The Red Ink Capital
This week the White House budget office released the “Mid-Session Review” of the federal budget. As expected the new figures point to higher deficits. For fiscal year 2003, the deficit jumps from $304 billion to $455 billion. Federal spending now consumes $2.2 trillion dollars, and the budget report increases the estimate of 2003 spending by $71 billion. While a slow economy and the Iraqi war have much to do with the deficit, the report is indicative of a larger systemic problem—a lack of fiscal discipline and excessive federal spending.
Today’s sluggish economy makes the issue of fiscal discipline more important, but the spending problem surfaced much earlier, with spending hikes approaching 15 percent in 2001 when a surging economy brought in surplus revenues to Washington. The average rate of spending increases from 1998 to 2003 has been 7.4 percent, a rate of growth that far exceeds the rate of growth in the average family’s income. For all the discussions of applying the surplus to save social security, Congress ultimately lapsed into spending on programs that foster chances of re-election. Surplus tax revenues are a scarce commodity in Washington, and unless they are returned to taxpayers through tax cuts, they are soon funneled into spending that expands the size of government. Since 1930, the longest streak of surpluses lasted only four years, and the government has been in deficit more than 80 percent of the time. In 1930 federal outlays accounted for 3.4 percent of gross domestic product; today government spending is roughly 20 percent.
In constant dollar terms, the revised $455 billion deficit is surpassed only by deficits at the peak of World War II. Fortunately, however, the economy is much larger today, and today’s deficits are a much more manageable percentage of the nation’s output, estimated to be 4.2 percent of GDP. While many have raised concerns that the deficit will crowd out private investments and push interest rates higher, historically there it has been difficult to find a strong correlation between interest rates and deficits. Even now with deficits reaching new heights, interest rates are at record lows. This does not rule out, however, adverse market responses to systemic spending excesses that continue unabated in the future.
Critics of President Bush’s economic policies assert that the recent tax cuts are responsible for driving the budget into deficit. The budget report, however, makes it clear that a slow economy and federal spending are more to blame for the increasing deficit numbers. According to the Office of Management and Budget, the three Bush tax cuts were responsible for only 23 percent of the upward deficit revisions since 2001. In fact, even without the tax cuts, the deficit would still be $278 billion. The economy’s lackluster performance is responsible for more than half of the revision, with the remaining 24 percent attributed to increased federal spending.
President Bush is aware of the need for fiscal discipline, claiming that stronger economic growth alone cannot solve the deficit problem. Federal spending is a problem and must be constrained. The White House is seeking to cap growth in discretionary spending at 4 percent. While useful, this locks in the growth in government that has occurred since 1998. A more aggressive plan must identify and eliminate wasteful or unnecessary spending. The administration is also asking Congress to adopt new budget enforcement mechanisms, such as the expired pay-go requirements, which attempt to force Congress to remain within prescribed spending guidelines.
In many ways, the debate over tax cuts was an attempt to establish limits on the growth of government. American voters made a clear choice to reduce the flow of resources to the government so that taxpayers could keep more of their money and make the decisions as to how that money was spent. A CSE poll conducted during the tax debate found that the more people learned about the tax cuts, the more supportive they were, especially as they learned what benefits the tax cuts provided.
As usual, Washington appears to want things both ways. Noting the popularity of the tax cuts, Congress ultimately moved to enact a tax cut package. At the same time, however, Washington continues to spend money in hopes of pleasing valued constituents. But when it comes to fiscal discipline, Congress cannot have it both ways. If spending continues in the wake of tax cuts, future generations will ultimately have to pay down the tab run up by Congress. A better path would be to recognize the voters’ commitment to a smaller government and reduce spending to live within the limits established by American taxpayers who have pressured Washington to cut taxes and reduce the size of government.
