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The Budget and Economic Outlook: Fiscal Years 2004-2013 January 2003 |
The major enforcement procedures that have governed federal budgeting for more than a decade--the annual limits on appropriations (discretionary spending) and the pay-as-you-go (PAYGO) requirement for new mandatory spending and revenue laws--expired on September 30, 2002. Originally enacted in the Budget Enforcement Act of 1990 (BEA), the procedures were devised as part of a broad political agreement reached in that year to reduce and then eliminate budget deficits. Initially set to expire in 1995, the procedures were extended twice--in 1993 and 1997--as part of two subsequent budget agreements also aimed at reducing and eliminating deficits. The discretionary spending limits and PAYGO requirement replaced the fixed deficit targets that were established by the Balanced Budget and Emergency Deficit Control Act of 1985 (known as the Gramm-Rudman-Hollings Act). The deficit targets imposed a rigid budgetary goal--eliminating deficits over a specified number of years--and set in place an automatic process, known as sequestration, to carry that out. However, the fixed targets were not linked to any political agreement on the policy changes needed to achieve them. Moreover, they were overtaken by the budgetary effects of lower-than-expected economic growth. In essence, the deficit targets were unrealistic. The BEA represented a different approach to budget discipline and control. The discretionary spending limits and PAYGO requirement applied only to new laws--those enacted after each of the three deficit-reduction agreements of the 1990s--and were intended to ensure that the net budgetary effects of those laws would not increase projected deficits (or lower projected surpluses). They did not call for additional changes in budget policies if economic or other changes unrelated to new laws caused the budget picture to worsen. During most of the period that the BEA procedures were in place, federal
fiscal fortunes improved significantly. Deficits declined steadily after
1992, and beginning in 1998, surpluses were recorded each year through
2001. The BEA framework contributed to that turnaround, but the effectiveness
of those procedures started to erode as surpluses began to emerge. From
1999 to 2002, annual appropriations exceeded the discretionary caps on
new budget authority and outlays set in 1997 by large amounts (see Figure A-1). Over the same period, new laws affecting direct spending and revenues were enacted with significant costs but without offsetting savings. Despite those trends, large surpluses continued to accumulate
because of the surge in tax revenues stemming mainly from robust economic
growth.(1) But in 2001,
the economy slowed significantly. The budgetary impact of that slowdown,
along with the impact of legislation enacted to respond to it and to the
terrorist attacks of September 11, 2001, among other factors, brought back
a deficit in 2002.
Ironically, the deficit returned just as the BEA procedures expired. Although the BEA was enacted as a temporary means of discipline, it became accepted by many as an effective framework, under the right conditions, for imposing long-term budgetary constraint. Yet despite the return to deficits, whether a consensus can be formed in the near future to resurrect that framework is unclear. Competing priorities, such as the costs of funding the war on terrorism, reviving the economy, and providing prescription drug coverage for the elderly, may make a consensus on fiscal discipline difficult to reach. So could the current outlook for the budget. Although the budget was in deficit for 2002, CBO's current projections show deficits declining after 2003 and small surpluses reemerging by 2007. Those projections, however, reflect current policies and the current economic forecast, both of which are almost certain to change. In addition to the many short-term pressures on the federal budget, the government's long-term fiscal condition is jeopardized by the increased health and retirement spending that will be required under current law for the baby-boom generation. The prospect of large budget deficits, both in the short term and the long term, suggests that some framework for budgetary discipline may be desirable. During the 108th Congress, lawmakers may consider making changes in
the budget process to improve budgetary discipline or achieve other goals.
This appendix reviews the provisions of the BEA that expired at the end
of fiscal year 2002, briefly summarizes the budget procedures that remain
in effect, evaluates the effectiveness of the BEA, and broadly outlines
some of the major options available to lawmakers for the budget process.
Overview of the Budget Enforcement Act and Expired and Expiring ProvisionsThe BEA built on an existing framework of budget enforcement procedures. The Balanced Budget and Emergency Deficit Control Act of 1985 established a schedule of fixed, declining deficit targets for every fiscal year beginning in 1986 and leading to a target of zero in 1991. The Deficit Control Act also created the procedure of sequestration to automatically cut spending for many federal programs if the deficit for a fiscal year was estimated to exceed the target level. A sequestration, if necessary, would be carried out by an executive order that the President would issue under the terms of a sequestration report from the Comptroller General of the United States, the head of the General Accounting Office. That report was to be based on a joint report by the Office of Management and Budget (OMB) and the Congressional Budget Office (CBO). In 1986, the Supreme Court held in Bowsher v. Synar that it was unconstitutional for the President's sequestration order, an executive action, to be determined by a report from the Comptroller General, an official accountable to the Congress.(2) Thus, the Deficit Control Act was modified to give OMB sole authority to prepare the estimates and calculations used to trigger a sequestration order. As part of that change, CBO was required to issue advisory sequestration reports. The 1987 revision to the law also revised the deficit targets and extended them through 1993.(3) Although deficits shrank somewhat in the late 1980s, they failed to meet the statutory targets--in some years by substantial margins (see Table A-1). The Deficit Control Act set targets, both original and revised, that were unrealistic in light of worsening economic conditions. Consequently, there was a strong incentive to adopt excessively optimistic economic assumptions in the estimates and calculations used to determine whether the deficit target for the year had been exceeded. For those reasons and others, actual deficits remained above the targets during the years that the law was in effect. The Budget Enforcement Act
The BEA established a budget enforcement framework that divided the budget into two parts. Discretionary spending, which is provided and controlled in appropriation acts, would be subject to annual aggregate limits on budget authority and outlays. Laws affecting mandatory spending and revenues would be covered by a PAYGO procedure to prevent those laws from increasing the deficit. A breach of the discretionary spending caps would lead to reductions only in discretionary programs, and a breach of the PAYGO control would trigger cuts only in certain mandatory programs. Although the Deficit Control Act's targets were retained, they essentially became moot because they were adjusted annually for changes in economic and technical factors and the budgetary effects of any new legislation were controlled by the sequestration procedure that enforced the discretionary spending limits and PAYGO requirement. Originally set to expire at the end of fiscal year 1995, the discretionary spending limits and PAYGO requirement were amended and extended twice, in 1993 and again in 1997, as a part of two subsequent multiyear deficit-reduction agreements. In each extension, the basic framework of the BEA was continued without major substantive changes. With the emergence of surpluses in 1998, some people asserted that the PAYGO requirement should be applied in a fiscal year only if new mandatory spending or tax laws were estimated to cause deficits to return. However, both OMB and CBO, with the concurrence of the House and Senate Budget Committees, continued to prepare PAYGO estimates and sequestration calculations without regard to estimates of the deficit or surplus for a particular fiscal year. The discretionary spending limits were set forth in section 251 of the Deficit Control Act (as amended by the BEA). In some years, the limits were further divided to apply to different categories--such as defense, international, and domestic spending. Under the law, estimated discretionary spending could not exceed the limit for each category. If OMB determined that it did, the President was required to cancel budgetary resources available for that category by the amount of the breach. Certain programs were exempt from a discretionary sequestration, but most programs in the breached category were faced with a uniform percentage reduction in spending.(4) Three times each year, OMB adjusted the limits, as directed in section 251. Adjustments were allowed for changes in concepts and definitions (such as reclassifying spending from one category to another); changes in inflation from the level assumed at the time that the caps were set (repealed as part of the 1997 extension of the caps); emergency requirements; and special allowances for certain types of spending, such as continuing disability reviews under the Social Security program and certain payments to the International Monetary Fund. The largest and most significant adjustment for the entire 1991-2002 period was for emergency spending. Under the BEA, the limits could be adjusted for the full amount of any appropriation designated by both the President and the Congress as an emergency requirement. Unlike most of the other specified adjustments to the discretionary spending limits, there was no limit on the amount of the adjustment that could be made for emergency appropriations. The PAYGO requirement (section 252 of the Deficit Control Act) generally stipulated that new mandatory spending or revenue laws enacted through fiscal year 2002 must be "budget neutral" (that is, not increase the deficit or reduce the surplus). OMB and CBO recorded the five-year budgetary effects of mandatory spending and revenue laws on a PAYGO scorecard.(5) (CBO's estimates were only advisory.) At the end of a Congressional session, OMB totaled the budgetary effects of laws enacted to date (as recorded on the scorecard). A positive balance on the PAYGO scorecard represented a net cost, whereas a negative balance signified net savings. If the balance was positive--caused an increase in the deficit or decrease in the surplus for that fiscal year--a PAYGO sequestration (an automatic reduction in mandatory spending) was required to offset the increase in the deficit or decrease in the surplus. However, nearly all mandatory spending was exempt from a PAYGO sequestration. Expired Provisions
For laws enacted after fiscal year 2002, the PAYGO requirement no longer applies.(6) Thus, CBO and OMB are no longer required to track the five-year budgetary effects of new mandatory spending and revenue laws for the purposes of PAYGO enforcement. For laws enacted through fiscal year 2002, the PAYGO enforcement mechanism exists through fiscal year 2006. However, Public Law 107-312, enacted on December 2, 2002, instructed OMB to change the existing PAYGO balances for all years to zero. That law eliminated the possibility of a sequestration of mandatory spending as a result of legislation enacted before the end of 2002. Certain Senate procedures generally linked to the discretionary spending
limits and PAYGO requirement also were scheduled to expire at the end of
fiscal year 2002. Specifically, in section 904 of the Congressional Budget
and Impoundment Control Act of 1974, the Senate established that 60 votes--instead
of a simple majority--would be required to waive certain budget points
of order under that law and the Deficit Control Act.(7)
Most of those requirements for a super majority were scheduled to expire
on September 30, 2002. However, on October 16, 2002, Senate Resolution
304 extended most of the waiver requirements through April 15, 2003 (see Box A-1).
Senate Resolution 304 also extended a point of order (and the accompanying
requirement for 60 votes for a waiver) that enforces a separate PAYGO requirement
in the Senate.(8) That
point of order is set forth in section 207 of the 2000 budget resolution
(House Con. Res. 68, 106th Congress). It is intended to prohibit the Senate
from considering any new direct spending or tax measures that would cause
or increase an on-budget deficit (that is, a deficit excluding the Social
Security trust funds and net outlays of the Postal Service) over a 10-year
period that begins with the first year covered by the most recently adopted
budget resolution.
Evaluating the BEAThrough the mid-1990s, when consensus remained to rein in deficits, the BEA appeared to curb the growth in both discretionary and mandatory spending. In nominal terms, total discretionary budget authority was $35 billion lower in 1997 than in 1991, although total discretionary outlays were $14 billion higher (see Table A-2). Those figures, however, mask substantial programmatic shifts (that were aided by the end of the Cold War) from national defense to nondefense programs. In 1997, both defense budget authority and outlays were well below the amounts recorded in 1991; that budget authority had dropped by $66 billion, and outlays had declined by $48 billion. Over the period, nondefense budget authority increased by $31 billion and nondefense outlays jumped by $62 billion. Between 1991 and 1997, most new revenue and mandatory spending laws that were enacted were consistent with the PAYGO requirement to be deficit neutral; end-of-session balances on the PAYGO scorecard consistently showed zero or net reductions in the deficit. |
In 1997, lawmakers extended both the discretionary spending limits and the PAYGO provisions of the BEA as part of an agreement to eliminate the deficit by 2002. But that goal was reached in the very next year, as the government recorded its first surplus in nearly 30 years. That surplus eliminated the essential purpose of the BEA--to combat and control deficits. In this new fiscal landscape, with projections showing mounting surpluses for the coming decade, the BEA could not restrain the pressures to spend more. To comply with the letter of the law while boosting discretionary spending
above the statutory limits, lawmakers used a number of approaches--including
advance appropriations, delays in making obligations and payments, emergency
designations, and specific directives. For example, in 1999 and 2000, lawmakers
enacted emergency appropriations totaling $34 billion and $44 billion,
respectively--far above the annual average for such spending from 1991
to 1998 (see Figure A-2). Comparable amounts
were enacted for 2001 and 2002 mainly in response to the terrorist attacks
of September 11, 2001. During the first six years of the BEA (1991 through
1997), emergency appropriations totaled $52 billion; during the four years
following the 1998 surplus, emergency appropriations totaled more than
three times that amount.
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To accommodate increased nonemergency spending for 2001, lawmakers increased the caps on budget authority and outlays by $99 billion and $59 billion, respectively. The following year, they increased the limits on budget authority and outlays by even larger amounts--$134 billion and $133 billion, respectively. From 1998 through 2002, total discretionary appropriations grew at an average annual rate of 8.5 percent; by comparison, from 1991 through 1997 such spending declined at an average annual rate of 1.1 percent. Similarly, after the emergence of surpluses, lawmakers enacted legislation to increase mandatory spending or reduce revenues but used legislative directives to statutorily comply with the PAYGO requirement. Thus, for 2001 and later years, lawmakers eliminated more than $700 billion in positive balances--that is, amounts that would have triggered a PAYGO sequestration--from the scorecard (see Table A-3). Most of that amount stemmed from the estimated drop in revenues attributed to the Economic Growth and Tax Relief Reconciliation Act of 2001. By contrast, during the earlier years of the BEA, the balances on the scorecard were zero or negative, and lawmakers statutorily removed negative balances so that those savings could not be used to offset the costs of new mandatory spending or revenue legislation. |
During the 12 years that the threat of a discretionary sequestration was present, sequestrations were ordered only twice, both in 1991 (the first year that the spending limits were in effect) and both for relatively insignificant amounts. One of the sequestrations was rescinded by subsequent law; the second led to estimated savings of $1.4 million (discretionary spending totaled $533 billion in 1991). For laws affecting mandatory spending or revenues, a PAYGO sequestration has never been triggered. Interpreting the absence of large sequestrations over the BEA's history
is difficult. In some years, especially 1991 to 1997, perhaps the threat
of sequestration served as an effective deterrent to legislation that would
have violated the spending limits or PAYGO requirement. More recently,
the absence of sequestrations may simply reflect the lack of consensus
among lawmakers to guard the bottom line of the budget. With the emergence
of large surpluses came the willingness to enact legislation to increase
the caps substantially or eliminate the positive PAYGO balances. The lack
of sequestrations may also have reflected shifting priorities; for example,
legislative efforts aimed at fighting the war on terrorism or reviving
the economy may have been deemed more important than avoiding a return
to budget deficits. In a sense, that change in priorities may confirm a
premise underlying the BEA--that a budget enforcement framework works best
when there is a firm consensus on the fiscal goal or goals to be achieved
and the policy changes needed to achieve them.
OptionsAs lawmakers consider whether or how to change the budget process, the choices they face divide broadly into three categories:
Maintain the Status Quo
In general, the federal budget process is an amalgam of procedures that lawmakers and public officials use to establish, control, and account for spending and revenue policies. The budget process includes preparation of the President's budget by the executive branch, the Congressional budget process (centered on a Congressional budget resolution and, in some years, on reconciliation legislation), the authorization and appropriation process, execution of budget law (including impoundment control, a procedure under the Congressional Budget Act for deferring or rescinding appropriated funds), and financial management rules. Those fundamental procedures and practices, grounded in permanent statutes, Congressional rules, agencies' regulations, and longstanding practice, do not expire. Under the Budget and Accounting Act of 1921, the President submits his budget on the first Monday in February. Under the Congressional Budget Act, the Congress's first major action is to adopt the annual budget resolution, which does not become law. The budget resolution is scheduled to be adopted by April 15. It is usually completed after that date, in some years by substantial margins, because final agreement on a Congressional budget plan often is difficult to reach. The budget resolution serves as a blueprint for Congressional action on separate pieces of revenue and spending legislation. In addition, the resolution's aggregate levels of revenues and spending, and spending allocations made to Congressional committees are enforced by points of order that Members of Congress may raise against individual revenue or spending bills as they are considered by the House or Senate. In general, if a point of order brought under the Congressional Budget Act is sustained (or is not waived), the offending legislation may not be considered further. The budget resolution may also instruct Congressional committees to produce reconciliation legislation that conforms permanent revenue or spending laws within their jurisdiction to the levels set forth in the resolution. The existing budget process, based on the President's budget and the Congressional budget resolution, provides the means for lawmakers to establish and enforce major changes in budget policies. The process has served as a conduit for major policy initiatives and multiyear deficit-reduction agreements, which typically have been put in place in legislation developed to carry out reconciliation directives in budget resolutions. However, when consensus on such policies has not emerged, the process has stalled. To wit, the Congress was unable to reach final agreement on the budget resolutions for fiscal years 1999 and 2003, and action on appropriation bills for those years was delayed. Whether or not the BEA framework (or something like it) is renewed, political agreement on the budget is probably the largest single factor in ensuring that the budget process functions smoothly. Reinstate and Adjust the Structure Established by the Budget Enforcement Act
Despite recent experience, the underlying philosophy of the BEA--that appropriations should be enacted within enforceable limits and that the estimated costs of new tax and mandatory spending legislation should generally be budget neutral--proved to be effective in the 1990s when deficits existed and appeared likely to continue or grow. In essence, the political consensus to reduce those deficits helped the BEA framework to succeed. As lawmakers consider whether or how to reinstate those procedures, they may want to examine how the previous process could be improved. Some issues include the following:
Make Major Changes in the Budget Process
ConclusionThe imperative to reduce and control deficits, seen as a crisis, prompted
lawmakers to fashion the BEA framework of budget constraints. While the
BEA contributed to liquidating chronic deficits, the effectiveness of those
constraints was mixed. The surpluses, though short-lived, eliminated the
consensus that had formed to deal with the nation's financial exigency
and thereby undermined the BEA. Now, the reemergence of deficits comes
as the nation attends to the war on terrorism and to reviving economic
growth, taking the focus away from long-term control of deficits. At the
same time, fiscal pressures linked to the aging of the baby-boom generation
are looming, and pressures to increase spending and reduce taxes are substantial.
A review of the budget process might be desirable in order to ensure an
appropriate framework for the important policy decisions that lie ahead.
Moreover, a political consensus on those policies appears to be the most
important factor in ensuring that the budget process--however it is constructed--functions smoothly.
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