Some politicians talk about the need for a balanced budget amendment to the Constitution because of our ever-growing national debt, now at over $17 trillion.
Raising the debt ceiling has become a grueling political fight in recent years. Voters usually hear only sound bites from the political rhetoric. But what is the real story behind the rhetoric and just how does the federal government intend to spend what it expects to collect in revenues ($3.034 trillion) and the money it borrows ($744 billion) that make up the proposed $3.778 trillion federal budget?
There are basically two major categories of spending in the budget — mandatory and discretionary. Mandatory budget items are those that are required by law. There are no appropriations for these items each year because spending is determined by eligibility rules. These items include Social Security, Medicare, Medicaid, the food stamp program, called Supplemental Nutrition Assistance Program (SNAP), unemployment compensation and a few others that are minor. Some politicians like to call these programs "entitlements." For the 2014 budget proposed by the president, 70 percent of the spending ($2.645 trillion) is mandatory, including 6 percent for interest on the debt. The President doesn't control mandatory spending. It is established by Congress in the current law. Mandatory spending has been a large and growing percentage of the budget for many years.
This leaves 30 percent of the 2014 Budget ($1.133 trillion) for discretionary items, including defense. Defense is 57 percent of discretionary spending ($646 billion). The next three highest discretionary items are certain veterans benefits, education and government operations totaling 18 percent. These four Budget items make up 75 percent of the discretionary Budget. When added to mandatory spending, the total is 92.5 percent of the 2014 Budget. That leaves 7.5 percent of the Budget ($283 billion) for all other discretionary expenditures. Eliminating all discretionary spending except defense would still not balance the budget.
Budget surpluses will be required to reduce the national debt. During the past 30 years, budget surpluses occurred during just four fiscal years, 1998 to 2001. The first decade in the 21st century turned all that around. The total national debt doubled as the nation became involved in two wars and Congress enacted tax cuts and a Medicare drug benefit. Then the debt increased more as the global economy became gripped in the Great Recession of 2008. Mandatory spending programs kicked in as unemployment rose, tax revenues declined and Congress enacted TARP and the stimulus program.
So, as the Senate and House committees meet to agree on a 2014 budget, how and where can they make significant cuts? Defense is the largest discretionary budget item but it has already taken some big cuts as part of the sequestration, which did not affect mandatory programs. Consequently, when it comes to discretionary spending, about all Congress can do is make a few "drop in the bucket" cuts around the edges.
That leaves mandatory programs where Congress will have to change the rules. Social Security benefits are primarily paid out of a $2.625 trillion trust fund, but that fund is in jeopardy of being exhausted in the future due to an aging population. In order to prolong its future viability, Congress could increase the eligible retirement age to 68. They could also change the inflation formula by implementing "chained CPI," which would reduce cost of living increases in benefit payments. Chained CPI would also result in some tax increases because income brackets and exemptions in the tax code would not increase as much each year.
The rules could also be changed for Medicare, Medicaid and SNAP. The eligibility age for Medicare could be increased to 67 and eligibility income levels for Medicaid and SNAP could be lowered so that fewer people would qualify for these programs. Adjusting the income levels is called "means testing." Means testing could also be further applied in the Medicare program, where it already exists with regard to Part B premiums. Basically, means testing determines if an individual or family is eligible for help from the government, based upon whether the individual or family possesses the means to do without that help. In other words, the higher your income, the lower your benefits.
Changing the rules on mandatory programs will involve tough political decisions, regardless of party affiliation or ideology. Changing the rules will mean that millions of Americans, many of them voters, will either receive less in payments or less in benefits, or both. In addition, there is the US economy where around 22 percent of Gross Domestic Product is government spending. No matter which government program is cut, whether entitlements or defense, jobs are lost and tax revenues decrease. Logically, if a balanced budget is to be achieved, tax revenue must be increased and expenses must be cut. There are no simple solutions to the national debt problem, including a balanced budget amendment to the Constitution. Don't let any politician tell you there are.
Ron Davis retired as general counsel for Dow Chemical Pacific Ltd., based in Hong Kong. He serves on the Flat Rock Village Council.