Changing the budget rules

Posted: Aug 29, 2001 12:00 AM
There is a growing sense in Congress and among economists that the presentation of the federal budget and the budget process could use updating. The way the budget is presented has not changed significantly since 1968, while the budget process is largely governed by rules contained in the Budget Enforcement Act of 1990, adopted during a period of large deficits. The first step toward updating the budget was taken on Aug. 2, when the House Budget Committee reported legislation for a new budget commission. This commission would be modeled on the President's Commission on Budget Concepts, which issued a report in 1967 that fundamentally altered the way the budget is calculated. Co-sponsored by House Budget Committee Chairman Jim Nussle, R-Iowa, and Ranking Minority Member John Spratt, D-S.C., H.R. 981 would establish a commission to examine such issues as the following: -- The efficacy of a two-year budget cycle, which would allow more time for budget oversight. -- An evaluation of user fees, which are currently scored as offsetting receipts or "negative spending," rather than as federal revenues. -- Improved accounting for acquisition and disposal of financial assets and the use of accrual-based measures for long-term financial commitments. These are all well and good. Unfortunately, the legislation ropes off some of the most important areas of the budget that need modernization. These include Social Security, Medicare and government-sponsored enterprises, such as Fannie Mae. In tying the commission's hands this way, Nussle and Spratt have undermined the ability of a new budget commission to do the job that is needed. In recent testimony before the House Budget Committee, Barry Anderson of the Congressional Budget Office explained some of the reasons why the Social Security Trust Fund should not be off limits to reform of its budgetary presentation. One reason is that the Social Security Trust Fund is just one of more than 200 trust funds now contained in the budget. The proliferation of trust funds is due in no small part to the enormous success of the Social Security Trust Fund in protecting Social Security from the budgetary pressures that affect the rest of the budget. As Anderson notes, government trust funds do not correspond in any meaningful way to those in the private sector. Government trust funds are simply a form of earmarking, "accounting mechanisms that record tax receipts, user fees, and other credits and associated expenditures," in Anderson's words. Economists generally oppose the idea of earmarking, because it reduces the government's flexibility. Too much money ends up being spent on privileged programs, leaving too little for others that may have greater needs and justification for spending. They are also skeptical about implying that a government trust fund has anything in common with its private sector counterparts. As Anderson explains, "The beneficiary of a private trust fund usually owns the fund's income and often owns its assets. The trustees of the fund also have a fiduciary responsibility to manage the fund on behalf of its beneficiaries and cannot make unilateral changes to the provisions governing the trust. In contrast, federal trust funds are owned by the federal government. They are created by law, and lawmakers can change those laws or repeal them." To put it another way, Social Security recipients have no legal right to their benefits, the way a private trust fund beneficiary does. The Supreme Court ruled as such in the case of Flemming vs. Nestor in 1960. It follows from this that the size or even existence of the Social Security Trust Fund has no relation to benefits. Benefits do not rise when the trust fund grows, and they do not fall when it shrinks. And Congress can, and often does, change Social Security benefits without reference to the trust fund's assets. For example, Social Security COLA's have been adjusted many times. Clarifying these facts in the budget would be a useful thing. But, as noted earlier, the budget commission would be prohibited from making any recommendations in this area -- too much danger that it might say the Social Security emperor is wearing no clothes, I suppose. Still, there may be a role for a new budget commission to play. The Budget Enforcement Act expires next year, which will probably force Congress to adopt some sort of new budget procedures. Better those changes be guided by informed analysis than solely by partisan political winds. The chances for success of a new budget commission would be enhanced if private groups, like the
Heritage Foundation and Brookings Institution, unencumbered by political constraints, issued their own reports on improving budget concepts, presentation and processes. My guess is that there will be at least some areas of general agreement around which consensus reforms can be made.