Executive Summary: How to Get Federal Spending Under Control
Following a multi-year spending spree that pushed federal spending above $20,000 per household and the budget deficit up to nearly $500 billion, lawmakers are finally seeking ways to control federal spending. President George W. Bush's 2005 budget provides a positive first step by proposing to freeze most non-security discretionary spending at 2004 levels.
Reducing federal spending is extraordinarily difficult. Even the most wasteful programs are passionately supported by armies of recipients, administrators, and lobbyists. Yet avoiding these difficult decisions only makes the problem worse. The baby boomers will soon collide with Social Security and Medicare to produce a sea of red ink, leading to a near doubling of all taxes or the termination of most federal programs. Lawmakers need to get spending under control immediately while laying the groundwork for comprehensive Social Security and Medicare reforms.
Five Steps. If they are serious about controlling spending, lawmakers should take the following five steps:
Stop digging. Federal spending is growing at its fastest rate since the 1960s, but many of the same lawmakers that are calling for spending restraint also support legislation to expand highway spending by 72 percent, increase special education spending by 151 percent, and once again extend unemployment benefits. Each of these spending increases will dig the United States deeper into its financial hole and necessitate even more difficult choices later. Lawmakers should cut spending now.
Balance the budget by 2014 without raising taxes. Budget deficits are merely a symptom of two larger problems: a sluggish economy and runaway spending. Restoring economic growth requires low tax rates, and runaway spending is the most dangerous threat to pro-growth tax relief. Balancing the budget with spending cuts will improve the country's ability to deal with the massive Social Security and Medicare liabilities that will come due when the baby boomers retire.
Freeze discretionary spending in 2005. Discretionary spending leaped 39 percent between 2001 and 2004. Even after excluding defense and costs related to September 11, discretionary spending is rising 7 percent annually. Do these agencies need yet another spending increase this year? Congress and the President should do what millions of families do: set priorities and balance each high-priority spending increase with a low-priority spending cut.
Reform entitlements. Spending cannot be restrained without reforming entitlements, which comprise two-thirds of all federal spending and threaten the country's long-term finances. These programs are projected to grow by 6 percent annually for the next decade--a rate that would make it nearly impossible to balance the budget by 2014. Lawmakers seeking to rein in spending should put all entitlement spending on the table, including the 2003 Medicare drug bill and the 2002 farm bill.
Fix the budget process. Lawmakers still cling to a budget process created in 1974. Over the past 30 years, successive Congresses have punched this process full of holes, and federal spending has correspondingly tripled. The current budget process provides no workable tools to limit spending, no restrictions on passing massive costs onto future generations, and no incentive to bring all parties to the table early in the budget process to set a framework.
Common Traps. As lawmakers work to bring federal spending under control, they should avoid the following common traps:
Expecting an economic boom to balance the budget. While recent tax cuts will likely aid economic growth and bring in new tax revenues, it is unrealistic to expect tax revenues to grow at the 9 percent annual rate necessary to balance the budget by 2014 under current spending trends. Balancing the budget requires spending restraint.
Increasing spending through accounting gimmicks. Lawmakers tried to hide the 2004 spending increases by shifting budget authority between years, which is Congress's equivalent of backdating its checks. These accounting gimmicks could not cover up the 9 percent increase in projected discretionary outlays for 2004. Lawmakers are already discussing gimmicks to substantially increase spending this year, which would worsen the nation's fiscal situation.
Making only the easy spending cuts. Lawmakers often reject any spending cut that could offend someone. Yet every dollar government spends--no matter how wasteful--is received by someone who would be angry to lose these benefits. Every spending cut will offend somebody, and any easy cuts surely would have been made by now. Lawmakers who are serious about cutting spending should focus on the millions of taxpayers--both current and future--who are forced to sacrifice their financial well-being in order to fund ineffective federal programs.
Priority Budgets. In 2004, national defense, homeland security, and entitlement challenges make spending reform more important than ever. It is time to step back and think about the role of government, the obligations of the private sector, and the delineation between federal and state responsibilities.
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. Heritage Foundation research assistant Keith Miller contributed to this paper.