Balancing Act: A Constitutional Amendment For Fiscal Discipline

There is significant debate surrounding the proposal to add a balanced budget amendment to the constitution. A balanced budget amendment would require that a state cannot spend more than its income, forcing a balance between projected receipts and expenditures. This could be achieved annually or over a multi-year period. Proponents of the amendment argue that it will reduce deficit spending and prevent politicians from making irresponsible short-term spending decisions. Additionally, it is believed that this amendment will create strong political pressure to rein in deficits and impose fiscal responsibility. On the other hand, opponents argue that it could limit the ability of policymakers to respond effectively to economic recessions and emergencies, potentially leading to deeper and longer recessions and causing significant job losses. Furthermore, opponents contend that political pressure could result in budget gimmicks that meet the letter but not the spirit of the law.

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Balanced budget amendments in other countries

Balanced budget amendments or debt brakes are constitutional rules requiring that a state cannot spend more than its income. They mandate a balance between the projected receipts and expenditures of the government, and this balance requirement may be for each fiscal year or over a multi-year period.

While the United States would be an outlier if it adopted a strict balanced budget amendment, several countries have implemented similar rules. Germany, Hong Kong, Italy, Poland, Slovenia, Spain, and Switzerland have all added balanced-budget provisions to their constitutions. Additionally, 44 states in the US have submitted applications for a balanced budget amendment at some point in the past, although not all were simultaneous.

The specific provisions of these amendments vary by country. For example, Italy's amendment, added in 2012, allows deficit spending in emergencies if authorized by a majority of both houses of Parliament. Poland's constitution, adopted in 1997, caps public debt at 60% of GDP, with a self-imposed debt threshold of 55% of GDP to ensure this level is never breached. In Switzerland, citizens adopted a debt brake as a constitutional amendment in 2001, implemented in 2003, after years of rising deficits and debt.

Some countries' fiscal rules are more flexible than the proposed US amendment. For example, the Fiscal Compact, signed by Euro area countries in 2012, limits budget deficits over an entire economic cycle, not each year. This allows governments to run higher deficits during recessions to reduce the severity of downturns. In contrast, the proposed US amendment would require a balanced budget every year, regardless of economic conditions, unless overridden by a supermajority vote in both houses of Congress.

The IMF identified nine countries with constitutional rules about budget balance or deficits, including Denmark, Germany, Italy, Latvia, Lithuania, Malta, and Switzerland, which target structural budget deficits rather than total deficits. Singapore's rule targets balance over a multi-year period, and Georgia's rule permits deficits up to 3% of GDP.

Pros and cons of a balanced budget amendment

A balanced budget amendment is a constitutional rule that requires a state to not spend more than its income. This amendment has been introduced in Germany, Hong Kong, Italy, Poland, Slovenia, Spain, Switzerland, and most US states.

Pros

• It reduces deficit spending and prevents politicians from making irresponsible short-term spending decisions.
• It creates strong political pressure to rein in deficits and imposes financial discipline.
• It ensures that future generations are not burdened with debts accumulated by earlier generations.
• It could prevent tax increases by requiring lawmakers to vote to expand the borrowing power of the government.

Cons

• It could limit the ability of policymakers to use fiscal policy to address recessions or respond to emergencies.
• It could lead to budget gimmicks that meet the letter but not the spirit of the law.
• It could threaten significant economic harm and cause job losses by tipping weak economies into recession.
• It could raise problems for the operation of Social Security and other vital federal programs.
• It could result in deep budget cuts affecting millions of Americans.

How a balanced budget amendment could be enforced

A balanced budget amendment or debt brake 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, and the balance requirement may be for each fiscal year or over a multi-year period.

There are several ways in which a balanced budget amendment could be enforced:

Spending Cuts and Tax Increases

One of the ways to enforce a balanced budget amendment is through a package of spending cuts and tax increases. However, this approach has been criticised for being economically dangerous and causing significant economic harm. It could lead to prolonged recessions, job losses, and uncertainty in the economy.

Supermajority Exception

The supermajority exception allows a minority in Congress to decide on fiscal policy. This could be used to override the requirement for a balanced budget in a given year. However, it has been argued that this exception gives too much power to a minority in Congress.

Multi-Year Balance

Some balanced budget requirements target multi-year balance instead of annual balance. Structural balance over a medium term allows for adjustments for automatic changes in benefit programs, also known as automatic stabilizers. This approach avoids the pro-cyclical features of an annual balance requirement.

Constitutional Pressure

Supporters of a balanced budget amendment argue that the pressure to respect the Constitution will create strong political pressure to rein in deficits and impose accountability for irresponsible fiscal policy. This could force opposing parties to compromise and pass legislation that meets the constitutional requirement.

Enforcement Through Legislation

The balanced budget amendment could include a provision assigning Congress the responsibility to enforce the amendment through legislation. This would give Congress the power to create laws that ensure the budget remains balanced.

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The economic impact of a balanced budget amendment

Proponents of a balanced budget amendment argue that it is necessary to address the nation's long-term fiscal problems and reduce irresponsible government spending. They believe that limiting spending to the government's income will prevent the accumulation of debts for future generations. By requiring a balanced budget, the amendment would enforce fiscal discipline and constrain politicians from making irresponsible spending decisions. This argument is supported by the fact that some countries, such as Germany, Italy, and Switzerland, have successfully implemented balanced budget amendments, reducing their deficit spending. Additionally, a balanced budget amendment could create strong political pressure to rein in deficits and impose much-needed fiscal responsibility.

On the other hand, opponents argue that a balanced budget amendment could have negative economic consequences. They believe that requiring a balanced budget every year, regardless of the state of the economy, could lead to recessions and job losses. During economic downturns, governments may need to increase spending to stimulate the economy, and a balanced budget amendment could hamper their ability to do so. This inflexibility could make the economy less stable and exacerbate business cycle fluctuations. Additionally, opponents argue that the amendment could limit the ability of policymakers to use fiscal policy tools, such as deficit spending and tax adjustments, to respond to recessions and national emergencies effectively.

Furthermore, there are concerns that a balanced budget amendment could disrupt federal budgeting and policymaking. Policymakers might seek ways to evade the amendment's restrictions, potentially leading to budget gimmicks and creative accounting practices that could undermine the integrity of the Constitution. Additionally, the amendment could pose risks to vital federal programs, such as Social Security, and require deep budget cuts that could negatively impact millions of Americans.

While proponents argue that a balanced budget amendment promotes fiscal responsibility and limits deficit spending, opponents caution that it could have unintended negative consequences on the economy and the government's ability to respond to economic challenges. The potential impact on federal programs and the flexibility needed during economic downturns are essential considerations in evaluating the potential economic effects of a balanced budget amendment.

Historical attempts to pass a balanced budget amendment

In 1994, Senator Danforth of Missouri successfully modified the proposed constitutional amendment on budgeting, restricting judicial involvement unless Congress authorized another form of relief through implementing legislation. In 1995, the Republican-led Congress clashed with President Clinton, resulting in a vetoed budget and a brief shutdown of the federal government. The same year, a balanced budget amendment requiring 3/5th House and Senate votes for deficits passed the House of Representatives and came within one vote of passing the Senate.

In 2008, Article 34 of the Constitution was amended to include balancing public sector accounts as an objective. In 2011, Italian Prime Minister Silvio Berlusconi promised to balance the budget by 2013, and a balanced budget amendment was added to the Italian Constitution in 2012 with an overwhelming parliamentary majority.

Other countries that have adopted balanced budget amendments include Germany, Hong Kong, Poland, Slovenia, Spain, and Switzerland.

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