next decade. A mandatory cap might tie the growth of spending for individual programs to the increase in the eligible population and inflation. Such a cap could also use a sequestration to enforce compliance with the cap, and savings would be achieved if spending was held to the cap level.

The difficulty with both the annual appropriation and cap approach is that they are potentially inconsistent with the underlying, legislated commitment to provide benefits to the designated population. Some acceptable procedure is required to ration capped benefits among those declared by law as eligible to receive a full entitlement. Moreover, the Congress is limited in its ability to delegate authority to executive branch agencies to reduce unilaterally those payments made from mandatory spending programs.

Some critics also view the existing process as inadequate because it creates incentives to use the BEA's emergency designation, which has the effect of increasing the deficit. They contend that the emergency designation gives the Congress and the President an incentive to underfund certain accounts in the normal appropriation process in order to fit under the caps, only to increase the deficit when a supplemental appropriation is provided after an emergency is declared. They propose that emergencies be funded by budgeting for those events in advance of their occurrence under the existing caps. Others support the current process, citing the difficulty of predicting the timing of and amounts needed for emergencies.

Too Little Attention Is Paid to the Long Run and to Non-Federal Costs

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 short-sighted and to push costs beyond the expiration date of the BEA. Accordingly, the Senate already has instituted a 10-year point of order in response to that concern. Others would go further: the Entitlement Commission suggested a 30-year window for budget decisions. Of course, a longer time horizon is essential to a complete assessment, but it significantly adds to the uncertainty surrounding budget estimates.

A second set of concerns has to do with the limited coverage of the budget. Federal policy often imposes costs on non-Federal entities. Mandating that State and local governments or private businesses provide certain services, for example, can substitute for direct Federal spending. Non-Federal costs, however, do not show up in the Federal budget. That outcome has led to proposals that State and local mandates and private sector regulatory costs be moved formally into the budget. As an alternative, others have proposed that more information be made available on the total costs of such requirements before legislative action is taken and that additional procedural impediments be placed in the way of costly increases in those requirements. In fact, the Congress and the President took that approach in enacting the Unfunded Mandate Reform Act of 1995.

The President's Role in the Process Is Too Inactive and Too Inflexible

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 is the only elected official with a national constituency and that he or she needs to remain accountable for the budget throughout the process. Two reforms are proposed. The first would require the President's signature on budget resolutions, thus providing the opportunity for the President and the Congress to reach agreement at an earlier stage than currently. The second would grant increased authority to the President to veto individual budget items. Indeed, both Houses of Congress have enacted separate stautory versions of the line-item veto during this session.

Such an increase in Presidential involvement could restrict congressional budgetary prerogatives. In the case of a joint budget resolution, requiring the President's signature could result in conflict and stalemate at an earlier stage of the process, making it more difficult to adopt a congressional budget. One can easily imagine the added difficulties that would have been encountered this year if the budget resolution had had to meet the President's approval as well as that of both Houses of Congress. Conversely, we have yet to experience the endgame of this year's struggle; it is unlikely to be resolved smoothly. The line-item veto would increase the President's power to pursue his or her budget priorities at the expense of those of the Congress. Depending on the relative weights one assigns to Presidential and congressional priorities, that might or might not be a positive development.

Current Budgetary Accounting Might Bias Policy Outcomes

A final criticism of the budget process is that current budgetary concepts-in particular the rules governing accounting in the budget-prevent budgetary costs from reflecting economic costs in a timely fashion. That criticism recognizes that policy

makers respond to the estimated costs of various actions as they are scored in the budget. To the extent that costs are misstated, decisions can be biased away from the most efficient outcome.

Numerous proposals have been offered to address the possibility of a cost bias. Most would make greater use of an accrual, rather than a cash, basis of accounting in the budget. 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. To proponents, that form of capital budgeting would correct a bias that they believe results because the cost of an investment project is not shown in the budget as it is consumed through use over many years. Alternatively, smoothing out costs over an extended period might make things seem more inexpensive that they are if policymakers only consider the short

run.

Another approach to the same concern about a potential bias against capital investment argues that the goal of a balanced budget should be targeted toward the operating component of the budget, not its capital component. In that view, a balanced budget rule would apply to government expenditures for current consumption and operations, but borrowing—subject to a specified limit—would be permitted to finance long-lived Federal investments. Critics of that approach are concerned that relaxing budgetary discipline for spending classified as investment would create strong incentives to classify many activities as capital, regardless of whether they met suitable investment criteria or not.

Another set of proposals would expand the use of accrual accounting for Federal pensions and insurance programs. Accounting for the cost of those programs when cash is paid, critics argue, does not accurately reflect the cost of an activity when costs are controllable. Opponents contend that this method of accounting would make the budget much too dependent on the uncertain estimates of events many years in the future.

CONCLUSIONS

In conclusion, I would suggest that-some developments to the contrary-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 issue of our time: How to balance the division of scarce resources between public and private uses and between present and future generations. No doubt the unchecked growth of entitlement spending poses a continuing threat to the desired balance. Moveover, the current budget process is clearly better suited to controlling discretionary spending than entitlements.

Nonetheless, as the current Congress has demonstrated in the new budget resolution, the budget infrastructure is flexible and can be used to outline the changes required 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 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 to the process are certainly welcome and should be pursued, the current system 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 spending in the first place.

Mr. Goss. Thank you very much, Dr. O'Neill. I appreciate your underscoring a couple of areas that I think were well presented in your written testimony-which I read last night-because they keep coming up again, and obviously the problem of what to do with our entitlements, our mandatory spending.

I served on the Kerrey Entitlement and Tax Reform Commission, and I was very interested to hear your remarks about our proposal for the 30-year window and some of our attempts to grapple with this. You have sort of suggested maybe we ought to be looking at a separate track.

Is that a firm suggestion or have you got something that we ought to flesh out there? We didn't really specify exactly what we meant in our 30-year window except you have got to look at this

in a longer range than 5 years because you miss a lot of the trees when you have a 5-year window.

Ms. O'NEILL. I certainly agree with the spirit of your comment, but we at CBO shudder when talk is made of extending the horizon for the routine budget because we know how difficult it is to make estimates for a 5-year period.

The uncertainty mounts, but it is true that there are certain programs Social Security, Medicare, the commitments to an aging population-that have to be considered within the framework of a distant horizon because you can't change the benefits structure at the last minute. It takes planning now for the future. So the question is, How can you bring this to the public's attention?

It seems that the issues really are specific to those programs and that they deserve a study of their own, and I think it is certainly desirable to devote a chapter in an annual report to long-term problems as a separate issue.

Now, if some legislation were to be suggested and we were to do a cost estimate that clearly had implications beyond a 5-year window, we could certainly-informally or as part of an accompanying study or commentary-look at those implications that are known. But how much they are known is not all that apparent. As a routine matter, however, that would probably lead to a lot of dubious estimates.

Mr. Goss. Well, I totally understand your desire for precision in this process. In your job you have to have that. There is the practical reality that there is not a full awareness of the problem and the political reality is that there probably isn't sufficient courage to deal with it once it is known unless we do it prospectively, so the temptation is immediately to say we have to look at this in a generational bite and actually when you start looking at the charts you do see that you are out there a generation, two generations out there before the train wrecks all happen. So the temptation to say, yes, we can fix this prospectively, we have the time to do it now, and I think that was what the genesis of the 30-year window is. We have got to find some kind of mechanism to throw this thing out there and say, people going into the workplace today may not have exactly the same set of rules and regulations about their programs down the road that my grandfather had or that I have, but they will be fair and equal to the greatest degree possible within the affordability of the United States. That process, it seems to me, is very amorphous at the moment.

In fact, it doesn't exist at the moment except when it is politically suitable for some people to start throwing these charts around. I would like to try and formalize that some way, and I don't know if we can become more specific than you first answered me, but I think that is where these questions are coming from and where this concern is because I think the entitlement problem is the problem. I think that is the big bear in the woods.

Ms. O'NEILL. I certainly would agree with that.

Mr. Goss. The other observation, before I turn to David, I was interested when you were talking about the President, it seems the President is a part of this and the congressional part of this, in a simplified way I have always thought that wonderful statement about the buck stops there always meant that the buck starts here,

and that therefore we better get the budget right or we are going to have a hard time stopping the buck there or helping the President stop the buck there, whether it is the line-item veto or some other way.

I thought back as we have gone through some of the history of this, and how did we get into this business of budgeting anyway and a part of that has always been, well, at least in the last 25 years it has been the tugging back and forth between downtown and the Hill on the subject of who is driving on this.

Do feel that there should be a change right now? I detected some enunciations in your delivery. Do you feel that there is a serious imbalance now?

Ms. O'NEILL. As you know, CBO really doesn't

Mr. Goss. I understand.

Ms. O'NEILL. We are impartial about these things. We consider the advantages and the disadvantages. I pointed out that there are a number of disadvantages in trying, just as a practical matter to get agreement early. It could just cause a stalemate so that it would be impossible to go beyond

Mr. Goss. We are scared of that. Just pragmatically we are dealing with lockboxes. You know, we are trying to determine what that means and how to make something work, and we have OMB figures and the resolution guideline numbers that we use in our budget resolution. You have got two different sets of numbers, so, What is it that we are putting in the lockbox?

Those are just daily problems that we have to wrestle with, that you have to wrestle with as well. We have to wrestle with them in a slightly different perspective than you do. I don't know how you change that because I don't think you can take either party out of the game, and I don't think you can take the mechanisms that support the players in either party out of the game, so I feel you always have a bifurcated arrangement. Is that a correct conclusion?

Ms. O'NEILL. But eventually some agreement is reached. Everybody faces pressures that they are aware of. Everybody is now aware that there is a deficit, and it will only grow if nothing at all is done. It is large now and the problem will only get worse.

We are projecting that by the year 2005, the deficit, if nothing were done at all, would be 4 percent of GDP, and beyond that it will only get worse. So, no, with those forces in front of you, staring you in the face, it seems to me that there is a strong incentive on the part of everybody to try and come to some agreement. There are certain things that may prove to be stumbling blocks.

Mr. Goss. I have taken a lot of time. There is one other area if David doesn't cover it I would like to get your advice on as well. Mr. DREIER. Thank you very much. Why at the outset don't we ask if we could submit some questions to you.

Ms. O'NEILL. That would be fine. [See p. 19.]

Mr. DREIER. There are a number of things that I have that I would like to cover. I am just going to get into one brief, very, very brief one right now, and that is the issue of unfunded mandates.

A lot of us were involved in that. I served as a conferee on the legislation that put in place the legislation calling for dealing with the issue of unfunded mandates. You will recall that in the authorization process $4.5 million was provided for you all, then when it

came to the legislative appropriations, $1.1 million, I wonder if that is going to be adequate and what your sense is right now as we look at this very important issue.

Ms. O'NEILL. We had asked for roughly half of the I believe it was $2.6 million. We cut in half the original cost estimate, figuring that we could in the spirit of reducing-of trying to be parsimonious with our own resources-that we could make some rearrangements within CBO.

Mr. DREIER. We appreciate that.

Ms. O'NEILL. But we felt that we realistically needed the $2.6 million, and that is because the unfunded mandates really require us to get into estimates involving States and localities. Although we have done cost estimates that incorporated a State and local component, they didn't have the teeth that they now have with the unfunded mandates legislation and we really must beef up our capability in that regard. Developing sources in all of the States is obviously going to be an expensive matter.

Mr. DREIER. Do you feel confident, though, about the ability to deal with that?

Ms. O'NEILL. I don't know. Bob Reischauer predicted we would be back asking for more.

Mr. DREIER. That is what I was wondering, what your sense is

now.

Ms. O'NEILL. It is very hard to say. One of the concerns is that there may be some dynamic effects of the legislation itself if fewer mandates are offered. Then there won't be as much work as one might anticipate; but given past history, unfunded mandates come along all the time, and we would want to do a good job of covering the States, localities, and the private sector. Frequently, many pieces of legislation have implications for the private sector and we would want to do a good job.

Mr. DREIER. Let me just ask one other question, then I have a couple things I am going to submit to you in writing.

Yesterday we had this informal briefing here and there was a discussion on the impact of the Budget Act itself and the observation was made that since passage of it in 1974 we have seen this tremendous growth in the size of deficits, and then it was observed by Tony Beilenson that had it not been for the Budget Act, the deficits would have been significantly greater than they have been. I wondered if you have any response to that.

Ms. O'NEILL. I think, as you point out, it is an example of drawing a conclusion about the effects of a policy change without some counter factual situation to measure it against. It is literally true that the budget deficit did increase after the 1974 Act, but as I pointed out in my testimony, we really changed along the way; there was a dramatic shift from a budget that was essentially appropriated programs.

It is really striking that 70 percent of the budget in 1962 was devoted to discretionary programs that were under the control of the Appropriations Committees. In addition to that, the entitlements such as Social Security were not indexed, so that on an annual basis the cost-of-living adjustment could be considered. We could ask, "Can we afford it this year or not?" There were many more checks.