A Balanced Budget Amendment: Constitutional Spending Control

A balanced budget amendment is a constitutional rule that requires a state to avoid spending beyond its income. It mandates a balance between a government's projected receipts and expenditures, which may be enforced annually or over a multi-year period. This amendment has been introduced in various countries and states, including Germany, Italy, Poland, Spain, Switzerland, and most US states. The amendment aims to reduce deficit spending and prevent politicians from making irresponsible short-term financial decisions. However, critics argue that it could hinder a government's ability to address economic recessions and respond to emergencies effectively.

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Spending and income

The amendment's impact on spending and income is significant. It would make it unconstitutional for the government to run annual budget deficits. In practice, this means that states would be forced to increase taxes or cut spending when the economy slows down, which could provide a fiscal drag instead of stimulating the economy. During recessions, tax revenues often decrease faster than wages and business profits, and a balanced budget amendment could require tax increases or program cuts to prevent a deficit, threatening to prolong and deepen recessions.

Some countries, like Germany, Italy, Poland, and Switzerland, have introduced "debt brakes" as part of their balanced budget provisions. These debt brakes set limits on the government's debt levels as a percentage of gross domestic product (GDP). For example, Poland's constitution caps public debt at 60% of GDP, and the government must take action to balance the budget if a self-imposed debt threshold of 55% of GDP is exceeded.

The potential consequences of a balanced budget amendment on spending and income are debated. Proponents argue that it will create strong political pressure to rein in deficits and hold politicians accountable for irresponsible fiscal policies. On the other hand, opponents warn that it could limit the government's ability to respond to recessions and emergencies effectively and might lead to the use of accounting gimmicks to meet budgetary requirements, potentially damaging the government's capacity and political leadership.

While a balanced budget amendment focuses on controlling deficits and debt, it does not address the underlying policy differences and complex accounting rules that contribute to these issues. It is also worth noting that, in reality, politicians might find ways to circumvent such restrictions, as seen in the case of Germany, where the federal government used off-budget funds to bypass the debt brake rule.

Annual vs multi-year balance

A balanced budget amendment to the constitution is a constitutional rule that requires a state to not spend more than its income. It requires a balance between the projected receipts and expenditures of the government. This balance requirement may be for each fiscal year or over a multi-year period.

Annual balance requirements may be pro-cyclical, meaning that they can force states to raise taxes or cut spending during an economic slowdown, which can cause a fiscal drag. This can be avoided by targeting multi-year balance instead, which allows for adjustments for automatic changes in benefits programs, known as automatic stabilizers.

However, multi-year balance requirements may not always be effective. For example, Austria tried to amend its constitution in 2011 and 2019 to introduce a German-style "debt brake", forcing the government to reduce its debt level to 60% of GDP by 2020. However, the government failed to gain enough support for the amendment.

On the other hand, some countries have successfully implemented multi-year balance requirements. Germany amended its constitution in 2009 to introduce a "debt brake", which applies to both the federal government and the German states. From 2016 onwards, the federal government was not allowed to run a structural deficit of more than 0.35% of GDP, and since 2020, the states have not been permitted to run any structural deficit at all.

While annual balance requirements can be problematic during economic slowdowns, they can also provide more flexibility than multi-year balance requirements. They allow governments to plan for the next year's budget based on estimates of outlays and revenues, which can be crucial for responding to changing economic conditions.

Emergencies and exceptions

A balanced budget amendment is a constitutional rule that requires a state to not spend more than its income. This rule is also known as a debt brake. While a balanced budget amendment can help reduce deficit spending, it can also threaten significant economic harm. For example, in the US, a balanced budget amendment could threaten Social Security and other vital federal programs.

During emergencies, a balanced budget can be difficult to maintain. In the case of a natural disaster or severe economic crisis, a balanced budget amendment could hamper a government's ability to respond quickly and effectively. For instance, during recessions, tax revenues fall faster than wages and business profits, and lower wages and profits push people into lower tax brackets. This mitigates the harm to purchasing power caused by the recession. A constitutional balanced budget amendment would suspend these automatic stabilizers, requiring federal programs to be cut or taxes to be increased to prevent a deficit.

Some countries have made exceptions to the balanced budget amendment during emergencies. For example, Germany's Schuldenbremse ("debt brake") permits exceptions during emergencies such as natural disasters or severe economic crises. Similarly, Italy's balanced budget amendment allows deficit spending during emergencies if authorized by a majority in both houses of Parliament. Poland's constitution caps public debt at 60% of GDP, but the government has a self-imposed debt threshold of 55% of GDP and must take action to balance the budget once this level is exceeded. In Spain, the balanced budget amendment also makes exceptions for natural catastrophes, economic recessions, or other emergencies.

While a balanced budget amendment can help maintain fiscal discipline, it can also limit a government's ability to respond to emergencies and economic downturns. Opponents of a balanced budget amendment argue that it could lead to higher taxes and reduced spending during economic slowdowns, providing a fiscal drag when countercyclical policy is needed to stimulate the economy. In addition, a balanced budget amendment could incentivize policymakers to use dubious accounting and budget gimmicks to meet the budgetary requirements, potentially damaging the public's perception of the integrity and transparency of the federal budget.

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Political implications

The political implications of a balanced budget amendment to the US Constitution are complex and multifaceted.

Supporters of such an amendment argue that it would create strong political pressure to rein in deficits and hold elected officials accountable for irresponsible fiscal policies. They believe that the respect for the Constitution will force opposing parties to compromise and pass legislation meeting the constitutional requirement. This view aligns with the notion that democratic politics is the problem, and a constitutional amendment is the solution to bar politicians from specific budgetary outcomes.

However, opponents argue that the political pressure could lead to budget gimmicks that meet the letter but not the spirit of the law. They contend that it may hamper the federal government's ability to respond effectively to economic recessions and national emergencies. The amendment's requirement for federal expenditures to be offset by revenues in the same year could pose challenges. Additionally, there is a concern that it might spur politicians to use bookkeeping gimmicks and other tricks to conceal the true budget situation.

The potential impact on legislative-executive relations and Congress's power is also a consideration. The amendment could give the President vast new budgetary powers in implementing the federal budget, as seen in some states where the governor has carte blanche in withholding funds to avert a deficit.

Furthermore, the amendment has been criticised as "political posturing" or "political expediency", with proponents positioning themselves as supporters of a balanced budget without specifying the unpopular measures needed to achieve it.

In conclusion, while a balanced budget amendment may initially constrain deficit spending, it could lead to political and budgetary complexities, especially in times of economic downturn or national crises.

Economic risks

A balanced budget amendment to the US Constitution would require a balanced budget every year, regardless of the state of the economy. This would have several economic risks:

Suspending automatic stabilizers

During recessions, tax revenues fall faster than wages and business profits, as lower wages push people into lower tax brackets. This mitigates the harm to purchasing power caused by the recession. Additionally, automatic benefit increases help those who have lost wages and preserve the incomes of those who produce or sell goods and services. These are referred to as "automatic stabilizers" by economists, as they help to stabilize the economy when it turns down. A balanced budget amendment would essentially suspend these automatic stabilizers, requiring that federal programs be cut or taxes increased to prevent a deficit from occurring. This would pull money out of the economy at exactly the wrong time, the opposite of sound economic policy.

Tipping weak economies into recession

Requiring a balanced budget every year, regardless of the state of the economy, would raise serious risks of tipping weak economies into recession and making recessions longer and deeper, causing very large job losses. This is because the amendment would force policymakers to cut spending, raise taxes, or both just when the economy is weak or already in recession, which is the opposite of what good economic policy would advise. 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. Rather than allowing automatic stabilizers to cushion a weak economy, the amendment would force policymakers to make pro-cyclical policy decisions that could further weaken the economy.

Impairing the federal government's ability to respond to economic downturns

The federal government has tools to address economic downturns, such as lowering taxes and increasing spending on benefit programs, which act as automatic stabilizers to help preserve jobs and restore the economy after a downturn. A balanced budget amendment would impair the federal government's ability to respond to economic downturns by limiting its ability to use fiscal policy to counteract recessions. This could make it more difficult for the government to respond to the needs of working families.

Creating incentives for budget gimmicks

A balanced budget amendment could create incentives for policymakers to use dubious accounting and budget gimmicks to meet the budgetary requirements. This could devalue the Constitution and disrupt federal budgeting and policymaking. Additionally, these gimmicks could affect the public's perception of the integrity, transparency, and credibility of the federal budget.

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