Budgeting for Dummies

Budgeting for Dummies
By Howard Rich
2/24/2011

President Obama has said that the cuts included in his fiscal 2012 budget will force “tough choices and sacrifices.” Meanwhile, House Speaker John Boehner invoked a former tax-hiking president in defending his chamber’s proposed budget reductions.

“When we say we are going to cut spending, read my lips: We are going to cut spending,” Boehner said. It’s no surprise that political leaders are talking a good game. Americans have finally grasped the rough outlines of their government’s looming fiscal collapse — and are demanding deep cuts in an effort to restore some semblance of sanity to the spending process.

Unfortunately, Obama has proposed trimming just $30 billion from a $3.66 trillion budget, while Boehner’s cuts total a mere $61 billion.

You’ve heard the expression “using a bazooka to kill a fly”? Well, these proposals are akin to using a fly swatter to kill a charging rhino.

But glaringly inadequate spending reductions are only the beginning of the problem — far graver dangers lurk within our government’s shoddy accounting and chronic refusal to address the root causes of this impending implosion. Consider these numbers: In 2008, the White House Office of Management and Budget projected a total three-year deficit of $334 billion for fiscal 2009-11.

These projections were made before the onset of the recession, obviously, but a year later — when America’s economic free fall was in full effect — OMB was still projecting ludicrously low deficits. In fact, two years ago OMB projected a total three-year deficit of only $302 billion for fiscal 2010-12.

The actual shortfalls for fiscal 2009 and 2010 ended up being $1.4 trillion and $1.3 trillion, respectively — the largest federal deficits since World War II. And the projected deficits for fiscal 2011 and 2012 are currently estimated at $1.6 trillion and $1.1 trillion.

Yet even these astoundingly high numbers are based on dubious fiscal forecasting. For example, the Congressional Budget Office is projecting that the government will owe $5.5 trillion in interest payments on its ballooning $14.2 trillion debt over the coming decade. But that figure represents the best-case scenario. More realistic forecasts put the 10-year interest tab closer to $7.5 trillion.

Whichever amount you assume, interest payments on the debt will dwarf the $478 billion in cuts that Obama has proposed over the coming decade — as well as the $2.5 trillion in cuts proposed by the Republican Study Committee over the same time period.

Equally troubling are the unrealistic revenue assumptions contained in Obama’s budget — forecasts which form the basis for future deficit projections. According to Obama’s numbers, total gross receipts will climb from $2.17 trillion this year to $3.58 trillion by 2015 — a 65% increase. Does anyone expect our economy to support such a dramatic expansion of federal tax receipts so soon?

Double-digit annual revenue growth has occurred just three times over the last two decades. And yet Obama is counting on this rate of growth to take place in five consecutive budget years?

No wonder one economist recently referred to his revenue estimates as “something approaching the realm of Greek myth.”

Speaking of myths, let’s return to the “tough choices and sacrifice” that Obama alluded to in proposing his $30 billion in cuts.

Perhaps he — and for that matter Boehner — is unaware of the $703 billion in “unobligated” agency surpluses that Sen. Tom Coburn and others have recommended tapping in an effort to reduce the deficit. Of these funds, $82.4 billion has been sitting in agency reserve accounts for more than six years.

Obviously neither Obama’s nor Boehner’s cuts seem so “sacrificial” in light of those surpluses.

Tough choices and sacrifice will be required, however, in addressing entitlements. Spending on Social Security, Medicare and Medicaid will consume nearly two-thirds of the federal budget by the end of the decade — yet neither Obama nor Boehner has summoned the political courage to address these ticking time bombs.

In failing to do so, they are refusing to level with the American people about the inevitable insolvency of these programs.

America can pull itself back from the brink, but it will take a level of honesty and a commitment to cutting government not yet seen from the leaders of either political party. It will also require sending a copy of “Budgeting for Dummies” to both the White House and Capitol Hill.
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Entitlements: A Debate Deferred
By Howard Rich
2/17/2011

Washington politicians have worked themselves into a fine lather lately debating spending cuts. Yet as familiar rhetorical jabs are exchanged over proposed reductions to things like NPR and the National Archives, the real spending debate is being ignored.

I’m referring of course to the debate over “entitlements” – decades worth of multi-trillion dollar promises made by former Congresses that had no intention whatsoever of keeping any of them.

Once a distant dilemma, entitlements are now the “wolf at the door,” a present, pernicious threat to the immediate fiscal health of our nation. Yet as this unprecedented wave of red ink crests over our country – dwarfing the debate over discretionary spending – politicians of both parties remain incapable of leveling with the public regarding the damage to come.

In fact entitlement reform isn’t even part of the budgetary conversation.

Fiscal conservatives in the U.S. Senate have correctly criticized recent budget reductions proposed by the U.S. House as inadequate.

“They’re talking about cutting $35 billion,” U.S. Sen. Rand Paul (R-Kentucky) said last week. “We spend $35 billion in five days. We add $35 billion to the debt in nine days. It’s not enough and we will not avoid financial ruin in our country if we do not think more boldly.”

On the other end of the political spectrum, Senator Majority Leader Harry Reid (D-Nevada) accused House Republicans of inviting a government shutdown by proposing cuts that “would be devastating to our economy and send us back into a recession.”

What no one is addressing, however, are unavoidable changes to Social Security, Medicaid and Medicare that have been ignored for decades despite ominous warnings and soaring unfunded liabilities. Even after a special commission appointed by President Barack Obama recommended entitlement reform, the White House once again dodged the issue in its budget this week, saying that entitlements “will be part of the conversation over the next several years.”

The next several years?

The problem with “kicking the can down the road” is that eventually the road runs out – and when it comes to entitlements, America is fast approaching that point.

Spending on Social Security, Medicare and Medicaid currently consumes almost half of the federal budget – a figure that’s expected to climb to 64 percent by the end of the decade, according to the Committee for a Responsible Federal Budget (CRFB).

Social Security will see its costs soar as the first of the baby boomers have already begun retiring. According to the latest estimates, enrollment in Social Security will increase from 44 million to 73 million over the next two decades, far outpacing the “new investors” in this massive government-run Ponzi scheme. In 2015, the program will begin running permanent deficits – and by 2035 it will have nearly exhausted its trust funds.

“The program is expected to grow from 4.8 percent of GDP today to nearly 6.1 percent in 2030,” a recent CRFB report calculated.

Meanwhile the retirement of the baby boomers means that Medicare enrollment will grow from 47 million to 80 million over the next two decades – creating yet another cost crunch. Currently representing 3.6 percent of GDP, Medicare will consume 5.1 percent of GDP in 2030 according to a recent report published by the Kaiser Family Foundation.

Beyond these twin behemoths is the explosive growth of Medicaid – the state health care system – which saw its ranks swell by more than 6 million during the first two years of the recession. According to a recent survey of state health care directors, Medicaid spending grew by 8.8 percent in 2010 – well above the projected rate of 6.3 percent and the highest rate of growth in eight years.

Rather than reining in entitlement growth, however, government recently created a brand new entitlement – “Obamacare.” It also borrowed trillions of dollars to pay for bailouts and new deficit spending, the combined effect of which has created an unprecedented interest crunch. In fact, the Congressional Budget Office estimated earlier this month that interest payments on the national debt alone will consume $5.5 – $6.8 trillion over the coming decade.

How are we going to pay for all of this? Keynesians want to raise taxes, but such a shortsighted solution simultaneously ignores the root of the problem while limiting our ability to pay back that mountain of money.

“Higher tax rates will reach a point of diminishing returns when revenue declines,” Jim Powell of the Cato Institute wrote recently. “Taxes cannot save the entitlements.”

Nothing can save entitlements – at least not as they are currently configured. That’s why instead of being ignored they must be put on the table along with every other program funded by government – and cut.
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To read another article by Howard Rich, click here.