“Back in 1965 the Federal Government spent about 17% of GDP and the politicians annually controlled almost 70% of that spending; the other 30% being (mandatory) entitlements and interest on the national debt. The CBO projects that by 2025 Federal Government spending will be about 22% of GDP…
…but the politicians will only annually control about 23% of this spending, with a whopping 77% being spent on (mandatory) entitlements and interest on the national debt. And more than half the 23% is for defense…so really our politicians are only fighting over and deciding on about 10% of the federal budget every year. That’s pretty scary financially and probably also why many of us have so little respect for the politicians in D.C. these days. When are our federal government politicians going to tackle entitlement reform? When we can’t afford our military or we default on our debts? (By the way, this crowding out of defense and all other discretionary spending by entitlements and interest, has a direct parallel in state and local government spending on public safety and other services for taxpayers, being crowded out by unsustainable public pension plans and even some municipalities filing for bankruptcy/defaulting on their debts.)”, Mike Perry
Budget Priorities Don’t Bode Well for Future
Misshapen spending baked into the federal budget could harm economic growth if left to fester
By Greg Ip
If congressional squabbling causes the U.S. government to shut down this year, the economy will be fine. Unfortunately, the same cannot be said if the misshapen priorities embedded in the current federal budget are left to fester.
Indeed, the real budget crisis isn’t about the deficit, which for now is near historical norms. Nor is it about the level of taxes or even total federal spending.
Rather, it’s the composition of that spending. The net result of budget policies since 2010 will be to undercut the federal contribution to the country’s human, physical and intellectual capital, undermining long-run economic growth, as an unreformed safety net swallows up ever more of national income and saps growth in the labor force.
The simplest illustration of this dichotomy is that under current law, domestic discretionary programs—programs that must be reauthorized each year by Congress—will shrivel to 2.3% of the country’s gross domestic product, the broadest measure of economic output, by 2025, the Congressional Budget Office projects. That would be the lowest since before 1965, down from 3.4% in 2007. This category includes most federal spending on research, education, training and infrastructure (though not highways)—in other words, the sort of spending that enhances economic growth.
At the same time, mandatory programs, which don’t need annual authorization and include most of the social safety net, will balloon to 14.1% of GDP by 2025 from 10.1% in 2007, according to the CBO.
This is due partly to the Affordable Care Act, but even more to the impact on Social Security, Medicare and Medicaid of an aging population and health care costs, which, after a respite, will outstrip inflation in coming decades.
No one set out to create a budget so inimical to economic growth; it was an unhappy consequence of circumstances and politics. In 2011, the Republican-led Congress, determined to put a brake on deficits and the size of government, persuaded President Barack Obama to accept caps on domestic discretionary and military spending. The more painful, long-run changes to taxes and entitlements were supposed to follow.
But when the two sides couldn’t agree on those changes, a “sequester” that capped discretionary spending even more tightly kicked in.
While those caps were subsequently eased a bit, Republican legislators envision returning to them in the coming fiscal year for domestic spending.
Because the sequester makes no adjustment for economic or population growth, the CBO reckons it would shrink GDP in the coming year by 0.4%. But the real harm comes in the long run. U.S. productivity growth is its lowest in decades as is the proportion of working-age people in the workforce. Fiscal policy aggravates both problems.
Most of the federal government’s contribution to the nation’s productive capital is “discretionary” and vulnerable to the sequester. The White House says it would reduce competitive research grants by the National Institutes of Health for fiscal 2016 to the lowest level since 1998, at a time when federal research is already near historical lows relative to GDP.
Enrollment in Head Start, a preschool preparation program, and federal per-student funding for grades K through 12, adjusted for inflation, would fall in fiscal 2016 to the levels seen in 2001.
The infrastructure budget of the Federal Aviation Administration, which is struggling to upgrade the nation’s air traffic control system, would hit a 15-year low, and the Washington region’s problem-plagued subway would lose a third of its federal funds under the House Republicans’ proposed appropriations.
Of course, a lot of money is badly spent and the White House wish list includes its share of projects of dubious economic merit, from weatherizing drafty houses to high-speed rail. This calls for more effective cost-benefit evaluation.
But money for that is also scarce. A federal center that tests ways to deliver Medicare and Medicaid services more cost-effectively could lose all its funding, even though the CBO reckons it produces net savings for the taxpayer.
Mr. Obama blames this squeeze on Republicans and promises to veto funding bills that adhere to the sequester. Yet a squeeze was inevitable even without the sequester as entitlements suck up more of taxpayers’ dollars.
The presidential candidates aren’t much better. As Marc Goldwein of the Committee for a Responsible Federal Budget notes, Democratic candidate and Vermont Sen. Bernie Sanders actually wants to expand Social Security and raise payroll taxes, while Donald Trump, the Republican front-runner, would leave both Social Security and Medicare alone. (One exception is Republican New Jersey Gov. Chris Christie, who has a credible plan for both entitlements, but that’s hardly helped his poll numbers.)
These are the sorts of priorities that will reverberate years from now, when the controversy over Planned Parenthood has largely passed.