Restoring More Discretion to the Federal Budget

By: C. Eugene Steuerle  and Rudolph G. Penner

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The nation must change how it makes budget decisions. Permanent entitlement and tax subsidy programs, particularly those that grow automatically, dominate federal spending. Their growth, often set in motion by lawmakers long since dead or retired, is not scrutinized with the same attention as the discretionary programs Congress must vote on each year to be maintained, as well as grow. The result? A predetermined, inflexible federal budget that does not reflect our country’s needs.

Social Security, Medicare, and Medicaid, the three largest entitlement programs, accounted for $1.9 trillion, or about half, of federal spending in 2015. More important, they will absorb more than all the increase in tax revenues our growing economy will provide over the next decade and beyond. This astounding growth, combined with political unwillingness to collect enough taxes to pay for current government spending, translates to accelerating increases in budget deficits and national debt.

Congress can take steps to draw more attention to long-term sustainability when making budget choices. One possible reason such growth remains unchecked is that much of the budget process currently focuses at most on total spending and revenues over the next 10 years. This leads to game-playing when policymakers decide to increase government largess: Costs can be hidden outside the budget window, or costly “pay-fors” can be postponed for a later Congress to deal with.

Reforms focused on a 10-year window are similarly myopic and inadequate. To protect existing beneficiaries when enacting reform, typically only a small portion of the deficit reduction shows up in the first decade; the most impact is made on future beneficiaries, not current ones. A longer time horizon also makes reforms more palatable politically; it shifts the focus from threatening today’s retirees to allowing younger households to garner greater resources during their working years in exchange for less relative growth in government retirement benefits.

Better presentations of the budget priorities set by the president and Congress is crucial for reform. Current budget documents do not give a very clear picture of how much growth in spending is predetermined versus newly legislated. Nor do they reflect the relationship among real growth in taxes, tax subsidies, and spending programs.

What would such an improved portrayal show? Near-term problems in how our money is spent, not just long-term ones related to growing debt. Today’s current law, as estimated by the Congressional Budget Office, implies $1.281 trillion more inflation-adjusted dollars will be spent in 2026 than in 2016: $845 billion from revenue increases and $436 billion from deficit increases. Of these dollars, 33 percent  will be devoted to Social Security and 37 percent to health programs, mostly Medicare and Medicaid. A further 27 percent will be devoted to larger interest costs related to debt increases.

What does this leave for everything else? Essentially nothing. About 1 percent of the $1.281 trillion would be spent for defense and 4 percent for other mandatory spending, most of which is for non-health entitlements. Domestic programs that must be funded every year will be cut slightly in real dollars while declining substantially as a share of national income. Only much larger deficits at an unsustainable level prevent further hits on these programs.

Entitlements should be reviewed more frequently, and periodic votes of Congress should determine most of their growth. Permanent tax subsidies need similar scrutiny and limits placed on their automatic growth. In good times, tax rates must be high enough to avoid pushing today’s costs onto tomorrow.

Automatic triggers that activate if economic and demographic developments turn out worse than expected are one way to slow benefit growth or increase revenues. Sweden, Canada, Japan, and Germany use triggers in their Social Security programs; U.S. policymakers can learn from them. Of course, triggers work best when they reinforce sustainable programs. If required adjustments are too politically painful, Congress will simply override them, as it did for many years with updates to physician payment rates in Medicare.

We must grant future voters and those they elect more flexibility to allocate budget resources. Improving the way Congress budgets can enable government to better respond to changing needs, set new national priorities, and get off a disastrous fiscal path.

C. Eugene Steuerle is an Institute fellow and the Richard B. Fisher chair at the Urban Institute. Rudolph G. Penner is an Institute fellow at the Urban Institute. They are the coauthors of “Options to Restore More Discretion to the Federal Budget,” a joint publication by the Mercatus Center at George Mason University and the Urban Institute.

A version of this post originally appeared on Economics21.

Photo by 401(K) 2012 via Flickr Creative Commons.

 


One Comment on “Restoring More Discretion to the Federal Budget”

  1. Michael Bindner says:

    There are a few ways to get control of the budget.

    The first is to fund entitlements with a subtraction VAT/net business receipts tax to replace payroll taxes, corporate income taxes and pass-through taxes from business income. The tax could have offsets for firms which provide services in lieu of the government doing so – such as personal retirement accounts holding employer voting stock (distributed equally, not by income) and employer provided doctors rather than a single-payer insurance program (which is inevitable). Both would be safety valves to keep spending from going too far. Also funded would be education, corrections and mental health care (often the same thing). This could be a joint regional/state tax and be collected by states.

    The second is a VAT to fund discretionary spending – with a constitutional amendment allowing regional VAT rates and ratifyting (though it is not required) regional governments of equal electoral voting strength. This would fund both military (non-strategic) and civil discretionary spending. Regions that want more government would pay a higher rate, lower government, lower rate. No more unneeded military bases. A carbon tax could also be used or added. States would collect this as well.

    The only nationally collected tax would be a residual income and inheritance surtax (with inherited assets sold treated as normal income), with a 50K individual/100K joint limit. It would fund debt repayment (including the social security trust fund), net interest (no more rolling it over) strategic nuclear and overseas deployments. This fund may be in deficit, but those that pay it will know that it is theirs to fund, not everyone’s, so they will accept a higher rate to reduce the debt to as low as possible.


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