Thursday, April 07, 2011

A Republican walks the walk on cutting the US federal deficit

Business Times - 08 Apr 2011

A Republican walks the walk on cutting the US federal deficit


AFTER talking and talking about the need to take control of the growing debt, there are signs that at least some politicians in Washington may be getting serious about tackling the issue. One of the Republican Party's rising young stars, Representative Paul Ryan of Wisconsin, proposed on Tuesday cutting about US$6 trillion from the US federal deficit over the next 10 years. His plan ignited a major debate on Capitol Hill that could produce a powerful political momentum in Washington towards placing the issue of America's crumbling fiscal house on the top of the legislative and policy agendas, and affecting the outcome of next year's elections.

There is a general consensus in Washington that the mounting deficit threatens long-term US economic security and the standard of living of Americans, and that reducing the deficit would require major cuts in government spending.

Federal expenditures more than doubled from US$1.86 trillion to US$3.82 trillion in the 10 years from 2001 to 2011, producing this year's huge US$1.65 trillion fiscal deficit.

According to estimates by the non-partisan Congressional Budget Office (CBO), President Barack Obama's budget plans would add another US$10.4 trillion in deficits over the next decade from 2012 to 2021. The CBO projected that the expected addition to the federal debt over the next decade would mean that a family of four would owe a debt of US$134,000 by the end of the decade - doubling the debt that families will face by the end of 2011.

There is also a general agreement in Washington that the reason that no dramatic steps have been taken to deal with the growing debt has to do with a lack of political courage. Indeed, the recommendations to solving the debt crisis that were offered by a bipartisan com- mission last fall went nowhere as they faced strong opposition from both Republican and Democrat lawmakers. They expressed concerns that the spending cuts and other reforms proposed by the commission were too 'painful'. Translation: If any lawmaker would support the recommendations, he or she would be voted out of office in the next election.

So do Mr Ryan and his Republican colleagues have the political will and power to prove the critics wrong? Mr Ryan's plan cuts US$6.2 trillion in spending over the next decade against President Obama's 2012 budget and cuts US$5.8 trillion relative to the current policy baseline. And it achieves US$4.4 trillion in deficit reduction over the next decade compared to the president's 2012 budget, exceeding the recommendations of the bipartisan commission. Implementing the plan would bring federal spending back to 20 per cent of GDP, which is roughly its historic level, dropping to 15 per cent by 2050. And it will reduce the national debt by US$4.7 trillion, as the accumulated debt is being paid off over time.

That the plan introduced by Mr Ryan, who is the chairman of the House of Representatives Budget Committee, is so remarkable has to do not only with its big numbers. He is calling for a major restructuring of placing a cap on spending on two government-backed programmes that subsidise healthcare for the elderly (Medicare) and the poor (Medicaid). And any small-time political professional in Washington would tell you that any politician who calls for placing a cap on spending on Medicare - which provides healthcare for every American above the age of 65 - is a politician with a death wish. Indeed, a recent poll indicated that close to 80 per cent of Americans are opposed to reducing federal support for Medicare, which is exactly what Mr Ryan is proposing.

His 'Path to Prosperity' budget for 2012 and a 10-year spending blueprint is also calling for a major overhaul of the US tax system - another politically charged issue - by lowering the top corporate and individual income tax rates to 25 per cent. That would get rid of the plan for US$1.5 trillion in tax increases on the wealthy anticipated by the 2012 Obama budget. It would also bring an end to special tax breaks that the government provides to big corporations with powerful connections in Washington and replace them with a lower tax rate on all corporations.

More controversial is Mr Ryan's proposal to cut the US$800 billion in new taxes imposed by the healthcare law, which the budget repeals and defunds.

And Mr Ryan's plan refrains from making any changes in the government-financed national insurance programme (Social Security) that makes funds available to any American above 62. Most experts believe that the programme will not be sustainable and will probably run out of money by 2037 as millions of 'baby boomers' start to retire in the coming years.

Moreover, Mr Ryan proposes a mostly symbolic cut of US$78 billion in the gigantic defence budget that is expected to expand as the US is being sucked into new military interventions in the Middle East, in addition to the two wars in Afghanistan and Iraq.

During a press conference, Mr Ryan insisted that embracing his plan was a 'moral imperative' and would avert the 'economic collapse' of the US. 'We're actually saving Medicare and Medicaid, making them solvent for future generations. And, yes, we're cutting spending. We're cutting a lot of spending, because government is spending way beyond its means.'

Democratic lawmakers are expected to bash Mr Ryan's proposals as reckless and argue that they reflect the pro-free-market ideological orientation of the Republicans and their close ties to business interests, while hurting the members of the middle class who have yet to benefit from the slow economic recovery.

Hence, Representative Chris Van Hollen from Maryland, who is the ranking Democrat on the House Budget Committee, has accused Mr Ryan of protecting 'tax breaks for millionaires, oil companies and other big-money special interests while slashing our investment in education, ending the current healthcare guarantees for seniors on Medicare, and denying healthcare coverage to tens of millions of Americans'.

But the Democrats and the White House are going to be under pressure to counter Mr Ryan's plan to deal with the nation's debt by issuing their own proposals. Mr Obama and the Democrats are expected to make the argument that embracing a major plan to cut the deficit would have to wait until the momentum of the economic recovery is accelerated and that there are clear signs that the high unemployment rate is falling. Republicans will probably counter by insisting that the rising debt is a clear and present danger, and needs to be dealt with as soon as possible.

It will be interesting to see how American voters respond to this debate during next year's presidential election and Congressional races. Will they reward the Republican candidates like Mr Ryan calling for cuts in spending on Medicare and other social and economic programmes, and punish the Big-Government-spending Democrats? Or will they buy into the message advanced by Mr Obama and the Democrats that the cuts proposed by the Republicans are going to slow down economic and job growth?

The irony is that an improvement in the economic conditions and a fall in the unemployment rate could actually benefit the Republicans, since voters who feel a growing sense of economic security will be more willing to support cuts in government spending.

Copyright © 2010 Singapore Press Holdings Ltd. All rights reserved.

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