How not to spend 2.8 trillion dollars

The Federal budget--2.8 trillion dollars in 2006--includes a vast array of programs within hundreds of agencies. When boiled down, however, government spending consists of five basic activities, according to Chris Edwards, director of Tax Policy Studies for the Cato Institute, Washington, D.C. They are paying workers, buying goods and services, transferring wealth to favored groups, subsidizing state and local governments, and paying interest on debt.

Transfer payments, such as Social Security benefits, are the largest spending activity at 1.26 trillion dollars, or 45% of the budget; purchases of goods and services, 17%; aid to states, 15%; compensation costs for Federal workers, 13%; and interest, 10%.

The Constitution authorizes the Federal government to hire workers and purchase items needed to carry out basic enumerated functions. It generally does not create a Federal role in transfers of wealth or aid to the states, yet those two activities now account for 60% of all Federal spending.

During the 1990s, growth in the Federal budget was somewhat restrained but, since 2000, most types of spending have soared. Estimates indicate that Federal purchases have doubled since 1998, aid to the states has doubled since 1995, and transfers (except Social Security) have doubled since 1994. Total Federal spending has grown at an average annual rate of 6.7% this decade, compared to 3.8% during the 1990s.

With today's large budget deficits and looming cost increases in programs for the elderly, spending cuts are needed desperately, Edwards insists. Reformers can look to the main types of spending to find budget savings.

* Transfers are the largest and fastest-growing type of spending. Congress should cut all types, including Social Security benefits, health care spending, and business subsidies. Transfers produce a mirage that the government is creating a net flow of income to the people, but the reality is that every dollar of spending comes from taxes on current and future workers, savers, and small businesses. Those taxes get cycled through the sausage factory on Capitol Hill and redirected to favored groups.

* Federal procurement has been subject to much waste and scandal. Contracts for defense, energy, and technology projects often go over-budget; inventories are poorly managed; and health programs are subject to huge overbilling problems. Many reforms are needed, including privatizing activities such as energy research, cutting low-priority weapons programs, and making procurement data more accessible for public scrutiny.

* About 800 Federal initiatives provide subsidies to state and local governments. These range from Medicaid to obscure programs such as boating safety, forestry assistance, and arts in education. Federal aid creates huge bureaucracies at all three levels of government and imposes heavy regulation on what should be autonomous local activities.

* Federal compensation has risen much faster than private-sector compensation in recent years. In 2005, average wages and benefits for Federal civilian workers was $106,579, which is double the average for U.S. private-sector workers of $53,289. A Federal wage freeze should be put into effect and benefits scaled back, Edwards advocates.

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