Budget Facts Summary from White House Annual Budget

                 A Citizen's Guide to the Federal Budget

The budget is $1.5 trillion of spending this year.


o  The Government spends most of your money on a few major
   programs. In the current year, 1995, defense accounts for 18
   percent, Social Security for 22 percent, Medicare for 10
   percent, Medicaid for six percent, and interest payments on
   the national debt for 15 percent. Together, these five
   programs account for over 70 percent of all Federal spending.

o  Other programs that get lots of attention--controversial
   programs like welfare (Aid to Families with Dependent
   Children) and foreign aid--actually account for tiny portions
   of spending. Together, welfare and foreign aid account for
   less than three percent of all Federal spending.

o  The Government collects most of its revenues from a few main
   sources. Individual income taxes account for 44 percent,
   social insurance receipts (largely, Social Security payroll
   taxes) for 36 percent, and corporate income taxes for 11
   percent. Together, they come to over 90 percent of revenues.

o  Because all of the revenues do not cover the costs of all
   spending, the Government borrows money to finance this
   deficit. The total it has borrowed over the years, but not
   repaid, is the national debt.


o  In its first 150 years, the Government sometimes generated
   budget deficits--for instance, to finance a war--but later ran
   surpluses and repaid much of the debt that had accumulated.

o  But budget deficits have grown more frequent in the last
   half-century--the last surplus was in 1969--and they soared in
   the 1980s. As a result, the national debt quintupled in size after
   1980--from $709 billion to $3.6 trillion.

o  President Clinton worked hard with the last Congress to
   reduce the deficit. As a result, the deficit fell from $290
   billion in 1992 to $203 billion in 1994, and to an estimated
   $193 billion this year.

Origins of Today's Budget

The Federal budget was not always so large. Indeed, for most of
the Nation s history, it was quite small. In its first three
years, the Government spent a total of only about $4 million. By
1800, total annual spending still amounted to less than $11
million. A century later, the total had climbed only to $521

But beginning with the "New Deal" in the 1930s, the Federal
Government came to play a much larger role in American life. As
President Franklin D. Roosevelt sought to use the full powers of
his office to end the Great Depression, he and Congress greatly
expanded Federal programs. Federal spending, which totalled less
than $4 billion in 1931, climbed to nearly $7 billion in 1934 and
to over $8 billion in 1936. Then, U.S. entry into World War II
sent annual Federal spending soaring to over $91 billion by 1944.

To measure the roles that Federal tax and spending policies play
in American life, one should compare the budget to the size of
the economy--also known as GDP, the total value of U.S. goods and
services. Just before the New Deal, Federal spending measured
less than five percent of GDP. During the New Deal, it quickly
doubled to 10 percent. And it continued growing to 20-25 percent
of GDP, where it has hovered since the mid-1970s. (See the
Historical Budget Summary table at the end of this Guide.)

Where the Money Comes From and Where it Goes

Revenues: The sources of Federal revenues have changed quite a
bit over the years. Before Congress established the individual
and corporate income taxes early in this century, the Government
received most of its revenues from excise taxes, customs duties,
and sales of land. Gradually, income taxes accounted for a larger
share of receipts.

But the histories of individual and corporate income taxes have
varied greatly. Since World War II, individual income taxes have
provided a relatively constant share of all Federal
receipts--about 45 percent. 

The share of corporate income taxes, however, fell from 40 percent in 1943
to just six percent in 1983; it has since risen to 11 percent. 

At the same time, the share of Federal receipts from payroll
taxes--mostly, for Social Security and Medicare--has sky-rocketed
from less than eight percent in 1945 to 36 percent today; not
only are more and more workers paying taxes into the Social
Security and Medicare trust funds, but the Government has
increased payroll tax rates in order to finance Social Security
and Medicare benefits. At the same time, the share of excise
taxes has plummeted, while shares of other taxes have fluctuated
at lower levels.


Discretionary spending, which includes defense, domestic discretionary,
and international aid: In 1962--the first year for which we have reliable
breakdowns--this category accounted for 70 percent of all Federal
spending. Since then, it has gradually fallen to today's level of 36
percent. Over the years, spending also has shifted dramatically among
defense, domestic discretionary, and international aid. 

Defense accounted for almost one out of every two dollars of
total Federal spending in 1962. After the Vietnam War, however,
its share of spending fell to less than 25 percent. Since then,
defense's share rose a bit in the early 1980s, then began to fall
again later that decade. Today, with the Cold War over, it
accounts for 18 percent of spending.

Domestic discretionary spending comprised 16 percent of all
spending in 1962. It hovered between 20 and 23 percent of
spending in the 1960s and 1970s, but has returned to about the
share it occupied three decades ago.

Despite widespread perceptions to the contrary, spending on
international affairs--principally, foreign aid--has comprised a
very small share of spending for each of the last 30 years. Its
share fell from five percent in 1962 to only 1.4 percent today.

As a share of the budget, mandatory spending has soared in recent
decades.  But, here again, one must look beneath the totals to
understand the forces behind this trend.  First, we must look at
the main entitlement programs--Social Security, Medicare,
Medicaid, and Aid to Families with Dependent Children--and then
at net interest on the national debt.

1. Perhaps the most popular Federal program ever, Social
   Security provides monthly benefits to over 43 million retired
   and disabled workers, their dependents, and survivors. The
   program has expanded steadily since its creation in the
   1930s. Today, it accounts for 22 percent of all Federal

2. Medicare, which provides health care coverage for over 37
   million elderly Americans, includes Part A, hospital
   insurance, and Part B, insurance for physicians' and other
   services. Since its birth in 1965, it has accounted for a
   larger and larger share of spending. Today, it measures 10

3. Medicaid, the health care program for the poor, also was
   established in 1965. Unlike for Medicare, however, the
   Federal Government shares costs with the States, paying from
   50 to 83 percent of them. Both Federal and State costs are
   growing rapidly. Medicaid, which provides services to over 36
   million Americans, accounts for six percent of the Federal

4. The costs of Aid to Families with Dependent Children (AFDC),
   the main Federal welfare program, also are shared with the
   States; the Federal Government pays from 50 to 79 percent of
   them. AFDC, established as Aid to Dependent Children in 1935,
   provides cash and services to needy children and their
   families. This program accounts for one percent of Federal

5. Net Interest payments, the result of previous budget
   deficits, consumed only about seven percent of Federal
   spending for most of the 1960s and 1970s. But with the huge
   deficits in recent years, that share quickly doubled to 15
   percent, where it stands today.

These figures illustrate an important fact about the budget: A
handful of programs account for the vast bulk of it. Social
Security occupies 22 percent of spending, defense accounts for 18
percent, net interest accounts for 15, Medicare for 10, and
Medicaid for six percent. Together, these programs account for
over 70 percent of spending.

What the figures also show is that, despite popular views to the
contrary, you can't balance the budget simply by eliminating
foreign aid and welfare. You can't even reduce the deficit very
much that way. 

Deficits and the Debt

You've heard a lot about the Federal budget deficit and Federal
debt in recent years. No wonder! Both exploded in size in the
1980s. Before we explain what happened and what we're trying to
do about it, let's take a moment to define the terms.

A deficit occurs when the Government spends more money in a year
than it receives in revenues. The Government then borrows money
by selling securities--bonds, notes, or bills--to investors who
earn interest.

The debt is the total amount of money that the Government owes to
these investors--that is, the total amount of annual deficits that
the Government has not repaid.  When, for instance, the
Government generated a deficit of $203 billion last year, it
added that much to the Federal debt, which now totals about $3.6

The budget deficit is not a new phenomenon. The Government
generated its first deficit way back in 1792, and has generated
over 100 since then. But for most of the Nation's history, the
deficit was caused by one of two temporary factors: a war or a
recession. Wars necessitated major increases in military
spending, while recessions reduced Federal tax receipts from both
businesses and individuals.

The Government, for instance, generated deficits during the War
of 1812, the recession of 1837, the Civil War, the depression of
the 1890s, and World War I. Once the war ended or the economy
began to grow, however, the Government followed its deficits with
budget surpluses, with which the President and Congress paid off
some or all of the debt.

But budget deficits have grown much more frequent since the
1930s. President Roosevelt relied on deficits to help finance his
New Deal. Then World War II forced the Nation to spend
unprecedented amounts on defense. Since then--under Democratic and
Republican Presidents, Democratic and Republican Congresses--the
Government has balanced its books only eight times, most recently
in 1969.

Nevertheless, the deficits before 1981 paled in comparison to
what followed. That year, the Government cut income tax rates and
greatly increased defense spending, but it did not enact the
requisite amount of cuts in domestic programs to make up the
difference. In addition, the recession of the early 1980s reduced
Federal revenues and forced the Government to service more
national debt at a time when interest rates were high. As a
result, the deficit soared.

Why the Deficit is a Problem

If budget deficits occur so frequently, should we worry much
about them?

The deficit forces the Federal Government to borrow money on the
capital markets.  That Government borrowing competes with
businesses borrowing to buy factories and machines that make
workers more productive and raise incomes; and with families
borrowing to buy new homes, cars, and other goods that provide
valuable services for years.

The competition for funds tends to produce higher interest rates.
(As you may recall, President Clinton's deficit-reduction plan
helped to cut interest rates, helping Americans buy cars and
refinance mortgages more easily and helping businesses increase
their investment.)

Also, deficits increase the national debt and, through it, the
Government's obligation to pay interest. The more it must pay to
service its debt, the less it has available to spend on
education, law enforcement, and other important services, or the
more it must collect in taxes forever after. Today, the
Government must spend 40 percent of every personal income tax
dollar to pay interest on the national debt.

But the deficit has another side.  If the Government borrows
money to finance investments that truly will pay for themselves
in the future, then future generations who inherit the debt also
reap the benefits of the investments.  If, for instance, the
Government borrows money to build new roads and bridges needed to
make the economy more productive, then living standards will rise
and future generations will have the higher incomes they need to
pay off the debt and still live better than they would have

Too often, however, recent deficits have not financed
investments. Instead, they have merely helped the Government to
pay its day-to-day bills. Under those circumstances, future
generations will inherit a debt for which they receive no real

In the end, the deficit is a decision about today and tomorrow.
We can provide a solid foundation for future generations, just as
parents try to do within a family; or we can generate large
budget deficits and debt as our legacy to those who come after

Deficit Reduction Efforts

Ever since the deficit soared in the early 1980s, successive
Presidents and Congresses have tried various ways to cut it down
to size. Until recently, such efforts have met with only limited

During the 1980s, President Reagan and Congress clashed over
budget priorities; the President wanted to cut domestic spending
more than Congress, while Congress sought fewer defense funds
than the President wanted. Consequently, the two sides could not
find a way to solve the problem; they only kept it from getting

By 1985, both sides were ready for drastic measures.  That year,
they enacted the Balanced Budget and Emergency Deficit Control
Act, better known as Gramm-Rudman-Hollings.  The measure set
annual deficit targets and required, if necessary, across-the-
board cuts in many programs to reach them.  But, faced with the
prospect of huge cuts, the President and Congress amended the law
two years later.

Then, President Bush and Congress overhauled Gramm-Rudman-
Hollings by enacting the Budget Enforcement Act. Rather than
focus on annual deficit targets, this law was designed instead to
limit spending.

First, it set separate yearly limits on defense, international
affairs, and domestic discretionary spending. Second, it created
"pay-as-you-go" rules for entitlements and taxes; those who
proposed new spending on entitlements or lower taxes would have
to offset the costs by cutting other entitlements or raising
other taxes.

For what it was designed to do, the law worked. It did, in fact,
limit discretionary spending and force the proponents of new
entitlements and tax cuts to find ways to finance them. But the
deficit, which Government experts said would fall, actually rose.
Why? Because the recession of the early 1990s reduced individual
and corporate tax receipts while it increased spending on
unemployment and other programs, and because Federal health care
spending grew rapidly.

So in 1993, President Clinton and Congress took another crack at
deficit reduction. They enacted a package of spending cuts and
higher revenues almost entirely from higher income taxes on the
top 1.2 percent of wealthy Americans. The new law imposed its own
limits on discretionary spending and extended the pay-as-you-go

The law was designed to reduce the annual deficit for each year
between 1994 and 1998 by $47 billion in 1994, $83 billion in
1995, $101 billion in 1996, $129 billion in 1997, and $146
billion in 1998. Added together, the five annual reductions would
total about $505 billion. But, because the economy began to grow
more strongly than expected--bringing in more revenues and
reducing payments for unemployment and other social programs--we
now expect the total deficits from 1994 to 1998 to be $616
billion lower than they would have been without the change in

Clearly, the President's deficit-cutting efforts have paid off.
The deficit has fallen from $290 billion in 1992 to $203 billion
in 1994. We expect it to continue falling to $193 billion this

Then, however, we expect it to remain at about that level for the
foreseeable future. The main reason: the soaring costs of
Medicare and Medicaid. We project that each will grow more than
nine percent a year for the next five years--far faster than
Federal revenues. Rising costs in those two programs reflect the
rising costs of health care in general. That's a large reason why
President Clinton pushed so hard for health reform and why he
continues to support the concept.

The President's Budget Priorities

With help from President Clinton's 1993 budget plan, the economy
has performed remarkably well in the past two years. It has
created 5.6 million new jobs, while keeping inflation under
control. But not everyone has shared in the recovery. Many
middle-income Americans are working harder and harder, but their
incomes are stagnant or even falling. In his 1996 budget, which
he sent to Congress February 6, the President proposes to focus
on those Americans.

The President proposes a Middle Class Bill of Rights to raise the
living standards of middle-income Americans in the short and long
terms. Its four elements are:

o  a $500 per child tax credit for families with children under

o  expanded eligibility for tax-free contributions to Individual
   Retirement Accounts (IRAs), and penalty-free withdrawals from
   IRAs for educational, housing, and medical needs;

o  a tax deduction for college, university, or vocational
   education costs; and

o  a G.I. Bill for America's Workers, including "Skill grants"
   to help jobless or low-income workers get the job training
   they need.

With this Middle Class Bill of Rights, average Americans will be
better able to pay their bills today. They also will be able to
invest in their futures--saving through an IRA account, financing
their children's education, or obtaining their own job training.

At the same time, the President proposes to keep the budget
deficit under control by providing $144 billion in new budget
savings over the next five years. He wants to end 130 programs
altogether and cut many others, but he is not proposing any new
taxes. The budget savings not only will more than offset the
costs of his $63 billion Middle Class Bill of Rights, they also
will help reduce the deficit as a percentage of GDP to its lowest
level since 1979.

The President wants to continue making the kinds of Federal
investments that will help strengthen the economy, and raise
living standards, for the future. His budget, for instance,
proposes more for science and technology, including programs at
the National Science Foundation and the National Institutes of

As a former governor, the President understands that many
problems are better addressed by States, localities, and the
private sector. As a result, his budget in many cases proposes to
give these more-local levels of government the money and tools to
help them help themselves.

He proposes, for instance, to provide more funds for his national
service program, which encourages Americans of all ages to
volunteer their services in local communities across the country.
He also proposes to give States and localities the funds to hire
more police, build more prison space, and offer more drug

More Value for the Dollar

To reinvent Government--that is, to improve the benefits and
services that Americans were getting from the Government--the
President established the National Performance Review in early
1993 and put Vice President Gore in charge.  Though it obviously
faced a big challenge, the National Performance Review has
ignited a series of important improvements.  Departments and
agencies have begun to provide better service and cut their
mountains of regulations and red tape.

At the same time, the President and Congress enacted a bill in
1994 that will reduce the size of the Federal bureaucracy by
272,900 positions by 1999, cutting the workforce to its smallest
size since John Kennedy was President. In fact, the workforce is
already smaller by 102,000 positions since President Clinton took

Now, the President and Vice President are redoubling their
efforts. In what they call Phase II of reinventing Government,
they are looking across Government for agencies and programs to
eliminate or restructure, and activities to shift to States,
localities, or the private sector.

As part of his 1996 budget, the President announced his plans to
restructure the Departments of Housing and Urban Development,
Energy, and Transportation, the General Services Administration,
and the Office of Personnel Management--saving $23 billion over
five years and improving services for Americans. The President
plans to announce other restructuring proposals later this year.


Each year, the budget includes thousands of pages of writing
about the Government's broad array of programs and activities. It
is not an easy document to understand, even for those who work in

We hope that, with this Guide, we have given you a basic sense of
what the budget is, how the Government raises and spends money,
why it has generated budget deficits over the years, and why you
should care about the deficit. We also hope that we have
explained the President's budget policies to date, and what he
plans for the future.
                                 HISTORICAL BUDGET SUMMARY

                        In Billions of Dollars               As Percentages of 
                ------------------------------------- -------------------------
                                  Surplus   Debt Held                   Surplus
   Debt Held
                                     or       by the                       or  
     by the
                Receipts Outlays Deficit(-) Public(1) Receipts Outlays Deficit(
-) Public(1)
                -------- ------- ---------- --------- -------- ------- --------
-- ---------
1930               4.1      3.3      0.7       15.4      4.2      3.4      0.8 
1931               3.1      3.6     -0.5       16.5      3.7      4.3     -0.6 
1932               1.9      4.7     -2.7       19.2      2.9      7.0     -4.1 
1933               2.0      4.6     -2.6       22.2      3.5      8.1     -4.6 
1934               3.0      6.5     -3.6       26.7      4.9     10.8     -5.9 

1935               3.6      6.4     -2.8       28.1      5.3      9.3     -4.1 
1936               3.9      8.2     -4.3       33.2      5.1     10.6     -5.6 
1937               5.4      7.6     -2.2       34.9      6.2      8.7     -2.5 
1938               6.8      6.8     -0.1       34.5      7.7      7.8     -0.1 
1939               6.3      9.1     -2.8       41.4      7.2     10.4     -3.2 

1940               6.5      9.5     -2.9       42.8      6.9      9.9     -3.1 
1941               8.7     13.7     -4.9       48.2      7.7     12.1     -4.4 
1942              14.6     35.1    -20.5       67.8     10.3     24.8    -14.5 
1943              24.0     78.6    -54.6      127.8     13.7     44.8    -31.1 
1944              43.7     91.3    -47.6      184.8     21.7     45.3    -23.6 

1945              45.2     92.7    -47.6      235.2     21.3     43.7    -22.4 
1946              39.3     55.2    -15.9      241.9     18.5     26.0     -7.5 
1947              38.5     34.5      4.0      224.3     17.3     15.5      1.8 
1948              41.6     29.8     11.8      216.3     16.8     12.1      4.8 
1949              39.4     38.8      0.6      214.3     15.0     14.8      0.2 

1950              39.4     42.6     -3.1      219.0     14.8     16.0     -1.2 
1951              51.6     45.5      6.1      214.3     16.5     14.5      1.9 
1952              66.2     67.7     -1.5      214.8     19.4     19.9     -0.4 
1953              69.6     76.1     -6.5      218.4     19.1     20.9     -1.8 
1954              69.7     70.9     -1.2      224.5     18.9     19.3     -0.3 

1955              65.5     68.4     -3.0      226.6     17.0     17.8     -0.8 
1956              74.6     70.6      3.9      222.2     17.9     17.0      0.9 
1957              80.0     76.6      3.4      219.3     18.3     17.5      0.8 
1958              79.6     82.4     -2.8      226.3     17.8     18.4     -0.6 
1959              79.2     92.1    -12.8      234.7     16.5     19.2     -2.7 

1960              92.5     92.2      0.3      236.8     18.3     18.3      0.1 
1961              94.4     97.7     -3.3      238.4     18.3     18.9     -0.6 
1962              99.7    106.8     -7.1      248.0     18.0     19.2     -1.3 
1963             106.6    111.3     -4.8      254.0     18.2     19.0     -0.8 
1964             112.6    118.5     -5.9      256.8     18.0     19.0     -0.9 

1965             116.8    118.2     -1.4      260.8     17.4     17.6     -0.2 
1966             130.8    134.5     -3.7      263.7     17.8     18.3     -0.5 
1967             148.8    157.5     -8.6      266.6     18.8     19.8     -1.1 
1968             153.0    178.1    -25.2      289.5     18.1     21.0     -3.0 
1969             186.9    183.6      3.2      278.1     20.2     19.8      0.4 

1970             192.8    195.6     -2.8      283.2     19.6     19.9     -0.3 
1971             187.1    210.2    -23.0      303.0     17.8     20.0     -2.2 
1972             207.3    230.7    -23.4      322.4     18.1     20.1     -2.0 
1973             230.8    245.7    -14.9      340.9     18.1     19.3     -1.2 
1974             263.2    269.4     -6.1      343.7     18.8     19.2     -0.4 

1975             279.1    332.3    -53.2      394.7     18.5     22.0     -3.5 
1976             298.1    371.8    -73.7      477.4     17.7     22.1     -4.4 
TQ                81.2     96.0    -14.7      495.5     18.3     21.6     -3.3 
1977             355.6    409.2    -53.7      549.1     18.5     21.3     -2.8 
1978             399.6    458.7    -59.2      607.1     18.5     21.3     -2.7 
1979             463.3    504.0    -40.7      640.3     19.1     20.7     -1.7 

1980             517.1    590.9    -73.8      709.8     19.6     22.3     -2.8 
1981             599.3    678.2    -79.0      785.3     20.2     22.9     -2.7 
1982             617.8    745.8   -128.0      919.8     19.8     23.9     -4.1 
1983             600.6    808.4   -207.8    1,131.6     18.1     24.4     -6.3 
1984             666.5    851.8   -185.4    1,300.5     18.0     23.1     -5.0 

1985             734.1    946.4   -212.3    1,499.9     18.5     23.9     -5.4 
1986             769.1    990.3   -221.2    1,736.7     18.2     23.5     -5.2 
1987             854.1  1,003.9   -149.8    1,888.7     19.2     22.5     -3.4 
1988             909.0  1,064.1   -155.2    2,050.8     18.9     22.1     -3.2 
1989             990.7  1,143.2   -152.5    2,189.9     19.2     22.1     -2.9 

1990           1,031.3  1,252.7   -221.4    2,410.7     18.8     22.9     -4.0 
1991           1,054.3  1,323.4   -269.2    2,688.1     18.6     23.3     -4.7 
1992           1,090.5  1,380.9   -290.4    2,998.8     18.4     23.3     -4.9 
1993           1,153.5  1,408.7   -255.1    3,247.5     18.4     22.5     -4.1 
1994           1,257.7  1,460.9   -203.2    3,432.2     19.0     22.0     -3.1 

1995 estimate  1,346.4  1,538.9   -192.5    3,640.1     19.2     21.9     -2.7 
1996 estimate  1,415.5  1,612.1   -196.7    3,857.3     19.1     21.8     -2.7 
1997 estimate  1,471.6  1,684.7   -213.1    4,101.2     18.8     21.6     -2.7 
1998 estimate  1,548.8  1,745.2   -196.4    4,334.9     18.8     21.2     -2.4 
1999 estimate  1,624.7  1,822.2   -197.4    4,571.2     18.7     20.9     -2.3 

2000 estimate  1,710.9  1,905.3   -194.4    4,805.4     18.6     20.7     -2.1 

1) The figures shown under Debt Held By the Public for 1930-1938
are not comparable to those shown for 1939 forward. For the
earlier period, the debt figures have only been partially
adjusted to exclude debt held by Government accounts and have not
been adjusted to reflect current definitions of Federal debt
outstanding. All debt figures are for debt outstanding at the end
of the fiscal year.