Smart Spending: A Bipartisan Path for Sound Fiscal Policy
By Robert James Horne & James Bialick / Published August 1, 2023
Part 2: New Modeling & Policy Designs Series
Key Takeaways
The need to reduce federal spending is becoming more popular among the voters- the economy, inflation, and past spending habits are all contributing factors.
Complicating lawmakers’ efforts to reduce federal expenditures are historical differences between Democrats and Republicans on the most appropriate ways to save and spend federal revenues.
Financial credit rating agency Fitch recently downgraded the US credit rating from AAA to AA+ highlighting decades of deficit spending and federal governance concerns.
Updating decades-old statutes to improve how efficiently existing federal funds are spent is a bipartisan way to create savings without reducing benefits.
Viewing policy changes as opportunity zones for smarter spending can facilitate broader bipartisan policy discussions about how well statutes work in an ever-changing world.
This legislative approach, called Smart Spending, can deliver better returns from existing federal financial investments.
“The Task Force is intended to serve as an incubator for finding new ways to improve health outcomes while reducing federal spending. We will serve as a forum for developing and modeling legislation to improve spending efficiency, returns on federal investments, and an overall more cost-effective health care system.”
Reps Jodey C. Arrington (R-Texas) And Michael C. Burgess (R-Texas)
Opinion Contributors, The Hill, 08/22/23
The need to reduce federal spending is becoming more popular among the voters. The economy, inflation, and high levels of spending during the height of COVID-19 are all contributing factors. Complicating lawmakers’ efforts are historical differences between Democrats and Republicans on the most appropriate ways to save and spend federal revenues.
Updating decades-old statutes to improve how existing federal funds are most efficiently spent can create savings without reducing benefits. This alternative approach, referenced here as Smart Spending, holds real promise.
This article outlines a smart spending strategy that a bipartisan majority in Congress can use to reduce deficits. The recent announcement by the House Budget Committee Task Force offers Congress an opportunity to put this strategy into motion. The Task Force also represents a means of responding to voters who are increasingly calling on lawmakers to better align federal spending with annual revenues.
Voters are Reevaluating Government Spending in this Current Economic Climate
Concerns over government spending are growing, especially among younger Americans, because of the fear that continued deficit spending will affect their retirement. A CNBC report in early 2021 captures the issue well:
Younger generations don’t have a lot of faith that Social Security will be available to them when they retire.
About 23% of Gen Z (those born in 1997 or later) and 26% of millennials (born between 1981 and 1996) believe there’s little chance they’ll be able to rely on Social Security to fund their retirement, according to Northwestern Mutual’s 2020 Planning & Progress Study. That’s compared to just 7% of non-retired baby boomers (born between 1946 and 1964) who similarly believe it is not at all likely Social Security will be there when they retire.
Younger Americans’ fears that they won’t receive Social Security benefits isn’t completely unfounded.
Social Security is primarily funded through a payroll tax. Americans who are currently working pay into a fund that is used to provide benefits to those who are retired or disabled, as well as families in which a spouse or parent dies. Those taxes generally cover all the expenses and benefits of the program.
But because many retirees are living longer, there are more funds being taken out than going in. Starting this year, experts predict that Social Security will need to start dipping into the reserve funds that it’s accumulated over the years to cover benefit payments. While the majority of Social Security benefits will still be funded through payroll taxes, the agency will use trust fund reserves to make up the difference.
If no changes are made to Social Security funding, the program’s reserves could be exhausted by 2035 or 2036, about 15 years from now. At that point, Social Security would not completely run out of money, but it would only be able to pay out about 75% to 80% of the promised benefits, according to some estimates.
Retirement concerns are not the only factors driving a renewed focus on deficit spending. The current economic climate and inflation are significantly reducing the ability of people to save for the needs of their later years. More and more American families have become economically vulnerable–including millions of seniors living on fixed incomes–as inflation reduces the buying power of hard-earned savings and social security benefits. When combined, these factors represent a clear threat to the future prosperity of all Americans.
Voters are increasingly looking to hold lawmakers in Congress accountable for the current state of the economy.
In a new Pew Research Center survey about the public’s policy priorities, 57% of Americans cited reducing the budget deficit as a top priority for the president and Congress to address this year, up from 45% a year ago. Concern has risen among members of both parties, although Republicans and Republican-leaning independents are still far more likely than Democrats and Democratic leaners (71% vs. 44%) to view cutting the deficit as a leading priority.
Changing voter sentiments can provide sufficient incentives for more bipartisan collaboration; new methods to find savings can help promote this bipartisanship.
Global Credit Agencies Reevaluating US Credit Worthiness Against Peers
The federal government has had a multi-decade challenge with deficit spending. As a result, financial credit rating agency Fitch recently downgraded the US credit rating from AAA to AA+ sighting past deficit spending.
The rating downgrade of the United States reflects the expected fiscal deterioration over the next three years, a high and growing general government debt burden, and the erosion of governance relative to 'AA' and 'AAA' rated peers over the last two decades that has manifested in repeated debt limit standoffs and last-minute resolutions.
Political governance concerns in Washington, DC, were also cited as a cause for the downgrade. The recent debt-ceiling brinksmanship has only exacerbated the situation and increased global concern about the stability of the American financial system.
The repeated debt-limit political standoffs and last-minute resolutions have eroded confidence in fiscal management. In addition, the government lacks a medium-term fiscal framework, unlike most peers, and has a complex budgeting process.
These charges make clear that both parties are responsible for addressing deficit spending and the processes that govern legislation and congressional budgeting. Absent changes, the status quo will continue to erode American leadership in the eyes of global financial markets.
Smart Spending: A Congressional Savings and Offset Development Strategy
Smart spending approaches to legislating can allow lawmakers new opportunities to reduce federal spending by increasing the returns on taxpayer dollars spent. It can also improve the societal returns on federal spending to benefit the quality of products and services, improve access, or increase the efficiency and efficacy of program operations; all actions that are capable of new savings without the need for new federal outlays or cuts to existing benefits.
Considering how funds flow from the treasury to product and service delivery is crucial for effective policymaking. It enables Congress to evaluate the opportunity costs associated with new spending and explore alternative ways to achieve the same goals without incurring additional debts. Rather than assuming that underutilized services are unnecessary and cutting them, a greater focus on returns on investments (ROI) may be possible by identifying why programs are underused.
There are many ways in which policy redevelopment can increase federal investment yields without spending more money. Statutes governing federal health care programs, such as Medicare, are largely rooted in the policies of the 1960s and are inefficient from a contemporary policy perspective. Medicare statutes contribute to roughly $65 billion lost yearly to waste, fraud, and abuse, which is more than half a trillion dollars over a decade. While the actions of third parties are to blame for fraudulent acts, federal statutes and regulations enable these actions.
Medicare is just one example of a larger point; mental health is another. The federal government spends roughly $380 billion annually, with a large portion spent helping Americans with a mental illness afford their medical bills. Instead, policy redevelopment focused on updating federal spending priorities in favor of preventing mental illness is a spending strategy capable of reducing the incidence of mental illness nationwide and the costs of treating them.
Imagine the potential outcomes if Congress adopted Smart Spending as a legislative strategy. Many laws in effect today with large federal spending requirements were written before modern computing power was available. Viewing policy changes as opportunity zones for smarter spending can facilitate broader bipartisan policy discussions about how well statutes work in an ever-changing world. Modernizing federal statutes can also serve as opportunities for local communities to redevelop existing operations to achieve more with less.
Smart Spending: A New Savings Strategy for a New Congressional Task Force
“If we don’t change course, our children and grandchildren will lose both their health security and the quality of life every generation of Americans deserves.”
Reps Jodey C. Arrington (R-Texas) And Michael C. Burgess (R-Texas)
Opinion Contributors, The Hill, 08/22/23
House Budget Committee Chairman Jodey Arrington’s call to reframe the national debate on spending is understandable. America is living beyond its financial means, voters are losing confidence in the ability of Congress to guarantee Medicare and Social Security benefits, and yet it is hard to find areas of agreement between the parties on ways to reduce spending. These issues are complex, and yet Congress must have a way to meet the moment.
The notion of updating how existing statutes and regulations spend federal funds to improve returns on these investments–such as cost savings and improved benefits–is an innovative approach to federal lawmaking. It allows for new savings without necessitating reductions in benefits. It suggests that finding offsets for must-pass legislation can become more streamlined and consistent. It opens up a new role for Chairman Arrington and members of the task force–working to support the legislative efforts of other House committees.
There is precedent for the Budget Committee adopting a more regular legislative role in the U.S. House of Representatives. The Budget Committee was established by The Budget Act of 1974 with jurisdiction over budgetary matters. While the Committee’s jurisdiction does not allow it to pass legislation like authorizing committees, developing new legislation and scoring ideas for other committees is consistent with its authority.
Since 1995, House Rules have provided that the Budget Committee shall have jurisdiction over the budget process generally. This includes studying on a continuing basis proposals to improve or reform the budget process, including both singular and comprehensive changes to the budget process. These rule changes can be proposed as a provision in the budget resolution, or as a separate measure.
When considering budget reform, the Budget Committee may create a task force (the Budget Committee does not have subcommittees, but sometimes creates ad hoc task forces to address specific issues) to research potential reform issues. The task force may hold hearings where they listen to testimony from current and past Members of Congress, as well as representatives from the Administration, to help determine the need for reform. For example, during the 105th Congress the Budget Committee created a Task Force on Budget Process, also known as the Nussle-Cardin Task Force, that examined budget reform issues. This task force held hearings and eventually released several recommendations, including making the budget resolution a joint resolution.
There are many challenges facing Americans today that will define our next generation, but large financial problems like Medicare and Social Security shortfalls threaten the economic livelihood of us all. People are losing faith that elected leaders in the nation’s capital can reach a solution. Any effort to find and implement cost-saving measures in ways least burdensome to Americans should be considered.
Conclusion
Congress is often confronted with a host of issues competing for limited time on authorizing committee calendars. The House Budget Committee, through its recent actions, can help address an urgent need: creating viable and sound policy ways to reduce federal spending. Smart Spending can be a strategy the committee uses to better respond to voter interests and help provide financial support for other committee actions. Chairman Arrington and members of the task force deserve credit for this undertaking. KPG will have more to share on these efforts in the coming months.