Back in 2010, I crunched the numbers from the Congressional Budget Office and reported that the budget could be balanced in just 10 years if politicians exercised a modicum of fiscal discipline and limited annual spending increases to about 2 percent yearly.

When CBO issued new numbers early last year, I repeated the exercise and again found that the same modest level of budgetary restraint would eliminate red ink in about 10 years.

And when CBO issued their update last summer, I did the same thing and once again confirmed that deficits would disappear in a decade if politicians didn’t let the overall budget rise by faster than 2 percent each year.

Well, the new CBO 10-year forecast was released this morning. I’m going to give you three guesses about what I discovered when I looked at the numbers, and the first two don’t count.

Yes, you guessed it. As the chart illustrates (click to enlarge), balancing the budget doesn’t require any tax increases. Not does it require big spending cuts (though that would be a very good idea).

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From The Hill:

The Senate on Wednesday defeated each party’s version of a constitutional amendment that would have required a balanced federal budget.

The rival proposals would have prohibited Congress from spending more each year than it receives in revenue.

But each one fell well short of the two-thirds majority needed to send them to the states for ratification.

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Our national debt has soared past $15 trillion- forcing a historic debate about the proper size and scope of our government. This debate is an enduring one in our great Republic. It will define who we are as a nation – about our future for our children and grandchildren.

The American people are demanding dramatic action. But standing in the way is a President who refuses to back away from his failed agenda of higher taxes and higher spending. This is a President who has presided over the single largest reduction in employment in modern times. This is a President who has tried to tax almost anything that moves. This is a President who has increased the national debt by 35 percent on his watch.

There is only one response to this President and to our spending-fueled debt crisis – that is a constitutional balanced budget amendment that would put a straightjacket on our nation’s addiction to spending money we simply do not have.

This week, the Senate will once again consider a balanced budget amendment, backed by all 47 Republicans in the Senate, to make sure we never face this level of debt again. It requires Washington to balance its budget every year like American families do, ensures that any tax increase only occurs with supermajority approval in Congress, limits Congress’ ability to raise the debt ceiling, and caps spending at 18 percent of our nation’s economy.

It will be a divisive debate, because the President and his liberal allies in Congress cannot allow a balanced budget amendment to succeed. They want to grow government, encroach on liberty, and expand our debt to levels we simply cannot sustain.

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Since I’ve written before about Canada’s remarkable period of fiscal restraint during the 1990s, I am very pleased to see that the establishment press is finally giving some attention to what our northern neighbors did to reduce the burden of government spending.

Here are some key passages from a Reuters story.

“Everyone wants to know how we did it,” said political economist Brian Lee Crowley, head of the Ottawa-based think tank Macdonald-Laurier Institute, who has examined the lessons of the 1990s. But to win its budget wars, Canada first had to realize how dire its situation was and then dramatically shrink the size of government rather than just limit the pace of spending growth. It would eventually oversee the biggest reduction in Canadian government spending since demobilization after World War Two. …The turnaround began with Chretien’s arrival as prime minister in November 1993, when his Liberal Party – in some ways Canada’s equivalent of the Democrats in the U.S. – swept to victory with a strong majority. The new government took one look at the dreadful state of the books and decided to act. “I said to myself, I will do it. I might be prime minister for only one term, but I will do it,” said Chretien. …The Liberals thought their first, rushed budget – delivered in February 1994, three months after taking office, was tough. It reformed unemployment insurance entitlements, and cut defense and foreign aid… The upstart Reform Party, then the main national opposition party, had campaigned on “zero-in-three” – balance the budget in three years. “We were always trying to go faster,” said Reform’s leader at the time, Preston Manning. …The Liberals were stung by the criticism and, at first reluctantly but then with gusto, they got out the chain saws. …Cutting government spending programs went against the Liberal grain. Contrary to the Reform Party, the Liberals saw a more important role for government. Paul Martin now has a lasting reputation as the finance minister who slayed Canada’s deficit, but the conversion from spender to cutter was painful. His father, also called Paul, had helped create Medicare, Canada’s publicly funded health care system, and suddenly here was Paul Junior contemplating massive cuts.

This is a remarkable story. My only real quibble is that the fiscal restraint actually started the year before the Liberal Party took power, as the chart (click to enlarge) illustrates.

But the key thing to understand is that Canada enjoyed a five-year period when government spending increased by an average of only 1 percent each year.

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From The Hill:

Democrats in Congress are urging their party leaders to get behind a balanced-budget amendment (BBA), fearing that Republicans will use the issue as a political weapon in 2012.

President Obama and Democratic leaders in Congress have spoken out against the need for such a measure, but rank-and-file members claim they are falling into a GOP trap.

Instead of speaking out against balancing the budget, Obama and the Democratic leadership should embrace a centrist BBA measure, some Democrats say.

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The Congressional Budget Office has just released the update to its Economic and Budget Outlook.

There are several things from this new report that probably deserve commentary, including a new estimate that unemployment will “remain above 8 percent until 2014.”

This certainly doesn’t reflect well on the Obama White House, which claimed that flushing $800 billion down the Washington rathole would prevent the joblessness rate from ever climbing above 8 percent.

Not that I have any faith in CBO estimates. After all, those bureaucrats still embrace Keynesian economics.

But this post is not about the backwards economics at CBO. Instead, I want to look at the new budget forecast and see what degree of fiscal discipline is necessary to get rid of red ink.

The first thing I did was to look at CBO’s revenue forecast, which can be found in table 1-2. But CBO assumes the 2001 and 2003 tax cuts will expire at the end of 2012, as well as other automatic tax hikes for 2013. So I went to table 1-8 and got the projections for those tax provisions and backed them out of the baseline forecast.

That gave me a no-tax-hike forecast for the next 10 years, which shows that revenues will grow, on average, slightly faster than 6.6 percent annually. Or, for those who like actual numbers, revenues will climb from a bit over $2.3 trillion this year to almost $4.4 trillion in 2021.

Something else we know from CBO’s budget forecast is that spending this year (fiscal year 2011) is projected to be a bit below $3.6 trillion.

So if we know that tax revenues will be $4.4 trillion in 2021 (and that’s without any tax hike), and we know that spending is about $3.6 trillion today, then even those of us who hate math can probably figure out that we can balance the budget by 2021 so long as government spending does not increase by more than $800 billion during the next 10 years.

Yes, you read that correctly.

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I interviewed Congressman Connie Mack (R-FL), via telephone, about his new “Mack Penny Plan,” which is gaining considerable support from both House and Senate Republicans, and even some Democrats.

Congressman Connie Mack did not vote to raise the debt ceiling before the August recess. He was looking for a long-term solution to the nation’s deficits, which are leading to unsustainable debt.

After working with some grass-roots groups, Mr. Mack designed the “One Percent Spending Reduction Act,” or, the “Mack Penny Plan,” which, he says, will cut and cap federal spending, and balance the federal budget in eight years.

In short, the “Mack Penny Plan” would:

• Cut federal spending by 1% each year for 6 years
• Cap spending at 18% of GDP in the 7th year
• Balance the federal budget in the 8th year
• Save taxpayers $7.5 trillion over 10 years

“What’s different about this plan,” the Florida congressman says, “is that it’s pretty simple. We freeze spending at the 2011 level- about $3.6 trillion- and cut 1% of spending for six years- that’s one penny out of every dollar. Everyone has had to cut at least one penny out of every dollar, whether in family or business budgets, so that’s not too hard for the federal government to do.”

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As we tick-tock toward August 2nd, the day President Obama and Treasury Secretary Tim Geithner have set as the day the Executive Branch will have to start prioritizing expenditures – establishing what programs are covered exclusively by actual tax revenue and not borrowed money, we approach an artificial deadline for a secondary issue created by a much more systemic national malady. Where the news media and elected officials argue, whine and mislead on the issue of raising the federal debt limit ceiling, the debt ceiling isn’t even close to the issue that all inside the beltway, but for the TEA Party, are refusing to address seriously: overspending.

Many on the Left side of the aisle have been caught rationalizing the need to raise the debt ceiling by noting it has been raised 78 times since 1960 – 49 times under Republican presidents, and 29 times under Democrat presidents, an irrelevant attribution due to the fact that Congress holds the power of the purse, not the Executive Branch. In fact, if one wants to split hairs about which party has presided over the majority of debt ceiling raises, and, consequently, which party has presided over the most deficit spending, it would be more accurate to point out that Democrats, from 1960 to 2010, have held the majorities in the Senate for 36 years and the House for 41 years. Ergo, Democrats and Progressives are far more to blame than Republicans for bringing the nation to the precipice of financial ruin.

Truth be told, both sides of the aisle are to blame for spending beyond their means, the honest man – or woman – recognizes and acknowledges that Congress has been spending more than it takes in for generations, whether under Republican leadership or Democrat leadership. That said, our nation would be infinitely better served if the news media and the elected class abandoned the blame game and political gimmicks – something that Progressives and especially Pres. Obama are not wont to do, to focus on the urgent need for them to commit to balancing the budget.
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With Sen. Harry Reid (D.-Nv.) leading the charge that killed the Cut, Cap and Balance Act (it apparently was the “worst piece of legislation” he’d ever seen),  and a new deal to break the impasse over raising the debt ceiling looming, it’s appropriate to ask why Democrats hate the idea of a balanced budget amendment.

Americans are forced each day to live with a balanced budget – families can only spend more than their income for a short time without ultimately going into default.  Firms in a private market must live with a balanced budget or they’ll quickly exit industry.

So, why do Democrats hate the idea of a balanced budget amendment?  Such an amendment would force Congress to spend within its means.  What’s the problem with forcing expenses and revenue to equal each other?  It seems to make sense in the absence of some mechanism (like profits and losses in the private market) to incentivize a prudent use of resources, that politicians should be bound to spend within their means.

It’s not that Democrats don’t believe in fiscal discretion or think there are no consequences to amassing a massive debt for future generations to pay.  President Obama has repeatedly stated that deficit reduction is a priority, and he favors a “big deal” to both raise the debt limit and reduce spending by billions.  Democrats in Congress have supported these goals of working hard to reduce the deficit over the next decade.  Listening to lawmakers speak about their desire to cut spending, one would expect wide-spread bipartisan support for a balanced budget amendment.

Not so fast.

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Here’s a new video from the Cato Institute that looks at the “Cut, Cap, and Balance” proposal, and analyzes that budget reform in the broader context of the debt-limit fight and America’s looming fiscal crisis.

The video features my commentary, along with the sage analysis of my Cato colleague Chris Edwards. We make two simple points. First, fiscal reforms are necessary because America faces a Greek-style fiscal crisis if we leave the federal budget on autopilot.

Actually, America’s collapse will be worse since we won’t get a bailout from the IMF. Yet this doesn’t seem to bother President Obama, who apparently views the debt-limit fight as an opportunity for class-warfare demogaguery and transparent efforts to seduce the GOP into a suicidal tax-hike deal.

Second, the fiscal reforms that are necessary should be very feasible since they actually involve relatively modest spending restraint. Genuine spending cuts would be preferable, of course, but merely slowing the growth of spending can put America on a sustainable path.

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The President has issued an ultimatum that more tax revenue must be part of budget negotiations. Indeed, he endlessly repeats his desire for a “balanced approach,” implying that as much as 50 percent of the deficit reduction in any agreement should come from higher revenues.

Because I am a thoughtful, middle-of-the-road, pragmatic guy, I’m willing to accept the President’s ultimatum. I do have one tiny request, however, and that is for any such deal to be based on honest math.

What I mean by this is that I don’t want politicians to approve a budget that results in more spending, but then claim that they “cut spending” because the budget didn’t grow even faster. I want a spending cut to mean less spending (gee, what a novel idea).

And when they talk about new revenue, I want to see how much revenue the IRS is collecting this year, and measure revenue increases against that number. After all, the crowd in Washington should be happy to get more money, even if it is the result of benign factors such as more jobs being created, companies earning higher profits, and people getting more pay.

I assume these are reasonable requests. After all, this is how businesses and households operate their budgets, and I’m sure the political insiders wouldn’t want to use dishonest numbers to mislead voters (perish the thought!).

So what would a balanced approach look like, assuming we want to use honest math? The answer isn’t that complicated. I started with the latest estimates from the Congressional Budget Office for spending and revenues for this fiscal year (FY2011). I then assume, in the interest of a “balanced approach,” that spending should be cut by 5 percent each year and that revenues should climb by 5 percent each year.

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While Minnesota is quickly approaching a July 1^st government shutdown, Governor Mark Dayton refuses to call the Legislators back for a special session. The budget passed by the Legislature not only increases spending to the highest levels Minnesota has ever seen, yet balances the budget without raising taxes. So why did the Governor veto it? He did so because he wanted to add in an extra $1.8 billion in tax increases, which only 8% of Minnesotans want.

The state constitution states no bills can even be considered until the governor calls the Legislature into special session. So the bill written by the House Republicans to continue current funding levels until a deal is made, cannot even be heard. According to recent article by the Examiner, Republicans have been attempting to reach across aisles and work together by offering to match the Governor’s budget on K-12 Education, the courts and public safety. However, if Gov. Dayton isn’t willing to call a special session to pass those bills plus the Transportation Bill, then many jobs will be lost. The reality is that over 20,000 jobs could be kept by just signing the Transportation Bill that works on the dedicated funding.

In an article by the Chanhassen Villager, Senate Tax Committee Chair Julianne Ortman asked, “Why wouldn’t he just agree to our $34 billion budget? It’s the largest state budget we’ve ever had, and it funds all of the state’s essential services. If there’s something critical that we haven’t funded, let’s talk. I think our budget does fund everything that’s critical. I question the governor when he says that he’s really concerned about those folks, but he’s willing to hold them hostage to a tax increase of $1.8 billion. It’s not right.”

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Sunday was an historic day in the state of Wisconsin.

Governor Scott K. Walker put pen to paper and signed his first two-year budget. It erases a defict of more than $3 billion dollars, ushers in significant education reforms and freezes local property taxes…all without raising taxes. When you add in the chaotic atmosphere in Madison and the tumultuous nature of politics in the Badger State, what Walker has accomplished in such a short time is quite remarkable.

From the MacIver News Service:

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There’s a lot of buzz about a Wall Street Journal interview with Stanley Druckenmiller, in which he argues that a temporary delay in making payments on U.S. government debt (which technically would be a default) would be a small price to pay if it resulted in the long-term spending reforms that are needed to save America from becoming another Greece.

One of the world’s most successful money managers, the lanky, sandy-haired Mr. Druckenmiller is so concerned about the government’s ability to pay for its future obligations that he’s willing to accept a temporary delay in the interest payments he’s owed on his U.S. Treasury bonds—if the result is a Washington deal to restrain runaway entitlement costs. “I think technical default would be horrible,” he says from the 24th floor of his midtown Manhattan office, “but I don’t think it’s going to be the end of the world. It’s not going to be catastrophic. What’s going to be catastrophic is if we don’t solve the real problem,” meaning Washington’s spending addiction. …Mr. Druckenmiller’s view on the debt limit bumps up against virtually the entire Wall Street-Washington financial establishment. A recent note on behalf of giant banks on the Treasury Borrowing Advisory Committee warned of a “severe and long-lasting impact” if the debt limit is not raised immediately. …This week more than 60 trade associations, representing virtually all of American big business, forecast “a massive spike in borrowing costs.” On Thursday Federal Reserve Chairman Ben Bernanke raised the specter of a market crisis similar to the one that followed the 2008 bankruptcy of Lehman Brothers. As usual, the most aggressive predictor of doom in the absence of increased government spending has been Treasury Secretary Timothy Geithner. In a May 2 letter to House Speaker John Boehner, Mr. Geithner warned of “a catastrophic economic impact” and said, “Default would cause a financial crisis potentially more severe than the crisis from which we are only now starting to recover.”

Mr. Druckenmiller is not overly impressed by this hyperbole. The article continues with this key passage.

“Here are your two options: piece of paper number one—let’s just call it a 10-year Treasury. So I own this piece of paper. I get an income stream obviously over 10 years . . . and one of my interest payments is going to be delayed, I don’t know, six days, eight days, 15 days, but I know I’m going to get it. There’s not a doubt in my mind that it’s not going to pay, but it’s going to be delayed. But in exchange for that, let’s suppose I know I’m going to get massive cuts in entitlements and the government is going to get their house in order so my payments seven, eight, nine, 10 years out are much more assured,” he says. Then there’s “piece of paper number two,” he says, under a scenario in which the debt limit is quickly raised to avoid any possible disruption in payments. “I don’t have to wait six, eight, or 10 days for one of my many payments over 10 years. I get it on time. But we’re going to continue to pile up trillions of dollars of debt and I may have a Greek situation on my hands in six or seven years. Now as an owner, which piece of paper do I want to own? To me it’s a no-brainer. It’s piece of paper number one.” …”Russia had a real default and two or three years later they had all-time low interest rates,” says Mr. Druckenmiller. In the future, he says, “People aren’t going to wonder whether 20 years ago we delayed an interest payment for six days. They’re going to wonder whether we got our house in order.”

This is a very compelling argument, but it overlooks one major problem – the complete inability of Republicans to succeed in forcing fiscal reform using this approach.

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The man just doesn’t get it.

In his deficit reduction plan unveiled Wednesday, President Obama proposed a spending reduction of only $4 trillion over the next 12 years, a figure that falls significantly short of the spending cuts proposed by the President’s own debt commission. The speech is yet another reminder that Obama is not serious about cutting federal spending in practice, but rather in delivering platitudes in the midst of what is arguably our most serious budget crisis in history.

And so the spending debate rages on in Washington.

Many forward-thinking Congressional Republicans, particularly those who ascended to office on the wave of Tea Party victories, have cautioned that lawmakers ought not to accept a spending plan without making sure they get something in return—in the name of restoring fiscal accountability to Washington.

This is indeed a wise impulse: The national debt now looms at well over $14 trillion. The national deficit hurdles toward $1.4 trillion. Our country’s deficit has now reached such epic proportions that even if the federal government were to seize the total assets of every American billionaire, we could not cover the costs of this year’s deficit alone.

Judging from speech this week, either Obama has not internalized the enormity of our national debt, or he is simply not concerned with it. Whether that epiphany strikes him or not, though, we are teetering on the edge of budgetary meltdown, and something must be done if we wish to avoid a complete and utter national fiscal crisis.

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Just days after the introduction of a very good plan by the Chairman of the House Budget Committee, leaders from the Republican Study Committee in the House of Representatives have introduced an even better plan.

In a previous post, I compared spending levels from the Obama budget and the Ryan budget and showed that the burden of federal spending would rise much faster if the White House plan was adopted.

If the goal is to restrain government, the RSC blueprint is the best of all worlds. As the chart illustrates, government only grows by an average of 1.7 percent annually with that plan, compared to an average of 2.8 percent growth under Ryan’s good budget and 4.7 percent average growth with Obama’s head-in-the-sand proposal.

According to the numbers released by the Republican Study Committee, the burden of federal spending would fall to about 18 percent of GDP after 10 years if the RSC plan is implemented.

While that’s a great improvement compared to today, the federal government would still consume as much of the economy as it did when Bill Clinton left office.

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Many of the politicians in Washington, including President Obama during his State-of-the-Union address, piously tell us that there is no way to balance the budget without tax increases. Trying to get rid of red ink without higher taxes, they tell us, would require “savage” and “draconian” budget cuts.

I would like to slash the budget and free up resources for private-sector growth, so that sounds good to me. But what’s the truth?

The Congressional Budget Office has just released its 10-year projections for the budget, so I crunched the numbers to determine what it would take to balance the budget without tax hikes. Much to nobody’s surprise, the politicians are not telling the truth.

The chart below (click here for larger image) shows that revenues are expected to grow (because of factors such as inflation, more population, and economic expansion) by more than 7 percent each year. Balancing the budget is simple so long as politicians increase spending at a slower rate. If they freeze the budget, we almost balance the budget by 2017. If federal spending is capped so it grows 1 percent each year, the budget is balanced in 2019. And if the crowd in Washington can limit spending growth to about 2 percent each year, red ink almost disappears in just 10 years.

These numbers, incidentally, assume that the 2001 and 2003 tax cuts are made permanent (they are now scheduled to expire in two years). They also assume that the AMT is adjusted for inflation, so the chart shows that we can balance the budget without any increase in the tax burden.

I did these calculations last year, and found the same results. And I also examined how we balanced the budget in the 1990s and found that spending restraint was the key. The combination of a GOP Congress and Bill Clinton in the White House led to a four-year period of government spending growing by an average of just 2.9 percent each year.

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The conservative House Republican Study Committee today will unveil a rescission bill that will save $2.5 trillion over 10 years. It’s a bold proposal that returns federal spending to pre-Obama levels, eliminates remaining stimulus money and ends more than 100 specific programs.

Conservatives want their proposal to set the stage for upcoming spending fights over the 2011 continuing resolution, debt ceiling and fiscal 2012 budget. It’s as much a signal to Republican leadership as it is to President Obama that conservatives are committed to courageous ideas.

The proposal comes amid new fears among conservatives that GOP leaders are hedging on their “Pledge to America” campaign promise to cut $100 billion in federal spending by returning to fiscal 2008 levels.

Because the 2011 continuing resolution expires in March — five months into the current fiscal year — there is concern Republicans might reduce the $100 billion figure by prorating it.

Rep. Jim Jordan (R-Ohio), chairman of the Republican Study Committee, is circulating a letter to Speaker John Boehner (R-Ohio) to ensure the GOP keeps its $100 billion promise.

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Using just a big piece of pork, a large knife, and a small knife, the budget chef shows how to balance the federal budget by 2020.

As a special treat, he does it without raising taxes from the current Bush-era rates!

It seems like a complicated preparation at first, but it’s so simple that almost any elected official should be able to pull it off like a pro!

Domestic and foreign investors will love this, and it will also help create a stable environment conducive to long-term, sustainable economic growth.

Between 2011 and 2020, the Congressional Budget Office estimates that total federal outlays – for defense, agriculture subsidies, Medicare, Social Security, you name it – will total a whopping $42.1 trillion (in 2010 dollars). To bring outlays down to revenue, we need to cut a total of $1.3 trillion in total expenditures over the next 10 years.

That sounds like a really tall order until you realize that it cutting just 3.6 percent a year for each of the next 10 years.

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Co-authored with Veronique de Rugy

A value-added tax, a soda tax, a gas tax, banning earmarks, freezing a portion of federal spending at “pre-stimulus” levels – there’s no shortage of ideas being thrown out to fix the country’s disastrous balance sheet, which threatens not just near-term economic recovery but the possibility of long-term growth. Like last week’s report from the president’s Commission on Fiscal Responsibility and Reform, most of the current plans to fix the country’s finances rely more on increases in revenues than on cuts in spending. In part due to its heavy reliance on revenue hikes, the commission, charged with balancing the budget by 2020, failed to win enough votes of its own members to present its recommendations to Congress.

Which raises the question: Can America really reduce its debt and deficit without raising taxes to job-killing rates or cutting essential services to developing-world levels? The answer is not simply yes, it’s that we have to.

Raising government revenue – taxes – substantially is not only bad policy, it has proven difficult and ultimately unsustainable for any length of time in the past 60 years. Since 1950, annual government revenue, as a percentage of Gross Domestic Product (GDP), has averaged just below 18 percent despite every attempt to jack it up or tamp it down. Our post-World War II experience shows that if the government is going to live within its means, it can’t spend much more than 18 percent of GDP. Period.

Which is one reason to be happy that the debt commission’s recommendations won’t be presented to Congress anytime soon. The report assumes revenue equal to 21 percent of GDP and struggles to get spending to “below 22% and eventually to 21%” of GDP. That’s a recipe for disaster that would guarantee deficits and red ink.

Similarly, former Sens. Bill Bradley, John Danforth, and Gary Hart, working with the Committee for a Responsible Budget, have offered up a plan to balance the budget by 2020 that relies on revenue hitting 20.8 percent of GDP, a level that hasn’t been achieved once in the past 60 years. Republicans have not advanced any realistic near-term plans. Rep. Paul Ryan’s (R-Wisc.) Roadmap to the American Future does not balance the budget until 2063. The pre-election GOP’s Pledge to America is worthless since it fails to provide specifics (and to the extent it does, it is no good).

The current situation is a bipartisan disaster that requires immediate action. Since Bill Clinton left the White House in 2001, total federal spending has increased by a massive 60 percent in inflation-adjusted 2010 dollars. In fiscal year 2010, which ended September 30, the federal government spent $3.6 trillion, or 25 percent of Gross Domestic Product. That’s the most spending, in terms of percentage of GDP, since 1946. Likewise, last year’s $1.5 trillion deficit, as a percentage of GDP, was the largest deficit since 1945.

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