Issues & Insights

Spending Limits That Will Make The Federal Budget Affordable

By Wayne Winegarden

Editor’s Note: This is excerpted from a larger report published by the Pacific Research Institute. The full report is available here.

Spring is in the air, which of course means it’s time to start thinking about the federal budget. Our latest Beyond the New Normal analysis examined what it would take to transform our current unaffordable federal budget. And while it would take political discipline and courage beyond what current leadership (both Democratic and Republican) have demonstrated, the necessary reforms are well known.

The reforms, as the 15 Percent Solution illustrated, should strive to bring total federal spending down to 15 percent of national income. Since it currently stands at 24 percent of national income, this requires long-term spending discipline on the part of the federal government.

It actually requires even more discipline than the current expenditure levels suggest. Without fundamental reforms, government spending will grow to around 33 percent of national income by 2044. The costs in terms of slower economic growth and stagnating family incomes will be high.

There is an alternative future, however. If we constrain the growth in spending to below the growth in our national income (I suggest around 2 percentage points below), then we can achieve an affordable federal budget by 2044. Importantly, by making the federal government more affordable and prioritizing government spending on high-value/high-priority projects, economic growth will accelerate, and families will experience robust growth in their incomes.

The stakes are high, and we need leadership out of Washington D.C. to start addressing the problems that are driving the growth in government spending. Seen from this perspective, the President’s budget released this week is a disappointment.

A meaningful pro-growth budget recognizes that any discussion about budget discipline is meaningless without addressing the impending financial disasters that are Social Security and Medicare. The time to save these programs was yesterday, and without reform these programs will go bankrupt.

As we identified in Realizing the 15 Percent Solution, there are well-known reforms to these programs that would improve their fiscal soundness, ensure that these programs fulfill their important purpose, and meaningfully improve the affordability of the federal government.

Similarly, while there are sound arguments that defense department expenditures need to grow, there are also opportunities to improve our military effectiveness while saving money by increasing the military’s funding stability and respecting the prioritization needs as identified by the military professionals.

Other reform opportunities including using the vast assets of the federal government (which include gold, oil reserves, unused buildings, land holdings, and mineral rights) to reduce the growing debt costs, and imposing a hard budget constraint on all other federal expenditures.

It is from this perspective that the President’s budget is a disappointment. It is past time that the politicians in D.C. took their responsibility seriously and started budgeting as if our future prosperity depended on it – because it does.

Wayne Winegarden is a senior fellow in business and economics at the Pacific Research Institute.

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