It is a pleasure and an honor to be here to explain to the House Budget Committee and the American people my support for a balanced budget amendment to the U.S. Constitution.
I am a long-time supporter of such an amendment, and in fact helped David Stockman prepare his Congressional testimony on S.J. Res. 58 in 1982; that version of the balanced budget amendment passed the Senate but failed in the House of Representatives. I hope H.J. Res. 1 will have a better fate.
The balanced budget amendment, if approved by the Congress and 38 or more of the 50 states, would place in the Constitution not economic micro-management but a fundamental rule of fiscal responsibility--that the people of this country want their elected representatives to deal with the difficult choices involved in taxing and spending in the present. The amendment is flexible--perhaps too flexible--in allowing the Congress to override its provisions with a mere 60 percent majority.
The problem of the deficit seems to be shrinking--the fiscal 1996 deficit was only 1.4 percent of the Gross Domestic Product. But the vast majority of the decline in the deficit is the result of cutting national defense, which is now at its lowest level as a percentage of GDP since before the Second World War. [In the last four years federal outlays on physical resources have declined as a percentage of GDP as well.] The human resources category of the budget, which includes retirement and health expenditures, has been virtually constant as a percentage of GDP.
But the pressures on federal spending will increase dramatically when the baby-boom generation begins to retire in 2008. The ratio of people working to people retired will begin to decline, and federal expenditures for Social Security and Medicare will increase as a percentage of GDP.
Now we have about 3 people working for every retired person; by the year 2030 there will be only about 2 people working for each retired person. And outlays for Social Security (OASDI) and the hospital insurance part of Medicare (HI) will increase from the 1996 level of 6.39 percent of GDP almost of full percentage point by 2010, over two percentage points by 2020, and almost four percentage points by 2030.
To finance an increase in expenditures through increased taxes, a convenient rule of thumb is that for every increase of a percentage point of GDP in federal spending, tax revenue would have to be raised by an amount equivalent to a 10 percent surcharge on all individual and corporate income taxes. So by the year 2030, we are looking at an amount equal to a surcharge of 40 percent on all income taxes.
The demographic crisis is thus a fiscal crisis that is extremely difficult politically. Passage of the balanced budget amendment by the U.S. Congress would encourage debate about this problem in every state of the union, which would in itself be a benefit whatever the ultimate outcome. What we decide to do will affect Americans of different generations differently. It is not an easy matter. But it is a debate we should have.
If passed the amendment would not eliminate the difficult choices of controlling spending versus increasing taxes, but it would do a great deal to limit the option of running continual annual deficits and thus increasing the federal debt in relation to GDP. And thus it would help preclude the favorite solution of governments around the world to national debt, which is to inflate the currency until the national debt is depreciated to an acceptable level--which is, of course, another form of taxation.
Finally, the balanced budget amendment will contribute to economic growth because it will encourage spending control rather than continual increases in taxes. It will also discourage the deficit-spending option with its ultimate solution of inflation. We know that inflation itself is detrimental to economic growth; so also is a rational prediction that the government is likely to inflate the currency in the future.
We have debated a balanced budget amendment to the Constitution ever since we lost the sense of fiscal responsibility that led us to balance the budget except in time of war. Legislative balanced-budget acts have failed to lead to balanced budgets. I found in my bookshelf a document called Balancing the Budget: Hearings Before the Subcommittee on Constitutional Amendments of the Committee on the Judiciary of the United States Senate. It is dated 1975. It is now 1997. It's time for the Congress to act and to let the people of the several states make the final decision.