Chairmen Boren and Hamilton, Vice-Chairmen Domenici and Dreier, and

Members of the Committee, thank you for inviting me to testify today on the budget process.

In my testimony I will cover three topics:

The two different historical roles of the budget process;

o Implications of recent experience for what the budget process can and cannot accomplish; and

Some of the proposed structural changes to the budget process that have recently received the greatest legislative attention, and the arguments that have been advanced both for and against each proposal.

THE ROLE OF THE BUDGET PROCESS

The federal budget process has historically been called on to play two roles. The first is to prescribe the general rules and procedures governing the presentation of the budget by the President and deliberation on the budget

in the Congress. With the massive increase in the budget deficit over the past decade, however, a second purpose has arisen. Attempts have been made to use the budget process to force reductions in the deficit, or to enforce compliance with deficit reduction agreements that have already been made.

General Rules Governing the Budget Process

The general rules governing the budget process are primarily contained in two laws. The first is the Budget and Accounting Act of 1921. This law created the Bureau of the Budget (now the Office of Management and Budget) and the General Accounting Office. In addition, the Budget and Accounting Act required the President to present a set of budget recommendations annually to the Congress, and has been amended several times since to prescribe new requirements for Presidential budget submissions.

The Congressional budget process was codified with the passage of the Congressional Budget and Impoundment Control Act of 1974. This law was passed both in response to the frustration generated by the fragmented nature of the Congressional budget process and to provide the Congress with greater ability to exercise its budgetary responsibilities. The act strengthened the

Congressional role in the budget process by beefing up and centralizing its budgetary capacity.

The House and Senate Budget Committees were created to coordinate Congressional action on the budget, and the Congressional Budget Office (CBO) was established as a source of nonpartisan analysis and information on the budget and the economy. The concurrent budget resolution was created to coordinate various portions of the budget. The budget resolution gave the Congress the ability to consider the broad outlines of the budget as a whole at a relatively early stage in the process. The resolution sets out parameters for future Congressional action on the budget--the passage of bills governing taxing and spending.

Using the Budget Process Specifically to Reduce the Deficit

The advent of large budget deficits in the early 1980s ushered in a new era for the budget process. In this era, the primary focus of the process has not been on general procedures, but on establishing rules specifically focused on deficit reduction. This role is codified in two major laws--the Balanced Budget and Emergency Deficit Control Act of 1985 (popularly known as Gramm-Rudman-Hollings) and the Budget Enforcement Act of 1990 (BEA).

Gramm-Rudman-Hollings had a simple goal--to reduce the size of the

deficit to specified levels each year until expenditures were in balance with

revenues. If annual deficit targets were not met by enacting the appropriate

s-the-board

amount of spending restraint or tax increases, automatic across-t

spending cuts (or sequestration) took effect. According to the targets specified in the legislation, the budget was to be balanced by fiscal year 1991. · The first Gramm-Rudman-Hollings law was replaced in September of 1987 by a successor, which delayed the target for budgetary balance to fiscal year 1993.

The deficit, of course, has not come down as promised by the GrammRudman-Hollings legislation. In an effort to live within the short-term budget constraints, the President and the Congress evaded the targets by relying on overly optimistic economic assumptions and outright budget gimmickry. This smoke-and-mirrors strategy enabled policymakers to appear to live within the annual constraints, while doing little to reduce the actual deficit. For example, the original deficit target for 1990, the last year the GrammRudman-Hollings procedures were fully in place, was $36 billion. The revised 1990 target, established in 1987, was $100 billion. The actual deficit for that year was $220 billion. The estimate of the deficit for 1993 (the year in which the revised targets were to require a balanced budget) in CBO's January report to the Congress is $310 billion.

The BEA created a quite different kind of process than GrammRudman-Hollings. It was enacted to enforce compliance with the deficitreducing actions agreed to in the 1990 budget summit agreement. Its purpose was not to force the enactment of further reductions. Moreover, it focuses not on achieving some prescribed deficit level, but on controlling spending and preventing policy actions that would cause the deficit to increase. Two separate procedures were set up to achieve these ends. The first is the discretionary spending caps, which place limits on the level of budget authority and outlays through 1995. The second is the pay-as-you-go (PAYGO) process, which requires that Congressional actions affecting mandatory spending or revenues be deficit neutral.

The Congress and the President have largely lived within the BEA's constraints. Although the deficit outlook has deteriorated since the 1990 budget agreement, this turn of events is not the result of any failure of the BEA. The deterioration of the economy and technical reestimates of revenues and spending, especially for Medicare and Medicaid, are largely responsible for the increase in the projected deficit since 1990. That virtually none of the change in the deficit outlook results from policy actions is a testimonial to the success of the BEA in enforcing the budget agreement (see Table 1). The BEA did not, however, include any procedure to reconsider the rules were the deficit outlook to deteriorate.