C U R R E N T
T H E
AND
I S S U E S
S Y S T E M
G R A M M - R U D M A N
U.S.
B U D G E T
ACT
D E F I C I T S
MINI REVIEW 86-5E
Terrence J. Thomas
Economics D i v i s i o n
Research Branch
Ottawa
24 February 1986
L I B R A R Y OF P A R L I A M E N T
CANADA
LIBRARY OF PARLIAMENT
BIBLIOTHEQUE DU PARLEMENT
THE GRAMM-RUDMAN ACT
AND U.S. BUDGET DEFICITS
INTRODUCTION
The Balanced Budget and Emergency Control
signed i n t o law i n t h e U.S.
on December 12, 1985.
Act o f 1985 was
Known as t h e Gramm-Rudman
( o r Gramm-~udman-~oll
i n g s ) Act a f t e r i t s Senate sponsors,
t h e Act r e q u i r e s
t h e f e d e r a l d e f i c i t t o be reduced t o zero by f i s c a l year 1991 ( s i n c e October
1976, t h e f i s c a l year i n t h e U.S.
has run from October 1 t o September 30).
One o f t h e co-sponsors o f t h e Act described i t as "a bad idea whose t i m e has
come."
It has c e r t a i n l y been one o f t h e most c o n t r o v e r s i a l pieces o f l e g i s -
l a t i o n i n t h e U.S.
i n recent years,
and i t may even be u n c o n s t i t u t i o n a l .
Whatever t h e f u t u r e o f t h e Gramrn-Rudrnan Act,
i t has a l r e a d y changed t h e way
people l o o k a t t h e U.S. budget d e f i c i t .
BACKGROUND ON THE U.S.
The U.S.
away.
DEFICIT
f e d e r a l d e f i c i t has been a problem t h a t would n o t go
Since 1950 t h e r e have been o n l y f i v e years w i t h a budget s u r p l u s and
n o t one o f these occurred a f t e r 1970.
I n recent years,
P r e s i d e n t dedicated t o f i s c a l r e s p o n s i b i l i t y ,
uncontrollable.
deficits,
even under a
t h e budget has seemed t o be
The severe recession i n t h e e a r l y
1980s l e d t o
b u t these were not reversed as t h e economy recovered.
large
Setween
1980 and 1985 t h e gross f e d e r a l debt --roughly t h e d e f i c i t s accumulated over
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time-- doubled; t h e gross debt i s now over $2 t r i l l i o n ( a l l f i g u r e s i n t h i s
n o t e are i n U.S.
dollars).
By 1984, t h e i n t e r e s t on t h e debt had zoomed t o
over $1 00 b i l l i o n and paying i t r e q u i r e d almost 17% o f f e d e r a l revenues.
Table 1 shows a c t u a l
1979.
The i n c r e a s i n g
and estimated f e d e r a l
deficits
since
a b s o l u t e s i z e of t h e d e f i c i t i s o f course s t r i k i n g ,
b u t so a r e t h e i n a c c u r a c i e s i n t h e short-term d e f i c i t forecasts.
Table 1
ACTUAL AND ESTIMATED U.S.
FEDERAL DEFICITS
($ b i l l i o n s )
Fiscal
Year Actual Jan.'79
Source:
J a n e g 8 0Jan.'81
Feb.'82
Feb.'83
Feb.'84 Feb.'85
Economic Report o f t h e President, v a r i o u s issues
It i s almost impossible t o e s t i m a t e d e f i c i t s
Feb.'86
.
w i t h precision.
Any e r r o r s
made i n f o r e c a s t i n g t h e s t a t e of t h e business c y c l e w i l l lead t o e r r o r s i n
forecasting the d e f i c i t .
It i s
noteworthy t h a t each
of
the
two-year
e s t i m a t e s presented i n t h e t a b l e assumed t h e d e f i c i t would improve i n t h e
second year.
T h i s suggests t h e r e was more w i s h f u l t h i n k i n g than conscious
p o l i c y d i r e c t e d a t reducing t h e d e f i c i t .
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SPECIFICS OF GRAMM-RUDMAN
The Gramm-Rudman Act provides a d e f i c i t - r e d u c i n g p l a n t h a t i s
s t a r t l i n g both i n i t s apparent s i m p l i c i t y and i n i t s i m p l i c a t i o n s .
p r o v i d e s maximum a1 lowable d e f i c i t s f o r t h e f i s c a l
The Act
years between now and
1991 :
Table 2
MAXIMUM ALLOWABLE DEFICITS UNDER GRAMM-RUDMAN
F i s c a l Year
m Deficit
ions, U.S.)
71.9
44
08
72
36
0
From f i s c a l y e a r 1987 t o f i s c a l y e a r 1991 t h e maximum a l l o w a b l e d e f i c i t
f a l l s i n even $36 b i l l i o n steps.
I n those years t h e d e f i c i t i s f i x e d .
f i s c a l y e a r 1986, Congress f i x e d t h e c u t s a t $11.7
d e f i c i t o f under $185 b i l l i o n .
j u s t over $200 b i 11ion,
For
b i l l i o n having assumed a
Now t h e d e f i c i t i n 1986 i s expected t o be
so larger-than-expected
cuts w i l l
be requi r e d i n
f i s c a l 1987 t o reach t h a t y e a r ' s d e f i c i t t a r g e t o f $144 b i l l i o n .
Suppose
for
fiscal
1987
the
expected
deficit
was
$204
b i l l i o n ; t o reach t h e a l l o w a b l e d e f i c i t f o r t h a t year, $60 b i l l i o n o f t h i s
would have t o be eliminated.
cuts,
T h i s could be accomplished by expenditure
revenue increases o r some combination o f these.
I f Congress and t h e
P r e s i d e n t c o u l d n o t agree on a package t h a t chopped t h e r e q u i r e d amount,
automatic across-the-
board c u t s t o non-exempt gov,ernment programs would be
made by a u n i f o r m percentage t o ensure t h a t t h e t a r g e t was reached.
Rudman does n o t go i n t o e f f e c t d u r i n g a p e r i o d o f recession o r war.)
(Gramm-
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Those programs exempted from t h e automatic c u t s
represent
o r $627 b i l l i o n o f t h e $974 bi11ion expected
over 61
4% o f 1986 o u t l a y s ,
The major exemptions are:
out1 ays.
s o c i a l s e c u r i t y , i n t e r e s t on t h e debt, defence c o n t r a c t s
p r e v i o u s l y signed,
medicaid,
supplemental
security
income, veterans' pensions and compensation, a i d t o
f ami 1ies w i t h dependent c h i 1dren,
food stamps and
n u t r i t i o n programs.
I n a d d i t i o n t o these,
medicare and veterans'
h e a l t h care are v i r t u a l l y
adding $82 b i l l i o n o r j u s t over 8% of 1986 o u t l a y s t o t h e l i s t o f
exempt,
untouchable programs.
These programs,
by t h e way,
could be c u t i n t h e
budget b a r g a i n i n g process t h a t t a k e s p l a c e b e f o r e t h e automatic cutbacks are
effected.
T h i s b a r g a i n i n g process could,
of
course,
lower t h e d e f i c i t
enough i n any f i s c a l y e a r f o r no automatic c u t s t o be needed,
but t h i s i s
n o t expected.
With t h e exempt and v i r t u a l l y exempt programs amounting t o
i t i s easy t o see t h a t t h e remaining programs w i l l
almost 73% o f o u t l a y s ,
f a c e deep c u t s i n any attempt t o balance t h e budget.
t u r e s by I%,
f o r example,
C u t t i n g t o t a l expendi-
i m p l i e s t h a t t h e non-exempt programs must be c u t
by around 4%.
The non-exempt programs i n c l u d e those deal ing w i t h defence,
science, energy, t r a n s p o r t a t i o n , education, f o r e i g n aid, heal t h y a g r i c u l t u r e
and t h e environment.
H a l f o f t h e automatic c u t s would a f f e c t defence and
h a l f these o t h e r programs.
THE CONSTITUTIONALITY OF GRAMM-RUDMAN
The
day
the
Gramm-Rudman
Act
was
signed,
a
group
of
congressmen j o i n e d t h e Ralph N a d e r - a f f i l i a t e d Pub1 i c C i t i z e n s L i t i g a t i o n
Group and went t o c o u r t w i t h a s u i t t h a t claimed t h e Act was u n c o n s t i t u t i o n al.
The
automatic
question
cuts.
of
constitutionality
A major argument
centres
on
the
from t h e L i t i g a t i o n
provision
Group was
for
that
Congress cannot have i t s powers t o l o o k a f t e r government expenditure and
revenue programs replaced by a mechanical r u l e .
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On February 7,
district
court
1986 a three-judge . panel
D.C.
i n Washington,
unconstitutional
.
ruled that
from t h e f e d e r a l
t h e Gramm-Rudman
Act was
The f i n d i n g was based on a separation-of-powers
issue.
According t o t h e Act t h e P r e s i d e n t would have t o put i n t o e f f e c t spending
c u t s p r e s c r i b e d by t h e c o m p t r o l l e r general
removable by Congress.
The mechanical
-
t h e use o f t h e c o m p t r o l l e r
t h e c o m p t r o l l e r general i s
process o f t h e automatic c u t s by
i t s e l f d i d n o t seem t o worry t h e c o u r t ;
process
, but
i t was a s p e c i f i c p a r t o f t h i s
general
-
that
led t o the
court
decision.
In
ways,
however,
the
district
court
The case w i l l be heard by t h e Supreme Court,
ir r e l e v a n t .
perhaps
many
as
early
as
June.
Pending
the
outcome
of
Grarnm-Rudman Act, w i t h i t s p r o v i s i o n f o r automatic cuts,
decision
is
w i t h a decision
the
appeal,
the
remains i n e f f e c t .
Moreover, t h e Act c o n t a i n s a f a l l - b a c k p o s i t i o n i n case t h e c o u r t s eventually
invalidate
the
provision
for
automatic
cuts.
Unfortunately,
the
f a l l - b a c k p o s i t i o n i s s i m i l a r t o t h e present budgetary process t h a t l e d t o
Gramm-Rudman i n t h e f i r s t place.
Congress could,
o f course,
g i v e up i t s
a u t h o r i t y t o remove t h e c o m p t r o l l e r general o r f i n d some o t h e r means t o meet
t h e goal
of
reducing t h e
deficit.
As
one
congressman
put
it:
"If
Gramm-Rudman dies, i t w i l l r u l e from t h e grave."
OTHER ISSUES
Constitutionality
connected w i t h Gramm-Rudman.
is
one
of
several
unresolved
issues
Many wonder what e f f e c t t h e automatic cuts
would have on defence o r on such d i s c r e t i o n a r y programs as those d e a l i n g
w i t h t h e environment.
place
-
Others wonder i f t h e automatic c u t s w i l l ever take
t h e f e a r o f mechanical across-the-board
c u t s may f o r c e Congress and
t h e P r e s i d e n t t o bargain and reach some compromise t o produce t h e necessary
d e f i c i t reduction.
Perhaps t h e most i m p o r t a n t unresolved issue has t o do
w i t h t h e macroeconomic e f f e c t s o f t h e l a r g e decreases i n t h e d e f i c i t .
p r e l i m i n a r y a n a l y s i s has been v e r y gloomy,
Some
but no one knows t h e e x t e n t t o
which monetary p o l i c y w i l l be loosened as f i s c a l p o l i c y i s t i g h t e n e d under
Gramm-Rudman.
And no one knows i f ( o r by how much) reducing t h e d e f i c i t
w i l l lower r e a l i n t e r e s t r a t e s and s t i m u l a t e t h e p r i v a t e s e c t o r i n t h e U.S.
!