February 13, 2011
In a bid to reconcile the conflicting political demands for economic growth and deficit reduction, President Obama on Monday will unveil a nearly $4 trillion-dollar budget for 2012 that makes a modest down payment on his “Sputnik moment” investment agenda and attempts to trim the deficit by $1.1 trillion over the coming decade.
As promised in his State of the Union Address last month, the president’s overall budget request will include a five-year freeze on domestic spending. It will also call for slowing the growth of the Pentagon’s budget over the next five years, although defense would still see a sizable increase over current levels.
The president’s new budget, outlined for news organizations by a senior administration official on Friday, would target for reductions such popular programs as low-income heating and air conditioning assistance, community development block grants and airport grants. Two-thirds of the savings would come from spending cuts, while a third would come from raising tax revenues — an approach certain to draw sharp opposition from the Republicans.
Taken together, the ten-year savings would go well beyond the cut that were outlined in an op-ed in the New York Times earlier this month, in which Office of Management and Budget director Jack Lew said the overall plan will reduce the projected federal budget deficits by $400 billion over the next decade. But the president’s new budget to be unveiled on Monday nevertheless represents only a minor reduction in the $6.9 trillion growth of the national debt that was recently projected by the Congressional Budget Office over the next decade. Moreover, Obama’s budget plan does not even hit the short-term goal he set for his bipartisan fiscal commission of reducing deficits to 3 percent of the gross domestic product by 2015.
“After a decade of rising deficits, this budget asks Washington to live within its means, while at the same time investing in our future,” Obama said in his weekly national address on Saturday.
Republicans in Congress are certain to dismiss the plan as “dead on arrival.” House Budget Committee Chairman Paul Ryan, R-Wis., said today on Fox News Sunday that he would withhold his judgment until he studies the president’s budget tomorrow. He added, however, that the budget appeared to be “very small on spending discipline” while providing a lot of money for “investments” and new initiatives — an approach the GOP does not favor. Last week, House Appropriations chairman Harold Rogers, R-Ky., proposed to cut domestic discretionary spending by $100 billion over the next seven months, a move Democrats branded as “draconian” and many budget analysts suggested would undermine the operations of crucial government agencies. Given his own goal of freezing domestic spending at current levels, the president needed to find programs to cut or eliminate in order to come up with money to invest in education, infrastructure and clean energy — the three-legged stool of his investment agenda.
Secretary of Education Arne Duncan on Friday said the education department budget will continue the president’s commitment to his “race to the top” initiative, which received $1.35 billion of the department’s $46.7 billion budget this year. The program also received $4 billion in stimulus act funds. Instead of states competing for the money, as happened the first two years of the program, the administration plans to give local districts a chance.
Duncan also told reporters in a conference call that demand for Pell grants, which would allow low and moderate income students to attend college, have rapidly expanded during the Great Recession. “We’re absolutely committed to the program,” he said. “There’s been a huge uptake and we’re committed to continuing this.”
However, budget director Lew told CNN Sunday that to cut the cost of the program students will now begin accruing interest on their loans while in college instead of after graduation, and grants for summer programs would be eliminated. The president, Duncan and Lew will travel to a Baltimore middle school on Monday afternoon to highlight the administration’s efforts to beef up science and technical education in the schools.
Investing in Infrastructure
Earlier this month, the president said he wants to invest $53 billion over the next six years to begin building out a high-speed rail network in the U.S Leaks to the press about the budget suggested the president was willing to abandon some key political supporters to find money for his programs. Lew indicated programs slated for cuts included community development block grants ($300 million); community service agencies ($350 million); and the Great Lakes Restoration program ($125 million).
While the numbers associated with those programs are small, each is backed by important Democratic Party constituencies. CDBG grants have been a mainstay of urban economic development programs since the mid-1970s; the community service agency program, a legacy of President Lyndon Johnson’s War on Poverty, are also largely located in big cities and depressed rural areas; and cleaning up the Great Lakes is a high priority for Obama’s home state of Illinois and other Midwestern states.
The president’s budget will also call for cuts in half the low-income heating assistance programs, which helps poor people pay their oil and gas bills. That $2.5 billion in savings drew an angry reaction last week from liberal Democrats like Rep. Bobby Rush (D-Ill.), the only politician who’s ever defeated Obama in an election — in a race for Rush’s House seat. “Our low-income American families must always be offered, and given, needed assistance to cook and to heat their homes in winter,” Rush said.
The president’s defense proposals were laid out last month by Secretary of Defense Robert Gates, who called for $78 billion in cuts over the next five years. But those “cuts” were actually only reductions from previously scheduled increases.
More for Defense
According to reports on Bloomberg News last week, the administration budget proposal will include $553 billion for core Pentagon programs in 2012, which represents a $23 billion increase from current levels of spending and a $5 billion increase from defense authorization legislation passed just before Christmas.
“The Gates cuts are not cuts at all,” William Hartung, a defense analyst with the New America Foundation, told The Fiscal Times. “It is just a slowing in the rate of increase in Pentagon spending. The president could make $50 billion in real cuts this year alone without harming our security.”
The Congressional Budget Office issued a new report late Friday that in order to maintain the current programs at the Pentagon, the government will have to spend an additional $187 billion over the next five years on top of the current spending.
The higher levels will be needed simply to maintain existing programs. “The primary cause of long-term growth in DoD's budget from 2011 through 2028 would be increasing costs for operation and support,” the report said. “CBO projects significant increases in the costs for military and civilian compensation, military medical care, and various operation and maintenance activities.”
With U.S. troops leaving Iraq and Afghanistan, the president’s budget will call for sharp reductions in special appropriations for war spending. The defense authorization bill called for $159 billion for the two wars; Bloomberg reported the president’s request included just $117 billion in the special appropriation.
“That’s a real decline in spending and will reduce the deficit,” Todd Harrison, a senior fellow at the Center for Strategic and Budgetary Assessments, a Washington-based defense think tank, said in an interview with The Fiscal Times. “But if the Iraqi government asks us to keep more troops, [the administration] will have to come back for a supplemental, and we could end up spending that after all.”
Social Security Stays Untouched
The president’s budget proposal will be notable for what it doesn’t contain. Administration officials considered including in the budget a proposal to bolster the long-term prospects of the Social Security program by raising the income ceiling on which taxes are levied and raising the retirement age. But the administration abandoned the idea, according to an article in Friday’s Wall Street Journal, after learning that no Republicans would join the effort.
The administration would pay a huge political price for compromising on Social Security. Liberals and organized labor are already mounting a grass roots campaign to fight changes in eligibility, although they do support increasing the ceiling on wages subject to payroll taxes from the current $106,800 to $180,000, which the administration briefly considered after it was proposed by the president’s bipartisan fiscal commission.
The administration will propose some minor changes in the nation’s senior citizen health care program. Budget director Lew on Sunday said the budget would include $62 billion in Medicare cuts to pay for increasing physician salaries, and a proposal to reduce medical malpractice lawsuits.
Corporate Tax Reform—A Non Starter
Secretary of Treasury Timothy Geithner earlier this month also ruled out including tax reform in the president’s budget proposal, saying any proposal to lower corporate tax rates would have to be at least revenue neutral. Lowering the statutory rate from 35 percent while allowing tax-free repatriation of overseas profits — major goals of the corporate lobbying campaign for tax reform — without reducing revenue to the Treasury would require eliminating numerous loopholes in the corporate tax code. That raises taxes on many firms, which makes it a non-starter in broad segments of the business community.
However, the administration will propose, as it did in its first two budgets, eliminating the special subsidies that go to the oil and gas industry. That could raise as much as $4 billion a year. The president will propose shifting those subsidies into clean energy programs, which include the president’s goal of putting one million electric vehicles on the road by 2015.
The Wall Street Journal reports that the president’s budget projects a $1.6 trillion deficit this year, which is $120 billion higher than what the Congressional Budget Office projected last month. The deficit will fall to $1.1 trillion in 2012 as the economy continues its modest rebound, according to the administration plan.