912 August 19,1992 WASHINGNINS BUDGET .BINGE GETTING EVEN WORSE Daniel J. Mitchell John M. Olin Fellow INTRODUCTION statistics recently released from the Office of Management and Budget (Om) con firm that the tax md spcnSng increases concocted by the White House and Congress have been an unmitigated disaster. Rather than co ntrol spending, cut the deficit, and reig nite the economy, the 1990 budget agreement has led to accelerating spending, a surge in red ink, and economic stagnation.

According to the Mid-Session Review of the Budget, issued July 24, federal spending has cli mbed to $1.407 trillion for fiscal 1992, an increase of $262.9 billion in just three yam To make matters worse, spending now is projected to climb by another $96.8 bil lion in fucall993, bringing federal spending over the $1.5 trillion mark. The Mid-Ses s ion Review also reveals that the budget deficit for the year will reach an all-time high of 333.5 billion in fiscal 1992, a staggering $180 billion higher than the figure three years ago.

The dismal fiscal pdicy record of the last three years largely is th e result of the 1990 budget deal. That ill-fated agreement between Congress and the White House was sup posed to reduce budget deficits by a total of almost $500 billion over the 1991-1995 pe riod. In every possible way, however, the deal failed. Accordin g to the Mid-Session Re view The cumulative budget deficit for the 1991-1995 period now is expected to be 707.8 billion higher than the figure projected in the 1990 Mid-Session Review made befare the deficit reduction deal was consummated. The budget agree ment was supposed to cut the deficit $500 billion.

THE BOITOM LINE: an error of $1.2 trillion. v a The Budget Summit: Promising $500 Billion Reduotion in Federal Deficit, Delivering $708 Bi llion increase Bllllonm of l901 Dollua $860 260 aaoo I Projected spending levels, instead of falling by $325 billion between 1991 and 1995, as negotiators in 1990 pred~cted, will be $179.8 billion above the 1990 Mid-Session Review projections, according t o this summers Review.

THE BOTTOM LINE: a $500 billion e& by the budget deal supparters The tax hikes in the budget deal were supposed to generate $175 billion of ad ditional Tevenlie between 1991 and 19

95. But this summers Review predicts that revenue during this period will be $528.5 billion below 1990 Mid-Session Review projections.

THE BOTTOM LINE: an envr of over $700 billion.

The budget deal gutted the 1985 Gramm-Rudman-Hollings Deficit Reduction Act, the law which successfully lowered the growth of federal spending and re duced the federal budget defxit when it was enforced. The 1990 agreement re placed Gramm-Rudman with a law, the so-called Budget Enforcement Act that permits spending to increase at much faster rates.

THE BOTTOM LINE: Inflation-adjusted domestic spending is growing mare than seven and one-half times faster now than it was under Gramm-Rudman.

Despite the budget deals clear failure, as evident from the governments own statis tics, Congress and the Admin%ration seem determined to s tick to the terms of their bud get fiasco. But to those lawmakers and policy makers concerned about todays stagnant economy and about Americas future prosperity, the policy lessons of the latest budget figures are cleat: If the United States economy is to avoid being bankrupted by Washing ton, Congress and thewhite House must agree to urgent steps to control spending, pf etably by returning to the budget discipline of Gramm-Rudman. And as the sorry exM ence of the 1990 agreement shows, any agreement to con t rol spending must not, under any circumstances, contain an increase in taxes 2 AMERICA'S FEDERAL SPENDING CRISIS 5 The economic crisis now afflicting America never should have happened When Ron ald Reagan left office in January 1989, the economy was expan ding, sedg records for job creation and peacetime economic growth. Thanks in large part to Gramm-Rudman the federal budget deficit had fallen to 3.0 pexcefit of gross domestic product (GDP) in 1989, down from a peak of 6.3 percent in 19

83. The falling def icit was not just the result of spending restraint. The job mation and economic growth during the 1980s resulted in I wmrd~tax~nuesyflhg iRte&e4edemGF-w,-even though critics had charged that reductions in marginal tax rates in the early 1980s would leave the federal govern ment "revenue-starved."

Unfortunately, the Bush Administration and Congress were not content to leave well enough alone. In 1989, the White House and Congress used budget gimmicks and ac counting tricks to evade Gramm-Rudman's fiscal dis cipline and thus to permit a substan tial rise in fiscal 1990 federal spending. This reckless policy increased the gap between the projected deficit and the legally mandated Gramm-Rudman deficit target far the fol lowing fiscal year. As a result, when fac e d in 1990 with the prospect of having to duce projected fiscal 1991 spending increases by large amounts to comply with Gramm-Rud man, Congress and the White House decided instead to negotiate a new budget plan rather than make long-overdue cuts in the blo a ted federal budget. Ironically, although supporters ~f the budget deal claimed the agreement was to reduce budget deficits, the budget summit actually was convened to avoid the genuine deficit reduction which wodd have occumd automatically had Gramm-Rudma n been enforced view issued by OMB this July 24 reveals just how much the country's fiscal situation has deteriorated since Rei:p left office X Federal spending is projected at $1.407 trillion for fiscal 1992, some $262.9 bil lion higher than it was when B u sh took office. By next year, it is projected to be 1.504 trillion, QI $359.7 billion higher The results of this irresponsible budget policy m now evident. The Mid-Session Re X Federall spending now consumes 24.0 percent of GDP, up from 22.1 percent in 19

89. By next year, federal spending is projected to consume 24.3 percent of GDP X Over eight years, Ronald Reagan reduced domestic spending from 14.83 percent of GDP down to 12.24 percent of GDP. In just three years, George Bush and Con have gedtted domest ic spending to climb to 14.92 percent, wiping out the gains achieved during the Reagan years X F inflation-adjusted 1987 dollars, domestic spending has increased by a total of $134.1 billion from fiscal 1989 to fiscal 1992, an average annual inmase of 44. 7 billion during the Bush Administration. This compares with a total increase betwem fiscal 1981 and fiscal 1989 of $22.54 billion, averaging $2.82 billion an nually under Reagan, and a total increase between fiscal 1977 and fiscal 198 1 of 61.24 billion, o r $15.31 billion annually, during the Carter Administration X Inflation-adjusted domestic spending has climbed by an average of 7.14 per cent annually under lush, or m~ than thirteen times faster than the 0.53 per 3 K K K Y Y Y x cent average annual growt h under Reagan and neariy two and one-half times faster than the 2.95 percent average annual domestic spending growth under Carter.

The budget deficit, which was 153.5 billion in fiscal 1989, when Bush became President will be $333.5 billion this fiscal ye ar and is expected to reach an all time record of $341.0 billion next fiscal year. This $187.5 billion jump repsents an increase of 122 percent in just four years In the summer of 1990, before taxes were raised, the projected budget deficit for 1993 was $ 135.2 billion3he currenf eStimate fof thafyear is $341.0 billion.

This represents a $205.8 billion increase in the projected deficit since the deficit Fuction tax increase was signed into law.

The cumulative budget deficit for the 1991-1995 period now is expected to be 707.8 billion higher than that projected just two years ago. Advocates of the budget summit argued that this agreement would reduce the 1991-1995 cumulative deficit by $500 billion. Supporters of the budget agreement erred, in other words b y approximately $1.2 trillion in the budget impact of their actions (seeTable 1 Spending for the 1991-1995 period is expected to be $179 billion higher than projected in the summer of 1990Lnot $325 billion lower as the budget summit advocates estimated the i r agreement would achieve. This repsents an em of ap proximately $500 billion (see Table 2 On the revenue side, budget summit defenders were off by $700 billion, losing 3 of previously projected revenue for every $1 of additional revenue the ill-fated dea l was supposed to generate. Rather than raising $175 billion of new tax revenue during 1991-1995 when compared with baseline forecasts, as the budget agreement assumed, total revenues now are projected to be $528.5 billion lower than they were estimated to be in the summer of 1990-befm the tax hike (seeTable 3 The 1990 budget agreement included provisions which eliminated the fixed an nual deficit targets that were the key feature of the 1985 Gramm-Rudman Hollings Deficit Reduction Act. These fued deficit t a rgets effectively capped the growth of federal spending since automatic budget cuts, known as sequestration would occur if lawmakers attempted to increase spending by more than the sum of projected revenues plus the allowable deficit for each year. The Bu dget Enforce ment Act

EA which replaced Gramm-Rudman after the budget agreement does not cap the total growth of federal spending.

Supporters claimed that the BEA was an improvement over Gramm-Rudman, but inflation-adjusted do mestic spending has grown at an 8.38 percent annual av erage rate under the new budget law, or more than seven and one-half times faster than the growth rate under Gramm-Rudman.

The BEAs caps on domestic discretionary spending have failed to curtail spend ing. Inflation-adjusted domestic discretionary spending under the BEA, for example, is climbing at a 5.4 percent annual clip, or more than five times the 1.01 percent average annual growth rate under Gramm-Rudman. I 4 Table 1 The Budget Summit's Dismal Fa ilure, Part I Def icit Estimates billions 1091 1002 1993 1994 1095 1990 Mid-Session pre-budget deal) 231.4 205.0 135.2 79.6 76.8 1 992 IMid-Sessi&n ,2

7 e: L J 333.5 1 341.0 274.2 218.4 Difference +37.3 128.5 +205.8 +194.6 +141.6 1 3 Source: Mi&Session Review of the Budget, Office of Management and Budget, Washington, D.C July 19

90. Mi&Session Review of the Budget, Office of Management and Budget, Washington, D.C July 1992 Table 2 The Budget Summit's Dismal Failure, Part II Spending Estimates billions 19 91 ,1092 1993 1994 1095 1990 Mid-Session pre-budget deal) 13s. 1 1399.5 1413.9 1442.7 1517.9 1992 Mid-Session 1323.0 1407.1 1503.9 1527.3 1544.8 Difference -30.1 +7.6 +90.0 +84.6 +26.9 Note: Spending In 1991 and 1992 actually was, and is, higher than list ed because allied contribu tions for the Gulf War are 9:intcd as "negative spending' rather than revenue. while the spending numbers should be adjusted io increase 1991 and 1992 spending by those amounts, official Admin istration figures are used here.

Source: Mi&Session Review of the Budget, Office of Management and Budget, Washington, D.C July 19

90. Mid-Session Review of the Budger, Office of Management and Budget, Washington D.C July 1992 Table 3 The Budget Summit's Dismal Failure, Part 111 Revenue Est imates billions 1991 1002 1993 1994 1095 1990 Mid-Session pre-budget deal) 1121.7 1194.5 1278.7 1363. 7 1441.1 1992 Mid-Session 1054.3 1073.6 1162.9 1253.1 1326.4 Difference e 4 -120.9 -1 15.8 -1 10.0 -1 14.7 Source: Mid-Session Review of the Budget, Offi ce of Management and Budget, Washington, D.C July 19

90. Mid-Session Review of the Budget Office of Management and Budget, washington, D.C July 1992 5 11 With Gramm-Rudmans cap on overall spending gone, Congress and the Admin istration have allowed entitle ment spending to grow unchecked. Under the BEA, inflation-adjusted entitlement spending is growing at an annual average rate of 9.43 percent, or more Ban eight times faster than the 1.13 percent annual growth rate under Gramm-Rudman uted to bailing out th e deposit insurance PHONEY EXCUSES FOR THE FISCAL CRISIS get, Oftice of ManWment and Budget, Washington, D.C JUIY 1892 r? I E 7.e I y L Some supporters of the budget deal still maintain that the agreement was sound fiscal policy. They have even gone so far as to develop theories explaining why fiscal policy would be in even worse shape if the 1990 package had not been enacted. Upon closer ex amination, however, these excuses are shown to be phoney Phoney Excuse #I : The spending rise is due to the savings a n d loan bailout. I I Some critics blame the deposit insur yce bailout for the deteriorating budget eytimates. But Table 4 indicates that de posit insurance spending is no excuse for the spending and deficit picture. Inflation adjusted domestic spending-whi c h ex cludes defense, international spending net interest on the debt, as well as deposit insurance outlays-is growing nearly 16 times more each year under Bush thy it did under Reagan. Of the $1.2 trillion def icit m revealed by the Mid-Session Re view, l e ss than $100 billion can be attrib Table 4 Average Annual Domestic Spending Growth billions $1987 Annual Annual Dollar Percent Increase Change Carter $15.31 2.95 Reagan $2.82 0.53 Bush $44.70 7.14 sourcu SurQet d um u~fed states 00vrammmc FYI Hlstuical Te blee, office of Management and Budget, Wash- ington, D.C Fekuay 1 8

92. MMesskm Rdew d iim Bud More detailed budget fips show that both domestic discretionary spending and enti tlement outlays have climbed rapidly. As Table 5 illustrates, Bush clearly reve rsed Reagans policies and easily has outspent Carter I Phoney Excuse #2: The recession caused deficits to climb.

Some supporters of the budget deal concede that budget deficits have increased, but nonetheless argue that deficits would have increased even more in the absence of a bud get deal. According to this novel theory, the recession caused tax revenues to fall and led to higher outlays far safety-net programs, the combination of which increased deficits by amounts that we= not expected when the agree ment was hatched in 19

90. Following this line of reasoning, deficits over the 1991-1995 time period would be almost $500 bil lion higher were it not for the budget deal.

This argument puts the cart before the horse. It makes sense only if one believes th at the recession was completely unrelated to the record tax increase. While it is certainly true that the recession had many causes, including other policy mistakes such as the in 6crease in reption since 1989, it is pat ently absurd to claim that the rec o rd tax in crease imposed by the 1990 budget deal had no impact on the econ omy. Opponents of e-199.0 deal~m right when they warned, as they did over and over again that the tax inmases would hinder em nomic growth by re ducing incentives to work, save, an d in Dollar Percent Dollar Percent Increase Change Increase Change 6actW 2.24 0 J.4J 13.07 3.7 Reagan 2.30 -1.24 5.11 1.32 Table 5 Average Annual Domestic Spending Growth billions $1 987 Discretionary Entitlements I Annual Annual Annual Annual Source: Budg e? of the United States Government, N1993; Historical Ta bles, Office of Management and Budget, Washington, D.C., Februaly 19

92. Mid-Session Review of the Budge Office of Management and Budget, Washington, D.C July 1992 vest. The opponents pointed out tha t a tax increase would slow growth and that a smaller than expected tax base would produce less tax revenue than summiteers proje ted. Critics of the budget deal did warn that high taxes might cause the deficit to rise. 5 PHONEY EXCUSE #3: Short-term hike s in taxes and spending were the price for getting Congress to go along with tight spending controls In the future Gramm-Rudman, defenders of the agreement assert, was not working and needed to be replaced by more effective budget rules. Supporters argue t hat the Budget Enfme ment Act imposes strict controls on federal spending in the future, and that these con trols will reduce future deficits.

The evidence clearly shows, however, that federal spending is &rowing much faster under t he BEA than it did under Gramm-Rudman. Indeed, one of the biggest mistakes of the budget summit was th elimination of the fmed annual deficit targets mandated by the Gramm-Rudman Act. 3 1 2 3 William G. Laffer, III and Nancy Bod George Bush's Hidden Tax: The Explosion in Regulation Heritage Foundation Backgrounder No. 905, July 10,1992.

Daniel I. Mitchell Mr. President Keep Your Promise: No New Taxes," Heritage Foundation Backgrounder No 769, May 18,1990.

Gramm-Rudman imposed maximum annual deficits designed to balance the budget by fiscal 19

93. If policy makers did not bring the deficit for the next year's budget within $10 billion of the mandated deficit target, automatic spending cuts, known as sequestration, would occur to bring the deficit down to t he legally required level.The key feature of Gramm-Rudman was the creation of a limit on total federal spending since lawmakers could spend no more than the sum of projected revenues plus the maximum allowable deficit If projected spending did exceed that level, sequesrration occurred c 7 To be sure, Gramm-Rudman itself was far from perfect. When the law was in force lawmakers-resorted to overly optimistic-ixonomic assumptiqns to evade the laws intent.

Budget gimmicks and accounting tricks often were uc&d to delay long-overdue spend ing cuts and program reforms. But for all the laws shortcomings, it worked tolerably well, and spendin w at a slower rate under Gramm-Rudman than it did before the laws enactment. Mmw, spending under Gramm-Rudman grew much slow e r than it has since the 1990 budget deal replaced it with the supposedly tougher Budget Enforce ment Act fP e mblem-iiith the new7bndget4awi$tabsence offixed deficit targets. Instead the BEAs deficit targets are adjusted each year automatically on the bas i s of eco nomic and technical re-estimates. This means that, instead of a schedule of deficit tar gets forcing Congress to achieve a balanced budget in a specific future year, the BEA al lows budget deficits to increase without any corrective action being r equired to bring about deficit reduction. Critics of the budget deal argued in 1990 that the BEA thus would permit spending increases that would have been impossible under Gramm-Rud man. That is in fact what happened. Table 6 compares spending growth unde r Gramm Rudman and the BEA Table 6 Spendlng growth under Gramm-Rudman and BEA billions $1 987 Total Domestic Dlscretlonary Entitlements Annual Annual Annual Annual Annual Annual Dollar Percent Dollar Percent Dollar Percent Increase Change Increase Change I ncrease Change G-R $6.34 1.09 1.52 1.01 4.82 1.13 BEA $53.35 8.38 8.91 5.40 44.44 9.43 Sdurce: Budge0 of the United States Government, FY7993; Historical Tables, Office of Management and Bqdget, Washington D.C February 19

92. Mid-Session Review of the Budg et, Office of Management and Budget, Washington D.C July 1992 I The provision in the BEA which allows deficit targets to be revised for economic and technical re-estimates can be suspended, at the discretion of the President, on January 21,19

93. As a res ult, whoever wins the presidential election this November could, if he so chooses, restore some of the budget discipline imposed by Gramm-Rudman. Whether or not this leads to impxowl fiscal performance, of course, will depend on the Residents budget strat e gy 4 Daniel J. Mitchell, Save the Gramm-Rudman Sequester, Heritage Foundation Buckgrounder No. 763, April 3 1990 8 CONCLUSION The runaway deficits hd sluggish economic perfmance of Tecent years demonstrate that raising taxes and weakening spending control s does nothing to balance budgets and speed economic growth The lesson found in this year's Mid-Session Review of the Budget is clear. Raising taxes to reduce the budget deficit only makes fiscal matters worse and undermines the economy. If similar policie s are pursued in the future, the U.S. economy will continue to i&te. If,%owever,-policy'makerKih 'the ex&5Ztiie 'grid legislative branches of the federal government rewgnize the lessons of the 1990 budget agreement, they will work together to reduce both t axes and spending. Then the economy will prosper and the bud get deficit will shrink 3