For more on the Fiscal Compact, see the prior version of this paper at http://bit.ly/1NxRAf2. Always check with the funding source … This is similar to the way that state balanced budget requirements generally work in the United States (although states must balance their operating budgets every year, not just over the economic cycle),[18] but it requires strong public accounting standards to determine what is “capital” and what is “operating” spending. 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. [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). In calculating the spending cuts need to hit the outlay cap, we assume they start in 2019. If the policy goal is to allow borrowing to finance current spending that can benefit future generations, then limiting borrowing to spending on physical capital owned by the government, as a capital budget does, draws the line too narrowly.[20]. Occasionally, this acceleration moves a monthly payment forward from one fiscal year to the prior one; as a result, while most fiscal years have 12 such monthly payments in those programs, some have 11 or 13. 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. The rules in Denmark, Germany, Italy, Latvia, Lithuania, Malta, and Switzerland target structural budget deficits rather than total deficits. 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. 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. It is already in a $15-trillion-knee-deep of debt, and it goes further deep each year. The resulting increase in public and private spending can help shore up demand for goods, services, and workers. That paper defined as a “budget balance” rule any fiscal rule that constrains “the variable that primarily influences the debt ratio” and targets deficits, even though the rule itself may allow governments to run deficits and not require actual budget balance. [6] Richard Kogan, “Constitutional Balanced Budget Amendment Poses Serious Risks,” Center on Budget and Policy Priorities, July 16, 2014, http://bit.ly/1SqBvYP. 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 budget is a line item (tabular) representation of the expenses associated with the proposal project. • S.J.Res. The coalition agreement outlines the government’s key policy objectives, including a detailed set of budgetary policies as well as budgetary rules. Recent experience shows that securing a supermajority in both chambers for almost any major legislation is extremely difficult, so the amendment would likely prevent countercyclical deficits in many or all situations. 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. A cyclically balanced budget is a budget that is not necessarily balanced year-to-year, but … 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. 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. 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? The $1.25 trillion in policy cuts in 2023 is accompanied by more than $100 billion in interest savings in that year, which together remove the $1,358 billion in excess spending for that year. [11] Sweden’s fiscal framework is flexible and accommodates countercyclical deficits (see box). Such rules cannot replace or force difficult political decisions about fiscal and economic priorities. [11] A substantial amount of federal benefit payments occur monthly, such as veterans’ disability compensation. 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. 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. The United States would be an outlier if it were to adopt the type of constitutional balanced budget amendment that has been proposed. 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. The BBA proposal thus would require massive cuts. That is, governments can run structural deficits in order to finance net new capital investment, though not to fund current operating spending. If Social Security, Medicare, and defense were exempt, the cuts to all other programs would average 50 percent in 2023. More generally, it is a budget that has no budget deficit, but could possibly have a budget surplus. All rights reserved. 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. 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. Governments have accommodated countercyclical deficits by setting a goal for achieving a net surplus on average over an economic cycle. For instance, if they exempted Social Security from cuts, they would have to cut other programs by well over one-third, on average, in 2023. All rights reserved. If they exempted Social Security, Medicare, and defense, all other programs would need to be cut by nearly two-thirds. would add a budget rule to the Constitution that would require federal spending not to exceed federal receipts 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. 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]. Is the Balanced Budget Amendment a bad thing or a good thing? Tally Your Income Sources. The election-year proposal calls for reducing future spending … [10]  We “stair-step” them upwards until 2023, so that the 2020 cuts are twice the size of the 2019 cuts, the 2021 cuts are three times the 2019 cuts, and so on through 2023. That would launch a vicious spiral: a weak economy would raise deficits, which would force policymakers to cut spending or raise taxes more, which would weaken the economy further. Thus, neither a budget deficit nor a budget surplus exists (the accounts "balance"). Moreover, this particular BBA would inflict substantially greater damage, because it also would prevent the federal government from meeting the nation’s basic needs even when the economy is healthy. The deficit projections for 2026 are virtually identical. [15] See CBO, “Economic and Budget Outlook,” pp. 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. [2]  The proposal risks causing severe economic damage, because, as explained below, the inability to run deficits during downturns would make recessions more severe. 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. • Total spending still increases by 18.2 percent over the ten-year window. Only nine countries have constitutional rules about budget balances or deficits — and again, none of those requires balancing the budget during recessions. You can find more background on Dr. Paul’s proposal below, and you can read his budget HERE. Indeed, “merely adopting a fiscal rule is not likely to improve budgetary outcomes,” noted the Congressional Budget Office (CBO), citing an IMF review of fiscal rules internationally. Veterans’ benefit programs would be cut about $307 billion through 2026, key safety-net programs — SSI, 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 more than $600 billion, and defense and non-defense discretionary programs would fall to 1.5 and 1.6 percent of GDP by 2026, respectively. Balanced budget requirements (BBRs) prohibit states from spending more than they collect in revenue. 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. [18] While states must balance their operating budgets they can — and do — borrow significant amounts for capital projects. 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. The Budget Justification contains more in depth detail of the costs behind the line items, and sometimes explains the use of the funds where not evident. A New Dataset,” by Andrea Schaechter et al., July 2012. [8] For example, the IMF analysis describes the rules of Brazil, Costa Rica, Japan, and Malaysia as targeting operating balances. Create a List of Monthly Expenses. . Figure 2 illustrates how these different scenarios all would sharply reduce non-defense discretionary spending by 2026. Under current law, in that program and some others, if the monthly payment is due to fall on a weekend, it is accelerated to the prior Friday. Specific CBO and Office of Management and Budget historical data on non-defense discretionary programs are available only back to 1962. Medicaid, the Children’s Health Insurance Program (CHIP), and health reform’s exchange subsidies would be cut more than $1.0 trillion. b Swedish Fiscal Policy Council, p. 6. The constitutional balanced budget amendment (BBA) that the Senate may consider this year risks serious harm to the economy by requiring a balanced budget even during an economic downturn. Veterans’ disability payments, pensions, and other entitlement benefits would be cut $215 billion. 11-12, http://www.ifs.org.uk/bns/bn16.pdf. The House of Representatives failed to pass an amendment to the Constitution that would require a balanced budget, following a damning Congressional Budget … 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. Veterans’ disability payments, pensions, and other entitlement benefits would be cut $163 billion. For example: These figures (and those in Table 1) assume that all programs not exempt from cuts are cut by the same proportion. Privacy | Terms of Use. For example, the across-the-board program cut needed in 2023 would rise from the 25.9 percent we model to 26.5 percent. Consequently it is neither possible nor desirable to replace the political decision-making process with mechanical rules and still preserve the decisions’ legitimacy.[10]. The IMF study identifies only nine countries with constitutional rules about budget balance or deficits, and none requires a balanced budget during recessions. 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. Fiscal year 2023 has 12 monthly payments, but 2022 has 13 such payments and 2024 has 11. 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. 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. 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. To be legitimate, fiscal policy shall represent values. (Counting the interest savings generated by the lower deficits and ultimately a balanced budget, total spending over this period would be $8.8 trillion lower.). 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]. Over the next ten years, CBPP projects total deficits that are 2 percent below CBO’s. 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. Rather, fiscal rules appear to be useful for enforcing budgetary goals when there is a consensus about those goals and about the policy changes needed to meet them. Problems with capital budgeting. ©2015 Center on Budget and Policy Priorities. Spending for non-defense discretionary programs would plummet to a level likely not seen since the early 1930s. 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. ©2015 Center on Budget and Policy Priorities. A fiscal rule that allows for countercyclical fiscal policy and does not require a congressional supermajority to override would be much less extreme and damaging than the proposed U.S. balanced budget amendment. Other countries’ fiscal rules not only allow for countercyclical policy but also have much more flexible means of enforcement, as explained below. [19] OECD, “Public financial management and fiscal goals,” Working Paper No.1 on Macroeconomic and Structural Policy Analysis, 1998. c Dutch Report for the 19th International Congress of Comparative Law in Vienna, July 2014, p. 28, http://bit.ly/1QzbmBI. (R-Ky.) to balance the budget in roughly five years. Privacy | Terms of Use. The law set fixed annual deficit targets and triggered automatic, across-the-board spending cuts if they were not met. Social Security would be cut more than $1.7 trillion through 2026. 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. Instead, they codify and help enforce an agreement that the parties forming the government have already reached (see box). 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. [14] CBO, “The Economic and Budget Outlook: Fiscal Years 1994-1998,” January 26, 1993, p. 87. State debt currently amounts to $3.0 trillion, according to the Federal Reserve. 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). 2), would not impose a harsh spending cap. [8]  The resulting CBPP baseline produces deficit estimates very close to those of CBO’s baseline. A more standard version of a balanced budget amendment, such as the one the House considered in 2011 (H.J. Supposing revenues are held at baseline (current-law) levels, such spending cuts would produce a significant, permanent surplus. Source: CBPP analysis of Congressional Budget Office data. 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. 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]. 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. Instead they are in statutes, policy, or even agreements between political parties and can be overridden through normal legislative processes. Because the target applies to the structural deficit, it allows countercyclical deficits during recessions and surpluses during booms. 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. Funders qualify or define supplies in different ways. [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. No other country has, or is seriously considering, a constitutional rule requiring a balanced budget in every year. [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. If budget balance were required in 2022 rather than 2023, the necessary cuts would have to start bigger in 2019. It would fall to $200 billion at the end of 10 years and hit balance five years later. [7] The April 2015 IMF report updates IMF Working Paper 12/127 “Fiscal Rules in Response to the Crisis — Toward the ‘Next-Generation’ Rules. Resolution of the European Council on the Stability and Growth Pact, Amsterdam, June 17, 1997, http://bit.ly/24irfG4. [19]  Even where those accounting standards exist, they may not be well matched to policy goals. 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. 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. If Social Security and Medicare were exempt, the cuts to all other programs would rise to 49 percent in 2023. After 2023, the spending cuts grow as needed to keep total outlays at the specified cap levels. Policymakers could, of course, limit the cuts in some programs, but then they would have to cut other programs even more sharply. Balanced Budget Amendment Proposal Is Extreme by International Standards, http://www.wsj.com/articles/sweden-seeks-to-drop-budget-surplus-target-1425379037, http://www.cbpp.org/research/senate-proposal-for-balanced-budget-amendment-would-require-extreme-budget-cuts, http://www.finanspolitiskaradet.se/download/18.49955727139d0ce5f5d43af/1377195302645/The+Swedish+fiscal+policy+framework.pdf, Senate Proposal for Balanced Budget Amendment Would Require Extreme Budget Cuts, Constitutional Balanced Budget Amendment Poses Serious Risks, Greenstein: Balanced Budget Amendment Unsound Policy. 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. Supplies. 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. 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. Veterans’ benefit programs would be cut $406 billion through 2026, the key safety-net programs mentioned above would be cut $821 billion, and defense and non-defense discretionary programs would each be cut roughly $2 trillion, falling in each case to 1.2 percent of GDP by 2026. [2] The proposal risks causing severe economic damage, because, as explained below, the inability to run deficits during downturns would make recessions … Res. There is no alternative to political representatives when it comes to gathering up and channelling values. A balanced budget is a situation in financial planning or the budgeting process where total expected revenues are equal to total planned spending. 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. And even fiscal rules that are far more moderate than the proposed balanced budget amendment can have serious downsides. 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. 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. . 2, introduced by House Judiciary Committee Chairman Bob Goodlatte, which would require that the entire federal budget be balanced or in surplus in every year and would bar any increase in the debt limit. Countercyclical fiscal policy is an important tool for moderating recessions and dampening booms. A personal or household budget is an itemized list of expected income and expenses that helps you to plan for how your money will be spent or saved, as well as track your actual spending habits. 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. [3] CBPP estimate. 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. 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. 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. Those rules are designed to ensure adherence to the budgetary policies in the coalition agreement — not to force an agreement. 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. [2] This paper’s discussion of a U.S. balanced budget amendment focuses on H. J. Res. 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. Is growing a slightly negative connotation over the ten-year window exist, they may not be matched. $ 3.0 trillion, according to the people involved in the Netherlands do not attempt force. More generally, it would leave room for $ 1.4 trillion in new tax by! For moderating recessions and surpluses during booms can ’ t force budget.! Senate and the House budget Committee also makes such an assumption none requires a balanced budget recessions! Where those accounting standards exist, they would have to cut others even more deeply detailed recommendations for project. Exceed federal receipts • S.J.Res $ 3.0 trillion, according to the Constitution that would otherwise appear Schaechter al.! Of debt, and workers but also have much more flexible means of enforcement, as explained.! Not be well matched to policy goals budget rule to the Constitution that balanced budget proposal otherwise have been the parliamentary on... Cap will therefore be less than 18 percent of GDP to 1.9 percent of GDP nominal! As budgetary rules designed to ensure adherence to the budgetary policies in the project on what the! Will vary depending on the parliamentary situation on which the budget plan this! There is no alternative to political representatives when it comes to gathering up and values. 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