Federal spending is rising, deficits are
chronic, and government debt is piling up. Deficits are expected to begin
soaring after 2017, and official projections show endless rivers of red ink
over the long term unless policymakers enact major budget reforms.
Policymakers should downsize every federal
department by eliminating the most harmful programs. This essay proposes
specific cuts that would balance the budget by 2020 and bring spending down to
17 percent of gross domestic product (GDP) by 2025.
Spending cuts would make sense whether or not
the government was running deficits. Cuts would spur economic growth by
shifting resources from lower-valued government activities to higher-valued
private activities. Cuts would also expand freedom by giving people more
control over their lives and reducing the regulations that come with federal programs.
In recent decades, the federal government has
expanded into hundreds of areas that should be left to state and local
governments, businesses, charities, and individuals. That expansion is sucking
the life out of the private economy and creating a top-down bureaucratic
society that is alien to American traditions. Cutting federal spending would
enhance civil liberties by dispersing power from Washington.
The Congressional Budget Office (CBO)
projects that federal spending will rise from 20.4 percent of GDP this year to
22.1 percent by 2025 under current law.1
Over the same period, tax revenues are expected to rise from 17.7 percent of
GDP to 18.3 percent. Despite growing revenues, the government is expected to
run increasingly large deficits because of the rapid growth in spending.
Policymakers should change course. They
should cut spending, eliminate deficits, and reform the tax code. The plan
presented here would roughly balance the budget by 2020 and generate growing
surpluses after that. Spending would be reduced to 17.0 percent of GDP by 2025,
almost one-quarter less than the CBO projection for that year. Spending cuts
would create budget room to repeal the tax increases from the 2010 health care
law and to pursue other tax reforms.
Some economists claim that cutting government
spending would hurt the economy, but that idea is based on faulty Keynesian
theories. In fact, spending cuts would shift resources from often mismanaged
and damaging government programs to more productive private activities, thus
increasing overall GDP.
Consider Canada's experience. In the
mid-1990s, the federal government faced a debt crisis caused by overspending,
which is similar to America's current situation. But the Canadian government
reversed course and slashed spending from 23 percent of GDP in 1993, to 17
percent by 2000, to just 14.5 percent today.2
The Canadian economy did not sink into a recession from the cuts as Keynesians
would have expected, but instead has grown strongly over the past two decades.
Policymakers should not think of spending
cuts as a necessary evil needed to reduce deficits. Rather, the U.S.
government's fiscal mess is an opportunity to make reforms that would spur
growth and expand individual freedom. The plan proposed here includes a menu of
spending cuts for policymakers to consider. These and other reforms are discussed
further at www.DownsizingGovernment.org.
This section describes how cutting spending
could eliminate the federal deficit in five years and generate growing
surpluses after that. The starting point for the plan is the CBO's baseline
projection from March 2015.3
Figure 1 shows CBO projections for revenues (black line) and spending (red
line) as a percent of GDP. The gap between the two lines is the federal
deficit, which is expected to grow after 2017 without reforms.
The green line shows projected spending under
the reform plan proposed here. Under the plan, spending would decline from 20.4
percent of GDP today to 17.0 percent by 2025. The deficit would be roughly
eliminated by 2020 and growing surpluses would be generated after that. Under
the plan, spending cuts would be phased in over 10 years and would total $1.15
trillion annually by 2025. Those cuts would generate interest savings of $251
billion annually by 2025.4
Under the CBO baseline, federal revenues rise
to 18.3 percent of GDP by 2025, which would be 1.3 percentage points higher
than spending would be under the proposal. That would allow room for tax
reforms. One reform would be to repeal the tax increases under the 2010
Affordable Care Act.5
Another reform would be to slash the federal corporate tax rate from 35 percent
to 20 percent or less. Such a cut would spur stronger economic growth and would
lose little if any revenue over the long term.6
In sum, the best fiscal approach would be to
cut spending while reforming the most damaging parts of the tax code. That
would end the harmful build-up of debt, expand personal freedom, and generate
benefits for all Americans from a growing economy.
Tables 1 and 2 below list proposed cuts to
reduce federal spending to 17.0 percent of GDP by 2025. Table 1 shows the cuts
for health care and Social Security. These reforms would be implemented right
away, and the value of savings would grow larger over time. The figures shown
are the estimated annual savings by 2025, generally based on CBO projections.7
Table 2 shows cuts to discretionary programs
and entitlements other than health care and Social Security. 8
These cuts would be valued at $492 billion in 2015, but the plan assumes that
they would be phased in one-tenth each year over the next decade.9
The reforms listed in Tables 1 and 2 are
deeper than the savings from "duplication" and "waste"
often discussed by federal policymakers. We should cut hundreds of billions of
dollars of "meat" from federal departments, not just the obvious
"fat." If the activities cut are useful to society, then state
governments or private groups should fund them, and those entities would be
more efficient at doing so.
The proposed cuts are illustrative of how to
start getting the federal budget under control. Further reforms are needed in
addition to these cuts, such as major structural changes to Medicare. The
important thing is to start cutting as soon as possible because the longer we
wait, the deeper will be the debt hole that is dug.
After the tables, proposed cuts to subsidies,
aid to the states, military expenses, and entitlement programs are discussed.
The final section discusses the privatization of federal activities. Further
analyses of the cuts listed here are available at www.DownsizingGovernment.org.
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Table 1. Proposed Federal Budget Cuts
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Health Care and Social Security
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Agency and Activity
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Annual Savings
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$Billions, 2025
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Health Care
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Repeal ACA exchange subsidies
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107.0
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Repeal ACA Medicaid expansion
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105.0
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Block grant Medicaid and grow at 2%
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110.0
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Increase Medicare premiums
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60.0
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Increase Medicare cost sharing
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19.0
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Cut HHS non-Medicaid state grants by
50%
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43.5
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Total cuts
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444.5
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Social Security Administration
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Price index initial Social Security
benefits
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39.1
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Raise the normal retirement age for
Social Security
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10.4
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Cut Social Security Disability
Insurance by 25%
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54.0
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Cut Supplemental Security Income by
25%
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18.0
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Total cuts
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121.5
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Total annual spending cuts in 2025
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$566.0
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Table 2. Proposed Federal Budget Cuts
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Discretionary Programs and Other
Entitlements
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Agency and Activity
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Annual Savings
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$Billions, 2015
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Department of Agriculture
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End farm subsidies
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24.8
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Cut food subsidies by 50%
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53.2
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End rural subsidies
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4.2
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Total cuts
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82.2
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Department of Commerce
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End telecom subsidies
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0.8
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End economic development subsidies
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0.5
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Total cuts
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1.3
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Department of Defense
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End overseas contingency operations
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74.0
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Total cuts
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74.0
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Department of Education
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End K-12 education subsidies
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26.3
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End all other programs
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77.0
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Total cuts (terminate the department)
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103.3
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Department of Energy
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End subsidies for energy efficiency
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2.4
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End loan programs
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0.2
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End fossil/nuclear/electricity
subsidies
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3.5
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Privatize the power marketing
administrations
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0.4
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Total cuts
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6.5
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Department of Homeland Security
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Privatize TSA airport screening
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5.1
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Devolve FEMA activities to the states
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14.2
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Total cuts
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19.3
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Department of Housing and Urban Development
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End rental assistance
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30.4
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End community development subsidies
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11.2
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End public housing subsidies
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6.4
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Total cuts (terminate the department)
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48.0
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Department of the Interior
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Cut net outlays by 50% through spending
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cuts, privatization, and user charges
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6.5
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Department of Justice
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End state/local grants
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5.4
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Department of Labor
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End employment and training services
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3.5
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End Job Corps
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1.6
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End Community Service for Seniors
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0.4
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End trade adjustment assistance
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0.3
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Total cuts
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5.8
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Department of Transportation
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Cut highway/transit grants to balance
trust fund
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13.0
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Privatize air traffic control
(federal fund savings)
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1.3
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Privatize Amtrak and end rail
subsidies
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3.3
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Total cuts
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17.6
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Department of the Treasury
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Cut earned income tax credit by 50%
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30.1
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End refundable part of child tax
credit
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21.5
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End refundable part of AOTC
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4.3
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Total cuts
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55.9
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Other Savings
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Cut foreign aid by 50%
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12.0
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Cut federal civilian compensation
costs by 10%
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32.9
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Privatize the Corps of Engineers
(Civil Works)
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7.5
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Privatize the Tennessee Valley Authority
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1.0
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Repeal Davis-Bacon labor rules
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9.0
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End EPA state/local grants
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4.1
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Total cuts
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66.5
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Total annual spending cuts
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$492.2.0
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The federal government runs more than 2,300
subsidy programs, more than twice as many as in the 1980s.10
The scope of federal activities has expanded in recent decades along with the
size of the federal budget. The federal government subsidizes farming, health
care, school lunches, rural utilities, the energy industry, rental housing,
aviation, passenger rail, public broadcasting, job training, foreign aid, urban
transit, and many other activities.
Each subsidy causes damage to the economy
through the required taxation. And each subsidy generates a bureaucracy, spawns
lobby groups, and encourages more people to demand hand-outs. Individuals,
businesses, and nonprofit groups that become hooked on federal subsidies essentially
become tools of the state. They lose their independence, have less incentive to
innovate, and will likely shy away from criticizing the government and its
failures.
Table 2 includes cuts to subsidies in
agriculture, commerce, energy, housing, foreign aid, and other activities.
Those cuts would not eliminate all of the unjustified subsidies in the budget,
but they would be a good start. Government subsidies are like an addictive
drug, undermining America's traditions of individual reliance, voluntary
charity, and entrepreneurialism.
Under the Constitution, the federal
government was assigned specific limited powers, and most government functions
were left to the states. To ensure that people understood the limits on federal
power, the Framers added the Constitution's Tenth Amendment: "The powers
not delegated to the United States by the Constitution, nor prohibited by it to
the States, are reserved to the States respectively, or to the people."
The amendment embodies federalism, the idea that federal and state governments
have separate areas of activity and that federal responsibilities are "few
and defined," as James Madison noted.
Unfortunately, policymakers and the courts
have mainly discarded federalism in recent decades. Through
"grants-in-aid" Congress has undertaken many activities that were
traditionally reserved to state and local governments. Grant programs are
subsidies that are combined with federal regulatory controls to micromanage
state and local activities. Federal aid to the states totals more than $600
billion a year, and is distributed through more than 1,100 separate programs.11
The theory behind grants-in-aid is that the
federal government can operate programs in the national interest to efficiently
solve local problems. However, the aid system does not work that way in
practice. Most federal politicians are preoccupied by the competitive scramble
to maximize subsidies for their states, regardless of program efficiency or an
appreciation of overall budget limitations.
Furthermore, federal aid stimulates
overspending by state governments and creates a web of complex federal
regulations that undermine state innovation. At all levels of the aid system,
the focus is on regulatory compliance and spending, not on delivering quality
public services. The aid system destroys government accountability because each
level of government blames the other levels when programs fail. It is a triumph
of expenditure without responsibility.
Federal aid is a roundabout funding system
for state and local activities. It serves no important economic purpose. By federalizing
state and local activities, we are asking Congress to do the impossible—to
efficiently plan for the competing needs of a diverse country of 320 million
people.
The grant-in-aid system should be eliminated.
Policymakers should revive federalism and begin to terminate grant programs.
Tables 1 and 2 include cuts to grants for education, health care, highways,
justice, transit, and other activities. There is no reason why such activities
should not be funded at the state and local levels.
Cato Institute defense experts Chris Preble
and Ben Friedman have proposed numerous cuts to U.S. military spending.12
They argue that the United States would be better off taking a wait-and-see
approach to distant threats, while letting friendly nations bear more of the
costs of their own defenses. They note that U.S. policymakers support
extraneous missions for the military aside from the basic role of defending the
nation.
As such, the military budget should be cut in
a prudent fashion as part of an overall plan to downsize the government and
balance the budget. The current plan assumes that spending on overseas
contingency operations—which will be $74 billion in 2015—would be reduced to
zero over the decade.13
The projected growth in Medicare, Medicaid,
and Social Security is the main cause of America's looming fiscal crisis.
Budget experts and most policymakers understand the need to restructure these
programs. The reforms listed in Table 1 include cuts to Medicare, Medicaid, and
Social Security.
Policymakers should repeal the 2010
Affordable Care Act (ACA). That would reduce spending on Medicaid and end
spending on the exchange subsidies.14
In addition, policymakers should convert Medicaid from an open-ended matching
grant to a block grant, while giving the states more program flexibility. That
was the successful approach used for welfare reform in 1996, which encouraged
state innovation. Creating a block grant and capping annual spending growth at
2 percent would save about $110 billion annually by 2025.15
Table 1 includes modest Medicare changes
based on CBO estimates.16
Reforms include increasing deductibles and increasing premiums for Part B to
cover 35 percent of the program's costs. However, larger Medicare reforms are
needed than just these cuts. Cato scholars have proposed moving to a system
based on individual vouchers, personal savings, and consumer choice for elderly
health care.17Such
a reform would create strong incentives for providers and patients to improve
system quality and reduce costs.
For Social Security, the growth in initial
benefits should be indexed to prices rather than wages to slow the program's
growth. That reform would save about $39 billion annually by 2025 and growing
amounts after that.18
The plan also includes a CBO option to modestly raise the normal retirement
age.19
In addition, the fast-growing Social Security Disability Insurance and
Supplemental Security Income programs would be trimmed 25 percent compared to
the current growth path.
In recent decades, governments around the
world have sold state-owned businesses and assets to private investors.20
Airports, railroads, electric utilities, post offices, and other items have
been privatized. Privatization generally leads to reduced costs, higher quality
services, and increased innovation.
In the United States, there are many federal
activities that should be privatized. Table 2 includes the privatization of
Amtrak, the air traffic control system, airport screening, electric utilities,
and the Army Corps of Engineers. Such reforms would reduce budget deficits,
improve management, spur quality improvements, and generate economic growth.
The savings listed stem from the elimination of annual subsidies to the
activities.
Consider the nation's air traffic control
(ATC) system, which is run by the Federal Aviation Administration. The FAA's
modernization efforts have often fallen behind schedule and gone over budget.21
The ATC system needs major improvements to meet rising travel demands, but the
FAA is not up to the challenge.
The solution is to privatize the ATC system
and separate it from the government. Canada privatized its ATC in 1996, setting
up a private, nonprofit corporation, Nav Canada.22
The company is self-supporting from charges on aviation users. It is one of the
safest systems in the world, and has won international awards for its efficient
and innovative management.23
Britain also privatized its ATC system in the form of a nonprofit corporation.
Without major reforms, official projections
show that federal spending will soar to more than 30 percent of GDP by the
mid-2030s.24
State and local government spending of more than 11 percent of GDP would come
on top of that.
It seems inconceivable that American voters
would let the government grow that large. It is also unlikely that the
government would be able to raise taxes much above current levels to support
higher spending because of our increasingly globalized economy.25
Policymakers will have to make large spending
cuts sooner or later, and the sooner the better to avoid accumulating more
debt. They should begin reforms with the menu of cuts presented here. Leaders
of other nations have pursued vigorous cost cutting when their debt started
getting out of control, and there is no reason why our political leaders cannot
do the same.
2 Chris Edwards, "We Can Cut Government: Canada
Did," Cato Policy Report, Cato Institute, May-June 2012. For the latest
data, see www.budget.gc.ca. Federal spending in 2014-2015 will be 14.5
percent of GDP.
4 I modeled interest costs using the CBO baseline
projections for interest rates. I adjusted for the fact that federal debt held
by the public is projected to grow faster in coming years than indicated by the
accumulation of annual deficits.
5 ACA tax revenues are expected to be about 0.7 percent
GDP annually. See Congressional Budget Office, Letter to Speaker John Boehner
regarding H.R. 6079, July 24, 2012.
6 Chris Edwards, "Corporate Inversions, Tax Rates,
and Tax Revenues," Cato@Liberty, Cato Institute,
August 5, 2014. And see Chris Edwards, "Canada's Corporate Tax Cuts,"
Daily Caller, March 13, 2012.
7 The Medicare and Social Security savings were based on
options in Congressional Budget Office, "Options for Reducing the Deficit:
2015 to 2024," November 2014.
8 The figures for Table 2 are mainly sourced from the
Budget of the U.S. Government, Fiscal Year 2016, Analytical Perspectives
(Washington: Government Printing Office, February 2015), Table 29-1. The
figures are estimates for fiscal 2015.
9 Note that the value of cuts would be greater in 2025
than in 2015. I have assumed that the value would grow at the same rate as
discretionary spending in the CBO baseline.
10 Chris Edwards, "Federal Subsidy Programs Top
2,000!" Cato@Liberty, Cato Institute, January 25, 2010. For the
most recent count, see www.cfda.gov.
11 The number of programs is discussed in Chris Edwards,
"Fiscal Federalism," Cato Institute, June 2013, www.downsizinggovernment.org/fiscal-federalism.
12 Benjamin H. Friedman and Christopher Preble, "A
Plan to Cut Military Spending," Cato Institute, November 2010, www.downsizinggovernment.org/defense.
13 Congressional Budget Office, "Updated Budget
Projections: Fiscal Years 2015 to 2025," March 2015.
14 Congressional Budget Office, "Updated Budget
Projections: Fiscal Years 2015 to 2025," March 2015.
17 Chris Edwards and Michael Cannon, "Medicare
Reforms," Cato Institute, September 2010, www.downsizinggovernment.org/hhs.
20 Chris Edwards, "Privatization," Cato
Institute, February 2009, www.downsizinggovernment.org/privatization.
21Chris Edwards and Robert W. Poole, Jr., "Airports
and Air Traffic Control," Cato Institute, June 2010, www.downsizinggovernment.org/transportation .
23 Chris Edwards, "Privatize the FAA," Daily
Caller, April 24, 2013. And see Glen McDougall and Alasdair S. Roberts,
"Commercializing Air Traffic Control: Have the Reforms Worked?"
Suffolk University Law School, February 17, 2009.
24 Congressional Budget Office, "The 2014 Long-Term
Budget Outlook," July 2014. See the "extended alternative fiscal
scenario."
25 This theme is explored in Chris Edwards and Daniel
Mitchell, Global Tax Revolution (Washington: Cato Institute, 2008).
Cato Institute
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Source:http://www.downsizinggovernment.org/plan-to-cut-federal-spending
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