Description

Executive Summary

The return to large federal deficits after a brief

period of surpluses shows that it is very difficult

to enforce fiscal discipline within the current

budget process. Strong tax revenue growth and

falling defense spending during the 1990s resulted

in a balanced budget in fiscal year 1998 for the

first time in 29 years. But budget balance did not

last long because Congress has opened the flood-gates

to rapid defense and nondefense spending

increases in recent years. The war on terrorism

has given Congress and the administration political

cover to further increase the budget and side-step

needed spending tradeoffs.



Large deficits may renew interest in budget

process reforms to restrain spending. Indeed, in its

latest budget the Bush administration proposed

creating a new statutory line item veto that would

be linked to deficit reduction. In the 1980s and

1990s, there were repeated efforts to impose

greater discipline on the budget process by enacting

both a line item veto and a balanced budget

amendment to the Constitution. A balanced budget

amendment with a supermajority requirement

to protect against tax increases would be an effective

restraint, but it has so far failed to gain the

needed political support. Meanwhile, a statutory

line item veto was passed in 1996 but was subsequently

struck down by the Supreme Court.



This study discusses lessons learned from those

past reform efforts and proposes a new "balanced

budget veto" mechanism. Under this mechanism, the

president would be empowered with an item reduction

veto only during sessions of Congress following

fiscal years with budget deficits. The item reduction

veto would provide the president with a tool to cut

spending when Congress has failed to do so.



Such a veto power, however, would not

enshrine balanced budgets as constitutional doctrine.

Instead, it would provide Congress an

incentive to curb deficits and regain budgetary

power that has been temporarily bestowed on

the president. Congress would be institutionally

penalized for not limiting spending, and presidents

would have a bias against raising taxes so

as not to lose their veto power.



Congress and the administration need to focus

on institutional reforms to mend the broken budget

process. They should consider adopting a bal-anced

budget veto as a new tool to encourage fiscal

responsibility through spending restraint.