What’s Really in the Ryan Budget

by alexvanbuskirk

What’s Really in the Ryan Budget: Good fiscal policy requires the private sector to grow faster than the government. That is the crucial goal of the House Republican budget

By Daniel J. Mitchell @ WSJ (August 15, 2012)

Thanks to several years of fiscal restraint during the 1990s, the burden of federal spending dropped to 18.2% of gross domestic product by the time Bill Clinton left office. The federal budget today consumes more than 24% of economic output, a one-third increase since 2001 in the share of the U.S. economy allocated by politics rather than market forces. That makes the Republican House budget, which would reverse this trend, extremely important for the economic health of the country.

The most important headline about the Ryan budget is that it limits the growth rate of federal spending, with outlays increasing by an average of 3.1% annually over the next 10 years. If spending is left on autopilot, by contrast, it would grow by 4.3% (or nearly 39% faster). If President Obama is re-elected, the burden of spending presumably will climb more rapidly.

This comes as a surprise to many people since the press is filled with stories about the Ryan budget imposing trillions of dollars of “savage” and “draconian” spending cuts. All of these stories, however, are based on Washington’s misleading budget process that automatically assumes an ever-expanding government. The 4.3% “base line” increase is the benchmark for measuring “cuts”—even though spending is rising rather than falling, and it’s only the rate of spending growth that is being slowed.

The simple way of making this happen is to follow what I’ve been calling the golden rule of good fiscal policy: The private sector should grow faster than the government. This is what happens with the Ryan budget. The Congressional Budget Office expects nominal economic output (before inflation) to grow about 5% each year over the next decade. So if federal spending grows 3.1% annually, the burden of federal spending slowly shrinks as a share of GDP.

According to the House Budget Committee, the federal budget would consume slightly less than 20% of economic output if the Ryan budget remained in place for 10 years. This would be remarkable progress considering that the federal government is now consuming 24% of GDP vs. Mr. Clinton’s 18.2% in 2001. If Paul Ryan’s policies are social Darwinism, as Mr. Obama and his allies allege, one can only speculate where Bill Clinton ranks in their estimation.

But good entitlement policy also is a godsend for taxpayers, particularly in the long run. Without reform, the burden of federal spending will jump to 35% of GDP by 2040, compared to 18.75% of output under the Ryan budget.

Assuming the GOP ticket prevails in November, Mitt Romney will make the big decisions on fiscal policy. But there is no escaping the fiscal math. If Mr. Romney intends to keep his no-tax-hike promise, he has to restrain the growth of spending. This doesn’t mean he has to go with every detail of the Ryan budget—but it’s certainly a good place to start.