Credibility Deficit Widens with President’s Third “Budget” in Seven Months
President’s “Math” Doesn’t Add Up
In the span of seven months, President Obama has offered three different budget plans for the federal government. He offered an actual budget in February, a budget “framework” in April, and yet another tax-and-spend plan this past week (more spending in the “American Jobs Act”; more taxes in a new plan unveiled yesterday). Unfortunately, none of these approaches has provided the kind of leadership that America needs to lift the crushing burden of debt while promoting sustained economic growth.
The following House Budget Committee analysis unpacks the President’s widening credibility deficit – on taxes, spending, debt, and gimmicks.
Tax Hikes on Job Creators: Contrary to claims of “balance,” the President’s latest tax-and-spend plan is dominated by higher taxes. Not including war spending and estimated savings in debt-service costs, 80 percent of the deficit-reduction claims take the form of higher taxes. At a time when economic growth remains stagnant and private-sector job creation remains elusive, the President’s calls for tax increases are deeply misguided.
Doubles Down on Health Care Rationing: This Administration’s misguided approach to health care spending is most evident in its doubling down on the President’s new health care law. Instead of offering a plan to save and strengthen critical health and retirement security programs so that government can keep its promises to current and future generations, the proposal claims that 90 percent of its Medicare savings will come from the same kinds of price controls that have failed in the past. If tried on the scale that the President wants, these restrictions would result in reduced access and denied benefits for current seniors.
Lack of Credibility Reveals Deeper Flaws: Rebutting criticism of a plan marked by divisive substance and marketed with partisan rhetoric, President Obama said yesterday: “It’s not class warfare. It’s math.” The President’s comments demand attention to the numbers. And the numbers underscore this President’s lack of fiscal seriousness. Because of empty promises made by politicians of both political parties, the federal government faces tens of trillions of dollars in unfunded liabilities. The President has called for even higher taxes and deeper Medicare cuts – yet “math” reveals that he is still not being honest with the American people on what will be needed to seriously confront our looming fiscal crisis.
The unavoidable truth of the matter is that this President remains wedded to an unsustainable trajectory of government spending. The tax increases and Medicare price controls he has proposed are insufficient to match the spending he’s promised.
The Merciless “Math”
The President insists that his demands for tax increases on 0.3% of the population are not driven by ideology, but rather by “math.” In his remarks in the Rose Garden yesterday, he continued: “The money has to come from some place.” So let’s examine the “math”:
Even if tax revenue as a share of the economy were to grow in excess of its historical average, tax increases simply cannot match the spending commitments of the federal government in the years ahead. Based on Congressional Budget Office (CBO) projections of their likely policy trajectory, government spending is on pace to double within a generation, and eclipse 75 percent of the entire economy later this century (see Figure 1). As the Washington Examiner’s Philip Klein observed: “No amount of rhetoric by [President] Obama is going to change the numbers.” In other words: “It’s math.”
The federal government’s debt challenge is a function of the explosive growth of entitlement spending, specifically the health care entitlements: Medicare, Medicaid, and most recently trillions of dollars of additional obligations stemming from the enactment of the President’s health care law (see Figure 3).
Medicare, Medicaid, and additional government health spending programs will soon eclipse all other government spending. According to Figure 4, non-health related government spending as a share of the economy is on pace to slowly decline in the decades ahead, while government’s spending on health care as a share of the economy explodes.
Currently, health care spending is growing twice as fast as economic growth. General revenue required to finance Medicare is expected to grow from $280 billion in 2011 to $468 billion in 2021. In future years, total federal health spending is expected to grow from 5.6 percent of GDP to nearly 20 percent of GDP – almost equal to the post-World War II average for the entire federal government. This is clearly unsustainable.
The exploding cost of health care is bankrupting the country, yet among the primary drivers of health inflation is the structure of the government’s open-ended health care entitlement programs.
Decades of Medicare price controls have failed to control spending. Instead of cutting costs, they encourage providers to bill for more services each year. Many experts – from both sides of the aisle – believe that the Medicare Fee-For-Service (FFS) system is a major reason for the explosion of costs in American health care.
Medicare reimburses providers for their services without question, without concern for quality and without thought to cost. This top-down delivery system exacerbates waste in the health care system, as none of the primary stakeholders has a strong incentive to reduce waste.
Politicians’ repeated efforts to patch this problem without reforming the structure of the subsidy have amounted to one failure after another. Time and again, Congress has sought to apply band-aids by reducing the rate at which doctors and hospitals are reimbursed for treating Medicare patients. These repeated fee reductions have had two consequences: Providers have either increased the volume of services they provide for each condition, leading to waste, fraud and abuse; or they have stopped accepting Medicare patients, limiting access for seniors.
Despite these misguided interventions, the rising cost of Medicare continues unabated. Today, Medicare spending is growing at a rate of 7.2 percent every year. This is more than twice the rate at which the nation’s economy is growing. The unchecked growth of the Medicare program threatens not only the federal budget, but also, more critically, the very health security of millions of American seniors. In testimony before the House Budget Committee, Department of Health and Human Services Secretary Kathleen Sebelius made clear: “I would say that the current fee-for-service system, yes, is unsustainable.”
Another major health care entitlement – Medicaid – has fallen victim to the same trend: an open-ended commitment that drives up costs, coupled with misguided price controls that restrict access. There is no limit on the federal government’s matching contributions to state spending, so state governments “spend most of their energy devising ways to ‘maximize’ how much they get from the federal government,” while seeking to minimize their own share of the tab. The program’s mandates and misaligned incentives have driven up spending at such a rate that Medicaid is now estimated to replace elementary and secondary education as the largest component of total state spending. In an effort to restrain costs, policymakers have sought to reduce payments to providers, resulting in Medicaid beneficiaries finding it increasingly difficult to find access to quality care.
The structural problems with Medicare and Medicaid, along with the discriminatory tax treatment of health insurance, all serve as key contributors to health inflation. The failure to reform these government policies has pushed affordable coverage out of reach for millions of Americans, eroded workers’ paychecks for those with coverage, and exacerbated the fiscal challenges at the federal, state, and local levels of government.
The President’s Health Overhaul Makes Matters Worse
Despite being sold as a serious attempt to tackle the problem of health inflation, the President’s health care law was anything but. Its primary focus was on expanding coverage via government subsidies, instead of making coverage more affordable with reforms that promote competition and choice. With its maze of mandates, dictates, controls, tax hikes and new entitlements, the flawed new law will push costs even further in the wrong direction:
The President and his party’s leaders are deeply committed to the bureaucratic vision of health care represented by their new health care law. They have greeted efforts to move federal health care policy in the direction of greater competition and choice with demagoguery and derision. It remains difficult to build bipartisan health care reform on top of a partisan health care law. Because of the Democrats’ intransigence on health care, their “grand bargain” proposals usually sidestep the politically difficult question of how to control government spending on health care. Too often, efforts to chart a sustainable fiscal path rely on artificial savings targets, as opposed to actual policy reforms that would reduce health care spending in the future.Rather than clinging to an unsustainable status quo, it is imperative that policymakers advance patient-centered reforms – fixing what’s broken in health care without breaking what’s working. In Medicare, this means giving seniors the power to choose from a list of Medicare approved and subsidized coverage options, like the system that members of Congress enjoy. In Medicaid, it means returning authority over the program to the states and giving them the flexibility to tailor their programs to the diverse needs of their unique populations. And for all Americans, it means making health insurance more portable and more affordable by personalizing the tax credit for health insurance.
The President’s Latest Budget Plan: Strike Three
The President remains firmly wedded to his unaffordable vision on health care. Unwilling to consider approaches that deal with the root drivers of health inflation, his budget proposals are unable to conform to basic math. There is no degree of taxation that can match the spending promises made by this Administration without inflicting irreparable economic damage. Government spending as a share of our economy is on pace to double by mid-century, and will consume 75 percent in the decades to follow.
The Misguided Approach on Health Care
Instead of proposing much needed reforms to health entitlement programs, the President instead doubles down on the top-down price controls from his health care plan.
The President continues to avoid offering serious proposals to save Medicare from its looming collapse.
The President’s proposal fails to address the biggest driver of state budget problems – Medicaid.
The President proposes $1.57 trillion in higher taxes in the midst of the slowest economic recovery in recent memory. While these tax hikes are leavened somewhat by his proposals to extend and expand certain tax relief that was agreed to on a bipartisan basis at the end of 2010, today’s proposal offers temporary tax rebates in exchange for permanently higher taxes on job creation.
Inequities in the tax code (for instance, the fact that tax loopholes are disproportionately used by the wealthy) should be addressed through fundamental tax reform, not through one-off punitive measures that seek to further divide Americans.
In a reprise of the failed stimulus program, the President proposes nearly $182 billion in new spending. As with the first failed stimulus, we can expect very little bang for the deficit-financed buck, as government does a poor job of allocating resources to their most efficient and productive uses (see, for example, the recent bankruptcy of stimulus recipient Solyndra). Meanwhile, growing federal debt and looming federal tax increases will fuel uncertainty about fiscal problems and discourage businesses from making the kinds of long-term investments that create jobs.
Increases Federal Intrusion into Local Education
Adds More Spending for “Shovel-Ready” Projects
Missed Opportunity for Federal Job Training Reform
Tax Increases Hidden In “Mandatory Savings”
The Return of the War Gimmicks
Potential Areas for Common Ground
The core failure of the President’s plan is its lack of seriousness in acknowledging what he calls “math.” The inadequacy of the proposal however, should not distract observers from the range of policy suggestions offered by the President – most of which would make our economic situation worse. Before discussing the proposed increases in taxes and spending, it is worth highlighting a few common sense proposals that are long overdue and worthy of consideration.
The President’s newest budget proposal does include several savings proposals that are similar to ideas included in the House-passed budget resolution, including the following areas:
The Debate America Deserves
It has been 873 days since Senate Democrats last passed a budget. The President and his party’s leaders have yet to put forward any specific solutions that actually lift the crushing burden of debt. In sharp contrast, the U.S. House of Representatives advanced an actual budget that strengthens the social safety net, tackles the entitlement crisis, pays off the debt, and charts a path to economic growth and job creation. The House passed this plan by its statutory deadline of April 15, 2011. Beyond meeting their legal obligation to pass a budget, members of the House met their solemn commitment to those they serve to confront the real debt crisis facing this nation.
The drivers of the debt are directly addressed in the House-passed budget, as government spending is brought under control and Washington’s fiscal house is put in order. Under its status quo projections detailed in its 2010 Long-Term Budget Outlook, CBO estimates that the federal government’s debt will grow to 344 percent of the economy by 2050. In that same year, CBO estimates debt under the House-passed budget will have dropped to 10 percent (see Figure 5).
As the federal government nears the limits of its borrowing authority, policymakers should cut what government spending they can and do so in a responsible manner. But when it comes to addressing the larger debt crisis before us, too many in Washington are still not having the debate the American people deserve.
View as a PDF here.
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