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Category: Free Markets
Vic Miller

Federal budgets face splits between Congress and the White House, differences between House and Senate, and small Democratic majorities in both houses make coalition-building necessary, yet difficult as coalitions keep shifting. Add to that difficulties of producing compromises on virtually any point even when ultimate goals are agreed. Says Vic Miller, Senior Fellow at Federal Funds Information for States, “it’s very difficult to reach consensus.”

Federal Spending for Dummies

Miller simplified the federal budget in a single sentence: “Defense and Medicare spending have approximately doubled this decade, growing at about 10% annually; all other categories combined have increased an average of 5% annually.” The wild card is interest payments on the national debt. The debt has grown. Interest expense has been held down by extremely low interest costs. If they rise, that will produce a third driving force for the budget. All three have built-in cost drivers that will continue to increase their spending despite annual decisions.

Miller points out the long-term primacy of Medicare benefits in driving Federal spending. “There are no limits under current law,” he points out. “Drugs, vaccines, procedures and equipment are continuously added without the need to finance them. And the federal accounting means that the program’s total costs are hidden. Medicare spending should approach $500 billion in 2009, 25% more than the $391 billion shown in the budget. The difference is that the premiums and clawback payments from states are recorded not as federal receipts but as offsets to outlays. “Medicare’s growth is perhaps the primary fiscal issue of the next ten years,” says Miller. “It’s what’s driving the system.” So, Miller, says, we have a choice: “either raise revenues, cut benefits, or under current law expect to see a slow degradation of government.”

Medicare

Since the 1950s, the federal government has been the dominant tax collector, roughly 18-21% of GDP vs. state and local government of about 10% of GDP. Recent cuts have reduced the federal share to 16%-18%, not sustainable for the long term. FY 2008 receipts could easily be down $150 billion or more from 2007, reaching shares of the economy last seen in the Eisenhower Administration. If maintained, this will by definition means fewer grants, and reduced services by state and local governments.

In addition, the growth of Medicare—and the creation of the new Medicare Part D prescription drug benefit—are increasing the direct taps on the state budget. State and local governments of California now provide about $4 billion annually to the Medicare program. Of this, an estimated $2 billion pays the employer share of the Medicare payroll tax for public employees. About $2 billion consists of mandated Medicaid spending in support of Californians dually eligible for both programs, of which half is from state revenues. And slightly more than $1 billion is the “clawback” annual payment imposed on states to help pay for Part D.

The Budget Process

In a word, with people running for reelection and disagreement between members, the most likely federal outcome this year is a continuing resolution. Looking ahead, we’re likely to see growth in federal tax revenues under current law slow to a crawl, and the rebates will mean actual reductions. Congress will attempt to add some spending for FY 2008, but the Administration will oppose it. Says Miller, we will “start seeing a yawning deficit again, especially if interest costs accelerate. We will see continuing irresolution until the results of the November election give us direction.” That is, if the results do provide direction.

Some states with large energy and extraction industries are in good or excellent shape. Farming states also have experienced increased food prices, and their budgets appear stronger. But about half the states—first those that depended on the sales tax, and now those that are depending on property-related revenues or income taxes, are seeing shrinking balances and increased demands for services. And where they used to look to the federal government at such times, they find little

Says Miller in sum, “as a country, we need to come to grips with our budget situation. We cannot continue forever our expenditures with the revenue structure we have established. We cannot continue governing with a series of non-decisions.”