Myth: The deficit, not spending, is the problem

Liberal myth

Congress should focus its efforts on trimming the deficit and balancing the budget, raising taxes if need be so revenues match expenditures.

The facts

Excess spending, not the budget deficits, are the real problem.

• Deficits are a symptom of excess government spending
• Even were the government running a surplus, the arguments for cutting government spending would remain the same
• Raising taxes to eliminate the deficit would leave the spending problem untouched and cause economic harm

High federal spending is the real problem

The federal budget is growing at a record pace—and is the real reason for the deficits.

• Federal spending has grown twice as fast under President Bush as under President Clinton
• Federal spending has increased by 45 percent since 2001, from $1,863 billion to $2,708 billion—that’s almost eight percent a year!
• Federal spending neared $22,000 per household in 2005, the highest level since World War II (inflation-adjusted)
• Between 2001 and 2006, education spending surged 137 percent, international affairs spending jumped 111 percent, and health research and regulation spending rose 78 percent.

The coming retirement of 77 million baby boomers will push Social Security, Medicare, and Medicaid spending to unsustainable levels.

• The total cost of those three programs is projected to leap from 8.4% of GDP today to 18.9% of GDP by 2050.
• Unless those three programs are reformed, lawmakers face three options:
   
1. Raise taxes every year until taxes are 60 percent ($11,000 per household) higher than today;
2. Eliminate every federal program except Social Security, Medicare, and Medicaid by 2045; or
3. Do nothing and watch the federal debt expand so much that even a minor interest rate response would induce a spiral of rising debt and interest rates, threatening the entire economy.
    
• Combined with spending by states and local municipalities, America’s economy would be more government-run than any European country. (See chart)
• Since the private sector spends money more wisely than government, reductions in government spending would lead to greater prosperity

Deficits are a symptom, spending is the disease

While deficits are not the problem Congress should address, they do remain an important issue.

• Deficits enable politicians to disguise the price of government from taxpayers
• Absent spending reform, future deficits will be much larger, with unknown economic consequences

Spending cuts are the solution

In the face of ever-increasing social spending that threatens to bankrupt our country, cuts are necessary to preserve freedom and prosperity.

• Even a modicum of fiscal discipline—holding spending increases to 4 percent annually—would cut the federal deficit by more than 50 percent in just five years.
• The budget reconciliation bill enacted in February 2006 cuts the projected growth in entitlement spending to 38 percent over five years, instead of 39 percent over five years. This is not nearly enough.

Raising taxes is not the solution

If politicians see deficits as the problem, they will be tempted to raise taxes to balance the books. Raising taxes to solve over-spending is based on risky assumptions and poor economic policy.

• Raising taxes would be disastrous for the economy— meaning less income to tax, potentially resulting in even less government revenue and thus higher deficits
• Raising taxes to balance the budget only works if lawmakers are trusted not to increase spending after the tax increase—which is implausible at best
• If politicians believe that excess spending can be “erased” by raising taxes (as if a smaller deficit means the government is spending more wisely) there is no incentive for any spending restraint at all

Spending hikes, not tax cuts, caused 1980s deficits

We’ve heard these liberal myths about the causes of deficits in the past. It has become conventional wisdom that Ronald Reagan’s tax rate cuts caused the deficits in the 1980s, but there is no evidence except that both tax relief and budget deficits occurred during the 1980s.

But correlation does not mean causation. Then, as now, the problem was overspending, not low tax rates. The truth is, during the 1980s:

• President Reagan signed major tax cuts into law in 1981 and 1986
• Inflation-adjusted tax revenue increased by 28 percent—an even larger jump than the 27 percent revenue increase during the high-tax 1970s.1 (See charts)
• Inflation-adjusted federal spending increased by 36 percent. These budgets resulted from deals in which the Democratic Congresses agreed to pass tax relief and increase defense spending and President Reagan agreed to sign into law new domestic social spending.

A basic analysis shows that this rapid increase in spending, not any alleged revenue losses from tax relief, created the budget deficits.

Related Heritage research

• Daniel J. Mitchell, “The President’s Tax Agenda: Pro-Growth Measures Jeopardized by Excessive Spending and Misguided Focus on Deficit,” February 7, 2006
• Brian Riedl, “Federal Spending—By The Numbers” (PDF), February 6, 2006
• Brian Riedl, “Entitlement-Driven Long-Term Budget Substantially Worse Than Previously Projected,” November 30, 2005
• Brian Riedl, “Ten Common Myths About Taxes, Spending, and Budget Deficits,” June 13, 2003

Footnotes

1. U.S. Office of Management and Budget, Budget of the United States Government, Fiscal Year 2004: Historical Tables (Washington, D.C.: U.S. Government Printing Office, 2003), Table 1.3.