Towards an Effective Spending Cap

by Michael J. New

As negotiations about the debt ceiling continue, the House of Representatives has scheduled a vote on the Cut, Cap, and Balance Act this Wednesday. “Cut, Cap, and Balance” originated in the Republican Study Committee and is sponsored by 34 congressmen, 38 senators, and scores of fiscally conservative groups. It would enact budget cuts of $112 billion in FY 2012 and cap future domestic spending at 18 percent of Gross Domestic Product. Also, contingent upon House and Senate passage of a balanced-budget amendment, it would grant President Obama’s request for a debt-limit increase

Fiscal conservatives are wise to use the debt ceiling as leverage to enact some meaningful budget-process reforms. After all, spending that is cut one year can always be increased in subsequent years. Furthermore, spending cuts that have been promised in previous budget negotiations do not always take effect. Effective budget reforms are the best long-term strategy for both reducing the current budget deficit and making future fiscal crises less likely.

Unfortunately, at the federal level, budget-process reform is easier said than done. At the state level, fiscal conservatives have enjoyed success at limiting the growth of government; in many states, balanced-budget amendments were part of the original state constitution. Political scientist David Primo at the University or Rochester has found that these balanced-budget amendments, when coupled with an elected state judiciary, are an effective restraint on government growth.

In other states, conservatives and libertarians have been able to use the initiative process to circumvent hostile legislatures. This was the case with Proposition 13 in California and Proposition 2 ½ in Massachusetts. However, the best example of an effective limit on state government is Colorado Taxpayer’s Bill of Rights (TABOR). It placed a low constitutional limit on revenue growth in Colorado and mandated taxpayer rebate of surplus revenues. Between 1997 and 2002, Colorado taxpayers received $3.2 billion in rebates from the state government. During this time, Colorado easily led the nation in economic growth.

At the federal level, there is no initiative process and, needless to say, no pre-existing balanced-budget amendment. As such, fiscal conservatives have fewer options. However, history teaches some important lessons. During the 1980s, when triple-digit deficits became commonplace for the first time in U.S. history, there were protracted negotiations between President Reagan and House Democrats about reducing the deficit. The end result was the Gramm Rudman Hollings Act of 1985. Gramm Rudman Hollings established declining deficit targets with the goal of a zero deficit by 1991. If the targets were not met, automatic spending cuts would be triggered — half from defense spending, half from non-defense spending.

The Gramm Rudman Hollings Act did result in some spending cuts and may have done some short-term good. But mostly it encouraged creative bookkeeping. In order to reach the deficit targets, expenditures were frequently placed into the budgets for subsequent fiscal years. When the early 1990s recession slowed revenue growth, the required spending cuts became too substantial and the Gramm Rudman Hollings framework was eventually abandoned by Congress.

One of the lessons Congress learned from Gramm Rudman Hollings was that it is can be very difficult to control the size of the budget deficit due to foreign conflicts, natural disasters, and economic slowdowns. As such, when the next round of negotiations about deficit reduction took place in 1990, there was a shift in strategy. Congress realized that even though it was limited in its ability to control the size of the deficit, it could control spending. That led to the adoption of the discretionary spending caps that accompanied the 1990 Budget Enforcement Act (BEA).

Growth in non-defense discretionary spending did level off in the early to mid-1990s. However, it is hard to say whether this was due to 1) the BEA spending caps, 2) the early 1990s economic slowdown, 3) increased concern about the deficit, or 4) the 1994 Republican takeover of Congress. That having been said, budget caps can still reinforce an existing consensus about limiting government growth. Indeed, as the economy improved and deficit concerns faded, spending started to increase more quickly in the late 1990s.

Overall, one problem that has consistently hindered the effectiveness of fiscal limits is enforceability. Attempts by legislatures to circumvent spending caps typically inspire little outrage from voters or taxpayers. Additionally, statutory budget caps can be weakened or raised at any time. Now, since the early 1990s, the rise of social media has made it easier for taxpayer groups to communicate with their members. As such, if a spending cap is put in place, the work of fiscal conservatives has only just begun. We need to ensure that the cap as visible as possible and that any efforts by Congress to spend above the cap are widely publicized and criticized. Not surprisingly, vigilance may well be the price of liberty.

— Michael J. New is an assistant professor of political science at the University of Alabama and a fellow at the Witherspoon Institute in Princeton, N.J.