The Magazine

Conan the Budget Cutter

Memo to Arnold: Get tough on spending and don't raise taxes.

Oct 20, 2003, Vol. 9, No. 06 • By FRED BARNES
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CAN ARNOLD SCHWARZENEGGER govern California? Of course he can, so long as he adheres to rule number one for Republican governors: Don't raise taxes without first making a heroic effort to wipe out a deficit by spending cuts alone. If spending cuts won't suffice, borrow to cover the shortfall. And if borrowing isn't an option, make sure any tax hike is tiny and temporary. Two conservative Republican governors, Bob Riley of Alabama and Kenny Guinn of Nevada, have violated this important rule of political survival and now their governorships are in ruins. Riley was humiliated when voters in a statewide referendum overwhelmingly rejected his proposed tax hike. Guinn sparked a recall drive that's serious but likely to fail.

For Schwarzenegger, there's only one way to redeem his campaign promise of no new taxes (bets, of course, being off in the event of a major earthquake or 9/11-like terrorist attack). That's by submitting a budget in January with no new taxes.

From all indications, Schwarzenegger understands this. Post-election, he's renewed his pledge to concentrate on spending, not taxes, and faulted Gov. Gray Davis and the Democratic legislature for "spending, spending, spending" as revenues fell off. Nor are Schwarzenegger's advisers seeking wiggle room on taxes. "He's going to solve the budget problem by cutting spending and not by raising taxes," said former secretary of state and treasury secretary George P. Shultz, one of Schwarzenegger's closest advisers.

Another sign of Schwarzenegger's intentions is his hiring of Donna Arduin, Florida governor Jeb Bush's budget director, to conduct an audit of California's finances. If he'd wanted to use the audit to justify raising taxes, he wouldn't have summoned Arduin. Her reputation is for locating spending cuts and averting tax increases. She did exactly that for three Republican governors--Bush, John Engler of Michigan, and George Pataki of New York. "She knows where the bodies are buried" in state budgets, says Steve Moore of the tax-phobic Club for Growth.

Still, given California's humongous deficit, the question is whether it's feasible to rely solely on spending cuts. Democrats insist it's not. "The math is tough," according to state treasurer Phil Angelides. The California press--and the national media, for that matter--are filled with stories about the difficulty of finding enough spending cuts. "Many budget makers are skeptical that the audit . . . will find billions of dollars in waste . . . or turn up the kinds of surprises [Schwarzenegger] predicts will provide a guiding light toward fiscal health," wrote Evan Halper and Jeffrey Rabin in the Los Angeles Times.

In truth, the budget is a target-rich environment. For 16 years, spending by the Democrat-controlled legislature was restrained by Republican governors, first George Deukmejian, then Pete Wilson. And from 1979 to 1990, spending was limited by law to no more than the rate of population growth and inflation combined. But in 1998, with the election of Davis, Democrats took full control of the California government. Spending skyrocketed 40 percent in the past four years. Could it be possible that all this new spending involves essential government services the public can't do without? Not a chance.

Credible budgets with deep spending cuts are not unknown in California. Last February, state senate Republicans offered a budget that included $5.1 billion in reduced spending followed by a two-year freeze on new expenditures. In July, Republicans released a 58-page list of cuts totaling $2.72 billion, some of which Davis had proposed but then abandoned. Democrats rejected them, though the cuts would have reduced the amount of borrowing needed for a balanced budget. Tom McClintock, the Republican state senator who ran against Schwarzenegger in the recall election, has urged a more radical approach--balancing the budget by suspending required spending and reducing current expenditures 9.5 percent.

To produce a balanced budget without new taxes, Schwarzenegger may not have to find cuts of $12 billion as currently envisioned. Jim Brulte, the Republican leader in the senate, says the economic recovery should generate $2 to $3 billion in revenue beyond current projections. Savings could also come from reduced debt payments. Brulte, whose top aide has been appointed Schwarzenegger's transition staff director, says the new governor "should be able to do it without a tax increase."

Democrats in the legislature bitterly oppose a diet of spending cuts. "If [Schwarzenegger] wants to take money away from the aged, blind, and disabled, or if he wants to take money away from poor women and children, I don't think so," said senate majority leader John Burton of San Francisco. "Not while I'm around." Democrats have enormous clout not only because of majorities in both legislative houses, but also because it takes a two-thirds vote to pass a budget.