Issue Position: Cutting Deficit Spending

Issue Position

Congressional Budget Office projections reveal no shortage of federal revenues in coming years. Instead, they show federal spending -- which is already abnormally high -- rising to unprecedented levels and the government accumulating massive debt as a result.

Historically, America's strong growth and high living standards were built on our relatively smaller government. The ongoing surge in federal spending threatens to undo this competitive advantage that we have enjoyed in the world economy. The Congressional Budget Office's new projections show that federal spending will rise by about 10 percentage points of GDP by 2035. If that happens, American governments will be consuming more than half of everything produced in the nation by that year. That would doom young people to unbearable levels of taxation and a stagnant economy with fewer opportunities.

In recent years, policymakers have put great time and effort into trying to manipulate the short-run economy. These efforts have been very unsuccessful, and the government is much further in debt as a result.

Instead, policymakers should turn their full attentions to long-run spending reforms. They should begin terminating the many unneeded and damaging federal programs that draw resources out of the private sector and sap the economy's strength. The Cato Institute has documented the reasons why we should terminate many federal programs and agencies at www.DownsizingGovernment.org.

In addition, Congress should create budget restraint mechanisms to encourage policymakers to make spending tradeoffs. In testimonies to the Senate Finance Committee, former Senator Phil Gramm and former Comptroller General David Walker proposed mechanisms to target and control deficits. However, it would be better for new budget mechanisms to target spending, not deficits. A simple mechanism would be to impose a cap of three percent on the annual growth in total federal outlays. Even that modest restraint would be enough to balance the budget in a little over a decade.

Some policymakers worry that spending cuts would hurt the economy, but other high-income nations have cut spending with very positive economic results. In the mid-1990s, for example, Canada faced a debt crisis caused by runaway government spending -- similar to our current situation. But the Canadian government changed course and slashed total spending 10 percent in just two years and then held it roughly flat for another three years.

Total Canadian government spending was cut by more than 10 percentage points of GDP over a decade. The Canadian economy did not sink into a recession as Keynesian economists might fear, but instead was launched on a 15-year economic boom. A recent Joint Economic Committee report summarizes other international examples of spending cuts coinciding with strong economic growth. In conclusion, cutting federal spending is the right policy to strengthen U.S. economic growth over both the short-term and longer-term horizons.

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