Key Facts About The Federal Budget Debate

It’s that time of year when the president and Congress submit their proposed federal budgets for the next fiscal year, in this case FY2015 which begins on October 1 this year. Most Americans’ eyes glaze over when it comes to the annual budget debate in Washington, but I want to mention a few interesting facts about our nation’s budget and massive spending that we should all be aware of – regardless of your political persuasion.

On Tuesday, the White House released (a month late) President Obama’s budget proposal which would spend almost $4 trillion in FY2015 and raise taxes on the “wealthy.” I’ll get into a few details of that below.

The Senate has announced that it will not submit a new budget for FY2015 at all, since Congress agreed to a new two-year budget framework late last year. The House, on the other hand, will propose a new budget supposedly next week, and then the debate will begin to try and reach a final budget agreement.

But before we get into any specifics, let’s look at the budgetary issue from a broader perspective.

Basically and sadly, US government spending is mostly on autopilot. The government is scheduled to spend $3.8 trillion (the most ever) this fiscal year. Of that $3.8 trillion, 70% ($2.66 trillion) will go to mandatory spending programs, chiefly Social Security, Medicare, Medicaid and interest on the federal debt. That leaves only 30% ($1.14 trillion) for lawmakers to haggle over.

Put differently, in a federal budget of nearly $4 trillion, the president and Congress will argue over about $1 trillion, divided roughly evenly between defense needs and every other federal function. Under these circumstances, even the most modest policy changes can become a recipe for political trench warfare – especially when it comes to cutting defense.

President Obama’s budget plan for fiscal 2015 does not change the discretionary vs. non-discretionary percentages noted above. He has abandoned any talk of restructuring entitlements, presumably because this is an election year in which control of the Senate hangs in the balance.

Yet as we all know, we need to trim entitlement spending which increases every year. Given the president’s latest budget for FY2015, it does not appear that there will be any entitlement reform until we get a new president in 2017 – if then. In fact, Mr. Obama’s 10-year budget projection adds $222 billion to entitlements over the next decade.

Shifting gears, all presidents’ budgets are based on some assumptions about economic growth. President Obama’s latest budget rests on the assumption that the US economy will grow by 3.1% this year and even more in 2015. Yet the Congressional Budget Office pegs growth this year at only 2.7%, and the consensus among economists is only about 2.5%. If the economy grows slower than the White House forecasts, revenues will decline and the deficit would be larger, maybe a lot larger.

Here are a few highlights from Obama’s new budget proposal.  First, it would increase federal spending by $56 billion or so in FY2015, paying for it with selected tax increases on high income earners, while shifting money among his priorities here and there.

Second, one of the few parts of the government that will see real spending reductions is defense. Over 10 years, Obama wants to cut defense spending by a total of $1.14 trillion and slash the Army by 100,000 members to less than 450,000 soldiers (as I wrote about in my E-Letter on Tuesday.)

In fact, when you compare “baseline” spending to Obama’s budget proposal, you find that the $1.14 trillion in defense cuts over the next decade account for more than half of his proposed $2.2 trillion deficit reduction (which will never happen). Once again, defense suffers the brunt of cuts.

Yet Obama claims that his budget “ensures we maintain ready, modern and capable defense forces to address any threats we might face, including threats from terrorism and cyber-attacks.” As my kids would say, Yeah, right!

Meanwhile, Obama wants to hike taxes an additional $1.8 trillion over the next decade — on top of the $1 trillion in ObamaCare taxes and the $620 billion in tax hikes he secured in January of 2013. In addition to all these tax increases, Obama still wants to raise the minimum wage from $7.25 to $10.10.

Is there an economist out there who thinks this will boost growth? Let me know.

Or better yet, post your comments on today’s blog.