Ten things to know about the federal budget

/ Source: msnbc.com

Here are some concepts to keep in mind as the Bush administration offers its Fiscal Year 2006 budget Monday.

1. The document that President Bush submits to Congress on Monday is only the beginning of a long budget-making process.

Federal law requires the president to submit a proposal for how the taxpayers’ money should be spent in the new fiscal year that begins Oct. 1.

The proposal is not binding; it is up to Congress to enact a budget resolution that will set the outlines of spending for the new fiscal year.

“The Bush budget will be as ‘dead on arrival’ as any other budget called that in the last few decades,” said Stan Collender, a federal budget expert who served on the staff of the Senate Budget Committee.

2. How one measures spending, revenues and deficits makes all the difference.

The deficit in 2004, $412 billion, was the biggest in history.

Or was it? In nominal terms it was, but when measured as a percent of the total American economy, it was far from being the biggest. Since 1962, there have been 10 years in which the deficit was bigger, as a percentage of Gross Domestic Product, than it was last year.

In the past 40 years, the biggest deficit occurred in 1983, when it amounted to 6 percent of GDP. Last year’s deficit was 3.6 percent of GDP.

For the modern era, the record was in 1943 when the deficit amounted to 30.3 percent of GDP.

But Collender points out that while that the 1983 deficit was bigger than today’s deficit, in 1983 the Social Security system didn’t have an excess of revenues over outlays.

Today Social Security does have an excess of revenues ($152.8 billion for 2003), which is included in the overall budget deficit calculation, making the deficit appear smaller.

3. Federal spending, although bigger in nominal terms than it was 40 years ago, has remained within a fairly narrow range, when measured as a percentage of GDP.

From 1962 to last year, outlays ranged between 17.2 percent of GDP and 23.5 percent of GDP. Last year they amounted to 19.8 percent of GDP.

So as a rough yardstick, federal spending has been about one-fifth of the total economy.

Today’s federal government is a far bigger animal than the one your grandparents or great-grandparents knew. Federal outlays in the 1930s were small, in fact, minuscule by today’s standards: In 1930, federal spending amounted to only 3.4 percent of GDP.

During World War II, government spending soared, hitting 43.7 percent of GDP in 1944.

4. Since Sept. 11, 2001, military outlays have increased sharply — and almost as importantly, they have muddled the regular budget process.

Since the terrorist attacks on the United States on Sept 11, 2001, the Bush administration has requested and Congress has approved five emergency supplemental spending bills for military needs.

These ad hoc spending requests were almost all handled outside the regular budget process. Even though debate took place on the House and Senate floors, the supplemental spending bills made it more difficult for Congress to estimate the big picture of military spending.

The Bush administration will soon send Congress a new supplemental request for $80 billion for Iraq, Afghanistan and other operations, but Steven Kosiak of the Center for Strategic and Budgetary Assessments said the Bush administration instead should account for these costs in its regular Fiscal Year 2006 budget proposal.

“There really is no excuse for not having a ‘plug’ [estimated figure] in there for (fiscal year) 2006 costs (for Iraq and Afghanistan),” he said. “We know it’s not going to be zero.”

In all, the Congressional Budget Office (CBO) says, since September 2001 Congress has provided nearly $200 billion in supplemental spending for operations in Afghanistan, Iraq and other parts of the world in the war against terrorists.

Military outlays have increased from $275 billion in 1999 to $454 billion in 2004, or from 16 percent of federal spending in 1999 to 20 percent of federal spending last year.

5. The federal government spends far less on the military than it did in John Kennedy’s presidency.

In 1962, when Kennedy squared off with Soviets over nuclear missiles in Cuba, U.S. defense outlays were nearly half of all federal spending, or about 9.3 percent of GDP.

Last year, they were 20 percent of all federal spending or 3.9 percent of GDP.

6. The entitlements programs, principally Medicare, Medicaid and Social Security, are inexorably becoming a bigger proportion of federal spending.

Twenty years ago, the three big entitlements accounted for 30 percent of federal outlays. Last year, they amounted to 42 percent of spending and by 2015 they’ll be 55 percent.

Comptroller General David Walker, who heads the General Accountability Office (GAO), the government’s spending watchdog, said late last year, “our nation’s fiscal policy is on an unsustainable course. As long-term budget simulations by GAO, the Congressional Budget Office (CBO), and others show, over the long term we face a large and growing structural deficit due primarily to known demographic trends and rising health care costs.”

7. The growth in the entitlements programs means that discretionary outlays for items such as national parks, AIDS prevention, etc. keep shrinking as a percentage of total spending.

8. Changes in tax rates and the mix of the various taxes — on income, on capital gains, on inherited wealth, etc. — have made only a modest difference in how much revenue the government has collected over the long haul.

In 1973, the federal government collected about 17 percent of national income. Last year, the government collected about 16 percent of national income.

Yet the federal tax code has changed dozens of times since 1973, with tax rates on earned income, capital gains, inherited wealth and consumer items such as gasoline going up and down.

In the long run, despite these changes in the tax code, the government’s take of national income has remained within the range of 16 percent to 20 percent of GDP.

9. The United States government borrows money from lenders in Japan, China and other countries to pay for its current outlays. Some members of Congress see this as a risky practice.

“The shocking thing is that of the debt we went out and borrowed last year, almost all of it was borrowed from foreign sources,” said Sen. Bill Nelson, D-Fla., at Tuesday’s hearing of the Senate Budget Committee. “And the two biggest sources that we're borrowing from are banks in Japan and China. This is just simply not a good position for us, from a defense posture, to be in.”

But CBO director Douglas Holtz-Eakin said at that same hearing that while borrowing from foreigners “is certainly something that merits watching” it is also true that “the fraction of U.S. international liabilities, whether in total or government, held by foreign governments is smaller than it was 10 years ago, smaller than it was 20 years ago.”

10. The deficit is an imperfect measure of the government’s fiscal position.

The surplus or deficit in any given year is only a snapshot of the difference between receipts and outlays.

If one ponders the payments the federal government has promised to make in 2020 and beyond, the picture is more daunting.

The GAO’s recent study of the government’s Consolidated Financial Statements for FY 2004 found that the government last year “added $13 trillion in new liabilities, unfunded commitments, and other obligations, principally due to the new Medicare prescription drug program. The federal government’s net liabilities, unfunded commitments, and other obligations now amount to more than $43 trillion, or about $350,000 for every full-time worker.”