No. 1816January 25, 2005

This paper, in its entirety, can be found at: www.heritage.org/research/budget/bg1816.cfm

Produced by the Thomas A. Roe Institute for Economic Policy Studies

Published by The Heritage Foundation214 Massachusetts Avenue, NEWashington, DC 20002–4999

What’s Wrong with the Federal Budget ProcessBrian M. Riedl

The current federal budget process is failing tomeet its most basic obligations. The process issupposed to provide an orderly roadmap fordetermining the nation’s annual spending andrevenue priorities, but instead it stifles debate,prevents cooperation, and frequently breaksdown. Created in 1974, the current process hasbeen subject to 30 years of abuse and loopholesfrom lawmakers hoping to exploit its structuralflaws. The budget process finally collapsed dur-ing the fiscal year 2003 and 2004 budget debates,during which:

• The annual budgets were not completed untilfour months into the fiscal year that they weredesigned to fund;

• The House of Representatives, Senate, andWhite House could not even agree on a basicbudgetary framework for fiscal year 2005;

• President George W. Bush neared completionof his 2004 budget submission—and mostagencies laid the groundwork for their 2005budget requests—without knowing their 2003budget levels; and

• Discretionary spending caps that were createdto limit spending were allowed to expire with-out any replacement.

A Budget Process Plagued with Problems.Multi-year discretionary spending caps and pay-as-you-go (PAYGO) were both created to imposefiscal responsibility on annual budget writers.

Although caps were intended to restrain spending,PAYGO was designed to focus on budget deficits,regardless of government size. Not only wasPAYGO not designed to curtail spending, it actu-ally prevented several policies that would havereduced both spending and budget deficits. Otherbiases toward higher spending and taxes arisefrom the decentralization of authorizing commit-tees, baseline budgeting that defines small spend-ing increases as cuts, and the scoring of taxproposals by a method that overstates the revenuescollected by high taxes.

When crafting annual budgets, the Presidentand Congress are not brought together to settle ona basic framework until the end of the process,and Congress can override its own frameworkwith a majority vote in the House of Representa-tives and a three-fifths vote in the Senate. Once theappropriations process begins, two-thirds of thebudget is deemed “uncontrollable” and excludedfrom the oversight of annual appropriations.Emergency spending is also typically excludedfrom annual appropriations bills and is instead rel-egated to ad hoc budgeting outside of normal bud-

(202) 546-4400 • heritage.org

Nothing written here is to be construed as necessarily reflecting the views of The Heritage Foundation or as an attempt to aid or

hinder the passage of any bill before Congress.

No. 1816 January 25, 2005

get constraints. The complexity of the budgetprocess guarantees that important decisions areoften determined by those who know how to bendthe budget rules in their favor.

Elements of Reform. A reformed budget pro-cess should be simple, easy to implement, lessprone to loopholes, and designed to facilitate com-munication and cooperation between the Admin-istration and Congress. Positive reform would:

• Place annual caps on total spending ratherthan bring back discretionary spendingcaps and PAYGO. Discretionary spendingcaps were somewhat successful in curtailingunnecessary expenditures. However, they wereset for periods too long to allow the flexibilityneeded to deal with unanticipated economicfactors and were relatively easy to override.The PAYGO system, likewise, failed to providea realistic means of keeping expenditures andtaxes in check. The system’s narrow focus onensuring deficit neutrality did not allow suffi-cient flexibility to capitalize on prospectivetrade-offs among discretionary funding, taxes,and entitlements. Additionally, PAYGOincluded no limits on the $1.5 trillion that iscurrently allocated for mandatory spending,nor did it allow a rollback in tax increases aseconomic growth moved families into higherincome brackets. In short, PAYGO did not cur-tail excessive mandatory spending and was notcompatible with discretionary spending caps.

Total spending caps would address these prob-lems by placing a ceiling on the total amountof spending (both discretionary and manda-tory) allowed in the budget resolution for eachof the following three years. Unlike discretion-ary caps and PAYGO, these caps are easy tounderstand and implement, and they are notriddled with loopholes and gimmicks. Legisla-tors would have full flexibility in writing eachannual budget, including the ability to makeany necessary trade-offs between mandatoryand discretionary programs (current and pro-posed) as long as they stay within the cap.Congress would need a two-thirds vote to passa budget resolution or appropriations bill that

exceeds the year’s cap. This hurdle would pre-vent opportunistic bypassing of the caps, whileensuring that extra funds could be made avail-able in the event of a catastrophic emergency.

• Promote cooperation with the President.This should be done by requiring that annualbudget resolutions become binding acts thatare signed into law by the President. Settingthis basic budgetary framework early in theyear would make the appropriations processrun more smoothly and with more discipline.

• Clarify budget allocations. Spending appro-priations should be broken down by commit-tee or subcommittee rather than by function.In addition, avenues for spending reductionsshould be expanded by including mandatoryspending in the annual appropriations processand eliminating advance appropriations andbaseline budgeting, which has been used tocharacterize an increase in spending as a “cut”if it is below the projected increase.

• Enhance accountability. This should be doneby creating an emergency reserve fund, limit-ing terms of service on appropriations andbudget committees, and preventing govern-ment shutdowns by establishing automaticcontinuing resolutions.

• Promote realistic estimates of the impact ofbudgetary decisions. Implementing reality-based scoring of tax proposals would revealtheir impact on a changing economy. Addition-ally, incorporating generational accountinginto spending and tax proposals wouldaccount for the projected impact on futureworkers and taxpayers.

Conclusion. The chaos of the 2003 and 2004federal budget debates, as well as the expiration ofdiscretionary spending caps and PAYGO rules, pro-vide Congress with a golden opportunity to com-prehensively examine the current budget process.

—Brian M. Riedl is Grover M. Hermann Fellow inFederal Budgetary Affairs in the Thomas A. Roe Insti-tute for Economic Policy Studies at The HeritageFoundation.

No. 1816January 25, 2005

• The federal budget process is in tatters.Thirty years of abuse have rendered itunable to fulfill its basic duty of rationallyallocating federal spending.

• A better budget process would be simple,understandable, less prone to loopholes,and designed to facilitate communicationbetween the President and Congress.

• Lawmakers should enact a cap on total fed-eral spending. Congress could manuallydetermine cap levels (OmniCaps) or use theinflation-plus-population-growth formula ofthe Taxpayers Bill of Rights (TABOR) model.

• A joint budget resolution would bring thePresident to the bargaining table earlier inthe process and give the budget resolutionthe force of law.

• Other budget reforms would enhanceaccountability, promote realistic budgetestimates, and eliminate the bias towardhigher spending and tax levels.

This paper, in its entirety, can be found at: www.heritage.org/research/budget/bg1816.cfm

Produced by the Thomas A. Roe Institute for Economic Policy Studies

Published by The Heritage Foundation214 Massachusetts Avenue, NEWashington, DC 20002–4999(202) 546-4400 • heritage.org

Talking Points

What’s Wrong with the Federal Budget ProcessBrian M. Riedl

The current federal budget process is failing tomeet its most basic obligations. The process is sup-posed to provide an orderly roadmap for determin-ing the nation’s annual spending and revenuepriorities, but instead it stifles debate, prevents coop-eration, and frequently breaks down. Created in1974, the current process has been subject to 30years of abuse and loopholes from lawmakers hopingto exploit its structural flaws. The budget processfinally collapsed during the fiscal year (FY) 2003 and2004 budget debates, during which:

• The annual budgets were not completed untilfour months into the fiscal year that they weredesigned to fund;

• The House of Representatives, Senate, and WhiteHouse could not even agree on a basic budgetaryframework for fiscal year 2005;

• President George W. Bush neared completion ofhis 2004 budget submission—and most agencieslaid the groundwork for their 2005 budgetrequests—without knowing their 2003 budgetlevels; and

• Discretionary spending caps that were created tolimit spending were allowed to expire withoutany replacement.

With so much still undecided, the safest predictionis that, as in previous years, the eventual winners of thisyear’s budget battle will be those who can read the legalfine print and twist the available loopholes and gim-micks in their favor. This is no way to write a budget.

Nothing written here is to be construed as necessarily reflect-ing the views of The Heritage Foundation or as an attempt to

aid or hinder the passage of any bill before Congress.

January 25, 2005No. 1816

Budgets are about setting priorities. Nationsoften have infinite desires and only finite resourcesto fulfill them. A rational budget progress shouldhelp lawmakers set priorities and separate vitalneeds from unaffordable luxuries. Without spend-ing limits and priority setting, lawmakers lack thetools to allocate resources efficiently, and the over-all result is wasteful spending, high taxes, andsluggish economic growth.

Why Reform Is DifficultDespite the popularity of fixing the budget

process, the last eight years have seen everymajor reform proposal defeated in the House orSenate. One reason for this failure is that nearlyall proposals inherently alter the relative budget-writing influence of some members, committees,or legislative bodies, and those losing any of theirpower fight tirelessly to defeat the proposal.Another cause of failure is the lack of urgency forbudget discipline controls during a recent periodof soaring government revenues and budget sur-pluses. This justification for complacency hascrumbled: The war on terrorism and homelandsecurity costs are putting new pressures onspending. Ensuring a disciplined budget processthat best allocates the federal government’sresources is now a matter of national security andeconomic health.

The past 30 years have provided valuable les-sons regarding which process reforms succeed,which fail, and why. Because many of the pastreforms succeeded until lawmakers exploited theirstructural faults, reforming the budget processdoes not require reinventing the wheel, but onlyrepairing it. The 1974 Congressional Budget andImpoundment Control Act required that all annualappropriations bills be coordinated under theumbrella of a broad budget resolution that set gen-eral budgetary priorities. The Budget EnforcementAct of 1990 (and the prior Gramm−Rudman−Hollings Act) gave budgeters multi-year targetswithin which to work. These reforms broughtrational planning and coordination to the budgetprocess, and their subsequent weakening hasmade it, once again, disjointed and chaotic.Reforms strengthening the concepts of this prior

legislation will revitalize the budget process. Themost important reforms would:

• Place a strong yet realistic and flexible cap oneach year’s total spending;

• Resolve major differences earlier in the processby bringing the President into the annual con-gressional budget resolutions;

• Put all programs (including mandatory ones)on the table during the annual appropriationsdebate; and

• Strengthen budget enforcement by requiring atwo-thirds vote to bypass any of the budgetrestraints.

Problems with the Current Budget Process

The current budget process has four majorproblems.

Problem #1: The President and Congresshave little incentive to seek agreement. In addi-tion, Congress habitually violates its own inter-nal agreements.

Presidents and Congresses seldom agree oneven the broadest budgetary blueprint; therefore,negotiating an agreement on the funding of thehundreds of programs that require annual appro-priations is a daunting and time-consuming task.Given the scale and scope of this endeavor, it issenseless that the President and Congress are notrequired to begin negotiating their differencesuntil the very end of the budget process, when theappropriations bills reach the President’s desk.Without having previously agreed on an overallbudgetary blueprint, the chances of Congress andthe President negotiating a timely agreement onthe details of each program are slim. Accordingly,each autumn the President and Congress are facedwith a choice between two undesirable options:(1) hastily negotiating their differences regardinghundreds of programs (affecting billions of dollars)without the benefit of any binding framework; or(2) investing the time needed for careful negotia-tions but exceeding the budget completion dead-lines, thereby leaving many agencies at risk ofrunning out of funding.

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No. 1816 January 25, 2005

The current budget process not only discour-ages early agreements between Congress and thePresident, it discourages Congress from enforcingits own internal agreements. Until their 2002 expi-ration, multi-year discretionary spending capswere supposed to constrain congressional budgetresolutions, which in turn constrain appropriators.Another spending safeguard was the pay-as-you-go (PAYGO) model, which was created to ensurethat neither the expansion of entitlements nor taxlegislation would increase the budget deficit. How-ever, both the discretionary caps and PAYGO rulescould be overridden by a simple majority vote inthe House and a three-fifths vote in the Senate.1

Constraints that can be discarded this easily arenot authentic constraints.

A better budget process would bring the rele-vant players to the bargaining table early in theyear to set a broad—yet binding—framework thatwould guide the decisions regarding specific pro-gram appropriations throughout the course of theyear. The process should also be workable andrealistic and should not impede the daily functionsof the federal government if negotiations stall.

Problem #2: The budget process fails to pro-vide a clearinghouse for all spending.

The federal budget is supposed to provide anopportunity for Congress and the President to stepback and decide how much the federal governmentshould tax and spend during the following year. Inreality, only the one-third of spending that is classi-fied as discretionary is subject to the appropriationsprocess every year. Almost all other programs (clas-sified as mandatory) are left without regular over-sight to grow uncontrollably from year to year.Thus, the budget process denies the nation’s policy-makers an opportunity to set annual spending andtax priorities with all programs on the table.

Furthermore, the mandatory programs that are“off the table” represent the largest long-term threatto the nation’s fiscal health. In 2008, the first Baby

Boomers will begin collecting Social Security andMedicare benefits, with costs expected to increaseenough to raise federal spending by 5 percent ofgross domestic product (GDP) by 2030 (the currentequivalent of $5,200 per household annually) and13 percent of GDP by 2050 (the current equivalentof $13,500 per household annually).2 This wouldresult in either substantial tax increases or elimina-tion of most other federal programs. A rational bud-get process cannot simply ignore this issue bytaking these problems off the table.

Mandatory programs are not the only onesexcluded from the budget process. Although natu-ral disasters and other emergencies occur nearlyevery year, they are not anticipated in the budgetprocess. Congress regularly allocates all availablebudgetary resources to non-emergency expenses.When the inevitable $5 billion to $15 billion disas-ter relief tab reaches Congress each year, it has nochoice but to exceed the spending levels of the orig-inal cap. Although some catastrophic emergenciesmay be too large to budget for, there is no reasonwhy Congress cannot set aside funds within eachbudget for non-catastrophic emergency expenses.

Problem #3: The budget process is designedwith a bias toward higher spending and taxes.

Public choice theory recognizes that howdemocracies make decisions has a substantialeffect on what is decided. Multi-year constraints,such as PAYGO and discretionary spending caps,represent an attempt by policymakers with a long-term view to constrain the decisions of annualbudgeters who are focused only on the short term.However, these multi-year constraints fail to settlethe question of whether the budget process shouldbe used to limit spending (as discretionary capssuggest) or to slow the growth of the budget defi-cit, regardless of government size (as PAYGO sug-gests). This confusion created odd situationswhereby even policies that would achieve bothgoals of reducing spending and reducing the bud-

1. A three-fifths vote in the Senate is required only if a Senator raises a point of order against legislation for violating these rules. Otherwise, the Senate can override these rules with a simple majority.

2. Heritage Foundation calculations based on Congressional Budget Office, “Long-Term Budget Outlook,” December 2003, at www.cbo.gov/showdoc.cfm?index=4916&sequence=0 (July 9, 2004).

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January 25, 2005No. 1816

get deficit (such as a discretionary spending cutaccompanied by a smaller tax cut) have not beenallowed. Furthermore, PAYGO did not successfullyblunt the pro-spending bias of annual budget writ-ers because it focused only on the effects of newpolicies and ignored current policies—because itwas rarely enforced.

Public choice theorists also note the pro-spend-ing bias caused by the decentralization of spendingcommittees. Although a single appropriationscommittee in the House and the Senate annuallyapproves all discretionary spending, nearly adozen different committees in each body of Con-gress write mandatory spending programs. Thelack of coordination between these committeescreates a “tragedy of the commons,” whereby eachcommittee is responsible only for the funding of itsown pet programs with no obligation to trade offtheir costs with the costs of other committees’ pro-grams.3 Accordingly, each committee over-priori-tizes and consequently over-funds its ownprograms. A single committee reviewing all legisla-tion would solve this bias by taking on the respon-sibility to make the difficult trade-offs.4

Odd Accounting Rules. Two congressionalaccounting rules also tilt the playing field in favorof higher taxes and spending. When deciding howto adjust a program’s annual funding, Congress isrequired to start from “current policy” baselinesthat have factored in new costs from inflation,increased benefits, and new enrollees. If the cur-rent policy baseline for a program mandates a 10percent increase, then even an allocation that is 9percent above the previous year’s levels is consid-ered a “cut.” Policymakers wanting to avoid theerroneous impression of “cutting” funding for pop-

ular programs must vote for larger spendingincreases than they may deem necessary.

Accounting rules also inflate the appeal ofhigher taxes. When calculating the effect of a pro-posed tax cut, Congress assumes that higher taxeswill not depress any sector of the economy(thereby reducing the new revenue created) andthat lower taxes will not provide any economicstimulus that could recover some of the lost reve-nue. This bias always makes higher taxes appearmore appealing than lower taxes from a budgetaryand economic standpoint.

Problem #4: The budget process is complexand subject to abuse by the few who can masterits intricacies.

The current budget process is too complex forvoters, journalists, and even many policymakersto understand. As a result, budgetary decisionsare often dominated by those who can takeadvantage of its intricacies and bend the com-plex budget rules in their favor. Rather thanhighlighting such matters as the impact of poli-cies and budgetary priorities, attention isfocused on such terms as advance appropria-tions, obligation and payment delays, and pointsof order. A reformed budget process should besimple, easy to implement, and less prone toloopholes and gimmicks.

A Proposal for ReformThe order of the following recommendations

matches the timeline of the federal budget process.The proposal begins with the outside statutoryconstraints placed on annual budgets before theyare written. It then moves through an annual bud-

3. The budget committees are intended to address this “tragedy of the commons” by writing annual budget resolutions that trade-off all spending. Budget resolution writers may attach reconciliation instructions requiring that authorizing commit-tees reduce their mandatory program budgets. However, budget committees rarely issue such reconciliation instructions. They instead focus most of their attention on determining how much discretionary spending to allocate to the appropria-tions committees.

4. Professor John Cogan of Stanford University examined both decentralized and centralized budgeting processes between 1799 and 1989. During the 97 years of centralized budgeting, the average annual budget deficit was only 0.15 percent of the GDP. In the 94 years of decentralized budgeting, the average annual budget deficit was 2.49 percent of GDP. This data supports the position that the current decentralization of the federal budget process leads to increased government spend-ing. John Cogan, “The Federal Budget,” in David R. Henderson, ed., The Concise Encyclopedia of Economics, Web ed., 2002, at www.econlib.org/library/Enc/FederalBudget.html (July 9, 2004).

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January 25, 2005No. 1816

page 5

Figure 1 B 1816

1990-2002 Federal Budget Process: Complexity and Loopholes

Discretionary spending cap set several years in

advance

PAYGO rules limiting new mandatory

spending and tax legislation in place

President submits annual budget request

to Congress

Congress writes annual budget resolution

setting spending/revenue

targets (President is uninvolved)

Vote to pass budget resolution exceeding

spending caps:House: majority

Senate: 3/5

Vote to pass budget resolution within spending caps:House: majoritySenate: majority

Budget resolution implemented

Discretionary spending sent to appropriations

committee

Advanced appropriations may be used to spend beyond

cap

Congress votes on appropriations bills

Vote needed if exceeds the cap and

budget resolution level

Vote needed if within the cap and budget resolution

level

With "emergency" label:

House: majoritySenate: majority

Without "emergency" label:

House: majoritySenate: 3/5

House: majority Senate: majority

Congress can vote to cancel cap

enforcement:House: majoritySenate: majority

Any new mandatory or tax legislation sent to authorizing and tax

committees(no trade-offs between

mandatory and discretionary spending

allowed)

Congress votes on mandatory and tax

changes

Vote needed if violating PAYGO

Vote needed if staying within

PAYGO

With "emergency" label on spending:

House: majoritySenate: majority

Without "emergency" label on spending:

House: majoritySenate: 3/5

House: majoritySenate: majority

Congress can vote to cancel PAYGO enforcement:

House: majoritySenate: majority

Bills go to President to sign

or veto

Bills go to President to sign or veto

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No. 1816 January 25, 2005

Figure 2 B 1816

A Simple and Rational Budget Plan

OmniCap (set in 3-year increments) or Taxpayers’ Bill of Rights Cap places a ceiling on

the year's total spending

President submits annual budget

request

Congress writes annual budget resolution setting spending/revenue targets

Vote to pass a budget resolution exceeding the

OmniCap/TABOR Cap:House: 2/3Senate: 2/3

Vote to pass a budget resolution within the

OmniCap/TABOR Cap:House: majoritySenate: majority

Budget resolution goes to President

for signature

All spending sent to appropriations committees.All trade-offs between mandatory and discretionary

spending allowed. Emergency reserve fund created. No loopholes for additional emergency spending

Vote to pass appropriations bills exceeding the

OmniCap/TABOR Cap or budget resolution:

House: 2/3Senate: 2/3

Vote to pass appropriations bills within the OmniCap/TABOR Cap and budget resolution:

House: majoritySenate: majority

Bills go to President to sign

or veto

No. 1816 January 25, 2005

get process, with the budget resolution followedby the appropriations process and presidentialapproval. The proposal concludes with a sectionon general reforms that would affect all portions ofthe budget process.

Reforming Outside Constraints on Annual Budgets

Although Congress and the President write a newbudget each year, policymakers have long acted toconstrain the choices that budgeters face. These out-side constraints can be constitutional, such as theconstitutional requirement of Article I, Section 8,that government spending be preceded by congres-sional appropriations and the long-standing proposalfor a constitutional amendment to require a balancedbudget. Statutory laws also provide external budgetconstraints, such as those requiring Congress towrite an annual budget resolution or to adhere tolong-term spending caps and PAYGO limits.

Permanent, rigid, external constraints on annualbudgets are considered necessary because:

(1) They bring predictability and order to theannual budget process; (2) multi-year planningallows policymakers to debate long-term budgetgoals; and (3) in a given budget debate, they canrequire policymakers to make the necessary hardchoices. Critics of outside restraints argue that it isunwise to restrict the options of future budgeters,especially given the difficulty of anticipating futurebudgetary and economic situations.5 A simple,easily implemented budgetary framework thatwould allow the flexibility needed to meet the crit-ics’ objections is described below.

Recommendation #1: Congress should placeannual caps on total spending rather thanbringing back discretionary spending caps andPAYGO.

The current round of multi-year budget restric-tions began in 1985, when the Gramm−Rudman−Hollings Act (GRH) enforced annual budget deficittargets by allowing the President to sequester excessspending to meet the targeted budget deficit. In1990, policymakers concluded that GRH budgetdeficit targets were too strict to be realistic and yettoo weak to reduce the budget deficit. Theyreplaced GRH with a system of multi-year caps ondiscretionary spending and PAYGO rules requiringthat any new entitlement or tax legislation be deficitneutral. If legislation violating caps or PAYGO wasenacted, the Office of Management and Budget(OMB) would be required to enact across-the-boardsequestrations on all non-exempt programs untilthe cost of the legislation was balanced. Althoughcaps and PAYGO expired in late 2002, Congressappears inclined to bring them back.6

The Promises and Pitfalls of Discretionary Caps.The relatively strict discretionary caps of the early1990s mandated that discretionary spendinggrow at approximately 2 percent per yearmuchslower than the 5 percent annual rate of the1980s.7 Congress generally obeyed these capsand reduced the growth rate of discretionaryspending (with the unavoidable exception of thePersian Gulf War). Caps showed promise despitetheir flaws. For instance:

• Discretionary caps succeeded best in the short run.They succeeded because they were simple andunderstandable. They failed when they ceasedbeing realistic. Throughout the 1990s, capswere typically set for five-year periods. Thisproved to be too long a time horizon to antici-pate the needs of an evolving economic andbudgetary scenario. Thus, the five-year seriesof caps created in 1990 was rewritten by 1993.The new five-year caps set in 1993 were signif-

5. Proposed constitutional amendments that would require a balanced budget or a supermajority to raise taxes are good ways to provide significant multi-year discipline. Such reforms are beyond the scope of this paper, which focuses on what Con-gress and the President can accomplish in the short term without amending the U.S. Constitution.

6. The Senate has temporarily retained the rule allowing a Senator to offer a point of order against legislation violating PAYGO, which requires a three-fifths vote to override. Violating PAYGO would not induce sequestration.

7. Calculated from Office of Management and Budget, Budget of the United States Government, Fiscal Year 2003: Historical Tables, Table 8.2, page 124, and Office of Management and Budget, Budget of the United States Government, Fiscal Year 2003: Analytical Perspectives, p. 287.

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January 25, 2005No. 1816

icantly altered in 1996 and then replaced in1997 by a new series of five-year caps thatwere also effectively abandoned by 2000.Clearly, a series of spending caps cannot beexpected to have a shelf life beyond three yearsbefore the changing economic and budgetarypicture renders it outdated and unrealistic.

• Discretionary caps lacked real enforcement.Caps become unrealistic when Congressdecides that the spending reductions theyrequire are too politically dangerous. Suchsituations expose a second weakness of pastspending caps—how easily they can beignored. These multi-year constraints aresupposed to provide a check on the whim ofthe short-term congressional majority. There-fore, one would expect that they would beenforced with additional hurdles that Con-gress must clear before bypassing them. Yet,rather than raising the bar from a majorityvote to a supermajority to bypass caps, therules now only require Congress to designateadditional spending as “emergency” spend-ing before passing it with a simple majority.

The emergency designation was intended foruse only when unforeseen disasters and catas-trophes required additional spending. However,the loophole invited abuse by making it easy forlegislators to bypass spending caps without asupermajority vote. In the 2000 budget, Con-gress designated $44 billion of mostly ordinaryspending as “emergency” to bypass the outdatedcap levels.8 Congress actually used the emer-gency designation properly in the 2001 and2002 budgets by limiting it to the $20 billionappropriated each year for legitimate 9/11-related emergency spending. Legislators did notactually obey the caps those years: They simplyused a different loophole—raising the spendingcaps by $96 billion in the 2001 budget and thenby $135 billion in the 2002 budget—to accom-modate all extra spending demands.9

The solution is not to abolish caps, but to rec-ognize their proper use and realistic limitations.Caps were intended to constrain congressionalspending and to force legislators to make the dif-ficult decisions required for responsible budget-ing. There are limits, however, on legislators’willingness to accept politically unpopular deci-sions forced upon them by the budget process.Furthermore, caps will fail to force Congress tomake even slightly inconvenient choices if theycan be overridden by a simple majority vote.These problems are fixable.

Shortcomings of PAYGO. In contrast to discre-tionary caps, PAYGO was conceptually flawedfrom the start. PAYGO mandated that any newtax or mandatory spending legislation notincrease the budget deficit. This policy requiredthat the costs of any tax reductions or entitle-ment expansions must be balanced either byraising taxes in other areas or reducing otherentitlements. If this counterbalance was notaccomplished, at the end of the year the Office ofManagement and Budget would sequester otherspending in the budget to a level that equaledthe costs incurred by the new legislation. PAYGOhad four major shortcomings:

• PAYGO was not enforced. No meaningfulsequestration ever took place in 12 years ofPAYGO, in part because Congress was carefulto avoid PAYGO-violating legislation. Likecaps, however, PAYGO was ignored when itwas deemed unrealistic. Between FY 1998and FY 2001, Congress enacted legislationviolating PAYGO by a total of $46 billion andthen attached provisions to later legislationpreventing OMB from enforcing the law witha sequestration. Congress then voted toblock the sequestration of its $130 billionviolation for FY 2002 and its $127 billionviolation for FY 2003.10 Thus, PAYGOserved as only a slight deterrent to new taxand entitlement legislation.

8. Calculated from the Office of Management and Budget, Analytical Perspectives, p. 287.

9. Ibid. Because spending caps are set by statute, altering them requires enacting a new law. Congress would write the new cap into the final appropriations bill during each year.

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No. 1816 January 25, 2005

Chart 1 B 1816

Annual Growth in (Non-Interest) Mandatory Spending Was Not Slowed by PAYGO's 1991 Implementation

40%

51%

10

20

30

40

50

60%

1980-1991 1991-2002Fiscal Years

Growth in inflation-adjusted annual spending

Source: Calculated from the Office of Management and Budget’s Historical Tables in the Budget of the United States Government, Fiscal Year 2003.

• PAYGO prevented trade-offs.Lax enforcement was not theonly factor in PAYGO’s fail-ure. Another was the incon-sistent treatment of dis-cretionary funding and man-datory funding. Discretion-ary funds were subject tocaps on spending, but man-datory spending was allowedto increase as long as taxeswere raised correspondingly.The separate rules applied tothe different categories ofexpenditures prevented anytrade-off between discretion-ary spending and mandatoryspending or taxes. For exam-ple, policymakers could notshift $10 billion in discre-tionary expenditures to man-datory programs, because this would violatePAYGO. Conversely, shifting $10 billion frommandatory to discretionary spending wouldviolate the caps. Even though balancing a$10 billion tax cut with a $20 billion reduc-tion in discretionary spending would bothreduce spending and the budget deficit, sucha move would not be permissible because itwould violate PAYGO.

• PAYGO ignored current mandatory spending.Not only did PAYGO actually prevent policiesthat would have tamed the budget deficit andcurtailed excessive spending, it was alsodesigned to allow mandatory programs to

grow unrestrained. PAYGO prevented newlegislation from increasing the budget deficit.Yet most of the growth in mandatory spend-ing that caused the budget deficits and exces-sive federal spending over the past 25 yearsarose from the natural, automatic growth ofcurrent entitlement programs such as SocialSecurity, Medicare, and Medicaid. PAYGOcentered the mandatory spending debatearound the dangers of new legislation, buttreated the entire $1.5 trillion spent on cur-rent mandatory programsmany of whichare expensive, outdated, and wastefulsim-ply as a given.11 The preference of PAYGO’s

10. Office of Management and Budget, Analytical Perspectives, p. 291, and Bud Newman, “Senate Passes Pay-Go Bill Ordering OMB to Avoid Sequester of Entitlement Programs,” BNA Daily Report for Executives, November 19, 2002, p. G5.

11. Rudolph Penner, a former director of the Congressional Budget Office, defends PAYGO’s policy of focusing only on legis-lated changes in mandatory spending. He states that the annual changes in mandatory spending are driven mostly by eco-nomic factors, and when a weak economy automatically triggers increased mandatory spending, it becomes politically infeasible to trim these programs enough to remain under the required level. Although the experience of the Gramm-Rud-man-Hollings Act fits within this viewpoint, the nation cannot afford to continue allowing mandatory spending programs to grow at their current rate without any real oversight or limits. If past limits on mandatory spending proved unrealisti-cally tight, as Penner suggests, policymakers could write looser caps. Shortening the time horizon of caps to three years will also keep them more realistic than past caps. Loose and realistic caps are better than no caps at all. Rudolph G. Penner, “Repairing the Congressional Budget Process,” Urban Institute, May 2002, at www.urban.org/url.cfm?ID=410522 (January 10, 2005).

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January 25, 2005No. 1816

designers to place current mandatory spend-ing outside of the law’s reach is a major rea-son why mandatory spending (excluding netinterest) actually grew faster in the 12 yearswith PAYGO than in the previous 12 yearsbefore the law (See Chart 1).12

• PAYGO raised taxes. The same PAYGO rulesthat allowed entitlement spending to growunrestrained also made tax increases auto-matic. The booming 1990s increased theincomes of millions of workers, thereby push-ing them into higher marginal income taxbrackets. PAYGO’s goal of deficit neutralityimplies that legislation merely reversing theseunlegislated tax increases should be allowed.Yet PAYGO acknowledged only tax and enti-tlement changes resulting from legislation.Therefore, legislated tax cuts could not beused to correct unlegislated tax increases,even if it is within the deficit-neutral goal ofrestoring revenues to their original level.Despite the best of intentions, PAYGO’s legacyhas been a bias toward high taxes, an inabilityto address runaway entitlement growth, andcounterproductive administrative rules dis-couraging trade-offs between mandatory anddiscretionary spending.

Total Spending Caps: A Key to Workable SpendingLimits. The most simple and effective policy to ensureresponsible budgeting would replace the current col-lection of discretionary spending caps and PAYGOrules with one simple cap on total spending for eachyear. This cap could take either of two forms:

1. TABOR caps would be determined by a formula.Modeled after Colorado’s Taxpayer Bill ofRights (TABOR) law, a TABOR cap would limitannual spending increases to the inflation rateplus population growth.13

2. OmniCaps would be set manually by lawmakers.These caps would function like an authoriza-tion. Every three years, the budget commit-tees would write legislation authorizing amaximum level of spending for each of thenext three years. Each year’s OmniCap wouldconsist of just two numbers—a budgetauthority total and an outlay total.14 Theauthorization would become a binding lawupon passage by the full House and Senateand the President’s signature.15

Each year’s spending cap would be enforcedthrough the budget resolution, whose total spend-ing target would be limited to the current year’scap.16 A resolution exceeding the year’s cap would

12. Calculated from Office of Management and Budget, Historical Tables. Annual mandatory spending (excluding net interest) grew by 40 percent between 1980 and 1991 (before PAYGO) and by 51 percent between 1991 and 2002 (during PAYGO).

13. For a more complete explanation of the proposed federal Taxpayers’ Bill of Rights, see Brian M. Riedl, “Restrain Runaway Spending with a Federal Taxpayers’ Bill of Rights,” Heritage Foundation Backgrounder No. 1793, August 27, 2004, at www.heritage.org/Research/Budget/bg1793.cfm.

14. Legislators would be free to include non-binding guidelines for breakdowns such as mandatory and discretionary spend-ing.

15. One potential danger lies in Congress’s having to delay the beginning of the annual budget once every three years because it must first complete the OmniCap reauthorization (i.e., delaying the 2006 budget until Congress completes the Omni-Caps for 2006, 2007, and 2008). Enacting these caps the year before Congress begins writing the first of its three budgets (2005 in this example) would leave time to write those budgets. However, writing them too early would require Congress and the President to project spending levels several years ahead, which would risk rendering the later OmniCaps unrealis-tic.

16. Multi-year revenue targets do not accompany multi-year spending caps because targets are nearly impossible to enforce. The federal government can firmly control spending because it dispenses the funds itself. Revenues, on the other hand, come from taxpayers and are dependent on the individual working, spending, and savings patterns of 290 million Ameri-cans. Governments can set tax laws and aim to keep revenues within a certain range but they cannot enforce specific tar-gets. Nor does a feasible remedy exist if revenues begin to diverge from their annual target, because enacting and implementing new tax policies would take too long to affect the current fiscal year. Therefore, tax revenue goals fit best in the annual budget resolution, where they serve as non-binding guidelines.

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No. 1816 January 25, 2005

require a two-thirds vote by Congress instead ofthe regular majority vote. Each annual budget res-olution would then go to the President’s desk to besigned or vetoed. Once the budget resolution’stotal spending target is in place, the budget pro-cess would continue as usual: The budget resolu-tion would set spending breakdowns; authorizersand appropriators would perform their duties(with the same two-thirds vote needed to exceedany of the 302(a) allocations or 302(b) sub-alloca-tions); and the President would sign or veto theappropriations bills.

Total spending caps have several significantadvantages over the current system:

• Simplicity. Each year’s cap would contain justone amount for budget authority and oneamount for outlaysno gimmicks, loopholes,or sophisticated and overly complex reforms.

• Flexibility. Congress would be able to writeeach year’s budget without the kind of micro-management that has prohibited trade-offsbetween discretionary and mandatory spend-ing. Spending could be allocated across pro-grams in any way that lawmakers see fit solong as total spending remains below the cur-rent year’s cap.

• Competition. Unlike the PAYGO system, totalspending caps would put current as well as pro-posed mandatory spending on the negotiationstable. This provision ensures that all spendingrequests will compete with one another and thatno item will receive a free pass.

• Reasonable enforcement. The requirement of atwo-thirds vote to override these caps wouldbe easily achievable in the event of a catastro-phe, such as the 9/11 attacks, but wouldmake it too difficult to exceed spending limitswhen Members of Congress simply wish toavoid making tough choices. Requiring apresidential signature for the annual budget

resolution serves as an additional hurdle tounjustified overspending.

Critics contend that any cap encompassingmandatory programs will lead to drastic cuts invital entitlements. Under Omnicaps, that wouldoccur only if lawmakers consciously choose to setlow OmniCap levels. Under a TABOR cap, itwould occur only if lawmakers refuse to rein inlow-priority programs to make room for priorityentitlement programs.

Reforming the Annual Budget ResolutionPrior to 1974, annual spending and revenue

totals were not centrally coordinated or evenplanned by Congress. Each spending and tax billwas individually written, debated, and passed, andCongress waited until the end of the entire processto tally up the total. The 1974 Congressional Bud-get and Impoundment Control Act17 createdannual budget resolutions through which Con-gress would commit to total spending and revenuetargets before jumping into annual appropriationsand reconciliations.18 Over time, however, thescope and enforcement of budget resolutions haveweakened to the point at which annual appropria-tions are beginning to resemble the chaotic pre-1974 process. The following proposals willstrengthen budget resolutions and their role in set-ting annual targets.

Recommendation #2: The total spending capshould limit the annual budget resolution’sspending levels, and the annual budget resolu-tion should limit annual appropriations.

For multi-year spending restrictions to be rele-vant, they must be enforced all the way down toindividual spending bills. To that end, total spend-ing caps should serve as a ceiling on annual bud-get resolution spending levels, which, in turn,should serve as a ceiling on annual appropriationsand mandatory expenditures.19 This means thatbypassing the total spending cap, the annual bud-

17. Biennial budgeting would provide Congress with more time to better plan and debate each budget and to conduct more stringent program oversight. However, it is generally excluded from this proposal because vehement congressional opposi-tion has made biennial budgeting a “third rail” of budget process reform, immediately killing any proposal that includes it. Biennial budgeting is not required for this paper’s proposals to succeed.

18. Public Law 93–344.

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January 25, 2005No. 1816

get resolution’s spending target, or the appropria-tions 302(b) sub-allocations should require a two-thirds vote by both the House and the Senate. Thiswould ensure that the limits are bypassed only intimes of real emergency.

Recommendation #3: The President should beincluded in formulating the budget resolution.

If two sides are expected to work out adetailed agreement on a complex subject withina nine-month period, it makes little sense to sep-arate them for the first eight months. It makeseven less sense for one side to spend so muchtime working out the smallest details of its offerwithout having first forged the basic structure ofan agreement with the other side. Yet this is howthe federal budget is currently written. The Pres-ident begins the process in February by present-ing his proposed budget as an opening offer.Congress then spends up to eight months pre-paring its counteroffer in the form of 13 detailedannual appropriations bills. At that point, withthe deadline for completion quickly approach-ing, the President’s options are limited to makinga sign-or-veto decision on each appropriationsbill. At this stage, negotiations prove to beextremely difficult because the two sides musthaggle over the details of hundreds of programsin the absence of a basic framework of aggregatespending targets. Inevitably, this process resultsin rushed compromises that are completed wellpast the fiscal year deadline.

An increasingly popular solution would be tomove from a concurrent budget resolution (whichdoes not involve the President) to a joint budgetresolution (which would require the President’ssignature to become law). By working out the dif-ferences early in the process and enacting a bind-ing law, the President and Congress would have achance to settle broad issues regarding the appro-priate level of total spending and revenue. Thiswould limit the appropriations debate to the com-position of federal spending, and any disagree-ments in this area would be far easier to work outwith the spending totals already in place.20

There will be times when Congress and thePresident cannot agree on spending and revenuelevels. The budget process could be moved for-ward in those instances by allowing Congress toinitiate appropriations bills under an unsignedbudget resolution. Requiring a two-thirds vote topass each appropriations bill in the absence of ajoint budget resolution will provide adequatepressure for Congress and the White House tosettle their differences.

Some critics contend that giving the President arole in the budget resolution unfairly transferspower from Congress to the President. However,Congress’s budget cannot be enacted until thePresident approves it.21 This reform would simplymove up the inevitable negotiations and providean opportunity to settle contentious issues earlierrather than later.

19. In addition to requiring a two-thirds supermajority to exceed the 302(a) cap on total discretionary spending, lawmakers could apply that supermajority requirement to legislation exceeding the 302(b) subcommittee allocations.

20. An innovative idea promoted by Representatives Chris Cox (R-CA) and Paul Ryan (R-WI) would allow Members of Con-gress to reduce spending limits toward the end of the budget process. Currently, Members who reduce a program’s funding while debating an appropriations bill on the floor see those savings quickly spent on different programs. The “lock box” proposal would allow the amendment’s authors to retain the savings by reducing the bill’s spending limit by the amount of the proposed spending reduction. This seems fair: The current budget process allows Congress to easily raise spending limits at the end of the budget process, so it should also be able to lower them. This reform would not fit into this paper’s proposal because it violates the central idea of settling spending totals early in the process. Easily adjusting them upward or downward later in the process would once again create a situation in which the President, the House, and the Senate end up with different spending totals that must be negotiated at the end of the process. Rather than achieving symmetry by giving both sides the ability to effortlessly alter spending limits, neither side should be allowed to do so. Of course, Con-gress could always decide to spend less than the OmniCap or TABOR cap.

21. Presidential vetoes are occasionally overridden by a two-thirds vote in the House and Senate, which happens to be the same vote required to exceed budget restraints in this proposal.

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No. 1816 January 25, 2005

Recommendation #4: Spending should bebroken down by committee (and appropria-tions subcommittee) instead of by function.

Current budget resolutions follow the Presi-dent’s lead by breaking down spending into func-tional classifications such as international affairs,transportation, and income security.

A more relevant breakdown is the amount thateach committee and subcommittee will be allowedto spend. While committee breakdowns are pro-vided in the budget report, they are not the focus ofdeliberations and they exclude the subcommitteebreakdowns that are vital for the appropriationscommittee. Rather than distracting Members withthe functional breakdown, Congress should write abudget resolution that focuses solely on the com-mittee and subcommittee breakdown. A simpleone-page document providing total spending limitsand a committee-by-committee (as well as appro-priations subcommittee) breakdown would allowCongress to see and debate the budget resolution inthe format most relevant to the subsequent appro-priations process and would provide a roadmapdetailing each committee’s expectations.22

Although Congress should structure the budgetresolution around the committees, this does notmean the current committee setup cannot beimproved. Specifically, many of the 13 appropriationssubcommittees are grouped by issues totally unre-lated to each other (such as veterans, housing, andNASA for one subcommittee, commerce, justice, andstate for another). If lawmakers grouped the appro-priations subcommittees by their spending functions(such as health, income security, and transportation),they could more rationally and systematically deter-mine and implement their budget priorities.

Reforming the Annual Appropriations Process After completing the budget resolution, the

respective budget committees divide up the bud-getary resources by committee. Committees that

authorize mandatory and tax legislation rarely arerequired to act because their programs will con-tinue operating under current formulas (althoughsome budgetary resolutions contain reconcilia-tion instructions requiring a committee to rewriteits programs to achieve a specified level of bud-getary savings). The most important allocationsare to the House and Senate appropriations com-mittees, which receive all discretionary spendingallocations and then provide a further subdivi-sion to each of their respective 13 subcommit-tees. Only expenditures for these programs arescrutinized annually.

Recommendation #5: Mandatory spendingshould be brought into the annual appropria-tions process.

In the absence of reconciliation instructions(which are becomingly increasing rare), only theone-third of federal spending classified as discre-tionary must move through the annual appropria-tions process. The other two-thirds, classified asmandatory spending, is simply deemed uncontrol-lable and set on autopilot to grow without anyrestraints or oversight. In the absence of long-termplanning and accountability, mandatory spendingsince 1962 has grown 11 times faster than discre-tionary spending.23 Even supporters of increasedmandatory spending should agree that the federalbudget cannot provide a meaningful nationaldebate on spending and tax priorities if two-thirdsof the federal government’s programs are immedi-ately taken off the table. Labeling programsuntouchable and providing them with blank checksinsulates them from the trade-offs that must bemade when competing priorities are weighed.

Moving all spending into the annual appropri-ations process would allow Congress to make thetrade-offs necessary to promote the most efficientand effective use of resources. All programswould be sent to the appropriations committee to

22. The following section’s proposal to move all spending into the annual appropriations process would mean all spending (except net interest) would be allocated to the appropriations committees. Therefore, the relevant breakdown would be by appropriations subcommittees.

23. Brian Riedl, Rea Hederman, and Ethan Baker, Federal Revenue and Spending: A Book of Charts (Washington, D.C., The Heri-tage Foundation, 2002), Chart S–13.

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January 25, 2005No. 1816

receive a specific dollar appropriation for theupcoming year and would be forbidden fromspending beyond that amount. Although it islikely that most mandatory programs wouldescape major reforms, Congress would begranted the tools to rein in programs that spendmore than is deemed necessary.

Answering the Critics. Critics point out the diffi-culty of appropriating the right amount to manda-tory programs. Indeed, most mandatory programshave historically been excluded from the appropri-ations process because their program beneficiariesare legally “entitled” to their benefit, leaving thecost of the program to be determined by the num-ber of enrollees. In reality, most entitlement pro-grams have predictable enrollment changes fromyear to year, making it relatively easy for Congressto anticipate the funding levels needed to maintaincurrent benefits.

The Food Stamp program proves that not allentitlements require a blank check. Currently,Congress and the President annually decide howmuch the nation should spend on this programfor the following year, and then appropriate thatamount. Recipients remain entitled to their bene-fits, and if the annual appropriation appearsinsufficient to fund all beneficiaries at currentbenefit levels, then those levels may be slightlyadjusted to keep spending in line with the appro-priation. All other mandatory spending could beappropriated in this manner, except for the pay-ment of net interests on government bonds,which the federal government is obligated to payto its investors. Political realities may keep SocialSecurity and Medicare exempt from the appropri-ations process as well.24

Committees that authorize mandatory pro-grams may oppose sharing their spending powerwith the appropriations committee. In a sense,appropriations committees would merely takeover the reconciliation duties that currently allowbudget committees to order reductions in manda-tory spending. The real difference between the

two systems is that reconciliation allows autho-rizing committees to find their own spendingreductions, while this proposal empowers theappropriations committee to write the actualreductions. Still, it is unlikely that appropriatorswould make significant changes to mandatoryspending formulas during the appropriationsprocess without asking the authorizing commit-tee to revisit the law themselves.

Another concern might be that the appropria-tions committees would be overwhelmed by theduties of appropriating all programs. Biennialbudgeting presents one way to ease that pressure.Bringing the President into the budget resolutionprocess in the spring should also reduce thenumber of issues that would have to be workedout with the White House in the autumn, thusallowing for smoother and quicker negotiations.Furthermore, it is unlikely that appropriatorswould significantly adjust many mandatory pro-grams in a given year.

However, if lawmakers insist on leaving man-datory spending outside the appropriations pro-cess, TABOR or OmniCaps could still apply.Lawmakers could continue to budget for thoseprograms in the budget resolution. If unantici-pated mandatory expenses during the fiscal yearthreaten to push total spending above the overallcap, lawmakers could simply go back and findsavings either in those programs or elsewhere inbudget. This could be accomplished manually orautomatically by writing a “trigger” into the bud-get resolution specifying where to streamlinespending in such an event.

Recommendation #6: Congress should createan emergency reserve fund.

Most families understand the wisdom of settingaside money for unexpected emergencies. Likewise,states maintain “rainy-day funds” for disaster reliefand other unforeseen needs. The federal govern-ment, however, does not set aside any funding foremergencies. More than just an oversight, the failureto budget for emergencies provides Congress with a

24. Congress should make adding to this list of exempt programs as difficult as possible. The hurdles should include requiring a strong supermajority vote and presidential signature, as well as banning “off-budget” program labels.

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Table 1 B 1816

The House Can Easily Bypass Budget Rules, and Senators Need Only Seek the Lowest Procedural Hurdles

Method of bypassing budget rule Vote Required

Current and Recent* Proposed **

House Senate House Senate

Pass bill violating PAYGO (non-emergencies)Pass bill violating PAYGO (emergencies)Cancel PAYGO enforcement

Enact budget resolution violating spending capsPass bill violating spending caps (non-emergencies)Pass bill violating spending caps (emergencies)Cancel spending caps enforcement or increase cap levels

Exceed budget resolution’s total spending allocationsExceed budget resolution’s appropriations 302(b) subcommittee allocations

“Advance appropriate” years ahead

MajorityMajorityMajority

MajorityMajorityMajorityMajority

Majority

Majority

Majority

3/5MajorityMajority

3/53/5

MajorityMajority

3/5

3/5

Majority

N/AN/AN/A

2/32/32/32/3

2/3

2/3

N/A

N/AN/AN/A

2/32/32/32/3

2/3

2/3

N/A

*Spending caps and PAYGO rules expired in 2002. The Senate, however, passed a series of temporary extensions for most of its three-fifths vote requirements listed above. The “current and recent” columns represent the current rules as well as recently expired rules that are likely to be brought back. **PAYGO and advance appropriations would be eliminated under this proposal.

backdoor means of exceedingspending caps. After allocating allbudgetary resources to regularspending programs within thelimitations of caps, Congress canlater claim that “unforeseen”emergency needs required it toexceed the original spendingcaps.

The current budget processmakes this easy. As stated ear-lier, Congress can bypass discre-tionary spending caps to fundemergencies with only a major-ity vote. Exceeding the budgetresolution’s spending ceilingsrequires only a majority vote inthe House and a three-fifthsvote in the Senate.25 These lowhurdles for excess spending pro-vide Congress with little incen-tive to fund emergencies (oreven non-emergencies) under-neath discretionary spending caps or the annualbudget resolution.

Congress should budget sufficiently for regu-lar emergencies, while assuring that the neces-sary escape hatch for catastrophic emergenciesis not abused. Such reforms would promotebetter planning and coordination within theconstraints of the budget caps and annual bud-get resolution.

How It Would Work. Given that non-war emer-gency spending throughout the 1990s averaged$9 billion per year, Congress could require thatthe annual budget resolution allocate a minimumof 0.5 percent of the total annual budget (approx-imately $10 billion in 2004) as an emergencyreserve fund. Allowing unused emergency budgetauthority to roll over to the following year wouldensure that the fund could remain solvent even ifannual emergency spending fluctuates between$5 billion and $15 billion annually, so long as

average annual emergency funding does notexceed $10 billion per year. In the event thatemergency spending beyond the capacity of thefund is required, these expenditures should beoffset by spending cuts in other areas. Requiringthat all emergency spending must come from aseparate appropriations bill and meet a stipulateddefinition of “emergency” will help to preventabuses of the fund.

It is possible that a catastrophic event could drainthe emergency fund and require expenditures thatare too large to be offset by other spending reduc-tions. In such a situation, additional emergencyspending that bypasses the statutory total spendingcaps and the budget resolution should require thesame two-thirds vote in Congress that would berequired for non-emergency spending.

No “Emergency” Loopholes to Abuse. A two-thirdsvote is a high hurdle, but the chain of budgetaryenforcement is only as strong as its weakest link. If

25. Again, a three-fifths vote in the Senate is required only if a Senator raises a point of order against legislation for violating these rules. Otherwise, a simple majority vote could override these rules in the Senate.

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January 25, 2005No. 1816

Chart 2 B 1816

In 2004, Advance Appropriation Were 12 Times Higher Than Their 1996 Levels

5

10

15

20

$25

Fiscal Year

Source: United States Senate Committee on the Budget, “Informed Budgeteer,” 107th Congress, 2nd Session: No. 21, July 9, 2002, and data provided by the Senate Budget Committee.

1996 1997 1998 1999 2000 2001 2002 2003 2004

the vote required to exceed thebudget resolution for emergencyspending is any lower than thebudget resolution’s non-emer-gency hurdle (two-thirds), or thehurdle for exceeding multi-yeartotal spending caps (two-thirds),Congress would likely onceagain abuse the emergency loop-hole to bypass spending limits(See Table 1). In the event that amassive catastrophe exhaustsboth the emergency fund and theadditional amount that couldreasonably be offset elsewhere inthe budget, Congress shouldhave no problem producing thenecessary two-thirds vote toappropriate extra funding.

Recommendation #7: Con-gress should eliminate advanceappropriations.

In addition to designating all new spending as“emergency,” Congress often uses advance appro-priations to exceed spending limits. Advanceappropriations allow legislators to provide bud-getary authority for funding that would notbecome available until a year or more after thecurrent fiscal year. For example, if legislatorswriting the 2005 federal budget run out of roomunder the current spending cap and budget reso-lution, they can allocate additional expendituresfor the 2006 fiscal year. Advance appropriationsare similar to spending caps in that they are aform of multi-year planning. However, there is asignificant difference between the two mecha-nisms: Whereas spending targets provide a broadframework within which future Congresses mustcreate their budgets, advance appropriations bindfuture Congresses to designated funding alloca-tions for specific programs. In doing so, theyplace a tight and unnecessary straitjacket onfuture budgeters.

Advance appropriations averaged under $3 bil-lion per year in the 1990s, but expanded to nearly$24 billion by 2004 as legislators used them toexceed spending caps (See Chart 2).26 Lawmakersoften defend the $15 billion in annual advanceappropriations for education programs by assert-ing that schools operating on a different fiscal yearthan the federal government need early assurancesof full funding. Yet even the Department of Educa-tion admits there is no programmatic justificationfor advance appropriations.27 The 2005 federalbudget (which runs from October 2004 throughSeptember 2005) funds the 2005−2006 schoolyear (which runs from July 2005 through June2006). Thus, even without advance appropria-tions, nearly all education spending becomesavailable well before the school year begins. Fur-thermore, the predictability of annual federal edu-cation spending allows local school districts toplan their budgets in advance.

Likewise, $9 billion in annual advance appro-priations is not justified in areas such as housing

26. Committee on the Budget, U.S. Senate, “Informed Budgeteer,” No. 21, 107th Cong., 2nd Sess., July 9, 2002, and data pro-vided by the Senate Budget Committee.

27. Ibid.

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No. 1816 January 25, 2005

vouchers and Head Start. Congress could elimi-nate advance appropriations by requiring that allbudget authority be credited to the current or fol-lowing year’s spending totals—regardless of whenthe funds are actually released.

Recommendation #8: Service on the appropri-ations and budget committees should be limited.

Most of these proposals to bring order to thebudget process would increase the power of thebudget and appropriations committees. The Houseand Senate budget committees would write theOmniCaps (although not a TABOR cap), as well asthe more strongly enforced annual budget resolu-tions. The House and Senate appropriations com-mittees would annually appropriate funds formandatory as well as discretionary programs. Thepowerful influence of these committees on the fed-eral budget, which affects every issue, should bebalanced by a steady rotation of membership. Lim-iting Members to four years on each committee outof every 12 years they serve in Congress wouldensure regular turnover. These restrictions need notbe unnecessarily strict: A Member could serve fouryears on each committee, even at the same time.Prior committee service in the other body of Con-gress should not count against a Member’s total.

In addition to diffusing the committees’increased power, committee term limits wouldaddress the bias that typically emerges over timeon these committees. For example, Capitol Hillobservers have long noted that increased tenure onappropriations committees often creates a biastoward excessive spending by obscuring a big-pic-ture perspective. Conversely, the big-picture focusof budget committees often results in their mem-bers’ having a more fiscally conservative orienta-tion than their colleagues outside thesecommittees. Increasing the turnover on these com-mittees will help them to more accurately repre-sent the views of Congress as a whole.

Recommendation #9: Congress should pre-vent government shutdowns with automaticcontinuing resolutions.

Even the best efforts to simplify the budget pro-cess and foster cooperation cannot guarantee that abudget will be completed by the annual October 1deadline. Failure to complete the budget by thisdeadline risks paralysis in the federal governmentbecause it leaves many agencies unable to spendmoney. Congress has missed the October 1 deadlinein 26 of the past 27 years, resulting in a series ofcontinuing resolutions (CRs) to fund the federal gov-ernment in the interim. Contentious debate regard-ing the composition of the CRs creates regularuncertainty among both providers and recipients offederal services.28 This insecurity could be assuagedby a law that guaranteed continued funding at theprior year’s rate to agencies without a budget for thenew fiscal year. Some in Congress may oppose usingthe prior year’s budget: Many fiscal liberals wouldsupport automatic increases, such as cost of livingadjustments, and many fiscal conservatives wouldsupport automatic reductions for one-time expensesor even an entirely different budgetary formula. Sim-plicity, however, makes the prior year’s funding levelthe most practical option. Budgeters who dislike thatformula would have an added incentive to forge anew budget agreement more quickly.

Reforming the Role of the President The most important presidential power in the

budget process is the authority to sign the appro-priations into law or to veto them. Given the diffi-culty of overriding a presidential veto (whichrequires a two-thirds majority in both the Houseand the Senate), Congress must write a budget thatthe President will be willing to sign.

Because Congress is not obligated to incorpo-rate the President’s budget proposal into the bud-get resolution or any appropriation, the Presidentis on the sidelines throughout much of the bud-get debate. Although the White House canattempt to influence Congress by asserting itsviewpoint, the President does not directly influ-ence the final budget until the end of the processwhen the appropriations bills are submitted forthe President to sign or veto. The President couldbe brought into the process earlier by converting

28. This uncertainty was heightened after the inability of Congress and the President to agree on a CR led to a government shutdown in the winter of 1995-1996.

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January 25, 2005No. 1816

the concurrent budget resolution into a jointbudget resolution that would be signed by thePresident. A number of other popular proposalshave been made to strengthen the President’s roleat the end of the budget process throughimpoundment, enhanced rescission, and a con-stitutional line-item veto.

Recommendation #10: Presidential rescis-sion should be strengthened.

The increasing usage of omnibus spending billsis forcing lawmakers to vote on increasingly largespending bills. Consequently, the same bills thatfund priorities such as homeland security, health,and education also fund $50 million for an indoorrainforest in Iowa and $250,000 for the Rock andRoll Hall of Fame in Ohio. The only course ofaction available to lawmakers who refuse to fundwasteful spending is to vote against the entire bill.

Rescission bills provide an innovative way to cutthe wasteful spending out of legislation. After thelegislation is enacted, the President can request abill to de-fund wasteful programs and grantsbefore the funds are spent. Lawmakers frustratedby having to vote for the wasteful components ofan otherwise good bill are given an opportunity togo back and remove the waste.

Congress, however, often balks at rescissionrequests. Rather than go on record as supportingwasteful pork-barrel projects and obsolete pro-grams, Congress blocks rescission requests byrefusing to vote on them.

A positive reform would guarantee that allpresidential rescission requests receive “expe-dited consideration” by proceeding directly tothe House and Senate floor for a vote. Ratherthan continuing to avoid rescission requests,lawmakers would be forced to go on record assupporting or opposing these wasteful expen-ditures. The likely result would be less waste-ful spending.

Enhanced rescission is a weaker presidentialtool than a line-item veto (which could be overrid-den only by a two-thirds vote of Congress) orimpoundment (whereby a President could rescindspending without any input from Congress).Nonetheless, it is a feasible way to help the Presi-

dent check wasteful spending without removingany significant congressional powers.

Accounting Changes Across the Budget Process Several accounting requirements currently pro-

vide Congress with a biased perspective of thecosts and benefits of tax and spending proposals.They should be replaced by mo.re accurateaccounting methods that better represent the real-world impact of budget proposals.

Recommendation #11: The annual budget should include liabilities and unfunded obligations.

The current budget process is prepared on acash basis, in which spending is based on whencash is expected to change hands. There is nobudgetary consideration of the actual financialcommitments resulting from policy changesenacted by Congress because these will be paidwell into the future. As a result, entitlement pro-grams such as Social Security and Medicare havehuge unfunded obligations attached to them.Because they are financed on this pay-as-you-gobasis, lawmakers are not forced to deal with thisproblem in a serious way. The private sector, onthe other hand, has a regimented process foracknowledging and tackling these types of obli-gations. The underlying principles of private sec-tor financial reporting should be applied to thefederal budget process to present a clearer pictureof the nation’s fiscal health.

The proposals below are presented as a menu ofoptions—by no means exhaustive—to add to thecurrent debate about dealing with long-term enti-tlement obligations.

Limiting Growth in Federal Liabilities and Obliga-tions. Adoption of a budget, or limit, for liabilitiesand obligations as part of the budget processwould allow lawmakers to make policy changes,but require them to live within the limits estab-lished by a liability budget. Any new spendingpolicy would have to be evaluated on the liabilityor obligation it creates over a long-term basis. Thiswould provide policymakers with a measure of fulldisclosure and transparency that they now lackwhen making financial decisions. To live withinthe “budget,” Congress would pay for liabilityincreases by cutting other obligations.

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Adding a “Payment Plan” for Liabilities and Obliga-tions to the Annual Budget. Adding a payment mea-sure for liabilities and obligations to the annualbudget would force Congress to acknowledge thecost of federal obligations and begin to balancenear-term spending patterns with long-term reali-ties by reducing spending growth. This wouldwork by including an “annual payment” of federalobligations in the budget resolution. In times ofbudget deficits this “annual payment” wouldrequire policymakers to budget more responsiblyby reserving resources that would otherwise beused for spending, although it would not directlyreduce total liabilities and obligations. In any yearwith a budget surplus, resources would bereserved to pay down liabilities such as federalpension liabilities or debt held by the public. Thismeasure would work best in tandem with strong,enforceable spending limits to prevent lawmakersfrom merely increasing deficits.29

Recommendation #12: Congress should ter-minate baseline budgeting.

The 1974 Congressional Budget and Impound-ment Control Act requires Congress to use “cur-rent policy” baselines as the starting point forconsideration of new spending.30 For many enti-tlement programs, projected spending calculatedfrom these baselines is automatically adjusted forinflation, new enrollees, and increased benefits.Under this system, accounting standards havedefined annual increases as large as 7 percent asspending “freezes” and spending increases as highas 6 percent as “reductions.” Although a 6 percentspending increase may not be enough to fully funda program under certain standards, simple arith-metic shows that it is not a reduction. Baselinebudgeting discourages Members of Congress fromvoting for smaller spending increases in popularprograms, given that such a vote could be charac-terized as a reduction in funding. Honest andresponsible budgeting should not include suchmisleading adjustments.

Recommendation #13: Tax proposals shouldbe scored using reality-based models.

Accurate budget planning requires using the besttax projections available. Congress, however, cur-rently requires that its scorekeepers assume that taxrates do not affect the economy. They assume thattax reductions will not stimulate economic growthor recover a portion of the lost tax revenue and thattax increases will not harm the economy, therebydiminishing the anticipated revenue gain. These“static” scoring models, which are rejected by mosteconomists, consistently overstate the positive bud-getary effects of high taxes. Using any of the existing“reality-based” scoring models would include theeconomic effect of tax proposals and lead to moreaccurate tax projections.

ConclusionThe chaos of the of the 2003 and 2004 federal

budget debates and the expiration of discretionaryspending caps and PAYGO rules provide Congresswith both a reason and an opportunity to stepback and comprehensively examine the currentbudget process. The past 30 years have shown thata budget process does not last longer than 10 to 12years before mounting abuses necessitate majorreforms. The last major reforms, enacted in 1990,hung on by a thread before expiring in 2002.

Although war and economic revitalization con-tinue to dominate the agenda, leaving little timefor comprehensive budget process reform, Con-gress should resist the temptation to reflexivelyvote to continue the current process. This pro-cess—which has engendered shortsighted, hap-hazard decision making by those who canmanipulate the process—will not efficiently allo-cate the nation’s resources to its highest, crucialpriorities: defense, anti-terrorism, economic recov-ery, and long-term entitlement reform.

—Brian M. Riedl is Grover M. Hermann Fellow inFederal Budgetary Affairs in the Thomas A. Roe Institutefor Economic Policy Studies at The Heritage Foundation.

29. See Alison Fraser, “Time for the Federal Budget Process to Include Unfunded Entitlement Obligations,” Heritage Founda-tion Backgrounder, forthcoming.

30. Joint Economic Committee, U.S. Congress, “Budget Process Reform,” May 1997, p. 6.

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Appendix B 1816

Multi-year discretionary spending caps are occasionally written. These caps can be bypassed by a majority vote to label all extra spending “emergency.” (Expired in 2002)

All legislation to increase mandatory spending or reduce taxes must be balanced by tax increases or reduced mandatory spending elsewhere. Mandatory programs and tax revenues that grow naturally without new legislation are not affected by this law, which can also be overridden by a majority vote in the House and a three-fifths vote in the Senate. (Mostly expired in 2002)

One cap limiting total spending for each year. This cap could be set by the formula of inflation plus population growth (a TABOR cap). Alternatively, Congress and the President could manually determine the caps in three-year increments (an OmniCap). Require a two-thirds vote by Congress to pass a budget resolution that exceeds its year’s spending cap.

Mandatory spending

Discretionary spending

Policy ProposalCurrent and Recent Law

Multi-Year Restrictions

The House and Senate write a joint budget resolution setting spending and revenue targets. Despite having to eventually approve all spending and revenue bills, the President has no formal role in setting this annual budget framework.

Budget resolution spending limits can be waived by a three-fifths vote in the Senate and a majority vote in the House.

The focus of the budget resolution is the spending breakdown by the type of expenditure (the “function”).

Have Congress and the President settle broad disputes early in the process by making the budget resolution a binding law that is signed by the President.

Require a two-thirds vote by Congress to both write a budget resolution with total spending levels exceeding the OmniCap or TABOR cap, and to appropriate beyond the budget resolution’s levels.

Focus on the breakdown by committee (and appropriations subcommittee), which is more relevant to appropriators.

Participants involved

Enforcement of provisions

Spending breakdown

Annual Budget Resolution

Programs appropriated

Emergency spending

Loopholes

With few exceptions, only the one-third of spending classified as discretionary is subject to annual appropriations. The rest is considered uncontrollable and left to grow automatically every year.

Unlike most states, Congress does not set aside money in an emergency fund. It allocates all spending under its caps to regular programs and then uses emergencies as an opportunity to exceed the original caps.

Advance appropriations allow policymakers to bypass spending limits by appropriating money years down the road. Also, the ability to bypass spending limits with a majority vote simply by designating extra spending as “emergency” is abused regularly.

Subject all expenditures (except net interest) to the annual appropriations process. Allow the inevitable exceptions for Social Security and Medicare.

Require Congress to set aside at least 0.5 percent of its annual budget for an emergency fund. Reducing other programs could fund additional emergency spending. Additional emergency appropriations beyond the budget resolution would be available with a two-thirds vote by Congress.

End the practice of advance appropriations. Eliminate loopholes by requiring the same two-thirds vote to bypass the total spending cap and the annual budget resolution, even in cases of emergency.

Annual Appropriations

APPENDIX

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Appendix B 1816

No statutory limits on committee assignments exist. Each party enforces its own rules.

For agencies that begin the fiscal year without a budget, Congress and the President can work out a continuing resolution to provide tempo-rary funding. Substantial time is often needed to write and debate each continuing resolution.

Limit each member to four years each on the budget and appropriations committees for every 12 years in the House or Senate.

Implement automatic continuing resolutions at the prior year’s spending levels for agencies without a budget.

Policy ProposalCurrent and Recent Law

Presidential requests to rescind previously appropriated budget authority must be approved by a majority vote in both the House and Senate within 45 days for the rescission to occur.

End the common practice of Congress blocking rescission proposals by refusing to schedule a vote on them. Guarantee the “expedited consideration” of presidential rescission requests, whereby they proceed directly to the House and Senate floor for a vote.

Rescission

Spending

Taxes

Future liabilities

Baseline budgeting automatically factors in the costs of inflation, increased enrollment, and increased benefits when providing a starting point for funding many mandatory spending programs. Providing an increase smaller than this adjustment is often called a spending decrease.

Static scoring estimates assume that tax rates do not affect the economy. Consequently, they understate the revenue loss from tax decreases and overstate the revenue gain from tax increases.

Policymakers are not required to examine how current polices will affect the taxes paid and benefits received by following generations.

Terminate baseline budgeting. It is misleading to define a “cut” as a smaller increase than some would prefer.

Replace static scoring with reality-based scoring, which incorporates the economic effect of tax policy into their revenue estimates.

Require that budgets measure the cost of future liabilities from current programs.

Accounting Methods Across the Budget Process

APPENDIX (cont.)

Committee term limits

Government shutdowns

President’s Role