Raise your hand if you’d favor a balanced budget that spent 18% of GDP. Not so fast, GOP hopefuls!

Posted by Nolan Miller on Aug 12, 2011

Filed Under (U.S. Fiscal Policy)

Last night’s GOP debate featured some high political theater.  One of the highlights was when the moderator asked the eight candidates to raise their hands if they would reject a deficit deal that included $1 in tax increases for every $10 in spending cuts.  Every one of the contenders raised their hands.

Now, I don’t want to be political here, but I don’t think it is political to say that the candidates could not possibly have been thinking when they supported this proposition.  (The one exception is Ron Paul, who is a principled Libertarian and supports the elimination of the income tax entirely.)  Let’s think about what it would mean.  Currently, the U.S. federal government spends about 24% of GDP each year and takes in about 15% of GDP in taxes.  So, a 10-to-1 ratio of spending cuts to revenue increases, if scaled appropriately, could lead to a balanced budget that spends around 16% of GDP.

Now, the current revenue number is somewhat lower than the historical average, which has run around 18% of GDP.  This is partially due to the recession and partially due to the Bush tax cuts.  If the economy recovers and the Bush tax cuts are extended, CBO expects receipts to grow to about 21 percent of GDP by 2020 (with part of this increase being driven by new taxes aimed at paying for the Patient Protection and Affordable Care Act).  Of this increase, expiration of tax provisions are expected to contribute about 1.8% of GDP.  About 0.5% of GDP comes from expiration of the Bush tax cuts for households making more than $250,000 per year, which President Obama opposes. 

So, let’s do a quick, back-of-the-envelope calculation using numbers from the Office of Management and Budget.  (See tables 1.1 and 1.2).  Between 2011 and 2016, OMB estimates that total tax receipts will be about $18.54 trillion and total outlays will be about $23.95 trillion, for a total deficit of $5.41 trillion.  Suppose we were to close the gap using a 10-to-1 ratio of spending cuts to tax increases.  This would give us a balanced budget that spends $19.03 trillion.  Total GDP over this period is expected to be $104.02 trillion, which implies that federal government spending would be 18.3 percent of GDP over that period.  Ballpark computations (which I haven’t done fully) suggest that about the same conclusion comes from using a 10 year window.

The balanced budget amendment proposals that the Republicans have proposed tend to cap federal spending at about 18% of GDP unless there is an extraordinary override vote.  Many of the candidates have voiced their support for these proposals.

Now, the calculations I’ve done may not be quite right, but I think the point is clear.  A 10-to-1 ratio of cost reductions to revenue increases gets us to exactly where Republicans say they want us to be: a balanced budget that spends around 18 percent of GDP.  At the very least, a thinking candidate should have thought that the numbers were close enough to the ballpark that the proposal would require more scrutiny.

So, this leaves us with two possibilities.  Either the candidates were making a stand, saying that while they were willing to spend 18 percent of GDP, 18.3 percent was just too much, or else they just weren’t thinking and dutifully raised their hands in response to what they thought people wanted to hear.  If the former, I can respect that.  If, as I suspect, support for the proposition that a 10-to-1 ratio of spending cuts to revenue increases arose from a failure to consider the proposal and a desire to pander to the party’s base, the candidates are going to need to step it up.  (I suspect that the same set of hands would have gone up if the ratio had been 20-to-1 as well.)  The issues facing the country are too difficult and important to entrust to someone who is not willing to think about them.