Five Ways the Chasm Between Democratic and Republican Budget Plans is Growing

By :: January 24th, 2013

If their leaders’ public statements are to be believed, the fiscal chasm between the political parties is widening. And it is hard to see how it can be bridged.   

Congressional Democrats and Republicans have agreed to put off the next budget crisis for a month or so. This is a good thing, especially considering the alternative. And they’ll try to write a budget through the formal legislative process rather than starting with high-level negotiations with the White House. This is euphemistically known as regular order though it is hardly regular (it has not been used since the George W. Bush Administration) and there is nothing orderly about it.

The trouble is, Republicans and Democrats are setting out fiscal goals that are light-years apart.  Maybe these are merely opening bids. But without huge concessions, budget talks will be futile. Here are five stumbling blocks to a deal:   

The Next Crisis. While the House GOP agreed to delay the battle over the debt limit until summer, it will try to use two  March deadlines--a package of automatic across-the-board spending cuts and a looming government shutdown-- as leverage to slash government .  Democrats prefer March’s automatic spending cuts to the even deeper reductions Republicans are aiming for.

Spending Cuts. House Budget Committee chair Paul Ryan (R-WI) wants a fiscal plan that would balance the budget in 10 years, and he’d do it entirely by cutting spending. He also wants broad-based individual tax reform that raises no more money than current law. Democrats flatly reject both ideas.

Ryan’s promise to balance the budget in a decade with no tax increases implies cuts in federal spending unseen since the U.S. disarmed after World War II. Most lawmakers are horrified that the automatic spending cuts now scheduled for March would cut military spending by 9.4 percent and domestic spending by about 8 percent. (And note this so-called sequester would exempt Social Security and Medicaid as well as Medicare benefits from any cuts).

But reaching balance in a decade with only spending cuts would make those reductions look like pocket change. It would require slashing all federal outlays by at least 13 percent and probably more in 2022 alone. No Democrat will support it.

That spending cut is my rough estimate based on adjusting the Congressional Budget Office’s Aug, 2012 baseline for the tax and spending changes in the American Tax Relief Act. It assumes, however, that Congress lets all temporary tax extenders expire, ends all funding for the wars in Iraq and Afghanistan, and allows physicians to get whacked with a huge cut in Medicare payments. If those things don’t happen, Ryan’s task will be even tougher.  

The fiscal framework.  Where Ryan would get it all his budget savings from spending cuts, new Senate Budget Committee Chair Patty Murray (D-WA) says any additional deficit reduction should be divided equally between spending cuts and new revenues.

The Goal Line. But Democrats and Republicans don’t even agree on the goal line in this game. While Ryan wants balance in a decade, Democrats are not thinking about balancing the budget at all. Their aim: Stabilize the debt so it does not grow faster than the economy. This would set the ratio of debt to Gross Domestic Product at about 73 percent.

For a sense of how different these goals are, Democrats would have to reduce cumulative deficits by about $1.4 trillion over the next decade to stabilize the debt. Ryan would have to cut spending by more than $700 billion in 2022 alone.

Tax reform. Both sides claim they want to do it. But Republicans insist the new tax law raise no more money than the current code while Democrats demand it generate new revenues to help reduce the deficit. Until they agree on how much a new revenue code should raise, any tax code rewrite is a dead letter.

To summarize: The House will soon pass a budget resolution that calls for balance in 10 years accomplished entirely with spending cuts. The Senate will pass a budget that is not intended to get to balance at all and will divide any deficit reduction equally between taxes and spending.  Both senators and congressman will get paid, per the terms of the new debt limit extension, but it is hard to see how these dueling measures will get us any closer to a long-term budget plan.

 

 

 

 

 

14Comments

  1. Michael Bindner  ::  4:27 pm on January 24th, 2013:

    The Budget Control Act provides adequate spending caps to pass appropriations. The question of Medicare should safely be finessed until we know whether health insurance stock investors are more risk averse than the uninsured (even with subsidies). If the health insurance stock prices become worthless, the automobile bailout will look like small potatoes and what will come out of this will be some form of national or state based single-payer program – or at least a subsidized public option along with repeal of guaranteed issue. Either one will require some form of broad based payroll or consumption tax, where slipping in Medicare and Medicaid fixes will seem like an afterthought.

  2. SteveinCH  ::  9:02 pm on January 24th, 2013:

    Ryan’s promise to balance the budget in a decade with no tax increases implies cuts in federal spending unseen since the U.S. disarmed after World War II. Most lawmakers are horrified that the automatic spending cuts now scheduled for March would cut military spending by 9.4 percent and domestic spending by about 8 percent. (And note this so-called sequester would exempt Social Security and Medicaid as well as Medicare benefits from any cuts).

    This argument is beyond inapt and is instead simply incorrect.

    Let’s assume that spending by fiscal 2022 declines from fiscal 2012 levels to the the level of tax receipts projected in 2022.

    The tax receipts can be deduced by taking the CBO alternate forecast and adding about 0.4% of GDP for the recent tax changes. That would give us a 2022 revenue total of about 19.0% of GDP versus a 2012 spending level of 22.8% of GDP. That’s a decline of 3.8% of GDP over a decade.

    Now let’s compare that to two things. The decline in WWII (say 1945 to 1955) was nearly 25% of GDP from the low 40s to the high teens. It seems a little odd to compare a decline of 3.8% of GDP to one of 20 plus percent doesn’t it?

    And let’s compare to the decline from say 1990 to 2000…turns out that was a decline of 3.7% of GDP. So is 3.8% more like 3.7% or more like 20%. I wonder…

  3. Vivian Darkbloom  ::  3:05 am on January 25th, 2013:

    There are a couple of different ways to look at a “cut” in spending. Gleckman’s paragraph’s on Ryan’s proposed “cuts” suggests that these are actual reductions from current spending rather than a reduction in the growth of spending. He does not, in respect of Ryan’s proposal, refer at all to spending as a percentage of GDP, as you do. So, in this sense, you are being generous.

    On the other hand, if the comparison is to spending as a percentage of GDP, one might compare the “cut” or, better, the “reduction in growth” of spending to (1) current spending/GDP levels or (2) to projected spending/GDP levels.

    As you note, the 2012 spending/GDP is 22.8 percent of GDP. However, under the CBO alternative scenario in the August 2012 document, spending/GDP is projected to be 24.1 percent of 2022 GDP (See Table 1-6). The latter might be more appropriate if you are comparing it to 2022 revenues. If one takes the latter number, the spread is 5.1 percent. These are quite different measures as to what a “cut”, or even a “reduction in growth” of spending means.

    Even if we take the figure 5.1 percent of GDP, I would expect the actual percentage to be lower due to the following factors:

    1. The proposal to combine this with real tax reform should have a positive effect on future GDP;
    2. The 24.1 percent figure assumes that the $1.2 trillion sequester required by the Budget Control Act does not take effect (see note to Table 1.6);
    3. The CBO figure of 24.1 percent of GDP for spending in 2022 includes interest expense per their footnote to Table 1-6. Reduction in spending and balancing the budget by 2022 would have the effect of lowering debt and therefore interest expense (and likely the effect of lowering borrowing rates on the existing debt).

    Thus, the actual reduction is likely just as close to your 3.8 percent estimate than it is to 5.1 percent. It is, in any event, very close to the reduction in spending in the 1990’s than to the post-WWII period. And, is it fair to say that Ryan’s proposed “spending cut” as a percentage of GDP should include $1.2 trillion in spending cuts already agreed to and required by law? Why are these “Ryan’s cuts”? If that is not taken into account, it’s even more likely the figure is closer to 3.8 percent.

    With respect to the interest expense portion of outlays, you perhaps remember that I wrote on January 4, 2012 that Howard likely made a mistake in his column of January 3, 2012 in which he stated:

    “By 2022, spending will rise to about 22.3 percent of GDP and revenues to about 19.4 percent, and the deficit will be back up to 2.9 percent of GDP. However, spending will be about 1.8 percent lower than under CBO’s most likely scenario, and revenues about 0.8 percent higher.”

    So, per the above, Howard indicated that under the alternative fiscal scenario, spending would be 24.1 percent (22.3 plus 1.8) of GDP in 2022. He further stated that that was excluding net interest expense. However, as I pointed out earlier, the CBO data clearly contradicts that. I previously overlooked the footnote to Table 1-6 that even more clearly demonstrates that error. I would be interested to know why the TPC has not corrected that.

  4. Top Links: GOP’s new election strategy, ‘Why win when you can gerrymander?’ — MSNBC  ::  11:07 am on January 25th, 2013:

    […] Oh, and the Ryan budget is back. “Ryan’s promise to balance the budget in a decade with no tax increases implies cuts in federal spending unseen since the U.S. disarmed after World War II.” (Tax Policy Center) […]

  5. Top Links: GOP’s new election strategy, ‘Why win when you can gerrymander?’ | Now  ::  11:15 am on January 25th, 2013:

    […] increases implies cuts in federal spending unseen since the U.S. disarmed after World War II.” (Tax Policy Center) The NRA has released what it calls a “national scientific poll” (so you know it’s quality) […]

  6. Top Links: GOP’s new election strategy, ‘Why win when you can gerrymander?’  ::  2:56 pm on January 25th, 2013:

    […] Oh, and the Ryan budget is back. “Ryan’s promise to balance the budget in a decade with no tax increases implies cuts in federal spending unseen since the U.S. disarmed after World War II.” (Tax Policy Center) […]

  7. Steveinch  ::  4:21 pm on January 25th, 2013:

    Great post Vivian. We could of course get into another discussion about the value of the word cut when what is meant is “reduction from an arbitrary level of future spending” but I know we agree on that point.

    Pretty much regardless of how you want to define the word, what Ryan would need to accomplish would look quite similar to what happened in the 1990s. My recollection of the 90s was that it worked pretty well economically.

    In fact, I thought I had been told that returning to the tax rates of the 90s would be good because the 90s were so good economically. One wonders why this logic doesn’t apply to changes in or levels of spending.

  8. Serrurier muel  ::  9:38 am on February 20th, 2013:

    Come on Michael. That’s not totally true.

  9. Syl Spin  ::  4:52 am on February 21st, 2013:

    Indeed, tax reform is a very picky subject. One does need a real vision to lead such things to the end.

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