Budget debates make good political theater. Each party forces recorded votes designed to score political points and embarrass members of the opposing party. The House had fun yesterday with some amendments before adopting the Republican proposal written by Paul Ryan (R‑WI). The Senate began debate on its proposal last evening and is bracing for Friday’s “vote-a-rama” – a day of recorded votes on dozens of politically-barbed amendments advanced by members of both parties.
In this post, I’m going to try to look past the theatrics and, doing my best to be impartial, make a few high-level observations about the Senate Democratic and House Republican proposals. To do that, I’m going to use this chart (click to enlarge):
The chart presents revenues, outlays and deficits under four separate headings:
40-year average.
The blue bars represent the average revenues, outlays and deficits between 1972 and 2011. CBO presented these average numbers last year. They represent the level of federal taxes and spending that we have been accustomed to for most or all of our lives. Both budgets would change this well-established fiscal pattern, but in very different ways.
CBO “baseline” average for the next 10 years.
Whereas the first bar in each cluster looked back over the past four decades, the next three look forward. The second bar represents what CBO expects to happen over the next decade (2014–2023), assuming the President and Congress make no changes to existing law – no tax hikes or cuts; no increases or decreases in entitlement spending. It’s what fiscal policy would look like if the government went on auto-pilot, continuing to collect taxes, spend and borrow money according to laws already in place. This, too, is a pretty sharp departure from what we’ve been used to over the past four decades.
Senate Democratic proposal for the next 10 years.
The green bars (no, that’s not a statement on the environment) represent the resolution that the Senate began debate on last evening. It is expected to pass the Senate later this week.
House Republican proposal for the next 10 years.
The bar on the far right (no pun intended) in each cluster represents the House GOP proposal that passed earlier yesterday.
I’ve done two things in this chart that I hope make it easier to understand. First, I’ve expressed the tax and spending plans as percentages of gross domestic product (GDP), which is the total output of the American economy. That eliminates having to account for the fact that a 1971 dollar is worth a heckuva lot more than a dollar is worth today or will be worth 10 years from now. More importantly, it enables me to say that the Democrats want federal spending to average 21.7 percent of GDP over the next decade; that’s a lot easier to read than the $46,362,049,000,000 that their budget proposes to spend.
Second, I’ve looked at “average” spending, because that’s lots simpler than looking at several lines that change from year to year. Hopefully, this simplifies the presentation without oversimplification.
Here are a few observations:
Brace for higher taxes.
The budget process is just beginning and there are such significant differences between the House and Senate plans that many observers believe an agreement to be impossible. If talks collapse and tax policy remains unchanged, the federal government will collect taxes amounting to 18.9 percent of economic output over the next 10 years. That’s 1 percent of GDP higher than over the past 40 years. Think 1 percent of GDP isn’t much? Think again. The government will collect $2.1 trillion more in taxes over the next 10 years than if they stuck with the historical revenue rate. That’s real money and you’ll feel the difference.
Both parties have climbed on the higher tax bandwagon.
The general perception is that Republicans want to cut taxes and Democrats want to raise them. These charts demonstrate that isn’t quite the case. The Democratic budget does call for higher taxes. Under their measure, federal revenues would average 19.3 percent of GDP, 0.4 percent more than under current law and 1.4 percent more than the 40-year average. But Republicans aren’t tax slackers. Their projected revenue is just a tick below the CBO baseline of 18.9 percent. That represents a big change for the party. More on that below.
Both budgets reduce the deficit.
The Democratic budget would reduce the average deficit to 2.4 percent of GDP, significantly lower than both the historical average and the CBO baseline for the next 10 years. Republicans go them one better, eliminating the deficit entirely in 2023.
The two sides aren’t in the same area code on spending.
While the public debate often fixates on taxes, the most dramatic difference between the two parties is in spending. The Democratic budget would spend, on average, 21.7 percent of GDP, roughly splitting the difference between the historical average (21.0 percent) and the CBO baseline projection (22.1 percent). The GOP budget would cut substantially below both. The gap between the two proposals is enormous, with the House budget proposing to spend about $5 trillion less than the Senate budget. That dwarfs the differences between the two sides on taxes, where less than $1 trillion separates the two sides. Not that $1 trillion isn’t a lot of money; it’s an average of $100 billion per year. But the difference on the spending side is about 5 times as great.
Despite that difference, the two budgets are generally in the same ballpark in many areas of spending.
Neither side wants to touch Social Security and, despite philosophical differences on Medicare, they’re not all that far apart. Democrats propose to spend $6.74 trillion on the program, Republicans $6.56 trillion, a figure roughly 2.6 percent less. Both sides would drop defense and domestic discretionary spending below historic levels, although Republicans advocate much deeper cuts in domestic spending. I don’t want to paper over the differences here. Clearly, Republicans want a much more austere government than do Democrats and that austerity is reflected virtually across the board in spending. But these differences would seem to me to be bridgeable were it not for the health law.
Health care is the biggest bone of contention between the two budget proposals.
If the two sides are going to reach agreement on the budget, they are going to have to find some outside-the-box accord on the new health law. No single difference between the two budgets is quite that big – not taxes, not other entitlement spending (including Medicare), not national security or even domestic discretionary spending. This is all the more surprising since House Republicans have agreed to adopt several important features of a law that they have long vowed to repeal. They pretty much accept its new taxes and its $700 billion in Medicare cuts that Mitt Romney (and Paul Ryan) campaigned against last fall. But they don’t accept the spending and that is prodigious. By assuming repeal of the health law’s spending provisions, the GOP budget saves almost $2 trillion — $1.25 trillion from eliminating health insurance subsidies, $635 billion from nixing the Medicaid expansion and another $23 billion in related savings. That’s a lot of savings and something to which most Congressional Democrats and the President are unalterably opposed.
This post is too long (I promise future posts will be briefer) and too short – it deals in very high-level generalities and glosses over a whole lot of detail in the process. Its purpose is to lay out some general thoughts on the budget and to show how health care may well prove to be the issue that stymies any grand agreement.
Those are my general thoughts. What are yours?