Tuesday, December 14, 2010

Shrinking the Federal Budget Deficit


I’d like to share with you a recent discussion that led me to do a little research on the Federal budget deficit and what levers could be pulled to move us towards a balanced budget in the coming years. I hope you find the topic interesting and it gets you thinking more about the defining issue of our generation, the burgeoning Federal Deficit. The discussion started with a friend of mine (who is a big Fox News watcher) suggesting that we could close the budget deficit by cutting the compensation of Federal employees who are being paid more than their private counterparts for doing the same job. On a gut level, I did not think that that a cut in Federal payroll could appreciably close the deficit, but I said that I would review federal expenditures to either substantiate or change my view. After reviewing the numbers, I conclude that even if we cut the Federal payroll substantially, we cannot balance the federal budget without also trimming entitlements and defense. And even that solution, if it did balance the budget, would not begin to address a repayment of the $13.8 Trillion National Debt, which is a separate liability from that of the annual deficit!

BTW, factcheck.org did a long and boring analysis of Rand Paul’s comments concerning pay differentials between public and private employees (http://factcheck.org/2010/12/are-federal-workers-overpaid/). The issue is complicated, but for the sake of this discussion, lets assume that US federal government workers are 10% overpaid visa vie their corporate counterparts.

Current 2010 Budget $3.5Trillion*
Current 2010 Tax Revenue $2.1Trillion*
Current 2010 Budget Deficit $1.4Trillion*
Currently, the U.S. Office of Personal Management estimates that there are just over 4.2 million federal employees. Thus, based on the average salary figures reported by USA Today, total wages paid to all federal employees now total nearly $300 billion per year. Add to this figure the costs of insurance, paid time off, and retirement benefits (which have not even been quantified here), and the total federal outlay to "pay" federal employees soars by billions more.

Let’s take a $320B base figure as the cost of federal employees and benefits and then use the assumption that federal workers are paid on average 10% more that comparable workers in the private sector. If we were to implement a 10% across the board cut of salaries and benefits (politically a virtual impossibility), we would save the taxpayers $32B dollars a year. Sounds like a large number. But based on 2010 numbers, that savings would only represent 2.5% of the 2010 budget deficit. If we could to get rid of every U.S. Government worker (right-wing dream), we could only close 25% of the colossal 2010 deficit.

Now if you say that 2010 was an aberration due to the cost of the $787 Billion Stimulus Act, let’s look at 2008.

2008 Budget $2.9 Trillion*
2008 Tax Revenue $2.66 Trillion*
2008 Budget Deficit $240 Brillion*
The $32 Billion representing the 10% public/private savings differential in the original assumption would represent 15% of the 2008 deficit. A better percentage savings than in 2010 to be sure, but still not nearly enough to solve the deficit problem, in what some consider a more typical budgetary year.

For the sake of supply-siders, let’s look at closing the deficit using the other side of the ledger - tax receipts. I agree with conservatives who argue that we could cut the deficit by taking actions to speed the growth of the economy and increase the taxable base. But, to show you the limit of that approach, in 1999, a year where most economists said our economy was running on all cylinders, the U.S. ran a budget surplus of $77 Billion. According to factcheck.org, $75 Billion of that sum was attributable to a short-term surplus in the social security fund. Only $1.9 Billion of the surplus came from tax receipts.

So, although we do need to lessen regulation and create tax incentives designed to spur economic development, the deficit will not appreciably shrink without attacking our biggest expenditure categories. To properly attack these sacred cow expenditure while also promoting policies that increase GDP, I believe we need to take the following steps to reverse the current budgetary trends:
a) add a needs test to social security. For taxpayers with significant assets, social security would be capped at a simple return of money paid in;
b) increasing the age of full eligibility to 68 for taxpayers in the system less than 15 years;
c) begin bringing market forces to control spiraling medicare costs (e.g. allow purchase of prescription drugs from Canada);
d) cut all government departments 10% save for the Department of Defense which would be cut 5%
e) grow the economy by switching to a flat 18% tax on all income above $45,000 and guarantee that tax rates would not change for 10 years (a. no deductions for individuals and b. non-profits & churches would begin to be taxed);
f) enact a balanced budget constitutional amendment to stop the cycle of over-spending;
g) enact a temporary consumption tax dedicated solely to paying off the national debt.

If and when the national debt is paid off, we can then drop the consumption tax. The savings from no consumption tax and no debt interest payments would then allow for the lowering of the estate tax to 18%, equal to the tax rate on earned income (2011 estate tax is scheduled to be 35% on amounts above $5M). Without much proof beyond a gut feeling, I also believe that a balanced budget would eventually free up enough money to give each American a yearly voucher of around $2000 ($660B total) to spend solely on bare-bones health insurance. By the Federal Government footing a healthcare safety net which allowed consumers to choose among competing private plans, we re-engage the primary patient / doctor relationship and inject market forces to tame the health care beast. This change would, over time, go a long way towards curbing the increases in the cost of entitlements such as Medicare by incentivizing early intervention “health care" as opposed to the high-cost administering of critical "sick care”. Finally, Government financed/Consumer chosen healthcare would sidestep the nasty constitutional fight about to begin over whether the federal government has the right to force citizens to buy Obamacare.

Do you read these numbers differently than I do? What’s your opinion beyond the obvious fact that Washington doesn’t have the leadership (on either side of the aisle) to implement any plan that requires tough choices.

Humbly submitted,


*Numbers from Wikipedia

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