Budget Process and Rules
If Republicans win a majority in the U.S. Senate this November, they may push to have the Congressional Budget Office (CBO) and the Joint Committee on Taxation (JCT) use dynamic estimates in official scoring of legislation, according to press reports. Dynamic estimates, which include the economic effects of proposed legislation, would provide useful information to lawmakers. Trying to determine these effects, however, is an uncertain science.
Analysis of the potential dynamic effects of legislation could provide policymakers with useful information in evaluating legislation. However, incorporating dynamic analysis into official budgetary scores of legislation could be problematic for a variety of reasons and could lead to Congress enacting legislation that increases the deficit. While such analysis could be beneficial to understanding the full implications of legislation, it should only be provided as supplementary information and not part of the official score.
In brief, dynamic estimates incorporate the effect that legislation would have on macroeconomic variables such as Gross Domestic Product, employment, and inflation. Current scoring conventions only include microeconomic changes. To learn more about dynamic scoring, read our report: Understanding Dynamic Scoring.
A new paper by Donald Marron of the Urban Institute brings a new idea to the table in the debate over accounting methods for federal lending programs. The paper proposes an approach Marron argues corrects the downsides he describes in both current Federal Credit Reform Act (FCRA) budget accounting standards and fair-value accounting. His approach is called "expected returns," and it is a third way that maintains some of the benefits of both approaches.
Simply put, expected returns accounting calculates a yearly expected value on a loan by comparing the government's returns net of defaults to its borrowing costs (interest on the new federal debt that funds the loan). This method, the paper argues, is a more accurate picture of the actual fiscal effects of the loan over many years in contrast to showing the lifetime effect of a loan in one year as FCRA and fair-value do. This presentation allows for the accounting of any taxpayer subsidies over market rates, an important point made by fair-value. Expected returns accounting departs from both approaches by spreading the score over time when net returns or losses are expected.
Below is an example of a $1,000 dollar loan at below market interest rates from the paper. The government loses $35 in the first year because the loan is below market rates, but it gains money in later years as its returns exceed borrowing costs.
Few topics elicit more yawns than a deep dive into accounting standards. Yet, there may be good reasons to grab a cup of coffee and pay attention to the way our government does its bookkeeping. As a National Affairs article by Jason Delisle and Jason Richwine and a Congressional Budget Office (CBO) report on federal mortgage guarantees remind us, accounting methods can make a big difference for budget projections.
According to the official method for evaluating credit programs spelled out in the Federal Credit Reform Act (FCRA) of 1990, the federal government earns healthy profits from its federal student loan portfolio and the single-family loan guarantee program, to the tune of $184 billion and $63 billion respectively. But as we have explained before, there are different methods to evaluate the budgetary impact of federal programs. Using a different accounting method, known as fair-value accounting, CBO projects that these programs could actually cost the government $95 billion and $2 billion respectively. (Click here to read more about fair-value accounting.)
The use of supplemental appropriations got some press last month as the Obama Administration requested $4.3 billion to address the Central American migrant crisis and fight wildfires. Although neither funding measure passed, it showed the role that supplementals continue to play in the appropriations process. Lawmakers use supplemental appropriations to respond to needs that they did not foresee when they passed government funding measures. To see how much activity has taken place outside of the "regular" process, CBO has helpfully recapped in a new report total supplemental appropriations since 2000 (see the data in Excel here). They break down spending by year and type, showing both the amounts that have been requested and what ultimately was passed into law.
Overall, Presidential administrations have requested $1 trillion over the past 15 fiscal years, and Congress has enacted $1.1 trillion of appropriations ($1.15 trillion of gross spending net of $50 billion in rescissions of past authorized spending). The enacted amount is equal to 0.5 percent of GDP over that period, and it peaked at 1.3 percent ($191 billion) in 2009 when war spending was near its peak; by contrast, there was no supplemental spending in 2011 and 2012 and only $225 million so far in 2014. Including interest brings total spending to $1.4 trillion, or 0.7 percent of GDP.
The Bipartisan Policy Center held an event Tuesday commemorating the 40th anniversary of the Congressional Budget Act, which became law on July 12. The event featured two panel discussions: The first panel included six former directors of the Congressional Budget Office (including CRFB Board members Alice Rivlin, Rudy Penner, and Dan Crippen), and the second panel consisted of former chairmen and members of the House and Senate Budget Committees (including CRFB Co-Chair Bill Frenzel and Board member Jim Jones). Bill Hoagland, another CRFB Board member, presided over the event. Both panels touched on the merits of the Congressional Budget Office, which the Budget Act created, and the failure of Congress to pass concurrent budget resolutions in recent years. The speakers also touched on many of the issues raised in our recent paper on the problems with the budget process. On the whole, the panelists stated that the political polarization of Congress, not inadequacies in the Budget Act, was a main reason for the gridlock in the process.
See the full videos of the panels here.
Kent Conrad, a former Democratic senator from North Dakota, and Judd Gregg, a former Republican senator from New Hampshire, are both former chairmen of the Senate Budget Committee. They recently co-wrote an op-ed featured in Roll Call. It is reposted here.
Since ratification of the constitutional authority given to Congress to tax and spend in 1788, our government has struggled to manage the federal budget. After numerous failed budget concepts and commissions, the Budget Act was finally enacted in 1974 to establish the modern-day budget process. Almost exactly 40 years since the Budget Act was signed into law, there is growing consensus among policymakers and budget observers that the system no longer functions as intended.
As former chairmen of the Senate Budget Committee, we have personally witnessed the transformation away from a functioning regular order and toward an ad hoc approach to fiscal policy. Congress adopted an annual budget resolution, approved by both chambers, each fiscal year from 1976 through 1998. Since then, however, there have been eight fiscal years in which Congress has not approved a budget resolution. Government shutdowns, fiscal cliffs, temporary fixes and retroactive policy changes — all without serious consideration of our nation’s fiscal health — have become the new budgetary world order. Even when budget rules are in place, lawmakers evade them with gimmicks, emergency designations and waivers that result in the costs being added to our debt.
One of the core functions of Congress is to review and allocate discretionary spending each year through 12 appropriations bills. If not done by the beginning of the fiscal year on Oct. 1, then either the government shuts down or operates on a continuing resolution. As the Committee for a Responsible Federal Budget points out in a new paper detailing the problems with the current process, the average length and breadth of continuing resolutions has increased in recent years. These temporary funding extensions, along with shut downs, postpone important funding decisions and hamper the efficiency across the federal government.
We also know too well that even when budgets are produced on time, they are often political documents that lawmakers never expect to implement or enforce. Consideration of budget resolutions on the floor of the United States Senate in particular often devolves into late-night “vote-o-rama” sessions where hundreds of political messaging amendments geared to inspire campaign commercials are filed, while there is little debate on the ways to address the long-term drivers of our debt such as the need for tax reform and entitlement reform. In fact, we found the constraints of the budget process and the lack of political will to address the debt so stifling that we worked together to author legislation to create a special commission, later known as the Fiscal Commission or Simpson-Bowles, to bypass some of these process challenges.
Yesterday, the Commmittee for a Responsible Federal Budget released a paper detailing the problems with the federal budget process. In light of the 40th anniversary of the enactment of the Congressional Budget and Impoundment Control Act of 1974 this past Saturday, the paper details many problems facing the current budget process.
The paper focuses on three main issues -- each with many aspects to them -- with the modern budget process: lack of transparency, lack of accountability, and lack of a long-term focus. These issues have resulted in poor planning and policy around the debt, with the process increasingly becoming ad hoc, ineffective, and short-sighted in practice.
Continuing our series of transportation-focused blogs, this blog discusses the budgetary treatment of the Highway Trust Fund (HTF). While most of the attention regarding the HTF has focused on proposals to address the impending exhaustion of the HTF, the need to reauthorize highway programs by the end of September presents an opportunity to reform the budgetary treatment of spending from the HTF to provide greater transparency in highway spending.
One of the wonkier fiscal debates that arises from time to time concerns the accounting method used to measure the size of the budget deficit. This week, the U.S. Government Accountability Office (GAO) published an online primer that explains the different ways to measure the deficit and what these measures say about the government’s fiscal health.
The International Monetary Fund recently published a study on budget institutions in G-20 countries. The study takes stock of these countries' progress in reforming their budget institutions and examines whether having strong budget institutions has helped countries tackle their budget challenges in the aftermath of the financial crisis. While it is difficult to measure the impact of institutional arrangements on budgetary outcomes, the IMF's verdict is that they do matter.