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Appropriations enacted by the Congress have not exceeded the limits on discretionary spending for fiscal year 1997 or 1998. Moreover, legislation dealing with direct spending or receipts has not increased the fiscal year 1998 deficit. As a result, the Congressional Budget Office (CBO) estimates that neither a discretionary spending nor a pay-as-you-go sequestration is required in fiscal year 1998. (CBO's estimates are merely advisory, however. The Office of Management and Budget makes the final determination about any sequestration.)
 

BACKGROUND

Sequestration--the cancellation of budgetary resources--is an automatic procedure to control discretionary appropriations and legislative changes in direct (mandatory) spending and receipts.⁽¹⁾ The Congress and the President can avoid a discretionary sequestration by keeping discretionary spending within established statutory limits, and a pay-as-you-go sequestration by making sure that the cumulative effect of direct spending and receipt legislation is deficit neutral in each fiscal year.

Federal law requires CBO each year to issue a sequestration preview report five days before the President submits a budget, a sequestration update report on August 15, and a final sequestration report 10 days after a session of Congress ends. Each sequestration report must contain estimates of the following items:

• The current limits on discretionary spending and any adjustments to them; and
  
  
• The amount by which legislation enacted since the Budget Enforcement Act of 1997 that affects direct spending or receipts has increased or decreased the deficit, as well as the amount of any required pay-as-you-go sequestration.

The final sequestration report must also include the amount of discretionary new budget authority for that fiscal year, estimated total outlays, and the amount of any required discretionary sequestration.

This final sequestration report to the Congress and the Office of Management and Budget (OMB) provides the required information.
 

DISCRETIONARY SEQUESTRATION REPORT

The Budget Enforcement Act of 1990 (BEA-90) established discretionary spending limits for fiscal years 1991 through 1995 and provided for across-the-board cuts--known as sequestration--should annual appropriations breach the limits. BEA-90 also included specific instructions for adjusting those spending caps. The Omnibus Budget Reconciliation Act of 1993 (OBRA-93) set limits on total discretionary budget authority and outlays for fiscal years 1996 through 1998 and extended the existing enforcement procedures, including the cap adjustments, for that period. Spending from the Violent Crime Reduction Trust Fund (VCRTF) was excluded from the caps by the Violent Crime Control and Law Enforcement Act of 1994, which created the trust fund. That act established separate limits through 1998 on VCRTF spending and lowered the discretionary caps each year by that amount.

The Budget Enforcement Act of 1997 (BEA-97), title X of the Balanced Budget Act of 1997, sets discretionary spending limits for fiscal years 1997 through 2002 and extends the existing enforcement procedures, but with some modifications. Those modifications create additional categories of discretionary spending that will be subject to sequestration after fiscal year 1997 and redefine the required adjustments to the caps. For fiscal years 1998 and 1999, the law splits discretionary spending into three categories: defense, nondefense, and VCRTF spending. For fiscal year 2000, it combines defense and nondefense spending into a single discretionary category, while retaining the violent crime reduction category. For fiscal years 2001 and 2002, the law folds all three into one discretionary category, so the limits apply to total discretionary spending.

BEA-97 also makes various changes to the instructions for adjusting those spending limits. It subjects the violent crime reduction category to adjustment for the first time (previously, caps on VCRTF spending were immutable). It eliminates the adjustment for differences between earlier estimates of future inflation and more recent estimates, and for technical differences between OMB's and CBO's estimates of enacted budget authority. BEA-97 also reinstates an adjustment for quota payments to the International Monetary Fund, and it allows the discretionary caps to be raised to cover U.S. payment of arrearages to international organizations (such as the United Nations) and the cost of ensuring compliance with the earned income tax credit (EITC). Those new adjustments--like the existing adjustments for emergency appropriations and for spending by the Social Security Administration on continuing disability reviews--are made after budget authority for the specified purposes has been provided in appropriation acts.

Discretionary Spending Limits for Fiscal Year 1997

According to the new Budget Enforcement Act, the limits that apply to discretionary budget authority and outlays for 1997 are the current adjusted caps. OMB's estimates of those caps are the ones that determine whether enacted appropriations fall within the limits or whether a sequestration is required to eliminate a breach of them. (CBO's estimates are merely advisory.) Thus, CBO uses the estimates in OMB's most recent sequestration update report--which was published with the President's midsession budget review in September--as the starting point for the adjustments it is required to make in this final sequestration report. The limits on VCRTF budget authority and outlays do not require any adjustment, so the amounts shown here are the same as those in CBO's sequestration update report from August.

CBO's new estimates of the general-purpose discretionary spending limits for 1997 (shown in Table 1) differ from the ones in its August report solely because of technical differences that result when CBO adopts the OMB estimates as its starting point. The adjustment in budget authority is necessary because CBO included in its previous report $30 million in contingent emergency appropriations for the National Park Service that the President had not released. (As a rule, CBO's estimates include such appropriations since no further action by the Congress is necessary to make the funds available. OMB, however, only includes contingent emergency appropriations actually released by the President.) The $1,755 million adjustment in outlays largely reflects differences in estimates of how quickly emergency appropriations will be spent. On average, OMB assumes that emergency funds will be spent more rapidly than CBO does. The largest differences relate to military spending ($1,011 million) and disaster relief spending ($508 million).
 

Total discretionary new budget authority and total discretionary outlays for fiscal year 1997 fell well below their respective limits (see Table 2). Section 251(a)(5) of the Balanced Budget and Emergency Deficit Control Act provides that if appropriations for the current year enacted after June 30 cause that year's spending limits to be breached, the limits for the following year are reduced by the amount of the breach. Because both general-purpose and VCRTF discretionary spending were below the caps for fiscal year 1997, no adjustments to the spending limits for 1998 are necessary.
 

Discretionary Spending Limits for Fiscal Years 1998-2002

CBO's new estimates of the limits on discretionary spending after 1997 (shown in Table 3) differ from those in its August update report for three reasons. First, CBO adjusted the caps to reflect technical differences between the spending limits in its update report and those in OMB's update report. Second, it increased the limits to account for emergency funds enacted or made available since OMB issued its update report. Third, it adjusted the caps to allow for increased spending for continuing disability reviews in the Social Security program, U.S. payment of arrearages to international organizations, and EITC compliance initiatives.
 

CBO's August estimates of the limits on budget authority differed from those in OMB's subsequent report only for fiscal year 1998. That $16 million difference in the nondefense discretionary category stems from different treatment by CBO and OMB of a reappropriation for the Customs Service. CBO scored the reappropriation as an emergency measure because it extended the life of the original emergency measure. OMB scored the reappropriation as regular discretionary spending, which did not require an adjustment to the cap.

For the limits on outlays, technical differences between the estimates in the two update reports follow from the aforementioned differences between CBO and OMB in estimating how quickly emergency appropriations will be spent. Adopting the caps in OMB's update report caused CBO to lower its estimates of the caps for the defense category and increase them for the nondefense category. The adjustment is positive for the nondefense category because CBO estimates that spending from emergency appropriations for the Federal Emergency Management Agency's Disaster Relief program will not occur until fiscal year 1999, whereas OMB expects that account to disburse $1.3 billion from the new appropriation in fiscal year 1998.

Emergency spending enacted in the regular 1998 appropriation bills raises that year's limit on nondefense budget authority by $307 million. The outlays resulting from that authority raise the nondefense outlay cap by $79 million for 1998 and $227 million for 1999 and the overall discretionary outlay cap by $1 million for 2000. (The nondefense and defense discretionary categories are folded into the overall discretionary category after fiscal year 1999.)

Of the $307 million in emergency appropriations, $300 million for the Low Income Home Energy Assistance Program is available contingent on its release by the President. As discussed above, CBO includes such contingent emergency appropriations in its cap adjustments, but OMB does not unless they have already been released by the President. Thus, when CBO adopts OMB's estimates of the spending limits, it must adjust them for subsequently released contingent appropriations. The only such appropriation released since OMB's September update report was for construction of an emergency outlet for Devils Lake, North Dakota. It increases the nondefense budget authority limit by $5 million for 1998 and the outlay limits by $3 million for 1998 and $2 million for 1999.

Appropriations for continuing disability reviews, arrearages to international organizations, and EITC compliance initiatives require an increase of $888 million in the nondefense budget authority limit for 1998. Outlays from that authority are estimated to total $522 million in 1998, $64 million in 1999, $68 million in 2000, and smaller amounts thereafter. The 1998 and 1999 outlays increase the nondefense discretionary outlay limits; outlays after 1999 increase the overall discretionary limits. (Further details on those adjustments, required by section 251(b)(2) of the Balanced Budget and Emergency Deficit Control Act, are found in Table 3.)

CBO estimates that Congressional action on 1998 appropriation bills falls within the statutory limits. As shown in Table 4, both defense and violent crime reduction spending are extremely close to their budget authority and outlay limits. Nondefense discretionary spending, by contrast, is $1 billion lower than its budget authority cap and almost $400 million lower than its outlay cap.
 

The estimates in Table 4 of enacted discretionary spending and the limits on that spending do not include the effects of the President's use of his cancellation authority under the Line Item Veto Act. CBO did not adjust its estimates for those effects because the time allowed by the Line Item Veto Act for the Congress to pass disapproval bills has not yet elapsed for any of the canceled items. Should the Congress and the President fail to enact disapproval bills within that time limit to restore a canceled amount, both the estimates of the bills and the discretionary spending caps would be reduced in later discretionary sequestration reports by the estimated effect of the cancellations.
 

PAY-AS-YOU-GO SEQUESTRATION REPORT

The Budget Enforcement Act of 1990 established the pay-as-you-go (PAYGO) sequestration mechanism to ensure that any legislative changes in direct spending or receipts enacted after that act would not increase the combined deficits of the current fiscal year and the budget year. If legislative changes during a session of Congress did increase that measure of the deficit (or reduce a projected surplus), a pay-as-you-go sequestration would be required at the end of the session. Under the sequestration, mandatory programs (other than those specifically exempt) would be cut by enough to eliminate the increase. The pay-as-you-go provisions of BEA-90 applied through fiscal year 1995; OBRA-93 extended them through 1998.

The Budget Enforcement Act of 1997 extends PAYGO discipline to legislation enacted through 2002, but it applies the sequestration procedure through 2006 to eliminate any deficit increase (including a reduction in any projected surplus) that might result from legislation enacted before 2003. Previously, PAYGO only ensured that legislation enacted before the end of fiscal year 1998 would not increase the deficit through that year. Now, the PAYGO scorecard must take into account the effects in the current year, the budget year, and the following four years of legislation enacted before the end of 2002. In other words, although legislation enacted between 2003 and 2006 is not subject to PAYGO discipline, the estimated effects of legislation enacted before then will be recorded on the PAYGO scorecard for any year through 2006 covered by the estimate. If a cumulative increase in the deficit is projected for any of those years, it will trigger a sequestration in that year.

The second PAYGO change that BEA-97 makes is to include the current year's deficit effects in the sequestration calculation only to the extent that they were not included in OMB's final sequestration report for that year. Previous law included the entire current year's effects, which resulted in double-counting. (For example, the impacts in 1996, which were recorded as budget year effects in the final sequestration report for fiscal year 1996, became the current year effects in the following winter's sequestration preview report for fiscal year 1997.) Eliminating that double-counting means that an increase in mandatory spending or a decrease in receipts during a budget year must largely be offset in that same year by either the provisions of other legislation or the effects of a previous sequestration instead of by current year balances.

Both CBO and OMB are required to estimate the net change in the deficit resulting from direct spending or receipt legislation. As with the discretionary spending limits, however, OMB's estimates determine whether a sequestration is necessary. CBO has therefore adopted the estimates of changes in the deficit from OMB's September update report as the starting point for this report. In September, OMB estimated that no PAYGO balance exists for any year between 1997 and 2002. (That estimate includes all adjustments required by law, in addition to the effect of all enacted legislation. BEA-97 required an adjustment to eliminate existing PAYGO balances, effectively beginning the PAYGO scorecard anew. OMB's estimate includes that adjustment and the effect of several bills that had no net PAYGO effect.)

Legislation enacted since OMB's September report reduced the 1998 deficit by $165 million but increased it for every year after that (see Table 5). Those figures include the effect of a provision dealing with receipts (contained in the Treasury, Postal Service, and General Government appropriation bill for 1998) that the President canceled through line-item veto. CBO includes that legislation on the PAYGO scorecard because it believes that revenue provisions in appropriation bills are enforced under PAYGO, and the Line Item Veto Act does not provide for adjusting the PAYGO scorecard for the effects of cancellations. Although a sequestration will not be required for 1998, one will be needed in 1999 unless direct spending or receipt legislation enacted next session reduces the combined 1998 and 1999 deficit by a total of $71 million.
 

1. Current sequestration procedures were established by the Budget Enforcement Act of 1990, which amended the Balanced Budget and Emergency Deficit Control Act of 1985 and the Congressional Budget and Impoundment Control Act of 1974. The Omnibus Budget Reconciliation Act of 1993 extended the application of those procedures through 1998. The Budget Enforcement Act of 1997 further extended them, with modifications, through 2002 (or in some cases 2006).