[8] See for example the Technical Note at the end of Robert Greenstein, Joel Friedman, and Isaac Shapiro, “Program Spending Historically Low Outside Social Security and Medicare, Projected to Fall Further,” CBPP, February 24, 2016, http://www.cbpp.org/research/federal-budget/program-spending-historically-low-outside-social-security-and-medicare. A New Dataset,” by Andrea Schaechter et al., July 2012. 2), would not impose a harsh spending cap. [14] CBO, “The Economic and Budget Outlook: Fiscal Years 1994-1998,” January 26, 1993, p. 87. The Balanced Budget and Emergency Deficit Control Act of 1985 illustrates that fiscal rules can’t force budget changes. [8]  The resulting CBPP baseline produces deficit estimates very close to those of CBO’s baseline. But when consensus about budgetary goals erodes, rules will not necessarily stand in the way of policymakers who want to spend more or tax less than the rules allow.[13]. The BBA proposal thus would require massive cuts. That is, in addition to any temporary deficits caused by recession, a country may set an objective that allows it to run a deficit of 0.5 percent of GDP even when its economy operates at full capacity.[9]. Privacy | Terms of Use. If only Social Security and defense were exempt, the required cut to other programs would be 45 percent. In short, there is no ultimate relief to be gained either by accelerating or delaying the BBA’s effective date, since balancing the budget by 2023 happens to require cutting programs by much the same percent as would balancing either somewhat earlier or somewhat later.[11]. A more standard version of a balanced budget amendment, such as the one the House considered in 2011 (H.J. [5] “Man Up: AJ(obs)A vs. J(obs)TGA,” October 21, 2011, http://bit.ly/26soR1G. The deficit projections for 2026 are virtually identical. (This advantage is partly offset by the higher interest costs generated by our assumption that policymakers will enact tax cuts to eliminate the surpluses that the deep spending cuts required by the BBA proposal would produce under existing tax law. [16] IMF, “Fiscal Rules — Anchoring Expectations for Sustainable Public Finance,” December 16, 2009, p. 39, http://bit.ly/1XVFAEE. [2] This paper’s discussion of a U.S. balanced budget amendment focuses on H. J. Res. The House of Representatives failed to pass an amendment to the Constitution that would require a balanced budget, following a damning Congressional Budget … If Social Security were exempt, the average cut to all other programs would rise from 20 percent in 2023 to 28 percent. [8] For example, the IMF analysis describes the rules of Brazil, Costa Rica, Japan, and Malaysia as targeting operating balances. [21]  This occurred because the definitions of operating and capital spending were determined by accounting convention rather than by economic criteria. From there, our analysis assumes spending cuts will be phased in over the five-year period 2019-2023 sufficient to balance the budget in fiscal year 2023 at the level of the spending cap specified in the Senate BBA proposal. If the cuts start in 2019, deficits and debt will be lower in 2019-2022 than they would otherwise have been. Veterans’ benefit programs would be cut $408 billion through 2026, key safety-net programs would be cut $825 billion, and non-defense discretionary spending would be cut $2 trillion, falling to 1.3 percent of GDP by 2026. No other country has, or is seriously considering, a constitutional rule requiring a balanced budget in every year. For example: Sweden’s fiscal rules, described as a “framework” rather than strict rules, are statutory and political rather than constitutional. The budget has been in deficit since 2009. a Charles Duxbury, “Sweden Seeks to Drop Budget Surplus Target,” Wall Street Journal, March 3, 2015, http://www.wsj.com/articles/sweden-seeks-to-drop-budget-surplus-target-1425379037. [15] See CBO, “Economic and Budget Outlook,” pp. The Constitution requires the Governor to submit by January 10 of each year a state budget proposal for the upcoming fiscal year (beginning on July 1) which is balanced—meaning that estimated revenues must meet or exceed proposed expenditures. A proposed balanced budget amendment (BBA) to the Constitution is set to be considered by Congress this July—the first such vote since 1997. [10] Swedish Fiscal Policy Council, “The Swedish Fiscal Policy Framework,” March 2011, pp. While well-designed fiscal rules can help enforce deficit reduction agreements that policymakers have already reached, they cannot substitute for or force hard political choices about the specific spending and revenue measures to take to reduce deficits. Problems with capital budgeting. Supposing revenues are held at baseline (current-law) levels, such spending cuts would produce a significant, permanent surplus. In evaluating whether assuming a target year other than 2023 would seriously change the depth of the needed spending cuts, we therefore first assume that Congress would repeal the provisions of law that cause these occasional timing shifts; that is, we adjust current law to have 12 monthly payments in every fiscal year. [20] For an assessment of capital budgeting, see Report of the President’s Commission to Study Capital Budgeting, February 1999, http://1.usa.gov/1qRpYY3. A number of states’ balanced budget requirements also allow operating deficits during an economic downturn or to meet some emergency, as long as the state has accumulated sufficient “rainy day funds” by running operating surpluses in prior years. A budget proposal is usually needed before a project could be started so that you can finish it on time and in the most effective way. To meet the cap in 2023 and subsequent years (while assuming budget balance rather than large surpluses), Congress would have to cut spending on federal programs — that is, all spending except interest on the debt — by an average of 26 percent in 2023 (see Figure 1), which translates to $8.0 trillion in program cuts through 2026. • Total spending still increases by 18.2 percent over the ten-year window. This does not mean, however, that such rules are necessarily sound ways to stabilize the public debt at a sustainable level, because they still have significant drawbacks. All rights reserved. When building a small business budget, you need to … would add a budget rule to the Constitution that would require federal spending not to exceed federal receipts Fiscal year 2023 has 12 monthly payments, but 2022 has 13 such payments and 2024 has 11. Many conservatives have suggested passing a law or even a Constitutional amendment requiring the government to balance its budget. And even fiscal rules that are far more moderate than the proposed balanced budget amendment can have serious downsides. Other proposals: rules set aside during military conflict No fiscal restraint: how often has the U.S. not had troops in harm’s way abroad? There are both economic and budgetary advantages to phasing in the necessary cuts starting in 2019 rather than instituting them all at once in 2023: Calculations of cuts. Because the target applies to the structural deficit, it allows countercyclical deficits during recessions and surpluses during booms. Such rules cannot replace or force difficult political decisions about fiscal and economic priorities. First things first. It is already in a $15-trillion-knee-deep of debt, and it goes further deep each year. That means it’s not clear the final proposal might affect the state’s budget. In short, beyond the other serious problems that a balanced budget amendment would engender, the spending level mandated by the Senate Republican BBA proposal is starkly inadequate. 1. The Blueprint for Balance provides detailed recommendations for the annual congressional budget. In general, therefore, fiscal policy will vary depending on the parliamentary situation on which the government of the day is based. In this model, those surpluses would appear first in 2022, totaling $1.5 trillion over the five-year period 2022 to 2026, so our assumed tax cuts eliminate these surpluses in 2022 and subsequent years. [2] The proposal risks causing severe economic damage, because, as explained below, the inability to run deficits during downturns would make recessions … Here are its advantages and disadvantages. Furthermore, mechanical rules are inherently ill-suited to forcing agreement on deficit reduction: rigid rules can neither take into account the full range of priorities and values that policymakers must balance, nor foresee and accommodate all future economic and social conditions. The resulting increase in public and private spending can help shore up demand for goods, services, and workers. Similarly, fiscal rules in the Netherlands do not attempt to force agreement on deficit targets and how to achieve them. (R-Ky.) to balance the budget in roughly five years. [9] Policymakers might opt to have the tax cuts become effective before 2022, when surpluses would otherwise first appear, in order to package them with the very large program cuts necessitated by the spending limits and thus make the latter more politically palatable. Defense would be cut more than $1.0 trillion, falling from its current level (including war spending) of 3.2 percent of GDP to 1.8 percent of GDP by 2026. By contrast, many fiscal rules in other countries can be overridden by a simple majority vote (or whatever other process is normally required to pass ordinary laws) or have no clear enforcement mechanisms other than political attention and pressure. You can find more background on Dr. Paul’s proposal below, and you can read his budget HERE. Is the Balanced Budget Amendment a bad thing or a good thing? The proposed spending limit — which would apply to all federal spending, whether for military engagements, natural disasters, epidemics, interest payments, or ongoing programs — is so low that it would produce a budget surplus of about $315 billion in 2023 and growing surpluses in subsequent years, unless tax cuts were enacted alongside these severe budget cuts. Moreover, the level of spending under President Reagan occurred before any baby boomers had retired and when spending throughout the U.S. health care system (including the private sector) was just over half of today’s level as a percent of GDP. It would force policymakers to cut spending, raise taxes, or both just when the economy is weak or already in recession — the opposite of what good economic policy would advise. [19]  Even where those accounting standards exist, they may not be well matched to policy goals. When Congress next convened, in January 2018, it would be faced with designing a budget for fiscal year 2019, which begins on October 1, 2018. Balanced budget requirements (BBRs) prohibit states from spending more than they collect in revenue. Supplies. [19] OECD, “Public financial management and fiscal goals,” Working Paper No.1 on Macroeconomic and Structural Policy Analysis, 1998. Source: CBPP analysis of Congressional Budget Office data. mostly used when referencing governmental spending and programs [7]  Instead, they allow the country to run deficits during recessions and surpluses during booms by: For example, countries of the European Union (EU) agreed in 2012 to a “Fiscal Compact” requiring each of them to adopt a deficit target; in response, some countries have enacted legislation or constitutional changes. The analysis in this paper starts from the baseline projection that the Congressional Budget Office (CBO) issued on March 24, 2016 (https://www.cbo.gov/sites/default/files/51118-2016-03-BudgetProjections.xlsx), with certain small adjustments explained in previous analyses. No other country has or is considering a rule that would prohibit countercyclical fiscal policy, and for a very good reason: such a rule would worsen recessions, potentially causing catastrophic economic damage. Some fiscal rules require only that a government’s operating budget be balanced over the economic cycle. Over the next decade, the national debt is projected to nearly overtake the country’s economy. [3] For example, Douglas Holtz-Eakin, testimony before the Senate Judiciary Committee, March 16, 2016, http://1.usa.gov/1VV2mi0. That’s because the proposed amendment — introduced by Senate President Pro Tem Orrin Hatch (R-UT) and cosponsored by every Republican senator — would enshrine in the Constitution a severe cap on total federal spending set at 18 percent of gross domestic product in the prior completed calendar year.[2]. . Proposing a balanced budget amendment to the Constitution of the United States. 58, proposed Balanced-Budget-Amendment approved by the U.S. Senate on August 4, 1982 d Ibid., p. 29. The United States would be an outlier if it were to adopt the type of constitutional balanced budget amendment that has been proposed. A lower debt at the end of 2022 means that interest costs will be lower in 2023, which goes a small part of the way to balancing the budget and therefore reduces the needed program cuts in 2023 and subsequent years. Most fiscal rules are not constitutional. President Donald Trump unveiled a $4.8 trillion budget Monday that seeks to balance the budget in 15 years, falling short of the the traditional Republican target of doing so over 10 years. The Balanced Budget Amendment would constitutionally prohibit federal expenditures from exceeding total revenue for any fiscal year, resulting in a balanced budget at the end of each year. Medicaid, the Children’s Health Insurance Program (CHIP), and health reform’s exchange subsidies would be cut more than $1.0 trillion. Congressional Republicans are promoting a constitutional amendment requiring a balanced federal budget every year — regardless of the state of the economy — unless supermajorities of both houses override that requirement. Senate Proposal for Balanced Budget Amendment Would Require Extreme Budget Cuts, https://www.cbo.gov/sites/default/files/51118-2016-03-BudgetProjections.xlsx, http://www.cbpp.org/research/federal-budget/house-gop-budget-gets-62-percent-of-budget-cuts-from-low-and-moderate-income, http://www.cbpp.org/research/federal-budget/program-spending-historically-low-outside-social-security-and-medicare, Balanced Budget Amendment Proposal Is Extreme by International Standards, Constitutional Balanced Budget Amendment Poses Serious Risks, Greenstein: Balanced Budget Amendment Unsound Policy. As a result, revenues equal the levels of the spending limits in each year from 2022 onward, so that the budget is balanced at those levels. If they exempted Social Security, Medicare, and defense, all other programs would need to be cut by nearly two-thirds. But, as CBO explained, GRH “clearly did not lower the deficit to anywhere near close to the targeted level.”[14]  Instead of reaching agreement on “real, permanent” deficit reduction to avoid the across-the-board cuts, policymakers met the targets “by using overly optimistic economic assumptions and outright budget gimmickry such as shifting military pay dates between years and moving costly spending off-budget.” CBO concluded that “Any budget procedure that establishes fixed deficit targets represents an attempt to force future agreements and is subject to this problem,” and that a constitutional balanced budget amendment would be no exception. After 2023, the spending cuts grow as needed to keep total outlays at the specified cap levels. c Dutch Report for the 19th International Congress of Comparative Law in Vienna, July 2014, p. 28, http://bit.ly/1QzbmBI. [10] This date is consistent with our assumption that the states might complete ratification of the Senate proposed BBA by the end of 2017. Instead of constraining political processes, the fiscal framework aims to draw attention to the country’s long-term fiscal sustainability and make fiscal policy more transparent. Singapore’s rule targets balance over a multi-year period (the current term of the government), and Georgia’s rule allows for deficits up to 3 percent of gross domestic product (GDP). [15]  The law established statutory limits on discretionary spending at the levels specified in the budget agreement and required any future spending increases or tax cuts to be offset by other policy changes (the so-called pay-as-you-go rule). If the cuts required by the Senate Republican BBA proposal were made equally across all programs, Social Security would be cut $2.3 trillion over the ten-year period, and defense would be cut more than $1 trillion on top of the cuts that have already occurred and are scheduled to occur as a result of the 2011 Budget Control Act’s annual funding caps and sequestration. Countercyclical fiscal policy is an important tool for moderating recessions and dampening booms. Write down a list of all the expenses you expect to have during … This growth in spending cuts after 2023 is just above the growth rate of GDP; in this analysis, the required program cuts reach about $1.25 trillion, or 5.1 percent of GDP, in 2023, and rise to 5.5 percent of GDP by 2026. It also was before the September 11 terrorist attacks led to the creation of a new category of homeland security spending, and before the wars in Iraq and Afghanistan led to increases in veterans’ health-care costs that will endure for decades. The proposal sees the deficit falling below $1 trillion at the end of fiscal year 2021. The highly regarded private forecasting firm Macroeconomic Advisers has warned that if a balanced budget amendment had been in place during the last recession, “the effect on the economy would be catastrophic.”  It warned that a balanced budget amendment would likely impede economic growth by eviscerating the “automatic stabilizers” (automatic spending increases for social programs and declines in tax revenues during an economic slowdown) that moderate recessions and booms, so that “recessions would be deeper and longer.”[5]  The amendment would also likely harm Social Security and other vital federal functions.[6]. A 2015 International Monetary Fund (IMF) survey of 89 countries worldwide, including all members of the Organisation for Economic Co-operation and Development (OECD) and the Eurozone, found:[4]. That is, governments can run structural deficits in order to finance net new capital investment, though not to fund current operating spending. Proponents argue that other countries have benefited from adopting “fiscal rules” that guide and limit their fiscal policies. Krista Ruffini, Hannah Shaw, and Shea Conaway co-authored or assisted with previous versions of this paper. Veterans’ disability payments, pensions, and other entitlement benefits would be cut $215 billion. Spending for non-defense discretionary programs would plummet to a level likely not seen since the early 1930s. The Budget Enforcement Act of 1990 was more credible and successful because it aimed at preventing erosion in the deficit reduction that Congress and the President had already agreed to earlier that year, rather than trying to force such an agreement. • S.J.Res. But it would require that federal outlays not exceed federal receipts in any fiscal year, and even that proposal would require massive budget cuts, assuming taxes are not raised to help balance the budget. Finally, it should be noted that the ultimate magnitude of the budget cuts needed is not affected much by the precise year in which the budget must first be balanced. A balanced budget amendment that prevents the use of deficits to ameliorate recessions could cause severe economic damage. In calculating the spending cuts need to hit the outlay cap, we assume they start in 2019. The balanced budget amendment is a proposal introduced in Congress almost every two years, without success, that would limit the federal government's spending to no more than it generates in revenue from taxes in any fiscal year. If phased in over time, the cuts are less likely to drag the economy into an immediate recession. But if they exempted certain programs from cuts, they would have to cut others even more deeply. Over the next ten years, CBPP projects total deficits that are 2 percent below CBO’s. Anomalies of this sort could lead to strange peaks or valleys in the amounts of spending cuts needed to adhere to the Senate’s proposed spending limits. Policymakers could, of course, limit the cuts in some programs, but then they would have to cut other programs even more sharply. . Privacy | Terms of Use. If Congress cut all programs across the board: Exempting any program from cuts would require even larger cuts in the others: Note: Program cuts do not include associated interest savings. Create a List of Monthly Expenses. [7] If only defense were exempt, other programs would need to be cut by 30 percent in 2023. Social Security would be cut more than $1.7 trillion through 2026. [2] Senator Orrin Hatch introduced Senate Joint Resolution 6 on February 4, 2015. Arguments Against a Balanced Budget Law . If such a standard BBA took effect in fiscal year 2023, then in order to balance the budget that year and subsequent years, policymakers would have to cut program spending by 20 percent in 2023, which translates to $6 trillion in program cuts through 2026. Careful design may avoid some problems with fiscal rules, but other problems, such as forecasting error, are harder to overcome. U.S. proponents of a balanced budget amendment have pointed to other developed countries’ fiscal rules as demonstrating why the US should adopt such a proposal, but other countries’ fiscal rules allow for countercyclical fiscal policy to lessen the impact of recessions. The spending limit is so low, in fact, that: We examined the impact if a 16.8-percent-of-GDP spending cap took effect in fiscal year 2023, as would occur if Congress approved the constitutional amendment now and the requisite number of states ratified it by the end of next year. There is no alternative to political representatives when it comes to gathering up and channelling values. If Social Security, Medicare, and defense were exempt, the cuts to all other programs would average 50 percent in 2023. Amazon had its debt grow by over 450% over a 10-year period, but its overall growth rose faster than its total debt, which was reflected in its earnings-to-interest ratio. To be legitimate, fiscal policy shall represent values. [4] The Senate’s BBA specifies that its requirements would take effect in the fifth fiscal year after its ratification. Under the proposal, the first year in which the budget would have to be balanced might be fiscal year 2023. ©2015 Center on Budget and Policy Priorities. See Richard Kogan and Cecile Murray, “Senate Proposal for Balanced Budget Amendment Would Require Extreme Budget Cuts,” Center on Budget and Policy Priorities, May 3, 2016, http://www.cbpp.org/research/senate-proposal-for-balanced-budget-amendment-would-require-extreme-budget-cuts. For example, until 2008, the United Kingdom had a fiscal rule that allowed borrowing for capital investment but did not fully permit “borrowing to finance current spending projects of value to future generations,” according to the Institute for Fiscal Studies. Non-defense discretionary (i.e., non-entitlement) programs would be cut about $1.1 trillion. 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