Download - Cutting Spending in the US: Can It Be Done
Cutting Federal Government Spending: Yes We Did
David R. HendersonResearch Fellow, Hoover Institution,
Stanford Universityand
Associate Professor of Economics, Graduate School of Business and Public
Policy Naval Postgraduate School
Me with Former President Reagan, January 1993
Canada’s Budget Triumph
Federal spending on programs (as a percent of GDP):
• 1992-1993: 17.5 percent• 2000-2001: 11.3 percent
Canada’s Budget Triumph (cont)
Federal spending on servicing the federal debt (as a percent of GDP):
• 1992-1993: 5.6 percent• 1999-2000: 4.3 percent
What is a “Cut”?When analysts refer to government budget cuts, they do not all use the word “cut” the same way. A cut in government spending can mean one of four things:(i) A cut in the dollar amount of spending even
when there is inflation;(ii) A cut in real spending, that is, an inflation-
adjusted cut;(iii) A cut in spending as a percent of GDP;(iv) A cut in the planned increase in spending.
America’s Budget Triumph
Defense Spending as % of GDP
Net Interest on Debt as a % of GDP
The Big Three
Other Domestic Spending
Fell from:
• 6.41 percent of GDP in 1990 to • 5.40 percent in 2000
Was High Economic Growth in the 1990s an Important Cause?
Average annual economic growth by decade:
• 1990s: 3.2 percent• 1980s: 3.2 percent• 1970s: 3.2 percent
Did Cuts Hurt Growth?
Growth in last half of decade, 1995-2000, after most of the cuts had kicked in:
• 4.0 percent annual average real GDP growth
Due to United Legislative/Executive, as in Canada?
No.
1990-1992: R Pres, D Congress1993-1994: D Pres, D Congress1995-2000: D Pres, R Congress
Earlier Evidence: Drop in Post WWII Federal Spending
Post WWII Growth of Real Private GDP
Moral of the Story
Modest cuts in spending (in real terms), combined with keeping growth in spending below growth in GDP, will ultimately balance budgets and even produce budget surpluses.
Where Cuts Can Be Made?
Defense spending today, at about 3.8 percent of GDP, is below where it was at the start of the 1990s, when it was about 5.2 percent.There is still room to cut defense spending substantially.
But the growth in government spending in the future will be mainly in Medicare, Medicaid, and Social Security.
The Danger of Our Current Debt
• Net interest on the debt is very low.• This is because the interest rate on the
debt is low.• Even a one-percentage-point rise in
interest rates on the approximately $12 trillion in debt held by the public would increase government spending by a hefty $120 billion. This is about 0.75 percent of GDP.
Solution: Lock in Low, Long-Term Interest Rates
• Short-term problem: If we lock in long-term rates on, say, $3 trillion of debt, debt service on this $3 trillion immediately rises by $90 billion.
• Long-term benefit: If interest rates rise by more than 3 points, feds will save money.
• Diversified strategy: That’s why I chose $3 trillion.
Yes We Can – Cut Federal Spending