Rethinking Spending Targets

Settle in, because it looks like it will be a long hot summer debate about taxing and spending. We're already hearing the old saws from Republican

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Settle in, because it looks like it will be a long hot summer debate about taxing and spending. We're already hearing the old saws from Republicans about how we spend too much, tax cuts don't increase the deficit, and we're saddling our children and grandchildren with enormous, horrible debt that will surely bankrupt them before they're even born.

It isn't like we haven't all heard this before, or like we don't hear it over and over, but this time perhaps we could start by shattering myths. One begging to be shattered is this idea that we must limit spending to a certain percentage of GDP in order to be "fiscally solvent".

Center on Budget and Policy Priorities explains:

Simply put, aiming to stabilize the budget at the recent historical spending average of 21 percent of GDP might be appropriate for the years ahead if the age distribution of the population remained the same as it was in recent decades; if health care costs grew no faster than the economy; if Medicare had no drug benefit; if we were willing to leave more than 30 million Americans without health coverage; if there were no terrorist threats and hence no need for homeland security spending; if no wounded veterans of Iraq and Afghanistan needed medical care and income support; and if decisions and events over the last decade had not nearly doubled the national debt as a share of GDP. But that’s not the world in which we live, and it’s not the target at which we should aim.

This report hits at the heart of why today's spending debate is such a non-starter: Historically, we have not had revenues that come close to what is needed to maintain public services and programs. (As an aside: the unspoken but clear message is that taxes should NEVER have been cut in the first place)

The historical record shows a persistent mismatch between revenues and the funding needed for public services. Revenues at the 40-year average — a little over 18 percent of GDP — would not have balanced the budget in any of the last 40 years. The only balanced budgets over this period occurred from 1998 through 2001, years in which revenues were markedly above the 40-year average. Revenues in these years were in the 20-to-21-percent-of-GDP range. As a result of this mismatch between revenues and funding needs, the government ran deficits that averaged 2.6 percent of GDP over the past 40 years.

In case that wasn't clear enough, let me make it clearer: Bill Clinton's budget put us on the path to fiscal solvency without cutting services, and George Bush's tax cuts derailed it. To further complicate the picture, the whole "Homeland Security" spending package along with a couple of wars finished the job.

Indeed, the CBPP report confirms this, and urges policymakers to rethink how they approach Federal debt and spending.

The bottom line is that arbitrary numerical targets for federal spending and revenues are misguided. Although history provides useful information and guidance, it should not be a straitjacket. What will be appropriate in 2020, 2030, or 2050 is not necessarily the same as in 1970 or 1980. Budgetary policies, like other policies, must respond to changing circumstances. “As our cause is new,” wrote Abraham Lincoln, “so we must think anew, and act anew.”

And this:

In our view, the aging of the population, the continued importance of Social Security and Medicare, the growth in federal responsibilities in recent years in areas such as homeland security, and rising health care costs justify higher levels of federal spending and revenues over the next 40 years than over the past four decades.

Let the Congress have ears to hear.

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