Transparency and Control: Improving Financial Management in Congress

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Mr. Chairman and members of the committee, thank you forinviting me to testify today regarding the budget process andfederal spending restraint.

Federal outlays have increased 45 percent in the last fiveyears. The government has run deficits in 33 of the last 37 years.The costs of federal programs for the elderly are set to balloonand impose huge burdens on young Americans. Clearly, current budgetprocedures are not working very well. They are stacking the deck infavor of program expansion without regard to current and future taxburdens.

We can improve federal financial management by focusing on twokey budgeting principles: transparency and control. Theseprinciples are sorely lacking in today's budget process. Hugespending bills are rushed through Congress, with many members andthe general public unaware of the wasteful details. Spending isroutinely increased despite massive and ongoing flows of red ink.And under current rules, reform-minded members have been unable tocontrol the appetites of their spendthrift colleagues who devotetheir efforts to narrow parochial concerns.

The need to find budget savings and cut the waste will beintense in coming years. Members of Congress and the public needbetter information and more powerful tools to control spending andavoid a fiscal train wreck. Creating a new statutory cap on thegrowth in total federal outlays would be a good step towardincreasing both transparency and control in the budget process.

Improving Transparency in Federal Budgeting

The subtitle of the hearing today asks whether Congress istransparent in the way it appropriates funds. Let me first praisethe part of the current process that is quite transparent-thereporting of budget aggregates by the Congressional Budget Officeand Office of Management and Budget. The regular budget updatesfrom these agencies allow interested citizens to find out how muchtheir government taxes and spends, how big the deficit is, and howfast the budget is growing.

Except for the big-picture data, everything else in the budgetprocess is nontransparent. The process gets very confusing whenCongress starts passing frequent supplemental spending bills,throws thousands of earmarks into bills and reports at the lastminute, and makes most of the important spending decisions inbehind-the-scenes horse-trading. Also, the language of federalbudgeting is tough to decipher for average citizens and often has apro-spending bias-consider phrases such as "spending cuts," "budgetbaseline," "not fully funded," "entitlement," and "trust fund."

Both liberals and conservatives should support making thefederal budget process more transparent. An important reform wouldbe to make information about the recipients of federal largessemore readily available. Whether it's earmarks, farm subsidies,corporate welfare, or grants to nonprofit groups, federal taxpayersdeserve to know who is receiving their hard-earned dollars.

A few years ago, the Washington Post had to battle theDepartment of Agriculture with a lawsuit before the agency wouldreveal the list of farm businesses that received taxpayersubsidies. It shouldn't be that difficult for the public to findout how its money is being spent. The people have a right to knowthat the government is handing out their tax dollars to Ted Turner,David Rockefeller, Bernie Ebbers, and Ken Lay in the form ofagriculture subsidies. 1

Legislation (S. 2590) introduced by Sens. Tom Coburn (R-OK) andBarack Obama (D-IL) would create a federal database on the Internetthat lists the names of the 30,000 groups that receive federalearmarks and other handouts, and the amounts received. That wouldbe an excellent step toward helping the public understand wheretheir tax dollars are going. Enron, for example, received hundredsof millions of dollars in corporate welfare from different federalagencies. Citizens need a comprehensive database so they can findout all the federal giveaways that are going to particularcompanies, groups, and congressional districts.

With federal corruption in the news these days, making dataavailable is more important than ever. Full disclosure regardingthe recipients of federal hand-outs is a good first step toreducing corruption. 2 Theissue of transparency is not just about citizens understanding whatmembers of Congress are doing, it is about members being alert towhat other members are doing. Many members, for example, said thatthey were outraged by the pork-for-profit schemes of Rep. Randy"Duke" Cunningham (R-CA). Other members are now under investigationfor similar schemes. With greater disclosure of pork spending,members might not get up to such mischief in the first place.

There are other reforms, particularly related to earmarks, thatwould improve budget transparency. These include requiring earmarksto be included in bill language (not report language), requiringearmark sponsors to be listed in bills, making public all earmarkrequest letters, and making conference reports publicly available afew days ahead of floor consideration. 3 I'd like to see the end of all earmarking, butthese reforms would be a good start.

Reformers often note, correctly, that Congress should do moreoversight of the executive branch to stop waste, fraud, and abuse.But it is the public that does the oversight of Congress, and inthis age of websites, blogs, and computer databases, there is noreason why citizens should not be given access to morecomprehensive, real-time information to aid in the oversight offederal budget actions. Proposals like S. 2590 would be a real stepforward for getting citizens involved in monitoring government inthe Internet age.

New Procedures Needed for Budget Control

Congress is supposed to control spending, but spending has beencompletely out of control in recent years. Most of the budgetconsists of so-called entitlement spending, which is growingrapidly on automatic pilot. Discretionary spending is supposed tobe under tighter control in the annual appropriations process. Butwe've seen an explosion in the cost of supplemental spending billsoutside the regular budget process in recent years. In addition,some of the budget rules that we do have in place, such as thestatutory debt limit, haven't created any serious constraint onspending or deficits.

Some people argue that new restrictions on the budget processare not needed because Congress has the power to restrain spendingand balance the budget whenever it wants. But political scientistshave long recognized that the self-interested actions of individualmembers often lead to overall legislative outcomes that underminethe general welfare. 4Indeed, frequent statements and press releases by many members makeit clear that their top priority is to aid targeted interests intheir states and districts, not to legislate in the broad interestsof all Americans. If left to their own devices, many membersessentially become lobbyists and activists for their own narrowcauses, and broader concerns, such as the size of the debt imposedon future generations, are ignored.

New and improved federal budget rules are needed to help channelthe energies of members into reforms that are in the interests ofaverage citizens and taxpayers. Without tight budget rules, CapitolHill descends into an "every man for himself" spending stampede-abudget anarchy that creates uncontrolled budget expansion andsoaring deficits.

The lack of adequate federal budget rules and constraintscontrasts with the tighter budget environment in most states.5 Virtually all the stateshave statutory or constitutional requirements to balance theirbudgets. Governors in 42 states have line-item veto authority. Moststate constitutions include limitations on government debt. All thestates are fiscally constrained by the need to prevent their bondratings from falling. In addition, more than half the states havesome form of overall budget cap or tax and expenditure limitation(TEL). 6 This form of budgetconstraint should be implemented at the federal level, as discussedbelow.

There have been numerous efforts to impose tighter controls onthe federal budget. One reform effort was the 1985Gramm-Rudman-Hollings Act. It established a series of decliningdeficit targets over five years, which if not met resulted in anautomatic cut, or sequester, to a broad range of programs. Congressreplaced GRH in 1990 with the Budget Enforcement Act. The BEAimposed annual dollar caps on discretionary (annually appropriated)spending and "pay-as-you-go" rules on entitlement programs thatrequired the cost of any program expansion to be offset elsewherein the budget. Those rules contributed to restraint, but they havesince expired.

Bolder efforts to control spending and deficits have beendebated in Congress but have narrowly failed to pass. Abalanced-budget amendment (BBA) to the Constitution was proposed inCongress as far back as 1936. In 1982 the Senate passed a BBA by avote of 69-31. In addition to requiring budget balance, theamendment would have limited the annual growth rate in federalrevenues to the growth rate in national income. Unfortunately, theBBA failed to gain the needed two-thirds approval in the House. Atthe time, a parallel effort resulted in resolutions being passed in31 states calling for a constitutional convention to approve a BBA,but that effort came up three states short of the required number.In 1995 Congress again voted on a BBA, and it again failed. The BBApassed the House by a 300-132 margin but fell one vote short ofpassage in the Senate.

Capping Total Federal Spending

Today, reformers are focusing on statutory rather thanconstitutional efforts to control the budget. And unlike GRH andthe BBA, today's efforts are focused on spending control, notdeficit reduction, because of recognition that deficits are simplya byproduct of the more fundamental overspending problem. There aremany good proposals to exert greater control over spending,including restoring budget impoundment, a sunset commission, andbiennial budgeting. 7

However, a more direct and powerful way to control the budget isto impose a cap on the growth in total spending. 8 A number of House members, including JohnCampbell (R-CA) and Todd Akin (R-MO), are considering introducingbills to place a statutory cap on the annual growth in totalfederal outlays, including both discretionary and entitlementoutlays.

Note that the BEA imposed multiyear caps on discretionaryspending but did not cap entitlement spending. Yet the rapid growthin entitlement spending is an important factor in today's highdeficits and will likely cause a major budget crisis in the future.Entitlements account for more than half of the budget and should beincluded under any cap.

A cap and sequester mechanism on discretionary spending, asunder BEA, is straightforward. But it is more complicated tosequester entitlement programs because spending is driven byformulas, reimbursement rates, calculated benefits, and othercriteria. Thus, a spending cap law would need to spell out in somedetail the particular procedures that agencies would follow to trimentitlement outlays if ordered by sequester. Legally, there is noproblem with Congress capping and sequestering entitlements.Recipients of federal entitlement benefits are not legally entitledto their benefits, and Congress can freeze them or cut them at anytime to get the budget under control. 9

There was substantial interest in capping entitlements in theearly 1990s. In 1992, the bipartisan Strengthening of AmericaCommission, headed by Sens. Sam Nunn (D-GA) and Pete Domenici(R-NM), proposed capping all non-Social Security entitlementspending at the growth rate of inflation plus the number ofbeneficiaries in programs. 10 The Entitlement Control Act of 1994 (H.R. 4593)introduced by Rep. Charles Stenholm (D-TX) would have capped thegrowth in all entitlement programs to inflation plus one percentplus the number of beneficiaries. Both of those proposals includedprocedures for sequestering entitlement spending with broad cuts ifthe caps were breached.

Structuring a Cap on Federal Spending

A simple way to structure a cap is to limit annual spendinggrowth to the growth in an economic indicator such as grossdomestic product or personal income. Another possible cap is thesum of population growth plus inflation. In that case, ifpopulation grew at 1 percent and inflation was 3 percent, thenfederal spending could grow at most by 4 percent.

Figure 1 shows actual federal outlay growth since 1990 comparedto possible caps. The GDP and income caps would be looser than acap based on population growth plus inflation. Whichever indicatoris used should be smoothed by averaging it over about five years.The basic principle underlying all of these caps is that thegovernment should live within constraints, as average families do,and the government should not consume an increasing share of thenation's income or output.

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How might a spending cap constrain federal spending in thefuture? Figure 2 shows that any of the caps would reduce the growthof future spending compared to a business-as-usual scenario.11 But the lower cap ofpopulation plus inflation would offer greater spending constraint.All of the caps would provide protection against a nightmarescenario of continued spending growth similar to the growth ofrecent years. But it is also true that a cap would not guaranteethat Congress proactively made the large spending reforms that weneed and eliminated wasteful programs in the federal budget. Notethat in Figure 2 the House Republican conservative budget plan is amore responsible spending path that is below the cap amounts.12 This plan would cutwasteful programs and bring the deficit down to zero over fiveyears.

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With an overall spending cap in place, Congress would passannual budget resolutions and make sure that discretionary andentitlement spending totals were projected to fit under the cap forthe upcoming fiscal year. If needed, reconciliation instructionswould be included to reduce spending on entitlement programs to fitunder the cap for the upcoming fiscal year and to reduce out-yearspending to fit under projected future caps. The process could bestrengthened by turning today's concurrent budget resolution into ajoint budget resolution signed by the president, as the Bushadministration has proposed.

The Office of Management and Budget would provide regularupdates regarding whether spending is likely to breach the legalcap, and Congress could take corrective actions as needed. If acongressional session ended and OMB determined that outlays werestill above the cap, the president would be required to cut, orsequester, spending across the board by the amount needed to meetthe cap. The GRH and the BEA included sequester mechanisms thatcovered only portions of the defense, nondefense, and entitlementbudgets. A better approach would be to cap all spending and subjectall programs to a sequester should Congress fail to restrainspending sufficiently. But let's hope that, when sequesters werelooming, Congress would make the needed cuts before sequestrationactually took place.

The Advantage of Capping Spending

The Colorado Taxpayer's Bill of Rights, or TABOR, is aconstitutional cap on state revenue growth. The annual growth instate tax revenues is limited to the growth in state populationplus inflation. Any revenues that flow into the government abovethe cap must be rebated back to state taxpayers. TABOR has workedwell in Colorado, but for the federal government a cap on spendingis more appropriate than a cap on revenues. One reason is thatstate governments must balance their budgets each year, and thus acap on revenues essentially becomes a cap on spending in thestates. By contrast, the federal government runs large deficits,and thus a cap on revenue growth would not limit the overall budgetor deficits.

One advantage of capping federal spending rather than revenuesor deficits is that spending is quite stable and can be directlycontrolled by Congress. GRH tried to cap deficits, but deficits canswing wildly from year to year, and that can take policymakers bysurprise. Indeed, one reason why GRH was scrapped was that therewas a swing upward in the deficit projection and Congress wasunwilling to allow a large and sudden sequester to occur. Regardinga cap on revenues, one cause of the recent controversy surroundingthe TABOR cap in Colorado was the fairly rapid fall in staterevenues during the economic slowdown a few years ago. A cap onspending avoids problems related to upswings and downswings in theeconomy because spending fluctuates less and is controlled directlyby Congress.

Another difference between a spending and a revenue cap is thatyou do not need a taxpayer rebate mechanism under a spending cap.The tax rebate mechanism in Colorado has delivered substantialsavings to taxpayers, but it has become a complex part of the statebudget process because of special interest pressures to micromanageexactly who gets the rebates. By contrast, under a federal cap onspending, any savings would automatically go toward reducing thefederal deficit and debt (just as with any spending restraintwithout a cap). In years with rapid revenue growth like this year,a spending cap would ensure that the federal deficit was sharplyreduced. Congress would continue to have the option of cuttingtaxes whenever it wanted, but there would be no need for a complexrebate mechanism.

A final note: one shortcoming of a statutory spending cap isthat Congress would have the option of rewriting the law if itdidn't want to comply with it. In the past, Congress has oftenrewritten budget laws and found ways to get around budgetrestrictions when it wanted. But a cap on overall spending would bea very simple and high-profile symbol of restraint for supportersin Congress and the public to rally around and defend. Some budgetlaws have been too complex and hard for the public to understand.An overall cap on spending growth is easy to understand, andwatchdog groups would keep the public informed about any cheatingby Congress or the administration. A spending cap creates bothtransparency and control in federal budgeting. Over time, publicawareness and budgetary tradition would aid in the enforcement of acap.

Conclusion

Federal policymakers need both a change in mindset and tougherbudget rules to ward of huge tax hikes or a financial crisis infuture years as entitlement costs soar. They need to scour thebudget for programs and agencies to eliminate. 13 A spending cap is part of the solution toget the budget under control and avert another federal spendingorgy like the one of recent years.

Clearly, current budget rules have not worked very well, and weshould experiment with new rules to try and get a grip on theoverspending problem. Budget reforms such as biennial budgeting andestablishing a sunset commission are good ideas that should beconsidered. But a cap on overall federal spending is more direct,more powerful, and easier for the public to understand.

Thank you for holding these important hearings. I look forwardto working with the committee on its agenda for federal budgetreform.

BIOGRAPHICAL SKETCH OF CHRIS EDWARDS

Chris Edwards is tax directorat the Cato Institute and author of Downsizing the Federal Government.


1 Chris Edwards and TadDeHaven, "Farm Reform Reversal," Cato Institute Tax & BudgetBulletin no. 2, March 2002.

2 Chris Edwards, "ReducingFederal Corruption," Cato Institute Tax & Budget Bulletin no.34, May 2006.

3 For a discussion onearmark reforms, see Tom Finnigan, "All About Pork: The Abuse ofEarmarks and the Needed Reforms," Citizens Against GovernmentWaste, May 3, 2006.

4 For a discussion, seeChris Edwards, Downsizing the Federal Government(Washington: Cato Institute, 2005), chapter 6.

5 For background on statebudget processes, see National Association of State BudgetOfficers, "Budget Processes in the States," January 2002.

6 Michael New, "LimitingGovernment through Direct Democracy," Cato Institute PolicyAnalysis no. 420, December 13, 2001.

7 For some reform ideas,see Brian Riedl, "What's Wrong with the Federal Budget Process,"Heritage Foundation, January 25, 2005. See also the RepublicanStudy Committee's Family Budget Protection Act at www.house.gov/ryan/press_releases/2004pressreleases/family_budget_protection_act.htm.

8 For background, seeBrian Riedl, "Restrain Runaway Spending with a Federal Taxpayers'Bill of Rights," Heritage Foundation, August 27, 2004. See alsoChris Edwards, "Capping Federal Spending," Cato Institute Tax &Budget Bulletin no. 32, March 2006.

9 For a discussion, seeSusan J. Irving, "Budget Policy: Issues in Capping MandatorySpending," Government Accountability Office, GAO/AIMD-94-155, July1994.

10 The commission wassponsored by the Center for Strategic and InternationalStudies.

11 The business-as-usualscenario assumes that discretionary spending grows with GDP andthat entitlement spending grows per the Congressional Budget Officebaseline.

12 House RepublicanStudy Committee, "Contract with America: Renewed," March 8,2006.

13 For detaileddiscussion of federal programs that should be eliminated, see ChrisEdwards, Downsizing the Federal Government (Washington:Cato Institute, 2005). See www.downsizinggovernment.com.

Chris Edwards

Subcommittee on Federal Financial Management,
Government Information, and International Security

Committee on Homeland Security and Government Affairs
United States Senate