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Under current law, the caps imposed on spending have often been waived in order to fund emergency expenditures. For example, the spending caps imposed by the Budget Enforcement Act of 1990 have been waived for disaster relief, military spending, overseas contingency spending, and program initiatives (Schick 2007, 2010). Exempting these expenditures for emergencies tends to undermine the effectiveness of this fiscal rule. This also begs the question of what is an emergency expenditure; the broader the definition of an emergency, the less effective the caps imposed on discretionary spending.

A broad consensus has supported emergency expenditures for disaster relief (Schick 2007, 2010). Expenditures for disaster relief over the past decade could be used to provide a benchmark for the magnitude of emergency funds required to meet these needs.

A broad consensus has also supported expenditures for military emergencies (Schick 2007, 2010). Defense expenditures over the past century suggests an important distinction between military expenditure during World War II and expenditures for military conflicts since then. Emergency spending for military conflicts of the magnitude of World War II would certainly require deficit spending and debt beyond the limits imposed by the cap on emergency fund. One way to distinguish such military emergencies is to suspend the cap on the emergency fund and allow unlimited borrowing while a declaration of war is in place.

At the same time, we would distinguish between the claims on federal spending in such a declared war, and the expenditures for military emergencies without a declaration of war, such as the Iraq and Afghanistan wars. Our analysis reveals that expenditures for these latter military emergencies could have been financed from an emergency fund, while meeting other emergencies such as natural disasters and financial crises. The War Powers Resolution limits troop deployment by the President without a formal declaration of war. The constraints imposed by an emergency fund cap could add a budgetary as well as a troop limit to the authority granted to the President under the War Powers Resolution. Provisions of the emergency fund would have to provide flexibility to the President to respond to a military crisis, e.g. waiving the emergency fund cap during the first sixty days of a military conflict.

The MP rules contain a new approach to emergency spending pressures (Merrifield and Poulson 2017). Define the basis for emergency spending, assume there will be some, and plan for it. For example, the basis would include approved spending categories and approval would entail a mix of congressional super-majority and executive order. The MP rules include annual deposits into an emergency fund until the account fills. The deposit amounts don’t count against the discretionary spending cap. An annual deposit rate of twenty percent of discretionary general fund spending, with an account balance limit of forty percent was enough to finance the military emergencies, natural disasters, and financial crisis responses of 1994-2015. Such an emergency fund allows the government to meet those needs while maintaining stable growth in funding for ongoing programs. Extraordinary emergencies, such as declarations of war, and especially large natural disasters, are wholly exempt from the emergency fund limits or allow borrowing against future deposits.

The MP rules also allow for deficits in the emergency fund in periods of financial crisis and recession. However, like the Swiss debt brake, these deficits in the emergency fund must be offset by surpluses in the primary budget in the near term. Given the average duration of business cycles in the post-World War Two period, a three year time limit should be adequate to restore positive balances in the emergency fund. A simulated recession of the MP rules over the forecast period provides evidence that these provisions for an emergency fund could stabilize expenditures during a mild recession, without undermining the effectiveness of the MP rules in achieving the debt targets in the long term (Merrifield and Poulson 2017).

DOWNLOAD: Emergency Funds and Escape Clauses in the MP Fiscal Rule

Emergency Funds and Escape Clauses in the MP Fiscal Rule

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