economic stimulus (10): prepare for budget cuts

November 2, 2008 | Vetting explained

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Last updated: November 2, 2008

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After having spent all the money for a massive stimulus program in order to keep the unemployment in check, governments will have to start thinking hard about how to cut their budgets, not just a little bit, but dramatically. As I have shown in my series of articles, we are facing an economic contraction more than 27% and more from unemployment, caused by a $1000/month income/cost gap of the average American. Market mechanisms fail and risks from derivative bets need to be contained. Governments need to sweep up the unemployed through infrastructure, education, and military programs in order to tighten the labour market. State and local governments have to keep their cost up and rely on the Federal government for massive deficit funding. The food and energy supply needs protecting in order to avoid disastrous consequences. Our future investments need to focus on geothermal energy production and hydrogen distribution. I proposed abandoning corporate income taxes in turning the education system into a competitive mechanism in order to render America the most competitive nation in the world. Finally, in my last article I proposed to cut the wings to partisan politics. Many of my proposals aim at short term cost boosts and substantial long term cost reductions. What most societies the world over have forgotten that governments should spend when times are turning bad, but they should not spend when times are good. Note: all rough calculations and numbers are based on current values. Inflation is not taken into account in this article. The government income side It should be possible that a sales tax of 20% on everything, including services (excluding food) should pay for government budgets on all levels a few years after an economic recovery sets in. One tax that is fully transparent should be the ONLY income for government. Everything else sounds not only complicated but it smells of corruption. No buts and no ifs (you can convince me otherwise and I'll incorporate it). A future government should build equity, and debt should be repaid from mandated state profits. Deficits and debt should no longer be acceptable in government, except for hard times. That was the easy part. It is simple, not difficult to implement, measurable by anyone, and fully transparent. After the economic crisis is going to be "over" and normality resumes at a lower level the income out of sales tax would be about $1 trillion for the Federal government and about $650 billion for state governments. Normality would be AFTER debt will have to be driven down because the cost in interest rates for future debt will disable governments. Social Security/Insurance is supposed to be a neutral item, and is thus not treated separately here. The government spending side The Federal Government The spending side for governments is more difficult to address. Firstly, we have to assume a horrendous debt load after having financed America through the crisis. Depending on the level of unemployment, we can expect additional spending of about $2 trillion per year on top of the "normal" $3 trillion deficit that pops in as of next year. Thus, within 5 years, the debt load will be a whopping $36 trillion. The interest payments on that debt alone will reach about $850 billion by 2014 if a comparable interest load is applied as for the 2008 debt of $11 trillion, which I believe sits below a modest 2.5 %. The Federal Government must thus refinance its debt load at lower levels as quickly as it can and also lock in future financing at the lowest possible rate. If the government can secure its debt at 1.5% instead, the cost will be $540 billion. It can quickly be seen that the Federal government will need roughly an extra 5 points in emergency fund directed sales tax with a sliding scale until the debt is driven down and eliminated. That neutralizes interest payments in the budget equation. Unfortunately, the beast will starve otherwise. While 25% sales tax sounds high, the total state income and spending would still be well below 20%, which would be fantastic compared to many European countries where the state rate has reached more than 50% of GDP. Thus, if there is a goal in sight, Americans can pull together and pay even more to reduce the load on future generations. * From the $1 trillion, Defense will eat up 50 %. * Social Security is neutralized as per above. * Basic health care, with the new approach of $100/month base insurance and high deductibles, total health care cost, including private extended health care insurance should run below $ 1 trillion per year. The government share of the basic plan would run at less than $350 billion per year. * The new education financing should stand at about $2 trillion per year and cost about $ 50 billion per year. * Discretionary government spending should be eliminated altogether. * Other mandatory programs need to be cut or reorganized to bring the total cost down to below $100 billion per year. This is what the Federal Government should have to do with and my basic proposals, while expanding cost at first, point to exactly that direction. The Federal Government should start its reorganization now as that in itself is going to be part of economic stimulus. The state governments State governments would retain income of about $650 billion from earlier $850 billion. However, state and local governments would no longer bear the cost of education, except for primary education. The rest would be financed by the Federal Government. Similar to the Federal Budget, state budgets have to be stripped and every mandate and activity has to be renewed with solid majorities. Governments can exist with tighter budgets. A focused government is more powerful than a wasteful and distracted government. Cuts will have to be made as soon as a recovery is in sight. In fact, some of them are "automated" because businesses will start demanding workers again and they will have to be pulled off the military and infrastructure programs. This article is part of a series of articles focussing on what local, state and federal governments need to do now in order to address the upcoming economic Depression. economic stimulus (1): the disabled consumer at http://www.ireport.com/docs/DOC-132064 economic stimulus (2): focus on income and equity at http://www.ireport.com/docs/DOC-132067 economic stimulus (3): quarantine risk at http://www.ireport.com/docs/DOC-132200 economic stimulus (4): sweep up the unemployed at http://www.ireport.com/docs/DOC-132202 economic stimulus (5): bailout state governments at http://www.ireport.com/docs/DOC-132205 economic stimulus (6): protect food and energy supply at http://www.ireport.com/docs/DOC-132795 economic stimulus (7): invest into the future at http://www.ireport.com/docs/DOC-132856 economic stimulus (8): be globally the most competitive at http://www.ireport.com/docs/DOC-133022 economic stimulus (9): change politics at http://www.ireport.com/docs/DOC-133026 economic stimulus (10): prepare for budget cuts at http://www.ireport.com/docs/DOC-133113 Please comment. I will try to address questions, if I can. H.R. Tschudi, economist and entrepreneur, Vancouver

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