Postelection update: Deficits & debt

SAFE’s position on the government’s fiscal situation is straightforward. The government (and by extension the United States) is living beyond its means, and the situation must be corrected. The first step is to agree on a fiscal goal. Then establish and execute a strategy to achieve the goal with a minimum of collateral damage and prevent backsliding down the road.

Here is the goal SAFE proposed in a letter sent to all members of Congress in
June 2013: “balancing the budget within say three years and keeping it that way.”

Some may believe it would take longer to turn the fiscal ship of state around, e.g., the House passed a budget plan for fiscal year 2014 that projected a balanced budget in 10 years without tax increases, while the Senate plan, which called for spending $5 trillion more than the House plan over the next 10 years (with $1 trillion in tax increases and $4 trillion in additional borrowing), was not designed to achieve budget balance at all.

OK, but why not try to balance the budget in three years and see how things go instead of deferring the heavy lifting until later (ten years is an eternity in politics)? An 8-point plan that SAFE outlined in 2013 suggests a plan of attack. The acid test would be success in eliminating wasteful government programs and activities. A status report on the fiscal problem,

Until the mid-term elections, Democrats controlled the Senate; this enabled them to block spending cuts they disagreed with (basically targeted cuts in any areas other than national defense) while Republicans could blame the Democrats instead of slashing wasteful spending and taking responsibility for doing so. In the new Congress, Republicans will have the power – and we hope motivation – to practice what they have been preaching.

With the new political balance in mind, this entry will review where the fiscal problem stands and offer some thoughts on how to tackle it.

A. Authorizations – The government is currently authorized to spend money by a continuing resolution that runs until Dec. 11, and the debt limit is suspended until 3/15/15. We’re not sure the debt limit serves much purpose as Congress clearly should not stop payment of the nation’s legitimate debts, so just keep suspending it, but something must be done about the CR.

Most Republicans have no desire to be blamed for a government shutdown or alleged default on the debt, and the soon-to-be Senate majority leader has said these strategies will be off the table. McConnell rules out government shutdown to block Obama immigration moves, Stephen Dinan, Washington Times,

“We’ll not be shutting the government down or threatening to default on the national debt,” Sen. Mitch McConnell, the incoming majority leader, told reporters after meeting with his GOP colleagues, flatly ruling out an all-or-nothing showdown over Mr. Obama’s plans.

However, defunding seems the most likely GOP weapon to combat the president’s extraordinary (and in our opinion unconstitutional) amnesty order for 5+ million illegal immigrants so this may not be the final word on the subject. Illegal immigration update,

Republicans will not be in a position to make a move on immigration until the new Congress, and they will probably want to gauge the public reaction to the president’s order before deciding what to do. Look for a short-term extension of the CR during the lame duck session to preserve an option to play the defunding card later.

For the purpose of tightening up the overall budget process, as opposed to exercising the “power of the purse” to influence administrative policy on immigration or whatever, it seems a bit late to worry about approving a budget for a fiscal year that will have been underway for three months before the new Congress convenes. It would probably be more effective to focus on hashing out a solid budget for FY 2016 in a timely manner.

B. Budget numbers - In fiscal year 2014 (ended September 30), the government ran a $483B deficit (2.8% of GDP). This was the lowest deficit since fiscal year 2008 ($459B), the last full budget of the Bush administration; it compared to a FY 2013 deficit of $679B (4.1% of GDP).

Although touted as showing steady progress, the FY 2014 deficit was hardly cause for rejoicing. Earlier year deficits (FY 2009 et seq.), which had soared to unprecedented levels in reaction to an economic recession, e.g., $1.5 trillion in 2009, represented a dubious standard for comparison. And the deficit reduction vs. FY 2013 reflected rising tax revenues (due to tax increases at the start of 2013) plus a gradually recovering economy, not spending cuts (outlays rose by $50B). Treasury Department press release,

Based on current projections, the deficit will run about half a trillion dollars per year for the next several fiscal years and bottom out at 2.7% of GDP in FY 2017 & 2018. An update of the budget and economic outlook: 2014 to 2024, Congressional Budget Office,
August 2014.

After that, the deficit is projected to grow faster than the economy due to rising interest rates and the soaring cost of entitlement programs – this despite a declining share of revenues going into “discretionary” spending for national defense and other traditional government functions. Don’t forget the fiscal problem,


Here is a schedule of spending cuts vis-à-vis the CBO projection to balance the budget in three years (starting in FY 2016) without raising taxes.
A larger amount of spending cuts (say $1.5 trillion for FY 2016-18) might be indicated if it were concluded that projected levels of defense spending must be increased in the interest of preserving national security. The possible need for such action will be explored in the final entry of this postelection review series.

Our spending cut scenario may sound ambitious, but given the necessary political will it could be accomplished. As for where to look, Citizens Against Government Waste has just published a list of “604 recommendations that would save taxpayers $641.9 billion in the first year and $2.7 trillion over five years.” Prime cuts

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Some of the suggestions seem problematic, but we think there are enough good ideas in the mix to cover the spending cuts needed for FY 2016, FY 2017 and possibly FY 2018. Moreover, there are surely some potential spending cuts that CAGW has not identified.

Another reference in the search for up front spending cuts would be a list of policy options for deficit reduction that the CBO published on 11/20/14. This analysis is geared to a 10-year time frame, however, and a good part of the report is devoted to possible tax increases.

Much bigger cuts would be required in subsequent years, making it impossible to maintain long term budget balance without restructuring Social Security, healthcare programs, and other “entitlements.”

SAFE recently offered some suggestions re Social Security, notably (1) screen disability awards more effectively to rein in abusive claims, and (2) allow younger workers to establish personal retirement accounts, thereby giving them ownership, inheritability and choice. An update on the Social Security shortfall,

The status of GovCare and other healthcare programs will be updated by another entry in this postelection series.

C. Budget procedures – A few months ago, we threw out some fairly radical ideas for overhauling the government’s budget process. Time to get serious about budgeting, 1/20/14.

On second thought, some of these changes do not seem necessary, e.g., making major changes in the congressional committee structure, and/or go further than necessary. Here is a more modest list that we think would suffice:

(a) Ask the Office of Management and Budget to label its budget document “Budget Proposal of the President,” as the “Budget of the U.S. Government” title will be reserved for the congressionally approved budget.

(b) Move to a 2-year budgeting system, i.e., have the new Congress approve a budget for fiscal years 2016-17. In said budget, show three years of historical data plus budget data for the two years. Do not show projected data for additional years, which would clutter up the budget document without adding much value. Drop the “mandatory” and “discretionary” spending labels, which imply that entitlement programs have priority over the traditional functions of government when the opposite should be true.

(c) Reorient the Congressional Budget Office and also the Joint Committee of Taxation (JCT) for a new mission of helping to balance the budget and keep it that way vs. growing the government. Procedural changes could be helpful, such as using dynamic scoring in evaluating the revenue effects of tax increases and tax cuts. However, personnel changes would be needed as well, and there is little doubt that they would be painted as undermining the supposedly “bipartisan” character of the CBO. Accordingly, Republicans should be prepared for a fight. Proper staffing and reform of the JCT and CBO is an IQ test for the Republican Party, Daniel Mitchell,,

House and Senate budgets should be put on the table by the current deadline with the objective of reconciling the differences and adopting a final budget that would provide a basis for appropriation bills by not later than July 1, 2015. Departmental appropriation bills should then be developed, presented and approved by October 1, 2015, or as soon thereafter as possible.

Does this schedule sound ambitious? You bet! But it should be doable, given that one party now controls both houses of Congress, and it could result in more effective oversight over government spending than has been seen in a long time.

SAFE to Congress: Please get this done!

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