Chapter 14 Outline
A. The Gramm-Rudman-Hollings Act
1. Under the Gramm-Rudman-Hollings Act, the federal budget deficit was to be reduced by at least $36 billion each fiscal year so that the budget would be balanced by fiscal 1991.
2. Prior to the beginning of each fiscal year, estimates of whether and by how much the budget would exceed the deficit target were to be made.
a. If the budget exceeded the deficit target, Congress and the president were to agree on spending cuts or across-the-board spending cuts were to be instituted.
3. There were several objections to the Gramm-Rudman-Hollings Act.
a. The Act eliminated fiscal policy as a means of stabilizing the economy.
1. This criticism was less serious than it sounds because more reliance could be placed on monetary policy and because the Act could be suspended during recessions or wartime.
b. There was a lack of flexibility regarding both the annual reduction in the deficit and how it could be achieved.
B. President Bush's Deficit Reduction Plan
1. President Bush presented a plan to reduce projected deficits by almost $500 billion over a five-year span starting with fiscal 1991.
2. Most of the deficit reduction was to come from cuts in government spending.
3. The plan eliminated the annual Gramm-Rudman deficit targets and mandated a pay-as-you-go approach for increasing spending or decreasing taxes.
C. President Clinton's Deficit Reduction Plan
1. President Clinton presented a plan to reduce the estimated budget deficits by $496 billion over a five-year span starting in fiscal 1994.
2. The reduction was to come through both spending cuts and tax hikes.
D. The Balanced Budget Amendment
1. Proponents of a constitutional amendment requiring the federal government to balance the budget annually are concerned with both the adverse effects of structural deficits and limiting the size of the government sector.
2. Most economists do not support a constitutional amendment requiring a balanced budget.
a. They believe such an amendment can cause greater instability in the economy.
b. They believe that it is best to leave decisions regarding budget priorities and the balance between the government and private sectors to elected representatives.
c. They believe that such an amendment may not effectively limit the growth of the federal government.
3. There are practical problems associated with balancing the budget.
a. Revenues and expenditures must be predicted for the budget year in question.
1. Such forecasts are often in accurate because of changing business conditions.
4. A balanced budget amendment may some unintended consequences.
a. A balanced budget amendment may result in more off-budget spending.
b. A balanced budget amendment may force the private sector to bear the cost of new social programs.
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