October 13, 1994

October 13, 1994 | FYI on

The Politics of Cutting Spending

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October 13, 1994

THE POLITICS OF CUTTING SPENDING

Stuart M. Butler Scott A. Hodge Vice President and Director Grover M. Hermann Fellow of Domestic and Economic in Federal Budgetary Affairs Policy Studies

Recent exchanges in the press about the House Republicans' "Contract with America" under- score once again why spending is at the heart of the federal deficit problem and why piecemeal spending cut proposals almost invariably fail. Whenever a lawmaker or candidate proposes to trim the growth of federal spending, or to cut the tax burden on Americans by trimming programs, a familiar political game begins - in which the taxpayer is always the loser. First, the individual advocating spending cuts is challenged to reveal the specific cuts he or she proposes. Then, as soon as a proposed cut is revealed, political opponents appeal to those who would be directly affected by the cut. With most to lose, these program benefi- ciaries campaign vigorously against the spending reduction. And although the average taxpayer would gain from the cut, the fact that the savings are spread thinly across all taxpayers means the gain to any single household is very small. Consequently, it is difficult for the politicians supporting a cut to mobilize popular support among average taxpayers, while those opposing the cut can count on the well-organized, well-financed, and impassioned backing of the program's beneficiaries. This lopsided political calculus always gives the advantage to those opposing cuts in spending. It also makes it very risky for lawmakers and candidates to specify how spending should be controlled --doing so can be political suicide because it triggers a special-interest backlash. This calculus has been explained by "public choice" economists as one of the main reasons why it is so difficult to control spending in the U.S. political system. Understanding the political dynamics of spending cut proposals led Heritage Foundation scholars last year to propose an economic plan based on two political tactics:

1 Scott A. Hodge, "Putting Families First: A Deficit Reduction and Tax Relief Strategy," Heritage Foundation Backgrounder No. 927, February 16, 1993.

1) A package of spending cuts should in part finance targeted tax reductions. These tax re- forms should not be across-the-board reductions, however, which would have little impact on each household. They should instead be tax cuts that provide large benefits to certain identifi- able households, while correcting a genuine problem in the tax code that slows the economy or hurts families. In this way, a strong constituency can be assembled with much to gain from a package of spending cuts. This constituency then becomes a political counterweight to the con- stituency resisting the budget cuts.

2) The specific cuts should be assembled by a commission within the framework of a legis- lated limit on the growth of federal spending. The spending-cut commission would act much like the military base closing commission, or a team of trade treaty negotiators. It would assemble a package of cuts that balances sensitive competing political concerns, and this pack- age would be presented for an up-or-down vote in Congress without amendment. In this way, the Heritage scholars reason, lawmakers would not be voting on individual cuts, and so would be less vulnerable. Like up-or-down votes on a package of base closings, or a trade treaty, an up- or-down vote on a spending package - especially if linked with targeted tax relief - would help insulate members from attacks by beneficiaries of particular programs. This strategy led to a tax relief and spending reduction proposal, called Putting Families First, which centers on family tax relief. This plan formed the central features of H.R. 3645, sponsored in the House by Representatives Rod Grams (R-MN) and Tim Hutchinson (R-AR), and S. 1576 spon- sored in the Senate by Dan Coats (R-11)). In this proposal: The rate of increase of federal spending would be held at a growth rate of 2 percent per year, or just below the current rate of inflation. This would yield savings of $727 billion over the next five years when compared with the current pattern of federal spending projected by the Congressional Budget Office. The CBO projects total fed- eral spending to grow over 5 percent annually through fiscal 2004. The appendix contains an updated summary of the effect of the spending cap. The specific cuts needed to meet the required 2 percent limit would be developed by an independent commission, modeled on the base closing commission. The recommen- dations of the commission would voted on by Congress without amendment. Of the $727 billion in savings from spending cuts, roughly $140 billion would be re- turned to the economy in tax cuts. Specifically:

Some $108 billion would be returned to 35 million families in the form of a new $500 tax credit per child for all working families with children. Another $9 billion would be returned in a package of pro-growth tax reduc- tions, including the indexation of capital gains, expanded individual retirement accounts (IRAs), and a neutral cost recovery plan. It should be noted that the cost of this tax relief assumes a "static" revenue estimate, or that marginal tax rate cuts do not stimulate new revenue - contrary to experience. Thus in real- ity, the cost of the package would be less than $9 billion. Another $26 billion would be returned to seniors by lifting the tax penalties on seniors who work.

The remaining $588 billion would be devoted to deficit reduction, leading to a balanced federal budget in fiscal 2001 (see appendix). The 2% Spending Cap Saves $727 Billion Over Five Years and $1.5 Trillion by Fiscal 2002 $2,400 Billions of Dollars MMM Clinton Spending Growth (CBO Estimates) @ Spending Capped at 2% per Year $Z209 2,200 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - ----

$2,086 -7 2,000 - - - - - - - - - - - - - - - - - - - - - - - - - - 34,9740-

$1,863

1,800 - - - - - - - - - - - - - - - - - $1,758-

$1,684

$1,609 1,600 $1,525-

R

1995 1996 1997 1998 1999 2000 2001 2002

Clinton Deficits vs. Spending Cap Deficits

Billions of Dollars $319 billion 300 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Deficit Clinton Deficits

200 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

100 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

Deficits Produced by 2% Spending Cap $67 billion -100 Surplus 1995 1996 1997 1998 1999 2000 2001 2002 4F

;67 billion Su rplus

Note: Deficits produced by 2% spending cap assume static revenue losses from tax cuts.

To be sure, it would be wise to furnish a commission with a menu of possible cuts as the starting point for a package. Ideally this would take the form of cuts likely to have bipartisan support. Per- haps a good starting point would be some 100 cuts already proposed by White House Chief of Staff Leon Panetta when he was chairman of the House Budget Committee, and by Office of Manage- ment and Budget Director Alice Rivlin when she was Director of the Congressional Budget Office. Cuts already put forward by two top Clinton Administration officials, and supported by many Re- publicans, could form the bipartisan foundation of a commission-proposed package. The appendix contains a summary of the Panetta-Rivlin cuts, which total nearly $300 billion in savings. The public choice dynamics of spending control play into the hands of those who want to block any reductions in the growth of federal spending. Thus, although it may seem reasonable for an op- ponent to demand which specific cuts a candidate or lawmaker proposes to finance a tax reduction, in reality this merely presents the spending cut and the politician recommending it as open targets for the special interests who gain from the affected program. It is important for politicians who ad- vocate spending control and lower taxes to avoid this trap by arguing for a commission to recom- mend the package of cuts, and by building constituency support for spending reduction by linking cuts to targeted tax relief. Comprehensive trade treaties could never be enacted by Congress if law- makers voted on each line of an agreement, and not a single unnecessary military base was closed for ten years until Congress had to vote up-and-down on a commission-recorrimended list of clos- ings. There will be no real control of federal spending as long as lawmakers and candidates are force to defend specific line-item cuts against the inevitable barrage of special-interest lobbying. NOTES TO APPENDIX The attached spending cut recommendations were taken from "Balanced Budget Amendment Op- tions," House Committee on the Budget (Leon Panetta, Chairman), May 26, 1992, and Reducing the Federal Deficit: Strategies and Options, Congressional Budget Office (Alice M. Rivlin, Director), February 1982. The estimated savings resulting from these proposed cuts have been updated, where possible, based upon the estimates contained in CBO's Reducing the Deficit. Spending and Revenue Options, February 1994. The estimated savings from the options identified with an asterisk (*) were derived from: "The Balanced Budget Plan," submitted on March 17, 1994, as an alternative 1995 budget by the Balanced Budget Task Force chaired by Congressman Gerald B. Solomon, or CBO's Reducing the Deficit: Spending and Revenue Options, February 1993. SELECTED SPENDING CUTS PROPOSED BY PANETTA AND RIVLIN

Five-Year Total Savings Function DISCRETIONARY SPENDING CUTS ($Millions) 150 Consolidate Overseas Broadcasting Programs $2,150.0 150 Reduce Security Assistance $1,740.0 150 Phase-out Defense Acquisition Fund* $200.0 150 Reduce Export-import Bank Credits $1,380.0 150 Phase Out Economic Assistance to Israel and Egypt* $4,510.0

250 Cancel the Advanced Rocket Motor* $496.0 250 Cancel the Space Station $10,400.0

270 Eliminate Further Clean Coal Technology $20.0 270 Change Strategic Petroleum Reserve Funding $325.0 270 Reduce Rural Electrification Administration Subsidies $260.0

300 Reduce Below-cost Timber Sales $235.0 300 Enact Superfund Cost Containment Measures $2,180.0 300 Hike Weather Service Fees* $25.0 300 Privatize the NOAA Research Fleet* $250.0 300 End EPA Sewage Treatment Grants* $7,115.0

350 Streamline USDA Field Offices $900.0 350 Reform Foreign Agriculture Service (FAS) $150.0 350 Reduce ACIF Farm Loans $430.0 350 Reduce Agriculture Research & Extension Services by 50% $830.0

370 Eliminate Trade Promotion Activities $820.0 370 End Small Business Administration Earmarked Grants* $54.0 370 Eliminate SBA Business Loans $2,680.0 370 Reduce Export Administration by 25% $45.0 370 Eliminate FmHA Homeownership Loans $1,840.0 370 Eliminate FmHA Rental Housing $1,430.0

400 Cut Highway Demonstration Projects $2,590.0 400 Cut Airport Improvement Grants $6,260.0 400 Abolish the Interstate Commerce Commission $140.0 400 Eliminate Essential Air Service Subsidies n/a 400 Cut Urban Mass Transit Subsidies $6,880.0 400 Eliminate Amtrak Subsidies $1,900.0

450 Eliminate TVA Non-power Programs $610.0 450 Eliminate the Appalachian Regional Commission $690.0 450 Eliminate Rural Development Loans and Grants $1,930.0

Appendix Page 1

SELECTED SPENDING CUTS PROPOSED BY PANE17A AND RIVLIN Five-Year Total Savings Function DISCRETIONARY SPENDING CUTS ($Millions) 500 Eliminate Campus-based Aid $5,920.0 500 Eliminate State Student Incentive Grants $350.0 500 Eliminate Impact Aid $4,120.0 500 Eliminate Consumer Homemaking Grants $140.0 500 Eliminate Law-related Grants $25.0 500 Eliminate community-based Grants $50.0 500 Eliminate Law School Grants $60.0 500 Eliminate Library Grants $70.0 500 Eliminate Follow-Through $35.0 500 Eliminate the National Endowments fbr the Arts and Humanities $5,300.0 500 Consolidate Social Service Programs $5,590.0

550 Reduce funding for the National Institutes of Health by 10% $5,110.0 550 Eliminate Most Health Training Subsidies* $1,427.0

600 Modify Fees for Federal Housing $1,230.0 600 Reduce HUD Utility Payments* $145.0 600 End HUD New Construction and Replace with Vouchers $955.0 600 Reduce Refugee Assistance* $463.0

700 Cut new VA Construction* $557.0 700 Improve Management of VA Hospitals* $3,230.0 700 Close or Convert Outmoded VA Hospitals $1,170.0

750 Eliminate Justice Assistance $1,230.0

920 Terminate Most Commissions* $645.0 920 Cut Civilian Agency Overhead Costs* $24,489.0 920 Repeal the Davis-Bacon Act $3,080.0 Total Discretionary Savings $126,856.0

Appendix Page 2

SELECTED SPENDING CUTS PROPOSED BY PANETTA AND RIVLIN Five-Year Total Savings Function MANDATORY SPENDING CUTS ($Millions) 270 Power Marketing Administration Debt Reform $4,800.0

300 Raise Inland Waterway User Fees $3,140.0 300 Eliminate Subsidies for Federal Water* $75.0 300 Raise Commercial and Recreation Fees $720.0 300 Change Royalty Payments to States from Gross Receipts Basis $880.0 to Net Basis 300 Charge Royalties on Hardrock Mining Claims $280.0

350 Eliminate Market Promotion Program $500.0 350 Lower Agriculture Target Prices 3% per year $11,050.0 350 Eliminate the Dairy Subsidy Program $2,000.0 350 Replace Crop Insurance with Disaster Assistance $1,660.0 350 Eliminate the Export Enhancement Program $4,160.0

370 Tighten FmHA Loan Standards* $1,440.0 370 Enact FHA Management Reforms* $222.0

400 Eliminate Maritime Operating Subsidies $1,142.0 400 Eliminate Freight Subsidies* $77.0 400 Enact User Fees for Airport Landing Slots $1,500.0 400 Raise Coast Guard fees to Cover 100% of Costs n/a

500 Limit Foster Care Administrative Costs $150.0 500 Raise Interest Rates on Student Loans $1,530.0 500 Charge Interest on Student Loans during Grace Period $9,560.0

550 Raise State Match on Medicaid/AFDC/Food Stamps to 50% $36,000.0

570 Phase-out disproportionate Share Payments to Hospitals $12,550.0 570 Lower Indirect Payments to Teaching Hospitals to 6% $4,790.0 570 Reduce Direct Payments to Teaching Hospitals $1,070.0 570 Set Part B Deductible at $150 and Index to Inflation* $7,350.0 570 Set SMI Coinsurance at 25% $16,250.0 570 Require 20% Copayment for Clinical Laboratory Services $6,180.0 570 Require 20% Copayment for Home Health and Skilled Nursing $20,450.0 Facilities

600 Suspend Military Retirement COLAs Until Age 62* $5,550.0 600 Increase Employee Contribution for Civil Service Retirement $4,180.0 System 600 Use Last 4 Years to Compute Civil Service Pensions $510.0 600 Require 50% Match for Civil Service Thrift Plan $2,340.0

Appendix Page 3

SELECTED SPENDING CUTS PROPOSED BY PANETTA AND RIVLIN Five-Year Total Savings Function MANDATORY SPENDING CUTS ($Millions) 600 Re-Target Child Nutrition Programs to Below 185% of Poverty $3,070.0 Level 600 Penalize States for Food Stamp Errors* $245.0 600 Eliminate Trade Adjustment Assistance Cash Benefits $660.0

700 End Veterans' Compensation Benefits for Low-Rated $3,250.0 Disabilities 700 Increase Third Party Payer Reimbursement* $225.0 700 Reduce Resale Losses on VA Loans* $7.0 Mandatory Savings = $169,563.0

Total Savings Discretionary & Mandatory = $296,419.0

Appendix Page 4