A Citizen's Guide to the Federal Budget - A Citizen's Guide to the Federal Budget

[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]

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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.
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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
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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.
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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.
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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.
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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
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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.)
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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,
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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.
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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).
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--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 patients� choices� 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 Government�s 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