Federal government spending
is rising, deficits are chronic, and accumulated debt is reaching
dangerous levels. Growing spending and debt are undermining
economic growth and may push the nation into a financial crisis in
The solution to these problems is to downsize
every federal department by cutting the most harmful programs.
This study proposes specific cuts that would reduce
federal spending by almost one-quarter and balance the budget
within a decade.
Federal spending cuts would
spur economic growth by shifting resources from lower-valued
government activities to higher-valued private ones. Cuts would
expand freedom by giving people more control over their lives and
reducing the regulations that come with spending
The federal government has
expanded into many areas that should be left to state and local
governments, businesses, charities, and individuals. That expansion
is sucking the life out of the private economy and creating a
top-down bureaucratic society that is alien to American traditions.
So cutting federal spending would enhance civil liberties by
dispersing power from Washington.
The Congressional Budget
Office (CBO) projects that federal spending will rise from 21.1
percent of gross domestic product (GDP) this year to 23.1 percent
by 2026 under current law.1 Over
the same period, tax revenues are expected to remain flat at about
18.2 percent of GDP. As a consequence, rising spending will produce
increasingly large deficits.
Policymakers should change
course. They should cut spending and eliminate deficits. The plan
presented here would balance the budget within a decade and
generate growing surpluses after that. Spending would be reduced to
17.7 percent of GDP by 2026, or almost one-quarter less than the
CBO projection for that year.
Some economists claim that
cutting government spending would hurt the economy, but that notion
is based on faulty Keynesian theories. In fact, spending cuts would
shift resources from often mismanaged and damaging government
programs to more productive private activities, thus increasing
overall GDP. Markets have mechanisms to allocate resources to
high-value activities, but the government has no such
capabilities. name="sdendnote2anc" href="#sdendnote2sym">2
It is true that
private businesses make many mistakes, but entrepreneurs and
competition are constantly fixing them. By contrast, federal
agencies follow failed and obsolete approaches decade after
decade.3 So moving resources out of
the government would be a net gain for the economy.
Consider Canada's experience.
In the mid-1990s, the federal government faced a debt crisis caused
by overspending, which is similar to America's current situation.
But the Canadian government reversed course and slashed spending
from 23 percent of GDP in 1993, to 17 percent by 2000, to just 15
percent today. name="sdendnote4anc" href="#sdendnote4sym">4 The
Canadian economy did not sink into a recession from the cuts as
Keynesians would have expected, but instead grew strongly during
the 1990s and 2000s.
Thus policymakers should not
think of spending cuts as a necessary evil to reduce deficits.
Rather, the U.S. government's fiscal mess is an opportunity to make
reforms that would spur growth and expand individual freedom. The
plan proposed here includes a menu of spending reforms for
policymakers to consider. These and other reforms are discussed
further at www.DownsizingGovernment.org .
This section describes how
cutting spending would eliminate the federal deficit within a
decade and generate growing surpluses after that. The starting
point for the plan is the CBO's baseline projection from March
2016.5 Figure 1 shows CBO projections for revenues (black line) and
spending (red line) as a percent of GDP. The gap between the two
lines is the federal deficit, which is expected to grow steadily
The blue line shows projected
spending under the reform plan proposed here. Under the plan,
spending would decline from 21.1 percent of GDP today to 17.7
percent by 2026. The deficit would be eliminated by 2024 and
growing surpluses would be generated after that. Under the plan,
spending cuts would be phased in over 10 years and would total $1.5
trillion annually by 2026, including about $250 billion in reduced
interest costs that year.6
Falling spending and deficits
would allow room for tax reforms. One reform would be to repeal the
tax increases under the 2010 Affordable Care
Act.7 Another reform would be to slash the federal corporate tax
rate from 35 percent to 15 percent, which would match the reformed
Canadian rate. Such a cut would spur stronger economic growth and
lose little revenue over the long term.8
In sum, the best fiscal
approach would be to cut spending and reform the most damaging
parts of the tax code. That would end the harmful build-up of debt,
expand personal freedom, and generate benefits for all Americans
from a growing economy.
Tables 1 and 2 below list
proposed cuts to reduce federal spending to 17.7 percent of GDP by
2026. Table 1 shows the cuts for health care and Social Security.
These reforms would be implemented right away, but the value of
savings would grow larger over time. The figures shown are the
estimated annual savings by 2026, generally based on CBO
projections. name="sdendnote9anc" href="#sdendnote9sym">9
Table 2 shows cuts to
discretionary programs and entitlements other than health care and
Social Security. name="sdendnote10anc" href="#sdendnote10sym">10 These cuts would be valued at $458 billion in 2016, but the
plan assumes that they would be phased in one-tenth each year over
the next decade. name="sdendnote11anc" href="#sdendnote11sym">11
The reforms listed in Tables
1 and 2 are deeper than the savings from "duplication" and "waste"
often discussed by federal policymakers. We should cut hundreds of
billions of dollars of "meat" from federal departments, not just
the obvious "fat." If the activities cut are useful to society,
then state governments or private groups should fund them, and
those entities would be more efficient at doing so.
The proposed cuts are
illustrative of how to start getting the federal budget under
control. Further reforms are needed in addition to these cuts, such
as major structural changes to Medicare. The important thing is to
start cutting as soon as possible because the longer we wait, the
deeper will be the debt hole that is dug.
After the tables, proposed
cuts to subsidies, aid to the states, military expenses, and
entitlement programs are discussed. The final section discusses the
privatization of federal activities. Further analyses of the cuts
listed here are available at www.DownsizingGovernment.org .
|Table 1. Proposed
Federal Budget Cuts
|Health Care and Social
|Repeal ACA exchange subsidies||103|
|Repeal ACA Medicaid expansion||122|
|Block grant Medicaid and grow at 2%||128|
|Increase Medicare premiums||63|
|Increase Medicare cost sharing||20|
|Cut Medicare improper payments by 50%||78|
|Cut HHS non-Medicaid state grants by
|Price index initial Social Security
|Raise the normal retirement age for Social
|Cut Social Security Disability Insurance by
|Cut Supplemental Security Income by 25%||18|
|Total annual spending
cuts in 2026
|Table 2. Proposed
Federal Budget Cuts
|Discretionary Programs and
|Department of Agriculture|
|End farm subsidies||29.3|
|Cut food subsidies by 50%||53.5|
|End rural subsidies||6.5|
|Department of Commerce|
|End telecom subsidies||0.6|
|End economic development subsidies||0.4|
|Department of Defense|
|End overseas contingency operations||59.0|
|Department of Education|
|End K-12 education grants||25.3|
|End all other programs||53.8|
|Total cuts (terminate the department)||79.1|
|Department of Energy|
|End subsidies for renewables||2.2|
|Privatize power marketing
|Department of Homeland
|Privatize TSA airport screening||4.9|
|Devolve FEMA activities to the states||16.6|
|Department of Housing and Urban
|End rental assistance||30.5|
|End community development subsidies||11.0|
|End public housing subsidies||5.8|
|Total cuts (terminate the department)||47.3|
|Department of the Interior|
|Reduce net outlays by 50% through
|cuts, privatization, and user charges||7.0|
|Department of Justice|
|End state/local grants||6.7|
|Department of Labor|
|End employment and training services||3.6|
|End Job Corps||1.6|
|End trade adjustment assistance||0.8|
|End Community Service for Seniors||0.4|
|Cut highway/transit grants to balance trust
|Privatize air traffic control (federal fund
|Privatize Amtrak and end rail subsidies||3.6|
|Department of the Treasury|
|Cut earned income tax credit by 50%||30.7|
|End refundable part of child tax credit||21.6|
|End refundable part of AOTC||4.4|
|Cut foreign aid by 50%||8.0|
|Cut federal civilian compensation costs by
|Privatize the Corps of Engineers (Civil
|Privatize the Tennessee Valley
|Repeal Davis-Bacon labor rules||9.0|
|End EPA state/local grants||4.1|
|Total annual spending
Subsidies to Individuals
The federal government funds
more than 2,300 subsidy programs, more than twice as many as in the
1980s.12 The scope of federal activities has expanded in recent decades along
with the size of the federal budget. The federal government subsidizes
farming, health care, school lunches, rural utilities, the energy
industry, rental housing, aviation, passenger rail, public
broadcasting, job training, foreign aid, urban transit, and many
Each subsidy causes damage to the economy
through the required taxation. And each subsidy generates a
bureaucracy, spawns lobby groups, and encourages even more people
to demand government hand-outs. Individuals, businesses, and
nonprofit groups that become hooked on federal subsidies
essentially become tools of the state. They lose their
independence, have less incentive to innovate, and shy away from
criticizing the government and its failures.
Table 2 includes cuts to subsidies in
agriculture, commerce, energy, housing, foreign aid, and other
activities. Those cuts would not eliminate all of the unjustified
subsidies in the budget, but they would be a good start. Government
subsidies are like an addictive drug, undermining America's
traditions of individual reliance, voluntary charity, and
Aid to the
Under the Constitution, the federal
government was assigned specific limited powers, and most
government functions were left to the states. To ensure that people
understood the limits on federal power, the Framers added the
Constitution's Tenth Amendment: "The powers not delegated to the
United States by the Constitution, nor prohibited by it to the
States, are reserved to the States respectively, or to the people."
The amendment embodies federalism, the idea that federal and state
governments have separate areas of activity and that federal
responsibilities are "few and defined," as James Madison noted.
Unfortunately, policymakers and the courts
have mainly discarded federalism in recent decades. Through
"grants-in-aid" Congress has undertaken many activities that were
traditionally reserved to state and local governments. Grant
programs are subsidies that are combined with federal regulatory
controls to micromanage state and local activities. Federal aid to
the states totals more than $660 billion a year, and is distributed
through more than 1,100 separate programs.13
The theory behind grants-in-aid is that the
federal government can operate programs in the national interest to
efficiently solve local problems. However, the aid system does not
work that way in practice. Most federal politicians are preoccupied
by the competitive scramble to maximize subsidies for their states,
regardless of program efficiency or an appreciation of overall
Furthermore, federal aid stimulates
overspending by state governments and creates a web of complex
federal regulations that undermine state innovation. At all levels
of the aid system, the focus is on regulatory compliance and
spending, not on delivering quality public services. The aid system
destroys government accountability because each level of government
blames the other levels when programs fail. It is a triumph of
expenditure without responsibility.
Federal aid is a roundabout funding system
for state and local activities. It serves no important economic
purpose. By federalizing state and local activities, we are asking
Congress to do the impossible-to efficiently plan for the competing
needs of a diverse country of 320 million people.
The grant-in-aid system should be eliminated.
Policymakers should revive federalism and begin terminating grant
programs. Tables 1 and 2include cuts to grants for
education, health care, highways, justice, transit, and other
activities. There is no reason why such activities should not be
funded at the state and local levels.
Cato Institute defense
experts Chris Preble and Ben Friedman have proposed numerous cuts
to U.S. military spending.14 They argue that the United States would be better off
taking a wait-and-see approach to distant threats, while letting
friendly nations bear more of the costs of their own defenses. They
note that U.S. p olicymakers support
extraneous missions for the military aside from the basic role of
defending the nation.
As such, the military budget should be cut in
a prudent fashion as part of an overall plan to downsize the
government and balance the budget. The current plan
assumes that spending on overseas contingency operations-which will
be $59 billion in 2016-would be reduced to zero over the
Medicare, Medicaid, and
The projected growth in
Medicare, Medicaid, and Social Security is the main cause of
America's looming fiscal crisis. Budget experts generally agree on
the need to restructure these programs. The reforms listed in Table
1 include cuts to Medicare, Medicaid, and Social
Policymakers should repeal
the 2010 Affordable Care Act (ACA). That would reduce spending on
Medicaid and end spending on the exchange subsidies. In addition,
policymakers should convert Medicaid from an open-ended matching
grant to a block grant, while giving state governments more program
flexibility. That was the successful approach used for welfare
reform in 1996, which encouraged state innovation. Changing
Medicaid to a block grant and capping annual spending growth at 2
percent would save about $128 billion annually by
Table 1 includes modest
Medicare changes based on CBO estimates.16 Reforms include increasing deductibles and increasing premiums
for Part B to cover 35 percent of the program's costs. It also
assumes that the Medicare improper payment rate would be cut in
half to six percent.17
However, larger Medicare
reforms are needed than just these cuts. Cato scholars have
proposed moving to a system based on individual vouchers, personal
savings, and consumer choice for elderly health
care.18 Such a reform would
create strong incentives for providers and patients to improve
system quality and reduce costs.
For Social Security, the
growth in initial benefits should be indexed to prices rather than
wages to slow the program's growth. That reform would save about
$39 billion annually by 2026 and growing amounts after
plan also includes a CBO option to modestly raise the normal
retirement age. name="sdendnote20anc" href="#sdendnote20sym">20 In
addition, the fraud-plagued Social Security Disability Insurance
and Supplemental Security Income programs would be trimmed 25
percent compared to current spending projections.
A privatization revolution has swept the world since
the 1980s. Following Britain's lead, governments in more than 100
countries have transferred thousands of state-owned businesses to
the private sector. More than $3 trillion of railroads, energy
companies, postal services, airports, and other businesses have
been privatized. href="#sdendnote21sym">21 Governments of both
the political right and left have sold off state-owned
Privatization helps spur economic growth. It allows
entrepreneurs and business leaders to reduce costs, improve service
quality, and increase innovation. It also benefits the environment
by reducing the wasteful use of resources.
Despite the global success of privatization, reforms
have largely bypassed our own federal government. There are many
activities that have been privatized abroad that remain in
government hands in this country. That creates an opportunity for
U.S. policymakers to learn from foreign privatization and enact
proven reforms here.
Table 2 includes the privatization of Amtrak,
the air traffic control system, airport screening, electric
utilities, and the Army Corps of Engineers. Such reforms would
reduce budget deficits and improve management. The savings listed
in the table stem from the elimination of federal subsidies to
Consider the nation's air traffic control
(ATC) system, which is run by the Federal Aviation Administration.
The FAA's modernization efforts have often fallen behind schedule
and gone overbudget.22 The
ATC system needs major improvements to meet rising travel demands,
but the FAA is not up to the challenge.
The solution is to privatize the ATC system
and separate it from the government. Canada privatized its ATC in
1996, setting up a private, nonprofit corporation, Nav
Canada.23 The company is
self-supporting from charges on aviation users. It is one of the
safest systems in the world, and has won international awards for
its efficient and innovative management.24
Without major reforms, official projections
show that federal spending will soar to more than 30 percent of GDP
by the 2030s. href="#sdendnote25sym">25 State and local
government spending of 11 percent or more of GDP would come on top
It seems inconceivable that American voters
would let the government grow that large. It is also unlikely that
the government would be able to raise taxes much above current
levels to support higher spending because of our increasingly
Policymakers will have to make large spending
cuts sooner or later, and the sooner the better to avoid
accumulating more debt. They should begin reforming the government
with the menu of cuts presented here. Leaders of other nations have
pursued vigorous cost cutting when their debt started getting out
of control, and there is no reason why our political leaders cannot
do the same.
1 Congressional Budget
Office, "Updated Budget Projections: 2016 to 2026," March 2016.
2 Chris Edwards, "Central
Planning and Government Failure," DownsizingGovernment.org, Cato
Institute, September 2015.
3 Chris Edwards,
"Bureaucratic Failure in the Federal Government,"
DownsizingGovernment.org, Cato Institute, September 2015.
5 Congressional Budget
Office, "Updated Budget Projections: 2016 to 2026," March 2016.
6 As the deficit was
reduced, interest costs would fall. I modeled interest costs using
CBO projections for interest rates. I adjusted for the fact that
federal debt held by the public is projected to grow faster in
coming years than indicated by the accumulation of annual
7 ACA tax revenues are
expected to be about 0.7 percent of GDP annually. See Congressional
Budget Office, Letter to Speaker John Boehner regarding H.R. 6079,
July 24, 2012.
8 Chris Edwards,
"Corporate Inversions, Tax Rates, and Tax Revenues," Cato@Liberty,
Cato Institute, August 5, 2014. And see Chris Edwards, "Canada's
Corporate Tax Cuts," Daily Caller , March 13, 2012.
9 Some of the Medicare
and Social Security savings were based on options in Congressional
Budget Office, "Options for Reducing the Deficit: 2015 to 2024,"
10 The figures for
Table 2 are mainly sourced from the Budget of the U.S.
Government, Fiscal Year 2017, Analytical Perspectives
(Washington: Government Printing Office, February 2016), Table
29-1. The figures are estimates for fiscal 2016.
that the values of cuts would be greater in 2026 than in 2016. I
have assumed that the values would grow at
the same rate as discretionary spending in the CBO
15 This figure is in
addition to the Medicaid savings from repealing the ACA.
16 Some of these are
described in Congressional Budget Office, "Options for Reducing the
Deficit: 2015 to 2024," November 2014.
17 The current improper
payment rate is about 12 percent. See Centers for Medicare and
Medicaid Services, Comprehensive Error Rate Testing. Data for
19 Congressional Budget
Office, "Options for Reducing the Deficit: 2015 to 2024," November
20 Congressional Budget
Office, "Options for Reducing the Deficit: 2015 to 2024," November
21 Chris Edwards,
"Options for Federal Privatization and Reform Lessons from Abroad,"
Cato Institute, forthcoming, 2016.
24 Chris Edwards,
"Reforming Air Traffic Control," Tax and Budget Bulletin no. 74,
Cato Institute, February 17, 2016.
25 Congressional Budget
Office, "The 2015 Long-Term Budget Outlook," June 2015. See the
"extended alternative fiscal scenario."
26 This theme is
explored in Chris Edwards and Daniel Mitchell, Global Tax
Revolution (Washington: Cato Institute, 2008).