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

    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

                            SOURCES: CASH AND CREDIT

    [[Page 6]]

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

    They decide how much spending they will finance through taxes and how
    much through borrowing. They debate how to use the budget to help the
    economy grow, or to redistribute income. And, especially lately, they
    debate how to use the budget surplus to adress longer-term concerns and
    invest in the Nation's future.

    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

                          SOURCES: TAXES AND BORROWING

    [[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 1998, revenues were greater than
    spending, and the Government was able to reduce the national debt with
    the difference between revenues and spending--that is, the surplus.

    Revenues come from these sources:

     Individual income taxes will raise an estimated $900 billion
             in 2000, equal to about 10 percent of GDP.

     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 an estimated seven percent in 2000.

     Corporate income taxes, which will raise an estimated $189
             billion, have shrunk steadily as a percent of GDP, from 4.5
             percent in 1955 to an estimated 2.1 percent in 2000.

    [[Page 8]]

                      Table 2-1.  Revenues By Source Summary
                            (In billions of dollars)

    ----------------------------------------------------------------------------
           Source                 1998                  Estimate
                                 Actual  1999   2000   2001   2002   2003   2004

    ----------------------------------------------------------------------------
    Individual income taxes.....   829    869    900    912    943    971    1,018
    Corporate income taxes......   189    182    189    197    203    212      221
    Payroll taxes...............   572    609    637    660    686    712      739
    Excise taxes................    58     68     70     71     72     74       75
    Estate and gift taxes.......    24     26     27     28     30     32       34
    Customs duties..............    18     18     18     20     21     23       25
    Miscellaneous receipts......    33     35     42     45     50     52       53
                                 -------------------------------------------------
    Total receipts.............. 1,722  1,806  1,883  1,933  2,007  2,075    2,166
    ------------------------------------------------------------------------------

    Notes: The revenues listed in this table do not include revenues from
    the Governments business-like activities--i.e., the sale of electricity
    and fees at 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 because of 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 and airports and airways--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

       The United States and Japan have the lowest revenues as a percent
                of GDP of the seven countries listed above.

    [[Page 10]]

    Spending

    As we have said, the Federal Government will spend nearly $1.8
    trillion\1\ and have a surplus of over $117 billion in 2000, which
    we divided into nine large categories as shown in Chart 2-6.

     The largest Federal program is Social Security,
             which will provide monthly benefits to nearly 45 million
             retired and disabled workers, their dependents, and survivors.
             It accounts for 22 percent of your Federal dollar (or 23
             percent of all Federal spending).

     Medicare, which will provide health care coverage for
             over 40 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-

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

       *Means-tested entitlements are those for which eligibility is
        based on income. The Medicaid program is also a means-tested
        entitlement.

    --------
    \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 will total an estimated $216
    billion in 2000. Without them, spending would total an estimated $2.0
    trillion in 2000, not $1.8 trillion.

    [[Page 11]]

    growing share of spending. In 2000 it will comprise 11 percent of your Federal dollar (or 12 percent of all Federal spending).

     Medicaid, in 2000, will provide health care services
             to over 34 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 your Federal dollar (also six
             percent of the 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 your Federal
             dollar (also six percent of the budget).

     The remaining mandatory spending, which mainly consists of
             Federal retirement and insurance programs, unemployment
             insurance, and payments to farmers, comprise six percent
             of your Federal dollar (also six percent of the budget).

     National defense discretionary spending will total an
             estimated $275 billion in 2000, comprising over 15 percent
             of your Federal dollar (and 16 percent of the budget).

     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
             187 percent in 2000. (or 17 percent of your Federal dollar).

     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.
             Since the budget is now is surplus, interest payments are
             estimated 12 percent of the budget in 2000 (11 perceent of
             your Federal dollar).

    Six percent of your Fedral dollar (the budget surplus) will
            not be spent. The President has proposed that any surplus be
            reserved until a plan to save Social Security has been enacted.

    [[Page 12]]

                           Table 2-2.  Spending Summary
                         (Outlays, in billions of dollars)

    ----------------------------------------------------------------------------
                                                     Estimate
                                  1998  ----------------------------------------
                                 Actual  1999   2000   2001   2002   2003   2004
    ----------------------------------------------------------------------------
    Budget Policy with Social Security
     reform:

     Outlays:

    Discretionary:
     Department of Defense.......  258    265    262    269    279    291    301
     Non-DoD discretionary.......   19     19     19     19     19     19     19
     Priority initiatives........  ...    ...    ...      2      4      7     10
                                 -----------------------------------------------
       Subtotal, discretionary...  555    581    592    612    623    636    649

    Mandatory:
     Programmatic:
      Social security............  376    389    405    424    444    465    487
      Medicare and Medicaid......  291    311    328    350    363    391    416
      Means-tested entitlements
       (except Medicaid)..........  99    107    112    118    124    129    134
      Deposit insurance.........   -4     -5      -2    -2      -1     -*      1
      Other......................   92    117    116    118    115    125    131
                                 -----------------------------------------------
       Subtotal, mandatory.......  855    919    959  1,007  1,044  1,110  1,170
    Net interest.................  243    227    215    207    197    188    179
                                 -----------------------------------------------
       Subtotal, mandatory and
        net interest.............1,098  1,146  1,174  1,214  1,241  1,297  1,349

                                 -----------------------------------------------
    Total outlays................1,653  1,727  1,766  1,826  1,863  1,934  1,998

    Receipts.....................1,722  1,806  1,883  1,933  2,007  2,075  2,166

    Resources contingent upon Social
      Security reform:

       Department of Defense.....  ...    ...    ...    -10    -17    -13    -15
       Non-DoD discretionary.....  ...    ...    ...    -15    -20    -16     -9
       Priority initiatives......  ...    ...    ...     -2     -4     -7    -10
       Related debt service......  ...    ...    ...     -1     -2     -4     -6
                                 -----------------------------------------------
        Total....................  ...    ...    ...    -27    -43    -41    -40

    Reserve pending Social
     Security reform..............   69     79    117    134    187    182    208

        Surplus...................    0      0      0      0      0      0      0

    MEMORANDUM:

     Discretionary totals if no Social
      Security reform is enacted,
      net of designated offsets.... 555    581    574    573    568    584    600

    ----------------------------------------------------------------------------
    *$500 million or less.

    [[Page 13]]

                            Table 2-3. Spending by Function
                            (Outlays, in billions Of dollars)
    ------------------------------------------------------------------------------
                                                         Estimate
                 Function                1998  -----------------------------------
                                        Actual  1999  2000  2001  2002  2003  2004
    ------------------------------------------------------------------------------
    National defense:
     Department of Defense-Military...     256   264   261   269   278   290   300
     Other............................      12    13    13    14    14    14    14
                                      --------------------------------------------

    Total, national defense...........     268   277   274   282   292   304   314
    International affairs ............      13    15    16    17    18    18    18
    General science, space, and
     technology.......................      18    19    19    19    19    19    19
    Energy............................       1     *    -2    -1    -1    -1    -1
    Natural resources and environment.      22    24    24    24    24    24    24
    Agriculture.......................      12    21    15    13    11    10    10
    Commerce and housing credit.......       1     *     6     8     9    10    10
    Transportation....................      40    43    46    49    50    52    53
    Community and regional development.     10    10    10    10    10     9     9
    Education, training, employment,
     and social services..............      55    60    63    68    67    69    70
    Health............................     123   143   152   163   173   185   197
    Medicare..........................     193   205   217   231   235   252   266
    Income security....................    233   243   258   267   275   282   291
    Social security....................    379   393   409   427   447   468   491
    Veterans benefits and services....      42    44    44    45    46    47    48
    Administration of justice.........      23    24    28    29    28    28    28
    General government................      13    15    14    15    15    15    15
    Net interest......................     243   227   215   206   195   183   173
    Allowances........................     ...     3     3   -27   -40   -34   -29
    Undistributed offsetting receipts.     -47    40   -46   -45   -51   -47   -48
                                      --------------------------------------------
    Total.............................   1,653 1,727 1,766 1,799 1,820 1,893 1,958
    ------------------------------------------------------------------------------
    * $500 million or less.

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

    [[Page 14]]

                        Table 2-4.  Spending by Agency
                       (Outlays, in billions of dollars)
    ----------------------------------------------------------------------------
                                                           Estimate
             Agency                     1998 -----------------------------------
                                       Actual 1999  2000  2001  2002  2003  2004
    ----------------------------------------------------------------------------
    Legislative Branch.................    2     2     3     3     3     3     3
    Judicial Branch....................    3     3     4     4     4     4     4
    Agriculture........................   16    17    16    15    15    15    15
    Commerce...........................    4     5     7     5     5     5     5
    Defense-Military...................  258   265   262   269   279   291   301
    Education..........................   26    29    32    35    35    35    35
    Energy.............................   17    17    18    18    18    18    18
    Health and Human Services..........   35    39    42    43    43    43    43
    Housing and Urban Development......   33    33    34    34    32    31    30
    Interior...........................    7     8     8     9     9     9     9
    Justice............................   15    16    19    20    19    19    19
    Labor..............................   10    11    11    11    11    12    12
    State..............................    5     6     6     7     7     6     7
    Transportation.....................   37    4-    43    47    49    40    51
    Treasury...........................   11    12    12    13    13    13    13
    Veterans Affairs...................   18    19    19    19    19    19    19
    Corps of Engineers.................    4     4     4     4     4     4     4
    Other Defense Civil Programs.......    *     *     *     *     *     *     *
    Environmental Protection Agency....    7     7     7     8     7     7     7
    Executive Office of the President..    *     *     *     *     *     *     *
    Federal Emergency Management Agency    3     3     3     3     2     2     2
    General Services Administration....    1     *     *     *     *     *     *
    International Assistance Programs..   11    12    12    12    13    12    12
    National Aeronautics and Space
     Administration....................   14    14    13    13    13    14    14
    National Science Foundation........    3     3     4     4     4     4     4
    Office of Personnel Management.....    *     *     *     *     *     *     *
    Small Business Administration......    1     1     1     1     1     1     1
    Social Security Administration.....    5     6     6     6     6     6     6
    Other Independent Agencies.........    6     6     6     6     7     7     7
    Allowances ........................ ....     3     3   -24   -36   -29   -24
    Undistributed offsetting receipts.. ....  ....    -3     1     1    -*    -*
                                       -----------------------------------------
      Total............................  555   581   592   586   582   600   615
    ----------------------------------------------------------------------------
    * $500 million or less.

    Note: Discretionary spending is appropriated by the Congress each
          year, in contrast with mandatory spending, which is automatic
          under permanent law. For a more complete discussion of
          discretionary spending, see ``Action in Congress'' in Chapter 3.

    Spending that is shown as a minus means that receipts exceed outlays.
          Numbers may not add to the totals because of 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