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Confusing Deficits with Surpluses and Train Wrecks

Thursday April 10th, 2014   •   Posted by Craig Eyermann at 6:25am PDT   •  

image003 When politicians start confusing deficits for “surpluses”, can a train wreck be far behind?

Before we go any further, for the sake of avoiding any confusion, let’s define exactly what a deficit is. A deficit is the amount by which cash expenses exceed cash income or revenue. That makes a deficit the exact opposite of the situation that exists when there is a surplus.

In fact, if what you spend in cash is greater than the amount you collect in income or revenue, the only way you can possibly get to a surplus is to borrow the difference and then some. That borrowing however doesn’t change the fact that you really have a deficit. And if you keep running a deficit like this, you will eventually experience a fiscal train wreck.

Saying you have a surplus when you’re really running a deficit, as some leading politicians in California are doing right now, doesn’t change that outcome.

Last year, California’s Governor Jerry Brown proclaimed an end to the state’s worrisome and persistent deficit. How did he do it? In the 2012 election he had fed voters the notion that a proposed income tax increase would be spent on education. California voters treat education as a sacred cow, even though the state ranks near the bottom in test outcomes. They passed the ballot issue.

On January 31 last year, the state’s General Fund had a deficit of $15.7 billion. The higher tax rates brought in new money. This, along with internal and external borrowing, made it look as if the deficit had gone with the wind, but it hadn’t. Brown called it a surplus, amid much cheering by the spendthrift legislature.

Fast forward to the end of January this year. The deficit had been whittled down to $12.6 billion. Some surplus!

That’s quite a lot different from the story that Governor Brown was telling just several weeks earlier, as reported by the Wall Street Journal:

On Thursday, Gov. Jerry Brown called the improvement in the state’s fiscal house “good news,” and he proposed spending an additional $10 billion annually for California’s schools. But anticipating calls for further increased spending and preparing for a likely re-election bid, he also urged fiscal restraint as he officially proposed a $154.9 billion budget.

“By no means are we out of the wilderness, we have serious issues before us in terms of long-term liabilities, debts, and we must be very prudent in the way we spend public funds,” Mr. Brown said. However, “after years of drought, and cutbacks and pink slips for the teachers, we are finally able to provide a substantial amount of new money for all the schools of California.”

In the eyes of a politician, a smaller than expected deficit really means that they now have extra money to spend, because they will not consider reducing how much they are planning to borrow.

So how does Governor Brown propose to spend this newfound windfall?

Mr. Brown’s proposed budget increases kindergarten through 12th grade public education spending by $10 billion, sends new money to colleges and universities, and allocates money to expand health-care coverage to millions.

That sounds more impressive than it really is, which becomes clear in the next paragraph:

Mr. Brown also seeks to pay money owed to state schools but deferred during the years of crisis as well as pay back bonds sold to balance the budget 10 years ago, and make some infrastructure improvements. In addition, the budget endorses a plan to strengthen the rainy day fund through constitutional amendment.

In other words, most of the money for K-12 education in California will really be going to partially reset the fiscal shell game that the state government was playing with the state’s public school system in trying to make it appear that the state government was solvent, when it was really running larger deficits. But wait, there’s more!

It also reflects the governor’s commitment to a troubled $68 billion plan to bring high-speed rail to the state by proposing to help finance the project using $250 million in proceeds from selling cap-and-trade pollution credits.

And so, the inevitable fiscal train wreck, when it comes, will be a high speed one!

Featured Image:
National Transportation Safety Board

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April 2014