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Restoring Balance to the United States Budget

After billions in stimulus spending and bailing out banks and automakers, America’s public finances are in a dismal state. This year, the federal deficit alone is set to near $1.5 trillion while the national debt reach a staggering $13.7 trillion last month. Americans may need to brace for austerity but plans to rein in spending are few and controversial.

Ahead of November’s midterm elections for Congress, Republicans pledged to rein in spending, somehow but they volunteered few specifics. A deal struck with the administration this week, which sees an extension of tax cuts combined with continued unemployment benefit spending into next year, offers little hope for future bipartisan agreement. Similarly, both parties’ response to the only concrete plans for deficit reduction drawn up so far have been virtually opposite on all major items.

The National Commission on Fiscal Responsibility and Reform which was formed by President Barack Obama in January, proposed deep budget cuts last month, including a freeze in government salaries, reductions in subsidies and an end to congressional earmarks. The largest expenditures of government—entitlements as Medicaid, Medicare and Social Security which together account for more than $1.4 trillion in federal spending—were not exempt from the commission’s recommendations although proposed reforms fell short of actually balancing the books on these programs. ObamaCare, which will only increase health care spending, was not mentioned in the commission’s report.

Raising the retirement age and asking doctors if not insurers to share in the burden of mounting health care costs, as the commission prescribed, will not make the entitlements affordable unless their scope is reduced or taxes are raised. Democrats are adamantly opposed to entitlement reform however and the president has explicitly pledged to preserve Social Security “forever.” Republicans will block any proposed tax hike, leaving the country with a huge deficit that equals approximately a third of total spending.

If Democrats and Republicans cannot manage to shrink the deficit there is another way—freeze federal spending altogether. Even if revenues collapsed to barely 15 percent of national income as a result of the recession, the Congressional Budget Office estimates that tax revenues will grow by an average of 7.3 percent annually over the next decade. Without an increase in government spending, the budget will balance itself by 2016. Even if spending is allowed to keep pace with inflation and grow at 2 percent a year, the budget balances in 2020.

By that year even the president’s fiscal commission is still several hundreds of billions short of balance. But as the national debt continues to mount, so do interest payments which this year amounted to more than $160 billion—an 18 percent increase compared to 2009.

A freeze in federal spending—which, as the economy recovers and begins to grow again, effectively amounts to a reduction in the size of government—should not be anathema to any politician. Democrats have raised spending as high as 25 percent of GDP, a level not seen since World War II. The debt it incurs is unsustainable while such a raised involvement of government in the private sphere is economically unsound.

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