A 5% Spending Cut and the Wisdom of Charles Dickens

Three Things to Know

On October 17, President Donald Trump told the press that he was asking his cabinet agencies to reduce their budgets for next year by 5%. He is to be commended for this laudable goal, though we should keep in mind that Congress sets the budget. It is up to that body, in the final analysis, to reduce spending.

Nevertheless, the shift in thinking – and spending, if enacted – would be welcome. At $779 billion, deficit spending is up 17% from the prior year. That is an additional $779 billion added to our national debt at a time when the 10-year bond yield is rising. The federal government paid interest of $534.5 billion as of June 2018 on an annualized rate. That is up 17.2% from the year before. Carrying our national debt is getting more and more expensive as interest rates rise and the debt itself grows. June's $534.5 billion is money that the government had to either raise or hold back from spending or investing elsewhere.

In my ITR Economics presentations to companies and associations, I frequently use a chart that shows the breakdown of federal government spending. The “Consumption Expenditures” line, which includes everything from national defense to the National Endowment for the Arts and every non-entitlement line item in between, was up 4.5% for the quarter ending in June 2018. Total federal expenditures (including entitlements) through the same quarter were up 5.9%.

It is not clear which portions of the budget would take the cuts under Mr. Trump’s directive. Business people know that across-the-board cuts are typically not the best way to go about reducing spending; we can hope government follows this best-practice.

If it marked the beginning of a new trend, cutting 5% would most likely help in the longer term. However, one press statement does not make for sustained action. We are leaving our long-term 2030-2040 outlook – tied to demographics, national debt, health care and other entitlements, and inflation – on the table. Invest into the rising trends of the coming decade, keeping in mind that there are still going to be business cycles and opportunities for creating wealth.

The president’s cabinet directive? It's a start, so here’s hoping! But hope is not an effective business strategy – best to rely on your own initiatives and prowess.

We don’t want to find ourselves in the situation described by Charles Dickens: “Circumstances beyond my individual control…"

Brian Beaulieu
CEO