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

    [[Page i]]

    Table of Contents

       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. The Budget Surplus and Fiscal Discipline...............    21
           Why a Budget Surplus is Important.....................    23
           Surplus and Debt......................................    25
           Returning the Budget to Surplus.......................    26

       5. The President's 2000 Budget............................    29
           Investing in the Future...............................    29
           Improving Performance Through Better Management.......    32

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

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

    [[Page iii]]

    A Note to the Reader

       Next year, your Federal Government will spend nearly $1.8 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 four
       years ago, and why we have published this fifth 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 have been problems,
       and what the President hopes to accomplish with his 2000 budget.

       After you read these pages, we hope that you will think the tour was
       worth your time.

    [[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, 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 revenues are greater than spending, the Government runs a surplus.
    When there is a surplus, the Government can reduce 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 2000 Budget is a document that embodies the President's budget
    proposal to Congress for fiscal 2000, the fiscal year that begins on
    October 1, 1999. It reflects the President's priorities and proposes to
    protect the budget surplus until Social Security is reformed.

    The Federal budget, of course, is not the only budget that affects the
    economy or the American people. The budgets of State and local

    [[Page 2]]

            Chart 1-1.  Government Spending as a Share of GDP, 1998

           Total Government spending accounts for about one-third of
         the national economy. Federal spending is about two-thirds of
                       this amount, or 20 percent of GDP.

    governments have an impact as well. While Federal Government spending
    was a little less than 20 percent of the Gross Domestic Product (or GDP,
    which measures the size of the economy) in 1998, State and local
    governments spending was about another nine 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 $989 billion that State and local governments
    spent in 1998, $230 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
    spending (Federal, State, and local combined).

    [[Page 3]]

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

          The United States allocates a smaller portion of its GDP to
                    government than any other nation shown.

    [[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

                            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

    [[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 2000, 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 2000--that is, October 1, 1999 to September 30, 2000_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    Executive Branch agencies develop     February-December
    President's budget    requests for funds and submit them    1998
    for fiscal 2000.      to the Office of Management and
                          Budget. The President reviews the
                          requests and makes the final
                          decisions on what goes in his budget.
    -----------------------------------------------------------------------------
    Budget preparation    The budget documents are prepared     December 1998-
    and transmittal.      and transmitted to Congress.          February 1999
    -----------------------------------------------------------------------------
    Congressional action  Congress reviews the                  March-September
    on the budget.        President's budget, develops its      1999
                          own budget, and approves
                          spending and revenue bills.
    -----------------------------------------------------------------------------
    The fiscal year begins.                                     October 1, 1999
    -----------------------------------------------------------------------------
    Agency program managers execute the budget                  October 1, 1999-
    provided in law.                                            September 30, 2000
    -----------------------------------------------------------------------------
    Data on actual spending and receipts for                    October-November
    the completed fiscal year become available.                 2000
    -----------------------------------------------------------------------------

    Action in Congress

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

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

     Mandatory spending, which accounts for 67 percent of all
             spending, is authorized by permanent laws, not by the 13
             annual appropriations bills. It includes entitlements--such
             as Social Security, Medicare, veterans'

    [[Page 19]]

             benefits, and Food Stamps-through which individuals receive
             benefits because they are eligible based on their age, income,
             or other criteria. It also includes interest on the national
             debt, which the Government pays to individuals and institutions
             that hold Treasury bonds and other Government securities. The
             President and Congress can change the law in order to change
             the spending on entitlements and other mandatory programs--but
             they don't have to.

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

    Currently, the law imposes a limit, or ``cap,'' through 2002 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.''

    [[Page 20]]

    Budget authority (or BA) is what the law authorizes the Federal
    Government to spend for certain programs, projects, or activities. What
    the Government actually spends in a particular year, however, is an
    outlay. To see the�20difference, 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. The Budget Surplus and Fiscal Discipline

    In 1998 the Federal budget reported a surplus of $69 billion, the
    first surplus since 1969, and reduced Federal debt held by the public
    by over $50 billion. With continued prudent fiscal policies, the budget
    can remain in surplus for many years. The turnaround from deficit to
    surplus can be attributed to fiscal discipline and strong economic
    growth. The change from deficit to surplus is an important milestone.

       Put simply, a surplus occurs when revenues exceeds spending in any
        year--just as a deficit occurs when spending exceed revenues.
        Generally, to finance

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

    Deficits began increasing dramatically in the 1980s, but have
    now been reversed.

    [[Page 22]]

    past deficits, the Treasury has borrowed money. With certain
    exceptions, the debt is the sum total of our deficits minus our
    surplus, over the years.

    The Government incurred its first deficit in 1792, and it generated
    70 annual deficits between 1900 and 1997.

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

    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 surplus, 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.

    Chart 4-2.  Outlays as a Percent of GDP

    Between 1965 and 1998, spending on Social Security, Medicare and
    Medicaid, and interest as a percentage of GDP grew, while spending
    on defense fell.

    [[Page 23]]

    Since then--with Democratic and Republican Presidents, Democratic and
    Republican Congresses--the Government has balanced its books only
    nine times, most recently last year.

    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 have we been able to move from deficit to surplus? Because
    spending growth has been restrained. Outlays are growing slower
    and revenues are holding steady.

    Revenues have stayed relatively constant, at around 17 to 21 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 below 20 percent today.

    Since 1983, spending had been reduced or held constant as percent
    of GDP across a wide variety of programs. The most significant
    reduction has occurred in discretionary spending, which has fallen
    from 10.3 percent to 6.6 percent of GDP. Combined spending on social
    security and net interest has remained roughly constant at about
    7-1/2 percent of GDP since 1983. A similar path has been followed in
    the rest of mandatory spending in total, but only because the growth
    in Medicare and Medicaid has been offset by declines in other
    mandatory spending (see Chart 4-2).

    Why a Budget Surplus is Important

    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.)

    Should we worry about the possibility of a return to budget deficits?

    The 2000 Budget forecasts surplus for decades to come, if we maintain
    the policy of fiscal discipline and strategic investments in the
    American people.

    [[Page 24]]

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

        Of the seven nations shown above, only the United States and Canada eliminated their total Government budget deficits in 1997.

    We must do all we can to keep the days of deficits in the past.
    Budget deficits force 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. As recently as 1997, the Government spent over 15
    percent of its budget to pay interest, in contrast to a projected 12
    percent for 2000. Continuing surplus will reduce these interest
    payments further in future years.

    [[Page 25]]

    In the end, the surplus is a decision about our future. We can
    provide a solid foundation for future generations, just as parents
    try to do within a family. For a Nation, this means a strong economy
    and low interest rates and debt. Alternatively, we can generate
    large deficits and debt for those who come after us.

    Surplus and Debt

    If the Government incurs a surplus, it generally repays debt held by
    the public.

    Table 4-1 summarizes the relationship between the budget surplus or
    deficit and the repayment of Federal debt.

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

    Debt held by the public was $3.7 trillion at the end of 1998-roughly
    the net effect of deficits and surplus over the last 200 years.
    Debt held by the public does not include debt the Government owes
    itself--the total of all trust fund surplus and deficits over the years,
    like the Social Security surplus, which the law says must be invested
    in Federal securities.

    Because of the progress in eliminating the budget deficit, the debt
    held by the public has been reduced for the first time in 29 years.

               Table 4-1. Federal Government Financing and Debt
                           (in billions of dollars)
    ----------------------------------------------------------------------------
                                  1998                  Estimate
                                         -----------------------------------------
                                        Actual  1999  2000  2001  2002  2003  2004
    ------------------------------------------------------------------------------
    Federal Government financing:
     Budget surplus..............           69    79   117   134   187   182   208
     Other means of financing....          -18   -29   -19   -17   -17   -16   -15
                                         -----------------------------------------  Repayment of debt held by the public    51    50    98   117   170   166   193
    Federal Government debt:
     Debt held by the public............ 3,720 3,670 3,572 3,455 3,285 3,119 2,926
     Debt held by government
       accounts......................... 1,759 1,945 2,140 2,326 2,530 2,736 2,948
                                         -----------------------------------------
      Gross Federal debt.......          5,479 5,615 5,711 5,781 5,815 5,856 5,874
     Debt subject to legal limit........ 5,439 5,577 5,674 5,745 5,780 5,821 5,842
    ------------------------------------------------------------------------------
    Note: Numbers may not add to the totals because of rounding.

    [[Page 26]]

    The sum of debt held by the public and debt the Government owes itself
    is called Gross Federal Debt. At the end of 1998, it totaled $5.5 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.
    Because the budget has returned to surplus and debt is being reduced,
    there will be no need to increase the statutory limit in 2000.

    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 44
    percent of GDP at the end of 1998. As a percentage of GDP, debt held
    by the public was highest at the end of World War II, at 109 percent,
    then fell to 24 percent in 1974 before gradually rising to a peak
    of 50 percent in the middle 1990s.

    That decline, from 109 to 24 percent, occurred because the economy
    grew faster than the debt accumulated; debt held by the public rose
    from $242 billion to $344 billion in those years, but the economy
    grew faster.

    Individuals and institutions in the United States hold two-thirds
    of debt held by the public. The rest is held in foreign countries.

    Returning the Budget to Surplus

    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. It
    set annual deficit targets for five years, declining to a balanced
    budget in  1991. If necessary, GRH required across-the-board cuts in
    programs to comply with the deficit targets.

    [[Page 27]]

    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.

    Although the 1993 plan had exceeded all expectations in reducing the
    deficit, the task of reaching balance would require one final push.
    That would come with the historic 1997 Balanced Budget Act (BBA).

    Originally designed to balance the budget by 2002, the BBA provided
    for $247 billion in savings over five years. It also extended the
    solvency of Medicare's trust fund for at least 10 years while
    providing for the largest investment in higher education since
    the G.I. Bill in 1945, the largest investment in children's
    health care since the creation of Medicaid in 1965, and a
    $500-per-child tax credit for about 27 million working families.

    [[Page 28]]

    Clearly, the President's deficit reduction efforts have paid off.
    The deficit fell from $290 billion in 1992 to a surplus of $69
    billion in 1998.

    The President is now proposing to reserve the surplus until Social
    Security is reformed. His plan for reform uses 62 percent of the
    projected unified budget surplus of the next 15 years to put the
    Social Security system on sound financial footing well into the next
    century. In 2000 the challenge for both the President and the Congress
    is to maintain fiscal discipline and reach comprehensive Social
    Security reform while continuing to invest in the American people.
    The next chapter describes the President's plans for achieving that goal.

    [[Page 29]]

    5. THE PRESIDENT'S 2000 BUDGET

    The President's 2000 budget promises the third balanced budget of
    this Administration. With it, the Nation's fiscal house is in order
    and we are prepared to meet the challenges of the next century.
    It continues on the path the President has followed for the past
    six years of maintaining fiscal discipline and investing wisely
    in our Nation's priorities.

    It invests in education and training so Americans can make the most
    of this economy's opportunities. It invests in health and the
    environment to improve our quality of life. It invests in our
    security at home and abroad, strengthens law enforcement and
    provides our Armed Forces with the resources they need to safeguard
    our national interests in the next century.

    The President's budget makes these investments while maintaining the
    fiscal discipline that allowed the Federal Government to record its
    first surplus in a generation last year. The budget forecasts that
    the Government will produce a surplus again this year, and will
    continue to do so for decades to come. Our success in eliminating
    the budget deficit proves that we are capable of fulfilling great
    responsibilities, and there is now every reason for us to rise to
    the next challenge. The President believes it is now time to work
    together to save Social Security.

       Investing in the Future

    In his State of the Union address, the President proposed a framework
    for a comprehensive, bipartisan solution to the long-term financing
    problems of Social Security. The President's plan proposes using 62
    percent of the unified budget surplus of the next 15 years to
    strengthen Social Security. It would tap the power of financial
    markets by investing roughly one-fifth of the surplus dedicated to
    Social Security in private financial instruments, including
    corporate equities. This proposal would substantially improve the
    program's fiscal position, strengthening it until the middle of the
    next century. Then, in a bipartisan effort envisioned by the national
    dialogue of the last year, the President is urging Congress to join
    him to make the difficult but achievable choices to save Social
    Security until 2075.

    [[Page 30]]

    Once Social Security is on sound financial footing, the President
    proposes saving and improving Medicare, the Federal program that
    finances health care for millions of seniors and disabled Americans.
    The President's framework will reserve 15 percent of the projected
    budget surplus of the nest 15 years for Medicare, ensuring that
    its trust fund is secure for 20 years.

    The President is also committed to helping all Americans save and
    invest so that they will have additional sources of income in retirement.
    Dedicating just over 10 percent of the surplus of the next 15 years
    to Universal Savings Accounts will help Americans save for the future
    by allowing them to invest as they choose and receive matching
    contributions.

    And looking ahead to the Nation's other vital needs that will arise in
    the future, the President's framework will reserve 11 percent of the
    projected surplus for military readiness, education, and other critical
    domestic priorities.

    The President's budget builds on efforts to invest in the skills of
    the American people. It continues his policy of helping working
    families with their basic needs_raising their children, sending
    them to college, and expanding access to health care. It also invests
    in education and training, the environment,, science and technology,
    law enforcement, and other priorities to help raise the standard of
    living and quality of life of Americans.

    In this budget, the President is proposing major initiatives that
    will continue his investments in high-priority areas_from helping
    working families with their child care expenses to allowing Americans
    from 55 to 65 to buy into Medicare; from helping States and school
    districts recruit and prepare thousands more teachers and build
    thousands more classrooms to making every effort to fight tobacco
    and its use among young people.

    For six years, the President has sought to help working families
    balance the demands of work and family. In this budget he proposes
    a major effort to make child care more affordable, accessible and
    safe, by expanding tax credits for middle-income families and for
    businesses to expand their child care needs, and increasing funds with
    which the Child Care and Development Block Grant can help more poor
    and near poor children. The budget proposes and Early Learning Fund,
    which would provide grants to communities for activities that improve
    early childhood deduction and the quality of child care for those
    under age five.

    The President has worked hard to expand health care coverage and
    improve the Nations' health. The budget  gives new insurance options
    to hundreds of thousands of Americans aged 55 to 65 and it advocates
    bipartisan national

    [[Page 31]]
    legislation that would reduce tobacco use among the young. The
    President's budget proposed initiatives to help patients, families,
    and care givers cope with the burdens of long-term care; and it
    helps reduce barriers to employment for individuals with
    disabilities. The budget also enables more Medicare beneficiaries
    to receive promising cancer treatments by participating more easily
    in clinical trials. And it improves the fiscal soundness of Medicare
    and Medicaid through new management proposals, including programs
    to combat waste, fraud, and abuse.

    The President's efforts have also enhanced access to, and the
    quality of, education and training. The budget takes the next
    steps by continuing to help States and school districts reduce class
    size by recruiting and preparing thousands more teachers and
    building thousands more new classrooms. The President's budget
    proposes improving school accountability by funding monetary awards
    to the highest performing schools that serve low-income students,
    providing resources to States to help them identify and change the
    least successful schools, and ending social promotion by funding
    additional education hours through programs like the 21st Century
    Community Learning Centers. The budget also proposes further
    increases in the maximum Pell Grant to help low-income undergraduates
    complete their college education and more funding for universal
    reemployment services to help train or find jobs for all dislocated
    workers who need help.

    The budget proposes a historic inter-agency Lands Legacy initiative
    to both preserve the Nation's Great Places, and advance preservation
    of open spaces in every community. This initiative will give State
    and local governments the loots for orderly growth while protecting
    and enhancing green spaces, clean water, wildlife habitat and
    outdoor recreation. The Administration also proposes a Livability
    Initiative with a new financing mechanism, Better America Bonds,
    to create more open spaces in urban and suburban areas, improve
    water quality, and clean up abandoned industrial sites. In
    addition, the budget would restore and rehabilitate national
    parks, forests, and public lands and facilities; expand efforts to
    restore and protect the water quality of rivers and lakes; and
    better protect endangered species.

    The President had worked to bring peace to troubled parts of the
    world, and has played a leadership role in Northern Ireland, Bosnia,
    and most recently in the Wye River Memorandum on the Middle East.
    The budget reinforces America's commitment to peace in the Middle
    East by providing for an economic and military assistance package
    arising for the Wye River Memorandum. The work of diplomacy,
    advancing peace and United States interests, has inherent dangers,
    as the death toll from the terrorist attacks on two U.S. Embassies
    in Africa last year reminds us. The budget proposes

    [[Page 32]]

    increased funding to ensure the continued protection of American
    embassies, consulates and other facilities, and the valuable employees
    who work there. It supports significant increases in funding for
    State Department programs to address the threats posed by weapons
    of mass destruction. The budget also increases programs that support
    U.S. manufacturing exports and continues our long standing policy of
    opening foreign markets.

    The mission of our Armed Forces has changed in this post-Cold War
    era, and in many ways it is more complex. Today, the U.S. military
    must guard against major threats to the Nation's security, including
    regional dangers like cross-border aggression, the proliferation of
    the technology of weapons of mass destruction, transnational dangers
    like the spread of drugs and terrorism, and direct attacks on the
    U.S. homeland from intercontinental ballistic missiles or other
    weapons of mass destruction. The U.S. Armed Forces are well prepared
    to meet this mission. Military readiness_the ability to engage where
    and when necessary_is razor sharp, and this budget provides resources
    to make sure that it stays that way for years to come. The budget
    provides a long term, sustained increase in defense spending to
    enhance the military's ability to respond to crises, build for the
    future through programs for weapons modernization, and take care
    of military personnel and their families by enhancing the quality
    of life, thereby increasing retention and recruitment.

                  Improving Performance Through Better Management

    A key element in the Administration's ability to making these
    investments, while balancing the budget, is the reinvention of
    overnment_doing more with less. Efforts led by Vice President
    Gore's National Partnership for Reinvention have streamlined
    Government, reduced its work force, and focused on performance
    in improve operations and delivery of service. And these efforts,
    by reducing the cost of Government operations, have improved
    the bottom line and contributed to our strong economy.

    Since 1993, the Administration, working with the Congress, has
    eliminated and reduced hundreds of unnecessary programs and projects.
    The size of Government, that is, the actual total of Government
    spending, has equaled a smaller share of GDP than in any year of
    the previous two Administrations, and in 2000 will drop to 19.4
    percent of GDP, its lowest level since the early 1970s. Finally,
    the Administration has cut the size of the Federal civilian work
    force by 365,000, creating the smallest work force in 36 years
    and, as a share of total civilian employment, the smallest since
    1933 (see Chart 5�091).

    [[Page 33]]

    Chart 5-1.  Cuts in Civilian Employment

    Note: In 1993, the President pledged to cut the Federal work force
    by 252,000 full-time equivalent (FTE) positions. Simply put, one
    full-time employee counts as one FTE, and two employees who work
    half-time also count as one FTE.

    The Administration, however, is working to create not just a
    smaller Government, but a better one, a Government that best
    provides services and benefits to its ultimate customers_the
    American people. It has not just cut the Federal work force, it
    has streamlined layers of bureaucracy. It has not just reorganized
    headquarters and field offices, it has ensured that those closest
    to the customers can best serve them.

    For 2000, the Administration once again is turning its efforts to
    the next stage of ``reinventing'' the Federal Government. It plans
    to dramatically overhaul 32 Federal agencies to improve performance
    in key services, such as expediting student loan processing and
    speeding aid to disaster victims. It also plans to continue tackling
    critical challenges, such as ensuring that Government computers
    can process the year 2000 date change and making more  Government
    services available electronically.

    Under the 1993 Government Performance and Results Act, Cabinet
    departments and agencies have prepared individual performance
    plans that they will send to Congress with the performance goals
    they plan to meet in 2000. These plans provided the basis for the
    second Government-wide

    [[Page 34]]

    Performance Plan which is contained in the budget. In 2000, for the
    first time, agencies will submit to the President and the Congress
    annual reports for 1999 that compare actual and target performance
    levels and explain any difference between them.

    [[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

    [[Page 36]]

     allocations, within the spending target, for discretionary and
     mandatory spending.

    ``Cap''

     A ``cap'' is a legal limit on 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.

    [[Page 37]]

     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 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 1999 ends
     September 30, 1999.

    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.

    [[Page 38]]

    Social Insurance Payroll Taxes

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

    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                                                    Page
         What Is the Budget?
          1-1 Government Spending as a Share of GDP, 1998................   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
         The President's 1999 Budget
          5-1 Cuts in Civilian Employment................................  33

    [[Page 40]]

       List of Tables                                                    Page

         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