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94 IRET Byline 1 (1991)

handle is hein.taxfoundation/iretbyln0094 and id is 1 raw text is: February 4, 1991 No. 94 THE PRISONER OF OBRA Operating on the conviction that every cloud must have a silver lining, we have looked for a redeeming virtue in 1990's Omnibus Budget Reconciliation Act -- OBRA90. The going was hard. We did, however, find some salutary elements in the Act that warrant mention. For one thing, OBRA90 shifts the emphasis in federal budget policy from deficit reduction to curbing spending growth. Deficit targets for the current and succeeding four fiscal years remain in the law, but are much less of a driving force in budget decision making. Standing alone, this downgrading of Gramm-Rudman-Hollings deficit targets might be alarming; with the caps the Act imposes on the principal, broad spending categories in fiscal years 1991-1993 and on total spending in 1994-1995, however, policy makers appear to have recognized that it is government spending, not the budget deficit, that is the fiscal mischief maker. Another encouraging feature of OBRA90 is that the imposition of caps on government spending downplays spending baselines as a factor in decisions about spending for any program. Baseline budgeting keys spending decisions to the previous year's spending and the inflation rate. If last year's spending on a program, when assessed against mean- ingful criteria, was excessive, baseline budgeting almost certainly will result in even greater excess in this year's spending. Baseline projections of program outlays are useful as indications of how large government programs will become if not changed by legislation. They are not themselves, however, appropriate guides for policy decisions about how much to spend on a program in any particular period. OBRA90's spending caps may indeed have been determined primarily by reference to some baseline or other, but at least for the present these caps appear to have made baselines far less relevant to spending decisions. If -- and it's a big if -- the spending caps remain intact, they will prevent legislated spending excesses that aren't Institute for Research on the Economics of Taxation IRET. Bine curtailed by sequester in the year they occur from boosting spending in the succeeding fiscal year or years. Any such ex- cess, presumably, will reduce spending caps in the following fiscal year. Gaming the system by delaying budget decision making to the last possible moment will no longer be an effective device for evading the spending ceilings specified in Congressional budget resolutions. Spending curbs, moreover, are no longer to be merely a matter of language in budget resolutions. The spending caps specified in OBRA90 presumably apply to new budget autho- rity and appropriations, as well. It will no longer be possible for Congress to pretend fiscal prudence merely by resolving not to spend; it must also suit its appropriations to its resolve. Finally, OBRA90 appears to recognize that the major element of budgetary excess is the seemingly uncheckable expansion of so-called entitlement spending. Under OBRA90's pay-as-you-go, or PAYGO, provisions, new entit- lement legislation that is estimated to increase the budget deficit requires the President to issue a sequester order for across-the-board cuts in nonexempt entitlement outlays. Sequester, requiring the same across-the-board cuts, would also be ordered should any tax legislation be estimated to increase the deficit above target. PAYGO is far from an unqualified blessing, but at least it suggests the possibility that Congress recognizes the fiscal and economic peril in unchecked increases in these entitlement outlays. But we come to bury OBRA 90, not to praise it. The Act suffers three signally important deficiencies. For one thing, at a time when the expansionary steam clearly had gone out of the economy and when the loosening of tax restraints on the economy's growth was sorely needed, the Congress and the Administration combined forces to saddle the American people with the second-largest tax increase in the nation's history. For another, instead of urgently needed, straight- forward, meaningful reform of the budget-making process, the Congress and the Administration fashioned an extraordinarily complex set of rules to constrain tax and spending decisions in fiscal years 1991-1995. Thirdly, OBRA90 excludes Social Security trust fund receipts and outlays from budget reckoning. Doing so makes an artificial and false distinction between payroll taxes and all other taxes in the federal revenue system and between social security retirement benefits and all other federal transfer payments. It gives credence to the mistaken notion that the Social Security trust fund is a real trust fund with real income-producing assets. In short, it perpetuates myths about social security that have always seriously hampered good public policy concerning provision for retirement income. OBRA also ties the hands of tax policy makers. PAYGO holds tax policy hostage to politically-favored nonexempt IRET is a non-profit, tax exempt 501(c)(3) economic policy research and educational organization devoted to informing the public about policies that will promote economic growth and efficient operation of the free market economy. 1331 Pennsylvania Ave., N.W., Suite 515, Washington, D.C. 20004 Phone: (202) 347-9570

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