Where the Money Is

Sept. 1, 1990

In marathon sessions planned for early September, White House and congressional negotiators will grapple again with the most difficult problem in Washington: the federal deficit, which in 1991 promises to hit $164 billion or $232 billion–or $305 billion –depending on how one chooses to count.

If the government cannot, by action or artifice, get the number close to the legal ceiling of $64 billion by the middle of October, the Gramm-Rudman- Hollings deficit reduction act will take over and begin assessing the cuts automatically.

So far, the only strong action has been to cut defense. The 1991 reductions, nominally based on diminishing military requirements, are in fact driven by financial pressures. The nation believes that the present defense program is unaffordable and that it offers a relatively painless solution to the deficit.

Rep. Les Aspin (D-Wis.), chairman of the House Armed Services Committee, predicts that “the budget negotiations are going to come up with a number for defense that is not in any way related to the threat but is related to the politics of the budget resolution.”

The political consensus is that 1991 defense cuts are the first big installment toward a twenty-five percent force reduction over five years.

The Deficit. In July, the Congressional Budget Office raised its “baseline” deficit projection–the outcome if spending and revenue plans are unchanged–to $164 billion. If money the Resolution Trust Corp. needs for the savings and loan bailout is counted toward the deficit, the total rises to $232 billion. If a Social Security trust fund “surplus” is factored out of the accounting, the deficit is $305 billion.

By law, the deficit is measured in outlays, or funds that the government actually expends during the year in question. The authorization bill adopted by the House Armed Services Committee–reducing troop levels by 129,000 next year and terminating eighteen weapon programs–would save $7.8 billion in 1991 outlays. A somewhat less severe Senate bill saves $6.3 billion. These are small drops in a very large bucket.

Applying the Proceeds. Defense has been cut every year since 1986, but the savings were not applied to the deficit. Congress simply transferred the money into other spending categories. This habit shows every sign of continuing.

In July, the House Appropriations Committee–humming, then singing “The Battle Hymn of the Republic”– added $4.4 billion to the budget request of $1667.23 billion for education, human services, health, and labor programs in 1991. That bill, along with three others from this committee, would appropriate $13.24 billion not requested in the budget proposal.

Defense and the Deficit. Despite the popular belief that defense caused the deficit, the trend lines head in diverging directions. The deficit is going up while defense spending is going down.

In 1990, defense spending will be 5.5 percent of the Gross National Product–substantially less than in the 1950s and 1960s. The House Armed Services Committee cuts would take it down to 4.8 percent in 1991.

By contrast, entitlement and benefit programs rose to 11.1 percent of GNP in 1990 and will be 11.8 percent in 1991. This is the only category in which federal spending grows faster than GNP.

The House authorization bill proposes 1991 defense outlays of $295.5 billion. In its baseline-plus-bailout configuration, the deficit pulls within hailing distance of that number and, without the screen of a trust fund off-set, would exceed it.

Income and Outgo. Federal revenues in 1991 are estimated at 19.3 percent of GNP. This approximates the pattern of the past twenty years, when overall revenues averaged 18.64 percent. The internal breakout, however, has changed significantly.

As a percentage of government revenue, social insurance taxes are now approximately twice their share in the early 1960s. “Growth in social insurance taxes has roughly coincided with expansion of benefits under the entitlement programs for which they are earmarked,” the Congressional Budget Office says.

The Double Balk. The basic problem is that, while revenues are 19.1 percent of GNP, outlays are 22.6 percent. Over the next five years, the gap will narrow, but an appreciable gap remains.

President Bush said June 26 that a deficit solution must include “tax revenue increases” and alteration of entitlement programs. He was promptly clobbered for reneging on his “read my lips” pledge not to raise taxes and for explicitly targeting entitlement benefits. The President retreated to a less embattled position.

Profiles in Affordability. The nation that spent 8.2 percent of GNP on defense in 1960 and 7.8 percent in 1970 is not beggared by 5.5 percent in 1990. Nonaffordability is a bogus issue.

Perhaps we can spend less on defense, but that will not erase the deficit. That isn’t where the money–or the problem–is. If entitlement programs and the tax structure are untouchable, the deficit has a long future.

Meanwhile, as an indicator of relative affordability, the budget-busting package reported out by the House Appropriations Committee in July includes development money for a “magnetic levitation train” to replace old-timey trains that run on wheels and tracks.