President Obama, in defending his 2012 budget plan Tuesday at a White House news conference, staked his ground for the coming budget battle with the Republican-led House by rejecting immediate short term cuts that he said would jeopardize the economic recovery. He set a medium-term goal of bringing the deficit, which is projected to hit a staggering $1.6 trillion this year, down to a more manageable 3 percent of gross domestic product or about $600 billion by the middle of this decade.
Responding to Republican criticism that he “kicked the can down the road” by failing to tackle the long-term challenges facing the federal budget largely caused by fast-growing Medicare and Medicaid costs, the president said “this is not a matter of you go first or I go first. It’s about everybody having a serious conversation about where we want to go and then getting everybody to step in that boat at the same time so we can go forward together.”
Obama on Monday sent Congress a fiscal 2012 budget calling for $3.7 trillion of spending. The plan outlines many program cuts in a bid to trim deficit spending by a total of $1.1 trillion over the coming decade – but with no proposals for controlling the long term costs of major entitlements, including the national health care programs.
In an interview on ABC News today, House Budget Committee Chairman Paul Ryan, R-Wis., said Obama’s budget falls far short of the spending reforms needed in health care and retirement programs. “So the drivers of our debt are our entitlements programs,” he said. “You have to do entitlement reform if you're serious about this budget -- if you're serious about this debt. And the point I keep making about entitlement reform, the sooner we tackle it, the better off everybody is because the kinds of reforms that we've advocated in the past tell current seniors, people in or near retirement, that they're exempt from changes but we prospectively make these changes for younger generations.”
Economic Assumptions
The president’s opponents and deficit hawks would like to see immediate, sharp reductions in spending. Many also oppose many elements of the president’s plan, which eliminates a number of tax preferences for major corporations. The president’s plan includes a discretionary spending freeze, slower increases in military spending, and selective tax increases.
While critics focus on the size of the cuts in the president’s plan, the budget proposal also rests on economic assumptions that raise serious questions about its ability to achieve the 2015 goal of bringing the budget into primary balance – where revenue coming into the government equals the expenditures going out. The plan only succeeds in cutting the federal deficit by more than half over the next four years if the nation experiences fairly rapid economic growth. And while that would be good news for the millions of unemployed Americans looking for work, it’s hardly a given as the nation emerges from the worst financial crisis since the Great Depression.
The plan projects economic growth will reach 4.4 percent a year in 2013 and 4.3 percent in 2014. If the economy does grow that fast, unemployment will fall and tax receipts will rise. Economic advisor Austan Goolsbee noted yesterday that those growth projections were made before the December tax package deal that temporarily extended the Bush era tax cuts, and offered a two percentage point payroll tax break plus gave business a one-year tax holiday for new investment.
“Most of that is not in the forecast,” Goolsbee told reporters. But it wasn’t in the Congressional Budget Office economic forecasts either, or in the forecasts of private sector Blue Chip economists. While they are revising their economic outlooks upward, they started from points that were significantly below the administration’s forecast. The Blue Chip economists before the tax cuts were at 3.0 and 2.8 percent in 2013 and 2014, respectively.
A second question worth asking is whether the president’s deficit reduction goals go far enough. One way to answer that question is to measure its deficit projections to the recent budget plan offered by the presidentially-appointed fiscal commission, which was headed by Democrat Erskine Bowles and former Republican Senator Alan Simpson. Their goal was lowering the federal deficit to 2.4 percent of GDP by 2015.
Its final recommendation included $1 in defense cuts for every $1 in discretionary spending cuts, and called for each of those to be matched by another dollar raised through tax increases. While their report was snubbed by nearly every conservative Republican and liberal Democrat on the commission, the president’s proposed budget comes within shouting distance of achieving that goal. During his White House news conference today, Obama repeatedly disputed contentions that his fiscal commission’s tough recommendations for long term debt reduction through tax and entitlement reforms have been shelved. “The notion that it has been shelved I think is incorrect,” he said. “It still provides a framework for a conversation.”
Another Benchmark for ComparisonThe Congressional Budget Office offers another benchmark for comparison. Its latest projection shows the budget deficit declining to about 3 percent of GDP by 2015 – just like the president’s budget. But the CBO looked only at current law, which is its job, and current law says all the Bush era tax cuts will expire at the end of 2012.
That’s not a very likely scenario. But it is one way to get the deficit down to 3 percent of GDP. Some economists argue it wouldn’t hurt the economy to raise taxes on the middle class and the well-to-do since that was the level that existed in the late 1990s when unemployment was 4 percent. But that’s logic, not a policy that is on either party’s agenda.
Finally there are the spending and tax goals in the plan, which can be summed up by saying they win few friends and make many enemies. The president’s plan relies on a fairly stringent budget freeze on domestic spending that has already alienated some key elements of his political base. The rest of the Obama budget offers a minimal down payment on his public investment agenda, often offset by tax increases or cuts in other programs.
For example, the president highlighted his commitment to meeting the rising demand from college-bound youths for Pell grants and loans. But the $44 billion in additional spending on that program over the next ten years will be largely offset by $39 billion raised by eliminating Pell grants for summer sessions and allowing interest to accrue to those loans while young people are still in college.
The tax changes offered business under the rubric of tax reform, meanwhile, was a similar smorgasbord of offsetting line items that will prove mildly pleasing to some while alienating powerful special interests. The president offered to make the research and development tax credit permanent, eliminate capital gains on small business stock, and tax dividends and long-term capital gains at a 20 percent rate. But at the same time, he would eliminate tax breaks that go to fossil fuel industries, reinstate the Superfund environmental clean-up tax, and impose a new “financial crisis responsibility fee” on financial institutions.
The Republican opposition all but called the Obama budget dead on arrival. “We need a serious plan to address our out-of-control spending and our anemic economy – this is neither,” said Ways and Means Committee Chairman Dave Camp, R-Mich.
Democrat Kent Conrad North Dakota, who chairs the Senate Budget Committee and was a leading member of the fiscal commission, called the budget a good start, but nowhere near enough. “We need a much more robust package of deficit and debt reduction over the medium- and long-term. It is not enough to focus primarily on cutting the non-security discretionary part of the budget.”
Like the last budget presented by President Obama, this is one stake in the ground where few Congressmen care to gather.
