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There is no defensible reason for the mixture of on- and off-budget lending transactions illustrated in the table. These inconsistent financing practices have come about because of the efforts of agencies and interest groups to maintain a fiction of low program costs through financing activities off-budget. It is difficult for budgetary control incentives to work effectively in this atmosphere. Through the credit budget process, the Administration is trying to build a more rational system, but as long as off-budget spending is invisible to the unified budget process, it will be considered a "free good" rather than another method of Government allocation of scarce taxpayers' resources.

Some might argue that the remedy to the inconsistent treatment of lending control is to exclude all lending from the unified budget. The Administration disagrees:

Federal loans allocate economic resources


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just as do other forms of and as such they should be included in the unified


All Federal loans involve the use of Federal cash; such cash must come from taxes, the sale of assets, or borrowing from the public. From 1974 to June 1983, the FFB directly accounted for a $103 billion addition to the Federal debt in order to finance loans to support

agency programs.


Federal loan programs generally have major and varying elements of subsidy that are inseparable from the loans. These subsidy elements are no different from other Federal subsidies that are included as outlays. With the best of will, it would be virtually impossible to measure the subsidies accurately.

If Federal lending were excluded from the unified budget, strong incentives would exist to substitute lending for grants or direct purchases. Loans would be perceived as costless to the Government and therefore given more readily, merely to avoid the difficult decisions on resource allocation that are part of the budget process.

I would emphasize, however, that placing FFB outlays on-budget does not solve the problem of credit control nor does it lessen the need for a credit

budget. If anything, the credit budget must be strengthened. It is the only mechanism that we have for monitoring all Federal credit activity, loan guarantees as well as direct loans. It measures the total amount of new Federal credit activity, in contrast to the net outlays recorded for on- and off-budget direct loans.

The credit budget is therefore an essential part of our budget process and will remain essential even with all FFB outlays included in the budget and attributed to the programs that are supported by the FFB on their behalf. At the same time that the credit budget is essential, however, it is not sufficient as a control mechanism. It needs to be complemented by the inclusion of all direct lending in the unified budget, so that direct lending can be compared with other types of Federal spending.

Coverage of S. 1679

For all of the above reasons, the Administration supports the basic provisions of S. 1679. There are, however, some essential amendments that we would recommend. As written, S. 1679 states that Federal agencies may not issue, sell, or guarantee obligations "of a type" that were issued, sold, or guaranteed and financed through the FFB during the period beginning October 1, 1981, and ending September 30, 1984, unless those obligations are first offered for sale to the FFB.

We are concerned that such wording would allow new or existing programs, which are financed directly in the investment securities markets or which altered the characteristics of their obligations, to escape the discipline of the budget. We therefore recommend wording that requires agencies to offer for sale to the FFB any obligations of a type normally financed in the investment securities market. This requirement could be waived in those cases where we determined that the obligations (1) were not suitable investments of the FFB because of the credit risks entailed in the obligation or (2) were financed in a manner that is least disruptive of private financial markets and institutions. The Administration, in a separate report, will discuss the debt management implications of the bill and provide specific language to correct the deficiencies of the bill.


S. 1679 would require that all transactions of the Federal Financing Bank be included in the Federal budget and attributed to the agencies that are responsible for them. Such requirements are consistent with the budget concepts and concerns that I have just described. The basic provisions of S. 1679 are important, and we support them. We therefore would welcome the opportunity to work with your Committee on the amendments necessary to achieve the principles of S. 1679 in the most effective way.

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Senator TRIBLE. I thank you very much. I have read your statement twice prior to this hearing. It is well done. I think it presents a very strong case for the action contemplated by this legislation. Let me ask you, in terms of your oral statement today, to flesh out a point made in your written statement submitted for the record, and that is, why do loans as a conceptual matter belong in the Federal unified budget? You touched on that issue, talked about measuring cash flow. You set forth in your statement on pages 10 and 11 certain public policy reasons.

I would like you to take a few minutes and discuss that for our purposes here today, if you will, because I think that's really the

heart of the matter.

Mr. WRIGHT. Certainly, Mr. Chairman. From my point of view, it's very simple. Direct loans basically are a cash outlay by the Federal Government. There is not any difference between them and an S&E account or any other type of direct outlay of the Federal Gov


However, in many cases, for some reason, whether it be politics or the national priorities at the time, we decided that we were going to treat them as if they weren't outlays. And, as you said in your statement introducing the bill, this treatment is inconsistent at best, and dishonest at worst.

And since, if you are going to have a unified budget, and you're going to hold to the principle of a unified budget, then all cash transactions should be included in that budget. And we think that excluding some transactions is a fairly substantial breach of budget discipline. I understand that you're going to have witnesses that are going to come in and say that it's a very small percentage of the total. Mr. Chairman, any percentage of the total is a breach in the discipline of the unified budget, and if that's the case, we should state it. We feel very strongly that this bill represents a way to be able to measure not only the priorities of the Federal Government, but to properly account for them.

Senator TRIBLE. Senator Proxmire?

Senator PROXMIRE. On page 13, Mr. Wright, you say in the second sentence, "We therefore recommend wording that requires agencies to offer for sale to the FFB any obligations of a type normally financed in the investment securities market."

Is it your interpretation that the bill as drafted would permit any new program to go directly to the market without going to the FFB and therefore escape the budget?

Mr. WRIGHT. We are concerned, Senator, that a new program may not be included specifically within S. 1679.

We are also concerned, for example, that an agency would be able to make a slight revision to an existing program or security and thus escape the provisions of S. 1679. Therefore we would like improved language there.

Senator PROXMIRE. Make a slight revision, call it a new program, and thereby escape the inclusion in the budget?

Mr. WRIGHT. Yes. They would only have to change the terms of the security or obligation. For example, they could change the pooling arrangements.

Senator PROXMIRE. Senator Gorton and I tried to deal with that problem in our S. 711.

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