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This report provides material that supplements the Congressional Budget Office's (CBO's) The Economic and Budget Outlook: An Update (July 1, 1999). In accordance with CBO's mandate to provide objective and impartial analysis, this document contains no recommendations.

The analysis was prepared by Jennifer Winkler of the Projection's Unit in CBO's Budget Analysis Division under the supervision of Paul Van de Water.

Christian Spoor edited the report, and Liz Williams proofread it. Marion Curry assisted in the production of the report. Kathryn Quattrone prepared the final version for publication, and Laurie Brown prepared the electronic versions for CBO's World Wide Web site (www.cbo.gov).
 

Dan L. Crippen
Director
July 30, 1999
 
 

The federal budget is not the only mechanism for gauging the effect of federal government revenues and spending on the economy. That effect can also be seen through the official national income and product accounts (NIPAs) produced by the Commerce Department's Bureau of Economic Analysis. The NIPAs provide a picture of government activity in terms of production, distribution, and use of output. They recast the government's transactions into categories that affect gross domestic product, income, and other macroeconomic totals, thereby helping to trace the relationship between the federal sector and other areas of the economy.
 

Relationship Between the Budget and the NIPAs

A handful of major differences distinguish the treatment of federal receipts and expenditures in the NIPAs from their treatment in the unified budget. For example, the NIPAs shift selected dollars from the spending to the receipt side of the ledger to reflect intrabudgetary or voluntary payments that the budget records as negative outlays. Such shifts are referred to as netting and grossing adjustments and do not affect the surplus or deficit (see Table 1). The vast majority of netting and grossing adjustments reflect intrabudgetary receipts for retirement contributions on behalf of federal workers and voluntary premiums for Medicare coverage.
 

By contrast, other differences between the federal budget and the NIPAs do affect the surplus or deficit. The NIPA totals exclude government transactions that involve the transfer of existing assets and liabilities and therefore do not contribute to current income and production. Prominent among such lending and financial adjustments are those for deposit insurance outlays, cash flows for direct loans made by the government before credit reform, and sales of government assets. Other factors that separate NIPA accounting from budget accounting include geographic adjustments (the exclusion of Puerto Rico, the Virgin Islands, and a few other areas from the national economic statistics) and timing adjustments (such as correcting for irregular numbers of benefit checks or paychecks in the budget because of quirks in the calendar).

Another difference between the NIPAs and the unified budget is their differing treatment of investment and capital consumption. The unified budget reflects all expenditures of the federal government, including investment purchases such as buildings and aircraft carriers. The NIPA budget shows the current, or operating, account for the federal government; consequently, it excludes government investment and includes the government's consumption of fixed capital (depreciation). (Government investment does not disappear but is classed along with private investment rather than in the government accounts.) That parallels the treatment of investment in and depreciation of private-sector assets in the NIPAs.
 

NIPA Receipts and Expenditures

The federal sector of the NIPAs generally classifies receipts according to their source (see Table 2). The leading source of government receipts in the 1999-2009 period is taxes and fees paid by individuals. Following that category are contributions (including premiums) for social insurance, such as Social Security, Medicare, unemployment insurance, and federal employees' retirement. The remaining categories are accruals of taxes on corporate profits, including the earnings of the Federal Reserve System, and accruals of indirect business taxes (chiefly excise taxes) and nontax accruals (chiefly fees).
 

Government expenditures are classified according to their purpose and destination. Defense and nondefense consumption of goods and services is purchases made by the government for immediate use. The largest share of current consumption is compensation of federal employees. Consumption of fixed government capital is the use the government gets from its fixed assets.

Transfer payments are cash payments made directly to people or foreign nations. Grants-in-aid are payments that the federal government makes to state or local governments, which then use them for transfers (such as paying Medicaid benefits), consumption (such as hiring additional police officers), or investment (such as building highways).

Although both the unified budget and the NIPAs contain a category labeled "net interest," the NIPA figure is smaller. A variety of differences cause the two measures to diverge. The largest difference is the contrasting treatment of interest received on late payments of personal and business taxes. In the unified budget, both types of interest payments are counted on the revenue side, as individual income taxes and corporate income taxes, respectively. In the NIPAs, they appear as offsets to federal interest payments.

The NIPA category labeled "subsidies less current surplus of government enterprises" contains two components, as its name suggests. The first--subsidies--is defined as monetary grants paid by government to businesses, including state and local government enterprises. Subsidies are dominated by housing assistance.

The second part of the category is the current surplus of government enterprises. Government enterprises are certain business-type operations of the government, such as the Postal Service. The operating costs of government enterprises are mostly covered by the sale of goods and services to the public rather than by tax receipts. The difference between sales and current operating expenses is the enterprise's surplus or deficit. Government enterprises should not be confused with government-sponsored enterprises (GSEs), private entities established and chartered by the federal government to perform specific financial functions, usually under the supervision of a government agency. Examples of GSEs include the Federal National Mortgage Association (Fannie Mae) and the Student Loan Marketing Association (Sallie Mae). As privately owned organizations, GSEs are not included in the budget or in the federal sector of the NIPAs.

The final entry in Table 2 under expenditures, labeled "required reductions in discretionary spending," is not a category in the NIPAs. Rather, it is an accounting for policy changes that must be made in the future. The discretionary expenditures included in the NIPA categories reflect 1999 levels of spending, adjusted for inflation each year. The Balanced Budget Act of 1997 imposed statutory limits on total discretionary spending. Holding spending to those limits would require policymakers to reduce discretionary outlays below levels that would keep pace with inflation. Those savings cannot be assigned to a particular NIPA category because policymakers can comply with the discretionary spending caps in any number of ways. But reductions are most likely to come from defense and nondefense consumption and grants to state and local governments.