Right Thinking From The Left Coast
Reality is merely an illusion, albeit a very persistent one. - Albert Einstein

Saturday, October 09, 2010

Cut Spending? That’s Unpossible

Several websites have been buzzing about the math of deficit reduction.  It’s been pointed out that you could keep the Bush tax cuts and balance the budget by 2020 if you limited spending growth to 2% per year.

I don’t this is a realistic analysis.  2% spending growth doesn’t just create itself.  Such growth would only come about with big cuts in Medicare and Social Security, which have growing payrolls and guaranteed cost of living increases.  Without cutting these back, they will grow rapidly over the next decade.  It would also mean effective cuts in almost all discretionary spending, including defense (especially defense).

But it does give one a sense of the problem’s scale.

The good news is that other countries are showing that it is possible to, over a decade or so, exercise this kind of spending restraint.  The UK, for example:

Even the hardest-core Tea Partier would admire the ambition of Cameron’s chancellor of the Exchequer, George Osborne, to effectively eliminate Britain’s deficit by 2015. When the results of a top-to-bottom review of government spending are issued next month, all departments except health care and foreign aid are expected to face cuts of at least 25 percent over the next four years. By the end of this first term, Cameron and Osborne’s plans would reduce spending to 39 percent of national income—down from 47 percent when they took office, and two points lower than the figure Thatcher had achieved when she left office in 1991. As many as 600,000 public-sector employees could lose their jobs in the process.

Britain has an entrenched budget problem we can not even imagine.  A fifth of the country works for the government and they are threatening massive strikes if Cameron does what he pretty much has to do.  Their welfare state is massive and the usual economists are predicting death and disaster if spending is cut.  But Cameron has no choice.  Ironically, he might only be able to do it because the Liberal Democrats are in his coalition and are being realistic about the budget.  Only Nixon could go to China.  And only liberals can cut spending without being demonized.

But that’s ambitions.  Can this be done in reality?  Just look north of the border:

In 1994 government debt was 68 percent of Canada’s GDP. By 2008 that number was down to 29 percent. Finance Minister Paul Martin Jr. and Prime Minister Jean Chrétien, both of the Liberal Party, are the two unlikely stars in this heroic tale of fiscal discipline....

Martin and Chrétien enforced discipline on other cabinet members with a zero-sum ground rule: If a cabinet member wanted a smaller cut in one program, he had to propose a bigger cut in another.

Check out the graph at Reason.  Almost every program got cut—real cuts, not “we slowed the growth to 6% per year” cuts.  Spending has increased over the last decade, but at half the rate that it has in the US.  And all this with a socialized medicine monkey on their back.  Ironically, there fiscal discipline has freed up their government to have more spending flexibility.  And if it turned Canada into some post-apocalyptic wasteland prowled by zombies, I must have missed it.

Our situation does not have to be dire.  Here is a budget tool that allows you to change spending and taxation to stabilize the debt.  It’s hard to do with the Bush tax cuts intact.  But it can be done.  I just wonder if we’re going to get any leadership on this from either party.  The GOP is currently trying to assure us the don’t weight as much as a duck while the Democrats’ ambition extend to running fake candidates to try to split the vote.  I don’t know what it’s going to take to wake them up other than a few more electoral 2x4’s to the head.

Posted by Hal_10000 on 10/09/10 at 05:16 AM in Politics   Law, & Economics  • (0) TrackbacksPermalink
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