How the U.S. Can Achieve Fiscal Sustainability

A Call for a Council on Fiscal Sustainability

by Jurgen Brauer and Dick Lepre

The President’s Council of Economic Advisers released its annual report last week. Among other conclusions, it finds that “It is essential that the United States follow a fiscal policy that stabilizes the debt-to-GDP ratio at a feasible level”. Similarly, the Congressional Budget Office issues regular warnings about the lack of public finance sustainability. Nor is the United States alone. The European Union is going through contortions to deal with the specter of Greece defaulting on its public debt.

Congress recognizes that the country’s debt path is unsustainable. While the economics of the matter is straightforward—cut spending, raise taxes, or both—the politics is not. But if voters are not going to insist on fiscal sustainability from Congress and if Congress is not going to control public finances on its own accord, then one must conclude that the fiscal process is lacking a necessary ingredient. To supply it, we propose the creation of a permanent Council on Fiscal Sustainability. Under enabling legislation, its members—presumably economists—would be appointed by the President, and confirmed by the Senate, to nonrenewable 14 year terms and report to Congress twice a year. This is not a revamped Congressional Budget Office, nor a refurbished Council of Economic Advisers, but an independent agency akin to the Federal Reserve Bank.

The CFS would have a single task: each year it would place before Congress an annual maximum budget deficit figure that is economically sound over the medium to long term. In planning the budget, Congress would look at spending and revenue and, if the difference exceeded the CFS number, it would have to cut spending or increase taxes or some combination of the two. Our notion is not simply idealistic but recognizes the difficult decisions which politicians face and the inability of the present structure to act in the interests of the nation's long-term economic health.

The enabling legislation should mandate that the deficit limit presented to Congress by CFS must be accepted unless it is voted down by a resolution of disapproval. There is precedent: the Base Realignment and Closure (BRAC) process regarding military base closures is an example whereby a “this takes effect unless you vote to disapprove” process helped achieve the desired goal in a manner that was politically acceptable.

Creation of the CFS gives each member of Congress a new degree of political freedom. “You folks needed those roads, and under the CFS deficit limit, taxes had to increase to pay for them”. Or, “I voted to limit spending because under the CFS deficit limit, the alternative would have been to raise your taxes”.

We know from the experience of the very many countries—eighty nations as of 2009—that have introduced so-called fiscal rules that two issues are key: the rule needs to be credible, and it needs to be flexible. For instance, the United Kingdom put its fiscal rule in abeyance when it found that it was not sufficiently flexible to deal with the current extraordinary economic environment. Thus, writing legislation to set up the Council will need to address budgetary eventualities, pre-commitments of when it is, and is not, permissible to breach annual deficit limits. It would also have to come with phase-in provisions, such as those passed in Germany last year so that the transition from unsustainable to sustainable public debt can proceed in an orderly way.

Flexibility, however, can make rules less credible. To be credible, ultimately the Council needs to be free of short-term political meddling. To deal with that problem, Germany, Poland, and Switzerland for instance changed their constitutions. For the United States, we believe, that structuring the Council along the idea of an up or down vote on the Council’s recommended annual deficit number might just break the current log jam.

This is a detailed IMF report enumerating the types of fiscal rules which exist and the nations in which they are operating. Read page 5 of that report if you are in a hurry.

Jurgen Brauer is Professor of Economics, James M. Hull College of Business, Augusta State University, Augusta, GA.

Dick Lepre is a Senior Loan Officer with RPM Mortgage of San Francisco, CA

Comments

[James Studley]

I think this is an excellent idea. We must at least attempt to control the budget. If congress won't then the grass roots efforts of the people who it is affecting should speak out.

[John]

I'm afraid another Council won't help.

[Dick Lepre]

John,

This is not merely another council whose power is merely to advise. It has the power to cap the deficit and that will help.

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