What the Federal Budget Doesn’t Tell Us

As usual, the White House’s spending plan is getting all the attention. What we should be looking at is how we spend across the public sector.
by | February 22, 2012

Once again, we're consumed with the annual ritual of the president's budget. All of official Washington becomes fixed on the White House's proposals and their impact on deficits, debt, priorities and the economy. While it is the first shot in the annual budget wars, it is by no means the last word, since Congress ultimately decides how the federal government will spend our money.

But the federal budget tells just part of the story. It records only about 60 percent of the public sector's revenues and 69 percent of its spending. The missing part is the budgets for the state and local sector.

Much attention, for example, has been given to the level of revenues in the administration's budget plan (15 percent of GDP) and of spending (24 percent of GDP). However, when looking at the public sector as a whole, total government revenues were 25 percent of GDP in 2010, while spending was 35 percent of the economy. While the total federal deficit was nearly 9 percent of GDP, it topped 10 percent when adding in state and local shortfalls.

In fairness, there is one table in the federal budget's historical tables that puts it all together—back on page 340. Except for those of us who have no life, these tables are bound for the dustbin, not the front page.

What difference does any of this make? Much of the debate about the federal budget is really a broader contest about the role of government. A public debate that focuses exclusively on a single level of government's budget is akin to single-entry bookkeeping that considers only one side of the increasingly intertwined public-sector balance sheet.

A broader perspective on budgeting has become ever more critical as the federal government, states and localities have become increasingly interdependent in delivering public services. State and local governments, employing nine times as many employees as the national government, have become vital partners in implementing most major domestic federal programs, including those involving welfare, health care and environmental protection. The state and local dependence on federal aid is epitomized by the role of a single federal program, Medicaid, that has become the veritable "Pac-Man" of state budgets, squeezing all other spending priorities in its seemingly inexorable growth.

Against this backdrop, there are specific gains to be realized from finding a way to accompany the federal budget with a broader focus on the total public sector:

• Economic policy: The fiscal actions of all levels of government influence the economy, albeit in contradictory ways. The federal government plays a decisive role in stimulating the economy during recessions, but the budget responses of states and localities to economic downturn can serve to prolong them. In the latest Great Recession, the Obama stimulus helped to mitigate state and local spending cuts, but it was not sufficient as state and local job losses served to delay the recovery. While federal officials focused more on the state and local sector during this recession, this was not the case in many past recessions.

Public priorities: Budgets are a reflection of how we as a nation make hard choices across competing priorities with scarce resources. While it is important to know how federal funds are allocated for such priorities as education and health care, it is also critical to understand priorities across the public sector since broad public goals call on the resources of all levels of government. Yet the federal budget provides little, if any, perspective on total public-sector allocations, such as the relative magnitude of federal spending vs. that of states and localities for most domestic-policy areas.

Cost shifting: One of the time-honored ways that governments deal with tight fiscal times is to shift costs to other sectors, whether they be states or private businesses. The Medicaid block grant proposal, for instance, would achieve substantial federal savings—at considerable potential expense to state and local governments. A single-entry bookkeeping approach threatens to obscure these broader fiscal implications while fostering the appearance of fiscal sobriety.

Fiscal stewardship: The absence of a total public-sector perspective in the federal budget is symptomatic of the absence of a broader absence of fiscal comity in our federal system. In many other nations, the national government assumes a level of fiscal stewardship for the fiscal fortunes of lower levels of government, recognizing the imbalance between the limited revenue potential of state or local taxes and the growing expenditure responsibilities thrust upon lower levels of government. We have no such fiscal-equalization or revenue-sharing program. We abandoned the one we had in the 1980s when the federal budget fell into deep deficits, ironically following the recommendation of the one president in recent times who championed federalism: Ronald Reagan.

Let me emphasize that I do not envision some kind of total public-sector budget supplanting the federal budget. Each level of government is fiscally independent and must account for its own policy decisions. However, what is remarkable is how little the realities of fiscal interdependence are manifest in our annual federal budget debate.

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