Comments on H.R. 5846

Published by the Government Accountability Office on 1971-05-20.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

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                                   BEFORE SUBCOMMITTEEON INTERNATIONAL TRADE
                                        COMMITTEE ON BANKING AND CURRENCY
                                     UNITED STATES HOUSE OF REE'RESENTATIVES
                            H.R. 5846 .3 to amend the            Export-Import    Bank Act of 1945, as
                            amended, to allow for               greater   expansion of export trade of
                            the United States,    to            exclude Bank receipts    and disburse-
                            ments from the budget               of the United States,    and for other

                                                                May 20, 1971

                Mr. Chairman and Members of the Subcommittee:

                         We appear       at your      request         to present           our views and answer your

                questions       on the provisions              of H.R.         5846, which would                  exclude     the

          f     receipts       and disbursements              of the Export-Import                   Bank from the totals                      /70
                of the budget           of the United          States        Government            and exempt them from any

                annual      expenditure          and net      lending         limitations           imposed on the budget.

              4 Our    views were expressed                in September           1970 when we appeared                     before     the
      \p        Senate Subcommittee               on International              Finance,           Committee        on Banking         and
                Currency,       at its      request     on a similar              bill,        S. 4268, which           failed        of

                enactment       and also         in March 1971 before                 the Senate         Committee           on Banking,

                Housing      and Urban Affairs              on S. 19 and S. 581.                     Our position            on H.R.        5846

                is the same as the one taken                    in our previous                 testimony.

                         As you know, the General                 Accounting              Office     has over many years                   favored

                the principle           of full     disclosure             to the Congress            and review            by the Congress

                of the budgetary            programs        submitted          by the executive               branch.         In our view

                excluding       the Export-Import              Bank's        receipts          and disbursements              from the

                budget      totals   would        establish       a highly          undesirable          precedent           since     the

                exclusion       could     with     equal      logic        and justification             be applied           to other

                loan programs.            In my opinion,              it    is impossible            to differentiate                between

                this     program and other            loan programs              in the budget.              It    would open the
door      to excluding         other       programs,        a weakening               of the budgetary               process,

and reduce         the ability           of the Congress                to establish             budgetary        priorities.

The objectives            of the legislation                could            be accomplished            with    equal

effectiveness          by an amendment to the Expenditure                                  Control        and Limitation

Act     or by administrative                action        by the Office               of Management and Budget

to increase         the     limit      on expenditures                 for     the Bank.

          Our position         is consistent              with        the conclusion             of the President’s

Commission         on Budget          Concepts       of October               1967,     that     all     loan programs

operated       by Federal            entities      in which            the capital             stock     is owned by the

Government         should      be included           in the budget                on a net         lending      basis.          That

is to say,         the budget          totals      include            the difference             between        loan outlays

or disbursements             on one side,            and loan reimbursements                           or repayments          on the

other      side.     This      budget       policy        as it        affects        the Export-Import               Bank has

been in existence              for     many years.               It    was in eff&t              long before          the report

on the President’s                  Commission‘on          Budget            Concepts      and the adoption              of the

unified      budget.

          The President’s             Commission          on Budget            Concepts         was a bipartisan              group.

It    was chaired         by Mr.        David     Kennedy,            who was later             appointed        Secretary        of

the Treasury,          by President              Nixon.          The Commission                included        the Chairman

and the ranking             minority        members of the House and Senate Appropriations

Committee.          I was a member of the Commission.                                   Mr. Robert           Mayo,    later

Director       of the Bureau             of the Budget,                was its        staff      director,           I attach

a list      of the members of the Commission

          The Commission’s              report     was unanimous                 and its        recommendations           were

adopted      by President             Johnson      and later            by President             Nixon.

         The Budget     Commission        considered       an alternative     of excluding     all         loans

from     the budget,     and arguments        were made         to   the Commission   supporting       this

course     of action.       The arguments             pro and con were set forth       in an excellent

staff     paper   presented      to the Commission             by Mr. Mayo, and I would       like     to

read the pertinent          excerpt:

         “The case for      excluding       loans       from   the budget

                “Several    reasons have been given at one time or another
         for treating     loans at the very least as something other than
         ordinary    budget expenditures      or for excluding       them altogether
         from the calculation       of budget surplus or deficit.            The reason
         for excluding      loans in the NIA budget--that         there are not in-
         come items in ordinary       accounting    practice--has       already  been stated.

               “The same conclusion     seems to be suggested if we consider     the
         net economic effect     if the Federal Government simultaneously      makes
         a loan and finances     the loan by borrowing.     We will  set aside for
         the moment the case where bonds are sold to the’central          bank, which
         is the financial    equivalent   of printing   new money.   If the Government
         borrows by selling    bonds, its lending and borrowing      of equal amounts
         very largely   wash out in net economic effect,      depending somewhat of
         course on the type of security      sold and the type of loan made.

                  “Much of the Federal Government’s             borrowing      and relending      is
         a form of activity            quite different      in economic character        from the
         levyingof       taxes and the purchase of goods and services                 for public
         programs.         In many cases, the Government is simply acting as a con-
         duit for funds borrowed from areas or capital                     markets with loanable
         funds to spare, passing them on to private,                     State and local govern-
         ment, or foreign            parties    who are not able to borrow directly            them-
         selves.       In this sense, the Government is engaging in financial
         intermediation,           like a bank, a savings and loan association,                or
         other financial           intermediary,       By borrowing      and relending,     these
         institutions          bring the interests        of savers (lenders)       and borrowers
         into balance.            When Government lending activity            is viewed this way,
         then it seems logical               to treat  loans differently        from ordinary
         taxes and expenditures --indeed               even exclude them completely--in
         calculating         the budget surplus or deficit.”


         “The case for        including     loans       in the budget

                “Advocates  of including loans in the calculation                     of budget
         surplus or deficit    point out that when the Government                     makes loans,

      it is not just acting       as a bank or financial     intermediary.         If
      financial   intermediation      were all that were required,         the private
      sector could well take care of balancing           the interests       of borrowers
      and lenders in a country with such highly developed capital                  markets
      as ours.    Clearly     something else is involved,      specifically      a
      recognition    that without     Federal intervention,     important      public
      objectives    would not be accomplished       through the ordinary        working of
      the capital    markets.

             “From this point of view9 Federal loan programs represent                       a
      redirection     of national    resources    to comply with social priorities.
      They establish     claims on resources       and demands for current             output
      of the economy that are very hard to distinguish                   from the demands
      and claims that arise from Federal expenditures                  for grants,      transfer
      payments, or subsidies--       transactions    which are clearly           included      in
      anyone’s measure of Government ‘expenditures.’                   ‘Soft”    loans by the
      Agency for International         Development to developing            countries     repay-
      able in local currency,        and nonrecoursk       loans to farmers made by the
      Commodity Credit      Corporation     (CCC) for which there is no legal
      obligation    to repay if the farmer prefers             to forfeit     his collateral,
      are only extreme examples of so-called             ‘loans’      which are particularly
      hard to distinguish       from ordinary     Government expenditures.              In any
      event, the burden on the Treasury           to finance       loans through taxes or
      borrowing   is not less than-- or different            from--the      burden associated
      with financing     any other Government expenditure.


             ‘“To some, the pressures      to minimize budget expenditures        and
      the budget deficit     provide an argument for excluding          loans so that
      the choice between direct         and indirect     loans can be made solely on
      their    respective  merits.      But if loans were excluded from the budget,
      these same pressures       might well ledd to an even worse distortion            of
      program choices,      The    misnaming   of  grants,    transfer payments,    and
      subsidies --to get them out of the budget totals--might              be greatly
      stepped up. * * *‘I

      The sum and substance            of the staff     paper was to argue         that     loans     made

by the Government         would   not be made if       adequate     credit    resources       were

available    on the same terms in the private   sector.                  Accordingly,         the budget
itself    should provide for and reflect  any redirection                    of economic       resources

through    governmental      action.      The effect     of any such programs             should     be

reported    on a net basis,        not on a gross       basis     as a proper    reflection          of this



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        redirection,            and should            be included        in the calculations                of budget         surplus

        or deficit.

                 There      is a very          brief     statement          in the final         Commission          report           which

        is also         pertinent:

                           “In line with the Commission’s            conviction  that a unified
                           budget system is essential,          and that a comprehensive
                           definition     of the budget is very important,          the inclusion
                           of net lending as well as other expenditures               in the budget
                           has particular’     significance.       With both in the budget,       there
                           should be no pressure          by special   interests   or program partisans
                           to redesign other expenditure           programs to give them the
                           appearance of direct         loans in order ‘to get them out of the

                 You have heard               the arguments          that     the Bank supports               U-S.    exports,

        that     it     helps     meet the U,S,           balance       of payments           problems,        and that          it

        makes a profit.                Valid         as these      points     may be, they         do not make Export-

        Import         Bank loans        unique        from a budgetary             point      of view,        There      are also

        other         loan programs           that     have their        own important           purposes.           For ‘example,
        such important               loan programs          of the Farmers            Home Administration,                 Veterans

        Administration,               Rural      Electrification             Administration,             Small    Business

        Administration,               and the Department               of Housing           and Urban Development                     for

        college         housing       are,     from     somebody”s          point    of view,      of a high          priority               and

        also     extremely           important,          These loan programs , as you probably                            know,             re-

        present         a total       of outstanding            loans       more than        $50 billion.         Total       net lending

        in the 1971 Budget                   is approximately            $11 billion.

                 I do not know how anyone could                          differentiate           between       the Export-Import

        Bank case and other                   cases represented              by the loans         that      are   included             in the

        budget         today.        Supporters         of these       programs        could     argue with          equal       force             that

        they     are unique.             The issue        before        the Committee,           therefore,          is whether                   these

        programs)          and many others,              are to be reviewed                 in an orderly         way so that                 the
        Congress         can make informed               decisions          as to the priorities               of need.

          It     has also              been argued           that      Export-Import          Bank loan disbursements

take      place          over     a period           of years,          but so do disbursements                   under       other

Federal           loan         programs.            The Office          of Management and Budget                      (OMB) should

have,      and presumably                       does have,          estimates       of the rate          of disbursement                 avail-

able      to it          when it          estimates          net budget          outlays.        But even if            OMB estimates

were wrong,               it     could          at any time          during      the year,       after        considering           dis-

bursements               and receipts               under     outstanding           loan agreements,              make upward

adjustments               if     the Bank could               justify         an overall        increase        in     loan

operations.                    This      is     legally      permissible           under     the Government             Corporation

Control          Act      for     all         Government           corporations;        unless         the Congress           specifi-

cally          limits          the program           in appropriation               acts.

          As we have pointed                        out in hearings              on similar       legislative             proposals,

whether          the net              lending       of the Bank is              included      in the portion              of the

President’s               budget          used in determining                   the deficit       or surplus            is within

his      discretion.                   Legislation           for     this     purpose       is unnecessary.               However,

the Executive                   Branch,          as a policy           matter      has chosen          to continue         to include

the net lending                   for         the Export-Import               Bank in the budget               along      with      other

loan programs,                   in      line      with     the recommendations               of his      Budget        Commission,

which          recommendations                   the President              had theretofore            adopted.         Presumably,

the Executive                   Branch          wants     the Congress           to take      the responsibility                   for

departing               from     the unified              budget.

          In summary,                  Mr.      Chairman,          we have not argued            that     the Bank’s             lending

operations               are not extremely                   important.            We believe          they    are.       Nor do we

differ          on the need for                    the program          to have a high           priority.             But the

fundamental               purpose             of the budget            is    to bring       together      competing           needs

so that          overall              priorities          may be established                and resources             allocated.

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It     is hard to escape the conclusion                      that      the Bank's      problem        is not

with     the way the budget                is developed,        but with         the fact     that     the

Executive          Branch     does not assign           as high a priority             to the Bank's

lending          operations     as the Bank desires.                   Similarly,      the Congress,             if

it     believes       that    additional        resources       should      be made available             to the

Export-Import            Bank , could        initiate       specific       action     to do so within                 the

budgetary          process     and without         destroying          the unified       budget       concept.

         We understand            that     the Subcommittee            is also      considering        at this

time H.R.          8181.      We do not have any comments to offer                          with     respect          to

this     bill,       other    than the observation              that-it       is unclear           to us what would

happen to the short                term discount         loan program of the Export-Import                             Bank

if     a similar       discount          program were established                in the Federal          Reserve


         This concludes            my statement.

                                   MEMBERSOF THE PRESIDENT'S

                                  COMMISSION ON BUDGET CONCEPTS

The Honorable David M. Kennedy, Chairman of the Board, Continental   Illinois
  National  Bank and Trust Company of Chicago. (Secretary of the Treasury,
  1969 - 1970.1

          The Honorable Robert            B. Anderson,      New York City         (Secretary       of the
            Treasury,  1957-60).

          The Honorable Frank T. Bow, Ranking Minority    Member, Committee
            on Appropriations, U.S. House of Representatives.

          The Honorable         Henry H. Fowler,       Secretary        of the Treasury.

          The Honorable Carl Hayden,             Chairman,       Committee.on         Appropriations,
            U.S. Senate.

          Mr. Winthrop C. Lenz, Executive Vice President,                         Merrill,      Lynch,
             Pierce, Fenner & Smith, New York City.

          The Honorable George H. Mahon, Chairman,                        Committee    on Appropriations,
            U.S. House of Representatives.

          Professor      Paul W. McCracken,        The University            of Michigan.

          The Honorable         Charles    L. Schultze,       Director,        Bureau of the Budget.

          Professor      Carl    S. Shoup, Columbia         University.

          Mr. Leonard      S. Silk, Editorial Page,Editor                   and Chairman       of the
             Editorial     Board, Business Week.

          The Honorable         Elmer B. Staats,       Comptroller          General    .of the United

          Mr. Robert M. Trueblood,    Chairman of the Policy Group,                           Touche, Ross,
            Bailey & Smart, Chicago (President,     American Institute                          of Certified
             Public Accountants,   1965-66).

          Professor Robert C. Turner,  Indiana                 University        (Assistant      Director,
            Bureau of the Budget, 1961-621,

          Dr. Theodore      0. Yntema,       Oakland      University,        Rochester,       Michigan.

          The Honorable Milton            R. Young, Ranking         Minority      Member, Committee
            on Appropriations,            U.S. Senate.