Fulfilling Your Budget Reform Promise of a Net Spending Cut: A Memo to President-elect Obama
I'm cutting more than I'm spending so that it will be a net
--Barack Obama, Second Presidential Debate, October 7, 2008
We are going to go through our federal budget, as I promised
during the campaign, page by page, line by line, eliminating those
programs we don't need and insisting that those that we do need
operate in a sensible, cost-effective way.
--Barack Obama, announcement of OMB Director nominee, November
President-elect Obama, you campaigned on fiscal discipline and the
need to make tough choices. Although your budget blueprint
specifies large new spending hikes, you also promised a cumulative
"net spending cut."
While announcing the nomination of Peter Orszag to head the
Office of Management and Budget, you expanded on your fiscal
discipline pledge by stating that "budget reform is not an option.
It's a necessity," and that federal budgeting would require "tough
choices. There are just going to be some programs that simply don't
work and we've got to eliminate them." You added that a strong
reason for selecting Mr. Orszag is that he "doesn't need a roadmap
to know where the bodies are buried in the federal budget" and
would be able to go through the federal budget "page by page, line
Virtually all Presidents promise to rein in spending, but few
succeed because every dollar of government spending--no matter how
wasteful--will be strongly defended by its recipient as well as by
the lawmakers who annually fund that spending. Thus, for you to
restrain spending, you must not only identify lower-priority
spending, but also spend political capital to enact your proposed
The following guidelines can help you fulfill your pledge for a
net spending cut.
- Take the pledge seriously. Given the massive
spending increases promised--including a stimulus bill rumored to
cost as much as $700 billion--it would be easy to disregard your
promise of a net spending cut. Yet lawmakers are already
using the recession as an excuse to dust off old spending wish
lists and dubiously call them "stimulus" bills. With the 2009
projected budget deficit already approaching $1 trillion,
additional "stimulus" spending would be unaffordable, not to
mention ineffective in rescuing the economy.
In this rush to expand government, cooler heads must prevail.
Priority-setting and trade-offs are more important than ever, and
your promise of a net spending cut must stand in the way of an
unaffordable spending hike.
- Define "net spending cut." Campaign promises
are often based on slippery rhetoric and accounting, so it is
important to define "net spending cut" precisely and publicly.
During the October 7, 2008, presidential debate, you stated that
"I'm cutting more than I'm spending so that it will be a net
spending cut." However, annual federal spending hikes can be either
legislated (Congress and the President decide to expand a program)
or automatic (entitlement program budgets grow on autopilot). Would
you merely prevent legislated spending hikes while keeping the rest
of the budget growing on autopilot, or would you truly prevent all
net spending hikes?
Other questions arise. Should spending growth be measured in
nominal dollars, in inflation-adjusted dollars, or as total
spending as a percentage of the economy? Would you count
discretionary spending, entitlement spending, or both? Do net
interest payments on the national debt count in the spending
totals? Which years are covered by this promise: next year only or
across your first term?
You should simply define "net spending cut" as what it means in
layman's terms to the millions of Americans who heard your pledge:
Washington spending fewer total nominal dollars next year than this
year. Any redefinition would justifiably be seen by many voters as
nothing more than another misleading campaign promise.
- Cut farm subsidies. The first place to look
for spending offsets should be farm subsidies--America's largest
corporate welfare program. You have already criticized a farm policy
that granted $49 million to ineligible wealthy farmers in recent
years, but the utter ridiculousness of U.S farm
policy does not end there. Taxpayers spend $25 billion annually on
farm subsidies, the majority of which are granted to commercial
farmers, who also report an average income of $200,000 and an
average net worth of $2 million. There is no excuse for taxing
waiters and welders to fund corporate welfare payments to a booming
In addition to costing Americans $25 billion in taxes, farm
subsidies raise food prices by $12 billion annually. Environmental
damage results from farmers overplanting crops to maximize
subsidies. By undermining America's trade negotiations, subsidies
raise consumer prices and restrict U.S. exports. Cotton subsidies
undercut African farmers, keeping them in desperate poverty. And as
The Omnivore's Dilemma author Michael Pollan has written,
farm subsidies contribute to obesity, rising health care costs, and
early death by subsidizing corn and soy, from which sugars and fats
are derived, rather than more healthful fruits and
Over 90 percent of all farm subsidies goes to growers of just five
crops: wheat, cotton, corn, soybeans, and rice. Just as producers
of fruits, vegetables, beef, and poultry currently thrive without
subsidies, so can other farmers. You should eliminate most farm
subsidies and replace them with crop insurance and farmers' savings
accounts to smooth out yearly fluctuations in farm income.
- Reform entitlement programs. Entitlements
consume 60 percent of the federal budget. They are growing nearly 7
percent annually on autopilot, and the recession costs of
unemployment benefits, Medicaid, and food stamps may push that
growth rate even higher. On top of these growing entitlement costs,
you have pledged an expensive expansion of the Medicare drug
entitlement as well as large spending increases to expand
government health care coverage. Such expansions could push annual
entitlement spending growth to 10 percent or even 15 percent. This
is clearly unsustainable.
The simple fact is that if you are to deliver on your promise to
reduce spending, you must tackle these programs. With the first of
77 million baby boomers entering retirement, you must reform Social
Security, Medicare, and Medicaid before they overwhelm the federal
budget. You could also apply work requirements to more antipoverty
programs, which would both save money and help low-income families
rise out of poverty.
- Devolve more programs to state and local
governments. Under the federal highway program, states
collect the gasoline tax and then send that money to Washington so
that politicians can subtract a hefty administrative fee, add
expensive mandates and pork projects, and then send those highway
dollars right back to the states. You should eliminate the
federal middleman and instead let states keep their gas tax
revenues and decide how to spend them--without costly
interference from bureaucrats and lawmakers in
Nor is there any reason for Washington politicians and bureaucrats
to micromanage other essentially state and local activities such as
housing, justice, education, and economic development.
You should devolve these programs and empower state and local
governments to tailor them to local needs and create laboratories
to test new ideas and policies. Over time, the best techniques and
strategies would be copied by other states, and the result would be
more accountable and effective state government, as well as a more
streamlined federal government.
- Eliminate waste, pork, and corporate welfare.
While the potential savings are susceptible to exaggeration, few
would disagree that the federal budget contains an enormous amount
of wasteful spending. Earmarks are a quick and easy place to
start. The $17 billion spent annually on pork projects includes the
Charles Rangel School of Public Service, the Montana Sheep
Institute, and the Andre Agassi College Preparatory Academy. You
should eliminate these projects and reduce the program budgets
accordingly. You should also make a firm promise to veto any
legislation that contains earmarks.
Nor is pork the only type of budget waste. Washington makes at
least $55 billion in annual program overpayments. The government's
own auditors admit that 22 percent of all federal programs fail to
show any positive effect on the populations they serve. Many
programs are also redundant: The federal government runs 342
economic development programs, 130 programs serving the disabled,
and 130 programs serving at-risk youth. Washington spends $60
billion a year on corporate welfare--more than it spends on
homeland security. Though corporate lobbyists will tell you how
many jobs these subsidies create--even green jobs--you should not
be swayed. The fact is that these programs provide little or no
economic value, and there is no justification to tax teachers and
truck drivers to subsidize Fortune 500 companies.
The government continues to run outdated relics like the Rural
Utilities Service, whose mission of providing rural electricity was
achieved decades ago. You could save taxpayers billions of dollars
by eliminating these and other examples of waste.
- Use PAYGO to prevent expensive new
entitlements. The 110th Congress reinstated Pay-As-You-Go
(PAYGO) rules requiring that new entitlement expansions or tax cuts
be deficit-neutral. PAYGO was supposed to promote fiscal
responsibility but instead has become another tool for expanding
government. Congress voted to waive PAYGO on numerous spending
increases (such as stimulus and "emergency" bills) and then evaded
PAYGO with gimmicks on other large spending increases (such as the
farm bill, SCHIP, and student aid expansion). Members of the
House Democrats' Blue Dog Coalition have rarely let PAYGO interfere
with expensive government expansions, yet they suddenly became
deficit-focused PAYGO adherents whenever the agenda shifted to tax
relief--or even preserving current tax rates.
You pledged to make PAYGO a centerpiece of your budget agenda. For
PAYGO truly to help government live within its means--and for you
to fulfill your promise of a net spending cut--you must use it as a
tool to offset expansions of entitlement programs with equal
reductions in existing entitlements. This is more responsible than
dismissing PAYGO whenever it becomes an inconvenient impediment to
new spending. It is also more responsible than enforcing PAYGO with
large tax increases to fund new entitlements, which lead only to
bigger government and further recession-worsening tax increases.
Using PAYGO as a tool to offset spending is the only way to deliver
on your promise of a net spending reduction.
- Resist gimmicks when calculating spending. It
has become increasingly common for lawmakers to meet budget targets
by declaring all excess spending to be "emergencies" and then
excluding them from the listed spending totals. In 2008, lawmakers
declared at least $333 billion--11 percent of all spending--to be
"emergencies" even though only a small fraction of this total met
the true definition of an emergency. This has rendered
meaningless any distinction between regular and "emergency"
spending. Declaring an "emergency" does not take taxpayers off the
hook for funding an expenditure; you must therefore ensure that
such spending is included when calculating a net spending cut.
The American people have repeatedly expressed exasperation at
the pork, runaway spending, and budget deficits that have plagued
Washington during this decade. You were elected President on the
promise of fiscal responsibility and a "net spending cut." Scaling
back planned "stimulus" spending that would likely fail to help the
economy would be a strong first step toward fulfilling your
promise. Reforming Social Security and Medicare before more of the
77 million baby boomers begin to collect benefits is also
It is not difficult to identify the programs most in need of
reform, but fiscal responsibility can be achieved only through a
willingness to stand up to interest groups and their allies in
Congress and by making the difficult but necessary decisions. The
result will be a stronger economy, a smaller budget deficit, and a
lower tax burden.
Brian M. Riedl is
Grover M. Hermann Fellow in Federal Budgetary Affairs in, and Alison Acosta Fraser is
Director of, the Thomas A. Roe Institute for Economic Policy
Studies at The Heritage Foundation.
Show references in this report
 It is worth noting that the pledge of a "net spending cut" was made on October 7, 2008--after the collapse of Fannie Mae and Freddie Mac, the subsequent financial collapse, and the enactment of a $700 billion rescue package. Thus, the classic claim that "new circumstances" trump earlier campaign promises does not apply here.
 "President-elect Obama Third Press Conference Transcript."
 The examples of waste cited here, as well as many others, can be found in Riedl, "Federal Spending by the Numbers: 2008."