February 21, 2014

Reform Entitlements - Or Go Bust

Charles Blahous

J. Fish and Lillian F. Smith Chair
Summary

The budget that America needs — versus the more likely budget shaped by concurrent political forces — are two very different things. As we prepare to receive and evaluate President Obama’s next submitted budget, it is worth knowing what a set of budget proposals would look like if focused on solving our escalating fiscal problems.

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The president can delay his budget, but no good can come from further postponing our country’s desperately needed financial reforms.

The White House announced that President Obama's proposed budget for fiscal year 2015 will be released on March 4, roughly one month behind schedule. Of course, far more important than the budget's submission date is its content. Unfortunately, there is every reason to expect that, like the president's recent State of the Union address, this year's budget submission will represent another critical missed opportunity to address escalating federal fiscal problems -- while they still can be solved.

Implicitly, every presidential budget is a compilation of the president’s policy choices, and this budget will be no exception. Election year budgets in particular often highlight issues that differentiate the president’s views from his political opponents’. But as we prepare to receive President Obama’s next budget in its political context, it is worth understanding how the country’s fiscal policy challenges appear when politics are subtracted from the equation.

Among the most important poiThe president can delay his budget, but no good can come from further postponing our country’s desperately needed financial reforms.

The White House announced that President Obama's proposed budget for fiscal year 2015 will be released on March 4, roughly one month behind schedule. Of course, far more important than the budget's submission date is its content. Unfortunately, there is every reason to expect that, like the president's recent State of the Union address, this year's budget submission will represent another critical missed opportunity to address escalating federal fiscal problems -- while they still can be solved.

Implicitly, every presidential budget is a compilation of the president’s policy choices, and this budget will be no exception. Election year budgets in particular often highlight issues that differentiate the president’s views from his political opponents’. But as we prepare to receive President Obama’s next budget in its political context, it is worth understanding how the country’s fiscal policy challenges appear when politics are subtracted from the equation.

Among the most important points to be understood about the budget is that the U.S. government continues to spend far more money than it collects in tax revenues, causing debt to accumulate at unsustainable rates. Whereas federal debt held by the public equaled 35 percent of our total economic output as recently as 2007, its size had soared to 72 percentby last year. TheCongressional Budget Office sees it rising further to 79 percent of our economy by 2024 and climbing even higher afterward. Even this dire projection optimistically assumes that various forms of budget discipline under current law will be observed in the future, although they have not been in the past.

This unsustainable debt accumulation represents a clear and present danger to our economic well-being. When the federal government runs deficits, it soaks up the capital available for individuals to borrow and for businesses to invest, grow and create jobs. Specifically, we cannot afford to leave our debt growing faster than our economy's ability to keep pace. If we are not actually buying down the debt, prudent fiscal policy adjustments require having it grow more slowly than our economic output. Such action is necessary to ensure that our children's standard of living is not permanently lowered by their carrying substantially heavier debt burdens than were shouldered by any previous American generation.

America’s rising debt is the accumulation of years of deficits, notably including the exceptionally large deficits of the last few years. Deficits embody the difference between spending and revenues; a closer look at this difference reveals that the nation’s fiscal predicament is exclusively a spending-driven phenomenon. Currently, and in future projections, federal revenue collections actually exceed the historical average of 17.4 percent that was collected when deficits were far smaller.

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