A User's Guide to Government Spending Cuts

Small changes could happen this year, but bigger cuts aren’t likely till 2013, at least.


If Democrats and Republicans agree that government spending needs to be slashed, it should start happening sometime soon, right?

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Naaaaah. President Obama has outlined one type of spending plan, Republicans another. There's some overlap, which could yield minor cuts this year or next, but the two sides still have major differences that are likely to prevent any big changes in government. Obama wants to cut some spending while doubling down on other areas he considers pillars of the future economy, such as clean energy, biomedicine, information technology, and education. Republicans say we can't even afford that, and need to cut just about everything in sight. Since the dickering is likely to last for months (or years), here's a tip sheet on what's coming and how ordinary folks should prepare:

Big cuts won't happen over the next two years. The national debt is indeed enormous, and Rep. Paul Ryan, the Republican chairman of the House Budget Committee, is right when he says it will soon be larger than the entire economy. But it's still not at crisis proportions, which means it's almost certain that the most controversial changes—cuts in Medicare, Medicaid, and Social Security benefits, plus a variety of tax increases—won't happen before the 2012 elections. Changes in those popular programs need to happen sooner or later, because they soak up so much federal spending and are all running at a deficit. So Americans have some time to adjust, but will eventually have to shoulder more of the burden for retirement and healthcare.

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Smaller cuts could happen soon. Washington politicians need some kind of progress to show that they're serious about fixing the government's finances, which is why "discretionary non-defense spending" has become a shared target of Democrats and Republicans alike. This chunk of spending amounts to about $560 billion, which means that if you cut every penny of it in the current fiscal year, the government would still run a deficit of about $800 billion. If you also included the $700 billion defense budget—and cut every penny of that, too—you'd start to come close to balancing the budget. Since cutting all discretionary spending is obviously a non-starter, budget hawks are eager to make aggressive cuts wherever they can.

That discretionary spending funds a lot of things Americans consider necessary, not discretionary: federal highways, veterans benefits, air and water protection, aid for schools and universities, air-traffic control, arts and humanities, the National Park Service, urban development, extensions of unemployment insurance for the long-term unemployed, and the entire budgets for Congress, the federal judiciary, and most federal agencies. Lawmakers will spend the next several months looking hard for programs they can cut, while advocates of targeted programs will lobby for cuts in somebody else's budget. That alone could be a bloody battle.

Republicans want to cut at least $100 billion in discretionary spending this year, an amount that some critics say would gut law enforcement, environmental protection, food safety, and other services Americans deem vital. Groups or individuals dependent on government funding might want to check the Republicans' list of preferred cuts or simply peruse a breakdown of the government's spending to see if they could be affected. In a list of government outlays, anything not labeled defense, Medicare, Social Security, or healthcare services could be subject to an early round of cuts.

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States and cities are already cutting. The federal government gets most of the attention, but states and cities can't run up deficits the way Washington can, and many have already made deep cuts affecting schools, fire and police departments, garbage collection, healthcare for the poor, and many other services people depend on every day. The Center on Budget and Policy Priorities says that 31 states have cut healthcare spending, 29 have cut programs for the elderly, and 34 have cut education. Another 17 states have hiked their sales tax, and 13 have raised income tax rates. So many people worried about cutbacks in government spending or new taxes are already enduring them. Woes at the federal level could start to trickle down to ordinary people just as states and cities start to turn themselves around.

Government work will become a lot less appealing. Not long ago, government jobs were considered "recession-proof" because public-sector spending usually held up when the rest of the economy hit the skids. But those days look like they're ending. With such bloated federal budgets, critics are asking an obvious question: Why doesn't the government restructure and cut costs during hard times, the same way most companies do? The answer, finally, seems to be that it should.

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Obama has already frozen federal pay for two years and said he'd like to see the consolidation of obsolete or overlapping agencies. Republicans favor a longer pay freeze and a 15 percent cut in the size of the federal workforce—which would still be mild compared to the cuts at many companies. Those kinds of moves are already happening at state and local governments. Critics of the government talk about the public sector as if it's a mere nuisance that needs to be reined in, but the government sector is a huge part of the economy. The federal government employs about 2.8 million people. All levels of government combined employ more than 22 million Americans, which is four times the size of the construction industry and twice the size of the manufacturing workforce. Cutting pay or axing some of those jobs might be necessary, but it will also reduce the number of consumers with money to spend, which could slow overall growth.

Eventually, government is going to cost more and deliver less. Washington can duck and weave for a few more years, but sooner or later, the government will have to tackle its debt—and kick the borrowing habit. Talk could start to become reality beginning in 2013, especially if Obama wins a second term and doesn't have to worry about reelection. And for anybody wondering what the spending cuts and tax increases might be, there have now been several bipartisan panels that have recommended a whole range of moves to solve the problem.

It's a good bet, for instance, that seniors will have to bear more of their own healthcare costs and wait longer to start collecting Social Security payments. Politicians have said those cuts will be phased in gradually, but it might be wise to assume a more abrupt timeline. Medicaid spending and other services for the poor will probably decline. So will defense spending, which could affect thousands of people who work for defense contractors or are employed directly by the Defense Department.

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A tax overhaul—which Obama mentioned in his State of the Union address—could simplify business and individual tax rates, with a lot fewer mind-boggling deductions. But the bottom line is that overall, taxes will rise for the wealthy and for many middle-income earners. The mortgage-interest deduction will probably be phased back, which could affect people with mortgages of $500,000 or more. And there could end up being a national sales tax, effectively raising prices on many things people buy, with likely exemptions for food, clothing, and basic necessities. In short, it's going to cost more to live in America, with fewer perks. The party is petering out.

Twitter: @rickjnewman