A daunting task on the federal budget

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President Obama will release his proposed 2012-13 budget in early February. Over subsequent months, members of Congress will debate and attempt to score political points on the budget, especially in an election year, while special interests with their snouts stuck deep in the federal trough will seek to suck up even more taxpayer dollars.

Make no mistake, the federal budget has a real and significant impact on our economy. Unfortunately, contrary to assorted political claims, that effect — beyond various core duties, such as national defense — is overwhelmingly negative, particularly at recent levels of federal spending.

Reining in federal spending stands out as a critical, but daunting endeavor if our economy is to get back on a path of strong growth.

On Jan. 13, President Obama tried to claim the mantle of fiscal responsibility. He asked Congress for the authority to merge six federal agencies dealing with business and trade — the U.S. Department of Commerce’s core business and trade functions, the Small Business Administration, the Office of the U.S. Trade Representative, the Export-Import Bank, the Overseas Private Investment Corporation, and the U.S. Trade and Development Agency.

Any effort to truly streamline and eliminate duplication in government is welcome. The projected savings for taxpayers would tally up to $3 billion over 10 years. Hmmm. Keep in mind that the federal government, according to the Congressional Budget Office, is projected to spend a staggering $43.9 trillion from 2012 to 2021.

All of a sudden this proposal isn’t very impressive. For good measure, in government-speak, $3 billion in savings does not mean that outlays actually would be reduced by that amount. Instead, it’s about smaller than otherwise assumed increases. The President’s proposal seems less like real streamlining, and more like merely re-labeling what the government is doing.

If this is a signal of what we can expect when Obama releases his budget, Congress will need to take the budget in a very different direction.

It’s important to understand what’s happened in recent years on federal spending. The numbers drive home the lack of fiscal responsibility.

In just two years, from 2007 to 2009, federal outlays increased by 29 percent — from $2.7 trillion to $3.5 trillion. After a small, one-year breather in 2010, when outlays fell by 1.7 percent, spending increased in 2011 by another 4.2 percent. Therefore, over the four-year period of 2007 to 2011, the federal government grew by about one-third. And federal outlays are expected to increase in 2012 as well.

In fact, the CBO forecasts federal outlays rising relentlessly over the coming decade — topping $4 trillion in 2016 and $5 trillion by 2020. And after peaking in 2009 at 25 percent of economy, outlays are projected to stay in the range of 22 percent to 23 percent of GDP as far as the eye can see, according to both the CBO and the Office of Management and Budget. That’s never happened before in U.S. history.

Combine the recent spending binge with the dramatic decline in federal revenues due to the deep recession and poor recovery, and the federal budget deficit has run around $1.3 trillion to $1.4 trillion annually. It’s expected to come in at about $1 trillion this year. As a result, federal debt held by the public has more than doubled since 2007 — going from $5 trillion to an expected $11.3 trillion at the end of this year.

But why is any of this a concern for the economy? After all, didn’t we hear many politicians and even various economists proclaiming that the economy needed big increases in government spending and borrowing in order to get the economy moving? That is, in fact, what liberal Keynesian economists had advised, and what was implemented at the end of the Bush years and throughout the Obama administration. Of course, this hasn’t worked out too well.

Two fundamental flaws exist with this thinking. First, resources spent by the government have to come from somewhere, that is, whether via taxes or borrowing, they are diverted from the private sector. So, in effect, politically driven government spending replaces more productive private investment and spending. Think about government’s fallacious shovel-ready stimulus projects. Not only were they not shovel ready, as President Obama came to admit, but there’s nothing stimulating about politicians doling out dollars.

Second, individuals, entrepreneurs and businesses understand that pushing federal spending to historically high levels, along with unprecedented increases in federal debt, mean that chances increase for higher taxes in the near term and over the long haul.

At a time when the U.S. economy needs pro-growth tax relief, investors and businesses fear possible tax increases. None of this, obviously, is good for economic and employment growth.

If serious about reining in government in order to allow the private sector to expand, then a hard cap must be placed on federal outlays. Mitt Romney, who is seeking the Republican presidential nomination, has called for a spending cap at 20 percent of GDP. That’s well above the 18.2 percent level when President Clinton left office. But it effectively would put federal outlays where they stood in 2007 before the recent explosion in spending. That would be a huge improvement over where we’ve been under President Obama, and otherwise appear to be headed.

Raymond J. Keating is the chief economist for the Small Business & Entrepreneurship Council. His new book is “Chuck” vs. the Business World: Business Tips on TV.