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The Gop's Brutal Bottom Line


Government: Fiscal Policy

THE GOP'S BRUTAL BOTTOM LINE

"Once members of Congress know exactly, chapter and verse, the pain that the government must live with in order to get a balanced budget, their knees will buckle."

--House Majority Leader Richard K. Armey (R-Tex.)

The GOP-controlled Congress is on its way to approving a balanced-budget amendment to the Constitution. But Armey is right about the agony. States may see federal aid slashed by at least one-third. Local taxes would rise. Medicare patients would have fewer health-care choices and pay more for them. Welfare for poor mothers and children would be slashed. Subsidies to farmers and small businesses would be trimmed. And costs of everything from college loans to airplane tickets would surely rise.

With programs such as these on the chopping block, it's no wonder Republicans aren't saying how they would fulfill their Contract With America. They have pledged to balance the books by 2002 while allowing for more defense spending and cutting taxes by $370 billion--without trimming Social Security or raising other taxes. To make the rhetoric real, BUSINESS WEEK put together a representative package of cuts. These aren't necessarily the exact changes the GOP would make, but they provide a sense of how the Contract would change government.

GOP deficit-cutters can't escape their own bottom line: They'd have to slash planned spending through 2002 by an eye-popping $1.5 trillion, or more than 20% for programs other than Social Security and defense. House Speaker Newt Gingrich (R-Ga.) claims that savings can be achieved by reducing the rate of government growth. But deep cuts are unavoidable, even for the middle class, which has been largely sheltered from past deficit-trimming. "It would radically change the character of government," says Iris J. Lave, associate director of the Center on Budget & Policy Priorities.

On the plus side, businesses may be liberated from government red tape. Companies, middle-class families, and investors could pocket juicy tax cuts. The biggest payoff could come from sharply lower interest rates. DRI/McGraw-Hill estimates that a balanced budget in 2002 would drop rates on 10-year government bonds by two percentage points, boost business and housing investment by 6%, and hike annual economic growth 0.25%. In that light, a big drop in spending may be desirable. Says Conference Board Chief Economist Gail D. Fosler: "This kind of restraint helps in a period of sustained growth."

But how would lawmakers get to balance? The GOP's favorite targets are welfare, foreign aid, and programs of the "cultural elites"--the National Endowments for the Arts & the Humanities and the Corporation for Public Broadcasting. Shuttering the endowments and CPB would save a paltry $4 billion over seven years--0.2% of what's needed. Squeezing welfare by one-third would pick up $40 billion by 2002. Chopping foreign aid in half would produce an additional $70 billion. But when you need $1.5 trillion, this is chicken feed.

For bigger bucks, the GOP will have to cut up to $560 billion in projected domestic discretionary spending over the next seven years. A few sacred cows might be spared the ax--including prisons, courts, and most veterans benefits--but nearly everything else would get chopped. Amtrak would be privatized, so would the air-traffic-control system--saving about $50 billion through 2002. Airport-construction grants and mass-transit operating subsidies would be dumped, picking up $16 billion. The federal power-marketing agencies, which provide low-cost electricity to the South and West, would be sold. Programs such as the Appalachian Regional Commission and Community Development Block Grants would disappear. Visitor fees at national parks might triple, raising $1 billion. And entire Cabinet departments might vanish, though the savings would still be relatively small. Shuttering the Education Dept.--including many student-loan programs--would save about $210 billion through 2002. Yet after all that, deficit-cutters would only be about 16% toward their goal.

The real money--$900 billion through 2002--would have to come from politically sensitive "entitlements," such as subsidies for farmers, health care for the aged and poor, and retirement benefits for federal employees. By protecting Social Security--22% of the budget by 2002--the GOP must target the big health programs. In a sense, the sick and infirm would pay to protect healthy pensioners. "You can't seriously tackle the deficit without making significant savings in Medicare and Medicaid," argues the Heritage Foundation's Robert E. Moffit.

DAUNTING TASK. In the past, budgeteers could squeeze payments to doctors and hospitals and tinker with patient premiums. But it will take far more than that this time. One possibility: pushing new retirees into managed-care plans, such as health-maintenance and preferred-provider organizations. That could cut Medicare spending by $250 billion over seven years. Doing the same for Medicaid, which serves many elderly in long-term care and poor women and children, could save an additional $120 billion.

The task is so daunting that for the GOP to keep its promise--balancing the budget while cutting taxes, boosting military spending, and leaving Social Security untouched--it could freeze all other spending at 1995 levels for seven years yet still might not meet its goal. And, assuming 3% inflation, such a freeze would slash federal purchasing power by 23%.

That leaves the GOP with few choices. It can freeze defense spending or drop some of its tax-cut ideas. Republicans also want government inflation measures recalculated, which could save $200 billion over seven years. But that means lower cost-of-living hikes for Social Security recipients and reduced inflation adjustments for taxpayers' standard deductions and personal exemptions. And that sounds a lot like a backhanded Social Security cut and a tax hike--both Contract no-no's.

There is, of course, another alternative--passing a Constitutional amendment but not actually balancing the budget. And as the choices get tougher, the GOP may try to find a way to do just that. One House Republican has just the solution: "I'm going to vote for the amendment. And then I'm going to pray to God that the states don't ratify it."By Howard Gleckman, with Mike McNamee, in Washington


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