The Deficit Trap: Why Spending Cuts Must Take Center Stage

‍Introduction

Following a campaign that paid regular lip service to the threat of rising budget deficits, the passage of the Republicans' large tax and spending package, dubbed the One Big Beautiful Bill Act (OBBBA), should leave budget hawks unsettled. Stripping out the gimmicks of temporary policy, the law will leave aggregate federal spending higher than before the reform and deficits at a whopping $3 trillion in 2032. Some sub-categories of health and welfare spending were reformed. Still, Republicans may have unwittingly catalyzed a bipartisan consensus that our fiscal problem isn’t profligate spending, but a lack of revenue.

For decades, deficit hawks have rallied around warnings of red ink and the dangers of runaway national debt. However, focusing solely on deficits has papered over deeper disagreements about the role of government, the optimal mix of spending and taxation, and the direction for fiscal policy.

Deficits matter tremendously. Persistently large annual shortfalls fuel debt accumulation, raise borrowing costs, and risk a sudden fiscal collapse. Yet the focus on the deficit misdirects the policy response from a common parallel goal: reducing the size and scope of government. Deficit rhetoric has confused the coalition so that even among Republicans, tax cuts are primarily justified as “paying for themselves” rather than reducing the size of government, and trillions of dollars in higher tariff revenue is celebrated.  

Fiscal sustainability must be redefined in terms of controlling expenditures. Unless federal spending cuts take center stage, the focus on deficit reduction will ultimately usher in a European-style tax state with significantly higher taxes on middle-class Americans and a permanently larger government.  

The Split Within the Deficit Hawk Coalition

Historically, champions of limited government relied on taxes as a proxy for the size of the state. Politically, this makes sense: taxes are visible, costly, and incite resistance. Yet when the government can borrow without a near-term binding constraint, limiting tax revenue no longer guarantees smaller government. In fact, it can have the opposite effect by allowing spending to grow unconnected to revenues.

This is where the fiscal hawk coalition breaks down. It is not a single camp but two seemingly allied factions whose different starting assumptions lead them to opposite conclusions and different tactical strategies. The first camp, known as the budget hawks, comprises small-government advocates—libertarians, classical liberals, and fiscal conservatives—whose primary goal is to reduce the size of the state. For them, the deficit is a problem only insofar as it reflects too much spending. The solution is to bend outlays to historical revenue levels. Raising taxes locks in the ratchet of government growth.

By contrast, the second camp of deficit hawks takes a “balance at any cost” approach. These hawks are focused above all on solvency. Often lacking a core commitment to limited government, they see significant tax increases as a necessary part of any fiscal adjustment. In many cases, they support new spending as long as it comes paired with new revenues.  

Both camps agree that deficits are unsustainable, but their remedies diverge radically. Simply declaring that “the deficit is bad” does not clarify how to fix it. Without an explicit framework to prioritize spending restraint first, deficit reduction arguments inevitably drift toward higher taxes or no fix at all.

In 1982, President Ronald Reagan agreed to raise taxes in exchange for promised future spending cuts. Sold as $3 of cuts for every $1 of new taxes, the tax hikes were enacted, but the spending cuts never materialized. Eight years later, President George H.W. Bush broke his “no new taxes” pledge as part of the 1990 budget deal. The package included discretionary caps and pay-as-you-go rules, but in practice, these mechanisms proved weak and failed to impose lasting spending discipline. Spending grew by double digits in the following years. More recently, the Simpson-Bowles Commission proposed another lopsided approach, suggesting historically high tax levels accompanied by only modest spending restraint.

Budget hawks have consistently struggled to articulate a positive vision for cutting spending. Without explaining how restraint improves everyday life, it is hard to build durable support. Until advocates of limited government can pair low-tax arguments with a compelling case for why spending cuts benefit people, they will continue to lose the debate.

Spending Cuts for Their Own Sake  

Too often, spending reductions are framed as painful austerity, while tax cuts are sold as growth-enhancing liberation. This rhetorical asymmetry has left budget hawks perpetually on the back foot. Spending restraint is not just an accounting exercise; it improves human welfare. Cutting spending pairs back the tools with which the government interferes in our lives. Both sides of the fiscal ledger distort incentives to work and save, crowd out family and community institutions, and dampen the entrepreneurial dynamism that has long distinguished America.

Government spending has grown dramatically. Since 1950, total U.S. government spending has climbed from 21 percent of the economy to 34 percent in 2024, a 60 percent increase. Real spending per person (in 2017 dollars) has increased even more, quadrupling from $5,000 in 1950 to $23,000 today. There’s plenty of spending to cut, but budget hawks keep failing to make a persuasive case for restraint.  

Government transfers, at best, have a limited effect on important outcome measures; at worst, they weaken labor force attachment, subsidize unhealthy behaviors, and make the recipients worse off. Reducing the breadth of government-subsidized housing, health insurance, food aid, and direct transfers is not only a budgetary necessity; it lifts the constraints of a system that locks low-income Americans in poverty. Cutting spending on transfer programs will reduce poverty and increase independence.

The welfare reforms of the 1990s, which tied benefits to work, had a profound impact. They reduced caseloads, increased employment, and lowered poverty among former recipients. Just as importantly, the gains did not stop there. Children in households affected by the reforms also benefited, showing lasting improvements in food security levels.

Even the most politically sensitive spending programs should be scaled back or eliminated. For example, the government-run Social Security system ensures America’s retirees receive below-market returns on their Social Security taxes, making current and future retirees poorer, not more financially secure. Had Republicans succeeded in slowing benefit growth and creating private retirement accounts in the early 2000s, economist Andrew Biggs estimates that current low- and middle-income retirees would be receiving benefits 3 percent to 8 percent higher than they do today. More radical reforms could have boosted personal savings by hundreds of thousands of dollars, but politicians pilfered those potential returns by delaying reform too long. Still, reforms that keep the system from crowding out an ever-growing share of young Americans’ personal income can improve well-being compared to the alternatives.  

Conservatives discuss tax cuts with passion and clarity; they should also articulate spending cuts with the same clarity.

Spending Cuts Are Tax Cuts

Not cutting spending is a tax increase. When the government runs annual deficits of $2 trillion, every dollar of new spending is a future dollar of higher taxation. In this context, cutting spending is itself a form of tax relief. Investors, households, and businesses understand this: if spending is not cut, taxes (or inflation) must eventually rise to make up the difference.

This is one result found in economist Alberto Alesina’s research on fiscal adjustments. Large gaps between revenues and spending create economic uncertainty for forward-looking investors who understand that spending levels determine the long-run tax rate. In this circumstance, cutting spending signals a commitment to keeping taxes low, and investors respond accordingly. In a 2020 working paper, John Cogan, Daniel Heil, and John Taylor show that holding down projected expenditure growth can boost short- and long-run private investment, personal consumption, and GDP growth. When deficits are high, cutting spending is its own supply-side reform.

If spending continues unchecked, history and arithmetic suggest that broad-based taxes are inevitable. Every other advanced economy that has built and sustains a large welfare state uses broad-based value-added taxes (VATs) and high wage taxes to fund it. According to a Cato Institute analysis, adopting a European-style tax regime would increase US middle-class tax bills by approximately $12,000 per person. This is the fiscal trajectory America is currently on.

The early warning signs that the political system will turn to tax increases instead of spending cuts are already evident. The tax cuts in 2017 and OBBBA were largely justified as economic stimulus that would pay for itself through faster economic growth. These claims are highly suspect, but they do show an implicit acknowledgement that the goal was not to reduce the size of the state, but rather to maximize revenue.

Even more worrying, President Trump and some Republicans are championing trillions of dollars in projected new revenue from tariffs, new corporate surtaxes, and other novel revenue sources. These efforts align with similar rhetoric from the political left, which insists that the deficit problem is simply a matter of not taxing the wealthiest Americans enough. These fiscal experiments—whether they be tariffs or wealth taxes—won’t come close to solving the deficit problem, but they reveal a burgeoning bipartisan willingness to accept higher indirect taxes instead of addressing expenditure growth.

The consequences of higher taxes on prosperity are stark. Economists Christina and David Romer found that a $1 tax increase in the United States has historically decreased GDP by about $3. Nobel Prize-winning economist Edward Prescott has also shown, to his surprise, “virtually all the large differences between the US labor supply” and those of Germany, France, and similar European countries are due to differences in tax systems. Higher taxes on wages, consumption, and investment suppress work, saving, and entrepreneurship. Higher taxes make us poorer.

Because tax hikes drag down economic growth, they are an ineffective way to address the deficit. Alesina’s research indicates that tax-based fiscal adjustments are “self-defeating,” as they tend to weaken the economy. This adds pressure to expenditure growth by increasing the use of countercyclical anti-poverty programs, which then requires still higher taxes to avoid a debt crisis, which in turn makes it harder to reduce debt ratios. This cycle of tax hikes, weak growth, and rising spending has historically made tax-based deficit reduction elusive.

Spending restraint sends a signal of credibility. It tells markets and taxpayers that today’s low taxes can be sustained tomorrow. By contrast, failing to cut spending all but guarantees future tax hikes. This is why budget hawks should stop treating deficit reduction as a goal in its own right. Spending restraint isn’t austerity; it’s supply-side stimulus.

Conclusion

The reconciliation fight revealed the limits of deficit rhetoric. Deficit hawks lost because they focused on a problem that most voters don’t feel directly. The real battle is over the size and scope of government. Without credible plans to restrain spending, America’s fiscal future points toward a European-style taxation model: less growth, fewer jobs, and higher burdens on the middle class.

The task for budget hawks is to redefine fiscal sustainability as ensuring the government does less and leaves more space for families, communities, and markets to work. Spending restraint must be sold with the same clarity and conviction as tax relief: as a promise of more opportunity, lower costs, and greater freedoms. Only by centering spending cuts will taxes remain low. This is why spending cuts matter. They are not just about balancing the books, but about preventing the continued proliferation of broad-based tax hikes. 

Adam N. Michel is director of tax policy studies at the Cato Institute.