Fwd: EPI Budget Spam

Doug Henwood dhenwood at panix.com
Thu Sep 23 11:03:21 PDT 1999


[Max sent this to owner-lbo-talk and not lbo-talk.]

From: sawicky at epinet.org (Max Sawicky) Date: Thu, 23 Sep 1999 13:23:57 -0400

The following, including tables, can be downloaded from our web site at epinet.org

mbs

September 22, 1999 Issue Brief #134

Social Investment and the Budget Debate

by Jeff Faux and Max Sawicky

Budget politics in America have become a two-legged stool. While

congressional Republicans and administration Democrats argue

over the size of tax cuts and debt reduction, the third leg of budget

policy – social investment – remains too short, imperiling future

economic and social stability. Indeed, the recent 10-year budget

plans advanced by the leadership of both parties would require

substantial cuts in public investment and social services in order to

finance tax cuts. But however this year’s budget is patched together,

both sides’ proposals signal an intention to continue with the

“unbalanced” budget priorities of the past 20 years.

Surplus illusions

The Congressional Budget Office (CBO) has projected total budget

surpluses of $2,896 billion over the next decade, of which $1,899

billion will come from the expected surplus in the “off-budget” Social

Security program, and $997 billion will come from “on-budget”

revenues and programs (Table 1). Both sides have proposed to

lock up the projected Social Security surplus by using it to pay down

the national debt, thus precluding a debate on using that surplus for

public investment or other purposes.

It is widely assumed that the non-Social Security surplus is available

for tax cuts, new spending, or even further deficit reduction. But

where would that $997 billion surplus really come from? The source

of more than 90% of that surplus actually comes from plans to

reduce the current level of federal government services, ranging

from meat and poultry inspection to educating children in Head

Start.

Part of the confusion lies in the misleading use by both Congress

and the Clinton Administration of spending numbers automatically

“capped” by the provisions of the 1997 budget agreement. These

numbers, which appear as “baselines” in the budget documents, do

not represent a stable level of funding but rather reductions in real

spending below what is necessary to maintain the current level of

public services.

The “current services” budget shown in Table 2 displays a more

realistic estimate of spending needed to keep programs operating

at their 1999 levels. It is a conservative estimate in that it reflects

only expected price changes and not population growth or the

increased public investments in human and physical capital needed

to support future growth in a more competitive global economy.

As Table 2 shows, within the discretionary spending category,

nondefense spending absorbs virtually all of the proposed

reductions – the Clinton 10-year budget proposes a slight increase

in military spending over current levels, while the Republican’s

budget proposes a slightly lower level. In either case, it is

nondefense spending that will be cut.

Over the 10-year period in question, the Republican budget would

reduce nondefense discretionary spending by 20.1% overall, with

the cuts reaching almost 28.6% by fiscal year 2009. The Clinton

budget also cuts the nondefense discretionary budget, by almost

12.8% in 2009 and over 6.4% overall for the decade. To complicate

matters, the Clinton budget proposal assumes that some domestic

spending can be maintained with a series of “offsets” (e.g.,

superfund tax increase, takeback of tobacco tax revenues from

states, increased user fees), whose passage is at best

problematic. If those offsets are denied by Congress, and the

spending therefore correspondingly reduced, the cuts in current

services in Clinton’s budget could be as much as 50% higher than

the overall 6.4% projected.

Table 2 shows that the difference between the “capped” and the

current services budget is $595 billion over 10 years. But, as the

Center on Budget and Policy Priorities has pointed out, the shortfall

is actually much greater for two reasons. First, there will be higher

interest costs associated with the higher spending needed to close

the gap. Second, the shortfall is greater as a result of the pattern in

the 1990s of not budgeting for necessary programs (e.g., the

Census), which then get funded as emergencies. These and other

items could add roughly another $290 billion to the gap between the

CBO projections and the money needed to maintain current

services, eating up almost 90% of the projected non-Social Security

surplus. [1]

Shrinking social investments

Since the exact composition of discretionary spending cuts is

decided in the annual appropriations process, it is not yet certain

where the cuts will be made. Clinton’s Office of Management and

Budget (OMB), however, has provided some clues. In August 1999,

the OMB estimated that the Republican budget, which calls for a tax

cut of $792 billion over 10 years, would require a 50% cut in an

array of specific nondefense discretionary programs by 2009 if

applied across the board. [2] Among other assumptions, the OMB

assumes that the GOP defense spending projections would have to

match its own. The results are shown in the first column of Table 3.

But the Clinton Administration is also proposing program cuts,

which officials have stated come to 13% of nondefense

discretionary spending by 2009. [3] The second column in Table 3

shows the results of applying the OMB’s across-the-board spending

formula to the 13% spending cut implied by Clinton’s budget.

Thus, where the Republican proposal drops 430,000 children from

Head Start, the Clinton budget drops 111,800. Where the

Republican budget reduces the number of students in low-income

school districts receiving aid by 5.9 million, the Clinton budget

reduces it by 1.5 million. Where the Republican budget will result in

4,200 fewer meat inspectors, the Clinton budget leads to 1,092

fewer.

These projections are an indication of the priorities of both the

Republican Congress and a Democratic White House. Domestic

investment programs – education and training, physical

infrastructure, and research and development – presently make up

26% of discretionary spending. Real spending for these areas has

dropped from 2.6% to 1.6% of GDP in the 20 years up to 1998. The

Republican proposal, and to a lesser extent the Democratic one,

imply a readiness to reduce such investments even further,

widening the shortfall in what the nation needs to sustain long-term

economic growth.

The impracticality of the caps on discretionary spending is painfully

obvious in the current struggle over FY2000 spending. To avoid

appearing to exceed the caps, Congress has considered an

assortment of devious accounting procedures, including the

classification of certain kinds of routine spending as “emergencies,”

attributing outlays to fiscal year 1999 or 2001, and adding an extra

“13th” month to the fiscal year. The practical shortcoming of this

jerry-rigged approach is that any reasoned consideration of

long-term spending will be inordinately difficult. Instead, gimmicks

facilitate eleventh-hour political deals and close out the budgetary

process. Discretionary spending is reduced to a political grab-bag

instead of an instrument for necessary policies.

In early 1998, the Economic Policy Institute identified a minimum

gap of more than $65 billion between spending needs and

spending levels in three domestic investment areas alone, reflecting

the steady erosion of spending in recent years. [4] The realities of

these gaps can be seen in dilapidated and overcrowded schools,

inadequate training programs, jammed transportation systems, and

reduced civilian research and development spending. The

investment gap is understated in that it does not include spending

on public health, low-income housing, and environmental protection,

which also support future growth.

The cost of neglecting public investment will be paid in one way or

another. If not now, then in the future – at a higher price and resulting

in lower living standards.

Public opinion of national needs

Ironically, despite the conventional wisdom that government

spending on such investments and social needs is not popular, the

polls taken during the current budget debate have consistently

shown a preference for spending on education, health, and other

specific national needs over a tax cut. [5]

For example, an ABC/Washington Post poll [6] conducted at the

beginning of September asked: “Which of these do you think should

be the top priority for any surplus money in the federal budget – cut

federal income taxes, put it toward reducing the national debt,

strengthen the Social Security system, or increase spending on

other domestic programs such as education or health care?” The

poll yielded the following results:

Education/Health 37%

Social Security 29%

Reduce Debt 19%

Cut Taxes 14%

No Opinion 1%

It is time for Washington to catch up with the people. The 1997

budget agreement, with its artificial straightjacket on public

spending, has not fostered a better public debate over national

priorities. Instead, it has given a cover of fiscal respectability to the

notion that social investments are expendable

This fall’s desperate search by congressional leaders for tricks and

gimmicks in order to fit the budget into caps that are too tight

illustrates a problem that will only grow worse. Not only are

important investments shortchanged, but the quality of health,

education, environmental protection, and other programs is

undermined by the constant uncertainty of funding.

Congress and the president should scrap these obviously

unworkable caps and install a budget process that treats public

spending as a means of improving the nation’s human, physical,

and research and development assets, treating them as capital

investments that would be fiscally irresponsible to neglect. Until they

adopt this approach, the budget, like a two-legged stool, will not be

balanced.

Endnotes

1. Elkin, Sam and Robert Greenstein. 1999. Much of the Projected

Non-Social Security Surplus Is a Mirage: Vast Majority of Surplus

Rests on Assumptions of Deep Cuts in Domestic Programs That

Are Unlikely to Occur. Washington, D.C.: Center on Budget and

Policy Priorities.

2. Office of Management and Budget. 1999. Programmatic

Impacts in FY 2009 of the Republican Tax Cut.

3. In a report from the Center on Budget and Policy Priorities

entitled Beyond the Rhetoric: What the Clinton Budget and the

Republican Budget Plan Really Propose for Appropriated

Programs (1999), James Horney and Robert Greenstein state: “In

recent days, administration officials have acknowledged their plan

includes a 13% reduction in nondefense discretionary spending by

FY2009, compared to today’s levels adjusted for inflation. Their

proposal does not represent new or additional spending.”

EPI has independently confirmed the 13% estimate with

administration officials. Table 3 extrapolates the administration’s

number to its own budget proposal, based on a 50/13 ratio. In other

words, if a 50% cut means a reduction of X, then a 13% cut means

a reduction of 26% of X (13/50).

4. Baker, Dean. 1998. The Public Investment Deficit: Two

Decades of Neglect Threaten 21st Century Economy. Briefing

Paper. Washington, D.C.: Economic Policy Institute.

5. Teixeira, Ruy. 1999. Washington's Deaf Ear: Public Opinion and

the National Budget Debate. Issue Brief. Washington, D.C.:

Economic Policy Institute.

6. ABC/Washington Post poll, August 30-September 2, 1999.



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