The Role of Spending Growth in the Deficit

As illustrated in my previous post, the growth of federal spending under Bush has actually been quite modest, other than in the categories of defense and health care. As a result, if we were to try to imagine what the budget deficit would have been with more restrained spending growth, we find that it would have made very little difference – unless you cut defense spending.

(Alternatively, one could consider reducing the growth of health care spending, but since that would probably require a fundamental change to the entire health care system in the US, such a scenario is a subject for another day.)

The following chart shows the budget deficit under a few alternative scenarios. The red line shows the actual and forecast (under the Bush administration’s 2005 budget proposal, which assumes very tight controls on discretionary spending over the next few years) budget deficit. The light blue line depicts what the budget would have been if all discretionary spending, other than for defense and homeland security, had remained constant at year 2000 levels (i.e. at their lowest levels in 35 years), as a fraction of GDP.

Source: The projection of the budget deficit for the rest of the decade is from the CBO. Alternate budget scenarios based on the average estimates of the budgetary cost of each of the Bush tax cuts as given here, and historical spending levels as given here.

The graph illustrates that because discretionary spending growth has actually been quite modest, holding such NDNHS discretionary spending constant would have made very little difference to the budget deficit.

The dark blue line proposes a different scenario: suppose NDNHS spending had been frozen at year 2000 levels, and defense and homeland security spending (DHS) had risen by only half as much as it did between 2001 and 2005 (again, as a percent of GDP). So, for example, under this scenario DHS spending would have risen from about $300bn in 2000 to about $465bn in 2005, instead of its actual level of around $535bn. This spending scenario now starts to put a bit of a dent in the budget deficit.

But the only scenario that actually goes most of the way toward eliminating the budget deficit is if this latter spending scenario is combined with the supposition that the Bush tax cuts had never happened.

The lesson is fairly straightforward: the deficit was overwhelmingly due to the tax cuts, not spending growth under the Bush administration. (Note: for more about the effect of the tax cuts on the deficit, see The Budgetary Effects of the Bush Tax Cuts.) It is equally clear that any plan that hopes to seriously reduce the US’s budget deficit will almost certainly have to include a substantial reversal of the Bush tax cuts.

Kash

UPDATE: Parenthetical note about health care spending added.