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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.