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Moreover, even a casual glance at how projected federal budgets compare with actual outcomes shows more serious discrepancies for projected deficit or surplus than for projected expenditures. Government can appropriate, and the administration can spend, definite dollar sums decided in advance (though they do not always do so); government does not levy taxes specified in dollars in advance.

Third, it is important to separate issues. Personally, I do not believe that fiscal policy is a desirable instrument for economic stabilization; but that is a minority opinion, even in the economics profession, let alone among the broader group. In any event, the issue of limiting the size of government is separable from the use of fiscal policy for economic stabilization. A spending limitation does not prevent the use of fiscal policy for stabilization. Tax receipts will automatically vary with the cycle in a direction that is regarded as stabilizing, and this built-in effect can be strengthened or offset by discretionary changes in taxes. Changes in taxes can be a complete substitute for changes in spending to affect the economyindeed, many, if not most students of fiscal policy regard them as preferable.

These are the reasons why I regard a constitutional limitation on government spending as a more effective device for enabling the public to limit government than a requirement for a balanced budget.

BROOKINGS

The Brookings Bulletin / Volume 16, Number 1/ Summer 1979

Which Way
to a Balanced Budget?

Bruce K. MacLaury

Public interest in proposals to limit federal spending and balance the budget will probably continue into the 1980s. In the following article, excerpted from Setting National Priorities: The 1980 Budget, President Bruce K. MacLaury of the Brookings Institution examines constitutional amendments and other proposed means of ensuring an annual balance between federal receipts and expenditures.

celeration of inflation. Few people blame government alone for the nation's inflation problems rising energy and food prices did play a role. But most people do assign government an important responsibility for inflation and with reason.

The administration and the Congress have contributed to inflation in a number of separate actions that individually seemed negligible for inflation arithmetic, but that cumulatively added to the momentum of rising wages and prices—hikes in payroll taxes and minimum wage rates, acreage allotments and higher crop support prices, import limitations and steel trigger prices, inade

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GALLUP POLL in July 1978 found that 81 percent

of the respondents favored a constitutional

amendment requiring Congress to balance the federal budget every year. At the end of March 1979, twenty-nine of the necessary thirty-four states had approved some form of resolution asking Congress to call a constitutional convention for the purpose of proposing such an amendment. And the Ninety-sixth Congress itself started off with a flurry of bills and resolutions in a hasty effort to get at the head of the stampede.

Demands for balanced budgets, reduced taxes, and limited federal expenditures are nothing new in this country. But they have taken on a new political dimension with the passage last year of California's Proposition 13, which drastically cut property taxes in that state. For

years, bills to require balanced federal budgets have been introduced in Congress as a matter of ritual, but never before have they received a serious hearing.

The public's frustration with government has many probable causes—the past decade's unexpectedly large increases in income transfer programs, continuing reports of inefficiency and waste, rising social security taxes, and the expanding web of regulations and red tape. But no single factor, it seems, has had a more corrosive effect on public attitudes, particularly attitudes toward government, than the persistence and recent ac

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quate consideration of costs in regulatory decisions, and so forth. Given the underemployed state of the economy in the last few years, the cost-raising effects of actions such as these may well have contributed more to infistion than have the level of federal spending or the budget deficits.

But those who blame government for inflation usually

2

have in mind "excessive" government expenditures or budget deficits as the major culprits. For this reason, they propose a variety of limitations on spending and on defi

dts.

A good case can in fact be made for further strengthening controls over the federal budget. The risk, however, is that some of the proposed cures are far worse than the present disease. In evaluating this risk, it is important to distinguish between limitations imposed by constitutional amendments and those effected through changes in federal law.

Rationale for Budgetary Limitations A fundamental issue in the current debate is whether deficits in the federal budget in and of themselves contribute to inflation. No one would argue that such deficits never add to inflationary pressures, they did add to them during the Vietnam war and in 1972–73. On those occasions, the excess of federal expenditures over receipts was superimposed on an economy whose re

Setting National Priorities: The 1980 Budget, Joseph A. Pechman, editor. Published May 1979, 229 pages, $4.95 paper, $11.95 cloth,

sources were already fully employed. In such circumstances, additional demand, whether from government or from the private sector, results not in additional output but in inflation

In different circumstances, however, when resources -human and capital-are underemployed, an increase in total demand can increase output and employment without necessarily creating pressures that generate inAlation. Then the use of the federal budget to counter slack in other sectors has obvious advantages and, conceptually at least, few costs. Moreover, fiscal stimulus can be achieved through tax cuts as well as by expenditure increases (though not necessarily with the same incidence, timing, and multipliers), so that during recessions countercyclical policies need not result in swollen outlays even when they do result in deficits.

The Brookings Bulletin

THE BROOKINGS BULLETIN

But even though there is no necessary link between federal deficits and inflation or between countercyclical fiscal policy and an expanding government role, the record is pretty clear:

1. Federal deficits have contributed to excess demand pressures and inflation in critical times in the past.

2. The difference between an economy that is "underemployed" and one that is "fully employed" is difficult to gauge, partly because it is defined by a range rather than by a point. Moreover, the range itself is changing with changes in the competitive structure of industries, the work force, income maintenance programs, patterns of employment, and the availability of efficient plant capacity.

3. The processes by which fiscal policy is adapted to changing economic conditions are ponderous and unreliable, a problem that is compounded by the uncertain lags in the impact of discretionary fiscal actions on the economy itself.

4. Fiscal policy decisions are biased toward deficits during recessions, without the discipline of surpluses during periods of excess demand, and toward expenditure increases rather than tax reductions to provide stimulus.

For all these reasons, countercyclical fiscal policy, though it has been--and remains a valid tool for improving the performance of the economy, has limitations that are becoming increasingly apparent. Moreover, lagging productivity and a somber budget outlook for the next five years make budget discipline imperative. Consequently, a widespread search is on for some means of correcting the political biases that have resulted in sixteen deficits in the past seventeen years. But it is a long and perilous leap from this conclusion to a demand that there be no more deficits except in declared national emergencies.

A QUARTERLY DEVOTED TO BROOKINGS PUBLICATIONS

Vol. 16, NO 1. Summer 1970
Copyright 1979 by the Brookings Institution

Edited by James D. Farrell,
The Brookings Institution is an independent organization
drooted to monpartisan research, education, and publication

in economics, government, foreign policy

and the social sciences generally
Second-class postage paid a Washington, D.C.

USPS I D. No. 14209, Publication No. 951640
Postmaster: Change-of-address cards (Form 387°) should be sent to

The Brookings Institution
1775 Massachusetto Avenue, NW, Washington, DC 20026

The Balanced Budget Amendment
The most radical suggestion proposed in the name of fis-
cal responsibility is that deficits in the federal budget be
prohibited by constitutional amendment. Only by in-
corporating this requirement in the fundamental law of
the land, it is argued, can the pressures toward excessive
federal spending and deficits be held in check.

Analogies are sometimes drawn with similar requirements in state constitutions and city charters. However, such analogies frequently fail to point out that (1) the requirement for federal budget balance usually applies to receipts and outlays in the unified budget--which includes all types of purchases--while state and local governments usually balance the current account and finance capital outlays through borrowing; (2) individual states, unlike the federal government, have neither the

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