Balanced Budget Amendment - How To Budget And Pay Off Debt

A balanced-budget amendment is a constitutional rule requiring that a state cannot spend more than its income. It requires a balance between the projected receipts and expenditures of the government.

Balanced-budget provisions have been added to the constitutions of most U.S. states, the Basic Law of Germany, the Hong Kong Basic Law, Spain, Italy and the Swiss Constitution. It is often proposed that a balanced-budget rule be added to the national United States Constitution. Most balanced-budget provisions make an exception for times of war, national emergency, or recession, or allow the legislature to suspend the rule by a supermajority vote.

Europe

Austria

In November 2011 the Austrian coalition government agreed to amend its constitution and introduce a German style Schuldenbremse ("debt brake"). This will force the government to reduce its debt level to 60% of gross domestic product (GDP) by 2020.

Germany

In 2009 Germany's constitution was amended to introduce the Schuldenbremse ("debt brake"), a balanced budget provision. This will apply to both the federal government and the Länder (German states). From 2016 onwards the federal government will be forbidden to run a structural deficit of more than 0.35% of GDP. From 2020, the states will not be permitted to run any structural deficit at all. The Basic Law permits an exception to be made for emergencies such as a natural disaster or severe economic crisis.

Italy

In 2011 Italian Prime Minister Silvio Berlusconi promised to balance the budget by 2013, and a balanced budget amendment to the Constitution of Italy was added in 2012.

Poland

Poland's constitution (adopted in 1997) caps the public debt at 60% of GDP â€" the government cannot take on any financial obligations that would cause that limit to be exceeded. To ensure this level is never breached, Poland has a self-imposed debt threshold of 55% of GDP, and the government must take action to balance the budget once this level is exceeded.

Slovenia

In 2013 the Slovenian parliament approved a balanced budget amendment to the constitution that will come into force in 2015.

Spain

In 2011 the Spanish Parliament proposed a law amending the Spanish Constitution to require a balanced budget at both the national and regional level by 2020. The law states that public debt can not exceed 60% of GDP, though exceptions would be made in case of a natural catastrophe, economic recession or other emergencies. The changes will also require the government to stick to EU annual deficit limits of 3% of GDP.

Switzerland

After years of rising deficits and debt in the 1990s, Switzerland's citizens adopted the debt brake as a constitutional amendment in 2001. The rule was implemented starting in 2003. It states that each year, the budget must be in balance, adjusted for economic conditions. This adjustment is made by multiplying expenditures by a cyclical factor (the ratio of trend real GDP to expected real GDP), thus either allowing for deficits during recessions or forcing lawmakers to have surpluses during booms. Essentially, the rule calls for structural balance in each year and absolute balance over the course of a business cycle. So if lawmakers want to have expansionary fiscal policy during recessions, they need to pay for it by saving up during good economic times. The rule did initially allow for "extraordinary spending" if a qualified parliamentary majority approved, but recent changes have made this spending count as normal expenditures.

Paying off debt on one income

United States

U.S. states

Every U.S. state other than Vermont has some form of balanced budget provision that applies to its operating budget. The precise form of this provision varies from state to state. Indiana has a state debt prohibition with an exception for "temporary and casual deficits," but no balanced budget requirement. The governor is not legally required to submit a balanced budget, the legislature is not required to approve appropriations that are within available revenue, and the state is not required to end the year in balance. An unusual variant is the Oregon kicker, which bans surpluses of more than 2% of revenue by refunding the money to the taxpayers. State balanced budget requirements do not apply to state capital budgets, which generally allow states to use their debt capacity to finance long-term expenditures such as transportation and other infrastructure.

U.S. federal government

There is no balanced budget provision in the U.S. Constitution. Thus, the U.S. federal government is not required to have a balanced budget. However, with the one important exception found in Article 1, Section 8. Clause 1. grants Congress the power "...to pay the debts..." which is the first thing that must take place in order to have a Balanced Budget. Several amendments to the U.S. Constitution have been proposed which would require a balanced budget, but none have been passed. Most of these proposed amendments allow a supermajority to waive the requirement of a balanced budget in times of war or national emergency.

There is dispute among U.S. economists, due to varying macroeconomic theories, as to whether a balanced budget is needed or even useful to achieve long term economic growth.

History

The Articles of Confederation and Perpetual Union had granted to the Continental Congress the power

to borrow money, or emit bills on the credit of the United States, transmitting every half-year to the respective States an account of the sums of money so borrowed or emitted

And, with this as a model Article I, Section 8, Clause 2 of the Constitution grants to the United States Congress the power

To borrow money on the credit of the United States;

At the time that the Constitution came into effect, the United States had a significant debt, primarily associated with the Revolutionary War. There were differences within and between the major political coalitions over the possible liquidation or increase of this debt. As early as 1798, Thomas Jefferson wrote:

I wish it were possible to obtain a single amendment to our Constitution. I would be willing to depend on that alone for the reduction of the administration of our government; I mean an additional article taking from the Federal Government the power of borrowing. I now deny their power of making paper money or anything else a legal tender. I know that to pay all proper expenses within the year would, in case of war, be hard on us. But not so hard as ten wars instead of one. For wars could be reduced in that proportion; besides that the State governments would be free to lend their credit in borrowing quotas.

(Although Jefferson made a point of seeking a balanced budget during the early years of his administration, he seems to have later reversed himself in purchasing the Louisiana Territory. But note also that he made no exception for war, but rather saw the requirement of maintaining a balanced budget as a salutary deterrent.)

The issue of the federal debt was next addressed by the Constitution within Section 4 of the Fourteenth Amendment (proposed on June 13, 1866 and ratified on July 9, 1868):

The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned. But neither the United States nor any State shall assume or pay any debt or obligation incurred in aid of insurrection or rebellion against the United States, or any claim for the loss or emancipation of any slave; but all such debts, obligations and claims shall be held illegal and void.

On May 4, 1936, Representative Harold Knutson (R-Minnesota) introduced House Joint Resolution 579, resolution in support of a Constitutional Amendment that would have placed a per capita ceiling on the federal debt in peacetime.

Article V of the Constitution specifies that if the legislatures of two-thirds of the states apply to Congress for a constitutional amendment by means of an amendment-proposing convention, then Congress must call that convention. Between May 8, 1957 (Indiana), and July 21, 1983 (Missouri), such applications, from 32 different state legislatures, were submitted to Congress on the subject of a Balanced Budget Amendment. The petitioning states were Alabama, Alaska, Arizona, Arkansas, Colorado, Delaware, Florida, Georgia, Idaho, Indiana, Iowa, Kansas, Louisiana, Maryland, Mississippi, Missouri, Nebraska, Nevada, New Hampshire, New Mexico, North Carolina, North Dakota, Oklahoma, Oregon, Pennsylvania, South Carolina, South Dakota, Tennessee, Texas, Utah, Virginia, and Wyoming. After a dry spell lasting three decades, on November 20, 2013, lawmakers in Ohio provided the 33rd application on the subject (Senate Joint Resolution No. 5) and, on March 26, 2014, Michigan legislators (Senate Joint Resolution "V") provided the 34th. Taking into account the states whose lawmakers rescinded their prior Article V convention applicationsâ€"and did not later re-applyâ€"this leaves the count at 27 states, or 7 shy of the needed 34.

Deficit spending

Unlike the constitutions of most U.S. states, the United States Constitution does not require the United States Congress to pass a balanced budget, one in which the projected income to the government through taxes, fees, fines, and other revenues equals or exceeds the amount proposed to be spent. This has led to deficit spending and the creation of a national debt. Except for a short period during the presidency of Andrew Jackson since its inception the United States federal government has always been in debt.

Gross debt includes both public debt and Intragovernmental holdingsâ€"money borrowed from federal funds such as Medicare and Social Security.

Fiscal years 1940â€"2009 GDP figures are derived from 2010 Office of Management and Budget figures which contained revisions of prior year figures due to significant changes from prior GDP measurements. Fiscal years 1950-2010 GDP measurements are derived from December 2010 Bureau of Economic Analysis figures which also tend to be subject to revision. The two measures in Fiscal Years 1980, 1990 and 2000-2007 diverge only slightly.

Nixon and Carter

Deficit spending resumed under Richard Nixon, who had become president by the time that the 1969 surplus was known. Nixon's advisors chose to fight inflation rather than to maintain a balanced budget. Nixon was famously quoted as saying, "We are all Keynesians now," with regard to the budget deficit that his administration began to accumulate during years of mild recession. (He also imposed the first peacetime wage and price controls, mandatory petroleum allotments, and many other features of a planned economy).

With the distractions of the Watergate scandal and the budget deficit relatively small, however, most criticisms were sidelined until the administration of Jimmy Carter. During Carter's presidency, the term "stagflation" enjoyed widespread use as the economy stagnated even among increased inflation rates. This economic situation had been previously unheard of in the United States where increasing prices and wages had generally been seen during times of economic growth. Republicans began to make much mention of "Democratic deficits" and proposed the Balanced Budget Amendment as a cure.

During this time period, many liberal Democrats began to call for a Balanced Budget Amendment, including Governor Jerry Brown of California, who ran for president against Carter in 1980, and then-Congressman Paul Simon, who, upon his election to the U.S. Senate, would write the version of the amendment that came closest to passing.

National Taxpayers Union and an Article V Constitutional Convention

The 1980 presidential election gave the presidency to Republican Ronald Reagan and control of the Senate to the Republicans for 3/4 of Reagan's presidency. Passage of the amendment started to seem more possible, though passage of a constitutional amendment requires a two-thirds vote in both houses of Congress. Deficit spending soared in the 1980s. A program agreed to by Administration and Congressional leaders which was supposed to entail two dollars of spending cuts for every dollar of tax increases was an abysmal failure, and deficits soared further. It became apparent that Congress had no intention of passing the Balanced Budget Amendment, and President Reagan never once proposed a balanced budget for adoption by the Congress.

The amendment's backers, far from despairing, said that it was needed more than ever. They began a plan to make an "end run" around Congress, for the U.S. Constitution also allows two-thirds of state legislatures to petition for a new constitutional convention to be called for the purpose of writing proposed amendments to the Constitution, a procedure which has never happened at the federal level since the original constitutional convention of 1787. Much of this effort was initially organized by the National Taxpayers Union and its President at the time, George Snyder, a former state senate majority leader. Many people were appalled at the concept; some constitutional scholars suggested that such a body could not be limited to its ostensible purpose and could largely rewrite the Constitution, perhaps removing or reducing the Bill of Rights, a fear that backers described as being totally groundless, since any proposed changes would still have to be approved by three quarters of the states, which would presumably doom any attempt to end basic constitutional freedoms.

Detractors also noted that there was no mechanism in place by which to select delegates to any such convention, meaning that the states might choose to select them in a way which tended to subvert democracy. Backers also produced their own constitutional scholars stating that limiting such a convention was perfectly constitutional, that it could be limited to whatever purpose the states had called it for, and that states would be free to select the delegates to represent them, as was the case in 1787.

By 1979, the effort to push the states to support an amendment had made serious progress with 29 of the 34 states required for an Article V Convention. An opposition effort was led by Massachusetts Lt. Governor Thomas P. O'Neill III and a group of labor and liberal cause organizations including the AFLâ€"CIO and Common Cause. By 1983, the legislatures of 32 of the required 34 states had approved resolutions/memorials to trigger the calling of an Article V convention on the subject of a Balanced Budget Amendment to the U.S. Constitution. Between 1988 and 2010, lawmakers in 16 statesâ€"exactly half of those that had applied for an Article V Convention on the topic of a Balanced Budget Amendment up until 1983â€"rescinded their Convention applications. Then, from 2010 to 2015, lawmakers in 9 of the 16 rescinding states reversed course yet again and re-applied for a Convention to propose a Balanced Budget Amendment. In 2010, Nebraska lawmakers simply re-affirmed their 1976 Convention call on this subject without ever having rescinded (Legislative Resolution No. 106).

Gramm-Rudman-Hollings Act

Perhaps motivated by the number of state legislatures calling for such a convention approaching the required two-thirds, and recognizing its inability to make sufficient cuts on its own initiative to balance the budget, Congress responded in 1985 with the Gramm-Rudman-Hollings Act, named for its Senate sponsors, which called for automatic cuts in discretionary spending when certain deficit-reduction targets were not met. This act soon became a convenient target for opponents of all stripes, who blamed it for government failing to meet perceived needs, for not abolishing the deficit, and anything else that might be wrong with government. When it began to affect popular programs, and was partially overturned in the courts, it was first amended to postpone the strength of its effects until later years, and then repealed in its entirety.

George H. W. Bush and Ross Perot

President George H. W. Bush, in part to help ensure Congressional support for the Gulf War, agreed to turn back on a campaign promise of no tax increases, reportedly in part because he saw disaffection from his conservative base due to the looming deficit.

Deficit spending continued, but was no longer much of an issue until the presidential bid of Ross Perot during the 1992 presidential election. Perot made the deficit, and his plans to eliminate it, the major issue of his campaign, along with his protectionist plans to reduce and then eliminate the trade deficit. Many supporters of the Balanced Budget Amendment flocked to the Perot camp. Despite winning a substantial number of popular votes, Perot failed to carry a single state (zero electoral votes). He eventually faded from the political scene and when appearances were made, focused more on the trade deficit issue.

Clinton and the budget surplus

President Bill Clinton did not support a constitutional amendment, but in his 1992 campaign he called for balancing the budget through ordinary fiscal policy. He came into office facing a large deficit. Clinton signed into law the Omnibus Budget Reconciliation Act of 1993, which attacked the deficit by raising taxes. Beginning with the 1998 budget year, during his second term, the federal government ran a yearly budget surplus through FY 2001. During the Clinton administration, there was an official surplus of $419 billion during Fiscal years 1998, 1999, 2000, and 2001.

However, it has been argued that this official balanced budget only constituted a surplus in the public debt (or on-budget), in which the Treasury Department borrowed increased tax revenue from intragovernmental debt (namely the Social Security Trust Fund), thus adding more interest on Treasury bonds. In effect, the four year alleged 'surplus' was only in public debt holdings, while the National Debt Outstanding increased every fiscal year, the lowest being a $17.9 billion deficit in FY2000. Meanwhile, Government Sponsored Enterprises (GSEs) such as GNMA, FNMA and FHLMC continued to borrow and spend an extra $543.6 billion over and above their previous 3 years. GSE debt instruments are classified as US Government Securities, but are not officially part of the Federal Debt total.

In 1994, many Americans viewed reducing the deficit as one of the most important public policy objectives. To that end, in that year's Congressional election, Republicans campaigned against Clinton's tax increase and took control of both the Senate and the House. The Republican-led Congress immediately engaged in a battle with President Clinton culminating in a vetoed budget which and a brief shutdown of the Federal government. Despite negotiations disagreement remained on the pace of spending cuts. Ultimately Republican concessions differed little from what was attainable without shutdown. One provision of their "Contract with America" campaign document called for a balanced-budget amendment. In 1995, such an amendment passed the House of Representatives and came within one vote of passing the Senate.

In his final State of the Union address, Clinton said the United States should continue to balance its books and pay off the debt.

Deficits under George W. Bush and Barack Obama

A recession, tax cuts and increases in military and other spending have eliminated late 1990s-era surpluses. Both the deficit and debt grew to the largest in U.S. history. In fiscal years starting September 30, 2002 and ending September 30, 2004 the deficit increased nearly 50%.

The Bush Administration and a Republican Congress, during their 6 years of majority control, never proposed or voted on a balanced budget amendment as they had called for during the Carter and Clinton presidencies but they cut the amount of the yearly deficit over the next several years. Bush called the outcome for Fiscal 2006 a "dramatic reduction" that redeemed his 2004 campaign pledge to halve the deficit earlier than his original 2009 target date, despite the fact that the 2006 deficit of $536.5 billion was over 4X higher than the year Bush took office in 2001. By 2008, the last full year of Bush's presidency, the deficit had almost doubled again, for the first time exceeding $1 trillion. As a result, during the administration of President George W. Bush, the gross debt increased from $5.7 trillion in January 2001 to $10.7 trillion by December 2008, rising from 57.0% of GDP to 74.5% of GDP.

By the end of 2008, a large reduction in tax revenues caused by the Great Recession and the cost of federal stimulus spending began contributing to a rapidly increasing deficit. Responses to the crisis from both the Bush administrationâ€"the bank bailouts and economic stimulus of late 2008â€"and more stimulus spending in the first months of the Obama administration grew the deficit further. By the end of 2009 it reached a record $11.9 trillion. The Congressional Budget Office estimated in March 2009 that under the Obama administration public debt would rise from 40.8% of GDP in 2008 to 70.1% in 2012. Gross debt did rise to 84.5% of GDP at the end of Fiscal Year 2009 and to 93.5% of GDP at the end of Fiscal Year 2010. (Gross debt includes both public debt and Intragovernmental holdings â€" money borrowed from federal funds such as Medicare and Social Security.)

During the 2011 US debt ceiling crisis, some Republicans supported a bill that would avert the crisis by raising the debt ceiling, but with an increase that would not take effect until a balanced-budget amendment was approved by both houses of Congress and submitted to the states. In addition to balancing the budget, it would also impose a constitutional limit on federal spending as a percentage of gross domestic product and would set a supermajority requirement on tax increases. The Budget Control Act of 2011, which resolved the debt-ceiling crisis, required Congress to vote on a balanced-budget amendment in the near future. In addition, it stated that once a balanced budget amendment was sent to the states, the debt ceiling would be automatically increased by 1.5 trillion (this would be in addition to the initial debt limit increase of 2.1 trillion (from 14.294 to 16.394 trillion)). If this provision were to take effect today, it would raise the debt limit to approximately 18.199 trillion and would therefore end the 2013 debt ceiling crisis.

On November 18, 2011 the House of Representatives voted down a balanced-budget amendment that would not have imposed a supermajority requirement on tax increases. House Rules Committee chair David Dreier (R-CA), who had voted for the amendment in 1995, announced that he had changed his mind about the need to amend the Constitution, in light of the success in balancing the budget in the late 1990s.

Support

Historically as a political issue, the deficit, national debt, and the proposed Balanced Budget Amendment have ebbed and flowed in levels of discussion and the proposed amendment has varied greatly in level of support. The modern discussion of the issue seems to have been started by the Republican Party in response to the "guns and butter" policies of President Lyndon B. Johnson, who simultaneously announced his desires for "Great Society" social programs while prosecuting the Vietnam War. Johnson also pushed for Congressional enactment of a surtax as well as other tax increases which allowed him to leave office in 1969 with a balanced budget (plus a small surplus) on the books. This was the last time the United States would see a balanced budget until FY 1998.

In 2003, approximately 90% of the members of the American Economic Association agreed with the statement, "If the federal budget is to be balanced, it should be done over the course of the business cycle, rather than yearly." A reason cited by several leading economists is that a "balanced budget amendment would mandate perverse actions in the face of recessions" by requiring spending cuts that would aggravate the recession. As government spending is part of any country's GDP, sharp cuts in spending to achieve a balanced budget would increase a government's overall debt burden by increasing the country's debt to GDP ratio.

Currently, most Democrats and Democrat-leaning Independents want to simply stabilize the public debt (all debt except intergovernmental holdings) as a percentage of GDP, and worry about balancing later. On the other hand, most Republicans and Republican-leaning Independents support a balanced-budget amendment that would require balancing the federal budget by a certain fiscal year in the near future.

The amendment has been called "political posturing" because its proponents use it to position themselves as supporters of a balanced budget but without specifying which unpopular tax increases or spending cuts they would support to reach that goal. For example, Robert Bixby of the anti-deficit Concord Coalition called the amendment "an avoidance device." Economist Dean Baker has noted that if the federal government were to run budget surpluses with the US still experiencing a large trade deficit, the economy would, in the absence of economic bubbles, shrink and experience rising unemployment. Without significant devaluation of the US dollar, he has stated, the federal government necessarily has to run budget deficits to offset trade deficits or there will be high unemployment.

It has been argued that such amendment would likely be unenforceable. Among other reasons, the standard budgetary process in the United States operates with projected figures. There is no way of knowing ahead of time whether the budget would end up unbalanced in any fiscal year, before that fiscal year is over. While the Congress may be mandated by the amendment only to pass balanced budgets, this could be easily circumvented by inflating revenue projections, or routing spending through off-budget channels. Balanced-budget amendment proposals often contain an exemption for emergencies such as being in the state of war. It could be envisioned that the Congress would simply declare the country in a perpetual state of war, year after year, just to avoid the necessity of politically costly spending cuts or tax increases.

Beginning in the mid-1970s, state legislatures began the process of applying to Congress for the calling of a convention to propose a Balanced-Budget Amendment to the United States Constitution, pursuant to Article V of the Federal Constitution.

By 1983, this effort had reached 32 out of the necessary 34 applications to trigger such a convention. Between 1988 and 2010, though, lawmakers in 16 of those 32 statesâ€"exactly half of themâ€"rescinded their prior applications for a convention. Then, in 2010, there began a reversal of course in the state legislatures, with Florida re-applying for a convention on the topic of a Balanced Budget Amendment that year. The following year, 2011, Alabama likewise re-applied. Both Florida and Alabama had rescinded in 1988. Then, in 2012, New Hampshire re-applied after having rescinded as recently as 2010. In 2014, Georgia re-applied, after having rescinded a decade earlier in 2004, and Tennessee re-applied after having rescinded in 2010. Likewise, in 2014, Louisiana re-applied after having rescinded in 1990. During 2015, South Dakota re-applied, after having rescinded in 2010, followed by Utah re-applyingâ€"after having rescinded in 2001. All eight of those states went from applying, to rescinding, to re-applying. Covering completely new ground, however, were Ohio lawmakers in 2013 and Michigan legislators in 2014, which applied for a Balanced-Budget Amendment convention for the very first time.

Questions have been raised as to whether a state legislature that has applied for a convention may later rescind that application. If the rescissions of those 12 remaining states between 1988 and 2010â€"setting aside Alabama, Florida, Georgia, and New Hampshireâ€"are not valid then the threshold of 34 states required by Article V was met with the Michigan Legislature's application of March 26, 2014, for a convention on the subject of a Balanced Budget Amendment and Congress, under Article V, would be constitutionally obligated to call a convention. Article V of the Constitution provides no guidance on whether a state may rescind its application for a constitutional convention. It does not specify an enforcement mechanism if two-thirds of the states should apply and Congress refuses to call one. It does not set forth the manner by which a constitutional convention is to be summoned or how delegates would be chosen, or whether the states would have one vote or would be entitled to vote in proportion to their population. The last time that clarifying legislation was introduced in Congress was on January 15, 1991, when U.S. Senator Orrin G. Hatch offered the bill S. 214, which received no further consideration than to be referred on that date to the U.S. Senate's Committee on the Judiciary.

Criticism

Many Neo-Keynesian economists believe that while a large federal deficit has an adverse effect on the economy, deficit spending has significant benefits in times of recession.

Post-Keynesian economists, and particularly proponents of Modern Monetary Theory, argue that the finances of the state are entirely unlike the finances of businesses or households, since the state is an issuer of currency and everybody else is a currency user, and thus the state can run deficits practically indefinitely. Therefore, a "modern, fiscally and monetarily sovereign state" such as the United States "is never dependent on borrowing or taxing to be able to spend." Post-Keynesians argue that the term "state deficit" itself is "grossly misleading," as is "state debt" since state debt essentially represents private savings. They completely reject the "new fiscal orthodoxy" represented by the "drive" to balance state budgets, arguing that this is "just substituting household net indebtedness for planned deficits, [and] private deficits for public deficits: "

The forecasting firm Macroeconomic Advisers LLC addressed the effect of balancing the federal budget for 2012, in the wake of the late-2000s recession: "Then, instead of forecasting real GDP growth of 2% or so for FY 2012, we'd mark that projection down to perhaps â€"12% and raise our forecast of the unemployment rate from 9% to 16%, or roughly 11 million fewer jobs." Furthermore, the resulting loss of tax revenue and increase in mandatory spending would require additional cuts in discretionary spending that would cause a loss of four million more jobs.