July 25, 2011

Business Cycle Balanced Budget Amendment

David M. Primo

Senior Affiliated Scholar

As the House and Senate await a possible vote on a balanced budget amendment to the U.S. Constitution, Rep. Justin Amash (R-MI) proposed an alternative approach, the Business Cycle Balanced Budget Amendment (BCBBA). His bill has two important features which differentiate it from others before Congress. 

First, after a ten-year transition period, the BCBBA limits spending in each fiscal year to the average annual revenues of the previous three years (adjusted for inflation and population), as opposed to simply requiring revenues in a given year to equal outlays in that year. The rule creates a disincentive for tax hikes because new tax revenue today cannot be spent until tomorrow, as spending caps are based on previous revenues. This transforms the standard political calculus under which legislators take credit for spending today while deferring the costs until tomorrow.

Second, a three-fourths majority of both houses of Congress is required to exceed the spending limit in a given year. Most emergency provisions in balanced budget proposals have lower thresholds. This higher supermajority requirement will make it more difficult to invoke the waiver procedure and therefore gives the rule more “bite.”

Rep. Amash’s proposal is one of many circulating in Congress to address the nation's fiscal problems, and the U.S. will benefit from a robust debate regarding these competing proposals.