Election Policy Fact Check: Ryan Budget Plan Impact

UMD Public Policy's Philip Joyce: Budget Cuts Would 'Put us in Uncharted Waters'

COLLEGE PARK, Md. - The School of Public Policy at the University of Maryland is offering Policy Fact Check - an ongoing series examining the key policy issues of the presidential campaign.

Professor Philip Joyce provides this 10-point analysis of the potential impact of GOP Vice President hopeful Rep. Paul Ryan's proposed budget - one of the most talked-about policy plans of the campaign. Joyce, a professor of Management, Finance and Leadership, served in the Congressional Budget Office and the Illinois Bureau of the Budget and is the author of the book, The Congressional Budget Office: Honest Numbers, Power, and Policy Making.

Joyce says that while the rhetoric from both sides about Ryan's budget proposal has been intense, Ryan, who chairs the House Budget Committee, hasn't actually offered any details about one of the most significant points of his proposal - cuts to federal government services. Thus, it's impossible to know what the actual impact of his budget would be.

Some highlights of Joyce's analysis:

• "Reductions of this magnitude put us in uncharted waters," Joyce says. "These are not the kinds of reductions that can be dealt with by eliminating 'waste, fraud and abuse.' It will require the federal government to stop doing lots of things that it does now."
  
  
• The cuts could be realized through the elimination of entire agencies or services or through a two-thirds reduction in - for example - air-traffic controllers, border guards, doctors and nurses in veterans' hospitals, prison guards, and FBI agents. Regardless of where the cuts are made, it's impossible to absorb reductions of the impact Ryan proposed without substantial effects on what the government does, and how well it does it.
  
  
• "There are no specifics in the Ryan budget that indicate how these reductions are going to be realized. Because of this, it makes them appear more realistic, and less threatening, than they will likely be in fact," Joyce says.

While Ryan offered his controversial proposal in an effort to rein in debt and balance the budget, it won't achieve balance until about 2040, Joyce says. It would reduce the debt without increasing revenues - and while leaving Social Security alone, it would make substantial changes to Medicare and Medicaid - a proposition that has caused a great deal of controversy.

However, Joyce says the biggest impact of the proposal would almost certainly be in the form of budget cuts to "everything else" - including major cuts to departments or services Americans rely on - and those cuts haven't received the debate they deserve. Because Ryan hasn't given details about what he would cut, Joyce says, voters simply can't make an informed choice about Ryan's proposal.

"Budgeting is about choice, and choice is about information. The Ryan budget does not include enough specifics to permit an informed choice," Joyce says.

1. The Ryan budget would not balance until almost 2040, or more than a quarter of a century from now, but it does lower the debt substantially from current policies. The deficit in fiscal year 2011 was almost 9 percent of GDP; deficits under the Ryan budget would be stabilized at about 1 percent of GDP by 2023. While the Ryan budget would continue to add to the debt (because annual budgets would still be in deficit), debt would be substantially lower under the Ryan budget than it would be under current policies. Debt, as of 2011, was 68 percent of GDP. CBO has developed a projection of future deficits and debt, which it calls the alternate fiscal scenario (or AFS). This AFS assumes that current policies (such as the Bush tax cuts, among others) are continued. The debt would rise to 96 percent of GDP in 2023 under the AFS; the Ryan budget would lower that to 61 percent. By the time the Ryan budget is balanced around 2040, the debt under the AFS is projected to be 194 percent of GDP, compared to 38 percent under the Ryan plan.

2. Congressman Ryan's budget more or less freezes revenues at the level that they would reach under current policies. Revenues in Congressman Ryan's budget would increase from the 2011 levels of 15.5 percent of GDP, to almost 19 percent of GDP by 2023 (this is simply a result of the economic recovery), and would remain at that level through 2040. This does not mean that there would be no revenue changes. For the individual income tax, the budget would create a new two-rate system (10 percent and 25 percent) and would offset this through base broadening. The budget does not specify which current exemptions and deductions would be reduced or eliminated in order to broaden the tax base.

3. Social Security is not touched in the Ryan budget. Both the CBO alternate fiscal scenario and the Ryan budget would see Social Security spending growing from 4.75 percent of GDP in 2011 to 5.5 percent in 2023 and 6 percent in 2040.

4. Medicare cost increases would be controlled, while Medicaid and the state CHIP program would see substantial reductions both from current levels and from the baseline. Medicare, under the Ryan plan, would increase from 3.25 percent of GDP in 2011 to 3.5 percent in 2023 (as opposed to 4 percent in the CBO alternate scenario), and 4.75 percent in 2040 (compared to 6.25 percent). Medicaid and CHIP spending would be cut roughly in half by 2023; these cuts would remain in effect through 2040.

5. Overall spending (excluding interest) would fall under the Ryan plan relative to current policy. Spending was 24 percent of GDP in 2011; this was inflated from the historical 40-year average of 21 percent, largely due to temporary effects of the recession. The Ryan budget would lower spending to just over 20 percent of GDP in 2023 (compared to over 25 percent in the AFS) and just under 19 percent of GDP in 2040 (an 80 percent reduction from the AFS level of 34 percent). The main reason that spending would rise under the AFS has to do with the growth that is expected in the major entitlement programs, which is driven by increasing caseloads and costs.

6. The brunt of the spending reductions in the Ryan plan will be felt by the portion of the budget that represents "everything else," which would be roughly half of its current level by 2023 and roughly one-third of its current level by 2040. Since Medicare and Social Security expenditures grow under the Ryan budget, and Medicaid is not cut enough to offset these increases, this means that the rest of the budget must make up the difference. In 2011, this other spending (defense and nondefense discretionary spending, and other mandatory spending) accounted for 12.5 percent of GDP. This would decline, under the CBO AFS, to 8.5 percent of GDP by 2023 and 8.25 percent by 2040 (this decline, again, is mainly due to removing temporary increases in spending from the recession). The Ryan budget would reduce this part of the budget to 6.75 percent by 2023 and 4.75 percent by 2040.

7. If defense spending is kept at its historical minimum level, other mandatory spending and nondefense discretionary spending would have to be cut by 50 percent or more by 2040. Defense spending has not been lower than 3 percent of GDP in any year since World War II. Assuming that it was able to be reduced to that level (it was at 4.7 percent of GDP in 2011, therefore such a reduction would implicitly assume that the U.S. did not engage in any costly wars in the next 30 years), this would mean that other spending (which is a combination of nondefense discretionary and other mandatory spending) would have to come in at no larger than 3.75 percent of GDP in 2023 and 1.75 percent of GDP in 2040.

8. Reductions of this magnitude put us in uncharted waters. The reductions in other mandatory and nondefense discretionary spending are not the kinds of reductions that can be dealt with by eliminating "waste, fraud and abuse." It will require the federal government to stop doing lots of things that it does now. There are no specifics in the Ryan budget that indicate how these reductions are going to be realized. Because of this, it makes them appear more realistic, and less threatening, than they will likely be in fact.

9. Consider the following illustrative possibilities:

• Eliminating the Departments of Commerce, Energy, and Education, along with the EPA, as some have suggested, would have reduced the 2011 budget by approximately $140 billion, or 1 percent of GDP, by 2023 and 2040. This would still not meet the target in Chairman Ryan's budget; doing so would require additional cuts of almost 1 percent of GDP by 2023. The gap could be closed by eliminating federal nutrition programs, as well as Supplemental Security Income. Alternatively, veterans' benefits, unemployment insurance and earned income/child tax credits could be eliminated. Looking forward, we would have to eliminate these departments, make the 2023 cuts listed above, and reduce all other nondefense discretionary spending by approximately 50 percent by 2040.
  
  
• If these same mandatory spending reductions were taken, but none of these four departments was eliminated, it would require larger reductions in nondefense discretionary spending by 2040. These reductions would amount to a reduction of about two-thirds in this other spending. Assuming that this resulted in an equivalent reduction in personnel, this could mean a two-thirds reduction in air traffic controllers, border guards, doctors and nurses in veterans hospitals, prison guards, and FBI agents.

This is not a prediction that either of these scenarios will occur. The point is that it is simply not possible to absorb reductions of this magnitude without having it result in substantial effects on what the government does, and how well it does it.

10. The bottom line is that we cannot have an informed discussion about the future path of government unless we know what the specific effects of various budget alternatives will be. The Ryan budget is very clear as to its overall path, but not at all clear on how we will get there.

As of now, we know this: Relative to the path that the budget is currently on, the Ryan budget would reduce deficits and debt, but all of these actions would be on the spending side. While it is clear that Social Security is off the table, and while the policy implications for Medicare and Medicaid are clearer, it is impossible to determine what the effects elsewhere would be. Budgeting is about choice, and choice is about information. The Ryan budget does not include enough specifics to permit an informed choice.

-Philip Joyce-

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