For Immediate Release: Wednesday, June 22, 2011
Contact: Phoebe Silag or Karen Conner, news@epi.org 202-775-8810

Spending caps would harm the social safety net and the economy, two new EPI analyses find

Senators Bob Corker and Claire McCaskill have introduced the Commitment to American Prosperity Act (CAP Act), which would phase in hard caps on government spending over a 10-year period and impose sequestration, or an automatic spending cut, if the caps were breached.  In two new studies, Economic Policy Institute (EPI) experts analyze the impact the CAP Act could have on federal outlays. The CAP Act could severely harm the social safety net, which millions of Americans rely on, as well as harm the economy, especially during downturns like the Great Recession.

In Why spending caps are poor policy: Understanding the costs and constraints of capping spending as a share of the economy, Rebecca Thiess, Andrew Fieldhouse and Ethan Pollack looks at the broad effects the legislation would have on government spending.   In a case study, they also estimate the impact the CAP Act would have had on unemployment and GDP during the Great Recession, had it been passed prior to the most recent economic downturn.  In Unbalanced budgeting: Federal spending cap may endanger Social Security, Thiess examines how the CAP Act could impact Social Security outlays in particular.  Both papers also briefly discuss the balanced budget amendments proposed by Senator Orrin Hatch and Representative Bob Goodlatte.

The CAP Act would mandate that federal spending be reduced from its currently projected 2011 level of 24.1% of GDP to 20.6% of GDP by 2022.  The 20.6% figure equals the average level of spending between 1970 and 2008—it thus does not account for an aging population, rapidly-rising health care costs and costs related to recently-passed legislation.  While the CAP Act would impose sequestration if federal spending levels exceeded permissible spending levels, Congress could avoid this by constructing a federal budget that stayed within the mandated targets.  Why spending caps are poor policy outlines four possible scenarios, including that of sequestration.  All four scenarios are characterized by large cuts to the social safety net.

Why spending caps are poor policy also examines the likely economic impact of the CAP Act, had it been fully implemented before the Great Recession, and finds that forced spending cuts between 2008 and 2011 would have pushed the unemployment rate an average of one percentage point above actual levels. The CAP Act would have severely limited countercyclical fiscal policy, all but ruling out the 2009 Recovery Act and subsequent emergency unemployment benefits and state fiscal relief.

Unbalanced budgeting explores the impact the CAP Act could have specifically on Social Security.  It finds that across-the-board cuts would reduce Social Security outlays by 13.6% by 2021.  If cuts were triggered by sequestration, outlays could fall 16.4% by 2021.  In both scenarios, these cuts could lead to major benefit cuts, as well as job losses in the hundreds of thousands.

Finally, both studies find that a balanced budget amendment, such as the ones proposed by Senator Hatch and Representative Goodlatte, could result in even more severe cuts to federal spending.

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