Republicans Are Talking About Spending Cuts Again. Take It With a Grain of Salt.
If Past Is Prologue, Republicans Will Squander Any Win
Republicans are talking about using the debt limit as leverage to cut spending should they win control of the House in the midterm elections. House Minority Leader Kevin McCarthy (R-CA), in an interview with Punchbowl News, said, “You can’t just continue down the path to keep spending and adding to the debt.” He said, “We’re not just going to keep lifting your credit card limit” and suggested that both sides should figure out where they can cut spending. He also didn’t take entitlements like Medicare and Social Security off the table.
McCarthy isn’t wrong about the debt limit and federal spending. The debt limit has also been the only way Republicans have been able to force spending cuts in the past, but I’ll come back to that in a bit. Before we dive further into McCarthy’s comments, we need to look at federal spending and the basics of what it entails. The Congressional Budget Office (CBO) released the ten-year budget outlook in May, so we have recent figures. The data, however, are not recent enough to show the impact of the Inflation Reduction Act. We’ll also go back as far as the CBO has historical data to show trends.
The good news is that I wrote about the CBO’s ten-year and long-term budget projections in early August. Clearly, McCarthy is right that the United States faces significant challenges when it comes to federal spending. It’s even more concerning that these challenges will come in the face of revenues that exceed the historical average.
Assuming there are no changes to current law (this means the individual tax cuts in the Tax Cuts and Jobs Act expire at the end of tax year 2025), revenues as a percent of gross domestic product (GDP) are projected to reach 18 percent in FY 2026, 18.4 percent in FY 2035, 18.8 percent in FY 2046, and 19.1 percent in FY 2051. The high point for federal revenues as a percentage of GDP in the CBO’s data, which goes back to FY 1962, was 20 percent in FY 2000. Progressives like to talk about the 90+ percent top marginal tax rates in and around the 1950s, but the only year that surpassed FY 2000 was FY 1944, according to historical data provided by the Office of Management and Budget (Table 1.2), when revenues as a percentage of GDP were 20.5 percent. The average revenues between FY 1943 and FY 1981 were 17.2 percent. The average revenues between FY 1981 and FY 2021 were 17.3 percent.
In terms of outlays, the average between FY 1962 and FY 2021 was 20.4 percent. Obviously, FY 2020 and FY 2021 are anomalies because of the pandemic. Federal spending jumped dramatically to 31.3 percent and 30.5 percent of GDP in FY 2020 and FY 2021 as Congress scrambled to address the pandemic and related economic disruptions. As a side note, this makes President Biden and congressional Democrats’ boasting that they cut the deficit so absurd. The deficit had nowhere to go but down, and it would’ve gone lower had they not passed two partisan bills, the American Rescue Plan Act and the Inflation Reduction Act.
Keep in mind that mandatory and net interest spending—70.6 percent of all federal spending in FY 2022—aren’t subject to congressional appropriation. Spending for in these two categories is baked in the cake and based entirely on obligations. Discretionary spending—29.4 percent of federal spending—is subject to congressional appropriation.
As you can see below, mandatory spending—which includes Medicare, Medicaid, and Social Security—is projected to rise over the next 30 years. This is because our society is growing older, and more people will retire and begin receiving benefits from Medicare and Social Security. Now, these programs face funding shortfalls within the next 15 years and will see benefit cuts absent congressional action. As interest rates have increased, the cost of servicing the national debt will increase. Net interest is projected to surpass defense spending as a share of GDP in FY 2030 and rise above total discretionary spending in the FY 2043 to FY 2052 period.
In terms of shares of total federal spending, net interest will jump from 6.7 percent in FY 2022 to an average of 21.4 percent between FY 2043 and FY 2052. The budget deficit will grow from 4.2 percent of GDP in FY 2022 to 6.1 percent in FY 2032 to 8.2 percent in FY 2042 to 11.1 percent in FY 2052. The share of the national debt held by the public is projected to be 185 percent of GDP. It’s currently around 98 percent.
The trend is clear. Mandatory spending and net interest are going up and will continue to go up. Discretionary spending has declined and is projected to continue to decline, but that’s subject to appropriation, so it’s really up to Congress whether that continues. But even if the trend continues, the budget deficit and the share of the national debt held by the public will continue to rise.
The Past Shows You Can’t Trust Republicans to Actually Cut Spending
The short of it is that McCarthy isn’t wrong. The United States is facing severe long-term budgetary problems. A friend and economic commentator recently complained that fiscal conservatives, classical liberals, and libertarians have been saying this for years. He said it in a “boy who cried wolf” way. Yes, it’s true. We have been saying it for years, but we’ve been saying it from a perspective of “hey, this is going to happen down the road if we don’t get our fiscal house in order.” The projections back us up on that. So, absent Congress doing something, we will face pain down the road.
McCarthy talked about “eliminat[ing] some waste,” but Congress could cut all nondefense discretionary spending in FY 2032 and still run a budget deficit of $991 billion. Granted, that would reduce the deficit from the projected 6.1 percent of GDP to 2.7 percent, but it’s not a simple matter of cutting waste. To his credit, McCarthy didn’t take entitlements off the table. The likelihood of that, though, is incredibly slim. This would take bipartisan political will that simply doesn’t exist in these hyper-partisan times. Republicans want the entitlement reforms without the tax increases while Democrats don’t want the entitlement reforms and still want the tax increases.
The thing is, Republicans actually did get a win on spending in 2011. Then, they spent the next several years consistently undermining themselves. Before I go on here, I should say that Republicans did keep spending in check after they took control of the House in 2011. I’m not saying otherwise, but they could’ve done so much better had they not gotten nervous.
In 2011, during the midst of a debt limit fight, Congress passed the bipartisan Budget Control Act (BCA). The Senate vote on the BCA is here, and the House vote is here. The BCA set up a disapproval process through which the Obama administration could increase the debt limit on its own. Congress could disapprove of the increase, but it never did. The administration increased the debt limit three times. Although the House voted to disapprove of two of the increases in September 2011 and January 2012, the Senate allowed the increases to take place (see here and here). Congress didn’t consider a disapproval resolution for the third increase.
The law required a one-time vote on a balanced budget amendment. The House failed to pass a balanced budget amendment, H.J.Res. 2, in November 2011. The Senate failed to pass two others, S.J.Res. 10 and S.J.Res. 24, in December 2011. You can find the roll calls for the Senate votes here and here.
The BCA created the Joint Select Committee on Deficit Reduction. This select committee was tasked with identifying at least $1.5 trillion in targeted spending cuts over ten years. The select committee held five public meetings, one of which was for organization purposes, but failed to come up with the recommended spending cuts.
Finally, in the absence of an agreement for spending cuts that were approved by Congress, the BCA mandated automatic across-the-board spending cuts of $1.2 trillion over ten years, through FY 2021. Although everything else in the law failed, the sequester of $1.2 trillion in spending was good news, or so we thought.
Although President Obama promised to veto any attempt to get rid of the automatic cuts, Congress delayed the initial round of spending cuts in December 2012 and January 2013 with the passage of the American Taxpayer Relief Act, which also increased income taxes for taxpayers earning $400,000 or more and capital gains taxes. Then-Speaker John Boehner (R-OH) got nervous about the spending cuts, which included sequestration for defense spending. Although he played a role in negotiating and passing the BCA, Boehner called it “a dramatic new federal policy…that threatens U.S. national security, thousands of jobs and more.” Boehner’s comments set the stage for years of disappointment.
Congress routinely passed budget agreements that amended the BCA with new discretionary spending caps to avoid spending cuts, the Bipartisan Budget Act of 2013, the Bipartisan Budget Act of 2015, the Bipartisan Budget Act of 2018, and the Bipartisan Budget Act of 2019.
Over the course of the BCA, and before taking emergency and pandemic-related spending into consideration, Congress passed budgets for FY 2013 through FY 2021 that busted the spending caps by $808 billion. Congress also used funds for “overseas contingency operations/global war on terrorism” (OCO/GWOT), which is exempt from the spending caps, to increase defense spending. This means that the overall negation of the BCA exceeds the $808 billion mentioned. OCO/GWOT funding between FY 2013 and FY 2017 was $434.6 billion, which would’ve exceeded the sequester under BCA once the $808 billion is added.
So, here’s my point about all of this. The biggest increases in discretionary spending came between FY 2018 and FY 2021. Congress busted the caps by $617 billion, excluding OCO/GWOT funding, in these four fiscal years. These two budgets that covered these four years were signed into law by a Republican president. The first of these two budgets was passed by a Republican-controlled Congress. Although most House Republicans opposed these two budgets (see here and here), most Senate Republicans supported them (see here and here).
Republicans talk a really good game about federal spending, particularly lately with inflation being a major topic, but when they have some power, they keep federal spending at best. When Republicans have full control of government, they actually make it worse. This isn’t even getting into pandemic spending and the fact that the overheating of the economy began under a Republican administration.
McCarthy and House Republicans may try to leverage the debt limit. I doubt they’ll be successful because McCarthy isn’t Boehner. If McCarthy and House Republicans are successful, will they stand by that success when and if they win full control of the federal government again? If past is prologue, we should all have our doubts.