Seven Reforms to Balance the Budget

July/​August 1996 • Policy Report

Over the past 50 years Congress has lost all control over federal spending. As Table 1 shows, even after adjusting forinflation, the federal government spends almost four times more today than it did 40 years ago. Entitlement spending has seenthe largest growth. My overall conclusion from the data is that government today is America’s number‐​one growth industry.

A top priority for this Congress should be passage of a new budget act. The 1974 Budget Reform and Impoundment ControlAct has been a monumental failure. One of the purposes of that act was to eliminate deficit spending, but this is the actuallegacy of that legislation: in the 20 years before the act, the federal deficit averaged just 1 percent of gross domestic product,or $30 billion 1994 dollars. In the 20 years since the 1974 act, the average budget deficit has been $170 billion per year, or3.5 percent of GDP. We have accumulated more than $4 trillion in debt since 1976. By any objective standard, the budgetprocess has not worked better under the 1974 act — it has worked much worse.

Figure 1 shows how the budget deficit has grown since Harry S. Truman was president. Despite recent progress in reducingthe deficit, the long‐​term prognosis remains grim. In fact, the Congressional Budget Office predicts that if we stick with theClinton budget plan, the deficit will begin rising after 1996 and reach a record high of $350 billion within 10 years.

The 1974 Budget Act cannot be fixed. Tinkering won’t do the trick. Congress ought to repeal the act before it does moredamage to our national economy.

The centerpiece of any budget reform quite clearly should be an amendment to the Constitution outlawing deficit spending.Most members of this committee are keenly aware of the need for a balanced‐​budget requirement, so I will not dwell on it.

Deficit spending is an unconscionable form of fiscal child abuse. There are hundreds of groups in Washington that pretend tospeak for the interests of children. But who in Washington, among the thousands of powerful special‐​interest lobbyists andself‐​proclaimed do‐​gooders, speaks for the children who are going to have to pay off our irresponsible debts? The singlemost pro‐​child policy that any of us can pursue in Washington today is to reduce the crushing burden of debt our governmentis now preparing to place on the next generation’s backs.

I sincerely wish that we did not need a constitutional amendment to cure Washington’s addiction to red ink. Unfortunately, thedestruction of our nation’s once firmly held moral rule against deficit spending — what James Buchanan called “the collapse ofthe constitutional consensus” — requires us to amend our Constitution and command Congress to do what it used to feel honorbound to do — balance the budget.

Tax‐​and‐​spend opponents of a balanced‐​budget amendment argue that a constitutional requirement is just “a gimmick.” Noone really believes that. If the amendment were a gimmick, Congress would have approved it long ago. Defense contractors,corporate lobbyists, federal workers, teachers’ unions, the welfare industry, and other powerful special‐​interest groupsferociously attack the amendment, not because they think it won’t work, but because they shudder at the thought that it will.What frightens the predator economy in Washington is that gift‐​bearing politicians may have the federal credit card takenaway from them.

The U.S. House of Representatives last year wisely approved a balanced‐​budget amendment, but it was defeated in theSenate. The matter is now out of your hands. The real issue is, What can be done in the meantime to make the budgetprocess work better and to end deficit spending?

Last year the House passed a courageous budget, crafted by Budget Committee chairman John Kasich, that promised abalanced budget by 2002. But one thing is a virtual certainty: no matter how sincere your intentions of balancing the budget,the deficit will not be eliminated by 2002 unless new budget enforcement rules are implemented to ensure that this admirable,though minimal, goal is honored.

I would urge that a new budget act contain the following seven provisions, which are discussed in order of priority.

1.) An Enforceable Legislative Balanced‐​Budget Requirement

Don’t wait for a balanced‐​budget amendment. Act now. The most urgent reform for this Congress to undertake is passage ofa balanced‐​budget law that enforces the deficit targets established in the House budget resolution.

What I have in mind is a new Gramm‐​Rudman‐​Hollings formula that establishes iron‐​clad enforceable deficit targets. One ofthe great myths in Washington is that Gramm‐​Rudman was repealed because it wasn’t working. Gramm‐​Rudman wasrepealed by the pro‐​spending constituencies in Congress precisely because it was working too well.

Gramm‐​Rudman was enacted in 1985, when Congress was under intense public pressure to immediately reform the budgetand reduce the $200 billion budget deficit. The controversial law required Congress to balance the budget by 1991 bymeeting a series of annual deficit reduction targets. If Congress missed those targets, the law would trigger automaticspending cuts — a process called “sequestration” — to reduce the deficit to the mandated level.

Critics charge that the act was a dismal failure because Congress continually veered off the balanced‐​budget track. It is truethat Congress routinely missed the deficit targets. Actual deficits under Gramm‐​Rudman were, on average, about $30 billionper year above maximum deficit targets.

Still, Gramm‐​Rudman had a positive effect on the federal budget. The best way to measure its impact is to compare theactual deficits recorded during the five years the act was in effect with what the deficit was projected to be by theCongressional Budget Office without Gramm‐​Rudman. The 1989 deficit was about $100 billion lower than had beenexpected in 1985 without Gramm‐​Rudman. The deficit fell from 6 to 3 percent of GDP under Gramm‐​Rudman.

The most dramatic effect of Gramm‐​Rudman was to curb government expenditures. Government spending in the five yearsbefore the act grew at a rate of 8.7 percent, but it slowed to only 3.2 percent in the five years Gramm‐​Rudman was in effect.Even entitlement spending was curtailed under Gramm‐​Rudman to a 5 percent growth rate, because Congress realized that ifit allowed programs like Medicare and Medicaid to rise uncontrollably, that would eat up the rest of the budget and causepainful automatic cuts in discretionary spending.

Sen. Phil Gramm (R‐​Tex.) and House Majority Leader Dick Armey have introduced legislation to restore many of thefeatures of Gramm‐​Rudman. The most vital reform is a series of deficit reduction targets that, if missed, would triggerautomatic across‐​the‐​board spending cuts — a sequester. I would urge that any new sequester process include all federaloutlays except interest payments and Social Security benefits. That would impose a much‐​needed dose of discipline on thebudget process.

Table 1: 40 Years of Government Growth

Billions of 1995 Dollars

1955 1995 Real Growth
1955–95 (%)
National defense 242.8 271.6 11.9
Health 1.7 272.4 16,374.2
Income security 28.8 223.0 674.0
Social Security 25.2 336.1 1,236.4
Education & socialservices 2.5 56.1 2,117.4
Vetrans’ benefits 26.6 38.4 44.5
Communitydevelopment 0.7 12.6 1,618.8
Interest 27.6 234.2 750.0
Int’l affairs 12.6 18.7 48.2
Science &Technology 0.4 17.0 3,937.8
Agriculture 20.0 14.4 -27.9
Justice & generalgovt. 5.2 32.1 523.4
Transportation 7.1 39.2 453.1
Energy & naturalresources 7.2 26.5 268.4
Offsetting recipts -19.8 -41.4 108.6
Total Outlays 388.9 1,538.9 295.7

2.) A Supermajority Requirement to Raise Taxes

Americans have been hit with 12 tax hikes in the past 20 years; each one has succeeded in further expanding the size ofgovernment rather than reducing the debt. Requiring a three‐​fifths or two‐​thirds majority in both the House and the Senate topass a tax increase would allow Congress to pass tax hikes in cases of national emergency but would make it very difficult forUncle Sam to continue the annual ritual of peacetime tax hikes. Several states, including Arizona, California, and Oklahoma,have enacted such measures; they have stopped tax increases dead in their tracks. As one Arizona taxpayer advocate of thesupermajority requirement recently told me, “Now the legislature doesn’t even bother to propose new taxes.”

Congress passed the part of the “Contract with America” that promised new rules requiring a 60 percent vote to raise incometaxes. That was a good start. But now that hurdle should be made to apply to all revenue‐​raising bills.

3.) National Referendum on All Tax Increases

Another populist budget reform that is sweeping the states is the requirement that any tax increase be ratified by a popularvote of the people in the next election. That gives the taxpayers veto power over the state legislature’s efforts to raise taxes.Congress, too, should be forced to take its case to the people when it wants to take more dollars out of our paychecks. It isa virtual certainty that George Bush and Bill Clinton’s wildly unpopular record tax increases would have been blocked if sucha rule had been in effect.

Minority Leader Dick Gephardt deserves hearty congratulations for suggesting this reform as part of his 10 percent tax plan.Perhaps a bipartisan consensus could emerge on the issue.

4.) Dynamic Scoring of Tax Law Changes

The 1986 capital gains tax rate increase has raised roughly $100 billion less revenue than the Joint Tax Committee estimatedwhen the law was passed. Capital gains realizations are less than half the level expected, as shown in Figure 2. Why suchgigantic forecasting errors? Congress still uses static analysis to score tax rate changes — that is, it assumes little change inbehavior in response to tax changes and thus almost no overall economic impact of new tax laws. The assumptions have beenshown time and again to be wrong. We know the procedures are wrong, but we still use them.

The capital gains tax cut promised in the “Contract with America” will almost certainly raise revenues for the government — andit might raise substantial new revenues. The rich will actually pay more taxes with the rate cut. But the Joint Tax Committeerefuses to score those dynamic effects. Scholars at the Cato Institute have long endorsed a zero capital gains tax. But thestatic revenue estimators say that will reduce revenues by $150 billion over five years. Dynamic estimates indicate that a zerocapital gains tax would so energize our economy that total tax revenues might actually increase. But as long as we are slavesto static scoring, pro‐​growth tax initiatives will be torpedoed by faulty computer models.

Dynamic scoring will yield more accurate tax revenue estimates and thus encourage better policy.

5.) An End to Baseline Budgeting

A 4.5 percent increase in spending on the School Lunch Program is a budget increase, not a budget “cut.” Baseline budgetingis a fraud. Lee Iacocca once stated that if business used baseline budgeting the way Congress does, “they’d throw us in jail.”

It’s time to end the false and misleading advertising in the budget. Congress should be required to use this year’s actualspending total as the baseline for the next year’s budget. If Congress spends more next year than it did in the current year, it isincreasing the budget; if it spends less, it is cutting it.

6.) A Statute of Limitation on All Spending Programs

It has been said that the closest thing to immortality on this earth is a government program. Congress doesn’t know how toend programs — even years and years after their missions have been accomplished. A five‐​year sunset provision should applyto every spending program in the budget — both entitlements and discretionary programs. That would require the true“reinvention” of programs by forcing the reexamination of every program, including entitlements, every five years.

7.) Debt Buy‐​Down Provision

This is Rep. Bob Walker’s idea that would allow taxpayers to dedicate up to 10 percent of their income tax payments toretirement of the national debt. Politicians earmark spending all the time. Taxpayers should have the same right.

Rules Matter

Those budget process reforms are vitally important to the balanced‐​budget exercise because the rules of the game matter.The rules dictate outcomes. For more than 20 years, forces that favor spending have consistently prevailed over forces thatfavor fiscal restraint. That pro‐​spending bias in Washington threatens to cripple our nation’s economic future.

Let me conclude by retelling a story about the late great Washington Redskins football coach George Allen. Allen lived by themotto “the future is now.” He traded all the Redskins draft picks for over‐​the‐​hill veterans. He spent millions of dollars ofowner Jack Kent Cooke’s money to purchase expensive free agents. After several years of that, Cooke finally fired Allen.When asked why, Cooke responded, “When George Allen came to Washington I gave him an unlimited budget. But Georgemanaged to exceed it.” That’s the way taxpayers now feel about our politicians in Washington.

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