Paul Ryan Fiscal Year 2014 Budget
WASHINGTON & SANTA FE, NM (By Loren Adler, Shai Akabas and Brian Collins, Bipartisan Policy Center) March 13, 2013 ― Both the House and Senate plan to mark up budgets for Fiscal Year (FY) 2014, and President Obama and various congressional caucuses are preparing to release blueprints of their own. The Bipartisan Policy Center (BPC) will attempt to replicate our objective analyses from last year in order to provide an accessible understanding of each plan and how they compare to one another and the bipartisan commission proposals.
The headline from House Budget Committee Chairman Paul Ryan’s FY 2014 budget proposal is his goal of balancing the federal budget within a decade. This is a more aggressive goal than either the BPC Domenici-Rivlin Task Force or the Simpson-Bowles Fiscal Commission adopted, both of which endeavored to stabilize the debt as a share of the economy and then set it on a downward path. Additionally, Ryan’s plan proposes to meet this objective solely through future policy changes that reduce spending, including significant reforms to some of the major entitlement programs.
Overall, the proposal is very similar to last year’s House GOP Budget. One major exception, however, is Chairman Ryan has now included a strong push for regular order, in which differences between the House and Senate budget resolutions would be resolved by a conference committee. This would enable the use of budget reconciliation, which allows for expedited consideration of budget-related legislation, especially in the Senate.
Regardless of the political viability of the specific policies contained in the Ryan plan, its passage in the House would facilitate regular order and provide a helpful first step forward for a broader budget agreement.
Below is BPC’s summary and analysis of Chairman Ryan’s budget. All of the information about the budget proposal is taken directly from either The Path to Prosperity: A Responsible Balanced Budget or the Congressional Budget Office’s (CBO) Long-Term Budgetary Impact of Paths for Federal Revenues and Spending Specified by Chairman Ryan (an analysis produced by CBO last year describes some common elements between these two Ryan budgets).
For a number of reasons, this analysis focuses heavily on the ten-year budget window. Although it is critical to understand the long-term effects of major policies included in any budget, significant uncertainty in projections and lack of specificity in policies make concrete scoring beyond the first decade impossible for many of these packages.
Debt, Spending, and Revenues
Under Chairman Ryan’s budget, the ratio of debt to our economy, or gross domestic product (GDP), would decline to 55 percent by 2023. Notably, this is lower than the debt levels achieved by either the BPC’s Domenici-Rivlin 2.0 or Simpson-Bowles commissions (both of which reduce the debt to roughly 65-70 percent of GDP by 2023), and it is significantly lower than under the BPC Alternative Baseline* (81 percent).
The chart below illustrates the revenue and spending levels achieved in 2023 by various budget paths, including Chairman Ryan’s.
Ryan’s budget would necessitate an increase of the debt ceiling by roughly $3.6 trillion through 2023. Due to the significant debt reduction contained in that plan, the increase is approximately $6.6 trillion less than required by the BPC Alternative Baseline over the same period.
Regardless of what budget is implemented for FY 2014, BPC has projected the debt limit will next need to be increased as soon as August of this year.
Medicaid and the Children’s Health Insurance Program (CHIP)
This budget would repeal the Patient Protection and Affordable Care Act’s (PPACA) expansion of Medicaid and CHIP is scheduled to extend coverage to most nonelderly adults and children with incomes below 138 percent of the federal poverty level.
Additionally, instead of the current shared-financing system between the states and federal government, the federal share of Medicaid and CHIP would be allocated to the states through block grants. The budget also recommends giving states additional flexibility to use those funds to deliver health coverage.
The total dollar amount of the block grants would increase annually with population growth and inflation (approximately 3 percent annually, on average). For reference, non-PPACA Medicaid spending is currently projected to grow at an average roughly 6 percent annually, according to CBO.
In FY 2023, Ryan’s budget would spend $347 billion on Medicaid and CHIP, whereas under CBO’s baseline, those two programs are projected to account for $578 billion. Approximately 40 percent of this reduction results from the fact Ryan’s budget repeals the Medicaid and CHIP expansion in the ACA, while the other 60 percent – roughly $140 billion in FY 2023 – is the cut produced by the block granting of both programs.
Within the ten-year window, Chairman Ryan only proposes one reform specific to Medicare that produces savings. The budget would increase means testing in Parts B and D of the program, resulting in upper-income beneficiaries paying higher premiums for their physician and prescription drug coverage. This is similar to the proposal from President Obama in his FY 2013 budget.
A larger reform of the Medicare program would begin for those becoming eligible in 2024 or later. The House GOP budget introduces a competitive bidding system, backstopped by a cap on per-beneficiary spending growth of 0.5 percentage points faster than the economy (GDP+0.5%). This reform is very similar to the proposal he advanced in December 2011 with Senator Ron Wyden (D-OR), except the annual growth cap is now set at GDP+0.5% instead of GDP+1%.
Seniors and individuals with disabilities would be able to choose between traditional Medicare and various private healthcare plans on a newly established, regulated Medicare Exchange, similar in structure to those created by PPACA. In each region, healthcare plans would be paid based on the cost of the second-least expensive approved private plan or traditional Medicare, whichever is less costly, risk-adjusted for the health status of their enrollees. The cost of this plan would establish the “benchmark” government payment in each locality. Therefore, the amount the government contributes would be tied to the cost of health care in a given area.
Beneficiaries who choose to enroll in a plan that is more expensive than the benchmark – even if that plan is traditional Medicare – would be required to pay the incremental additional cost. A beneficiary who enrolls in the least-expensive approved plan would be rebated the full difference in cost from the benchmark.
Additionally, if costs per enrollee continued to grow faster than the cap of GDP+0.5%, beneficiaries would have to pay an additional premium to make up the difference. For reference, CBO’s latest projection is Medicare will grow at GDP+0.6% per beneficiary from 2024-2029 and faster than GDP+1% thereafter (starting at GDP+1.5% in 2030 and slowly declining) under current law, which assumes the cuts from PPACA remain in place and are effective. If the backstop mentioned above went into place, the Ryan proposal would protect dual eligibles and some other low-income beneficiaries.
One significant difference in Medicare from last year’s budget is the current proposal does not mention an increase in the Medicare eligibility age. In the previous budget, beginning in 2023, the plan proposed to increase the eligibility age by two months per year until it reached 67 in 2034.
The “Doc Fix” – Chairman Ryan’s budget proposes to prevent the 25-percent cut to physicians’ payments under Medicare is scheduled for 2014. This automatic cut, resulting from the sustainable growth rate (SGR) mechanism installed in the 1990s, has been avoided in recent years – referred to as the “doc fix” – with offsetting deficit reduction. While including the “doc fix” in his budget, Chairman Ryan does not propose any specific offsets to pay for it. Therefore, in scoring the plan, BPC has added the cost of the fix (which is also included in the BPC Alternative Baseline) to the total debt and deficit levels.
The Medicare Sequester – The House GOP plan does not change the 2-percent Medicare sequestration cuts are scheduled to hit each year through 2021. For the eight years of sequestration included in the ten-year budget window (i.e., excluding FY 2013 – an additional $11 billion), these automatic reductions will cut roughly $116 billion from payments to providers and plans.
The Affordable Care Act
Among other elements, the House GOP budget would repeal:
The individual mandate;
The establishment of health insurance exchanges and subsides for eligible individuals and families who purchase coverage through them;
The expansion of Medicaid coverage to include most nonelderly people with income below 138 percent of poverty;
The Independent Payment Advisory Board (IPAB);
The provisions that closed the “doughnut hole” in Medicare Part D;
The so-called “Cadillac Tax” on high-cost employer-provided health plans;
The penalties on certain employers if any of their workers obtain subsidized coverage through the exchanges; and
The tax credits for small employers that offer health insurance.
It is important to note Chairman Ryan’s proposal maintains the various cuts to Medicare enacted in PPACA. CBO projects these reductions to save approximately $800 billion over the coming decade, and to continue restraining Medicare cost growth in later years.
Other Health Care
Tort Reform – The Ryan budget would cap non-economic and punitive damages in medical liability lawsuits. BPC has estimated a proposal like this (e.g., one from Senator Orrin Hatch (R-UT) in 2009) would save approximately $80 billion over the ten-year window.
The House GOP budget also recommends allowing Americans to purchase health insurance coverage across state lines.
Ryan does not make specific proposals to improve the solvency of Social Security, but calls for a bipartisan process, whereby both the president and congressional leaders would be required to propose plans to restore 75-year sustainable solvency to the program.
The chairman’s budget does make explicit reference to increasing the program’s minimum benefit for those most in need of assistance, a policy both Domenici-Rivlin 2.0 and Simpson-Bowles recommended in their broader reform packages.
Ryan outlines tax reform parameters that could be used by the Ways and Means Committee through the reconciliation process later this year. Chairman Ryan indicates he wants to achieve revenue-neutral tax reform from a current law baseline (i.e., assuming the usual “tax extenders” expire for 2014, the recently-extended low-income credits expire for 2018, and PPACA taxes are implemented as scheduled).
His proposal repeals the AMT, condenses the rate structure of the individual income tax to just two rates – with 10 percent as the bottom bracket and “a goal” of 25 percent for the higher one – and lowers the top corporate tax rate to 25 percent. Also, the text of the budget indicates disapproval of an increase in taxes on investment income, stating those taxes “suppress innovation, job creation, and economic growth.”
Ryan’s reform outline proposes to offset the revenue loss from the rate reductions and the repeal of tax provisions in PPACA (altogether approximately $7 trillion over ten years using BPC projections off of estimates by the Tax Policy Center) by broadening the base through the elimination or reform of exemptions, deductions, and credits in the income tax code. In order to remain revenue-neutral, nearly every tax expenditure would have to be eliminated – even more than are discarded in BPC’s Domenici-Rivlin 2.0 plan.
The chairman’s budget also would switch to a “territorial” system for corporate taxation.
Chairman Ryan’s budget proposal replaces the caps set by the sequester for FYs 2014-2021 with higher caps for defense discretionary and lower caps for non-defense discretionary (NDD) funding for FYs 2014-2023.
Defense Discretionary: Ryan’s budget ends the defense sequester beyond the current fiscal year and provides funding roughly at the pre-sequester cap levels from the Budget Control Act of 2011. While defense spending would still decline to its lowest levels as a share of the economy in the post-World War II era, the budget would increase funding by $550 billion above the CBO baseline that assumes the sequester through FY 2023.
Non-Defense Discretionary: In tandem with restoring the defense funding set to be cut by the sequester, Ryan’s budget would commensurately reduce non-defense discretionary spending far below the amount already being cut by sequestration. Beyond that, Ryan proposes yet another $249 billion of cuts to NDD over the next decade.
All together, the chairman’s budget would cut non-defense discretionary funding by an additional $800 billion on top of the sequester from FY 2014-2023.
NDD funding would decline to only two percent of GDP in 2023, significantly below its lowest level in the modern era of 3.2 percent.
Finally, as discussed in more detail below, due to the Ryan budget’s commitment to funding the Veterans Administration at $9 billion above its FY 2014 budget request – and continuing that commitment of services for the duration of the decade – along with requiring additional monies for Pell Grants out of discretionary funds, the dollars available for all other non-defense discretionary spending would be squeezed even further than described above.
Other Mandatory Programs
All nine years of the sequester cuts to other mandatory spending (which includes all mandatory spending other than the major entitlements, such as Medicare, Medicaid, and Social Security) would take effect under the Ryan budget. These across-the-board cuts to non-exempt spending programs would amount to roughly $40 billion from FY 2014-2023 (with an additional $5 billion cut in FY 2013).
The House GOP budget proposes $962 billion of cuts to other mandatory spending through FY 2023 below the current law sequestration levels. The following bullets specify some proposals that would contribute to this total:
Ryan would implement a plan to reduce the federal workforce by 10 percent over the next two years through retirements and voluntary separations, which the budget states will save $49 billion over ten years.
Ryan would require all federal employees to contribute significantly more money toward their retirement plans, saving $132 billion through FY 2023, according to the budget.
Ryan proposes to freeze the maximum award level for Pell Grants at $5,645 (the level scheduled under current law for FY 2014) through FY 2023.
Currently, Pell Grants are funded mostly through discretionary spending, which is supplemented by a smaller amount of mandatory spending. Under the House GOP budget, mandatory spending on Pell Grants would end and they would be entirely funded through discretionary spending. Thus, in order to maintain the funding levels proposed in the budget, further unidentified cuts to non-defense discretionary spending of approximately $60 billion over ten years would have to be made in order to remain under the caps.
Eligibility for federal student financial aid would be tightened under the chairman’s plan by reducing the amount of financial resources may be disregarded when awarding need-based aid.
The budget tasks the Agriculture Committee with implementing reforms to farm programs, such as fixed payments and crop-insurance programs, to save $31 billion through FY 2023 – a figure that is in the range of other recent savings proposals for farm programs.
Chairman Ryan proposes to convert the Supplemental Nutrition Assistance Program (food stamps) from an open-ended entitlement to a block grant to the states. The grants would be indexed for inflation and eligibility. There would also be new time limits and work requirements, which would be phased-in over an unspecified period. Overall, this will reduce federal funding for the program.
The House GOP budget includes a provision that would eliminate the ability for the administration to enter into waivers with states that modify the work requirements established in the Temporary Assistance for Needy Families (welfare) statute.
The budget proposal winds down government support for Fannie Mae and Freddie Mac, eventually fully privatizing them. It also would require “fair-value scoring” (as detailed below) for all federal credit programs, including housing programs such as the Federal Housing Authority, which also guarantees a substantial number of mortgages.
The House GOP budget would consolidate dozens of job training programs into “career scholarship” programs and thereby reduce their total funding level. The plan would also increase accountability by tracking metrics that can measure the success rate of the programs, and adopt a proposal from President Obama’s FY 2013 budget to close low-performing Job Corps centers.
Ryan proposes to sell “unneeded” federal property (as delineated in some recent pieces of legislation offered by Republicans) and increase the portion of the proceeds from federal land sales that is allocated to reducing the deficit. Additionally, he proposes to reduce the federal auto fleet (excluding the Department of Defense and the U.S. Postal Service) by 20 percent.
The House GOP plan proposes to revisit the Dodd-Frank financial regulation reforms.
The budget would rescind unobligated balances in the Department of Energy’s loan portfolio, and lift moratoriums and bans on exploration for domestic energy supplies, thereby raising an unspecified level of royalties and related revenue.
Chairman Ryan supports increases in anti-fraud accounts for the Medicare, Medicaid, Supplemental Security Income, and Disability Insurance programs.
Chairman Ryan also proposes a selection of reforms to the federal budget process:
Create a budget “point of order” – a parliamentary maneuver that can be used to block progress of legislation – for bills that would increase long-term mandatory spending beyond the ten-year budget scoring window.
Limit advance appropriations – discretionary spending approved in a prior fiscal year can sometimes be used to avoid spending limits.
Allow for the use of “fair value” accounting for assets and liabilities when scoring policies affecting federal credit programs. Some contend this calculation provides a truer picture of the costs by incorporating risk into the estimates. This accounting would increase the cost of credit programs – including federal student loans and federally guaranteed mortgage loans – as scored by the CBO.
Require all congressional authorizing committees to hold regular hearings about and provide annual recommendations for spending reductions for the programs within their jurisdiction.
* This goal can be accomplished without ever balancing the budget; as long as gross domestic product (GDP) is growing at a faster rate than the nation’s debt burden, the debt will shrink as a share of the economy.
** The BPC Alternative Baseline assumes current law, except:
funding for combat operations overseas winds down;
Medicare physician payments are frozen at 2013 levels (the “doc fix”);
the sequester is waived;
expiring tax provisions are extended as they have been in the past; and
aid for Hurricane Sandy is not extrapolated for future years.