Government Shutdown Battle to Be Followed by Bigger Fight; GOP wants $4 Trillion in Cuts Over Next Decade; Is that Enough?

When it comes to budget battles, you haven't seen anything yet. Given the cat fight over $30 billion, less than 1% of the budget, it will be interesting to watch the spectacle of GOP attempts to get agreement over proposed $4 trillion in cuts.

Let's pick this story up with a column from yesterday's New York Times: Budget Battle to Be Followed by an Even Bigger Fight

Even as the two parties struggled over the weekend to reach a deal on federal spending for the next six months and avert a government shutdown at the end of the week, House Republicans were completing a budget proposal for next year and beyond. It is likely to spur an ideological showdown over the size of government and the role of entitlement programs like Medicaid and Medicare.

The plan, which is scheduled to be unveiled Tuesday, will be the most ambitious Republican effort since the November elections to put a conservative stamp on economic and domestic policy. It involves far greater stakes for Congress and for President Obama — substantively and politically — than the current fight over spending cuts.

The longer-term budget proposal has been led by Representative Paul D. Ryan, a Wisconsin Republican who is the party’s leading voice on budget matters, and will go beyond numbers to provide policy prescriptions.

It will call for deep spending cuts again in 2012, chart a path to reducing the deficit and slowing the growth of the accumulating national debt, and grapple with the politically volatile issue of reining in the cost of entitlement programs, starting with Medicaid, which provides health coverage for the poor.

“We want to get spending and debt under control, and we want to get the economy growing, and we want to address the big drivers of our debt, and that is the entitlement programs,” Mr. Ryan, chairman of the Budget Committee, said in an interview. “We have a moral obligation to the country to do this.”

The efforts of Mr. Ryan, backed by Mr. Boehner and other Republican leaders, are certain to meet serious resistance from the Democratic-led Senate and from Mr. Obama. In many respects, the nasty fight over financing the government for the next six months has been a warm-up for the longer-term budget battle, which could be further inflamed by a debate over raising the federal debt limit.

“You are going to see major reforms in Medicare and Medicaid; you are going to see a change in the deficit trajectory that is pretty dramatic,” said Representative Tom Cole, an Oklahoma Republican who is on the Budget Committee.

“Ryan isn’t touching the third rail,” Mr. Cole said, employing the expression used to suggest that messing with Social Security and Medicare can be politically fatal. “He is wrapping both hands around it.”

While Mr. Ryan and top Republican aides would not discuss specifics, there are strong indications that the proposal will draw on deficit reduction plans that Mr. Ryan laid out in his 2010 “roadmap plan” and a second proposal he wrote with Alice M. Rivlin, a director of the Office of Management and Budget in the Clinton administration.

In that plan, Ms. Rivlin and Mr. Ryan proposed that Medicaid financing be converted into a block grant program, with states given a set allotment of money and new discretion to shape health coverage programs for the poor. Their Medicare proposal would allow those nearing eligibility to remain with the current system, and it would create a program that would provide payments to Medicare enrollees to buy private health insurance.

Republican leaders have not previously embraced Mr. Ryan’s proposals on Medicare and Social Security, but Mr. Boehner said he had tired of watching Congress avoid difficult decisions on entitlement programs.

“You can’t continue to whistle past the graveyard,” he said. “We are imprisoning the future for our kids and our grandkids if we do not act, and it’s time to act.”

Mr. Ryan promised that his blueprint would be a significant departure from the budget issued this year by Mr. Obama, which made no major recommendations on how to address the big entitlement programs. “The president is not leading; we need to,” Mr. Ryan said. “Otherwise the country has no vision and no option for getting out of this debt crisis that we are going into.”

Obama Not Leading

I did no comment on the story yesterday because there are no specific proposals or specific amounts. However, one thing is for sure, and that is Obama is not leading any budget efforts.

For more on leadership, please see Global Crisis in Leadership Nearly Everywhere You Look

Today we still have no specifics, but we do have an amount.

GOP Plans $4 Trillion in Budget Cuts

Yahoo! News reports GOP 2012 budget to make $4 trillion-plus in cuts

The House Republican chairman who's writing a 2012 budget says the GOP will propose cutting more than $4 trillion over the next decade.

The head of the House Budget Committee, Rep. Paul Ryan, says President Barack Obama is "punting on the budget and not doing a thing to prevent a debt crisis."

Ryan tells "Fox News Sunday" that GOP budget-writers are looking at cutting $4 trillion-plus in spending over the next decade. That's more than even what the president's deficit commission recommended.

Ryan is talking about spending caps and long-term belt-tightening for the Medicare and Medicaid health programs. He wants older people who are wealthy to pay more out of pocket for their health care.

The GOP plan for the budget year that begins Oct. 1 is coming out Tuesday.

$4 Trillion is Not Enough

$4 Trillion sounds like a hell of a lot of money. However, spread out over 10 years, the amount is $400 billion per year. The current budget deficit is $1.6 trillion. Thus the GOP proposal only covers one-fourth of what it takes to balance the budget.

Moreover, until the budget is balanced the national debt grows as does interest on the national debt.

Interest on the National Debt Exceeds $400 Billion

Inquiring minds are interested in Interest Expense on the Debt Outstanding as provided by Treasury Direct.

For 2010, interest on the national debt was $413.954 billion. Bear in mind interest rates on treasuries are historically very low, and rising.

I do not know what Ryan figures into his analysis, but I bet the GOP is way too optimistic. Moreover, given the GOP is only addressing one-fourth the amount needed to balance the budget, the rest must come from increased taxes or increased revenues via growth.

Tax Revenue Collection Analysis

Making the rather safe assumption that the GOP will not propose $1.2 trillion per year in tax hikes, I am willing to go out on a very sturdy limb that says tax revenues will not rise enough to cover the difference (not even counting the issue of interest on the national debt).

Thus, as significant as $4 trillion in cuts sounds, it is nowhere close to what needs to happen to balance the budget.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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