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Spending Can Be Cut

Politicians who tell you democracies canít slash spending are lying.

Veronique de Rugy
July 14, 2010

When times are hard financially, families frequently let their credit card balance expand. But they also slash expenses to meet their new financial situation. They stop going out for dinner, for instance, or take their vacation locally instead of abroad. They might even downsize their house.

When economies fall into recession, gov-ernments too tend to let their “credit card balances” expand: Their budget deficits explode. Slashing spending, though, is regarded as a step too far.

The U.S. government is not the exception that proves the rule. During the economic crisis of the past 18 months, Washington has increased its deficit fast and hard. According to the Congressional Budget Office, the deficit grew from 1.2 percent of the Gross Domestic Product (GDP) in 2007 to 10 percent in 2010—roughly $1.4 trillion. Meanwhile, the consensus on both the right and the left seems to be that cutting spending is simply impossible.

In May, House Whip Eric Cantor (R-Va.) unveiled the GOP’s YouCut website, which includes five possible spending cuts for citizens to vote on. Rep. Cantor promised to take the winning cut to the House floor next week for members to consider. The average price tag of each reduction would be just $638 million in annual savings. That’s less than 0.02 percent of the $3.7 trillion federal budget, or just 0.04 percent of this year’s federal deficit of $1.6 trillion. In the big picture, the cut would basically be meaningless.

On the Democratic side, President Barack Obama’s recent budget request promises to freeze discretionary spending (excluding the Pentagon and homeland security) to save $250 billion over 10 years. Our annual deficits are $1 trillion or more. Again, the reduction is essentially meaningless.

Also on the left, a recent study by the Center for American Progress, called “The New Deficit Commission’s 2015 Targets,” argues that the bipartisan commission tasked with reducing the deficit may have no choice but to recommend tax increases. You’d need $250 billion in across-the-board cuts—6.8 percent of spending—to make total government expenditures (minus interest on the debt) equal total government revenues; and that, the study concludes, is just too much. “Not only,” the authors write, “does such a policy not make much sense (surely some kinds of federal spending are more important than others), but it also doesn’t pass the political reality test. There is simply no conceivable way President Obama and Congress—not to mention the American people—will allow cuts of this magnitude to be applied equally to all parts of the budget.”

Well, we’d better hope big cuts are conceivable. A recent International Monetary Fund (IMF) study, “The State of Public Finances Cross-Country Fiscal Monitor: November 2009,” shows that the United States has one of the largest structural deficits in the world, almost as large as that of Greece. And we know how well things are going in Athens. To get our national debt back down to 60 percent of GDP (the number that economists use as the limit for fiscal sustainability) by 2030, the U.S. would need to undertake a major fiscal adjustment, equivalent to 8.8 percent of GDP. That could entail cutting spending, increasing taxes, or both—but no matter what, the money involved will be significant. Whether or not the number is exactly correct, the basic message is true.

Yes, cutting public spending can seem challenging. Entitlement spending increases automatically in a recession and as the population ages. Meanwhile, military actions in Afghanistan and Iraq and the ongoing threat of terrorism all help lawmakers claim that those parts of the budget are off limits. Lawmakers tend to be wary of spending reductions in general, as they believe their political survival rests on rewarding their supporters with jobs or subsidies.

Yet there is evidence that Congress can cut spending—and cut it by a lot. First, consider a new Goldman Sachs Global Economics study by Ben Broadbent titled “Fiscal Tightening Need Not Be Electorally Costly, But It Will Test Government Unity.” Broadbent shows that spending cuts can actually be a good thing politically. “It is commonly assumed that cuts in government spending will be both economically painful and electorally costly,” he writes. “Neither is borne out in the data. We’ve written before about the limited (and sometimes positive) effects of spending cuts on economic growth, at least in open economies. Here we add some simple analysis on the electoral consequences and, like others, find no evidence that spending cuts reduce support for the incumbent government. If anything the opposite tends to be true.” Among other evidence, the paper cites the three governments that executed the most high-profile expenditure-based deficit reductions in recent history and yet were re-elected: Ireland in 1987, Sweden in 1994, and Canada in 1994. 

Broadbent’s empirical study complements a 1998 Brookings Institute study by the economists Alberto Alesina, Roberto Perotti, and Jose Tavares. The trio found “no evidence that looser fiscal policy implies longer political tenure.” They also show that “cuts in the government wage bill do not increase the probability that the government will collapse…nor does the popularity of the government fall in the immediate aftermath of fiscal adjustments.”

Nor is every governmental expense as politically risky as Medicare or the Pentagon. According to the Government Accountability Office’s “U.S. Government Financial Statements, Fiscal Year 2009 Audit,” overpayments by the federal government alone are estimated to be at least $98 billion each year. That’s $500 billion over five years. Certainly that would never fly at the individual level: Imagine paying your mortgage twice, or coughing up cash for stuff you never received.

Other countries have managed to cut spending. According to the IMF study, over the last 30 years nine developed nations have cut their structural deficits by at least 10 percent of GDP. Ireland reduced spending by 20 percent from 1978 to 1989. Sweden and Finland both achieved cuts of 13 percent from 1993 to 2000, and Sweden pulled off another 13 percent cut from 1980 to 1987. Denmark managed a 12 percent reduction from 1982 to 1986; Greece, 12 percent from 1989 to 1995; Israel, 11 percent from 1980 to 1983; Belgium, 11 percent from 1983 to 1998; Canada, 10 percent from 1985 to 1999. 

And in the past few months, faced with rising deficits that threatened to bankrupt the country, Lithuania took some drastic austerity measures meant to produce savings equal to 9 percent of GDP in one year. Among other reforms, the government cut public spending by 30 percent, slashing public sector wages 20 to 30 percent and reducing pensions by as much as 11 percent. If they did it, why can’t we?

According to the Bureau of Labor Statistics, in 2008 the average consumer unit (2.5 persons) earned $63,563 and spent $50,486. Of these expenditures, $21,533 was devoted to essential spending—that is, clothing, shelter, transportation, and health care. Out of the remaining $28,953, spending on entertainment consumed an additional $2,835 and $5,113 was devoted to miscellaneous items. 

So if the average family were seeking to trim its operating costs, there are 28,953 non-essential dollars, well over 50 percent of total spending, that could hypothetically be cut. The federal government could do it as well. I don’t think citizens concerned about the nation’s economic future will accept arguments that spending can’t be cut when we taxpayers can and do cut our personal spending during difficult times. I also doubt that 0.02 percent is all that can be trimmed from the budget. The cuts we need and should demand are more like 10 percent, 20 percent, 30 percent, or more. It’s time for lawmakers and the policy community to start acting like real people with real money and to start excising those billions from the nation’s bloated budget. 

Contributing Editor Veronique de Rugy (vderugy@gmu.edu) is a senior research fellow at the Mercatus Center at George Mason University. This column first appeared at Reason.com.


Veronique de Rugy is Senior Research Fellow


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