PELL GRANT PROGRAM DISCRETIONARY FUNDING NEEDED TO MAINTAIN A DISCRETIONARY MAXIMUM AWARD OF $4,860
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Laws and procedures under which Congress decides how much money to spend each year, what to spend it on, and how to raise the money to pay for that spending. The Congressional Budget Act of 1974 lays out a formal framework for developing and enforcing a “budget resolution” to guide the process but in recent years the process has not always worked as envisioned.
The process starts when the President submits a detailed budget request for the coming fiscal year, which begins on October 1. (The President’s request is supposed to come by the first Monday in February, but sometimes the submission is delayed — particularly when a new Administration takes office or congressional action on the prior year’s budget has been delayed.) This budget request — developed through an interactive process between federal agencies and the President’s Office of Management and Budget (OMB) that begins the previous spring (or earlier) — plays three important roles.
First, it tells Congress what the President recommends for overall federal fiscal policy, as established by three main components: (1) how much money the federal government should spend on public purposes; (2) how much it should take in as tax revenues; and (3) how much of a deficit (or surplus) the federal government should run, which is simply the difference between (1) and (2). In most years, actual federal spending exceeds tax revenues and the resulting deficit is financed through borrowing (see chart).
Second, the President’s budget lays out his relative priorities for federal programs — how much he believes should be spent on defense, agriculture, education, health, and so on. The President’s budget is very specific, and recommends funding levels for individual federal programs or small groups of programs called “budget accounts.” The budget typically sketches out fiscal policy and budget priorities not only for the coming year but also for the next ten years. The budget is accompanied by supporting volumes, including historical tables that set out past budget figures.
The third role of the President’s budget is signaling to Congress the President’s recommendations for spending and tax policy changes. As discussed below, the budget comprises different types of programs, some that require new funding each year to continue and others that are ongoing and therefore do not require annual action by Congress. While the President must recommend funding levels for annually appropriated programs, he need not propose legislative changes for those parts of the budget that are ongoing.
As noted, the President’s budget does not need to include recommendations to ensure the continuation of ongoing mandatory programs and revenues, but it will nonetheless typically include proposals to alter some mandatory programs and revenue laws.
Next, Congress generally holds hearings to question Administration officials about their requests and then develops its own budget plan, called a “budget resolution.” This work is done by the House and Senate Budget Committees, whose primary function is to draft and enforce the budget resolution. Once the Budget Committees pass their budget resolutions, the bills go to the House and Senate floors, where they can be amended (by a majority vote). A House-Senate conference then resolves any differences, and the budget resolution for the year is adopted when both houses pass the conference report.
The budget resolution is a “concurrent” congressional resolution, not an ordinary bill, and therefore does not go to the President for his signature or veto. It also requires only a majority vote to pass, and its consideration is one of the few actions that cannot be filibustered in the Senate. Because it does not go to the President, a budget resolution cannot enact spending or tax law. Instead, it sets targets for other congressional committees that can propose legislation directly providing or changing spending and taxes.
Congress is supposed to pass the budget resolution by April 15, but it often takes longer. In recent years it has been common for Congress not to pass a budget resolution at all. When that happens, the previous year’s resolution, which is a multi-year plan, stays in effect, although the House, the Senate, or both can and typically do adopt special procedures to set spending levels (see box: What if There Is No Budget Resolution?).
Budget authority and outlays thus serve different purposes. Budget authority represents a limit on the new financial obligations federal agencies may incur (by signing contracts or making grants, for example), and is generally what Congress focuses on in making most budgetary decisions. Outlays, because they represent actual cash flow, help determine the size of the overall deficit or surplus.
The spending totals in the budget resolution do not apply to “authorizing” legislation that merely establishes or changes rules for federal programs funded through the annual appropriations process. Unless it changes an entitlement program (such as Social Security or Medicare), authorizing legislation does not actually have a budgetary effect. For example, the education committees could produce legislation that authorizes a certain amount to be spent on the Title I education program for disadvantaged children. However, none of that money can be spent until the annual Labor-Health and Human Services-Education appropriations bill — which includes education spending — sets the actual dollar level for Title I funding for the year, which is frequently less than the authorized limit.
Often the report accompanying the budget resolution contains language describing the assumptions behind it, including how much it envisions certain programs being cut or increased. These assumptions generally serve only as guidance to the other committees and are not binding on them. Sometimes, though, the budget resolution includes more complicated devices intended to ensure that particular programs receive a certain amount of funding.
The budget resolution can also include temporary or permanent changes to the congressional budget process.
Congress has seldom completed action on the budget resolution by the April 15 target date specified in the Budget Act, and it failed to complete action on a resolution for fiscal years 1999, 2003, 2005, 2007, and each year from 2011 through 2014. In the absence of a budget resolution, the House and Senate typically enact separate budget targets, which they “deem” to be a substitute for the budget resolution. Such deeming resolutions typically provide spending allocations to the Appropriations Committees but may serve a variety of other budgetary purposes. Unless the House or Senate agrees to such a deeming resolution, the multi-year revenue floors and spending allocations for mandatory programs that had been agreed to in the most recent budget resolution remain in effect.
The Bipartisan Budget Act of 2013 described below took a different tack, establishing a “Congressional Budget” for fiscal years 2014 and 2015 in statute as an alternative to the concurrent budget resolution called for in the Congressional Budget Act.
Following adoption of the budget resolution, Congress considers the annual appropriations bills that are needed to fund discretionary programs in the coming fiscal year and legislation to enact changes to mandatory spending or revenue levels as specified in the budget resolution. Mechanisms exist to enforce the terms of the budget resolution during the consideration of such legislation, and a special mechanism known as “reconciliation” exists to expedite the consideration of mandatory spending and tax legislation.
The main enforcement mechanism that prevents Congress from passing legislation that violates the terms of the budget resolution is the ability of a single member of the House or the Senate to raise a budget “point of order” on the floor to block such legislation. In some recent years, this point of order has not been particularly important in the House because it can be waived there by a simple majority vote on a resolution developed by the leadership-appointed Rules Committee, which sets the conditions under which each bill will be considered on the floor.
However, the budget point of order is important in the Senate, where any legislation that exceeds a committee’s spending allocation — or cuts taxes below the level allowed in the budget resolution — is vulnerable to a budget point of order on the floor that requires 60 votes to waive.
Appropriations bills (or amendments to them) must fit within the 302(a) allocation given to the Appropriations Committee as well as the committee-determined 302(b) sub-allocations for the coming fiscal year. Tax or entitlement bills (or any amendments offered to them) must fit within the budget resolution’s spending limit for the relevant committee or within the revenue floor, both in the first year and over the total multi-year period covered by the budget resolution. The cost of a tax or entitlement bill is determined (or “scored”) by the Budget Committees, nearly always by relying on the nonpartisan Congressional Budget Office (CBO). CBO measures the cost of tax or entitlement legislation against a budgetary “baseline” that projects mandatory spending and tax receipts under current law.
From time to time, Congress makes use of an optional, special procedure outlined in the Congressional Budget Act known as “reconciliation” to expedite the consideration of mandatory spending and tax legislation. This procedure was originally designed as a deficit-reduction tool, to force committees to produce spending cuts or tax increases called for in the budget resolution. However, it was used to enact tax cuts several times during the George W. Bush Administration, thereby increasing projected deficits. Senate rules now prohibit using reconciliation to consider legislation that would increase the deficit; House rules prohibit using it to increase mandatory spending.
In addition, the Byrd rule bars any entitlement increases or tax cuts that cost money beyond the five (or more) years covered by the reconciliation directive, unless other provisions in the bill fully offset these “out-year” costs.
If Congress does not complete action on an appropriations bill before the start of the fiscal year on October 1, it must pass, and the President must sign, a continuing resolution (CR) to provide stopgap funding for affected agencies and discretionary programs. If Congress doesn’t pass or the President will not sign a CR because it contains provisions he finds unacceptable, agencies that have not received funding through the ordinary appropriations process must shut down operations.
A dispute over delay or defunding of health reform legislation between President Obama and congressional Republicans led to a 16-day shutdown of ordinary government operations beginning October 1, 2013. A dispute between President Clinton and congressional Republicans in the winter of 1995-96 produced a 21-day shutdown of substantial portions of the federal government.
Separately from the limits established in the annual budget process, Congress operates under statutory deficit-control mechanisms that prevent tax and mandatory spending legislation from increasing the deficit and that constrain discretionary spending.
If budget legislation violates these statutes, the relevant sequestration penalties apply automatically, unless Congress also modifies the requirements. For example, policymakers modified the 2013 BCA sequestration requirement in the American Taxpayer Relief Act of 2012. Similarly, the Bipartisan Budget Act of 2013, worked out by Senate Budget Committee Chair Patty Murray (D-WA) and House Budget Committee Chair Paul Ryan (R-WI), reduced sequestration cuts in 2014 and 2015 while extending BCA sequestration of mandatory programs through 2023.
The annual federal budget process begins with a detailed proposal from the President; Congress next develops a blueprint called a budget resolution that sets limits on how much each committee can spend or reduce revenues over the course of the year; and the terms of the budget resolution are then enforced against individual appropriations, entitlement bills, and tax bills on the House and Senate floors. In addition, Congress sometimes uses a special procedure called “reconciliation” to facilitate the passage of deficit reduction legislation or other major entitlement or tax legislation. Moreover, the budget is subject to statutory deficit-control requirements. Legislation implementing a budget resolution that violates those requirements could trigger across-the-board budget cuts to offset the violations.
From the Congressional Budget Office:
The federal budget deficit, which has fallen sharply during the past few years, is projected to hold steady relative to the size of the economy through 2018. Beyond that point, however, the gap between spending and revenues is projected to grow, further increasing federal debt relative to the size of the economy—which is already historically high.
Those projections by CBO, based on the assumption that current laws governing taxes and spending will generally remain unchanged, are built upon the agency’s economic forecast. According to that forecast, the economy will expand at a solid pace in 2015 and for the next few years—to the point that the gap between the nation’s output and its potential (that is, maximum sustainable) output will be essentially eliminated by the end of 2017. As a result, the unemployment rate will fall a little further, and more people will be encouraged to enter or stay in the labor force. Beyond 2017, CBO projects, real (inflation-adjusted) gross domestic product (GDP) will grow at a rate that is notably less than the average growth during the 1980s and 1990s.
CBO estimates that the deficit for this fiscal year will amount to $468 billion, slightly less than the deficit in 2014 (see the table below). At 2.6 percent of GDP, this year’s deficit is projected to be the smallest relative to the nation’s output since 2007 but close to the 2.7 percent that deficits have averaged over the past 50 years.
Although the deficits in CBO’s baseline projections remain roughly stable as a percentage of GDP through 2018, they rise after that. The deficit in 2025 is projected to be $1.1 trillion, or 4.0 percent of GDP, and cumulative deficits over the 2016–2025 period are projected to total $7.6 trillion. CBO expects that federal debt held by the public will amount to 74 percent of GDP at the end of this fiscal year—more than twice what it was at the end of 2007 and higher than in any year since 1950 (see figure below). By 2025, in CBO’s baseline projections, federal debt rises to nearly 79 percent of GDP.
In CBO’s projections, outlays rise from a little more than 20 percent of GDP this year (which is about what federal spending has averaged over the past 50 years) to a little more than 22 percent in 2025 (see figure below). Four key factors underlie that increase:
Consequently, under current law, spending will grow faster than the economy for Social Security; the major health care programs, including Medicare, Medicaid, and subsidies offered through insurance exchanges; and net interest costs. In contrast, mandatory spending other than that for Social Security and health care, as well as both defense and nondefense discretionary spending, will shrink relative to the size of the economy. By 2019, outlays in those three categories taken together will fall below the percentage of GDP they were from 1998 through 2001, when such spending was the lowest since at least 1940 (the earliest year for which comparable data have been reported).
Revenues are projected to rise significantly by 2016, buoyed by the expiration of several provisions of law that reduced tax liabilities and by the ongoing economic expansion. In CBO’s projections, based on current law, revenues equal about 18½ percent of GDP in 2016 and remain between 18 percent and 18½ percent through 2025. Revenues at that level would represent a greater share of the economy than their 50-year average of about 17½ percent of GDP but would still be less than outlays by growing amounts over the course of the decade. Revenues from the individual income tax are expected to rise relative to GDP—mostly because people’s income will move into higher tax brackets as income gains outpace inflation, to which those brackets are indexed. But those increases are expected to be offset by reductions relative to GDP in revenues from the corporate income tax and other sources.
The deficit that CBO now estimates for 2015 is essentially the same as what the agency projected in August. CBO’s estimate of outlays this year has declined by $94 billion, or about 3 percent, from the August projection because of a number of developments, including higher-than-expected receipts from auctions of licenses to use the electromagnetic spectrum for commercial purposes. But CBO’s estimate of revenues has dropped almost as much—by $93 billion, also about 3 percent—mostly because of the enactment of legislation that retroactively extended a host of expired tax provisions through December 2014.
Over the 2015–2024 period, deficits are now projected to total about $175 billion less than CBO’s August estimate for that period. The current projections of revenues and outlays for those years are both lower than previously estimated, outlays a little more so.
When CBO last issued long-term budget projections (in July 2014), it projected that, under current law, debt would exceed 100 percent of GDP 25 years from now and would continue on an upward trajectory thereafter—a trend that could not be sustained. (The 10-year projections presented here do not materially change that outlook.) Such large and growing federal debt would have serious negative consequences, including increasing federal spending for interest payments; restraining economic growth in the long term; giving policymakers less flexibility to respond to unexpected challenges; and eventually heightening the risk of a fiscal crisis.
CBO anticipates that, under current law, economic activity will expand at a solid pace in 2015 and over the next few years—reducing the amount of underused resources, or “slack,” in the economy.
In CBO’s estimation, increases in consumer spending, business investment, and residential investment will drive the economic expansion this year and over the next few years. The growth in those categories of spending will derive mainly from increases in hourly compensation, rising wealth, the recent decline in crude oil prices, and a step-up in the rate of household formation (as people are more willing and able to set up new homes). As measured by the change from the fourth quarter of the previous year, real GDP will grow by about 3 percent in 2015 and 2016 and by 2½ percent in 2017, CBO expects (see figure below).
The difference between actual GDP and CBO’s estimate of potential GDP—which is a measure of slack for the whole economy—was about 2 percent of potential GDP at the end of 2014. During the next few years, CBO expects, actual GDP will rise more rapidly than its potential, gradually eliminating that slack. For the labor market in particular, CBO anticipates that slack will dissipate by the end of 2017. By CBO’s projections, increased hiring will reduce the unemployment rate from 5.7 percent in the fourth quarter of 2014 to 5.3 percent in the fourth quarter of 2017, which is close to the expected natural rate of unemployment (that is, the rate arising from all sources except fluctuations in the overall demand for goods and services). That increased hiring will also encourage more people to enter or stay in the labor force, boosting the labor force participation rate (which is the percentage of people who are working or actively looking for work).
The agency’s projections beyond the next few years are not based on estimates of cyclical developments in the economy, because the agency does not attempt to predict economic fluctuations that far into the future; instead, those projections are based on estimates of underlying factors that affect the economy’s productive capacity.
For 2020 through 2025, CBO projects that real GDP will grow by an average of 2.2 percent per year—a rate that matches the agency’s estimate of the potential growth of the economy in those years. Potential output is expected to grow much more slowly than it did during the 1980s and 1990s primarily because the labor force is anticipated to expand more slowly than it did then. Growth in the potential labor force will be held down by the ongoing retirement of the baby boomers; by a relatively stable labor force participation rate among working-age women, after sharp increases from the 1960s to the mid-1990s; and by federal tax and spending policies set in current law.
The elimination of slack in the economy will eventually remove the downward pressure on the rate of inflation and on interest rates that has existed for the past several years. By CBO’s estimates, the rate of inflation as measured by the price index for personal consumption expenditures will move up gradually to the Federal Reserve’s goal of 2 percent, hitting that mark in 2017 and beyond. Interest rates on Treasury securities, which have been exceptionally low since the recession, will rise considerably in the next few years, CBO expects, but remain lower than they were, on average, in previous decades. Between 2020 and 2025, the projected interest rates on 3-month Treasury bills and 10-year Treasury notes are 3.4 percent and 4.6 percent, respectively.
Last August, CBO projected real GDP growth averaging 2.7 percent per year for 2014 through 2018; CBO now anticipates that real GDP growth will average 2.5 percent annually over that period. The revision mainly reflects a reduction in CBO’s estimate of potential output and therefore of the current amount of slack in the economy. On the basis of the current projection of potential output, CBO now forecasts that real GDP in 2024 will be roughly 1 percent lower than the level estimated in August. In addition, the sharper-than-anticipated drop in the unemployment rate in the second half of last year caused CBO to lower its projection of that rate for the next few years.