It is difficult to avoid the battle in Washington over the continuing resolution that provides funds to allow the federal government to operate until October 1, 2011. Pending is the still more controversy fight over the President’s recently announced 2012 budget proposal. Neither the Republican continuing resolution nor the Obama 2012 budget proposal address the overall budget problem. The real battle is yet to come. There should be little doubt that whatever results will negatively impact on the Bay Area, the poor and working class
The President is requesting $1.2 trillion until September 30, the end of the 2011 fiscal year. The House’s continuing resolution for addressing the funding request proposed more than $60 billion in discretionary spending cuts. These cuts, which are based in part on ideological issues, impact almost every area of government and set up a showdown with Senate Democrats and the White House. The government shutdowns if the parties fail to agree by March 4. Presently, they are far apart in their thinking.
According the Office of Management and Budget, discretionary spending was $1.39 trillion in FY 2010. This was 38% of total spending. Security spending ($844 billion) accounts for more than half. This includes the Department of Defense, overseas contingency programs and Homeland Security. Non-security spending was $553 billion. This includes Health and Human Services ($84 billion), Transportation ($76 billion), Education ($46.8 billion), Housing and Urban Development ($43.6 billion) and Agriculture ($25 billion). The FY 2011 budget held spending level at $1.4 billion, while Non-Security spending was cut to $520 billion. Ideological issues aside, the issue for Democrats is that the timing of Republican cuts creates a potential drag on a still extremely weak economy.
The President’s 2012 budget proposes cutting the deficit by $1.1 trillion over 10 years. Obama has called for a $3.771 trillion budget, down $72 billion from his 2011 request. Part of the accounting, $400 billion, results from a five-year freeze on non-security discretionary spending. The President’s program cuts include community service block grants and higher interest charges on federal loans to graduate students. Republicans have vowed to introduce a 2012 budget by the end of March that will contrast sharply with the President’s budget. They have also vowed to tackle long-term fiscal problems and propose reform the government entitlement programs, which include Medicare, Medicaid and Social Security.
Since 2001, the last time the federal budget balanced, federal debt has increased from 33% of GDP to 62% in 2010. As of August 2010, CBO projected deficits totaling $6.2 trillion for the 10 years starting in 2011, raising federal debt held by the public to more than 69 percent of GDP by 2020, almost double the 36 percent of GDP observed at the end of 2007.
How did we get here? The federal budget balanced when President Clinton pushed through large tax increases. These fell almost exclusively on upper-income taxpayers. Concurrently, his fiscal 1994 budget showed spending restraint. He benefited from a strong economy and gains in the stock markets. A Social Security surplus made the figures look better than it would otherwise. Removing Social Security, there was still a surplus of $1.9 billion in fiscal 1999 and $86.4 billion in fiscal 2000.
This roughly $2 trillion gap in the deficit from 20000 to 2010 was analyzed by the New York Times in 2010. They found that recessions or the business cycle accounted for 37% and policies enacted by President Bush accounted for 33%. Policies enacted by President Bush and supported or extended by President Obama accounted for 20%, while new policies from President Obama accounted for only 10%.
While the parties debate how to divide a smaller pie, all agree that deficit reduction is necessary. A June 2010 report by the CBO (revised August 2010), shows that, based on a continuation of the then current budget policies, the deficit would reach 185% by 2035. By then, interest on debt will squeeze out spending for other priorities and lower per capita GDP by 15%. It is likely that well before 2035 a financial crisis would be triggered by foreign creditors, most likely China refusing to buy US debt. Before that happens, interest rates will rise and creditors will pressure for tax increases and spending cuts. Risk increases proportionately to debt. We begin to lose control over trigger events and risk falling into Japan-style economic stagnation or needing to avoid these circumstances with a “stealthy default” through currency devaluation and inflation.
The Japanese have accumulated a debt of nearly 200% of GDP. They remain on an unsustainable fiscal path, yet they have so far avoided disaster. We cannot, however, follow the same course. Japan’s debt is primarily funded by its own citizens through their savings. The US has a relatively small savings rate and less than half of US Treasury bonds are owned by domestic savers.
Continued inaction is not a viable solution. According to the Government Accountability Office, we could have double-digit growth for a decade and still not get ourselves out of the current fiscal situation. Immediate actions must concurrently support the economic recovery, the laying of a foundation for sustained future growth, and cuts in the deficit, whether through tax increases or spending reductions. It is the balance among these three factors, and the philosophical differences behind each, which is heating up the budget battle.
Following the budget battle over discretionary spending, law makers will be backed into a tighter corner where they must face decisions they have avoided for years. According the National Commission on Fiscal Responsibility, additional actions include comprehensive tax reform, health care cost containment, mandatory savings, social security reform, and process changes. Spending on the major entitlement programs will sharply increase and health insurance programs will account for most of the gain.
On December 17, 2010, President Obama settled an argument over additional stimulus funding by signing legislation extending Bush-era tax cuts for two years. Regardless of whom wins the 2012 election, President and Congress will face the expiration of tax cuts and the need for additional spending cuts. Decisions may be helped by economic recovery and reduced war expense due to withdrawal from Afghanistan. Nonetheless, the debate over near-term non-security discretionary spending should move to the far more difficult issues of security and medium-term entitlement spending and comprehensive tax reform.