Tuesday, April 20, 2010


The federal budget picture has collapsed over the past decade. In 2000, Washington collected $2.6 trillion, spent $2.3 trillion and ran a $300 billion surplus. One decade later, in 2010, Washington is set to collect $2.1 trillion, spend $3.6 trillion and run a $1.5 trillion deficit (all numbers adjusted for inflation).

What happened?

Tax revenues in 2000 had been inflated to postwar records by the stock-market bubble, and 2010 revenues have been depleted by a deep recession. Setting aside those outliers, tax revenues are expected to rebound toward the historical average of 18 percent of gross domestic product (GDP) even if the tax cuts are made permanent.

The same cannot be said for spending. While spending grew just 11 percent faster than inflation during the entire 1990s, it expanded by 62 percent in the 2000s — the largest growth of the federal government over any 10-year period since the 1950s. And only a small fraction of this new spending is a temporary result of the recession. Most of it represents a permanent and accelerating expansion of government.

Where did all the money go?

Social Security and Medicare account for $400 billion of the $1.3 trillion spending increase. Most of this growth resulted from the natural increase in the number of retirees, combined with rising benefits and growing health care costs. The expensive 2003 Medicare drug entitlement also contributed in Medicare’s 81 percent expansion.

Defense spending surged by 91 percent, or $342 billion. Spending levels had fallen dramatically after the Cold War ended in the early 1990s. The Sept. 11 attacks and subsequent wars in Afghanistan and Iraq returned the defense budget to the same percentage of GDP that prevailed 20 years ago.

Altogether, these additional Social Security, Medicare and defense costs make up a majority of the $1.3 trillion expansion of the federal budget during the 2000s.

Very quietly, the anti-poverty budget also expanded by $305 billion, or 89 percent. Under President George W. Bush, anti-poverty spending surpassed 3 percent of GDP for the first time ever. During the current recession, President Obama has increased it by an additional 33 percent.

The largest anti-poverty spending increases took place in Medicaid (82 percent) and food stamps (208 percent) as a result of rising benefits and 20 million additional recipients. Budget increases of approximately 50 percent were granted to child nutrition programs, food aid for those eligible for the Women, Infants and Children (WIC) program, and outlays for the refundable Earned Income Tax Credit (EITC). The State Children’s Health Insurance Program (SCHIP) budget leaped from $1.5 billion to $9 billion, and two programs that did not even exist two years ago — the refundable Making Work Pay credit and the homeowner bailouts — will cost a combined $50 billion this year.

A portion of these new costs should recede as the recession ends, although most of the increase will be permanent. And the new health care law’s Medicaid expansion likely will keep those costs rising steeply.

Unemployment benefits surged from $30 billion all the way to $194 billion over the past decade. Those costs should fall once the recession ends and the jobs picture improves.

The veterans’ budget doubled from $60 billion to $124 billion. The medical costs of treating veterans of the wars in Iraq and Afghanistan, as well as expanded veterans benefits, contributed.

Taxpayers may be surprised to learn that federal education spending soared 155 percent in the 2000s, to more than $100 billion. The kindergarten-through-12th-grade education budget already had grown 62 percent in the 1990s before the No Child Left Behind law set the stage for an additional 219 percent expansion in the 2000s.

College student financial aid increased 58 percent as well. State and local governments still provide the vast majority of education funding, although Washington clearly is expanding its control and influence.

Over the past decade, large budget increases also went toward international affairs (132 percent), highways and mass transit (79 percent), health research and regulation (69 percent), and federal law enforcement (51 percent).

Only one part of the budget saw a significant decrease: interest on the national debt. Although the debt expanded by $4 trillion, record-low interest rates reduced annual net interest costs by $100 billion. However, once interest rates rebound to typical levels, net interest costs will double or even triple quickly.

Budgets are about setting priorities and making trade-offs. It is understandable for a few top priorities to take funding precedence. Yet it is completely unsustainable to provide permanent, massive spending increases to all the programs listed above.

The federal budget today is $1.3 trillion larger than in 2000 under President Clinton. Is America any better off? Perhaps returning most spending to those 2000 spending levels would not cause the sky to fall.

The alternative is to finance this spending with permanent tax increases of $10,000 per household. Such a tax increase — like a 20 percent value-added tax or doubling of all federal income taxes — would devastate families, businesses and the economy.

During the past decade, Washington lived under the fantasy that spending could nearly double without eventually forcing taxes to follow. Unsustainable budget deficits have shattered that fantasy. It’s time for lawmakers to pare back spending or face impossible tax increases.

Brian Riedl is Grover M. Hermann Fellow in Federal Budgetary Affairs at the Heritage Foundation (www.heritage.org).

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