The cost-cutting battle lines are drawn in the U.S. Congress. But the fight will affect only maybe a sixth of spending, with big-ticket items like defense and Social Security getting a bipartisan pass for now. Still, tackling even that small slice would save money and reassure markets. A temporary government shutdown would be a small price to pay.
Republicans, who control the House, want to cut $61 billion a year from discretionary programs, excluding defense and other security items, which depending on each politician’s chosen definition total $500 billion or somewhat more of the $3.5 trillion federal budget for 2010. Cost cuts on that scale, though, could lead to an impasse with the Democrat-controlled Senate next month. Meanwhile, President Barack Obama has called for a five-year freeze at current spending levels, saving an average of $40 billion a year over 10 years.
Neither approach would put the nation’s finances on a sound footing. Even hacking at defense spending would only help for a while. What’s needed is a real effort to tackle future spending on Social Security and government healthcare programs. And anyway, even if an aggressive plan like that put forward by House Budget Committee Chairman Paul Ryan came to pass, spending on these so-called entitlements would still most likely rise before it started falling.
But this key: Controlling discretionary spending therefore still has a role to play, and the reductions being proposed by the House GOP could be the start of a sustained effort. Cuts in this area could be faster off the mark, as evidenced by both Republicans and Obama showing willingness to consider them. Moreover, an initial taste of austerity, even if it looks modest, would compound into big future gains.
Suppose non-defense discretionary spending was cut, frozen for 10 years, then increases at the 2.7 percent annual rate normally assumed by the Congressional Budget Office. Compare that to the case where there’s no cut and no freeze and the cost just goes up every year. The present value of those savings over 80 years isn’t too far off the estimated $8 trillion present-value shortfall in Social Security funding, according to calculations from the e21 think tank.
That suggests that cuts in discretionary spending could ultimately be almost as important as Social Security reform. The coming fight, if not quickly resolved, could leave the government forced to close its offices for a while. But if those are the stakes, it could be worth a brief involuntary holiday for bureaucrats.