The federal budget process was established primarily to allow Congress to make major budget policy trade-offs--tax increases versus budget cuts, guns versus butter. Yet this very possibility of choice is putting pressure on the process and may lead to its eventual collapse. The consequences of collapse, or of not getting a timely agreement for adoption of a first resolution, could be devastating for the beginning economic recovery and for state and local governments.
The nation's governors are well aware of how hard it is to achieve a consensus on a budget, particularly since all states but one are forbidden by law from operating with deficit budgets. Like federal revenues, state revenues have failed to materialize at the expected levels during these last four years of recession. Nevertheless, governors and legislators have cut spending and increased taxes repeatedly to balance state budgets.
Quick adoption of a resolution and adherence to the congressional budget timetable are vital to states, since the process provides the only allocation of federal funds before most states begin their fiscal years. The fiscal condition of most states has been severely damaged by the protracted recession, so states cannot implement late federal budget decisions without seriously affecting the services states provide their citizens.
Perhaps the most serious risk of a budget stalemate is that it could abort the long-awaited economic recovery. People who buy durable goods and housing and who make business investments--areas that traditionally lead to economic recovery--are extremely sensitive to both long-run and short-run interest rates. Those rates depend on the financial market's expectations regarding future deficits. Failure to resolve the budget impasse and lower out- year deficits could reduce confidence, raise interest rates and cripple our economic recovery. Such a result is unacceptable, given the financial condition of most states.
The governors have avoided the federal budget debate in the past, limiting their interest to those portions of the federal budget that flow directly to their treasuries. Yet the prospect of huge federal deficits forced the governors in early March to develop a specific budget recommendation. They are convinced that this position represents the emerging national consensus. It is the only comprehensive, bipartisan budget position by political leaders who represent the citizens of all the states. The Senate should look to this position as an important starting point for a bipartisan agreement.
Three fundamental principles should guide decisions on the federal budget:
Congress must moderate the level of real spending growth in defense to 4-to-6 percent for fiscal 1984 and to 3-to-5 percent overall for the next five years. These ranges represent a potential compromise between the House resolution of approximately 3 percent, and the administration's 10 percent. We cannot have a strong America without a strong economy, nor build our national defense at the expense of our nation's internal defenses as capital investments in infrastructure, education and help for our people in greatest need.
If Congress cuts domestic programs, the reductions should fall in the non-means-tested entitlement programs such as Medicare and pensions, programs projected to have major cost increases over the 1980s. Non-defense discretionary spending should be funded at three- fourths the rate of economic growth, means- tested entitlement programs, such as AFDC and Medicaid, should be fully funded.
Even with these spending levels, deficits would still be too high as a percentage of GNP without additional revenue or expenditure changes. Federal deficits are projected to consume 80 percent of total savings by fiscal year 1988. Interest rates, even considering lower inflation, will remain too high, and the threatened rise in federal borrowing will further crowd out private investment. Our nation's economic health cannot tolerate persistent annual deficits close to $200 billion. Therefore, revenue increases may be necessary in fiscal 1984 to convince financial markets that Congress is making progress in reducing deficit levels back to 2 percent of GNP by 1988.
While not endorsing specific revenue measures, the governors agree that difficult revenue decisions must be made to achieve long-term economic stability.
The governors urge the Senate to quickly adopt a first budget resolution. We believe there is a substantial risk that stalemate will increase interest rates and slow both the economic recovery and long-term economic growth. Without economic recovery, we cannot provide jobs for the millions of American men and women who need work and want to work. Without recovery, the already extremely serious fiscal conditions of the states will continue to deteriorate.