[4] IMF, “Fiscal Rules at a Glance,” April 2015, http://bit.ly/1pCYynJ. Privacy | Terms of Use. 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. Balanced budget requirements (BBRs) prohibit states from spending more than they collect in revenue. [16] IMF, “Fiscal Rules — Anchoring Expectations for Sustainable Public Finance,” December 16, 2009, p. 39, http://bit.ly/1XVFAEE. 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. Even a fiscal rule that was better designed than the proposed U.S balanced budget amendment could not substitute for making hard budgetary and economic choices or for generating the political consensus necessary to do so. [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. 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). Defense spending would be cut almost $800 billion, falling from its current 3.2 percent of GDP to 2.0 percent by 2026, a level not seen since 1940. Thus, neither a budget deficit nor a budget surplus exists (the accounts "balance"). The law set fixed annual deficit targets and triggered automatic, across-the-board spending cuts if they were not met. A balanced budget amendment that prevents the use of deficits to ameliorate recessions could cause severe economic damage. Rules can make it harder for policymakers to succumb to pressure to stray from agreed-upon policy decisions. [14] CBO, “The Economic and Budget Outlook: Fiscal Years 1994-1998,” January 26, 1993, p. 87. The House of Representatives failed to pass an amendment to the Constitution that would require a balanced budget, following a damning Congressional Budget … The Medicare cuts alone would grow to almost $1.6 trillion through 2026, for instance. To be legitimate, fiscal policy shall represent values. But the size of the program cuts would reach a level in 2022 very similar to the cuts for 2023 that we model: 25 percent on average, instead of the 26 percent for 2023 that we calculate in this analysis. Privacy | Terms of Use. 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. 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. 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. May encourage small scale operations for fiscal reasons Better alternative: consensus-driven supermajority Amash - Business Cycle Balanced Budget Amendment 13 [7] If only defense were exempt, other programs would need to be cut by 30 percent in 2023. State debt currently amounts to $3.0 trillion, according to the Federal Reserve. Dr. Rand Paul’s Balanced Budget: • Reduces spending by $183.1B in FY20 and by $11.3T over 10 years relative to baseline. The cuts through 2026, if spread proportionally over all programs, would be as follows: Policymakers would not have to cut all programs by the same percentage and likely would not do so. Further, international and U.S. experience does not indicate that adopting any type of fiscal rule — and certainly not one as draconian as the proposed balanced budget amendment — would by itself produce sound fiscal policy. After 2023, the spending cuts grow as needed to keep total outlays at the specified cap levels. Furthermore, the Fiscal Compact permits a government to run structural deficits during both expansions and recessions as long as it sets a “medium term objective” to make progress towards a structural deficit of no more than 0.5 percent of GDP. A cyclically balanced budget is a budget that is not necessarily balanced year-to-year, but … [12]  CBO explained: [E]xperience in the United States and elsewhere suggests that fiscal rules are not a substitute for making difficult choices about the budget. Supposing revenues are held at baseline (current-law) levels, such spending cuts would produce a significant, permanent surplus. Spending for non-defense discretionary programs would plummet to a level likely not seen since the early 1930s.The cuts would be equally severe in non-defense discretionary programs, such as education, transportation, law enforcement, environmental protection, and medical and scientific research. 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. 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. [2] The proposal risks causing severe economic damage, because, as explained below, the inability to run deficits during downturns would make recessions … Funders qualify or define supplies in different ways. For example, Swedish governments have explicitly noted that Sweden’s fiscal rules are not intended to constrain or replace political decision-making about budget priorities: [T]he purpose of the fiscal policy framework is not to deprive democratically elected representatives of the right to decide fiscal policy. During the Reagan Administration, the federal government would have breached the spending limit that the Senate Republican BBA would set by an average of 5.8 percent of GDP, which is equivalent to “excess” spending of $1.1 trillion in 2016 alone. The rules in Denmark, Germany, Italy, Latvia, Lithuania, Malta, and Switzerland target structural budget deficits rather than total deficits. [3]  No other country has, or is seriously considering, a constitutional rule requiring a balanced budget in every year.But no other country has — or is seriously considering — a constitutional rule requiring a balanced budget in every year. These requirements would be waivable only by a three-fifths vote of both the House and Senate, by declaration of war, or by enactment of a joint resolution declaring a “military conflict which causes an imminent and serious threat to national security.”  Congressional Republicans have also proposed constitutional amendments even more restrictive than H. J. Res 2. Arguments Against a Balanced Budget Law . Key safety-net programs — Supplemental Security Income (SSI) for the elderly and disabled poor, SNAP, the school lunch and other child nutrition programs, and the refundable portions of the Child Tax Credit and Earned Income Tax Credit — would be cut $436 billion. 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. d Ibid., p. 29. The word budget may have taken on a slightly negative connotation over the years, invoking an image of pinching pennies or limited spending. The balanced budget was the surprise in Pence’s speech and his staff said they’re still working with legislative leaders to work out the language. 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. 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. Indeed, it is a normal policy assumption to make when faced with arbitrary budget targets such as a balanced budget in every year or a constitutional spending limit. First things first. If Social Security were exempt, the average cut to all other programs would rise from 20 percent in 2023 to 28 percent. All rights reserved. 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. 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. We fix the nominal value of the starting program cuts in 2019 at the level that, with interest savings also accounted for, will reduce spending to the specified outlay cap levels in 2023. Funding for these programs would fall from the current 3.3 percent of GDP to 1.9 percent of GDP by 2026. Policymakers could, of course, limit the cuts in some programs, but then they would have to cut other programs even more sharply. [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. Social Security would be cut about $2.3 trillion. That means it’s not clear the final proposal might affect the state’s budget. But if they exempted certain programs from cuts, they would have to cut others even more deeply. 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. . 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. If they exempted Social Security, Medicare, and defense, all other programs would need to be cut by nearly two-thirds. 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. Cuts are assumed to be distributed equally across the board except to those programs specified as spared from cuts. ©2015 Center on Budget and Policy Priorities. Only nine countries have constitutional rules about budget balances or deficits — and again, none of those requires balancing the budget during recessions. Similarly, fiscal rules in the Netherlands do not attempt to force agreement on deficit targets and how to achieve them. Other countries’ fiscal rules not only allow for countercyclical policy but also have much more flexible means of enforcement, as explained below. Medicare would be cut about $1.5 trillion. It’s unclear whether the severely restrictive spending limit was designed to facilitate tax cuts even in the face of a balanced budget requirement. Consequently it is neither possible nor desirable to replace the political decision-making process with mechanical rules and still preserve the decisions’ legitimacy.[10]. During the second term of the Clinton Administration, when the federal government ran surpluses for the only time since 1969, spending would nevertheless have breached the limit by an average of 1.6 percent of GDP, equivalent to $300 billion in 2016 alone. [10] Swedish Fiscal Policy Council, “The Swedish Fiscal Policy Framework,” March 2011, pp. By contrast, the proposed U.S. balanced budget amendment would require supermajority votes in both the House and Senate to waive the balanced budget requirement, even in a recession. 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]. 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. Source: CBPP analysis of Congressional Budget Office data. For example, the Tax Foundation says the tax plan alone could cost as much as $3.9 trillion, if all businesses -- big and small -- get taxed at the lowest 15% rate that Trump has proposed… This cap would compel policymakers to cut all programs by an average of more than one-fourth when it takes effect — we are assuming 2023. 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]. If budget balance were required in 2022 rather than 2023, the necessary cuts would have to start bigger in 2019. 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. 14-15, http://www.finanspolitiskaradet.se/download/18.49955727139d0ce5f5d43af/1377195302645/The+Swedish+fiscal+policy+framework.pdf. 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. 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