Federal Budget

The Fiscal Policy Context for a Conservative Reform Agenda

“Sound fiscal policy is essential for sound governance. History shows that powerful nations that engage in reckless spending and borrowing eventually fall into periods of decline. It would be disastrous if the United States were to drift into such a slide. Unfortunately, that’s no longer as remote a possibility as it once was.”

— James Capretta

The size and scope of the federal government has grown steadily in the last half-century with the expansion of spending and new federal programs. Today’s federal budget is far different than it was five decades ago. The proportion of mandatory spending to discretionary spending has essentially flipped. In 1965, mandatory spending represented 26 percent of the federal budget; fifty years later, it accounted for 62 percent. With demographic changes underway and the continued rapid growth in health care costs, entitlement programs will continue to exacerbate fiscal pressures and create new ones, including the risk of a debt crisis.

The threat of such a crisis is more serious today than it was even in 2008. The national debt skyrocketed by $7.1 trillion between 2009 and 2015. The average level of federal debt from 1950 to 2008 was 40 percent of GDP; by 2015, that level had reached 74 percent.

The long-term outlook is not promising. Failure to make rational, gradual reforms today will lead to a crisis, necessitating drastic, severe changes to the budget, namely punishing tax increases or draconian austerity.

A conservative framework for the federal budget is necessary. James Capretta argues that a conservative approach must include four key reforms. First, defense funding must be restored to a level commensurate with U.S. global leadership. Second, non-defense discretionary spending must be stabilized at 2.8 percent of GDP, a realistic approach that suggests reform and elimination of some unnecessary programs. Third, Social Security and health care programs should be reformed in ways to promote economic security for middle-class households. Finally, tax policy should be designed to raise, in the least burdensome and intrusive way, the revenue necessary for the resulting federal budget.

The key to conservative reforms to the federal budget is a long-term approach, not chasing short-term goals, focusing exclusively on budget numbers, or working around the margins of non-defense discretionary spending.