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


[[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 or repayment of borrowing. 
  If revenues are greater than spending, the Government runs a surplus. 
  When there is a surplus, the Government can reduce the national debt--
  money it owes to American and foreign investors. 
 something that affects the Nation's economy. 
  Some types of spending on things like education and support for 
  science and technology are done in the hope they will 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 earn more and unemployment is 
  low. In this atmosphere, revenues increase and the surplus grows. 
 a historical record. 
  The budget reports on how the Government has spent money in the past, 
  and how that spending was financed. 
  The 2002 Budget is a document that embodies the President's budget 
  proposal to Congress for fiscal 2002, the fiscal year that begins on 
  October 1, 2001. It reflects the President's priorities and proposes 
  that the entire Social Security surplus be saved and set aside for 
  Social Security and debt 
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  reduction. The President's budget also moderates the recent extremely 
  rapid growth in discretionary spending, while funding national 
  priorities and providing tax relief. 
  The Federal budget, of course, is not the only budget that affects the 
  economy or the American people. The budgets of State and local 
  governments have an impact as well. While Federal Government spending 
  was 18 percent of the Gross Domestic Product (or GDP, which measures 
  the size of the economy) in 2000, State and local government 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 $1,152 billion that State and local governments 
  spent in 2000, $242 billion came from Federal grants. 
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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. 


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  On the other hand, if they find themselves with more income than needed 
  to meet their usual needs, they might use some of the extra money to 
  improve their situation in critical areas, such as buying better health 
  insurance, and to pay off the debts they built up in earlier years. 
  In some ways, 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. Unlike 
  the Government though, a family can't just decide to take money from its 
  neighbors when it wants to spend more than it takes in. 
  Also, unlike a family, the Government must keep in mind that it gets 
  its revenue from you, the taxpayer. When the Federal budget is in 
  surplus, the Government debates not only how much of the surplus to 
  invest in new 


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  spending, or to pay down past debt, but also how much to return to 
  the taxpayers in the form of tax relief. The Government also debates 
  how its spending and revenue decisions will help the economy grow. 
  In this chapter, we will discuss these decisions in some detail--that 
  is, how the Government raises revenues and where it spends money. 
Revenues 
  The money that the Federal Government uses to pay its bills--its 
  revenues or receipts--comes mostly from taxes. In the past three years, 
  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. 
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                  Table 2-1. Revenues By Source--Summary 
                        (In billions of dollars) 
-----------------------------------------------------------------------------
                                                     Estimate
                              -----------------------------------------------
       Source                 2000 ------------------------------------------
                             Actual   2001   2002   2003   2004   2005   2006
-----------------------------------------------------------------------------
Individual income taxes .... 1,004   1,073  1,079  1,092  1,118  1,157  1,197
Corporate income taxes .....   207     213    219    227    235    244    252
Payroll taxes ..............   653     690    726    766    806    856    896
Excise taxes ...............    69      71     74     76     78     81     82
Estate and gift taxes ......    29      31     29     27     28     25     22
Customs duties .............    20      21     23     24     25     26     28
Miscellaneous revenues .....    43      38     43     45     48     49     51
   Total revenues .......... 2,025   2,137  2,192  2,258  2,339   2,438  2,529
------------------------------------------------------------------------------
Note: The revenues listed in this table do not include revenues from the 
Government's business-like activities--such as entrance fees at national 
parks. Instead of counting these collections as revenues, the Government 
subtracts them from spending. This produces totals for revenues and 
spending that show the level of Government activity without the 
business-like activity. 

Revenues come from these sources:

 Individual income taxes will raise an estimated $1,079 billion 
  in 2002, equal to about 9.9 percent of GDP, after reaching an all-time 
  high in 2001. Total taxes, as a percent of GDP, also reached a peace-
  time high in 2001. 
 Corporate income taxes, which will raise an estimated $219 
  billion, have shrunk steadily as a percent of GDP, from 4.5 percent in 
  1955 to an estimated two percent in 2002. 
 Social insurance payroll taxes 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 6.7 percent in 2002. 
 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 deposits others in the general fund. 
 The Government also collects estate and gift taxes, customs 
  duties, and miscellaneous revenues--for example, Federal Reserve 
  earnings, fines, penalties, and forfeitures. 
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Spending

As noted, the Federal Government will collect around $2.2 trillion 
and spend nearly $2.0 trillion,\1\ which is divided into several 
categories as shown in Chart 2-7, leaving a surplus of $231 billion 
in 2002. 
 The largest Federal program is Social Security, which will 
provide monthly benefits to more than 46 million retired and disabled 
workers, their dependents, and survivors. It accounts for 23 percent 
of all Federal spending. 
----------------------------
\1\ This amount does not include all of the Government's spending. As 
explained under ``Revenues,'' the Government subtracts collections from 
its business-like activities, such as entrance fees at national parks, 
from spending instead of adding them to revenues. These collections are 
estimated to be $0.2 trillion in 2002. If they were not subtracted from 
spending, spending would total an estimated $2.2 trillion in 2002, not 
$2.0 trillion.

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 Medicare will provide health care coverage for more than 40 
million elderly Americans and people with disabilities. Since its 
creation in 1965, Medicare has accounted for an ever-growing share of 
spending. In 2002, it will comprise 12 percent of all Federal spending. 
 Medicaid will provide health care services to a little more 
than 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, although the rate of growth 
has fallen from the double-digit pace of the late 1980s and early 1990s. 
In 2002, Medicaid will account for seven 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, 
Supplemental Security Income, Child Nutrition, the Earned Income Tax 
Credit, and veterans' pensions. This category will account for an 
estimated six percent of the budget. 


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 The remaining mandatory spending, which mainly consists of 
Federal retirement and insurance programs, unemployment insurance, 
and payments to farmers, makes up seven percent of the budget. 

 National defense discretionary spending will total an 
estimated $319 billion in 2002, comprising 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--will total an estimated $373 billion 
in 2002, or 19 percent of the budget. 
 Interest payments, primarily the result of previous budget 
deficits, averaged seven percent of Federal spending in the 1960s and 
1970s and rose to a high of 15 percent in 1996. Since 1998, the 
budget has been in surplus. As a result, interest payments are 
estimated to drop to less than 10 percent of the budget in 2002. 
 Slightly less than 11 percent of your Federal dollar (the 
budget surplus) will be reserved for contingencies or used to reduce 
the Federal debt to ensure the continued solvency of Social Security. 
``On'' and ``Off'' Budget 
From time to time, you may hear the term ``on-budget,'' which refers 
to the budget excluding certain programs that are legally designated 
as ``off-budget.'' 
Traditionally, the President's budget has focused on the totals for the 
unified budget. The unified budget encompasses all of the budgetary 
activities of the Government, and the unified budget surplus or deficit 
is the measure that determines how much the Government has to borrow 
from the public (in the case of a deficit), or how much past borrowing 
can be repaid (in the case of a surplus). 
More recently, the on-budget surplus has received increasing attention. 
For all practical purposes, the off-budget surplus is the surplus in 
the Social Security program. This means that the on-budget surplus is 
the budget surplus excluding the Social Security surplus.\2\ 
-------------------
\2\ The Postal Service is also designated as off-budget, which is 
why the off-budget surplus and the Social Security surplus are not 
exactly the same. 
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                        Table 2-2. Spending Summary
                          (In billions of dollars) 
-----------------------------------------------------------------------------
                                                     Estimate 
                                  -------------------------------------------
                                  2001     2002    2003    2004    2005   2006
-----------------------------------------------------------------------------

Outlays: 
  Discretionary .................  649      692     712     731     754    770
  Mandatory: 
    Social Security .............  430      452     474     498     524    553
    Medicare ....................  216      226     239     252     279    292
    Medicaid ....................  129      142     153     166     181    196
    Other mandatory .............  226      260     264     268     286    285
                                   -------------------------------------------
  Subtotal, mandatory .........  1,001    1,081   1,129   1,184   1,270  1,326
  Net interest ................    206      188     175     161     145    127
                                   -------------------------------------------
Total, outlays ................  1,856    1,961   2,016   2,077   2,169  2,224
Receipts ......................  2,137    2,192   2,258   2,339   2,438  2,529
                                   -------------------------------------------
  Unified surplus .............    281      231     242     262     269    305
  On-budget surplus/ contingency   125       59      49      52      32     52
  Off-budget surplus ..........    156      172     193     211     237    252
------------------------------------------------------------------------------

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                   Table 2-3. Total Spending by Function 
                     (Outlays, in billions of dollars) 
------------------------------------------------------------------------------
      Function            Actual                    Estimate 
                  ------------------  ----------------------------------------
                  1998   1999   2000   2001   2002   2003   2004   2005   2006
------------------------------------------------------------------------------
National defense   268    274    294    299    319    322    333    347    354
International 
  affairs           13     15     17     17     21     21     21     22     22 General science, 
  space, and 
  technology ....   18     18     19     20     21     21     22     23     23
Energy ..........    1      1     -1     -1     -*     -*     -1     -*     -*
Natural resources 
  and environment   22     24     25     27     27     28     28     28     29
Agriculture .....   12     23     37     26     19     15     14     14     14
Commerce and 
  housing credit     1      3      3     -1      7      5      4      4      2
Transportation      40     43     47     51     55     57     60     62     64
Community and 
  regional 
  development       10     12     11     11     12     11     11     10     10
Education, training, 
  employment, and 
  social services   55     56     59     65     77     81     83     85     87
Health ..........  131    141    155    175    202    224    243    251    265
Medicare ........  193    190    197    219    230    242    256    283    296
Income security    233    238    248    263    276    286    296    309    317
Social security    379    390    409    434    455    477    502    528    557
Veterans benefits 
  and services      42     43     47     45     52     54     56     60     60
Administration of 
  justice           23     26     28     29     32     35     35     35     36
General government  16     16     13     17     16     17     18     17     18
Net interest       241    230    223    206    188    175    161    145    127
Allowances ......   ..     ..     ..     ..      2      4      5      5      6
Undistributed 
offsetting 
  receipts         -47    -40    -43    -48    -49    -60    -71    -59    -62
                  ------------------------------------------------------------
Total .........  1,653  1,703  1,789  1,856  1,961  2,016  2,077  2,169  2,224
------------------------------------------------------------------------------
* $500 million or less. 
Note: Spending that is shown as a minus means that receipts exceed outlays. 


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              Table 2-4. Discretionary Budget Authority by Agency 
                           (In billions of dollars) 
------------------------------------------------------------------------------
       Agency                   Actual                    Estimate 
                         -----------------------------------------------------
                         1998  1999  2000  2001  2002  2003  2004  2005  2006 
------------------------------------------------------------------------------
Legislative Branch ......   2     3     3     3     3     3     3     3     3 
Judicial Branch .........   3     3     4     4     5     5     5     5     5 
Agriculture .............  16    16    17    19    18    19    19    19    20 
Commerce ................   4     5     9     5     5     5     5     5     6 
Defense-Military ........ 260   275   287   296   310   319   328   337   347 
Education ...............  30    29    29    40    45    46    47    48    49 
Energy ..................  17    18    18    20    19    20    20    21    21 
Health and Human Services  37    42    45    54    57    62    63    65    67 
Housing and Urban 
  Development ...........  20    22    21    28    30    32    33    35    36 
Interior ................   8     8     8    10    10    10    10    10    11 
Justice .................  18    18    19    21    20    22    22    22    23 
Labor ...................  11    11     9    12    11    12    12    12    13 
State ...................   6     8     8     8     9     9     9    10    10 
Transportation ..........  13    14    14    18    16    17    18    18    18 
Treasury ................  11    13    13    14    15    15    15    16    16 
Veterans Affairs ........  19    19    21    22    23    24    24    25    26 
Corps of Engineers ......   4     4     4     5     4     4     4     4     4 
Other Defense Civil 
  Programs ..............   *     *     *     *     *     *     *     *     * 
Environmental Protection 
  Agency ................   7     8     8     8     7     7     8     7     7 
Executive Office of the 
  President .............   *     *     *     *     *     *     *     *     * 
Federal Emergency 
  Management Agency .....   3     3     4     2     2     2     2     2     2 
General Services 
  Administration ........   *     1    -*     *     1     1     1     1     1 
International Assistance 
  Programs ..............  11    31    14    13    13    13    13    14    14 
National Aeronautics and
  Space Administration ..  14    14    14    14    15    15    15    16    16 
National Science 
  Foundation ............   3     4     4     4     4     5     5     5     5 
Office of Personnel 
  Management ............   *     *     *     *     *     *     *     *     * 
Small Business 
  Administration ........   1     1     1     *     1     1     1     1     1 
Social Security 
  Administration ........   5     5     6     6     6     7     7     7     7 
Other Independent Agencies  6     6     6     6     6     6     6     6     6 
Allowances ..............                           5     5     6     6     6 
                            --------------------------------------------------
Total ................... 530   582   584   635   661   685   703   720   738 
------------------------------------------------------------------------------
* $500 million or less. Notes: 
Notes:
  Discretionary budget authority is appropriated by Congress each year, 
    in contrast to mandatory authority, which is automatic under 
    permanent law. 
  For a more complete discussion of discretionary appropriations, see 
    ``Action in Congress'' in Chapter 3. 
  Budget authority that is shown as a minus means that receipts exceed 
    budget authority. 
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Social Security is running large surpluses right now, because payroll 
taxes were raised dramatically in the early 1980s and because the 
relatively large ``baby-boom'' generation is big enough to provide the 
Social Security benefits provided to the relatively small generation of 
current retirees. These surpluses have held down the unified deficit by 
offsetting part of the deficit in the on-budget accounts. When the 
unified budget first booked a surplus of $69 billion in 1998, the on-
budget accounts were still in deficit by $30 billion. In 1999, the unified 
budget ran a $125 billion surplus, nearly all of which was the result 
of the Social Security surplus. The on-budget accounts were almost 
exactly in balance. For 2002, $59 billion of the estimated $231 billion 
surplus comes from the on-budget accounts. 
Under the President's proposals, the entire Social Security surplus 
would be saved and set aside for Social Security and debt reduction. 
The President's overall budgetary framework is discussed in Chapter 5. 
Chart 2-9 illustrates the relationship between on- and off-budget 
items, and the unified budget. 


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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 specifies 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. 
In some years, it is not possible for the President to adhere to the 
normal schedule. The law does not require an outgoing President to 
transmit a budget, and it is impractical for an incoming President to 
complete a budget within a few days of taking office. President George 
W. Bush submitted a summary budget plan, A Blueprint for New Beginnings--A 
Responsible Budget for America's Priorities, to Congress on 
February 28, 2001. 
President Bush's detailed budget--which includes a main book and 
several accompanying books\1\--covers thousands of pages and provides 
an abundance of information. These books, which were submitted in April 
2001, allow people from all walks of life to examine the budget from 
many different perspectives. 
Action in Congress 
Congress first passes 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 surplus 
or deficit, and allocations within the spending target for the two 
types of spending--discretionary and mandatory--explained below. 
 Discretionary spending, which accounts for one-third 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 

-------------------------
\1\ They are the main budget book, entitled Budget of the United States 
Government: Fiscal Year 2002, as well as Analytical Perspectives, 
Appendix, Historical Tables, and A Citizen's Guide to the Federal Budget, 
which you are now reading. 
[[Page 16]]

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 two-thirds of all 
spending, is authorized by permanent laws, not by the 13 annual 
appropriations bills. It includes entitlements--such as Social Security, 
Medicare, veterans' benefits, and Food Stamps--through which individuals 
receive benefits because they are eligible based on their age, income, or 
other criteria. It also includes interest on the national debt, which the 
Government pays to individuals and institutions that hold Treasury bonds 
and other Government securities. The President and Congress can change the 
law in order to change the spending on entitlements and other mandatory 
programs--but they don't have to. 
Think of it this way: For discretionary programs, Congress and the 
President must act each year to provide spending authority. For 
mandatory programs, they may act to change the spending that current 
laws require. 
Currently, the law imposes limits, or ``caps,'' through 2002 on annual 
discretionary spending. The budget proposes to revise these caps beginning 
in 2001 to recognize changing fiscal conditions, and extend the caps at 
appropriate levels through 2006. 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,'' or 
PAYGO, is designed to prevent new legislation from reducing the surplus or 
increasing the deficit. The budget also proposes extending the PAYGO system. 
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. To consider the budget's proposed changes in taxes, the 
House Ways and Means and the Senate Finance Committees will 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 
[[Page 17]]

changes still others. Congressional rules require that these committees 
and subcommittees take actions that are consistent with the budget 
resolution. 

If you read through the President's budget, the budget resolution, or the 
appropriations or authorizing bills that Congress drafts, you will notice 
that the Government measures spending in two ways--``budget authority'' and 
``outlays.''
Budget authority (or BA) is what the law authorizes the Federal Government 
to spend for certain programs, projects, or activities. What the Government 
actually spends in a particular year, however, is an outlay. To see the 
difference, consider what happens when the Government decides to build a 
space exploration system. 
The President and Congress may agree to spend $1 billion for the space 
system. Congress appropriates $1 billion in BA. But the system may take 
10 years to build. Thus, the Government may spend $100 million in outlays 
in the first year to begin construction and the remaining $900 million over 
the next nine years as construction continues. 
Monitoring the Budget 
Once the President and Congress approve spending, the Government monitors 
the budget through: 
 agency program managers and budget officials, including the 
Inspectors General, or IGs; 
 the Office of Management and Budget; 
 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 
 ensure that programs are well managed and achieving the intended 
results. 
[[Page 18]]

Prodded by Congress, the Executive Branch has begun to pay more attention 
to good management of late, starting with 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 19]]

4. The Budget Surplus and Fiscal Discipline 
--------------------------------------------

In 1998, the Federal budget reported its first surplus ($69 billion) 
since 1969. In 1999, the surplus nearly doubled to $125 billion, and 
then again in 2000 to $236 billion. As a result of these surpluses, 
Federal debt held by the public has been reduced from $3.8 trillion at 
the end of 1997 to $3.4 trillion at the end of 2000 and to an estimated 
$3.2 trillion in 2001. With continued prudent fiscal policies, the budget 
can remain in surplus for many years. Under the President's budget 
proposals, $2.0 trillion in Federal debt held by the public will be retired 
over the next 10 years--all of the debt that can responsibly be retired. 
Put simply, a surplus occurs when receipts exceed spending in any 
year--just as a deficit occurs when spending exceeds receipts. Generally, 
to finance past deficits, the Treasury has borrowed money. With certain 
exceptions, the debt is the sum total of our deficits, minus our surpluses, 
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 surpluses 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 receipts from businesses and 
individuals. 
The Government generated deficits during the War of 1812, the recession 
of 1837, the Civil War, the depression of the 1890s, and World War I. Once 
the war ended or the economy began to grow, the Government followed its 
deficits with budget surpluses, with which it paid down the debt. 
Deficits returned in 1931 and remained for the rest of the decade--due to 
the Great Depression and the spending associated with President 
Roosevelt's New Deal. Then, World War II forced the Nation to spend 
unprecedented amounts on defense and to incur corresponding unprecedented 
deficits. 
Since then--with Democratic and Republican Presidents, Democratic and 
Republican Congresses--the Government has balanced its books only 11 times, 
most recently last year. 
[[Page 20]]

During the 1970s, large budget deficits emerged as the economy was 
disrupted by oil shocks and inflation. In the 1980s, this trend increased. 
By 1992, the deficit reached $290 billion. Budget deficits have gradually 
declined since that high point, returning to balance in 1998. In 2000, the 
budget surplus was $236 billion. 
Why have we been able to move from deficit to balance? The main reason is 
because strong economic growth has increased tax receipts faster than the 
growth in Federal spending. Also, the end of the Cold War allowed the growth 
in defense spending to slow. 
Until recently, receipts have stayed relatively constant, at around 17 to 
20 percent of GDP, since the 1960s. However, strong economic growth since 
the mid-1990s has increased receipts to nearly 21 percent of GDP, the 
highest level since World War II. In that same time, outlays grew from about 
[[Page 21]]

17 percent of GDP in 1965 to nearly 24 percent in 1983 before falling to 
18 percent in 2000. 
Nevertheless, since 1983, spending has grown dramatically across a 
wide variety of programs. Total spending in 2000 is 37 percent higher 
than in 1983 in constant dollars. Medicare and Medicaid, combined, are 
175 percent higher and Social Security is 48 percent higher. Similarly, 
spending for net interest is 60 percent higher in 2000 than in 1983. In 
total, discretionary spending is six percent higher. But non-defense 
discretionary spending is 30 percent higher while national defense 
discretionary spending is 11 percent lower than in 1983. In recent years 
the growth in discretionary spending has accelerated, especially since 
1997. Between 1997 and 2000, total discretionary spending has increased 
five percent, with non-defense discretionary spending increasing more 
than eight percent during this three-year period. (Note: all numbers 
adjusted for inflation). (See Chart 4-2.) 
[[Page 22]]

Why a Budget Surplus is Important 
As Chart 4-3 illustrates, this Nation has a good record when compared to 
the recent history of four 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.) 
The 2002 Budget forecasts surpluses for decades to come if we maintain a 
policy of fiscal discipline. 
Should we worry about the possibility of a return to budget deficits? 

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, defense, law enforcement, and 
other important services, 
[[Page 23]]

or the more it must collect in taxes. As recently as 1997, the 
Government spent more than 15 percent of its budget to pay interest, 
in contrast to less than 10 percent projected for 2002. The President's 
budget will reduce these interest payments dramatically in the next 10 
years. 
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 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. 
              Table 4-1. Federal Government Financing and Debt 
                          (In billions of dollars) 
----------------------------------------------------------------------------
                             2000                 Estimate                  
                            Actual -----------------------------------------
                                     2001   2002   2003   2004   2005   2006
----------------------------------------------------------------------------
Federal Government financing: 
  Unified budget surplus ..... 236    281    231    242    262    269    305 
    On-budget surplus/reserve 
       for contingencies\1\ ..  87    125     59     49     52     32     52
    Off-budget surplus ....... 150    156    172    193    211    237    252
  Financing other than the 
    change in debt held by 
    the public ............... -13    -45     -4    -15    -16    -15    -14 
    Amount available to repay 
     debt held by the public;  223    236    227    227    246    254    291 
Federal Government debt: 
  Debt subject to legal limit 5,592 5,588  5,627  5,688  5,749  5,822  5,881
  Gross Federal debt ......  5,629  5,625  5,664  5,724  5,784  5,856  5,913 
    Debt held by  
      Government accounts... 2,219  2,451  2,717  3,004  3,310  3,636  3,985
    Debt held by the public  3,410  3,174  2,947  2,720  2,473  2,219  1,928
-----------------------------------------------------------------------------
\1\ The actual amount of annual debt retirement will vary depending upon 
the availability of eligible redeemable debt, and the use, if any, of the 
contingency reserve. 
[[Page 24]]
Debt held by the public was $3.4 trillion at the end of 2000--roughly 
the net effect of deficits and surpluses over the last 200 years. Debt 
held by the public does not include debt the Government owes itself--the 
total of all trust fund surpluses and deficits over the years, like the 
Social Security surplus, which the law says must be invested in Federal securities. 
Because the large budget deficit has been turned into a surplus, the debt 
held by the public was reduced for three years in a row, for the first 
time since 1947--1949. 
The sum of debt held by the public and debt the Government owes itself is 
called Gross Federal Debt. At the end of 2000, it totaled $5.6 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 either reduce the debt by raising receipts or 
reducing spending, or enact a law to increase the limit. Because the 
budget has returned to surplus and publicly held debt is being reduced, 
there will be no need to increase the statutory limit in 2002. 
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 35 percent 
of GDP at the end of 2000. 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 49 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 about two-thirds 
of debt held by the public. The rest is held in foreign countries. 
[[Page 25]]
5. THE PRESIDENT'S 2002 BUDGET 
--------------------------------

A budget is much more than a collection of numbers. A budget is a 
reflection of a nation's priorities, needs, and promise. With this budget 
I am confident that we can make a great Nation even better. In the midst 
of this budget's heft and detail, there is a vision for a better and more 
prosperous America.--President George W. Bush 
President George W. Bush's 2002 Budget is shaped around a clearly 
defined goal--the belief that Government should be activist but limited. 
Government cannot create a strong economy, but it can create the 
conditions that permit a free citizenry to do so. 
At the same time, Government must also learn from the private sector, 
finding ways to increase efficiency and customer satisfaction. The 
President's Budget moderates the rapid growth of discretionary spending 
that began with the arrival of budget surpluses in 1998 while funding key 
Federal priorities in education, health, environment, and other programs. 
Thematic Highlights of President Bush's 2002 Budget 
 Funds the Nation's spending priorities. For example, the budget 
strengthens and reforms education, granting the Education Department the 
largest percentage spending increase of any department (11.5 percent 
increase in 2002). 
 Moderates recent explosive growth in discretionary spending to 
4.0 percent growth in 2002, an increase of $26 billion over 2001. 
 Achieves historic levels of debt reduction, retiring the maximum 
amount of debt possible over 10 years ($ 2 trillion). 
 Allocates projected $5.6 trillion surplus over 10 years. 
Breakdown of surplus: 
         --Saves all of Social Security surplus ($ 2.6 trillion) for 
           Social Security and commits to reforming the program. 
         --Lets taxpayers keep roughly one-fourth of the surplus they 
           produced ($ 1.6 trillion over 10 years). 
[[Page 26]]
         --Creates an unprecedented $1.0 trillion reserve for additional 
           needs and contingencies. 
 Modernizes and reforms Medicare, and spends every penny of 
Medicare tax and premium collections over the next 10 years only on 
Medicare. 
 Restores commitment to military personnel and begins transition 
to a 21stCentury force structure. 
 Champions compassionate conservatism by supporting the critical 
role that faith-based and community organizations play in helping people 
at the local level. 
 Saves taxpayers billions of dollars by making reductions in 
one-time spending, unjustified programs, duplicative programs, and 
programs that have completed their mission in 2002. 
The President's Policy Priorities 
The President's Budget, which is balanced for 10 consecutive years, 
funds America's priorities, retires an unprecedented $2 trillion in debt, 
provides needed tax relief for everyone who pays income taxes, revitalizes 
education, reforms and modernizes Social Security and Medicare, brings 
defense strategy and spending in line with the challenges of the next half-
century, supports faith-based and community outreach efforts, moderates 
Government spending growth to a reasonable four percent, and establishes 
a first-ever $1 trillion contingency fund for unexpected needs. 
 The President's Budget commits to using today's surpluses to 
reduce the Federal Government's publicly held debt so that future 
generations are not shackled with the responsibility of paying for the 
current generation's overspending. It commits to an unprecedented amount 
of debt retirement--$2 trillion in debt over the next 10 years and reduces 
Federal debt as a share of the economy to the lowest level in a century. 
 The President's Budget proposes a bold and fair tax relief plan 
that will reduce the inequities of the current tax code and help ensure 
that America remains prosperous. This tax relief plan promotes the values 
that make the American economy second to none--access to the middle class, 
family, equal opportunity, and the entrepreneurial spirit. This plan will 
reduce taxes for everyone who pays income taxes, and it will encourage 
enterprise by lowering marginal tax rates. 
[[Page 27]]
 The Administration believes that every young American should 
have the opportunity to go to a good school and acquire the skills that 
will be needed to advance in today's high technology society. Today, 
America's public schools serve some children well. But some schools 
clearly do not teach adequately, nurture consistently, or offer a fair 
start in life. Members of both parties and both Houses of Congress agree 
that Federal education dollars should be spent in ways that restore local 
control; encourages States to set high standards; hold schools accountable 
for improving student achievement, including by measuring achievement 
through frequent assessment; improve the quality of classroom instruction 
and school safety; and, where a school persistently fails, assist parents 
in finding better options. Some education initiatives in this budget 
originated on one side of the political aisle, some on the other. All 
stress results over promises and accountability over process. Federal 
spending is a small part of America's total education spending. The 
President's Budget declares that the Federal Government must not spend for 
spending's sake. This budget puts together an education program and budget 
that ensures that ``no child is left behind.'' 
 The President's Budget shores up Social Security's finances so 
that this program can continue to provide retirement security for all 
future retirees. Today, the Social Security program is in surplus. 
Beginning around 2016, beyond the Government's 10-year planning horizon, 
the program will begin to run a cash deficit. After 2038, the trust fund 
will be depleted and payroll taxes at that time will cover only 73 
percent of promised benefits. Returns have declined to such a point that 
future retirees would do two or three times better if they invested their 
Social Security taxes in low risk securities. Unless Social Security is 
reformed, many young people of following generations might not get back 
from Social Security what they put in. Social Security could be a losing 
proposition for them. Reform must make Social Security a sound program 
for tomorrow's retirees. The cost of saving Social Security goes up with 
every passing year, and our ability to improve returns on total 
contributions goes down. With this budget, the Administration commits 
itself to working with both parties and Houses of Congress to fix Social 
Security now. 
 The President is committed to shoring up Medicare's finances 
as well, while providing better, more efficient coverage for our seniors. 
Medicare is already spending more than it takes in. Medicare spending 
already exceeds taxes and premiums by $66 billion this year. That will 
grow to $216 billion (constant dollars) by 2020. The antiquated division 
of the program into hospital and non-hospital pieces does not encourage 
[[Page 28]]
efficient medical care. Medicare has not adapted to 21st Century medicine. 
Medicare is often slow to incorporate new technologies and methods of 
delivering health care. In addition, although medical care increasingly 
relies on pharmaceuticals, it lacks prescription drug coverage. As in 
virtually all fields, technological and entrepreneurial innovation are 
among the keys to creating more value for the dollar in health care. 
Reform that works for patients must make room for such innovation. 
Reform should expand patientsï¿½ choicesï¿½ not restrict them. This budget 
initiates the process of Medicare modernization and delivers immediate 
relief on prescription drugs for our neediest seniors. 
 The Administration is committed to enhancing our national 
security. Today our Nation faces no major foreign adversary. Our military 
is unquestionably the strongest on earth. And yet our forces are deployed 
around the world maintaining peace and keeping a watchful eye on our 
national interests with increasing frequency. These deployments have 
created some stress on our military. To boost the morale of these 
dedicated men and women, the President's budget will, in addition to the 
well-deserved pay raises earned each year, include an additional $1.4 
billion to ensure better compensation for our troops. The budget also 
includes $3 billion in additional funding to improve military housing and 
increase research and development. 
Furthermore, the United States must develop a strategic vision for the 
21st Century national security agenda that will inform research, 
development, and procurement decisions for the next generation of 
defense systems. This budget begins the process of force re-examination. 
And it commits America to developing, designing, and building a national 
missile defense as fast as possible. 
 The President's plan will support community and faith-based 
efforts to help needy Americans. Today, Federal funds are denied to 
many faithbased and other community-based programs that have succeeded 
in helping people curb criminal behavior, conquer addiction, strengthen 
families, and overcome poverty. 
Federal policy should become outcome-based, insisting on success and 
steering resources to the effective and to the inspired. Federal tax 
policy must spark an outpouring of private philanthropy in America, 
spurring billions more annually in charitable giving to neighborhood-
serving groups, both sacred and secular. The Government must heed the 
growing consensus across America that successful Government programs 
can work in fruitful partnership with community-serving and faith-based 
[[Page 29]]
organizations, whether run by Methodists, Muslims, Mormons, or good 
people of no faith at all. The United States must observe the bedrock 
principles of pluralism, nondiscrimination, evenhandedness, and 
neutrality. With this budget, private and charitable groups, including 
religious ones, will have the fullest opportunity permitted by law to 
compete on a level playing field for Federal funds, so long as they 
achieve valid public purposes. With this budget, the Federal Government 
rallied and supports these armies of compassion across America. 
Additional Budget Highlights 
 K-12 Education. Increases funding for elementary and secondary 
education by $1.9 billion in 2002 over 2001 funding. 
 Reading. Fully funds the President's Reading First initiative, 
including Early Reading First, at $975 million in 2002, more than tripling 
funding for reading. 
 Medicare. Sets aside $153 billion over the next 10 years for the 
Immediate Helping Hand initiative and Medicare modernization. 
 National Institutes of Health (NIH). Continues commitment to 
double NIH, by providing a $2.8 billion increase, the largest annual 
funding increase in NIH's history. 
 WIC. Funds the Special Supplemental Nutrition Program for Women, 
Infants, and Children (WIC) at 7.25 million individuals a month, 
maintaining current program level. 
 Conservation. Provides the highest ever request for the Land 
and Water Conservation Fund--fully funding the program at $900 million. 
 Energy Assistance. Nearly doubles the existing Weatherization 
Assistance Program providing an increase of $1.4 billion over 10 years. 
 Community Health Centers. Launches a doubling of the number 
of people served by Community Health Centers by adding 1,200 sites. 
 Provides tax relief to all Americans who pay income tax. 
 Reduces the marriage penalty. 
 Ends the death tax. 
 Tax incentives. Provides other tax incentives for education, 
farmers, the disabled, health care, the environment, and charitable 
purposes. 
[[Page 30]]
 National Defense. Provides a $14 billion increase in Department 
of Defense spending in 2002 to begin to arrest the decline in national 
security, including $1.4 billion for military compensation to improve 
quality of life and reenlistment and retention of military personnel, 
$2.6 billion for research and development for new technologies (including 
missile defense alternatives), and $400 million to improve housing for our 
military members and their families. 
 Veterans' Assistance: Increases funding to $1.1 billion to 
fully implement legislation that will assist in the processing of 
veterans' disability claims. 
 International Security. Improves embassy security overseas, 
adding $1.2 billion. 
The time for bold action is now. We have the unprecedented opportunity 
to fund our national priorities, reform critical programs, pay off all 
of the Federal debt that makes sense to, and provide needed tax relief. 
I present this budget in the spirit of cooperation and with the great 
expectation that the will of the people and the needs of the Nation will 
guide our deliberations and lead us to success.--President George W. Bush 
[[Page 31]]

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 32]]
   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 surplus, 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 until 
      maturity. 
   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 surplus, that 
      the law says must be invested in Federal securities. 
[[Page 33]]
   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 2002 ends 
   September 30, 2002. 
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.'' 
``On-Budget''
   Those programs not legally designated as 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). 
[[Page 34]]
Receipt 
   This is another word for revenue. 
Revenue 
   This is another word for receipt. Revenues include the collections 
   that result from Government activity, such as taxes. They do not 
   include collections that result from the Governmentï¿½s business-like 
   activities, such as the entrance fees at national parks. Business-like 
   collections are subtracted from total spending to calculate outlays for 
   the year. 
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 comprehensive 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 35]]
List of Charts and Tables List of Charts 
-----------------------------------------

  List of Charts                                                     Page 

     What Is the Budget? 
       1-1 Government Spending as a Share of GDP, 2000 ...............  2 
     Where the Money Comes From--and Where It Goes 
       2-1 Family Budgeting ..........................................  3 
       2-2 National Budgeting ........................................  4 
       2-3 The Federal Government Dollar--Where It Comes From ........  5 
       2-4 Individual Income Taxes as a Share of GDP at Record High ..  7 
       2-5 Constant Dollar Revenue Growth ............................  7 
       2-6 Composition of Revenues ...................................  8 
       2-7 How Your Tax Dollar is Used ...............................  9 
       2-8 Constant Dollar Spending Growth ........................... 11 
       2-9 On- and Off-Budget Surplus Projections .................... 14 

     The Budget Surplus and Fiscal Discipline 
       4-1 Returning the Budget to Surplus ........................... 20 
       4-2 Constant Dollar Outlays by Category ....................... 21 
       4-3 Total Government Surplus or Deficit as a Percent of GDP ... 22 

  List of Tables                                                     Page 
     Where the Money Comes From--and Where It Goes 
       2-1 Revenues by Source--Summary ...............................  6 
       2-2 Spending Summary .......................................... 11 
       2-3 Total Spending by Function ................................ 12 
       2-4 Discretionary Budget Authority by Agency .................. 13 

     The Budget Surplus and Fiscal Discipline 
       4-1 Federal Government Financing and Debt ..................... 23 


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