Veronique de Rugy: Republicans Must Avoid Repeating History with the Budget

The tedious and long battle for House speaker was over. Now, the GOP is arguably more focused than ever on fiscal responsibility and cutting expenditures. Republicans want spending cuts to achieve this goal in return for raising the debt ceiling. While it is worthwhile to ask for future fiscal discipline before Uncle Sam can borrow even more money, it is not wise.

Congress will eventually need to pass legislation that authorizes the Department of Treasury, to borrow money beyond the current debt ceiling level in order to avoid default. Besides, when previous Congresses — both Republican- and Democratic-controlled — passed spending bills paid for with money they didn’t have, legislators implicitly agreed to raise the debt ceiling as needed. However, this doesn’t mean that legislators of today cannot demand spending restraint.

Janet Yellen, Treasury Secretary, has already stated that the Treasury will start “extraordinary measures” To ensure that the federal government can meet its payments obligations, even if the ceiling doesn’t rise immediately. This should allow payment obligations to continue without default until June and give legislators enough time to reach an agreement on raising the debt ceiling. This has been done before, and it can be again.

This is the path that Republicans are now pursuing, which in theory is great. However, it seems that they are going about it wrong. Brian Riedl from the Manhattan Institute claims that the GOP plans to cut $130 Billion in discretionary appropriations. The cuts to the defense budget, veteran’s health, and veterans’ pension funds will not be made, even though they make up $993 billion of the $1,602 trillion discretionary budget. Their plan, Riedl points out, will require “freezing those two items and cutting everything else by 21% immediately.”

This maneuver ensures political failure for the Republican plan. There are easily 21% of spending cuts that can be made in programs such the National Institutes of Health, Centers for Disease Control and Prevention, Food and Drug Administration, and Departments of Transportation, Education, and Energy. Some of these discretionary programs need to be eliminated. But, cutting only a small portion of the discretionary budget is not a good idea. This would make trillions of dollars unreachable and could be a political misstep. 

This mistake was made decades ago with the Balanced Budget and Emergency Deficit Control Act of 1985, known as the Gramm-Rudman-Hollings Act. The legislation established a maximum deficit amount, which would be reduced over time until it disappeared. To bring the budget into balance, the president would have to reduce nonexempt spending by a uniform amount if the limits were broken. The Act’s framework was not effective in constraining spending. This is partly because Congress exempted too much programs, including entitlement and defense spending, from sequestration. This allowed the budget to continue growing. In 1990, the deficit limit had been breached by close to $100 billion. This would have required nonexempt programs cut by approximately a third.

Unfortunately, Republicans’ fiscal targets will be politically impossible, just as those cuts. Instead, lawmakers could instead freeze discretionary appropriations for this year and then impose a 2% annual growth cap. Riedl rightly points out, “Each 1% we trim the annual growth rate of discretionary spending (such as from 3% to 2% per year) saves $1 trillion over the decade. Over the long-term, savings get big.” Even better, even though these caps may seem reasonable, especially once inflation is under control, it will be necessary that certain programs, including defense spending undergo significant reforms or get eliminated. 

All things considered, while it is important to limit discretionary spending, fiscal sustainability also requires that Congress reduce the mandatory budget side. Social Security, Medicare, Medicaid, not defense or education, are still the major drivers of our future debt. Riedl states that 86% of federal spending will come from these three programs between 2008 and 2032. This includes the interest Treasury must pay. The result is that there will never be enough discretionary spending cuts to manage the coming debt explosion.

I admire the Republicans’ commitment toward fiscal restraint. But they must do it right or they’ll fail as others have done before.