What would be the consequences of balancing the federal budget NEXT year?

Let’s assume for the purposes of this thread that politicians get on board with a plan to balance the budget in the year 2013. Let’s also assume that the public might piss and moan about the cuts, but won’t do anything to disrupt the process while it happens.

The proposal is like this: We use as a baseline the government receipts this year. I don’t have the numbers, and it doesn’t matter, but let’s assume $2 trillion.

EVERY piece of spending next year will allocate a percentage to that department that was used this year (except for interest on the debt which can’t be changed). If social security got X% of the federal outlays this year, then next year it gets X% of the federal receipts. If defense got Y%, next year it gets Y% of the receipts. (X and Y being adjusted for the interest that can’t be reduced). No favorites, no special exemptions. Nothing. The same percentage as last year for every single department.

What are the horrific consequences and who suffers the most?

Along with that, what positives would happen? Would the economy rebound in a hurry because investors see that we are serious about fiscal responsibility?

Note: I’m not advocating this plan. I would just like to see what posters think would happen in such a scenario.

Including Social Security and Medicare in the cuts will draw some justifiable objections, but let’s ignore that. Even besides those, there are certain legal obligations the government has besides interest payments, but let’s ignore those as well.

Since Federal revenue less net interest payments is 2300 - 227 = 2073 Billion; and Federal outlay less net interest payments is 3600 - 227 = 3373 Billion; the arithmetic works out to
A 39% cut for every department and every pensioner or Medicare patient.
Of course the arithmetic works differently if you exclude cuts in “mandatory” programs. In that case budget balancing requires Cutting “discretionary” spending to zero and Slashing the military budget to less than one fifteenth of its present level. … Actually it would be worse than this, since IRS enforcement is all “discretionary” and with no IRS department at all, tax revenues might decline.

Just to start with one simple example, air traffic control has been underfunded. I doubt if suddenly laying off 39% of the remaining controllers is wise. Of course, there will be less demand for airflight with seniors and government employees all having their incomes cut 39%.

There would be economic collapse, which would cause the world economy to collapse.

It will take quite a while to unwind our borrowing from the future. Currently the entire economy is based on it.

Of course, we will definitely collapse at some point anyway if we don’t fix our borrowing addiction. But we can’t fix it overnight.

I’m a little curious as to why your OP says it’s about balancing the budget, but only concerns itself with cutting programs? Balance can come from increased revenue, you know.

Really? Will we? Remember, we’re at 14 trillion, and people are practically paying us to borrow their money – our interest rate on long-term bonds is very close to inflation. In fact, despite our gigantic debt, we’re still a “safe bet”. Why do you think that’s going to stop soon?

Because Grover Norquist. Also because raising revenue to match spending in any meaningful way would be virtually impossible and disasterous.

Economic collapse and worldwide depression. You just can’t take that much money out of the economy and expect it to function.

Nitpick – our interest rate out to 15 years or so is *below *inflation. A couple of weeks ago, it was below inflation out to 20 years. Right now, the real (inflation-adjusted) rate on TIPS bonds is -1.22% at 5 years, -0.58% at 10 years, and 0.11% at 20 years.

So, when jtgain asks “Along with that, what positives would happen? Would the economy rebound in a hurry because investors see that we are serious about fiscal responsibility?”, I ask, by what mechanism? Will rates go down further? The are already negative in real terms out past 10 years. They don’t even hit 1% in nominal terms until past 5 years.

Anyway, it would be bad. What do I mean by bad? Human sacrifice, dogs and cats living together…mass hysteria! [/Venkman]

If nothing is done, the OP’s scenario would come true in a greatly reduced fashion in January. Most of government would take a cut of about 10% across the board, with Social Security spared and Medicare taking substantially lesser in cuts.

One report put out by the defense industry projected 1 million job losses due to the 10% cut to defense. Another industry report found that 10% cuts to the FAA would mean 130,000 lost jobs and a contraction of the economy of up to $18 billion in the short run, growing in later years. Triple the size of those cuts and we would be talking about direct job losses of close to a million government employees and eliminate about a trillion dollars, or about seven percent, of the economy, not to mention the ripple effects down to state and local governments. The indirect job and job losses would be several times that.

National Parks would have to close, disease research would be gutted, we’d have to let people go from prisons. Pretty much every American, anyone who does business with America, and everyone else would instantly lose any trust in the US government. It would be just as bad as having the Taliban - yes, the honest to god Taliban – take over this country.

There would be no upside. Instead of investors being happy about “fiscal responsibility,” many investors would quite simply lose their shirt. When the economy finally recovered, business would be faced with large costs that the government once took care of: Social Security would be gutted so workers would be demanding new pension plans; infrastructure would be severely impacted making it harder to move goods; access to the courts would be limited causing problems to enforce contracts and patent rights; and so on.

Actually there would be one upside: the people who are now talking about government debt being the main issue holding back our economy would be proven wrong… and a lot of them would probably end up starving on the streets along with millions of others.

Are you using projected 2013 umbers for revenue? Not that you’re going to find $1.3T extra dollars next year over this year, but I’m just curious. At any rate, anything more than 10% would be bad, and anything more than 20% would probably be disasterous.

I just grabbed the numbers from the pie-charts near the top of this page:
http://en.wikipedia.org/wiki/United_States_federal_budget
They’re for FY 2011; if that’s unfair, sorry. I wasn’t looking for biased numbers, just the first to appear via Google

Unless you had a large across the board tax increase as well then I don’t think it’s possible. What would happen is something similar to the Cliff they are talking about in November, when automatic cuts would go into effect if there is no compromise on the budget. Who would suffer? Well, to a degree I suppose everyone. The ones who would suffer the most are the folks who would lose their jobs. Next would be folks who would lose whatever service the government was providing that it either wouldn’t be providing anymore or had been reduced. In the short term, it would be pretty grim.

In theory and in the long term it might actually set up economic growth down the line (or, maybe not), but short term it would be bad. Basically, there isn’t a silver bullet to get out of the mess we are in. We have overspent and are underpaying. We need budget cuts AND a tax increase…and that’s going to be hard for everyone (hell, most anyone) to swallow. We also need budget discipline wrt tax increases going towards the deficit and getting our house in order, rather than new programs or entitlements. Plus, you’d need some sort of trust between the parties, between the American people and the government, between the ‘rich’, ‘middle class’ and ‘poor’, etc etc. So, not likely to happen…no one trusts anyone to do the right thing, to do things that are in the best interest of the nation, to make sacrifices toward that goal…instead, everyone wants the other guy to make the sacrifices, or thinks that the other guy is trying to screw them and get away without making the sacrifices needed.

The GSA would have to settle for traveling by bus to their conventions, now relocated to Branson, MO.

On the bad side: Market collapse; Massive rise in unemployment; weakening of the dollar and increase in interest rates, as world markets reassess the sanity of the US government; Massive Greek style austerity protests across the country.

On the good side: Quick legislation by popular demand to undo the cuts; government cutting rhetoric banished from the political dialogue for a generation.

Leaving aside the other stuff here, which I’m skeptical of, why is a weak dollar on the bad side? I’d think that it would be a good thing, overall…not that it seems to be going in that direction lately.

I don’t doubt what anyone is saying. I can see where such massive cuts would cause huge problems. Here’s my head scratcher, though:

http://www.whitehouse.gov/sites/default/files/omb/budget/fy2013/assets/hist.pdf (warning PDF)

If you look at the projected receipts for 2013, it’s $2.9 trillion and change. If you look at historical outlays, we spent less than that in 2007 and more than that in 2008.

I know that comparing home budgets and government budgets is not cromulent, but if I had to live on what I made in 2007-2008, it would cause belt-tightening, but it would work. What is so different in our world from 5 years ago that would mean that living off of the money we spent then would be devastating and cause worldwide chaos?

IOW, why would millions lose their jobs when millions haven’t been hired since 2007-8?

Missed the edit window: Further, we like to talk of the good old days of Clinton surpluses. The last surplus we have had was in 2001 when government outlays were ~$1.8 trillion. This year they are nearly $3.6 trillion. That’s per YEAR, so any talk of the Iraq wars and 9/11 shouldn’t count for much as Iraq is nearly over and we are preparing to withdraw from Afghanistan.

In 11 years, why has government spending doubled? Keep in mind that this is spending only, so the Bush tax cuts don’t even enter into the equation.

Second observation: If we hold government spending stagnant for 5 years, the budget is balanced ($200 billion surplus). No cuts, no tax increases. If returning to 2007 levels would cause despair, would telling people now that they must live on 2012 spending in 2017 cause the same angst?

Not to mention that even with these cuts we’d still have a deficit, probably a massive one, since revenues would plummet due to the collapse in the economy. This would cause interest rates to rise further deepening the problem.
If anyone doubts this, look at Spain. Budget cuts to cure fiscal problems are not working very well.

Projected outlays for 2013 include the lapsing of all the Bush tax-cuts, all the Stimulus tax cuts and the extension of the AMT tax cut. If all those things happen, the deficit will indeed be negative in real terms (we’ll still have a small deficit, but it will be less then GDP growth, so the debt as a fraction of GDP will shrink).

So under current law, there isn’t a deficit problem over the next decade. The budget is effectively balanced.

The problem is both parties want to extend at least some of those tax-cuts (and the GOP wants to make them larger), so when people make deficit projections, its almost always assuming some subset of those taxcuts are extended.

For one thing, the private sector was employing 2,000,000 more people in 2007 than it is now.

The main reason why we can’t just turn back the clock to 2007 and expect that level of spending to be sufficient is that the really big swings in spending relate to simple fact-of-life adjustments: boomers are retiring, mainly.

Look on pages 54 (58 of the PDF) and the following. Check out Medicare: in 2007 it cost $375 billion, in 2013 it will cost $530 billion. Look at Social Security: $586 billion in 2007 and $825 billion in 2013. Also, income security, which includes Federal employee retirements as well as unemployment compensation: $365 billion in 2007 to $559 billion in 2013. There’s other stuff that has gone up, too, like defense, but these are the major changes.

Aging of people isn’t the only reason why these costs of risen, of course; a shitty economy makes people more reliant on some of these types of services. What are you going to do, tell people getting UI that they should only collect those benefits when the economy is good?

To break this down into the household examples that we all hate so much: over time the value of your house tends to grow, meaning your property tax bill will tend to grow, too. You can’t just look back to some past year and declare, “There is no reason why I should pay more than $4,000 a year in property taxes like I did in 2008! I just refuse to pay a dime more!” Well, those tax bills are going to grow whether you like it or not. You don’t pay them, well, you’re going to be in trouble.

Some sort of thing with Medicare and Social Security: just because $xxx billion was sufficient in 2007, doesn’t mean that $xxx billion is good enough for the future. If the government decides that it just will not pay more than $xxx billion a year for these benefits, well, whoo, boy: there’s going to be trouble.