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A public policy blog from AEI
Speaker John Boehner has told House Republicans that the GOP’s upcoming budget will balance the federal books in a decade, according to reporter Robert Costa of National Review. And I’m sure Budget Committee Chairman Paul Ryan will fashion a plan that does just that. But for any budget planner, torturing the numbers until they scream “We balance!”‘ is one thing. Matching tax and expenditure in a responsible, realistic way is another
Accomplishing the latter won’t be easy for the House GOP. Its 2013 “Path to Prosperity” budget didn’t quite manage the trick, although it would shrink the annual budget deficit considerably from nearly 8% of GDP in 2012 to around 1% in the latter half of the ten-year budget window. In the chart below, taken from the PTP budget, also notice the drop in publicly held debt as a share of GDP even without a balanced budget. A balanced budget is not necessary to reduce the debt-GDP ratio:
Team Ryan later released an addendum to this budget, one assuming its tax reform policies — lowering marginal rates, broadening the tax base — would produce faster GDP growth that was 0.5, 0.75, or 1.0 percentage point above CBO’s economic forecast for the decade. (The original PTP used CBO economic assumptions.) Depending on which of those three growth scenarios you plug in, the budget would balance in 2019, 2021, or 2025. It’s not yet known, of course, what sort of economic assumptions will be used in this new budget.
Some observations and questions:
1. Driving down spending to below 20% of GDP will be difficult, but it’s necessary to avoid more tax hikes. The most recent CBO forecast — which assumes a) the Budget Control Act spending caps and b) the sequester with its deep defense cuts — only manages to lower spending to 21.2% of GDP by 2018 after which it begins to rise again thanks in large part to rising Medicare costs. And even without the sequester, nondefense discretionary spending would be at historically low levels:
2. One way, in addition to reduced discretionary spending, that last year’s House budget lowers spending to below 20% of GDP is by lowering projected Medicaid spending by nearly $800 billion over the decade. It does this by converting the federal share of Medicaid spending into a block grant indexed for inflation and population growth. But is this too aggressive?
3. Just what tax breaks does the House want to scale back or eliminate as part of its tax reform plan? Reducing or eliminating some tax preferences, like those on investment income, would actually hurt economic growth. And will the House stick with its plan of consolidating the current six individual income tax brackets into just two brackets of 10% and 25%? Will the House continue to use the slower-growth CBO forecasts?
4. Yet another question: Will the House try to balance the budget in a decade without major Medicare reform until 2023? As last year’s PTP put it:
To strengthen the Medicare program to serve the needs of both current and future retirees, the budget would reform the Medicare program and put it on sound financial footing for generations to come. For those workers currently under the age of 55, beginning in 2023, those seniors would be given a choice of private plans competing alongside the traditional fee-‐for-‐service option on a newly created Medicare Exchange. Medicare would provide a premium-‐support payment either to pay for or offset the premium of the plan chosen by the senior.
5. I guess my point is that if you’re going to try and balance the federal budget within a decade, you need to make Medicare and Social Security reform part of the solution ASAP. And if you don’t do that, you a) leave yourself with a bigger problem in those out years, and b) force more drastic cuts than necessary in everything else over the next decade.
Lots for the GOP consider.
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