December 15, 2004 | Backgrounder on Federal Budget
Serious budgetary challenges await the 109th Congress. Federal spending has leaped 23 percent in just three years, the budget process is in tatters, and voters are frustrated with the prospect of large long-term structural budget deficits. Most important, the first baby boomers will collect their first Social Security checks on January 1, 2008-just three years away. Unless spending is brought under control, Americans will face substantial tax increases and a slowing economy that provides fewer jobs and lower incomes. To avoid that fate, this paper charts a responsible, pro-growth spending agenda for the 109th Congress.
Principle #1: Spending-Not the Budget Deficit-Is the Problem
The current budget deficit is not harming the economy. According to some, government borrowing sharply drives up interest rates and reduces investment, thus slowing the economy. However, a closer examination reveals little correlation between government debt and interest rates. The debt-to-GDP (gross domestic product) ratio (which is a better way to assess the economic impact of borrowing) currently stands at 40 percent. This is below the post-World War II average of 44 percent (See Chart 2). Government borrowing remains modest by historical standards.
However, while the current budget deficit by itself is not alarming, it is a symptom of a much larger problem: runaway spending. All federal spending must be financed by taking resources from the productive sector of the economy, either by collecting more taxes or by borrowing more (which merely postpones the tax increases). Because they damage economies, averting these tax increases should be the main economic focus of lawmakers. The only way to provide long-term tax relief is by reducing long-term spending.
Principle #2: The Budget Process Impedes Responsible Budgeting
Congress remains saddled with an outdated budget process that was created in 1974 to maximize federal spending. Meaningful spending caps are absent, budget resolutions are rarely enforced, and lawmakers can create major new entitlements without proposing any plan to pay for them. The complexity of the budget process guarantees that important decisions are often determined by those who know how to bend the budget rules in their favor.
A rational budget process should help lawmakers to set priorities by capping overall spending and to make trade-offs within that framework. It should help lawmakers balance short-term priorities with long-term budget realities. Finally, the budget process should be simple, understandable, and protected from abuses and loopholes. In short, the budget process should reflect America's budget priorities, rather than undermine them.
Principle #3: Entitlement Reform Is Urgent
As currently projected, Social Security and Medicare will eventually bankrupt the federal budget. Within a few decades, these programs alone will require either tax increases totaling more than the current equivalent of $10,000 per household or the elimination of every other federal program.
Lawmakers must move quickly on reform. Social Security outlays are already growing 5 percent annually, and Medicare is expanding 9 percent annually. The first baby boomers will retire in 2008, after which costs will accelerate.
By 2018, Social Security will begin to run deficits. The Social Security trust fund, which was supposed to keep the system solvent, was never funded with any real assets. There is no pile of money to tap into in 2018. Beginning that year, the system will require ever-larger amounts of general revenue to pay the promised benefits.
The longer lawmakers wait to fix these entitlement programs, the more difficult and expensive the solutions will be, for two reasons. First, projected steep increases in federal Social Security spending will leave less payroll tax revenue available for personal retirement accounts. Second, the sooner workers can establish personal retirement accounts, the longer their investments will grow, which in a world of compound interest means much larger personal retirement accounts.
Nor can lawmakers continue to ignore skyrocketing Medicare costs. Medicare's unfunded liability is substantially higher than Social Security's unfunded liability, and the new Medicare drug benefit has added an estimated $8 trillion in unfunded costs over the next 75 years. Like Social Security, delaying Medicare reform will only make it more expensive.
What Congress Should Do
To rein in spending, Congress should implement five recommendations.
the Budget Process
Congress Should Enact a Federal Taxpayers' Bill of Rights. Federal spending should be capped by a Taxpayers' Bill of Rights (TABOR) law that restricts spending increases to the inflation rate plus the population growth rate. Such a limit is not too much to ask within a federal budget that-after a 23 percent expansion in three years-is overflowing with wasteful, outdated, duplicative, and unjustified programs. A TABOR would save taxpayers $4 trillion during the next decade and could be enforced by requiring a two-thirds supermajority to pass the budget resolution or any spending bill that pushes federal spending above the TABOR allowance. Such a bar is low enough to clear during a national emergency or war, but high enough to prevent abuse. Budget surpluses could be automatically split between tax rebates and debt reduction.
Colorado enacted the first TABOR law in 1992. Since then, the state government's growth rate has been reduced to 3 percent, and taxpayers have received $3.3 billion in tax rebates. By 2002, the average Colorado household was paying $3,729 less in state taxes than if spending had continued growing at its pre-TABOR rate. Since TABOR, Colorado's economic growth rate has nearly doubled, job growth has nearly doubled, and per capita incomes have grown 85 percent faster than before the amendment. It is no wonder that after 12 years of experience Colorado residents support TABOR by an overwhelming 3 to 1 margin.
A federal TABOR would require lawmakers to set priorities, reduce wasteful spending, and reform entitlement programs. It would also protect the family budget from the federal budget.
The House of Representatives Should Reform Its Rules. The rules package enacted by Members of the House of Representatives should be designed to enforce budget restraint. Unfortunately, most rules are so easily waived that they have become irrelevant. For example, points of order against House rules violations can be overridden by a simple majority vote, which creates no additional hurdle above the simple majority needed to pass regular legislation. (The Senate often requires a three-fifths vote.) Worse, the Rules Committee often waives these points of order before they even come to the floor. Rules that can be so easily overridden cease to be rules. Positive reforms in the House would:
Once points of order become enforceable enough to be relevant, lawmakers should update the list of violations to include:
Other rules reforms could include:
Recommendation #2: Reform Social Security and Medicare
Social Security reform cannot wait. (See Chart 3.) Costs are increasing and the first baby boomers are three years from retirement. Additionally, promptly reforming Social Security will be less expensive and lead to personal retirement accounts that are larger because they will have had more time to accumulate. Social Security reform should follow three steps:
First, the federal budget should be prepared for reform by Congress requiring that the President's budget submission and the congressional budget resolution include data on the long-term unfunded obligations of federal entitlements. This would help clear confusion among lawmakers, reporters, and voters regarding Social Security's obligations. When reform legislation is introduced, people could see that seemingly "expensive" reforms will actually save money in the long run. Congress could then work to prevent any future legislation increasing the government's long-term unfunded obligations.
Second, lawmakers should enact legislation classifying any payroll tax dollars that are placed into personal retirement accounts as budget neutral rather than as outlays. Directing money to personal accounts is a transfer of an asset from the Social Security trust fund to a personal account and should not be treated as an expenditure or outlay. Personal accounts will reduce long-term obligations and long-term spending, and the government's accounting should reflect that.
Finally, Congress should pass legislation creating Social Security personal accounts.
While Social Security is expected to play a central role in the 109th Congress, lawmakers should also repeal the Medicare drug benefit, which was enacted without any plan to pay for its huge liabilities. Lawmakers should reform the whole program to curb costs and to increase choice and competition.
Discretionary spending has leaped 37 percent in the past three years. Even after excluding all security-related spending (e.g., defense, homeland security, and international aid), discretionary spending has surged 24 percent. This guns-and-butter budget is not sustainable. Discretionary appropriations, like mandatory spending, must be pared back to control spending.
This is not as difficult as it may appear. Programs that have received such large increases can afford to be modestly pared back. Even a 10 percent cut would still leave discretionary budgets 23 percent above 2001 levels. The lack of spending restraint in recent years has also allowed a substantial amount of waste to build up in these programs. Lawmakers can bring discretionary spending under control by:
Recommendation #4: Rein in Authorizations
Several programs, including some covered by bills held over from the 108th Congress, are scheduled for reauthorization in 2005-including highways and mass transit, higher education, Temporary Assistance for Needy Families, child care, Head Start, job training, energy, the Coast Guard, and the Millennium Challenge Account. Lawmakers reauthorizing these bills should:
There is no shortage of waste in the federal budget. It has been 20 years since the Grace Commission audited the federal government. In that time, wasteful spending has continued to grow without any serious oversight from lawmakers. Out of the thousands of federal programs, only one program of significance has been eliminated since President George W. Bush took office. Wasteful and unnecessary programs generally fall into at least one of six categories:
A recent Heritage Foundation analysis identified nearly 500 programs meeting at least one of these criteria. Many programs meet several of them. Before moving onto the more difficult spending decisions, lawmakers should first reduce wasteful spending by:
Heritage Foundation calculations based on Council of Economic Advisers, Economic Report of the President, February 2004, p. 378, Table B-79, at www.gpoaccess.gov/usbudget/fy05/pdf/2004_erp.pdf (December 2, 2004). Debt is defined as publicly held federal debt.
See David C. John, "Misleading the Public: How the Social Security Trust Fund Really Works," Heritage Foundation Executive Memorandum No. 940, September 2, 2004, at www.heritage.org/Research/SocialSecurity/em940.cfm.
Boards of Trustees, Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds, 2004 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplemental Insurance Trust Funds, March 23, 2004, at www.cms.hhs.gov/publications/trusteesreport (December 2, 2004).
For more on TABOR, see Brian M. Riedl, "Restrain Runaway Spending with a Federal Taxpayers' Bill of Rights," Heritage Foundation Backgrounder No. 1793, August 27, 2004, at www.heritage.org/Research/Budget/bg1793.cfm.
See David C. John, "How to Fix Social Security," Heritage Foundation Backgrounder No. 1811, November 17, 2004, at www.heritage.org/Research/SocialSecurity/bg1811.cfm.
For specific reform proposals, see The Heritage Foundation, Center for Health Policy Studies, health care research Web site, at www.heritage.org/research/healthcare/index.cfm.
Heritage Foundation calculations based on data from the Office of Management and Budget and the Congressional Budget Office.
In 2002, the Department of Housing and Urban Development's Drug Elimination Grants for Low-Income Housing program was terminated, saving approximately $300 million annually.
See Brian M. Riedl, "How to Get Federal Spending Under Control," Heritage Foundation Backgrounder No. 1733, March 10, 2004, at www.heritage.org/Research/Budget/bg1733.cfm.
During the 108th Congress, Senator Brownback introduced S. 837, Representative Tiahrt introduced H.R. 3213, and Representative Brady introduced H.R. 1227 to establish such a commission.
The Heritage Foundation has also detailed waste in entitlement programs. See Brian M. Riedl, "How Congress Can Achieve Savings of 1 Percent by Targeting Waste, Fraud, and Abuse," Heritage Foundation Backgrounder No. 1681, August 28, 2003, at www.heritage.org/Research/Budget/BG1681.cfm.