What is Baseline Budgeting

A "compromise" deal has been reached.  We'll continue to borrow money to pay for an ineffective government to provide unecessary services to a nation, the majority of which does not contribute anything, much less their "fair share."

The deal allegedly calls for "massive" spending cuts.  "Historic reductions in spending" show the purported resolve of our elected leaders to delay our descent into national bankruptcy.  This year our government will spending $3.8 Trillion.  To hear our overlords talk you'd think that next year we'd be spending significantly less than this.  Not so.  In fact, we'll spend more, and more the year after that, and more the year after that. 

If we see massive economic growth for the next 10 years, our projected budget deficits still exceed $8 trillion.  If, on the other hand, our economy continues for the next 2 years to grow at the anemic pace it has for the previous year, or worse, contracts.  The 10 year deficit figures could top $12 trillion.  We could easily double our national debt in 10 years.

But, doesnt' this deal cut $1 trillion in spending?  If you believe that, I have an investment opportunity for you. 

What the deal does is make extraordinarily optimistic ASSUMPTIONS about the growth in the economy, the capture of tax revenues at rates higher than we have ever captured them, and, most importantly, a SLIGHT reduction in the RATE OF GROWTH of government spending.  That's assuming that any of these cuts ACTUALLY HAPPEN.  A commission will make the recommendations, but Congress still has to agree to make it happen.

So, what is baseline budgeting.  Let's assume you're going to spend $1,000 this month and next month you plan to increase your spending by 10% to $1,100 and each month thereafter you increase by 10%.  $1,000 is your baseline.  Pretty soon your budget has increased significantly.  In 10 months, it's more than doubled.  Budget "cuts" under a baseline budgeting method mean you only increase it by 9% or maybe 8% each month.  Yes, you spend LESS than you had originally ASSUMED, but you're not really spending less. 

This is the deal that was struck, and so we continue a long succession of presidents and congresses failing to deliver the necessary fiscal discipline to truly make this a prosperous nation.