Hubbard and Kane Highlight Budget Process Reform

This weekend in The New York Times, former Chairman of the Council of Economic Advisors Glenn Hubbard and the Hudson Institute's Tim Kane challenged both parties' approach to dealing with one of our of nation's most important problems and suggested ways to help maintain fiscal discipline.

As a result of the short-term improvements in budget projections, argue Hubbard and Kane, both ends of the political spectrum have been eager to turn the focus away from deficit reduction. Some on the left have used the projections to argue for a focus on things like the short-term economy, while some on the right have turned the focus to shrinking government. But the debt problem is still not solved, especially in the long term. We have made some progress, but a fiscal solution will require more difficult reforms to entitlement programs and the tax code, on which we have been far less successful.

The good news is that the tone from both parties has changed recently, as leaders are beginning to realize the difficulty in operating with the sequester (and the debt limit looming). As the conversation moves forward, Hubbard and Kane offer two possible improvements to the budget process: improving the current fiscal accounting and fiscal rules.

On accounting, Kane and Hubbard emphasize that current budgetary accounting may not give enough emphasis to the long-term outlook, especially when considering entitlement programs:

Starting with loosely binding ropes, Congress should modify the budget treatment of entitlement programs. The federal government continues to analyze Social Security and Medicare through the lens of cash accounting: counting up the costs of new long-term obligations not in the year the obligation is made, but off in the distant future when they must be paid...Changes in the accrued liabilities of Social Security and Medicare, in particular, should be assessed on the federal budget each year.

Considering the fiscal gap along with the current budget measures could help show the magnitude of the long-term problem. The Intergenerational Financial Obligations Reform (INFORM) Act that a bipartisan group of Senators introduced in July would better show the sustainability of our entitlements through the use of generational accounting.

Hubbard and Kane then suggest a form of a balanced budget amendment which would limit current year spending to the average revenue collected over the previous seven years. They explain:

If our goal is to “balance” instead of just “starve” the federal beast, the amendment will trust voters to choose the amount of government it wants so long as the sticker price is honest, and there will be as many Democratic senators on board as Republicans. Here are three practical modifications that Congress should consider in a new balanced budget amendment.

First, because reconciling expenditures and revenues would be impossible in real time, the constraint should be on expenditures only. A good rule would be this: Congress shall spend no more in the current year than it collected, on average, over the previous seven years. No more overspending in fat years and no draconian cuts to expenditures during future recessions.

Second, any amendment should be simple, focused only on fiscal balance. The best mix of tax and expenditure changes is for each generation of voters to decide.

Third, there should be an exception to the spending constraint for national emergencies.

Hubbard and Kane's suggestions are useful contributions in thinking about the budget process. There have been a number of other balanced budget amendments proposed which seek to find an optimal balance between being restrictive but flexible enough to allow for deficits when they are truly necessary. The Peterson-Pew Commission on Budget Reform discussed having an aspirational goal to balance the budget over each business cycle. Senators Bob Corker (R-TN) and Claire McCaskill (D-MO) introduced a bill to eventually cap total spending at 20.6 percent of the preceding three years' average GDP.

However, given that debt is the key concern, rules focused on targeting a debt level or path may be the most helpful. For example, the Bipartisan Path Forward would require lawmakers to put the debt on a downward path, with tax and spending enforcement mechanisms and a 67-vote threshold to overturn them. The President proposed targeting debt to be on a downward path by the end of the ten-year window, enforced by cuts to most spending and tax expenditures. The Peterson-Pew Commission suggested having a series of debt targets enforced by across-the-board spending cuts and tax increases. The Commission also created a fiscal toolbox comparing a number of different enforcement mechanisms that lawmakers and budget experts had previously proposed.

While changes to fiscal accounting and the creation of rules are not the end-all be-all of deficit reduction, they certainly help in making budgetary trade-offs more explicit and encouraging sustainable fiscal policy.