Budget Restraints That Work

February 28, 2018

House Speaker Paul Ryan (R-WI) last year tasked Rep. Doug Collins (R-GA) with chairing a working group to examine budget reforms to constrain the growth in federal government debt. 

The need is pressing. Sustained budget deficits have seen debt held by the public explode from 32.6 percent of gross domestic product (GDP) in 2002 to 77 percent in 2016—a level only previously seen following World War II. Whereas that debt spike was reduced quickly due to huge military spending cuts and sustained high growth and inflation, projections show that in the future, the U.S. debt-to-GDP level will rise rapidly absent entitlement reform or major cuts to discretionary spending. 

The Congressional Budget Office previously estimated that getting the debt-to-GDP ratio back to its historic average of 40 percent by 2047 would require permanent spending cuts starting today equal to 3.1 percent of GDP (15 percent of non-interest federal spending). They calculated that delaying any cuts until 2028 would instead require reductions of 4.6 percent of GDP to achieve the same goal. 

Despite widespread acknowledgement of this looming fiscal crisis, politicians have so far seemed unable or reluctant to act. In fact, they have recently exacerbated the problem. Congressional legislation for tax cuts in December, a spending-cap busting budget deal in February, and a previously forecasted deficit increase means the overall deficit is expected to near-double in the coming years as a proportion of GDP. 

The Republican working group has therefore considered explicit restraints on spending or deficits in the budget process in the hope that rules might overcome Congress’s apparent “deficit bias.” In the past three decades, 96 countries have used fiscal rules, defined as “a long-lasting constraint on fiscal policy through numerical limits on budgetary aggregates.” Well-designed restraints can enhance budget discipline if there is political buy-in. A key lesson across countries, though, is that if rules are to endure, they must be flexible enough to withstand temporary recessions and adjust to new trends. 

This bulletin examines the experience of the federal government, state governments, and three foreign countries (Chile, Switzerland, and the United Kingdom [UK]) with explicit fiscal rules. It draws on these case studies to outline 11 principles under which a fiscal rule is most likely to achieve sustained reductions in debt relative to GDP.

The full report is here.

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