Manual on the Federal Budget Process

Order Code 98-720 GOV

CRS Report for Congress

Received through the CRS Web

Manual on the Federal Budget Process

August 28, 1998

Robert Keith

Specialist in American National Government

Government Division

Allen Schick

Consultant

Congressional Research Service ˜ The Library of Congress

ABSTRACT

This manual provides a comprehensive explanation of the federal budget process, including

an overview and separate chapters on the framework for budget enforcement; the President's

budget; the congressional budget resolution and reconciliation; revenues and borrowing;

authorizations and direct spending; annual appropriations; and the implementation of spending

laws. It is intended to assist users of federal budget information in understanding how the

process works and how data are to be interpreted. Excerpts from legislation, standard forms,

and other documentation developed at each stage of the budget process are exhibited.

Appended material includes a listing of milestones in the federal budget process, citations to

major budgetary laws, and a glossary of budgetary terms. The manual is not expected to be

updated. (A much shorter explanation of the federal budget process—28 pages—is provided

in CRS Report 98-721, Introduction to the Federal Budget Process.)

Manual on the Federal Budget Process

Summary

Budgeting for the federal government is an enormously complex process. It

entails dozens of subprocesses, countless rules and procedures, the efforts of tens of

thousands of staff persons in the executive and legislative branches, millions of work

hours each year, and the active participation of the President and congressional

leaders, as well as other Members of Congress and executive officials.

The enforcement of budgetary decisions involves a complex web of procedures

that encompasses both congressional and executive actions. These procedures are

rooted principally in two statutes—the Congressional Budget Act of 1974 and the

Budget Enforcement Act (BEA). The 1974 act established a congressional budget

process in which budget policies are enforced by Congress during the consideration

of individual measures. The BEA is the current embodiment of additional

enforcement procedures, first established in the Balanced Budget and Emergency

Deficit Control Act of 1985 and renewed with substantial modification in 1990 and

1997, that are used mainly by the Executive to enforce budget policies after

congressional action for a session has ended.

The President’s budget, officially referred to as the Budget of the United States

Government, is required by law to be submitted to Congress early in the legislative

session. The President’s budget is only a request to Congress. Nevertheless, the

power to formulate and submit the budget is a vital tool in the President’s direction

of the executive branch and of national policy. The President’s proposals often

influence congressional revenue and spending decisions, though the extent of the

influence varies from year to year and depends more on political and fiscal conditions

than on the legal status of the budget.

The Congressional Budget Act of 1974 establishes the congressional budget

process as the means by which Congress coordinates the various budget-related

actions (such as the consideration of appropriations and revenue measures) taken by

it during the course of the year. The process is centered around an annual concurrent

resolution on the budget that sets aggregate budget policies and functional spending

priorities for at least the next five fiscal years. Because a concurrent resolution is not

a law—it cannot be signed or vetoed by the President—the budget resolution does

not have statutory effect; no money can be raised or spent pursuant to it. Revenue

and spending amounts set in the budget resolution establish the basis for the

enforcement of congressional budget policies through points of order.

Congress implements budget resolution policies through action on individual

revenue and debt-limit measures, annual appropriations acts, and direct spending

legislation. In some years, Congress considers reconciliation legislation pursuant to

reconciliation instructions in the budget resolution.

The federal government has a decentralized system of expenditure management.

The Office of Management and Budget has year-round responsibility in overseeing the

expenditure of funds, but agencies have primary responsibility to ensure the legality

and propriety of expenditure.

Contents

Chapter 1. Overview of the Federal Budget Process . . . . . . . . . . . . . . . . . . . . . 1

The Evolution of Federal Budgeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

The Budget Cycle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Roles of the Participants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Basic Concepts of Federal Budgeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

The Budget and the Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

Chapter 2. The Framework for Budget Enforcement . . . . . . . . . . . . . . . . . . . . 23

Deficit Reduction and the Rules of Congressional Budgeting . . . . . . . . . . 23

Budgeting for Discretionary and Direct Spending . . . . . . . . . . . . . . . . . . . 26

The Chain of Discretionary Spending Control . . . . . . . . . . . . . . . . . . . . . 30

Deficit Targets, Discretionary Spending Limits, and the

PAYGO Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

Baseline Budget Projections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38

Budgeting for Direct and Guaranteed Loans . . . . . . . . . . . . . . . . . . . . . . . 39

Chapter 3. The President’s Budget . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47

Formulation and Content of the President’s Budget . . . . . . . . . . . . . . . . . 48

The Economic Forecast and Projections . . . . . . . . . . . . . . . . . . . . . . . . . . 53

Information in the President’s Budget . . . . . . . . . . . . . . . . . . . . . . . . . . . 56

Chapter 4. The Congressional Budget Resolution and Reconciliation . . . . . . . 63

The Congressional Budget Resolution . . . . . . . . . . . . . . . . . . . . . . . . . . . 63

The Reconciliation Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79

Chapter 5. Revenues and Borrowing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85

Revenue Legislation in Congress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88

Pay-As-You-Go (PAYGO) Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90

Tax Expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91

Offsetting Collections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93

Borrowing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93

Chapter 6. Authorizations and Direct Spending . . . . . . . . . . . . . . . . . . . . . . . 99

The Authorization Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99

Direct Spending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106

Chapter 7. Annual Appropriations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113

Types of Appropriations Measures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115

Appropriations Procedures in Congress . . . . . . . . . . . . . . . . . . . . . . . . . 117

Continuing Appropriations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126

Interpreting Appropriations Measures . . . . . . . . . . . . . . . . . . . . . . . . . . 126

Chapter 8. Implementation of Spending Laws . . . . . . . . . . . . . . . . . . . . . . . . 139

Implementation of Spending Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139

Financial Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151

Appendix A. How to Obtain Publications Exhibited in the Manual . . . . . . . . 165

Appendix B. Milestones in the Federal Budget Process . . . . . . . . . . . . . . . . . 167

Appendix C. Citations to Major Budgetary Laws . . . . . . . . . . . . . . . . . . . . . 171

Appendix D. Glossary of Budgetary Terms . . . . . . . . . . . . . . . . . . . . . . . . . . 173

List of Figures

Box 1-A. Congress’s “Power of the Purse” . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Box 1-B. Key Budgetary Agencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Box 1-C. Major Laws Affecting Congressional Budgeting: 1974-1998 . . . . . . . 6

Box 1-D. Principal Budgetary Entities of the Executive Branch . . . . . . . . . . . . 12

Box 1-E. Principal Budgetary Functions of Congressional Committees . . . . . . 13

Box 1-F. Principal Budgetary Functions of Congressional Support Agencies . . 14

Box 2-A. Differences Between Discretionary and Direct Spending . . . . . . . . . . 28

Box 2-B. The Chain of Discretionary Spending Control . . . . . . . . . . . . . . . . . . 31

Box 2-C. Sequestration Process Timetable . . . . . . . . . . . . . . . . . . . . . . . . . . . 38

Box 2-D. Credit Reform Account Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . 46

Box 3-A. An Illustration of the Stages in Budget Formulation: The

Department of Education . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

Box 3-B. OMB Publications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50

Box 3-C. Confidentiality of Budgetary Information . . . . . . . . . . . . . . . . . . . . . 51

Box 3-D. Volumes in the President’s Annual Budget Submission . . . . . . . . . . . 52

Box 4-A. Congressional Budget Process Timetable . . . . . . . . . . . . . . . . . . . . . 64

Box 4-B. Functional Classifications of the Budget . . . . . . . . . . . . . . . . . . . . . . 67

Box 4-C. Deficit Neutrality of Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . 83

Box 4-D. The Senate’s “Byrd Rule” on Extraneous Matter . . . . . . . . . . . . . . . 84

Box 5-A. Bar Against Revenue Provisions in Non-Revenue Measures:

House Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86

Box 5-B. Joint Committee on Taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88

Box 6-A. House and Senate Rules on Authorizing Legislation . . . . . . . . . . . . 102

Box 7-A. Appropriations Jurisdiction: House and Senate Rules . . . . . . . . . . 114

Box 8-A. Major Financial Management Roles and Responsibilities . . . . . . . . . 140

Box 8-B. Restrictions on the Use of Funds . . . . . . . . . . . . . . . . . . . . . . . . . . 142

Box 8-C. Evidence of Obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144

Box 8-D. Major Federal Laws Affecting Financial Management . . . . . . . . . . . 152

Box 8-E. Major Features of the Government Performance and Results

Act of 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154

Box 8-F. Statements of Federal Financial Accounting Standards . . . . . . . . . . 156

List of Tables

Exhibit 1-A.

Exhibit 1-B.

Exhibit 1-C.

Exhibit 2-A.

Exhibit 2-B.

Exhibit 2-C.

Exhibit 2-D.

Exhibit 2-E.

Exhibit 2-F.

Exhibit 2-G.

Exhibit 3-A.

Exhibit 3-B.

Exhibit 3-C.

Exhibit 3-D.

Exhibit 3-E.

Exhibit 3-F.

Exhibit 3-G.

Exhibit 4-A.

Exhibit 4-B.

Outlays and Revenues as a Percentage of GDP: Fiscal

Years 1962-2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Relation of Budget Authority to Outlays . . . . . . . . . . . . . . . . . . 17

Sensitivity of Budget Projections to Changes in Economic

Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

Alternative Measurements of the Deficit/Surplus . . . . . . . . . . . . 24

Outlays for Mandatory Spending and Net Interest:

FY1970-1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

Discretionary Spending Limits . . . . . . . . . . . . . . . . . . . . . . . . . 34

The PAYGO Scorecard . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36

Hypothetical Baseline Projections and Policy Changes . . . . . . . 40

Relation of Subsidy Rates, Budget Authority, and Loan

Levels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42

Calculation of Subsidy Cost . . . . . . . . . . . . . . . . . . . . . . . . . . . 44

CBO Reestimates of the President’s Budget . . . . . . . . . . . . . . . 54

Economic Forecast . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55

Appropriations Language . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58

Program Description and Workload Data . . . . . . . . . . . . . . . . . 59

Program and Financing Schedule: Obligations by

Program Activity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60

Program and Financing Schedule: New Budget

Authority and Outlays . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61

Object Classification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62

Exhibit 4-C.

Exhibit 4-D.

Exhibit 4-E.

Exhibit 4-F.

Exhibit 4-G.

Exhibit 4-H.

Exhibit 4-I.

Exhibit 4-J.

Exhibit 4-K.

Budget Resolution Aggregates: Revenues . . . . . . . . . . . . . . . . 65

Budget Resolution Aggregates: Spending, Deficit, and

Public Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66

Views and Estimates of Committees . . . . . . . . . . . . . . . . . . . . . 68

Committee Report Accompanying a Budget Resolution . . . . . . 70

Section 302(a) Allocations to House Committees . . . . . . . . . . . 73

Section 302(a) Allocations to Senate Committees . . . . . . . . . . . 74

Section 302(b) Subdivisions by Appropriations Committees . . . 75

CBO Cost Estimates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76

Scoring Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77

House Reconciliation Directives . . . . . . . . . . . . . . . . . . . . . . . . 80

Senate Reconciliation Directives . . . . . . . . . . . . . . . . . . . . . . . . 81

Exhibit 5-A.

Exhibit 5-B.

Exhibit 5-C.

Exhibit 5-D.

Exhibit 5-E.

Sources of Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87

Revenue Effects of Major Enacted Legislation . . . . . . . . . . . . . 89

Tax Expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92

Offsetting Collections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94

Increases in the Statutory Debt Limit During the 1990s . . . . . . 97

Exhibit 6-A.

Exhibit 6-B.

Exhibit 6-C.

Exhibit 6-D.

Exhibit 6-E.

Exhibit 6-F.

Basic Purposes of Authorizations Acts . . . . . . . . . . . . . . . . . . 100

Types of Discretionary Authorizations . . . . . . . . . . . . . . . . . . 104

Reauthorization Requirements . . . . . . . . . . . . . . . . . . . . . . . . 105

Earmarking and Other Features of Authorizations . . . . . . . . . . 107

Borrowing and Contract Authority . . . . . . . . . . . . . . . . . . . . . 109

Entitlement Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110

Exhibit 7-A.

Exhibit 7-B.

Exhibit 7-C.

Exhibit 7-D.

Exhibit 7-E.

Exhibit 7-F.

Exhibit 7-G.

Exhibit 7-H.

Exhibit 7-I.

Exhibit 7-J.

Exhibit 7-K.

Exhibit 7-L.

Exhibit 7-M.

Exhibit 7-N.

Exhibit 7-O.

Exhibit 7-P.

Exhibit 7-Q.

Exhibit 7-R.

Types of Appropriations Measures . . . . . . . . . . . . . . . . . . . . . 116

Sequence of an Appropriations Act Through Congress . . . . . . 118

Sequence of House Actions on Appropriations Measures . . . . 120

Special Rules on Appropriations Bills . . . . . . . . . . . . . . . . . . . 121

Statement of Administration Policy . . . . . . . . . . . . . . . . . . . . . 122

Sequence of Senate Action on Appropriations Measures . . . . . 123

Unanimous Consent Agreements on Appropriations Bills . . . . 124

Numbered Senate Amendments . . . . . . . . . . . . . . . . . . . . . . . 125

Conference Action on Appropriations Measures . . . . . . . . . . . 127

Continuing Appropriations . . . . . . . . . . . . . . . . . . . . . . . . . . . 128

Structure of a Regular Appropriations Act . . . . . . . . . . . . . . . 130

Structure of an Appropriations Account . . . . . . . . . . . . . . . . . 131

Other Types of Appropriations Accounts . . . . . . . . . . . . . . . . 132

Availability of Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133

Limitations on Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134

Limitations on Use of Appropriated Funds . . . . . . . . . . . . . . . 136

Committee Report: Account and Program Amounts . . . . . . . 137

Committee Report: Directives to Agencies . . . . . . . . . . . . . . 138

Exhibit 8-A.

Exhibit 8-B.

Exhibit 8-C.

Exhibit 8-D.

Exhibit 8-E.

Exhibit 8-F.

Exhibit 8-G.

Exhibit 8-H.

Exhibit 8-I.

Apportionment Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . 141

GAO Decisions on the Legality of Expenditure . . . . . . . . . . . . 143

Reprogramming Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 146

Presidential Impoundment Messages . . . . . . . . . . . . . . . . . . . . 149

GAO Review of Impoundment Messages . . . . . . . . . . . . . . . . 150

Chief Financial Officer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153

Agency Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . 157

Flow of Financial Transactions . . . . . . . . . . . . . . . . . . . . . . . . 159

Management Accountability and Control . . . . . . . . . . . . . . . . 161

Manual on the Federal Budget Process

Chapter 1. Overview of the Federal Budget Process

Budgeting for the federal government is an enormously complex process. It

entails dozens of subprocesses, countless rules and procedures, the efforts of tens of

thousands of staff persons in the executive and legislative branches, millions of work

hours each year, and the active participation of the President and congressional

leaders, as well as other Members of Congress and executive officials. It could hardly

be otherwise, because so much is at stake when budget decisions are made.

Since 1962, as Exhibit 1-A shows, federal spending—as measured in

outlays—has amounted to between 17% and 24% of the Gross Domestic Product

(GDP) of the United States. Federal revenues have hovered between 17% and 20%

of GDP during the same period. The deficit, which has resulted from the imbalance

between revenues and spending, accounts for the largest single source of borrowing

in capital markets. Although the deficit declined markedly during most of this decade

and surpluses are projected for the near term, federal outlays and revenues as a share

of GDP will remain significant. The deficit is expected to recur, and rise sharply, in

a couple of decades as retirement and health costs for the “baby-boomer” generation

escalate.

The trend of federal revenues and spending relative to GDP is only one of the

ways of measuring the impact of the budget. Trends also can be measured in terms

of real spending (i.e., inflation-adjusted spending), or in terms of the shares of the

budget allocated to major national priorities, such as defense, aid to state and local

governments, and health care. One of the useful ways of measuring trends is to

examine how the composition of federal spending has changed over time. Exhibit 2B, which is discussed later, reveals the growth in the share of the budget spent on

various entitlement programs. This exhibit suggests still another perspective: the

growth in the numbers of persons receiving various types of federal payments.

The budget is, however, much more than a matter of numbers. It finances

federal programs and assists many households in meeting basic expenses. It provides

a safety net for persons facing illness or old age. It is the means by which the United

States invests in its future through both physical improvements, such as highway

construction, and human improvements, such as training and education. The budget

pays for national defense and signals to allies and adversaries the role of the United

States on the world scene. It is one of the principal instruments available to the

federal government for regulating economic activity and for stabilizing household

incomes.

CRS-2

Exhibit 1-A.

Outlays and Revenues as a Percentage of GDP:

Fiscal Years 1962-2006

(1)

During the period from FY1962-2006, actual and projected revenues

(shown by the solid line) fluctuate within a narrow range, from 17.0% to

19.9% of Gross Domestic Product (GDP).

(2)

Actual and projected outlays (shown by the dashed line) fluctuate within a

wider range during the same period, from 17.2% to 23.2% of GDP.

(3)

The actual deficit reached a high of 6.1% of GDP in FY1983.

(4)

In January 1998, CBO projected (as shown here) that favorable economic

developments, the enactment of deficit-reduction legislation, and other

factors would cause the deficit to be eliminated by FY2001. Within a

couple of months, CBO projected that a surplus would occur as early as

FY1998.

(5)

The percentages shown here are on a “total budget” basis; they include the

transactions of the off-budget entities, which are the Social Security trust

funds and the Postal Service fund.

Source: Chart prepared by the Congressional Research Service based on

data in: Congressional Budget Office, The Economic and Budget Outlook:

Fiscal Years 1999-2008, January 1998, Summary Table 2, page xviii, and Table

E-5, page 113.

CRS-3

With so much at stake, it should not be surprising that budgeting often is a

difficult and contentious process. Allocating over a trillion-and-a-half dollars is

anything but a routine task, for as big as the budget is, there is never enough money

to satisfy all the claims on it. To budget is to fight over money. The conflict sprawls

between the two parties and between the executive and legislative branches. There

often is friction among congressional committees and between those who make tax

policy and those who control spending. The scope of conflict has expanded as the

size of the budget has grown and become even more prominent in the economic life

of the country.

The procedures described in this manual are the means devised over the years

to channel conflict in ways that enable the numerous participants to work their way

toward agreement each year. In this sense, the rules affect outcomes. How much is

taxed and spent and who gets what depend in substantial measure on the rules and

procedures of federal budgeting. In studying the budget process, therefore, one gains

an understanding not only of the roles of participants and the many steps that they

must take each year, but also of the interaction between budgetary procedures and

policy. (Appendix A explains how to obtain publications cited in this report.)

The Evolution of Federal Budgeting

The “power of the purse” is a legislative power. The Constitution lists the power

to lay and collect taxes and the power to borrow as powers of Congress; further, it

provides that funds may be drawn from the Treasury only pursuant to appropriations

made by law (see Box 1-A). The Constitution does not state how these legislative

powers are to be exercised, nor does it expressly provide for the President to have a

role in the management of the nation’s finances. During the nation’s early years, the

House and Senate devised

procedures for the enactment of

Box 1-A.

spending and revenue

Congress’s “Power of the Purse”

legislation. As these procedures

U.S. Constitution

evolved during the 19th century

th

and the first decades of the 20

Article I, Section 8

century, they led to highly

fragmented legislative actions.

The Congress shall have Power

In the course of each session,

To lay and collect Taxes, Duties,

Congress passed many separate

Imposts, and Excises ...

appropriations bills and other

To borrow Money on the credit of

measures affecting the financial

the United States ...

condition of the federal

government.

Neither the

Article I, Section 9

Constitution nor the procedures

adopted by the House and

No Money shall be drawn from the

Senate provided for a budget

Treasury, but in Consequence of

system (that is, for a

Appropriations made by Law ...

coordinated set of actions

covering all federal spending

and revenues). As long as the

federal government was small and its spending and revenues were stable, such a

budget system was not considered necessary.

CRS-4

Legislative fragmentation was mirrored by fragmentation in the executive branch.

The President had a limited role in overseeing financial operations, and most agencies

submitted their spending estimates to relevant congressional committees without

having their requests reviewed by the President. Early in this century, however, the

incessant rise in federal spending and the recurrence of deficits (spending exceeded

revenues in half of the 20 years preceding FY1920) led Congress to seek a more

coordinated means of making financial decisions. The key legislation was the Budget

and Accounting Act of 1921, which established the executive budget process.

The 1921 Budget and Accounting Act did not directly alter the procedures by

which Congress makes revenue and spending decisions. The main impact was in the

executive branch. The President was required to submit his budget recommendations

to Congress each year, and the Bureau of the Budget—renamed the Office of

Management and Budget (OMB) in 1970—was created to assist him in carrying out

his budgetary responsibilities (see Box 1-B for an identification of key budgetary

agencies). Congress, it was expected, would be able to coordinate its revenue and

spending decisions if it received comprehensive budget recommendations from the

President. In line with this expectation, the House and Senate changed their rules to

consolidate the jurisdiction of the Appropriations Committees over spending. The

1921 act also established the General Accounting Office (GAO), headed by the

comptroller general, and made it the principal auditing arm of the federal government.

The 1921 act, as amended, remains the statutory basis for the presidential budget

system.

Box 1-B.

Key Budgetary Agencies

Congressional Budget Office (CBO)

Created by the 1974 Congressional

Budget Act, CBO serves as Congress’s

independent, nonpartisan agency for

budgetary information and analysis.

General Accounting Office (GAO)

Created by the 1921 Budget and

Accounting Act, GAO conducts audits

and evaluations of federal programs for

Congress, as well as many other types of

budgetary activity.

Office of Management and Budget (OMB)

Established by the 1921 Budget and

Accounting Act as the Bureau of the

Budget, and renamed in 1970, OMB

coordinates the preparation and

implementation of the President’s

budget.

After World War II, the

belief that the presidential budget

sufficed to maintain fiscal control

gave way to the view that

Congress needed its own budget

process. Some Members of

Congress feared that dependence

on the executive budget had

bolstered the President’s fiscal

powers at the expense of

Congress’s; others felt that as

long as its financial decisions

were fragmented, Congress

could not effectively control

expenditures. Some efforts were

made in the late 1940s to create

a congressional budget, but it

was not until the 1970s that a

durable process was established.

The Congressional Budget

and Impoundment Control Act

of 1974 established a

congressional budget process

centered around a concurrent resolution on the budget, scheduled for adoption prior

to legislative consideration of revenue or spending bills. The congressional budget

CRS-5

process initiated in the 1970s did not replace the preexisting revenue and spending

processes. Instead, it provided an overall legislative framework within which the

many separate measures affecting the budget would be considered. The central

purpose of the budget process established by the 1974 act is to coordinate the various

revenue and spending decisions that are made in separate revenue, appropriations, and

other budgetary measures. To assist Congress in making budget decisions, the 1974

act established the Congressional Budget Office (CBO) and directed it to provide data

on and analyses of the federal budget.

During the years that the congressional budget process has been in operation, its

procedures have been adapted by Congress to changing circumstances. Following a

decade of experience with the 1974 Congressional Budget Act, Congress made

further changes in the budget process by enacting the Balanced Budget and

Emergency Deficit Control Act in 1985 (also known as the Gramm-Rudman-Hollings

Act), the Budget Enforcement Act in 1990, and the Line Item Veto Act in 1996,

among other laws.

The 1985 act prescribed declining deficit targets intended to achieve balance in

FY1991; the targets were enforced by sequestration, a process involving automatic,

across-the-board cuts in nonexempt spending programs if the targets were expected

to be exceeded. The 1990 act replaced the deficit targets with caps on discretionary

spending and a pay-as-you-go requirement for revenue and direct spending legislation;

sequestration was retained as the means of enforcing the two new mechanisms.

Finally, the 1996 act authorized the President to cancel discretionary spending in

appropriation acts, as well as new direct spending and limited tax benefits in other

legislation, subject to expedited legislative procedures by which Congress could

overturn the cancellations. (The Supreme Court struck down the Line Item Veto Act

in June 1998 as unconstitutional.) Other, less extensive changes have been made from

time to time. The various modifications made by these and other laws are discussed

in appropriate sections of the manual.

Box 1-C identifies some of the major laws affecting the congressional budget

process in the last quarter century. Appendix B summarizes the major milestones in

the development of the federal budget process. Appendix C provides citations to

major budgetary laws.

The Budget Cycle

Federal budgeting is a cyclical activity that begins with the formulation of the

President’s annual budget and concludes with the audit and review of expenditures.

The process spreads over a multi-year period. The main stages are formulation of the

President’s budget, congressional budget actions, implementation of the budget, and

audit and review. While the basic steps continue from year to year, particular

procedures often vary in accord with the style of the President, the economic and

political considerations under which the budget is prepared and implemented, and

other factors.

CRS-6

Box 1-C.

Major Laws Affecting Congressional Budgeting: 1974-1998

Congressional Budget and Impoundment Control Act of 1974

Established the congressional budget process, including the budget

resolution and reconciliation, created House and Senate Budget Committees

and CBO, and set forth impoundment control procedures.

Balanced Budget and Emergency Deficit Control Act of 1985

(Gramm-Rudman-Hollings Act)

Established declining deficit targets, leading to balance in FY1991, and the

sequestration process; also, modified the congressional budget process

extensively.

Balanced Budget and Emergency Deficit Control Reaffirmation Act of 1987

Placed the sequester “trigger” in the hands of the OMB director and revised

and extended the deficit targets, aiming at balance in FY1993.

Budget Enforcement Act of 1990

Replaced deficit targets with discretionary spending limits and a pay-as-yougo (PAYGO) process through FY1995, both enforced by sequestration; also,

modified the congressional budget process extensively. Included the Federal

Credit Reform Act of 1990.

Omnibus Budget Reconciliation Act of 1993

Extended the discretionary spending limits and PAYGO process through

FY1998.

Line Item Veto Act (1996)

Granted the President special authority from 1997 through 2004 to cancel

discretionary spending, new direct spending, or limited tax benefits in

legislation. (Struck down by the Supreme Court in June 1998.)

Budget Enforcement Act of 1997

Extended the discretionary spending limits and PAYGO process through

FY2002 and made changes (mostly minor or technical) in the congressional

budget process.

The activities related to a single fiscal year usually stretch over a period of twoand-a-half calendar years (or longer). As the budget is being considered, federal

agencies must deal with three different fiscal years at the same time: implementing

the budget for the current fiscal year; seeking funds from Congress for the next fiscal

year; and planning for the fiscal year after that.

Formulation of the President’s Budget. No later than early February of

each year, the President must submit to Congress a budget for the fiscal year starting

on October 1. Preparation of the President’s budget begins in the spring of the

preceding year, about ten months before it is submitted to Congress. At the time the

CRS-7

budget is being considered, federal agencies must deal concurrently with three fiscal

years: they are implementing the budget for the current fiscal year, seeking funds

from Congress for the fiscal year starting on October 1 (the budget year), and

preparing for the fiscal year after that. Understandably, therefore, budgets are

formulated with a great deal of uncertainty about the conditions to which they will

apply.

Before it examines detailed spending and program requests, OMB reviews the

major policy issues for the next budget and updates the long-term forecast of revenues

and spending. Together with the Council of Economic Advisers (CEA), it reviews

the economic outlook and presents the President with a projection of future economic

conditions. The President often issues (through OMB) policy directives and planning

guidelines to be used by agencies in preparing their budget requests. The extent to

which these guidelines limit the amounts that agencies may request varies from year

to year.

The summer months and the early fall are an intensive period for preparation of

detailed budget requests by federal agencies. These requests are reviewed by OMB,

which notifies agencies of the spending levels recommended by it for their programs.

Agencies have a brief period during which they may appeal to the President for higher

levels than were recommended by OMB. Some recent Presidents (particularly Nixon,

Reagan, and Bush) delegated much of the “appeals” function to senior White House

staff; others (such as Ford, Carter, and Clinton) had a more direct role in resolving

budget appeals. The appeals often involve policy issues as well as budget levels.

After the appeals have been decided, budget preparation is completed, but changes

may be made right up to the deadline for printing the budget.

The budget submitted by the President contains a report for the upcoming fiscal

year, indicating whether the President’s recommendations are consistent with the

discretionary spending limits and pay-as-you-go requirement established under the

Budget Enforcement Act of 1990, as amended.

Congressional Action on the Budget. Congressional budget actions may

be classified according to three distinct types of measures involved: (1) adoption of

a budget resolution; the steps associated with this action commonly are referred to as

the “congressional budget process”; (2) passage of the annual appropriations bills,

including regular, supplemental, and continuing appropriations measures; and (3)

passage of other legislation affecting the federal budget, such as authorizing

legislation, reconciliation bills, and measures changing tax law, modifying entitlement

programs, or adjusting the debt limit. The budget resolution is Congress’s main

procedure for linking these different types of measures.

The Budget Resolution. The congressional budget process begins early

each year after the President submits his annual budget. Congress is not bound by the

President’s recommendations. When it develops a budget resolution, Congress may

use different policy, economic, and technical assumptions than those presented in the

executive budget. When it enacts legislation to carry out the budget plan, it may

provide more or less funds than the President has requested for particular programs,

or make different changes in tax laws than the President has recommended.

CRS-8

Under the 1974 Congressional Budget Act, each House and Senate committee

is required to issue a “views and estimates” report on the budget matters in its

jurisdiction within six weeks after the President submits his budget. The Budget

Committees use these reports, along with CBO analyses, to prepare the budget

resolution for the coming fiscal year. The Budget Committees use baseline

projections of revenues, spending, and the surplus or deficit to estimate the impact of

proposed policy changes.

The budget resolution, which is supposed to be adopted by April 15, contains

total revenue and spending levels for at least five fiscal years. These totals generally

are binding for the first year and the sum of all five years. Because it is a concurrent

resolution (which is not presented to the President for his signature or veto), the

budget resolution does not have statutory effect. No taxes can be levied or funds

spent pursuant to a budget resolution.

The budget resolution consists of three main sections: aggregates, functional

allocations of spending, and (optionally) reconciliation instructions. The aggregates

include total revenues, and the amount by which total revenues should be changed;

total new budget authority; total outlays; the surplus or deficit; and the debt limit.

The new budget authority and outlay levels are allocated among 20 functional

categories, such as National Defense, International Affairs, Energy, or Agriculture.

Reconciliation instructions direct designated House and Senate committees to report

legislation conforming spending, revenue, or debt-limit levels under existing law to

current budget policies. These instructions are included when Congress seeks to

make changes in revenue or direct spending laws.

The budget resolution does not mention specific programs or accounts, but the

aggregates, functional allocations, and reconciliation instructions typically are

predicated on assumptions about particular programs. These assumptions sometimes

are set forth in the reports of the Budget Committees accompanying the budget

resolution, but they are not binding on Congress when it considers revenue or

spending legislation.

To ensure that the budget resolution serves as a guideline for subsequent action

on budget-related measures, Congress is supposed to adopt it before turning to the

consideration of revenue, spending, or debt-limit measures for the next fiscal year.

However, Congress often fails to adopt the budget resolution by the April 15 deadline

specified in the 1974 Congressional Budget Act. The rules of the House permit it to

consider regular appropriations bills after May 15 even if the budget resolution has

not yet been adopted.

Annual Appropriations Measures. The rules of the House and (to a lesser

extent) the Senate require that agencies and programs be authorized in law before an

appropriation is made for them. An authorizing act is a law that: (1) establishes a

program or agency and the terms and conditions under which it operates; and (2)

authorizes the enactment of appropriations for that program or agency. Authorizing

legislation may originate in either the House or the Senate and may be considered any

time during the year. Many agencies and programs have temporary authorizations

that have to be renewed annually or every few years.

CRS-9

Action on appropriations measures sometimes is delayed by the failure of

Congress to enact necessary authorizing legislation. The House and Senate often

waive or disregard their rules against unauthorized appropriations for ongoing

programs that have not yet been reauthorized.

The budgetary impact of authorizing legislation depends on whether it contains

only discretionary authorizations (for which funding is provided in annual

appropriations acts) or direct spending, which itself enables an agency to enter into

obligations.

Annual appropriations are provided in 13 regular appropriations bills, each one

under the jurisdiction of parallel House and Senate Appropriations subcommittees that

recommend spending levels to the full committees. These bills come to the House and

Senate individually as do other measures (such as revenue and entitlement legislation)

affecting overall budget levels. When Congress fails to enact all of the regular

appropriations bills by the start of the fiscal year, it provides interim funding in

continuing resolutions. In some years, these measures have provided appropriations

for the full fiscal year, not just for a month or two. Congress also enacts supplemental

appropriations measures to provide additional funding to federal agencies or programs

or to finance spending not covered in the regular appropriations bills.

Regular, continuing, and supplemental appropriations measures (as well as other

spending legislation) are linked to the budget resolution through the “Section 302”

procedures established in those sections of the 1974 Congressional Budget Act. After

a budget resolution has been adopted, the spending totals are allocated to the House

and Senate Appropriations Committees (and to other committees with spending

jurisdiction). The Appropriations Committees then subdivide their spending amounts

among their 13 subcommittees. When an appropriations measure is considered by the

House or Senate, the spending provided in it is compared to the amount subdivided

to the pertinent subcommittee. In some circumstances, consideration of an

appropriations measure may be barred by a point order on the grounds that budget

resolution levels or the Section 302 amounts would be breached. In most instances,

however, the appropriations bill is consistent with the Section 302 subdivision.

Reconciliation Bills and Other Measures Affecting the Budget.

Annual appropriations are enacted for only about half of total federal spending; the

remainder is determined largely by permanent appropriations and other funding

devices that do not require annual action by Congress. In addition, the amount of

revenue generated each year is determined principally by existing law. This means

that Congress cannot enforce its budget decisions merely by comparing the amounts

in new legislation with its budgeted levels. The portions of the budget governed by

existing law are controlled primarily through the reconciliation procedures mentioned

earlier. These procedures are triggered by reconciliation instructions in the budget

resolution that direct designated committees to change revenue or spending laws by

specified amounts. In most instances, committees subject to reconciliation

instructions are given a deadline by which they are to report changes in existing laws.

The recommendations of the instructed committees usually are consolidated into an

omnibus reconciliation bill.

CRS-10

Congressional committees also can report legislation changing revenue or

spending laws (such as entitlements) on their own initiative. When they do so, the

amounts of revenue or spending estimated to result from enactment of the measure

are compared to the budget resolution or the Section 302 allocations. Under some

circumstances, variance from the budgeted levels can lead to a point of order barring

consideration of the legislation.

Implementation of the Budget. Although they are bound by congressional

decisions, agencies typically have some spending discretion because appropriations

are made in broad categories. Agencies generally conform to the financial and

program plans they submit to congressional committees, but they sometimes

reprogram funds (shift them from one use to another within an account) or use other

devices to meet unanticipated needs or changing conditions. Some reprogrammings

require approval by the Appropriations Committees or legislative committees.

Agencies cannot spend appropriations until OMB apportions those funds. The

Antideficiency Act requires that OMB apportion funds to prevent the necessity for

deficiency or supplemental appropriations or to achieve the most effective and

economical use of funds. OMB apportions available funds among time periods (such

as quarters or months) or projects, then agencies allot their apportioned funds among

their administrative units. Agencies generally are not permitted to spend in excess of

their apportionments.

When the President or another executive official withholds funds provided by

Congress, he uses the procedures set forth in the Impoundment Control Act of 1974.

If the President wants to delay obligations or expenditures, he proposes a deferral, but

may do so only for the reasons authorized in the Antideficiency Act. He cannot defer

funds for policy reasons. If the President wants to cancel an appropriation, he must

propose a rescission. If Congress fails to rescind the funds within a 45-day waiting

period, the President must release the funds. The comptroller general oversees

compliance with the Impoundment Control Act.

In 1996, Congress gave the President special authority for 1997-2004 to cancel

discretionary spending, items of new direct spending, and limited tax benefits under

the Line Item Veto Act. President Clinton exercised this authority in 1997 in the case

of two reconciliation acts and nine regular appropriations acts for FY1998. However,

the Supreme Court struck down the act in June 1998.

The final phase of the budget process is review and audit. Under the principle

of internal control, agencies have the primary responsibility for ensuring the propriety

and efficiency of their expenditures. Agencies are required to maintain accounting

systems and to audit their expenditures in accordance with standards promulgated by

GAO. Two laws passed in recent years, the Chief Financial Officers Act of 1990 and

the Government Performance and Results Act of 1993, seek to strengthen financial

management and reporting in the federal government.

CRS-11

Roles of the Participants

Budgeting cannot be an isolated activity, conducted solely by a small number of

financial experts. Because the stakes in budgeting radiate to all sectors of public

policy, the participants come from all parts of the federal government. Some

budget-makers are program specialists; others are fiscal experts. Some occupy central

roles in government; some participate from the limited perspective of a particular

program or organization. The division of budgetary labor is essentially political in

character: there are program advocates and fiscal guardians, legislative controllers

and executive bargainers, presidential agents and agency managers.

The existence of parallel legislative and executive processes adds significantly to

the number and diversity of budget participants. The executive branch has its own

budget experts; so too does Congress. There are program experts in all executive

agencies as well as in most congressional committees. Congress, in exercise of its

budgetary independence, has developed its own databases, so as to avoid undue

dependence on executive sources.

There is much greater budgetary heterogeneity in Congress than in the executive

branch, however. As an institution that represents a diversity of interests and

perspectives, Congress has diversified its budgetary processes to allow a multiplicity

of participants. When it comes to public money, no one in Congress is fully in charge,

but just about every Member and committee has some role in shaping revenue or

spending legislation.

The principal roles and functions of the participants in the budget process are

summarized in the next three boxes and discussed in more detail below.

Executive Roles. There are three main participants in executive budgeting;

arrayed in hierarchical order, they are the President, OMB, and the executive agencies

(see Box 1-D). In addition to these, various executive units have specialized roles.

The Treasury Department maintains governmentwide accounts, manages federal cash

and debt, issues periodic statements on the condition of the budget, and has the lead

role (on the executive side) in tax policy. The Council of Economic Advisers prepares

the annual Economic Report, forecasts economic trends, and advises the President

(along with others) on economic policy, and the National Economic Council

coordinates policy advice for the White House.

Budget roles cannot be considered independently of the participants. As the

interests, skills, and relationships among participants change, so too do the roles they

play. Some presidents take an active interest in budget policy; but few of them get

involved in specific budget decisions.

The manner in which the President uses OMB (and its director) varies from

administration to administration. In some years, OMB has the dominant role in budget

policy; in other seasons, it faces tough competition from other presidential agencies

and advisors.

Yet there must be a measure of stability to budgetary roles, if only because of the

urgent need to produce a budget each year. If some participants were to behave

CRS-12

Box 1-D.

Principal Budgetary Entities of the Executive Branch

President

Establishes executive

budget policy and

submits budget to

Congress.

Submits supplemental

requests, budget

amendments, and updates

to Congress.

Office of Management

and Budget (OMB)

Operates executive

budget system and

advises President.

Submit budget requests to

OMB; appeal to

President for more funds.

Issues budget targets and

“passbacks” to agencies.

Justify President’s budget

recommendations before

congressional

committees.

Prepares budget options

and recommendations for

President.

Signs (or vetoes) revenue,

appropriation, and other

budget-related measures

passed by Congress.

Issues sequestration

reports.

Notifies Congress of

proposed rescissions and

deferrals.

Reviews proposed

legislation and testimony

to determine whether it

conforms to the

President’s policies.

Issues sequestration

orders to cancel

budgetary resources.

Federal agencies

Request apportionment

from OMB and allot

funds among subunits.

Maintain accounting

systems and systems of

internal control.

Obligate funds and preaudit expenditures.

Apportions funds and

oversees execution of the

budget.

Carry out the activities

for which funds were

provided.

Conducts management

activities to improve

efficiency of federal

expenditures.

Develop strategic plans,

performance measures,

and other material on

program objectives and

results.

Scores the budgetary

impact of enacted

legislation.

differently each year, others might not know what to expect of them or how to adjust

their own roles. Budgeting is a process that depends on reciprocal expectations. It

is expected that agencies will seek more funds for programs in their jurisdiction and

that OMB will seek to constrain budgetary growth. It is expected that the President

will try to push his budget through Congress and that legislators will try to exercise

some independence in budget policy, but it is also expected that both sides will

compose their differences without going to the brink. When one side is more adamant

than usual, this pattern of expectations can break down, leading to protracted conflict,

as happened in the mid-1990s.

CRS-13

Box 1-E.

Principal Budgetary Functions of Congressional Committees

Authorizing

Committees

Appropriations

Committees

Revenue

Committees

Report authorizing

and direct

spending

legislation.

Report regular,

supplemental, and

continuing

appropriation bills.

Report revenue

legislation.

Report budget

resolutions.

Oversee executive

agencies.

Review proposed

rescissions and

deferrals.

Report legislation

on public debt

limit, Social

Security, and

certain other

entitlements.

Draft

reconciliation

instructions and

compile

reconciliation bill.

Submit views and

estimates to

Budget

Committees on

matters in their

jurisdiction.

Recommend

changes in laws

pursuant to

reconciliation

instructions.

Include CBO cost

estimates in

reports on their

legislation.

Submit views and

estimates to

Budget

Committees on

federal spending.

Provide guidance,

directives, and

earmarks in

reports

accompanying the

appropriation bills.

Establish rules for

reprogramming.

Submit views and

estimates to

Budget

Committees on

matters in their

jurisdiction.

Recommend

changes in laws

pursuant to

reconciliation

instructions.

Budget

Committees

Allocate new

budget authority

and outlays to

committees.

Monitor budget

and advise

Congress on its

status.

Score the

budgetary impact

of revenue and

direct spending

legislation.

Establish account

structure for

federal agencies.

Legislative Roles. Legislative roles encompass the activities of congressional

leaders, House and Senate committees (see Box 1-E), and congressional support

agencies (see Box 1-F). In recent years, legislative budgetary roles have been less

stable than in the past. Several explanations can be offered for this, beginning with the

fact, already noted, that there is considerable diversity in legislative budgetary roles.

However, the congressional budget process, other changes in budgetary procedure,

and political differences between the two branches have been of greater importance.

The 1974 Congressional Budget Act introduced new participants in the

legislative process, but it also retained the old ones. On paper, the roles of the

revenue, authorizing, and appropriating committees were hardly changed, but the

establishment of the Budget Committees inevitably altered expectations and behavior.

CRS-14

Even before the budget process was established, Congress was experiencing

considerable budgetary turbulence. As many authorizing committees moved from

permanent to periodic authorizations, they became more active in proposing spending

levels for specific programs. Moreover, entitlements (as well as other forms of direct

spending) became more prevalent. These changes affected the jurisdiction and role

of the Appropriations Committees.

Box 1-F.

Principal Budgetary Functions of Congressional Support Agencies

Congressional

Budget Office

General Accounting

Office

Congressional

Research Service

Issues reports on budget

and economy, including 5year projections.

Reviews agency

accounting and financial

management systems.

Analyzes legislative issues

and proposals affecting

agency and program

operations.

Analyzes federal

programs and options for

dealing with selected

problems.

Reviews deferrals and

rescissions to determine

whether they have been

properly reported, and

whether funds have been

released as required.

Reestimates the

President’s budget using

its own economic and

technical assumptions.

Estimates 5-year costs of

reported bills.

Estimates costs of

unfunded mandates in

reported bills.

Issues advisory

sequestration reports.

Maintains databases for

scorekeeping.

Prepares baseline budget

projections.

Audits operations of

certain federal agencies.

Issues legal opinions

concerning the use of

funds.

Prepares legislative

histories of particular

legislation and programs.

Analyzes proposals to

change the federal budget

process.

Assists committees and

Members by providing

data and analyses relevant

to their legislative

responsibilities.

Settles claims and debt

collection issues involving

appeals of agency actions

and certain questions of

law.

Evaluates programs and

develops methods for

assessing the effectiveness

of expenditures.

Assists the budget, tax,

appropriations, and other

committees.

Despite the fact that the congressional budget process has been in operation for

more than two decades, role changes continue to unfold in Congress. Reconciliation

has altered legislative roles and relationships. In each year since 1975, the

congressional budget process has been implemented differently. Multi-year budgeting

CRS-15

was introduced one year, credit budgeting another. In some years party leaders have

been active in shaping the budget; in other years they have remained on the sidelines.

Relationships between Congress and the White House have varied from year to year

and have contributed to role uncertainty on Capitol Hill. The 1985 Balanced Budget

Act and deficit pressures also have influenced legislative roles and behavior.

The budgetary roles and relationships of the President and congressional

participants have been greatly affected by reliance on budget summit negotiations

between the executive and legislative branches. A summit agreement in 1987

established overall budget policy for FY1988 and FY1989; a 1989 summit agreement

set overall policy for FY1990; a summit agreement in 1990 established the budget

framework for FY1991-1995; and a summit agreement in 1997 set the path for a

balanced budget by FY2002.

The increased reliance on summit negotiations has been due to two factors—split

political control of the executive and legislative branches, and the drive to reduce or

eliminate the budget deficit. In 18 of the 24 years since Congress established its own

budget process, the presidency has been controlled by one party, and one or both

houses of Congress by the other. During this period, Republicans and Democrats

often have disagreed on budget policy, and each party has had sufficient strength to

block the other’s initiatives. Moreover, as concern over deficit spending mounted,

both parties faced difficult and often controversial decisions on taxing and spending.

Negotiated budgets have been the principal means by which the two parties have

bridged their differences and agreed on policies to reduce the deficit.

The importance of budget summitry was demonstrated by the budget deadlock

and government shutdown in 1995. During that year, each party proceeded on its

own. The President submitted a budget that was unacceptable to congressional

Republicans, who adopted a budget resolution that diverged significantly from

President Clinton’s proposals. When Congress tried to implement its budget strategy

in reconciliation legislation, President Clinton vetoed the bill. In the ensuing impasse,

Congress and the President were unable to agree on major appropriations bills,

leading to the lengthiest shutdown of federal agencies in U.S. history.

The 1995 stalemate shows that the outcomes of budget summits generally are

uncertain because they depend on the willingness of the two branches to enter into

negotiations and to set aside major differences in budget policy. Two of the summit

negotiations mentioned above took place in the spring, the other two occurred in the

fall. The first agreement covered two fiscal years, the next applied to only a single

fiscal year, and the most recent ones covered five fiscal years. If summit negotiations

guide budget making in the future, one result is likely to be greater uncertainty about

the budgetary behavior of participants.

Basic Concepts of Federal Budgeting

The federal budget is a compilation of numbers about the revenues, spending,

and borrowing and debt of the government. Revenues come largely from taxes, but

stem from other sources as well (such as duties, fines, licenses, and gifts). Spending

involves such concepts as budget authority, obligations, outlays, and offsetting

collections. The numbers are computed according to rules and conventions that have

CRS-16

accumulated over the years; they do not always conform to the way revenues and

spending are accounted for in other processes. Some of the rules are not recognized

in law, but they are nonetheless used by the various participants in federal budgeting.

Appendix D provides a glossary of terms used in the federal budget process.

Budget Authority and Outlays. When Congress appropriates money, it

provides budget authority, that is, authority to enter into obligations. Budget

authority also may be provided in legislation that does not go through the

appropriations process (direct spending legislation). The key congressional spending

decisions relate to the obligations that agencies are authorized to incur during a fiscal

year, not to the outlays made during the year. (Obligations occur when agencies

enter into contracts, submit purchase orders, employ personnel, and so forth; outlays

occur when obligations are liquidated, primarily through the issuance of checks,

electronic fund transfers, or the disbursement of cash.)

Budget authority that first becomes available for a fiscal year is counted as new

budget authority. In programs that have permanent appropriations, new budget

authority becomes available each year without congressional action. Under law, the

income of the Social Security trust funds and certain other trust funds is automatically

available for obligation; hence, the annual receipts of these funds are counted as new

budget authority.

The provision of budget authority is the key point at which Congress exercises

control over federal spending, although the outlay level often receives greater public

attention because of its bearing on the deficit. Congress does not directly control

outlays; each year’s outlays derive in part from new budget authority and in part from

“carryover” budget authority provided in prior years. For example, President

Clinton’s budget for FY1999 estimated that outlays would total $1,733 billion. As

shown in Exhibit 1-B (taken from the President’s FY1999 budget), approximately

$1,365 billion of this amount was estimated to come from new budget authority for

the fiscal year, while the remainder ($368 billion) was estimated to come from budget

authority enacted in prior years.

Budget authority and outlays can be thought of as akin to deposits and

withdrawals in a bank account. When Congress provides budget authority, whether

by appropriating funds or otherwise enacting legislation that enables an agency to

incur obligations, its actions have the effect of making a deposit into an agency

account. That is, the budget authority augments the financial resources available to

the agency. When bills are paid and outlays occur, resources are withdrawn from the

agency’s account.

The relation of budget authority to outlays varies from program to program and

depends on spendout rates, the rates at which funds provided by Congress are

obligated and payments disbursed. In a program with a high spendout rate, most new

budget authority is expended during the fiscal year; if the spendout rate is low,

however, most of the outlays occur in later years.

CRS-17

Exhibit 1-B.

Relation of Budget Authority to Outlays

(dollars in billions)

(1)

This exhibit shows the relationship of budget authority to outlays in the

FY1999 budget. It shows that: (a) not all budget authority becomes

outlays in the year for which it is provided; and (b) a portion of each year’s

outlays derives from budget authority provided in prior years. The flow of

outlays from budget authority is measured by the spendout rate, sometimes

called the outlay rate.

(2)

Total new budget authority typically exceeds total outlays for a fiscal year

because in programs with long lead times, such as construction, it may take

years for the resources provided by Congress to be spent.

(3)

The outlays set forth in the budget are only estimates of the amount to be

spent. Actual outlays for a fiscal year may vary significantly from the

estimate. However, congressional budget procedures, such as Section 302

allocations, control annual appropriations acts and other legislation in

terms of the volume of outlays in a fiscal year.

(4)

Unspent budget authority carried over into future years consists of both

obligated and unobligated balances. Most of the obligated balances are

for contracts entered into in prior years; most of the unobligated balances

are in trust funds.

Source: Office of Management and Budget, Budget of the United States

Government, Fiscal Year 1999, Analytical Perspectives, February 1998, Chart

20-1, page 352.

CRS-18

Regardless of the spendout rate, the outlays in the budget are merely estimates

of the amounts that will be disbursed during the year. If payments turn out to be

higher than the budget estimate, outlays will be above the budgeted level. The

President and Congress control outlays indirectly by deciding on the amount of

budget authority to be provided or by limiting the amount of obligations to be

incurred.

Budget reforms enacted since 1985 have increased the prominence of outlay

estimates and controls in federal budgeting. Under these procedures, outlay estimates

are essential in enforcing the discretionary spending limits and the pay-as-you-go

requirement. This process is outlined in the next chapter.

Certain receipts of the federal government are accounted for as “offsets” against

outlays rather than as revenues. Various fees collected by government agencies are

deducted from outlays; similarly, income from the sale of certain assets are treated as

offsetting receipts. Most such receipts are offset against the outlays of the agencies

that collect the money, but in the case of offshore oil leases and certain other

activities, the revenues are deducted from the total outlays of the government.

Scope of the Budget. The budget consists of two main groups of funds:

federal funds and trust funds. Federal funds—which comprise mainly the general

fund—largely derive from the general exercise of the taxing power and general

borrowing and for the most part are not earmarked by law to any specific program or

agency. One component of federal funds, called special funds, are earmarked as to

source and purpose. The use of federal funds is determined largely by appropriations

acts.

Trust funds are established, under the terms of statutes that designate them as

trust funds, to account for funds earmarked by specific sources and purposes. The

Social Security funds are the largest of the trust funds; revenues are collected under

a Social Security payroll tax and are used to pay for Social Security benefits and

related purposes. The unified budget includes both the federal funds and the trust

funds. The balances in the trust funds are borrowed by the federal government; they

are counted, therefore, in the federal debt. Because these balances offset a budget

deficit but are included in the federal debt, the annual increase in the debt invariably

exceeds the amount of the budget deficit. For the same reason, it is possible that the

federal debt will rise even when the federal government has a budget surplus.

Capital and operating expenses are not segregated in the budget. Hence, monies

used for the operations of government agencies as well as for the acquisition of

long-life assets (such as buildings, roads, and weapons systems) are reported as

budget outlays. Proposals have been made from time to time to divide the budget into

capital and operating accounts. While these proposals have not been adopted, the

budget contains various tables showing the investment and operating outlays of the

government.

The budget totals do not include all the financial transactions of the federal

government. The main exclusions fall into two categories—off-budget entities and

government-sponsored enterprises. In addition, the budget includes direct and

CRS-19

guaranteed loans on the basis of the accounting rules established by the Federal Credit

Reform Act of 1990, which are discussed more fully in the next chapter.

Off-budget entities are excluded by law from the budget totals. The receipts and

disbursements of the Social Security trust funds (the Old-Age and Survivors

Insurance Fund and the Disability Insurance Fund), as well as spending for the Postal

Service Fund, are excluded from the budget totals. These transactions are shown

separately in the budget. Thus, the budget now reports two deficit or surplus

amounts—one excluding the Social Security trust funds and the Postal Service Fund,

and the other (on a “total” or “consolidated” basis) including these entities. The latter

is the main focus of discussion in both the President’s budget and the congressional

budget process. The official policy adopted by the President and Congress to achieve

a balanced budget early in the near term uses a consolidated basis, which includes

Social Security.

The transactions of government-owned corporations (excluding the Postal

Service), as well as revolving funds, are included in the budget on a net basis. That

is, the amount shown in the budget is the difference between receipts and outlays, not

the total activity of the enterprise or revolving fund. If, for example, a revolving fund

has annual income of $150 million and disbursements of $200 million, the budget

would report $50 million as net outlays.

Government-sponsored enterprises (GSEs) are excluded from the budget

because they are deemed to be private rather than public entities. The federal

government does not own any equity in these enterprises, most of which receive their

financing from private sources. Although they were established by the federal

government, their budgets are not reviewed by the President or Congress in the same

manner as other programs. Most of these enterprises engage in credit activities. They

borrow funds in capital markets and lend money to homeowners, farmers, and others.

In total, these enterprises have assets and liabilities in excess of one trillion dollars.

At this writing, the government-sponsored enterprises are:

! the Student Loan Marketing Association (Sallie Mae);

! the College Construction Loan Insurance Association (Connie Lee);

! the Federal National Mortgage Association (Fannie Mae);

! the Federal Home Loan Mortgage Corporation;

! the Banks for Cooperatives;

! the Farm Credit Banks;

! the Federal Agricultural Mortgage Corporation;

! the Federal Home Loan Banks;

! the Financing Corporation; and

! the Resolution Funding Corporation.

Financial statements of the government-sponsored enterprises are published in

the President’s budget.

Functional Categories of the Budget. Budget authority and outlays are

classified into 20 functional categories that represent the major objectives and

operations of the federal government. Each of the functions is divided into a number

of subfunctions. (See Box 4-B for a list of budget functions.)

CRS-20

Although the functional classification has diminished in importance in recent

years, it is used for a number of purposes in the federal budget process. First, the

functional classification brings together in a single category the various programs and

activities serving a common objective, regardless of the agency responsible for them.

For example, the “National Defense” function includes most of the programs and

expenditures of the Defense Department, as well as defense-related activities of the

Energy Department and other federal agencies.

Second, the functional classification shows the various types of resources spent

on the same objective. Thus, the budget presents the budget authority, outlays, tax

expenditures, and credit authority associated with each function.

Third, the functional classification may be used to explain the President’s budget

policies and is used to present budgetary data.

Finally, the functional classification is used in establishing congressional budget

priorities. Each budget resolution contains a functional allocation of new budget

authority and outlays for at least the next five fiscal years.

The Budget and the Economy

A key purpose of the federal budget is to allocate public funds among

government agencies and programs. Viewed from this perspective, the budget is an

internal management tool of government. Much of the budget process entails

relationships among federal agencies and between the agencies and Congress.

The budget, however, serves another role which transcends the internal

operations of the government. It is a prime means of influencing the condition of the

economy. The size of the budget (and especially the deficit), the shape of tax policy,

and the pattern of federal spending help determine the rate of economic growth,

employment trends, interest rates, and price changes. When they make budget

decisions, therefore, the President and Congress are guided in part by concern about

the impact of their policies on economic performance.

The relation of the budget and the economy is bilateral. Not only does the

budget influence the economy, but the reverse also is true: the condition of the

economy shapes budget outcomes. When the President and Congress formulate their

budgets for the next fiscal year or beyond, they must make assumptions about future

economic conditions. They typically make assumptions about real and nominal

growth, the Gross Domestic Product, short- and long-term interest rates, and inflation

and unemployment rates. Differences in the assumptions used by the two branches

of government often account for sizeable differences in their planned budget levels.

Because the budget is predicated on assumptions about future economic

conditions, the extent to which the President’s or Congress’s budget policies

materialize depends, in substantial measure, on whether the assumptions prove to be

accurate. Any major discrepancy between assumed and actual economic conditions

will translate into variances between expected and actual budget results.

CRS-21

Exhibit 1-C reveals that the budget is highly sensitive to changes in economic

conditions. Deviations of the economy from the assumed path will lead to higher or

lower revenues, outlays, and deficits. Revenues are particularly sensitive to the rate

of economic growth; outlays are particularly sensitive to the interest rate paid on

government debt. Moreover, as the exhibit indicates, the impact of these economic

conditions on the budget compounds with each passing year.

According to the information presented in Exhibit 1-C, one tenth of one

percentage point lower economic growth would subtract an estimated $1 billion from

federal revenues in the first year and $9 billion in the fifth year; a one percentage point

rise in inflation would add $6 billion to outlays in the first year and $62 billion in the

fifth year.

The relation of the budget and the economy is a matter of considerable dispute.

Controversy rages over the appropriate size of the surplus or deficit, the assumptions

to be used in making budget projections, and the extent to which federal government

policy should affect the supply of, or the demand for, goods and services.

CRS-22

Exhibit 1-C.

Sensitivity of Budget Projections to Changes in Economic Conditions

1998

1999

2000

2001

2002

2003

2004

Real Rate of Growth is 0.1 Percentage Point a Year Lower

Beginning in January 1998

Change in Revenues

Change in Outlays

Net interest (Debt service)

Mandatory spending

Change in Deficit or Surplusb

-1

-3

-5

-7

-9

-12

-15

a

a

-1

a

a

-3

a

a

-5

1

a

-8

1

a

-11

2

a

-14

3

a

-18

Inflation Rate is 1 Percentage Point a Year Higher

Beginning in January 1998

Change in Revenues

Change in Outlays

Net interest

Higher rates

Debt Service

Discretionary spending

Mandatory spending

Total

Change in Deficit or Surplusb

9

26

45

65

87

111

139

5

a

0

1

6

3

15

a

0

8

22

4

20

-1

0

17

37

8

23

-1

0

28

50

15

25

-3

0

40

62

24

27

-4

6

53

81

30

27

-7

12

67

99

40

a. Less than $500 million

b. A minus sign indicates an increase in the deficit or a decrease in the surplus.

(1)

Revenues and outlays, and therefore the surplus or deficit as well, are

sensitive to changes in economic conditions, particularly the rate of real

growth, unemployment and inflation levels, and interest rates. This exhibit

displays the estimated effects on the budget of changes in economic

assumptions for two of these factors—real growth and inflation. Real

growth refers to the change in the Gross Domestic Product after

adjustment for price changes.

(2)

Inflation increases both revenues and outlays in roughly equal degrees,

which lessens its net effect on the surplus or deficit.

(3)

Under these projections, a rise in inflation has a much greater impact on

interest payments and mandatory spending during the first five years than

it does on discretionary spending because the latter is assumed to be

capped by statutory limits in effect through FY2002. The effect on interest

payments occurs more quickly but levels off after a few years; the effect on

mandatory spending builds more slowly but continues to increase year

after year. After FY2002, when the caps on discretionary spending are

assumed to expire, such spending begins to rise steadily.

Source: Congressional Budget Office, The Economic and Budget Outlook:

Fiscal Years 1999-2008, January 1998, Table C-1, page 98.

CRS-23

2. The Framework for Budget Enforcement

The enforcement of budgetary decisions involves a complex web of procedures

that encompasses both congressional and executive actions. These procedures are

rooted principally in two statutes—the Congressional Budget Act of 1974 and the

Budget Enforcement Act (BEA). The 1974 act established a congressional budget

process, as discussed in Chapter 4, in which budget policies are enforced by Congress

during the consideration of individual measures. The BEA is the current embodiment

of additional enforcement procedures, first established in the Balanced Budget and

Emergency Deficit Control Act of 1985 and renewed with modification in 1990 and

1997, that are used mainly by the executive to enforce budget policies after

congressional action for a session has ended.

These twin sets of enforcement procedures are separate and distinct, but they

have common elements and are linked in various ways. One important common

element is the emphasis placed on reducing the deficit in past years and, currently, on

maintaining a surplus. Another is the distinction drawn between the treatment of

discretionary spending on the one hand and direct spending and revenues on the other.

Congress enforces budget decisions in two ways. One is by guarding against

actions that would cause budget outcomes to deviate from a desired course; the other

is by ensuring that the House and Senate (and their committees) abide by the budget

decisions taken in the congressional budget resolution. This chapter deals with

enforcing budget outcomes; Chapter 4 deals with enforcing congressional budget

decisions. In addition, this chapter addresses two other elements of the framework

for budget enforcement—budget baselines and the new rules for the treatment of

federal credit activities.

Deficit Reduction and the Rules of Congressional Budgeting

Between the early 1980s and the late 1990s, annual consideration of the budget

was dominated by concern about the budget deficit. The reason for this concern is

evident from Exhibit 2-A, which displays the budget deficit at 4-year intervals since

FY1982. In the mid-1980s, the deficit exceeded $200 billion and amounted to almost

six percent of GDP. High deficits persisted in the early 1990s.

The size of the deficit depends on how it is measured. The “total” or

“consolidated” deficit combines all on-budget federal funds and trust funds with the

off-budget entities (the Social Security trust funds and the Postal Service Fund). The

total deficit generally is regarded as the most comprehensive measure of the impact

of the budget on the economy.

CRS-24

Exhibit 2-A.

Alternative Measurements of the Deficit/Surplus

(1)

This table, taken from President Clinton’s initial budget submission for

FY1999 (in February 1998), displays three alternative measures of the

deficit or surplus: (a) on a total or consolidated basis; (b) on an on-budget

basis (which excludes the Social Security trust funds and the Postal Service

Fund); and (c) on a federal-funds basis (which excludes all trust funds).

Depending on the basis for the measurement, the estimate for FY2002

ranged from a deficit of $111 billion to a surplus of $90 billion.

(2)

The total deficit incorporates both on-budget and off-budget transactions,

but it does not include the finances of government-sponsored enterprises.

(3)

The Social Security trust funds ran an $8 billion deficit in FY1982, but

since then they have run a steadily increasing surplus (amounting to about

$100 billion by the end of the 1990s). With the Social Security trust funds

excluded, the reported deficit (after FY1982) is much higher because the

annual surplus in these funds does not offset the deficit in the rest of the

budget.

(4)

The federal funds deficit excludes all trust funds, whether they are onbudget or off-budget.

Source: Chart prepared by the Congressional Research Service based on

data in: Office of Management and Budget, Budget of the United States

Government, Fiscal Year 1999, Historical Tables, February 1998, Table 1.1,

pages 19-20, and Table 1.4, pages 25-26.

CRS-25

A narrower measure of the deficit—the on-budget deficit—is derived by

excluding the Social Security trust funds and the Postal Service Fund from the totals.

As noted, this exclusion is mandated by law, although Social Security and the Postal

Service Fund are counted in the budget in reports on the deficit. In 1983, Congress

enacted legislation revising the financing of the Social Security trust funds in order to

bring about increasing annual surpluses for the next several decades. As Exhibit 2-A

discusses, the Social Security trust funds ran a small deficit in FY1982; thereafter, the

trust funds have run steadily increasing surpluses (amounting to about $100 billion by

the end of the 1990s). Therefore, excluding Social Security from computations of the

deficit or surplus results in higher deficit or lower surplus figures. (The accumulated

balance credited to these funds is much higher than the annual surplus; it now

amounts to hundreds of billions of dollars and is projected to amount to trillions of

dollars in the early decades of the next century.)

A still narrower measure of the deficit—the federal funds deficit—would exclude

all trust funds from deficit computations. As is the case with Social Security,

the other trust funds in the net incur an annual surplus. Exhibit 2-A shows that the

federal funds deficit exceeded $300 billion in the early 1990s.

Regardless of the measure used, it is evident that the deficit was unusually high

for an extended period of time. This chronic deficit prompted Congress to enact the

Balanced Budget and Emergency Deficit Control Act of 1985. The original 1985

Balanced Budget Act established deficit targets for each year through FY1991, when

the budget was to be balanced, and a sequestration process under which budgetary

resources would be canceled automatically if the estimated deficit exceeded the

amount allowed under the act.

Even with the targets, the actual deficit for the covered years was above the

targeted level. The 1985 act, as originally framed, did not require that the actual

deficit be within the target; it required only that the deficit projected at the start of the

fiscal year be within that amount. Thus, any increase in the deficit during the fiscal

year, whether because of changes in economic conditions, policy changes, or other

factors, did not activate the sequestration process for that fiscal year.

Failure to achieve the deficit targets, and other problems, led Congress to revise

the process in the Budget Enforcement Act (BEA) of 1990. Sequestration

procedures were retained, but the fixed deficit targets were replaced by adjustable

ones (which expired at the end of FY1995), adjustable limits were imposed on

discretionary spending, and a pay-as-you-go (PAYGO) process was established for

revenues and direct spending. The discretionary spending limits and PAYGO process

were extended in 1993 (through FY1998) and again in 1997 (through FY2002).

Different categories of discretionary spending are used for different periods.

Under the 1997 changes, discretionary spending limits apply separately to defense and

nondefense spending for FY1998-1999 and to violent crime reduction spending for

FY1998-2000; for the remaining fiscal years, all discretionary spending is merged into

a single category. In 1998, as part of the Transportation Equity Act for the 21st

Century, Congress added separate categories for highway and mass transit spending.

CRS-26

The PAYGO process requires that legislation enacted during a session affecting

revenues or direct spending not increase the deficit or reduce the surplus. Legislation

reducing revenues or increasing direct spending must be fully offset (in the same or

other legislation) by revenue increases or reductions in direct spending.

Violations of the discretionary spending limits or the PAYGO requirement are

enforced by sequestration. Sequestration has not been used in recent years.

Budgeting for Discretionary and Direct Spending

The distinction drawn by the BEA between discretionary spending (which is

controlled through the annual appropriations process) and direct spending (which is

provided outside of the annual appropriations process) recognizes that the federal

government has somewhat different, though overlapping, means of dealing with these

two types of spending. One set of procedures pertains to discretionary spending,

another to direct spending.

Most of the direct spending subject to the PAYGO process under the BEA

involves entitlement programs; the rest consists of other forms of mandatory spending

provided through authorizing legislation and interest payments. In fact, entitlements

now account for about half of total federal spending (all direct spending, including net

interest, accounts for about two-thirds of the total). Their recent growth is shown in

Exhibit 2-B, which also shows the rise in the number of recipients of these payments.

The impressive feature of this trend is that most of the growth in spending and in the

number of recipients has been built into existing law; for the most part, it has not been

the result of new legislation. Indeed, the increase has occurred despite a number of

legislative enactments to curtail entitlement programs.

The procedures for discretionary and direct spending converge at two critical

points in federal budgeting: formulation of the President’s budget and formulation of

the congressional budget resolution. Both of these policy statements encompass

discretionary and direct spending. But as Box 2-A indicates, the procedures used in

budgeting for these types of expenditure differ greatly. The distinctions drawn in this

box have some notable exceptions. Some procedures associated with direct spending

are applied to particular types of discretionary programs, and vice versa.

Nevertheless, the generalizations presented here help to explain the complications of

the budget process and explain how decisions are made. The paragraphs below

correspond to the entries in Box 2-A.

(1) Budgetary Impact of Authorizing Legislation. An authorization for a

discretionary spending program is only a license to enact an appropriation. The

amount of budgetary resources available for spending is determined in annual

appropriations acts. For direct spending programs (principally entitlements), on the

other hand, the authorizing legislation either provides, or effectively mandates the

appropriation of, budget authority. In those entitlement programs that are subject to

annual appropriation, the Appropriations Committees have little or no discretion as

to the amounts they provide.

CRS-27

Exhibit 2-B.

Outlays for Mandatory Spending and Net Interest: FY1970-1996

(in billions of dollars)

1970

1980

1990

1996

75.5

(39%)

314.9

(53%)

752.9

(60%)

1,026.7

(66%)

Outlays for selected major

entitlements:

Social Security (OASDI)

Medicare

Medicaid

Unemployment assistance

Federal retirement

Food/nutrition assistance

30

6

3

3

6

1

118

31

14

17

27

13

245

96

41

17

52

21

344

171

92

23

68

34

Recipients of selected major

entitlements (in millions of persons):

Social Security (OASDI)

Food Stamps (and predecessors)

Medicare Hospital Insurance

Medicaid

26

9

20

15

35

19

28

22

39

19

33

25

43

26

38

34

Outlays for mandatory spending and

net interest (and as a percent of

total outlays)

(1)

This exhibit consists of three sections. The first section shows total outlays

for mandatory programs and net interest, and such spending as a

percentage of total federal outlays; the second part shows outlays for

selected major entitlement programs; and the third part shows trends in the

number of recipients of selected major entitlement programs.

(2)

Mandatory and net interest spending grew almost 15-fold between FY1970

and FY1996, claiming an increasingly greater share of the budget. As a

percentage of total federal outlays, mandatory and net interest spending

increased from 39% in FY1970 to 66% in FY1996.

(3)

Most mandatory or direct spending is for entitlements, which primarily

involve retirement and disability programs (such as Social Security) and

health programs (such as Medicare and Medicaid).

(4)

Because most entitlement spending stems from permanent law, spending

automatically increases over time as more people receive benefits.

Entitlement spending also increases because of inflation.

Source: Office of Management and Budget, Budget of the United States

Government, Fiscal Year 1999, Historical Tables, February 1998, Table 3.1

(pages 42-49), Table 8.1 (page 117), and Table 8.5 (pages 121-125).

CRS-28

Box 2-A.

Differences Between Discretionary and Direct Spending

Feature

Discretionary

Spending

Direct Spending

(1) Budgetary impact of

authorizing legislation.

No direct impact;

authorizes consideration

of appropriations bills.

Direct impact; provides

budgetary resources.

(2) Committees which

provide or mandate

budget authority.

Appropriations

Committees.

Authorizing committees.

(3) Frequency of

decision-making.

Annual.

Periodic.

(4) Means of enforcing

the budget resolution.

Section 302 allocations

and suballocations.

Reconciliation process.

(5) Budget Enforcement

Act controls.

Discretionary spending

limits.

Pay-as-you-go (PAYGO)

requirement.

(6) Basis of computing

budget impact.

Current year’s spending

and President’s request.

Baseline budget

projections.

(7) Typical decision

facing Congress.

How much to increase.

How much to decrease.

(8) Impact of economic

changes.

Indirect, discretionary.

Direct, often automatic.

(2) Committees Which Provide or Mandate Budget Authority. The

Appropriations Committees have jurisdiction and effective control over discretionary

spending programs, while authorizing committees effectively control direct spending

programs (including those funded in annual appropriations acts). In fact, committee

jurisdiction determines whether a program is classified as discretionary or direct

spending. All spending under the effective control of the Appropriations Committees

is discretionary; everything else is direct spending. Accordingly, when legislation

establishes a program as discretionary or direct spending, it not only determines the

character of spending but the locus of congressional committee control as well.

(3) Frequency of Decision-Making. Discretionary appropriations are, with

few exceptions, made annually for the current or next fiscal year. Direct spending

programs typically are established in permanent law that continues in effect until such

time as it is revised or terminated by another law. The fact that many entitlements

have annual appropriations does not diminish the permanence of the laws governing

the amounts spent. It should be noted, however, that some direct spending programs,

CRS-29

such as Medicare, have been subject to frequent legislative changes. The purpose of

such legislation has been to modify existing law, not to provide annual funding.

(4) Means of Enforcing the Budget Resolution. The procedures used by

Congress to enforce the policies set forth in the annual budget resolution differ

somewhat for discretionary and direct spending programs. For both types of

spending, Congress relies on allocations made under Section 302 of the 1974

Congressional Budget Act to ensure that spending legislation reported by House and

Senate committees conforms to established budget policies. But although this

procedure is effective in controlling new legislation—both annual appropriations

measures and new entitlement legislation—it is not an effective control on the

spending that results from existing laws. Hence, Congress relies on reconciliation

procedures to enforce budget policies with respect to existing spending and revenue

laws. Reconciliation is not currently applied to discretionary programs funded in

annual appropriations measures.

(5) Budget Enforcement Act Controls. Discretionary programs are subject

to the spending limits set in the BEA. Direct spending is not capped, but operates

under the PAYGO process, which requires that direct spending and revenue

legislation enacted for a fiscal year not cause the deficit to rise or the surplus to

decrease. The lack of caps is due to the fact that most direct spending programs are

open-ended, with spending determined by eligibility rules and payment formulas in

existing law rather than by new legislation.

(6) Basis of Computing Budget Impact. The baseline projections discussed

earlier are applied to both discretionary and direct spending programs, but they are

much more prominently used in scoring changes for the latter. In recommending

funds for discretionary programs, the Appropriations Committees rely almost

exclusively on two other benchmarks: the appropriation for the current fiscal year and

the amount requested by the President for the upcoming fiscal year. These

committees regularly compare the amount recommended by them to each of these

benchmarks, but make no mention in their reports of baseline budget projections. In

the case of direct spending programs, however, the reconciliation instructions, the

budgetary impact of legislative changes made in reconciliation bills, and other claimed

savings (or increases) are computed in terms of the baseline projections.

(7) Typical Decision Facing Congress. Because discretionary spending is

determined in annual appropriations acts, the typical decision facing Congress for such

spending is the amount by which it should be changed from the current year’s level.

Direct spending is determined by permanent law and often is affected by exogenous

factors, such as price changes, so that decisions typically deal with the amount of

increases or decreases from baseline levels. In direct spending programs, increases

often are built into law; in discretionary spending programs, they are not.

(8) Impact of Economic Changes. When economic conditions—such as the

inflation or unemployment rate—change, there often is an automatic, reciprocal

change in direct spending. A price rise triggers cost-of-living adjustments (COLAs)

in various payment programs, as does a rise in the number of persons filing

unemployment claims or participating in the Food Stamps program. Discretionary

CRS-30

spending, by contrast, is largely insulated from such changes. When prices rise, for

example, Congress can opt to appropriate more discretionary funds or it can compel

the affected agency to absorb the increased costs.

The Chain of Discretionary Spending Control

The many pieces and procedures of the federal budget process have been

introduced in this and the preceding chapter. At this point, it would be useful to put

some of the pieces together to see how they create a chain of spending controls as

part of an integrated budget process (see Box 2-B). The controls traced in the exhibit

pertain most fully to discretionary spending. A somewhat different set of controls

would apply to other parts of the budget, such as direct spending and revenues,

though there are some common features. The discussion that follows is keyed to the

accompanying exhibit.

Before explaining the individual controls, two points should be noted. First, each

control (other than the first one) is based on “may not be exceeded” rules. That is,

the amount available under one step may not normally exceed the amount provided

in the previous step. These rules establish a chain relationship among the various

parts of the process. But the “may not be exceeded” rules do not always mean that

the controls produce the desired results. For one thing, there can be various

adjustments or exceptions, as will be explained below. For another, enforcement of

the “may not be exceeded” rules often depends on estimates and assumptions which

may prove to be erroneous as events unfold. Third, enforcement of those rules

pertaining to Congress sometimes may be set aside. Despite these caveats, the

sequence of controls generally are quite effective in keeping discretionary spending

within established limits.

The second point to be noted is that the chain of controls engages the

participation of virtually all executive and legislative participants in federal budgeting.

Note, however, that the chain does not begin with the President’s budget because (as

discussed earlier) it is only a set of recommendations. Congress does not have to

accept these recommendations in its own budget actions. Note also that the chain

does not include authorizing legislation because these measures do not always

determine the amount that may be appropriated.

(1) Discretionary Spending Limits. The limits set dollar caps on budget

authority and outlays, subject to adjustment by OMB for certain purposes prescribed

by law, on broad categories of discretionary spending through FY2002. The

President’s budget recommendations and the congressional budget resolution adhere

to these limits. At times, however, the President and CBO do not agree on how these

limits are to be applied, and CBO sometimes finds that the President has

recommended spending in excess of the discretionary spending caps.

(2) Budget Resolution Aggregates. The aggregates in the budget resolution

may be lower than, or the same amount as, the discretionary spending limits.

Legislation considered by Congress may not violate the aggregate spending levels

(total budget authority and total outlays) in the budget resolution and, by implication,

may not exceed the discretionary spending limits.

CRS-31

Box 2-B.

The Chain of Discretionary Spending Control

Control or

Limitation

Method of Control

(1)

Discretionary

spending limits

Caps on discretionary budget authority and outlays,

adjusted periodically as prescribed by law; they apply to

defense and nondefense categories for FY1998-1999

and a total category for FY2000-2002; also, violent

crime reduction (FY1998-2000) and highway and mass

transit (FY1999-2003) categories are used.

(2)

Budget resolution

aggregates

Ceilings on total budget authority and outlays which

guide the enactment of legislation; budget resolution

aggregates do not exceed discretionary spending limits.

Allocations of total budget authority and outlays in the

budget resolution to committees with spending

jurisdiction; total amounts allocated to committees may

not exceed the budget resolution aggregates.

(3)

Section 302(a)

allocations

(4)

Section 302(b)

subdivisions

(5)

Appropriation

(6)

Apportionments

(7)

Allotments

The distribution of apportioned resources by a

department or agency among its subunits; the amount

allotted may not exceed the amount apportioned.

(8)

Obligations

Actions taken by federal agencies that incur financial

liabilities of the federal government; an agency may not

obligate in excess of the resources available to it.

(9)

Outlays

Payments made by the Treasury Department to

liquidate obligations lawfully incurred by agencies;

outlays may not exceed obligations.

A committee’s subdivision of its spending allocations by

subcommittee (or by program); subdivisions made by a

committee may not exceed its allocations.

The amount of budget authority or outlays resulting

from an appropriations act may not exceed the Section

302(b) subdivision to the relevant Appropriations

subcommittee.

The distribution of enacted appropriations (or other

budgetary resources) for a fiscal year by OMB to

projects or fiscal year quarters within an account; the

total amount apportioned to an account may not exceed

the amount appropriated.

CRS-32

(3) Section 302(a) Allocations. After a budget resolution is adopted, the total

budget authority and outlays in it are allocated among House and Senate committees

with jurisdiction over discretionary or direct spending. Discretionary spending is

under the jurisdiction of the Appropriations Committees. The total amounts allocated

to committees may not exceed the budget resolution aggregates.

(4) Section 302(b) Subdivisions. The Appropriations Committees are

required to subdivide their allocations among their subcommittees. (The other House

and Senate committees are not required to subdivide their allocations.) The

subdivisions made by the subcommittees may not exceed the amounts allocated to the

full committee. The spending in each annual appropriations measure is compared to

the relevant subdivision made under Section 302(b). In some cases, a point of order

can be raised against an appropriations measure that exceeds the relevant subdivision.

(5) Apportionments. After the appropriations measures have been enacted,

OMB apportions funds to agencies by quarters of the fiscal year or by project. The

amounts apportioned during the fiscal year may not be more than the amount

appropriated. However, “deficiency” apportionments are permitted in some instances.

(6) Allotments. Each department and agency allots the amount apportioned to

it among its subunits. The amount allotted may not be more than the amount

apportioned. Some agencies (generally small ones) skip the allotment procedure.

(7) Obligations. An agency is not permitted to obligate (except under very

limited exceptions) in excess of the resources available to it or for purposes other than

those for which the funds were provided. The amount available for obligation in an

account may include—in addition to new appropriations—transfers from other

accounts, funds carried over from prior years, and (when authorized by law) certain

offsetting receipts collected by the agency.

(8) Outlays. This is the final step in the chain of spending control. The

Treasury Department makes payments to liquidate obligations lawfully incurred by

agencies. Outlays may not exceed obligations.

Deficit Targets, Discretionary Spending Limits, and the

PAYGO Process

Establishment of the Sequestration Process. The 1985 Balanced

Budget Act established a series of declining annual deficit targets and created an

automatic spending-reduction process (known as sequestration) intended to ensure

that the deficit targets were adhered to even if Congress and the President failed to

reduce the deficit sufficiently through legislative action. The Budget Enforcement Act

(BEA) of 1990 made major changes in conjunction with the enactment of a five-year

deficit-reduction accord covering FY1991-1995. In 1993, the BEA procedures were

extended through FY1998 as part of another comprehensive budget agreement

between the President and Congress. Most recently, the procedures were extended

through FY2002, with modifications, by the Budget Enforcement Act (BEA) of 1997,

as part of a plan to balance the budget by that fiscal year.

CRS-33

Sequestration involves the issuance of a presidential order that permanently

cancels budgetary resources, except for revolving funds, special funds, trust funds,

and certain offsetting collections. As originally framed, the purpose of sequestration

was to achieve a required amount of outlay savings to reduce the estimated deficit to

target levels. Once sequestration is triggered by an executive determination, spending

reductions are made automatically; this process, therefore, is regarded by many as

providing a strong incentive for Congress and the President to reach agreement on

legislation that would avoid a sequester.

Changes Made by the Budget Enforcement Acts of 1990 and 1997.

From its inception in 1985 until its revision by the BEA in 1990, the process was tied

solely to the enforcement of fixed deficit targets. The BEA changed the sequestration

process substantially. First, it effectively eliminated the deficit targets as a factor in

budget enforcement. Second, the BEA established adjustable limits on discretionary

spending funded in the annual appropriations process. Third, the BEA created

pay-as-you-go (PAYGO) procedures to require that increases in direct spending (i.e.,

spending controlled outside of the annual appropriations process) or decreases in

revenues due to legislative action are offset so that there is no net increase in the

deficit or reduction of the surplus.

The BEA established new sequestration procedures to enforce the discretionary

spending limits and the pay-as-you-go requirements. To the extent that any

sequesters must be made, they occur on the same day (which must be within 15

calendar days after Congress adjourns to end a session); sequestration of this type is

referred to as end-of-session sequestration. Further, one or more additional

sequesters may occur subsequently in the fiscal year to eliminate any breach in the

discretionary spending limits; this type of sequestration is referred to as within-session

sequestration.

Previously, the surpluses of the Social Security trust funds were included in the

deficit estimates made under the 1985 Balanced Budget Act but Social Security

spending (except for administrative expenses) was exempt from sequestration. Under

the BEA, Social Security spending still is exempt from sequestration, but the trust

fund surpluses are excluded from the deficit estimates.

The BEA established adjustable limits on discretionary spending. For

FY1991-1993, separate limits were set for new budget authority and outlays for three

different categories—defense, international, and domestic. For FY 1994-1998, limits

on new budget authority and outlays were established for a single category—total

discretionary spending. In 1994, the Violent Crime Control and Law Enforcement

Act of 1994 (P.L. 103-322) established separate but parallel sequestration procedures

for violent crime reduction programs through FY2000.

In 1997, the BEA limits for FY1998 were revised and new limits were

established through FY2002 (see Exhibit 2-C). The limits are established for the

following categories of discretionary spending: defense and nondefense, for FY19981999; discretionary (a single category), for FY2000-2002; and violent crime

reduction, for FY1998-2000. In 1998, as part of the Transportation Equity Act for

CRS-34

the 21st Century (P.L. 105-178), Congress created separate categories for highway

and mass transit spending for FY1999-2003.

CRS-35

Exhibit 2-C.

Discretionary Spending Limits

(in millions of dollars)

1998

1999

2000

Non-Defense Discretionary Spending

Budget Authority

Outlays

253,506

285,686

283,737

289,297

285,937

290,057

Violent Crime Reduction Spending

Budget Authority

Outlays

5,500

4,833

5,800

4,953

4,500

5,554

Defense Discretionary Spending

Budget Authority

Outlays

269,000

267,124

271,570

266,635

275,429

269,072

Total Discretionary Spending

Budget Authority

Outlays

528,006

557,643

561,107

560,885

565,866

564,683

(1)

The discretionary spending limits apply to funds provided in annual

appropriations acts (except for mandatory programs, such as Medicaid,

funded in such acts). Limits are set on both new budget authority and

outlays; a breach of either type of limit would cause a sequester.

(2)

The discretionary spending limits are divided into categories, which vary

by fiscal year. The BEA of 1997 established the following categories for

the five-year period covering FY1998-2002 (FY2001 and FY2002 are not

shown here): defense and nondefense for FY1998-1999; total discretionary

(a single category) for FY2000-2002; and violent crime reduction for

FY1998-2000. In 1998, the Transportation Equity Act for the 21st Century

established highway and mass transit categories beginning with FY1999.

(3)

Periodically, the OMB director adjusts the discretionary spending limits

for factors set forth in the BEA, including such things as changes in

concepts and definitions, emergency spending, and the enactment of

legislation in specified categories (such as for continuing disability reviews

and international arrearages).

(4)

Discretionary spending limits also are included in the budget resolution

and are enforced in the Senate (but not the House) by a point of order.

Source: Office of Management and Budget, Budget of the United States

Government, Fiscal Year 1999, Analytical Perspectives, February 1998, Table

14-2, pages 261-263.

CRS-36

Under the BEA, the discretionary spending limits must be adjusted periodically

by the President for various factors, including (among others), changes in concepts

and definitions, a special outlay allowance (to accommodate estimating differences

between OMB and CBO), and the enactment of legislation providing emergency

funding and funding for the International Monetary Fund, international arrearages, an

earned income tax credit compliance initiative, and other specially designated

purposes.

Enforcement of the spending limits is accomplished through a special

sequestration process that is triggered automatically, at the end of a congressional

session, if the applicable spending limit is breached through the enactment of

legislation. If the enactment of legislation causing a breach in the spending limits for

the current year occurs during the last quarter of the fiscal year (i.e., between July 1

and September 30), the appropriate discretionary spending limits for the next fiscal

year are reduced by the amount of the breach.

Under the PAYGO process created by the BEA, legislation increasing direct

spending or decreasing revenues must be offset so that the deficit is not increased or

the surplus reduced (see Exhibit 2-D). The PAYGO process does not require any

offsetting action when the spending increase or revenue decrease is due to the

operation of existing law, such as an increase in the number of persons participating

in the Medicare program. Direct spending consists largely of spending for entitlement

programs. Most direct spending and revenue programs are established under

permanent law, so there is not necessarily any need for recurring legislative action on

them (and the PAYGO process does not require such action).

Enforcement of the PAYGO process also is accomplished through a special

sequestration procedure. The PAYGO process does not preclude Congress from

enacting legislation to increase direct spending; it only requires that the increase be

offset by reductions in other direct spending programs (which could include increases

in offsetting receipts), by increases in revenues, or by a combination of the two in

order to avoid a sequester. If a sequester under this process is required, it would have

to offset the amount of any net deficit increase (or surplus reduction) for the fiscal

year caused by the enactment of legislation in the current and prior sessions of

Congress, and would be applied to nonexempt direct spending programs.

Spending for Social Security benefits and current federal deposit insurance

commitments, as well as emergency direct spending and revenue legislation (so

designated by both the President and by Congress), is exempted completely from the

PAYGO sequestration process. All remaining direct spending programs are covered

by the PAYGO process to the extent that legislation affecting their spending levels is

counted in determining whether a net increase or decrease in the deficit has occurred

for a fiscal year. If a PAYGO sequester occurs, however, many direct spending

programs would be exempt from reduction.

In 1997, coverage of the PAYGO requirement was extended to legislation

enacted through FY2002; however, the PAYGO process remains in effect through

FY2006 to deal with the outyear effects of such measures. Consequently, a PAYGO

CRS-37

sequester could occur in FY2003-2006 based on legislation enacted before the end

of FY2002.

Report

No.

Act

No.

Act Title

1998

1999

2000

2001

2002

2003

Legislation enacted in the 1st Session—Reports issued after 11/21/97 (not reflected in Final Report):

417

418

PL 105-85

H.R. 1119

P.L. 105-89

H.R. 867

National Defense

Authorization Act for Fiscal

Year 1998:

OMB estimate

CBO estimate

Adoption and Safe Families

Act of 1997

OMB estimate

CBO estimate

-156

-159

3

9

10

17

15

19

-4

-13

-24

-35

-1

-1

.....

.....

3

.....

11

.....

40

.....

76

7

-153

-156

11

68

16

95

14

96

10

22

9

-68

* * * * *

Total, new balances

(excluding Final Sequester

Report FY1998 amount):

OMB estimate

CBO estimate

Exhibit 2-D.

The PAYGO Scorecard

(1)

The budgetary impact of all direct spending and revenue legislation

enacted beginning with FY1991 is recorded on a multi-year PAYGO

“scorecard.” This exhibit shows an excerpt from a table in the

sequestration preview report for FY1999, issued in February 1998 as part

of the President’s budget. By this time, more than 400 separate PAYGO

measures had been enacted.

(2)

From time to time, Congress and the President have reset the PAYGO

balances to zero as part of a major deficit-reduction act in order that the

sizeable savings from the act not be available to offset future spending

increases or revenue reductions. This happened with the Balanced Budget

Act of 1997, which was enacted several months before this sequestration

preview report was issued.

(3)

This exhibit shows that the National Defense Authorization Act for FY1998

contained modest amounts of direct spending, ranging in one year from

savings of $156 million to increases of $15 million in another.

(4)

Although the PAYGO scorecard exhibited here shows a balance of $11

million for FY1999, no sequester would be required under these estimates

(assuming they remained unchanged during the session). This is because,

under a “look back” feature, the balance for the current year (-$153

million for FY1998) is added to the balance for the budget year. In this

case, the FY1998 “credit” more than offsets the FY1999 amount.

CRS-38

Source: Office of Management and Budget, Budget of the United States

Government, Fiscal Year 1999, Analytical Perspectives, February 1998, Table

14-5, pages 268-269.

CRS-39

As originally framed, the 1985 Balanced Budget Act provided for the automatic

issuance of a sequestration order by the President upon the submission of a report by

the comptroller general identifying a deficit excess. This feature of the act was

invalidated by a Supreme Court ruling (Bowsher v. Synar) in 1986 on the ground that

the constitutional separation-of-powers doctrine was violated because the comptroller

general is a legislative branch official. Congress subsequently revised the process in

the Balanced Budget and Emergency Deficit Control Reaffirmation Act of 1987 by

placing the triggering function in the hands of the OMB director, an executive branch

official.

The Timing of Sequestration Actions. The multiple sequestration

procedures established by the BEA in 1990 remain automatic and are triggered by a

report from the OMB director. For sequestration purposes generally, there is only

one triggering report issued each year (just after the end of the session). Additionally,

OMB reports triggering a sequester for discretionary spending may be issued during

the following session if legislative developments so warrant (i.e., the enactment of

supplemental appropriations). The CBO director must provide advisory sequestration

reports, shortly before the OMB director’s reports are due.

The timetable for the sequestration process is set forth in Box 2-C.

Early in the session, OMB and CBO issue sequestration preview reports. The

reports provide estimates of the discretionary spending limits, with the adjustments

prescribed by law. Also, the reports provide estimates of any net deficit increase or

decrease caused by the enactment of direct spending or revenue legislation subject to

the PAYGO process. In August, OMB and CBO issue sequestration update reports

to reflect the impact of legislation enacted during the interim. Finally, OMB and CBO

issue sequestration reports shortly after Congress adjourns to end the session. The

end-of-session reports must reflect any pertinent legislation enacted since the update

reports were issued and must indicate the baseline amount of budgetary resources and

the amount and percentage of the reduction for each account subject to sequestration.

In preparing its update and final sequestration reports, OMB must use the

economic and technical assumptions that were used in the earlier preview report.

During the course of the session, OMB must provide Congress with cost estimates

of budgetary legislation shortly after its enactment, so that compliance with the

discretionary spending limits and PAYGO requirements can be monitored. The cost

estimates must be based on the economic and technical assumptions used in the

President’s most recent budget.

Several other reports are associated with the sequestration process. For

example, within-session sequestration reports may be issued by CBO and OMB (no

later than July 10 and July 15, respectively) if supplemental appropriations or other

discretionary spending is enacted that causes a breach in a discretionary spending

limit. Also, the comptroller general issues a compliance report, if requested by either

the House or Senate Budget Committee, evaluating whether the OMB and CBO

reports and the presidential order comply with the requirements of the act.

CRS-40

Box 2-C.

Sequestration Process Timetable

Deadline

Action to be completed

5 days before the President’s

budget submission

CBO issues sequestration preview report.

Date of the President’s

budget submission

OMB issues sequestration preview report

(as part of the President’s budget).

August 10

President notifies Congress if he intends to

exempt military personnel accounts.

August 15

CBO issues sequestration update report.

August 20

OMB issues sequestration update report.

10 days after end of session

CBO issues final sequestration report.

15 days after end of session

OMB issues final sequestration report;

President issues any required sequestration

order.

Any sequestration order issued by the President must follow the OMB

sequestration report strictly.

Sequestration procedures may be suspended in the event a declaration of war is

enacted or if Congress enacts a special joint resolution triggered by the issuance of a

CBO report indicating “low growth” in the economy. Also, there are several special

procedures under the act by which the final sequestration order for a fiscal year may

be modified or the implementation of the order affected.

Baseline Budget Projections

Most appropriations are for a definite amount and the budget authority is

provided for a single fiscal year. The main task is to estimate the outlays that will

derive in the next year and beyond from the budget authority provided in the

appropriations bill. CBO and the Appropriations Committees base these estimates on

outlay (or spendout) rates—the percentage of budget authority that is spent in each

year. These outlay rates vary by account and are based on historical records. For

example, if $1 billion is appropriated to an account which has a spendout rate of 80%

in the first fiscal year that funds become available, the outlay estimate for that fiscal

year will be $800 million; the remaining $200 million will become outlays in

subsequent years.

Scoring is much more complex in enforcing the statutory PAYGO requirement.

For one thing, unlike appropriations, revenue and direct spending legislation usually

is open-ended; it does not specify the amount by which revenue or spending will be

CRS-41

changed. For another, the impact of this type of legislation continues in future years.

In enforcing the PAYGO requirement, Congress must estimate the revenue gain or

loss for each of the next five years (and 10 years under the special Senate rule), and

it cannot do so simply by referring to the text of the legislation being scored. It must

also take into account the behavior of taxpayers, economic conditions, and other

factors that affect revenue collection.

Congress scores revenue and direct spending legislation by reference to baseline

projections issued by CBO, sometimes in cooperation with OMB. CBO works

closely with the Joint Committee on Taxation in preparing its baseline revenue

projections (see Box 5-B). The baseline is an extrapolation of future budget

conditions, typically for each of the next five years, based on the assumption that

current policies will continue in effect. The baseline projections incorporate

assumptions about future inflation and workload changes mandated by law. These

projections are made for the budget aggregates as well as for individual programs and

accounts.

When Congress considers revenue or direct spending legislation, CBO estimates

the amount of revenues or outlays that would ensue if the measure were enacted. It

then compares this amount with the baseline projection to score the legislation. Thus,

the score measures budgetary impact as the difference between the amount projected

under current policies and the amount estimated if the legislation were enacted. A

score is reported for each of the years and often for the sum of the years as well.

Exhibit 2-E provides a hypothetical example of using baseline projections to

score legislation. In this hypothetical case, legislation would be scored as reducing

spending against the baseline by $3.08 million the first year and $53.53 million over

the five years covered by the baseline.

The BEA makes OMB the “official scorer” of congressional budget actions. The

OMB score is authoritative in determining whether offsets or a sequester are required

under the PAYGO rules. However, Congress usually relies on the CBO score while

it is considering legislation. The OMB and CBO scores on legislation sometimes

differ.

In addition to enforcing PAYGO, baseline projections and scoring are used in

computing the amount of deficit reduction agreed to in budget summit negotiations

between the President and Congress and enacted in reconciliation acts.

Budgeting for Direct and Guaranteed Loans

The Federal Credit Reform Act of 1990 made fundamental changes in the

budgetary treatment of direct loans and guaranteed loans. The reform, which first

became effective for FY1992, shifted the accounting basis for federally provided or

guaranteed credit from the amount of cash flowing into or out of the Treasury to the

estimated subsidy cost of the loans. Credit reform entails complex procedures for

estimating these subsidy costs and new accounting mechanisms for recording various

loan transactions. The changes have had only a modest impact on budget totals but

a substantial impact on budgeting for particular loan programs.

CRS-42

Exhibit 2-E.

Hypothetical Baseline Projections and Policy Changes

(by fiscal year; in millions of dollars)

1999

2000

2001

2002

2003

Baseline projections

Initial projections

100.00

107.12

114.74

122.91

131.66

Assumptions

Inflation increase—4%

Workload increase—3%

Total increase

4.00

3.12

7.12

4.28

3.34

7.62

4.59

3.58

8.17

4.92

3.83

8.75

5.27

4.11

9.38

107.12

114.74

122.91

131.66

141.04

-2.00

-4.20

-6.63

-9.30

-12.23

-1.08

-3.08

-2.30

-6.50

-3.67

-10.30

-5.20

-14.50

-6.92

-19.15

Final projections

Policy changes

Cap inflation increase at 2%

Change laws to limit

workload rises to 2%

Total policy changes

(1)

This hypothetical example shows baseline projections of budget authority

for FY1999-2003, based on an assumed level of budget authority for the

current year (FY1998) of $100 billion.

(2)

The baseline includes adjustments for projected inflation (in this case,

inflation increases of 4% for each year covered by the baseline) and

mandatory workload increases of 3% (such as increases in the number of

Social Security recipients). These adjustments typically lead to projections

of rising spending in each subsequent year.

(3)

Policy changes represent changes from established policy (often involving

changes in law) and cause spending to vary from baseline levels. For

example, such changes might include setting inflation adjustments below

projected levels (in this case, a 2% cap) or modifying eligibility rules so as

to reduce workload increases (in this case, limiting them to 2%).

(4)

Note that spending reductions tend to grow in the outyears; in this

instance, the assumed policy changes save an estimated $3.08 million from

the projected baseline in the first year and $19.15 million in the fifth year.

In this hypothetical example, the cumulative savings over five years ($53.53

million) are more than half of the projected spending level for FY1998

($100 million).

Source: Table prepared by the Congressional Research Service.

CRS-43

The Pre-1992 Method of Budgeting for Loans. Prior to the Federal

Credit Reform Act, the budget accounted for both direct loans and loan guarantees

on a cash basis. Direct loans were recorded as outlays when funds were disbursed.

These outlays were netted against repayments of principal and interest on old loans,

so that net outlays were the difference between disbursements of new loans and

repayments of old ones. (However, the congressional budget resolution budgeted for

both direct and guaranteed loans on a gross basis, that is, total direct loan obligations

and total guaranteed loan commitments. The inclusion of loan volumes in the budget

resolution has not been altered by credit reform.) Loan guarantees were budgeted as

outlays only when payment was made pursuant to default or to some other

contingency requiring a federal disbursement. No outlays were recorded when the

commitment was made to issue the guarantee.

This system had a number of perceived shortcomings. First, it overstated the

cost of direct loans and understated the cost of loan guarantees, thereby encouraging

the federal government to favor the latter type of loan regardless of its true cost.

Second, because direct loans were recorded as outlays when the funds were

disbursed, no budget entry was made when, as often happened, the loans were

defaulted, forgiven, converted into grants, or forgotten. The budget had inadequate

means of recognizing these costs. Third, neither Congress nor executive agencies had

effective control of guaranteed loans. They did not have to set aside resources for

loan guarantees, even when defaults were probable; when defaults occurred, the

ensuing outlays were uncontrollable. Fourth, the treatment of direct and guaranteed

loans made it impossible to compare the cost of these types of transactions to one

another or to other budgetary actions, such as grants.

The Federal Credit Reform Act of 1990. In response to these perceived

shortcomings, the Federal Credit Reform Act established a system of budgeting for

the subsidized cost of loans. The credit reforms put direct and guaranteed loans on

an equal footing, provide a means of recognizing a change in the status of loans in

the budget, control guaranteed loans at the time the commitment is made, and provide

a basis for comparing direct and guaranteed loans with other uses of budgetary

resources. The 1990 act also established procedures for handling the unsubsidized

portion of loans as well as loans made prior to FY1992.

The new system requires that budget authority and outlays be budgeted for the

estimated subsidy cost of direct and guaranteed loans. This cost is defined in the 1990

act as “the estimated long-term cost to the government of a direct loan or a loan

guarantee, calculated on a net present value basis, excluding administrative costs ....”

Under the new system, Congress appropriates budget authority or provides

indefinite authority equal to the subsidy cost. This budget authority is placed in a

program account from which funds are disbursed to a financing account. The various

accounts maintained in credit budgeting are explained later in this section. Exhibit

2-F shows the relation between subsidy rates, budget authority, and loan levels for

certain direct loans using 1999 data.

CRS-44

Exhibit 2-F.

Relation of Subsidy Rates, Budget Authority, and Loan Levels

(budget authority and loan levels in millions of dollars)

1999 weighted

average

subsidy as a

percent of

disbursements

1999

subsidy

budget

authority

1999

estimated

loan levels

Agriculture:

Agricultural credit insurance

Rural community advancement

Rural electrification and telephone

Rural telephone bank

Distance learning/medical link

Rural housing insurance fund

Rural development loan fund

Rural economic development

P.L. 480 direct loans

8.5

14.43

2.27

2.65

0.12

16.45

50.35

25.22

86.79

56

153

36

10

*

197

18

4

89

666

1,014

1,475

175

150

1,197

35

15

102

Small Business Administration:

Disaster loans

Business loans

5.93

9.54

53

6

901

60

5.99

1,310

21,875

Agency and program

Total

* $500 thousand or less.

(1)

The Federal Credit Reform Act of 1990 established new controls on federal

credit activities, including direct and guaranteed loans; the act does not

apply to deposit insurance and other insurance programs.

(2)

Under the act, Congress appropriates budget authority equal to subsidy

costs. The subsidy determines the loan levels that can be supported

(although they sometimes are limited in statute by Congress; see Exhibit

7-O).

(3)

This exhibit shows data on the direct loan activities of selected agencies for

FY1999. In total, the President requested subsidy budget authority of

$1,310 million to support $21,875 million in loan levels for the year; the

weighted average subsidy for the total level of activity was 5.99 percent.

(4)

The rate of subsidy (and associated budget authority and loan levels)

varies widely for different programs, even within the same agency.

Subsidies for Agriculture Department programs range from less than 1%

to nearly 87%.

Source: Office of Management and Budget, Budget of the United States

Government, Fiscal Year 1999, Analytical Perspectives, February 1998, Table

8-3, page 188.

CRS-45

Estimating the Subsidy Cost. Estimating the subsidy cost is a complex

process that must be done for each credit program. The process is designed to

separate the subsidized portion of the loan from the unsubsidized portion. Budget

authority and outlays are provided only for the subsidized portion, which is the

subsidy cost. This cost typically is less than the face value of a direct loan because all

or part of most loans is repaid. It is also less than the amount guaranteed because

only some such loans default. The unsubsidized portion of direct loans must be

financed, but it is not included in the subsidy cost; hence, no budget authority is

appropriated for it.

The subsidized portion of a direct loan is the amount, discounted to present

value, that is not repaid. For guaranteed loans, it is the portion, also discounted to

present value, on which the federal government is estimated to incur payment in the

future. In discounting to present value, a factor equal to the interest rate paid by the

Treasury Department is applied to all estimated cash flows associated with the loan.

When discounted, a payment made by the federal government in the first year of the

loan has a higher value, and therefore a higher subsidy cost, than an equivalent

payment made in a later year. Furthermore, present value is computed on a net basis,

so that estimated inflows are discounted to present value and then subtracted from

discounted outflows.

Direct Loans. Before a direct loan may be obligated, Congress must provide

budget authority in an annual appropriations act or other measure to cover the subsidy

cost. The amount of budget authority required for a given volume of loans depends

on the subsidy rate, that is, subsidy outlays as a percentage of loan disbursements.

For example, if the subsidy rate is 25 percent, budget authority of $10 million would

support $40 million of loan obligations. Exhibit 2-G shows how the subsidy rate is

derived from estimated cash flows.

The subsidy rate is calculated for each direct loan program. Many

characteristics, some related to the terms of the loans, others to the status of the

borrowers, go into calculation of the subsidy rate. These include the interest and fees

charged borrowers, assumed defaults and recoveries on defaults, and the maturity of

the loan.

Guaranteed Loans. The procedures used for estimating subsidy costs of

guaranteed loans are similar to those used for direct loans, but some of the factors

differ. The subsidy cost of guaranteed loans is the difference between the present

value of the federal government’s cash disbursements for defaults and other payments,

and the present value of the estimated cash inflows from fees, recoveries, and other

collections. In other words, the subsidy cost is the portion of estimated payments by

the federal government that is not expected to be offset by collections, in present

value terms. As with direct loans, Congress must provide sufficient budget authority

to permit the federal government to make loan guarantee commitments.

CRS-46

Exhibit 2-G.

Calculation of Subsidy Cost

Credit Subsidy Calculation for a Hypothetical Direct Loan

Obligated in FY 1999

(by fiscal year; in millions of dollars)

1999

2000

2001

2002

2003

2004

Sum

Obligated

Disbursed

Repayments:

Interest

Principal

Total

1,000

1,000

.....

.....

.....

.....

.....

.....

.....

.....

.....

.....

1,000

1,000

.....

.....

0

-50

.....

-50

-50

.....

-50

-50

.....

-50

-50

.....

-50

-50

-1,000

-1,050

-250

-1,000

-1,250

Net cash flows

1,000

-50

-50

-50

-50

-1,050

-250

Discount rate

(assumed rate on 5year Treasury

securities)

7.6%

-46

-43

-40

-37

-728

106

Present value of

cash flows

1,000

(1)

This hypothetical example involves a $1.0 billion direct loan obligated and

disbursed in FY1999. The example assumes that: (a) the loan is disbursed

soon after obligation; (b) the borrower pays interest annually at five

percent, well below the Treasury’s cost of money; (c) the principal is paid

in full at the end of five years (no default); and (d) for simplicity, all cash

flows take place at the end of the year.

(2)

An appropriation of subsidy costs is made for the fiscal year in which the

loan is obligated, even if some or all of the funds will be outlayed in

subsequent years. Note that after the first year the actual net cash flows

are different from the present value of these cash flows.

(3)

A subsidy appropriation of $106 million is needed for FY1999; this amount

is derived by totaling the present value of cash flows for all fiscal years

during the life of the loan (FY1999-2004). Outlays of $106 million also

are scored for FY1999.

(4)

The subsidy rate is calculated by dividing the sum of the present value of

cash flows by total loan obligations, yielding in this instance a subsidy rate

of 10.6 percent. On the basis of this calculation, an appropriation of $106

million would permit direct loan obligations of $1.0 billion.

Source: Table prepared by the Congressional Budget Office in 1991 and

updated by the Congressional Research Service in 1998.

CRS-47

Recording Cash Flows in the Budget. Credit reform necessitates the

establishment of separate budgetary accounts for the subsidized and unsubsidized

portions of loans, and for the cash flows of both pre-reform loans and those made

after the new procedures took effect. Three types of accounts have been established

to accommodate these needs: (1) program accounts for the subsidized portion of new

loans and administrative expenses; (2) financing accounts for the unsubsidized portion

and for all cash flows, except administrative expenses, during the life of new loans;

and (3) liquidating accounts for the cash flows of pre-reform loans. Box 2-D lists the

budgetary status of these accounts.

Program Account. This is the type of account into which an appropriation is

provided to cover the subsidy cost of a direct or guaranteed loan. An amount

typically is also appropriated to this account for administrative expenses, though these

expenses are not included in the computation of subsidy costs. Direct and guaranteed

loans are segregated within these accounts. The program account does not receive

any funds for the unsubsidized portion of a direct or guaranteed loan.

Financing Account. This type of account is non-budgetary; its cash inflows

and outflows are not included in the budget totals. These flows are accounted for as

a “means of financing,” not as budget receipts or outlays. The financing account

collects the subsidy cost appropriation from the program account and borrows the

unsubsidized portion of the loan from the Treasury Department, as needed, to make

loan disbursements. Payments of fees, interest, principal, and other charges are placed

in the financing account which repays, with interest, money borrowed from the

Treasury Department. Separate financing accounts are maintained (within the same

program) for direct and guaranteed loans. In the case of guaranteed loans, the

financing account serves as a reserve for defaults. It lends these reserves, with

interest, to the Treasury Department.

Liquidating Account. This kind of account handles the cash flows for loans

made prior to FY1992. Because these loans were made under pre-reform procedures,

they are budgeted on a cash basis. The liquidating account collects payments of

principal, interest, and fees, and pays default claims and interest subsidies. The

liquidating account does not make new loan disbursements or commitments.

CRS-48

Box 2-D.

Credit Reform Account Structure

Liquidating

Account

Program

Account

Financing

Account(s)

Mandatory scoring.

Discretionary scoring for

discretionary programs and

appropriations actions. Pay-asyou-go scoring for entitlements if

changes are enacted by

authorizing committees.

Scored “below the line” as

a means of financing.

Scored on a cash basis.

Scored on a credit reform

(subsidy) basis.

Cash flows scored as a

means of financing.

“Old loan activity”

(permanent, indefinite

BA).

New subsidies and admin.

expenses (current, definite BA for

discretionary programs; current,

indefinite BA for mandatory

programs).

Cash flows from new

credit activity (scored as

means of financing; no

appropriations required).

For loans obligated or

committed prior to

FY1992:

• collects repayments,

interest fees;

• repays any borrowing

with interest;

• pays default claims

and interest subsidies;

and

• if loans are modified

or restructured, a

subsidy is scored as a

new loan.

For loans obligated or committed

in FY1992 and beyond:

• displays full cost of program in

budget;

• receives appropriation of

subsidy and administrative

expenses;

• pays subsidy outlays to

financing accounts; and

• adjustments to original subsidy

appropriations provided as

permanent, indefinite

appropriations, but scored against

discretionary caps.

For loans obligated or

committed in FY1992 and

beyond:

Direct Loan Financing

Account

• collects subsidy from

program account;

• borrows unsubsidized

portion of loan from

Treasury;

• collects repayments,

interest, fees; and

• repays borrowing to

Treasury with interest.

Guaranteed Loan

Financing Account

• collects subsidy from

program account;

• collects fees from

borrowers;

• acts as a reserve for

defaults;

• receives interest on

reserves from Treasury;

and

• pays default claims and

interest subsidies.

Chapter 3. The President’s Budget

The President’s budget, officially referred to as the Budget of the United States

Government, is required by law to be submitted to Congress early in the legislative

session, no later than the first Monday in February. The budget consists of estimates

of spending, revenues, borrowing, and debt; policy and legislative recommendations;

detailed estimates of the financial operations of federal agencies and programs; data

on the actual and projected performance of the economy; and other information

supporting the President’s recommendations.

The President’s budget is only a request to Congress. Congress is not required

to adopt the President’s recommendations; in fact, one of the purposes of the budget

resolution process described in Chapter 4 is to enhance Congress’s independence from

presidential influence. Nevertheless, the power to formulate and submit the budget

is a vital tool in the President’s direction of the executive branch and of national

policy. The President’s proposals often influence congressional revenue and spending

decisions, though the extent of the influence varies from year to year and depends

more on political and fiscal conditions than on the legal status of the budget.

The Constitution does not provide for a budget, nor does it require the President

to make recommendations concerning the revenues and spending of the federal

government. Until 1921, the federal government operated without a comprehensive

presidential budget process. Instead, agencies submitted estimates to the secretary

of the Treasury (who compiled them in a Book of Estimates each year). The

President was not formally involved in the process, though some Presidents actively

intervened to shape financial policy.

The Budget and Accounting Act of 1921 provides for a national budget system.

Its basic requirement is that the President prepare and submit a budget to Congress

each year. The 1921 act established the Bureau of the Budget (now the Office of

Management and Budget) to assist the President in preparing and implementing the

executive budget. Although it has been amended many times, this statute provides the

legal basis for the presidential budget, prescribes much of its content, and defines the

roles of the President and the agencies in the process.

The three key advisers to the President on economic and budgetary matters,

sometimes referred to as the “Troika,” are the director of OMB, the secretary of the

Treasury, and the chairman of the Council of Economic Advisers. Presidents

sometimes have accorded significant influence over economic and budgetary matters

to an informal group of advisers, including such persons as the White House chief of

staff and special presidential assistants, in addition to members of the Troika.

In the executive branch, OMB is the hub of the federal budget process. Its chief

mission is to assist the President by overseeing the preparation of the budget and its

submission to Congress, and to supervise its administration and implementation by the

CRS-50

executive agencies. In doing so, OMB helps set funding priorities, assesses

competing funding demands among agencies, and evaluates the effectiveness of

agency programs. OMB seeks to ensure that the legislative proposals and

congressional testimony of agencies, as well as agency reports and rules, are

consistent with the President’s budget recommendations and administration policies.

During the consideration of budgetary legislation, OMB maintains liaison with the

House and Senate, communicating the President’s position on budgetary issues

through devices such as Statements of Administration Policy (see Exhibit 7-E). In

addition to its budgetary mission, OMB oversees and coordinates the administration’s

procurement, financial management, information, and regulatory policies. In OMB,

the budget and review functions report directly to the director and deputy director,

but the management and regulatory functions usually report to the deputy director for

management.

Formulation and Content of the President’s Budget

Preparation of the President’s budget typically begins in the spring (or earlier)

each year, at least nine months before the budget is submitted to Congress, about 17

months before the start of the fiscal year to which it pertains, and about 29 months

before the close of that fiscal year. The early stages of budget preparation occur in

federal agencies. When they begin work on the budget for a fiscal year, agencies

already are implementing the budget for the fiscal year in progress and awaiting final

appropriations actions and other legislative decisions for the fiscal year after that. The

long lead times and the fact that appropriations have not yet been made for the next

year mean that the budget is prepared with a great deal of uncertainty about economic

conditions, presidential policies, and congressional actions.

At one time, OMB had a formal process, known as the spring preview, for

developing presidential budget guidelines for the next fiscal year. During the 1980s,

however, the formal process withered away (possibly because of the preoccupation

of OMB and the White House with congressional budget activity). Nowadays,

however, agencies usually are at work preparing their own budgets before presidential

policies and detailed technical instructions are communicated to them.

Box 3-A displays the budget preparation schedule in one federal agency. This

example sets forth excerpts from a more detailed schedule used by the Department of

Education (the complete schedule may be obtained on the Internet at:

http://www.ed.gov/offices/OUS/budcal98.html). Note that the process begins at the

lower levels of the agency and moves progressively to higher levels until it is

consolidated into an agency-wide budget for submission to OMB. This “bottom up”

approach is typical of federal agencies, though some have elaborate planning

processes which allow for objectives established at the top to guide budget

preparation.

Bottom-up budgeting is a time-consuming process. It begins almost a full year

before the President submits his budget to Congress, and a year and a half before the

beginning of the fiscal year to which it pertains. When the Education Department

started work on the FY2000 budget, it was barely half way through FY1998 and

Congress had just begun work on the FY1999 budget.

CRS-51

Box 3-A.

An Illustration of the Stages in Budget Formulation:

The Department of Education

Calendar

date

Action

Explanation

Spring

Allowance letter issued by

OMB to Department.

OMB specifies budget authority and

outlay ceilings for budget year and

outyears.

May

OUS (Office of the Under

Secretary) staff begin to

develop budget and

legislative

recommendations.

Assistant secretaries are asked to

submit their budget and legislative

priorities to the under secretary.

June

OUS submits preliminary

budget recommendations

and the priorities of the

assistant secretaries to the

secretary.

Secretary makes preliminary decisions

on new initiatives and total dollar

levels and requests issue papers.

July

OUS staff develop issue

papers and submit final

budget recommendations to

the secretary, along with the

assistant secretaries’

recommendations.

Formal briefings are held for the

secretary involving OUS, assistant

secretaries, and other senior staff

officers. Secretary makes final

decisions.

September

Budget request transmitted

to OMB.

Department submits budget request to

OMB in early September, along with a

transmittal letter from the secretary

covering highlights and major issues.

October

Department responds to

detailed questions

concerning budget

submission and revises

request.

OMB staff request answers to analytic

questions to enable them to make

recommendations to the director of

OMB; revisions take into account

current legislative action by Congress.

NovemberDecember

OMB passback and appeals

of passback.

OMB passback contains not only

funding decisions, but program policy

changes, legislative direction, and

personnel ceilings. Although the

OMB passback represents final

decisions, agencies can appeal levels

to the budget examiners, the director,

or the President, depending on the

nature of the issue.

January

Preparation of President’s

budget materials.

Department prepares a variety of

materials to explain and justify

budget.

February

President submits his budget

to Congress.

By law, it must be submitted by the

first Monday in February.

CRS-52

The Government Performance and Results Act (GPRA) requires federal agencies

to submit strategic plans and performance plans to the OMB director. Strategic plans,

which initially had to be submitted no later than September 30, 1997, lay out the longterm goals and objectives of the agencies; they must cover at least five years and must

be revised periodically. Performance plans are submitted annually as part of the

budget process, beginning with the FY1999 budget cycle. Strategic and performance

plans are supposed to be integrated with and guide budget preparation, but it is too

early to assess whether this has been achieved. Procedures under GPRA are

discussed more fully in Chapter 8.

As agencies formulate their budgets, they maintain continuing contact with the

OMB examiners assigned to them. These contacts provide agencies with guidance

in preparing their budgets and also enable them to alert OMB to any needs or

problems that may loom ahead.

Midway during their work on

Box 3-B.

the budget, agencies receive

OMB Publications

Circular A-11 from OMB,

OMB communicates its instructions and

which contains detailed

guidelines on budget preparation and other

instructions and schedules for

activities to agencies by means of the following

submission of budget estimates.

types of publications:

OMB communicates its

! Circulars, which are expected to have a

instructions and guidelines on

continuing effect of two years or more;

budget preparation and other

! Bulletins, which contain guidance of a

activities to agencies through

more transitory nature that would

circulars, bulletins, and other

normally expire after one or two years;

publications (see Box 3-B).

! Regulations and Paperwork, reports,

updated daily, that list the regulations

Agency requests are

and paperwork under OMB review;

submitted to OMB in late

summer or early fall; these are

! Financial Management policies and

reviewed by OMB staff in

Grants Management circulars and

consultation with the President

related documents;

and his aides. The review has

! Federal Register Submissions, which

several distinct stages: (1) staff

include copies of proposed and final rule

review, during which OMB staff

submissions to the Federal Register.

prepare issue papers, consult

with agency officials, and

prepare recommendations; (2) director’s review, at which major issues are discussed,

OMB examiners defend their recommendations, and the OMB director makes budget

decisions; (3) passback, at which agencies are notified of the director’s decisions and

have an opportunity to appeal to OMB if they disagree with aspects of the passback;

(4) appeals, which are first taken to OMB, but if agreement cannot be reached, may

be taken to the President; and (5) final decisions, which are made by the President,

pursuant to which agencies must promptly revise their budget submissions to bring

them into accord with these decisions. The budget is then printed for distribution to

Congress and the public.

CRS-53

The 1921 Budget and

Accounting Act bars agencies

from submitting their budget

requests directly to Congress

(see Box 3-C). Moreover,

OMB regulations in Circular A10 provide for confidentiality in

all budget requests and

recommendations prior to the

transmittal of the President’s

budget to Congress. However,

it is quite common for internal

budget documents to become

public while the budget is still

being formulated.

Box 3-C.

Confidentiality of Budgetary Information

Budget and Accounting Act of 1921

(31 U.S.C. 1108(e))

Except as provided in subsection (f) of this

section, an officer or employee of an

agency...may submit to Congress or a

committee of Congress an appropriations

estimate or request, a request for an increase in

that estimate or request, or a recommendation

on meeting the financial needs of the

Government only when requested by either

House of Congress.

The format and content of the budget are partly determined by law, but the 1921

Budget and Accounting Act authorizes the President to set forth the budget “in such

form and detail” as he may determine. Over the years, there has been an increase in

the number of volumes making up the budget submission, as well as in the types of

information and explanatory material presented. (During a 4-year period covering

FY1991-1994, however, the budget was presented as a single document.) The

different volumes used in recent years are shown in Box 3-D.

Much of the budget is an estimate of requirements under existing law rather than

a request for congressional action. About one-third of all spending in the budget is

discretionary; Congress must act each year on appropriations acts providing

discretionary budget authority. The remainder of the spending, however, is

mandatory; it occurs automatically each year (with some exceptions) under permanent

law. Similarly, most of the revenue for a fiscal year is generated under permanent

law. The President usually proposes some changes in mandatory spending and

revenue laws in his budget.

The President is required to submit a budget update (reflecting changed

economic conditions, congressional actions, and other factors), referred to as the

Mid-Session Review, by July 15 each year. The President may revise his

recommendations any time during the year. Changes requested before Congress has

acted are submitted as budget amendments; requests made for additional funds after

Congress has acted on the particular appropriations measures are submitted as

supplemental requests. The Mid-Session Review and messages transmitting budget

amendments, supplemental requests, and impoundment proposals are routinely printed

as House documents.

The President and his budget office have an important but limited role once the

budget is submitted to Congress. OMB officials and other presidential advisors

appear before congressional committees to discuss overall policy and economic issues,

but they generally leave formal discussions of specific programs to the affected

agencies. Agencies thus bear the principal responsibility for defending the President’s

program recommendations at congressional hearings.

Agencies are

CRS-54

Box 3-D.

Volumes in the President’s Annual Budget Submission

In most years, the President submits his annual budget to Congress as

a multi-volume set. In recent years, the major volumes that make up this

set have included:

! the Budget (referred to officially as the Budget of the United States

Government), which includes the budget message of the President,

detailed presentations on the President’s major budgetary initiatives,

a descriptive discussion of federal programs organized by budget

function, and summary tables;

! the Appendix, which sets forth detailed financial information on

individual programs and appropriation accounts;

! the Analytical Perspectives, which contains analyses that are

designed to highlight specified subject areas or provide other

significant presentations of budget data that place the budget in

perspective, such as current services estimates, economic and

accounting analyses, and the Budget Enforcement Act preview

report;

! the Historical Tables, which provide data on budget receipts,

outlays, surpluses or deficits, federal debt, and federal employment

covering an extended time period—in most cases beginning in

FY1940 or earlier; and

! Budget Information for States, which provides proposed state-bystate obligations for the major federal formula grant programs to

state and local governments.

In addition, the budget submission is supplemented by A Citizen’s

Guide to the Federal Budget, Budget System and Concepts, and several

technical reports.

The President transmits his annual Economic Report of the President

to Congress shortly after his budget submission. This document includes

the report of the Council of Economic Advisers.

Later in the year, the President submits the Mid-Session Review of

his budget.

supposed to justify the President’s recommendations, not their own, and OMB

maintains an elaborate legislative clearance process to ensure that agency budget

justifications, testimony, and other submissions are consistent with presidential policy.

But the fragmented structure of the appropriations process and interactions

at congressional hearings sometimes enable agencies to exert independence from the

White House’s position on particular issues.

Independence from the President’s recommendations also is fostered by CBO

review of the Administration’s proposals. The CBO review, which generally is

published about one month after the President’s budget is submitted to Congress,

includes its reestimates of the President’s budget, based on its own economic and

CRS-55

technical assumptions. The CBO review includes a summary, backed up by detailed

analyses of major programs and policies. As Exhibit 3-A reveals, CBO sometimes

finds that, if the President’s budget proposals were put into effect, they would yield

a higher deficit or lower surplus than the Administration had projected. Although the

differences between the President’s estimates and CBO’s estimates often seem to be

large, they usually amount to less than one-half percent of total revenue and spending.

In recent years, several factors have given the President more continuing

involvement in congressional action on the budget. One factor is the Budget

Enforcement Act, which requires the President to notify Congress whether the

discretionary spending limits and pay-as-you-go requirements are being met. (This

process is discussed in Chapter 2.) Another factor is the trend toward budget

summits at which an overall agreement is negotiated by presidential aides and

congressional leaders. Finally, with agencies and Congress acting more independently

on budget matters than in the past, the President and his aides must closely monitor

developments in Congress.

The Economic Forecast and Projections

Because of its size—outlays total one-fifth of GDP—the budget has a significant

impact on the economy. As stated in the opening chapter, the relationship between

the budget and the economy is bilateral. Not only does budget policy affect the

economy, economic performance strongly influences budget outcomes. In making the

budget, the President must consider the condition of the economy and the potential

effects of federal policies on prices, employment levels, the output of goods and

services, and other economic indicators.

The President’s budget contains a forecast of economic conditions for the next

two calendar years (see Exhibit 3-B). It also projects assumed economic

performance for a longer period. There is a marked tendency for these forecasts and

assumptions to project steady improvement in the years ahead. Shortly after the

budget is issued, the President submits an annual Economic Report to Congress. This

document also contains the annual report of the President’s Council of Economic

Advisers.

Congress is not bound by the President’s economic projections. It usually makes

its own economic forecast, relying on data and analyses from CBO, in formulating the

budget resolution for the next fiscal year. Congress and the President sometimes

coordinate their economic forecasts, however, especially when they engage in a

budget summit.

The budget is highly sensitive to the level of economic growth, price changes,

interest rates, and unemployment (see Exhibit 1-C). Deviations between actual and

projected economic conditions will cause receipts and outlays to vary from budgeted

amounts. Revenues are especially sensitive to the level of economic activity; outlays

are directly affected by interest rates.

CRS-56

Exhibit 3-A.

CBO Reestimates of the President’s Budget

(by fiscal year, in billions of dollars)

Deficit (-) or surpl

This text is long and has been trimmed here. Open the source document for the complete record.