Most farmers support the concept of a balanced federal budget However, the Balanced Budget Amendment (BBA) already passed by the U.S. House of Representatives and recently rejected by the Senate, could have far more impact on farmers than the Farm Bill itself

Meyers, William H.

English

Most farmers support the concept of a balanced federal budget However, the Balanced Budget Amendment (BBA) already passed by the U.S. House of Representatives and recently rejected by the Senate, could have far more impact on farmers than the Farm Bill itself.</p

Meyers, William

Digital Repository @ Iowa State University (ISU)

The Balanced Budget Amendment: How It May Impact Farm Programs (William H. Meyers 515 294-1184) Most fanners support the concept of a balanced federal b1.1dget However, the Balanced Budget Amendment (BBA) already passed by the U.S. House of Representa-tives and recently rejected by the Senate, could have far more impact on farmers than the Farm Bill itself. If the Senate reconsiders and approves the BBA later this year, the Congress ostensibly will be looking for up to $700 billion in budget cuts over the next five years. This magnitude of reduction would be required to pay for proposed tax cuts of $200 billion while putting the budget on track to be in balance by 2002. Fanners and other agribusiness interests need to watch both tax cms and budget cuts to discern the net impact on their bottom line. Thls is not the ftrst time that farm program decisions have been driven by budget pressures. In fact , the last two significant changes in conunodity program provisions were not enacted in farm legislation but were made to cut expenditures as part of the Omnibus Budget Reconciliation Act of 1990 (OBRA-90) and the OBRA-93. For example, in 1990 the flex acres provi-sion was introduced to cut the payment base by 15 percent and the calculation of deficiency payments for wheat and feed grains was changed to use the annual average rather than the first seven-month average price. ln 1995, however, the intensified focus on the budget deficit, and the balanced budget amendment (BBA) in particular, are certain to increase the pressure to cut discretionary and entitlement programs, including those directly affecting farmers. President Clinton's February 6 budget message focused on preventing increases in the deficit rather than on reductions. It proposed only $144 billion in spending cuts over five years. included no significant changes in farm pro-grams (though projected costs declined slightly), and increased domestic food assistance spending. Cuts proposed by the House and Senate are likely to be much larger, especially if the BBA is also passed by the Senate. To get a sense for the size of the projected cuts, compare the $700 billion total that could be proposed by the House in 1995 to spending cuts of $192.2 billion in the OBRA-93. This legislation cut agricul-tural spending by $2.5 billion and increased domestic Iowa Ag Review food programs by $2.5 billion over five years. The reported House goal in the first budget-cuning install-ment of $200 billion is to cut $10 billion ($2 billion per year) out of farm and food programs combined. But it's not yet known how the cuts would be split or what the contribution of these programs would be to the second budget-cutting installment of up to $500 billion. By comparison , fann and conservation programs are projected by the Congressional Budget Office to cost about $57 bUlion and food programs about $196 billion over the next five years. Another consideration that may affect the debate is the high variability of farm program costs. Current programs are designed so that payments and storage program costs are higher when prices fall and vice versa. lf the budget cutting Includes efforts to make farm program costs more predictable, or even com-p letely predetermined by a fixed budget allocation, Congress may consider several alternatives available to achieve such a goal. Whether or not any of these options would be politically viable remains to be seen, but a few are listed here as examples and \vithout offering judgment on their efficacy. First, the continuation of current loan and farmer-owned reserve prog1·ams could provide price ·risk reduction at minimal cost. This basic set of loan_ and stock programs would not incur significant costs. These programs cost only $4.15 billion over the last five years compared with $58.4 billion for all fann programs. While there may be some groups that also would want to change the loan and sLOck programs, anything more than tinkering at the edges would jeopardize the benefits of carrying on a familiar and well-understood program as a low-cost price risk reduction mechanism. If the loan rates were raised too much, it could increase the potential for higher and more variable costs and may interfere with market prices and export competitiveness. lf the loan rates were lowered or changed from nonrecourse ro recourse loans, it could decrease the price risk reduction provided to producers. There are a number of alternative fonns of income support or income stabilization that have been sug-gested and could be layered .on top of these basic loan and storage programs. Their design and magnitude would be heavily illfluenced by the budget monies available to fund them. A common element of these programs is the complete elimination of the target price, deficiency payment, and set-aside programs. March 1995 CENTER FOR AGRICULTURAL AND RURAL DEVELOPMENT Page 13 Iowa Ag Review This would present a trade-off of cost and benefits to producers. On one band, they would lose the income protection that deficiency payments provide, but they would gain complete nexibility in allocation decisions regarding the use of their land and other inputs. Ihe government risk sharing in this case would come in the form of a payments scheme such as one of those described below and continuing current loan and farmer-owned reserve programs in roughly the same form in which they currently exist. Here is a sample, though not e-xhaustive, list or such alternatives: 1. Compensation payment guarantee. Perhaps the most simple and easily implemented program would consist of fixed payments allocated to producers proportional to their current payments eligibility. The proportions could be based on a formula such as the average of the last five years of payments. The advantage of this approach in terms of budget is that there would be no uncenainty about budget outlays [rom one year to the next. These payments would be based on historical production and benefit patterns and would not in an y way be inOuenced by what would be planted in the future. Since these payments would be proportional to some recent his torical period, this compensation plan would not significantly change the distribution of benefits. 2. Revenue assurance. The Iowa Plan, proposed by a task force of Iowa crop and livestock producers and farm organizations, combines the continuation o[ current loan and s tock programs with an expanded insurance program that would be designed to provide a revenue safety net in lieu of the yield coverage avail-able under the current crop insurance program. The protection level of the safety features again depends upon the budget available for the program. As an example, a 70 percent revenue protection plan would trigger payments .if revenue in one year fell below 70 percent of the moving average over the last five years. lf revenue assurance were designed in such a way that it would be actuarially sound, the government could make a fLXed contribution toward the cost of the insurance and thereby also maintain cenainty about government outlays. ln tllis case, there would be variabili ty in the insurance payments from year to year, but the government contribution would be fixed. 3. Targeted payments. A targeted payment scheme could be based on a number of different criteria. Some have suggested targeted payments based on means testing, which would presumably provide little or no supporl for large commercial farms, and support for middle-sized and smaller farms would hinge on some means-based criteria. Although arguments can certainly be mounted in support of various targeting schemes,.it is unlikely that a debate over targeting a shrinking revenue pic could be easily resolved. While some members of Congress may support the idea of means testing, others may view any kind of targeting as a type of social engineering. 4. Green payments. Using this approach, programs related to conservation and environmental concerns could be treated independently. Under option one above, where payments are constant and continuous, there could be some kind of conservation comp1iance conditionality. The other schemes do not lend them-selves well to this hind of linkage, especially the targeted program, which may not include a large pan of the U.S. land in production. The wetlands reserve program is a freestanding example. A targeted and reformed CRP program could be designed in a similar manner, where payments are made in return for meeting specific land use requirements. However, a linkage between conunodity and "green'' programs may occur on the budget side. That is, if more funds were used for environmental programs such as a targeted CRP, less would be available for the income support or stabilization programs. In this environment, Iowa farmers and their organiza-tions should be comparing the potemial benefits of deficit reductions and tax cuts to the potential losses in farm program benefits. With regard to farm program reform, it seems likely that reduced monetary benefits · would be offset by increased decision making flexibil-ity in land use. Depending on the size of the required spencling cut, changes could involve a wide range of options such as increasing nex acres from 15 percent to some higher level, reducing target prices, eliminat-ing the export enhancement program, or replacing current programs with some combination of safety net provisions as discussed . There is no doubt that deficit reduction is a higher priority this year than it bas been before, and that this priori ty will be of increased importance if the Balanced Budget Amendment passes the Senate as well as the House. Page L4 CENTER FOR AGRICUUURAL AND RURAL DEVELOPMENT March 1995 • 

The Balanced Budget Amendment: How It May Impact Farm Programs

https://lib.dr.iastate.edu/cgi/viewcontent.cgi?article=1350&amp;context=iowaagreview

The Balanced Budget Amendment: How It May Impact Farm Programs

Abstract

Similar works

Full text

Available Versions

Digital Repository @ Iowa State University (ISU)