Testimony

The Case for New Fiscal Rules

By William A. Niskanen
January 20, 1995
Joint Economic Committee
United States Congress

A proposed budget that would increase the federal debt or taxes should be approved by a broader consensus of Congress than that required for routine legislation. That is the sum and substance of the balanced budget/tax limitation amendment now before Congress.

Consistent with the letter and spirit of the Constitution, the proposed amendment defines the rules by which the major fiscal decisions would be made, not the outcomes of these decisions. The proposed amendment would not constitutionalize fiscal policy. The “automatic fiscal stabilizer” would still be effective; stronger-than-expected economic conditions would lead to a budget surplus, weaker-than-expected conditions to a budget deficit. The amendment would require broader support for an increase in debt or taxes but would not require a balanced budget or prohibit a tax increase. The primary purpose and effect of the proposed amendment would be to assure that a decision to expand the fiscal powers of the federal government reflects a broader support of Congress than that required for routine legislation.

The Case for New Fiscal Rules

For the first 140 years of U.S. history, the federal budget was effectively constrained by two fiscal rules: the formal limits in the Constitution on the enumerated spending powers and an informal rule that the government could borrow only during recessions and wars. At the end of the 1920s, federal expenditures were 2.6 percent of GDP, most of which was for the military and the deferred costs of prior wars. And the characteristic budget surplus during peacetime recovery years constrained the federal debt to 16 percent of GDP. The constraints on federal spending and borrowing also contributed to the conditions that led to a roughly stable general price level over that long period.

Over the past six decades, however, federal expenditures have increased to about 23 percent of GDP, most of which is for new forms of services and transfer payments. Larger and more frequent budget deficits (continuous since 1969) have increased the federal debt held by the public to an amount about 50 percent of GDP. And the general price level is now about 10 times the level at the beginning of this period. This dramatic change in fiscal and monetary conditions in my lifetime occurred without one amendment to the Constitution that would authorize a change in the fiscal rules. Our effective constitution has been transformed into one in which Congress and the president may authorize any type or amount of expenditures and taxes, subject only to the voting rule for routine legislation.

The appropriate response to this erosion of the substantive limits on federal fiscal powers is to approve more constraining voting rules on decisions affecting the budget totals. One should reject out of hand the argument that such rules are inherently inconsistent with democratic government.

All of us are willing to delegate many decisions within a family, firm, and other voluntary organizations to realize the benefits of comparative advantage and the reduction of decisionmaking costs. For this same reason, many nations have chosen a representative government with a majority voting rule. Such delegations, however, are almost always subject to substantive, quantitative, or procedural constraints on the group to which the decisions are delegated. Moreover, there is an important relation between the voting rule and the several types of constraints: the lower the voting rule, the more important are the constraints on the authorized powers of the organization.

For governments, the realistic alternatives are to authorize a narrow range of powers and a majority voting rule or a broader range of powers and a supermajority rule. The design of the U.S. Constitution was to limit federal expenditures to the enumerated powers defined in Article 1, Section 8, with the amount of such expenditures to be determined by the normal voting rules for appropriations. There is a reasonable case that such substantive limits may be preferable to a supermajority rule on the budget totals. Such substantive limits, for example, permit a federal politician to respond to constituent pleas by saying, “I would like to help you, but the Constitution does not authorize Congress to finance this service.” But that genie is already out of the bottle. Most of the current activities of the federal government have no constitutional basis in the enumerated powers, and there is no prospect of a constitutional consensus on the original substantive limits or on some new set of substantive limits.

The case for a new fiscal rule affecting the authority of the federal government to borrow is based on three observations. First, the current pattern of federal expenditures and receipts is not sustainable. Second, it is preferable to stabilize the ratio of the federal debt (or interest payments) to GDP sooner than later, at levels of this ratio closer to the present level than at a higher level; net interest payments, already the third largest component of federal expenditures, are also among the most rapidly growing components. Third, Congress has demonstrated no ability to bind itself or a subsequent Congress to a sustainable borrowing rule.

The absence of obvious near-term adverse effects of the federal deficit, however, has contributed to the erosion of the political discipline necessary to enforce a sustainable fiscal policy; if some adverse effects had been more apparent, the normal political incentives of Congress would probably have been sufficient to reduce the growth of the federal debt. The primary problem of federal borrowing is a moral problem: we are passing an increasing part of the cost of current government services to our children—without their consent. Federal net interest payments are now about $2,000 per taxpayer; each new generation of voters and taxpayers would clearly prefer that less borrowing had been authorized in prior years. The case for a new constitutional rule on the authority to increase the federal debt is to protect our children from our own lack of fiscal discipline.

Finally, the U.S. Constitution requires a supermajority to approve several measures. Congress has established a supermajority rule for several other types of measures, now including proposals to reduce taxes. Almost all of the states have some form of special rule on the issue of new debt. Many of the states require a supermajority of the legislature or a referendum to increase taxes. Majority rule has instrumental value—it is the minimum voting rule that avoids inconsistent decisions on the same vote—but it does not have normative value in and of itself. There is ample precedent and a strong case for requiring a higher voting rule on more important decisions like the overall levels of public debt and taxes.

Some Remaining Issues

Two remaining issues must be resolved to assure approval and ratification of an effective amendment:

The Senate version of the proposed amendment, which authorizes an increase in taxes by a majority of the members of each house, does not provide an adequate barrier against increased taxes. This increases the prospect that the budget would be balanced by higher taxes rather than a slower growth of spending, weakens the potential economic benefits of the amendment, and reduces the prospects for ratification.

Neither version protects state and local governments from an increase in unfunded mandates. Congress plans to vote on a statute that provides such protection before the vote on the proposed constitutional amendment, but statutory protection that may later be changed may not be sufficient to assure ratification of the amendment.

Congress is now rushing to vote on these issues by the end of next week. If it takes more time to resolve the above issues, Congress should delay the vote. There has never been a better opportunity to restore a responsible fiscal constitution. Do it right. Seize the day!