Dubya’s New Plan to Balance the U.S. Budget

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Last week, for no particular reason, I did something I knew would make me cringe. President Bush addressed the United States public after his first cabinet meeting of 2007 and I watched every minute. Regardless of your political stance, it’s hard to disagree that the typical Bush press conference involves some sort of tongue twisting episode that is too glaring to ignore. To my delight, he managed to say something quite interesting.

Before we reveal Dubya’s latest grand scheme, allow me to burden you with a brief disclaimer: Unlike my colleagues here at The Daily Reckoning Australia, I would never dare call myself an expert in much of anything, especially economics. The majority of the figures in this essay (while honest) were calculated on either the back of an old envelope or the edges of a bar napkin, and my words carry only the clout of – in a word – a rookie. Regardless, you have my promise, I wouldn’t dare lead you anywhere beyond my own capacities.

With that in mind, back to Mr. Bush and his recent “eureka!” moment.

“One area where we must work together…is that…we gotta make sure we spend the people’s money wisely,” said Mr. Bush, as if he expected a mix of applause and gasps of awe. President Bush said this as a segway into introducing his new plan to balance the budget by 2012 – which I’ll be speaking of in just one moment. But first, we owe it to ourselves to briefly recollect the current administration’s history of “spending the people’s money wisely.”

During the first term of his presidency, in a period of less than 24 months, George W. Bush and Congress accrued more national debt than any other administration during the first 200 years of American independence… combined! Since his inauguration, President Bush has presided over the accumulation of over $3 trillion in debt, an increase of well over 60% since the Clinton administration. Bush and company are the sole reason why Douglas Durst, son of the eccentric mogul Seymour Durst, turned his father’s famous Times Square debt clock back on in 2002 after nearly two years of surplus. Similarly, a Library of Congress report in September 2006 estimated the War on Terror to cost $549 billion by the end of the 2007 fiscal year – a war claimed by the BBC to be the world’s most expensive military effort since WWII. The War on Terror may, or may not, be a moral and worthwhile venture. Whether you stand on one side of that fence or the other, we can all admit that it has been a very pricey undertaking.

We could go on and on, but you get the point. “Spending the people’s money wisely” would be a first for the Bush administration.

In the same press conference, President Bush announced a new government-spending plan. Through continued “pro-growth economic policies” and “spending restraint” Bush plans on unveiling a budget proposal next month that he claims will balance the federal budget by 2012. Eager for details, I was disappointed to watch the president drone on for the remainder of the press conference with politics as usual.

Lucky for us, The White House Office of Management and Budget (OMB) was kind enough to publish a few documents in 2006 aimed at helping folks like you and I learn how the most profligate president in history plans on reining it in – all without raising taxes, of course.

The OMB Overview of the President’s 2007 Budget is a quick read…three pages in length and written in simple terms. By all means, feel free to follow along.

At the heart of Bush’s plan to balance the budget is a gradual step down of the national deficit. Through a variety of very lofty sounding goals (extending economic expansion, increasing competitiveness, limiting spending, removing trade barriers, etc.) the OMB plans to gradually bring down the deficit as % of GDP. 2006 saw a hefty 3.2% deficit ($432 bil) and the OMB aims to chop that down to 2.6% in 2007, then to 1.4% in 2009, and presumably to 0% by 2012. Hmmm…what are the odds of that?

After pouring through several other much less readable congressional reports, a few figures don’t make a very good case for the success of Bush’s plan. First, as you may have guessed, the GWB administration has averaged a deficit far higher than their future goals – 2.7% over their seven-year stint. The current 40-year historical average is hovering around 2.3% deficit per the GDP. So in order for his plan to work, the president and his congress will have to drop 0.4% just to reach an average largely unbreakable by 40 years of their predecessors. Then, in less than 2 years, they will have to reduce the 2.3% deficit almost in half – a percentage of the GDP this administration has never even come close to attaining. And finally, after being out of office for four years, the Bush administration will reduce this already seemingly unattainable deficit to zero – using either voodoo spells or telepathy, I can only assume.

But wait…these OMB folks are intelligent individuals. This plan sounds quite ambitious, but shouldn’t we give them the benefit of the doubt? After all, these are the same top budget officials who predicted back in the end of 2002 that the War in Iraq’s total cost wouldn’t exceed $50-60 billion (that’s a near miss by about 1000% and counting for those of you keeping score at home).

Although, to be fair, I would have never been able to guess how much the War on Terror would cost. Even the very smart people of the U.S. government are allowed to miss their mark from time to time. Who knows…this time around, the OMB might hit the nail right on the head. But there lies our other bone to pick with the president’s 2007 budget plans: even if they work exactly as planed, these plans are still likely to leave us worse off than we are today.

Let’s say Mr. Bush and Congress are able to gradually reduce the federal deficit. According to OMB projections, it would ring to the tune of something like this (using very conservative calculations):

End of 2006: 3.6% Deficit as per GDP = $432 Billion deeper in debt
End of 2007: 2.6% Deficit as per GDP = $354 Billion in the hole
End of 2008: 2.0% Deficit as per GDP = $272 Billion balance due
End of 2009: 1.4% Deficit as per GDP = $190 Billion in the red
End of 2010: 0.7% Deficit as per GDP = $95 Billion squandered
End of 2011: 0.0% Deficit as per GDP = $1.34 Trillion total amassed debt (at least!) between 2006-2012

With the current negative balance coming in somewhere around $8.86 trillion, this brave new world of fiscal restraint and pro-growth economic policy will put the United States well over $10 trillion in debt by the time the books are balanced in 2012. Keep in mind; this is if everything goes exactly as planned!

As I’ve admitted before, my calculations, despite their sincerity, are quite basic. However, the more you think about it, the more you may realize that the lack of depth in these figures makes them far more daunting.

For example, none of these projections (and not even GW’s) include the massive amount of cash owed to limited liabilities like Medicare, Medicaid, and Social Security. Former Treasury Secretary Paul O’Neal bravely estimated that these programs could one day cost the United States over $44 trillion in entitlements. If you care to investigate further, look for a chart-filled report on the OMB site called The Nation’s Fiscal Outlook. My favorite is the graph in the Social Security section entitled “Current Trends are Not Sustainable.”

Also, all of the above dollar figure estimates from 2008-2012 were derived using the 2007 projected GDP. In other words, as the economy grows, so too will the size of the deficit as percentage of the GDP. Thus, billions more dollars are unaccounted for in my primitive breakdown.

And that’s not all. Billions, if not trillions of dollars are hypothetically owed in interest payments to owners of U.S. Treasuries and bonds. They could cash them in whenever they want, and the falling value of the dollar (11% to the euro in 2006 alone) would give them good reason to act quickly.

By the way, when we say “they” we mean mostly China and Japan. They have quietly amassed the largest stockpile of American debt on the planet – over $1 trillion in Treasury securities according to the Treasury Department. Think they will wait to cash in until $50 can’t even buy a bowl of miso soup?

Lastly, President Bush is entitled to billions of dollars in “off-budget” expenses, such as urgent wartime funding. While this money seems to appear out of nowhere whenever it is needed, rest assured, it will be owed to someone, someday.

So where does this leave us?

Well…one could assume that, despite the president’s recent posturing, we will continue spending in the same manner as the first seven years of the Bush administration. If so, The Congressional Budget Office projects the United States to be just short of $12 trillion in debt by 2012 – not including all the expenses listed above, of course.

We could also put our faith in our president, and trust that he will deliver on his promise to lower the deficit and balance the budget by 2012. If that does come to fruition, our debt will still be at least $10 trillion (which looks even scarier with all the zeros – $10,000,000,000,000.00)

Don’t get me wrong; saving $2 trillion is a pretty sweet deal. That much money could be the catalyst for some fantastic changes.

But is the United States public really better off?

Try as I may…I can’t say yes. Anytime a politician, especially the president, addresses his people with words like “balanced budget” and “fiscal restraint” we can’t help but be enticed by the lure of making up lost ground. But the truth, as it seems to me, is that even though Bush’s plan for America’s fiscal future is a step right direction, the U.S. is still moving backwards.

Regards,

Ian Mathias
for The Daily Reckoning Australia

P.S. Bush told Americans last night that 21,500 extra troops were needed to help “break the cycle of violence” in Iraq and hasten an eventual withdrawal. On the heels of this stern speech urging his congressional counterparts to limit spending, this sort of undertaking doesn’t bode well for pinching any pennies…Dubya will ask Congress for $5.6 billion for extra deployment and another $1.2 billion for rebuilding and jobs in Iraq. But I guess no one really expected Bush to pull out of Iraq quite yet.

Ian Mathias
Ian Mathias is the managing editor of the 5 Min. Forecast and Agora Financial's public relations/media coordinator. In the short time Ian has been working for Agora Financial, his writings have been syndicated in several respected media outlets, including Forbes.com, the Associated Press, Yahoo! and MSN Money.
Ian Mathias

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Comments

  1. Ian,

    It was very smart to initiate your review with all the caveats. There are some very major issues with your paper.

    First, something should have triggered the BS detector as you read the OMB report. Like most government reports it was staffed, written, chopped, and printed – and then distributed after events had already overtaken the report. Here is what I mean:

    “The increase in receipts in 2004 and 2005 played a significant role in bringing down the size of the deficit. Since the President set a goal of cutting the deficit in half from its projected peak in 2004 of 4.5 percent of GDP, or $521 billion, the deficit has come down markedly. The final 2004 deficit was 3.6 percent of GDP, or $413 billion, and the 2005 deficit fell further, to 2.6 percent of GDP, or $318 billion.In last year’s Mid-Session Review, the Administration forecast a higher nominal deficit for 2006, in part reflecting the implementation on January 1, 2006 of the new Medicare prescription drug benefit. With the unanticipated spending associated with relief and recovery efforts in response to Hurricanes Katrina and Rita, the deficit is now expected to be larger than previously forecast. We now project that the 2006 deficit will come in at 3.2 percent of GDP, or $423 billion.”

    Ian, even though my government flaks were yakking about FY2007 (which started on October 1, 2006 and will end September 30, 2007) they are using ancient data. They are estimating an FY2006 deficit of $423 Billion. FY2006 is now three months in the past. The actual deficit was $248 Billion – that is, $175 Billion less than ‘estimated’. And, that includes Katrina spending and military supplementals. The Katrina funding was allocated last year. Who knows what will happen to the military supplemental – but my personal belief is that my military can survive on a ½ Trillion dollar budget, eh… Additionally, you also have to watch out for all the Lib stats. The US debt has increased by $1.5 Trillion under Bush budgets. The best source for real data is the ‘Monthly Treasury Statement’. You can view montly balance sheets as they happen real time.

    Now, I will go out on a limb.I predict a FY2007 deficit of between $60 Billion and $150 Billion. We will be running surpluses either next year or the year after.

    That includes a biblical flood and the Global War on Terror.

    Could you have imagined the US balance sheet without 9/11 and Katrina???

    Reply
  2. Ian,

    The numbers just came out – and they were a bit better than I expected.

    MTS 2006/12, ie. FY2007 1st Qtr

    This means that the US budget deficit will be rounding error as of September 30, 2007 (the end of the fiscal year). It means we will be running huge surpluses next year and the year after – given the Libs do nothing to destroy the economy.

    If we don’t have an earthquake that wipes out California or a massive terror strike that is…

    Watch out when using CBO numbers. They do not take in consideration the growth in revenues that occur when people move their money around as a result of capital gains and dividend tax code changes. Additiionally, US stockholders are now demanding cold hard cash dividends from their companies (resulting from the 2003 tax code changes). Dividends are paid in after tax corporate profits. Thus, corporations must show more profit to pay those dividends. That additional profit then is taxed. Also, the accounting practices that show the profit (as forced by the stockholders) is why EXXON and the rest are ‘showing record profits’.

    Enjoy the prosperity!!!

    Reply
  3. Better climb back off that limb, Boghie: it’s about to collapse.

    First: the Social Security surplus (currently about $180B/year) is being used to mask the size of the current-accounts deficit. That’s about a trillion in debt (owed to the SS trust fund) you neglected to count.

    Second: in another bit of hinky accounting, supplemental appropriations are not counted for budget deficit purposes. That means that most of the money spent on Katrina and Iraq is “off the books” for deficit-calculation purposes, but still runs up the debt.

    Third: if you check the latest news, you’ll read that, despite the uptick in 1Q07 revenues, budget analysts are still expecting this year’s deficit to be bigger than last year’s.

    If you go to omb.gov, you’ll find downloadable spreadsheets with summaries of revenues and expenditures, as well as stats on the national debt. Read them, and you’ll see that Ian is right.

    Ran Talbott
    January 14, 2007
    Reply
  4. Ran,

    The numbers I point to include the supplementals and include the Social Security Surplus. You can watch the effect of the supplimentals on the expeditures as they occur and are spent. The MTS numbers are the actual expenditures of the government agencies. Did you note that the OMB page you directed me to still estimates FY2006 revenues and expenditures. We are now 3 1/2 months past the FY2006 end date. Those revenues and those expenditures are known. Additionally, even those estimates included Katrina. Just look at them…

    I use these numbers because it is an ‘apples to apples’ comparison through time. I can compare FY2006 with FY1996. The accounting procedures are identicle.

    On page 1 of the OMB site it refrences a supplemental. Did you read it. Here is the important part regarding you comment that supplementals are not accounted for in the MTS:

    DEPARTMENT OF HOMELAND SECURITY
    Transportation Security Administration

    From unobligated balances currently available to the Transportation Security Administration, not to exceed $195,000,000 may be transferred to “Expenses”, Transportation Security Administration, to liquidate obligations incurred against funds appropriated in fiscal years 2002 and 2003, notwithstanding Section 503 of Public Law 109-295.

    This request would authorize the transfer of $195 million of existing unobligated balances to liquidate obligations incurred in fiscal years 2002 and 2003. This request would ensure that adequate resources are available for existing obligations for contracts and grants for the Transportation Security Administration (TSA). The request is necessary to complete the implementation of a comprehensive corrective action plan developed by TSA to strengthen internal financial management procedures, including revising reporting and adjustment procedures, reconciliation of purchase orders to the general ledger monthly, and ensuring responsibility and accountability for each account.

    I will not-very-gladly, but I will, eat crow if you can provide a link to any official document (like the OMB site you mentioned) that illustrates a policy not to account for supplemental expenditures in the Monthly Treasury Statement. They are not ‘budgeted in’, but they are expensed as they are obligated.

    Reply
  5. And for something completely different – I can spell. I hate reviewing my stuff after posting…

    —-

    Ran,

    The numbers I point to include the supplemental and include the Social Security Surplus. You can watch the effect of the supplemental on the expenditures as they occur and are spent. The MTS numbers are the actual expenditures of the government agencies. Did you note that the OMB page you directed me to still estimates FY2006 revenues and expenditures. We are now 3 1/2 months past the FY2006 end date. Those revenues and those expenditures are known. Additionally, even those estimates included Katrina. Just look at them…

    I use these numbers because it is an ‘apples to apples’ comparison through time. I can compare FY2006 with FY1996. The accounting procedures are identical.

    On page 1 of the OMB site it references a supplemental. Did you read it. Here is the important part regarding you comment that supplemental are not accounted for in the MTS:

    DEPARTMENT OF HOMELAND SECURITY
    Transportation Security Administration

    From unobligated balances currently available to the Transportation Security Administration, not to exceed $195,000,000 may be transferred to “Expenses”, Transportation Security Administration, to liquidate obligations incurred against funds appropriated in fiscal years 2002 and 2003, notwithstanding Section 503 of Public Law 109-295.

    This request would authorize the transfer of $195 million of existing unobligated balances to liquidate obligations incurred in fiscal years 2002 and 2003. This request would ensure that adequate resources are available for existing obligations for contracts and grants for the Transportation Security Administration (TSA). The request is necessary to complete the implementation of a comprehensive corrective action plan developed by TSA to strengthen internal financial management procedures, including revising reporting and adjustment procedures, reconciliation of purchase orders to the general ledger monthly, and ensuring responsibility and accountability for each account.

    I will not-very-gladly, but I will, eat crow if you can provide a link to any official document (like the OMB site you mentioned) that illustrates a policy not to account for supplemental expenditures in the Monthly Treasury Statement. They are not ‘budgeted in’, but they are expensed as they are obligated.

    Reply
  6. Finally,

    On those Social Security Surpluses…

    I, apparently, agree with Ran that ‘investing’ the Social Security surplus in short term government bonds that are then used to cover expenditures might not be the best investment model for retirement and disability accounts.

    Maybe, we can agree that this surplus should be placed into personal investment retirement accounts – and thus acrue more than the 4% – 5% (before inflation) gains than current regulations require. Maybe back in 1967 when LBJ and Congress voted to allow investment of surplus in only the safest asset known they were being a bit too conservative.

    If you invest your retirement assets in bonds such as Social Security is forced to than you will not be living well in retirement. In some cases you will lose money.

    It is a bad deal – let’s let our workers have some say in how their retirement assets are allocated!!!

    Reply
  7. First off, let me say that I agree with Boghie’s prediction of the 2007 deficit number. I never put much faith in budget numbers. The MTS is the report to watch.

    Some problems I have with Ian’s post:

    “Also, all of the above dollar figure estimates from 2008-2012 were derived using the 2007 projected GDP. In other words, as the economy grows, so too will the size of the deficit as percentage of the GDP”

    GDP is the denominator. If GDP grows faster than the deficit , the size of the deficit will shrink as a percentage.of GDP.

    “Billions, if not trillions of dollars are hypothetically owed in interest payments to owners of U.S. Treasuries and bonds. They could cash them in whenever they want … when we say “they” we mean mostly China and Japan. They have quietly amassed the largest stockpile of American debt on the planet – over $1 trillion in Treasury securities according to the Treasury Department.”

    The largest holders of US debt (as of 10/31/06) are 1) the federal government (43%) and 2) US citizens (32%). China holds 4% of our national debt . (http://www.publicdebt.treas.gov/opd/opdpdodt.htm) (http://www.ustreas.gov/tic/mfh.txt)

    Reply

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