The Heritage Foundation

Executive Memorandum #287 on Federal Budget

October 8, 1990

October 8, 1990 | Executive Memorandum on Federal Budget

The Budget Summit Agreement, Part IX: What Next?


(Archived document, may contain errors)

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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'

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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.

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