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Summary

  • The fiscal 2015 budget resolution passed by the House purports to reach balance by 2024 and is based on what could be considered fantasy.
  • It includes an increase of $483 billion in defense outlays over the 2015-2024 period above what is proscribed by the current law budget control caps.
  • Even after this increase in defense spending the Ryan budget reduces total federal outlays by $5.135 trillion and then adds in a macroeconomic fiscal impact of $175 billion.

House Budget Committee Chairman (and soon possibly House Ways and Means Committee chairman) Paul Ryan has released a fiscal 2015 budget resolution entitled "The Path to Prosperity". It is a follow-up to a similar document he released last year but with a few differences. This resolution was not needed since the Ryan-Murray two year budget agreement reached last December formally set spending figures for 2015.

The purpose of this latest resolution is threefold in our mind. First, it sets out Republican budget priorities which not surprisingly are distinctly different from those of the current administration. Second, for the first time it attempts to introduce dynamic scoring is setting out a budget path. Third, it attempts to show how Republican budget priorities would address future debt and deficits. From our analysis, based on methodology employed in our Federal Budget Update article, we would conclude that the Budget Chairman is partially successful on the first objective, but he fails miserably on the other two.

The issue of static versus dynamic scoring of the federal budget has been debated since the time of the Reagan administration. Democratic administrations and the Congressional Budget Office have consistently adhered to a static formulation which is simply to measure the direct impact on revenue and expenditures of current law and potential changes in current law given a path of GDP and inflation. Those favoring dynamic scoring have taken this approach as a point of departure but then measure how various fiscal incentives affect behavior and therefore economic activity. The impact on economic activity then theoretically affects revenues, expenditures and thus the budget deficit or surplus.

The top of Table I below lays out the budget path envisioned by the Congressional Budget Office under current law. This is the same as we presented in our recent comparison of the Congressional Budget Office and Office of Management and Budget budgets dated March 15, 2014. Based on current law the Congressional Budget Office shows that the deficit declines through 2015 and then begins rising steadily as entitlement spending explodes.

The Congressional Budget Office analysis may be too optimistic or pessimistic. Time will tell, although the Congressional Budget Office has in the past week revised down its estimates of future deficits because of an anticipated slowing of health costs as a result of the Affordable Care Act's enrollment numbers. This is not the issue here though. The fact is the Congressional Budget Office performs rigorous analyses based on a projected path of nominal GDP growth, interest rates, and other macroeconomic variables.

We could not uncover any such rigor in the House Republican Budget plan. Its budget path is laid out in middle portion of Table I. You will note that it lacks forecasts of any macro input variables because we could not find any. It does show a budget path which reaches balance by 2024, but not by any rigorous measuring process as near as we could determine.

Under the Ryan budget proposal there is an increase of $483 billion in defense outlays over the 2015-2024 period above what is proscribed by the current law budget control caps. Even after this increase in defense spending the Ryan budget reduces total federal outlays by $5.135 trillion and then adds in a Macroeconomic Fiscal Impact of $175 billion. The Ryan budget calls for revenue totals each year during 2015-2024 that are the same as the current law revenue stream shown by Congressional Budget Office.

Looking at these three components in more detail raises many questions. On the spending side there is much less spending in aggregate. But while the Ryan budget is specific on defense spending it is not at all specific on which spending programs would be reduced or eliminated. In fact the only program it has identified is about $1 trillion of saving by eliminating the Affordable Care Act. Other savings would be achieved by dissembling social programs and providing block grants to the states to meet their individual needs.

On the revenue side the Republican budget would set a top individual rate of 25% and consolidate the current seven individual income tax brackets into two with the first bracket being 10%. It would repeal the alternative minimum tax and it would reduce the corporate tax to 25% while eliminating unspecified distortions in the tax code. Without defining distortions, these are presumed to be various deductions, preferences, and exemptions. If this is to be believed the result is a revenue neutral result that would alter behavior sufficiently to produce a fiscal dividend which we presume is the "macro fiscal impact".

How this macro fiscal impact is derived and quantified lacks credibility in our view. Once again there are no specifics but as near as we could tell the House Budget Committee asked the Congressional Budget Office how smaller deficits affect interest rates. The answer is that all else being equal (static analysis) lower deficits would reduce interest rates which in turn would boost economic activity. The Congressional Budget Office notes than if real GDP growth were merely 0.1% per year lower than expected over ten years, revenue would be $272 billion lower, spending would be $40 billion higher, and the cumulative deficit would rise by $311 billion. If so, then the reverse would be true according to the House Budget Committee and this it says provides a $175 billion macro fiscal impact. Interestingly, the effect on GDP of reducing federal outlays by $5.135 trillion over ten years is not addressed.

The Ryan budget concedes that in the transition period of 2015-2017 there would be a negative macro fiscal impact which would boost the deficit. But from 2018 forward it is asserted that the lower interest rates emanating from their plan would increase economic activity and thus produce a net fiscal impact of $175 billion which is exactly the amount needed to reach budget balance by 2024. There are even problems with this. For example, with interest rates already at a rock bottom level, the economic impact of even lower rates would be unlikely to be as great as if nominal rates were much higher to begin with. Not only is the Japanese experience of the last two decades consistent with this but so too is the experience of the entire developed world over the past five years of low and even lower interest rates.

In our recent comparative analysis of the Congressional Budget Office and Office of Management and Budget budgets we noted that the Office of Management and Budget budget was mainly a political document outlining the President's priorities of increased spending and increased taxes relative to current law. One could suppose the Ryan budget is also a political document describing a road to budget balance via tax cuts and spending cuts relative to current law. The problem is that Ryan's road to balance is a dead end because it does not achieve balance without a macro fiscal impact variable. And from the method by which it is derived perhaps a more appropriate term for it would be a fudge factor.

Nevertheless, the Ryan budget plan was adopted by the full House of Representatives. And while it is not needed because of the two year budget accord that was reached last December, it can be labeled a Republican budget alternative. The suspicion here is that far more Republicans will be running away from this budget than running toward it.

Table I

CBO Baseline

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

Nominal GDP % change

3.9

4.9

5.3

5.1

4.5

4.4

4.3

4.2

4.2

4.2

4.1

10-year Treasury %

3.1

3.7

4.3

4.8

5.0

5.0

5.0

5.0

5.0

5.0

5.0

Federal Outlays ($billions)

3543

3783

4020

4212

4425

4684

4939

5200

5522

5749

6000

Federal Revenues ($billions)

3029

3305

3481

3631

3770

3932

4104

4288

4490

4702

4926

Deficit ($billions)

514

478

539

581

655

752

836

912

1031

1047

1074

Deficit as % GDP

3.0

2.6

2.8

2.9

3.1

3.4

3.7

3.8

4.2

4.1

4.0

Debt held by the Public ($billions)

12717

13263

13861

14507

15218

16028

16925

17899

19001

20115

21260

Debt held by Public as % of GDP

73.6

73.2

72.6

72.3

72.6

73.3

74.2

75.3

76.8

78.0

79.2

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

House Budget Committee Chairman Ryan Budget

Federal Outlays ($billions)

3543

3664

3676

3787

3927

4134

4334

4516

4733

4865

4995

Federal Revenues ($billions)

3029

3305

3481

3631

3770

3932

4104

4288

4490

4702

4926

Macroeconomic Fiscal Impact

21

31

24

-9

-4

-25

-36

-44

-59

-74

Deficit ($billions)

514

380

227

180

147

198

205

192

199

104

-5

Deficit as % GDP

3.0

2.1

1.2

0.9

0.7

0.9

0.9

0.8

0.8

0.4

0.0

Debt held by the Public ($billions)

12717

13213

13419

13800

13860

14080

14427

14579

14940

15080

15176

Debt held by Public as % of GDP

73.6

73.0

71.0

69.0

66.0

64.0

63.0

60.0

60.0

58.0

56.0

Source: Federal Budget Fantasy

Additional disclosure: Please note that this article was written by Dr. Vincent J. Malanga and Dr. Lance Brofman with sponsorship by BEACH INVESTMENT COUNSEL, INC. and is used with the permission of both.