The return to large federal deficits after a briefperiod of surpluses shows that it is very difficultto enforce fiscal discipline within the currentbudget process. Strong tax revenue growth andfalling defense spending during the 1990s resultedin a balanced budget in fiscal year 1998 for thefirst time in 29 years. But budget balance did notlast long because Congress has opened the flood-gatesto rapid defense and nondefense spendingincreases in recent years. The war on terrorismhas given Congress and the administration politicalcover to further increase the budget and side-stepneeded spending tradeoffs.
Large deficits may renew interest in budgetprocess reforms to restrain spending. Indeed, in itslatest budget the Bush administration proposedcreating a new statutory line item veto that wouldbe linked to deficit reduction. In the 1980s and1990s, there were repeated efforts to imposegreater discipline on the budget process by enactingboth a line item veto and a balanced budgetamendment to the Constitution. A balanced budgetamendment with a supermajority requirementto protect against tax increases would be an effectiverestraint, but it has so far failed to gain theneeded political support. Meanwhile, a statutoryline item veto was passed in 1996 but was subsequentlystruck down by the Supreme Court.
This study discusses lessons learned from thosepast reform efforts and proposes a new "balancedbudget veto" mechanism. Under this mechanism, thepresident would be empowered with an item reductionveto only during sessions of Congress followingfiscal years with budget deficits. The item reductionveto would provide the president with a tool to cutspending when Congress has failed to do so.
Such a veto power, however, would notenshrine balanced budgets as constitutional doctrine.Instead, it would provide Congress anincentive to curb deficits and regain budgetarypower that has been temporarily bestowed onthe president. Congress would be institutionallypenalized for not limiting spending, and presidentswould have a bias against raising taxes soas not to lose their veto power.
Congress and the administration need to focuson institutional reforms to mend the broken budgetprocess. They should consider adopting a bal-ancedbudget veto as a new tool to encourage fiscalresponsibility through spending restraint.