House Budget Committee Chairman Rep. Paul Ryan, R-Wis., this morning unveiled an updated budget proposal aimed at overhauling Medicare and Medicaid, reforming the tax code and putting the nation on a sustainable fiscal path.
If implemented, the plan would reduce deficits by $3.26 trillion from 2013 through 2022 relative to President Obama’s budget, according to the Congressional Budget Office, while averting massive tax hikes.
In many ways, the proposal is similar to the one Ryan authored and the House GOP passed last year, with several key differences.
Last year, Ryan called for transitioning to a “premium support” Medicare system in which seniors use government subsidies toward the purchase of privately administered health insurance plans. This year, he keeps that general structure, but preserves the traditional Medicare plan as an option. This change did not come as a major surprise.
This past December, Ryan co-authored a similar Medicare reform with liberal Democratic Sen. Ron Wyden of Oregon and for months, Ryan has been signaling that he would integrate this approach into his new budget. Preserving traditional Medicare as an option is politically safer. But I question whether there could ever be a truly level-playing field when a government plan is competing against private plans. Ryan has downplayed the significance of this difference, and has said he actually intended to adopt the same sort of plan last year, but ran into “complications” with the CBO. He has always emphasized the idea that there’s an emerging consensus on reforming Medicare by keeping costs down through more individual choice and competition, as opposed to Obama’s idea of having a centralized bureaucracy attempting to contain spending. It’s also worth noting that Republican presidential candidate Mitt Romney has embraced the same sort of plan.
When Ryan and Wyden announced their proposal last December, they said they were able to come to an agreement because they put the issue of Obama’s health care law on the side. By contrast, in this budget Ryan proposes repealing the law, meaning that Wyden is unlikely to back it.
The new budget also calls for overhauling Medicaid by block granting federal dollars to states and giving them added flexibility to experiment with their own reforms.
Ryan’s budget would also privatize Freddie Mac and Fannie Mae, remove regulatory barriers to domestic energy development and reduce the federal workforce by 10 percent over three years through attrition and a pay freeze. In addition, it creates a mechanism for averting severe defense cuts scheduled to go into effect next year.
The Ryan plan would simplify the tax code by closing loopholes and ending deductions, while lowering rates and consolidating the current six tax brackets to two – 10 percent and 25 percent. On the corporate side, he would slash the rate to 25 percent from 35 percent, which is currently the second highest in the industrialized world. He would also transition to a “territorial” tax system, meaning that multinational corporations are only taxed in the nations in which they do business, rather than being double taxed when they bring earnings back to the United States.
The two biggest omissions in the plan are that Ryan’s budget doesn’t include comprehensive health care or Social Security reform. Ryan has introduced proposals on both, and references some ideas in his budget document, so the fact that this budget doesn’t include them suggests that two years after Obamacare passed, Republicans still can’t agree among themselves on an alternative and Social Security remains a thorny issue.
Measuring how Ryan’s new plan affects the deficit depends on what it’s being measured against, but generally it would mean less spending and lower taxes than other scenarios.
Compared with the CBO baseline, which, among other things, assumes all Bush tax rates will expire and that Congress will actually go through with steep scheduled cuts to physicians payments under Medicare, Ryan’s budget would add $240 billion to deficits over the decade. Yet compared to Obama’s budget, Ryan would reduce spending by $5.3 trillion and taxes by $2 trillion, for $3.26 trillion in deficit reduction. Compared to his own budget from last year, public debt would be $1 trillion less by 2021.
But Ryan’s key Medicare reform doesn’t kick in until 2023, meaning that the major cost savings only come over time. Under a scenario in which the CBO assumes Congress will continue making policy as they have in the past, debt would rise to a staggering 194 percent of GDP by 2040. By way of comparison, Greece, which recently defaulted on its debt, had a debt to GDP ratio of 165 percent in 2011. Yet under Ryan’s reform, that number would be 38 percent. By 2050, the CBO model breaks down, but Ryan’s plan reduces debt as a share of the economy to 10 percent.
Though it’s easy to write off such projections as coming way in the future, if bond holders determine that the United States doesn’t have an actual plan to do put the nation on a sustainable fiscal course, it could trigger an actual debt crisis far sooner than these projections suggest. Furthermore, delaying action would require much more sweeping reforms that the nation won’t have the luxury of phasing in over time.
Politically, this budget sets up the contrast that both Ryan and Obama wanted in the 2012 election. Obama has not produced a budget that includes a solution to the nation’s debt problem and Senate Majority Leader Harry Reid, D-Nev., has said for the third year in the row, the Democratic Senate will not pass a budget. This gives Democrats the ability to attack Ryan’s plan, claiming it destroys Medicare, without having to defend their own plan. On the flip side, Ryan is hoping that by offering a solution, voters will reward Republicans for being the more responsible party at a time of national crisis.