Debt Ceilings and the Federal Budget

Debt Ceilings and the Federal Budget

Josh

By Josh Loveless

It’s January 2013!  That means it is time for many of us as families, businesses, churches, and organizations to start enacting our financial plans for the next twelve months.   As individuals, or business owners, our financial plans likely include an assessment of our financial situation at the end of the previous year, and a strategy that will dictate our financial plans for this year.

The main vehicle in financial planning for a week, month, or year is a budget.  Budgets are critical in conducting any kind of financial transaction.  I wanted to write today about the purpose of a budget, and why it is so important, especially at a federal level.  I know this should be elementary finance, but hopefully you the reader will take a moment to follow along, because there is a larger point to be made about our nation’s current situation.

I would like to quote Wikipedia in order to establish a baseline definition of budgets upon which everyone can agree:

A budget (from old French bougette, purse) is a financial plan and a list of all planned expenses and revenues. It is a plan for saving, borrowing and spending.

A budget is an important concept … an organizational plan stated in monetary terms.

In summary, the purpose of budgeting is to:

  1. Provide a forecast of revenues and expenditures, that is, construct a model of how our business might perform financially if certain strategies, events and plans are carried out.
  2. Enable the actual financial operation of the business to be measured against the forecast.
  3. Establish the cost constraint for a project, program, or operation.

From: http://en.wikipedia.org/wiki/Budget

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In other words we use a budget as a blueprint by which we can conduct financial transactions, providing confidence that plan adherence will lead to goal achievement.  In examining that statement a little further we can draw some obvious conclusions:

  1. In order to create a budget, we first need to know and understand our current financial situation, including a candid assessment of the success or failure of previous budgets.
  2.  We must actually have quantifiable end goals established that we wish to reach with at least one ultimate date by which we want them achieved.  For families this might include saving for retirement or a vacation, or paying off debts.  For businesses, it might mean saving for a new computer system, targeting profits, or finding monies to provide a pay raise for employees.
  3. Budgets are NOT for simply tracking what we spend.  A budget is the detailed plan not the game, like a playbook in sports.  As a coach we must however hold ourselves accountable to the playbook.
  4. Budgets are not just random numbers and data points arbitrarily splashed on an excel spreadsheet, a budget provides information.

All of this seem obvious to everyone?  What does this have to do with our country?  Like many of our households the United States of America is in a state of financial disaster.  For example, I am guessing by now we’ve all seen the debt clock.  If you haven’t recently, check it out at www.usdebtclock.org.

This IS a government of the people, by the people, and for the people.  The picture that is painted by the U.S. debt clock is one that should deeply concern every single American citizen, even those who pay few taxes.  Thanks to information like this, many Americans are finally starting to ask the two most important questions about our financial situation:

  1. How did we get here?
  2. How do we get out of this mess and avoiding repeating our mistakes?

There are lots of proposed answers out there.  Some of them are very complex.  Republicans and Democrats alike have numerous recommendations, designs, and campaign pitches addressing both.  But it seems to me that neither side is telling America the simple, hard truth:

We are here because we’ve abandoned rudimentary financial principles, and the only way out is to reestablish them as requirements.

That means that the United States Government needs a financial plan that includes all of the basic points discussed above.  We need to establish quantifiable goals with reasonable time frames.  We need to have a plan for reducing our debts.  And MOST importantly we must pass a budget.

The news is all abuzz about the federal budget, and the debt ceiling.    The truth is that for at least the last 12 years (probably much longer) these two implements have been nothing more than political gimmicks.  In fact it is so much so that the debt ceiling has NEVER been decreased, and was raised 90 times in the last century.  That’s nearly once a year.

Debt Ceiling

Your federal government has not passed a budget since April 29, 2009.  In fact the White House is now claiming that a budget is no longer necessary, and that the Congress should simply cede the debt ceiling power to the president.  These financial tools, once grounded in fiscal common sense, are now used as nothing more than talking points meant to deceive or divide the public.

From a financial perspective, every American household and business knows that not having goals, plans, or a budget is tantamount to economic suicide.  But this basic fact appears to escape the political class.  This makes the tax hikes we passed at the end of last year essentially meaningless.  It is unconscionable to demand an increase in borrowing before establishing how much is needed and why. It is time for this nonsense to come to an end.

We the people need to demand that our congress get serious about our financial situation.  We need to demand that our Congress and our President lay out a common sense financial plan with clear, attainable, quantifiable goals.   We need to demand that they pass, and adhere to a budget that is specifically designed to meet those goals.  We need to hold them accountable when they don’t follow the plan.  If our congress and our president cannot do this, they are not public servants; they are usurpers and abusers of power and should be replaced.  Let us not forget where the money they are entrusted with comes from: our time, labor, ingenuity, and prosperity; not theirs.

Debt Ceiling height

2 responses to “Debt Ceilings and the Federal Budget

  1. Great thoughts Josh. Well thought out and well written. I can’t help but think that our government is hiding their financial crimes under the guise of complexity–the complexity that they have created in the tax code, the complexity that they have created with the fed, and the complextity they have created with such a large government with endless departments. Of course, the solutions are found in very simple principles such as the ones you outline above.

  2. So true Dave! And they want to tell us it’s TOO complex to resolve. And that the running the government isn’t like running a business or a home. B.S. I worked for the State of Utah for 7 years, as well as other not for profits. Even when you can’t accurately predict revenue and spending you can still do financial planning.

    Let’s not also make the mistake of allowing the political class to attempt to convince us that due to it’s difference and complexity that there aren’t immutable common sense fiscal factors at work in ANY budget or economy.

    The most important of course is that when you spend more than you take in you MUST incur debt. Once incurred that debt MUST be serviced. Even destroying your creditor has a price and counts as servicing, there is no other way out than to pay it in some way.

    The second is that a budget DOES NOT equal a financial plan. A financial plan however MUST include a budget. The budget is the playbook, not the game itself. The playbook needs to account for as many scenarios as possible. And most importantly it must have rules and constraints so that we know when we are stepping out of bounds.

    This is why any business is relentless in driving its sales staff (the other half of my career) to forecast and forecast accurately. A budget should include the steps that service debt, plan for the unexpected, include projected revenue, include expected savings, and include projected expenditures.

    While no one (not even the best private company) can predict the future, the point is to plan for the worst and hope for the best. 46 states in the U.S. have some constitutional provision requiring a balanced budget. Many of them do this while incurring/servicing debt and setting aside “rainy day” funds for unplanned events. Is the federal government really so different?

    In the case of the federal budget, we DO have all these facts and figures. We have massive, complex, and varied forecasts in fact. The folks at the CBO are actually quite effective. I’ve pursued through a lot of the data they present, and I can tell you many of the businesses I’ve worked for don’t even come close to the kind of scrutiny and scenario planning they provide.

    The CBO has however been so largely ignored over the last 8 years that they might as well be laid off. The budget process has become nothing more than a gimmick, one we’ve pretty much thrown out all together. And worst of all, we have NO plan whatsoever coming from Congress on how to actually manage our financial future. In fact, the White House and the President repeatedly said during the fiscal cliff negotiations that they don’t believe we have any financial problems and that if we can just spend more everything will be hunky dory (madness!).

    So I think the point is not so much to say that congress should do everything we do in our home budgets. I think we make the comparison because it so clearly shows in certain cases how ludicrous and unprincipled our policies really are.

    These are just my opinions of course. And I am willing to concede that there are a hundred other ways of dealing with our problems. But that’s just it… we aren’t even dealing with them, we’re just paying them lip service. Raising taxes without knowing the real impact for example is meaningless and makes zero difference. (Which is one reason why the TEA party is so incensed because it’s just a class warfare power play).

    I say no more gimmicks. We can’t keep pretending that 1-2 = 1, or 1+1=11. If we do, we will eventually have to service our debt in very very ugly and difficult ways….

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