Budget Rules

This report will appear in the September issue of National Tax Journal.

The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.

Note: This report is available in its entirety in the Portable Document Format (PDF).

People tend to expect both too much and too little of budget rules. Because they are more art (or perhaps, craft) than science, it is impossible to derive some ideal set of rules through theory. Because they involve many arbitrary elements, they are also easy to disparage. And yet, an orderly decision process requires rules, written or unwritten.

We believe that the return of significant deficits after a brief interlude of surpluses will make it inevitable that budget policy will be a prime focus of attention in 2005 or soon thereafter, and that budget rules will receive a significant share of that attention. This article represents an attempt to make some sense out of budget rules and what we might expect from them.

Budget rules can be likened to the rules by which a household conducts its financial affairs. No matter how formal or informal, they cannot force rational budget decisions if the parties to the agreement do not want to be rational. By the same token, once there is a political consensus behind a specific goal, like balancing the budget, rules can limit the extent to which the Congress strays from that goal. They can keep nudging legislators in the right direction, even if they do not always prevent moves in the wrong direction. They can also provide a handy excuse when a legislator is forced to make an unpopular decision. A politician can say that he or she would love to give a tax break to a certain industry, but the rules forbid it.

Rules may not by themselves force action, but they can have a powerful effect on the types of actions taken. No piece of legislation is drafted without some set of rules, implicit or explicit, as to what will be contained in it and what will not. There are one-time budget rules, like reducing the size of the cumulative deficit over 5 years by $500 billion. That was the budget target for both the 1990 and 1993 budget agreements. The Tax Reform legislation of 1986 had to be "deficit-neutral and revenue-neutral", and "75-year trust fund balance of roughly zero" was the goal of the 1983 Social Security reform. One-time rules are often, simply agreed to by the leadership. Then there are rules that are meant to apply over time, such as "pay-as-you-go (PAYGO)" and the "Byrd rule" applying to long-term changes in the deficit (see discussion below).

Budget rules are frequently associated with numerical targets, such as a zero change in the deficit in any bill enacted over a given period (PAYGO). That these rules have a powerful impact on policy is reflected in the fact that almost all major legislation in recent years has been crafted and restricted under both one-time and more extended rules. Even in recent years, when budget discipline eroded badly, the so-called Byrd rule prevented reconciliation bills from increasing deficits after the end of the budget horizon used in the budget resolution. Often legislation will be crafted under both ongoing budget rules and one-time targets adopted for particular legislation. Thus, Congress in 1993 utilized the 1990 Budget Enforcement Act to enforce its additional $500 billion deficit reduction over 5 years, even though the 1993 package was not anticipated when the 1990 act was passed.

Rules are inherently impure. In the effort to set limits that inhibit undesirable actions, rules will sometimes inhibit desirable actions. This is unavoidable. However, this takes us one step further down into the quagmire of rule-making. The very arbitrariness of rules means there must be an escape clause, perhaps allowing a supermajority vote in the Senate or a House Rules Committee decision to waive the rules from time to time. Thus, rules applied to legislation in general, rather than specific legislation like a budget agreement, are generally written to be waived in case of a national emergency. But this opens a major loophole, because it is so difficult to define an "emergency".

Note: This report is available in its entirety in the Portable Document Format (PDF).

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Disclaimer: The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.