Commentary | Budget, Taxes, and Public Investment

House 18% spending cap is as bad and infeasible a policy as the Senate’s

A few months ago, we argued that the Senate Republican Consensus Balanced Budget Amendment, which would cap federal spending at 18% of recent economic output, was not just bad policy, but was simply not feasible. Blogger Bruce Bartlett, former adviser to President Reagan, charitably described the plan as possibly the “dopiest constitutional amendment” of all time, one that “looks like it was drafted by a couple of interns on the back of a napkin.” Now, the House Republicans are following suit and have proposed a balanced budget amendment (BBA) with an 18% spending cap of their own. The House version is computed differently but nonetheless represents an extreme and unworkable assault on the Great Society and New Deal legislation. Even using a different formula, an 18% spending cap is still bad policy and infeasible.

The House Judiciary Committee is marking up “Proposing a balanced budget amendment to the Constitution of the United States” (H.J.Res. 1). In many ways, this bill resembles the deeply flawed Senate balanced budget amendment. It would formulaically limit federal spending and require a two-thirds supermajority vote of both chambers to waive this limit. Any tax increase or budget deficit would require three-fifths majority vote of both chambers (the Senate bill set a higher two-thirds supermajority threshold). Like the Senate bill, there would be exemptions for times of war but not for economic downturns. Yesterday, the House Judiciary Committee approved an amendment by Rep. Louie Gohmert (R-Texas) to reduce the primary spending cap (excluding debt service) from 20% of GDP to 18% of GDP. Today, the procedural hurdle for revenue increases was amended upwards to a two-thirds supermajority.

The Senate BBA would cap total spending for a given fiscal year at 18% of GDP for the calendar year that ended before the start of the current fiscal year. Consequently, if the BBA became effective at the start of fiscal year 2016 (October 1, 2015), spending would be capped at 18% of GDP for calendar year 2014. (If enacted this year, the Senate bill would go into effect in fiscal year 2016 and the House bill would go into effect in 2017.) Based on Congressional Budget Office projections, this would translate to an average effective cap of 16.6% of GDP over 2016–21, diminishing government to its smallest capacity since 1956.

As amended, the House BBA, on the other hand, caps primary spending at 18% of economic output for the current fiscal year. Consequently, budgets would be drafted based on projected GDP, which would politicize the CBO’s economic projections and also force deep cuts if those projections proved bullish, say at the onset of a recession. This design would also open the door to costly tax cuts, effectively shrinking government well below the “permissible” spending cap.

Tax cuts increase spending because larger deficits require more borrowing and subsequent debt service costs. By excluding debt service from the definition of spending, this additional cost wouldn’t violate the spending limit, making it easier to defund the federal government. Requiring a supermajority vote for any tax increase would also make it easier to defund government. Congress could only run a budget deficit if the BBA were waived by a supermajority in both chambers, so the revenue level would be the de facto limit on total spending; the 18% of GDP cap on primary spending wouldn’t even be the effective ceiling for government spending.

Assuming all the Bush tax cuts are extended and current policy for the alternative minimum tax is continued, revenue will average 18.3% of GDP over 2017–21. The House Republican 2012 budget would have continued all these tax cuts and choked off even more revenue. This would become the effective limit for total government spending—and based on current policies it’s likely that debt service will average closer to 3.7% of GDP over this period, not 0.3% of GDP (the difference between this effective revenue spending cap and the statutory primary spending cap). Consequently, primary spending would be forced well below 18% of GDP. In dollar terms, the gap between current policy outlays and revenues averages close to $1.1 trillion annually over 2017–21.

The federal government simply cannot operate at around 18% of the economy given the aging population, spiraling health care costs, and the legacy of two unfunded foreign wars and a decade’s worth of costly tax cuts. The Congressional Budget Office’s long-term analysis of the House Republican 2012 budget suggests that it would not reduce total spending below 18% of GDP by 2040, and that analysis relies on the arbitrary (and unrealistic) assumption that revenue would hold at 19% of GDP. The draconian House budget would not comply with the chamber’s proposed constitutional balanced budget amendment for decades.

Beyond shrinking government to implausibly low levels, the House BBA would also irrationally constrain fiscal policy during recessions. Even if the balanced budget requirement were waived by three-fifths of each chamber, the 18% primary spending cap would require a higher two-thirds supermajority waiver. Looking to the Great Recession, it is instructive that neither the Emergency Economic Stabilization Act of 2008 (which authorized the Troubled Asset Relief Program) nor the American Recovery and Reinvestment Act of 2009 met this hurdle. In 2009, primary spending totaled 23.7% of GDP because of automatic and legislated efforts to support the economy. If primary spending had been constrained to 18% of GDP, we could easily have fallen into a severe economic depression.

Like the Senate bill, the House proposal is deeply flawed. As we argued before, parliamentary restrictions on tax increases and budget deficits would amplify political gridlock, handicap fiscal policy, and intensify economic downturns by ruling out effective responses to both cyclical events and unforeseen emergencies. Their own budget, which eviscerates Medicare and Medicaid, would violate this balanced budget amendment for decades to come, assuming current tax policies are continued. This proposal is neither sound nor viable.

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