Proposed Balanced Budget Amendment is Extreme by International Standards
End Notes
[1] Hannah Shaw co-authored the original version of this paper. Shea Conaway provided valuable research assistance.
[2] For example, see Steven G. Calabresi, “The Answer Is a Balanced Budget Amendment,” The American Spectator, October 2011, http://spectator.org/archives/2011/10/28/the-answer-is-a-balanced-budge, and David A. Patten, “Tea Party Applauds Europe’s Call for Balanced Budgets,” Newsmax, August 16, 2011, http://www.newsmax.com/Newsfront/tea-party-europe-balanced/2011/08/16/id/407595.
[3] The euro area, also known as the “eurozone,” consists of European Union member states that have adopted the euro as their currency. They are: Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain.
[4] Treaty on Stability, Coordination, and Governance, 2012, http://european-council.europa.eu/eurozone-governance/treaty-on-stability. Eurozone countries are subject to all provisions of the Fiscal Compact; non-eurozone member states (excluding the Czech Republic and United Kingdom) are only accountable for Articles III and IV, which state, respectively, that countries’ budgetary positions should accord with their medium-term objectives (to be outlined in their constitutions) and that general government debt should fall to 60 percent of GDP.
[5] Various balanced budget amendment bills have been introduced over the years; while they vary in specific details, they all share this fundamental feature of requiring a balanced budget in every year (except in times of war). Most recently, Senator John Cornyn (R-TX) introduced a balanced budget amendment, S.J. Res. 7, February 13, 2013. Congress debated and rejected a similar amendment in 2011.
[6] Andrea Schaechter, Tidiane Kinda, Nina Budina, and Anke Weber, “Fiscal Rules in Response to the Crisis — Toward the “Next-Generation” Rules: A New Dataset,” International Monetary Fund Working Paper, Fiscal Affairs Department, July 2012, http://www.imf.org/external/pubs/ft/wp/2012/wp12187.pdf.
[7] Robert Greenstein and Richard Kogan, “Balanced Budget Amendment Highly Ill-Advised for Addressing Long-Term Fiscal Problems,” November 14, 2011, https://www.cbpp.org/cms/index.cfm?fa=view&id=3616; Macroeconomic Advisers, “Man Up: AJ(obs)A vs. J(obs)TGA,” October 21, 2011, http://macroadvisers.blogspot.com/2011/10/man-up-ajobsa-vs-jobstga.html.
[8] Nicola Clark, “Sarkozy and Merkel Vow Fiscal Unity for Euro Nations,” New York Times, August 16, 2011, http://www.nytimes.com/2011/08/17/business/global/merkel-arrives-in-paris-to-begin-economic-talks-with-sarkozy.html.
[9] Reuters Ireland, “EU Leaders Sign New Budget Rules Deal,” March 2, 2012, http://www.rte.ie/news/2012/0302/euro-business.html.
[10] Ben Philpott, “Perry Likely to Push for Balanced Budget Amendment,” Texas Tribune, October 25, 2011, http://www.texastribune.org/texas-people/rick-perry/flat-tax-speech-perry-push-balanced-budget/.
[11] Organisation for Economic Co-operation and Development (OECD), “Public financial management and fiscal goals,” Working Paper No.1 on Macroeconomic and Structural Policy Analysis, 1998.
[12] Macroeconomic Advisers, “Man Up: AJ(obs)A vs. J(obs)TGA,” October 21, 2011, http://macroadvisers.blogspot.com/2011/10/man-up-ajobsa-vs-jobstga.html.
[13] See also Robert Greenstein, “The False ‘Family Analogy’ Argument for a Balanced Budget Amendment,” Off the Charts blog, November 16, 2011, http://www.offthechartsblog.org/the-false-family-analogy-argument-for-a-balanced-budget-amendment.
[14] Resolution of the European Council on the Stability and Growth Pact, Amsterdam, June 17, 1997, http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:31997Y0802(01):EN:HTML.
[15] Resolution of the European Council on the Stability and Growth Pact, Amsterdam, June 17, 1997, http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:31997Y0802(01):EN:HTML. European Council regulations stipulate that countries with general government debt exceeding 60 percent of GDP should reduce their debt by 0.05 percent of the difference between the country’s current debt ratio and 60 percent of GDP. The Stability and Growth Pact permits deficits up to 3 percent of GDP. The Fiscal Compact clarifies this provision and permits deficits up to 0.5 percent of cyclically-adjusted GDP (1 percent for countries with government debt of less than 60 percent of GDP). Sanctions, which may occur only after the Commission determines the country is in breach of the excessive deficit criterion, cannot exceed 0.1 percent of GDP (Treaty on Stability, Coordination, and Governance, 2012, Article VII and VIII).
[16] Treaty on Stability, Coordination, and Governance, 2012, Article III, Par. 3(b).
[17] Council Regulation (EC) No 1056/2005 of 27 June 2005 Amending Regulation (EC) No 1467/97 Article I, Par 1.
[18] See European Council, “European Council concludes discussion on the new fiscal compact,” December 09, 2011, http://www.european-council.europa.eu/home-page/highlights/european-council-concludes-discussion-on-the-new-fiscal-compact.
[19] IMF report, 2012, pp. 20, 42.
[20] Recent Republican versions of the balanced budget amendent, such as the one Congress rejected in 2011 and that Senator Cornyn introduced this year, would require a two-thirds majority vote to waive the requirements. Previous versions of the amendment typically required a three-fifths majority for waivers.
[21] Treaty on Stability, Coordination, and Governance, 2012, Article III, Par 1(d).
[22] Treaty on Stability, Coordination, and Governance, 2012, Article III, Par 1(e).
[23] Her Majesty’s (HM) Treasury (United Kingdom), “Financial Statement and Budget Report 1997,” July 1997, http://archive.treasury.gov.uk/budget/1997/report/fsbr.htm, Section 1.19. The UK Treasury considered the golden rule to be met if the annual average budget surplus as a share of GDP over the economic cycle is in balance or surplus: HM Treasury (United Kingdom), Pre-Budget Report, December 2004, http://news.bbc.co.uk/nol/shared/bsp/hi/pdfs/02_12_04_pbr04_maindoc1.76.pdf, p. 193.
[24] Institute for Fiscal Studies, “The Government’s Fiscal Rules,” November 2006, http://www.ifs.org.uk/bns/bn16.pdf, p. 10.
[25] Institute for Fiscal Studies, “The IFS Green Budget Chapter 2, The New Fiscal Framework: An Assessment,” http://www.ifs.org.uk/publications/5460. Under the current version, the “current budget must be forecast to be in balance or in surplus by the end of a rolling, five-year forecast horizon.”
[26] As eurozone countries ratify the Fiscal Compact, more countries will establish such national rules. Most newly approved rules (as of October 2012) will become effective between 2013 and 2020. See IMF (2012) and European Parliament, Directorate General for the Presidency, “Table on the Ratification Process of Amendment of Art. 136 TFEU, ESM Treaty and Fiscal Compact,” updated October 2 2012, http://www.europarl.europa.eu/webnp/webdav/site/myjahiasite/users/fboschi/public/art.%20136%20ESM%20fiscal%20compact%20ratprocess.pdf.
[27] If the golden rule is excessively violated, then to offset the violation the German government is required to run smaller deficits or larger surpluses than otherwise allowed once the economy is in recovery. The rule is being phased in and will take full effect in 2016. IMF 2012 report, pp. 21-22.
[28] IMF “Fiscal Rules—Anchoring Expectations for Sustainable Public Finance,” December 16, 2009, p. 39, http://www.imf.org/external/np/pp/eng/2009/121609.pdf.
[29] Frank Bodmer, “The Swiss Debt Brake: How it Works and What Can Go Wrong,” Schweizerische Zeitschrift für Volkswirtschaft und Statistik (2006) Vol. 142 (3), pp. 307-330; IMF 2012 report, pp.20-21.
[30] Agence France-Presse, “Spain passes ‘golden rule’ reform to fend off debt crisis,” July 9, 2011, http://www.france24.com/en/20110907-spain-passes-golden-rule-reform-fend-off-eurozone-sovereign-debt-crisis-parliament.
[31] Those limits are 3 percent of GDP for deficits and 60 percent of GDP for debt. Official Journal of the European Union, “10. Protocol on the excessive deficit procedure,” December 16, 2004, http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:C:2004:310:0337:0338:EN:PDF.
[32] IMF 2012 report, p. 26.
[33] Centre for European Policy Studies, “Spanish Constitutional Reform,” September 2011, http://www.ceps.eu/book/spain's-constitutional-reform-what-seen-and-not-seen, p. 2.
[34] IMF 2012 report.
[35] IMF 2009 report, p. 39.
[36] IFS, p. 11-12.
[37] While states must balance their operating budgets they can — and do — borrow significant amounts for capital projects. (A number of states’ balanced budget requirements also allow the state to run operating deficits during an economic downturn or to meet some emergency, as long as the state has accumulated sufficient “rainy day funds” by running operating surpluses in prior years.)
[38] Organisation for Economic Co-operation and Development, “Public financial management and fiscal goals,” Working Paper No.1 on Macroeconomic and Structural Policy Analysis, 1998.
[39] IFS, p. 2.
[40] IFS, p. 20.
[41] Keiko Honjo, “The Golden Rule and the Economic Cycles,” International Monetary Fund Working Paper WP/07/199, http://www.imf.org/external/pubs/ft/wp/2007/wp07199.pdf, p. 5.