resource programs 

would be 5 percent below the baseline in 

1993, and outlay savings would be about $60 

million. 

Other Changes 

The President proposes to share half the proceeds from selling oil and gas exploration and 

development rights for the Arctic Kational 

Wildlife Refuge (ANWR) with the state of 

Alaska. CBO considers these transactions to 

be asset sales because the sale of such rights 

would result in the depletion of mineral resources currently owned by the federal government. Alaska's share of ANWR leasing 

receipts--which CBO estimates would total 

about $800 million in 1995 and about $450 

million in 1996--is shown in function 300, and 

the proposed payout of those receipts to the 

state is shown in function 800. The federal 

March 1992 

share of such receipts is shown in function 

950. The overall effect of these transactions 

on the federal budget, net of payments to 

Alaska, would be receipts totaling $1.3 billion 

in 1995 and 1996. 

eBO Reestimates 

CBO's estimates of outlays are above the 

Administration's estimates by $0.4 billion in 

1993 and by $1.3 billion over the 1993-1997 

period, primarily reflecting different spending 

rates for many accounts in the conservation 

and land management and pollution control 

programs. CBO also assumes that any action 

by the Congress to open the ANWR to oil and 

gas exploration and development is likely to 

occur later than the Administration assumes. 

Consequently, CBO assumes that the first 

lease sale would occur in 1995 rather than 

1994. CBO also projects that Alaska's share 

of bonus bids from competitive bidding would 

be about $0.8 billion lower than estimated by 

the Administration over the 1993-1997 period. 
CHAPTER FIVE THE ADMINISTRATION'S DOMESTIC PROPOSALS 89 

Function 350: Agriculture 

PROPOSED SPENDING CHANGES (By fiscal year, outlays in billions of dollars) 

CBO Baseline Without Discretionary Caps 

Proposed Changes 

Pay-As-You-Go 

Discretionary 

Agricultural Credit Insurance Fund 

Other 

Subtotal 

Other Changes 

Total 

President's 1993 Budget 

as Estimated by CBO 

President's 1993 Budget 

CBO Reestimates 

a. Less than $SO million. 

Proposed Changes 

CBO estimates that changes proposed by the 

Administration would save $0.5 billion in 

1993 and $3.6 billion over the 1993-1997 peri0d relative to the CSO baseline. Agriculture 

spending is projected to decline over this 

period, even under current law, because crop 

prices are expected to improve, resulting in 

smaller direct payments to farmers. 

Pay-As-You-Go Policy Changes 

Commodity Credit Corporation (CCC). 

About 60 percent of the spending in this 

function is for price support activities of the 

CCC, which are estimated to cost $8 billion to 

$1O billion a year between 1993 and 1997. 

The Administration is proposing only one 

1992 

15.6 

0 

0 

~ 

0 

0 

0 

15.6 

17.4 

-1.8 

1993 1994 1995 1996 1997 

16.3 15.0 13.0 13.2 13.5 

-0.2 -0.1 a -0.1 a 

-0.1 -0.1 -0.1 -0.2 -0.2 

-0.1 -0.3 -0.5 -0.7 -0.9 

-0.2 -0.4 -0.6 -0.8 1.1 

a a a a a 

-0.5 -0.5 -0.7 -0.9 1.1 

15.8 14.5 12.4 12.3 12.4 

16.1 14.9 12.6 12.4 12.0 

-0.3 -0.4 -0.2 a 0.4 

change in these programs--eliminating payments for any producers who earn more than 

$100,000 per year in income from off-farm 

sources. Although the budget shows savings 

in 1992, CSO assumes that this change would 

take effect with the 1993 crops and that savings would begin in 1993. This proposal 

would affect a relatively small number of 

producers, and the amount of savings is uncertain because farmers may restructure their 

finances to stay below the income threshold. 

CSO estimates that this proposal would reduce deficiency payments by about $45 million per year once the program is fully in effect and would save about $200 million over 

the 1993-1997 period. 

Farm Credit System. The President proposes 

to require the Farm Credit System to make 

annual payments to the Financial Assistance 

Corporation (F AC) to cover F AC's debt service obligations. Such debt was issued to as-
90 ANALYSIS OF THE PRESIDENT'S BUDGET 

sist system institutions experiencing financial 

difficulties. Under current law, FAC would 

payoff its debt and repay Treasury interest 

costs after 2006. The President's proposal 

would result in savings of about $0.2 billion 

on a present-value basis. The budget would 

record these estimated savings in 1993. 

Other. The budget also includes a proposal to 

eliminate the mandatory payments of $3 million per year that the Cooperative State Research Service makes to states. 

Discretionary Policy Changes 

Agricultural Credit Insurance Fund. The 

Farmers Home Administration makes direct 

loans and loan guarantees to farmers to purchase and operate farms. The President's 

budget would reduce the subsidy appropriations necessary to make these loans by $0.1 

billion in 1993 relative to the baseline. About 

90 percent of this cut would result from a proposed 64 percent reduction in subsidies for direct operating loans. Reductions in other direct loan programs would be partly offset by 

increases in funding for loan guarantees. 

Other Agriculture Programs. The President 

is proposing to reduce funding for many activities of the Department of Agriculture below 1992 levels and to freeze appropriations at 

the 1993 levels in subsequent years. The 

President's proposals would result in net 

outlay savings of about $0.1 billion in 1993 

and $2.5 billion over the 1993-1997 period 

compared with the CBO baseline. Decreases 

relative to the baseline are slated for the Agricultural Stabilization and Conservation Service, the Animal and Plant Health Inspection 

Service, the Cooperative State Research Service, the Agricultural Research Service, the 

Extension Service, and the Foreign Agricultural Service. In contrast, increased funding is 

provided for research on new uses of agricultural commodities and the development of 

biofuels. The President has also asked for authority to levy user fees for grain inspection 

and agricultural marketing services. 

March 1992 

Other Changes 

The Enterprise for the Americas Initiative. 

As part of an initiative to reduce the debt of 

Latin American countries. the Administration 

proposes to sell some of the debt that these 

countries owe to the Commodity Credit Corporation. The sale would require additional 

subsidy appropriations and outlays in function 

150, and would result in net receipts to the 

CCC liquidating account in function 350, 

which makes and receives payments related to 

previously guaranteed export loans. The sale 

receipts would be offset by smaller repayments in 1993 and subsequent years and 

would not be counted for deficit reduction 

purposes. CBO estimates that this proposal 

would produce net receipts in function 350 of 

$28 million in 1993 and $1 million in 1994, 

followed by outlays of $32 million over the 

1995-1997 period. 

CBO Reestimates 

CBO's outlay estimates for agriculture programs are significantly lower than the Administration's in 1992 and somewhat lower in 

other years. The bulk of the difference is in 

CCC outlays. 

CBO estimates CCC outlays to be lower 

than those forecast by the Administration by 

about $1.9 billion in 1992, $1.6 billion in 1993, 

and $2.1 billion over the 1994- 1997 period. 

These differences result in part from CBO's 

projections of higher prices for wheat and 

feed grains. Recent data on current commodity demand and on 1992 crop plantings 

for the major grains imply lower stocks and 

higher prices than those estimated by the Administration. Therefore, deficiency payments 

made in 1992 are likely to be lower and crop 

loan repayments higher than the Administration projects. [n addition, unlike CBO, the 

Administration projects that unexpected expenses for working capital will total $1 billion a year. 
CHAPTER FIVE 

CBO estimates higher outlays both for 

existing export credit guarantees and for new 

credits. This difference amounts to $2 billion 

over the 1993-1997 period and occurs because 

CBO projects a higher subsidy cost for loan 

guarantees extended to the republics of the 

former Soviet Union. 

THE ADMINISTRATION'S DOMESTlC PROPOSALS 91 

Finally, CBO expects lower savings than 

does the Administration from the proposal to 

eliminate program payments for producers 

whose off-farm income exceeds $100,000. 

CBO assumes a greater degree of farm reorganization to avoid the payment threshold, resulting in estimated savings that are about $0.1 

billion a year lower between 1994 and 1997. 
92 ANALYSIS OF THE PRESIDENT'S BUDGET March 1992 

Function 370: Commerce and Housing Credit 

PROPOSED SPENDING CHANGES (By fiscal year, outlays in billions of dollars) 

CBO Baseline Without Discretionary Caps 

Proposed Changes 

Pay-As-You-Go 

Discretionary 

Rural Housing Insurance Fund 

Postal Service 

Small Business Administration 

Other 

Subtotal 

Other Changes 

Postal Service 

Banking reform 

Total 

President's 1993 Budget 

as Estimated by CBO 

a. Less than $50 million. 

Proposed Changes 

Under the Administration's budget, spending 

for commerce and housing credit programs 

would be below the baseline in each year 

during the 1993-1997 period, largely because 

of proposed cuts in discretionary spending 

programs totaling $0.5 billion in 1993 and $4.7 

billion over the five-year period. 

Under baseline assumptions, total spending 

in this function is projected to plummet from 

$76 bi1lion in 1993 to $37 billion in 1994. By 

1997, the function would show negative 

outlays, or net receipts, of $25 billion. Spending under the Administration's policy would 

follow the same pattern. This dramatic decline in outlays will occur primarily because 

spending for resolving failed savings and loan 

institutions is expected to peak in 1993 at 

about $53 billion, and the government will 

then begin to collect increasing amounts of 

1992 

72.6 

0 

0 

0 

a 

a 

0.1 

0 

0 

0.1 

72.7 

1993 1994 1995 1996 1997 

75.6 36.5 -13.8 -41.7 -25.1 

0 0 0 0 0 

-0.1 -0.2 -0.2 -0.3 -0.3 

-0.4 -0.4 -0.4 -0.4 -0.4 

-0.2 -0.3 -0.3 -0.3 -0.4 

0.1 0.1 _a 

-0.5 -0.7 -0.9 1.2 1.4 

0.3 0.1 0 -0.3 -0.1 

0 0 0 0 0 

-0.2 -0.6 -0.9 1.5 -1.5 

75.4 36.0 -14.7 -43.2 -26.6 

receipts from selling the assets of the failed 

thrifts. CBO also estimates that net outlays of 

the Bank [nsurance Fund (BIF) will decline 

substantially from 1993's level of $17 billion. 

Discretionary Policy Changes 

Rural Housing Insurance Fund (RHIF). The 

program change" proposed in the President's 

budget are similar to those included in last 

year's budget. Currently, the bulk of rural 

housing assistance is in the form of deeply 

subsidized direct loans to low-income households and developers of low-income rental 

housing. The President would replace some 

of these direct loans with guarantees of private 

loans. Low-income borrowers with guaranteed loans would receive federal subsidies that 

could reduce the effective interest rate an estimated average of 3 percentage points. Other 

borrowers would receive no assistance beyond 

the guarantee. 
CHAPTER FIVE 

The budget includes a 1993 appropnation 

request of $0.5 billion for rural housing subsidies, which is estimated to support about 

$1.7 billion in single-family and multifamily 

lending, down from $2.2 billion in 1992. The 

direct loan activity proposed by the President 

for 1993 is estimated to provide single-family 

assistance to about 7,400 households and to 

fund 8,200 rental units. The Administration's 

loan guarantee program would assist an additional 13,100 borrowers. The budget proposals would reduce outlays for subsidies and 

administrative costs by less than $0.1 billion in 

1993 and by about $ 1.0 billion over the 1993-

1997 period relative to the baseline. 

These savings would be offset partially by 

additional spending for a proposed rental 

voucher program for rural areas. This program would be similar to that operated by the 

Department of Housing and Urban Development. The budget includes (in function 600) 

annual funding of $140 million for vouchers, 

which could support an additional 5,000 to 

6,000 units each year. 

Payment to the Postal Service. The President 

is proposing to terminate or restrict certain 

preferred postage rates, to increase the rates 

for most preferred mailers, and to eliminate 

the portion of the appropriated subsidy that 

covers these preferred postage rates. Relative 

to the CBO baseline, these changes would 

save $0.4 billion annually over the 1993-1997 

period. 

Small Business Administration (SBA). About 

$0.2 billion of the 1993 savings relative to the 

CBO baseline would be achieved through reduced appropriations for SBA loan subsidies 

and administrative costs. The Administration 

proposes to convert all SBA direct lending to 

guaranteed lending, except for certain direct 

loans to minority-owned firms, and to increase the fees that are charged for several 

types of loan guarantees. This proposal is 

similar to those included in previous budgets. 

Total 1993 subsidy appropriations would be 

$88 million, well below the CBO baseline 

level of $279 million. Total loans made or 

THE ADMINISTRA nON'S DOMESTIC PROPOSALS 93 

guaranteed would decline from $4.9 billion in 

1992 to $4.8 billion in 1993. 

Other. The Administration would achieve 

savings of $55 million in 1993 and $318 million over five years by establishing a new 

transaction fee to be collected by the Commodity Futures Trading Commission. Requested 1993 appropriations of $371 million 

for the Federal Housing Administration's 

General and Special Risk Insurance Fund 

programs--$115 million above the baseline--

would raise outlays for these programs by $73 

million in that year. The significant increase 

in funding would be required because, based 

on new data, the Administration has substantially raised its estimate of the subsidy cost 

for these guarantees. 

Other Changes 

Postal Service (Off·Budget). The President is 

proposing to increase Postal Service payments 

to the Civil Service Retirement Fund (see 

function 950) and to the Federal Employees 

Health Benefits Fund (see function 550) during fiscal years 1993 through 1995. These 

increases, totaling $0.3 billion annually and 

$0.9 billion over the next three years, are intragovernmental transactions and would be reflected as receipts on the discretionary scorecard in functions 950 and 550, respectively. 

The net effect in function 550 would be to reduce the required general fund appropriation 

to the Federal Employees Health Benefits 

Fund. Including the cuts in postal subsidies 

discussed above, the proposals in the budget 

affecting the Postal Service would result in 

reduced appropriations of $2.3 billion (in 

functions 370 and 550) and increased receipts 

of $0.6 billion (in function 950), or a net 

spending reduction of about $2.9 billion (onbudget) relative to the baseline over the fiveyear period. 

To recover these costs, the Postal Service is 

likely to increase postal rates, resulting in net 

savings to the federal government. Rates for 

preferred mailers affected by the proposal 
94 ANALYSIS OF THE PRESIDENT'S BCDGET 

would probably be raised in 1993. A rate increase to cover the additional costs for payments to the Civil Service Retirement and 

Federal Employees Health Benefits funds 

would be in addition to the 13 percent general 

rate hike that CBO assumes would occur in 

February 1994. Before that increase, net outlays of the Postal Service would rise by $0.4 

billion over the 1993-1994 period as a result 

of this proposal. Although the Administration is proposing to enact these changes in appropriation bills, this amount would not be 

scored as discretionary spending because the 

Postal Service is off-budget. The Postal Service surplus or deficit would be unaffected 

once these additional costs are covered by 

higher rates. 

Banking Reform Proposals. The President 

again proposes to allow interstate banking and 

branching, to permit commercial ownership of 

banks, and to authorize banks to affiliate with 

a broad range of financial firms through the 

formation of financial-services holding companies. These proposals were originally made 

last year as part of a comprehensive banking 

and deposit insurance reform package, but 

were not included in the Federal Deposit Insurance Corporation Improvement Act of 

1991, which was enacted last fall. Although 

the Administration has included estimated 

savings from these proposals in its pay-as-yougo tabulations. CBO believes that the Budget 

Enforcement Act of 1990 effectively removed 

the effects of such proposals from the pay-asyou-go calculations. Furthermore, as dis 

cussed below, CBO estimates that the Administration's proposals would have no significant 

effect on the government's cash flows over the 

next five years. 

CBO Reestinlates 

CBO estimates that outlays for this function 

will be lower than the Administration projects 

by $14.8 billion in 1992 and $8.7 billion in 

1993, but higher by $47 billion over the following four years. Most of these variations 

March 1992 

are attributable to differing estimates for 

spending on deposit insurance activities by the 

Bank Insurance Fund and the Resolution 

Trust Corporation (RTC). 

Pay-As-You-Go Reestimates 

Bank Insurance Fund. The Administration 

has estimated that its banking reform proposals would reduce BIF's cash outlays by 

$7.8 billion in 1994, $11.7 billion in 1995, and 

$6.6 billion in 1996, and would increase outlays by $7.8 billion in 1997. The Administration believes that the proposals would reduce the number and cost of bank failures by 

raising the earnings of banks, increasing their 

cost efficiency, diversifying their risk, and improving their ability to raise capital. 

CBO estimates that these proposals would 

not have a significant impact on BIF spending 

over the next five years. Over the long term, 

they should lead to a more diversified, more 

efficient, and more competiti ve banking industry. But improved efficiencies are more 

likely to result in lower costs to consumers of 

banking services than in higher profits to 

banks. Furthermore, the bank losses that B1F 

will have to cover during the next few years 

have already been incurred or would not be 

avoided by enacting the Administration's proposals. In fact, there could be additional 

losses in the short term because most geographic expansion is expensive and increased 

competition may threaten the viability of 

some local banks. Consequently, CBO sees 

no significant benefit to the Bank Insurance 

Fund over the 1992- 1997 period. 

Other Reestimates 

Bank Insurance Fund. CBO differs significantly from the Administration not only in its 

assessment of the legislative proposals but also 

in its projections of B[F spending under current law. The budget projects unprecedented 

costs for case resolution over the next several 

years, particularly between 1992 and 1995. 
CHAPTER FIVE 

The Administration estimates that bank losses 

covered by BIF during that period would total 

about $72 billion on failed assets of about 

$360 billion. CBO believes that the prospects 

for the banking industry are less severe and 

projects bank losses of $43 billion on failed 

assets of $250 billion over the same period. 

Largely as a result of these differences, CBO's 

estimate of the fund's outlays is lower than 

the Administration's by $18.5 billion in 1992, 

by $20.7 billion in 1993, and by another $3.5 

billion over the following four years. 

Resolution Trust Corporation. CBO expects 

that about 500 more savings and loan institutions will become insolvent through 1995 than 

does the Administration. Under CBO's baseline projections, the RTC's cumulative losses 

will be about $150 billion, compared with the 

Administration's estimate of about $130 billion. Both the Administration and CBO treat 

the funds necessary to meet the government's 

commitment to insure deposits as mandatory, 

and both assume that sufficient funds will be 

provided to allow the RTC to resolve the inventory of failed thrifts. CBO expects that the 

R TC will need to continue closing or merging 

sick thrifts through 1995, whereas the Administration expects it to complete its caseload by 

1993. As a result, the most significant difference in outlays over the 1993-1997 period occurs in 1994, when CBO expects that net outlays will exceed the Administration's estimate 

by $55 billion. 

CBO's estimates for net outlays in 1993 and 

1995 are higher than those estimated in the 

President's budget by $17 billion and $8 billion, respectively, largely because CBO projects the closing of more insolvent thrifts and 

the acquisition of more assets in the resolution process. The additional spending for 

working capital is expected to generate future 

offsetting collections for the agency when the 

assets are sold. Thus, CBO's estimate of net 

outlays in 1996 is lower than the Administration's by $26 billion. 

FSLIC Resolution Fund. This fund is charged 

with paying off the obligations incurred by the 

Federal Savings and Loan Insurance CorporaTHE ADMINISTRATION'S DOMESTIC PROPOSALS 95 

tion. The fund makes payments to acquirers 

of failed thrifts, mostly to cover interest and 

principal payments on notes and to maintain 

yields or cover capital losses on assets purchased from failed thrifts. The Congress appropriated $15.9 billion in 1992 for the fund 

to renegotiate the assistance agreements that 

were made final before 1989 in an effort to reduce the government's long-term costs. The 

President's budget assumes that $5.6 billion of 

this authority will not be used in 1992 and 

that appropriations in 1993 will be needed· to 

replenish this lapsed authority. Because CBO 

expects that the agency will spend most of its 

1992 funding this year, its estimate of outlays 

is higher by $4.0 billion for 1992, but lower by 

$3.4 billion for 1993. Over the 1994-1997 

period, CBO's estimate of outlays is $0.8 billion less than the Administration's, largely because of higher projected collections from asset sales. 

GNMA Mortgage-Backed Securities. At the 

beginning of 1993, the Administration would 

transfer the Government National Mortgage 

Association's guarantee portfolios in good 

standing from the on-budget liquidating account to the nonbudgetary financing account, 

regardless of when the guarantees were originated. The liquidating account would include only those portfolios that defaulted before October 1, 1992. This change would increase on-budget outlays by $2.2 billion in 

1993 and by small amounts in future years, reflecting the shift to the financing account of 

Treasury securities that support the guarantee 

liabilities that would be transferred. Credit 

reform procedures adopted in 1990, however, 

specify that the consequences of guarantees in 

effect before October 1, 1991, should appear 

in the liquidatiag account. Therefore, eBO 

believes that this transaction does not properly reflect credit reform procedures and ha5. 

excluded it from its budget estimates. 

Postal Service. CBO's estimates of Postal Service outlays are different from the Administration's primarily because the budget does 

not reflect the large year-to-year swings in net 

operating income that result from periodic 

rate increases. CBO's estimate of Postal Ser-
96 ANALYSlS OF THE PRESlDENT'S BUDGET 

vice outlays is $1.8 billion lower than the Administration's over the 1993-1997 period and 

reflects a projected rate increase in fiscal year 

1994. 

Other. CBO estimates that outlays in the 

credit liquidating account of the Federal 

Housing Administration's Mutual Mortgage 

March 1992 

Insurance Fund will be greater than the 

Administration estimates in 1992 and each of 

the next four years. These differences result 

primarily from varying estimates of claims 

from insurance commitments issued before 

1992. Over the 1992-1997 period, CBO's estimate of outlays in this account is $1.5 billion 

higher than the Administration's. 

CBO REESTIMATES OF PROPOSED SPENDING IN FUNCTION 370 OF 

THE PRESIDENT'S BUDGET (By fiscal year, outlays in billions of dollars) 

1992 1993 1994 1995 1996 1997 

President's 1993 Budget 87.5 84.1 -20.1 -23.2 -20.3 -31.8 

CBO Reestimates 

Pay-As-You-Go Proposals 

Bank Insurance Fund 0 0 7.8 11.7 6.6 -7.8 

Other 

Bank Insurance Fund 18.5 -20.7 -4.8 -5.8 -2.5 9.6 

Resolution Trust Corporation -0.4 17.5 55.1 8.0 -26.4 a 

FSLIC Resolution Fund 4.0 -3.3 a a -0.4 -0.3 

GNMA -0.3 -2.5 -0.5 -0.5 -0.5 -0.5 

Postal Service :1 a -1.7 -2.0 a 1.9 

Other ~ 0.4 0.2 ~ ~ Subtotal -14.8 -8.7 48.3 -29.5 12.9 

Total -14.8 -8.7 56.1 8.6 -22.9 5.2 

President's 1993 Budget 

as Estimated by CBO 72.7 75.4 36.0 -14.7 -43.2 -26.6 

a. Less than $50 million. 
CHAPTER FIVE THE ADMINISTRA nON'S DOMESnC PROPOSALS 97 

Function 400: Transportation 

PROPOSED SPENDING CHANGES (By fiscal year, outlays in billions of dollars) 

CBO Baseline Without Discretionary Caps 

Proposed Changes 

Pay-As-You-Go 

Disc retio nary 

Mass transit 

Federal-aid highways 

Miscellaneous highway construction projects 

Grants to Amtrak 

Northeast Corridor Improvement Program 

Federal Aviation Administration 

Other 

Total 

President's 1993 Budget 

as Estimated by CBO 

President's 1993 Budget 

CBO Reestimates 

a. Less than $50 million. 

Proposed Changes 

Outlays for transportation programs under the 

Administration's policies would be $0.8 billion lower than the CBO baseline in 1993. 

These savings result from proposals that 

would limit 1993 discretionary budget authority to a level $1.9 billion (12 percent) below the baseline and that would hold down 

obligations for highway and transit programs 

controlled by obligation ceilings. There are 

no pay-as-you-go proposals in this function. 

Ground Transportation. Reductions in 

spending for ground transportation would 

account for almost all of the savings in this 

function. The budget request for mass transit 

programs would result in outlays of $3.4 bitlion--$O.4 billion below the CBO baseline. 

Annual obligations for these programs are 

controlled by both annual appropriations and 

1992 

33.6 

0 

0 

0 

0 

0 

0 

0 

_a 

a 

33.6 

34.0 

-0.4 

1993 1994 1995 1996 1997 

36.0 39.0 40.7 42.3 43.8 

0 0 0 0 0 

-0.4 -0.6 -0.8 -0.9 1.1 

-0.1 -0.7 1.2 -1.7 -2.3 

-0.1 -0.3 -0.5 -0.6 -0.6 

-0.3 -0.3 -0.4 -0.4 -0.4 

a -0.1 -0.2 -0.2 -0.2 

a -0.1 -0.4 -0.7 -l.l 

~ -0.1 -0.3 -0.5 -0.7 

-0.8 -2.2 -3.7 -5.0 -6.4 

35.2 36.7 37.0 37.3 37.4 

35.1 36.7 37.0 37.2 37.3 

0.1 a 0.1 0.1 0.1 

annual obligation ceilings. Given the requested appropriations and obligation ceilings, 

CBO estimates that total obligations for transit 

programs in 1993 would be $3.0 billion, compared with $3.9 billion under the baseline. 

Programs targeted for cuts include operating 

subsidies for larger urban areas and capital 

subsidies provided through discretionary 

grants. 

Highway programs are also targeted for 

cuts. The Administration's proposal would 

limit total obligations for federal-aid highways 

in 1993 to $19.2 billion--$2.2 billion above the 

estimated 1992 level, but $0.8 billion below 

the CBO baseline--resulting in outlay savings 

of $0.1 billion in 1993. The requested 1993 

obligation ceiling would be higher than the 

baseline level, but the budget also incorporates a proposal to lnel ude under the ceiling several programs that are now exempt. Including previously exempt programs and 
98 ANALYSIS OF THE PRESIDENT'S BUDGET 

freezing the obligation ceiling at the 1993 level 

for subsequent years would save 56 billion 

over the five-year period. (Despite these cuts 

in obligations, CBO estimates that spending 

for federal-aid highways under the Administration's proposals would increase by 17 percent over the 1992-1995 period, reflecting the 

delayed impact of increases in obligations between 1990 and 1992.) The proposal to eliminate new funding for miscellaneous appropriated highway demonstration projects 

would reduce 1993 budget authority by $0.6 

billion, saving $0.1 billion in outlays in that 

year. The savings on such projects over the 

five-year period would total $3.3 billion. 

Additional savings would be achieved by 

reductions in funding for Amtrak subsidies, 

including subsidies for improvements to the 

Northeast Corridor, and by a proposal to delay the availability of 1993 capital assistance 

for Amtrak until July of that year. The proposals would reduce appropriations for Amtrak subsidies by $0.3 billion below the baseline and would eliminate all appropriations 

for the Northeast Corridor ($0.2 billion in 

1992). As a result, 1993 outlays would be reduced by $0.4 billion compared with the CBO 

baseline. 

Air Transportation. Funding for aVIatIOn 

programs would be increased in 1993 and 

would then be held constant over the 1994-

1997 period. The President's proposed spending authority for the Federal Aviation Administration (FAA) in 1993 is 50.6 billion, or 6 

percent, above the 1992 level and $0.2 billion 

March 1992 

(2 percent) above the CBO baseline. Most of 

this increase would be used to continue modernizing and improving the air traffic control 

system. Spending authority for FAA facilities 

and equipment would be increased from 52.4 

billion in 1992 to 52.7 billion in 1993, an increase of almost 13 percent and more than 

$0.2 billion above the CBO baseline. The Administration proposes to derive 85 percent of 

the funds for the FAA from the Airport and 

Airway Trust Fund over the 1993-1997 period, 

up from 75 percent in 1992. 

Water Transportation. The President proposes 1993 appropriations for discretionary 

water transportation programs of $3.0 billion, 

6 percent above the 1992 level. The proposed 

funding level is $38 million (about 1 percent) 

above the CBO baseline for such programs 

and would result in additional outlays of $37 

million. The increase is largely for operating 

expenses of the U.S. Coast Guard, offset by 

small cuts in other discretionary accounts. 

CBO Reestimates 

CBO's estimates of spending under the President's policies are $0.4 billion lower than the 

Administration's estimate in 1992 and $0.1 

billion higher in 1993. Most of the difference 

in 1992 is attributable to differing assumptions 

about spending from budget authority from 

previous years for Coast Guard operating expenses. Other reestimates are relatively small. 
CHAPTER FIVE THE ADMINISTRATION'S DOMESTIC PROPOSALS 99 

Function 450: Conlmunity and Regional Development 

PROPOSED SPENDING CHANGES (By fiscal year, outlays in billions of dollars) 

1992 1993 1994 1995 1996 1997 

CBO Baseline Without Discretionary Capsa 7.0 7.3 7.2 7.2 7.2 7.5 

Proposed Changes 

Pay-As-You-Go 0 0 0 0 0 0 

Discretionary 

Community development b b -0.3 -0.6 -0.8 -1.0 

Area and regional development b -0.2 -0.4 -0.6 -0.8 -0.9 

Disaster relief and insurance 0 -0.1 -0.1 -0.1 -0.1 -0.1 

Total b -0.3 -0.8 -1.3 1.7 -2.0 

President's 1993 Budget 

as Estimated by CBO 7.0 7.0 6.4 5.9 5.4 5.5 

President's 1993 Budget 6.9 7.0 6.5 5.8 5.4 5.2 

CBO Reestimates b b -0.1 0.1 0.1 0.3 

a. Excludes projection of [992 emergency appropriation of $800 million for disaster relief. 

b. Less than $50 million. 

Proposed Changes 

Under the President's proposals for community and regional development programs, 

both budget authority and outlays would fall 

below the baseline. Budget authority would 

be about $6.2 billion for 1993, $1.4 billion below the CBO baseline. Outlays would fall below the baseline by about $0.3 billion in 1993 

and would be about 17 percent below baseline 

levels over the 1993-1997 period. There are 

no pay-as-you-go proposals in this function. 

Community Development. The community 

development programs focus primarily on 

housing and economic development in urban 

areas. As in previous years, the President 

proposes to reduce funding for the Community Development Block Grant program in 

1993 and beyond. Appropriations would drop 

from the 1992 level of $3.4 billion to $2.9 billion per year thereafter. Because the program 

spends at a relatively slow rate, the reduction 

would not have a significant effect on outlays 

in 1993, but would reduce outlays by $2.5 billion over the next five years. The President's 

budget also proposes eliminating the community development loan guarantee program 

after 1992. 

Additional savings in community development would result from eliminating supplemental assistance to the homeless and emergency grants for community water assistance. 

The savings are offset somewhat by slight increases in salaries and expenses and research 

and development activities of the Department 

of Housing and Urban Development, and in 

funding for a number of independent housing 

agencies. 

Area and Regional Development. Area and 

regional development programs primarily 

fund rural economic development. The President has again proposed eliminating some of 
100 ANALYSIS OF THE PRESlDENT'S BUDGET 

these programs and reducing funding for 

others. The proposed levels of budget authority would result in outlay savings relative 

to the baseline of $0.2 billion in 1993 and 

nearly $3.0 billion over the 1993-1997 period. 

The President proposes to end the Economic Development Administration's economic 

development assistance and loan guarantee 

programs, which would save $39 million relative to the baseline in 1993 and $0.9 billion 

over five years. In addition, the President 

seeks to reduce appropriations for the Appalachian Regional Commission development 

programs and the Tennessee Valley Authority. 

These reductions would result in outlay savings of $15 million in 1993 and $0.5 billion 

over the 1993-1997 period. 

The budget includes no funding for the Rural Electrification Administration's distance 

learning and medical link grants and for the 

Farmers Home Administration's (FmHA's) 

rural community fire protection grants. It 

provides reduced funding for FmHA water 

and waste disposal grants. These proposals 

would result in outlay savings of $3 million in 

1993 and $0.2 billion from 1993 through 1997. 

These reductions are partially offset by slight 

increases in funding for FmH A rural development grants, the rural development loan program, and the Rural Telephone Bank (RTB). 

Once again, the President proposes to discontinue the Rural Development Insurance 

Fund's loan guarantees for water and waste 

disposal systems, but recommends increasing 

the authorization for the fund's guarantees of 

community development loans. The Administration also proposes increases in the authorized loan level and subsidy appropriation for 

RTB direct loans. Under the Administration's plan, all telephone loans made by the 

March 1992 

Department of Agriculture would be arranged through the RTB. The President requests a direct loan authorization of 5475 million, which includes an authorization level of 

$60 million for low-interest loans for telephone borrowers who would not qualify for 

RTB loans under existing criteria. 

Proposed reductions in spending for Bureau of Indian Affairs (BlA) programs would 

result in outlay savings of 50.1 billion for 1993 

relative to the CBO baseline. Funding for the 

operation of Indian programs and BIA construction would be reduced by 13 percent in 

1993, relative to the baseline, resulting in outlay savings of $48 million for 1993 and 50.8 

billion for the 1993-1997 period. The President also proposes to discontinue the BIA direct loan program and to increase the authorized amount for BIA loan guarantees. 

The President's budget would reduce the 

amount appropriated for settlements of Indian 

claims, reflecting an estimate of fewer settlements in the next fiscal year. 

Disaster Relief and Insurance. As in last 

year's budget, the President proposes to limit 

Small Business Administration disaster loans 

to borrowers unable to obtain loans from private lenders. In addition, the interest rate on 

such disaster loans would be increased to the 

Treasury cost of borrowing. These proposals 

would reduce outlays by $0.1 billion in 1993 

and by $0.6 billion over five years relative to 

the baseline. 

CBO Reestimates 

CBO's estimates of outlays for function 450 

are very close to the Administration's. 
CHAPTER FIVE THE ADMINISTRATION'S DOMESTIC PROPOSALS 101 

Function 500: Education, Training, 

Employment, and Social Services 

PROPOSED SPENDING CHANGES (By fiscal year, outlays in billions of dollars) 

CBO Baseline Without Discretionary Caps 

Proposed Changes 

Pay-As-You -Go 

Guaranteed student loan programs 

Foster care 

Trade Adjustment Assistance 

Subtotal 

Discretionary 

Elementary and secondary education 

Student financial assistance 

Training and employment 

Social services 

Other 

Subtotal 

Total 

President's 1993 Budget 

as Estimated by CBO 

President's 1993 Budget 

CBO Reestimates 

a. Less than $50 million. 

Proposed Changes 

The President's proposals for education, job 

training, employment, and social services 

would reduce spending $0.7 billion, about 1 

percent, below CBO baseline projections in 

1993. By 1997, spending would fall $3.9 billion below the CBO baseline, or about 7 percent. In 1993, virtually all spending reductions result from spending cuts for discretionary programs. With a few exceptions--the 

Head Start program, some elementary and 

secondary education programs, and Pell 

Grants--virtuall y all of the discretionary programs are held at or below baseline levels in 

1992 

45.9 

-0.3 

0 

~ 

-0.3 

0 

0 

0 

0 

_a 

a 

-0.3 

45.6 

45.0 

0.6 

1993 1994 1995 1996 1997 

50.2 50.3 50.9 47.7 53.4 

a -0.1 -0.1 -0.1 -0.1 

a 0.1 0.1 0.1 0.1 

_a -0.1 -0.1 -0.1 -0.1 

a -0.1 a a -0.1 

-0.1 0.1 -0.2 -0.7 -1.3 

0.1 0.2 a -0.3 -0.5 

-0.1 -0.1 -0.5 -0.7 -1.1 

-0.6 0.5 -0.3 -0.4 -0.6 

_a --1! -0.1 -0.2 -0.4 

-0.7 0.7 -1.1 -2.4 -3.9 

-0.7 0.6 -1.2 -2.5 -3.9 

49.4 50.9 49.8 45.3 49.5 

49.6 51.5 50.3 45.9 50.1 

-0.1 -0.6 -0.5 -0.6 -0.6 

1993 and are frozen at the President's 1993 

request level from 1994 through 1997. 

Pay-As-You-Go Policy Changes 

Guaranteed Student Loan Programs. The 

President's 1993 budget calls for a number of 

changes to the guaranteed student loan programs; these changes would reduce spending 

by an estimated $0.3 billion in 1992 but have 

small effects on spending in 1993 and succeeding years. Annual borrowing hmits in the 

Stafford Loan program would increase between $875 and $1,000 for most borrowers, 

depending on the student's year in school. 
102 ANALYSIS OF THE PRESIDENT'S BUDGET 

Annual borrowing limits in the Supplemental 

Loans for Students program would be increased by $2,000 for most undergraduate students and $6,000 for graduate students. CBO 

estimates that approximately 1.2 million borrowers will increase their borrowing an average of $900 in 1993, raising loan volume by 9 

percent. Less-than-half~time students would 

become eligible to participate in the guaranteed student loan programs under the Administration,s plan, raising participation and loan 

volume marginally. 

The President also proposes to continue recent legislative efforts aimed at reducing federal default costs. For 1992 and following 

years, the budget includes several provisions 

that could prevent defaults, increase default 

collections, or lower federal default costs by 

sharing costs with state governments and 

lenders. After 1993, costs of the increased 

loan volume would be more than offset by reductions in the loan subsidy as a result of 

these measures. Under credit reform accounting, and assuming enactment in 1992, the 

present value of the savings on loans outstanding in 1992 would be shown as an outlay 

reduction in 1992. 

Foster Care. The Administration proposes to 

restructure Foster Care and Adoption Assistance fundamentally, without significantly 

changing total funding. A new capped entitlement for Child Welfare Services (CWS) of 

$1.3 billion in 1993 would replace the administrative and training portions of the existing 

Foster Care and Adoption Assistance programs. Such a reform would reduce the 

paperwork and disputes clouding the current 

process for funding the administrative costs of 

foster care. Troubled children and families 

could also benefit from the broader array of 

services allowed under the proposed CWS 

grants. A key question is whether the proposed funding levels for the CWS grants over 

the next five years are higher or lower than 

what states would otherwise have claimed 

under the existing programs. CBO estimates 

that the five-year total of $8.3 billion in Child 

Welfare Services grants is 5 percent greater 

than administrative and training expenditures 

March 1992 

under current law and would increase federal 

outlays by a five-year total of $0.4 billion. 

Under the Administration's estimates, this restructuring would be budget neutral. 

Trade Adjustment Assistance. As in recent 

years, the President proposes to eliminate the 

Trade Adjustment Assistance training programs (as well as cash payments in function 

600). This proposal would affect approximately 20,000 people and save $0_1 billion a 

year after 1993. Savings in 1993 would be 

smaller than in later years because people 

training during the week of September 30, 

1992, would continue to receive services. 

Discretionary Policy Changes 

Elementary and Secondary Education. The 

President requests an increase in budget authority that is $0.3 billion, or about 2 percent, 

above the CBO baseline projections in 1993. 

This increase accommodates two new initiatives that would raise 1993 funding by a total 

of $664 million. The first initiative funds 

parental choice programs that would expand 

educational options for children from middleand low-income families. The second funds a 

variety of programs designed to help communities achieve the national educational 

goals by the year 2000. However, Impact Aid 

grants to school districts for children whose 

parents either work or live on federal property would be eliminated, and other grant 

programs would be pared. Outlays would be 

$0.1 billion below the baseline in 1993 because cuts in Impact Aid payments would occur sooner than increased spending on new 

initiatives. 

Student Financial Assistance. The President's 

budget includes $7.7 billion in federal funding 

for student financial assistance, $0.6 billion or 

8 percent above the baseline. More than half 

of this increase--$332 mi Ilion --covers funding 

shortfalls in past years in the Pel! Grant program. Within the remaining funding in 

creases, the President proposes to reallocate 

funds among student aid programs. In the 

Pell Grant program, the maximum grant 
CHAPTER FIVE 

would be increased by $1,300, to a total of 

$3,700. Also proposed is a new $170 million 

Presidential Achievement Scholarship program for Pell Grant recipients who excel in 

their studies. Another $50 million in new 

funding would help states improve the licensing of schools participating in the federal student aid programs. These program increases 

are partially offset by provisions that channel 

Pell Grant funds to the neediest students, thus 

eliminating approximately 400,000 current 

recipients from the program. Student aid 

costs are further reduced by substantial cuts in 

supplemental grants, work-study, and Perkins 

loans and by elimination of state student incentive grants. Funding is frozen at the 1993 

level for 1994 through 1997. 

Training and Employment. Policy changes in 

1993 are minor in training and employment 

programs, although after 1993 most programs 

are frozen at the 1993 or 1994 level. In addition' the Administration proposes to target 

Job Training Partnership Act funds toward 

people who are most in need of training by 

replacing the existing block grant and summer 

youth programs with separate year-round programs for low-income adults and youth. Also, 

a new grant program--Youth Opportunities 

Unlimited--is proposed for fiscal years 1993 

through 1995 to provide comprehensive services to youth living in high-poverty areas. 

Social Services. The President's budget proposes to increase Head Start funding by $530 

million (23 percent above the baseline) in 

1993, to shift $823 million of State Legalization Impact Assistance Grant (SLIAG) funds 

from 1993 to 1994, and to end the Community 

Services Block Grant program. Other 

changes are modest. 

The President's budget highlights the Head 

Start program, which provides comprehensive 

THE ADMINISTRATION'S DOMESTIC PROPOSALS 103 

services to low-income children of preschool 

age. The program would be funded at $2.8 

billion in 1993. Adjusting average costs per 

child for inflation, Head Start services would 

reach 788,000 youngsters, a 166,000 increase 

over the expected participation in 1992. The 

President proposes to freeze Head Start funding at 1993 levels for 1994 through 1997. 

SLIAG grants go to states to pay for certain 

costs of the legalization of undocumented 

aliens required by the Immigration Reform 

and Control Act of 1986. The President proposes to rescind $823 million of SLIAG's already appropriated 1993 funds and restore 

those funds in 1994. This shift lowers 1993 

outlays by $0.6 billion and increases 1994 outlays by an equal amount. California, the recipient of approximately 60 percent of SLIAG 

funds to date, is likely to be the most affected 

by the delayed funding. 

Once again, the President proposes eliminating the Community Services Block Grant 

program, reducing spending by $0.3 billion in 

1993. 

CBO Reestimates 

The CBO reestimates in this function are 

small and are made up of both economic and 

technical changes. CBO's slightly higher projection of interest rates accounts for small upward reestimates in guaranteed student loan 

programs. However, CBO projects lower 

growth in student loan volumes than the Administration does, which leads to downward 

reestimates in the out-years. Reestimates are 

also made for the Foster Care and Adoption 

Assistance program and for discretionary education programs. 
104 ANALYSIS OF THE PRESIDENT'S BUDGET March 1992 

Function 550: Health 

PROPOSED SPENDING CHANGES (By fiscal year, outlays in billions of dollars) 

CBO Baseline Without Discretionary Caps 

Proposed Changes 

Pay-As-You-Go 

Federal Employees Health Benefits 

Other 

Subtotal 

Discretionary 

Public Health Service 

Federal Employees Health Benefits 

Other 

Subtotal 

Other 

Federal Employees Health Benefits 

Total 

President's 1993 Budget 

as Estimated by CBO 

a. Less than $50 million. 

Proposed Changes 

The President's 1993 budget proposes modest 

spending cuts compared with the CBO baseline, reducing health spending by $0.7 billion 

in 1993 and $3.8 billion in 1997. These 

changes would reduce baseline spending by 

about 2.5 percent in 1997. The Federal Employees Health Benefits program and the Public Health Service are targeted for the largest 

reductions, but Medicaid is left almost untouched. 

Pay-As-You-Go Policy Changes 

Federal Employees Health Benefits. The 

President's budget for the Federal Employees 

Health Benefits (FEHB) program includes a 

pay-as-you-go proposal that would reduce 

program spending by $85 million in 1993 and 

1992 

90.7 

0 

...Q 

0 

a 

0 

--1! 

a 

0 

a 

90.7 

1993 1994 1995 1996 1997 

104.4 115.4 127.4 141. 7 157.1 

-0.1 a -0.1 -0.1 -0.1 

a a -0.1 -0.1 -0.1 

-0.1 a -0.1 -0.2 -0.2 

a -0.5 -0.8 -1.5 -2.3 

-0.1 -0.1 -0.1 0 0 

-0.4 -0.4 -0.5 -0.6 -0.7 

-0.5 -1.1 -1.4 -2.1 -3.0 

-0.1 -0.3 -0.5 -0.5 -0.6 

-0.7 -1.5 -2.0 -2.9 -3.8 

103.7 113.9 125.4 138.8 153.3 

by $375 million over the 1993-1997 period. 

The plan would limit the amount providers 

can bill for certain health services for retired 

enrollees who are over age 65 but are not covered by Medicare. According to the proposal, 

allowed charges for physician services would 

be limited to Medicare's maximum allowable 

actual charge, reducing FEHB outlays as well 

as the out-of-pocket payments of annuitants. 

The proposal is estimated to save the government $85 million in 1993 and $95 million in 

1997. 

Other. The President's ·1993 budget includes 

a Medicaid proposal that would slightly reduce Medicaid spending; proposed changes to 

two other programs would indirectly increase 

Medicaid spending by small amounts. The 

Medicaid proposal would enhance state authority to collect medical child support payments through the Child Support Enforcement Agency and would also allow a custodial 
CHAPTER FIVE 

parent to file directly with the noncustodial 

parent's insurer for reimbursement for a 

child's medical payments. CBO estimates that 

this proposal would result in savings of $5 

million in 1993, rising to $19 million in 1997. 

Other proposed changes that would affect 

Medicaid spending include changes to the 

pension program of the Department of Veterans Affairs (function 700) and to the Aid to 

Families with Dependent Children program 

(function 600). Together these changes would 

result in increased Medicaid spending of $77 

million in 1993, reaching $104 million in 1997. 

Discretionary Policy Changes 

Public Health Service. The Administration's 

funding level for the discretionary programs 

of the Public Health Service would approximate CBO baseline levels in 1993 and maintain the 1993 funding level from 1994 through 

1997. By 1997, spending would be reduced 

below the CBO baseline by $2.3 billion, or 11 

percent. 

Within the Public Health Service, the Administration would fund most of the programs 

of the Health Resources and Services Administration (HRSA) at baseline levels in 1993 

and maintain the 1993 funding level from 

1994 through 1997. As in previous budgets, 

the Administration also proposes to eliminate 

most of the HRSA's health professions' grant 

programs. Savings, compared with the CBO 

baseline, would rise from $19 million in 1993 

to $358 million in 1997. 

As in the last 10 budgets, the Administration plans to cut funding for the construction of Indian health facilities. The 1993 

funding request is 6 percent below the CBO 

baseline for 1993. Under the President's request, spending for Indian health facilities 

would fall $6 million below the CBO estimate 

in 1993 and $181 million below in 1997. The 

Administration also plans to decrease 1993 

funding for the Indian Health Service by 7 

percent, compared with the CBO baseline, 

and maintain the 1993 funding level through 

THE ADMINISTRATION'S DOMESTIC PROPOSALS lOS 

1997. The President's request would put Indian Health Service spending $0.1 billion below the CBO baseline in 1993 and $0.3 billion 

below in 1997. 

The Administration's planned funding for 

both the Centers for Disease Control (CDC) 

and the Alcohol, Drug Abuse, and Mental 

Health Administration (ADAMHA) is slightly 

above the CBO baseline for 1993 and continues the 1993 level through 1997. By 1997, 

spending relative to the CBO baseline would 

be $0.2 billion lower for CDC and $0.3 billion 

lower for ADAMHA. 

The Administration's request for research 

programs of the National Institutes of Health 

is 2 percent above the CBO baseline for fiscal 

year 1993. The 1993 funding level would be 

maintained from 1994 through 1997. [n addition, the President's request would delay obligations of $0.6 billion of each year's funding 

in 1993 through 1997. These delays would 

slow spending on a portion of each year's 

funding. The two changes result in savings of 

$0.3 billion in 1994, compared with the CBO 

baseline, growing to $1 billion in 1997. 

Although the Administration intends to reduce funding for the Food and Drug Administration (FDA), it would institute user fees 

for submitting applications to market new 

products and assume the availability of other 

existing fees; as a result, total FDA funding 

would approximately equal the CBO baseline. 

Under the proposal for user fees, which was 

also in the previous two budgets, federal funding would be 26 percent lower than CBO's 

baseline in 1993, resulting in savings that 

would increa~e from $0.2 billion in 1993 to 

$0.4 billion in 1997. 

Federal Employees Health Benefits. The 

budget has proposed appropriation language 

to reduce federal spending for annuitants' 

health benefits. Reductions would be 

achieved by requiring the Postal Service to reimburse the government for a certain portion 

of past payments for federal health benefits 

for Postal Service annuitants. In a series of 

changes since 1986, the Congress has sought to 
106 ANALYSIS OF THE PRESIDENT'S BUDGET 

reduce the government's liability for paying 

the government portion of FEHB premiums 

for these annuitants. The President's budget 

proposal would require the Postal Service to 

make three lump-sum payments of $105 million in 1993 through 1995. 

Other. The President's budget for Medicaid 

would reduce federal spending for surveying 

and certifying providers by funding these 

activities through user fees collected from service providers and depositing the fees in a revolving fund. CBO estimates that this proposal, which was included in the President's 

1992 budget, would save $0.1 billion in each 

of the years from 1993 through 1997. 

The Administration's proposed funding 

level for Consumer and Occupational Health 

and Safety programs is $0.2 billion below the 

CBO baseline in 1993, with the 1993 funding 

level maintained through 1997. Spending 

would be $0.3 billion below the CBO baseline 

in 1993 and $0.6 below in 1997. 

Other Changes 

The President's budget for FEHB includes 

several policy changes to be achieved by administrative action. The plan would increase 

cost sharing for federal annuitants who are 

also Medicare beneficiaries by requiring copayments for prescription drugs and limiting 

payments for physician services to the Medicare-allowed charge. Savings are estimated at 

$75 million in 1993, rising to $155 million in 

1997. 

In addition, the budget plan includes a 

change in the current policy of calculating the 

government's premium contribution based on 

the average premium of the "big six" FEHB 

plans, including a proxy premium for the 

high-option Aetna plan that is no longer 

offered. A temporary provision of the Omnibus Budget Reconciliation Act of 1990 specified that a proxy premium be used in place 

of the (high-option) Aetna premium for calculating the government's contribution. The 

new formula would instead be based on the 

March 1992 

remaining five plans, resulting in a drop in the 

federal government's contribution of $231 

million in 1994 and $473 million in 1997. 

CBO Reestimates 

Medicaid. CBO's baseline for federal expenditures for Medicaid is $4.2 billion lower 

than the President's in 1992 and $24.3 billion 

lower in 1997. The difference stems largely 

from differing assessments of state forecasts of 

Medicaid spending. Although both the Administration and CBO use state forecasts of 

Medicaid expenditures in developing their 

Medicaid projections, each uses them differently. The CBO Medicaid baseline is developed using the states' current-year estimates 

to calibrate current-year spending for the 

CBO Medicaid projection model; CBO then 

applies inflators representing the growth of 

prices, populations, and service intensity to 

the current-year estimate to forecast spending 

throughout the projection period. 

In contrast, the Administration uses state 

estimates of Medicaid spending as the starting 

point for its projections of Medicaid outlays, 

but it believes the state forecasts are systematically biased downward. In its estimates for 

fiscal years 1992 and 1993, the Administration 

has adjusted the state forecasts upward by $4.4 

billion and $10.7 billion, respectively, to compensate for the perceived underestimates of 

Medicaid outlays by state offices. The Administration then projects out-year spending 

based on the adjusted state estimates for 1992 

and 1993. Because the Administration's estimates for 1992 and 1993 are significantly higher than CBO's, the resulting out-year projections are higher. Moreover, in 1994 through 

1997, the Administration assumes that Medicaid will grow by about 15 percent a year, but 

CBO projects an average increase in outlays 

of 12 percent a year. 

Other. CBO's reestimates of the President's 

budget for all other programs in function 550 

are small. 
CHAPTER FIVE THE ADMINISTRATION'S DOMESTIC PROPOSALS 107 

CBO REESTIMATES OF PROPOSED SPENDING IN FUNCTION 550 OF 

THE PRESIDENT'S BUDGET (By fiscal year, outlays in billions of dollars) 

1992 1993 1994 1995 1996 1997 

President's 1993 Budget 94.6 108.2 122.9 138.5 156.8 177.8 

CBO Reestimates 

Pay-As-You-Go Proposals 

Technical 0 0.1 0.1 0.1 0.1 0.1 

Other 

Technical 

Medicaid -4.2 -4.9 -9.2 13.5 -18.5 -24.4 

Other 0.3 0.4 ...Q;l ~ 0.4 

Subtotal -3.9 -4.5 -9.1 -13.2 -18.1 -24.6 

Total -3.9 -4.4 -9.0 -13.1 -18.0 -24.6 

President's 1993 Budget 

as Estimated by CBO 90.7 103.7 113.9 125.4 138.8 153.3 
108 ANALYSIS OF THE PRESIDENT'S BUDGET March 1992 

Function 570: Medicare 

PROPOSED SPENDING CHANGES (By fiscal year, outlays in billions of dollars) 

1992 

CBO Baseline Without Discretionary Caps 118.0 

Proposed Changes 

Pay-As-You-Go 

Delay hospital update 0 

Reduce payment for laboratory services 0 

Reduce federal subsidy for highincome beneficiaries a 

Other ....-J1 

Subtotal a 

Discretionary 

Medicare contractors and 

HCF A administration 0 

Total a 

President's 1993 Budget 

as Estimated by CBO 118.0 

President's 1993 Budget 118.6 

CBO Reestimates 

a. Less than $50 million. 

Proposed Changes 

The President's budget proposes to reduce 

Medicare spending by $1.3 billion in 1993 and 

by $4.2 billion in 1997, compared with baseline levels. Medicare baseline spending is 

projected to grow at an average annual rate of 

11.3 percent from 1992 through 1997. The 

Administration's proposals would reduce this 

growth by 0.4 percentage points annually. 

Reductions are proposed in both the Hospital 

Insurance (HI) and Supplementary Medical 

Insurance (SMI) portions of Medicare. [n addition, some Medicare enrollees would be required to pay higher premiums. 

-0.7 

1993 1994 1995 1996 1997 

130.5 144.7 161.0 180.6 201.7 

-0.6 -1.0 -1.2 1.1 1.1 

-0.3 -0.5 -0.7 -0.9 1.2 

-0.1 -0.3 -0.5 -0.7 -0.9 

-0.1 -0.2 -0.3 -0.3 -0.3 

-1.2 -2.0 -2.6 -3.0 -3.5 

-0.1 -0.3 -0.4 -0.6 -0.7 

-1.3 -2.3 -3.0 -3.6 -4.2 

129.2 142.4 158.0 177.0 197.5 

129.3 142.8 158.7 178.9 200.4 

-0.1 -0.4 -0.6 -1.9 -2.9 

Delay the Hospital Update. The President's 

plan would delay the annual hospital payment 

update from October 1 to January 1 each 

year. The Administration states that this proposal would put the hospital update on the 

same payment cycle used for most other 

health providers. Under CBO's assumed rates 

of inflation, the proposals would reduce reimbursements to hospitals by about 1.5 percent a 

year. CBO estimates that this one-time delay 

would save $0.6 billion in 1993 and $1.1 billion in 1997. 
CHAPTER FIVE 

Reduce the Payment for Laboratory Services. 

The President's budget includes two proposals 

to revise the payment structure and slow the 

growth of spending for clinical laboratory 

services. (From 1987 through 1991, spending 

for independent clinical laboratory services 

increased at an average annual rate of 19 

percent.) The first proposal would lower the 

existing cap on fees from 88 percent to 76 

percent of the median amount charged by all 

carriers. The second proposal would give the 

Secretary of Health and Human Services 

(HHS) discretion when applying the update 

factor for laboratory services. These updates 

could be positive or negative for each service. 

The Administration's assumption of a freeze 

in the laboratory update for 1993 through 

1997 was used to estimate this proposal. The 

savings from the two proposals would be $0.3 

billion in 1993, increasing to $1.2 billion by 

1997. 

Reduce the Federal Medicare Subsidy for 

High.Income Beneficiaries. The President's 

budget proposes raising the SMI premium for 

certain high-income beneficiaries. The cur· 

rent monthly premium, set by the Omnibus 

Budget Reconciliation Act of 1990, equals approximately 25 percent of program costs. The 

remaining 75 percent of SMI program costs 

are financed from general revenues. The 

President proposes to increase the SMI premium to 75 percent of program costs for beneficiaries with annual income greater than 

5100,000 for single beneficiaries and $125,000 

for couples. This budget assumes an effective 

date of April 1, 1992. The monthly premium 

paid by these higher-income enrollees would 

be 5104.10 in 1993, compared with 536.60 under current law. Around 875,000 beneficiaries could be required to pay the higher premium by 1997 if they chose to continue their 

enrollment in SM£. Versions of this proposal 

were considered and rejected both during the 

1990 budget summit negotiations and in Congressional deliberations on last year's Presidential budget. 

Estimated savings from this proposal are 

$45 million in 1992, increasing to 50.9 billion 

by 1997. These estimates are subject to conTHE ADMINISTRATION'S DOMESTIC PROPOSALS 109 

siderable uncertainty because the enforcement 

mechanisms have not yet been specified. Also, the costs associated with administering this 

proposal are estimated to be $25 million in 

1992 and $50 million in each succeeding year. 

These added administrative costs do not appear to have been included in the Administration's request for Medicare administration. 

Other Proposals. The budget includes three 

other Medicare proposals. Reimbursement 

for anesthesia services would be paid at a 

single fee regardless of whether the service is 

provided by an anesthesiologist working alone 

or one supervising a certified registered nurse 

anesthetist (CRNA). This change would reduce the total payment when an anesthesiologist is supervising a CRN A. In addition, the 

proposal would lower payments to CRN As. 

Estimated annual savings from both changes 

are $0.1 billion in 1993 and $0.2 billion in 

1997. 

Unlike previous budgets, this budget includes only one proposal that would reduce 

payments to suppliers of durable medical 

equipment. The President's budget proposal 

would give the Secretary of HHS discretion 

when applying the update factor for items of 

durable medical equipment. These updates 

could be positive or negative for each item of 

equipment provided. Savings were estimated 

based on the Administration's assumption that 

the fee schedule update would be frozen in 

1993 and 1994. CBO estimates annual savings 

of $35 million in 1993 and $170 million by 

1997. 

The President also proposes to include under Medicare all state and local government 

employees hired before April 1. 1986. \1ost 

state and local employees already have HI 

coverage, either through previous em ployment 

or through their spouses. This proposal 

would affect both revenues (see Chapter 3) 

and outlays. Only the effect of the increased 

HI outlays is shown in function 570. Outlay 

increases from this proposal are estimated at 

$3 million in 1993, rising to $50 million in 

1997. The Administration did not incl ude the 

effect on HI outlays in its budget. 
1 10 ANALYSIS OF THE PRESIDENT'S BUDGET 

Discretionary Policy Changes 

Medicare Administration. The President's request for administrative funds for the Health 

Care Financing Administration is $0.1 billion 

below the CBO baseline in 1993 and $0.7 billion below in 1997. The request contains two 

components: a four-year freeze, and a change 

in the funding source for survey and certification activities from a general fund appropriation to user fees. The 1994-1997 request is 

frozen at the 1993 level. User fee collections 

are expected to raise $0.2 billion annually. 

March 1992 

CBO Reestimates 

CBO's estimate of the Medicare program is 

lower than, though very close to, the Administration's in 1992 through 1997. The differences stem from different economic and technical estimating assumptions. The hospital 

market basket update and the Medicare Economic Index are the two major indices used to 

project Medicare spending. Wages are a large 

part of both indices, and CBO's projections of 

wage growth are lower than those of the Administration. CBO technical factors also result in downward reestimates in the out-years, 

partially resulting from lower estimated 

growth in the use of physician and laboratory 

serVlces. 
CHAPTER FIVE THE ADMINISTRATION'S DOMESTIC PROPOSALS 111 

Function 600: Income Security 

PROPOSED SPENDING CHANGES (By fiscal year, outlays in billions of dollars) 

1992 

CBO Baseline Without Discretionary Caps 196.4 

Proposed Changes 

Pay-As-You-Go 

Civil Service Retirement 0 

AFDC, Food Stamps, and Child 

Support Enforcement 0 

Trade Adjustment Assistance and other .1! 

Subtotal a 

Discretionary 

Low-income energy assistance 0 

Program administration 0 

Housing assistance a 

Child nutrition 0 

Other ..Q 

Subtotal a 

Total a 

Public Health Service Retired Officers Fund 

(Transfer from function 500) 0 

President's 1993 Budget 

as Estimated by CBO 196.4 

a. Less than $50 million. 

Proposed Changes 

The President's proposals would r~duce outlays for income security programs by $2.1 billion relative to CBO baseline levels in 1993 

(about 1 percent) and by $6.4 billion in 1997 

(about 3 percent). Savings would total $17 

billion over five years. Two-fifths of the savings would result from pay-as-you-go policy 

changes, most notably from eliminating the 

optional lump-sum payment in Civil Service 

Retirement. Outlays for low-income energy 

assistance and several other discretionary programs would be lowered through a combination of reduced funding levels and restrictions that delay obligations. Reimbursements 

would be reduced for meals served in family 

1993 1994 1995 1996 1997 

197.0 206.5 217.2 227.1 239.5 

0 0 0 -2.1 -2.8 

-0.2 -0.1 -0.1 -0.1 -0.2 

-0.1 -0.2 -0.2 -0.2 -0.3 

-0.3 -0.3 -0.3 -2.4 -3.2 

-1.2 -0.5 -0.6 -0.6 -0.7 

a -0.1 -0.4 -0.6 -0.8 

-0,1 0.2 a -0.2 0.5 

-0.2 -0.2 -0.2 -0.3 -0.3 

-0.4 -0.5 -0.7 -0.7 -0.8 

-1.8 -1.2 -1.9 -2.4 -3.2 

-2.1 -1.5 -2.2 -4.8 -6.4 

0.1 0.1 0.1 0.1 0.1 

195.0 205.1 215.1 222.4 233.2 

day care homes. Funding reallocations, including some funding increases, are proposed 

for housing and nutrition programs. 

Pay-As-You-Go Policy Changes 

Civil Service Retirement. The PreSIdent's 

budget would eliminate the option of a lumpsum payment in Civil Service Retirement. 

Current law will give federal employees retiring after October 1, 1995, the option of 

withdrawing their contributions on retirement 

in exchange for reduced annuity payments. 

Certain small groups of federal retirees are 

already allowed to elect a lump-sum benefit. 

The President's proposal would permanently 
112 ANALYSIS OF THE PRESIDENT'S BUDGET 

extend the current law's prohibitions on 

lump-sum payments and would also eliminate 

the option for those groups currently allowed 

it, effective October 1, 1995. CBO estimates 

that eliminating the lump-sum option for all 

federal employees would save $2.1 billion in 

1996 and 52.8 billion in 1997. These savings, 

however, would be offset in later years by 

higher annuity payments. 

AFDC, Food Stamps, and Child Support 

Enforcement. The President's proposed 

changes to these programs are modest, resulting in savings of $0.1 billion to $0.2 billion a 

year and $0.7 billion over five years. Of the 

seven policies discussed below, four were included in last year's budget. 

Two new policy proposals would increase 

spending under the Aid to Families with Dependent Children (AFDC) and Food Stamp 

programs at the states' discretion. CBO assumes that half the states would elect the two 

policy changes. The first proposal would allow families already on AFDC to accumulate 

resources up to $10,000 without losing AFDC 

or food stamp eligibility. Current resource 

limits are $1,000 in AFDC and $2,000 in the 

Food Stamp program. Given the limited 

asset-generating ability of low-income families, 

CBO estimates that this change would increase the AFDC caseload by only 5,000 families, increasing AFDC costs by less than $0.1 

billion over the 1993-1997 period. 

The second proposal involves the Administration's new Plan for Achieving Self-Support 

(PASS), which encourages entrepreneurial 

activities among AFDC recipients. Under this 

plan, states would disregard all income and 

resources associated with a family's approved 

self-employment plan when calculating eligibility and benefits for AFDC and food stamps. 

Administrative data and self-employment demonstration projects suggest that fewer than 

l percent of AFDC recipients would participate in PASS. With low participation expected, CBO estimates that the proposal 

would increase AFDC and food stamp costs 

by $0.1 billion over the five-year estimation 

period. 

March 1992 

A third AFDC legislative proposal would 

limit assistance provided in the AFDC Emergency Assistance program to 30 consecutive 

days in a 12-month period. This limitation 

would reduce federal funding to a number of 

states that use Emergency Assistance funds to 

cover emergencies for up to 12 consecutive 

months and would save an estimated 50.2 billion over the 1993-1997 period. 

Three proposals would modify the Child 

Support Enforcement (CSE) program. First, 

the Administration has expanded last year's 

proposal requiring food stamp recipients to 

cooperate with CSE personnel to also include 

recipients of housing assistance. The second 

change, identical to a proposal in last year's 

budget, would mandate higher fees for CSE 

services provided to families that are not receiving AFDC. Third, a new performancebased incentive formula would reward states 

for establishing paternities and child support, 

obligations. Net savings from these three proposals are estimated to total 50.8 billion over 

five years. 

Finally, the Administration proposes a minor reduction in food stamp outlays in 1996 

and 1997 by extending a 1990 farm bill provision due to expire in 1995. The provision 

would reduce the share of overpayment collections retained by the states and increase the 

federal share of such collections by less than 

$20 million annually. 

Trade Adjustment Assistance and Other 

Proposals. As it has in recent years, the President's budget proposes to eliminate the Trade 

Adjustment Assistance program for workers 

who lose their jobs because of competition 

from foreign imports. The proposal would 

save an estimated $0.1 billion annually and 

would eliminate benefits for approximately 

24,000 workers in 1993. 

The remaining pay-as-you-go policy 

changes affect nutrition programs, the Pension 

Benefit Guaranty Corporation, and the Supplemental Security Income program. The Administration proposes a series of largely offsetting policy changes in child nutrition pro-
CHAPTER FIVE 

grams in order to shift more benefits to 

lower-income children. Subsidies for meals 

served to children from families with income 

between 130 percent and 185 percent of the 

poverty line would be increased by 25 cents 

for lunches and 20 cents for breakfasts. This 

increase would be offset by a proposed 6 cent 

reduction in subsidies for meals served to 

children from families with income above 185 

percent of the poverty line. Past budgets have 

included similar proposals for child nutrition 

programs. 

Proposals that would affect the Pension 

Benefit Guaranty Corporation (PBGC) include revising the funding requirements for 

single-employer plans, placing certain limits 

on guaranteed benefits, enforcing the minimum funding requirements, and changing the 

treatment of PBGC claims in bankruptcy 

cases. On a cash basis, the Administration 

estimates that these changes would have no 

effect on federal outlays over the projection 

period, although they would produce savings 

in later years. CBO estimates that these 

changes would have small near-term savings, 

no more than $20 million a year. The 

changes would also cause significant revenue 

losses, as discussed in Chapter 3. The Administration proposes to convert PBGC from cash 

to accrual accounting and would give pay-asyou-go credit for its legislative proposals ($8.7 

billion in 1992). CBO has not included the 

effects of this accounting change in its 

spending estimates and does not believe that 

any pay-as-you-go credit should be given, as 

discussed in Chapter 1. 

Finally, the Administration has one legislative pay-as-you-go proposal affecting the 

Supplemental Security Income (SSI) program. 

The proposal would allow the Social Security 

Administration to collect SSI overpayments by 

reducing Social Security payments. This action would reduce SSI outlays by an estimated 

$34 million in 1993 and by $23 million in 

1997. The amount that would be collected in 

1993 is more than would be collected in 1997 

because of an existing backlog of uncollected 

overpayments. 

THE ADMINISTRATION'S DOMESTIC PROPOSALS 113 

Discretionary Policy Changes 

Low-Income Home Energy Assistance. The 

Administration requests $1.1 billion for the 

Low-Income Home Energy Assistance Program (LIHEAP) in 1993, of which $0.8 billion, 

or 75 percent, would not be available for obligation until September 30, 1993. The CBO 

baseline for 1993 includes a higher funding 

level of $1.5 billion and no obligation delay. 

The combination of lower funding and delayed obligations reduces 1993 outlays under 

the President's budget by $1.2 billion relative 

to the CBO baseline. The Administration 

proposes to hold LlHEAP funding constant at 

$1.1 billion from 1993 through 1997, resulting 

in a funding level that by 1997 falls to 60 percent of CBO's inflation-adjusted baseline. 

The Administration's proposed delay of obligations extends a policy contained in 

LIHEAP's 1992 appropriation language, 

which states that over one-fourth of the 1992 

appropriation cannot be obligated until after 

September 30, 1992. The President's proposal 

to delay the majority of the 1993 appropriation is in part an adjustment for the 1992 

delay, although the proportion of 1993 funds 

proposed to be delayed is considerably higher 

than was delayed in 1992. 

Program Administration. Outlays under the 

President's proposed funding levels for administrative expenses for unemployment compensation, Supplemental Security Income, 

food programs, and other income security 

programs are within $50 million of CBO 

baseline levels in 1993, but fall to $0.8 billion 

below CBO baseline levels in 1997. The 

growing stream of outlay savings relative to 

CBO's baseline is the result of the President's 

proposal to freeze most administrative programs at the 1993 level; in contrast, the CBO 

baseline adjusts levels for inflation through 

1997. The largest reduction in administrative 

expenses is for unemployment compensation. 

The President's request for administrative 

expenses for SSJ is higher than the CBO 

baseline in both 1993 and 1994, with the re-
114 ANALYSIS OF THE PRESIDENT'S BUDGET 

quested amounts dropping below the baseline 

from 1995 through 1997 as the result of a proposed 1994-1997 freeze. The requested increases are in response to a higher rate of 

disability applications, which has increased 

the average time for processing disability 

claims. The President's request for 1993 

would be even higher except for a proposal to 

fund part of the SSI program's administrative 

expenses through a fee imposed on states that 

choose to have the Social Security Administration administer their state supplemental 

payments. The fee, which the Administration 

is proposing in appropriation language for the 

Limitation on Administrative Expenses (LAE) 

account, would equal 1.67 percent of a state's 

supplementary payments and would be 

credited directly to the LAE account. The 

amount collected from the states in 1993 

would be approximately $60 million. 

Housing Assistance. For 1993, the President 

has requested $20.3 billion for the housing 

assistance programs of the Department of 

Housing and Urban Development (HUD) and 

the Farmers Home Administration. This 

funding level is $1.5 billion below the baseline 

level for 1993. Estimated outlays would fall 

only $0.1 billion below the baseline in the first 

year, however, because of the multiyear nature of many housing programs. Over the 

1993-1997 period, the President's budget proposals would reduce housing assistance outlays by $0.6 billion, a reduction of one-half of 

1 percent below baseline levels. 

The President's request would shift funds 

among the various housing programs and 

would make vouchers the principal means of 

providing rental assistance. The HUD proposal would fund 98,000 vouchers, compared 

with the 22,000 vouchers assumed in the CBO 

baseline. Emphasizing vouchers raises outlays 

in the beginning of the five-year projection 

period because appropriations for vouchers 

are spent more rapidly than for other housing 

programs. These increases in housing outlays 

would be offset by proposals to eliminate 

funding for public housing construction, to 

March 1992 

reduce the public housing modernization 

program, and to reduce or eliminate several 

smaller housing programs. 

The President also proposes to significantly 

reallocate funding among three programs 

authorized in the National Affordable Housing Act of 1990. The Administration proposes 

to increase funding for HOPE (Homeownership and Opportunity for People Everywhere) 

grants, which enable some residents of public 

housing and other low-income families to purchase their residences. Funding would also be 

increased for a program allowing HUD to 

offer various inducements to owners of lowincome housing to maintain low-income 

tenancy. Increases in these two programs 

would be largely offset by a reduction of more 

than 50 percent in funding for the Home Investment Partnership Program, which provides funds to participating state and local jurisdictions to increase the availability of 

low-income housing. 

Child Nutrition. The Administration's budget 

request for child nutrition programs includes 

a proposal to reduce subsidies for meals 

served to children in family day care homes 

unless the family day care home determines 

that the children are from families with income at or below 185 percent of the poverty 

line. The estimated savings of between $0.2 

billion and $0.3 billion a year would be scored 

as a discretionary change, even though child 

nutrition programs are entitlement programs, 

because the change is proposed through appropriation language. 

Other. Under the President's proposals, outlays for the remaining income security programs fall $0.4 billion below CBO's baseline 

in 1993 and $3.1 billion belov. CBO's baseline 

over the five-year projection period. The 

largest reduction is in the Refugee and Entrant Assistance program, which would be cut 

by almost 50 percent. The President also proposes a 1993-1997 freeze and an obligation delay for the Child Care and Development 

Block Grant program. 
CHAPTER FIVE 

For 1993, the President proposes a modest 

increase in the Special Supplemental Food 

Program for Women, Infants, and Children 

(WIC), but this increase is partially offset by 

reduced funding for the Commodity Supplemental Food, Emergency Food and Shelter, 

Elderly Nutrition, Food Distribution on Indian Reservations, and Soup Kitchen programs. Because the budget holds requests for 

1994 through 1997 at 1993 levels, outlays for 

these six nutrition programs fall $0.6 billion 

below CBO baseline levels over five years. 

Other Changes 

The final change in function 600 would be a 

transfer of about $0.1 billion annually from 

function 550 for payment of retirement benefits for Public Health Service commissioned 

corps officers. Financing of the retirement 

fund would be changed from a pay-as-you-go 

system to an accrual-basis system, but there 

would be no change in benefit levels and no 

net change in outlays. 

CBO Reestimates 

Pay-As-You-Go Reestimates. CBO's reestimates of the pay-as-you-go proposals are 

small for 1993 through 1995. The positive reestimates of $0.1 billion in both 1996 and 1997 

are largely the result of CBO's smaller estimates of savings from the proposed elimination of the lump-sum benefit in Civil Service 

Retirement. This difference reflects CBO's 

smaller estimate of the number of people 

electing the lump-sum benefit under current 

law. 

Other Reestimates. CBO's economic reestimates increase spending in most programs 

because CBO projects higher inflation, resulting in more rapid growth in indexed entitlements. Also, CBO's projections for unemployment rates are higher than the Administration's projections in every year but 1993, 

THE ADMINISTRATION'S DOMESTIC PROPOSALS l15 

resulting in further upward reestimates. The 

reestimates are downward for a few programs 

because of lower projections for the consumer 

price index for "food away from home" and 

certain federal pay assumptions. 

CBO's technical reestimate of the Supplemental Security Income program lowers outlays by $1.4 billion in 1993 and by $2.9 billion 

in 1997. Most of the SSI reestimate results 

from differing assumptions about the number 

of SSI recipients. In 1993, CBO assumes a 

slightly smaller number of blind or disabled 

beneficiaries than the President's budget 

assumes. CBO is also lower than the Administration in estimating the n um ber of 

claimants who, as a result of the Supreme 

Court's decision in Sullivan v. Zebley, will 

seek benefits that were denied in the past. In 

1997, the difference in projected outlays results from the Administration's higher estimate of recipients in the base year and slightly 

higher estimated rates of growth in the recipient population throughout the projection 

period. 

Estimates of the number of people receiving unemployment compensation, food 

stamps, and Aid to Families with Dependent 

Children--three programs particularly sensitive to changes in unemployment rates--are 

again uncertain this year. Caseload increases 

in these programs in the past year were larger 

than expected given current unemployment 

rates. For the Food Stamp program, CBO reestimates outlays downward by between $1.1 

billion and $1.5 billion annually because CBO 

projects an earlier peak in the growth of the 

caseload than the Administration does. For 

both unemployment compensation and 

AFDC, CBO projects more recipients than 

does the Administration, resulting in upward 

outlay reestimates. 

CBO's reestimates for the child nutntiOn 

programs result from lower assumptions about 

participation in the Child Care and Adult 

Food program. Other reestimates are dominated by negative reestimates in the earned 

income tax credit program. 
116 ANALYSIS OF THE PRESIDENT'S BUDGET March 1992 

CBO REESTIMATES OF PROPOSED SPENDING IN FUNCTION 600 OF 

THE PRESIDENT'S BUDGET (By fiscal year, outlays in billions of dollars) 

1992 1993 1994 1995 1996 1997 

President's 1993 Budget 198.1 196.7 206.5 216.2 221.7 231.7 

CBO Reestimates 

Pay-As-You-Go Proposals 

Technical a a a a 0.1 0.1 

Other 

Economic 0.3 0.3 0.7 1.8 2.7 3.4 

Technical 

Supplemental Security Income -1.3 -1.4 -1.4 -2.0 -2.4 -2.9 

Food stamps -0.5 -1.2 -1.5 -1.4 -1.1 -1.1 

Unemployment compensation 0.4 0.7 0.7 0.9 1.2 1.2 

AFDC and child support a 0.3 0.6 0.8 1.0 1.4 

Child nutrition -0.1 -0.2 -0.3 -0.4 -0.4 -0.5 

Other -0.4 -0.4 -0.2 -0.7 -0.3 -0.1 

Subtotal -2.0 -2.1 -2.1 -2.8 -2.1 -1.9 

Total 1.7 -1.8 1.4 -1.0 0.7 1.6 

President's 1993 Budget 

as Estimated by CBO 196.4 195.0 205.1 215.1 222.4 233.2 

a. Less than $50 million. 
CHAPTER FIVE THE ADMIN£STRA TION'S DOMESTIC PROPOSALS 117 

Function 650: Social Security 

PROPOSED SPENDING CHANGES (By fiscal year, outlays in billions of dollars) 

1992 1993 1994 1995 1996 1997 

CBO Baseline Without Discretionary Caps 287.0 303.2 320.5 338.4 357.4 377.4 

Proposed Changes 

Discretionary 

Administrative costs 0 -0.1 -0.1 -0.2 -0.3 -0.5 

Other Changesb 

Earnings test 0 0.1 0.1 a a a 

Other 0 a a ---1! a ---1! 

Subtotal 0 0.1 0.1 a a a 

Total 0 a 0.1 -0.1 -0.3 -0.5 

President's 1993 Budget 

as Estimated by CBO 287.0 303.2 320.5 338.2 357.0 377.0 

a. Less than SSO million. 

b. Changes in Social Security benefits and revenues are not included under the general pay-as-you-go restrictions, but instead are 

subject to separate rules in the Senate and the House. 

Proposed Changes 

The President's 1993 budget proposes only 

minor changes in Social Security. The overall 

policy changes would modify program spe~ding by less than 0.1 percent over the next five 

years. 

Administrative Costs. Funds for admin 

istering the Old-Age and Survivors Insurance 

(OASI) program and the Disability Insuranc.e 

(01) program would increase under the PreSldent's request at approximately baseline rates 

between 1992 and 1993. eBO shows a small 

reduction below baseline levels for these programs' administrative expenses in 1993: This 

reduction is the result of an anomaly lllvolving the distribution of the limitation on administrative expenses for the Social Security 

Administration between the Social Security 

programs and the Supplemental Security. Income program. During the 1994-1997 penod, 

the President's plan would freeze administrative expenses at 1993 levels, resulting in growing savings in discretionary spending. By 

1997, spending would fall $460 million below 

the eBO baseline. 

Because eBO i~ forecasting increases in the 

number of Dr applications over the projection 

period, the administrative funding in the 

President's budget could result in significant 

increases in processing time for disability 

claims. The Social Security Administration's 

budget justification cites this as a possible 

problem even in 1993. 

Earnings Test. The Administration proposes 

modest adjustments in the limits on exempt 

earnings for people ages 65-69 in 1993 and 

1994, with the limits returning to the current 

law's levels in 1995. The exact increases have 

not been specified except that they would 

total $1,000 in 1993 and 1994. However, the 

estimated additional benefit payments in the 

President's budget are consistent with a $500 

increase for both 1993 and 1994 on top of 

projected exempt amounts of $10,680 in 1993 

and $11,160 in 1994. eBO estimates that the 
118 ANALYSIS OF THE PRESIDENT'S BUDGET 

additional outlays from these increases would 

total $235 million over the next five years. 

CBO Reestimates 

CBO has reestimated the President's budget 

request upward by about $0.3 billion in 1992 

and about $9.5 billion in 1997. CBO's projections of higher inflation and the resulting 

higher cost-of-living adjustments increase outlays by $6.2 billion in 1997. 

Social Security Cost-of-Living Adjustments 

Assumed by CBO and the Administration 

(In percent, by fiscal year) 

1993 1994 1995 1997 

CBO 

Administration 

3.2 

3.0 

3.7 

3.2 

3.6 3.7 3.6 

3.2 3.2 3.2 

March 1992 

CBO's technical estimating assumptions increase outlays by $0.3 billion in 1992 and 

about $3.4 billion in 1997. Average monthly 

benefits, after accounting for differences in 

cost-of-living adjustments, are the largest element of the reestimate and amount to about 

$2.6 billion in 1997. That figure represents a 

reestimate of about 0.7 percent, less than $5 

per month for the average beneficiary. CBO 

predicts a slightly larger number of Social 

Security beneficiaries than does the Administration--the net effect of a lower number of 

OASI recipients and a higher number of 01 

recipients. Overall, this causes CBO to project about $1.0 billion more in benefit payments than the Administration does over the 

projection period. The remaining significant 

source of reestimate is retroactive benefits, 

which CBO projects at $0.1 billion to $0.4 billion a year higher than the President's budget. 

CBO REESTIMATES OF PROPOSED SPENDING IN FUNCTION 650 OF 

THE PRESIDENT'S BUDGET (By fiscal year, outlays in billions of dollars) 

1992 1993 1994 1995 1996 1997 

President's 1993 Budget 286.7 302.3 317.7 333.5 350.0 367.4 

eBO Reestimates 

Economic 

Cost-of-living adjustments 0 0.4 1.6 2.9 4.4 6.2 

Technical 

Average benefits adjusted 

for inflation 0.2 0.4 0.8 1.4 2.0 2.6 

N urn ber of beneficiaries a -0.1 a 0.2 0.3 0.6 

Retroactive benefits 0.1 0.2 0.3 0.4 0.3 0.1 

Other ~ a a a a a 

Subtotal 0.3 0.6 I.2 1.9 2.6 3.4 

Total 0.3 1.0 2.8 4.8 7.0 9.5 

President's 1993 Budget 

as Estimated by eBO 287.0 303.2 320.5 338.2 357.0 377.0 

a. Le~s than $5fl million. 
CHAPTER FIVE THE ADMINISTRATION'S DOMESTIC PROPOSALS 119 

Function 700: Veterans Benefits and Services 

PROPOSED SPENDING CHANGES (By fiscal year, outlays in billions of dollars) 

CBO Baseline Without Discretionary Caps 

Proposed Changes 

Pay-As-You-Go 

Pensions 

Housing programs 

Reimbursements, medical care 

Education programs 

Subtotal 

Discretionary 

Housing programs 

Reimbursements, medical care 

Medical care 

General operating expenses 

Other 

Subtotal 

Total 

President's 1993 Budget 

as Estimated by CBO 

a. Less than $50 million. 

Proposed Changes 

The President's 1993 budget includes more 

than 20 legislative proposals for veterar.,s 

benefits and services. The combined effect of 

these proposals would be to reduce spending 

for function 700 over the 1993-1997 period by 

$10.1 billion (5.3 percent) relative to the CBO 

baseline. Almost all proposals would reduce 

spending below baseline levels. Many would 

extend sunset dates on savings provisions enacted in the Omnibus Budget Reconciliation 

Act of 1990 (OBRA-90) or would restate proposals offered in last year's budget. 

Pay-As-You-Go Policy Changes 

Pensions. The President proposes eliminating 

the sunset clauses in two pension-related 

1992 

34.2 

0 

0 

0 

0 

0 

0 

0 

0 

0 

0 

0 

0 

34.2 

1993 1994 1995 1996 1997 

35.3 38,1 37.9 37.6 40.4 

-0.2 -0.2 -0.2 -0.2 -0.3 

-0.4 -0.1 -0.1 -0.1 -0.1 

0 -0.2 -0.2 -0.2 -0.3 

a a -0.1 -0.1 -0.1 

-0.6 -0.5 -0.6 -0.6 -0.7 

-0.2 -0.2 -0.2 -0.1 -0.2 

-0.1 -0.1 -0.1 -0.1 -0.1 

a a -0.9 -1.6 -2.3 

a a -0.1 -0.1 -0.2 

a _a -0.1 -0.2 -0.2 

-0.3 -0.3 -1.3 -2.1 -3.0 

-0.9 -0.8 -1.9 -2.8 -3.7 

34.4 37.3 36.0 34.8 36.7 

provisions of OBRA-90. The first provision 

authorizes the Department of Veterans Affairs 

(VA) to have access to Internal Revenue Service data for the purpose of verifying the income reported by VA pensioners. Under current law, this authority would expire on 

September 30, 1992. Extending this authority 

would save an estimated $344 million from 

1993 through 1997. 

A second proposal would eliminate the 

September 30, 1992, sunset date on a prov!-

sion that limits to $90 a month the pension for 

any unmarried or childless veteran who is 

receiving Medicaid coverage in a Medicaidapproved nursing home. This change would 

affect about 14,000 veterans a year and would 

save $739 miHion in pensions through 1997. 

Medicaid requires that any income above a 

personal-needs allowance (generally $30 a 

month) be used to defray nursing home costs 
120 ANALYSIS OF THE PRESIDENT'S BUDGET 

before Medicaid will pay the remaining costs. 

Therefore, Medicaid costs would rise as pension benefits are lowered. The net five-year 

savings to the federal government from this 

proposal would be $325 million. 

Housing Programs. The President proposes 

several changes in the V A programs that 

guarantee home loans to veterans. [n the 

Guaranty and Indemnity program, greater 

restrictions would be placed on the multiple 

use of the loan guaranty benefit. Currently, a 

veteran who has paid off a guaranteed loan 

can receive a second loan on the same basis as 

the first. The President's proposal would require a 10 percent down payment and a 2.5 

percent origination fee for any subsequent use 

of the entitlement. (Under current law, the 

fee ranges from 0.5 percent to 1.25 percent 

depending on the loan-to-value ratio.) 

Approximately 15 percent of VA mortgage 

guarantees are used by individuals who have 

had their entitlement restored after paying off 

an earlier guaranteed loan. Thus, around 

31,000 potential homebuyers would be affected by this proposal. About 4,600 (15 percent) of them would be expected to obtain financing from non -V A sources if the proposal 

were enacted. The requirement of a 10 percent down payment on second-use guarantees 

is also estimated to reduce the foreclosure 

rate on the affected loans by approximately 15 

percent. 

Another proposal would affect both the 

Guaranty and Indemnity program and the 

Loan Guaranty program. The President again 

proposes to alter the agency's procedure on 

foreclosures. The effect of this proposal 

would be to decrease V A payments on certain 

defaults, and it is estimated to save $400 million in 1993--when the effects on existing 

loans are scored--and approximately $90 million a year thereafter. 

Reimbursements for Medical Care. The 

President's budget proposes to repeal the sunset date on another provision of OBRA-90 related to billing for services provided in V A 

medical facilities. The VA's authority to bill 

March 1992 

health insurers for the care of non-serviceconnected conditions provided to insured service-disabled veterans expires under current 

law on September 30, 1993. Extending this 

authority through 1997 would bring in an 

estimated $200 million in additional insurance 

reimbursements each year. 

Education Programs. The Administration 

proposes to limit vocational rehabilitation 

benefits to veterans with service-connected 

disabilities rated at 30 percent or higher. 

Approximately 1,200 veterans with disabilities 

rated at 20 percent would become ineligible in 

1994, increasing to around 5,000 ineligible veterans in 1997. The option is estimated to save 

more than $75 million in the first five years. 

A second proposal would require activeduty service personnel who elect to participate 

in the Montgomery GI Bill program to contribute $1,400 to the program over a 12-month 

period, rather than the current required contribution of $1,200. This would restore the 

benefits-to-contributions ratio to 9 to 1; the 

ratio was reduced last year when benefits were 

increased without a corresponding change in 

the contribution level. Contributions would 

be expected to increase by $155 million over 

the 1993-1997 period under this proposal. 

Compensation. The President's budget proposes a 3 percent cost-of-living adjustment 

(COLA) in the compensation program rates, 

effective December 1, 1992. Because compensation COLAs are assumed in both the CBO 

and Administration baselines, this proposal 

has no cost relative to those baselines. 

Discretionary Policy Changes 

The President is proposing several changes in 

mandatory spending accounts that would be 

made through amendments in appropriation 

language. Normally, changes to mandatory 

accounts are subject to pay-as-you-go procedures. However, because these changes 

would be effected through appropriation bills, 

they are shown as discretionary proposals. 
CHAPTER FIVE 

Housing Programs. The President is proposing to increase all fees for V A home loan 

guarantees by 0.75 percentage points. This 

change would reduce the subsidy cost of such 

loans by around $155 million a year, for a 

total savings over five years of $790 million. 

Reimbursements for Medical Care. The 

President would extend two provisions of 

OBRA-90 that grant the VA the authority to 

collect co payments from certain veterans receiving VA medical care. Under present law, 

these provisions would expire after 1992. One 

provision would continue an increase in the 

level of copayments levied against an estimated 10,000 admissions and 50,000 outpatient visits each year. The second provision 

would continue the copayment on medication 

provided by the V A on an outpatient basis. 

Extending these two authorities is expected to 

bring in nearly $300 million in copayment 

collections over the next five years. 

The President is also proposing a change in 

appropriation language to require copayments of service-disabled veterans with disabilities rated below 50 percent who are seeking care for non-service-connected conditions. 

Under this provision, copayments would be 

newly levied on an estimated 50,000 admissions to V A hospitals and 275,000 outpatient 

visits. This provision would increase collections by more than $35 million in 1993 and 

$140 million over five years. 

Medical Care. The 1993 budget reflects several policy changes in the medical care account that would result in a small net savings 

in 1993, a small net cost in 1994, and a large 

and growing net savings from 1995 through 

1997. The President is requesting 1993 appropriation language that would delay the availability of $429 million in funds for equipment, 

land, and structures until August 1, 1993. A 

similar obligation delay has been included in 

every appropriation since 1990. This proposal 

would shift $260 million in outlays from 1993 

to 1994. Under a second proposal, only veterans living more than 50 miles from a V A 

facility would be reimbursed for travel expenses to and from V A hospitals. This reTHE ADMINISTRATION'S DOMESTIC PROPOSALS 12l 

quirement would generate savings of around 

$40 million annually. 

Finally, the President's budget authority 

req uest for medical care differs substantially 

from the CBO baseline. The President's request for 1993 is more than $300 million 

above the baseline level, but the requests for 

1994 through 1997 are held virtually flat at the 

1993 level. Under this pattern of budget authority, outlays would exceed the baseline by 

$280 million in 1993, then fall short by 

amounts increasing from $190 million in 1994 

to $2.3 billion in 1997. A reduction in outlays 

of the magnitude the President has proposed 

for 1997 would represent 13.5 percent of total 

baseline outlays for VA medical care in that 

year. 

General Operating Expenses. The President's 

requested spending levels for administering 

veterans' benefits fall below the inflation-adjusted levels in the CBO baseline by increasing amounts between 1993 and 1997. By 1997, 

a shortfall of $180 million, more than 18 percent of the baseline total, is expected. 

CBO Reestimates 

Pay-As-You-Go Reestimates. CBO's reestimates of the Administration's pay-as-you-go 

proposals are relatively small. The largest difference is in CBO's estimate of the savings 

from the Administration's proposals for V A 

housing programs. CBO's estimate of the savings in 1993 is more than $200 million below 

the Administration's estimate as a result of 

differences in estimated default costs for loans 

originated before 1992. Because the CBO 

baseline reflects lower default costs for these 

loans than are projected by the Office of 

Management and Budget, CBO's estimate of 

the proposal's impact on those costs is lower. 

Other Reestimates. Differences in economic 

assumptions cause CBO's estimates of compensation and pension outlays to be $24 million above the President's estimates in 1993, 
122 ANALYSIS OF THE PRESIDENT'S BUDGET 

with the difference growing to $355 million by 

1997. The difference results from higher 

COLAs underlying CBO's estimates. (See 

function 650 for CBO's and the Administration's COLA assumptions.) 

In both the Guaranty and Indemnity program and the Loan Guaranty program, CBO's 

estimate of average default costs on future and 

existing guaranteed loans is significantly lower 

than the Administration's estimate. As a 

result, subsidy and outlay estimates are lower. 

Between 1993 and 1997, CBO estimates Guaranty and Indemnity subsidies at $2.8 billion 

less than the Administration does and Loan 

Guaranty subsidies at $630 million less. 

The differences between the CBO and 

OMB estimates of total benefits for the compensation and pension programs are relatively 

small; the differences in the outlay estimates, 

however, are considerably larger. The first 

day of fiscal years 1994 and 1995 will fall on a 

March 1992 

weekend. Based on previous practice, CBO 

assumes that the V A will issue benefit checks 

to arrive on Friday, thereby moving one 

month's outlays into the preceding fiscal year. 

Under this assumption, 13 months of benefits 

will be outlaid in 1994, 12 months in 1995, 

and 11 months in 1996. It appears that the 

Administration's outlay estimates reflect a different timing. 

In 1992, CBO's compensation baseline includes $115 million for the payment of eight 

months of benefits to certain incompetent veterans resulting from a recent court decision. 

This decision enjoined the V A from withholding compensation benefits from these veterans in compliance with a provision of 

OBRA-90. The effect of the injunction is not 

reflected in the President's budget. 

The remaining reestimdtes are small and 

are in the areas of medical care, medical reimbursements, and readjustment benefits. 

CBO REESTIMATES OF PROPOSED SPENDING IN FUNCTION 700 OF 

THE PRESIDENTS BUDGET (By fiscal year, outlays in billions of dollars) 

1992 1993 1994 1995 1996 1997 

President's 1993 Budget 33.8 34.4 36.3 35.9 35.0 36.8 

CBO Reestimates 

Pay-As-You-Go Proposals 0 0.2 -0.1 a a a 

Other 

Economic 

Cost-of-living adjustments 0 a 0.1 0.2 0.2 0.4 

Technical 

Housing programs -0.3 -0.5 -0.6 -0.7 -0.7 -0.7 

Compensation and pensions 0.3 0.4 0.8 0.1 0.1 0.2 

Other 0.5 -1!. 0.6 0.3 0.2 ---1! 

Subtotal 0.4 -0.1 0.9 -0.2 -0.4 -0.5 

Total 0.4 0.1 0.9 a -0.2 -0.2 

President's 1993 Budget 

as Estimated by CBO 34.2 34.4 37.3 36.0 34.8 36.7 

a. Less than $50 million. 
CHAPTER FIVE THE ADMINISTRATION'S DOMESTIC PROPOSALS 123 

Function 750: Administration of Justice 

PROPOSED SPENDING CHANGES (By fiscal year, outlays in billions of dollars) 

CBO Baseline Without Discretionary Caps 

Proposed Changes 

Pay-As-You-Go 

Customs user fees 

Discretionary 

Law enforcement programs 

The Judiciary 

Original request 

President's adjustment 

Federal prison system 

Justice assistance 

Other 

Subtotal 

Total 

President's 1993 Budget 

as Estimated by CBO 

President's 1993 Budget 

CBO Reestimates 

a. Less than $50 million. 

Proposed Changes 

The President's budget for administration of 

justice increases spending above the baseline 

in 1993 and holds spending for many programs constant thereafter. The President's 

budget proposes $15.8 billion in spending 

authority for 1993--an increase of $1.2 billion, 

or 8 percent, over 1992 spending authority. 

The President's proposals would result in net 

outlays that are $0.6 billion (4 percent) above 

the CBO baseline for 1993, but $4.7 billion, or 

6 percent, below the baseline for the 1993-

1997 period. As a result of steady increases in 

funding for programs and activities in this 

function, outlays in 1993 would be almost 60 

percent above the 1990 level. 

1992 

14.3 

0 

0 

a 

0 

0 

0 

.-J! 

a 

a 

14.3 

14.1 

0.2 

1993 1994 1995 1996 1997 

15.3 16.0 16.6 18.0 18.7 

0 0 0 -0.7 -0.8 

a -0.1 -0.4 -0.8 -1.2 

0.3 0.6 0.9 1.3 1.8 

0 -0.4 -0.8 -1.3 -1.9 

0.1 a -0.1 -0.2 -0.3 

a -0.1 -0.2 -0.2 -0.2 

Q:.l ...-J! -0.1 -0.2 -0.3 

0.6 0.1 -0.6 -1.3 -2.0 

0.6 0.1 -0.6 -2.0 -2.8 

15.9 16.1 16.0 16.0 15.9 

15.4 16.0 15.7 15.7 15.7 

0.5 0.2 0.3 0.2 0.2 

Pay-As-You-Go Policy Changes 

Customs User Fees. The President's budget 

includes receipts from customs user fees beyond their scheduled expiration date in 1995. 

Extending these fees would yield a total of 

$1.5 billion in 1996 and 1997. 

Discretionary Policy Changes 

Law Enforcement Programs. Law enforcement spending would be slightly above the 

baseline in 1993 under the proposals contained in the President's budget. Total budget 

authority for law enforcement would be about 

$80 million, or 1 percent, above the CBO 
124 ANALYSIS OF THE PRESIDENT'S BUDGET 

baseline, with the largest increases targeted for 

the Federal Bureau of Investigation, the Drug 

Enforcement Administration, and the Immigration and Naturalization Service. Outlays 

for law enforcement would be about $40 million above the baseline in 1993 and about $2.5 

billion below the baseline over the following 

four years, excluding the extended customs 

user fees. 

The Judiciary. The budget submitted by the 

Judiciary includes a significant increase in 

spending in 1993. Budget authority would 

total $2.8 billion compared with $2.4 billion in 

1992, a 19 percent increase. Outlays would be 

$300 million, or 13 percent, above the CBO 

baseline for 1993 and about $5 billion above 

the baseline over the 1993-1997 period. Normally, the President's budget includes the Judiciary's request without change. This year, 

however, the Administration has adjusteq the 

1994-1997 estimates downward, bringing them 

close to baseline levels. 

Federal Prison System. The Administration is 

requesting increased funding for the federal 

prison system that would result in outlays 

$121 million above the baseline in 1993. The 

budget assumes that funding is frozen at the 

1993 level over the following four years. Outlays would fall below the baseline by close to 

$600 million over that period. Spending authority for the system's operating expenses 

would be $1.9 billion in 1993, an increase of 

almost $300 million (19 percent) from 1992. 

The increase is intended to cover the costs of 

a growing inmate population and the opening 

March 1992 

of five new prisons. In contrast, the funding 

request for buildings and facilities is 25 percent below the 1992 level. Also, the Administration is requesting authority to collect fees 

from prisoners equivalent to the first year's 

cost of incarceration. These fees are estimated to bring in $48 million a year. 

Justice Assistance. Under the President's 

proposals, spending for justice assistance 

would be below the baseline each year. The 

1993 appropriation request for the Office of 

Justice Programs would be $137 million (15 

percent) below the baseline. The decrease 

would come primarily from juvenile justice 

grants and grants to areas with a high incidence of drug trafficking. 

Other. Most other programs would be targeted for increases in 1993 and held constant 

thereafter. The President would hold budget 

authority for the Legal Services Corporation 

constant at the 1992 level, resulting in a reduction in spending of almost $200 million 

relative to the CBO baseline from 1993 

through 1997. 

CBO Reestimates 

CBO estimates that spending under the 

Administration's policies would be slightly 

higher in each year than estimated in the 

budget. 
CHAPTER FIVE THE ADMINISTRATION'S DOMESTIC PROPOSALS 125 

Function 800: General Government 

PROPOSED SPENDING CHANGES (By fiscal year, outlays in billions of dollars) 

CBO Baseline Without Discretionary Caps 

Proposed Changes 

Pay-As-You-Go 

Payment to Alaska from leasing 

Arctic National Wildlife Refuge 

Impact assistance to coastal communities 

Subtotal 

Discretionary 

Legislative branch 

Original request 

President's adjustment 

Internal Revenue Service 

Federal Buildings Fund 

Other 

Subtotal 

Total 

President's 1993 Budget 

as Estimated by CBO 

President's 1993 Budget 

CBO Reestimates 

a. Less than $50 million. 

Proposed Changes 

Under the President's budget for 1993, spending for discretionary general government activities would increase by $0.2 billion above 

baseline levels. Funding for most of these 

programs would be frozen at the 1993 level 

over the 1994-1997 period, resulting in savings 

for discretionary programs of almost $6 billion 

during that period. These savings would be 

partially offset by increases from pay-as-yougo proposals. 

1992 

13.0 

0 

~ 

0 

0 

0 

0 

0 

~ 

0 

0 

13.0 

12.8 

0.2 

1993 1994 1995 1996 1997 

13.8 14.2 14.4 14.5 i5.0 

0 0 0.8 0.5 a 

~ -1! -1! QJ. QJ. 

0 a 0.8 0.5 0.1 

0.2 0.1 a -0.1 -0.2 

-0.2 -0.2 -0.2 -0.2 -0.2 

0.1 -0.1 -0.4 -0.7 -1.1 

0.1, -0.1 -0.1 -0.3, -0.4 

-0.1 -0.2 -0.3 -0.4 -0.5 

0.2 -0.5 -1.0 -1.7 -2.4 

0.2 -0.5 -0.2 -1.2 -2.4 

14.1 13.7 14.3 13.3 12.7 

14.0 15.1 13.3 13.4 12.6 

0.1 -1.3 1.0 -0.1 0.1 

Pay-As-You-Go Policy Cliang~s 

The budget includes two proposals that wO\.lld 

affect mineral leasing payments to states 

beginning in 1994. Alas.ka would be paid' 50 

percent of receipts earned from leasing the 

Arctic National Wildlife Refuge (ANWR). 

CBO estimates that the payments to Alaska 

would total $0.8 billion in 1995 and $0,.5 billion in 1996. In addition, the President's plan 

to share 12.5 percent of new royalties from.oil 

and gas production on the Outer Continental 
128 ANALYSIS OF THE PRESIDENT'S BUDGET March 1992 

Function 900: Net Interest 

PROPOSED SPENDING CHANGES (By fiscal year, outlays in billions of dollars) 

1992 1993 

CBO Baselinea 201.0 214.0 

Proposed Changes 

Pay-As-You-Go 

Interest on IRS refunds -0.1 -0.4 

Other Changes 

Debt service 0.1 0.2 

Other ---'2 b 

Subtotal 0.1 0.1 

Total 0.1 -0.3 

President's 1993 Budget 

as Estimated by CBO 20Ll 213.7 

a. Assumes compliance with discretionary spending caps. 

b. Less than $50 million. 

Proposed Changes 

The President's budget contains only one 

pay-as-you -go proposal affecting net interest. 

Under certain circumstances, the government 

pays interest on tax payments that must be 

refunded. Specifically, in the case of income 

tax refunds, the government pays interest 

beginning 45 days after the original due date. 

Thus, taxpayers who file amended returns (for 

which the original filing date has passed) typically collect one or more years' worth of interest. Under the President's proposal, the 

government would owe little or no interest to 

such filers so long as it processed their 

amended returns promptly. The Administration also proposes extending the 45-day 

interest-free processing period to certain refunds not currently covered, such as those for 

excise, estate, and gift taxes. The proposal 

would be effective in July 1992. In CBO's 

estimation, it would reduce interest paid to 

taxpayers by $50 million in the last quarter of 

1992 and by about $400 million to $500 million per year thereafter. 

1994 1995 1996 1997 

231.8 246.1 261.5 279.7 

-0.4 -0.4 -0.5 -0.5 

0.4 1.0 1.2 0.4 

-0.2 -0.3 -0.3 -0.3 

0.2 0.8 0.9 0.1 

-0.2 0.4 0.4 -0.4 

231.6 246.4 261.9 279.3 

The· largest component of net interest--

payments on the public debt--is a function of 

the federal deficit and market interest rates 

and therefore cannot be controlled directly. 

As explained in Chapt< i" 1, CBO estimates 

that the Administration's policies would add 

to the deficit in most years. As a result, debt 

service costs would exceed those in the baseline by amounts ranging from $0.1 billion in 

1992 to $1.2 billion in 1996. 

Federal Debt 

Debt held by the public grows each year by 

roughly the amount of the federal deficit. 

Thus, the growth in federal debt slows gradually through 1996 and picks up again in 1997. 

As the table shows, debt held by the public is 

expected to leap from just over $3 trillion at 

the end of 1992 to $4.3 trillion at the end of 

1997. The President's proposals hardly make 

a dent in the rapid buildup of debt. As a percentage of gross domestic product, debt held 
CHAPTER FIVE THE ADMINISTRAnON'S DOMEsnc PROPOSALS lZ9 

by the public is projected to rise from 52 percent in 1992 to around 55 percent in 1994 

through 1997. 

CBO Reestimates 

Reestimates of the Administration's net interest spending add $2.3 billion to outlays in 

1992, less than $50 million in 1993, and $15.8 

billion in 1997. These differences stem mostly 

from technical estimating differences in the 

near term and from higher interest rate assumptions in 1995 through 1997. 

As discussed in Chapter 2, CBO assumes 

generally lower interest rates from 1992 

through 1994 than does the Office of Management and Budget, but higher rates in 1995 

through 1997. By 1997, CBO's assumed interest rates on all maturities are approximately 

0.5 percentage points higher than the Administration's estimates. These higher rates are 

reflected in economic reestimates of $12.4 billion in 1997. 

Technical reestimates to interest on the 

public debt add an average of more than $4 

billion per year to outlays. CBO disagrees 

with OMB's assumption that relatively highrate state and local government issues will be 

redeemed rapidly and replaced with loweryielding instruments. Furthermore, CBO assumes that relatively more borrowing will occur in the early part of each vear, thereby accruing interest costs more quickly. 

This function includes, as receipts, interest 

that the Federal Financing Bank (FFB) earns 

on its loans to the Resolution Trust Corporation and the Bank Insurance Fund. CBO 

anticipates that the two deposit insurance 

agencies will together borrow more than OMB 

assumes and thus create larger receipts of interest earnings for the FFB. Between 1992 

and 1997, this difference (which is offset in 

the budget in function 370) totals an additional $11.3 billion. Smaller technical estimating differences are attributed to other intragovernmental interest accounts, interest to 

and from credit financing accounts, and interest on tax refunds. 

As discussed in Chapter 1, CBO believes 

that the Administration's deficit estimates are 

too high in 1992 and 1993 and too low in 1994 

through 1997. Thus, CBO estimates lower 

debt service costs through 1994 and higher 

debt service costs thereafter. By 1997, CBO's 

reestimate boosts debt service by $3.7 billion. 

CBO PROJECTIONS OF FEDERAL DEBT HELD BY THE PUBLIC (By fiscal year) 

1992 1993 1994 1995 1996 1997 

In Billions of Dollars 

CBO Baselinea 3,049 3,385 3,656 3,865 4,061 4,304 

President's Proposed Budget 

as Reestimated by CBO 3,054 3,386 3,666 3,886 4,077 4,301 

Difference 5 10 21 16 -3 

As a Percentage of GOP 

CBO Baselinea 52.2 54.3 55.2 55.2 54.8 54.8 

President's Proposed Budget 

as Reestimated by CBO 52.2 54.3 55.4 55.5 55.0 54.8 

SOURCE: Congressional Budget Office. 

a. Assumes compliance with discretionary spending caps. 
130 ANALYSIS OF THE PRESIDENT'S BUDGET March 1992 

CBO REESTIMATES OF PROPOSED SPENDING IN FUNCTION 900 OF 

THE PRESIDENT'S BUDGET (By fiscal year, outlays in billions of dollars) 

1992 1993 1994 1995 1996 1997 

President's 1993 Budget 198.8 213.7 230.9 242.2 253.0 263.5 

CBO Reestimates 

Economic 

Net interest on public debt -2.1 -1.6 -0.5 3.1 7.6 12.5 

Other interest ~ ~ ~ -1!. -0.1 -0.1 

Subtotal -2.1 -1.6 -0.5 3.1 7.6 12.4 

Technical 

Net interest on public debt 5.2 4.5 4.5 4.4 4.0 4.2 

Receipts from deposit insurance 

agencies -0.8 -0.7 -1.8 -3.6 -2.9 -1.5 

Other 0.6 a -1.0 -1.6 -2.4 -2.9 

Subtotal 5.0 TI 1.7 -0.8 -1.3 -0.3 

Debt Service -0.6 -2.2 -0.6 1.9 2.6 3.7 

Total 2.3 a 0.6 4.3 8.9 15.8 

President's 1993 Budget 

as Estimated by CBO 201.1 213.7 231.6 246.4 261.9 279.3 

a. Less than $50 million. 
CHAPTER FIVE THE ADMINISTRATION'S DOMESTIC PROPOSALS 131 

Function 920: Allowances 

PROPOSED SPENDING CHANGES (By fiscal year, outlays in billions of dollars) 

CBO Baseline Without Discretionary Caps 

Proposed Changes 

Discretionary 

Davis-Bacon reform 

Pay raise delay 

Government contribution for proposed 

Public Health Service commissioned corps 

Total 

President's 1993 Budget 

as Estimated by CBO 

President's 1993 Budget 

CBO Reestimates 

Proposed Changes 

Function 920 has traditionally been used to 

record proposed costs or savings that, for various reasons, cannot easily be allocated by 

function or agency elsewhere in the budget. 

Ultimately, however, these items would have 

to be reflected in appropriations for specific 

budget accounts. 

As in last year's budget, the President proposes to modify the Davis-Bacon Act, a law 

that requires the payment of prevailing wages 

on construction projects financed with federal 

funds. The proposed changes would increase 

the minimum contract covered by DavisBacon from the current level of $2,000 to 

$250,000. This change is assumed to reduce 

the required budget authority and outlays in 

domestic discretionary accounts by about $0.1 

billion annually. Proposed savings in national 

defense are incorporated in function 050. 

The President's appropriation requests in 

other functions of the budget assume that the 

1992 

0 

0 

0 

~ 

0 

0 

0 

0 

1993 1994 1995 1996 1997 

0 0 0 0 0 

-0.1 -0.1 -0.1 -0.1 -0.1 

-0.5 0 0 0 0 

0.1 QJ. 0.1 QJ. QJ. 

-0.4 0 0 0 0 

-0.4 0 0 0 0 

-0.4 -7.6 -4.6 0 0 

0 7.6 4.6 0 0 

Department of Labor will issue regulations on 

the use of helper workers. The department 

promulgated regulations on helpers in February 1991, but the 1991 supplemental appropriation contained language specifically prohibiting the Secretary of Labor from using any 

funds to carry out those regulations. The regulations would save $0.6 billion per year by 

1997. 

The President proposes to delay the 1993 

pay adjustment for federal civilian employees 

by three months. The Federal Employees Pay 

Comparability Act of 1990 linked General 

Schedule and other white-collar salary adjustments to the annual increase in the Employment Cost Index. Salaries are adjusted each 

January. The President's proposal would delay the 1993 white-collar salary increase to 

April 1993. Salary adjustments for each of the 

wage areas of the Federal Wage System (FWS) 

are staggered throughout the year; the President's proposal would delay the 1993 FWS 

salary adjustments by three months. The proposal would save $460 million in 1993. 
132 ANALYSIS OF THE PRESIDENT'S BUDGET 

As discussed in function 550, the President 

proposes new, accrual-based rules for funding 

Public Health Service retirement. The proposal would require additional contributions 

by several agencies on behalf of their workers, 

amounting to about $100 million a year. The 

extra contributions are placed in this function; 

the offsetting receipts are in function 950 of 

the budget. 

March 1992 

CBO Reestimates 

The Administration's budget includes unspecified savings in discretionary spending in 

1994 and 1995. Based on recent experience, 

however, CBO believes that such savings are 

unlikely to appear in the absence of specific 

policy proposals. CBO has deleted the unspecified savings from its estimate of the President's budget, increasing outlays by $7.6 billion in 1994 and $4.6 billion in 1995. 
CHAPTER FIVE THE ADMINISTRATrON'S DOMESTrC PROPOSALS 133 

Function 950: Undistributed Offsetting Receipts 

PROPOSED SPENDING CHANGES (By fiscal year, outlays in billions of dollars) 

1992 1993 1994 1995 1996 1997 

CBO Baseline Without Discretionary Caps -39.1 -39.9 -39.5 -40.5 -41.3 -43.0 

Proposed Changes 

Pay-As-You-Go 

Spectrum auctions 0 0 -2.0 -1.6 -0.7 0 

Discretionary 

Employer's share of employee retirement 0 -0.3 -0.3 -0.3 -0.1 -0.1 

Spectrum auctions ~ ~ _0 -0.3 -0.2 0.1 

Subtotal 0 -0.3 -0.3 -0.6 -0.3 a 

Other Changes 

Lease of naval petroleum reserve 

at Elk Hillsc 0 1.2 -0.2 -0.2 -0.2 -0.2 

Lease of Arctic National Wildlife Refuge 

(Federal share)b 0 0 0 -0.8 -0.5 a 

Sale of Alaska PMAc ~ -0.1 ~ _0 ~ ~ Subtotal 0 -1.3 -0.2 -1.0 -0.6 -0.2 

Total 0 -1.6 -2.5 -3.2 -1.6 -0.2 

President's 1993 Budget 

as Estimated by CBO -39.1 -41.5 -42.0 -43.7 -42.9 -43.2 

a. Less than $50 million. 

b. Projected receipts from leasing the Arctic National Wildlife Refuge would be split between the federal government and the state 

of Alaska, with the Alaskan share of leasing receipts shown in function 300 and the proposed payout of those receipts to the state 

shown in function 800. 

c. The receipts from the proposed lease of the naval petroleum reserve at Elk Hills, California, and from the proposed sale of the 

Alaska Power Marketing Administration (PMA) are shown in function 950. Outlays in function 270 would increase relative to 

the baseline if these transactions are carried out, because the assets would no longer generate direct receipts to the government. 

Proposed Changes 

The budget includes measures that would 

increase undistributed offsetting recei pts by 

$1.6 billion in 1993. The President proposes 

to sell the rights to oil and gas production at 

the naval petroleum reserve at Elk Hills, 

California (NPR-1), the rights to oil and gas 

exploration and development at the Arctic 

National Wildlife Refuge (ANWR), and the 

Alaska Power Marketing Administration 

(PMA). The budget also includes a proposal 

to auction the rights to use communications 

frequencies. Additional proposals would affect the amounts agencies contribute to employee retirement, which appear as receipts in 

this function. Most of these proposals are 

similar to ones that appeared in previous 

years' budgets. 

Pay-As-You-Go Policy Changes 

Spectrum Auctions. The President proposes 

to use competitive bidding to award all initial 

licenses and new construction permits involving use of the electromagnetic spectrum. 
134 ANALYSIS OF THE PRESIDENT'S BUDGET 

In addition, the legislation proposed by the 

Administration would require the Federal 

Communications Commission (FCC) to free 

up 45 megahertz (MHz) of the electromagnetic spectrum currently used by government 

agencies and open it for competitive bidding 

and assignment during the 1995-1997 period. 

The FCC would move current commercial 

and federal government users from their 

existing frequencies and auction the freed-up 

frequencies for new commercial uses. CBO 

estimates that this initiative would result in 

gross receipts of $5 billion over the 1994-1996 

period from auctioning about 220 MHz currently planned for reassignment plus the 45 

MHz mandated by the Administration's legislative proposal. 

The Administration's proposal would require appropriation action for auctioning 20 

MHz of the 45 MHz mandated by the bill. 

CBO therefore includes receipts of $4.3 billion in the pay-as-you-go category and the remaining $0.7 billion under discretionary savings. CBO estimates that relocating government users would cost $500 million over the 

1995-1999 period, $300 million of which 

would occur between 1995 and 1997. These 

expenditures would be discretionary and 

would partially offset the projected receipts in 

that spending category. 

Discretionary Policy Changes 

Employer's Share of Employee Retirement. 

The President's budget proposes to make the 

Postal Service pay for any remaining unfunded liability resulting from pre-1991 costof-living adjustments. These payments would 

increase receipts by $210 million annually 

from 1993 through 1995. 

Another proposal would establish an accrual-based retirement system for commissioned 

corps officers of the Public Health Service. 

Under this proposal, increased employer contributions to the retirement system would 

raise receipts shown in function 950 by $98 

million in 1993 and by $536 million over the 

March 1992 

1993-1997 period. These additional receipts 

would offset higher spending in other budget 

functions, thus resulting in no net budgetary 

impact. 

Other Changes 

CBO considers the proposed sale of production rights at NPR-1 and the ANWR to be 

asset sales because the sale of such rights 

would deplete mineral resources currently 

owned by the federal government. Under the 

Balanced Budget and Emergency Deficit 

Control Act of 1985, the proceeds of nonroutine asset sales are not credited for deficit 

reduction purposes. 

Naval Petroleum Reserve. The President 

proposes to transfer the rights to produce oil 

and gas at the government's Elk Hills, California, oil field to a private operator through 

a long-term lease. The buyer(s) of these rights 

would pay the government $1.2 billion in 1993 

and additional amounts over the 1994-1997 

period. Over a seven-year period, the state of 

California would receive 7 percent of these 

bonus payments. Starting in 1994, the federal 

government and California would share 

equally in royalties on future production, 

which would be paid at a rate of 12.5 percent. 

CBO estimates that the federal share of 

NPR-1 royalties and bonus payments would 

total $1.9 billion over the 1993-1997 period. 

These receipts would be partially offset (in 

function 270) by a loss of about $1.3 billion in 

net income that the government would otherwise receive over the five-year period from 

selling NPR-1 products. The government 

would forgo additional net income in years 

after 1997 as well. The President also proposes to use some of the royalty and bonus 

payment receipts to establish a defense 

petroleum inventory of 10 million barrels. 

Expenditures for the proposed inventory are 

included in function 270. They would total 

about $100 million over the 1993-1997 period 

and an additional $200 million after 1997. 
CHAPTER F[VE 

Arctic National Wildlife Refuge. The President proposes opening the ANWR to exploration and drilling for oil and gas, and splitting 

the proceeds of ANWR lease sales evenly between the federal government and the state of 

Alaska. CBO expects that lease sales would 

occur in 1995 and 1996, with net federal 

receipts totaling $0.8 billion and $0.5 billion, 

respectively. (Collection of the Alaskan share 

of ANWR receipts is shown in function 300, 

and the payment of those funds to the state is 

shown in function 800.) 

Sale of Alaska Power Marketing Administration. The President proposes to sell the 

Alaska PMA at the end of 1993, yielding $85 

million. This income would be partially offset 

by the loss of income that the government 

would receive if it kept the PMA. This loss 

would appear in function 270 and would 

amount to $44 million over the 1993-1997 

period and more in subsequent years. 

CBO Reestimates 

CBO's estimates of the budgetary impacts of 

each of the proposals affecting this function 

differ significantly from the Administration's, 

but the aggregate difference over the 1992-

1997 period is less than $0.3 billion. 

Pay-As-You-Go Reestimates 

Spectrum Auctions. The Administration 

estimates that the sale of licenses and permits 

would generate gross receipts of about $6.8 

billion over the 1995-1997 period, and that 

the auction would entail discretionary costs of 

$3.0 billion over the same period for relocating government users. Thus, the budget 

includes net receipts of $3.8 billion. By comparison, CBO estimates that net receipts 

would total $4.7 billion over the 1994-1997 

period, of which $4.3 billion would count for 

pay-as-you-go purposes. 

THE ADMINISTRATION'S DOMESTIC PROPOSALS 135 

The legislation proposed by the Administration would require the FCC to auction new 

licenses and construction permits, with some 

exceptions. CBO believes that this legislation 

would require the FCC to auction not only 

the 45 MHz specified in the President's request, but also additional frequencies that the 

FCC will make available through current proceedings. (The Administration's estimate appears to encompass only the 45 MHz.) CBO 

therefore estimates that the proposed legislation would lead to earlier auctions than assumed in the budget, and that the auctions 

would yield $2 billion in receipts in 1994. 

The President's budget does not project any 

auction receipts until 1995. 

Other Reestimates 

Employer's Share of Employee Retirement. 

CBO's estimates of offsetting receipts for 

agency contributions to retirement programs 

for the government's civilian employees are 

lower than the Administration's estimates by 

$0.2 billion in 1992; this difference increases 

to $2.3 billion by 1997. CBO's estimates of 

employer contributions for military employees 

exceed the Administration's estimates by $1.3 

billion in 1994, with the difference falling to 

$0.9 billion by 1997. 

CBO's estimates of agency retirement contributions for civilian employees are lower 

than the Administration's estimates mainly 

because CBO's estimates reflect the budget's 

proposed reductions in the number of civilians working for the Department of Defense 

(000) and the Administration's estimates do 

not. 

CBO's estimates of agency retirement contributions for military employees are higher 

because the Administration's request for fiscal 

years 1994 through 1997 assumes a change in 

the long-term economic assumptions used to 

calculate the government's contribution rate 

for mllitary retirement. This change would 

effectively lower 000'~ contributions to the 
136 ANALYSIS OF THE PRESIDENT'S BUDGET 

retirement fund by about $2.8 billion each 

year. Whether this change occurs will depend 

on the decisions of an independent board of 

actuaries charged with evaluating the soundness of the military retirement fund. CHO's 

estimates assume that the actuaries will revise 

the long-term assumptions, but only by about 

half as much as the Administration assumes. 

Arctic National Wildlife Refuge. The President proposes to open the ANWR to oil and 

gas exploration and development, and assumes that legislation would be enacted by 

June 1992, with the first lease sale occurring 

in 1994. CBO assumes that any Congressional 

March 1992 

action is likely to occur later--by early in 

fiscal year 1993--and that the first lease sale 

could not occur until 1995. CBO also projects 

that the federal share of bonus bids from 

competitive bidding would be about $0.8 billion less than the Administration projects over 

the 1993-1997 period. 

Outer Continental Shelf. CBO's estimates of 

receipts from Outer Continental Shelf leasing 

are higher than the President's by $0.4 billion 

in 1993 and by an average of $0.6 billion annually from 1994 through 1997, primarily 

because CBO assumes higher oil and gas 

prices than the Administration does. 

CBO REESTIMATES OF PROPOSED SPENDING IN FUNCTION 950 OF 

THE PRESIDENT'S BUDGET (By fiscal year, outlays in billions of dollars) 

1992 1993 1994 1995 1996 1997 

President's 1993 Budget -38.8 -41.6 -40.3 -42.0 -44.4 -45.0 

CBO Reestimates 

Pay-As-You-Go Proposals 

Spectrum auctions 0 0 -2.0 -0.3 1.0 0.8 

Other 

Employer's share of 

employee retirement 0.2 0.5 -0.6 0.3 1.0 1.4 

Lease of Arctic National 

Wildlife Refuge 0 0 1.3 -0.8 0.3 a 

Outer Continental Shelf -0.6 -0.4 -0.5 -0.6 -0.6 -0.6 

Other ~ 0.2 -0.3 -0,2 0.1 

Total -0.4 0.2 -1.6 -1.7 1.5 1.8 

President's 1993 Budget 

as Estimated by CBO -39.1 -41.5 -42.0 -43.7 -42.9 -43.2 

a. Less than $50 million. 
Appendixes 

Appendix A 

Baseline Budget Projections 

T hroughout this volume, the Administration's proposals are contrasted with the 

Congressional Budget Office's (CBO's) 

baseline estimates of the budget. The baseline shows the path of revenues and spending 

if current laws and policies remain unchanged. It is not a forecast of budget outcomes, since policymakers will certainly seek 

many changes in priorities. But the baseline 

is a handy yardstick for gauging the potential 

impacts of proposed changes--those advocated in the President's budget as well as in 

competing packages. 

Baseline projections follow long-established 

rules. Revenues and entitlement programs 

(like Social Security and Medicare) continue 

on their course until the Congress changes the 

laws that underpin them --laws setting tax rates 

and taxable income, benefit formulas and eligibility, and so forth. For these categories, 

therefore, the baseline represents CBO's best 

estimate of what will happen under current 

laws. Any expiring provisions of law are assumed to expire as scheduled, with two important exceptions. The baseline assumes that 

excise taxes dedicated to trust funds (such as 

the Airport and Airway Trust Fund), and any 

large entitlement programs, will continue past 

their current expirations--two assumptions 

that are explicitly stated in law. 

Unlike entitlement programs, discretionary 

programs are funded anew each year through 

the appropriation process. Discretionary programs encompass nearly all the defense and 

international affairs budgets and many domestic programs: space, e?ergy, transportation, 

envIronmental protectIon, health research, 

and salaries and expenses of civilian agencies, 

to name just a few. The Budget Enforcement 

Act of 1990 (BEA) set multiyear caps on appropriations, both on budget authority (the 

ability to obligate money) and on outlays (actual spending). Through 1993. separate caps 

apply to three broad types of discretionary 

spending: defense, international, and domestic. In 1994 and 1995, a single lid covers all 

discretionary spending. CBO's baseline assumes compliance with these caps, which will 

inexorably force trade-offs among many competing programs (see discussion below). 

No discretionary spending caps are specified after the Budget Enforcement Act expires 

in 1995. The baseline projections simply preserve 1995's real spending levels in 1996 and 

1997, boosting them for inflation of about 3.4 

percent per year. 

A few categories of spending remain. The 

government has pledged to protect depositors 

in banks and savings and loan institutions, 

and the baseline for deposit insurance shows 

the cost of meeting those promises. Offsetting 

receipts, such as fees and collections, represent CBO's best estimate of sums collected 

under current laws and policies. And net interest is not directly controlled by policymakers but is driven by market interest rates 

and future deficits. 
140 ANALYSIS OF THE PRESIDENT'S BUDGET 

Changes in the CBO Baseline 

CBO's report, The Economic and Budget Outlook: Fiscal Years 1993-1997 (January 1992), 

described the baseline projections in detaiL 

Since then, CBO has made modest revisions 

to its baseline projections (see Table A-I). 

Only one piece of legislation has affected 

the budget totals since January. A bill further 

extending unemployment benefits in the wake 

of the recession (P.L.102-244) boosts spending in 1992 and, by a smaller amount, in 1993. 

The same act modifies the rules tbat corporaTableA-1. 

March 1992 

tions use to calculate estimated income tax 

payments; this provision, though it affects the 

timing of receipts, is nevertheless revenue 

neutral over the 1992-1996 period. 

Recent administrative actions have led 

CBO to drop its estimate of revenues by $15 

billion in 1992, $6 billion in 1993, and small 

amounts in later years. The revision is almost 

wholly the result of the Administration's move 

to reduce income taxes withheld from workers' paychecks, a step that did not require legislation. Long-run effects are virtually nil because lower collections in one year are offset 

by shrunken tax refunds in the next. Another, 

smaller revision (amounting to less tban $500 

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

1992 1993 1994 1995 1996 1997 

January 1992 Estimate 352 327 260 194 178 226 

Legislative Changes (Extension 

of Unemployment Insurance) 

Revenues 0 1 a -1 a 0 

Outlays 3 1 0 0 0 0 

Deficit 3 a a 1 a 0 

Other Policy Changesb 

Revenues -15 -6 -1 -1 -2 -2 

Outlays 0 0 0 0 0 0 

Deficit 15 6 1 1 2 2 

Technical Revisions 

Revenues a a a a a a 

Outlays 

Discretionary programs 1 4 5 6 6 6 

Mandatory programs .2. -1 1 ...1 2 2 

Subtotal -2 4 6 7 "9 "9 

Deficit -2 4 6 7 9 9 

Total 16 10 7 9 11 10 

Current Estimate 368 336 267 203 189 236 

SOURCE: Congressional Budget Office. 

NOTE: Projections include Social Security and the Postal Service, which are off-budget. Projections assume compliance with discretionary spending caps in the Budget Enforcement Act. 

a. less than $500 million. 

b. Change in individual income ta)( withholding tables and in required reserve ratios for commercial banks. 
APPENDIX A 

million a year) marks a recent reduction in 

the reserves that banks and other depositing 

institutions must set aside with the Federal 

Reserve System, which affects corporate income taxes and Federal Reserve earnings. 

Technical revisions in outlays boost the 

projected deficit. Extra spending in discretionary programs reflects new, higher spending caps that were published in conjunction 

with the Administration's budget. The Budget 

Enforcement Act designated the Administration's Office of Management and Budget 

(OMB) as the official scorekeeper for compliTableA-2. 

BASELINE BUDGET PROJECTIONS 141 

ance purposes. In announcing new caps for 

fiscal year 1993 and previewing those for later 

years, OMB consistently adopted more generous solutions than did CBO (in its own advisory report) on several contentious issues: 

the size of a downward adjustment that was 

required by unexpectedly low inflation, the 

amount of cuts required to comply with last 

year's highway bill, and the amount of elbow 

room afforded for spending related to Operation Desert Storm. Altogether, OMB's more 

generous interpretations allow $4 billion to $6 

billion a year more in discretionary spending 

than CBO assumed earlier. Because OMB's 

The Deficit Outlook Under Current Policies (By fiscal year) 

Actual 

1991 1992 1993 1994 1995 1996 1997 

In Billions of Dollars 

Total Deficit Assuming 

Discretionary Caps 269 368 336 267 203 189 236 

Deficit Excluding Deposit Insurance 

and Desert Storm Contributions 246 307 267 235 219 233 265 

On-Budget Deficit (Excluding Social 

Security and Postal Service) 321 420 400 344 290 287 346 

Standardized-Employment Deficita 172 209 198 186 180 202 245 

Memoranda: 

Deposit Insurance 66 65 69 33 -17 -45 -29 

Desert Storm Contributions -43 -5 0 0 0 0 0 

Off-Budget Surplus 

Social Security 54 53 65 76 86 98 110 

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

Total, Off-Budget Surplus 52 52 64 76 87 98 109 

As a Percentage of GOP 

Total Deficit Assuming 

Discretionary Caps 4.8 6.3 5.4 4.0 2.9 2.5 3.0 

Deficit Excluding Deposit Insurance 

and Desert Storm Contributions 4.4 5.3 4.3 3.5 3.1 3.1 3.4 

Standardized-Employment Deficita, c 2.9 3.4 3.1 2.7 2.5 2.7 3.1 

SOURCE: Congressional Budget Office. 

a. Excludes deposit insurance and Desert Storm contributions. 

b. Less than $500 million. 

c. Shown as a percentage of potential GOP. 
142 ANALYSIS OF THE PRESIDENT'S BUDGET 

estimates will control the appropriation 

process, CBO now uses OMB's official caps. 

Revisions to mandatory programs are relatively small, changing outlays by $1 billion to $3 

billion a year. 

In sum, the reVISIOns to CBO's baseline 

swell the deficit by $16 billion in 1992 and by 

an average of $9 billion a year thereafter (see 

Table A-I). The resulting deficit falls through 

mid-decade but then turns up again. As 

CBO's January report explained more fully, 

today's record-breaking deficits stem partly 

from temporary factors--namely, from the recession, which depresses revenues and boosts 

spending, and from the hemorrhage of spendTableA-3. 

March 1992 

ing on deposit insurance. Stripping such factors out of the totals helps to highlight the 

government's underlying deficit (see Table 

A-2). These temporary factors fade in importance. At the same time, the Budget Enforcement Act's caps on discretionary spending call 

for further belt-tightening in 1993 through 

1995. Thus, the deficit dwindles before getting stuck at about 3 percent of gross domestic 

product (GDP) in mid-decade. 

Totals for the major revenue sources and 

spending categories are presented in Table 

A-3. Because entitlement spending alone--

largely fueled by the government's health care 

and retirement programs--accounts for apBaseline Budget Projections. Assuming Compliance with Discretionary Spending Caps (By fiscal year) 

Actual 

Category 1991 1992 1993 1994 1995 1996 1997 

In Billions of Dollars 

Revenues 

Individual income 468 476 513 556 596 633 673 

Corporate income 98 98 110 120 125 129 131 

Social insurance 396 415 449 480 509 540 570 

Other 92 98 102 106 110 111 115 

Total 1,054 1,088 1,173 1,262 1,340 1,413 1,490 

On-budget 760 783 845 911 968 1,018 1,070 

Off-budget 294 305 328 350 372 395 420 

Outlays 

Defense discretionary 317 313 297 a a a a 

International discretionary 19 20 21 a a a a 

Domestic discretionary 196 215 225 a a a a 

Subtotal 532 548 543 537 538 556 575 

Mandatory spending, 

excluding deposit insurance 636 710 751 797 848 903 977 

Deposit insurance 66 65 69 33 -17 -45 -29 

Net interest 196 201 214 232 246 262 280 

Offsetting receiptsb -108 -69 -67 -73 -74 -77 

Total 1,323 1,455 1,510 1,529 1,543 1,602 1,726 

On-budget 1,081 1,203 1,246 1,255 1,258 1,305 1,416 

Off-budget 242 252 264 274 285 297 310 

Deficit 269 368 336 267 203 189 236 

On-budget deficit 321 420 400 344 290 287 346 

Off-budget surplus 52 52 64 76 87 98 109 

-_ ... _-----------_ ...... _--- .. ---------_ ... _- ........... _--_ ... _----_ ... -------_ ...... _----_ ... - ... _--

(Continued) 

SOURCE: Congressional Budget Office, 
APPENDIX A 

proximately half of all federal spending, more 

detail about this huge category is depicted in 

Table A-4. 

How Tight Are the Caps? 

By setting broad caps on discretionary spending, the BEA's drafters forced trade-offs 

among programs. There are literally thousands of possible ways to comply with the 

caps. eBO's baseline projections assume that 

policymakers will achieve compliance. eBO 

cannot project how individual programs will 

fare in the ensuing competition, but it can 

TableA-3. 

Continued 

Actual 

Category 1991 1992 

BASELINE BUDGET PROJECTIONS 143 

sketch the implications of the discretionary 

caps for budget totals. 

One way to illustrate the policymakers' task 

is to compare the caps with a path that keeps 

real spending at today's levels. Table A-S 

shows how high discretionary spending 

levels--both budget authority and outlays--

would climb if they preserved the amount and 

mix of discretionary spending in 1992. Because of inflation, these amounts would grow 

every year. But the law does not allow policymakers to appropriate this much money. In 

1993, the legislators must freeze domestic appropriations at roughly the 1992 levels, while 

chopping the defense budget from this year's 

figure. Moreover, further rounds of cuts 

1993 1994 1995 1996 1997 

As a Percentage of GOP 

Revenues 

Individual income 8.3 8.1 8.2 8.4 8.5 8.5 8.6 

Corporate income 1.7 1.7 1.8 1.8 1.8 1.7 1.7 

Social insurance 7.0 7.1 7.2 7.2 7.3 7.3 7.3 

Other 1.6 1.7 ...li U 1.5 

Total 18.7 18.6 18.8 19.1 19.1 19.1 19.0 

On-budget 13.5 13.4 13.6 13.8 13.8 13.7 13.6 

Off-budget 5.2 5.2 5.3 5.3 5.3 5.3 5.3 

Outlays 

Defense discretionary 5.6 5.4 4.8 a a a a 

International discretionary 0.3 0.3 0.3 a a a a 

Domestic discretionary 3.5 3.7 3.6 a a a a 

Subtotal 9.5 9.4 8.7 iff 7.7 7.5 7.3 

Mandatory spending, 

excluding deposit insurance 11.3 12.1 12.0 12.0 12.1 12.2 12.4 

Deposit insurance 1.2 1.1 1.1 0.5 -0.2 -0.6 -0.4 

Net interest 3.5 3.4 3.4 3.5 3.5 3.5 3.6 

Offsetting receiptsb -1.9 -1.2 ..:.L..Q -1.0 -1.0 

Total 23.5 24.9 24.2 23.1 22.0 21.6 22.0 

On-budget 19.2 20.6 20.0 19.0 18.0 17 .. 6 18.0 

Off-budget 4.3 4.3 4.2 4.1 4.1 4.0 4.0 

Deficit 4.8 6.3 5.4 4.0 2.9 2.5 3.0 

On-budget deficit 5.7 7.2 6.4 5.2 4.1 3.9 4.4 

Off-budget surplus 0.9 0.9 1.0 1.2 1.2 1.3 1.4 

a. Discretionary spending caps are specified by category through 1993 and in the aggregate for 1994 and 1995. Projections for 1996 

and 1997 assume that spending grows at the rate of inflation after 1995. 

b. Indudes contributions from allied nations for Operation Desert Storm. 
144 ANALYSIS OF THE PRESIDENT'S BUDGET March 1992 

TableA-4. 

CBO Baseline Projections for Mandatory Spending, 

Excluding Deposit Insurance (By fiscal year, in billions of dollars) 

Actual 

1991 1992 1993 1994 1995 1996 1997 

Means-Tested Programs 

Medicaid 53 68 80 89 100 113 126 

Food Stampsa 20 23 23 23 23 24 25 

Supplemental Security Income 15 17 18 21 22 21 25 

Family Support 14 16 17 17 18 19 19 

Veterans' Pensions 4 4 4 4 4 4 4 

Child Nutrition 6 6 6 7 7 8 8 

Earned Income Tax Credit 5 7 8 9 12 12 13 

Stafford Loansb 5 2 3 3 3 3 3 

Other --.1 3 3 

Total 122 146 162 177 193 207 228 

Non-Means-Tested Programs 

Social Security 267 285 301 318 335 354 374 

Medicare 114 128 143 159 177 198 220 

Subtotal 381 413 443 477 ill 553 594 

Other Retirement and Disability 

Federal civilianc 37 38 39 42 44 50 54 

Military 23 24 26 27 28 30 32 

Other 4 5 5 5 5 5 

Subtotal 64 67 70 74 78 91 

Unemployment Compensation 25 35 26 25 26 26 27 

Other Programs 

Veterans' benefitsd 14 16 16 18 17 16 18 

Farm price supports 10 9 11 10 9 9 9 

Social services 6 5 6 5 5 5 5 

Credit reform liquidating accounts 0 9 5 2 1 -8 -5 

Other 13 10 12 10 9 10 

Subtotal 43 49 50 44 39 37 

Total 514 564 589 620 655 696 748 

Total 

All Mandatory Spending, 

Excluding Deposit Insurance 636 710 751 797 848 903 977 

SOURCE: Congressional Budget Office. 

NOTE; Spending for major benefit programs shown in this table includes benefits only. Outlays for administrative costs of most 

benefit programs are classified as nondefense discretionary spending, and Medicare premium collections as offsetting 

receipts. 

a. Indudes nutrition assistance to Puerto Rico. 

b. Formerly known asguaranteed student loans. 

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

d. Includes veterans' compensation, readjustment benefits,life insurance, and housing programs. 
APPENDlX A BASELINE BUDGET PROJECTlONS 145 

TableA-5. 

Comparison of Discretionary Spending Levels (By fiscal year, in billions of dollars) 

1992 1993 1994 1995 1996 1997 

Amounts Required to Preserve Real ResourcesB 

Budget Authority 

Defense 301 302 313 325 337 350 

Internationa Ib 21 21 22 23 24 25 

Domestic 204 213 220 228 242 256 

Total 526 536 556 576 603 630 

Outlays 

Defense 313 307 311 319 329 341 

Internationalb 20 20 21 22 23 23 

Domestic 215 232 245 255 265 275 

Total 548 560 578 596 617 639 

Savings from Complying with Caps 

Budget Authority 

Defense 0 -13 c c c c 

Internationalb 0 1 c c c c 

Domestic ..Q ...::§ .J; .J; .J; 

Total 0 -18 -44 -59 -68 -78 

Outlays 

Defense 0 -10 c c c c 

Internationalb 0 d c c c c 

Domestic ..Q 3.. .J; .J; --f .J; 

Total 0 -17 -41 -58 -60 -64 

Baseline Assuming Compliance with Caps 

Budget Authority 

Defense 301 289 c c c c 

Internationalb 21 23 c c c c 

Domestic 204 206 ...J; ...J; ...J; 

Total 526 518 511 517 535 553 

Outlays 

Defense 313 297 c c c c 

Internationa Ib 20 21 c c c c 

Domestic 215 225 ...J; c ...J; 

Total 548 543 537 538 556 575 

SOURCE: Congressional Budget Office. 

a. Preserves 1992 real resources, except emergency appropriations. 

b. The international caps would permit a slight increase in real resources in 1993. 

c. Discretionary spending caps are specified by category through 1993 and in the aggregate for 1994 and 1995. Projections for 1996 

and 1997 assume that spending grows at the rate of inflation after 1995. 

d. Less than $500 million. 
146 ANALYSIS OF THE PRESIDENT'S BUDGET 

will be required in 1994 and 1995. The cuts 

will be painful even if they are not savage. By 

1995, total discretionary spending--in real 

dollars--would be about 10 percent below 

1992 levels. As a percentage of GDP, it will 

have slipped below 8 percent, the lowest share 

in decades. 

Trust Funds in the Projections 

Legislation passed in 1983 formally placed the 

two Social Security trust funds (Old-Age and 

Survivors Insurance and Disability Insurance) 

off-budget. Both CBO and the Administration comply with this law by displaying onand off-budget totals separately. (Besides Social Security, the much smaller Postal Service 

TableA-6. 

March 1992 

fund is also legally off-budget.) These offbudget totals are shown in Table A-2. Economists and credit market participants focus on 

the government's total finances, ignoring the 

on- and off-budget distinction. Social Security alone accounts for about one-fourth of government revenues and one-fifth of spending. 

No useful budget measures can overlook such 

large flows. 

The Social Security funds are merely the 

largest of many federal trust funds. The major 

funds and their surpluses are depicted in 

Table A-6. In the budget, trust funds serve a 

purely bookkeeping role, tracking earmarked 

collections and spending. The apparent size 

of Social Security and other trust fund surpluses has distorted budget debate. Specifically, some budget watchers maintain that 

trust funds mask the true deficit--their term 

eBO Projections of Trust Fund Surpluses (By fiscal year, in billions of dollars) 

1992 1993 1994 1995 1996 1997 

Social Security 53 65 76 86 98 110 

Medicare 14 11 9 9 7 4 

Military Retirement 13 12 10 10 9 8 

Civilian Retirementa 24 26 29 31 30 31 

Unemployment -15 -2 2 3 5 4 

Highway and Airport 2 2 b -1 -1 -1 

Otherc -1 2 2 2 2 2 

Total Trust Fund Surplus 95 117 128 139 149 158 

Federal Funds Deficitd -463 -454 -395 -342 -338 -395 

Total Deficit -368 -336 -267 -203 -189 -236 

Memorandum: 

Net Transfers from Federal 

Funds to Trust Funds 192 201 214 234 257 281 

SOURCE: Congressional Budget Office. 

a. Civil Service Retirement, Foreign Service Retirement, and several smallerfunds. 

b. Less than $500 million. 

c. Primarily Railroad Retirement, employees' health insurance and life insurance, Hazardous Substance Superfund, and various 

veterans' insurance trust funds. 

d. Assumes that discretionary spending reductions are made in non-trust-fund programs. 
APPENDIX A 

for the federal funds deficit, which excludes 

trust funds. That is a misconception, for two 

compelling reasons. 

First, all trust funds rely, to a greater or 

lesser degree, on transfers from elsewhere in 

the budget to generate their surpluses. (In a 

classic example, the Medicare Part B program 

finances just one-fourth of its costs from premiums, simply counting on a general fund 

transfer for all the rest, thereby posting a 

small "surplus.") Such transfers swell the federal funds deficit and the trust fund surplus by 

equal amounts but obviously do not change 

the total deficit or the government's borrowing needs by one penny. As Table A-6 shows, 

such transfers total roughly $200 billion a 

year; without them, the trust funds would not 

show surpluses. 

Second, and more important, decisions 

about programs financed by trust funds are 

part and parcel of overall decisions about the 

use of economic resources. No major federal 

government program is self-supporting in any 

meaningful way. Every dollar of spending requires taxing (or borrowing from) someone 

and granting benefits to others. Trust fund 

status alone ought not to protect certain programs in the competition for scarce resources 

when other needs lack such a protective label. 

The Ten-Year Budget Outlook 

eBO generally does its baseline projections 

for a five-year horizon. But budget forecasters are often queried about the longer-run 

outlook. Does the deficit eventually go away 

of its own accord? The answer appears to be 

no. Under current policies, after the mid1990s the deficit is expected to start climbing 

in dollar terms and--more worrisome-was a 

percentage of GOP. A broad-brush view of 

the budget outlook through 2002 is presented 

in Table A-7. 

BASELINE BUDGET PROJECTIONS 147 

eBO expects that, under current policies, 

revenues will barely outpace the growth in 

GOP, climbing from 19.0 percent of GOP in 

1997 to 19.1 percent in 2002. Personal income taxes account for this slight rise. 

But spending grows faster than revenues. 

Outlays grow by more than 1 percent of GOP 

in the 1997-2002 period. Within the spending 

totals, some categories grow faster than GDP 

while others lag behind. The government's 

big health care programs--Medicare and 

Medicaid--continue to soar, and together they 

represent 5.9 percent of GOP in 2002 (versus 

4.4 percent in 1997). Net interest outlays inch 

up from 3.6 percent of GOP in 1997 to 3.8 

?ercent in 2002. Social Security benefits stay 

just below 5 percent of GOP. In 2002, the 

final year of this projection, the big demands 

that the baby-boom generation will place on 

Social Security and Medicare will still lie 

more than five years away. Most other 

spending programs roughly preserve their 

1997 shares. A sole exception is discretionary 

spending--defense, international, and domestic. These program areas are assumed, in the 

baseline projections, merely to keep up with 

inflation once the Budget Enforcement Act's 

caps expire in 1995. They therefore dwindle 

gradually as a share of GOP, from 7.3 percent 

in 1997 to 6.7 percent in 2002. 

As large deficits persist, the debt held by 

the public soars to more than 59 percent of 

GOP under current policies, up from 52 percent today. Not since the mid-1950s (when 

nearly all the debt was left over from World 

War II) will the debt-to-GOP ratio have been 

so high. 

Economic assumptions are critical to these 

projections. For 1998 through 2002, eBO 

posits that real economic growth continues at 

about 2 percent a year. The unemployment 

rate is about 51 percent, down slightly from 

the 1997 level. Short-term interest rates (as 

measured by three-month Treasury bills) and 

longer-term rates (such as lO-year Treasury 
148 ANAL YS[S OF THE PRESIDENT'S BUDGET March 1992 

TableA-7. 

The Budget Outlook Through 2002 (By fiscal year) 

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 

In Billions of Dollars 

Revenues 1,088 1,173 1,262 1,340 1,413 1,490 1,578 1,665 1,755 1,851 1,953 

Outlays 

Discretionary 548 543 537 538 556 575 596 618 640 663 687 

Mandatory 

Social Security 285 301 318 335 354 374 395 418 441 466 492 

Medicare 128 143 159 177 198 220 244 271 301 335 372 

Medicaid 68 80 89 100 113 126 142 160 180 202 227 

Other 229 228 231 235 238 256 265 276 288 299 312 

Subtotal 7TO 1ST 797 848 903 977 1,046 1,124 1,209 1,302 1,404 

Deposit insurance 65 69 33 17 -45 -29 -19 -14 -12 -10 -9 

Net interest 201 214 232 246 262 280 299 319 340 365 393 

Offsetting receiptsa -69 -67 -69 -74 -77 -85 -89 

Total 1,455 1,510 1,529 1,543 1,602 1,726 1,843 1,962 2,089 2,226 2,376 

Deficit 368 336 267 203 189 236 265 296 333 375 423 

Deficit Excluding 

Deposit Insurance 

and Desert Storm 

Contributions 307 267 235 219 233 265 283 311 345 385 432 

Debt Held by the Public 3,049 3,385 3,656 3,865 4,061 4,304 4,576 4,879 5,220 5,602 6,032 

As a Percentage of GOP 

Revenues 18.6 18_8 19.1 19.1 19.1 19.0 19.0 19.1 19.1 19.1 19.1 

Outlays 

Discretiona ry 9.4 8.7 8.1 7.7 7.5 7.3 7.2 7.1 7.0 6.8 6.7 

Mandatory 

Social Security 4.9 4.8 4.8 4.8 4.8 4.8 4.8 4.8 4.8 4.8 4.8 

Medicare 2.2 2.3 2.4 2.5 2.7 2.8 2.9 3.1 3.3 3.5 3.6 

Medicaid 1.2 1.3 1.3 1.4 1.5 1.6 1.7 1.8 2.0 2.1 2.2 

Other 3.9 3.7 3.5 3.4 3.2 3.3 3.2 3.2 3.1 3.1 3.1 

Subtotal 12.1 12.0 12.0 12.1 12.2 12.4 12.6 12.9 13.1 13.4 13.7 

Deposit insurance 1.1 1.1 0.5 -0.2 -0.6 -0.4 -0.2 -0.2 -0.1 -0.1 -0.1 

Net interest 3.4 3.4 3.5 3.5 3.5 3.6 3.6 3.6 3.7 3.8 3.8 

Offsetting receiptsa -1.1 -1.0 -1.0 -1.0 ....:.LQ -1.0 -1.0 --1.& -1.0 

Total 24.9 24.2 23.1 22.0 21.6 22.0 22.2 22.5 22.7 23.0 23.3 

Deficit 6.3 5.4 4.0 2.9 2.5 3.0 3.2 3.4 3.6 3.9 4.1 

Deficit Excluding 

Deposit Insurance 

and Desert Storm 

Contributions 5.3 4.3 3.5 3.1 3.1 3.4 3.4 3.6 3.7 4.0 4.2 

Debt Held by the Public 52.2 54.3 55.2 55.2 54.8 54.8 55.2 55.9 56.7 57.8 59.1 

SOURCE: Congressional Budget Office. 

a. Includescontributions from allied nations for Operation Desert Storm. 
APPENDIX A 

notes) are also assumed to remain constant at 

5.6 per~ent and 7.1 percent, respectively. Inflation chugs along at about 3.6 percent. 

Five-year budget projections are highly uncertain, and lO-year projections are even more 

so. Major uncertainties include assumptions 

about economic performance (chiefly real 

BASELINE BUDGET PROJECTIONS 149 

economic growth and interest rates); others 

are more narrowly budget-related--the outlook for a continued surge in use of medical 

care, the size and timing of outlays for deposit 

insurance, and so forth. CBO's projections, 

uncertain though they are, nevertheless challenge the comfortable notion that the deficit 

will eventually go away of its own accord. 

Appendix B 

Major Contributors to the 

Revenue and Spending Projections 

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

Revenue Projections 

Mark Booth 

Leonard Burman 

Maureen Griffin 

Jon Hakken 

Katherine Johnson 

Larry Ozanne 

Linda Radey 

Pearl Richardson 

John Stell 

David Weiner 

Roberton Williams 

Spending Projections 

Defense and International Affairs 

Eugene Bryton 

Kent Christensen 

Raymond Hall 

Barbara Hollinshead 

William Myers 

Mary Helen Petrus 

Amy Plapp 

Lisa Siegel 

Joseph Whitehill 

Human Resources 

Sandra Clark 

Paul Cullinan 

Cathy Ellman 

Corporate income taxes, Federal Reserve System earnings 

Individual income taxes 

Social insurance contributions, excise taxes, estate and gift taxes 

Corporate income taxes 

Excise taxes, NIPA receipts 

Individual income taxes 

Excise taxes 

Individual and corporate income taxes 

Customs duties, miscellaneous receipts 

Individual income taxes 

Individual income taxes 

Defense 

International affairs 

Defense 

Defense 

Defense 

Defense 

Defense 

Defense 

International affairs 

Child nutrition, veterans' compensation and pensions 

Social Security 

Civil Service Retirement, Railroad Retirement 
152 ANALYSIS OF THE PRESIDENT'S BUDGET March 1992 

Alan Fairbank 

Scott Harrison 

Jean Hearne 

Lori Housman 

Julia Isaacs 

Deborah Kalcevic 

Josh Leichter 

Jeff Lemieux 

Cory Oltman 

Pat Purcell 

Kathleen Shepherd 

Connie Takata 

John Tapogna 

Natural and Physical Resources 

Philip Bartholomew 

Kim Cawley 

Patricia Conroy 

Peter Fontaine 

Mark Grabowicz 

Theresa Gullo 

James Hearn 

David Hull 

Thomas Lutton 

Mary Maginniss 

Eileen Manfredi 

Marjorie Miller 

Andrew Morton 

Deborah Reis 

Mitchell Rosenfeld 

Brent Shipp 

John Webb 

Other 

Janet Airis 

Edward Blau 

Betty Embrey 

Kenneth Farris 

Glen Goodnow 

Alice Grant 

Leslie Griffin 

Vernon Hammett 

Ellen Hays 

Sandra Hoffman 

Jeffrey Holland 

Richard Krop 

Hospital Insurance 

Medicare 

Medicaid 

Medicare 

Food stamps, foster care, child care 

Education 

Social service programs, Head Start 

Health 

Unemployment insurance, training programs, 

veterans' education 

Supplemental Security Income, Medicaid 

Veterans' benefits 

Public Health Service' 

Aid to Families with Dependent Children, child 

support enforcement 

Deposit insurance 

Energy, pollution control and abatement 

Community and regional development, general government 

Energy 

Science and space, justice 

Water resources, conservation, and land management 

General government, Agricultural Credit Insurance Fund, 

Outer Continental Shelf receipts 

Agriculture 

Deposit insurance 

Deposit insurance 

Agriculture 

Transportation, Federal Housing Administration 

Agriculture 

Recreation, water transportation 

Air transportation, justice, Postal Service 

Housing and mortgage credit 

Commerce, disaster relief 

Appropriation bills 

Appropriation bills 

Appropriation bills 

Computer support 

Authorization bills 

Appropriation bills 

Net interest on the public debt 

Computer support 

Other interest, credit 

Computer support 

Net interest on the public debt 

Civilian agency pay, historical data 
APPENDIX B 

Terri Linger 

Fritz Maier 

Kathy Ruffing 

Robert Sempsey 

Jeff Swersey 

MAJOR CONTRIBUTORS TO THE REVENUE AND SPENDING PROJECTIONS 153 

Computer support 

Computer support 

Treasury borrowing, interest, and debt 

Appropriation bills 

Computer support 


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