If only U.S. Treasuries had covenants like corporate debt does. Instead of linking to EBITDA, metrics like borrowing or spending as a share of GDP could be used. That might be a stretch, but lawmakers are still trying to implement new fiscal rules. It's an idea whose time has come "“ or at least come back.
Back in 1985, Congress passed a law requiring it to meet annual deficit targets on the way to a balanced budget in 1991. On its face, the effort was a complete bust. Congress routinely evaded the yearly limits, and the 1991 budget was $269 billion in the red. But much fiscal good was done. Before the recession hit in 1990-91, the deficit had fallen to 2.8 percent of GDP from 5.1 percent, while the rate of annual discretionary spending (excluding social insurance programs) also had declined substantially.
Two legislators have taken up the cause anew. Senators Bob Corker of Tennessee, a Republican, and Claire McCaskill of Missouri, a Democrat, want to reduce spending over 10 years to a cap of 20.6 percent of GDP, the 40-year historical average. Exceeding that limit would result in across-the-board spending cuts that could only be waived by supermajority votes in both chambers. Based on Congressional Budget Office baseline forecasts, hitting the proposed Corker-McCaskill target would create a small projected surplus.
Some argue the cap is far too low given an aging U.S. population, rising healthcare costs and higher debt interest payments. Indeed, it would require a hefty 20 percent Medicare cut by 2025. But such reductions aren't unreasonable, says the CBO, if Medicare was to be turned into a subsidized voucher program for seniors, as some Republicans propose.
The Obama debt commission had a slightly different perspective, arguing for limits that focused on debt instead of spending. It's an approach the International Monetary Fund also endorses. But whatever form such rules might take, expect the general concept to be a part of the debate over raising the U.S debt ceiling. Congress would still hold the key to its own fiscal handcuffs, of course. But escaping austerity might prove just a bit harder.
Read Full Article »
