As Congress works out the 2012 federal budget, senators and representatives should keep in mind the millions of unemployed Americans still looking for work, the families with homes in foreclosure and others living on the edge. In this fragile recovery, the nation’s fiscal health depends on timing as much as on the right mix of cuts and investments. Austerity could backfire; just look at Britain. Since last summer’s drastic cutbacks, its economy has been in decline.
President Obama’s $3.7 trillion budget contains good news. It invests in education, public transportation and green energy financed by curtailing tax breaks for oil companies; these allocations promote long-term growth. The budget also cuts spending: a freeze on discretionary expenditures saves $400 billion and grants to the states to reform medical malpractice laws indirectly reduce the costs of health care. The budget also raises $375 billion in revenue by ending some corporate tax breaks, imposing a bank tax and higher rates on capital gains and the unemployment payroll tax and capping itemized deductions for high-income filers. Over a decade this budget would shave $1.1 trillion from the deficit.
Overall, however, the budget is too cautious. It continues giveaways to the affluent, like the mortgage interest deduction on second homes, while too many of its cuts, like home-heating assistance, community development block grants, job training programs and student loans, would harm persons with the lowest incomes. That is an assault on elementary justice.
The scope of the president’s budget, moreover, is too narrow, focused on just 12 percent of the overall federal budget, a part called “non-security discretionary spending,” which excludes allocations for the Defense Department and the Department of Homeland Security. Instead, Congress must sift through “mandatory expenditures” set up by law to look for cuts that promote fairness and economic growth.
Interest payments on the federal deficit cannot be cut, of course. And Congress is debating whether Social Security even belongs in this budget process, since it is solvent and will remain so for the next 27 years. It has customarily been treated as a separate item, with its own funding, and it is not appropriate to lump it in with entitlements, as its opponents have done. Trimming defense and health care, however, could cut the deficit and leave the recovery intact.
Defense. Mr. Obama would allow future increases to the defense budget to grow no faster than the inflation rate, saving $78 billion. But that assumes increases, when defense already makes up a quarter of the federal budget. Instead, defense should be cut by at least the amount excised from the domestic budget, $400 billion, now while Congress supports reductions. Canceling the alternative F-35 jet engine project and the Expeditionary Fighting Vehicle will save around $14 billion. Other weapons projects could be canceled or postponed and the budget of each military branch made as lean as possible without jeopardizing national security. The Secretary of Defense would raise the employee portion of the health insurance premium for retirees and contractors. But health care, which equals one-tenth of the Pentagon’s budget, could be reduced further.
Health care. Medicare, under the Affordable Care Act, was cut enough to extend its life by a decade. But curbing health care costs, which are more than one-third of the federal budget and growing, is essential. The best ideas include: (1) changes in the way hospitals and doctors are paid, so that physicians are rewarded for quality treatment rather than the number of tests performed; (2) research to determine the best treatments and medicines for specific illnesses, so that the latest, newest and most expensive do not replace less expensive treatments and drugs that are as effective or better; and (3) means-testing of eligibility for Medicare and/or allowing income-related differentials in its patient payment scale. Reducing those costs, not rushing to slash the deficit, is the way forward.
Tax reform. Since austerity is counterproductive and spending cuts are inadequate, revenues must be raised. The budget rightly calls for corporate tax reform. But after a decade of tax cuts that favored wealthy individuals, progressive individual tax reform is overdue. This fact has not escaped ordinary citizens, who can make wise choices about the federal budget, despite its size and complexity. A recent study at the University of Maryland asked a sample of 800 adults to propose a federal budget. Participants increased spending on job training, the environment and education. On average, they cut spending by $146 billion for the year, with the biggest cuts (more than $100 billion) in defense; they also cut veterans’ benefits, the space program and federal highways. Most important, they raised revenue by $292 billion, almost double the amount they cut. Washington should pay attention to that.