Automatic Spending Cuts a Possible Bargaining Chip
Policy + Politics

Automatic Spending Cuts a Possible Bargaining Chip


For nearly a quarter century of fiscal warfare, presidents and lawmakers have sought the perfect budgetary robot that would knock heads and impose tough spending measures when policy makers lacked the will or consensus to do it themselves.

Beginning with the landmark Reagan-era Balanced Budget Act , politicians and budget geeks have experimented with a variety of “triggers” that would automatically cut spending or raise taxes when the government strayed from the path of deficit reduction.

Now President Obama and a slew of fiscal experts and lawmakers are touting new ideas for budget caps and spending cut triggers as Democrats and Republicans attempt to negotiate a long-term plan for cutting the deficit and raising the federal debt ceiling. Earlier this month, Obama outlined a “debt failsafe” scheme as part of his framework for reducing deficits by $4 trillion over the coming dozen years.

Similar schemes have been advanced by prominent budget groups, including the National Commission on Fiscal Responsibility and Reform headed by Erskine Bowles and Alan Simpson, the Bipartisan Policy Center’s Debt Reduction Taskforce , and the Peterson-Pew Commission on Budget Reform. The House-passed Republican budget plan would lock in long-term savings with “enforceable spending caps and budget process reforms.”

Moreover, Republicans and some Democrats are also considering a proposal from Sens. Bob Corker, R-Tenn., and Claire McCaskill, D-Mo. , that would eventually cap federal spending at about 20 percent of the country’s economic output.

With such a groundswell of interest in arcane budgetary techniques for forcing reductions in the deficit, Obama’s debt failsafe plan -- or a variation of it -- is certain to be on the table when a bipartisan taskforce chaired by Vice President Biden begins talks next week on a long term budget plan to bring down the deficit.

The debt failsafe plan is also likely to become a bargaining chip in negotiations between the White House and congressional Republican leaders over legislation to raise the $14.3 trillion debt ceiling this summer to avert the first default on U.S. Treasury borrowing in history. House Speaker John Boehner , R-Ohio, and other Republican lawmakers are insisting that they won’t vote to raise the debt ceiling without a Democratic commitment to long-term spending cuts.

“The goal of these negotiations is to agree on a legislative framework for comprehensive deficit reduction, which we believe must include concrete goals, timelines and enforcement mechanisms,” an administration spokesperson told The Fiscal Times this week.

G. William Hoagland , vice president for public policy at CIGNA health insurance and a veteran Senate Republican budget staff director, said Tuesday that a spending-cut trigger “will give confidence to the members [of Congress] that they can raise the debt limit because there is a process that puts them on a path to get them to whatever goal they set.”

In its simplest form, robotic budgeting of this sort allows lawmakers and the president to set long term targets or benchmarks for reducing the deficit while mandating the administration to automatically make across-the-board spending cuts or revenue increases whenever the government falls short of those targets or goals. But this mechanical approach to budget discipline has a checkered history, and some budget experts warn that triggers can be a legislative cop-out.

“There clearly needs to be some enforcement mechanism, but it will only work if there is general bipartisan buy-in to the plan it seeks to enforce,” said Robert L. Bixby , executive director of the Concord Coalition, a deficit watchdog group. “The trigger itself can't be relied upon to do the heavy lifting. . . The cuts would need to be both reasonable and tied to a goal both parties have pledged to achieve.”

Robert Greenstein , president of the liberal Center on Budget and Policy Priorities, favors the use of mechanisms to enforce budget discipline, just as former President George H.W. Bush and a Democratic Congress succeeded in doing with enactment of the 1990 Budget Enforcement Act.

However, he said that lawmakers and the president must be careful not to embrace what he described as “procyclical” caps and automatic spending cuts that impose deep cuts in social services and jobs programs during downturns in the economy. “You want changes under the automatic mechanism to be big enough to draw blood and cause consternation, but not so massive that they are unthinkable, which increases the chances they get blown away,” Greenstein told The Fiscal Times.

Obama’s plan, outlined by the president in a major address at George Washington University on April 13, would stabilize the ratio of debt to the Gross Domestic Product beginning in 2014 and further reduce that ratio throughout the remainder of the decade. Deficits as a share of the economy would average no more than 2.8 percent of GDP in the second half of the decade, compared to 10 percent or more projected for this year.

If the government were to miss those targets, there would be automatic spending cuts and changes to the tax code to generate sufficient savings and revenue to achieve the goals, according to a White House fact sheet

But there are many variations of this approach that policy makers could choose from:

The Bowles-Simpson plan, for instance, would tightly restrain and cap spending through 2020, using both legislative procedures and across-the-board spending cuts, if necessary, to keep domestic and defense spending in check. “The Peterson-Pew Commission approach would reduce the ratio of national debt to GDP from the current 66 percent to 60 percent by 2018 – if necessary, by resorting to a 50-50 combination of spending cuts and tax increases.

The latest proposal generating some buzz among budget policy experts – called Save as You Go or SAVEGO -- was unveiled last week by the Bipartisan Policy Center’s Debt Reduction Task force, headed by former Democratic White House Budget Director Alice Rivlin and former Senate Budget Committee Chairman Pete V. Domenici, R-N.M.

The plan,  patterned after the highly successful 1990 budget act, also aims at reducing the debt-to-GDP ratio to 60 percent by 2021. But instead of setting specific annual deficit targets, Congress would be required to agree to annual budget savings targets for domestic and defense discretionary spending as well as health care and other entitlement programs, under this approach.

If Congress were to exceed its discretionary spending targets, there would be an automatic across the board cut or “sequester” to bring the budget back into line. Similarly, if Congress exceeded limits on entitlement programs, there would be across-the-board cuts in those program, and possibly – but not necessarily – an increase in taxes.

The fact that this approach would give Congress wiggle room to avoid a tax increase in the event spending exceeded the targets may give this plan added cache with Republicans, according to Hoagland, an adviser to the Bipartisan Policy Center.

Proponents of this approach say it would differ from the 1985 Gramm-Rudman-Hollings Act because it would set budgetary savings goals, which are under the direct control of Congress and the administration, rather than specific debt or deficit reduction targets, which are hard to forecast and are easily influenced by fluctuations in the economy.

Devised by former senators Phil Gramm of Texas, Warren Rudman of New Hampshire and Ernest Hollings of South Carolina in 1985, the measure set a series of fixed deficit targets and an enforcement mechanism called “sequestration.” Spending cuts were to be triggered if the estimated deficit for that fiscal year exceeded the law’s target for that year. The deficit dropped from $221 billion in 1986 to $153 billion in 1989, but there was considerable debate over whether the constraints were responsible for the decrease.

Rivlin , who served on both the Bipartisan Policy center taskforce and the Bowles-Simpson fiscal commission, told reporters Tuesday that “all of us [would prefer to see] Congress get itself together and actually solve the substance of the problem, by changing the entitlements and discretionary spending and revenues for a multi-year period to rein in the debt.”

“But even if they do that, they’re going to need an enforcement mechanism,” Rivlin added. “If they don’t do the substance, they need a way to force themselves to do it.”