“Uncle … Uncle … UNCLE!” I give up – you win, Congress!

That’s how I feel after trying to figure out the federal budget. That is also what you might be saying after trying to read through this post. I apologize in advance – it is pretty dry. I also had to give up reading through budget resolutions and appropriations bills before I was irreversibly trapped in the budget research quagmire.

So, how does Congress intend to balance the federal budget by 2024 with their tax and spending plan.

The Concurrent Resolution on the Budget for Fiscal Year 2016 (House of Representatives Report 114-96) is sometimes interesting, sometimes confusing and sometimes boring. It is written by politicians and their staff, many of whom are lawyers, and some sections require a few read-throughs to figure out the meaning, if that’s even possible for the layman. There are veiled and not-so-veiled statements which condemn the political opponents of the Congressional leadership, and many of the country’s woes are blamed on the President. There are also statements that seem pretty childish. Here’s one of my favorites:

“SEC. 6216.(a)(4) The President’s fiscal year 2016 budget irresponsibly ignores current law and requests a defense budget $38 billion above the caps for rhetorical gain. … (b) …However, in total with $90 billion, the House of Representatives Budget estimate for Overseas Contingency Operations funding for the Department of Defense, the fiscal year 2016 budget provides over $613 billion for total defense spending that is higher than the president’s budget request for the fiscal year.”

In other words, the President wants to increase spending for national defense and he wants to include the funds for overseas contingency operations and the war on terror within the defense budget to better represent the government’s actual spending. The Iraq and Afghanistan Wars were paid for off-budget by use of this overseas operations category. The House calls the President irresponsible for adopting this approach and approves a budget which again keeps some military spending ($90 billion) off-budget. Many people feel this off-budget category is the more irresponsible action.

In my last “America Great” post a few weeks ago, I attempted to calculate a “minimum size of federal government” based on the statements and website information of the republican presidential candidates. I used some substantial cuts to the discretionary spending limits proposed by the president, but increased military spending to bring it back to 2011 levels. With those changes, I arrived at a minimum size for the federal government of $3.65 trillion versus the 2015 budget of $3.68 trillion, a 0.8% decrease. Not much of a reduction and probably impossible to balance the budget with the tax cuts proposed by the republican presidential candidates.

When I looked further, I discovered that the approved fiscal year 2015 budget was in fact $3.626 trillion, so my minimum size of the federal government was a slight increase over the enacted budget laws. Congress has gotten into the habit of passing appropriations bills at the last minute that both increase spending and delay taxes so the actual spending is generally higher than the approved budgets. The president signs these bills into law so the federal government can pay its bills, and as a consequence, the deficit increases.

A quick note about the difference between “Net Budget Authority” and “Outlays.” Net budget authority is the amount approved by congress for operations in a given fiscal year. Outlays are the monies actually spent in a fiscal year and may include payments from a previously year’s net budget authority that were not disbursed until the current year. Consider, as an example, payments to a defense contractor who is building a ship for the Navy, but the payments are made at different stages of the construction which span more than one year.

Today’s topic, however, is the Congressional report that promises to balance the budget in eight years without new taxes. It is certainly worth a look.

How Do You Balance The Federal Budget?
Easy question – all you have to do is to make sure you don’t spend more than your income in any given fiscal year. While the question is easy to answer in simple terms, the realities are very difficult when you consider the size and scope of the federal government. Throw in politics, ideologies, emotions and a bunch of economists who do not agree on the benefits or consequences of various actions, and you have a very unclear situation. (What do you call a group of economists? A flock – as in sheep? A gaggle – as in geese? A murder – as in crows? I hope it’s not a murder.)

For the family with one or two steady incomes, we can have a good idea of how much spending is allowed in order to have a balanced budget. Each month, the total income is $AAA, the rent or mortgage payment is $XXX, the groceries cost $YYY on average, the car payment, gas and maintenance totals $ZZZ, etc. These are examples of mandatory spending, although for some people, you can substitute bus or train fare for car expenses. Discretionary expenses would be things like dining out, vacations, movies, alcohol and gift giving. Since the income is steady, this family knows how much can be spent to stay within budget.

For the federal government, there are also mandatory and discretionary spending categories, but the income is harder to predict. The Congressional Budget Office makes predictions of how the economy will grow or contract over the next 10-year period and the president and congress are supposed to use those numbers to predict tax receipts and social safety net and entitlement costs (Medicaid, unemployment compensation, disability, Social Security & Medicare). Those predictions, however, can change substantially between when the president submits his budget on or before February 1 and when the budget is approved by the end of September, although in recent years, the appropriations bills have not come until late December.

For fiscal year 2016 (October 1, 2015 – September 30, 2016), the president submitted a budget request to congress for $4.066474 trillion in “Net Budget Authority” of which $1.154933 falls into the discretionary category. The House of Representatives proposed a reduction to $3.7208 trillion, the Senate proposed $3.6807 trillion, and the conference committee arrived at a budget of $3.8224 trillion in expenses, of which $1.1197 trillion is discretionary spending and $2.7027 trillion is mandatory spending.

Total spending approved by congress for the 2016 fiscal year is 6.0% lower than the president’s proposal and 5.4% higher than the approved spending for fiscal year 2015.

The mandatory spending set out in the Budget Resolution needs no further action to take effect; it’s disbursements are mandated by previously enacted laws. Disbursements for discretionary spending, on the other hand, are governed by appropriations bills which are signed into law by the President.

When I began my research, I assumed that whatever cuts the House and Senate would make to the President’s budget request would come only from the discretionary side, but I was mistaken. The Congressionally approved concurrent resolution outlined in H.R. 114-96 cuts both mandatory and discretionary spending. In fact, the approved mandatory spending is 7.0% lower than the President’s request while the discretionary spending is only reduced by 3.1%. It is this larger percentage cut in mandatory spending, which is the larger portion of the federal budget, that allows the congressional plan to claim a balanced budget by 2024. So how do you cut mandatory spending?

Time to Pause and Gather My Thoughts
1. Are the economic assumptions used by Congress and the President reasonable?
2. How and from where does Congress justify the cuts to mandatory spending?
3. Same question for discretionary spending?
4. Is there any trickery going on which boosts income or hides spending in order to make the balance budget calculations work out?

The Economic Assumptions
Since the mandatory spending categories of Medicare and Social Security accounted for 39% of all spending in the 2015 budget, and an average of 10,000 Baby Boomers retire every day, all economists, the president and members of Congress realize that total spending will increase each year through at least 2030. The president and both houses of congress use assumptions to estimate the amount of that year-over-year increase. Because of the budget process timing, the President and Congress have different estimates available. Congress gets theirs from the Congressional Budget Office (CBO), but that department is constantly updating the numbers based on current data. The data:

Real GDP Growth, % Increase
President (Feb 2015): 2.8%
Congress (Aug 2015): 2.7%
CBO (Jan 2016): 2.5%

Consumer Price Index, % Increase
President (Feb 2015): 2.1%
Congress (Aug 2015): 2.3%
CBO (Jan 2016): 2.0%

Unemployment Rate, %
President (Feb 2015): 4.9%
Congress (Aug 2015): 5.4%
CBO (Jan 2016): 4.5%

10-Year Treasury Note, %
President (Feb 2015): 3.7%
Congress (Aug 2015): 3.8%
CBO (Jan 2016): 3.5%

Per H.R. 114-96, “According to CBO, if annual real GDP growth is just 0.1 percentage point higher over the budget window, deficits would be reduced by $326 billion” {SEC. 6202(a)(11)}. Consequently, if the 0.2% difference between the latest real GDP growth numbers provided by CBO and those used by Congress for the 2016 budget are consistent throughout the budget window, the national debt will be $652 higher in the next ten years. The CBO’s latest estimates, however, predict that real GDP growth will be less than 2.0% for 2017 and 2018 as a result of congressional decisions at the end of the year – namely, the Bipartisan Budget Act of 2015 and the Consolidated Appropriations Act, 2016. This will make a large and lasting negative impact on the federal deficits and debt.

In sum, the President’s and Congress’ real GDP growth estimates are too high and as a result, the anticipated income is too high and the deficit and debt prediction is too low. In 2024, for example, Congress estimates total revenue of $4.806 trillion while the CBO estimates $196 billion less revenue.

The difference in spending differs more substantially. In 2024, Congress estimates outlays of $4.774 trillion and a budget surplus of $32 billion, while the CBO estimates outlays of $5.699 trillion and a budget deficit of $1.226 trillion. The CBO numbers include the omnibus appropriations bill in December which increased spending and delayed the implementation of certain tax laws thus reducing revenue. I feel cutting taxes and increasing spending is a recipe for disaster when the country is already operating so far into the red.

Mandatory Spending
So, while the government’s year-end actions went against the concurrent budget resolution outlined in H.R. 114-96, what was the spending plan?

While mandatory spending is controlled by previously passed laws, that doesn’t mean that the president and congress have to agree on how the laws – such as those governing Social Security, Medicare and the Affordable Care Act – direct the spending. Using the figures for outlays, the largest changes congress approved versus the President’s budget request come from (top 8):
1. -$85.251 billion from Health,
2. -$62.847 billion from Transportation
3. +$54.800 billion additional for Allowances
4. -$18.610 billion from Social Security
5. -$17.773 billion from Income Security
6. +$13.806 billion additional for Commerce & Housing Credit
7. -$11.138 billion from Education, Training, Employment & Social Services
8. -$10.081 billion from Medicare

The president’s proposed budget includes programs and enhancements which I’m pretty sure he knows will not make it past a republican controlled congress, and cutting those programs is part of the process. Perhaps it’s more useful to see how the approved 2016 budget compares to that from 2015.

In order of decreasing dollar amount, congress has made the following changes to outlays from 2015 to 2016 in mandatory spending categories (top 8):
1. +$89.740 billion additional for Allowances
2. +$60.100 billion additional for Medicare
3. +$32.800 billion additional for Social Security
4. +$19.000 billion additional for Income Security
5. +$16.000 billion additional for Veterans Benefits
6. +$15.100 billion additional for Health
7. +$8.000 billion additional for Net Interest on the National Debt
8. -$3.600 billion less anticipated Social Security and Medicare Taxes received

In all categories, Congress increased mandatory spending by $239.439 billion from 2015 to 2016 – a 9.9% increase.

Discretionary Spending
Congress reduced the President’s discretionary spending request by $37.509 billion, or 3.2%. Once again, the change from 2015 may be more useful.

In order of decreasing dollar amount, congress has made the following changes to outlays between 2015 to 2016 in discretionary spending categories (top 8):
1. -$20.100 billion from Government-Wide Savings
2. +$14.900 billion for Allowances
3. +$6.900 billion for International Affairs
4. +$6.700 billion for Transportation
5. +$5.300 billion for Commerce & Housing Credit
6. -$3.800 billion from Overseas Contingency Operations/War on Terror
7. -$3.300 billion from National Defense
8. +$2.800 billion for Veterans Benefits

In total, Congress increased discretionary spending by $3.600 billion, or 0.3%, versus 2015 spending. The 2015 budget resolution showed spending of $20.1 billion for government-wide savings in 2015 and anticipated significant costs reductions in future years (-$14.2 billion in 2016, -$30.5 billion in 2017, -$38.3 billion in 2018, up to savings of -$117.2 billion in 2024). The 2016 budget resolution has no entries for this category, so it appears that the savings will not be achieved, although the expenses may have been incurred in 2015.

Any Trickery?
In a word, yes. As just mentioned, there’s the government-wide savings category which seems to have been a way to spend extra money in 2015, but claim the savings in future years and subsequent reduction in the deficit. That, however, was in the 2015 budget resolution, not the 2016 resolution.

For 2016, we have a couple tricks. The President proposed rolling the expenses for Overseas Contingency Operations/War on Terror into the National Defense budget, but Congress kept them separated. This was the same method used to keep Iraq and Afghanistan War expenses outside of the budget during the George W. Bush presidency. In this category, Congress has set a spending limit of $96.287 billion in net budget authority for 2016 with outlays of $48.798 billion. In subsequent years, the net budget authority is significantly reduced through 2021 and then set to $0 for 2022-2025. Outlays lag behind the net budget authority, but also fall from a high of $64.598 billion in 2017 to $892 million in 2025. This trick underestimates the cost for overseas operations and the war on terror and predicts lower deficit and debt figures than are reasonable.

We already discussed the higher revenue projections by Congress and the President than are supported by the CBO.

The biggest trick, however, seems to be the difference between what Congress approves in their budget resolutions and what they authorize in the appropriations bills (discretionary spending) and the laws they pass which affect mandatory spending. Their estimates of growth in mandatory spending also seem to be substantially less than what the CBO estimates. In the year 2024, Congress estimates total mandatory spending of $2.997 trillion while the CBO estimates $3.875 trillion – a $878 billion difference. Similarly, because of the cumulative effect of projecting lower deficits by way of budget tricks, Congress estimates the interest paid to service the debt at $598 billion, while the CBO places it at $719 billion in 2024 – a $121 billion difference.

So, Aside from Trickery, Where Exactly are the Spending Cuts
Laws would have to be changed to impact mandatory spending and considering Congress’ inability to work together, this does not seem likely. Therefore, less look at discretionary spending which is controlled by the appropriations bills.

This is where I gave up.

Here is a sample from the 887 page “Consolidated Appropriations Act, 2016” – it deals with the funding of the Office of the Secretary of Agriculture:

“For necessary expenses of the Office of the Secretary, $45,555,000, of which not to exceed $5,051,000 shall be available for the immediate Office of the Secretary, of which not to exceed $250,000 shall be available for the Military Veterans Agricultural Liaison; not to exceed $502,000 shall be available for the Office of Tribal Relations; not to exceed $1,496,000 shall be available for the Office of Homeland Security and Emergency Coordination; not to exceed $1,209,000 shall be available for the Office of Advocacy and Outreach; not to exceed $25,928,000 shall be available for the Office of the Assistant Secretary for Administration, of which $25,124,000 shall be available for Departmental Administration to provide for necessary expenses for management support services to offices of the Department and for general administration, security, repairs and alterations, and other miscellaneous supplies and expenses not otherwise provided for and necessary for the practical and efficient work of the Department; not to exceed $3,869,000 shall be available for the Office of Assistant Secretary for Congressional Relations to carry out the programs funded by this act….”

That’s about half of the first sentence and the agricultural programs section of the bill goes on like this for 11 pages.

Okay, I’m done – and exhausted. I have concluded that Congress’ 2016 concurrent budget resolution which promises to balance the budget by 2024 uses tricks and inflated economic estimates to achieve that goal on paper. In reality, however, Congress makes deals late in the prior fiscal year or early in the current one to reduce taxes and increase spending and that system adds to the federal deficit and debt. If the government is serious about balancing the budget, those actions need to be controlled.

The primary root of the problem is that politicians seem more concerned with getting re-elected than doing what’s right for the country. There is a significant number of people proposing a balanced budget amendment. I disagree with this approach. There are short periods of time when you want the government to spend more than it receives in revenue in order to stimulate the economy. A balance budget amendment would guarantee that recessions are deeper and last longer because with reduced revenue, the government would also have to cut jobs and costs.

What if you were not allowed to use credit cards or take out a loan? You would have to find a job, pay rent or live with your parents if they are so inclined, feed yourself, and cover your other needs out of your paycheck before you would be able to purchase a car, go to college or buy a house. They would all have to be cash deals if you didn’t have access to debt.

The same is true for the federal government. With a balanced budget amendment, the government could only pay employees, social security recipients, doctors, military personnel, fuel for the military, etc., if they had cash in the bank, so to speak. Those payments would have to be delayed or reduced if tax revenues are less than projected. This would not be a good system.

So what do we do? Good questions – I’m thinking about that.

Next Time: Part III-C: A Look at How Job Creation is Affected by Tax Cuts and Increases (America Great Series; Taxes, Economy & Jobs)