Spending Caps Have a Mixed History Dealing with the Deficit
Alex M. Parker

June 1, 2011

Proposals to cap spending have been tried before, with limited results

When it comes to deficit reduction, the list of things which both parties agree on is shrinking. But there's one idea that has at least some bipartisan approval: passage of some type of measure to restrict Congress's ability to spend in the future.

Influential Washington figures of all ideological stripes are promoting different flavors of the caps idea. Conservative Republicans such as Sen. Mike Lee of Utah are pushing for a balanced budget amendment to the U.S. Constitution, a decades-old idea that would limit spending levels for the federal government at 18 percent of GDP. Missouri Democratic Sen. Claire McCaskill joined some Republicans to support a measure which would set into place similar statutory limits, which would ultimately limit government spending to 20.6 percent of gross domestic product, the historical average of government spending for the past 40 years.. Former New Mexico Republican Sen. Pete Domenici and former Clinton Budget Director Alice Rivlin recently advocated a "Save as you Go" law, which would automatically trigger across-the-board cuts if a certain amount of spending cuts and deficit reduction targets aren't met. President Obama's 2012 budget included a similar spending trigger, also tied to targets for deficit reduction.

Lawmakers like the idea of a spending cap, because it allows them to commit to a balanced budget, without necessarily committing to the tax hikes or deep program cuts which true deficit reduction would require. However, Congress has tried this route in the past -- and the record is mixed, at best. Spending caps tend to run into a tricky Catch-22. It would be irresponsible not to allow some flexibility in any type of cap, so the nation can respond to wars, disasters, or other unexpected events which require quick spending. But once the cap becomes flexible, it quickly loses its power to hold the fiscal line. In the past, if Congress really wanted to spend, it figured out a way how.

In 1985, the Gramm-Rudman-Hollings Act was passed under similar circumstances to today. The federal debt was nearing a then record $2 trillion, a growing cause of concern even though it seems like a pittance compared to the current $14.3 trillion debt. Washington was divided, with Democrats controlling the House of Representatives and Republicans controlling the Senate and the White House. Sponsored by Republican senators Phil Gramm of Texas and Warren Rudman of New Hampshire, along with Democratic Sen. Ernest Hollings of South Carolina, the bill established targets for amounts to cut in the yearly deficit.. If Congress couldn't meet the targets, the bill would force across-the-board cuts on the federal budget. But Congress eventually exempted most federal spending from the bill, and figured out gimmicks to work around the rest.

With the debt continuing to grow, Democrats and George H. W. Bush hashed out a deficit reduction plan in 1990 during tense negotiations at Andrews Air Force Base. Those plans were eventually coupled with the Budget Enforcement Act, a more successful set of budget restrictions which set caps on yearly discretionary spending. It also created "pay as you go" or "paygo" rules, which required any new spending for entitlements, or any new tax cuts, to be offset through some type of new revenue or spending cuts. With help from a booming economy and the 1993 deficit reduction plan which included several tax hikes, the deficit shrank over the next decade until there was a $230 billion surplus in 2000.

But in the end, Congress couldn't stick with the caps. It declared numerous emergencies to allow increases in discretionary spending, perhaps most memorably for the 2000 Census. To pass the 2001 income tax cuts, Congress included a sunset provision which got around the paygo requirements. And lawmakers ultimately allowed the Budget Enforcement Act, and thus the paygo rules, to expire in 2002. When Democrats took back control of Congress, they reinstated paygo rules in the House of Representatives in 2007, and in the Senate in 2010, although the final legislation included billions of dollars in exemptions. Paul Van de Water, a senior fellow with the left-leaning Center for Budget and Policy Priorities, said that the experience with paygo shows that measures like that are helpful, but they are no substitute for a concrete deficit reduction plan. "It's the distinction between trying to create procedures to force action, versus trying to enforce an agreement that was already agreed to," de Water says.

There are other reasons to doubt that a spending cap would force Congress to finally get serious about spending. Every year, existing laws call for reductions in Medicare reimbursement for doctors and for the alternative minimum tax to expand to cover more Americans. And every year, Congress agrees to delay these, adding billions to the deficit. Just as with a spending cap, the law should force them to resolve the issues, but there always seems to be a majority in favor of pushing them further down the road.

Ultimately, though, Republicans and Democrats may not be able to agree on a spending cap for the same reason they can't agree on anything else -- the two parties have drastically different views about the size and scope of the federal government. Republicans are suspicious of any cap not tied to spending, fearing that it might just lead to spiraling taxes. But Democrats are opposed to spending caps because they could lead to slashes in social services, as the costs of healthcare tend to rise much faster than GDP. Procedural changes might help them along, but if history is any guide it won't resolve the wide gulf between their philosophies.