Balanced Budget Amendment Could Lead to Extreme Budget Cuts

Programs such as Social Security, Medicare, national defense, and veterans’ benefits could be cut by an average of one-fifth under a constitutional amendment before the House this week to require a balanced budget in every year.  If policymakers chose to protect some programs from cuts, the cuts in other programs would be even deeper.  If they protected Social Security and Medicare, for example, all other programs would be cut by two-fifths.

balancing the budget is a far more draconian response than needed to stop the debt from spiraling out of control.Previous CBPP analyses have discussed other reasons why such a constitutional amendment would be harmful.^[1]  For example, it would make recessions longer and deeper by forcing spending cuts or tax increases when the economy is weak, and it would undercut the structure of funds such as Social Security by preventing them from using their accumulated savings as intended.  Moreover, balancing the budget is a far more draconian response than needed to stop the debt from spiraling out of control.

The likelihood that it would lead to unnecessarily deep program cuts is an additional serious problem with a balanced budget amendment.  To be sure, policymakers could balance the budget with large tax increases instead of large budget cuts, or with some combination of the two.  But if they relied solely on budget cuts, those cuts would be extreme, as the table below shows.

We calculate those cuts under the following assumptions:

• We assume that Congress will pass the proposal now before the House and that three-fourths of the states will ratify it within two years, so that the budget would have to be balanced by 2025.
• We assume that Congress, to hit the balanced budget target in 2025, will start cutting programs in 2020, with the cuts phasing in each year.  Thus, the cuts achieved before 2025 would lead to a lower debt — and lower interest costs — in 2025, reducing somewhat the cuts needed in that year.
• We build our calculations from the “baseline,” or projection of revenues, expenditures, and deficits, that the Congressional Budget Office (CBO) issued on April 9.^[2]  This projection is arguably optimistic about projected deficits, since it assumes that policymakers will not extend the recently enacted tax cuts or funding increases.

On this basis, we calculate that the required cuts to balance the budget in 2025 would average 21 percent in that year, would total $1.1 trillion in 2025 alone, and (if those program cuts were simply extended and not deepened) would total $9.2 trillion through 2028.^[3]

If those cuts were distributed proportionally across all programs, Social Security would be cut by about $325 billion in 2025 alone and by a total of $2.6 trillion through 2028, for example.  But policymakers could choose to leave Social Security untouched and focus the cuts on other programs.  For instance, if they protected Social Security from cuts and did not raise taxes, they would have to cut all other programs, including Medicare, by an average of 30 percent.  If they also protected Medicare, the cuts in all other programs would reach 41 percent.

That 41 percent figure includes defense.  CBO projections assume that defense spending will be 2.6 percent of gross domestic product (GDP) in 2025, down from the current 3.1 percent; under the balanced budget requirement, it would fall to 1.6 percent of GDP in 2025.  If policymakers chose to leave defense untouched at 2.6 percent of GDP in 2025 and instead cut all other programs, including Social Security and Medicare, those programs would be cut an average of 25 percent.