Spending cuts? Not quite.

Baseline:
We could expect to receive $39.084 trillion in revenue between 2012 and 2021.
We could expect to spend $46.055 trillion in outlays in the same period, for $6.971 trillion in expanded deficit. Per the CBO

Change:
The bill signed yesterday "calls for up to $2.4 trillion in savings over the next decade."

I'm honestly not sure what will happen to revenue projections for the next ten year. Being a two handed economist, on one hand, lower government spending should leave opportunities for a more efficient private sector to step in. On the other hand, given the uncertainty of the of the federal gov't to pay its bills, markets have frowned. (The S&P 500 is down 1.58% in the last five days).

We can expect spending to decease to $43.655 trillion over the next ten years, and assuming that revenue stays constant, an increased deficit of $4.571.

Is an average annual spending of $4.366 trillion really a huge spending cut, as many popular media sources state? As a comparison, in FY2010 the US spent $3.456 trillion, and the ten years leading up to that year averaged $2.614 trillion. Assuming compounded annual inflation of 3 percent, the average is $2.945 trillion.

Not really the killer spending cuts that you've read about? I suppose when the original spending bar is set so far out of the U.S.'s ability to pay, even large cuts don't bring it back in line.

(HT to: Cafe Hayek for many of the sources.)

Where is my money going?

Even for a numbers geek, such as myself, U.S. spending is a hard thing to wrap my head around. Realizing I indebted myself hundreds of thousands of dollars to buy a house was hard enough.

Reviewing state budgets that throw the word 'billion' around is hard to envision, but possible. ie The state spent more then 5,831 of my houses on Debt Service in 2010. (This is harder to envision when the state does not label, or mislabels data. $1,948 billion, really?)

That is why I love what alot of people are doing with graphical representation of information

http://www.wheredidmytaxdollarsgo.com/

Does just that, allowing me to see, on average, where my federal tax dollars are going.

A state level one could be very interesting...

BHI offers testimony on debt restructuring bill before Senate committee

At the request of Chairman Mark Montigny, the Beacon Hill Institute at Suffolk University offered testimony on "An act relative to debt restructuring," this morning at 11:30 a.m. in Room A-1 of the State House in Boston.

Good afternoon, I am Paul Bachman and I am the Director of Research at the Beacon Hill Institute at Suffolk University. I would like to thank the members of the Senate Committee on Bonding, Capital Expenditure and State Assets for opportunity to testify today and, in particular, Sen. Mark Montigny, chairman.

House Bill No. 4617 would authorize the state treasurer to restructure some $573.7 million dollars in state bonds. Given the current budget problems facing the legislature, restructuring is an attractive option. While the restructuring may serve the best interest of the Commonwealth in the current fiscal year, the state's outstanding debt obligations could become problematic in the medium and long term, particularly in light of the state's current high debt burden relative to other states.

Massachusetts Current Debt Burden

Massachusetts carries one of the highest government debt burdens of all 50 states. The Patrick administration's "FY 2010 Capital Budget & Investment Plan" includes a debt affordability analysis. The report section titled "Existing Debt Burden" cites a 2007 U.S. Census Bureau study that ranked Massachusetts third in the nation in outstanding debt and first in the nation in debt per capita. The report also cites numerous debt measurements by Moody's Investor Services and Standards & Poor's that ranks Massachusetts first in tax-supported debt per capita; second in net tax-supported debt as a percentage of personal income; fourth in total net tax-supported debt and fifth in total gross tax-supported debt.

The A&F report attempts to mitigate these sobering statistics by noting that these figures include certain debt issued by entities other than the Commonwealth for which the Commonwealth is not liable such as the Massachusetts School Building Authority (MSBA). The report also notes that the numbers exclude local debt, which can be substantial in other states that have "stronger county governments and other political subdivisions that issue debt to finance capital improvements." The report observes that "it is safe to assume that Massachusetts would likely rank lower when measuring debt as a percentage of personal income or per capita if both state and local debt were taken into account."

Unfortunately, the numbers do not support this safe assumption. The Beacon Hill Institute used U.S. Census Bureau data for FY 2007 to compare the debt burden of Massachusetts to other states using data for both state and local government. At $89.6 billion in FY 2007, Massachusetts state and local debt represented 28% of state personal income compared to an average of 20% for all states. Massachusetts ranked third, behind Alaska at 35.6% and New York at 28.4%. This outstanding debt represents $13,792 per capita, nearly double the $7,990 average for all states, putting us in second place, again behind Alaska.

The A & F report is technically correct that the Commonwealth is not liable for a portion of the debt, which is issued by entities, such as the $4.6 billion in MSBA debt. In fact, the newly created Massachusetts Department of Transportation holds a large portion of this debt, including debt from the MBTA and Massachusetts Transportation Authority. Moreover, the MBTA debt of $6.2 billion for FY 2009 is no longer subject to the statutory bond cap.

However, it is naive to suggest that the state would not ultimately bear at least partial responsibility for the debts of the MSBA or other agencies in the event of a change in status. I am reminded of the Special Investment Vehicles, or SIVs used by banks to remove risky assets from their balance sheets, which eventually wound up back on the balance sheets of many banks. More recently, European Union member states joined the International Monetary Fund to bailout Greece in spite of the fact that Germany and other European states were not liable for this debt.

Thus, I do not think we can rest comfortably with the notion that the Commonwealth is "not liable" for the debts of these entities. Moreover, I think the debt of these agencies should be included in any future debt affordability analysis.

The Beacon Hill Institute's Competitive Index includes a subindex that measures the state's bond rating against other states. The index has shown that Massachusetts consistently ranks between 22^nd and 28^th over the past five years. The Commonwealth's middle- of-the-pack bond rating doesn't impinge on the state's ability to remain competitive, that is to say to put in place policies that promote economic growth and sustain high levels of income for its citizens. Massachusetts, thanks to the strength of its high tech, finance and human resources sectors, tops our latest ranking. Nonetheless, our index does show that Massachusetts has room to improve (or stay near the top) and our bond rating is one thing we can control to some extent.

The Economic Impact

In isolation, House No. 4617 would have very little, if any impact on the state's ability to issue bonds or to the state economy. However, the bill would allow the legislature and put off unpleasant budgetary decisions in hopes that the extra time will allow the state budget deficit to shrink with a growing economy. A persistent and large budget deficit may tempt the Legislature to use debt restructuring again and again.

Bear in mind that outside factors come into play: 1) federal fiscal policy and 2) a demographic shift. FY 2012 may prove just as challenging as FY 2011 as federal stimulus money dries up and the 2001 and 2003 federal tax cuts expire. Tighter monetary policy, almost a sure thing given the very loose current policy, could also restrain economic growth.

In the longer term, the state cannot push into the future the payment of its relatively high debts indefinitely. Repeated debt restructuring could risk future downgrades to its bond rating and take place in an environment of higher interest rates in the bond market. Also, debt servicing costs would rise and begin to consume an increasing portion of state resources, inhibiting the state's ability to deliver services in the future.

Notes:
Governor Deval Patrick's Five Year Capital Investment Plan FY2010 - FY2014 "Existing Debt Burden" Administration and Finance (2009) http://www.mass.gov/bb/cap/fy2009/exec/hdebtafford_5.htm (accessed May 3, 2010).
² Massachusetts School Building Authority Annual Report 2008 – 2009 http://www.massschoolbuildings.org/uploadedFiles/Pressroom/Newsletters/2208.2009_Annual_Report.pdf (accessed May 3, 2010).
³ Massachusetts Department of Transportation, "Stakeholder Briefing," (October 2009) http://www.eot.state.ma.us/downloads/90_DayReport/briefing100609.pdf (accessed May 3, 2010).

ROBERT SAMUELSON:

Should the United States someday suffer a budget crisis, it will be hard not to conclude that Obama and his allies sowed the seeds, because they ignored conspicuous warnings. A further irony will not escape historians. For two years, Obama and members of Congress have angrily blamed the shortsightedness and selfishness of bankers and rating agencies for causing the recent financial crisis. The president and his supporters, historians will note, were equally shortsighted and self-centered -- though their quest was for political glory, not financial gain.

Let's be clear. A "budget crisis" is not some minor accounting exercise. It's a wrenching political, social and economic upheaval. Large deficits and rising debt -- the accumulation of past deficits -- spook investors, leading to higher interest rates on government loans. The higher rates expand the budget deficit and further unnerve investors. To reverse this calamitous cycle, the government has to cut spending deeply or raise taxes sharply. Lower spending and higher taxes in turn depress the economy and lead to higher unemployment. Not pretty.

As a watchdog, CBO fails

Former BHI intern, SUNY-Albany PhD candidate and owner of the Sociological Imagination, Josh McCabe doubts whether the Congressional Budget Office (CBO) lives up to its reputation as a fiscal watchdog, particularly when it comes to health care.

In reality, the CBO is underestimating their underestimation. Skopol’s fiscal watchdogs must be asleep on the job. Evidence from my home state of Massachusetts confirms my view that healthcare costs will only vastly increase if the package passes. Despite the fact that Obama is basically proposing a federal version of the plan already in place in Massachusetts, nobody likes to talk about the Massachusetts healthcare experiment for partisan reasons. Republicans don’t want to talk about it because it was pushed by then Republican Governor Romney while Democrats don’t want to talk about it because it’s largely a failure. Despite assurances otherwise, the number of new coverage mandates has continued to expand and now Governor Patrick wants to institute ad hoc price controls on insurance rates because nothing has been done to curb rising costs.

Read the whole blog entry.

Explaining the Shadow Budget

Director of Research Paul Bachman describes the Shadow Budget and its application to the Commonwealth of Massachusetts in an interview with Jim Musser of the Mercatus Center.

The "Shadow Budget" is part of a proposal outlined in BHI's latest study, Massachusetts Fiscal Policy: The Legend v. the Facts.

The study also hypothesizes how the Commonwealth of Massachusetts would have performed it a Tax and Expenditure (TEL) were in place since 1999.

Governor Patrick releases House 1 Budget Recommendations

Citing the current economic downturn and declining state revenues, Governor Deval Patrick this morning released his House 1 budget. The $28 billion budget raises registry fees and meals and hotel taxes, draws from the state's rainy day fund and expands the state's bottle bill. The governor also reaffirmed a recent plan to cut $128 million from this year's local aid and $220 million in the next fiscal year.

Flanked by members of this cabinet at the State House, Patrick outlined the "multi-pronged solution" including a fix to the current FY 2009 budget. One part of that effort includes the elimination of sales tax exemptions on certain foods and beverages such as candy and alcohol. This change is expected to generate $25 million this year and $121.5 million next year with funds to be earmarked for public health and wellness programs.

Throughout the press conference, Patrick stressed his efforts to strike a balance between competing interests, long-term goals and commitments and the sharp downturn in revenues.

"The national recession is inflicting serious pain across Massachusetts, from household budgets to the state's balance sheets, and like many residents throughout the Commonwealth, we have to make do with less," said Governor Patrick. "At the same time we also have opportunities. The Economic Recovery Plan leverages reforms and responsible budgeting that could help alleviate the mounting pressure on our communities now and in the future."

Patrick said the the budget may call for more layoffs of state employees. He noted that some programs faced severe reductions "to prevent deeper cuts" down the road.

A portion of the governor's proposed budget relies on federal aid dollars yet to be approved by Congress. The Governor said he was optimistic that the Obama administration would provide states with funds from the stimulus package.

Patrick also unveiled a second Municipal Partnership Act which calls for the an increase in the meals tax and an option for cities and towns to levy their own 1 percent sales tax. It also calls for the ability of local government to tax telecommunications property, a measure that will raise approximately $26 million according to budget documents. The act urges cities and towns to shift more of their retirees to Medicare, a move which won legislative approval last year.

Patrick also suggested that cities and towns could achieve efficiencies from regionalization particularly in the area of contract advertising.

"I anticipate there will be vigorous debate," the governor told reporters. "But endless debate is not acceptable. We need action."

During a question and answer session, Patrick said the state will move to direct all capital gains tax revenue to rainy day fund. In the past, capital gains tax revenue, because of their volatile nature, have made estimates used for planning budgets unpredictable and complex.

New revenue for the FY2010 budget include proposals for:

Meals and hotel taxes ($150 million from a 1-cent statewide increase dedicated to taking the sting out of local aid cuts and $200 million for a 1-cent local option)

Commonwealth Wellness Fund: Earmarking $121.5 million for public health initiatives by eliminating sales tax on alcohol, candy and sweetened beverages.

Expanding the state's bottle bill: Earmarking $20 million for recycling and water and and sewer rate relief by including once exempt beverages such as water, juice, sports and coffee-flavored drinks into the bottle bill program.

Registry fees: Earmarking for the state highway fund an expected $74.5 million from "updated and consolidated Registry of Motor Vehicle fees."

More on the governor's budget recommendations here, here and here.

Press coverage Globe/AP; Herald and Boston Business Journal

Against the grain! A trillion here or there won't help.

A new year of magical thinking.

"The best thing the federal government could do now is avoid the phony Obama tax cut and not increase spending at all. It's time for the Senate Republicans to step up."

David Henderson explains why in Forbes. The rest of us may know why the Republicans can't step up.