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Can Congress balance the federal budget without a tax increase? Indeed it is possible, but to do it Congress would have to undertake fiscal policy changes of Herculean proportions. Namely: radically changing Social Security's benefit for retirees, turn Medicaid over to the states, and implement other spending cuts.
First, a little background regarding how the 'normal era' budget deficit grew to about $460 billion in FY2008, and to more than $1.4 trillion in the bank bailout/recession era. While both political parties have done a poor job reining-in spending, the nation's fiscal deterioration in 2001 from budget surplus to budget deficit can be traced to two factors: the $1.1 trillion 2001 Bush tax cut and increased post-9/11 defense spending for anti-terrorism efforts, and for the Iraq/Afghanistan wars.
Had the United States rescinded approximately one-half of the 2001 tax cut at the start of the Iraq war in 2003, the nation's fiscal picture would be much more manageable today. The nation didn't, and that's the main reason the U.S. is looking at a Congressional Budget Office baseline structural deficit of about $500-550 billion annually through 2015, even after the end of bank bailout and fiscal stimulus spending.
What if Congress doesn't raise taxes to close the gap? Then the reduction (obviously) has to come from the spending side, and that would require changes in big-ticket entitlement programs Social Security and Medicaid. Health care reform, assuming it's passed, will likely help contain cost increases for Medicaid, along with Medicare, but these cost reductions will not nearly be enough to balance the budget: Social Security and other programs would have to be cut.
Fiscal Analysis: The problem with above is that the $200-300 billion cuts in Social Security would be so large that no Congress -- led by Democrats or Republicans -- would attempt them: they'd be voted out of office if they did. Hence, given Social Security's 'third-rail' status, that leaves spending cuts in other programs, combined with a tax increase, as the way to balance the budget. Or, the nation could opt to continue to rack-up massive debt -- the national debt currently is $11.9 trillion and counting -- but that would be bad news for the dollar, and ultimately, for the U.S. economy.
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Financial Editor Joseph Lazzaro is writing a book on the U.S. presidency and the U.S. economy.
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Reader Comments (Page 1 of 1)
10-26-2009 @ 5:24PM
Iridium said...
Yes and it is very easy. Get rid of every entitlement program. Just ending medicaid and welfare will save almost $1 trillion per year. We wouldn't actually have to cut social security.
The only solution is to get rid of the nanny state. Also Joe, states already have medicaid programs. The federal government needed to step in because these programs have been broke for a very long time.
If things keep going as they are Ohio's Medicaid program will make up 65% of the states budget by 2016.
In reality the government only needs around $500 billion to cover everything needed. That is even a stretch. The original mandated powers by the Constitution require even less.
END FOODSTAMPS, END WELFARE, END THE FREE LUNCH!!!
The welfare class can live far better than the lower rung of the working class. $700 a month for food, $199 housing, credits for heating and electricity, transportation credits, free medical, and a check for $1000 or more every month. It's no wonder the welfare rolls are growing so rapidly.
That's the goal though. What do you call a system where everyone relies on the government for their well being?
10-26-2009 @ 7:02PM
william lindblad said...
The realistic answer to the 1st paragraph is NO.
Iridiium, there is no chance of getting rid of the overhead either. Like it or not they are system safeguards and the administration of these assorted programs is - far from perfect.
I would say that all politicians know the liberty, equality fraternity motto and we currently have bank bonus protesters hitting the street. I don't think that the idea would garner much support on the hill.
Social security is no mans land as at least on third of this country is either on it or approaching the age. Besides, the bulk of the people collecting did pay into the fund. It is just that one can collect earlier and we are living longer that is the main funding problem. In short any monkeyshines in this area is political suicide as the seniors do one thing - they vote - at a high group rate.
The obstacles to a balanced budget in this time frame are beyond comprehension. The only way to get there is to cut spending in a dramatic fashion that would include removing all future support to any entity failing in a manner that would be detrimental to the economy. There could be no extension of unemployment benefits. Future COLA increases to social security would have to be put on hold. Money being spent on infrastructure would have to dry up, along with first time buyer, cash for clunkers and any other real or imagined stimulus concepts. Many of the ideas have proven to be not to hot, but as they say about the road to hell being paved with good intentions---.
10-26-2009 @ 8:02PM
Ben said...
Can regular responsible people balance their budget without getting a pay raise?
10-27-2009 @ 5:53AM
Dan Barnett said...
Mr. Lindblad,
Ten years ago the Federal Budget was in surplus. Then came the Bush tax cuts for the wealthy and the budget games funding the wars. The budget went into huge deficits and there wasn't a peep from those now decrying the deficit problem. I'd respectfully suggest that you don't pay too much attention the issue. They trot out "balanced budget" under Democratic Presidents and shove it back into the closet when a Republican is elected.