Mr. Goss. Thank you. Appreciate you being here. STATEMENT OF JUNE E. O'NEILL, DIRECTOR, Ms. O'NEILL. Chairman Goss, Chairman Dreier, members of the subcommittee, thank you for inviting me to testify today on the budget process. I will submit my prepared statement for the record and summarize the three topics discussed. They are the evolving role of Congress in the budget process, lessons from recent experience with budgeting, and finally criticisms and proposed reforms of the current process. For many years the Congress has participated in the budget process by prescribing general rules and procedures concerning the presentation of the President's budget and the enactment of spending and tax laws. The general rules of the budget process are contained in two laws, the Budget and Accounting Act of 1921 and the Congressional Budget and Impoundment Act of 1974. The Congress has also played a key role in the control of both spending and the size of the budget deficit or surplus. Three decades ago, when discretionary spending accounted for nearly 70 percent of budget outlays, the control of spending fell largely to the Appropriations Committees. Over time, however, the composition of the budget and the nature of budget control have changed dramatically. In the current year, that is 1995, discretionary spending is expected to make up only 36 percent of total outlays, falling to 30 percent by the year 2000. Growth in entitlement spending has outpaced both discretionary spending and revenues, leading to unanticipated large deficits. Further, such growth occurs without congressional action and is highly responsive to economic conditions and other factors that are often difficult to predict. Although the budget process has had some success in controlling discretionary spending, controlling entitlement spending presents a much tougher challenge. The growth in entitlements and the large budget deficits of the 1980's have brought new challenges to the budget process. The primary focus of the process has shifted to the development of rules specifically intended to reduce the deficit. That role is manifested 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, the BEA. Gramm-Rudman-Hollings had a single goal, to reduce the size of the deficit to specified levels each year until expenditures were in balance with revenues. But the deficit did not come down. Instead of enacting the changes in laws governing revenues and spending necessary to reduce the deficit, the President and the Congress were able to avoid the intent of the act by changing the deficit targets and by basing budget estimates on overly optimistic forecasts. The BEA created a very different process than that established by Gramm-Rudman-Hollings. Its purpose was not to force the attainment of a specific deficit level. Rather, it attempted to control spending and prevent legislative actions that would cause the deficit to increase. The Congress and the President have lived within the BEA's constraints. Although the deficit outlook deteriorated just after the 1990 budget agreement, that turn of events did not result from evading the stricture set up by the BEA. Rather, the deterioration of the economy and the open-ended nature of entitlement programs, such as Medicare and Medicaid, were largely responsible for increasing the deficit over the 1990 projections. Virtually nothing of the darkening deficit picture after 1990 resulted from policy actions that were controlled under the BEA. Some tentative lessons can be drawn from the past 20 years of experience with congressional budgeting. First, the 1974 Budget Act created an infrastructure for budgeting that has proved to be of lasting value. The budget committees, the timetables and rules of procedure, and the information systems put in place by this legislation afford the Congress an expanded capacity to frame a budget in a systematic and informed manner in addition to providing it with the means to pursue an explicit fiscal policy role. Thus, the essential elements for effective budget control by the Congress have been put in place. The second lesson we have learned is that there is a limit to what the process alone can accomplish. The budget process ultimately is not really a substitute for specific policy decisions required to produce a desired result. The budgeting process has no magical powers. At best it can provide opportunities for the Congress to make informed decisions that will result in desired out comes. Third, in designing budget procedures, control mechanisms should focus on those things that can be controlled directly. That lesson comes from the contrasting experiences with Gramm-Rudman-Hollings and the Budget Enforcement Act. Gramm-RudmanHollings explicitly attempted to reduce the deficit without specifying how that was to be accomplished; thus, it suffered from the absence of a direct link between the object of control and those variables that the Congress can control. The relative success of the BEA stems in part from its confinement to controllable legislative actions. That is particularly apparent in the case of discretionary spending, which has been consistently declining as a percentage of gross domestic product. Inevitably, the BEA's changed emphasis has come at a price. By focusing on legislative action through the PAYGO rules, the BEA does not force enactment of measures to reduce the deficit further. Under the BEA, entitlements can still expand considerably because of changes in population, inflation, utilization rates, and in the case of health programs, because of changes in technology that enhance the quality of benefits. Many observers are dissatisfied with the current process, and they have proposed changes. I will comment briefly on some of the major criticisms and suggestions for reform. One broad area of concern is that the process is too complex, too time-consuming, and too rule-bound. Critics argue, for example, that if the budget was enacted less frequently, as would be the case under such proposals as biennial budgeting, more time would be freed up for legislating and oversight. But enacting the budget less frequently would decrease fiscal flexibility. Moreover, given the uncertainty that often surrounds budget estimates, it is likely that the second year would be spent making adjustments to decisions made in the budget year because of unanticipated changes in the economy or in other factors affecting program costs. The process is also criticized as too rule-bound. The PAYGO procedures, for example, have created very complex rules. Although the complexity of the process is certainly troubling, it may be a natural byproduct of repeated attempts to bring the budget under balance. Fewer rules are desirable, but so are lower deficits. Given that many of the current rules try to curb the deficit, they may eventually outlive their usefulness. We should keep in mind, however, that the pressures on the budget in the next century, brought about by the Government's commitment to an aging population, could mean that it will become as difficult to maintain balance as it is to achieve it. Another problem of concern is that the budget system is inadequate to control direct spending. The apparent uncontrollability of mandatory spending has fostered many suggestions for bringing it under greater control through a process change, including sunset provisions for all programs, annual appropriations for mandatory programs, and an enforceable cap on mandatory spending. One difficulty with the annual appropriation and cap approach is that they may both be viewed as inconsistent with the underlying legislative commitment to provide benefits to the designated population. Another difficulty is that the Congress is limited in its ability to delegate authority to executive agencies to reduce unilaterally those payments made from mandatory spending programs. Some recent studies, such as that of the Bipartisan Commission on Entitlement and Tax Reform, have decried the lack of attention to the long-term implications of budget decisions. According to that view, the 5-year budget horizon creates incentives to be shortsighted and to push costs beyond the expiration date of the BEA. The Entitlement Commission suggests a 30-year window for budget decisions. One big drawback of such long-term budgeting is that it would significantly add to the uncertainties surrounding budget estimates. Moreover, many programs have a relatively short policy life and extrapolating them into the long term may not always make sense. Of course, a longer time horizon is essential for the planning of future benefits and revenues in a program like Social Security, but the complex analysis required would seem to justify studies that need not be tied to the routine budget process. Another set of concerns deals with the President's role in the budget process. Some critics argue that the President needs to be involved more fully and continually in the budget process. That argument usually emphasizes that the President, as the only elected official with a national constituency, must remain accountable for the budget throughout the process. Two reforms have been proposed. One would require the President's signature on budget resolutions. The second would grant increased authority to the President to veto individual budget items. Such an increase in Presidential involvement, however, could restrict congressional budgetary prerogatives. Moreover, in the case of a joint budget resolution, requiring the President's signature could result in conflict and stalemate at an early stage of the process, making it even more difficult to adopt a congressional budget. The line-item veto would increase the President's power to pursue his budget priorities at the expense of those of the Congress. But depending on the relative weights one assigns to Presidential and congressional priorities, that might or might not be a positive development. Another criticism of the budget process is that current budgetary concepts prevent budgetary cost from reflecting economic costs in a timely fashion. Policymakers respond to the estimated costs of various actions as they are scored in the budget. If costs are misstated, decisions can be biased away from the most sufficient outcome. Numerous proposals have been offered to address the possibility of a cost bias. One frequently cited proposal would change the budgetary treatment of Federal investments to report costs over the expected life of the investment rather than up front when the asset is acquired. Another approach argues that the goal of a balanced budget - should be targeted toward the operating component of the budget, not its capital component. Still another set of proposals would expand the use of accrual accounting for Federal pensions and insurance programs. The proposed reforms cited and many more have their strengths and limitations, and some of them have been described in more detail in my prepared statement. In conclusion, I would suggest that despite some contrary developments, the last two decades of congressional budgeting have been fruitful. The Congress has created a budgetary infrastructure that enables it to address the most pressing fiscal issues of our time; namely, how to balance the division of scarce resources between public and private uses and between present and future generations. The unchecked growth of entitlement spending, however, remains an obstacle to attaining the desired balance. Nonetheless, there is reason for optimism. As the current Congress has demonstrated in the new budget resolution, the budget infrastructure is flexible and can be used to outline the changes necessary to control mandatory spending. No one can predict the outcome of this year's efforts, but failure to achieve the objectives of the resolution is not likely to be the fault alone of the budget process. Enacting required legislation involves a consensus, not only among divergent views within the Congress, but also between the Congress and the President. Such agreement is not always easy to achieve. In sum, getting mandatory spending under control is urgent. Although potential improvements of the process are certainly welcome and should be pursued, the current process appears adequate to support policy decisions that would reduce the deficit. The hard fact remains that eliminating the deficit will ultimately require changes in the legislation that authorizes the mandatory spending in the first place. Thank you. [Ms. O'Neill's prepared statement follows:] PREPARED STATEMENT OF JUNE E. O'NEILL, DIRECTOR, CONGRESSIONAL BUDGET OFFICE Chairman Goss, Chairman Dreier, and members of the subcommittees, thank you for inviting me to testify today on the budget process. In my testimony, I will discuss three topics: The evolving role of the congressional budget process; Criticisms of both the current process and some proposed reforms. THE ROLE OF THE CONGRESS IN THE FEDERAL BUDGET PROCESS For many decades, the role of the Congress in the Federal budget process has included prescribing general rules and procedures for presenting the President's budget and for enacting spending and tax laws. Historically, the Congress has also assumed responsibility for controlling spending and the size of the budget deficit or surplus. Three decades ago, when discretionary spending accounted for nearly 70 percent of budget outlays, the lion's share of the responsibility for spending control fell to the Appropriations Committees. Over time, however, both the composition of the budget and the nature of budget control have changed dramatically. In the current year, discretionary spending is expected to make up only 36 percent of total outlays, and by fiscal year 2000 the share directly controlled by the Appropriations Committees will fall to 30 percent. Growth in entitlement spending has outpaced both discretionary spending and revenues and, thus, led to unanticipated large deficits. Further, such growth occurs without congressional action and is highly responsive to economic conditions and other factors that are difficult to predict. Although the budget process has had some success in controlling discretionary spending, controlling entitlements spending presents a tougher challenge. Recent reform efforts have recognized the inherent difficulties of controlling entitlement growth, but the problem persists. How the Budget Process Developed The general rules of the budget process are contained in two laws. The first is the Budget and Accounting Act of 1921. That 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 include new requirements for Presidential budget submissions. The current congressional budget process was established with the Congressional Budget and Impoundment Control Act of 1974. That law was passed both in response to the frustration generated by the fragmented nature of congressional budgeting and as a way to provide the Congress with greater ability to carry out its budgetary responsibilities. Part of the reason for the reform, too, was a sense that President Nixon had abused his ability to impound appropriated funds; the 1974 Act severely restricted the President's ability to rescind such funds. The act strengthened the congressional role in the budget process by centralizing and augmenting the Congress' capacity to budget. Thus, 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 budget resolution gives the Congress the ability to consider the board outlines of the budget as a whole and establishes the guidelines 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 large budget deficits in the 1980's ushered in a new era for the budget process. During this period, the primary focus of the process has been on establishing rules specifically intended to reduce the deficit. That role is manifest 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 single 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 appropriate spending restraint or tax increases, automatic across-the-board spending cuts or sequestrations-were to take effect. |