Foundation

Reducing Discretionary Spending Alone Cannot Balance the Budget

by Demian Brady / /

The “2017: State of the Budget” NTUF put together included a chart of historical data to illustrate how the federal debt has risen to its highest levels since WWII. The latest projections from the Congressional Budget Office (CBO) show that the debt will continue to rise as a share of the economy for the foreseeable future. In CBO's annual outlook series, the budget and economic projections are based on current law, and assume that existing policies will generally remain in place.

A consistent methodology is useful for showing policymakers what would happen if government policies continue as a baseline guide. Unfortunately, these reports continue to reflect that current fiscal policies are on an unsustainable path. On the other hand, existing policies could be reformed. There are a number of proposals on the President’s agenda and in the Congressional “A Better Way” plan that would enact significant reforms to re-shape the economic and fiscal landscape.

Underlying CBO’s budget outlook are its assumptions regarding the health of the economy: “CBO’s economic forecast—which —indicates that under current law, economic growth over the next two years would remain close to the modest rate observed since the end of the recession in 2009.” Obama was the first President since Hoover that did not achieve an average annual economic growth of at least 3 percent during his terms in office. Two top priority agenda items in 2017 could dramatically alter the economic outlook: tax reform and regulatory reform have the potential to spark productivity and boost growth.

Spending reform is also on the table. Within 48 hours of President Trump being sworn into office, news reports indicated that his administration is considering significant cuts to discretionary spending. While it is a good start to tackle spending programs like the Economic Development Administration and the Department of Agriculture’s duplicative Catfish Inspection Program, the federal budget cannot be balanced by solely reducing discretionary spending.

According to the CBO outlook, although federal revenue will increase from $3.3 trillion in 2016 to $5.1 trillion in 2027, it will be outpaced by federal outlays as they increase from $3.8 trillion in 2016 to $6.5 trillion in 2027. In other words, the federal deficit will increase from $587 billion in 2016 to $1.4 trillion in 2027, with a small and temporary reduction in the federal deficit between 2016 and 2018.

Federal spending is outpacing federal revenue due to mandatory spending programs like Social Security, Medicare, Medicaid, and other major health care programs, which when coupled with net interest on the debt consumes 69% of the entire federal budget. Discretionary federal spending, which includes defense, transportation, and education spending, will increase from $1.2 trillion in 2016 to $1.45 trillion in 2027, a 23% increase. Over that same time frame, mandatory spending will increase from $2.4 trillion to $4.3, a 77% increase.

 

Congress does not appropriate funding each year for mandatory spending programs. Instead, mandatory spending levels are based on the number of people who qualify for the program’s benefits each year. Since these mandatory programs generally provide benefits to the elderly, the growing population of retiring Baby Boomers contribute to the growth of these programs. The CBO, just like in its previous reports, properly identified mandatory spending as the major driver of federal spending over the next decade. Specifically, Social Security, Medicare, and net interest on the debt will be responsible for 70% of all federal spending increases over the next ten years.

Absent entitlement spending reforms, this crashing deficit will negatively impact the ability of the economy to build and invest, and will hinder the Unites States’ ability to respond to unforeseen events such as an economic downturn or military engagement. According to the CBO, these high levels of spending and debt are unsustainable and will discourage investments and savings that are necessary for economic growth. Therefore, unless spending and the debt is curbed, taxpayers and employers can expect lower total wages and overall productivity.

The CBO data provides a guidepost for spending levels. Historically, tax receipts have averaged 17 percent of the nation’s Gross Domestic Product (GDP, a measure of the size of the economy). Over the next ten years, outlays will soar in excess of 23 percent of GDP while revenues will average nearly 18 percent -- which is the cap on outlays that would be set under the Penny Plan to reform the budget.

Without addressing mandatory spending and the major drivers of federal spending, any effort to balance the federal budget will fall short. If Congress and the new administration only tackle discretionary spending, it would be like a doctor addressing a patient’s common cold but not his malignant tumor. Congress and President Trump must be willing to make tough policy choices on important federal programs and not be satisfied with just trimming small, obscure programs from the federal budget.


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