Writing in The Washington Post, Fareed Zakaria recently called the GOP tax bill the worst piece of legislation in modern history. Why? Because, he claims, it will starve the federal government of the resources it needs for public investments in infrastructure and research. But Zakaria’s assessment is misleading. He is right that a budget crunch is now underway and will intensify in the years ahead, but the primary cause is not tax cuts.
Left out of Zakaria’s account is the role that runaway entitlement spending is playing — and will continue to play — in squeezing other government programs. If his main concern is inadequate public investment in annually appropriated domestic accounts (sometimes called “domestic discretionary spending”), he should focus his ire on President Obama and the many other Democratic and Republican politicians who have favored consumption-oriented entitlements at the expense of all other public priorities. Left unchecked, entitlement spending will overwhelm the federal government in coming years — with or without the GOP’s relatively small tax cut.
In 1967, Congress approved annual appropriations with spending equal to 12.7 percent of GDP, including 8.6 percent of GDP for defense accounts and 4.1 percent of GDP for domestic activities. At that time, entitlement spending was equal to 4.9 percent of GDP. By 2016, the shares of the federal budget that went to annually appropriated accounts and entitlements had flipped. Annually appropriated spending had fallen to just 6.4 percent of GDP, including 3.2 percent of GDP for defense and 3.3 percent of GDP for domestic programs and agencies. Meanwhile, entitlement spending rose steadily over the past five decades, reaching 13.2 percent of GDP in 2016. In 2016, federal revenues were equal to 17.8 percent of GDP — the same level as in 1967, and slightly above the 17.4 percent of GDP average over the past half century.
These figures tell a clear story. While revenues have gone up during some periods and down during others, they have hovered around 17 to 18 percent of GDP. By contrast, entitlement spending — especially spending on Medicare and Medicaid — has grown steadily and rapidly for decades. In a series of budgetary deals involving both parties, Congress has imposed fairly tight restraints on defense and non-defense appropriations to keep annual budget deficits from spiraling out of control. Imposing tighter control on defense and non-defense appropriations was far easier, for political and programmatic reasons, than restraining the growth of entitlements. The large drawdown of defense spending that occurred after the dissolution of the Soviet Union has gone largely toward funding higher rates of spending on entitlement programs. (Domestic appropriations have fallen somewhat as a percentage of the national economy over the past 50 years, but not precipitously.)
The budgetary squeeze from growing entitlement spending will get worse in the years ahead, especially with the retirement of the baby boom generation. The Congressional Budget Office (CBO) projects that spending on Social Security, Medicare, and Medicaid alone will increase government outlays by 4.5 percent of GDP in 2040 compared to 2017.
In 2011, in the aftermath of the GOP takeover of the House in the 2010 midterm election, President Obama tried to strike a “grand bargain” on the budget with Speaker John Boehner. They discussed a mix of entitlement reforms and tax increases to narrow projected budget deficits over the medium and long-term. In the end, they couldn’t reach an agreement. (Republicans say the president made a last-minute request for more tax increases after a preliminary deal had been struck, which Boehner rejected). As a fallback, the president and the speaker agreed to the Budget Control Act. Over 10 years, the law imposed caps on defense and non-defense appropriations that cut spending by $741 billion. In addition, the law called for automatic cuts mainly to appropriated accounts of an additional $1.2 trillion over 10 years, in the event that a bipartisan budget commission failed to reach an agreement on a legislative solution. When, predictably, that commission did fail, the additional cuts were triggered.
Both parties are now in the process of trying to unwind some of the deep cuts in appropriations that the BCA set in motion. Still, the BCA is emblematic of the fundamental problem in the federal budget: It is far easier for politicians to agree to caps on future spending for discretionary accounts than to agree on controversial entitlement reforms.
In President Obama’s last budget submission, sent to Congress in February 2016, he proposed a 10-year spending plan that showed non-defense discretionary accounts falling to just 2.5 percent of GDP in 2025. Ten-year budget projections are rarely accurate, but the president’s budget framework is telling nonetheless. The Obama administration wanted to show that the deficit was under control. But the president was unwilling to embrace tax increases or serious entitlement reforms. So the administration’s solution was to suggest discretionary spending should fall to the lowest level as a percentage of the economy in the entire post-war period — thus squeezing all those programs that Zakaria claims are indispensable to our future prosperity.
It is true that the GOP tax bill will reduce future federal revenue and widen the government’s budget deficits — but not by large amounts. Before the tax legislation, CBO projected the government would run a deficit of 5.6 percent of GDP in 2030. The Joint Committee on Taxation (JCT) expected the Senate version of the tax bill would widen deficits in the coming years by another 0.5 to 1.0 percent of GDP; the final version is likely to have a similar effect.
Increasing future deficits is not ideal, of course. It would be better for the economy if the GOP followed up the tax legislation with bills containing serious entitlement reforms that would narrow future deficits by amounts that are larger than the tax cuts. The combination of the tax legislation with long-term deficit reduction would be strongly pro-growth, and would allow for greater public investments of the kind Zakaria supports.
But Zakaria never mentions the problem of entitlement spending or the need to reform these programs. Instead, he implies that the primary cause of future deficits is the Republican impulse for tax cutting, which is false. The truth is that annually appropriated domestic accounts have been under pressure for many years — including during the entirety of the Obama presidency — because of the growth in entitlement spending. Even if the GOP weren’t advancing a tax cut this year, there still wouldn’t be any money available for the kind of public spending Zakaria favors. Suggesting otherwise only confuses matters and provides an excuse for politicians to delay further an actual and enduring solution to the nation’s fiscal problems.
James C. Capretta is a RealClearPolicy Contributor and holds the Milton Friedman chair at the American Enterprise Institute.