A Primer on Primary Balance
After two days of hearings on Capitol Hill and reading scores of articles, commentaries, and blogposts about the President’s Budget, there seems to be some confusion about a key accomplishment of this plan: putting the Budget into primary balance by the middle of the decade.
“Primary balance” does not mean that a budget is balanced. It is a technical term that describes something that is actually quite easy to understand. For a moment, put national finances aside and think about the finances of a family.
Imagine a family – already living beyond its means -- where one of the parents is laid off at the same time that the roof of their house needs repair and they are hit by unexpected health expenses. With less money coming in and more money needed to go out, they are forced to charge more and more on their credit card. The result is that they sink deeper in to debt.
The first thing that this family would need to do on the way to getting their finances in order is to stop charging new items onto their credit card. Once they do that, the income they have coming in would be enough to cover their current household expenses. Of course, they would still have the overhang of the debts they incurred, and those debts would grow as the interest payments did. But, the rate at which their debts would grow would slow. They would have reached an important milestone toward being fiscally sound.
While the federal budget is enormously more complex, it works in a similar way. In the years leading up to the Obama Administration, the government was not living within its means, notably, taking on two large tax cuts and a new prescription drug benefit for Medicare without paying for it. Once the economic crisis hit, revenues plummeted just as outlays – including automatic stabilizers such as unemployment insurance and one-time emergency measures needed to jump-start the economy – increased. As a result, our deficits – already large – grew even larger, reaching 10.9 percent of the economy this year.
Like our hypothetical family, what we need to do now that a recovery is underway is to get to the point where our current spending on programs is no longer adding to our debts by increasing the principal that we owe. The 2012 Budget does that: it includes more than $1 trillion in deficit reduction – two-thirds from lower spending -- and puts the nation on a path toward fiscal sustainability.
Specifically, by the middle of the decade, we will be able to pay our current bills and remain in primary balance for the remainder of the decade (for those of you so inclined, go to this table in the Budget and look at the last line on page 176). This does not mean that the federal government is debt-free. It means that the government will be in a place where it is paying for all of its programs—in other words, where spending on government programs will not be adding to our debt, and debt is growing no faster than the economy. Just as no longer charging new purchases to a credit card is a crucial first step for a family to start living within its means, reaching primary balance is an important first step for a nation on the road back from high deficits. That is why one of the charges to the Fiscal Commission was to find a path to primary balance because policymakers on both sides of the aisle saw how important reaching this milestone was.
Reaching primary balance will mean implementing the most deficit reduction since the end of World War II as we go from our current historic deficit of more than 10 percent of GDP to around 3 percent of GDP, the level at which we will reach primary balance and be paying for the government’s programs.
To be sure, reaching this milestone is not enough. The debt is still there, and it is still accumulating interest—just like a credit card bill. And we are going to have to start paying that debt down too. That is why the President has called this budget a down payment, because we will still have work to do to pay down the debt and address our long-term fiscal challenges.
Doing that work will take all sides being clear about our goals, finding areas of agreement, and then exploring where we can work together. The Administration is committed to doing that because what we need now is not more partisanship, but more problem-solving.
Jack Lew is the Director of the Office of Management and Budget.
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