Game on. Five months after the president's bipartisan deficit commission laid down its vision for how to address our federal fiscal straits, and nearly three months after President Obama presented his federal budget proposal for 2012 -- which pretty much ignored the recommendations of his deficit commission -- we finally have specific spending and saving proposals from the Republican side of the aisle.
The 2012 budget proposal championed by House budget committee chairman Paul Ryan lays out more than $6 trillion in spending cuts. An analysis by the Congressional Budget Office concludes that federal spending (excluding debt interest payments) would equal 14 percent of GDP in 2050; it is currently on a path to be 26 percent. Federal debt would reach 10 percent of GDP in 2050; its trajectory under current law has it reaching 90 percent of GDP in 2050. And the Ryan budget gets the federal budget to running at a slight surplus in 2050; under existing law, the deficit would amount to 4 percent of GDP in 2050.
How to get all of that accomplished? Well, the main savings comes from transforming Medicare from a program that pays for care that is needed (with certain out-of-pocket expenses) to a program that pays a fixed annual benefit and requires beneficiaries to cover more of the their health care costs. The CBO estimates beneficiaries' share of premiums and out-of-pocket costs would be more than 60 percent under the Ryan plan, compared to 35 percent today. The other big ticket savings are from Medicaid cutbacks, with additional savings coming from rolling back discretionary spending programs (excluding defense) to their pre-2008 levels, and freezing those budgets for five years.
To be clear, with a Democratic-controlled Senate and a Democrat in the White House, the Ryan budget proposal is not going to be enacted for 2012. In fact, 2012 is beside the point. This is all about big-picture policy considerations that will define the shape and scope of the federal government for decades. It's hard to negotiate when the other side isn't yet at the table, but with Ryan bringing the Republicans to the table, we may be one important step closer to a serious debate on the future role of the federal government, a debate that will surely extend past 2012 budget talks in Congress and become a centerpiece of the 2012 presidential election process.
Here's a cheat sheet of what the Ryan 2012 federal budget proposal sets out to tackle:
What would get axed:
- Health care reform. The Ryan budget calls for rescinding the Affordable Care Act. Bad news for the 32 million uninsured who would gain coverage under the new plan.
- Fannie Mae and Freddie Mac. The issue with what to do with Fannie and Freddie over the long-term is already on the table in Washington. Ryan calls for eventually dismantling the programs and also scaling back the role of the Federal Housing Administration (FHA). This is another call for policy change that would ultimately increase the cost of mortgages.
What would get a major overhaul:
- Medicare. Beginning in 2022, the eligibility age would be slowly increased from its current 65 to 67 by 2033. (Anyone 55 or older at the end of 2011 would not be impacted by any of the plan's proposals.) Echoing Ryan's Roadmap for America from last year, beneficiaries would receive an annual voucher -- the proposal prefers to phrase it as "premium support" -- from which they would purchase coverage from private plans. If the cost of the plan exceeds your stipend, you're on the hook for the difference. The annual stipend would be adjusted each year using the general rate of inflation, which has typically run at less than half the rate of medical inflation. While Ryan proposes means-testing to assure the safety net exists for lower-income Americans, higher income beneficiaries would receive a lower voucher amount, with those in the top 8 percent of income receiving 50 percent or less of the base payment proposed in the Ryan budget. That's going to add to already hefty retiree medical expenses. According to Fidelity, a 65-year old couple retiring this year is looking at about $230,000 in out-of-pocket expenses beyond what is covered by Medicare at its present benefit levels; remove health care reform from the equation and it jumps to $250,000. And that is all before considering the costs of Ryan's plan. Ryan believes the "premium support" model will make consumers more cost conscious and that in turn will drive down medical costs. MoneyWatch's Mark Thoma is among many who find that to be a dubious claim and the entire Medicare proposal "immoral." The GOP budget did not give a specific savings figure from overhauling Medicare.
- Medicaid. This would switch to a block-grant program where states are given an annual chunk of cash and that's it, which would mean massive cuts in federal Medicaid spending. The CBO estimates federal Medicaid payments would be 35 percent lower in 2022 and nearly halved by 2030 under the Ryan plan. If states can't wring out cost savings, cuts to Medicaid or other state programs seem likely. The budget savings: $750 billion over 10 years.
- Social Security. The Ryan budget spends a lot of time explaining why benefits need to be scaled back, laying out all sorts of graphics on longevity and demographic issues and spelling out the funding problems. But the budget proposal chose to not make any proposed cuts to the program, suggesting only that lawmakers be "forced to come to the table" to make the necessary fixes.
Also on the negotiating/cutting table:
- Defense. If there was a clear "winner" here, it is the defense budget. Ryan's proposal is the same as the Obama budget: accept the $178 billion decrease in defense spending (it's not really a cut; just less growth in spending) over the next 10 years already proposed by Secretary Gates. And Ryan calls for $100 billion of that savings to be plowed back into the defense budget.
- Discretionary spending other than defense. If you think you've been trimming your budget, just wait to see what happens to federal discretionary programs. Ryan wants all the budgets rolled back to where they were before 2008 (that is, before the stimulus spending started and raised this part of the budget pie by 24 percent), and then he wants a five-year freeze at those levels. The Environmental Protection Agency was called out for its budget creep of the past few years, and was an opportunity for Ryan and the Republicans to make it clear they see scaling back the EPA as a way to stifle any further cap and trade talk.
- The tax code. The top individual income tax rate would fall to 25 percent from its current high of 35 percent, and the top corporate tax rate would also be capped at 25 percent. But Ryan also proposes, albeit without laying out specifics, that the rate cuts would be offset by closing all sorts of loopholes. That could mean it is revenue neutral at the end of the day.
- Federal workers. The GOP budget calls for reducing the federal civilian workforce by 10 percent over three years, freezing pay for five years, and requiring federal workers to put more of their current pay toward their pension benefits. All that is deemed to save $375 billion over 10 years.
- Farm subsidies. Ryan's budget calls for reducing farm subsidies given the sharp rise in commodity prices. The budget also calls for farmers to assume more of the cost of crop insurance. The proposed cuts would save $30 billion over 10 years.
- Detroit. Ryan calls for the federal auto fleet to be reduced by 20 percent, which his plan says would save "hundreds of millions." For a document focused on the $14 trillion debt and $1.5 trillion deficit, that seems like small potatoes. But it did give the GOP the chance to take a swipe at the Obama administration bailout of Detroit, saying that "in 2010, the federal government reported a worldwide inventory of over 662,000 vehicles and spent $4.6 billion on its fleet. In addition, the 2009 stimulus bill provided $300 million to 'green the federal fleet' by purchasing 17,205 vehicles -- a back-door bailout for the already bailed-out automakers."
Photo courtesy Flickr user Gage Skidmore
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