March 28 (Bloomberg) -- House Republicans expect to adopt a budget resolution this week that envisions eliminating most federal debt by cutting government’s share of the economy to a level not seen since 1951, before Medicare, Medicaid, the Environmental Protection Agency and the space program.
Federal spending as a proportion of gross domestic product would fall by one-third by 2050 to 16 percent from 24 percent in 2011, according to calculations by the non-partisan Congressional Budget Office. The last time it was at that level, Harry Truman was president, and Nat King Cole ruled the pop charts.
“You end up in a very different world than we’ve been used to in the past 50 to 60 years,” said former CBO Director Robert Reischauer. The blueprint, written by House Budget Committee Chairman Paul Ryan of Wisconsin, “would eliminate many of the elements of government that people depend on and that people want,” Reischauer said.
It raises no extra revenue and relies on spending reductions alone to bring the budget into balance. Over the next decade, it would cut $5.3 trillion in projected outlays, with food stamps, Pell college tuition grants, farm subsidies as well as the operating budgets of most government departments slated for major reductions.
And that would be just a down payment on the cuts to come. The plan caps the growth of Medicare and reduces Medicaid. Expenditures on everything else outside of Social Security and a children’s health insurance program would be slashed to 3.75 percent of GDP by 2050 from 12.5 percent in 2011, the CBO said. That category includes defense spending, which Ryan proposes to increase next year and which has not been below 3 percent of GDP since World War II.
If defense spending followed its historic pattern, much of government -- national parks, the FBI, school lunches, border enforcement and more -- would have to live on just .75 percent of GDP in 2050, an eightfold cut from roughly eight percent last year.
The CBO’s long-term projections show how hard it is to balance the budget and reduce debt without increasing taxes. By 2050, the Ryan plan reduces the government’s outstanding obligations to 10 percent of GDP, according to the budget office. That would be the lowest level since World War I and compares with 68 percent last year.
President Barack Obama has called for a “balanced approach” to tackling government red ink that combines tax increases with reductions in expenditures. The president’s plan, though, reduces the 2013 to 2022 cumulative deficit by $3.3 trillion less than Ryan would. And by 2050, debt as a share of GDP under Obama’s proposal would rise to a record 124 percent.
While the Republican resolution is certain to die in the Senate, where Democrats have said they don’t intend to adopt a budget plan this year, it is noteworthy because it represents what Republicans say they would do over time if they won the White House and gained full control of Congress.
Leading Republican presidential candidate Mitt Romney praised the House budget outline, calling it an “excellent piece of work” that is “very much needed.”
Maryland Representative Chris Van Hollen, the top Democrat on the House budget committee, said in an interview that Republicans are using “the argument of deficits to reduce the government to the size that you could strangle it in a bathtub,” referring to a vow by anti-tax activist Grover Norquist to do just that.
“By 2050, most of the federal government aside from Social Security, health care and defense would cease to exist,” Robert Greenstein, president of the Center on Budget and Policy Priorities in Washington, wrote in a March 20 report. The center advocates policies benefitting low-income families.
Ryan defends his program as a necessary step to rein in ballooning budget deficits before global investors lose faith in the ability of the U.S. government to meet its obligations.
“The goal is to avoid a debt crisis,” he said in an interview on Capitol Hill. “What we’re trying to do is put the country on a trajectory that is sustainable.”
He also said that it’s unfair to compare the range of government services in his budget to current ones because those will have to be slashed anyway in order to avoid financial turmoil.
“To measure anything against today, and the world as we know it, is an intellectually dishonest exercise because the world as we know it is unsustainable because of the explosion in debt,” he said.
In a press statement, Ryan contrasted his approach with Obama’s, calling the president’s budget proposal “irresponsible” and “a recipe for a debt crisis.”
Balancing the Budget
It’s rare for congressional budgets to address what might happen after the first decade. Republicans were eager, though, to show that they would at least put the government on the path toward balancing the budget. Still, they would take until 2040 to erase the annual deficit.
Some Republican lawmakers said they were unaware of the long-term implications of their budget and added they had no plans to squeeze much of the government out of existence.
“This is not some secret design to take away all government,” said Representative James Lankford, an Oklahoma Republican who sits on the House budget panel. “There is a role for the federal government; there should be a role for the federal government.”
Douglas Holtz-Eakin, a former CBO director who is now president of the American Action Forum in Washington, said it’s ridiculous to judge this year’s budget proposal for what it implies about the shape of government almost four decades from now. “It’s not like you’re putting democracy on auto-pilot,” said Holtz-Eakin, who was chief economic adviser to Republican candidate John McCain in the 2008 presidential campaign.
Bob Bixby, head of the Concord Coalition, commended Ryan for being willing to back politically-unpopular measures needed to put government finances back into shape, including tackling run-away health care spending.
“He’s been gutsy enough to put some bold ideas on the table to not just halt the growth of the debt but to try to bring it back down,” said Bixby, whose Washington-based non-profit group advocates for balanced budgets.
Reischauer said that the Ryan plan goes too far in reducing the debt. “The notion that you have to pay off all of the debt is wonderful rhetoric but it is neither realistic nor necessary.”
Just as important is what the government is doing with the money that it borrows from investors, he said. If it’s using the proceeds to help make the economy more efficient, that’s not a concern, as it’s enhancing the country’s ability to pay back the debt in the future.
‘No Magic Number’
“There is no magic number” for what’s the best level of the debt as a proportion of GDP, said Donald Marron, who served in the Bush White House and was acting CBO director in 2006. What you want is for government to have liabilities that are low enough that it can ramp up borrowing if needed in a crisis without spooking investors, said Marron, who is now director of the Urban-Brookings Tax Policy Center in Washington.
“There is sort of an international standard,” for the optimal level of government debt as a share of an economy, said Marc Goldwein, senior policy director for the Committee for a Responsible Federal Budget, a non-profit advocacy group in Washington. “Sixty percent or below, you’re in the safe zone. Ninety percent or above, you’re in the danger zone.”
Research by Carmen Reinhart of the Peterson Institute for International Economics and Kenneth Rogoff of Harvard University found that countries suffer slowdowns in growth when debt tops 90 percent of the economy.
Revamp Tax Code
Ryan’s budget proposal, which would cut the debt to GDP ratio to 53 percent in 2030, also includes a major revamping of the tax code. It reduces the number of tax brackets to two from six and the top rate to 25 percent from 35 percent.
The tax package is not intended to raise any additional resources for the government. Federal revenues under the Ryan proposal average 18 to 19 percent of GDP, in line with historic norms.
Bixby said there’s no way that Congress is going to shrink the size of government in the long run as much as is implied by the Republican plan.
“That’s not going to happen,” he said, adding, “the Ryan budget inadvertently demonstrates how unrealistic it is to talk about a sustainable fiscal policy that doesn’t rely on some more revenues.”
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