CBPP: Domestic Spending Concerns Overstated

[2] The claims, however, turn out to rest in large part on dubious use of data that produces misleading conclusions (as is explained in detail, starting on page 3). Careful examination of the budget data, using standard methods of analysis employed by the Congressional Budget Office, the Office of Management and Budget, and other budget analysts and economists, shows:

 

Spending as a Share of the Economy in Lower Today Than is Any Year

 

from 1975 Through 1996

 

 

 

• While federal spending has risen in the past few years, it remains far below peak levels. The standard measure used to examine changes in federal spending over extended periods of time is to measure spending as a share of the economy. Federal spending equaled 19.9 percent of the economy (i.e., of the Gross Domestic Product) in fiscal year 2003. This was lower than in every year from 1975 through 1996.

• Nearly two-thirds of the increase in spending in 2003 that has resulted from actions that federal policymakers have taken since January 2001 occurred in the areas of defense, homeland security, and international affairs (which includes expenditures in Iraq and Afghanistan).

• Furthermore, Congress and the White House stopped increasing the funds for domestic appropriated programs outside homeland security once budget surpluses disappeared and deficits returned. If the pending omnibus appropriations bill is enacted, total appropriations for domestic discretionary (i.e., non-entitlement) programs outside homeland security will be $6 billion lower in fiscal year 2004 than in fiscal year 2002, after adjusting for inflation.

• Total appropriations for all discretionary programs -- including defense and homeland security programs -- will rise 3 percent in fiscal year 2004 before adjusting for inflation, and just 1.1 percent after adjusting for inflation.

• Congress and the White House have expanded several entitlement programs, and the prescription drug legislation in particular ultimately will have large costs. A sizeable share of the increases that policymakers have enacted in entitlement spending other than the new prescription drug benefit, however, are temporary increases made in response to the weak economy -- such as the provision of additional weeks of unemployment benefits and fiscal relief to the states. These temporary spending increases will end as the economy recovers; they pose no ongoing fiscal threat.

[4] Second, the fiscal impact of the domestic spending increases remains much smaller than the fiscal impact of the tax cuts. Increases in domestic discretionary spending account for only five percent of the increase in costs in fiscal year 2003 that resulted from spending and tax legislation enacted since January 2001. Increases in entitlement spending accounted for another 12 percent of the increase in costs. By contrast, increases in defense, homeland security, and international affairs spending accounted for 28 percent of the increase in costs from legislation enacted since January 2001. And tax cuts accounted for 55 percent of the cost of such legislation, a figure that will rise to 57 percent in 2004.

The Heritage FoundationReports

[5] The figures just cited convey a very different sense of domestic spending trends than the figures being cited by those on the right who decry "runaway federal spending" and call for policymakers to clamp down on "exploding" domestic spending. The claims regarding runaway spending come to a large degree from a series of recent Heritage Foundation reports by Brian Riedl. These reports portray federal spending, especially for domestic programs, as out of control and imply that rising deficits are due primarily to a lack of spending discipline. The pending omnibus appropriations bill is singled out for particular criticism. These Heritage reports are the source of a number of frequently cited "talking points," including:

 

The Cost in 2003 of Tax and Spending Legislation

 

Enacted Since January 2001, by Budget Category

 

 

 

• Federal spending has risen so much that it exceeds $20,000 per household for the first time since World War II;

• The majority of the new spending since 2001 is unrelated to defense or terrorism;

• Spending unrelated to defense and the terrorist attacks grew 11 percent between 2001 and 2003, the fastest rate of growth in nearly a decade; and

• The omnibus appropriations bill (and the other fiscal year 2004 appropriations bills) are sufficiently bloated that discretionary spending will jump another 9 percent in 2004.

[7] 1. Is Federal Spending at a Post-World War II High? Riedl trumpets the finding that federal expenditures per household, after adjustment for inflation, are at a post-World War II high. Budget analysts, however, generally do not regard expenditures- per-household as a particularly useful way to measure spending trends over long periods of time. They strongly prefer to track federal spending over extended periods as a share of the economy. When the Congressional Budget Office, the Office of Management and Budget, and analysts and economists with no ax to grind seek to assess changes in government spending and tax receipts over long periods, they generally examine changes in spending as a share of the economy, rather than changes in expenditures per household.

[8] Analysts find much less value in examining expenditures- per-household over time for two fundamental reasons. First, the economy grows over time, and household incomes rise with it. As long as federal spending does not increase as a share of the economy, it consumes no greater share of the nation's income, and no tax increases are needed to finance it. Second, keeping federal spending from rising over long periods of time as measured on a per- household basis -- which Riedl implies is the appropriate standard of fiscal discipline -- is virtually impossible. Federal expenditures per household rise over time due to such basic factors as advances in technology in health care and other areas and real wage growth in the U.S. economy.

• Increases in federal expenditures over time in part reflect improvements in technology. For example, major new health care technologies have emerged in the decades since World War II -- such as MRIs and drug therapies -- that markedly improve health and save lives but have substantially increased the cost of health care. As a consequence, health care costs have risen faster than inflation in both the public and the private sectors, a trend that continues today as medical technology continues to advance and new medical breakthroughs continue to occur. No one would suggest that Medicare, Medicaid, and veterans health programs not use these new and improved medical technologies.

• Similarly, no one would suggest that our military still use World War II or Korean War-vintage technologies. The Air Force now flies B-2 Stealth bombers; the Navy uses nuclear-powered submarines and launches long-range cruise missiles; and the Army operates unmanned aerial vehicles equipped with air-to- surface missiles. These newer technologies make our military more effective but cost more than the weapons they replace.

• Part of the increase in federal spending over time also reflects real growth in wages across the U.S. economy. The largest single federal program -- Social Security -- is directly linked to wages. Its benefits are designed to replace a certain percentage of wages that workers earned during their careers so that their standard-of-living does not fall too much in old age. Since average wages rise faster than inflation as the economy grows, average Social Security benefits also rise over time, as do the payroll taxes that finance them. Preventing Social Security benefits from rising over time would require cuts in Social Security benefits that would become increasingly deep as the years go by.

• Moreover, the federal government is a large employer, and to attract qualified workers, it must offer wages that compete with private-sector wages for comparable positions. Freezing federal spending per household over time in real terms would require the federal government to freeze real wages for decades at a time. If real wages for federal civilian and military personnel were frozen over time while wages in the private sector continued to increase, the federal government -- including the Armed Forces -- would not be able to attract or retain qualified personnel.

[10] The relevant question thus is not whether federal expenditures per household are higher than in the previous 60 years -- which, of course, they are -- but whether federal expenditures as a share of the economy are at higher levels than in the past. And federal spending as a share of the economy is not unusually high. Federal spending in 2003 equaled 19.9 percent of GDP, lower than in every year from 1975 through 1996 (see the graph on page 1).

[11] Moreover, federal spending as a share of GDP necessarily rises when the economy weakens, since expenditures for programs like unemployment insurance, Medicaid, and food stamps increase as workers lose their jobs and qualify for these benefits. At 19.9 percent of GDP, federal expenditures were higher in 2003 than in the immediately preceding years, but substantially lower than during the downturns of the early 1990s and the early 1980s, when expenditures exceeded 22 percent of GDP in most years and rose as high as 23.5 percent of GDP in 1983.

[12] Heritage's trumpeting of the factoid that expenditures per household are at a post-World War II high would not be so problematic if the Heritage reports also provided figures on changes over time in federal spending as a share of the economy (and noted that the latter measure is the more widely used method for examining changes over long periods). Heritage never mentions the data on spending as a share of the economy, however, or explains that those data yield a different result.

2. Are increases in domestic spending responsible for a majority of the overall increase in spending between 2001 and 2003? Riedl contends that increases in domestic spending account for 55 percent of the total increases in spending since 2001. He gets this result by bypassing the standard method used to measure the size of increases and decreases in spending caused by policymakers' actions. Instead, he combines temporary increases in expenditures for programs such as unemployment insurance that occur automatically when the economy weakens, and other increases that occur for reasons unrelated to policymakers' actions (such as increases in health care costs that affect the private and public sectors alike and increases in Social Security costs that result from the rise in real wages over time), with increases in costs that do result from legislation.

[13] Analyzing the effects of actions that policymakers have taken entails measuring changes from the Congressional Budget Office baseline -- that is, changes from the spending levels that would have resulted if policymakers had passed no legislation to increase spending in any way. When this approach -- the standard method of measuring spending changes resulting from policymakers' actions -- is used, the results are sharply different from those that Riedl cites.

• Increases in defense, homeland security, and international affairs (including spending in Iraq and Afghanistan) account for 63 percent of the increase in spending in 2003 that resulted from legislation enacted since January 2001.

• Increases in domestic programs outside homeland security (including increases in veterans benefits, which are part of domestic spending) account for the remaining 37 percent of the spending increase. (See Table 1.)

[14] Moreover, when the costs of all legislation enacted since January 2001 are examined -- including the costs of tax-cut legislation -- the role of increases in domestic spending diminishes further.

• The Heritage reports are silent on the role of tax cuts in contributing to the return of budget deficits, and conservative critiques of exploding spending generally imply that spending increases are a major cause of the resurgence of deficits but tax cuts are not. Yet CBO data show that in fiscal year 2003, increases in domestic discretionary programs outside homeland security accounted for onlyfive percent of the cost of legislation enacted since January 2001. Increases in entitlements enacted since January 2001 accounting for another 12 percent of this cost.

• By comparison, increases in spending for defense, homeland security, and international affairs accounted for 28 percent of the cost of legislation enacted during this period, more than the increases in domestic discretionary programs and entitlement programs combined.

• And tax cuts were responsible for 55 percent of the cost in 2003 of legislation enacted since January 2001, a percentage that will rise to even higher levels in years after 2003. (See Table 2.)

3. Has Domestic Spending Risen Unusually Fast in the Past Few Years? Another of Riedl's featured "talking points" is that spending unrelated to defense or the terrorist attacks rose by a total of 11 percent between 2001 and 2003, the fastest two-year growth rate in nearly a decade. This figure is accurate. But the portrayal of domestic spending as experiencing mushrooming growth is misleading, because it is presented without explanation that recessions virtually always trigger a temporary increase in the rate of spending growth.

• Domestic spending rises during economic downturns because expenditures for unemployment insurance and other benefit programs increase, as people lose their jobs and employer- based health insurance and become eligible for various benefit programs. Such increases in expenditures are temporary in nature; they recede as unemployment declines.

• Moreover, these temporary spending increases are widely regarded as beneficial, both because of the timely assistance they provide to families that have lost their jobs and because these spending increases provide effective economic stimulus and thereby help make recessions less deep. For this reason, programs like unemployment insurance that automatically expand when the economy weakens are known as "automatic stabilizers."

[15] It thus should come as no surprise that rate of growth in federal spending for domestic programs has been more rapid in the past few years than in nearly a decade -- after all, the previous economic downturn occurred just about a decade before the current one. Instead of making it appear shocking that domestic spending grew at a faster rate during the past few years than during the preceding economic boom, as the Heritage reports do, analysts might ask the following, more relevant question: did domestic spending outside homeland security rise more rapidly during the current economic slowdown than during the previous downturn, in the early 1990s? The answer is that the rate of spending growth during the recent downturn has not been more rapid.

• Between fiscal year 2000, the high point of the economic expansion of the last decade, and fiscal year 2003, domestic spending outside homeland security rose at annual average rate of 5.6 percent, after adjustment for inflation. Between fiscal year 1989 (the high point of the recovery of the 1980s) and fiscal year 1992, such spending rose at a nearly identical rate of 5.4 percent. (These figures exclude spending on interest payments.)

• Moreover, the 5.6 percent average increase in domestic spending over the 2000-2003 period includes substantial expenditures for the rebuilding of New York City and smaller amounts for a compensation fund for the victims of 9/11; no comparable expenditures occurred in the 1989-1992 period. Even the very small difference between the 5.6 percent average growth rate for 2000-2003 and the 5.4 percent growth rate for the early 1990s disappears when these 9/11-related expenditures are removed from the comparison.

[17] The surge in discretionary spending also appears to be receding. Growth in appropriations for discretionary programs slowed considerably in 2003, and will slow much more in 2004. As discussed below, total appropriations for discretionary programs -- including defense and homeland security -- will increase only 1.1 percent over the 2003 level, after adjusting for inflation, and appropriations for domestic discretionary programs outside homeland security will actually be lower in inflation-adjusted terms in 2004 than in 2002. This is not a picture of domestic discretionary spending that is shooting out of control.¹

                                   Table 3

4. Do the Fiscal Year 2004 Appropriations Bills Contain Large Increases for Domestic Programs? Finally, in his latest Heritage piece, Riedl portrays the 2004 appropriations bills as bloated because outlays (i.e., expenditures) for discretionary programs will increase 9 percent between fiscal year 2003 and fiscal year 2004. Riedl includes no breakdown of domestic and defense spending increases in his piece. Someone reading the piece in conjunction with Riedl's earlier reports would likely draw the conclusion that domestic and defense programs alike are continuing to surge and are given another round of big increases in the 2004 appropriations bills.

[18] Examination of the CBO data on the appropriations bills shows that this is not the case.

• Assuming enactment of the omnibus appropriations bill, total appropriations for discretionary programs will rise only three percent in 2004; after adjusting for inflation, the increase is 1.1 percent. (These figures reflect adjustments to remove timing gimmicks that otherwise can distort year-to-year comparisons.²)

• Moreover, funding for domestic appropriated programs outside homeland security will not increase at all under the 2004 appropriations bills, after adjusting for inflation. Overall funding for these domestic programs is set at the same level in fiscal year 2004 (in inflation-adjusted terms) as in the appropriations bills for fiscal year 2003.

• And appropriations for domestic programs outside homeland security were reduced in fiscal year 2003 -- by 1.5 percent, after adjusting for inflation. As a result, total appropriations for domestic appropriations programs outside homeland security will be $6 billion lower in fiscal year 2004 than they were in fiscal year 2002, after taking inflation into account. (See Table 3.) Since no funds can be spent for discretionary programs that have not been appropriated, expenditures for domestic discretionary programs will fall, in inflation-adjusted terms, in coming years.

• The increases in funding in both the 2003 and 2004 appropriations bills (in inflation-adjusted terms) thus come entirely in the defense, homeland security, and international affairs areas. Funding for that part of the budget jumped 17 percent in fiscal year 2003, after adjusting for inflation. It will increase another 1.9 percent in 2004. (See Table 4.)

• Indeed, the only year since President Bush took office in which appropriations for domestic discretionary programs outside of homeland security increased, after adjusting for inflation, was fiscal year 2002. The budget and appropriations bills for 2002 were written at a time when the White House and Congressional leaders were issuing assurances that budget surpluses were so large that the nation could readily afford large tax cuts, major defense spending increases, a prescription drug benefit, and other initiatives, and still have large surpluses left for decades. Moreover, a portion of the increases in domestic appropriations enacted for fiscal year 2002 consisted of new funding for reconstruction in New York City, necessitated by the terrorist attacks. Once budget surpluses disappeared, real increases in funding for domestic discretionary programs outside homeland security ended.

[20] That outlays for discretionary programs will increase 9 percent in fiscal year 2004 is relevant in other contexts. But measuring changes in outlays is not a valid way to assess the degree of profligacy in the 2004 appropriations bills.

[21] Riedl's report on the omnibus appropriations bill also lacks information on the relative roles of defense and domestic programs in contributing to the 9 percent increase in outlays that he cites. The CBO outlay figures on which Riedl relies do provide information on this matter; they show that 72 percent of the real increase in outlays for discretionary programs in 2004 (i.e., the increase beyond the 2003 outlay levels, adjusted for inflation) consists of increases in the defense, homeland security, and international affairs areas. There will be some increase (beyond inflation) in outlays for domestic discretionary programs outside homeland security in 2004, but that increase reflects expenditures being made in 2004 from funds appropriated in the appropriations bills for fiscal year 2002, including funds for the rebuilding of New York. The increases in funding for domestic programs contained in the 2002 bills were provided at a time when large budget surpluses were said to exist.

Conclusion

[22] The conclusions that emerge from a fair reading of the budget data, using standard budget measures, do not neatly fit the claims being made on the right. There is no question that federal spending growth has increased significantly in the past few years. But the spending growth to date that has resulted from actions policymakers have taken in the past few years has been concentrated primarily in the defense, homeland security, and international affairs areas. Appropriations for domestic discretionary programs outside homeland security have fallen since 2002, after adjustment for inflation, and expenditures for entitlements such as unemployment insurance will decline as the economic recovery strengthens. Tax cuts have increased the deficit by a larger amount than all spending increases combined.

[23] This is not, however, a reason to be sanguine about the fiscal outlook. To the contrary. If made permanent, the tax cuts enacted over the last three years will cost the Treasury $3.5 trillion including interest between 2002 and 2011, and defense, homeland security, and international affairs programs will continue to absorb considerable new resources even if their growth rates slow. In addition, the recently enacted Medicare prescription drug bill will add substantially to deficits, especially in future decades when its cost will expand. And of course, the aging of the population and continued increases in health care costs will have very large budgetary effects over time, especially as the baby boomers retire. Deficits now extend as far as the eye can see and threaten eventually to mount to dangerous levels.

[24] But contrary to what the Heritage reports assert or imply, growth in domestic spending in the past few years has not been the driving force behind the return of large budget deficits, and increases in domestic discretionary programs in particular have neither contributed substantially to the current deficits we face nor are a major contributing factor to our serious long-term fiscal problems.

²See Richard Kogan, op. cit. The adjustments are of virtually identical size in 2003 and 2004 and thus have almost no effect on the rate of growth of appropriations from 2003 to 2004.