Too Much Hope? Why Obama's Budget Is Unrealistic

The Obama administration earlier this week released its proposed budget for the 2011 fiscal year which starts Oct. 1, 2010. The numbers are daunting: A $3.8 trillion federal budget for next year, with a projected $1.3 trillion deficit on top of tax revenues of $2.5 trillion. The current fiscal year 2010 deficit is expected to reach $1.6 trillion.The White House plans to freeze spending on non-entitlement, non-Pentagon programs -- in effect freezing about 17% of the total budget -- and let the Bush-era tax cuts on upper-income households lapse on Jan. 1, 2011, raising about $100 billion in additional tax revenues per year.

A Staggering Deficit

Even if the partial freeze and reversion to higher taxes are accepted by Congress, the projected deficit will remain a staggering 10% of the nation's GDP. Should tax revenues continue declining and Congress reject the modest cuts, the deficit could quickly rise far above $1.3 trillion.

To put this budget in the proper context, we need a little history.

The Federal budget in 1980 was $590 billion (not adjusted for inflation). Federal expenditures are estimated at $3.5 trillion for the 2010 fiscal year. According to the Bureau of Labor Statistics inflation calculator, $100 in 1980 is the equivalent of $260 today. So if Federal spending had risen at the rate of inflation, the Federal budget would be about $1.5 trillion today, not $3.5 trillion.

We as a nation have added $2 trillion in Federal spending above inflation.

Bulk Goes To Three Programs

Where does all this money go? The vast bulk goes to three programs: Social Security ($700 billion in fiscal 2010 -- this year); Medicare/Medicaid ($821 billion) and Defense Department ($663 billion). Many other programs, such as the Veterans Administration, are lumped into so-called "discretionary spending," though they are effectively mandatory programs.

Just these three programs -- Social Security, Medicare/Medicaid and the Pentagon -- total $2.19 trillion, almost exactly matching 2009 tax revenues.

Other mandatory programs add $571 billion, and the interest paid on external national debt cost another $165 billion. Programs which are essentially mandatory -- the Veterans Administration, and the Departments of Agriculture, Energy (nuclear weapons maintenance and research) Transportation and Homeland Security -- total another $218 billion.

If we dispensed entirely with all the other branches of government -- the departments of Justice, State, Education, Housing and Urban Development, Health and Human Services, NASA, Labor, the EPA and every other program, the "stripped down" budget of mandatory spending still totals $3.144 trillion -- a $1 trillion structural deficit.

Not Very Rosy

Yet this only begins to describe the issues going forward. Politicians and government agencies alike often issue rosy projections which have little connection to the financial realities of recessionary or slow-growth eras. The White House budget for 2013, for example, calls for a massive rise in tax revenues and a decline in the Federal deficit to $400 billion -- a magical drop of over $1 trillion based on what amounts to wishful thinking.

The numbers we can actually measure are not very rosy.

For instance, official projections suggest that Social Security will remain solvent until the politically benign date of 2044. (In the fine print, the report notes that this benign projection assumes Social Security taxes rise from 11% of payroll to over 19%).

Regardless of what may or may not transpire in 30 years, what we do know is that the current recession has trimmed revenues even as it has driven many workers to retire "early" at 62 rather than wait for their full benefit at 66.

Outlays Are Soaring

As a result, outlays are soaring: monthly benefits were $56.6 billion in September 2009, up from $51.5 in 2008, a staggering 10% increase in a single year.

Meanwhile, as job losses mount, Social Security revenues have slipped into the negative column. In 2007 the system generated a surplus of $191 billion; based on current trends, that surplus will be gone by 2011 or 2012, six years earlier than the program's Trustees forecast in June of 2009.

Consider Medicaid expenditures, which have skyrocketed to $290 billion. Did anyone notice that many of the long-term unemployed who have exhausted their unemployment benefits now qualify for Medicaid?

There are good reasons to doubt that tax revenues will rise as projected -- or increase at all. Indeed, tax revenues fell 7% in December 2009 even as the economy was supposedly growing at a 2.2% annual clip.

Intense Lobbying Occurs

The costs of the three largest programs keep marching higher; freezing the 17% of the budget which is moderately discretionary does nothing to rein in the galloping behemoths of Defense ($744 billion for 2011), Medicare/Medicaid/other mandatory ($1.435 trillion in 2011), and Social Security ($730 billion in 2011).

These programs alone total $2.9 trillion, roughly $500 billion in excess of projected tax revenues. Include essential programs like the Veterans Administration and Transportation, and the deficit rises to the structural level of $1 trillion.

But does anyone think that eliminating entire departments of the Federal government is even plausible? Every cut, no matter how modest, draws intense lobbying by those government agencies and private contractors who will see their incomes drop.

No politician wants to see even one job cut from their district, let alone the thousands which would result from meaningful cuts in Federal spending.

A Tough Reality

Combine unrealistically rosy projections of rapidly rising tax revenues and skyrocketing expenditures in defense, entitlements and other mandatory spending, and what we get are structural deficits well above $1 trillion for as far as the eye can see.

Even adding $100 billion a year in additional tax revenues won't change that reality.
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