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The Deficit Reduction Act of 1984 (Section 2906) directs the Congressional Budget Office (CBO) to conduct a study of the administrative feasibility and potential impact of applying alternative formula approaches to the entire federal budget. This report was prepared to fulfill this study requirement.
 

Rudolph G. Penner
Director
January 1985
 
 

FORMULA APPROACHES TO BUDGETING

The prospect of large and growing budget deficits for the remainder of the 1980s, and the feeling that the effects of measures to reduce these deficits should be spread widely across various budget categories have led to proposals for formula-type approaches for dealing with the problem. Some of these proposals are very general in nature and, by themselves, do not reveal what specific policy measures would have to be taken to implement them. Examples include a constitutional requirement for a balanced budget, an expenditure cap that would prohibit spending from exceeding a specified level or a certain percentage of the gross national product (GNP), and a limit on the annual growth in budget outlays. Other proposals are more specific in nature and generally can be translated easily into specific actions. Such proposals include budget "freezes" that would hold appropriations to last year's levels, across-the-board percentage reductions to amounts provided in annual appropriation bills, and proposals calling for specified growth rates in discretionary appropriations.

Formulas may be appealing because of their simplicity and apparent evenhandedness. For example, a one or two-year freeze in appropriations is a relatively simple concept to explain and carry out, and gives the appearance of treating fairly all claimants for budgetary resources. Applying formulas to entitlement benefits and other mandatory spending is usually more difficult, but formulas can be applied to certain features of entitlement programs such as annual cost-of-living adjustments.

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