“Tax Reform” and the “Federal Budget” are big in the news right now. How much do you know about taxes and government budgets?
Governmental agencies don’t budget their planned activities like a household or small business might. Instead, they utilize what is called “fund accounting”.
In your own household budget, you have a pretty good idea how much money is coming in (i.e. your wages or salary, after taxes), which is pretty much fixed, and roughly how much your expenses are going to be. The latter might be your rent or mortgage, your utilities, food, auto expenses, insurance, credit card debt, etc. Whatever is left over, if any, is your discretionary income that you might apply to entertainment, savings, investment, etc. If you’re on top of your finances, you keep a close tab on your bank balance and credit card obligations to make sure you don’t bounce checks or get in arrears with credit card companies. You stay responsible and live within your means.
Governmental agencies rely on taxes, basically, to fund their operations. The various departments don’t collect these taxes directly; that is done by specialized agencies such as the Tax Collector in local government or the Internal Revenue Service in the Federal government. The various agencies, when they prepare their annual budgets, estimate the annual cost to perform their function, the legislative branch reviews those estimates, and then approves an appropriation, which is the agency’s authorization to spend. And, off the agency goes, doing it’s job, and incurring costs required to do so…up to the limit of the appropriation.
Of course, almost all of the Federal agencies, with the exception of the tax collection branch of government, are uninvolved with tracking the tax money coming in. They have their own duties to perform. The assumption in fund accounting is that the projected tax revenue will materialize and be collected by year’s end.
In your household budget, you know immediately if (a) your income shuts off, or (b) if some unexpected expense arises that puts your budget in jeopardy. Since you have early warning, you might be able to adjust your spending accordingly to weather the storm.
In governmental fund accounting, the realization that budget is in trouble comes much later, as individual agencies are not collecting taxes on a real-time basis, and the agencies who do the tax collecting receive the money not on a monthly basis, but, rather, quarterly or annually. So, when a budget is blown, it is too late to “fix” the problem.
That is why, in governmental fund accounting, it is critically important to estimate revenue realistically. “Wishful thinking” is not a sound practice among budget professionals.
Whether you are managing a household budget, or a governmental one, a budget crisis is typically resolved by borrowing money…if you have good credit.
In the case of the Federal government, a blown budget or “deficit”, occurs because the overall expense outpaced the revenue that was actually received. Although this could have been caused by unanticipated emergency spending (for disasters, wars, etc.), typically the deficit is caused by overblown revenue estimates. When this is a regularly occurring phenomena, i.e. the Administration and Congress intentionally inflate revenue projections, then it is called “deficit spending”.
For example, President Trump’s 2017 Budget projects a $400 billion budget deficit.
The result of “deficit spending” is an increase in the National Debt, as the government needs to sell Treasury securities to generate money needed to pay it’s bills. The total National Debt of the United States is almost $20 trillion, or more than the annual Gross Domestic Product of the country.
As a result, the Federal Budget must project an increasing Debt obligation payment each year to pay the interest cost of the money that Uncle Sam has borrowed in years past. The current annual interest payment in the Federal Budget is about $400 billion dollars.
Thus, the 2017 Federal Budget could be balanced if either (a) it didn’t have to include the debt repayment obligation, or (b) if expenditures were pared down by roughly $400 billion. Of course, this also presupposes that this year’s budget revenue estimates are honest ones. Typically, the political party in power likes to fudge the revenue estimates a little high, so that it can justify spending more money. As the saying goes, “Money is the mother’s milk of politics.” So, revenue estimation accidents happen…all of the time, as a matter of policy, at least in the Federal government.
To be fair, both Democrats and Republicans play this game, and always have. They just don’t like it when the other party gets more of the pork.
Let’s assume some well-meaning (or, cynical) Federal official campaigned with the promise to eliminate deficit spending and balance the budget. That would be a very admirable goal. However, cutting $400 billion from the Federal Budget sounds easier than it really is. This is because each Federal agency has a purpose and, therefore, a constituency (i.e. voters who support that agency’s role in our government). Elected officials are loathe to reduce or eliminate programs that voters support…because those officials might not get re-elected.
There are some Federal agencies and programs which can’t be touched, in a political sense. That would include Social Security, because all of those old geezers (including me!) vote. Similarly, you’ve got Medicare and Health, National Defense, and Veterans’ Services…really tough ones to take the ax to if you’re planning on getting re-elected. And, of course, you’ve got the Debt interest; you can’t do anything about that.
These “sacred cows” account for roughly 80 percent of the Federal Budget, leaving approximately $750 billion in miscellaneous Federal agency budgets that would have to absorb a $400 billion haircut in order for the overall budget to be balanced.
Of that $750 billion, $88 billion goes to Transportation (i.e. our highways), and $56 billion to Justice (our Federal courts and prisons). Who wants to be soft on crime or be responsible for potholes on our Interstate highway system? Probably no one. So, now, we’re looking at $400 billion being subtracted from $600 billion in remaining programs to balance the budget. What’s left?
The GOP/Trump solution is two-fold: (1) gut the regulatory agencies, and (2) enact massive tax cuts for the rich and for corporations which will miraculously kick-start the Nation’s economic engine, thereby generating more tax revenue.
Part 1 would allow financial institutions free reign to prey upon consumers, Wall Street charlatans to cook up Ponzi schemes, and corporations to improve their bottom line by abusing consumers and the environment. Basically, it would set us on track to become a Third World country.
(News Flash: Yesterday the GOP succeeded in passing legislation that takes away citizens’ rights to sue banks and credit card companies for predatory practices. Yes, Folks…it’s happening to us. This is “Making America Great Again”?)
Part 2 would further enrich the Nation’s elite… guaranteed… but would be unlikely to generate sufficient new tax revenue to pay for those gifts. It would be a repeat of the Reaganomics and Bush “trickle down” experiments, which failed. In the absence of the projected taxes from the promised super-charged economy, the Federal budget would be significantly out-of-balance, and massive deficits would result…just as occurred during the Reagan years, when the National Debt doubled.
The bottom line: be wary of “Tax Reform” and the proposed Federal Budget. Remember the story about the Trojan Horse…danger hiding in plain sight.
By the way, the Federal Budget doesn’t include a massive slush fund for disasters and wars.
When catastrophic events like hurricanes and fires devastate America, FEMA renders aid and provides loans to help victims rebuild their lives. The actual appropriation for all FEMA relief in a calendar year is limited, and the magnitude of this year’s disasters is unprecedented. Unfortunately, FEMA is one of those agencies that the Trump Administration nominated earlier this year to receive a massive budget haircut. (I’m sure that’s why he’s declaring “Mission Accomplished” in Puerto Rico while 80 percent of the country still has no electricity a month after the disaster.)
Wars are not budgeted, and their cost can be prohibitive…i.e. budget-busting. The last Gulf War, under Bush, cost us an estimated $1 billion per day. Thus, it should be alarming when President Trump, as is his nature, makes warmongering comments practically every week. He’s threatened North Korea and Venezuela with armed conflict in the past several months, and this past week we’ve learned that we have U.S. military troops in Niger (Africa) doing…who knows what? Heaven forbid we add another far-flung front to our international war effort that already includes Iraq, Syria, Afghanistan and probably Yemen.
We could be talking about serious money, all of which would have to be borrowed.
