May 27, 2004

May 27, 2004 | WebMemo on Federal Budget

The Budget Conference Report and the Need for Real Process Reform

Last week, the House of Representatives finally passed a conference report on the budget resolution for fiscal year 2005. The good news is that the conference report includes the same spending restraints passed by both chambers, limiting spending growth to essentially the same as the President's budget-a welcome brake on spending growth. The report also directs $27.5 billion to extend expiring tax cuts and uses a pay-as-you-go rule (PAYGO) to constrain further expansion of mandatory spending. The bad news is that the report does not constrain growth in existing mandatory spending and takes no real steps toward budget process reform.

President Bush presented his budget request to Congress in February, but delays over setting the budget framework pushed Congress months behind schedule on appropriations-hardly an unusual situation. This recurrence bolsters the already-strong case for reform of the federal budget process.

Stymied in the Senate

Because the conference report exempts $27.5 billion in tax cuts from PAYGO-giving them protection from filibuster-and lets PAYGO expire after one year, it may not pass the Senate. The Senate has postponed its vote on the conference report until after the Memorial Day recess, and if the report does not pass this will be the second time in three years that Congress has failed to agree on a budget blueprint. Still, if appropriators act with fiscal discipline and work within the consensus targets set forth in the report, the lack of a formal agreement will have limited consequences.

If the report is not passed, both houses will have to vote on the debt limit, which must be increased at some point this summer given expected federal spending. The budget resolution conference report includes the "Gephardt rule," which would provide automatic House approval to increase the debt limit once the budget resolution is enacted. In the Senate, the budget agreement would bring with it reconciliation protections to prevent a filibuster against a vote to raise the debt limit. Without a budget agreement, debt-limit votes in both chambers are likely to be politically charged.

Budget Process Reform

Despite this year's budgetary disorder, the only budget process debate has been whether to bring back discretionary caps and PAYGO rules from the 1990s. While caps have successfully restrained discretionary spending under the right circumstances, PAYGO rules have historically failed to curtail runaway mandatory spending. PAYGO merely mandates that any new tax cut or entitlement expansion be balanced with a choice of equal tax increases or entitlement cuts. Because it applies only to the creation of new entitlements, PAYGO ignores the $1.3 trillion in current, annual entitlements-a cost that is projected to nearly double over the next decade. Furthermore, during the 1990-2002 PAYGO experiment, Congress regularly voted to bypass these restraints and create new entitlements.

The conference report would subject the Senate to a one-year discretionary spending cap and one year of PAYGO, but with an exemption: $27.5 billion in 2005 tax cuts, enough room to extend the expiring child tax credit expansion, marriage penalty elimination, and the new 10 percent tax bracket. This version of PAYGO has only two advantages. First, it prevents PAYGO from imposing a painful tax increase on low-income families. Second, the law would expire next year and therefore would allow Congress to come back in 2005 and enact real budget process reform that[1]

  1. Caps entitlements as well as discretionary spending. Discretionary spending caps have been popular and successful. Yet it's impossible to bring federal spending under control while leaving the $1.3 trillion entitlement budget running on autopilot. Unless entitlement spending is capped, its natural growth over the next few decades will necessitate tax increases of between $5,000 and $10,000 per household.
  2. Makes the budget resolution a binding law. Concurrent budget resolutions have two problems. First, by not involving the president, they do not encourage the necessary coordination between the White House and Congress until the very end of the budget process, when delays risk government shutdown. Second, Congress can easily bypass any spending restraints in a concurrent budget resolution, which does not have the force of law. Moving to a joint budget resolution would bring the president and Congress to the table early in the budget process, and give the force of law to the budget framework they create.
  3. Presents a full picture of future obligations. Before a family or business commits to a new long-term obligation, it must make a substantial down payment and convince the lender that the debt can be repaid. The federal government is under no such constraints. Lawmakers can commit to a massive financial entitlement (such as the Medicare drug benefit) with no down payment, no set monthly payments, and no standard "credit check" to determine which commitments are affordable. A positive first step would be to include a measure of all future obligations in the federal budget, just as businesses are required to do. This would contain a breakdown of contractual liabilities, such as debt, and social insurance liabilities, such as Medicare and Social Security.
  4. Enforces budget decisions. Over the past thirty years, Congress has developed numerous loopholes to avert budget restraints. In the 1990s, Congress skirted discretionary caps by classifying regular spending as "emergencies" that were exempt from caps. Currently, the spending restraints in the annual budget resolutions can be waived with only a three-fifths vote in the Senate and a majority vote in the House. Congress could better enforce its decisions by tightening the definition of "emergency" (and requiring a supermajority vote for larger emergency expenditures) and by moving to a joint budget resolution that better enforces spending restraint.

Conclusion

The budget resolution conference report passed last week by the House institutionalizes Congress's intent to rein in the growth in federal spending. However, the lack of an orderly framework for this year's budget illustrates how sorely Congress needs to overhaul the entire federal budget process. These reforms should restrain total spending, make the budget resolution binding, force Congress to address long-term liabilities, and provide strong enforcement for budget decisions.

Alison Acosta Fraser is Director of the Thomas A. Roe Institute for Economic Policy Studies, Brian Riedl is Grover M. Hermann Fellow in Federal Budgetary Affairs, and Keith Miller is a research assistant, at The Heritage Foundation.

About the Author

Alison Acosta Fraser Senior Fellow and Director of Government Finance Programs
Domestic and Economic Policy

Brian M. Riedl Grover Hermann Fellow in Federal Budgetary Affairs
Thomas A. Roe Institute for Economic Policy Studies

Related Issues: Federal Budget

Show references in this report

[1] For more information, see Brian Riedl and Alison Fraser, "Four Principles of Budget Process Reform," Heritage Foundation Backgrounder No. 1746, April 8, 2004.