Senate Budget Committee Analysis of Clinton's Budget

THE PRESIDENT'S FY 2000 BUDGET:

(1) In this document, all dollar and percentage amounts relating to the President's budget and to current services estimates have been taken from the President's 2000 budget document. These figures are based on the President's economic forecast and technical estimating procedures and have not been reestimated by the Congressional Budget Office.

(2) "BEA" refers to the Budget Enforcement Act, Title XIII of the Omnibus Budget Reconciliation Act of 1990. "BBA" refers to the Bipartisan Budget Agreement of 1997.

(3) Unless otherwise stated, all years in this report are fiscal years.

(4) In the case of all tables: (a) Details may not add to totals due to rounding; (b) "N/A" means not available or not applicable; and (c) "(*)" means less than $0.5 billion, less than $500,000 or less than one-half percent.

OVERVIEW

THE PRESIDENT'S FY 2000 BUDGET: A GLORIOUS DILEMMA FOR THE 21st CENTURY?

"We are in the eye of the storm between large past deficits

Just one year ago, the President's budget projected a slight cumulative surplus of $8 billion for the three years 1998-2000. Today's transmittal estimates cumulative surplus for these same three years of nearly $300 billion. Such wide gyrations in near term forecasts should give all legislators pause when developing policies based on multi-year prognostications.

The achievement of these surpluses, however, has had very little to do with proposals included in the President's budget submission last year or now. The strength of the economy and past budget policies, beginning in 1990 with a budget reform law that established caps on annual spending and required offsets for new mandatory spending or tax reductions (paygo), laid the groundwork for today's bright picture.

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Contradictions, however, in the President's 2000 budget are painfully clear. While maintaining the vestige of the BBA's discipline, the President's budget expands government with nearly $130 billion in new spending and social spending tax initiatives over the next five years. Like last year's budget, the Administration has not told supporters of the programs slated for increases in the President's budget about the "pay-fors". Predictably, these pay-fors are unlikely to materialize. Thus supporters' expectations of funding increases grow, pay-fors are not enacted, and confrontation in the annual appropriation process is assured.

The President proposes to meet BBA spending limits and expand other mandatory programs in part by: (1) raising tobacco taxes -- $34 billion; (2) recouping $16 billion from what the states won in last year's settlement; (3) increasing user fees by $21 billion; (4) reclassifying increased discretionary spending for expanded military retirement benefits as mandatory spending -- $5.6 billion, (5) speeding up the collection of spectrum auction receipts and slowing down spending in 2000 by advance funding other programs into years beyond 2000.

Despite rhetoric that the 2000 defense budget shows a sea change in the President's thinking on defense, the initiatives are more cosmetic than real. Once again the President's 2000 budget under funds defense programs and outlays for defense will actually decline from 1999 to 2000.

Finally, the President's budget includes serious and dangerous contradictions as it relates to long-term budget liabilities. By claiming to extend the solvency of Social Security and Medicare while proposing no real changes, the budget sets up a false expectation that these programs require no changes. In fact, some changes, such as expanding Medicare to cover prescription drugs, could actually reduce that program's solvency without other substantive changes. While on one hand expressing concern about future pension liabilities, the President's budget proposes to increase dramatically unfunded liabilities by undoing military retirement reforms adopted by Congress in 1986.

The President's 2000 Budget: A Contradiction

Federal spending in the President's budget is projected to increase from $1.727 trillion this year to nearly $2.0 trillion in 2004. Total Federal spending over the next five years would reach nearly $9.4 trillion. Spending would grow at an average annual rate of 3.0 percent. Revenues would grow from $1.806 trillion this year to more than $2.166 trillion in 2004, a total of $10.1 trillion in receipts over the next five years.

Receipts including the President's new tax initiatives, would grow faster than expenditures, rising annually at a rate of 3.7 percent. For 2000, the President's budget estimates total federal receipts topping a historic high of 20.7 percent of GDP. Only one other time in recorded budget history did federal receipts exceed 20.7 percent, and that was during the war year of 1944 when the figure reached 20.9 percent.

The President's budget proposes to expand mandatory spending programs by nearly $22 billion for child care, Medicare buy-ins, welfare to work initiatives, and provide funds for Superfund orphan shares. New spending and tax credit initiatives in the President's budget with costs over the next five years follow:

     Discretionary initiatives      $74.7 billion

Excluding new user fees, tobacco taxes and tobacco recoupment, accounting gimmicks for military retirement and other programs, there is only one major spending reduction of any significance proposed in the President's budget -- $10.4 billion from the Medicare program. These savings are derived as follows: $2.9 billion from "fraud, waste, and abuse," $7.5 billion from hospital payment update delays this year, and other minor changes. These gross savings in the Medicare program are offset by $1.7 billion in new Medicare initiatives. No proposal to fund Medicare prescription drugs is included in this budget!

The President's Social Security Plan: Another Contradiction

Instead of putting together a bold plan to save Social Security, the President relies on accounting legerdemain and a proposal to have the Federal government spend a portion of Social Security reserves on private stocks.

Federal Reserve Board Chairman Alan Greenspan recently warned that injecting the Federal government into the stock market "would arguably put at risk the efficiency of our capital markets and thus, our economy." He expanded on this concern about the Federal government investing Social Security assets in equities by stating: "I'm fearful that we will use those assets in a way which, one, will create a lower rate of return for Social Security recipients, but, even of greater concern, that it will create a sub-optimal use of our capital resources and those assets which create our standard of living." If Chairman Greenspan is correct, this aspect of the President's proposal will harm the economy and provide less for all retirees along with all other Americans in the long-run.

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     Defense                         $54.7 billion

Under any definition of the "debt", the President increases the Federal government's debt relative to levels that would be needed under current law. Most focus on two levels of debt. The first, DEBT SUBJECT TO LIMIT, refers to total debt issued by the federal government, including debt issued to Federal trust funds, such as Social Security. Congress has enacted a $5.95 trillion statutory limit on this gross level of debt. A subset of total debt is borrowing from the public (non-federal sources), known as DEBT HELD BY THE PUBLIC.

The table on page 7 shows the President's budget increases both total debt (debt subject to limit) and debt held by the public. While the President accurately points out that his budget would lead to a reduction in the debt held by the public, he does not point out that his budget would increase the debt held by the public by $363 billion over the next five years relative to current law. A more striking change occurs in total debt levels of the federal government. Under the President's budget, over the next five years, total debt would grow by $1.2 trillion.

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OMB's and CBO's economic forecasts are extremely similar and are quite close to Blue Chip's estimates. Over the last year, both OMB and CBO have boosted their economic forecasts in response to better- than-expected 1998 growth and some structural improvement in the underlying economy. Better economics account for slightly under 50 percent of the improvement in OMB's five-year budget estimates relative to last February. Economics account for roughly one third of the improvement in CBO's budget estimates from last March.

I: ECONOMIC OVERVIEW

As of December 1998, the current economic expansion became the longest on record during times of peace. Despite its age, it is showing few signs of slowing, with real GDP growth in the fourth quarter of 1998 registering 5.6 percent. Such strength surprised many who had expected a sharp slowdown in US growth at the end of last year, due the spreading global financial crisis. However, in a perverse sense, this crisis seems to have helped the US economy thus far -- although manufacturing and commodity production have weakened considerably, the influx of foreign capital into US assets (so-called 'safe haven flows') has led to a sharp decline in US Treasury yields which ignited consumption and investment.

Going forward, some slowdown seems likely, particularly in light of current tight labor market conditions. However, this slowdown should be gradual and is not expected to result in recession -- in its latest poll, 63 percent of Blue Chip forecasters do not expect a recession in either 1999 or 2000. Of course, there are risks to this outlook -- a sharp fall in the Dow could lead to a contraction in consumer spending, while rising wage pressures could further erode corporate profitability and rekindle inflationary pressures. Yet, while both risk factors bear careful watch, neither seems an undue threat to the near-term economic outlook.

II: COMPARISON OF ADMINISTRATION ECONOMICS VERSUS CBO'S

OMB's and CBO's economic forecasts are extremely similar and are well within the range of error on these forecasts. Both look for the economy to slow below its potential growth rate in the next few years, while inflation increases slightly. However, neither expects a recession. On net, OMB is slightly more optimistic on inflation, unemployment and interest rates, while CBO is slightly more optimistic on income shares.

Both OMB and CBO take cyclical considerations into account for 1999 and 2000, and make out-year projections based on the underlying trends in the economy.

GROWTH

OMB and CBO look for the economy to slow from 1998's torrid pace. Both expect below-trend real growth over much of the 2000-2004 budget window, induced in part by the spill-over effects of the Asian crisis on US net exports and constraints imposed by today's tight job market. OMB believes the slowdown will be somewhat smoother than CBO -- the latter has a sharper dip in 2000 and a slightly stronger recovery in 2001 and 2002. Yet, over the 5 year budget window, both OMB and CBO expect average annualized real GDP growth of 2.2 percent.

Blue Chip is more optimistic on real GDP growth than either OMB or CBO. They believe that the economy's potential growth rate in 2004 is 2.6 percent, whereas both OMB and CBO peg it at 2.4 percent between 2004-2008.

Since OMB & CBO's GDP deflator assumptions are identical from 2001 to 2004, their nominal GDP forecasts are also quite close.

INFLATION

Both OMB and CBO expect that inflation will pick-up slightly this year, in deference to tight labor markets and a waning of temporary factors that had been restraining prices up to this point (ie, the strengthening dollar and plunging commodity prices).

As alluded to above, OMB and CBO assume that the GDP deflator growth will pick-up in 1999 and 2000, and plateau at 2.1 percent in 2001 and beyond.

Both OMB and CBO look for CPI growth to pick-up as well. However, OMB expects CPI growth to plateau at 2.3 percent in 2000 and beyond, while CBO looks for it to average 2.6 percent over the same period. OMB attributes its lower CPI number to ta recent technical change by BLS which will shave approximately 0.2 percent from CPI growth in 1999 and beyond. (Since 1994, technical corrections have reduced CPI growth by 0.7 percent). CBO also acknowledges the impact of the technical CPI changes, however, it expects these changes to be swamped by other factors such as rising wage pressures and less downward pressure from import prices and medical care costs). CBO also notes that the recent settlement between the states and the tobacco companies should raise 1999 CPI growth by between 0.2-0.3 percent. The Blue Chip forecasters are more pessimistic on CPI growth than either OMB or CBO -- they look for CPI growth to plateau at 2.7 percent.

CPI-GDP DEFLATOR WEDGE

In budget calculations, the difference (or wedge) between CPI and the GDP deflator is important. Since indexed outlays are linked mainly to CPI while revenue projections are based on the GDP deflator, budget forecasts look better the lower CPI is in relation to GDP deflator.

OMB assumes a CPI-GDP deflator wedge of only 0.2 percent, while CBO expects this to average 0.5 percent over the budget window. As such, OMB is more optimistic on this measure than CBO. Blue Chip is between the two shops, expecting a 0.3 percent wedge.

INCOME SHARES

Income shares are a less publicized portion of the forecasts, although they can have key budgetary effects. Income shares depict the breakdown of national income between wages and salaries, benefits, corporate profits, proprietors' income, rental income and net interest. They are expressed as a share of GDP.

If all of the above areas were taxed the same, the division between income categories would make little budgetary difference. Yet, this is not the case. Wages and salaries and corporate profits are taxed at a higher effective rate -- as such, the higher they are relative to the other income categories, the higher the projected revenue stream. These latter two are referred to as taxable shares.

OMB and CBO both expect the corporate profit share to decline over the budget window, as higher wage costs reduce corporate profitability. For the same reason, both also look for a slight increase in the wage and salary share.

Overall, OMB and CBO have similar forecasts for the taxable share between 1999 to 2001. However, from 2002-2004, CBO has more optimistic assumptions than OMB. Blue Chip does not produce forecasts for taxable shares.

III: SENSITIVITY TO ECONOMIC CHANGES

Recent experience highlights the sensitivity of one year's surplus number to economic factors. As such, CBO examined how changes in these variables could affect their budget forecasts. With regards to the economy, they looked at three scenarios: 1) continued strong growth, 2) a boom/bust cycle and 3) an immediate slowdown due to financial turmoil. In the optimistic case, the 2004 surplus would be $305 billion, compared to the current $234 billion estimate. The boom/bust scenario would halve the 2001 surplus, but would leave the 2004 surplus only slightly below its current projection. Interestingly, the financial turmoil scenario would halve the 2000 surplus estimate, but would actually leave the 2004 surplus slightly higher than currently projected since the economy would be in a recovery phase at that point.

CBO also examined the impact of changing the trend growth rate of the tax base. They found that the 2004 surplus would likely be between $140 billion and $330 billion in the pessimistic and optimistic tax base growth scenarios.

As such, CBO's sensitivity analysis shows that yearly surplus estimates are quite vulnerable to change. However, they also show that the projection of continued surpluses from 2004-2009 appears somewhat robust even assuming a near-term recession.

IV: LONG-TERM OUTLOOK

CBO has updated its long-term budget estimates to reflect the improvement in the near-term fiscal position. Its measure of the US' fiscal imbalance halved, however, the long-term fiscal outlook is still unsustainable without entitlement reform.

In CBO's model, the large surpluses of 1999-2009 lead to the elimination of publicly held debt by 2012, with the US actually building up net assets that total 12 of GDP by 2020. However, as the demographic backdrop worsens, the US begins to issue debt again soon after 2030. By 2060, the debt to GDP ratio is almost 130 percent and fiscal meltdown soon follows. (It is important to note that CBO assumes all projected surpluses will be used to retire debt - if some is spent instead, the fiscal meltdown occurs much more quickly.)

The Administration tells a different story. Its current services baseline indicates that the US fiscal outlook is sustainable as is, assuming surpluses are saved. However, this stems from two questionable assumptions. 1) They assume that discretionary spending is frozen in real terms for the next 70 years. This would pull discretionary spending down from just under 7 percent of GDP to less than 3 percent by 2070. Most do not find this credible in light of the US' growing population and the need to replace aging defense and other infrastructure. However, if the Administration assumes frozen real discretionary spending in its long-term model, it should support fiscal discipline in the near-term as well. 2) OMB does not have any economic feedbacks in their model, which means that rising deficits do not boost interest rates and slow the economy. This assumption is also not credible. OMB does point out that the fiscal outlook deteriorates markedly if the two above assumptions are relaxed.

Under its current services baseline, OMB predicts that the US will have net assets by 2015. In contrast, the President says that this policies will leave the US with a debt of 7 percent in this same year. Thus, this shows that the President is planning to spend some of the projected surpluses and highlights the fact that we'd be in better fiscal shape if we did not implement his budget and did nothing instead.

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FUNCTION 050: NATIONAL DEFENSE

The Administration has requested $280.8 billion in total budget authority and $274.1 in total outlays for the National Defense budget function (050) in 2000. ¹ According to OMB calculations, this is $4.6 billion more in BA than Congress appropriated for National Defense in 1999 and $2.6 billion less in outlays.

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This function includes operation of the foreign affairs establishment including embassies and other diplomatic missions abroad; foreign aid grants and technical assistance activities in the less developed countries; security assistance to foreign governments; foreign military sales made through the Foreign Military Sales Trust Fund; U.S. contributions to international financial institutions; Export-Import Bank and other trade promotion activities; and refugee assistance.

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The adjusted 1999 discretionary current services totals $18.663 billion. The President's request is $21.3 billion in discretionary budget authority in 2000. If the request is adjusted for Section 314 of the Budget Act (see note 1) the request increases discretionary budget authority by $2.2 billion over the 1999 adjusted level, or a 11.7 percent increase. When excluding the Middle East aid for the Wye Memorandum supplemental ($500 million in 2000), the request for 2000 is a $1.7 billion increase over the 1999 level, or a 9 percent increase. ¹¹

o The President's request for Multilateral Development Banks

Two supplemental requests are included in the President's 2000 budget. These supplementals total approximately $1.8 billion in 1999, $0.5 billion in 2000, and $0.5 billion in 2001.

     o The supplemental request for Hurricane Mitch is not included

In addition to the emergency advance appropriations requested for the Wye River Memorandum, the President requests a total of $3 billion for embassy security activities as advanced appropriations for fiscal years 2000-2004. These amounts are NOT REQUESTED AS EMERGENCIES but as advance appropriations at the following levels:

     2001                $300 million

This function includes the National Aeronautics and Space Administration (NASA) civilian space program and basic research programs of the National Science Foundation (NSF) and Department of Energy (DOE).

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o The President's budget proposes $12.5 billion for the National

This function includes the Department of Energy's civilian programs, the Rural Utilities Service, the power programs of the Tennessee Valley Authority (TVA) and the Nuclear Regulatory Commission (NRC).

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o As part of his Climate Change Technology Initiative, the

This function includes a wide variety of programs whose primary purpose is to develop, manage, and maintain the nation's natural resources and environment. Agencies with major programs in this function include: the Army of Corps of Engineers, Bureau of Reclamation, Forest Service, Bureau of Land Management (BLM), Fish and Wildlife Service, the National Park Service (FWS), Environmental Protection Agency (EPA), National Oceanic and Atmospheric Administration (NOAA), and the U.S. Geological Survey (USGS).

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FUNCTION 350: AGRICULTURE

This function includes programs that intend to promote the economic stability of agriculture. Programs in this function include direct assistance and loans to food and fiber producers, market information and agricultural research. Producers are assisted with production flexibility contract payments, crop insurance, non- recourse crop loans, operating loans and export promotion.

The price support programs operated by the Commodity Credit Corporation (CCC) constitute most of the spending in this function. Agriculture spending has varied widely over the last 25 years. CCC spending has gone from $0.6 billion in 1975 to a record high of $26 billion in 1986.

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The Administration projects Commodity Credit Corporation (CCC) outlays to total $18.4 billion in 1999 and $12.6 billion in 2000.

o The Administration proposes a number of new user fees in 1999,

This function includes discretionary housing programs, such as subsidies for single and multifamily housing in rural areas and mortgage insurance provided by the Federal Housing Administration; net spending by the Postal Service; discretionary funding for commerce programs, such as international trade and exports, science and technology, the census, and small business; and mandatory spending for deposit insurance activities related to banks, savings and loans, and credit unions.

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Looking at DISCRETIONARY PROGRAMS ALONE, the President proposes to increase budget authority from $3.7 billion in 1999 to $5.4 billion in 2000, a 45 percent jump. However, setting aside the additional resources ($1.7 billion above baseline) in 2000 to pay for the census, the President would reduce BA for the remaining discretionary programs in this function by $0.1 billion below the 1999 level, for a 2.2 percent decrease. Specific major proposals are listed below.

o The primary increase is for the Bureau of the Census, which

This function supports all major modes of transportation. Function 400 includes ground transportation programs, such as the federal-aid highway program, mass transit, and the National Rail Passenger Corporation (Amtrak); air transportation through the Federal Aviation Administration (FAA) airport improvement program, facilities and equipment program, and operation of the air traffic control system; water transportation through the Coast Guard and Maritime Administration; the Surface Transportation Board; the National Transportation Safety Board; and related transportation safety and support activities within the Department of Transportation.

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o For 2000, the President's budget proposes total budget

     o According to OMB's revenue estimates, highway obligations for

In addition, the President's budget request distributes $1.1 billion of the additional $1.5 billion under TEA-21 in the following manner:

o $341 million for increased funding for TEA-21 Congestion

The budget request for Transit Section 3 New Starts discretionary grants has been increased by $150 million over 1999. Transit formula funds requested by the Administration has been increased by $500 million for 2000.

The President's request for the Federal Aviation Administration (FAA) would create new cost-based user fees in order to fund air traffic control operations within the FAA. The Administration's budget assumes the collection of $1.5 billion in new fees for 2000.

The President's budget claims that current aviation excise taxes would continue at a reduced rate in the future. However, the President's projections of both the new cost-based user fee and total receipts into the Airport and Airway Trust Fund do not show current excise taxes being reduced during the 2000 through 2004 period.

o For 2000, the President requests $10.1 billion in budget

This function covers the regional and developmental programs that fund physical facilities or financial infrastructures of communities. The major programs are administered through a variety of agencies including the Department of Housing and Urban Development, the Appalachian Regional Commission (ARC), the Tennessee Valley Authority, the Economic Development Administration (EDA), the Bureau of Indian Affairs, the Federal Emergency Management Agency, and the Department of Agriculture.

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o President Clinton proposes to increase funding in 2000 from

This function includes those activities designed to promote the acquiring of knowledge and skills, to provide social services for needy individuals, and for research directly related to these program areas. In general, the activities funded by this function are administered through the Departments of Labor, Health and Human Services, and Education.

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This function covers all health spending except that for Medicare, military health, and veterans health. The major programs include Medicaid, health benefits for federal retirees, the Food and Drug Administration, the Health Resources and Services Administration, the Indian Health Service, the Centers for Disease Control and Prevention, the National Institutes of Health, the Substance Abuse and Mental Health Services Administration, and the Occupational Safety and Health Administration.

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This function includes only the Medicare program. Medicare pays for medical services for about 39.8 million senior and disabled citizens and for those with End Stage Renal Disease. Medicare is administered by the Health Care Financing Administration, part of the Department of Health and Human Services.

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The income security function contains the: 1) major cash and in- kind means-tested entitlements; 2) general retirement, disability and pension programs excluding Social Security and Veteran's compensation programs; 3) federal and military retirement programs; 4) unemployment compensation; 5) low-income housing programs; and 6) other low-income support programs. Function 600 is the fourth largest functional category after Social Security, defense, and interest on the federal debt.

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CHILD CARE

     o The budget contains a $23.2 billion, five-year initiative to

This function -- the largest in terms of outlays in the federal budget -- includes Social Security benefits, or old age, survivors and disability insurance (OASDI). Social Security is also the largest entitlement program. Benefits are paid from the Social Security trust funds and financed by payroll taxes. For purposes of the Budget Enforcement Act, the Social Security trust funds are off-budget and do not count toward deficit projections. However, the administrative expenses of the Social Security Administration are on-budget and remain within the caps on overall discretionary spending.

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This function includes all programs directed toward veterans of the armed forces. Income security needs of disabled veterans, indigent veterans, and survivors of deceased veterans are addressed through compensation benefits, pensions, and life insurance programs. Major education, training, and rehabilitation and readjustment programs include the Montgomery GI Bill, the Veterans Educational Assistance Program, and the Vocational Rehabilitation and Counseling program. Veterans are also able to receive guarantees on home loans. Roughly half of all spending on veterans is for the Veterans Health Administration, which comprises over 700 hospitals, nursing homes, domiciliaries, and outpatient clinics.

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VETERAN'S BENEFITS

     o The President proposes a 2.4 percent cost of living adjustment

This function includes funding for federal law enforcement activities, including criminal investigations by the Federal Bureau of Investigation (FBI) and the Drug Enforcement Agency (DEA), border enforcement and the control of illegal immigration by the Customs Service and the Immigration and Naturalization Service (INS), as well as funding for prison construction, drug treatment, crime prevention programs and the federal Judiciary. The function includes resources for the Violent Crime Reduction Trust Fund (VCRTF) into which were deposited assumed annual savings from reducing the federal workforce between 1995 and 2000. Under current law, this trust fund expires in 2000.

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     o The President requests an additional $1.3 billion for a new

This function consists of the activities of the Legislative Branch, the Executive Office of the President, U.S. Treasury fiscal operations (including the IRS's tax collection activities), personnel and property management, and general purpose fiscal assistance to states, localities, and U.S. territories.

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     o President Clinton is requesting $8.0 billion for the Internal

This function usually displays the budgetary effects of proposals that cannot be easily distributed across other budget functions. In past years, Function 920 has included total savings or costs from proposals associated with emergency spending or proposals contingent on certain events that have uncertain chances of occurring.

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     o For 2000, rather than proposing specific reductions in

This function records offsetting receipts (receipts, not federal revenues or taxes, that the budget shows as offsets to spending programs) that are too large to record in other budget functions. Such receipts are either intrabudgetary (a payment from one federal agency to another, such as agency payments to the retirement trust funds) or proprietary (a payment from the public for some type of business transaction with the government). The main types of receipts recorded as "undistributed" in this function are: the payments federal agencies make to retirement trust funds for their employees, payments made by companies for the right to explore and produce oil and gas on the Outer Continental Shelf, and payments by those who bid for the right to buy or use the public property or resources, such as the electromagnetic spectrum.

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     o The President proposes to ACCELERATE INTO 2000 AN AUCTION OF

Outlays for net interest represent the gross cost of financing all federal government debt, less interest earned by federal government on its trust fund investments and on loans to the public.

Net interest spending is not directly controllable by policy actions. Interest spending depends on the level of debt and on interest rates. Congress and the President control the level of debt through decisions about spending and taxation. Interest rates are determined by market forces and Federal Reserve policy.

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     o President Clinton proposes to increase total federal debt by

Federal revenues are taxes and other collections from the public that result from the government's sovereign or governmental powers. This section provides an overview of President Clinton's revenue proposals for the period 1999-2004. Revenues in the Clinton budget are expected to grow by $359.2 billion, or 19.9 percent, between 1999 and 2004. Over the five-year period 2000-2004, President Clinton's budget recommends net tax increases of $45.8 billion.

Current services revenues are projected to be 20.6 percent of GDP in 2000. If President Clinton's revenue proposals are adopted, taxes will reach 20.7 percent of GDP in 2000, the highest level as a percentage of the economy since World War II (when revenues to finance the war reached 20.9 percent of GDP in 1944). ($ Billions)

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The President proposes a series of provisions that increase federal revenues by $78.5 billion over the period 2000-2004. These proposals include $34.5 billion in receipts from tobacco legislation, $33.4 billion in new taxes from the elimination of unwarranted benefits, and $10.6 billion from reinstating expired taxes and other proposals.

     o The President's budget includes $34.5 billion in RECEIPTS FROM

BUDGET PROCESS

Despite increasingly tight discretionary spending caps, the President's budget proposes significant increases for certain discretionary programs. However, once again, according to the President's own estimates, his budget does not stay within the statutory caps by actually reducing other discretionary spending. Instead, over the next five years, the President meets the caps by using a combination of: mandatory spending savings, increased tax revenues, changes to the pay- go rules, and, under the guise of Social Security reform, allows unified budget surpluses to be spent.

Under the Budget Enforcement Act, the savings resulting from reductions in mandatory spending made in an appropriations bill are credited as discretionary savings to that bill for the purpose of determining compliance with the discretionary caps. However, under current law, revenue increases may not be credited as discretionary savings for the purpose of meeting the caps. Both the Congressional Budget Office and the Federal courts (through rulings in the Line Item Veto cases) support this interpretation of the law. Nonetheless, the President's budget uses revenue increases to offset spending in order to meet the caps.

In order to increase spending for the Department of Defense, the President's budget proposes two changes to the pay-go rules set out in the Budget Enforcement Act. First, the President proposes to transfer previously enacted revenue and mandatory savings to permit a $2.9 billion increase in discretionary spending for the Department of Defense. Under current law, pay- go savings may only be used for deficit reduction or to offset mandatory spending increases or revenue reductions in the same year; they may not be carried forward. In addition, the President's budget also proposes changes in budget rules to not count the Department of Defense's additional contributions to the military retirement trust funds for expanded retirement benefits as a net increase in discretionary spending, thus freeing up $5.6 billion in savings for spending in other areas.

To increase non-defense discretionary spending by $17.8 billion in 2000 and still remain within the caps, the President's budget is dependent upon: reductions in mandatory spending, increases in tax revenues, advanced appropriations and federal tobacco revenues. While mandatory savings and the making of advanced appropriations are permitted under current law to make room for increased discretionary spending, tax increases are not. The President's increases for non- defense discretionary spending for years 2001 through 2004 depend on the enactment of Social Security reform to somehow permit unified budget surpluses to be spent.

The President's budget also proposes creating a "Reserve for Priority Initiatives" that would total $30 billion over the next five years. Priorities would include increases for the National Institutes of Health, education, and national security. Again, this spending is dependent upon the enactment of Social Security reform.

The President's budget also includes proposals for biennial budgeting and for expedited rescission. In calling for biennial budgeting, the President endorses the idea of both two-year budgeting and appropriations. The President also appears to support the notion of a joint budget resolution that would require the President's signature and give it the force of law. In light of the demise of the Line Item Veto Act, the President's budget also calls for the enactment of expedited rescission authority. This would expand upon existing rescission authority contained in title X of the Congressional Budget Act and would require Congress to have an up or down vote on all rescissions proposed by the President. Current law merely provides expedited legislative procedures for considering such legislation -- it does not mandate that these procedures be used.

THE FEDERAL GOVERNMENT PERFORMANCE PLAN

This is the second year that the President must submit a Federal government performance plan for the overall budget. The plan is required by the Government Performance and Results Act of 1993, a law introducing performance measurement to the executive branch. Under this act, agencies must produce outcome-oriented goals and then measure the actual performance of every program. The Federal performance plan is based on agency plans and should provide a single cohesive picture of the President's highest priorities. One year from now, when the actual results are in, Congress should finally be able to answer the fundamental Results Act question: What is the Federal government accomplishing?

Some members of Congress were hopeful that the Federal performance plan would address the longstanding problem of duplication and fragmentation across agencies. Now that program goals are in writing, the Administration has the ability to make similar or overlapping programs compete for resources. The Federal performance plan is the logical vehicle for identifying and addressing this overlap. Many analysts were surprised last year when the first mission-based examination of the Federal government did not expose any mission-creep or duplication. This year's plan does not adequately address overlap either, despite the fact that GAO's recently released Performance and Accountability Series identified 32 policy areas that are characterized by fragmentation and overlap. GAO reported that "In program area after program area, [GAO has] found that unfocused and uncoordinated crosscutting programs waste scarce funds, confuse and frustrate taxpayers and other program customers, and limit overall program effectiveness."

OMB does not believe that the Federal performance plan should drive change; rather OMB views the plan as a derivative document reflecting budget and management decisions made throughout the process. Despite this different viewpoint, the Administration plan has some strengths. Similar to last year, the document clearly outlines many important management challenges facing the Federal government. The President's primary management goals are to successfully manage the Year 2000 conversion, to use results to improve program management, and to improve financial information such as unit-cost data. However, since financial information for most agencies is still not reliable, there is considerable fear that the agency performance data will not be accurate either.

We understand that implementing the Results Act is an extremely difficult task. Considering the vast number of Federal programs, the Administration did a reasonable job of consolidating the plan. The plan also includes a number of sensible outcome measures, such as reducing the total number of transportation related-fatalities. However, until the actual results are in, we will still not have a comprehensive picture of the performance of the Federal government.

² The budget request includes a 1999 supplemental proposal to reduce 1999 emergency appropriations by $882 million, but the balance of the $2.8 billion difference in OMB's calculation of 1999 and actual congressional appropriations is not explained. The $882 million was appropriated for intelligence and missile defense purposes.

³ There are many reports on this subject; a few major ones are: from GAO: Future Years Defense Program: Optimistic Estimates Lead to Billions in Overprogramming, July 1994; DoD Is Unlikely to Deliver Planned Programs Within Expected Budgets, January 1997 (Briefing to Senate Committee on the Budget); from CBO: An Analysis of the Administration's Future Years Defense Program for 1995 through 1999, January 1995; Funding Risk in the Administration's Plan for National defense for 1997 to 2001, January 1997 (Briefing to Senate Budget Committee); and from The Center for Strategic & International Studies, At the Dawn of the New Millennium: Averting the Coming Train Wreck, Dr. Dan Goure and Jeffery Ranney, May 1998.

⁴ The Center for Strategic & International Studies, At the Dawn of the New Millennium: Averting the Coming Train Wreck, Dr. Dan Goure and Jeffery Ranney, May 1998.

⁵ Defense Science Board: Summer Study Outbrief, remarks by The Hon. Jacques S. Gansler, Under Secretary of Defense (Acquisition and Technology), Beckman Center, Irvine, California, August 13, 1998, p. 2.

⁶ Information provided to Senate Budget Committee by the Office of the Chairman of the Joint Chiefs of Staff, January 14, 1999; to supplement "CJCS Legislative Capstone" briefing materials, December 1, 1998.

⁷ "Listen to the JOs: Why Retention Is a Problem," Rear Admiral John T. Natter (ret.), Proceedings, Naval Institute Press, October, 1998, p. 59.

⁸ See High Risk Series: An Update, U.S. General Accounting Office, GAO/HR-99-1, January 1999, pp. 82-94, and Major Management Challenges and Program Risks: Department of Defense, U.S. General Accounting Office, GAO/OGC-99-5, January, 1999.

⁹ High Risk Series: An Update, p. 86.

¹⁰ Section 314 of the Budget Act allows for a $1.884 billion adjustment to budgetary totals and the discretionary caps for arrearages in fiscal years 1998-2000. $1.473 billion has been enacted to date leaving $410 million left for an arrearages adjustment in 2000 (which was originally intended in the BBA for the United Nations in 2000).

¹¹ 2000 levels do not include requested advance appropriations in the years 2001-2004 for embassy security funding.

/a/ Includes Civil Service Retirement, Military Retirement, Medicare, unemployment insurance and the Highway and Airport and Airway trust funds.

/b/ Primarily interest on loans to the public and to the RTC and Bank Insurance Fund.

/c/ Differs from gross federal debt because most debt issued by agencies other than Treasury is excluded from the debt limit.

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