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February 2014 - Volume 22, Number 1

   

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Making Budget Rules Work

By David M. Primo, Ani and Mark Gabrellian Professor, University of Rochester
Senior Scholar, The Mercatus Center at George Mason University

 

The United States faces severe fiscal challenges — most notably, the unsustainable growth of entitlement spending and a mounting debt burden that raises concerns about the government’s ability to pay it back without strangling economic growth. These threats reflect the inability of Congress and Presidents to make the hard choices necessary to restore fiscal responsibility to the federal budget. 

 

While there is always talk of budget reform in Washington, Congress inevitably fails to construct effective and lasting fiscal restraints.  This is the result of two key problems faced by legislators: commitment and enforcement. Well-designed budget rules can help legislators overcome these problems to create credible and sustainable changes to the federal budget. The following are ten actionable principles for ensuring that elected officials enact fiscally restrained budgets. These principles are also applicable to the state budget process.

 

Ten Principles of Budget Rule Design

 

1. Use budget rules to change the terms of the debate. Budget battles will be fought differently if fiscal responsibility is a requirement, not an option.
2. Apply rules permanently and to the entire federal budget. Temporary rules or rules exempting certain programs won’t help in the long run. 
3. Focus on spending. Washington cannot address the looming budget crisis without gaining control of the unsustainable spending growth that drives it. 
4. Build flexibility into rules by “smoothing.”  Tie budget rule targets or limits to a multi-year period or long-term economic performance to accommodate economic downturns or other transitory events.
5. Build flexibility into rules by incorporating limited, carefully constructed emergency provisions. Account for major disruptions like war.
6. Be precise to prevent loopholes and gimmicks. History proves that if there is a way around a rule, a legislator will find it.
7. Pay careful attention to “starting points.” Consider cutting inflated spending levels (e.g., from stimulus) prior to pegging permissible increases to the current budget. 
8. Fight against faux fiscal discipline and resist the temptation to compromise on rule design. You are better off with no rule than a badly designed one.
9. Use a commission as a supplement to, not a replacement for, a budget rule. Commissions are great for specifics, but they can’t produce change without some other external pressure.
10. Incorporate well-designed rules into the U.S. Constitution. While there are pros and cons to constitutional rules, without this external enforcement, budget rules will always be vulnerable to legislators’ propensity to break them. 

 

Major adjustments to the federal budget are necessary to stanch the increase in the federal debt and reduce the deficit without hurting the economy.  Incremental steps in the budgetary arena have achieved little, and the United States needs more dramatic action. By implementing new budget rules today, legislators can help force hard decisions tomorrow.  No budget rule will be perfect, and problems will undoubtedly arise from any rule enacted through the legislative process.  Inaction, though, is simply not a reasonable option any longer.  The U.S. states face their own set of daunting fiscal challenges, including pension obligations, and they would also benefit from following the steps outlined above.

 

Reprinted with the author’s permission. Dr. David M. Primo is an Associate Professor of Political Science and Business Administration at the University of Rochester and a Senior Scholar at the Mercatus Center at George Mason University. This is an except from his study “Making Budget Rules Work,” 2014, <http://mercatus.org/publication/making-budget-rules-work-0>.

 

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