Bipartisan Senate budget bill could damage the economy during recessions

Last week, the Senate Budget Committee passed a bipartisan set of budget reforms out of committee. While they include some important steps forward, such as effectively eliminating the archaic debt limit, their centerpiece is a deeply damaging provision that, if passed into law, would make recessions far more damaging by forcing Congress to consider steep cuts just when the economy would be most hurt by them.

Under the reforms, instead of passing a budget every year, Congress would be on a two-year budget cycle. This is not totally objectionable. The damaging provisions are the “special reconciliation instructions“ provided in the second year of this budget cycle. In the first year, the Congressional Budget Office (CBO) would project the debt-to-GDP ratio from the budget. In the second year, CBO would report on whether the federal government is meeting those debt-to-GDP targets, and if not, trigger the special reconciliation instructions. These instructions would require the Senate Budget Committee to recommend an amount of deficit reduction in response to missing the debt-to-GDP targets and create a fast track for passing those deficit reductions.

Others have rightly focused on the extent to which this could line up budget cuts to programs that U.S. families rely on, like Medicaid, Medicare, and the Affordable Care Act. For example, revenues have come in even lower than CBO expected following the Republican Tax Cuts and Jobs Act (TCJA). If this reform bill were in place, Congress would be expected to respond to these larger-than-expected tax cuts for the rich with deficit reduction. This has been in the Republican leadership playbook all along, as they have made it abundantly clear that cuts to vital programs for low- and moderate-income families are the intended next step after passing regressive tax cuts for the rich and corporations. 

But that’s not the only disaster for U.S. households this process could create. If Congress tried to reduce the deficit on the scale of missed debt-to-GDP targets during a recession, the result would be an economic catastrophe by further sapping demand from the economy and driving the United States further into recession. As data from a recent CBO report makes clear, recessions are exactly when CBO debt projections are likely to be extremely off, as fewer revenues come in and more government spending occurs as the economy contracts.

When the United States isn’t headed into a recession, CBO projections actually typically overestimate debt growth in the next year by a very small amount. But the average error in CBO debt projections near the beginning of an economic downturn is an extraordinarily large 5.4 percent of GDP, with CBO missing the mark during the Great Recession by a staggering 8.8 percent of GDP.

Figure A

CBO typically underestimates debt growth near the beginning of a recession: Average budget-year debt error as a percent of GDP

Average Error Near the Beginning of Economic Downturns -5.444
Average Error for Other Projections 0.802
Average Error for All Projections 0.251
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Source: EPI analysis of the Congressional Budge Office's September 2019 report on past deficit and debt projection.

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The effects of the special reconciliation instructions would compound. As GDP contracts, it is more likely that the next CBO projection will also show a larger-than-expected increase in the debt-to-GDP ratio. This could spark more cuts and so on.

In fairness, the Senate Budget Committee would not necessarily be required to recommend deficit reduction that exactly matches the misstatement in CBO projections during a recession. But should this give us any comfort? The experience of the Great Recession says no.

With the economy in a deep recession, congressional Republicans intentionally throttled the economy with fiscal austerity measures for political gain, causing undue harm to millions of U.S. families. And too many policymakers and the media took the sudden turn to deficit-hawking by congressional Republicans seriously.

This all culminated in steep cuts to federal spending through the Budget Control Act of 2011, which significantly damaged the economic recovery from the Great Recession. If government spending following the end of the Great Recession had tracked spending in previous recoveries, a full recovery with unemployment around 4 percent would have been reached by the end of 2013. These new special reconciliation instructions, much like the House adoption of “Paygo” budgeting rules at the beginning of this Congress, reinforce the discredited economic view that deficits are unequivocally bad and only during outright recessions should deficit reduction move off center stage as a key policymaking priority. It is not unlikely that the special reconciliation instructions included in this reform effort could help turn a run-of-the-mill recession into something much, much worse.