United States: Recent Economic Developments
Author:
International Monetary Fund
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Publication Date:
11 Sep 1996
eISBN:
9781451839487
Language:
English
Keywords:
ISCR; CR; GDP; income; contingency proposal; administration's FY; interest outlay; United States government; government enterprise; Budget planning and preparation; Tax allowances; Administration in revenue administration; Corporate income tax; Social assistance spending; gross investment
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This paper reviews economic developments in the United States during 1992–96. The paper briefly describes improvements in the national income and product accounts (NIPA) and some of their implications for the analysis of long-term trends in U.S. investment and saving. The paper highlights that the effect of the 1990–92 recession on employment was considerably less severe than the effect of the 1981–82 recession. During the 1990–92 recession, employment fell by 1½ percent, compared with a drop of 3 percent during the 1981–82 recession.

Abstract

This paper reviews economic developments in the United States during 1992–96. The paper briefly describes improvements in the national income and product accounts (NIPA) and some of their implications for the analysis of long-term trends in U.S. investment and saving. The paper highlights that the effect of the 1990–92 recession on employment was considerably less severe than the effect of the 1981–82 recession. During the 1990–92 recession, employment fell by 1½ percent, compared with a drop of 3 percent during the 1981–82 recession.

V. Recent Fiscal Developments in the united States

Following the expansionary fiscal policy of the early 1980s, efforts to restore fiscal discipline resulted in federal legislation in 1985 and 1987 that called for a balanced budget over the medium term. 1/ These legislative initiatives and the strong cyclical expansion helped reduce the unified federal deficit from 6.3 percent of GDP in FY 1983 to 2.9 percent of GDP by FY 1989 (Charts 1 and 2). 2/ The fiscal situation weakened in FY 1990, however, and new legislative disciplines were introduced in the October 1990 Budget Enforcement Act (BEA). The BEA replaced annual deficit ceilings with caps on discretionary outlays and a requirement that legislated changes to taxes or mandatory programs not add to the deficit (the “pay-as-you-go” provision). 3/ Despite these provisions, the deficit rose to 4.9 percent of GDP in FY 1992, owing to continued rapid growth in entitlement programs, the cost of resolving the saving and loan crisis, and the effect of the economic slowdown on revenues and outlays.

Chart 1
Chart 1

UNITED STATES: FEDERAL FISCAL INDICATORS

(In percent of GDP; fiscal years)

Citation: IMF Staff Country Reports 1996, 093; 10.5089/9781451839487.002.A005

Sources: Budget of the United States Government: Fiscal Year 1997 (March 1996); May 1996 Economic and Budget Outlook; and staff estimates.
Chart 2
Chart 2

UNITED STATES: EXPENDITURE AND REVENUE TRENDS 1/

(In percent of GDP; fiscal years)

Citation: IMF Staff Country Reports 1996, 093; 10.5089/9781451839487.002.A005

Source: Budget of the United States Government: Fiscal Year 1997 (March 1996).1/ Shaded area represents Administration’s budget projections.

The unified federal budget deficit fell from 4.9 percent of GDP in FY 1992 to 2.3 percent of GDP in FY 1995. This improvement reflected the deficit reduction measures included in the Omnibus Budget Reconciliation Act of August 1993 (OBRA93) and the cyclical recovery.

1. The Omnibus Budget Reconciliation Act of 1993

The OBRA93 envisaged cumulative deficit reduction of about $500 billion over the period FY 1994-98, with a reduction in the FY 1998 deficit of $146 billion (1 ¾ percent of GDP) relative to what it would have been otherwise. 4/ Measures included tax increases targeted principally at higher income taxpayers 5/, corporations, and gasoline consumption. These tax increases were to account for roughly half of the projected cumulative deficit reduction. Expenditure cuts targeted both discretionary and mandatory spending and were projected to account for roughly two-fifths of the cumulative deficit reduction. Savings in mandatory spending would be achieved, for example, through cuts in outlays for Medicare (reduced payments for medical services), a reduction in supplemental payments to hospitals servicing large numbers of uninsured patients, and cuts in agriculture, veterans, and student loan programs. Cuts in discretionary outlays were to be achieved by renewing a five-year cap on nominal discretionary spending, which in OBRA93 was set roughly equal to the level of nominal discretionary spending in FY 1993. Budget discipline also was to be enforced by renewing the 1990 requirement that legislated changes in taxes or mandatory programs not add to the deficit. 1/

2. The Administration’s FY 1996 budget

Following the election of a Republican majority in both houses of Congress in the fall of 1994, Congressional and Administration support for deficit reduction has intensified. Initially, however, there were substantive differences in both the measures proposed and the target date for eliminating the deficit. During the summer of 1995, both Congress and the Administration announced plans to eliminate the budget deficit, the former within seven years and the latter within ten years. 2/ At the start of FY 1996 (October 1, 1995), none of the 13 regular appropriations bills for discretionary spending had been enacted. Disagreements on appropriations led to two temporary, partial shutdowns of the Government, first in November 1995 and again in December 1995 lasting through January 6, 1996. With Congress and the Administration unable to agree, much of the Government’s discretionary spending was funded under a series of continuing resolutions through the first half of the fiscal year. 3/

Congress passed its version of the FY 1996 budget—the Balanced Budget Act of 1995—in November 1995, which included measures to eliminate the unified budget deficit by FY 2002 under the economic and technical assumptions of the CBO. This legislation was subsequently vetoed by the President on December 6, 1995. The final appropriations bills for FY 1996 were passed on April 26, 1996.

3. FY 1997 budget proposals

The Administration’s FY 1997 budget was presented to Congress on March 19, 1996. The budget proposed measures that would achieve a small surplus (0.1 percent of GDP) by FY 2001 under the economic and technical assumptions of the Office of Management and Budget (OMB). The Administration’s proposed spending cuts would save $7.1 billion in discretionary and $8.1 billion in mandatory spending during FY 1997 relative to the current services baseline (Table 1). Administration priorities in discretionary spending include funding for environmental protection enforcement, education programs, and science and technology. Savings in mandatory expenditures for 1997 would be achieved principally through proposed reforms in Medicare ($5.8 billion) and the welfare system ($4.9 billion); proposals affecting Medicaid spending are projected to increase spending in FY 1997 by $3.3 billion, but to reduce it thereafter. 1/

Table 1.

UNITED STATES: Administration’s FY 1997 Budget Proposals

(In billions of dollars, fiscal years)

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Sources: Budget of the United States Government: Fiscal Year 1997 (March 1996); and Fund staff estimates.

Medicare reforms under the Administration’s budget include changes in compensation for hospitals and health-care providers, and policies to curtail waste, fraud, and abuse. 2/ The premium paid by recipients under Part B (supplementary medical insurance) would remain unchanged at 25 percent of program costs. 3/ The Administration also proposes a number of modifications that expand benefits by allowing direct Medicare reimbursement to certain previously excluded health-care providers, by extending Medicare managed-care opportunities, and by increasing coverage of preventive care.

The Administration’s budget would give increased flexibility to the states in administering Medicaid programs and would establish a per-person cap on the growth of total spending. Proposed reforms also would gradually reduce so-called “disproportionate-share hospital payments” and target those hospitals serving a large share of Medicaid and uninsured patients. 1/

In the area of welfare reform, the Administration’s plan would repeal the Aid to Families with Dependent Children (AFDC) program and create a conditional entitlement to cash assistance on a time-limited basis. Ablebodied recipients would have to find employment after two years, or lose their cash benefits, and cash benefits would be limited to five years in most cases. Children would be protected under the proposed system through the use of vouchers to ensure access to essential items such as clothing and housing. The budget also proposes increased funding for child-care assistance for low-income parents. Under OMB technical and economic assumptions, proposed reforms of Medicare, Medicaid, and welfare are projected to yield about half of the total deficit reduction projected for FY 2002 (Table 2).

Table 2.

UNITED STATES: Alternative Assessment of the Administration’s FY 1997 Budget

(In percent of GDP fiscal years)

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Sources: Budget of the United States Government: Fiscal Year 1997 (March 1996); Congressional Budget Office. The Economic and Budget Outlook: Fiscal Years 1997-2006 (May 1996); and Fund staff estimates. Staff estimates adjust the administration projections for differences between the administration and staff macroeconomic assumptions. CBO estimates reflect differences from the Administration in macroeconomic and technical assumptions.

Excludes net interest outlays.

Debt held by the public includes debt bold by the Federal Reserve Banks.

CBO based on balance-budget economic assumptions.

Proposed tax measures in the Administration’s 1997 budget are projected to reduce revenue by $12.0 billion in FY 1997, the net effect of tax cuts of $17.6 billion and tax increases of $5.6 billion. The Administration’s individual tax cuts are directed toward middle-income households, principally through a proposed $300 income-tax credit for each child under age 13. 2/ Income tax proposals also would include a deduction for education and training expenses and expand eligibility for individual retirement accounts (IRAs). 3/ The budget proposes tax relief for small businesses, expanded enterprise zones, accelerated write-offs for certain environmental cleanup efforts, and tax benefits for the troops in Bosnia. Tax increases would include adjustments in calculating the earned-income tax credit (EITC) 1/ and measures to close a number of corporate tax loopholes. 2/

Also included in the Administration’s budget is a set of contingency measures to ensure budget balance by FY 2002. In the event that the unified budget deficit is not at least $20 billion below the CBO’s budget estimate for FY 2000, most of the tax cut provisions would end (this is referred to as the “trigger-off” mechanism) 3/ and further discretionary spending cuts might be enacted. Other savings would be identified if actual savings or revenues from the first set of contingency measures did not achieve the targeted deficit.

The Administration’s budget would be balanced by FY 2001 under OMB technical and economic assumptions. However, under the CBO’s more conservative assumptions the Administration’s budget would remain in deficit through FY 2002 ($81 billion or 0.8 percent of GDP in FY 2002) in the absence of the Administration’s contingency plans.

The U.S. Congress adopted a FY 1997 budget resolution on June 13, 1996 that contains broad spending guidelines for the 13 appropriations committees as well as targeted savings in welfare, Medicaid, and Medicare, and proposed tax cuts. The budget resolution envisages an extension of discretionary spending caps and pay-as-you-go requirements through FY 2002; the existing provisions expire at the end of FY 1998. At this stage, the specific measures to be included in legislation for discretionary spending intended to achieve the targets established in the budget resolution have not been identified. The resolution calls for a $500 per-child tax credit for “middle-class” families; projected to reduce tax revenues by a total of $122 billion over six years. It also assumes comprehensive reform of Medicare that would result in cumulative savings of $158 billion through FY 2002. Welfare spending would be cut by $53 billion over six years and Medicaid reform would save an additional $72 billion through FY 2002.

A broad comparison of the overall deficit-reduction plans of the Administration and the Congress (under CBO technical and economic assumptions) is presented in Table 3. With the Administration’s sunset provision for the tax cuts and unspecified discretionary spending cuts of $22 billion and $46 billion in FY 2001 and FY 2002 respectively, the Administration’s budget would achieve a small surplus of $3 billion in FY 2002. The Congressional proposal would cut the deficit by about 0.2 percent of GDP in 1997 and also would achieve a small surplus ($5 billion) by FY 2002.

Table 3.

UNITED STATES: Congressional and Administration Budget Deficits under May 1996 CBO Assumptions

(In billions of dollars, fiscal years)

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Sources: The Economic and Budget Outlook: Fiscal Years 1997-2006, Congressional Budget Office (May 1996); U.S. House of Representatives, Committee on the Budget (Majority Caucus); and Fund staff estimates.

Current services under balanced-budget economic assumptions and discretionary spending growing at the rate of inflation up to the discretionary caps imposed through FY 1998 and growing with inflation after FY 1998.

The Administration’s contingency proposals call for an end to proposed tax cuts after FY 2000, additional savings from further restraining Medicare costs, deeper unspecified cuts in discretionary spending, and new fees on television broadcasters to offset any shortfall in anticipated receipts from the auction of broadcast spectrum rights.

Figures released by the U.S. House of Representatives, Committee on the Budget (Majority Caucus).

4. General government fiscal situation

The general government fiscal deficit (on a national accounts basis) reached a recent peak of 4.4 percent of GDP in calendar year 1992, before falling in the subsequent three years to 2 percent of GDP in 1995 (Tables 4–6). 1/ The increase in the ratio during the 1990-92 period was largely related to an increase in the expenditure ratio; transfer payments to persons grew rapidly owing largely to the cyclical downturn. The revenue ratio was relatively stable as the cyclical weakness in personal tax and nontax receipts as a share of GDP was offset by a rise in indirect business taxes and social insurance receipts. 2/

Table 4.

UNITED STATES: General Government Transactions, National Income Accounts Basis

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Source: Bureau of Economic Analysis, U.S. Department of Commerce (supplied by Haver Analytics).

Current surplus lass gross investment plus consumption of fixed capital.

Table 5.

UNITED STATES: Federal Government Transactions, National Income Accounts Basis

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Source: Bureau of Economic Analysis, U.S. Department of Commerce (supplied by Haver Analytics).

Current surplus less gross investment plus consumption of fixed capital.

Table 6.

UNITED STATES: State and Local Government Transactions, National Income Accounts Basis

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Source: Bureau of Economic Analysis, U.S. Department of Commerce (supplied by Haver Analytics).

Currant surplus less gross investment plus consumption of fixed capital.

The improvement in the fiscal balance during the 1992-95 period was due to a roughly equal increase in the revenue ratio and a decline in the expenditure ratio. The rise in revenues was related to the cyclical expansion and to the tax measures introduced by the federal government in August 1993. The decline in the expenditure ratio was the result of slower growth in government consumption, related to budgetary constraints at both the federal and state and local levels. This more than offset a rise in net interest payments (as short-term interest rates rose) and continued increases in transfers to individuals (partly owing to the rising costs of health care programs at both the federal and state and local levels). Government investment as a share of GDP declined steadily during the 1990-95 period falling from 3.5 percent to 3.1 percent, owing to the effects of budget constraints on military outlays at the federal level. Developments in the national accounts data for the federal government largely mirrored the data on a unified basis. An important exception is with regard to the net effects of transactions related to deposit insurance, which are treated as a financing item in the national accounts data. 1/

The aggregate fiscal surplus of the state and local governments has remained roughly constant at about ¼ percent of GDP, in large part owing to legislative balanced budget constraints. However, revenues of the state and local government sector were relatively buoyant in the 1990-95 period, rising by 1 percentage point of GDP to 13.7 percent, owing to rising property tax revenues and increased grants in aid from the federal government (which are used to fund social programs, including Medicaid). The increase in the revenue ratio was matched by an increase in outlays for transfers to persons.

1/

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.

2/

The fiscal year runs from October to September.

3/

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.

4/

See the Background Papers for the 1994 Article IV Consultation (SM/94/223, Chapter V) for a more detailed description of OBRA93.

5/

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.

1/

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.

2/

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.

3/

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.

1/

The initial increase appears to result, in part, from proposed payments to the states to ease the transition into the new Medicaid system.

2/

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.

3/

The Medicare program consists of two parts: Hospital Insurance (also know as Part A); and Supplementary Medical Insurance (also known as Part B).

1/

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.

2/

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.

3/

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.

1/

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.

2/

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.

3/

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.

1/

In the discussion below, the fiscal balance is defined as the sum of the current surplus less gross government investment plus capital consumption allowances.

2/

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.

1/

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.

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Cover IMF Staff Country Reports
United States: Recent Economic Developments
Author:
International Monetary Fund
Volume/Issue:
Volume 1996: Issue 093
Publisher:
International Monetary Fund
ISBN:
9781451839487
ISSN:
1934-7685
Pages:
129
DOI:
https://doi.org/10.5089/9781451839487.002
  • Chart 1
    View in gallery
    Chart 1

    UNITED STATES: FEDERAL FISCAL INDICATORS

    (In percent of GDP; fiscal years)

  • Chart 2
    View in gallery
    Chart 2

    UNITED STATES: EXPENDITURE AND REVENUE TRENDS 1/

    (In percent of GDP; fiscal years)

Chart 1

UNITED STATES: FEDERAL FISCAL INDICATORS

(In percent of GDP; fiscal years)
Chart 2

UNITED STATES: EXPENDITURE AND REVENUE TRENDS 1/

(In percent of GDP; fiscal years)