May 29, 2017

Boosting Growth Through Fiscal Policy

Last week, the Congressional Budget Office published a blog exploring the role of fiscal policy in improving economic productivity. The subject is particularly interesting given how frequently politicians propose to pay for their agendas, be they tax cuts or spending increases, with dubious claims of improved economic growth. CBO identified four main fiscal tools that can actually result in increased growth through higher productivity:

  • Increasing funding for federal research and development (R&D)

  • Incentivize private investment in R&D through tax credits

  • Increase federal spending on education

  • Increasing loans or loan guarantees for businesses pursuing innovative technology

While federal lending programs can be difficult to quantify, the first three of these are easily measured and are worth putting in perspective relative to other areas of the federal budget.

In Fiscal Year 2017, the federal government is projected to directly spend just under $126 billion on four categories of R&D which include everything from new weapons systems to space exploration and experimental cancer treatments. On top of that, the government will spend just under $13 billion this year on tax credits for private research and development. (This comprises less than 1 percent of tax expenditures.)

Education spending is a bit more complicated, as a substantial portion of education funding is spent on student loans (which are ultimately repaid and so are not well reflected in a straightforward budgetary analysis). Nonetheless, net federal outlays for education in FY 2017 (including K-12, higher education, and job training) are projected to be just over $93 billion.

Altogether, these investments total just under $236 billion per year. While this may sound like a lot, it pales in comparison to other categories of federal spending. It’s less than the $270 billion the federal government will spend this year just to service past debts. The defense budget, not including R&D, totals $529 billion. Social Security is projected to cost $946 billion this year alone. And health care service programs (primarily Medicare and Medicaid) will clock in at a whopping $1.1 trillion.

To put these numbers in perspective, that means the federal government is spending almost nine times as much on federal health care and retirement programs as it is on all federal investments combined. Given that our budget is supposed to be a reflection of our priorities as a nation, current fiscal policy suggests that much of the growth-oriented rhetoric from politicians is merely just that.

This discrepancy will only grow worse in the coming years as the cost of major entitlement programs balloons with changing demographics while revenues remain stagnant. Fewer resources will be available to devote to investments in the future on our current fiscal trajectory, and the result will be a slowing economy.

As we prepare for the 2017 budget process to begin in earnest, policymakers should focus their attention on the real drivers of our fiscal challenges and ensure that growth-oriented investments do not bear the brunt of any deficit-reduction efforts. They should not merely talk about economic growth while actually redirecting funds away from the investments that facilitate it. If politicians truly care about stimulating growth, they should start reflecting that in their budgetary decisions.