Cato takes on the federal budget

by Robert Maynard

There are very few politician of either party who are really serious about tackling the federal government’s problem with run away spending.  For a serious approach to this critical issue, it is better to check out the Cato Institute’s Tax and Budget Policy Bulletin:

The federal budget includes a vast array of programs in hundreds of agencies. But when boiled down, the budget consists of just five basic spending activities: compensating federal workers, purchasing goods and services, giving aid to state and local governments, transferring wealth through subsidy and benefit programs, and paying interest on the federal debt.

The federal government spent $3.9 trillion in 2013, according to the Bureau of Economic Analysis (BEA).1  Transfers were the largest spending activity at $1.98 trillion, followed by purchases at $571 billion, aid to the states at $510 billion, interest at $414 billion, and compensation at $407 billion.2

Five Federal Spending Activities

Transfers to individuals and businesses account for 51 percent of federal spending. Some of the largest benefit and subsidy programs are Social Security, Medicare, food stamps, refundable tax credits, unemployment insurance, farm subsidies, and supplemental security income.

Purchases account for 15 percent of spending. The government buys everything from fighter jets to computers and paper clips. Defense activities account for 63 percent of purchases and nondefense for 37 percent.

Aid to the states accounts for 13 percent of spending.  It is delivered through more than 1,100 programs for health care, highways, education, housing, and many other things.3 Medicaid is the largest aid-to-state program.

Interest accounts for 11 percent of spending. This BEA measure of interest is somewhat larger than the net interest measure in the federal government’s budget.

Compensation (wages and benefits) for 3.7 million defense and nondefense federal workers accounts for 10 percent of spending. Defense workers (uniformed and civilian) account for 60 percent of federal compensation costs and nondefense for 40 percent.4

The chart tracking the trend of government spending over time shows a sharp upward spike in all four areas of government spending after 2008, but a sharp leveling off after 2010.  This would indicate that the efforts of the much maligned Tea Party movement have not been in vein.

Yes, the Tea Party movement has done a good job, but much more is needed.  Here is a short section introducing a plan of real spending cuts in all four areas.

Four Ways to Cut Spending

Official projections show huge federal budget deficits and ever rising debt in coming decades. Without reforms, the non-stop red ink will undermine economic growth and reduce living standards. As such, policymakers should begin scouring the budget for programs to cut.

In this regard, note that the U.S. Constitution does not create an open-ended role for the federal government to transfer wealth or aid the states. Yet today those two activities account for about two-thirds of federal spending even though they run counter to the government’s limited purposes under the Constitution.

So transfers and aid should be the focus of major cuts. However, there is also much waste and unneeded spending within the government’s purchasing and compensation. Cuts should be made to all types of spending.