Important debates over the federal budget are now taking place in Congress. Kentucky’s representatives, including Senate Minority Leader Mitch McConnell, House Appropriations Committee Chair Hal Rogers, and Senator Rand Paul, are in the thick of this debate.
The work ahead is significant. In addition to finishing this year’s budget and crafting a budget for 2012, Congress must soon approve an increase in the amount of debt the federal government can owe in order to avoid default.
Some members of the Kentucky delegation are among those using current and future budget challenges as an opportunity to push for extreme, immediate cuts to the budget. We’re also hearing about proposals to set arbitrary limits on spending as a share of the economy and even a constitutional amendment to eliminate budget deficits.
Good choices on these critical questions require understanding of the causes of the budget deficit and the role of public investment in economic recovery and long-term growth.
The short-term budget deficit is higher for two main reasons: revenue fell when the economy collapsed, and the federal government stepped in to halt the economy’s decline.
The Recovery Act provided a mix of public investments and tax cuts for working families to give the economy a boost. It extended unemployment insurance, food assistance, and health insurance for people who lost jobs, helping families get by while at the same time boosting economic activity by putting money in the hands of people who would spend it right away.
This response was critical because the economy’s other engines were stalled. Consumer spending was sputtering because fewer jobs and declining home values meant less ability to spend, while business investment idled because demand was not there. Government was the only entity that could jump-start the economy and get it moving.
The Congressional Budget Office has confirmed that the Recovery Act created up to 3.6 million jobs and helped bring the official recession to an end.
While the economy is now gradually advancing, this recession was the most severe since the Great Depression. Getting to full speed will take time. At current rates of growth, the unemployment rate may not equal pre-recession levels until 2015 or later.
The 2011 budget that passed the House could bring growth to a halt by slashing spending while unemployment remains high. Extreme plans like those of Senator Rand Paul would drastically cut or eliminate funding for key areas like education, housing and energy.
In the short-term, the most important deficit is the jobs deficit, and plans to cut critical investments will only make that problem worse. Elimination of necessary services would ripple through local economies and cost jobs.
We can and should enact legislation that will reduce the budget deficit once the economy is back on its feet. But one necessary ingredient to a lower long-term deficit is strong economic growth, which will require investment in education, infrastructure, clean energy and other areas. A deficit reduction approach comprised entirely of cutting needed investments will harm the future growth rate.
Plans to face the long-term budget deficit should focus on the real challenges. The largest contributor to the deficit in coming years is the continued high growth of health care costs. Health care has long been growing faster than the economy due to a range of factors including high administrative costs associated with our fragmented payment system, the growth of expensive medical technologies and an inefficient health care delivery system.
The Affordable Care Act passed last year is the first step in addressing those issues, and the Congressional Budget Office has confirmed that the bill will reduce the budget deficit. But additional reform will be needed in the future to make health care both more effective and more affordable.
We face an important decision over the expiration of the Bush-era tax cuts (now scheduled for 2012). We will also have to address reform of the tax system, including scrutiny of the estimated $1 trillion in tax preferences and loopholes that are buried in the tax code.
Kentuckians should be concerned about proposals to wantonly cut or arbitrarily limit investments needed for immediate economic recovery and long-term economic prosperity. We should be deeply troubled by radical plans like the constitutional amendment to prevent budget deficits that Senator Paul touted in a recent visit to the Kentucky legislature. That amendment would lock away critical tools the country needs to address future recessions.
Our approach must recognize the critical role of public investment in spurring job creation in tough times and building lasting prosperity in the future.
Jason Bailey is Director of the Kentucky Center for Economic Policy (KCEP).
Federal Budget and Investment.pdf
