2020: A Budget Odyssey

Runaway entitlement spending Entitlements are the driving force behind budgetary expansion. Federal entitlement spending in real dollars has doubled roughly every eight years since 1950. Outlays for Social Security, health care, and welfare programs are five to ten times larger today in inflation-adjusted dollars than in 1950. To borrow an appropriate analogy from former Office of Management and Budget Director Richard Darman, entitlements are like relentless Pac-Men gobbling up the nation's economic resources.

Defense budget growing since 1950 but shrinking as a share of GDP - Defense spending has been growing, though irregularly, since the 1950s. However, as discussed earlier, at less than five percent of GDP, defense spending in 1993 is well below its average in the 1950s and 1960s. Defense spending consumes only about half the share of GDP today than it did in the 1950s and 1960s. Furthermore, defense has been shrinking as a percentage of the federal budget consistently since the 1960s from about 40 percent of the budget to about 20 percent.

Outlays for federal lending and interest on debt expanding - Federal credit programs and interest on the national debt are two other fast-growing areas of the budget. As the federal budget deficit continues to grow (it is now $250 billion) interest payments also climb rapidly. Meanwhile, the savings and loan cleanup added an estimated $300 billion to federal outlays. Although this particular crisis is over, at least temporarily, there is now concern that the Federal Deposit Insurance Corporation, the Federal Housing Administration, and the Pension Benefit Guaranty Corporation will soon require multi-billion dollar taxpayer bailouts of their own.

Domestic discretionary spending slowed in 1980s - Most domestic discretionary programs - including agriculture, transportation, natural resources, social services, general government, and science expanded sharply from 1950 to 1980. In the 1980s the Reagan Administration had marginal success in trimming these programs. Their budgets in real dollars (but not in nominal dollars) declined in some cases. Nonetheless, without exception these domestic discretionary programs are considerably larger today than in 1950 and, as discussed in an earlier chapter, they are growing rapidly again so far in the 1990s.

2020: A Budget Odyssey

The picture that emerges from this brief review of postWorld War II federal fiscal policy is this: Although virtually every area of the budget has expanded sharply since 1950, entitlements are the primary villain in the loss of federal fiscal discipline.

A Glimpse into Our Fiscal Future

To project the level and composition of spending over the next three decades, we make four assumptions about the U.S. economy and fiscal priorities:

ASSUMPTION #1. Real GDP will grow at a two percent real annual rate over the next thirty years, which is consistent with the predictions of the Social Security Administration.

ASSUMPTION #2. Defense spending will average 4.5 percent of GDP-well below its post-World War II average-and

remain constant at that level.

ASSUMPTION #3. Social Security and health care expenditures will rise at the rate forecasted by the Social Security Administration (assumption 2-B of the 1991 trustees report) and the Health Care Financing Administration. This assumes no new or expanded benefits over the next twenty years.

ASSUMPTION #4. Discretionary programs in the budget will grow at their real annual rate of growth from 1950 to 1990. That is, we extrapolate their budget totals over the next 30 years based on their growth over the past 40 years.

The results that emerge from these reasonable assumptions paints a bleak picture of America's fiscal future. Table 1-2 shows the breakdown of spending for major components of the budget. In the absence of dramatic reform, government expansion relative to the private economy will accelerate at an alarming and economically unsustainable rate:

♦ The federal government alone will consume 27 percent of GDP by the year 2000, 32 percent of GDP by the year 2010, and 41 percent by the year 2020. See Figure 1-1. Even if state and local spending simply remains constant as a share of the economy, by 2020 more than half of all economic output will be directly controlled by the govemment.

♦ In 1990 dollars, the federal budget by the year 2000 will reach $1.8 trillion, by the year 2010 it will exceed $2.5 trillion, and by 2020 the budget will approach $4 trillion.

**All projections were done using the average annual growth rate for 1950-93, except those for National Defense, Health, Social Security, and Gross Domestic Product, which were done by a different methodology.

2020: A Budget Odyssey

Total federal liabilities will surpass $20 trillion by the end of the century. This will represent a debt of almost $300,000 for every family of four in the U.S.

♦ Entitlement spending-health care, Social Security, and income security-will continue to undergo explosive growth. Figure 1-2 shows that outlays will reach nearly $1 trillion (1990 dollars) by the year 2000 and $1.4 trillion in 2010, or just less than is spent on the entire federal budget today. By 2020 entitlements alone will consume the same share of GDP as the entire budget does today.

♦ Real spending on domestic discretionary programssocial services, community development, science and space, and so on-will double in ten years and quadruple in twenty years, as they did in the 1950-1991 period. By 2020 total discretionary domestic programs will consume roughly twice the level of GDP that they do today.

◆ The fastest growing areas of the domestic, non-entitlement budget will be education and social services spending. These programs will see their budgets rise tenfold in real dollars over the next 30 years-up from $48 billion to $500 billion.

How will Congress pay for this orgy of new spending? Debt and taxes, of course.

Over the post-World War II period federal taxes have averaged roughly 18.5 percent of GDP. Today taxes consume roughly 19 percent of GDP. Let's assume that federal taxes rise steadily to 25 percent of GDP by the year 2020. This would constitute a federal tax burden much higher than ever before in peacetime. Under this scenario the deficit would still skyrocket to nearly inconceivable levels early next century. Figures 1-3 shows:

The deficit in 1990 dollars will swell to over $300 billion by 2000, $600 billion in 2010, and $1.4 trillion by 2020.

♦ The deficit alone in 2020 will be as large as the entire 1992 budget, $1.4 trillion.

♦ The deficit will reach 5.5 percent of GDP in 2000, 8 percent of GDP in 2010, and 16 percent of GDP in 2020.

If the deficit climbs to these forecasted levels, then clearly interest expenditures-what we pay to finance the national debt-will also skyrocket over the next three decades. Figure 1-4 underscores the magnitude of the crisis:

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