Paul Ryan’s Fiscal Year 2013 Budget: The Details

By Loren Adler, Shai Akabas

Wednesday, March 21, 2012

UPDATE: Details on Paul Ryan’s Fiscal Year 2014 Budget

Representative Paul Ryan (R-WI) at a BPC policy forum in December 2011

We hope that this comprehensive summary will further clarify the entirety of his plan, and compare it in some key respects to that of President Barack Obama and the plans proposed by the bipartisan fiscal commissions (BPC’s Domenici-Rivlin and Bowles-Simpson).


More from BPC’s FY 2013 Budget Analysis Series


View BPC’s interactive Fiscal Cliff Timeline


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 debt reduction plan, 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 Ryan’s budget, the ratio of debt to our economy, or gross domestic product (GDP), would decline to 62 percent by 2022. Notably, this is lower than the debt levels achieved by either the Domenici-Rivlin or Bowles-Simpson commissions (both of which reduce the debt to 67 percent of GDP by 2022), and significantly lower than that under the president’s budget proposal for FY 2013 (76 percent) or the BPC Plausible Baseline* (86 percent).

The chart below illustrates the revenue and spending levels achieved in 2022 by each major budget plan.

 

Ryan%20Budget%2011_0(1).jpg

To view and share a larger version of the graph above, click here.

Ryan2(1).jpg

To view and share a larger version of the graph above, click here.

Debt Ceiling

Ryan’s budget would necessitate an increase of the debt ceiling by roughly $5.5 trillion through 2022. Due to the comparatively lower overall level of debt cited above, the increase is approximately $3 trillion less than that required by the president’s budget over the same horizon.

Medicaid and the Children’s Health Insurance Program (CHIP)

This budget would repeal the Affordable Care Act’s (ACAs) expansion of Medicaid and CHIP that is scheduled to extend coverage to most nonelderly people (and their 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 would be allocated to the states through block grants.

  • The total dollar amount of the block grants would increase annually with population growth and inflation (approximately 3% annually, on average). For reference, Medicaid spending currently has an average annual growth rate of roughly 7%, according to CBO.
  • In the year 2022, Ryan’s spending on Medicaid and CHIP is $332 billion, whereas under CBO’s baseline, that total amounts to $628 billion. Approximately half of this reduction results from the fact that Ryan’s budget repeals the Medicaid and CHIP expansion in the ACA, while the other half – roughly $160 billion in 2022 – is the cut produced by the block granting of both programs.
  • CBO analysis: “The responses of the states [to this policy] would be of particular importance. If states were given additional flexibility to allocate federal funds for Medicaid and CHIP according to their own priorities, they might be able to improve the efficiency of those programs in delivering health care to low-income populations. Nevertheless, even with significant efficiency gains, the magnitude of the reduction in spending relative to such spending in the other scenarios means that states would need to increase their spending on these programs, make considerable cutbacks in them, or both. Cutbacks might involve reduced eligibility for Medicaid and CHIP, coverage of fewer services, lower payments to providers, or increased cost-sharing by beneficiaries – all of which would reduce access to care.

Medicare

Under Ryan’s budget, the Medicare program would remain the same as under current law for everyone enrolled before 2023. Two changes would be made for those who become eligible in 2023 or later:

  1. 1) Beginning in 2023, the chairman’s plan increases the eligibility age for Medicare by two months per year until it reaches 67 in 2034. 2) Ryan’s budget introduces a competitive bidding system, backstopped by a cap on per beneficiary growth of 0.5 percentage points faster than the economy (GDP+0.5%). This reform is very similar to the proposal that he advanced in December 2011 with Senator Ron Wyden (D-OR), except that the annual growth cap is now set at GDP+0.5% instead of GDP+1%. Seniors would be able to choose between traditional fee-for-service Medicare (FFS) and various private healthcare plans on a newly established, regulated Medicare Exchange, similar in structure to those created by the ACA. In each region, healthcare plans would be paid based on the cost of the second-least expensive approved private plan or FFS, 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 that 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 FFS – 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%, seniors would have to pay an additional premium to make up the difference. For reference, CBO projects Medicare to grow at GDP+0.8% per beneficiary from 2023-2032 and GDP+1.7% thereafter under current law, which assumes that the cuts from the ACA remain in place and are effective.

Ryan’s budget does not propose to prevent the 27-percent cut to physicians’ payments under Medicare that is scheduled to be imposed in calendar year 2013. This automatic cut resulting from the sustainable growth rate (SGR) mechanism installed in the 1990s has been avoided in recent years by providing offsetting deficit reduction – referred to as the “doc fix.” The chairman’s budget does not include such a “doc fix,” and thus would allow these cuts to occur.

Affordable Care Act

Among other elements, Ryan’s budget would repeal:

  • The individual mandate;
  • The establishment of health insurance exchanges and subsides for eligible individuals and families who purchase coverage through them (CBO analysis: “The number of people without health insurance would be much higher than under CBO’s [baseline scenario].”)
  • The expansion of Medicaid coverage to include most nonelderly people with income below 138 percent of poverty;
  • The Community Living Assistance Service and Supports (CLASS) act;
  • 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 that his proposal maintains the various cuts to Medicare enacted in the ACA. CBO projects these reductions to save more than $500 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 damages in medical liability lawsuits.  To view and share a larger version of the graph above, click here.

Social Security

Ryan does not make specific proposals for Social Security, but calls for a bipartisan process, whereby both the president and congressional leaders would have to submit plans to restore the program to balance.

Taxes

While he does not include a detailed proposal, Ryan indicates that he wants to achieve revenue-neutral tax reform from a current policy baseline – i.e., if all of the 2001, 2003, and 2010 tax cuts are extended and the Alternative Minimum Tax (AMT) is indexed to inflation. His proposal repeals the AMT, condenses the rate structure of the individual income tax to just two rates of 10 and 25 percent, and lowers the top corporate tax rate to 25 percent. His reform proposes to offset the revenue loss from these elements and the repeal of tax provisions in the ACA (altogether estimated by the Tax Policy Center to be $4.6 trillion over 10 years) 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. The Chairman’s budget also would switch to a “territorial” system for corporate taxation.

Discretionary Spending

The treatment of discretionary spending is a bit difficult to follow, but below is our attempt at an explanation:

  • The Ryan budget turns off the automatic sequester cuts to annually appropriated (discretionary) spending that are scheduled to take effect on January 2, 2013. (These cuts for FY 2013 are more than offset by the reductions that are mandated through the reconciliation process described in the “Other Mandatory” section of this post.)
  • The reduced caps imposed by the 2014-2021 sequester for both defense and non-defense discretionary (NDD) spending are altered – and for all practical purposes, replaced – to fit the levels allocated in the Chairman’s budget. (See p. 45 of the legislative text.) The total discretionary spending levels are approximately $120 billion below the levels implied by the sequester over the decade
  • The budget sets defense discretionary spending at roughly $200 billion above the outlays implied by the original Budget Control Act (BCA) cap levels for the decade. Thus, defense discretionary outlays over the 10-year window in the Ryan budget are $710 billion above the levels implied by the sequester.
  • When the previous two bullet points are taken together, the conclusion is that NDD spending is taking enormous reductions in the Ryan budget. To be exact, outlays for NDD over the decade would be approximately $830 billion (or $710 billion plus $120 billion) below the sequester cap levels. This further reduces NDD spending by more than double the amount that is cut from NDD by the sequester, which is roughly $340 billion. So, in total, the Ryan proposal would reduce NDD spending by $1.17 trillion from the outlay levels implied by the BCA caps.
  • In addition, Ryan proposes to eliminate funds that have been budgeted for disaster relief, and require all such spending to fit under the significantly-constrained NDD caps. This would amount to roughly $80 billion over the decade.
  • The 2022 levels in the budget for both defense discretionary and NDD would represent historic lows as a percentage of GDP.

 To view and share a larger version of the graph above, click here.  To view and share a larger version of the graph above, click here.

Other Mandatory Programs

  • All nine years of the sequester cuts to mandatory spending programs are allowed to take effect under the House GOP budget. These across-the-board cuts to non-exempt programs would amount to roughly $114 billion through 2022.
  • In waiving the sequester cuts to annually appropriated spending for FY 2013, Ryan’s plan more than offsets this policy through additional cuts to mandatory spending programs. These reductions are to occur through a reconciliation-like process, and total approximately $240 billion in savings over 10 years.
  • Starting in 2016, Ryan proposes to block grant funding for the Supplemental Nutrition Assistance Program (food stamps) to the states. The grants would be indexed for inflation and eligibility, but the definition for the latter would be changed to include time limits on participation and work requirements.
  • The budget also transforms other low-income assistance programs to the states through block grants in a similar manner.
  • Ryan would require federal civilian employees to contribute significantly more money toward their retirement plans.
  • At the start of the next farm bill, the budget proposes to reform farm programs by reducing fixed payments to farmers and altering the open-ended nature of the government’s support for crop insurance.

Miscellaneous

  • Ryan’s proposal winds down Fannie Mae and Freddie Mac, eventually fully privatizing them. It also would revise the Credit Reform Act to stop the transfer of taxpayer risk to the Federal Housing Administration by using “fair-value scoring” for federal credit programs.
  • Ryan proposes to limit the growth of Pell grants.
  • The budget consolidates dozens of job training programs.
  • Ryan proposes to revisit the Dodd-Frank financial regulation reform.
  • The budget lifts moratoriums and bans on exploration for domestic energy supplies, thereby raising an unspecified level of revenues from bonus bids, rents, royalties, and fees.
  • Ryan proposes to sell unneeded federal assets and reduce the federal auto fleet (excluding the Department of Defense and the U.S. Postal Service) by 20 percent.
  • The budget eliminates funding for high-speed rail projects.
  • Chairman Ryan supports increases in anti-fraud accounts for the Medicare, Medicaid, Supplemental Security Income, and Disability Insurance programs.

The plan also proposes a number of accounting and process changes to realize gains and minimize losses in certain areas of the federal budget:

  • Allow for the use of “fair value” accounting for assets and liabilities when scoring policies affecting federal credit programs. Some contend that this calculation provides a truer picture of the costs by incorporating risk into the estimates.
  • Identify and achieve savings through the cancellation or rescission of unobligated balances.
  • Prevent deficit-negative transfers from the Treasury to the Highway Trust Fund.
  • Require regular hearings and reports on waste, fraud, and abuse from congressional authorizing committees.

* BPC’s Plausible Baseline assumes:

  1. The 2001, 2003, and 2010 tax cuts are extended permanently.
  2. The AMT is indexed to inflation.
  3. Medicare physician payment rates are frozen at 2012 levels (the “doc fix”).
  4. The Budget Control Act’s sequester does not take effect.
  5. The number of troops deployed for overseas contingency operations is reduced to 45,000 by 2015.

Related Posts

2012-03-21 00:00:00
How Paul Ryan’s budget plan compares to those of President Obama and BPC’s Debt Reduction Task Force