The new President of the United States has been elected on the promise of fiscal responsibility. He has promised the voters he will not raise taxes, and he will not reduce Social Security or Medicare. He has promised interest groups that he will not reduce Commerce Department spending. By law he cannot reduce the net interest paid on the debt. The President's budget is projected to leave the country with a $230 billion surplus, and he promises not to allow a deficit, unless the U.S. faces a recession or war.
Suddenly, the United States is subject to military attack -- a turn of events not anticipated in the current budget. At the same time, a lingering recession reduces the government's tax revenues and forces the government to increase its spending on unemployment benefits, welfare, housing assistance, food stamps, and other need-based programs. Because of the increased spending and reduced revenues, the nation falls into a projected deficit of nearly $429 billion.
Then Congress passes legislation to increase military spending by 20 percent, to pay for increased security within the U.S. and to pay for a prolonged military response against the attacking country and other potential threats. The President signs this bill into law, increasing the projected deficit to nearly $530 billion.
The President is committed to keeping his campaign promises, in order to maintain support for his reelection. He must protect the programs he promised to protect, and he cannot raise taxes, so he must cut spending on other programs to stay within his new guideline to keep the deficit below $450 billion. The President turns to you, his trusted economic advisor, for help. (Note: While some events in this scenario reflect actual events, others are hypothetical for the purposes of this exercise. Budget figures are actual White House figures of 2005, including spending and revenues of 2005 ).
- Follow this link to the CEE National Budget Simulation.
- To represent the 20 percent increase in military spending, the spending levels have automatically been changed. You can see how this affects the total spending at the bottom of the column.
- Scroll to the bottom of the page to see the effect of the increase in military spending on the "New Surplus" or "New Deficit" (a negative surplus is a deficit). Remember that you need to get this figure below $450 billion. Make note of the relative amounts of the budget spent on each area listed in the table, so that you can decide where cuts might be effective to reduce the deficit.
- Now begin cutting the program budgets as a tradeoff for the increased defense spending. Remember, for political reasons or by law, you cannot make any changes in these areas: Commerce and housing credit, Medicare, Social Security, Net interest, Allowances, and Undistributed offsetting receipts. You can click on the names of the spending areas to see the programs in the respective spending areas.
- Keep cutting programs until you have reached your $450 billion deficit limit. Hint: You will have to cut most programs by at least 7.5 percent to reach your target. When cutting programs, keep in mind that program cuts could seriously affect citizens’ daily lives. Also keep in mind people who may be so angered by program cuts that they will take action to prevent the President’s reelection.
You may be tempted to quickly reach deficit limits by making extreme cuts or even eliminating entire programs. You should consider the real-life ramifications of such cuts, and realize that even 7.5 percent cuts in many programs will have serious consequences.
When you have reached your target, print out your results. Consider which programs you have cut, to help you answer the reflection questions on the Worksheet. When you are finished with the lesson, hand in the paper that you printed along with this worksheet.
You should now write an explanation of the decisions that you made and the justifications for those decisions. If you have individually completed the activity, with your classmates you can discuss the decisions and justifications. Also hand in the printout of the "Your New Budget" page as a way to assess your decision-making skills in this activity.