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Fiscal rules in the U.S. have failed in constrain spending in the long term, and a major flaw has been emergency expenditures. This design flaw can be traced to the first comprehensive fiscal rule, the Balanced Budget and Emergency Deficit Control Act, commonly referred to as the Gramm-Rudman Hollings Act in 1985 (Blondal et al 2003; Merrifield and Poulson 2017).

As the title suggests, the purpose of this Act was a gradual reduction in the deficit over the period 1986-1990, and a balanced budget in 1991. The Act set ceilings on the deficit in each of these years. If the deficit exceeded those caps the Act required reductions in expenditures through the procedure of sequestration.

That Act was amended by the Budget Enforcement Act (BEA) of 1990. The BEA replaced maximum deficit limits with annual limit on discretionary spending and controls over increases in the deficit. The BEA introduced the Pay-As-You-Go principle, requiring that any increase in mandatory spending or decrease in tax revenue resulting from legislation must be fully offset so that the deficit is not increased. The BEA maintains sequestration as an enforcement mechanism when these rules are violated.

There is some controversy regarding the effectiveness of these fiscal rules, but it is generally agreed that their effectiveness was eroded in the late 1990s. Congress found many ways to avoid sequestration and circumvent the constraints on fiscal policy imposed by the rules. A major flaw in the design of these rules was the emergency clause that allowed for temporary overspending. The Clause was originally intended to provide funding for true emergencies such as hurricanes, and natural disasters. In the initial years emergency spending was generally under 10 billion dollars annually. But, in the late 1990s emergency spending was expanded to include a broader range of programs, and emergency expenditures increased significantly. Emergency spending continues to erode the constraints on spending imposed by fiscal rules (Posner 2011; Posner, Redburn, and Meyers 2012; Posner and Sommerfeld 2013). For example, the Budget Resolution FY 2016 used accounting procedures to exempt emergency spending from the spending caps (Peterson and Lubold 2015). The Resolution allocated $96 billion in defense funds to the Overseas Contingency Operation (OCO) Account, which is not subject to the budget cap. The OCO account was originally created to fund the wars in the Middle East. By shifting defense funding into this off-budget account, Congress could pretend that they were meeting the budget caps (Peterson and Lubold 2015). The defense spending bill was blocked in voting along party lines, with every Democrat except one voting to block the bill. The Democrats promised to block all spending bills until Republicans agreed to begin serious negotiations over the budget, that is, discussion of modifying or lifting the Budget Caps as opposed to heavily relying on Overseas Contingency Operations (OCO) funds in order to raise Pentagon spending while technically abiding by the caps.

The Budget Resolution FY 2016 continued a pattern of accounting procedures that allow Congress to circumvent the spending caps imposed by the Budget Act of 2011 (Schick 2007, 2015; United States Congress, 2015). What a majority of Congress seemed to agree on is that the spending caps imposed by the Budget Control Act of 2011 should be lifted (Blinder 2015). Republicans wanted to increase defense spending above the spending caps; Democrats wanted to boost domestic spending by a comparable amount. Democrats objected to the defense bill reliance on an emergency fund that increases military spending without corresponding increases in domestic spending.

DOWNLOAD: How ‘Emergency’ Spending has Undermined Fiscal Rules in the U.S.

How ‘Emergency’ Spending Has Undermined Fiscal Rules in the U.S.

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