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Issue Brief #4243 on Budget and Spending

July 2, 2014

The IMF Is Following the Obama Administration’s Playbook on the Federal Budget

By

The International Monetary Fund’s report on its 2014 Article IV Consultation with the United States risks encouraging inaction by U.S. lawmakers on adopting structural entitlement reforms to control U.S. spending and debt growth. The IMF report suggests institutional budget reforms to “lessen fiscal policy uncertainty,” citing “recent experience of debt ceiling brinkmanship and the government shut down.”[1] Although the political fights of recent years are dwarfed by the giant colossus that is the looming entitlement spending crisis, the IMF pays much less attention to addressing this critical U.S. budget challenge.

The IMF’s suggestions follow the Obama Administration’s federal budget playbook by focusing on immediate spending and tax increases with very moderate entitlement tweaks in the future.[2] Despite the U.S. public debt doubling since just before President Obama came into office,[3] the IMF calls for “expand[ing] the near-term budget envelope”—i.e., increasing spending. The IMF also recommends adding a value-added tax and new carbon taxes on top of the current U.S. tax burden, which would help to fuel higher spending.

It is within this context that the IMF proposes several institutional fiscal reforms, including the following:

IMF Recommendation: Bipartisan agreement on a clear, simple, medium-term fiscal objective (with an integrated view of all budget functions and numerical targets for the debt and deficit).

Analysis: Many analysts suggest that Congress adopt a budget that puts the U.S. debt on a downward trajectory. A carefully designed budget would pursue a path to balance with spending control. The IMF’s recommendations are much broader than that. In conjunction with the IMF’s suggestion to implement some of President Obama’s spending initiatives, a harmful bipartisan agreement would increase spending and taxes today and leave the U.S. on its dangerous fiscal trajectory. Adopting a budget agreement is important, but it cannot be just any budget agreement.

IMF Recommendation: Carefully designed mechanisms to trigger revenue or spending adjustments if targets are breached.

Analysis: Automatic triggers that act when Congress fails are a key feature of successful fiscal consolidation plans. Such triggers should reduce spending to reduce the deficit and debt. Automatically triggered tax increases would merely enable greater spending, which is the opposite of spending control. As Heritage economist Salim Furth points out, tax increases to reduce the deficit are much worse than spending cuts for the economy.[4] A spending trigger could operate like the sequester (which the IMF criticized)[5] or it could trigger actual policy reforms like increasing the retirement age, adopting a more accurate inflation index to curb entitlement benefit growth, or reducing benefits for upper-income earners.

IMF Recommendation: An automatic process that would raise the debt ceiling once agreement is reached on the broad budget parameters.

Analysis: This recommendation appears to be designed to provide political cover for lawmakers who want to authorize additional borrowing.[6] Voting to increase the debt ceiling has high public visibility and is an opportunity to hold Congress and the President accountable for failing to control spending and waste and for authorizing money for pork projects.[7] Congress should put the budget on a path to balance with structural entitlement reforms[8] and stand accountable to the American people for the projected debt increase.

IMF Recommendation: Shifting to a budget cycle where annual spending levels are agreed to for a two-year period (but with the possibility of supplemental budget resolutions during that two-year window under clearly specified conditions).

Analysis: Proponents of the two-year budget cycle argue that it would provide more certainty to agencies regarding their funding. Congress already uses multi-year authorizations as a tool, and a two-year cycle is not necessarily the best time frame for multi-year projects. Proponents also argue that it would free Congress to conduct important oversight work. This assumes that Congress is falling behind in its oversight responsibilities for a lack of time, an unlikely proposition. Senator Tom Coburn suggests instead that “[i]gnoring their responsibility to conduct oversight and determine if a given federal program is effective, Members of Congress are often beholden to special interest groups and would rather continue funding an old program instead of eliminating it.”[9]

As for the possibility of supplemental resolutions, a two-year cycle makes these very likely due to the estimating challenges for the $4 trillion enterprise known as the federal budget. As former House Budget Committee staffer Patrick Louis Knudsen has warned: “[More supplemental spending] would risk depleting the budget resolution as a vehicle for defining either public policy or fiscal discipline and would risk institutionalizing the spend-as-you-go practices of recent years.”[10] Finally, given the general breakdown of budgeting in Congress, a two-year cycle is no less likely to suffer from stop-gap measures but could indeed exacerbate problems in the current process.[11]

A Credible Strategy

As recently as 2011, the IMF warned that the U.S. lacks a "credible strategy" to stabilize its mounting public debt.[12] Little has changed in the U.S. debt outlook since then: The U.S. still lacks a credible action plan to prevent public debt from growing far beyond the size of the U.S economic product, or GDP, before today’s preschoolers go off to college or work.[13] Such a strategy must begin with putting entitlement spending on a more sustainable long-term path, particularly by reforming health care and retirement programs for the elderly. Instead of singing to the tune of the Obama Administration, the IMF should go back to the drawing board to identify budget reforms that will curb U.S. spending and debt.

—Romina Boccia is the Grover M. Hermann Fellow in Federal Budgetary Affairs in the Thomas A. Roe Institute for Economic Policy Studies, of the Institute for Economic Freedom and Opportunity, at The Heritage Foundation.

Show references in this report

[1] International Monetary Fund, “2014 Article IV Consultation with the United States of America Concluding Statement of the IMF Mission,” June 16, 2014, http://www.imf.org/external/np/ms/2014/061614.htm (accessed June 27, 2014).

[2] The Heritage Foundation, “President Obama’s 2015 Budget: How Government Expansion Will Limit Opportunity, Slow Economic Growth, and Erode Financial and National Security,” Heritage Foundation Backgrounder No. 2903, April 14, 2014, http://www.heritage.org/research/reports/2014/04/president-obamas-2015-budget-how-government-expansion-will-limit-opportunity-slow-economic-growth-and-erode-financial-and-national-security.

[3] Romina Boccia, “The Sure Path to American Decline,” The National Interest, November 6, 2013, http://nationalinterest.org/commentary/the-sure-path-american-decline-9365 (accessed June 27, 2014).

[4] Salim Furth, “America’s Austerity: It’s the Tax Increases,” Heritage Foundation Issue Brief No. 4086, November 14, 2013, http://www.heritage.org/research/reports/2013/11/america-s-austerity-tax-increases-and-deficit-reduction.

[5] Christopher Rugaber, “IMF to US: Economy Sounder, but Ditch the Sequester,” The Christian Science Monitor, June 15, 2013, http://www.csmonitor.com/Business/Latest-News-Wires/2013/0615/IMF-to-US-Economy-sounder-but-ditch-the-sequester (accessed June 27, 2014).

[6] Romina Boccia, “Blank Check: What It Means to Suspend the Debt Limit,” Heritage Foundation Issue Brief No. 4149, February 14, 2014, http://www.heritage.org/research/reports/2014/02/blank-check-what-it-means-to-suspend-the-debt-limit.

[7] Romina Boccia, “How Congress Can Improve Government Programs and Save Taxpayer Dollars,” Heritage Foundation Backgrounder No. 2915, June 10, 2014, http://www.heritage.org/research/reports/2014/06/how-congress-can-improve-government-programs-and-save-taxpayer-dollars.

[8] Stuart M. Butler, Alison Acosta Fraser, and William W. Beach, eds., Saving the American Dream, The Heritage Plan to Fix the Debt, Cut Spending, and Restore Prosperity, The Heritage Foundation, May 2011, http://savingthedream.org/about-the-plan/plan-details/SavAmerDream.pdf.

[9] Boccia, “How Congress Can Improve Government Programs and Save Taxpayer Dollars.”

[10] Patrick Knudsen, “An Analysis of Selected Budget Process Reforms,” Heritage Foundation Center for Policy Innovation Discussion Paper No. 16, April 11, 2014, http://www.heritage.org/research/reports/2014/04/an-analysis-of-selected-budget-process-reforms.

[11] Romina Boccia and Michael Sargent, “The Federal Budget in 2013: Dysfunction Revisited,” Heritage Foundation Issue Brief No. 4189, April 1, 2014, http://www.heritage.org/research/reports/2014/04/the-federal-budget-in-2013-dysfunction-revisited.

[12] Romina Boccia, “How the United States’ High Debt Will Weaken the Economy and Hurt Americans,” Heritage Foundation Backgrounder No. 2768, February 12, 2013, http://www.heritage.org/research/reports/2013/02/how-the-united-states-high-debt-will-weaken-the-economy-and-hurt-americans.

[13] The Heritage Foundation, “Publicly Held Debt Set to Skyrocket,” Federal Budget in Pictures, 2014, http://www.heritage.org/federalbudget/national-debt-skyrocket.

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