Should governments be forced to balance their budgets?

Michael Maiello | Dec 06, 2017

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When the United States Senate voted to approve its momentous tax-reform bill early Saturday morning, it did so despite numerous analyses that have suggested the revenue lost to the bill’s tax cuts is unlikely to be made up by economic growth. Reduced revenue would make it more difficult for the government to balance its annual fiscal-year budget; over 10 years, estimates suggest, the tax bill could add between $500 billion and $1.4 trillion to the national debt.

Many US lawmakers have long voiced concern about the country’s growing debt and the regularity with which the federal government runs its annual budget at a deficit, and some have even suggested the US Constitution be amended to require that the federal budget remain in balance. In fact, less than a month before the US Senate passed its tax bill, the Wisconsin state senate passed a resolution that made Wisconsin the 28th state to call for a constitutional convention to create such an amendment.

The US Constitution has never required a balanced budget over any time frame, and most pieces of federal legislation aimed at reducing or eliminating deficits target periods longer than one year, so as to take economic cycles into account. How would forcing the federal government to stick to a balanced budget each fiscal year affect the US economy and the government’s ability to borrow?

To find out, Chicago Booth’s Initiative on Global Markets turned to its Economic Experts Panel with a pair of questions. The panelists were nearly unanimous in saying that a balanced-budget amendment would not “substantially reduce output variability in the United States,” but there was less agreement as to whether such an amendment would make borrowing cheaper.

“Suppose the government spends and borrows less,” wrote Harvard’s Oliver Hart in his response. “This might raise interest rates if consumers spend more to offset critical services.”

Darrell Duffie, Stanford
“Fiscal measures (e.g. TARP) can and often do reduce the severity of recessions.”
Response: Strongly Disagree

Oliver Hart, Harvard
“Fiscal stimulus can be useful sometimes. Straight-jacketing the government is a mistake. Also I don’t see how it would be enforced.”
Response: Strongly Disagree

Larry Samuelson, Yale
“Requiring budget balance would upend current operating procedure, with effects too uncertain to predict reduced output variability.”
Response: Disagree

Austan Goolsbee, Chicago Booth
“If we were dumb enough to force ourselves to cut spending/raise taxes in the middle of recessions, who’s to say (the) world wouldn’t RAISE rates?”
Response: Strongly Disagree

Robert Hall, Stanford
“The gov(ernment) is way down the path of disappearance of a market for its debt, with the highest peacetime deficit/GDP ever.”
Response: Agree

William Nordhaus, Yale
“Fiscal impact lowers interest rates, but turmoil impact would raise. Net impact unclear.”
Response: Uncertain