Curbing Federal Spending

FEDERAL SPENDING IS SURGING out of control. The growth of spending programs, especially middle-class entitlements, is a direct threat to the economy and will lead to huge deficits and debt, drastic cuts in other spending, or sharply higher taxes. Yet Washington seems paralyzed, unable to say “no” to new spending and unwilling to restrain and reform entitlements. Besides a general failure of leadership in addressing entitlements, inaction is almost guaranteed by an outdated budget process that hides future program costs and fails to require lawmakers to make serious choices. This must change. If it does not, a growing government will steadily erode economic performance and personal freedom. A properly limited federal government can be achieved only with a new budget process that discloses the true long-term costs of programs, limits total spending, and forces real choices among priorities, together with a serious reform of Medicare and Social Security that reduces liabilities while improving the programs.

Principles

The focus of budget control policy should be on reducing spending as a proportion of national income, not on reducing the deficit. The deficit is not the threat to the economy, but rather a symptom of the real problem of high and climbing federal spending. A balanced budget does not necessarily require controlling spending because it could also be accomplished through higher taxes and higher spending. Higher federal spending removes resources from the productive private sector.

Entitlement programs should be curbed through reform or eliminated. Entitlement programs unfairly obligate future taxpayers, and middle-class entitlements— such as Medicare—are growing at unsustainable rates, threatening huge tax increases on future generations and threatening the economy. These problems must be addressed now so that orderly reforms can curb their growth.

The budget process should force Congress to make real choices among appropriate priorities and to consider the long-term costs of programs. Federal spending priorities should be based on core constitutional functions, such as defense. Subsidies and corporate welfare do not meet these criteria and should be eliminated. The current budget process was designed 30 years ago and does not effectively force Congress to limit spending by requiring priority setting or trade-offs or to reconsider obligations created by federal programs such as Social Security or Medicare. The budget should contain measures of liabilities and obligations, and force Congress to plan to meet these obligations.

Federal programs should be held to measurable standards, and failed and obsolete programs should be eliminated. The effectiveness of all federal programs should be subject to independent evaluations to determine effectiveness based on results, and funding levels should be adjusted accordingly.

Objectives

Enact a new federal budget process. The outdated budget process no longer reflects America’s current budget priorities. Four key reforms are needed to transform the budget process into one that requires and rewards fiscal restraint and long-term planning:

● Impose spending caps. There are no constraints on federal spending under the current system. Lawmakers can simply add up the cost of their preferred discretionary programs and pass legislation to fund them. Mandatory programs, such as Social Security and farm subsidies, are placed on autopilot, growing automatically without any oversight. Spending growth should be limited through caps on total federal spending. This would force lawmakers to do what families as well as state and local governments do: set priorities and make trade-offs.

● Include long-term obligations in the budget. Although families can see every month how much they owe on their mortgage or cars, and stockholders can see the cost of employee retirement packages in legally required corporate reports, the federal budget does not include the cost of long-term financial commitments. Consequently, lawmakers enter into long-term financial commitments without planning how to pay for them. The federal budget should include these long-term costs and require that lawmakers produce a plan to pay for them.

● Transform the annual budget resolution into a binding act of Congress. Budget resolutions are intended to set a budget framework early in the annual budget process. Yet budget resolutions are not binding, so Congress can simply override them and spend more. Furthermore, the exclusion of the President from the budget resolutions means that contentious issues between the White House and Congress are not settled until the end of the budget process, when delays can cause government shutdowns. Converting the budget resolution into a binding law signed by the President would help to avert these problems.

● Implement laws to achieve better enforcement. Even when lawmakers do enact restraints, large loopholes typically render them irrelevant. For example, lawmakers can exceed even modest spending limits simply by labeling programs “emergency” or by voting (with a simple majority) to ignore their own rules. To enforce fiscal restraint, emergency spending should be restricted and at least a two-thirds supermajority should be required to bypass budget spending rules.

Enact a Taxpayers’ Bill of Rights. Federal spending should be capped through a Taxpayers’ Bill of Rights (TABOR) law that restricts spending increases to the inflation rate plus population growth. Such a limit is not too much to ask within a federal budget that, after a 25 percent expansion in three years, is overflowing with wasteful, outdated, duplicative, and unjustified programs. TABOR would save taxpayers $4 trillion over the next decade and could be enforced by requiring a two-thirds supermajority to pass the budget resolution or any spending bill that exceeds the TABOR allowance. Such a bar is low enough to clear during a national emergency or war, yet high enough to prevent abuse. Budget surpluses could be split automatically between tax rebates and debt reduction.

Colorado enacted the first TABOR law in 1992. Since then, the state government’s growth rate has been reduced to 3 percent, and taxpayers have received $3.3 billion in tax rebates. By 2002, the average Colorado household was paying $3,729 less in state taxes than if spending had continued growing at its pre-TABOR rate.

A federal TABOR would require lawmakers to set priorities, reduce wasteful spending, and reform entitlement programs. It would also protect the family budget from the federal budget.

Reform Social Security and Medicare to reduce liabilities while improving retirement programs. The $44 trillion shortfall in Social Security and Medicare represents the most important economic challenge of our time. The first baby boomers will reach early retirement on January 1, 2008, at which point Social Security and Medicare costs will begin rising to levels that will crowd out every other federal program. The new drug benefit worsens Medicare’s finances. The Medicare trustees estimate that the drug benefit faces an $8.1 trillion shortfall over the next 75 years. Within four decades, these programs will require tax increases that, at today’s prices and incomes, would exceed $10,000 per household.

Lawmakers should begin changing Social Security from a pay-as-you-go system into one in which individuals set aside funds for their own retirement. Over the long run, placing these funds in personal retirement accounts should lead to substantially higher benefit levels than under the current system. Unlike current Social Security benefits, individuals would own these accounts and could pass them on to their children.

Congress should repeal the Medicare drug benefit, which was enacted without any plan to deal with its huge unfunded liabilities. Lawmakers should delay or repeal the new entitlement scheduled to go into effect in 2006 and instead reform the whole program to curb costs and increase choice and competition.

Freeze total discretionary spending, making trade-offs between defense and lower-priority programs. Congress should demonstrate its commitment to restraining federal spending by starting with annual appropriations. Discretionary spending should be frozen, and Congress should trade off spending for priority programs with cuts in lower-priority programs. Defense and homeland security spending, which together comprise over half of the discretionary budget, should be established as priorities.

Programs should then be reviewed to assure that every dollar is spent efficiently. To fund defense and homeland security priorities, lower-priority discretionary programs should be eliminated. Lawmakers could start this process with the $23 billion spent annually on special-interest pork-barrel projects, such as grants to the Please Touch Museum and the Rock and Roll Hall of Fame.

Establish a “base-closing” commission on wasteful programs. To make it easier for Members to eliminate programs, Congress should appoint a commission, similar to the successful military base-closing commissions of the late 1980s, to create a list of all wasteful, outdated, duplicative, and unnecessary programs that should be eliminated. Lawmakers should then be required to cast an up-or-down vote to eliminate all programs on the list, preventing individual lawmakers from amending the list to protect their special-interest projects. The large savings should justify each lawmaker’s vote to give up one or two special-interest subsidies.


Brian M. Riedl is Grover M. Hermann Fellow in Federal Budgetary Affairs and Alison Fraser is Director of the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation. This article is reprinted from The Heritage Foundation’s Mandate for Leadership.