The federal government faces a large long-term mismatch between projected spending and projected revenues. Closing this fiscal gap will require hard choices to yield trillions of dollars in budget savings. Achieving these savings while sustaining the nation's highest public priorities, supporting robust economic growth, and dealing with inevitable emergencies will be difficult.
Soon after the election, the United States will approach a "fiscal cliff" when the Bush tax cuts expire and sequestration's automatic cuts kick in. This may offer an opportunity for agreements on policy adjustments to address the problem. A continued stalemate would trigger across-the-board spending cuts and massive tax increases, pitching the nation back into recession and complicating an already staggering political and fiscal challenge. Whatever budget savings are negotiated must be implemented and sustained year-by-year through the federal budget process.
To help the next administration and Congress meet the fiscal challenge, four expert observers have prepared an agenda of practical and bold budget process reforms that should be seriously considered in an effort to repair the federal budget process. These include steps to expand the budget's time horizon and to help policymakers act more strategically to meet the public's highest priorities while finding budget savings sufficient to put the federal budget on a sustainable path. They also propose to streamline and discipline budget decisions and to better fix responsibility for outcomes.
Avoiding the Real Fiscal Cliff
In the absence of policy changes, an aging population and rising healthcare costs will send the budget into a tailspin, with deficits and debt rising to unsustainable levels. As these pressures accumulate, a smaller cohort of workers will be left to finance the costs. Unless we take a longer view of the budget, our standard of living will decline and the precipitous changes necessary to rescue the nation will cause lasting damage. Here are recommended actions to correct this flawed approach:
- The president should be required to include in annual budgets a detailed analysis of how his fiscal policies will play out over the next two decades, and provide specific budget proposals to close any projected long-term fiscal gap.
- The Government Accountability Office (GAO), the Office of Management and Budget (OMB), and the Congressional Budget Office (CBO) should prepare annual reports on "fiscal exposures," including the long-term costs of major social insurance and pension commitments.
- Accruing costs for long-term commitments such as federal pensions and healthcare and federal insurance programs should be booked as they arise and included in annual estimates of spending and deficits.
- The president should propose and Congress should enact medium- and long-term targets for the debt, as a starting point for estimating annual and multi-year budget savings required to achieve them.
- Annual budget resolutions should be used to implement a pre-established multi-year target, such as debt as percent of gross domestic product (GDP), and should include specified policy changes and caps on appropriated spending consistent with that multi-year framework.
- CBO should be required to assess whether the president's budget, the budget resolution, and deficit reduction legislation meet the overall savings targets previously adopted.
Cutting spending or raising new revenues without a careful eye to the nation's long-term interests and the sustainability of its commitments risks a period of slow growth that could threaten our position in the world. The United States needs a new process that analyzes the base of current resource use and alternatives using information on expected costs and returns to the society over a long horizon. Put simply, the federal government needs to learn how to budget strategically. A strategic approach will involve: (1) new ways of organizing and using information; (2) new decision methods; and (3) supportive reforms in both presidential and congressional processes. Here are practical steps toward a more strategic approach.
- The new administration, in consultation with Congress, should identify a handful of high-priority national objectives that will be the focus of strategic budget reviews over the coming year. The aim of each review should be to use public and private resources to achieve improvements by specified dates toward a major policy objective—such as a fully employed, more productive labor force; greater energy independence, or broad improvements in health—while yielding budget savings.
- Each strategic budget review should rigorously examine the full portfolio of current federal programs, including tax expenditures. As alternatives to current or proposed spending, it should assess the potential use of regulations and other policy instruments to achieve a given objective. It also should examine the contributions of states, communities, and others to achievement of the objective.
- The administration should designate a leader responsible for each strategic review. Each review should include representatives of nonfederal partners and should be conducted with full transparency, public hearings, and input from all stakeholders. Expert panels of the National Research Council should be asked to review the evidence on the effectiveness and relative social returns from recommended changes in policy and resource use. Advice should be sought from the National Academy of Public Administration on effective implementation of the recommended strategy.
- At the completion of each strategic budget review,
the president's budget and legislative agenda for the next fiscal year should incorporate the first stages of
a proposed reform estimated to achieve breakthrough returns and accelerated progress toward the priority goal.
- Under renewed presidential reorganization authority, Congress should give fast-track consideration to any reorganization legislation required to implement the recommended strategy.
President's Role in the Budget Process
Article I of the Constitution grants "the power of the purse" to the legislative branch by requiring that all government spending be appropriated by the Congress. This creates the potential for electoral accountability and responsiveness to the public on how the government spends money, and on how the government finances spending through taxing and borrowing. Article II of the Constitution gives the president the power to veto legislation and the responsibility to execute programs.
Because Congress and the president share powers, they usually must compromise to enact legislation, including budgets. But sharing power also permits each branch to blame the other when they fail to compromise. Granting the president slightly greater powers could increase accountability for achieving good budget outcomes. We recommend these changes:
- The president should have expedited rescission authority, which would allow him to propose cancellation of individual provisions in enacted appropriations bills and require Congress to take up-or-down votes on those proposals.
- The annual budget process should begin with negotiated agreement between the president and Congress on a joint budget resolution. This would set in law each year the budget totals that are now supposed to be passed by the Congress in the form of a concurrent budget resolution.
- The president should be required to propose budget modifications in particularly challenging sectors of the budget. An alternative would be to create fast-track procedures for selected areas in which presidential proposals would be guaranteed votes, with or without amendments. This would give the president responsibility to propose significant reorganizations of federal agencies and programs.
- Congress should consider limiting the extensive direction it now gives agencies about how they should spend money. This approach would take advantage of the substantially increased ability of the executive branch to report on its performance in attaining program goals.
- Presidents should be asked to invest more effort in educating the public about the country's long-term fiscal outlook and the policy responses that would put the government on a fiscally sustainable path. One step in this direction is to require that the president address the nation each fall on fiscal sustainability.
Boost the Congressional Budget Process
Congress has been a strong player in the budget process since the founding of the republic. Historically that role was mainly manifested, at least on an annual basis, in the consideration and passage of appropriations legislation. However, since 1974, with the passage of the Congressional Budget and Impoundment Control Act, Congress has been empowered to play a more substantial role in establishing overall fiscal policy.
Both the annual appropriations process and the larger budget process have become increasingly dysfunctional. Much of this dysfunction relates to the increasingly partisan nature of the budget process, but there are various reforms that can be considered that may encourage a more effective congressional budget process.
The congressional budget process as it now operates has three main problems. First, appropriations legislation, necessary to fund 40 percent of the government on an annual basis, is chronically late. Second, and related, the budget resolution, designed to promote the setting of overall fiscal policy, has become an "optional" device, seemingly only enacted when broad consensus already exists on a path for the budget. Third, the budget process, far from encouraging fiscal discipline, detracts from a responsible approach to budgeting.
These actions could be taken to strengthen the congressional budget process:
- The budget committees should be remade as leadership committees, and could include chairs and ranking members of the appropriations and revenue committees and other major authorizing committees, as well as others appointed by House and Senate leaders.
- If the budget resolution is not reported out by the budget committee in either house by May 15 in any year, any member should be permitted to propose a budget resolution on the floor of the House or
- Annual use of the reconciliation process should be mandated until the public debt is stabilized at 60 percent of GDP. If a reconciliation bill is not considered by the House and Senate in a given year, a sequestration process involving automatic spending cuts and tax increases should take effect.
Authorizing and appropriations committees should be combined, with each newly consolidated committee having general responsibility for performance in a mission or functional area, including review of related tax expenditures and effective program implementation.
Continuing resolutions should be prohibited. Specifically, this would require any appropriation bill to provide at least a full year of appropriated funding to be able to be considered on the floor of the House or Senate. One practical way to enforce this would be to prohibit any bill that does not provide a full 12 months of funding to be passed unless 75 percent of each house voted for the bill.
The actions recommended here will help the president and Congress meet a looming fiscal challenge while protecting the Nation's highest priorities.