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National needs and the functional classification.—This section discusses the budget in terms of national needs, agency missions, and major programs. National needs are defined in 16 broad areas— termed budget functions—that provide a coherent and comprehensive basis for analyzing and understanding the budget. The budget resources devoted to meeting national needs are classified by budget functions; so that budget authority and outlays of budget and off-budget Federal entities; loan guarantees; and tax expenditures are grouped in terms of national needs being addressed. To the maximum extent feasible, these groupings are made without regard to agency or organizational distinctions. They are also the categories used by the Congress in developing concurrent resolutions on the budget. In keeping with the requirement of the Congressional Budget Act of 1974, the national needs presentation is supported by analysis of agency missions and major programs. In general, the subfunction totals that make up each major functional category represent the resources devoted to agency missions. In a few instances, however, the subfunction totals represent amounts for overhead or similar activities, that cannot logically be attributed to a single mission category. Because of the relationship between national needs and major functions, and between missions and subfunctions, the functional structure was revised during the past year. The revisions are the product of a detailed review carried out in close consultation with the Appropriations and Budget Committees of both Houses of the Congress. The major changes are as follows: * Energy has been established as a function separate from natural resources and environment. Transportation has been established as a function separate from commerce and housing credit. * Military assistance has been reclassified from the national defense function to the international affairs function. • The health subfunctions have been restructured to identify more clearly the major missions in the health area. • Several functional and subfunctional titles have been changed to clarify the major needs or missions being served by these programs.

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All functional data presented in the budget have been adjusted so that they are on a comparable basis for all years. In addition, comparable data on Federal outlays by subfunction for all years since 1962 and by major function for all years since 1940 are available upon request from the Office of Management and Budget.

For purposes of the functional classification, each Federal activity must be classified in the one function that defines its most important purpose. This is necessary to avoid double counting and to assure that the components of the budget will add up to the total. However, many activities serve more than one national need or major mission. Therefore, the subsections in this part of the budget contain subsidiary information that identifies, to the extent feasible, those programs whose primary objective is to meet one category of national needs but that also make substantial contributions toward meeting other national needs.

Credit.—More information on Federal credit activities is presented than has previously been the case. In each national needs section with significant loan activity, there is a table showing the total amounts of direct and guaranteed loans that meet a particular national need. For direct loans the tables show both new loans and offsetting payments, sales, and adjustments. The resulting figures on net credit outlays represent the budget outlays for the direct loans identified.

The tables also show new guaranteed loans and the net amount of credit guaranteed. Unlike direct loans, guaranteed loans do not result, in general, in budget outlays except in the case of default. A further discussion of loans and loan guarantees may be found in Parts 2 and 6 of the Budget and in Special Analysis F in the Special Analyses volume of the budget.

Because loan guarantees have a relatively limited impact on budget outlays, they have, in the past, tended to receive less scrutiny in the executive and legislative branches than other Federal programs. The administration is proposing procedures that would subject both direct loans and loan guarantees to greater budget discipline. A discussion of this proposal is included in Part 2.

Tax expenditures.—Tax expenditures are revenue losses under the individual and corporation income tax laws that are attributable to special exclusions, exemptions, or deductions from gross income or to special credits, preferential rates of tax, or deferrals of tax liability. Nearly all tax expenditure provisions are intended either to encourage particular economic activities or to reduce the tax liabilities for taxpayers in special circumstances. They are, therefore, one means by which the Federal Government pursues its objectives, and in most cases can be viewed as alternatives to other instruments of Government policy such as outlays, loan guarantees, regulations, and other tax law provisions. The most important tax expenditures are discussed in the national needs sections that follow in order to compare them with the outlays and loan guarantees that serve the same broad purpose. The 1979 estimates used in these discussions are consistent with the administration's tax reform proposals unless otherwise noted. In the past, some of the largest tax expenditures have been classified into three special categories—personal investment, business investment, and other tax expenditures. This year, however, they have all been classified in the budget functions into which they most closely fit. This is in accordance with the practice followed by the Congressional Budget Office. It further results in allocating all tax expenditures to national needs. Tax expenditures are discussed further in Part 6 and in Special Analysis G, “Tax Expenditures.” The latter includes a listing and an analysis of all tax expenditures, along with a discussion of the definition and measurement of tax expenditures. Estimates are presented there based on both current law and the administration's tax proposals.

Other Federal fiscal activities.—The Federal Government allocates resources by means other than those reflected in budget outlays, tax expenditures and loan guarantees, Outlays of the off-budget Federal entities, which are federally owned and controlled but excluded from the budget under provisions of laws, are similar in nature to budget outlays. The regulation of economic activity also has a major impact on the economy in many sectors. Finally, taxation affects the allocation of resources among private uses and the distribution of income among individuals in many important ways not covered by tax expenditures. Federal taxes other than income taxes affect the economy, as do tax rates, personal exemptions, and other features of the income taxes that are not treated as tax expenditures.

The national needs sections that follow include information on off-budget Federal entities, and discuss major issues regarding economic regulation. Off-budget Federal entities—along with privately owned, Government-sponsored enterprises—are also discussed in Part 6 of the Budget.

Structure of national needs sections.—Each of the sections that follow has a similar structure. In general, the structure is as follows: • a statement of national needs; • a listing of the major missions and the amount of outlays proposed for each mission in 1979; • a brief summary of the major budget proposals and administration policies;

• a table that displays outlays by national need, agency mission,

and major program for the years 1977 through 1980, and

budget authority for 1979; • a more detailed discussion of the budget proposals for each major

mission; and • a table on credit programs, including both direct lending and loan

guarantees. In addition, each section discusses, to the extent feasible, related programs allocated to other major missions or national needs. The level of detail of this discussion depends on the degree to which there are substantial and important related programs, and is also affected by the availability of supporting data. The discussion of related programs is included either as part of the discussion of mission categories or for the section as a whole, whichever is more useful.

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