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.