Federal budget estimates, fiscal year 1996.

Beall, Peter G. ; Northwood, Joyce

The fiscal 1996 budget transmitted by the President to Congress shows a $4.1 billion increase in the Federal deficit, from $192.5 billion in 1995 to $196.6 billion in 1996.(1) The budget proposes a tax cut for middle-class taxpayers that reduces revenues by $3.8 billion; this reduction is partly offset by other proposals to increase taxes and to trim spending.

The tax cut has three elements:

* Phased-in tax credit of up to $500 for dependent children under 13 years of age ($3.5 billion in 1996).

* Phased-in deduction of up to 10,000 for post-secondary education and training expenses ($0.7 billion 1996).

* Expanded eligibility for deductible "front-loaded" individual retirement accounts. (This provision is expected to raise $0.4 billion in 1996 but to reduce receipts in later years.)

To offset the loss of revenue due to the tax cut, the budget proposes an acceleration of efforts to reinvent the Federal Government ($1.4 billion), including the following: A consolidation of 271 existing programs into 27 new programs, the termination of approximately 90 programs, the privatization of certain government functions, and the transfer of other programs to State and local governments. The budget also proposes cuts in discretionary spending, the largest of which is in national defense spending ($7.6 billion).

The budget also includes $1.1 billion in tax increases to help offset the tax cuts. The three largest provisions are as follows:

* Tighten rules for taxing foreign trusts ($0.3 billion).

* Expand fees collected under the securities laws to better match and fund services provided by the Securities and Exchange Commission ($0.3 billion).

* Extend the environmental taxes on corporate taxable income ($0.3 billion).

This article summarizes the administration's budget estimates and the economic assumptions underlying them, and it provides a translation of the estimates into the national income and product accounts (NIPA) framework.(2)

Economic assumptions

In all four quarters of 1994, economic activity was strong; growth in real gross domestic product (GDP) ranged between 3.3 percent and 4.5 percent (seasonally adjusted annual rates).(3) Inflation remained low throughout the year; the Consumer Price Index rose only 2.7 percent. However, to head off potential inflationary pressures, the Federal Reserve Board tightened monetary policy by raising its target for the Federal funds rate six times in 1994, for a cumulative increase of 2.5 percentage points.

The administration forecasts that real GDP will increase 2.4 percent during 1995 and 2.5 percent during 1996, compared with a 3.6-percent increase during 1994 (table 1). (These changes are from fourth quarter to fourth quarter.) inflation as measured by the increase in the Consumer Price Index is forecast to be 3.2 percent during both 1995 and 1996, compared with 2.8 percent during 1994. The unemployment rate is forecast to be 5.8 percent in 1995 and 5.9 percent in 1996, close to the 1994 level of 6.1 percent.

Table 1. - Economic Assumptions Underlying the Budget

 Calendar year

 1994 1995 1996

 Billions of dollars

Gross domestic product:
 Current dollars 6,735 7,117 7,507
 1987 dollars 5,337 5,488 5,622

Incomes:
 Personal income 5,691 6,026 6,366
 Wages and salaries 3,273 3,429 3,610
 Corporate profits before taxes 522 544 572

 Percent change from
 preceding year

Gross domestic product in current dollars:
 Annual average 6.2 5.7 5.5
 Fourth quarter 6.3 5.4 5.5

Gross domestic product in 1987 dollars:
 Annual average 3.9 2.8 2.5
 Fourth quarter 3.6 2.4 2.5

Consumer Price Index:(1)
 Annual average 2.6 3.1 3.2
 Fourth quarter 2.8 3.2 3.2

 Percent

Unemployment rate (pre-1994 basis):(2)
 Annual average 6.1 5.8 5.9
 Fourth quarter 5.8 6.0 5.8

Interest rate (annual average):(3)
 91-day Treasury bills 4.2 5.9 5.5
 10-day Treasury notes 7.1 7.9 7.2

Source: The Budget of the United States Government, Fiscal Year
1996.
(1.) Consumer Price Index for all urban consumers.
(2.) Percent of labor force, including armed forces residing in
the United States.
(3.) Average rate on new issues within a year.

Current-services estimates

Current-services estimates show what receipts and outlays would be without policy change. In concept, these estimates are neither recommended amounts nor forecasts; they form a base with which administration or congressional proposals can be compared. The estimates are based on the same economic assumptions as those underlying the budget.

Budget receipts in fiscal year 1996 are $3.0 billion lower than the current-services estimate of receipts, primarily reflecting the proposed middle-class tax cut (table 2). Budget outlay's in 1996 are $7.0 billion lower than the current-services estimate of outlays. The proposed reduction in spending mainly reflects decreases in defense programs and savings from Government reinvention. These savings are partly offset by proposed increases in other functional areas, such as a $2.7 billion increase in community and regional development and a $1.1 billion increase in administration of justice.

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The budget estimates

Under the administration's budget, receipts in fiscal year 1996 increase $69.1 billion, or 5.1 percent, to $1,415.5 billion. Receipts in 1995 are $1,346.4 billion, up 7.1 percent from 1994. These increases are largely due to assumed increases in income resulting from both real economic growth and inflation. The increase in 1996 is smaller than that in 1995 because of the administration's proposed middle-class tax cut.

Budget outlays in fiscal year 1996 increase $73.2 billion, or 4.8 percent, to $1,612.1 billion (table 3). Outlays in 1995 are $1,538.9 billion, up 5.3 percent from 1994. The 1996 increase is the net result of increases of $99.8 billion and decreases of $21.8 billion. As in recent years, the majority of the increase - 84 percent - represents increases in mandatory spending, such as net interest, and in entitlement programs such as social security and medicare. The largest increase in both 1995 and 1996 is in net interest. The largest decrease in both years is in national defense.

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The 1996 budget deficit is $196.6 billion, up $3.1 billion from 1995 (table 4). The increase reflects an $11.4 billion increase in the current-services budget deficit that is largely offset by proposed administration cuts, primarily program cuts for national defense. The budget deficit is smaller than the current-services deficit because of decreases in most Federal spending functions that more than offset revenue losses from the middle-class tax cut. In fiscal year 1995, the budget deficit is larger than the current-services deficit because of proposed increases in several Federal spending functions.

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NIPA estimates for the Federal sector

The Bureau of Economic Analysis prepares estimates of the Federal sector on the NIPA basis that are consistent with the budget estimates. Estimates of the Federal sector, which are integrated conceptually and statistically with the rest of the NIPA's, differ in several respects from the budget estimates; unlike the budget estimates, these estimates exclude financial transactions, such as loans, and they record categories of receipts and expenditures on a timing basis different from that of the budget.(4) Table 4 summarizes the differences between the current services estimates, the administration's budget, and the budget estimates on the NIPA basis. Table 5 shows the relation between budget receipts and NIPA receipts, and table 6 shows the relation between budget outlays and NIPA expenditures.(5)

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Federal receipts on the NIPA basis increase $68.3 billion in fiscal year 1996, to $1,504.0 billion, reflecting a $71.3 billion increase from higher tax bases and a $0.8 billion increase from other tax changes (table 7). These increases are partly offset by the proposed middle-class tax cut ($3.8 billion). The increase in total receipts slowed for the second consecutive year in 1996, reflecting slower growth in personal tax and nontax receipts and in contributions for social insurance. The growth in corporate profits tax accruals levels out in 1996 after decelerating in 1995. Chart 1 shows the components of receipts on the NIPA basis for 1986-96.

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Federal expenditures on the NIPA basis increase $82.5 billion in fiscal year 1996 to $1,691.9 billion (table 8). Federal expenditure growth decelerates slightly in 1996 because of slower growth in net interest paid, nondefense purchases, and grants-in-aid to State and local governments (chart 2); the growth in transfer payments remains robust. Transfer payments increase $47.1 billion - $20.4 billion for medicare and $17.3 billion for social security (of which $10.2 billion is cost-of-living adjustments). Other large increases include net interest paid ($21.5 billion), grants-in-aid to State and local governments for medicaid ($7.5 billion), and nondefense purchases ($5.3 billion). National defense purchases decrease $3.7 billion, reflecting the continuing decline in procurement of military equipment. Subsidies less the current surplus of government enterprises decrease $0.5 billion. Chart 3 shows the components of expenditures on the NIPA basis for 1986-96.

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National defense outlays in the budget differ from national defense purchases in the NIPA's (see table 9) for three principal reasons. First, some defense outlays, such as disbursements for foreign military sales, are not, treated as purchases in the NIPA's. Second, a timing difference exists because the NIPA's are on a delivery basis, while budget outlays are on a cash basis. Third, the two series treat the financing of the military retirement program differently. In defense outlays, this item is measured as a cash payment from the military personnel appropriation account to the military retirement trust fund; in the NIPA's, total military retired pay is used as the measure of the retirement program's cost. At present, the budget measure of the retirement program shows a decline because of a reduction in military payrolls, but the NIPA series shows an increase because of the rising number of retirees and higher benefits.

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The deficit for fiscal year 1996 on the NIPA basis increases $14.2 billion after increasing only $1.2 billion in 1995. This acceleration is primarily due to slowdowns in the growth of personal tax and nontax receipts and of contributions for social insurance. Since 1988, the NIPA deficit has remained smaller than the budget deficit primarily because lending transactions and payments to residents of U.S. territories and Puerto Rico are removed from the expenditures on the NIPA basis (chart 4).

Quarterly pattern. - Quarterly estimates of NIPA receipts and expenditures that are consistent with the fiscal year receipts and outlays in the budget are shown in table 10. Receipts reflect the quarterly pattern resulting from enacted and proposed legislation that would decrease personal and excise taxes and increase corporate taxes; they also reflect the administration's projected quarterly pattern of wages and profits. Expenditures reflect the quarterly pattern resulting from enacted and proposed legislation that would reduce defense purchases, adjust Federal pay, and provide for cost-of-living increases in social security and in Federal employee retirement benefits.

The deficit shows an upward trend from the first quarter of 1995 through the third quarter of 1996. It grows in the first quarter of 1995, driven by an increase in net interest paid, the social security cost-of-living adjustments (2.8 percent), the Federal civilian pay increase (2-percent pay raise and 0.6-percent locality differential), and the Federal military pay raise (2.6 percent). The deficit plummets in the second quarters of both 1995 and 1996, reflecting surges in personal tax collections for deferred 1993 tax payments. These personal tax liabilities, which were retroactively imposed in 1993, can be spread without penalty over the 1994, 1995, and 1996 tax years. The deficit returns to trend in the third quarters of 1995 and 1996, reflecting a normalization of personal tax payment levels.

Table 10 follows.

(1.) Office of Management and Budget, The Budget of the United States Government, Fiscal Year 1996 (Washington, DC: U.S. Government Printing Office, February 1995). (2.) A package of tables - "National Income and Product Accounts Translation of the Federal Budget" - is available from BEA shortly after the release of the budget; this year's package is $12.00. For further information, write to Government Division (BE-57), Bureau of Economic Analysis, U.S. Department of Commerce, Washington, DC 20230, or call (202) 606-9775. (3.) The economic assumptions are based on incomplete 1994 information that may differ from the currently published information. (4.) For a detailed discussion of the difference, see Government Transactions, NIPA Methodology Paper Series MP-5 (November 1988). (MP-5 is available from the National Technical Information Service, Accession No. PB 90-118480.) In addition, the comprehensive NIPA revision released in December 1991 made several changes to the definitions and classifications used to measure the Federal sector. All of these changes are discussed in detail in "A Preview of the Comprehensive Revision of the National Income and Product Accounts: Definitional and Classificational Changes," Survey of Current Business 71 (September 1991):23- 31. (5.) The relation of budget receipts and outlays to NIPA receipts and expenditures is shown in NIPA table 3.18B, last published in the September 1994 Survey.