THE fiscal year 1986 budget, submitted to Congress in earlyFebruary, would fundamentally alter the scope and scale of Federalfiscal programs and significantly change the Federal Government’srelationship with some parts of the economy, especially agriculture andState and local governments. To help reduce the large and growingdeficit, the budget proposes a 1-year freeze in total outlays other thanfor debt service. The freeze would not be applied across-the-board; itwould be achieved by a combination of selective freezes, terminations,reductions, and management improvements in individual programs.
National defense outlays, while reduced from the estimate included inthe mid-session review of the 1985 budget, continue to increase, as dooutlays for Social Security benefits. The budget proposes sbustantial reductions from current servicesoutlays–that is, outlays that would take place without policy changes.The reductions are in medicare, in agricultural and other subsidies tobusiness and upper income groups, in numerous grants to State and localgovernments, in Federal payroll costs, and in credit programs. A freezeis proposed for automatic annual cost-of-living adjustments for someentitlement program benefits other than Social Security, formeans-tested programs, and for programs for the disabled. A number ofimmediate terminations, including local government revenue sharing andadditions to the strategic petroleum reserve, as well as phaseouts,including crop insurance and grants for the construction of sewagetreatment plants, are proposed. The budget also proposes to increase a variety of fees–such asloan origination fees, customs fees, and navigation fees–paid by usersand beneficiaries of Federal services. The budget does not include anyproposal for tax reform and simplification, although the administrationplans to submit a proposal later. The minor tax changes that areproposed increase receipts, on balance, in 1986 by only $0.
2 billion. National defense spending increases 12.6 percent in 1986; in realterms, according to the administration, the increase is 8.3 percent.This level of spending would push total spending for national defensefor the fiscal year 1982-86 period to $1.
2 trillion, or about 27 percentof total budget outlays for the period. The budget continues thepattern of large increases for procurement–up 19.1 percent in 1986–andsmaller increases in operation and maintenance–up 6.7 percent–and incompensation of millitary personnel–up 7.2 percent. Much of theprocurrement spending increase is for strategic nuclear programs: Theadministration is requesting $6.
2 billion for 48 B-1 bombers, $4.7billion for a Trident submarine and missiles, and $4.0 billion for 48 MXmissiles. A large increase–22.3 percent–is proposed for research anddevelopment, with emphasis on strategic weapons programs, including theStar Wars program, the space-based defense against nuclear missiles. Nondefense spending declines 2.4 percent in 1986; in real terms,the decline is 6.
1 percent. Excluding debt service and social security,nondefense spending declines 12.1 percent, reflecting theadministration’s freeze program.
The only major function to showan increase is health, reflecting an increase in medicaid. The largestproposed reductions are in agriculture and energy. The administration proposes to include all currently off-budgetentities in the coverage of the unified budget; the budget estimates, intotal and by function, reflect this proposal.
Among the off-budgetentities proposed for inclusion are the Federal Financing Bank (FFB),the strategic petroleum reserve, and the Postal Service. Economic assumptions The economic assumptions underlying the fiscal year 1986 budget areshown in table 1. In addition, monetary policy is assumed to avoidexcessive stimulus, while providing sufficent liquidity to sustain theexpansion. According to the Council of Economic Advisers, the economicassumptions for 1986 reflect projected trends and should not beinterpreted as year-to-year forecasts.” GNP in constant dollars is forecast to increase at a constant rateof 4 percent through calendar years 1985 and 1986. From the fourthquarter of 1984 to the fouth quarter of 1985, personal consumptionexpenditures are excpected to increase 4.
3 percent, about the same as in1984. Residential investment–with housing starts of 1.7 million–isexpected to increase 1.7 percent, about one-half the 1984 increase.Nonresidential investment is expected to increase 6.
8 percent,considerably below the 1984 increase but still faster than GNP. Theincrease in Federal purchases over the four quarters of 1985 is 2.2percent, down from 14.2 percent over the preceding four quarters, due toassumed cuts in purchases in late 1985. State and local purchases areexpected to increase at a slower pace–2.7 percent–in 1985 than in1984. With moderate expansion of the money supply and continued realgrowth in GNP, prices–as measured by the GNP deflator–are expected toincrease 4.
3 percent over the four quarters of 1985. Employment isexpected to increase 2.3 million in 1985, compared with 3.5 million in1984, leading to a decline in the unemployment rate to 7 percent by thefourth quarter of 1985. Unified budget The unified budget deficit decreases from $222.2 billion in fiscalyear 1985 to $180.
0 billion in fiscal year 1986 (table 2 and chart 1).Of the $42.2 billion decline in the 1986 deficit, over one-half is theresult of two factors: $11.0 billion is the result of includingoff-budget entities in the budget and $12.5 billion is the result of adecline in new loans for low-rent public housing. The deficit ofoff-budget entities declines to $1.5 billion in 1986 from $12.
5 billionin 1985. The FFB accounts for $10.3 billion of this decline; thedecline in its deficit is largely the result of a proposal to terminateseveral lending programs. The decline in low-rent public housing loansreflects a decline from an unusually large outlay–$14.3 billion–in1985 by the Department of Housing and Urban Development to purchasepublic and Indian housing loans for which the tax-exempt status has beenquestioned because of a provision of the Deficit Reduction Act of 1984;in 1986, these outlays amount to $1.8 billion.
Excluding these twofactors, the deficit declines $18.8 billion. Receipts increase $56.8 billion–or 7.7 percent–in 1986, to $793.
7billion. Receipts in 1985 are $736.9 billion, up 10.6 percent from1984. Proposed legislation and administrative actions increasereceipts, on balance, $0.
2 billion in 1986. The largest proposedincreases are $0.6 billion in taxes levied to finance the HazardousSubstance Response Trust Fund (commonly referred to as Superfund), whichpays for the cleanup of hazardous waste sites, and $0.
4 billion for aspeedup in the deposit of State and local government social securitypayroll taxes. The largest reductions are $0.7 billion for a 3-yearextension of the research and experimental expenditures tax credit,which is scheduled to expire December 31, 1985, and $0.4 billion for atuition tax credit of 50 percent of tuition expenses paid to privateelementary and secondary schools for qualified dependents. Outlays increase $14.6 billion–or only 1.
5 percent–in 1986, to$973.7 billion. Outlays in 1985 are $959.1 billion, up $107.3 billion,or 12.6 percent. The 1986 increase is the net result of $58.8 billionin increases and $44.
2 billion in decreases. Table 3 shows the changein unified budget outlays by function; three functions–nationaldefense, social security and medicare, and net interest–account for 95percent ofd the $58.8 billion of increases. The $44.2 billion ofdecreases is largely the result of proposals to cut nondefense outlaysexcept Social Security benefits. (Net interest is indirectly reduced bythe effect of the other functional reductions on the increase in debt.)Reductions in agriculture and in energy and an increase in undistributed offsetting receipts account for about 40 percent of the reductions. Thedecline in housing assistance, a subfunction of income security, is theresult of the unusually large increase in 1985 discussed earlier.
Current services estimates Current services estimates show what receipts and outlays would bewithout policy changes. They are neither recommended amounts norforcasts, but rather are a base with which administration orcongressional proposals can be compared. The level of outlays generallyis that needed to maintain ongoing Federal programs and activities atfiscal year 1985 levels in real terms. The major exception is fornational defense; the current services reflects enacted 1985appropriations and administration policy in the 1985 mid-session review. Unified budget receipts in 1986 are $0.6 billion lower than currentservices receipts, reflecting proposed tax reductions of $1.
6 billionand tax increases of $1.0 billion (table 4). The largest proposed taxreduction is the extension of the research and experimental expenditurestax credit and the largest tax increase is the speed-up of the State andlocal government deposit of Social Security taxes. Receipts are alsoreduced by a proposed 5-percent reduction in Federal employee pay,effective January 1, 1986; the pay reduction lowers contributions forretirement and for life insurance.
Unified budget outlays are $50.8 billion lower than currentservices outlays; proposed program reductions ($51.5 billion) exceedproposed increases ($0.
7 billion). Current services outlays fornational defense are reduced $8.9 billion, or 3.0 percent.
Outlays fornondefense programs are reduced $42.6 billion, or 5.8 percent.
Farmincome stabilization programs are reduced $5.3 billion, and include aproposal to set Commodity Credit Corporation (CCC) price support loanrates and subsidy target prices in alignment with market prices.Medicare outlays are reduced $4.1 billion, mainly by proposals to freezepayments to hospitals under the prospective payment system at 1985levels and to extend the existing freeze on payments to physicians untilOctober 1986. The termination of local government revenue sharing in1986, 1 year before the current authorization expires, reduces outlays$3.8 billion. The termination of further additions to the strategicpetroleum reserve, a part of the reduction in the energy function,reduces outlays $1.
5 billion. According to the budget, current services outlays for discretionaryprograms are 20 percent of budget outlays in 1986, and current servicesoutlays for entitlements and other mandatory programs are 43 percent.The former–such as housing, mass transit, and pay raises–are reduced anet $21.2 billion, and the latter–such as medicare, medicaid, and farmprice supports–are reduced $13.9 billion. The remainingreductions–$12.
0 billion–are in national defense ($8.9 billion) and innet interest ($3.1 billion). Undistributed offsetting receipts, whichare offset against total outlays, are higher by $3.6 billion. Theimpending sale of the Conrail system accounts for $1.
2 billion of theincrease and proposed user fees are processing fees on passengers andcommercial carriers entering the United States by land or sea ($0.5billion) and fees for dreding harbors and inland waterways ($0.6billion). Federal sector BEA has prepared estimates of the Federal sector on the nationalincome and product accounting (NIPA) basis consistent with the unifiedbudget estimates (table 2). Estimates of the Federal sector are integrated conceptually andstatistically with the rest of the NIPA’s and differ in severalrespects from the unified budget. Unlike the unified budget, theyexclude financial transactions, such as loans, and record severalcategories of receipts and expenditures on a timing basis that isdifferent from the budget.
(For a more detailed discussion of thedifferences, see the February 1980 SURVE OF CURRENT BUSINESS.) Table 5shows the relation between unified budget and NIPA receipts and table 6shows the relation between unified budget outlays and NIPA expenditures.The proposed inclusion of off-budget entities in the unified budgeteliminates a reconciliation item between the unified budget and theFederal sector of the NIPA’s; these entities always have beenincluded in the Federal sector. Federal receipts on the NIPA basis in fiscal year 1986 are $826.6billion, up $68.
1 billion from 1985 (chart 2). The increase is the netresult of an $81.4 billion increase due to higher tax bases and a $13.3billion decrease due to tax changes (table 7). Enacted tax changesreduce receipts $16.0 billion in 1986 and proposed legislation increasestaxes $2.7 billion Proposed legislation increases indirect business taxand nontax accruals $3.8 billion and reduces other receipt categories$1.
1 billion. The major proposals increasing indirect business taxesare to put in place a variety of user fees and to use funds recovered bythe Federal Government from pricing and allocation violations under theEmergency Petroleum Allocation Act of 1973 to finance various energyprograms. (In the unified budget, the recovered funds are recorded asproprietary receipts and are offset against outlays.) Federal expenditures on the NIPA basis in 1986 are $992.
7 billion,up $44.2 billion from 1985; this increase is about one-half the increasein 1985 (chart3 and chart 4). Table 8 highlights the major factors thatcontribute to recent changes in Federal expenditures. The largestincrease in 1986-$16.3 billion–is in “other” national defensepurchases; combined with the increases in purchases of military hardwareand paychanges, national defense purchases increase $30.2 billion,accounting for about 70 percent of the total increase. Net interestpaid increases $13.
2 billion and Social Security benefits increase $11.1billion, including $7.5 billion for cost-of-living adjustments.
Partlyoffsetting these increases are declines in agriculture subsidies, inrevenue sharing, and in “other” nondefense purchases. The5-percent civilian pay reduction results in a $0.9 billion decline in1986. Table 9 shows the relation between national defense outlays in theunified budget and national defense purchases on the NIPA basis. In1986, outlays, which are measured on a checks-issued basis, increaseslightly more than purchases, which are recorded largely on a deliverybasis. This larger increase in outlays reflects the steep increase inprocurement of military hardware, for which checks are issued prior todelivery. Quarterly pattern.
–Table 10 shows the major factors that affectthe quarterly pattern of receipts and expenditures through fiscal year1986. The Federal deficit declines steadily after the fourth quarter of1984, with one interruption in the first quarter of 1986, when thesecond round of indexation under the Economic Recovery Tax Act (thefirst round was in the first quarter of 1985) holds down the increase inpersonal taxes. Receipts reflect the pattern of enacted and proposedtax changes and the administration’s projected quarterly pattern ofwages and profits. Expenditures reflect the pattern of proposedlegislation and selected other items, such as a cost-of-living increasesin retirement benefits. Cyclically adjusted deficit.
–Measures of the cyclically adjustedbudget are estimates of what the budget would be if the economy weremoving along a trend GNP path–a path free from cyclical fluctuations–rather than along its actual path. Consequently, cyclicalfluctuations in the economy do not affect cyclically adjusted budgets.Two measures of the cyclically adjusted budget, one based on a”middle expansion” trend GNP and one based on a 6-percentunemployment rate trend GNP, are shown in table 11. (See the December1983 SURVEY for a discussion of these trend measures of GNP andBEA’s methodology for calculating cyclincally adjusted budgets.) As measured using cyclical adjustments based on middle-expansiontrend GNP, the Federal sector of the NIPA’s was in deficit incalendar year 1983.
The deficit widened in 1984 and will widen furtherin 1985 (table 11). On a quarterly basis, the deficit declined in thefirst half of 1983, but then increased in the second half, when thefinal withholding rate cut under the Economic Recovery Tax Act of 1981became effective. The deficit increases further throughout 1984 beforedeclining in most quarters of 1985 and 1986. The cyclically adjusted budget based on middle-expansion trend GNPdiscussed above is associated with a middle-expansion trend unemploymentrate that is 7.4 percent in 1983, falls to 7.
3 percent by mid-1984, thenremains at that rate through mid-1986. Table 11 also shows a measure ofthe cyclically adjusted budget based on a constant 6-percentunemployment rate. On this basis, the cyclically adjusted deficit islower, but follows the same quarterly pattern.