No Fix For US Fiscal Policy without New Rules

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No Fix For US Fiscal Policy without New Rules

Post prepared November 10, 2010

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Posted Nov. 16, 2010 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com

The Peterson-Pew Commission Report on Fiscal Rules

In November, the Peterson-Pew Commission on Budget Reform released a report on fiscal policy rules

The Commission is a joint project of the Peter G. Peterson Foundation and the Pew Charitable Trust

Members of the Commission include former members of Congress, cabinet officers, and other high officials from both parties


A Failed Budget Process

The principal message of the report is that the budget process is broken

A new set of rules is needed to lengthen the time horizon of fiscal policy and constrain taxes and spending within sustainable limits

Budgets are created annually, without any kind of fiscal target to guide the process . . . Increasingly there is no comprehensive action on the budget at all: rather, a series of short-term continuing resolutions followed by huge omnibus spending bills. . . . The bulk of spending and revenue occurs on autopilot without annual review or any constraint on growth . . . Lawmakers routinely continue programs that could not withstand rigorous evaluations of their costs and benefits.


The Peterson-Pew Baseline Scenario

The Peterson-Pew Commission begins from a baseline scenario that is somewhat more pessimistic than the CBO baseline

Renewal of Bush tax cuts for incomes less than $250,000

Permanent patch of alternative minimum tax

Freeze of inheritance tax at 2009 levels

Freeze on Medicare physician payment rates


First Step: The Sustainable Debt Act

The President and Congress agree to a statutory medium-term debt target and corresponding annual fiscal targets.

The President submits and Congress adopts a multi-year budget plan designed to meet the medium-term target.

New enforcement measures ensure the budget targets are met. If legislation fails to meet the specified targets, an automatic budget trigger is

used to direct the budget back on track. Once the initial debt target is achieved, a new target is set to bring the debt down

further In the long run, automatic triggers are attached to the drivers of fiscal imbalances:

health care, Social Security, and tax expenditures.


Initial Target: Debt Ratio at 60% by 2018


Enforcement Mechanisms

Statutory multi-year discretionary spending caps and a strengthened pay-as-you-go (PAYGO) statute would provide discipline.

If enacted budget legislation does not meet the target, the President could propose rescissions to help meet it.

If the target were still missed, spending reductions and tax increases would be imposed through automatic trigger mechanisms.50% of automatic deficit reduction achieved through spending cuts50% through broad-based tax surcharge


Past Attempts at Budget Rules

Gramm-Rudman-Hollings Act of 1985 set strict deficit targets and allowed sequestration of excessive spending (money would not be spent even if appropriated by Congress)

Budget Enforcement Act of 1990 established pay-as-you-go (PAYGO) rules

Line Item Veto Act of 1990 allowed President to reject individual budget items not consistent with goals

Senator Phil Gramm. The Gramm-Rudman-Hollings Act of 1985 mandated fiscal discipline, but it lasted only five yearsPhoto source: http://en.wikipedia.org/wiki/File:PhilGramm.jpg


Why Past Rules have Failed

The US Constitution gives Congress a pre-eminent role in setting the budget. The supreme court has rejected attempts like the line item veto that would reduce its authority

In past attempts like PAYGO, Congress has been both the party that sets the rules and the one that enforces them. The result: When violations occur, the rules are waived, weakened, ignored, or allowed to expire

Supreme Court Building, Washington DCPhoto source: DBKing, http://commons.wikimedia.org/wiki/File:US_Supreme_Court_%2835650678%29.jpg

No Fix For US Fiscal Policy without New Rules

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