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Budget Battle: Entitlement Reform Is Obama’s “Achilles’ Heel,” Holtz-Eakin Says

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A major budget battle is brewing in Washington, pitting President Obama against Congressional Republicans, led by House Budget Committee Chairman Paul Ryan (R-Wisc.).

On Tuesday, Ryan is expected to release his new 2013 budget. In a preview of sorts, last week Ryan released a theatrical video that warned "the most predictable crisis we've ever had" is looming and chastised other politicians for failing to address the budget deficit.

"Let me ask you a question: What if your president, your senator and your congressman knew it was coming?" Ryan asks in the highly produced video. "But they chose to do nothing about it, because it wasn't good politics? What would you think of that person? It would be immoral."

Ryan didn't name President Obama by name but the implication seems clear.

"Paul Ryan is making the point - anyone who does not make a budget proposal that fixes these big programs is doing a disservice to Americans," says Douglas Holtz-Eakin, president of the American Action Forum and former director of the Congressional Budget Office (CBO). "That's right. We simply cannot survive on our current trajectory."

Ryan's theatrical trailer was designed to highlight the need to put in reform of Medicare and Medicaid in his 2013 budget, according to Holtz-Eakin. "He has to do things that change the future and he shouldn't be attacked for doing that."

A year ago, Ryan first proposed major changes to Medicare and was attacked for it, both by the White House and some conservative politicians, namely Newt Gingrich who called it "right-wing social engineering."

Holtz-Eakin, who was chief economist for President George W. Bush's Council of Economic Advisers, says Republicans have learned their lesson from the 2011 experience.

"[Republicans] felt substantively they were right about their budget and were portrayed unfairly by the Democrats," he says. "They're already ready this year, because it's an election year, to make sure they don't end up on the wrong side of that public relations war."

Doing his part to help the GOP's PR effort, Holtz-Eakin repeated the "shaming" of Senate Democrats for failing to put out a budget in over 1000 days and says President Obama's failure to put out "any serious entitlement reform during his entire first team is a real Achilles' heel in the budget fights."

White House vs. CBO vs. House GOP

While Obama-Ryan is the main event, the White House lost a preliminary match last week when the CBO scored President Obama's 2013 budget.

According to the non-partisan CBO, the Obama budget would raise the deficit by $365 billion next year and add $3.5 trillion in annual deficits through 2022 versus the White House's forecast that the budget would reduce the deficit by $3.2 trillion over the next decade.

Holtz-Eakin attributes the huge swing in estimates to different estimates of revenues, including treatment over the Bush tax cuts set to expire on Dec. 31, as well as economic growth and budget caps negotiated during the debt limit deal.

"This is a very confusing area because there's a whole mix of policies being put in their budget and there's no absolute standard for what the right thing might be," he says.

In addition, the CBO must assume all the tax cuts (including the Bush tax cuts and temporary payroll tax cut), spending cuts (notably the $1.2 trillion in automatic cuts stemming from the 'Super Committee's' failure last year) and benefit programs (including extension of unemployment) due to expire on Dec. 31 will do so as currently scheduled.

Princeton economist and former Fed Vice Chairman Alan Blinder estimates the resulting "fiscal contraction" would cut about 3.5% from U.S. GDP growth in the coming year, "depending on exactly how you count certain items, all at once."

It's highly unlikely these issues will be addressed in the pending budget talks, according to Holtz-Eakin, who fears they will be left to the lame duck session after the 2012 elections.

Expiration of the Bush tax cuts and the sequestration would be "a big hit to the economy and there is no game plan for addressing it at this point," he says.

A 'predictable crisis,' indeed.

Aaron Task is the host of The Daily Ticker. You can follow him on Twitter at @aarontask or email him at altask@yahoo.com

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