Types of Budget Commitments

Laws that commit the government to spend money create budget authority . Budget authority (BA) is just what it sounds like: authority granted to some agent of the government to spend money. The money spent is called an outlay . Outlays cannot be made without budget authority; but some small amounts of BA may never be spent if the government buys something more cheaply than anticipated.

In a given year some appropriated funds may remain unspent. The acts provide budget authority, but each year's outlays (i.e., actual spending) combine this year's and previous years' authority. For example, an

appropriation may allow the Urban Mass Transportation Administration (UMTA) to commit $200 million for a rapid transit extension in Chicago. This BA allows UMTA to enter into an obligation (i.e., contract) to spend that money. The money actually will be outlaid (spent) over a period of years as the extension is built and material, labor, and design are paid for. In fiscal 1980, the year before our story begins, 17.9 percent of federal outlays were based on such prior year contracts and obligations;^[1] a similar percentage of the budget authority obligated for fiscal 1980 would not be spent until later years.

This difference between budget authority and outlays is the primary source of confusion for people who follow federal budgeting. Congress votes on BA, but each year's spending—and thus fiscal policy and the deficit—depends on outlays. Congress has some idea how much outlay will result from its votes on BA, but the estimates can be controversial.

Budget authority itself takes a variety of forms, related mostly to the kind of activity being authorized. The major distinction is between annual and permanent appropriations.

Annual appropriations are enacted in the yearly appropriations acts, which allow agencies (e.g., the FBI or National Institutes of Health) to spend or contract to spend specific amounts of money. Annual appropriations acts are drafted and managed by special appropriations committees in the House and the Senate. Each committee in each house has the same thirteen subcommittees and identical jurisdiction over a group of federal agencies. Each subcommittee is supposed to produce a bill for its jurisdiction every year; thus there are thirteen annual appropriations acts.

Permanent appropriations generally are made by Congress in other legislation; the most important is the Social Security Act of 1935 with its numerous amendments. Almost all these are entitlements; the law says that a person or group is "entitled" to some payment if certain conditions are met.

Entitlements do not specify spending totals. Total spending under these programs is simply the sum of legislatively mandated payments applied for by recipients. Totals are not only not directly chosen, but they can also be known only in retrospect. One cannot know in advance either the number of unemployed or their previous base earnings, and therefore one cannot know the cost of unemployment insurance. Finally, while some entitlements are formally appropriated (for example, for food stamps, each year appropriations must be made so programs can draw funds from the Treasury), the government's obligations are created in the authorizing law. The appropriations committees cannot erase those obligations.

The differences between appropriation and entitlement spending mean that legal authority for spending is the product of decisions made by different committees at different times. Entitlements have been adopted and amended separately over the years. When one considers that over half the outlays comes from entitlements and that each year's appropriations create outlays over a period of years, it should be no surprise that only 27.3 percent of the outlays in the government's 1980 fiscal year resulted from that year's appropriations process.

What is true of spending is more true of taxing: tax law is an accretion of years of decisions. Like entitlement legislation, tax law is open-ended: individuals are obligated to contribute according to some criteria; the government is not guaranteed some specific sum of revenue. Revenue may be influenced and estimated but not decreed.

Tax legislation is considered by the House Committee on Ways and Means and the Senate Committee on Finance. These committees also control the many entitlement programs, such as unemployment compensation and the massive Old Age, Survivors, Disability and Health Insurance (OASDHI), that have special taxes to finance their benefits. OASDHI includes the old-age pensions we normally call social security, disability pensions, and medicare. Sometimes that system's taxes (FICA on your paycheck) are described as contributions earmarked for trust funds. They are still taxes: if you meet the criteria for paying them, do not pay them, and are caught, you may go to jail.

The tax committees have another type of jurisdiction that resembles spending in that it may allocate benefits among people and groups for social purposes: tax preferences . These provisions of the law can reduce a taxpayer's liability to the government so long as that person performs some act the government wishes to encourage. Tax preferences that benefit individuals greatly can yet be justified in wider social terms: the tax deduction for mortgage interest, for example, encourages both the construction industry and the social goal of widespread individual home ownership. Those who do not like a tax preference call it a loophole; the metaphor, suggesting money escaping or being diverted from its intended use, is misleading. Such loopholes, passed by Congress, are as intended as any other legislation.

Tax preferences and entitlements are similar in that people make commitments because of government policy—to invest under certain depreciation rules, to retire at a certain age given social security. Because people take action based on these promises, politicians are particularly reluctant to break them. The best-known entitlements and tax preferences are promises to huge numbers of people: the elderly (social security) or homeowners (the mortgage interest deduction). Both policies also increased substantially in the post-World War II era. On the spending

side, which received the most attention, entitlements grew in part from keeping old promises; as more and more people reached retirement age, the promised social security or civil service retirement pensions cost the government more. Entitlements also grew from making new promises: medical care for the aged (medicare), nutrition for the impoverished (food stamps), or increases in the benefits of big, old programs (social security).

Entitlement spending rose from 35.2 percent of federal outlays in fiscal 1967 to 53.6 percent in 1974 to 55.7 percent in 1980.^[2] Many commentators view this increase as an end-run by authorizing committees (spenders) around appropriations committees (guardians of the public purse). Yet the major entitlements would fit poorly into a system of annual appropriations. Medical care for the aged, for example, could be provided by annually funded government-run hospitals, but that is called socialized medicine, not considered politically feasible. Once the decision is made to reimburse patients for costs incurred in the private sector, spending cannot be planned in advance. In short, there are legitimate policy reasons for entitlement funding—efficiency or the political difficulty of alternatives or the desire to keep promises.

These good reasons should not obscure the consequences for government. First, more and more spending is not controlled by the institutions created for annual review of spending, the appropriations committees. Second, entitlement spending is subject to the vagaries of the economy; in providing certainty to the recipients, the government takes uncertainty upon itself. Third, the major entitlements are very difficult to cut.