Targeting Budget Process, Triggering Fiscal Progress

“Trigger” has become the term du jour in the budget world as of late, particularly as it relates to the debt limit, and it doesn’t refer to shooting ourselves in the foot. On the contrary, agreement on a debt or deficit trigger could be just the thing to help us come together on raising the statutory debt ceiling and avoid facing the firing squad.

Ever since President Obama proposed a “debt failsafe” in his big fiscal policy speech earlier this month, interest has grown in the concept of a trigger mechanism that can help meet budget targets designed to put the country on a sound fiscal course. Senate Majority Leader Harry Reid (D-NV) said yesterday that legislation to increase the debt limit should be coupled with a deficit “cap” enforced by triggers. And the bipartisan Gang of Six Senators working on a comprehensive fiscal plan is also devising a trigger to ensure that debt reduction targets are met. The group may release its plan as early as next week.

Amid growing recognition that a stand-alone debt limit increase will be politically difficult with lawmakers and voters increasingly concerned about mounting national debt and clamoring for concrete steps to reduce it, momentum is building for coupling a debt ceiling increase with a trigger mechanism. The increased attention raises important questions such as: What exactly is a trigger? and How can a trigger be implemented?

Fortunately, the Peterson-Pew Commission on Budget Reform (a project of CRFB) has been studying and deliberating on the issue for more than two years. Fiscal targets and triggers figured prominently in the Commission’s November 2010 report, Getting Back in the Black, which offered a comprehensive framework for reforming the federal budget process to help the nation put its fiscal house in order. Today they shared their vast knowledge with a new briefing paper and accompanying forum.

Peterson-Pew Fiscal Targets: Ten Issues in Designing a Debt Failsafe” answers the questions that policymakers and others are asking concerning how a trigger would work and offers recommendations for designing effective triggers. It was unveiled and discussed this morning at a standing-room-only briefing on Capitol Hill. Attendees included congressional staff, media, and other Washington movers and shakers.

After introductory remarks from CRFB Chair Bill Frenzel, Steve Redburn, project director of the Peterson-Pew Commission, provided an overview of the concept. He described three basic types of triggers. A “forcing” trigger is designed to compel policymakers to adopt specific policies to meet a set target. An “enforcing” trigger can be established as part of a comprehensive budget deal to ensure that the intended savings are attained through specific policies. And a third option involves a trigger that complements a comprehensive budget plan where specific polices achieve only a portion of the goal and the trigger kicks in to finish the job. The paper recommends adopting a forcing trigger as soon as possible and making an enforcing trigger part of a subsequent budget plan to help keep it on track. Redburn advised that triggers are most useful when, if applied, they are applied annually.

Of course, triggers are only effective if the proper fiscal targets are set. Peterson-Pew Commissioner William Hoagland noted that the targets in the Graham-Rudman-Hollings deficit control act were fixed and based on rosy economic scenarios, triggering two sequestrations of funds that were so large that Congress substantially reduced one and overrode the other. The Peterson-Pew Commission has recommended a medium-term goal of stabilizing the debt at 60 percent of GDP by the end of the decade and reducing the debt further to historical levels of below 40 percent thereafter, with corresponding annual debt targets to attain those ultimate goals. For purposes of a trigger, those debt targets should be translated into annual savings targets so that policymakers are held accountable for what they can control each year—policies they adopt—as opposed to economic outcomes. The savings targets can then be updated along the way so that they are aggressive enough to keep the country on track but not so unreasonable that they will be ignored or circumvented.

Hoagland also cautioned that a trigger based on spending cuts alone could be gamed by lawmakers via spending through the tax code. “Tax expenditures” is another term that has gained prominence recently as these tax exemptions and exclusions with little oversight or review of their cost effectiveness have grown to a cost of over $1 trillion annually in lost revenue. Legislators on both sides of the aisle have targeted them for reform. [See the CRFB paper on tax expenditures here.] The panel agreed that tax expenditures must be integrated into the budget process and included as one of the areas subject to a trigger. CRFB President Maya MacGuineas added that any spending caps must be accompanied by a “PAYGO for tax expenditures” to guard against gaming, and that allowing tax expenditures to become a spending cap loophole would set back the growing momentum for fundamental tax reform. Ms. MacGuineas recently co-authored a paper with Martin Feldstein and Daniel Feenberg about potential ways to cap individual tax expenditure benefits.

MacGuineas also counseled that while the debt ceiling must be increased without political brinksmanship, the debt limit debate provides a useful “speed bump” to prompt fiscal reform, and legislation increasing the debt limit could include budget process reform to make it more palatable. Although she said a comprehensive, multi-year fiscal plan would be the preferable route for budget reform, the compressed timeframe before the limit is reached precludes such an option, making agreement on a trigger the most viable alternative.

While the track record of previous triggers is not spectacular, the lessons learned from those past experiences can improve the prospects for future success. The key is finding the right balance between inflicting enough broad-based pain so that policymakers are motivated to avoid the trigger through sensible policies while not being so harsh that it is evaded through gimmicks or outright overridden. As Peterson-Pew Commissioner Barry Anderson said at the briefing, the best triggers are the ones that are never pulled.

The paper recommends capping the size of the automatic adjustment in any given year at no more than one percent of GDP, which would diminish any adverse effects on economic growth and reduce the likelihood that it would be subverted. It also recommends waiving any trigger in the face of severe economic circumstances or a national emergency such as a war.

The Peterson-Pew Commission recognizes that process reforms alone will not put us on the road to fiscal sustainability, but fiscal targets and triggers must be part of any comprehensive, long-term approach. Putting triggers in place now can help us avoid shooting even larger holes in our fiscal outlook and help heal our gaping debt wounds.