It’s that time of year when Congress gets to work to create a federal budget. With a new President, all eyes will be watching to see how the Legislature responds to the proposed budget presented by President Trump. The fur is already flying from the Left, so this week as the House gets down to crafting a budget it appears they will see different strategy for spending Americans’ tax dollars than has been normal in the past.
Almost all Americans watch in disbelief every year as the arguments escalate during the budget process, especially now that our federal debt is approaching $20 trillion, not counting unfunded liability, which many place as high as $75 trillion. (that is comprised of Medicare, Social Security, government employee retirement benefits, etc.) We all ask, “Why can’t the government treat their operating budget the same way we treat ours?” Great question….never a good answer. It is mystifying how any family, business, or government can possibly look favorably on a budget that always spends more money than its total income, and does so purposely. Yet every year Americans watch it happen. Some economists have somehow found a way to endorse an annual budget deficit. But all I can think about is how difficult deciding who to pay and who not to pay each month can be. I guess the fact that Congress does not have to worry about running out of money allows them to sleep at night. When the Treasury runs dry and they need some more money, they simply borrow some more. After all, it’s no big deal to them — you and I will pay it back….along with our children, grandchildren, and great grandchildren.
President Trump’s budget proposal when released last week was met with loud boos — certainly from Democrats but there were some Republicans who chimed in. Why? Spending government money has for a long time been the holy grail of federal public service. The mantra is, “get elected, go to Washington, find money to spend whether we need to spend it or not.” Government budget cuts are actually unheard of, except “fake cuts.” “Fake cuts?” You bet. Haven’t you already heard that President Trump has “cut the budget” for 2017? First, a President cannot cut or increase a budget. Congress determines the budget. The President simply offers a budget. Yes, there are actual budget cuts in his proposal. But some of his suggested cuts are not cuts at all. In fact many are not. How is that so? Because of magical budgeting that our government has done for many years: Baseline Budgeting.
Here’s how Baseline Budgeting works: last year’s budget items are the starting point. But for next year, each item has an automatic INCREASE built in. The baseline budgeting increase is a formula based on this: the last year’s amount for that particular item is multiplied by the annual inflation rate times that year’s U.S. population growth rate. Let’s say the 2016 budget amount was $1.00. For 2017, that same item’s budget amount would be $1.00 x 1.7% (inflation rate) x .73% (population increase amount), or about $1.01. That doesn’t seem to be much of an increase, but just remember in normal financial years, the U.S. inflation rate runs 3-6%. The point is in the budget, there is a built in increase for each budget item. So when cries come complaining about budget cuts, they almost always are untrue, because the complaint is actually about a cut in the automatic INCREASE and not an actual cut from last year’s amount. I will not accuse government officials of trying to hide money from us, but honestly that is the only explanation I have for using baseline budgeting. Why not just use actual numbers unless they want to keep spending increases quiet?
In the budget noise every year have you ever heard anyone talking about spending less than our income so we can pay down the $20 trillion debt? Me either. One encouragement to me having Donald Trump in the White House is that as a businessman, he understands real budgeting and real cash flow. He knows firsthand that you cannot borrow your way to financial success, and doing so will literally bankrupt you. That hold trues for the U.S. Our debt is not nearly as desirable to debt holders as in previous years. Don’t be surprised as we begin to see the desire for U.S. Treasury bonds gets less and less. The Chinese hold most of our debt. And if/when they feel we will be unable to honor that debt repayment, they’ll head for the hills. Then what happens: Bankruptcy.
The Trump budget proposal makes some significant and serious cuts in various government departments and programs. Without questions those cuts will affect many people. And that is unfortunate. While all the arguments fly on Capitol Hill in the next weeks remember that we need to hold our national politicians accountable for spending. Real budgeting is necessary to get real numbers to enable those officials to make good decisions. Cuts must happen in D.C. just like they must happen at your house and mine. Can you see a way to spend about 20% more than you make every year? The only way that could be sustainable is if there is a favorite uncle in your life that plugs that 20% hole for you. There aren’t a lot of those uncles around. And even though the U.S. has an uncle — “Uncle Sam” — all his money comes from your pockets and mine. Somebody is going to have to pull in the horns and bite some bullets and stop spending. And it’s got to start this year.