The Budget Summit Agreement, Part IX: What Next?
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THE BUDGET SUMMIT AGREEMENT: PART IX M11AT NEXT?
Several hours ago the House of Representatives rejected the budget
summit agreement - and with good reason. Yet the debate revealed a
fundamental misunderstanding about the package. The proposed budget
woul d not have cut the deficit by cutting spending and raising
taxes. It would have increased both spending and taxes. And then it
would have opened the door for even larger-in- creases in the
future. Further, the economic damage wrought by such a package wou
l d have reduced revenues to Treasury. The result: 71be budget
deficit would have increased. ne vote against the budget summit
agreement was not a major defeat for George Bush. The agreement
itself was a defeat for Bush's central campaign promises: continue
d economic growth and no new taxes. Ile repudiation of the summit
budget is a victory for Bush because it offers him an opportunity
to resolve the budget problem while keeping his promises intact.
71be question now is, what next? There are a number of appr o aches
vastly better than the summit agreemeniL The best is the so-called
"Four Percent Solution." This plan involves no new taxes. It calls
for no program cuts. It would allow spending to increase by 4
percent over the previous year, that is, at the appro x imate rate
of inflation. This would balance the budget by 1994. For greater
deficit reduction, defense spending could be Erozen at the levels
agreed to by the budget summiteers. If Congress and the
Administration find that a 4 percent annual growth in spe n ding
pinches too tight, then they may consider a 6.5 percent solution.
This allows non-defense spending to climb 6.5 percent per year;
this roughly is the level agreed upon by summiteers. This would
balance the federal deficit by 1995. Ile only thing that would
sabotage these budget-balancing schedules would be a tax increase
which strangles economic growth: A 6.5 percent solution would allow
non-defense spending to grow greatly in excess of the rate of
inflation. It would not be a cut at all. Aftaeldng Wa s te.
Congress too finally should attack the waste and unnecessary
spending in the federal budget. The summit agreement made no
attempt to do so. The summit package did not cut funding for
programs or shutdown program that serve no national interest. The
He r itage Foundation has identified a potential $130 billion in
cuts that would lower the budget deficit and eliminate the need for
higher taxes. By raising taxes and pushing the country into a
recession, the summit agreement would have resulted in higher out l
ays for such programs as unemployment and food stamps, less
revenues in the Treasury, and therefore a higher budget deficit. A
new budget agreement should contain real policy reforms to promote
economic growth, which is the best way to generate revenue. O ne
way to do this is to cut the capital gains tax rate. Ibis would not
be a break for the wealthy. Economic statistics long have proved
that a capital gains tax cut is used mainly by middle class
Americans selling their homes'
or their farms or thei r small businesses. Cutting the capital
gains rate, moreover, would trigger business activity that would
bring in billions of dollars of new tax revenues. Bush said at a
press conference that "if Congress really wants economic growth and
increased revenue s , the place to start is not with tax increases
but with incentives for growth, investment - and jobs." Vital
Programs Secure. If Bush and Congress allow the
Gramm-Rudmann-Hollings sequester automatically to cut federal
outlays, it need not be a disaster. F irst, most government
programs that directly help people are exempt from the sequester.
Social Security, Medicaid, food stamps, and the Women, Infants and
Children program are not touched. Second, Congress can shuffle the
mix of cuts, for example, fully f u nding air traffic controllers
and health inspectors while cutting back further in less vital
programs. If sequester is distasteful to lawmakers, they could pass
what is called a continuing resolution. This continues into next
year the current year's spend i ng levels. This would produce
significant real savings while allowing the government to continue
to operate. While there are, of course, some problems with a
continuing resolution, it is much better for the economy than last
weekend's budget summit packag e . If Congress refuses to cooperate
with the President, George Bush can use the 1870 "Antideficiency
Act." Carter Administration Attorney General Benjamin Civiletti
maintained that this act gives the President the authority to incur
obligations in advance o f appropriations by Congress for the
safety of life and the protection of property. 71is would mean, for
example, that the President could allow air traffic controllers and
health inspectors to remain on the job while Congress considers the
budget. The bu d get summit agreement went down to defeat, as well
it should have. The President now has the opportunity to keep his
pledge of economic growth and no new taxes. Congress has the
opportunity to craft a budget that - unlike the summit agreement -
does not in crease programs and taxes. It is possible to balance
the federal budget in the next half-dozen years without raising
taxes and without gutting programs. Edward L Hudgins, Ph.D. Deputy
Director of Domestic Policy Studies
F or further information: Scott A. Hod ge and Robert Rector, "The
Budget Summit Agreement: Part III, No NewTaxes Needed," Heritage
Foundation Backgrounder Update No. 142, October 3, 1990. Scott A.
Hodge, "Rx for the Federal Deficit: The Four Percent Solution,"
Heritage Foundation Backgmnder No . 797, September 4,1990. Scott A.
Hodge, "A $130 billion No-Tax Prescription for the Budget Deficit,"
Heritage Foundation Backgrounder No. 772, May31,1990.