Economics, Pethokoukis

Is Washington cutting the wrong kind of spending?

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Here’s how the budget caps in the Budget Control Act will affect nondefense discretionary spending (via analyst Michael Linden at the Center for American Progress):

From 1962 through 2011 nondefense discretionary spending has averaged 3.9 percent of GDP and has never slipped under 3.2 percent. Furthermore, spending will continue to decline in each subsequent year. In 2022, however, nondefense discretionary spending is projected to dip below 2.8 percent of GDP, putting it at more than 30 percent under the past half-century’s average.

And here’s what happens what you add in the sequester:

If fully implemented, the sequester will reduce the nondefense discretionary part of the federal budget by $331 billion from 2013 through 2022, a cut of an additional 5 percent from the already-lower capped levels. The result: reducing nondefense discretionary spending even further from the already projected historic lows. Instead of totaling 3.2 percent of GDP in 2017, nondefense discretionary spending would total less than 3 percent of GDP and would be on its way down to 2.6 percent by 2022. This is less than two-thirds of what was previously its lowest level.

And yet despite the cuts to both defense and nondefense discretionary spending as a share of the economy, the Congressional Budget Office still forecasts total spending at a historically high 22.3% of GDP in 2022.

Even as overall discretionary spending fall to 6.9% of GDP in 2022 from 8.3% in 2012 — a year when overall spending was 22.9% of GDP — it is partially offset by a rise in mandatory spending to 14.4% of GDP from 13.2% of GDP. In addition, interest spending rises to 2.3% of GDP from 1.4%.

How can Washington cut one kind of spending so deeply and ignore another kind, even though the latter is what poses the big long-term risk to the US economy? Linden:

The very diversity and breadth of the services and programs that live under the banner of nondefense discretionary is what makes the category such a favorite target for budget cuts. The public is far more likely to accept massive cuts to a nameless collection of nebulous programs than it is to a list of specific programs that they know and like. But the effects will be the same nonetheless. We cannot cut these services down to unprecedented levels and expect there to be no impact.

One example: Spending on public goods such as infrastructure and scientific, technological, and health care R&D will fall by a third:

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Better to a) trade some of these near-term, across-the-board spending cuts for entitlement reform, and b) institute pro-growth tax reform.

4 thoughts on “Is Washington cutting the wrong kind of spending?

  1. I think entitlement and tax reform are good things, but I question the premise that some subset of government spending is “entitled” to some constant (or growing) share of GDP.

  2. One example: Spending on public goods such as infrastructure and scientific, technological, and health care R&D will fall by a third:…

    Why should Washington be funding ‘public goods’? The government has no money. It either has to take what it spends from the earnings of productive people or borrow the money and guarantee that future taxes will rise or that the currency will be devalued?

    If R&D is necessary why not let the private sector spend money on it? After all, it is far more capable of judging where to deploy resources than the central planners that make the decisions today. If Hong Kong can have a private company build rail lines or toll bridges why can’t the US? And why should Congress cut not only the non-discretionary spending but defense and the welfare programs that take up such a huge portion of total revenues and require borrowing to maintain them?

  3. The entire gain from the 2 % tax increase on the “rich” has been eaten up by the Sandy Hook bill. Cutting spending is a dream never to be realized.

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