    [A Citizen's Guide to the Federal Budget]
    [From the U.S. Government Printing Office, www.gpo.gov]

    A Note to the Reader, iii

    1. What Is the Budget?,  1

    2. Where the Money Comes From--and Where It Goes,  5
       Revenues, 7
       Spending, 10
       ``On'' and ``Off'' Budget, 15

    3. How Does the Government Create a Budget? 17
       The President's Budget, 17
       The Budget Process, 18
       Action in Congress, 19
       Monitoring the Budget, 20

    4. Deficits and the Debt, 23
       Why the Deficit is a Problem, 25
       Deficits and Debt, 26
       Deficit Reduction Efforts, 28

    5. The President's 1997 Budget, 31
       Reaching Balance, 31
       Maintaining Our Values, 32
       Making Government Work, 33

    Glossary, 37

    List of Charts and Tables, 41

    [[Page iii]]

                          A Note to the Reader

    Next year, your Federal Government will spend over $1.6 trillion.

    Needless to say, that's a lot of money. And the Government spends it
    on lots of things--on programs as large and popular as Social Security, and on
    activities as small and unknown as repairs to the National Zoo.
    Together, these programs are what make up the Federal budget.

    How much do you know about the budget? If your answer is ``not much,''
    you're not alone. In fact, hardly anybody knows everything that's in the
    thousands of pages, and several books, that make up the budget each year.

    But we know you care a lot about how the Government spends your money.
    That's why we created A Citizen's Guide to the Federal Budget last year,
    and why we have published this second edition. With it, we hope to make
    the budget more accessible and understandable.

    The Guide is designed to give you a walking tour of the budget.
    In these pages, we will outline for you how the Government raises revenues and
    spends money, how the President and Congress enact the budget, why the
    budget deficit and Federal debt are problems, and what the President
    hopes to accomplish with his 1997 budget.

    After you read these pages, we hope that you will think the tour was worth
    your time. And we hope you will give us your suggestions about how we can
    make the Guide more useful to you in the future.

    [[Page 1]]

    1. What Is the Budget?

    What is ``the Federal budget''? It is:

    a plan for how the Government spends your money.

       What activities are funded? How much does it spend for defense,
       national parks, the FBI, Medicare, issuing passports, and meat and
       fish inspection?

    a plan for how the Government pays for its activities.

       How much revenue does it raise through different kinds of
       taxes--income taxes, excise taxes, and social insurance payroll
       taxes?

    a plan for Government borrowing.

       If spending is greater than revenues, the Government runs a deficit.
       To finance deficits, the Government has to borrow money.
       Government borrowing adds to the national debt.

    something that affects the Nation's economy.

       Some types of spending--such as improvements in education and support
       for science and technology--increase productivity and raise
       incomes in the future.
       Taxes, on the other hand, reduce incomes, leaving people with less
       money to spend.

    something that is affected by the Nation's economy.

       When the economy is doing well, people are earning more and
       unemployment is low. In this atmosphere, revenues increase and
       the deficit shrinks.

    an historical record.

       The budget reports on how the Government has spent money in
       the past, and how that spending was financed.

    The 1997 budget is a document that embodies the President's budget
    proposal to Congress for fiscal 1997, the fiscal year that begins on
    October 1, 1996. It reflects the President's priorities and his plan
    to balance the budget by 2002.

    [[Page 2]]

    The Federal budget, of course, is not the only budget that affects the
    economy or the American people. The budgets of State and
    local governments have an impact as well. While the Federal Government
    spends about 22 percent of the Gross Domestic Product (or GDP, which
    measures the size of the economy), State and local governments spend
    about another 11 percent (see Chart 1-1).

    State and local governments are independent of the Federal Government,
    and they have their own sources of revenue (taxes and borrowing). But
    the Federal Government supplements State and local revenues by making
    grants to them. Of the $961 billion that State and local governments
    spent in 1995, $213 billion came from Federal grants.

    Compared to six other industrialized nations, the United States
    allocates the smallest share of its GDP to government (Federal, State,
    and local combined), except for Japan (see Chart 12).

     Chart 1-1. Government Spending as a Share of GDP, 1995

    [[Page 3]]

    Chart 1-2. Total Government Outlays as a Percent of GDP

    [[Page 5]

    2. Where the Money Comes From--and Where it Goes

    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

    [[Page 17]]

    3. How Does the Government Create a Budget?

    The President and Congress both play major roles in developing the
    Federal budget.

    The President's Budget

    The law requires that, by the first Monday in February, the President
    submit to Congress his proposed Federal budget for the next fiscal
    year, which begins October 1.

    The White House's Office of Management and Budget (OMB) prepares the
    budget proposal, after receiving direction from the President and
    consulting with his senior advisors and officials from Cabinet
    departments and other agencies.

    The President's budget--which typically includes a main book and
    several accompanying books--covers thousands of pages and provides
    reams of details.

    This year, President Clinton faced unusual challenges in presenting
    his budget. At a time when OMB normally would have prepared that
    budget, the President and congressional leaders of both parties were
    negotiating a plan to balance the budget over seven years, and
    Congress had not finished the necessary spending bills for 1996.

    As a result, the President submitted a brief budget document on
    February 5 to comply with the legal requirement, and the rest of the
    budget books,1 with the traditional amount of back-up details, in
    March.
    -----------------
    1 They are the main budget book, entitled, Budget of the United States
    Government--Supplement: Fiscal Year 1997, as well as Analytical
    Perspectives, Appendix, Historical Tables, and A Citizen's
    Guide to the Federal Budget, which you are now reading.

    [[Page 18]]

    The Budget Process

    Through the budget process, the President and Congress decide how much
    to spend and tax in any one fiscal year. More specifically, they
    decide how much to spend on each activity, ensure that the Government
    spends no more and spends it only for that activity, and report on
    that spending at the end of each budget cycle.

    The President's budget is his plan for the next year. But it's just a
    proposal. After receiving it, Congress has its own budget process to
    follow. Only after the Congress passes, and the President signs, the
    required spending bills has the Government created its actual budget.

    For fiscal 1997-that is, October 1, 1996 to September 30, 1997--the
    major steps in the budget process are outlined in Chart 3-1.

    Chart 3-1. Major Steps in the Budget Process
    -----------------------------------------------------------------------
    Formulation of the President's budget for fiscal 1997.

      Executive Branch agencies develop requests for funds and submit them to
      the Office of Management and Budget. The President reviews the requests
      and makes the fiscal decisions on what goes in his budget.

      February-December 1995
    -----------------------------------------------------------------------
    Budget preparation and transmittal.

      The budget documents are prepared and transmitted to the Congress.

      December 1995--February/March 1996 1
    -----------------------------------------------------------------------
    Congressional action on the budget.

      The Congress reviews the President's proposed budget, develops its
      own budget, and approves spending and revenue bills.

      March--September 1996
    -----------------------------------------------------------------------
    The fiscal year begins.

      October 1, 1996
    -----------------------------------------------------------------------
    Agency program managers execute the budget provided in law.

      October 1, 1996--September 30, 1997
    -----------------------------------------------------------------------
    Data on actual spending and receipts for the completed fiscal year
    become available.

      October--November 1997
    -----------------------------------------------------------------------
    1 Due to unusual circumstances, the President submitted the 1997 budget
    in two steps--one in February, the other in March.

    [[Page 19]]

    Action in Congress

    Congress first must pass a ``budget resolution''--a framework within
    which the Members will make their decisions about spending and taxes.
    It includes targets for total spending, total revenues, and the
    deficit, and allocations within the spending target for the two types
    of spending--discretionary and mandatory--explained below:

      Discretionary spending, which accounts for 33 percent of all Federal
      spending, is what the President and Congress must decide to spend for
      the next year through the 13 annual appropriations bills. It includes
      money for such activities as the FBI and the Coast Guard, for housing
      and education, for space exploration and highway construction, and for
      defense and foreign aid.

      Mandatory spending, which accounts for 67 percent of all spending, is
      authorized by permanent laws, not by the 13 annual appropriations
      bills. It includes entitlements--such as Social Security, Medicare,
      veterans' benefits, and Food Stamps--through which individuals receive
      benefits because they are eligible based on their age, income, or
      other criteria. It also includes interest on the national debt, which
      the Government pays to individuals and institutions that hold Treasury
      bonds and other Government securities. The President and Congress can
      change the law in order to change the spending on entitlements and
      other mandatory programs--but they don't have to.

    Think of it this way: For discretionary programs, Congress and the
    President must act each year to provide spending authority. For mandatory
    programs, they may act in order to change the spending that current
    laws require.

    Currently, the law imposes a limit, or ``cap,'' through 1998 on total
    annual discretionary spending. Within the cap, however, the President and Congress can, and often do, change the spending levels from year
    to year for the thousands of individual Federal spending programs.

    In addition, the law requires that legislation that would raise
    mandatory spending or lower revenues--compared to existing law--be
    offset by spending cuts or revenue increases. This requirement, called
    ``pay-as-you- go,'' is designed to prevent new legislation from increasing the deficit.

    Once Congress passes the budget resolution, it turns its attention to
    passing the 13 annual appropriations bills and, if it chooses,
    ``authorizing'' bills to change the laws governing mandatory spending and revenues.

    [[Page 20]

    Congress begins by examining the President's budget in detail. Scores
    of committees and subcommittees hold hearings on proposals under their
    jurisdiction. The House and Senate Armed Services Authorizing Committees,
    and the Defense and Military Construction Subcommittees of
    the Appropriations Committees, for instance, hold hearings on the
    President's defense plan. If the President's budget proposed changes
    in taxes, the House Ways and Means and the Senate Finance Committees
    would hold hearings. The Budget Director, Cabinet officers, and other
    Administration officials work with Congress as it accepts some of the
    President's proposals, rejects others, and changes still others.
    Congressional rules require that these committees and subcommittees
    take actions that reflect the budget resolution.

    If you read through the President's budget, the budget resolution, or
    the appropriations or authorizing bills that Congress drafts, you will
    notice that the Government measures spending in two ways--``budget
    authority'' and ``outlays'':

    Budget authority (or BA) is what the law authorizes the Federal
    Government to spend for certain programs, projects, or activities.
    What the Government actually spends in a particular year, however, is
    an outlay. To see the difference, consider what happens when the
    Government decides to build a space exploration system.

    The President and Congress may agree to spend $1 billion for the space
    system. Congress appropriates $1 billion in BA. But the system may
    take 10 years to build. Thus, the Government may spend $100 million in
    outlays in the first year to begin construction and the remaining $900
    million over the next nine years as construction continues.

    Monitoring the Budget

    Once the President and Congress approve spending, the Government
    monitors the budget through:

      agency program managers and budget officials, including the Inspectors
      General, or IGs, who report only to the agency head;

      OMB;

      congressional committees; and

      the General Accounting Office, an auditing arm of Congress.

    [[Page 21]]

    This oversight is designed to:

      ensure that agencies comply with legal limits on spending, and that
      they use budget authority only for the purposes intended;

      see that programs are operating consistently with legal requirements
      and existing policy; and, finally,

      ensure that programs are well managed and achieving the intended results.

    The Government has paid more attention to good management of late,
    through the work of Vice President Gore's National Performance Review
    and implementation of the 1993 Government Performance and Results Act.
    This law is designed to improve Government programs by using better
    measurements of their results in order to evaluate their effectiveness.

    [[Page 23]]

    4. Deficits and the Debt

    You've probably heard a lot about the Federal budget deficit and debt
    in recent years, primarily because both exploded in size in the 1980s.

    Put simply, a deficit occurs when spending exceeds revenues in
    any year--just as a surplus occurs when revenues exceed spending.
    Generally, to finance our deficits, the Treasury borrows money. The
    debt is the sum total of our deficits, minus our surpluses, over the
    years.

    The deficit is not a new phenomenon; the Government incurred its first
    in 1792, and it generated 68 annual deficits between 1900 and 1995.

    Chart 4-1 provides the history of budget surpluses and deficits since 1940.

    Chart 4-1. Past and Future Budget Deficits or Surpluses

    [[Page 24]]

    For most of the Nation's history, deficits were the result of either
    wars or recessions. Wars necessitated major increases in military
    spending, while recessions reduced Federal tax revenues from
    businesses and individuals.

    The Government generated deficits during the War of 1812, the
    recession of 1837, the Civil War, the depression of the 1890s, and
    World War I. Once the war ended or the economy began to grow, the
    Government followed its deficits with budget surpluses, with which it
    paid down the debt.

    Deficits returned in 1931 and remained for the rest of the decade_due
    to the Great Depression and the spending associated with President
    Roosevelt�s New Deal. Then, World War II forced the Nation to spend
    unprecedented amounts on defense and to incur unprecedented deficits.
    Since then--with Democratic and Republican Presidents, Democratic and
    Republican Congresses--the Government has balanced its books only eight
    times, most recently in 1969.

    Why have deficits become such a perennial problem for budget
    decisionmakers? Because spending has been growing faster than
    revenues.

    Chart 4-2. Outlays as a Percent of GDP

    [[Page 25]]

    Revenues have stayed relatively constant, at around 19 percent of GDP,
    since the 1960s. In that time, however, outlays have grown from below
    18 percent of GDP in 1965 to up to 24 percent in 1983 before falling
    to 21 percent today. Much of the spending growth has come in Social
    Security, Medicare, Medicaid, and interest payments (see Chart 4�2).

    Nevertheless, the deficits before 1981 paled in comparison to what
    followed. That year, the Government cut income tax rates and greatly
    increased defense spending, but it did not cut non-defense programs
    enough to make up the difference. Also, the recession of the early
    1980s reduced Federal revenues, increased Federal outlays for
    unemployment insurance and similar programs that are closely tied to
    economic conditions, and forced the Government to pay interest on more
    national debt at a time when interest rates were high. As a result,
    the deficit soared.

    Why the Deficit is a Problem

    The United States is not alone in struggling with budget deficits. As
    Chart 4�3 illustrates, this Nation has an average record when compared
    to the recent history of six other major developed economies. (To make
    accurate comparisons with the governments of other nations, the U.S.
    data include the activities of State and local governments).

    If budget deficits occur so frequently, here and abroad, should we
    worry about them?

    The short answer is, yes. The deficit forces the Government to borrow
    money in the private capital markets. That borrowing competes with (1)
    borrowing by businesses that want to build factories and machines that
    make workers more productive and raise incomes, and (2) borrowing by
    families who hope to buy new homes, cars, and other goods. The
    competition for funds tends to produce higher interest rates.

    Deficits increase the Federal debt and, with it, the Government's
    obligation to pay interest. The more it must pay in interest, the less
    it has available to spend on education, law enforcement, and other
    important services, or the more it must collect in taxes--forever
    after. Today, the Government spends 15 percent of its budget to pay
    interest.

    As shown in Chart 4-4, the Federal interest burden grew substantially
    in the 1980s. By 1997, net interest spending will be nearly as much as
    the Government will spend on national defense.

    In the end, the deficit is a decision about our future. We can provide
    a solid foundation for future generations, just as parents try to do
    within a family by

    [[Page 26]]

    limiting the amount of debt that they pass on; or we can generate
    large deficits and debt for those who come after us.

    Deficits and Debt

    If the Government incurs a deficit, it must borrow from the public.

    Table 4-1 summarizes the relationship between the budget deficit and
    Federal borrowing.

    Federal borrowing involves the sale, to the public, of notes and bonds
    of varying sizes and time periods. The cumulative amount of borrowing
    from the public--i.e., the debt held by the public--is the most
    important measure of Federal debt because it is what the Government
    has borrowed in the private markets over the years, and it determines
    how much the Government pays in interest to the public.

    Chart 4-3. Total Government Surplus or Deficit as a Percent of GDP

    [[Page 27]]

                Table 4-1. Federal Government Financing and Debt

                            (In billions of dollars)
    ------------------------------------------------------------------------------
                                   1995                     Estimate
            Function              Actual  1996  1997  1998  1999  2000  2001  2002
    ------------------------------------------------------------------------------
    Federal Government financing:
      Budget deficit (-) or
        surplus                    -164   -146  -140   -98   -64   -28     8    44
      Other means of financing       -7    -20   -24   -27   -29   -29   -28   -27
                                 -------------------------------------------------
      Borrowing from the public     171    165   164   124    93    57    20   -17

    Federal Government debt:
      Debt held by the public     3,603  3,769 3,933 4,057 4,151 4,207 4,227 4,210
      Debt held by government
        accounts                  1,318  1,439 1,566 1,693 1,828 1,978 2,133 2,297
                                 -------------------------------------------------
    Gross Federal debt            4,921  5,207 5,499 5,750 5,979 6,185 6,360 6,506

    Debt subject to legal limit   4,885  5,163 5,456 5,711 5,939 6,145 6,321 6,468

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

    Debt held by the public was $3.6 trillion at the end of 1995--roughly
    the net effect of deficits and surpluses over the last 200 years. Debt
    held by the

    [[Page 28]]

    public does not include debt the Government owes itself--the total of
    all trust fund surpluses and deficits over the years, like the Social
    Security surpluses, that the law says must be invested in Federal securities.

    The sum of debt held by the public and debt the Government owes itself
    is called Gross Federal Debt. At the end of 1995, it totaled $4.9 trillion.

    Another measure of Federal debt is debt subject to legal limit, which
    is similar to Gross Federal Debt. When the Government reaches the
    limit, it loses its authority to borrow more to finance its spending;
    then, the President and Congress must enact a law to increase the
    limit.

    The Government's ability to finance its debt is tied to the size and
    strength of the economy, or GDP. Debt held by the public exceeded 50
    percent of GDP at the end of 1996. As a share of GDP, debt held by the
    public was highest at the end of World War II, at 114 percent, then
    fell to 24 percent in 1974 before gradually rising to current levels.

    That decline, from 114 to 24 percent, occurred because the economy
    grew faster than the debt accumulated; debt held by the public rose
    from $242 billion to $344 billion in those years, but the economy grew
    faster.

    Individuals and institutions in the United States hold over 75 percent
    of debt held by the public. The rest is held in foreign countries.

    Deficit Reduction Efforts

    Ever since the deficit soared in the early 1980s, successive
    Presidents and Congresses have tried to cut it. Until recently, they
    met with only limited success.

    In the early 1980s, President Reagan and Congress agreed on a large
    tax cut, but could not agree about cutting spending; the President
    wanted to cut domestic spending more than Congress, while Congress
    sought fewer defense funds than the President wanted. They wound up
    spending more on domestic programs than the President wanted, and more
    on defense than Congress wanted. At the same time, a recession led to
    more spending to aid those affected by the recession, and reductions
    in tax revenues due to lower incomes and corporate profits.

    By 1985, both sides were ready for drastic measures. That year, they
    enacted the Balanced Budget and Emergency Deficit Control Act, better
    known as Gramm-Rudman-Hollings (GRH). It set annual deficit targets
    for five years, declining to a balanced budget in 1991. If necessary,
    GRH required across-the-board cuts in programs to comply with the
    deficit targets.

    [[Page 29]]

    Faced with the prospect of huge spending cuts in 1987, however, the
    President and Congress amended the law, postponing a balanced budget
    until 1993. The President and Congress never achieved those revised
    targets, in part because of the extraordinary costs of returning the
    Nation's savings and loan industry to a sound financial footing.

    By 1990, President Bush and Congress enacted spending cuts and tax
    increases that were designed to cut the accumulated deficits by about
    $500 billion over five years. They also enacted the Budget Enforcement
    Act (BEA)�rather than set annual deficit targets, the BEA was designed
    to limit discretionary spending while ensuring that any new
    entitlement programs or tax cuts did not make the deficit worse.

    First, the BEA set annual limits on total discretionary spending for
    defense, international affairs, and domestic programs. Second, it
    created ``pay-as- you-go'' rules for entitlements and taxes: those who
    proposed new spending on entitlements or lower taxes were forced to
    offset the costs by cutting other entitlements or raising other taxes.

    For what it was designed to do, the law worked. It did, in fact, limit
    discretionary spending and force proponents of new entitlements and
    tax cuts to find ways to finance them. But the deficit, which
    Government and private experts said would fall, actually rose.

    Why? Because the recession of the early 1990s reduced individual and
    corporate tax revenues and increased spending that is tied to economic
    fluctuations. Federal health care spending also continued to grow
    rapidly.

    In 1993, President Clinton and the Congress made another effort to cut
    the deficit. They enacted a five-year deficit reduction package of
    spending cuts and higher revenues. The law was designed to cut the
    accumulated deficits from 1994 to 1998 by about $500 billion. The new
    law extended the limits on discretionary spending and the ``pay-as-you-go'' rules.

    Clearly, the President's deficit reduction efforts have paid off. The
    deficit fell from $290 billion in 1992 to $164 billion in 1995, and by
    over half as a share of GDP, to 2.3 percent. Now, as you will see in
    the next chapter, the President wants to finish the job by balancing
    the budget over the next seven years.

    [[Page 31]]

    5. The President's 1997 Budget

    As we have said, the President released his 1997 budget in two steps
    this year. On February 5, he released a brief document that outlined
    his priorities. Then in March, he released the budget books with the
    details that traditionally comprise the annual budget proposal.

    The President's 1997 budget would reach balance over the next seven
    years by cutting unnecessary and lower priority spending.
    The budget would strengthen Medicare and Medicaid; invest in education
    and training, the environment, science and technology, and other
    priorities; reform welfare; maintain a strong defense; and provide tax
    relief to help families raise their children, send them to college,
    and save for the future.

    Like his earlier budgets, this budget contributes to two of the
    President's key goals-strengthening the economy and making Government work.

    Reaching Balance

    The President's budget saves $593 billion 1 over seven years (after
    subtracting the costs of his proposed tax cut). Among its major
    elements, the budget:

      saves $297 billion in discretionary spending, cutting unnecessary and
      lower priority spending but investing in education and training, the
      environment, science and technology, law enforcement, and other
      priorities that will raise living standards and improve the quality of
      American life;

      saves $124 billion in Medicare, strengthening and improving the
      program and guaranteeing the solvency of its trust fund for over a decade;

      saves $59 billion in Medicaid, reforming the program but continuing
      the guarantee of meaningful health and long-term care coverage for the
      most vulnerable Americans;

    ------------------
    1 Using the last available assumptions of the Congressional Budget
    Office.

    [[Page 32]]

      saves $40 billion through real welfare reform, moving recipients to
      work while protecting children;

      saves $49 billion by reforming a host of other mandatory programs;

      saves $62 billion by ending corporate subsidies and other tax loopholes;
      and

      cuts taxes by $100 billion, providing tax relief to tens of millions
      of middle-income Americans and to small businesses.

    Maintaining Our Values

    From the start, the President's economic program has emphasized one
    primary concern�to raise the standard of living for average Americans
    now and in the future. His budget policy has played a central role.

    The President's budget plan of 1993, which he enacted with the last
    Congress, has cut the budget deficit nearly in half in three
    years--from $290 billion in 1992 to $164 billion in 1995. That, in
    turn, has cut Federal borrowing, making more funds available in the
    private markets so businesses can invest, grow more productive,
    expand, and create jobs.

    Working with Congress, the President also has shifted Federal
    resources to education and training, science and technology, and other
    priorities, not only to make businesses more competitive but to give
    Americans the skills they need to compete in the new economy.

    This budget maintains or expands his investments in these key areas.

    In education and training, these investments include the Head Start
    program for disadvantaged children; the Safe and Drug-Free Schools and
    Communities program to create safe learning environments; Goals 2000,
    which helps States and school systems extend high academic standards,
    better teaching, and better learning to all students; AmeriCorps,
    through which 25,000 Americans this year are serving their communities
    and earning money for college; Pell grant scholarships for needy
    students; and Skill Grants (or job training vouchers) for dislocated
    workers and low-income adults.

    The budget also protects environmental enforcement through the
    Environmental Protection Agency�s operating program; funds programs to
    protect national parks and other sensitive resources; and invests in
    basic and applied research and technology.

    The budget funds the Community Oriented Policing Services (COPS)
    initiative to put 100,000 more police on the street by the year 2000;
    more

    [[Page 33]]

    border patrols to prevent illegal immigration and more inspections to
    prevent the hiring of illegal immigrants; and the Community
    Development Financial Institutions fund to spur growth and create jobs
    in communities that have been left behind.

    In addition, the budget includes funds to launch the important
    initiatives that the President outlined in his State of the Union address:

      for education, it funds a Technology Literacy Challenge to connect
      every classroom to the information superhighway by the year 2000;
      expanded work-study to help one million students work their way
      through college by 2000; a $1,000 merit scholarship for the top five
      percent of graduates in every high school; and Charter Schools to let
      parents, teachers, and communities create public schools to meet their
      own children's needs;

      for workers, it funds initiatives to make it easier for small
      businesses and farmers to establish their own pension plans; to
      encourage these and other employees to establish flexible pension
      plans that workers can take with them when they change jobs; and to
      help workers who lose their health insurance when they lose their jobs
      pay for private insurance coverage for up to six months;

      for the environment, it funds tax incentives to encourage companies to
      clean up ``brownfields''--abandoned, contaminated industrial properties
      in distressed areas; and

      for law enforcement, it provides funds with which the FBI and other
      law enforcement agencies will launch a war on juvenile crime and gangs
      that involve juveniles.

    Making Government Work

    ``The era of big Government is over,'' President Clinton declared in his
    State of the Union address in late January 1996. ``But we cannot go
    back to the time when our citizens were left to fend for themselves.''

    The President has worked hard to create a leaner, but not meaner,
    Federal Government, one that works hand-in-hand with States, localities, businesses, and community and civic associations to
    manage resources wisely while helping those Americans who cannot help
    themselves.

    In 1993, the President pledged to cut the Federal workforce by 252,000
    full-time equivalent (FTE) positions. A year later, the President and
    Congress enacted the Federal Workforce Restructuring Act, requiring cuts of 272,900

    [[Page 34]]

    FTEs by the end of this decade. (An FTE is not necessarily synonymous
    with an employee. One full-time employee counts as one FTE, and two
    half-time employees also count as one FTE.)

    To date, the Administration has cut the workforce by over 200,000
    employees out of 2.2 million in January 1993, giving us the smallest
    Federal workforce in 30 years. This corresponds to a reduction of
    185,000 FTEs (see Chart 5-1).

    While Americans want a smaller Government, they also deserve one that
    works better--that treats them as valued customers at Social Security,
    veterans', and other offices; that uses their tax dollars wisely; and
    that makes a real impact on their lives when it addresses the problems
    of crime and poverty and the challenges of work and education.

    Chart 5-1. Cuts in Civilian Employment

    [[Page 35]]

    From the start, the President has stressed the importance of providing
    better service to Government's customers--the tens of millions of
    Americans who come in contact with it. His efforts are bearing fruit:

      Social Security Administration's (SSA) Customer Service Hotline:
      Business Week reported in mid-1995 that an independent survey of some
      of the Nation's best 1-800 customer services hotlines ranked SSA's
      hotline on top, ahead of companies like L.L. Bean, Federal Express,
      and Disney. SSA's reputation for solving problems quickly and
      courteously earned it the highest overall score.

      Customs Service--Streamlining Inspections: In Miami, the airlines and
      Federal agencies formed partnerships to overhaul Customs procedures
      for international travelers, eliminating three-hour delays and missed
      connecting flights. Officials from the Customs Service, the
      Immigration and Naturalization Service, and the Agriculture Department
      worked with airline officials to reduce waiting times to 45 minutes, on
      average.

      Veterans Affairs (VA) Department Responding to Customers:
      Responding to complaints about long waits to see benefits counselors,
      the VA promised veterans that it would cut waiting times to 30 minutes
      or less. Having met that promise, the VA has aimed higher; it now
      promises veterans no more than a 20-minute wait and is meeting that
      goal 90 percent of the time.

    Americans want a Government that uses common sense when it makes
    decisions that affect their lives. The Administration is answering
    their call.

    [[Page 37]]

    Glossary

    Appropriation
      An appropriation is an act of Congress that enables Federal agencies
      to spend money for specific purposes.

    Authorization
      An authorization is an act of Congress that establishes or continues a
      Federal program or agency, and sets forth the guidelines to which it
      must adhere.

    Balanced Budget
      A balanced budget occurs when total revenues equal total outlays for a
      fiscal year.

    Budget Authority (BA)
      Budget authority is what the law authorizes, or allows, the Federal
      Government to spend for programs, projects, or activities.

    Budget Enforcement Act (BEA) of 1990
      The BEA is the law that was designed to limit discretionary spending
      while ensuring that any new entitlement program or tax cuts did not
      make the deficit worse. It set annual limits on total discretionary
      spending and created ``pay-as-you-go'' rules for any changes in
      entitlements and taxes. (See ``pay-as-you-go.'')

    Balanced Budget and Emergency Deficit Control Act of 1985
    (Gramm-Rudman-Hollings, or GRH)
      The Balanced Budget and Emergency Deficit Control Act of 1985 was
      designed to end deficit spending. It set annual deficit targets for
      five years, declining to a balanced budget in 1991. If necessary, it
      required across-the-board cuts in programs to comply with the deficit
      targets. It was never fully implemented.

    Budget Resolution
      The budget resolution is the annual framework within which Congress
      makes its decisions about spending and taxes. This framework includes
      targets for total spending, total revenues, and the deficit, as well
      as allocations, within the spending target, for discretionary and
      mandatory spending.

    [[Page 38]]

    ``Cap''
      A ``cap'' is a legal limit on total annual discretionary spending.

    Deficit
      The deficit is the difference produced when spending exceeds revenues
      in a fiscal year.

    Discretionary Spending
      Discretionary spending is what the President and Congress must decide
      to spend for the next fiscal year through 13 annual appropriations
      bills. Examples include money for such activities as the FBI and the
      Coast Guard, housing and education, space exploration and highway
      construction, and defense and foreign aid.

    Entitlement
      An entitlement is a program that legally obligates the Federal
      Government to make payments to any person who meets the legal criteria
      for eligibility. Examples include Social Security, Medicare, and Medicaid.

    Excise Taxes
      Excise taxes apply to various products, including alcohol, tobacco,
      transportation fuels, and telephone service.

    Federal Debt
      The gross Federal debt is divided into two categories: debt held by
      the public, and debt the Government owes itself. Another category is
      debt subject to legal limit.

      Debt Held by the Public
        Debt held by the public is the total of all Federal deficits, minus
        surpluses, over the years. This is the cumulative amount of money the
        Federal Government has borrowed from the public, through the sale of
        notes and bonds of varying sizes and time periods.

      Debt the Government Owes Itself
        Debt the Government owes itself is the total of all trust fund
        surpluses over the years, like the Social Security surpluses, that the
        law says must be invested in Federal securities.

      Debt Subject to Legal Limit
        Debt subject to legal limit, which is roughly the same as gross
        Federal debt, is the maximum amount of Federal securities that may
        be legally

    [[Page 39]]

        outstanding at any time. When the limit is reached, the President and
        Congress must enact a law to increase it.

    Fiscal Year
      The fiscal year is the Government's accounting period. It begins
      October 1 and ends on September 30. For example, fiscal 1997 ends
      September 30, 1997.

    Gramm-Rudman-Hollings
      See Balanced Budget and Emergency Deficit Control Act of 1985.

    Gross Domestic Product (GDP)
      GDP is the standard measurement of the size of the economy. It is the
      total production of goods and services within the United States.

    Mandatory Spending
      Mandatory spending is authorized by permanent law. An example is
      Social Security. The President and Congress can change the law to
      change the level of spending on mandatory programs � but they don't have to.

    ``Off-Budget''
      By law, the Government must distinguish ``off-budget'' programs separate
      from the budget totals. Social Security and the Postal Service are
      ``off-budget.''

    Outlays
      Outlays are the amount of money the Government actually spends in a
      given fiscal year.

    ``Pay-As-You-Go''
      Set forth by the BEA, ``pay-as-you-go'' refers to requirements that new
      spending proposals on entitlements or tax cuts must be offset by cuts
      in other entitlements or by other tax increases, to ensure that the
      deficit does not rise. (See BEA.)

    Revenue
      Revenue is money collected by the Government.

    Social Insurance Payroll Taxes
      This tax category includes Social Security taxes, Medicare taxes,
      unemployment insurance taxes, and Federal employee retirement payments.

    [[Page 40]]

    Surplus
      A surplus is the amount by which revenues exceed outlays.

    Trust Funds
      Trust funds are Government accounts, set forth by law as trust funds,
      for revenues and spending designated for specific purposes.

    Unified Federal Budget
      The unified budget, the most useful display of the Government's
      finances, is the presentation of the Federal budget in which revenues
      from all sources and outlays to all activities are consolidated.

    [[Page 41]]

    List of Charts and Tables

    List of Charts

    What Is the Budget?
      1-1 Government Spending as a Share of GDP, 1995, 2
      1-2 Total Government Outlays as a Percent of GDP,  3

    Where the Money Comes From--and Where It Goes
      2-1 Family Budgeting, 5
      2-2 National Budgeting,  6
      2-3 The Federal Government Dollar--Where It Comes From,  7
      2-4 Composition of Revenues Over the Last 40 Years, 9
      2-5 Revenues as a Percent of GDP--Comparison With Other
      2-5 Countries, 9
      2-6 The Federal Government Dollar--Where It Goes,  10
      2-7 On- and Off-Budget Deficit Projections, 15

    How Does the Government Create a Budget?
      3-1 Major Steps in the Budget Process, 18

    Deficits and the Debt
      4-1 Past and Future Budget Deficits or Surpluses,  23
      4-2 Outlays as a Percent of GDP, 24
      4-3 Total Government Surplus or Deficit as a Percent of GDP, 26
      4-4 Interest Costs as a Percent of Income Tax Revenues Over
            40 Years, 27

    The President's 1997 Budget
      5-1 Cuts in Civilian Employment,  34

    [[Page 42]]

    List of Tables

    Where the Money Comes From--and Where It Goes
      2-1 Revenues by Source--Summary,  8
      2-2 Spending Summary,  12
      2-3 Spending by Function,  13
      2-4 Spending by Agency, 14

    Deficits and the Debt
      4-1 Federal Government Financing and Debt, 27