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1 Includes sale of loan assets.

2 Loans made by Treasury to New York City are subsequently sold to the Federal Financing Bank with Treasury's guarantee.

range from relatively narrow categorical programs to block grant programs, are designed to meet other national needs and to serve other major missions. They are, therefore, not included as general purpose fiscal assistance, although they are, taken together, a far larger source of State and local funds. Total grants-in-aid are estimated to reach $85.0 billion in 1979, an increase of 6% over 1978 and 24% over 1977. The sharp rate of growth in Federal grants in 1978 is largely due to economic stimulus programs. As the economy improves, outlays for these programs will level off or decline.

Federal grants will comprise an estimated 26.2% of State and local expenditures in 1979.


[In millions of dollars)

Function 1977 1978 1979 actual estimate estimate

National defense-------------------------------------------- 96 90 82 Energy---------------------------------------------------- 74 270 644 Natural resources and environment--------------------------- 4, 189 4,895 5,578 Agriculture------------------------------------------------ 371 391 383 Commerce and housing credit-------------------------------- 18 34 45 Transportation--------------------------------------------- 8, 298 9,562 10,440 Community and region l development------------------------- 4,496 6,700 6, 279 Education, training, employment, and social services------------ 15,753 20,811 22,380 Health---------------------------------------------------- 12, 104 12,875 14,084 Income security-------------------------------------------- 12,613 13,985 14,806 Veterans benefits and services-------------------------------- 79 85 88 Administration of justice------------------------------------ 713 649 567 General government---------------------------------------- 154 197 180 General purpose fiscal assistance ----------------------------- 9,438 9,743 9,463

Total outlays----------------------------------------- 68,396 80,288 85,020

1 These numbers differ slightly from total outlays for this function, because they exclude administrative expenses.

INTEREST Interest is the cost of borrowing or the income from lending money. This function includes both interest paid and interest received by the Federal Government. Budget outlays for the interest function are estimated to increase by $5.7 billion in 1978 and $5.2 billion in 1979, reaching a gross level of $49.0 billion in 1979. These increases result largely from financing unified budget deficits of $62 billion in 1978 and $61 billion in 1979, and from Federal borrowing to finance offbudget Federal entities. The estimated amount of additional Federal borrowing necessary for this latter purpose is $12 billion in 1978, and $13 billion in 1979.

[Functional code 900; in millions of dollars]

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1 Includes interest paid on the public debt held by Government investment accounts.

These outlay estimates assume continuation of current market interest rates at the levels prevailing when the projections were made. The rate on 91-day bills is assumed to be 6.1% through 1980. Although interest rates are likely to be different from this, they are extremely difficult to forecast. The longer range projections of interest costs presented in Part 3 assume a decline in interest rates consistent with the projected decline in the rate of inflation.

Interest costs are highly sensitive to changes in interest rates. Assuming no change in the level of debt, a 12-percentage-point increase in interest rates as of March 1978 would increase 1978 interest outlays by $0.3 billion, and 1979 outlays by $1.5 billion.

A substantial portion of interest outlays is paid to trust funds on securities held by the funds. These amounts are deducted from both budget authority and outlays before arriving at unified budget totals, since the payment of interest is not made to the public, but consists of offsetting transactions within the budget itself. As shown in the following table, net interest outlays—the interest function minus the interest received by trust funds—are projected to be $39.9 billion in 1979. These estimates of net interest include outlays due to off-budget operations.

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1 Shown as budget receipts.
2 Net amount of interest to be paid from receipts or other means of financing.

In addition, Federal Reserve banks hold government securities as part of their monetary functions. The Federal Reserve banks return a portion of the interest they receive on those securities back to the Treasury as miscellaneous budget receipts. This deposit of earnings is projected to be $6.3 billion in 1979. Deducting these receipts from net interest totals results in a net impact on the budget of $33.6 billion in 1979. The net impact of interest is the amount of interest that must be paid from receipts or additional borrowing to meet Federal financing requirements.

A tax expenditure arises from the optional deferral of interest income on U.S. savings bonds. Normally, the interest on these bonds would be taxed each year as it is credited, but the holder may defer paying the tax until the bond is redeemed. The revenue loss is projected to be $0.6 billion in 1979.


Allowances are included in the 1979 budget to cover statutory pay increases for Federal civilian agency employees, future initiatives and unforeseen requirements that may arise. Pay allowances for the Department of Defense are included in the National Defense function.

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The Federal Pay Comparability Act of 1970 provides a system for annually adjusting Federal white-collar pay on the basis of comparability with the private sector. In 1977, the number of private establishments covered by the comparability survey was increased by 24%. This increase provides an improved base upon which to make future comparability adjustments.

The President has asked business and labor to cooperate in a voluntary program to decelerate wage and price increases. Every effort is to be made to hold wage and price increases in 1978 significantly below those in the prior year. The President intends to keep this criterion in mind when he reviews the October 1978 pay raise recommendations of the President's pay agent, the Federal Employees Pay Council, and the Advisory Committee on Federal Pay, and after a review of the economic situation at the time. The President's final decision will be made in late summer.

As part of the overall effort to hold down inflationary trends, Federal agencies will be required to limit additional funds requested to cover the pay increase to no more than 6%.

Recently, the Federal personnel management project recommended legislative changes in the Federal pay, system. These proposals include splitting the present general schedule into two schedules and setting salaries in the new clerical and technical schedule on a local basis. Enactment of this proposal will improve the process of setting pay on

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