Omar Bennett
A balanced budget amendment or debt brake is a constitutional rule that requires a state to avoid spending beyond its income. It mandates a balance between the projected receipts and expenditures of the government, and this balance may be for each fiscal year or over a multi-year period. While the concept has been implemented in various countries and US states, the question of whether it should be added to the US Constitution remains a contentious issue. The argument centres on whether such an amendment would effectively address the problem of federal deficits and growing federal debt, or if it would instead limit the ability of policymakers to respond to economic downturns and emergencies.
| Characteristics | Values |
|---|---|
| Purpose | To address the nation's long-term fiscal problems and reduce deficit spending |
| Function | Requires a balance between the projected receipts and expenditures of the government |
| Timeframe | May be for each fiscal year or over a multi-year period |
| Impact | Could threaten significant economic harm and cause job losses |
| Support | Has often had bipartisan support but has become more associated with the Republican Party in the 21st century |
| Opposition | Could limit the ability of policymakers to use fiscal policy to address recessions and emergencies |
| Examples | Germany, Hong Kong, Italy, Poland, Slovenia, Spain, Switzerland, and most U.S. states |
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What You'll Learn
The economic risks of a balanced budget amendment
A balanced budget amendment or debt brake is a constitutional rule requiring that a state cannot spend more than its income. While it is argued that such an amendment reduces deficit spending and constrains politicians from making irresponsible short-term spending decisions, there are several economic risks associated with it. Firstly, it would require a balanced budget every year, regardless of the state of the economy, unless a supermajority of both houses overrode that requirement. This would pose a serious risk of tipping weak economies into recession and making recessions longer and deeper, causing very large job losses. In times of recession, deficit spending has significant benefits, whereas spending cuts by governments aggravate and lengthen recessions.
Secondly, when the economy slows, federal revenues decline or grow more slowly, and spending on unemployment insurance and other social programs increases, causing deficits to rise. This is the exact opposite of what good economic policy would advise. In addition, data showing that the economy is in recession do not become available until the economy has already begun to weaken; it could take many months before sufficient data is available to convince a congressional supermajority to waive the balanced budget requirement, if at all. In the meantime, substantial economic damage and large job losses would occur.
Thirdly, some balanced budget proposals would either prohibit any tax increases or restrict federal revenue collections to very low levels, limit total federal expenditures, or both. This would essentially impose a constitutional requirement for deep budget cuts affecting tens or hundreds of millions of Americans. For example, if the 2012 budget had been balanced through program cuts, those cuts would have totalled about $1.5 trillion in 2012 alone and would have thrown about 15 million more people out of work, according to Macroeconomic Advisers.
Finally, the fact that state governments need to work against these effects in their own budgets risks making the economy less stable and exacerbating the swings in business cycles.
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The political will to balance budgets
However, opponents argue that this political pressure could lead to budget gimmicks and accounting tricks that only meet the letter of the law, compromising the integrity and transparency of the federal budget. They contend that a balanced-budget amendment would not address the underlying lack of political will, and policymakers would find ways to evade its restrictions, potentially disrupting federal budgeting and policymaking.
The experience of countries like Italy supports the notion that political will is a critical factor. Despite Italy's balanced-budget amendment, deficit spending continues with parliamentary authorization, loosely interpreting "emergency" to justify new debt. This suggests that political will, or lack thereof, can undermine the effectiveness of constitutional amendments.
Additionally, the economic risks associated with a balanced-budget amendment further complicate the political landscape. Critics argue that it could limit the ability of future policymakers to use fiscal policy flexibly during recessions or emergencies. The potential for substantial economic harm and job losses raises significant concerns, influencing the political will to implement such amendments.
Ultimately, the debate highlights the complex interplay between political will, economic considerations, and the potential impact on budgeting processes. While proponents believe a constitutional amendment will create the necessary pressure for responsible fiscal policies, opponents caution that it may lead to unintended consequences and potential circumvention of the amendment's objectives.
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The constitutional validity of a balanced budget amendment
The validity of a balanced budget amendment to the Constitution has been a topic of debate, with proponents and opponents offering differing perspectives on its economic and political implications.
Proponents of a balanced budget amendment argue that it is necessary to control America's deficits and debt and to protect future generations from debts accumulated by earlier generations. They contend that a constitutional amendment will create strong political pressure to rein in deficits and hold policymakers accountable for irresponsible fiscal policies. Additionally, they believe that it will reduce deficit spending and prevent politicians from making short-term irresponsible spending decisions. The amendment has gained bipartisan support in the past, with more recent associations tilting towards the Republican Party.
On the other hand, opponents argue that a balanced budget amendment could limit the ability of future policymakers to use fiscal policy effectively to address economic recessions and respond to national emergencies. They contend that it could lead to significant economic harm, causing deeper and longer recessions and resulting in substantial job losses. The requirement for federal expenditures to be offset by revenues in the same year is seen as a potential impediment to the operation of Social Security and other vital federal programs. Furthermore, critics argue that the amendment is "political posturing," as its supporters do not specify the unpopular tax increases or spending cuts needed to achieve a balanced budget.
Several countries, including Germany, Italy, Poland, Slovenia, Spain, and Switzerland, have incorporated balanced-budget provisions into their constitutions. However, the effectiveness of these amendments varies, with Italy, for example, having never achieved a balanced budget since the passage of its amendment.
In conclusion, the constitutional validity of a balanced budget amendment remains a subject of contention. While some argue that it is a necessary constraint to control deficits and debt, others warn of its potential detrimental economic and political consequences. The experiences of other countries with similar amendments offer a mixed picture, underscoring the complexity of implementing such a measure.
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The impact on federal programs
A balanced budget amendment would have a significant impact on federal programs. The amendment would essentially suspend the automatic stabilizers that occur when the economy is weak, such as temporarily lowering revenues and increasing spending on unemployment insurance and welfare programs. This would mean that federal programs would need to be cut or taxes increased to prevent a deficit, pulling money out of the economy at a time that could cause very large job losses and harm economic growth.
The amendment would also affect the operation of Social Security and other vital federal programs, as well as military retirement and civil service retirement programs. The Federal Deposit Insurance Corporation and the Pension Benefit Guaranty Corporation would also face challenges in responding quickly to bank or pension fund failures without causing the budget to slip out of balance.
State and local governments would need to increase taxes significantly to pay for the shifts in cost burdens, and they would be left to fill the gaps in federal "safety net" programs for nutrition, housing, education, and medical care. This could have a detrimental impact on people's daily lives, as cautioned by Governor Roy Romer of Colorado in his testimony before the Constitution Subcommittee in 1995.
Furthermore, the requirement for a balanced budget every year, regardless of the state of the economy, could tip weak economies into recession and make recessions longer and deeper. This would be exacerbated by the difficulty of securing a supermajority vote in both chambers of Congress to waive the balanced budget requirement in case of an economic downturn.
Overall, a balanced budget amendment would pose serious risks to the economy and federal programs, and leading economists have warned of its adverse effects.
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International implementation of balanced budget amendments
In Europe, Germany, Italy, Poland, Slovenia, Spain, and Switzerland have all introduced constitutional balanced budget amendments or "debt brakes". For example, Germany's "Schuldenbremse" ("debt brake") was introduced in 2009 and applies to both the federal government and the states. Similarly, Spain proposed a law in 2011 to amend its constitution and require a balanced budget at the national and regional levels by 2020. Switzerland's citizens also adopted a debt brake as a constitutional amendment in 2001, which was implemented in 2003.
On the other hand, the "Fiscal Compact" signed by euro area countries in March 2012 limits budget deficits over an economic cycle rather than every year. This compact allows governments to run higher deficits during recessions to reduce the severity of economic downturns or in response to "exceptional circumstances." The 1997 EU Stability and Growth Pact, which preceded the Fiscal Compact, established that all European countries should aim for a balanced structural budget with decreasing general government debt.
In the United States, there have been proposals for a constitutional balanced budget amendment, but it has faced opposition due to its potential economic risks. Critics argue that it could limit the ability of policymakers to respond to recessions and national emergencies effectively, potentially causing deeper and longer recessions. Proponents, however, argue that a balanced budget amendment would promote fiscal discipline and prevent irresponsible spending decisions by politicians.
Overall, while some countries have implemented constitutional balanced budget amendments, others have opted for more flexible fiscal rules that allow for deficits during economic downturns. The impact of these amendments varies, and there are ongoing debates about their effectiveness and potential risks.
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Frequently asked questions
A balanced budget amendment is a constitutional rule requiring that a state cannot spend more than its income.
Supporters argue that it will reduce deficit spending and impose needed accountability for irresponsible fiscal policy.
Critics argue that it could limit the ability of policymakers to use fiscal policy to respond to recessions and emergencies, and that it could lead to economic harm and job losses.
Balanced budget provisions have been added to the constitutions of Germany, Hong Kong, Italy, Poland, Slovenia, Spain, Switzerland, and others.
Yes, proposals for a balanced budget amendment to the US Constitution have been introduced in Congress, but it has not been ratified. The amendment continues to be supported by lobbying organizations and some political parties.
!["Debt Bill" Budget Control Act of 2011 The August Amendment to the Balanced Budget and Emergency Deficit Control Act of 1985 [Annotated]](https://m.media-amazon.com/images/I/31bkolipvuL._AC_UY218_.jpg)
