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Federal fiscal programs.

Federal Fiscal Programs

THE fiscal year 1992 budget is consistent with the 5-year deficit reductions enacted in the Omnibus Budget Reconciliation Act of 1990.(1) The budget recommends discretionary spending levels that are within the statutory caps of the act for defense, international, and domestic spending. It implements the savings and reforms for entitlement programs as provided in the act, and it conforms to the "pay-as-you-go" requirements; that is, any new proposals to reduce taxes or increase spending must be offset so that the effect on the deficit is neutral. The budget holds the rate of growth in total spending to 2.6 percent, well below projected inflation.

The Omnibus Budget Reconciliation Act of 1990 includes several provisions to increase receipts in 1992: Limiting itemized deductions, phasing out the personal exemption as a taxpayer's adjusted gross income exceeds threshold amounts, and increasing excise taxes on alcohol, tobacco, and gasoline. In addition, the budget proposes to increase receipts by lowering the tax rate on capital gains (thereby increasing individual income taxes in the short run as taxpayers realize more capital gains) and by extending coverage of medicare hospital insurance to all State and local government employees.

The budget shows national defense outlays declining 1.2 percent in 1992. (In real terms, according to the administration, national defense outlays decline 5.3 percent.) Outlays for the procurement of military hardware decline 6.1 percent in 1992, compared with a 2.3-percent decline in 1991. The largest increase - 6.5 percent - is for research, development, test, and evaluation. Nondefense outlays increase 3.6 percent in 1992. (In real terms, non-defense outlays decline 0.5 percent.) Proposed policy changes in mandatory programs, such as medicare, and a "flexible freeze" hold down the increase in spending.

Economic assumptions

After almost 8 years of expansion, the economy entered a recession in the fourth quarter of 1990. According to the Economic Report of the President, "The downturn was caused in large part by the economic effects of Iraq's invasion of Kuwait. That caused a jump in oil prices and directly reduced business and consumer confidence."(2) These factors, along with the uncertainty about the resolution of the Persian Gulf crisis, "dealt a substantial blow to an economy already sluggish from other factors." The other factors included rising interest rates, tight credit conditions, and the other effects of a tight monetary policy that was undertaken in early 1988 in "a successful attempt to prevent an increase in inflation."

The Council of Economic Advisers, in describing the outlook for 1991 in the Economic Report, noted that the downturn is not expected to last long and that a recovery will start by the middle of 1991. The Council also stated that the administration's economic policies "are designed both to mitigate the current downturn and to strengthen the foundations for a solid recovery and a return to sustained economic growth." The administration believes that several factors point to a short downturn and an early recovery. First, business inventories are low relative to sales, indicating "that a prolonged period of inventory liquidation is not likely in the short term." Second, in the early stage of previous recessions both interest rates and inflation were either high or rising; in the current downturn, the core inflation is moderating and is lower than in the 1974-75 and 1981-82 recessions. Third, the established credibility of the Federal Reserve's policy to fight inflation allows room for the Federal Reserve to soften the downturn without raising expectations of higher inflation. Fourth, the outlook for export growth continues to be strong as major trading partners are expected to experience stronger growth than the United States. Fifth, declining interest rates will have positive effects on investment and consumer spending in the second half of 1991. According to the Council, a successful resolution to the Persian Gulf crisis is a major ingredient to the recovery.

Real GNP is forecast to increase 0.9 percent from the fourth quarter of 1990 to the fourth quarter of 1991 and 3.6 percent from the fourth quarter of 1991 to the fourth quarter of 1992 (table 1). The rate of inflation is expected to moderate slightly in 1991: The GNP implicit price deflator is forecast to increase 4.3 percent (fourth quarter to fourth quarter) after increasing 4.5 percent in 1990. The Council states that the "economic slowdown in 1990 created excess capacity in many industries and eased tightness in labor markets, which will contribute to downward pressure on underlying inflation during the year." The unemployment rate is expected to increase to 6.6 percent by the fourth quarter of 1991, and the interest rate for 91-day Treasury bills is expected to decline to 6.4 percent.

For 1991, the Council based their forecast of the increase in real GNP (fourth quarter to fourth quarter) on the following assessment. Personal consumption expenditures - paced by consumer durables - are expected to increase 0.5 percent. Nonresidential fixed investment is expected to increase 1.6 percent as business spending on new plant and equipment improves through the year. Residential investment is expected to increase 1.5 percent, in contrast to an 8.7-percent decline in 1990. According to the Council, exports of manufactured goods and farm commodities are expected to increase and the higher export growth of manufactured goods will further stimulate spending on new plant and equipment. Federal Government purchases of goods and services are expected to decline 3.9 percent, in contrast to a 5.5-percent increase in 1990. State and local government purchases are expected to increase 1.8 percent, down from a 2.5-percent increase in 1990.

Table : Table 1. - Economic Assumptions Underlying the Fiscal Year 1992 Budget
 Calendar year
 Actu- Estimates
 al
 1989 1990 1991 1992
 Billions of dollars


GNP:
 Current dollars 5,201 5,465 5,689 6,095
 1982 dollars 4,118 4,152 4,140 4,267


Incomes:

 Personal income 4,384 4,644 4,856 5,182
 Wages and salaries 2,573 2,700 2,802 3,006
 Corporate profits before taxes 308 300 294 335
 Percent change from preceding
 year


GNP in current dollars:
 Annual average 6.7 5.1 4.1 7.1
 Fourth quarter 5.6 4.5 5.3 7.5


GNP in 1982 dollars:
 Annual average 2.5 .8 -.3 3.1
 Fourth quarter 1.8 .9 3.6


GNP implicit price deflator:
 Annual average 4.1 4.2 4.4 3.9
 Fourth quarter 3.7 4.5 4.3 3.8


Consumer Price Index:(1)
 Annual average 4.8 5.3 5.2 4.0
 Fourth quarter 4.5 6.3 4.3 3.9
 Percent


Unemployment rate:(2)
 Annual average 5.2 5.4 6.7 6.6
 Fourth quarter 5.3 5.8 6.6 6.5


Interest rate:(3)
 91 -day Treasury bills 8.1 7.5 6.4 6.0
 1 -year Treasury notes 8.5 8.5 7.5 7.2


(1.) Consumer Price Index for urban wage earners and clerical workers. (2.) Percent of labor force, including armed forces residing in the United States. (3.) Average rate on new issues within a year. The estimates assume, by convention, that interest rates vary with the rate of inflation. Source: The Budget of the United States Government, Fiscal Year 1992.

Current services estimates

Current services estimates show what receipts and outlays would be without policy change. In concept, these estimates are neither recommended amounts nor forecasts; they are bases with which administration or congressional proposals can be compared. The current services estimates conform to the limits on discretionary spending and the requirement that direct spending and receipts proposals be deficit neutral as provided in the Omnibus Budget Reconciliation Act of 1990. The estimates are based on the same economic assumptions as those underlying the budget.

Budget receipts in 1992 are $2.7 billion higher than current services receipts, reflecting the administration's proposals to increase receipts, as previously mentioned (table 2). Budget outlays are $1.3 billion lower than current services outlays; proposed program reduction ($6.3 billion) exceed proposed program increases ($5.0 billion). The largest proposed program increase - $4.6 billion - is for Operation Desert Storm, and the largest proposed program reduction - $2.9 billion - is for a variety of medicare reforms.

Table : Table 2. - Relation of Current Services Estimates to the budget
 [Billions of dollars]
 Fiscal year
 1991 1992
 Receipts
Current services estimate 1,091.1 1,162.3


Plus: Proposed legislation:
 Reduce the capital gains tax .4 3.0
 Other -.3
Equals: The budget 1,091.4 1,165.0
 Outlays
Current services estimates 1,401.4 1,447.2


Plus: Proposed program increases:
 National defense 8.2 4.6
 Operation Desert Storm allowance 23.2 4.6
 Defense cooperation account -15.0
 Other .1 .4


Proposed program reductions:
 Medicare -2.9
 Naval petroleum reserve -1.2
 Other -.1 -2.2
Equals: The budget 1,409.6 1,445.9


The budget estimates

The budget deficit decreases $37.2 billion in fiscal year 1992, from $318.1 billion in fiscal year 1991 to $280.9 billion (table 3 and chart 4). Of this decrease, $25.4 billion is the result of a decline in the current services budget deficit, and $11.8 billion is the result of the administration's deficit-reduction proposals.

Table : Table 3. - Federal Government Receipts and Expenditures
 [Billions of dollars]
 Fiscal year
 Actual Estimates
 1990 1991 1992
 Budget
Receipts 1,031.3 1,091.4 1,165.0
Outlays 1,251.7 1,409.6 1,445.9
 Surplus or deficit (-) -220.4 -318.1 -280.9


National income and product
 accounts
Receipts 1,094.9 1,148.1 1,237.4
Expenditures 1,252.7 1,351.5 1,418.6
 Surplus or deficit (-) -157.7 -203.3 -181.2


Cyclically adjusted surplus or

deficit (-) -175.8 -168.3 -152.1

Receipts increase $73.6 billion - or 6.7 percent - in 1992, to $1,165.0 billion. Receipts in 1991 are $1,091.4 billion, up 5.8 percent from 1990. Administration proposals for tax legislation have only a minor effect on receipts, increasing them $2.3 billion in 1992: Receipts are raised $2.6 billion by lowering the capital gains tax and $1.1 billion by extending medicare hospital insurance to all State and local government employees; receipts are lowered $0.8 billion by extending the research and experimentation credit and allocation rules and $0.3 billion by allowing for the establishment of family savings accounts.

Outlays increase $36.3 billion - or 2.6 percent - in 1992, to $1,445.9 billion. Outlays in 1991 are $1,409.6 billion, up 12.6 percent. The 1992 increase is the net result of $42.3 billion in increases and $6.0 billion in decreases. Table 4 shows budget outlays by function: Four functions - social security, net interest, income security, and medicare - more than account for the increase in total outlays; all other functions, on balance, decline. The largest increase - $19.6 billion - is for social security and includes $10.5 billion for a 5.2 percent cost-of-living adjustment, effective January 1, 1992. The largest decline - $26.7 billion - is for commerce and housing; it is mainly due to declines in spending by the Resolution Trust Corporation.(3) National defense spending declines $3.7 billion because of reduced spending for Operation Desert Storm. [Tabular Data Omitted]

Federal sector

BEA has prepared estimates of the Federal sector on the national income and product accounts (NIPA) basis that are consistent with the budget estimates. Estimates of the Federal sector, which are integrated conceptually and statistically with the rest of the NIPA's, differ in several respects from the budget estimates; unlike the budget estimates, these estimates exclude financial transactions, such as loans, and they record several categories of receipts and expenditures on a timing basis different from that of the budget. (For a more detailed discussion of the differences, see Government Transactions, NIPA Methodology Paper Series MP-5; order information appears on the inside back cover of this issue.) Table 5 shows the relation between budget receipts and NIPA receipts, and table 6 shows the relation between budget outlays and NIPA expenditures.<4> Table 5. - Relation of Federal Government Receipts in the National Income and Product Accounts to the Budget
 [Billions of dollars]
 Fiscal year
 1990 1991 1992
Budget receipts 1,031.3 1,091.4 1,165.0
Less: Coverage differences 2.0 2.2 2.3


Plus: Netting differences:

Contributions to government
 employees retirement funds 44.5 48.4 52.0
 Other 19.1 20.5 21.6


Timing differences:

Corporate income tax -2.8 -4.5 -1.3

Federal and State

unemployment insurance

taxes .1 .1 .3

Withheld personal income tax

and social security
 contributions 5.0 -6.3 1.5
 Excise taxes -.2 .6 .5


Other

Miscellaneous

Equals: Federal Government receipts,

NIPA's 1,094.9 1,148.1 1,237.4

Table : Table 6. - Relation of Federal Government Expenditures in the National Income and Product Accounts to the Budget
 [Billions of dollars]
 Fiscal year
 1990 1991 1992
Budget outlays 1,251.7 1,409.6 1,445.9


Less: Coverage differences:
 Geographic 6.2 6.8 7.1
 Other .2 .3 .4


Financial transactions:
 Net lending 7.2 9.5 10.6
 Deposit insurance 61.8 112.3 85.9
 Other -4.2 -2.5 -1.8


Net purchases of land:
 Outer Continental Shelf -.7 -1.1 -1.7
 Other .4 .4 .4


Plus: Netting differences:

Contributions government
 employees retirement funds 44.5 48.4 52.0
 Other 19.1 20.5 21.6


Timing differences:
 National defense purchases 5.3 -.9 -.4
 Other 2.8 -.4 .2
 Miscellaneous .1 .2 .1


Equals: Federal Government expenditures, NIPA's 1,252.7

1,351.5 1,418.6

Federal receipts on the NIPA basis increase $89.3 billion, to $1,237.4 billion, in fiscal year 1992 (chart 5). The 1992 increase is the result of a $69.8 billion increase due to higher tax bases and a $19.5 billion increase due to tax changes (table 7). The increase due to tax changes is largely accounted for by social security rate and base increases and by the Omnibus Budget Reconciliation Act of 1990; proposed tax legislation has only a small impact on 1992 receipts. [Tabular Data Omitted]

Federal expenditures on the NIPA basis increase $67.1 billion, to $1,418.6 billion, in 1992 (charts 6 and 7). Table 8 highlights the major factors that contribute to recent changes in Federal expenditures. Expenditures for Operation Desert Storm have a significant impact on the change in expenditures for both 1991 and 1992. The budget estimates include an allowance for the operation of $23.2 billion in 1991 and $4.6 billion in 1992; the estimates for 1991 also include an offsetting receipt of $15.0 billion reflecting contributions from various allies in the operation. In the NIPA's, the allowance is included in defense purchases, and the contributions are included as negative transfer payments to foreigners.

Table : Table 8. - Sources of Change in Federal Government Expenditures, NIPA Basis
 [Billions of dollars]
 Fiscal year
 1990 1991 1992
Total expenditures 80.5 98.8 67.1
 Purchases of goods and services 17.1 32.8 -10.0
 Operation Desert Storm allowance 23.2 -18.6
 Military hardware -1.1 -4.2 -3.7
 Pay raises(1) 3.4 5.4 5.3
 National defense 2.4 3.6 3.4
 Nondefense 1.1 1.8 1.9
 Commodity Credit Corporation 1.9 1.7 1.0


National Aeronautics and Space
 Administration 1.3 1.2 1.2
 Other 11.6 5.5 4.8
 National defense 6.5 -4.1 -.4
 Nondefense 5.1 9.6 5.2
 Transfer payments 42.7 31.7 54.5
 Social security 15.9 19.3 19.3
 Medicare 12.7 6.3 10.5
 Military and civilian pensions 3.2 4.0 3.1
 Unemployment benefits 3.1 7.7 .1
 Food stamps 1.9 2.8 1.2
 Supplemental security income 1.1 3.1 .5
 Defense cooperation account -15.0 15.0
 Other 4.8 3.5 4.8


Grants-in-aid to State and local
 governments 12.5 19.8 12.1
 Public assistance 7.6 12.4 9.2
 Highways .7 .6
 Education .9 1.5 1.4
 Other 3.3 5.9 .9
 Net interest paid 14.4 17.0 10.2


Subsidiaries less current surplus of
 government enterprises -6.2 -2.5 .3
 Commodity Credit Corporation -1.7 .5
 Agriculture subsidies -5.7 .9 -.1
 Housing 1.7 1.8 2.1
 Postal Service .4 -1.5 -1.2
 Deposit Insurance -.1 -3.3 -.6
 Other -.8 -.9 .1


(1)Consists of pay raises beginning in January 1990.

In NIPA expenditures, the largest 1992 increase - $19.3 billion - is for social security, which includes $14.1 billion for cost-of-living adjustments. Within purchases, Federal employee pay raises add $5.3 billion, and "other nondefense" purchases add $5.2 billion; more than offsetting these increases is an $18.6 billion decline in an allowance for Operation Desert Storm and a $3.7 billion decline in purchases of military hardware. Grants-in-aid to State and local governments for public assistance increase $9.2 billion. Net interest paid increases $10.2 billion. An increase in housing subsidies is partly offset by a increase in the Postal Service surplus, which reflects a postal rate increase in February 1991.

Table 9 shows the relation between national defense outlays in the budget estimates and national defense purchases in the NIPA's. In 1992, purchases decline more than outlays because of the decline in spending for Operation Desert Storm.

Table : Table 9. - Relation of National Defense Purchases in the National Income and Product Accounts to National Defense Outlays in the Budget

[Billions of dollars]

Fiscal year
1990 1991 1992
National defense outlays in the budget 299.3 298.9 295.2
 Department of Defense, military 289.8 287.5 283.0
 Military personnel 75.6 78.9 77.8
 Operation and maintenance 88.3 86.2 85.7
 Procurement 81.0 79.1 74.3
 Aircraft 26.1 26.3 23.1
 Missiles 10.4 9.8 8.3
 Ships 11.0 10.9 11.3
 Weapons 8.3 8.2 7.6
 Ammunition 2.0 1.8 1.6
 Other 23.2 22.2 22.3


Research, development, test and
 evaluation 37.5 35.5 37.8
 Other 7.4 7.7 7.3


Atomic energy and other defense-related
 activities 9.6 11.5 12.2
Plus: Military assistance purchases .1 .1 .1
 Operation Desert Storm allowance 23.2 4.6
Less: Grants-in-aid and net interest paid 2.4 2.4 2.5
 Timing difference -4.3 .6 -.2
 Other adjustments -7.8 -7.3 -10.6
Equals: National defense purchases, NIPA's 309.1 327.6 308.3


Quarterly pattern. - Table 10 shows the major factors that affect the quarterly pattern of NIPA Federal receipts and expenditures through 1992. Receipts reflect the pattern of enacted and proposed legislation and the administration's projected quarterly pattern of wages and profits. Expenditures reflect the pattern of proposed legislation and selected other items, mainly pay raises for Federal employees and cost-of-living adjustments in social security and in Federal employee retirement benefits. The Federal deficit increases through the first half of 1991, reflecting pay raises, cost-of-living adjustments, and spending for Operation Desert Storm. The short recession limits the growth in receipts in the first half of 1991 - despite social security rate and base increases and the initial effects of the Omnibus Budget Reconciliation Act of 1990. The deficit declines in the second half of 1991, reflecting a rebound in receipts and a decline in spending for Operation Desert Storm. The deficit increases in early 1992 when pay raises and cost-of-living adjustments take effect, and it declines through the remainder of the fiscal year. [Tabular Data Omitted]

Cyclically adjusted deficit. - Cyclically adjusted receipts, expenditures, and surplus or deficit are estimates of what these measures would be if the economy were moving along a trend GNP path - a path free from cyclical fluctuations - rather than along its actual path. Consequently, cyclical fluctuations in the economy do not affect cyclically adjusted budgets.

As measured using cyclical adjustments based on a 6-percent unemployment rate trend GNP, the Federal sector of the NIPA's was in deficit in calendar year 1989 (table 11). The deficit increased in 1990, but it is expected to decline in 1991. In 1991 and 1992, the cyclically adjusted deficit follows a quarterly pattern similar to, but at a lower level than, that of the NIPA deficit.

Table : Table 11. - Cyclically Adjusted Surplus or Deficit (-), NIPA Basis

[Billions of dollars; quarters at seasonally adjusted annual rates]
 Based on 6-percent unemployment
 rate trend GNP
 Level Change


Calendar year
1989 -164.1 2.1
1990 -174.9 -10.8
1991 -166.1 8.8


Quarters

1989:
 I -166.7 18.0
 II -155.1 11.6
 III -161.8 -6.7
 IV -172.8 -11.0


1990:
 I -190.5 -17.7
 II -182.0 8.5
 II -157.8 -6.7
 IV -169.1 11.3


1991:
 I -173.3 -4.2
 II -181.5 -8.2
 III -154.3 27.2
 IV -155.2 -.9


1992:
 I -158.1 -2.9
 II -151.8 6.3
 III -140.2 11.6


(1) The Budget of the United States Government, Fiscal Year 1992, Office of Management and Budget (Washington, DC: U.S. Government Printing Office, February 1991). (2) "Annual Report of the Council of Economic Advisers," in the Economic Report of the President (Washington DC: U.S. Government Printing Office, February 1991). (3) For a discussion of this fund, see "NIPA Treatment of the `Bailout' of Thrift Institutions," a section of the "Business Situation" in the December 1989 Survey of Current Business. (4) A major expenditure reconciliation item in table 6 - $85.9 billion in fiscal year 1992 - is for "deposit insurance"; this item represents the different treatments of spending for the bailout of thrift institutions. In the budget, this spending is included in outlays; in the NIPA's, this spending is regarded as asset transfers, which are excluded from expenditures because they do not arise from current production. For a detailed dicussion of this treatment, see the "Business Situation" article referred to in footnote 3.
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Author:Wakefield, Joseph C.
Publication:Survey of Current Business
Date:Feb 1, 1991
Words:3723
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