Obama’s Budget: Small Cuts, Big $1.6 trillion Deficit
Policy + Politics

Obama’s Budget: Small Cuts, Big $1.6 trillion Deficit

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President Obama on Monday sent Congress a fiscal 2012 budget calling for $3.73 trillion of spending and predicting a record $1.6 trillion deficit for the current fiscal year. The plan represents a modest, cautious strategy for controlling the long-term debt.

The new deficit forecast for the current fiscal year that ends Sept. 30 is larger than the $1.48 trillion deficit recently projected by the non-partisan Congressional Budget Office, and it further underscores the challenges confronting the Obama administration and a politically divided Congress in containing the long term debt. The White House and the Republican controlled House appear headed for a major confrontation over GOP efforts to cut as much as $100 billion from this year’s budget, and over conservative resistance to raising the $14.3 trillion total ceiling on government borrowing  to avert a possible government shutdown and financial crisis this spring.

As promised in his State of the Union address, the president’s budget for the fiscal year that begins Oct. 1st  includes a five-year freeze on all discretionary spending outside of defense and national security, and a slowing of growth in the Pentagon budget projected to save $78 billion over the next five years.  The budget also outlines proposed cuts in a wide range of popular domestic programs – including low-income energy assistance, community development block grant and Great Lakes cleanup projects – and increases in tax revenues in a bid to trim deficit spending by a total of $1.1 trillion over the coming decade.

Pell grants for low-income college students would be eliminated for summer classes, and graduate students would begin accruing interest immediately upon receiving federal loans, rather than after graduation. These savings would largely offset the rapid increase in student demand for these Pell grant loans.

About two thirds of these overall savings would come from spending cuts and a third from new tax revenues generated in part by eliminating deductions and rescinding tax breaks for high income families making more than $250,000 a year. The budget calls for more than $1.6 trillion in fresh revenue over the next decade, much of it through higher taxes on the wealthy and businesses.

The overall spending of $3.7 trillion called for in Obama’s budget is about a $90 billion less than the estimated  spending for the current 2011 fiscal year, or a two-percent reduction.

The president’s budget relies on a fairly optimistic outlook for the economy over the next few years, which if it doesn’t pan out would sharply eat into projected tax collections. The administration expects the economy to grow at a 2.7 percent clip this year, the same as the Congressional Budget Office. But it expects the next decade will average 3.4 percent growth, which is slightly faster than the CBO projection of 3.1 percent average annual growth–but in the middle of private forecasts, according to Austan Goolsbee, the president’s chief economic adviser.

But contrary to the call of Obama’s fiscal commission last December to reduce the deficit by $4 trillion by 2020 through deep spending cuts, elimination of scores of tax loopholes and major entitlement reform, Obama balanced his concern about  fiscal discipline with a fresh round of spending on education and research, investments in infrastructure and high-speed wireless data network, and other programs he says are essential to the economic recovery and enhancing the country’s global competitive edge.

“So even as recovery begins to take hold, we have more work to do to live up to our promise by repairing the damage this brutal recession has inflected on our people, generating millions of new jobs, and seizing the economic opportunities of this competitive, new century,” Obama said in his budget message to Congress.

The overall budget plan would reduce the federal deficit as a share of gross domestic product to 3.1 percent by 2015 – slightly higher than the 2.4 percent goal set by the president’s fiscal commission in its report released last fall.

During a speech this morning at the Parkville Middle School and Center of Technology in Baltimore, Obama characterized his proposed spending cuts as simply a “down payment” on reducing the long term debt, but without taking dire action that could derail the recovery from the worst recessions in modern times. “We can’t sacrifice our future in the process,” he said.

The Long Term Deficit
Under Obama’s budget plan, annual deficits through fiscal year 2021 will add a combined $7.2 trillion to the federal debt – including lofty deficits of $1.6 trillion this year and $1.1 trillion in 2012, and lesser deficits of $768 billion in 2013, $645 billion in 2014 and $607 billion in 2015 and $649 billion in 2016.  The $1.6 trillion deficit projection for this year is equal to nearly 11 percent of the gross domestic product, making it the biggest gap between spending and revenues since the end of World War II.

The release of the budget, in some ways, marks an opening shot in Obama’s bid for reelection in 2012, in which he is attempting to sharply delineate differences between Democrats and Republicans over spending and deficit issues at a time when unemployment remains high at 9 percent and the economy has not recovered from the recession as quickly as many had hoped.

In a letter to Obama on Sunday, House Speaker John Boehner, R-Ohio, said that “the spending binge in Washington” was hurting the economy, and then added in an interview on NBC’s “Meet the Press” that the U.S. is “broke” and it would be highly dangerous to do nothing to rectify the problem.

But the White House and congressional Democrats argue House Republicans are essentially taking a “meat ax”  to important domestic programs that constitute only 16 percent of the overall budget that will undermine the recovery and inflict pain on a lot of Americans without doing much to reduce the deficit. Obama said that while his budget lays offers a path for paying down the deficit, that “Growing the economy and spurring job creation by America’s businesses, large and small, is my top priority.” 

A senior administration official said Obama's budget request maps "a sustainable path" that would stabilize government finances in preparation for a broader debate about how to tackle the biggest drivers of future deficits: Social Security and health care for the elderly, as well as a tax code that offers more in breaks and deductions than it collects in revenue, according to the Washington Post.

Despite pleas from members of his own deficit commission and other deficit hawks on Capitol Hill to address the long term structural deficit, the administration concluded there was no political upside to tackling tax and entitlement reform in his budget, giving Republicans and other administration critics an opportunity to go after him without putting down their own proposals for long-term deficit and debt.

Moreover, 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 fiscal commission.

Alice Rivlin, a member of the fiscal commission and a former Clinton administration budget director who had hoped for major proposals on entitlements and tax reform, said that Obama’s decision to skirt those issues for now was a smart tactical move. “The history of the last two years is that everything the president is for, the Republicans immediately attack and say they’re against–the clearest example being health care reform,” she said. “So if you’re working in that atmosphere, I think you have to figure out how am I going to get bipartisan cover.“

Rivlin noted that while the president is under attack in the House, the Senate affords Obama a good opportunity to work with Democrats and Republicans to forge a bipartisan strategy for  controlling long term spending for Social Security, Medicare and Medicaid. “That’s the chance for having some bipartisan covering, so he’s not taking the risk of torpedoing that by coming out for it” in his budget.

However, Senate Budget Committee Chairman Kent Conrad, D-N.D., another member of the fiscal commission, complained, “If we're going to get this debt down to a level that's sustainable, then we've got to do substantially more than $1 trillion worth of deficit reduction in the next decade. We just do." 

Under the administration’s budget, Pentagon spending is slated to decline slightly from this year’s spending levels, but at $707.5 billion would still be a 6.1 percent increase over 2010 spending. Secretary Robert Gates laid out $78 billion in military cuts over the next five years by eliminating the Marine Corps Expeditionary Fighting Vehicle, the procurement of the Army Surface Launched Medium Range Air-to-Air Missile defense system and the Navy’s SM-2 Block III surface-to-air missile.

But those savings are largely poured back into additional procurement of existing weapons systems or continuing to develop costly programs like the F-35 Joint Strike Fighter. While military research and construction are slated to decline by about $13 billion compared to 2010, procurement is slated to rise more than $8 billion and routine operations and maintenance receives nearly a $20 billion bump.

With wars in Afghanistan and Iraq winding down, supplementary expenditures in the two war theaters are expected to decline to $118 billion from $159 billion. However, the administration’s request for overseas operations of the State and U.S. Agency for International Development budgets includes over $5 billion for Iraq, nearly doubling 2010’s total, and $2.2 billion in aid for Afghanistan, which remains about the same.

Related Links
Obama’s Budget Goodies (CNN Money)
Dodd-Frank May Cost $6.5B and 5000 Staff in Obama Budget (Bloomberg Businessweek)
Obama Budget Would Boost Education Spending (The Wall Street Journal)