34 STATEMENT OF RUDOLPH G. PENNER, DIRECTOR, Mr. PENNER. Thank you, Mr. Chairman. It is a great pleasure to be here to discuss the Balanced Budget Act with you. I believe that yesterday the Comptroller General laid out the basic procedures for you, so I will just skip over that part of my testimony. There is a chart over here that lists the key dates, and a similar chart appears on page 3 of my testimony. Starting on page 4 of the testimony, we describe an illustrative sequestration based on several very important assumptions. First of all, we make no change in either our February economic forecast or in the technical assumptions that we used in February. Obviously, some changes are likely when we make our August report. Further, this illustration reflects legislation enacted since the February forecast but assumes no new legislation affecting the budget between now and August 15. Or putting the matter another way, in our annual report of last February, we gave you an illustrative sequestration for 1987. All we have done in this new illustration is to adjust the February numbers for legislation passed since then. It is also very important to emphasize that the sequestration amount in August depends not just on our report, but rather on an average of OMB and CBO estimates. Or, if the GAO remains in the picture next August, they can choose either of our estimates, or use entirely new ones that they would construct. The last important point to make in evaluating our numbers here is that our assumptions essentially assume that there are no appropriations legislation passed before August 15. Under those circumstances the law is very precise in directing us to go back to the 1986 appropriation levels and use them as our base for the calculation and for calculating the percentage amounts. In other words, the law does not allow us to adjust the base in any way for inflation. It is equivalent to a nominal freeze with regard to Mr. BROOKS. What about continuing resolutions? Mr. PENNER. Anything less than a 12-month continuing resolution must be ignored. But if we have a full 12-month continuing resolution, we would take that into account. Well, let me start reading my statement where we get to the actual numbers. The major elements of the calculations for the illustrative 1987 sequestration are shown in table 2 on page 8. Although the sequestration actually applies to new budget authority and other spending authority, the calculations use outlay estimates to determine the amount of the sequestration. The first step is to divide the amount of the estimated excess deficit, which would be $16.6 billion in our illustration, into two halves. One half-$8.3 billion-is assigned to defense programs, and the other half to nondefense programs. Second, the total amount of outlay savings from eliminating automatic spending increases is calculated. One-half of those savings for indexed retirement and disability programs is applied to the required reductions in defense programs, and one-half to nondefense. Under our February economic assumptions, this amounts 35 to an estimated $1.2 billion for 1987, so that $0.6 billion is subtracted from the $8.3 billion required outlay reduction for both defense and nondefense programs. Various additional calculations have to be made for nondefense programs, including the savings that can be obtained by eliminating the automatic spending increases in three programs-the National Wool Act, Special Milk Program, and vocational rehabilitation grants. Also included are savings to be obtained by applying certain special rules for guaranteed student loans, foster care and adoption assistance, Medicare, and veterans health programs. These estimated savings amount to another $1.5 billion, which is also subtracted from the required $8.3 billion in nondefense outlays. This leaves $7.7 billion for defense programs and $6.2 billion for nondefense programs to be obtained by across-the-board, uniform percentage reductions in budgetary resources. The uniform percentages are calculated by dividing these dollar amounts by total estimated 1987 outlays associated with sequestrable budgetary resources. For defense programs, the sequestrable base is estimated to be $173 billion. For nondefense programs, the equivalent base is $109.6 billion-lower than for defense programs because a large portion of nondefense spending is either exempt from sequestration or limited by special rules. The resulting sequestration percentages are 4.5 percent for defense and 5.7 percent for nondefense. These percentages are then applied to the new budget authority and other spending authority in the sequestration base. The sequestration base levels and sequestration calculations are very sensitive to changes in economic assumptions and other factors. It is not unusual these days for budget deficit estimates to change by tens of billions of dollars within a 6-month period because of revised economic forecasts and other factors. For example, lower real growth and taxable income projections can result in significantly reduced revenue estimates. If you turn to table 3 on page 11 of my testimony, Mr. Chairman, you can see how important this effect is. For example, suppose the excess deficit calculation went from $20 to $30 billion because of a change in our revenue estimate. A $10 billion change in our revenue estimate would be a little over 1 percent-not much of a change. But because only, roughly speaking, a quarter of the budget bears the full brunt of sequestration, you can see how, because of that small change in our deficit estimate, the sequestration percentage changes by quite a lot-in this case from 5.4 percent in defense to 8.3 percent, or for nondefense from 7.3 to 11.8 percent. Thus, the way the sequestration is structured tends to really magnify the effect of any adjustment to our estimates. Looking at the impact of the sequestration of this sort of magnitude, a 1987 sequestration of 4.5 percent for defense programs and 5.7 percent for nondefense programs would be much more severe than these percentages imply. First, in my illustration, these reductions would be on top of the 1986 sequestrations of 4.9 percent for defense and 4.3 percent for nondefense programs. Therefore, you should look at it as though you combine these two sequestrations, and they imply reductions from the original appropriation levels 36 passed in 1986 of 9.2 percent for defense and 9.8 percent for nondefense programs. Second, the reduction in real terms would be even greater because, as I said before, we would not be allowed in these circumstances to adjust for inflation in any way. The postsequestration budget levels for 1987 are shown in table 4 in comparison to 1986 scorekeeping levels and 1987 CBO baseline projections and sequestration base levels. Total outlays for 1987 would be limited to $990 billion under our illustrative sequestration, only $10 billion more than the outlays estimated for 1986roughly a 1 percent increase. Defense outlays would be held to about the 1986 estimated level, while nondefense outlays would rise by only $5 billion. To achieve these results, new budget authority for the national defense function would be reduced to $276 billion through sequestration, more than $10 billion below the amount available in 1986 and more than $40 billion below the level requested by the President for 1987. Furthermore, the resulting program mix would be very different from that proposed by the President. Also, mandatory increases in Social Security outlays and other entitlement programs would have to be almost completely offset by decreases in other nondefense programs. Additional details on the illustrative 1987 sequestration for defense programs are shown in Table 5. Although the impact would vary from program to program, it would not be much different from the impact of the 1986 sequestration except for military personnel accounts, which would be especially hard hit. The military personnel accounts were almost totally exempt from sequestration in 1986, but would not be exempt under the law in 1987. They would be hit harder than other defense accounts in 1987 because the starting point for the reduction would be from an already depressed level. To fund certain pay raise and retirement costs, the 1986 appropriations for military personnel provided access to unobligated balances in the procurement accounts in lieu of new budget authority. Consequently, 1986 new budget authority in the military personnel accounts is about 7 percent-or $5 billion-lower than actual costs. Reducing the 1986 budget authority level by another 4.5 percent under our illustrative sequestration would reduce available resources 11 percent below the level needed to support current manpower strengths. This could translate into a reduction of 350,000 or more active and reserve personnel as a result of the 1987 sequestration. Regardless of the outcome of the Supreme Court decision, the sequestration procedures for 1987 will begin in August when CBO and OMB release their initial budget estimates. The CBO estimates presented today are illustrative only and are subject to significant change over the next 2 months as a result of legislative actions, revisions to the underlying assumptions, and other factors. While our illustrative 1987 sequestration involves relatively low across-the-board percentage cuts in spending programs, the impact would be quite severe, especially for military personnel, since the cuts would be applied to 1986 postsequestration appropriation levels for most programs. Thank you very much, Mr. Chairman. [Mr. Penner's prepared statement follows:] 37 Statement of Congressional Budget Office before the Subcommittee on Legislation and National Security June 19, 1986 NOTICE This statement is not available for public release until it is delivered at 10:00 a.m. (EDT), Thursday, June 19, 38 Mr. Chairman, I am pleased to have the opportunity to discuss the sequestration procedures under the Balanced Budget and Emergency Deficit Control Act of 1985 (P.L. 99-177)-or more briefly, the Balanced Budget Act. My statement this morning will cover two areas: The sequestration procedures for fiscal year 1987 that will begin in August; and O Some illustrative sequestration calculations for 1987. SEQUESTRATION PROCEDURES The Balanced Budget Act establishes steadily declining deficit targets after 1986, culminating in a balanced budget in fiscal year 1991. The deficit target for 1987 is $144 billion. Unless the Congress acts to reduce the deficit to within $10 billion of this level before the start of the fiscal year, the $144 billion deficit target would be achieved by sequestering budgetary resources. The act provides a $10 billion leeway for 1987 through 1990, but none for 1991. Except for trust and special funds, sequestration involves permanently canceling new budget authority and other spending authority to obligate and expend funds. The deficit estimates used to implement the act are provided by the Congressional Budget Office (CBO), the Office of Management and Budget (OMB), and the General Accounting Office (GAO). Although the automatic spending reduction provision of the act has been ruled unconstitutional by a |