Two visions of deficit reduction

Posted Wednesday, April 20, 2011 in Analysis

by Gina Hamilton

WASHINGTON, D.C. – On Wednesday, April 13, President Obama gave a speech at American University that outlined his vision of deficit reduction over the next 12 years. Minutes later, the Republican leadership in the House blasted his plan.

It's just politics as usual in the tinderbox that has been Washington, D.C., over the last few years – to the detriment of meaningful budget reform.

During a telephone press conference immediately following Obama's speech, National Economic Council Deputy Director Jason Furman and Deputy Communications Director Jen Psaki took questions from regional reporters.

Furman said that the Obama approach is one of "shared prosperity and shared responsibility." Obama said that he would cut $4 trillion from the budget over the next 12 years.

"It's not just about numbers and figures," Obama said. "It's about building the future we want."

Furman said that there were stark contrasts between Obama's plan and the House Republicans' plan, which cuts only slightly more from the budget, but does it over a quicker time frame.

According to Obama, the Republicans' plan calls for cutting 70 percent from clean energy initiatives and environmental protections, cutting 25 percent from education programs, and cutting 33 percent from transportation programs. They also want to fundamentally change Medicare by issuing vouchers, which may or may not be enough to cover the cost of health insurance for seniors.

The plan the Republicans announced calls for $4.4 trillion in cuts, all of it from domestic spending. Some $80 billion would be saved by repealing the health-care bill;  another $45 billion from not spending the rest of the stimulus funds; and $30 billion would be saved by dumping federal control of Fannie Mae and Freddie Mac, the troubled mortgage-investment giants. Changes to how the federal government reimburses states for Medicaid would save $16.1 billion, and cuts to the federal workforce would save $40 billion. But the lion's share would come from discretionary funding of domestic programs – from Title IX to green energy programs to public radio – a total of $2.29 trillion.

Republican Deficit Plan

Obama's plan calls for cutting non-security discretionary spending by $770 billion; cutting security spending – mostly defense – by $400 billion; cutting health-care spending by $480 billion (by creating an independent payment advisory board, instituting reforms that would make Medicare more flexible, efficient and accountable, and by saving money in places where spending appears to be excessive); and reforming taxation, closing loopholes and ending the Bush tax cuts for the wealthy, that are responsible for $1 trillion. He says he would also force mandatory savings in agricultural reform and spending reform, saving billions on debt interest.

Obama Deficit Plan

Furman says that there is a backstop enforcement option. While Obama would like to have both houses of Congress on board, Furman says Obama is willing to use executive options to cut spending and institute tax reforms. The "fail-safe" would trigger across-the-board cuts (except for Social Security and Medicare) in spending and tax adjustments if the deficit was not falling fast enough by 2014. Such a program would have to be enacted by Congress, and in the current political climate, it is difficult to imagine it passing both houses. Previous "fail-safe" options have not fared well; it was tried during the Reagan administration, was tinkered with when deficit targets were not reached to save critical programs, and was eventually done away with.

House Republicans, who had been invited to the speech, lashed out minutes later at what they called an excessively partisan tone and an undisguised effort to raise taxes.

Wisconsin Rep. Paul Ryan (chairman of the House Budget Committee), who had earlier this month presented a Medicare-reform plan that both the Senate and Obama refused to entertain, said his excitement at being invited to the speech turned to disappointment by what he described as its excessively partisan and dramatically inaccurate content.

"What we heard today was not fiscal leadership from our commander in chief; we heard a political broadside from our campaigner in chief," Ryan said.

On the Senate side, a small group of senators called the Gang of Six, working on its own deficit-reduction plan, is cautiously looking at Obama's plan. Republican Sen. Saxby Chambliss of Georgia offered qualified support.

"I hope the president is serious about now engaging in this process. We will carry on working hard as a group to deliver a plan to lower the deficit and retire the debt, and will listen to good ideas from all sectors. I was disappointed to hear the president advocate for tax increases. I will continue to advocate for tax reform that lowers individual and corporate rates," Chambliss said in a statement.

Chambliss is not entirely alone, but neither is he in the majority of his party. Most on the Republican side of the Senate aisle are not pleased with Obama's framework for deficit reduction.

The problem with budget reform is that the two parties are very far apart on how to achieve it. Democrats advocate increasing taxes on the wealthiest Americans, closing corporate tax loopholes, and trimming fat from non-discretionary budget items and defense; Republicans refuse to entertain the notion of tax increases of any kind and want domestic spending slashed. They also advocate tax cuts, believing that supply-side economics will expand the pool of taxpayers and bring down the deficit.

Here, we'll look at the Democratic plan and the Republican plan side by side.

Democratic Deficit Plan

Republican Deficit Plan

Health care: Obama’s plan would cut $480 billion from Medicare and Medicaid through the use of an independent payment advisory board, and making reforms that would make Medicare more flexible, efficient and accountable.  States that saved money on Medicaid would be rewarded, while states with excessive spending patterns would be asked to look for savings.

The Obama plan would move forward with
the health-care bill enacted last year as passed.

The Obama plan would protect Medicare for all seniors.


Health care: The Ryan plan (not accepted by all Republicans) would give states Medicaid funding through block grants, cutting the federal contribution significantly. It would repeal and defund the Obama health-care law, in particular the large federal subsidies that would go to low-income families or sign them up in Medicaid programs. While Ryan says his program would expand access, it does not explain how that would work.

For people now 55 or younger, the traditional Medicare program – a defined benefit plan – would cease to exist and, starting in 2022, would be converted to a defined contribution program – a so-called voucher system, giving seniors a set amount per year and requiring them to buy their own insurance. Starting in 2022 the eligibility age would gradually be ratcheted up to 67 from the current 65.


Taxation: The Obama plan kills the Bush tax cuts, closes corporate loopholes, and may add additional taxes to the wealthiest Americans, adding $1 trillion to the Treasury.

Taxation: House Republicans reject any tax increases, and have proposed cutting additional taxes that would benefit the top 5 percent of the population.

Domestic spending: The Obama plan cuts $770 billion in non-entitlement discretionary spending. There are as of yet no details on what would be cut and by how much.

Domestic spending: The Republican plan relies almost entirely on cutting domestic spending in such areas as clean energy initiatives, education and transportation.

Military: The Obama plan calls for $400 billion in cuts to security spending, mostly military spending. His own secretary of defense is opposed to cutting this much, and could only agree to cut $200 billion.

Military: The Republicans oppose military cuts in general, and did not include any military cuts in their budget proposal.

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