Federal budget fantasies

December 29, 2012

Regardless of the outcome of the negotiations between President Obama and Congress, the government’s budget is seriously out of balance. Here is a fiscal picture for the federal government from February in a simple form:

* U.S. Tax revenue: $2,170,000,000,000

* Fed budget: $3,820,000,000,000

* New debt: $1,650,000,000,000

* National debt: $14,271,000,000,000

* Recent budget cuts: $38,500,000,000

Let’s remove eight zeros from these figures and pretend it’s a household budget:

* Annual family income: $21,700

* Money the family spent: $38,200

* New debt on the credit card: $16,500

* Outstanding balance on the credit card: $142,710

* Total budget cuts so far: $38.50

The only brake on the spending of the federal government is the debt ceiling. Congress has been willing over and over to raise the limit on the amount of debt issued by the U.S. Treasury. This debt is transferred to the Federal Reserve, which sells it to financial markets, but it has been buying it back as part of its quantitative easing program. Unless Congress finds some fiscal discipline, this process will likely continue for decades, or until some external shock or technology development drives real productivity and growth.

But in muniland, cities and states must balance budgets every year. Slowly recovering revenues have made this a struggle. A white paper from the International City/County Managers Association (ICMA) discusses how local officials have managed their belt tightening:

For most managers, budgetary changes over the past five years have been recurring, but more subtle—decreases in size of workforce, delays in filling vacant positions, temporary furloughs, limits on overtime, across-the-board budgetary cuts, increased contributions from employees to pension plans and health insurance premiums, reallocating responsibilities, delaying capital improvement projects, and/or restructuring of departments. For some managers, the new normal is simply a leaner, more efficient organization, which is something they point to with pride rather than regret or hand-wringing.

These are difficult choices for public managers, but companies go through these processes routinely when the business cycle slows and retrenchment is necessary. State and local governments had about thirty years of uninterrupted growth before the 2008 financial crisis, so it was a fairly radical change for most to reverse course.

Since the federal government has the capacity to issue debt, it rarely retrenches. But it is vital that the federal government follows the lead of state and local governments and assess its operations to find efficiency. As taxpayers start paying increased federal taxes in 2013, they are going to want to know that their tax money is being spent carefully and wisely.

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