CRFB Says Obama's Budget Does Not Go Far Enough

• Debt held by the public would rise from 68 percent of GDP in 2011 to 74 percent in 2012 and 77 percent in 2013, before declining to over 76 percent in 2018 and stabilizing at that level through 2022. We estimate that under CBO's more pessimistic economic assumptions, debt would reach nearly 80 percent of GDP in 2022.

• The budget proposes $2.1 trillion in new gross revenues through 2022 relative to current policy, along with $360 billion in health care reductions, and $160 billion in other mandatory reductions.

• The President's budget also proposes a number of deficit-increasing measures, including a $350 billion jobs package, nearly $370 billion in tax reductions, and nearly $270 billion in increased spending -- mostly for education and infrastructure.

• When combined with the Budget Control Act (BCA) discretionary caps, the drawdown of the wars in Iraq and Afghanistan, and the recovering economy, these proposals would lift revenue from 15.8 percent of GDP in 2012 to 20.1 percent in 2022 while reducing spending from 24.3 percent of GDP in 2012 to 22.8 percent by 2022.

• Under the budget, deficits would fall from 8.5 percent of GDP in 2012 to 5.5 percent in 2013, 3.0 percent in 2017, and roughly 2.8 percent annually between 2018 and 2022.

• The President's budget takes an important step by laying out a number of policies to stabilize the debt. Given how serious the nation's fiscal challenges are, however, the President should have laid out a specific comprehensive plan to return the nation to a sustainable fiscal path, rather than just a first step.

The FY 2013 budget shows deficits of more than $1.3 trillion (8.5 percent of GDP) in 2012 and about $900 billion (5.5 percent of GDP) in 2013. After 2013, these deficits will continue to fall as a share of the economy -- to 3.9 percent in 2014 ($668 billion), 3.0 percent in 2017 ($612 billion), and about 2.8 percent of GDP per year thereafter, through 2022.

Due to a combination of the economic recovery, the unwinding of certain stimulus tax cuts, the implementation of revenue provisions from the 2010 health reform legislation, and the President's revenue-raising policies, revenues under the President's budget would rise from 15.8 percent of GDP in 2012 to 19.0 percent by 2015 and 20.1 percent by 2022.

As the economy recovers, stimulus expires, the war draws down, and proposed spending cuts are implemented, outlays would fall -- from 24.3 percent of GDP in 2012 to 23.3 percent in 2013 and 22.0 percent by 2017. However, due to population aging and rising health care costs outlays will rise after 2017, reaching 22.8 percent by 2022.

      Fig. 1: Revenue, Outlays, Deficit, and Debt under the President's

As a result of these deficits, debt in the President's budget would rise in early years -- from less than 68 percent of GDP in 2011 to over 78 percent in 2014. Beyond 2014, debt would begin to shrink relative to the economy and ultimately stabilize at over 76 percent of GDP through 2022. Importantly, this is a major improvement over last year's budget -- in which debt rose to 87 percent of GDP by 2021. Though much of the difference is due to the spending caps passed under the Budget Control Act, this year's budget also includes a substantial amount of new deficit reduction relative to last year's in all areas of the budget including revenue, health care, and other mandatory savings.

That said, the President's most recent budget falls short when compared to other debt reduction plans that have been put forward, including from the President himself in September 2011 (which projected debt levels of 74 percent of GDP in 2021). Both the Fiscal Commission's plan and the budget passed by House Republicans last year would put debt on a clear downward path, whereas the President's budget only temporarily stabilizes the debt.

 

Fig. 2: Public Debt under Various Proposals (Percent of GDP)

 

 

 

Over the long-term, the President's budget would not constrain rising debt, as retirement and health care costs continue growing faster than the economy. According to the Administration's own estimates, debt would grow as a share of the economy past 2022 -- exceeding 93 percent by 2035 and nearly 125 percent by 2050. These levels would be both economically constraining and ultimately unsustainable.

Jobs Proposals

President Obama's budget includes a number of measures that are intended to boost short-term economic growth, particularly in 2012 and 2013. Taken together, these proposals would cost $178 billion in 2012 alone and more than $350 billion through 2022.

On the tax side, he would extend the two percent payroll tax holiday for the remainder of the year, extend 100 percent expensing for businesses on certain equipment, provide a temporary employer tax credit for creating jobs or increasing wages, and enact a number of smaller changes. On the spending side, the President would extend and reform expanded unemployment benefits and increase infrastructure investment for schools, highways, and other areas. The budget would also provide small amounts of spending for additional job creation initiatives.

² President's FY 2013 Budget, pp. 2-3.

By and large, the President's discretionary levels track those agreed to in the BCA. Based on those caps, FY2013 base discretionary savings is limited to $1.047 trillion - $4 billion more than the FY 2012 discretionary cap (the Administration adjusts that number down to $1.043 trillion to account for a change in budgetary treatment for highways).

Defense spending in the President's budget would be reduced by 1 percent in 2013. Funding for the Justice Department, Department of Homeland Security, and the EPA would also see cuts. On the other hand, the President would increase spending for research and development throughout government -- particularly for clean energy programs, biomedical research, the National Science Foundation, and programs for advanced manufacturers.

Although the President's budget holds non-war discretionary spending to levels as specified by the BCA, the Administration does make two changes within the discretionary budget. First, the Administration calls for a cap on war spending -- and counts the $850 billion in lower spending (compared to a baseline that has war spending growing at the rate of inflation) toward his savings totals. As CRFB has written before, a war spending cap can help ensure defense savings materialize, but counting savings from the war drawdown is nothing more than a budget gimmick. This change does not represent a new policy, but rather a recognition of a policy already in place.

Even more concerning is that the President proposes to use some of these phony war savings in order to finance an increase in highway spending. Currently, Congress is negotiating a highway bill to fund future transportation infrastructure. Existing gas tax revenue is insufficient to cover current highway spending levels, meaning that policymakers must identify new offsets to cover their costs. The Administration's proposal, however, would circumvent this process by simply using phony war savings in order to cover the existing shortfall and to increase transportation spending by $125 billion.

Mandatory Spending

President Obama borrows from his September Submission to the Super Committee to make a substantial number of reductions and reforms to mandatory spending programs.

On the health side, the largest amount of savings -- over $150 billion through 2022 -- would come from a policy to require certain drug manufacturers in Medicare Part D to pay rebates to the government. The President also supports over $100 billion in various reductions in provider payments to hospitals and post-acute care facilities as well as over $30 billion in Medicare beneficiary changes beginning after 2017 (the largest of which is an increase in premiums for higher earners). In addition, the President supports about $50 billion in Medicaid savings -- mainly from reducing gaming of the matching rate by states and switching to a single "blended rate" for each state -- along with a number of smaller health savings.

Outside of health care, the President supports eliminating direct payments to farmers and making other agricultural subsidy reforms (over $30 billion in savings); reforming the federal civilian retirement program, including by increasing employee contributions (about $30 billion in savings); and putting in place or increasing a variety of user fees and asset sales ($75 billion in savings); along with a variety of smaller spending cuts.

Tax Policy

In his budget, President Obama calls for comprehensive tax reform meant to achieve a number of principles. Specifically, he calls on tax reform to simplify the code, lower tax rates, reduce the number of tax brackets, eliminate tax breaks for millionaires, and reduce and simplify tax breaks so they offer "at least as good a deal for the middle class as for wealthy Americans." He also calls for tax reform that would reduce the deficit by at least $1.5 trillion in a way that is at least as progressive as if the upper-income tax cuts expired, would increase domestic job creation and growth, and would observe a "Buffett Rule," requiring that households making over $1 million pay at least 30 percent of income in taxes.

          Fig. 4: Effect of Tax and Spending Proposals on the Deficit

To further reduce the deficit, the President proposes additional revenue increases from higher earning individuals and corporations. On the individual side, most of the remaining revenue (about $580 billion in savings) comes from a policy that would limit the value of various tax deductions and exclusions for those in the highest tax brackets.

On the corporate side, the President's budget includes a variety of revenue-raising policies, including from reforming the U.S. international tax system (about $150 billion in savings), reducing tax benefits for financial, insurance, and fossil fuel industries (about $50 billion in savings), and enacting a variety of other changes.

The President also includes several revenue-generating policies in his set of mandatory proposals, including by increasing IRS enforcement, reforming the unemployment insurance tax, and establishing a tax on banks to recover the costs of the TARP program.

At the same time, the President proposes a number of tax cuts. For individuals, the largest cut would be an extension of the American Opportunity Tax Credit for college attendance. On the corporate side, the President's budget includes a number of policies to expand manufacturing and encourage "insourcing," including by making the research and experimentation tax credit permanent.

On net, these policies together would generate about $1.7 trillion in deficit reduction relative to current policy.

Economic Assumptions

An important part of any budget is the economic assumptions that underlie them. The stronger the economy, the more revenue that will be collected and the greater the capacity to maintain higher levels of nominal debt.

OMB's economic assumptions are somewhat more optimistic than CBO's, as well as the Blue Chip consensus ranges. The Administration projects real GDP growth to be 2.7 percent in 2012 and 3.0 percent in 2013, compared to 2.2 percent and 1 percent, respectively, from the CBO. Importantly, much of this difference is due to the fact that CBO assumes a temporary economic contraction in 2013 due to all the tax cuts expiring and the automatic spending sequester going off at the same time in the start of 2013. However, OMB continues to be more optimistic than CBO beyond this contractionary period, with estimated growth rates of 2.5 percent per year by the end of the decade as opposed to 2.4 percent by CBO.

On the whole, these faster growth rates likely lead to a more favorable fiscal picture than what CBO would show using its economic projections. By our estimates, if OMB were to employ CBO assumptions debt would stabilize at about 80 percent of GDP as opposed to 76 percent.

      Fig. 5: Comparison of Economic Projections (Calendar Year)

The President's budget tracks closely to his submission to the Super Committee in September, which was a step in the right direction on deficit reduction, but not nearly sufficient. The President's budget would stabilize the debt as a share of the economy through the second half of the decade, but would do so at too high of a level and without the necessary entitlement reforms to bring down the debt over the long-run.

Rather than offer savings large enough to fix the budget problem, the Administration attempts to inflate its headline savings number, as can be seen by looking at the more important metric of debt as a share of GDP. It is highly disappointing that the President didn't go further in his proposals and offer a plan that is large enough to deal with the nation's fiscal challenges in the medium and long-term.