ISSUE BRIEF No. 3546 | MARCH 21, 2012

The Ryan Budget: Confronting the Nation’s Spending Crisis Alison Acosta Fraser and Patrick Louis Knudsen

n the few months since Toward that goal, House Budget It should provide a broad framework IWashington’s dramatic debt ceil- Committee chairman (R– for spending and revenue priorities ing confrontation, America’s fiscal WI) has released a proposed federal and for achieving balance. It must situation has only worsened. Federal budget resolution for fiscal year (FY) also set out at least thematically the spending is set to soar past previ- 2013 entitled The Path to Prosperity: fundamental policy reforms needed ous record-shattering levels, endan- A Blueprint for American Renewal. to achieve the fiscal objectives. A gering the economic future of the The plan lays out a comprehensive budget should be taken as a whole nation. This is a moral issue because series of solutions to fix the nation’s and measured in a comprehensive younger generations will be forced twin crises of spending and debt. It way—not by simply checking a series to bear either staggering levels of rolls back the spending excesses of of boxes. Still, certain benchmarks debt or crushing taxes, or both. It the past, tackles entitlement pro- can help guide the evaluation: is also a political challenge to this grams, makes defense a priority, and nation’s democracy as more and undertakes an important growth ■■ Does it begin decisive entitle- more Americans become dependent agenda to unleash America’s free ment reform? The main sources on government benefits while law- enterprise system and get Americans of spending growth are the major makers seem unable to take decisive back to work. This budget is not per- entitlement programs: , corrective action. The spending- fect; few consensus political docu- , and Social Security. driven debt crises of Greece and Italy ments can be. It should be bolder Any serious budget should offer are clear and compelling evidence in implementing its entitlement substantive proposals to improve that America must urgently change reforms. It should strive for more benefits and make these programs course. The only way to avoid a simi- aggressive spending reductions. It sustainable and affordable in both lar fate is to make bold, substantive is slow to reach balance, largely the the short term and the long term. changes in the size, scope, and pur- consequence of avoiding changes in This must include the repeal of pose of the federal government. Social Security and slowly phasing in Obamacare. health entitlement reforms. Still, this ■■ This paper, in its entirety, can be found at plan, like that passed by the House Does it cut spending sharply http://report.heritage.org/ib3546 last year, substantially advances the and quickly? Spending is the Produced by the Thomas A. Roe Institute serious and necessary conversation root of all other fiscal problems. for Economic Policy Studies about securing America’s future and So any budget should immediately its legacy of freedom, opportunity, and consistently rein in spending. 214 Avenue, NE Washington, DC 20002–4999 and self government. (202) 546-4400 | heritage.org ■■ Does it avoid tax hikes? Raising Nothing written here is to be construed as necessarily Benchmarks for the taxes on American families, busi- reflecting the views of The Heritage Foundation or as an attempt to aid or hinder the passage of any bill Path to Prosperity nesses, and investors is the wrong before Congress. A budget contains many elements. solution. Higher taxes slow the ISSUE BRIEF | NO. 3546 MARCH 21, 2012

CHART 1 is necessary to preserve America’s liberty and prosperity. It should The Heritage Plan Would Reverse Trajectory be fully funded. Cutting defense of Unsustainable Debt spending is not a responsible solu- Without significant spending reforms, the national debt is projected to tion to getting spending under reach 185 percent of GDP by 2035. Under the Heritage plan, federal control. spending would be reduced by about half, which would dramatically lower the debt to 30 percent. ■■ Does it move swiftly to a bal- anced budget? The federal gov- PUBLICLY HELD DEBT AS A PERCENTAGE OF GDP ernment should balance its budget 200% by getting spending under control. 185% CURRENT By 2023, PROJECTIONS national debt is The best benchmark for mea- projected to reach suring progress in fixing the bud- 150% 100 percent of the get mess is Heritage’s Saving the economy American Dream: The Heritage Plan to Fix the Debt, Cut Spending, and Restore Prosperity.1 The Heritage 100% proposal features bold, sweeping changes to transform entitlement programs that guarantee America’s seniors economic security in retire- 30% ment and reins in their costs to make 50% them affordable. It has major spend- HERITAGE ing reductions in other parts of the PLAN budget and ensures full funding for national defense. It also features a 0% bold, new pro-growth tax reform 2010 2015 2020 2025 2030 2035 plan. Source: Congressional Budget O ce, The Long-Term Budget Outlook, June 2010, at The Ryan budget does not meet http://www.cbo.gov/publication/21546 (March 20, 2012); and calculations by the Center for Data all the goals of Saving the American Analysis based on data provided by the Peter G. Peterson Foundation. Dream, but it takes strong steps toward a number of them. IB 3546 heritage.org Entitlement Reform Entitlements constitute nearly 60 economy and cost jobs. Higher freedom and faster growth. Faster percent of total federal spending, and taxes also mean higher govern- growth generates more revenues— their runaway growth—especially ment spending. without tax hikes—and naturally from Medicare, Medicaid, and Social lowers spending on safety net and Security—represents the great- ■■ Does it contain pro-growth tax anti-poverty programs. est threat to the nation’s fiscal and reforms? Fixing the budget mess economic health. The Ryan budget and ensuring a vibrant economy ■■ Does it ensure a strong nation- begins to tackle Medicare, Medicaid, requires a strong growth agenda. al defense? Defense is a core and other anti-poverty programs. A simpler, pro-growth tax code constitutional responsibility of The budget calls for immediate would result in greater economic the federal government, one that entitlement spending reductions of

1. Stuart M. Butler, Alison Acosta Fraser, and William W. Beach, eds., Saving the American Dream: The Heritage Plan to Fix the Debt, Cut Spending, and Restore Prosperity, The Heritage Foundation, 2011, at http://www.heritage.org/research/reports/2011/05/saving-the-american-dream-the-heritage-plan-to-fix-the-debt-cut- spending-and-restore-prosperity.

2 ISSUE BRIEF | NO. 3546 MARCH 21, 2012

CHART 2

Entitlement Spending Will PERCENTAGE OF GDP More Than Double by 2050 20% 18.2% Total 16.9% Spending on Medicare, Medicaid and the Obamacare subsidy program, and 14.7% 5.9% Social 15% Security Social Security will soar as 78 million 6.1% baby boomers retire and health care 12.1% costs climb. Total spending on federal 10.3% 6.0% Medicaid, 4.7% health care programs will triple. 10% 5.2% Obamacare 8.3% 4.2% Subsidy 4.8% 3.5% Program 4.2% 2.8% 5% 1.9% 1.5% 6.6% 7.6% Medicare Source: Congressional Budget Oce, 4.1% 5.2% The Long-Term Budget Outlook, June 30, 2010, 2.7% 3.6% at http://www.cbo.gov/publication/21546 0% (March 20, 2012). 2005 2010 2020 2030 2040 2050

IB 3546 heritage.org

$18 billion in 2012–2013 and $331 that is financially unsustainable.2 risk. For example, upper-income billion over 10 years. These changes Medicare. The House bud- seniors would pay more than the would be driven by the budget recon- get would transition the current standard premium, and lower- ciliation process, with firm instruc- Medicare program into premium income recipients would qualify for tions to committees of jurisdiction to support beginning in 2023. Premium additional assistance. Additionally, ensure that they really occur. About support provides seniors with high-risk beneficiaries would secure $70 billion of the reductions would defined financial contributions from greater payments to offset their go to partially offset automatic cuts the government to apply to health higher costs, and a risk-adjustment known as “sequestration,” which care plans that they choose for mechanism would guarantee sicker would devastate national defense. themselves, in contrast to one-size- Medicare patients access to medi- The remaining spending reductions fits-all, government-funded, govern- cal care—and ensure continued plan would come from changes to rein in ment-regulated, and government- participation and market stability longer-term entitlement spending— controlled health care. Plan options in the new program. The market- especially in the government’s health would include traditional Medicare based bidding and requirements that programs. and would compete alongside private Medicare compete head-to-head Obamacare. On health care, health plans in a market called the with private plans for patients’ dol- one of the most important policy “Medicare Exchange.” The govern- lars closely resembles Heritage’s plan changes in the Ryan budget is the ment contribution would be based in Saving the American Dream. repeal of Obamacare. Not only does on a competitive bidding process. A Most experts agree that compe- Obamacare add trillions in new senior could choose a more expen- tition in health care would control spending and billions in tax hikes sive health plan than the government costs. But to assure budgetary savings, that the country cannot afford; it contribution but would have to pay the Ryan budget includes a cap on expands on a failed price-control the difference. Medicare spending at the growth of model for Medicare, massively broad- The government’s defined contri- gross domestic product (GDP) plus 0.5 ens a broken Medicaid program, and bution in Medicare would be further percent. The budget also includes pro- introduces a new subsidy scheme adjusted by income, geography, and cess reforms that disclose long-term

2. See The Heritage Foundation, “The Case Against Obamacare: A Health Care Policy Series for the 112th Congress,” at http://www.heritage.org/research/projects/ the-case-against-obamacare.

3 ISSUE BRIEF | NO. 3546 MARCH 21, 2012

unfunded liabilities, forcing Congress Entitlements: and businesses to create new jobs. to confront their growing costs. It What Is Missing Other positive features of the also establishes mechanisms for The Ryan budget’s effort to tax plan include abolition of the controlling longer-term costs of advance entitlement reform should Alternative Minimum Tax and a entitlement programs, taking them be stronger. Implementation move to a territorial business tax off budgetary autopilot. At the same of Medicare premium sup- in place of our worldwide system. time, the Ryan budget calls for repeal- port is delayed for 10 years— This kind of growth-oriented tax ing Obamacare’s rationing panel, “grandfathering the grandparents,” plan would help promote a stronger the Independent Payment Advisory as Ryan puts it. This is one of the economy along with more wage and Board, which is important to do with- principal reasons the budget does not job growth. in the full repeal of Obamacare. balance in the coming 10 years. The proposed tax reforms would Medicaid. The Ryan budget In addition, the budget contains have been far stronger, however, had replaces the open-ended financing no Social Security reforms, resort- they eliminated taxes on capital arrangement with a fixed federal ing instead to a mechanism that gains, dividends, and the death tax. contribution to the states. In addi- would trigger reforms. It does not tion, the proposal offers states great- include basic steps to rein in the cost Defense er flexibility in designing their pro- of Social Security, such as gradually A strong national defense is both a grams to better help those in need. raising the retirement age or using a key responsibility of the federal gov- Putting Medicaid on a budget more realistic measure for cost-of- ernment under the Constitution and is a critical first step to fundamen- living increases. Such changes would essential to protecting Americans’ tally reforming Medicaid. The next be important steps to shoring up liberties. As such, Ryan is certain- step should be to help mothers and Social Security’s finances. ly correct that America needs “a children out of the poorly perform- military that keeps America safe by ing Medicaid program and give them Growth-Oriented Tax letting national strategic priorities access and assistance to purchase Reform—Not Tax Hikes determine spending levels, not the private health insurance options The root of the government’s defi- other way around.” However, Ryan’s while working with the states to cit problem is excess spending, not a budget restores only about half the develop a more patient-centered lack of revenue. The budget resolu- core defense funding cuts proposed safety net for the poor elderly and tion recognizes that the economy by President Obama’s over a 10-year those with disabilities. cannot withstand the impact of period. Other Health Care. Elsewhere impending tax hikes at the end of Congress needs to recognize that on the issue of health care, the Ryan this year and stops the mammoth covering the full cost of the overseas budget notes the current tax treat- job-killing, anti-growth tax increas- contingency operations, including ment of health insurance, creates es coming on January 1, 2013. “resetting” the force drained by a a variety of distortions in the mar- Instead, the budget resolution decade of combat, will require fund- ketplace, and recommends steps to reduces the highest-in-the-world ing that extends long beyond the end address these flaws. Ideally, changes corporate tax rate from 35 percent of the operations themselves. to the tax treatment of health insur- to 25 percent and reduces the top Ryan’s budget proposal takes ance would replace the current tax individual income rate to the same some but not enough steps to begin structure with individual tax relief level. The lower corporate tax rate to address the most immediate that helps consumers buy their own would reverse the flow of jobs to for- threat to maintaining the nation’s policies. This tax change is critical eign countries, and the lower individ- military capabilities. This is the in moving toward a patient-centered, ual income tax rate would improve threat of the “sequestration” provi- market-driven health care system. incentives for workers and business- sion for defense in last year’s Budget es to produce more and for investors Control Act. President Obama, by

4 ISSUE BRIEF | NO. 3546 MARCH 21, 2012

CHART 3 The Numbers The Big Picture When its collection of policies Cutting spending is requisite to Obama Budget Would is boiled down to the numbers, the solving the nation’s budget crisis. But Make Defense the Ryan plan reduces budget defi- setting numbers alone will not get Lowest Budget Priority cits from $1.2 trillion this year (7.6 the job done. Instead, each one of the percent of GDP) to $166 billion (0.8 elements described above is an inte- OUTLAYS IN TRILLIONS OF DOLLARS percent of GDP) in 2018, after which gral component to a transformative $3.0 they tick up again to $287 billion (1.2 budget. Ryan’s budget, and any other percent of GDP) in 2022. The bud- budget, should be evaluated on how get begins to stabilize debt, reduc- well it delivers on all these elements $2.5 ing debt held by the public from 73.2 together. Ryan’s budget takes strong Social Security, Medicare, and percent of GDP now to 62.3 percent strides in the right direction. It cuts Medicaid in 2022. spending, in the budget year and into The budget also proposes caps on the future—from both discretionary $2.0 total spending and on major catego- and mandatory accounts—provides ries of spending and requires peri- substantive entitlement reforms, and odic reviews of entitlement programs avoids tax hikes. It also outlines a tax $1.5 Domestic to take them off autopilot spend- reform that would strengthen the Spending ing. The critical point, after all, is to economy and by implication further reduce spending, which drives all strengthen government finances other fiscal problems. Over the long through stronger economic growth. $1.0 Interest term, the budget brings spending There is a great deal more work down from its unsustainably high to do, as the Heritage plan Saving level of 23.4 percent of GDP this year the American Dream reflects. $0.5 Defense to 19.3 percent in 2018. Spending Nevertheless, the Ryan budget repre- then edges back upward as more sents real progress toward tackling baby boomers retire—reaching 19.8 the nation’s fiscal and economic chal-

$0 percent of GDP in 2022—but remains lenges. But this progress will become below 20 percent (the average of reality only if Congress follows 2011 2015 2020 2022 the past 50 years). By 2040, spend- through with legislation that delivers Source: Heritage Foundation calculations ing is down to 18.75 percent of GDP. these kinds of strong policy changes. based on data from Oce of Management As noted earlier, “grandfathering —Alison Acosta Fraser is Director and Budget, Budget of the United States Government, Fiscal Year 2013, February 13, the grandparents” and not tackling of and Patrick Louis Knudsen is the 2012, at http://www.whitehouse.gov/sites/ Social Security makes it much more Grover M. Hermann Fellow in Federal default/files/omb/budget/fy2013/assets/ budget.pdf (February 13, 2012). difficult to reduce spending more and Budgetary Affairs in the Thomas A. thus balance the budget before the Roe Institute for Economic Policy IB 3546 heritage.org late 2030s. Studies at The Heritage Foundation. The budget holds non-war discre- Nina Owcharenko, Curtis Dubay, and tionary spending in 2013 to $1.028 Baker Spring also contributed to this contrast, proposes to make defense trillion, $19 billion below the Budget report. the lowest budget priority of the fed- Control Act ceiling and $15 billion eral government by later this decade below the 2012 limit—which, if enact- and threatens to veto bills that defer ed by appropriations bills, would be a defense sequestration.3 real cut from prior year spending.

3. Baker Spring, “Obama’s Defense Budget Makes Protecting America Its Lowest Priority,” Heritage Foundation Backgrounder No. 2658, March 1, 2012, at http:// www.heritage.org/research/reports/2012/03/obamas-defense-budget-makes-protecting-america-its-lowest-priority.

5