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Manhattan Institute

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Budget Bloodbath a Result of Lawmakers' Refusal to Confront Entitlement Spending

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Budget Bloodbath a Result of Lawmakers' Refusal to Confront Entitlement Spending

The Hill May 24, 2017
EconomicsBudgetTax

President Trump’s budget proposal and its hysterical reaction are the predictable result of a nation that stubbornly refuses to confront escalating Social Security and Medicare costs. Advocates of all other budget priorities are left to fight viciously over the rapidly-shrinking scraps.

Since the end of World War II, federal spending has typically remained around 20 percent of GDP. Within that total, Social Security and Medicare costs have leaped from 6 percent of GDP in 2000 to 8 percent today, on their way to a projected 10 percent a decade from now—and 12 percent a decade after that. This will continue to squeeze all other spending, especially when combined with the resulting interest costs on the national debt.

In particular, America cannot sustainably add 77 million retiring baby boomers to a Medicare system that collects $140,000 in lifetime taxes from the typical retiring couple and then provides them with $422,000 in benefits (all adjusted into net present values) without slashing other programs to the bone.

Nevertheless, President Trump promised voters that Social Security and Medicare benefits would be sacrosanct. That decision explains his entire budget proposal.

Washington currently spends $4 trillion annually. Of that amount, Trump has taken off the table nearly all of the $2.4 trillion currently spent on Social Security ($940 billion), Medicare ($600 billion), defense ($600 billion, but which does not face automatic growth), and interest on the debt ($270 billion, which cannot be directly addressed). In fact, his budget allows these costs to grow by 77 percent to $4.3 trillion within a decade.

How can the president allow that spending to expand by $1.9 trillion without burying the nation in red ink? He wisely rejects massive, economy-damaging tax increases, especially considering that revenues are already on pace to reach their highest sustained percentage of GDP in American history. Besides, there is no “tax the rich” policy that could come close to funding these long-term costs.

The only remaining option is to eviscerate much of the remaining $1.6 trillion of the federal budget that consists of Medicaid and ObamaCare subsidies ($450 billion), anti-poverty entitlements ($270 billion), other entitlement programs ($230 billion), and non-defense discretionary spending ($600 billion).

And that is exactly what President Trump has proposed.

ObamaCare would be repealed and replaced. Medicaid spending, currently $389 billion, would likely fall over the next decade rather than rising to $650 billion to accommodate rising caseloads and costs. Anti-poverty programs would face significant reforms. And non-defense discretionary spending (which consists of programs like health research, education, foreign aid, homeland security, housing, and infrastructure) would be cut to 1930s levels.

Many of these reforms are necessary. Medicaid’s flawed design encourages states to overspend (and even defraud Washington) in order to receive higher federal reimbursements. Washington’s welfare system is too centralized, wasteful, and inflexible to the unique needs of low-income families. There is little reason why a 37 percent increase in the number of poor Americans since 2000 should have caused a 148 percent increase in the number of SNAP (food stamp) recipients. Non-defense discretionary spending includes many functions best left to state and local governments.

Yet enacting these deep cuts would still not solve the long-term budget challenge. The president’s proposal to cut 2027 non-defense discretionary spending $260 billion below the currently-projected level would merely finance 33 days of Social Security and Medicare spending that year (and fewer days in subsequent years). As Social Security and Medicare costs continue to soar, lawmakers would run out of other programs to cut – leaving only escalating tax increases. In other words, there is no escaping the necessity of Social Security and Medicare reform. Delays only make the inevitable reforms more drastic on seniors.

Ultimately, these budget battles – defense versus non-defense discretionary spending; rising ObamaCare and Medicaid spending versus sustainable tax levels – will only worsen over time as advocates battle over a shrinking pool of remaining resources. Even Congress’ tax reform agenda is currently being held hostage to deficit concerns brought on by unrestrained entitlement costs. Until the president and Congress confront Social Security and Medicare costs, all other priorities will remain endangered.

This piece originally appeared at The Hill

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Brian M. Riedl is a senior fellow at the Manhattan Institute. Follow him on Twitter here

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