One possible explanation for the difficulty in controlling the budget is that a major component of spending-tax expenditures-receives privileged status. It is treated as tax cuts rather than as spending. This paper explores the implications of that classification and illustrates how it can lead to higher taxes, larger government, and an inefficient mix of spending (too many tax expenditures). The paper then analyzes alternative budgeting approaches that would explicitly incorporate and measure tax expenditures. It concludes by analyzing ways to control tax expenditures (and other spending) and the special challenges presented by tax expenditures.

The Federal Credit Reform Act (FCRA) improved the treatment of credit in the federal budget, but failed to make the budget cost of credit and noncredit programs fully comparable. Inconsistencies and downwardly biased credit costs arise from the restriction under FCRA that cash flows be discounted at Treasury rates, and from the omission of certain administrative costs. We describe the shortcomings of FCRA and policy distortions that may occur, and propose modifications to the Act that would more closely align budget costs of credit and noncredit programs.

Some ways of budgeting for disasters have the potential to increase welfare by increasing national savings, reducing exposure to risk and promoting mitigation prior to a loss. Those ways can also contribute to aggregate fiscal stability over the long term. The power of budgeting, however, can be misdirected to increase losses and lead to fiscal instability. This paper describes the potential for gain from alternative budgetary treatments of policies aimed at reducing the effects on consumption of random shocks to income and wealth. It identifies a critical difference between alternatives: budgetary recognition of expected costs of relief and recovery before the loss event. We classify those different methods as ex ante and ex post budgeting. We also consider some budgetary mechanisms that can promote effective recognition and constrain opportunistic behaviour by elected officials. Finally, this paper describes related budgetary practices in some OECD countries. Many have instituted policies consistent with ex ante budgeting, but we have insufficient information to determine their effectiveness.

, and Pew Subsidyscope for helpful comments and discussions. The views expressed herein are those of the authors and do not necessarily reflect the views of any of the organizations with which we are affiliated, or the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peerreviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

The U.S. financial crisis and recession that began in 2007 poses profound challenges for public policy and administration. It also provides useful information about the effects of economic policies. This paper considers the implications of current developments for the use of implied guarantees as an instrument of public policy. It draws on experience with Fannie Mae and Freddie Mac to argue that implied federal guarantees have a severe disadvantage. Their costs are largely unmeasured, unrecognized in the budget, and unmanaged. Yet their use appears to be increasing in the current crisis. To minimize the costs of the expanded financial safety net, government should measure and manage those costs more effectively. To that end, this paper proposes new budgetary treatments of federal implied guarantees.