top of page

Exploding Propaganda Series (Part 2 of 7): Section 1's Pay-As-You-Go Spending Limit

The Compact for a Balanced Budget advances a specific Balanced Budget Amendment that you can read today, and which four states have already contractually committed to ratify. Read it here. Nevertheless, the opposition does not think the Amendment does enough. They usually start by attacking Section 1 of the seven section Amendment. They criticize it they do not think it is a big deal that the section limits federal spending at all times to cash from taxation (and non-borrowed income, like free and clear property sales) and from a limited amount of debt. This criticism reveals ignorance of the fact that governments, including the federal government, currently are able to spend beyond taxation and a limited amount of debt. They do so by essentially giving IOUs to vendors. Sometimes this is called "floating warrants"--the government will issue a check to a vendor and tell it not to cash it. Sometimes this is called a "rollover"-the government simply chooses not to book the spending in the current fiscal year, and relies on the vendor extending credit during the interim. This sort of evasion is not rare. It is standard practice in the states to evade their balanced budget and debt limit requirements. It is used to float as much as 10% of a state budget routinely and far more in times of crisis. At lower levels of government, cities like Detroit or territories like Puerto Rico, there is also the phenomena of "moral obligation" borrowing to support spending. There are many versions of this--enough for Puerto Rico to support most of its spending with it. In theory, moral obligation borrowing does not have to be repaid, but the bonds or other borrowing instruments are definitely purchased with a wink and a nudge. Lenders understand that government's credit on regular bonding will be hurt if it defaults on moral obligation bonding. Still more spending occurs based on borrowing in this way. Knowing this (we have a team of experts familiar in this line of work), we had to start with an initial spending limit that precludes all such gamesmanship. That's what section 1 is meant to do. We start with an honest baseline limit on spending to two determinable sources of funding-taxes (and non-borrowed/unencumbered income) and full faith and credit borrowing. This section is actually a hugely important reform. The failure to grasp that reveals a lack of familiarity with standard fiscal policy issues or it is deliberately deceptive. Either way, the opposition has no credibility. Stay tuned for section 2 tomorrowEndFragment

Featured Posts
Recent Posts
Follow Us
  • Wix Facebook page
  • YouTube App Icon

Visit CFA on Facebook

Get Educated about CFA on YouTube

Search By Tags
No tags yet.
bottom of page