If someone proposed that we could easily get back to the average budget deficit for the past 50 years, would you be intrigued? OK, good.
I was reading a post written by my friend Jimmy Pethokoukis on his blog and I became intrigued with a nice Federal budget deficit calculator he mentioned. I did not try to balance the budget, but rather I chose to get back to the average budget deficit we had from 1960 through 2009.
The Baseline Budget Deficit
To start, take a look at this chart of budget deficits as a percentage of the economy measured as gross domestic product or GDP. The answer is in the chart below. As you will see, we have had an average deficit of 2% of GDP for the past 50 years or so.
The red dotted line is for spending and the gray dotted line is for taxes received. The little yellow box gives the average of 20% for spending and 18% for revenues from 1960 -2009. Therefore, I believe a 2% deficit is a good starting number:
Source: Heritage Foundation
The gray vertical line separates actual spending and tax revenues from projected spending and revenues. The red horizontal line shows how we have ramped up spending far above anything seen in the past 50 years. The gray horizontal line shows tax revenues. The percentages for spending and revenues are shown as percentages of gross domestic product (GDP).
No Tax Increases; Spending Cuts Only
I decided to go with spending cuts only, as I believe tax increases would be particularly bad now in a weak economy. So, no tax increases allowed. Of course, you can do it any way you like.
The calculator worked well, but it had rigid parameters (such as only looking at years 2015 and 2030) and I could only use the cuts allowed in it. Nonetheless, I was able to achieve the 2% deficit for the year 2015 (which would be a deficit of $300 billion, given my estimate of GDP as $1.5 trillion in 2015) very easily just by instituting modest pay cuts and downsizing of the Federal workforce.
Here is how I achieved $133 billion in cuts, getting well under $300 in the deficit for 2015:
- Cutting foreign aid in half
- Cutting all earmarks
- Eliminating Federal farm subsidies
- Cutting Federal civilian workers pay by 5%
- Cutting the Federal workforce by 10%
- Cutting a modest number of Federal contractors
And, that was it. No doubt there would be a few howls, but these are not draconian cuts by any means. And, if the farmers said it was too mean, we could cut their subsidies by half only and add one other modest cut such as eliminating a few wacky government projects.
Getting to the 2% budget deficit level for the year 2030 (assuming a $2 trillion economy and, therefore a deficit of $400 billion) was a bit harder, because the projected deficit was a lot higher on this calculator. Nonetheless, I still did so without any tax increases, onerous cuts or changes in Social Security or Medicare eligibility. I included all of those cuts listed above and added a few others here:
- Cutting several small Federal programs
- Cutting Federal aid to states by 5%
- Canceling or delaying some Defense Department weapons systems
- Capping troops in Iraq & Afghanistan at 60,000 in 2015
- Capping Medicare expense growth at GDP growth plus 1%
- Instituting medical malpractive reform
- Using CPI to calculate cost of living increases in Social Security
With these cuts, I got the budget deficit for 2030 well under 2% of GDP which I estimated to be $2 trillion at that time. Therefore, I had a target deficit of no more than $400 billion and actually got to a projected budget deficit of $355 billion. This list of cuts is still quite modest and I believe it is pretty well distributed. Everyone takes a modest hit, but we achieve our fiscal goals without much pain.
I took these as two separate exercises, but if we did all the cuts shown above, we would have a modest budget deficit in 2030 and we would have a very small deficit in 2015.
Try it out. I recommend this as a good exercise for anyone who cares about our future. And, it’s easy and fun. Go here to play the deficit game.
Hat tip: James Pethokoukis