The 1 Percent Solution to Balancing the Federal Budget

This study by Jason Fichtner of the Mercatus Center at George Mason University offers a simple “1 Percent Solution” to balancing the federal budget. The 1 percent solution is to cut federal spending by one percent per year, and with the current revenue stream the federal budget can be balanced in about five years. Can this work?

I’ve done some back of the envelope calculations on this, and it looks like it comes pretty close: within a year or two anyway. Fichtner’s back of the envelope calculations appear in a graph on page 6 of his full study. He shows that even if we slow spending growth to increase only two percent a year the budget could be balanced by around 2020.

The 1 percent solution title is a bit of a gimmick in my view, because just a spending freeze would only put off budget balance by one year. Could a spending freeze, or even a small reduction in spending, actually be implemented?

The simple arithmetic in the 1 percent solution is correct, but it avoids the real issue, which is controlling entitlement spending. Fichtner says, “This paper does not provide a master plan identifying specific programmatic spending reductions in discretionary spending, such as defense and agriculture, nor in entitlement programs, such as Social Security, Medicare, and Medicaid. Entitlement spending on Medicare and Medicaid alone is estimated to continually increase as a share of the economy.” Therein lies the rub.

If we assume that total federal spending declines by one percent a year, then when we add up interest on the remaining federal debt plus the Obama administration’s projections for spending on Social Security, Medicare, Medicaid, and national defense, those categories alone add up to the total budget in 2019. Right now, budget items outside these categories comprise more than $1 trillion in annual expenditures.

There is no way the 1 percent solution can be implemented without cuts in planned expenditures in Social Security, Medicare, and Medicaid, and the 1 percent solution offers no guidance on how this can be done, as the study plainly states. So, yes, we could balance the budget in 5-7 years if we just cut federal spending by one percent a year, but no, we can’t do this without drastic reform of our entitlement programs.

The 1 percent solution is a good device for showing that if we just got spending under control, we could stop the massive deficits that eventually will bankrupt our nation. We don’t need more revenues, we just need to get spending under control. But, the 1 percent solution stops short of actually being a solution, because it doesn’t explain how the growth in entitlement spending can be slowed, which would be absolutely necessary for it to be implemented.

Randall G. Holcombe is a Research Fellow at the Independent Institute and DeVoe Moore Professor of Economics at Florida State University. His Independent books include Housing America (edited with Benjamin Powell); and Writing Off Ideas.
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