The return to large federal deficits after a brief period of surpluses shows that it is very difficult to enforce fiscal discipline within the current budget process. Strong tax revenue growth and falling defense spending during the 1990s resulted in a balanced budget in fiscal year 1998 for the first time in 29 years. But budget balance did not last long because Congress has opened the flood-gates to rapid defense and nondefense spending increases in recent years. The war on terrorism has given Congress and the administration political cover to further increase the budget and side-step needed spending tradeoffs.
Large deficits may renew interest in budget process reforms to restrain spending. Indeed, in its latest budget the Bush administration proposed creating a new statutory line item veto that would be linked to deficit reduction. In the 1980s and 1990s, there were repeated efforts to impose greater discipline on the budget process by enacting both a line item veto and a balanced budget amendment to the Constitution. A balanced budget amendment with a supermajority requirement to protect against tax increases would be an effective restraint, but it has so far failed to gain the needed political support. Meanwhile, a statutory line item veto was passed in 1996 but was subsequently struck down by the Supreme Court.
This study discusses lessons learned from those past reform efforts and proposes a new “balanced budget veto” mechanism. Under this mechanism, the president would be empowered with an item reduction veto only during sessions of Congress following fiscal years with budget deficits. The item reduction veto would provide the president with a tool to cut spending when Congress has failed to do so.
Such a veto power, however, would not enshrine balanced budgets as constitutional doctrine. Instead, it would provide Congress an incentive to curb deficits and regain budgetary power that has been temporarily bestowed on the president. Congress would be institutionally penalized for not limiting spending, and presidents would have a bias against raising taxes so as not to lose their veto power.
Congress and the administration need to focus on institutional reforms to mend the broken budget process. They should consider adopting a bal-anced budget veto as a new tool to encourage fiscal responsibility through spending restraint.