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By John Ubaldi
Columnist, In Homeland Security
The highly contentious midterm elections have been relegated to the annals of history. Both political parties spent all their energy attacking each other with little attention paid to how they would tackle America’s most pressing issues, the biggest among them being the national debt.
At the end of fiscal year 2019, the national debt will be an estimated $22.7 trillion. Unfortunately, neither political party has offered any practical solutions to even begin a discussion of this serious national security threat.
James C. Capretta, a resident fellow at the American Enterprise Institute (AEI), discusses ways to get the national debt under control.
“The deep recession of 2007 to 2009 and rising expenses for major entitlement programs have propelled U.S. government debt to levels not seen since the end of World War I,” he writes. “The federal government ran an annual deficit of $779 billion in fiscal year 2018, pushing cumulative federal debt up to about $15.7 trillion, or 78 percent of GDP. From 1950 to 2008, the average level of federal debt was 40 percent of GDP. The Congressional Budget Office (CBO) projects federal debt will rise to 152 percent of GDP in 2048 under its extended baseline scenario.”
CBO Highlights Top Five Expenditures of Federal Government
An ominous sign from the Congressional Budget Office (CBO) is that the top five federal government expenditures for fiscal year 2018 went to:
- Social Security benefits: $918 billion
- Medicare: $563 billion
- Medicaid: $356 billion
- The military: $552 billion
- Net interest on the public debt: $343 billion
The only one of the five expenditures that comes under discretionary spending is national defense. The remaining four are non-discretionary spending and can only be adjusted by changing the current laws that govern these programs. So far, there is no appetite by Democrats and Republicans to recalibrate entitlement programs.
At the end of fiscal year 2018 on September 30, the federal deficit was estimated at $895 billion with interest payments on the national debt rising the fastest.
The rise in interest payments correlates to the rise in the debt. Interest rates have been going up since they were artificially kept low in 2009. The increase in inflation has raised the interest cost on inflation-adjusted bonds.
The Fallacy of Tax Cuts and Rising Federal Debt
Much has been reported about the reason for the increase in the federal debt. Many observers attribute it to the tax cuts passed in December 2017. But the CBO reported in January 2017 that if there were no changes in fiscal policy, the debt would substantially increase due to higher entitlements spending, healthcare costs and interest on the debt.
The CBO report was written 11 months before the Trump tax cuts become law. Last Friday, the Treasury Department reported that the U.S. had collected a record amount of tax revenue. However, spending continues unabated with no chance of it subsiding.
Using a ‘Starve the Beast’ Philosophy
Many people have advocated a “starve the beast” tactic before taxes are lowered again, claiming that reduced spending should be the first priority. Previous tax reductions — beginning with President Kennedy’s tax cut in the early 1960s, President Reagan’s in the 1980s and President Bush’s in the early 2000s — all had a positive impact on the economy.
Unfortunately, federal spending is never reduced, only increased. Politicians from both parties eventually reverted to tax increases, which have a severe impact on the economy.
To place this into historical context, President Obama raised taxes and increased spending. As a result, the economy stagnated.
Democrats and Republicans Fail to Address the National Debt
Now, both political parties are advocating for reducing the federal debt, but the question is where to begin. The Democratic Party insists that entitlement spending is off the table, even though the CBO has projected that Medicare will cost the federal government $776 billion and total more than $1 trillion in 2023.
In fact, many Democrats have called for expanding entitlement spending, including former Democratic presidential candidate, Senator Bernie Sanders (I-VT).
Republicans balk at defense reductions, especially after a recent report by the National Defense Strategy Commission claimed that the U.S would struggle to win a war and perhaps could lose a war against either Russia or China.
On Friday, Defense News reported that the Department of Defense “failed” its first-ever audit. Since a 1990 congressional law made it mandatory for all government agencies to conduct audits, the Pentagon has been the sole holdout until now.
Trump Instructs Federal Agencies to Reduce Budgets by Five Percent
Last month, President Trump instructed his cabinet secretaries to reduce their annual budgets by 5% or more. This is an important first step, but what is truly needed is a 21st century overhaul of how the federal government allocates its resources.
No one is expecting the government to operate as a business. However, if the U.S. is ever going to get its fiscal house in order, it needs to increase economic growth and substantially alter its spending appetite by making the federal government more efficient. This means ending the duplication of agencies and putting in place best business practices.
This would be a start. But only when Washington gets serious about the fiscal health of the nation will the national debt begin to shrink to a more manageable level.