Tag Archives: deficit

Budget picture brightens; projected deficit down to $627 million

The updated state budget forecast was released today, and it contains some good news.    The projected budget deficit for 2014-15 has fallen by $463 million to $627 million.

Of the $463 million improvement, $323 million reflects increased revenues.  Most of the revenue increase comes in individual and corporate income taxes and is primarily a result of changes in Minnesota law passed earlier this month conforming state tax law with federal tax law.  On the spending side, the early opt-in to the Medicaid expansion as part of the Affordable Care Act continues to pay dividends for the state, as projected spending on these programs is projected to drop $64 million from the previous forecast.

The $627 million deficit figure does not include inflation on the spending side of the equation.  Projected inflation for the 2014-15 biennium totals $854 million.  Governor Mark Dayton’s original budget proposal did not include inflation into his baseline spending, so that amount was — in real terms — a spending cut.

Also of note in the updated forecast was the continuing dismal performance of electronic pulltabs, which are being used a funding source to back the bonds on the new Minnesota Vikings stadium.  When passed last May, estimates of revenue in the 2012-13 biennium totaled  about $35 million, but to date, the state has collected less than $2 million.  As a result, revenue estimates have been slashed in half for the coming biennium, leading to the question of whether or not it’s time to start looking for a Plan B.

To further illustrate how poorly the e-pulltabs have fared, when the bill was passed, it was anticipated that by the end of 2015, pulltab revenues would have exceeded stadium expenses by $65 million,  Now, pulltab revenues aren’t expected to catch up to expenses until 2021.

Gov. Dayton is speaking this afternoon outlining his reaction to the updated forecast, although he is not expected to release his new budget until the week of March 11.  Dayton has signaled an increased renters tax credit and exemptions for capital equipment. Additionally, I will be posting an updated Brick City Budget proposal that reflects the new figures tomorrow (or later today).

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Shooting Ourselves In The Foot: Breaking Down The Sequester

Barring a last-minute deal between President Barack Obama and Republican Congressional leaders, it appears that the sequester — $85.3 billion in spending cuts for this fiscal year (and a total of $1.2 trillion in cuts over the next decade) — will be implemented beginning March 1.

What will the sequester mean?  Let’s take a look.

Details of the cuts

$85.3 billion represents about 2.4% of total government spending.  But the impacts of the sequester will be far more impactful than that, because of the programs that are exempted from the spending cuts.  Additionally, five months of the federal fiscal year has already passed, meaning that the full year value of the cuts have to be taken in a seven-month timeframe.

Half of the spending cuts will come out defense.  $42.7 billion represents 7.8 percent of the defense budget on an annual basis, but compressing those cuts into seven months will result in a 13% cut in defense spending the rest of the year.  There are no significant exceptions to the defense spending cuts, meaning that essentially all items in the defense budget will get an across-the-board cut.  This includes operations in Afghanistan and military aid for Hurricane Sandy relief.  Additionally, President Obama has indicated he will protect soldiers from receiving pay cuts, which means all other programs will see yet larger cuts to make up the difference.  Finally, restrictions in the sequester language mean that the Administration is prohibited from cutting the pay of civilian defense employees and must instead reduce headcount.

The other half of the spending comes out of three categories:  domestic discretionary spending, domestic mandatory spending, and Medicare.  Together, these categories make up the remaining $42.7 billion.  Let’s talk about what is excluded from these three categories first — the list is long and includes Social Security, non-administrative expenses in the Veterans Administration, refundable tax credits (like the Earned Income Tax Credit), Children’s Health Insurance Program, standard unemployment benefits, Medicaid, and most other programs supporting low-income families.  These programs represent over $2 trillion in annual government spending, meaning that all of the cuts are being taken against spending that represents about 40% of the federal budget.

Domestic discretionary spending cuts will total $26.4 billion, representing a 5.2% cut on an annual basis and an 8% cut over the next seven months.  These cuts will hit areas of the budget including education funding for programs like Head Start, will require closing the air traffic control towers at several state airports, federal funding for “Meals on Wheels” programs, and grants for environmental projects.

Domestic mandatory spending will be cut by $5.1 billion, also representing a 5.2% cut on an annual basis and an 8% cut over the next seven months.  These cuts will impact farm subsidies, extended unemployment benefits, and some federal health care programs, such as the Indian Health Care program.

Finally, Medicare will see $11.2 billion in cuts, representing a 2% cut.  Medicare cuts will not impact beneficiaries of the program, but rather reflect a cut in provider and Medicare Advantage reimbursement rates.

What Will Happen?

The budget cuts in the sequester are really just about the worst kind of cuts that could be made.  First off, they are arbitrary and across-the-board.  The President has no discretion on how to distribute the cuts, meaning that effective programs are cut at the same rates as programs that have less impact.  Second, there are too many exceptions.  The cuts, as noted above, represent a small portion of the total budget, but since a majority of the budget is excluded from the cuts, the programs that are hit are hit hard.

These cuts are also going to have major negative impacts on employment and economic growth.  The Bipartisan Policy Center projects a loss of 1 million jobs and 0.5% of gross domestic product.  Other estimates claim job losses in excess of 700,000.  Implementing the sequester is going to seriously damage a still fragile recovery and sluggish labor markets.

Worst of all, the combined effect of all of these impacts mean that we are unlikely to get any meaningful deficit reduction as a result of the sequester.  Slower economic growth means that the economy will produce less tax revenue, making the deficit situation worse than before.  As evidence of how this is possible, one need only look at what is occurring in Europe.  Following rounds of budget cuts, the United Kingdom (which is on the verge of a triple-dip recession), France, and Spain have all missed their deficit reduction targets.  Fed chairman Ben Bernanke warned of the same possibility before the House Financial Services Committee today.

Additionally, the fact that health care and entitlement programs are essentially left off the chopping block means that these cuts do practically nothing to change the long-term debt picture, because that is where the majority of spending (and spending growth) will happen over the coming decades.

The upshot here is that the failure of our political system to take the right path regarding our financial future has us on the verge of a serious self-inflicted blow to our economy.  One might think that the risks here would be enough to get folks looking beyond their own narrow political interest.  But apparently not.  There’s a reasoned approach to be had here, maintaining levels of spending today to preserve the economic recovery while instituting reforms in the medium- to long-term in order to bring debt levels down to a sustainable level.  Who’s going to set aside their party’s political interests to protect the jobs of hundreds of thousands of Americans?

General Sources:

Bipartisan Policy Center (explainer)

Washington Post (state-by-state impacts)

10 Charts of 2012: History of U.S. Debt

Source:  Quartz.com

Source: Quartz.com

This chart, from Quartz.com, shows the historical debt-to-GDP ratio for the United States going back to 1790.  What’s interesting to note about the graph is how the historical trends in this ration changed during the Reagan years.  Prior to that point, we saw a fairly traditional pattern:  debt rose during wars and during economic downturns.  What made the Reagan years different was the fact that debt continued to increase even during the best of times in the 1980s.

10 Charts of the Year — Federal Spending and Revenues

Our Chart of the Year for today comes from the Senate Budget Committee, showing the gap between federal spending and federal revenues.

Source: Senate Budget Committee

What does this chart mean?

This chart demonstrates that revenue has to be part of the solution to the deficit. It shows that the last five times the budget was in surplus (in 1969, 1998, 1999, 2000, and 2001), revenue was near 20 percent of GDP. Revenue is now at 15.4 percent of GDP, near its lowest level in 60 years. – Sen. Kent Conrad (D-ND)

It’s our fault, too

Wonder why we get such ridiculous policies and nonsense from our politicians? In part, it’s because we can’t face up to the hard choices.

A recent Pew survey showed that although most Americans would prefer spending cuts to tax increases to balance the budget, there’s practically no area of the budget that we favor cutting.

Education: +51 (62% favor increased spending versus 11% favor cutting spending)
Veterans benefits: +45
Medicare: +28
Crime prevention: +21
Health care (excluding Medicare): +17
Energy: +13
Scientific research +13
Environment: +10
Anti-terrorism: +10
Agriculture: +9
Defense: +1
Unemployment benefits: -1
Foreign aid: -24

The only area of the budget that Americans can agree (outside of the margin of error) on cutting is foreign aid, which represents 1% of the federal budget.

But it gets better (or worse).

When asked about how states should balance their budgets, here was the support for different provisions:

Cut government pensions: 0 (47% favor, 47% oppose)
Raise business taxes: -14
Cut higher education: -35
Cut transportation: -36
Increase sales taxes: -37
Increase income taxes: -40
Cut health care: -55
Cut K-12 education: -61

That’s right. Even though nearly every state in the union faces significant deficits, there isn’t a single provision to address the issue that has popular support.

We can’t expect our politicians to get the house in order if we aren’t willing to be honest about the choices we have to make.


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