- The Washington Times - Monday, May 17, 2004

Soon-to-be-introduced legislation now circulating on Capitol Hill would place a national limit on the growth of federal spending to help finance the transition to a large personal account option for Social Security. That legislation is essential if we are to prevent the federal government from growing by more than half relative to the economy over the next generation.

The bill’s spending limitation would reduce the rate of growth of federal spending by 1 percentage point for each of eight years. It would then allow total federal spending to grow no more than the rate of growth of gross domestic product (GDP) each year for a period.

A forthcoming study by Empower America Chief Economist Larry Hunter, to be published by the Texas-based Institute for Policy Innovation, shows how critical this spending restraint is. The current baseline of spending growth over the next eight years is assumed in the legislation to be the rate of growth of GDP. This means the bill’s spending restraint effectively requires total federal spending to grow by 1 percentage point less than economic growth for each of the next eight years.

As a result, after eight years, the restriction would reduce federal spending from about 20 percent of GDP today to about 18.4 percent of GDP. Mr. Hunter crucially illustrates that if the Bush tax cuts are made permanent, and the problem of the alternative minimum tax spreading from the rich to the general public is corrected, then federal revenues would also stabilize at about 18.4 percent of GDP.

So the spending restraint proposed by the bill is exactly what is needed to balance the budget while making the Bush tax cuts permanent. Once this is achieved, the bill would stabilize federal spending along with taxes at about 18.4 percent of GDP, by limiting federal spending to grow no faster than GDP.

The long run savings such a policy would produce would be far more than is needed to finance the transition to the Social Security personal accounts proposed in the legislation. So, after the spending restraint over the first eight years, the bill maintains its limit of spending growth to the rate of GDP growth for only five years. After that, annual spending growth is limited to the rate of growth of GDP plus 1.75 percentage points, until the transition deficits of the personal account reform plan, and all temporary debt issued to cover those deficits in the short run, are eliminated.

This is all that is needed to complete the transition financing for the Social Security reform plan. Federal spending as a percent of GDP would be maintained at about 1.6 percentage points less than it would otherwise be for a period, until the Social Security reform’s transition deficits and debt are completely covered. This avoids the criticism from some that the modest spending limitation proposed in the plan somehow requires draconian, long-term spending reductions.

By 2030, the spending restraint for the Social Security reform plan would have reduced federal spending by about 6 percent from the high level it would otherwise reach by then. In that year, moreover, federal spending would still be 15 percent higher as a percent of GDP than today.

What fiscal conservatives of all stripes should target, however, is maintaining on a permanent basis the stricter spending restraint started in this reform bill. Once taxes and spending are stabilized at 18.4 percent of GDP, and spending is limited to grow no more than the rate of growth of GDP, that limit should be maintained permanently, rather than relaxed after 5 years.

This would avoid a burgeoning, long-term federal spending crisis that few now recognize. The Congressional Budget Office projects that under current trends by 2050 federal spending as a percent of GDP would have grown to 32.8 percent of GDP, about two-thirds higher than today’s level around 20 percent.

This massive increase in big government must be stopped. The spending limitation in the soon-to-be-introduced Social Security reform bill shows the way. If that restraint is made permanent, rather than relaxed to pay only for the Social Security reform transition, then federal spending and taxes would again be stabilized over the long run at 18.4 percent of GDP.

The personal account reform plan in the bill will itself ultimately reduce federal spending as a percent of GDP by about 5 percentage points, as future Social Security retirement benefits would be paid almost entirely by the personal accounts rather than the federal government. The spending restraint to finance the transition would have laid the foundation for additional spending savings equal to about 1.6 percentage points of GDP.

Federal spending would then still have to be reduced by another 7.8 percent of GDP by 2050 to keep the federal government at 18.4 percent of GDP. That would require additional reforms of Medicaid and other welfare programs, as well as Medicare.

The main point is that this is exactly the long-term budget policy that conservatives, libertarians and free market progressives need to start fighting for now. Reform involving a large personal account option for Social Security is itself a huge issue. But the reform bill soon to be introduced actually charts the essential long-term course for the entire federal budget.

Peter Ferrara is a senior fellow at the Institute for Policy Innovation, and director of the Social Security Project for the Club for Growth.

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