Budgeting

BUDGET CRISIS - FOLLOW-UP 10-24-11

---The Federal Budget is morbidly obese, and "gaining weight" every day.---

INTRODUCTION

This is my second attempt to shed some light on the very murkey process used to approve the US budget. The crisis relates to the inability to reduce the deficit. It might be helpful for you to read the first blog entry before reading this one.

The Federal Government's inability to eliminate the deficit means that the national debt continues to increase daily. The only way the deficit can be reduced is by a combination of spending reductions and increased revenues.

Before commenting on what to do about the budget situation, I want to: -Present the latest figures from the Congressional Budget Office -Define some of the terms (as I understand them), and state a few rules that have to be followed.

CBO REPORT

From the "Monthly Budget Review"
for Fiscal Year 2011 (ending 9-30-11)
published by CBO on 10-7-11 (dollars in billions)

....................Actual.......Prelim
....................FY2010.....FY2011

Revenues......2,162........2,303
Outlays.........3,456........3,600
Deficit.........-1,294.......-1,298

Revenues (Income/Taxes)
Individual.........899........1,093
Soc Sec..........865...........819
Corporate........191...........180
Other...............207...........210

Total.............2,162........2,303

Outlays (Spending)
Defense..........667...........679
SS Benefits.....696...........720
Medicare.........450...........483
Medicaid.........273...........275
Unemploy't......162...........123
Other...........1,048........1,088

Subtotal.......3,295........3,368

Interest...........228...........266
TARP............-108...........-39
Other...............40..............5

Total............3,456........3,600

I know, I know, that's a lot of numbers to throw at you all at once. Just hang on for a while. You don't have to read or study the table, just hold on to it as something to refer to.

DEFINITIONS AND RULES

I don't pretend for a minute that I am an expert in budgeting (or anything else). I just like to run off at the mouth (or keyboard) from time to time. But in any case, let's see if some informal definitions will help assure that we are "singing from the same songsheet." Here are some terms and what I think they mean:

Income - same as revenue, taxes, receipts
Expenses - same as outlay, spending, out-go
Deficit - expenses are greater than income
Surplus - income is greater than expenses
Balanced budget - income equals expenses
Debt - amount owed; accumulated deficits
Debt ceiling - limit of money owed; set by Congress; changes frequently
Cuts - reductions in spending or the growth of spending
Cap - spending is limited (capped) to a certain amount, usually prior year's spending
GDP - not strictly a Federal budget item, it is the sum of all goods and services in US

Now for a few rules regarding budgets:
1. A deficit means the debt increases
2, A surplus means the debt is reduced
3. A balanced budget means the debt does not change
4. Interest paid depends on the going rate

THE BUDGET PROBLEM TODAY (Why It Is a Problem)

In my previous blog on the Budget Crisis I drew a comparison between the Federal budget process and your typical credit card bill. I'll toss out another comparison:

We've all seen a movie or TV show that presented a family headed for disaster. They were well-to-do and living high, but after financial reverses, the dummies kept on spending and refused to cut back on their expenses. Pretty soon, debt piled up and...you know the rest. They were ruined. The same thing is happening at the Federal level.

What is the consequence of inaction? That is, if Congress keeps raising the debt limit and continues to approve deficit-ridden budgets, what will that mean? I don't know. But the idea scares me. The family in the show above better do something or they'll end up in the poor house. Is there a Federal equivalent to "poor house?"

Current solutions as proposed reduce the deficit but do not eliminate it. The debt grows every year. And what will happen when the interest rates go up? The amount of interest paid by the Treasury Department will go up too.

Be aware of two things:
- Spending reductions are usually given for a period of ten years; makes them seem bigger.
- A "cut" in a specific program may still result in a spending increase. A cut is not the same

as a cap. For example: A Federal Agency is expected to increase from $100m this year

to $110m next year. The administration reduces next year's level to $105m. That is

considered a "cut" of $5 million.

The big problem is this: No matter what reductions are proposed, strong objections
will try to shoot them down.

WHAT TO DO ABOUT THE BUDGET CRISIS

Much of what can be done to improve the budget problem depends on policy reform. For instance, launching a war is going to increase Defense spending. I plan to have some comments on this topic (Policy Reform) soon.

President Eisenhower in the 1950s directed a 2%/10% reduction in each agency. This was a 2% personnel cut and a 10% cut in the rest of the budget. So, some reforms can be effected by executive action. Another is a freeze. This can be in hiring and promotions. Reforming taxes can go either way -- increase or decrease revenues.

Specific cuts/caps that ought to be considered:
- DOD cuts -- new weapons systems, base closings, mothball 2/3 of the sub fleet.
- Policy reform -- changes in social and welfare programs, energy policy, etc. would

have dramatic impacts on the budget.
- Energy -- increase US output of oil and gas.
- Social -- means-test socsec, limit welfare/medical coverage to US citizens.

CONCLUSION

I have no real conclusion to offer that would resolve the budget crisis. Short of appointing a Czar with total authority, I think our present system just isn't equipped to address situations like the one we face. I just don't have much confidence in the ability of Congress and the White House to work together to find an adequate solution. The outlook is grim, indeed.

Walter Magee