The Super Committee Needs to Update the Budget / Debt Assumptions

Although the 12 members of the "Super Committee" have now been chosen, I was reading an AP article this week by Alan Fram titled "Latest Picks for the Debt Panel Spark Some Pessimism" several comments caught my eye and triggered some other thoughts about the National Debt and the 2012 Budget.  [Doesn't the term Debt Panel sound very familiar to the Death Panel in prior news reports]
http://denver.xfinity.comcast.net/articles/news-general/20110809/US.Debt.Super.Committee/ 
In this article and throughout the news, the phrase of "trimming $1.5 trillion in debt over the next decade" clearly is the challenge to this 12 member committee.  But how misleading are these phrases.  In truth, the panel's only requirement is to reduce the growth of the debt over the next decade, NOT to trim $1.5T from the current debt!  Just to be clear let me state some basic facts about the debt and the 2012 US Budget.

• The current National Debt is $14.5 Trillion
• The estimated 2011 Government Receipts are $2.17 Trillion, with Outlays of $3.77 Trillion for a 2011 Deficit of $1.60 Trillion
• Over the next 10 years, to 2021, Government Receipts total $37.93 Trillion with Outlays of $47.32 Trillion for an 10 year deficit of $9.39 Trillion.
• This creates a National Debt in 2021 of $24.86 Trillion.  Remember that this does not include any Supplemental Spending which I discussed in my posting 3/10/2011 titled "Annual Deficits and the National Debt"
• Over the past 10 years, through 2010, Supplemental Spending totaled $3.45 Trillion which could therefore, increase the 2021 National Debt to $28.31 Trillion!
• So the job of this "Committee" is to reduce the 2021 Debt to $23.36 Trillion (or $26.81T if you add supplemental spending).  Again for reference, the current Debt is $14.5T.
• This will only reduce the Growth of the Debt from 4.85% to 4.21% compounded annually. 

For those who have interest in the source of this data, most comes from Table S-3, of the Summary Tables on the following link: http://www.whitehouse.gov/omb/budget/Overview and the historical numbers come from this same link and click "Historical Tables".

Now with this background estabished, how could a slight reduction in the debt be achieved by the committee.  I would start by looking at the big ticket items in the budget which many of you may know already, but there was one surprise for me.  And also note that Non-security discretionary spending represents only 9.9% of all outlays over the next 10 years!

National Defense is the largest and is part of the Discretionary or Appropriated Programs.  The total Discretionary budget over these 10 years is $14.14 T of which Defense is 2/3's.  So, a 10% reduction over these 10 years would just about do it!  Skipping Social Security for a moment, the next largest, is Income Security.  This includes Federal Employee Retirement, Unemployment Compensation, but also includes Housing Assistance, Food/Nutrition Assistance, and Other.  Putting a 10% reduction on just part of this area would easily obtain the other $.10 T.  JOB DONE!

But lets get real in the context of the current politics, current economic conditions, S&P downgrade and the requirement of a Balanced Budget Ammendment vote. The Democrats want to maintain all the social programs and the Republicans want to be revenue neutral.  In the paragraph above, you can see that is quite possible.

But we must now put the entire 2012 Budget up against the current economic realities.  What ecomonic assumptions are built into the Budget?  GDP growth is forecasted to be 5.1% compounded annually for these 10 years as you can see below.

Looking at the previous 20 years from 1988 to 2008 (Great Recession), the compound GDP growth was 5.4%.

 Many financial experts are now forecasting that US GDP growth will more likely be in the 2 - 3% range in the new global ecomony.  This certainly will have some effect on the predcited Goverment Receipts, especially Income Tax Receipts.  Below is the Individual Income Tax forecast in the Budget.

So the Budget is assuming a 9.7% compound growth in Income Tax collected when the GDP budgeted growth is only 5.1%!  Has the tax growth been this high recently?  In the chart below, the same period from 1988 to 2008 is evaluated.

As you can see, the compound growth over these 20 years is only 5.4%, which is very close to the GDP growth.  Seems the budget is a bit agressive on these assumptions, and it is much the same for Corporate Income Tax.  But, what would happen over these 10 years if the Government Receipt growth was much lower?  Of course it would add to the future deficits and debt!  But how much?  If we grew total Receipts at only 5%, this would add an additional $9.22 T to the debt.  If Receipts grew at only 3%, the debt would increase by $12.22 T! 

Putting this all together, how does the country look in 2021, assuming 3% GDP growth, 5% growth in Tax Receipts (agressive), no new taxes, and an additional  $1.5 T deficit reduction by the committee (plus the $.8T already done, gives $2.3T).  This would produce a National Debt in 2021 of

$31.78 T (assuming no Supplemental Spending).  If we held the Publicly held debt around 70%, it would produce a Net Government Debt of 111% of GDP.  For reference, currently we are 72%, Greece is 152%, Ireland is 95%, Italy is 101% and Japan is 128%.  For the US to stay at our 72%, the Super Committee would need to find an additional $7.80 T in spending cuts! 

Lets try to quantify this $7.8T in what this would mean in spending cuts based on the current 2012 Budget spending.

1. Cut All Discretionary Spending (Security and non-Security) by 55%
2. Eliminate Social Security, Medicare and Medicaid (Including Receipts)
3. Cut all Non Security Discretionary and Medicaid Spending

I don't think this will ever happen!  So what about Revenue.  You could recover this $7.8 T if you DOUBLED the taxes on the top 20% of wage earners which is also very unlikely.  Soooooo, it seems to me that the committee WILL have to have a balanced approach of both increasing Revenue and cutting Outlays in spite of the politics.  And oh by the way, we have to vote on a Balanced Budget Ammendment being pushed by the same group that does not want to increase Revenue.  This will obviously cause a combination of 1, 2 and 3 above which throws grandma under the train full of the sick and non-working driven by a terrorist!!