Apart from ensuring internal and external security, there is no other function as central to purposes of modern government as budgeting. Budgets are the mechanisms by which society’s different interests are prioritized and satisfied. A well-functioning budget process is one that fairly represents those interests and balances them against one another. It should do this not just for the year in which a budget is enacted, but over time: Budgets should be sustainable and not shift the burden of obligation from the current generation to future ones except for extraordinary reasons, like fighting an existential war.
By these standards, there is no area of American government where dysfunctionality has been on greater display than in the annual Federal budget process. Congress has not followed its own rules for timely agreement on budgets since at least 2008. A crisis over the Republican House’s failure to lift the debt ceiling led to passage in 2011 of a Budget Control Act that delegated authority to a supercommittee. The latter’s failure to come to agreement then triggered arbitrary budget sequestration. Congress failed to enact even a continuing resolution in 2013, which led to a shutdown of the Federal government for 16 days. As of late September, another such confrontation loomed between the Obama Administration and the Republican-controlled Congress.
Perhaps the final outcome of this chaotic process has not been too terrible. Following the 2008 financial crisis, the Democratic-controlled Congresses passed a large stimulus bill, a bit of Keynesian pump-priming that, in conjunction with a very loose monetary policy, was sufficient to slowly restart economic growth. One can argue whether the sequester’s return to modest austerity was premature, but it has been less damaging than the European preference for immediate austerity following a financial crisis. The United States today is near the top of the OECD in terms of economic growth and employment.
Nevertheless, we have a deep structural problem with budgeting, and our not-so-bad performance has been the almost accidental outcome of a process that no one would deliberately design. It leaves huge, recognized problems like a disgraceful tax code untouched and will not produce sustainable budgets as the Baby Boom generation ages. Clearly, too, specific institutional reforms might lead to better long-term budgeting outcomes. Other developed democracies (and some developing ones) have better-designed approaches to budgeting than does America, from which we could learn. That said, it is undeniable that even the best process can be used to enact a bad policy. Germany has a much better budget process than the United States, but its rigid insistence on austerity (which Chancellor Merkel refuses to call Austerität, but rather Sparpolitik, “savings policy”) in the wake of financial crisis has led to worse outcomes than America’s modest Keynesianism. Good final outcomes thus require the mating of the right process, policies, and underlying social consensus.
Moreover, we must address the question of whether our dysfunctionality is due to the institutional rules by which we formulate and execute budgets, or to underlying divisions in American society over what the budget should be. If the problem is the latter, then even the best-designed set of rules will not solve the problem. My view is that the problem lies more in our current political culture than in process, but that procedural fixes might still help us avoid some of the worst outcomes.
In addition to problems with the Federal budget, many states and municipalities follow even worse procedures and have accumulated a totally unsustainable stock of future liabilities. Changes at a state level are also part of the reform picture.
A necessary context for any discussion of the budget process is America’s long-term fiscal outlook. Many conservatives have argued that America’s debt is out of control and threatens to turn the United States into a gigantic Greece, while liberal commentators like Paul Krugman have pooh-poohed deficit worries. The United States in fact has a very serious long-term fiscal problem that the country has not been willing to face since the late 1990s. At the same time, it is one that could be readily addressed if we had a reasonable political process. Other developed democracies have faced equally grave crises and resolved them, and there is no reason the United States could not as well, save for the politics of the budget.
According to the widely respected Congressional Budget Office, the U.S. deficit in early 2015 was a relatively modest 2.6 percent of GDP. This compares to the 10.8 percent reached in 2009 in the wake of the financial crisis (nearly 12 percent including state and local debt)—levels that helped set the Tea Party into motion. The sharp narrowing of deficits in the six years since then is largely attributable to a slow return to economic growth, as opposed to any kind of strict fiscal discipline. (The rate of growth of deficit-driving health care costs has also slowed, for reasons that are not entirely clear.) The U.S. stock of debt is high at 74 percent of GDP, which, as the CBO notes, is a higher than at any time since 1946. But it is nowhere as high as Greece (currently around 170 percent) or Japan (about 220 percent). Other developed democracies face debt levels at least this bad (the European Union’s average is about 87 percent). Historically, several countries, including Sweden, Canada, Australia, New Zealand, and Germany itself, have worked their way down from similarly high levels.
The U.S. problem lies in the longer term as the Baby Boom generation ages and health care costs rise. The CBO projects the annual deficit to rise to 3.8 percent of GDP by 2025 and 6.6 percent by 2040, and the total debt to increase to 78 and 107 percent by those years. These projections do not take account of future recessions or external shocks, which could increase the debt load substantially, just as the 2008 crisis did. Steadily rising levels of debt are not sustainable; as our fiscal outlook deteriorates, interest rates will rise and at a certain point bondholders will cease wanting to hold U.S. securities as a store of value.
In addition to the question of sustainability and aggregate quantities, there is also a large question of quality. This is not really about “waste, fraud and abuse” in the U.S. budget, as many think; rather, there are a large number of politically sanctioned but highly questionable line items (for example, the mortgage interest deduction) that do not serve broader public purposes, but that the political system has been unable to reform. The patient’s condition is therefore momentarily stable but serious in the long run and should be addressed through sensible long-term fiscal policies. It is the latter, however, that have been absent in recent years.
The American budget process is highly complex, drawn out, and open to interest group manipulation. In a Westminster system (such as those prevailing in Britain, Canada, New Zealand, and Australia) the budget is drawn up by the executive at the direction of the cabinet and presented as a package to parliament, which usually votes to accept it within a week or two. In the United States, by contrast, the budget cycle begins in the fall with agency requests to the Office of Management and Budget, leading to the President’s budget proposal in February. Budgetary authority is, however, firmly vested by the Constitution in Congress. The latter’s elaborate committee system oversees two separate processes of authorization and appropriation through both the House and Senate based on the President’s proposal. Final reconciliation is supposed to take place by October after countless hearings and negotiations; it is this reconciliation process that has broken down in recent years.
In all political systems, budgeting involves a tug of war between the spending or line ministries and a central finance ministry seeking to constrain aggregate spending. The spending ministries reflect constituent and interest group pressures whose demands are potentially unlimited, while the finance ministry seeks something like the common good of fiscal sustainability. A government’s ability to control its budget depends on the balance of power between the center and the ministries. Federal systems like those in the United States, Mexico, Brazil, and India face the further problem that a great deal of spending is done at the state or local level, over which national governments often have limited control.
The democracies that have reformed their systems in recent years have all done so by increasing their finance ministry’s centralized control over the budget, and in some cases the spending minister’s control over his or her own ministry. Thus, for example, Sweden adopted top-down budgeting after the devastating financial crisis of the early 1990s that ballooned deficits to 13 percent of GDP. The Minister of Finance and the legislature’s finance committee gained more authority to set formal surplus and expenditure targets. Australia implemented a different form of top-down budgeting in which the Finance Minister was allowed to dictate budget totals for each department, leaving the individual ministries with the discretion to determine allocations.
Presidential systems, however, have special problems in centralizing budget authority because of the separate and equal legitimacy of the two branches. Legislatures are loath to delegate more authority to the executive, particularly when the latter may be held by a different party: Consider how the Republicans would feel if they were told they should grant President Obama more discretion over the budget. In parliamentary systems, by contrast, the executive is simply an emanation of the legislature and (in theory, at least) fully controlled by the majority in parliament.
In Latin America’s presidential systems, this potential conflict has typically been solved by delegating quasi-dictatorial powers to the executive. This has sometimes taken the form of rule by decree (as in Argentina in the early 1990s), or reversionary budgets where, in the absence of legislative agreement on the budget, the entire budget-making authority reverts to the President (practiced by Chile in the early 20th century).
America has been reluctant to go down this road. The legislature’s control over the purse was a fundamental issue both in the English Civil War and in the American Revolution, and is thus deeply entrenched in American practice. During the period from the ratification of the Constitution to 1921, budgeting was done entirely in Congress through a decentralized committee structure. Despite the lack of centralization, deficits were relatively modest, increasing only in times of war. This changed with mounting deficits at the time of World War I, leading to the Budget and Accounting Act of 1921, which established presidential dominance over the budgeting process. This act required the President to submit an annual budget and created the Bureau of Budget in the Executive Branch (renamed the Office of Management and Budget in 1970). This period ended in 1974 with the Congressional Budget and Impoundment Act, whereby Congress took back authority over the budget in the wake of ballooning deficits from new entitlement spending and the Vietnam War. The 1974 Budget Act provided for Congress to adopt an annual budget resolution setting aggregate revenue and spending levels, and created the Congressional Budget Office.
While other democracies have sought to improve fiscal discipline by strengthening executive control, the American approach since 1974 has been for Congress to impose rules on itself that would in effect decrease its own freedom of action. These included the so-called Gramm-Rudman-Hollings Act of 1985, the Budget Enforcement Act of 1990 that established pay-as-you-go rules for revenues and direct spending, and most recently the Budget Control Act of 2011, which imposed automatic sequestration on discretionary spending if a designated supercommittee failed to reach agreement on the budget.
There are several existing benchmarks by which we can evaluate American budget performance. International institutions like the World Bank and the IMF have developed sophisticated metrics like the Public Expenditure and Financial Accountability Program (PEFA) by which they evaluate the performance of member countries. These metrics typically divide the budgeting process into several components, such as: (1) a country’s ability to understand its fiscal challenges; (2) its capacity to develop a plan for fiscal consolidation; and (3) its actual implementation of these plans.
The United States scores very well in terms of standards like the transparency of its (Federal) budget process and its ability to assess its fiscal challenges. The CBO is generally regarded as the premier independent fiscal institution whose analyses are widely respected by both U.S. political parties and imitated by other countries. It dutifully scores every new bill reported out by a Congressional committee for downstream fiscal consequences. Individual agencies collect substantial performance data when compared to foreign counterparts, and the Government Accountability Office performs numerous audits of individual programs.
On the other hand, the United States ranks slightly below average in terms of developing budget consolidation plans. International best practice recommends that countries develop medium-term expenditure plans, that is, budgets that cover at least the next five fiscal years, so as to signal to financial markets the likely trajectory of revenues and spending. The United States, by contrast, has not been able to pass budgets for the coming fiscal year, much less out-years. Needless to say, except for a brief period in the 1990s when the Clinton Administration was able to work with a Republican Congress to achieve a budget surplus, the U.S. political system has been consistently unable to rein in long-term deficits or to rationalize its tax code and expenditures.
In terms of budget enforcement—that is, a country’s ability to stick to a budget once passed—the IMF rates the United States near the bottom of the rich country pack. Gramm-Rudman-Hollings failed, for example, because its rigid deficit targets did not take account of later developments like the 1991–92 recession, which caused Congress to suspend its targets. Recent efforts to reform flood insurance, Medicare, and veterans’ pensions were repealed or overridden almost as soon as they were enacted.
In addition to international standards, the government itself sets benchmarks in the form of the recommendations of the Governmental Accounting Standards Board. These are meant to provide guidance to states, but the Federal government does not itself follow many of its own recommendations. For example, the latter does not maintain separate operating and capital accounts; nor does it ensure that operating expenses are not funded out of non-recurring sources of revenue.
Why then is the U.S. system so poor at formulating a coherent plan for fiscal consolidation, and at executing it over the medium-term? We can divide the reasons into political and procedural ones.
The political story is a familiar one having to do with polarization. The Democratic Party has been largely unwilling to touch entitlement spending, which takes up some 65 percent of Federal spending, while a large number of Republicans have vowed never to raise taxes of any sort, even if that consists of closing an existing tax loophole. The surplus of the late 1990s disappeared after 2000 because the newly elected George W. Bush and a Republican Congress convinced themselves that tax cuts would be self-financing by unleashing economic growth. For his part, President Obama never endorsed entitlement reform or embraced centrist deficit reduction plans like Simpson-Bowles. The two parties have been evenly split in their control of the different branches of government over the past decade (except for 2008–10), and subject to increasing partisan rancor that has discouraged bipartisanship. The Tea Party wing of the Republican Party, in particular, has been willing to hold the budget process hostage to goals like the repeal of the Affordable Care Act, or, in 2015, the de-funding of Planned Parenthood. The degree to which this polarization reflects an equally polarized electorate is subject to debate, but with regard to the parties, there is today virtually no ideological overlap.
The second set of reasons for poor budgeting is institutional and procedural. As noted earlier, virtually all recent attempts by parliamentary systems to improve budget process have involved strengthening executive control over the process, a route foreclosed in the United States by its presidential system. Efforts to impose budget discipline must therefore come from within Congress itself; existing institutions like the reconciliation process and omnibus spending bills are an effort to do just this. The House’s closed rule is what prevents its 435 members from “loading the Christmas tree” in the manner of the Senate.
The basic problem lies, however, in Congress’ inability or unwillingness to bind itself. Any rule that Congress makes it can unmake, and in recent years it has done exactly that when faced with an unpalatable tax increase or spending cut. More broadly, the American system of checks and balance privileges minorities at the expense of majorities and provides a large number of veto points through which well-organized and financed interest groups can protect themselves. Some of these veto points are embedded in the Constitution, while others, like the routine use of the filibuster, have been added over time. Thus, while many Republicans and Democrats both agree that the corporate tax rate is too high and that there are too many subsidies and exemptions buried in the tax code, they have not been able to reform the system as a whole.
Moreover, pressure to be seen as fiscally responsible often yields counterproductive results. Suzanne Mettler has pointed out that both parties in recent decades have preferred to achieve their economic or social goals through tax exemptions or credits (like the Earned Income Tax Credit for the working poor or accelerated depreciation allowances for corporations). In fiscal terms, these tax expenditures are no different from new spending programs, but politicians somehow get credit for great prudence by going this route.1 And as John DiIulio has shown, imposing arbitrary caps on numbers of Federal bureaucrats and their salaries has simply pushed much of the work of government onto contractors.2 Finally, the scoring of new tax and spending measures by the CBO has been endlessly gamed to minimize out-year impacts on the deficit.
The political obstacles to agreeing on a budget in a timely fashion would be solved if either party achieved solid control of both houses of Congress and the Presidency, or if a centrist majority somehow emerged that forced both parties to compromise. (Whether such outcomes would lead to good policy is a separate question.)
Unified government has existed, however, only intermittently over the past few decades. While we await its return, serious reform would need to focus instead on institutional changes that might improve results under conditions of continued polarization. The basic strategy would be to centralize authority and reduce the number of veto points in the political system. Since we cannot move from a presidential to a parliamentary system, this requires introducing selected parliamentary-type mechanisms into the American presidential system. There are several ways to do this that are within the realm of political possibility.
The most obvious strategy for forcing agreement on a budget is to delegate the decision not to the Executive Branch but to a non-partisan commission, or to a carefully selected bipartisan commission, that would then present the whole budget to Congress for approval in a single up-or-down vote. The model for this would be the Base Closure and Realignment Commission (BRAC) that was used to bind Congress to a rational base reduction strategy. This was the thinking behind the supercommittee that was supposed to get Congress out of the 2011 budget crisis.
A second approach has to do with the setting of reversion points that would prevent future government shutdowns. A reversion point automatically sets the budget in the event that the legislature cannot agree on a new one by the beginning of the new fiscal year. Currently, the default reversion point is zero—that is, the government shuts down entirely in the absence of a budget. The 2013 shutdown occurred because enough Republicans were sufficiently hostile to the very idea of government that they were willing to take that risk in order to repeal the Affordable Care Act. As in the shutdowns of 1995–96, this was not a winning political strategy, but given the frequency with which this has happened in the past two decades, we cannot assume it will not occur again.
It is possible to set alternative reversion points that would mitigate this problem. The simplest would be to keep the previous year’s budget in force (in other words, automatic continuing resolutions), which would guarantee against future shutdowns. Congress could also eliminate the need for annual votes on the debt ceiling. Another possibility would be to set a reversion point involving serious tax increases and spending cuts that would be sufficiently obnoxious to both parties that they would be forced to negotiate more seriously.
One could also make the incentives more personal. Bargaining failure occurs because enough members of Congress are willing to impose costs on the whole community in the event of failure to achieve their preferred policy outcome. One could concentrate the costs on the legislators themselves, however, by forfeiting their pay or access to campaign funds for every day that a budget is not passed. (Currently, members of Congress continue to receive their pay during a shutdown, while their staffers do not.) This type of measure was actually mandated in California’s Proposition 25, which passed in 2010; the state has achieved timely budgets ever since.
Alternatively, one could increase positive incentives to negotiate by bringing back earmarks, which were banned in 2011. The case against earmarks is widely understood; they distort the budget and bias it toward spending. On the other hand, they have historically been the mechanism by which a decentralized budgeting authority, Congress, achieves agreement on a final document.
There are a host of smaller measures in the spirit of parliamentarism-within-presidentialism that the U.S. government could take that would improve budgeting around the margins. If top-down budgeting is not possible on the part of the Executive Branch as a whole, then it might be workable within individual cabinet departments. As in the Australian reform, cabinet officers would be given greater authority to rationally allocate a fixed sum within their own departments.
The Federal government could also try to exercise more authority over the states, whose practices and transparency are often worse than those of the Federal government. Although all but one of the fifty states have constitutions mandating balanced budgets, the definition of “budget balance” can be fudged through a host of accounting tricks. Many states have failed to move from cash to accrual accounting, thus vastly understating their future liabilities. Most states do not have a local equivalent of the CBO to score expenditures and help consolidate budgets, with the result that budget transparency is significantly lower than for the Federal government. Many use non-recurring revenue to support routine operating expenses, and make highly questionable assumptions about future actuarial and growth trends in order to achieve budget “balance.” The Federal government could create both positive and negative incentives for states to move toward budgeting best practices.
There is, however, considerable reason to be skeptical about the workability of any of these institutional reforms in the context of present-day polarization. A number of them have already been tried. The supercommittee of 2013 was supposed to bypass normal Congressional procedures but ended up becoming as polarized and deadlocked as Congress itself. The idea of setting an unpleasant reversion point lay behind the Budget Control Act of 2011, which mandated an arbitrary sequester in the event of bargaining failure. As it turned out, partisan divisions were so deep that Congress accepted this outcome rather than agree on a budget. It is hard to imagine Congress allowing a non-partisan commission to set the budget; conflict would immediately shift to the commission’s composition. It is hard to see the current Republican majority agreeing to either status quo reversion points or elimination of yearly votes on the debt ceiling, since this would eliminate two levers they have sought to use to gain their way. Nor is it likely that either party in Congress would grant individual Cabinet Secretaries greater discretion over their own budgets; doing so would involve giving up their authority to, for example, fund individual defense contracts in their own districts.
The only one of the above proposals that has any empirical track record of success is the personal sanctioning of members of Congress for failure to agree on the budget. Whether this would work at a Federal level or survive Constitutional challenges is an open question. So is whether Congress would ever be willing to subject itself to such constraints absent a major shock to the system from outside.
The problem of budgeting, then, reverts to the underlying problem of polarization in the political system. Reforms leading to better and more sustainable Federal budgets may thus lie in an area outside of the budget process itself—that is, in electoral or campaign finance reform.
1Mettler, The Submerged State: How Invisible Government Policies Undermine American Democracy (University of Chicago Press, 2011); and see Robert Nessen, “Credit Where Credit Is Not Due”, The American Interest (November/December 2012).
2DiIulio, Bring Back the Bureaucrats: Why More Federal Workers Will Lead to Better (and Smaller!) Government (Templeton Press, 2014).