1) Between 1992-1993 and 2000-2001, Canada reduced federal spending as a percentage of GDP from 17.5% to 11.3% and spending on servicing federal debt from 5.6% to 4.3% of GDP through modest cuts in spending growth. 2) Similarly, in the US between 1990-2000, federal spending as a percentage of GDP declined from over 20% to 18% through keeping spending growth below GDP growth. 3) However, future spending growth is projected to come from entitlement programs like Medicare, Medicaid and Social Security rather than discretionary spending.

1. Cutting Federal Government Spending:
Yes We Did
David R. Henderson
Research Fellow, Hoover Institution,
Stanford University
and
Associate Professor of Economics,
Graduate School of Business and Public
Policy Naval Postgraduate School

2. Me with Former President Reagan,
January 1993

3. Canada’s Budget Triumph
Federal spending on programs (as a
percent of GDP):
•
•
1992-1993: 17.5 percent
2000-2001: 11.3 percent

4. Canada’s Budget Triumph (cont)
Federal spending on servicing the federal
debt (as a percent of GDP):
•
•
1992-1993: 5.6 percent
1999-2000: 4.3 percent

5. What is a “Cut”?
When analysts refer to government budget cuts,
they do not all use the word “cut” the same way. A
cut in government spending can mean one of four
things:
(i) A cut in the dollar amount of spending even
when there is inflation;
(ii) A cut in real spending, that is, an inflationadjusted cut;
(iii) A cut in spending as a percent of GDP;
(iv) A cut in the planned increase in spending.

6. America’s Budget Triumph
Figure 1
Federal spending as % of GDP
25
% GDP
20
15
10
5
0
1990
1991
1992
1993
1994
1995
Year
1996
1997
1998
1999
2000

7. Defense Spending as % of GDP
Figure 2
Defense spending as % of GDP
6
5
% GDP
4
3
2
1
0
1990
1991
1992
1993
1994
1995
Year
1996
1997
1998
1999
2000

8. Net Interest on Debt as a % of GDP
Figure 3
Net interest as % of GDP
3.5
3
% GDP
2.5
2
1.5
1
0.5
0
1990
1991
1992
1993
1994
1995
Year
1996
1997
1998
1999
2000

9. The Big Three
Figure 7
% of GDP
Social Security, Medicare, and Medicaid Spending as a Percent of GDP.
9
8
7
6
5
4
3
2
1
0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
Year
Medicare
Social security
Medicaid
Total

10. Other Domestic Spending
Fell from:
•
•
6.41 percent of GDP in 1990 to
5.40 percent in 2000

11. Was High Economic Growth in the 1990s
an Important Cause?
Average annual economic growth by decade:
•
•
•
1990s: 3.2 percent
1980s: 3.2 percent
1970s: 3.2 percent

12. Did Cuts Hurt Growth?
Growth in last half of decade, 1995-2000,
after most of the cuts had kicked in:
•
4.0 percent annual average real GDP
growth

13. Due to United Legislative/Executive, as in
Canada?
No.
1990-1992: R Pres, D Congress
1993-1994: D Pres, D Congress
1995-2000: D Pres, R Congress

14. Earlier Evidence: Drop in Post WWII
Federal Spending

15. Post WWII Growth of Real Private GDP

16. Moral of the Story
Modest cuts in spending (in real terms),
combined with keeping growth in spending
below growth in GDP, will ultimately balance
budgets and even produce budget
surpluses.

17. Where Cuts Can Be Made?
Defense spending today, at about 3.8 percent
of GDP, is below where it was at the start of
the 1990s, when it was about 5.2 percent.
There is still room to cut defense spending
substantially.
But the growth in government spending in the
future will be mainly in Medicare, Medicaid,
and Social Security.

18. The Danger of Our Current Debt
•
•
•
Net interest on the debt is very low.
This is because the interest rate on the
debt is low.
Even a one-percentage-point rise in
interest rates on the approximately $12
trillion in debt held by the public would
increase government spending by a
hefty $120 billion. This is about 0.75
percent of GDP.

19. Solution: Lock in Low, Long-Term Interest
Rates
•
•
•
Short-term problem: If we lock in longterm rates on, say, $3 trillion of debt, debt
service on this $3 trillion immediately
rises by $90 billion.
Long-term benefit: If interest rates rise by
more than 3 points, feds will save money.
Diversified strategy: That’s why I chose
$3 trillion.

20. Yes We Can – Cut Federal Spending