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Budget enforcement procedures. (Annex II).

The budget enforcement procedures that have governed debates over spending and revenue expired at the end of FY 2002. These procedures (established by the Budget Enforcement Act (BEA) of 1990 and later extensions) consisted of annual caps on discretionary spending and a pay-as-you-go requirement (i.e. a budget neutrality requirement) for legislated changes in mandatory programmes or revenues. The BEA followed the late 1980s experience with the Budget Enforcement and Deficit Control Act of 1985 -- often referred to as the Gramm-Rudman-Hollings (GRH) Act (after the principal senators behind the legislation). GRH established a schedule of fixed federal deficit targets for 1986-91 which reached zero in the final year. The targets were to be enforced by a process termed sequestration, under which discretionary spending in many categories would be subject to across-the-board cuts in the event the deficit target was estimated to be breached. However, the deficit targets were not binding, in the sense that they could be overruled by subsequent legislative action, and they were not reached. The BEA replaced the deficit targets of GRH with a set of annual budget caps that limited discretionary outlays and the budget neutrality requirement on any law that would alter mandatory spending or revenues. The original law was set to expire in 1995, but was extended several times, most recently in the Balanced Budget Act of 1997.

Between 1991 and 1997, discretionary spending grew much more slowly than inflation, and sequestration was only necessary in the initial year of the new procedures, suggesting some positive effect from the BEA. However, the slowing in expenditure growth stemmed primarily from the defence cutbacks that followed the end of the cold war, and this would arguably have occurred without the BEA. Moreover, the emergence of growing surpluses by the latter half of the decade was followed by a breakdown in the tightness of the discretionary caps through a series of "emergency" appropriations in 1999 and 2000 and a lifting of the caps for 2001 and 2002 to accommodate new higher levels of appropriations.

Academic research has examined the efficacy of the budget enforcement provisions. Auerbach (1994) and Gramlich (1995) both note that the provisions regarding discretionary spending under GRH and BEA could be overruled by a simple majority of Congress and hence would seem to have little binding effect. Gramlich (1990) attributes the failure of GRH to this escape clause. Moreover, the appropriation caps have applied only to discretionary spending and mandatory spending has been (and will be to a larger extent in the future) the most important source of spending growth (Gramlich, 1995), implying that such caps (if renewed) will have less effect on future spending than they may have had in the past. Other observers are more sanguine, and attribute an important role for the budget enforcement provisions in restricting spending growth (e.g. Schick, 1997; Dharmapala, 2001). Given the impending spending pressures and the deterioration in the budget outlook relative to recent expectations, a renewal of the caps and pa y-as-you-go provisions of BEA could prove useful.

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Publication:OECD Economic Surveys - United States
Date:Nov 1, 2002
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