The Not-So-Secret Truth About Deficit Cutting

Posted May 28, 2010 at 4:29pm

Forget everything you’ve heard about how hard it is to cut the federal deficit. Once you disregard the partisan rhetoric and put aside the election-year demagoguery, you rapidly come to a conclusion that is seldom stated as directly as this: The federal government is going to have to stop doing some of the things it’s currently doing.

[IMGCAP(1)]This applies to tax breaks as well as spending programs. In much the same way that what the government does through spending will have to come under a great deal of scrutiny, much of what Washington does through the tax code will also have to be seriously — and perhaps harshly — reappraised.

With the notable exception of the $700 billion stimulus bill adopted last year, almost everything the federal government does on both the spending and tax sides of the budget in one way or another is an ongoing effort. Very few programs and provisions are put in place with planned sunsets; the assumption is that they will continue.

President Jimmy Carter learned this the hard way when he tried and failed to get the federal government to implement “zero-based” budgeting. ZBB was a very popular concept in the corporate world in the late 1970s, and Carter thought it should be applied to the federal budget. But the president quickly discovered that it was impossible to objectively rank spending programs according to their priority. Even if you could, trying to get the government to do the equivalent of what ZBB corporations were doing — deciding that those programs that fell below the line wouldn’t be funded — turned out to be practically impossible and politically naive. ZBB quickly died and has seldom been mentioned in polite conversation in the federal budgeting community since then.

The fact that most of what’s in the federal budget is ongoing in one way or another makes the usual division between “mandatory” and “discretionary” spending quaint and largely beside the point. The truth is that one way or another there’s at least an expectation that almost all spending and taxing provisions will continue even if there’s a legal requirement that they be re-approved.

Mandatory programs are the most obvious because they are specifically created to be ongoing. Although they can be changed any time Congress and the White House want, current law remains in place unless and until that happens.

Interest on the debt is a special category of mandatory spending. Unlike benefit programs, what the government spends on interest depends solely on borrowing that has already occurred. Although there may be a way to reduce federal interest payments legislatively, doing that would likely cost the government more than it would otherwise have spent on future interest payments because investors will demand higher rates to compensate for the increase in risk that the government will again unilaterally change the terms of the bill, note or bond.

Even though it has to be funded annually, much of the remaining approximately one-third of federal spending should also be considered ongoing. For example, the Justice Department, federal jails and federal courts may require a yearly appropriation, but that doesn’t mean those funds are truly discretionary. The same is true of almost all Pentagon spending that isn’t related to a war or similar military activity.

The U.S. tax code is like mandatory spending because most of the provisions continue unchanged until Congress and the president decide differently. And, as last week’s version of the annual extenders debate clearly demonstrates, even tax programs that have a sunset provision typically are expected to remain in place. If you have any doubt, just remember that the tax extenders debate, which since the start of the year was as likely to take place as anything in politics can be, was about extending expiring provisions.

The key point is that, with the exception of the handful of tax and spending programs that are openly intended to be one-time efforts such as the Troubled Asset Relief Program, the stimulus bill and, even though they have been continuing for multiple years, activities in Iraq and Afghanistan, the baseline deficit from all ongoing initiatives is what’s critical. Although estimates vary, that’s about $1 trillion.

The short-term goal the White House has asked the president’s budget commission to reach is to come up with a plan to get the primary deficit (not counting interest on the debt) to around $500 billion by the end of fiscal 2015. Depending on the level of economic growth, that implies that the federal government will have to stop doing between $250 billion and $300 billion worth of things. From a bottom-line perspective, it will make no difference if the government stops an existing tax break or a spending initiative. Unless additional new revenues are agreed to, the needed change will have to be for the government to stop spending something it is already spending or to forgo a tax break that is already in the books under current law.

Stan Collender is a partner at Qorvis Communications and founder of the blog Capital Gains and Games. He is also the author of “The Guide to the Federal Budget.”