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Impeding Problem Bigger Than Recent Crisis

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By Lowell L. Kalapa

(Released on 10/26/08)

While the credit crisis is still rocking the financial markets across the globe, an even bigger problem is looming over the horizon for Congress and the leaders of our country.

It is the fact that more than half of all federal spending is beyond the control of our elected officials and only about 20% of federal expenditures can be considered “discretionary.” While critics decry the expenditure of our federal tax dollars to fund the war in the Middle East, they should recognize that only about 20% of all federal money is spent on defense. This is a sharp contrast to the 45% that was spent on defense at the height of the Viet Nam War in the mid-1960’s. In those days Social Security accounted for 14% of federal expenditures while net interest on the federal debt accounted for about 7%, and Medicare/Medicaid accounted for less than 2% of federal expenditures.

Compare that to federal expenditures in 2007 when Social Security accounted for 21% and Medicare/Medicaid accounted for another 21% of federal spending. Thus, spending on Social Security and Medicare/Medicaid account for more than twice the amount spent on defense spending. And with an aging population that is forecast to increase from the current 13% of the population that is age 65 and older to nearly 20% of the population 40 years from now, the percentage of federal spending that will go for Social Security and Medicare/Medicaid can be expected to grow even larger. That is unless Congress acts to correct this course.

Although a number of proposals to reform Social Security have been bantered around with little success, some of the problem lies with the growing cost of health care in the United States. In the past 40 years the cost of health care has grown annually, on average, about 2.5% faster than the growth in the Gross Domestic Product (GDP) which means the cost of health care is taking more and more of the nation’s wealth. Another part of the problem is that total federal spending far out paces all federal revenues received in the year 2007 and has for some time. Thus, the nation is highly dependent on borrowed money, causing the percentage of federal spending going for net interest to grow.

While out of control spending has a lot to do with this picture, so does the fact that federal lawmakers have found numerous ways to spend money out the back door with all sorts of tax expenditures for this or that special interest. While no one wants higher taxes, all must realize that if taxes are reduced, then the spending that goes hand in hand with that action must also be reduced. To spend more than the federal government takes is morally wrong in that the nation is incurring expenditures to satisfy this generation of taxpayers while leaving the problem of paying for that spending to future generations.

Unfortunately, there are those who would promulgate popular myths about this problem. For example, there are those who believe that we can grow our way out of the difficult budget choices because they believe that economic growth will provide added revenues to cover the shortfall. Unfortunately, that is not the case as evidenced by the current economic crisis. And as noted earlier, the cost of health care has traditionally outpaced the growth of the GDP by 2.5% annually.

Others believe that if waste is eliminated or that if health care can be delivered more efficiently, the deficit problem can be solved. Again, as we have witnessed in recent times, every effort to eliminate waste or solve rising health care costs has been foiled for one reason or another. Still others believe that taxes need to be raised starting with rolling back the tax cuts initiated by the current administration or the obverse, that cutting taxes will raise revenues. Again, Congress has had neither the will nor the fervor to do either.

What it does come down to is the fact that many of the programs beg reform and not just cut backs. Medicare, Medicaid, and Social Security are on automatic pilot with built in annual increases. These programs need to be decoupled from these automatic increases and they need careful review. They promise more than the taxpayer can afford. The current fiscal policy is unsustainable.

While there are no easy solutions, like cutting waste and fraud, there are solutions; but those solutions will require bipartisan cooperation and a willingness to put all options on the table. It will also require public engagement to buy-in if these difficult solutions are to be realized. The time to start is now if we are going to fix the problem.

Lowell L. Kalapa is the president of the Tax Foundation of Hawaii. Mr. Kalapa’s commentary is printed each week in the Maui News, West Hawaii Today, Garden Isle News, and the HawaiiReporter.com.

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