The Gramm-Rudman-Hollings Act of 1985 imposed deficit targets that declined to zero by FY 1991, and required automatic sequestration or across-the-board cuts in spending if the targets were not met. The Act subsequently was ruled unconstitutional and was amended in 1987 by the Balanced Budget and Emergency Deficit Control Act of 1987, which required a balanced budget by 1993. See SM/90/159, pp. 29-30, for further details.
The fiscal year runs from October to September.
Discretionary spending requires annual appropriations from Congress. Mandatory spending (e.g., Medicare, Medicaid, and welfare programs) is provided for under existing legislation and does not require annual reauthorization by Congress.
See the Background Papers for the 1994 Article IV Consultation (SM/94/223, Chapter V) for a more detailed description of OBRA93.
These included an increase in the top marginal income tax rate, an income surtax, reduced personal exemptions, the removal of the ceiling on income subject to the Medicare wage tax, and an increase in the taxable portion of social security benefits.
As indicated above, the caps on discretionary spending and the “pay-as-you-go” requirement were originally introduced in the October 1990 Budget Enforcement Act (BEA). OBRA93 tightened the BEA caps on discretionary spending, extended these to 1998, and strengthened the pay-as-you-go provision by requiring that legislation not increase the deficit over a five-to-ten year horizon.
Following the release of the Administration’s FY 1996 budget in early February 1995, the Administration responded to Congressional efforts to achieve a balanced budget by FY 2002 by presenting in June 1995 a plan to achieve balance by FY 2005. The plan did not receive the support of the Congressional majority, which criticized the Administration’s budget priorities, economic assumptions, and the proposed pace of deficit reduction.
Discretionary spending is authorized through appropriations legislation each year. If an appropriations bill is not signed into law by the beginning of the fiscal year, Congress typically enacts, and presents to the President for approval or veto, a continuing resolution providing spending authority to affected agencies through a specified date, or until a regular appropriations bill is enacted.
The initial increase appears to result, in part, from proposed payments to the states to ease the transition into the new Medicaid system.
Provider payment reforms include, for example, reducing the annual inflation increase in payments to hospitals, reducing payments to hospitals for capital equipment, and establishing separate payment systems for home health care and skilled nursing facilities.
The Medicare program consists of two parts: Hospital Insurance (also know as Part A); and Supplementary Medical Insurance (also known as Part B).
Under the “disproportionate share hospital” (DSH) program, states must augment their Medicaid payments to qualified hospitals that provide inpatient services to a disproportionate number of Medicaid recipients and/or to other low income persons. Such payments automatically generate DSH payments from the federal government to the states according to a specified formula.
The credit would rise to $500 per child in 1999 and beyond. The credit would be phased out for taxpayers with (adjusted gross) incomes between $60,000 and $75,000. This range would be adjusted for inflation beginning in the year 2000.
A deduction of up to $5,000 per year would be permitted for education and training expenses, including tuition and fees directly related to a student’s enrollment in degree programs and courses to improve job skills. This benefit would be available for education expenses of a taxpayer, the spouse, or dependents. The allowable deduction would rise to $10,000 in 1999. In June 1996, the President announced that the Administration was supporting a tax credit to pay the cost of tuition at the average community college for the first year (“HOPE Scholarships”). The same amount could also be applied to the first year of enrollment at a four-year university or college. The tax credit would be extended for a second year contingent upon student performance.
The EITC is treated as an expenditure in the federal budget. Eligibility for the EITC would be eliminated for noncitizens and unauthorized workers, and eligibility would be restricted for individuals with sizable capital gains and other unearned income.
Examples include revised depreciation deductions, requiring gains under certain stock sales to be treated as income, and restricting interest deductions for corporations that invest in tax-exempt bonds.
The tax cuts earmarked for elimination under the trigger-off mechanism include all elements of the President’s Middle Class Bill of Rights (tax credits for dependent children, expanded IRAs, and tax incentives for education and training), small business tax benefits, and new enterprise zone arrangements. It does not apply to proposed pension simplification, estate and gift tax relief, expanded “empowerment zones” and “enterprise communities,” or to tax relief for the troops in Bosnia.
In the discussion below, the fiscal balance is defined as the sum of the current surplus less gross government investment plus capital consumption allowances.
The fiscal effect of the Gulf War can be seen in the data for 1991; current outlays (related to defense spending) rose sharply, but were more than offset by net transfers to the U.S. Government, which lowered net transfers to the rest of world.
Differences between the unified and national accounts fiscal deficit relate mainly to (i) the inclusion of capital consumption as an explicit expenditure in the national accounts; (ii) the exclusion of Puerto Rico, the Virgin Islands, and other similar areas from the national accounts; (iii) the treatment of net lending as a financing item; and (iv) timing differences.