Budget Debate: How Would You Balance the Federal Budget?

March 4, 2011

After an introductory reading about the debate now raging in Washington, students try their hand at balancing a projected 2015 budget themselves.

To the Teacher:

Right now, there is a debate raging in Washington, DC. The topic: the U.S. federal budget. Republicans, who gained control of the House of Representatives as a result of the 2010 midterm elections, have said that cutting government spending is one of their key priorities. They have proposed cuts of approximately $60 billion to the current budget and have stated their desire to cut as much as $100 billion. (http://www.huffingtonpost.com/2011/02/13/paul-ryan-gop-budget-cuts-defic...)
President Obama, for his part, favors more gradual decreases, but he too has proposed cuts, suggesting a five-year freeze on discretionary spending.
This lesson is designed to help students better understand what items make up the federal budget, what impact budget cuts might have on their lives, and what options might be pursued to balance the federal budget over the long term.
This lesson is divided into two parts: the first part is an introductory reading. The second part is a small group exercise in which students consider how they might balance a projected 2015 budget by choosing between various options for raising revenue and cutting spending.


Student reading:

Congress Debates Cutting the Budget

Right now in Washington, DC an intense debate is taking place over the federal budget. Republicans—who gained control over the House of Representatives after the 2010 midterm elections—want to cut at least $60 billion in government spending. They cite the budget deficit as their key concern. The New York Times reports that the U.S. federal budget deficit will widen to $1.5 trillion this year. (http://thecaucus.blogs.nytimes.com/2011/01/26/deficit-1-5-trillion-a-pos...)
Democrats and Republicans have arrived at different strategies for approaching this issue. As the Times explained:
The new deficit numbers effectively set the parameters of what is expected to be a fierce fight between Republicans and the Obama administration over fiscal policy. Congressional Republican leaders are calling for immediate steep cuts in spending, while President Obama in his State of the Union address called for a five-year freeze on discretionary spending, which would be a much more gradual approach.
The cuts that are being proposed by the Republicans could have a direct impact on the lives of many Americans. If enacted, they would result in reduced funding in everything from job training programs to community healthcare centers (http://www.cbsnews.com/8301-503544_162-20031200-503544.html).  Budget cuts could also lead to reductions in student loans for college and in the amount of funding available to Head Start programs in local schools (http://www.onlineathens.com/stories/021611/new_786329458.shtml).
Before we join the debate about budget cuts, we need to better understand what is in the federal budget and how our tax dollars are spent.
So, just what is in the federal budget? The federal budget is divided into two main areas: mandatory and discretionary spending. (Source: National Priorities Project)
Mandatory Spending
Mandatory spending is spending that is not up for debate every year. It is budgeted automatically, based on laws that have already been passed. It includes things like Social Security, the U.S.'s main public pension program, which provides most workers with a modest monthly payment when they retire. Social Security also provides support for disabled people who are unable to work. It is funded through payroll taxes paid by those who are still working and their employers. (There is a deduction on people's paychecks specifically to support Social Security payments.)
Mandatory spending also includes two major government healthcare programs, Medicare and Medicaid. Medicare provides healthcare for seniors; Medicaid for low-income people. Previous laws passed by Congress decided who qualifies for these programs. Funding is determined based on who meets the programs' eligibility requirements, rather than through the annual budgeting process.
Another area distinct from (but related to) mandatory spending is the interest on the national debt. This interest adds to the budget every year, regardless of what budget decisions Congress makes.
Discretionary Spending
Discretionary spending, on the other hand, is the money that is debated every year by Congress as it sets the federal budget.
In the future, Congressional leaders have indicated that they will debate reforming the so-called entitlement programs that are now considered mandatory spending. This is partly because rising healthcare costs for Medicare and Medicaid present a major challenge for the federal budget in the long term.
But right now, the budget debate in Washington is just over what parts of discretionary spending should be cut.
Many Americans do not have a very good idea of what is in the budget. For instance, in a 2010 poll, people greatly overestimated the amount of money that is devoted to foreign aid:
Asked to estimate how much of the federal budget goes to foreign aid the median        estimate is 25 percent. Asked how much they thought would be an "appropriate"          percentage the median response is 10 percent.
In fact just 1 percent of the federal budget goes to foreign aid. Even if one only includes the discretionary part of the federal budget, foreign aid represents only 2.6 percent. 
The following pie chart shows how discretionary spending was divided for the 2011 budget:
Obviously, military spending (which includes both the base budget for the Pentagon and funding for wars in Iraq and Afghanistan) accounts for by far the largest area of discretionary spending. However, both Democratic and Republican budget proposals increase the base level of funding for the Department of Defense in the coming years.
CBS News reported that Republican proposals would instead focus on cuts to programs in other parts of the pie (http://www.cbsnews.com/8301-503544_162-20031200-503544.html):
The list shows Republicans would give $2 billion less to jobs training programs than Mr. Obama would, as well as $1.3 billion less to community health centers.
Climate change and energy reform initiatives are a clear target: The proposal would give $1.6 billion less to the EPA and $1.4 billion less to the Department of Energy's Loan Guarantee Authority, which enables the Energy Department to work with private companies and lenders to finance clean energy projects.
Those who oppose such cuts argue that right now, when the economy is still recovering from a sharp downturn, government should be focusing on creating jobs, and that reducing spending in the short term will both hurt the economy and end up costing the government money. Economist Paul Krugman writes (http://www.nytimes.com/2011/02/18/opinion/18krugman.html):
"Slashing spending while the economy is still deeply depressed is a recipe for slower economic growth, which means lower tax receipts — so any deficit reduction from GOP cuts would be at least partly offset by lower revenue.  The whole budget debate, then, is a sham. House Republicans, in particular, are literally stealing food from the mouths of babes — nutritional aid to pregnant women and very young children is one of the items on their cutting block — so they can pose, falsely, as deficit hawks."
On March 2, Federal Reserve Chairman Ben Bernanke appeared before a Congressional committee. CNN reported: (http://money.cnn.com/2011/03/02/news/economy/bernanke_house_testimony/?c...):
Republican proposals to cut up to $61 billion in spending by the end of September. He said such cuts would likely cost about 200,000 jobs and shave a few tenths of a percentage point off the economic growth rate. "We need to keep our eye on deficit reduction but we need to do it in a long-term framework," he said in response to one Democrat's question.
Others who oppose cuts argue that lawmakers must also consider raising revenue through taxes. They point out that, in addition to spending on wars in Iraq and Afghanistan, a significant portion of the deficits created in recent years were produced by tax cuts enacted by the George W. Bush administration. A liberal think tank, the Center for American Progress, argued in 2010 (http://www.americanprogress.org/issues/2010/07/let_cuts_expire.html):
President Bush and a Republican-controlled Congress passed a series of massive tax cuts from 2001 to 2006. Their cuts lowered everyone's taxes, but they were skewed heavily to the wealthy...
All of these tax cuts were passed with a "sunset" provision that will cause them to expire at the end of 2010. Virtually everyone in Congress agrees with the Obama administration that we should make permanent all of the reduced taxes for those who make less than $250,000—that's 98 percent of Americans. The disagreement is limited to those cuts that affect the richest 2 percent of Americans—with conservatives demanding that the wealthiest Americans continue to benefit from the Bush administration's largess...
Extending the Bush tax cuts for the wealthy will cost about $80 billion over just the next two years.
In addition to allowing Bush-era tax cuts to expire, those who oppose cuts to government programs have proposed other means of increasing revenue, such as a tax on Wall Street financial transactions or a tax on carbon emissions, which might help to address global climate change.
Republicans counter that the Bush tax cuts and other tax breaks for individuals and businesses help stimulate the economy—and that any tax increases, even on the very rich, would be harmful. "Raising taxes on any American, and especially small businesses, in a struggling economy is the exact wrong thing to do," said House Speaker John Boehner, "a position shared by not only by my Republican colleagues, and several of my Democratic colleagues, but by a vast number of economists."
Ultimately, Republicans were successful in having the Bush-era tax cuts for the wealthiest Americans extended for two years at the end of 2010.
For discussion:
1. What questions do students have about the reading? How might they be answered?
2. What do you think of the pie chart for discretionary spending? How do you think the pie should be divided?
3. Only certain parts of the budget are currently on the table in the debate about cuts. Why? If you do not have enough information, how might you find out more?
4. What do you think about the specific programs targeted for cuts?
5. What do you think about the idea of raising certain taxes (or reversing tax cuts) as an alternative to cutting spending?


Small Group Activity:

How would you balance the budget?

On November 13, 2010, the New York Times presented readers with an exercise that challenged them to consider how they would bridge the nation's projected 2015 budget gap of $413 billion. Readers could choose between a variety of options—some recommended last year by a bipartisan commission on reducing the deficit, and others proposed by budget analysts of different political backgrounds. The interactive exercise is available the New York Times website at http://www.nytimes.com/interactive/2010/11/13/weekinreview/deficits-grap....
The following handout represents an adapted and abbreviated version of the exercise. It is designed to be used in the classroom, without need for computer access. Note that because this exercise has fewer options than the New York Times version, the handout instructs students to bridge a hypothetical gap of $300 billion.
Print out the exercise and distribute to students as a handout. Ask students to break into small groups.  Ask each group, using the worksheet, to select between the various options.
Toward the end of class, bring the students back together for a final discussion and to compare different groups' budget plans.


Working with your group, decide what options you might choose to cover a hypothetical budget gap of $300 billion. After making your choices, add up the total of the funds noted next to your selections.
Cut foreign aid in half: $17 billion
Eliminate farm subsidies: $14 billion
Opponents believe subsidies help large businesses at the expense of small farms. Supporters believe subsidies protect American agriculture.
Cut pay of civilian federal workers by 5 percent: $14 billion
Reduce the federal workforce by 10 percent: $12 billion
This would eliminate approximately 200,000 federal jobs
Other cuts to the federal government: $30 billion
This includes reduced funds for the Smithsonian and the National Park Service, and closing the Office of Safe and Drug-Free Schools.                                                                         
Cut aid to states by 5 percent: $29 billion
This pressure states to cut funding for schools, police, and other services.         
Reduce nuclear arsenal and space spending: $19 billion
This would cut number of nuclear warheads and end the "star wars" missile defense program.                   
Reduce military to pre-Iraq War size and further reduce troops in Asia and Europe: $25 billion
Cancel or delay some weapons programs: $19 billion
This would cancel some expensive purchases, identified by the Sustainable Defense Task Force as possible cuts.                                                                                       
Reduce the number of troops in Iraq & Afghanistan: $51 billion
This would be a faster withdrawal than the Obama administration now plans, reducing to 60,000 troops by 2015.
Enact medical malpractice reform: $8 billion
The Times explains: "Many doctors believe so-called defensive medicine - ordering tests and procedures to avoid lawsuits - is a major reason health costs are so high. This option would begin to reduce the chances of large malpractice verdicts, and supporters believe, also reduce rising medical costs. Opponents say it could reduce doctors' incentives to avoid errors. The savings estimate comes from the Congressional Budget Office."
Increase the Medicare eligibility age to 68: $8 billion
Raise the Social Security retirement age to 68: $13 billion
This would rise rom the currently planned 67, encouraging people to work for longer.    
Return the estate tax to Clinton-era levels: $50 billion
Those passing on an estate worth more than $1 million to their heirs would have a portion of the estate taxed.
End Bush tax cuts for income above $250,000/year: $54 billion
End Bush tax cuts for income below $250,000/year: $172 billion
Payroll tax increase for high earners: $50 billion
Those making over the current ceiling of $106,000 would have to contribute more to Social Security and Medicare.
Millionaire's tax on income above $1 million: $50 billion
National sales tax: $41 billion
This would add a tax of 5 cents on every dollar for most purchases.
Carbon tax: $40 billion
This option would tax carbon emissions, which scientists believe contribute to global warming.
Bank Tax: $73 billion
This would tax banks based on their size and the amount of risk they take.
Total gap covered by your budget plan:       $___________________________


For discussion:

1. Was covering the hypothetical budget gap more or less difficult than you expected?
2 . Did you have trouble deciding where to make cuts because you needed more information about particular programs? If so, which programs? (The teacher might make a list of these on the board and use them for future discussion and inquiry.) 
3. The least popular choice among New York Times readers was allowing Bush tax cuts to expire for those with income below $250,000 a year. (http://www.nytimes.com/2010/11/21/weekinreview/21leonhardt.html) Did your group choose this option? What were items that were not popular with the class?
4. The most popular choice among New York Times readers was reducing the military to less than its size before the Iraq war. Was this a popular choice in your group? Was it popular among the class as a whole?
5. As young people, do you think you have a different attitude toward increasing the eligibility ages of Social Security and Medicare than might older people?
6. Did doing this exercise change your feelings about the budget debate in Washington? If so, how?
Research assistance provided by Eric Augenbraun.

We welcome your comments. Please email them to Morningside Center at: lmcclure@morningsidecenter.org.