OPINION:
Congressional Republicans should remember: Control spending and you control deficits. This is important, as new Republican Senate and House majorities sharpen their pencils to write their first budget. Republicans are going to want that budget to balance. However, if instead of focusing on deficits, they focus on spending, the deficits will take care of themselves.
The mistaken belief is that spending must determine revenues, when the opposite is true: Revenues must dictate spending. Historical evidence shows the secret to fiscal prudence is controlling spending first.
The federal budget has balanced 12 times since 1940. Each time the budget has balanced after running deficits, federal spending as a percent of gross domestic product has fallen. There have been three periods with consecutive years of balanced budgets. In each of these years, federal spending as a percentage of GDP was lower than the year before the budget balanced.
Finally, when the federal budget fell back into deficit, federal spending as a percentage of GDP increased from its balanced level every time but one (1970, when spending fell 0.1 percent of GDP from 1969’s level).
Increased revenues have no such compelling record. Of the 12 balanced budgets, only seven times did the balanced year’s revenues exceed the preceding deficit year’s. In the other five, revenues were actually lower.
Another comparison makes the same point. According to the Congressional Budget Office, over the last 40 years, federal revenues have averaged 17.4 percent of GDP and federal outlays 20.1 percent. During the 12 balanced budget years, revenues averaged 18.1 percent of GDP, and outlays 16.7 percent. Compared to their 40-year average, the balanced budget average for revenues was only 4 percent higher, while the balanced budget average for spending was 16.2 percent lower.
There are several reasons for the marked difference spending and revenues play in balancing budgets.
First, spending begets spending. It creates clients both inside and outside of government. These clients seek more spending because they benefit from it.
Second, government spending channels resources away from the more productive and innovative private sector. In the private sector, resource allocation is determined by economic competition. In the public sector, it is determined by political power. The result: The economy grows less than it otherwise would have — thereby encouraging more compensatory spending.
Third, government spending creates dependency. People begin attributing their well-being to spending. From there, it is a simple step to assume more spending would yield greater well-being.
For all these reasons, cutting spending is difficult, which is why it is so rarely done, and why federal budgets so rarely balance. However, once spending falls, it unleashes many positives.
First, spending’s fall reduces those inside and outside of government who clamor for it to increase. This reduces both the demand in a given year, but also creates a dynamic of diminished demand going forward. It is not surprising that when the budget has balanced, it has usually done so for more than a single year. Of the 12 balanced budgets since 1940, only three of them have been single years of balance.
Second, when spending goes down relative to the economy, the private sector’s share of the economy increases. With more of the nation’s resources at the disposal of the more productive private sector, the potential for long-term economic growth increases. Increased economic growth generates more federal revenue on one hand and — if spending is restrained — means federal spending relative to the economy will continue to decline.
Third, once spending is controlled, the dependency mindset begins to weaken. No longer do people attribute their prosperity to government growth.
The past is clear: Focus first on controlling spending, and the deficits will diminish. The mistaken belief that tax increases should lead the way is proved by current projections. Looking just at CBO’s projections — without President Obama’s latest proposed tax and spending increases — revenue relative to GDP would have to increase by 27.4 percent from 2014 to catch 2025 projected spending.
Chasing deficit cuts with tax increases is akin to a dog chasing its tail. Neither deficit nor tail is generally caught and if it is, the exercise can be extremely painful.
As congressional Republicans begin their seemingly thankless task of trying to extract fiscal order from chaos, they should remember that the best way to control deficits is to reduce spending.
• J.T. Young served in the Treasury Department and the Office of Management and Budget from 2001 to 2004 and as a congressional staff member from 1987 to 2000.
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