Economics, Pethokoukis

Does Washington really need to balance the US budget in 10 years?

Image Credit: US Treasury Department

Image Credit: US Treasury Department

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.

23 thoughts on “Does Washington really need to balance the US budget in 10 years?

  1. reading this entire blogpost, it’s not until the very last sentence that Social Security is mentioned and it is in conjunction with Medicare.

    Social Security is not Medicare and the finances for Social Security are benign compared to Medicare because Social Security, by law, cannot spend more than the FICA tax generates unless Congress approves it or Congress alternatively approves one or more reforms to bring SS back into alignment with FICA revenues

    Conflating Social Security and Medicare into the same issue does nothing good for either of them and it gives the impression that advocates of cuts to Medicare also advocate cuts to SS which is – in a word – just plain dumb.

    FICA is what funds SS – and until/unless the law is changed, SS cannot spend more on benefits than FICA generates in taxes.

    We should be so lucky with Medicare.

    but even with Medicare – the bias towards crippling the program continues.

    For instance, the “reform” is focused on cuts ….rather than on higher premiums and higher co-pays and deductibles.

    why not do that? That’s what the private sector would do.

    the idea that the govt gives someone a voucher to then go out and find insurance – as a senior with a “pre-existing” condition called “aging” is comical.

    Basically this is not a proposal to “strengthen” and “sustain” Medicare at all.

    It’s a plan to force seniors back into the market for insurance where many would find it next to impossible to find affordable insurance.

    so then..seniors would not have insurance …. get sick… and go to the hospital as charity care where the hospital would be forced to take them and forced to treat them and then any efforts on their part to collect debt by traditional means like garnishment of wages or judgments would go nowhere.

    so the “path to prosperity” is basically a path to disaster for seniors, hospitals, and ultimately taxpayers.

    this is the “plan”… that Ryan brings to the table.

    they’re putting lipstick on it for sure but at the end of the day all the feather dancing in the world is not going to hide that dingle berry.

    • “FICA is what funds SS – and until/unless the law is changed, SS cannot spend more on benefits than FICA generates in taxes.”

      Except, it does already because (a) there is no trust fund and (b) the law is easily changed – as we just saw with the recent tax cut and subsequent hike.

  2. There are some entrepreneural opportunities here if Team Ryan comes back with more “pro-growth” strategies.
    “SS Gave $2.7T to the General Fund and All I Got Was This Lousy Tee Shirt.”

  3. Hey Jim,

    Quick question: what changed in the 1990′s that Clinton could show budget ‘surpluses’ while the total debt continued to grow every year he was in office? LBJ created the unitary budget, but something must have changed in the budget metrics, no?

    Thanks.

  4. There needs to be an immediate reduction in the size and cost of the Federal Government, it has grown like a malignant tumor and is threatening to kill the Host. A reduction of around 50% is required to cut the spending. When they say cut spending it means cutting the number of employees, offices and overhead.

    Clinton, Bush and Obama have exploded the size and cost of the Federal Government. The first two were pikers compared to Obama who has really taken growing government to a new level.

    • just to point out (once again) that no POTUS can spend a thin dime unless Congress approves it.

      that’s the simple truth.

      and the spending under Obama is lower not higher than the prior POTUS because of some cuts that have been made.

      but no spending at all can be done by any POTUS including Obama unless both Houses of Congress – both Dem and GOP vote in the majority to approve it.

      If you want a balanced budget – it has to come from Congress.

      • “the spending under Obama is lower not higher than the prior POTUS”

        This is not just a false statement, it is fantastically false. The “cuts” have been only tiny reductions in the rate of growth–not actual reductions in spending. The stimulus alone has added nearly $2.6T in new spending because it increased the baseline spending that is included in now three years of Obama’s tab. Without a budget for three years, the 2009 spending level has been rolled forward into three years of continuing resolutions. Obama’s spending dwarfs the Iraq war off-budget spending.

        Wow. Your comment is possibly the most misinformed, and outrageously ignorant one I have read in the past three years. You most certainly are a liberal Democrat: no other political class is so impenetrably unable to understand arithmetic.

          • Sophistry. The bottom line is that while Bush was a disaster for spending, his last two years were given a nice nudge by an all-Democrat congress. Obama has taken the fire that he ‘inherited’ and has thrown gasoline on it by adding a massive new entitlement (that is already driving up health care costs). As noted, the stimulus alone will add nearly $3T in spending that did not exist before 2009.

            Most tellingly, I think, is that you and most other lefties completely ignore the ‘budgets’ that Obama has submitted. These reveal the true proclivities of the man. Fortunately, nobody in Congress was stupid enough to actually vote for any of these sad fiscal jokes / waste of trees, but they do show that Obama has absolutely no concept of fiscal rectitude, constraint, or reality.

            We’re going to find out just how this dim bulb’s policies work out over the next four years. Personally, I’d like the GOP to give him everything he asks for fiscally. It would exact an awful toll on the country, but it would be worth it because it would finally destroy and bury the left.

          • the number I get for the stimulus is 814 billion.. you can put it in GOGGLE and get quite a few authoritative references for that number..

            Can you provide an authoritative reference for number.
            Actually how about 2 that agree – and not biased sites.

            re: budgets Obama has submitted. regardless of that it takes Congress to approve and that’s the check on the POTUS spending.

            The truth is that the Republicans have continued to vote to continue spending at deficit levels – the last time they voted for Sept 2012 when a majority of them voted for the CR to continue spending at a 1 trillion dollar level.

            Obama had nothing to do with the Republicans vote. It was all their own doing.

          • One glance and I can see these numbers are bogus. The stimulus did not contribute only $874B. It was enacted in 2009 and because no budget has been produced by the Dem Senate for three years, that $874 spending has been rolled forward into two subsequent sets of continuing resolutions. That’s $2.6T right there that did not exist prior to 2009…which completely invalidates the cited ‘analysis.’

            Look, Larry, the election is over. You can stop with the absurd arguments against reality. You won. We get to see how your ideas play out. Just don’t think you can bullsh*t anybody but your innumerate liberal friends.

          • Comical.

            You argue first that POTUS doesn’t spend anything unless Congress authorizes it; then proceed to argue that Obama has spent less than Bush. Completely bipolar.

            And, no Congress or President binds a subsequent Congress or President, so your lame “Bush Policy Costs” vs. “Obama Policy Costs” are ridiculous. When the Democrats and Obama passed those budgets, everything in them became their policies.

            Not to mention the fact that the 2009 budget wasn’t passed and signed until Obama took office, the Democrat Congress refusing to do anything while Bush was still in there.

  5. This administration definitely does not want a healthy revitalized economy. The return to normalcy would include adjusting interest rates to normal levels. Yes, federal revenues would grow, but look what would then happen to the interest on the national debt. We are at the position in debt service where growth will go into paying interest on the national debt, not in reducing the debt. A continuing semi-stagnant economy gives the administration cover to continue their failed policies and party power grabs.

    • Right. Interest payments will rise exponentially while revenues will rise arithmetically–an impossible situation that we’re going to get to witness in Japan before it happens to us. Japan is starting an inflationary push by killing the yen, but evidently they’re too foolish to consider what that will do to their massive debt load.

  6. re: ” One glance and I can see these numbers are bogus. The stimulus did not contribute only $874B. It was enacted in 2009 and because no budget has been produced by the Dem Senate for three years, that $874 spending has been rolled forward into two subsequent sets of continuing resolutions. That’s $2.6T right there that did not exist prior to 2009…which completely invalidates the cited ‘analysis.’

    all I asked you was to provide a credible source for your number.. I can provide you with no less than 1/2 dozen credible sources for mine:

    here’s one from an anti-Obama site:

    http://www.nationalreview.com/articles/250673/stimulus-814-billion-flop-deroy-murdock

    so how about a source for you number?

  7. Well, we need to all sit down and put our heads together, both parties, and fix the problem of the debt. We have to practice what we preach, and pay our bills, or how different are we than the people Romney criticized? If we don’t pay our debt, than EVERYONE has been living off the Gov’t, especially the rich!

    • well, here is the essential problem in my view:

      our current tax revenues are about 1.5T.

      that’s a true number:

      what many people think is that the number is 2.3T but they overlook the fact that the FICA Tax is a dedicated tax that cannot be spent for general budget items and that leaves you with 1.5T.

      The second problem is that many people think the DOD budget is about 800b but they equate DOD to National Defense and that’s simply not the case.

      When you add up ALL the National Defense costs it comes to about 1.5T. This would be things like the VA, Homeland Security, FBI/CIA anti-terrorism efforts, NASA military satellites, DOE work for naval ship reactors, etc.

      so I always ask this question. If you accept the fact that we only have 1.5T in hand to pay for govt – and you are opposed to more taxes – then tell me what PERCENTAGE of our available revenues would we allocated to National Defense?

      give me a percentage… I’ll start the ball rolling – 50%. Should we spend 50% of our available tax revenues on National Defense? Less? more? give me a percent.

      batter up

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>