Main menu

Nobody is proposing actual spending cuts

When the history of the Great Debt Limit Debate is written, one of the key villains will be the definition of "cut." For everyone who lives outside the halls of Congress, "cut" means to reduce. But inside Congress, "cut" means to spend less than your baseline projection of future spending. Since spending always tends to rise by at least the growth of nominal GDP, which has averaged about 5.5% for the past 30 years, the baseline that everyone compares their budget proposals to tends to project increased spending of about 5-6% per year.

Over the past 12 months the federal government has spent $3.56 trillion. A typical baseline would project spending to increase about 5.5% a year, reaching some $6 trillion a year by 2021 (budget scoring generally focuses on what happens over the next 10 years). That would equate to total expenditures of $48.4 trillion over the next decade. So when one party proposes to "cut" spending by, say, $4 trillion, what they really mean is that they propose to spend $44.4 trillion over the next 10 years instead of $48.4 trillion. The $4 trillion "cut" they are proposing actually works out to a 4% annual increase in spending, instead of a 5.5% annual increase in spending.

So even the most radical of "cuts" that are being proposed today would still allow government spending to increase by 4% a year. How hard or draconian is that?

I suspect the great majority of Americans would be stunned to realize that if we allowed government spending to increase by only 2% a year, then we could probably balance the budget in about 7 years, without any need to increase tax rates or actually cut anybody's spending. No real cuts and no real tax hikes are needed to balance the budget within a reasonable time frame. Why is there so much sound and fury surrounding this debate?

(My calculations assume that tax revenues as a percent of GDP rise naturally to about 18% of GDP over the next 7 years, which is close to the long-term average and the same level that was achieved a few years after the Bush tax cuts. Tax revenue as a % of GDP always rises during the expansion phase of a business cycle, and we know that the current level of tax rates can generate 18% of GDP if the economy is healthy.)

UPDATE: Prompted by reader "William" as to why it seems so hard for Congress to do something simple like cutting the growth rate of spending to 2% instead of 5.5%, I offer this explanation: The problem with cutting the growth rate of spending is that CBO scores this as a "cut", and the "cut" that would result from a 2% growth rate in spending would be on the order of $8.6 trillion. My guess is that no congressman or senator would want to be labeled as the guy who "cut" such a gigantic amount of spending. Think of all the kids who would starve, the old folks who would die from lack of medicine, etc. In short, it would be too easy for political opponents to brand the cutter as an evil madman, when in fact he was just trying to be reasonably prudent.

Filled Under:


Posting Komentar