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WebMemo #896 on Federal Budget

October 26, 2005

An Innovative and Bold Budget Proposal in the Senate

By

Federal spending has leaped 33 percent since 2001 to nearly $22,000 per household. Rapidly-escalating Social Security, Medicare, and Medicaid spending, combined with necessary national security and Gulf Coast hurricane reconstruction costs, threaten to push spending even higher. In the absence of reform, taxes would need to be raised by $7,000 per household within a decade just to balance the budget.[1]

Against this backdrop, seven Senators known as the "Fiscal Watch Team" have called on Congress to offset hurricane-related costs and bring back fiscal responsibility. Senators John Ensign (R-NV), Sam Brownback (R-KS), Tom Coburn (R-OK), Jim DeMint (R-SC), Lindsey Graham (R-SC), John McCain (R-AZ), and John Sununu (R-NH) deserve commendation for offering a specific, realistic agenda to restore fiscal sanity and save American taxpayers at least $115 billion over the next two years, and even more thereafter. Their innovative proposal would cut wasteful spending, delay unaffordable new spending, and force belt-tightening across other programs. On October 6, 2005, Heritage Foundation president Edwin J. Feulner drew two lines in the sand for lawmakers to return to fiscal sanity: postpone the Medicare drug entitlement for at least one year and abandon all pork barrel spending.[2] The Senator's plan does that and more.

The six-point agenda is as follows:

1) Reduce Non-Defense/Homeland Security Discretionary Spending by Five Percent Across the Board

Discretionary spending has leaped 48 percent since 2001. While defense has accounted for much of this increase, even non-defense discretionary programs have expanded 37 over that same period-the fastest growth in 25 years.[3] These guns-and-butter budgets do not represent business as usual. Lawmakers cut non-defense spending in half during World War II, and by a quarter during the Korean War.[4] Because budgets are about setting priorities and making trade-offs, lower-priority programs should be eliminated in order to make room for vital national security programs.

The seven Senators'plan calls for a 5 percent across-the-board cut to 2006 non-defense, non-homeland security discretionary spending-for about $20 billion in savings. It then allows the President to "add back" 20 percent of those savings ($4 billion) to high-priority programs, essentially holding harmless those programs. Overall, $16 billion would be streamlined.

This restraint is hardly unprecedented: discretionary spending was essentially frozen between 1991 and 1996 at $533 billion per year. These reforms would still leave discretionary spending-both for defense and non-defense programs-substantially higher than in previous years.

2) Delay the Medicare Drug Entitlement for Two Years

The case for fundamental Medicare reform has never been clearer. Medicare is projected to expand 9 percent annually over the next decade, and its long-term shortfall is several times larger than Social Security's. The Senators' proposal calls for a two-year delay in implementing the unaffordable Medicare drug entitlement-a strong first step toward Medicare reform.

The universal entitlement is both unaffordable and unnecessary. The drug entitlement is estimated to cost $724 billion over the next decade and as much as $2 trillion over the following decade. Over the next 75 years, the drug entitlement's $8.1 trillion shortfall will more than double Social Security's $3.7 trillion shortfall.[5] This universal entitlement would cover not only seniors lacking coverage, but also the three-quarters of seniors who already have existing drug coverage.

The Senators' proposal delays the drug entitlement for two years and in the meantime extends and expands the existing Medicare Drug Discount Card, which would provide $1,200 in annual assistance to needy seniors. This reform would save $80 billion over the next two years and provide an opportunity for lawmakers to reconsider the drug entitlement.

3) Accelerate the Medicare Part B Means Test

Currently, Medicare beneficiaries pay 25 percent of premiums for Medicare Part B coverage, and the federal government pays the rest. Beginning in 2007, individuals earning over $80,000 annually and couples earning over $160,000 annually are scheduled to see slight premium increases phased in over five years.

The Senators' proposal would eliminate the five-year phase-in and move the implementation date up to 2006. Under this proposal, Medicare recipients who earn high incomes would still pay only slightly more per month than low-income retirees. This reasonable reform would save $3 billion to $4 billion annually.

4) Rescind All Highway Bill Pork Projects

The recent highway bill included nearly 6,400 pork projects, many of which have nothing to do with enhancing mobility or relieving highway congestion. These include 418 bicycle paths and footpaths (likely enough to stretch from the Atlantic Ocean across the continent to the Pacific Ocean), 218 projects for intermodal facilities and improvements, and 291 other projects, such as museums, redevelopment, and port improvements.[6] It also included $320 million for Alaska's infamous "Bridge to Nowhere," which will replace the ferry that currently connects Ketchican, Alaska (pop. 8,900), to Gravina Island (pop. 50) with a bridge nearly as long as the Golden Gate Bridge and higher than the Brooklyn Bridge.

Because highway legislation should focus on the nation's highway priorities, the Senators' proposal would rescind these pork projects and put those savings towards offsetting higher-priority spending, such as Gulf Coast reconstruction. Of course, state governments could still supplement any remaining transportation needs not addressed by the remaining $262 billion in the highway bill. This common sense proposal, which spreads the sacrifice across all states, would save $24 billon over the next four years.

5) Freeze Salaries for Members of Congress and Federal Civilian Employees for One Year

Lawmakers and federal employees should not exempt themselves from the sacrifices necessary to rebuild the Gulf Coast following Hurricane Katrina. A one-year salary freeze for lawmakers and federal civilian employees allows them to take part in the grand American tradition of sacrifice. This will save $2 billion in 2006.

6) Create a Government Waste Commission

Lawmakers who generally support spending restraint often bristle when one of their pet programs is targeted for elimination. They are understandably concerned about proposals to single out their constituents for spending cuts and then disperse the savings nationally. The Commission on the Accountability and Review of Federal Agencies (CARFA) would address this problem by applying the military base-closing model to domestic spending. CARFA would appoint a commission to compile a list of unnecessary, outdated, wasteful, or duplicative discretionary programs. Congress would then vote up-or-down to eliminate all programs on the list. Rather than single out one program championed by a few lawmakers, CARFA ensures that nearly all lawmakers would share the spending sacrifices. The large combined savings would ease lawmakers' pain of seeing a favored program terminated. This model successfully closed obsolete military bases fifteen years ago, and as part of this proposal, could successfully terminate outdated programs in 2005.

Conclusion

Strong spending reforms are not unprecedented. During World War II and the Korean War, lawmakers overhauled non-war spending. More recently, budget deals in the 1990s (temporarily) reined in entitlement programs and effectively froze discretionary spending for most of the decade. In 2005, escalating entitlements, national security expenses, and disaster relief costs again make common sense spending restraint a top national priority. With their plan, Senators Ensign, Brownback, Coburn, DeMint, Graham, McCain, and Sununu demonstrate that they are serious about fiscal responsibility. Other lawmakers should step forward and similarly show their commitment to sound fiscal policy.

Brian M. Riedlis Grover M. Hermann Fellow in Federal Budgetary Affairs in the Thomas A. Roe Institute for Economic Policy Studies at the Heritage Foundation.

Show references in this report

[1] Brian M. Riedl , "Hurricane Costs Send Budget Projections Deeper into the Red," Heritage Foundation Webmemo No. 881, September 16, 2005, at http://www.heritage.org/Research/Budget/wm844.cfm. See the table in this paper for yearly shortfalls.

[2] Edwin J. Feulner, Ph.D., and Alison Acosta Fraser, "A Line in the Sand for Fiscally Responsible Lawmakers," Heritage Foundation Webmemo No. 874, October 6, 2005, at http://www.heritage.org/Research/Budget/wm874.cfm.

[3] Brian M. Riedl, "Federal Spending: By the Numbers," Heritage Foundation Webmemo No. 881, October 11, 2005, at http://www.heritage.org/Research/Budget/wm881.cfm.

[4] Mitch Daniels' remarks to the National Press Club, November 28, 2001, at http://www.whitehouse.gov/omb/speeches/natl_press_club.html. Daniels states that non-defense spending decreased 22 percent between 1939 and 1942 and then by 37 percent more between 1942 and 1944.

[5] Centers for Medicare and Medicaid Services, 2004 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplemental Insurance Trust Funds, March 23, 2004, p. 109, at http://www.cms.hhs.gov/publications/trusteesreport, and Social Security Administration, 2004 Social Security Trustees Report, March 23, 2004, p. 2, at http://www.ssa.gov/OACT/TR/TR04/tr04.pdf.

[6] According to a Congressional Research Service study referenced by the Republican Study Committee, at http://johnshadegg.house.gov/rsc/.

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