The 1974 Budget Act's Impact on U.S. Spending and Debt: A Synthetic Control Study

Abstract

The 1974 Budget Act marked a turning point in U.S. budgeting history. With the Act, Congress decisively asserted its fiscal power, becoming more independent from the President in developing the budget and appropriating funds. Lawmakers at the time believed that the status quo, wherein Congress approved the budget in a piecemeal fashion, improperly limited their authority. While rising deficits and debts put pressure on Washington to restrain them, the President’s most direct method for cutting spending – impoundment – caused the conflict between Congress and the President that boiled over and led to the Budget Act. In this paper, we set out to discover how this compromise, the 1974 Congressional Budget and Impoundment Control Act (or 1974 Budget Act), ultimately impacted spending and debt. More specifically we use a synthetic control model to test the alternative – what would have happened without the Act? In short, we find that after 1974, public debt-to-GDP and public expenditures-to-GDP both increased, but less than what they would have without it. Section 2 outlines the Institutional framework, Section 3 describes the empirical methodology, Section 4 discusses the data sample and the empirical strategy Section 5 describes the results, Section 6 discusses broad implications for modern reformers, and the Appendix shows the placebo tests which give robustness to synthetic control analysis.