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Economic Forecasts

A Stubborn U.S. Budget

How can the federal government bring revenues and expenses back into balance?

For a moment, let's stop the finger-pointing about how the federal budget deficit got so huge so fast, at the end of the Bush administration and in the first year of Obama's. The causes are many: falling tax receipts in a severe recession, two long wars, tax cuts for everyone, emergency relief for financial markets and the jobless, stimulus spending on infrastructure, and more. I'll let economic historians -- and passionate partisans -- argue about this. The more pressing issue is how to bring revenues and expenses back into balance.

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Whatever is done on the revenue side -- raising taxes, holding them at current levels or cutting them -- must be accompanied by spending restraint. And that's something Congress has never been good at. Members of Congress get elected by saying yes, not no. Public pressure for fiscal restraint is unfocused, but demands for more help from Washington are like lasers.

To understand how hard it is to cut federal spending, consider this: About three-fifths of it -- 57.3%, as I figure it -- goes out in direct payments to individual Americans or is spent on their personal behalf (for example, by health-care and housing providers). Here are the key transfer payments and their share of total federal spending:

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Health care: 23.8% (13% for the general senior population, 7.8% for the poor and 3% for veterans).

Pensions: 22.2% (19% for Social Security recipients, 3.2% for federal civilian and military retirees combined).

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Unemployment benefits: 2.8%.

Food stamps and other nutrition programs for the poor: 2.7%.

Housing subsidies for the poor: 1.7%.

Cash payments to the disabled poor: 1.3%.

Low-income tax credit (direct payment to the lowest earners): 1.2%.

Cash welfare for poor mothers with children: 0.8%.

College-tuition aid (not including GI bill): 0.5%.

Crop subsidies: 0.3%.

Much of this 57% continues on autopilot, as entitlements are not subject to freezing or trimming -- unless Congress changes the authorizing laws. The lobbies for every entitlement are immensely powerful, and they remind Congress that transfer payments are spent almost immediately, supporting consumer demand across the nation.

So what's the biggest area of discretionary spending? Military operations and hardware. At almost one-fifth (19.6%) of next year's budget, defense is the third-largest federal expenditure by function, after health care and pensions.

It's likely that military spending will drift lower over time, as the wars in the Middle East wind down. Obama and Congress are eyeing major cuts in armament programs, but defense contractors will remind the voters of how many manufacturing jobs they support in most of the 50 states.

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What's left of discretionary spending? Well, every other function of government: transportation, education, alternative-energy research and subsidies, public health, medical research, foreign aid, diplomacy, trade promotion, homeland security, law-enforcement aid to state and local governments, disaster relief, environmental protection, national parks, basic science research, space exploration, the arts, and much more.

The problem is, all of these together account for only about 16% of federal spending. Not one of these functions gets even 3% of the budget, and many are well under 1%. They are the scraps and crumbs on Washington's dinner table -- even if a 1% share equals $38 billion in a federal budget of $3.8 trillion.

The big stuff is the hardest to cut -- entitlement payments and defense. Literally uncuttable are the interest payments Washington must make every year -- half of the total to foreign creditors -- on the accumulated deficits of past years. Interest is now 7% of the budget and climbing.

Got your own ideas on where to trim? Maybe Congress will listen before the elections in November.

Columnist Knight Kiplinger is Editor in Chief of Kiplinger's Personal Finance and of The Kiplinger Letter and Kiplinger.com.

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