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4 Ways to Solve the Budget Deficit and National Debt

President Obama submitted his budget proposal to congress this week.  Here are some of the highlights or lowlights (depending how you look at it):

1) $3.7 trillion in spending is forecasted for next year’s fiscal year, which runs from October 1, 2011 through September 30, 2012

2) $2.6 trillion in revenue is forecasted for the same fiscal year

3) $1.1 trillion budget deficit is the result

4) $15+ trillion national debt by late 2012

2012 Budget

In short, the budget calls for a freeze on federal spending for five years, which means that spending levels stay as is and cannot increase, but it doesn’t cut the spending in general.  The administration sees this as a spending cut as they claim it will save the U.S. tax-payer about $400 billion over 5 years.  The majority of the ‘savings’ will come from tax increases on the wealthy, by letting the current Bush tax cuts expire in two years for the wealthy.  Then on top of that, discretionary spending is being cut for such programs as heating assistance for the poor.

What’s wrong with this budget?

1) It’s a political move by the President.  Rather than leading as a President and setting a good example, the President is banking on the Republicans having to make the next move, which will be more dramatically in the sense that they will need to cut deeper as they face enormous pressure from the Tea Party constituents.

2) It doesn’t touch the entitlement programs, which need to be looked at if we’re serious about reducing the budget deficit and the national debt.  Again, it’s a political move by the President so that he can blame the Republicans in 2012 if they went ahead and cut the entitlement programs too deep.

3) It doesn’t address Defense spending seriously and again it leaves out spending for Iraq and Afghanistan.  If a U.S. tax-payer left out part of his income or debt to the IRS he or she would face jail time, but apparently it’s okay for the U.S. government to omit this $100+ billion annual spending bill from the budget entirely.

4) It doesn’t even mention paying down the national debt of $14+ trillion.  It’s probably because in the plan it’s dumping another $1.1 trillion on top of it.

Will the Republicans counter with a better budget?

The short answer is probably not.  I guarantee you they won’t cut the spending down to $2.6 trillion, which is the magic number to close the budget deficit.   Remember, even at that level the government won’t pay down the national debt.

Entitlement Spending

The Republicans want to cut $100 billion from 2011 fiscal year.  So far, they’re close to $60 billion, but I doubt it they’ll be able to get the full $100 billion.  Even that is just a symbolic move as it does nothing to our long term debt obligations as a nation.  The idea that the Republicans will be able to come up with $1.1 trillion in spending cuts for 2012 is next to impossible.  You would have to cut every budget by 42.3% in order to have a balanced budget.

Bill O’Reilly even suggested last week that we should go back to pre-recession spending levels, but here again that would still leave us with a $400 billion budget deficit.  Okay, so let’s try some drastic austerity measures and see if we can close the gap by spending cuts alone…

Defense

The Defense spending is 19.27% of the budget or $712.99 billion.  Cutting it by 42.3% would mean that the defense department would have to cut its budget by $301.59 billion.  Yeah, good luck on that one at Capitol Hill.  At most the Pentagon will be able to come up with $78 billion (Robert Gates has the report he submitted not too long ago).  We can talk about pulling our troops out of Iraq and Afghanistan, but there again, we don’t account for that spending in the $712.99 billion…!  So let’s be optimistic and we’re going to tighten our belts for real and get the Robert Gates’ number up to $150 billion in spending cuts.  Sorry Boehner, your jet engine ‘pork’ project is out the door.

Social Security

20.04% of the budget is spent on social security or $741.48 billion.  One problem about this program; it’s a self-sustaining program, at least that’s how it was designed by FDR’s administration.  In other words, we cannot cut this program to pay for other programs, we can only cut it to keep the program itself alive.  Changes are needed to keep it solvent, but the taxes taking out of everyone’s paycheck for social security are meant for social security and not for other programs.

Medicare / Medicaid

22.62% of the budget is spent on Medicare / Medicaid or $836.94 billion.  Cutting back by 42.3% would mean a cut of about $354.02 billion.  It’s not a big secret that that there are two huge savings to be made in this program.  The first one is regarding the fraud committed on an annual basis, which adds up to about $60 billion annually.  The second one is automation of the system, which could add another $10 billion to the savings, but that’s only 20% of the cuts needed to the program.  Cutting it any deeper will put an enormous burden on the States, who already face budget deficits of their own.  But, let’s compromise, and let’s say we’re going to cut it even more by doing away with the prescription program that Bush enacted without paying for it during his administration.  This will save the tax payer an additional $100 billion per year for a total savings of $170 billion.

Net Interest

This accounts for 6.31% of our budget or $233.47 billion.  Problem of course is that we can’t cut here since it’s our debt obligation, so no savings here.  As a matter of fact we’d actually have to increase this budget if we want to pay down our debt, but we’ll save that for 2013 and beyond for now…

Discretionary Spending

31.76% or $1.175 trillion is spend on everything else (housing, education, unemployment, subsidies, transportation, Veterans, etc.).   Let’s jump on the Tea party bandwagon for a second and cut this budget by 42.3%.  So we’re going to save $497.03 billion across the board.  We’d probably have to do away with programs such as farm subsidies, oil industry subsidies (a.k.a. tax credits), heating assistance, etc., but let’s assume the politicians are able to bite the bullet and manage to save us $497.03 billion.

Total Savings

Add all the savings up from above and we come to a total savings package of: $817.03 billion.  I bet you this savings total will be much more than the Republican’s plan that we’re going to see here shortly.  However, we have a $1.1 trillion budget deficit, which means we’re still short by $282.97 billion in order to close the gap.  See the dilemma?  Either way you’re going to slice it, we have to make some tough decisions and that means that tax increases are going to have to be on table as well…

Problems with this Plan?

1) Cutting defense, Medicare/Medicaid and discretionary spending will put a few more million people on the street as they will become unemployed.  Defense contractors will have to lay off people.  Hospitals, nursing homes, etc. will have to lay off people.  Dept of education, veterans affairs, etc. will have to lay off people.  Since we’re cutting off farm subsidies, some farmers will go out of business.  In other words, we run the risk of throwing this country back into a deep recession.

2) It doesn’t address the long term debt issue of $14+ trillion

What are the solutions?

Compromise is the only way.  Tea party members don’t like it, Republicans won’t like it and Democrats won’t like it, but we need to make tough choices.  If we’re going to cut our spending dramatically and still aren’t able to close the gap it would leave us with no other choice but to raise revenues.

1) Targeted budget cuts.  Instead of maybe cutting the budget by $812.03 billion, you’d cut it be $550 billion instead.  Remember, we have to compromise…

2) Revenue increases.  Instead of increasing revenues by $312 billion, you’d have to increase it to over $550 billion instead.

3) Run a small budget deficit for a couple of years to use the money for targeted infrastructure spending to put people to work and to get the U.S. economy in shape for future growth.  Remember, the drastic cuts are putting a few extra million Americans back to the unemployment line.

4) Once the economy picks up steam the revenues will only increase, but congress needs to keep the spending levels down.  This way you’ll be in a budget surplus by 2015 and then can start using the surplus to pay down the debt

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