So What Should We Think About Going to 2008 Levels?

There’s been a lot of discussion about the recent spending cuts put forward by Representative Ryan (R-WI), designed to bring non-security discretionary spending back to 2008 levels for the remained of FY2011. Some of the right have criticized these cuts for being too mild, while others on the left have called them draconian. With both sides attacking the same plan, a general rule is that it is a plan worth taking a serious look at.

Let’s review some of the criticisms, and see how the plan stacks up.

Criticism 1: Cuts Don’t Meet the Promise

One criticism of these cuts is that these cuts break the promise that Republicans made in their Pledge to America to bring FY2011 non-security discretionary spending down to 2008 levels -- about a $100 billion cut; $32 billion in cuts seems well short of this. But the $32 billion is relative to the Continuing Resolution that essentially has already frozen 2011 funding at 2010 levels, whereas the $100 billion promised is relative to the spending proposed in the President’s budget. Compared to the President’s budget, that $32 billion increases to $58 billion.

Moreover, that $58 billion only covers 7 months of the fiscal year. The first 5 months of the fiscal years are already set by the Continuing Resolution. Thought of another way, the $58 billion in cuts is “pro-rated” for the portion of the year House Republicans have control over.

^{Numbers in billions and rounded}

Criticism 2: Cuts Will Hurt the Economy

Economists tend to agree that deficits should be larger when the economy is weak and smaller (or non-existent) in good times. CRFB agrees with this position. Given this, one could argue that now is not the ideal time for large spending cuts. Again, we agree.

But in the scheme of things, $32 billion is quite small. It equals:

• 2.2% of $1.5 trillion the deficit
• 0.9% of the $3.7 trillion in total federal spending
• 0.2% of the $15 trillion economy.

Moreover, we just passed a massive tax cut/stimulus bill which increases the FY2011 deficit by nearly $400 billion. Given that, it is hard be excessively concerned about a $32 billion spending reduction. We need to carefully weigh the short-term aggregate demand needs of the economy against the fiscal threats we face. The payoff of these initial cuts is less in the immediate term, and more important over time. If the proposed spending levels were continued through 2012 (on a full rather than pro-rated bases) and then grown with inflation thereafter, we would save $800 to $900 billion over ten years, relative to CBO's baseline. That’s some pretty impressive savings.

Criticism 3: Cuts Will Decimate Important Federal Programs

Yes, these cuts will have significant effects on a variety of government programs. Cuts of this magnitude will require going far beyond rooting out waste and excess administrative spending – though we hope policy makers will start there. But reducing our deficit requires tough choices, including a reevaluation of what the government should and shouldn’t do. Surely significant programmatic cuts, terminations, and consolidations are warranted. These are the types of choices that we all have to make as a society. We are concerned, however, that there will be administrative difficulties in enacting these cuts so abruptly. Given the short time frame, agencies may have to resort to defunding grants already awarded (including to the States) or furloughing employees.

Criticism 4: Focus on Domestic Discretionary is Too Narrow

How true. Though domestic discretionary spending should certainly not be spared from reform, it is impossible to make real progress on the debt looking at this area alone. Even eliminating domestic discretionary spending altogether would only reduce this year’s deficit by one third this years (from $1.5 trillion to about $1 trillion), and would never come close to balancing the budget. As Senator Al Simpson explained recently, “there's only one way to do this, you dig into the big four, Medicare, Medicaid, Social Security and defense.” (And we would add “tax expenditures” as a fifth.) While domestic discretionary spending may be a good starting point, it’s time to get serious about our debt and enact a comprehensive fiscal consolidation plan – addressing all areas of the budget – into law.