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Ugly truths of a balanced budget

Listening to some politicians you would think all we needed to do to balance the budget was eliminate a few minor programs and root out waste, fraud, and abuse. Refreshingly on February 14th, freshmen Senator Rand Paul (R-Ky.) injected some reason into the conversation saying that the federal government “can cut all of the non-military discretionary spending and not balance the budget.” This claim was verified by Politifact.org and speaks to the true scope of our budgetary quagmire. Let’s take a look at some of the ugly truths of balancing the federal budget.

First, let’s look at the proposed & projected budget. The best source is obviously whitehouse.gov/omb/budget, but there is another good summary at www.pgpf.org if you want some of the details. Here is a summary for the next five years:

Totals in Billions 2011 2012 2013 2014 2015
Receipts 2,174 2,627 3,003 3,333 3,583
Outlays 3,819 3,729 3,771 3,977 4,190
Deficit 1,645 1,101 768 645 607

Not good right? Note, that this assumes a growth in GDP and increased tax receipts so it is simply the president’s projection. Since the 2011 budget year is already underway and the fight will mostly be about the future, let’s look at the next year. For FY12, the major elements of the federal budget are:

  • 22.62% on Medicare, Medicaid & CHIP (843 billion)
  • 20.04% on Social Security (747 billion)
  • 19.27% on National Defense (719 billion)
  • 14.48% on Safety Net Programs (540 billion)
  • 6.31% on Interest on Debt (235 billion)

The remaining 17.28% covers everything else including education, infrastructure, foreign affairs, science research, etc. So to tackle a $1.1 trillion dollar deficit (29.5% of budget) you can’t rely on small items like foreign aid which makes up less than 1% of the budget. No matter what you do there are some tough choices that must be carefully implemented to avoid upsetting the economy or breaking promises to citizens:

Non-Defense Discretionary Spending Cuts – Along with capping spending there are many sensible cuts politicians will likely agree to, but the trimming will not produce much. Perhaps a best estimate would match the fiscal commission’s goal of $100 billion in domestic savings.

Reduce Defense Spending – Phasing out $200 million dollar daily expenditures in Afghanistan and other costly military operations could save $100-$200 billion or more. We certainly need defense spending, but not necessarily more than the next 20 countries combined.

Increase Tax Revenue – Taking into account any fragility in the economy the U.S. needs smart revenue increases. This could be from tax reform and eliminating deductions, but beyond simple economic recovery we need a boost from the lost revenue from the Bush tax cuts. Suppose we could bring in $300 billion more than projected.

Health Care Spending – The toxicity of this area obviously makes it difficult to handle, but we simply have no choice long-term. To put it in perspective, we have more than $38* trillion (yes trillion) dollars in future health care liabilities. The main savings will come with further health reform, promotion of healthy living and reductions in Medicare and Medicaid. Immediate savings would be meager and hard fought over, but let’s assume we could wrangle $50 billion away. (*revised estimate of $22 trillion from new health law)

Stabilize Social Security – This item is more-or-less self sustaining to date with deficits soon on the horizon as the population ages. Social Security is similarly toxic and not worth treating as a deficit reduction tool. To stabilize it in the long run we need to raise the retirement age as people live longer, increase the payroll tax cap, and means test for wealth/need of recipients.

Remember also that safety net program spending (like unemployment benefits) will decrease as the economy recovers. This will reduce outlays and increase tax revenue.

Regardless, the ugly truth here is that saving $100 billion in domestic cuts, $200 billion in defense, $300 billion in tax increases and $50 billion in health care changes would only get us $650 billion of the projected (some say optimistically so) 2012 budget. This means the national debt and interest on the debt are destined to grow for the foreseeable future.

No wonder the conversation is so difficult to have and to understand. What politician is going to say, “Folks, we need return military spending to pre 9/11 figures, increase your taxes, cut the government by 15%, and renegotiate the social contracts for health and retirement. And we’ll still be in a budgetary hole!” Hopefully there are politicians who will emerge with enough courage to lead this challenging and complex debate. I have my eye on a few, but I’ll wait and see.

Categories: Politics
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