March 8, 1979
Page 4451
SENATE BUDGET COMMITTEE AND CONGRESSIONAL RESEARCH LETTER STUDIES ON BALANCED BUDGET
Mr. MUSKIE. Mr. President, I call to Senators attention two staff studies that have been prepared by the staff of the Senate Budget Committee and the Congressional Research Service. They analyze the various approaches to a balanced budget proposed in State applications for a constitutional amendment and in legislative proposals introduced in the Senate to date. Mr. President, I ask that these documents be printed in the RECORD.
The documents follow:
MEMORANDUM
To Senator Muskie.
From Jill Scheu and Lew Shuster.
Date March 1, 1979.
Subject A balanced Federal budget: Analysis of State applications and Senate legislative proposals.
Almost 50 State Petitions, bills and resolutions focused on a balanced federal budget are now under consideration in the Senate. To aid the Budget Committee's review of these matters, an analysis of those documents has been prepared. This memorandum categorizes and summarizes the constitutional convention applications from the states for a balanced federal budget and the legislative proposals for budgetary balance introduced in the Senate in the 96th Congress.
Categorization is based primarily on the formula used to achieve a balanced budget. For each category there is a brief description and analysis of the economic defects.
1. Balanced Federal budget formula:
a. State Applications:
(1) Four states (Florida, Georgia, North Carolina, and Oregon) have passed applications that incorporate the following wording:
. . . to require a balanced federal budget and to make certain exceptions with respect thereto."
Three applications are convention calls only; the fourth also requests Congress to propose an amendment.
Georgia would call convention for the "specific and exclusive" purpose of proposing this amendment. In addition, the Georgia application states that it constitutes a continuing application until ⅔ of the states have submitted applications, or if Congress proposes an "identical" amendment before January 1, 1977, the application will cease tobe in effect.
Oregon's application is similar to Georgia's,except that it gives Congress until January 1, 1979, to propose an identical amendment. It also calls on other state legislatures to pass similar petitions.
North Carolina's application imposes a time limitation so that in the event Congress proposes the amendment, the budget must be balanced within four years of the amendment's ratification.
(2) Idaho adopted the new NTU model petition which provides:
. . . that the federal budget be balanced in the absence of a national emergency."
The application also contains the following resolutions:
Congress shall propose an amendment or, alternatively, Congress shall call a convention for the specific and exclusive purpose of proposing such an amendment;
This application constitutes a continuing application until 2/3 of the legislatures have made application, but if Congress proposes an identical amendment, then this petition is no longer in effect;
This application is null and void if the convention is not so limited;
This legislature proposes that legislatures or other states similarly apply to Congress.
It is probable that Indiana and Utah, states recently adopting applications, also adopted this model.
b. Legislation Introduced in the Senate: None.
c. Defects:
Limits the ability of the federal government to respond quickly and flexibility to changing economic conditions, particularly in periods of recession and high unemployment.
May be absolutely impossible to achieve in periods of steep economic downturn which, though severe, would be difficult to characterize as a "national emergency."
Does not define "national emergency" thus causing the likelihood of prolonged debate which would likely go on until a deep recession or depression had already occurred, thus rendering any timely federal budget response impossible.
Could lead to higher future taxes and higher future spending, since the simplest way to balance the budget in periods of economic growth is refrain from cutting taxes.
2. Appropriations/revenues formula:
a. State Applications:
(1) 10 States (Alabama, Kansas, Nebraska, Nevada, New Mexico, Oklahoma, Pennsylvania, South Dakota, Tennessee and Virginia) passed applications using the following formula:
"In the absence of a national emergency . . . the total of all federal appropriations made by the Congress for any fiscal year may not exceed the total of all estimated federal revenues for that fiscal year."
(2) Eight of these states (Alabama, Kansas, Nebraska, New Mexico, Oklahoma, Pennsylvania, South Dakota and Virginia) passed identical petitions 4 based on the first model petition of the National Taxpayers Union which included the following resolutions:
That Congress shall submit an amendment containing this formula to the states for ratification;
That alternatively, Congress shall call a convention for the "specific and exclusive purpose" of proposing such an amendment;
That the legislatures of each of the several states shall pass similar applications.
The other two (Nevada and Tennessee) used the same basic formula, but only called for a convention.
(3) Four more states (Arizona, Maryland, South Carolina and Wyoming) have passed applications using the same formula, but adding a clause which excludes from total revenues all revenues derived from borrowing.
b. Legislation Introduced in the Senate: None.
c. Defects:
Goes well beyond the concept of a balanced budget; would require large budget surpluses because appropriations in recent years have run about 10% higher than outlays and are likely to continue to do so in an expanding economy. This would seriously slow economic growth.
Would be likely to undermine the "full funding" concept for multi-year projects under which the full cost of such projects is appropriated at the outset so that Congress and the public can see in advance the total cost.
Limits the ability of the federal government to respond quickly and flexibly to changing economic conditions, particularly in periods of recession and high unemployment.
May be absolutely impossible to achieve in periods of steep economic downturn which, though severe, would be difficult to characterize as a "national emergency."
Does not define "national emergency" thus causing the likelihood of prolonged debate which would likely go on until a deep recession or depression had already occurred, thusrendering any timely federal budget response impossible.
Could lead to higher future taxes and higher future spending, since the simplest way to balance the budget in periods of economic growth is to refrain from cutting taxes.
3. Outlays/revenues formula:
a. State Applications:
(1) Delaware passed a convention call only, to propose an amendment requiring that the costs of operating the federal government shall not exceed its income during any fiscal year except in the event of a declared war.
b. Legislation introduced in the Senate:
(1) Six resolutions (Talmadge, Helms. Lugar, McClure, Heflin, Byrd, H.) use simple balance the budget language stating that total expenditures or outlays shall not exceed receipts.
Two provide for suspension of the terms of the amendment on a vote by 2/3 of each House: one provides for suspension if both Houses agree to a concurrent resolution declaring an emergency.
c. Defects:
Limits the ability of the federal government to respond quickly and flexibly to changing economic conditions, particularly in periods of recession and high unemployment.
May be absolutely impossible to achieve in periods of steep economic downturn which, though severe, would be difficult to characterize as a "national emergency."
Does not define "national emergency" thus causing the likelihood of prolonged debate which would likely go on until a deep recession or depression has already occurred, thus rendering any timely federal budget response impossible.
Could lead to higher future taxes and higher future spending, since the simplest way to balance the budget in periods of economic growth is to refrain from cutting taxes.
4. Balanced budget/national debt formula
a. State Applications
(1) Three states (Texas, Louisiana and Mississippi) have passed applications which deal with both a balanced budget and reducing the national debt:
". . . achievement of a balanced budget and amortization of the national debt."
While Texas simply calls for an amendment, not a convention, which would require the achievement of a balanced budget within a reasonable time after adoption and establish a procedure for amortizing the national debt, the provisions of the Louisiana and Mississippi petitions call for a convention and present the same issue in more specific terms.
b. Legislation introduced in the Senate:
(1) Three joint resolutions (Wallop, Thurmond and Armstrong) provide for both a balanced budget and repayment of the national debt. Two provide that 5% of the receipts shall be available only for repayment of the national debt over a twenty year period. The third requires repayment at the rate of 1/10 every 10 years for 100 years. All three contain clauses allowing suspension of the provision for national emergencies; one requires that any indebtedness incurred pursuant to such a suspension must be repaid within three years.
c. Defects:
The statement is internally inconsistent, since amortization of the national debt would require a budget surplus, not a budget balance.
Puts a further drag on economic growth.
Limits the ability of the federal government to respond quickly and flexibly to changing economic conditions, particularly in periods of recession and high unemployment.
May be absolutely impossible to achieve in periods of steep economic downturn which, though severe, would be difficult to characterize as a "national emergency."
Does not define "national emergency" thus causing the likelihood of prolonged debate which would likely go on until a deep recession or depression has already occurred, thus rendering any timely federal budget response impossible.
Could lead to higher future taxes and higher future spending, since the simplest way to balance the budget in periods of economic growth is to refrain from cutting taxes.
5. Year and GNP limitation formula:
a. State Applications: None.
b. Legislation Introduced in the Senate: (1) Two bills (Dole, Roth) have been introduced to amend the Budget Act by imposing limits on total outlays and revenues contained in concurrent budget resolutions to specific percentages of the GNP. The Dole bill also limits the number of budgets that may contain a deficit to not more than one every four years. In addition, any deficit must be made up within two years. Each bill provides for suspension of its provisions by a ⅔ vote in each House.
(2) One joint resolution (Dole) limits the number of years in which expenditures may exceed receipts to 3 out of 8 years. Each year's deficit must be made up by surpluses in the following years. Federal outlays shall not exceed 18 percent of the GNP beginning with the third year after ratification.
c. Defects:
Contains arbitrary limitations of 1 deficit in 4 years, or 3 deficits in 8 years — the state of the economy may require anywhere from 0 to 4 to 8 deficit years in a particular time period, and there is no way of knowing for sure in advance.
Imposes an arbitrary spending limit, constraining outlays without consideration of economic and social needs.
Has a perverse cyclical impact, allowing outlays to rise rapidly in inflationary periodsand holding down outlay growth when economy has just experienced a recession.
6. Surtax formula:
a. State Applications: None.
b. Legislation Introduced in the Senate:
(1) Two joint resolutions (DeConcini, Stennis) require the President to determine the amount by which outlays exceeded receipts at the close of each fiscal year, and to then impose an income tax surtax that would produce the amount. The two resolutions are identical except that one requires a 2/3 vote for suspension, the other a 3/4 vote.
c. Defects:
Places a heavy burden on the economy — if a deficit was experienced one year because the economy experienced a recession, the combined effect of a balanced budget and the surtax the following year might plunge the economy into an even deeper recession.
Promotes a spend now, pay later mentality — spend this year, taxes rise automatically next year.
Limits the ability of the federal government to respond quickly and flexibly to changing economic conditions, particularly in periods of recession and high unemployment.
May be absolutely impossible to achieve in periods of steep economic downturn which, though severe, would be difficult to characterize as a "national emergency."
Does not define "national emergency" thus causing the likelihood of prolonged debate which would likely go on until a deep recession or depression had already occurred, thus rendering any timely federal budget response impossible.
Could lead to higher future taxes and higher future spending, since the simplest way to balance the budget in periods of economic growth is to refrain from cutting taxes.
7. Percent of national income formula:
a. State Applications: None.
b. Legislation Introduced in the Senate:
(1) One joint resolution (McClure) restricts outlays to not more than 33⅓% of the average national income for the 3 prior calendar years. A vote of 3/4 from both Houses may approve expenditures in excess of 33⅓% in case of war or emergency.
c. Defects:
Imposes an arbitrary spending limit, constraining outlays without consideration of economic and social needs.
Averages 2 years of actual data with 1 year of projection, forcing us to base a spending limit on a forecast of national income that is uncertain and subject to change.
Has a perverse cyclical impact, allowing outlays to rise rapidly in inflationary periods and holding down outlay growth when economy has just experienced a recession.
Promotes the idea that this is how fast spending should grow — the specified ceiling might become a floor.
8. Spending limit tied to prior year's growth formula:
a. State Applications: None.
b. Legislation Introduced in the Senate:
(1) Within the next two weeks a joint resolution is expected to be introduced (Stone and Heinz) that incorporates the Friedman formula. It would hold the growth of federal spending in any year to the rate at which the economy grew the year before. Restrictions would be even tighter if inflation exceeded 3%. Any surpluses would be used to reduce the national debt. The spending limits could be lifted in times of national emergency by a ⅔ vote of Congress. The limits could be lifted permanently only with a ¾ vote of Congress and approval of 26 state legislatures.
c. Defects:
Imposes an arbitrary spending limit, constraining outlays without consideration of economic and social needs.
Estimates of GNP represent the "best guess" of a group of Bureau of Economic Analysis experts — their judgment would be the basis for a limit on federal spending.
Holds down outlay growth when the economy has just experienced a recession, which could hinder progress of an economic recovery.
9. Deficit spending prohibition formula:
a. State Applications:
(1) Colorado passed a convention call only, for the specific and exclusive purpose of proposing an amendment which would prohibit deficit spending. The application would be void if the convention was not so limited.
b. Legislation Introduced in the Senate: None.
c. Defects:
Limits the ability of the federal government to respond quickly and flexibly to changing economic conditions, particularly in periods of recession and high unemployment.
May be absolutely impossible to achieve in periods of steep economic downturn which, though severe, would be difficult to characterize as a "national emergency."
Does not define "national emergency" thus causing the likelihood of prolonged debate which would likely go on until a deep recession or depression had already occurred, thus rendering any timely federal budget response impossible.
Could lead to higher future taxes and higher future spending, since the simplest way to balance the budget in periods of economic growth is to refrain from cutting taxes.
10. Limited Federal debt formula:
a. State Applications:
(1) Arkansas passed a convention call only to consider an amendment that would require no debt above the national debt ceiling existing at the date of ratification, unless voted by ⅔ of Congress, or unless to repel invasion, suppress insurrection, defend the United States in war or to pay the existing debt.
b. Legislation Introduced in the Senate: None.
c. Defects:
Would require a budget surplus of $31.3 billion in FY 80, which would seriously slow economic growth.
Limits the ability of the federal government to respond quickly and flexibly to changing economic conditions, particularly in periods of recession and high unemployment.
May be absolutely impossible to achieve in periods of steep economic downturn which, though severe, would be difficult to characterize as a "national emergency."
Does not define "national emergency" thus causing the likelihood of prolonged debate which would likely go on until a deep recession or depression had already occurred, thus rendering any timely federal budget response impossible.
Could lead to higher future taxes and higher future spending, since the simplest way to balance the budget in periods of economic growth is to refrain from cutting taxes.
11. Balanced budget in years of strong economic growth formula:
a. State Applications: None.
b. Legislation Introduced in the Senate:
(1) A bill (Proxmire) would amend the Employment Act of 1946 to require outlays to equal receipts in any year in which real economic growth exceeds 3 . Should the President and 2/3 of Congress determine that a national emergency exists, the President may submit an alternative budget, in addition to the "balanced"budget.
c. Defects:
Imposes rigid formula as substitute for careful budget decisions in light of each year's economic circumstances.
Requires a balanced budget, and would therefore slow economic growth in the recovery years immediately following a recession, which could abort the recovery and plunge the economy into an even more severe recession or a depression.
Triggers the balanced budget requirement on the basis of an uncertain economic forecast which could be subject to substantial revision.
2. Federal spending freeze formula:
a. State Applications: None.
b. Legislation Introduced in the Senate:
(1) A resolution (Stone) requires the Budget Committee to include in the concurrent resolutions for FY80, FY81, and FY82 levels of outlays and budget authority which are not greater than 98% of the levels contained in the final concurrent budget resolution for FY 79.
c. Defects:
Freezes outlays at $447.8 billion through fiscal year 1982, resulting in cuts from current policy of $73 billion in fiscal year 1980 and $177 billion by fiscal year 1982.
Ignores growth in outlays required by current law, including effects of inflation adjustment and demographic changes on Social Security.
Means that by fiscal year 1982, we would have to abolish all Federal welfare, transportation, housing, agriculture education, community development, employment and training, and energy programs and still fall short of cuts required to hold outlays to this level.
13. Unallocated $10 billion outlay cut formula:
a. State Applications: None.
b. Legislation Introduced in the Senate;
(1) A resolution (Roth) expresses the sense of the Senate that the first concurrent resolution for fiscal year 1980 should recommend a level of outlays at least $10,000,000,000 lower than the level recommended by the President.
c. Defects:
Imposes an arbitrary spending cut that has no rational basis and no analysis of economic and social needs or specific program areas to be cut.
Would require significant spending cuts below current law — something the Budget Committee expects to do this year, but which will be very difficult.
Falls heavily on outlays from new budget authority — 26 percent of outlays are from prior year budget authority.
14. Balanced two-year formula;
State Applications;
(1) North Dakota's application calls upon "the people of the several states for a convention" to propose the following amendment:
The President shall submit a budget at the beginning of each new Congress.
Expenditures for each 2 year period shall not exceed estimated revenues except during war or national emergency declared by Congress.
b. Legislation Introduced in the Senate: None.
c. Defects:
Limits the ability of the federal government to respond quickly and flexibly to changing economic conditions, particularly in periods of recession and high unemployment.
May be absolutely impossible to achieve in periods of steep economic downturn which, though severe, would be difficult to characterize as a "national emergency."
Does not define "national emergency" thus causing the likelihood of prolonged debate which would likely go on until a deep recession or depression had already occurred, thus rendering any timely federal budget response impossible.
Could lead to higher future taxes and higher future spending, since the simplest way to balance the budget in periods of economic growth is to refrain from cutting taxes.
15. Separate Federal capital and operating budget formula:
a. State Applications: None.
b. Legislation Introduced in the Senate:
(1) A resolution (Hart) expresses the sense of the Senate that both the President's Budget and the Congressional Budget should divide proposed outlays between those for capital items and investment-type programs, and those for operating or current program or purposes,
c. Defects:
Promotes false sense of budgetary balance and masks the impact of the federal budget on the economy.
Weakens the budget as a control mechanism — could lead to higher federal spending for programs included in the capital budget and higher total federal spending.
Fails to define capital and operating programs; capital programs for the Federal government are not the same as for private business, and the definitions could cause extended controversy, particularly if the capital portion gets less scrutiny.
Changes accounting without any change in Treasury financing needs or the impact of the budget on the economy.
16. Establishment of a regulatory budget formula:
a. State Applications: None.
b. Legislation Introduced in the Senate:
(1) A bill (Bentsen) to amend the Congressional Budget Act, calling for new procedures aimed at producing a regulatory budget which would set maximum costs of compliance with rules and regulations promulgated by every federal agency.
c. Defects:
Imposes an unwieldy layer of procedural requirements on top of a very tight Congressional budget timetable.
Duplicates existing requirements for regulation impact analysis, focuses on costs rather than a balancing of costs and benefits, and fails to put information to use to review and possibly alter current laws and regulations. (Sharp contrast to Sunset, which would use existing analysis and provide a review process for evaluating each program's costs and benefits and terminating those which are no longer productive.)
Suffers from the problem that we could never measure private sector "costs of compliance" with the certainty implied by a regulatory budget, and those private sector expenditures would be beyond direct federal control.
CONSTITUTIONAL LIMITATIONS ON THE BUDGET
During the first month of the 96th Congress, more than 50 constitutional amendments were proposed to require a balanced budget or to limit the expenditures of the federal government. Approximately one dozen of these measures have been introduced in the Senate, and more can be expected as the pace of legislative activity accelerates. Congressional action has been spurred by petitions of many state legislatures for a constitutional convention to consider a balanced budget amendment. According to some counts, more than three-quarters of the required 34 states have already applied to Congress for a constitutional convention.
This paper reviews the various approaches to balanced budgets and spending limitations. It then examines some of the possible impacts of these types of constitutional restrictions on congressional budget practices. Finally, it explores the possibility of a capital budget for the federal government.
BALANCED BUDGETS AND SPENDING RESTRICTIONS
All of the proposed amendments introduced in the Senate intend to circumscribe the budgetary powers of Congress, but they pursue this objective in different ways. Nine purport to require a balanced budget each year; three would limit the total outlays of the federal government. One of the proposals (S.J. Res. 5) combines types of restrictions; Sen. McClure has introduced parallel measures providing for a limitation on federal spending (S.J. Res. 9) and a balanced budget (S.J. Res. 10).
Although the balanced budget proposals are more numerous, there are indications of a trend away from this approach in favor of spending limitations. The Tidewater conference of Republican officials refused to endorse a balanced budget amendment and opted for spending limitations instead. Moreover, the Friedman (National Tax Limitation Committee) proposals call for a spending limit, not a balanced budget. There appear to be two distinct explanations for the sudden cooling of interest in a balanced budget by constitutional fiat. First, the requirement could either be unworkable or damaging to the economic interests of the United States. In case of an economic downturn, government receipts inevitably would fall below their projected level, and if Congress tried to compensate for the shortfall and retain a balance by raising taxes or lowering expenditures, it would further aggravate the nation's economic problems. (As will be discussed below, most budget-balancing amendments authorize Congress to suspend this requirement in case of emergency.) Second, a balanced-budget rule might induce higher taxes rather than lower expenditures. While this requirement would not compel Congress to legislate increases in tax rates, it might thwart the passage of the types of tax-cutting legislation approved by Congress in each year since 1975. If this were to happen, during periods of high inflation and economic growth, the portion of personal income going to the payment of federal taxes would inexorably rise.
Many of the balanced budget amendments would not actually bar deficit spending. S.J. Res. 2 (DeConcini) and S. J. Res. 6 (Stennis) provide that Congress "shall seek to assure" a balanced budget, but they do not prohibit either appropriations or outlays in excess of revenues. S.J. Res. 4 (Lugar) would require that the concurrent resolutions on the budget adopted twice (or more often) each year by Congress be balanced, but under this procedure it still would be possible for the federal government to incur a deficit. Consider the following hypothetical circumstances: the second resolution adopted by Congress shortly before the start of the fiscal year projects a balance. With all of the regular appropriation bills already enacted, it no longer is necessary for Congress to take any budget-related action. But during the fiscal year, economic performance falls below the expected level with the result that federal revenues also decline, thereby turning the projected surplus into an actual deficit without any action by Congress. It should also be noted that the congressional budget resolutions presently exclude about $12 billion of off-budget outlays; federal spending could be imbalanced in this amount without violating the letter of the Lugar amendment.
Some of the amendments impose the balanced budget requirement on Congress, others merely declare that total outlays shall not exceed total revenues. S.J. Res. 7 (Armstrong) for example, provides that "Congress shall make no appropriation for any fiscal year if the resulting total of appropriations for such fiscal year would exceed the total estimated revenues of the United States for such fiscal year." To the extent that deficits result from actions other than those taken by Congress in its appropriations process, Armstrong would not be an obstacle. The executive branch would be permitted to spend in excess of revenues, provided, of course, that it had budget authority to do so. Furthermore, deficits occasioned by shifts in federal revenues, whether by action of Congress or because of economic conditions, would not be directly covered by Armstrong. Another proposal, S.J. Res. 5 (Dole), does not mention Congress at all. It stipulates that "the aggregate amount of expenditures made by the government during any fiscal year shall not exceed the net amount of revenue." Leaving aside its obvious intent, a strict interpretation of the Dole Amendment is that Congress can appropriate in excess of revenues but that the executive branch would be barred from spending any excess.
Several amendments specify that "Congress shall assure that the total outlays ... do not exceed the total receipts." (S.J. Res. 13, 16). This language clearly vests enforcement in Congress, but fulfillment of this responsibility might not be an easy task. Since actual outlays are made by the executive branch, a balanced budget requirement might lead to an expansion of executive impoundment practices which were curtailed by the Impoundment Control Act of 1974. If Congress were to require a President to use the impoundment controls even in the face of a prospective deficit, the effect might be to obstruct achievement of a balanced budget.
The problems in interpreting the Armstrong, Dole and other amendments are not semantic gyrations but arise out of the crucial fact that Congress does not presently make legally binding outlay decisions. The appropriations made by Congress relate to the amount of budget authority (authority to incur obligations) required by the federal government, not to its cash needs or expected outlays. Any effective constitutional prohibition would have to reckon with the budgetary practices of the United States and the division of responsibility between the executive and legislative branches. These issues will be considered later in this report.
The difficulty of securing budgetary balance by congressional action alone are rooted in two features of the federal budget process. First, as has been mentioned, Congress has an obligations based appropriations process. As a result, the outlays made in any fiscal year depend not only on the current decisions of Congress but on past actions as well. Second, more than three-quarters of each year's budget outlays are "uncontrollable under existing law", either because of past legislative or executive actions or because of exogenous factors such as the inflation and unemployment rates.
Spending Limitations.
Each of the measures calling for a limitation on total federal outlays takes a different approach.
The Dole amendment would hold total outlays to no more than 18 percent of GNP; McClure's spending limitation (S.J. Res. 9) would restrict outlays to no more than one-third of national income; the Friedman proposal would limit each year's increase in outlays to the growth in GNP, minus an adjustment for inflation.
Dole's amendment would constrain federal spending at a level significantly below Carter's 1980 budget or projections for the next several years. His 18 percent of GNP ceiling compares to the 21.7 percent in Carter's budget and to the 22.6 average for the past 5 years. If the 18 percent limitation were in effect for fiscal 1980, total outlays would have to be restrained to approximately $450 billion, about $90 billion below the total (including off-budget) outlays recommended by the President. Although it deals only with the spending side of the budget, this limitation contemplates a truly significant reduction in federal tax revenues. Assuming no change in the existing tax structure, federal budgets in the 1980s would be running massive surpluses in excess of $100 billion per year. (Of course, this estimate does not take into account the likely dampening effect of such surpluses on the economy and budget receipts.) The overriding purpose of the 18 percent limit — as well as the other proposed spending limitations — is to retrench the relative size of the public sector.
This may be a difficult-to-achieve goal, however. Twenty years ago, in 1959, the federal budget was 19.5 percent of GNP; optimistic forecasts for the 1980s assume a larger federal government than would be allowed by the Dole amendment. Carter's latest budget projects that federal outlays will recede to 20.7 percent of GNP in fiscal 1982, but this target allows almost no room for program growth.
The Dole amendment would not prevent the government from using the budget to manage the economy but would effectively require that short-term fiscal stimulation be provided through tax reductions rather than expenditure increases. Yet changing economic conditions could play havoc with the 18-percent goal. Even if Congress were to approve budget resolutions and appropriations bills which conform to this target, unanticipated downturns in the economy could force expenditures well above 18 percent of GNP. Because of automatic features of fiscal stabilization, when economic output drops, there is a modest rise in federal expenditures. With smaller real GNP and higher outlays, the federal budget consumes a larger share of economic resources even without action by Congress. Thus, as a consequence of the 1958 recession, outlays climbed from 18.7 to 19.5 percent of GNP in fiscal 1959, only to recede to 18.5 percent in the following year when economic growth resumed. Similarly, the 1975 recession occasioned a 3 percent rise in federal outlays as a percent of GNP, with a dropoff (but not to the previous percentage level) when economic conditions improved.
McClure's amendment (S.J. Res. 9) would limit total outlays to no more than one-third of the average national income for the three prior calendar years. Unlike Dole, therefore, outlays would be linked to past rather than projected economic performance. Moreover, the use of a multiyear average in the McClure approach would shield the outlay limit somewhat from zigzagging economic performance.
National income is computed by subtracting capital consumption and various tax payments and liabilities from GNP along with several other statistical adjustments.
In using this economic measure, McClure eschewed other, more familiar, computations such as personal income and disposable personal income. If it were applied, the 33% percent limitation would compel a modest reduction in federal outlays (perhaps $10 billion below the total contemplated in the 1980 budget). Its main effect, however, would be to constrain future budgetary growth by limiting increases in federal outlays to the growth in national income. One can only conjecture about the severity of this constraint, for it depends on what the size of the budget would be in the absence of any limitation. But it is worth noting that outlays have climbed from approximately 30 percent of average national income at the start of the 1970s to about 34 percent at the present time.
The Friedman (National Tax Limitation Committee) proposal would limit each year's rise in total outlays to the increase in GNP during the preceding calendar year, but the allowable increase would be reduced by one-fourth of the rate of inflation above three percent. (The Friedman formula defines inflation as the difference between the change in real and nominal GNP.) Thus, if nominal GNP were to rise by 9.5 percent and prices by 7 percent (these rates approximate the Administration's economic forecast for 1980), the next year's budget outlays would be permitted to rise by no more than 8.5 percent.
This approach would not only bar any future permanent growth in the relative size of the budget, but it is likely to force a progressive decline as well. Although it lacks a rollback feature or an explicit ceiling (such as is found in the Dole and McClure measures) the inflation penalty in the Friedman formula would automatically compel a shrinkage in the government's relative expenditures every year that inflation exceeded three percent. Moreover, the Friedman formula differs critically from Dole and McClure in that it does not put a floor under the mandatory reduction in the federal budget. Dole does not require shrinkage below 18 percent of GNP; McClure does not compel outlays to be less than 1/3 of national income. But Friedman could set into motion a change in federal government that reduces it to well below either of the other targets.
The actual impact of Friedman will depend on the rate of inflation: the higher the rate, the faster and steeper will be the decline in relative outlays. For example, if the economic projections for 1980 with respect to inflation and GNP were to persist throughout the 1980s (prices rising 7 percent and output 9.5 percent), by the end of the decade the federal budget would have to drop from 21.7 percent of GNP to no more than 17.1 percent. While the economic assumptions upon which these calculations are based are not likely to materialize (it is highly unlikely that economic growth and inflation will experience constant rates through the decade), the implication nonetheless is unavoidable, that the Friedman scheme could require much steeper retrenchment than appears on its face.
The Friedman proposal speaks of a gentle as opposed to an abrupt scale-down in the relative size of government. But the potential change could be far greater than has been experienced in the postwar era. During the 1960s, outlays grew 2 percent in relative terms, and they have increased an additional one percent in the 1970s. As demonstrated above, with persistent inflation, the change within a single decade could be far greater under the Friedman idea.
The inflation penalty can have severely retrenching effects during periods of stagflation, when the economy is either stagnant or declining and inflation is high. The combination of these conditions would simultaneously lower the GNP base on which outlay increases are to be computed and raise the inflation penalty. The net effect could be a sharp decline in relative expenditures during a period of high unemployment. This real possibility can be shown by applying Friedman's formula to the economic conditions that prevailed in the mid-1970s when the OPEC boycott, worldwide food shortages, and other factors took a heavy economic toll. Real GNP fell in 1975 while unemployment soared to 9 percent, with more than 8 million Americans out of work. Nevertheless, inflation was extremely high, slightly in excess of 9 percent as measured by the Friedman formula. Had this spending limitation been in effect, it would have constrained budget outlays for fiscal 1977, the first full fiscal year after calendar year 1975. Total outlays in fiscal 1977 would not have been allowed to exceed $395.4 billion, $10 billion below the amount (including the off-budget entities) initially proposed by President Ford in what was widely regarded as an extremely tight budget, and $17 billion below the final results for that year.
Without taking account of automatic adjustments in the economy (for example, a smaller budget might have led to lower GNP than was actually produced), federal outlays would have been about 21.5 percent of GNP, a drop of more than 1½ percent compared to the preceding fiscal year. Thus, in lieu of a gentle decline in GNP promised by the Friedman group, there might have been a steep, destabilizing drop during a period of continuing high unemployment.
The inflation penalty is intended to prod Congress to do something about inflation. In the words of its sponsors, "the higher the inflation rate, the greater the incentive for Congress to reduce inflation." The assumption is that inflation is always within the control of Congress, a position that ignores other contributing factors such as world markets and the actions of other countries.
At the core, the three spending limitations reviewed here seek a forced retrenchment in the size of the federal government. Their principal aim is to assure less rather than more government.
McClure would require a modest cutback that probably could be accommodated within conventional budget methods. The cuts might be painful, but they could be achieved without requiring a significant redirection in the scale and priorities of the federal government. Dole would compel a much steeper reduction, amounting to about one-sixth of the size of the federal budget. Unless it was phased in over a number of years, the Dole amendment would be an abrupt turnabout in the role and scope of the federal government. Of course, Dole's concept could be retained but its impact mitigated by pegging the expenditure limit at above 18 percent of GNP. If 20 percent were set as the constitutional limit, it probably could be achieved without a disruptive effect on public policy.
The Friedman approach is open ended with its impact depending on future economic growth and inflation. But it is possible that over time this could have a much more radical effect on the federal government than either of the other spending limitations. Unless inflation is significantly lower than it has been during the past decade, the size of the federal government will have to contract in order to abide the Friedman limits. Although the reductions would be decremental rather than all-at-once, the long-term consequences could be truly radical. One wonders whether a fundamental reordering of the role and purposes of the federal government should be considered under the guise of a spending limitation. The issues raised by Friedman are far more than budgetary matters alone, for they reach to almost every corner of public policy.
OVERRIDING THE CONSTITUTIONAL RESTRICTIONS
Most of the proposed constitutional amendments would authorize Congress to temporarily set aside the restrictions. While the procedures differ, they usually provide for a concurrent resolution (a legislative measure which is not presented to the President for his review) specifying that conditions warrant deficit spending or expenditures in excess of the constitutional limitation. A few (such as Friedman) predicate congressional override on a declaration of emergency by the President, but most enable Congress to act unilaterally without the participation (or concurrence) of the executive branch.
The proposed amendments differ as to the conditions that would permit an override. Some refer to "national emergency,"others to "grave national emergency"; some mention war, others speak in more general terms. As long as Congress can decide whether a particular condition meets the requirement, the differences in wording are of little consequence. However, the size of the congressional majority required to override could make a big difference. The requirement ranges from a majority of the voting members of the House and Senate in S.J. Res. 11 (Talmadge) to three-quarters of all the members of the House and Senate in S.J. Res. 7 (Armstrong). In a close vote, the numerical standard could spell the difference between victory and defeat for an override attempt. It bears noting that in recent years most of the concurrent resolutions on the budget have passed the House with razor-thin majorities, sometimes fewer than a handful of votes. With House Republicans lined up in virtually solid opposition to deficit spending, the resolutions have barely managed to squeak through. A high constitutional threshold for overriding the limitation is likely to bolster the bargaining positions of congressmen who favor smaller deficits or lower spending. By withholding their support until the deficit or spending level is brought closer to their preference, the holdouts would be able to magnify their influence over the budget. Thus, while a high requirement would not necessarily rule out imbalanced budgets or breaches of the spending limitations, it might lead to smaller deficits and less spending by Congress.
Some of the proposed amendments would place substantive restrictions on the power of Congress to override a balanced budget requirement. S.J. Res. 16 (Wallop) would not permit the deficit to exceed total revenues by more than 10 percent. At current budget levels, this would allow a deficit of about $50 billion. S.J. Res. 5 (Dole) would not permit a deficit in more than three years out of any eight consecutive years. If this restriction were to have retroactive effect, it would bar deficit spending during the first 5 years that the constitutional provision was operative.
REPAYING THE DEFICIT AND THE PUBLIC DEBT
A number of the proposed amendments provide for Congress to liquidate any deficit incurred after the constitutional restrictions take effect. S.J. Res. 2 (DeConcini) and S. J. Res 6 (Stennis) require that any deficit is to be paid off by a surtax levied in the next calendar year. The surtax would become effective without congressional action; all that would be required is a presidential message setting the surcharge at a rate sufficient to cover the deficit. However, Congress could suspend all or part of the surtax by a two-thirds (S.J. Res. 2) or three-quarters (S.J. Res. 6) vote. S.J. Res. 5 and S.J. Res. 16 allow more time for repayment, up to three years in the former and as much as four years in the latter.
A few of the proposed amendments would require the accumulation of surpluses to retire the public debt. S.J. Res. 7 would spread repayment of the debt over 100 years, with 10 percent repaid during each 10 year period. S.J. Res. 16 would establish a 20-year repayment schedule, with annual surpluses equal to 5.5 percent of total outlays used for this purpose.
WHAT'S IN A BUDGET?
Any constitutional restriction on deficits or expenditures must come to grips with the issue of what constitutes the budget of the United States Government. The question of what ought to go into the budget is by no means settled; current practices are a compound of written and unwritten rules, many of which were introduced by the executive branch without the explicit concurrence of Congress. Moreover, the emplacement of an expenditure or budgetary restriction in the Constitution will not bring an end to the improvisation of new governmental forms and accounting procedures. Quite the opposite, one can expect that the more formidable the restriction the more likely that it will invite the executive and legislative branches to contrive new practices. Only one thing can be certain: the more inclusive the definitive of the budget, the more restrictive will be any constitutional limitation on deficits or expenditures.
Off-budget programs.
The leading candidates for inclusion in the budget are six federal agencies all or portions of whose activities have been excluded from the budget's totals by Congress. The six off-budget agencies are the Federal Financing Bank (FFB), the Rural Electrification and Telephone Revolving Fund, the Rural Telephone Bank, the Pension Benefit Guaranty Corporation, the Postal Service Fund, and the U.S. Railway Association. A seventh, the Board of Governors of the Federal Reserve System,has a somewhat ambiguous status. It is excluded from the budget by tradition rather than by law.
Off-budget outlays are expected to total $12 billion in fiscal 1980. More than $11 billion of this amount is accounted for by the purchase of federally-guaranteed obligationsby FFB. Under its charter, the Federal Financing Bank is authorized to acquire any obligation guaranteed in whole or in part by any federal agency. (It also can purchase direct federal obligations, but these are included in the budgets of agencies making the loans.) There is no limit on the amount of guaranteed loans that can be purchased by FFB. When it needs funds to finance these purchases, FFB borrows from the Treasury which, in turn, provides for its cash needs by borrowing from the public. Thus, FFB's loan activities have the same impact as the regular budget deficit on capital markets.
The House Budget Committee recommended in 1976 (H. Rept. No. 94-1740) that various off-budget agencies be included in the federal budget, but it withheld a recommendation on the status of the Federal Financing Bank pending further study. However, in 1978 (H. Rept. 95-1055, p. 23) the Budget Committee supported legislation to include FFB in the budget. If all off-budget agencies were placed on-budget; there would be an estimated net addition of $12 billion to the fiscal 1980 outlays and deficit. Presumably, this additional amount would be covered by a budget or expenditure limitation written into the Constitution.
Government-Sponsored Enterprises.
These enterprises are privately-owned corporations established and chartered by the United States to perform certain "public" functions. Seven such enterprises are identified in the fiscal 1980 budget, and their financial statements are annexed to the Budget Appendix. However, the finances of these organizations are not included in the outlay or deficit totals of the United States Government. The seven sponsored enterprises are credit operations: Student Loan Marketing Association; Federal National Mortgage Association; Banks for Cooperatives; Federal Intermediate Credit Banks; Federal Land Banks; Federal Home Banks; and the Federal Home Loan Mortgage Corporation.
These enterprises are only a few of the hundreds of corporations created or chartered by Congress since 1791. During the past two decades, Congress has devised a variety of organization forms combining elements of public and private enterprise. These include private corporations which are funded entirely by federal appropriations (e.g., the Legal Services Corporation) private for-profit corporations which have public and private sources of revenues (Consolidated Rail Corporation), and profit-making corporations partly owned by the federal government (National Railroad Passenger Corporation).
The 1967 President's Commission on Budget Concepts devised a simple test for determining whether a government-sponsored corporation should be on- or off-budget:
"The criterion recommended by the Commission is basically that Government sponsored enterprises be omitted from the budget when such enterprises are completely privately owned."
As the activities and finances of the "quasi-governments" (as they are sometimes referred to) have become more complex, it has become increasingly difficult to use the private ownership test to distinguish between public and private activities. In a 1978 paper for the National Academy of Public Administration, Graham S. Finney argued that "an either/or, public/private world, separating government and for profit enterprises, has long ceased to exist, if it ever really did."
But whether or not such distinctions are valid, they would have to be made in applying a constitutional limitation on the budget. Government sponsored corporations would have to be placed either within or outside the budget; no gray areas could be tolerated in deciding whether or not a quasi-public expenditure creates a deficit or exceeds a spending limitation.
The private ownership test is not a full measure of the federal government's involvement — financial and administrative — in the activities of sponsored organizations. With respect to the seven privately-owned enterprises annexed to — but not included in — the budget, the federal government has a considerable interest in their finances and performance. Their financial relationship to the federal government is described in the 1980 budget (Special Analysis, p. 164):
"Since they are private, their activities are not included in the budget totals. They are all subject, however, to some form of Federal supervision and by law or by custom consult with the Treasury Department in planning the marketing of their debt.
"Government sponsorship has endowed these enterprises with certain characteristics that differentiate them in credit markets from completely private institutions. They have been given special preferences, and certain tax exemptions and the special eligibility of offering their securities as investments of federally regulated institutions. These advantages give their security obligations a preferred position in the securities market, enabling them to borrow at rates only slightly higher than those of the Treasury."
Although the securities issued by these corporations disclaim any liability of the United States, they are similar to the "moral obligation" (or revenue) bonds issued by public authorities in many states. They are listed in the New York Times and other publications under the heading, "Government and Agency Bonds." Despite the legal disclaimer. the federal government probably would not be able to remain on the sidelines if any of the enterprises fail. The involvement of the United States is potentially greater than that of stockholders of private corporations whose exposure is limited to the value of their stock. The private ownership test might be an irrelevant standard by which to measure the public character of federally-sponsored enterprises. In its 1976 report on off-budget financing, the House Budget Committee explicitly rejected private ownership as the sole criterion for establishing the budgetary status of these enterprises. It noted that in most cases investment markets do not consider the Government-sponsored enterprises to be completely private nor, in most cases, would a member of the general public draw this distinction. Each of the Government-sponsored enterprises is subject to some greater or lesser measure of Federal direction, and some implicit subsidy may be presumed to arise whenever borrowing from the public is undertaken. (H. Rept. No. 94-1740, p. 7)
In accord with this finding, the Budget Committee recommended that Congress not create any new enterprises with off-budget status "pending resolution of the question of appropriate criteria for existing agencies."
The sponsored enterprises will account for an estimated $19 billion in outlays in fiscal 1980. It should be noted, however, that neither Congress nor the President exercises direct budgetary control over these loan activities, so that actual outlays can vary significantly from the original estimate.
One can anticipate that stringent constitutional restrictions on deficits or expenditures would invite the creation of additional "quasi-governmental" enterprises outside the budget. This clearly has been the experience in state governments, a number of which have turned to public corporations and "moral obligation" bonds in order to evade their own constitutional restrictions.
States have financed billions of dollars of capital construction by vesting responsibility in private or quasi-public organizations which are not legally deemed to be governmental entities. These evasive practices often are more costly than direct borrowing by the state because revenue bonds generally bear higher interest rates than comparable general obligation bonds. Furthermore, these special institutions often escape not only constitutional limits on borrowing but also the political controls to which regular public organizations are subject.
It would not be difficult to remove tens of billions of dollars from the federal budget by creating "quasi" institutions with authority to raise revenues and to borrow. It would be possible, for example, to create a $100 billion dollar national health insurance system without a single dollar for this purpose appearing in the budget. While there may be legitimate reasons for creating these types of enterprises, overly restrictive constitutional controls can have a warping effect on the structure of the United States Government.
Guaranteed Loans.
The third major category of federal financial transactions excluded from the budget total consists of loans for which the United States commits itself to pay all or part of the principal and or interest in case of default by the borrower. Guaranteed loans are excluded from the budget by section 3(a) (2) of the Congressional Budget Act which provides that the term budget authority "does not include authority to insure or guarantee the repayment of indebtedness incurred by another person or government." This exclusion is based on the fact that guaranteed loans (unlike direct loans which are in the budget) are a contingent liability in which the obligation of the United States is activated only in case of default. The United States bears no liability if the borrower makes the required debt payments; in case of default, any payment by the United States is included in the Budget.
The budgetary status of guaranteed loans was considered by the President's Commission on Budget Concepts in 1967. In comments prepared for the Commission, Dr. Arthur Okun predicted that the different budgetary treatment of direct and guaranteed loans "would lead to a strong preference in the budgetary process for guarantees over direct loans." Moreover, the staff of the Commission cautioned that—
". . . continuing pressures on both Congress and the Executive to hold down the level of apparent Federal spending and the budget deficit establish artificial incentives to shift from direct loans to indirect lending whether or not the guarantee or insurance of private loans represents a fully satisfactory substitute."
These expectations have been realized. There has been a huge increase in the volume of loan guarantees. By the end of fiscal 1980, the total of such loans outstanding is projected to exceed $400 billion, an increase of almost $100 billion in the space of just three years. The total of such loans held by the Federal Financing Bank is expected to reach $56 billion, and the amount held by the public is estimated at $239 billion.
Various congressional committees have expressed alarm at the growth in these guarantees. In a 1979 report, the House Appropriations Committee was disturbed by "the recent proliferation of legislative proposals involving program guarantees, which while they do not grant budget authority in the technical sense of the term, do thus establish a contingent liability on the taxpayer virtually beyond the subsequent control of Congress."
In a report on the second budget resolution for fiscal year 1977, the Senate Budget Committee voiced concern about "the increasing use of guarantee mechanisms that have the effect of circumventing the discipline of the Congressional budget process," and it indicated its desire for "appropriate recommendation to Congress to establish control over proliferation of such programs."
The 1980 budget takes two steps toward budgetary control of loan guarantees. For the first time, schedules of loan guarantees have been included in the Appendix for each account with which such guarantees are associated. In addition, the Administration has proposed that annual limits be set on outstanding loan guarantees. Even if such limits were established, one can anticipate that constitutional restrictions on direct budget outlays will generate pressure for circumvention by means of guarantees.
The three off-budget devices discussed here will net to more than $50 billion in fiscal 1980. Although they presently are the chief means for conducting financial activities outside the budget, new mechanisms might be devised in response to constitutional restraints.
WHAT IS AN OUTLAY?
If definition of the budget's scope is difficult, determining what constitutes an outlay can be even more troublesome. There is almost no law on the subject, and a jumble of conflicting practices and traditions complicates the quest for defensible criteria. Yet a spending limitation cannot be enforced without rules for deciding what is an outlay. The issue, at first glance, seems straightforward and without complication: an outlay occurs whenever the federal government makes a payment of funds. The issue, however, is not whether a payment constitutes an outlay, but how outlays are computed for budgetary purposes. It is in the counting of outlays that difficulties abound.
Grossing Versus Netting.
In the course of each year, the federal government makes a sizeable number of direct loans (which, as noted earlier, are reported in the budget) and also receives payment from borrowers to whom loans were extended in previous years. The federal practice is to count direct loans in the budget on a net basis, that is the gross amount of new loans minus repayments. This method is consistent with the definition of outlays in the Congressional Budget Act as "expenditures and net lending of funds."
The financial activities of public enterprise revolving funds also are reported in the budget on a net basis. These funds conduct business type operations for which they obtain receipts from the users of their services. The receipts, however, are not computed in the budget as federal revenues, but offset the expenditures of the public enterprises. As a result of this accounting practice, the amount shown in the budget as outlays for pubic enterprise funds is the excess of their expenditures over revenues. In fiscal 1980, the gross outlays of the public enterprise funds will be about $46 billion, but with $38 billion in receipts from the public, the budget will show only approximately $8 billion in outlays. The treatment of these outlays on a net basis conforms to the 1967 recommendation of the President's Commission on Budget Concepts.
However, in 1977, the Comptroller General recommended that these funds be reported on a gross rather than a net basis. The reasons set forth in his report relate to the ability of Congress to control the budget:
". . . when new accounts are classified (public enterprise) revolving funds or whenever existing revolving funds grow, budget outlays do not increase as rapidly as they would if accounted for on a gross basis. The changing of an account to a revolving fund gives the appearance that budget expenditures are declining even though the rate of expenditure may remain the same or even increase. Using the revolving fund classification might help to reduce budget totals and escape national priority debate by changing fund structure without changing fund purposes."
In other words, changes in accounting procedures and budgetary definitions can veil the actual budget totals. However, no constitutional restriction can be immunized against one or another form of budgetary legerdemain.
RECEIPTS AS NEGATIVE EXPENDITURES; EXPENDITURES AS NEGATIVE RECEIPTS
Various receipts of the federal government are treated as offsets against outlays rather than as federal revenues. These fall into two categories: receipts which offset particular categories of expenditure (about $1.6 billion in the 1980 budget), and $2.6 billion in undistributed receipts which are applied against the outlay totals in the budget. While there may be legitimate economic reasons for treating some of these receipts as negative expenditures (in the case of offshore income, for example, the United States can be regarded as exchanging one asset — the lease — for another — royalties), this budgetary practice can complicate the task of producing reliable receipt and outlay estimates, free from political bias. In some recent years, the Administration produced unrealistic estimates of the income from offshore oil and gas leases as a means of showing lower deficit and outlay totals in its budget.
One of the most controversial instances in which receipts are treated as negative expenditures occurs when the federal government sells loan assets (direct loans or securities known as participation certificates or certificates of beneficial ownership.) Here, too, the transaction is treated as an exchange of assets and the revenues are computed as offsets to expenditures. In view of the high volume of obligations owned by the federal government, this practice gives the executive branch a great deal of latitude in influencing the level of outlays that appears in the budget. It is possible to show a reduction in outlays merely by selling some of the assets to the public. The Office of Management and Budget has been critical of the manner in which sales of some loan assets are accounted for. It points out (The Budget for Fiscal Year 1980, p. 316) that
". . . as a means of financing outlays there is no difference in substance between an agency selling securities labeled "certificates of beneficial ownership", the same agency selling securities labeled "debt", and the Treasury selling securities labeled "debt." Moreover, when certificates of beneficial ownership are sold, the ownership of the specific loans is retained by the Government, interest payments on the loans continue to be made to the Government, and the Government continues to incur the servicing costs of the loans and to assume fully the risk of default on the loans."
If receipts sometimes are counted as negative expenditures, the opposite also has been true: expenditures are sometimes treated as negative receipts rather than as outlays of the federal government. The 1980 budget proposes to make direct payments to certain individuals whose wage increase is held to 7 percent or below. Some of these "wage insurance" payments are treated in the budget as refunds of tax receipts, not as outlays. The effect is to reduce outlays $2.3 billion below the total that would appear in the budget if such payments were computed as expenditures. Several years ago, when the "earned income credit" program — direct payments to low-income workers — was established, the House and Senate Budget Committees wrangled over whether credits in excess of tax liability should be accounted for as offsets to receipts or as outlays. For fiscal year 1978 the committees decided to treat them as negative receipts, but for the 1979 budget, they counted them as outlays, thus demonstrating the lack of hard and fast rules for these types of budgetary transactions.
The grossing-versus-netting argument and the existence of offsetting receipts and expenditures arise out of the complexity and sprawl of the federal budget. Even if no attempt were made to circumvent budgetary controls, there would be a great number of contentious accounting issues. But with constitutional restrictions in force, there surely will be ample incentive for manmade contrivances to evade the controls.
It should be noted that these issues relating to the definition of outlays would not affect computations of budgetary balance. Any change in the outlay totals would be matched by an adjustment to receipts and vice versa. However, constitutional limitations on expenditures would be significantly impacted by the manner in which outlays are handled in the budget.
Unless it were detailed in the extreme, a constitutional limitation on expenditures could not resolve these definitional and accounting issues. The matter would have to be resolved by statutory elaborations which give meaning to the bare bones constitutional intent. The effect of any limitation will depend, therefore, on statutory interpretation rather than on the constitutional provision. Arguably, therefore, the whole issue ought to be left for statutory determination where it would be decided anyway.
CONTROL OF OUTLAYS
In order to be enforceable, a balanced budget requirement or a spending limitation would have to be accompanied by means of controlling the outlays of the United States Government. At the present time, Congress lacks adequate means to hold outlays within limits. It does not directly decide how much is to be spent in a particular year by each federal agency or program. Its control extends to the appropriation of funds or to other legislation authorizing agencies to enter into obligations. The cash expenditure occurs only when the obligation is paid off, sometimes long after congressional activity has ended. In the ordinary sequence of events, Congress has little direct control over the timing of expenditures.
When an appropriation and the ensuing outlays occur in the same fiscal year, there is no difference between the two measures of budget activity. Such is estimated to be the case, however, for less than 65 percent of the new budget authority requested for fiscal 1980. An estimated $136 billion of the outlays projected in fiscal 1980 will derive from budget authority carried over from previous years.
The Congressional Budget Act requires Congress to set outlay targets in the first concurrent resolution on the budget and ceilings in the second resolution. However, these outlay amounts are not statutory limitations on the allowable expenditures of the federal government in a fiscal year. As discussed earlier, it is feasible for Congress to specify an outlay total in its budget resolution, but for federal spending to exceed that level because of matters beyond its direct control.
When the Budget Act was under consideration, one proposal called for Congress to fix outlay limits in each appropriation bill. The effect would have been to establish legally binding outlay numbers rather than merely "advisory" ones. During its work on the legislation, the Senate Committee on Rules and Administration addressed the question of whether outlay limitations could provide effective budget control. The Committee concluded (S. Rept. No. 93-688, p. 20) that in view of the difficulty of precisely estimating such outlays, a limitation would not be workable:
"The problem with outlay ceilings is that it is difficult to estimate precisely how much will be spent in a particular fiscal year. Each year's outlays derive from past as well as current actions of Congress. More than $100 billion of the outlays estimated in the President's budget for fiscal 1975 result from budget authority provided in prior years. Congress controls current and future outlays by deciding how much new budget authority to give executive agencies, but once the authority is in the "pipeline," Congress can (under current procedures) control outlays only by imposing deep cuts on the fraction of the budget which is controllable.
"In the 1975 budget, approximately $223 billion, or almost 75 percent of total outlays, is estimated as uncontrollable under existing law. Many of the uncontrollable items are open-ended programs, spending for which cannot be effectively set in the appropriations process. It is exceedingly difficult to estimate these amounts precisely, and in recent years there has been considerable variance between the uncontrollable expenditures estimated in the budget and actual expenditures for that fiscal year. In an average year uncontrollable costs are more than five billion dollars above the original budget estimate."
During the first years of the congressional budget process, actual outlays were $10 billion or more below the original estimates, and even billions below the revised estimates made later in the year. While these shortfalls might seem to suggest that a constitutional limitation can be enforced, there is no reason to expect a shortfall to occur in every year. The same factors which have caused outlays to fall below estimates can have the opposite effect under different economic or political conditions.
Moreover, the shortfalls would have an exceedingly contractionary effect if the Friedman amendment were in effect. Every shortfall would lower the outlay base on which the next year's allowable expenditures would be calculated, it could cause the budget to shrink even below the relative levels projected earlier. Furthermore, with shortfalls prejudicing the outlay base, the executive branch would have a powerful incentive to spend up to its allowable limit. It would be penalized for prudent and efficient management. The Friedman amendment has an efficiency penalty which can impair financial management in the federal government.
POTENTIAL IMPACTS OF CONSTITUTIONAL RESTRICTIONS
Those who seek constitutional restrictions on the budget or on spending assume that requirements for a balanced budget or limitations on federal expenditures would force changes in federal practices. This section considers some of the intended — and possible unintended — effects of these requirements.
Tax Policy.
None of the proposed amendments specifically addresses or purports to limit the tax policies of the United States. Yet one can foresee significant changes in the tax system. Balanced budget requirements would exert upward pressure on taxes; spending limitations would probably have the opposite effect. In the short run, the easiest (and sometimes only) way to secure a balance would be to raise taxes, or at least not lower them to the level that might otherwise be desired. As was discussed earlier, the recent practice of using the growth and inflation "dividends" of the tax system to reduce nominal tax rates might be seriously curbed. On the other hand, if stringent spending limitations were imposed, the federal government would likely accumulate massive surpluses in the absence of periodic tax cuts. But it is by no means certain that spending limitations would stimulate general tax reductions. Inasmuch as these limitations would constrain the ability of the government to provide benefits through direct outlays, pressure might build up for subsidies through the tax system. Rather than general tax reductions, Congress might respond by enacting new and increased "tax expenditures" for favored interests. In economic terms, a subsidy provided by means of preferential tax treatment has the same value as a subsidy provided via a cash outlay but whereas the latter would be constrained by a constitutional limitation, the former would not. Of course, if balanced budgets were mandated, the provision would have a restrictive effect on both general tax reductions and tax expenditures.
Another possible outcome derives from theaccounting conventions discussed earlier. To the extent that an outlay can be defined as an offset to receipts, a spending limitation would goad Congress to devise transactions that could escape being tagged as outlays.
Fiscal Policy.
Even with an override feature for national emergencies, any requirement that outlays not exceed receipts would have a dampening effect on the federal government's ability to respond to economic crises. Strict enforcement of a budgetary balance would compel a Hoover-like reaction, in which expenditures are reduced to match a drop in government revenues. If this were to happen, the stabilizing capacity of the federal budget would be severely impaired and comparatively mild recessions could blow up into major depressions.
This is not a likely scenario, however, because Congress probably would relax the requirement by exercising its override authority. Even Hoover was forced to abandon his balanced budget ideals: the federal budget ran a small ($462 million) deficit in fiscal 1931 and a much larger one ($2,735 million) in the next fiscal year. The point, however, is that even if a deficit were authorized, it almost definitely would be smaller than would occur in the absence of a constitutional limitation. Especially if extraordinary majorities (two-thirds or three-fourths) of the House and Senate were required to suspend the limitation, opponents might be able to block approval until the deficit is whittled down to acceptable size.
A spending limitation would not have these adverse impacts on the federal government's capacity to stimulate the economy. But both because of the sensitivity of tax receipts to economic performance and the constitutional inhibition against increasing expenditures, the bulk of the stimulus would have to be provided through tax policy. Such actions are likely to have different distributive impacts (which groups and individuals benefit) than economic stimulation provided through spending programs. One can conjecture that the lowest-income groups — often those hardest hit by a recession — would be most disadvantaged by a constitutional policy which biases fiscal policy toward tax relief.
Controllable and Uncontrollable Expenditures.
More than three-quarters of fiscal 1980 outlays are classified by OMB as "relatively uncontrollable under existing law." This phrase has been challenged by some who claim that virtually all of the budget is controllable if Congress wishes to change existing law. Nevertheless, the concept provides a useful clue to how Congress and the executive branch might act when faced with a need to reduce outlays in order to uphold a constitutional requirement. Over the short run, that is, the fiscal year for which such a requirement would be operative, much of the burden would have to be borne by the controllable sector of the budget. In the language of federal budgeters, the uncontrollable would bleed the controllables, a predicament which occurs in the best of times and is inescapable in the worst. How the required cuts are spread among the controllables would depend on the political climate for defense versus domestic programs. In view of the fact that defense accounts for almost 60 percent of controllable outlays, it is likely to be vulnerable to forced reductions, except when international conditions dictate higher spending for that purpose. Federal assistance to state and local governments is a likely target, though the Friedman amendment would protect these recipient governments against cutbacks for a six-year period.
Over the long term, one can expect budgetary constraints to induce Congress to make marginal adjustments in the entitlement programs which have spiraled during the past decade and add up to 70 percent of all uncontrollables. By marginal adjustments, one has in mind trims in certain features of these programs rather than wholesale eliminations. The savings proposed by Carter for fiscal 1980 in social security are marginal, both in the sense that the initial cost reductions are modest and the basics of the program are undisturbed. But because modest savings tend to balloon over time, even marginal adjustments can have pronounced effects on future budgets.
Regardless of where the cuts would be distributed, constitutional constraints can be expected to bias the budget against proposed new programs. The preferred position of existing programs versus new ones is already entrenched in the budget, but the penalty against major initiatives within the budget will grow. Of course, this bias might be offset by the concentration of program starts outside the budget. New programs, under these circumstances, might be able to make it only if they carry methods of evading budgetary control.
Executive-Legislative Relationships.
Although the proposed amendments are silent about relationships between Congress and the executive branch, one cannot escape the feeling that it is Congress which is to be constrained. The drive for anchoring budgetary restrictions in the Constitution is predicated on the belief that Congress cannot be trusted to abide any controls it is free to break. There also is an undertone of argument that Congress is culpable for the runaway spending and massive deficits which have beset recent budgets.
In at least two ways, the constitutional proposals can tilt the balance of budgetary power in favor of the executive branch. First, on the assumption that the President's budget would consume just about all of the spending room available under a constitutional limitation, Congress would be left with the option of redistributing expenditures rather than adding to total outlays. It might be able to take from defense and give to domestic programs (a transfer which it has made in most years since Vietnam) , but it would have little recourse other than to accept the President's dictates.
Congress might try to wriggle out of this predicament by shifting the costs of its decisions to future budgets. In view of the fact that Congress makes budget authority decisions and that much new authority is not spent until future years, Congress could establish programs with low first year costs but with incremental costs locked into future budgets. If this were to happen, the focus of budgetary debate in Congress would shift from the current to future budgets, with congressmen competing to stake their claims for future increments. The net result would be a worsening of the ability of Congress to control outyear expenditures. A constraint intended to strengthen control over expenditures might have precisely the opposite effect, particularly since all of the proposed amendments take a one-year-at-a-time posture.
The second impact of these restrictions would be to bolster the President's claim of power to impound funds appropriated by Congress. In the past, Presidents claimed an inherent power to impound; under these limitations, they could claim a constitutional power to impound. Lest this prospect appear to be fanciful, one need only recall that in the great impoundment battle between President Nixon and Congress, a claim of authority to impound was grounded on presidential interpretations of statutory limits on expenditures and the statutory limit on the public debt.
The impoundment power might indeed offer the only means by which stern constitutional constraints could be enforced. The inability of Congress to control outlays has already been mentioned. In abiding the new budgetary limits, Congress might be forced to cede impoundment authority to the President or helplessly stand by as he works his will on the budget.
The Future Role of the United States.
This section concludes by returning to a theme which was broached earlier: the proposed spending limitations mask their real purpose, a radical transformation in the character, reach, and purpose of the United States Government. The extent to which the trend toward active government would be reversed would depend on (1) the type of limitation written into the Constitution, and (2) the willingness and ability of the Government to do via other means that which it could no longer do via the budget. While one should not underestimate the ingenuity which surely will be applied to evade the controls or to act in nonbudgetary ways, there is no escaping the prospect that a federal government operating under a constitutional strait jacket would be markedly different than one which is unfettered and can decide what and how to execute its will. The differences might be in the walling off of major segments of government from popular and legislative control through the expansion of "quasi"governments. They might be reflected in an untangling of the relationships that have grown between the federal and state and local governments, along with a dispersion of power and money from the center to states and municipalities. Change might come through a contraction of America's presence on the world scene or through greater reliance on market mechanisms to provide "social" goods and services and to manage economic affairs. The list of possible mutations certainly is endless, and yet no list could comprehend the full range of intended and unintended possibilities.
One must be concerned, therefore, about constitutional changes so rife with uncertainty, and so silent as to their real purpose. Budgetary discipline might be the least of the consequences wrought by constitutional experimentation. Surely the other possibilities ought to be debated before budgetary change is decided. And the terms of debate ought to be markedly broader than the budget alone: let the other possibilities be aired, and only then will it be possible to make informed judgments as to whether the budget is the appropriate means toward those ends.
BORROWING FOR CAPITAL INVESTMENT
The proposed balanced budget requirements have regenerated interest in a capital budget for the United States Government. A capital — or divided — budget is one in which the government's investment in physical, curable assets would be segregated from the regular ("operating") budget and would not be included (except perhaps for depreciation charges) in the calculation of the budget surplus or deficit. The capital budget is standard accounting practice for most large business firms as well as for many state and local governments which are restricted to borrowing only for permanent improvements. The capital budget concept has been around for many years, but it has never been adopted for the federal government.
Concern over a balanced budget is not the only argument advanced in favor of a capital budget.
Perhaps the most compelling reason is that there is a fundamental distinction between a capital and a current expenditure. When the government purchases a capital asset, there is no change in its net worth, since it is merely exchanging one asset for another or concurrently creating assets and liabilities of equal value. However, when the government expends for current goods and services, there is a net decrease in its assets inasmuch as the asset it acquires has no permanent value.
It has been argued that a capital budget would facilitate long-range planning of physical improvements. The federal practice of lumping capital investments with current outlays induces a one-year-at-a-time perspective in which little attention is paid to future priorities and costs.
Moreover, a capital budget might help to standardize existing budget practices with respect to "outyear" costs. At the present time, major weapons are "full funded", with new budget authority provided for acquisitions that might stretch over a number of years. Water resource projects, however, are funded on an installment basis, with each budget providing only the amount of new budget authority required for a single fiscal year.
A capital budget could provide a useful guideline for regulating the use of debt. It could serve as an alternative to a rigid balanced budget concept and provide a yardstick for determining whether a particular level of debt financing is appropriate. If the federal government were to finance capital investments by borrowing — as is common in many states and localities — the public might accept the need to borrow for capital purposes as long as the regular budget is balanced.
Slightly more than 20 percent of the fiscal 1980 budget might qualify as capital expenses. Special Analysis D identifies $115 billion in investment-type programs, $44 billion of which goes for national defense and the remainder for civil programs. The investment programs include the acquisition of physical assets ($57 billion), research and development ($30 billion), and education and training activities ($21 billion). These estimated investment costs far exceed the projected fiscal 1980 deficit, but some caveats are in order before the $115 billion number is used as a measure of net capital investments.
First, the estimates are approximations, not precise numbers. The federal government presently lacks an accounting system for segregating capital and current expenditures. Second, no adjustment is made for depreciation of federal assets acquired in the past. Even if the $115 billion estimate was firm, it would represent gross expenditures, not net capital investment. The measurement of depreciation could pose serious accounting difficulties especially for weapons systems. Third, a substantial portion of the $115 billion goes for the acquisition of assets or investment by non-federal entities. The federal government subsidizes the construction of merchant ships by private shipyards and highways by state governments. Although the United States Government does not own these assets, it finances their acquisition and the benefits accrue to the American people.
Most economists who have expressed themselves on the subject do not favor a separate capital budget. A major study by Maynard S. Comiez — A Capital Budget Statement for the U.S. Government (The Brookings Institution: 1966) concluded that "the case for a federal capital budget involving separate loan financing for capital outlays is not persuasive." (p. 30) The principal argument against a capital budget is that the condition of the economy rather than capital investment should be the main determinant of how much of a surplus or deficit ought to be incurred by the federal government. Countercyclical fiscal policy requires that overall economic conditions rather than immediate capital plans determine the government's borrowing policy. Because the federal government has economic management responsibilities, it should not apply the budget practices appropriate for state and local governments.
A subsidiary concern is that if capital outlays were financed by borrowing, there might be a tendency to favor them at the expense of operating programs. In some hard-pressed states and localities, for example, it sometimes is easier to get funds for a new facility financed in the capital budget than funds for maintenance of an existing facility in the operating budget.
It should be noted that the segregation of capital and current expenses by many states and localities is in many cases an outgrowth of their own constitutional and legal restrictions on borrowing for operating programs. If the federal government were subjected to a similar restriction, the temptation to develop a separate capital budget would be very great, whether the capital borrowing is excepted from the constitutional restriction or for special entities which do the borrowing in behalf of the government.