November 8, 2010
By Brian M. Riedl
Just two years ago, pundits and politicians pounded George W. Bush for presiding over a "staggering" $458 billion budget deficit. Since then, the deficit has soared—to $1.4 trillion in 2009 and to $1.3 trillion this year. Merely maintaining current tax-and-spending policies would push the annual deficit to nearly $2 trillion by 2020, and even that ocean of red ink assumes a return to peace and prosperity.
These numbers are unsustainable. Doubling the national debt will significantly harm the economy and place an obscene financial burden on our children and grandchildren.
Much of this election was about our nation's rapidly deteriorating fiscal condition. Fixing the budget is paramount; however, it must be done in the right way. Simply focusing on deficits and aiming to balance the budget without identifying the underlying problem could mean all solutions are treated equally. Yet some solutions, such as steeply raising taxes, can cause more harm than good.
Washington's problem isn't that it taxes too little. Even if all 2001 and 2003 tax cuts are extended, federal revenues are headed back toward 18 percent of the total economy—the average level for the last 50 years. What's changing is federal spending. Historically, it equals 20 percent of the economy. But now it is projected to top 26 percent by the end of the decade. Spending is the root cause of our spiraling long-term deficits. It's what Congress must tackle to fix the budget.
That's not the only reason to focus on spending restraint. Tax hikes reduce incentives to work, save, invest, and create jobs, which is why no economic theory advocates raising taxes in tough times. The better way to raise revenues is to focus on pro-growth tax policies—starting with retaining the 2001 and 2003 tax relief—that can put 15 million unemployed Americans back to work.
Addressing soaring spending begins with reforming Social Security, Medicare, and Medicaid, which (along with interest on the debt) are responsible for nearly the entire rise in long-term budget deficits. Congress should take these programs' spending off autopilot by putting them on long-term budgets. It should then phase in changes such as higher eligibility ages and restructured benefits for upper-income retiree.
While waiting for those reforms, Congress must root out unaffordable spending elsewhere. After expanding the federal budget by $727 billion on everything from education to NASA over the past three years, Congress should be able to cut about half that amount immediately.
They should start by tightening their own belts: freeze federal compensation until it is reformed, cut the bloated federal travel budget, rescind unspent appropriations, and cut Congress's budget. Washington should also recall unspent stimulus dollars; repeal Obamacare; reform farm subsidies; and eliminate small, outdated programs like the Rural Utilities Service.
Spending cuts will not harm. Every dollar Congress injects into the economy must first be taxed or borrowed out of the economy. So the less Washington taxes and borrows, the more businesses and families will have to spend.
In the past decade, inflation-adjusted federal spending has leapt from $21,500 per household to nearly $30,000. Unchecked, it will hit $38,000 per household by the end of this decade. Few taxpayers believe we are getting our money's worth. Unless we want to also tax $38,000 per household, the only way to balance the budget is through spending restraint.
First appeared in US News and World Report
Brian M. Riedl
Grover Hermann Fellow in Federal Budgetary Affairs
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