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White House says jobs report is a good sign, but warns of budget cuts

People wait on line to meet with recruiters during a job fair in Melville, N.Y., last year. (Shannon Stapleton ……look out for the impact of across-the-board spending cuts known in D.C. as “sequestration.”

The American economy added 236,000 jobs in the month of February and unemployment dropped from 7.9 in January to 7.7 percent last month, according to new figures released on Friday morning by the Bureau of Labor Statistics.

The White House cheered the report. Alan B. Krueger, chairman of the Council of Economic Advisers, said in a White House blog post that “while more work remains to be done, today’s employment report provides evidence that the recovery that began in mid-2009 is gaining traction.”

But Krueger emphasized that the data came from early February, “before sequestration began.” Those cuts, roughly $85 billion for the rest of the fiscal year, are expected to whittle down economic growth and cost jobs, according to nonpartisan analysts.

“The monthly employment and unemployment figures can be volatile, and payroll employment estimates can be subject to substantial revision,” Krueger said. “Therefore, it is important not to read too much into any one monthly report and it is informative to consider each report in the context of other data that are becoming available.”

Krueger's comments recalled President Barack Obama's March 1 admonition that failing to replace sequestration would hold down what remains a slow but steady recovery—comments that sounded very much like an insurance policy against the potential political damage to come. "Every time that we get a piece of economic news, over the next month, next two months, next six months, as long as the sequester is in place, we’ll know that that economic news could have been better if Congress had not failed to act," Obama said.

Republicans greeted the report as decent news, but they declared the economy was still weaker than it should be.

“Any job creation is positive news,” Republican House Speaker John Boehner said in a statement. “But the fact is unemployment in America is still way above the levels the Obama White House projected” four years ago in the debate over the stimulus package.

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Gov. Jindal says president's budget warnings are scare tactics

Politics Confidential

Louisiana Governor Bobby Jindal (R - La.) accused President Obama of playing "political theater" by warning that looming across-the-board spending cuts set to go into effect on Friday will have a devastating impact on the government's ability to function and provide for the nation's most vulnerable, saying the cuts can be made in ways that are less damaging.

"The reality is that this is just part of political theater, part of the campaign," Jindal told Politics Confidential following a luncheon at the White House for the National Governors Association. "He's trying to scare the American people. He's trying to distort the impact."

The White House released a report Sunday night detailing the state-by-state impact of the cuts known as 'the sequester'; the report says that just in Jindal's state of Louisina, 1,730 fewer children will receive vaccines, while $488,000 will be cut from a nutrition assistance programs that provides meals to seniors, among other cuts.

But Jindal says the president could cut the $85 billion required by sequestration without impacting programs like these.

"Your job as the chief executive is to outline to Congress how you would prioritize these reductions, and you can cut $85 billion and protect critical services," says Jindal, calling on the president. "Every governor has done that. Since I've been a governor, I've done that."

Jindal continued on to say that the president could save tens of billions of dollars by delaying the implementation of new programs that haven't gone into effect yet instead of the cuts outlined in the White House's Sunday report.

To hear more of Jindal’s interview, including why he won’t compromise on tax increases, check out this week’s Politics Confidential.

ABC's Alexandra Dukakis contributed to this episode.

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A closer look at the Ryan budget plan

Rep. Paul Ryan greets the crowd after Gov. Romney introduced him as his running mate Saturday. (Win McNamee/Getty …

Mitt Romney's budget hawk running mate Paul Ryan made his name in Congress by releasing a bold, government-slashing budget proposal that he calls 'The Path to Prosperity." It was first proposed for fiscal year 2012. Democrats have criticized Ryan's budget as a "Darwinian" re-making of the federal government, which would reward the rich and corporations with lower tax rates while cutting safety-net programs like Medicaid by hundreds of billions of dollars. But Ryan and his defenders say he is one of the few people in Washington willing to state the obvious, yet politically risky fact that the nation's entitlement programs aren't sustainable.

President Barack Obama's campaign released a statement Saturday saying Ryan's plan "would end Medicare as we know it by turning it into a voucher system, shifting thousands of dollars in health-care costs to seniors." The attack shows Democrats will use Ryan's budget proposals as a weapon against Romney. But will it work on voters?

Below, we've laid out the five key points from Ryan's "Pathway to Prosperity" budget so that you can judge for yourself.

1. Ryan's budget plan cuts $5.8 trillion over 10 years from projected federal spending and reduces the deficit by $4.4 trillion over the same period. Discretionary spending, which includes programs like food stamps, would see more than $900 billion in reductions. The budget also calls for the repeal of President Obama's health care reform law, which supporters say would save billions in federal subsidies that will be given to lower-income people to buy insurance.

2. The most contentious part of Ryan's proposed budget are the changes to Medicare, the nation's insurance plan for retirees and a political third rail. Ryan's plan would eventually transform Medicare into defined payments that seniors can use to buy private insurance or a government plan on an insurance exchange. There would be no limits to the out-of-pocket costs seniors could pay in this program, but Ryan assumes that the increased competition between Medicare and private plans would bring down overall costs. The amount of money seniors get to buy insurance would grow at a slightly higher rate than GDP each year. (The Congressional Budget Office says this would save the government money, but also significantly increase the amount seniors will eventually have to pay for their own insurance.) The eligibility age would gradually rise to 67, from 65. Democrats say this transforms Medicare into a "voucher program" that may leave seniors with big prescription bills and other medical costs, and the Obama campaign is already using this against Romney and Ryan. If Obama can convince seniors--a powerful voting bloc that turns out at the polls--that Ryan would worsen or weaken Medicare, it could mean bad news for their campaign.

3. Ryan would cut the top federal income tax rate for individuals and corporations to 25 percent from 35 percent. The budget says some tax breaks and loopholes would be eliminated to help offset the revenue loss.

4. Ryan would slash Medicaid, the insurance program for some low-income people, by $735 billion over ten years, and hand the program back to the states to administer with more freedom. The CBO writes that states would most likely have to "reduce payments to providers, curtail eligibility for Medicaid, provide less extensive coverage to beneficiaries, or pay more themselves than would be the case under current law."

5. The budget spares Social Security and defense spending, which are left at current levels. Ryan's decision to back off Social Security is interesting, since he put forward proposals to privatize the program around the same time that President George W. Bush tried to sell the nation on a similar proposal. (Social Security does not face the same solvency challenges as Medicare and Medicaid, and is not projected to grow much as a percentage of GDP over the next 20 years.)

Correction: An earlier version of this article contained a typo.

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Ryan's budget chase could shape his political path

JANESVILLE, Wis. (AP) — There are plenty of reasons for Republican presidential candidate Mitt Romney to choose Rep. Paul Ryan as a running mate.

The whip-smart Wisconsin congressman is from a battleground state. He's the GOP's leading voice on the nation's budget and is the rare member of the Republican establishment who's loved by the tea party.

"If that bridge ever came, I would consider crossing it," Ryan told The Associated Press in an interview this month. He added: "I really don't have tremendous political ambition. I have policy ambition."

Yes, that's the typical humble-speak of someone who's a potential vice presidential candidate. But it's also true that Ryan has let political opportunities pass before, choosing to focus on taming what he calls a "big, dysfunctional government" beset by unsustainable spending.

Those who know Ryan say that means that while Romney ponders whether to ask, Ryan is deciding whether accepting a political promotion is the best way to achieve his "policy ambition."

"He does have more force and authority than he would have in the vice presidency. I think he clearly knows that," said Vin Weber, a former Minnesota congressman and Ryan's supervisor when the two were at a Washington think tank in the 1990s. "So the question becomes, Would that be worth sacrificing to put yourself clearly in line to be the nominee after Romney?"

Romney planned to appear with Ryan on Monday during a visit to a fabric mill in the congressman's hometown of Janesville, a blue-collar city along the Rock River still coping with the mothballing of a GM assembly plant a few years ago.

The ascent has been swift for Ryan, who was voted prom king and the "Biggest Brown-Noser" of his 1988 high school class before leaving for college in Ohio. He maintained his ties to home through summer internships for Republican Sen. Robert Kasten, who later hired Ryan full time. The former senator remembers him as "bright and inquisitive and very consumed" with complex tax policy.

Ryan went on to flourish at a conservative policy institute founded by Republican Jack Kemp. A congressman, a member of the George H.W. Bush administration and GOP presidential nominee Bob's Dole's running mate in 1996, Kemp championed tax cuts as the primary tool for promoting economic growth. Ryan considers Kemp, who died in 2009, his mentor.

By 28, Ryan was back in Janesville winning election to Congress. At 42, he is among the breed of congressmen who sleep in the office rather than put down roots in Washington.

Heavy with both factories and farms, Ryan's district in southern Wisconsin is typically carried by Democratic presidential candidates. His opponents note that part of his success lies in the overtures he makes across the aisle, from party-bucking votes against weakening prevailing wage laws to simpler gestures, like his recent attendance at a wake for the father of a local Democratic stalwart.

Prone to speaking in bar graphs as he warns of "a gathering storm" of debt that will challenge America's way of life, Ryan has also mastered the ability to hang a smile on ideas that generations of politicians have found treacherous.

He casts his push to scale back food stamps and other welfare assistance as empowerment for the downtrodden now lulled into complacency. Opening Medicare to more private competition, he argues, is about preventing an all-out program collapse that would devastate future retirees.

"He's a master politician," said former Wisconsin Democratic Party Chairman Jim Wineke. "I don't have a mean thought in my body about Paul. I just fundamentally disagree with his policies. He puts on a good face for some pretty awful policies."

The global economic crisis and the rise of the tea party, with its focused attention on government spending and debt, have made Ryan's budget plans something of a GOP litmus test. In March, Romney was quick to praise Ryan's latest proposal to slice trillions from the federal budget. Ryan reciprocated soon after with an endorsement of Romney's White House bid.

Picking Ryan as his running mate would be read as a full embrace of his budget ideas. But that assumes Ryan would return Romney's interest.

During President George W. Bush's second term, Ryan pulled his name from consideration for the White House budget director post. He says he didn't think there was the will, particularly in Congress, to address the structural budget changes he believes are needed to avert a crippling debt crisis.

"There were no followers," he said.

More recently, Ryan resisted a call to chase an open Senate seat in Wisconsin. "I didn't want to walk away from the conversation I started and the fight I'm in," he said. By remaining in the House, Ryan can keep an intense focus as budget chairman on his signature issue — something he might not be able to do in a Romney administration.

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Report: Shortchanging IRS budget hurts taxpayers (AP)

WASHINGTON – Congress is damaging the Internal Revenue Service by shortchanging its budget, making it harder for the agency to help taxpayers, detect fraud and bolster revenue collection even as budget deficits surge, a government watchdog said Wednesday.

"The imbalance between its workload and its resources is becoming unmanageable," Nina E. Olson, the national taxpayer advocate, wrote in her annual report on the IRS.

Olson, an independent watchdog within the agency, wrote that agency computers set aside 1.1 million tax returns seeking refunds last year for examination for possible fraud, a 72 percent increase from 2010.

Responding to that and similar problems, the IRS relies increasingly on software to detect bogus returns. But these computer programs make mistakes of their own and limit personal contact the agency has with taxpayers, and one result has been an erosion of the rights of people who have disputes with the IRS, the report said.

"The most serious problems facing U.S. taxpayers is the combination of the IRS's expanding workload and the limited resources available to it," Olson wrote.

Her report came days after the IRS said individuals and companies underpaid their taxes in 2006, the most recent year available, by $385 billion after audits and other enforcement efforts. In recent years, federal deficits have exceeded $1 trillion annually.

The agency collected about $2.3 trillion last year.

Its budget this year is $11.8 billion, $300 million below last year and $1.5 billion less than requested by President Barack Obama.

"The IRS is effectively the accounts receivable department of the federal government," Olson wrote, adding later, "If the federal government were a private company, its management would fund the accounts receivable department at a level that it believed would maximize the company's bottom line."

Rep. Charles Boustany Jr., R-La., a top member of the tax-writing House Ways and Means Committee, said the report highlighted that the tax system "has grown more complex and confusing over the years, reaffirming the need for comprehensive tax reform" — a top Republican priority. He made no mention of increasing the IRS budget.

IRS spokeswoman Michelle Eldridge said to combat burgeoning cases of fraud, the IRS uses congressionally approved compliance programs that are constantly audited to make sure people's rights are protected.

"While fewer dollars in a tight budget environment impacts elements of taxpayer service, it does nothing to erode our protection of taxpayers," she said.

By pointing her finger at the IRS budget, Olson was highlighting a politically sensitive issue. Especially in times of huge budget shortfalls, many lawmakers have little interest in being generous to the widely unpopular agency, which processes 141 million individual tax returns annually, including almost 120 million requests for refunds.

Obama said his IRS budget request would improve tax collections and enhance service, but he was unable to win over lawmakers.

"Like families across the country, the IRS will have to do more with less," Rep. Jo Ann Emerson, R-Mo., who heads the House Appropriations subcommittee that controls the agency's budget, said last fall.

The report blamed growing fraud on people who submit multiple false returns via electronic filing, and the growth of refundable tax credits for purchases of first homes, college costs and other expenses. Refundable credits can produce cash payments to people owing no taxes.

Olson wrote that the IRS handled more than 226,000 cases of identity fraud in 2011, a 20 percent increase over 2010. Thieves often request refunds by using the Social Security number of a person they claim is a relative, frequently filing early before the actual taxpayer submits a return.

"You want to make sure you're not abusing the taxpayers by letting dollars go out the door," Olson said in an interview of efforts to stop cheaters and collect owed revenue. Otherwise, she said, "taxpayers are going to get disgusted" and lose faith in the tax system.

But the agency's increased reliance on computers means it is increasingly using "practices and procedures that harm taxpayers by acting on assumptions of noncompliance arrived at by automated processes that do not solicit, encourage or allow taxpayer response," the report said.

The agency contacted taxpayers 15 million times in 2010 to change their claimed tax liability, according to the report. Only 1 in 10 of those contacts was considered an audit, meaning most were denied the additional rights audits allow, including the ability to go to tax court.

In one measure of error, Olson's bureau received 21,000 complaints from taxpayers last year after the IRS blocked requested refunds because it suspected fraud. Three in four of them eventually qualified for the refunds, which averaged $5,600 and typically took six months to reach taxpayers.

In addition, the IRS corrected 10.6 million "mathematical errors" in taxpayers' returns in 2010, more than double the 4 million it corrected in 2005, the report said. But the IRS itself made mistakes — out of 300,000 returns on which it disallowed exemptions for dependent children, it had to restore the exemption just over half the time.

The report said that at the end of last year, it took the agency more than six weeks to answer nearly half of taxpayers' letters and faxes dealing with adjustments to their returns. And between 2004 and last year, the portion of taxpayers' phone calls the IRS answered fell from 87 percent to 70 percent.

"Few government agencies or businesses would be satisfied if their customer service departments were unable to answer three out of every 10 calls," the report said.

Highlighting tax code complexity, 4,428 changes have been made to the 3.8 million-word code over the past decade, the report said, including an estimated 579 changes in 2010.

___

Online:

IRS National Taxpayer Advocate report: www.TaxpayerAdvocate.irs.gov

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First Person: A Merry Christmas on a Tight Budget (ContributorNetwork)

*Note: This was written by a Yahoo! contributor. Do you have a personal finance story that you'd like to share? Sign up with the Yahoo! Contributor Network to start publishing your own finance articles.

This Christmas, my family has a much smaller budget than in previous years. I have a total of $1,000 dollars to work with. This amount includes presents for family, friends, and travel. It's definitely going to be tight but I have a budget worked out that I think will allow me to fit everything in.

Decorations

Instead of buying everything new this year, we are having a Christmas party with my children's friends and making our decorations. I'm using old decorations, ribbon, pine cones, strings of lights, and pretty much anything I can find that's been used or given to me to make something new. I'm spending a grand total of $10 on glue, new hooks, and glitter.

Travel

We always fly to Palm Springs, California for Christmas to spend time with our family, but the prices for plane tickets are ridiculous. Instead of cutting travel from our holiday budget this year, we are just flying with a discount airline and getting a deal for $99 from Missouri to Los Angeles instead of flying into Palm Springs directly. We have to spend some extra time in the car but the savings are worth it. My ex-husband is paying for the children and I am paying for my ticket. That brings my budget down to $700.

Presents for Friends

I normally spend around $500 on my close friends for Christmas. This year I want to spend around $100 for everyone. I'm making an assortment of homemade cookies and candies with recipes I found in Better Homes and Gardens. I found adorable candy dishes at the thrift store and ribbon at a local dollar store. I had enough left over after buying all of the supplies to make Christmas Cocoa for everyone as well. The total for everything was $97. That brings my budget down to $603.

The Children

My children want expensive gifts every year. This year my son wants Vanilla Speed Skates which are around $300 per pair. My daughter wants an iPad which is even more expensive. Neither of these will fit into my budget for Christmas. I can't just buy them one gift. After travel and friends I have approximately $300 to spend on each child. I found my son's speed skates on eBay for under $100 new, my daughter is getting a knock off version of an iPad from Wal-Mart for $179 and I still have $300 left to buy all of the cute little things they love.

It's been hard to fit a gift for everyone into my budget and still visit family, but I accomplished it by thinking outside of the box. I hope that everyone appreciates the love and hardwork I put into this Christmas.

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Balance the Budget Deficit in 3 Easy Steps (The Motley Fool)

No one in Washington can agree on how to narrow the budget deficit. Not even balance. Just narrow.

The debate over next year's budget alone has been ongoing for months. Progress is obnoxiously difficult. One person wants this, another calls it sacred and says cut that, any number of think tanks say both are wrong, and Paul Krugman thinks everyone's a moron.

Tough problems, these. But as Berkshire Hathaway (NYSE: BRK-B - News) quote machine Charlie Munger said recently, "It's amusing to see someone spend 1 million man-hours on something I can solve with my left hand."

With only partial seriousness, I'm going to do just that, balancing next year's $1.1 trillion budget deficit in three easy steps.

Step one: Return real (inflation-adjusted) defense spending to average 1990s levels
Current projections show $738 billion will go toward defense spending in 2012. That's one-fifth of all federal spending, and more than twice as much as goes toward the Department of Education, veterans benefits, the Department of Justice, the Department of Energy, and the Department of Agriculture combined.

It wasn't always this way. Adjusted for inflation, an average of $373 billion was spent on defense annually between 1994 and 2000. Reverting to similar levels would cut $365 billion from next year's budget.

Now our deficit's down to $735 billion. Where to next?

Step two: Return tax revenue as a percentage of GDP to average 1980s levels
Tax revenue as a percentage of GDP is now just 14.4% -- a fifth below the long-term average, and the lowest level since World War II.

Returning that figure to the 18.3% average seen in the 1980s would draw in $585 billion in additional tax revenue. In fact, you don't even need to go back to the 1980s. Just returning to 2007 levels would mean collecting more than half a trillion dollars more than we do today.

Now our deficit's down to $150 billion. Progress! What next?

Step three: Rationalize Medicare
I'll let former White House budget director Peter Orszag do the talking here:

"Researchers have estimated that nearly 30 percent of Medicare's costs could be saved without negatively affecting health outcomes if spending in high- and medium-cost areas could be reduced to the level in low-cost areas -- and those estimates could probably be extrapolated to the health care system as a whole. With health care spending currently representing 16 percent of GDP, that estimate would suggest that nearly 5 percent of GDP -- or roughly $700 billion each year -- goes to health care spending that cannot be shown to improve health outcomes."

Medicare's 2012 outlays are projected to be $492 billion. Saving "nearly 30 percent," as Orszag suggests could occur without affecting health outcomes, cuts $150 billion from federal spending.

And now the budget's balanced.

Cause and effect
Again, I write this with only half a straight face. It may not be feasible to gut defense spending amid two wars -- and contractors like Boeing (NYSE: BA - News) and Lockheed Martin (NYSE: LMT - News) pay taxes, so cutting $1 lowers the deficit by a smaller amount. Tax revenue as a percentage of GDP has fallen so far largely because unemployment is so high. Making the health care system more efficient is the epitome of the phrase "easier said than done." There are also nonmonetary factors. Is the world safe enough to gut the defense budget? It's a question number-crunchers can't answer. I'm not directly advocating any of this.

Still, these exercises drive home an excellent point New York Times columnist David Leonhardt made last month. I've used this quote before, but its importance bears its repeating:

"Eventually, the country will have to confront the deficit we have, rather than the deficit we imagine. The one we imagine is a deficit caused by waste, fraud, abuse, foreign aid, oil industry subsidies and vague out-of-control spending. The one we have is caused by the world's highest health costs (by far), the world's largest military (by far), a Social Security program built when most people died by 70 -- and to pay for it all, the lowest tax rates in decades."

Willie Sutton robbed banks "because that's where the money is." Those wrestling over how to attack the deficit would be wise to think the same way.

Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics.

Fool contributor TMFHousel. The Motley Fool owns shares of Lockheed Martin. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Budget math: Is too much 'off the table' to really fix US deficit? (The Christian Science Monitor)

Picture a family that gets in over its head in debt. The two heads of the household decide the problem needs urgent attention, but that they won't consider any solutions that involve changes to their income, their mortgage and housing costs, their health care, or their retirement plans.

Now picture that family being the United States, as represented by its elected officials.

That's essentially what's happening now in Washington, as Democrats and Republicans agree on a major problem but not on how to fix it. On Thursday, bipartisan talks led by Vice President Joe Biden continue. After the group met Wednesday, lawmakers expressed optimism about reaching a fiscal deal, even though some key pieces of the nation's finances are currently viewed as "off the table."

RECOMMENDED: National debt ceiling 101: Is a crisis looming?

Republicans generally don't want to consider raising taxes as part of a plan to reduce federal deficits. And the rift between the two parties over how to fix Medicare and Social Security has pushed those entitlement programs to the sidelines.

So the two parties are focused on other parts of the federal budget – such discretionary spending and where to cut it – as they rush to put a fiscal deal in place before Aug. 2. Both sides agree that it's a good idea to act by early August, ideally a bit ahead of that Treasury-announced deadline, to avoid a serious funding challenge for the nation. After that, the government won't be able to borrow, by issuing new bonds, unless Congress has raised the debt limit.

The limited scope of the bipartisan talks doesn't mean they are fruitless.

In fact, as lawmakers left Wednesday's meeting members of both parties struck an optimistic tone about the progress being made. The group is meeting at a stepped-up pace (it will gather again Thursday, for its third meeting of the week) with the goal of setting a framework for legislation by July 4.

Still, because some key elements of the budget aren't in play, it appears likely that the resulting legislation will be a partial solution to fiscal troubles. To truly put the national debt on a track of stabilization or decline, those "off the table" elements will almost certainly need to be part of the solution.

Here's a glimpse of the math: Social Security, Medicare, Medicaid, and interest on the national debt currently account for nearly half of all federal spending –and that total is poised to grow substantially if no changes are made. They are comparable to the role that housing, health care, and retirement plans play in the typical family budget.

President Obama's bipartisan fiscal commission proposed last year that the government should aim to cut projected federal deficits by about $4 trillion over the next decade. Independent advocates of fiscal responsibility have embraced that goal as roughly the amount needed to halt the rapid growth of public debt and maintain investor confidence in the US economy.

For context, even after making $4 trillion in headway the US would still run deficits totaling perhaps $5 trillion over the next 10 years, but the deficit problem would decline when viewed as a share of the overall economy.

Say you wanted to achieve that whole $4 trillion in progress through spending cuts, without touching Social Security, Medicare, or Medicaid. That would require major cuts, probably on the order of 15 percent, to all other parts of the budget.

That "other" part of the budget includes domestic discretionary programs, defense, and miscellaneous spending programs (such as farm subsidies) that Congress has made mandatory rather than subject to annual appropriations. All this spending is projected by the Congressional Budget Office to total some $21 trillion over the next decade.

The fiscal commission estimated that some of the fiscal progress in its $4 trillion total – about $700 billion worth – would come from reductions in expected interest on the debt. Following that logic, cutting about $3.3 trillion (or 16 percent) of that $21 trillion in projected spending might reach the target.Note that if Congress decided some programs shouldn't be cut that much, the remaining spending cuts would have to go even higher.

Defense spending is an example – and not just a hypothetical one. National security accounts for nearly half of that $21 trillion in projected spending over the next decade. So if Congress decided to cut security spending by 5 percent, the remaining spending would face cuts of about 25 percent, to reach the target.

Many politicians in both parties are reluctant to cut military spending that much, warning of a possible erosion of national security.

In a hearing on the budget Wednesday, Defense Secretary Robert Gates talked about the tough choices the Pentagon confronts as it enters a likely era of tighter budgets. He said the nation will need to examine goals such as the longstanding notion that America should be able to fight two sizable wars at once, or other ways to reduce spending.

His comments came in response to a question about how to reach an Obama administration goal of $400 billion in defense cuts (a spending reduction of less than 5 percent) over a decade.

Overall, closing the budget gap without adjusting entitlement benefits or taxes would only become more difficult as America looks beyond a 10-year time horizon. That's because of the costs of baby-boom retirements and a related jump in interest costs on the debt.

The upshot of all this analysis: There's room to make some significant headway on the budget deficit by cutting miscellaneous things like farm subsidies, highway funding, and nonessential weapons systems. But that's probably just one piece of a larger puzzle.

For his part, Mr. Biden has said he's optimistic that the bipartisan talks will result in a deal to raise the national debt limit while cutting expected spending by more than $1 trillion. He didn't say over what time frame.

RECOMMENDED: National debt ceiling 101: Is a crisis looming?

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Budget math: Is too much 'off the table' to really fix US deficit? (The Christian Science Monitor)

Picture a family that gets in over its head in debt. The two heads of the household decide the problem needs urgent attention, but that they won't consider any solutions that involve changes to their income, their mortgage and housing costs, their health care, or their retirement plans.

Now picture that family being the United States, as represented by its elected officials.

That's essentially what's happening now in Washington, as Democrats and Republicans agree on a major problem but not on how to fix it. On Thursday, bipartisan talks led by Vice President Joe Biden continue. After the group met Wednesday, lawmakers expressed optimism about reaching a fiscal deal, even though some key pieces of the nation's finances are currently viewed as "off the table."

RECOMMENDED: National debt ceiling 101: Is a crisis looming?

Republicans generally don't want to consider raising taxes as part of a plan to reduce federal deficits. And the rift between the two parties over how to fix Medicare and Social Security has pushed those entitlement programs to the sidelines.

So the two parties are focused on other parts of the federal budget – such discretionary spending and where to cut it – as they rush to put a fiscal deal in place before Aug. 2. Both sides agree that it's a good idea to act by early August, ideally a bit ahead of that Treasury-announced deadline, to avoid a serious funding challenge for the nation. After that, the government won't be able to borrow, by issuing new bonds, unless Congress has raised the debt limit.

The limited scope of the bipartisan talks doesn't mean they are fruitless.

In fact, as lawmakers left Wednesday's meeting members of both parties struck an optimistic tone about the progress being made. The group is meeting at a stepped-up pace (it will gather again Thursday, for its third meeting of the week) with the goal of setting a framework for legislation by July 4.

Still, because some key elements of the budget aren't in play, it appears likely that the resulting legislation will be a partial solution to fiscal troubles. To truly put the national debt on a track of stabilization or decline, those "off the table" elements will almost certainly need to be part of the solution.

Here's a glimpse of the math: Social Security, Medicare, Medicaid, and interest on the national debt currently account for nearly half of all federal spending –and that total is poised to grow substantially if no changes are made. They are comparable to the role that housing, health care, and retirement plans play in the typical family budget.

President Obama's bipartisan fiscal commission proposed last year that the government should aim to cut projected federal deficits by about $4 trillion over the next decade. Independent advocates of fiscal responsibility have embraced that goal as roughly the amount needed to halt the rapid growth of public debt and maintain investor confidence in the US economy.

For context, even after making $4 trillion in headway the US would still run deficits totaling perhaps $5 trillion over the next 10 years, but the deficit problem would decline when viewed as a share of the overall economy.

Say you wanted to achieve that whole $4 trillion in progress through spending cuts, without touching Social Security, Medicare, or Medicaid. That would require major cuts, probably on the order of 15 percent, to all other parts of the budget.

That "other" part of the budget includes domestic discretionary programs, defense, and miscellaneous spending programs (such as farm subsidies) that Congress has made mandatory rather than subject to annual appropriations. All this spending is projected by the Congressional Budget Office to total some $21 trillion over the next decade.

The fiscal commission estimated that some of the fiscal progress in its $4 trillion total – about $700 billion worth – would come from reductions in expected interest on the debt. Following that logic, cutting about $3.3 trillion (or 16 percent) of that $21 trillion in projected spending might reach the target.Note that if Congress decided some programs shouldn't be cut that much, the remaining spending cuts would have to go even higher.

Defense spending is an example – and not just a hypothetical one. National security accounts for nearly half of that $21 trillion in projected spending over the next decade. So if Congress decided to cut security spending by 5 percent, the remaining spending would face cuts of about 25 percent, to reach the target.

Many politicians in both parties are reluctant to cut military spending that much, warning of a possible erosion of national security.

In a hearing on the budget Wednesday, Defense Secretary Robert Gates talked about the tough choices the Pentagon confronts as it enters a likely era of tighter budgets. He said the nation will need to examine goals such as the longstanding notion that America should be able to fight two sizable wars at once, or other ways to reduce spending.

His comments came in response to a question about how to reach an Obama administration goal of $400 billion in defense cuts (a spending reduction of less than 5 percent) over a decade.

Overall, closing the budget gap without adjusting entitlement benefits or taxes would only become more difficult as America looks beyond a 10-year time horizon. That's because of the costs of baby-boom retirements and a related jump in interest costs on the debt.

The upshot of all this analysis: There's room to make some significant headway on the budget deficit by cutting miscellaneous things like farm subsidies, highway funding, and nonessential weapons systems. But that's probably just one piece of a larger puzzle.

For his part, Mr. Biden has said he's optimistic that the bipartisan talks will result in a deal to raise the national debt limit while cutting expected spending by more than $1 trillion. He didn't say over what time frame.

RECOMMENDED: National debt ceiling 101: Is a crisis looming?

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April budget gap narrows sharply from year ago (Reuters)

WASHINGTON (Reuters) – A surge in income tax receipts helped cut the U.S. monthly budget deficit in half in April compared to a year ago, figures issued by the Treasury Department on Wednesday showed.

The budget deficit came in at $40.5 billion in April, compared with an $82.7 billion shortfall in April 2010, the Treasury said.

But the relatively favorable data didn't change the picture of an economy heading deeper in debt and just days away from a May 16 deadline for hitting a legally set ceiling on government borrowing.

For the first seven months of fiscal 2011, which ends September 30, the cumulative deficit swelled to $869.9 billion from $799.7 billion in the comparable year-earlier period.

The deficit figures are a somber backdrop for the ongoing effort by the Obama administration to reach agreement with Capitol Hill lawmakers on a course of action for slashing the deficit.

The White House said President Barack Obama will get involved directly this week in trading ideas with lawmakers on the problem but said he won't be negotiating with them. Republicans and even some Democrats want the administration to be more aggressive in cutting spending.

Adding urgency to the talks is next Monday's projected deadline for hitting a $14.294 trillion debt ceiling, which caps the amount the country can legally borrow. Republicans want the administration to agree to deep spending reductions as a price for agreeing to raise the limit.

In April, the budget report shows government spending rose to $330 billion from $328 billion in April 2010 and for the first seven months of the fiscal year it was up to $2.179 trillion from $1.999 trillion a year earlier.

On the income side, receipts in April rose to $289.5 billion from $245.3 billion. Within that category, individual income tax receipts rose strongly to $155.6 billion from $107.3 billion in April 2010 -- possibly a sign of an improving job market in a strengthening economy though Treasury offered no explanation.

Corporate income tax receipts in April gained to $25.1 billion from $23.1 billion in April last year, less striking than the increase in individual income tax receipts but nonetheless on the same upward trend.

April 18 was this year's filing deadline for individuals to pay their 2010 income taxes and April is typically a strong month for receipts. The April receipts number, for example, was triple the government's $52.8 billion take in March.

The Congressional Budget Office, Congress's watchdog agency, forecasts that for all of fiscal 2011 the government will post a staggering $1.4-trillion budget deficit -- a gap between spending and income that must be met by borrowing for purposes from paying for wars to doling out pensions.

Merely paying interest owed on publicly held government debt -- much of it to overseas investors -- cost $139.3 billion in April. That was up from $123.1 billion in April 2010.

(Reporting by Glenn Somerville, editing by Neil Stempleman)

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Connecticut House OKs budget, widespread tax hikes (Reuters)

NEW YORK (Reuters) – Connecticut's Democratic-led House of Representatives has approved a new $40.1 billion, two-year budget with widespread tax increases on personal income and goods ranging from cigarettes to luxury items.

Freshman Governor Dannel Malloy, who bucked anti-tax policies that swept Tea Party-backed candidates into office last November, is expected to sign the budget into law on Wednesday afternoon following the house approval late Tuesday.

The Democrat has repeatedly called for shared sacrifices from all state residents, including public employees.

Unless state workers agree to $2 billion of concessions, layoff notices are expected to start being mailed on Friday. This mirrors a trend seen around the nation as states increasingly turn to layoffs to balance their books, potentially gouging GDP growth by half a percentage point.

Connecticut, like many states, is starting to see revenues recover from lows hit during the recession. But Malloy refused to back down on almost all of his tax increases. One exception was the increase planned for gasoline, which was dropped.

House Democrats rejected the Republican two-year budget plan, which totaled $6 billion less and raised no state taxes.

So the state's top income tax rate for wealthy individuals will rise to 6.7 percent from 6.5 percent and the estate and gift tax threshold will fall to $2 million from $3.5 million.

Though Connecticut competes with New Jersey and New York for jobs and residents, its top income tax rate will remain about 2 percentage points below those of its neighbors.

For all consumers, sales taxes will rise to 6.35 percent from 6 percent. But only the rich will be paying a 7 percent levy on cars that cost more than $50,000, boats that cost more than $100,000, jewelry -- real or faux -- that costs more than $5,000 and clothing or footwear that tops $1,000.

But the new budget will also make people who buy clothing and footwear that costs $50 or less pay sales taxes. And a $500 annual property tax credit was cut to $300.

Still, Malloy created an earned income tax credit to help lower-income individuals.

The new budget imposes sales taxes on a wide range of services, from yoga classes to cosmetic plastic surgery to manicures, pedicures and spa services. A cabaret tax also was created that the state will collect and return to localities.

The cigarette tax will rise 40 cents to $3.40 per pack, the diesel fuel tax will go up 3 cents to 29 cents, and alcohol excise taxes will climb 20 percent. The current 10 percent corporation tax surcharge that was set to expire will instead double for the years 2012 and 2013.

Like a few other states, Connecticut also wants to charge sales taxes on Internet sales though its peers have had trouble enforcing similar requirements.

For more budget details, please see: web site: http://www.cga.ct.gov/2011/FN/2011SB-01239-R01-FN.htm.

The new 2012 budget that starts on July 1 totals $19.8 billion, a 2.14 percent increase in appropriated funds over the current budget. The 2013 budget is $20.285 billion, an increase of 2.32 percent.

The budget boosts job creating tax credits to $20 million from $11 million. Malloy said his plan will speed job creation. In a statement issued just after midnight on Wednesday, the governor, who inherited a multi-billion deficit, said: "This budget is balanced, honest, and contains none of the gimmicks that helped get us into this mess."

(Reporting by Joan Gralla; Editing by Andrew Hay)

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The Most Sensible Way to Solve the Budget Deficit (The Motley Fool)

I'm about to cure over half of the projected budget deficit over the next decade. Theoretically, at least.

This doesn't involve tax hikes. We won't even need to decrease spending. We might actually raise spending a little. In the end, we'll shave the deficit by several trillion dollars over the next 10 years.

Sound impossible? It's not. Unlikely, yes, but keep reading. This should start to make sense.

Tax evasion added $3 trillion to the deficit over the past decade alone, an average of $300 billion a year, according to IRS data. This isn't revenue lost from legal tax write-offs, like the mortgage interest deduction. It's not even, as the IRS notes, "taxes that should have been paid on income from the illegal sector of the economy." That $300 billion represents the amount of revenue lost from people deliberately cheating on their taxes every year. This includes underreporting income, hidden offshore bank accounts, sham trusts, and other ways to illegally stiff the IRS.

Put that money in perspective. Tax evasion in the last decade cost an amount roughly equivalent to the Bush tax cuts, the Obama stimulus, and the wars in Iraq and Afghanistan ... combined. That $300 billion is more than four times the Department of Education's budget and 10 times what we spend on science and technology. It's amazing more people aren't outraged about this stuff. Rather, they likely would be if they knew about it.

Some more figures: According to the Congressional Budget Office, the cumulative projected budget deficit over the next 10 years is $6.97 trillion. That's how much additional debt we'll rack up if current laws are left unchanged.

Now extrapolate last decade's tax fraud into the next, and adjust it for inflation and economic growth. We're probably looking at $4 trillion in tax fraud over the next 10 years.

And there it is. Without raising tax rates or reducing spending, we could eliminate more than half of our projected deficit over the next 10 years by simply eliminating tax cheats.

That's irrational, of course. It will never happen. Like I said, this is theoretical. There will always be tax cheats. But pointing these numbers out is important for a few reasons.

1. Prioritizing
I've often said that any politician serious about tackling the deficit should focus on just one issue: health-care costs. That's where essentially all the long-term budget pressures are. But after reviewing tax-cheat data, I think there's a new qualifier: cracking down on tax evasion should be a top priority in the short run. Areas that have been getting deficit-reduction attention lately pale in comparison to what could be saved by ramping up tax enforcement. Cracking down on tax cheats is also probably the most politically feasible way to reduce the deficit. It's simply enforcing existing rules, rather than setting up a fight by changing rules in ways someone will find biased and unfair.

2. Investing
A deficit-reduction plan earlier this year proposed cutting $603 million from the IRS's budget. The cut was eventually scrapped, and for good reason: IRS commissioner Douglas Shulman noted that the cuts would reduce tax collections by $4 billion annually, increasing deficits by a factor of six-to-one. This stressed an important point. IRS agents can be very good investments for taxpayers. An enforcement agent making $60,000 a year who cracks one big case pays for his entire career. Any comprehensive deficit-reduction plan should increase the IRS's budget.

3. Learning from others
Greece is a good example of what happens when tax evasion is ignored. Greece's current status as a near-bankrupt slave grasping at its creditors was caused by many factors, but one of the largest was an endemic culture of tax cheating. Only chumps followed the rules. Emphatic disregard for the tax man became the norm.

Michael Lewis did a wonderful job exposing this culture in an essay published last year in Vanity Fair. "Somewhere between 30 and 40 percent of the activity in the Greek economy that might be subject to the income tax goes officially unrecorded," Lewis writes.

He continues: "The scale of Greek tax cheating was at least as incredible as its scope: an estimated two-thirds of Greek doctors reported incomes under 12,000 euros a year -- which meant, because incomes below that amount weren't taxable, that even plastic surgeons making millions a year paid no tax at all."

In one Greek town, 324 residents admitted to having swimming pools -- an asset that increases property taxes. A satellite photo showed the actual number of pool owners was 16,974. Small wonder Greece found itself where it is today when 98% of the population cheats on their taxes.

Could we be next?

Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics.

Fool contributor free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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IMF urges U.S. budget include Fannie, Freddie costs (Reuters)

WASHINGTON (Reuters) – The United States should include in its budget the cost of mortgage loan guarantees and other housing supports, the International Monetary Fund said on Wednesday in a rare criticism of its biggest shareholder.

The IMF's findings may land it squarely in the middle of a hot political debate over what to do about Fannie Mae and Freddie Mac, the mortgage finance giants that back most new housing loans.

The IMF also faulted the Obama administration for failing to address the tax deduction for mortgage interest, which it called "both expensive and regressive."

The tax break is hugely popular, and eliminating it would no doubt cause political pain at a time when the Obama administration is already preparing for the 2012 presidential election campaign.

The IMF did say that the weak U.S. housing market still needs government guarantees for securitized mortgages, and abruptly removing those support could be damaging.

"However, government guarantees should be explicit and fully accounted for on the government's balance sheet," it said.

"There is a need for better-defined and more transparent government participation in the housing market, with all such policies, including strict affordable housing goals, transparently shown in the government's budget," it added.

The Obama administration has kept Fannie and Freddie off the budget, as did the Bush administration before it. Including them would make an already ugly fiscal picture look even worse.

The United States put those companies, which buy loans from banks and repackage them as securities for investors, into conservatorship in 2008 as the housing market bust led to massive losses on loans they guaranteed. The government has propped them up with more than $134 billion in taxpayer funds.

The U.S. Congressional Budget Office said in 2010 that Fannie and Freddie should be treated as government entities and counted in the budget, and many Republicans in Congress have pushed for that as well.

The IMF has generally tiptoed around direct confrontation on policy issues with the United States, which is its largest member and has effective veto power over any IMF decisions.

Overall, the Obama administration's housing reform proposals were "headed in the right direction, although some concerns and challenges remain," the IMF said.

The Fund said the reform efforts rightly focused on winding down Fannie and Freddie, adding the firms should be closed over the medium term to allow private-market securitization to return.

The private sector all but vanished from the mortgage-backed securities markets after the housing bust and financial crisis spawned hundreds of billions of dollars in losses. The government -- through Fannie Mae, Freddie Mac and the Federal Housing Administration -- now backs close to nine of 10 new residential mortgages.

The IMF's recommendations were included in its Global Financial Stability report, released ahead of its spring meeting scheduled for mid-April.

"While an overhaul of the housing finance system will take years to complete, U.S. authorities need to step up their efforts now to develop and implement an appropriate action plan," the IMF said.

(Editing by Leslie Adler)

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