On March 17th, the US House of Representatives released its Fiscal 2016 Budget in a document entitled A Balanced Budget for a Stronger America. While admirable in sentiment, the Budget falls far short of the desires of any true fiscal conservative.
Here are the highlights:
- Nominal GDP (NGDP) rises at 4.6% per year on average during the 2015-2024 period (all percent growths will reflect this period on CAGR basis)
- Social Security increases at 6.1%, Medicare at 5.8% per annum, that is, faster than NGDP by 1.2-1.5% per annum
- Medicaid is cut initially, and severely at that
- Other Mandatory spending declines at a 1.8% pace
- Discretionary spending is essentially flat in nominal terms
- The War on Terror is essentially axed (I have always thought these things tend to be driven by events, rather than budgets)
- Most importantly, by far the biggest increase in spending is on interest. This rises by 2.5x over the period, increasing at a 10.6% CAGR, due to both rising debt and increasing interest rates (per CBO assumptions)
- Spending as a share of GDP falls from 20.2% in 2015 to around 18.7%-19.0% of GDP for most of the forecast. The exit rate is 18.4%, but only in the last year. By contrast, Bill Clinton exited his term with spending at 18.2% of GDP.
- Revenues are 17.9%-18.1% of GDP in most years, low by traditional standards.
The budget really never reaches balance, although one might torture it to confess to breakeven in 2024. The budget deficit is generally under 1.0% of GDP, materially so in some years.
Debt (held by the public) as a percent of GDP declines from 73% to 56%. Thus, the shadow of the Great Recession will be in the country’s financials even 17 years after the start of the downturn. (There is no recession in the forecast, by the way.)
The specific numbers can be found on the table below.
As a fiscal conservative, let me characterize the House Budget as a grossly inadequate proposal. The budget should be balanced latest in 2017, and frankly, better in 2016.
Below is an alternative proposal based on the House template.
In this, the growth of spending on entitlements, including Social Security, Medicare and Medicaid, are held below the growth of nominal GDP. The secret to success is essentially a two year moratorium on spending increases, after which spending can essentially rise by the Republican House proposal. Nominal GDP needs to catch up with spending promises made earlier. If it does, the budget will be in good shape.
In this budget, balance is achieved in 2017, not 2024 or later. It frankly acknowledges that the unprecedented peacetime expansion of government borrowing during the Great Recession requires unprecedented fiscal discipline to repay. Over the budget horizon, outlays increase by 3.2% per annum, while revenues increase by 4.8%. Spending, at 18.4% of GDP, is a bit above the best years of the Clinton Administration. Taxes rise to 18.9% of GDP, historically a fairly high level.
The budget reaches balance in 2017, with a surplus of 0.6% of GDP emerging over time. The debt declines from 73% to 47% of GDP, with outlay growth essentially returning to more typical rates from 2020. It is very much a hard money, hard decisions budget.
Of course, the central challenge of this budget is entitlement reform, a well-trodden topic not worth repeating here.
Of greater concern, however, are the principal-agent problems associated with such a budget. Democracy is not kind to budget surpluses. Politicians have an incentive to spend all the money at their disposal to purchase voter fealty. Therefore, neither Republican nor Democratic parties should reasonably be expected to adhere to any commitments to a budget surplus. The only real purpose of a surplus, from the political perspective, is as a slush fund with which to buy votes. Politicians, and democracy, have a deficit bias.
To overcome such a bias, as I have many times argued, we require a Fiscal Accountability Act (FAA), which would pay politicians a bonus based upon the change in GDP less the change in government debt. With an FAA in place, the surplus would be secure. Without it, any hopes of a budget surplus are entirely futile.