Claiming to tackle spending, Washington will mistake target for culprit next year. By disproportionately focusing on defense for next year's spending cuts, federal policymakers are ignoring the real reason for uncontrolled spending: mandatory programs. The result: the budget area that has shrunk relative to the U.S. economy gets whacked, while the area that has exploded goes largely unscathed.
There are two major categories of federal outlays: discretionary spending, which is determined annually, and mandatory spending, which once enacted, goes on indefinitely. Forty years ago, discretionary spending was the slightly larger category -- equaling 10.9% of GDP versus mandatory's 7.4%. Today, the situation is reversed: in 2011, discretionary spending was 9% of GDP, while mandatory spending was 13.5%.
Within the discretionary spending category, defense spending has undergone an even greater relative shrinkage. In 1972, defense spending was 6.7% of U.S. GDP, while nondefense spending was 4.2%. In 2011, defense comprised 4.7% of GDP, while nondefense was 4.3%.
Today, defense spending is roughly just half of the far smaller of the two federal spending categories. The culprit in Washington's decades-long spending binge is obvious, so guess what is targeted for next year's automatic spending cuts? That's right: defense spending.
Last year's Budget Control Act required $2.1 trillion in deficit reduction over a decade. First, there was an immediate $900 billion in cuts -- over 80% of which was from discretionary spending. Second, once Congress failed to achieve the remaining savings, further cuts will happen next year.
According to the Congressional Budget Office, 84% of these 2013 cuts will come from discretionary spending -- and 61% of those will come from defense spending. Thus not only will Washington's spending cuts come from the smaller and relatively shrinking category of federal spending, those cuts will come disproportionately from defense -- the major area of spending most rapidly shrinking relative to the economy.
To comprehend what is going on, imagine what the federal budget would look like today, if mandatory spending had performed like discretionary or defense spending over the last 40 years.
Since 1972, discretionary spending has fallen 17.4% relative to the economy, while defense spending has fallen 29.9%. Over that time, mandatory spending has almost doubled relative to the economy -- increasing 82.4%.
If mandatory spending's growth had just kept pace with the economy, last year's federal deficit would have been just 2.6% of GDP, instead of the 8.7% it was.
If mandatory spending had matched just discretionary spending's fall over the last 40 years, last year's budget deficit would have been just 1.3% of GDP -- just slightly larger than it was in pre-recession 2007.
If mandatory spending had matched defense spending's 40-year fall, last year's deficit would have amounted to just 0.4% of GDP.
All these huge deficit improvements would have come even with revenues at today's recession-reduced levels. If current receipts were equal to their 40-year average (roughly 18% of GDP) -- instead of last year's 15.4% -- the federal budget would have had a surplus equal to 2.2%.
Such a surplus would have actually allowed mandatory spending to grow by 30% relative to the economy -- the same percentage by which defense fell -- and still leave the federal budget balanced.
If all these rosy projections for federal spending seem unbelievable, remember: they are based on what has actually happened to discretionary and defense spending -- and which helped absorb some of mandatory spending's fiscal assault -- over the last 40 years.
What is really incredible is that discretionary and defense, which are relatively shrinking, are the spending areas Washington has targeted for more cuts. What goes comparatively unscathed is the culprit of the government's spending problem: mandatory spending, which is only projected to get bigger as Baby Boomers move into Medicare and Social Security.
By mistakenly targeting defense as the spending culprit, Washington is proving the modern axiom that no good deed goes unpunished.