Budget Process: Evolution and Challenges (Testimony, 07/11/96,
GAO/T-AIMD-96-129).

Pursuant to a congressional request, GAO discussed the evolution of the
budget process and challenges to changing the budget process. GAO noted
that: (1) conflicts over who controlled the budget led to the
Congressional Budget and Impoundment Control Act of 1974 and Congress'
role in setting federal fiscal policies and establishing spending
priorities; (2) the act also established the Congressional Budget Office
as an independent source of budget numbers and set up a process for the
President to report budget rescissions and deferrals; (3) in 1985, the
focus of the budget process shifted from increasing congressional
control over the budget to reducing the deficit; (4) later legislation
held Congress accountable for the part of the budget under its direct
control, but did not seek to control growth in direct spending programs
or tax expenditures, which are the main reasons for continued budget
growth; (5) the budget process should provide a long-term perspective,
focus on macro trade-offs between consumption and investment
expenditures, provide necessary information to make informed trade-off
decisions between missions areas, be enforceable, provide for control
and accountability, and be transparent; (6) streamlining parts of the
budget process may cause problems in other budget processes; (7) if the
use of multiyear fiscal policy agreements continues, then annual budget
resolutions could be eliminated, but a lookback procedure would become
very important; and (8) a 2-year appropriation cycle would change the
nature of the budget process, but how much time would be saved is
unclear.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  T-AIMD-96-129
     TITLE:  Budget Process: Evolution and Challenges
      DATE:  07/11/96
   SUBJECT:  Budget administration
             Congressional/executive relations
             Budget controllability
             Budget deficit
             Deficit reduction
             Fiscal policies
             Future budget projections
             Macroeconomic analysis
             Permanent budget authority
             Balanced budgets

             
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Cover
================================================================ COVER


Before the Committee on the Budget
House of Representatives

For Release on Delivery
Expected at
10:00 a.m.
Thursday,
July 11, 1996

BUDGET PROCESS - EVOLUTION AND
CHALLENGES

Statement of Susan J.  Irving
Associate Director, Budget Issues
Accounting and Information Management Division

GAO/T-AIMD-96-129

GAO/AIMD-96-129t


(935205)


Abbreviations
=============================================================== ABBREV

  OMB - x
  GRH - x
  CBO - x
  GRH II - x
  OBRA - x
  BEA - x
  PAYGO - x

============================================================ Chapter 0

Mr.  Chairman and Members of the Committee: 

I am pleased to be here today to discuss the budget process with you. 
Everyone involved in that process shares some frustration with it. 
The public finds it confusing.  Executive branch agencies find it
burdensome and time-consuming.  Members of the Congress say it seems
too lengthy with its many votes on authorizations, the budget
resolution, reconciliation, appropriations, and the debt limit.  And,
too often, the results are not what was expected or hoped for. 

In one sense, of course, nothing could be more important than debates
about the budget--and important debates often take time.  Budgeting
is the process by which we as a nation resolve the large number of
often conflicting objectives that citizens seek to achieve through
government action.  The budget determines the fiscal policy stance of
the government--that is, the relationship between spending and
revenues.  And it is through the budget process that the Congress and
the President reach agreement about the areas in which the federal
government will be involved and in what way. 

Because the decisions are so important, we expect a great deal from
our budget and budget process.  We want the budget to be clear and
understandable.  We want the process to be simple--or at least not
too complex.  But at the same time we want a process that presents
the Congress and the American people with a framework to understand
the significant choices and the information necessary to make the
best-informed decisions about federal tax and spending policy.  This
is not easy. 

Over the past several years GAO has made a number of suggestions
about changes in the budget process.  A list of some of those
testimonies and reports is attached to my statement.  Today, however,
as you requested, I'd like to focus not on specific changes but on
the question of how the process came to look as it does today and the
challenges you face in the near term.  In the second half of this
written statement--consistent with the questions provided by your
staff--I discuss some broad objectives and criteria one might use in
looking at the design of or changes in any budget process. 


   BACKGROUND:  THE 1974 BUDGET
   ACT
---------------------------------------------------------- Chapter 0:1

To understand where we are it helps to know where we've been.  The
budget process of today was not created in a single step.  Rather, it
was created in stages--and for the most part new pieces did not
replace but were added to existing processes. 

Looking back at the objectives and structure of the 1974
Congressional Budget and Impoundment Control Act is very useful.  The
Constitution gives the Congress the power of the purse.  The 1921
Budget and Accounting Act centralized power over executive agency
budget requests under the President and--to balance this grant of
power--moved control of the audit of spending from the Treasury to a
new legislative branch entity, the GAO.  The Congress also
centralized its own spending decisions in the House and Senate
Appropriations Committees. 

There was always some spending that did not go through the
appropriations process--the first Congress provided a permanent
appropriation to pay interest on the debt.  However, this type of
spending--otherwise referred to as "backdoor" spending--increased
during the 20th century.  Authority to borrow was created in the
early 1930s.  The Social Security Act of 1935 created a new permanent
appropriation.  Contract authority was expanded over the years.  In
1987 and again this year, we reported\1 that for fiscal years 1985
and 1994 close to 60 percent of budget authority and offsetting
collections from nonfederal sources credited to accounts was
available as a result of prior legislative action and was thus not
provided in the annual appropriations process. 

An attempt in the late 1940s to create a joint House/Senate
"legislative budget" failed.  Meanwhile, the analytic strength of the
Executive Office of the President was increased. 

Frustration with the piecemeal approach to spending and revenue
decisions, concern that the increase in the proportion of the budget
financed outside the appropriations process was leading to less
control, and a major disagreement over Presidential versus
congressional power to set spending led to the creation in 1972 of a
Joint Study Committee on Budget Control.  Its recommendations led
directly to what later became the Congressional Budget and
Impoundment Control Act of 1974. 

In that act, the Congress declared "that it is essential--


(1) to assure effective congressional control over the budgetary
process;

(2) to provide for congressional determination each year of the
appropriate level of Federal revenues and expenditures;

(3) to provide a system of impoundment control;

(4) to establish national budget priorities; and

(5) to provide for the furnishing of information by the executive
branch in a manner that will assist the Congress in discharging its
duties."

We all often forget that the 1974 act did not seek a specific result
in terms of the deficit.  Rather, it sought to assert the Congress'
role in setting overall federal fiscal policy and establishing
spending priorities and to impose a structure and a timetable on the
budget debate.  Underlying the 1974 act was the belief that the
Congress could become an equal player only if it--like the executive
branch--could offer a single "budget statement" with an overall
fiscal policy and an allocation across priorities.  Prior to 1974
only the President had a fiscal policy.  The Congress did not look at
the budget as a whole and there was no congressional budget per se,
only the cumulative result of individual pieces of legislation.  The
Congress did not examine or vote on overall spending or revenues. 
The 1974 act sought to change that, and it did. 

The act sought to create a "congressional" budget as a counterpoint
to the President's budget--but it carefully avoided giving the Budget
Committees anything like the power or even the coordinating role of
the President's Office of Management and Budget (OMB).  The Budget
Committees were layered on top of the existing committee structure,
and limitations were placed on the level of detail with which the
Budget Committees could deal.  The Budget Resolution was to represent
a congressional statement about total revenues and total spending and
about the allocation of spending across various national missions. 
The design of programs and the allocation of spending within each
mission area would be left to the authorizing and appropriations
committees.  The Budget Committees would deal in round numbers--they
could not decide policy.  Of course, this distinction was always a
little artificial.  Even in a world of lower deficits there were
always policy assumptions behind the numbers.  Frequently policy or
program design defines the range of numbers possible.  And, it turns
out that the model of first deciding how much and then debating the
specifics is not an entirely comfortable model for federal budget
decisions.  For some, the decision on "how much" is tied to the
decision on how that number will be achieved.  Recently, as the
budget process has been increasingly aimed at deficit reduction, this
distinction between overall numbers and the specific policies to
achieve them has become more strained. 

The 1974 act also eliminated the Congress' dependence on OMB for
numbers and analysis by giving the Congress an independent source of
budget numbers--the Congressional Budget Office (CBO).  It settled
the fight about impoundments by setting up a process for the
President to report rescissions and deferrals. 


--------------------
\1 Budget Issues:  The Use of Spending Authority and Permanent
Appropriations Is Widespread (GAO/AFMD-87-44, July 17, 1987) and
Budget Issues:  Inventory of Accounts With Spending Authority and
Permanent Appropriations, 1996 (GAO/AIMD-96-79, May 31, 1996). 


   GRAMM-RUDMAN-HOLLINGS AND THE
   BUDGET ENFORCEMENT ACT
---------------------------------------------------------- Chapter 0:2

It was not until the Balanced Budget and Emergency Deficit Control
Act of 1985--commonly known as Gramm-Rudman-Hollings or GRH--that the
focus of the process changed from increasing Congressional control
over the budget to reducing the deficit.  Both the original GRH and
the 1987 amendments (GRH II) sought to achieve a balanced budget by
establishing annual deficit targets to be enforced by "sequesters" if
legislation failed to achieve them.  Measured against its stated
objective of a balanced budget, GRH failed. 

GRH sought to hold the Congress responsible for the deficit,
regardless of what drove the deficit.  If the deficit grew because of
the economy or demographics--factors not directly controllable by the
Congress--the sequester response dictated by GRH was the same as if
the deficit grew because of congressional action or inaction.  If a
sequester was necessary, it did not differentiate between those
programs where the Congress had made cuts and those where there had
been no cuts or even some increases--an almost pure prisoners'
dilemma.  Finally, the timing of the annual "snapshot" determining
the deficit and the size of the sequester and the fact that progress
was measured 1 year at a time created a great incentive for achieving
annual targets through short-term actions such as shifting the timing
of outlays. 

The deficit did not, as we know, come down as envisioned.  As table 1
below shows, in the year GRH II called for a zero deficit the actual
deficit was $255 billion. 



                                Table 1
                
                  Gramm-Rudman-Hollings (GRH) Deficit
                      Targets and Actual Deficits

                                                                Actual
                                                   GRH     GRH  Defici
                                                  1985    1987       t
----------------------------------------------  ------  ------  ------
FY 1986                                          171.9             221
FY 1987                                            144             150
FY 1988                                            108     144     155
FY 1989                                             72     136     152
FY 1990                                             36     100     221
FY 1991                                              0      64     269
FY 1992                                                     28     290
FY 1993                                                      0     255
----------------------------------------------------------------------
The perceived failures of GRH led to the Budget Enforcement Act (BEA)
of 1990.  This act--extended and amended in the Omnibus Budget
Reconciliation Act (OBRA) of 1993--was designed to enforce the
multi-year provisions of the summit agreement reached by President
Bush and the Congress. 

GRH, with its sole focus on the deficit, was unable to achieve its
goals without the Congress and the Administration agreeing to address
programs whose spending is driven by economic, demographic, or other
behavioral factors.  The focus of BEA is very different from that of
Gramm-Rudman-Hollings.  BEA seeks to limit congressional action and
so to influence the result.  Unlike GRH, BEA holds the Congress
accountable for what it can directly control through its actions, and
not for the impact of the economy or demographics, which are beyond
its direct control.  And on those terms BEA has been a success. 

BEA did this by dividing spending into two parts:  pay-as-you-go
(PAYGO) and discretionary.  It imposed caps on the discretionary part
that have succeeded in holding down discretionary spending--as a
share of gross domestic product, discretionary spending declined from
9.2 percent in 1990 to 7.2 percent in 1996.  BEA has also constrained
congressional actions to create new entitlements or tax cuts. 

GRH sought to use a change in process to force agreement.  The
experience under this act showed, I believe, that no process can
force agreement where one does not exist.  In contrast, both in 1990
and 1993 substantive agreement on the discretionary caps and PAYGO
neutrality was reached and BEA process was created to enforce this
agreement.  This is an important distinction. 

Although BEA has succeeded on its own terms, its ambition was
limited.  It did not seek to control economic, price- or
demographic-driven growth in existing direct spending programs or tax
expenditures, and these are the areas of greatest growth today. 


   MEETING THE CHALLENGE OF TODAY
---------------------------------------------------------- Chapter 0:3

A budget process can facilitate or hamper substantive decisions, but
it cannot replace them.  The budget structure can make clear
information necessary for important decisions or the structure can
make some information harder to find.  The process can highlight
trade-offs and set rules for action. 

Later in this statement I suggest some broad objectives for a budget
process or criteria by which it might be judged.  As your staff
requested, however, I will first expand a little on the question of
how BEA's design and the evolution of the budget process relates to
the challenges you face today. 

BEA created a sharp distinction between appropriated programs--the
discretionary portion of the budget--and what are called direct
spending programs--primarily entitlements--and revenues.  Within
entitlements BEA made another distinction between changes in program
costs driven by legislation and those driven by changes in
population, the economy, private behavior, or prices.  Because the
sharpness of this distinction has become even more important, I'd
like to elaborate a little. 

BEA focused on actions:  it specified that the Congress must
appropriate only so much money each year for discretionary programs
and that any legislated changes in entitlements and/or taxes during a
session of the Congress were to be deficit-neutral.  The effect of
this control on discretionary programs and on entitlements has been
quite different. 

Spending for discretionary programs is controlled by the
appropriations process.  The Congress provides budget authority and
specifies a period of availability.  Controlling legislative action
is the same as controlling spending.  The amount appropriated can be
specified and measured against a cap. 

For entitlement programs and for revenues, controlling legislative
actions is not the same as controlling spending or revenues.  For an
entitlement program, spending in any given year is the result of the
interaction between the formula that governs that program and
demographics or services provided.  For example, spending for a
retirement program is a function of the number of retirees, the
amount each is entitled to under the program's benefit formula, and
any inflation adjustment.  The eligibility rules and the benefit
formulas are specified in law; the number of dollars to be spent is
not.  BEA required that if the Congress and the President were to
legislate an expansion in any entitlement program--either through the
benefit formula or the individuals or services covered--that
expansion had to be "paid for" during the same session of the
Congress through either a legislated reduction in another entitlement
program or a revenue increase.  Legislated changes in entitlements
and taxes were to be deficit-neutral over multi-year periods. 
However, BEA did NOT seek to control changes in direct spending or in
revenues (including tax expenditures) that resulted from changes in
the economy, changes in population, changes in the cost of medical
care, etc.  And it is the increased cost of entitlements caused by
such changes that is driving the budget outlook. 

In the recent report on backdoor spending for Chairman Domenici and
Senator Exon we reported that the greatest growth in such spending
authority since our 1987 report has not been new accounts but in
accounts--largely medical and retirement-- which have existed for 30
years or more.  Indeed, six accounts, all of them in existence more
than 30 years, used 84 percent of total permanent appropriations used
in 1994. 

In a 1995 report to you and Chairman Domenici we updated our
simulations of the long-term economic impacts of deficits we first
published in a 1992 report.\2 We identified three forces driving the
long-term growth of budget deficits:  health spending, interest
costs, and--after 2010--Social Security.  These simulations did not
assume any legislated changes in health programs.  Nonetheless,
health care cost inflation and the aging of the population work
together to drive the deficit to unsustainable levels with extremely
negative economic effects. 


--------------------
\2 The Deficit and the Economy:  An Update of Long-Term Simulations
(GAO/AIMD/OCE-95-119, April 26, 1995) and Budget Policy:  Prompt
Action Necessary to Avert Long-Term Damage to the Economy
(GAO/OCG-92-2, June 5, 1992). 


   BROAD OBJECTIVES FOR A BUDGET
   PROCESS
---------------------------------------------------------- Chapter 0:4

Are the expressed objectives of the 1974 act still relevant as we
approach the 21st century?  At one level the answer must clearly be
"yes." Some of these objectives have been met--there is now a system
of impoundment controls--and others have now been firmly embedded
into the framework of our budget debate.  And, in a broad sense,
there can be little quarrel with the need to continue effective
congressional control over the budgetary process, to provide for
congressional determination of the appropriate level of federal
revenues and expenditures, or to establish national priorities.  The
questions that confront those who would stand back and look at the
process as a whole are to what degree have these objectives been
achieved, should they be modified, and--given the challenges of the
near future--should the Congress have additional objectives for its
budget process. 

I would like to turn now to the question of what a budget process
should do.  Some of this discussion repeats points made earlier but
in a different context.  First, I'll list four broad goals or
criteria for a budget process, discuss the current process in those
terms, and comment on some possible changes.  Then I'll turn to the
overarching issue of streamlining the process. 

A budget process should

  -- provide information about the long-term impact of decisions
     while recognizing the differences between short-term forecasts,
     medium-term projections, and a long-term perspective;

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

  -- provide information necessary to make informed trade-offs on a
     variety of levels, e.g., between mission areas and between
     different tools; and

  -- be enforceable, provide for control and accountability, and be
     transparent. 

Let me discuss each of these in turn. 


      THE BUDGET PROCESS SHOULD
      PROVIDE A LONG-TERM
      PERSPECTIVE
-------------------------------------------------------- Chapter 0:4.1

A long-term perspective is important in both a macro and a micro
sense.  The macro perspective has to do with our nations's economic
health.  In previous reports and testimonies we have argued that the
nation's economic future depends in large part upon today's budget
and investment decisions.\3 Therefore, we believe that, at the
macroeconomic level, the budget should provide a long-term framework
and should be grounded on a linkage of fiscal policy with the
long-term economic outlook.  This would require a focus both on
overall fiscal policy and on the composition of federal activity. 

The micro aspect of this longer-term perspective relates to those
programs and activities where a longer time horizon is necessary to
understand the fiscal and spending implications of a commitment. 
Examples include retirement programs, Medicare, pension guarantees,
and mortgage-related commitments.  Even very rough projections may be
better in these areas than ignoring the long term. 

Although the multi-year focus of BEA represents significant progress
in this regard, planning for longer-range economic goals requires
exploring the implications of budget decisions for as long as 30
years or more into the future.  This is not to say that detailed
budget projections could be made over a longer-time horizon. 
Forecasts and projections are difficult enough for 1 to 3 years.  The
longer the time horizon, the less accurate any detailed projection is
likely to be.  However, there are differences between a short-term
forecast, medium-term projections, and a long-term perspective. 

The President, the Congress, and the public need to think about the
longer term when making choices about the composition of federal
activity.  This is true for at least two reasons:  (1) each
generation is in part custodian for the economy it hands the next and
(2) some changes must be phased in over long periods of time. 
Introducing a longer-term perspective into the budget debate without
falling into the trap of treating 30-year projections as anything
more than indicative simulations is difficult.  In testimony last
year we provided some ideas on how this might be done.\4 For example,
if financial statements were improved and available with the
President's budget, the two together would provide useful information
on the longer-term implications of some policies.  Another approach
might be to have long-term simulations of current budget policies,
perhaps over a 30-year period, prepared periodically to help assess
the future consequences of current decisions.  The effects of policy
changes as well as broader fiscal policy alternatives could be
projected over the long term.  Such projections could be prepared and
presented in the President's budget documents. 


--------------------
\3 See The Deficit and the Economy:  An Update of Long-Term
Simulations (GAO/AIMD/OCE-95-119, April 26, 1995).  See also Budget
Policy:  Prompt Action Necessary To Avert Long-Term Damage to the
Economy (GAO/OCG-92-2, June 5, 1992) and Budget Policy:  Long-Term
Implications of the Deficit (GAO/T-OCG-93-6, March 25, 1993). 

\4 Managing for Results:  Strengthening Financial and Budgetary
Reporting (GAO/T-AIMD-95-181, July 11, 1995). 


      THE BUDGET PROCESS SHOULD
      FACILITATE A FOCUS ON
      IMPORTANT MACRO TRADE-OFFS
-------------------------------------------------------- Chapter 0:4.2

Although the surest way of increasing national savings and investment
would be to reduce federal dissaving by eliminating the deficit, the
composition of federal spending also matters.  Federal spending can
be divided into two broad categories based on the economic effect of
that spending:  consumption spending having a short-term economic
impact and investment spending intended to have a positive effect on
long-term private-sector economic growth.  We have argued that within
any given fiscal policy path, the allocation of federal activity
between investment and consumption is important and is deserving of
explicit consideration. 

The current budget process does not prompt the executive branch or
the Congress to make explicit decisions about the appropriate mix of
spending for current consumption and spending for long-term
investment.  Appropriations subcommittees provide funding by
department and agency in appropriations accounts that do not
distinguish between investment and consumption spending.  Although
alternative budget presentations that accompany the President's
budgets provide some information on investment, these are not part of
the formal budget process.  The investment/consumption decision is
not one of the organizing themes for the budget debate.  How
consideration of investment versus consumption is introduced into the
budget process depends on how the overall process is to be
structured.  We have suggested that within the existing BEA
structure, incorporating an investment component under the
discretionary caps would be an appropriate and practical approach to
supplement the unified budget's focus on macroeconomic issues.  An
investment component would direct attention to the trade-offs between
consumption and investment--but it would not weaken the overall
fiscal discipline established by the caps.  It would provide
policymakers with a new tool for setting priorities between the long
term and the short term.\5 If the Congress and the President chose to
change the budget process in ways that moved away from the current
system of discretionary caps and PAYGO rules, one of the issues to
consider in designing a new process would be how to introduce this
trade-off between the long term and the near term, between investment
and consumption, into the structure of the debate. 


--------------------
\5 See Budget Structure:  Providing an Investment Focus in the
Federal Budget (GAO/T-AIMD-95-178, June 29, 1995) and Budget Issues: 
Incorporating an Investment Component in the Federal Budget
(GAO/AIMD-94-40, November 9, 1993). 


      THE BUDGET PROCESS SHOULD
      FACILITATE INFORMED
      TRADE-OFFS BETWEEN MISSIONS
      AND BETWEEN THE DIFFERENT
      TOOLS OF GOVERNMENT
-------------------------------------------------------- Chapter 0:4.3

The budget process is the central process through which the President
and the Congress select among and balance the competing demands for
government activity in achieving various goals.  Therefore, the
process should provide the information necessary to debate the
relative priority among national needs or missions.  The functional
structure of the budget resolution was intended to facilitate
priority-setting even among related programs housed in different
agencies and different committees.  By organizing the budget along
"national needs" or mission areas, the budget resolution sought to
permit an examination of the totality of federal spending activity in
each area--regardless of the committee of jurisdiction or the agency
at issue--and to permit priority-setting and trade-offs between
missions.  Instead of focusing on what each department spent, the
Congress and the President were to be able to look across departments
at the totality of activity in education and training or income
security or transportation.  From the beginning, however, the
structure was not complete; if the government chose to advance a
given mission area through the tax code, that commitment did not show
up in the functional display.  So, for example, the functional
structure shows support for science and technology through loans or
grants or federal activity but not through the research and
development tax credit. 

Even on the spending side of the budget, however, the functional
totals do not translate into and may not match the allocation of
resources to the appropriations subcommittees.  While the budget
resolution is organized by national mission, the appropriations
subcommittees are still organized along agency lines.  This makes it
difficult to trace the path from the budget resolution's stated
priorities through the appropriations process.  Although CBO
translates the budget resolution functional totals into allocations
to the full Appropriations Committees, suballocations to the
subcommittees (the so-called 602(b) allocations) are made by the
Appropriations Committees.  At one level priority setting within the
discretionary side of the budget has been delegated to the
Appropriations Committee--where it resided before the 1974 act.  The
Congress may or may not consider this a problem.  However, if you are
standing back and looking at the entire budget process, a question to
ask is whether the current functional structure highlights the
mission trade-offs relevant for today and whether the functional
structure is doing as much to facilitate a debate among priorities as
you would like. 

The sharp division BEA sought to draw between discretionary spending
limits and the PAYGO scorecard made a great deal of sense.  It
simplified jurisdictional issues.  It also recognized the difference
in time horizons.  Discretionary appropriations may be provided for 1
or more years and a discretionary spending cut may be a 1-year cut. 
Most changes in entitlement or tax law last longer than a single
year.  This sharp division, however, limits the ability to shift
spending priorities.  For example, it would be difficult to shift
spending away from consumption support concentrated in the mandatory
sector toward investment programs funded in the discretionary portion
of the budget.  Current rules do not permit cuts in mandatory
spending to be used to pay for increases in appropriated programs. 
Consideration should be given to when and under what circumstances
breaching the wall between discretionary and mandatory categories
makes sense. 

At a level below the establishment of broad spending priorities, the
budget process should facilitate the selection of the appropriate
policy tool with which to address some mission.  For any given goal
or mission in which the federal government will play a financial
role, there are a variety of tools available:  grants, loans, loan
guarantees, or tax provisions.  The budget process should provide the
information necessary to permit a choice based not on jurisdictional
problems or scoring conventions but on the match between the goal and
the tool. 

In order to facilitate appropriate choices, the budget must also
provide information on the costs of various alternatives--on a
comparable basis--and on the nature of the government's commitment. 
This is one area in which there has been some improvement.  The
Credit Reform Act changed the way loans and loan guarantees were
treated in the budget because the previous cash-based treatment gave
decisionmakers misleading signals on the cost comparisons among
grants, loan guarantees, and direct loans.  However, as I noted
above, there are still some programs for which either cash-based
reporting sends misleading signals or for which even a 5-year
perspective provides a misleading perspective on the nature of the
government's actual or potential commitment. 


      THE BUDGET PROCESS SHOULD BE
      ENFORCEABLE, PROVIDE FOR
      CONTROL AND ACCOUNTABILITY,
      AND BE TRANSPARENT
-------------------------------------------------------- Chapter 0:4.4

These three elements are not identical, but they are closely related
and achieving one has implications for the others.  By enforcement I
mean a mechanism to enforce decisions once they are made. 
Accountability has at least two dimensions:  accountability for the
full costs of commitments that are to be made, and targeting
enforcement to actions taken.  It can also encompass the broader
issue of taking responsibility for responding to unexpected events. 
And, finally, the process should be transparent, that is,
understandable to those outside the process.  I will discuss each of
these in turn. 

Enforcement:  In general, enforceability requires a system for
tracking outcomes and tying them to actions.  One great strength of
BEA has been the enforcement provisions.  By targeting penalties to
actions, BEA has succeeded in restraining discretionary spending to
within the caps and in restraining new direct spending legislation. 
The design of the enforcement provisions in BEA has also created
accountability for actions.  Costs are to be recorded in the budget
up front, when they can be controlled.  And enforcement is targeted
to actions.  The appropriations committees are responsible for
compliance with the discretionary spending limits while the PAYGO
scorecard tracks compliance with the PAYGO rules.  Unlike the
prisoners' dilemma created by GRH, sequesters are applied only to an
area where the breach occurs. 

Accountability:  The targeted nature of the sequester provisions in
BEA served not only as enforcement but also to provide accountability
for compliance with the rules.  Some of the scoring and costing rules
introduced by BEA have also increased accountability for the costs of
actions taken.  On another level, however, accountability is diffuse. 
The deficits in the early 1990s were greater than those expected by
those who voted for and complied with the provisions of OBRA.  This
slippage was due almost entirely to a worse than expected economy and
"technical changes."\6 Although GRH showed that holding committees
responsible for results rather than actions is problematic, there are
ways to bring more responsibility for the results of unforeseen
actions into the system. 

We, and former CBO Director Reischauer, have previously suggested
that the Congress might want to consider introducing a "lookback"
into its system of budgetary controls.  In a report issued to the
Republican leadership last year, we described such a process under
which the Congress would periodically look back at progress in
reducing the deficit.\7

Such a lookback would compare the current CBO deficit projections to
those projected at the time of a prior deficit reduction agreement
and/or the most recent reconciliation legislation and analyze the
reasons for any difference.  For a difference exceeding a
predetermined amount, the Congress would decide explicitly--by
voting--whether to accept the slippage or to act to bring the deficit
path closer to the original goal by recouping some or all of this
slippage.  Although one could argue that each year's budget
resolution implicitly accepts or rejects changes in the deficit
outlook, it does not require an explicit consideration and decision. 
Adoption of the requirement for such explicit consideration would
provide members who make difficult choices in reconciliation an
additional opportunity to ensure that the deficit path they voted for
will, in fact, materialize. 

A similar--but more narrowly focused--process could be used to prompt
consideration of the path of mandatory spending.\8 Under its current
structure, BEA requires any action that would cause a growth in
mandatory spending to be offset, but it leaves completely
unconstrained any growth in these programs that results from economic
or demographic factors.  This distinction is consistent with the
act's focus on controlling actions, but it has created other
problems.  Indeed, the very success of BEA at constraining
discretionary and new direct spending has highlighted the dramatic
growth in some entitlement programs.  One way to begin to deal with
this might be to adopt a procedure similar to that recommended by the
House members of the Joint Committee on the Organization of the
Congress.  Under such a procedure, direct spending targets for
several fiscal years could be specified.  If the President's budget
showed that these targets were exceeded in the prior year or would be
exceeded in the current or budget years, the President would be
required to analyze the causes of the overage and recommend whether
none, some, or all of the overage should be recouped.  The Congress
could be required to vote either on the President's proposal or on an
alternative one.  If the goal was merely to restrain direct spending
to the currently projected levels, then the current law baseline
would constitute the targets.  However, such a procedure could also
be used as a kind of lookback on the success of any efforts to reduce
mandatory spending. 

Transparency:  Transparency is important because the budget debate is
critically important--not because of the numbers in it but because it
represents a statement about collective priorities and collective
action.  In a democracy, the debate about these priorities should be
made as understandable as possible.  If even reasonably dedicated
citizens cannot understand the budget document or the budget debate,
there is little accountability. 

If the budget debate is to be accessible to the American people--or
to any significant subset of the population--consideration will have
to be given to simplifying the structure of the budget, streamlining
the process, and reducing the number of translations required to get
from one part of the process to another.  Does the Congress wish to
organize the debate by national mission or by agency?  If there is a
need for both perspectives, how can they be brought together in an
understandable way?  Discussions about 602(b) allocations and "direct
spending" are the stuff of what someone once called "budget process
groupies"--not of the evening news or quick explanation. 

There must be summary documents, such as the old Budget in Brief,
that explain where money comes from and where it goes.  For fiscal
years 1996 and 1997, OMB once again included a citizen-oriented
document as part of the budget documents.  The Citizen's Guide to the
Federal Budget provided an overview of the budget, highlighting such
concepts as the deficit and the debt, and reviewing the President's
budget proposals.  They did not, however, provide much insight on the
long-term implications of current spending policies. 

Citizens cannot be expected to feel a stake in the budget debate--a
debate that will affect all our lives and our national future--or to
accept decisions made by others without basic information.  At a
minimum citizens need to how much money the federal government takes
in--and how--and on what funds are spent. 


--------------------
\6 For a discussion of this, see Budget Process:  Issues Concerning
the 1990 Reconciliation Act (GAO/AIMD-95-3, October 7, 1994). 

\7 See, Budget Process:  Issues Concerning the 1990 Reconciliation
Act (GAO/AIMD-95-3, October 7, 1994). 

\8 See Budget Policy:  Issues in Capping Mandatory Spending
(GAO/AIMD-94-155, July 18, 1994). 


   OVERALL STREAMLINING ISSUES
---------------------------------------------------------- Chapter 0:5

Each of the criteria or goals are important, and they are
related--but they cannot all be maximized in a single process. 
Trade-offs are necessary.  Any review of the budget process comes up
against the overarching question:  is there just too much process? 
The feeling that there are too many votes on related issues is, as I
noted, in part a function of the way the process was created, of the
decision to layer the Budget Committees and the budget process on top
of the existing committee and procedural structure of the House and
the Senate.  The idea was that the budget resolution would define the
overall aggregates and the rest of the process would proceed within
those aggregates.  As I mentioned above, however, especially as the
goal of the process shifted to deficit reduction, this distinction
became increasingly strained.  There are a number of possible
responses, but most of them involve considering the relationship of
the budget resolution to legislation and of the various committees in
the Congress. 

Streamlining--making the process take less time--has been the focus
of a number of proposals in the past.  However, it is in this area
that it is especially important to think about the fact that a
response to one problem may create another problem.  Eliminating
parts of the process or changing the cycle will have consequences
beyond reducing the number of votes.  These may or may not be
acceptable, but they should be recognized.  I will touch very briefly
on three processes:  the budget resolution, authorizations, and
appropriations. 

If the recent pattern of multi-year fiscal policy agreements is to
continue, are annual budget resolutions still necessary?  It is
important to review progress every year, but such a review may not
require a complete budget resolution.  If, however, annual budget
resolutions are to be replaced with biennial budget resolutions, then
something like the "lookback" procedure described above could become
very important.  Without it, there would be no procedure for tracking
progress against the previous budget agreement or reconciliation
bill. 

Multi-year authorizations can provide a longer-term perspective
within which appropriations would be determined.  Although the need
for periodic reauthorizations can provide a window for program
revision, there is little reason to reexamine and reauthorize
programs more often than they might actually be changed.  Of course,
multi-year authorizations are already the rule in the nondefense
portion of the budget. 

Some have suggested that changing the appropriations cycle from
annual to biennial could free up time.  As I have previously
testified before this committee, it is important to differentiate
between the length of availability of funds and the timing of the
appropriations cycle.  Even within the 39 percent of the budget that
is on an annual budget cycle, not all appropriations are for 1-year
funds.  The appropriations subcommittees have been able--even within
an annual appropriations cycle--to provide 1-year, multi-year, or
no-year money as they have thought appropriate for the program or
agency at issue.  Annual appropriations have long been a basic means
of exerting and enforcing congressional policy.  A 2-year
appropriations cycle would change the nature of that control.  It is
also unclear how much time it would save. 

In the end, streamlining or reducing the amount of time spent on
apparently repetitive votes will require decisions about which votes
are no longer necessary.  That, in turn, is likely to require
decisions about the relationship between discretionary and mandatory
spending, between various committees, and about the nature and style
of congressional control over the budget and appropriations. 


   SUMMARY AND CONCLUSIONS
---------------------------------------------------------- Chapter 0:6

The budget process is the source of a great deal of frustration.  The
public finds it hard to understand.  Members of the Congress complain
that it is time-consuming and duplicative, requiring frequent votes
on the same thing.  And, too often, the results are not what was
expected or desired. 

It is inevitable that, given the nature of today's budget challenge,
there will be frustration.  It is important, however, to try to
separate frustration with process from frustration over policy.  To
bring the deficit down requires hard decisions about what government
will and will not do.  A process may facilitate the debate, but it
cannot make the decision. 

In considering whether and how to redesign the budget process,
therefore, it is important to look beyond those frustrations tied
directly to the need to bring down the federal deficit.  The budget
process serves a wider purpose.  It is, in a real sense, the process
for dealing with competing claims and setting priorities. 

The budget process should offer the Congress the means to set overall
fiscal policy and to make decisions about relative priorities among
missions or claims.  In a democracy this process should be
understandable to the interested citizen and it should offer that
citizen some accountability.  I have suggested that these overall
goals are advanced by a process that:  provides a long-term focus;
provides information and structure to focus on important macro
trade-offs; provides information necessary to make trade-offs between
mission areas and between different governmental tools; is
enforceable in that it provides for control and accountability; and
is transparent. 

The apparently never-ending and repetitive nature of the budget
process is in large part a function of the way it was created.  A new
process to provide an overall view was layered on top of the existing
structures and processes by which the micro decisions are made in the
Congress.  Any attempt to streamline or "simplify" the process must
consider the relationship between the goal of simplicity and the
existing decision structure in the Congress. 

In addition, I have suggested that the Congress might want to
consider the creation of a lookback procedure by which it would
periodically look back at progress in reducing the deficit.  Such a
lookback would compare the current CBO deficit projections to those
projected at the time of a prior deficit reduction agreement and/or
the most recent reconciliation legislation and analyze the reasons
for any difference.  For a difference exceeding a predetermined
amount, the Congress would decide explicitly--by voting--whether to
accept the slippage or to act to bring the deficit path closer to the
original goal by recouping some or all of this slippage.  Although
one could argue that each year's budget resolution implicitly accepts
or rejects changes in the deficit outlook, it does not require an
explicit consideration and decision.  Adoption of the requirement for
such explicit consideration would provide members who make difficult
choices in reconciliation an additional opportunity to ensure that
the deficit path they voted for will, in fact, materialize. 


-------------------------------------------------------- Chapter 0:6.1

Mr.  Chairman, no budget process is easy to design or to live with. 
I would be happy to answer any questions you or your colleagues may
have, and we stand ready to work with you as you consider whether
changes in the budget process are necessary and, if so, their design. 


RELATED GAO PRODUCTS
================================================== Appendix Attachment

Correspondence to Chairman Horn, Information on Reprogramming
Authority and Trust Funds (GAO/AIMD-96-102R, June 7, 1996). 

Correspondence to Chairman Kasich, Budgeting for Federal Insurance
(GAO/AIMD-96-73R, March 22, 1996). 

Budget Issues:  Earmarking in the Federal Government
(GAO/AIMD-95-216FS, August 1, 1995). 

Budget Process:  History and Future Directions (GAO/T-AIMD-95-214,
July 13, 1995). 

Budget Structure:  Providing an Investment Focus in the Federal
Budget (GAO/T-AIMD-95-178, June 29, 1995). 

Correspondence to Chairman Wolf, Transportation Trust Funds
(GAO/AIMD-95-95R, March 15, 1995). 

Budget Process:  Issues Concerning the 1990 Reconciliation Act
(GAO/AIMD-95-3, October 7, 1994). 

Budget Policy:  Issues in Capping Mandatory Spending
(GAO/AIMD-94-155, July 18, 1994). 

Budget Process:  Biennial Budgeting for the Federal Government
(GAO/T-AIMD-94-112, April 28, 1994). 

Budget Process:  Some Reforms Offer Promise (GAO/T-AIMD-94-86, March
2, 1994). 

Budget Policy:  Investment Budgeting for the Federal Government
(GAO/T-AIMD-94-54, November 9, 1993). 

Budget Issues:  Incorporating an Investment Component in the Federal
Budget (GAO/AIMD-94-40, November 9, 1993). 

Correspondence to Chairmen and Ranking Members of House and Senate
Committee on the Budget Committees and Chairman of former House
Committee on Government Operations (B-247667, May 19, 1993). 


*** End of document. ***