Politics & Policy

Real Cuts for the Debt Vote

The way to save money is to terminate programs, not trim them.

The House’s overwhelming rejection of a clean debt-limit increase means that the two parties must now find major spending cuts. House Republicans say that they will not support a debt increase unless the Democrats agree to equal-sized spending cuts. If Congress raises the debt limit by $1 trillion, then it must also find budget savings of at least $1 trillion, over either five or ten years.

The crucial question is: Will the proposed budget savings be real cuts or smoke-and-mirrors “cuts”? Many of the cuts in the 2011 budget deal were of the latter variety.

There are only two types of cuts that are “real”: legislated reductions in entitlements and complete terminations of discretionary programs. Once enacted, those types of cuts have the best chance of shrinking the government permanently.

#ad#Let’s look at entitlements. Real cuts could include increasing the Social Security retirement age, changing retiree cost-of-living allowances, and increasing patient deductibles under Medicare. Those are real cuts because benefits would be permanently reduced unless liberals could get a majority in the House and 60 votes in the Senate to reverse them down the road, which is unlikely given the huge deficits we face.

Rather than such real cuts, President Obama has proposed phony cuts, such as a “debt fail-safe trigger,” which is just a promise that future Congresses will find savings. Indeed, because Obama’s trigger is slanted toward tax hikes, it could embolden liberals to spend even more in the near term in the hope of triggering large revenue increases later on.

With discretionary spending, any debt-increase deal should terminate entire programs, not just trim them. The 2011 budget deal cut spending by $38 billion, but most of the savings were through reductions to ongoing programs. The problem is that advocates for those programs are now energized to undo the cuts, which they could do anytime through simple majority votes during the appropriations process.

By contrast, fully repealing a program and its underlying authorization would scorch the earth and likely prevent its revival. For example, the government spends $9 billion a year on public-housing subsidies. Lawmakers could trim the subsidy by $5 billion a year, which would theoretically save $50 billion over ten years. However, we could only be really sure of the first-year savings of $5 billion, because appropriators could easily restore the spending down the road.

If, however, Congress abolished public-housing spending and repealed the law allowing it, then we could be confident of saving $90 billion over the next decade. Reauthorizing the program would face numerous legislative hurdles, including the Senate’s general supermajority requirement. In today’s fiscal environment, if we kill a major subsidy program, it is not likely to come back from the grave.

For the debt-increase vote, fiscal conservatives should be suspicious of any discretionary-spending cuts that aren’t tied to full repeal of particular programs. Any plan that shows major savings from assumed reductions in future discretionary spending is meaningless unless it is based on terminations, or is at least enforced by a rigid spending cap that requires a supermajority to void.

A final source of budget trickery to watch out for involves budget baselines. Leading up to the 2011 budget deal, the House leadership promised $100 billion in cuts. However, that number was based on the inflated spending level from Obama’s never-enacted budget. So the GOP went into the negotiations with no more than $61 billion of real cuts in hand, and that total was whittled down from there.

Inflated baselines have played a prominent role in other budget deals, such as the infamous 1990 deal in which Pres. George H. W. Bush broke his tax pledge. Bush claimed that he received two and a half dollars in spending cuts for each dollar in tax hikes. But a lot of those “cuts” were against an inflated defense baseline that both parties knew was unrealistically high given the winding down of the Cold War.

In sum, Republican leaders have made an unusually explicit promise about spending cuts that must be passed this year. It is a great chance for conservative voters and tea partiers to hold GOP feet to the fire and really shrink the government. I trust that Republicans are sincere in their promises, but we need to verify that any budget deal delivers real and lasting cuts.

— Chris Edwards is editor of the Cato Institute’s www.DownsizingGovernment.org.

Chris Edwards is an economist at the Cato Institute. He recently testified before the House Oversight and Reform Committee about the USPS’s dire financial condition.

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