Scrap the Budget Caps

Robert D. Reischauer
Robert Reischauer Headshot
Robert D. Reischauer Distinguished Institute Fellow; President Emeritus - Urban Institute

June 9, 1999

Like boastful teenagers, the president and the congressional Republicans are engaged in a reckless game of chicken over the discretionary spending caps that restrain spending in the one-third of the budget not devoted to entitlement programs or interest payments. The problem lies in the unrealistically low caps established for fiscal years 1999 to 2002 by the Balanced Budget Act of 1997.

The Republican leadership and the president publicly brag that they can live with these caps but privately admit that they can’t. Rather than waiting to pick up the pieces after the inevitable head-on collision in October, the two sides should face reality now.

Enforceable spending caps, which have been in place since fiscal 1991, have helped transform the large deficits of the past into today’s surpluses. Between 1990 and 1998, discretionary spending, adjusted for inflation, was cut 11 percent.

The caps have been sustained in part because they are not rigid. They can accommodate the inherent unpredictability of the nation’s fiscal needs because they are automatically raised to reflect any spending that both the president and Congress designate for emergency purposes. While a few recent abuses of this designation have occurred, the great bulk of emergency spending has been directed at genuine exigencies, such as natural disasters and military conflicts.

The spending caps have been effective because they imposed realistic restraint—at least that was the case prior to the Balanced Budget Act’s limits. The collapse of the Soviet Union allowed lawmakers to reduce real defense spending by 27 percent over the 1990-98 period. With the cushion provided by this decrease, they could meet the caps even while increasing discretionary spending for domestic priorities by 18 percent.

But in their zeal to achieve a balanced budget by 2002, lawmakers set caps in the Balanced Budget Act that required a 12 percent cut in spending between 1997 and 2002—more than had been achieved in the previous seven years. With the defense downsizing already played out and deficits morphing into surpluses, such stringent caps were unachievable. The only question was who would cry “Uncle” first.

Faced with unrealistic spending limits last year, the Republicans couldn’t muster the majorities needed to approve a budget resolution or to pass eight of the 13 regular appropriation bills. At crunch time last October, the president forced the Republicans to swallow $16 billion in emergency discretionary spending; for some items, the “emergency” designation underscored the living nature of the English language.

Following this debacle, many fiscal conservatives vowed never to let it happen again and waited to see how the president would handle the more stringent caps for the coming year. The president did not cry “Uncle.” His fiscal 2000 budget pleased Democratic constituencies by audaciously boosting spending $30 billion over the limits. At the same time, it claimed fealty to the caps by offsetting the excess spending using various budget gimmicks, rule changes and accepted mechanisms. Congressional Republicans, and many Democrats, found the president’s proposed offsets unacceptable.

With bravado and without thinking through the consequences, Republicans quickly passed a budget resolution that adhered to the spending caps. To comply with this resolution, they now have to pass appropriation bills that cut discretionary outlays $22 billion below the nominal levels provided for fiscal 1999, a feat that both appropriations committee chairmen readily admit is impossible.

Now both sides are readying themselves for the October collision. Republicans hope to sucker the president into signing appropriation bills for defense and several other agencies that are amply funded. They then will wait until he begs them to provide more money than the caps will permit for education, health and other Democratic priorities. At that point, they believe, they will be able to get the president to acquiesce to a Republican tax cut in return for cap-busting social spending. Goodbye, fiscal discipline!

Democrats plan to sit back. The Republicans, they predict, will be unable to pass most of the appropriation bills because many in the GOP won’t go along with the deep cuts that will be required. With a government shutdown looming, Democrats hope that voters will see why the Republicans should no longer be entrusted with running Congress.

When an agreement on an omnibus spending bill is reached late some October night, Democrats believe it will contain much of what the president wants, together with a full helping of member-sponsored pork barrel projects, all designated as emergencies. Once again, Republicans will be left fuming over how they have been taken to the cleaners.

There is a better way, one that avoids the threat of a government shutdown, the heightened partisan animosity generated by the year-end budget battle and the bad policy that emanates when the budget is slapped together after the fiscal year has begun. Like adults, the congressional leadership and the president should admit that the spending caps set in the Balanced Budget Act are unachievable, that neither party is willing to cut spending in nominal terms now that budget surpluses have appeared four years ahead of schedule. The caps should be raised to recognize a portion of the added spending approved last year and to accommodate future inflation.

To assuage the concerns of fiscal conservatives, the revised spending caps and the pay-as-you-go discipline that limit mandatory spending and tax cuts should be extended through 2005, and an explicit definition of emergency spending should be adopted. This may seem a small sop to offer fiscal conservatives, who rightly will conclude that higher caps would both eat into the resources available for future tax cuts and absorb some of the Social Security surpluses for the next year or two. But they should recognize that the budget chicanery and political animosity that will accompany a continued effort to hew to the present unrealistic caps will make it impossible to enact any procedural restraints once the current spending caps and pay-as-you-go discipline terminate after 2002.

Without continued procedural restraints, the hard-fought gains of the past decade will be washed away by new waves of spending and the undertow of massive tax cuts. Establishing realistic caps now is the way to achieve politically sustainable restraint over the long run.