Published on 12/17/10

How to balance the budget

By Jeffrey H. Dorfman

The U.S government is currently running an unprecedented $1.3 trillion budget deficit (that’s $1,300 billion). Regardless of the recent pronouncement from the deficit commission, there is no plan to do much in the way of addressing the deficit. President Barack Obama’s budget projections show the current level of spending continuing as far as the eye can see. The Republicans, who are about to control the House, have no interest in raising taxes.

Republicans continue to claim that the problem is out-of-control spending (thanks to both Presidents George W. Bush and Obama). They are calling for cancellation of the remaining stimulus spending and further cuts in federal spending.

Democrats blame the deficit on President Bush’s tax cuts. They want to increase income taxes at least on the high-income earners, if not on everybody.

Both could be right

It is possible that they are both correct. Perhaps a little historical context can help us see what has truly transpired.

In January 2001, we were at the end of the Clinton presidency. The budget had a $160 billion surplus, and the government had been split for six years between a Republican Congress and a Democratic president. We will soon have a similar split government. But can we expect to see a surplus any time soon? Not unless government makes big changes in the current budget.

So what has changed since Clinton’s term ended?

To examine this, I compared the current federal spending and tax receipts to those at the start of 2001. The latest figure for U.S. government spending is $3.75 trillion for third quarter 2010. At the start of 2001, federal spending was $1.94 trillion.

To be fair, we need to adjust the 2001 spending to account for inflation since then, which has amounted to about 23 percent, and for population growth, which has been 9.5 percent. So to spend the equivalent amount per person today would take $2.63 trillion. That means we are currently spending $1.12 trillion more per year than what we were spending at the end of the Clinton administration, even after adjusting for population growth and inflation.

On the revenue side, the latest 2010 number is $2.42 trillion. The 2001 number was $2.10 trillion. When I adjust the 2001 revenue for inflation and population growth, the equivalent revenue today would be $2.84 trillion. Thus, revenue is $420 billion lower today than it was in 2001 once we make the adjustments for inflation and population.

Spending outpaced revenues

So in comparing the changes to revenues and expenditures, we find that federal government revenues have dropped by 15 percent since 2001 on a constant dollar, per capita basis (with half of the drop due to the just-ended recession and half having occurred before the recession). Meanwhile, federal spending has increased by an astonishing 43 percent over the same period, again after the adjustments for inflation and population growth.

These numbers suggest that the deficit has been caused much more by out-of-control spending than by a shortage of tax revenues.

So for a start, Congress should reduce spending to an amount equivalent to the end of President Clinton’s term adjusted for inflation and population growth. That would shrink the current federal deficit to a fairly manageable $230 billion.

Anyone protesting (and there would be many in both parties) would have to explain how President Clinton and the Republican Congress had been stingy or misguided back in 2001 when they managed on that level of spending.

The tax receipt data from 2007 suggests that as we continue to recover from the recession, tax revenues should rise by about $200 billion without needing to raise any tax rates. That would give us a balanced budget.

Returning government spending to the equivalent of 2001 levels would be difficult politically. Both bureaucrats and politicians will scream to protect their favorite programs. But it would balance the budget.

And, by my memory, government did plenty back in 2001. I say, let’s return to the Clinton administration.

Jeffrey H. Dorfman is a professor of agricultural and applied aconomics with the University of Georgia College of Agricultural and Environmental Sciences.

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