Nov. 14 (Bloomberg) -- Former Massachusetts Governor Mitt Romney says it’s “time to level with the American people about what it will take to cut spending and to balance our budget.”
While promising a “credible plan” to do that, the Republican presidential contender has proposed cuts that amount to little more than 60 percent of the $500 billion in annual spending reductions he vows. Some of his anticipated savings may not materialize, according to budget experts. And he wants to cut taxes and spend more on defense even as he pledges to bring spending down to 20 percent of the U.S. economy.
“Romney may be our only hope, so let’s hope he takes a remedial math course before January 2013,” says former Reagan administration budget director David Stockman. “You can’t get to 20 percent of GDP on spending without taking a fire ax to the Pentagon budget and sharply reducing Social Security payments to the more affluent current retirees.”
One of Romney’s biggest cuts -- repealing the new health- care law -- actually would increase the deficit, according to Congressional Budget Office calculations. Savings from another proposal, to peg federal employees’ pay to that of private industry, are disputed by a recent government study. And his plan assumes the economy grows at annual rates that are roughly 50 percent faster than those expected by the Federal Reserve.
On Nov. 4, Romney said he would cut $500 billion in annual spending by the end of his first term in 2016 and then “put us on a path to a balanced budget and a constitutional amendment that requires government to spend only what it earns.”
The proposals he has offered -- including turning the Medicaid health-insurance program for the poor over to the states, reducing government workers’ pay and cutting waste -- total less than $320 billion, according to data compiled by Bloomberg.
Balancing the budget would be made more difficult by his plan to reduce taxes and reverse the Obama administration’s scheduled defense-spending cuts of $450 billion over the next 10 years.
Most budget analysts, including the co-chairmen of the president’s national fiscal commission, say more tax revenue is needed to significantly reduce the deficits. Former Senator Alan Simpson, a Wyoming Republican, and onetime White House chief of Staff Erskine Bowles, a Democrat, proposed raising $117 billion in new revenue in 2016 through a comprehensive tax overhaul that would lower rates, broaden the base and eliminate loopholes and special industry preferences in the tax code.
Bush Tax Cuts
The Simpson-Bowles plan would result in a $432 billion deficit that year compared with the White House forecast of a $583 billion shortfall.
Romney not only rejects any need for higher tax revenue to reduce the deficit, he’s proposing significant reductions. He would extend the Bush-era tax cuts beyond their scheduled expiration at the end of next year, eliminate the estate tax, reduce corporate tax rates and end capital gains and dividend taxes for those making less than $200,000 a year.
Extending all the Bush tax cuts, including indexing the alternative minimum tax, would cost $3.8 trillion in revenue over 10 years, the nonpartisan Congressional Research Service said in a Dec. 10, 2010, report.
Cutting the corporate tax rate to 25 percent from 35 percent would cost an additional $1 trillion over 10 years, according to the congressional Joint Committee on Taxation.
4% Economic Growth
Romney says he’s counting on the U.S. economy to grow at an annual rate of 4 percent, which would boost revenue.
“The notion that you have to cut spending is absolutely right,” says Douglas Holtz-Eakin, former director of the Congressional Budget Office and an adviser to the 2008 presidential campaign of Republican John McCain. “You preserve the core functions of government -- national defense, infrastructure, basic research, education, stuff like that -- and you cut government employment and transfer programs.”
He calls Romney’s entitlement plans a “reasonably sensible strategy.”
Diane Lim Rogers, chief economist of the nonpartisan Concord Coalition, which advocates fiscal restraint, says more details are needed.
“The flaw in all of these plans that do all the reductions on the spending side is that none of these politicians have spelled out what this means in terms of real per-person benefits,” says Rogers.
Soaring Medicare Costs
An aging U.S. population combined with steadily increasing health-care costs is driving a rise in entitlement spending. Medicare costs have doubled since 2003 to what the White House estimates will be $494 billion this year. The expected increase in such spending between now and 2016 exceeds annual U.S. spending on veterans’ benefits and services.
Romney has offered proposals for major changes in entitlement programs, including Social Security and Medicare, without specifying any reduction in individual benefits. He says there would be no difference in either program for current retirees or “those near retirement.”
Without offering details, Romney says he would “slowly raise the retirement age” and cut benefits below current projections for higher-income recipients. He proposes supplanting the current fee-for-service Medicare program with a government subsidy that would allow individuals to buy private health insurance providing at “least the same level of benefits,” or to continue in the current program.
‘A Moral Imperative’
Those changes wouldn’t be enough if Romney wants to keep spending within 20 percent of gross domestic product, says economist Dean Baker, co-director of the Center for Economic and Policy Research.
“You’re really talking about taking an ax to these programs,” he says.
Romney calls ending runaway borrowing “a moral imperative” in his pledge to cap government spending at 20 percent of the economy by 2016. He hasn’t specified how much he expects to collect in tax revenue that year or how large the budget deficit would be.
Since World War II, government tax collections have averaged about 18 percent of the economy, implying a 2016 deficit under the Romney plan of about 2 percent, roughly half the 3.9 percent gap forecast by the nonpartisan, Washington- based Committee for a Responsible Federal Budget.
His spending blueprint assumes continued annual deficits through at least 2016 and government spending that year of almost $4 trillion, based on CBO projections of the size of the economy then.
Representative Paul Ryan, chairman of the House Budget Committee, told the Weekly Standard that Romney’s plan “tracks very well with our budget and includes the same kind of spending controls.”
The Wisconsin Republican’s budget projects a $481 billion deficit in 2016 and wouldn’t be balanced before 2031.
Romney’s vow to repeal the Obama administration’s health- care overhaul would save $95 billion in 2016, he said in a Nov. 3 USA Today article.
Eliminating the law -- which Republicans call “Obamacare” -- would reduce the deficit in 2016, although by only $16 billion, according to the Congressional Budget Office. Over the 2012-2016 presidential term, repeal would add $85 billion to the government’s deficits, CBO said in a Feb. 18 analysis.
Many Republicans back some aspects of the administration’s approach, including guaranteeing that individuals with pre- existing conditions aren’t denied insurance. On his web site, Romney supports such a measure.
Cutting Federal Pay
Romney also says $47 billion could be saved each year by reducing government employees’ pay to private industry levels. Yet a study by the Federal Salary Council, an advisory body whose members are appointed by the president, released earlier this month concluded government workers are paid an average of 26 percent less than their counterparts in private industry.
And Romney’s projection that the economy will grow 4 percent a year is much faster than either the Federal Reserve or the International Monetary Fund expects.
“That is an aggressive goal, but great progress can be made,” Glenn Hubbard, who heads Romney’s economic policy team, wrote on his web site.
Hubbard, dean of Columbia Business School and former chairman of the Council of Economic Advisers under President George W. Bush, declined an interview request.
Earlier this month, the Fed released an updated forecast calling for long-term growth in the years after 2014 of between 2.4 percent and 2.7 percent. The IMF projects average annual growth of 3.1 percent for 2013-2016.