Executive Summary: What's Wrong with the Federal Budget Process
The current federal budget process is failing to meet its most basic obligations. The process is supposed to provide an orderly roadmap for determining the nation's annual spending and revenue priorities, but instead it stifles debate, prevents cooperation, and frequently breaks down. Created in 1974, the current process has been subject to 30 years of abuse and loopholes from lawmakers hoping to exploit its structural flaws. The budget process finally collapsed during the fiscal year 2003 and 2004 budget debates, during which:
- The annual budgets were not completed until four months into the fiscal year that they were designed to fund;
- The House of Representatives, Senate, and White House could not even agree on a basic budgetary framework for fiscal year 2005;
- President George W. Bush neared completion of his 2004 budget submission-and most agencies laid the groundwork for their 2005 budget requests-without knowing their 2003 budget levels; and
- Discretionary spending caps that were created to limit spending were allowed to expire without any replacement.
A Budget Process Plagued with Problems. Multi-year discretionary spending caps and pay-as-you-go (PAYGO) were both created to impose fiscal responsibility on annual budget writers. Although caps were intended to restrain spending, PAYGO was designed to focus on budget deficits, regardless of government size. Not only was PAYGO not designed to curtail spending, it actually prevented several policies that would have reduced both spending and budget deficits. Other biases toward higher spending and taxes arise from the decentralization of authorizing committees, baseline budgeting that defines small spending increases as cuts, and the scoring of tax proposals by a method that overstates the revenues collected by high taxes.
When crafting annual budgets, the President and Congress are not brought together to settle on a basic framework until the end of the process, and Congress can override its own framework with a majority vote in the House of Representatives and a three-fifths vote in the Senate. Once the appropriations process begins, two-thirds of the budget is deemed "uncontrollable" and excluded from the oversight of annual appropriations. Emergency spending is also typically excluded from annual appropriations bills and is instead relegated to ad hoc budgeting outside of normal budget constraints. The complexity of the budget process guarantees that important decisions are often determined by those who know how to bend the budget rules in their favor.
Elements of Reform. A reformed budget process should be simple, easy to implement, less prone to loopholes, and designed to facilitate communication and cooperation between the Administration and Congress. Positive reform would:
Place annual caps on total spending rather than bring back discretionary spending caps and PAYGO. Discretionary spending caps were somewhat successful in curtailing unnecessary expenditures. However, they were set for periods too long to allow the flexibility needed to deal with unanticipated economic factors and were relatively easy to override. The PAYGO system, likewise, failed to provide a realistic means of keeping expenditures and taxes in check. The system's narrow focus on ensuring deficit neutrality did not allow sufficient flexibility to capitalize on prospective trade-offs among discretionary funding, taxes, and entitlements. Additionally, PAYGO included no limits on the $1.5 trillion that is currently allocated for mandatory spending, nor did it allow a rollback in tax increases as economic growth moved families into higher income brackets. In short, PAYGO did not curtail excessive mandatory spending and was not compatible with discretionary spending caps.
Total spending caps would address these problems by placing a ceiling on the total amount of spending (both discretionary and mandatory) allowed in the budget resolution for each of the following three years. Unlike discretionary caps and PAYGO, these caps are easy to understand and implement, and they are not riddled with loopholes and gimmicks. Legislators would have full flexibility in writing each annual budget, including the ability to make any necessary trade-offs between mandatory and discretionary programs (current and proposed) as long as they stay within the cap. Congress would need a two-thirds vote to pass a budget resolution or appropriations bill that exceeds the year's cap. This hurdle would prevent opportunistic bypassing of the caps, while ensuring that extra funds could be made available in the event of a catastrophic emergency.
Promote cooperation with the President. This should be done by requiring that annual budget resolutions become binding acts that are signed into law by the President. Setting this basic budgetary framework early in the year would make the appropriations process run more smoothly and with more discipline.
Clarify budget allocations. Spending appropriations should be broken down by committee or subcommittee rather than by function. In addition, avenues for spending reductions should be expanded by including mandatory spending in the annual appropriations process and eliminating advance appropriations and baseline budgeting, which has been used to characterize an increase in spending as a "cut" if it is below the projected increase.
Enhance accountability. This should be done by creating an emergency reserve fund, limiting terms of service on appropriations and budget committees, and preventing government shutdowns by establishing automatic continuing resolutions.
Promote realistic estimates of the impact of budgetary decisions. Implementing reality-based scoring of tax proposals would reveal their impact on a changing economy. Additionally, incorporating generational accounting into spending and tax proposals would account for the projected impact on future workers and taxpayers.
The chaos of the 2003 and 2004 federal budget debates, as well as the expiration of discretionary spending caps and PAYGO rules, provide Congress with a golden opportunity to comprehensively examine the current budget process. Brian M. Riedl is Grover M. Hermann Fellow in Federal Budgetary Affairs in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.