FAQ – What is the Budget and Why It Matters to You –
· What exactly is the budget?
· Where does the money come from, and where does it go?
· Who proposes the budget? What is the process?
· What are the effects of a deficit? Why should I care about it?
· Isn’t there a debt limit?
· What is strange about the President’s 2007 Budget proposal?
· What is the Alternative Minimum Tax (AMT)? Why does it need to be fixed?
· What is “debt service”?
· What about the President’s claim that he cuts the deficit in half over the five-year period of 2004 through 2009?
· What other changes are there in the President’s Budget proposal for 2007?
· What does all this mean for Social Security? Won’t private accounts “save” Social Security?
· What about budget projections?
· What is a “pay-go” system?
· Who is affected by the President’s 2007 Budget proposal?

What exactly is the budget?

The budget is a plan for how the Federal Government is going to spend its money for the next fiscal year – starting October 1st of the current year and ending September 30th of the next year – as well as estimates how these plans will impact the budget in the coming years. It assigns what programs and needs will get funded, which ongoing initiatives will get spending increases and which programs will get cuts. Just as families sit down at their kitchen table to balance their checkbook and plan their spending for the coming weeks and months – groceries, saving for college, an operation, car repairs – the Government does the same thing on a national level.

Essentially, the budget decides which programs will live and which will die. For this reason, Democrats believe the budget is a statement of our national priorities. It is a chance to address problems and make the country a better place for all of us. The values of America’s families - national security, prosperity, opportunity, fairness, community, and accountability – should all be reflected in the budget.

Where does the money come from, and where does it go?

The money that comes into the Federal Government – revenue – comes from a variety of sources. Individual income tax is a major source of funds for keeping the country running. Corporate income tax is also a source, although the percent of money collected from this category has been shrinking in recent years. Social insurance receipts – payroll taxes for Social Security, Medicare, and unemployment insurance – are meant to fund those respective programs. There are also federal excise taxes on certain goods, such as alcohol, tobacco, and gasoline. There are also miscellaneous other sources of revenue.

The revenue then pays for meeting the key needs of the American people. Some of the important “entitlement” programs that are funded through federal revenues include Social Security, Medicare, Medicaid, guaranteed student loan programs, and veterans’ benefits. Some of the other important programs that federal revenues support include the Department of Defense, the Department of Homeland Security, the Federal Bureau of Investigation, Cops-on-the-Beat, No Child Left Behind, Head Start, Pell Grants, the National Institutes of Health, highway construction, and the Environmental Protection Agency.

Who proposes the budget? What is the process?

On February 6, 2006, the President submitted his budget proposal for Fiscal Year 2007 to Congress of roughly $2.77 trillion in expenditures.

The White House’s Office of Management and Budget (OMB) assembles the President’s budget document. This is several thousand pages long. The proposal is then submitted to Congress on the first Monday of February, where it must be approved. The President’s budget includes proposals regarding “discretionary” spending, which is spending that must be appropriated by Congress each year; “entitlement” spending for such programs as Medicare, Medicaid, and veterans’ benefits; and revenues. Many changes are often made to the President’s budget while it is in Congress. For all “discretionary” spending, the new budget is returned to the President in the form of 13 separate spending bills, and the President signs those bills into law. However, this can be a long back-and-forth process. It can take many months for the budget to get through Congress, and even then the President may not sign what Congress has put together.

The Republican leadership has also been instituting “martial law” in the budget process - – ignoring House rules that require the House not vote on final versions of bills until at least three days after they are approved by committees. This means Members are forced to rush through massive last-minute omnibus spending bills – a combination of nine separate spending bills rolled into one complicated mess. As a direct result of this practice, in 2005 hidden Republican provisions that violate taxpayer privacy rights were snuck into the bill and had to be removed by a special session of Congress.

What are the effects of a deficit? Why should I care about it?

Just as a family facing a financial crisis may find themselves spending more than they earn, or a business in trouble is spending more money that it takes in, the Government can have the same problem. Sometimes this occurs because of unforeseen events. But it can also be the result of poor planning, negligence, or misplaced priorities.

Unfortunately, the Bush Administration has turned the record surpluses it inherited into record deficits. The Clinton Administration had three years in a row of budget surpluses, ending with a surplus of $236 billion in 2000. And yet, this year’s deficit is slated to be a record $423 billion, breaking the record 2004 deficit of $412. Counting 2006, the last four deficits have been the largest four deficits in history.

But what do all these deficits mean? Every year that the Government spends more than it takes in, it must borrow money to make up the cost. That borrowing gets added to all the other borrowing – all the other deficits – the country has amassed over time. This is the national debt, and it currently stands at more than $8.5 trillion.

These shortfalls have a significant impact on the U.S. economy. As Alan Greenspan has said, “There’s no question that as deficits go up, contrary to what some have said, it does affect long-term interest rates. It does have a negative impact on the economy.” If chronic deficits raise interest rates, higher interest rates will make borrowing harder for individuals and businesses. Everyday Americans won’t be able to afford homes, cars or college educations if they can’t afford high interest rates. Small businesses will not be able to grow, hire more workers, or even get started if they can’t get affordable access to the capital they need. So the ultimate result is a slower, weaker economy for America’s working families.

Another problem is whom we are doing our borrowing from. While much of the money comes from individuals and corporations through the form of bonds and securities, too much of our debt is foreign-held. By lending us hundreds of billions of dollars each year, foreign countries are making us dependent on them. This can have a profound influence on the future of our country’s economy. Under the Bush Administration, foreign-owned debt has risen to more than 41 percent of debt.

For these reasons, it is crucial that the budget exercise fiscal responsibility.

Isn’t there a debt limit?

Yes, the statutory debt limit was put in place to keep the nation’s annual deficits in check. But the irresponsible policies and fiscal mismanagement of the President and his allies in Congress have continually forced the statutory debt limit higher and higher. On March 20, 2006, for the fourth time in five years, Republicans increased the debt limit to an astounding $9 trillion. These four increases over five years total well over $2.2 trillion. 

What is strange about the President’s 2007 Budget proposal?

The President’s 2007 Budget proposal has several things wrong with it. It omits hidden costs and cuts to a number of critical domestic services, like veterans’ health care, mine safety, and nutrition assistance for women, infants, and children. Perhaps the most noticeable is that the two issues at the top of the President’s agenda – Iraq and privatizing Social Security – are not included in the budget. The war will cost billions this year alone, and the plan to undermine Social Security will eventually cost trillions.

Other massive costs were also left out of the budget. For example, the Administration also included no funding for repairing the Alternative Minimum Tax (AMT), which is estimated to cost $844 billion over the next 10 years. In addition, the budget the President submitted to Congress only covers five years, through 2010 – even though traditionally a President’s budget is supposed to provide figures for the next ten years, not the next five. The result of this is that the President is able to hide most of the costs of making his tax cuts permanent, because most of these massive costs will occur after 2010.

Taking into account realistic war costs, Social Security privatization, making the tax cuts permanent, repairing the AMT and debt service, the Administration’s proposals will add approximately $3.9 trillion to the deficit over the next ten years.

What is the Alternative Minimum Tax (AMT)? Why does it need to be fixed?

The Alternative Minimum Tax (AMT) is a tax that was devised to help stop the nation’s wealthiest income earners from using tax loopholes unfairly. However, over the next few years, millions of middle class families will be hit by the AMT if repairing the AMT is not enacted. If no changes are made, eventually between 30 and 40 million Americans will be rolled into the AMT – middle income households the AMT was never intended for. And yet the President’s budget does nothing to fix this.

What is “debt service”?

Debt service is the interest our Government has to pay for all the money it is borrowing. Just like a family paying back a loan to a bank for a house, the government must pay back its creditors.

Because our debt is so large, our debt service is also extremely large, and every dollar spent on it is a dollar that could have gone towards something more useful. It is essentially a tax on fiscal mismanagement and a tax on the future. To put the size of the debt service in perspective, for Fiscal Year 2004 the U.S. Government spent $160 billion on debt service alone, compared with $60 billion spent on education. So for that year the federal government spent more than two and a half times as much paying interest on the debt than it did on meeting the education needs of our nation’s children. The President’s current budget policies will continue this sad reality.

What about the President’s claim that he cuts the deficit in half over the five-year period of 2004 through 2009?

This claim has no basis in reality. First, the Administration bases its math on the original OMB projection of the 2004 deficit of $521 billion (which outside analysts never believed). The actual 2004 deficit was $412 billion – and the Administration claims it will achieve a deficit of $233 billion in 2009, which is a reduction in the deficit of 40 percent, not 50 percent. But more importantly, the Administration’s projection of a $233 billion deficit in 2009 is completely unrealistic – omitting the costs of the wars in Iraq and Afghanistan, fixing the Alternative Minimum Tax, Social Security privatization, and related debt service. According to calculations of the Democratic staff of the Budget Committee, when these omitted costs are included, the deficit in 2009 will be $419 billion – larger than the deficit in 2004. In other words, instead of cutting the deficit in half, the President will increase the deficit over the next five years.

What other changes are there in the President’s Budget proposal for 2007?

The Administration has aggressively targeted cuts in domestic discretionary spending, which includes services for students, veterans, small business, rural and urban development, Medicaid, environmental protection, law enforcement, and many other programs. These are services that Americans rely on. These reductions and cuts will have devastating effects on the lives of countless Americans, but do little to reduce the deficit. These reductions and cuts will have devastating effects on the lives of countless Americans, but do little to reduce the deficit.

What does all this mean for Social Security? Won’t private accounts “save” Social Security?

First of all, amazingly, the President’s expansive and expensive plans to privatize Social Security are not even mentioned in his budget.

Secondly, not only does the President exaggerate the Social Security problem, the President’s plan to ‘fix’ it would make matters worse and weaken both the budget and the Social Security trust fund. The cost of the President’s plan to privatize Social Security would cost about $750 billion through 2015 alone, even though the plan would not be fully phased in until 2011. Over the first 20 years of full implementation, the plan would cost $4.9 trillion, according to the Center on Budget and Policy Priorities. In addition to creating even larger budget deficits than are currently projected, the plan would sap the Social Security trust funds much more rapidly than under current law, causing them to become exhausted sooner. Far from ‘fixing’ the problems of Social Security, the President’s plan would cause Social Security payroll taxes to fall below expenditures starting in 2012, rather than 2018 as under current law. Furthermore, the Social Security Trust Fund would be exhausted in 2031 under the President’s plan – 11 years sooner than under current law.

What about budget projections?

Responsible budgets are supposed to include projections for the future ten years down the line to examine the full, long-term effects of policies. But the President’s Fiscal Year 2007 budget proposal only includes projections up to 2011, hiding and ignoring the full effects of the President’s damaging policies.

What is a “pay-go” system?

“Pay-Go” (pay-as-you-go) is a system that Democrats want to put in place in order to return to fiscal responsibility and keep American priorities in place. Pay-Go means that spending increases, as well as tax cuts, need to be offset by cuts in other areas – like fewer corporate tax breaks. It is the same approach millions of Americans take when they figure out their own personal budgets.

The Pay-Go system is a Democratic system that was used successfully during the 1990’s to balance the federal budget for the first time in a generation, turning budget deficits into budget surpluses. But Republicans now in control of Congress have refused to reinstate Pay-Go rules. Democrats believe Pay-Go rules that apply to both spending and tax cuts would be a first step toward truly reigning in budget deficits.

Who is affected by the President’s 2007 Budget proposal?

Everyone. All Americans will suffer the consequences of the President’s agenda. At the same time, the massive deficits created by the Administration’s tax cuts and the costs and effects of the Social Security privatization plan will damage the entire nation.

Americans with children need to be concerned about the massive education cuts in the President’s budget proposal. Americans who care about security and safety should be concerned with cuts to the 24.9 percent cut to first responders and the complete elimination of funding for law enforcement terrorism prevention. Americans who believe those in poverty and in need of health care should be shown compassion should be concerned with the President’s plan to cut $60 billion from Medicaid over ten years. Americans who respect and honor the brave men and women who have served in the armed forces and who are currently serving in Iraq and Afghanistan should be concerned with the President’s plans to increase co-payments for health care benefits for veterans.

In short, any American who cares about the future of the county needs to be concerned with the Administration’s budget plans. The President has stated, “Leadership means not passing problems on to future generations.” But it is our children and grandchildren, along with today’s younger workers, who will face the consequences of these disastrous policies. House Democrats will fight for fiscal discipline while defending the values that Americans hold most dear: national security, prosperity, opportunity, fairness, community, and accountability.