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Why incremental adjustments are a better approach to automatic budget enforcement

Why incremental adjustments are a better approach to automatic budget enforcement

Congress needs a new approach to automatic budget enforcement to replace the failed model that relies on across-the-board cuts. Instead, enforcement should help Congress budget responsibly in the first place by setting up automatic consequences that make small, repeatable, surgical adjustments to various federal programs.

This approach would increase the difficulty of building a political coalition to waive or otherwise turn off enforcement when triggered by irresponsible legislation. Incremental enforcement could complement existing budget tools, but it would be most effective to support reasonable budget targets applied to a comprehensive budget.

Automatic budget enforcement has been a paper tiger

Existing statutory enforcement mechanisms didn’t keep Congress from repeatedly increasing the Budget Control Act (BCA) caps on discretionary spending. They didn’t get Congress to meet spending and deficit caps under the Budget Enforcement Act of 1990 or the Bipartisan Budget and Deficit Control Act of 1985 or BBEDCA’s 1987 reaffirmation, respectively.

Automatic enforcement hasn’t stopped Congress from passing massive deficit increases through revenue and direct spending changes. Bipartisan bills directly waive the sequester of “non-exempt” direct spending programs under the Statutory Pay-As-You-Go Act of 2010. Statutory PAYGO can’t be waived in partisan reconciliation bills, but even then, the legislation’s deficit impact doesn’t result in offsetting automatic changes.

For example, the American Rescue Plan Act of 2021 (ARP) created $1.9 trillion in new federal debt through partisan reconciliation. Yet the December 2021 Consolidated Appropriations Act, 2022 pushed that year’s saving targets from January 2022 to January 2023, essentially doubling them. Congress did it again in the December 2022 Consolidated Appropriations Act, 2023. This piled the scheduled cuts for January 2022, 2023, and 2024 onto those in January 2025.

After ARP, Statutory PAYGO’s automatic across-the-board cuts to those direct spending programs without enough political support to get exempted would wipe most of them out. The savings still wouldn’t come close to meeting even one year’s savings targets. Congress has no appetite for this.

And, of course, federal budgeting is balkanized. Congress doesn’t coherently manage across the entire budget. Related, no overall budget targets exist for automatic enforcement to bolster.

A better approach to automatic enforcement

Automatic enforcement could be far more effective. Instead of instructing the Office of Management and Budget to impose goofy meat axe sequesters under Statutory PAYGO and discretionary caps, Congress could develop surgical, incremental changes to direct spending, and, if necessary, revenue provisions, along with limited discretionary savings for OMB to carry out. This approach to enforcement would be most effective in support of well-designed, overall budget targets.

The goal of this incremental approach is NOT for the changes to be triggered. The objective is to promote responsible budgeting in the first place to encourage better budget outcomes.

To be credible, however, automatic enforcement must be reasonable enough that Congress could let it happen: irritating, perhaps, but tolerable. This requires a softer touch than today’s draconian cuts, which Congress just turns off.

Last year, I described a limited version of this concept to support Social Security solvency. All beneficiaries face a 25% benefit cut under current law when the Social Security Old Age and Survivors Insurance trust fund runs out of reserves in 2032. The proposal would delay insolvency by making small, repeatable, and reasonable changes to various spending and revenue parameters. Social Security solvency can — and perhaps should — be separate from automatic triggers that apply to the rest of the budget.

Re-engineering automatic enforcement has three pillars

First, replace one-year savings with 10-year savings. Large spending cuts in a single year, as Statutory PAYGO requires, means sudden, dramatic policy changes. Reducing spending by, say, $100 billion over 10 years would let savings start small and grow as they phase in. It allows many more palatable options, as the recently updated CBO budget options show.

Second, replace across-the-board cuts with small tweaks. Today’s Statutory PAYGO cuts would entirely wipe out some programs, while the BCA’s discretionary sequester applied equal cuts to all appropriations programs regardless of value. As we have seen, neither is politically sustainable.

The alternative is to identify or create parameters in law where small, incremental changes can happen each time that budget enforcement is needed, and to compile enough of them that those changes can meaningfully affect budget outcomes. Targeted changes can also add complexity to frustrate coalition building by special interests that might otherwise undermine sound budgeting.

Third, share tolerable levels of pain. This is a political calculation. Wiping out some programs while not touching others doesn’t distribute the burden across interests that are salient to an overwhelming number of members of Congress.

For example, the current approach doesn’t give spending hawks much reason to come to the table. Imposing cuts only on social programs or on security spending or, on the other hand, only increasing revenue cannot survive shifting political power in Congress. Everyone must dislike something — but not too much — for automatic enforcement to work.

Considerations for choosing incremental adjustments

  • Framework: Incremental enforcement would be compatible with overall budget targets as well as with Statutory PAYGO’s scorecards, instructions for OMB to carry out automatic enforcement, and other aspects. As an aside, Statutory PAYGO has many flaws, but fixing them is pointless without credible enforcement.
  • Adjustments: Incremental enforcement relies on finding or creating program features that allow small, repeatable changes.
  • Timing: A ten-year savings window lets different options take effect immediately, with a lag, or staggered, depending on the adjustment.
  • Allocations: Setting overall ratios for savings targets between and within lists of policy adjustments is the central design challenge.
  • Stacking/Interactions: One-time and repeated adjustments of each parameter must make sense individually and in the context of others.

Illustrative options for incremental enforcement

Table 1 lists illustrative options for incremental direct spending savings. Rough estimates are only available for some options. Collectively, triggering each option only once could reduce spending by at least $340 billion over a decade. Repeated incremental adjustments could reduce spending by $1.8 trillion or more over a decade.

These extrapolations are only meant to illustrate the incremental adjustment framework as a proof of concept. Ultimately Congress would need authoritative estimates from the Congressional Budget Office to select and to calibrate options.

Table 1: Direct spending options for incremental enforcement

Option U.S. Code Citation(s) Savings, CBO Option Savings, per increment
Medicare: Increase eligibility age of 65 by 3 months per birth year for two birth year cohorts 42 USC 1395c $22 B $11 B
Medicare: Part B/D means testing, increase premium percentages by 2 PP 42 USC 1935r(i)(3)(C)(i)(III), 1395w-113(a)(7) $406 B $80 B
Medicare: Part B means testing, suspend income threshold inflation adjustment for 2 years 42 USC 1395r(i)(5) $57 B $10 B
Medicaid FMAP: Increase the statutory State percentage ratio from 45% by 1 PP 42 USC 1396d(b) $667 $133 B
Medicaid: Reduce PPACA expansion FMAP from 90% by 5 PP 42 USC 1956d(y)(1)(E) $604 B $100 B
Federal Employee Retirement System (FERS): Increase eligibility age for immediate retirement from 62/60 by 6 months 5 USC 8412(h)(1)(E) n/a n/a
FERS: Increase eligibility ages for early retirement by 1 year 5 USC 8414(a)-(c) n/a n/a
FERS: Reduce pay multipliers by 0.05 PP for future accruals 5 USC 8415 n/a n/a
FERS: Increase high-three-years-of-pay factor by 3 months 5 USC 8401(3) n/a n/a
Federal Employee Health Benefits Program (FEHBP): Reduce 72% weighted average/ 75% per plan limit on employer subsidy by 1 PP 5 USC 8906(b)(1), 8906(b)(2) n/a $4 B
Military Retirement: Reduce 2.5% pay multiplier by 0.05 PP for future accruals 10 USC 1409(b) n/a n/a
SNAP: Reduce eligibility limit of gross income of 30% above poverty by 1 PP 7 USC 2014(c) n/a n/a
SNAP: Increase definition of elderly from 60 years by 6 months 7 USC 2012(j)(1) n/a n/a
TRICARE Prime: Increase annual enrollment premiums in the retired category by 2 PP above the indexation 10 USC 1075a(b)(2) n/a n/a
Premium Tax Credit: Increase the premium percentages by 1 PP 26 USC 36B(b)(3) n/a n/a
Crop Insurance: Reduce taxpayer subsidy rate from 60 percent on average by 4 PP 7 USC 1508(e)(2) $28 B $5 B
Totals >$1,784 B >$343 B

Incremental enforcement on revenue and direct spending

Although applying incremental enforcement only to spending savings may be ideal on policy grounds, it may not be politically sustainable. Revenue may have to be included too. The best options would include reducing the value of tax credits, exemptions, exclusions, and deductions (other than cost recovery provisions). Increasing income tax rates would be among the worst options.

Putting it all together, Congress would set a ratio between 1) direct spending reductions and 2) revenue increases as well as 3) a tolerable constraint on appropriated spending (see next section). OMB would use the ratio to subdivide savings between the direct spending and revenue lists and work down the items on each until savings meet the respective targets. If making every adjustment in a list wouldn’t be enough to meet a sub-target, OMB could repeat the process until reaching each savings target.

For example, consider a 4:1 ratio between spending savings and revenue and a savings target of $200 billion over ten years. At least $160 billion in savings would come from reductions in spending growth, while at least $40 billion would come from revenue.

The options above are more than enough to reach the $160 billion direct spending savings sub-target, so only some options would be used that year. The next time savings would be needed, the spending list would start with the next item on the list. The same approach would apply to the revenue side.

Discretionary spending requires a different approach

A tolerable constraint on discretionary spending could help enforce overall budget targets. Appropriated spending, however, tends to be more politically sensitive per dollar than other areas of the budget. Practical limits exist on the potential for automatic savings from appropriated accounts.

As elsewhere, discretionary savings would reflect the change in the baseline over the full ten-year budget window. The BCA framework of defense and non-defense discretionary caps could work for modest savings, as could a single discretionary cap. Depending on inflation and other factors, a one-year freeze on appropriated spending with baseline growth thereafter could produce hundreds of billions in savings. Even a small deviation from the baseline in one year could yield substantial savings over a decade.

When setting the rules for OMB to apportion statute-directed, incremental savings across discretionary spending, direct spending, and revenue, it may be best to set a tolerable limit for appropriations savings first and then apportion remaining savings targets between the other two categories. Too much restraint from discretionary accounts could tempt Congress to waive enforcement entirely. Beyond some threshold, ratio-based savings targets across all three categories may undermine the durability of incremental enforcement.

Moreover, incremental enforcement could let Congress reallocate savings across categories. That is, to avoid pinching appropriations accounts, Congress could produce additional savings in other categories, or vice versa.

Again, for this to work, all significant blocks of members would need to dislike some triggered savings. That’s what would push most members to budget responsibly in the first place. Fiscal structures that tilt too strongly in one direction or another would be less likely to survive shifts in political power.

Applying incremental enforcement to a comprehensive budget and reasonable targets

Statutory PAYGO and BCA-style discretionary caps are artifacts of the Congressional Budget Act’s separation between appropriated spending and the rest of the budget: revenue and direct spending. This balkanization complicates the budget process, undermines Congress as a deliberative institution, and produces poor results.

Congress could instead have a comprehensive budget bill each year that meets reasonable budget targets reinforced with politically sustainable automatic enforcement like the proposal here.

Statutory PAYGO, budget reconciliation, and various other features of today’s budget process are complicated. They have not, however, delivered for the American people. Congress can strengthen its power of the purse and deliberative capacity by making the budget process more comprehensive, more straightforward, and more reasonable.