Wednesday, July 27, 2011

What Both Parties are not Telling Us About the Budget and the Deficit

Lets compare our home budget to the Federal Budget. Say our gross income is projected to be $100,000 which is subject to State and Federal income taxes; after which we have $70,000 to spend. Through the next 12 months, assuming we don’t have to replace the roof or the car, we have $70,000 to spend and that is it. We could take out a home equity loan and/or take our credit cards to the max but once we max out everything, if we can’t make the payments we have to file bankruptcy.

Now let’s look at what the Federal Government does under its “Baseline Budgeting.”  It starts off with the concept that its budget is based on an increase in annual spending of 7% regardless of the income the government receives.

The basic principle of how long it takes money to double is to divide 72 by the rate of return. If you earn 7% and divide 7% into 72 it will take just over 10 years to double your money.

The same principle applies to how long it will take the federal budget deficit to double. With Congress using a 7% increase as a baseline, the annual budget deficit will grow from $14 trillion this year to $28 trillion in 10 years. If we look at the deficit plans on the table, they are projecting a $1.2 to $2.4 trillion reduction over the next 10 years, if everything stays the same. If we take the higher savings of $2.4 and everybody keeps their promises the deficit will not be $28 trillion, but perhaps $26 trillion up from $14 trillion. Yes with $2.4 trillion in real budget cuts the deficit will just about double in 10 years, so how did we make any progress on the deficit?

These plans, which are reported to be budget cuts, are merely a reduction in the growth of the deficit. As I said in the July 6th Blog “You do the Math,” we are currently spending $1.4 trillion annually. If we take the $2.4 trillion over the next 10 years that will average $240 billion a year in reductions. That is only if Congress stays to its commitment to reduce $2.4 trillion. With a baseline budgeting process using the $1.4 trillion, a 7% increase the next year will add $98 billion more to the deficit this year.

Now lets go back to our home budget. How will you find the money to pay for the increases of 7% in your budget each year for the next 10 years if you have no credit left? The bottom line is, you can’t. Remember you read it hear, next year when you hear, that the budget deficit is higher than it is this year. I believe that Congress wants to keep us in the dark about the reality of what is going on in Washington.

I want you to call your Congressperson or Senator and ask him/her about “Baseline Budgeting” and see if he/she can tell you what it is and what the deficit will be next year.

Dan Perkins

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