Public Economics Dr.

Sauer

Chapter 4: US Budget I. US Budget Data Textbook Figure 4-1: Federal Taxes, Spending, and the Deficit

________________________________________________________________________________ Textbook Figure 4-2: Actual, Standardized, and Cyclically Adjusted US Budget Deficits

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Textbook Figure 4-3: CBOs Projected vs Actual Surplus/Deficit

_________________________________________________________________________________ II. A little history 1921: Budget and Accounting Act - President has overall responsibility for budget planning - created Bureau of the Budget which expanded the Presidents control over budgetary information - renamed Office of Management and Budget in 1971 Congress lacked authority to - establish and enforce budgetary priorities - coordinate actions on spending and revenue legislation - develop budgetary and economic information independently of the executive branch 1974: conflict between the legislative and executive branches reaches a high point - fundamental disagreement between the President and the Congress over control of budgetary and spending priorities President Richard Nixon used impoundments to stop Congress from funding programs that Nixon didnt like. Many in Congress also didnt like the executive branchs control of budgetary information. - questioned the objectivity The dispute led to enactment of the Congressional Budget and Impoundment Control Act of 1974. During the past half century, the Congress has witnessed a steady erosion of its control over the budget. In contrast, we have seen a consistent escalation of executive influence over budget and fiscal policies. The Congressional Budget and Impoundment Control Act of 1974 will give us the means to reverse that erosion.... [It] calls for the establishment of a Congressional Budget OfficeCBOas an agency of the Congress. The CBO... will provide Congress with the kind of 2

information and analysis it needs to work on an equal footing with the executive branch. Senator Edmund Muskie, June 21, 1974

The law established - procedures for controlling presidential impoundments of funds - formal process through which the Congress could develop, coordinate, and enforce its own budgetary priorities - the House and Senate Budget Committees to oversee execution of the budget process - the Congressional Budget Office to provide the budget committees and the Congress with an independent, nonpartisan source of information

III. The Role of the Congressional Budget Office CBOs chief responsibility is to help the budget committees with the Congressional budget resolution and its enforcement. The budget resolution sets - total levels of spending - total levels of revenues - broad spending priorities The budget resolution is a concurrent resolution - approved by the House and Senate - not signed by the President - does not have the force of law - provides no taxing or spending authority It is more like a blueprint to guide Congressional action on spending and revenue legislation within the jurisdiction of other committees. Other duties of the CBO are: 1. It provides budgetary information for Congress. - the Appropriations, Ways and Means, and Finance Committees - other Congressional committees - individual members of Congress 2. It must issue annual reports. - helps Congress identify authorizing legislation that should be in place before it considers the 12 regular appropriation bills 3. It must identify federal mandates contained in legislation and to estimate the cost that they would impose. 4. It must produce reports at Congressional request that analyze specific policy and program issues that are significant for the budget. 3

The CBO is transparent and non-partisan. - disclose assumptions - disclose methods - analyses do not present policy recommendations It has a decent reputation for professionalism and credibility. - critics say too Keynesian IV. Details of CBO Products A. Baseline Budget and Economic Projections - annual report on the budget and economic outlook for the next 10 years - issued in January and updated in the summer - gives Congress a baseline against which to measure the effects of proposed changes in spending and tax laws - constructed according to rules set forth in law B. Economic Forecasts Used for: - constructing the baseline budget projections - Congressional budget resolution Forecasts cover: - 18 months to 24 months - major economic variables The CBO does not attempt to forecast fluctuations in the economy more than 2 years ahead. - longer-term projections are based on trends in the labor force, productivity, and saving C. Analysis of the Presidents Budget CBO estimates the budgetary impact of the Presidents proposals using its own methodology. - independent re-estimate D. Cost Estimates for Bills CBO must produce a cost estimate for every bill approved by a Congressional committee. - committees also ask for cost estimates at various points in the legislative process The estimates show how the legislation would affect spending or revenues over the next five years or more. For most tax legislation, CBO uses estimates provided by the Joint Committee on Taxation. E. Scorekeeping The CBO keeps track of all spending and revenue legislation considered each year. - Congress needs to act within the levels set by the budget resolution The scorekeeping system keeps track of all bills affecting the budget from the time they are reported out of committee to the time they are enacted into law. F. Federal Mandates The Unfunded Mandates Reform Act of 1995 4

- requires CBO to provide committees with a statement regarding the costs of federal mandates in reported legislation - assess the impact of federal laws on state and local governments and the private sector - impose an enforceable duty - reduce or eliminate the amount of funding to cover the costs of existing mandates G. Budget Options CBO periodically releases reports discussing options for the budget. - cut spending or lower revenues - implications of certain policy choices e.g. paying down federal debt slowing growth of Social Security The report does not make recommendations. - discuss pros and cons of each option H. Monthly Budget Review CBO issues an analysis of federal spending and revenue totals for the - previous month - current month - fiscal year to date I. Unauthorized or Expiring Authorizations CBO issues a report that shows the total amount that the Congress has provided in appropriation acts for programs whose authorization has expired or is about to expire. - January J. Reports Under the Troubled Asset Relief Act of 2008 Emergency Economic Stabilization Act of 2008 - requires CBO to provide semiannual reports that assess the status of TARP V. US Federal Government Budgets FY 2012 Budget

whitehouse.gov/omb/budget

FY 2012 Proposed Budget

From Table S.4

(billions $)

whitehouse.gov/omb/budget

__________________________________________________________________________________ A budget doesnt reflect actual spending exactly.

Fiscal Year 2010: Budgeted vs. Actual (billions $) US Federal Government Spending Budget Actual Pensions 746 749.6 Health Care 846.8 820.7 Education 149.5 140.4 Defense 871.9 847.2 Welfare 427.7 502.3 Protection 55.7 53.4 Transportation 106.9 92.0 General Government 25.6 24.7 Other Spending 225.2 29.7 Interest 135.9 196.2 Total Spending 3,591.1 3,456.2 US Federal Government Revenue Budget Income Taxes 1,230.4 Social Insurance Taxes 940.4 Ad-valorem Taxes 134.4 Business and Other Revenue 27.5 Total Revenue 2,332.6

Actual 1,090.0 864.8 132.1 75.8 2,162.7

Federal Deficit Gross Public Debt

-1,258.4 -1,293.5 14,456.3 13,528.8

source: usgovernmentspending.com

Current budgets contain projections for future budgets.

________________________________________________________________________________ VI. From the August 2011 OMB Report The Budget and Economic Outlook: Update August 2011

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