As the President and Congress consider deficit reduction options and an increase in the debt limit, budget process proposals have recently become popular on Capitol Hill. In the last several months, President Obama has proposed a "debt failsafe" trigger, The Bipartisan Policy Center proposed a "Save as You Go" rule, and Senators McCaskill (D-MO) and Corker (R-TN), as well as House Budget Committee Chairman Paul Ryan (R-WI) have proposed a cap on overall spending. Additional proposals are likely in the days ahead as Vice President Biden convenes a new working group requested by President Obama and the bipartisan "Gang of Six" senators continue work on their proposal.
In a speech last month, President Obama set a goal of reducing the deficit by $4 trillion in 12 years or less using cuts to discretionary spending, health care savings, tax reform, and other proposals. Obama has appointed Vice President Biden to lead a group of congressional leaders in negotiations over the details. According to the administration, the framework announced by the President would have the goals of reducing deficits to 2.5 percent of GDP in 2015 while placing deficits on a declining path that gets closer to 2.0 percent of GDP by the end of the decade.
The deficit targets would be enforced using a "debt failsafe" trigger that would go into effect by 2014 if projections show that the debt-to-GDP ratio has not stabilized and will not be declining in the second half of the decade. If deficits as a percentage of GDP are projected to average more than 2.8 percent during the second half of the decade, the trigger would require an across-the-board spending reduction. The proposal would exempt Social Security, low-income programs and Medicare benefits from the trigger.
In 1985, the Gramm-Rudman-Hollings Act (GRH) began the process by establishing deficit targets and a sequestration process requiring cuts if the limits were exceeded. As the Senate Budget Committee's history of the budget process recounts, GRH is widely viewed as unsuccessful because it failed to reduce the deficit. While the law was intended to balance the budget by FY 1991, during FY 1986-1990 the actual deficit exceeded the target in every year. The sequestration process was also criticized after Congress proceeded to add a long list of exemptions and other gimmicks.
Eventually, the Budget Enforcement Act of 1990 replaced the GRH deficit targets with two new budget enforcement mechanisms: a PAYGO law requiring offsets for direct spending or revenue legislation and caps restricting annual appropriations. These mechanisms were generally considered to be successful in the 1990s when deficits were briefly replaced with projected surpluses. The two statutory mechanisms were subsequently revised over the years, though versions of them remained in effect until they expired in 2002. After statutory PAYGO expired, the House and Senate relied on internal PAYGO rules which did not have the force of law or include sequestration procedures. A new version of statutory PAYGO was signed into law by President Obama in 2009.
At the beginning of the 112th Congress, the House replaced its internal PAYGO rule with a new CUTGO rule that excludes revenue effects from the offset requirement and prevents revenue increases from being used to offset spending.
A significant weakness of GRH and similar budget enforcement proposals has been the pages of exemptions that frequently accompany the sequestration procedures. While some exemptions may be justified, as soon as one is approved, additional ideas for exemptions never seem to be far behind. The end result has usually been an ineffective sequestration process that covers only a small portion of federal spending. For a trigger or sequestration process to be effective, it must apply to a substantial portion of the spending that is driving deficit spending in the first place. If exemptions are included, they should be limited and rare.