Analysis | Pedro was already robbed. You can’t pay Paul.
Republicans have signaled that they will consider raising the debt limit only if President Biden agrees to the spending cuts. The White House says it will not negotiate terms to raise the debt ceiling.
Too often, politicians talk in broad strokes about the federal budget, with big numbers that make little sense to most people. Or they suggest that actual reductions in spending would be relatively easy to achieve.
On CBS’s “Face the Nation,” for example, Mace said, “I would lean on agency heads. Whether it’s a penny or a nickel, the Penny Plan does it for five cents on the dollar over five years.”
Five cents on the dollar means a 5 percent reduction in spending each year, without taking inflation into account. That translates into sharp reductions in spending. One penny, a 1 percent reduction, would not balance the budget.
Other Republicans have called for a dollar-for-dollar trade: a $1 increase in the debt ceiling for every dollar of spending cuts. That is almost impossible. The debt ceiling must be increased to pay for things that have already been purchased, according to laws approved by previous Congresses.
Here is a guide to help understand the debate.
Not like the family budget.
Politicians often conjure up the image of a couple sitting around the kitchen table, figuring out the family budget and how to pay off credit cards. But the federal budget is nothing like a family budget. There is no law that requires the budget to be balanced, and in dire economic times, such as during the pandemic, it is appropriate for the government to borrow to help stabilize the economy.
But politicians must be prudent.
Issuing new debt is an option with certain consequences. It is one thing to issue debt to build better schools, ensuring a well-educated workforce for the future; Another thing is to borrow to finance the expenses of the elderly, such as through Social Security.
The state of the US economy is also a factor. When the government issues new debt and the economy is close to full employment, it crowds out capital formation and ultimately passes on a smaller economy to future generations. In an economy with high unemployment after a recession, many economists would say that the impact of borrowing on capital formation is greatly reduced. Some economists also believe that future generations will be richer and more productive, and therefore will be able to foot the bill left by the previous generation.
One way to measure whether debt is too high is to compare it to the size of the overall economy. In 2023, the national debt is about 96 percent of gross domestic product, the broadest measure of the economy. That’s almost as big as it was during World War II, and the Congressional Budget Office (CBO) says the national debt is on track to surpass World War II levels by the end of the decade.
The federal budget as a dollar
Because Mace spoke of 5 cents on the dollar, let’s assume that the entire federal budget is one dollar.
The problem is that current federal revenue is worth about 83 cents, which means that the federal government spends 17 cents more a year than it earns. (We are relying on the CBO’s most recent estimate for fiscal year 2023, but these numbers do not reflect the additional 2023 spending Congress authorized in December.)
About 62 cents is spent on “mandatory programs” such as Social Security, the old-age retirement and disability system (22 cents); Medicare, the old-age health insurer (17 cents); and Medicaid, the health care program for the poor (10 cents). These programs are often called entitlement programs because people receive payments or services if they are “entitled” to them under the law, and any reduction in spending requires a new law. Other mandatory programs include income security such as food stamps and unemployment compensation and federal retirement and veterans programs, among others. (To complicate matters, some programs like Medicare have receipts for compensation, like health care premiums, but we’ll try to keep this simple.)
Nearly 8 cents goes to paying interest to Treasury bondholders, a figure that will continue to grow as more debt is issued over the next decade. Lawmakers can’t rip off bondholders without serious consequences, so that part of the budget will have to stay intact.
That leaves about 30 cents spent on discretionary spending: annual appropriations made by Congress for things like national defense, national parks, air traffic control, and the like. When Mace refers to “agency heads” cutting back, he means discretionary spending.
But about half, almost 14 cents, goes to national defense, which is also out of reach for many lawmakers.
Just over 16 cents goes to the rest of the federal government, which means it’s even less than the shortfall (17 cents) in federal revenue. Everything could be eliminated, including popular programs like border protection, air traffic control, and farm subsidies, and the government would still be in deficit.
In effect, Mace would put almost half of the federal budget out of reach (Social Security, Medicare, and interest on debt) and make the rest of the budget bear the burden. That would mean a 31 percent cut elsewhere to break even. If national defense is also off the table, the rest of the budget should be cut by 40 percent. That’s very different from the 5 percent per year suggested by Mace.
Freezing spending is not easy either
Sometimes politicians suggest simply freezing spending: the same dollar amount as the previous year. But that is in effect a cut, which means fewer resources for the government.
Inflation and population growth over time raise the cost of programs. So even a spending freeze means less year after year. If you were to earn the same salary year after year, you would eventually feel pressured as food and housing costs rise.
Here’s our favorite example of this phenomenon: Defense spending technically held constant from 1987 to 1994: $282 billion a year. But look at what happened to the military during those seven years: the number of troops was reduced from 2.2 million to 1.6 million, the number of Army divisions was reduced from 28 to 20, the combat wings of the Air Force dropped from 36 to 22 and the Navy’s combat ships dropped from 568 to 387. That’s because inflation over time ate up the value of those dollars. By most measures, defense spending was cut in that period, even though not a penny was cut in theory.
Of course, one way to mitigate the deficit would be to increase revenue. But most Republicans have ruled out any tax increases. They also want to keep the 2017 tax cuts that expire at the end of 2025 in place, even though, according to the Tax Policy Center, that would add more than $3 trillion to the federal debt over 10 years. In any case, as a percentage of gross domestic product, tax revenue is projected to already be higher (18.3 percent) than the average for the past six decades, even if tax cuts are extended, according to Brian’s calculations. Riedl of the Manhattan Institute.
Spending increased on ‘non-initial’ programs
Riedl has studied what happened to the federal budget since 2000, when the government last ran a budget surplus. As a percentage of GDP, total spending has increased by 7.7 percent. But discretionary spending, even with the coronavirus pandemic, was not the main culprit. In contrast, Social Security and other health entitlements represented 3.6 percent of GDP and other mandatory expenses were 3.2 percent of GDP.
Until recently, the discretionary part of the budget pie has been shrinking. That’s partly because, since 1983, the top six deficit-reduction deals have been based primarily on savings in discretionary spending, according to Riedl’s calculations. There is less and less to cut in that part of the budget.
Instead, it is the part of the budget that Mace says is “non-initial” (Social Security and Medicare) that is responsible for the mounting debt. The federal government continues to borrow from general revenue to make payments to those programs. More than half of the projected $21 trillion deficit over the next decade will come from such transfers, Riedl estimates. In part, that’s because most people receive more benefits than the taxes they paid into the system, especially from Medicare, as people are living longer and health costs have risen, according to estimates by the Urban Institute.
The nonpartisan Committee for a Responsible Federal Budget has put together a plan for how to achieve what seems like a modest goal: keep debt stable at about 97 percent of GDP through 2032. Just a quarter of the $6 trillion in savings would come from limits on discretionary spending. But contrary to Mace’s red line, the plan calls for lowering Medicare costs and also raising the retirement age for Social Security. It also calls for revising the Social Security payroll tax to raise more revenue and raise other taxes.
The Republican Study Committee, made up of conservative Republicans, unveiled a budget plan last year that would gradually raise the Social Security retirement age to 70, from 67 today, and Medicare eligibility to 67, from 65. as a way to reduce spending. He proposes cutting nearly $17 trillion in spending over 10 years, with most of it in mandatory spending, especially Medicare and Medicaid. But it’s the kind of plan issued by a minority party when it has no chance of approval. Although less than 20 percent of the cuts would come from the budget’s discretionary basket, many of the ideas are politically dangerous.
As for the “Five Cent Plan,” that’s a proposal by Sen. Rand Paul (R-Ky.) that Mace introduced in the House in 2022. Given the recent spike in spending, Paul now calls it the Six Cent Plan. : a plan of 6 cents. percentage reduction each year, because otherwise it would not break even in five years. This plan calls for drastic cuts in public spending from current projections ($15.5 trillion over 10 years, according to an aide to Paul) because it does not account for inflation and population growth at all. It just keeps cutting 6 percent from the previous year’s figure.
The plan does not specifically call for changes to Social Security and Medicare to achieve these savings, but instead leaves it up to Congress to meet these goals, a truly difficult task.
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