[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