Ersatz congressional budgeting

Posted: Jun 14, 2004 12:00 AM

It looks like Congress won't pass a budget this year. "So what?" you say, and rightfully so. The federal government will go on without interruption.

As a former member of the House Budget and Appropriations Committees, I can say with some experience that congressional budgeting is playacting anyway, and all the political hand-wringing is just stagecraft. The ersatz congressional budget lacks the two defining characteristics of real budgeting: binding budget constraints and enforceable spending priorities.

What euphemistically is called the congressional "budget" doesn't actually authorize the expenditure of monies; it simply sets the procedural framework in which Congress does authorize expenditures. If the congressional budget "doesn't pass," that means Congress simply uses other procedures to authorize expenditures, hopefully fewer of them.

The tangle over this year's congressional budget comes about because four Republican senators refuse to allow a congressional budget to pass without also reinstating the "paygo" rules, which expired last September. The paygo rules were a remnant of the infamous budget summit in 1990 where President George H. W. Bush broke his "no-new-taxes" promise and bowed to Democratic demands for tax increases, a promise that they quickly reneged on. President Reagan often lamented that he was promised $3 of spending cuts for every $1 of tax increase in the 1982 budget deal, but, "Congress never cut spending by even a penny." In 1990, as a result of the budget deal, taxes increased and so did the deficits.

Paygo was portrayed as a procedural enforcer of fiscal discipline. It required a supermajority vote of Congress to approve legislation enacting new spending increases unless offsetting tax increases were adopted to "pay for" the new spending. Likewise, paygo required a supermajority vote to cut taxes unless Congress also enacted offsetting spending reductions.

The problem with the old paygo rules was that they didn't apply to the source of most spending increases, namely entitlement spending. Neither did the paygo rules require spending reductions to offset the automatic tax increases that occur every year due to our progressive tax system.

Therefore, under paygo the default setting on government growth was "bigger." With automatic increases in federal entitlement spending and higher tax revenues built right into the system, the paygo rules were biased in favor of ever larger government.

On the spending side, paygo provided Congress a fig leaf against charges of fiscal profligacy by making it more difficult for Congress to enact new discretionary spending increases over and above the automatic entitlement spending growth. On the revenue side, paygo made it difficult for Congress to offset the damaging economic consequences of automatically increasing tax rates. In other words, paygo hung a revenue millstone around the neck of the economy in the name of "fiscal discipline" that didn't even stop the automatic growth in government.

During the 1990s, when Gingrich Republicans controlled the Congress and Clinton Democrats were in the White House, the paygo environment put the lid on federal spending growth but allowed federal revenues to rise rapidly. This situation resulted in a fiscal stalemate that produced uncontainable political pressure.

For example, the year Bill Clinton left the presidency, federal spending fell to 18.4 percent of GDP. During that same year, the federal tax burden as a share of GDP rose to 20.9 percent, matching its all-time wartime high in 1944.
The Congressional Budget Office projected that without tax cuts, revenue would stay near this record level indefinitely into the future.

The political pressure was released when George W. Bush became president and pushed a tax cut through the Congress to revive the economy. Interestingly, if the Bush tax cuts are made permanent and the Alternative Minimum Tax is indexed for inflation, revenues will level off at the historic average over the past 30 years.

If the Bush tax cuts are not made permanent, however, CBO projects the federal government will consume a record high of 20.5 percent of GDP in 2015, an unprecedented 22.6 percent in 2030 and an unimaginable 24.7 percent in 2050.
But even if revenue growth is put back on automatic pilot, spending increases sown into the fabric of current law will drive deficits ever higher. As Empower America's Chief Economist Lawrence Hunter points out in a forthcoming Institute for Policy Innovation report:

"Federal outlays are expected to hit 20 percent of GDP this year, and according to the Congressional Budget Office, if current trends continue, spending will rise to 24.5 percent of GDP by 2030 and to 32.8 percent by 2050.
Hence, no matter how fast the incredible federal revenue machine sucks in taxes, unless some kind of spending limitation is put into law, it will never be sufficient to keep pace with spending."

In order for Congress' budgeting rules to be neutral, they must ensure that, everything else being equal, government does not automatically increase as a share of the nation's income. Rather than reinstituting paygo and ensuring the continued growth of government and an unbearable burden on the U.S. economy, Congress should adopt rules prohibiting overall federal spending growth from exceeding the economy's growth rate. Now that would be a real budget.