Dealing With the Federal Budget in a Time of Madness

Summary of Remarks by
Stan Collender
Qorvis Communications LLC

This is the year of calling everyone’s bluff on federal budget deficit reduction. 

During 2009, policymakers produced the right fiscal policy for the right time:  growing the deficit when the economy was in the midst of a recession.  Yet, many policymakers groaned about government spending and rising debt levels.  Now with a growing economy, policymakers truly face the issue of deficit containment in the FY2011 budget, which covers the October 2010-to-September 2011 period.  Since resources are scarce and the value of individual programs aren’t comparable (consider the value of kids’ education to veterans’ benefits), Congress and the Administration face difficult decisions within the problematic context of the willingness of foreign buyers to purchase additional U.S. debt, the potential for inflation, pent-up demand, and the political reality of midterm elections.

When President Obama submits his budget to Congress in his state-of-the-union message, probably in early February, he intends to talk about deficit reduction.  His budget will most likely (1) assume three of the Bush tax provisions will not be extended; (2) provide for reductions in military spending in Iraq and Afghanistan (although savings will be minimal since fifty percent of spending is on personnel, who will continue to be on the payroll); and (3) recognize the burden of increasing interest on the federal debt.

The FY 2011 budget will not contain cuts in Medicare, Medicaid, or Social Security but rather will focus on cuts to discretionary domestic spending, which currently totals $500 billion.  The best guess is that discretionary domestic spending will be flat or reflect reductions up to minus five percent. 

The President’s FY 2011 budget will also call for the federal primary deficit budget to be balanced by 2014, which means the budget would be balanced less the cost of financing the debt.  By 2020, the total federal budget would be balanced.  These are the right goals for now, but in the next five-to-ten years, circumstances might change and call for a realignment of goals.

Yet even if circumstances don’t change, there is the possibility that nothing will happen to reduce the deficit and to balance the budget due to politics:  stopping the other side from winning is more important than governing, especially with midterm elections on the horizon. 

Therefore, this is the year for calling everyone’s bluff on budget deficit reduction.

Note: Policymakers, to escape the difficult decisions necessary to reduce the deficit, may appoint a budget commission.  Commissions don’t work, however, unless there is a consensus by the policymakers that something should be done.  It’s not clear such a consensus will emerge on the budget.

During the Q&A, the following points were made:

• It is possible to achieve the 2014 and 2020 budget goals if the three Bush tax provisions are allowed to expire, a reduction in military spending occurs, health care costs decrease per the CBO estimates, discretionary domestic spending declines two-to-four percent, the economy grows between three-and-four percent annually, and no surprise emergency expenditures surface.
• The public and Congress are not completely knowledgeable about the budget; e.g., few know that foreign aid makes up only one percent of the budget and is largely spent domestically.  This lack of knowledge presents a real issue for budget reform.
• There is no one “true” solution to curbing the federal budget deficits.  For every person on one side of the argument, there is a person on the other side. 
• Continued purchasing of U.S. debt by China may not be in danger because the Chinese need to the United States to import Chinese manufactured goods and the U.S. currency is needed in hedging activities by the Chinese. 
• Some states, like banks and companies, may be too big to let fail—such as California.  However, California may change its restrictive regulations to allow tax increases and cuts in services in order to balance its budget and will not require a federal bail-out.
• We are likely to see a paradigm shift in discretionary domestic spending.  For example, the department of education is seriously considering budget reductions.  However, what will cause a real paradigm shift will be a crisis tied unambiguously to the budget.
• Savings from health-care reform are unlikely before 2017.

In conclusion, two items likely to appear in the FY 2011 budget are:

• Annual deficit reduction targets with automatic reductions scheduled if targets are not met.
• Pay-as-you-go (PAYGO), which would mandate offsets for any tax cuts or spending increases so that the budget deficit does not increase.

Stan Collender is a partner with Qorvis Communications, LLC, in Washington, DC.  He is also a blogger on capitalgainsandgames.com, rated one of the top 25 economic blogs by the Wall Street Journal.  He has extensive experience in financial and public affairs communications--through work with Financial Dynamics, Price Waterhouse, and Touche Ross, among others--as well as extensive experience on Capitol Hill.  He is considered to be one of the leading experts on the U.S. budget and congressional budget process.

Rapporteur: Susan Doolittle

 

 

 

 

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