How the GOP Can Win the Debt-Cutting Fight
The midterms proved the public doesn't support the Dems' big government, big debt approach. But can the GOP get the country's fiscal house in order?
The state of U.S. government finances is a disaster that not only threatens U.S. growth and prosperity but is also undermining U.S. global leadership from business innovation to economic strength to international clout and eventually military edge. In the past few weeks reports have shown China is testing a new stealth jet, China's GDP will surpass the U.S. within the next decade and China is the largest funder of U.S. government debt through its huge holdings of U.S. Treasuries. This state of affairs should be a wake-up call – U.S. supremacy is in decline and it needs a dramatic change in direction!
The mid-term elections proved convincingly that the American public does not support the big government, big debt, no growth agenda of President Obama, former speaker Pelosi and the Democratic party.
Now that Republicans have arm-twisted President Obama into agreeing to extend the Bush tax cuts and thereby avoided the largest tax increase in U.S. history that was dangling over households and small businesses, they must position themselves on the side of smaller government, which means lower government spending and the elimination of the deficit. Without success on these fronts the prospect in 2012 of the expiration of the Bush tax cuts will leave them exposed as unable to afford their extension.
U.S. federal government expenditure has expanded at an astonishing rate over the past few years, growing by over $1 trillion or 40% in three years, from 19% of GDP in 2007 to over 25% in 2010. In 2010, federal revenues paid for less than $6 in every $10 of spending with debt funding the rest! There was not enough incoming to afford pensions/welfare and defense, let alone any other federal spending such as healthcare, education, energy, transport, research, etc, which were all paid for on borrowed money. Therefore (based on current estimates) it is no wonder that in just three years national debt will have increased by 50%; i.e. the first three years of the Obama Presidency will have added half the national debt that every other administration added in over 230 years!
Any extension of the debt ceiling should be tied to a reduction in government spending.
Here’s a few suggestions to start with:
- All uncommitted “stimulus” money approved in last Congress should be ceased immediately - this should save up to $100 billion dollars in 2011 and 2012.
- All non-pension/welfare spending be subjected to a 5% p.a. “efficiency dividend” for each of the next three years to force government to be innovative and efficient in how they spend money. Most American families and businesses will have squeezed their budgets by far more than this over the past few years and recent budgets in the UK and Ireland have delivered far greater reductions. This modest cut alone could meet the House Republicans pledge to cut spending by $100 billion and will grow in each of the second and third years by similar amounts.
- This 5% efficiency saving should also apply to defense, which had an unchecked blank check for years as it has battled with Afghanistan and Iraq, but now should face reality and start driving efficiencies and value for money (defense budget in 2010 was $240 billion or almost 40% higher than in 2007).
- Specifically for Medicare, co-pays should be increased to achieve the 5% efficiency saving and an additional co-pay introduced for drugs set at $5-$10 per script. In the medium term the “donut hole” should be retained rather than being phased out by 2020 and the states should be incentivized to come up with alternative lower cost Medicare options by retaining a share of future savings.
- Welfare entitlements should be subjected to entitlement indexation freezes for two years. During this time, these programs require a new round of welfare reform overhaul and this timeframe allows consideration of such, including encouraging states to develop their own alternatives.
- A no earmarks policy adopted for this Congress, with Republicans in the House challenging Democrats in the Senate to adopt this. Any Democratic (and Republican) Senator facing re-election in 2012 should be shamed into joining the House Republicans on this matter of principle. All representatives should sign a “no-pork” pledge!
If Republicans can steel themselves with such an approach they will demonstrate to their districts, their nation and the world that the US is serious about getting its fiscal house in order and that the latest brief flirtation with big debt funded government spending is over. Smaller government, lower debt coupled to the lower taxes locked in for the next two years will set the scene for returning the US to a pro-growth, pro-private enterprise led economy where hard work, innovation and entrepreneurship are the engines of prosperity again. This is the contract that Americans want from Republicans and if this Congress can deliver that then 2012 should be an even better outcome for them than 2010 was.