The U.S. Debt Gray Rhino Continued: Can We Slash Spending Enough?
As the next government shutdown showdown approaches, Washington should be smarter about cutting spending and keeping investment.
We’ve gone through potential ways to raise tax revenue through economic growth and through various tax increase options as ways to fix the federal budget deficit and debt gray rhino. What about spending cuts?
This will become a very big deal later in September as the next government shutdown showdown looms September 30th.
Reviewing spending for waste can be of great use. Remember the Department of Defense $10,000 toilet seat cover scandal of 2018?
But spending cuts have to pass muster as well.
As the “Department of Government Efficiency” farce earlier this year demonstrated, not all spending cuts are equal. Some cost far more than they “save.” A July report from the Permanent Subcommittee on Investigations found that DOGE generated at least $21.7 billion in waste through July 18, 2025. A Politico analysis released in August calculated that DOGE had saved less than 5 percent of its claims of more than $50 billion.
In fact, one former DOGE engineer went on record saying he was surprised at how little waste he found.
My screen for what to cut includes this: Cut frivolous, wasteful, or ineffective spending, but not investment that improves infrastructure, the environment, and economic competitiveness. Make cuts equitably. And make sure that they do not cost so much in GDP growth that they are net drains on the economy.
As you know, I have been playing around with some of the helpful budget-fixing scenario tools that some very smart folks have created. I’ve listed below some of the recent cuts, some of the proposed cuts this much, and some of the possible budget cut areas in the scenario tools.
What’s Been Cut So Far
Where has the current administration reduced spending so far?
The budget bill passed in July included $1.4 trillion in budget cuts over the next decade. Those cuts, alongside funding that Congress previously approve but has clawed back, come mainly in areas in which the budget cuts will reduce economic growth and/or damage important public goods like education, information, and health.
Cuts to Medicaid ($917 billion) and SNAP food aid (187 billion). This will affect the poorest Americans who have the least amount of leeway in their budgets. The economic impact differs by state but overall could cost 1.2 million jobs, roughly $124 billion in state GDP, and $9 billion in state and local tax revenue.
Ending the Biden administration’s clean energy credits ($543 billion).
Other cuts have been enacted through rescission, or the clawing back of funds that Congress previously authorized. The $9.4 billion in rescissions approved in July include international development and disaster relief aid, global health, and public broadcasting.
The administration also has terminated as much as $8.2 billion in federal support for higher education, with another $3.7 billion in the crosshairs.
Challenges to these cuts have been making their way through courts.
Spending Cut Proposals
As the September 30 deadline looms, the debate so far focuses on the following potential cuts:
Significant cuts to public health including the Centers for Disease Control and Prevention, the National Institutes of Health, and to maternal and child health programs.
Cutting support for education by 15 percent ($12 billion)
Cutting the Internal Revenue Service budget by 23 percent or roughly $3 billion.
Cutting an additional $5 billion of previously approved foreign development aid
In March, the last time Congress faced a showdown over approving continuing spending authorizations that would keep the government from shutting down, the Democrats blinked at the last minute to allow the GOP the cuts they wanted. This time may not end so calmly.
This country’s financial future is too important an issue to resolve in regular dysfunctional fights that put at risk the United States’ ability to meet its financial commitments. The country already has lost its “gold standard” sovereign credit rating because of this self-defeating dynamic.
In August I shared a half dozen tools for analyzing potential revenue increases and spending cuts. I’m summarizing some of the spending cut proposals below (without recommending whether or not to pursue any or all of them).
What Goes? Mandatory Spending Options
Roughly 70 percent of the budget is interest on the national debt and mandatory disbursements that are set by various formulas.
The United States’ best –indeed only-- option for reducing interest on the national debt is, to re-state the obvious to fix the budget issues, most likely by a combination of raising revenue and reducing spending. This would require fixing its political dysfunction. This would cut the amount owed and potentially put it back in the good graces of the credit rating agencies. (I’ll address other policy options in the next installment, on the used-to-be-unthinkable-but-sadly-now-we-must-consider-these-possibilities.)
Without recommending or discouraging any of the following, below are some of the spending cut options on the table.
The Peter G Peterson Foundation examines various options for potential mandatory spending modifications:
Modify payments to Medicare Advantage plans ($124 billion to $1 trillion over a decade)
Limit federal Medicaid spending (caps per state: $459 billion savings over a decade. Cap per enrollee: $893 billion)
Create a uniform Social Security benefit: Instead of the current system (which pays more to higher earners because it is based on earnings) a cap at 150 percent of the federal poverty level could save $283 billion over a decade; a cap at 125 percent of the poverty level could save $607 billion over the same period.
The Wharton Penn Budget model analyzes other potential mandatory spending tweaks. Check out the Appendix for detailed numbers.
Raise the full-benefit Social Security retirement age from 67 to 70 over time to cut spending by as much as $1.6 trillion from 2025 through 2054. The speed of adjustment is the big wild card -both politically and economically. As I’ve noted before, some jobs are far more physically demanding than others, so it would be practical and fair to make some distinctions by line of work. A construction worker, say, ought to be allowed to retire sooner than a desk worker.
Raise the Medicare eligibility age from 65 to 67 for as much as $5 trillion in savings from 2025 through 2054. Ditto on when this might start, how quickly it would phase in, and how different groups would be treated.
Convert Medicare to a premium support system that would allow beneficiaries to choose from competing insurance plans. The federal government would share the cost of premiums. This could reduce the cost by as much as 981 billion by 2034 and $4.8 trillion by 2054.
Index Social Security benefits to chained CPI, a different measure that could reduce payouts by 0.2 percent –or about $1.6 trillion by 2054.
Conventional wisdom has it that any cuts to these programs are the “third rail” of politics: touch at your peril. But focusing cuts on benefits to people who do not need them could work in the current political environment.
What Goes? Discretionary Spending Options
Only about 30 percent of the federal budget goes to discretionary spending -ie, allotments that Congress sets each year.
The biggest area of discretionary spending is defense, at around half of the total.
The Committee for a Responsible Federal Budget calculates that even limiting the growth of the defense budget to 1 percent a year could save $680 billion over the next decade.
The Peter G. Peterson Foundation calculates that reducing the defense budget could yield just shy of a trillion dollars over the decade.
The non-military discretionary spending category, which totaled around $785 billion in 2024, includes education and training, public health, transportation and energy infrastructure, agriculture, scientific research including the space program, veterans’ benefits, the environment, social services, international affairs, law enforcement and the judicial system, and other general government functions. Much of the spending in these categories also are more easily described as “investments” than “spending.”
Penn Wharton calculates that reducing non-military discretionary spending by 5 percent could yield $495 billion in savings over the next decade and $2.2 trillion over the next 30 years.
In playing with the various budget models, I found it relatively easy to push the budget into surpluses ranging from roughly $8 trillion to $14 trillion over the next decade.
Of course, the only options were yea or nay: accepting the full extent of the various revenue raising and spending cutting options on offer, without modifying them. Doing only a fraction of those could get this country back on track.
What Stays?
What funding would I keep, restore, or even expand?
We should prioritize spending that creates social good beyond the immediate beneficiaries: health care (you might remember the costs of a recent health emergency that got out of control), education (especially civics, needed now more than ever), infrastructure (especially the fragile electrical grid), clean energy, climate resilience including weather forecasting (yielding significant avoided cost savings), scientific and other research, and development aid (which can yield significant benefits in international goodwill for American diplomatic goals and companies, public health, and other areas).
All of these initiatives have to be done right. To be sure, none of the programs in the administration’s rifle sights was/is perfect.
Being in the middle of a car search myself, I can tell you first hand that the about-to-expire electric and plug-in hybrid vehicle tax credits are not the best use of money; they benefit urban people who likely can easily afford those vehicles anyways. For many of us EVs and PHEVs do not make sense even with the tax credit. A far better use of federal funds is to invest further improving electric vehicle charging infrastructure and public transportation. Also, we should restore the funds that had been earmarked to encourage Americans to make their homes more energy efficient; they help to cut emissions and reduce future energy costs, leaving more money for other things.
Cutting the IRS budget may be penny-wise, but Wow! is it ever pound-foolish. The Budget Lab at Yale calculates that IRS staff cuts could result in hundreds of billions of net foregone revenue —or even as much as $2.4 trillion— over the next decade.
Summing it up, I would reverse spending cuts most of the targets of the White House’s “cost” slashing. In rebuilding those programs, I’d pay attention to proposals by their proponents for review and healthy reform.
A Modest Proposal
Here are a few expenses I’d put on the chopping block first:
An ill-considered increase of $175 billion in spending on immigration enforcement and border protection. Full disclosure: living in Chicago, one of the cities in the White House’s crosshairs, and having written a book about the economic importance of getting immigration policy right, I have much more than a casual interest in this issue. Immigration crackdowns--which have targeted work sites, schools, and even people showing up for regular check-ins in accordance with the law-- already are hurting agriculture, manufacturing, and other economic sectors that employ a significant number of undocumented workers. By extension, the immigration crackdown is rippling through the economy. While past enforcement efforts prioritized criminal deportations, the new approach casts a wide net that already is ensnaring U.S. citizens and law-abiding immigrants and hurting U.S. businesses and consumers.
A significant part of fossil fuel subsidies. (And hey, how about a windfall tax, as other nations have done?) The Fossil Fuel Subsidy Tracker estimates that the United States spend nearly $18 billion in 2023 on direct (“explicit”) subsidies to coal, oil, natural gas, and end-use electricity; this does not include implicit subsidies such as climate adaptation and disaster relief. (There’s no room here for more detail, but Here’s their methodology if you want to dig deeper.)
Retrofitting a gift airplane that the current occupant of the White House will take with him when his term ends and which is estimated to cost between $400 million to more than $1 billion.
Cap unpopular spending on presidential and senior officials’ vacations, which include costs of transporting, housing, feeding, and paying Secret Service. Oh, and renting golf carts and portable toilets. By one estimate, President Trump spent $77 million of taxpayers’ money between January 20 and late July… to golf.
A hundred million here, a hundred million there, and soon you’re talking about real money.
Next up: the previously unthinkable option.