Budget Process: Extending Budget Controls (25-APR-02,		 
GAO-02-682T).							 
                                                                 
The events of September 11 imposed new demands on the federal	 
budget, while pent-up demands from years of fighting deficits	 
remain. In the past, GAO has suggested four broad principles for 
a budget process. That process should (1) provide information on 
the long-term impact of decisions, both macro--linking fiscal	 
policy to the long-term economic outlook--and micro--providing	 
recognition of the long-term spending implications of government 
commitments; (2) provide information and focus on important macro
trade-offs--e.g., between investment and consumption; (3) provide
information to make informed trade-offs between missions and	 
between the different policy tools of government; and (4) be	 
enforceable, provide for control and accountability, and be	 
transparent, using clear, consistent definitions. New rules and  
goals will be necessary to ensure fiscal discipline and to focus 
on long term implications of decisions. The federal government	 
still needs a decision-making framework to evaluate choices	 
between today's and future needs. Amending the current Budget	 
Enforcement Act without setting realistic caps and addressing	 
mandatory programs is unlikely to be successful because the	 
original act used limited actions to achieve a balanced budget. A
budget process appropriate for the early 21st century needs a	 
broader framework for thinking about near- and long-term fiscal  
goals.								 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-02-682T					        
    ACCNO:   A03184						        
  TITLE:     Budget Process: Extending Budget Controls		      
     DATE:   04/25/2002 
  SUBJECT:   Budget deficit					 
	     Budget surplus					 
	     Budget administration				 
	     Future budget projections				 
	     Medicaid Program					 
	     Medicare Program					 
	     Social Security Program				 

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GAO-02-682T
     
                  United States General Accounting Office

GAO Testimony

Before the Committee on the Budget, House of Representatives

For Release on Delivery
Expected at 9 a.m. BUDGET PROCESS
Thursday, April 25, 2002

Extending Budget Controls

Statement of Susan J. Irving Director, Federal Budget Analysis

                                      a

GAO-02-682T

Mr. Chairman, Mr. Spratt, Members of the Committee:

It is a pleasure to join you today as you think about how to extend and
adapt the Budget Enforcement Act (BEA) regime. The discretionary spending
limits and pay-as-you-go (PAYGO) mechanism established by BEA will expire
this year.1

Last summer when I appeared before this Committee, we were discussing what
kind of process and controls made sense in a time of surplus. Today-for a
variety of reasons-we face a different outlook. The events of September 11
impose a new set of demands on the federal budget. At the same time, the
pent-up demands kept in abeyance during years of fighting deficits remain.
The question before you is what kind of process and controls will permit
Congress and the president to respond to the needs of today while keeping in
mind the need to deal with the budgetary challenges looming over the
horizon.

Later in this statement I will talk about some particular elements and ideas
that have been proposed for adapting and extending budget enforcement
mechanisms. Before doing that, however, I would like to step back and talk a
bit about what a budget process can and cannot do.

A budget process can surface important issues; it can seek to focus the
debate on the important choices. But it is not a substitute for substantive
debate-no process can force agreement where one does not exist.

We ask a great deal of our budget process. We use it to determine aggregate
fiscal policy and to allocate resources across different claims. We use it
to drive program management. In the context of the Government Performance
and Results Act, we turn to the budget to tell us something about the cost
of obtaining a given level of results.

BEA, when first developed and later when it was extended, was a process
established to enforce a previously reached substantive agreement. Last
year, given 10-year projections showing fairly sizable surpluses, there was
a

1 Although the overall discretionary spending caps expire in 2002, the
Highway and Mass Transit outlay caps established under the Transportation
Equity Act for the 21st Century (TEA-21) continue through 2003, and the
conservation caps established as part of the fiscal year 2001 Interior
Appropriations Act were set through 2006. In addition, the sequestration
procedure applies through 2006 to eliminate any projected net costs stemming
from PAYGO legislation enacted through fiscal year 2002.

good deal of discussion about how much of the surplus should be spent (or
used for a tax cut) and how much of it should be used for debt reduction. At
that time, Congress and the president seemed to have reached a tacit
agreement that the Social Security surplus should be used for debt
reduction. While this did not eliminate disagreements about tax or spending
policy, it did provide a fiscal target to replace "zero deficit" or
"balanced budget." It set the outside parameters for the budget debate.

As I have testified before, the budget represents the decisions made about a
large number of often conflicting objectives that citizens want the
government to address. We should not be surprised that it generates
controversy. As BEA expires, you face a wealth of options and choices. I
appreciate the invitation to talk about some of these today. Some of these
points are discussed more fully in the BEA compliance report2 that we did
last year at your request, Mr. Chairman.

Principles for a Budget Process

In the past, we have suggested four broad principles or criteria for a
budget process.3 A process should

* provide information about the long-term impact of decisions, both
macro-linking fiscal policy to the long-term economic outlook-and
micro-providing recognition of the long-term spending implications of
government commitments;

* provide information and be structured to focus on important macro
trade-offs-e.g., between investment and consumption;

* provide information necessary to make informed trade-offs between missions
(or national needs) and between the different policy tools of government
(such as tax provisions, grants, and credit programs); and

2 U.S. General Accounting Office, Budget Issues: Budget Enforcement
Compliance Report, GAO-01-777 (Washington, D.C.: June 15, 2001).

3For a fuller discussion of these criteria see U.S. General Accounting
Office, Budget Process: Evolution and Challenges GAO/T-AIMD-96-129
(Washington, D.C.: July 11, 1996), Budget Process: History and Future
Directions, GAO/T-AIMD-95-214 (Washington, D.C.: July 13, 1995), and Budget
Process: Comments on H.R. 853,GAO/T-AIMD-99-188 (Washington, D.C.: May 12,
1999).

* be enforceable, provide for control and accountability, and be
transparent, using clear, consistent definitions.

The lack of adherence to the original BEA spending constraints in recent
years and the expiration of BEA suggest that now may be an opportune time to
think about the direction and purpose of our nation's fiscal policy. The
surpluses that many worked hard to achieve-with help from the economy-not
only strengthened the economy for the longer term but also put us in a
stronger position to respond to the events of September 11 and to the
economic slowdown than would otherwise have been the case. Going forward,
the nation's commitment to surpluses will be tested: a return to surplus
will require sustained discipline and difficult choices. It will be
important for Congress and the president to take a hard look at competing
claims on the federal fisc.4 A fundamental review of existing programs and
operations can create much needed fiscal flexibility to address emerging
needs by weeding out programs that have proven to be outdated, poorly
targeted, or inefficient in their design and management. Last October, you
and your Senate counterparts called for a return to budget surplus as a
fiscal goal.5 This remains an important fiscal goal, but achieving it will
not be easy. Much as the near-term projections have changed in a year, it is
important to remember that even last year the long-term picture did not look
rosy. These long-term fiscal challenges argued for continuation of some
fiscal restraint even in the face of a decade of projected surpluses. The
events of September 11 reminded us of the benefits fiscal flexibility
provides to our nation's capacity to respond to urgent and newly emergent
needs. However, as the comptroller general has pointed out, absent
substantive changes in entitlement programs for the elderly, in the long
term there will be virtually no room for any other federal spending
priorities-persistent deficits and escalating debt will

4 See U.S. General Accounting Office, Homeland Security: Challenges and
Strategies in Addressing Short- and Long-Term National Needs, GAO-02-160T
(Washington, D.C.: Nov. 7, 2001); Congressional Oversight: Opportunities to
Address Risks, Reduce Costs, and Improve Performance, GAO/T-AIMD-00-96
(Washington, D.C.: Feb. 17, 2000) and Budget Issues: Effective Oversight and
Budget Discipline are Essential-Even in a Time of Surplus, GAO/T-AIMD-00-73
(Washington, D.C.: Feb 1, 2000).

5 House and Senate Budget Committees, Revised Budgetary Outlook and
Principles for Economic Stimulus (October 4, 2001)

overwhelm the budget.6 While the near-term outlook has changed, the
long-term pressures have not. These long-term budget challenges driven by
demographic trends also serve to emphasize the importance of the first
principle cited above-the need to bring a long-term perspective to bear on
budget debates.

There is a broad consensus among observers and analysts who focus on the
budget both that BEA has constrained spending and that continuation of some
restraint is necessary both in times when near-term deficits are accepted
and when we achieve surpluses. These views have been articulated by
commentators ranging from Federal Reserve Chairman Alan Greenspan to former
CBO Director Robert Reischauer, the Concord Coalition, and President Bush.
Discussions on the future of the budget process have primarily focused on
revamping the current budget process rather than establishing a new one from
scratch.

Where the discussion focuses on specific control devices, the two most
frequently discussed are:(1) extending the discretionary spending caps and
(2) extending the PAYGO mechanism.

Recent History of Budget Enforcement Rules

The Budget Enforcement Act of 1990 (Title XIII of P.L. 101-508) was designed
to constrain future budgetary actions by Congress and the president. It took
a different tack on fiscal restraint than earlier efforts, which had focused
on annual deficit targets in order to balance the budget.7 Rather than force
agreement where there was none, BEA was designed to enforce a previously
reached agreement on the amount of discretionary spending and the budget
neutrality of revenue and mandatory spending legislation. The law was
extended twice.

While there is widespread agreement among observers and analysts of the
budget that BEA served for much of the decade as an effective restraint on
spending, there is also widespread agreement that BEA control mechanisms
were stretched so far in the last few years that they no longer

6 U.S. General Accounting Office, Budget Issues: Long-Term Fiscal
Challenges, GAO-02-467T (Washington, D.C.: Feb. 27, 2002) and Long-Term
Budget Issues: Moving From Balancing the Budget to Balancing Fiscal Risk,
GAO-01-385T (Washington, D.C.: Feb. 6, 2001).

7 For more on history, see GAO/T-AIMD-96-129.

served as an effective restraint. In part, recurring budget surpluses
undermined the acceptance of the spending caps and PAYGO enforcement.

Figure 1 illustrates the growing lack of adherence to the original
discretionary spending caps since the advent of surpluses in 1998. The
figure shows the original budget authority caps as established in 1990 and
as extended in 1993 and 1997, adjustments made to the caps, and the level of
actually enacted appropriations for fiscal years 1991 through 2002. As we
reported in our last three compliance reports, the amounts designated as
emergency spending for fiscal years 1999 and 2000-$34.4 billion and $30.8
billion respectively-were significantly higher than in most past years.8 In
addition to the larger than normal amounts, emergency appropriations in both
1999 and 2000 were used for a broader range of purposes than in most prior
years.9

8 See U.S. General Accounting Office, Budget Issues: Budget Enforcement
Compliance Report, GAO/AIMD-99-100 (Washington, D.C.: Apr. 1, 1999); Budget
Issues: Budget Enforcement Compliance Report, GAO/AIMD-00-174 (Washington,
D.C.: May 31, 2000) and GAO-01-777.

9 Additional information on issues related to emergency spending can be
found in the Congressional Budget Office report Emergency Spending Under the
Budget Enforcement Act, issued in December 1998, the update to that report
issued in June 1999, the CBO report Supplemental Appropriations in the
1990s, issued in March 2001, and U.S. General Accounting Office reports
Budgeting for Emergencies: State Practices and Federal Implications,
GAO/AIMD-99-250 (Washington, D.C.: Sept. 30, 1999) and Emergency Criteria:
How Five States Budget for Uncertainty, GAO/AIMD-99-156R (Washington, D.C.:
Apr. 20, 1999).

Figure 1: Discretionary Outlay Caps and Enacted Appropriations

Billions of dollars
800

700

600

500

400

300

200

100

0
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Fiscal year

Final adjusted caps
Original statutory caps
Final enacted appropriations

Note: Data for fiscal year 2002 are current as of February 4, 2002. Source:
Office of Management and Budget

Emergency spending designations have not been the only route to spending
above the discretionary spending caps. For fiscal year 2001 Congress took a
different approach-one that also highlights the declining effectiveness of
the BEA discretionary spending limits. The Foreign Operations Appropriations
Act (P.L. 106-429) raised the 2001 budget authority cap by $95.9 billion, a
level assumed to be sufficient to cover all enacted and anticipated
appropriations. Also, in January 2001, CBO reported that advance
appropriations, obligation and payment delays, and specific legislative
direction for scorekeeping had been used to boost discretionary spending
while allowing technical compliance with the limits.10 In 2002, Congress
once again raised spending limits to cover enacted appropriations. The
Department of Defense and Emergency Supplemental Appropriations Act for
200211 adjusted the budget authority caps upward by $134.5 billion.

Nor has PAYGO enforcement been exempt from implementation challenges. The
consolidated appropriations acts for both fiscal years 2000 and 2001
mandated that OMB change the PAYGO scorecard balance to zero. In fiscal year
2002, a similar instruction in the Department of Defense and Emergency
Supplemental Appropriations Act eliminated $130.3 billion in costs from the
PAYGO scorecard. Both OMB and CBO estimated that without the instructions to
change the scorecard, sequestrations would have been required in both 2001
and 2002.

Extending Caps on Discretionary Spending

BEA distinguished between spending controlled by the appropriations
process-"discretionary spending"-and that which flowed directly from
authorizing legislation-"direct spending," sometimes called "mandatory."
Caps were placed on discretionary spending-and Congress' compliance with the
caps was relatively easy to measure because discretionary spending totals
flow directly from legislative actions (i.e., appropriations laws).

As I noted above, there has been broad consensus that, although the caps
have been adjusted, they did serve to constrain appropriations. This

10 For a slightly longer discussion of these issues, see GAO-01-777.

11 The full name of the act is the Department of Defense and Emergency
Supplemental Appropriations for Recovery from and Response to Terrorist
Attacks on the United States Act, Public Law 107-117, 115 STAT.2230 (2002).

consensus, combined with the belief that continuing some restraints is
important, has led many to propose that some form of cap structure be
continued as a way of limiting discretionary appropriations. However, the
actions discussed above have also led many to note that caps can only work
if they are realistic; while caps can work if they are tighter than some may
like, they are unlikely to hold if they are seen as totally unreasonable or
unrealistic. If they are set at levels viewed as reasonable (even if not
desirable) by those who must comply with them, spending limits can be used
to force choices. In the near term, limits on discretionary spending may be
an important tool to prompt reexamination of existing programs as well as
new proposals.

Some have proposed changes in the structure of the caps by limiting them to
caps on budget authority. Outlays are controlled by and flow from budget
authority-although at different rates depending on the nature of the
program. Some argue that the existence of both budget authority and outlay
caps has encouraged provisions such as "delayed obligations" to be adopted
not for programmatic reasons but as a way of juggling the two caps. The
existence of two caps may also encourage moving budget authority from rapid
spend out to slower spend out programs, thus pushing more outlays to the
future and creating problems in complying with outlay caps in later years.
Extending only the budget authority cap would eliminate the incentive for
such actions and focus decisions on that which Congress is intended to
control-budget authority, which itself controls outlays. This would be
consistent with the original design of BEA. The obvious advantage to
focusing decisions on budget authority rather than outlays is that Congress
would not spend its time trying to control the timing of outlays.

However, eliminating the outlay cap would raise several issues-chief among
them being how to address the control of transportation programs for which
no budget authority cap currently exists, and the use of advance
appropriations to skirt budget authority caps. However, agreements about
these issues could be reached-this is not a case where implementation
difficulties need derail an idea. For example, the fiscal year 2002 budget
proposed a revision to the scorekeeping rule on advance appropriations so
that generally they would be scored in the year of enactment. Such a scoring
rule change could eliminate the practice of using advance appropriations to
skirt the caps. The 2002 Congressional Budget Resolution took another tack;
it capped advance appropriations at the amount advanced in the previous
year. This year the Administration proposed that total advance
appropriations continue to be capped in 2003 and the

president's budget assumed that all advance appropriations would be frozen
except for those that it said should be reduced or eliminated for
programmatic reasons.

There are other issues in the design of any new caps. For example, for how
long should caps be established? What categories should be established
within or in lieu of an overall cap? While the original BEA envisioned three
categories (Defense, International Affairs, and Domestic), over time
categories were combined and new categories were created. At one time or
another caps for Nondefense, Violent Crime Reduction, Highways, Mass Transit
and Conservation spending existed-many with different expiration dates.
Should these caps be ceilings, or should they-as is the case for highways
and conservation-provide for "guaranteed" levels of funding? The selection
of categories-and the design of the applicable caps-is not trivial.
Categories define the range of what is permissible. By design they limit
tradeoffs and so constrain both Congress and the president.

Because caps are defined in specific dollar amounts, it is important to
address the question of when and for what reasons the caps should be
adjusted. This is critical for making the caps realistic. For example,
without some provision for emergencies, no caps can be successful. In the
recent past it appears that there has been some connection between how
realistic the caps are and how flexible the definition of emergency is. As
discussed in both our 2000 and 2001 compliance reports, the amount and range
of spending considered as "emergency" has grown in recent years.12 There
have been a number of approaches suggested to balance the need to respond to
emergencies and the desire to avoid making the "emergency" label an easy way
to raise caps. The House Budget Resolution for fiscal year 2002 (H. Con.
Res. 83) established a reserve fund of $5.6 billion for emergencies in place
of the current practice of automatically increasing the appropriate levels
in the budget resolution for designated emergencies. It also established two
criteria for defining an emergency. These criteria require an emergency to
be a situation (other than a threat to national security) that (1) requires
new budget authority to prevent the imminent loss of life or property or in
response to the loss of life or property and (2) is unanticipated, meaning
that the situation is sudden, urgent, unforeseen, and temporary.

12See GAO/AIMD-00-174 and GAO-01-777.

In the past others have proposed providing for more emergency spending under
any spending caps-either in the form of a reserve or in a greater
appropriation for the Federal Emergency Management Agency (FEMA). If such an
approach were to be taken, the amounts for either the reserve or the FEMA
disaster relief account would need to be included when determining the level
of the caps. Some have proposed using a 5-or 10-year rolling average of
disaster/emergency spending as the appropriate reserve amount. Adjustments
to the caps would be limited to spending over and above that reserve or
appropriated level for extraordinary circumstances. Since the events of
September 11-and the necessary responses to it- would undoubtedly qualify as
such an "extraordinary circumstance," consideration of new approaches for
"emergency" spending should probably focus on what might be considered "more
usual" emergencies. It has been suggested that with additional up-front
appropriations or a reserve, emergency spending adjustments could be
disallowed. No matter what the provision, only the commitment of Congress
and the president can make any limit on cap adjustments for emergencies
work. States have used this reserve concept for emergencies, and their
experiences indicate that criteria for using emergency reserve funds may be
useful in controlling emergency spending.13 Agreements over the use of the
reserve would also need to be achieved at the federal level.

This discussion of issues in extending the BEA caps is not exhaustive.
Previously, we have reported on two other issues in particular-the scoring
of operating leases and the expansion of user fees as offsets to
discretionary spending. I would like to touch briefly on these.

Miscellaneous Discretionary Challenges: Leases and User Fees

We have previously reported that existing scoring rules favor leasing when
compared to the cost of various other methods of acquiring assets.14
Currently, for asset purchases, budget authority for the entire acquisition
cost must be recorded in the budget up front, in the year that the asset
acquisition is approved. In contrast, the scorekeeping rules for operating
leases often require that only the current year's lease costs be recognized
and recorded in the budget. This makes the operating lease appear less
costly from an annual budgetary perspective, and uses up less budget

13GAO/AIMD-99-250.

14 U.S. General  Accounting Office,  Budget Issues: Budget  Scorekeeping for
Acquisition of Federal Buildings, GAO/T-AIMD-94-189 (Washington, D.C.: Sept.
20, 1994).

authority under the cap. Alternative scorekeeping rules could recognize that
many operating leases are used for long-term needs and should be treated on
the same basis as purchases. This would entail scoring up front the present
value of lease payments for long-term needs covering the same time period
used to analyze ownership options. The caps could be adjusted appropriately
to accommodate this change. Most recently this issue has arisen in authority
provided to the Air Force to lease 100 Boeing aircraft to be used as tankers
for up to 10 years when the underlying need for such aircraft is much
longer-in fact, the need would likely encompass the aircraft's entire useful
life. Changing the scoring rule for leases would be in part an attempt to
have the rules recognize the long term need rather than the technical
structuring of the lease.

Many believe that one unfortunate side effect of the structure of BEA has
been an incentive to create revenues that can be categorized as "user fees"
and so offset discretionary spending-rather than be counted on the PAYGO
scorecard. The 1967 President's Commission on Budget Concepts recommended
that receipts from activities which were essentially governmental in nature,
including regulation and general taxation, be reported as receipts, and that
receipts from business-type activities "offset to the expenditures to which
they relate." However, these distinctions have been blurred in practice.
Ambiguous classifications combined with budget rules that make certain
designs most advantageous has led to a situation in which there is pressure
to treat fees from the public as offsets to appropriations under BEA caps,
regardless of whether the underlying federal activity is business or
governmental in nature. Consideration should be given to whether it is
possible to come up with and apply consistent standards-especially if the
discretionary caps are to be redesigned. The Administration has stated that
it plans to monitor and review the classification of user fees and other
types of collections.

Extending andRefining PAYGO

The PAYGO requirement prevented legislation that lowered revenue, created
new mandatory programs, or otherwise increased direct spending from
increasing the deficit unless offset by other legislative actions. As long
as the unified budget was in deficit, the provisions of PAYGO-and its
application-were clear. During our few years of surpluses, questions were
raised about whether the prohibition on increasing the deficit also applied
to reducing the surplus. Although Congress and the executive branch both
concluded that PAYGO did apply in such a situation-and although the question
is moot currently, it would be worth clarifying the point if PAYGO is
extended. Last year the Administration proposed-albeit implicitly- special
treatment for a tax cut. The 2002 budget stated that the president's tax
plan and Medicare reforms were fully financed by the surplus and that any
other spending or tax legislation would need to be offset by reductions in
spending or increases in receipts. Ultimately, the Department of Defense and
Emergency Supplemental Appropriations Act for 2002 eliminated the need to
offset any of the PAYGO legislation by resetting the 2001 and 2002 scorecard
to zero. While this action was undertaken for a number of reasons, when
surpluses return and Congress looks to create a PAYGO process for a time of
surplus, it might wish to consider the kinds of debt targets we found in
other nations.15 For example, it might wish to permit increased direct
spending or lower revenues as long as debt held by the public is planned to
be reduced by some set percentage or dollar amount. Such a provision might
prevent PAYGO from becoming as unrealistic as overly tight caps on
discretionary spending. However, the design of such a provision would be
important-how would a debt reduction requirement be specified? How would it
be measured? What should be the relationship between the amount of debt
reduction required and the amount of surplus reduction (i.e., tax cut or
direct spending increase) permitted? What, if any, relationship should there
be between this calculation and the discretionary caps?

While PAYGO constrained the creation or legislative expansion of direct
spending programs and tax cuts, it accepted the existing provisions of law
as given. It was not designed to trigger-and it did not trigger-any
examination of "the base." Cost increases in existing mandatory programs are
exempt from control under PAYGO and could be ignored. However, constraining
legislative actions that increase the cost of entitlements and

15 See U.S. General Accounting Office, Budget Surpluses: Experiences of
Other Nations and Implications for the United States, GAO/AIMD-00-23
(Washington, D.C.: Nov. 2, 1999).

mandatories is not enough. GAO's long-term budget simulations show that as
more and more of the baby boom generation enters retirement, spending for
Social Security, Medicare, and Medicaid will demand correspondingly larger
shares of federal revenues. Assuming, for example, that last year's tax
reductions are made permanent and discretionary spending keeps pace with the
economy, spending for net interest, Social Security, Medicare, and Medicaid
consumes nearly three-quarters of federal revenues by 2030, leaving little
room for other federal priorities, including defense and education.

The budget process is the one place where we as a nation can conduct a
healthy debate about competing claims and new priorities. However, such a
debate will be needlessly constrained if only new proposals and activities
are on the table. A fundamental review of existing programs and operations
can create much-needed fiscal flexibility to address emerging needs by
weeding out programs that have proven to be outdated, poorly targeted, or
inefficient in their design and management. It is always easier to subject
proposals for new activities or programs to greater scrutiny than that given
to existing ones. It is easy to treat existing activities as "given" and
force new proposals to compete only with each other. However, such an
approach would move us further from, rather than nearer to, budgetary
surpluses.16

Previously we suggested some sort of "lookback" procedure to prompt a
reexamination of "the base" in entitlement programs. Under such a process
Congress could specify spending targets for PAYGO programs for several
years. The president could be required to report in his budget whether these
targets either had been exceeded in the prior year or were likely to be
exceeded in the current or budget years. He could then be required to
recommend whether any or all of this overage should be recouped-and if so,
to propose a way to do so. Congress could be required to act on the
president's proposal.

While the current budget process contains a similar point of order against
worsening the financial condition of the Social Security trust funds,17 it
would be possible to link "tripwires" or "triggers" to measures related to

16 GAO-02-467T.

172  U.S.C. 632  (i), and U.S.  General Accounting Office,  Medicare Reform:
Issues  Associated   With   General  Revenue  Financing,   GAO/T-AIMD-00-126
(Washington, D.C.: Mar. 27, 2000).

overall budgetary flexibility or to specific program measures. For example,
if Congress were concerned about declining budgetary flexibility, it could
design a "tripwire" tied to the share of the budget devoted to mandatory
spending or to the share devoted to a major program.

Other variations of this type of "tripwire" approach have been suggested.
The 1999 Breaux-Frist proposal (S. 1895) for structural and substantive
changes to Medicare financing contained a new concept for measuring
"programmatic insolvency" and required congressional approval of additional
financing if that point was reached. Other specified actions could be
coupled with reaching a "tripwire," such as requiring Congress or the
president to propose alternatives to address reforms. Or the congressional
budget process could be used to require Congress to deal with unanticipated
cost growth beyond a specified "tripwire" by establishing a point of order
against a budget resolution with a spending path exceeding the specified
amount. One example of a threshold might be the percentage of gross domestic
product devoted to Medicare. The president would be brought into the process
as it progressed because changes to deal with the cost growth would require
enactment of a law.

Improving the Recognition of Long-Term Commitments

In previous reports we have argued that the nation's economic future depends
in large part upon today's budget and investment decisions.18 In fact, in
recent years there has been increased recognition of the long-term costs of
Social Security and Medicare.19

While these are the largest and most important long-term commitments- and
the ones that drive the long-term outlook-they are not the only ones in the
budget. Even those programs too small to drive the long-term outlook affect
future budgetary flexibility. For Congress, the president, and the public to
make informed decisions about these other programs, it is important to
understand their long-term cost implications. A longer time

18 See GAO/T-AIMD-96-129 and U.S. General Accounting Office, The Deficit and
the Economy: An Update of Long-Term Simulations, GAO/AIMD/OCE-95-119
(Washington, D.C.: April 26, 1995), among others.

19OMB, Budget of the United States Government, Fiscal Year 2002, April 9,
2001; CBO, The Budget and Economic Outlook: Fiscal Years 2002-2011, January
2001; GAO-01-385T; and U.S. General Accounting Office, Medicare: Higher
Expected Spending and Call for New Benefit Underscore Need for Meaningful
Reform,GAO-01-539T (Washington, D.C.: March 22, 2001).

horizon is useful not only at the macro level but also at the micro-policy
level. I am not suggesting that detailed budget estimates could be made for
all programs with long-term cost implications. However, better information
on the long-term costs of commitments like employee pension and health
benefits and environmental cleanup could be made available. New concepts and
metrics may be useful. We developed them before for credit programs and we
need to be open to expanding them to cover some other exposures. I should
note that the president's fiscal year 2003 budget has taken a step in this
direction by proposing that funding be included in agency budgets for the
accruing costs of pensions and retiree health care benefits.

The enactment of the Federal Credit Reform Act in 1990 represented a step
toward improving both the recognition of long-term costs and the ability to
compare different policy tools. With this law, Congress and the executive
branch changed budgeting for loan and loan guarantee programs. Prior to
Credit Reform, loan guarantees looked "free" in the budget. Direct loans
looked like grant programs because the budget ignored loan repayments. The
shift to accrual budgeting for subsidy costs permitted comparison of the
costs of credit programs both to each other and to spending programs in the
budget.

Information should be more easily available to Congress and the president
about the long-term cost implications both of existing programs and new
proposals. In 1997 we reported that the current cash-based budget generally
provides incomplete information on the costs of federal insurance
programs.20 The ultimate costs to the federal government may not be apparent
up front because of time lags between the extension of the insurance, the
receipt of premiums, and the payment of claims. While there are significant
estimation and implementation challenges, accrual-based budgeting has the
potential to improve budgetary information and incentives for these programs
by providing more accurate and timely recognition of the government's costs
and improving the information and incentives for managing insurance costs.
This concept was proposed in the Comprehensive Budget Process and Reform Act
of 1999 (H.R. 853), which would have shifted budgetary treatment of federal
insurance programs from a cash basis to an accrual basis.

20 U.S. General  Accounting  Office,  Budget Issues:  Budgeting  for Federal
Insurance Programs, GAO/AIMD-97-16 (Washington, D.C.: Sept. 30, 1997).

There are other commitments for which the cash and obligation-based budget
does not adequately represent the extent of the federal government's
commitment. These include employee pension programs, retiree health
programs, and environmental clean-up costs. While there are various
analytical and implementation challenges to including these costs in budget
totals, more could be done to provide information on the long-term cost
implications of these programs to Congress, the president, and the
interested public. We are continuing to analyze this issue.

Conclusion To affect decision making, the fiscal goals sought through a
budget process must be accepted as legitimate. For many years the goal of
"zero deficit"- or the norm of budget balance-was accepted as the right goal
for the budget process. In the absence of the zero deficit goal,
policymakers need an overall framework upon which a process and any targets
can be based. When the deficits turned to surpluses, there was discussion of
goals framed in terms of debt reduction or surpluses to be saved. As
difficult as selecting a fiscal goal in times of surplus is, selecting one
today may seem even more difficult. You must balance the need to respond not
only to those demands that existed last year-demands kept in abeyance during
many years of fighting deficits-but also demands imposed on us by the events
of September 11. At the same time-in part because of the demographic tidal
wave looming over the horizon-the events of September 11 do not argue for
abandonment of all controls.

Whatever interim targets Congress and the president agree on, compliance
with budget process rules, in both form and spirit, is more likely if end
goals, interim targets, and enforcement boundaries are both accepted and
realistic.

Enforcement is more successful when it is tied to actions controlled by
Congress and the president. Both the BEA spending caps and the PAYGO
enforcement rules were designed to hold Congress and the president
accountable for the costs of the laws enacted each session-not for costs
that could be attributed to economic changes or other factors.

Going forward, new rules and goals will be important to ensure fiscal
discipline and to prompt a focus on the longer-term implications of
decisions. The federal government still needs a decision-making framework
that permits it to evaluate choices against both today's needs and the
longer-term fiscal future that will be handed to future generations. What
process will enable policymakers to deal with the near term without

ignoring the long term? At the same time, the challenges for any budget
process are the same: what process will enable policymakers to make informed
decisions about both fiscal policy and the allocation of resources within
the budget?

Extending the current BEA without setting realistic caps and addressing
existing mandatory programs is unlikely to be successful for the long term.
The original BEA employed limited actions in aiming for a balanced budget.
It left untouched those programs-direct spending and tax legislation-
already in existence.

Today's situation may argue for an interim step in extending and modifying
BEA. However, going forward with new challenges, we believe that a new
process that prompts Congress to exercise more foresight in dealing with
long-term issues is needed. The budget process appropriate for the early
twenty-first century will have to exist as part of a broader framework for
thinking about near- and long-term fiscal goals.

This concludes my statement. I would be happy to respond to any questions
you or other Members of the Committee may have at this time.

Contacts and For future contacts regarding this testimony, please call me at
(202) 512-9142  or Christine  Bonham at (202)  512-9576. Jennifer Eichberger
also

Acknowledgements made key contributions to this testimony.
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