Budgets are about choices. Families must decide whether to replace the car or cut back on meals out and entertainment. Those of us who are weathering hard times must make far more difficult choices. But the fundamentals of budgeting are always about weighing alternatives and finding the one that is either the most enjoyable or the least painful.
Then there are pretend budgets. The most egregious example may be the “Penny Plan” introduced in 2011 by Rep. Connie Mack (R-FL), which now has more than 70 co-sponsors, including Sen. Rand Paul (R-KY), and is not really a budget at all. It contains the numbers but not the choices. Worse, it attempts to conceal from the public the kind of pain it would endure, particularly in states such as the one Rep. Mack represents, Florida.
Rep. Mack cuts federal spending by 1 percent each year until it is down to 18 percent of gross domestic product by 2018. He then keeps it at that level for the indefinite future. That sounds so easy that one might ask, “Why doesn’t he cut federal spending to 10 percent of GDP, which would allow us to cut federal taxes by one-third and still have a balanced budget?” The obvious answer is that we rely too heavily on an array of federal services to tolerate such a reduction. The same is true of Rep. Mack’s 18 percent.
Let me explain. The Congressional Budget Office projects that federal spending will total 22.5 percent of GDP 10 years from now, in 2022. That means that Rep. Mack’s plan would require a 4.4 percent of GDP cut, which, based on the Congressional Budget Office’s economic projections, would mean $1.1 trillion or about 20 percent less in federal spending than the Congressional Budget Office is forecasting we will have under current policy. Where would that money come from?
Already built into Congressional Budget Office assumptions is essentially a freeze in all government programs other than Social Security, Medicare, Medicaid, and the other entitlements. That means that the 15 major executive departments and all of the independent agencies will be spending about 20 percent less after adjusting for inflation and population growth than they are spending now. As a result, we are already facing significant cutbacks in government services, ranging from food safety to law enforcement, air traffic control and national defense—cutbacks on a scale that I personally don’t think we as a country will ultimately accept.
But let’s assume for the sake of argument that we do accept them. What further cuts will Rep. Mack’s budget plan require? Congressional Budget Office projections break down the 22.4 percent of GDP in the projected 2022 budget as follows: A total of 5.6 percent will go to discretionary programs; 14.3 percent will go to entitlement programs such as Social Security and Medicare; and 2.5 percent will go to interest on the debt. Rep. Mack advocates extending the 2001 and 2003 tax cuts by former President George W. Bush, so interest on the debt will be just as high under his plan even with his proposed spending cuts. That means that the 4.4 percent of GDP that he plans to take out of the federal budget will come either from discretionary programs or entitlements.
Making cuts of this magnitude in discretionary programs would be highly problematic for a number of reasons. First, since there will only be 5.6 percent left in those programs in 2022 (down from 8.4 percent this year) based on Congressional Budget Office projections, taking Rep. Mack’s 4.4 percent of GDP from those programs would mean an 80 percent cut in program levels beyond the real per-capita cuts forced by a 10-year freeze. Further, the majority of that 5.6 percent is defense spending. Does Rep. Mack really expect to eliminate 8 of the 10 active divisions in the Army or 225 of the 281 ships in the Navy?
The nondefense side of discretionary spending simply isn’t big enough to permit such a cut. If the FBI, the federal judiciary, the Federal Aviation Administration, NASA, the veterans medical program, the State Department, Customs and Border Patrol, the National Parks, cancer research, aid to local schools, and every other activity of every other department and independent agency of the government outside of defense was eliminated, you would only cut about 2.6 percent of GDP. You would still have to find another 1.8 percent elsewhere to get to the 4.4 percent needed in Rep. Mack’s plan.
That is why budget experts in both parties and of all philosophical persuasions recognize that holding government spending at a level even close to 18 percent will require huge reductions in entitlement spending and namely in programs for the elderly. Social Security and Medicare alone account for more than two-thirds of all entitlement spending. Medicaid may be thought of as a low-income program, but it is the principal payer of nursing home services for patients who have exhausted their personal assets—the situation in which most nursing home residents find themselves after a year or more as patients. In 2011 the elderly and disabled accounted for two-thirds of Medicaid payments, and when Medicaid is added to Social Security and Medicare, you have 85 percent of all entitlement spending.
There are lots of ways you can cut these programs. You can raise Medicare deductibles. You can give annual cost-of-living adjustments that are 1 percent or more below the actual increase in the cost of living. You can limit the drugs, procedures, and tests covered under Medicare. You could require immediate family members to contribute to the cost of nursing home care. The list is almost endless, but nearly all of these changes will have a big impact on the lives of millions—perhaps tens of millions—of real people. That is not to say that with a looming debt crisis, they should not be weighed against other options for restoring fiscal well-being. But if they are going to be on the table, we should know that they are on the table.
The so-called Penny Plan introduced by Rep. Mack is not a budget at all but simply a clever rhetorical gimmick to force such cuts while pretending to make only modest adjustments.
If we are going to resolve the current budget impasse and restore our nation’s fiscal balance, politicians need to level with the American people and explain the choices—and what they could potentially mean—to people. The Mack “Penny Plan” does just the opposite. It pretends that the budget problem can be solved easily and obscures the pain under a shroud of a simplistic and misleading mathematical formula.
Scott Lilly is a Senior Fellow at the Center for American Progress.