Get serious about budget gaps

If you are disappointed in the course of the 2016 campaigns so far, you are hardly alone.

Large and increasing percentages of voters say they are dissatisfied with both the tone and the likely outcome of the presidential primaries, for example. Nearly half (46 percent) of respondents in a recent Pew Research Center poll believe the Democratic frontrunner, Hillary Clinton, would prove to be a “poor” or “terrible” president if she were elected. Even more (59 percent) believe the same about the Republican frontrunner, Donald Trump.

Here in North Carolina, the launch of the gubernatorial contest between Republican incumbent Pat McCrory and Democratic challenger Roy Cooper hasn’t produced the same public revulsion. Neither is calling the other names or insulting the other’s spouse. But the campaign has yet to focus on our state’s major challenges in education, transportation, poverty, and other areas.

In my mind, the overarching issue of the 2016 election is fiscal responsibility. At both the federal and state levels, voters have been promised government benefits or services that are simply unaffordable at today’s rates of taxation and revenue collection. In short, we’ve been conned.

This fundamental problem of fiscal imbalance hangs over everything else. Talk in Washington about massive new expenditures on transportation, health care, education, or the military is just nonsense. The federal government continues to run large annual deficits. Its entitlement programs continue to grow at unsustainable rates. A conservative estimate, from Harvard University economist Jeffrey Miron, is that our federal finances are about $120 trillion out of whack. That’s the sum of the on-the-books federal debt plus unfunded liabilities for Social Security, Medicare, Medicaid, and other entitlements.

Could we eliminate this gap by raising taxes? Miron estimates that would take about a 50 percent increase in federal taxes, starting soon. That’s not likely, to put it mildly, and would be economically ruinous even if politically feasible. It’s important to remember that most Western countries have both far higher tax burdens and far larger fiscal imbalances than we do. America’s gap comes to between 5 percent and 9 percent of gross domestic product, depending on which economic assumptions you choose. By comparison, the gap is about 14 percent of GDP in Germany and 15 percent in France.

Fiscal imbalances aren’t nearly as massive at lower levels of government, of course, primarily because most states and localities require their operational budgets to be balanced against revenues on an annual basis. Still, these governments can and do borrow large amounts of money to fund capital construction, some of which has only a tenuous relationship with delivering valuable services that enhance economic growth over time.

Moreover, North Carolina is among the states that have accumulated unfunded liabilities for employee benefits. Our biggest problem is in the health plan for teachers and state employees. For decades, lawmakers promised public employees that they would receive supplemental health benefits upon retirement. But lawmakers neglected to build up any assets from which to pay these benefits. According to the latest estimate, North Carolina’s unfunded liability for retiree health benefits is $27 billion. To put it in perspective, that’s about 123 percent of the entire General Fund budget for the current fiscal year.

My point here is that candidates for state or federal office ought to be spending most of their time talking about how to bring our fiscal policies in line with our economic realities. A test of their seriousness would be how willing they are to advocate cutting expenditures or whole programs out of government budgets, and how willing they are to be specific about ways to restrain the escalating costs of Medicare, Medicaid, and other health care programs, which are the primary cause of the problem.

Unless Washington and state capitals get their acts together, American government will in the future become primarily a revenue collector for medical providers and retirees. That’s a recipe for economic and political disaster. And it explains why I, for one, am dissatisfied with current campaigns and candidates. Most are simply irrelevant.

John Locke Foundation chairman John Hood is the author of Catalyst: Jim Martin and the Rise of North Carolina Republicans.
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