additional reason behind the move for a constitutional amendment that would require a balanced budget or a limitation on the growth of Federal expenditures?

Answer:

Balancing the budget and limiting the growth of federal expenditures are separate goals, although they are frequently held by the same people.

The question is not so much whether the federal budget should be balanced, but whether a constitutional amendment is the appropriate mechanism to achieve that balance.

At present, the U.S. Congress is the most powerful legislative body in the world. Central to its power is the ability to control spending. The constitutional amendments that have been proposed would limit the power that the Congress now enjoys. A question that the Congress should address is: Is it good public policy to do so?

One might also ask whether the amendments that have been proposed are workable and, if they are workable, whether the loss of Congressional flexibility would lead to better or worse public policy.

How an Amendment Would Differ from the Budget Process

Question: Five years ago the Congress passed the Congressional Budget and Impoundment Control Act of 1974 (Public Law 93-344) to "regain control over the Federal budget." Now there is a great public outcry over the size of the deficit and "government out of control." Proposals for constitutional amendments to require a balanced budget abound. What do they offer that the Congressional budget process now can't achieve?

Answer: The principal difference, Mr. Chairman, between the existing Congressional budget process and the proposals for a constitutionally required balanced budget is that the latter prescribe an

outcome.

P.L. 93-344 set up a process--a mechanism whereby the Congress could, for the first time, set for itself targets and ceilings on total federal expenditures, total federal revenues, and the size of the deficit. Prior to 1975, the Congress was unable to do even that. The federal budget total each year was simply the sum of hundreds of budget decisions taken separately. Now, the Congress debates and votes on the totals themselves.

Why hasn't the Congress balanced the budget since the passage of the Budget Act of 1974? Quite simply, the reason is that a majority of the Congress did not think a balanced budget was appropriate in those years. The new Congressional budget process was implemented in the midst of the deepest recession since the Great Depression of the 1930s. The first budget resolutions voted by the Congress for fiscal year 1976 contained deficits of over $68 billion.

Since voting those first deficits in 1975, the Congress has found that it is very difficult to make significant changes in the federal budget in any single year. If the Congress wishes to balance the budget, it will have to plan to do So over the next several

years, lest the momentum of federal activity overwhelms it each year. I recommended to the Congress two years ago that it begin adopting advance budget targets for two, three, or even four years beyond the budget year. By so doing the Congress can gain control of the future shape of the federal budget.

Question:

Reduced Control Over the Budget

Some newspaper commentaries on budget-balancing amendments have stated that such an amendment might actually cause effective control over the budget to be reduced. Is that possible?

Answer: A constitutionally imposed requirement that the budget be balanced would probably increase the pressure to cut spending. Cutting spending can be done in two ways--actually eliminating federal programs, or finding some way to put that spending or federal activity off of the budget.

Already there are six off-budget entities or funds, despite the recommendation of the President's Commission on Budget Concepts in 1967 to include all federal activities within the unified budget totals. If the current pressure on the budget were increased, there might well be pressure to put additional activities off-budget.

Besides causing the creation of additional off-budget agencies, a balanced-budget requirement might reduce effective budget control by causing more federal assistance to be offered through loan guarantees. The Budget Act specifically excludes loan guarantees from the totals of budget authority and outlays. Therefore, it in a sense created a new backdoor financing authority. If a program can package its assistance in the form of a guarantee of credit, it will not show up as budget authority or outlays. In a study released last August, CBO noted that federal loan guarantees are growing dramatically. Furthermore, the nature of guarantee programs is changing. Whereas in the past they were insurance programs for small loans to a larger number of small borrowers, such as home buyers, now loan guarantees are used to direct credit to large and unique enterprises. New York City was granted guarantees of its borrowing by the last Congress as a way of aiding that troubled city. Guarantees have been proposed for synthetic fuel plants and for other large, unique projects.

The basic problem with the shift to guaranteed loans is that the Congress is in the same position now with respect to controlling loan guarantees that it was in with respect to controls on direct expenditures prior to 1974. It does not set total goals for guaranteed lending, so it has no way of determining how much credit the federal government will guarantee in a fiscal year.

If expenditures were either cut or limited through a constitutional amendment, supporters of the programs that were cut might seek special provisions in the tax code that would, in effect, replace an expenditure subsidy with a tax subsidy. If spending limitations inhibit expenditures for BEOG ́s, tuition subsidies, CETA jobs, and the like, one response might be to try to subsidize the same activities through the tax code with new tax expenditures for tuition tax credits, employment tax credits, and the like. It is important to remember that, unlike direct expenditures, tax expenditures are

not

controlled by the appropriations process and frequently do not require periodic reauthorizations.

These kinds of practices--more activities being placed offbudget and greater use of guaranteed loans and tax expenditures--pose threat of decreased budget control, even though there might be a constitutional limitation or requirement for a balanced budget.

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Deficits in Other Countries

Question: Can you tell the Committee if the patterns of deficit spending followed by the United States are unusual when compared with those of other industrialized countries?

Answer: Such a comparison is difficult to make, and one should be wary of any set of numbers. This is because countries differ in their governmental structure and in the accounting methods they apply to their budgets. For example, while the United States operates on a federal system, many other countries have a unitary governmental

structure.

With these major caveats in mind, the Committee might find the following chart useful. It indicates that the U.S. deficits over the last few years are not dramatically out of line when compared with those of other major industrialized countries. It should also be noted, however, that some industrialized countries, such as France and West Germany, have run smaller deficits as a percentage of their gross national product than has the United States.

The chart is drawn from data from the Conference Board and the International Monetary Fund and appears in an article by Albert T. Sommers, "The Balanced Federal Budget: An Orthodoxy in Trouble."

Experience in States with Balanced-Budget Amendments

Question: What has been the experience in the states that have constitutional requirements for balanced budgets? Have such provi

sions been effective?

Answer: Mr. Chairman, it is important to remember that a direct comparison between state and federal budgetary practices is misleading in that, at least up until this time, the federal budget has been used as a tool to manage the economy while the state budgets have not had to fulfill this role.

The federal budget is also difficult to compare with state budgets because budgetary practices are not uniform across the states. All but two states (Connecticut and Vermont) have either a constitutional or statutory provision that requires that their operating budgets be balanced. But the states differ on such questions as how they treat their capital budgets, what type of accounting system is used, the amount of state expenditures that are on- and off-budget, and the degree to which the Governor has power to control spending so that deficits do not arise.

At the request of the Senate and House Budget Committees, the Congressional Budget Office is in the midst of a study that seeks to analyze the differences between state and federal budgetary practices. As part of that study, CBO has contracted with a major national accounting firm--Peat, Marwick, Mitchell, and Company--to develop a methodology for translating state budgets into a federal budgetary framework, and vice versa. This contract also calls for that company to carry out numerical budgetary translations for four selected states. This contract will be completed in April, and we would be happy to make the results available to this Committee.

What we can say at this early date is that the preliminary findings indicate that no simple conclusions can be drawn about differences between state and federal budgetary practices. This is because of the great variety that exists in the budgetary practices followed by the states.

Question: I am aware of reports in the media, as well as COMments by Chairman Magnuson, that state that if the Federal budget were reconstituted according to the accounting principles employed by most states, the deficit would vanish and the Federal budget would be in surplus. What is the basis for these views? Would you please

comment.

Answer: As I indicated in my response to your previous question, at the request of the Senate and House Budget Committees, we are in the process of determining whether this is correct. CBO's contract with Peat, Marwick, Mitchell, and Company calls for that accounting firm to translate the fiscal year 1978 federal budget into the budgetary framework used by four states--California, Illinois, New York, and Maryland.

We should be able to make these data available to this Committee in April.