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Balanced Budget Amendment Could Lead to Extreme Budget Cuts

April 11, 2018

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.

TABLE 1
Additional Budget Cuts Required to Balance the Budget in 2025
Assumes revenues at current law, compliance with Budget Control Act caps (with sequestration resuming in 2020)
In billions of dollars
  No program spared from cuts; 21% cut for all programs in 2025 Social Security spared; 30% cut for all other programs in 2025 Social Security and Medicare spared; 41% cut for all other programs in 2025 Defense funding at CBO baseline (2.6% of GDP); nothing else spared; 25% cut for all other programs in 2025
  in 2025 2020-28 in 2025 2020-28 in 2025 2020-28 in 2025 2020-28
2025 deficit 1,275   1,275   1,275   1,275  
Required program cuts (interest savings will also occur) 1,100   1,100   1,100   1,100  
Cuts to Selected Programs                
Social Security 325 2,625 0 0 0 0 375 3,050
Medicare 200 1,725 300 2,400 0 0 250 2,000
Medicaid/Children’s Health Insurance Program/Affordable Care Act subsidies 150 1,150 200 1,600 275 2,175 175 1,325
Supplemental Security Income, Supplemental Nutrition Assistance Program, child nutrition, refundable parts of Child Tax Credit and Earned Income Tax Credit 50 475 75 650 100 900 75 550
Federal retirement 40 325 50 450 75 600 50 375
Veterans’ disability compensation and other entitlement benefits 30 250 40 350 50 475 30 275
Defense (including war costs) 150 1,250 200 1,775 300 2,400 0 0
[resulting level as a % of GDP] [2.1%]   [1.8%]   [1.6%]   [2.6%]  
Non-defense discretionary 150 1,225 200 1,725 275 2,350 175 1,425
[resulting level as a % of GDP] [2.0%]   [1.8%]   [1.5%]   [1.9%]  
Grand Total, all cuts (including cuts in other programs not mentioned in this table, except interest) 1,100 9,175 1,100 9,175 1,100 9,175 1,100 9,175

Source: CBPP analysis of Congressional Budget Office data

End Notes

[1] Richard Kogan, “Constitutional Balanced Budget Amendment Poses Serious Risks,” updated March 16, 2018, https://www.cbpp.org/research/federal-budget/constitutional-balanced-budget-amendment-poses-serious-risks; Richard Kogan, “5 Reasons Why the House Balanced Budget Amendment Is a Bad Idea,” April 11, 2018, https://www.cbpp.org/blog/5-reasons-why-the-house-balanced-budget-amendment-is-a-bad-idea; Paul N. Van de Water, “Why a Balanced Budget Amendment Would Harm Social Security and Federal Deposit Insurance,” April 9, 2018, https://www.cbpp.org/blog/why-a-balanced-budget-amendment-would-harm-social-security-and-federal-deposit-insurance.

[2] CBO’s projections include an extremely high level of natural disaster costs because the law requires CBO to assume that emergency funding provided this year for those costs will grow with inflation in future years.  We, in contrast, assume that future natural disaster costs will reflect the statistical likelihood of major and minor disasters occurring; as a result, our projections reflect a lower amount for this funding than the CBO projections.

[3] In the table, we round our figures to reflect the uncertainty of any projection.