18

Keith 2W. Carison

Keith M. Carlson is an assistant vice president at the FederalReserve Bank of St. Louis. Thomas A. Pollrnann provided re-search assistance.

Federal Budget Trends and the1981 Reagan Economic Plan

N EARLY 1981, a newly inaugurated RonaldReagan announced an economic plan which in-cluded goals of “an immediate, substantial, andsustained reduction in the growth of federal ex-penditur-es [and] a significant reduction in federaltax rates 1 After two terms in office, it seemstime to examine the original Reagan budget planin light of the actual performance over the 1980s.Althoirgh the budget plan had far-reaching eco-nomnic and social consequences, this an-tide fo-cuses on the extent towhich the initial budgetprojections were realized.z

First, the 1981 economic setting, which provided

the under-lying rationale for- the Reagan plan, issummarized. Then, because the budget and eco-nomic conditions an’e intern-elated, the 1981 eco-nomic assumptions are examined in r-etrnspect.

This is followed by a comparison of planned andrealized changes in federal outlays and receipts.The article concludes with an evaluation of the1981 budget plan.

THE 1981 ECONOMIC FORECAST INRETROSPECT

When the Reagan administration began prepar-ing its budget in late 1980 and ear-ly 1981, the U.S.economy was recovering fl’om a brief recession in

the first half of 1980. Output was growing slug-gishly for a recovery phase of the business cycle,unemployment was well above 7 percent of the

labor for-ce and productivity, as measun’ed by out-put per hour, was declining. Prices generally wereincreasing at double-digit rates and interest rates

reflected the high rate of inflation. The federalbudget deficit for fiscal 1980 was $60 billion andthe outgoing administration’s estimate for 1981was about $55 billion.

The incoming pr-esident described the situationas “the most serious set of economic problemssince the 1930s.”3 The most important cause ofthese problems, he suggested, was the gover-n-ment itself: through taxes, spending, regulatory

policies and monetary policies, it had sacrificed

‘America’s New Beginning. . . (1981), pp. 1—3. For furtherdetails, see Office of Management and Budget (1981 a) andCarlson (May and November 1981).

2For more extensive analyses of the Reagan years, see Boskin(1987), Mills and Palmer (1984), Modigliani (1988) andNiskanen (1988).

~America’sNew Beginning . . . (1981), p. 4.

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Figure 1Actual Movements vs.Key Economic VariablesGross National Product (percent change)Percent Fiscal Years

10

5

0

—5

Gross National Product Deflator (percent change)10

5

0

Civilian Unemployment Rate10

S

0

Reagan Forecasts of

Percent15

10

5

0

10

S

0

5

ID

5

0

10

5

0

IS

ID

5

01990

Gross National Product in 1982 Dollars (percent change)

Interest Rate (91-day Treasury bills)

1955 60 65 70 75 80 85

JANUARY/FEBRUARY 1989

20

long-ter-m growth and price stability for ephemeralshort-term goals. To combat these problems, theadministration proposed a pn’ogram that was in-

tended to:

restore fiscal integrity; inrrease incc-ritives for

saving, investment, and production; attain mone-

tary and financial stability; and enhance the role ofthe mar-ketplace as the principal forte in the allo-cation of resources.

4

An important par-t of every budget progn’am isthe set of under-lying economic assumptions?Figure 1 shows the administration’s 1981 for-ecastsfor a variety of key economic variables along withthem’ actual performance. As the top tier shows,the administration oven-estimated the growth innominal GNP from 1980 to 1986 by a substantialamount.’ In particular, it did not forecast the1981—82 r’ecession nor did it foresee the sharpreduction in nominal GNU growth after 1984. By1986, the cunrulative er-r’or for GNU was over $800billion, or’ almost 20 per-cent of the actual level ofGNP in 1986. This error reflected an actual GNPgrowth r’ate of 7.8 percent over the 1980—86 period,quite a hit lower than the assumed gr-owth rate of11 percent:

The over-estimate of nominal GNU reflected over-estimates of both real growth Isecond tier of figure1) arid inflation third tier’ of figun’e 11. The cumula-tive error in forecasts of real GNU by 1986 was 7percent while the GNU deflator was overestimated

by 11 percent. The 1981 administration forecast forinflation for the 1980—86 period was a 7.1 per-centannual rate; the actual inflation r-ate during thisperiod was 5.1 percent.’

The fourth tier of figur’e I indicates that the un-employment rate was underestimated in each ofthe years from 1981 to 1986. The administrationforecast that the unemployment rate would rise in1981, then fall to 5.6 percent by 1986; the actual1986 rate was 7.1 percent.

Finally, as indicated in the bottom tier of figure1, the Treasury bill rate was also underestimated.The Reagan administration forecast a steady de-

cline in the Treasury bill rate from more than 11percent in 1980 to 5.7 percent in 1986; the actualrate rose sharply in 1981, before falling to 6.4 per-cent in 1986.

These key economic variables generally movedunfavorably dur-ing the 1980—86 period in terms oftheir’ effect on the fedenal budget. The slower-than-fon’ecast gr’owth of nominal GNU slowed thegn-owth of receipts and contributed to a lar’gerdeficit. Although slower-than-expected inflationhelped to reduce the growth of budget outlays,slower’ real GNU growth and higher-than-forecastunemployment n’ates incr’eased outlays, par’ticu-

laniy for unemployment insurance. Meanwhile, thehigher-than-expected Tn-easuty hill rate alsoboosted outlays, especially when the governmentwas borrowing more than planned. Thus, most ofthe err’or’s in the adniinistration’s for-ecast wer-eones that increased the deficit more thanprojected?

THE BUDGET TOTALS:REALIZATIONS VS. THE REAGANPLAN

As figure 1 indicated, the Reagan administra-tion’s 1981 economic assumptions were errone-ous. A related question is towhat extent were thebudget projections also erroneous? An obviousmeasun’e of this par-ticular error- is the differencebetween the planned and the actual surplus/deficit. Figure 2 shows the size of this discn’epancy.The Reagan plan projected a steady move towarda balanced budget by 1986; the actual deficit for

1986 was $221 billion.’0 To better- understand whythe 1981 budget plan’s projections were in error-,individual budget categories ar’e examined below.”

~lbid.,p. 9.‘Althoughsuch assumptions are absolutelynecessary to prolectoutlays and receipts, economic conditions themselves areinfluenced by congressional and legislative decisions thataffect the budget. This was the administration’s reasoning in1981; its budget programs were designed to have a favorableeffect on the economy. In fact, its economic assumptions wereso optimistic, it felt compelled to say:

Indeed they do represent a dramatic departure from thetrends of recent years — but so do the proposed policies. Infact, if each portion of this comprehensive economic pro-gram is put in place— quickly and completely — the eco-nomic environment could improve even more rapidly thanenvisioned in these assumptions. [mid., p. 25.1

‘Generally, from this point on, all references to years are tofiscal years, i.e., the I 2’month period ending September 30.

~Sucha projection was not unusual in early1981. For example,the Congressional Budget Office projected a 1980—86 nominalGNP growth rate in excess of 11 percent. See CBO (1981).

‘By comparison, the CBO proiected a2.8 percent rate of realGNP growth and an 8.5 percent rate of inflation.

‘For a statistical investigation of bias in government economicforecasts, see Belongia (1988).

“Throughout this article references to the “Reagan plan” are tothe spending program that excluded what they called “unallo-cated savings.” These were cuts in spending for which detailwas to be provided later.

“The results of an alternative analysis using a small model ofbudget determination appears in appendix A.

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Figure 2Federal Surplus/DeficitBillions of dollars Fiscal Years

50

0

—50

— 100

— 150

200

—2501955 60 65 70 75

NOTE: Reagan plan does not include “unallocated savings.”

Billions of dollars

50

0

—50

— 100

—150

—200

—2501990

Outlays

One major objective of Reagan’s economic pro-gram was to

reduce the rate at which government spendingincreases...,‘t’hus, the badly needed etlor’t to‘‘cut’’ the budget really refers to t-cductioris in thearttotnnt of increase in spending requested fromone year to the next.”

The 1981 pn’ogr-am for reducing the growth of out-lays was subject to some confusion, however, be-cause a tar’get ceiling was set which included sub-stantial “unallocated savings” that were to bespecified later. In the following discussion, these

unallocated savings ar-e ignon’ed.

Figur-e 3 shows the Reagan plan for real federaloutlays along with actual teal outlays. Total out-lays in r-eal terms cleariy did not slow as much asplanned. From 1976 to 1980, the aver-age gn’owthrate of real federal outlays was 3.5 per-cent. Theactual rate of incr’ease from 1980 to 1988 was 2.9

percent, only slightly slower’ than fi-om 1976 to1980 and well in excess of the 1.1 percent rate thatthe administration had pr-ojected in 1981.

As figur’e 4 shows, another’ way to summan’izebudget tr-ends is to examine the tatio of outlays toGNU. From 1955 to 1980, the r’atio of total outlaysto GNU rose, albeit irregularly.” Although theReagan plan intended to reverse this tr-end sharplyafter 1981, this did not’occtnr.”

2,4merioa’s New Beginning. (1981), p. 10.

“This irregularmovement reflects, among other factors, thebusiness cycle as it affects both GNP and total outlays.

“The discrepancy in the 1980 ratio between the Reagan planand the realized outcome reflects the upward revisions of GNPthat have occurred since 1981.

80 85

~A0H

22

Figure 3Total Outlays (constant 1982 dollars)Ratio ScaleBillions of dollars900

800

700

600

500

400

300

Fiscal Years

Receipts

Another key pam’t of the 1981 economic programwas a set of tax proposals that was intended “toimprove the after-tax, after-inflation n’ewar’ds towor-k, saving, arid investment.” Among these pm-o-

posals were reductions in marginal tax rates for’individuals of 10 per-cent a year for three yearsstarting July 1,1981. For corpor-ations, the chieffeature of the proposed tax changes was an accel-erated recovery rate for the cost of machinery andequipment and cer-tain str’uctum-es to be phased inover five years. In general, the effect of the pro-

posed tax changes was to slow the gr-owth of fed-eral receipts by reducing the role of individualincome taxes and corporate income taxes in thet’evenue structur’e.

Figure 5 shows the Reagan plan for total re-ceipts along with actual receipts, both convertedto constant 1982 dollars. Clearly, the trend of realtotal receipts slowed aftem’ 1981 and was muchslower’ than planned. Real receipts plummeted in1982 and 1983 due both to the r-eduction in taxrates arid the 1981—82 recession. Since then, f-c-

ceipts have grown faster than in the 1981 Reaganfor-ecast: because they fell so much irI 1982 and1983, however’, their- 1986 level was still below that

projected by the administration in 1981.

When total receipts are charted relative to GNUfigure 6), the difference between what was

planned in 1981 and what actually happened isquite pronounced. In an alternative way, this dif-ference shows the influence of the recession andhow it suppressed federal receipts relative to GNU.

“America’s New Beginning. . . (1981)’ p. 9.

Ratio ScaleBillIons of dollars

900

1955 60 65 70NOTE: Reagan plan does not include “unallocated savings.”

75 80 85 1990

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23

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Figure 5Total Receipts (constant 1982 dollars)Ratio ScaleBillions of dollars Fiscal Years800

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Figure 6Total Receipts Relative to Gross National Product.22

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THE COMPOSITION OF THEBUDGET: REALIZATIONS VS. THEREAGAN PLAN

The 1981 Reagan plan called fbr both a slowingin the gr-owth of gover’nment outlays and a changein the composition of spending and receipts. Thechange in the composition of outlays was in-tended to:

shift Federal budget pr-ior-ities so that Federalresources ate spent for’ purposes that ar-c tr’uly theresponsibility of the national govcr-nment , our-budget plans reflect the increased importanceattached to national defense, maintain the FederalGovernment’s support for the truly needy, aridfirlfill our r’esponsibiliries for interest payments onthe national deht. The spending r’educlions willrestrain Federal involvement in areas that areproperly left to State and local gover’nnien ts or’ tothe private sector.”

The pr’ojected composition of total receiptsreflected the two major tax changes: tax relief forindividuals and greater tax incentives for invest-mnent by businesses.

Outlays

Table I shows the majom’ components ofoutlays

relative to total outlays.” ‘the fir-st column showsthat the Reagan administration planned to in-crease national defense outlays from 22.9 Uercenitof total outlays in 1980 to 35.7 percent in 1986.Although defense outlays did rise, the increase fellshort of the planned level; by 1986, defense outlayswere 27.6 percent of total outlays. Looking at it in adiffem-ent way, the planned growth of real defense

outlays were projected to gr-ow at an 8.6 per-centannual rate from 1980 to 1986; their actual rate ofincrease was 6.2 per-cent. The actual defensebuild-up, while slower than planned, did mark areversal of the previous trend.

“See appendix B for additional detail on these components.

.22

.21

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.18

60 65 70 75 80 85

.17

.16

“Ibid., ph

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The nondefense portion of the budget was re-duced, but, again, not to the extent that was

planned. The plan called for nondefense outlaysto fall to 64.3 percent of the total by 1986; the ac-tual proportion was 72.4 percent. Table 1 providesfurther detail on nondefense outlays. While theplan for’payments to individuals, relative to totaloutlays, seems close to the mark, the growth ratecomparison shows a different story. Individualpayment outlays rose faster than planned in realterms; the planned increase was a 1.6 percentaverage annual rate from 1980 to 1986 comparedwith the actual 2.8 percent rate of increase.

For the category of “all other gr’ants” (the thirdcolumn of table 11, the planned decline was real-ized in the first two years, but not afterward. Al-though grants in real terms fell rather dramatically

at a 4.8 percent rate from 1980 to 1986, this was

still less than the 10.7 percent rate of declineplanned by the 1981 administration.

The fourth column of table 1 shows the mostdramatic departure from the 1981 plan. Net inter-est outlays were forecast to decline sharply; in-stead, however, they rose sharply. Because thiscomponent of outlays cuts across all factors thataffect the budget and reflects the general intem-ac-tion of the budget with the economy, this forecasterror serves as a summary measure of the accu-racy of both the budget plan and the economic

forecast.’8 Because outlays grew faster thanplanned while receipts rose more slowly, net in-terest outlays were twice as large as planned in1981. Errors in receipts (overestimated) and out-lays (underestimated), combined with an underes-timate of interest m’ates, produced these largeerrors.

The final “all other” category of outlays shows adecline very close to, but generally somewhat lessthan planned. /

Receipts

Table 2 shows the components of receipts rela-tive to the total. The first column, individual in-come taxes, reflects the ambitious nature of the1981 tax proposal. The administration proposed a30 percent reduction in marginal tax rates for indi-viduals overa three-year period beginning July 1,1981. Marginal r-ates were to be reduced from anexisting range of 14 percent to 70 percent to arange of 10 percent to 50 percent by January 1,1984. This proposal was expected to reduce indi-vidual income taxes from near 47 percent of totalreceipts in 1980 to 43.9 percent in 1983; the per-centage was then forecast to rise to 46.7 in 1986because of its expected stimulus to activity viaincentives to work and invest.

The general movement of individual incometaxes relative to the total went according to plan;

“See appendix A.

JANUARY/FEBRUARY 1989

26

the timing, however, was substantially different forseveral reasons. One of these was the timing of theactual legislation. What’s more, an unanticipatedrecession occurred, and the anticipated boom ineconomic activity that was expected to follow onthe heels of the tax program failed to develop.

The second column of table 2 summarizes cor-porate income taxes. Again, the Reagan plan wasbroadly realized. Corporate taxes were reducedand their role in the tax system was m-educed, atleast through 1986. The planned and the actualpercentages were quite close in 1986, although theactual path of an’ival from 1981 to 1986 was some-what different than planned. Corporate incometaxes were severely affected by the 1981—82 reces-sion, dropping as a percentage of total receipts in1982—83. Despite the erroneous economic forecast,however, the general contours of the Reagan cor-pom’ate tax plans were realized. This pattern hasbeen reversed since 1986, however; the Tax ReformAct of 1986 tightened provisions for accelerated

depi-eciation of plant and equipment and repealedthe investment tax credit. These results have can-celled, to some extent, the effects of the 1981 taxact.

The evolving role of social insurance contribu-tions in the tax system is shown in the thirdcolumn of table 2. The actual ratio followed theplan very closely through 1982, but moved wellabove the forecast after that. This divergencereflected mainly the 1983 social security amend-

The foum’th column of table 2 shows the propor-tion of excise taxes to total receipts. The 1981Reagan administration forecast a sharp increase in1981 and 1982, followed by a steady decline. Thisgeneral pattern occurred, except that the peakwas in 1981 and was at a much lower level thanforecast. The discrepancy between what wasplanned and what actually occurred was mainlythe result of much smaller than expected gainsfrom the windfall profits tax; oil price forecastswere erroneous.

Finally, the ‘all other” category, which is unim-portant relative to the total, was underestimated.The major taxes in this category are estate and gifttaxes, customs duties and Federal Reserve de-posits. The dollar amount of all other receipts wasfor-eeast accurately; because the total was overesti-mated (figures 5 and 6), however, “all other” re-ceipts as a proportion of the total wasunderestimated.

SUMMARY EVALUATION OF 1981REAGAN BUDGET PLAN

Table 3 summarizes the 1981 Reagan budgetplan and compares its individual componentswith trends prior- to 1981 and what actually oc-cur-red after 1981. Rates of change for budget totals

ments that accelerated collections to keep thesocial security program afloat.

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and their major components are calculated from

the constant dollar measures. A broad judgment isreached on whether actual performance was con-sistent with the Reagan plan depending onwhether the actual 1980—88 trend was closer to theReagan plan than the prior 1976—80 trend.

The 1980—88 total outlay performance was in-consistent with the 1981 plan. Although the an-nual growth rate of total real outlays slowed froma 3.5 percent rate to a 2.9 percent rate, this wasstill substantially above the Reagan estimate of 1.1percent. Total real r’eeeipts, on the other hand,grew at a rate consistent with the 1981 plan; theyactually slowed more than planned because of the1981—82 recession.

An examination of the growth of the compo-nents of real outlays shows that some moved in adirection consistent with 1981 plan. Real defense

outlays did not rise as much as planned; however,their’ growth accelerated substantially from the1976—80 period. Although real nondefense outlaysgrew much more slowly, the Reagan plan calledfor a decline. The components of real nondefenseoutlays showed mixed results. Growth in real pay-ments for individuals and net interest slowed onlyslightly. The other two categories, however,

showed a sharp reversal fi’om the prior four years,although not as much as was planned.

Though r’eal total receipts moved consistentlywith the Reagan plan, the components of the total

showed mixed results. Real individual incometaxes rose more slowly than planned, chiefly be-cause economic growth was overestimated, buttheir growth was down sharply from the 1976—80trend. Real corporate income taxes slowed, butnot to the extent outlined in the 1981 plan. Realsocial insurance contributions grew at rates veryclose to what was forecast in 1981. Both the exciseand ‘all other” components of total receipts wereestimated incorrectly, but this had little conse-

quence since they are such small pr-oportions oftotal receipts.

CONCLUSION

In 1981, the newly inaugurated Reagan adminis-

tration fom’mulated a budget plan designed to slowthe growth of government and boost incentives(via taxes) to save< invest and work. Included in the

projeetions was a movement toward a balancedfederal budget by 1986. The actual rise in the fed-eral deficit since 1981, culminating with a $221

JANUARY/FEBRUARY 1989

28

billion deficit in 1986, suggests that the Reaganbudget program failed. Examination of the factors

contributing to the deficit as well as the composi-tion of both outlays and receipts, however, indi-cates broadly why this result occurred and pointsout that theme were a number of successes as wellas failures when individual components of thefederal budget are considered.

Total receipts in 1986 were overestimated byabout $170 billion, mainly because the 1981—82recession was not anticipated. The major tax pro-posals were adopted, although not in their exactform nor according to the proposed timetable.Because of differences in timing and subsequentlegislation, the actual composition of total receiptsvaried somewhat from the 1981 projections. The

direction of movement, however, was generally asprojected for individual income taxes, corporateincome taxes and social insurance contributions.The largest error in the projected composition oftotal receipts was for’ excise taxes, chiefly becausethe forecast of oil prices was in error with theresult that the windfall profits tax did not producerevenues as expected.

Total outlays were underestimated by about $30billion in 1986 (or’ more than $70 billion if the 1981estimate includes “unallocated savings”). Furtherexamination of outlays revealed a $73 billion errorin the projection of net interest. This error waslargely offset, however, because the actual defense

build-up fell about $69 billion below projeetionsby 1986. The noninterest portion of nondefensespending was underestimated by $15 billion, om’ 5percent.

In general, if one looks at budget outlays, theReagan pr-ogm-am enjoyed some success: the de-cline in the relative role of defense outlays wasreversed; payments for individuals relative to totaloutlays continued roughly as planned; all othergrants and the residual category of “all other out-

lays” continued to decline from their peaks in the

late 1970s or 1980. The major exception to the 1981plan was the rise in net interest outlays producedby failures to forecast the 1981—82 recession(which slowed the growth of receipts), the level ofinterest rates, and the cumulative effect on outlaysof compounding interest on a growing nationaldebt.”

REFERENCES

America’s New Beginning: A Program for Economic Recovery(The White House, Office of the Pness Secretary, February18,1981).

Belongia, Michael T. “Are Economic Forecasts by GovernmentAgencies Biased? Accurate?” this Review (November/Decem~ber 1988), pp. 15—23.

Boskin, Michael J. Reagan and the Economy (ICS Press,1987).

Carlson, Keith M. “Trends in Federal Revenues: 1955—86,”this Review (May 1981), pp. 31—39.

________ “Trends in Federal Spending: 1955—86,” thisReview (November 1981), pp. 15—24.

________ “The Critical Role of Economic Assumptions in theEvaluationof Federal Budget Programs,” this Review (Octo-ber 1983), pp. 5—14.

“Money Growth and the Size of the Federal Debt,”this Review (November 1984), pp. 5—16.

Congressional Budget Office. Air Analysis of PresidentReagan’s Budget Revisions for Fiscal Year 1982, Staff Work-ingPaper(March 1981).

Mills, Gregory B., and John L. Palmer, eds. Federal BudgetPolicy in the 1980s (The Urban Institute Press, 1984).

Modigliani, Franco. “Reagan’s Economic Policies: A Critique,”Oxford Economic Papers (September 1988), pp. 397—426.

Niskanen, William A. Reaganomics (Oxford University Press,19BB).

Office of Management and Budget. Fiscal Year 1982 BudgetRevisions (March 1981a).

Federal Government Finances (March 1981 b).________ Historical Tables, Budget of the United States

Government Fiscal Year 1990 (U.S. Government PrintingOffice, 1989).

“See appendix A and Carlson (1984).

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Appendix AThe Impact of Economic Assumptions on the 1981Reagan Budget Plan

An alternative method of evaluating the 1981budget plan is to simulate the effect on the budgetof economic conditions different from those as-sumed in planning the budget. An updated ver-sion of a budget model previously presented inthis Review was used to do this.’ The model con-sists of three parts: an estimate of the impact ofinflation and real growth on both (1) primary re-ceipts and (2) primary outlays, and (3) an esti-mated equation for net interest outlays. The latterreflects the indirect effects of inflation and real

‘See Carlson (1984), appendix B, for a summary of the model.The only difference from that model is that the interest costequation was reestimated with data through 1986. For an ex-tended discussion of the role of economic assumptions inbudget estimates, see Carlson (1983).

growth on receipts and outlays as well as the ef-fect of interest rate changes.

First, the 1981 Reagan budget plan was sepa-rated into primary receipts, primary outlays andnet interest (see table Al). The effects of actualinflation, real growth and interest rates then werecalculated, yielding simulated values of primaryreceipts and outlays and interest cost for the1981—86 period. These simulation results areshown in table A2.

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The results indicate that had the 1981 budgetplan been frilly implemented, it would haveyielded a deficit of about $255 billion in 1986.These results are based on the actual course ofinflation, real growth and interest rates from 1981to 1986. Since the actual 1986 deficit was $221 bil-lion (see table A3), apparently the 1981 programwas not implemented as planned. Specifically,from 1981 to 1986, neither total receipts nor pri-

mary outlays increased to the extent originallyplanned; total outlays increased more thanplanned because of large errors in estimating netinterest. Thus, the actual behavior of key economicvariables “overexplains” the deficit. That is, if pri-mary receipts and outlays had performed accord-ing to the 1981 plan, the 1986 deficit would havebeen much larger than it turned out to be.

FEDERAL RESERVE BANK OF ST. LOUIS

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Appendix BComposition of Federal Outlays

Federal outlays can be classified in terms of twoanalytical structures: budget function and majorprogram category. The functional classificationpresents outlays according to the purpose that afederal program is intended to serve. These func-

tions include, for example, national defense, inter-national affairs, energy programs, transportation,health, income security, etc. Two additional cate-gories — net interest and undistributed offsettingreceipts — do not address specific functions, butare included to cover the entire budget.

The classification of federal outlays by majorprogram category focuses on the method of cany-ing out an activity. The major program categoriesare national defense, benefit payments for individ-uals, grants to state and local governments (other

than for benefit payments), net interest and allother outlays. National defense and net interest

correspond to the functional categories of thesame name, but the remaining major programcategories do not correspond to a simple sum-ming of functional categories. Nonetheless, ap-proximations can be made. The accompanyingtable groups 1988 outlays by function to provideadded information about the major’ program cate-gories discussed in the text.

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