73 January 26, 1979 A REVIEW OF THE CARTER BUDGET FY 1980 INTRODUCTION President Carter describes his FY 1980 budget as "lean and austere."

A third characteristic might be optimistic. Several of the cuts proposed by the President will require not only congres sional agreement but also changes in existing substantive legisla tion, a more difficult task. Many of these economy measures have been offered and rejected during past congresses. In addition the administration's economic forecast, when compared with other prog nosticiations, appears distinctly roseate.

The president proposes a FY 1980 deficit of $29 billion.

Revenues will be $502.6 billion,and budget authority $615.5 billion.

Budget outlays will total $531.6 billion, an increase of $38.2 bil lion over 19

79. Off-budget agencies will spend an additional 12 billion dollars.

Increases in social security payments, due to increased bene f its and a greater number of beneficiaries, compose over one-third of the growth in spending Table 1 11.3 billion. Medicare/Medicaid, veterans benefits, and interest on the national debt are additional major elements in the outlay expansion Defense spendin g rises by 2 PRINCIPAL ELEMENTS OF SPENDING GROWTH TABLE 1 A) Social Security (benefit increases due to inflation adjustment plus increase in num 12.9 billion ber of beneficiaries B) Defense $11.3 C) Medicare/Medicaid (higher medical care costs plus growin g number of benefi ciaries, especially Medicare D). Veterans Benefits E) Interest 4.1 0.2 4.2 Source: Minority Staff, House Budget Committee.

The current services budget, an estimate of the cost of merely continuing existin.g progranis, including those indexed to inflation serves as a standard by which to measure the president's budget.

TABLE 2 President's Budget Revenue 502.6 Budget Authority 615.5 Outlays 531.6 Deficit 29.0 Current Services Budqet 504.5 618.2 544.1 31.6 Source The Budget of the U.S. Gove rnment, 1980 The administration has offered additions of $7 billion to the current services outlays estimate. The increases are spread among defense, veterans compensation, medicare/medicaid, the pro posed National Development Bank, and several other smal ler programs.

Cuts of more than $11 billion enable the administration to lower outlays below the current services estimate and produce a lesser deficit. Table 3 illustrates the sources of the discretion ary $7.7 billion cuts. Three billion is due to the 5. 5 percent limit on federal pay raises and the freeze on employment. The administration also expects to save 600 million dollars throuah the elimination of 158,000 public service jobs. The $700 million redu tion in agriculture price supports is highly depe ndent upon the 3 weather, exports, and the market, all factors not easily divined.

Historically, the presidents' budgets have been overly optimistic concerning farm price supports. Further cuts are achieved through curtailment of the national petroleum res erve program and a reliance on more rigorous government purchasing policies DECREASES NOT REQUIRING SUBSTANTIVE LEGISLATION TABLE 3 Program 1982 1979 1980 1981 Energy Supply 3 Agricultural price supports 3 7 National forests 1 3 Rail transportatipn 3 5 Im p act aid 2 Higher education 4 Pay restraint, Defense 1.8 Pay restraint, Civili'an agencies 1.2 Public service employment 6 Other 1.6 Total 5 -7.7 5 3 2 3 3 1.5 2.8 1.8 7 8.1 5 1.2 3 3 l 4 3.7 2.4 5 8.2 50 million or less Source: The Budget of the U.S. Gove r nment 1980 Unlike the discretionary cuts, the remaining 3.8 billion in cuts (Table 4) must be accompanied by substantive legislation. The impressive reductions in medicare and medical expenses are based on assumptions concerning both the passage and effec t iveness of Hospital Cost Containment legislation. Last year's effort at such a bill failed. Further cuts in the health field are dependent on congressional approval of legislation requiring employees to pro vide the primary health insurance for employees over sixty-five.

The 300 million dollar reduction in veterans medical care is based upon'another proposal permitting the Veterans Administration to collect from private insurers charges incurred by veterans treated at VA hospitals.

Carter also seeks legis lation which would reduce school lunch subsidies by 400 million. Federal payments to school districts encompassing federal facilities, known as impact aid, will be slashed by 200.00 million. Congress has resisted such attempts in the past. 4 PROPOSED DECR E ASES REQUIRING SUBSTANTIVE LEGISLATION TABLE 4 Program 1979 Hospital Cost Containment Medicare 4 Medicaid l Other health financing cost-savings Veterans medical care School lunch and related Social security and railroad retirement Public assistance Other T otal 4 1980 1.5 2 4 3 4 7 2 l 3.8 1981 2.8 4 5 3 4 1.8 2 2 6.6 1982 4.3 6 5 3 4 3.1 3 2 9.7 50 million or less Source: The Budget of the U.S. Government 1980 Changes in social security, such as eliminating minimum bene fits, the lump sum payments, and pos t-secondary school student benefits will, according to the administration, save the government over one-half billion dollars in 19

80. However, two days after the budget was presented, the Washington Post (January 24, 1979) re ported that A1 Ullman, chairm an of the House Ways and Means Com mittee, refused to consider the social security cutbacks. Assuming that Ways and Means does not consider the social security reforms there have been conflicting reports) the budget deficit as of January 24, has already r isen to 29.6 billion.

Ullman's refusal illustrates the tenuousness of the Carter spending cuts. The reductions, and thus the size of the deficit are dependent on several highly unpredictable factors, most notable of which is congressional cooperation. It is possible that the a usterity of the proposed budget might be destroyed simply through Congress' failure to accept Carter's legislative proposals.

Another factor which might quickly bloat the deficit is the economy. The economy and the budget are interdependent. Changes in the size and financing of the public sector affect aggregate demand, inflation, and the credit markets. The FY 1980 budget is itself a tool designed to reduce the rate of inflation.

The president's budget, submitted nine months prior to the start of the fisc al year can be significantly altered by unantici pated, or incorrectly anticipated, changes in the economy A 5 recession, for instance, would shrink expected revenues and swell anticipated outlays, such as unemployment insurance. The result would be a lar ger deficit.

The economic assumptions within the 1980 budget are favorable to the achievement of the 30 billion deficit goal. As Table 5 illustrates, the administration projects 2.2 percent increases in real GNP for 19

79. Chase Econometrics, Data Resourc es (DRI) and the Congressional Budget Office are predicting a recession. Higher real growth, and lower unemployment means greater government reve nues and fewer outlays COMPARISON OF ECONOMIC ASSUMPTIONS Change in Real GNP President's Budget DRI (Dec. 27 C hase (Nov. 22 Wharton (Dec. 28 CBO (Jan. 2 Change in Nominal GNP President's Budget DRI Chase Wharton CBO TABLE 5 4th/4 th 1979 1980 1978 4.0 2.2 3.2 3.8 -0.5 6.5 3.7 -0.2 3.2 3.9 1.4 na 4.0 1.1 3.9 12.7 9.8 9.8 5 12.3 14 12.6 6.8 9.8 12.6 8.4 na 12.5 9.3 6.7 Unemployment (4th quarter average) President's Budget 5.8 6.2 6.2 DRI 5.8 7.1 6.8 Chase 6.0 7.5 7.7 Wharton 5.8 6.1 na CBO 5.8 6.7 6.7 Inflation (CPI President's Budget DRI Chase Wharton CBO 9.2 7.4 6.3 9.1 7.8 6.9 9.1 7.5 8.9 8.3 8.8 8.2 6.1 na 7.6 T he 4th/4th rate indicates the rate of growth from the last quarter of one year to the last quarter of the following year.

Source: House Budget Committee 6 The president's forecast of the unemployment rate for both 1979 and 1980 is substantially lower than DRI's, Chase's, and the Congressional Budget Office. Only Wharton, at 6.1 percent, is in the same range. It is estimated that for each annuai increase of 0.1 percent iiithe unemployment rate outlays will increase by 350 to $450 million. Thus, if the Chase prediction of an unemploy ment rate of 7.7 is correct, total 1980 outlays will rise another 5.0 to 6.75 billion.

Should the unemployment rate exceed the projected 6.2 percent the administration will, according to Labor Secretary Ray Marshall use triggering mechanisms to increase public jobs. Such a pro gram would require a supplemental budget request.

Again, the president is among the most optimistic in his view of inflation. Wharton and the CBO both foresee rates of over 8 percent in 1979, compared to the administration's 7.

4. The admini stration also predicts a further moderation in 1980, when the in flation rate will bea6.3 percent.

Over thirty percent of the total 1980 outlays are tied to a cost of living index. Should the actual inflation rate exceed the expected total outlays, thenthe budget deficit will rise substantially.

The cost of the real waqe insurance program is budgeted at 2.5 billion. This will be composed of $2.3 billion in reduced tax receipts and outlays of $0.2 billion to workers who se rebates exceed their tax liabilities. It is estimated that for each one percent of inflation above the anticipated 7.5, the program wil.1 cost an additional $5 billion dollars.

The interest on the national debt in 1980 will be $11.1 billion.

In derivi ng this figure Carter broke with tradition and chose the interest rate not the current Treasury bill rate, but instead an assumption of the future level of that rate rate is affected by the rate of inflation, a higher than anticipated rate of inflation wi l l produce higher than anticipated interest costs is a tentative. calculation, based upon extremely optimistic assump tions. The administration has given itself the benefit of every doubt in deriving th.e budget totals. The possibility that the bud get def icit will be much larger than529 billion, is a strong one.

The Congressional Budget Office, for instance, has predicted a defi cit of $41 billion as Since the interest The deficit of $29 billion is not a sum etched in marble. It 1. Washington Star, January 22, 1979, p. A-11. 7 HIGHLIGHTS OF THE BUDGET REVENUE The Administration has no plans for a tax cut in 19

80. In fact, it is implementing cash management policies, such as requiring state and local governments to deposit social security taxes at an accelerated rate, designed to increase total revenues. Carter ha s also proposed an oil pollution liability and compensation fee and an increase in the railroad retirement tax. The former is to finance cleanup of oil spills and the ;latter is deemed necessary to the solvency of the retirement fund DEFENSE Carter's budg e t, in accordance with his pledge to NATO, in creases real defense spending by 3.1 percent. Procurement funds, increased by 7.8 percent in real terms, are to finance among other items, a Trident submarine, a conventionally powered aircraft carrier improvem ents in the Minuteman missile, and an air launched cruise missile. Funds for research, development, test and evaluation were increased 4.2 percent in real terms.

Despite the seemingly impressive gains, the Carter defense budget barely exceeds the current s ervices estimate. Much of the increase in procurement and research has been financed through a lid on military personnel costs than 1 percent in 1980, 1981, and 1982 Outlays for personnel rise by less Although 1980 outlays increased by 9.9 percent, budget authority rose only 8.1 percent authority again in 1981 and 1982 authority might be a handicap in developing long term defense projects The growth in outlays substantially exceed The effect of this squeeze in ENERGY The 1980 budget contains $15 billion in new borrowing authority for the Tennessee Valley Authority. Solar energy outlays, increasing by nearly 180 million, will produce a 40 percent increase in re search and a 22 percent increase in application funds Nuclear energy outlays were cut $125 million below the 1979 The reductions were accomplished through the cancellation level of the Clinch River breeder reactor and the decision not to repro cess spent fuel from commercial nuclear power plants. 8 COMMUNITY AND REGIONAL DEVELOPMENT The primary interes t in this function is Carter's proposed National Development Bank. The bank with budget authority of 3.5 billion, would offer grants, guaranteed loans, and other financial assistance to businesses located in economically depressed areas.

The budget would a lso increase, by 150 million, HUD's community block grant. Also contained within the budget are $150 million in authority and $76 million in outlays for the proposed Inland Energy Assistance program. The purpose is to "provide funds for non-costal states, communities, and Indian tribe,s 'to develop and carry out plans for mitigating the adverse effects of rapid popu lation growth due to the development of energy resources EDUCATION TRAINING EMPLOYMENT AND SOCIAL SERVICES The FY 1980 budget includes $400 mi l lion in authority, along with a supplemental request of $258 billion in FY 1979, for special grants to school districts with a high concentration of needy stu dents authority increment of $58 billion. Budget authority for an addi tional 20,000 guaranteed student loans is also provided.

The administration plans a decline in outlays for public service jobs of one half billion dollars. The 1980 outlays of 4.9 billion will provide jobs for 467,000 down from the current 625,000.

It is anticipated that the priv ate sector, spurred by the$603million Target Employment Tax Credit program, will take up the slack 250,000 jobs. The minimum eligibility requirement will now be fif teen, rather than fourteen Education of the handicapped receives an appropriations The sum m er youth employment program will lose funding for HEALTH In addition to the legislative savings of the Hospital Cost Containment proposal, the Carter health budget calls for Medicaid coverage for an additional 2 million children, under the auspices of the Children's Health Assessment Program (CHAP bility will also be extended to 100,000 low income pregnant women age of Rosalyn Carter and Joseph Califano, respectively, receive a boost in budget authority Medicaid eligi The mental health and anti-smoking pro grams, under the patron INCOME SECURITY The administration has proposed legislation which will eliminate several social security expenditures fare programs are, by law, indexed to the rate of inflation.

Other social security and wel 9 Carter has budgeted outlays of 6.7 billion, the same as the 1979 sum, for the aid to Families with Dependent Children Program.

Improvements in cash management and a crackdown in abuses are ex pected to achieve the necessary economies GENERAL PURPOSE FISCAL ASSISTANCE The admi nistration proposes to establish a targeted fiscal assistance program designed to replace the expired Anti-recession Fiscal Assistance Program (ARFA). The targeted assistance would be applied specifically to cities which became highly dependent upon ARFA. Supplemental authorizations and outlays of 250 million are requested for 19

79. Outlays of 150 million are projected for 1980.

Carter also plans to offer an additional 250 million in New York City loan guarantees LONG TERM OUTLOOK The Carter budget introduces, i,n the 1980 budget, a three year perspective. Thus the budget is a plan for not only 1980, but also 1981 and 1982.

According to this longer term outlook the budget will produce a surplus of $37.8 billion in 19

82. A balanced budget will be missed by a scant 1.2 billion in 19

81. Carter points out that as a percen tage of GNP, government spending will decline from 21.2 to 20.3 percent.

There are two caveats to this encouraging prediction. One is that the 1982 projections are based on the same optimistic economic and legislative assumptions as the short term budget.

Secondly, there are no tax cuts planned. The anticipated growth in reven ues is reliant upon increased social security taxes, inflation inspired rises in personal income, and remunerative cash management policies. The ratio of receipts to GNP, in contrast with the spending rises from 20.1 percent in 1980 to 21.6 percent in 198 2.

The president's budget now goes to the.Senate and House Budget committees where it will serve as the starting point for their deli berations. Congress will present its own budget on May

15. Since actual appropriations will be based on the congressional budget, the May 15th document will better reveal the economic role chosen by the government.

Eugene McAllister Walker Fellow in Economics