Keith M. Carlson

English

Research Papers in Economics

Controlling Federal Outlays:
Trends and Proposals
Keith M. Carison
N his February 1985 budget message, President
Reagan noted that
The past 4 years have alsoseenthe beginning ofa quiet
but profound revolution in the conductofour Federal
Government. We have halted what seemed atthe time
an inexorable set oftrends toward greater and greater
Government intrusiveness, more and more regulation,
higher’ and higher taxes, more and more spending,
higher and higher inflation, and weaker and weaker
defense,’
Yet, federal outlays as a proportion of GNP were still
half a percentage point above what they were when
the administration took office in 1981.
The purpose of this article is to summarize recent
trends in federal outlays and assess the administra-
tion’s future plans by placing them in a historical
context.’The focus ofthediscussion is on thebehavior
of federal outlays as a percent of GNP — a measure
that was used initially by the administration to sum-
marize thegovernment’s influence on the economy.
BUDGET (JUTI’LAYS t/S. •CURRENT
SUBVI.UES
Interpreting budget trends requires some reference
measure that can be used for comparison. The refer-
Keith M. Carison is an assistant vice president at the Federal Reserve
Bank of St. Louis. Thomas A. Pollmann providedresearch assistance.
‘Office of Management and Budget (1985a).
‘Even though the administration’s February 1985 proposals will not
be realized, these proposals provide a base for debate byCongress
whereby modifications will be made.
ence measure used in the February 1985 budget is the
“current services budget.” According to the budget
document, “current services” estimates are defined as
the estimatedbudget outlays andproposed budget
authority that would be included in the budget for the
following fiscal year if programs and activities of the
United States Government were carried on during that
year at the same level as the current year’ without a
change in policy?
Current services estimates “provide a base against
which budgetary alternatives maybe assessed.”4
Table 1 summarizes both the administration’s 1985
proposals and the current services estimates for 1985
through 1990.” A comparison of the figures indicates
that the administration plans to cut federal outlaysby
$507 billion between 1986 and 1990, with the largest
cuts coming in the last threeyears. When converted to
percentages, the cuts range from 5 percent in 1986 to
10.7 percent in 1990.
The bottom half of table 1 shows the current ser-
vices and proposed budget estimates as percentages
of GNP. The proposed estimates represent sizable
decreases in the proportion of federal government
outlays to GNP compared with the current services
estimates.
t’Thether such proposed reductions in the propor-
tion of federal outlays relative to GNP will actually
‘Office of Management and Budget (1 985b), p. A-i
4lbid, p. A-2.
‘For alternative estimates of both the administration’s program and
current services, see Congressional Budget Office (1985).
iiTable 1
Federal Outlays: Budget Estimates vs. Current Services, February 1985
In Billions of Dollars
1985 1986 1987 1988 1989 1990
Current services S960 4 $10245 $1109.2 $12000 $12626 $1332.8
Budoet estimates 959.1 973 7 1026.6 10948 1137.4 1190 0
Diference S 3 $50.8 5826 $1052 $1254 ‘ $142.8
$506 8
Percent difference 0 ~% 50% 75% 68% 9 ~ 107%
As a Percent otGNP
Current serv!ces 24.8% 244% 244% 24.4% 238°~ 234%
Budget estimates 24.8 23 2 22.6 22.2 21 42 0 9
Difference 00% 1 .2°.o 1 .8~ 22% 2.4% 2.53~
NOTE: All figu’es induce off-budgetoutlays.
occur depends crucially on both political consider-
ations and future economic conditions — neither of
which can be forecast with much reliability.’ One way
to assess the significance of the proposed reductions,
however, is to compare them with some longer-term
trends in federal outlays. In this manner, it is at least
possible to see what such reductions would mean in a
historical context.
To examine properly federal outlays relative to GNP
from a historical perspective requires adjusting out-
lays and GNP separately for the direct influence ofthe
business cycle.’ Since federal outlays generally rise
relative to GNP during recessions, the inclusion of
such percentages without adjustment could distort
the interpretation of underlying trends.
‘See Carlson (1983).
‘Federal outlays were adlusted for the cycle using correction factors
implicit in the work by de Leeuw and Holloway (1983). This meant
adjusting budget outlays in the same proportion as national income
accounts federal expenditures are adjusted to derive cyclically
adjusted expenditures. Following this procedure captures only the
automatic response of federaloutlays to the businesscycle, mean-
ing that countercyclical fiscal actions are still reflected in the figures.
Trend GNP is middle-expansion trend GNP asdefined by de Leeuw
and Holloway. See also Holloway (1984).
The historical record of cyclically adjusted feden
outlays as apercent ofadjustedGNP is summarized i
chart 1. Evenwith cyclical adjustment, this measure
government activity is still quite volatile, especially o
ayear-to-yearbasis. Consequently, a trend line forth
period 1956—81 has been plotted in the chart.
Extending the trend line from 1982 through 199
indicates that the administration has not been sw
cessful in reducing total outlays as a percent of GNP i
the 1981—84period. Moreover, the proposed 1985 lev
of outlays is well above the historical trend.
Chart I does show that the administration is prc
posing apathof outlays after 1985 that differs dramat
cally from both the 1956—SI trend and its first fo~
years in office. If the administration’s proposals at
enacted, the size of governmentwould be reduced
that prevailing in the mid-1970s.
An examination of total budget outlays relative
GNP masks the contrasting differences taking plac
between defense and nondefense outlays. Chart
summarizes these outlays relativeto GNP. Nondefens
outlays and GNP are adjusted for the business cycli
defense outlays are not adjustedbecause they are n
systematically related to the business cycle. The dt
fense portion ofthe chart shows the downward trentEDERAL RESERVE SANK OFST. LOUIS JUNE/JULY 1985
chart i
Total Budget Outlays as a Percent of GNP
of defense outlays relative to GNP from 1956 to 1981.
Since 1981, the trend has been reversed, with defense
spending rising to 6.3 percent of GNP in 1984. The
administration plans for future defense spending to
continue to rise relative to GNP; the proposed budget
calls for defense outlays to reach 7.5 percent of GNP
by 1990.’
The nondefense portion of the chart shows that the
growth ofcyclically adjusted nondefense outlays rela-
tive to trend GNP was extraordinarily rapid from 1956
to 1981. Such spending rose from 6.9 percent of GNP in
1956 to IS percent in 1981. Since 1981, however, the
ratio of nondefense outlays to GNP has been reduced
relative to its 1956—81 trend.
The administration plans for the reduction in non-
defense outlays relative to GNP to continue; these
reductions are quite dramatic relative to the 1956—81
trend. The administration’s proposals call for nonde-
‘The administration indicates that its proposed defense outlays will
be less than the current services estimates (see the appendix to this
article for 1990 estimates). The Congressional Budget Office dis-
putes this contention, claiming that the administration’s defense
proposals are greater than current services estimates. See Con-
gressional Budget Office (1985), p. 22.
fense outlays to be reduced to 13.4 percent of GNP by
1990. If realized, the relative size of the nondefense
budget would be reduced to levels prevailing in the
early 1970s.
Chart 3 summarizes nondefense spending by major
program category and emphasizes the method of car-
rying out government activities. The purpose of look-
ing at these categories is to determine where the
nondefense budget cuts will fall.’
The largest proportion of nondefense spending,
giventhis set ofcategories, ispaymentsforindividuals.
This categoryincludes both direct (forexample, Social
Security benefits) and indirect (via grants to state and
local governments, such as Medicaid and assistance
payments) transfer payments by the federal govern-
ment. According to thetop tierof chart 3, this spend-
ing grew rapidly from 1956 to 1981; its trend has
apparently been reversed since 1983. The administra-
‘For further detail relative to current services estimates, see the
appendix.
Percent Perceiii
25 25
24
23
22
21
20
19
18
17
1990 1956 58 60 62 64 66 68 70 12 14 16 78 80 82 84 86 88
NOTE; laid budget “hays and ONE are cyclically adju,iedFEDERAl. ~5ERVE SANK OF ST. LOUIS JUNE/JULY 191
cinch 2
Composition of Total Budget Outlays
Percent of GNP
Percent
tion plans to continue to reduce such payments rela-
tive to GNP to 9.8 percent by 1990, a dramatic depar-
ture from its growth over the 1956—81 period.
The category labeled ‘all other grants” includes all
grants to state and local governments except transfer
payments. Included in this category are grants for
wastewater treatment plants, highway construction,
community development, education, employment
and training assistance, and general revenue sharing.
The second tier of chart 3 indicates that this category
of spending has beenreduced well belowthe 1956—81
trend line in recent years. The extent of the cut is
dramatic — from a peak of 2.6 percent of GM’ in 1978
to 1.5 percent in 1984. Furthermore, this category is
projected for further cuts in the future, to 0.9 percent
of GNP in 1990.
The netinterest categoryhas attracted considerab
attention in recent years- Once a relatively insignil
cantpart ofthe budget,it has risenconsiderably to if
point where policymakers now view it with majc
concern.” The third tier of chart 3 shows that, afti
rising from 1.3 percent of GNPin 1956 to 1.6 percent i
1976, net interest rose steadily to 3.1 percent ofGNPi
1984. Projections of net interest depend on a numb
of factors, the most important of which is the futu
course of deficits and the projected level of intere
“This is because of the cumulative effect of net interest. Higher
interest addsto the current deficit, which carries overto future yea
in the form of a larger debt that must be financed. See Carisi
(1984).
P.rce en
1956 58 60 62 64 66 68 70 72 14 16 78 50 82 84 86 88 1990
NOTE, Nendebeene eeOe~,.end ONP are cyclic ally edlosred, Nendeleene e,tieys i,tc 1
5
deundiet,ibeted ehisettire receipt,.FEDERAL RESERVE SAMC OFSt LOUIS JUPE’JULY ISIS
chart
Composition of Nonclefense Outlays
Percent of GNP
~lH±)cttTTmiH~:(ri,
0
Percent
Net Interest
--
I
-~ ~
—~
1])~ I))) Ii)) (Ill 1))) I~11(FIII.
a.,
195641 T~eiid
4
2
0
Percent
—6
4
‘ct.-
———m-
i) (I) ti (
2
0 0
1956 58 60 62 64 66 68 10 72 74 76 78 80 82 84 86 88 1990
NOTE; GNP and payments for individnois ore cyciicoliy odiusted. AM other federal operations doe, tot include undistributed otiserting receipte.
Percent
All Other Grants
2
0
Percent
4
Percent
4
Percent
6 All Other Federal Operations
Actual
—7
2
9rates. Given the administration’s overall plan for re-
ducing the size of the deficit and a projected decline
in interest rates, net interest outlays as a percent of
GNP isprojected to continue risingthrough 1985, level
offfor two years, then drop sharply to 1990; however, it
will still remain above the 1956—81 trend as extrapo-
lated to 1990.
The “all otherfederal operations” category includes
outlays for foreign aid, general science research and
space technology, energy programs, farm price sup-
ports, housing credit activities and day-to-day opera-
tions of the government. Relative to GNP, as shown in
thebottom tierof chart 3, this category of nondefense
outlays displayed a slight upward trend during the
1956—Si period; it has declined in recent years. The
jump in the estimate for fiscal year 1985 reflects pri-
marily the surge in outlays related to the P1K farm
program. The administration plans to continue to cut
such outlays as a percent of GNP through 1990. Such
proposed cuts are centered on farm price support
programs, foreign aid and loan activities of the
government.
The federal government in its February 1985budget
announced cuts of about $507 billion relative to cur-
rent services estimates for the 1986—90 period. These
proposed cuts were compared with recent trends in
federal outlays relative to GNP since 1956; the results
of these comparisons are summarized in table 2. The
historical record indicates that, while attempts to cut
the proportion of total federal outlays to GNP have
been unsuccessful thus far, the administration’s cur-
rent proposals, if achieved,would reduceoutlays rela-
tive to GNP. The historical comparisons show the
present administration has altered the mix of total
outlays between defense and nondefense quite dra-
matically, and a continuation of this reversal is pro-
posed for the future.
Payments for individuals are scheduled to be cut
moderatelyrelative to GNPfor eachyear after 1985. Net
interest as apercent of GNP, which is currently climb-
ing well above past trends, is projected to continue
rising through 1985, level off, then move back toward
Table2
SummaryofTrends
Relationto 1958-81
PercentofGNp 1982-44 1985-90
Total budgetoutlays Above Below
Natjorialdefense Above Above
Nondefense Below 8sfow
Paymentsforindividuals Below Selow
Alt othergrants Below Below
Net interest Above Above
Aftotherfederaloperations Below Below
TAstratfl line trendwas fittedtotherelevant measure of outlays
asapercentofGMP
trend after 1987. Budget cuts, as measured by outlay
relative to GNP, are concentrated in “all othergrants t.
state and local governments” and in “all other federa
operations.” The government’s program is ambitious
in order to reducetotal budget outlays to 20.9 percen
of GNP by 1990, while at the same time increasin1
defense outlays to 7.5 percent of GNP, nondefensi
outlays will have to be reduced to 13.4 percent ofGNI
from the current level of approximately 18 percent.
Carlson, Keith M. The Critical Role of Economic Assumptions it
the Evaluation of Federal Budget Programs,” this Review (Octobe
1983), pp. 5—14.
‘Money Growth and the Size of the FederalDebt,’ thli
Review (November1984), pp. 5—16.
Congressional Budget Office. An Ana/ysis ofthe President’s Bud
getatyProposals forFiscal Year 1986 (February 1985).
de Leeuw, Frank, and Thomas M. Holloway. ‘Cyclical Adjustmen
of the Federal Budget and Federal Debt,’ Survey ofCurrent Busi
ness (December 1983), pp. 25—40.
Holloway, Thomas M. Cyclical Adjustment of the Federal Budge
and FederalDebt Detailed Methodology and Estimates, Bureau o
Economic Analysis Staff Paper 40 (U.S. Department of Com
merce, June 1984).
Office of Management and Budget. Budget of the United Statac
Government: Fiscal Year 1988 (February 1 985a), p. M4
SpecialAnalysis: Budgetofthe United States Govern
ment:Fiscal Year 1986 (February 1985b).
;~‘P1~aJrt~ ~ Jflulji ;~fl~3 ~c4~D~6~C ~
Federal outlays can be classified in terms of two
analytical structures: budget function and major pro-
gram category. The functional classification presents
outlays according to the purposes that federal pro-Table Al
1990 Federal Outlays: Current Services vs. Administration Proposals
(amounts in billions of dollars)
Current Administration Percent
Category services proposal Difference difference
National defense 5441 7 $4286 $ 13.1 30%
Beneti~payments for ,nciv’duals 590.6 5550 35.6 6 0
Health 48.9 408 --8.1 16.6
Social Security and Medicare 369.2 355.4 .- 13.8 37
Income securty 140.8 130.6 102 7.2
Veteran oayments 31.7 28 2 3.5 - 11 ~
Other grants to state ano local oovernrreflts’ 61 2 43.9 173 283
National resoUrces are enviror.menf 3,5 2.7 --0.8 22.9
Transportation’ 222 16.8 5,4 243
Community and regional aevelooment~ 5 7 3 8 . 1 93 3 3
Education, training employment and
social services’ 22.7 18.7 --4.0 176
Genera~ purpose fiscal assistance 7.1 1.9 5.2 732
Net interest 164.2 137.7 265 - 16.1
Other feceral operations’ 1173 699 -47.4 404
International affairs 19.5 14.5 5.0 -25.6
General service, space ano technology 11.0 11.1 0.1 0.9
Energy 61 23 -3.8 623
Natural resources and environment2 9 3 7 3 2.0 21.5
Agricu’ture 20.1 3.8 16.3 ~81,1
Commerce and housing crecit 3.8 —3 7 7.5 - 197 4
Transportation 100 76 —28 24.0
Community and regionat oevelopment’ 2.5 1 7 0 8 32.0
Education, training employment and
soda’ services’ 11 6 9.5 2i - 181
Adrr.In.stratOn & justice 74 69 - 0.5 6.8
Genera- government 6.1 4.9 1 2 - 19.7
AllowanceS 9,9 4.0 - 5.9 - 59 6
Undistr;buted offsetting receipts 42 1 45.0 2 9 —.
Amounts shown are thesums for the functions Irsted under them, and differ slightly from the major program category’ amounts shown
in the budget
‘The budgetgves current services est’mates for the tota:. Estimates by major program category were estimated by the author.
~rarn~ arc’ intended to serve these titnc’tir,i is an’ cletcnsi’. lu’ric’fiI p.fl clIents to iridi~ idirals. grants to
gmupecl joIn IS broad lu-eas including. jor (‘NitI1i~It’. state arid local govi’rnrnents other than for benefit
national defense inter-national atlairs nerg~ pro- payments net inti’re’,t other’ federal operatrons and
grams agriculture transportation. health and geflelal iindistr holed oltsetting receipts. National defense.
go~er-nmucntprograms. I bite jddjtiOflLlj (‘atigor’Ies ——. net interest and Lrnchstr’ihuted olisetling receipts cor-
net interest, crlIo~~aric’es arid uniiistr’ilnitt’d otisettirig r’espOiHI to tilt ttirirtioiial c’att’,40ties of the same
receipt~ - do 1101 address specihc ttiiic’tions, but dii name bitt, the rematning major pr gi-am -ategories
inc:luded to ro crthe entire budget. do not coi’r’i’spoiid to a ~impIe surrlflhiflM of tUrIctiolNul
categories \onethelc’ss appro.~in1atiOns can he mcccli’
Cl~ussitic ition of tedc’r’aI outlays in’ major program ‘I he ac’c’onipall,virlg table groups 1990 outlays liv [tine—
categorY focuses on the mi’thod of c’arn’ing nut an tion to ~ the approximate composition ol some of’
activth - ih e major pi-ogramn categoric’s are national the major program categoric’s.

Controlling federal outlays: trends and proposals

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