July 3, 2006

July 3, 2006 | Commentary on Federal Budget

Runaway Spending: Left Unchecked, Washington's Overspending Could Drown America in Taxes and Debt

After increasing spending 45 percent since 2001, President Bush and Congress are finally acknowledging that government growth is out of control. Yet despite some small steps in the right direction, they are not close to reining in government.

President Bush began the year proposing a 3.5 percent increase in discretionary spending (excluding Iraq and Hurricane Katrina relief, which are funded by emergency bills), with most of the increase concentrated in defense. While the House of Representatives agreed to this growth rate, senators passed a budget resolution relying on gimmicks to push the increase to 5.5 percent. Strong White House leadership finally persuaded the Senate to accept the lower growth rate.

Of course, there are no permanent victories in Washington. Lawmakers now writing the spending bills are adding spending by employing the common loophole of shifting about $10 billion from defense into domestic spending, which will then be replenished by adding $10 billion to the next Iraq emergency spending bill this fall.

These "emergency" bills have become the latest way to bust the budget. In April, senators larded up President Bush's $92 billion emergency bill for Iraq and Katrina relief with an additional $14 billion in wasteful spending. The Senate's "emergencies" included a massive farm bailout, highway spending as far away as Hawaii, and the infamous "railroad to nowhere" plan to relocate a running Mississippi rail line a few miles north to make room for Vegas-style casinos. Only President Bush's firm veto threat finally forced senators to drop the additional $14 billion.

The new focus on limiting discretionary spending growth is welcome, yet lawmakers continue to ignore the elephant in the room: entitlements. These programs are expanding $100 billion per year and rendering it nearly impossible to rein in spending. The president's calls to modestly trim the growth rate of Medicare and farm subsidies fell on deaf congressional ears, dooming taxpayers to rapid entitlement growth that, if not corrected, would eventually consume the entire federal budget.

Despite high spending, President Bush may meet his goal of halving the budget deficit by 2009 - and for two reasons: First, the president employed a colorful definition of "halving the deficit" that would allow him to declare victory even if the deficit merely drops from $413 billion to $340 billion. Second, surging tax revenues are closing the deficit. The 2003 tax cuts, scapegoated for every economic imperfection, were followed by the largest tax revenue increase in half a century. At a projected 18.3 percent of gross domestic product (GDP), 2006 tax revenues will actually be above the historical average. So the deficit is shrinking because Americans are paying more taxes, not because lawmakers are cutting spending.

One reason lawmakers fail to cut spending is because the outdated budget process does not force them to do so. There will always be pressure from various interest groups to spend, so lawmakers need enforceable spending caps to help them set priorities and make trade-offs. They allowed the successful discretionary spending caps of the 1990s to expire in 2002, leading to 9 percent annual discretionary spending hikes.

Senate Budget Committee Chairman Judd Gregg's Stop Over-Spending (S.O.S.) Act would recreate these discretionary spending caps and also force lawmakers to reduce the budget deficit each year by slowing the growth of runaway entitlement spending. The Senate's big spenders vehemently oppose Gregg's legislation, indicating the strong impact it would have.

An even better reform would cap the total growth of government at the inflation rate plus population growth. Lawmakers could still increase each program, though larger increases would have to be offset by reducing lower-priority programs. Closing all loopholes, any emergency spending would require a two-thirds super-majority. This commonsense reform would help lawmakers save more than $3 trillion over the next decade - enough to balance the budget, make the tax cuts permanent, and even finance the beginning of Social Security reform.

Don't hold your breath.

Why is spending restraint so important? Because, despite reducing tax rates, President Bush's and Congress' historic spending spree is laying the groundwork for the largest tax increase in American history.

Without a single veto, President Bush has overseen the largest spending spree since Franklin D. Roosevelt sat in the Oval Office. Surprisingly, new defense and homeland security costs account for less than one-third of all new spending. Even non-defense spending is expanding twice as fast as it did under President Clinton.

These guns and butter budgets are virtually unprecedented. During World War II and the Korean War, Presidents Roosevelt and Truman cut non-defense spending by 35 percent and 25 percent, respectively. Yet during the war on terrorism, lawmakers enacted the most expensive education, agriculture and highway bills ever, and created an $8.7 trillion Medicare drug entitlement. Since 2001, education spending is up 137 percent, international spending is up 111 percent, and health research and regulation spending is up 78 percent. Despite cries of "mean-spirited cuts," even anti-poverty spending just reached a record 3 percent of GDP.

In sum, 2006 federal spending will reach $23,760 per household - the highest inflation-adjusted level since World War II, and nearly $5,000 higher than five years ago. And that figure is increasing $1,000 annually. Unless spending is pared back, within a decade balancing the budget alone could require a $7,000 per household tax hike.

These lawmakers have grown addicted to playing Santa Claus with your tax dollars. Even Republican lawmakers routinely send press releases bragging about "record spending increases." Senate Majority Leader Bill Frist excitedly writes that the new Medicare drug entitlement is increasing Americans' dependency on the federal government. Pork-barrel projects increase 600 percent, federal auditors cannot locate $24.5 billion spent in 2003, Washington runs 342 overlapping economic development programs, and government credit cards are spent on football tickets and prostitutes. And where is Congress? Busy naming two new government buildings after Sens. Arlen Specter and Tom Harkin.

As stated earlier, lawmakers are ignoring the coming entitlement tsunami. While America has accumulated a $5 trillion debt since its founding, Social Security and Medicare face an impending shortfall of $36 trillion.

The problem is simple: On Jan. 1, 2008 - just 547 days from now - the first of 77 million baby boomers will receive their first Social Security check. The combination of a large boomer population and longer life spans will push Social Security and Medicare spending well beyond what the remaining taxpayers can afford. When Social Security was created in 1935, 42 workers supported each retiree. Since then, the ratio has steadily dropped down to just 3.3 workers per retiree today. By 2030, only two workers will support each retiree. That means a married couple in 2030 will have to support themselves, their children - and the Social Security and Medicare benefits of their very own retiree.

Medicare faces the same demographic challenge as Social Security. The additional problem of rising health care costs, however, leaves the Medicare shortfall six times larger than that of Social Security. Since Medicare does not cover long-term care such as nursing homes, millions of seniors will be forced into Medicaid, pushing those costs to stratospheric levels, too.

Combined, Social Security, Medicare and Medicaid spending will rise from 8.4 percent of GDP today to 18.9 percent of GDP by 2050 (the entire 2006 federal budget is 20 percent of GDP). Unpalatable options for funding these massive new costs include: (1) raising taxes every year until they reach $11,000 per household above today's level (adjusted for inflation and rising incomes); (2) eliminating every remaining federal program except defense within 20 years; (3) continuing to finance these entitlements with budget deficits, which would raise the national debt to 400 percent of GDP, necessitate enormous interest payments, and risk a major economic crisis.

Fortunately, there's a fourth option: Fundamentally reform Social Security, Medicare and Medicaid. And do it soon to give baby boomers time to adjust their retirement financial planning accordingly.

What have our elected officials done to address this impending crisis? Absolutely nothing. Every year reform is delayed, 77 million baby boomers move a year closer to retirement, and total reform costs increase by about $1 trillion. Timid politicians fear voters will punish anyone who courageously tries to reform these popular programs. So liberal lawmakers pretend the Social Security Trust Fund will pay all benefits until 2040 (lawmakers already spent every cent of it), and conservative lawmakers pretend that tax revenues from a growing economy can fund these costs (not even close). The bipartisan consensus: Ignore the problem and let the next generation deal with it.

Actually, that's not the whole story. Lawmakers in 2003 poured gasoline on the fiscal fire by creating a new $8.7 trillion Medicare drug entitlement - with no plan to pay for it. The largest government expansion since the Great Society, Medicare's drug entitlement faces a long-term shortfall more than double the entire Social Security shortfall.

Lawmakers could have limited this program to low-income seniors for a fraction of the cost. Instead, they created a universal entitlement to buy the most votes at election time. The intergenerational irresponsibility is appalling: Lawmakers enjoy temporary popularity, the next generation receives an $8.7 trillion tab.

If 2006 resembles past election years, lawmakers will continue talking up "fiscal responsibility" while bragging about all the new spending they brought home. They will talk about freezing "non-defense discretionary spending" without mentioning the gimmicks they used to hike that spending elsewhere. They will give lip service to budget process and pork reform without actually enacting it. They will congratulate themselves for a reduced deficit that resulted more from your bigger tax payments than any spending restraint from them. They will not, however, talk about the ticking time bomb in Social Security, Medicare and Medicaid. Why spoil the party?

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 San Diego Union-Tribune