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Federal budget developments.

Federal Budget Developments

On August 30, the administration released revised estimates of the fiscal year 1986 budget as part of its mid-session review. This release was less than 1 month after Congress adopted the first concurrent resolution on the budget--a step in the budget process that had been delayed by controversy over the kind of spending cuts to be taken to reduce the deficit and that, even as adopted, was considered by many analysts to be based on unrealistic assumptions about the economy and the ability to achieve the negotiated spending cuts. (See the August 1985 SURVEY OF CURRENT BUSINESS for a discussion of the resolution.) In the revised estimates, the administration incorporated only the part of the spending cuts contained in the resolution that were for national defense, maintained the deeper cuts for nondefense spending-- rejected by Congress in the resolution --contained in the April budget update, and made modest modifications to the economic assumptions.

With this combination of spending cuts, the administration was able to show a larger reduction in the deficit in later years than was estimated either in the April budget update or in the resolution. Although the administration's revised estimates of the deficit for fiscal years 1985 and 1986 are very close to those in April, the revised deficits are substantially lower beginning in 1987. In 1987, the deficit would be $139.3 billion, compared with $160.8 billion in April; in 1988, $99.8 billion, compared with $108.9 billion; and in 1990, $17.7 billion, compared with $84.9 billion. These reductions in the deficit since April are more than accounted for by the cuts in national defense spending contained in the resolution. Compared with the resolution, the administration's revised deficit of $177.8 billion in 1986 is about $6 billion higher. In 1987 and 1988, however, the administration's revised estimates are about $15 billion and $13 billion lower than in the resolution. (There were no estimates for 1989 and 1990 in the resolution.)

The mid-session review

The new estimates of unified budget receipts and outlays for fiscal years 1985 and 1986 reflect revised economic assumptions, reestimates of tax collections and agency spending based on more recent experience, legislation enacted by Congress, and policy changes by the administration since the April budget update.

The major legislative action was the passage in early August of a supplemental appropriation bill for fiscal year 1985. The major policy changes are the withdrawal of a proposed 5-percent cut in Federal civilian pay and acceptance of the lower national defense spending in the resolution. As mentioned, the revised estimates do not incorporate the resolution's nondefense spending totals, but the administration stated that these totals may be modified as individual authorization and appropriation bills are enacted. The revised receipt estimates do not include the administration's tax reform proposal. According to the administration, that proposal would not change the revenue totals very much, although the allocation among receipt categories would change.

On the basis of the revised economic assumptions, real GNP is expected to increase considerably less in calendar year 1985 than expected in April (table 1). From the fourth quarter of 1984 to the fourth quarter of 1985, real GNP is estimated to increase 3.0 percent, about 1 percentage point less than estimated in April. The lower growth is the result of a weaker-than-expected first half of 1985. Real GNP is expected to increase 4.5-5.5 percent through the rest of 1985 and to increase 4.0 percent through 1986. Consumer prices rise 3.8 percent in 1985, the same as assumed in April. The unemployment rate is also unchanged, and interest rates on 91-day Treasury bills are lower than assumed earlier.

Revised unified budget estimates.---- For fiscal year 1985, a $211.3 billion deficit is estimated, compared with $213.3 billion in April (table 2). Receipts are $4.6 billion lower; a downward revision of $4.9 billion due to revised economic assumptions and policy changes is partly offset by a $0.4 billion upward revision due to reestimates. Among receipts, downward revisions in corporation income taxes ($7.6 billion) and in excise taxes ($1.3 billion) are partly offset by upward revisions in individual income taxes ($2.3 billion), in social insurance taxes and contributions ($1.2 billion), and in all other receipts ($1.0 billion).

Outlays in 1985 are $6.6 billion lower; downward revisions of $6.8 billion and $0.8 billion due to reestimates and revised economic assumptions were partly offset by a $1.1 billion upward revision due to policy changes. On a program-by-program basis, the revision is the net of $14.6 billion of downward revisions and $8.2 billion of upward revisions. The largest downward revision--$5.2 billion-- is for national defense, largely the result of a reestimate. Other major downward revisions are for foreign military assistance ($1.3 billion), Social Security benefits ($1.1 billion), and for the Export-Import Bank ($1.0 billion). One-half of the upward revisions is due to reestimates of spending for agriculture programs--$2.4 billion for the Farmers Home Administration and $1.8 billion for the Commodity Credit Corporation (CCC). The former stems primarily from the Agricultural Credit Insurance Fund as a result of reduced loan repayments and the refinancing of many loans at lower interest rates. The latter stems from unexpectedly high crop production this year, which has resulted in lower farm prices and higher CCC spending. The other major upward revision is for foreign economic assistance ($1.0 billion); the 1985 supplemental appropriations bill increased aid to Egypt, Israel, and Jordan.

For fiscal year 1986, a deficit of $177.8 billion is estimated, compared with $177.4 billion in April. Receipts are $14.4 billion lower due to revised economic assumptions. All categories of receipts--except estate and gift taxes and customs duties, which are unchanged--are revised down. The largest revisions are for corporation income taxes ($8.2 billion) and individual income taxes ($2.2 billion).

Outlays in 1986 are $14.0 billion lower; downward revisions of $14.7 billion and $2.9 billion due to policy changes and revised economic assumptions are partly offset by a $3.6 billion upward revision due to reestimates. On a program-by-program basis, the revision is the net of $26.1 billion of downward revisions and $12.0 billion of upward revisions. The largest downward revision--$18.6 billion --is for national defense; it more than accounts for the policy changes mentioned above. The other large downward revision--3.1 billion--is for net interest, due to lower interest rates in the revised economic assumptions. The largest upward revisions are for the CCC ($2.9 billion) and for foreign economic assistance, both for the same reasons cited for 1985. The other large upward revision--$1.0 billion --is for foreign military assistance to offset the lower rate of spending in 1985.

Revised NIPA estimates.--BEA has prepared estimates of the Federal sector on the national income and product account (NIPA) basis consistent with the revised unified budget estimates (table 2, and table 3 for the quarterly pattern). On this basis, fiscal year 1985 receipts are $3.9 billion lower, expenditures are $0.8 billion higher, and the deficit is $4.6 billion higher than estimated in April. (Details of the April estimates are discussed in the April 1985 SURVEY.)

The revision in receipts is more than accounted for by corporate profits tax accruals; a downward revision of $6.6 billion is due to lower corporate profits in the revised economic assumptions. The other downward revision --$1.1 billion--is in contributions for social insurance, due to small revisions in several programs. Partly offsetting these downward revisions are upward revisions in personal tax and nontax receipts ($3.5 billion) and in indirect business tax and nontax receipts ($0.4 billion). The former is partly due to higher wages and salaries in the revised economic assumptions, and the latter is due to higher nuclear waste disposal fees.

The revision in expenditures is the net result of $4.8 billion of upward revisions and $4.0 billion of downward revisions. The largest upward revision --$2.8 billion--is in nondefense purchases of goods and services, reflecting higher purchases of agricultural commodities by the CCC. The other large upward revisions are in subsidies less current surplus of government enterprises ($1.0 billion) and in transfer payments to foreigners ($0.9 billion). The revision in subsidies less current surplus reflects higher housing subsidies and a higher Postal Service deficit. The revision in foreign transfers reflects higher spending for economic assistance. The largest downward revision--$3.1 billion--is in national defense purchases of goods and services, due to lower-than-anticipated spending since April. The other downward revisions are in grants-in-aid to State and local governments ($0.7 billion) and in transfer payments to persons ($0.2 billion). The revision in grants-in-aid is concentrated in grants for education; the revision in personal transfers is the net result of a $1.0 billion downward revision in Social Security benefits and small upward revisions in several other programs.

For fiscal year 1986, receipts are $16.8 billion lower, expenditures are $12.1 billion lower, and the deficit is $4.7 billion higher. All categories of receipts are revised down. The largest revision--$11.1 billion in corporate profits tax accruals--is due to lower corporate profits. Personal tax and nontax receipts are revised down $3.2 billion, reflecting lower declarations and net final settlements. Indirect business tax and nontax accruals are revised down $1.7 billion, reflecting lower windfall profit taxes and other excise taxes, such as for gasoline. Contributions for social insurance are revised down $0.8 billion, reflecting lower Social Security contributions.

The revision in expenditures is the net result of $21.3 billion of downward revisions and $9.2 billion of upward revisions. The largest downward revision--$17.1 billion for national defense purchases of goods and services--is due to the policy decision to accept the lower national defense spending contained in the budget resolution. Net interest paid is revised down $3.8 billion, reflecting the lower interest rates in the revised economic assumptions. Transfer payments to persons are revised down $0.4 billion, reflecting lower medicare transfers. The largest upward revision--$4.9 billion in nondefense purchases of goods and services--reflects higher spending by the CCC and withdrawal of the 5-percent civilian pay cut. Transfer payments to foreigners are revised up $2.1 billion due to the Congressional action on foreign economic assistance programs. Subsidies less the current surplus of government enterprises are revised up $1.6 billion, largely reflecting higher housing subsidies and a higher CCC deficit. Grants-in-aid to State and local governments are revised up $0.6 billion, reflecting higher grants for education.

Table 4 shows the relation between unified budget and NIPA receipts, and table 5 shows the relation between unified budget and NIPA expenditures.

Table: 1.--Economic Assumptions Underlying the Mid-Session Review Update of the Fiscal Year 1986 Budget

Table: 2.--Federal Government Receipts and Expenditures

Table: 3.--Federal Government Receipts and Expenditures, NIPA Basis

Table: 4.--Relation of Federal Government Receipts in the National Income and Product Accounts to the Unified Budget

Table: 5.--Relation of Federal Government Expenditures in the National Income and Product Accounts to the Unified Budget
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Author:Wakefield, Joseph C.
Publication:Survey of Current Business
Date:Sep 1, 1985
Words:1879
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