NCPA - National Center for Policy Analysis

A Plan to Cut Spending and Balance the Federal Budget

December 3, 2010

Federal spending is soaring, and government debt is piling up at more than a trillion dollars a year.  Official projections show rivers of red ink for years to come unless policymakers enact major budget reforms.  Unless spending is cut, the United States is headed down the road to economic ruin, says Chris Edwards, director of tax policy studies at the Cato Institute.

Short of a full balanced budget plan, policymakers could put in place a debt stabilization plan.

  • Such a plan would cut spending to 21.5 percent of gross domestic product (GDP) by 2020, which would trim annual deficits to 3 percent of GDP.
  • With deficits at that level, federal debt would be at least stabilized as a share of the economy, and we would avoid a Greek-style debt crisis.

Official budget projections show that federal debt is exploding because spending is at abnormally high levels.

  • With the 2001 and 2003 tax cuts in place, and with continued relief from the alternative minimum tax, federal revenues are expected to rise to 18.5 percent of GDP by 2020, which is a little higher than average over recent decades.
  • By contrast, it is federal spending -- currently at 25 percent of GDP -- that is far above normal levels.
  • During the last two years of the Clinton administration a decade ago, federal spending was just 18 percent of GDP.

Some analysts claim that cutting government spending would hurt the economy, but that idea is based on faulty Keynesian theories.  In fact, federal spending cuts would shift resources from often mismanaged and damaging government programs to the more productive private sector, thus increasing overall GDP, says Edwards.

Source: Chris Edwards, "A Plan to Cut Spending and Balance the Federal Budget," Cato Institute, November 2010.


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