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of the Budget (the predecessor to the Office of Management and Budget, OMB) to oversee the budget process within the executive and the General Accounting Office (the predecessor to the Government Accountability Office, GAO) as an external audit entity to provide Congress with an independent audit of accounts. The Congressional Budget and Impoundment Control Act (CBA) 1975 provides a framework for co-ordinating and controlling the legislative branch’s budget activities. The act created House and Senate Budget Committees, as well as the Congressional Budget Office (CBO) to assist congressional budget review. The law also curbs the President’s power to block expenditures approved by Congress (“impoundment” power).

Laws to improve financial management include the Inspector General Act (IGA) 1978 and the Federal Manager’s Financial Integrity Act (FMFIA) 1982, which focuses on internal financial controls. The Chief Financial Officers Act (CFOA) 1990 aimed at establishing responsibility in federal financial management systems. To improve performance in federal government agencies, the Government Performance and Results Act (GPRA) was adopted in 1993. The Budget Enforcement Acts (BEA) of 1990 and 1997 replaced the Balanced Budget and Emergency Deficit Control Act of 1985, commonly known as the Gramm-Rudman-Hollings (GRH) Act, which aimed to control, by legislative means, the federal deficit that was burgeoning in the 1980s (see next section on reforms).3

All laws, except for the Constitution, are “ordinary” laws – there are no higher primary laws. All laws are codified in the US Code.4 Title 31 (“Money and Finance”) includes the BAA and other laws. In addition, various regulations and circulars govern the budget process. Rules of the House and the Senate provide operational procedures and the distribution of competencies of the Appropriations Committees, the Senate Finance Committee, and the House Ways and Means Committee. Presidential executive orders and OMB circulars govern budget preparation and execution processes within the executive, especially the formulation of the President’s budget proposal and the execution and accounting of the budget.

1.2. Reforms of budget system laws5

Major reforms in budget system law have been made since 1920s, reflecting shifts in the balance of budgetary powers between the executive and the Congress, and the need to reduce the budget deficits.

Until the enactment of the BAA in 1921, the President had a limited role in overseeing federal finances – there was no central budget authority. Little effort was made to co-ordinate individual agencies’ spending or to ensure that they were in accordance with national priorities. Due, in part, to the growth of federal spending, stronger and more centralised presidential leadership in the

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budget process was needed. The BAA requires the submission of a single, comprehensive budget proposal to Congress by the President to propose an allocation of federal resources. Departments were barred from giving their requests directly to Congress. Since 1921, the President formulates a budget proposal for congressional reaction.

The 1974 CBA created a new budget process in Congress. Previously, there was no framework for Congress to establish its own spending priorities before work began on specific spending and revenue bills. A dispute in the early 1970s between the President and the Congress regarding presidential authority to impound money appropriated by Congress6 also contributed to the enactment of the CBA. The CBA established procedures for developing an annual congressional budget plan and achieving a system of impoundment control by creating Budget Committees in the House and the Senate, as well as the CBO to serve as the apolitical “scorekeeper” for Congress.

During the 1980s and 1990s, legislation aiming at reducing budget deficits was adopted. In the face of increasing budget deficits, Congress enacted the GRH Act in 1985, which called for the progressive reduction in the deficit in each fiscal year from 1986 through 1990 and for a balanced budget in fiscal year 1991. This objective was to be enforced by an automatic cancellation of budget resources (sequestration) if the projected deficit exceeded the target for a fiscal year.7 Due to defects in the GRH Act’s procedures, the law failed to achieve its main objective (Schick, 2002) (federal deficits continued to increase during those years). First, the law did not require that the actual deficits be within the target, but only that the deficit projected at the start of each fiscal year be. Second, Congress exempted most of the budget from the sequestration process. Third, any increase in the deficit during the fiscal year, whether because of estimation errors, changes in economic conditions or new policies, did not require congressional or presidential action to offset the increase.

To address the flaws in the GRH Act procedures, the BEA was adopted in 1990 (Title XIII of the Omnibus Budget Reconciliation Act 1990).8 The BEA established two independent mechanisms for reducing the deficit: caps on discretionary spending and a pay-as-you-go (PAYGO) requirement for mandatory spending and revenue legislation (see Box 2 for details). Until 1998, the discretionary expenditure caps were largely maintained and the PAYGO requirement was upheld (CBO, 2003). However, the effectiveness of the BEA began to erode when budget surpluses started to emerge, beginning in 1998. From 1999 to 2002 annual appropriations for discretionary spending exceeded the caps set in 1997 by large amounts, without triggering sequestrations. The emergency clause of the BEA, which allowed temporary overspending, was loosely interpreted. In addition, the Appropriations Acts for 2001 and 2002 raised the caps by large amounts. Advance appropriations were also

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Box 2. United States: Major contents of the Budget

Enforcement Act

Mandatory and discretionary spending

●Mandatory spending is defined as budget authority provided by law other than appropriations acts and entitlement authority. It includes payments for Medicare and Medicaid, the food stamp programme, unemployment insurance benefits, and farm price supports. Discretionary spending is defined residually as all non mandatory spending. It includes operating costs of most federal agencies, most defence expenditures, and various grant programmes. Discretionary budget authority is provided in annual appropriations acts.

Discretionary spending caps

●If the amount of budget authority provided in an appropriations act for the year exceeds the cap on budget authority, or if OMB estimates of the amount of outlays exceed the cap on outlays, the BEA requires the President to issue a sequestration order reducing most programmes by a uniform percentage. Special rules applied for some programmes. Importantly, the BEA exempted some programmes from sequestration.

PAYGO requirements

●Mandatory spending and new revenue proposals were subject to a “pay-as- you-go” (PAYGO) requirement. When a proposed law increased the deficit in the budget year or any of the following years, another provision of law was required to offset the increase. This could be achieved by either a reduction in spending or an increase in receipts in each year affected. A provision that increased welfare benefit payments, for example, would have to be offset by a provision reducing other mandatory spending or increasing taxes.

OMB and CBO estimates

●The BEA required both the OMB and the CBO to make estimates that determine whether there was to be a sequestration and report them to the President and Congress. Any differences between the OMB and CBO estimates required explanation.

Source: Senate Budget Committee, www.senate.gov/~budget/democratic/laws/balbudgetact1985.pdf.

expanded. In addition, during 1998-2002, large amounts of net costs under PAYGO were waived. In conclusion, during 1998-2002, the BEA rules were either circumvented or explicitly waived (Blondal et al., 2003). The BEA was allowed to expire in 2002. However, the budget reform proposals by the President to revive the BEA requirements is under discussion between the executive and Congress (OMB, 2004a).9