President Barack Obama laid out his vision for long term deficit reduction on Wednesday. In a speech at the George Washington University, the president proposed a combination of entitlement reforms and tax hikes to restore balance to the federal budget within twelve years. Republicans, who control one chamber of Congress, have ruled out tax increases however and favor much deeper spending cuts.
The United States are on the verge of a major debt crisis after three consecutive years of multitrillion dollar deficits. The national debt has nearly doubled within the past five years.
The president blamed the two wars his predecessor initiated as well as the tax cuts and prescription drug benefit enacted during the previous administration for the nation’s mounting debt burden.
The president’s own plan would save $770 billion in domestic and $400 billion in defense spending by 2023. Without resorting to block granting the program, the president hoped to reform Medicaid and cut some $100 billion in spending over ten years. He rejected the notion of shifting costs onto individuals. “I will not allow Medicare to become a voucher program that leaves seniors at the mercy of the insurance industry.”
By closing loopholes and making the individual tax code “fairer and simpler,” the president aimed to reduce tax expenditures. The largest reform would be to raise taxes on high income earners by reversing tax cuts enacted during the Bush Administration.
In January, the Congressional Budget Office warned that it could take many years for the country to regain pre-recession growth rates. Unless significant spending reductions are enacted, federal deficits could average 6 percent of GDP between 2012 and 2021. According to the same projection, by the end of the decade, the national debt would equal 100 percent of the total economy.
The main drivers of this debt explosion are public health care support and retirement programs. By 2021, more than half of federal spending would have to be allocated to Medicaid, Medicare and Social Security. Along with defense, interest payments and unemployment insurance, it would be nigh impossible for the federal government to continue to finance education and other domestic programs unless taxes are raised substantially.
Barack Obama’s 2012 budget, which foresaw $100 billion in yearly budget cuts between now and 2021, was criticized by fiscal conservatives for its utter lack of entitlement reforms. Speaker John Boehner, who leads the Republican opposition in the House of Representatives, declared the president’s budget dead on arrival in February, saying, “We’re broke.”
Last week, Congressman Paul Ryan, who chairs the House budget committee, introduced the Republican plan for deficit reduction. His “Path of Prosperity” proposed more than $6 trillion in federal spending cuts over the next ten years (or some $4.4 trillion in deficit reduction), largely by transforming Medicare for the elderly into a “premium support” program which subsidizes retirees’ health plan of choice and block granting Medicaid spending for the poor to the states, forcing them to rein in costs however they see fit.
Republicans would also lower corporate and top income tax rates to stir investment and job creation.
According to the president, Ryan’s plan would lead to a “fundamentally” different country than he envisages. “These are the kind of cuts that tells us we can’t afford the kind of America that I believe in,” he said.