U.S. spending grows at historic rate

COMMENTARY Budget and Spending

U.S. spending grows at historic rate

May 1st, 2006 3 min read

Former Senior Fellow and Director of Government Finance Programs

Alison served as a Senior Fellow and Director of Government Finance Programs.

On Tuesday, the White House warned the Senate that it would veto funds for the war effort and hurricane relief. Why? Because lawmakers have larded the bill with so much pork and special-interest spending that it's blatantly irresponsible.

The Senate even added a sister project to last year's failed "Bridges to Nowhere" project in Alaska. The $700 million for the "Train to Nowhere" would relocate newly rebuilt train tracks near the coast of Mississippi. The goal? To develop a new Vegas-style gambling mecca. Yet we're to believe these funds constitute a budget "emergency."

President Bush is right to promise a veto. There's a reason such pork items attract nationwide ridicule: They symbolize much that is wrong with Washington's spending habits. When it comes to the budget, though, there's much more to worry about than pork-barrel spending, which constitutes only 1 percent of all federal spending.

Washington already spends $23,760 a household, a post-World War II high. That level of spending represents 20 percent of the nation's economy, or gross domestic product, but it's like the airplane taxiing down the runway. It's just getting ready for takeoff. Thanks to the future spending on promises made to baby boomers, spending will explode to nearly 36.5 percent of GDP, according to rather optimistic estimates by the Congressional Budget Office. This country has never before sustained such a growing level of government spending.

Taxes, by comparison, are projected to reach 18 percent of GDP over the next few years. Indeed, this is the historical average of the U.S. tax burden. Tax revenues rise and fall as a share of the economy in response to changing tax policy and economic cycles. But they tend to return to this historical average, suggesting a "natural" tax level.

Washington has three choices to solve this problem: raise taxes, borrow huge sums of money (and therefore run huge deficits), or tackle spending. Choice number one means taxes approaching 30 percent of GDP. And, as entitlements continue to grow, this tax level would continue to grow. Add in state and local governments, and we're tipping 40 percent -- levels commonplace in Europe. It's no coincidence that these nations with such heavy tax burdens also suffer high unemployment and economic stagnation.

So, while policymakers in Washington wrangle over larded-up "emergency" spending measures, what are their plans for solving this problem?

First let's consider the White House. Every year the president submits a budget to Congress. It's meant to establish policy priorities for funding and make trade-offs for other spending that has lower priority (just as the rest of us do for our family budgets if we wish to avoid large debt). President Bush's budget priorities were defense spending and making the tax cuts permanent. He also called for reining in other lower-priority spending while taking small steps to rein in spending on Medicare and Medicaid.

Some of his proposals were roundly criticized as "slashing" spending. Yet, his budget would do little to improve the budget picture over the long term. The spending still would reach 35.6 percent of GDP, little progress over CBO's projection of 36.5 percent.

Now let's look at Congress. After considering the president's recommendations, Congress passes its own budget blueprint. Despite much rhetoric lately about reining in spending, members of the House and Senate have crafted budget resolutions that fare worse than the president's.

The House resolution makes minute changes to entitlement spending on health care (the real driver of future spending) and mandates some other savings. The result? Long-term spending would hit 36.04 percent of GDP. That's barely a rounding error. The Senate's results are nearly identical and leave the steep growth in expected spending virtually unchanged.

Is there no serious budget proposal? There is: that of the Republican Study Committee, a group of conservative House lawmakers. This group takes a hard look at Medicare and Medicaid spending. Certainly, their options for restructuring these programs, and other spending, would entail very tough choices. But consider their results: Long-term spending would drop to 19 percent of GDP.

Any serious proposal must address the looming entitlement crisis. By 2046 -- or earlier, depending on which experts you talk to -- all other spending will be crowded out. Americans must ask whether entitlements should take precedence over other spending, be it defense or education.

Congress and the president can ignore spending no longer. The "Railroad to Nowhere" epitomizes the wastefulness of federal largesse. It's time for a serious discussion of the hard choices. If Washington refuses to address entitlement spending seriously, the rest of us should be prepared -- either for European-level taxes or staggering debt.

Alison Acosta Fraser is director of the Roe Institute for Economic Policy Studies at The Heritage Foundation (heritage.org).

First appeared in the Philadelphia Inquirer