Republicans have indicated they will only consider raising the debt limit if President Biden agrees to cuts. The White House says it will not negotiate conditions for raising the debt ceiling.
Too often, politicians talk broadly about the federal budget, using large numbers that make little sense to most people. Or they suggest that actual cuts are relatively easy to achieve.
For example, on the CBS program “Face the Nation,” Mace said, “I’d lean on the bureau heads. Whether it’s a penny or five cents, the Penny Plan will make do with five cents on the dollar in five years.”
Five cents on the dollar means 5 percent less spending every year – without taking into account inflation. This translates into significant cuts. One cent — a 1 percent discount — wouldn’t balance the budget.
Other Republicans have launched a dollar-for-dollar exchange — raising the debt ceiling by $1 in exchange for every dollar of spending cuts. That is anything but impossible. The debt ceiling must be raised to pay for things already purchased, under laws passed by previous Congresses.
Here’s a guide to help understand the debate.
Not like the family budget
Politicians often conjure up the image of a couple sitting at the kitchen table figuring out the family budget and how to pay off credit cards. But the federal budget is not at all like a family budget. There is no law that requires the budget to be balanced – and in difficult economic times, such as during the pandemic, it is appropriate for the government to take on debt to help stabilize the economy.
But policymakers need to be careful.
Issuing new debt is a choice with certain consequences. It is one thing to issue debt to build better schools and ensure a well-educated workforce for the future; it is another to build up debt to finance the expenses of the elderly, for example through social security.
The state of the US economy also plays a role. When the government issues new debt and the economy is near full employment, this crowds out capital formation and ultimately passes a smaller economy on to future generations. In an economy with high unemployment after a recession, many economists would say that the impact of borrowing on capital formation has been greatly reduced. Some economists also believe that future generations will be richer and more productive, and thus able to foot the bill for the previous generation.
One way to gauge whether debt is too high is to compare it to the size of the overall economy. In 2023, the national debt will be about 96 percent of gross domestic product, the broadest measure of the economy. That’s nearly as large as it was during World War II — and the Congressional Budget Office (CBO) says the national debt is on track to exceed World War II levels by the end of the decade.
The federal budget as one dollar
Since Mace talked about 5 cents on the dollar, let’s assume the entire federal budget is one dollar.
The problem is that current federal revenue is worth about 83 cents, which means that the federal government spends 17 cents more each year than it earns. (We rely on the most recent CBO estimate for fiscal year 2023, but these numbers do not reflect the additional 2023 spending that Congress approved in December.)
About 62 cents is spent on “mandatory programs” such as Social Security, the old-age pension and disability scheme (22 cents); Medicare, the old age health insurance provider (17 cents); and Medicaid, the health care program for the poor (10 cents). These programs are often referred to as entitlement programs because people receive payments or services when they are entitled to them under the law – and any reduction in spending requires a new law. Other mandatory programs include income security such as food stamps and unemployment benefits and federal retirement and veterans programs. (To complicate matters, some programs, such as Medicare, have compensatory receipts, such as health insurance premiums, but we’ll try to keep this simple.)
Nearly 8 cents will be spent on interest payments to government bond holders — a number that will continue to grow as more debt is issued over the next decade. Policymakers cannot short bondholders without serious consequences, leaving part of the budget untouched.
That leaves about 30 cents spent on discretionary spending — annual appropriations from Congress for things like national defense, national parks, air traffic control, and the like. When Mace talks about “agency heads” cutting spending, she means discretionary spending.
But about half, nearly 14 cents, is spent on national defense — which is also off-limits to many lawmakers.
Just over 16 cents goes to the rest of the federal government — meaning it’s even less than the shortfall (17 cents) in federal revenue. Everything could be done away with — even popular programs like border security, air traffic control, and farm subsidies — and the government would still be in deficit.
In effect, Mace would take nearly half of the federal budget out of reach — Social Security, health care, and interest on the debt — and leave the rest of the budget to bear the brunt. That would mean a 31 percent cut elsewhere to reach equilibrium. If national defense is also off the table, the rest of the budget must be cut by 40 percent. That is quite different from the 5 percent per year that Mace proposes.
Freezing expenses isn’t easy either
Sometimes politicians propose a simple spending freeze – the same dollar amount as the year before. But that is in fact a cutback, so fewer resources for the government.
Inflation and population growth over time increase the cost of programs. So even a spending freeze means less year after year. If you earned the same salary year after year, you would end up feeling trapped as grocery and housing costs rise.
Here’s our favorite example of this phenomenon: Defense spending technically remained constant from 1987 to 1994: $282 billion a year. But look what happened to the army in those seven years: the number of troops fell from 2.2 million to 1.6 million, the number of army divisions was reduced from 28 to 20, the combat wings of the air force fell from 36 to 22 and the Navy’s combat ships dropped from 568 to 387. That’s because inflation erodes the value of those dollars over time. Defense spending was cut on most measures during that period, although in theory not a penny was cut.
Of course, one way to reduce the deficit is to increase revenue. But most Republicans have ruled out tax increases. They also want to keep the 2017 tax cuts that expire at the end of 2025 — even though that would add more than $3 trillion to the federal debt over 10 years, according to the Tax Policy Center. Either way, as a percentage of gross domestic product, tax revenue will be according to calculations by Brian Riedl of the Manhattan Institute.
Spending in non-starter programs increased
Riedl has examined what has happened to the federal budget since 2000, when the government last ran a budget surplus. As a percentage of GDP, total expenditures increased by 7.7 percent. But discretionary spending, even with the coronavirus pandemic, was not the main culprit. Instead, Social Security and other health entitlements accounted for 3.6 percent of GDP and other compulsory expenditures accounted for 3.2 percent of GDP.
Until recently, the discretionary portion of the budget pie was shrinking. That’s partly because since 1983, according to Riedl’s calculations, the six major deficit-reduction deals have largely relied on savings in discretionary spending. There is less and less to cut in that part of the budget.
Instead, it’s the portion of the budget that Mace says is a “nonstarter” — Social Security and health care — that’s responsible for the growing debt. The federal government continues to borrow from general revenue to make payments to those programs. More than half of the projected $21 trillion shortfall over the next decade will come from such transfers, Riedl estimates. In part, that’s because most people receive more benefits than taxes they paid into the system, especially from Medicare, as people are living longer and health costs have risen, according to estimates from the Urban Institute.
The impartial Committee for a Responsible Federal Budget has drawn up a blueprint for achieving what sounds like a modest goal: keeping debt stable at about 97 percent of GDP through 2032. Only a quarter of the $6 trillion in savings would come from of limits on discretionary spending. But unlike Mace’s redline, the plan calls for reducing costs for Medicare and also raising the retirement age for Social Security. It also calls for Social Security payroll taxes to be revised to generate more revenue — and raise other taxes.
The Republican Study Committee, made up of conservative Republicans, unveiled a budget plan last year that would gradually raise the Social Security retirement age to 70, from the current 67, and Medicare eligibility to 67, from the current 65, as a way to the expenses. It proposes to cut nearly $17 trillion in spending over 10 years, most of it on mandatory spending, particularly Medicare and Medicaid. But it is the type of plan enacted by a minority party when it has no chance of success. While less than 20 percent of the cuts would come from the free budget, many of the ideas are politically dangerous.
As for the “Five Penny Plan,” that’s a proposal from Senator Rand Paul (R-Ky.) that Mace introduced to the House in 2022. Given the recent increase in spending, Paul is now calling it the Six Penny Plan—a 6 percent cut each year—because otherwise he wouldn’t reach equilibrium in five years. This plan calls for major cuts in government spending from current projections—$15.5 trillion over 10 years, according to a Paul aide—because it completely ignores inflation and population growth. It continues to be down just 6 percent from last year’s figure.
The plan does not specifically call for changes to Social Security and Medicare to achieve these cuts, but leaves it up to Congress on how to achieve these goals – a tall order indeed.
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