Politics aside, the budget could be balanced

Reader feedback at end

Oh no, you may be thinking – not another lecture about how the budget must be balanced before it’s too late. Well no, this week's entry will assume that point and move on to some of the specifics.

As a reminder, however, consider this recently published CBO chart. The long-term budget outlook in 23 slides, Congressional Budget Office,
8/12/19.

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As shown, fiscal practices over the past several decades (basically allowing government spending to grow faster than the economy and/or the willingness of the American public to pay for it) have driven public debt (as distinguished from total debt, which includes IOUs in government trust funds) to the highest percentage of Gross Domestic Product since the aftermath of World War II. Based on current trends, this ratio will soar to unprecedented levels in the next 30 years – and that doesn’t take into account events like a major war that could require currently unanticipated uses of our national resources.

Does anyone truly believe this trend can continue without catastrophic consequences? If not, some major changes need to be made – starting now - as SAFE and other “fiscal hawks” have been saying for a long time. And for discussion purposes, we’ll assume the goal is not simply to reduce deficits to a “sustainable” level (e.g., 2% of GDP if the economy is growing 2% per year), it is to balance the budget without raising taxes.

A. Starting point – Congress didn’t see fit to pass a budget resolution this year, and the president’s budget proposal for Fiscal Year 2020 (BP-2020) was rejected in favor of the recently enacted Bipartisan Budget Act (BPBA), which abolished the last of the spending caps put in place pursuant to the Budget Control Act of 2011. Latest budget deal: faster process, similar results, 7/29/19.

Reliable spending levels for FY 2020 won’t be available until the appropriation bills are enacted, a process that’s not likely to be completed before December. So as an alternative starting point, let’s consider the “enacted” spending levels for FY 2019 (which will end on Sept. 30). Subtracting projected revenues for the year, that leaves an annual deficit of roundly $1 trillion dollars.
BP-2020 (download mid-session review, see Tables S-1 & S-8).

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B. Timing - There is no practical way to cut outlays by $1 trillion in a single year, but it’s folly to rely budget plans that take too long to achieve the desired result. The way things work in DC, saying something will be accomplished in 10 years or more is tantamount to saying it will never happen.

Accordingly, SAFE recently proposed a goal of balancing the budget, or at least coming close, in four years (a single presidential term). Prospects for action on the fiscal problem, 2
/18/19.

The FY 2020 budget proposal offered by the [House] Republican Study Committee came close, which suggests that our vision might be achievable if a political consensus could be achieved. RSC budget released, restores fiscal sanity to Congress, press release,
5/1/19 (download PDFs, budget & press packet).

The RSC Budget is the product of extensive deliberations between RSC Budget & Spending Task Force members, their staff, congressional committees, conservative think tanks and the executive branch. It contains more than 300 specific policy reforms and spending cuts. - lowers FY 2020 non-defense discretionary budget authority to $349 billion and reverses the effects of reckless spending caps increases – balances budget in 6 years (FY 2025) – reduces spending by $12.6 trillion over 10 years.

There didn’t seem to be an inventory of the specific spending cuts that were made, however, so we consulted several sources in an effort to come up with a list of proposals that could achieve a $1 trillion deficit reduction within a few years.

C. OMB – The president’s budget staff (Office of Management and Budget) provided a description of and savings estimate for numerous policy proposals reflected in BP-2020 (download Major Savings and Reforms). There are two sets of proposals, one for budgeted (aka discretionary) spending and the other for unbudgeted (aka mandatory) spending.

The budgeted cuts achieve stated savings in FY 2020, totaling $48.8B, which we assumed would continue at the same level thereafter. By departments, the largest cuts were proposed for HHS ($9.9B), Education ($7.2B), and State & foreign aid programs ($7.1B). No cuts were proposed for either Defense or the Veteran’s Administration.

The unbudgeted cuts project year-by-year savings for 10 years, which generally indicates a rising trend over the period. We ignored the smaller proposals in this category (primarily as a time-saver) and took 1/10 of the 10-year savings for larger proposals as representative of the annual effect. On this basis, unbudgeted savings came out as $136.5B for healthcare programs and $90.3B for all other programs.

Kudos to the OMB for a good first step and for documenting their proposals so clearly.

D. Revenue enhancement – Although this analysis won’t propose any tax increases (higher rates or new taxes), it would be in order – we believe – to abolish special interest tax breaks that have the effects of distorting economic decision-making and adding to tax law complexity (one of the prime causes for the chronic shortfall between taxes owed and taxes collected).

Heritage Foundation has suggested a list of 29 tax credits for repeal, including R&D tax credit, higher education tax credits, and low-income housing tax credit, with aggregate 10-year savings of $765B. Blueprint for Balance, Heritage Foundation, page 46,
2019. An annual savings of $76B is reflected in our analysis.

Also, two proposals for beefing up tax collections efforts were included in the MSR volume of the OMB,
op. cit. (pages 168-69), with projected annual savings of $10B.

E. Federal grants – One of the drivers of ever-growing government spending has been the proliferation of programs (from 4 in 1905 to 1,368 in 2018) that provide federal grants designed to encourage and influence the policies and programs of state and local governments. This practice diminishes accountability for government spending, encourages states to approve programs that they can’t afford, and creates a ton of costly paperwork and intergovernmental communications. Restoring responsible government by cutting federal aid, Chris Edwards, cato.org, 5/20/19.

A dozen years ago, SAFE went on a letter-writing kick on this subject. Enough already with government grants,
10/1/07. In hindsight, it appears that no one was listening.

The annual federal cost of these programs is now running nearly $700B a year (still about 15% of total budget outlays, as it was in 2007), spread across most of the departments and agencies of the government. One is tempted to suggest that all of the grants should be eliminated in one fell swoop, which together with the savings already mentioned would swiftly achieve the $1T deficit reduction target.

Such precipitous action would be unfair to the states, however, which have established numerous programs on the understanding that federal grants would be available. Accordingly, we suggest the following approach: (1) establish block grants for the states to replace the specific grants they are currently receiving; and (2) phase out the block grants at the rate of 20% per year for five years. The full $0.7T savings in year 5 would be credited against our deficit reduction goal.

F. Defense – The OMB proposes no budget savings for defense, which is understandable given an assessment that this vital function has been underfunded in recent years. Nevertheless, there are undoubtedly some opportunities for defense belt-tightening.

For example, the
Heritage budget includes proposals to reform military healthcare (p. 119) with estimated annual savings of $3.9B, and increase the use of performance-based logistics (p. 120) with estimated annual savings in the range of $9-32B per year.

Citizens Against Government Waste (CAGW) highlighted a proposal to reduce defense spending in its
2018 Prime Cuts book (download summary), namely the elimination of earmarks for the F-35 Joint Strike Fighter (JSF) program with projected 5-year savings of $13.4B.

Such opportunities should be carefully evaluated, but we are inclined to assume that any savings realized would be applied to other defense priorities rather than deficit reduction.

G. Social Security – The Social Security program is currently running a deficit versus dedicated revenues, the shortfall will grow rapidly as the number of retirees grows, and the administration has proposed no corrective action. Do savings opportunities exist that are being overlooked?

A suite of proposals is reflected in the Heritage budget, with 10-year savings as indicated. Blueprint for Balance,
op. cit., page 46.
•Modernize the spousal benefit, $2B
•Use the chained CPI, $12B
•Increase retirement age and index to life expectancy $32B
•Shift towards a flat, anti-poverty benefit, $645B

Our reaction, subject to review of the details involved, is that the first three proposals (with an average annual savings of $4.6B) might be saleable – but wouldn’t reduce the deficit a great deal. As for shifting to a flat, anti-poverty benefit, that would fundamentally change the nature of a benefit program of which most Americans approve. Don’t expect a favorable reception!

Another idea would be efforts to curtail the payment of Social Security benefits to dead people, perhaps among other things by requiring periodic acknowledgments from recipients. No one seems to know the magnitude of these improper payments, nor how fast the problem may be growing, but in the absence of better information we would suggest a placeholder estimate of $1B per year. Audit [MD & MI] reveals tens of millions of dollars in Social Security payments, Josh Hammer, dailywire.com,
3/26/19.

Over time, we believe Social Security benefits should be restructured for future retirees (current workers, not people already retired). See the
Social Security page of this website.

The best way to fix Social Security (make it equitable as well as solvent) would be to give younger workers the option of using the Social Security payroll taxes they pay to fund personal retirement accounts in lieu of traditional retirement benefits. There would be no effect on the benefits of retirees or workers nearing retirement.

H. Healthcare – The administration has placed some substantial proposals on the table for reforms to Medicare, Medicaid, and other healthcare programs ($1.4T over 10 years):
•Empower states and consumers to reform healthcare, p. 10 - $659B;
•Medicaid: Address wasteful spending, fraud & abuse, p. 141 - $39B;
•Medicaid: Other reforms, p. 142 - $143B;
•Medicare: Address wasteful spending, fraud & abuse, p. 143 - $457B;
•Medicare: Drug pricing & payment requests, p. 147 - $67B.
BP-2020,
op cit., download Major Savings and Reforms.

Numerous other proposals for restructuring or replacing the existing healthcare programs have been put on the table. Obviously, the differences of opinion must be hashed out, but we would hope that the ultimate policy decisions will give Americans more choices and control over their healthcare decisions than they currently enjoy. Top-down bureaucratic systems simply don’t work out very well except for the people running the show.

I. Summary – The foregoing discussion enumerates viable savings proposals that would, in the aggregate, eliminate the current deficit of $1T in about 5 years.

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**********FEEDBACK**********

#Thanks for the great work! – SAFE member (DE)

#I am in profound disagreement with SAFE's proposals to balance the budget. Please accept my resignation from this misguided group. – SAFE member (DE)

Resignation accepted.

# I want to emphasize two additional points. (1) Spending must have a fixed dollar limit - which I would suggest be the total amount actually collected in taxes for the previous year - or the budget system won’t work. Then the spenders would meet and agree to fit their spending plans into the afore-agreed-upon total. (2) It’s noteworthy that the budget was balanced for four years running during the second term of the Clinton administration. – SAFE member (GA)

PS. Have you seen my
new book (with Thomas Humphrey): Gold, the Real Bills Doctrine and the FED; Source of monetary disorder (1922-38)?

Comment: Agree that no budgeting system can work unless the players are working against an overall spending limit, which can’t readily be changed or waived. Your “red line” budget approach was covered in a previous entry. All in favor of responsible budgeting say aye, 1/4/16.

Also, you're quite right that the the budget was balanced for four years running in Clinton’s second term as well as for various prior years (most recently FY 1969). OMB historical tables, download spreadsheet Table 1.1. It may be instructive to consider why and how our political leaders were able to balance the budget during the Clinton era, yet failed to do so before (1970 et seq.) or since.

Congratulations on your new book; we’ll put it on the reading list.

#Given the dismal fiscal record of the past 50 years, in both the US and elsewhere, I don’t foresee a serious effort to rein in deficit spending. “Modern Monetary Theory” is the order of the day, and we shall see how the world’s currencies degrade in due time. Exciting! – SAFE director



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