A normal unemployment balanced budget rule (NUBAR) statute

Under a NUBAR statute, every year (starting with the budget that Congress plans during 2012 for the fiscal year 2013) Congress would be required to enact a planned federal budget that the Congressional Budget Office (CBO) estimates would be balanced next year if the economy’s unemployment rate is normal next year.  “Normal” would be defined as the average of the preceding decade.  There would be a small automatic change every year in the numerical value of the normal unemployment rate as the ten-year average is recomputed.  In this article 6 percent will be used for numerical illustrations.    

If the unemployment rate is above normal, the NUBAR statute would allow Congress to enact a fiscal stimulus package provided the package contains a “terminator” clause that automatically phases out the stimulus as the unemployment rate returns to normal.  Thus, NUBAR would not prevent Congress from enacting a large temporary fiscal stimulus to combat a recession.  It would, however, require that any stimulus package be automatically terminated as soon as the economy returns to a normal unemployment rate.

On September 1, 2012, one month before the beginning of fiscal year 2013, the CBO would provide a NUBAR estimate for the 2013 fiscal year.  CBO would estimate the labor force in 2013 and use it to estimate total employment in 2013 if the employment rate is 94 percent.  From its estimate of total employment and the total capital stock in 2013, CBO would estimate total output (GDP) and total income if the unemployment rate in 2013 is 6 percent.  Given total income and current tax law, CBO would estimate total tax revenue; and given current authorizations and appropriations for all federal spending programs, CBO would estimate total federal spending in 2013.  The difference between estimated spending and estimated tax revenue would be CBO’s estimated 2013 NUBAR deficit—the estimated deficit in 2013 given the assumption the unemployment rate in 2013 is 6 percent.

The question immediately arises: What happens if, on September 1, 2012, CBO reports that the planned budget for fiscal year 2013 shows a NUBAR deficit?  The NUBAR statute would then prescribe an automatic across-the-board uniform percentage decrease in all planned spending (direct expenditures and tax expenditures such as tax credits and tax deductions) and the same percentage increase in all taxes to achieve a planned balanced budget.  If the planned budget as of September 1 is estimated by CBO to have a NUBAR deficit, then CBO would be instructed to calculate the uniform percentage required to achieve a planned balanced budget.  On October 1 all planned spending (direct expenditures and tax expenditures) would be reduced by the required percentage and all taxes would be increased by that same percentage.  

NUBAR would apply substantial discipline to the federal budget starting in 2013.  Politically plausible estimates suggest that once the economy fully recovers it is likely that without a NUBAR statute the federal deficit would be roughly 6 percent of GDP (with spending roughly 25 percent of GDP and taxes roughly 19 percent of GDP).  Starting with the budget that is planned in 2012 for fiscal year 2013, NUBAR would compel Congress to eliminate the planned deficit.  Congress would be free to choose whatever combination of spending cuts and tax increases it prefers—at one extreme it could cut spending by 6 percentage points of GDP (from 25 percent to 19 percent), at the other extreme it could raise taxes by 6 percentage points of GDP (from 19 percent to 25 percent).  If Congress is unwilling to close any of the 6 percentage point when it submits its planned budget on September 1 so that it plans 25 percent spending and 19 percent taxes, then NUBAR would implement an across-the-board uniform percentage decrease in all components of spending and the same percentage increase in all taxes so that the budget that begins October 1, 2012 is expected by CBO to be balanced at approximately 22 percent in 2013 if the unemployment rate turns out to be normal in 2013.       

With a NUBAR statute enforced by its automatic across-the-board percentage adjustment, the federal budget would be balanced in a year when the economy is normal, be in surplus in a year when the economy is booming, and be in deficit in a year when the economy is in recession. 

Laurence Seidman is Chaplin Tyler Professor of Economics at the University of Delaware in Newark, Del.