Full text of Budget of the United States Government : Fiscal Year 1992 : Part One. Introduction

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I. THE BUDGET MESSAGE OF
THE PRESIDENT




Part One-1

THE FEDERAL GOVERNMENT DOLLAR
FISCAL YEAR 1992 ESTIMATE

Where It Comes From...
Other

Excise

RECEIPTS, OUTLAYS, DEFICIT/SURPLUS UNDER THE PRESIDENT'S
PROPOSED POLICY
(In billions of dollars)

Receipts
Outlays
Surplus or Deficit (+/-)




1990

1991

1992

1993

1994

1995

1996

1,031.3
1,251.7

1,091.4
1,409.6

1,165.0
1,445.9

1,252.7
1,454.2

1,365.3
1,427.1

1,467.3
1,470.3

1,560.7
1,540.8

-220.4

-318.1

-280.9

-201.5

-61.8

-2.9

+19.9

I. THE BUDGET MESSAGE OF THE
PRESIDENT
To the Congress of the United States:
I am pleased to present the Budget of the
United States Government for Fiscal Year
1992.
The budget is consistent with the 5-year deficit reduction law enacted last fall. It recommends discretionary spending levels that
fall within the statutory caps for defense,
international, and domestic discretionary programs. It implements the entitlement savings
and reforms enacted in the Budget Agreement.
It conforms to the new pay-as-you-go requirements.
By holding the overall rate of growth of Federal Government spending to approximately
2.6 percent—below the inflation rate—the
budget puts into effect the concept of a "flexible freeze," which is an essential means of
bringing the budget into long-term balance.
The longest period of peacetime economic expansion in history has been temporarily interrupted. We can, however, return to growth
soon—and proceed on the path to a new era
of expansion. With that goal in mind, the
budget places special priority on policies that
will enhance America's potential for long-term
economic growth, and that will give individuals
the power to take advantage of the opportunity
America uniquely offers.
To this end, I am again proposing tax incentives to increase savings and long-term investment.
On the spending side of the budget, the existence of a cap on domestic discretionry outlays rightly creates a competition for resources.
Priorities must be set. This budget proposes
that domestic investment be increased in the
following key areas:

Education

and

Human

Capital.-The

budget proposes investments to prepare children better for school, to promote choice and
excellence in our educational system, to improve math and science education, and to in-




crease the access of low-income Americans to
higher education.

Prevention

and

the

Next

Genera-

tion.-The budget includes proposals to help
reduce illness and death from preventable diseases, and to reverse the long-term trend of
underinvestment in children.

Research

and

Development

and

the

Human Frontier.-The
budget recommends
an increase of $8.4 billion in the Federal investment in research and development, with
special emphasis on basic research, high performance computing, and energy research and
development. It proposes to extend permanently the tax credit for research and experimentation to encourage private sector R&D investment. In addition, the budget reflects the
Administration's continued commitment to expanding human frontiers in space and biotechnology.

Transportation Infrastructure.-The budget supports an expansion of the Federal Government's investment in highways and bridges
to over $20 billion within 5 years, and proposes substantial increases to improve the condition of the Nation's airports, to modernize
the air traffic control system, and to continue
to develop the transportation infrastructure for
exploration and use of space.

America's Heritage and Environmental
Protection.— The budget includes increased
funds for the expansion and improvement of
America's treasury of parks, forests, wildlife
refuges, and other public lands; for the implementation of the Clean Air Act and other key
environmental statutes; for the cleanup of pollution at various Federal facilities and at
Superfund sites; and for protection and enhancement of coastal areas and wetlands.
Choice and Opportunity.-The budget provides: funds to help give parents greater choice
in child care, health care, education, and housing; the resources to allow all Americans, especially those with low incomes, to seize the opportunities that such choice provides; and a
Part One-3

Part One-lO
proposal to establish Enterprise Zones to bring
hope to our inner cities and distressed rural
areas.
Drugs and Crime.-The budget further increases the Administration's investment in
drug prevention, treatment, and law enforcement. And the budget substantially increases
the resources available to help the Federal Bureau of Investigation fight crime, the Federal
prosecutors prosecute criminals, and the Federal prison system accommodate those convicted of crimes.
To make such investments possible, the
budget includes recommendations to terminate
or reduce Federal investment in certain lowreturn programs, and proposes reforms to slow
the continuing growth of mandatory entitlement programs and to increase fairness in the
distribution of the benefits these programs provide.
In addition, the budget contains a new proposal to fund various programs now carried
out by the States through a comprehensive
block grant. The States are continuing to develop new and innovative ways to deliver services more effectively. The budget not only highlights several of these innovations; it proposes
to reinforce and build upon them.
The budget contains several proposals that
reflect my commitment to managing govern-




THE BUDGET FOR FISCAL YEAR 1992

ment better. These include measures to improve accountability, to reduce waste, to reform regulation, to employ risk management
budgeting in addressing threats to health and
safety, and to set clear objectives and measure
performance in meeting them.
Finally, consistent with the statutory caps
enacted last year, the budget provides the resources necessary to maintain national security, and to better advance American interests
abroad. As the budget goes to press, the timing
of the resolution of the multinational coalition's efforts to reverse the aggression in the
Persian Gulf is uncertain. For this reason, the
budget reflects only a placeholder for Operation Desert Shield. A supplemental request
for the incremental costs of Desert Shield,
which includes Desert Storm, will be forwarded to the Congress in the coming weeks.
The priority investments embodied in this
budget will help America prepare for the requirements and opportunities presented by a
rapidly changing world. I look forward to
working with the Congress in developing a
budget that lays the groundwork for a brighter
future, protects our national interests, and
helps create the conditions for long-term economic growth and prosperity.
GEORGE BUSH
FEBRUARY 4,

1991

II. DIRECTOR'S INTRODUCTION
AND OVERVIEW TABLES




Part One-5




II. DIRECTOR'S INTRODUCTION AND
OVERVIEW TABLES
A SOMBER MOMENT—BUT
WITH HOPE FOR A NEW ORDER
Last year's budget was published in an historical context that bordered on the euphoric.
Its introduction noted:
State-centered, command-and-control systems
seem to be decomposing
Liberated celebrants
have cheered the opening of the Berlin wall and
the decline of communist dictators. So too have
liberated Panamanians celebrated the fall of the
dictator in near-by Panama
This is not small stuff. It is another giant leap
of the human spirit yearning to breathe free.

The introduction, then, went on to lament:
Yet this great historical shift has been almost
trivialized in its translation into public debate
about the budget. The issue has been framed as:
"How big is the 'peace dividend' ?"—and, in effect,
"How can I get mine?"

This year's budget goes to press at a more
somber moment, when the fragility of peace
has again been made painfully evident. In August, a militaristic dictator brutally invaded
a peaceful neighbor. He refused to conform to
international norms established by the United
Nations. He destabilized a region that is vital
to the global economy—a region which, for too
long, has been the victim of conflict.
As a result, suffering has increased within
the region and throughout the world. Innocent
people have been hurt. Economies have weakened. Allied military action has been undertaken as a last resort to enforce the resolutions
of the United Nations. The early action has
gone well. But precious lives have been lost.
The poignant human costs of protecting freedom and the civilized rule of law have again
been made clear.

Iraqi invasion has the potential to set a favorable precedent for the post-Cold-War era—
what the President has termed a New World
Order.
At home, the Iraqi invasion of Kuwait has
caused obvious economic difficulties. Oil prices
were driven up for several months. Long-term
interest rates reflected a risk premium. In the
face of uncertainty, consumers and investors
have understandably held back. The resulting
economic slow-down has taken its toll. And the
problem of the fiscal deficit has thus been
compounded by the effects of the crisis in the
Gulf.
Yet in this somber domestic picture, too,
there is cause for hope. The move toward satisfactory resolution of the Gulf crisis is unequivocally positive for the domestic economy.
And the residual fiscal crisis, though regrettable, has the potential to foster—even to accelerate—domestic reform. Within the framework of the 1990 Budget Agreement, constructive reforms can be framed. Though less grand
than a New World Order, steps toward a new
domestic order can continue to be advanced—
at least at the margin of practicable change.
It is in this spirit that the new budget is
presented.
This introduction:
• reviews the deficit outlook;
• outlines a reform agenda; and
• discusses the need for a new conception
of "program life cycles"—within the framework of the 1990 Budget Act.

Yet, although the moment is somber, there
is cause for hope.

THE DEFICIT O U T L O O K WORSE BEFORE BETTER

The liberation of Kuwait has begun. But of
more far-reaching significance is this: With
U.S. leadership, the global response to the

The new budget is for fiscal years 1992 and
beyond. For each of these years, the consolidated deficit estimate promises to be better




Part One-7

Part One-lO

THE BUDGET FOR FISCAL YEAR 1992

than the year before. The projected deficit goes
down by $37 billion from 1991 to 1992. It
reaches balance by 1996. (See Table II-l.) As
a percent of GNP, it declines from 5.7 percent
(near the recent high of 6.3 percent in 1983)
to roughly 1 percent in the mid-1990s. The
longer-term trend is favorable by several different measures of "the deficit." (See Chart
II—1). But the inescapable reality of the near
term is: the deficit outlook is not good.

includes $30 billion in budget authority and
$8 billion in outlays (net of foreign contributions) as a placeholder for the incremental
costs of Operation Desert Shield. This does not
fully cover the additional costs of actual combat, however. With substantial foreign contributions, the adverse financial effects on the
United States should be mitigated. But neither
full costs not total contributions can be reliably
estimated as the budget goes to press.

The consolidated deficit for the current fiscal
year, 1991, is estimated at $318 billion. This

Even without the full net costs of Desert
Shield (which includes Desert Storm), this

Table II-l. DEFICIT ESTIMATES, 1991-1996
(In billions of dollars)

Consolidated Baseline
Consolidated Baseline with pessimistic economics
Consolidated Policy
Policy excluding Social Security
Policy excluding Deposit Insurance
Policy excluding Social Security and Deposit Insurance .... .

1991

1992

1993

-310.3
-336.1
-318.1
-378.6
-206.6
-267.1

-284.9
-326.0
-280.9
-343.3
-192.8
-255.2

-212.3
-262.1
-201.5
-274.9
-157.3
-230.7

1994

-67.5
--126.3
-61.8
--151.1
-99.9
--189.2

1995

1996

-12.1
-75.3
-2.9
-106.8
-45.3
-149.1

14.1
-61.4
19.9
-101.9
-10.0
-131.8

Chart 11-1. DEFICITS AS A PERCENT OF GNP
PERCENT
POLICY EXCLUDING
SOCIAL SECURITY
CONSOLIDATED BASEUNE WITH
PESSIMISTIC ECONOMICS
CONSOLIDATED BASELINE
POLICY EXCLUDING
SOCIAL SECURITY
Bt DEPOSIT INSURANCE
POLICY EXCLUDING
DEPOSIT INSURANCE
CONSOLIDATED
POLICY

-H—
1991




1992

1993

1994

1996

1996

II.

DIRECTOR'S INTRODUCTION AND OVERVIEW TABLES

1991 deficit estimate represents a substantial
deterioration relative to the 1990 deficit of
$220 billion. It is worse than was estimated
last summer, by both the Administration and
the Congressional Budget Office, during the
Budget Summit negotiations. And it is far
worse than the baseline deficit estimated a
year ago.
The two largest elements of this deterioration for 1991—each far greater than all others
combined—are:
• an increase of $105.5 billion in estimated
outlays for thrift and bank insurance (part
of which is due to a change in accounting
treatment); and
• a decrease of $87 billion in estimated receipts (principally due to a weaker economy).
The longest period of peacetime economic
growth has been interrupted. Revised economic
assumptions now reflect two consecutive quarters of negative real growth—the fourth quarter of calendar year 1990 and the first quarter
of calendar year 1991. (See Table III-l)
This temporary economic downturn was not
assumed last year by the Administration or
by most outside economists. Indeed, it was not
the result of ordinary causes. It did not start
as a turn of the "business cycle." Inventories
were relatively low. And it was not a correction
for "overheating."
Among the principal causes of the weaker
economy were a combination of the following:
• monetary policy, which for an extended period (roughly two years) remained on the
tighter side of its target range—not seeking to halt real growth, but slowing
growth out of concern for inflation and dollar weakness;

Part One-9

The return to healthy economic growth—and
the associated improvement in the deficit—assumes, and probably requires:
• improvement in all three areas—the Gulf,
the financial system, and monetary policy;
• adoption of the growth-oriented policies
noted in the President's Message and discussed further below; and
• full implementation of the 1990 Budget
Agreement—which reduces the previous
baseline deficit by $72.9 billion for 1992
and $138.1 billion for 1995.
As always, there is a risk that these are
excessively hopeful assumptions. But with the
new Budget Agreement, the risk is arguably
lower than in previous years.
Prior to enactment of the Agreement's procedural reforms, there were incentives for the
Administration to err in the direction of rosy
projections. There were related incentives for
the Congress first to criticize these projections
(visibly) and then to adopt the same projections (invisibly). Now, these perverse incentives have been reduced.
For this and other reasons, the Administration's projections are closer to mainstream
thinking. The calendar year 1991 real growth
forecast is almost identical to the current consensus forecast of the "Blue Chip" economic
experts, and is actually below that of the Congressional Budget Office (CBO). The long-term
growth forecast, although higher than that of
CBO, is nonetheless below America's postWorld-War-II average. Thus, the deficit outlook presented here may be judged to be more
credible than in the past.

• the "credit crunch"—as the banking system (both banks and regulators) struggled
to react to the S&L experience, new capital requirements, problems in the real estate market, and fears of a more general
slowdown; and,

Unfortunately, however, this does not necessarily mean that it is correct. Even in the
best of times, macroeconomics is a highly fallible "science." (Macroeconomists are often closer to each other than to reality.) And as this
budget goes to press, there are crucial unknowns: the timing and character of events
necessary to resolve the crisis in the Gulf.
These are fundamentally relevant uncertainties. Much will turn on them.

• perhaps most significantly, the multiple
adverse economic and psychological effects
of the crisis in the Gulf (as noted above).

So Chapter III, "Economic Assumptions and
Sensitivities," bears special attention. It discusses the extent to which the deficit outlook




Part One-lO
should be modified if one wishes to use different economic assumptions.

REFORMIST STEPS—TOWARD A
NEW DOMESTIC ORDER
Whatever one's economic assumptions,
America nonetheless can—and must—continue
its historic mission: protecting freedom, accelerating innovation, assuring fairness, increasing growth and opportunity, while limiting the
expansion of intrusive and inefficient government. The President's 1992 budget limits the
growth of Federal spending to 2.6 percent—
less than the inflation rate. Within this limit,
it nonetheless helps advance the process of
American renewal. The budget proposes reform
measures in each of the following domestic
areas:
(1) Education Reform
The United States spends more per student
on education than almost every other country
on earth. Yet, the average performance of
American elementary and secondary school
students on internationally administered tests
is disgracefully low. The performance is below
that of America's major trading partners. It
falls consistently near the bottom. The current
system unnecessarily holds young people back,
holds workers back, and holds the Nation
back. Clearly, more of the same cannot be acceptable.
In coordination with the Nation's Governors,
the President has initiated an ambitious national reform effort. Consistent with that reform effort, the budget gives special emphasis
to increased investment in child care (including almost $10 billion in tax credits and $732
million for the new child care block grant),
Head Start ($2.1 billion), compensatory education ($6.4 billion), mathematics and science
education ($1.9 billion), and the measurement
of results.
To accelerate the more basic reforms that
are necessary, the budget provides $690 million for a new Educational Excellence Act.
And, perhaps most importantly, it encourages
increased parental choice through: demonstration grants, greater flexibility for States,
an information clearinghouse, and a new incentive fund for States and localities that




THE BUDGET FOR FISCAL YEAR 1992

adopt choice-oriented certificate programs.
Greater choice would help foster a more market-like system and hold schools more accountable for performance. It is only with performance-based choice that more fundamental reform is likely to be achieved. (See Chapters
IV.A. and V.A.)
(2) Research and Development
America's long-term position internationally
and the potential for improvement in life at
home depend fundamentally upon investment
in a strong R&D base. Unfortunately, shortterm claims and pressures often tend to drive
out long-term investment. R&D is especially
vulnerable in both the public and private sectors. Since the 1960s, investment in civilian
R&D, particularly, has experienced a troublesome decline as a percent of GNP. To counter
these tendencies, the President's budgets have
sought to protect and increase R&D investment—without having the government cross
the line into the problematic area of "industrial policy."
This budget proposes to make the R&D tax
credit permanent in order to encourage more
private R&D; while it also increases the direct
Federal investment to $76 billion for 1992—
up $8.4 billion to the highest level ever. Basic
research would increase to $13 billion, with
pathbreaking efforts that range from high-energy physics to what promises to be one of
the most important and far-reaching research
projects in human history: the Human Genome
Project. In applied civilian R&D, exciting investments range from materials processing, to
biotechnology, to high-speed rail transport and
electric battery technology, to high performance computing. This investment in R&D unquestionably has the potential—in time—to
bring radical improvement in the quality of
human life across-the-board. (See Table II—2
and Chapter IV.C.)
(3) Financial Sector Reform
The S&L crisis was a central focus of reform
last year. This year, public attention has
begun to shift to the risks associated with
banks. While the analogy with S&Ls is not
appropriate, there unquestionably are risks.
From a budgetary perspective, they are reflected in the baseline projection for the Bank
Insurance Fund. In the absence of remedial

II.

Part One-11

DIRECTOR'S INTRODUCTION AND OVERVIEW TABLES

Table II-2. ENHANCING RESEARCH AND DEVELOPMENT AND
EXPANDING THE HUMAN FRONTIER—HIGHLIGHTS
(Dollar amounts in millions)
Budget Authority
1991

Enacted
Basic Research
Doubling the NSF budget
Increasing Basic Biomedical Research at NIH
Human Genome Project
Agricultural Research Initiative
Superconducting Super Collider
Applied Research
High Performance Computing and Communications
Energy R&D
Advanced Manufacturing and Materials
HIV/AIDS
Moving Fusion Energy from Science to Engineering
Aeronautics R&D
Expanding R&D at the National Institute of Standards and Technology
Maintaining National Security: Defense R&D
Expanding the Geographic Frontier: Space Exploration
Space Transportation Infrastructure
Space Science
Mission to Planet Earth (Global Change)
Mission From Planet Earth
Expanding the Human Frontier through Biotechnology

legislative action, the Fund balance would turn
negative in 1992. (See Chapter VIII.A.)
But the issues involved are far broader than
merely the accounting status of the Bank Insurance Fund. Financial markets have become
global. So has competition in financial services.
Technological advances have changed both the
character of services and of service-providers.
Yet, the legal and regulatory framework attempting to govern the American financial
service sector has not adapted. It is outdated—
as will be many American competitors if the
framework is not modernized.
With this problem in clear view, the President is proposing a comprehensive reform of
both deposit insurance and the legal-regulatory framework governing the financial services sector. (See associated Treasury study.)
(4) Incentives for Saving and Investment
In the past decade, significant tax bills have
been enacted at the rate of almost one per
year—including historic tax reform. On bal-




1992

Proposed

Dollar
change

Percent
change

2,316
4,634
135
73
243

2,722
4,968
169
125
534

+406
+334
+35
+52
+291

+18
+7
+26
+71
+120

489
676
1,316
1,152
275
482

638
903
1,310
1,210
337
543

+149
+227
-6
+58
+62
+61

+30
+34
+5
+23
+13

215
37,783

248
43,247

+33
+5,464

+15
+14

4,801
1,774
954
2,199
3,788

5,517
2,141
1,186
2,470
4,107

+716
+367
+232
+271
+319

+15
+21
+24
+12
+8

—

ance, the tax system has been radically improved. As a general matter, both the tax system and the taxpayer deserve a rest. Still,
there is one area that continues to merit further reform: the need to strengthen incentives
for saving and long-term investment.
Accordingly, the President's budget proposes
incentives to encourage: family savings, homeownership, longer-term investment, and investment in Enterprize Zones. (See Chapter
X and the related discussion of pay-as-you-go
requirements in Chapter XIV.)
(5) "Entitlement" Reform
In looking at the changing composition of
the Federal budget since the 1960s, two trends
stand out:
• First, the budget is being taken over by
so-called "mandatory" or "entitlement "
programs. These are largely transfer payments, which are not now subject to annual appropriation. They have grown from
28 percent of the budget in President Ken-

Part

THE BUDGET FOR FISCAL YEAR 1992

One-lO

Chart 11-2.

PERCENT
SENDING

"MANDATORY" PROGRAMS ARE TAKING
OVER THE BUDGET

DOMESTIC DISCRETIONARY, DEFENSE, AND MANDATORY SPENDING

1992S

(Outlay*)

BILLIONS
SOO-




DOMESTIC DISCRETIONARY
1962

1967

i i i
1972

1977

i i

1982

1967

1992

II.

DIRECTOR'S INTRODUCTION AND OVERVIEW TABLES

nedy's administration to nearly 52 percent
today. (See Chart II-2).
• Second, within the "mandatory" total,
funding for the non-poor has increased far
more than for the poor. (See Chart II—3.)
No serious effort to address the deficit can
ignore the 52 percent of the budget comprised
by "mandatory" programs. That is why the
1990 Budget Act included measures to reduce
the growth of "mandatories" by $100 billion
over five years. But that is still not enough.
Accordingly, this budget proposes to reduce
"mandatories" by another $47 billion over five
years. (See Table II—9.) In addition, the budget
reflects an important new emphasis for reform:
increasing fairness in the distribution of benefits, reducing subsidies for those who do not
need them.
In particular the budget proposes to: reduce
the subsidy of Medicare "Part B" premiums
for individuals with annual incomes over
$125,000; restructure higher education assistance to serve the needy better; reallocate
school lunch subsidies to increase benefits for

those with greater need; standardize benefits
to increase payments to survivors of lowerranking military personnel; and limit farm
subsidies for individuals with non-farm income
over $125,000. (See Chapter V.C.)
(6) Health System Reform
Although the American health system leads
the world in research and in many specialized
areas, its general performance is not yet satisfactory. Its costs continue to grow faster than
both inflation and the economy. Total national
expenditures on health now claim 13.5 percent
of GNP. Federal health spending is over 15
percent of the budget. This enormous and rising claim on resources comes at the expense
of what might otherwise be the expansion of
services for those who do not have fair or adequate access to the health system. And notwithstanding the huge expenditures, indicators
such as infant mortality and preventable death
and disease remain unnecessarily high.
The American health system is a hybrid—
partly government-managed, partly private,
partly in-between; partly a model of excellence,

Chart 11-3. MANDATORY SPENDING BY INCOME
1992$

BILLIONS
650

1962




Part One-13

(Outlays)

Part One-lO
and partly a disgrace. The challenge of reform
is complex. Comprehensive reform plans
abound. But none is a certain remedy, and
some threaten to cause as many problems as
they would cure. None is likely to be implemented quickly.

THE BUDGET FOR FISCAL YEAR 1992

tributed to all elements of the Strategy. (See
Chapter V.B.)
(8) Housing Reform

American public policy reflects a longstanding commitment to the importance of investment in housing. But the results have been
For the coming year, the Administration will
mixed—and clearly unsatisfactory for many of
continue to advance reform in manageable
the
poorest Americans. Part of the problem
steps—implementing last year's expansion of
has
been conceptual: too great an emphasis
access to Medicaid and the reform of Medion
direct
governmental ownership and mancare's physician payment system, while also
agement;
too
little emphasis on opportunities
accelerating reform in two new areas:
for poor people to benefit from choice and
• Malpractice reform. The budget proposes homeownership.
new Federal financial incentives for States
The budget reflects a reformist shift in conto adopt model malpractice reform meascepts: It proposes to fund fully ($2.1 billion
ures. This can help reduce both the direct
in 1992) the new HOPE program—creating opcosts of malpractice insurance and the inportunities for tenant management and ownerdirect costs of "defensive medicine"—while
ship. It requests a 38 percent increase in
expanding the availability of medical servvouchers for low income people—to increase
ices and increasing attention to approtheir power in the marketplace. And, on the
priate standards of care.
tax side: it would permit the use of Individual

• Investment in Prevention. The budget pro- Retirement Accounts by young families and
first-time homebuyers; and it would offer speposes to fund a concerted effort—through
cial incentives for investment in Enterprise
both education and increased investment
Zones—a refundable tax credit for wages,
in preventive services—to stop avoidable
expensing of investor purchases of new corhealth problems before they start. In doing
porate stock, and a zero capital gains rate for
so, it gives special emphasis to programs
investment in tangible property within Enteraffecting children—and to prenatal care,
prise Zones. (See Chapter V.A.)
infant nutrition, cancer screening, injury
control, smoking cessation and other mat(9) Transportation Infrastructure
ters of personal responsibility. (See Tables
Investment
II—3 and II-4, and see Chapter IV.B.)
The Nation's transportation systems are fundamental
to both economic productivity and
(7) Drug Abuse Reduction
the quality of life. And the stresses upon these
One of the most troubling breakdowns of
systems continue to mount. While attending
personal responsibility is reflected in drug
to important limits on the Federal role and
abuse. In the 1970s and 1980s, the problem
responsibility, the 1992 budget makes a major
grew to near-epidemic proportions. The Presicontribution to expansion and improvement of
dent advanced the first National Drug Control
the transportation infrastructure:
Strategy in September 1989. Several recent
• Annual obligations of the Highway Trust
studies have shown encouraging results. CoFund would be increased to $16 billion in
caine use seems to have declined significantly
1992 and to more than $20 billion by 1996.
from levels in the mid-1980s. But the drug
In
seeking to reauthorize the Federal
abuse problem is far from solved.
highway program, the Administration
would simplify and strengthen the existing
Accordingly, the budget continues to increase
program—establishing a new National
the resources allocated to the National Drug
Highway System, giving States greater
Control Strategy. For 1992, the Federal share
flexibility with a new block grant program,
increases by $1.1 billion to $11.7 billion (80
and allowing more innovative financing
percent higher than when the President took
with private participation. In addition, the
office). The increase in these resources is dis-




Part One-15

II. DIRECTOR'S INTRODUCTION AND OVERVIEW TABLES

Table II-3. SPENDING ON SELECTED PROGRAMS SERVING CHILDREN
INCREASES 9.5 PERCENT IN 1992
(In millions of dollars)

1990

Nutrition:
WIC
Child Nutrition
Other Nutrition
Health:
Targeted Infant Mortality
Medicaid
Community/Migrant Health
Immunizations
Maternal/Child Health
Other Health
Education and Social Services:
Head Start
Handicapped Education
Compensatory Education
Educational Excellence Act (proposed)
Precollege Math and Science Education
Child Care Block Grant
Foster Care
Social Security
Supplemental Security Income
Aid to Families with Dependent Children and Child Support
Other Education and Social Services
Refundable Tax Credits
Total Children's Funding

1991

p r

^

e d

2,126
4,887
7,985

2,350
5,577
9,138

2,573
6,066
9,825

—
8,200
227
187
554
222

*34
10,300
238
218
*554
264

139
12,000
238
258
554
266

1,552
2,055
5,368
—
333
—
1,375
8,375
1,261
12,165
2,453
6,287

1,952
2,467
6,225
—
515
732
2,611
9,048
3,531
14,008
2,642
6,941

2,052
2,730
6,424
490
661
732
2,186
9,716
2,497
15,162
2,352
9,973

65,612

79,345

86,851

Reflects HHS' plans to reprogram $34 million from MCH Block Grant to Targeted Infant Mortality in 1991. Overall resources
supporting this initiative will total $57 million in 1991 and $171 million in 1992, including funds from other public health grants.
1

Table II-4. THE BUDGET PROVIDES INCREASES FOR PROGRAMS
FOCUSED ON PREVENTION AND THE NEXT GENERATION
(Obligations in millions of dollars)

1991
Enacted

Childhood immunization
Infant Mortality Initiative
(Targeted Infant Mortality Initiative—non-add)
Breast and Cervical Cancer Prevention
Smoking Cessation
Physical Fitness and Diet
Accident and Injury Prevention
Access to Preventive Health Care
Family Planning
Lead Poisoning Prevention
Substance Abuse Prevention




218
7,335
57
269
90
122
1,683
5,410
399
8
1,442

1992
Proposed

Percent
Increase

258
8,011
171
410
97
139
1,907
6,026
420
41
1,515

+18.3
+9.2
+300.0
+52.4
+7.8
+13.9
+13.3
+11.4
+5.3
+412.5
+5.1

Part One-lO

THE BUDGET FOR FISCAL YEAR 1992

Table II-5. SELECTIONS FROM THE REFORM AGENDA—
WITHIN THE FLEXIBLE FREEZE FRAMEWORK1
Area

Highlights

(1) Education Reform:

• Long-term national goals—with Governors
• Special funding emphasis on early childhood ($87 billion)
• Parental choice—new incentive fund ($200 million)
• Educational Excellence Act ($690 million)
• Higher education funding reform
• Math/Science improvement program ($1.9 billion)

(2) Research and Development:

• Record level for R&D ($76 billion)
• Record level for basic research ($13 billion)
• Human Genome Project
• Increased emphasis on applied civilian R&D (e.g., materials
processing, biotechnology, high-performance computing)

(3) Financial Sector Reform:

• Deposit insurance reform
• Recapitalization of Bank Insurance Fund
• Comprehensive reform of legal and regulatory structure to modernize financial services sector

(4) Incentives for Saving and Investment:

• Enterprise Zones
• Family Savings Account
• IRA withdrawal for first-home buyers
• Capital gains modification for longer-term investment

(5) Entitlement Reform:

• $47 billion savings over 5 years
• Increased fairness/reduced subsidies for wealthy

(6) Health System Reform:

• Physician payment reform
• Malpractice reform
• Increased investment in prevention (prenatal care, infant nutrition, cancer screening, education for personal responsibility,
child care)

(7) Drug Abuse Reduction:

• National Drug Control Strategy
• $1.1 billion increase—to record $11.7 billion (Federal share)

(8) Housing Reform:

• Full funding for HOPE ($2.1 billion in 1992)
• 38 percent increase in vouchers
• IRA withdrawal for first-home buyers
• Enterprise Zones (refundable wage credit, expensing for new
stock, zero capital gains rate)

(9) Transportation Infrastructure Investment:

• New highway program (new National Highway System and new
block grant)
• Major increase in Highway Trust Fund obligations (over $20
billion by 1996)
• NASPLAN modernization
• Space transportation systems (Shuttle, ASRM, ALS, NASP)

(10) Government Management Reform:

• Budget process reform
• Regulatory reform
• Accounting systems reform
• High-Risk Area targeting
• Terminations: 238 programs and 3,591 projects

(11) "States as Laboratories

• Demonstrations and waivers
• Evaluation of natural experiments
• $15 billion program turn-over to States (fully funded)

Proposed total governmental spending for 1992 is 2.6 percent greater than 1991 (i.e., growth is less than the inflation rate).




II.

DIRECTOR'S INTRODUCTION AND OVERVIEW TABLES

budget proposes funding for major technological advances in high-speed rail and
"smart cars/smart highways," which could
help relieve the stress on the current system. (See Chapter IV.D.)
• The budget would continue to modernize
the national airspace system ("NASPLAN")—increasing funding for Federal
Aviation Administration facilities, equipment, and systems by 29 percent, to $2.7
billion.
• Within the budget for space exploration
and development, there is funding for the
space shuttle, a new advanced solid rocket
motor (ASRM), a new advanced launch
system (ALS), and a national aerospace
plane (NASP). As the use of space becomes
increasingly relevant, these essential elements of the space transportation system
should be better understood—and funded—as a vital part of America's infrastructure investment. (See Chapter IV.C.)
(10)

Governmental Management Reform

Any 1.4 trillion-dollar-per-year enterprise
{e.g., the Federal Government) is bound to
show signs of failure in one place or another.
But the public is demanding; and respect for
governmental performance remains understandably low. There is much room for management improvement.
Discontent with government is often visible
(and deemed to be newsworthy). The less
glamorous issues of management improvement
typically are not. Nonetheless, management reform continues to be advanced:
• Budget process reform. The Administration
is implementing the important and valuable reforms of the 1990 Budget Agreement—enforceable spending caps, "pay-asyou-go," and credit reform. Beyond these,
the Administration continues to seek the
line-item veto, joint (not concurrent) budget resolutions, biennial budgeting, and a
balanced budget Constitutional amendment. (See Chapter IX.D.)

Part One-17
application of Risk Management Budgeting. (See Chapter IX.C.)
• Accounting reform and oversight. The
budget continues to expand its analysis
and presentation of "Hidden Liabilities."
(See Chapter VIII.) The Administration is
implementing the new Chief Financial Officers legislation—improving accounting
standards, financial reporting systems,
and audits. The budget explicitly identifies
High-Risk Areas of vulnerability to fraud,
waste, and abuse. And, as appropriate, the
Administration is engaging special teams
in the effort to reduce these vulnerabilities. (See Chapter IX.A.)
• Reducing waste and improving returns on
investment. This is not only a problem of
accountancy and oversight, as suggested
above. It is also a problem requiring greater program evaluation and a willingness
to terminate outdated or ineffective programs and projects. (See Chapter IX.B.)
The problem, however, goes beyond conventional matters of accounting and evaluation—as discussed further below.

PROGRAM LIFE-CYCLES—AND
STATES AS LABORATORIES
Clearly, the government has a need and a
responsibility to improve the return on investment of Federal dollars. And improved accounting, analysis, and evaluation have an important role to play in this effort. But beyond
these rather technical issues, there are larger
structural issues that also require attention.
Fortunately, the 1990 Budget Act creates a
framework that can encourage a more basic
reform perspective.

The discussion of Entitlement Reform
(above) has highlighted the budgetary "takeover" by mandatory programs—and the tendency of such programs increasingly to benefit
the non-poor. The pay-as-you-go reforms may
serve not only to restrain the further expansion of "mandatories." They should also encourage greater anti-poverty efficiency in the
• Regulatory reform. The principles of regudesign of such programs.
latory reform continue to be advanced
through the President's Competitiveness
With respect to discretionary programs, the
Council and the Office of Information and
effect of budget process reforms may be an
Regulatory Affairs—and through broader
even more direct increase in attention to pro-




Part One-lO

THE BUDGET FOR FISCAL YEAR 1992

gram efficiency, effectiveness, and return on
investment. This should be a natural outgrowth of the existence of fixed, enforceable
caps on discretionary spending. With unequivocal limits on available resources, competition on the merits should increase.

vestments have been decreasing as a share of
domestic discretionary spending. (See Chart
II—5.) The President's budget seeks to correct
this trend by increasing investment in R&D,
prevention, early childhood, and transportation
infrastructure—areas with higher return.

As one begins to think about returns on investment, it is perhaps interesting to consider
how much Federal spending might be considered "investment" at all. This question involves highly arguable definitional issues.

The expectation of a possible shift toward
investment in programs with higher return
may, of course, prove to be no more than a
request and a hope. The existing domestic discretionary program structure has, to date,
proven to be rather rigid. Reform will require
a new flexibility and a new dynamic.

If one puts defense aside, and looks at how
much nondefense spending is oriented toward
longer-term investment (returns accruing over
a period greater than five years), one finds
that expenditures for short-term benefits clearly dominate. Long-term investments have been
declining as a percent of GNP. (See Chart
II-4.) This is, in part, a reflection of the budgetary ''takeover" by transfer payments to individuals ("mandatories").
But even if one focuses only on domestic
discretionary
programs
{i.e.,
excluding
mandatories), one finds that longer-term in-

In the past, domestic discretionary programs
often came into existence to address one alleged "urgent priority" or another. The urgency
may have derived from a transitory emergency, a desire for "demonstration," or a perceived need for Federal leadership in areas
where States and localities were slow to recognize or accept responsibility. As an abstract
matter, this rationale may have been legitimate.

Chart 11-4. CORE GOVERNMENT, LONG-TERM INVESTMENTS,
AND SHORT-TERM BENEFITS
PERCENT (Total Domestic Discretionary and Mandatory Outlays as a Percent of GNP)

NOTE: Lone-term Investments snd short-term benefits Include spendlna on both people end phyelcel Investments.




II.

Part One-19

DIRECTOR'S INTRODUCTION AND OVERVIEW TABLES

Chart 11-5. CORE GOVERNMENT, LONG-TERM INVESTMENTS,
AND SHORT-TERM BENERTS

r

(As a Percent of Total Domestic Discretionary Outlays)

NOTE: Long-term investments and short-term benefits include spending on both people end physioel investments.

Once in existence, however, programs have
tended to become fixtures in the budget. There
is, in practice, little evidence of a program lifecycle—other than a move toward immortality.
In a world of fixed spending caps, there will
be no room for emerging priorities if the programs-of-old remain immortal. To allow adaptation to shifting priorities, there will have to
be a more dynamic concept of program lifecycles:
• Some programs and projects will have to
die. This should be the case, for example,
when a program (whether demonstration
or not) has proven a failure, or when the
urgency of a past priority has been overtaken by events. It should also be the case
when a demonstration has proven a success and is, therefore, available for replication and funding through other
sources. In applying these principles, this
budget proposes the outright termination
of 238 specific domestic discretionary programs and 3,591 specific projects. These
terminations would save $4.6 billion in




budget authority in 1992. (See Chapter
IX.B.)
• Some programs should decline. This
should be the case when their relative priority is judged to have decreased. This
budget proposes declines of $8.3 billion in
budget authority from an additional 109
domestic discretionary programs. These
programs were funded at a total of $27.4
billion in 1991. Reasons for proposed reductions are presented in Chapter IX.B.
• Some programs should increase. The reductions and terminations noted above
help finance program increases in areas
judged to merit higher priority or improved return on investment. 250 domestic
discretionary programs are specifically recommended for increases totaling $17.8 billion. (See Table B-6 in Chapter IX.B and
the associated detail in Chapter XIII.)
• Some programs should be consolidated and
turned over to the States—funded in more
flexible form. Programs appropriate for
such turnover may be selected from two

Part One-lO
broad categories: those whose purposes are
judged by States to be of continuing value,
but whose relative funding priority at the
Federal level is declining; and those which
seem, in any case, to be appropriate for
flexible management by the States.
The President has established a target of
$15 billion in program turnovers for the
States. A list of possible turnover candidates totaling over $20 billion is at Table
II—9. The actual selection of programs for
turnover would have to be authorized by
the Congress—in consultation with the
Administration and the Governors. (After
the actual selection is determined, the current distribution of such programs by
State would be calculated. The Administration would then propose to replace
these programs with a single consolidated
block grant to the States. The formula for
this new block grant would approximate
the same distribution to the individual
States as they would receive under the
present program structure—seeking to assure that no State would be harmed by
the move to a new, consolidated block
grant.)
The value of this turn-over approach is
as follows. It allows the Federal Government to reduce overhead. It allows States
to manage a pool of financial resources
more flexibly. It moves power and decisionmaking closer to the people. And it
reenforces another reformist theme of this
Administration: appreciation and encouragement of "States as Laboratories."
This last point is especially important. The
American Federal system has within it an
enormous power for innovation: the natural variation and experimentation among
the States. For too long, this potential has
been under-appreciated at the Federal
level. Nonetheless, the reality is that some
of the most interesting examples of innovation are being set by the States—in
areas ranging from educational choice, to
enterprise zones, to health cost control,




THE BUDGET FOR FISCAL YEAR 1992

welfare reform, and transportation
nance. (See Chapter VI.)

fi-

The Administration seeks to reenforce this
natural power of the States—and to help
build upon it.
In sum, the opportunities for constructive reform are many. (See Table II—5.) Incentives
for choice, innovation, and improved performance can be advanced in education. Investment
in path-breaking R&D can be increased. The
financial service sector can be modernized. Tax
incentives for saving and long-term investment
can be strengthened. The budgetary "takeover"
by "mandatory" programs can be slowed; and
the benefits of entitlements can be better targeted for the needy. The problems of the
health system can be alleviataed, to some degree, by physician payment reform, malpractice reform, and an emphasis on prevention. The National Drug Control Strategy can
be carried forward aggressively to its next
stage. The approach to housing can be improved by greater emphasis on choice, homeownership, and Enterprise Zones. Stresses on
the transportation infrastructure can be relieved. And the government itself can be managed better—through budget process reform,
accounting reform, program evaluation, regulatory reform, and reenforcement of the innovative power of "States as laboratories."
These reforms can all be accommodated
within the "flexible freeze" (with total spending
growing at less than the inflation rate) and
within the limits of the 1990 Budget Act.
If these reform measures are adopted—and
assuming satisfactory resolution of the Gulf
crisis in the not-too-distant future—the economy can not only return to economic growth.
It can move on toward a new record for economic expansion as America advances to the
21st century.
RICHARD DARMAN
DIRECTOR,
OFFICE OF MANAGEMENT AND BUDGET

II.

Part One-21

DIRECTOR'S INTRODUCTION AND OVERVIEW TABLES

Table II-6. SPENDING, REVENUE, AND DEFICIT, 1991-1996
(Dollar amounts in billions)1
1992

1991
Dollars

Spending:
Discretionary:
Defense
International
Domestic
Subtotal, discretionary .
Mandatory
Interest
Total spending
Total revenues
Consolidated deficit

Dollars

Ch

1993
%ge

Dollars

C h

1994
^ge

Dollars

C h

1995
%ge

Dollars

1996

^

Dollars

C h

^

g e

307.8
18.7
199.8

300.4
19.6
212.0

-2.4
4.7
6.1

293.3
20.4
223.2

-2.4
4.2
5.3

287.6
21.5
228.9

-1.9
5.1
2.6

289.2
21.8
231.7

0.5
1.3
1.2

293.8
22.0
238.5

1.6
0.9
2.9

526.3
686.2
197.0

532.1
707.5
206.3

1.1
3.1
4.7

536.9
705.3
212.0

0.9
-0.3
2.8

538.0
673.5
215.5

0.2
-4.5
1.6

542.7
713.8
213.8

0.9
6.0
-0.8

554.2
775.6
211.0

2.1
8.7
-1.3

3.0 1,540.8
7.5 1,560.7
—
-19.9

4.8
6.4
—

1,409.6 1,445.9
1,091.4 1,165.0
318.1
280.9

2.6 1,454.2
6.7 1,252.7
—
201.5

0.6 1,427.1
7.5 1,365.3
—
61.8

-1.9 1,470.3
9.0 1,467.3
—
2.9

Memorandum
Deposit insurance (included above):
Resolution Trust Corporation
Bank Insurance Fund
FSLIC Resolution Fund
Savings Association Insurance Fund
and Other
Subtotal, Deposit insurance
Desert Shield (placeholder, included
above)
Social Security (included above):
Operating surplus
Interest
Total

—

34.3
8.0
2.8

-1.0

—

-0.8

—

0.4

—

-0.3

111.5

88.1

—

44.2

—

-38.1

—

-42.3

8.2

4.6

—

0.8

—

0.4

40.3
20.2

38.7
23.7

—

45.3
28.0

—

56.6
32.8

—
—

65.5
38.3

60.4

62.4

—

89.3

—

103.9

84.6
15.9
11.1
_*

Percent change measures change from previous year.
* $50 million or less.




76.1
9.7
3.3

—
—

73.3

—

-47.6
6.8
2.2

—
—
—

-45.7
0.9
2.7

—
—

—

—

—

—
—
—

-32.0
0.6
1.5

*
—

—
—
—

—

-29.9

—

—

—

—
—

77.2
44.6

—

—

121.8

—

—

Part One-lO

THE BUDGET FOR FISCAL YEAR 1992

Table II-7. RECEIPTS MEASURES, 1991-1996
(In millions of dollars)
1991

Enhance long-term investment1
Extend HI coverage to State and local employees2
Improve retail compliance with alcohol special occupational taxes2
Increase IRS enforcement funding
Extend tax deadlines for Desert Shield (placeholder) participants
Extend railroad UI reimburseable status2
Increase HUD land sales fee
Extend abandoned mine reclamation fees
Extend R&E credit
Extend R&E allocation rules
Establish family savings accounts
Extend health insurance deduction for self-employed
Extend low-income housing credit
Extend targeted jobs credit
Establish enterprise zones
Waive excise tax for certain early withdrawals from IRAs .
Extend business energy credits
Double and restore adoption deduction
Extend highway trust fund taxes2

1992

1993

1994

1995

1996

3,000
1,125

1,700
1,537

900
1,545

1,800
1,548

1,700
1,544

—

43
35

43
133

9
176

9
180

9
184

-38
-10

21
2

6
10

400
—

—

*

—
—
—
—
—
—
—
—
—
—
—
—

—

—

—

8

*

—

-500
-346
-300
-120
-59
-56
-50
-50
-30

—

—

—

-1

*

—

-1,000
-264
-800
-239
-215
-100
-160
-70
-17
-3

—

-1
*

-1,300

-1,600
-1,800

-2,300

—

_

—

-1,300
—

-305
-64
-310
-100
4
-3
—

*

260
-1,800

—

—

—

-337
-29
-520
-110
2
-3
—

—

-337
-20
-750
-110
1
-3
-2,722

Total effect on receipts

352

2,715

561

-740

-861

-4,345

Total effect on receipts with enhance long-term investment at zero

-48

-285

-1,139

-1,640

-2,661

-6,045

* $500,000 or less.
! The proposal to enhance long-term investment is shown as estimated by the Treasury Department's Office of Tax Analysis
(OTA). Because the methodological differences among OTA, Congressional estimators, and outside experts have not yet been
resolved, totals are presented with the Administration's estimate and with a zero (neutral) entry for the proposal.
2 Net of income tax offsets.

Table II-8. DEFICIT IMPACT OF ADMINISTRATION PAY-AS-YOU-GO
PROPOSALS
(In billions of dollars)
1991

Deficit impact of Administration pay-as-you-go proposals:
Direct spending (see Table II—8)
Receipts:
Extenders (selected)
Long-term investment incentive1
All other

1992

-0.1
*

-0.4
*

1993

1994

1995

1991-95

-6.3

-9.3

-9.0

-11.0

-35.8

1.1
-3.0
-0.8

1.8
-1.7
-0.6

1.7
-0.9
0.2

2.0
-1.8
0.9

6.6
-7.8
-0.3

-2.7

-0.4

0.9

1.0

-1.5

Total, receipts
Total, receipts with long-term investment incentive
at zero

-0.4

0.3

1.3

1.8

2.8

6.3

Total, net deficit impact
Total, net deficit impact with long-term investment incentive at zero

-0.5

-9.0

-9.8

-8.1

-9.9

-37.3

-0.1

-6.0

-8.1

-7.2

-8.1

-29.5

*

* $50 million or less.
xThe proposal to enhance long-term investment is shown as estimated by the Treasury Department's Office of Tax Analysis
(OTA). Because the methodological differences among OTA, Congressional estimators, and outside experts have not yet been
resolved, totals are presented with the Administration's estimates and with a zero (neutral) entry for this proposal.




II.

Part One-23

DIRECTOR'S INTRODUCTION AND OVERVIEW TABLES

Table II-9. PROPOSED POLICY CHANGES IN MANDATORY PROGRAMS
(Outlays; in millions of dollars)
1992
Department of Agriculture
Commodity Credit Corporation: reduce subsidies to those
with off-farm income over $125,000
Crop Insurance: increase farmer responsibility for premium
payments
Food Safety and Inspection Service: seek reimbursement
from industries for certain overtime activities
Food Stamps: effect of increased child support enforcement .
Miscellaneous User Fees: increase fees for recreation and
grain inspection and establish fees for agricultural marketing
Rural Electrification Administration: continue shift from direct to guaranteed loans
Department of Education
Guaranteed Student Loans: net impact of reducing the
number of loans that default by: improving eligibility
screening of schools; enhancing procedures for default collection; requiring risk sharing and increasing loan limitations
Department of Energy
Elk Hills Naval Petroleum Reserve: lease production rights
Power Marketing Administrations: revise the level and
schedule of the PMAs' debt repayments to the Federal
Government
Strategic Petroleum Reserve: delay required purchase of petroleum until 1992 and 19931
Department of Health and Human Services
Family Support: improve the child support enforcement system
Foster Care: limit the Federal Government's payment of administrative costs to only those required to provide benefits to low-income children
Medicaid: net impact of allowing States to expand medically-needy eligibility for pregnant women and children;
strengthening medical child support enforcement; and the
impact of Medicare proposals
Medicare:
Clinical Labs:
Apply 2% update for 1992 and 1993, only for those
below payment caps
Restore 20% co-insurance, identical to all other Part B
services
Subtotal, clinical labs
Coordinated Care Initiative: Begin a Medicare coordinated care initiative whose costs would be largely offset
by: applying home health limits by discipline and establishing a uniform disabled/ESRD secondary payor
threshold
^ h e SPR proposal saves $123 million in outlays for 1991.




1993

1994

1995

1996

-36

-90

-90

-90

-90

-77

-167

-164

-152

-146

-50
—

-50
-10

-50
-20

-50
-30

-50
-34

-29

-32

-32

-33

-34

-13

-38

-59

-74

-67

-102

-173

-229

-282

-289

-1,191

139

120

113

95

-377

-382

-406

-417

-402

36

86

-120

-129

-142

-163

-179

-210

-290

-352

-405

-452

25

75

75

90

95

-20

-50

-70

-80

-90

-450

-800

-900

-1,020

-1,160

-470

-850

-970

-1,100

-1,250

-130

25

40

70

195

—

—

—

Part One-lO

THE BUDGET FOR FISCAL YEAR 1992

Table II-9. PROPOSED POLICY CHANGES IN MANDATORY PROGRAMS—
Continued
(Outlays; in millions of dollars)
1992
Durable Medical Equipment (DME):
Adjust enteral/parenteral fee schedule
Refine DME/oxygen payment methods, in part to reflect
increased use of less-expensive oxygen delivery services

-10

1993

1994

1995

1996

-15

-15

-15

-15

-35

-85

-105

-130

-135

-45

-100

-120

-145

-150

-41

-169

-245

-323

-426

-1,045

-1,385

-1,705

-2,080

-2,500

-10

-10

-10

-10

-10

-30

-40

-50

-50

-60

-140
-670

-160
-930

-190
-1,320

-230
-1,450

-260
-1,540

Subtotal, hospitals
Outpatient Departments (OPDs): Pay a uniform rate for
outpatient services, whether performed in doctors' offices or OPDs
Physicians:
Eliminate double payment for physician collection of lab
specimens
Establish a single fee for anesthesia services
Establish a single fee for assistants at surgery
Revise 1991 Medicare volume performance standard to
correct error
Revise Medicare economic index to reflect better data
and new methodology
Use efficient rate for radiology and diagnostic tests

-1,895

-2,525

-3,275

-3,820

-4,370

-50

-100

-125

-150

-175

-10
-80
-50

-20
-150
-80

-20
-170
-90

-20
-200
-100

-25
-230
-110

-90

-150

-190

-220

Subtotal, physicians
Other:
Effect of Medicare proposals on HI premiums
Eliminate return-on-equity payments for proprietary
skilled nursing facilities
Establish a uniform payment policy for medicare covered drugs
Recalculate payments for physical and respiratory therapy, based on newer data

Subtotal, medical equipment
High-Income Beneficiaries: Reduce Federal Medicare subsidy for high-income beneficiaries (over $125,000 AGI) ..
Hospitals:
Adjust indirect medical education add-on payment factor from 7.65% to 4.4% in 1992, phasing down to 3.2%
in 1996
Eliminate duplicate payments for hospital-based nonphysician practitioners by adjusting hospital payment
update factor
Include payment for certain post-hospital services in
Medicare hospital payment
Limit graduate medical education per-resident payment, and encourage training of primary care physicians
Place Medicare hospital update on a January 1 cycle ....

Subtotal, other
Subtotal, Medicare
Supplemental Security Income: collect SSI over-payments
and charge States certain administrative fees




—

-30

—

—

—

—

-10

-15

-20

-20

-170

-350

-445

-530

-605

17

20

26

30

33

-50

-70

-60

-60

-70

-10

-30

-30

-40

-40

-10

-10

-15

-15

-20

—

-53

-90

-79

-85

-97

-2,854

-4,159

-5,219

-6,083

-6,878

-96

-159

-250

-250

-240

II.

Part One-25

DIRECTOR'S INTRODUCTION AND OVERVIEW TABLES

Table II-9. PROPOSED POLICY CHANGES IN MANDATORY PROGRAMS—
Continued
(Outlays; in millions of dollars)
1992
Department of Housing and Urban Development
Federal Housing Administration: reduce FHA multifamily
insurance claims through: improved underwriting, monitoring, and servicing; removal of legislative restraints on
defaulted property sales; and the proposed Low-Income
Resident Economic Empowerment program
Government National Mortgage Association: exempt GNMA
from VA's formula for acquiring foreclosed property producing savings for VA-guaranteed loans acquired by
GNMA
Department of the Interior
Arctic National Wildlife Refuge: lease oil and gas exploration rights

1993

1994

-564

-1,062

-1,024

-860

-1,269

-45

-38

-25

-20

-19

-1,901

-1

-1,201

-1

-193

-204

-200

-194

—

Department of Labor
Trade Adjustment Assistance: repeal TAA benefits for workers unemployed due to competition from imports

-114

Department of Treasury
Coinage Profit Fund: finance numismatic and bullion coin
operations for the United States Mint

-94

Department of Veterans Affairs
Veterans Compensation and Pension: standardize Dependency and Indemnity Compensation payments; increase
pension eligibility requirements and extend several expiring provisions of OBRA
Veterans Home Loans: raise fee and require down payment
for multiple use of loan guaranty benefit; improve formula
used to acquire foreclosed property and extend expiring
OBRA fee increase
Veterans Readjustment Benefits: target eligibility for vocational rehabilitation to veterans with higher rated disabilities and eliminate step-children from eligibility for training and education benefits
Veterans Third Party Medical Recoveries: extend several expiring provisions of OBRA
Environmental Protection Agency
Pesticide Reregistration Fee: remove existing cap on
amount that may be collected from any one registrant
Other Agencies
Corps of Engineers: expand existing user fees for day use of
developed recreational sites
Postal Service: require the Postal Service to pay a larger
share of the costs for health benefits and cost-of-living adjustments for post-1971 retired postal employees and
their survivors
Railroad Retirement Board: reflects net impact of conforming rail security benefits with social security benefits and
requiring the rail pension to finance 25% of the windfall
benefits
Other
Total, outlay savings

280-000 0 - 9



1 - 2 (PART 1)

—

—

1995

—

1996

—

-17

-433

-391

-354

-320

-308

-242

-202

-178

-160

-12

-32

-31

-31

-31

—

—

-225

-255

-274

-3

-3

-3

-3

-3

-20

-20

-20

-20

-20

-198

-198

-198

-198

-198

145
8

142
15

141
17

139
20

137
24

-6,316

-9,344

-8,984

-10,987

-10,999

Part One-lO

THE BUDGET FOR FISCAL YEAR 1992

Table 11-10. POTENTIAL BLOCK GRANT PROGRAMS
(In millions of dollars)

Enacted

Proposed

1991

Department/Programs
BA

1992
O

BA

1993
O

BA

1994
O

BA

1995
O

BA

1996
O

BA

O

Education:
Impact aid payments
Supplemental education opportunity grants
Chapter 2 block grant
Public library services programs

781

815

620

695

620

651

620

624

620

620

620

620

520
449
143

404
533
155

347
449
35

498
465
115

347
449
35

352
445
71

347
449
35

347
449
35

347
449
35

347
449
35

347
449
35

347
449
35

Environmental Protection Agency:
Construction grants

2,083

2,345

1,900

2,195

1,200

2,082

600

1,883

5,178
2,800

5,167
2,800

5,878
2,800

5,867
2,800

6,453
2,800

6,440
2,800

7,062
2,800

7,048
2,800

7,701
2,800

7,686
2,800

8,366
2,800

8,349
2,800

1,610

1,669

1,025

991

875

796

625

552

475

393

375

287

Health and Human Services:
State welfare administrative expenses for Medicaid, AFDC,
and Food Stamps
Social services block grant
Low-income home energy assistance program

—

1,482

—

1,025

Housing and Urban Development:
Selected public and subsidized
housing programs
Community development block
grants

5,512

3,185

4,789

3,805

4,837

4,484

4,897

4,685

4,961

5,036

5,026

4,968

3,200

3,073

2,920

3,097

2,920

3,061

2,920

2,906

2,920

2,914

2,920

2,915

Justice:
Byrne Memorial State and local
law enforcement assistance
program

490

342

490

421

490

475

490

481

490

484

490

491

Total




22,766 20,488 21,253 20,949 21,026 21,657 20,845 21,810 20,798 22,246 21,428 22,286

Part One-27

II. DIRECTOR'S INTRODUCTION AND OVERVIEW TABLES

Table 11-11. PROPOSED OUTLAYS, BY AGENCY
(In billions of dollars)

Agency

Discretionary Mandatory

Cabinet Agencies:
Agriculture
Commerce
Defense—Civil
Defense—Military
Education
Energy
Health and Human Services
Housing and Urban Development
Interior
Justice
.
Labor
State
Transportation
Treasury
Veterans Affairs
Major Agencies:
Deposit Insurance Accounts
Environmental Protection Agency
General Services Administration
National Aeronautics and Space Administration
Office of Personnel Management
Small Business Administration
Other Agencies:
Executive Office of the President
Funds Appropriated to the President
Judicial Branch
Legislative Branch
Other Independent Agencies
Allowances
Undistributed offsetting receipts
Total Outlays
1 Includes




1992

19911

impact of supplemental and rescissions.

Total

Discretionary Mandatory

11.6
2.9
3.4
288.3
18.8
16.0
27.8
21.8
6.6
7.7
8.8
4.0
30.5
8.8
13.9

43.9
-0.1
23.0
-0.8
6.1
-2.4
458.4
1.7
-0.2
1.0
25.7
0.3
0.2
268.3
17.5

55.4
2.8
26.4
287.5
24.8
13.5
486.3
23.5
6.4
8.7
34.5
4.3
30.8
277.1
31.3

12.5
2.9
3.5
283.8
20.5
17.4
28.7
23.4
6.7
9.0
9.2
4.2
31.6
9.6
14.7

0.1
5.9
0.9

111.4
-0.1
-0.1

111.5
5.8
0.8

13.5
0.2
0.5

35.0

0.3
11.8
1.9
2.2
10.3
8.2

-0.5
0.2
0.3
4.0

—

526.3

Total

43.2
-0.1
24.7
-0.7
7.0
-2.5
496.6
0.9
-0.2
1.0
25.5
0.3
0.3
289.0
18.1

55.7
2.8
28.2
283.0
27.5
14.9
525.3
24.3
6.5
10.0
34.8
4.5
31.9
298.6
32.8

6.1
0.9

88.1
-0.2
-0.1

88.1
5.9
0.7

13.5
35.2
0.5

14.7
0.2
0.5

36.8
-0.2

0.3
12.7
2.2
2.6
9.4
4.7

-109.4

0.3
11.3
2.1
2.5
14.2
8.2
-109.4

883.3

1,409.6

532.1

—

—

—

—

—

—

14.7
37.0
0.3

-118.0

0.3
12.0
2.3
3.0
14.0
4.7
-118.0

913.8

1,445.9

—

-0.7
0.1
0.4
4.6
—

Part One-lO

THE BUDGET FOR FISCAL YEAR 1992

Table 11-12. DISCRETIONARY PROPOSALS, BY APPROPRIATIONS
SUBCOMMITTEES
(In millions of dollars)
1991
Enacted

Appropriations Subcommittee
BA

1991
Proposed

Outlays

BA

1992
Proposed

Outlays

BA

1992 Proposed Less
1991 Enacted

Outlays

BA

Outlays

Domestic Discretionary
Commerce, Justice, State and Judiciary
District of Columbia
Energy and Water
Interior
Labor, HHS, and Education
Legislative Branch
Rural Development, Agriculture, and Related Agencies
Transportation
Treasury, Postal Service and General Government ...
Veterans Affairs, HUD, and Independent Agencies ...
Allowances
Total Domestic Discretionary

13,941
568
9,062
12,758
55,972
2,158

14,311
575
8,607
11,816
54,074
2,165

13,981
568
9,062
12,758
56,197
2,158

14,339
575
8,607
11,816
54,269
2,165

15,686
536
9,830
12,068
56,003
2,664

15,927
536
9,132
12,214
57,352
2,597

1,745
-32
768
-690
31
506

1,616
-39
525
398
3,278
432

8,845
12,498
11,872
60,265

8,901
29,842
10,772
58,549

8,856
12,498
11,872
60,198

8,914
29,842
10,772
58,516

10,204
14,560
10,807
64,914
97

9,674
31,067
11,241
62,195
97

1,360
2,062
-1,065
4,649
97

773
1,225
469
3,646
97

197,370 212,032

9,431

12,419

268,994 281,393 265,681 280,611 270,866 275,474
11,578
10,955
10,355
10,513
11,780
11,443
7,939
8,290
8,410
7,928
8,143
8,366
166
225
225
166
225
178
336
335
335
336
337
339

1,872
825
-267
3

-5,919
1,089
427
12
2

288,919 300,189 286,109 299,554 291,351 295,800

2,432

-4,389

—

187,939

—

—

199,612 188,147

—

199,814

Defense Discretionary
Defense
Energy and Water, Function 050
Military Construction
Commerce, Justice, State and Judiciary
Veterans Affairs, HUD and Independent Agencies ....
Total Defense Discretionary
Allowance for Desert Shield (placeholder)
Total Defense Discretionary with Allowance for
Desert Shield (placeholder)

—

—

14,000

8,200

—

4,611

288,919 300,189 300,109 307,754 291,351 300,411

—

—

4,611

2,432

222

1,123
12,441
1

274
723

International Discretionary
Commerce, Justice, State, and Judiciary
Foreign Operations
Labor, HHS and Education
Rural Development, Agriculture, and Related Agencies
Total International Discretionary
Total Discretionary




4,279
14,869
8

4,632
12,855
9

4,379
14,730
8

4,715
12,897
9

5,402
27,311
9

4,906
13,578
9

—

981

1,097

1,011

1,120

1,301

1,120

320

23

20,137

18,593

20,129

18,740

34,022

19,613

13,885

1,021

496,995 518,394 508,385 526,308 522,744 532,056

25,749

13,662

III. ECONOMIC ASSUMPTIONS
AND SENSITIVITIES




Part One-29




in.

ECONOMIC ASSUMPTIONS AND
SENSITIVITIES

INTRODUCTION
The economic expansion that began in November 1982—the longest peacetime period of
continuous growth—has been interrupted.
Iraq's invasion of Kuwait and the heightened
uncertainties that ensued hurt consumer confidence and contributed to a curtailment of
spending. That tipped the balance in the final
months of the year from slow economic growth
to contraction.
The current downturn is widely forecast to
be shorter and shallower than the average
postwar recession which lasted 11 months with
a real GNP decrease of 2.6 percent. The more
favorable outcome expected this time reflects
the absence of cyclical imbalances and inflationary pressures. Energy conservation has
made the economy much less vulnerable to oil
shocks than it was in the 1970s. Barring a
sustained surge in the price of oil, the economy
should stabilize and turn toward recovery
within the next few months.
RECENT DEVELOPMENTS
Real GNP, which grew at a 1.4 percent annual rate in the third quarter of 1990, declined
in the fourth. The exact extent of the drop
will not be known until this spring when final
data for the quarter are available, but the decrease appears to have been substantial.
Consumer spending, business fixed investment
and housing construction fell, largely in response to the growing uneasiness about the
future.
Businesses curtailed production and employment in order to avoid an unwanted buildup
of inventories. Industrial production was reduced 2 percent from the third to the fourth
quarter, with cutbacks widespread across industries. The Nation's payrolls were trimmed
by 420,000 workers, about V2 percent. By December, the total unemployment rate reached
6.0 percent, 0.5 percentage point above the
third quarter average, but was still low by his-

torical standards.




An initial burst of inflation brought on by
the surge in oil prices following the Iraqi invasion has given way to more moderate rises
in recent months as oil prices have retreated.
After increasing at a nearly 10 percent annual
rate in August-September, the Consumer Price
Index slowed to a 3.7 percent rate in November and December. Crude oil prices, which
reached $40 per barrel at their height in October, fell below $30 early this year. Outside
of the energy sector, inflation has been subdued recently.
Money growth decelerated sharply in 1990,
with the M2 and M3 aggregates barely exceeding the lower limits of the Federal Reserve's
target ranges. In the last 3 months of the year,
both aggregates were virtually unchanged. M2
adjusted for inflation, often a leading indicator
of economic activity, fell 3 percent from its
peak in December 1989. To alleviate the decline in economic activity, the Federal Reserve
lowered the Federal funds rate from 8^4 percent in July 1990 to around 6% percent at
the beginning of this year. The discount rate
was cut by V2 percentage point in December
1990.
The 3-month Treasury bill rate dropped
about IV4 percentage points from July to the
beginning of 1991 to reach 6.5 percent. At the
longer end of the maturity spectrum, the 10year Treasury note rate declined only slightly
over the period, primarily because of uncertainties related to tensions in the Persian Gulf.
In early 1991, banks cut the prime rate V2
percentage point to 9.5 percent.
ECONOMIC ASSUMPTIONS
Short-Term Prospects.—The Administration's economic assumptions, developed jointly
by the Council of Economic Advisers, the
Treasury and the Office of Management and
Budget, show a resumption of economic growth
in the near future, with the pace accelerating
into 1992. From the fourth quarter of 1990
to the fourth quarter of 1991, real GNP is
Part One-31

Part One-lO

THE BUDGET FOR FISCAL YEAR 1992

Table I I I - 1. ECONOMIC ASSUMPTIONS
(Calendar years; dollar amounts in billions)
Actual
1989

Major economic indicators:
Gross national product, percent
change, fourth quarter over fourth
quarter:
Current dollars
Constant (1982) dollars
GNP deflator (percent change, fourth
quarter over fourth quarter)
Consumer Price Index (percent
change, fourth quarter over fourth
quarter)1
Unemployment rate, total (fourth
quarter)2
Annual economic assumptions:
Gross national product:
Current dollars:
Amount
Percent change, year over year ..
Constant (1982) dollars:
Amount
Percent change, year over year ..
Incomes:
Personal income
Wages and salaries
Corporate profits before tax
Price level:
GNP deflator:
Level (1982=100), annual average
Percent change, year over year ..
Consumer Price Index:1
Level (1982-84 =100), annual
average
Percent change, year over year ..
Unemployment rate, total,
annual average2
Federal pay raises, January (percent)
Interest rates (percent):
91-day Treasury bills3
10-year Treasury notes

Assumptions
19904

1991

1992

1993

1994

1995

1996

5.6
1.8

4.5
0.0

5.3
0.9

7.5
3.6

7.1
3.4

6.8
3.2

6.5
3.0

6.4
3.0

3.7

4.5

4.3

3.8

3.6

3.5

3.4

3.3

4.5

6.3

4.3

3.9

3.6

3.5

3.4

3.3

5.3

5.8

6.6

6.5

6.0

5.7

5.2

5.1

5,201
6.7

5,465
5.1

5,689
4.1

6,095
7.1

6,536
7.2

6,990
7.0

7,451
6.6

7,931
6.4

4,118
2.5

4,152
0.8

4,140
-0.3

4,267
3.1

4,415
3.5

4,560
3.3

4,699
3.1

4,840
3.0

4,384
2,573
308

4,644
2,700
300

4,856
2,802
294

5,182
3,006
335

5,524
3,235
379

5,887
3,467
419

6,259
3,703
447

6,655
3,950
484

126.3
4.1

131.6
4.2

137.4
4.4

142.8
3.9

148.0
3.6

153.3
3.5

158.6
3.4

163.8
3.3

122.6
4.8

129.1
5.3

135.8
5.2

141.2
4.0

146.4
3.7

151.6
3.5

156.8
3.4

162.0
3.3

5.2
4.1

5.4
3.6

6.7
4.1

6.6
4.2

6.2
4.7

5.8
4.3

5.4
4.1

5.1
4.0

8.1
8.5

7.5
8.5

6.4
7.5

6.0
7.2

5.8
6.8

5.6
6.6

5.4
6.4

5.3
6.3

1CPI for urban wage earners and clerical workers. Two versions of the CPI are now published. The index shown here is that
currently used, as required by law, in calculating automatic cost-of-living increases for indexed Federal programs.
2 Percent of total labor force, including armed forces residing in the U.S.
3 Average rate on new issues within period, on a bank discount basis. These projections assume, by convention, that interest
rates decline with the rate of inflation.
4 Based on data available as of mid-December 1990.

projected to rise only 0.9 percent, with most
of the gain in the second half of the year.
The slow growth is projected to push the total
unemployment rate to the neighborhood of 63A
percent for much of the year. Faster real
growth of 3.6 percent during 1992 is expected




to put the unemployment rate back on a downward path (Table III-l).
The assessment that the downturn will be
mild and soon turn toward recovery is based
on several factors. First, the economy entered

III.

Part One-33

ECONOMIC ASSUMPTIONS AND SENSITIVITIES

ably in 1992 due to the continuing favorable
impact on the Nation's competitive position of
the dollar's decline during 1990 and relatively
faster growth abroad. As a result, net foreign
investment in the United States will be reduced. Net domestic saving and net private
domestic investment in 1992 are projected to
be around the levels of 1990 as declines during
the period of sluggish activity in 1991 are offset by subsequent increases as rapid growth
resumes.
Second, the precipitous loss of consumer confidence since July was due to an external develIt is difficult to gauge the effect of Federal
opment, the Persian Gulf crisis, rather than
Government borrowing from the public on ininternal weakness. Confidence can be restored
terest rates and exchange rates as required
quickly if it becomes evident that there will
by the Act. Both are influenced by many facnot be a replay of the previous oil shocks.
tors besides Government borrowing in a comThird, a recovery in interest-sensitive sectors plicated process involving supply and demand
such as housing, consumer durables and busi- of credit and public perceptions of fiscal and
ness investment is likely as a consequence of monetary policy here and abroad. The proposthe fall in interest rates in recent months. als in this budget are not expected to exert
Moreover, economic activity will be supported
a substantial independent influence on exby an improvement in the trade balance. The
change rates.
12 percent depreciation of the dollar during
Long-Term
Assumptions.—Real
GNP
1990 has made domestically produced goods
growth is assumed to be about 3 percent annumore competitive on world markets. In addition, faster growth abroad will further boost
ally by 1995-1996, accompanied by gradual deU.S. exports relative to imports.
clines in inflation and interest rates. The
growth projection is based on a slowing in the
Finally, the rate of inflation is likely to degrowth of the labor force, offset by faster
cline in 1991 and 1992, reflecting a return to
pre-crisis oil prices, the weaker labor market, growth of labor productivity. The civilian labor
force is assumed to rise about 1.3 percent per
and greater excess capacity.
year toward the end of the projection period,
Table III—2 shows a range of estimates for
slightly less than its average of the last four
economic variables related to saving, investyears. Labor productivity is assumed to inment and foreign trade, as required by the
crease at an annual rate of 1.9 percent per
Omnibus Trade and Competitiveness Act of
year at that time, up from the 1.3 percent
1988. The merchandise trade balance and curof the last expansion.
rent account are expected to improve considerthis period of weakness in relatively healthy
condition. Unlike previous cyclical peaks, it
was not overheated last year: growth had already slowed to well below a sustainable pace,
inflation and interest rates had not spiked,
and business inventories remained in line with
final sales. With few of the imbalances that
typically arise at the end of an expansion,
there is little need for a long period of decline
while excesses are eliminated.

Table III-2. SAVING, INVESTMENT, A N D TRADE B A L A N C E
(In billions of dollars)
1990 actual
Merchandise trade balance
Current account balance
Net foreign investment
Net domestic saving (excluding Federal saving)1
Net private domestic investment

-102
-96
-88
256
185

1992 estimate
-75
-65
-60
240
180

to
to
to
to
to

-95
-85
-80
260
200

1 Defined for purposes of Public Law 100-418 as the sum of private saving and the surpluses of State and local
governments. All series are based on National Income and Product Accounts except for the current account.




Part One-lO

THE BUDGET FOR FISCAL YEAR 1992

The productivity gain is predicated on the
adoption of sound fiscal and monetary policies
that foster a higher rate of capital formation.
THE BUDGET OUTLOOK UNDER
ALTERNATIVE ASSUMPTIONS
Because there is considerable uncertainty
surrounding any economic projection, it is useful to consider how the budget deficit would
be affected if economic performance differed
from the assumptions underlying the budget.
Two such alternatives are examined in this
section.
The "higher growth" alternative allows for
the possibility that the economy will pass
through the next six years without a significant downturn in economic activity. Following
a one-quarter decline in real GNP in the
fourth quarter of 1990, real economic growth
resumes in 1991 at a faster pace than in the
budget assumptions. Real GNP rises 1.3 percent over the four quarters of 1991 and 3.8
percent during 1992 (Table III-3). This alternative might occur with a quick rebound in
consumer confidence and spending or a strong
performance of U.S. exports in early 1991.

GNP in this alternative is assumed to grow
3.2 percent per year in 1995-1996 compared
with 3.0 percent in the budget. Inflation and
interest rates are also assumed to be somewhat higher.
The 1992 deficit is $6.9 billion lower with
the high growth path than in the budget; by
1996 the deficit is $30.3 billion less (Table
III-4). The effect of faster economic growth
and higher inflation on receipts outweighs the
effect of higher inflation and interest rates on
outlays.
In the "lower growth" alternative, the economy experiences a sharp and lengthy downturn in 1990-1991. The banking sector is assumed to be severely affected in this scenario,
with a prolonged period of high losses and increasing insolvencies. This alternative might
arise if confidence falls even further as the
economy weakens. Economic growth following
this recession is slower than in the budget,
rising only 2.6 percent in 1996. Interest rates
and inflation are somewhat lower in this alternative because of weaker demand.
The deficit is $40.4 billion higher in 1992
on the lower growth path. This includes an

Table III-3. ALTERNATIVE ECONOMIC ASSUMPTIONS
(Calendar years)
1991
Percent increase, fourth quarter over fourth
quarter:
Real GNP:
Budget assumptions
Higher growth
Lower growth
GNP deflator:
Budget assumptions
Higher growth
Lower growth
Total unemployment rate:1
Budget assumptions
Higher growth
Lower growth
91-day Treasury bill rate:1
Budget assumptions
Higher growth
Lower growth
1 Annual




average, percent.

1992

1993

1994

1995

1996

0.9
1.3
-1.3

3.6
3.8
3.5

3.4
3.6
3.3

3.2
3.4
2.9

3.0
3.2
2.7

3.0
3.2
2.6

4.3
4.5
4.1

3.8
4.2
3.6

3.6
4.1
3.4

3.5
4.0
3.3

3.4
3.9
3.2

3.3
3.8
3.1

6.7
6.5
7.1

6.6
6.4
6.9

6.2
6.0
6.5

5.8
5.6
6.1

5.4
5.2
5.7

5.1
5.0
5.4

6.4
6.7
6.2

6.0
6.5
5.7

5.8
6.4
5.5

5.6
6.2
5.3

5.4
6.0
5.2

5.3
5.9
5.1

III.

Part One-35

ECONOMIC ASSUMPTIONS AND SENSITIVITIES

Table III-4. BUDGET EFFECTS OF ALTERNATIVE ASSUMPTIONS
(Differences from budget; in billions of dollars)
1991
Higher growth:
Receipts
Outlays
Deficit reduction (-) ..
Lower growth:
Receipts
Outlays:
BIF
Other
Total outlays
Deficit increase (+)

$8.6 billion increase in the FDIC Bank Insurance Fund (BIF) outlays. A tentative estimate
would put additional BIF outlays at $36 billion
over the next 6 years. The deteriorating health
of depository institutions is discussed in Chapter VIII.A., "Recognizing and Reducing Federal
Underwriting Risks." By 1996, the deficit
would be $71.4 billion higher in this lower
growth alternative.
STRUCTURAL vs. CYCLICAL DEFICIT
The OBRA reforms succeeded in putting the
structural deficit on a declining path. This improvement, however, has been obscured by
temporary factors.
The downturn in the economy has raised unemployment and caused GNP to fall below its
high employment level. The decline in eco-

1992

1993

1994

1995

1996

3.3
0.1

10.7
3.8

20.3
10.1

30.6
13.7

42.4
19.1

54.9
24.6

-3.2

-6.9

-10.2

-16.9

-23.3

-30.3

-13.4

-30.8

-40.2

-48.1

-57.8

-69.0

10.6
1.5

8.6
1.0

8.3
0.5

8.5
0.6

1.5
2.2

-1.4
3.8

12.1

9.6

8.8

9.1

3.7

2.4

25.5

40.4

49.0

57.2

61.5

71.4

nomic activity has also caused the budget deficit to increase. Table III—5 divides the deficit
into a cyclical component and a noncyclical
structural component. On this calculation, cyclical factors account for $45 billion of the 1992
deficit, up from $5 billion in 1990.
Assuming that, by 1996, the total unemployment rate will have returned to 5.2 percent—
its level in the second quarter of 1990—the
cyclical portion of the deficit will be $2 billion,
while the structural portion will be a $22 billion surplus. Although the cyclical deficit is
virtually eliminated by 1996, the downturn
has a lingering effect on the structural portion.
Because of the additional debt incurred while
the unemployment rate exceeds 5.2 percent,
interest costs are permanently higher. These
additional interest payments amount to $13

Table III-5. ADJUSTED STRUCTURAL DEFICIT
(In billions of dollars)
1990

1991

1992

1993

1994

1995

1996

Consolidated surplus or deficit (-) ...
Cyclical component

-220
5

-318
37

-281
45

-202
34

-62
22

-3
11

20
2

Structural surplus or deficit (-)
Deposit insurance outlays

-215
58

-281
111

-236
88

-168
44

-40
-38

8
-42

22
-30

Adjusted structural deficit

-157

-170

-148

-124

-78

-34

-8




Part One-lO

THE BUDGET FOR FISCAL YEAR 1992

billion in 1996. Without them, the structural
surplus would be $35 billion.

IMPACT OF ECONOMIC CHANGES ON
THE DEFICIT

Outlays for deposit insurance of thrifts and
banks, as well as the receipts from sales of
assets of failed financial institutions, are "onetime only" transactions that will not be repeated once the problems of thrifts and banks
are resolved. Moreover, the near-term outlays
are partly balanced by future offsetting collections when the Government disposes of the assets it has acquired. The underlying deficit is
not affected by such transactions. Removing
deposit insurance from the deficit calculation
reduces the 1992 deficit by $88 billion, and
adds $30 billion to the 1996 deficit.

Recent economic developments and changes
in the economic assumptions from the 1991
budget for 1991-1995 have a large negative
impact on the deficit (Tables III—6 and III-7).
On balance, changes from the 1991 budget assumptions are estimated to have raised the
deficit by about $71 billion in 1991, and by
$109 billion in 1995. Receipts are $49 billion
lower in 1991 and $43 billion lower in 1995.
The much weaker economy in 1991 keeps the
level of real GNP in subsequent years below
that assumed in last year's budget. Outlays
are higher in all years as a result of increased
costs for unemployment-sensitive programs
The consolidated deficit shows a large $61
and higher interest costs associated with highbillion increase between 1990 and 1992 and
er interest rates and a larger outstanding Feda very rapid improvement over the succeeding
eral debt. The enlargement of the deficit is
four years. Subtracting both the cyclical compoameliorated somewhat by slightly higher inflanent and deposit insurance from the consolition, which adds more to receipts than to outdated deficit yields an adjusted structural defilays. Changes in policies and technical
cit that declines gradually between 1991 and
reestimates, including the increased cost to re1996.
solve thrift and bank insolvencies, are not included in these figures.

Table III-6. COMPARISON OF ECONOMIC ASSUMPTIONS IN THE 1991
AND 1992 BUDGETS
(Calendar years; dollar amounts in billions)

Nominal GNP:
1991 budget assumptions1
1992 budget assumptions
Real GNP (percent change):2
1991 budget assumption
1992 budget assumptions
GNP deflator (percent change):2
1991 budget assumption
1992 budget assumptions
Interest rate on 91-day Treasury bills
(percent):
1991 budget assumptions
1992 budget assumptions
Total unemployment rate (percent):
1991 budget assumptions
1992 budget assumptions
Adjusted for July 1990 revisions.




2 Fourth

1990

1991

1992

1993

1994

1995

5,544
5,465

5,958
5,689

6,391
6,095

6,830
6,536

7,270
6,990

7,713
7,451

2.6
—

3.3
0.9

3.2
3.6

3.1
3.4

3.0
3.2

3.0
3.0

4.2
4.5

4.1
4.3

3.8
3.8

3.5
3.6

3.2
3.5

2.9
3.4

6.7
7.5

5.4
6.4

5.3
6.0

5.0
5.8

4.7
5.6

4.4
5.4

5.4
5.4

5.3
6.7

5.2
6.6

5.1
6.2

5.0
5.8

5.0
5.4

quarter to fourth quarter.

III.

Part One-37

ECONOMIC ASSUMPTIONS AND SENSITIVITIES

Table III-7. EFFECTS ON THE BUDGET OF CHANGES IN ECONOMIC
ASSUMPTIONS SINCE LAST YEAR
(In billions of dollars)

1991
Budget totals under 1991 budget economicassumptions and 1992 budget policies:
Receipts
Outlays
Surplus or Deficit ( - )
Changes due to economic assumptions:
Receipts
Outlays:
Inflation
Unemployment
Interest rates
Interest on changes in borrowing
Total, outlays
Increase in deficit
Budget totals under 1992 budget economic
assumptions and policies:
Receipts
Outlays
Surplus or Deficit ( - )

SENSITIVITY OF THE BUDGET TO
ECONOMIC ASSUMPTIONS
Both receipts and outlays are powerfully affected by changes in economic conditions. This
sensitivity seriously complicates budget planning because errors in economic forecasting
lead to errors in the budget forecast. Many
of the budgetary effects of changes in economic
assumptions are fairly predictable, however,
and rules of thumb embodying these relationships can be used to estimate how various
changes in the economic assumptions would
alter outlays, receipts, and the deficit. Table
III—8 summarizes these rules of thumb.
These standard rules of thumb do not fully
account for the budgetary impacts that are
likely in an environment where many thrifts,
banks, and other financial institutions are already under stress. In these circumstances, the
impact on outlays of lower real GNP growth
would be larger than shown in Table III—8.
In the past, an average recession has been
accompanied by a doubling in the rate of net
charge-offs of nonperforming loans at banks,




1992

1993

1994

1995

1,140.8
1,388.0

1,228.2
1,408.8

1,323.0
1,405.9

1,422.3
1,368.7

1,510.1
1,404.0

-247.2

-180.6

-82.9

53.6

106.1

-49.4

-63.2

-70.3

-57.0

-42.8

5.0
6.3
5.9
4.4

9.5
6.9
10.9
9.8

11.9
5.8
14.4
16.2

14.0
4.3
17.8
22.3

15.5
2.2
19.8
28.8

21.6

37.1

48.3

58.4

66.3

71.0

100.3

118.6

115.4

109.1

1,091.4
1,409.6

1,165.0
1,445.9

1,252.7
1,454.2

1,365.3
1,427.1

1,467.3
1,470.3

-318.1

-280.9

-201.5

-61.8

-2.9

leading to insolvencies. If the increase in
charge-offs is greater than in past recessions,
then the increase in Federal outlays to cover
the liabilities of financial institutions would
also be greater.
Table III-8 shows that if real GNP growth
is lower by one percentage point in calendar
1991 only, and the unemployment rate rises
by one-half percentage point, the 1991 deficit
will be increased by $5.9 billion. The budget
effects are much larger if the real growth rate
is assumed to be one percentage point less in
each year 1991-1996 and the unemployment
rate rises one-half point in each year. The levels of real and nominal GNP then are below
the base case by a steadily growing percentage
and the unemployment rate steadily rises compared with the base case. The deficit is $117.8
billion higher than unde * the base case by
1996.
The effects of slower productivity growth are
shown in a third example where real growth
is one percentage point lower per year, while
the unemployment rate is unchanged. In this

Part One-lO
case, the estimated budget effects mount
steadily over the years, but more slowly. The
effect on the deficit reaches $103 billion by
1996.
Joint changes in interest rates and inflation
have a smaller effect on the deficit than equal
percentage point changes in real GNP growth,
because their effects on receipts and outlays
are substantially offsetting. If the rate of inflation and the level of interest rates are higher
by one percentage point in all years, the price
level and nominal GNP rise by a cumulatively
growing percentage above their base levels. In
this case, the effects on receipts and outlays
mount steadily in successive years, adding
$63.3 billion to outlays and $78.5 billion to
receipts in 1996, reducing the deficit by $15.2
billion.
These estimates assume inflation adjustments with a 2-year lag to the ceilings for
budget authority for discretionary programs in
accordance with the procedures specified in the
Budget Enforcement Act of 1990. They also
assume that Congress would increase appropriations to the adjusted ceilings. The lag in-




THE BUDGET FOR FISCAL YEAR 1992

volved in this adjustment to the ceiling for
nominal budget authority results in a reduction in real outlays for discretionary programs
when inflation is higher than was forecast in
the Act, and an increase in real outlays when
inflation is lower.
The table also shows the interest rate and
the inflation effects separately, and rules of
thumb for the added interest cost associated
with higher or lower deficits (increased or reduced borrowing).
The effects of changes in economic assumptions in the opposite direction are approximately symmetric to those shown in the table.
The impact of a one percentage point lower
rate of inflation or higher real growth would
be of about the same magnitude, but with the
opposite sign.
These rules of thumb hold the income share
composition of GNP constant. Because different income components are subject to different taxes and tax rates, estimates of total
receipts can be affected significantly by changing income shares. These relationships are too
complex, however, tc reduce to simple rules.

III.

Part One-39

ECONOMIC ASSUMPTIONS AND SENSITIVITIES

Table I I I - 8 . SENSITIVITY OF THE BUDGET TO ECONOMIC ASSUMPTIONS
(In billions of dollars)
Budget effect

1991

1992

1993

1994

1995

1996

Real Growth and Employment
Effects of 1 percent lower real GNP growth in
calendar year 1991 only, including higher
unemployment:1
Receipts
Outlays

-5.2
0.7

-11.5
3.9

-13.9
4.5

-14.7
5.8

-15.4
7.5

-16.0
8.7

5.9

15.4

18.4

20.5

22.9

24.7

-5.2
0.7

-17.1
4.6

-32.0
9.9

-48.1
15.2

-66.0
24.4

-85.1
32.7

5.9

21.7

41.9

63.3

90.4

117.8

-5.1
0.1

-17.1
1.0

-32.2
2.8

-48.8
5.7

-67.5
10.5

-88.0
15.2

5.2

18.1

35.0

54.5

78.0

103.2

5.6
4.6

11.8
11.0

12.0
10.1

11.5
11.0

12.3
11.4

12.7
11.5

Deficit increase (+)
Effects of a sustained 1 percentage point higher
rate of inflation and interest rates during
1991-1996:
Receipts
Outlays

-1.0

-0.8

-1.9

-0.5

-0.9

-1.2

5.6
4.6

18.2
16.2

31.9
27.7

45.9
39.2

61.7
51.2

78.5
63.3

Deficit increase (+)
Effects of a sustained 1 percentage point higher
interest rate during 1991-1996 (no inflation
change):
Receipts
Outlays

-1.0

-2.0

-4.2

-6.7

-10.5

-15.2

0.7
4.3

1.9
13.6

2.4
20.0

2.6
24.1

2.9
27.8

3.1
30.0

Deficit increase (+)
Effects of a sustained 1 percentage point higher
rate of inflation during 1991-1996 (no interest
rate change):
Receipts
Outlays

3.6

11.7

17.6

21.5

24.9

26.9

4.9
0.3

16.3
2.8

29.5
8.0

43.3
15.6

58.8
24.5

75.4
34.7

-4.6

-13.5

-21.5

-27.7

-34.3

-40.7

2.7

7.6

7.9

8.3

8.8

9.0

Deficit increase (+)
Effects of a sustained 1 percent lower annual real
GNP growth rate during 1991-1996, including
higher unemployment:1
Receipts
Outlays
Deficit increase (+)
Effects of a sustained 1 percent lower annual real
GNP growth rate during 1991-1996, with no
change in unemployment:
Receipts
Outlays
Deficit increase (+)
Inflation and Interest Rates
Effects of 1 percentage point higher rate of
inflation and interest rates during calendar year
1991 only:
Receipts
Outlays

Deficit increase (+)
Interest Cost of Higher Federal Borrowing
Effect of $100 billion additional borrowing during
1991
xThe

unemployment rate is assumed to be 0.5 percentage point higher per 1 percent shortfall in the level of real GNP.