A Big Error in the Senate Republicans’ Balanced Budget Amendment

By :: July 6th, 2011

Senate Republicans made a striking error in the balanced budget amendment they introduced last week. As written, the amendment would limit federal spending far more than those senators realize or, I suspect, desire.

The Republicans want the budget to be balanced by keeping spending down rather than by raising tax revenues. They thus propose limiting spending to no more than 18% of gross domestic product (GDP). That’s in line with average tax revenues over the past four decades, but well below average spending, which has been just short of 21% of GDP.

So what’s the problem? The way the amendment would implement the spending limit:

Total outlays for any fiscal year shall not exceed 18 percent of the gross domestic product of the United States for the calendar year ending before the beginning of such fiscal year, unless two-thirds of the duly chosen and sworn Members of each House of Congress shall provide by law for a specific amount in excess of such 18 percent by a roll call vote.

The amendment compares spending in one period (the upcoming fiscal year) to the size of the economy in an earlier period (the last complete calendar year). If the amendment were in force today, for example, spending in fiscal 2012, which starts in October, would be limited to 18 percent of GDP in calendar 2010. That’s a gap of 21 months.

As Bruce Bartlett pointed out in analyzing an earlier version of this amendment, that time lag can add up to big money. Why? Because both real economic growth and inflation will expand the economy during those 21 months.

The Congressional Budget Office projects, for example, that nominal GDP will grow about 4.5% annually in the latter part of this decade (the earliest the amendment could go into effect). Over 21 months, that works out to roughly 8% growth. The amendment would thus limit federal spending in those years to about 16.7% of each year’s GDP (16.7% = 18% / 1.08) not the advertised 18%. In 2020 alone that amounts to a difference of more than $300 billion in spending.

That’s a big error.

I doubt that Senate Republicans really want to limit spending to only 18% of GDP. Even the House Republican budget calls for spending of more than 20% of GDP for at least two decades. But if the Senate Republicans are serious, their first step should be to fix the drafting error in their amendment.

5Comments

  1. Vivian Darkbloom  ::  12:26 pm on July 6th, 2011:

    In fact, the Amendment does not limit spending at all. It merely states that it requires a two-thirds vote to exceed the stated threshold.

  2. Robert Olds  ::  3:28 pm on July 6th, 2011:

    When I first read the BBA, “window dressing” flashed before my eyes. The is little to no substance in the bill and it will never pass as written. But it gives folks, on both sides of the aisle, the ability to make something out of nothing.

  3. Michael Bindner  ::  9:01 pm on July 6th, 2011:

    This measure has not chance of clearing the House – and if it could, it would not be needed. The BBA is the GOP’s acknowledgement that their ideology is doomed the minority status and that this is NOT a center-right country, since if it were no super-majority requirement would be needed to protect their right to stall the process to extract concessions on fiscal matters.

  4. Michael Bindner  ::  9:04 pm on July 6th, 2011:

    The proper balanced budget requirement would be on a regional government for discretionary military and civil spending, funded by a regional VAT (amendment required to enact regional rates). Balancing the budget at that level, with automatic rate increases and spending cuts (each closing half the gap) would be real enforcement.

  5. David R  ::  2:47 pm on July 7th, 2011:

    Why do you think this was an error. These people are not that dumb. It is basically a way to get spending to 16% of GDP while maintaining the fiction it is 18% of GDP. This is deliberate, another step on the way to getting spending to 14-15% of GDP.