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The Hidden Reason Congress Can’t Rein in Spending and Deficits

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The Hidden Reason Congress Can’t Rein in Spending and Deficits

Heritage Foundation November 20, 2019
EconomicsTaxBudget

President Trump and Republican lawmakers have surrendered on a $320 billion spending increase covering the next two years. This discretionary spending hike soon will combine with hefty annual increases in mandatory spending to drive budget deficits over $1 trillion.

It is a familiar story. Year after year, fiscally conservative legislators promise spending cuts and balanced budgets. Yet with rare exceptions, the spending and red ink continue to rise. Not even the 1980 Reagan revolution, 1994 Republican revolution, 2010 tea party Congress election, nor the 2016 election of Donald Trump have significantly reined in government.

There is certainly enough blame to go around. Some politicians unrealistically promise that the heavy machinery of government can be brought to a halt quickly and easily. Others incorrectly assert that the budget can be balanced simply by cutting waste, foreign aid, or excessive welfare spending. Many politicians simply go to Washington, lose touch with their constituents, and instead cozy up with special interests and the liberal media.

While each of those factors contribute to the failure to rein in government, there is a more subtle reason why even the most committed coalition of lawmakers ultimately fail: The budget process is rigged in favor of ever-expanding government.

Our Dire Fiscal Situation

To begin, let’s take a step back.

America’s fiscal situation is indeed dire. This year’s budget deficit passed the $1 trillion mark in August. And annual deficits are projected to surpass $2 trillion within a decade if current policies are renewed.

The long-term picture is even worse. Over the next 30 years, the Congressional Budget Office projects $80 trillion in new red ink—and that is the rosy scenario that assumes no wars, no recessions, no new spending programs, the expiration of the 2017 tax cuts, and permanently low interest rates.

Social Security and Medicare shortfalls will drive these long-term deficits. The payroll taxes and Medicare premiums that supposedly fund these programs will not keep up with 74 million retiring baby boomers and rising health costs. General tax revenues (and new borrowing) will have to make up these escalating shortfalls, to the tune of $103 trillion over 30 years (including resulting interest costs from the portion of this spending put on the government’s credit card).

The rest of the federal budget is projected to run a $23 trillion surplus. In other words, the $80 trillion long-term deficit is entirely driven by Social Security and Medicare’s shortfalls. If those systems were truly paid for with payroll taxes and premiums, the long-term budget would not only remain balanced, but the $23 trillion surplus projected across the rest of the federal government over three decades could pay off the entire $22 trillion national debt.

A Baseline Rigged for Spending

Unfortunately for reformers, Social Security and Medicare are classified as mandatory programs, and that renders it nearly impossible to close their projected $103 trillion shortfall.

Here’s why: The budget baseline—the default starting point for congressional budget writers—essentially rigs the outcome in favor of higher spending. Only 30 percent of the federal budget is classified as discretionary spending. For the discretionary portion of the budget (which includes defense, health research, international spending, and K-12 education, among others), Congress begins each year by deciding on one total spending level ($1.245 trillion in FY 2019), and then passes a series of appropriations bills funding each discretionary program within that aggregate cap. The default spending level for discretionary spending is zero—Congress and the president must pass new legislation each year to fund these programs, or they will shut down.

The other 70 percent of the federal budget is classified as mandatory spending and is exempt from these budget restraints. Much of this mandatory spending consists of entitlements—programs such as Social Security, Medicare, most welfare programs, and farm subsidies—whose spending, by law, is determined by enrollment, and by benefit formulas that automatically become more generous each year (often growing faster than inflation). In other words, the budget process regards these programs as being on autopilot.

These growing costs are overwhelming the federal budget. Since 1965, mandatory spending has surged from 34 percent to 70 percent of the federal budget—on its way to nearly 80 percent of the budget within the next decade.

Led by Social Security and Medicare, total spending on mandatory programs (excluding interest on the debt) is projected to soar from $2.7 trillion to $4.6 trillion over the next decade. And importantly, this growth will occur automatically, outside of the annual budget process. It does not require any legislation or congressional vote. In fact, there is no requirement for Congress to provide any oversight of this spending at all.

Think about it: America and the Congress recently tore itself apart debating whether it can afford to cut taxes by $200 billion per year. That congressional debate and vote received extensive media coverage. At the same time, over the next decade, the annual cost of mandatory spending is set to rise automatically by $1.9 trillion—nearly 10 times the annual cost of the tax cuts—with no congressional debate, no vote, and scant media coverage.

So is it any wonder why the public focuses on tax cuts—rather than mandatory spending—as the lead cause of escalating debt?

Because this steep spending growth is the default baseline, averting it requires passing new legislation. Imagine an enterprising lawmaker decides that Medicaid’s automatic growth of 73 percent over the next decade (5.6 percent annually) is not fiscally responsible. The lawmaker introduces legislation to slow Medicaid growth to “only” 50 percent—which political opponents and media then portray as a radical plan to “cut Medicaid.” The public, mistakenly believing that Medicaid spending would actually decline, mobilizes against the bill. Even if the majority party is united in favor of this legislation, the opposition party needs only 41 senators to defeat the bill by filibuster (or it can be defeated by a House majority or a presidential veto).

This rigged baseline system is the reason neither Trump, nor a fiscally conservative Congress, can radically shrink spending or the deficit. The budget default is automatic, rapid growth. And as long as 41 senators want more spending, they can use the filibuster to defeat proposals for reining in spending. The only exception is the reconciliation process, which allows one budget bill per year to escape a filibuster. Even government shutdowns do not stop entitlement spending growth. (Moreover, they affect only a portion of discretionary spending.)

The biased baseline—not a lack of conviction—is also the main reason why former Rep. Paul Ryan, R-Wis., was never able to slow the growth of entitlements significantly despite 20 years spent unifying his own party around his innovative reform proposals, and why the “just fight harder” narrative that is popular on talk radio and among many grassroots organizations is incomplete. Government expansions are written into law to occur on autopilot—and changing those laws requires a House majority, 60 senators, and a supportive president. Fiscal conservatives have not won enough elections or achieved a clear voter mandate to repeal these laws. 

Budget reform is needed. Congress must bring mandatory spending back into the annual budget process, rather than leave 70 percent of the budget to grow on autopilot. Congress should require affirmative votes to increase spending above a certain rate—and also include cost-saving triggers if spending grows beyond those targets. No more blank checks.

A Double Standard on Taxes

Unfortunately, the big government biases of the budget baseline do not stop on the spending side. Some smaller mandatory programs—such as farm subsidies and Temporary Assistance for Needy Families (TANF)—must be renewed every five-to-seven years with a congressional reauthorization vote. However, the baseline rules automatically assume most of these programs will be renewed, and thus does not count these renewals as new spending that would have to be offset by other savings under congressional rules. Renewing these expiring programs is thus budgetarily “free.”

The same is not true for taxes. When tax cuts are scheduled to expire and require renewal—such as the 2017 tax cuts—the baseline rules automatically assume those tax cuts will expire. This means that renewing an existing tax cut is scored as a “new” tax cut for which budget rules require full offsets.

In other words, an expiring $50 billion mandatory spending program can be renewed for free. Yet an expiring $50 billion tax cut cannot be renewed unless Congress finds $50 billion in offsetting savings elsewhere. The result of this disparate treatment is a baseline biased in favor of both rising spending and rising taxes. Congress should instead apply the same rules to spending proposals that it applies to tax proposals.

There are more biases in favor of expanded government. Income tax brackets are indexed to inflation—yet wages and salaries typically grow faster than inflation. This means that over time, the median wages and salaries will move up into higher tax brackets, automatically pushing up the average tax rate across the economy, and increasing government’s share of national income. Occasional tax cuts that merely cancel out this “real bracket creep” are portrayed as unprecedented assaults on revenues, when in fact they are merely restoring the tax burden to its long-term share of the economy.

The 2017 tax cuts exacerbated this discrepancy. The law mandated that the tax brackets be indexed using a lower (albeit more accurate) measure of inflation called chained CPI—which will push families into higher tax brackets even faster. However, the law maintained the more generous inflation adjustments for spending programs. So once again, the budget process is precisely designed to ensure that both spending and taxes will automatically consume an increasing share of the economy (although spending will rise faster, worsening the deficit).

The Absence of Caps

As a final bias, the budget process includes no limits on total spending and deficits. Nearly all states require balanced budgets (even if some limits are more easily evaded), and several states have experimented with caps on the growth of government spending with some degree of success. By contrast, Washington has no balanced budget requirements, and no government-wide spending caps.

In the absence of caps on spending or deficits, there is little reason to set priorities and make trade-offs. Every program spending increase looks manageable on its own. But with no overarching fiscal target, even seemingly small annual increases across countless programs add up to a government growing far beyond its means. This set up is especially perilous when government spending is growing rapidly on autopilot.

Washington has experimented with modest caps. In the 1980s, the Gramm-Rudman-Hollings Act temporarily mandated that Washington reduce the budget deficit by a specific amount each year until the budget was balanced. Unfortunately, when a sluggish economy pushed the deficit upward, Congress simply repealed the enforcement of this policy rather than make the necessary cuts.

In the 1990s and then again in 2011, Congress and the president enacted multi-year caps on discretionary spending—and then repealed them as soon as they became difficult.

The past 30 years have seen no laws that would limit the baseline growth of mandatory spending—just occasional Pay-As-You-Go (PAYGO) laws that limit new increases above the already-generous baseline. The debt limit could block new deficit spending, yet both parties now routinely suspend it.

Reform proposals do exist. A balanced budget amendment to the U.S. Constitution is not likely feasible. However, Switzerland provides an innovative model with a formula that essentially balances the budget over the business cycle. Basically, spending growth remains steady, while revenues are allowed to automatically dip during recessions (bringing modest deficits), and soar during booms (bringing equal surpluses).

Rep. Kevin Brady, R-Texas, and Sen. Mike Braun, R-Ind., have proposed a similar model for America. The challenge—as we have seen—is that any law constraining spending and deficits can simply be canceled by a new law as soon as it proves burdensome. Only constitutional amendments truly constrain Congress, and those are extraordinarily difficult to enact. Yet strong statutory reforms that can be understood and appreciated by voters can incentivize Congress to work within those restrains and govern effectively.

Conclusion

Reining in runaway spending and deficits is difficult enough given the political popularity of government-as-Santa-Claus. It becomes nearly impossible when even motivated budget cutters face a budget process that is rigged in favor of automatic steep spending increases with no caps. While fixing the budget process may not be a glamorous headline grabber, it is absolutely necessary to give Congress a fighting chance to avert a coming debt crisis.

This piece originally appeared in the Heritage Foundation’s The Insider

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

Photo by Pineapple Studio/iStock

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