By The centre For Geoeconomic Studies
“There’s only one way to [fix America’s long-term budget problems],” said President Obama’s fiscal commission co-chair Alan Simpson. “You dig into the big four, Medicare, Medicaid, Social Security, and defence.”
In shying clear of Medicare, Medicaid, and Social Security in his 2012 budget proposal, the president took a bow to the formidable political challenge posed by the first three. But what about defence, which accounts for a whopping 22% of Federal expenditures? In spite of the ups and downs in the global peace index, history suggests that cuts in nominal defence spending are just as hard to achieve.
As the yellow line in the bottom figure shows, nominal defence spending almost never falls. Declines in defence spending as a percentage of GDP have historically been accounted for by inflation or real GDP growth – not by spending cuts.
The fiscal commission’s report called for $34 billion in nominal defence cuts between 2012 and 2013, a time-period during which the president’s budget calls for increases. But even the president’s much more modest brand of fiscal discipline looks oversold. His budget projects strong economic growth in the medium term, but if private growth forecasts are more accurate he will need to do the politically impossible – actually cut nominal spending – in order to achieve the real cuts implied by his budget.
Photo: Council on Foreign Relations
Business Insider Emails & Alerts
Site highlights each day to your inbox.