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Federal Budget and Spending




By Brian M. Riedl

Federal spending has reached $22,000 per household, in constant dollars, for the first time since World War II. "Discretionary" spending voted on each year by Congress has jumped 49 percent in just three years, and entitlement spending nears 11 percent of gross domestic product (GDP) for the first time ever. Furthermore, the upcoming retirement of the baby boomers will put an enormous strain on Social Security, Medicare, and Medicaid and sharply increase spending. It is imperative for lawmakers to get the nation’s finances in order immediately by restructuring entitlement programs and reducing federal spending. Putting off the difficult decisions until the federal budget’s condition deteriorates further will result in much harsher and more expensive policy choices.
Recommendations

 
  • Freeze 2007 discretionary spending and remember that the core problem is runaway federal spending, not the budget deficit or taxes that are too low. Current budget deficits are merely a symptom of a larger problem: runaway spending. Lawmakers should prioritize economic growth and the low taxes needed to spur growth and recognize that runaway spending represents the most dangerous long-term threat to pro-growth tax relief. As long as federal spending remains low enough to maintain a prosperous, low-tax economy, the budget deficit will solve itself. A positive first step would be freezing 2007 discretionary spending at the 2006 level.
  • Rein in runaway entitlement spending. The retirement of 77 million baby boomers could well push Social Security, Medicare, and Medicaid spending to unsustainable levels. The total cost of Social Security, Medicare, and Medicaid is projected to leap from today’s 8.4 percent of GDP to 18.9 percent of GDP by 2050. In the absence of reform, lawmakers face three options: (1) raise taxes every year until they are 57 percent ($11,000 per household) higher than today; (2) eliminate every federal program except Social Security, Medicare, and Medicaid by 2045; or (3) do nothing and watch the federal debt expand so that even a minor interest rate response would induce a spiral of rising debt and interest rates, threatening the entire economy. Clearly, reforming these programs is the only real option.
  • Reform the budget process. The current budget process encourages runaway federal spending because of its incentives and rules. Budget resolutions are rarely enforced, meaningful spending caps are absent, and lawmakers can create major new entitlements without proposing any plan to pay for them. Senators and Representatives who generally support spending restraint should not also seek earmarked pork-barrel spending or special programs. Budget process reform should be based on four principles: (1) establish a limit on overall spending; (2) present a full picture of future obligations in the budget; (3) bring the President into the budget process, mainly by giving the budget resolution the full force of an act of Congress; and (4) strengthen the enforcement of budget decisions.
Charts & Tables

 
  • Chart 1: Federal Budget, 1990-2005
  • Chart 2: Annual Growth in Discretionary Outlays
  • Chart 3: Entitlement and Net Interest Will Cause Skyrocketing Federal Spending
  • Chart 4: The Medicare Drug Entitlement's Unfunded Liability More Than Doubles Social Security'
  • Chart 5: The Number of Annual Pork Porjects in Appropritions Bills Has Skyrocketed
  • Table 1: Federal Spending by Category, 2001-2006
Recommended Reading

 
  • Brian M. Riedl, "The Myth of Spending Cuts for the Poor, Tax Cuts for the Rich," Heritage Foundation Backgrounder No. 1912, February 14, 2006.
    » Read Online
  • Brian M. Riedl, "Federal Spending: By the Numbers," Heritage Foundation WebMemo No. 989, February 6, 2006.
    » Read Online
  • Brian M. Riedl, "Entitlement-Driven Long-Term Budget Substantially Worse Than Previously Projected," Heritage Foundation Backgrounder No. 1897, November 30, 2005.
    » Read Online
  • Brian M. Riedl, "Restrain Runaway Spending with a Federal Taxpayers’ Bill of Rights," Heritage Foundation Backgrounder No. 1793, August 27, 2004.
    » Read Online
Issue Tool-Box
Facts & Figures
  • Entitlement programs that unfairly obligate future taxpayers, including middle-class entitlements like Medicare, are growing at unsustainable rates, and the result could be huge tax increases for future generations.
  • Between 2004 and 2006, tax revenues are projected to rise by an unprecedented $420 billion. This 22 percent jump—the largest two-year surge since 1976–1978, when soaring inflation and bracket creep steeply increased tax revenues—is partly the result of the 2001 and 2003 tax cuts, which increased incentives to work, save, and invest. Letting the tax cuts expire would harm businesses, families, and the economy. Moreover, history shows that any new revenues would just go to new spending.
  • President Bush’s 2007 budget request proposes freezes or near-freezes in most non-defense discretionary programs. However, these programs represent less than one-fifth of federal spending and cannot yield the savings needed. Entitlement spending is projected to nearly double over the next decade. Medicare is expanding by 9 percent annually, Medicaid by 8 percent annually, and Social Security by 6 percent annually.
  • Earmarked pork-barrel projects have increased nearly 1,000 percent over the past 10 years, diverting limited federal resources to low priorities and frivolous projects, circumventing the competitive award process, preempting state and local decision making, and increasing the risk of questionable budgeting practices. Using transportation funds to restore theaters and housing assistance funds to build nature centers are just two of the many examples that violate the general principles of good budgeting and honest accounting.
  • It is a myth that social spending has already been slashed and contains no available savings. From 2001 through 2006, education spending will have leaped 137 percent, health research and regulation will have increased by 78 percent, and anti-poverty spending will have surged by 39 percent to reach a record 16 percent of the federal budget.
  • Lawmakers still cling to the antiquated budget process created back in 1974. Successive Congresses have punched this process full of holes, and federal spending has correspondingly tripled. The current budget process provides no workable tools to limit spending, no restrictions on passing massive costs on to future generations, and no incentive to bring all parties to the table early in the process to set a framework.
  • Comprising two-thirds of all federal spending and growing by 7 percent annually, mandatory spending can no longer be taken off the table during the budget process. Spending caps have kept discretionary spending under control in the past and can work for mandatory programs as well.




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