The Case for New Federal Budget Concepts and Benchmarks: Defining the Problem

By DeSeve, G. Edward | The Journal of Government Financial Management, Winter 2004 | Go to article overview

The Case for New Federal Budget Concepts and Benchmarks: Defining the Problem


DeSeve, G. Edward, The Journal of Government Financial Management


Actions by the federal government over the last several years demonstrate the lack of fiscal discipline that has led to a 2004 deficit of $413 billion.1 The Congressional Budget Office (CBO) has projected deficits will total more than $2.2 trillion between 2005 and 2014.2

Actions by the federal government-both Congress and the Bush Administration-over the last several years demonstrate the lack of fiscal discipline that has led to a 2004 deficit of $413 billion.1 The Congressional Budget Office (CBO) has projected deficits will total more than $2.2 trillion between 2005 and 2014.2

It is no secret what leads to these deficit projections: tax cuts to stimulate the economy, increased military and homeland security spending, continued spending on domestic priorities and the increasing cost of entitlement programs. How could this come about? Federal Reserve Chairman Alan Greenspan blames the absence of rules to enforce fiscal discipline. Greenspan recently said, "Indeed, many of the rules that helped to discipline budgetary decision-making in the 1990s-in particular, the statutory limits on discretionary spending and the so-called PAYGO rules-were allowed to expire. Many analysts properly continue to be concerned that, without these enforcement mechanisms and the fundamental political will, they signal the built-in bias in favor of red ink will once again become entrenched."3

But does the deficit matter? Here views diverge. The White House has argued that the deficits are manageable and, as a percentage of gross domestic product (GDP), are smaller than those of the early 1990s. "So although large in nominal terms, and a legitimate subject of concern, today's deficits are manageable if-if-we continue pro-growth economic policies and exercise serious spending discipline," according to Joshua Bolten, former director of the U.S. Office of Management and Budget (OMB).4 Greenspan takes a different view. "Budget simulations by a broad range of analysts (including those at OMB and CBO) suggest that the rapid increase in the unified budget deficits that would occur under current law as the baby-boom generation retires could set in motion an unsustainable dynamic in which large deficits result in growing interest payments that augment deficits in future years. Such a development could have notable, destabilizing effects on the economy."4

Greenspan takes a different view. "Budget simulations by a broad range of analysts (including those at OMB and CBO) suggest that the rapid increase in the unified budget deficits that would occur under current law as the baby-boom generation retires could set in motion an unsustainable dynamic in which large deficits result in growing interest payments that augment deficits in future years. Such a development could have notable, destabilizing effects on the economy."4

What guideposts should we use to avoid this "unsustainable dynamic"? How can we assure the proper level of "pro-growth economic policies and serious spending discipline"? There is little guidance on this issue. Caps, firewalls, PAYGO and other mechanisms have been used to impose restraint. Recent proposals by both President Bush and Greenspan indicate a renewed support for PAYGO in particular. However, efforts to reimpose restraints are meeting significant resistance in Congress. This movement toward renewing the expired rules creates an opportunity to rethink the federal budget and create some new concepts and benchmarks to promote fiscal discipline.

Flaws in Current Budget Concepts

The current unified budget is a seriously flawed mechanism for operating government, managing fiscal stimulus and assuring proper accumulation of assets for future trust fund obligations. Nowhere in the private sector or in state and local government do we have a budget based on:

* Commingling revenues for current and future obligations;

* Using a deficit in the operating account to stimulate economic activity;

* Failing to properly recognize capital assets and to fund them over an appropriate period;

* Lack of planning for repayment of current debt. …

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