Standard budget terminology (See attachment F)

Title VIII directs GAO, in conjuntion with the CBO, Treasury, and the Office of Management and Budget, to develop standard budget terminology, definitions, classifications, and codes for use by Federal agencies supplying budget information to Congress. These were submitted and most recently published in March 1981. In addition, changes in functional classifications may be made only in consultation with the House and Senate Budget and Appropriations Committees.

Social Security Trust Funds

The Balanced Budget and Emergency Deficit Control Act of 1985 (Gramm-Rudman) affected the treatment of Social Security under the congressional budget process. Beginning in fiscal year 1986, the receipts and disbursements of the Federal Old-Age and Survivors Insurance Trust Fund, and the Federal Disability Insurance Trust Fund, and the taxes imposed on employers, employees, and the selfemployed may not be included in the Federal budget, either as submitted by the President or as stated in the congressional budget resolution. Receipts and disbursements of the trust funds are included in the Federal budget for fiscal years 1986 through 1991 only for the purpose of the deficit estimates required to determine whether the Federal deficit is within the maximum deficit amount targets required in the balanced budget act. Social Security benefits are exempt from sequestration.

Gramm-Rudman also exempted receipts and disbursements of the trust funds from any general budget limitation imposed by statute on expenditures and net lending or budget outlays of the Federal Government. In addition, Gramm-Rudman provided that no provision of law enacted after the date of enactment of that Act, other than an appropriation to the trust funds already authorized under the Social Security Act, could provide for payments from the general Treasury into the trust funds, or from the trust funds into the Treasury.

Finally changes to the Social Security program may not be included in a reconcilation bill pursuant to a budget resolution or in a Senate-originated response to sequestration.

Off-budget entities

The Balanced Budget and Emergency Deficit Control Act of 1985 amended the treatment of off-budget entities in the Federal budget. In general, with the exception of Social Security trust funds, offbudget entities are treated as on-budget for purposes of the Budget Act and Gramm-Rudman, including calculations of maximum deficit targets. Receipts and disbursements of the Federal Financing Bank (FFB), with respect to loan obligations of another Federal agency, previously accounted off budget, are included in the accounts of the agency.

"Off-budget entity" is defined in the Congressional Budget Act as any entity, other than a privately-owned Government-sponsored entity, established by law, with receipts and disbursements required by law to be excluded from the totals of the budget submitted by the President or congressional budget resolutions.

IMPOUNDMENT CONTROL

Title X, dealing with impoundment control, is a critical part of budget reform, a companion feature of the new budget control system. In the words of the House Rules Committee report on the budget reform legislation:

"One without the other would leave the Congress in a weak and ineffective position. No matter how prudently Congress discharges its appropriations responsibility, legislative decisions have no meaning if they can be unilaterally abrogated by Executive impoundments. On the other hand, if Congress appropriates funds without full awareness of the country's fiscal condition, its actions may be used by the President to justify the improper withholding of funds. By joining budget and impoundment control in a complete overhaul of the budget process the bill seeks to assure that the power of appropriation assigned to the Congress is responsibly and effectively exercised."

The title recognizes two types of impoundment actions by the Executive Branch: rescissions and deferrals.

Rescissions (proposed permanent withholdings of budget authority) must be proposed by the President whenever he determines that (1) all or part of any budget authority will not be needed to carry out the full objectives of a particular program; (2) budget authority should be rescinded for fiscal reasons; or (3) all or part of budget authority provided for only one fiscal year is to be reserved from obligation for that year. In such cases, the President is to submit a special message to the Congress requesting rescission of the budget authority, explaining fully the circumstances and reasons for the proposed action. Unless both Houses of the Congress complete action on a rescission bill within 45 days, the budget authority must be available for obligation.

Deferrals proposed temporary withholding of budget authority must be proposed by the President whenever any Executive action or inaction effectively precludes the obligation or expenditure of budget authority. In such cases, the President is to submit a special message to the Congress recommending the deferral of the budget authority. The President is required to make such budget authority available for obligation if either House passes an "impoundment resolution" disapproving the proposed deferral at any time after receipt of the special message.1

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A motion to discharge the committee of jurisdiction may be made by any Member who supports a rescission or deferral, if that committee has not reported an appropriate rescission bill or impoundment resolution at the end of 25 days after its introduction A motion to proceed to the consideration of such legislation may be made as soon as the committee has been discharged

Rescission and deferral messages are also to be transmitted to the Comptroller General who must review each message and advise the Congress of the facts surrounding the action and its probable effects. In the case of deferrals, he must state whether the deferral is, in his view, in accordance with existing statutory authority. The Comptroller General is also required to report to the Congress reserve or deferral action which has not been reported by the President; and to report and reclassify any incorrect transmittals by the President. Such reports by the Comptroller General have the same legal effect as rescission or deferral messages from the President. If budget authority is not made available for obligation by the President as required by the impoundment control provisions, the Comptroller General is authorized to initiate a civil action to bring about compliance. However, such action may not be brought until 25 days after the Comptroller General files an explanatory statement with the House and Senate.

The President is also required to submit monthly cumulative reports of proposed rescissions, reservations, and deferrals. These reports, to be published in the Federal Register, are to explain fully the factors that prompted the various impoundment actions.

ECONOMICS AND THE BUDGET PROCESS

The state of the economy and projections of future economic developments are critical factors in the development of budget recommendations. The budget and the economy interact with each other in many ways, the most important of which are:

First, many parts of the budget are sensitive to economic conditions, so that changes in the economic outlook can cause variations of tens of billions of dollars in outlay and revenue estimates. Revenues are affected by taxable incomes and many income security programs are affected by the level of economic activity and unemployment, so that slower economic growth will reduce income tax revenues and raise unemployment compensation, food stamps, AFDC, and other program spending. A higher inflation rate raises spending for those parts of the budget either explicitly or implicitly indexed for price changes, and can raise tax revenues in the short run as incomes rise faster than expected. (In the longer term, however, indexation of personal taxes prevents inflation from permanently increasing revenues as would have occurred prior to 1985 when indexing took effect.) Higher interest rates raise the cost of servicing the Federal debt, and therefore interest outlays in the budget.

Second, the budget has important effects upon the economy. For example, large and rising budget deficits accommodated by monetary policy tend to increase total demand in the economy; when private sector demands are strong this can lead to inflation if economic capacity is fully employed. Large deficits may, in any case, keep interest rates high if Government financing requirements compete with credit needs of the private sector. Such higher interest rates may attract foreign investment or result in reduced lending abroad by U.S. investors; in either case the exchange rate of the dollar may rise, with adverse consequences for U.S. exporters and import-competing indus

tries. On the other hand, excessive fiscal restraint when the economy is weak may contribute to that weakness and impede economic recovery.

Because budget revenues and spending depend so importantly upon economic conditions, the Committee requires a specific economic forecast for the budget year and economic projections for future years as the basis for its budget recommendations. The economic forecast and projections require, first of all, an assessment of current conditions in the economy and a projection of likely future conditions under current economic policy. After making such an assessment, the Committee must consider the likely economic effects of any policy changes which it may propose.

The assessment of current economic conditions is based upon the appraisal of many economic statistics and expert testimony from the adminstration, the Congressional Budget Office, the Federal Reserve Board and independent experts. In deciding upon appropriate fiscal policy, the Committee considers proposals from the administration and from the Joint Economic Committee as provided in the Budget Act, recommendations of other committees and Members of Congress, and proposals made in testimony from private groups and individuals. In evaluating these proposals the Committee must decide whether the economic developments forecast to result from current economic policy is satisfactory, and, if not, whether it can be modified by different economic policies. The Committee must then decide which of many competing proposals it should incorporate into its own policy recommendations, and what the effects of these proposals will be upon the Committee's economic projections.

There are a number of major considerations which the Committee must take into account in arriving at a set of final economic projections:

Consistency. The economic projections on which the budget recommendations are based must be internally consistent. Thus, it would be unrealistic for the Committee to assume continued rapid economic growth simultaneously with rapidly decelerating inflation and sharp declines in interest rates for the entire five years of the projections, or rapidly declining unemployment together with only moderate economic growth.

Structural Characteristics of the Budget. In formulating fiscal policy it is necessary for the Committee to distinguish between temporary or cyclical characteristics of the budget caused by fluctuation in economic activity and more permanent or structural characteristics which reflect budgetary policy. Deficits resulting from a recession have a different economic significance than deficits resulting from, for example, increases in defense spending, expansion of entitlement payments, or a permanent loss of revenues resulting from tax reductions. Similarly, an unusually small deficit or budget surplus resulting from an economic boom would not reflect the structural budget position.

Relationship Between Fiscal Policy and Monetary Policy. While the fiscal policy contained in the Federal Budget has major effects on the economy, the budget is by no means the only instrument of macroeconomic policy. In particular, mone

tary policy also has important effects upon the economy, and monetary and fiscal policy should be coordinated so that they are working toward the same goals. For instance, it would not normally be appropriate for fiscal policy to be extremely stimulative through large structural budget deficits, and at the same time for monetary policy to be extremely restrictive by maintaning very slow growth in the money supply, with consequently high interest rates. In order to better coordinate fiscal and monetary policy, the Budget Committee has generally reported to the Congress on fiscal and monetary policy coordination in its reports on the budget resolutions, and has sometimes included in the budget resolution recommendations on monetary policy which, in the Committee's view, would best serve to advance the coordination between fiscal and monetary policy and the attainment of Congressional economic goals assumed in the resolution.