Federal

How big is the federai budget' T1-*h:1:-i:::"T,ff["J"'Tf$::-*j]i::#

;;;;;;;;.ess such a tangled web? ln *nul,

a sruggish economy like an empty res-

odds with discreilonary fr.ttilpi]:ty? How ]

fffitl *r,}-l'"t ttt" federai bud- ;";'il" in ientit most Years' and i^,#il" ,''"P1"' brieflY ii:'"I'-"]: )"'",-in" ""a

ot trre r99os? *l?: l: ,n?::::;H;i*:,i1":":ff :t;;?ffi 1H:'J"'"'#,'JT""#-T',I':;:;:,,. whom? Answers to th

questions ."1". ""ili:::" tl.:Tl

:,:::,',lisnqree E 4 5 s :;;l'"T'#L

-;;;';"':- j:::'" Srrci''i'v l':s.qreu s u ,

u ., ,

ffi"ting in theory and Practtce The word budget derives

from

,h" ;i; ti*.rr -"ta bougette'which w about g4,ooo,ooo,ooo,ooo'oo-$4 trillion

means ,,litrle bag"

'"i?'"u"'11;:gq::l:::il",ffi:it,:rT '", iiffru; mo'" ti'11

a vear. rhat,s big monevl If this "little o"U :;:Xl,'#;t;;;"y stretchingfrom

north-

iJffi ffi i';*:*il* j*jl+;1,:"'*::;,t1il11'"*YJf il jil'.i#F;:* ern Maine to southern"THJ"; i;;;h;t way to e'"tp ,h.t.ti1T:]0", rates of geoo perH;;t*";ts for the Year' Here's "l?thit:

:#,'":H"T#J**":r'"i1#tiiti"*t',*;*:xT#Jni'#t?:'";-""'"-' ;;;;'";ent budgets have.a tremeno'

H3i11#"?:"i",","iiliil",:":"';'rurpi'-s crsctissecl in

our focus in rhis .i,lft", w*i.be ci.rpi"; i3 inclucll.' .,,,,.. , . r, . .

the federat budget,' beginning .,.-. ' 1Cn*gOinq{o"iailry*l in with the budg", pro.L,''fi':

tl"-; e .theiiilderaibudqet Froqes$ ' .",Tll3;;;i;ffiit

'

look ar the source of federai defi- e,gaticnaietordefnitspe*{ing, siTht€hql*ed:q11-:ff

'

;;r-;;;*theybrieflybecame e rru': :'' .'

i,,*;toffioi4i.e-tedtid,4.e,!l crrrnluses. W" ufao ""u'*ine

the g fmpiitoflederal'defiCits ': :(

: i;r : : '

',,:?ii::;Hi ""J 'i'''*pact

on

the economY'

Lff1 Th* ff*dermi ffiuaeKg*$- Fs*e*xs

Thefederalbudgetisaplanofoutlaysandrevenuesforaspecifiedperiod' usualiy a year' '"0"'"i

JJo" include uolt' gou""'ment pxrchases and transter

Davments Exhibit ' ';fi$];]ilJ"'a fiyi if *"i"':"*?:? since re6o' As vou

Iui., ,"", the share "t';;;;u';"i"c t" 1i:",:1ei$:i"n3::?ff1 :-i:;?l,i:*ffi',"'

ilil;;;lf in re6o to only 22 perce'ntli

;";;;t care for the *in*unt outravs ano.- ,r,",. r.,u, s,9*' :':;r. ff',X1? $"fi.TJ?,::=;;;" ;i;.: ll_ll; ;.-1ffiti;:n'ff:il-' elderly, was introdu:"o

tt,:':tr,:'^:';-*"*-, aimed primartLy

pe;ruu' r!rr""'

;;i:social securitv ?id Y:1:'-1:?,t:??#;i;;;;"y, i,, 'ooe -F**"*'in fact, Social Secuflty arru rvrsu*u^ -' r = leral outiays \Tr 2oo9'

l-. .l-'=ta.*'.* combined for 34 percent of

te(

CIIAFT'gI{ r3 i:i'1eral ll''rliliris llrC pt'6i'; p'riicl 183

o

F = o 0) :o 0)

o 0.) o) (o

a)o L c) o-

i:xlrii:il :. Defense's Share of Federal 0utlays Declined Since 1960 and Redistribution lncreased

100%

80%

60%

40%

20%

rgiil ''Jtf/ '5ltf '9t'? f$,?tf fJaRt fS9/ t9i9 t$t? t$flf Atdo A9rl AtU}9 SoURCES: Computed based an budget totals from fconornlc Bepoft af the President February 2009, Table B-80; and the Office of Manage- ment and Budget. For the latest data, go to Percentage shares for 2009 are estimates.

For the last two decades, welfare spending, which consists of cash and in-kind transfer payments, has remained relatively stable and in zoog accounted for r4 percent of federal outlays. And, thanks to low interest rates, interest payments on the national debt were 7 percent of federal outiays in zoo9, down from 15 percent as recently as 1996. So 48 percent, or nearly half the federai budget tn zoo9, redistributed income (Social Security, Medicare, and welfare); zz percent went toward defense; Z percent serviced the national debt; and the remaining 23 percent paid for everything else in the federal budget-from environ- mental protection to federal prisons to federal aid to education. The federa] government has shifted the focus from nationai defense to redistribution.

The Fresidentia| and Congressl<>nal RoEes The president's budget proposai begins to take shape a year before it is submitted to Congress, with each agency preparing a budget request. In late January or early February the president submits to Congress

budget resolution a congressicnal agree- men! ab*ut tatal out" Iays. spendi,]g by mefor cetegory" and expeeted revenues: it guides spending and revenue decisions by the many congressional commit- tees and subcon:nrittees

The Budget of the United States Government, a big pile of books detailing spending and reve- nue proposals for the upcom- ing fiscal year, which begins October r. At this stage, the president's budget is little more than detailed sugges- tions for congressional consid- eration. About the same time,

the president's Council of Economic Advisors sends Congress the Economic Report of the President, which offers the president's take on the economy.

Budget commit- tees in both the House and the Senate rework the president's budget until they agree on total outlays, spend- ing by major category and expected reve- nues. This agreement, called a budget resolu- tion, guides spending and revenue decisions made by the many congressional com- mittees and subcom-

mittees. The budget cycie is supposed to end before October r, the start ofthe new fiscal year. Before that date, Congress should have approved detailed plans for outlays along with revenue projections. Thus, the federal budget has a congressional gestation period of about nine months-though, as noted, the presi- dent's budget usually begins taking shape a year before it's submitted to Congress.

The size and composition of the budget and the difference between outlays and revenues measure the budget's fisca1 impact on the economy. When outlays exceed revenues, the budget is in de-fcit. A deficit stimulates aggregate demand in the short run but reduces national saving, which in the long run could impede eco' nomic growth. Alternatively, when revenues exceed. out- lays, the federal budget is in surplus. A surplus dampens aggregate demand in the short run but boosts domestic saving, which in the long run could promate economic growth.

Frsblems larith the Federel Budget Froeess The federal budget process sounds good on paper, but it does not work that well in practice. There are several problems.

Continu ing Resolutions lnstead of Budget Decisions

Congress often ignores the timetable for develop- ing and approving a budget. Because deadiines are frequently missed, budgets lgpically run from year

0%

144 PART 3 Fiscaj ariii ivioretary Policy

to year based on continuing resolutions, which are agreements to aliow agen- cies, in the absence of an

* :l1% overlyDetaired , ' t l l.( )ri rrl.i: .?.'.l9g"gtL\r:r, - ''rr\tll-l\ 1 r---i-^r j.

approved budget, to sPend at

the rate of the Previous Year's budget. PoorlY conceived Pro- grams continue through sheer

The federal budget is divided into thousands of accounts and subaccounts' which is whY it fills voiumes' To the extent that the budget is a waY of making Political payoffs, such micromanage- ment ailows elected officials to reward friends and Punish enemies with great Preclslon'

expand. On occasion, the President must temporarilY shut down some agencies because not even the continu-

irig resoiution can be approved on time-'

Foi example, in late 1995 and early i996'

most federal offices closed for z7 days'

!g.l.qtf v. Ps9 gsl P,'gq9?P

You can imagine the difficuity of using

the budget "i " tool of discretionarY fis

.

ry.e. I e"p"e lPJe. kPi:31 .?=q f, gst

inertia; successful programs cannot

o F

I L L

I

For examPle, a recent bud- get included $176,ooo for the Reindeer

ierders Association in Alaska, $4oo'ooo for the Southside Sportsman Club in New York, and $S million for an insect-

rearing facility in Mississippi' By bud- geting in such detail, Congress *1I Jot"

cal poliJy when the budget process takes.

t" fi"g. Ci r"n that the """t"gu recession lasts only

io *oirftt and that budget preparations begin more iir""

" y"tt and a haifbefore the budget takes effect'

pl"""i"g discretionary fiscal measures to reduce

".ono*i. fluctuations is difficult' That's one reason

*fly u,r"*pts to stimulate an ailing economy often ,""'* ,o haUhearted; by the time Congress and the president agree on a fistai remedy, the economy

has

often recovered on its own'

"V"l e.g.!Irg I le F !e. H s 9.g.el.

r"en :. "

. .

Congress has oniy limlted control over much of the

U"Ji*. Abovt tht;e-fourths of federal budget outlays are deteiminedbyexisting lau;s' For example' once

Congress

establishes eiigibility criteria, etrtitiement prc gre'ms'

such as Social iecurity, Medicare, and Medicaid' take

onlivesoftheirown,witheachannualappropriation ri*pfy reflecting the amount required to support the

"rpeciua number of entitled beneficiaries' Congress

tru, tto say in such appropriations unless it chooses to change benefits o;;ligibility criteria' Most entitle- ment piograms have such politically powerful con-

stituencies that Congress is reluctant to mess with

the structure.

sight of the 6ig pi-.t.,t"' When economic conditions

.n'""g" "t

*h"ilift" demand for certain public goods shifts] the federal government cannot easily

real-

io."," funds. oetaiied budgeting is not only time consuming, it reduces the flexibility of discretionary

fisca1 poliry and is subject to political abuse'

FossEb&e Eudget Refsrms Some reforms might improve the budget

process' First'

ii." """"rr

budgel could become a two-yearbudget' or

ii^":"tbudget.is it is, Congress spends near$ all of

;;; ;;;.;";king on the budget' rhe executive branch

;;#"yt dealiniwith three budgets: ad-rninistering an ;;;;"h ilJg"l, a"ru"aing a proposed budgetbefore congessior.al committees, and preparing

the next

budlet for submission to Congress' With-.a two-year

budget, Congress would not bL continually involved

;j,liildg", l"tiu"t",io"s, and cabinet members could focus more on runnlng their agencies (many

states

have adoptea two-yeaibudgets)' A two-year budget'

Congress approves a single budget that mixes capital

"tpJnaitrrr"i, tii." new iederal buildings or aircraft

."iti"tt, with operating expenditures' like employee payroils or military meals' Budgets for businesses

"r.t fot state and local governments usually distin-

gulst] uet*een a capital budgeland an operatingbudget'

ihe federal government, by mixing the two' offers a

fuzzier picture of what's going on'

however, would require lon- ger-term economic forecasts and would be less usefui than

a one-Year budget as a tool of

discretionary fi scal Poliry' Another Possible reform

would be to simPlifY the budget document bY con- centrating onlY on major groupings and eliminating line items. Each agencY head

would receive a total budget,

along with the discretion to allocate that budget in a

coniinuing resolutrons h*dget agree$le*ts that allow ageneies" in tlr* a!:sence o{ ** eg:Proved bilclget, tc cpend at ih€ i6t€ *f the Previous Vear's budaet

entitiernent programs suaraEteed benetits tor i'',*se who qrialilY for fioverntnant iransier irogru*u sq'lclr as social 5*euritY *nri fdedirare

CHAPTER r3 F'.:itr:ra; i3r:rcrets and Publtc iJclir;1' 185