Budget experts have watched the federal government’s budget process fail over the last few years as the policy choices required to put the budget on a sustainable path grew more challenging.

The darkening long-term outlook, masked by investors’ willingness so far to lend to the U.S. government at low rates, could at any time be greatly complicated by rising interest rates, or by unpredictable but inevitable future economic or other emergencies demanding higher spending. The publicly held federal debt is racing past 70 percent of the nation’s gross domestic product (GDP) and is projected to grow even more rapidly in coming decades, driven by the long-forecast retirement of the baby boomers and continuously rising healthcare costs—two of the biggest factors in what fiscal commission co-chair Erskine Bowles calls, “the most predictable economic crisis in U.S. history.” 

Last fall, the Joint Select Committee on Deficit Reduction (popularly, the Supercommittee) created by the Budget Control Act of 2011, tested the possibility that our fiscal challenges could be met by bypassing the regular process. Its collapse just before Thanksgiving has pointed everyone back to the drawing board. We now must reconsider whether it is possible to reform the regular budget process, to help support those leaders prepared to make the tough choices needed to put the federal budget on a sustainable course.

Many have concluded that the federal government’s governing institutions—and in particular the way they go about budgeting—are not up to the task. The Peterson-Pew Commission on Budget Reform issued a report in December 2010, Getting Back in the Black (http://budgetreform.org/document/getting-back-black), calling on Congress and the president to pass a new Sustainable Debt Act that would establish a new budgeting regime. The commission is made up of former directors of the Congressional Budget Office and the Office of Management and Budget, former budget committee chairs, and other distinguished and seasoned federal leaders. Their approach to reform was realistic and practical. It also was bold and consistent both with the extent to which the process is broken and the scale of the fiscal challenges ahead.

Others recognize the depth and political difficulty of the policy changes required to align spending and revenues over future decades and are looking at ways to repair the process. Old ideas such as a balanced budget amendment (BBA) to the Constitution or “biennial budgeting” received fresh attention. Some experts endorsed devices to bypass the broken budget process. Some favored a base closings commission model that delegated detailed negotiations over the budget to a special body and provided fast-track congressional procedures to facilitate enactment of whatever plan a majority of that group could agree on.

Fiscal Rules and Discipline

The basis for budget process reforms and for progress in stabilizing the debt must be a new national agreement on a rule or target for fiscal policy. Sitting down to prepare a federal budget without reference to a fiscal rule or target is like setting sail without a compass. Countries facing similar challenges—including Australia and Sweden—found it helpful to enact a fiscal rule as the first step in righting the fiscal ship.

In the United States, the traditional consensus that budgets should be balanced has evaporated. Therefore, the first task of American leaders is to help restore a national norm of fiscal responsibility. Otherwise, any newly enacted rule will quickly succumb to the siren call of urgent demands for government to do more than it is prepared to pay for.

A balanced budget requirement is an example of a fiscal rule, but not a practical one in the immediate future—both because there is nothing close to a consensus on some version of a BBA and because balance is now far out of reach. Balanced budget requirements also can force cuts in spending or tax increases when a stimulative policy response is needed. In the near term, a more practical rule would be one that required stabilizing the debt at a specified level (say, 60 percent of GDP) by a specific year (say, within a decade), and that included an escape clause for national emergencies or economic slowdowns.

The Peterson-Pew Commission has advocated enacting a debt target for the medium term —and with it a comprehensive set of procedural changes intended to help policy makers adopt and sustain a multi-year fiscal plan to reach it. Its proposed Sustainable Debt Act also would require annual debt targets consistent with the medium-term target.

The commission recommended strengthening procedures and institutions established by the Congressional Budget and Impoundment Act of 1974. It would enable House and Senate leaders, working through the budget committees and using the budget resolution and reconciliation procedures, to shape a multi-year budget that would meet the statutory targets. The resolution would set binding allocations for authorizing committees to prompt savings in mandatory spending and revenues, including tax expenditures.

The commission recommends that, instead of the typical practice of passing a budget resolution that is focused only on the next fiscal year, Congress adopt a resolution for a multi-year budget plan that, once enacted, would remain in place unless or until further adjustments were required to meet the debt targets in the Sustainable Debt Act.

Other major features of the proposed new regime are new methods of enforcing budget discipline and more transparent ways of presenting budget choices. The commission recommended a strong enforcement process to ensure that budgets meet targets. This would include a debt trigger mechanism to adjust spending and revenues automatically if, at the end of the year, budget legislation has missed the annual statutory target. Designing an effective trigger is tricky business; the commission issued last April a report outlining 10 of the design issues (http://budgetreform.org/document/peterson-pew-fiscal-targets-ten-issues-designing-new-debt-failsafe).

Other recommended enforcement measures included a strong version of pay-as-you-go legislation and caps on discretionary spending.

Over the long term, and once the debt has been stabilized at some uncomfortably high level, the commission argued that policies be put in place to gradually lower the debt to a safer level. This will require policy agreements addressing the fastest-growing parts of the budget. To help sustain the policies needed to achieve such a path, the commission supported a second trigger that, when enacted, proves insufficient to stay on a sustainable course will automatically adjust drivers of the debt (including tax expenditures) as needed to get back on track.

Greater Fiscal Transparency

To make budgeting more transparent, provide better information to decision makers, and help hold the president and Congress accountable for their decisions, the Peterson-Pew Commission recommended changes in the application of well-established budget concepts. Information provided in the budget should draw attention to its fastest growing parts. It should highlight the costs of insurance and financial guarantees; emergencies; various long-term fiscal exposures; and long-term fiscal effects of current and proposed policies.

Tax expenditures—totaling revenue losses of $1 trillion or more a year—should be fully included in the budget process. These special revenue-losing provisions of the tax code should be displayed alongside spending programs in the budget, included in budget resolution allocations and instructions to committees of jurisdiction, and routinely analyzed to compare their efficiency with that of alternative policy instruments.

Emergencies pose a special challenge to those seeking a more disciplined budget process because they are inherently unpredictable and because such costs vary widely from year to year. But, failure to incorporate a reasonable estimate of emergency needs in the budget both understates expected future spending and creates a potential loophole in any set of spending limits and controls. If this gap in the fiscal dike is not sealed, other reforms to shore up fiscal discipline will not hold.

Annually reserving amounts adequate to meet future emergencies—based perhaps on a rolling 10-year average of all emergency spending—would help the president and Congress enact budgets consistent with projected revenues. In addition to giving a truer projection of the fiscal outlook, budgeting for these costs would largely eliminate the need for emergency supplemental appropriations, closing one of the biggest escape routes from the budget discipline.

In a period of austerity, resources must be allocated more wisely and only to the highest priority and most cost-effective uses. To help with this, the commission recommended ways to make better use of information on program performance, including regular reviews to assess the cost-effectiveness of alternative programs and tax expenditures. It suggested that the Government Accountability Office be asked to regularly assess the effectiveness of selected groups of programs and policy instruments against their goals and report regularly to the budget committees on opportunities to reallocate resources to more efficient and higher-return uses.

It will not be easy to fix the federal budget process. Nor will process reforms magically produce agreement on a multi-year budget that is both supportive of economic growth and sustainable over the decades ahead. Effective political leadership that forges public support for adherence to a fiscal rule is essential.

What Federal Employees Can Do

Unless directly involved in budgeting for their agencies, there is little that federal managers can do directly to repair the federal budget process. However, they can approach their work in the same spirit and apply some of the same principles guiding the Peterson-Pew Commission. The prolonged period of austerity and fiscal consolidation we now face is perhaps unprecedented in our history. In that environment, decisions about how to use limited program resources must be more disciplined so that vital services are maintained.

Administrators need to be prepared to reengineer their business processes, forge voluntary partnerships, and continually search for ways to work smarter. And perhaps most important for budgeting, managers and their staff must be transparent and open in their reporting to stakeholders and up the line about what is working and what is not. Tough budget choices will then be informed with strong evidence on performance—giving policy makers the opportunity to maintain and improve results and, by doing so, help restore the public’s confidence in them and in its government. 

Steve Redburn was the Peterson-Pew Commission on Budget Reform’s project director (2010-2011) and former OMB executive. He is study director at the National Academy of Sciences and adjunct faculty member of George Washington University. Contact him at sredburn@comcast.net.

Demian Moore is senior policy analyst at the Committee for a Responsible Federal Budget, a program of the New America Foundation. Contact him at moore@newamerica.net.