A Budget Cutting Deal That Boosts Federal Spending


ACRU Staff


August 5, 2011

This column by ACRU General Counsel and Senior Fellow for the Carleson Center for Public Policy (CCPP) Peter Ferrara was published August 4, 2011 on Forbes.com.

How is it possible that we can “cut” federal spending by $2 trillion over the next 10 years, and yet federal spending will still increase over that time by $7.5 trillion? Of course, the latter scenario would be the result of the debt-limit increase deal reached in Washington this week.

Both parties tell us that the debt-limit deal includes $2 trillion in spending cuts, and the national media dutifully reports that those cuts are severe, yet the Congressional Budget Office (CBO) tells us that we are still on course for the national debt to increase by $8 trillion over the next 10 years. Why doesn’t the discussion over the federal budget, spending and debt in Washington make any sense?

It is called baseline budgeting. Here is how the hocus pocus works. The CBO assumes a “baseline” for federal spending over the next 10 years that includes federal spending increases of $9.5 trillion over that time. Any increase in those 10 years of less than $9.5 trillion will be reported by CBO as a cut in federal spending.

If skinflint Republicans propose a budget with $8.5 trillion in spending increases over 10 years, the CBO will report that as an historic, unprecedented cut of $1 trillion in federal spending. The national media would then blare that the Republicans have proposed radical, severe, extreme budget cuts of $1 trillion, even though they are all the while actually increasing federal spending by $8.5 trillion.

If Congress got some sense in it one day and passed a budget that just spent next year the same as this year, and continued that into the future, with no spending increases, CBO would report that as a spending cut of $9.5 trillion. The national media would blare that radical extremists had taken over Congress, spending next year just the same as this year. Ezra Klein of the Washington Post would report that Congress had gone “mad.”

It is like you are on a family budget of $4,000 a month, and with that you can barely make the house payment, car payment, health insurance payment, credit card payments, and keep food on the table for the kids. Your wife goes to the mall one weekend and falls in love with a beautiful dress that costs $400, and a matching pair of shoes that go for $200. She decides it is time to make sacrifices and cut back, so she buys the dress but not the shoes, on the family credit card. She comes home and announces the good news: she has found $200 in unnecessary family spending that she has cut out.

Though the CBO can give you an explanation for what its baseline involves and why, the specification of any such baseline is essentially arbitrary in any event. This is shown by the fact that the CBO always has at least two baselines for comparison purposes, one involving a projection of current law into the future, and another involving a projection of what it calls “current policy” into the future, involving an extension of current federal policies and practices.

Worst of all the public doesn’t understand any of it, and so can’t follow the budget debate. Whether federal spending is actually being cut or actually increasing rapidly is obscured completely by baseline budgeting. The debt limit deal even with its supposed $2 trillion in spending cuts actually only cuts back on the currently projected increase in the national debt over the next 10 years from $10 trillion to $8 trillion. Even under the budget proposed by House Budget Committee Chairman Paul Ryan, including $6.2 trillion in CBO scored spending cuts over 10 years, federal spending and debt would still increase during that time, even though eventually the budget would be balanced, and ultimately the national debt paid off, as scored by CBO.

Baseline budgeting involves confusion on the tax side as well. Under the debt limit deal, the process goes on now to the Super Committee, to consider tax and entitlement reform. The CBO baseline for those discussions includes the assumption that all of the Bush tax cuts will expire at the end of 2012 as in current law. That involves an assumed tax increase of $3.5 trillion over the next 10 years, the largest in American history.

That means if tax rates are merely extended the same as today, CBO will report that as a tax cut of $3.5 trillion, even though nothing will have changed. Under the debt limit deal, the Super Committee would then have to come up with, and Congress would have to adopt, other tax increases or spending cuts totaling roughly $4.7 trillion, to avoid the spending cut triggers under the deal.

To get elected, President Obama promised voters that there would be no tax increase for singles making less than $200,000 a year, and couples making less than $250,000. Keeping that promise would now involve the CBO scoring that as a “tax cut” of $2.8 trillion against its baseline, even though tax rates would stay the same for these taxpayers as they have been for the last 10 years. This will only thoroughly confuse the voting public (which is what the Washington Establishment wants).

What voters would best understand is “zero-based budgeting,” or what we might call family budgeting. Under this approach, if spending next year is just the same as this year, then that involves no spending cuts. If spending goes up by $1 for whatever reason, that is a spending increase of $1. Only if spending actually goes down would there be a spending cut.

The top Tea Party priority right now should be to replace baseline budgeting with this zero-based or family budgeting. Only then can America rationally discuss and debate federal spending, tax, deficit and debt issues. Ryan and other House Republican leaders have come to recognize this as a priority as well. Republicans should take the issue to the voters next year.

As for the rest of this year under the debt limit deal, the Super Committee and Congress could actually meet the requirements to avoid the cuts of the automatic sequestration trigger without a tax increase by adopting the Ryan budget. In fact, that budget would involve critical cuts in tax rates essential to getting the economy booming again over the long term.

The Ryan budget includes individual tax reform providing for a 25% tax rate for families making over $100,000 a year, and 10% for those making less, with generous personal exemptions to protect those with the lowest incomes from seeing any tax increase. It includes corporate tax reform that would close the loopholes that allow Obama political machine cronies like General Electric to avoid paying any taxes, and reduce the federal rate to a more internationally competitive 25%. These reforms would supercede the Bush tax cuts. They would also restore federal taxes to the average, long run, postwar historical level of the last 60 years.

This would be a good resolution of the debt limit deal. But barring that, it would be better for Congress to vote down any Super Committee tax increase, and for the issue to go to the voters in 2012. Do they want all the tax increases already scheduled in current law for 2013 under President Obama’s policies, including Obamacare and the expiration of the Bush tax cuts? Or do they want to maintain the level of taxes consistent with the postwar prosperity enjoyed by the American people for the last two thirds of a century, since the Great Depression.



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