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TESTIMONY
 
Statement of
Alice M. Rivlin
Director
Congressional Budget Office
 
Before the
Subcommittee on the Constitution
Committee on the Judiciary
United States Senate
 
October 11, 1979
 

Mr. Chairman, I welcome this opportunity to comment on proposals for amending the Constitution to require balance in the federal budget or to restrict the size of federal spending. I do not question the legitimacy of these objectives--the federal budget has been in deficit far too frequently in recent years and strong arguments can be made for lower levels of federal expenditures. But, I believe it would be a mistake to attempt to reach these objectives by writing a formula into the Constitution.

Cause for Concern

The relative size of the federal sector has grown substantially over the last thirty years as a result of increased benefit payments to individuals (especially Social Security, food stamps, medical payments, public assistance, student aid, and housing subsidies) along with rising federal grants to finance a wide variety of state and local government services. Federal outlays rose from an average of 18.2 percent of Gross National Product (GNP) during the 1950s, to 19.5 percent during the 1960s, to 21.2 percent during the 1970s.

Many believe this growth in federal spending is wasteful or even harmful and should be reduced to leave more room for private spending. Moreover, concern with the growth of federal spending serves as a proxy for more general concern with the growth of government power and the pervasiveness of government regulations.

Rising federal spending has been financed partly by increased federal revenues and partly by persistent federal deficits. In fiscal year 1980, the federal budget will be in deficit for the eleventh straight year, the nineteenth time in the last twenty years, the forty-second time in fifty years. The size of deficits has also increased during the postwar period. As a percent of the GNP, the average federal deficit during the 1970s was about double the average during the previous decade.

To many people, persistent deficits symbolize a lack of discipline that enables the Congress to enact spending programs without simultaneously increasing taxes. Moreover, many people believe that federal deficits cause inflation, either by "crowding out" the private sector investment that would increase the supply of goods and services and the level of productivity or, more directly, by forcing the Federal Reserve to increase the money supply in order to buy up the new federal debt. Recent escalation in inflation--even though it is largely associated with world oil prices and other events outside the control of the federal government--has focused attention on the inflation-creating potential of federal deficits.

The case for a constitutional amendment rests on the contention that our present political system is biased in favor of increased spending and deficits. The benefits of a particular federal program tend to be concentrated on a small group each member of which stands to gain substantially from the program, while the costs are spread over a large number of taxpayers (or victims of inflation) each of whom will lose only a little. Hence, elected officials are in a difficult position: if they vote against a program increase or champion a cut, they will encounter the vocal and well-organized opposition of the program's beneficiaries without earning more than a weak nod of approval from those who see their share of total taxes reduced by a small amount. Thus, it is argued, the political pressures on the Congress do not reflect the real desires of the electorate, and a constitutional amendment is necessary to redress the balance In favor of reduced spending and budget discipline.

The New Budget Process

This allegation of spending bias had much validity as long as spending and tax bills were voted on one at a time and the Congress had no opportunity to debate or vote on the overall size of the budget or the magnitude of the deficit. But since the implementation of the Congressional Budget Act of 1974, the Congress has required itself to consider and adopt overall spending totals and to vote explicitly on the planned deficit or surplus. Under the new procedures, those who would add to spending must visibly add to the total of expenditures and the deficit or must propose compensating cuts.

It is really too early to tell what effect this new process will have on spending and deficits. The process was implemented during the most severe recession since the 1930s. Much of the expenditure growth and deficits off the past four years can be attributed to the effect of the recession on the budget and the planned fiscal policy that the Congress adopted to speed the recovery.

The key test of the new process, therefore, is before us. There are signs that the process will provide the tools for achieving a balanced budget and controlling expenditure growth. This year the Senate adopted a plan that would lead to a balanced budget in fiscal year 1981. So far, that plan has been observed. Just last month, for the first time, the Senate voted to invoke the budget process's reconciliation procedure by requiring six committees to cut outlays by $3.6 billion.

As long as the budget process operates one year at a time, however, it will be difficult to achieve significant cutbacks without causing major hardships, leaving projects unfinished, and creating disappointed expectations. If the Congress is to cut spending in an orderly way, it must plan at least three years ahead and must seriously consider phasing out and restructuring programs and reducing the rate of growth of entitlements. The Long Amendment to the Debt Limit bill earlier this year was a first step In multiyear planning, but the Congress has yet to adopt an organized and coordinated plan for making cuts over several years.

Although a multiyear approach would allow the Congress to plan cuts, a constitutional formula requiring annual balance or restricting overall growth would force last minute, unplanned cuts as changing economic conditions caused federal outlays to rise and revenues to fall. It seems sensible, therefore, that before moving to a constitutional amendment the Congress should give its new process a chance.

Impact of a Balanced Budget Rule on the Economy

When the economy is close to full employment and the utilization of plant capacity is high, a federal budget deficit can add to short-run inflationary pressure by increasing aggregate demand for goods and services, and can exacerbate long-run inflationary tendencies by crowding out private investment needed to expand productive capacity. In the late 1960s, for example, unemployment was low and factory operating rates were high. Nevertheless, because of increased spending for the Vietnam War and an unwillingness either to curb other government spending or to raise taxes significantly, the federal deficit rose sharply. Not surprisingly, the inflation rate tripled between 1965 and 1969. Requiring budget balance in this period would have helped to avoid overheating the economy and accelerating inflation.

When the economy is sliding into a severe recession, however, attempting to balance the federal budget will almost certainly make the recession significantly worse. Deficits occur automatically in recession since declining incomes produce lower federal revenues and spending for unemployment compensation rises. At such a moment, raising taxes or cutting spending in order to balance the budget would reduce aggregate demand further and throw additional people out of work.

In fiscal year 1975, for example, the federal budget deficit rose sharply as the economy turned downward in response to escalating oil prices and other shocks. The federal deficit offset part of the decline in aggregate demand and helped to reduce the depth of the recession. Simulations on the econometric model of Data Resources Incorporated indicate that balancing the federal budget in both 1975 and 1976 would have raised the jobless rate by more than 3.5 percent--that is well over 3 million people--to 11 percent of the labor force, and would have delayed the recovery a full year. The additional economic slack, however, would have reduced the inflation rate by perhaps two percentage points in 1976 and 1977.

To require that the federal budget always be balanced is to give up a powerful tool for influencing the economy, especially at the beginning of a severe recession, and to shift the responsibility for stabilizing the economy entirely onto monetary policy. Rather than cast aside such a potent tool for fear that it may sometimes be misused, the Congress should explore ways to preserve discretion over fiscal policy while making it less vulnerable to misuse. The debate and explicit votes on budget deficits that are part of the new budget process should reduce the frequency of ill-timed budget imbalance.

Perverse Incentives of Constitutional Limitations

Constitutional limitations on federal spending or budget deficits would probably not reduce pressures for new federal activities, but might well change their form. The Congress could avoid the budget limits altogether by using the regulatory power of the federal government to force the private sector or states and localities to bear the cost of new programs. Employers, for example, could be asked to bear the major cost off national health insurance. New off-budget agencies or government-sponsored corporations could be created. Increasing use could be made of federal loan guarantees or other devices to allocate private credit to activities deemed especially desirable by the federal government. A constitutional limit on expenditures would also be likely to encourage the use of tax expenditures to provide subsidies to particular activities. Indeed, even without such a limit, subsidies granted through the tax code have been increasing at a faster rate than outlays in recent years--to an estimated $169 billion in fiscal year 1980.

One effect of the new budget process has been to draw Congressional attention to the current magnitude of tax expenditures , off-budget agencies, and credit activities of the federal government and to increase efforts to bring these activities within the purview of the budget process. CBO believes that Congressional control of the full range of federal activities would be enhanced by bringing off-budget spending agencies back on budget, by compiling a credit budget showing various loan and loan-guarantee activities of the government, and by reviewing tax expenditures on the same basis as direct expenditures. Public decisionmaking is improved and accountability is enhanced when the activities of government are as visible as possible and trade-offs among them can be explicitly considered.

From this point of view, a constitutional amendment would be a step backward. It would encourage the Congress to hide federal activities in off-budget agencies, to control through regulation, and to subsidize through the tax code. The power of the federal bureaucracy might well increase as accountability to the public was reduced.

In sum, I believe that the Congress has made enormous progress since the passage of the Congressional Budget Act of 1974. I urge those who believe in balancing the budget and holding down federal spending to work to strengthen and improve the present process, to use it, and to give it a chance before turning to a fixed rule that might set back progress toward accountable government and that could not be changed without the agreement of two-thirds of the House and the Senate and three-fourths of the states.

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