Using Multilayer Baselines for Fiscal Policy Analysis

Article excerpt

The concept of baseline budgeting has been rightfully criticized in recent Congressional debates because it enables politicians both to take credit for "deficit reductions" while simultaneously voting for ever-increasing dollar levels of support for federal programs. However, economic analysis of sequential sets of multiyear baselines offers a useful long-run approach to analyzing shifts in policy regimes. It also offers fresh insights as to which areas of the budget are controllable or predictable and which are not, those for which actual outlays closely track five-year planning horizons and those for which they don't. At a more theoretical level, federal spending baselines offer the only tangible view of forward looking behavior within the major GDP expenditure aggregates.

The actual course of federal spending in the post-World War II era has a momentum of its own, unaffected by which political party and economic philosophy controls the Congress or the White House. In recent decades, tax dollars or debt that support temporarily higher levels of defense spending are unlikely to be reduced when spending priorities shift. Other spending flows into place, filling the gap left by lower defense; temporary increases in defense spending are not matched by cutbacks elsewhere in the budget.(1) Neither the aftermath of the Vietnam War nor the end of the Cold War has been accompanied by a marked decline in the federal budget. It marches upwards year after year in smooth fashion in the aggregate, though not in individual budgetary accounts.

FISCAL POLICY REGIMES

Actual annual outlays provide little insight about fiscal policy regimes, what efforts administrations or Congresses are trying to make to control deficits, and what their budget priorities are.(2) In particular, when it comes to long-run analysis that is useful to the bond market, looking at sequential multiyear baselines offers advantages over traditional approaches to fiscal analysis.

The smooth upward course of outlays in Figure 1 masks the rather dramatic tensions evident in multiyear baselines over the twenty-year period shown in Figure 2. Five distinct policy regimes are evident in the baselines: (1) Carter/pre-Reagan; (2) Reagan cold war fiscal stimulus; (3) post-cold war/GRH; (4) peace dividend/BEA; (5) Clinton New Democrat. The fiscal stimulus of the Reagan years by comparison with the Carter years, centered on the defense build-up, is evident in the shift from Regime 1 to Regime 2 in Figure 2. The initial post-Cold War fiscal belttightening is evident in Regime 3, and the Gramm-Rudman-Hollings budget control law of that period may also have played a role in shifting baseline planning out of budgetary Regime 2. In some degree that baseline path was not sustained, as may be seen from the baseline Regime 4 that could be more completely labeled as "1990 recession/peace dividend expenditures/Darman BEA efforts to control same."

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The more recent regimes are better viewed, however, by contrasting the Bush/Darman era with the Clinton or New Democrat era portrayed in Figure 3. The flat portions of the 1991 and 1992 planning year baselines for FY 1992 and FY 1993, respectively, represent the effect of the 1990 BEA negotiated by then OMB director Darman.(3) The Clinton baselines of 1994-95 clearly represent abandonment of the Darman BEA approach, evident in the actual course of outlay growth in fiscal 1994 and 1995. The latter baselines revert to a pattern of aggregate fiscal expenditure growth nearly identical to the pre-BEA pattern of the Bush years, continuing the pattern of post-Cold War baseline growth first set in motion in planning year 1986 for the FY 1987 budget.

[Figure 3 ILLUSTRATION OMITTED]

BASELINE BLUFFS AND THE END OF THE COLD WAR

The 1980s build-up of national defense followed by the 1990s build-down is apparent from Figure 4. …