| Chapter 14 Outline |
| V. REDUCING THE DEFICIT |
| 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. |