The Heritage Foundation

Issue Bulletin #42

June 7, 1979

June 7, 1979 | Issue Bulletin on

A Review of the FY 1980 Budget Resolution

(Archived document, may contain errors)

42

June 7, 1979

A REVIEW OF THE FY 1980 BUDGET RESOLUTION

The House and Senate have approved a FY 1980 First Resolution which reduces the FY 1979 deficit, offers a FY 1980 deficit lower than President Carter's, and projects a balanced budget in FY 1981. Unfortunately this achievement is not the result of incisive and sizable cuts in spending. Congress chose instead to rely on the expansion of tax revenues through inflation.

THE RESOLUTION

The first budget resolution sets as non-binding FY 1980 targets: revenues of $509 billion, budget authority of $604.4 billion, outlays of $532 billion, and a deficit of $23 billion. By comparision, President Carter's budget, revised March 15, calls for revenues of $503.9 billion, budget authority of $615 billion, outlays of $532.3 billion, and a deficit of $28.4 billion.

Under the budget process created in 1974, Congress sets targets not only for the aggregates but also for the functional categories. The latter figures serve as guidelines for the Appropriations Committees' line item spending decisions. Congress' functional allocation closely resembles that proposed by President Carter. (Table 1)

major differences between House and Senate resolutions were lower defense spending and greater budget authority for Education, training, employment, and social services in the House. The House also voted to eliminate general revenue sharing for the states. The conferees, however, increased defense spending and restored $1.9 billion of the $2.3 billion in revenue sharing cuts. Although the original conference report cut the House's budget authority for education, $350 million was added after the H6use voted down the conference bill.

Congress' recent budget action also contains a revision of the FY 1979 Second Resolution. The current deficit is reduced from $38.8 billion to $33.5 billion. This seemingly auspicious

Table I

FY 1980 FUNCTIONAL CATEGORIES

Budget Authority Outlays (in millions)

National Defense 136,600 124,200

International Affairs 12,600 7,900

General Science, Space, and Technology 5,700 5,500

Energy 18,800 6,800

Natural Resources and Environment 12,600 11,700

Agriculture 5,000 5,400

Commerce and Housing Credit 6,900 3,200

Transportation 19,450 18,200

Community and Regional Development 8,900 8,100

Education,training, employ- ment and social services 30,850 30,500

Health 58,100 53,600

Income Security 214,800 183,300

Veterans Benefits and Services 21,200 20,600

Administration of Justice 4,200 4,400

General Government 4,400 4,300

General Purpose Fiscal Assistance 8,100 8,100

Interest 56,000 56,000

Allowances -100 -100

Undistributed Offsetting Receipts -19,700 -19,700

3

event is attributable entirely to the higher revenue estimates due to inflation. The revision actually increases FY 1979 budget authority by $3.6 billion and outlays by $7 billion. (Table 2.)

During debate on the debt limitation ceiling, Senator Russell Long (D.-La.) proposed, and Congress accepted, an amendment requiring the Budget Committees to prepare alternative budgets projecting a balance in either FY 1981 or FY 1982. Congress has within the first resolution indicated its preference for a balanced budget in FY 1981, a course which precludes a tax cut. Under this scenario outlays will rise 16.8 percent from FY 1979 to 1981. In contrast total revenues will rise over 26 percent. A tax cut affecting FY 1982 is foreseen.

Table II

BUDGET AGGREGATES

FY 1979 FY 1980 FY 1981 FY 1982 (revised)

Revenues 461.0 509.0 583.3 621.0

Budget Authority 559.2 604.4 640.3 691.6

Outlays 494.45 532.0 577.7 616.9

Deficit/Surplus 33.45 23.0 +5.6 +4.1

SPENDING

During the past several years the U.S. economy has been blessed with exceptional real growth and plagued by increasingly virulent inflation. The classic economic prescription is a restrictive fiscal policy. Yet Congress has failed to follow such a course. The first budget resolution, while modest, is not so severe as economic circumstances dictate. FY 1979 outlays rise 9.7 percent. During FY 1980 outlays increase another 7.6 percent. The deficit of $23 billion brings the five year total to $216.7 billion, all while the economy was growing at a strong pace.

A test of Congress' budget cutting fervor may be provided by its action, or inaction, on several "legislative savings" assumptions built into the conference report. Failure to enact all of the recommendations may result in another $4.3 billion in 1980 outlays.

Hospital Cost Containment: Congress anticipates an outlay savings of $1.4 billion in Medicare and Medicaid expenses upon passage of cost containment legislation.

Medicare and Medicaid: It is assumed that various reform measures, such as requiraing states to audit Medicaid providers, will produce FY 1980 savings of $404 million.

Veterans Benefits: Congress expects to save $262 billion in outlays from legislation requiring private insurers to pay for the non-service-related health care treatment received at veterans hospitals.

Child Nutrition Program: The House Budget Committee has projected a savings of $509 million through a tightening of various eligibility requirements.

Aid to Families with Dependent Children: An estimated $208 million is expected to be saved if legislation tightening income requirements and work expenses is enacted. A further $74 million is to be saved if the child support enforcement proposals are passed.

Food Stamps: It is assumed that changes in the food stamp program, offered by the administration, will produce FY 1980 savings of $152 million.

Additional sa.vings: Include Wage Board salary reform, reducing cost of living increases for federal retirees to once a yearl and cutting the impact aid program.

Several of these measures have been included in past Budget Committee reports. Their return attests to the uncertainty of their implementation. This year, in ah effort-to more closely pursue the legislative savings, House standing committees are to report to the Budget Committee, by July 1, on their actions. At that time it will be possible to better judge the sincerity of Congress in cutting spending.

REVENUES

The tremendous concern about budget austerity is motivated by the desire to use fiscal policy as an anti-inflation tool. Ironi- cally, the austerity of the budget, as measured by a smaller deficit, is largely the result of inflation's multiplicative effect on federal revenues. Salaries or wages, adjusted for inflation, are pushed into higher tax brackets. Federal revenues thus grow at a rate faster than inflation. It is estimated that "bracket creep" will add an additional $8 billion-in-federal revenues in FY 1980. decision to forego any tax cuts in both FY 1980 and ;_O)@ 1981 has caused critics to charge t-hait Congress is "balancing the budget on the public's back. The combined ef f ect of less purchasing power, _"bracke:L creep, " and higher social sec urity taxes have caused a de- cline in real, after tax income over the past few years.

A family of four, with one wage earner, has over the past five years, lost $241 in real after tax income, despite tax cuts in 1977 and 1979 (Table 3). Similar losses have been experienced by a variety of taxpayer permutations. The performance of real after tax income appears even more discouraging when contrasted with real economic growth rates of 5.7 percent (1976), 4.9 percent (77), 4.0 percent (78) and conference estimates of 3.3 percent (79) and 2.1 percent (80). Congress has placed a higher priority on a balanced budget in 1981, without substantial cuts in spending, than on pro- tecting the taxpayet I s real spendable.income.

CONCLUSION

Congress has been under intense scrutiny during the development of its budget. The threat of a constitutional amendment mandating a balanced budget and the ever worsening inflation provided Congress with an unprecedented impetus toward genuine budget stringency. Congress' response has been inadequate. Spending duts have been minor, and in several cases problematical. Most disappointing has been Congress' decision to attain a balanced budget through the hidden tax of inflation. As a result the taxpayer will, over the next two years, continue to experience a decline in real spendable income.

Eugene J. McAllister Walker Fellow in Economics

Table 3 6

EFFECT OF INFLATION AND FEDERAL TAXES ON THE REAL INCOME OF

REPRESENTATIVE HOUSEHOLDS, 1976-80

(1976 100)

Household: 1976 1977 1978 1979 1980

Household I: Gross Income ............ $13,000 $13,884 $15,134 $16,602 $17,830 Legislated Tax .......... -2,717 -2,707 3,070 3,514 3,897 Cumulative Inflation.... (.2) -712 -1,700 -2,839 -3,829 Net Real Income ....... 10,283 10,467 10,364 10,249 10,104

Household II: Gross Income ............ 15,000 16,020 17,462 19,156 20,688 Legislated Tax .......... 2,672 -2,761 -3,124 -3,613 -4,001 Cumulative Inflation..... (2). -844 -2,020 -3,371 -4,586 Net Real Income ....... 12,328 12,415 12,318 12,169 12,101

Household III: Gross Income ............ 17,000 18,156 19,790 21,710 23,446 Legislated Tax .......... -2,817 -2,821 -3,236 -3,756. -4,220 Cumulative Inflation .... (2) -976 -2,332 -3,894 -5,284 Net Real Income ........ 14,183 14,359 14,222 14,060 13,942

Household IV: Gross Income ............ 20,000 21,360 23,282 25,541 27,584 Legislated Tax .......... -4,075 -4,067 -4,788 -5,296 -5,935 Cumulative Inflation .... (2) -1,101 -2,606 -4,391 -5,950 Net Real Income ....... 15,925 16,192 15,888 15,854 15,699

Household V: Gross Income ............ 25,000 26,700 29,103 31,926 34,480 Legislated Tax .......... -5,313 -5,513 -6,290 -6,891 -7,701 Cumulative Inflation .... (2) -1,349 -3,214 -5,430 -7,360 Net Real Income ....... 19,687 19,838 19,599 19,605 19,419

1 Househoid I, a single wage earner; household II, a family of 2 with 1 wage earner; household III, a family of 4 with 1 wage earner; household IV, a family of 2 with 2 wage earners; household V, a family of 3 with 2 wage earners - 2 Not applicable. THE AVAILABILITY QUESTION

Perhaps the key question which has been ignored in the debate over the use of alcohol fuels is that of availability. It is this, more than any other single consideration which mitigates in their favor. They are produced from domestic resources, and are not subject to the vagaries of foreign governments. Moreover, the lead-time for construction of an alcohol plant is from 18 months to 2 years, by far the shortest time of any option available to us. To maintain perspective, however, it should be remembered that alcohol fuels are not a panacea. Rather, they are a major source which can help to reduce our dependence on imports by as much as 20 percent in the relatively near term. This, in and of itself, is a contribution significant enough to eliminate the necessity to overstate the benefits of alcohol fuels. This is especially true, since each barrel of alcohol used in our motor fuel stocks reduces the nation's import requirements by at least two barrels of oil. This is because, at best, we can distill 21 gallons of gasoline from a barrel of oil, and when unleaded gas is to be the product, the figure is closer to 19 gallons. As a result, it takes two barrels of oil to produce one barrel of gasoline. Regardless of how many barrels of oil it takes to produce a barrel of gasoline, though, the important point remains the availability of petroleum from which to distill our motor fuels. When the alternatives are either to use alcohol as a supplement or to do without, the choice becomes obvious.

CONCLUSION

In examining the extension of motor fuel stocks with alcohols distilled from grains, a couple of significant advantages become evident. First, and foremost, is the fact that alcohol fuels would be based in a domestic feedstock, and therefore not subject to the sudden interruption by foreign governments. Secondly, the adoption of an alcohol fuels program could provide the farm economy with a whole new market, helping to make the farmer self-sufficient, and, hopefully, eventually eliminating the need for farm subsidies.

While it is true that the -increase in the price of grain which would result if alcohol fuels were widely used would also be reflected in higher food prices, the fact is that higher petroleum prices on the world market might have a similarly adverse effect.

Finally, while keeping perspective, and realizing that the use of alcohol fuels in and of themselves will not solve the energy crisis, we must acknowledge that they do present one of our most hoepful short-to-intermediate term solutions. An alcohol plant with an annual capacity of 50 million gallons can be built in 18 months to 2 years. Each such plant has the potential to reduce our import requirement by 240,000 barrels annually. Were we to go to a 10 percent alcohol blend throughout our pool of motor fuels, we could reduce our import requirements by 1.4 million barrels per day, far more than we were importing from Iran.

Milton R. Copulos Policy Analyst

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