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JEC Testimony - 9.20.2011 - Statement of Chris Edwards, Director of Tax Policy Studies, Cato Institute

JEC Testimony - 9.20.2011 - Statement of Chris Edwards, Director of Tax Policy Studies, Cato Institute

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Published by: thecynicaleconomist on Oct 25, 2011
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1
The Damaging Rise in Federal Spending and DebtStatement of Chris Edwards, Director of Tax Policy Studies, Cato Institute,before the Joint Economic CommitteeSeptember 20, 2011
Mr. Chairman and members of the committee, thank you for inviting me to testify today.My comments will examine the likely damage to the economy if federal spending and debtkeep spiraling upward.
Rising Spending and Debt
Federal spending and debt have soared over the past decade. As a share of gross domesticproduct, spending grew from 18 percent in 2001 to 24 percent in 2011, while federal debtheld by the public jumped from 33 percent to 67 percent. The causes of this expansioninclude the costs of wars, growing entitlement programs, rising spending on discretionaryprograms, and the 2009 economic stimulus bill.Projections from the Congressional Budget Office show that without reforms spending anddebt will keep on rising for decades to come.
1
Under the
CBO‟s “alternative fiscalscenario,”
spending will grow to about 34 percent of GDP by 2035, as shown in Figure 1,and federal debt held by the public will increase to at least 187 percent of GDP.Hopefully, we will never reach anywhere near those levels of spending and debt. Goingdown that path would surely trigger major financial crises, as the ongoing debt problems inEurope illustrate. It is also very unlikely that Americans would support such a huge
Figure 1.Federal Revenues and Outlays, Percent of GDP
25.9%18.4%18.4%14.8%19.5%33.9%24.1%18.2%
0%5%10%15%20%25%30%35%
2001201120212035
RevenuesOutlays
 
2expansion of the government. The results of the 2010 elections suggest that the public hasalready started to revolt against excessive federal spending and debt.Some policymakers are calling for a
“balanced” package of spending cuts and tax increa
sesto reduce federal deficits. But CBO projections show that the long-term debt problem isnot a balanced one
 — 
it is caused by historic increases in spending, not shortages of revenues. Revenues have fallen in recent years due to the poor economy, but when growthreturns, revenues are expected to rise to the normal level of about 18 percent of GDP
 — 
even with all current tax cuts in place. It is spending that is expected to far exceed normallevels in the future, and thus spending is behind the huge increases in debt that areprojected.
America Has a High-Spending and High-Debt Government
Some analysts say that America can afford to increase taxes and spending because it is auniquely small-government country. Alas, that is no longer the case. Data from theOrganization for Economic Cooperation and Development (OECD) show that federal,state, and local government spending in the United States this year is a huge 41 percent of GDP.
2
 Figure 2 shows that government in the United States used to be about 10 percentage pointsof GDP smaller than the average government in the OECD. But that size advantage hasfallen to just 4 percentage points. A few high-income nations
 — 
such as Australia
 — 
nowhave smaller governments and much lower government debt than the United States.
Source: OECD Economic Outlook Database, September 2011, Annex Table 25.
Figure 2. Total Government Spending as a Share of GDP
30%32%34%36%38%40%42%44%46%48%50%
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 
United StatesOECD (Simple Average)
 
3Historicall
y, America‟s strong growth and high living standards were built on our 
relatively smaller government. The ongoing surge in federal spending is undoing thiscompetitive advantage we had enjoyed in the world economy. CBO projections show thatwithout reforms federal spending will rise by about 10 percentage points of GDP by 2035.If that happens, spending by American governments will be more than half of GDP by thatyear. That would doom young people to unbearable levels of taxation and a stagnanteconomy with fewer opportunities.American government debt has also soared to abnormally high levels. Figure 3 showsOECD data for gross government debt as a share of GDP.
3
(The data include debt forfederal, state, and local governments). In 2011, gross government debt is 101 percent of GDP in the United States, substantially above the OECD average of 78 percent.
4
 Harmful Effects of Deficit Spending
Federal deficit spending has exploded. Even with the recent passage of the Budget ControlAct, the deficit is still expected to about $1 trillion next year. The damage caused by thisspending includes:1.
 
Transferring resources from higher-valued private activities to lower-valuedgovernment activities. With government spending already at 41 percent of GDP, newspending will likely have a negative return, which will reduce output.
, , .Source: OECD Economic Outlook Database, September 2011, Annex Table 32.
 
Figure 3. Gross Government Debt as a Share of GDP
40%50%60%70%80%90%100%110%
1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 
United StatesOECD (Simple Average)

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