President George W. Bush's fiscal year (FY) 2005 budget proposes cutting the budget deficit in half over five years. Yet lawmakers are under intense pressure to enact a budget resolution that balances the budget within the 2005-2014 period. This paper provides a menu of spending targets to accomplish that objective.
Before assessing the spending requirements of a balanced budget, it is necessary to calculate a revenue projection. Revenues are projected by beginning with the January 2004 Congressional Budget Office (CBO) baseline and then incorporating President Bush's FY 2005-2014 tax proposals, such as making the 2001 and 2003 tax cuts permanent, reforming the alternative minimum tax, and creating tax-free savings accounts.1
Two different revenue projections emerge:
- The first is based on revenues using a dynamic score of the President's tax cuts. Dynamic scoring acknowledges that tax relief strengthens incentives to work, save, and invest, and that the resulting economic growth and tax revenues offset a portion of the original revenue loss.
- The second is based on revenues using a static score of the President's tax cuts. Static scoring assumes that tax policy does not affect economic behavior or growth. While very few economists would agree with static assumptions, lawmakers require the CBO to use them when projecting future tax revenues. (See the Appendix for spending and tax calculations.)
Using the CBO 2004 baseline estimate of $896 billion in discretionary outlays and $1,242 billion in mandatory outlays, it is possible to calculate the effects of various annual spending growth rates--both discretionary and mandatory.2 Table 1 shows which rates of discretionary spending and mandatory spending would combine to balance the budget under dynamic scoring. Table 2 shows the results for balancing the budget under static scoring.
Table 1 details the spending patterns that can balance the budget by 2014, assuming that tax revenues are scored dynamically. For example, a budget that expands discretionary spending by 3 percent annually and mandatory spending by 4 percent annually would achieve balance by 2014. Two observations are immediately evident:
- Most scenarios to balance the budget by 2014 require annual spending growth of approximately 4 percent or less.
- The CBO baseline shows mandatory spending growing by 6 percent annually over the next decade. Yet Table 1 shows no scenario to balance the budget by 2014 with 6 percent annual mandatory spending growth. This confirms that any plan to balance the budget must reform runaway entitlements, such as the 2003 Medicare drug bill and the 2002 farm bill. Furthermore, without reform, the growth rate of mandatory spending will accelerate in coming decades.
Lawmakers will likely seek a budget resolution that balances the budget by 2014 even when revenues are scored statically. Table 2 shows the spending options to achieve the objective. Most combinations require mandatory and discretionary spending to grow by 3 percent or less per year.
Difficult Decisions Required
Bringing spending growth all the way down from these high levels will require difficult decisions. However, recent spending hikes actually translate into more opportunities for savings. The 39 percent increase in discretionary spending since 2001 has left many agencies awash in cash, and they can afford to go for a few years without another major spending increase.
Mandatory spending is now at 11 percent of the gross domestic product ($11,144 per household) for the first time in American history.3 Many of these bloated programs can afford much-needed reforms. Lawmakers can begin to move toward a balanced budget by settling on a lean spending course and then reforming the budget process to lock in those spending ceilings.
Brian M. Riedl is Grover M. Hermann Fellow in Federal Budgetary Affairs in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.