Getting to Zero: How Congress Could Balance the Federal Budget

Capitol Building in WashingtonCongress is back in session in Washington, and investors know what that means -- the resumption of "rhetoric for dollars" regarding the U.S. budget and the deficit. But is it possible to summarize the deficit's core issues, sans the rhetoric and the hype? Here's a try:

The nonpartisan Congressional Budget Office (CBO), the legislature's budget tabulator, projects a $1.15 trillion budget deficit for this year, fiscal 2011, and a $766 billion deficit for fiscal 2012. But that was before the Obama administration and congressional Republicans agreed to extend the Bush tax cuts.

The good news from the agreement? Almost no one's taxes will increase in 2011 (except certain lower-income Americans). The tax cut extension also applies to 2012. The bad news? The 2011 budget deficit will likely be more than the CBO's estimate. Economists at Goldman Sachs (GS) are forecasting that this year's deficit will match 2010's $1.3 trillion.

A Deficit That's a Decade in the Making

To be sure, a trillion is an almost incomprehensibly big number. And because trillion-dollar budget deficits started only as recently as President George W. Bush's last year in office, it seems like the era of gargantuan gaps has present-day roots.

However, the $1.15 trillion deficit stemmed from policy decisions stretching back more than 10 years. Individually, each action by the president and Congress (aside from the business cycle, which no one can control) represented a significant allocation of resources -- a major policy decision. Moreover, what's astonishing during the 10-year period is that the nation was unsuccessful at either raising revenue from other sources or cutting other spending along the way to pay for the new initiatives. Among the initiatives/decisions that got to where we are now:

  • Defense spending for the Iraq/Afghanistan wars and for national security programs following the 9/11 terrorist attacks. Impact: increased deficit by $163 billion in 2011.
  • The 2001 Bush individual income/corporate income tax cut. In 2000, individual income taxes totaled $1 trillion; corporate income taxes, $207 billion. Had the 2001 tax cut not occurred and tax payments just kept pace with inflation (likely, given that the U.S. economy was expanding for much of the period), in 2011 individual income taxes would have totaled $1.275 trillion, corporate income taxes $263 billion. Impact: increased deficit by $331 billion in 2011.
  • The 2007-2009 recession. The Great Recession really hurt the nation's fiscal picture, due to increased spending for unemployment compensation, food stamps and other programs, and via reduced tax/fee revenue. Impact: increased deficit by about $250 billion in 2011, according to the Center on Budget and Policy Priorities, a liberal think tank in Washington, D.C.
  • Add about $50 billion for the bank bailout and other financial crisis support programs. All told, $794 billion of the projected $1.15 trillion deficit is due to supplemental war spending, the 2001 Bush tax cut and the recession.
Even excluding the above factors and assuming the deficit "normalizes" after the Bush tax cuts expire, war spending ends and typical GDP growth rates resume, the U.S. would still be running a roughly $356 billion deficit -- slightly less if federal interest payments are reduced. Hardly an insignificant sum.

That means Congress will still have to find additional spending cuts and/or tax increases to balance the budget.

Politically Plausible Cuts


Is it possible to find cuts and decrease spending outside of the initiatives described above? Indeed it is, and the Heritage Foundation, a conservative think tank based in Washington, has outlined $343 billion in what the group calls "available spending cuts."

Now, some of Heritage's recommendations seem more likely to yield savings (replacing the $15 billion farm subsidies program with improved crop insurance) than others (cutting Medicare payment errors in half by 2012 to save $44 billion).

But according to my analysis, about 50% of Heritage's proposed cuts are plausible, and of these, about 40% to 50% have a chance politically of being implemented, if the cuts affect Republican and Democratic constituencies equally. That would amount to an additional $75 billion in spending cuts.

Some of those savings that could become a reality include about $10 billion from a federal travel budget reduction; $6.5 billion by reducing energy subsidies; $2 billion from merging all four agriculture and research agencies; and $500 million by eliminating business subsidies from the National Institute of Standards and Technology.

To be sure, I don't agree with Heritage's entire list, but the important point is that there are programs that can be cut and in some cases eliminated -- enough to produce another $75 billion in budget savings. That would reduce the budget deficit to $281 billion.

Heritage's list doesn't specify whether the cuts should be made in one year or over several years, only that "Congress needs to start cutting spending now." I'd phase in my $75 billion in cuts over a four-year period, fiscal 2012 through 2015, which would give affected programs and constituencies more time to adjust.

Almost a Rounding Error

Now, how to eliminate the remaining $281 billion deficit? Beginning in 2015, cut about another $100 billion from the Pentagon budget over five years -- roughly $20 billion per year. Even after these reductions, the defense budget would still be roughly $548 billion in fiscal 2016.

Then impose a modest value-added tax to total about $50 billion, which would lower the deficit to about $131 billion, excluding annual net interest savings.

Of course, a $131 billion annual deficit is not a balanced budget. But compared to today's $1.15 trillion gap, $130 billion almost looks like a rounding error.

Congress would need to assess economic conditions in 2016, as well as evaluate increased Social Security/Medicare costs associated with the baby boom generation's retirement, before implementing additional cuts and/or tax increases. Nevertheless, getting to a roughly $100 billion deficit would be a victory in itself.

And it can achieved if Americans, especially policymakers, remember the following:

  1. No single decision created today's deficit -- it took numerous decisions.
  2. It took about 10 years for the budget to get this out of whack, so it's going to take at least five years, probably longer, to return the nation to fiscal health.
  3. For deficit reduction to be fair, it must involve equal sacrifices by both Republican and Democratic constituencies.

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36 Comments

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God Bless

ways to save NO MORE BAIL OUT BIG BUS., NO MORE WAR WE HAVE LOST TOOOOO MANY OF OUR YOUNG, NO MORE RAISES FOR CONGRESS, (THEY VOTED NO INCREASE IN COST OF LIVING FOR SRS. WHO HAVE WKED ALL THEIR LIVES FOOD OR MEDS NOW IS THEIR CHOICE), NO AID OF ANY KIND TO ILLEGAL ALIENS,NO MORE FREE RIDES JET, CARS FROM prez and family and any govt. wker,no salery or benifit of any kind for congress and reps,
THESE MAY BE SMALL STEPS BUT AS ANY SR. CAN TELL YOU PENNIES MAKE DOLLARS IF WE CAN EXIST ON NEXT TO NOTHING ( COST OF LIVING HAS INCREASED) GOVT. CAN MAKE IT OH YEA ADD ONE MORE NO CHOO CHOO MR pres.

February 27 2011 at 2:24 PM Report abuse +1 rate up rate down Reply
sal8110

You can't balance the budget by raising taxes. We need to stop the growth in SPENDING. Why is it assumed that every year we HAVE to spend more then the year before. In business if you do that, after a few years you go ouy of business and everyone is fired. If we continue down this road, by 2015 our government will be bankrupt, and no one gets anything, is that what we want?

January 19 2011 at 10:43 AM Report abuse rate up rate down Reply
sgentilejr

Shame, shame, shame that so many people are so lame.
Cut here, cut there, cut everywhere________and what end result does it produce??? LESS jobs and Less economic activity is all that results from cutting.
It does not matter where they cut___the end result is LESS Jobs.
Cut Farm subsidies and the farmers buy less farm equipment and the farm equipment suppliers cut employment.
Cut military spending and the military buys less equipment and the military equipment suppliers layoff their employees.
No matter where you cut or how___We end up with Less jobs and Less economic activity.
Cutting will hurt the country and push it further down the toilet as we lose more jobs and have less economic activity.
What people all forget is that when the government spends money___It ends up being money that gets spent and goes BACK to the pockets of We the people. The less they spend___the Less we get back.
California's Governor cut more than any governor in the USA for the past 6 years and all he got was the Worst economy out of all of the 50 states. Did cutting help California??? Hell no___it made their problems Worse. What did California get by cutting__the Worst housing market in the USA, Highest unemployment in the USA. Highest foreclosure rate in the nation___those are the things Arnold got by 6 years of cutting and more cutting.
Spending creates jobs, Cutting eliminates jobs.

January 19 2011 at 6:13 AM Report abuse rate up rate down Reply
1 reply to sgentilejr's comment
Trevor

Except every dollar the goons spent is a dollar that comes from taxes or borrowing, and therefore would have been spent or invested anyhow.

January 19 2011 at 8:46 AM Report abuse rate up rate down Reply
Mauricemcdnl

WWW.MYTRISTATEAGENT.COM........ Most of the changes to Medicare will benefit the citizens. Preventative care and discounted drugs are apositive step in the right direction!

January 18 2011 at 4:16 PM Report abuse +1 rate up rate down Reply
frank1946

No VAT Thank You !

Reduce Medicare by another $ 500 Mil., induce competition in Healthcare Insurance and Healthcare services.

No more expensive surgeries in Medicare, hips, joints, transplants, etc.

Drop Corporate Tax Rate to 15 %, stop jobs from going outside USA.

Drop Capital Gains and Investment Taxes to - 0- ZERO - for five years.

Accross the Board cuts of 5 % for 5 years, 1 % per year !

January 18 2011 at 4:04 PM Report abuse rate up rate down Reply
asronce

SCREW THE DRUG CZAR. Create a DEPT CZAR! cut, burn slash. Leave no one standing.

January 18 2011 at 1:13 PM Report abuse -1 rate up rate down Reply
asronce

Lets give Suzie Orman a shot @ the federal debt. Legislators will only complicate and derail any positive action. Suzie would balance the budget in 41 months utilizing her methods that have helped thousands of consumers whom have been living with debt by simply having more money coming in than going out and once and for all freeze any new entitlements programs and void all other contractual requirements by combining, downsizing and deleting programs that we want but don't need.

January 18 2011 at 1:05 PM Report abuse rate up rate down Reply
mcbr1de

Bad math by Mr Lazzaro, as usual. For example, he subtracts the 2001 tax cuts from the 1.15 trillion CBO estimated deficit, but the CBO estimate already included expiration of the tax cuts. He notes that in the baginning of the article, then completely ignores it when doing his calculations.

The true cause of the huges deficits are many, but the main one is entitlement programs, particularly Medicare, medicaid, and Social Security. These will grow rapidly as the Boomers age. Easy cuts will not make a dent in the deficit. And until it is a crisis, the hard cuts will not be made.

January 18 2011 at 12:34 PM Report abuse -2 rate up rate down Reply
Gumby

Lazzaro, you cant just focus on the federal budget balancing act alone, you must also focus on the energy supply balancing, energy conservation effort, many other balancing acts to help right our economy. Our lingering energy crisis since the Nixon years is a big source of our balancing headaches.. We are doing the right thing with wind power but very wrong stuff with solar energy (low efficiency) . We must use mirrors instead of photovoltaics for solar energy projects. Photovoltaics is a red herring invented by fossil fuel industry to slow us down from acheiving energy independence. YOu can not just ignore the rest of everything whilie working on the federal budget... Everything works together..

January 18 2011 at 12:31 PM Report abuse rate up rate down Reply
bohemianacres

Trevor, it sounds good, but who or what is willing to pay a trillion for the Grand Canyon? Or another trillion for the Petrified Forest? Maybe you were thinking China, or Japan has enough money. As for Social Security, this lawfully forced "Savings for Retirement" plan, I think it was a great idea and certainly helped numerous of my relatives, including parents, when they became too old to function in the workplace as the employers expected the jobs to be done, and lived out their lives independently in their homes. The only thing "scheming" about SS is it is also a victim of the economic forces of inflation and ZPG. As for the government hiring too many people, sure would help the federal budget, but it would not help the unemployment situation. And the States would have something to say about that. What is needed is forced living within one's means, be it an individual, business, corporation or government. And this means each and every year. We of the public are finding out the dark force of credit and the credit card. It is time for the government to pay up their credit and cut up the card. How and when are the awful and painful questions.

January 18 2011 at 11:48 AM Report abuse +1 rate up rate down Reply
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