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Republicans Target Health Care Spending to Cut Deficit More Than Obama

House Republicans promise to narrow the U.S. budget deficit more than President Barack Obama’s plan, in large part by scaling back the federal government’s health- care programs for the elderly and poor.

The Republican plan released by House Budget Committee Chairman Paul Ryan would phase out the traditional Medicare program for the elderly and replace it with subsidies to buy private insurance. It would cap spending on Medicaid, the health-care plan for the poor and give states more discretion over how to run the joint federal-state program, making long- range costs more predictable, according to budget analysts.

“It basically changes the promise from a level of coverage to a level of financial support,” said David Walker, former U.S. comptroller general.

Ryan’s plan forecasts shrinking federal deficits starting over the next decade, from $995 billion in fiscal 2012 to $385 billion, or 1.6 percent of gross domestic product, by 2021. By comparison, the budget Obama released in February forecast a deficit of $1.1 trillion next year with the 2021 shortfall hitting $774 billion, or 3.1 percent of GDP.

Still, both Obama and Ryan rely on assumptions that aren’t necessarily dependable because economics or politics can change drastically in five or 10 years. The claims of budget savings each is making run up against a history of official deficit forecasts that can be far off the mark within a few years.

“Who the hell knows what’s going to happen in 10 years?” said David M. Primo, a political science professor at the University of Rochester in New York who studies the federal budget.

Surpluses and Deficits

When Democratic President Bill Clinton reached a budget deal with Republicans in 1997, official estimates forecast the cuts would take five years to balance the budget, only to produce a surplus by 1998 that grew to $236 billion in 2000.

Conversely, when Republican President George W. Bush proposed his first round of tax cuts in 2001, the Congressional Budget Office forecast a surplus of $3.2 trillion over the next decade. Bush ended up running deficits throughout his presidency and left office with a shortfall of $1.4 trillion.

“There are two sorts of things beyond our control: what happens in the world -- so, that’s the economy, war, what have you,” Primo said. “And then there’s political dynamics. Either of those can cause massive deviations from the estimates that are put out.”

Tax Revenue

Obama achieves two-thirds of his budget savings through cuts in non-security discretionary spending, including low- income energy assistance, transportation and housing programs. The other third would come from revenue increases, including higher income taxes after 2012 for married couples making more than $250,000 annually.

Tax revenue can be difficult to project because it depends on the growth of the economy, said Rudy Penner, a former CBO director who is now a senior fellow at the Urban Institute in Washington.

“Incomes are very volatile at the top, based on the economy and the stock market,” Penner said. “Obviously raising the marginal rate on the rich also will intensify the search for legal tax avoidance, and you don’t know how successful they’ll be.”

The budget surpluses generated under Clinton were driven in part by the strong economy and a technology stock boom that created a “revenue bubble” from income taxes on investment gains, said Brian Riedl, a budget analyst for the Heritage Foundation, a policy research organization in Washington.

More Spending

The swing to deficits under Bush followed a fall in the stock market and a surge in spending for the wars in Afghanistan and Iraq, stepped-up security after the Sept. 11 terrorist attacks, a new prescription-drug benefit for the elderly and increases in highway spending, school aid and farm subsidies, Riedl said.

Ryan’s budget plan also includes cuts in discretionary spending. He proposes capping top corporate and individual tax rates at 25 percent. Meeting his deficit goals would require combining the tax cuts with elimination of popular tax breaks such as deductions for mortgage interest and charitable contributions.

While Obama has said he supports lowering corporate tax rates in conjunction with closing loopholes and eliminating special breaks for companies, he hasn’t presented a specific proposal.

The White House budget projects a 10-year total deficit of $7.2 trillion. Ryan’s would have a 10-year total of $5.1 trillion.

Higher CBO Number

By contrast, the Congressional Budget Office forecasts a fiscal 2012 shortfall of $1.4 trillion and a 10-year total deficit of $9.47 trillion. That reflects more conservative estimates on how fast the economy will recover, meaning less tax money flowing into the Treasury.

Obama yesterday declined to directly comment on Ryan’s budget proposal, saying he was focused on finishing a deal on spending levels for the rest of the current fiscal year.

“We’ll have time to have a long discussion about next year’s budget, as well as the long-term debt and deficit issues, where we’re going to have some very tough negotiations,” he told reporters at the White House. “And there are going to be, I think, very sharply contrasting visions in terms of where we should move the country.”

His spokesman, Jay Carney, was more direct.

Ryan’s plan “fails the test of balance” by cutting taxes for the wealthy while slashing programs that benefit middle- income and poor Americans, Carney said at a briefing.

“While we agree with congressman Ryan’s goal, we strongly disagree with his approach,” he said.

To contact the reporters on this story: Mike Dorning in Washington at mdorning@bloomberg.net; Catherine Dodge in Washington at cdodge1@bloomberg.net

To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net.

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