THE FEDERAL DEFICIT: HOW DID WE GET HERE?

In the previous newsletter on corporate taxes, I mentioned that having corporations pay their fair share of taxes would help reduce the deficit. The deficit is a hot topic with the federal Super Committee required to submit its recommendations on how to reduce the deficit in 2 weeks. (This is issue #3 of my Politics and Policy Newsletter, written 11/10/11.) 

The deficit does need to be addressed, especially over the long term. However, the strategies for reducing the deficit are hotly contested. The context and rational debate on the deficit often get lost in the heated rhetoric and political posturing. So here’s a first piece of perspective on the deficit.

In 2001, President Clinton turned over to new President George W. Bush a federal budget with a substantial surplus: [1]

• 2001 federal budget: a $127 billion surplus (asClinton left office)
• Projected surplus over the next 10 years of $5.6 trillion

When President Bush left office 8 years later, he had turned this surplus into a substantial deficit:

• 2008 federal budget: a $455 billion deficit (as Bush left office)
• Projected deficit for 2009 of $1.2 trillion and many trillions of dollars of deficits over the next 10 years

The surpluses turned into deficits due to three major reasons:

1. Large tax cuts that particularly benefited high income individuals and corporations
2. Increased military spending (including wars in Afghanistan and Iraq)
3. An economic recession (largely caused by a lack of regulation of the financial industry)

To reduce the deficit, therefore, it only makes sense to reverse the policies that caused it in the first place:

1. Reverse the Bush tax cuts. If all of them were allowed to expire at the end of 2012 as scheduled, future deficits would be cut roughly in half. [2]
2. Reduce military spending. Military spending more than doubled from 2001 to 2008 ($332 billion to $686 billion). All other federal spending increased less than 50% ($332 billion to $494 billion), excluding Social Security and Medicare, which have their own funding separate from general revenue. [3] (Figures are not adjusted for inflation.)
3. Improve the health of the economy, most importantly by increasing jobs and reducing unemployment. (More on this in a subsequent newsletter.)

I hope this is helpful context as you hear coverage of the Super Committee’s work to reach recommendations on deficit reduction. If you are so inclined, I encourage you to contact yourUSRepresentative and Senators by phone, email, or regular mail to share your thoughts on deficit reduction.