WHAT IS THE STRUCTURE OF THE BUDGET? HOW WOULD THE PRESID! 1S BUDGET AFFECT IT? HOW CAN I FIND THAT INFORMATION - QUICKLY — IN THE BUDGET DOCUMENTS? Joseph J. Minarik ‘The Committee For Economic Development ‘The National Press Foundation ‘The Center On Congress At Indiana University January 11, 2010Why Should We Care? Many people probably believe, explicitly or implicitly, that the little boy has been erying “wolf” about big budget deficits for many years, and so this whole concem is a proven farce ~ and we can move on to more important issues, like a possible NFL players strike next year. Please allow me to take just one moment from my central mission to assure you that the nation’s budget problem is no joke, and that in fact we are getting dangerously close to hitting the wall on this issue, “To summarize the problem in just one picture, please consider the following chart, which shows the size of the nation’s public debt (in technical terms, the debt held by the public ~ which will be explained later) as a percentage of our GDP. First, the basic physics of the public debt: Like a personal debt, the public debt bears interest, and that debt service must be paid. If you glimpse at the chart, you will see that the public debt is rising alarmingly. Just to make the arithmetic simple, let’s assume that the debt hits 100 percent of our GDP, and that we can service that debt at an average interest rate ‘of 5 percent. That would mean that we would have to collect taxes equal to 5 percent of our GDP every year just to pay interest on that debt. ‘What would that mean? To put that number in perspective, the federal government since World War If has collected taxes equal to, on average, about 18 percent of GDP. Conservative Members of the Congress have proposed amending the Constitution to require that taxes never go above 18 percent of GDP. By that standard, more than one dollar in four in taxes would go to pay debt service. Debt service buys you nothing. If you have heard people say that they do not trust the federal government because they pay taxes and see nothing for them (ignoring national security, homeland security, health research and all the rest — but put that aside for now), to the extent that their taxes go to pay interest on the debt, they are right. Apart from the wastefulness, a large debt will stifle economic growth and living standards. If you believe that heavy taxes inhibit investment and job creation, then the larger the debt, the hhigher taxes must be, and the worse for the economy. Beyond that, excessive debt can cause a financial implosion. We assumed above that we could service the debt at 5 percent interest. If the financial markets begin to doubt the stability of the federal government’s finances, they will demand a higher interest rate to hold ‘our paper. Higher interest rates => higher deficits => higher debt > higher interest rates =>... Once that cycle gets going, it accelerates, and becomes ever harder to stop. Don’t be comforted that projected debt is less than the previous peak at the end of World War Il. Then, masses of troops were coming home and entering the labor force. Now, masses of baby boomers are exiting the labor force. This time is different — and worse.+ st SS SX OOO DM OS DO Sw WS ¥ FE EELS S DP FPF EF EP SF vane boat boii pois euljaseg 8002 euljeseg Joquia}deag 0% 8002 Youle ra ov yeBpng O09) 396png o oe ddd 40 yuadled euljeseg 6002 IsNBny 001 C Ao10d WM 832PdN OD or SIOA97J || JEAA PLOAA SeYdeosddy }qeq *MOI/ We |-6u07 VYWHAT IS THE STRUCTURE OF THE BUDGET? HOW WOULD THE PRESIDENT’S BUDGET AFFECT IT? HOW CAN I FIND THAT INFORMATION ~ QUICKLY ~ IN THE BUDGET DOCUMENTS? 1. The quickest summary of the budget is the set of “Summary Tables” at the back of the Budget Summary volume itself. It shows limited history, but extends forward for the duration of the budget. It shows detail on changes in policy in the current budget submission. 2. For long-term history, and for greater detail, consult the Historical Tables volume. However, note that it does not present any of the policy proposals made in the budget — only the total numbers that result from those policies. One basic point to remember: What you will receive is the President’s budget, which will assume that all of his policies are enacted, and will be besed on his assumptions regarding the state of the economy, the progress of the war, the likelihood of hurricanes and other natural disasters, and every other development that will determine how much the federal government will spend, and how much it will collect in taxes. This will differ, possibly sharply, from the projections of the Congressional Budget Office, which assume no change in policy (including the expiration of all “temporary” tax cuts), the continuation (with adjustment for inflation) of current levels of spending, and (sometimes) significantly different economic assumptions. The White House and the Congress are under the control of the same party, and this is an election year. Later presenters will offer their own observations about how this will affect the process. In brief summary: When a President submits a budget to a Congress of his own party, especially preceding an election, he does not want to embarrass that Congress, or put its Members into an embarrassing position. There are always differences between the priorities of the White House and the Congress, even when they are under the control of the same party. Still, the President will not ‘want his own party's Congressional leaders to reject the budget’s policies out of hand, ot to find that they are unable to implement those policies. This should take some of the elements of ‘gamesmanship between branches of government out of the process that you are likely to see this ‘year, and should make the budget policies somewhat more straightforward and practical. On the other hand, it will make “messaging” to the public perhaps even more important Following are the basic structural relationships that make up the budget, with brief explanations, along with copies of the corresponding budget tables from last year. ‘Those tables are not necessarily identical (in either the order in which they are presented, or the presentations of the tables themselves) from year to year; however, the general pattern probably will hold.The Deficit Spending Minus Receipts This relationship was presented most basically last year in summary table S-1 (a copy of which follows) Note that this table presents the deficit as a positive number. That was the convention followed in the budget before we first had a budget surplus in 1998, You probably will not need to worry about seeing a budget surplus in this table — but read on. ‘The deficit is an important number in the budget every year. But don’t lose track of why it is important: It is (approximately) the amount of money that the federal government must borrow to finance its operations. Therefore, itis the amount by which the nation’s accumulated public debt must increase. A deficit in one particular year might be so large as to present a problem for the financial markets or the economy, but historically, the real budgetary problems arise when a nation’s debt (and therefore the interest cost of servicing that debt) grows so large as to be unmanageable. This year, there will be more than the usual small difference between the amount of the deficit as measured, and the amount of money that the Treasury needs to borrow. This is because of the financial institutions bailout, under Which some of the money that the federal government puts into the bailout might be recovered. Standard operating procedure for budgeteers since before forever has been to count as spending the estimated cost of such programs after (that is, net of) the estimated future recovery. (An example is the federal direct student loan program, where the amount counted for the deficit is not the amount lent in a given year, but rather the lending minus the expected repayments, taking into account likely defaults.) The difference between the deficit and borrowing was shown last year in Table S-14, under “Other transactions affecting borrowing for the public.” (Table S-14 follows.) In the Budget this year, table S-1 will show you the President's projections for the deficit under his policies over the next five or ten years. It will be hard to tell from these total numbers how reasonable these projections are. You will have to look into the details to get a better idea of where the budget is likely to go.