Capping federal spending at 18% of GDP is still infeasible

In his Iowa caucus speech Tuesday evening, former senator Rick Santorum (R-Pa.) pushed for deep tax cuts for the wealthy, $5 trillion in budget cuts over five years, a cap on government expenditure at 18 percent of the economy, and a balanced budget amendment “as a guarantee of freedom for this country.”

This isn’t just radically conservative—it’s a farcical proposal bordering on Ron Paul-levels of delusion. (No, we’re not all Austrians now.) To reiterate: arbitrarily capping government expenditure at 18 percent of GDP isn’t just undesirable, it’s infeasible and absolutely crazy. Federal spending has exceeded 18 percent of GDP since 1966 (roughly the inception of Medicare and Medicaid). As the population ages and health care costs continue to spiral, federal spending will have to rise, not fall, if voters want government to continue providing health care to seniors, impoverished children, and the disabled (polling strongly suggests they do). The House Republican 2012 budget—which proposed ending Medicare and eviscerating Medicaid—wouldn’t even reduce federal spending below 18 percent of GDP by 2040. Under a current policy baseline, spending is projected to be about 22.5 percent of GDP over fiscal years 2012-21. Wrenching expenditure down to 18 percent of GDP would therefore slash nearly 5 percent of GDP, or $8.7 trillion, from the budget over the next decade (cutting $1 in $5 dollars of expenditure). But even deeper budget cuts would be needed to achieve $5 trillion in cuts over five years anytime soon (in the first five years, the cap would only cut $3.7 trillion, relative to current policy).

From Flickr Creative Commons by Gage Skidmore

But it gets worse! Santorum’s spending cap is also tied to a balanced budget amendment, and his tax plan wouldn’t raise anywhere close to 18 percent of GDP in revenue. An extension of current tax policies—the starting point for Santorum’s sweeping tax cuts—is projected to raise revenues of only 17.6 percent of GDP over the next decade. From there, the alternative minimum tax would be repealed; the top tax rate would be reduced to 28 percent (while retaining major tax preferences and expanding exemptions); capital gains and dividends taxes would be further reduced to 12 percent; the estate tax would be repealed; the corporate tax rate would be halved to 17.5 percent and fully eliminated for manufacturers; and businesses would get even bigger tax breaks on foreign profits, research, and investment. Not a cheap wish list. While we haven’t scored it yet, it wouldn’t be surprising if Santorum’s tax plan fails to raise even 16 percent of GDP, forcing much deeper budget cuts. (Kevin Hassett of the American Enterprise Institute ballparks the annual static revenue loss between $550 billion and $700 billion, or between 3.4 and 4.3 percent of GDP.)

This could easily sink the U.S. economy. As Europe is discovering, the notion that spending cuts increase growth (i.e., expansionary austerity) is totally bunk in today’s context of high unemployment, low interest rates, and large output gaps. Spending caps and balanced budget amendments are terrible fiscal policies because they obstruct counter-cyclical fiscal stabilization and instead force pro-cyclical spending cuts. According to the private forecasting firm Macroeconomic Advisers, “If actually enforced in fiscal year (FY) 2012, a [balanced budget amendment] would quickly destroy millions of jobs while creating enormous economic and social upheaval.”

Senator Santorum’s plan wouldn’t just exacerbate future recessions—it would preclude a return to full employment and likely trigger another deep recession. What part of prolonged mass underemployment, widespread economic insecurity, and trillions of dollars in forgone national income represent a guarantee of freedom?


  • Guest

    If you post is true, then how come Reagan-nomics got the economy out of a slump.
    How come, less taxes and less socialistic thinking always seems to boost the economy, not to mention the fact that our nation thrived for 150 years on conservative thinking.

    maybe I am preaching here, but please give me one sample where socialistic/ proggresive ideals (aka Lyndon b. johnson, Woodrow Wilson) actually benefited the economy
    all it does is promote a mentality that government is meant to give us everything free of charge. In america, that has never gotten us anywhere but deep deficits and lost morals.

  • Jackpolidori

    Perhaps the commenter below fails to realize the huge accompanying increase in government spending during the Reagan administration —- defense. Nothing like aggregate demand. :)

  • Dickgaib

    Guest just go to time magazine 4/14/1986 under Reagan had been in office 6 plus years, guess what happened. OPEC FAILED AND OIL DROPPED IN PRICE BY 1/2 IN PRICE.  ANYONE IN THE WHITE HOUSE WITH THIS LUCK WOULD LOOK LIKE A WORLD BEATER. TAX CUT HAD LITTLE TO DO WITH THE REAGAN RECOVERY. ALSO BUY AND READ SENSELESS PANIC BY WM ISAAC, WHO WAS THE HEAD OF THE FDIC  UNDER REAGAN, APOINTED BY HIM TO FIX THE ECONOMY BACK THEN.   FACT ARE HARD TO CHANGE SO REAGAN SAID.

  • Dale David Mills

    If we would eliminate the Federal Reserve, the IRS, the Department of Energy, and the Department of Education and follow the Constitution, then it would be very possible to cap federal spending at 18% of GDP. We are facing a debt crisis if something isn’t done quickly.

  • http://www.facebook.com/mjsellers1 Jordan Sellers

    Sounds like we should start cutting Spending then :)