The Budget: You Say Potato…

The current debate in Washington, DC over the completion of the Fiscal Year 2011 budget and possible partial shut down of portions of the Federal Government is important.  There are many layers to its complexity.  Unfortunately, the legacy media continues to do a poor job of informing the citizenry about some of the basic issues of the budget process and obfuscating initial progress in tackling our fiscal crises in DC.

Since the passage of the Budget Act of 1974, the Congress has been tasked with passing a budget resolution, which is really a blue print for the next fiscal year that begins on October 1 of each year.  A central part of the budget resolution includes a final figure for the 302(a) allocations that includes the discretionary sections of the US budget.

The 302(a) allocation is separated into program activities for the Department of Defense (DoD) and then all of the non-defense activities.  Non-defense programs include, but are not limited to Agriculture, Commerce, Education, Interior and EPA, most Energy programs, Homeland Security, Housing, Justice, Labor, Transportation, and Veteran’s Affairs. A final 302(a) allocation is the floor for spending in these categories or the ceiling, depending on one’s perspective, but is the figure that Congress sets each year with the final passage of a budget resolution.

In 2010, for the first time since 1975, the House of Representatives did not even debate and pass a version of a budget resolution and is the key reason we find ourselves in April without completion the budget.  Press accounts suggest that the House Republicans have passed a bill, HR 1, which cuts $61 billion from the FY 2010 baseline, whereas President Obama and the Democrat controlled Senate initially offered to cut $10 billion.  The battle is then largely over a compromise between these two figures, along with policy “riders” that are annually included during appropriations debates.  I would like to focus on solely on the funding issues in play.

In both Republican and Democrat circles, these cuts are chided as somewhere between a “drop in the bucket” or “draconian reductions that will starve the poor and elderly.”  Leaving aside the understandably fierce disagreements over funding for Obamacare and sending public funds to Planned Parenthood, the average American might be wondering whether these discretionary cuts being debated are modest or substantial.  I believe a compromise figure in the vicinity of $40 billion is a serious down payment towards getting our fiscal house in order in DC.

On the surface, a $40 billion cut in a budget that is close to $4 trillion and a current account deficit in the area of $1.5 trillion might not seem much.  However, given the bizarre accounting rules used by the Congressional Budget Office (CBO), which use very different assumptions than we use for our own households, a $40 billion reduction from the current baseline of discretionary budget is significant.

The CBO uses five and ten-year windows in scoring budget proposals and assumes discretionary appropriations will go up each year and adjusts for inflation and population growth.  Therefore, if discretionary appropriations for FY 2010 were $1.1 trillion, it assumes approximately $1.155 trillion in FY 2011, then $1.25 trillion in FY 2012 and so on (all figures are illustrative estimates of actual expenditures). Therefore, reducing the figure by $40 billion in FY 2011 is compounded over time to become approximately $70 billion in cuts for FY 2012 and upward each year. This means that a ten-year window is savings of one trillion or more in government spending for these discretionary program activities.

I understand most people cannot fathom knowing precisely what electric power bills will be at their homes over a ten-year period, or their cell phone bill, or their cable television bill or even if they will have cable in ten years, but this is how CBO calculates budgets for discretionary appropriations.

When you review the recent budget for the entire government authored by House Budget Chairman Paul Ryan, which reduces spending by approximately $6 trillion over a ten-year period, we begin to understand that reducing the current year discretionary budget by at least $40 billion is serious savings over a ten-year window and a critical piece towards preventing fiscal insolvency.

I support the full $61 billion in cuts that are part of HR 1, as passed by the House in February because it would produce even greater savings over the long haul.  However, suggesting $40 billion is a pittance or something similar fails to give credit where credit is due for reducing spending.  The Tea Party movement that wiped out Democrats at the federal and state level all across the country last November and shows no sign of subsiding, is the primary reason why the current debate in Washington is over how much to cut.  This is a real sea change from the Pelosi-Reid led Congresses of the previous four years and is no small potatoes.

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