The Federal Budget

The Federal Budget A Challenge to Get One More of a Challenge to Control Its Size Ron Maccaroni rmacccaroni@hotmail.com January 28, 2014

Discussion Questions • Why do we have a Federal budget? • What is in the Federal budget? • How is the Federal budget developed and approved, and who is involved in the process? • How has the budget composition changed over time? • Do we need to cut the size of the Federal deficit and, if so, how?

Why is a Federal Budget Needed? • Founded in Law • Constitution requires Congress pass laws authorizing Federal spending. • “No money can be withdrawn from the Federal Treasury other than by rule of law.” • Gave Congress “power of the purse.” • Spending authorized through: • “Permanent” laws. • Annual “appropriation” laws (currently 12).

What Federal Entities Are Covered in the Budget? • Comprehensive • Covers all three branches of Federal Government. • “Unified Federal” budgets started in 1920’s.

12 Appropriation Laws(Functional Areas) • Legislative Branch • Defense • Homeland Security • Agriculture • Interior & Environment • Commerce, Justice & Science • Labor, HHS & Education • Transportation & HUD • Energy and Water • Military Construction & Veterans Affairs • State & Foreign Operations • Financial Services & General Government

Appropriation Laws OR • Omnibus Appropriation OR • Continuing Resolution Authority

What are the Purposes of the Federal Budget? • Sets forth the Government’s: • Priorities for “financing” federal operations and “spending” for federal programs and activities. • Priorities and allocation of resources for programs managed by the states, localities, and private sector. • Economic policies. • Historical record and report to the people.

What are the Basic Components of the Federal Budget? • The federal budget is a compilation of numbers for: • Revenuescome from taxes, duties, fines, fees, licenses, and gifts. • Spending involves outlays stemming from budget, offsetting receipts/collections, contract, and other authorities. • Surplus occurs when annual revenues exceed annual spending. • Deficit occurs when annual spending exceeds annual revenues (deficits require borrowing). • Debt is the accumulation of the deficits, less any surpluses.

Some Key Terms • Discretionary Spending = Costs for operating the Government; all 3 branches. The 12 annual appropriationlawsprovide discretionary “spending” authority. vs. • Mandatory (Non-Discretionary) Spending = Costs for entitlements and interest on Government debt. Congress passes or modifies permanent laws as needed to provide ongoing authority to pay entitlements.

Some Key Terms • Revenue = Amounts Congress authorizes Government entities to collect. vs. • Receipts = What Government entities actually collect annually and deposit into the Treasury.

Some Key Terms • Budget Authority = Authority Congress gives to Federal entities to obligate the Government, i.e., enter into contracts, and to pay bills now or sometime in the future. vs. • Outlays = Payment of bills; disbursements from the Treasury

Some Key Terms • Sequestration • Obligation authority is “canceled.” • Put in special accounts; can not be used. • Started in 1985 as a way of controlling deficit. • If funds can not be obligated, i.e., contracts not awarded, no outlays will occur. • Budget Control Act of 2011 applied different approach • Last dollar vs. first dollar

2013 Receipts Total = $2.774 Trillion ($ in Billions) Social “Insurance" Taxes$947.8 / 35% Corp. Income Taxes$273.5 / 10% Other Revenues$101.5 / 4% Excise & Estate Taxes & Duties $134.8 / 5% Individual Income Taxes$1,316.4 / 46% Source: Treasury Year-End Stmt.

2013 Outlays Total = $3.454.2 Trillion ($ in Billions) Medicare$497.8 / 14% Social Security$813.6 / 24% Net Interest $221.2 / 6% Medicaid$196.4 / 7% Defense Discretionary$635.2 / 18% Other Mandatory (SNAP, SSI, etc.)$537.3 / 15% Non-Defense Discretionary$552.7 / 16% Source: Treasury Year-End Stmt.

Enormity of Federal Deficits & Debt

Building the Budget – A Complex Process • Many laws control the budget development, approval, and execution processes. • Entails many sub processes, players, rules and procedures. • Requires efforts of almost everyone in Executive Branch and many in Legislative Branch. (Good source of information – OMB Circular A-11)

Phases of the Federal Budget Process App Review/Audit Agency Finances & Performance Prepare President’s Budget Request Budget Formulation Congressional Action Review and Audit Approve: Budget Reconciliation “Legal” Authority “Budget” Authority Funds: Control & Management Budget Execution

What is the Basic Budget Development/Approval Timeframe? • Feb President/OMB provides Executive Branch components budget preparation guidance • Mar – Aug Components draft budget requests • Sept – Dec OMB reviews/comments on budget requests • Jan Components finalize budget requests • 1st Mon Feb President submits unified budget request to Congress • Mar – Sept Congressional hearings, debates & bill enactment • 1 Oct Budget fiscal year begins

Key Executive Branch Players in The Budget Process • President • Determines size of and sets priorities for Executive Branch budget request. • Submits budget request to Congress. • Approves or vetoes authorization and appropriation laws passed by Congress. • Office of Management and Budget • Manages process for formulating and executing Executive Branch Budget. • Reviews components’ performance. • Components (departments, agencies, offices) • Develop budget requests. • Execute authorities in accordance with laws.

Key Congressional Players in The Budget Process • House & Senate Budget Committees • Determine size of discretionary budget = Concurrent Budget Resolution. • House & Senate Authorization Committees • Propose new or modifications to existing permanent laws dealing with revenue collection or entitlement programs. • Propose “legal” authority for components to execute programs and activities. • House & Senate Appropriation Committees • Propose annual appropriation laws.

Other Key Congressional Players • Senate Finance and House Ways and Means Committees • Deal with legislation on revenue, public debt and some entitlements. • Conference Committees • Resolve differences between House and Senate resolutions and bills. • Separate ones for budget, authorization, appropriation, and revenue committees. • Congressional Budget Office • Prepares budget estimates for Congress. • “Scores” legislative and budget proposals. • Estimates budget deficit for Congress.

Discretionary/Non-Discretionary Outlay Relationship Over Time $ in Millions

Composition of Non-Discretionary Outlays Over Time ($ in Billions)

Outlay Types Related to Deficits Over Time ($ in Millions)

Does the Deficit Need to be Cut? • Some argue don’t cut deficit now -- need Federal spending to support economy. AND • Deficit has been in a decreasing mode: • FY 2011 = $1.3 Trillion • FY 2013 = $680 Billion • FY 2014 = $560 Billion (CBO estimate) • FY 2015 = $378 Billion (CBO estimate)

Does the Deficit Need to be Cut? (cont’d) BUT • Deficit will begin increasing again: • FY 2016 = $432 Billion (CBO estimate) • FY 2020 = $733 Billion (CBO estimate) AND • Debt will continue to rise. • FY 2013 = $17.1 Trillion – 75.9% of GDP • FY 2020 = $22.4 Trillion – 76.4% of GDP (CBO estimate) • FT 2038 = 108% of GDP (CBO estimate)

How Can the Deficit be Cut?(FY 2014 CBO Estimate = $560B) • Cut discretionary spending? • FY 2014 approved = $1.110.7 Trillion* • Defense = $572 Billion • Education = $96.9 Billion • Transportation = $94.4 Billion • Income Security = $66.8 Billion • Veterans Benefits & Services = $62.4 Billion • Health = $57.7 Billion • International Affairs = $56.5 Billion • Administration of Justice = $43.2 Billion *Includes $98.4 Billion “contingency” funds

How Can the Deficit be Cut?(FY 2014 CBO Estimate = $560B) • Cut non-discretionary spending? • FY 2014 PB estimate = $2.310 Trillion • Social Security = $860.3 Billion • Medicare = $523.8 Billion • Income Security = $475 Billion • Health = $385 Billion • Veterans Benefits & Services = $85.9 Billion • Note - interest payments on debt must be paid! • FY2014 estimate = $222.9 Billion (net) • Only way to reduce interest payments is to reduce debt

How Can the Deficit be Cut?(FY 2014 CBO Estimate = $560B) • Increase tax revenue? • FY 2014 PB estimate = $3.022 Trillion • Individual income - $1.396 Trillion • Corporate income - $0.333 Trillion • Social insurance - $1.030 Trillion • Excise & Other - $0.263 Trillion • Some combination of cuts and tax revenue?

“Independently” ProposedDeficit/Debt Reduction Options • Bowles-Simpson* • Require $220 billion of defense and $165 billion of non-defense savings (pre sequester cuts) through 2023. • Limit discretionary spending growth to rate of inflation though 2025. • Multiple changes to Medicare and Medicaid -- $585 Billion. • Multiple changes to military and civilian federal employee pension and health care programs -- $100 Billion.

“Independently” ProposedDeficit/Debt Reduction Options • Increase/improve user fees -- $50 Billion. • Reduce agriculture subsidies -- $40 Billion. • Require tax reform -- $585 billion. • Adapt Chained CPI -- $280 Billion. * Similar proposals made by The Debt Reduction Task Force (Rivlin/Domenici) and by Congressional Budget Office

The Federal Budget