It’s Time to Legislate a Spending Cap
Only legally binding limits can brings deficits under control.Article Comments (20) more in Opinion »Email Printer
By STEPHEN MOORE
Treasury Secretary Tim Geithner told ABC’s George Stephanopoulos on Sunday that “We have to bring these deficits down very dramatically.” This is the understatement of the new century: Many private economists now predict that deficit spending will surpass $2 trillion this year, with $10 trillion more borrowing over the next decade.
How will the Obama administration cope with this budget recklessness? Mr. Geithner and Larry Summers, Mr. Obama’s director of the National Economic Council, hinted last weekend that taxes on everyone may have to go up.
These taxes could take the form of a broad-based energy tax (from a cap-and-trade system on carbon emissions), a payroll tax hike (as in the health-care reform plan), and a European-style national sales tax (a.k.a., a value-added tax, or VAT).
The potential burden would be staggering. It would take almost $16,000 more from every household in America to balance the budget just this year. To grab this money from top income-bracket earners, according to the Congressional Budget Office (CBO), we’d have to hike their tax rates to between 80% and 90%. The CBO noted earlier this year in its budget report that “[h]igh tax rates would slow the growth of the economy, making the spending burden harder to bear.”
Congressional Democrats do talk about “pay-as-you-go” budgeting—which requires higher taxes or entitlement spending cuts to pay for any new spending or new tax cuts—to enforce discipline. This is laughable.
When House Speaker Nancy Pelosi first implemented pay-as-you-go in 2007, the deficit was $160 billion. Today it’s 12 times higher. Congressional Democrats violated their own rules to the tune of $420 billion in their first two years in office. This year’s $786 billion fiscal stimulus bill was also outside the pay-go rules, as is the current $1 trillion health-care bill.
To bring the budget under some semblance of control, what’s needed are iron-clad restraints on the annual growth of expenditures. I call it “cap and save,” and here’s how it would work:
Each year federal expenditures (except interest on the national debt) would be limited to the rate of population growth plus the previous year’s inflation rate. U.S. population grows at about 1% per year, so if the rate of increase in the consumer price index were 3%, overall federal spending growth would be capped at an annual 4% rate. Only in years of a declared war or during a recession would Congress have the authority to suspend the cap.
The savings would be modest in the short term but would magnify over time, generating small, but manageable deficits. I calculated the savings from a spending cap relative to the current trajectory of spending anticipated by the CBO. A cap would reduce aggregate outlays through 2019 by $750 billion and by 2030 by $3 trillion. An added bonus: With lower deficits, we would also have to borrow less from the Chinese and other foreigners and save on interest payments as well.
To enforce a spending cap, Congress will need to authorize an automatic spending reduction formula. This means reviving a spending sequestration formula such as the one used under the Gramm-Rudman-Hollings Act of 1985 to help reduce the deficit in the late 1980s. (The law was repealed in 1990.)
Thus, if the CBO determined that federal spending was running above the spending limit at the mid-term of a fiscal year, every nonentitlement program in the budget would be cut by an equal percentage to bring outlays back under the cap. This would force Congress and the administration to prioritize spending and programs.
President Obama could have his health-care program—but only if he could identify offsetting savings of $1 trillion over 10 years elsewhere in the budget. And if tax revenues come in above the cap, the surplus revenues could be used for debt retirement or future tax cuts.
Colorado implemented a spending restraint plan in the 1990s. It was known as the Taxpayer Bill of Rights, and then-Gov. Bill Owens described it as a “fiscal straitjacket on the spenders.” It worked. The state balanced its budget every year and citizens received tax rebates in the mail because the legislature was prohibited from spending the windfall payments that came in during prosperous years. (The cap was eventually weakened by liberal interest groups but remains in place.)
That’s the spending discipline Washington needs. And as the Obama administration admits, there’s not a moment to lose.
Mr. Moore is senior economics writer for The Wall Street Journal editorial page.
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good idea, but will never happen.
