Runaway Spending

Economist.com | George Bush’s big-government conservatism
The Economist takes a much-deserved swipe at President Bush for letting spending get out of control and points out that most of it has not been on the military or homeland security. In fairness, they point out that neither party seems interested in balanced budgets — the nine dwarves want to repeal the Bush tax cuts but have already spent the money.

We will see tax increases in the future. Our best hope is that these increases are accompanied by reform that simplifies the tax code. In addition, the revenue shortfall could force the issue of entitlement reform and lower our long term fiscal burden from what it might otherwise be.

As for corporate welfare, it totals around $80 billion a year so there really is a chance for savings. Its elimination would be a boon as well.

IN HIS first three years as president, George Bush has cut taxes three times and yet orchestrated a sharp rise in public spending — not just, or indeed mainly, on foreign wars and “homeland security”, but also on domestic matters. For instance, spending on education has jumped by three-fifths since 2000, and spending on transport has risen by nearly half. Lower taxes, higher spending: the outcome is that the federal government, despite a steep fall in the interest it pays on its debt, has swung sharply into deficit — $450 billion this fiscal year, by most accounts.

That is not, yet, as big a deficit as that presided over by Ronald Reagan in 1983 (6% of GDP then, compared with about 4% of GDP for this year). Yet the deterioration of the government’s finances today — from a surplus of 2.4% of GDP in the 2000 fiscal year — is certainly steeper.

What is more, by 1983 Mr Reagan and Congress were together attempting to do something about the deficit. Nowadays, no one with political power is bothering to try. All the Democratic presidential hopefuls want, to a greater or lesser degree, to repeal Mr Bush’s tax cuts. Yet they aim to use the money not to bring down the deficit, but to expand public programmes. Mr Bush’s own new legislation to pay for prescription drugs under Medicare, the federal health programme for the elderly, will cost $400 billion over the next ten years. A bipartisan conspiracy exists, it seems, to ignore the risks of a widening deficit.

[….]

Fortunately, others are thinking more seriously about the choices that need to be made to secure long-term deficit reduction. In “Restoring Fiscal Sanity”, a report to be published on January 13th by the Brookings Institution, edited by Isabel Sawhill and Alice Rivlin, once Mr Clinton’s budget director, three options are offered.

The “smaller government” path emphasises cuts in “corporate welfare” (subsidised insurance, loans, etc), the devolution of responsibilities to the states, savings from that old chestnut of “waste, fraud and abuse”, and deep cuts in entitlements. The “larger government” path emphasises tax increases as the main route to sustainability. The “better government” path argues, in Clintonian style, that the government can be more effective without absorbing a larger share of GDP. The problem with this path, as the authors admit, is the difficulty of measuring the effectiveness of various government programmes, and of dealing with resistance to cutting them.

Given such resistance, it is more likely that higher taxes will play the largest part in plugging the deficit. The question, then, is whether the process of plugging begins sooner or later. Either way, Americans will soon have to accept that federal spending is rising to a permanently higher level, one closer to European levels of government spending. Perhaps they can soften the shock by taking their holidays in Paris.

That last bit is quite a slap. It’s not written in stone and with the proper reforms I outlined above we needn’t approach European levels of spending. If we do it will be a long-term drag on the economy.

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