A Credible First Step Toward a New Budget Strategy?

Last week the Senate voted down the House proposal (HR1) to slow the growth of spending in the current fiscal year 2011. Now alternative plans are being laid to slow the growth of spending in 2011 by roughly the same amount as HR1, possibly through a series of shorter continuing resolutions prorated at $2 billion per week. Simultaneously the House is developing a budget resolution for 2012 with the aim of reducing spending growth and the deficit in later years. Hence, the 2011 budget actions should be viewed as a first step of a longer term budget strategy. This first step is crucial. It establishes the credibility of the whole strategy.

Would a step any smaller than HR1 be credible? The following chart tries to present the basic facts in a simple way. It shows federal outlays from FY2000 to FY2011 as a share of GDP with and without HR1. The data are from CBO.

First note the remarkable explosion in government outlays in the past few years. In 2007 outlays were 19.6 percent of GDP. In 2011 outlays will be 24.7 percent of GDP.

Second, note the very modest effect HR1 would have on total outlays as a share of GDP in 2011: outlays would be 24.6 percent rather than 24.7 percent of GDP. (According to CBO, HR1 would reduce outlays by $19 billion or .12 percent of GDP in 2011).

So HR1 is a small first step, especially compared to the binge of the past two or three years. It is hard to see how a first step could be any smaller and still represent a credible start on a new strategy. Anything much less would not even be visible on the chart. For a budget strategy to be credible it has to start with real actions, not just promises of future actions. An actual step at least this large is essential for restoring credibility and increasing economic growth. Reasonable people can disagree about particular programs, but they should be able to agree that a step of this size is the bare minimum needed to get on with the important task of a budget strategy.