A revealing budget-balancing exercise

Congress is trying to draft a budget for the 2017-18 fiscal year, which actually began Oct. 1. It’s been 20 years since the federal government balanced its budget, and then only briefly.

The fiscal year that ended this past Sept. 30 operated at a deficit of about $668 billion, which boosted the federal debt to about $20 trillion.

Is that acceptable? Economists differ on that question.
Some believe that so long as the ratio of the yearly deficit to the gross domestic product (GDP) remains relatively low — now about three percent — then the deficit is not a problem.

Others cite the sharp projected increases in the federal debt over the next couple of decades, as the American population ages and draws down the Social Security and Medicare balances. The number of retirees that workforce employees and their employers have to support through their Social Security and Medicare withholdings will increase at an increasing rate.

Right now the federal debt stands about 80 percent of the size of the annual national economy, the highest level since the end of World War II. The debt is projected to grow faster than the economy, since annual deficits add to the debt total each year.

On its present course, the debt is expected to reach 150 percent of GDP within 30 years. That doesn’t take into account future military engagements, recessions or other unexpected emergencies that would require additional borrowing.

Most Americans, including most of those in the administration and Congress, believe that a burgeoning federal debt is not a good thing. So discussions about how to reduce annual federal deficits, or even eliminate them, take place regularly in various venues.

One of those happened last week at Drake University in Des Moines. It was held under the auspices of the Concord Coalition, a bipartisan national organization that for 25 years has worked to encourage a balanced federal budget.

The Concord Coalition’s Iowa chapter invited about 70 Iowans to sit around tables in groups of eight or so and consider 41 options to increase revenues and/or reduce expenditures at the federal level. I was one of the invitees.

It was a challenging exercise, and somewhat artificial as well. For example, nothing about the tax reform plan currently being discussed was included. How that comes out will be significant regarding the congressional budget discussions now taking place.

To some it would speed economic growth and thereby increase government revenues. To others it would reduce essential revenues and thereby increase the deficit and the debt. Economists continue to debate those options, and we didn’t dip our toes into those dangerous waters at the Drake event.

Nor did we discuss the possibility of military personnel buildups in case of ramped-up war efforts in Korea, Afghanistan, the Middle East and elsewhere. Those increases come with a financial cost, and they weren’t on our radar.

The real purpose of the exercise at Drake was to make us think about the comparative costs of economic options that have been discussed over time. In that respect, it was an evening well spent.

The Congressional Budget Office (CBO) projects that deficits will total an additional $9.4 trillion over the next decade, assuming current laws continue into the future unaltered. (Remember that a trillion is 1,000 billion.) The 41 options listed on our worksheets each came with its projected effect on federal deficits over that 10-year period.

Some are relatively slight.

Reducing subsidies in the crop insurance program, for example, would reduce deficits by $27 billion over the next decade, or $2.7 billion a year.

Eliminating federal subsidies for AMTRAK and other intercity rail systems would save $14 billion.

Gradually raising full retirement age for Social Security from 67 to 70 would save only $8 billion.

And reducing funding for the arts and humanities would save only $6 billion over the decade, or $600 million a year.

On the other hand, some actions would have enormous effects.

Increasing the maximum taxable earnings cap on the Social Security payroll tax would reduce the 10-year deficits by a total of $633 billion. Limiting the federal tax deduction for state and local taxes would cut deficits by $955 billion.

And the real whopper: eliminating federal taxes on capital gains and dividends would balloon the 10-year deficits by $1.370 trillion (that’s “trillion” with a T, or $1,370 billion.)

The Concord Coalition believes that U.S. budget policy “remains on an unsustainable track, driven by structural forces that increase federal spending faster than revenues.” The debt is driven by demographics, according to the organization, and “popular options, like cutting waste, fraud and abuse or growing our way out of debt, are not enough.”

The situation calls for tough choices. Huge tax cuts would more than likely drive the debt even deeper.

I hope the Concord Coalition is able to get the ear of Congress during its current tax debate.

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