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Federal budget estimates, fiscal year 1993.

THE PRESIDENT sent to Congress a fiscal year 1993 budget consistent with the requirements of the Budget Enforcement 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 also conforms to the "pay-as-you-go" requirements; that is, new proposals to reduce taxes or increase spending are offset so that the effect on the deficit is neutral. The principal feature of the budget is its incorporation of the President's agenda for economic growth, which was announced in the State of the Union Message. This agenda proposes a variety of tax changes, increases and decreases in many expenditure programs, several executive actions, regulatory reforms, and budget reforms. Some of these changes are intended to provide an immediate economic stimulus; others are designed to improve long-term growth.

Major tax law changes in the budget include the following proposals:

* Reduce excessive personal income tax withholding (implemented in March by executive action);

* Reduce the long-term capital gains tax;

* Increase the personal exemption for dependent children under 18 by $500;

* Adopt an investment tax allowance permitting extra depreciation for equipment acquired between February 1, 1992, and January 1, 1993; and placed in service before July 1, 1993;

* Extend tax benefits for research and experimentation expenditures;

* Provide a $5,000 tax credit for first-time homebuyers;

* Extend hospital insurance (medicare) coverage to additional State and local government employees; and

* Increase employee contributions to the Civil Service Retirement System.

Major changes affecting outlays include the following proposals:

* Further extend unemployment benefits;

* Increase expenditures for selected programs;

* Reduce defense spending;

* Reduce or eliminate spending for many "discretionary" programs; and

* Freeze Federal nondefense civilian employment.

This article summarizes the administration's budget estimates and the economic analysis underlying them, and it provides a translation of those estimates into the national income and product accounts framework. The translation does not include the President's comprehensive healt reform plan, because receipt and outlay details are not incorporated into the budget estimates.

Economic assumptions

Early in 1991, the economy appeared to be recovering from the recession that began in the second half of 1990. Later in the year, however, the recovery lost momentum, and the economy remained sluggish for the rest of 1991. According to the Economic Report of the President, (2) the rise in oil prices following the Iraqi invasion of Kuwait triggered the recession, but "a number of structural imbalances and the lagged effect of thight monetary policy in 1988 and 1989 also slowed the economy." The structural problems cited by the Counci include the buildup of private debt and the flattening of real estate values, the problems of the banking and thrift industries, the reduction of defense spending, and demographic factors associated with the maturing of the baby boom generation.

The Council of Economic Advisers projects a sluggish economy in the early part of 1992, followed by a renewed pickup in the second half. The Council believes several factors will contribute to increased growth. First, lower interest rates will result in higher consumer and business spending by midyear. Second, because business inventories remain relatively lean, production will respond quickly to increases in demand. Third, export growth will continue because of the relatively low exchange value of the dollar and growth in the world economy. The Economic Report states, "With the adoption of the President's progrowth proposals..., the prospects for renewed solid growth improve markedly. The policy forecast shows the expected course of the economy given the adoption of the pro-growth policies."

With the economic assumptions of the policy forecast (table 1), real gross domestic product (GDP) is projected to increase 2.2 percent from the fourth quarter of 1991 to the fourth quarter of 1992 and 3.0 percent from the forth quarter

[TABULAR DATA OMITTED]

of 1992 to the fourth quarter of 1993. Inflation is expected to remain stable through 1993: The GDP implicit price deflator is projected to increase 3.4 percent in 1993 (fourth quarter to fourth quarter) after increasing 3.2 percent in 1992 and 3.3 percent in 1991. The unemployment rate is expected to decrease to 6.8 percent by the fourth quarter of 1992 and the 6.4 percent by the fourth quarter of 1993. The interest rate on 91-day Treasury bills is expected to average 4.1 percent in 1992 and then rise to 4.9-percent average in 1993.

Current sevice 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 form a base with which administration or congressional proposals can be compared. The estimates are based on the same economic assumptions as those underlying the budget.

Budget receipts in 1993 are $3.6 billion lower than current services receipts, reflecting the tax proposals mentioned earlier (table 2). Budget outlays are $8.5 billion lower than current services outlays; proposed reductions in defense, medicare, and other programs are larger than proposed program increases.

[TABULAR DATA OMITTED]

The budget estimates

Beginning in 1992, the budget proposes that the outlays for deposit and pension insurance be converted from a cash to an accrual basis. In the past, the budget has recorded the cash received or paid by the government as the cost of these programs. For deposit insurance, the gross accrual cost in any year is the amount by which the resolution costs for insolvent firms increase between the beginning of the year and the end of the year (or the date of closure, for firms that close during the year). Offsetting cost reductions are recorded to the extent that insolvent firms improve during the year. Similarly for pension guarantees, the gross accrual cost is the difference between the accrued cost at the beginning of the year and that at the end of the year (or at termination, if that happens during the year). The accrued cost is the present value as of a given date of all active plans' estimated future insurance claims over the expected life of the firm.

Table 3 presents the administration's estimates on both a cash and an accrual basis. Elsewhere in this article, the budget numbers are cited on a cash basis only. (3) The national income and product accounts (NIPA) estimates are not affected by the difference.

The budget deficit decreases $49.8 billion in fiscal year 1993 to $349.9 billion (chart 1). Of this decrease, $40.1 billion results from a decline in the current services budget deficit and $9.7 billion from the administration's proposals.

[TABULAR DATA OMITTED]

Receipts increase $89.7 billion--or 8.2 percent--in 1993, to $1,165.4 billion. Receipts in 1992 are $1,075.7 billion, up 2.0 percent from 1991. Administration proposals for tax legislation reduce receipts in both years from their current services levels.

Outlays increase $39.9 billion--or 2.7 percent--in 1993, to $1,515.3 billion. Outlays in 1992 are $1,475.4 billion, up 11.5 percent. The 1993 increase is the net result of $84.6 billion in increases and $44.7 billion in decreases. As table 4 shows, increases in budget outlays for four

[TABULAR DATA OMITTED]

functions--social security, net interest, health, and medicare--more than account for the increase in total outlays; all othe functions, on balance, decline. The largest increase--$15.6 billion--is for social security and includes $6.4 billion for a 3.0-percent cost-of-living adjustment, effective January 1, 1993. The largest decline--$15.9 billion--is for national defense.

NIPA estimate s for the Federal sector

BEA has prepared estimates of the Federal sector on the NIPA basis that are consistent with the budget estimates. (4) 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. Also see "The Comprehensive Revision of the U.S. National Income and Product Accounts: A Review of Revisions and Major Statistical Changes" in the December 1991 SURVEY OF CURRENT BUSINESS.) Table 5 shows the relation between budget receipts and NIPA receipts, and table 6 shows the relation between budget outlays and NIPA expenditures.

A major expenditure reconciliation item--$73.8 billion in fiscal year 1993--is for deposit insurance; this item represents the difference in the treatments of spending for the bailout of failed financial institutions. In the budget, this spending is included in outlays; in the NIPA's, this spending

[TABULAR DATA OMITTED] is regarded as an asset transfer, a type of financial transaction that is excluded from the NIPA'S.

Federal receipts on the NIPA basis increase $110.5 billion, to $1,252.4 billion, in fiscal year 1993 (chart 2). The 1993 increase is the result of a $93.6 billion increase due to higher tax bases and a $16.9 billion increase due to tax changes (table 7). The increase due to tax changes is accounted for by proposed legislation, stricter requirements for estimated tax payments the revision of the income-tax withholding table, and social security base changes.

Federal expenditures on the NIPA basis increase $54.5 billion, to $1,504.1 billion, in 1993 (charts 3

[TABULAR DATA OMITTED]

and 4). Table 8 highlits the major factors that contribute to recent changes in Federal expenditures. The 1991 and 1992 changes from prior-year expenditures are heavily influenced by contributions to the defense cooperation account from coalition partners in the Persian Gulf war. The largest 1993 increase--$15.0 billion--is for social security and includes $9.1 billion for cost-of-living adjustments. Within purchases, pay raises add $4.7 billion, and "other nondefense" purchases add $3.2 billion; more than offsetting these increases is a $15.4 billion decline in "other defense" purchases and a $7.5 billion decline in purchases of military hardware. Net interest paid increases $14.1 billion, and grants-in-aid to State and local governments for medicaid increases $11.9 billion. Subsidies less the current surplus of government enterprises increases $4.2 billion, as

[TABULAR DATA OMITTED]

agricultural and housing subsidies increase and the current surplus of the Postal Service declines.

The table 9 shows the relation between national defense outlays in the budget estimates and national defense purchases in the NIPA'S. There are three principal reasons why the measure differ. First, some defense outlays are not treated as purchases in the NIPA'S; second, NIPA deliveries of goods and services exceed cash outlays in all 3 years, creating a timing difference; and third, financing of the military retirement program is treated differently in the two series. Defense outlays includes a cash payment from the military personnel appropriation account to the military retirement trust fund, while the NIPA measure uses total military retired pay as the measure of the retirement program's cost; as a result, the budget series is declining with the military payroll, while the NIPA series continues to increase with the rising number of retirees and higher benefits.

Quarterly pattern.-- Table 10 shows the major factors that affect the quarterly pattern of NIPA Federal receipts and expenditures through 1983. 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 firt half of 1992, reflecting January pay raises and cost-of-living adjustments and the March 1992 revision of the income-tax withholding tables. From this peak, the deficit declines steadily through fiscal year 1993. In the first quarter of 1993, the January pay raises and cost-of-living adjustments are offset by higher individual income tax payments (compensating for 1992's lower withholdings) and a rebound in corporate profits taxes from the sharp 1992 cut caused by the investment tax allowance.

(1) The Budget of the United States Government, Fiscal Year 1993, Office of Management Budget (Washington, DC. U.S. Government Printing Office, January 1992).

(2) "Annual Report of the Council of Economic Advisers," in the Economic Report of the President (Washington, DC: U.S. Government Printing Office, February 1992).

(3) The budgest estimates in this article differ slightly from those published in the original Budget document. Updated numbers were published in The Budget of the United States Government, Fiscal Year 1993, Supplement, Office of Management and Budget (Washington, DC: U.S. Government Printing Office, February 1992).

(4) The national income and product accounts (NIPA) estimates presented in this article incorporate the comprehensive NIPA revision released in December 1991. This revision made several changes to the definitions and classifications used to measure the Federal sector. Changes with major statistical impacts on the Federal sector include revisions to the treatment of deposit insurance and the Commodity Credit Corporation and of the payment of taxes from nonresidents to the Federal Government. All of these changes were discussed in detail in the September 1991 SURVEY OF CURRENT BUSINESS; the impact on the Federal sector of these changes and of changes in methodology was discussed in the December 1991 SURVEY. Revised estimates for 1987-90 were presented in "National Income and Product Accounts Tables, 1987-90" in the January 1992 SURVEY.
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Author:Dobbs, David T.
Publication:Survey of Current Business
Date:Mar 1, 1992
Words:2242
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