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Restoring Balance:
A budget proposal for fiscal year 2012that balances the budget and encourageseconomic growth
Senator Pat Toomey
May 10, 2011
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The Problem: Chronic Deficits
The United States has entered a new period in which sustained budget deficits have become afact of modern American politics. Our budget deficits are surpassed only by those accumulatedduring World War II, as a percentage of the gross domestic product.
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Yet unlike the temporarydeficits that resulted from emergency efforts to win the war, the deficits of the late 20th and early21st centuries have persisted year after year and reflect decisions made by Congress regardingthe regular operations of government.The period beginning in the early 1970s, when the modern budget process was firstimplemented, and ending in 1997, when Congress balanced the budget, represents the longestperiod of consecutive deficits on record. Moreover, the period beginning in 2002, when deficitsreturned after four years of surpluses, appears on track to surpass its predecessor.
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Indeed,deficits that far exceed those accumulated over the last 25 years are projected to continue wellinto the future. Such forecasts have led some
to label the current period the “
age of deficits
.”
The persistence of such deficits and the recent, dramatic increases in their size are indicationsthat the nation is currently on an unsustainable fiscal path.
The current path is “unsustainable”
because, absent fundamental spending reforms, these deficits will only grow both in absoluteterms and, more problematically, as a percentage of GDP. In addition, the debt that results fromannual deficits will increasingly cause slower economic growth, higher taxes and less security.Increased government spending means a reduction in the amount of private investment andhigher taxes on the American people, which leads to a lower quality of life for all. Massivebudget deficits will also eventually reduce the resources available for national defense andsecuring the homeland.A continuation of the current fiscal policy increases the possibility of another crisis, but this timeit may be much worse than the great recession in 2008. On the current trajectory, a fiscal crisiswould likely be accompanied by a collapse in the value of the dollar, a dramatic increase ininflation and interest rates, and perhaps even a failed Treasury auction as lenders lose confidencein the creditworthiness of the United States. Such events would seriously damage our economyand would destroy jobs.The current situation is a result of a massive increase in government spending over the lastdecade. This year, government spending totaled 24 percent of GDP, twice the level of the NewDeal when the government took dramatic steps in a failed attempt to end the Great Depression.Even more troubling, total federal spending has doubled in the 10 years since 2000, leading toever-increasing annual budget deficits.
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In current dollars, the highest war-time deficit was $54.6 billion (30.3 percent of GDP). The total amountof deficit spending from 1941 to 1945 was $175.2 billion. Deficits as a percentage of GDP during this period rangedfrom 4.3 percent in 1941 to 30.3 percent in 1943 and 21.5 percent in 1945. In contrast, the deficit in 2009 was $1.4trillion (9.9 percent of GDP). The total amount of deficit spending from 2005 to 2009 was $2.598 trillion, anddeficits as a percentage of GDP during this period ranged from 2.6 percent in 2005 to 9.9 percent in 2009.
3For example, the deficit totaled $248 billion in 2006, approximately 1.9 percent of GDP. In2007, the deficit fell to $162 billion, or 1.2 percent of GDP. However, this number increasedsignificantly in 2010 and 2011, when the deficit represented 10 percent and 9 percent of GDPrespectively. This year, the annual deficit is projected to total an astounding $1.4 trillion. Annualdeficits add up to the total debt of the U.S. government. In 1988, publicly-held debt totaled 41percent of GDP. The total debt of the government remained fairly stable through 2008, when itamounted to 40 percent of GDP. Yet today, just two short years later, total publicly-held debtamounts to 64 percent of GDP, and it is on track to represent 69 percent of GDP by the end of the fiscal year. Most troubling, we are on track to surpass a debt-to-GDP ratio of 100 percentsoon.The consequences of deficits of this size and the resulting mountain of debt are very real. Thecost of debt service alone will crowd out other spending in the federal budget. Today, interestpayments on the debt amount to approximately 6 percent of total spending, yet this number isprojected to rise considerably. In the p
resident’s budget, interest payments rise to 16
percent of all spending by 2021, despite several unrealistically optimistic projections, making it the fastest-growing line item in the federal budget.The corresponding level of government borrowing crowds out private investment and ultimatelyslows and reduces economic growth. To put this in to perspective, Greece ran deficits of 13.6percent of GDP and carried a debt load of 110 percent of GDP in 2009. That is not too far fromwhere we are now
–
but no one would suggest that the United States
should follow Greece’s
lead.
The Solution: Restore Balance
A budget is a governing document; it represents the priorities and governing agenda of theCongress. As a result, the budget process is central to congressional decision making.The bad news is that Congress has chosen to run deficits for 33 of the last 36 years. The goodnews is that these deficits represent a political, rather than an economic, problem, and Congressis quite capable of finding a solution. Congress did just that for four years from 1998 to 2001.During this period, Congress successfully balanced the budget and transformed regular deficitsinto recurring surpluses. Put simply, deficits are not inevitable; they can be stopped.Yet the fact remains that Congress has chosen not to make balanced budgets a priority. Thereturn of deficit spending in 2002 and the growing regularity of trillion-dollar deficits in theyears after 2008 are particularly perplexing given the apparent bipartisan support for reducingthe deficit and imposing some degree of fiscal discipline. Moreover, public opinion has beendecidedly against deficit spending in recent years.Despite the public demand for fiscal responsibility, Congress and the president have recentlymade a bad situation worse. If past efforts have not worked, then Congress must change the wayit approaches the problem and set a goal that is worthy of the sacrifices needed to meet it. In1997, adopting a goal of zero deficits ultimately led to the first balanced budget in almost 30years. It is unlikely that the American people will ever fully support the reductions in
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