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Receipts as negative expenditures; expenditures as negative receipts.- Various receipts of the federal government are treated as offsets against outlays rather than as federal revenues. These fall into two categories: receipts which offset particular categories of expenditure (about $1.6 billion in the 1980 budget), and $2.6 billion in undistributed receipts which are applied against the outlay totals in the budget. While there may be legitimate economic reasons for treating some of these receipts as negative expenditures in the case of offshore income, for example, the United States can be regarded as exchanging one asset—the lease-for another-royalties), this budgetary practice can complicate the task of producing reliable receipt and outlay estimates, free from political bias. In some recent years, the Administration produced unrealistic estimates of the income from offshore oil and gas leases as a means of showing lower deficit and outlay totals in its budget.

One of the most controversial instances in which receipts are treated as negative expenditures occurs when the federal government sells loan assets (direct loans or securities known as participation certificates or certificates of beneficial ownership.) Here, too, the transaction is treated as an exchange of assets and the revenues are computed as offsets to expenditures. In view of the high volume of obligations owned by the federal government, this practice gives the executive branch a great deal of latitude in influencing the level of outlays that appears in the budget. It is possible to show a reduction in outlavs merely by selling some of the assets to the public. The Office of Management and Budget has been critical of the manner in which sales of some loan assets are accounted for. It points out (The Budget for Fiscal Year 1980. p. 316) that

"* * * as a means of financing outlays there is no difference in substance between an agency selling securities labeled 'certificates of beneficial ownership,' the same agency selling securities labeled 'debt', and the Treasury selling securities labeled 'debt. Moreover, when certificates of beneficial ownership are sold, the ownership of the specific loans is retained by the Government, interest payments on the loans continue to be made to the Government, and the Government continues to incur the servicing costs of the loans and to assume fully the risk of default on the loans."

If receipts sometimes are counted as negative expenditures, the opposite also has been true: expenditures are sometimes treated as negative receipts rather than as outlays of the federal government. The 1980 budget proposes to make direct payments to certain individuals whose wage increase is held to 7 percent or below. Some of these "wage insurance” payments are treated in the budget as refunds of tax receipts, not as outlays. The effect is to reduce outlays $2.3 billion below the total that would appear in the budget if such payments were computed as expenditures. Several years ago, when the “earned income credit” programdirect payments to low-income workers—was established, the House and Senate Budget Committees wrangled over whether credits in excess of tax liability should be accounted for as offsets to receipts or as outlays. For fiscal year 1978, the committees decided to treat them as negative receipts, but for the 1979 budget, they counted them as outlays, thus demonstrating the lack of hard and fast rules for these types of budgetary transactions.

The grossing versus netting argument and the existence of offsetting receipts and expenditure arise out of the complexity and sprawl of the federal budget. Even if no attempt were made to circumvent budgetary controls, there would be a great number of contentious accounting issues. But with constitutional restrictions in force, there surely will be ample incentive for manmade contrivances to evade the controls.

It should be noted that these issues relating to the definition of outlays would not affect computations of budgetary balance. Any change in the outlay totals would be matched by an adjustment to receipts and vice versa. However, constitutional limitations on expenditures would be significantly impacted by the manner in which outlays are handled in the budget.

Unless it were detailed in the extreme, a constitutional limitation on expenditures could not resolve these definitional and accounting issues. The matter would have to be resolved by statutory elaborations which give meaning to the bare bones constitutional intent. The effect of any limitation will depend, therefore, on statutory interpretation rather than on the constitutional provision. Arguably, therefore, the whole issue ought to be left for statutory determination where it would be decided anyway.

Control of Outlays In order to be enforceable, a balanced budget requirement or a spending limitation would have to be accompanied by means of controlling the outlays of the United States Government. At the present time, Congress lacks adequate means to hold outlays within limits. It does not directly decide how much is to be spent in a particular year by each federal agency or program. Its control extends to the appropriation of funds or to other legislation authorizing agencies to enter into obligations. The cash expenditure occurs only when the obligation is paid off, sometimes long after congressional activity has ended. In the ordinary sequence of events, Congress has little direct control over the timing of expenditures.

When an appropriation and the ensuing outlays occur in the same fiscal year, there is no difference between the two measures of budget activity. Such is estimated to be the case, however, for less than 65 percent of the new budget authority requested for fiscal 1980. An estimated $136 billion of the outlays projected in fiscal 1980 will derive from budget authority carried over from previous years.

The Congressional Budget Act requires Congress to set outlay targets in the first concurrent resolution on the budget and ceilings in the second resolution. However, these outlay amounts are not statutory limitations on the allowable expenditures of the federal government in a fiscal year. As discussed earlier, it is feasible for Congress to specify an outlay total in its budget resolution, but for federal spending to exceed that level because of matters beyond its direct control.

When the Budget Act was under consideration, one proposal called for Congress to fix outlay limits in each appropriation bill. The effect would have been to establish legally binding outlay numbers rather than merely "advisory” ones. During its work on the legislation, the Senate Committee on Rules and Adminietration addressed the question of whether outlay limitations could provide effective budget control. The committee concluded (S. Rept. No. 93-688, p. 20) that in view of the difficulty of precisely estimating such outlays, a limitation would not be workable:

The problem with outlay ceilings is that it is difficult to estimate precisely how much will be spent in a particular fiscal year. Each year's outlays derive from past as well as current actions of Congress. More than $100 billion of the outlays estinated in the President's budget for fiscal 1975 result from budget authority provided in prior years. Congress controls current and future outlays by deciding how much new budget authority to give executive agencies, but once the authority is in the "pipeline,” Congress can (under current procedures) control outlays only by imposing deep cuts on the fraction of the budget which is controllable.

In the 1975 budget, approximately $223 billion, or almost 75 percent of total ourlays, is estimated as uncontrollable under existing law. Many of the uncontrollable items are open-ended programs, spending for which cannot be effectively set in the appropriations process. It is exceedingly difficult to estimate these amounts precisely, and in recent years there has been considerable variance between the uncontrollable expenditures estimated in the budget and actual erpenditures for that fiscal year. In an average year uncontrollable costs are more than five billion dollars above the original budget estimate.

During the first years of the congressional budget process, actual outlays were $10 billion or more below the original estimates, and even billions below the revised estimate made later in the year. While these shortfalls might seem to suggest that a constitutional limitation can be enforced, there is no reason to expect a shortfall to occur in every year. The same factors which have caused outlars to fall below estimates can have the opposite effect under different economic or political conditions.

Moreover, the shortfalls would have an exceedingly contractionary effect if the Friedman amendment were in effect. Every shortfall would lower the outlay base on which the next year's allowable expenditures would be calculated, it could caizse the budget to shrink even below the relative levels projected earlier. Furthermore, with shortfalls prejudicing the outlay base, the executive branch would have a powerful incentive to spend up to its allowable limit. It would be penalized for prudent and efficient management. The Friedman amendment has an efficiency penalty which can impair financial management in the federal government.

Potential Impacts of Constitutional Restrictions Those who seek constitutional restrictions on the budget or on spending assume that requirements for a balanced budget or limitations on federal expenditures would force changes in federal practices. This section considers some of the intended—and possible unintended-effects of these requirements.

T'as policy.- None of the proposed amendments specifically addresses or purports to limit the tax policies of the United States. Yet one can foresee significant changes in the tax system. Balanced budget requirements would exert upward pressure on taxes; spending limitations would probably have the opposite effect. In the short run, the easiest (and sometimes only) way to secure a balance would

be to raise taxes, or at least not lower them to the level that might otherwise be desired. As was discussed earlier, the recent practice of using the growth and inflation “dividends” of the tax system to reduce nominal tax rates might be seriously curbed. On the other hand, if stringent spending limitations were imposed, the federal government would likely accumulate massive surpluses in the absence of periodic tax cuts. But it is by no means certain that spending limitations would stimulate general tax reductions. Inasmuch as these limitations would constrain the ability of the government to provide benefits through direct outlays, pressure might build up for subsidies through the tax system. Rather than general tax reductions, Congress might respond by enacting new and increased “tax expenditures” for favored interests. In economic terms, a subsidy provided by means of preferential tax treatment has the same value as a subsidy provided via a cash outlay, but whereas the latter would be constrained by a constitutional limitation, the former would not. Of course, if balanced budgets were mandated, the provision would have a restrictive effect on both general tax reductions and tax expenditures.

Another possible outcome derives from the accounting conventions discussed earlier. To the extent that an outlay can be defined as an offset to receipts, a spending limitation would goad Congress to devise transactions that could escape being tagged as outlays.

Fiscal policy. Even with an override feature for national emergencies, any requirement that outlays not exceed receipts would have a dampening effect on the federal government's ability to respond to economic crises. Strict enforcement of a budgetary balance would compel a Hooverlike reaction, in which expenditures are reduced to match a drop in government revenues. If this were to happen, the stabilizing capacity of the federal budget would be severely impaired and comparatively mild recessions could blow up into major depressions.

This is not a likely scenario, however, because Congress probably would relax the requirement by exercising its override authority. Even Hoover was forced to abandon his balanced budget ideals: the federal budget ran a small ($462 million) deficit in fiscal 1931 and a much larger one ($2,735 million) in the next fiscal year. The point, however, is that even if a deficit were authorized, it almost definitely would be smaller than would occur in the absence of a constitutional limitation. Especially if extraordinary majorities (two-thirds or three-fourths) of the House and Senate were required to suspend the limitation, opponents might be able to block approval until the deficit is whittled down to acceptable size.

A spending limitation would not have these adverse impacts on the federal government's capacity to stimulate the economy. But both because of the sensitivity of tax receipts to economic performance and the constitutional inhibition against increasing expenditures, the bulk of the stimulus would have to be provided through tax policy. Such actions are likely to have different distributive impacts (which groups and individuals benefit) than economic stimulation provided through spending programs. One can conjecture that the lowest-income groups--often those hardest hit by a recession—would be most disadvantaged by a constitutional policy which biases fiscal policy toward tax relief.

Controllable and uncontrollable expenditures.- More than three-quarters of fiscal 1980 outlays are classified by OMB as "relatively uncontrollable under existing law.” This phrase has been challenged by some who claim that virtually all of the budget is controllable if Congress wishes to change existing law. Nevertheless, the concept provides a useful clue to how Congress and the executive branch might act when faced with a need to reduce outlays in order to uphold & constitutional requirement. Over the short-run, that is, the fiscal year for which such a requirement would be operative, much of the burden would have to be borne by the controllable sector of the budget. In the language of federal budgeters, the uncontrollable would bleed the controllables, a predicament which occurs in the best of times and is inescapable in the worst. How the required cuts are spread among the controllables would depend on the political climate for defense versus domestic programs. In view of the fact that defense accounts for almost 60 percent of controllable outlays, it is likely to be vulnerable to forced reductions, except when international conditions dictate higher spending for that purpose. Federal assistance to state and local governments is a likely target, though the Friedman amendment would protect these recipient governments against cutbacks for a six-year period. le Over the long-term, one can expect budgetary constraints to induce Congress to make marginal adjustments in the entitlement programs which have spiraled during the past decade and add up to 70 percent of all uncontrollables. By marginal adjustments, one has in mind trims in certain features of these programs

rather than wholesale eliminations. The savings proposed by Carter for fiscal 1980 in social security are marginal, both in the sense that the initial cost reductions are modest and the basics of the program are undisturbed. But because modest savings tend to balloon over time, even marginal adjustments can have pronounced effects on future budgets.

Regardless of where the cuts would be distributed, constitutional constraints can be expected to bias the budget against proposed new programs. The preferred position of existing programs versus new ones is already entrenched in the budget, but the penalty against major initiatives within the budget will grow. Of course, this bias might be offset by the concentration of program starts outside the budget. New programs, under these circumstances, might be able to make it only if they carry methods of evading budgetary control.

Executire-Legislative relationships.-Although the proposed amendments are silent about relationships between Congress and the executive branch, one cannot escape the feeling that it is Congress which is to be constrained. The drive for anchoring bucigetary restrictions in the Constitution is predicated on the belief that Congress cannot be trusted to abide any controls it is free to break. There also is an undertone of argument that Congress is culpable for the runaway spending and massive deficits which have beset recent budgets.

In at least two ways, the constitutional proposals can tilt the balance of budgetary power in favor of the executive branch. First, on the assumption that the President's budget would consume just about all of the spending room available under a constitutional limitation, Congress would be left with the option of redistributing expenditures rather than adding to total outlays. It might be able to take from defense and give to domestic programs (a transfer which it has made in most vears since Vietnam), but it would have little recourse other than to accept the President's clictates.

Congress might try to wiggle out of this predicament by shifting the costs of its decisions to future budgets. In view of the fact that Congress makes budget authority decisions and that much new authority is not spent until future years, Congress could establish programs with low first-year costs but with incremental costs locked into future budgets. If this were to happen, the focus of budgetary debate in Congress would shift frcin the current to future budgets, with congressmen competing to stake their claims for future increments. The net result would be a worsening of the ability of Congress to control out-year expenditures. A constraint intended to strengthen control over expenditures might have precisely the opposite effect, particularly since all of the proposed amendments take a one-year-at-a-time posture.

The second impact of these restrictions would be to bolster the President's claim of power to impound funds appropriated by Congress. In the past, President- claimed an inherent power to impound; under these limitations, they could claim a constitutional power to impound. Lest this prospect appear to be fanciful, one need only recall that in the great impoundment battle between President Nixon and Congress, a claim of authority to impound was grounded on presidential interpretations of statutory limits on expenditures and the statutory limit on the public debt.

The impoundment power might indeed offer the only means by which stern constitutional constraints could be enforced. The inability of Congress to control outlars has already been mentioned. In abiding the new budgetary limits, Congress might be forced to cede impoundment authority to the President or helplessly stand by as he works his will on the budget.

The future role of the United States. This section concludes by returning to a theme which was broached earlier: the proposed spending limitations mask their real purpose, a radical transformation in the character, reach, and purpose of the United States Government. The extent to which the trend toward active government would be reversed would depend on (1) the type of limitation written into the Constitution, and (2) the willingness and ability of the Government to do vial other means that which it could no longer do via the budget. While one should not underestimate the ingenuity which surely will be applied to evade the controls or to act in nonbudgetary ways, there is no escaping the prospect that a federal government operating under a constitutional straitjacket would be markedly different than one which is unfettered and can decide what and how to execute its will. The differences might be in the walling off of major segments of government from popular and legislative control through the expansion of "quasi” governments. They might be reflected in an untangling of the relationships that have grown between the federal and state and local governments, along with a dispersion of power and money from the center to states and municipalities. Change might come through a contraction of America's presence on the world scene or through greater reliance on market mechanisms to provide "social" goods and services and to manage economic affairs. The list of possible mutations certainly is endless, and yet no list could comprehend the full range of intended and unintended possibilities.

One must be concerned, therefore, about constitutional changes so rife with uncertainty, and so silent as to their real purpose. Budgetary discipline might be the least of the consequences wrought by constitutional experimentation. Surely the other possibilities ought to be debated before budgetary change is decided. And the terms of debate ought to be markedly broader than the budget alone: let the other possibilities be aired, and only then will it be possible to make informed judgments as to whether the budget is the appropriate means toward those ends.

Borrowing for Capital Investment The proposed budget requirements have regenerated interest in a capital budget for the United States Government. A capital or divided-budget is one in which the government's investment in physical, curable assets would be segregated from the regular (“operating”) budget and would not be included (except perhaps for depreciation charges) in the calculation of the budget surplus or deficit. The capital budget is standard accounting practice for most large business firms as well as for many state and local governments which are restricted to borrowing only for permanent improvements. The capital budget concept has been around for many years, but it has never been adopted for the federal government.

Concern over a balanced budget is not the only argument advanced in favor of a capital budget. Perhaps the most compelling reason is that there is a fundamental distinction between a capital and a current expenditure. When the government purchases a capital asset, there is no change in its net worth, since it is merely exchanging one asset for another or concurrently creating assets and liabilities of equal value. However, when the government expends for current goods and services, there is a net decrease in its assets inasmuch as the asset it acquires has no permanent value.

It has been argued that a capital budget would facilitate long-range planning of physical improvements. The federal practice of lumping capital investments with current outlays induces a one-year-at-a-time perspective in which little attention is paid to future priorities and costs. Moreover, a capital budget might help to standardize existing budget practices with respect to "outyear” costs. At the present time, major weapons are “full funded”, with new budget authority provided for acquisitions that might stretch over a number of years. Water resource projects, however, are funded on an installment basis, with each budget providing only the amount of new budget authority required for a single fiscal yer.

A capital budget could provide a useful guideline for regulating the use of debt. It could serve as an alternative to a rigid balanced budget concept and provide a yardstick for determining whether a particular level of debt financing is appropriate. If the federal government were to finance capital investments by borrowingas is common in many states and localities—the public might accept the need to borrow for capital purposes as long as the regular budget is balanced.

Slightly more than 20 percent of the fiscal 1980 budget might qualify as capital expenses. Special Analysis D identifies $115 billion in investment-type programs, $44 billion of which goes for national defense and the remainder for civil progruuns. The investment programs include the acquisition of physical assets ($57 billion), research and development ($30 billion), and education and training activities ($21 billion). These estimated investment costs far exceed the projected fiscal 1980 deficit, but some caveats are in order before the $115 billion number is used as a measure of net capital investments.

First, the estimates are approximations, not precise numbers. The federal government presently lacks an accounting system for segregating capital and current expenditures. Second, no adjustment is made for depreciation of federal assets acquired in the past. Éven if the $115 billion estimate was firm, it would represent gross expenditures, not net capital investment. The measurement of depreciation could pose serious accounting difficulties especially for weapons systems. Third, a sunstantial portion of the $115 billion goes for the acquisition of assets or investrient ly non-federal entities. The federal government subsidizes the construction of merchant ships by private shipyards and highways by state

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