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McCain’s (Big) Net Spending Cut

July 24th, 2008 . by economistmom

OK, so continuing where I left off on the “Obama’s Net Tax Cut” post last night, here are some observations on the level of federal spending that Senator McCain and Senator Obama are (at least implicitly) proposing–as implied by what we know about their tax plans (via Tax Policy Center estimates) and their deficit targets (via the words of the candidates’ advisors).

From the CBO baseline, take outlays as a share of GDP in fiscal year 2013:  19.5% ($3.53 trillion; GDP is projected at $18.077 trillion).

From the same CBO baseline document, see the table on “the budgetary effects of selected policy alternatives not included in CBO’s baseline” (on pages 9-10 of the pdf file); this is the update of the usual “table 1-5″ in CBO’s January report.  From that table, add some more war spending ($25 billion in 2013) and a more realistic assumption about the growth of discretionary spending ($135 billion in 2013) to get a more realistic projection of outlays in 2013 of ($3.53 trillion + $160 billion = $3.69 trillion, which is):  20.4% of GDP.

McCain’s revenues in 2013, according to the Tax Policy Center estimates:  17.4% of GDP.  McCain’s claim for the 2013 budget deficit under a McCain Administration:  0.0%.  So, the implicit level of outlays in 2013, under a McCain Administration:  17.4% of GDP–or a cut from the realistic path worth 3.0% of GDP ($542 billion, or a 14.7% cut from the realistic level of outlays under current policy extended). 

Note that not only is 17.4% way below both the current and the 40-year historical average of federal outlays of about 20 1/2% of GDP, but in fact, it’s so low that over the past 40 years shown in CBO historical tables we have never had a single instance of such low federal spending.  (The lowest in 40 years was 18.4% in fiscal year 2000 and 18.5% in FY2001–i.e., at the end of the Clinton Administration.)  So I had to look to the historical tables in the FY2009 budget to find that the last time outlays were below 17.4% was in 1965 (at 17.2%).  Back then revenues were a lot lower as well, by the way–at only 17.0% of GDP–but still the gap (deficit) that year was only 0.2% of GDP.

Is a 3% of GDP cut in government spending below a “realistic baseline” realistic?  Of course, I think not, but that presumes that with an aging population and rising health care costs, as a society we wouldn’t be so cold hearted as to “cut the old people off” (…you’d think, especially if the President is one of those people).  But, paraphrasing Doug Holtz-Eakin who yesterday mentioned the two reactions he gets to the McCain balanced-budget-in-2013 claim:  (i) skepticism, and (ii) fear, he warned: “look out.”  (You can go back to the audio to get his exact words… **UPDATE:  looking back at my notes, what Doug said was that the “horrified folks better get ready.”)

In contrast, the Obama campaign’s decision to have a much less ambitious deficit reduction plan affords them a more realistic path for federal spending, at least as implied by the estimates of their tax proposals: 

Obama’s revenues in 2013, according to the TPC estimates:  18.2% of GDP.  Obama’s claim for the 2013 budget deficit under an Obama Administration:  if we interpret Austan Goolsbee’s remarks yesterday as suggesting a $400 billion deficit, that’s 2.2% of GDP.  If we take the Financial Times’ interpretation of a 2.5% of GDP deficit, that’s a $450 billion deficit.  So, the implicit level of outlays in 2013, under an Obama Administration:  somewhere in the 20.4-20.7% of GDP range (that’s 18.2% plus 2.2 to 2.5%).   Note that (coincidentally?) this is just about or slightly higher than where the realistic outlays projection takes us.

So, while Senator Obama is probably proposing a small net tax increase relative to a “policy extended” baseline, Senator McCain is clearly proposing a huge net spending decrease relative to any baseline.  It’s a very stark difference in the candidates’ visions of the future role of government–and a very stark choice we voters have before us.

4 Responses to “McCain’s (Big) Net Spending Cut”

  1. comment number 1 by: M Gilleland

    Tonight, listening to Terry Gross (NPR) interview one of Obama’s economic advisors and a guy from the Tax Policy Center, I found it interesting that one of the drivers behind Obama’s economic policy is the fact that most of the economic prosperity (income) over the past ten years has gone to the top x% (the rich—I don’t remember the exact statistic.)

    Arguably, if we value a healthy, cohesive, sustainable society we don’t want extreme disparity between the not-rich and the rich. The question is how should this be corrected?

    Easy – Empower the federal government to take from the rich and redistribute to the not-rich.

    Hard – Empower the federal government to ensure that the not-rich have equal opportunity and other support to utilize their labor, mind, and talents to contribute the best they can in the context of a global economy with ever expanding opportunity to solve problems and serve others. Encourage individuals to be realistic about both the challenges and opportunities a global economy provides, avoid a victim or entitlement mentality, and let individuals bear the consequences of their choices in life.

  2. comment number 2 by: johnchx

    The thing I notice is that spending cuts, even really huge spending cuts, tend to be quite politically popular — as long as specific spending to be eliminated is never identified. On balance, I’d expect McCain’s fiscal stance — roughly: big tax cuts and even bigger, but undefined, spending cuts — to be a net positive for him.

  3. comment number 3 by: rdan

    What spending cuts by McCain??

  4. comment number 4 by: rdan