04.06.2011 1

Compound Savings

By Bill WilsonFor the 2012 budget, House Budget Committee Chairman Paul Ryan proposes approximately $110 billion of initial spending cuts, and a spending cap that will control the growth of spending going forward.

The mandatory cap on spending will require that any future increases in spending must be offset with cuts, leading to increasing savings every year. In fact, this is where the bulk of the savings are found, and is the most brilliant part of the proposal.

House Budget Chairman Paul Ryan is to be credited with explaining the extent of the debt crisis the nation faces, and what will happen if order is not brought back to the nation’s fiscal house soon. The overall proposal will reduce spending by $5.8 trillion from the current ten-year baseline (an average of $580 billion of cuts a year), and reduce the annual deficit from the Congressional Budget Office’s currently projected $1.48 trillion level to about $400 billion by 2021.

The Ryan proposal would certainly help the situation, by specifically rolling back Medicaid spending, saving $771 billion over ten years, non-defense discretionary spending by $1.617 trillion, and eliminating ObamaCare, saving $1.403 trillion. It also cuts so-called “mandatory” spending and results in interest payment reductions saving another $1.161 trillion. It also begins the discussion of entitlement reform, if only scratching the surface, with changes to Medicare.

However, the proposal does not go far enough. Because House Republicans are unable or unwilling to balance the budget any time soon, it will still add over $8 trillion to the national debt by 2021, bringing it to over $22 trillion instead of the projected $26 trillion. So, if anything, the proposal only buys the American people approximately five years or so from the fiscal catastrophe we face.

Which means that even if the proposal were implemented in full, Congress would still have deep cuts to make. The irony is less pain now will mean a lot more pain down the road when the real cuts have to be made.

Fundamentally, the proposal is inadequate because it only reduces spending by an initial $110 billion when the spending cap goes into effect, meaning the American people will have to wait for the real savings to be implemented.

The annual deficit will average $508 billion annually under the House GOP proposal. That’s not much of a decrease from the current Congressional Budget Office baseline average deficit of $697 billion from 2012-2020. It punts on proposing reform to Social Security and does not zero-fund and eliminate enough programs.

For those reasons, the debt will still be growing on an upward trajectory of about $800 billion on average every year, allowing it to rise to levels that one day will make it impossible to be refinanced, let alone be repaid.

It’s not enough to reduce the debt as a share of GDP; it must be reduced in nominal terms to get where we need to be as a nation. Only when the government no longer spends more than it takes in will the debt ever be able to be paid off. That must be the primary goal. Fortunately, the Ryan proposal is not so far off from achieving that.

Just by starting with $500 billion of initial cuts in 2012 instead of $110 billion, and then implementing the spending cap, would dramatically improve the performance of this proposal. Instead of an average deficit of $508 billion, the average deficit would be reduced to $130 billion, and the budget would be practically balanced by 2018.

But what to cut? Unemployment could be cut by $117 billion, getting back to a more limited approach of about 6 months totaling about $40 billion. Food stamps could be cut by $50 billion, the earned income tax credit could be eliminated saving $50 billion, and other tax credits too could be killed saving $43 billion.

Medicaid could be cut by $150 billion, as could CHIP by $20 billion, by reducing eligibility (which would require repealing ObamaCare in part). Eliminating the community development fund, saving another $1 billion.

That’s $428 billion roughly in savings.

Add to that another $100 billion in cuts to discretionary spending — Ryan already proposes $61 billion in net discretionary cuts for 2012. — and the goal of $500 billion of instant savings would be exceeded.

On that note, $500 billion of initial cuts should by no means be viewed as a ceiling of what can be done to improve the House Republican proposal. Initial cuts greater than $500 billion would speed the day of a balanced budget to just a few years from now. All it would take is an additional $390 billion of cuts.

That is the power of compound savings.

Bill Wilson is the President of Americans for Limited Government.

Copyright © 2008-2024 Americans for Limited Government