    [A Citizen's Guide to the Federal Budget]
    [2. Where the Money Comes From - and Where It
    Goes]
    [From the U.S. Government Printing Office, www.gpo.gov]

    In a typical American household, a father and mother might sit around
    the kitchen table to review the family budget. They might discuss how
    much they expect to earn each year, how much they can spend on food,
    shelter, clothing, transportation, and perhaps a vacation, and how
    much they might be able to save for their future needs.

    If they do not have enough money to make ends meet, they might discuss
    how they can spend less, such as by cutting back on restaurants,
    movies, or other entertainment. They also might consider whether to
    try to earn more by working more hours or taking another job. If they
    expect their shortfall to be temporary, they might try to borrow.

    Chart 2-1. Family Budgeting

    [[Page 6]]

    Generally speaking, the Federal Government plans its budget much like
    families do. The President and Congress determine how much money they
    expect the Government to receive in each of the next several years,
    where it will come from, and how much to spend to reach their
    goals--goals for national defense, foreign affairs, social insurance
    for the elderly, health insurance for the elderly and poor, law
    enforcement, education, transportation, science and technology, and
    others.

    They decide how much spending they will finance through taxes and how
    much through borrowing. They debate how to use the budget to help the
    economy grow, or to redistribute income. And, especially lately, they
    debate how to reduce spending in order to eliminate the deficit and
    balance the budget.

    In this chapter, we will discuss these decisions in some detail--that
    is, how the Government raises revenues and where it spends money.

    Chart 2-2. National Budgeting

    [[Page 7]]

    Revenues

    The money that the Federal Government uses to pay its bills--its
    revenues--comes mostly from taxes. In recent years, revenues
    have been lower than spending, and the Government has borrowed to
    finance the difference between revenues and spending--that is, the
    deficit.

    Revenues come from these sources:

       Individual income taxes will raise an estimated $645 billion in 1997,
       equal to about 8 percent of GDP--about the same percent as in each of
       the last 40 years.

       Social insurance payroll taxes--the fastest growing category of Federal
       revenues--include Social Security taxes, Medicare taxes, unemployment
       insurance taxes, and Federal employee retirement payments. This
       category has grown from two percent of GDP in 1955 to seven percent in
       1997.

       Corporate income taxes, which will raise an estimated $185 billion in
       1997, have shrunk steadily as a percent of GDP, from 4.6 percent in
       1955 to 2.2 percent today.

    Chart 2-3. The Federal Government Dollar--Where It Comes From

    [[Page 8]]

       Excise taxes apply to various products, including alcohol, tobacco,
       transportation fuels, and telephone services. The Government earmarks
       some of these taxes to support certain activities--including highways,
       airports and airways, and the cleanup of hazardous substances--and
       deposits others in the general fund.

       The Government also collects miscellaneous revenues--e.g., customs
       duties, Federal Reserve earnings, fines, penalties, and forfeitures.

                    Table 2-1. Revenues By Source-Summary

                         (In billions of dollars)
    ------------------------------------------------------------------------------
                                   1995                     Estimate
            Source                Actual  1996  1997  1998  1999  2000  2001  2002
    ------------------------------------------------------------------------------
    Individual income taxes         590    631   645   683   714   749   790   835
    Corporate income taxes          157    167   185   202   213   225   237   246
    Payroll taxes                   484    508   536   561   589   619   647   679
    Excise taxes                     57     54    60    60    62    63    64    66
    Estate and gift taxes            15     16    17    18    19    21    22    24
    Customs duties                   19     19    20    21    21    22    22    24
    Miscellaneous receipts           32     32    32    33    34    35    37    38
    Total revenues                1,355  1,427 1,495 1,578 1,653 1,734 1,820 1,912

    Notes: The revenues listed in this table do not include revenues from
    the Government's business-like activities-e.g., the sale of
    electricity and fees to national parks. The Government counts these
    revenues on the spending side of the budget, deducting them from other
    spending to calculate its outlays for the year.

    Numbers may not add to the totals due to rounding.

    [[Page 9]]

    Chart 2-4. Composition of Revenues Over the Last 40 Years

    Chart 2-5. Revenues as a Percent of GDP-Comparison With Other Countries

    [[Page 10]]

    Spending

    As we have said, the Federal Government will spend over $1.6
    trillion 1 in 1997, which we divided into eight large categories as
    shown in Chart 2-6.

       The largest Federal program is Social Security, which provides monthly
       benefits to more than 43 million retired and disabled workers, their
       dependents, and survivors. It accounts for 22 percent of all Federal
       spending.

       Medicare, which provides health care coverage for over 37 million
       elderly Americans and people with disabilities, consists of Part A
       (hospital insurance) and Part B (insurance for physician costs and
       other services). Since its birth in 1965, Medicare has accounted for
       an ever-growing share of spending. In 1997, it will comprise 11
       percent.

    Chart 2-6. The Federal Government Dollar--Where It Goes

    [[Page 11]]
       Medicaid provides health care services to over 36 million Americans,
       including the poor, people with disabilities, and senior citizens in
       nursing homes. Unlike Medicare, the Federal Government shares the
       costs of Medicaid with the States, paying between 50 and 83 percent of
       the total (depending on each State�s requirements). Federal and State
       costs are growing rapidly. Medicaid accounts for six percent of the Federal
       budget.

       Other means-tested entitlements provide benefits to people and
       families with incomes below certain minimum levels that vary from
       program to program. The major means-tested entitlements are Food
       Stamps and food aid to Puerto Rico, Aid to Families with Dependent
       Children, Supplemental Security Income, Child Nutrition, the Earned
       Income Tax Credit, and veterans� pensions. This category will account
       for an estimated six percent of the budget in 1997.

       The remaining entitlements, which mainly consist of Federal retirement
       and insurance programs and payments to farmers, comprise six percent
       of the budget.

       National defense discretionary spending will total an estimated $259
       billion in 1997, comprising 16 percent of the budget and 3.3 percent
       of GDP.

       Non-defense discretionary spending-a wide array of programs that
       include education, training, science, technology, housing,
       transportation, and foreign aid�has shrunk as a share of the budget
       from 23 percent in 1966 to an estimated 17 percent in 1997.

       Interest payments, primarily the result of previous budget deficits,
       averaged seven percent of Federal spending in the 1960s and 1970s.
       But, due to the large budget deficits that began in the 1980s, that
       share quickly doubled to 15 percent, where it stands today.

    [[Page 12]]

                        Table 2-2. Spending Summary

                      (Outlays, in billions of dollars)

    ------------------------------------------------------------------------------
                                   1995                     Estimate
            Category              Actual  1996  1997  1998  1999  2000  2001  2002
    ------------------------------------------------------------------------------
    Discretionary:
      National Defense              274    266   259   256   257   264   267   276
      International                  20     20    20    19    19    18    18    19
      Domestic                      252    255   263   264   260   255   264   278
        Subtotal, discretionary     546    541   542   539   536   537   548   573

    Mandatory:
      Programmatic:
        Social Security             333    348   365   383   402   421   442   464
        Medicare                    157    175   187   202   216   228   246   264
        Medicaid                     89     95   106   111   117   122   129   133
        Means-tested entitlements
          (except Medicaid)          92     97   104   109   114   121   121   129
        Other                       114    118   134   138   142   147   147   151
          Subtotal, programmatic    786    832   896   943   990 1,040 1,084 1,141
        Undistributed offsetting
            receipts,               -44    -42   -41   -42   -43   -46   -48   -69
          Subtotal, mandatory       741    790   855   901   947   955 1,036 1,072
        Net interest                232    241   238   236   235   230   227   223
          Subtotal, mandatory
            and net interest        973  1,031 1,093 1,137 1,181 1,225 1,263 1,295
          Total                   1,519  1,572 1,635 1,676 1,717 1,761 1,812 1,868

    Note: Numbers may not add to the totals due to rounding.

    [[Page 13]]

                            Table 2-3. Spending by Function

                            (Outlays, in billions of dollars)

    ------------------------------------------------------------------------------
                                   1995                     Estimate
            Function              Actual  1996  1997  1998  1999  2000  2001  2002
    ------------------------------------------------------------------------------
    National defense:
      Department of Defense--
        Military,                   259    254   247   244   246   254   257   265
      Other                          13     11    11    11    10     9     9    11
        Total, National defense     272    266   259   255   256   263   266   275
      International affairs          16     15    15    14    14    13    14    15
      General science, space,
        and technology               17     17    17    17    16    15    15    17
      Energy                          5      3     2     2     2     1     2     *
      Natural resources and
        environment                  22     22    22    21    21    20    21    22
      Agriculture                    10      8     8     9     9     8     7     7
      Commerce and housing credit   -14    -11     6     6     7     7     5     5
      Transportation                 39     40    39    39    37    35    34    35
      Community and regional
        development                  11     13    12    10     9     8     8     8
      Education, training,
        employment, and social
        services                     54     54    54    54    56    57    59    62
      Health                        115    121   135   141   147   152   156   162
      Medicare                      160    178   190   205   218   231   248   267
      Income security               220    228   237   245   253   264   269   282
      Social  Security              336    351   368   386   405   424   445   467
      Veterans benefits and
        services                     38     38    40    39    37    37    36    40
      Administration of justice      16     19    22    24    25    26    26    25
      General government             14     14    15    14    14    14    15    15
      Net interest                  232    241   238   236   235   230   227   223
      Allowances                            -*    -*    -*    -*    -*     5     9
      Undistributed offsetting
        receipts                    -44    -42   -41   -42   -43   -46   -48   -69
          Total                   1,519  1,572 1,635 1,676 1,717 1,761 1,812 1,868

    *  $500 million or less.

    Notes: Spending that is shown as a minus means that receipts exceed outlays.
           Numbers may not add to the totals due to rounding.

    [[Page 14]]

                           Table 2-4. Spending by Agency

                         (Outlays, in billions of dollars)

    ------------------------------------------------------------------------------
                                   1995                     Estimate
            Function              Actual  1996  1997  1998  1999  2000  2001  2002
    ------------------------------------------------------------------------------
    Legislative Branch                3      3     3     3     3     3     3     3
    The Judiciary                     3      3     4     4     4     4     4     4
    Executive Office of the President *      *     *     *     *     *     *     *
    Funds Appropriated to the
      President                      11     10    10    10    10    10     9    10
    Agriculture                      57     55    56    58    59    59    61    63
    Commerce                          3      4     4     4     5     6     4     4
    Defense-Military                260    254   247   244   246   254   257   265
    Defense-Civil                    32     32    33    34    35    36    37    38
    Education                        31     30    30    29    30    31    32    33
    Energy                           18     15    15    14    13    12    12    12
    Health and Human Services       303    327   354   378   397   416   439   465
    Housing and Urban Development    29     26    32    33    33    31    30    30
    Interior                          7      7     7     7     7     7     7     7
    Justice                          11     13    16    18    19    20    20    19
    Labor                            32     34    35    36    37    38    40    41
    State                             5      6     6     5     5     5     5     5
    Transportation                   39     39    38    38    36    34    33    35
    Treasury                        349    365   369   370   374   376   377   381
    Veterans Affairs                 38     38    40    39    37    37    36    40
    Environmental Protection Agency   6      6     6     7     7     7     7     7
    General Services Administration   1      *     1     1     *     *     *     *
    National Aeronautics and Space
      Administration                 13     14    14    14    13    12    12    13
    Office of Personnel Management   41     42    45    47    49    51    54    57
    Small Business Administration     1      1     *     *     *     *     *     1
    Social Security Administration  362    377   398   418   438   462   480   506
    Other Independent Agencies        2      9    21    20    20    19    19    20
    Allowances                      ...     -1    -5    -7    -6    -7    -2     *
    Undistributed offsetting
      receipts                     -138   -140  -143  -148  -153  -161  -166  -192
        Total                     1,519  1,572 1,635 1,676 1,717 1,761 1,812 1,868

    * $500 million or less.

    Notes: Spending that is shown as a minus means that receipts exceed outlays.
           Numbers may not add to the totals due to rounding.

    [[Page 15]]

    ``On'' and ``Off'' Budget

    From time to time, you may hear about programs that are
    ``off-budget,'' meaning that the Government categorizes them
    separately from other programs.

    Specifically, the law requires that the spending and revenues of two
    Federal programs, Social Security and the Postal Service, be excluded
    from the budget totals--that is, categorized as ``off-budget.''Therefore, the budget displays ``on-budget,'' ``off-budget,''
    and ``unified budget'' totals to satisfy this legal requirement.

    The unified budget is the most useful display of the Government's
    finances; it is vital in calculating how much the Government has to borrow.

    The ``off-budget'' category is designed to give special status to
    certain programs. Over the years, the Government has placed numerous
    programs ``off-budget,'' then returned them to the unified budget. But
    the mere listing of programs as ``off-budget'' does not, by itself,
    protect them from the budget process--e.g., Administration and
    congressional review, possible cuts, and hiring and procurement rules.

    Chart 2-7 illustrates the relationship between on- and off-budget
    items, and the unified budget.

    Chart 2-7. On- and Off-Budget Deficit Projections