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VOL 3
WHAT’S INSIDE WHY HAVE A BUDGET Does it Really Matter?
8
CONSEQUENCES The Consequences of Excessive Government Spending
12
IRRESPONSIBLE GOVERNING Why Passing the Buck Will Not Work
16
UNCERTAINTY Budgeting’s Impact on the Economy
19
UNSUSTAINABLE SPENDING Why Status Quo is Unsustainable
WHY HAVE A BUDGET: does it really matter?
INTRODUCTION TO THE BUDGET What is going on with this whole budget process anyways? Why do we have budgets and then have them ignored by Congress? What is considered law and what are considered guidelines? CONGRESSIONAL BUDGETING 101 Why Have a Budget Why the Budget Does Not Matter Why the Budget Really Matters WHY HAVE A BUDGET The current Congressional budget process was created by the Congressional Budget Act of 19741. It establishes the parameters of the federal government in respect to spending, tax revenue, deficit, and debt policies. THE DIFFERENT TYPES OF SPENDING In general, there are two types of spending. These two types of spending are mandatory (i.e., entitlement) and discretionary spending.
MANDATORY SPENDING is spending that’s on autopilot and is not subject to Congress’ yearly spending bills. Spending for things like Social Security, Medicare, and Medicaid are considered to be mandatory spending. DISCRETIONARY SPENDING is spending for programs and agencies through yearly appropriations acts, like Department of Defense and Department of Education funding. Currently, mandatory spending represents about two-thirds of total government spending, while discretionary spending represents the remaining onethird2.
WHY THE BUDGET DOESN’T MATTER Since the budget is in the form of a concurrent resolution and not a bill, it is not signed by the President and thus does not have the force of law. Therefore, the budget is largely a messaging tool. It puts members of Congress on record supporting or opposing various policy frameworks such as income tax rates and reforms to entitlement programs. Outside of policy proposals for entitlement programs, the current budget process in practice does very little to address entitlement spending. WHY THE BUDGET REALLY MATTERS A budget sets the overall spending cap for discretionary spending. As referenced earlier, this represents about one-third of total government spending. The total spending cap created by the budget is divided by the House and Senate Appropriations Committees among the 12 Appropriations subcommittees. Once they do this, it establishes separate spending caps for each of the 12 appropriation bills. In practice, this creates a cap on total spending and a cap for each of the 12 appropriations accounts (i.e., Department of Defense).
A budget also may have reconciliation instructions. Reconciliation instructions can later be used to prohibit Senate filibusters. In practice, this can set the stage for policy measures to pass the Senate by a simple majority-vote. If used as intended, the reconciliation process enhances “Congress’s ability to change current law in order to bring revenue, spending, and debt-limit levels into conformity with the policies of the budget resolution3.” Social Security is the only entitlement program explicitly excluded from the reconciliation process4. Reconciliation can be used as a serious deficit reduction tool but Congress has generally abandoned this practice. “Reconciliation was used in the 1980s and into the 1990s as a deficit-reduction tool. Beginning in the latter part of the 1990s, some reconciliation measures were used principally to reduce revenues, thereby increasing the deficit5.” Budget reconciliation is how aspects of the Bush Tax Cuts as well as Obama Health Reform were signed into law. In practice, neither of these measures matches the original intention of the reconciliation process.
WHY CAPS MATTER I thought you said the budget doesn’t have the force of law. Then why would a cap matter? Some items in the budget, including the overall discretionary spending cap, are enforceable by points-of-order. Points-of-order can be raised on the floor by members of Congress after an infraction of the budget resolution is made. In practice, budget points-of-order can be easily waived in the House if the majority party’s leadership wants them to be waived. In the Senate, however, it generally takes 60-votes to overcome a budget related
point-of-order, such as the violation of the total spending cap. According to the Congressional Research Service, the budget enforcement process “is not an effective control on the spending that results from existing laws6” although it generally works for new legislation.
1
http://www.access.gpo.gov/congress/house/hd106-320/pdf/hrm89.pdf, pp. 937
2
Congressional Budget Office. “An Analysis of the President’s Budgetary Proposals for Fis-
cal Year 2012.” http://www.cbo.gov/ftpdocs/121xx/doc12130/04-15-AnalysisPresidentsBudget.pdf. Table 1-2, comparison between FY 2011 mandatory and discretionary spending. 3
Congressional Research Service. “The Budget Reconciliation Process: House and Senate
Procedures. August 10, 2005. Pp. summary. http://assets.opencrs.com/rpts/RL33030 20050810.pdf 4 http://www.access.gpo.gov/congress/house/hd106-320/pdf/hrm89.pdf, pp. 975. 5 Congressional Research Service. “Introduction to the Federal Budget Process.” December 2, 2010. Pp. 24. http://assets.opencrs.com/rpts/98-721 20101202.pdf 6 Congressional Research Service. “Introduction to the Federal Budget Process.” December 2, 2010. Pp. 7. http://assets.opencrs.com/rpts/98-721 20101202.pdf
CO NSEQ UE NCE S : the consequences of excessive government spending
Americans have grown increasingly knowledgeable – and increasingly concerned – about the government’s recent explosion of spending and debt. Americans also have begun to understand there really is no “free lunch.” Washington’s fiscal recklessness has consequences, and these consequences grow exponentially worse with every day policymakers fail to get our nation’s fiscal house in order THE CONSEQUENCES OF OVERSPENDING Higher Taxes, Higher Cost of Living America’s Credit Score Dampened Economic Growth, Fewer Job Opportunities Less Flexibility Crushing Burden on Future Generations H I G H E R TA X E S , H I G H E R C O S T O F L I V I N G No government money is free money. Every dollar the government spends must be taken from the private sector through taxation, inflation, or borrow-
ing. Right now, the government is financing its overspending through borrowing and incurring debt that will have negative consequences. As the national debt grows out of control, policymakers will likely contemplate major tax hikes and increasing the money supply to pay our debt with less valuable money. Tax increases hamper economic recovery and hinder prospects of future growth. Increasing the money supply leads to higher prices and makes American families’ savings less valuable. A M E R I C A’ S C R E D I T S C O R E Last year, Moody’s Investor Service warned that, unless the United States reduced its debt, the credit agency would consider downgrading the U.S. debt rating from AAA status for the first time in history1. Even so, Washington still continues to spend under a heavy debt burden and heavy financial obligations. Downgrading the U.S. debt rating would signal to lenders that the U.S. has a higher potential of default and is no longer the lowest-risk investment. As Congress struggles to balance the budget and manage out-of-control debt levels, America must compete with other nations to borrow money. Because of the increased risks associated with buying U.S. debt, investors would likely require a higher interest rate. This would push U.S. interest payments higher, and worsen the country’s debt situation. D A M P E N E D E C O N O M I C G R O W T H , F E W E R J O B O P P O RT U N I T I E S
Many economists agree that high government spending can hurt the economy, while lowering spending can spur job creation and economic growth2.
Though spending has increased from $2.7 trillion to $3.5 trillion over the last four years, small businesses and families are still struggling to make ends meet3. Why? Government spending crowds out spending by the private sector. Each dollar spent by government – whether local, state, or federal – is a dollar that has to be raised by taxing the private sector. LESS FLEXIBILITY By 2021, interest payments and entitlement programs (such as Medicare, Social Security, and Medicaid) will consume more than 90 percent of projected federal revenues, or 90 cents out of every dollar collected in taxes4. This means less than 10 percent of tax revenue will be left to fund all other government functions: from providing for defense and homeland security to education and the environment. Any additional spending will be done with borrowed money. If nothing is done to address our under-funded entitlement programs, the programs’ beneficiaries, taxpayers, and the security of our nation will pay a price. C R U S H I N G B U R D E N O N F U T U R E G E N E R AT I O N S Between 2011 and 2020 interest payments on the debt, adjusted for inflation, will more than triple – spiking from $211 billion, to $627 billion5. When more of our money goes to pay interest on our debt, there is less money available to spend on other priorities. This is true for the government, since a growing portion of the federal budget will be spent on interest payments, and also for the economy overall, since more resources will be eaten up by interest.
Since World War II, government spending, on average, accounted for around one fifth, or 19.6 percent, of GDP. Today, federal spending accounts for nearly one quarter, or 25.3 percent, of GDP6. When government controls more of our economy and resources, the productive job-creating sectors are crowded out. Over the long run, this weakens our economy and threatens the financial stability of American families.
1
David Jolly and Catherine Rampell, “Moody’s Says U.S. Debt Could Test Triple-A Rat-
ing,” The New York Times, 3/15/10. http://www.nytimes.com/2010/03/16/business/ global/16rating.html 2
Less Spending, More Jobs: 150 Economists Call for Spending Cuts to Boost the Economy.
February 11, 2011. http://www.speaker.gov/blog/?postid=224851 3
President’s Budget, Historical Table 1.2, February 2011, http://www.whitehouse.gov/
omb/budget/Historicals 4 Figure found by dividing the total Federal Receipts in 2021 found in the Office of Management and Budget, Federal Receipt Report for FY 2012, Pg 171, (http://www.whitehouse. gov/sites/default/files/omb/budget/fy2012/assets/receipts.pdf), with the Net interest and Mandatory Spending of 2021 in the Office of Management and Budget, Technical Budget Analysis Report for FY 2012, Pg 419 (http://www.whitehouse.gov/sites/default/files/omb/ budget/fy2012/assets/technical_analyses.pdf). 5 Congressional Budget Office, Analysis of the President’s Budget for 2012. April 2011. http://www.cbo.gov/ftpdocs/121xx/doc12130/04-15-AnalysisPresidentsBudget.pdf 6 President’s Budget, Historical Table 1.2, February 2011, http://www.whitehouse.gov/omb/
budget/Historicals
IRR E SPO NS IBL E GO V E RNING : why passing the buck will not work Americans have grown increasingly knowledgeable – and increasingly concerned – about the government’s explosion of spending and debt. Americans have also begun to recognize the discrepancy between their own belt-tightening and what is, and isn’t, happening in Washington. IS THIS RESPONSIBLE GOVERNING? Washington Continues Deficit-Spending Spree No Priorities, No Plan, No Budget Passing The Buck WASHINGTON CONTINUES DEFICIT-SPENDING SPREE Economists of every political stripe have warned that failing to get government spending and debt under control will lead to dire consequences, including higher taxes, higher costs of living, slower economic growth, and fewer jobs. Despite strong evidence of spending-policy failures, and clear warnings of the consequences of out-of-control debt, Washington continues to overspend at an alarming rate.
While Washington’s overspending problem clearly isn’t new -- it has cumulatively overspent to the tune of $14.3 trillion – it has grown significantly worse1. In 2009, Obama vowed to cut the deficit in half by 20132. Instead, up to this point, deficit spending has skyrocketed. Despite taking in $2.3 trillion in taxes last year, Washington spent $3.5 trillion. It’s time for government to tighten its belt and cut spending just like families during these hard times. Cutting spending is about ending wasteful spending, making the government more efficient, showing respect to hardworking taxpayers, and making the tough choices today that save our children from even tougher choices tomorrow. NO PRIORITIES, NO PLAN, NO BUDGET Despite the nation’s precarious economic and fiscal situation, Congress last year failed to perform its most basic responsibility. For the first time since the implementation of the 1974 Budget Act, the House of Representatives failed to pass – or even to write – a budget. Additionally, the National Commission on Fiscal Responsibility and Reform was created by executive order of the President, and charged with recommending to Congress a remedy and plan for the nation’s dismal fiscal situation. • On December 2010, the Administration’s National Commission on Fiscal Responsibility and Reform released a proposal of the panel’s much-anticipated plan for reducing medium- and long-term deficits and debt. The document, a product of months of discussion among the bipartisan Commission’s 18-member panel, includes a mix of
broad goals and specific proposals for reforming the budget process, discretionary spending, mandatory spending, and tax laws. Though the Commission was appointed by the President, Washington refused to adopt the chairmen’s recommendations and passed the buck on adopting real fiscal reform. PASSING THE BUCK By running up unsustainable levels of spending and debt – and shirking the responsibility to address it – Washington is knowingly subjecting future generations of Americans to the painful consequences of its actions. Between 2011 and 2021 interest payments on the debt, adjusted for inflation, will nearly triple – spiking from $213 billion to $807 billion3. When more tax dollars are consumed by interest payments, there is less money available to spend on other priorities. By 2021, interest payments and entitlement programs (such as Medicare, Medicaid, and Social Security) will alone consume more than 90 percent of projected federal revenues, or 90 cents out of every dollar collected in taxes4. This means just 10 percent of tax revenue will be left to fund all other government functions: from defense and homeland security to education and the environment. Any additional spending will be done with borrowed money. We cannot tax or grow our way out of this problem. Unless Washington stops passing the buck and restrains spending, all Americans will suffer for this failure to govern.
As servicing the debt becomes more expensive, policymakers will likely contemplate major tax increases, or an increase in the money supply. Tax hikes will cut into family budgets and dampen prospects for growth and job creation. Paying for debt by increasing the money supply would push prices higher on goods and services, thus making American families’ savings less valuable.
1
U.S. Treasury Department, Debt to the Penny, 3/30/11
2
Mike Allen, “Obama vows to cut huge deficit in half,” Politico, 2/22/09 http://www.
politico.com/news/stories/0209/19124.html 3
Congressional Budget Office, Preliminary Analysis of the President’s Budget for 2012,
Extended Baseline, http://cbo.gov/doc.cfm?index=12103 4 Figure found by dividing the total Federal Receipts in 2021 found in the Office of Management and Budget, Federal Receipt Report for FY 2012, Pg 171 (http://www.whitehouse.gov/ sites/default/files/omb/budget/fy2012/assets/receipts.pdf), with the Net interest and Mandatory Spending of 2021 in the Office of Management and Budget, Technical Budget Analysis Report for FY 2012, Pg 419 (http://www.whitehouse.gov/sites/default/files/omb/budget/ fy2012/assets/technical_analyses.pdf).
UN CE RTA I NT Y: budgeting’s impact on the economy
Americans have grown increasingly knowledgeable – and increasingly concerned – about the government’s recent explosion of spending and debt. Americans have also grown fearful of the great unknown: what will Washington do next? As high unemployment and anemic economic growth continue to plague our nation, Washington continues to fuel uncertainty and a general lack of confidence about the future: will there be more jobs next year or less? What about the debt? Borrowing costs? Inflation? UNCERTAINTY & LACK OF CONFIDENCE IMPEDE OUR RECOVERY No Ability to Plan Unpredictable Interest Payments Hinder Investment Families and Companies Afraid to Act AMERICA HAS NO ABILITY TO PLAN Individuals, families, and business leaders cannot plan for the future because of uncertainty about policies coming out of Washington. Over the past few years, we’ve watched our government bail out financial
firms, take over auto companies, and significantly increase federal involvement in the housing and mortgage markets. Are these policies that companies may expect from the federal government? Companies, bondholders, shareholders, and consumers today can’t be certain when Washington will choose to act again, or under what terms. Even efforts to clarify the relationship between government and the private sector (as was attempted in last year’s financial regulatory reform bill) grant Washington bureaucracies so much discretion that no one knows exactly how the law will work when fully implemented. In a speech, Business Roundtable Chairman and Verizon CEO Ivan Seidenberg said, “In the search for short-term revenue fixes, we’re doing long-term damage to growth. By reaching into virtually every sector of economic life, government is injecting uncertainty into the marketplace and making it harder to raise capital and create new businesses1.” UNPREDICTABLE INTEREST PAYMENTS HINDER INVESTMENT What’s also troubling is the fact that interest rates on the federal debt have a strong potential to affect the economy and borrowing power of American small businesses during the next few years. Interest rates on the federal debt have been remarkably low while American debt has doubled over the last ten years2. As debt grows, so do payments on interest, which are expected, along with entitlement spending, to take up 90% of the budget by 20213. Should interest rates on the federal debt go up one percentage point higher than projected, it would increase spending on the debt by $1 trillion4. How will other countries respond to America’s debt crisis? Will small businesses see increases in their cost to borrow money and thus grow and thus create jobs?
Will the economy, five years from now, be able to support investments businesses make today? Will Washington have to increase taxes to pay for the debt? FAMILIES AND COMPANIES AFRAID TO ACT Because companies and families don’t know what new rules, regulations, and taxes might be coming from Washington, many are not investing in the economy. Instead they are playing it safe, and holding on to their assets as cash in order to avoid making a mistake in a system in which they lack confidence. Richard Fisher, President of the Federal Reserve Bank of Dallas recently stated: “Operating a business under conditions of excessive uncertainty is like playing a game when you don’t know the rules. Without rules, it is impossible to develop a strategy or playbook. Business leaders are forced to call a time-out: They remove their players from the field and anxiously wait on the sidelines until they have a better idea how to play the game. Too much uncertainty can create economic stasis as more and more decisions get delayed, retarding commitments to expansion of payrolls and capital expenditures and slowing the entire economy5.” 1
Speech by Ivan Seidenberg at the Economic Club of Washington. June 22, 2010.
2
Congressional Budget Office, Federal Debt and Interest Costs. December 2010. http:// www.cbo.gov/ftpdocs/119xx/doc11999/12-14-FederalDebt.pdf
3 Figure found by dividing the total Federal Receipts in 2021 found in the Office of Management and Budget, Federal Receipt Report for FY 2012, Pg 171 (http://www.whitehouse.gov/ sites/default/files/omb/budget/fy2012/assets/receipts.pdf), with the Net interest and Mandatory Spending of 2021 in the Office of Management and Budget, Technical Budget Analysis Report for FY 2012, Pg 419 (http://www.whitehouse.gov/sites/default/files/omb/budget/ fy2012/assets/technical_analyses.pdf). 4 Congressional Budget Office, The Budget and Ecomonic Outlook: Fiscal Years 2011-2021. January 2011. http://www.cbo.gov/ftpdocs/120xx/doc12039/01-26_FY2011Outlook.pdf 5 Speech by Richard Fisher at the Greater San Antonio Chamber of Commerce. July 29, 2010. http://dallasfed.org/news/speeches/fisher/2010/fs100729.cfm
UN SU STAI NABL E GO V E RNING : why status quo is unsustainable As American families are tightening their belts to make ends meet, they are increasingly concerned about the government’s explosion of spending and debt. Americans also have grown increasingly angry as Washington seems unable, or simply unwilling, to get control of its unsustainable levels of spending. AN UNSUSTAINABLE SPENDING PATH Overspending Mentality From Bad to Worse From Worse to Crisis Spending Reduction Only Sustainable Solution OVERSPENDING MENTALITY The problem of government overspending is not new. With few exceptions, government has always overspent (creating deficits by spending more than it took in) regardless of how much it taxed.
• The federal government has run a deficit every year since 1969, with the exception of the years between 1998 and 20011. The government is expected to run a fiscal year 2011 deficit of $1.4 trillion2. • Between 1980 and 1990, government spending increased by $500 billion (adjusting for inflation) -- an increase of 34 percent. Between 1990 and 2000, spending increased by another $200 billion -- an increase of 11 percent. And over the past decade, from 2000 to 2010, spending increased by $1.37 trillion -- an increase of 62 percent3. • Adjusting for inflation, the gross federal debt grew from $2.4 trillion to $5.3 trillion during the 1980s. Washington added another $1.8 trillion during the 1990s. Since 2000, our debt has grown from $7.1 trillion to $14.2 trillion4. • University of Maryland economist Carmen Reinhart, and expert on debt, testified before Congress that the United States’ current debt is approaching levels that will have significant negative impact on jobs and economic growth5. FROM BAD TO WORSE Recent explosive spending growth has made a bad situation much worse. • Government spending has hovered around one fifth, or 19.8 percent, of our economy since World War II. This year, federal spending will account for nearly one quarter, or 25.3 percent, of the nation’s GDP6. • This explosion of government spending isn’t just a temporary spike in reaction to the recent economic crisis; analysts expect government spending to remain above 24 percent of GDP from 2020 forward7.
• The government’s explosive growth means it is consuming ever more of our nation’s resources, leaving ever less for American families and businesses – the true engines of progress and economic growth. • Alice Rivlin, former Director of both the Administration’s Office of Management and Budget and the Congressional Budget Office, recently said, “…failure to rein in the rising debt poses an enormous risk to our economic vitality and national security in the relatively near term. We cannot afford non-essential spending for any broad purpose — whether it’s health or education or defense — until we get our federal budget back on a sustainable track8.” FROM WORSE TO CRISIS If Washington continues on its current spending path, America will face a devastating economic and fiscal crisis. Interest on the debt and entitlement spending alone will grow to consume almost the entire federal budget. The cost of government itself will grow to consume so much of the nation’s economic resources that little will be left for the private sector to create actual growth. Between 2011 and 2020, interest payments on the debt, adjusted for inflation, will nearly triple – spiking from $211 billion to $627 billion9. This is a best-case scenario, predicated on maintaining low interest rates and no further deficit creating government spending10. By 2021, interest payments and entitlement programs (such as Medicare, Social Security, and Medicaid) will consume 90 percent of projected federal revenues, or 90 cents out of every tax dollar11. This means just ten percent of the budget will be left to fund all other government functions: from providing for defense and homeland security to education and the environment.
SPENDING REDUCTION ONLY SUSTAINABLE SOLUTION It is impossible to tax, or even to grow, our way out of the coming fiscal crisis; spending must be reduced to sustainable levels. To close the gap between what we are expected to spend and what we are expected to take in for fiscal year 2012, the federal government would have to increase total revenues by $1.1 trillion. That represents a tax increase of nearly 50 percent. The Tax Policy Center has found that to raise income taxes to try to close the deficit would necessitate a top tax rate of 77 percent, which economists say would significantly hamper productivity12. If the federal government returned to the average, inflation-adjusted, per-household spending levels of the 1990s, the budget could be balanced in less than three years without any tax increases13. A big tax hike might appear to improve the deficit situation for the moment; but it will simply leave us with a still-unsustainable sized (and growing) government -- just with a higher-taxed people. Failing to address the actual problem of unsustainable government spending means Washington will just have to raise taxes again and again as spending continues to grow. Clearly, this model is itself unsustainable. It will increasingly discourage work, investment, business expansion, and job creation for as long as the government attempts the tax-hike ‘remedy’ to cure its spending problem.
1
Office of Management and Budget, Historical Tables, Table 1.1, http://www.whitehouse.gov/omb/ budget/Historicals/
2
Congressional Budget Office, Preliminary Analysis of the President’s Budget for 2012, http://cbo.gov/doc.cfm?index=12103
3
Office of Management and Budget, Historical Tables, Table 1.3, http://www.whitehouse.gov/omb/ budget/Historicals/
4
Office of Management and Budget, Historical Tables, Table 7.1, http://www.whitehouse.gov/omb/ budget/Historicals/
5
Walter Alarkon, “U.S. debt reaches level at which economic growth begins to slow,” The Hill, May 26, 2010.
6
Office of Management and Budget, Historical Tables, Table 1.3, http://www.whitehouse.gov/omb/ budget/Historicals/
7
Congressional Budget Office, Summary, Extended Baseline, June 2010.
8
Anna Cameron, “Defense Cuts Must Be On The Table, Say Experts,” Talk Radio News Service, 2/25/2011
9
Congressional Budget Office, Analysis of the President’s Budget for 2012. April 2011. http://www.cbo.gov/ftpdocs/121xx/doc12130/04-15-AnalysisPresidentsBudget.pdf
10
Congressional Budget Office, Preliminary Analysis of the President’s Budget for 2012, Extended Baseline, http://cbo.
gov/doc.cfm?index=12103 11 Figure found by dividing the total Federal Receipts in 2021 found in the Office of Management and Budget, Federal Receipt Report for FY 2012, Pg 171 (http://www.whitehouse.gov/sites/default/files/omb/budget/fy2012/assets/re ceipts.pdf), with the Net interest and Mandatory Spending of 2021 in the Office of Management and Budget, Technical Budget Analysis Report for FY 2012, Pg 419 (http://www.whitehouse.gov/sites/default/files/omb/budget/fy2012/as sets/technical_analyses.pdf). 12 5 Myths About Your Taxes, The Tax Policy Center, http://www.taxpolicycenter.org/publications/url.cfm?ID=901335 13 JC Watts, Op-Ed, “Getting the budget under control,” The Las Vegas Review Journal, 5/3/10
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