Please Do Not Promise to Balance the Federal Budget

Posted July 14, 2008 at 1:30pm

One of the two presumptive presidential candidates last week promised to balance the federal budget by 2013. I’m specifically not mentioning his name because (1) most likely you already know who made the pledge, and (2) for the purposes of this column it doesn’t really matter.

[IMGCAP(1)]This candidate’s promise to balance the budget four years after taking office was an unfortunate and painful reminder of what former Treasury Secretary John Snow used to quickly repeat whenever he was asked about what the Bush administration was going to do: cut the deficit in half by the end of 2009.

There were so many things wrong with that statement that it’s always hard to believe Snow ever got away with saying it.

What was wrong? First, it turned out that the White House was pledging to cut the deficit in half not from an actual level but rather from its phony projected all-time nominal high.

Second, when Snow spoke those words, the Bush administration was going to end, at the latest in 2008, so he was actually promising do something after the administration was out of office.

Third, the administration was really only promising to cut the deficit in half one time. Based on the fact that, with the president’s full support, the deficit in nominal terms is about where it was before it was reduced that one time, we can now say definitively that the White House’s commitment was anything but permanent.

Fourth, the Snow promise ignored the fact that the administration began with a surplus and that the substantial deficit it was promising to halve was the one it created.

But most important, the Snow mantra to cut the deficit in half by 2009 assumed that a substantially lower deficit would be the right fiscal policy for that year even though there was no possible way that he or anyone else could know whether that would really be the case. In fact, based on the current economic situation, a substantial reduction in next year’s deficit, that is, the same 2009 Snow was talking about, might well be the modern day equivalent of Herbert Hoover’s fiscal policy disasters of the late 1920s.

The candidate’s pledge to balance the budget by 2013 repeats the Snow mistake by again refusing to acknowledge that budget policy should fit the economy. Reducing or eliminating the deficit should never be promised in a vacuum. In 2013, the U.S. economic situation might well require an increased deficit, a substantial surplus or something in between. In July 2008, neither the candidate nor anyone else has a clue as to what the correct fiscal policy will be four and a half years from now. That makes the pledge to produce a balanced budget political pandering rather than good economics.

The pledge to balance the budget by 2013 also ignores what is becoming an increasingly obvious federal budget truth: The deficit is far more likely to increase rather than decrease in the next year or two. That will make eliminating the deficit in 2013 not just much harder but virtually impossible.

Start with tax policy. The alternative minimum tax will apply to many more taxpayers each of the next two years if Congress and the president don’t fix it permanently or continue to enact a series of one-year patches. Either way, revenues very likely will be $60 billion or so a year less than is currently projected. At least some portion of the tax cuts enacted in 2001 and 2003 will likely be extended before they expire at the end of 2010, and that will also reduce revenues compared to what they would otherwise be. Add to this the strong possibility that continued economic weakness will also reduce revenues, and it’s hard to see how the deficit outlook won’t deteriorate rather than improve.

The story is similar on spending. There is substantial talk about a second economic stimulus package that could add hundreds of billions of dollars to the deficit. The plan announced by the Treasury over the weekend to deal with the problems at Fannie Mae and Freddie Mac could increase spending and federal debt by billions. And does anyone really believe that the California forest fires won’t produce some type of emergency spending bill before the election that, given how late it is in fiscal 2008, will increase the deficit in 2009?

But beyond these responses to immediate problems lie a number of other things that are very likely to increase federal spending beyond what is currently assumed. Costs for personnel and weapons for the military are likely to rise even if activities in Iraq and Afghanistan end. As the ongoing salmonella investigation by the Food and Drug Administration once again amply demonstrates, many or most of the federal public safety and protection programs have been underfunded for some time and are performing very poorly as a result. And regardless of who is elected, the next Congress and president almost certainly will have some ideas about policy changes that will end up costing more than is currently projected.

Never mind that the candidate’s plan for dealing with the deficit doesn’t really add up; that’s actually the least important part of the debate. The far bigger problem is that promising to balance the budget in four years promises something that simply shouldn’t be promised.

The responsible position is for the candidate to admit that the budget is one of the tools the government has to deal with the economy, that a balanced budget is something to strive for when possible and, when that opportunity happens, he will do what is needed to make sure it isn’t squandered.

But as Hoover discovered, and as counterintuitive as it sounds, promising to balance the federal budget, no matter the situation, is actually the fiscally irresponsible position.

Stan Collender is managing director at Qorvis Communications and author of “The Guide to the Federal Budget.” His blog is Capital Gains and Games.