May 11, 2006

May 11, 2006 | Commentary on Federal Budget

Three Steps to Budget Reform

Over the past five years, federal spending has leapt 45 percent as lawmakers enacted budget-busting bills on Medicare, agriculture, education, energy and highways - all while funding the vital war on terrorism.

Unless Congress gets a handle on spending, within a decade, it will require a $7,000-per-household tax increase just to balance the budget. That's on top of the $20,000 per household being collected now.

Long-term trends are even worse. Within 20 years, Social Security, Medicare and Medicaid are projected to crowd out every federal program except defense - which itself would be crowded out by 2045. The longer lawmakers duck their responsibility to confront out-of-control spending, the more painful the remedy will be.

There is a path to fiscal sanity that avoids massive deficits and record tax increases. Congress should freeze nondefense discretionary spending, rein in runaway entitlements and extend the tax cuts of 2001 and 2003. The first two measures would help slow the growth in government spending and avoid the kind of economic stagnation that plagues Western Europe. Extending the tax cuts will help keep the American economy the envy of the world.

Step one: Freezing nondefense discretionary spending through 2011 should be a no-brainer. After growing by 43 percent since 2001, these budgets have room to level off for a few years. There is a precedent for such restraint, as total discretionary spending (including defense) was virtually frozen from 1991 through 1998.

Budgets are about setting priorities, and our priorities in today's dangerous world must be national defense and homeland security. Congress needs to acknowledge this and ensure that the least worthy programs take the brunt of the cuts. They should eliminate the $27 billion spent annually on special-interest projects, such as therapeutic horseback riding, the Baseball Hall of Fame and a program to curb Goth culture in Missouri - and don't vote for other spending to take its place.

Capping runaway entitlement spending is absolutely necessary to avoid European-size tax increases. Over the next decade, annual Medicare spending will expand by 9 percent, Medicaid spending by 8 percent, and Social Security spending by 6 percent as the first of the 77 million baby boomers retires. Thus far, Congress has stubbornly refused to confront this coming crisis. Last year, lawmakers had to twist arms to pass a reconciliation bill that merely trimmed short-term annual entitlement growth rates from 6.08 percent to 6.04 percent and did not affect long-term spending trends. That is not serious reform.

Congress should start by capping farm subsidies at $250,000 per farm. It should cap federal Medicaid growth at 5 percent per year and hand it out in block grants to states so they can tailor it to local needs. It should limit the Medicare drug entitlement to needy seniors, thus wiping out an unaffordable $8.1 trillion unfunded liability and begin to transform the Medicare system into one like the more efficient Federal Employees Health Benefit Program. It should convert more anti-poverty programs from inefficient handouts to time-limited benefits that encourage movement toward self-sufficiency, and it should attack ruthlessly the waste, fraud and abuse that leads to $40 billion per year in annual program overpayments.

Finally, Congress must encourage long-term economic growth by making permanent the tax cuts of 2001 and 2003. In the 11 quarters before the 2003 cuts took effect, real economic growth averaged 1.1 percent annually. In the 11 quarters since, it has expanded by 3.9 percent annually. Business investment declined for 10 straight quarters before the 2003 cuts; it has expanded in all 11 quarters since. Remember the talk of President Bush being the first president since the Depression to preside over negative job growth? Five million jobs have been created since the 2003 tax cuts.

Furthermore, low tax revenues are not the problem. Tax revenues are projected to rise a record $420 billion from 2004 to 2006, and are near the post-war average of 18 percent of GDP. Investors need to know that America plans to hold the line on taxes. Besides, history shows that any new revenues from tax hikes get spent anyway, rather than pay down debt. We cannot tax our way out of our budget challenges.

The coming surge in federal spending, resulting mostly from baby boomer retirement costs, is the single biggest economic challenge of our era. It's not difficult to see the tough choices that must be made. Congress simply needs the will to confront these challenges.

Brian Riedl is Grover M. Hermann Fellow in Federal Budgetary Affairs in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.

About the Author

Brian M. Riedl Grover Hermann Fellow in Federal Budgetary Affairs
Thomas A. Roe Institute for Economic Policy Studies

First appeared in the D.C. Examiner