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Excerpted from: Reducing the Deficit: Spending and Revenue Options The Congressional Budget Office February, 1993 [To order this printed publication, or to contact the Congressional Budget Office, call 202-226-2809.] This volume compiles more than 200 specific policy options for increasing federal revenues or reducing spending in a wide variety of federal programs. This is the 14th such compendium that the Congressional Budget Office (CBO) has prepared as part of its annual report to the House and Senate Committees on the Budget. Over the years, this report has become a standard reference for developing deficit reduction plans. The 239 specific policy options included in this report come from many sources, and most have been considered by the Congress at some time in the past. Three-quarters of the options were included in last year's edition; many of them have been revised or updated to reflect recent Congressional action. In accordance with CBO's mandate to provide objective and impartial analysis, the discussion of each option presents the cases for and against it as fairly as possible. CBO does not endorse the options included, nor does exclusion of any proposal imply a recommendation. The report begins with an introductory chapter that provides general background information on CBO's latest deficit projections and reviews various procedural changes that have been proposed as solutions to the deficit problem. The next three chapters present 198 options for reducing spending, organized by broad categories that have become the focus for deficit reduction efforts--defense and international discretionary spending, domestic discretionary spending, and entitlements and other mandatory spending. The last chapter presents 41 revenue-generating options. The report concludes with an appendix listing the spending options by the budget functions that would be affected. In accordance with CBO's mandate to provide objective and impartial analysis, the discussion of each option presents the cases for and against it as fairly as possible. CBO does not endorse the options included, nor does exclusion of any proposal imply a recommendation. The report begins with an introductory chapter that provides general background information on CBO's latest deficit projections and reviews various procedural changes that have been proposed as solutions to the deficit problem. The next three chapters present 198 options for reducing spending, organized by broad categories that have become the focus for deficit reduction efforts--defense and international discretionary spending, domestic discretionary spending, and entitlements and other mandatory spending. The last chapter presents 41 revenue-generating options. The report concludes with an appendix listing the spending options by the budget functions that would be affected. The economic assumptions and baseline budget projections underlying the estimates of spending reductions and revenue increases contained in this volume are described in more detail in the first volume of CBO's annual report, The Economic and Budget Outlook: Fiscal Years 1994-1998 (January 1993). Robert D. Reischauer Director February 1993 =========================================================================== Chapter One Policy Actions, Not Process Changes, Are the Key to Reducing the Federal Budget Deficit The federal budget deficit has plagued decisionmaking on the national budget for most of the last decade. Despite numerous legislative efforts to reduce the deficit and despite its prominence in the recent Presidential campaign, a genuine solution has proved elusive. In fact, by virtually any measure, the mismatch between revenues and spending keeps growing. Up until now, most proposals for addressing the deficit have been procedural. Proponents hope to force the political system and the public to face the difficult choices that are necessary to reduce the budget gap. Unfortunately, changes in the budget process alone are unlikely to force the decisions about taxes and spending needed to reduce the deficit. This volume provides a menu of options that policymakers can use to identify the difficult actions necessary to reduce federal red ink. The Economy and the Deficit According to the latest Congressional Budget Office (CBO) forecast, the economy finally appears to have reached a long-awaited stage of self-sustained growth. CBO expects this growth, however, to be far less robust than usually occurs early in an expansion. By 1994, the rate of growth of the gross domestic product (GDP) should be around 3 percent, and the unemployment rate should fall to 6.6 percent. The mild pace of the recovery will keep a lid on inflation rates; in fact, CBO expects that they will remain flat at about 2 3/4 percent through 1994. Long-term interest rates on government bonds will average almost 7 percent over this same period (see Figure 1). Over the medium term (1995 through 1998), CBO projects that real GDP will grow at an average annual rate of about 2.5 percent--or about one-half of one percentage point faster than the rate of growth CBO projects for potential real GDP. Given these growth rates, the gap between actual and potential real GDP will reach its historical average of about 0.6 percent of real GDP by 1998. Because the gap is greater than its historical average throughout the projection period, inflation is not likely to rise, even though the economy is growing faster than its potential. Therefore, CBO projects inflation to continue to remain steady throughout the medium term at about 2.7 percent. The unemployment rate is projected to fall in the projection period to a low of 5.7 percent by 1998. Long-term interest rates are also projected to remain steady at about 6.5 percent. One factor that can significantly affect the ability of the economy to sustain real growth and remain healthy in the long run is the federal budget deficit. Amid the concern that U.S. living standards may grow more slowly in coming decades than they did during most of the postwar period, reducing the budget deficit continues to be an important focus of attention because it will increase national saving. In fact, reducing the deficit is the most reliable way to improve national saving. Over the long run, a per- manently higher rate of saving will stimulate new investment, increase productive capacity, lower real interest rates, and raise the nation's standard of living. True, decreasing federal spending on consumption and increasing spending on well-chosen investments, as some economists have suggested, might also spur economic growth. A deficit that resulted from a greater reliance on investment spending would be less of a problem than the current budget deficit represents.1 Nevertheless, most economists believe that the increased private investment that would accompany a lower federal deficit would have an even greater positive effect on the long-term health of the economy. The Recent History of and Outlook for the Budget Deficit The federal budget deficit represents the difference between what the federal government spends and how much revenue it collects during a fiscal year. CBO projections show that the deficit, which has remained high for the past decade, will continue to represent a large percentage of GDP for the foreseeable future, at least without actions to arrest it. The three most common measures of the deficit are the unified deficit (a measure of the difference between all government revenues and spending), the standardized-employment deficit (which removes cyclical factors from the deficit calculation), and the on-budget deficit (which excludes the transactions of the Social Security trust funds and the Postal Service from the deficit calculations). (See Table 1 for a review of actual experience since 1977 using each of these measures.) The deficit has increased over the past decade under any of these measures, despite several laws designed to arrest its growth, including the Balanced Budget and Emergency Deficit Control Act of 1985 (also known as Gramm-Rudman-Hollings) and the Budget Enforcement Act of 1990 (BEA). As Figure 2 indicates, mandatory spending has a far more pronounced effect on the deficit than does discretionary spending. Discretionary spending is governed by annual appropriation action; limits set by appropriations constrain the total amount of this spending each year. Mandatory spending is driven by statutory formulas and eligibility requirements and is not limited by any specific dollar ceiling. Discretionary spending has declined as a percentage of GDP since 1980. Growth in manda- tory spending, however, has overshot this decline for a couple of reasons. First, spending for the federal government's health care programs--Medicare and Medicaid--has grown rapidly, almost doubling as a percentage of GDP since 1980. Second, spending for deposit insurance, driven by the savings and loan bailout, increased at a phenomenal rate in the late 1980s. Total deposit insurance outlays for 1992 and 1993, however, are estimated to be much lower than the rate of spending between 1988 and 1991. In addition, as federal debt has risen, the percentage of the budget devoted to paying interest on that debt has increased as well, from 2 percent of GDP in 1980 to 3.5 percent in 1992. The Budget Process and Deficit Reduction The increase in the deficit has spawned several attempts to design processes either to force deficit reduction actions or to carry out actions that have already been agreed on. Gramm-Rudman-Hollings (GRH), passed in 1985, had a simple goal--to reduce the deficit to zero by setting a series of declining targets over a five-year period until expenditures were in balance with revenues. The Budget Enforcement Act of 1990 established procedures to enforce the actions agreed to in that year's budget summit agreement. Under Gramm-Rudman-Hollings, deficit targets were to be enforced through automatic across-the-board spending cuts--a process called sequestration. According to the targets specified in the legislation, the budget was to be balanced by fiscal year 1991, although 1987 amendments to the law pushed the timetable back to fiscal year 1993. However, in an effort to live within the short-term budget constraints, the President and the Congress embraced overly optimistic economic assumptions and employed questionable budget techniques that enabled the government successfully to evade the restraints placed by the deficit targets. Largely because of the failures of GRH to reduce the deficit as planned, a five-year budget agreement was enacted into law in November 1990, with two major components. First, the agreement included specific measures to cut the deficit by roughly $500 billion over a five-year period. Second, the agreement established the BEA, whose primary purpose was to ensure that the savings agreed to in the deficit reduction accord would be realized. Two major sets of procedural rules were included in the BEA to police the deficit reduction established in the budget agreement. The first of these are the discretionary spending caps for fiscal years 1991 through 1995. For fiscal years 1991 through 1993, annual ceilings on budget authority and outlays were established for the three categories of discretionary spending--defense, international, and domestic. After 1993, budget authority and outlay caps exist only for total discretionary spending. Violation of the spending caps results in a sequestration of discretionary spending. The second major enforcement mechanism included in the BEA is the pay-as-you-go (PAYGO) process. This set of rules requires that legislative actions affecting mandatory spending and revenues not increase the deficit in any year. If this condition is not met, the PAYGO discipline is triggered by a separate sequestration of the resources available to a prescribed and limited number of mandatory programs. The BEA has been successful in its first two years in enforcing the deficit reduction actions of the Table 1. Deficit Under Alternative Measures, 1977-1992 (By fiscal year, in billions of dollars) Standardized- Unified On-Budget Employment Year Deficit Deficit Deficit 1977 53.7 49.8 38.4 1978 59.2 54.9 55.3 1979 40.2 38.2 42.7 1980 73.8 72.7 47.7 1981 79.0 74.0 37.4 1982 128.0 120.1 46.7 1983 207.8 208.0 105.2 1984 185.4 185.7 133.1 1985 212.3 221.7 177.4 1986 221.2 238.0 184.7 1987 149.8 169.3 118.9 1988 155.2 194.0 151.2 1989 152.5 205.2 145.7a 1990 221.4 278.0 161.0a 1991 269.5 321.7 179.8a 1992 290.2 340.3 201.5a SOURCE: Congressional Budget Office. a. Excludes deposit insurance. summit agreement. The discretionary spending caps are holding; the appropriations committees and the Congress lived within their limits in fiscal year 1992 and actually reduced spending to a level below the caps in fiscal year 1993. The pay-as-you-go process has discouraged major efforts either to increase entitlement spending or to cut taxes. Nonetheless, the deficit has not come down. When the BEA was enacted, policymakers believed that the budget summit agreement would lower the deficit substantially; the BEA included no requirement for additional deficit reduction if this outlook deteriorated. The factors that have led to an increase in the projected deficit since 1990 have largely to do with the deterioration of the economy and technical reestimates of revenues and spending, primarily for Medicare and Medicaid. Virtually none of the worsening in the deficit outlook results from policy actions.2 The Outlook for the Deficit Over the Next Ten Years The growth of the deficit over the past decade might not be a concern if this pattern were temporary. But CBO's projections indicate that, under current policy, the deficit is unlikely to diminish between now and fiscal year 2003. These projections, which assume that laws are not changed and that discretionary spending keeps up with inflation once the BEA's caps expire, show that deficits will leap from $310 billion in fiscal year 1993 to $653 billion by fiscal year 2003 (see Table 2). As a percentage of GDP, the federal deficit would decline from 5 percent to 4 percent between 1993 and 1996, rising again to almost 7 percent by 2003. In 2003, the federal debt will have reached its largest fraction of gross domestic product in more than 50 years. The projected growth in the deficit will continue to be fueled on the spending side by the growth of spending for the government's health care programs, which is projected to almost triple in dollar terms and increase substantially as a percentage of GDP over the period. In contrast, discretionary spending is projected to decline as a percentage of GDP through 2003 under current law, assuming that the caps for 1994 and 1995 are complied with and that discretionary spending does not grow in real terms between 1996 and 2003. The projections show that if current law is not changed, revenues remain a fairly constant percentage of GDP throughout the period. Although all budget projections (particularly those extending far into the future) are imprecise, these projections represent CBO's best judgment of where the federal budget is headed if policies are not changed. (For more details on both the economy and the budget, see Congressional Budget Office, Table 2. Baseline Deficit Projections, Fiscal Years 1993-2003 Total Deficit Assuming Discretionary Caps Billions of As a Percent- Dollars age of GDP 1993 310 5.0 1994 291 4.5 1995 284 4.1 1996 287 4.0 1997 319 4.2 1998 357 4.5 1999 404 4.9 2000 455 5.3 2001 513 5.8 2002 579 6.2 2003 653 6.8 SOURCE: Congressional Budget Office. The Economic and Budget Outlook: Fiscal Years 1994-1998, January 1993.) Clearly, if the budget deficit is to be dealt with, inaction is hardly the appropriate course. But what kinds of actions are in order? Ultimately, the deficit can be reduced only by taking policy actions to cut spending or raise taxes. But, unfortunately, attention is once again being focused on proposed procedural fixes. Procedural Options to Reduce the Deficit The budget process has an important role to play in any effort to reduce the deficit. But that role is generally limited to providing information to policymakers (on the costs of proposed actions, for example) and to enforcing previously agreed-upon actions to reduce the deficit. The process has not proved nearly as useful in forcing agreement on policy actions that would reduce federal debt. The proposals that have generated the most interest over the past several years indicate the woefully limited ability of process to substitute for policy. They can be divided into rules that focus on the overall process, those that target discretionary spending, procedural devices to control mandatory spending, and formula-based approaches to taxation. The Balanced Budget Amendment and Other Overall Budget Rules The first category of rule-based reforms would set targets for the budget as a whole. Recently, proposals that would require a balanced budget amendment to the U.S. Constitution have generated considerable attention. Such an amendment would set an annual target of zero for the budget deficit. During the 102nd Congress, proposals for a balanced budget amendment were considered in each House. H.J. Res. 290 fell only nine votes short of the two-thirds majority needed to win House passage in June 1992. Later that month, the Senate also considered, but did not pass, a proposed balanced budget amendment to the Constitution. Although such an amendment would clearly make balancing the budget the guiding principle behind federal fiscal policy, lawmakers would still have to make the specific hard decisions about spending cuts and tax increases. In all likelihood, a balanced budget amendment would not bring about these changes, and it could actually make things worse. Such an amendment would offer too many opportunities for evasion, would be hard to define and apply precisely, and would provide little flexibility for carrying out fiscal policy. The most important problem with a balanced budget rule is that it inevitably invites avoidance and evasion, as do all fixed annual deficit targets. There are four primary ways that the President and the Congress could get around an apparently rigid balanced budget constraint: o Timing mechanisms and other budget gimmicks could be used to achieve short-run budget targets, including such actions as shifting payment dates between fiscal years, accelerating or delaying tax collections, delaying needed spending until future fiscal years, and selling government assets. o The budget could be based on overly optimistic economic assumptions, if the amendment applied (as many proposals do) only to estimated revenues and outlays. A major step forward was made in the 1990 Budget Enforcement Act, which removed this incentive; a balanced budget amendment would reinstate it. o Off-budget agencies might be created that would have authority to borrow and to spend but whose transactions would not be directly recorded in the budget. Off-budget agencies could be misused simply to avoid having to make large cuts to meet a balanced budget rule. o Costly spending could be passed on to state and local governments or private businesses through mandates or regulations. These methods, and others, were used to circumvent the annual deficit targets in Gramm-Rudman-Hollings. There is no reason to expect that the balanced budget rule would not fall prey to the same sorts of maneuvers. Furthermore, no consensus exists on what should be included in the budget that has to be balanced under such a strict rule, or on how conformity with the balanced budget rule should be measured. Should the federal government be permitted to borrow to finance capital spending--perhaps at the cost of imposing less budget discipline on this spending? Should transactions that embody commitments to future costs and benefits be recognized only insofar as they affect cash flows, or should the accrual of future liabilities and benefits also be recognized? How should the balanced budget rules treat Social Security and other trust funds? Though the subject of considerable debate, these questions are not resolved in the proposed amendments. Finally, a balanced budget amendment would not provide sufficient flexibility to allow for responses to shocks, such as recessions or natural disasters. Such an amendment could hobble the ability of the federal government to stabilize the economy. Economists are less convinced than they used to be that the federal government can undertake timely counter-cyclical fiscal policy. But the economy is automatically stabilized when a recession temporarily lowers revenues and increases spending on Unemployment Insurance benefits and welfare programs. This automatic stabilizing occurs quickly and is self-limiting--it goes away as the economy recovers--but it temporarily increases the deficit. It is an important factor that dampens the amplitude of economic cycles. Other proposals have focused on changing the structure of the budget in a way that might promote policy actions to reduce the deficit. These proposals include (1) establishing a separate capital or investment budget that would permit borrowing for investment purposes but would require a balanced operating budget, and (2) removing trust funds from the calculation of the deficit in order to encourage policy actions to reduce the so-called federal funds deficit. Although structural reforms could possibly encourage reductions in federal borrowing, they are similar to the balanced budget amendment in that they do not themselves prescribe specific actions to achieve that result. Discretionary Spending Reforms Currently, discretionary spending accounts for 40 percent of total federal spending. Because discretionary appropriations represent the only part of the budget that must be acted on each year, they receive a great deal of attention. Discretionary spending has been declining as a percentage of GDP, and the prospects are for this trend to continue for the immediate future, under current policy. Several types of procedural devices have been enacted or proposed that would focus on the discretionary portion of the budget. These include the aforementioned caps on discretionary spending, Presidential authority to propose removing particular items from the budget, and formula-based approaches to reducing administrative expenses or the number of personnel in federal agencies. Spending Caps. Limits on discretionary spending, such as those included in the Budget Enforcement Act, focus on constraining the overall amount of money that the Congress may appropriate in a given year. In the BEA, limits were set on both budget authority and outlays for fiscal years 1991 through 1995. Caps do not prescribe which spending is to be cut. Rather, they establish an overall limit in an effort to force action to reduce individual appropriations to comply with that limit. This overall limit is effective since appropriators must act every year to fund discretionary programs. They cannot, therefore, evade the caps by simply failing to act. Caps do not themselves reduce the deficit, but are intended as triggers to policy changes that will reduce discretionary spending, such as those found in this volume. Item Veto and Expanded Rescission Power. Many Presidents have sought the authority to reduce or eliminate specific items in appropriation bills, a power possessed by 43 of the 50 state governors. The President currently has only two options--to either sign or veto a bill in its entirety. Proponents of the item veto say that this limits the President's ability to eliminate wasteful spending. Accordingly, they propose giving the President the power to re-duce some low-priority or locally oriented--so-called "pork-barrel"--projects, thus trimming the deficit. They argue that the President, as a representative of the general interest, should have the power to strike provisions that serve only a narrow interest. Although the item veto has often been proposed as a constitutional amendment, various statutory alternatives have been offered that are designed to have largely the same effect as the item veto. The most common of such proposals call for enhanced or expedited rescission procedures (a rescission rescinds--or cancels--an appropriation). Enhanced rescission would provide the President with the same authority as the item veto and would ultimately require a two-thirds vote to override a Presidential disapproval of spending items. Expedited rescission proposals (such as H.R. 2164, which passed the House in the last days of the 102nd Congress) are more limited in their grant of authority to the Presi- dent. They would require the Congress to vote on rescissions proposed by the President; a simple majority vote would prevail. Whether enacted as an amendment to the Constitution or statutorily, the item veto would have little effect on total spending and the deficit. Since the veto would apply only to discretionary spending, its potential usefulness in reducing the deficit or controlling spending is limited. Indeed, appropriated spending has already been restrained by other means. The BEA's discretionary spending caps represent a statutory agreement between the President and the Congress on the level of discretionary spending. The item veto is not a substitute for such an agreement and is unlikely to lead to additional reductions in a regime in which spending is capped. Even if such limits were not in place, only Presidents who value reduced spending over pursuing their own spending priorities are likely to use the item veto for deficit reduction. The item veto in this case would not necessarily lead to a smaller deficit through reducing discretionary spending. It would give the President bargaining power to use with the Congress, but whether that arrangement would lead to a decrease in spending depends on the degree to which the President supports reduced deficits rather than increased spending. Because an item veto would shift the balance of power between the President and the Congress, it probably would affect the distribution of spending by substituting some Presidential budget priorities for Congressional ones. Evidence from studies of how states use the item veto supports this claim; state governors have used it to shift state spending priorities rather than to decrease spending. Some analysts would argue that shifting spending priorities is sufficient reason to adopt the item veto if the President is less likely to engage in pork-barrel spending. Formula-Driven Cuts in Spending. In many cases, proposals to reduce discretionary spending take the form of across-the-board cuts in whole categories of federal expenditures. Proposals to cut federal over- head and federal employment are typical examples. Such efforts are, like process-oriented deficit reduction strategies, approaches that avoid the tough choices involved in cutting specific programs in favor of using formulas. In general, however, targeted reductions in low-priority programs are likely to lead to a more efficient use of resources than are across-the-board cuts. Consider, for example, across-the-board cuts in federal overhead--a term referring to federal costs not directly related to program delivery. (Such costs might include those covering Congressional liaison offices, public affairs staff, and personnel administration.) Efforts to cut overhead appear to affect only bureaucratic bloat and not the delivery to the public of essential services. In this sense, cuts in overhead are thought of as just a way to reduce federal waste. But federal budget and accounting practices do not even identify overhead (much less wasteful overhead) as a separate category of expense. In some cases, expenditures that are considered overhead represent the necessary costs that accompany the management of large and complex organizations. Such across-the-board cuts make no distinction between those expenses that are justified in terms of assisting with the delivery of important government services and those that are not. Many of the same general concerns arise in the case of cuts in federal employment. No doubt some excess employment exists, but if reductions affect programs that have expanding work loads--for example, law enforcement--the level and quality of critical services can decline. Certainly the government should eliminate any excessive overhead and employment, but the across-the-board approach is probably not the best strategy. Instead, the Congress might consider focusing on the type of reductions in programs outlined in the following chapters. The major changes in programs described in this volume would, generally, lead to some reductions in travel, printing, and other overhead-type costs as well as reductions in personnel. Moreover, the reductions would occur in overhead and employment rendered surplus or waste by virtue of the program changes adopted. Proposals to Control Mandatory Spending Approximately half of all federal spending goes for entitlements and other mandatory spending. Payments for these programs are governed by eligibility criteria and funding formulas that are set in law. The programs are not constrained by annual appropriation acts. Mandatory spending, particularly for health care programs (primarily Medicare and Medicaid), has grown much faster than virtually any other spending. The Budget Enforcement Act's pay-as-you-go process has improved the ability of the Congress and the President to ensure that actions affecting mandatory spending do not make the deficit any worse. PAYGO does not, however, restrain the growth in entitlement spending stemming from increases in the number of beneficiaries or greater costs of providing existing benefits. Many analysts now argue that, given the continued hemorrhaging of the deficit, it is necessary to go further than the BEA did. Proposals have surfaced for changing the process in a way that attempts to force additional deficit savings by holding mandatory spending below the level allowed by current law. One procedural approach to pursuing deficit reduction for entitlement programs is to expand the pay-as-you-go process to require a stated level of annual saving resulting from revenue and mandatory spending actions. This approach was included in H.R. 5676, which then House Budget Committee Chairman Leon Panetta introduced in the 102nd Congress. Failure to achieve the required level of deficit reduction would result in across-the-board reductions in mandatory spending and increases in taxes. This approach could achieve these savings either through specific policy choices to reduce mandatory spending or through the sequestration process. Another procedural proposal would place a limit, or cap, on the growth of mandatory spending. During the 102nd Congress, the Bush Administration and various Members supported the concept of placing an enforceable cap on mandatory spending. This proposal for a cap would have tied the growth of spending for individual programs to the increase in the eligible population and inflation, plus a transitional percentage that would allow the change to be phased in. A sequestration procedure would be established to enforce a breach of that cap. Savings would be achieved if spending were held to the cap level, because the costs of some programs, notably Medicare and Medicaid, are estimated to grow at a rate substantially higher than either the increase in their beneficiary populations or general inflation. The startling growth in Medicare and Medicaid is primarily the result of increases in the use of hospital and physician services, changes in the quality of care, and inflation in medical care that exceeds inflation in the rest of the economy. Without a fundamental restructuring of Medicare and Medicaid, holding the growth of their costs to the cap level would require real cuts in the health care services that would be available to the elderly, disabled, and poor. The advocates of this approach often do not accompany the call for a mandatory cap with the necessary proposals for reducing benefits in individual programs. For example, President Bush's 1993 budget indicated that a cap limiting the growth in mandatory programs to a level that accommodated increases in the recipient population, inflation, and a transitional percentage would save an estimated $293 billion between fiscal years 1993 and 1997. The same budget, however, proposed policy changes that would have resulted in a reduction of less than $25 billion in mandatory spending over that five-year period. A sequestration of mandatory programs--whether it is to enforce a cap or a deficit reduction target--is anything but easy to carry out. Government benefit checks and other mandatory spending cannot simply stop flowing after the cap is reached without disrupting, and possibly endangering, the lives of millions of citizens. Agencies in the executive branch could estimate the likely shortfall resulting from the cap and adjust all future payments to account for the effect of the limit. Such action, however, would involve an enormous amount of bureaucratic discretion and uncertainty about the benefits that will actually be provided. In any case, the courts may be asked to respond to the conflict between the legislation that authorized the mandatory spending and a sequestration of that spending. Regardless of these implementation issues, however, the mandatory cap (so long as it includes costly programs, such as Social Security and Medicare) would at least focus on the portion of spending that is currently not subject to annual, direct budgetary control. Whether a specific enforceable cap will achieve that control is open to some debate, however. Either reductions in specific programs (such as those that are contained in Chapter 4) or a workable sequestration mechanism would be necessary if the cap were to hold down mandatory spending and the deficit. If the growth in health care costs is not curbed, it would be extremely difficult to comply with a stringent mandatory cap. Greater control of federal health care spending probably could not be achieved without significant changes to the overall health care system--changes that would have significant disadvantages as well, such as limiting freedom of choice of providers, rapid access to new technologies, and research and development. Further, those cuts will be hard to achieve because many lawmakers will want to use any savings from improving the efficiency of Medicare and Medicaid to provide greater and more affordable access to medical care for citizens who are not covered by government health care programs and do not have access to, or cannot afford, private health insurance. A mandatory cap might increase the prospect for health care reform, but a cap would be a very blunt instrument to use in this delicate task. Revenue Actions Few procedural ways have been offered to increase the contribution of revenues to deficit reduction. Nonetheless, several recent proposals to enforce deficit reduction would rely on automatic tax surcharges, in addition to spending cuts, in order to enforce these actions. For example, deficit reductions targets in some of these bills would have been enforced in part by imposing a higher top marginal income tax rate. Most formula-based revenue proposals have another goal in mind. They tend to aim at tax reduction rather than decreases in the deficit. These proposals would typically limit either the overall level of taxation (tying it to a percentage of GDP, for example) or the amount of annual revenue growth (such as capping it at no more than 4 percent a year). Although these proposals may have merit on their own, they do not advance the cause of deficit reduction. If reducing the federal deficit is the goal, the only way to address that using revenue actions is by enacting the kinds of options suggested in Chapter 5. Conclusion: Reducing the Deficit Through Policy Actions Process changes have an important, yet limited, role to play in efforts to reduce the deficit. First, they can provide information to policymakers concerning the budgetary impacts of proposed actions. Second, they can enforce previously agreed-upon deficit reduction actions. The process is not as useful when used to force the adoption of these actions. No process can substitute for the fact that further deficit reduction will necessitate cutting spending, raising taxes, or both. A process--whether it is Gramm-Rudman-Hollings, the BEA, or something new--can make it marginally easier or more difficult for politicians to explain these decisions to voters, but it will not make the decisions significantly easier to make. How to Use This Report The policy options for reducing the deficit, which include both decreasing spending and increasing revenues, are presented in the four remaining chapters of this report. Chapters 2 and 3 cover the discretionary programs--national defense (including international programs) in Chapter 2, and domestic programs in Chapter 3. Chapter 4 covers entitlements and other mandatory programs and also presents options that involve raising fees. Chapter 5 discusses options that would raise revenues. Each of the options starts with a table showing annual and cumulative five-year savings. For an entitlement program, the numbers in these tables show the difference between what the program would cost under the CBO baseline, which assumes continuation of current law, and what it would cost (in millions of dollars) under the proposed modification. In the case of revenues, the entries show the increase in revenues (in billions of dollars)--over and above those due under current law--that would take place if the option were enacted. For discretionary programs, the tables record the savings compared with a baseline in which the assumed level of appropriations equals the actual 1993 appropriation increased for projected inflation. Because this baseline does not incorporate the discretionary spending limits imposed by the Budget Enforcement Act for 1994 and 1995, it is termed the uncapped baseline. In contrast, the CBO baseline assumes that the discretionary spending limits are met (see Table 3). In developing a deficit reduction plan, users of this volume should subtract the savings for their chosen options from the deficits in the uncapped baseline. Just to reach the deficits in the CBO baseline, they will have to select options that reduce discretionary outlays by $13 billion in 1994, $25 billion in 1995, and $107 billion over the 1994-1998 period. The Bush Administration's defense budget of last year offers much of the savings needed to reach the CBO baseline from the uncapped baseline. Compared with the uncapped baseline, the Bush Administration's 1993 budget would reduce outlays by $10 billion in 1994, $13 billion in 1995, and $80 billion over the 1994-1998 period (see Table 5 in Chapter 2). Many users of this volume may want to start by assuming all of the reductions inherent in last year's budget request. In fact, most of the options are constructed with last year's request in mind. Table 3. Required Reductions in Discretionary Spending (By fiscal year, in billions of dollars) Cumulative Five-Year 1994 1995 1996 1997 1998 Total Uncapped Baseline Deficit a.304 310 313 347 387 1,662 Reductions Required to Meet CBO Baseline Discretionary spending -13 -25 -24 -23 -23 -107 Debt-service savings b -1 -3 -5 -6 -16 Subtotal -13 -26 -27 -28 -29 -123 CBO Baseline Deficit c. 291 284 287 319 357 1,539 SOURCE:Congressional Budget Office. a. The assumed level of discretionary appropriations in 1994 through 1998 equals actual 1993 appropriations increased for projected inflation and excludes emergencies. b. Less than $500 million. c. Discretionary appropriations are held to the limits established by the Budget Enforcement Act for 1994 and 1995 and are adjusted for inflation thereafter. How much further should the deficit be reduced? There is no optimal level of savings. By way of comparison, the budget summit agreement of 1990 provided a total of almost $500 billion in spending cuts and tax increases over five years. Another $500 billion package would hold the 1998 deficit to about $180 billion, or 2.3 percent of GDP. Because of the rapid rise in the baseline deficit at the end of the decade, however, such a package would have to be followed by much deeper cuts in later years to keep the deficit on a downward path. Eliminating the deficit over the next five years would require about $1 trillion in cuts below the CBO baseline--twice as much as the 1990 effort (see Table 4). The specific options included in this volume came from various sources, such as past Presidential budget proposals, past legislative proposals, and the suggestions of various private groups. Others have been developed by CBO staff. In none of these cases should the inclusion of an option be taken as an endorsement by CBO. Furthermore, this particular menu is meant to cover a broad range of options, and the exclusion of options does not necessarily indicate their lesser worth. Finally, variations of these options are also possible; for example, tax rates could be raised by more or less than is contained in a specific option, or a decision could be made to change policies that affect spending by a lesser or greater amount than is indicated in a spending option. For each option, this volume presents the pros and cons. The decision as to whether to carry out any of them is for elected officials to make. Table 4. Illustrative Deficit Reduction Alternatives (By fiscal year, in billions of dollars) Cumulative Five-Year 1994 1995 1996 1997 1998 Total $500 Billion in Five-Year Savings CBO Baseline Deficit 291 284 287 319 357 1,539 Illustrative Savings Policy changes -30 -60 -90 -120 -150 -450 Debt-service savings -1 -4 -8 -15 -25 -53 Subtotal -31 -64 -98 -135 -175 -503 Resulting Deficit 261 220 188 184 183 1,036 $1 Trillion in Five-Year Savings CBO Baseline Deficit 291 284 287 319 357 1,539 Illustrative Savings Policy changes -60 -120 -180 -240 -300 -900 Debt-service savings -2 -7 -17 -31 -49 -105 Subtotal -62 -127 -197 -271 -349 -1,005 Resulting Deficit 230 157 90 49 8 533 SOURCE:Congressional Budget Office. Virtually all of the options presented here would, in isolation, reduce employment temporarily. Accordingly, this particular drawback is not noted in each discussion. Similarly, since all the proposals that would reduce grants to state and local governments would make their financial status worse, that fact is not repeated in each discussion. A last caveat is that some options may not be counted in meeting the BEA's requirements for implementation, even though they would reduce the deficit. An example would be a reduction in Social Security spending, which would not enter either the discretionary or PAYGO calculus since Social Security is governed by separate rules under the BEA. Generally, if the savings cannot be counted under the BEA, this is noted in the write-ups. Finally, though all of the options, if devoted to deficit reduction, would reduce federal interest costs, these savings are not part of the calculations made. When CBO is presented with a detailed budgetary plan, the individual options are "costed" as in this book, but a supplementary additional saving is scored for the effect of the whole package on net interest spending. Moreover, when such budget packages are put together, adjustments can be made for any interactions among the parts that would raise or lower the savings--something that could not be done for the options discussed here. The estimates do not take into account the possible economic gains or losses associated with large-scale deficit reduction. Other Proposals Not Covered by These Options Some proposed actions, although they could certainly result in substantial deficit reduction, are beyond the scope of this report and are therefore not included. Three of these actions that have received considerable attention can serve as examples: o The restructuring of the defense budget to reflect post-Cold War realities could result in large savings that are beyond the five-year time horizon of this volume. Canceling weapon systems, for example, could save substantial money over the long term, but not necessarily within the five-year window. o A redefining of the role of the national government within the federal system could have wide- ranging long-term effects on federal, state, and local budgets. Ultimately, it could involve a wholesale reexamination of both revenue sources and functional responsibilities at all three levels. But such a plan would have to be very broad and therefore could not easily be presented as a deficit reduction option in this report. o Raising the retirement age would reduce both Social Security and federal retirement costs. Most savings, however, would occur far beyond the five-year savings period identified in the options included in this report, because such a reform would necessarily need to be phased in over several years. The exclusion of these policy options is primarily a reflection of the time horizon chosen for budget savings rather than a statement concerning the viability of these proposals. Once again, however, they represent genuine policy choices that might, like the options specified in this volume, result in deficit reduction. ******************************ENDNOTES************************************* 1.For more details about the trade-off between deficit reduction and investment spending, see Box 5-1, p. 70, in Congressional Budget Office, The Economic and Budget Outlook: Fiscal Years 1994-1998 (January 1993). 2.See Box 6-1, p. 85, in Congressional Budget Office, The Economic and Budget Outlook: Fiscal Years 1994-1998.