A Discussion on the U.S. Budget

Summary of Remarks by
Brian Riedl
Senior Policy Analyst, Heritage Foundation
Dr. Joseph Minarik
SVP & Director of Research, Committee for Economic Development
February 16, 2010

When Mr. Riedl and Dr. Minarik came together to discuss the United States budget, they both agreed on one thing—it needs some balancing. It was the methods that they each suggested for balancing the budget that set them apart. Mr. Riedl’s presentation, “The Threat of Escalating Spending – And President Obama’s Response,” was driven by the idea that under the Obama Administration’s current policies and long-term deficits are driven by spending.

If today’s tax and spending policies do not change, Mr. Riedl projects that 2020 federal spending will reach 26 percent of the gross domestic product (5.3 percent of the GDP above the 40-year historical average), while revenues will come in at 17.7 percent (0.6 percent of GDP below the historical average). This means that 90 percent of the expanded budget deficit would come from higher-than-average spending, and 10 percent would come from lower-than-average tax revenues. Mr. Riedl explained that entitlements—comprised mostly of Social Security, Medicare and Medicaid—and net interest spending will create permanent, unsustainable budget deficits. Under Mr. Riedl’s figures, projected Social Security, Medicare and Medicaid costs will rise from 8.7 percent of GDP today to 18.6 percent by 2050. According to Mr. Riedl, growing entitlement-based deficits would lead to economic catastrophe, with massive net interest costs driving projected federal spending past 70 percent of GDP by 2050.

Mr. Riedl outlined President Obama’s budget summary starting with the major initiatives: stimulus III, health care, cap-and-trade and tax increases. That would include 2.9 trillion dollars in tax increases and 1.6 trillion dollars in new spending over the next decade, allowing deficits to remain at over one trillion dollars in 2020. According to Mr. Riedl, the President’s budget agenda would push inflation-adjusted federal spending past 36,000 dollars per household by 2020, with tax revenue per household coming in at only about 30,000 dollars.

The President’s nearly three trillion dollar tax increase would increase taxes for cap-and-trade energy, health reform, banking and other business items. In the meantime, the President plans to raise the income tax rates, capital gains and dividends rates for upper-income taxpayers. While the President would like to reinstate the personal exemption phase-out and place a limit on itemized deductions for upper-income taxpayers to 28 percent, he also plans to reform the United States international tax system and enact various tax cuts for families and businesses. President Obama’s goals include the provision of new stimulus tax cuts and extensions of expiring tax cuts as well as other proposals. The sum of these goals would result in a 10-year revenue increase of 2,853 billion dollars.

The President’s budget would produce sustained large budget deficits, resulting in a deficit of 832 billion dollars by 2020. While the nation’s current budget deficits can be compared to those during World War II, World War II came to an end, while the entitlement spending driving this budget deficit would continue forever. To top things off, the President would nearly double the national debt as a percentage of GDP from 41 percent—as it was in 2008—to 77 percent in 2020. At the same time, inflation-adjusted spending on net interest costs would nearly quadruple from 188 billion dollars in 2010 to 697 billion dollars in 2020. Mr. Riedl pointed out that while these figures and projections alone should be enough to leave the United States frightened, he said to keep in mind that the President’s budget relies on gimmicks. According to Mr. Riedl, the budget excludes the cost of the cap-and-trade proposal and lowballs discretionary spending.

Mr. Riedl outlined the consequences of the President’s budget to include delayed entitlement reform, large deficits and tax increases, slower economic growth and more government involvement. Mr. Riedl offers another approach that would protect the family budget from the federal budget. He proposes to enact spending caps, reform Social Security, Medicare and Medicaid, devolve programs out of Washington, root out waste, fraud, abuse and pork and rescind unspent TARP and stimulus funds.

After Mr. Riedl concluded his remarks, Dr. Minarik offered his thoughts on the budget. Dr. Minarik summed up his presentation, “The Debt Clock is Ticking” by acknowledging that people can argue about whether a solution should be relatively more taxes or spending, but if arguing derails a solution, the results could be tragic. Dr. Minarik provided a longer-term view of the budget as the debt approaches levels reached only at the end of World War II. The Congressional Budget Office estimates that with policy changes, debt will reach 100 percent of GDP by 2018. In 2010, debt is to reach 60 percent of GDP. This level may require painful budget savings when fighting for survival. The start of the baby boom generation was 1946. In 2008, 62 years had passed and the first born of the generation began to retire, while the 1960s, 70s and 80s saw more people in the workforce at the peak of the boomers’ workforce years. During these decades, it was much easier for the United States to deal with the debt.

Downsides to the massive debt include the crowding out of private investments, which slows economic growth. Also, huge debt reduces the ability to borrow when emergencies need to be addressed. And this public debt can mature quickly. Dr. Minarik said that foreign investors have purchased most new U.S. debt. Currently, the U.S. already ranks high in debt relative to the developed world and thus loses its debt advantage. This year, debt hits 60 percent of GDP, which is 12 years sooner than was expected as of only two years ago. Hypothetically, if the U.S. were to become a member of the European Union, it would have hit its maximum level of public debt as a percentage of GDP to be accepted for membership.

Dr. Minarik then issued his take on a solution to the growing debt. To make his point, Dr. Minarik quoted former Representative Lee Hamilton, “Reducing the budget deficit is the second highest priority of every Member of Congress.” This being said, each member has at least one other priority first, and by the time all of these priorities are met, there is no chance to balance the federal budget. Each member has a different plan to balance the budget, and those plans are impossible to reconcile. In any case, Dr. Minarik said that the debt needs to be reduced to 3 percent of GDP by 2020. This would be the minimum amount needed to keep the debt from growing at a faster rate than the economy.

After presenting their sides, Mr. Riedl and Dr. Minarik came together to discuss the budget. Together, they acknowledged that there is no political benefit for addressing the budget problem. For one member to step out and create a proposal to save the economy would be political suicide. Thus, a solution may not be found until people on both sides of the aisle get together. According to Dr. Minarik, it is a leader that is needed in this situation. A leader is one who is willing to be the first one to step up without fear of risking their personal gain for the benefit of all. While Mr. Riedl commented that Congressman Paul Ryan from Wisconsin has introduced a plan to balance the long-term budget by cutting entitlements instead of increasing taxes, Dr. Minarik pointed out that other members have yet to join in support of his plan. At the end of the discussion, the two speakers recognized that countries, corporations and state and local governments all have similar debt problems. It is not just the U.S. federal government. The causes of the debt problem—both declining fertility and mortality—have led the federal budget to this worrisome state.

Brian Riedl has been the Heritage Foundation’s lead federal budget analyst since 2001. He specializes in federal spending and taxes, as well as macroeconomic, agriculture, antipoverty, and education policy. He’s also a member of the bipartisan “Fiscal Wake-Up Tour” that tours the country speaking on the long-term budget deficits driven by rising Social Security, Medicare, and Medicaid costs.  Riedl holds a bachelor's degree in economics and political science from the University of Wisconsin, and a master's degree in public affairs from Princeton University.

Joseph Minarik is the Senior Vice President and Director of Research at CED. He worked closely with Members of Congress, especially Senator Bill Bradley, on efforts to reform the Federal income tax.  In 1993, Dr. Minarik became Associate Director for Economic Policy at the White House Office of Management and Budget, and worked on the formulation and adoption of President Bill Clinton’s 1993 economic program, and on the Administration’s program to eliminate the budget deficit, which evolved into the bipartisan balanced budget agreement of 1997.  He received three graduate degrees in economics from Yale University, earning his Ph.D. in 1974.  He received his B.A. in economics from Georgetown University in 1971.  

Rapporteur: Melissa Fett

 

 

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