Budget Process

Barak Obama has submitted his first ever US budget today. It is a REAL shocker. $3.6 Trillion dollars of spending. Many of those programs are worthwhile endeavors or sound very nice in theory. Let's break that down in reality. Barak Obama said that this budget will be paid for by raising taxes on ONLY those households that make over $250,000 a year or corporate entities. Well, I am here to burst that bubble with some cold hard numbers.

If the government raised taxes on those households that make over $250,000 a year to tax 100% of their income (and IF Paul Revere did not ride down the road shouting "The tax collector is coming") ; the government would collect $1.3 trillion dollars. That leaves $2.3 trillion in unfunded expenditures. Let's put that in terms we can all understand.

Let's say your family has $100,000 of income per year. Let's then say that you spend $163,000 in the course of the year. Would your bank cover $63,000 in overdrafts? Would they loan you the extra $63,000? What about next year? Could you spend that $63,000 (or more) of "unfunded expenditures" over and over again without any repercussions? THAT is what this budget does. 63% of the spending (and that is ONLY in my 100% taxation example) is NOT funded by tax dollars collected. That is not fiscally responsible.

I have some suggestions for our erstwhile elected leaders in their budget process for FY 2010. Perhaps this is new to some of those elected leaders or perhaps they have simply forgotten how to budget in the real world. Hopefully, this will spark some common sense.

When starting with a new year's budget, you need to identify the amount of money that will be available for expenditures. Take the sum of taxes collected in the last year that you have data for - say 2007. Now, since we all know we are in a "recession", subtract oh, say 10% from that number for contraction of incomes (and thus taxes collected). This should be a good number to start with for estimating purposes. This is the sum total of money that you have to spend. Whatever budget you come up with, you cannot exceed this number because then you will be spending money you don't have.

Now, identify all the items that you have in your expense listing that are necessities. This is not "like to have's" or "wish list" items. This is items that if you don't pay, bad things happen. For instance, the light bill for the Capitol, salaries of the military force, rent or mortgages on federal buildings. So, detail that list of items that were paid in that last year you have data from and determine if there have been any inflationary increases (like energy bills). Subtract those amounts from your available funds.

Now, make a list of all the things you spent money on last year that weren't absolute have to's and determine if there are cuts you want to make to this list or increases that must be made for any reason. This would be items like International Support for instance; are there any cuts you can make in these items. Is there any items that you want to grow? Subtract the amount you decide will be spent on these items from the available funds. What you have left is your "discretionary funds". This is money that you can spend on new programs or raises for salaries or other items that you want to introduce or to pay off debts that have been incurred.

Make a list of all the outstanding debts that are left over from other year's budgets. This is your unfunded liabilities list. Some of the "discretionary funds" need to be applied to these items so that you can start to "balance" your debt load. You cannot simply add new programs without making some inroads into paying these debts. Determine what debts will be paid and subtract those amounts from your available discretionary funds.

Now, identify all those new items you would like to put in place. Things that are the "nice to have's"; "want to have's"; "wish list" etc go on this list. Prioritize these items in order of importance or desire. Add up the totals for these new programs and see if they will fit into the budget. If they do, great. If they do not have the funds to cover the spending, you have to do one of two things - cut some of these new programs from the list or make cuts in other budget items.

Once you decide what will be in your expenses list and what will not, add them to your list of expenditures and subtract the amounts from your available funds. Note - remember you cannot go below zero and you should plan to have a small amount left over (say 5%) for reasonable and unexpected expenses. (This is called SAVINGS)

Folks, this is not hard. All US households do this process in some form or another all the time. (Granted some do this better than others) You cannot just shoot pie-in-the-sky budgets into the air and think that you can spend money you don't have and have no hope of ever paying for.

This is called FISCAL RESPONSIBILITY. Let's entreat our elected officials to apply some.