The Heritage Foundation

Executive Memorandum #289 on Federal Budget

October 10, 1990

October 10, 1990 | Executive Memorandum on Federal Budget

The "New" Budget Agreement, Part I: From Bad to Worse


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R@p!Ss@:n@@tives last week to reject A"n' f".Ptd'esUlffithAMed@m-..taxpay rc!kd t4q. @1.qpc of ON @t Sq M, i:ta49dcni;bddg4dr- agreement. qi4l,. ittm)6go t A wprke h y osed W6Kb e A @4 si eild' 1IM-o ugh tfie-fE lawi=k t%`at'n6t'6!Oy A b.'61padk9go Tiely-gepboxy I.I.Ty .. I nirprint, realized. t iJ:1L iA cause&. Oifep rete sioob kl*: economica 'if we sp ap, unra im mumptio - L !n -m alsq wou i;UM16n-:-Un" g Wet. Menng economy with the large taii -in r ect as ington ins Vii"ei "A" -h h' iders" wbo produced Op original agreemifit responded to tax- i MW package that is megw figs ...9 se. ivoo@ @;Wis iTi M@! @6w-the. vA, e r9flifts WAtfi sm JLtd UiCtl6d\u223\'a7 th 6* growth-destra ing Am. ges. Ev 'di inz e-p;Wmp ye n 08 10 inj &s@ e a.. ;,spe N't 'Ile 0 y advL"' leming con Assionql 'eft - i* comnutt669 With f@fldrimtive ja1z" _ U.SM " "fi T&ng ddV9fitage: gr ng-. - 6 savin e JO -h gs phate, cr pq of ft _y %"s 19 !P.@ hi flici Pihc:aZreeman@-:i w d -df 1w Re. byl gqt .i@ w-hi "My.-by-beth

e dtf '61 'go d@qevwld baye- beeq, a dis lb@.the economy. Not only is the-revised ir WFIMC& _p 1. teT r'commi fte bsto@f Li r.. di i r. -m'"*t*- tWindudingian 1hb' ic n "I ifiiiin t ven bf. fW f J "ran t e 6 9 - th a t't h e. fi n W) bit 41 g-ep t I i- s grow M''herica -him eqJci*:,dncc- the early 19,80L N -NON, -Man but they are almost Jssues pp, y -=mpJeii1 ""'iftid'in theirclMlid-thit it. 'a- folly.4 th p raise iiiiii" h ffi' c-,eilge !y YO.. . .. , ".Wlt ". P.!ec( -rWucing-the.'.r ecord- -133 . ta*.h* 46'in't con a7' iO.@css ftstead of b budget-ioiiie@dment--increases-.thr.. tax ibfti qvith the. added =g to. spoeffied &fi t id-to the-tak-w6firig-pom

new its 'taX the. geik ntpeynu gre2teT ncreases. Proponents ter., s `Vhanahe.@ ,agre. P. t IS OT11" in the 62.9 biffidttiti'the" 46MOak.9jd;:But-.the;qrJgin &r I ;pnt9i#ed'-ap*&h6&tedy1W bil- i'thIie'tdk'- 1)", billibi0be revcqu' losinj.0rcMfioMc\u218\'f2 mng the'qqpi 'i ' .: 1;1 Oiird ... '-.1 1 N. :kL

revenue-raising prowsions, were almost exactly offset by revenue-losing provisions, leaving the im- portant figure - net taxes - largely unchanged. Tl,.e budget resolution passed by the House and Senate, by contrast, increases net taxes by far More than the original agreement. Green Light for More Spe n ding. The original package did little to limit federal spending. The revised agreement does even less. The few positive spending proposals in the initial package, includ- ing reforms of Medicare and unemployment compensation, either are missing from the n e w pack- age or are reduced in scope. Under the initial agreement, Medicare spending was supposed to be $55 billion higher in 1995 than in 1990 - characteriz'ed in Washington parlance as a "cut," since it reduced the rate of increase in Medicare spending. U nder the new agreement, Medicare spending will climb faster. The foregone deficit reduction will be made up by higher taxes on working Americans. In many ways, however, the new agreement simply replicates the bad features of the old one. For example, the o nly genuine cuts are in the defense budget. The other supposed cuts actually are no more than reductions in previously planned increases. Other "cuts" in both the new and old proposals in fact are thinly-disguised tax increases or "fees." Remaining spendi n g savings are either unspecified or budget gimmicks, such as the provision transferring nearly $5.4 billion of revenue from the Postal Service to the general budget, and the provision changing the point in time when certain federal employee retirement ben e fits are paid. Rosy Scenario. The new agreement also continues to use the same discredited economic assump- tions contained in the initial package. The largest tax increase in history is assumed to cause the an- nual rate of economic growth to double in 1 9 91 and triple in 1992. Today's rising inflation and inter- est rates are supposed to fall magically, with long-term interest rates somehow dropping to their lowest level in a quarter century. Of course, if inflation and interest rates do not behave as pro jected, spending will be much higher than the agreement estimates since so many federal programs are tied to increases in the price level.

The newly enacted budget resolution is a victory for politics as usual and the status quo. Budget summit agreements in 1982, 1984, 1987, and 1989 all were enacted with the solemn promise that spending would be restrained, new taxes would be used for deficit reduction, and government bor- rowing would be reduced. In every single instance, however, the deficit rose in th e year following summit agreements as Congress spent every penny of the additional tax revenue and then some. There is no reason to believe that the result will be any different if Congress and the Bush Ad- ministration enact the latest "solution" to the f ederal deficit.

Daniel J. Mitchell John M. Olin Fellow in Political Economy

F or further information: Scott A. Hodge and Robert Rector, "The Budget Summit Agreement: Part H1, No New Taxes Needed, " Heritage Foundation Backgrounder Update No. 142, October 3, 1990. Daniel J. Mitchell, "The Budget Summit Agreement: ?art VIII, Hidden Time Bombs," Heritage Foundation Backgrounder Update No. 146, October 3,1990.

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