Sep 17, 2010
One of the biggest problems in the debate over our national debt and the federal budget is that no one seems to agree on what a “good” budget is. Does that mean a balanced budget? Or one that’s judged by the overall economy: small or no deficits in prosperous times; big deficits to stimulate the economy when times are bad? Is it based on the size of our national debt? Or maybe it’s about whether the budget is sustainable in the long run?
Don’t worry if the debate is confusing. One reason why it’s confusing is that economists and policymakers don’t agree either. And since the federal government doesn’t really have a long-term fiscal plan, there’s no yardstick for most people to judge it by.
The Committee on the Fiscal Future tried to address that by coming up with six questions to ask about any federal budget. Some of them require a trained economist to answer (we’re lining some up for that) but more importantly, we think they should be part of the regular budget reports issued by the White House Office of Management and Budget, the Government Accountability Office and the Congressional Budget Office. Those agencies shouldn’t just produce reports for Congress and other policymakers; they should work to make the nation’s fiscal situation understandable by anyone.
1. Does the proposed budget include policy actions that start to reduce the deficit in the near future in order to reduce short-term borrowing and long-term interest costs?
This sounds more complicated than it is; basically we’re talking about controlling our annual deficits, the amount the government comes up short every year. Whenever the government runs a deficit, it borrows money to make up the difference, adding to the national debt.
Given the severe recession we’re in, the federal government probably shouldn’t attempt to balance the budget (because that extra government spending is needed to create jobs and goose the economy). Even more importantly, the government probably can’t balance the budget soon even if it wanted to (because when businesses go bankrupt and more people are unemployed, the government takes in fewer taxes).
But we can make a start, and we probably should make a beginning on this soon, to do this gradually and steadily over time.
2. Does the proposed budget put the government on a path to reduce the federal debt within a decade to a sustainable percentage of GDP?
As we’ve pointed out, the committee thinks the nation should adopt a budget target of stabilizing the national debt at 60 percent of the total size of our economy. Other experts might pick different targets. But the Fiscal Future committee concluded that 60 percent is probably the best we can do: sustainable, allowing the government to provide necessary services while keeping the debt under control, but also the lowest target that’s actually practical and politically feasible. Just to put this in perspective, the U.S. public debt is projected to pass the 100 percent in the early 2020s; in other words, the government’s debts would be bigger than the entire U.S. economy.
3. Does the proposed budget align revenues and spending closely over the long term?
This, of course, is the crux of the problem. The federal government – and by extension the rest of us – is projected to spend trillions of dollars it doesn’t have over the next several decades, as health care costs continue to go up and the baby boomers start to retire. Doing what we usually do, namely borrowing, would drive up our debts to unsustainable levels.
This doesn’t even require the government to balance the budget all the time. But it would require projected spending and revenues to be at least in the same ballpark, and right now, they’re not.
4. Does the proposed budget restrain health care cost growth, and introduce changes now in the major entitlement programs and in other spending and tax policies, which will have cumulative beneficial fiscal effects over time?
A lot of our budget challenge is about turning around long-term trends, and the sooner we start changing those trends, the less wrenching the adjustments will be. Health care costs are a great example, because they’re the biggest single factor driving our budget problems. Health spending has been rising consistently at 6 or 7 percent a year, faster than inflation and faster than the overall economy. If current projections hold, we’ll be spending twice as much on health care in less than 10 years (up to $4.4 trillion nationally). The more health care costs overall, the more we’ll be spending for Medicare and Medicaid – and Medicare, in particular, is the real budget-buster we face.
The key thing here is starting soon, because small changes now pay off big later on.
5. Does the budget include spending and revenue policies that are cost-effective and promote more efficient use of resources, in both the public and private sectors?
This question is about getting smarter: eliminating wasteful or inefficient programs, making investments that pay off later on (such as in education or infrastructure) and structuring taxes in ways that don’t unduly burden businesses or individuals.
6. Does the federal budget reflect a realistic assessment of the fiscal problems facing state and local governments?
One way for the federal government to deal with its own budget problems is to shift some responsibilities onto state and local governments. If you’ve been reading the news from California or New York, however, you know state governments have their own problems, and their resources are smaller. There are good arguments for moving more programs to the states, but the Fiscal Future committee argues that it doesn’t do any good to do that unless we’re sure the states can actually do a better, more cost-effective job.