Shrinking the Budget May Not Be As Easy As Trump Thinks

Shrinking the Budget May Not Be As Easy As Trump Thinks
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For believers in small government, there is a ray of hope on the horizon. We have a (nominally) Republican president-elect who loves to point out how he is not beholden to the usual special interests and Republican majorities in both the House and Senate. If federal spending is ever going to be reined in, now would appear to be the time. Federal spending for the 2016 fiscal year ran about $3.95 trillion, a record high. Without any spending cuts, federal spending is projected at $4.15 trillion for the current fiscal year which started on October 1 and runs through September 30, 2017, breaking the $4 trillion barrier for the first time. It seems like cutting spending would be easy, but the reality might be quite different.

At a quick glance, spending cuts look like they can be found everywhere. For an easy comparison, I took the federal fiscal year 2001 budget, President Clinton's last budget, then adjusted it for inflation and population growth. The idea is that Democrats cannot complain as strenuously about budget cuts if the remaining federal spending is still as high as it was under President Clinton. In fact, adjusting for both inflation and population growth is quite generous toward the big spenders because many departments' spending has nothing to do with the population in the U.S. (think Departments of Defense and State, for example).

This exercise provides a possible budget cut of $1.09 trillion, based on 2016 spending of $3.95 trillion and the adjusted 2001 figure of only $2.86 trillion. Federal spending that has risen over $1 trillion more than needed to keep up with inflation and population growth in just fifteen years makes it look like budget cuts can be found everywhere. Republicans should be able to make huge cuts in spending without breaking a sweat, right?

Unfortunately, as soon as you look at the cuts, problems start. Because the population is aging, $284 billion of the spending increase is in Social Security benefits which President-elect Trump has vowed not to cut. Veteran's Affairs is another $109 billion of the "excess" spending growth, not an area Republicans are likely to want to cut. Just these two agencies have shrunk the easy money from $1.09 trillion to $702 billion.

The Department of Health and Human Services is responsible for $457 billion of the spending growth above inflation and population growth. Some of that is for Obamacare subsidies, but a lot is for Medicare and Medicaid spending. Even if Republicans repeal and replace Obamacare, it is unclear how much money will be saved under the replacement and when those savings might arrive. A safe bet is that little of the savings will occur this year or next, but will more likely be realized in later years, after the replacement plan is phased in.

If we take spending on healthcare out for now, we are down to $245 billion. That is certainly not a trillion dollars, but it's not small change either. If President-elect Trump and Congressional Republicans cut spending by $245 billion, representing about a 6 percent cut in federal spending, most small government advocates and fiscal conservatives would consider that a huge victory and an excellent start. It would even cut the deficit by about one-third.

However, the caveat to that is that of the remaining $245 billion in spending that has grown above inflation and population growth, $131 billion is in military spending. If one believes that President-elect Trump and Republicans in Congress want to cut defense spending by over $100 billion, then we have hope for a more frugal federal government. If not, then they are left looking through the remaining agencies for small cuts that might reduce spending by around $100 billion.

Even a cut in federal spending of that size would be good for the economy and a great sign that Republicans are going to follow through on their promises to reform and shrink government. Lowering federal spending by three percent, which translates to about $125 billion, hasn't happened in the over 50 years of data I examined. The closest we came was in 2013 when the federal government spent a little more than two percent less than in 2012, mostly accomplished with cuts in defense spending and a drop in unemployment benefits after the recession (yes, the sequester worked).

This column is not to suggest that federal spending should not be cut (it should) or cannot be cut (it certainly can be and I, for one, would support cuts to well below the adjusted 2001 levels). The point is that given expected Republican priorities and the Democrats' commitment to fight cuts in domestic social programs tooth and nail, budget cuts may be harder to come by than they think. There doesn't really appear to be a simple place to go to cut federal spending. President-elect Trump and the Republican Congress will need to get down in the weeds and make some tough choices. They should, and I hope that they do, but they better be prepared, because it won't be easy.

 

Jeffrey Dorfman is a professor of economics at the University of Georgia, and the author of the e-book, Ending the Era of the Free Lunch

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