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The Congress is considering over a hundred proposals that would limit the growth of federal spending or revenues, prohibit federal budget deficits, or both. Some of the proposals are in the form of amendments to the U.S. Constitution while others are in the form of legislation. One of these, S.J. Res. 58, has already passed the U.S. Senate. All of the proposals presume that the current budgetary procedures are incapable of overcoming a perceived bias in favor of ever greater levels of federal expenditures and persistent deficits.
This study, prepared at the request of the Senate Committee on the Budget and the House Committee on the Judiciary, analyzes the present system and the alternatives before the Congress. The study examines the degree to which the current procedures have produced ever higher levels of expenditures and persistent deficits, describes the rationales of the present system and the proposed alternatives, analyzes the effects of the alternatives on the economy and the size of the federal sector, and sets out some of the major difficulties that might be encountered in implementing the alternatives. In keeping with the mandate of the Congressional Budget Office (CBO) to provide objective analysis, the report contains no recommendations.
The paper was written primarily by John W. Ellwood. Alfred B. Fitt wrote Chapter I; Robert W. Hartman wrote the section on "The Short-Run Effects" in Chapter V; and Marvin M. Phaup, Jr., wrote the section on "The Long-Run Effects" in Chapter V. The authors wish to thank James Annable, William Beeman, James Blum, James Capra, Martin Levine, John Shillingburg, Paul Van de Water, and James Verdier of CBO for their comments. In addition, many persons outside CBO provided valuable advice and criticisms, including Mickey Levy, William A. Niskanen, Donald G. Oglivie, Allen Schick, and Aaron Wildavsky.
Patricia H. Johnston edited the manuscript. Nancy H. Brooks typed the
paper and prepared it for publication; Norma Leake typed several early
drafts.
Alice M. Rivlin
Director
September 1982
S.J. RES. 58
CHAPTER I. INTRODUCTION AND OVERVIEW
CHAPTER II. THE HISTORICAL RECORD
CHAPTER III. OPTIONS FOR ACHIEVING ANNUALLY BALANCED BUDGETS AND LIMITATIONS ON EXPENDITURE AND REVENUE GROWTH, SHORT OF STATUTORY OR CONSTITUTIONAL REQUIREMENTS
CHAPTER IV. LEGISLATIVE AND CONSTITUTIONAL OPTIONS THAT WOULD REQUIRE BALANCED BUDGETS OR LIMIT EXPENDITURE GROWTH
CHAPTER V. THE EFFECTS OF ANNUALLY BALANCED BUDGETS ON THE ECONOMY AND THE SIZE OF THE FEDERAL SECTOR
CHAPTER VI. THE EFFECTS OF EXPENDITURE LIMITATIONS ON THE ECONOMY AND THE SIZE OF THE FEDERAL SECTOR
CHAPTER VII. DIFFICULTIES OF ENFORCING A PROHIBITION
APPENDIX A. LESSONS FROM STATE EXPERIENCE
| TABLES | |
| 1. | CENTRAL GOVERNMENT NET LENDING ON A SYSTEM OF NATIONAL ACCOUNTS BASIS AS A PERCENT OF GDP/GNP |
| 2. | FEDERAL OUTLAYS AS A PERCENTAGE OF GROSS NATIONAL PRODUCT, FISCAL YEARS 1956-1981 |
| 3. | PERCENTAGES FAVORING OR OPPOSING A BALANCED BUDGET AMENDMENT AND VARIOUS POTENTIAL SPENDING REDUCTIONS IN JANUARY 1979 |
| 4. | NEW COMMITMENTS FOR FEDERAL CREDIT ACTIVITIES |
| 5. | PROJECTED FEDERAL DEFICITS |
| 6. | COMPOSITION OF FEDERAL OUTLAYS |
| 7. | FEDERAL BUDGET DEFICITS AND UNEMPLOYMENT AND INFLATION RATES (ACTUAL AND SIMULATED), FISCAL YEARS 1966-1969 |
| 8. | FEDERAL BUDGET DEFICITS AND UNEMPLOYMENT AND INFLATION RATES (ACTUAL AND SIMULATED), FISCAL YEARS 1970-1972 |
| 9. | UNEMPLOYMENT AND INFLATION RATES (ACTUAL AND SIMULATED), CALENDAR YEARS 1974-1977 |
| 10. | CBO'S OPTIMISTIC AND PESSIMISTIC ASSUMPTIONS |
| 11. | REDUCTION IN UNIFIED BUDGET RESULTING FROM HYPOTHETICAL FISCAL YEAR 1978 FEDERAL CAPITAL BUDGET FOLLOWING THE BUDGETARY PROCEDURES OF FOUR STATES |
| A-1. | SUMMARY OF LIMITATIONS ON STATE DEFICITS |
| A-2. | CONVERTING SAMPLE STATE BUDGETS TO THE FEDERAL FORMAT: SUMMARY OF ADJUSTMENTS |
| A-3. | LONG-TERM INDEBTEDNESS OF STATE GOVERNMENTS, JUNE 30, 1977 |
| A-4. | STATE AGENCIES AUTHORIZED TO ISSUE NONGUARANTEED OBLIGATIONS |
| A-5. | PERCENTAGE DISTRIBUTION, GROSS PUBLIC DEBT |
| FIGURES | |
| 1. | FIVE-YEAR MOVING AVERAGE OF THE UNIFIED BUDGET SURPLUS OR DEFICIT AS A PERCENT OF GNP |
| 2. | SELECTED GENERAL GOVERNMENT NET BORROWING AS A PERCENT OF GNP/GDP ON A SYSTEM OF NATIONAL ACCOUNTS BASIS, 1970-1982 |
| 3. | COMPARISON OF GENERAL GOVERNMENT DEFICITS AND REAL GDP GROWTH, 1970-1980 |
| 4. | COMPARISON OF GENERAL GOVERNMENT DEFICITS AND CONSUMER PRICE INFLATION, 1970-1980 |
| 5. | EVOLUTION OF GENERAL GOVERNMENT EXPENDITURE, 1960-1980 |
| 6. | COMPARISON OF THE SIZE OF THE GENERAL GOVERNMENT SECTOR AND REAL GDP GROWTH, 1970-1980 |
| 7. | COMPARISON OF THE SIZE OF THE GENERAL GOVERNMENT SECTOR AND CONSUMER PRICE INFLATION, 1970-1980 |
| 8. | UNIFIED BUDGET OUTLAYS AS A PERCENT OF GNP, BY TYPE OF OUTLAY |
| 9. | FIVE-YEAR MOVING AVERAGE OF ACTUAL OUTLAYS, ACTUAL REVENUES, AND S.J. RES. 58/H.J. RES. 350 REVENUE AND OUTLAY LIMITS AS A PERCENT OF FISCAL YEAR GNP, ASSUMING IMPLEMENTATION OF S.J. RES. 58/H.J. RES. 350 IN FISCAL YEAR 1981 |
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AMENDMENT TO THE CONSTITUTION As proposed by the U.S. Senate on August 4, 1982 SECTION 1. Prior to each fiscal year, the Congress shall adopt a statement of receipts and outlays for that year in which total outlays are no greater than total receipts. The Congress may amend such statement provided revised outlays are no greater than revised receipts. Whenever three-fifths of the whole number of both Houses shall deem it necessary, Congress in such statement may provide for a specific excess of outlays over receipts by a vote directed solely to that subject. The Congress and the President shall, pursuant to legislation or through exercise of their powers under the first and second articles, ensure that actual outlays do not exceed the outlays set forth in such statement. SECTION 2. Total receipts for any fiscal year set forth in the statement adopted pursuant to this article shall not increase by a rate greater than the rate of increase in national income in the year or years ending not less than six months nor more than twelve months before such fiscal year, unless a majority of the whole number of both Houses of Congress shall have passed a bill directed solely to approving specific additional receipts and such bill has become law. SECTION 3. The Congress may waive the provisions of this article for any fiscal year in which a declaration of war is in effect. SECTION 4. Total receipts shall include all receipts of the United States except those derived from borrowing and total outlays shall include all outlays of the United States except those for repayment of debt principal. SECTION 5. The Congress shall enforce and implement this article by appropriate legislation. SECTION 6. On and after the date this article takes effect, the amount of Federal public debt limit as of such date shall become permanent and there shall be no increase in such amount unless three-fifths of the whole number of both Houses of Congress shall have passed a bill approving such increase and such bill has become law. SECTION 7. This article shall take effect for the second fiscal year beginning after its ratification. |
Persistent federal deficits, coupled with steady growth in the share of the economy devoted to federal spending, have caused concern in many quarters. This concern led 31 state legislatures to petition the Congress to take some kind of action that would result in a Constitutional amendment favoring balanced budgets. More than 100 measures have been introduced in the 97th Congress proposing either statutory or Constitutional changes aimed at making deficits less likely and spending and taxing restraint more likely. President Reagan has endorsed and the Senate of the United States has now passed a resolution proposing a specific Constitutional amendment on the subject.
This report begins with an overview of the Senate proposed amendment
and the mid-1980s budget context in which it might take effect. Chapter
I concludes with a description of the organization of the balance of the
report.
OVERVIEW
When introduced in 1981, Senate Joint Resolution 58 and House Joint Resolution 350 were identical proposals for amending the Constitution to prescribe certain Congressional budget-making rules. The Senate, on August 4, 1982, by a 69-31 margin approved an altered version of S.J. Res. 58, while the House Committee on the Judiciary still is considering H.J. Res. 350. This overview will describe only S.J. Res. 58, because it remains to be seen whether or in what form the House will take up the question.
Provisions of S.J. Res. 58
The proposed amendment is designed to accomplish two purposes: to encourage the adoption of balanced instead of deficit budgets, and to limit the size of the federal government as a proportion of the total economy.
Balancing the Budget. S.J. Res. 58 directs the Congress, before the start of each fiscal year, to "adopt a statement of receipts and outlays for that year in which total outlays are no greater than total receipts."
If the amendment is ratified, the Constitution thereafter would consider balanced budgets to be the normal rule. Departures from that rule would be permitted, however, since the "statement of receipts and outlays"--that is, the budget of the United States government--may project outlays greater than receipts if three-fifths of the whole membership in both bodies approve.
Limiting the Size of Government. The proposal prohibits projecting receipts to rise at "a rate greater than the rate of increase in the national income," unless an absolute majority in both bodies has passed a bill "approving specific additional receipts and such bill has become law."
Because the normal rule set forth by S.J. Res. 58 is that outlays will not exceed receipts, and because receipts may not grow more rapidly than national income, the effect is to place an upper bound on federal spending as a proportion of national income. However much or little the national income grew in the base period (which the amendment leaves for later Congressional definition) will determine however much or little federal spending can be projected to grow in the budget year, irrespective of the assumed performance of the economy in that budget year.
The short-run effect of this formulation is to discourage balancing the budget by raising taxes instead of cutting spending. The long-run effect is to prevent growth of the federal government in relation to the private sector, unless Congressional majorities specifically vote otherwise.
This portion of the amendment is apparently mainly aimed at the "unlegislated" tax increases resulting from the effect of inflation on a progressive income tax system: taxpayers whose real incomes are not increasing are nevertheless pushed into higher income tax brackets and therefore pay a larger share of their incomes to the federal Treasury ("bracket creep"). If the Congress must vote the increase instead of simply letting it happen, an increase is less likely. (Another approach, but one with the same effect and already adopted by the Congress for 1985 and future years, is to index income tax brackets and exemptions to inflation in ways that will minimize bracket creep.)
Enforcement. The proposed amendment is not self-enforcing. No penalty is prescribed if the Congress is unable or chooses not to adopt a budget. In those circumstances, the "budget" would be the sum of appropriation and revenue bills that became law for that year, whether a surplus, a balance, or a deficit.
Section 5 of the proposal commands the Congress to "enforce and implement this article by appropriate legislation," however. The command is very clear, but in the end the response must be shaped by the Congress; it would not be found in the Constitution.
Assuming that the Congress does adopt "a statement of receipts and outlays," then the proposed amendment directs both the Congress and the President to "ensure that actual outlays do not exceed the outlays set forth in such statement." The precise means for ensuring such an outcome are left: for later legislative prescription or, in the case of the President, through the exercise of whatever Constitutional powers he already possesses.
Actual revenues, on the other hand, need not agree with the receipts projected in the budget; they may be either more or less. Thus, while the amendment does not tolerate an excess of actual outlays over planned outlays (even if the budget still remains in balance), it accepts a level of actual revenues short of planned receipts (even if this results in a deficit).
The reason for more lenient treatment of revenue shortfalls than outlay overruns was that the drafters of the amendment wished to allow for a short, unexpected recession, and its consequent revenue loss, without necessitating immediate compensating tax increases or spending cuts that might worsen the recession. However, a section added on the Senate floor erects the barrier of a supermajority vote against unplanned as well as planned deficits.
The Armstrong-Boren Amendment. During debate on S.J. Res. 58, Senators Armstrong and Boren successfully cosponsored what is now Section 6 of the proposed amendment. The section prohibits any increase in the statutory public debt ceiling on the date the amendment takes effect, unless three-fifths of the whole membership of both bodies thereafter approves a bill for that purpose and the bill becomes law.
The effect of Section 6 is to impose a real sanction against evading the strictures of the proposed amendment by simply failing to adopt any budget at all. But Section 6 would also bar unplanned deficits resulting from revenue shortfalls, unless there was leeway within the statutory debt ceiling. (This is true under present law as well, but simple majorities in the Congress, with the concurrence of the President, can raise the debt ceiling as necessary, whereas under Section 6, just 41 percent in either body could prevent a solution.)
Waiver and the President. ll the provisions of the proposed amendment may, but need not, be waived by simple majorities in the Congress for any fiscal year in which a declaration of war is in effect.
The President has no formal role either in the declaration of a war or in the waiver permitted by the amendment. Similarly, he has no formal role in the process by which Congress would adopt or amend "a statement of receipts and outlays" under S.J. Res. 58, whether in balance or in deficit. But he would have a role if the Congress wished to project receipts greater than permitted by the amendment's formula, for that would require a bill to be presented for his approval.
Effective Date. The amendment provides that it "shall take effect for the second fiscal year beginning after its ratification." For example, if the necessary number of states were to ratify the amendment before October 1, 1983, it would apply to fiscal year 1985, and the first "statement of receipts and outlays" would have to be in place by September 30, 1984, that is, sometime during the first fiscal year beginning after ratification.
The Purposes of S.J. Res. 58; Are They Desirable?
The First Goal; Balancing the Budget. The federal budget has been in deficit for 13 straight years and 21 of the last 22 years. The Congress has already approved deficits for the next three years. CBO now projects those deficits to exceed $150 billion in each year, and to be about $170 billion when off-budget spending is counted. The CBO projection assumes that all of the savings contemplated by the budget resolution for fiscal year 1983 will be achieved; if they are not, the outlook is even bleaker.
By five-year periods beginning in fiscal year 1962 and ending with fiscal year 1981, the annual deficit has averaged 0.8, 1.2, 2.1, and 2.0 percent of gross national product (GNP), and in no year did it exceed 4.0 percent of GNP. CBO projects that it will average 4.1 percent of GNP during fiscal years 1982-1985, however, with a peak of 4.7 percent in 1983.
Such persistent and large deficits portend continued difficulties in lowering interest rates and encouraging economic growth. Additionally, when the economy is operating close to capacity, a deficit contributes to inflationary pressures. More over, service of a growing national debt is preempting an ever larger share of the budget. Net interest on the federal debt has risen from 6.4 percent of budget outlays in fiscal year 1962 to nearly 10.5 percent in 1981, and may reach 13 percent by fiscal year 1985.
While concern over the implications of chronic deficits for long-run growth and for inflation is warranted, a federal deficit can be an important instrument for countering a recession. A deficit can help moderate income losses during a recession, thereby lowering the risk of a deeper decline in the economy. Moreover, in a prolonged or severe downturn, planned deficits--from a tax cut or temporary expenditure rise--can help to reverse the economic slide. A budget forced to be in surplus or balance during a downswing in the business cycle would harm rather than help the faltering economy.
All in all, the first goal of S.J. Res. 58--balancing the budget--is meant to give much heavier weight to the objectives of economic and productivity growth, and to moderation of inflation. But in so doing, it reduces the ability of the government to counter downturns in the economy and thus creates risks that an unrestrained budget process could avoid. Even if one grants that greater concern with growth and inflation is appropriate, whether a Constitutional amendment is the right means to express this concern is another matter, discussed later in this chapter.
The Second Goal: Limiting the Size of Government. Measured by federal spending, the government has grown from about 18 percent of GNP in the late 1950s to 20 percent in the early 1970s, and to an estimated 24.1 percent in 1982. (The 1982 figure should not be overemphasized; it is more the consequence of an economy in recession than of a government on the rise.) The budget plan adopted by Congress for fiscal years 1983-1985 will gradually cut back outlays as a percent of GNP to an estimated 22.7 percent in 1985.
Whether the described trends are desirable or undesirable, too slow or too fast, enough or not enough, cannot be demonstrated by analysis; rather the answer is a matter for intuition and political judgment. Few people have an explicit view as to what percentage of the gross national product should be administered by the federal government. The American people do, however, want a strong defense, clean air, safe skies, security in old age, an efficient FBI, protection against floods, and so forth. They do not want a crumbling interstate highway system, rundown national parks, rotten food in cans, failures in private pension plans, and so forth. The point at which the Congress and the President balance the people's infinitely numerous wants and aversions against their normal and natural reluctance to pay higher taxes will determine the size of the federal government.
If S.J. Res. 58 becomes part of the Constitution, it will represent a judgment that the size of the government at he time of ratification, measured by revenues as a proportion of national income, is about right.
New Budget Controls; Where Should They Appear?
If it is taken as a given that the Congressional budgeting process should be changed in ways that favor balanced over unbalanced budgets, there remains the question of whether to accomplish the change by rule, by statute, or by Constitutional amendment.
Proponents of change, short of a Constitutional amendment, argue that Congress has, and should use, the power to alter its own procedures in ways that strengthen the general interest in legislative combat with the special interests that press so hard for spending growth.
Those who hold this view maintain that Congress has in recent years shown greater recognition of the problem, and a willingness to deal with it, first with the enactment of the Congressional Budget Act of 1974, and since then with a variety of devices consistent with (though not originally contemplated by) that act, all of which tend to hold down spending or force committees to stay within the budget plan adopted by the full Congress.
There are, of course, many procedural changes that would favor balanced over unbalanced budgets. For example, either body could adopt a rule requiring a three-fifths majority to approve a budget deficit. But this change, as well as any other accomplished by amending legislative rules, has a major flaw in the view of supporters of a Constitutional amendment: the Congress can always decide to waive its own rules, and the next Congress can always reject the procedures of its predecessor. The same argument applies against reform by statute instead of by rule. Skeptics can and do point to the Byrd Amendment of 1978 (reaffirmed in 1980 and yet again in 1982), which provided that "Beginning with Fiscal Year 1981, the total budget outlays of the Federal Government shall not exceed its receipts," as an example of the futility of any Congressional commitment to a balanced budget.
Advocates of trying additional Congressional reform before turning to a Constitutional amendment argue, in turn, that the Byrd Amendment teaches only that declarations are not enough to change institutional behavior; it does not teach that actual procedural changes will be futile.
They also urge that flexibility in changing or waiving procedural rules from time to time is a virtue, not a vice, given the frequency of unanticipated events in the world, and that the Constitution, so difficult to amend, is particularly the wrong place to prescribe what shall be the normal fiscal policy of the United States.
Supporters of the Constitutional amendment route argue that Congress has consistently and convincingly demonstrated an institutional inability to defend the general interest against the hosts of special interests. The result--and they point to history as proof--is that spending proposals gain broad support, but that proposals to pay for the spending have no clear constituency and hence weak support at best. According to this argument, the case is already made: the Congress cannot and will not discipline itself, and budget deficits will forever be the norm unless a higher power--the Constitution--is brought to bear on the problem.
Ultimately, the issue comes back to the will of Congress. If a majority favors the kinds of change contemplated by S.J. Res. 58, then that change will occur, and can be accomplished without a Constitutional amendment. If S.J. Res. 58 should become a part of the Constitution, but not command majority support in some future Congress, it must be expected that the actual majority will search for and may well find a way to work its will.
Transition Problems
With projected on-budget deficits of over $150 billion in each of the next three fiscal years, balancing the budget in that period does not seem like a realistic objective. Indeed, a reduction in the deficit of sufficient size to balance the budget as early as 1985 would mean a reduction in fiscal stimulus that would not be consistent with continued economic recovery, unless an improbably easier monetary policy were adopted. It is desirable, however, to work in the direction of budgetary balance along the lines contemplated by the budget resolution for 1983. But the task, however desirable, will present formidable difficulties to the Congress.
To illustrate, CBO projects that outlays for 1985 under the current Congressional budget plan will be $910 billion. National defense, pensions, Medicare, other entitlements and net interest will consume $807 billion. All the rest of government--education, highways, law enforcement, welfare, grants to states, disease control and so on--consumes the remainder. If there is to be any significant reduction in the $152 billion deficit projected for that year, some combination of tax increases and cuts in all parts of the budget will be necessary.
If S.J. Res. 58 should be part of the Constitution by 1985, it follows
that at least for several more years the Congress may well have to muster
three-fifths votes for an unbalanced budget.
PLAN OF THIS PAPER
The next chapter begins with a review of the two perceived problems of deficits and high levels of federal spending. It then examines the degree to which the federal budget has been unbalanced in recent years; how fast federal expenditures have grown; what types of spending have driven that growth; whether the public's desires have been reflected in recent federal budgetary policy; and why the movement to change the Congressional budget process so fundamentally has gained such momentum at this time.
Chapters III and IV set out the various procedural changes that have been proposed to end federal budget deficits and limit the growth of expenditures. The options are not limited to rules and prohibitions; the discussion includes ways to improve the present process incrementally by providing more and better budgetary information to increase the government's accountability.
Chapters V and VI examine effects on the economy and the level of federal spending if either a prohibition on budget deficits or a limit on expenditures was successfully achieved. There is great disagreement over whether and under what conditions this is possible. Chapter VII, therefore, analyzes the workability of the various budget reform proposals.
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