WHY THIS SIMULATION CUTS THE BUDGET IN ONE YEAR

Why does this simulation cut this coming year's budget, rather than projecting cuts over many years like Congress and the President often do?

The primary reason is that thinking about dealing with the budget in one year is simpler: simpler to present, simpler to program and simpler to understand the issues at stake in the budget debate. And that simplicity is a virtue since long-term budget projections have an obvious history of obscuring hard choices and, frankly, allowing politicians to lie about ultimate results. This is one of the main reasons we have seen the return of the present budget deficit. The reality is that it is no easier to cut the deficit over a few years than in one year--the choices are the same. The only difference is that various budget gimmicks over time obscure those choices.

There are three major reasons projections into the future obscure these choices: inflation, changes in revenues due to population growth, and changes in numbers in need for government services due to population changes.

Inflation cuts the value of dollars spent on programs each year. A "freeze" in spending that ignores inflation will mean a real cut in that program. As an example, if we assume 3% inflation each year, a "freeze" in spending means almost a 20% real cut in the program over seven years. It is a much more clear and honest debate if we discuss whether to cut the program 20% up front.

Changes in revenue due to population growth means that the government can expect to raise more revenue each year without doing anything. This is on top of revenue increases due to inflation. Some budget projections play games with this expectation in order to argue for a budget. The massive tax cuts in the early 1980s projected much larger revenue increases than ever materialized, allowing "projections" of much smaller deficits than we actually ended up with by the end of the decade.

Along with revenues increasing with population growth, there are changes in the numbers in need of government services due to population changes. Population growth means more children in school, more total people unemployed (even with the same unemployment rate), more people qualifying for Medicare and Social Security and so on. What this means is that even if a program's spending increases with inflation, those benefits will be divided between more and more people, meaning fewer textbooks per child, lower benefits for Medicare recipients and so on. Increasing revenues due to population changes can often match increasing needs, but playing with projections with either number allow budget-cutters to obscure real cuts in programs for those using them.

The bottom-line is that adjusting the present budget (using fiscal year 2006 in our simulation) is the simplest way to show the choices we face in balancing the budget. In fact, it is a lot easier to make these cuts or raise revenue now, since as our population ages, the need for Medicare and Social Security is projected to grow much faster than both inflation and the growth in revenues. So if we can't balance the present budget, we can't do it any easier in the future.

Note that the gross totals for the national budget combine both spending, tax expenditures and the losses of revenue from the 2001 and 2003 tax cuts. Such number totals in budgets are always a bit arbitrary; concentrate on the deficit number as the target in this simulation.