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Balanced Budget Made Simple But Not Easy

By Peter Hess and Tom KazeePeter Hess is associate professor of economics, and Tom Kazee is associate professor of political science at Davidson College in North Carolina. / January 12, 1989



BLAME for the federal deficits is volleyed back and forth between Capitol Hill and the White House. The process that creates the federal budget has become so Byzantine that it's easy for our elected representatives to avoid responsibility. Aside from the finger pointing, the facts remain. At the beginning of the first Reagan administration the national debt was less than $1 trillion. It now approaches $2.5 trillion. The annual interest alone on that debt is $145 billion, or almost 15 percent of the federal budget. This means that next year, before the federal government can spend a dollar for education, defense, or health care, it must spend $145 billion to remain solvent. Moreover, the financing of the budget deficit entails either the crowding out of private investment and consumption through higher real interest rates, the running of trade deficits financed by foreign savings, or inflation (if the Federal Reserve chooses to create money to cover the excess expenditures).

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Will the Gramm-Rudman legislation solve the deficit dilemma in due time? Not likely.

The federal government has met its Gramm-Rudman goals with mirrors and creative accounting. Surpluses in the social security trust fund are holding down the size of the current deficits. Further fiscal sidestepping can be expected.

The real problem underlying the fiscal morass is lack of accountability. The budget process lets legislators pass the burden to future generations. As it now operates, the budget is determined by legislators who say, ``We'll decide what we want, approve that much spending, and worry about paying for it later.'' Here are some proposals for reform.

First, formulate the budget on a biennial basis. This corresponds to the term of House members and frees up some legislative time for other matters. It is easier to extend budget deliberations to include a second year than it is to start the process anew each year.

Second, change the system to ensure fiscal responsibility and accountability. For each two-year cycle, the Congressional Budget Office (CBO) and the Office of Management and Budget (OMB) would independently project net federal revenues based on the prevailing tax and entitlement systems and average economic performance (e.g., 3 percent annual growth in national income). These projections would be averaged. Then from the net revenue total would be subtracted interest due on the national debt. What remains would be available for discretionary federal spending.

Each member of the Senate and House and the president would be given 100 points to distribute over fairly broad expenditure categories. (See the attached sample fiscal scorecard.) The expenditure ``votes'' from all the legislators would be averaged to get a set of Senate priorities and a set of House priorities. The mean of the Senate, House, and the president's spending priorities would determine the budget allocations for the discretionary federal spending. The various legislative committees would then decide how to spend the money assigned to its area of oversight. Each committee might decide to use the same 100-point procedure to set the specific expenditure allocations.

If after the budget went into effect additional expenditures were deemed necessary for a particular program, the request would be brought before the House and Senate for approval. The request for additional expenditures, however, would have to be accompanied by a plan to raise that much in extra revenues. That is, from that point on, the system is ``pay as you go.''

This proposal places the budget process in the bright light of public accountability. The president's and each legislator's spending priorities would be public record. As a result, there may be more party discipline as the Republican and Democratic leadership endorse recommended fiscal scorecards.

This proposal avoids the fiscal straightjacket of a balanced budget amendment, since it allows for the desirable flexibility of unbalanced budgets. Net revenue projections will invariably be somewhat off-target due to the vagaries of the business cycle. Over the course of the business cycle, however, the federal budget would tend to be balanced.

This proposal for budget reform can easily be incorporated into the present Gramm-Rudman deficit targets. Furthermore, it increases the likelihood of attaining those targets. With the arrival of the Bush administration, isn't it time for a budget process that ensures accountability?