On Budget, Off Budget Federal Spending

Typically, a program is placed off-budget for political reasons. For example, after a request from President Reagan, Congress placed strategic petroleum reserve spending off-budget in 1982. Instead of using other means to control the deficit - raising revenues or cutting spending - placing this program off-budget gave the appearance of a smaller deficit, even though the government still needed to finance this spending.

The savings and loan bailout provides a similar example. The Bush Administration (1989-1992) wanted spending on the bailout - quite significant in terms of the overall budget - to be placed off-budget, thereby circumventing balance budget legislation. Congress retained some of the spending as on-budget, while placing part of it off-budget.

Currently, off-budget programs are included when reporting the budget totals (also called the consolidated or unified budget). By including the off-budget surpluses produced by the Social Security trust funds, the deficit appears significantly smaller than it would if on-budget programs stood alone.

The chart below indicates the difference between on-budget and off-budget deficits and surpluses. Though tight fiscal policy and a strong economy under the Clinton Administration led to on-budget surpluses beginning in 1999, the tax breaks of 2001-2003 combined with higher military spending created large on-budget deficits.

Why Keeping Social Security Off-Budget May Matter<!-- /-->

Social Security trust funds are financed through dedicated taxes called payroll taxes. It is kept off-budget because the source of its funding is unique and its purpose is considered paramount - to support a decent quality of life for the elderly. Payroll taxes were raised in the 1980s to produce surpluses in preparation for the retirement of the baby boomer generation. However, since the government has returned to on-budget deficit spending as of 2001, the federal government is, in a sense, borrowing from the Social Security surplus to pay for other programs, rather than shoring up finances now to prepare for the future.