What I Did on My Summer Vacation, and Other Stories

Posted September 15, 2008 at 2:21pm

Coming Down From the Mountain. I’ve just returned from a heavenly week in Yosemite National Park in California. As I typically rediscover whenever I visit any of the national parks, hiking through, by, under and around the cliffs, gorges, waterfalls and lakes created by a power that is obviously far stronger and more innovative than anything that happens in Washington is a great way to renew your soul.

[IMGCAP(1)]But I’m a budget guy, so no matter how much I try, it’s hard for me not to think about the federal budget implications of what I’m looking at.

From a federal budget perspective, what makes the national parks remarkable is that we use current taxes to maintain them. We’re not doing that just so those who are living and paying taxes today can enjoy the parks. We’re also doing it so that, unless nature decides something different, the parks will still be around for the great-grandchildren of our great-grandchildren and beyond. Taxpayers in 2008 are paying to preserve and maintain the parks that others will enjoy for a long time into the future.

In many ways, this seems be the essence of most other federal budget issues. The annual fight over spending and taxes is increasingly between those who don’t want to pay for federal activities they won’t enjoy personally and those who are willing to be taxed for activities that will primarily benefit someone else in another year, generation or life.

If you think about it in these terms, the constant debate over the deficit and national debt includes only part of what should be considered. Instead of being good or bad just for this year, the debate should also include at least some discussion about whether we are also doing what’s necessary to provide for the future.

Meanwhile, Back on the Farm … The overall federal budget situation either worsened considerably while I was away, or several things that had been there all along came out of the shadows and are now there for all to see. This includes the recently reported higher-than-expected unemployment rate, the federal takeover of Fannie Mae and Freddie Mac, the transfer of $8 billion from the Treasury to the Highway Trust Fund, the virtually certain emergency appropriation for the victims of the recent hurricanes, the growing likelihood that at least one additional major player on Wall Street will receive some type of federal bailout in the coming weeks, and a possible second economic stimulus bill.

And that may not be all. An emergency appropriation initiated for a particular purpose — like dealing with the hurricane-caused devastation in Texas — often provides an opportunity for Republicans and Democrats alike to add spending for other reasons. I would not be surprised to see additional assistance for states to deal with their current general fiscal issues, to help a state like California that has been having a drought, and to provide additional assistance to Louisiana and Mississippi for problems from Hurricanes Katrina and Rita that still have not been dealt with completely. And, as sure as anything can be in politics, a one-year fix of the alternative minimum tax is likely to be enacted before Congress adjourns for the year.

And in the Big City … In issuing its summer update last week, the Congressional Budget Office officially projected that the deficit in 2009 will be $438 billion, compared with $407 billion in 2008 and $162 billion in 2007 … and that was part of the good news.

As the CBO and the entire political spectrum of budget analysts in Washington immediately pointed out, these numbers are based on a very strict and legally required application of the federal forecasting rules, which don’t allow even extremely probable changes in taxes and spending — such as the one-year AMT fix — to be included if they haven’t yet been enacted. When this more realistic calculation — which should include AMT, an extension of expiring tax provisions, a supplemental appropriation and higher Federal Deposit Insurance Corp. spending — is made, a fiscal 2009 deficit close to or exceeding $600 billion seems to be far more likely than the $438 billion that was projected.

And that’s still the good news. The new president and Congress will have to consider further deficit increases as they begin to deal with the expiration of the 2001 and 2003 tax cuts, continuing spending for activities in Iraq and Afghanistan, the costs of campaign promises, and whatever else Mother Nature and the economy have waiting for us.

According to CBO Director Peter Orszag and many others, the more realistic calculation will mean that next year’s federal deficit will be somewhere between 4 percent and 5 percent of gross domestic product. The last time it was that high was at the end of the first Bush administration.

And up on Capitol Hill … Given that it was made less than a month before the end of the fiscal year, the CBO’s $407 billion deficit estimate for 2008 is likely to be pretty close to what will actually occur. There’s simply not much the government can do at this point with a previously unanticipated tax cut or spending increase that will affect the current year’s bottom line. Even if an emergency supplemental appropriation to deal with Hurricane Ike was enacted this week, nothing would actually be spent until after Oct 1.

All of the recent changes in the deficit outlook demonstrate once and for all the folly of a change to a two-year federal budget, which is often discussed by its supporters with something approaching reverence at the start of almost every new Congress. As just the past two weeks make clear, given all of the impossible-to-anticipate changes in the economy and what nature seems to constantly present, along with our own unwillingness to put money aside for budget contingencies, the chances of a one-year budget being very accurate is increasingly small these days. That means that a two-year budget is likely to be completely incorrect less than one year in and wildly irrelevant a year later.

Stan Collender is managing director at Qorvis Communications and author of “The Guide to the Federal Budget.” His blog is Capital Gains and Games.