Defining the FY2012 Budget Debate

April 19, 2011 - Notes and Sources

Before leaving town for the April recess, members of the U.S. House of Representatives voted on two different blueprints for the Fiscal Year 2012 federal budget – one introduced by House Budget Committee Chairman Paul Ryan (R-WI) and the other by the Congressional Progressive Caucus (CPC). One (Ryan) was approved, the other (CPC) was rejected. Together they represent opposite ends of the continuum of budget options currently under debate in Washington.

President Obama must navigate along this continuum during future negotiations with Congress over the FY2012 budget. In his April 13 speech on fiscal policy, the President responded strongly to a number of initiatives proposed in Chairman Ryan's plan. Unlike the CPC and Ryan plans, which are very detailed, the President's remarks are more of a general framework on which he will have to build during the budget debate.

The Ryan proposal constitutes the House FY2012 Budget Resolution and, if enacted by both the House and Senate, would set overall spending guidelines for Congress as they work on the FY2012 budget. The proposal passed the House on April 15, 2011 after only 4 hours of debate. The vote was 235 to 193 along party lines, with four Republicans voting “no.”  The CPC proposal was offered as an amendment to the Budget Resolution, but failed by a vote of 77-347.



Two Visions for America

House Budget Committee Chairman Paul Ryan’s “Path for Prosperity” and the Congressional Progressive Caucus’s “People’s Budget” are more than competing budget proposals. They are also very different visions for our nation.

The Ryan plan limits the size and scope of government and emphasizes the role of private corporations to provide jobs and create economic growth.  The CPC plan, on the other hand, focuses on job creation through such initiatives as the Surface Transportation Reauthorization and the Job Training and Workforce Development plans, strengthening the social safety net and reducing income inequality.

The fundamental differences between these two budgets revolve around the role of the government in the economy and the workings of the free market. The Ryan plan relies on free market forces to bring prosperity that will eventually “trickle down” to the lower and middle-classes by putting more money in the hands of businesses and wealthy individuals through tax cuts. The CPC proposal assumes there is a need for the government to make up for the failings of the free market system and to provide programs for the less fortunate.

A second distinction lies in the solution to the growing deficit problem. Chairman Ryan believes that the source of the problem is out of control spending and that slashing government programs alone will reduce the deficit. The CPC believes that raising revenues is as important as managing spending when dealing with the deficit because current taxation policies have reduced government income.

A third difference is the role of tax policy. The Ryan plan reduces corporate taxes and personal income taxes for the wealthy in an effort to spur economic growth, while the CPC approach uses taxes as a mechanism to reduce the growing income and wealth gap.


The Numbers

Both plans predict a reduction in the deficit. Yet the size of the reduction and the way it is accomplished are very different.

The GOP plan would reduce deficits by $1.6 trillion relative to the Congressional Budget Office’s (CBO) “baseline” budget through 2021. [Note: The CBO baseline is the current level of federal spending adjusted for inflation. It is the amount of money necessary to maintain all federal programs at their current level of activity.] The CPC plan would reduce deficits by $4.7 trillion for 2012-2021 compared to the CBO baseline. While the CPC plan claims to achieve a budget surplus of $30 billion in 2021, the GOP plan still envisions an annual deficit of nearly $400 billion in that year.

There are three strategies for addressing the country’s long-term deficits prevalant in the current debate:

  1. Cut benefits Americans receive from mandatory spending programs
  2. Cut security-related discretionary spending
  3. Raise government revenues by increasing taxes
Cumulative differences from the CBO baseline*, 2012-2021 Congressional Progressive Caucus Budget House GOP budget
Revenue $3.3 trillion more $4.2 trillion less
Non-security discretionary spending $1.7 trillion in new spending/investments $1.8 trillion in cuts
Security spending $2.3 trillion in cuts $0.8 trillion in cuts
Medicare, Medicaid, Social Security, and other mandatory spending No cuts $2.9 trillion in cuts
Net interest on debt payments $0.8 trillion less $0.2 trillion less
Deficit reduction $4.7 trillion less $1.6 trillion less

* The CBO baseline assumes that Congress will make no changes to current law over the next decade. Importantly, it assumes that Congress will allow for Bush era tax cuts to expire in 2013.



The Proposals

The table below lists the specific proposals in each plan. On the spending side, the CPC argues for the continued government provision of key public services, such as Medicare, and the role of public investment in assisting economic recovery by providing employment and rebuilding the nation’s infrastructure. The Ryan plan, on the other hand, severely limits the size and role of the government, through privatizing Medicare and reducing federal government employment.

On the revenue side, the contrasts between the two budgets are clear. The CPC increases taxes on the wealthy and corporations, stating that they have not been paying their fair share, while Ryan reduces taxes for these groups citing the need to encourage private investment and job growth.

  Congressional Progressive Caucus People's Budget Rep. Ryan's The Path to Prosperity
     
Underlying Philosophy Strengthens role of government in reducing income inequality and providing social safety net. Reduces deficit through combination of increased revenues and reductions in spending Relies on private sector to spur economic growth and employment using a trickle down approach. Reduces deficit solely through spending cuts
     
Revenues Shifts tax burden towards higher income earners and corporations Decreases taxes for wealthy and corporations
Individual Taxes Allows for the expiration of Bush era tax cuts Maintains the Bush era tax cuts
  Reverts highest individual tax brackets to 36% and 39.6% from 33% and 35% Cuts the top individual tax rate to 25% from 35%
  Enacts new tax brackets for high income earners (45%-49% for $1 million - $1 billion range Consolidates the current six tax brackets
  Taxes capital gains and dividends as ordinary income Eliminates $800 billion in tax increases imposed by the Patient Protection and Affordable Care Act
  Limits tax benefit of itemized deductions to 28%  
  Enacts progressive estate tax in which larger estates pay higher tax rates  
Corporate Taxes Imposes financial transaction tax on derivatives and speculative financial products Reduces corporate tax rate to 25% from 35%
  Repeals tax deductions and preferences for oil, natural gas and coal producers Eliminates loopholes and deductions that allow some corporations to pay no tax
  Taxes US corporate foreign income as it is earned instead of as dividend  
  Imposes tax equal to 0.15% of covered liabilities for banks with more than $50 billion in assets  
     
Investment Emphasizes public investment as engine for job creation and economic growth Believes that public investment crowds out private investment
  Rebuilds infrastructure - highways, railways, National Infrastructure Bank  
  Funds highway construction through increase in Gasoline Tax of 25 cents  
     
Health Care and Social Safety Net Maintains government role in providing vital public services and programs Limits government provision of social programs
  Maintains Medicare reimbursement rates for doctors Privatizes Medicare starting in 2022 for new beneficiaries
  Establishes public health care option in health care exchanges starting in 2014 Repeals Patient Protection and Affordable Care Act
  Negotiates drug prices with pharmaceutical companies Raises age of Medicare eligibility to 67 from 65
  Increases Social Security benefits based on higher employee contributions Converts Medicaid into block grants to the states
  Raises Social Security contribution limits, including employer contributions for high earners Converts SNAP (food stamps) into block grant to the states. Requires recipients to work or get job training
    Reduces Pell grants to 2008 levels
    Imposes time limits and work requirements for recipients of federal housing assistance (Section 8)
     
Defense Makes significant cuts in annual defense spending and ends the wars in Iraq and Afghanistan in FY2012 Largely exempts the military from spending cuts
Funding for Security Generates $2.3 trillion in savings compared to the CBO baseline over the FY2012-2021 period Provides real growth for “security” in each year through 2021, totaling $214 billion in new spending
Annual Pentagon Spending Reduces DoD baseline budget by $692.2 billion over 10 years compared to CBO, or $816.7 billion compared to the Obama Pentagon spending plan Reduces DoD waste by $178 billion. Reinvests $100 billion of this into key combat capabilities and uses $78 billion to reduce the deficit
Overseas Contingency Operations (Iraq & Afghanistan) Provides $161.4 billion for “Overseas Contingency Operations” (OCO) in FY2012 and withdraws U.S. forces from Iraq and Afghanistan. Provides no funding for OCO starting in FY2013, saving $1.6 trillion between 2013-2021 compared to the CBO baseline Continues Iraq and Afghanistan wars and provides $117.8 billion in FY2012. Anticipates over $1 trillion in savings from reduced costs of the “Global War on Terror” over the next decade by using the Pentagon's $50 billion annual “placeholder” for OCO costs
     
Government Maintains size and role of government Reduces size and scope of government
  Provides percentage increases for discretionary programs Reduces size of government to 20% of GDP by 2015 and 15% of GDP by 2050
    Reduces non-security discretionary spending to pre-2008 levels
    Reduces public sector employment by 10% through attrition by 2014
    Institutes government pay freeze through 2015
    Increases federal employee contributions to retirement
    Privatizes Fannie Mae and Freddie Mac
    Decreases regulation of the energy industry
    Establishes a binding cap on total spending as a percentage of the economy
    Requires any increase in debt levels to be accompanied by spending reductions




The Obama Framework

In opening his April 13 remarks, President Obama said, “this debate over budgets and deficits is about more than just numbers on a page; it’s about more than just cutting and spending.  It’s about the kind of future that we want.  It’s about the kind of country that we believe in.” On the numbers, the President's plan generates $4 trillion in deficit reduction over 12 years: $2 trillion in spending cuts across the budget, lower interest payments on the debt by $1 trillion, and $1 trillion by eliminating tax benefits for the wealthy.

To achieve the $2 trillion in spending savings, the President plans to keep "annual domestic spending" (non-security) low by building on the cuts that he and Congressional leaders agreed to as part of the FY2011 budget deal, saving about $750 billion over 12 years. He would continue to invest in medical research, clean energy technology, infrastructure, education, and job training.  The President also believes that the military should be part of spending cuts, and he has proposed $400 billion in defense savings.

On health care, the President states that the reforms already enacted will reduce the deficit by $1 trillion. He retains Medicare and Medicaid, providing additional benefits at lower costs through a series of efficiencies to eliminate waste, cut prescription drug costs through Medicare's purchasing power, and create a Medicare commission to recommend the best ways to reduce unnecessary spending. These reforms will save $500 billion by 2023 and an additional $1 trillion in the decade after that .

On Social Security the President stated that although the program is not the cause of the federal deficit, "it faces real long-term challenges in a country that’s growing older."

To raise $1 trillion by eliminating tax benefits for the wealthiest Americans, President Obama stated that he would not agree to extend the Bush era tax cuts for the wealthy again, and that he would limit itemized deductions for the wealthiest 2 percent of Americans – a reform that would reduce the deficit by $320 billion over 10 years.