Federal Budget 2010

President elect Barack Obama convened his economic advisors today and one of the challenges he will probably be faced with is how to enact programs that require substantial spendings while, at the same time, find a way to reverse some of the dangerous course the federal deficit appears to be on. On a new site designed as part of the transition into office, the candidate asks for some ideas, effectively trying to use the internet created a government run “for the people, by the people, and of the people.” Here are some ideas I had around the budget…

Balancing the budget

Balancing the budget, or at least lowering the growth of the current deficit, may be a way to signal a change in our national priorities. Doing so would not only appeal to fiscal conservatives but also work as an example to everyone in the country that the days of financing through debt are over. Sending such a strong signal would ensure larger support for some of the programs that are truly needed in terms of restoring the country’s infrastructure and ensuring that every American has access to education and healthcare resources.

The first item would probably be a repeal of the tax cuts enacted in 2001 and 2003. Such financial leger de main didn’t make sense then and it still doesn’t. Repealing those cuts would put anywhere from US$200 to US$300 billions back into the government coffers, which goes some way towards solving the budget deficit gap.

An order asking for a two percent across the board cut for all 2009 discretionary spendings would add about $240 billion in funds, helping handle the rest of the deficit (except for TARP)  and allowing the country to get closer to a balanced budget. The total budget would still represent an increase from the 2008 budget, just not as large a one. Making the cuts mandatory across the board would ensure that the pain is evenly spread and not based on any ideological directives.

Retiring the debt?

Another big question that could be considered would be around what to do with our national debt. Before TARP, interest on the national debt for 2009 were considered to be around US$260 billion. To put this in context, it’s more than what we spend on Medicaid yearly (US$215 billion); or 63 percent of what we spend on Medicare (US$409 billion); or 40 percent of what we spend on social security (US$644 billion); or a bit over 8 percent of the national budget… and that’s just the interest.

Not only that but today, for every US$100 the US government currently spends, it borrows US$14. That’s pretty scary because that money doesn’t come for free and that means that our interest payments will continue to increase over time.

So one could ask whether retiring some of that debt through accelerated payment might be a way to help create a surplus in the future. Since the debt will be crushing on future generations, why not take the hit now and find ways to use some of today’s entitlements as ways to offset those extra payment. For example, if we were to pull out of Iraq, we probably would end up with US$50 to US$100 billion in spendings that are no longer necessary. Assuming we had balanced the budget by other means, could we look at investing that money into retiring our national debt. The premise is the same as that of repaying a little more on your mortgage every month: if you did that, you might shaves years of interest on the back end. In the case of the country, that could means trillions of dollars that could be reinvesting in the country.

Encouraging Investment

Our current infrastructure is crumbling. Whether it is roads, bridges, railroads, or the electric grid, we are dealing wht a 20th century architecture that is not suited for our 21st century needs. For example, one of the biggest holdups in getting cleaner energy in the country is that the electric grid is not built in a fashion that would allow routing energy from low population areas to heavily populated one. Rebuilding the grid to solve that problem would cost about US$60 billion over several years. But here’s an interesting tidbit: that rebuilding could be done by the private enterprises that currently run the grid. The challenge would be in getting different states to agree to play together on setting common rules for building it out, coupled with some possible tax cuts to offset the initial investment costs. Something similar to the tax abatment on internet retail could be put in place around energy to stimulate, for somewhere around 4-5 years, the investment into new infrastructures through some form of private-public partnership.

Also in the public private partnership side would be the creation of a national service program allowing students to go to college for free in exchange for doing national service. The program would take the form of up to 4 years of college tuition paid for in exchange for up to 6 years of working for the country (The program would be sliced in one year increments, with tuition for one year being paid in exchange for 18 months of service). That service could take the shape of work as a government employee either at the state or federal level. Initially, the program would only be available for education through public universities. Private universities who are match the difference between the cost of a public offering and their own cost would later be added to the program, which might help curtail the rise in the cost of education. Service would be compulsory for anyone who has taken a government grant but there would be an opt-out clause that would allow someone to repay the loan in full, with interest, in their first year out of college, allowing them to join the private sector after that.

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