    [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......................................17
       Action in Congress......................................18
       Monitoring the Budget...................................20

    4. Deficits and the Debt...................................21
       Why the Deficit is a Problem............................23
       Deficits and Debt.......................................24
       Deficit Reduction Efforts...............................26

    5. The President's 1998 Budget.............................29
       Reaching Balance........................................29
       Investing in the Future.................................30
       Improving Performance in a Balanced Budget World........31

    Glossary...................................................35

    List of Charts and Tables..................................39

    [[Page iii]]

                          A Note to the Reader

    Next year, your Federal Government will spend nearly $1.7 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 two years ago,
    and why we have published this third 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 1998 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?

    The Federal budget 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 1998 budget is a document that embodies the President's budget
    proposal to Congress for fiscal 1998, the fiscal year that begins on
    October 1, 1997. It reflects the President's priorities and his plan
    to balance the budget by 2002.

    [[Page 2]]

     Chart 1-1. Government Spending as a Share of GDP, 1996

    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 21 percent of the Gross Domestic Product (or GDP, which
    measures the size of the economy), State and local governments spend
    about another 10 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 $939 billion that State and local governments
    spent in 1996, $211 billion came from Federal grants.

    As shown in Chart 1-2, compared to six other industrialized nations,
    the United States allocates the smallest share of its GDP to government
    (Federal, State, and local combined).

    [[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
    goal--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

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

    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 $691 billion in 1998, equal
      to about eight percent of GDP--roughly 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 nearly seven
      percent in 1998.

    . Corporate income taxes, which will raise an estimated $190 billion in
      1998, have shrunk steadily as a percent of GDP, from 4.5 percent in
      1955 to 2.3 percent today.

    [[Page 8]]

                    Table 2-1. Revenues By Source--Summary

                         (In billions of dollars)
    ------------------------------------------------------------------------
                                   1996                     Estimate
            Source                Actual  1997  1998  1999  2000  2001  2002
    ------------------------------------------------------------------------
    Individual income taxes          656   673   691   722   756   795   840
    Corporate income taxes           172   176   190   200   212   221   228
    Payroll taxes                    509   536   558   585   614   642   673
    Excise taxes                      54    57    61    64    65    66    67
    Estate and gift taxes             17    18    19    20    21    23    25
    Customs duties                    19    17    18    18    20    21    22
    Miscellaneous receipts            26    29    30    34    39    41    42
                                   -----------------------------------------
    Total receipts                 1,453 1,505 1,567 1,643 1,727 1,808 1,897
    -------------------------------------------------------------------------
    Notes: The revenues listed in this table do not include revenues from
    the Government's business-like activities--i.e., 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.

    . 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.

    [[Page 9]]

                   Chart 2-4. Composition of Revenues

    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 nearly $1.7 trillion 1~ in
    1998, 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 23 percent of all Federal
      spending.

    . Medicare, which provides health care coverage for over 33 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 1998, it will comprise 12 percent.

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

    ---------
    1 In calculating Federal spending~, the Government~ deducts collections
    (revenues) generated by the Government's business-like activities, such
    as fees to national parks. These collections w~ill total an estimated
    $209 billion in 1998. ~Without them, spending would total an estimated
    $1.9 trillion in 1998, not $1.7 trillion.

    [[Page 11]]

    . Medicaid provides health care services to over 38 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, 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 1998.

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

    . National defense discretionary spending will total an estimated $260
      billion in 1998, comprising 15 percent of the budget and 3.2 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 1998.

    . 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)

    -----------------------------------------------------------------------------
                                   1996                     Estimate
            Category              Actual  1997  1998  1999  2000  2001  2002
    -----------------------------------------------------------------------------
    Discretionary:
      National Defense               266   268   260   262   268   269   274
      International                   18    20    19    20    19    19    19
      Domestic                       250   263   268   276   277   274   274
                                    ----------------------------------------
        Subtotal, discretionary      534   550   547   558   564   561   567

    Mandatory:
      Programmatic:
        Social Security              347   364   381   399   418   438   460
        Medicare                     171   192   204   217   227   243   261
        Medicaid                      92    99   106   112   118   125   133
        Means-tested entitlements
          (except Medicaid)           95   104   107   112   117   115   122
        Other                        117   122   147   156   169   167   166
                                   -----------------------------------------
          Subtotal, programmatic     822   880   946   995 1,048 1,089 1,142
        Undistributed offsetting
            receipts                 -38   -46   -56   -44   -46   -50   -68
                                   -----------------------------------------
          Subtotal, mandatory        785   834   890   951 1,002 1,038 1,074
        Net interest                 241   247   250   252   248   245   239
                                   -----------------------------------------
          Subtotal, mandatory
            and net interest       1,026 1,081 1,140 1,203 1,251 1,283 1,313
                                   -----------------------------------------
          Total                    1,560 1,631 1,687 1,761 1,814 1,844 1,880
    -------------------------------------------------------------------------
    Note: Numbers may not add to the totals due to rounding.

    [[Page 13]]

                            Table 2-3. Spending by Function

                            (Outlays, in billions of dollars)

    -----------------------------------------------------------------------------
                                   1996                Estimate
            Function              Actual  1997  1998  1999  2000  2001  2002
    -----------------------------------------------------------------------------
    National defense:
    Department of Defense-
      Military                       253   254   247   249   255   256   261
    Other                             13    13    12    12    12    12    12
                                   -----------------------------------------
       Total, National defense       266   267   259   261   267   268   273
    International affairs             13    15    15    16    15    15    15
    General science, space,
      and technology                  17    17    16    16    16    16    16
    Energy                             3     2     2     1     2     2    -*
    Natural resources and
      environment                     22    23    22    23    23    23    23
    Agriculture                        9    10    12    12    11    10    10
    Commerce and housing credit      -11    -9     3     6    13     7     8
    Transportation                    40    39    39    39    39    39    39
    Community and regional
     development                      11    13    11    11    10     8     8
    Education, training,
      employment, and social
      services                        52    51    56    62    63    64    63
    Health                           119   128   138   145   152   160   165
    Medicare                         174   194   207   220   229   246   263
    Income security                  226   239   247   256   266   269   280
    Social Security                  350   368   384   402   421   441   463
    Veterans benefits and
      services                        37    40    41    42    44    41    43
    Administration of justice         18    21    24    26    26    26    26
    General government                12    13    13    13    14    13    13
    Net interest                     241   247   250   252   248   245   239
    Undistributed offsetting
      receipts                       -38   -46   -56 ~  -44   -46   -50   -68
                                   -----------------------------------------
        Total                      1,560 1,631 1,687 1,761 1,814 1,844 1,880
    ---------------------------------------------------------------------------
    *  $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)

    -----------------------------------------------------------------------------
                                   1996                     Estimate
            Agency                Actual  1997  1998  1999  2000  2001  2002
    -----------------------------------------------------------------------------
    Legislative Branch                 2     3     3     3     3     3     3
    The Judiciary                      3     4     4     4     4     4     4
    Executive Office of the
      President                        *     *     *     *     *     *     *
    Funds Appropriated to the
      President                       10    10    10    10    11    11    11
    Agriculture                       54    57    59    58    60    60    62
    Commerce                           4     4     4     5     6     4     4
    Defense-Military                 253   254   247   249   255   256   261
    Defense-Civil                     33    34    35    36    37    38    39
    Education                         30    28    32    36    37    37    36
    Energy                            16    15    15    15    15    14    12
    Health and Human Services        320   351   376   397   414   439   462
    Housing and Urban Development     26    30    32    33    32    30    30
    Interior                           7     7     7     7     7     7     7
    Justice                           12    15    17    19    19    19    18
    Labor                             32    33    36    38    39    40    40
    State                              5     5     6     6     5     6     6
    Transportation                    39    38    38    39    38    38    38
    Treasury                         365   381   390   398   400   402   403
    Veterans Affairs                  37    40    41    42    44    41    43
    Environmental Protection Agency    6     6     7     7     7     7     7
    General Services Administration    1     1     1     *     *     *     *
    National Aeronautics and Space
      Administration                  14    14    14    13    13    13    13
    Office of Personnel Management    43    45    47    49    51    53    56
    Small Business Administration      1     *     *     *     *     1     1
    Social Security Administration   375   396   413   432   454   471   496
    Other Independent Agencies         9    10    20    23    26    24    25
    Undistributed Offsetting
      Receipts                      -135  -151  -166  -157  -165  -174  -197
                                   --------------------------------------------
        Total                      1,560 1,631 1,687 1,761 1,814 1,844 1,880
    ---------------------------------------------------------------------------
    * $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 1--covers thousands of pages and provides
    reams of details.

    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.

    -----------------
    1 They are the main budget book, entitled, Budget of the United States
    Government: Fiscal Year 1998, as well as Analytical
    Perspectives, Appendix, Historical Tables, and A Citizen's
    Guide to the Federal Budget, which you are now reading.

    [[Page 18]]

    For fiscal 1998--that is, October 1, 1997 to September 30, 1998--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 1998.

      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 1996
    -----------------------------------------------------------------------
    Budget preparation and transmittal.

      The budget documents are prepared and transmitted to the Congress.

      December 1996-February 1997
    -----------------------------------------------------------------------
    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 1997
    -----------------------------------------------------------------------
    The fiscal year begins.

      October 1, 1997
    -----------------------------------------------------------------------
    Agency program managers execute the budget provided in law.

      October 1, 1997-September 30, 1998
    -----------------------------------------------------------------------
    Data on actual spending and receipts for the completed fiscal year
    become available.

      October-November 1998
    -----------------------------------------------------------------------

    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 32 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 68 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

    [[Page 19]]

      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.

    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

    [[Page 20]

    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.

    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 21]]

    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 69 annual deficits between 1900 and 1996.

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

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

    [[Page 22]]

    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 23]]

    Revenues have stayed relatively constant, at around 17 to 19 percent of
    GDP, since the 1960s. In that time, however, outlays have grown from
    about 17 percent of GDP in 1965 to up to nearly 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 a good 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.

    The Federal interest burden grew substantially in the 1980s, both in actual
    dollars and as a percentage of Federal income tax revenues (see Chart 4-4).
    By 1998, net interest spending will be nearly as much as the Government
    will spend on national defense.

    [[Page 24]]

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

    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 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

    [[Page 25]]

          Chart 4-4. Interest Costs as a Percent of Income Tax Revenues

    private markets over the years, and it determines how much the
    Government pays in interest to the public.

                Table 4-1. Federal Government Financing and Debt

                            (In billions of dollars)
    -----------------------------------------------------------------------------
                                    1996                     Estimate
                                   Actual  1997  1998  1999  2000  2001  2002
    -----------------------------------------------------------------------------
    Federal Government financing:
      Budget deficit (-) or
        surplus                      -107  -126  -121  -117  -87    -36    17
      Other means of financing        -22   -17   -25   -21  -22    -23   -22
                                 -----------------------------------------------
      Borrowing from the public       130   143   146   138  110     59     5
    Federal Government debt:
      Debt held by the public       3,733 3,876 4,021 4,159 4,269 4,328 4,333
      Debt held by government
        accounts                    1,449 1,578 1,715 1,853 2,003 2,157 2,319
                                 -----------------------------------------------
       Gross Federal debt           5,182 5,454 5,736 6,013 6,272 6,485 6,653
      Debt subject to legal limit   5,137 5,411 5,697 5,973 6,233 6,447 6,615
    ----------------------------------------------------------------------------
    Note: Numbers may not add to the totals due to rounding.

    [[Page 26]]

    Debt held by the public was $3.7 trillion at the end of ~1996--roughly the net
    effect of deficits and surpluses over the last 200 years. Debt held by the
    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 1996, it totaled $5.2 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 was 50 percent of GDP at the
    end of 1996. As a percentage of GDP, debt held by the public was highest at
    the end of World War II, at 111 percent, then fell to 24 percent in 1974
    before gradually rising to current levels.

    That decline, from 111 to 24 percent, occurred because the economy grew
    faster than the debt accumulated; debt held by the public rose by amounts
    ranging from $242 billion to $344 billion in those years, but the economy
    grew faster.

    Individuals and institutions in the United States hold over 70 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

    [[Page 27]]

    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.

    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 $107 billion in 1996, and by two-thirds as
    a share of GDP, to 1.4 percent. Now, as you will see in the next chapter, the
    President wants to finish the job by balancing the budget over the next five
    years.

    [[Page 29]]

    5. The President's 1998 Budget

    This budget fulfills the President's firm commitment to reach balance in
    2002, building on the balanced-budget proposals that he outlined in his
    negotiations last year with the bipartisan leaders of Congress. Having cut
    the deficit by over 60 percent in his first term, the President is determined
    to finish the job.

    Specifically, the President continues to seek cuts in unnecessary and
    lower-priority spending in both discretionary and mandatory programs, and
    to eliminate unwarranted tax and other preferences for corporations and
    others. The cuts would generate enough savings to provide tax relief to help
    middle-income Americans raise their children, send them to college, and
    save for the future; and to restore some harsh cuts in anti-poverty programs
    that Con~gress attached to last year's welfare reform bill.

    Reaching Balance

    Among its major elements, the budget:

    . saves $137 billion in discretionary spending, cutting unnecessary and
      lower-priority programs while investing in education and training, the
      environment, science and technology, law enforcement, and other
      priorities that would raise living standards and the quality of life for
      average Americans;

    . saves $100 billion in Medicare, ensuring the solvency of the Part A trust
      fund until 2007 while maintaining the essential quality of Medicare
      services for the elderly and people with disabilities;

    . saves $22 billion in Medicaid, building upon the substantial savings that
      Federal and State experimentation in this jointly-run program is already
      generating, and continuing the guarantee of essential health and
      long-term care coverage for the most vulnerable Americans;

    . saves $76 billion by ending corporate subsidies and other tax loopholes,
      extending expired tax provisions, and improving tax compliance;

    . saves $36 billion by continuing the Administration's successful policy of
      auctioning segments of the broadcast spectrum;

    [[Page 30]]

    . provides $18 billion to correct the harsh provisions that Congress
      attached to last year's welfare reform law; and

    . cuts taxes by $98 billion, providing tax relief to tens of millions of
      middle-income Americans and small businesses.

    Investing in the Future

    Balancing the budget is not an end in itself. Rather, it helps fulfill the
    President's main economic goa~l--to raise the standard of living for average
    Americans, both now and in the future. So do his spending priorities.

    The budget continues the President's policy of shifting Federal resources to
    education and training, science and technology, and other investments to
    enable Americans to get the skills to acquire good jobs, and to give
    businesses the tools to become more competitive, in the new economy. It
    also continues to shift resources to the environment and law enforcement,
    raising the quality of life for average Americans.

    For education and training, the budget proposes to fulfill the President's
    commitment to put one million disadvantaged children in the Head Start
    program by 2002; to create safe learning environments for more children;
    to help more school systems extend high academic standards, better
    teaching, and better learning to all students; to enable more Americans to
    serve their communities and earn money for college; to bring technology
    into more classrooms; to create a $1,000 merit scholarship for the top five
    percent of graduates in every high school; to let more parents, teachers, and
    communities create public schools to meet their own children's needs; to
    make it easier for parents and students to borrow and repay college loans; to
    create the largest increase in Pell Grant scholarships in history in 20
    years; and, finally, to provide Skill Grants to adults for job training.

    The budget proposes to maintain environmental enforcement; protect
    national parks and other sensitive resources; and provide tax incentives to
    encourage companies to clean up ``brownfields''--abandoned, contaminated
    industrial properties in distressed areas. It would put 17,000 more police on
    the street, bringing the total to 81,000 and moving closer to the President's
    goal of 100,000 by the year 2000; and it would provide more funds to
    combat juvenile crime and step up the fight against drugs, largely by
    focusing on treatment and prevention aimed at young Americans. It would increase the number of Border Patrol agents and workplace investigations to
    prevent illegal immigration and deter the hiring of illegal immigrants.

    [[Page 31]]

    The budget invests in research, including biomedical research at the National
    Institutes of Health, in programs to combat infectious diseases at the
    Centers for Disease Control, in the Ryan White AIDS program that provides
    potentially life-extending drug therapies to many people with AIDS, and in
    community health centers and Indian Health Service facilities. The budget
    funds full participation in the Special Supplemental Nutrition Program for
    Women, Infants, and Children (WIC), which would serve 7.5 million people
    by the end of 1998.

    Over the last year, the President also has proposed a series of initiatives
    to more quickly, and more effectively, meet his goal of higher living
    standards and a better quality of life for all Americans.

    . Along with his earlier call for a tax deduction of up to $10,000 for
      college tuition and job training, the President proposes a new $1,500-a-
      year HOPE scholarship tax credit to make two years of college universal.
      The budget also proposes to increase Pell Grants for lower-income families
      who lack the tax liability to benefit from the tax cuts.

    . The President proposes America Reads to help ensure that all children
      can read by the third grade, and a five-year, $5 billion school construction
      fund to help States and communities address the serious problem of
      dilapidated school buildings.

    . Building on his earlier proposal to help the unemployed keep their health
      care for six months, the President now proposes to help expand health
      care coverage to uninsured children.

    . Having taken the first step to reform welfare, the President now proposes
      to enhance the Work Opportunity Tax Credit to encourage employers to
      hire long-term welfare recipients.

    Improving Performance in a Balanced
    Budget World

    ``We still have work to do,'' the President declared in late 1996, ``for while
    the era of big Government is over, the era of big challenges is not.''

    Over the last four years, the President has used Federal resources and the
    power of his office to begin achieving educational excellence, expanding
    opportunity, cleaning up the environment, investing in promising research,
    ending welfare as we know it, protecting health care and pensions, making
    the tax system fairer. and keeping America strong. Americans want more

    [[Page 32]]

    progress on these and other issues and, with limited funds, the Federal
    Government must be able to respond effectively.

    Led by Vice President Gore's National Performance Review, the
    Administration promised to create a Government that ``works better and
    costs less.'' It is saving money, cutting the workforce, eliminating needless
    regulations and improving the necessary ones, streamlining bureaucracies,
    cutting red tape, and finding ways to better serve Government's
    ``customers''--the American people.

    In 1993, President Clinton 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 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 work force by over 250,000
    employees out of 2.2 million in January 1993, creating the smallest Federal
    workforce in 30 years and, as a percentage of all civilian workers, the
    smallest since 1931. The cuts correspond to a reduction of over 250,000
    FTEs (see Chart 5-1).

    But, 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.

    The Administration has found many ways for agencies to improve their
    performance and cut costs. Some of them focus on eliminating obsolete
    processes, others on improving the ones they have. Because agencies and
    programs are so different from one another, not every tool, technique, or
    strategy applies to each agency and department. But every agency and
    program can benefit from a number of them.

    Based on lessons learned over the past four years, the Administration plans
    to use the following seven tools.

    Restructure Agencies: Agencies are streamlining their workforces;
    eliminating redundant layers of bureaucracy; closing small, inefficient field
    offices; and creating partnerships with State and local governments and the
    private sector to focus on joint goals and the progress toward meeting them.

    Improve Effectiveness of the Federal Workplace: Federal workers
    are working harder and smarter each and every day, but the Government
    must continue to downsize the workforce to live within the means of a

    [[Page 33]]

               Chart 5~-1. Cuts In Civilian Employment

    balanced budget. The Administration will continue to closely manage and
    target its downsizing, while agencies work to avoid employee disputes and
    resolve them quickly when they occur.

    Reform Federal Purchasing Practices: Before President Clinton took
    office, efforts to make Government work better and cost less were often
    hindered by the Government's unique acquisition system. But now, with
    strong bipartisan support from Congress, the Administration is transforming
    the system into one that operates much more like those of our most
    successful companies.

    Expand Competition to Improve Services and Reduce Costs:
    Competition spurs efficiency. The Administration is encouraging agencies to
    compete with one another, and with the private sector, to provide common
    administrative support ser~vices. More competition will bring new technolo-
    gies, capital, management techniques, and opportunity to Federal employees
    ~and their customers.

    Follow the Best Private Sector Practices in Using Information
    Technology: Well-managed information technology should improve
    Government's productivity while cutting costs. Agencies are copying the
    successful practices of private firms to ensure that the technology provides
    workable solutions to real problems at a reasonable cost.

    [[Page 34]]

    Improve Credit Program Performance: The Government must
    manage its cash and loan assets as wisely as possible. It must design and
    administer its loan programs prudently, and provide incentives to ensure that
    it can collect its ``receivables'' (the amounts owed) in a timely fashion.

    Improve Business Management Practices: An efficient, effective
    Government needs sound financial management, reliable information, and,
    where appropriate, fees from those who benefit from Government's
    business-like activities.

    These tools are designed to do more than let agencies function better for
    their own sake. Ultimately, they are designed to help agencies provide
    better, more effective services to the American people.

    Already, agencies are assessing what their programs actually accomplish and
    what they must do to improve their performance. The Government
    Performance and Results Act (GPRA)--the landmark legislation that enjoyed
    broad bipartisan support in Congress before the President signed it in
    1993--makes agencies more accountable for, and focused on, what their
    programs achieve.

    Agencies now have many of the tools they need. Others will require
    legislation. The President wants to work with Congress to help agencies
    improve their performance in a balanced budget world.

    [[Page 35]]

    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 36]]

    ``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 37]]

    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 1998 ends
    September 30, 1998.

    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 38]]

    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 39]]

    List of Charts and Tables

    List of Charts

    What Is the Budget?
    1-1 Government Spending as a Share of GDP, 1996....................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........................................9
    2-5 Revenues as a Percent of GDP--Comparison With Other 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..................21
    4-2 Outlays as a Percent of GDP...................................22
    4-3 Total Government Surplus or Deficit as a Percent of GDP.......24
    4-4 Interest Costs as a Percent of Income Tax Revenues............27

    The President's 1997 Budget
    5-1 Cuts in Civilian Employment...................................33

    [[Page 40]]

    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.........................25