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On July 12,1974, President Nixon signed into law HR 7130, the Con gressional Budget and Impound ment Control Act of 1974. This measure contains the most radical revisions in Congressional budget ary procedures since at least the Budget and Accounting Act of 1921, which set up the Bureau of the Budget— now Office of Manage ment and Budget, or OMB— in the executive branch of the govern ment. The new procedures will shape the budget for fiscal 1977, which will be put together in calen dar 1976. New organization A joint Congressional Committee on the Budget will be established with a 23 member standing committee from the House of Representatives and a 15 member committee from the Senate. These committees, sin gly and jointly, will consider as a complete document the budget pre pared by OMB and sent up to Capitol Hill by the President. Under present procedures, soon to be sup planted, appropriations for expen ditures and receipts for revenues are acted upon by entirely separate committees in each House, com mencing with the thirteen House Appropriations subcommittees (ex penditures) and the Ways and Means Committee (revenues). Under this scheme of things, the total budget comes together only when these committees have fin ished their work, so that the final budget surplus or deficit is deter mined by the independent actions of the concerned committees. The 1 Joint Committee on the Budget, on the other hand, will approach the total budget at the very outset, with the size of the budget deficit or sur plus one of a number of initial de terminants of expenditures, rev enues and the public debt. The budget reform bill also provides for a Congressional Budget Office with a director appointed by the Speaker of the House and the Pres ident pro tern of the Senate. The staff of the Budget Office will pro vide information pertaining to the budget, appropriations bills or tax expenditures, as well as receipts, revenue estimates and changing revenue conditions. Up to now, Congressional budget makers have been seriously disadvantaged with respect to the executive branch. The legions of people in OMB and the budgetmaking sections of the var ious departments and agencies far outnumber the budget manpower now available to Congress. Although the fiscal year will begin October 1 the President will continue to submit his budget on the 15th day after Congress meets each year. After receiving reports from various committees and the Budget Office, the Budget Committees will com plete action on the first budget con current resolution on or before May 15. Between May 15 and September 15, Congress will work on the req uisite bills and resolutions providing budget and spending authority to fund federal programs. By Septem ber 15, Congress— acting through the joint Budget Committee— will (continued on page 2) Opinions expressed in this newsletter do not necessarily reflect the views of the management of the Federal Reserve Bank of San Francisco, nor of the Board of Governors of the Federal Reserve System. complete action on the second re quired concurrent resolution. Concurrent resolution The language of the budget reform bill is quite specific as to the nature and content of each concurrent res olution. It must set forth: 1. The appropriate level of total budget outlays and of total new budget authority; 2. An estimate of budget outlays and an appropriate level of new budget authority for each major functional category (federal pro grams) based upon allocations of the appropriate level of total budget outlays; 3. ' The amount, if any, of the sur plus or deficit in the budget which is appropriate in light of economic conditions and all other relevant factors; 4. The recommended level of Fed eral revenues and the amount, if any, by which the aggregate level of Federal revenues should be in creased or reduced; 5. The appropriate level of the pub lic debt, and the amount, if any, by which the statutory limit on the public debt should be increased or decreased. Thus, in the concurrent resolutions, both Houses of Congress must come to grips with the amount of money to be spent for all programs, the ordering of priorities among fed eral programs, and the manner in which revenues will be provided to fund Federal activities. The delib erate decision to run a surplus or deficit in the budget in the "light of 2 economic conditions" reflects the determination to use the Federal budget as an instrument of fiscal policy and control. If Congress wishes to stimulate the economy, a budget deficit is in order. On the other hand, if restraint upon the economy is appropriate, a budget surplus is called for. Of course, the impact of the budget upon the economy will be no different than under present budgetary proce dures, but it will be a matter of deliberate policy rather than a residual resulting from the inde pendent determination of each side of the budget. Same old problems The budget-reform package will en sure a better measure of control over expenditures and deficits in fiscal 1977 and beyond, but there remains a legacy of problems for the 1975 and 1976 Federal budgets. Be tween the post-Korean War low in 1955 and the proposed budget for fiscal 1975, Federal expenditures in creased by 344 percent, or at an 8-percent average annual rate. Rather less than half of this increase can be attributed to inflation. The major run-up in Federal expendi tures came in a rush in the mid1960's— and not entirely because of Vietnam. Transfer payments to persons and grants-in-aid to state and local gov ernments each increased nearly four-fold between fiscal 1966 and fiscal 1975. (Transfer payments in clude social-security benefits, medi care, aid to the disabled and public welfare payments, while grants-inaid cover a variety of manpower, public welfare and other programs.) With the advent of general revenue sharing with state and local govern ments in 1973, the growth of grantsin-aid has slowed. But social security benefit payments have continued to rise sharply, from just under $20 billion in 1965 to more than $75 billion in 1975. Unlike social security and unem ployment insurance, which are financed out of trust-fund receipts, most of the social programs of the 1960's have been financed out of the general fund of the Treasury. The growth and lack of adequate financing of these programs have been a major factor in the large budget deficits of the past decade. Obviously, even the best and most well-intentioned programs pose budget problems when they are underfunded. In the future, the budget reform procedures will force the consideration of the funding of programs, by bringing program de cisions within the scope of a given total level of Federal expenditures. Meanwhile, we remain captive of past decisions to appropriate with out accompanying decisions to pro vide needed funds. Controlling uncontrollables At the present time, there is a con siderable amount of discussion about cutting Federal spending as a means of fighting inflation. The budget presented to the Congress in January called for total outlays of $304.4 billion— since modified by 3 Congressional actions to $307.3 bil lion. However, would-be budget cutters must face the fact that not all parts of the budget can be oper ated upon. Some of the immune expenditures are obvious. Socialsecurity benefits are contractual payments, while interest on the public debt must be paid to main tain the credit of the Treasury. Open-ended programs and those involving fixed costs, as well as out lays from prior-year contracts and obligations, are regarded as "rel atively uncontrollable under present law." This covers 73.5 percent of projected spending in the 1975 budget. "Controllable" outlays in clude about two-thirds of total defense spending (about $59 billion) and about $26 billion of civilian programs. The portion of control lable expenditures in the budget has shrunk from 40.8 percent in 1967 to 26.5 percent in 1975, so that the margin available for change or recision without specific authorizing legislation has lessened. The budget reform bill will not be of any assistance in current attempts to trim the budget. However, it is spe cifically designed to avoid the situa tion which we now face. When funds are to be appropriated, choices must be made among pro grams contesting for funds, and the money must be provided either through taxes or borrowing. This may eliminate, or at least greatly alleviate the promotion of programs with strong initial appeal but serious cost implications. Herbert Runyon o e =Q uQ!§imjse/y\ . qe;n • uoSa-io • EpBAajsj . oqepi jiembh • em joj!|E3 • e uozuv jp T O • b>|sb|v IJ (0 ®iLS®S>®^J j|'igJI®p®^[ p©mp®dla>(g[ luj^jns©^^] BANKING DATA— TWELFTH FEDERAL RESERVE DISTRICT (Dollar amounts in millions) Selected Assets and Liab ilities Large Com m ercial Banks Amount Outstanding 7/10/74 Change from 7/3/74 Change from year ago Dollar Percent + + — — + + — + + + — — + — + + 9,144 + 8,963 + 10 + 3,321 + 2,796 + 810 -1,028 + 1,209 + 6,639 + 478 + 17 + 5,790 - 232 + 6,291 - 342 + 3,974 69 169 69 24 29 12 158 58 234 906 628 71 7 158 103 90 Loans (gross) adjusted and investments* Loans gross adjusted— Securities loans Commercial and industrial Real estate Consumer instalment U.S. Treasury securities Other Securities Deposits (less cash items)— total* Demand deposits adjusted U.S. Government deposits Time deposits— total* Savings Other time I.P.C. State and political subdivisions (Large negotiable CD's) 83,578 65,625 1,177 23,325 19,558 9,381 4,818 13,135 79,076 22,575 609 54,242 17,984 27,239 6,282 14,010 W eekly Averages of D aily Figures Week ended 7/10/74 Week ended 7/3/74 50 139 89 21 247 226 Member Bank Reserve Position Excess Reserves Borrowings Net free ( + ) / Net borrowed ( - ) Federal Funds— Seven Large Banks Interbank Federal funds transactions. Net purchases (+) / Net sales ( —) Transactions: U.S. securities dealers Net loans ( + ) / Net borrowings ( —) - - + + + + + + — + + + + + 12.28 15.82 0.86 16.60 16.68 9.45 17.58 10.14 9.17 2.16 2.87 11.95 1.27 + 30.03 — 5.16 + 39.60 Comparable year-ago period - 28 135 163 + 2,091 + 1,428 + 1,213 + 171 + + 172 24 ’ Includes items not shown separately. Information on this and other publications can be obtained by calling or writing the Administrative Services Department, Federal Reserve Bank of San Francisco, P.O. Box 7702, San Francisco, California 94120. Phone (415) 397-1137.
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