The R Street Institute asked several leading budget experts the following question:
“What is the most important federal budget process reform that would achieve a more sustainable fiscal outcome?”
R Street compiled the contributions in the post, “Virtual Federal Budget Reform Forum: Recommendations for Congress”. Read my contribution to the project below.
Offset Emergency Spending
Most budget experts will rightly tell you that Congress needs better fiscal rules. But as we’ve seen with the Budget Control Act and the recent Fiscal Responsibility Act, well-intentioned fiscal rules are useless if they have a massive loophole. In Washington, that loophole is the “emergency designation.”
Over the last three and a half decades, Congress has increasingly used emergency spending designations as a workaround to sidestep budget rules, avoid trade-offs, and pass massive spending bills with minimal congressional and public scrutiny.
From the wars in Iraq and Afghanistan to disaster relief and the COVID-19 pandemic, emergency designations have enabled more than $12.5 trillion in spending since 1991. That’s comparable to the entire amount spent on Medicaid and veterans’ programs combined during the same period, or roughly half the federal public debt.
This surge in spending has added an estimated $2.5 trillion in additional new interest costs, effectively throwing trillions of taxpayer dollars into a fire pit.
The problem isn’t just that Congress engages in spending binges during real crises (which they do). The problem is also that emergency designations have become a means of circumventing budget caps for routine, predictable expenses, such as law enforcement salaries or housing subsidies. This is largely because there is no expectation that emergency spending will be offset with spending cuts or revenue increases elsewhere. It is simply added to the national credit card, forever.
Luckily, we can learn a few lessons from our European neighbors on how to design good fiscal rules without abandoning the emergency exemption altogether.
Switzerland and Germany have both adopted debt brakes—binding constitutional fiscal rules that limit borrowing—which include mechanisms to exempt certain emergency spending, provided it is repaid over subsequent years. The COVID-19 pandemic response put these provisions to the test.
Since 2019, both Germany and Switzerland have reduced their governmental debt-to-GDP ratios, a sign of fiscal health. Meanwhile, nations with weaker fiscal rules, including the United States, have substantially increased their debt-to-GDP ratios.
Congress should follow Switzerland and Germany and adopt a debt brake that places binding constraints on borrowing, including a budget enforcement mechanism to track and offset new emergency spending. Should Congress violate spending limits or fail to offset new emergency spending, automatic, across-the-board spending reductions should serve as a backstop to offset new deficit spending over a five- or ten-year period.
Without a process to offset emergency spending, Congress will continue to use emergencies as a pretext to pass budget-breaking spending initiatives with no plan to rein in future spending.
Strong, well-designed fiscal rules anchor public expectations about politicians’ responsibility to budget in a forward-looking manner. Accordingly, emergency spending exemptions can provide the needed flexibility during a crisis without sacrificing economic and fiscal stability, so long as they are properly designed and fully offset.
Additional Resources:
The $15 Trillion Emergency Spending Loophole
Budget Restraints That Work: Lessons from Chile, Switzerland, the United Kingdom, and the United States