In the past, we have suggested four broad principles or criteria for a budget process. A process should provide information about the long-term impact of decisions, both macro—linking fiscal policy to the long-term economic outlook—and micro—providing recognition of the long-term spending implications of government commitments; provide information and be structured to focus on important macro trade-offs—e.g., between investment and consumption; provide information necessary to make informed trade-offs between missions (or national needs) and between the different policy tools of government (such as tax provisions, grants, and credit programs); and be enforceable, provide for control and accountability, and be transparent, using clear, consistent definitions. The lack of adherence to the original BEA spending constraints in recent years and the expiration of BEA suggest that now may be an opportune time to think about the direction and purpose of our nation’s fiscal policy. The surpluses that many worked hard to achieve—with help from the economy—not only strengthened the economy for the longer term but also put us in a stronger position to respond to the events of September 11 and to the economic slowdown than would otherwise have been the case. Going forward, the nation’s commitment to surpluses will be tested: a return to surplus will require sustained discipline and difficult choices. It will be important for Congress and the president to take a hard look at competing claims on the federal fisc. A fundamental review of existing programs and operations can create much needed fiscal flexibility to address emerging needs by weeding out programs that have proven to be outdated, poorly targeted, or inefficient in their design and management. Last October, you and your Senate counterparts called for a return to budget surplus as a fiscal goal. This remains an important fiscal goal, but achieving it will not be easy. Much as the near-term projections have changed in a year, it is important to remember that even last year the long- term picture did not look rosy. These long-term fiscal challenges argued for continuation of some fiscal restraint even in the face of a decade of projected surpluses. The events of September 11 reminded us of the benefits fiscal flexibility provides to our nation’s capacity to respond to urgent and newly emergent needs. However, as the comptroller general has pointed out, absent substantive changes in entitlement programs for the elderly, in the long term there will be virtually no room for any other federal spending priorities—persistent deficits and escalating debt will overwhelm the budget.While the near-term outlook has changed, the long- term pressures have not. These long-term budget challenges driven by demographic trends also serve to emphasize the importance of the first principle cited above—the need to bring a long-term perspective to bear on budget debates. There is a broad consensus among observers and analysts who focus on the budget both that BEA has constrained spending and that continuation of some restraint is necessary both in times when near-term deficits are accepted and when we achieve surpluses. These views have been articulated by commentators ranging from Federal Reserve Chairman Alan Greenspan to former CBO Director Robert Reischauer, the Concord Coalition, and President Bush. Discussions on the future of the budget process have primarily focused on revamping the current budget process rather than establishing a new one from scratch. Where the discussion focuses on specific control devices, the two most frequently discussed are:(1) extending the discretionary spending caps and (2) extending the PAYGO mechanism. The Budget Enforcement Act of 1990 (Title XIII of P.L. 101-508) was designed to constrain future budgetary actions by Congress and the president. It took a different tack on fiscal restraint than earlier efforts, which had focused on annual deficit targets in order to balance the budget.Rather than force agreement where there was none, BEA was designed to enforce a previously reached agreement on the amount of discretionary spending and the budget neutrality of revenue and mandatory spending legislation. The law was extended twice. While there is widespread agreement among observers and analysts of the budget that BEA served for much of the decade as an effective restraint on spending, there is also widespread agreement that BEA control mechanisms were stretched so far in the last few years that they no longer served as an effective restraint. In part, recurring budget surpluses undermined the acceptance of the spending caps and PAYGO enforcement. Figure 1 illustrates the growing lack of adherence to the original discretionary spending caps since the advent of surpluses in 1998. The figure shows the original budget authority caps as established in 1990 and as extended in 1993 and 1997, adjustments made to the caps, and the level of actually enacted appropriations for fiscal years 1991 through 2002. As we reported in our last three compliance reports, the amounts designated as emergency spending for fiscal years 1999 and 2000—$34.4 billion and $30.8 billion respectively—were significantly higher than in most past years. In addition to the larger than normal amounts, emergency appropriations in both 1999 and 2000 were used for a broader range of purposes than in most prior years. Emergency spending designations have not been the only route to spending above the discretionary spending caps. For fiscal year 2001 Congress took a different approach—one that also highlights the declining effectiveness of the BEA discretionary spending limits. The Foreign Operations Appropriations Act (P.L. 106-429) raised the 2001 budget authority cap by $95.9 billion, a level assumed to be sufficient to cover all enacted and anticipated appropriations. Also, in January 2001, CBO reported that advance appropriations, obligation and payment delays, and specific legislative direction for scorekeeping had been used to boost discretionary spending while allowing technical compliance with the limits. In 2002, Congress once again raised spending limits to cover enacted appropriations. The Department of Defense and Emergency Supplemental Appropriations Act for 2002 adjusted the budget authority caps upward by $134.5 billion. Nor has PAYGO enforcement been exempt from implementation challenges. The consolidated appropriations acts for both fiscal years 2000 and 2001 mandated that OMB change the PAYGO scorecard balance to zero. In fiscal year 2002, a similar instruction in the Department of Defense and Emergency Supplemental Appropriations Act eliminated $130.3 billion in costs from the PAYGO scorecard. Both OMB and CBO estimated that without the instructions to change the scorecard, sequestrations would have been required in both 2001 and 2002. BEA distinguished between spending controlled by the appropriations process—“discretionary spending”—and that which flowed directly from authorizing legislation—“direct spending,” sometimes called “mandatory.” Caps were placed on discretionary spending—and Congress’ compliance with the caps was relatively easy to measure because discretionary spending totals flow directly from legislative actions (i.e., appropriations laws). As I noted above, there has been broad consensus that, although the caps have been adjusted, they did serve to constrain appropriations. This consensus, combined with the belief that continuing some restraints is important, has led many to propose that some form of cap structure be continued as a way of limiting discretionary appropriations. However, the actions discussed above have also led many to note that caps can only work if they are realistic; while caps can work if they are tighter than some may like, they are unlikely to hold if they are seen as totally unreasonable or unrealistic. If they are set at levels viewed as reasonable (even if not desirable) by those who must comply with them, spending limits can be used to force choices. In the near term, limits on discretionary spending may be an important tool to prompt reexamination of existing programs as well as new proposals. Some have proposed changes in the structure of the caps by limiting them to caps on budget authority. Outlays are controlled by and flow from budget authority—although at different rates depending on the nature of the program. Some argue that the existence of both budget authority and outlay caps has encouraged provisions such as “delayed obligations” to be adopted not for programmatic reasons but as a way of juggling the two caps. The existence of two caps may also encourage moving budget authority from rapid spend out to slower spend out programs, thus pushing more outlays to the future and creating problems in complying with outlay caps in later years. Extending only the budget authority cap would eliminate the incentive for such actions and focus decisions on that which Congress is intended to control—budget authority, which itself controls outlays. This would be consistent with the original design of BEA. The obvious advantage to focusing decisions on budget authority rather than outlays is that Congress would not spend its time trying to control the timing of outlays. However, eliminating the outlay cap would raise several issues—chief among them being how to address the control of transportation programs for which no budget authority cap currently exists, and the use of advance appropriations to skirt budget authority caps. However, agreements about these issues could be reached—this is not a case where implementation difficulties need derail an idea. For example, the fiscal year 2002 budget proposed a revision to the scorekeeping rule on advance appropriations so that generally they would be scored in the year of enactment. Such a scoring rule change could eliminate the practice of using advance appropriations to skirt the caps. The 2002 Congressional Budget Resolution took another tack; it capped advance appropriations at the amount advanced in the previous year. This year the Administration proposed that total advance appropriations continue to be capped in 2003 and the president’s budget assumed that all advance appropriations would be frozen except for those that it said should be reduced or eliminated for programmatic reasons. There are other issues in the design of any new caps. For example, for how long should caps be established? What categories should be established within or in lieu of an overall cap? While the original BEA envisioned three categories (Defense, International Affairs, and Domestic), over time categories were combined and new categories were created.