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A Real Solution for the Fiscal Cliff

Nov 23, 2012 by

by Henry W. Burke

11.22.12

The Heritage Foundation plan will lead to a balanced budget in 10 years!  By 2022, this plan will generate surpluses, allowing us to pay down our burgeoning national debt.

Everyone is talking about the so-called “fiscal cliff.”  Prior to the November election, the two Presidential campaigns barely mentioned the fiscal cliff; and it was not discussed in the three Presidential debates.  With the election behind us and January 1 fast approaching, it is a different story.

The famous fiscal cliff is the combination of the nearly $500 billion in tax hikes (“Taxmageddon”) and the mandatory federal spending cuts (“Sequestration”).  If the White House and Congress fail to act, we will reach the dreaded fiscal cliff on January 1, 2013.

Taxmageddon will amount to $494 billion in tax hikes.  Most of these are the result of long-standing policies that expire at the end of 2012.  On an individual level, average taxpayers will see their taxes increase by about $2,000 to $4,000 next year!

The poorly written Budget Control Act (BCA) contained an Obama Administration-proposed procedure, called “Sequestration,” that would automatically slash $1.2 trillion in spending starting January 2, 2013.

Half of the cuts are to come from national defense and the other half will come from non-defense items.  Even though defense represents only 18 % of total federal spending, it has been targeted for a disproportionate share of the cuts.  Under Sequestration, defense will experience a 10 percent reduction, jeopardizing our national security in the process.

The White House and Congress are good at one thing — “kicking the can down the road.”  I will not bore you with the tedious details leading to the present precarious predicament.  Clearly, their procrastination on making the tough decisions has brought us to the edge of the precipice.

If Obama and Congress take no action, the U.S. will go off the fiscal cliff and experience another recession.  According to the Congressional Budget Office (CBO), the country will see a drop of 0.5 % in the Gross Domestic Product (GDP) and an increase in the unemployment rate to 9.1 % in 2013.

http://www.cbo.gov/sites/default/files/cbofiles/attachments/11-08-12-FiscalTightening.pdf

Current Picture of the Federal Government

The two major aspects of the federal budget are Spending (Outlays or Expenses) and Revenue (Receipts or Taxes).  Government reports typically use the terms “outlays” and “receipts.”  For Fiscal Year 2012 (which ended September 30, 2012), the figures are as follows:

Receipts and Outlays for Fiscal Year 2012

(Billions of Dollars)

 

 

Description

Actual 2012

Amount

($ Billions)

Percent

of GDP

Revenue (Receipts)
Individual Income Taxes     1,132
Social Insurance Taxes        845
Corporate Income Taxes        242
Other        230
    Total Receipts     2,449    15.8 %
Expenses (Outlays) — Total     3,538    22.8 %
Deficit     1,089     7.0 %

Source: CBO Monthly Budget Review, 11.07.12

http://www.cbo.gov/sites/default/files/cbofiles/attachments/43698-Nov-MBR.pdf

The federal government spent $3,538 billion ($3.538 trillion) in FY 2012; the federal government took in $2.449 trillion (revenue from taxes).  This means that the budget deficit for this year was $1.089 trillion.  In simple terms, the government spent $1.1 trillion more than it took in from taxes.

[$3.538 trillion – $2.449 trillion = $1.089 trillion deficit]

However, the “Real Deficit” for the year was $1.276 trillion.  On September 30, 2011, the national debt was $14.790 trillion; by September 30, 2012, the national debt had grown to $16.066 trillion.  In the 12-month period from October 1, 2011 to September 30, 2012 (FY 2012), the national debt grew by $1.276 trillion.

[$16.066 trillion – $14.790 trillion = $1.276 trillion]

Gross Domestic Product (GDP) for Fiscal Year 2012

(Trillions of Dollars)

Year and Quarter

GDP

($ Trillions)

Percent

Change

2011 — Q IV   15.321     4.1 %
2012 — Q I   15.478     2.0 %
2012 — Q II   15.586     1.3 %
2012 — Q III   15.776     2.0 %
  Total   62.161     9.4 %
  Average   15.540     2.3 %

Source:  Bureau of Economic Analysis, “Gross Domestic Product: Third Quarter 2012,” 10.26.12

http://www.bea.gov/newsreleases/national/gdp/2012/pdf/gdp3q12_adv.pdf

Therefore, the FY 2012 Revenue of $2.449 trillion is 15.8 % of GDP; the Spending of $3.538 trillion is 22.8 % of GDP.  The $1.089 trillion deficit is 7.0 % of GDP.

The national debt (Total Public Debt Outstanding) on 9.30.12 (9.28.12 given) was $16.066 trillion.  For this date, the Debt Held by the Public was $11.269 trillion and Intragovernmental Holdings was $4.797 trillion.

[Debt Held by the Public + Intragovernmental Holdings = Total Public Debt Outstanding]

[$11.269 trillion + $4.797 trillion = $16.066 trillion.]

A national debt of $16.1 trillion represents 103% of GDP.  Our country is in real trouble!

The CBO typically uses Debt Held by the Public instead of Total Public Debt Outstanding to represent the National Debt.  Under the CBO interpretation, the $11.3 trillion Debt Held by the Public is 73 % of GDP.

According to the CBO’s Alternative Fiscal Scenario, by 2037, national debt (Debt Held by the Public) will explode to 199 % of GDP, driven by growth in spending that will reach 36 % of GDP.  Clearly, our government is out of control and headed in the wrong direction.

It might be helpful to have a better understanding of federal spending.  In Fiscal Year 2012 (which ended 9.30.12), spending was as follows:

Total Outlays in Fiscal Year 2012

(Billions of Dollars)

Major Category

FY 2012

Amount

($ Billions)

Percent

of Total

Defense – Military       651     18 %
Social Security Benefits       762     22 %
Medicare       469     13 %
Medicaid       251       7 %
Unemployment Benefits         96       3 %
Other Activities    1,022     29 %
    Subtotal    3,251     92 %
Net Interest on Public Debt       258       7 %
TARP         24       1 %
Payments to GSEs           5       —
      Total Outlays    3,538   100 %

Source:  CBO Monthly Budget Review, 11.07.12

http://www.cbo.gov/sites/default/files/cbofiles/attachments/43698-Nov-MBR.pdf

Peterson Foundation — Solutions Initiative

In this political climate, sound reasoning and wise counsel are hard to find.  Our lawmakers must strive to listen to the voices of reason when making their decisions about our country’s economic future.

In 2011, the Peter G. Peterson Foundation organized the Solutions Initiative, giving grants to six organizations so they could develop long-term plans for America’s survival.  With the fiscal cliff looming, Peterson’s “Fiscal Solutions Initiative II” called for updates to address 2012 Post-Election: The Fiscal Cliff and Beyond.

The participants for this second project are the following: The Heritage Foundation, the conservative American Action Forum (AAF), the Bipartisan Policy Center (BPC), the liberal Center for American Progress (CAP),  and the Economic Policy Institute (EPI).

The Peterson Foundation hosted an event in Washington, D.C. on November 16, 2012 in which the five organizations presented their plans.  The webcast of this conference is quite interesting.

http://www.pgpf.org/fiscalcliff.aspx

The full “Solutions Initiative II” report is available for download below, along with each contributing organization’s plan.

http://www.pgpf.org/fiscalcliff/solutionsinitiative

Of the five plans, the Heritage Foundation plan would reduce government spending the most and would reduce U.S. “Debt Held by the Public” the most — by a substantial margin.  The full report presents a chart that shows a graphical comparison of the five plans.  In tabular form, the plans are compared below:

Solutions Initiative II Plans: Projected Budget Levels in 2022 and 2037

(As a percentage of GDP)

Description

AAF

BPC

CAP

EPI

Heritage

Year 2022

Revenue   19.4   20.9   20.8   23.0   18.5
Spending   21.8   22.3   22.4   25.3   17.6
Deficits   -2.4   -1.5   -1.6   -2.3     0.9
Debt Held by the Public*   71.7  68.3  66.0  78.6   54.5

Year 2037

Revenue   21.2   22.6   23.1   25.3   18.5
Spending   18.8   25.0   22.5   26.3   18.3
Deficits     2.4   -2.4     0.6   -1.0     0.2
Debt Held by the Public*   40.1  64.8   40.4  66.3   28.0

Source:  The Peter G. Peterson Foundation, “The Solutions Initiative II” — 2012 Post-Election: The Fiscal Cliff and Beyond, November 2012

http://www.pgpf.org/fiscalcliff/solutionsinitiative

Notes:

* End of Year

AAF — American Action Forum

BPC — Bipartisan Policy Center

CAP — Center for American Progress

EPI — Economic Policy Institute

Heritage — The Heritage Foundation

Under the Heritage plan, the annual deficit will drop to zero by 2022.  In fact, Revenue will exceed Spending by 0.9 % of GDP in 2022 (a surplus will be created).  By 2037, the national debt (given as Debt Held by the Public) will be reduced to 28.0 % of GDP.  Considering that today’s Debt Held by the Public stands at 73 % of GDP, a figure of 28.0 % is amazing!  A shrinking national debt is a worthy goal, indeed.

Because the Heritage Foundation’s plan is better than the other plans and yields the best results, I will focus on the Heritage plan in this report.

The Heritage Foundation Plan

The Heritage Foundation updated the Saving the American Dream plan to address the fiscal cliff and rein in spending.  The plan features a pro-growth tax reform plan to expand the economy and generate more tax revenues.  At the same time, the plan will restructure entitlement programs to provide real economic security for seniors.

The Heritage plan balances the federal budget within 10 years without raising taxes!  (In 2022, Revenue will be 18.5 % of GDP and Spending will be 17.6 % of GDP.)  Annual deficits will be eliminated.  Because we will generate surpluses, we will actually reduce the national debt.

The Heritage plan focuses government assistance on those who truly need it with a guarantee that no American would have to live in poverty.  Finally, the plan recognizes the constitutionally authorized power to make national defense a core priority of the federal government.

The White House and Congress must take action immediately.  The Heritage Foundation is urging lawmakers to act swiftly yet carefully to stabilize the current situation.  In Heritage’s words, lawmakers should:

  • Preclude the huge tax hike known as Taxmageddon;
  • Prevent the reckless, automatic defense cuts, preferably by choosing alternative savings;
  • Renounce any other tax increases;
  • Resist the temptation to conjure further ad hoc budget schemes and grand bargains; and
  • Return as soon as possible to the regular practice of congressional budgeting.

http://www.heritage.org/research/reports/2012/11/fiscal-cliff-what-congress-should-do

The Heritage Plan Will Control Spending

I mentioned that the two major aspects of the federal budget are Spending and Revenue.  The situation with the federal government is not a revenue problem; it is a spending problem.  We simply spend too much money!

The primary driver of spending is clearly the major entitlement programs: Social Security, Medicare, and Medicaid.  Together, they comprise 42 % of federal spending.  Another huge category is means-tested welfare, one of the largest areas in the budget.  In FY 2011, the 79 federal welfare programs totaled a whopping $717 billion!

http://www.heritage.org/research/testimony/2012/05/examining-the-means-tested-welfare-state

The Heritage Foundation portion of the Peterson “Solutions Initiative II” report is found on pages 49 – 53.  Heritage stated the following:

The Heritage plan reflects the need to rein in spending immediately and rethink major programs. Spending on the open-­ended Social Security, Medicare, and Medicaid entitlements must be brought under control, and the core foundations of these programs should be strengthened. The following principles guided the policy solutions in Saving the American Dream:

  •   Total spending must be brought under control to balance the budget without raising taxes, ultimately holding revenues at their historical share of GDP.
  •   Entitlement programs should, unlike today, actually guarantee seniors economic security in retirement and be recast as real and sustainable insurance programs focused on those who really need them.
  •   Other spending must be curbed and the federal government restricted to its proper functions.
  •   Defense, as a core constitutional function of the federal government, should be fully funded and efficiently delivered.

Heritage strongly recommends that we need to address health care, the biggest driver of spending.  The flawed Obamacare law should be repealed and replaced with a true patient-centered, market-based model.  This must include reforms to Medicare, Medicaid, and tax treatment of health insurance.

Medicare’s finances must be brought under control.  In lieu of traditional Medicaid, able-bodied individuals and families should receive direct federal government assistance in the form of tax credits or direct assistance to enable them to buy private insurance coverage.  For the disabled and frail elderly, Medicaid would remain a joint federal–state safety net program.

Social Security is running permanent cash flow deficits, has severe programmatic flaws, and needs to be reformed.  Social Security’s eligibility age should be gradually increased in tandem with that for Medicare.

Heritage also addresses other areas of spending.

          Defense cuts are already reducing military readiness. Thus, the defense portion of the BCA cuts is dangerously flawed and must be reversed. The sequester for defense spending (including the 2013 cuts) is eliminated and more than offset with reforms in other spending and entitlements. Defense spending is brought slowly up to and held at 4 percent of GDP.

          Non-­defense discretionary spending is set for 2013 at the BCA sequester level and then reduced to 2 percent of GDP, after which it is indexed to inflation.

The Heritage Plan Will Enhance Revenue

As a first step, the Heritage Foundation stresses that we must prevent the horrible consequences of the looming Taxmageddon.  This is accomplished by extending all current tax policies early in 2013.  Businesses and citizens cannot function effectively in the present uncertain tax climate.

The tax system should be structurally reformed to foster growth, especially for saving and investing.  Also, the new tax system must be much simpler than the current cumbersome tax code.

In Saving the American Dream, Heritage presents and describes a New Flat Tax.  The report tells us:

Under the New Flat Tax, the individual income tax and the payroll tax are rolled into one system with the same tax rate as is imposed on business income. Also, nearly all other federal levies are repealed, leaving a simple system for both individuals and businesses. Under the New Flat Tax as it applies to individuals, only income used for consumption is taxed, thus eliminating the existing tax bias against saving.

Under the Heritage plan, the New Flat Tax is implemented effective January 1, 2014.

Raising the Debt Limit

The Budget Control Act (BCA) of 2011 granted the last increase in the federal government’s debt limit.  On January 27, 2012, the debt limit was automatically raised from $15.194 trillion to $16.394 trillion (an increase of $1.20 trillion).

The current national debt on 11.20.12 (Total Public Debt Outstanding) is $16.293 trillion.  The national debt has increased by $1.070 trillion since January 1, 2012 (in 325 days).  At this rate of increase, the national debt will reach the $16.394 trillion debt limit on December 21, 2012.

This means the lame duck Congress has another task to accomplish — raise the federal debt limit.  This offers one more opportunity to confront the consequences of reckless spending.  Another credit downgrade is likely, with or without the debt limit increase.

Obviously, this short paper cannot adequately cover either the Heritage Foundation’s portion of the Peterson report nor the full Saving the American Dream report.  I strongly recommend these reports to the interested readers.

http://www.pgpf.org/fiscalcliff/solutionsinitiative

http://www.savingthedream.org/about-the-plan/plan-details/SavAmerDream.pdf

I am not completely naive on the current situation in Washington.  In this politically-charged environment, I am afraid that sound reasoning and logic will be pushed aside.  Instead, political ideology and posturing may dominate the important negotiations.  For example, the Democrats appear to be bent on class warfare and raising tax rates on the “rich.”  It is those so-called “rich” that produce about two-thirds of the jobs in America.

The White House and Congress must take specific steps immediately to avert the job-killing fiscal cliff.  (These are listed on page 50 of the “Solutions Initiative II” report.)  They must also deal with raising the debt limit.

The current schedule has the U.S. House and Senate in Session from November 23 to December 14, 2012.  I think they should remain in Washington, D.C. until they complete their work.  [I will not hold my breath on this one.]

http://hobnobblog.com/wordpress/wp-content/uploads/2012/07/2012_CongressionalCalendar_WEB.pdf

Action Required

I strongly urge you to contact your elected officials (Congressmen, Senators, and White House).  Ask them to read this report.  More importantly, encourage them to study the Heritage Foundation reports —  Saving the American Dream and the Heritage section of the Peterson “Solutions Initiative II” report (pages 49 – 53).  Our lawmakers do not need to “reinvent the wheel.”  The work has been done and the calculations have been verified.

We can avoid the fiscal cliff and place America on a sound foundation for real growth and prosperity.  It is not too late to “save the American dream!”

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Bio for Henry W. Burke

Henry Burke is a Civil Engineer  with a B.S.C.E. and M.S.C.E.  He has been a Registered Professional Engineer (P.E.) for 37 years and has worked as a Civil Engineer in construction for over 40 years. 

Mr. Burke had a successful 27-year career with a large construction contractor. 

Henry Burke serves as a full-time volunteer to oversee various construction projects. He has written numerous articles on education, engineering, construction, politics, taxes, and the economy.

Henry W. Burke
E-mail:  hwburke@cox.net

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