The Government Spending Scam

Last week I wrote about the fiscal gap and implications for tax revenues and income tax rates. This week I focus on federal government spending and the fiscal gap. I call the spending discussion a scam because much of the wording describing the course of future spending is all about cuts. And while there are some cuts and the overall message suggests smaller deficits in the future, the truth is that spending will increase at very strong rates and it does not appear that much is being accomplished with respect to the fiscal gap on the spending side. Thus either debt or tax revenues will have to cover the spending.  The data show also that by taking some of the bigger spending programs out of the discussion we purposely and unnecessarily jeopardize the great majority of government services and therefore put even more stress on taxes and debt.

This is not an easy project to do right now. I get my data for federal government spending from the White House web site. It comes from what the President calls the 2013 budget. Fiscal year 2013 started about two months ago on October 1, 2012. The problem is that the budget projection numbers for 2013 and beyond are being estimated based on so-called spending caps legislated in something called the Budget Control Act. I could have used another version of spending produced with a different set of assumptions published by the Congressional Budget Office but that just adds more speculation about what budget changes will be made in the next month or two or longer.

So I am sticking with what is published on the White House site because it is the only official budget right now.  (http://www.whitehouse.gov/omb/budget ) This budget version exaggerates how much spending restraint there will be – assuming that some of the caps will be removed in new legislation. So if spending looks like it is growing in the White House budget – then it will probably grow even more under a new compromise bill. So let’s at least see what is in store for us at the moment.

To create some basis of comparison let’s start by identifying what might be normal changes in federal government spending. From 1992 to 1997 spending increased by $220 billion. In five years the level of spending increased from $1.38 trillion in 1992 to a level of $1.6 trillion in 1997. In the next five years, 1997 to 2002, the level of spending rose by $400 billion. The increase in five years was about double the five years before. From 2002 to 2007 spending increased by $720 billion. So let’s stop there. You can see a progression of government spending increases over five years periods – expanding by $220 billion, then $400 billion, then $720 billion. I am not sure what you would call normal. Focusing on increases you can see a rapidly rising curve of federal spending.

One would expect a significant yet temporary increase in government spending during the recession and slow economic recovery that followed. And we got it. From 2007 to 2012 federal government spending increased by a little more than $1 trillion. Federal spending went from $2.73 trillion in 2007 to $3.8 trillion in 2012. So the change curve was  not dented and simply continued. The President’s budget –- with spending caps in place – has government spending rising from $3.8 trillion in 2012 to $4.53 billion in 2017. That amounts to another five year increase of $730 billion. How do we interpret that increase?

First, does it look like gut crunching austerity? I don’t think so. The government will be spending more and more and more – as we approach 2017.

Second, how do we evaluate the size of the projected future $736 billion increase? Well it is really big. It is bigger than the increase in the 10 years from 1992 to 2002. It is also bigger than the very rapid period from 2002 to 2007 when spending rose by $720 billion.

Point taken – the government is spending at about as high a rate as it ever has – and by "ever has" we mean more and more and more. I could present all this spending information in real terms or as a percent of GDP and it would show slightly different relative outcomes – but the general point would be the same. There is no austerity. Government spending is not decreasing. Government spending did not take a breather after the recession. What was supposed to be temporary government spending to stimulate a recessionary economy is now permanent.

But the issue is more interesting because we haven’t talked about specific components of spending. Luckily the White House website provides lots of details of spending by year and by program. What we see is very interesting especially in light of Harry Reid’s threat that he will never touch one cent of Social Security, Medicare, and Medicaid.

Recall that total federal spending is projected to increase by $730 trillion between 2012 and 2017. Here are the main* spending categories that account for the increases:

Interest on the debt                                        $340 billion

Social Security                                                 254

Healthcare Services                                          251

Medicare                                                         157

Income Security for Veterans                             29

Federal Employment Retirement/Security            24

Other Income Security                                        24

Higher Education                                                19

Ground Transportation                                       16

     Non-Interest Sub-Total                          $774 billion

Total                                                      $1,114 billion

If we count interest on the national debt the government is planning to spend $1.1 trillion over the next five years on these nine categories. That is, in 2017 we will be spending on an annual basis more than $1 trillion than we did in 2012 in these areas.

Notice that if we focus on the Big Three programs – Social Security, Healthcare Services, and Medicare this accounts for $662 of the planned spending increases. When Harry Reid says he is not going to touch these categories of spending he is basically saying there is no way to control federal government spending. Since he can’t eliminate interest on the debt without a national default, any politician who says he can control government spending and not include all spending categories is involved in a scam. What he really means when he says this is that he either wants higher taxes or higher debt.

One final point. The government does plan to cut quite a few programs. The largest cuts will go to Defense ($126 billion), Commerce and Housing Credit ($114 billion), ), Unemployment Compensation ($56 billion), and Elementary, Secondary and Vocational Education ($46 billion). Quite a few others will be cut by smaller amounts.  Some of those cuts are not real policy changes but are the automatic result of an improving economy.  Others are debatable. A lot of programs will see true cuts so that the Big Three programs can enjoy large increases.

I am not advocating that we cut any particular program but I do see a real scam in operation here. By purposely letting the Big Three programs grow we take a blunt ax to the rest of government AND we raise taxes and probably the debt. It seems to me that putting everything on the table is the only way to make progress on our fiscal gap. We can control government spending but we cannot do it by playing politics as usual. 

*There were other categories that had increased spending but I did not include in this table any increases that were less than $10 billion.