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The Economic and Budget Outlook: Fiscal Years 1999-2008 January 1998

In addition to the usual budget presentation, the economic influence of federal government revenues and spending can be portrayed through the national income and product accounts (NIPAs). The NIPAs provide a picture of government activity in terms of production, distribution, and use of output. That approach recasts the government's transactions into categories that affect gross domestic product, income, and other macroeconomic totals, thereby helping to trace the relationship between the federal sector and other areas of the economy.
 

Relationship Between the Budget and the NIPAs

A handful of major differences distinguish the NIPA version of federal receipts and expenditures from its budgetary counterpart. One example is the shift of selected dollars from the spending to the receipt side of the budget to reflect voluntary or intrabudgetary payments that the budget records as negative outlays. Such shifts are referred to as netting and grossing adjustments and do not affect the deficit or surplus (see Table D-1). The vast majority of netting and grossing adjustments are voluntary premiums for Medicare coverage ($21 billion in 1998) and intrabudgetary receipts for retirement contributions on behalf of federal workers ($71 billion in 1998).
 

By contrast, other differences between the federal budget and the NIPAs do affect the deficit or surplus. The NIPA totals exclude transactions that involve the transfer of existing assets and liabilities and therefore do not contribute to current income and production. Prominent among such lending and financial adjustments are those for deposit insurance outlays, loan transactions and credit subsidies, and sales of government assets. In 1997, such lending and financial transactions totaled nearly $27 billion. Almost half of that total was attributed to $11 billion in receipts from the auctioning of rights to use portions of the electromagnetic spectrum. In 1998 and 1999, lending and financial adjustments are expected to contribute an average of $11 billion to the difference between the federal budget deficit and the NIPA deficit. Other factors driving a wedge between budget and NIPA deficit accounting include geographic adjustments (the exclusion of Puerto Rico, the Virgin Islands, and a few other areas from the national economic statistics) and timing adjustments (such as correcting for irregular numbers of benefit checks, paychecks, or Medicare payments to health maintenance organizations because of calendar quirks).

Another difference between the NIPA and the unified budget lies in their differing treatment of investment and capital consumption. The unified budget includes all expenditures of the federal government, including investment purchases such as buildings and aircraft carriers. The NIPA budget shows the current or operating account for the federal government; consequently, government investment is left out and government's consumption of fixed capital (depreciation) is included. (Government investment does not disappear but is classed along with private investment rather than in the government accounts.) That parallels the treatment of investment in and depreciation of private-sector assets in the NIPAs. CBO estimates that capital consumption will be $8 billion greater than new investment in 1998. By 2006, capital consumption is projected to be smaller than investment.

Sometimes the Bureau of Economic Analysis in the Department of Commerce reports actual NIPA expenditure or receipt totals that are larger or smaller than can be readily explained. The NIPA data for fiscal year 1997, calculated as the sum of quarterly data from October 1996 through September 1997, are an example. Even after the familiar adjustments--chiefly for netting and grossing, geographic exclusions, treatment of investment and depreciation, and lending and financial transactions--are made, both NIPA receipts and expenditures appear surprisingly high in 1997. That result is evidenced by the $19 billion in "other" revenue differences and the $15 billion in "other" outlay differences in Table D-1, items that are normally quite small. Because those two anomalies effectively cancel one another out, the NIPA deficit for fiscal year 1997 is not much different from what its normal relationship to the budget would imply. Those anomalies suggest that both NIPA receipts and expenditures may need to be revised downward by the Bureau of Economic Analysis. CBO does not assume in its 1998-2008 projections that the unusually large differences found in 1997 will persist.

In the early and mid-1980s, the NIPA deficit and the unified budget deficit generally paralleled each other, and the NIPA deficit was several billion dollars less than the unified budget's (see Figure D-1). During the late 1980s and early 1990s, the difference between the two fluctuated widely because of large swings in lending and financial exclusions. For example, sizable deposit insurance outlays in 1989 through 1991 significantly widened the gap between the NIPA and the unified budget deficit. Since 1992, when both deposit insurance spending and the unified deficit as a whole have been plummeting, the gap between the NIPA and unified measures has narrowed markedly. In 1998, the NIPA deficit is expected to be only $2 billion larger than the unified budget deficit. As projections of a small unified budget deficit give way to an increasing unified budget surplus beginning in 2001, the pattern of NIPA surpluses consistently outpaces the surpluses found in the unified budget.
 

Figure D-1. A Comparison of NIPA and Unified Budget Deficits (-) and Surpluses, Fiscal Years 1980-2008

SOURCES: Congressional Budget Office; Department of Commerce, Bureau of Economic Analysis.

NOTE: NIPA = national income and product accounts.

NIPA Receipts and Expenditures

The federal sector of the NIPAs generally classifies receipts according to their source and expenditures according to their purpose and destination (see Table D-2).
 

The leading source of receipts for the federal government in the 1998-2008 period is taxes and fees paid by individuals. Following that category are contributions (including premiums) for social insurance, such as Social Security, Medicare, unemployment insurance, and federal employees' retirement. Those two categories are expected to raise about $786 billion and $668 billion, respectively, in 1998. The remaining categories are accruals of taxes on corporate profits, including the earnings of the Federal Reserve System, and indirect business tax (chiefly excise taxes) and nontax accruals (chiefly fees).

Government expenditures are classified according to their purpose and destination. Defense and nondefense consumption of goods and services are purchases made by the government for immediate use. The largest share of current consumption is compensation of federal employees. Consumption of fixed government capital (depreciation) is the use the government gets from its fixed assets.

Transfer payments are cash payments made directly to people or foreign nations. Grants-in-aid are payments made by the federal government to state or local governments. They are then used by the states or localities for transfers (such as Medicaid), consumption (such as hiring additional police officers), or investment (such as highway construction).

Although both the unified budget and the NIPAs contain a category labeled "net interest," the NIPA figure is smaller. A variety of differences cause the two measures to diverge. The largest is the contrasting treatment of interest received on late payments of personal and business taxes. In the unified budget, both types of payments are counted on the revenue side, as individual income taxes and corporate income taxes, respectively. In the NIPAs, those differences appear as offsets to federal interest payments, thereby lowering net interest payments by $13 billion to $18 billion each year through 2008.

The category labeled "subsidies less current surplus of government enterprises" contains two components, as its name suggests. The first--subsidies--is defined as monetary grants paid by government to businesses, including state and local government enterprises. Subsidies are dominated by housing assistance, which accounts for approximately two-thirds of 1998 subsidy expenditures.

The second portion of the category is the current surplus of government enterprises. Government enterprises are certain business-type operations of the government--for example, the Postal Service. The operating costs of government enterprises are mostly covered by the sale of goods and services to the public rather than by tax receipts. The difference between sales and current operating expenses is the enterprise's surplus or deficit. Government enterprises should not be confused with government-sponsored enterprises (GSEs), private entities established and chartered by the federal government to perform specific financial functions, usually under the supervision of a government agency. Examples of GSEs include the Federal National Mortgage Association (Fannie Mae) and the Student Loan Marketing Association (Sallie Mae). As privately owned organizations, GSEs are not included in the budget or in the federal sector of the NIPAs.

A final category under expenditures is required reductions in discretionary spending (see Table D-2). That is not a category in the NIPAs; rather, it is an accounting for those policy changes that must be made in the future. The discretionary expenditures included in the NIPA categories reflect 1998 levels of spending, adjusted for inflation each year. The Balanced Budget Act of 1997 established statutory limits on total discretionary spending, forcing policymakers to reduce spending below those levels. The law requires unspecified savings of $16 billion in 1999 and increasing amounts thereafter. Those savings cannot be assigned to any particular NIPA category because policymakers can comply with the discretionary spending caps in any number of ways, but reductions are most likely to come from defense and nondefense consumption and grants to states and local governments.

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