Revised July 2, 1999
Concerns Regarding the Nussle-Cardin-Goss Budget Process Bill
by Sam Elkin and Robert Greenstein
This revised report reflects the changes in
the House Budget and House Rules Committees.
On June 17, the House Budget Committee approved the Comprehensive Budget Process Reform Act (H.R. 853), a measure introduced by Reps. Jim Nussle, Ben Cardin, and Porter Goss. This legislation is expected to be brought to the House floor in late June or early July.
The bill could lead to larger reductions in discretionary programs than the reductions envisioned under the 1997 Balanced Budget Act.
Some of the proposals in this legislation represent well thought out ideas for budget process reform, such as proposals dealing with the budgetary treatment of federal insurance programs. (See box below) Unfortunately, the bill also contains provisions that could make the budget process less efficient and delay action on appropriations bills, weaken budget mechanisms that are preserving budget surpluses which may turn out to be needed for Social Security reform, and lead to larger reductions in discretionary programs than the reductions already envisioned under the 1997 Balanced Budget Act. This paper (as well as a more detail analysis available from the Center) examines various proposals in the bill that would be likely to have problematic effects, including the following:
- The bill would likely squeeze discretionary programs; it would effectively allow the caps on discretionary spending to be reduced to pay for tax cuts and entitlement expansions and also would lower the discretionary caps when either the House or Senate passes an amendment to an appropriations bill reducing funding for a discretionary program.
- The bill would repeal the provision of law allowing appropriations bills to be brought to the House floor after May 15 if a budget resolution has not yet been approved and bar floor action on appropriations ills until work on the budget resolution has been completed. Moreover, the bill would lengthen the time it takes to finish work on a budget resolution because it would convert the resolution into a joint resolution that requires a Presidential signature.
- The bill would alter the "pay-as-you-go" rules, allowing projected surpluses in the non-Social Security budget to be used to finance tax cuts and entitlement increases before Social Security reform is approved and before it is known whether a portion of these funds are needed to fashion Social Security solvency legislation that can secure majority support in both houses.
If projected surpluses are used to pay for tax cuts and the surpluses subsequently fail to materialize, cuts in Medicare, student loans, farm price supports, and various other entitlements would be triggered through sequestration.
Under the bill, if projected surpluses are used to pay for tax cuts and the surpluses subsequently fail to materialize as forecast which could easily happen, especially if the economy performs less well than forecast or the tax cuts turn out to be more expensive than was assumed at the time they were enacted cuts in Medicare, student loans, farm price supports, and various other entitlements would be triggered through the sequestration process.
Impact on Discretionary Programs
Discretionary programs constitute a declining share of the budget. At $575 billion in fiscal year 1999 (roughly evenly divided between defense and domestic programs), discretionary spending accounts for 34 percent of the budget and seven percent of the economy (i.e., of the Gross Domestic Product). The Congressional Budget Office projects that if discretionary spending stays within the caps through 2002 (the last year for which caps have been established) and grows with inflation thereafter, discretionary spending will decline to 29 percent of the budget and five percent of GDP by 2009. By contrast, ten years ago in 1989, discretionary spending constituted 43 percent of the budget and nine percent of GDP.
Various provisions of the Nussle-Cardin-Goss bill would exert additional downward pressure on funding for discretionary programs. For example, the bill contains a "lock-box" provision that would cause reductions in the discretionary caps. After the House and Senate had completed floor action on any appropriations bill but before conference on the bill the total amount of funding cuts each chamber had approved in floor action on the bill would be averaged.(1) The discretionary caps would be reduced by this average amount for the fiscal year in question as well as for all succeeding years for which a cap had been established. These cap reductions would be instituted even if one house had approved a cut by a narrow margin and the other house had decisively rejected it. In addition, the cap reductions would apply to all years for which a cap had been set even if the spending cut passed on the floor reduced funding for a one-time project that would be funded for just one year.
The bill also would enable tax cuts and entitlement expansions to be financed by reductions in the discretionary spending caps, since it would allow non-Social Security surpluses to be used for tax cuts and entitlement increases and reductions in the discretionary caps would enlarge these surpluses. Allowing tax cuts and entitlement expansions to be financed by reducing the discretionary caps raises important concerns.
The discretionary caps typically are set for only a few years at a time; currently, the caps are in place through 2002. Lowering the caps would thus assure savings for only several years. Tax cuts and entitlement expansions, by contrast, are usually permanent and often grow in cost over time. Allowing policymakers to pay for permanent tax cuts and entitlement expansions with reductions in the discretionary caps that provide short-term savings could ultimately lead to a return of budget deficits.
DISCRETIONARY SPENDING: CURRENT BASELINE, COMPARED TO FROZEN BASELINE UNDER NUSSLE-CARDIN-GOSS PROPOSAL
10-year total 2000 to 2009
(in billions of dollars)
Total discretionary spending
Current baseline 1
Nussle-Cardin-Goss proposed baseline 2
Nussle-Cardin-Goss baseline, as dollar reduction from current baseline
Nussle-Cardin-Goss baseline, as percentage reduction from current baseline
1 The current baseline assumes that discretionary spending will be at its capped level while the caps are in place, and will grow with inflation starting in 2003, when there are no caps.
2 Under the Nussle-Cardin-Goss proposal, the baseline would assume that discretionary spending will be at its capped level while the caps are in place, and be frozen at the prior year's levels starting in 2003, when there are no caps.
Source: CBO July 1999 Baseline Budget Projections, Assuming Compliance with Discretionary Spending Caps
Furthermore, because reducing the discretionary caps does not entail making cuts in specific discretionary programs, the practice of lowering the caps to pay for tax cuts could prove Congress to pay for specific tax cuts with unspecified deep cuts in the discretionary part of the budget, which appropriators would later enticing to policymakers. It would allow (possibly after the next election) have to turn into specific discretionary program cuts.
Exacerbating this problem, the bill requires that the "baseline" used in making budget projections assume that discretionary spending will be frozen in all years for which a statutory cap has not yet been set, with no adjustment for inflation. This represents a departure from current practice, under which baseline levels for discretionary spending for future years without a cap are assumed to be equal to the prior year's level, with an adjustment for inflation.
Eliminating inflation adjustments in projecting discretionary spending levels will make budget surpluses appear to be substantially larger. For example, this provision of the Nussle-Cardin-Goss bill would artificially swell projections of the non-Social Security surplus by $419 billion over the next 10 years. (See table above.) These artificially swollen surplus projections could lead to larger tax cuts. And larger tax cuts could, in turn, effectively lock in low levels of discretionary spending, since the tax cuts would have consumed the resources needed to support discretionary appropriations at a more adequate level.
Delays on Appropriations Bills
The bill would likely lead to lengthy delays in action on appropriations bills. The appropriations committees would be prevented from sending appropriations bills to the House floor until work on the budget resolution had been completed. Under current budget rules, if action on the budget resolution has not been concluded by May 15, the House Appropriations Committee may send appropriations bills to the floor.
Allowing policymakers to pay for permanent tax cuts and entitlement expansions with reductions in the discretionary caps that provide only short-term savings could ultimately lead to a return of budget deficits.
In addition, the bill would change the budget resolution from a concurrent resolution to a joint resolution, meaning it must be signed by the President. (Concurrent resolutions do not go to the President and are not laws.) Getting the two houses of Congress to agree on a budget resolution has often proved to be a lengthy process under current procedures even when the same party controls both houses. Developing a budget resolution that also must win the President's approval and signature and would have the force of law almost certainly would be a lengthier undertaking. The Nussle-Cardin-Goss bill would allow the old type of concurrent resolution to be used instead of a joint resolution, but only if a joint resolution had first passed Congress and been vetoed by the President.
The bill consequently would make the process of passing a budget resolution more difficult and time consuming, while barring appropriations bills from coming to the House floor until the budget resolution had been approved, regardless of how long that might take. The likely result would be that in many years, floor action on appropriations bills would not be able to start until late in the year. In years in which budget agreements are delayed, the appropriations committees could lose months of valuable time and find themselves under great strain to put together and pass bills in compressed timeframes late in the year. The bill would bar action on appropriations bills prior to approval of a budget resolution despite the fact that the existence of statutory caps on discretionary spending makes the budget resolution somewhat superfluous insofar as discretionary spending levels are concerned.
The Nussle-Cardin-Goss bill also could make it more difficult in another respect to pass appropriations bills. It would establish an "automatic continuing resolution" that would maintain funding at the prior year's level for programs in appropriations bills not enacted when a fiscal year commenced.(2) The automatic CR would not expire after a few weeks or months, but would last for the full fiscal year unless superseded by passage of the appropriations bill.
Although the automatic CR provision is intended to avert government shutdowns, its principal effect could be to make it more likely that Congress would fail to work out agreements on controversial appropriations bills, because a year-long CR would kick in automatically. This also could encourage minority Senate factions of 41 or more Senators to use filibusters to block appropriations bills to which they objected, since doing so would not threaten disruption of government operations.
The result could be that automatic CRs would begin to supplant some appropriations bills. If so, the effect would be unfortunate. Instead of Congress acting to raise funding levels for some programs and lower levels for others to reflect changes in needs and priorities, programs would be locked in at the prior year's level. The status quo would be reinforced at the expense of more responsive and effective government.
Difficulties in Responding to Emergencies
The bill would make it harder for Congress to provide aid in a timely manner to victims of many natural disasters and other emergencies. As originally introduced and as approved by the Budget Committee, H.R. 853 contained some provisions that could be modestly useful in improving budgetary procedures relating to emergencies. But when the Rules Committee marked up the bill, it rewrote the emergency provisions in a manner that could cause serious problems.
As the bill stands after the Rules Committee mark-up, it limits expenditures on emergencies in any fiscal year to the average amount of emergency spending in recent fiscal years. Any amounts above the average would count against the discretionary caps, requiring offsetting cuts in other discretionary programs. (If the emergency spending above the national average occurred in a mandatory program as would occur if the nation fell into recession and extensions of unemployment insurance benefits were needed then either offsetting cuts in other entitlements or tax increases would be needed.) If the offsetting cuts are not made, sequestration would be triggered.
This means that in a year in which there are a larger-than-average number of hurricanes, floods, tornadoes, or other major disasters or in which there are an average number of natural disasters but a foreign military opposition or international economic emergency also occurs the victims of the disasters that occur last could be left out in the cold. Overcoming these strictures against above-average emergency spending would entail writing a statutory exemption from these rules into the legislation providing the funds that raised emergency spending for the year above the average level and obtaining 60 votes in the Senate for the statutory exemption.
Effects on Social Security and Medicare Reform
The "pay-as-you-go" budget rules currently in place require that entitlement increases and tax cuts be paid for with reductions in other entitlement programs or revenue-raising measures. These rules apply whether the budget is in deficit or surplus. Enacted in 1990, the pay-as-you-go rules have played a large role in eliminating deficits and more recently in preserving surpluses.
The Nussle-Cardin-Goss bill would alter these rules to allow policymakers to use non-Social Security surpluses to finance tax cuts and entitlement increases. Offsetting tax increases or entitlement reductions would not be needed. Although a provision of this nature may ultimately make sense, enacting it now could make it more difficult to reform Social Security and Medicare.
Plans to restore long-term Social Security and Medicare solvency may require more resources than the Social Security surplus itself provides; some temporary general revenue transfers from the non-Social Security surplus to the Social Security and/or Medicare trust funds may be necessary to fashion solvency legislation that can pass. If action is taken to alter budget rules so the non-Social Security surplus can be consumed by tax cuts and entitlement increases before legislation restoring Social Security and Medicare solvency is approved, resources that may prove necessary for solvency legislation may disappear. That could make it more difficult to secure agreement on Social Security and Medicare legislation. (It also could mean that whatever Social Security and Medicare solvency legislation ultimately is enacted would have to contain larger benefit reductions than might otherwise be the case, because resources that could have been used to bolster the trust funds would be gone.)
Sequesters If Surpluses Do Not Materialize
By eliminating inflation adjustments when projecting discretionary spending levels for future years, the bill would artificially swell the non-Social Security surplus by $419 billion over the next 10 years.
This provision of the bill also poses another problem. Projected surpluses in the non-Social Security budget would essentially be used as contingent offsets for tax cuts or entitlement increases. If the surplus for a fiscal year subsequently turned out smaller than had been projected, the tax cut or entitlement expansion would no longer be considered to have been fully financed. To secure the needed financing, a sequester that cut Medicare and other various entitlement programs (including guaranteed student loans, the child support enforcement program, the social services block grant, farm price supports, and crop insurance, among others), would be triggered unless Congress and the President acted swiftly fill the financing hole by cutting entitlement programs, raising taxes, or lowering the discretionary caps.
This provision of the H.R. 853 poses dangers to Medicare and various other entitlements. Policymakers would pass permanent tax cuts and/or entitlement increases based on projections of surpluses that could prove too optimistic. CBO and OMB deficit and surplus projections have been off by large margins in recent years, underestimating deficits substantially in some years and overestimating deficits or underestimating surpluses in others. If this provision of the bill becomes law and paves the way for large tax cuts this year, but surpluses subsequently turn out much smaller than current projections assume, Medicare and other entitlement programs could face large across-the-board cuts unless Congress acted swiftly to pass deep program reductions or sizeable tax increases.
For example, CBO's January 1999 forecast shows a $63 billion non-Social Security surplus in 2004. Congress might pass a tax cut that costs $63 billion in 2004 without any offsets and assume the surplus would cover it. Suppose that when 2004 arrives, however, the non-Social Security surplus for that year is only $10 billion (not counting the effects of the tax cut). CBO deficit and surplus estimates made five years in advance have, on average, been off by more than that amount. If this occurred, the President would have to order an across-the-board cut of $53 billion unless Congress passed legislation cutting programs or raising taxes by that amount.
A $53 billion sequester would be larger than the biggest first-year savings ever considered in any congressional budget plan of the last two decades. It would cut Medicare provider payments by four percent and entirely eliminate a number of programs, including farm price supports, crop insurance, the Social Services Block Grant, and payments to states for the child support enforcement program.
This would be problematic for another reason as well. One of the most common reasons a surplus projection can turn out to be too high is that the economy has slowed since the projection was made. During economic slowdowns, revenues are lower than forecast, while expenditures for unemployment insurance, food stamps, and other programs are higher.
Most economists agree that cutting spending or increasing taxes when the economy is weak can push a faltering economy into recession. This, however, is precisely what would be required under H.R. 853 if a large tax cut or entitlement increase were enacted on the basis of projected surpluses but the surpluses failed to materialize because the economy weakened.
This feature of the Nussle-Cardin-Goss legislation would essentially resurrect one of the components of the 1985 Gramm-Rudman law most responsible for that law's failure. The Gramm-Rudman legislation established fixed deficit targets, enforced by across-the-board cuts if the targets were missed. It ignored the fact that because deficits swell when the economy slows, the law required deepening cuts as the economy weakened. As a result, large sequesters would threaten, especially when the economy could least absorb them. Since Congress and the President could not tolerate large cuts when the economy weakened or when deficit targets were missed by large margins for other reasons beyond policymakers' control, they would engage in large-scale budget deception to make it appear as though deficit targets would be met when everyone knew otherwise, and ultimately, when all else failed and crisis loomed, they would change the targets. Eventually, the unsuccessful
Bill Would Improve Accounting of Federal Insurance Programs
The federal budget currently treats federal insurance programs (such as flood, pension, crop, and deposit insurance) according to cash-based accounting methods. Under such methods, the budget credits the government with revenue at the time the government collects insurance premiums and charges the government with expenditures at the time the government makes claim payments. Under the accrual-based accounting methods the Nussle-Cardin-Goss bill would establish, instead of recording the flow of cash in these insurance programs each year, the budget would reflect the risk that new insurance contracts ultimately would cause the government to make payments not offset by insurance premiums that it had collected.
More specifically, the procedures the bill would establish would require the budget to reflect the governments liabilities at the time the government assumes them. The expected net losses the government would incur over the life of an insurance contract would be recorded as a cost at the time the contractual arrangement was made. This would help policymakers understand the true costs of policies affecting government insurance programs.
There are some significant technical concerns about how OMB and CBO would estimate the expected net losses that result from insurance contracts. For that reason, this change in accounting methods would be phased in over five years, and studies would be conducted by OMB, CBO and GAO during the phase-in period. Two years after the accounting methods were fully implemented, they would expire, and Congress could decide whether they had been sufficiently successful to continue their use.
Gramm-Rudman process was replaced with the much more realistic and successful procedures the Budget Enforcement Act of 1990 established. The BEA has maintained and enforced fiscal discipline without requiring fiscal retrenchment when the economy weakens or deficit forecasts become more adverse due to factors that policymakers cannot control.
These problems would not be limited under H.R. 853 to periods when growth was slowing. For example, tax-cut legislation could turn out to cost more than projected because inventive tax lawyers and corporate finance departments found ways to create tax shelters Congress had not intended. If tax-cut legislation turned out to cost more than forecast and hence was not fully offset, H.R. 853 could trigger a sequester of Medicare and other entitlements. The sequestration would not touch the tax provisions that had caused the problem.
CBO and OMB forecasts of future surpluses also could prove too optimistic for other reasons. CBO has cautioned that its surplus forecasts may be off by large amounts if revenues grow more slowly than it has forecast. Analysts do not fully understand why revenues have grown more rapidly than projected in recent years, and they do not know the extent to which the factors that have caused this unexpected revenue growth are temporary or permanent. Revenue growth in future years could be either lower or higher than CBO currently projects and by substantial amounts. If revenue growth turns out to be significantly lower but the projected surpluses have been used to finance large tax cuts and other expenditures, as H.R. 853 would allow, deficits in the non-Social Security part of the budget would threaten, and large sequesters would loom.
If budget rules are altered so the non-Social Security surplus can be consumed by tax cuts before legislation restoring Social Security and Medicare solvency is approved, resources that may prove necessary for solvency legislation may disappear.
Similarly, a drop in the stock market would result in lower-than-expected revenue collections, since less would be collected in capital gains taxes. That, too, could trigger a large sequester of Medicare and other programs.
CBO this year devoted a full chapter of its annual report on the budget and the economy to the uncertainty of its projections. It warned that considerable uncertainty" surrounds its budget estimates. CBO reported that if its estimate of the surplus for 2004 proves to be off by the average amount that CBO projections made five years in advance have proven wrong during the past decade, the forecast for 2004 could be too high or too low by as much as $300 billion.
This is a reason for exercising caution and not altering the budget rules to allow projected surpluses to be used in full or large part for tax cuts and entitlement expansions. If large tax cuts or entitlement expansions are passed but surpluses of the magnitude projected do not materialize, H.R. 853 could lead to large sequesters of Medicare and certain other mandatory programs, large cuts in other parts of the budget, or perhaps most likely changes in law to evade these requirements, with the result that deficits would return.
Transfer of Power to the Budget Committees
Another feature of the legislation is that it would effectively shift power from other committees, especially the Appropriations Committees, to the Budget Committees. The budget resolutions the Budget Committees write would be converted into joint resolutions with the force of law. The appropriations committees would be barred from taking appropriations bills to the House and Senate floors until the budget committees had completed work on the budget resolution. In addition, the bill's provisions relating to emergency spending would grant the Budget Committees exclusive authority to determine whether spending that other committees seek to designate as emergencies meets the definition of an emergency. The authority of the appropriations committees would be weakened further to the extent that automatic continuing resolutions began to displace regular appropriations bills.
1. A Member offering an amendment on the House or Senate floor could specify that the savings the amendment produced not go into the lock-box.
2. The House Appropriations Committee, which has joint jurisdiction over the automatic CR provision, voted in June to remove this provision. In a subsequent mark-up of the bill, however, the Rules Committee retained this provision. Since the Budget Committee and Rules Committee versions of the bill both contain this provision and the Rules Committee determines what goes to the floor, this provision is expected to be included in the provision that goes to the floor.