Five Ways to Tackle Spending and Deficits

COMMENTARY Budget and Spending

Five Ways to Tackle Spending and Deficits

Jul 21, 2010 3 min read

Senior Fellow, Manhattan Institute

When Gallup recently polled Americans on the biggest threat to America's future well-being, the escalating national debt tied terrorism at the top.

They're right to worry. Washington's debt is on a completely unsustainable path. The Congressional Budget Office projects that the national debt held by the public — which stood below $6 trillion as late as 2008 — will top $20 trillion by the end of this decade if President Obama's budget is implemented. At 90 percent of the economy, such debt levels would risk large increases in interest rates and tax rates, and could also result in a Greece-like economic crisis. Beyond our own economic consequences, dumping this staggering debt load on future generations would be absolutely immoral.

Large future deficits are not the result of a revenue shortage. Even if the 2001 and 2003 tax cuts are extended, revenues should rebound to their 50-year average (18 percent of the economy) within a few years. The problem is that federal spending — historically 20 percent of the economy — is set to rise to 26 percent of the economy by 2020, and keep rising thereafter.

Put differently, Washington consistently spent $21,000 per household annually through the 1980s and 1990s. Former President George W. Bush raised per-household spending to $25,000, before Mr. Obama pushed it to $31,000 this year, on its way to $37,000 by 2020 (all adjusted for inflation). And if spending leaps $12,000 per household between 2008 and 2020, then taxes must eventually leap accordingly — with massive deficits in the meantime.

America's fate is not yet sealed. This bleak future of rising spending, painful tax increases and unsustainable deficits can be avoided if lawmakers quickly take the following five steps:

1. Stop digging. Lawmakers must break their addiction to deficit spending. They should repeal the remaining stimulus funds, which have failed to create jobs and growth. Any new unemployment assistance should be offset by spending cuts elsewhere, as Sen. John Thune, South Dakota Republican, has proposed. Remaining TARP funds should be rescinded before they can be allocated to new spending. And most importantly, lawmakers must repeal ObamaCare, which any reasonable analysis exposes as a ticking time bomb for surging spending and deficits.

2. Cap spending growth. Washington has no enforceable spending caps. Discretionary spending has nearly doubled since Congress let its spending caps expire in 2002. Entitlement spending grows every year on autopilot. The repeated bypassing of "Pay As You Go" (PAY-GO) rules has rendered that budget constraint irrelevant.

As long as Congress remains under pressure to spend, it needs spending caps to help it set priorities and make trade-offs. A law mandating that government cannot grow faster than the economy, personal income or inflation plus population growth, would create a budget process consistent with America's budget priorities.

3. Reform Social Security, Medicare and Medicaid. These three programs are responsible for nearly all the growth in long-term deficits. As 10,000 baby boomers retire into these programs daily, there won't be enough workers left to pay these benefits (especially as rising health care costs infect Medicare and Medicaid). Overall, Social Security and Medicare face an unfathomable $46 trillion unfunded obligation over the next 75 years. Simply put, the budget deficit will never significantly fall until these entitlements are reformed.

Reform likely will mean raising the Social Security eligibility age faster than under current law. Upper-income retirees may be subject to mild income-testing of their Social Security benefits, as well as some reduction in their taxpayer subsidies for Medicare Parts B and D (which, unlike Medicare Part A benefits, are not "earned" through payroll taxes).

4. Empower states. Washington taxes families, subtracts a hefty administrative cost, and then sends the remaining tax revenues back to state and local governments, with specific rules dictating how they may spend the money. In that sense, Washington is merely an expensive middleman, contributing little more than meddling mandates that constrain the flexibility that state and local governments need to address their own issues creatively.

Instead of performing many functions poorly, Congress should focus on performing a few functions well. Most highway, education, justice and economic development programs should be devolved to state and local governments, which will have the flexibility to tailor local programs to local needs (thus likely performing those functions at a lower taxpayer cost). Devolution also solves the earmark problem - if Alaska wants to build a "Bridge to Nowhere," it can spend its own money on it, rather than take it from Minnesota's bridge-repair funds.

5. Eliminate waste. While the deficit cannot be eliminated by cutting waste alone, Congress should pick this low-hanging fruit. For example, each year Washington loses $98 billion to payment errors, spends more than $90 billion on corporate welfare and pays $25 billion maintaining vacant federal properties. Cutting waste is also vital for Congress to begin building the public trust and credibility needed to undertake the larger reforms in Social Security and Medicare.

These common-sense reforms will not be easy or painless. However, digging a $20 trillion national debt, followed by permanent $12,000 per-household tax increases, would be even more painful. Responsible lawmakers must act now.

Brian Riedl is Grover M. Hermann Fellow in Federal Budgetary Affairs at the Heritage Foundation

First appeared in The Washington Times