A Balanced Look at a Balanced Budget Amendment

The growing concern about America’s mounting national debt and the inability of our elected leaders to adequately address it has led to many calls for a balanced budget amendment (BBA) to the U.S. Constitution. Given our current fiscal problems, the attractiveness of requiring federal spending and revenue to balance each year is obvious and no doubt that numerous candidates will tout their support for a BBA as evidence of their seriousness when it comes to fiscal responsibility. However, the conversation regarding a balanced budget is becoming decidedly unbalanced, with political ideology trumping fiscal sanity. Before we get unhinged about a balanced budget amendment, let’s take a poised look at it.

One need look no further than the states to see the popularity, and shortcomings, of a BBA. Proponents like to point to the fact that at least 45 states (and as many as 49, depending on the definition) have some form of balanced budget requirement as evidence of the feasibility and appeal of such an approach. What they don’t point out is that the budget situation in many of these states is worse than the abysmal federal condition. Less transparency and more budget gimmickry often result as policymakers seek to circumvent balanced budget constraints by keeping things such as public pensions and healthcare costs off budget. The fact that budgetary basket case California has a balanced budget amendment should highlight the limitations of this route. In addition, many states and localities, unlike the federal government, have separate budgets for capital expenditures, which are often financed through the issue of bonds. Therefore, translating the practices of states to the federal level is not as straightforward as it seems at first blush.

One thing is clear; we will have a balanced budget amendment debate in the U.S. this year. The recent debt ceiling deal dictates that both the House and Senate must vote on a BBA between October 1 and December 31, 2011. The discussion will be intense, with many arguing that a BBA will be essential to improving our fiscal outlook. In order to be productive, the dialogue needs to be informed by some key points.

First of all, many budget experts argue that the fiscal situation in this country has gotten so out of hand that balancing the federal budget in the near term is practically impossible. This contention is borne out by the fact that the budget plan passed by the House earlier this year, which slashes spending substantially, would not balance the budget within the next decade. This also underscores how difficult it will be to balance the budget without increasing revenue somehow.

In fact, many conservatives in the past refused to support a balanced budget amendment because they feared it would inevitably lead to higher taxes. Such concerns were behind the crafting of the BBA supported by all Senate Republicans and a similar version that was approved by the House Judiciary Committee, which in addition to requiring a balanced budget, also calls for capping spending at 18% of GDP and a two-thirds supermajority vote in both houses to raise taxes. This approach, supported by many conservatives, goes well beyond a traditional BBA. Don’t be surprised if progressives respond with their own slanted version. We are already seeing it with a BBA authored by Senator Mark Udall (D-CO) that may serve as the Democratic counterweight to the GOP-backed version. Udall’s BBA would exclude Social Security from the balanced budget requirement and prohibit enacting tax cuts for those making over $1 million a year unless the budget is in surplus.

Balanced budget requirements driven by political dogma will severely constrain the budget choices of policymakers and only make the fiscal situation worse. Instead of a rigid BBA, more flexible fiscal rules may be more effective. Experiences abroad offer momentum and insight. Italy recently agreed to pursue a balanced budget amendment to its constitution in order to reassure creditors about its spiraling debt. And recently the heads of France and Germany called for all Eurozone countries to enact balanced budget requirements as Europe deals with a deepening debt crisis.

The international experience also provides some innovative ideas for a BBA. In 2001, voters in Switzerland overwhelmingly approved of a balanced budget amendment to the country’s constitution in response to rapidly rising national debt. The Swiss “debt brake” put a little twist on the traditional BBA. Instead of demanding a balanced budget each year, the Swiss version balances the budget over the economic cycle, meaning that the government is allowed to run a deficit when the economy is struggling in exchange for being in surplus during boom times. This approach negates one of the major criticisms of a BBA – that it hamstrings the ability of governments to respond to crises and prevents automatic stabilizers like unemployment insurance and welfare benefits from kicking in when they are most needed, during economic slowdowns.

In 2009, Germany instituted a similar debt brake. Although it is too early to make any conclusions from Germany, the fact that Switzerland has weathered the global recession better than most countries has many looking there as an example for the U.S. to follow. However, some argue that the export-oriented Swiss economy has benefited from economic stimulus measures undertaken by its neighbors. Some also point out that the model is flawed because it is difficult to exactly define an economic cycle. Chile and Sweden also provide examples that should be examined.

Yet, a major impediment to a balanced budget amendment is the fact that amending the U.S. Constitution is not an easy task. In addition to two-thirds majorities of both houses of Congress approving a BBA, three-fourths of the states must also ratify it. Relying on a long process with an uncertain ending while the fiscal situation deteriorates further is not a good option.

The federal budget process is definitely broken and in desperate need of reform. But there are plenty of fiscal rules and budget reforms that can be implemented now, as opposed to going through the constitutional route. One of the projects I have worked on, the Peterson-Pew Commission on Budget Reform, has offered a detailed framework for budget process reform that will not require changing the constitution and will facilitate a fiscal plan to put the U.S. on the right course.

Most importantly, process changes like a balanced budget amendment must complement, not supplant, concrete policies to reduce the debt. A balanced budget amendment, or any other fiscal rule, will not substitute for making tough budget decisions. A politician’s support for a BBA cannot stand as their sole, or even primary, solution to our fiscal problems. We need a comprehensive, multiyear fiscal plan that stabilizes the debt in the medium term and reduces it further down the road.