Commentary

A Little Less Is Still a Lot

The fiscal 2006 federal budget is being billed as the tightest yet by the Bush administration. But the administration’s rhetoric does not match the budget substance. Overall spending is projected to rise 3.6% in 2006, but that follows an enormous 33% increase over the past four years. And tens of billions more will be needed for Iraq.

At first glance the budget sounds pretty tough this year, with a promise to cut or terminate 150 federal programs. But even if Congress passed all those cuts, 2006 spending would be reduced by less than 1%. Last year’s budget likewise proposed terminating 65 programs, but only five were actually ended.

In prior years, Congress has ignored most of the limited cuts proposed by the administration because of a conflicted message from the White House — namely, We want spending restraint, except in the many areas where we want increases. It’s the same mixed message this year — the budget’s five-page summary begins with three pages of tough talk about spending restraint, but the last two pages offer a laundry list of 37 “program increases and new initiatives.”

The president wants $1.5 billion more for foreign aid, $268 million more for coal research, $260 million more for hydrogen research, and $28 billion more for student aid over 10 years. What is particularly corrosive is how the administration keeps expanding the scope of federal power into state and private activities. For example, the budget includes another $100 million to “promote healthy marriages” and $1.5 billion for a “high school initiative,” which continues the administration’s offensive to take control over the nation’s schools begun with the No Child Left Behind law.

To give some credit, the Bush budget does include real cuts in some areas, such as housing, transportation and the Corps of Engineers. The budget proposes that nondefense discretionary outlays rise by 2.4% in 2006, and then has spending falling later in the decade. But don’t hold your breath for those out-year reductions.

It’s an old game to make the budget numbers add up by assuming that cuts will happen in later years, just not in the current budget year. Consider the spending levels that President Bush proposed for 2005 in his first budget four years ago. He proposed that spending on education would be $83 billion in 2005. The new budget says that 2005 education spending will be $96 billion. Similarly, estimated 2005 spending on agriculture jumped from $14 billion to $31 billion, transportation from $61 billion to $68 billion, and international affairs from $21 billion to $32 billion.

One reason that the Bush administration has made so little progress on spending restraint is because it continues to use the deficit as the bellwether of “restraint.” It’s true that the deficit is expected to fall in coming years, but that’s mainly because revenues will be rising so quickly.

The focus on budget deficits implies that it makes little difference whether the government spends less or taxes more. In reality, the evidence is clear that higher tax rates discourage productive efforts, and that reduced government purchases and transfer payments have the opposite effect.

Government purchases reduce the availability of labor, equipment and real property by raising their costs to private businesses. This “crowding out” is real, not financial. It is not reduced by taxing less and borrowing more. Government transfer payments are a disincentive not just for the taxpayers who fund them, but for those who receive them. These disincentive effects occur however transfers are funded.

We think that Congress should go beyond the administration’s limited cuts by enacting an overall federal budget cap to force trade-offs between defense, entitlements and domestic discretionary spending. And Congress needs to start moving major programs such as highway spending and the giant Medicaid back to the states. A first step would be to turn Medicaid into a block grant and slow spending to at least the inflation rate. The Bush budget includes some restraint on Medicaid spending, but block-granting the program would create savings of $55 billion annually by 2010 and $161 billion annually by 2015.

President Bush is a staunch tax-cutter and he should be lauded for tackling Social Security and tax reform. But spending needs to be cut more sharply to avert tax hikes down the road. What if the next president is a liberal Democrat or a weak-kneed Republican? High deficits could be used as an excuse to reverse prior tax cuts, as they were for George H.W. Bush and Bill Clinton, who together pushed the top income tax rate up from 28% to 40%. President Bush and the Republicans need to make sure that their recent tax cuts are a lasting legacy and begin serious downsizing of the huge federal budget.

Messrs. Edwards and Reynolds are director of tax policy and senior fellow at the Cato Institute.