An 18% Spending Cap Is Not Just Bad Policy, It's Simply Not Feasible

03/31/2011 05:07 pm ET | Updated May 31, 2011

Senate Republicans are lining up behind what they call a Consensus Balanced Budget Amendment. It would limit federal spending to 18% of gross domestic product and require a two-thirds supermajority vote of both chambers to pass any tax increase or run a budget deficit (with lower parliamentary hurdles set for times of war and military conflict, but not recessions). The proposal is deeply flawed. Parliamentary restrictions on tax increases and budget deficits would amplify political gridlock, handicap fiscal policy, and undoubtedly intensify economic downturns by ruling out effective responses to both cyclical events and unforeseen emergencies. And notions of reducing government spending to 18% of the economy under the amendment's global spending cap are in the realm of the delusional.

The United States faces an aging population, spiraling health care costs, and the legacy of two unfunded foreign wars and a decade's worth of sweeping tax cuts. What would a balanced budget amendment that constrains federal spending to its lowest level since 1966 (just after Medicare was enacted) mean in this environment?

Based on a bare-bones extension of current policy, projected government spending over 2016-21 would average 23.9% of GDP (assuming a scheduled reduction in Medicare physician payments is prevented and the alternative minimum tax is patched, reflections of current policy not built into the Congressional Budget Office baseline). Under this current policy baseline, projected revenue would average 20.1% annually over 2016-21, so the 18% spending cap would not only cut spending by 24.8% ($7.6 trillion), but cut significantly more than needed to balance the budget entirely on the spending side of the ledger. (If enacted this fiscal year, the balanced budget amendment would become effective in fiscal 2016.) This proposed cap is not about deficit reduction; this is about locking in the unfair and costly Bush-era tax cuts.

Under an alternative scenario in which all the Bush tax cuts were extended, baseline revenue would fall to 18.3% of GDP and spending would jump to 24.4% of GDP over this same period (pushing deficits up by $3.0 trillion over 2016-21). Measured against this baseline, the balanced budget amendment would slash noninterest spending by $8.3 trillion over 2016-21, with annual cuts escalating from $1.1 trillion in 2016 to $1.7 trillion in 2021. By 2020, the requisite cut to noninterest spending would exceed the entire base discretionary budget (essentially everything but emergency supplemental appropriations for overseas contingency operations). Entire cabinet agencies, such as the departments of Education and Energy, and all of their programs, would have to be abolished.

The federal budget is a slow ship to turn. Changes to the major entitlement programs (Social Security, Medicare, Medicaid, and other health programs) would take years to generate savings, particularly if individuals over the age of 55 were protected from any changes to taxes or benefits (in order to allow those approaching retirement to plan accordingly).

Eliminating all other mandatory spending -- including veterans' benefits, federal and military retirement pay, and all income security programs--would reduce primary spending by only $3.6 trillion over 2016-21 -- covering less than half of the necessary savings, even if the Bush tax cuts are allowed to expire on schedule (the "bare-bones" current policy extension). Defaulting on interest payments, the remaining category of spending, is not an option.

It is unclear if anyone has given serious thought to how annual spending cuts ranging from $1.1 trillion to $1.7 trillion could be achieved. The balanced budget amendment itself does not detail any savings.

The most specific Republican long-term budget proposal, House Budget Committee Chairman Paul Ryan's Roadmap for America's Future -- which, like the balanced budget amendment, also places the entire burden of deficit reduction on spending cuts -- would violate this balanced budget amendment for at least half a century.

Ryan's Roadmap -- a draconian but detailed plan to partially privatize Social Security, voucherize Medicare, block grant Medicaid, and eliminate the Children's Health Insurance Program -- would not meet the 18% of GDP spending cap for more than half a century. According to CBO, primary spending under the Ryan Roadmap would total 19.3% in 2040, with total spending at 23.5%. (This CBO calculation assumes that the accompanying tax policies would generate revenue of 19.0% of GDP, whereas the Tax Policy Center estimates that revenue under the Ryan Roadmap would average only 16.3% of GDP over 2011-20). Again ignoring the regressive, budget-breaking tax policies in the Ryan Roadmap, total spending would equal 19.5% of GDP by 2060 -- a full 1.5 percentage points above the global spending cap in the balanced budget amendment.

In short, not even eviscerating Medicare, Medicaid, and Social Security would generate adequate savings to meet the balanced budget amendment global spending cap within 50 years.

This plan moves the goal post for the coming debt ceiling debate so far to the right that Republicans have left the stadium. Short of eliminating every cabinet agency, drastically defaulting on our obligations to our citizens (Social Security, Medicare, and Medicaid), or defaulting on our obligations to our creditors, this plan simply is not feasible. Even if it were feasible, cutting $1.1 trillion in federal spending by 2016 -- when the economy is projected to just be returning to potential output and full employment -- would be economically devastating. Budget process proposals are much easier to generate than budgets, but this one is totally detached from reality.