The Stronger America Budget

Michael Chahinian Budget Analyst
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The United States government’s annual take of over $2 trillion is larger than the GDP of all but the eight largest countries in the world. So why are we broke? Although federal revenue is projected to increase to its historical average of 18% of GDP in a few years, the pundits inform us there’s no way we can have a strong defense and modest tax rates, at least not without “slashing” sacred programs like Social Security and Medicare.

In fact, that choice is false. The budget can be balanced in the short term without raising taxes, cutting defense, Social Security, Medicare, or veterans programs, or closing any departments or agencies. It can even be done without the cuts in last August’s Budget Control Act. Assuming current policies had continued, the federal government would spend about $2.8 trillion in FY2015 not including Social Security or Medicare. Of that, about $700 billion would be for defense. The deficit, meanwhile, would be nearly $1 trillion. Of course, in the long run we’d have to make reforms to Social Security and Medicare to keep the budget in balance.

How can we achieve a savings of nearly $1 trillion in the rest of the government by FY2015? For one, we can cap the overall level of discretionary spending at the 2008 level and then let it grow by inflation, for a savings of about $100 billion in FY2015. Next, we can combine our nation’s 71 welfare programs, cap spending at the 2000 level once the recession ends, and then let it grow by inflation for a savings of $362 billion. Although that may seem like a devastating cut, current welfare spending is four times the amount needed to raise the incomes of all poor people above the poverty line. These programs would still receive nearly $400 billion from the federal government alone, which would be a 10-fold increase since 1960, adjusted for inflation. The need for welfare can be substantially reduced by requiring able-bodied recipients to work and promoting marriage. Some experts such as Robert Rector at the Heritage Foundation estimate that such reforms could reduce the poverty rate by two-thirds.

There are many other opportunities for savings. For example, we can sell off excess federal government land for a savings of $58 billion in FY2015 alone. The federal government currently owns the majority of some Western states for no compelling reason. We can sell 450 million acres of federal land over a period of 10 years while still protecting important sites such as military bases, national parks, and wildlife refuges. An additional savings of $60 billion can come from repealing unspent stimulus funds, $50 billion can be saved by rescinding other unspent federal funds, $44 billion can come from reducing federal program payment errors, $30 billion from reforming Fannie Mae and Freddie Mac, $27 billion from eliminating child tax credit refunds in excess of tax liability, $25 billion from maintaining vacant federal properties, and $20 billion from rescinding unspent federal funds after 36 months. There are many smaller savings too numerous to fit in this piece, not to mention the interest cost savings of not borrowing this money.

Why wouldn’t we want to simply raise taxes or slash defense to pay for our excesses? For one, there is a global correlation between high taxes and low incomes. Although pundits will often point to Sweden or France as models for us to emulate, our per capita income is 30% higher than Sweden’s and 38% higher than France’s. Second, we are in a global marketplace and the higher our taxes are the less competitive we are. Our biggest competitor of course is China, and despite being communist, it is balancing its budget at 18% of GDP.

Cutting defense is no panacea either. Although $700 billion appears to be a lot of money, at 3.6% of GDP in 2015 it would actually be far below the 50-year average of 5.5% of GDP. Still, why shouldn’t we skimp more on defense? Besides the fact that the military is being asked to do more with less than it ever has in modern history, once again we are in a competitive arena. The country with the second-highest military spending in the world is China, and if current trends continue China will achieve military spending parity with the U.S. in 15-20 years. Although many contend that China is not a threat, Japan was a U.S. ally in the early 1920s and never came close to economic or military parity with the U.S.

As our credit downgrade and the events in Europe show, business as usual is not affordable. Tough choices must be made indeed, but don’t be bullied into thinking taxes must be raised and/or defense must be cut. Balancing the budget without those bad options is a choice we must make to secure our nation’s future.

Michael Chahinian was a budget analyst on Capitol Hill for several years. He can be reached at pragmaticpolicy@gmail.com.