Why Budgets Matter

Much of what government does depends on money. From the nation's founding until today, conflicts over the powers to tax, spend, and borrow have been at the heart of American politics. Why Budgets Matter is a comprehensive account of how these conflicts over budget policy have shaped national politics by determining the size and role of the federal government.

The history of budget policy provides a unique perspective on political change in the United States and helps explain how and why the federal government has grown over time. Dennis Ippolito reviews the different stages of this development—from the era of small government prior to the Civil War through the dramatic transformations of the New Deal and Cold War up to the current challenges of modernizing the welfare state—and shows how each of these stages reflected a dominant vision of the size and role of the federal government, incorporating particular spending, tax, and borrowing philosophies and policies.

Why Budgets Matter offers new insights into the enduring debate over "limited government" versus "big government" in the United States and will be a valuable resource for students, scholars, and policy makers seeking a better understanding of the background to the fiscal problems we face today.

“It is said that some governments go over their budgets very carefully, while others do it without even noticing.  Ippolito manages to convey something fresh and new about both the revenue and expenditure sides of budgets in this well-written and comprehensive text. But what I found astonishing about the book is its ambition:  it explains why the federal budget works as it does, rather than just describing the process. Ippolito's main thesis, that the tendency toward deficits and growth of government is a product of larger forces in American politics, looked like an anachronism just two years ago. But deficits are back. This book couldn't be more timely, and it couldn't be more important.”—Michael Munger, Duke University

“A comprehensive, clear, and valuable account of the exceedingly complex history of federal budgeting. Ippolito succeeds admirably.”—Louis Fisher, Congressional Research Service

“Ippolito’s analysis of the budget process is an important contribution to the literature on the American budget process. It is unquestionably one of the best books on the subject, similar in scope to Aaron Wildavsky’s classic The New Politics of the Budgetary Process (1988). Overall, Why Budgets Matter: Budget Policy and American Government is an excellent historical account of the federal budget process, and it is intended for a general adult reading audience.”—Patrick Fisher, Perspectives on Political Science

“This work is particularly notable because it starts with the very beginnings of the US in 1789; most analysis of federal finance concentrates on the post-WWII era.”—J.L. Mikesell, Choice

“What a timely book. As the U.S. federal government embarks on a course of record-setting debt accumulation, Dennis Ippolito provides the perfect context: the story of American fiscal policy. This is not another book about process. It is not another description of congressional wrangling. And it is not a period piece. In Why Budgets Matter, Ippolito offers us something new. . . . He has provided a broad, sweeping history and a good one at that. What seems to belong, given the scope of the book, is there; what does not belong, is not. The accounting itself is nicely documented and rings true. It also is a pleasure to read. . . . [T]here . . . is much to recommend this book to many different audiences. It is ideal for various undergraduate courses and selected graduate courses as well. Most scholars of American politics and policy will want to have a copy at hand, as will attentive members of the general public.”—Christopher Wlezien, Political Science Quarterly

“Dennis Ippolito has written another important book on the federal budget. . . . One genuine achievement of the book is the organization of a massive amount of information into historical periods that correspond with larger developments in American politics. Ippolito combines secondary sources with extensive references to government fiscal documents to map budget decisions over time, identify changes in major priorities, and link budget decisions to broader developments in United States domestic and foreign policy.”—Daniel J Palazzolo, Perspectives on Politics

“This book is without doubt the best analysis yet written of federal budgeting from the late eighteenth century to the present. . . . The subject matter of this splendid book should therefore be of immense interest to students of political history and public policy.”—Iwan Morgan , Journal of American History

Dennis S. Ippolito is Eugene McElvaney Professor of Political Science at Southern Methodist University. He has published eight previous books, including Uncertain Legacies: Federal Budget Policy from Roosevelt through Reagan (1990) and Blunting the Sword: Budget Policy and the Future of Defense (1994).

Contents

List of Figures and Tables

Preface

1. Perspectives on Budget Policy

2. The "Small Government" Era (1789–1860)

3. Budgeting for Government Growth (1860–1915)

4. The Transition to Modern Government (1915–1940)

5. War and Defense Budgets (1940–1970)

6. Social Welfare Budgets and Deficits (1970–1990)

7. Reconciliation and Balanced Budgets (1990–2001)

8. Budgeting for the Future

Selected Bibliography

Index

Chapter 1: Perspectives on Budget Policy

In recent decades, conflicts over federal budget policy have monopolized the nation’s political agenda. During the 1970s and 1980s, the partisan and ideological deadlock over spending and taxation was especially severe, resulting in chronic deficits and soaring debt. Between 1980 and 1990, the publiclyheld federal debt more than tripled, to $2.4 trillion. Then, over the next decade, the budget outlook changed dramatically. A series of deficit-reduction measures, and an unusually favorable economy, produced the first balanced budgets in nearly three decades. In January 2001, budget surpluses of $5.6 trillion were projected for the first decade of the twenty-first century, and policymakers were debating how to allocate these surpluses and to prepare for future demographic pressures on federal retirement and healthcare spending.

Before long, however, another fiscal turnaround occurred. Tax cuts enacted in 2001, defense increases that followed the September 11 terrorist attacks on the United States, and a weak economy brought the budget back into deficit. In January 2002, ten-year surplus projections were $4 trillion less than the previous year’s, and Congress and the executive branch were once again seriously at odds over the size, shape, and balance of the federal budget. The history of federal budget policy provides a useful context for analyzing these contemporary struggles over fiscal politics. More than two centuries ago, Alexander Hamilton made clear the critical importance of the federal government’s "power of the purse." "Money," Hamilton wrote, "is, with propriety, considered as the vital principle of the body politic; as that which sustains its life and motion and enables it to perform its most essential functions." From the Federalist-Jeffersonian Republican battles of Hamilton’s day to the present, the budget has served as the principal determinant of the size and scope of government. The extent and use of federal taxing powers, the constitutional reach of federal spending, and the management of deficits and debt have defined the federal government’s role in the social and economic lives of its citizens.

The challenge of determining the appropriate size of government is a common feature of the eras, or stages, of budget policy development in the United States. There are, however, important distinctions between these eras as well. Extraconstitutional fiscal norms, particularly regarding peacetime deficits and debt, have changed a great deal over time, as has the composition of federal spending. During the nineteenth and early twentieth centuries, federal spending was limited to traditional public goods, such as internal improvements, government services, and national defense. Since the New Deal and World War II, the budget has been dominated first by Cold War defense requirements and more recently by social welfare programs. On the revenue side, the transition from the limited indirect taxes of the nineteenth century to the comprehensive income taxation of the post–World War II period has been equally far-reaching. Finally, as the president and Congress have competed over spending and tax policy, the institutional parameters of the budget process have changed.

Chronicling these changes and their impact comprises the approach of this book. The history of federal budget policy is divided into eras that reflect distinctive conceptions of the size and scope of government. Within each era, budget policy is examined in terms of major spending and tax issues, the institutional arrangements of the budget process, and the effectiveness of budget control. Comparing these eras helps to illuminate the policy and political bases of government growth and provides insights into how and why fiscal problems develop and the means through which legislators and presidents attempt to resolve them.

The History of the Balanced-Budget Rule

A good starting point in understanding budget policy and budget control is the balanced-budget "rule." The belief that the federal government should balance its budget has been a powerful force in American politics. Webber and Wildavsky, who identify a number of important differences between American and European budgeting during the nineteenth century, find the clearest example of "American exceptionalism" in a balanced-budget belief that was "almost a religion." Against this backdrop, our modern-day difficulties with deficits and debt might suggest a serious decline in fiscal responsibility, but the reality is more complex.

Deficits and debt are not modern inventions. The United States began with a substantial Revolutionary War debt; deficit spending during wartime and periodic economic recessions produced comparable debt levels after the Civil War and World War I (Fig. 1.1). The balanced-budget rule, then, has always accommodated emergency deficits (notably war) and cyclical deficits (temporary imbalances during severe economic downturns). In addition, the rule had contradictory political applications during our early history.

Before the Civil War, for example, the balanced-budget rule was used by Jeffersonians and Jacksonians—by the 1830s, Thomas Jefferson’s Republican party had become Andrew Jackson’s Democratic party—to limit the federal government’s role in domestic politics. State governments, by comparison, borrowed freely and accumulated much larger debts than the federal government. Then, after the Civil War, the balanced-budget rule accommodated a different set of political concerns. The Republican majority that dominated national politics during this period was committed to high protective tariffs. Armed with the abundant revenues from these tariffs, Republicans initiated expensive spending programs. Thus, during this latter period, the balancedbudget rule was employed to expand rather than limit government.

Since the New Deal, deficits have certainly been more common than they were earlier. During the Great Depression, federal spending rose sharply, the budget was in deficit each year, and the relative size of deficits was approximately three percent of gross domestic product (GDP) (Table 1.1). The deficits that helped finance World War II were enormous, averaging about 25 percent of GDP from 1943 to 1945. By the end of World War II, the publicly-held federal debt was almost 110 percent of GDP, the highest level ever recorded. Despite their unusual scale, the deficits of the 1930s and early 1940s were, like prior deficits, driven by a weak economy and by war. After World War II and through the 1950s, the commitment to balanced budgets resurfaced. The Truman administration achieved a budget surplus from 1947 to 1949, and the Eisenhower administration balanced three of its peacetime budgets after the Korean War.

The transition to large and chronic deficits began during the 1960s, as economic policy prescriptions and nondefense spending growth undermined the balanced-budget rule. In 1963, the Kennedy administration proposed large tax cuts and planned deficits to boost economic growth. Its rationale was that fiscal stimulus, in the form of deliberate deficits, would revitalize a sluggish economy; the budget could then be brought into balance at high levels of growth and employment. When growth surged and deficits fell following the administration’s tax cuts, this more aggressive fiscal policy approach was legitimized, at least for a time.

The second and more lasting element of the 1960s transition was the reshaping of spending policy during the Johnson presidency. Despite the Vietnam War, the Johnson administration pursued an ambitious domestic policy agenda, and the result was a sharp break with previous wartime spending patterns. During World War II, defense spending absorbed as much as 90 percent of the budget, while the defense budget share for the Korean War climbed to almost 70 percent. When the Vietnam War began, defense spending was still more than 40 percent of federal outlays, but the wartime peak in the late 1960s was not much higher, because domestic spending had risen along with defense. By the time the Vietnam War officially ended in 1973, the defense budget share had dropped to just over 30 percent. Defense budgets declined even further through the end of the decade, but total spending continued to grow in response to domestic program commitments.

Between 1965 and 1980, the defense-GDP ratio dropped by one-third, from 7.4 percent to 4.9 percent. Total outlays, however, soared from 17.2 percent of GDP to 21.6 percent, the highest level since World War II. With revenue levels lagging well behind, deficits grew rapidly during the 1970s and even more rapidly during the 1980s. Under Ronald Reagan, annual deficits averaged almost 4 percent of GDP.

Moreover, the deficits that took hold during this period were "structural" —had the economy been at optimum levels of growth and employment, the spending and tax laws in place would still have yielded deficits. Structural deficits for the 1980s were generally lower than actual deficits, but the structural deficit "policy gap" between spending and revenues was still extremely large (Table 1.2). Efforts to reduce these deficits were frustrated by sharp differences between the Reagan administration and Congress over spending and tax policy. While both sides endorsed the balanced-budget rule, there was no consensus on the level of federal spending at which the budget should be balanced.

The Spending Problem. The impasse over budget policy that emerged during the 1970s and deepened under Reagan was directly related to the changes that had occurred in the composition of spending. The shift in the spending side of the budget began with the social welfare initiatives of the Johnson presidency and accelerated with their expansion during the 1970s. From the end of World War II through the early 1960s, defense and nondefense discretionary spending—that is, spending determined by the annual appropriations process—accounted for about two-thirds of the budget. The remainder consisted of mandatory spending for social welfare programs and interest payments on the federal debt. By the 1980s, the budget shares for discretionary and mandatory spending had been nearly reversed (Table 1.3). Retirement and healthcare entitlements accounted for much of this change. In 1960, Social Security outlays were less than 2.5 percent of GDP.

Two decades later, Social Security along with the Medicare and Medicaid programs enacted in 1965 had risen to 6 percent of GDP. These and other social welfare expansions more than offset the modest decline in discretionary spending levels during this period. During the 1970s, for example, the defense-GDP ratio dropped by more than three percentage points, but nearly half of this reduction was absorbed by higher spending for discretionary domestic programs. Under Ronald Reagan, the latter were cut back, but defense levels rose. In effect, Congress was unwilling to restrain domestic spending during the 1970s; Reagan was equally unwilling to cut defense, and he was unable to reverse the growth of major entitlements. The result was the highest spending levels since World War II.

The Revenue Problem. During World War II, when spending was almost 45 percent of GDP and the political barriers against high taxes were weak, revenues were only marginally higher than 20 percent of GDP. After the war, revenue levels fell and, in contrast to spending, remained within a narrow range (Table 1.4). In addition, the composition of revenues shifted toward direct taxes over the postwar period. In 1950, about one-half of total revenue was produced by individual income taxes and social insurance taxes (primarily payroll taxes for Social Security). By the 1980s, this share had grown to approximately 80 percent, making it more difficult to raise revenue levels without imposing higher tax burdens on individuals.

The Reagan administration’s tax program was directed toward lowering, not raising, tax burdens on individuals. The 1981 tax cut that the administration sponsored contained large reductions in income tax rates, and the 1986 Tax Reform Act cut marginal rates still further. When deficits soared after the 1981 tax cut, Reagan signed tax bills that boosted corporation income taxes and payroll taxes, but he adamantly opposed efforts to raise tax rates on individuals.

The revenue levels in place during the 1980s were only slightly above those of prior decades, but spending levels were substantially higher. The yawning gap between the two could not be narrowed without a significant increase in the federal government’s largest revenue source, individual income taxes, and these increases were unacceptable to Ronald Reagan.

Modern Deficits: Solutions

The severity of structural deficits led many observers, including leading scholars, to conclude that the modern deficit problem was intractable. Numerous studies argued that the defining features of contemporary American politics—divided party control, congressional decentralization, ubiquitous and powerful interest groups—and the constitutional separation of powers between the president and Congress posed formidable, perhaps insuperable, barriers to effective fiscal control. A 1996 study concluded that institutional limitations and expansive policy commitments had undermined the federal government’s ability "to pursue coherent and rational [fiscal] objectives," resulting in "a rising trend in deficit spending that shows no signs of abating."

Even more sweeping indictments questioned whether modern budgets should "be left adrift in the sea of democratic politics." For some critics, the answer to this dilemma was amending the Constitution to prohibit deficits except during wartime or recession. By restricting the options for deficit financing, a constitutional balanced-budget rule would force the public and its representatives "to take account of the costs of government as well as the benefits, and to do so simultaneously." While various balanced-budget amendments had been introduced in Congress for decades, the fiscal problems of the 1980s and early 1990s served to intensify support for a constitutional change. In 1995, when Republicans gained control of the House and Senate, their constitutional balanced-budget proposal was a top legislative priority, and Congress failed by the narrowest of margins to send the amendment to the states for ratification.

The debate over a constitutional remedy soon lost its urgency, when it became apparent that policy changes during the early 1990s were moving the budget toward balance more quickly and decisively than anyone had expected. In 1990, President George H. Bush had broken the long-standing partisan deadlock over deficit reduction by signing a multiyear package of tax increases and defense cutbacks. Unlike Reagan, Bush finally accepted the necessity for higher taxes on individuals and substantially higher revenue levels in narrowing structural deficits. On the spending side, the end of the Cold War had allowed Bush to make important concessions on defense. Then, in 1993, the Clinton administration had persuaded Congress to pass another five-year deficit-reduction package of tax increases and spending cuts.

Both the Bush and Clinton budget agreements contained tight limits on discretionary spending and complementary deficit-reduction controls on entitlements and revenues. Policy changes, multiyear enforcement provi- sions, and an unexpectedly strong economy moved the budget into surplus in 1998. Two years later, the surplus exceeded $235 billion. As shown in Table 1.5, the structural deficit problem was solved by two basic policy adjustments. First, revenue levels were raised substantially between 1990 and 2000, with more than 80 percent of this revenue growth supplied by individual income taxes. Second, discretionary spending fell by 2.4 percent of GDP, with more than 90 percent of this reduction in defense. Defense cuts, the elimination of deposit insurance outlays that had funded savings and loans insolvencies in the early 1990s, and interest savings from lower debt levels combined to bring the outlay-GDP ratio to its lowest level in more than three decades.

It took time, then, for the causes and consequences of the modern deficit problem to be fully understood. Policymakers then needed additional time, and different circumstances, to implement the policy changes and budgetary controls that altered spending and revenue growth rates. The combination of Cold War defense requirements and social welfare state commitments had created very powerful spending pressures, and this spending dynamic had to be broken to control and finally eliminate structural deficits.

The deficit problem of the post-Vietnam period was caused by basic political disagreements over spending and tax policy. Similar disagreements over the appropriate level of taxation and the balance between defense and nondefense spending have resurfaced since 2001. President George W. Bush’s $1.35 trillion tax cut in 2001 was aimed at lowering revenue levels and thereby limiting spending growth. The war on terrorism that was launched after the September 11 attacks on the United States has sharply increased defense budgets. As projected surpluses give way to deficits, the Bush administration and Congress must struggle once again to reconcile the desire for balanced budgets with the political pressures of modern budget policy.

Cross-National Comparisons

An additional perspective on budget policy and budget control in the United States is provided by past and future fiscal trends in other democracies. During the past century, the relative size of government has increased in all of the industrialized democracies, and, since the 1960s, the composition of their spending has shifted toward social welfare entitlements. Moreover, this latter shift has caused similar structural deficit problems. A critique of U.S. fiscal policy during the 1980s attributed the explosive growth of deficits to "intellectual error of the first magnitude . . . [or] deliberate moral irresponsibility on a truly astonishing scale." This condemnation, however, ignored the fact that deficits in the United States were not isolated events. Other industrialized democracies were encountering deficit-control problems of comparable severity and for similar reasons: "The fiscal deficits of the 1980s were rooted in decisions made in the 1960s and 1970s to create and enlarge public programs. Governments . . . increased spending under the presumption that the high economic growth rates of the 1950s and 1960s would continue. By the time economic growth rates slowed in the mid-1970s, many of these programs were entrenched."

These entrenched programs, in the United States and elsewhere, "involved social welfare commitments." New benefit programs had been established, existing ones had been expanded, and automatic benefit adjustments, such as indexing, had been introduced at a time when budgetary projections were optimistic. When economic growth began to slow and deficits appeared, it was widely assumed that the imbalances were temporary and would not require major fiscal adjustments. By the time governments recognized that budgetary problems were more severe, they "found themselves overcommitted and facing even larger deficits."

The expansion of government budgets in the industrialized democracies paralleled spending trends in the United States. Traditional or "defining" programs, such as defense, diminished in terms of relative importance, while social welfare programs proliferated in number and rose sharply in cost. For a time, these cost increases were financed through budgetary growth and transfers from other sectors of the budget, such as defense. When growth slowed and the margin for transfers narrowed, governments were confronted with "a structural budgetary fault . . . [caused by] demands that cannot be reduced and supplies of revenue that cannot be raised sufficiently to satisfy them."

By the early 1980s, all of the Group of Seven (G-7) countries had deficits (Fig. 1.2). Over the next fifteen years, virtually all of the larger group of developed countries included in the Organisation for Economic Co-Operation and Development (OECD) faced chronic and, in some cases sizable, structural imbalances. From 1980 to 1995, structural deficits for the OECD countries averaged approximately 3 percent of potential GDP annually; structural deficits in the United States over this period were at or below the OECD average. Then, by the late 1990s, fiscal consolidation efforts in the United States and in most industrialized democracies had either eased or reversed structural imbalances.

The trend in public debt levels in the United States was also part of a broader pattern. After World War II, the publicly-held federal debt-GDP ratio dropped by more than three-fourths before stabilizing during the 1970s and then rising during the 1980s and 1990s. By the mid-1990s, publiclyheld debt was nearly 50 percent of GDP. Rising debt-GDP ratios similarly afflicted other countries beginning in the 1970s. By 1995, the average OECD gross public debt was over 70 percent of GDP, and net debt was close to 50 percent.

These cross-national comparisons reflect the substantial convergence in the fiscal problems faced by the advanced democracies. These countries have long-established and costly social welfare systems that enjoy strong public support, and the programs that provide retirement and health benefits across virtually the entire population are the most entrenched. Past rates of growth in these programs have been unusually high, making it necessary for governments to create new macrobudgetary rules to achieve fiscal consolidation. Under the Maastricht Treaty, for example, European Union members must comply with budgetary limits on deficits and debt. While other financial criteria must be satisfied as well, "deficit and debt targets clearly have taken center stage in recent European politics." In the United States, macrobudgetary rules have been even more restrictive in terms of spending controls and tax policy changes. This common effort to strengthen fiscal discipline "suggests the critical role of budgeting and public administration in contemporary international affairs, as well as what might be called the internationalization of budgeting."

There is also a prospective dimension to this internationalization of budgeting. Funding requirements for social welfare systems will intensify over the next few decades because of demographic trends. Population aging, caused by the confluence of longer life expectancy and low birth rates, means there will be fewer and fewer workers to support a growing number of beneficiaries. In the face of "these relentless pressures on public finance," governments will be forced to consider additional fiscal reforms.

Similar budget policy problems among the industrialized democracies have produced similar fiscal policy strategies, with budget planning geared to structural-deficit control and to debt-to-GDP ratios that can be sustained indefinitely. Neither of these fiscal goals can be achieved in the future without social welfare retrenchments that, given demographic patterns, extend over many decades, but the necessity for long-term budget discipline creates an obvious dilemma for democratically elected governments having limited political tenure. The European Union has attempted to provide some electoral protection for its member governments by setting uniform limits on deficits and debt. The United States will be attempting to exercise much the same discipline without a fixed standard, albeit with less severe demographic pressures and a narrower social welfare system.

The Budget Process and Centralization

The framers of the Constitution conferred on Congress the powers to tax, spend, and borrow. One of the persistent problems that Congress has faced in exercising its "power of the purse" is how to organize the budget process to protect its institutional prerogatives, while producing acceptable fiscal outcomes. In the modern era, Congress has faced the additional difficulty of controlling large spending programs that operate outside the regular appropriations process. An effective budget process must be congruent, in terms of procedural controls, with the types of spending programs and revenue policies that drive the budget. For the past few decades, this requirement has led Congress to centralize its internal procedures and to rely on macrobudgetary rules and controls. The result is a budget process that is extremely complex and time-consuming and often depends heavily on presidential direction.

Microbudgeting and Incrementalism

During the early history of the United States, there were no formal mechanisms in Congress for coordinating spending and revenues nor, until 1921, was there a presidential budget. Yet, as Wildavsky explains, "Calculations were made, conflict diffused, and . . . budgets were passed on time while revenues and expenditures stayed within hailing distance." This microbudgeting, or bottom-up, approach allocated spending to individual programs and agencies without the need for overall totals, because there was "widespread agreement on the norms of balance and comprehensiveness." The former rested on a "de facto spending limit," while the latter meant that "neither substantial revenues nor expenditures were outside the purview of the political authorities for ratcheting up or down."

Whereas much of the historical literature on classical budgeting stresses the effectiveness of incrementalist, decentralized decision making, the reality was more complex. Wartime financing presented serious problems throughout the nineteenth century, forcing Congress to cede authority to the executive branch and especially the Secretary of the Treasury. The requirement that wartime debt be quickly retired also meant centralized controls were required for spending, with the post–Civil War Appropriations Committees providing a model reform of this type. In addition, balanced budgets did not guarantee financial stability. Federal credit and debt management, for example, often created financial dislocations, because Congress could not adequately coordinate fiscal and monetary policy.

Perhaps the key element in classical budgeting, however, was the limited scope of federal spending. With the exception of interest on the debt, most spending during the nineteenth and early twentieth centuries was what we now classify as discretionary. The locus of control was the annual appropriations process, which allowed Congress to enforce spending discipline as needed. Moreover, since state and local governments were responsible for many of the largest and fastest-growing spending programs during this period, Congress was not confronted by relentless pressures to spend.

Macrobudgeting and Coordination

The decline of incrementalism as both a descriptive and prescriptive norm for budgeting can be attributed to a variety of economic and political changes that have made budget policy less stable and consensual. The changing composition of spending policy, however, has clearly had an enormous impact on the perceived need for centralization and coordination in the budgetary process. As mandatory social welfare entitlements displaced discretionary spending as the largest share of the federal budget, the congressional appropriations process could not effectively control either spending totals or spending growth. A parallel decline affected presidential budgets, since the president’s leverage over mandatory spending was limited.

These new forms of spending commitments necessitated the implementation of macrobudgetary rules and procedures. Since the 1970s, both Congress and the executive branch have worked to make budgets more comprehensive, predictable, and controllable through enforceable, multiyear limits on spending and through formal coordination of spending and revenue levels. The federal budgetary process is now highly centralized, allowing Congress and the president to negotiate multiyear budget agreements and to use expedited legislative processes to implement those agreements.

Budget Reform

The balanced-budget principle in American politics is not self-enforcing. A degree of centralized control has always been necessary to balance spending demands against one another and to keep them in line with available revenues. Periodic attempts to reform the budget process have therefore been directed toward centralizing spending authority within the House and Senate and, in the twentieth century, with providing fiscal policy coordination through presidential budgets.

Budget reform efforts have typically been spurred by deficit and debt concerns. Until recently, these concerns were tied to wartime debts, with the Civil War, World War I, and World War II being followed by congressional budget process reforms that met with varying degrees of success. The deficit and debt problems that surfaced more recently were different in terms of causes and severity, and the corresponding reform efforts were more complex and comprehensive than in the past. In particular, the 1974 Congressional Budget and Impoundment Control Act mandated annual legislative budgets that governed both spending and revenue levels. Prior congressional reforms had focused on spending, notably appropriations bills, rather than on formal coordination of spending and revenue decisions.

The major reforms of the budget process have a shared emphasis on centralization. The difficulty has been in designing reforms that would protect the legislative power of the purse against executive encroachments and would resolve budget policy problems, such as excessive spending, inadequate revenues, or persistent deficits and growing debt. Institutional arrangements are a complicating feature in federal budget control, and concerns have been raised about the institutional costs to Congress of centralization. A leading constitutional scholar has argued that the 1974 Budget Act has compromised congressional accountability to the public and increased Congress’ vulnerability to presidential leverage. Since it is likely that even more centralized and comprehensive fiscal controls will be proposed to deal with future entitlement financing pressures, these concerns about constitutional prerogatives and institutional balance will need to be addressed in budget reform debates.

The Politics of Budget Policy

The budget represents a crucial set of political decisions. Much of what we consider politically important—what the government does, who decides what it does, and who benefits from it—can be translated into the financial language of budget policy. The chapters that follow trace the evolution of budget policy from the nation’s founding through the modern era, and the purpose of this historical analysis is to document the growth of government over time and to explore the factors that have shaped that growth.

The central debate about the appropriate size of government is not an abstract argument. Rather, this debate involves competing ideas about what the federal government should do in terms of its spending commitments and the tax policies to support that spending. The size of government debate also involves competing ideas about deficits, debt, and the importance of balanced budgets. Today, for example, it is generally accepted that governments cannot, indeed should not, balance budgets during major wars or recessions.

At other times, however, the crucial question is whether budgets should be balanced at high or low spending levels. Battles over balanced budgets, today as in the past, are battles over the size and shape of budgets. The size and shape of budgets, in turn, define the role of the federal government in carrying out its constitutional powers to tax, spend, and borrow to "provide for the common Defence and general Welfare of the United States."

© 2003 The Penn State University

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