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Budget Lessons from the States for the Feds:How to Radically Change Expectations about the Federal

by Dr. Carolyn Bourdeaux, Senior Visiting Scholar, University of Georgia; Board Member of the Concord Coalition; Former Member of Congress from Georgia’s 7th District

Now that we’ve come through the debt ceiling drama, most of us who want to see more fiscal responsibility at the federal level can agree that we got to a reasonable result, but the process was - to put it mildly - a problem. We cannot use the full faith and credit of the nation and the economic health of the global economy as a bargaining chip to restore fiscal responsibility. There has to be a better way. In fact, many of us who study state budgeting annually observe budget processes that lead to (largely) fiscally responsible decision-making and do not require high stakes hostage taking to get there. As someone who has worked at both the state and federal level, the differences are striking and suggest that some serious thought should be given to translating some valuable lessons of state budget processes and policies to the federal level. The most obvious place to begin is that almost all states have some sort of statutory or constitutional balanced budget requirement. The objection to this at the national level is that the federal government may need to run deficits to reboot the economy or respond to emergencies – but we are now running nearly $2 trillion-dollar annual deficits when times are good. And without any procedural restraint to invoke, it is very hard for policymakers to temper expectations and build a culture of fiscal discipline consistently over time. While balanced budget requirements at the state level are often perceived as strictly binding, state budgeters can deploy any number of tricks to circumvent these requirements. States can short their pension obligations, issue debt to cover operating expenses, create off-the-books entities to issue debt, pass the buck to local governments, and game the revenue estimate - just to name a few gimmicks. Yet, by and large, year after year, most states pass fiscally constrained budgets. Balanced budget requirements are as much about perception than about a hard and fast rule. The balanced budget expectations also set the groundwork for everything that follows. If everyone believes you have to have a balanced budget on an annual basis, then the revenue estimates at the beginning of the year need to be conservative and binding so that the state doesn’t run over budget by the end of the year. Cuts in taxes or increases in spending have much more tangible consequences because there are clear and transparent tradeoffs experienced within a single fiscal year – the fiscal pain typically cannot be pushed to amorphous future years as so often happens at the federal level. The state experience suggests that balanced budget requirements don’t have to be airtight. They can accommodate emergencies, but they need to be credible enough to create an expectation around fiscal restraint that a broad swath of the population accepts. During the Great Recession, I was director of Georgia’s Senate Budget and Evaluation Office. The legislators I worked with, most of whom were Republicans, hated making budget cuts and certainly hated increasing taxes to balance the budget. Many feared that balancing the budget would end their political careers, but they grit their teeth and did it, cutting billions out of a $20 billion state budget, eliminating programs, raising taxes, and imposing a two-week furlough on all state employees. The budgets passed by broad and bipartisan majorities, and despite their fears, no one that I’m aware of ever paid an electoral penalty for these actions. A legislator could stand in front of constituents and show a graph of the revenue shortfall and explain that the budget had to be cut and taxes raised because the state was required to balance its budget. Interest groups and advocacy organizations certainly resisted the cuts or tax increases, but the debate centered more around the fairness of shared fiscal pain rather than whether cuts or tax increases should be made at all. At the federal level, this dialogue has completely broken down. Money is no object. And while I applaud the effort to impose spending caps, legislators are going to find it very hard to enforce them when it comes to the actual appropriations and revenue bills. You can’t ask one group to accept fiscal pain if it is not perceived as necessary in the first place – after all the federal government can run deficits. It has before, why not again? A budget process needs to accommodate the very human dimension of cutback budgeting, which is that it is very hard to tell someone that they are going to have to sustain a loss. And how people perceive a loss is heavily influenced by context. Public sector budgeting, state or federal, does not resemble the textbook “rational allocation of priorities.” Fiscal decisions are deeply affected by an interaction of political forces with culture, community expectations, and common human cognitive errors such as loss aversion. Fiscal discipline is as much about the habits of the heart and mind than about any process or rule. However, the process and rules do matter and inform the presentation of tradeoffs as well as help establish the expectations around a budget. With deficits projected to average roughly $2 trillion over the next 10 years, balancing the federal budget in a single year or even over ten years is likely more than our political system or even economy can sustain. One way or another, however, the federal government needs a comprehensive statutory change that sets realistic, enforceable deficit and debt targets. We need to radically upend the expectations around the budget so that the effort to restore fiscal restraint becomes a systemic part of the debate year after year – as opposed to requiring one-off moments of heroic political sacrifice or crazy political maneuvers such as hijacking the national debt limit. And while it is not entirely clear what form this should take; it’s time to start the debate. The contents of this guest column reflect those of the author and not necessarily those of Barrett and Greene, Inc.


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