Budget Deficit

The phrase, "budget deficit," is normally applied to situations where, at the end of a calendar or fiscal year, a public entity turns out to have spent more money than it has been able to collect in taxes, fees, and other impositions. Individuals, businesses, not-for-profit entities, and public bodies all operate under budgets too, of course. But when a business has a "budget deficit" the phrase means that it has experienced a "loss." Individuals "overspend." When contractors spend more than their contracts provide, they have "overruns."

Public sector deficits are of substantial interest to the public, not least to the commercial sector. Deficits are invariably covered by borrowing. When governments borrow money they compete for available national savings with the commercial institutions that also wish to borrow money to finance their operations. The Federal Government, particularly, enjoys an advantage because its treasury bills are of the highest quality and are preferred to any other kinds of bonds. A shortage of available money hampers economic activity.

THE U.S. BUDGET DEFICIT

Based on the estimates of the Congressional Budget Office, the FY 2005 budget deficit was $331 billion, down from $412 billion in FY 2004. In the 40-year span from FY 1965 to FY 2005, the Federal Government has had a budget surplus only five times, in FY 1969 and in the period FY 1998–2001 inclusive. In all other years, the government ran in the red. The FY 2004 deficit was the highest ever in U.S. history.

INDIVIDUALS AND HOUSEHOLDS

According to the Bureau of Economic Analysis (BEA), an element of the U.S. Department of Commerce, the personal savings rate in FY 2004 stood at 1.8 percent (savings as a percent of disposable income); this rate stood at 7.7 percent in FY 1992 and has been on a steady decline in the intervening years. Household data indicate a slightly lower rate, 1.6 percent in FY 2004 and 7.5 percent in FY 1992. In FY 2005, according to the BEA, the savings rate had turned negative (−0.2 percent in November, but it had been as low as −3.4 percent in August), suggesting that individuals were experiencing a "budget deficit" too.

BIBLIOGRAPHY

Congressional Budget Office. "Historical Budget Data." The Budget and Economic Outlook: Fiscal Years 2006 to 2015. 25 January 2005.

Hornyak, Steve. "Budgeting Made Easy." Management Accounting. October 1998.

Reason, Tim. "Building Better Budgets." CFO. December 2000.

U.S. Department of Commerce. "Personal Income and Outlays: November 2005." Bureau of Economic Analysis. 22 December 2005.

                                Hillstrom, Northern Lights

                                 updated by Magee, ECDI

Balanced Budget and Emergency Deficit Control Act (1985)

Jonathan L. Entin

The Balanced Budget and Emergency Deficit Control Act (P.L. 99-177, 99 Stat. 1038) is popularly known as the Gramm-Rudman-Hollings Act after the names of its principal sponsors, and was designed to reduce the federal budget deficit. The law did so primarily by setting seemingly rigid deficit limits and authorizing mandatory, across-the-board spending reductions to reach them. Although the Supreme Court ruled that a key part of this mechanism was unconstitutional, the basic concepts embodied in the statute have continued to influence the process for adopting the federal budget.

BACKGROUND AND MAJOR PROVISIONS

Although the Constitution does not mandate a balanced budget, it does require Congress to approve all federal expenditures (Article I, section 9, clause 7), and it empowers the federal government to raise revenue through taxes, tariffs, and other measures (Article I, section 8, clause 1). The latter provision also authorizes the government to incur and pay debts. Congress has passed legislation establishing procedures for adopting the federal budget (e.g., the Congressional Budget and Impoundment Control Act) and for handling the national debt (e.g., the Public Debt Act).

The government regularly ran a budget deficit in the years following World War II, but the situation became especially serious in the early 1980s. Between 1981 and 1985 the annual budget deficit nearly quadrupled, and it threatened to remain at high levels indefinitely. Further, if nothing were done, the total national debt would have more than doubled between 1985 and 1990. The Balanced Budget and Emergency Deficit Control Act was adopted in the fall of 1985 in connection with a measure that raised the national debt ceiling.

The law's most important feature was a schedule for reducing the federal budget deficit to zero by 1991. It fixed a maximum allowable deficit for each fiscal year. If Congress and the president failed to adopt a budget that met the target, the law called for across-the-board spending reductions in most federal programs. Responsibility for determining whether the budget satisfied this requirement was given to the comptroller general, who is the head of the General Accounting Office (an agency that does research and investigations at the behest of Congress). The comptroller also had the authority to order the across-the-board spending cuts needed to lower the deficit to the required level.

LEGAL CHALLENGE

Opponents of this law immediately challenged its constitutionality. In Bowsher v. Synar (1986), the Supreme Court ruled that the comptroller general could not exercise the authority given to that official under the act. This decision left the rest of the statute intact.

The Court explained that the task of implementing a law passed by Congress is an executive function, and that the Constitution (Article II, section 1, clause 1) gives the executive power to the president. Of course, the president cannot personally execute all the laws passed by the legislative branch. Therefore, the chief executive must have the assistance of agents who are subject to presidential supervision and dismissal to assure their loyalty and efficiency. The comptroller general, in the Court's view, was not accountable to the president. Instead, this official was legally subservient to Congress. Allowing an official who is accountable to the legislature rather than to the president to execute the law violated the separation of powers embodied in the Constitution.

What made the comptroller general subservient to Congress? It was, the Court explained, the procedure for firing that official. The president could not dismiss the comptroller for any reason. Congress alone was in charge of the process for removing the comptroller. It could initiate removal proceedings and could even dismiss the comptroller over the president's objection.

The ability to discharge executive agents has long been regarded as a crucial component of presidential power. This issue lay at the heart of the controversy over the discredited Tenure of Office Act (1867), which required the president to obtain the Senate's approval to discharge a cabinet member. (President Andrew Johnson's defiance of that law was the primary basis for his impeachment.)

The comptroller was subservient to Congress, the Court reasoned, even though the legislative branch had never threatened to remove anyone from that office for any reason. All that mattered was that the comptroller had no reason to fear the president but every reason to fear Congress in order to stay out of trouble and remain on the job. The comptroller could continue to perform other duties on behalf of Congress but could not play any role in executing or enforcing federal statutes.

AFTERMATH

The Supreme Court's ruling did not address two other problems with the statute. First, the law addressed only the projected deficit at the beginning of each fiscal year, not the actual deficit at the end of the year. Second, the law did not require that the projected deficit be based on realistic assumptions about inflation and economic growth or on standard accounting principles.

In response to the Court's decision, Congress amended the statute to give primary responsibility for implementation to the Office of Management and Budget, an executive branch agency, with advisory input from the Congressional Budget Office. In 1987 Congress revised the deficit targets, extended the deadline for eliminating the budget deficit, and changed the procedures for enacting the federal budget. Subsequent laws have altered the focus from the overall deficit to spending caps and other mechanisms designed to limit the growth of discretionary expenditures.

Meanwhile, Congress and the president have managed to avoid the across-the-board spending cuts authorized by the original Balanced Budget and Emergency Deficit Control Act. Only in late 1990 were such cuts ordered, but they were repealed in early 1991 after Congress and President George H.W. Bush reached agreement on a budget that complied with the deficit limit for that year. At the same time, the federal budget deficit was eliminated during the second administration of President William J. Clinton. That happened because of improvements in the national economy, however, not because of the threat of automatic spending cuts. The deficit's elimination was short-lived, as it recurred as a result of spending and tax policies during the administration of President George W. Bush.

See also: Congressional Budget and Impoundment Control Act; Public Debt Acts.

BIBLIOGRAPHY

McKitrick, Eric L. Andrew Johnson and Reconstruction. Chicago: University of Chicago Press, 1964.

White, Joseph, and Aaron B. Wildavsky. The Deficit and the Public Interest: The Search for Responsible Budgeting in the 1980s. Berkeley: University of California Press, 1989.

Wildavsky, Aaron B. The Politics of the Budgetary Process, 4th ed. Boston: Little, Brown, 1984.

BUDGET DEFICIT

A budget is an estimate of expected income and expenses for a specific period of time. Governments, private businesses, and individuals use the budget-making process to establish financial goals. The completed budget is then used as a blueprint to monitor the progress toward those goals. If income or expenses are equal, a budget is in balance. But, depending on financial objectives, a budget might have a surplus or deficit. A surplus is created when an individual or organization has more income than expenses for a given time period and decides to set some of this money aside. For instance, an individual might make monthly payments into a college-savings plan that will be used in the future. A deficit is just the opposite and occurs when expenses are greater than income. As a consequence, money is borrowed from an outside source. For example, an individual who wants to buy a car may lack the necessary cash and so takes out a loan to cover the cost. If a deficit continues over a long period of time, it is called a chronic deficit.

During much of the 1970s, '80s, and '90s, the U.S. federal government had annual budget deficits that often exceeded $100 billion. In 1992, the federal government had an annual budget deficit of $290 billion. The result of these years of deficit spending was that by 1999, the United States had a national debt of approximately $5.5 trillion and paid $240 billion annually in interest to finance the debt. The purpose of the federal budget is to collect and spend the funds needed to carry out social, military, and economic policies. According to the Employment Act of 1946, the federal government has the responsibility to promote maximum employment, fight inflation, and encourage economic stability and growth. To achieve these aims, the federal government might spend more money than it receives in order to stimulate the economy. This type of fiscal policy creates a budget deficit. The federal government reversed this budget deficit spending in the late 1990s and began passing surplus budgets. By 2008, the federal government's annual budget is expected to reach a surplus of $251 billion. However, unless these annual surpluses are used to pay off the accumulated debt, the country will have an estimated federal debt of $6.3 trillion in 2003.

See also: Inflation