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Backward-Looking Federal Spending Target Isn’t the Answer

At its meeting yesterday, the President’s Commission on Fiscal Responsibility and Reform discussed imposing a numerical limit on federal spending as a share of the economy. One of the commission’s co-chairs has suggested capping spending and revenues at 21
percent of gross domestic product (GDP), the average spending level over the past 40 years. But as I explain in a new report, averages from the past aren’t a good guide for the future:

  • Meeting longstanding commitments will cost much more. As the Center on Budget and Policy Priorities and others have frequently written, the aging of the population and rising health care costs will drive up spending for Medicare, Medicaid, and Social Security in coming decades.
  • Federal responsibilities have grown significantly in recent years. Since 2000, we’ve greatly expanded spending on homeland security, veterans’ benefits (largely because of Iraq and Afghanistan), and education, among other things. We’ve also added a Medicare prescription drug benefit and enacted the Affordable Care Act, which will increase spending(though it’s fully paid for and will actually reduce the deficit).
  • Interest costs will be much higher. By the end of 2010 — largely due to the wars in Iraq and Afghanistan, the Bush-era tax cuts, and the recession — debt held by the public will be nearly twice as large as a share of GDP as in 2001, with a corresponding increase in interest costs.

Aiming to stabilize spending at 21 percent of GDP might be appropriate if none of these things were happening — but they are. As Matt Miller points out, even under President Reagan federal spending didn’t fall below 21 percent of GDP, and that was a time when no baby boomers were retired and health care costs were more than one-third lower as a share of the economy than they are today.

Earlier this year, an expert committee convened by the National Academy of Sciences and National Academy of Public Administration issued a major report outlining four paths to stabilize the debt — two extreme paths consisting nearly entirely of program cuts in one case and nearly entirely of tax increases in the other, and two intermediate paths that blended program and tax changes.

The extreme low-spending path would cut Medicare and Medicaid by over 40 percent by 2050, cut Social Security benefits for new retirees by more than a quarter by 2050, and cut all other spending by about 20 percent. Under it, federal spending would be — you guessed it — about 21 percent of GDP.