3A. PROSPERITY AND JOBS THE ECONOMIC PROGRAM At the time of the 1992 election, the U.S. economy was caught in a destructive cycle of weak investment in household durables (with unsatisfactory growth in business plant and equipment as well), adverse consumer sentiment, and stagnant employment. To break out of that cycle, the economy needed jobs--to add to household incomes, and to give families the confidence to make commitments for housing and other big-ticket consumer goods that, in turn, stimulate investment in the business sector and build momentum for the economy as a whole. The jobs picture was not encouraging. The unemployment rate had risen, predictably, with the recession that began in mid-1990. Surprisingly, however, employment remained stagnant--and the unemployment rate continued rising--for a year after the recession technically ended. Breaking this pattern of sluggish employment growth would be essential to energize the recovery. The same prescription would help toward the ultimate goal of the President's vision for economic renewal: increasing prosperity for all Americans. In the long run, even if every qualified job seeker can find work with just a limited search, living standards depend upon the factories, machines, and technology available to make our workers productive (as well as the skills of the workers themselves). Increased demand for big-ticket items, and hence investment goods, would begin the process of building for the future. The greatest resistance to this economic takeoff--the major source of inertia--was the burden of debt service in all sectors of the economy. With interest rates stubbornly high, much of current income was absorbed in meeting past commitments; and future commitments for major purchases appeared dauntingly expensive. This Administration recognized that cutting interest rates would be crucial to stimulate the economic recovery. Insert chart: CHRT3A-1 The economy was stalled by high interest rates; and interest rate reduction was stalled by concerns about economic policy. Large budget deficits raise interest rates through a straightforward interaction of supply and demand: as the Federal Government demanded more of a limited supply of credit in the financial markets, it drove up the price--that is, the rate of interest. But further, large and apparently permanent budget deficits threatened inflation: if there were further policy errors (and large, continuing budget deficits clearly do not inspire confidence in economic policy), or if the buildup of debt grew so large that the Federal Government could not service it (and hence could only inflate its way out of the debt), more rapid inflation would result. Lenders in the financial markets naturally demanded higher interest rates to protect themselves against such threats of future inflation. The overwhelming majority of economists would argue that deficit reduction slows the economy in the near term--by reducing the purchasing power in the hands of businesses and consumers. (Every dollar of Federal spending becomes someone's spendable income--either as the price of labor or commodities supplied to the government, or as a grant or transfer. Taxes reduce household or business spendable income directly.) Partially offsetting that effect is the reduction of interest rates that results as Federal borrowing needs are reduced. Ultimately, that drop in interest rates encourages investment and makes the economy stronger; but for the short run, the expected net effect of credible deficit reduction on economic growth is negative. However, the economic policy inherited by this Administration was so out of balance that righting it--reducing the large and continuing budget deficits--bore far less of a short-run cost than most economists expected. Fears of future inflation--because of the mounting budget deficits--were so great that lenders demanded an extraordinary margin of protection through higher interest rates. As the President's economic plan was developed and put into law, the fears of mounting deficits and future inflation were dissipated, and bond buyers reduced their interest rate demands by far more than the margin predicted by past economic analysis. Thus, the effect of credible deficit reduction on the financial markets was much more than the narrow supply-and-demand impact in the conventional analysis; it was a restoration of financial stability, through the undoing of a pattern of continuing past economic policy errors, and a threat of similar mistakes extending into the future. Thus, budget discipline has freed the economy from a burden that limited its prospects in both the long run and the short run. o The yield on 30-year Treasury notes, which stood at 7.66 percent on election day of 1992, dropped to 6.09 percent by late August 1993 when Congress approved the Administration's economic plan. Although the long-term rates have climbed slightly in recent months, they remained about 100 basis points lower than in early November 1992. (See Chart 3A-1.) Insert chart: CHRT3A-2 Insert chart: CHRT3A-3 That drop in interest rates, through refinancing of home mortgages and other long-term loans, reduced the debt-service burden of households and businesses, freeing some of the cash flow that was devoted to servicing past commitments and allowing them to consider new investments in autos, homes, and plant and equipment. The same lower interest rates reduced the cost of those further commitments. With the growth of demand for big-ticket goods came increased employment--both in these sectors and throughout the economy. (See Charts 3A-2, 3, 4, and 5.) Insert chart: CHRT3A-4 Insert chart: CHRT3A-5 Insert chart: CHRT3A-6 o Corporate finance has reversed course, with slower issuance of corporate bonds and increased new issues of corporate stock--reversing the dangerous trend of the 1980s toward increased leverage. o With the change in corporate finance and the reduction of interest rates, the debt-service burden on corporate cash flow has eased considerably--declining to close to its average of the 1970s. The same changes have benefitted households, with their debt-service costs as a share of disposable personal income declining by about two percentage points. Economic growth over the past year has been heavily concentrated in purchases of business investment goods, homes, automobiles, and other consumer durables--precisely because such goods are typically financed by borrowing, and the Administration's program has brought the cost of borrowing down. This is doubly gratifying--both because it helps sectors of the economy that had been especially weak, and because it builds for the future. o During the first three quarters of 1993, for example, investment in producers' durable equipment rose at an inflation-adjusted annual rate of 16.5 percent, followed by production of durable consumption items at a 5.6 percent rate. The housing market showed considerable strength in the closing months of 1993, when new and existing home sales reached levels not seen in years. THE PAYOFF: MORE JOBS, BETTER JOBS The growing strength in the investment and consumer durables industries finally provided the long-needed boost to employment growth that now promises to become self-sustaining. o Payroll employment increased by nearly two million jobs in 1993. In fact, almost twice as many new private sector jobs were created in 1993 than during all of the four years of the Bush Administration. Total employment (including farm and self-employed) increased by 2.5 million; from 1988 to 1992, the average yearly increase was only 0.5 million. Job increases were widespread in 1993, with 57 percent of all industries expanding employment. The manufacturing sector, which had been trimming payrolls since 1990, added jobs in the last three months of 1993. (See Chart 3A-6.) o The overall jobless rate fell to 6.4 percent in December 1993, or 1.3 percentage points below its June 1992 high. The unemployment rate fell or held steady in every month of 1993. The unemployment rates of all major demographic groups--teenagers, adults, whites, African Americans and Hispanics--fell over the year. The number of unemployed fell in ten of the last twelve months; the cumulative reduction was 1.1 million. During the prior four years, the number of unemployed rose by an average of 0.7 million per year. (See Chart 3A-7.) Insert chart: CHRT3A-7 o In December, 1.7 million workers had been without a job for 27 weeks or longer--still far too many, but less than the high of 2.0 million reached in September 1992. o About one-half of the 1993 increase in employment occurred in high-paying managerial and professional occupations. There have been large reductions in the numbers of persons laid off and of permanently separated job losers. Also, in November, the work week reached its highest level since the end of World War II, and overtime its highest level since that statistic was first collected in the 1950s. These records signal future employment gains. And despite the rapid growth of output and employment, inflation has remained subdued--lending further stability to interest rates. After rising at an annual rate of 3.8 percent in the first quarter of 1993, CPI inflation slowed to a 2.7 percent rate for the year. At the producer level, inflation has nearly disappeared, with the core PPI (that is, excluding the volatile food and energy components) increasing only 0.2 percent during 1993--the best performance since 1974. (See Chart 3A-8.) Insert chart: CHRT3A-8 One further benefit of this Administration's economic program has not yet been felt. As was noted above, large budget deficits increase the Nation's borrowing from abroad, raise the value of the dollar, and thereby increase our trade deficit. From the early 1980s, budget irresponsibility has done untold harm to the manufacturing sector through these effects. With the deficit reduced and interest rates down, the dollar can find a more competitive level, and U.S. exporters will have a fairer playing field. Thus, budget discipline, combined with a lean American manufacturing industry, bodes well for U.S. growth and jobs in the future. Unfortunately, U.S. exporters cannot sell if other economies cannot buy; and virtually all other industrialized nations--especially Japan and Europe--are mired in recession, suffering their own adjustments from the excesses of the 1980s. So while the U.S. trade position with the industrializing nations is strong--and U.S. manufacturers are more competitive than they have been for decades--our overall trade deficit remains high. But the fundamentals are in place to change that, dramatically and for the better, once Europe, Japan and other nations pull themselves out of their own economic slumps. JOBS IN THE 1995 BUDGET This budget will contribute to continued job growth. First, continued budget discipline will keep interest rates down, and keep employment growing. With the momentum of investment in business equipment, new homes, new automobiles, and other consumer durables, the economic recovery has become self-sustaining. Employment growth is on track for the President's goal of eight million new jobs over four years, and the unemployment rate is falling faster than economic forecasters have predicted. Second, many of the President's proposed public investments in the 1995 budget will create more and better jobs directly: o The President's 1995 budget request for highways--full funding of the ISTEA highways program--will support a large number of direct and indirect jobs, mostly in the construction and supplying industries. o The budget request for mass transit formula capital grants would support further jobs, mostly in the construction, motor vehicle manufacturing, and business and professional service industries. o The proposed 42 percent increase for debt and equity capital guarantee programs provided through the Small Business Administration will contribute to the creation of new employment opportunities through small business creation and expansion, and also help to maintain existing jobs. o The budget maintains funding in the Community Development Block Grant (CDBG) program, which provides grants for a wide range of community development activities. The request includes $200 million for the HUD Secretary's proposed "Leveraged Investments For Tomorrow" program, for mixed-use development in distressed urban neighborhoods. CDBG is an important job creator. o The Administration proposes $900 million for new community and economic development initiatives, to assist local governments to stimulate job creation and economic vitality within urban neighborhoods through support of individual projects and local community-building efforts. o The President's request for public housing modernization funds will improve living conditions for many of the almost 1.3 million families living in public housing--and will support numerous job opportunities. o The proposed Community Development Financial Institutions Fund would provide assistance to qualifying community development lenders. Lowering barriers for lending in distressed neighborhoods will open the door to construction employment opportunities. o In July of 1993, the President requested a comprehensive review and overhaul of interagency regulation implementing the Community Reinvestment Act. The review yielded proposed revised regulation on December 21, 1993. With clearer guidance, reduced compliance burdens and greater flexibility, private lenders will be able to increase credit in distressed communities, aiding development and construction employment. o Last year, the President proposed and the Congress enacted legislation to create Enterprise Zones and Communities, to concentrate resources--through tax cuts, investment, and regulatory relief--on neighborhoods that are lagging behind the economic expansion. This year, the Administration will implement that policy. This will add Federal assistance to newly freed private resources, and stimulate economic activity and job creation in the parts of the country that need it most. o The Vice President's push for information highways will create jobs as we extend our high-speed communications network to every classroom, clinic, hospital and library in America. Other research and technology investments will also accelerate technological progress and employ scientific and technical workers--and help to reemploy workers from the downsizing defense sector. o Within the Department of Labor, Title II-B of the Job Training Partnership Act subsidizes temporary minimum-wage jobs and academic enrichment for low-income youth aged 14-21 during the summer. The budget increases funding for this program. o The Administration provides substantial increases for water infrastructure projects, including Clean Water State Revolving Funds, Drinking Water State Revolving Funds, and loans and grants for rural water and wastewater disposal systems. These investments will lead to job creation in infrastructure construction, repair and improvement. Other Administration initiatives will help to safeguard this job growth. The Workforce Security proposal, creating a new reemployment system, will help to match workers with job opportunities. The expansion of the Job Corps will help some of the most disadvantaged job seekers. The School-to-Work initiative will help non-college-bound secondary-school students to train for and find productive jobs. Finally, last year's small business tax cuts--including the increase in the amount of business investment eligible for immediate deduction (expensing), and the capital gains tax break for new small businesses--will keep America's prime job generator moving. This Administration has made early and substantial progress on creating more and better jobs--far beyond the expectations of most economists and job-market experts. With job creation at almost eight times the rate of the preceding Administration--almost twice the jobs in one quarter of the time--the nation is on track to reach the President's eight-million-job goal. Continued adherence to the economic program and the President's proposed investments will keep job creation on the fast track. BUDGET PROJECTIONS The budget outlook has improved enormously over the past year; but much remains to be done to put the economy finally on a sound fiscal footing. As the President has often said, it took many years to find our way into our current predicament, and it will take many years to work our way out. There are three broad tasks remaining to achieve a truly sound fiscal policy: o Fulfill the requirements of OBRA-93. The major outstanding obligation is finding discretionary spending savings to meet the discretionary spending caps. Some critics argued that the discretionary caps postponed actual deficit reduction; but discretionary spending has always been appropriated on an annual basis, so those savings can be attained only over time. The second requirement is obeying the pay-as-you-go restrictions on entitlement programs and taxes; any tax cut or entitlement spending increase must be offset by another tax increase or entitlement spending cut. A further requirement is imposed by the President's entitlement targets, established by executive order; if entitlement spending exceeds or is projected to exceed the preset levels, the President must report to the Congress on the cause and, if he chooses, offer a legislative solution. Compliance with OBRA-93 will lock in the $500 billion of deficit reduction that turned the economy around. o Health reform. Medicare and Medicaid costs are a growing burden on both the private and the public sectors. Health care costs are the single major force behind the Federal budget deficit. In fact, the Federal Government's health care costs are growing so fast that, without fundamental change, there can be no control of the overall budget deficit. o A sound economy. In the long run, we need growing incomes and plentiful employment opportunities to keep the Nation's ledger sound. So, within the constraints imposed by OBRA-93, we must invest in science and technology, physical infrastructure, and worker skills that the private sector needs to make the economy grow. This budget continues the progress made last year on all of these fronts. Total Spending 1995 outlays are projected at $1,518.3 billion (without the Administration's health reform proposal), an increase of $34.3 billion, or 2.3 percent, from 1994. Later years show continued slow outlay growth. Between 1993 and 1999, total outlays are projected to grow by an average of only 4.5 percent per year. In contrast, between 1981 and 1993, total outlays grew by an average of 6.3 percent per year. In 1999, projected outlays equal 20.9 percent of the gross domestic product (GDP); in 1993, outlays equaled 22.4 percent of GDP. Discretionary Spending Discretionary spending is controlled by caps set in OBRA-93 through 1998--holding outlays to the approximate level of 1993, without an increase for inflation expected at the enactment of the 1993 law (a "hard freeze"). (If inflation exceeds the 1993 forecast, the spending caps are adjusted upward for the excess; but if inflation is below the 1993 forecast--as it was last year--the spending caps are adjusted downward for the underage.) As a result, discretionary spending is expected to remain at approximately the 1993 level through 1998--which would leave it at an inflation-adjusted level 12 percent below that of 1994. Compared with what would have been spent with a full inflation adjustment over 1994-1998, this restraint of OBRA-93 will save a cumulative $107.7 billion. After 1993, discretionary spending is subject to a single cap; in 1991-1993 there were separate caps for defense, international, and domestic discretionary spending. Given the Administration's proposed downward path for defense, the two nondefense categories are not held to a hard freeze; but the defense reductions are not large enough to permit nondefense spending to keep up with inflation. Domestic discretionary spending has not been the source of the increase in the budget deficit. While the budget deficit has increased as a percentage of GDP, domestic discretionary spending is below its 1980 percentage of GDP. Total discretionary spending is at its lowest percentage of the GDP since 1962 (the earliest year for which data have been compiled). Over the next five years, all categories of discretionary spending are projected to shrink as percentages of the GDP. National Performance Review The restrained spending levels in this budget reflect, in part, the recommendations of the National Performance Review (NPR). Recommendations that cut across agency lines--FTE savings, procurement reforms, and other crosscutting proposals--are discussed in more detail in Chapter 3C, "Delivering a Government That Works Better and Costs Less." Table 3A-1 summarizes the current status of proposed 1994/1995 budget savings from the recommendations of the National Performance Review agency teams. The current savings estimate of $6.8 billion compares favorably with the original NPR estimate. Table 3A-1. STATUS REPORT: LATEST ESTIMATE OF SAVINGS NPR Agency Teams -------------------------------------------------- Billion of Dollars -------------------------------------------------- Original NPR savings estimates........... 7.0 Higher than anticipated savings.......... 1.9 Proposals proceeding, but with startup delays and/or reestimates of savings.... -1.6 Proposals not proceeding at the present time.................................... -0.5 ------- Current savings estimate................. 6.8 -------------------------------------------------- Table 3A-2 provides more detailed information on the agency savings proposals affecting the estimates in the 1995 budget. Table 3A-2. PROGRESS REPORT: NATIONAL PERFORMANCE REVIEW RECOMMENDATIONS WITH 1995 BUDGET EFFECTS (In millions of dollars) ---------------------------------------------------------------------- 1995 Estimate -------------------------- Recommendation Budget Authority Outlays Receipts ---------------------------------------------------------------------- Department of Agriculture: The wool and mohair subisidy program will be phased out beginning in 1994 and all payments are terminated after 1996 per Public Law 103-130....................... -47.0 -47.0 -- Legislation was submitted in the Fall of 1993 to phase out the honey program by the end of 1996.......................... -6.5 -6.5 -- Legislation was submitted in the Fall of 1993 to reorganize the Departmental agency structure. This program will reduce the number of USDA bureaus from 42 to 30 and is a vital part of the Administration's plan to streamline USDA's extensive field office structure.. -166.9 -158.3 -- Department of Commerce: To help protect fishing resources, fees will be proposed to help recover the costs of administering living marine resources................................ -- -- 82.0 Department of Defense: The Corps of Engineers will recover its costs for processing certain commercial applications and DOD will establish goals for solid waste reduction and recycling.. -50.0 -43.0 6.0 The efficiency of DOD health care operations will be maximized by using emerging technology to upgrade care at DOD health care facilities and by closing the Uniformed Services University of Health Sciences (USUHS).................. -16.0 -9.0 -- Department of Energy: DOE defense facilities and laboratories will be redirected to Post-Cold War Priorities by consolidating or eliminating unneeded facilities, and making their services of greater benefit in the post-Cold War era................. -1,007.4 -862.8 -- Department of Health and Human Services: In order to take more aggressive actions to collect outstanding debts owed to the Social Security Trust Fund, SSA will request the authority to use a full range of debt collection tools available under the Debt Collection Act of 1982.......... -60.0 -60.0 -- User fees are proposed for the inspection and approval processes of the Food and Drug Administration (FDA). Food, drug and medical device manufacturers, processors and suppliers should be required to pay for FDA services......................... -337.9 -337.9 -- The Health Care Financing Administration will seek authority to fully and openly compete Medicare claims processing contracts to reduce costs, improve quality of service, and eliminate inefficiencies and conflicts of interest. -80.0 -80.0 -- Department of Housing and Urban Development: To assist neighborhood revitalization, the 1995 budget includes an FHA single-family mortgage insurance initiative............ 14.0 7.4 -- Incentive contracts will be used to refinance expensive old subsidized mortgages................................ -177.0 37.4 -- Administrative changes will reduce unjustified increases in annual payments to Section 8 projects. This proposal would limit rent increases to those cases where existing rents are less than the local market average rent for non-luxury housing.................................. -- -110.0 -- Public housing agencies will be encouraged to make better use of their assets by reducing subsidies paid for unjustifiably vacant units............................. -43.3 -19.9 -- Department of the Interior: Reclamation of abandoned mine lands will be improved through a combination of administrative and legislative strategies designed to reduce duplication, increase States' decisionmaking authority, and distribute reclamation funds where they are needed most.......................... -15.0 -15.0 -- A national spatial data infrastructure will be established administratively through development of digital data standards, accelerated development of a data clearinghouse, and acquisition of new high-priority data................... 7.0 6.7 -- Mineral Management Service royalty collections will be improved through legislative action to enable penalties to be assessed for substantial underpayments -- -- 2.0 The Federal Helium Program will be improved through administrative action. To obtain maximum benefit from helium operations, the Government will reduce costs, increase efficiencies in helium operations, increase sales of crude helium as market conditions permit, and study the recommendations to cancel the helium debt.............................. -2.0 -2.0 6.0 Reforms will be instituted to guarantee a fair return for Federal resources such as livestock grazing and hard-rock mining... 17.0 17.0 80.0 Environmental mangement will be enhanced by remediating hazardous materials sites through administrative action............ 3.9 3.9 -- Entrepreneurial management will be promoted by seeking expanded authority to increase park entrance and other recreation user fees..................... 4.8 3.6 32.0 Department of Labor: Occupationally disabled Federal employees will be helped to return to productive careers by extending DOL's assisted reemployment progam, thereby reducing long-term benefit costs to the government; an administrative review of the FECA long-term benefit rolls will also be undertaken....................... -7.0 -7.0 -- An electronic database will be developed to enable Federal contracting agencies to electronically access wage determination information instantly. When integrated into the Service Contract Act process, it should eliminate delays both in the delivery of wage determinations and in the Federal procurement process.......... 0.5 0.5 -- The Consumer Price Index (CPI) will be revised and updated. The CPI is revised after each decennial census. This revision will be completed in 2000. The revision includes new market baskets of goods and services as well as improvements in collecting and processing data for the CPI and surveys which support the CPI.......................... 5.2 5.2 -- The Federal Employees Compensation Act will be amended in order to reduce fraud by (1) making it a felony to lie on benefit applications, (2) making people convicted of defrauding the program ineligible for benefits, and (3) making people who are incarcerated ineligible for benefits............................. -1.0 -1.0 -- National Aeronautics and Space Administration: A major reorganization to streamline program management has occurred and savings are continued in the 1995 budget. -396.0 -282.0 -- Small Business Administration: User fees will be established for Small Business Development Centers, located primarily at colleges and universities, which provide management and technical assistance to small businesses........... -- -- 17.0 Department of State/U.S. Information Agency: A department-wide computer modernization and upgrade plan will be developed along with a more effective management policy to begin modernization of computer systems in 1995.......................... 25.0 21.3 -- USIA will begin to restructure core program activities in 1994............... -3.0 -3.0 -- The Regional Administrative Management Center in Mexico City will be relocated to a domestic location................... -- 2.7 -- Department of Transportation: Federal Aviation Administration fees will be increased for inspection of foreign repair facilities........................ -- -- 1.6 Level I (low use) air control towers will be converted to contract operation....... 8.3 8.1 -- Funding for selected highway demonstration projects is proposed for rescission. These demonstration projects should compete at the state level for the limited highway resources available and not be singled out for special treatment at the Federal level..................... -817.0 -406.3 -- Unobligated balances for 1992 and prior earmarked funding for the FTA New Starts and Bus Program that remain unobligated after three years will be proposed for rescission............................... -- -5.1 -- New, more restrictive criteria will be proposed for small airports to qualify for essential air service subsidies. Somewhat tighter criteria were enacted for 1994................................. -7.8 -6.7 -- To reduce costs, federal grant funding of two Federal Aviation Administration post-secondary education programs is proposed for elimination................. -- -10.0 -- Department of Treasury: Federal resources dedicated to the interdiction of drugs will be redirected and better coordinated by consolidating intelligence gathering facilities and reducing flying hours and the marine interdiction fleet....................... -57.4 -51.0 -- The licensing fee for firearm dealers is proposed to increase from $200 for three years to $600 per year to cover the costs of license processing and reduce the number of dealers. A fee increase to $200 was enacted in the Brady Bill............ -- -- 25.2 Section 5121 of the Internal Revenue Code will be amended to require proof of tax payment by retailers prior to sale of alcohol to them by wholesalers........... -- -- 13.6 NAFTA legislation provides for fee increases and implements the Customs Modernization Act, as recommended by the NPR. The 1995 Budget includes inititatives to modernize Customs commercial operations.................... -- -- 215.0 Civil monetary penalties are proposed to be adjusted to the inflation index....... -- -- 16.9 Certain Federal workers will be required to convert from checks to electronic funds transfer and the consolidation of Financial Management Services (FMS) regional centers will begin.............. -2.4 -1.9 -- Department of Veterans Affairs: The final stage of VA's computer modernization effort for benefits claims processing will be funded................ 25.5 -- -- A pilot project in the New York City Regional Office is designed to help streamline the benefits claims process... 0.3 0.3 -- Supply depots will be phased out. The conversion from a depot storage to a vendor, just-in-time delivery system will be completed by the end of 1995.......... -11.0 -55.0 -- VA's capabilities in implementing electronic data interchange technology will be enhanced. Benefits from implementing this proposal include more efficient management of VA's supply inventories.............................. -12.9 -12.9 -- Administrative costs of the Veterans insurance program will be recovered from premiums and dividends from three VA life insurance programs....................... -29.4 -29.4 -- ---------------------------------------------------------------------- Total, 1995 budget savings................. -3,242.4 -2,508.6 497.3 Total 1995 budget authority plus receipts. 3,739.7 Memorandum: 1994 savings enacted/requested............ -2,901.5 -703.6 163.0 Total 1994 budget authority plus receipts 3,064.5 NPR budget savings estimated for 1994 and 1995..................................... -6,143.9 -3,212.2 660.3 Total budget authority plus receipts..... 6,804.2 ---------------------------------------------------------------------- Entitlements OBRA-93 cut projected entitlement spending by $3.7 billion in 1994, and $98.4 billion over 1994-1998. There were also five-year increases of $18.3 billion in the earned income tax credit, $2.7 billion in food stamps, and $6.1 billion in other programs. In 1995, entitlements (not including debt service) are projected to comprise 50.2 percent of budget outlays, or 10.9 percent of the GDP--at a total of $762.9 billion. This is a substantial increase from 1965 ($27.8 billion, 23.5 percent of outlays, and 4.1 percent of GDP) and 1980 ($261.9 billion, 44.3 percent of outlays, and 9.9 percent of GDP). This rapid growth has led some to conclude that entitlements are the source of the budget deficit problem. This is true, but insufficiently precise. In fact, from 1980 through 1992, Federal spending on health care increased from 1.7 percent to 3.2 percent of GDP, while other entitlements shrank from 8.2 percent to 7.9 percent. Looking forward, the picture is the same. By 1999 (without passage of the Administration's health reform proposal), combined Medicare and Medicaid spending will reach $386.9 billion, equal to 20.3 percent of total outlays or 4.4 percent of GDP. Other entitlements will grow to $633.8 billion, equal to 33.3 percent of total outlays or 7.2 percent of GDP--less than the percentages of 1992. Medicare and Medicaid spending will grow faster than revenues; other entitlements will grow more slowly than revenues. In fact, over the five-year budget window, Medicare and Medicaid are the only major categories of Federal spending that are projected to grow faster than the economy, or faster than revenues. Even interest on the debt, which had been one of the fastest-growing categories of the budget, has been brought under control by passage of the Administration's deficit-reduction program. Health care is left as the sole major force behind the budget deficit. The simple mathematical fact is that, with health costs growing faster than the economy over the foreseeable future, reform of health care is essential if the deficit is to be brought under control. Any other savings merely buy time, because health costs will eventually grow to erase that progress. Social Security comprises about one-third of total entitlement spending. In the very long run, Social Security costs are projected to increase sharply--mostly as a result of the retirement of the baby boom population, but also because of increased life expectancies, and hence longer periods of retirement. At this time, Social Security is running annual surpluses which add to the balance in its trust fund and reduce the unified budget deficit. However, we must maintain the goal of 75-year actuarial balance; and the 75-year outlook for the system worsens slightly with each passing year, as one year of system surplus becomes history and one year of post-baby-boom deficit comes over the 75-year horizon. This is a long-term Social Security issue, not a short-term budget deficit issue; it should be answered with careful study, not precipitous, politically motivated action. Social Security is one of the most successful Federal programs in history; it is largely responsible for the reduction in the incidence of poverty among the aged from 35.2 percent in 1959 to 12.9 percent in 1992. More than half of today's elderly rely on Social Security for most of their income, and millions of workers nearing retirement have factored their expected Social Security benefits into their retirement plans. The Social Security Board of Trustees will report on the condition of the system early this year. Entitlements other than Medicare, Medicaid and Social Security comprise only about 40 percent of projected total entitlement spending for 1995. Spending on these programs is projected to grow less rapidly than the economy or Federal revenues. These programs include Federal military and civilian employee retirement, food stamps, aid to families with dependent children, farm price supports, unemployment compensation, and other, smaller programs. The Administration is committed to seek efficiencies and savings in these programs, and the Bipartisan Commission on Entitlement Reform, established by the President under Executive Order No. 12878, will contribute to that task. However, given the size and rapid rate of growth of the medical programs, ultimate deficit control can come only if we address that area. The Administration has proposed a major health reform to be considered by the Congress this year. This proposal is expected to add to outlays modestly in the first few years (offset by other provisions), but to contribute significant deficit reduction in 1999 and later years. The health reform program is discussed in detail in Chapter 4. The Administration also proposes a comprehensive reform of the Nation's welfare programs, which is being drafted for submission to the Congress in the spring. This program will combine training and child care initiatives for the welfare population with work requirements and other outlay-reducing provisions in a deficit-neutral package. This program is discussed more fully in Chapter 3B. Total entitlement outlays are projected to increase from $763.6 billion in 1995 to $1,020.7 billion in 1999. These projections are within the bounds set by the entitlement targets in the President's Executive Order No. 12857. During the upcoming year, the Administration will put forward significant initiatives including comprehensive health and welfare reforms, and ratification of the Uruguay Round agreement of the GATT. These initiatives will be deficit-neutral, in keeping with the pay-as-you-go restrictions in the Budget Enforcement Act. Revenues OBRA-93 achieved slightly less than half of its total deficit reduction through tax increases--$250.1 billion cumulatively over 1994-1998. With those increases, revenues are expected to change very little as a percentage of GDP over the next five years--from 19.1 percent in 1995 to 18.6 percent in 1999. This budget proposes no further change in revenues. It proposes some increases in user fees. These are scored in the Budget according to the principles set forth by the bipartisan Report of the President's Commission on Budget Concepts, October 1967, which have been observed by all succeeding Administrations. The Administration supports revenue-neutral initiatives designed to promote sensible and equitable administration of the internal revenue laws. These include simplification, technical corrections, and taxpayer compliance measures. The Administration will monitor and consider ways to ease the impact of the reduction of the deductible portion of business meals and entertainment expenses. Deficit With these changes in outlays and revenues, the deficit is projected to decline from $254.7 billion in 1993, to an estimated $234.8 billion in 1994, to a projected $176.1 billion in 1995. If this forecast materializes, it will mark the first consecutive three-year decline in the budget deficit since 1948--under President Harry S Truman. As a percentage of GDP, the deficit falls from 4.0 percent in 1993, to 3.5 percent in 1994, to 2.5 percent in 1995--the lowest since 1979, before Ronald Reagan took office. Without health-care reform, spending in Medicare and Medicaid will continue to grow faster than the economy, and will eventually force the deficit up again. It is essential to long-term deficit control that the Congress pass the President's health-care reform proposal. MAINTAINING BUDGET DISCIPLINE Ultimately, the Nation's budget deficit problem will be solved by changes in policy, not changes in process. However, this Administration recognizes that the budget process must support, not impede, the formulation of budget policy and the attainment of other important National goals. Therefore, the Administration supported significant budget process disciplines in OBRA-93, and proposes further reforms in the current budget. Some of the proposals are major changes in the budget process or structure; others are relatively small, but will sharpen the focus of the budget and make it more rational and understandable. Reforms in OBRA-93 and Associated Administrative Action Discretionary spending caps. As noted above, OBRA-93 extended the discretionary spending caps enacted in the Budget Enforcement Act of 1990 (BEA) through 1998 at approximately the 1993 level--leaving discretionary spending at an inflation-adjusted level 12 percent below that of 1994. These caps are a major source of budget discipline. The discretionary spending caps have been obeyed; discretionary spending has been held at or below the levels prescribed in the BEA. While the law allows an emergency designation for spending outside of the budget caps, this exception has been used sparingly; from 1991 through 1993, total emergency spending has been limited to such needs as hurricanes Andrew and Hugo, tropical storms Iniki and Omar, the Loma Prieta earthquake, and the midwest floods. Pay-as-you-go. The Administration also proposed extension of the "pay-as-you-go" restraint on entitlement increases and tax cuts, and it was enacted in OBRA-93. Pay-as-you-go requires that any proposed reduction in taxes or increase in entitlement spending be offset by a tax increase or entitlement cut, so that the entire package is "deficit neutral." Like the discretionary caps, the pay-as-you-go restriction has been obeyed. Entitlement targets. The pay-as-you-go constraints have been successful in that they have prevented the statutory expansion of existing entitlement programs, the creation of new entitlements, or the enactment of tax cuts without budgetary offsets. However, it has not prevented the unanticipated growth of costs of existing entitlements, particularly in medical care. To address this problem, the President issued Executive Order No. 12857, which established targets for spending for entitlement or mandatory programs (except deposit insurance and interest on the public debt) for 1994 through 1997. The targets were based on the 1994 budget resolution's estimates of mandatory spending, and may be adjusted annually in the budget for unanticipated increases in the number of beneficiaries. If there is an actual or projected overage in any year, the President must submit a message in the budget explaining the cause. Depending on economic or other circumstances, the President may recommend recouping or eliminating all, some, or none of the overage. If the President recommends reducing the overage, the message must include the text of a resolution providing specific instructions to the appropriate Committees in the House of Representatives and the Senate. The House has instituted rules to expedite its response to such a message. (See Chapter 15, "Review of Direct Spending and Receipts," in the Analytical Perspectives volume of this budget.) This Executive Order replaced an identical legislative proposal, which passed the House but was procedurally blocked by a minority in the Senate. Deficit Reduction Fund. The President established a Deficit Reduction Fund in the Treasury by Executive Order No. 12858. The Fund guarantees that the net budget savings achieved by OBRA-93 are dedicated exclusively to deficit reduction. Amounts in the Fund can be used only to redeem maturing debt obligations of the Treasury that are held by foreign governments. Information about the Fund is included in Chapter 16, "Deficit Reduction Fund," in the Analytical Perspectives volume of this Budget. Legislative Proposals The budget process can be further reformed to facilitate sound economic policy, and to clarify the budget itself. Enhanced rescission authority. The current rescission procedures are inadequate. Each appropriations act passed by the Congress provides billions of dollars of funding for thousands of items. If the President believes that a particular spending item should be reduced or eliminated, he has three choices: o He can veto the entire bill, and potentially disrupt funding for many Federal agencies and programs. o He can sign the bill, and allow the misguided money to be spent. o He can sign the bill, and ask the Congress to "rescind" the particular item in accord with the rules of the Impoundment Control Act of 1974. Under current rules, a proposed rescission does not become effective unless it is approved by both Houses of the Congress within 45 days. If a proposed rescission is not approved, the funds must be spent. This means that the Congress can defeat the President's rescission proposals by inaction. The President's actual proposal need never come to a vote, even in Committee. It is important to maintain the proper authority of the Congress in matters of spending; however, it is reasonable to ask that a President's rescission recommendations receive a timely up-or-down vote. Several bills have been introduced in the Congress to achieve that objective, including the Expedited Rescissions Act of 1993, which the President supported and the House passed last year. They would merely require the Congress to put each of the President's rescission recommendations, individually and without change, to a prompt majority vote (unlike the current veto procedure's two-thirds vote). Such reform is needed to make the rescission authority meaningful. Biennial budgeting. The budget process consumes an enormous amount of time each year, to the detriment of other important functions of the Executive Branch and the Congress. With only slightly more effort every other year, the budget process could cover two years instead of one. This would: o Reduce the frequency with which hundreds of small and noncontroversial appropriations are considered, and allow more time for the major issues; o Leave more time in the intervening year for program oversight by Congress and the Executive Branch; o Allow the Executive Branch to shift resources from budgeting to program management; o Provide greater predictability to program managers and the public; and o Reduce the opportunities to enact wasteful spending. A biennial budget would not preclude changes (supplemental appropriations and rescissions) during the alternate year any more than the current annual budget precludes changes during the year. Realistically, the need for incremental mid-cycle changes is likely to be somewhat greater, because appropriations in the alternate year will have been based on assumptions made further in advance of actual operations. Nevertheless, those changes will be far fewer and simpler than the current annual appropriations process. Proper accounting for retirement costs.--The Administration is proposing a reform to charge Federal agencies the full cost of the Government's share of retirement benefits for Federal employees covered by the Civil Service Retirement System (CSRS) and other, smaller, individual-agency systems. Effective in the mid-1980s, Federal civilian and military employee retirement systems were reformed to charge agencies for the full accruing costs of new hires; but agencies are charged for only about two-fifths of the Government's share of accruing costs for civilian employees hired before 1984--who still constitute 1.6 million of the Federal work force. The Administration's proposed reform makes the cost of the Federal retirement system more explicit. It will also improve agency budget decisions, because it will force comparisons of the full cost of labor with alternative means of providing services, such as contracting out or acquiring labor-saving hardware. It will also allow better comparisons between labor-intensive programs and other programs. This step will not change the deficit, because the increased agency contribution will be paid from one Government account into another. Simplify the investment of balances held by Government accounts. Federal funds are authorized by law to invest in U.S. Treasury securities. In some cases, fund managers may choose any terms for Treasury securities available in the private market. This arrangement is complex and obscures the budget presentation. The Administration plans to conduct a review of the government account investments and propose legislation that would simplify the way these accounts are credited with interest, while continuing to recognize program objectives and tie returns to market rates on Treasury securities. Other Administration Initiatives The Administration plans to make administrative changes in the budget process after consultation with the Congress. Improve budget accountability. The structure of budget functions, subfunctions, accounts and subaccounts should be aligned with agency missions, outputs, and desired outcomes. The full cost of these operations should be charged to the budgetary account for a program or activity. The current structure has grown haphazardly and does not meet these objectives. OMB, working with the agencies and consulting with the Congress, will begin a review of the functional and account structure, in conjunction with the implementation of the Government Performance and Results Act of 1993. Some budget account restructuring may be proposed for the 1996 budget, and full agency strategic plans will be completed prior to 1998. Present budget in millions and consolidate accounts. The budget comprises about 2,200 expenditure and receipt accounts shown in thousands of dollars (ranging from $1,000 to over $300 billion) for about 130 agencies, and 90,000 separate "lines" of information. This level of detail and the disparity in sizes of accounts distracts from the larger issues of program and policy. OMB plans to present the detailed budget Appendix in millions of dollars, and to consolidate smaller accounts as part of the restructuring just described. Discontinue the separate grouping of Federal funds and trust funds. Maintaining separate summary figures for Federal funds and trust funds no longer serves a useful purpose. OMB plans to discontinue the separate grouping beginning with the 1996 budget. Summary tables and an analysis of revolving, special, and trust funds, as a group, will be presented. The accounting integrity of all trust funds will be preserved, and the existing presentations for all major trust funds will be continued. A Capital Budget The NPR recommended that the budget "recognize the special nature and long-term benefits of investments through a separate capital budget." This budget begins this process, which will be completed with the 1996 document. Under the NPR proposal, the budget would be presented in three parts: a capital budget for fixed assets; an operating budget of all expenditures except those included in the capital budget, plus depreciation on the stock of assets purchased under the capital budget; and a "total" or "cash" budget corresponding to the current measure of outlays. The purpose of the capital budget is to intensify and improve the analysis and review of capital investment expenditures--outlays that yield long-term benefits. By the broadest measure, the Federal Government will spend over $250 billion on capital investment in 1994. The Administration is strongly committed to increasing investment--both public and private--to raise economic growth and future living standards. In A Vision of Change for America, the President identified these as key elements of his economic plan for the Nation: "... long-term public investments to increase the productivity of our people and businesses; and a serious, fair, and balanced deficit-reduction plan to stop the government from draining the private investments that generate jobs and increase incomes." Thus, the President proposed to increase investment and reduce the deficit at the same time. Congress appropriated 69 percent of the President's proposed investments, while reducing the deficit by more than $500 billion over five years. For more than forty years, the budget has separated Federal investment outlays from outlays for current use, using several broad categories of investment so that alternative definitions of investment could be used. This presentation was designed primarily for analytical purposes rather than for decision-making. Now, the capital budget will put such analysis to more practical use. A capital budget requires several refinements to be most effective. The NPR recommended several changes to the planning and budgeting process for fixed assets which OMB plans to put into effect for the 1996 budget: o A long-term planning and analysis process for fixed-asset acquisitions, to provide guidance for evaluating choices and setting priorities. o Incorporation into the budget of the results of agency plans, including a cross-cutting analysis of fixed-asset acquisitions among different agencies. o More flexible funding mechanisms and procedures to ensure that the most economical method of acquiring fixed assets is used. In particular, the rules of the budget process should not prevent acquisition by the most economical means of needed fixed assets, even if that would create "spikes" in agency spending. The Federal Government's method of accounting for fixed assets obviously does not change the supply of real or financial resources in the economy; therefore, this capital budgeting process does not obviate the need for fiscal discipline. Furthermore, budget discipline cannot be enforced through a budget measure including depreciation, which is a sunk cost not subject to current control. For these reasons, the NPR stated that, "The cash budget reflects the effect of both the capital and the operating budget on the economy. Therefore, the discipline of the cash outlay caps in the Budget Enforcement Act must be maintained." With continued fiscal discipline, long-term planning and more detailed budget review, the NPR's proposed capital budget will help the Federal Government to allocate its scarce investment dollars in the most efficient way--while reducing the Federal deficit and increasing economic growth in the long run. An Option Opposed by the Administration The Administration does not support current proposals to amend the Constitution to require a balanced budget. While such an amendment may appear to impose fiscal responsibility by forcing policymakers to face hard choices, in practice it would do more harm than good. o First and foremost, our Constitution is the foundation of our democracy, safeguarding our most fundamental rights and liberties. It is not the proper vehicle to define accounting methods, data measures, projection periods, and other technical and economic concepts. The Constitution was meant to be timeless; it should not prescribe annual policy choices. o Second, any balanced budget amendment would constrain macroeconomic policy. The Government could be forced to raise taxes or cut spending when the economy was weak, which could cause or aggravate recessions. While most proposed amendments would allow three-fifths of the Congress to override the requirements, and could even allow an automatic suspension of the requirements during a recession, the real harm would be done when the amendment required fiscal contraction before a recession was obvious. The amendment would thus threaten the Nation's overall economic strength, which is a principal test of wise fiscal stewardship. o Third, the balanced budget amendment could encourage manipulation of the budget. It would strengthen the incentive to shift costs off the budget through direct regulation of the private sector, unfunded mandates on states, creation of government-sponsored entities, or subtle accounting devices. For one example, some important government policies--such as certain insurance and retirement programs--show significant differences between costs measured on accrual and cash bases; accounting methods could be chosen to minimize the measured deficit. For another, a reluctance to show the deterioration of the Nation's financial institutions led to tens of billions of dollars of unnecessary costs for thrift and bank restructuring. A balanced budget amendment could encourage future administrations to mismeasure such accruing costs, with potentially serious implications for long-term economic welfare. o Fourth, the amendment would be extremely difficult to enforce. Tax and spending policies--or the validity of forecasts of economic conditions, outlays and revenues--could ultimately be decided in the courts, by unelected judges. A frequently violated or manipulated amendment could bring disrespect for the Constitution as a whole. o While an amendment would provide a sense of action, it would not by itself provide any deficit reduction. In fact, the illusion of progress could delay the necessary hard choices, leading to an even more economically damaging crunch when the amendment finally took effect. The amendment is, in truth, a gimmick designed precisely to postpone the hard choices needed to deal with the deficit problem. Past Presidents and Congresses did not hide behind the Constitution when the times required difficult and painful action. Indeed, last year's enactment of a $500 billion deficit reduction package required no Constitutional amendment--only the leadership and will to make tough choices. o Finally, an amendment would give a minority in Congress the power to bring government operations to a halt--and could result in less deficit reduction, not more. If economic or other conditions make a deficit inevitable, but three-fifths of the Congress is needed to pass a budget with a deficit, then two-fifths plus one can prevent enactment of a budget. For that minority, there would be a tremendous temptation to demand some projects for their constituents--after all, there would be a deficit anyway--as the price for their votes to pass a budget. This would make fiscal policy excessively responsive to special interests and increase, not decrease, the deficit. While the Administration is selective in its support of budget process proposals, the debate about methods should not obscure the substantial agreement about goals. The Clinton Administration is strongly committed to the objectives of most proposed reforms--sound fiscal policy, continued deficit reduction, and vigorous long-term economic growth. INVESTING FOR PRODUCTIVITY AND PROSPERITY: SETTING PRIORITIES UNDER BUDGET DISCIPLINE At the outset of this Administration, the economy needed Federal budget deficit reduction for both short-run and long-run reasons. In the near term--as has been amply demonstrated--deficit reduction would reduce the burden of Federal borrowing on the credit markets, reduce interest rates, and thereby stimulate credit-sensitive purchases and allow the economy as a whole to grow. In the long run, by freeing private savings to finance private investment, deficit reduction encourages the capital formation needed to increase productivity, raise living standards, and create jobs. But the economy also needs public investment for the long run--to provide physical infrastructure, scientific and technological knowledge, and worker skills that allow the private sector to prosper and grow. President Clinton and Vice President Gore articulated their program for public investment during the election campaign in Putting People First; that program was presented to the Congress in A Vision of Change for America in the early days of their Administration. While deficit reduction and public investment are complementary prerequisites of economic health, they conflict in the budget. Tax increases contributed less than half of total deficit reduction in the President's economic plan--with the amount restricted to limit the burden on middle-class families and maintain economic incentives--and so significant spending restraint was unavoidable. The Congress passed, and the President signed, legislation mandating $107.7 billion of discretionary spending savings over 1994-1998 through binding caps--a five-year hard freeze. Yet discretionary spending must implement much of this Administration's investment agenda. The President's 1994 budget began the process of increasing public investment through discipline elsewhere in the budget. The Congress followed the President's lead and funded about two-thirds of his substantial public investment program. This 1995 budget continues on that same path. Despite the tight discretionary cap--spending must actually decline in dollar terms, without any adjustment for inflation--this budget provides $7.7 billion of increases in outlays ($13.7 billion in budgetary resources) in the President's designated investments by making tough choices in the other budget accounts. The budget achieves the necessary savings in the following ways: o Choosing priorities. With limited resources, a dollar devoted to one objective cannot be used for another purpose. The President had to determine which goals were most important. Accordingly, the budget focuses its resources on the prerequisites of economic growth--infrastructure, scientific and technological knowledge, education, worker training, health reform, personal security from crime and drug abuse, and national security. Other public purposes must take their proper place in the line for resources. The result is a budget that fulfills the commitment to deficit reduction while funding the highest investment priorities. o Achieving efficiencies. Given a set of priorities, there are more and less cost-effective ways to pursue them. With limited resources available because of the imperative of deficit reduction, it is equally imperative to choose the best means to each objective. Thus, the budget funds formula grants for infrastructure rather than earmarked projects; civilian and "dual-use" technology more than specialized defense research; an unconditional "re-employment" system more than a plethora of narrow earmarked programs; and treatment of hard-core drug abusers more than interdiction of drug shipments in vast "transit zones." The broad range of such choices is presented in the following discussion. o Personnel reduction. The President directed the agencies and departments to achieve reductions of 100,000 personnel by the end of 1995 in Executive Order No. 12839. The National Performance Review recommended increasing that reduction to 252,000 by the end of 1999; that recommendation was implemented through a Presidential Memorandum of September 11, 1993, "Streamlining the Bureaucracy." Personnel reductions on this track are included in this budget, and provide substantial spending savings. o Administrative efficiencies. The President further required that the agencies and departments achieve administrative savings of 3 percent in 1994, increasing to 14 percent by 1997, in Executive Order No. 12837. Because administrative expenses themselves do not achieve investment objectives, such costs are an appropriate source of savings. The President's mandate, coupled with the budgetary pressures involved in meeting the discretionary cap, provide still further means of achieving deficit reduction while funding a significant investment program. The following discussions show how, in every priority area, tough choices were made and efficiencies were achieved to allow deficit reduction and public investment to join--for the long-term strength of the economy.