This posting is the first in a 7 posting explaining the Balanced Budget Amendment at the heart of the Compact for a Balanced Budget.
The goal of this series is to explain each of the 5 substantive sections of the Compact's 629 word Balanced Budget Amendment in light of the 6th definitional section so that you will have perfect clarity on its meaning and policy implications.
This is a BBA that is designed to fix the national debt by strongly incentivizing the correct policy choices, while still having a plausible bipartisan path to ratification in 38 states. The policy components of the amendment have also been poll-tested and enjoy supermajority rates of support. You can verify that here. Another important initial point is that the model legislation is shorter and less complex than many of the BBAs that have been introduced in Congress. You can verify that here.
With that said, here is the text of section 1 of the model legislation:
“Total outlays of the government of the United States shall not exceed total receipts of the government of the United States at any point in time unless the excess of outlays over receipts is financed exclusively by debt issued in strict conformity with this article.”
Here are the relevant definitions furnished by section 6 of the Amendment:
• “debt” means any obligation backed by the full faith and credit of the government of the United States;
• “total outlays of the government of the United States” means all expenditures of the government of the United States from any source; and
• “total receipts of the government of the United States” means all tax receipts and other income of the government of the United States, excluding proceeds from its issuance or incurrence of debt or any type of liability.
Taking into consideration these definitions, section 1 of the Amendment means that the federal government cannot spend at “any point in time” more than: (a) tax receipts; (b) income to the federal government that does not constitute proceeds from the incurrence of debt or liabilities; and (c) proceeds from incurring full faith and credit obligations. In other words, the federal budget must be “balanced” by limiting spending to tax receipts, income received free and clear of any continuing obligation, such as fees and fines, and full faith and credit debt financing. This section is designed to impose a true “pay as you go” cash-based spending limit on the federal government as the backbone of the limit on federal borrowing capacity that is imposed and enforced in the following sections of the Amendment.
Because this section frames its balanced budget concept as a spending limit, there is no risk of judicial intervention forcing a tax increase to balance the budget. There is no textual hook that could justify an increase in receipts to cover excessive spending. If available borrowing capacity is exhausted (which is addressed by sections 2 and 3 of the Amendment, discussed in the next two emails), the judiciary can only force the federal government to spend no more than “total receipts;” i.e. available tax receipts and income received free and clear of any continuing obligation.
Additionally, the definitions utilized in section 6 of the Amendment ensure that section 1’s pay-as-you-go spending limit cannot be evaded by any known budgetary or financial gamesmanship.
For example, the federal government cannot increase its ability to spend by obtaining proceeds from sale-lease back schemes, whereby government assets are “sold” under a condition that they will be leased back on an installment payment schedule; this would constitute “proceeds from the incurrence of liabilities,” which is excluded from the definition of “total receipts” to which spending is limited.
Likewise, spending remains limited at all times to “total receipts” and available “debt” financing no matter when or how the bills are booked or paid. Consequently, the federal government cannot increase its ability to spend by pushing bills due in the current fiscal year to the next fiscal year. Nor can the federal government increase its ability to spend by “floating warrants,” i.e. issuing checks with an instruction not to cash them.
Finally, the federal government cannot increase its ability to spend by assuming no-recourse loans or issuing moral obligation bonding because the available “debt” financing that can support spending beyond “total receipts” is limited by section 6 to “full faith and credit” obligations.
The bottom line is that section 1 of the model Balanced Budget Amendment, combined with the relevant definitions of section 6, would ensure that the federal government cannot spend more than cash on hand from ordinary revenue sources and plain vanilla full faith and credit borrowing. This provision is the unbreakable backbone of the strong limit on federal borrowing capacity that is enforced in sections 2, 3 and 4 of the Amendment, which will be discussed next.
If you want a preview of what’s coming, you can read a 1 page overview of the model legislation here, you can find a short 5 page policy brief on the model legislation here or you can watch a 10 minute YouTube video on the model legislation here.