As the process became more and more focused on deficit reduction, that line became harder and harder to draw. In part, I think, because the Congress began to feel that credibility was at stake and being more explicit about assumptions behind the budget resolution numbers made it clear that people had thought through a way to reach the numbers in the resolution-that it wasn't just some random selection of numbers. This led finally to the situation where this year's budget resolution is in many areas quite specific. And as I mentioned before, I think out there many people think the resolution actually changed laws.

There are certainly ways to streamline the process and ways to reduce the layers, but they involve possible relative power shifts and possible in jurisdictions. It is not that I think such changes can't be made, but I don't think we should kid ourselves that there are any easy, painless, magical ways to streamline the process.

I will just make one final note. I think a process can structure the debate. It can define which questions you are forced to deal with, and which questions are easy to ignore, but it cannot dictate the results. No process substitutes for a decision to make the hard decisions about what the Government should do in what arenas.

The challenge for all of you, I guess, is to design a process both for today's deficit reduction challenge and for the broader and longer term debate over priorities, which will exist even after the budget has been balanced. I don't think it is easy. I don't think it is impossible. I am glad I don't have to do it, but I am very happy to be here to help.

[Ms. Irving's prepared statement follows:]

PREPARED STATEMENT OF SUSAN J. IRVING, ASSOCIATE DIRECTOR, BUDGET ISSUES, GENERAL ACCOUNTING OFFICE

Mr. Chairmen and members of the subcommittees: I am pleased to be here today to discuss the budget process with you. Everyone involved in that process shares some frustration with it. The public finds it confusing. Executive branch agencies find it burdensome and time-consuming. Menbers of Congress say it seems too lengthy with its many votes on authorizations, the budget resolution, reconciliation, appropriations, and the debt limit. And, too often, the results are not what was expected or hoped for.

In one sense, of course, nothing could be more important than debates about the budget-and important debates often take time. Budgeting is the process by which we as a nation resolve the large number of often conflicting objectives which citizens seek to achieve through government action. The budget determines the fiscal policy stance of the Government—that is, the relationship between spending and revenues. And it is through the budget process that the Congress and the President reach agreement on the areas in which the Federal Government will be involved and in what way.

Because the decisions are so important, we expect a great deal from our budget and budget process. We want the budget to be clear and understandable. We want a process that presents the Congress and the American people with a framework in which to understand the significant choices and the information necessary to make the best informed decisions about Federal tax and spending policy. Doing all this is not easy.

In May 1993, letters to the chairmen and ranking members of the House and Senate Budget Committees and the then House Government Operations Committee, we suggested possible changes to the current budget process. Also, in June 1993, we gave the Joint Committee on the Organization of the Congress some ideas that could lead to a more streamlined budget process. I testified before this subcommittee last year on a number of the proposals made by the House Members of the Joint Committee.

Today, however, as you requested, I'd like to stand back and look at some of the broader questions and issues involved in any examination of the budget process.

Your letter asks three questions:

No. 1, What are the objectives of the Congressional Budget and Impoundment Control Act of 1974?

No. 2, Which of these objectives are relevant in today's fiscal environment?
No. 3, Should the budget process be redesigned?

BACKGROUND: THE 1974 BUDGET ACT AND SUBSEQUENT AMENDMENTS

I agree with your premise that to understand where we are, it helps to know where we've been. In that context, looking back at the objectives and structure of the Congressional Budget and Impoundment Control Act of 1974 is very useful. The Constitution gives the Congress the power of the purse. The Budget and Accounting Act of 1921 centralized power over executive agency budget requests under the President and to balance this grant of power-moved control of the audit of spending from the Treasury to a new entity-responsive to the Congress the General Accounting Office (GAO).

This century has seen an increase in the amount of spending that does not go through the annual appropriations process. Several major factors contributed to this trend. For example, loan authority was created in 1932. The Social Security Act of 1935 created a new, large permanent appropriation. Contract authority was expanded over the years. We have reported1 that for fiscal year 1985, 58 percent of budget authority and offsetting collections from non-Federal sources credited to accounts was provided outside the annual appropriations process. Based on our ongoing work in this area, we have no reason to believe the amount of such backdoor authority has decreased. Indeed, our work thus far has shown a significant increase in the number of budget accounts having such authority.

All of these reduced the Appropriations Committee's overview of and control over the budget. There was no central congressional view of the entire budget. In the mid-1940's and attempt to create a joint House-Senate legislative budget failed. Meanwhile the analytic strength of the Executive Office of the President was increased through the creation of the Council of Economic Advisers and the expansion of OMB.

In 1972, the Congress established a Joint Study Committee on Budget Control. Its recommendations led directly to what later became the Congressional Budget and Impoundment Control Act of 1974.

In that act, the Congress declared that it is essential

(1) to assure effective congressional control over the budgetary process;

(2) to provide for congressional determination each year of the appropriate level of Federal revenues and expenditures;

(3) to provide a system of impoundment control;

(4) to establish national budget priorities; and

(5) to provide for the furnishing of information by the executive branch in a manner that will assist the Congress in discharging its duties.

We all often forget that this act was neutral as to fiscal policy outcome. That is, it did not seek a specific result in terms of deficit. Rather, it sought to assert the Congress' role in setting overall Federal fiscal policy and establishing spending priorities and to impose a structure and a timetable on the budget debate. Underlying the 1974 Budget Act was a belief that Congress could become an equal player only if it like the executive branch-could offer a single budget statement with overall fiscal policy and allocation across priorities.

Today, we take the functional structure of the budget for granted, but that structure was something of a major breakthrough. It required the President to show and it permitted the Congress and other observers to see spending by national need or mission rather than by agency. Whether the functional structure has served as it might is an issue to consider and I'll offer some observations on that later in this statement. The 1974 Act also eliminated the Congress' dependence on the Office of Management and Budget (OMB) for numbers and analysis by giving the Congress an independent source of budget numbers-the Congressional Budget Office (CBO). It settled the fight about impoundments by setting up a process for rescissions and deferrals.

It was not until the enactment of the Balanced Budget and Emergency Deficit Control Act of 1985-commonly known as Gramm-Rudman-Hollings or GRH-that the focus of the process changed from increasing congressional control over the budget and budget process to reducing the deficit. Both the original GRH and the 1987 amendments (GRH II) sought to achieve a balanced budget by establishing def

1Budget Issues: The Use of Spending Authority and Permanent Appropriations is Widespread (GAO/AFMD-87-44, July 17, 1987).

icit targets to be enforced by sequesters if legislation failed to achieve them. Measured against its stated objective-a balanced budget-GRH failed.

The budget act was again amended as part of the budget summit at which President Bush and the Congress agreed on a multiyear deficit reduction package. The Budget Enforcement Act (BEA) of 1990-extended and amended in the Omnibus Budget Reconciliation Act (OBRA) of 1993-was designed to implement the multiyear provisions of that summit agreement. The focus of BEA is very different from that of Gramm-Rudman-Hollings. BEA seeks to limit congressional actions that would increase the deficit. GRH sought to use a change in process to force agreement. In contrast, both in 1990 and 1993, substantive agreement on the discretionary caps and pay-as-you-go (PAYGO) neutrality was reached, and the BEA process was created to enforce this agreement. On those terms, BEA has been a success. GRH sought to hold the Congress responsible for the deficit, regardless of what drove the deficit. If the deficit grew because of the economy, the response was the same as if the deficit grew because of congressional action or inaction. If a sequester was necessary, it did not differentiate between those programs to which the congress had made cuts and those in which there had been no cuts-an almost pure prisoner's dilemma. Finally, the timing of the annual snapshot and the fact that progress was measured 1 year at a time created a great incentive for achieving annual targets through shifting outlay dates from one fiscal year to another and other short-term actions.

In contrast, BEA holds the Congress accountable for the results of its actionsnot for the impact of the economy or demographics. BEA, as you know, divided the budgetary universe into two parts: PAYGO and discretionary. The discretionary spending caps have succeeded in holding down discretionary spending-it has declined as a share of gross domestic product from 9.2 percent in 1990 to an estimated 7.2 percent in 1996. And, contrary to what some believed at the time, the discretionary caps have held. For the PAYGO part of the budget, BEA has also constrained new entitlements or tax cuts. As I just noted, BEA has succeeded on its own terms. But BEA's ambition was limited. It did not seek to control economic or demographic-driven growth in existing direct spending programs-and that is the area of greatest growth today.

WHERE ARE WE TODAY?

Although there is virtually universal agreement that the current process is flawed, changes must be carefully considered. The current process is, in part, the cumulative result of many changes made to address previous problems.

For example, let me turn to the complaint that the process takes too long and has too many repetitive votes. The 1974 Act sought to create a congressional budget as a counterpoint to the President's budget-but it carefully avoided giving the Budget Committees anything like the power or even the coordinating role of the President's OMB. The Budget Committees were layered on top of the existing committee structure. And the level of detail with which the Budget Committees could deal was limited. The budget resolution was to represent a congressional statement about total revenues and total spending and about the allocation on spending across various national missions. The design of programs and the allocation of spending within each mission area would be left to the authorizing and appropriations committees. The Budget Committees would deal in round numbers-they could not decide policy. Of course, this distinction was always a little artificial. Even in a world of lower deficits, there were always policy assumptions behind the numbers. Frequently, policy or program design defines the range of numbers possible. And, it turns out that the model of first deciding how much and then debating the specifics is not an entirely comfortable model for Federal budget decisions. For some, the decision on how much is tied to the decision on how that number will be achieved.

As the budget process has been increasingly aimed at deficit reduction, this distinction between overall numbers and the policies to achieve them has become more strained. This year's conference report on the budget resolution contains a great deal more programmatic detail as to the assumptions underlying the numbers in the resolution than did previous conference reports. You and I-as participants and close observers of the process-know that only the numbers are binding, but much of the public may well believe that the budget resolution actually changed or eliminated various programs. The more the assumptions are reported in the press, the more prevalent that belief is likely to be. Given this situation, the votes on substantive legislation and appropriations to actually implement the resolution look even more like repetitive votes. But it is important to recognize that there are different perspectives on this. The Washington press is beginning to report the dif

ferences between the budget resolution and actual policy changes. This may better inform the public while at the same time increasing its confusion.

Are the expressed objectives of the 1974 Act still relevant as we approach the 21st century? At one level, the answer must clearly be yes. Some have been met-there is now a system of impoundment controls-and others have now been firmly embedded into the framework of our budget debate. And, in a broad sense, there can be little quarrel with the need to continue effective congressional control over the budgetary process, to provide for congressional determination of the appropriate level of Federal revenues and expenditures, or to establish national priorities. The question that confronts you today is to what degree have these objectives been achieved, should they be modified, and-given today's challenges-should the Congress have additional objectives for its budget process.

As you requested, I would like to turn now to the question of what might be expected of a budget process. First, I'll list four important objectives for a budget process, discuss the current process in those terms, and comment on some possible changes. Then I'll turn to the overarching issue of streamlining the process.

A budget process can be measured against numerous criteria. Four important objectives are

to provide information about the long-term impact of decisions while recognizing the differences between short-term forecasts, medium-term projections, and a long-term perspective;

to provide information and be structured to focus on the important macro tradeoffs, for example, between consumption and investment;

to provide information necessary to make informed tradeoffs on a variety of levels, for example, between mission areas and between different tools; and

to be enforceable, provide for control and accountability, and be transparent. Let me discuss each of these in turn.

Objective: Provide a long-term perspective

A long-term perspective is important in both a macro and a micro sense. The macro perspective has to do with our Nation's economic health. In previous reports and testimonies, we have said that the Nation's economic future depends in large part upon today's budget and investment decisions.2 Therefore, we believe that, at the macroeconomic level, it is important for the budget to provide a long-term framework and be grounded on a linkage of fiscal policy with the long-term economic outlook. This would require a focus both on overall fiscal policy and on the composition of Federal activity.

At the micro level this longer-term perspective relates to those programs and activities for which a longer time horizon is necessary to understand the fiscal and spending implications of a commitment. Examples include Social Security, Medicare, pension guarantees, and mortgage-related commitments. Even very rough projections may be better in these areas than ignoring the long term.

Although the multiyear focus of BEA represents significant progress in this regard, planning for longer-range economic goals requires exploring the implications of budget decisions for as much as 30 years or more into the future. I do not mean to suggest that detailed budget projections could be made over a longer time horizon. Forecasts and projections are difficult enough for 1 to 3 years, and the longer the time horizon, the less accurate any detailed projection is likely to be. However, there is value in recognizing the differences between a short-term forecast, mediumterm projections, and long-term perspective.

Thinking about the longer term when making choices about the composition of Federal activity is important for at least two reasons: No. 1, each generation is in part custodian for the economy it hands the next, and, No. 2, some changes must be phased in over long periods of time. Introducing a longer-term perspective into the budget debate without falling into the trap of treating 30-year projections as anything more than indicative simulations is difficult. In testimony earlier this week, we provided some ideas on how this might be done.3 For example, if financial statements were improved and available with the President's budget, the two together would provide useful information on the longer-term implications of some policies. Another approach might be to have long-term simulations of current budget policies, perhaps over a 30-year period, prepared periodically to help assess the fu

2 See The Deficit and the Economy: An Update of Long-term Simulations (GAO/AIMD/OCE95-119, April 26, 1995). See also Budget Policy: Prompt Action Necessary to Avert Long-term Damage to the Economy (GAO/OCG-92-2, June 5, 1992) and Budget Policy: Long-term Implications of the Deficit (GAŎ/T-OCG-93–6).

3 Managing for Results: Strengthening Financial and Budgetary Reporting (GAO/T-AIMD-95– 181, July 11, 1995).

ture consequences of current decisions. The effects of policy changes as well as broader fiscal policy alternatives could be projected over the long term. Such projections could be prepared and presented in the President's budget documents as well as in congressional budget documents.

Objective: Facilitate important macro tradeoffs

Although the surest way of increasing national savings and investment would be to reduce Federal dissaving by eliminating the deficit, the composition of Federal spending also matters. We have noted that Federal spending can be divided into two broad categories based on the economic effect of that spending-consumption spending having a short-term economic impact and investment spending intended to have a positive effect on long-term private sector economic growth. We have argued that within any given fiscal policy path, the allocation of Federal spending between investment and consumption is important and is deserving of explicit consideration. The current budget process does not prompt the executive branch or the Congress to make explicit decisions about the appropriate mix of spending for current consumption and spending for long-term investment. Appropriations subcommittees provide funding by department and agency in appropriations accounts that do not distinguish between investment and consumption spending. Although alternative budget presentations which accompany the President's budgets provide some information on investment, they are not part of the formal budget process. The investment/consumption decision is not one of the organizing themes for the budget debate. If this consideration of investment vs. consumption is to be introduced into the budget process, the way it is done depends on how the overall process is structured. We have suggested that within the existing BEA structure incorporating as investment component within the discretionary caps would be an appropriate and practical approach to supplement the unified budget's focus on macroeconomic issues. An investment component would direct attention to the tradeoffs between consumption and investment but within the overall fiscal discipline established by the caps. It would provide policymakers with a new tool for setting priorities between the long term and the short term. If the Congress and the President chose to change the budget process in ways that moved away from the current system of discretionary caps and PAYGO rules, one of the issues to consider in any redesign would be how to introduce this tradeoff between the long term and the near term, between investment and consumption into the structure of the debate.

Objective: Facilitate informed tradeoffs between missions and between the different tools of government

The budget process is the central process through which the President and the Congress select among and balance the competing demands for government activity in achieving various goals. Therefore, it would be helpful if the process provided the information decisionmakers felt necessary to consider the relative priority among national needs or missions. In part, of course, the functional structure of the budget resolution was intended to facilitate priority-setting even among related programs housed in different agencies and falling under different committees. By organizing the budget along national needs or mission areas, the budget resolution sought to permit an examination of the totality of Federal spending activity in each arearegardless of the committee of jurisdiction or the agency at issue-and to permit priority-setting and tradeoffs among missions. Instead of focusing on what each department spent, the Congress and the President were to be able to look across departments at the totality of activity in education and training or income security or transportation. From the beginning, however, the structure was not complete; if the Government chose to advance a given mission area through the tax code, that commitment did not show up in the functional display. So, for example, the functional structure shows support for science and technology through loans or grants or Federal activity but not through the research and development tax credit.

Even on the spending side of the budget, however, the functional totals do not translate into and may not match the allocation of resources to the Appropriations subcommittees. While the budget resolution is organized by national mission, the Appropriations subcommittees for the most part are still organized along agency lines. There are reasons for this, but it does make it more difficult to trace the path from the budget resolution's stated priorities through the appropriations process. Although the budget resolution functional totals are translated into allocations to the full Appropriations Committees, suballocations to the subcommittees the so-called

See Budget Structure: Providing an Investment Focus in the Federal Budget (GAO/T-AIMD95-178, June 29, 1995) and Budget Issues: Incorporating an Investment Component in the Federal Budget (GAÓ/AIMD–94–40, November 9, 1993).

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