The Pros and Cons of Ryan’s 2015 Path to Prosperity Budget

Today, House Budget Committee Chairman Paul Ryan released the Fiscal Year 2015 Path to Prosperity Budget. Building on foundations established in 2011, this plan seeks to balance the budget within 10 years by cutting spending, reforming poverty programs, and importantly, reforming the health care entitlements—the largest drivers of deficit spending and debt.

In numbers, the Ryan Budget would:

• Cut spending by $5.1 trillion, including about $800 billion in lower interest costs.
• Achieve the biggest spending savings, $2 trillion, from repealing Obamacare.
• Keep a cap on discretionary spending through the end of the10-year budget window, after the BCA expires in 2021.
• Reduce the public debt from 73 percent of GDP in 2015 to 56 percent of GDP by 2024.
• Increase spending in nominal terms from $3.6 trillion (20.2 percent of GDP) to just shy of $5 trillion in 2024 (18.4 percent of GDP), spending $1 trillion less in 2024 than the President’s Budget called for.

Obamacare Repeal. Ryan’s budget would repeal new spending and new taxes in Obamacare. The budget would save $792 billion over 10 years by repealing the costly Medicaid expansion and $1.2 trillion over 10 years by repealing the subsidies and related exchange spending. The Ryan budget would repeal the numerous tax increases, including the government mandates on employers and individuals to purchase coverage. Such spending reductions are a critical first step to establishing a sound budget and necessary to lay the groundwork for conservative health care reform.

Medicaid Reforms. The Ryan budget proposal rightly repeals the Medicaid expansion included in Obamacare. In addition, it would put Medicaid on a budget by replacing the current open-ended funding model with a more fiscally sound allotment model that would be indexed to population growth and inflation. Such a change would help reduce the perverse incentives created by the open-ended funding model we have today. While setting a budget is a key first step, the policy changes that accompany these fiscal reforms are equally as important. In particular, policymakers should look to mainstream the Medicaid population into private coverage and out of the failing government program.

Medicare Reforms. The Ryan budget makes the structural changes that are desperately needed to the Medicare program. Repealing the Independent Payment Advisory Board and implementing a premium support model of financing for Medicare moves the program in a fiscally responsible and patient-centered direction, benefiting both taxpayers and seniors.

Unfortunately, the Ryan budget proposal doesn’t implement major structural reforms until 2024, which is too slow. Medicare’s fiscal challenges are too severe. The sooner this transition is made, the better.

The budget does consolidate the complex payment structure, secures legislative efforts to provide a long term “fix” for Medicare’s physician reimbursement system, raises the retirement age, and further reduces taxpayer subsidies for upper-income retirees. All are critical steps in order to transition toward premium support.

Tax Reform. The Ryan Budget again includes tax reform—for which Ryan should be applauded. Tax reform is vital to reviving the economy and putting it on a stronger foundation for growth going forward. The House, building off of Ways and Means chairman Dave Camp’s draft tax reform proposal, continues to do the heavy lifting for tax reform while President Obama and the Senate sit silent on this important issue. The continued work the House is doing keeps the debate on tax reform going and improves the chances for tax reform sooner rather than later.

Defense.  The FY2015 Budget Resolution is a step in the right direction for funding defense. It recognizes many areas of concern as a result of recent cuts to defense, such as, for example, the increased risk involved due to planned reductions in the force structure. Thus, starting in FY2016, the budget resolution increases the discretionary base budget for defense by an average of $54 billion each year over the Budget Control Act caps. This will, in essence, relieve the pressures of sequestration for defense. The new discretionary budget is also slightly higher than the President’s budget request for the Department of Defense by about $67 billion. While a far cry from fully funding defense, the increased spending on defense will prevent the military from making even more drastic cuts to our nation’s strength. Importantly, the budget would shift spending from inappropriate and wasteful domestic programs towards funding Congress’s main constitutional responsibility.

Education. The Ryan budget includes important reforms such as employing fair-value accounting measures. The federal government’s current accounting practices, by and large, fail to account for market risk, likely understating the cost of student loans to taxpayers. On the K–12 front, the Ryan budget wisely calls for the elimination of ineffective and duplicative programs. Moreover, the budget would put a cap on Pell Grant awards and shift the program onto the discretionary side of the budget where it would likely receive more deliberation and review by Congress.

Energy. When it comes to energy, the budget resolution makes clear that opening access to America’s natural resources and ending the federal government’s intervention in energy markets will promote competition, provide affordable energy, and avert wasted taxpayer dollars. For far too long, Washington has used the political process to control the production or consumption of one energy source or technology over another through laws, executive orders, regulations and government spending programs. The budget resolution rightly scales back duplicative and unnecessary Department of Energy programs that attempt to drive technologies into the marketplace.

Fannie and Freddie. The budget proposal “envisions the eventual elimination of Fannie Mae and Freddie Mac, winding down their government guarantee and ending taxpayer subsidies.” Eliminating Fannie and Freddie is a long overdue step toward getting the government out of the housing market, but the details of how this goal is accomplished will be critical. The proposal mentions possibly following the approach in H.R. 2767, the Protecting American Taxpayers and Homeowners Act of 2013, which is a step in the right direction. If, on the other hand, the Senate’s approach to housing finance reform were adopted, taxpayers would continue to guarantee private investments in the mortgage market. Also, importantly, the budget would account for Fannie and Freddie’s budgetary impact using a fair-value approach, revealing to taxpayers that the GSE’s impose a real cost on taxpayers.

Transportation. With regard to transportation, the budget would phase out subsidies for the Essential Air Services program; for over three decades, taxpayers have been subsidizing rural passengers who opt for air travel when other, possibly cheaper, ways of traveling are available. Phasing out the subsidies is a responsible reform that will give state and local governments time to plan. Perhaps most importantly, Ryan’s budget recommends that Washington give states increased flexibility to pay for their highway projects priorities, perhaps through keeping and spending the gas taxes collected in their state instead of sending them to Washington. Such a reform would empower states and citizens—not Washington bureaucrats and special interests—to solve their transportation challenges that they know best.

The following experts contributed to this blog: Alyene Senger (Health Care); Curtis Dubay (Taxes); Diem Salmon (Defense); Lindsey Burke (Education); Nick Loris (Energy), Norbert Michel (GSEs); Emily Goff (Transportation)

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