Federal fiscal programs.

Wakefield, Joseph C.

Federal Fiscal Programs THE fiscal year 1987 budget, consistent with budgets of recent years, proposes to alter the scope and scale of Federal fiscal programs and to change the Federal Government's relationship with some parts of the economy, especially agriculture and State and local governments. The budget, submitted to Congress in early February, reflects the impact of the Balanced Budget and Emergency Deficit Control Act of 1985, which mandates deficit limits for fiscal years 1986-91. (See the article on page 32 for a discussion of this act and the new timetable for the budget process.) To reduce the large deficit, the budget proposes outlays substantially below current services outlays--that is, outlays that would take place without policy changes--to be implemented by program terminations and rescissions, social service reforms, and management improvements in individual programs. National defense outlays, while reduced from previous estimates, continue to increase, as do outlays for Social Security benefits.

The budget proposes minor tax changes, administrative actons, and a variety of new or increased fees--such as loan origination fees, customs fees, and recreation fees--to be paid by users and beneficiaries of Federal services. These proposals increase receipts, on balance, by a relatively small amount. The budget does not include any proposal for tax reform and simplification.

National defense spending increases 6.2 percent in 1987; in real terms, according to the administration, the increase is 2.4 percent. The budget includes only a 1.3-percent increase for procurement in 1987, compared with 7.6 percent in 1986 and 13.7 percent in 1985. A large increase--10.2 percent--is proposed for research and development, with emphasis on strategic weapons, especially the strategic defense initiative, or Star Wars program. Operation and maintenance spending increases 9.1 percent, compared with 2.5 percent in 1986.

Nondefense spending declines 0.3 percent in 1987; in real terms, the decline in 4.2 percent. Excluding debt service and social security, nondefense spending declines 5.4 percent. The largest proposed reductions are in agriculture and in education, training, employment, and social services. The largest proposed increases are in social security and net interest.

Economic assumptions

Monetary growth, although expected to decline gradually following an acceleration last year, is expected to provide sufficient liquidity to sustain the expansion. Other economic assumptions underlying the fiscal year 1987 budget are shown in table 1. According to the Council of Economic Advisers, the assumptions "anticipate that real business investment will continue to lead the expansion." Further, "A substantial slowdown in inventory accumulation during 1985 left inventory levels very low, so that continued growth in final sales would be expected to trigger production increases."

From the fourth quarter of 1985 to the fourth quarter of 1986, GNP in constant dollars is forecast to increase 4 percent. Personal consumption expenditures are expected to increase 2.6 percent, slightly less than in 1985. Residential investment--with housing starts of 1.9 million--is expected to increase 8 percent, or 25 percent more than in 1985. Nonresidential fixed investment is expected to increase 5 percent, about 20 percent below the 1985 increase, but still faster than GNP. Federal purchases of goods and services decline 4 percent, compared with an 11.8-percent increase in 1985. This decline reflects a sharp reduction in Federal purchases of agricultural commodities by the fourth quarter of 1986 from the very high level in the fourth quarter of 1985. (The decline also reflects, in part, cuts made under the sequester order implemented for fiscal 1986 in compliance with the Balanced Budget and Emergency Deficit Control Act of 1985. State and local purchases are expected to increase at a somewhat faster pace--3.5 percent--in 1986 than in 1985.

Prices, as measured by the GNP deflator, are expected to increase somewhat faster in 1986 than in 1985. According to the Council, "Rapid monetary growth throughout 1985 as well as the depriciation of the dollar are expected to place upward pressure on prices." Prices are expected to increase 3.8 percent over the four quarters of 1986. Employment is expected to increase 1.7 million in 1986, leading to a decline in the unemployment rate of 6.7 percent by the fourth quarter of 1986.

Unified budget

The unified budget deficit decreases from $202.8 billion in fiscal year 1986 to $143.6 billion in fiscal year 1987 (table 2 and chart 1). Of the $59.2 billion decline in the deficit, $23.8 billion is the result of an assumed decline in the current services budget deficit and $35.4 billion is the result of administration deficit-reduction proposals.

Receipts increase $73.3 billion--or 9.4 percent--in 1987, to $850.4 billion. Receipts in 1986 are $777.1 billion, up 5.9 percent from 1985. Proposed legislation and administrative actions increase receipts, on balance, $6.3 billion in 1987. The largest proposed increases are $1.7 billion for an extension of the temporary 16-cent cigarette excise tax (the tax reverts to 8 cents on March 15, 1986) and $1.0 billion from the resolution of cases involving petroleum pricing and allocation violations under the Emergency Petroleum Allocation Act of 1973. The largest reduction is $0.4 billion for a tax credit for tuition expenses paid to private elementary and secondary schools, effective August 1, 1986.

Outlays increase $14.1 billion--or 1.4 percent--in 1987, to $994.0 billion. Outlays in 1986 are $979.9 billion, up $33.6 billion, or 3.6 percent. The 1987 increase is the net result of $37.4 billion in increases and $23.3 billion in decreases. Table 3 shows the change in unified budget outlays by function; four functions--national defense, social security, medicare, and net interest--account for 95 percent of the $37.4 billion of increases. The $23.3 billion in decreases is the result of proposals to cut nondefense outlays except Social Security benefits. Reductions in agriculture and in education, training, employment, and social services account for 42 percent of the reductions. The reduction in outlays for agriculture is largely the result of the Food Security act of 1985, which froze target prices (used in determining agricultural subsidies) for 1986 and 1987 and lowered the dollar amount farmers can borrow (with the crop as collateral) for wheat, corn, and other feed grains.

Current services estimates

Current services estimates show what receipts and outlays would be without policy changes. They are neither recommended amounts nor forecasts, but rather a base with which administration or congressional proposals can be compared. The level of outlays generally is that needed to maintain ongoing Federal programs and activities at fiscal year 1986 levels in real terms. The major exception is for national defense; the current services estimates reflects the fiscal year 1986 congressional budget resulution. The 1986 current services outlays have been reduced as a result of sequestration under the Balanced Budget and Emergency Deficit Control Act of 1985.

Unified budget receipts in 1987 are $6.3 billion higher than current services receipts, reflecting the administration's proposals to increase receipts as previously discussed (table 4). As mentioned, the major proposal is to extend the cigarette excise tax. Other proposals would increase receipts by raising to 9 percent from 7 percent, the civil service retirement contribution (effective October 1, 1986) and by more effective collection of taxes under various Internal Revenue Service (IRS) initiatives.

Unified budget outlays are $31.9 billion lower than current services outlays; proposed program reductions $34.8 billion) exceed proposed increases ($2.9 billion). Current services outlays for national defense are reduced $2.7 billion, or 1 percent, and those for nondefense programs are reduced $32.1 billion, or 4.3 percent. Medicare outlays are reduced $4.7 billion, largely by reforming payments to hospitals for medical education, by phasing hospital capital costs into the calculation of prospective payment system rates for inpatient hospital care, and by increasing the supplementary medical insurance premium to cover 27 percent of program costs in 1987. A variety of proposals reduce education outlays $2.4 billion; they particularly affect higher education and include increased contributions from parents and students and reduced payments to cover interest on student loans. A proposed increase in the voucher system for low-income households and consolidation of programs reduces outlays for housing assistance $2.1 billion. A phaseout of crop insurance services and a greater emphasis on guaranteed rather than direct loans contribute to the $1.7 billion reduction in farm income stabilization outlays. The administration also proposes to sell five power marketing administrations (such as Bonneville), the naval petroleum reserves, and surplus property to yield savings of $1.7 billion in 1987. Proposed user fees and credit fees contribute $3.3 billion to the total reduction. Included in user fees are processing fees on passengers and commercial carriers entering the United States by land or sea ($0.5 billion) and the replacement of the penalty for failure to pay taxes imposed by IRS with a cost-of-collection fee ($0.3 billion).

Federal sector

BEA has prepared estimates of the Federal sector on the national income and product account (NIPA) basis consistent with the unified budget estimates (table 2). Estimates of the Federal sector are integrated conceptually and statistically with the rest of the NIPA's and differ in several respects from the unified budget. Unlike the unified budget, they exclude financial transactions, such as loans, and record several categories of receipts and expenditures on a timing basis that is different from the budget. (For a more detailed discussion of the differences, see the February 1980 SURVEY OF CURRENT BUSINESS.) Table 5 shows the relation between unified budget receipts and NIPA receipts, and table 6 shows the relation between unified budget outlays and NIPA expenditures.

Federal receipts on the NIPA basis are $905.2 billion in fiscal year 1987, up $82.0 billion from 1986 (chart 2). The increase is the net result of an $84.8 billion increase due to higher tax bases and a $2.8 billion decrease due to tax changes (table 7). Enacted tax changes reduce receipts $9.6 billion, and proposed legislation increases taxes $6.8 billion. Proposed legislation increases indirect business tax and nontax accruals ($3.1 billion) and contributions for social insurance ($2.1 billion) and reduces personal tax and nontax receipts ($0.4 billion). The major proposal increasing indirect busienss taxes is the extension of the cigarette excise tax; proposed user fees also contribute to the increase. The proposal to increase the civil service retirement contribution accounts for the increase in contributions. The tuition tax credit accounts for the proposed reduction in personal taxes.

Federal expenditures on the NIPA basis are $1,043.7 billion in fiscal year 1987, up $27.8 billion from 1986; this increase is about one-half of the 1986 increase (chart 3 and chart 4). Table 8 highlights the major factors that contribute to recent changes in Federal expenditures. The largest increase in 1987--$11.8 billion--is for Social Security benefits, including $6.5 billion for cost-of-living adjustments. "Other" national defense purchases increase $10.9 billion; combined with the increase in purchases of military hardware and pay raises, national defense purchases increase $19.5 billion, accounting for 70 percent of the total increase. Net interest paid increases $6.3 billion, and medicare transfer payments increase $3.0 billion. Partly offsetting these increases are declines in purchases of agricultural commodities by the Commodity Credit Corporation and in revenue sharing grants to local governments, which expire at the end of fiscal year 1986.

Table 9 shows the relation between national defense outlays in the unified budget and national defense purchases on the NIPA basis. In 1987, outlays, which are measured on a checks-issued basis, increase slightly less than purchases, which are recorded largely on a delivery basis. The larger increase in purchases reflects a sharp increase in deliveries--particularly of the B-1 bomber and the Peackeeper (MX) missile--for which checks were issued prior to delivery.

Quarterly pattern.--Table 10 shows the major factors that affect the quarterly pattern of receipts and expenditures through fiscal year 1987. The Federal deficit declines steadily after the fourth quarter of 1985; the large decline in the second quarter of 1986 largely reflects the effects of the sequester order, which was effective March 1. Receipts reflect the pattern of enacted and proposed tax changes and the administration's projected quarterly pattern of wages and profits. Expenditures reflect the pattern of proposed legislation and selected other items, such as Federal employee pay raises and cost-of-living adjustments in Social Security benefits.

Cyclically adjusted deficit.--Measures of the cyclically adjusted budget are estimates of what the budget would be if the economy were moving along a trend GNP path--a path free from cyclical fluctuations--rather than along its actual path. Consequently, cyclical fluctuations 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-percent unemployment rate trend GNP, are shown in table 11. (At the time this article was written, the complete model used to prepare these estimates had not yet been updated to reflect the recently completed comprehensive revisions of the NIPA's. The estimate shown in table 11 was prepared using a simplified model. The complete model will be updated and results published in the SURVEY in the spring.)

As measured using cyclical adjustments based on middle-expansion trend GNP, the Federal sector of the NIPA's was in deficit in calendar year 1984. The deficit widened in 1985, but will increase only slightly in 1986. On a quarterly basis, the deficit increased throughout 1984. A sharp decline in the deficit in the first quarter of 1985 and a sharp increase in the second quarter largely reflect a delay in income tax refund payments in the first quarter and the subsequent catchup. The deficit peaks in the fourth quarter of 1985, then declines in every quarter of 1986 and 1987.

The cyclically adjusted budget based on middle-expansion trend GNP is associated with a middle-expansion trend unemployment rate of 7.4 percent. The cyclically adjusted deficit based on a constant 6-percent unemployment rate is lower, but follows the same quarterly pattern.