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October 14, 1977
Shortfall
Pentagon purchasing agents did
their best, pushing out $1.7 billion
in new contracts on the very last
day, yet the Federal government
fell fa'r short of its spending target in
the fiscal year which ended September 30. Last January, budget
analystsenvisioned total spending
of more than $411 billion, but the
actual figure probably fell below
$402 billion. This embarrassing
situation followed on the heels of a
similar shortfall last year, which was
widely blamed for the late-1976
((pause" in economic activity.
Many people are surprised (although perhaps not concerned)
that the bureaucracy has failed to
do what it usually does very wellthat is, spend money. The average
critic believes that the Federal
government already takes too
much of our income-roughly 20 to
25 percent of total U.S. output over
the past two decades. Thus, with
outlays reduced, the Federal deficit
(and Treasury borrowing needs)
could be smaller, thereby lowering
interest payments and taxes. Under
these circumstances, more of the
nation's resources could be devoted to meeting private needs rather
than the public sector's demands.
Just as importantly, a smaller Federal deficit could lower inflationary
expe.ctationsand reduce price
pressureson the general economy.
Why worry?
The concern with a shortfall rather
focusses upon the short-run impact
which Federal underspending
could have on budget planning and
the strength of the overall economy. Continued shortfalls could
undermine the still-fragile budgetreform process, and tempt Congress to adopt broad new spending
programs.becauseof a belief that all
the money would not be spent.
Moreover, as we saw during the
1976 ((pause," a spending shortfall
could adversely affect many individuals who were counting on the
jobs created by Federally-supported construction work in their
communities.
The $7-billion shortfall in fiscal 1976
outlays, coupled with the underspending in the ensuing (JulySeptember) transition qua:rter,
could partially explain the economic slowdown during that period. (According to the Congressional Budget Office, the shortfall
reduced GNP in summer-fall 1976at
about a one-percent annual rate.)
Some observers foresee a certain
parallelism this fall, with the 1977
shortfall being accompanied by
another slowdown in economic
activity. The fears have been rein'forced by the expected dependence of the economy on government spending in the year ahead.
The second stage of the Administration's stimulus program has just
begun with large transfers to state
and local governments, most of
whom are in relatively good financial shape and anxious to spend
(continued on page 2)
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Opinions expressed in this newsletter do not
Iv reflect the views of the management o·f the
Federal
Bank of San Francisco, nor of the Board
of Covernors of the Federal Reserve System.
funds rather than reduce debt. In
total, the Federal government in
fiscal 1978 is expected to boost
outlays by some $60 billion to about
$463 billion (unified budget basis).
In the Administration's view, Federal spending of that magnitude
should help generate more than 4percent real growth in the economy, and thereby help bring the
unemployment rate below the 7percent plateau around which it has
hovered since last spring. (In the
past, a 4-percent growth rate has
been just sufficient to maintain, but
not reduce, the current jobless
rate.) Another shortfall in budgeted
expenditures could, of course,
upset those hopes.
Why the shortfall?
Actually, expenditures have fallen
short of budgeted outlays in 12 of
the past 18 years, but the shortfalls
have been especially significant last
year and this. And most of the
spending which does not occur
within the budgeted time appears
lost, not to be made up in future
budget periods. Part of the explanation may be the budget process
itself, which builds into the system a
bias toward overestimating the
government's ability to spend money. Agencies may seek more than
they can spend, in an effort to
insure even more funds in future
years for as-yet-unexpected programs.
Again, budget estimates are based
upon some sizable unknowns at the
time when estimates are initially
made. Estimatesfor open-ended
spending programs which are af2
fected by changing business conditions sometimes end up too high in
an expanding economy. (Budget
outlays decrease about $15 billion
for each one-percent drop in the
unemployment rate.) Again, snags
develop in certain programs, especially those affecting states and
localities, because of massive paperwork which involves several
government agencies in each case.
Another unpredictable factor is the
Congressional calendar, which frequently delays appropriations for
various purposes. Even the weather,
such as last winter's severe cold, can
delay spending for construction
and other programs.
Despite all the different theories,
budget experts are still not certain
what is throwing off their spending
projections. Consequently, the past
record becomes an important element in predicting future spending
patterns. And some analysts, looking at our recent experience with
the estimates produced by the
Office of Management and Budget
(OMB), argue that actual expenditures in fiscal 1978 will fall short of
the projected $463 billion.
When the enor?
But a closer look into OMB's
forecasting record can prod4ce a
surprisingly different conclusion.
The likelihood of a spending shortfall depends on which of several
different spending estimates are
compared with the expenditure
figure which finally materializes.
The first estimate-which we don't
consider in these comparisons-is
published in the January prior to
the beginning of the fiscal year, and
this is followed by the midsession
review (MSR) published each summer near the beginning of each
fiscal year. (This MSR estimate is the
one emphasized in this article.)
Later budget revisions are published within each fiscal year. For
example, a midsession review of the
fiscal 1975 budget figure was pub1ishedin May 1974, and later
projections were published in February and May 1975.
the MSR estimate for fiscal 1977,
which was made in July 1976, was
very close to (perhaps a little below)
the figure which will finally be
reported. It shou Id be noted,
however, that that estimate would
have been considerably higher
($414billion) but for Ford Administration "hold-downs" on certain
programs that were ignored in later
budget revisions.
In recent years, MSR estimates have
actually underestimated the final
outlay figures. The upward bias that
budget experts talk about-the
shortfall-occurred in fiscal 1976
and 1977only in the interyear
revisions. For example, actual final
outlays in fiscal 1976 amounted to
$366Y2 illion, representing a $7b
billion shortfall from the estimate
made the previous January, while
the probable figure for fiscal 1 977$400to $402 billion-represents
roughly a $10-billion shortfall from
last January'sestimate. In contrast,
What of fiscal 1978?In July of this
year, OMB estimated budget outlays of $463 billion for that periodmore than 15 percent higher than
the actual figure now expected for
fiscal 1977. However, given the
intense scrutiny which OMB is now
giving its own estimates, there is
less likelihood than before of a
shortfall in any of the estimates
developed for the new fiscal year.
In view of the sharp spending
increase that has already been
projected, this suggeststhat the
government sector will indeed
provide a significant stimulus to the
economy in the year ahead.
Rose McElhattan
$ Billions
475
Federal Government Outlays
(Unified Budget)
425
Estimates
Actual
MSR Later
t t
j
l
375
325
1975
Fiscal Years
3
1976
1977
1978
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B AN KI N G O AT A-TWE LfTH FEDERAL RIESIERVE DSTRDCT
D
(Dollar amounts in millions)
Se!ectedAssetsand liabilities
Large Commercial 8ani{s
Amount
Outstanding
Change from
year ago
Dollar
Percent
Change
from
9/28/77
9/21/77
-
loans (gross, adjusted) and investments*
loans (gross, adjusted)-total
Security 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*
States and pol,itical subdivisions
Savings deposits
Other time
large negotiable CD's
100,863
78,298
1,670
24,062
25,919
13,583
8,296
14,269
99,414
27,726
959
69,146
5,280
31,885
29,598
11,930
Weekly Averages
of Daily Figures
Week ended
+
+
+
+
+
+
-
+
+
+
+
+
+
9/28/77
89
68
92
32
87
87
177
20
1,087
223
431
842
1
219
492
459
+
+
+
+
+
+
+
+
+
+
+
+
+
+
10,715
10,001
220
1,842
5,077
1,828
870
1,584
9,671
2,645
406
6,582
40
4,269
2,433
655
Week ended
9/21177
+
+
+
+
+
+
+
+
+
+
+
+
+
+
11.89
14.64
15.17
8.29
24.36
15.55
9.49
12.49
10.78
10.55
73.42
10.52
0.75
15.46
8.96
5.81
• Comparable
year-ago period
Member Bank ReservePosition
ExcessReserves (+)/Deficiency (-)
Borrowings
Net free(+)/Net borrowed (-)
+
30
41
11
+
17
0
17
49
28
21
+
883
+
+
694
- 1,570
274
+
411
+
+
Federal Funds-Seven Large Banks
Interbank Federal fund transactions
Net purchases (+)/Net sales (-)
Transactions with U.S. security dealers
Net loans (+)/Net borrowings H
*Includes items not shown separately.
+
127
partnerships and corporations.
Editorial comments may be addressedto the editor (William Burke) or to the author•••.
Information on this and other publications can be obtained by calling or writing the Public
Information Section, Federal Reserve Bank of San francisco, P.O. Box 7702, San francisco 94120.
Phone (415) 544-2184.
@FedFRASER