Saturday, July 14, 2012

Principled Spending - The Numbers

So now we come to the actual numbers that we would use for our principled spending budget.

Let's start with putting some numbers on the principles.  As you recall, our first principle has to do with base spending growth equally the growth rate of inflation plus population.  To get at this, I've used the last 5 year inflation rate for medical spending and other spending from the CPI.  For population, I've used the US population numbers with the exception of for Medicare and Social Security.  So to summarize, Medical spending has a projected inflation rate of 3.6% which is assumed constant for the next decade and the senior population grows between 2.7% and 3.5% per year depending on census projections.

The second set of numbers requires us to understand the current level of emergency spending and take it out of the budget over time.  For this, I have estimated reducing $100 billion in overseas contingency operations (Iraq and AfPak) and $200 billion in "income security."  Both of these are consistent with government estimates and the spending is reduced over a 4 year period from 2013 to 2016.

Finally, I apply an efficiency factor to government spending of 1% per annum.  In effect, this requires government to improve efficiency of delivery by 10 percent over the next decade but this factor is not applied to pure transfer programs (namely social security and other income security).

Finally, baseline defense (ex-OCOs) is treated as a special case.  Defense is assumed to grow only with the rate of inflation since population has little to do with the need for defense spending.

With these assumptions, we arrive at the following growth rates by category.

Defense (including OCO spending) - (0.4%)
Medicare - 5.7%
Social security - 5.2%
Non defense discretionary - 1.6%
Medicaid - 3.2%

Total spending - 2.2%

Or graphically, to compare the President's budget to the forecast, you get something that looks like the following:

And there you see the impact of excess spending over a principled baseline.  You may be wondering about the deficit against current baselines.  This number is pretty hard to calculate because of the large number of baselines.  However, using the revenue assumptions in the Ryan budget as a proxy for the current policy baseline, we would have a deficit in 2022 of 1.6% of GDP in 2022.  The deficit would fall below 3% of GDP in 2016.  All this from a simple change in spending orientation.

In the next post, I'll talk about how the tax code might change to fund this projected level of spending, since, as you recall, the principled approach to to tax enough to cover your spending.