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January 2, 1981
Hit List?
As soon as the chaplain completes his
reading from the Bible next Monday, the
members of the 97th Congress will turn their
attention to what has become a new bible on
Capitol Hi I I -a Congressional Budget Office
report on "Reducing the Federal Budget."
The CB O prepared the report early last year in
response to a request from eight Congressmen who wanted to find ways to stem the
acceleration in Federal spending. The report
undoubtedly will become'''must'' reading
this year because of the growing belief on the
Hill that promised tax reductions must be
accompanied by spending cutbacks if inflation is to be held in check.
In its report, the CB O listed 56 specific areas
where spending cutbacks could be made,
along with 16 possible changes in "tax
expenditures" (loopholes) and 3 possible
improvements in administrative areas. This
"hit list" could yield substantial savings from
projected budget levels over the 1981-85
period -the time-span specified by the Congressional sponsors of the study. If the savings
from all the individual items were totalled,
they wou Id exceed $400 bi II ion over the fiveyear period. That figure is exaggerated, however, "because some of the items are alternatives to others, and because possible ripple
effects in still other programs preclude a precise estimate of aggregate net savings." The
savings would be substantial in any eventbut so wou Id the pol itical costs, as can be
seen from a reading ofthe CB O report, which
scrupulously setsforth the arguments on both
sides of each proposed cutback.
Surgein spending
In recent decades, Federal spending has
grown substantially-in nominal terms, in
real terms (after adjusting for inflation), and
relative to the size of the economy. Federal
receipts have also grown substantially, as
many voters noted on their march to the polls
in November-although
the spending pace
has been much faster, leading to a growing
gap between the amounts collected and
spent by the Federal government. Between
the 1 955-59 and 1 975-79 periods, receipts
rose from 1 7.2 to 19.4 percent of GNP, but
spending jumped from 17.9 to 22.0 percent
of GN P (see chart). The widening gap led to
soaring deficits, which in the 1970's totalled
$31 5 billion -an amount roughly matching
the sum of all the deficits recorded in the
nation's entire earlier history.
This situation did not develop overnight, as
the CB O staff notes: "The growth and shape
of the current Federal budget is largely the
consequence of decisions, not of the current
Congress, but of past Congresses." Budget
trends were i rifluenced by some forces wh ich
Congress itself cou Id not affect, such as the
nation's changing age composition, especially the expansion of the aged population. But
Congress also responded to various interest
groups pushing for a new or enlarged Federal
role in caring for the old, the poor. and the
jobless-and in supporting those groups
againstthe ravages of inflation. And Congress
responded as well to state-and-Iocal government pressures for Federal help in meeting the cost of highways and other public
faci Iities.
Spending cutbacks might at first glance appear hopeless, especially if the budget is
considered only in terms of broad budget
categories. More than 20 percent of all Federal spending is for defense, and a bipartisan
majority seems bound to increase spending
in this category substantially, rather than the
reverse. Another 40 percent of all Federal
spending goes for social security, medicare
and unemployment compensation, and most
candidates last fall agreed that the bulk of
these programs would not be cut. Interest on
the debt accounts for another 10 percent of
Federal expenditures, and those costs have
been going up rather than down in line with
skyrocketing interest rates. The 10 percent
involved in grants to states and local govern-
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Opinions expressed in this newsletter do not
rlecessarilv reflect the views of the rnanagernent
of the Federal Re::ierve Bank of San Francisco.
nor of Hie Board of Covernc\rs of the Federa!
Reserve System,
to encourage certain kinds of activity orto aid
certain types oftaxpayers. Examples of potential savings in this category would include
limitations on home-mortgage interest deductions or termination of subsidies on (tax
exempt) single-family housing bonds. Lastly,
under the heading of improved administration, increases in revenues could stem from
such steps as tax withholding on interest and
dividend income.
ments can be cut only by shifting the burden
of those programs to other governmental levels. And the programs involved in the other
20-25 percent of the budget all have their
staunch partisans in agriculture, construction, health and other interest groups.
"Illustrative savings"
Faced with that problem, the CB O staff gave
their Congressional sponsors a lengthy list of
possible cutbacks, under five different categories. (Although termed illustrative, the projected dollar savings represented the CB O's
best estimates of what could be achieved
overthe 1 981 -85 period.) Under the heading
of "management efficiences," which includes ending duplication and improving
program administration, the CB O staff listed a
number of potential savings, such as eliminating farm deficiency payments or reforming
the wage-board (blue collar) pay system.
Under the heading of "better targeting" of
payments and subsidies at the most needy
rather than broader groups, the staff listed
such possibilities as restructuring the.col legestudent loan program or modifying childnutrition programs.
Retirement programscrucial
Although savings apparently can be achieved
across a wide range of Federal programs, the
CB O's approach apparently wou Id rely heavilyon limitations on the growth of various
reti rement programs. Several proposals
would involve a shift in indexing procedures.
Roughly $30.0 billion could be saved over
the 1 981 -85 period if the government used
a modified consumer-price index to index
benefits for about 44 million beneficiaries
of major retirement plans-replacing the
present CPI, which tends to overstate homeownership costs. Again, roughly $39.6 billion
could be saved if the government adjusted
cost-of-living increases for social-security
beneficiaries by 85 percent instead of 100
percent of the CPI increases-adjusting for
the exemption of social-security benefits
from income and payroll taxes. In both cases,
the reason for limiting indexation would be to
ensure that no group in the population obtains greater legislative protection against inflation than any other group.
Several other categories of savings would be
accomplished simply by shifting responsibility for certain programs to the private sector
or to other levels of government. For example, limiting Federal highway aid or raising user charges for airports and airways
would generate large savings, although this
would mean forcing other sectors to pick up
the costs if they want the services continued.
A fifth category of "revised judgments,"
which involves reversing past policy decisions which have proven too costly in the
light of changing priorities, could yield savings from (for example) a hospital costcontainment program or replacement of the
M X missile program by an expanded seabased deterrent.
Another proposal would involve the taxation
of some portion of social-security benefits. If
half of such benefits were taxed, the proposal
would yield $36.0 billion in revenues over a
five-year period. When social-security benefits were first paid 40 years ago, the Internal
Revenue Service exempted them from income taxation on the theory that they represented general assistance to the elderly; who
were generally poor. The tax loss was negligible in those days, but the annual loss to the
Treasury could approach $20 billion in 1985,
because many upper-income recipients are
now subsidized by the tax-free status of such
The CB O staff noted that similar reductions
could be achieved on the tax side of the
budget through cuts in "tax expenditures,"
which are special provisions in the tax code
2
benefits. In these circumstances, taxing onehalf of social-security benefits might representthe most equ itable way of treati ng socialsecurity and other retirement plans in the
same fashion.
fully in somebody else's garden. Strong reasons can be advanced for retaining-rather
than terminating or limiting-practically
every item on the list. But in this day oflirnited
horizons, it seems imperative that Congress
spend as much time examining the need for
existing programs as it does analyzing the
arguments for proposed new programs.
The CBO's listof "illustrative savings" -or hit
list, as it might be called-could provide the
new Congress with some very difficult decisions. There are a number of sacred cows
involved, and all appear to be grazing peace-
William Burke
Federal Ac tivity as
Perce'nt of GN P
Percent
25
20
Receipts ...
15
10
5
o
1 955-59
1 960-64
1 965-69
3
1970-74
1975-79
U018U!4SE'M• 4E'ln • uo8cu O • E'PE'i\ClN 04E'PI
•
HE'ME'H • E'!U.l0j!lE':)
E'U OZ! JV.
E'>jSE'IV
CS
Y:0)
\ill\2?
J(
\ill\2?
CD)
\ill
BANKING DATA-TWELfTH fEDERAL
RESERVE
DISTRICT
(Dollaramounts millions)
in
Selected
Assetsand Liabilities
large Commercial
Banks
Loans
(gross,
adjusted) investments*
and
Loans
(gross,
adjusted) total#
Commercial industrial
and
Real
estate
Loans individuals
to
Securities
loans
U.s.Treasury
securities*
Othersecurities*
Demand
deposits total#
Demand
deposits adjusted
Savings
deposits total
Timedeposits total#
Individuals, & corp. .
part.
(Large
negotiable
CD's)
WeeklyAverages
of Daily figures
MemberBani, eserve
R
Position
Excess
Reserves )/Deficiency )
(+
(Borrowings
Netfreereserves )/Net borrowed(
(+
-)
Amount
Outstanding
12/17/80
146,314
124,023
37,049
49,915
23,937
1,323
6,726
15,565
46,189
33,010
28,426
70,979
61,633
28,061
Change
from
yearago
Dollar
Percent
Change
from
12/10/80
798
694
705
97
82
31
1
105
176
-1,068
- 449
1,040
867
33.9
-
9,416
10,120
4,435
6,645
354
334
548
156
908
1,118
216
11,958
11,427
6,034
Weekended
Weekended
12/17/80
12/10/80
n.a.
196
n.a.
n.a.
Comparable
year period
-ago
n.a.
64
6.9
8.9
13.6
15.4
1.5
20.2
7.5
1.0
2.0
3.5
0.8
20.3
22.8
27.4
-
30
208
239
* Excludes
trading
account
securities.
# Includes
items shown
not
separately.
Editorial
comments be addressed theeditor(WilliamBurke) to theauthor.... free copies this
may
to
or
of
andotherfederalReserve
publications beobtained calling writingthePublic
can
by
or
Infonnation
Section,
Federal
Reserve of San.Francisco, Box7702,Sanfrancisco
Bank
P.O.
Phone
(415) 544-2184.
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