Ryan Versus Obama; Budget Plans Mean Fiscal Tightening Either Way

Tyler Durden's picture

Republican Presidential candidate Mitt Romney's selection of Rep. Paul Ryan (R-WI) as his running mate has generated renewed interest in the House-passed budget resolution that Ryan authored. Ryan's budget outline would reduce the deficit more quickly and impose more fiscal restraint than the President's budget proposal. However, as Goldman notes. while both proposals would increase revenues due to the scheduled expiration of the payroll tax cut at year end, the President's would raise income taxes as well. Rep. Ryan's plan, on the other hand, would cut spending sharply in 2013 and 2014, even though it assumes a one-year delay in the spending cuts under the "sequester" set to take effect at year-end.

Goldman Sachs: The President's Budget and the Ryan Plan: Fiscal Tightening Either Way

Republican Presidential candidate Mitt Romney announced on Saturday, August 11 that he has selected Rep. Paul Ryan, the Republican Chairman of the House Budget Committee, as his running mate. The selection of Rep. Ryan is notable because (1) he is more clearly associated with specific policy stances than most prior vice presidential candidates, and (2) the fiscal policy issues for which he is known also happen a key issue in the campaign as well as one of the key areas of economic uncertainty in the coming year. Market participants thus appear to be more interested than usual in the implications of the vice-presidential selection, particularly in light of the "fiscal cliff" at year end and the prospects for broader fiscal reforms in 2013.

While the selection of Rep. Ryan for the Republican ticket is very likely to increase the focus on fiscal issues in the presidential campaign, and thus might prompt increased discussion of the "fiscal cliff" on the campaign trail, this should have little bearing on the resolution of these issues at year end. We continue to believe that the economic effects of allowing the fiscal cliff to take effect in full will be the greatest motivation for members of Congress to reach an agreement.

On the other hand, Gov. Romney's vice-presidential selection is likely to increase the campaign focus on medium-term deficit reduction. Exhibit 1 below shows the fiscal path under (1) Rep. Ryan's budget plan, (2) the President's proposal, and (3) an extension of current policy. To calculate the path under current policy, we start with the Congressional Budget Office's (CBO) alternative scenario, which assumes extension of all expiring income tax cuts, and continued relief from the alternative minimum tax (AMT) and scheduled Medicare physician payment cuts. We make three further adjustments to reach a path equivalent with extending current policy: we assume (1) extension of the payroll tax cut, (2) a drawdown of troops overseas similar to the President's budget, and (3) an extension of emergency unemployment benefits. Even with these extensions, this path still brings the budget closer to balance due to cyclical improvement and some fiscal restraint built into current law.

Against this scenario, we compare the two other proposals. The first is the President's budget submission to Congress in February, which includes the recommendations on deficit reduction made to the "super committee" last year. The second is Rep. Ryan's "Path to Prosperity" proposal, which was the basis for the annual budget resolution the House passed earlier this year. The formats of these proposals are thus quite different, though both have shortcomings. The President's budget is very detailed, but relies on internal White House economic projections. For this reason, we rely on the Congressional Budget Office's re-estimate of the President's budget, which applies CBO's economic assumptions. Those economic assumptions are also implicit in Rep. Ryan's plan, but his plan comes in the form of an annual congressional budget resolution, a piece of legislation which typically includes few specifics and projects top-line revenue levels and spending by broad functional category. While Rep. Ryan has published additional details that go beyond what is in the legislation itself, some sources of savings are nevertheless not entirely clear.

Both proposals would reduce the deficit significantly relative to current policy. The President's would bring the budget nearly to primary balance (i.e., spending excluding interest expense would be nearly equal to revenues). Rep. Ryan's budget resolution goes well beyond this, proposing to bring the deficit to primary (ex-interest) balance by mid-decade. Assuming that the Treasury's average borrowing rate is roughly equal to nominal GDP growth, bringing the budget into primary balance should be enough to stabilize the debt-to-GDP ratio, with the primary surplus the Ryan plan proposes in the second half of the decade enough to reduce it.

Exhibit 1: President's budget would nearly eliminate primary deficit, while Ryan proposes a primary surplus


The fiscal path under Rep. Ryan's budget resolution would be achieved through more dramatic deficit reduction in the near term. Exhibit 2 shows the year-over-year change in the primary balance projected under the two plans, along with the path we have calculated that follows the current policy. While the President's plan and the Ryan plan would tighten fiscal policy in 2013, the Ryan plan would tighten fiscal policy by 2.6% of GDP from fiscal year (FY) 2013 versus FY2012. The President's plan would also tighten fiscal policy considerably in 2013, by 1.4% of GDP. Some of this deficit reduction represents cyclical improvement, though most of it is related to policy changes.


Exhibit 2: Compared with current policy, both proposals would impose greater fiscal restraint in 2013 and 2014


Beyond the pace of deficit reduction, the composition of deficit reduction would differ significantly under the two plans. Exhibit 3 shows that both plans call for an increase in tax revenues in FY2013, due in large part to the scheduled expiration of the payroll tax cut, which neither proposal would extend. The President's proposal would also allow the tax cuts on household income over $250,000 to expire and it would impose new limitations on tax deductions and exclusions for upper-income taxpayers; the effect of these tax increases continue into 2014, when tax returns for 2013 are due. In our own estimates, we assume that the payroll tax cut will indeed be allowed to expire at year end, though we assume that the 2001/2003 tax cuts will be extended into 2013.


Exhibit 3: Revenues would rise under both proposals in 2013, but would keep rising under the President's budget


Rep. Ryan's budget plan would reduce spending by 1.2% and 1.3% of GDP in FY2013 and FY2014, respectively, compared with modest reductions in spending (as a share of GDP) under the President's proposal. This is despite the fact that his plan would reverse most of the spending cut planned under "sequestration" in 2013, with other cuts spread out over the next ten years (the President's budget assumes that the sequester is not implemented).

As we have noted before, what is remarkable about the two proposals is how modest the savings are from Medicare and Social Security--two programs critical to the longer-term fiscal outlook--in both plans. While both proposals propose incremental reductions in Medicare expenditures versus current policy over the next ten years--the Ryan plan calls for a slightly greater amount--the differences in projected spending are minor. The Ryan plan involves more significant changes to the structure of Medicare later on, but these would not take effect until outside the 10-year window Congress uses to evaluate fiscal policy.

The differences in other programs are in fact much more notable in the near term. The House-passed budget envisions repeal of most of the Affordable Care Act (ACA), excluding the cuts to Medicare payments used to finance some of the cost. This would reduce Medicaid spending projections substantially, as would the Ryan plan's proposal to shift Medicaid to a "block grant" indexed to inflation and population growth but no longer tied to state health expenditures. The food stamp program would also be shifted to a block grant, starting in 2016, and projected spending in a number of other programs in the "mandatory" segment of the budget would be reduced.


Exhibit 4: Spending would come down more quickly under Ryan budget


Aspects of either plan could conceivably become law. If either party controls both chambers of Congress and the White House, that party would be able to take advantage of the budget "reconciliation" process. This involves two steps: (1) passage of a budget resolution that instructs various congressional committees to meet certain spending and revenue targets; and (2) passage of legislation produced by the committees to carry out those instructions. Reconciliation could potentially be a very important tool, since it allows legislation dealing with fiscal policy--generally this means tax changes or modifications to "mandatory" spending programs--to pass the Senate with a simple majority and free from filibuster and other procedural obstructions that usually take 60 votes to clear. In theory, if Gov. Romney were to win the White House with a slim Republican majority in the Senate, Republicans would be able to use reconciliation to pass a good deal of the Ryan proposal, including extension of expiring tax cuts, repeal of most of the Affordable Care Act (ACA) and other spending cuts.

While the reconciliation process is a powerful tool, two aspects of that process could result in less fiscal restraint in 2013 than proposed under Rep. Ryan's plan. First, a few politically centrist Republican members of Congress might advocate for smaller spending cuts, and if the Republican majority in the House or Senate were very slim this could be enough to lead to changes in the proposal. Second, the budget process and reconciliation process typically occur in the spring and summer, respectively, so policy changes might not be enacted until mid-2013 in such a scenario.

If the President wins reelection and/or Democrats hold their majority in the Senate, a bipartisan compromise would be necessary to enact fiscal reforms. This has been difficult to achieve over the last year or so and we expect compromise to be even tougher as some of the less controversial options for deficit reduction were enacted as part of last year's debt limit compromise and thus no longer available. That said, it is becoming increasingly clear that resolving the disagreement over pending fiscal issues--the expiring tax cuts, the sequester, and how to address the next increase in the debt limit that will become necessary in early 2013--could be easier in the context of a broader fiscal agreement that deals with tax and entitlement reform and moves beyond, for example, the binary question of whether to extend the tax cuts on upper incomes. So even if neither party has the unilateral ability to push through fiscal changes, it seems likely that some deficit reduction measures will be enacted in 2013.

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HelluvaEngineer's picture

ROTFLMAO...budget cuts.  Stop it, youre killing me.

Daily Bail's picture

There are no such thing as budget cuts, just SLIGHT decreases in the already-planned increases.

PHOTO OF THE DAY - The Truth About Paul Ryan

Tippoo Sultan's picture

As an aside, there have been many articles blossoming in the media over the past several days which have been quite critical of Rep. Ryan's budget proposal...we would ask, in the interest of complete objectivity and fairness, what are the particulars of Joe "Failed Hair Plugs" Biden's budget outline ?

Ah, we thought so. Next article, please...

AldousHuxley's picture

There is no Paul Ryan plan.....he is too busy making a show of himself to the media.

His plans are written by his top donors.


2012, FIRE (Finance, Insurance, Real Estate) and Pharam made top 5 donors to his campaign.


yes, wall st. hates reform( the little they even had) and pharma hates obamacare.





Same shite with Joe Biden....FIRE and lawyers made top donors.


FIRE Wants you to pay for their bailout either way by taking away money for your "entitlements" that you and your children pay for.

Daily Bail's picture

To further my point, the House passed legislation last year during the debt ceiling showdown that INCREASES spending by $7 TRILLION over the next ten years versus a baseline budget that would have increased spending by $9.5 TRILLION over the same period.

Ryan claims to support cuts in spending, but he won't touch the military.


Freedom In Your Lifetime's picture

That about sums it up. As long as the government or it's corporate subsidaries can create money, government spending wil newer be lower than the previous year.

Michael's picture

The distraction meme in the MSM these days is to focus attention on social security and Medicare reform for all the old fucks who still only get their news from the the dinosaur media that very few watch anymore.

When will the prestitute media start talking about cutting militarism spending?

Hopefully the old fucks are too Alzheimer addled these days to even vote.

Watauga's picture

You appear to me to be nothing but a spoiled, arrogant twit who hasn't a clue about history.  You may even be a psychopathic narcissist.  Unless you're 14, in which case you are simply young and stupid.

Those "old fucks" upon whom you wish Alzheimer's are largely good, hard-working people who fought in WWII, Korea, or Vietnam to defend your right to say the silly things you so often say.  Many of their generations died.  Many were maimed.  Many suffered deprivations you could not even conceive of.  Yet out of it they came home, went to work, paid taxes and Social Security and Medicare.  Those "old fucks" built everything that is good about the United States.

The fact that politicians, the monied interests, the academic and media Left, and the Statists have torn it apart, piece by piece, out of selfish interests, does not mean that the "old fucks" have been anything but good, decent, honorable people.

You spoiled little child.  Your attitude sickens me.  I pray that you find some faint glimmer of wisdom in spite of your all-consuming hatred and malice towwards others.

blindman's picture

qe counts as some form of fiscal restraint
or tightening, no?

Meesohaawnee's picture

yea sure. best joke ive heard all day.. why stop now where having a party

silverserfer's picture

Budget cuts? Budget cuts! fuck budget cuts! we dont need not stinkin butdget cuts! Budget cuts?

austerity is for slacker europeans!

I want debt impolsion/explosion and a smell in the air of roasting bankers.

You cant end the FED with budget cuts. 

AldousHuxley's picture

some banker meat might have too much fat for consumption.

sitenine's picture

Hey! Guess what! Every $1 not spent by the .gov subtracts $1 from GDP in a world where growth is measured in GDP. Get it? The only way out of this ponzi is real growth, and growth is impossible when EVERYTHING from oil production to clean water has peaked. If the failure of the human species were summed up in one phrase, it would be "failure to understand the exponential function."

Crimedog's picture

Real growth is not impossible.  Of all of the things that make me optimistic about the future, it is the ability of the USA to produce a majority of our own energy.  This ramp up in the production of domestically produced energy has just begun - take a look at North Dakota.  Fracking will open up previously untapped oil and nat gas resources and this will in fact create jobs.  And while green energy gets crapped on as a boondoggle, there are legitimate areas for growth in this space.  We just need to get the government out of the business of picking winners and losers.



AldousHuxley's picture

commodity export is business for 3rd world countries because societal system is so bad that it fails to produce any valuable human talents.

It is great for people who control it, but bad for rest of the citizens who have no chance of acquiring such assets.



sitenine's picture

@Crimedog - Don't refer me to the NYT, and don't lecture me about fracking.  If you don't understand what I just said,  then you're obviously nothing more than another cog in the wheel of perpetual growth stupidity.

Lucius Cornelius Sulla's picture

Agent Smith: I'd like to share a revelation that I've had during my time here. It came to me when I tried to classify your species and I realized that you're not actually mammals. Every mammal on this planet instinctively develops a natural equilibrium with the surrounding environment but you humans do not. You move to an area and you multiply and multiply until every natural resource is consumed and the only way you can survive is to spread to another area. There is another organism on this planet that follows the same pattern. Do you know what it is? A virus. Human beings are a disease, a cancer of this planet. You're a plague and we are the cure. 

Reese Bobby's picture

Comeback Forward Barack Romney!


Spastica Rex's picture

Completely eliminate the Federal Department of Education. Small potatoes, but it's a start.

you enjoy myself's picture

or just explicitly get rid of social security for anyone under 55 - its not going to be there anyways.

nmewn's picture




T axed

E nough

A lready

nmewn's picture

Yes...but I'm already spoken for ;-)

Pareto's picture

Ok.  fuck that makes everything clear!  So, no discernable difference between the two budgets as far as the graphs show.  I mean how do you......CAN SOMEBODY honestly say that any of this shit means anything, or will actually materialize especially when predicated on GDP forecasts?  And given the time horizon of politics, is anybody going to be around when it doesn't pan out?  Who believes this bullshit anymore?  Seems to me, its two different versions on how government can continue to screw everybody without actually going broke.  I can't even follow the math - fuck the math - I can't even follow the money.  Seriously, the day some government official from CBO emphatically asserts "the budget is correct" is the day you HAVE to say, "hey buddy, you're full of shit!"  Show us the money, or the math.  They make it complicated enough so that not even a Ph.d in math can follow it.  Its all bunk.  How can somebody with no vested interest, see this through to fruition?  Its not going to happen.  Ever.

Lucius Cornelius Sulla's picture

You're totally right, they are all full of shit.  However, Mr. Market will eventually put all of the jackasses in their place.  That is one thing you can count on.

Pareto's picture

I look forward to that day, when the No Free Lunch axiom resumes control.

Big Ben's picture

Budget deficit? Impossible! That was fixed in 1985 by the Gramm-Rudman-Hollings Balanced Budget Act.

Thank goodness for responsible politicians like Phil Gramm, who was also responsible for Gramm-Leach-Bliley which is largely responsible for the present period of prosperity that we are enjoying. \sarc

lolmao500's picture

All of these are scam. None of it will happen. Not willfully anyways.

In other news...


Obama set to assure Israel that, if all else fails, US will attack Iran by June 2013

Shizzmoney's picture

Anti-government icon Paul Ryan and his family made their fortune off government contracts http://t.co/lkMreLbN

As for what one could say for the govt check he cashed, well:

"You didn't write that".

game theory's picture

Dear Gov't:

No one believes you.




tahoebumsmith's picture

Lets get one thing straight...The Obama Administration hasn't passed a budget since Sept 2009! WTF??? Please explain.


Watauga's picture

Seriously, I don't know about Romney and Ryan and whether they would actually cut the budget, reduce annual deficits, and eventually reduce the debt, but I know--KNOW--that Obama will do just the opposite.  How can any self-respecting analyst pretend that Obama would do anything but substantially increase the budget, deficits, and debt?