Sid Mittra
Emeritus Professor

In Washington, D.C., the popular annual festival, a.k.a. the budget battle, has just begun. With great fanfare, on February 10 the Office of Management and Budget delivered the President’s proposed budget for the 2021 fiscal year to the House Budget Committee. It was the largest budget ever–$4.3 trillion with an expected deficit of $1 trillion for the first time in U.S. history. Some saw the Budget as marked dead on arrival, while others claimed it was the most creative budget any president has ever created.  

And with that, the battle lines were clearly drawn. 

Contours of the 2021 Budget

The Congress ultimately decides what to fund and how much is allocated for each program. However, record shows that the President has occasionally found ways to circumvent Congress’s budget allocations. Examples include: spending military budget to build a wall and by refusing to spend the money for a program that Congress allocated. Still, the document does provide a window into the White House’s spending priorities. Of course, past experience dictates that once government programs are created, they’re virtually impossible to eliminate, even if they are no longer useful or have become wasteful.

Here are the key elements of President’s priorities.

            Cuts to Safety Net Programs.  The Budget proposes about $2 trillion cuts in most safety net programs. These reductions encompass, but are not limited to, the following programs: Medicaid, federal housing assistance, food stamp recipients, federal disability insurance benefits, student loan programs, foreign aid, public broadcasting and environmental programs.

            Increased spending. Several projects are expected to get higher funding. The President wants lto boost the defense budget so we can develop state-of-the-art weapons. He also wants to spend more money on areas like restricting immigration, including an additional $2 billion for his wall along the southern border. 

            Medicare Tweaked. The budget includes more than a dozen proposals to streamline the program. But the changes do not represent major structural changes to the program that would reduce benefits or limit who would be eligible for the programs.        

             Deepest Program Cuts. Several programs suffer deep cuts, revealing their disapproval by the President.

1. The budget once again calls for eliminating subsidized federal student loans and ending the public service loan forgiveness program, an incentive for teachers, police officers, government workers and other public servants that cancels their remaining federal student loans after a decade of payments.
2. The President reserved some of its deepest cuts for the Environmental Protection Agency, which would face a 26 percent reduction in funding and the elimination of 50 programs deemed wasteful.
3. The President once again suggested cutting funds for America’s primary food assistance program and continued an effort to reduce the number of adults who can qualify for the Supplemental Nutrition Assistance Program, or SNAP.
4. The administration again proposed to cut funding for the Department of Housing and Urban Development, including programs that help pay for rental assistance for low-income people.
5. The proposed budget slashes discretionary funding for the Commerce Department, which monitors the weather, collects economic data, promotes exports, issues patents and other duties, by more than 37 percent, the largest single cut to any agency.

True Nature of the Problem

Insofar as the passage of the Budget is concerned, the party preferences are clearly established: More defense spending, lower taxes and drastically reduced regulations for the Republicans, and for the Democrats higher spending for domestic programs and no cuts in the established safety nets like Medicare and Social Security.

Now superimpose this built-in conflict on our legal structure and you will have a sense of what is at stake. First the budget has to be approved by the House which currently has a Democratic majority. Then it has to pass through the Senate which has a Republican majority. Finally, the President has to approve the budget passed by both Houses. If he vetoes it, the Congress can override his veto, throwing the country into chaos.  

Of course, the good news is that eventually the Budget will jump through all the hoops so the Congress can approve it and the President can accept it. Failing to do that will mean government will come to a standstill, a situation none of us can comprehend.  

Highlights of Budget Problems

A. The deficit issue. The Budget deficit is expected to reach $1 trillion, which I feel is not sustainable in the long run. The reason is that this deficit is expected to occur during the longest continuous growth of the economy. What would happen when we experience a recession? Also, the size of this deficit is based on rosy economic growth picture. When a realistic number is substituted, the deficit inexorably balloons. 

B. President’s Preferences. The magic wand the President uses to reduce the deficit is to substantially cut domestic programs and trim everything else. His budget would slash the amount spent on domestic discretionary programs by about a third by fiscal year 2030, reducing such spending as measured as a share of the GDP by nearly half to a mere 1.6 percent. He would also cut Medicaid by nearly 20 percent in 10 years and reduce other mandatory program spending by about 12 percent.

At this point it is important to add a caveat. Even if all of Trump’s proposed cuts were implemented, these cuts appear minuscule (only 7% of GDP) when compared with total projected spending of $60 trillion over the decade.  

C. Preference of Republicans.  Republicans, too, are determined to veto the President’s plan for reducing the defense spending from the current level of 3.4% of GDP to a mere 2.2% of GDP by 2030. If implemented, that spending would then be less than what China and Russia spend and would be at par with European countries like France and Britain. Republicans would never allow the President to dethrone our powerful country by taking such a drastic measure.

D. Deficit Reduction. I have stated that the expected budget deficit is not sustainable. If in the future the economy slows down, or interest rates rise, or even if dollar is no longer universally accepted as the world’s reserve currency, the deficit will skyrocket, ultimately leading to disastrous consequences.

            So, what’s the solution?  

Proposed 2-Cs Solution

After examining various options currently available, I have concluded that only two options are viable, which I prefer to call the 2-Cs Solution.

            C-1: Compromise

Yes, even though the country is split between two political parties, a budget compromise constitutes a winning strategy. This is possible if both tax hikes and domestic spending cuts are on the table. While delicate and thoughtful negotiations are at the heart of this strategy, both sides can begin to prepare for their jockeying positions, recognizing that this is their best chance for getting what they want while agreeing to allow members of the other party what they value most. Once that delicate balance is reached, a general agreement, or a consensus, will become a reality.

            C-2: Crisis

If the country suddenly faces an unexpected crisis, all bets are off. Depending on the nature of this crisis, the government will justifiably abandon the normal budget constraints and take drastic measures to quickly end the crisis. In such an environment, both parties will come together, as they always have in the past, and mutually agree on a consensus plan.

The Bottom Line

As is always the case, the nature of the final budget will largely depend on the way the presidential election will ultimately shape up. So, for n ow, we conclude that the he jury is still out.

             Please stay tuned.

Travis Smith, CFP, provided technical support for this article. Freelance editor Katy Koontz provided editing. However, the author takes full responsibility for the contents of this blog. 

Travis Smith, CFP, and David Doane, Emeritus Professor, provided technical support for this article.  However, the author takes full responsibility for the contents of this blog.