Mises Daily

A
A
Home | Library | The Deficit Reduction Myth

The Deficit Reduction Myth

December 6, 2005

Tags Taxes and SpendingU.S. EconomyFiscal Theory

 

Congress is treating the deficit as a big joke, but surely most people aren't so stupid as to think that "deficit reduction" is really that.

Congress has outspent its own income in 45 of the last 50 years, thereby running up deficits by over $5 trillion. But $4 trillion of those deficits were in just the last 20 years. And then President Bush's budget submission this last February projected $3 trillion more of deficits in just the next 6 years. That is how much Congress itself actually spends in excess of its own income tax revenue. In government lingo, those are the real "on-budget" numbers.

That clearly isn't something Congress wants everyone to know about. So it disguises what it is doing. How? In three simple steps: (1) it takes out all the (really "off-budget") excess money coming into the Social Security retirement fund, that is supposed to be saved for future retirees' checks, (2) considers it as "income" for Congress and uses it all to pay Congress's own bills, and then (3) subtracts that "income" from Congress's own losses and reports only the total to the public as "the" budget.

But people might actually get alarmed if they knew that Congress itself really spent about $1.42 for every $1.00 of its own income tax revenue in both fiscal 2003 and 2004, setting all-time percentage and dollar deficit records. So President Bush has assured us that "deficit reduction" will cut "the" deficit in half by 2009.

First, there must have been a decision made to try to fool the public as to what was being done. The total budget deficit for 2004 had been projected to be $521 billion, far and away the highest ever. It would have exceeded even the previous record actual deficit of $378 billion in 2003 by 38%. But in fact the actual 2004 deficit came in at "only" $412 billion, thus still setting a new national record.

Now guess what the starting point for measuring "deficit reduction" was picked to be? You're right: the never-realized $521 billion budget of 2004. In other words, the deficit is to be reduced from a level that it never (thankfully) even reached.

And the goal is to cut that $521 billion in half, meaning that the goal is to cut $261 billion out of the total deficit annually by 2009.

What those in Washington must mistakenly think is a secret is that $184 billion (or 70%) of the "cutting" was already done on paper before the actual "deficit reduction" even began. The first $109 billion was of course the difference between the $521 billion budget and the record $412 billion actual in 2004. That was $109 billion of "deficit" that never really even happened. The second $75 billion comes from the way Congress covers up its actual deficits by 

 They have ways of making us pay

adding in the Social Security surplus.

The Social Security surplus was $155 billion in 2004 and is projected to be $230 billion in 2009. All that revenue is supposed to be "saved" to pay the future retirement checks of the baby boomers. Taking that additional $75 billion a year out of the retirement fund and spending it is the second big way that "the" total reported deficit will be "reduced". The more Congress can take out of the retirement fund and spend, the better their reported deficit looks.

So if we keep Social Security out of the totals, Congress's real plan is to "cut" its own deficit by only the remaining $77 billion. That is only about 4% of the expected total that Congress anticipates spending in 2009.

As a result, President Bush's recent budget submission projects that, when "deficit reduction" is completed, Congress itself will really have in the year 2009 an ("on-budget") deficit of $463 billion. That is still spending of about $1.24 for every $1.00 of income tax revenue. And meanwhile government spending is forecast to go up by $600 billion per year, or 45%, in just the five years from 2004 to 2009.

Of course in the five years through 2009, bigger and bigger annual amounts (totaling to almost $1 trillion) will be in effect embezzled from the retirement fund and spent to cover the government's perpetual spending appetite. So by the year 2009 Congress will be able to cover up its own actual annual $463 billion deficit by subtracting the $230 billion taken from Social Security, and telling us that "the" (net) deficit will thereby be "only" $233 billion that year.

If those in Washington wonder why inflation is coming on, why everyone is alarmed about the prospects for  retirement income, and why the dollar is headed further down the tubes in the foreign currency markets, they should realize that the rest of the world does know what is going on, even if Congress doesn't.

Bert McLachlan (bertmclachlan@msn.com) is the author of Saving Social Security (From Congress) (2001). Comment on the blog. See also "Do Deficits Matter" by LH White and Roger Garrison.


Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.

Follow Mises Institute