Paul Ryan's big plans for a small budget

November 3, 2010: 7:14 AM ET

The likely incoming chairman of the House Budget Committee has a big worry: A crushing debt crisis. His solution? Big cuts in spending.

Rep. Paul Ryan of Wisconsin wants to cut spending dramatically.

The Republican victory in the House will likely make Paul Ryan (R-Wis.) the new chairman of the Budget Committee, where, at age 40, he's now his party's ranking member. From that powerful seat, Ryan plans to shape legislation that would impose strict restraints on spending, and tackle entitlement reform -- a challenge that terrifies most of his fellow Republicans.

Ryan has been shaping a detailed plan to achieve a balanced budget strictly through dramatic reductions in spending, with no tax increases, for years. He spells out those ideas in great detail in his Roadmap for America's Future, a favorite target for the Obama administration. Put simply, Ryan's blueprint would preserve generous Social Security and Medicare benefits for the poor and sick who need those programs the most, while reducing payments for the wealthy and middle class Americans in the future.

But those reductions come with an intriguing free market twist: He'd introduce Medicare vouchers, for example, that could lower prices by turning seniors into informed bargain hunters for healthcare. The concept is that market discipline would lower prices, giving middle class consumers more buying power to cushion the lower benefits that, Ryan says, are inevitable legacy of future promises that can't be met.

Ryan spoke to Fortune on Tuesday afternoon as he campaigned in his mostly blue-collar district south of Milwaukee.

The Democrats claim that the Republicans have no credible plan for rescuing the economy. What specific legislation will you propose?

We owe it to the country to give Americans a clear choice in the future. With divided government, we can't pass reforms until after the 2012 election. That will be the most important election in the lives of America's voters, no matter what generation they belong to. But we will try to enact the legislation what would become law after 2012. We will try to pass a bill to repeal ObamaCare. That bill will not be signed into law, but it doesn't mean we won't try. We might even be able to pass an entitlement reform bill.

If the Republican Party controls only the House, then those bills may never get to the President's desk.

I think it suffices to control the House, and the House passes those bills. Then we'll be defined with our actions. We'll show how we could do things differently. It will either stop in the Senate or at the President's desk, but we will have spelled out our position for the voters. On entitlement reform, the number of seats we win will be very important. We need 218 votes. It will be far easier if we gain 60 seats than if we gain 40, because with 60 the Republicans would have far more fiscal conservatives. (Update: The Republicans won 60 seats)

What strategy do you expect the White House to use in combating the Republicans over the next two years?

How will they react? It's hard to predict. They misread the country fundamentally and think that marketing and practicing better politics is the solution. For the administration, it's a marketing problem, not a policy problem. For the President, good policy is good politics not the other way around. Maybe he'll do a moderate makeover to hang on to his progressive philosophy. My guess is that there will be some cuts in non-defense discretionary spending. I sure hope there are some cuts somewhere.

It's hard to figure them out. The White House does not talk to us. I did know Orszag and Emanuel, but not the team today. Do they do real policy change or cosmetic marketing change? The administration has been attacking me on the Roadmap and my specific plans for entitlements for two years and they will probably be continuing those attacks.

Are you concerned with a possible debt crisis triggered by a spike in interest rates – one that's caused by the enormous increase in the deficit?

The threat of a financial crisis is my biggest concern. It could be avoided if we reform entitlements. It's a totally avoidable problem. Imagine before the 2008 crash, if you knew it was coming, and you could see in advance the timing and the scope of the crisis.  And as a leader, you chose to do nothing about it. As a voter, you'd fire those leaders who chose to do nothing.

America's leadership is in the same position today. This is most predictable crisis in nation's history, and no one is doing anything about it. It's just a matter of time before the bond vigilantes come after us. Will the political class do it or not? That's the most important question facing America.

Many Americans fear that a crisis will lead to a value-added tax. Is that a real possibility?

It depends on who's in power when the crisis occurs. The Democrats are comfortable with the massive deficits. They'd be comfortable with imposing a VAT in heat of financial meltdown.  But now power is shifting. If it happens in the next two years with the Republicans in control of Congress, we will go after spending to solve the crisis. It will be all about controlling spending, not imposing a VAT.

You are a member of the deficit commission charged with finding a path to a balanced budget. Will the commission recommend a VAT?

I like consumption-based reform as replacement to the current tax system. But I will not support any consumption tax without reforming entitlements.  Otherwise the consumption tax will simply be a new revenue machine to make the revenue line chase the spending line. The key is to get the spending line down then, think about tax reform after spending is under control. The goal should not be to invent a new revenue machine

You need 14 of 18 votes from the members of the commission to recommend a VAT. There are not 14 votes for it. Sure, there is sentiment for a VAT among the Democrats on the commission. But the commission will not recommend a VAT. And the Democrats that advocate a VAT are losing their grip on power.

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About This Author
Shawn Tully
Shawn Tully
Senior EDITOR-AT-LARGE, Fortune

Shawn Tully has been writing feature stories for Fortune since 1980. He's covered stories as varied as the Vatican's finances, the exile of fugitive commodities trader Marc Rich, and the disastrous merger between Guidant and Boston Scientific. He specializes in banking, federal budget and spending issues, and health care. Tully holds a B.A. in English from Princeton University, an M.B.A. from the University of Chicago, and a master's in Applied Economics from the Universite Catholique de Louvain in Belgium.

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