Monday, August 1, 2011

Crossing the Streams

OK.  Bad Ghostbusters reference but with all the talk of “cuts” and revenues in Washington these days, I wanted to return to the theme of “real” baseline budgeting.  One of the things that is often said is that balancing the budget will require “massive cuts.”  We must again remember that Washington defines a cut a bit differently than you or I might.  So I will counter with the following picture

Here we see projected spending are receipts based on three sources.  The spending line assumes 2010 spending as the base and grows spending by the rate of inflation plus population as projected in the President’s FY2012 budget submission.  The receipts line is based on the CBO baseline projection subtracting 2 percentage points for every year from FY2013 on to take an (aggressive) assumption of the reduced revenues from making no change in tax policy.  GDP is drawn also from the President’s FY2012 budget submission.

So what would this “spending only” approach tell us.

1.     Spending as a percentage of GDP declines rapidly over the period from 23.6% in 2011 to 19.4% in 2021.  This is without making any cuts in spending.  This is not to say that no benefit cuts may be required but simply that a COLA like view of government spending produces dramatic results.
2.     The government reaches “primary balance”, the goal the President has set for the budget process by 2016 (3.1% deficit) or 2017 (2.4% deficit).
3.     The deficit by 2021 is a mere 0.6% of GDP, suggesting that another couple of years would bring the budget to absolute balance.

Just something for those that argue that a cuts only solution is impossible to think about.  The budget can be nearly balanced with no cuts whatsoever as long as Washington chooses to live within a budget constraint.

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