Fixing the Rules of the Game

The budget stalemate back in the spring, the summer debt ceiling debacle, the recent failure of the “super committee,” and the near paralysis over extending the payroll tax cut are all symptoms of a broken governing system. The non-partisan Peterson-Pew Commission on Budget Reform recently issued a series of recommendations on how to begin fixing the system.

The Peterson-Pew Commission is comprised of pragmatic politicians and budget experts from both sides of the aisle, both sides of the Capitol, and both ends of Pennsylvania Avenue.  They didn’t set out to offer the usual radical solutions, such as constitutional amendments, removing entitlement spending, or combining the appropriations and authorization committees into a single process.  Those proposals have been offered before and have gone nowhere.

Instead, the Commission set its sights on getting the regular, existing budget process to work. They did not attempt to fix the deficit.  They felt the most realistic thing that could be done is to create a set of neutral “rules of the game” that did not incentivize or favor any particular policy outcome.

While the Commission’s report – in fact, even the Commission’s topic – may come across as unexciting and uninteresting, in fact, the contents are must-reads for the many stakeholders in the political process.

The Commission’s recommendations are grouped into four short, but readable reports:

Fiscal Rules and Budget Targets.

“The Commission believes the basis for budget process reforms and for progress in stabilizing the debt must be agreement on a rule or target for fiscal policy.”  As a result, the Commission recommends setting a medium-term debt target in a statute (such as 40 percent of GDP. . . right now, it is approaching 70 percent).  It also recommends setting annual debt targets that will move the total debt towards the medium-term target, and include a trigger to automatically adjust spending and taxing to close any gaps that may arise.

The report describes the history of fiscal rules in the U.S., such as the 1980s Gramm-Rudman Act, the alternatives that could be chosen, how other countries have approached these challenges, and the effectiveness of different approaches.  It also lays out criteria for how to choose a fiscal rule that would work in the U.S. context.

Multi-Year Budgeting.

“The magnitude of the fiscal problem facing the country makes it imperative to think about budgeting – and budget enforcement – in multi-year terms.”  As a result, the Commission recommends a multi-year budgeting and enforcement law, which they call the Sustainable Debt Act, that would shift the budget process from a one-year plan to a long-term plan that would move the federal government to a sustainable fiscal path, and keep it on that path.

The report describes how this was the original intent of the 1974 Budget and Impoundment Control Act, where the newly-created Budget Committees in Congress were to develop a 5 to 10 year budget resolution, but it never worked out that way in practice.  It notes that the collapse of the Super Committee created in 2011 “provides an opportunity to again focus on budget process reforms. . . “

Budgeting for Emergencies.

Emergencies such as floods, hurricanes, or terror acts “pose a special challenge to those seeking a more disciplined budget process because they are inherently unpredictable and because such costs vary widely from year to year.”  But “If this gap in the fiscal dike is not sealed, other reforms to shore up fiscal discipline will not hold.”

The report recommends creating a single emergency reserve fund for the entire government, instead of agency-by-agency, defining what constitutes an “emergency” more stringently, defining in advance which programs can draw upon the fund, projecting a more realistic level of funding for the reserve fund, allowing funds to be carried over to future fiscal years, and enact a mandatory permanent appropriation for the reserve fund.

The report recognizes there are plusses and minuses to its approach, but the key is to budget for emergencies more realistically to avoid the need for emergency supplementation appropriations.

Budgeting for Performance.

The Commission recognizes that the goal is not to just balance the budget but to do so in a way that trade-off decisions are made in the context of how well existing programs operate. The Commission says that such an approach should involve three elements:

• Measuring policy and program results;
• Identifying the highest policy priorities; and
• Instituting new budget procedures that apply evidence on results to decisions on how to advance the highest priorities.

​​The Commission recommends adopting a new “portfolio budgeting” approach (which I blogged about some months ago), which it believes can be done in the context of the new GPRA Modernization Act enacted in early 2011.  It suggests that the president and Congress “test and develop a portfolio-based performance approach to budgeting” that examines the effects of various policy tools used to achieve results in a specific program area, such as housing.  This would include assessing the effects of direct spending, regulation, and tax expenditures.  It would require congressional committees and federal agencies to work across traditional jurisdictional boundaries, so this would be a revolutionary approach if applied more broadly.

Now, all we need is some next steps to actually happen!