April 5, 2006

April 5, 2006 | WebMemo on Federal Budget

The FY 2007 Budget Resolution: Long-Term Spending Challenges

As the House of Representatives takes up debate on the budget resolution, Members should extend their focus beyond the short term budget window of 2011 to the real problem of long-term spending. Any serious budget proposal must not only rein in spending today but also tackle the problem posed by growing entitlement programs. Focusing on the deficit is no solution because it treats spending cuts the same as tax hikes and overlooks the significance of the entitlements. Of the four budget plans released by the Administration and Congress, three trim spending only at the margins and would not resolve the long-term spending crisis. Only the House Republican Study Committee's budget proposal, which holds down future spending growth, especially in entitlements, seriously addresses long-term spending issues.

 

The Four Budget Proposals

Chart1

The Long Term

Federal spending has skyrocketed over the past five years, and this growth will accelerate if Congress and the President do not develop serious long-term solutions. In fiscal year (FY) 2007, the federal government is set to spend about $2.8 trillion, or 20 percent of the country's gross domestic product (GDP). The three major entitlements-Medicare, Medicaid, and Social Security-currently consume nearly half of all federal spending and will take a larger bite each year, as the baby boomers enter retirement. Nominal Medicare spending will be 519 percent higher in 2030 than it is today, leading the federal budget to consume 27 percent of GDP. [1] Government spending will hit about 38 percent of GDP by 2050.[2] Factor in state and local government, and total government spending will reach about 50 percent of GDP, higher than in France and Germany today. It is no coincidence that countries with such stifling government sectors often suffer from double-digit unemployment and economic stagnation. Lawmakers must focus on this risk when writing the annual budget.

 

The President's Budget

 

Chart2

President George W. Bush's budget proposal[3] would shave a small amount of non-defense discretionary spending but would do little to reduce the growth of the three massive entitlement programs-Medicare, Medicaid, and Social Security. The President's proposal would allow discretionary spending to increase to $873 billion, $30 billion above the 2006 level. To this end, the President would eliminate or significantly cut 141 failed, wasteful, or outdated programs, for $15 billion in FY 2007 savings. On the mandatory side, the President calls for small cuts, proposing about $65 billion in net savings from 2007 through 2011-roughly $36 billion from Medicare and $5 billion from Medicaid and SCHIP. On its present course, Medicare is expected to grow 70 percent from 2005 through 2011. President Bush's plan would reduce this growth to 66 percent. [4] That's not nearly enough to solve the long-term problem.

 

The Senate Budget Resolution

Chart3

The Senate-passed FY 2007 budget resolution[5] does not include any real savings in mandatory spending. The resolution even manages to increase discretionary spending well above the President's proposed ceiling of $873 billion. While the Senate resolution shows $3 billion in mandatory "savings," this is actually new revenue from ANWR and not a reduction in government. Even worse, the resolution proposes $9 billion in new discretionary spending, as well as a $7 billion budget "gimmick" aimed at increasing education, health, and labor spending.

 

The House Budget Resolution

Chart4

The House's FY 2007 budget blueprint,[6]expected to be considered on the House floor later this week, proposes $6.75 billion in mandatory savings, which come in part from raising user fees, such as health care co-payments. Unlike the Senate's resolution, the House's remains within the President's proposed $873 billion discretionary ceiling. While the House budget resolution does not raise spending, it does not address the long-term spending problem.

 

The RSC Budget Proposal

Chart5

The House Republican Study Committee (RSC) proposal[7] contains substantial discretionary savings and would reduce entitlement-spending growth to sustainable levels. The RSC proposal would save nearly $312 billion in non-defense discretionary spending by eliminating 150 wasteful and outdated programs, striking all pork projects from the recent highway bill, and reforming education programs. These are significant steps and would offset the cost of increased spending on budget priorities like defense and homeland security. The proposal also would reduce the growth of entitlement spending by $358 billion from 2007 through 2011. These savings come from a variety of serious reforms to Medicare, Medicaid, and SCHIP. The RSC's plan would slow the growth of Medicare spending to 5.4 percent and Medicaid spending to 4 percent-around one-half of what those growth rates are today

 

Conclusion

The solution to the long-term spending crisis does not lie in the budget proposals that are currently being debated on the House and Senate floor. The President's budget would make minor spending reductions at the margins of long-term spending, while the Senate and House resolutions would leave steep expected growth in spending virtually unchanged.

 

In contrast, the RSC proposal attacks the long-term spending problem head-on with savings in both non-defense discretionary and mandatory spending. The RSC proposal will hold total federal spending at approximately 19 percent of GDP-about even with today's level. Congress and the President should take the RSC's lead and pay serious attention to the long-term effects of today's budgets.

 

Michelle Muccio is a Research Assistant in, and Alison Acosta Fraser is Director of, the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.



* Methodology: All charts in this paper were generated by the Heritage Foundation's Interactive Long-Term Budget Calculator, which is a tool for assessing the impact of policy changes over a 45-year time span. Starting with the Congressional Budget Office's "Scenerio 2" long-term budget forecast, these long-term projections are based on the provisions of each proposal and simple estimates, based on historical budgeting, of each proposal's 45-year impact. For more information on the Heritage Budget Calculator and its methodology, please contact the authors of this paper.

[1]For a 50-year spending baseline as well as additional budget data, see Congressional Budget Office, The Long-Term Budget Outlook, December 2005, at http://cbo.gov/ftpdocs/69xx/doc6982/
12-15-LongTermOutlook.pdf
.

[2] Ibid.

[3] Office of Management and Budget, Budget of the United States Government Fiscal Year 2007, Summary Tables.

[4]Brian M. Riedl, "The President's Budget: Strong on Short-Term Spending, But Long-Term Challenges Remain" Heritage Foundation  WebMemo No. 990, February 6, 2006, at http://www.heritage.org/Research/Budget/wm990.cfm.

[6] See http://www.house.gov./budget/fy07totalspendrev.pdf for House Budget Committee functional summary table.

[7] Republican Study Committee, RSC FY 2007 Budget: Contract With America Renewed, March 8, 2006, at http://www.house.gov/pence/rsc/doc/
RSC_2007_BUDGET.pdf
.

About the Author

Michelle Muccio Research Assistant
Thomas A. Roe Institute for Economic Policy Studies

Alison Acosta Fraser Senior Fellow and Director of Government Finance Programs
Domestic and Economic Policy

Related Issues: Federal Budget