The arrival of Paul Ryan on the US Presidential scene not only has big implications for that election in November (perhaps the opponent that Obama really wanted), but also casts interesting light on the British political situation. Ryan’s plan is based on the now regular US Republican device of unfunded tax cuts – a device which we may see spreading soon across the Atlantic. Ryan is not the originator of this ruse, but following in the footsteps of its main architect, George W. Bush. Bush pushed through, utterly irresponsibly, enormous unfunded tax cuts and hugely expensive unfunded wars. This was not a reluctant necessity of the times. It was a deliberate policy of cutting revenues (tax cuts for the super-rich) and feeding the Pentagon (Iraq and Afghanistan) precisely in order to drive up the deficit and thus justify cuts in spending. The financial crash and subsequent bailouts, so far from being a disaster, were manna from heaven in driving this policy even further and faster.
Ryan is now proposing to cut the top marginal rate of tax for the rich from 35% to just 25% – entirely unfunded. This must mean vast cuts in US public expenditure, but these are left (deliberately) unspecified. What is known is that the Ryan plan would “shred the measly means-tested safety net for the vulnerable”, i.e. the $100bn per year for food stamps and cash assistance for needy families and the $300bn a year for Medicaid. So Federal support, which is demand led, would be turned into block grants of fixed amounts which would be indexed to consumer prices, but not otherwise raised.
The overall effect of the Ryan plan would be that Federal debt would rise by $6 trillions (nearly 50% of US GDP) over the next decade alone. It would make Federal revenue 2.5% of GDP lower and spending 3.5% of GDP lower than the current Congressional Budget Office baseline by 2022. In the longer term the Ryan proposals intend that all spending, other than health, social security and interest, should fall to 3.5% of GDP. Yet spending in this category has exceeded 8% of GDP in every year since the Second World War. Ryan’s coup de grace however is to eliminate Medicare for everybody below 65 in 2022, to be replaced by vouchers for purchasing insurance that would be pitched so low that more than two-thirds of the cost would be transferred to the voucher-holder. This would be political insanity, as no doubt Obama will point out forcibly, the equivalent of multiplying the woes of Greece 5-fold.
Similarly for Osborne the financial crash has been a boon – by ‘compelling’ him to cut the deficit drastically. And on top of that he’s already beginning to adopt the Ryan tactics as he showed by his infamous unfunded 5% cut in the top rate of income tax – which handily meant he had to cut the deficit by an extra £3bn. Watch this space for a lot more.