Freeman

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Red-Lining the Federal Government Budget

Apologists Greatly Exaggerate the Public's Demand for Government Services

NOVEMBER 01, 1996 by RICHARD H. TIMBERLAKE

Dr. Timberlake is professor of economics emeritus at the University of Georgia, Athens.

Throughout the United States, millions of households and business firms routinely balance their annual expenditures with their annual incomes. They look aghast and uncomprehendingly at a federal government that has not balanced its budget in the last 25 years, while its debt—the national debt—the sum of the government’s annual budget deficits, has soared to almost $5 trillion.

Politicians and the media claim that people want too many government services. They argue that the government’s taxing powers cannot keep pace with the spending necessary to satisfy these demands even though tax revenues increase automatically every year without any deliberate legislation to increase them further.

These apologists greatly exaggerate the public’s demand for government services. Much of what the public demands is actually a burgeoning supply of something-for-nothing by uncontrolled government bureaus. A more accurate analysis of public preferences shows that while the individual taxpayer wants much less total government, he fears that budget cuts may eliminate the specific program that benefits him without reciprocating cuts in other programs. The net effect is that total expenditures continue to rise out of control so as to accommodate the sum of preferences for specific programs.

The two major political parties are now locked in a titanic struggle over what both sides label a balanced budget. This label, however, violates the common principle of truth in advertising. First, party leaders are not debating on a balanced budget for now or even for now-plus-five years. They are bargaining about an annual budget that would allegedly be balanced seven years hence! Both parties propose tax revenues and spending projections for the intervening years that supposedly would provide a path to budget balance. However, even the Republican path includes increased government spending of $50 billion a year, and another $650 billion increase in the $5 trillion national debt, before the annual budget is finally balanced in 2002.

Can anyone believe that these spending projections would remain inviolate? That future Congresses would honor the constraints that this Congress is trying to impose on them? That future crises would not provide convenient excuses for abandoning the earlier legislators’ pledges?

Most important of all, the Republican strategy for balance relies on Congressional Budget Office (CBO) calculations of future years’ tax revenues and spendings. These estimates are subject to endless debate over their accuracy, and what effect they would have on various segments of the electorate and special-interest groups. No one can certify the numbers of either party nor the commitment of future congresses to this Congress’s ideals.

A Different Strategy

What is needed, as every private householder and businessman living outside the Washington Beltway understands, is an entirely different strategy. Budget balancers, who sincerely believe their fiscal principles, should concentrate on balancing the 1997 budget, not the one in 20-ought-something. No private householder plans a budget seven years hence, or even two years ahead. She plans it month by month for the next year as it unfolds. And she does not use projections of future income. She looks at last year’s realized income (what could be more certain?), and bases the coming year’s spending plans on last year’s certainty.

So the government’s budgeteers should similarly calculate. Their accountants know virtually to the dollar how much revenue came into the Treasury during 1995-1996. That number should be their spending red-line for 1996-1997. They would then be able to prioritize government spending on programs, agencies, departments, projects, deployments, commissions, administrations, and funds. The president, if he is equally sincere about budget balance, should then accept the Congress’s total spending limit, based on the last fiscal year’s total tax revenues, as his own red line. He should have a line-item veto to take out spending items he thinks are unnecessary. The House of Representatives, however, has the sole constitutional power to initiate fiscal spending. So the president has no authority to add his own line items even though he would be able to bargain quid pro quos with congressional leaders.

Several features of this plan suggest its practicality. First, it establishes a fiscal rule for the government’s operations that every householder and businessman, regardless of his particular ideology, can understand, appreciate, and accept. Yes, the federal government would still be spending $1.4 trillion dollars next year—that’s a million people each spending $1.4 million dollars, a mind-boggling amount. However, a rule-based limit would finally be in place.

Second, future Congresses would not be on schedule to take the heat for what the present Congress has planned for them. The Congress now in session would be setting an example and a precedent for subsequent Congresses to follow.

Third, since this year’s tax revenues will usually exceed last year’s, adherence to this rule would normally result in small budget surpluses for the current year. (Yes, I realize that is an unfamiliar word.) These surpluses could be used to reduce especially counterproductive taxes or to redeem the national debt. While the debt problem is so enormous now that it requires other medicine, at least with a budget red-line in place it would not get any larger.

Finally, a tax red-line on total federal spending would prevent individual preferences for spending programs from forcing up total spending. Total federal spending would be fixed first by the red-line rule, and spending on particular programs would have to be tailored to fit this total. The total would still be obscenely obese, but at least it would be under control. Future efforts of economically minded legislators could then be directed to cutting out the most flagrantly useless agencies, departments, and programs without concern that total spending was still hemorrhaging.

ASSOCIATED ISSUE

November 1996

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