Photo credit: Getty Images via @daylife
The $3.7 trillion budget that President Obama introduced yesterday clearly places spending initiatives aimed at job creation and rebuilding the American middle class ahead of deficit and debt reduction and austerity. It is a political document, and needs to be seen as such.
Simply put, Obama’s budget is not practical. It does not take any serious, long-term steps to rein in spending or address the serious need to reduce the debt and deficit. It taxes and spends too much while failing to meaningfully address our entitlement crisis.
In his budget, the President calls for $1.3 trillion in spending, including $350 billion in spending on jobs programs and $476 billion in infrastructure projects. Obama also wants to increase aid for manufacturing research and development by 19 percent to $2.2 billion, maintain lower payroll taxes, and spend money hiring teachers and retraining workers.
To pay for the spending, the President would raise $1.5 trillion in added tax revenue over 10 years, primarily from higher taxes on wealthier Americans. He would let the Bush tax cuts expire for families earning more than $250,000 a year, and enact the “Buffett Rule,” which would effectively raise the tax rate on millionaires to a minimum tax of 30 percent.
The budget does include some serious cuts that should not be overlooked. These cuts largely come from the $8.5 billion in discretionary cuts agreed to last year in the debt-ceiling negotiations, which forces some cuts at the Pentagon and the lowest spending on domestic agencies as a percentage of the economy in at least 10 years.
Although the President’s budget has a lot of deficit reduction – about $4 trillion over the next 10 years – it would still result in $6.7 trillion in deficits over the next decade, and do nothing to tackle the national debt, which is projected to be an alarming 74% of gross domestic product (GDP) this year. This debt-to-GDP ratio would reach 77% by 2022, and likely increase significantly after that due to an aging population and the growing cost of Social Security and health care.
In contrast, the Obama-appointed deficit reduction commission, the Bipartisan Fiscal Commission led by Erskine Bowles and Alan Simpson, put forward a proposal that aimed to reduce the debt to 60% of GDP and keep decreasing with time. Obama declined to endorse the commission’s recommendations, which additionally included serious attempts to restructure Social Security and Medicare entitlement programs. He and other Democratic leaders have refused to look into significant cuts to benefits unless Republicans become more willing to consider some of Obama’s taxes increases. I believe the debt commission’s framework should be revived and used as a starting point to get both sides involved in achieving a fiscally sound budget.
Further, Obama’s budget does not uphold his 2009 promise to cut the $1.3 trillion deficit in half by the end of his term; his budget projects it will be $1.15 trillion in 2012 and $901 billion in 2013. This is certainly in part due to the lagging economy, which has not recovered nearly as quickly as economists predicted three years ago.
However, Obama’s budget doesn’t take steps to address the long-term issue of debt and deficit reduction going forward because it spends and taxes too much while using budget and accounting gimmicks to claim exaggerated savings, all the while avoiding the nation’s biggest challenges.
Indeed, Obama’s budget keeps spending at unprecedented levels, projecting $20.6 trillion in government spending over the next five years and $47 trillion in spending over the next ten years. It calls for $1.9 trillion in higher taxes at a time when the economy continues to struggle. And Obama reaches $4 trillion in deficit reduction by including these tax hikes and “war savings” from reducing U.S. involvement in Iraq and Afghanistan – “savings” we never planned to spend.
Most importantly, by failing to address the nation’s biggest budget challenges – the looming crises of the three big entitlement programs – the President’s budget only addresses 40% of the government’s spending problem. Obama was incredibly vague on how to address health care spending, one of the primary drivers of long-term deficits, and is doing little to restrain the surge in Medicare and Medicaid costs expected to come with the retirement of baby boomers.
Instead, Obama proposed measures to trim spending on federal health care programs that would ultimately hurt medical innovation, research, and job creation, and increase health care costs for seniors through mandatory drug rebates, reducing data protection for biologic medicines, and strengthening the Independent Payment Advisory Board (IPAB).
Implementing mandatory rebates in Medicare Part D are a short-sighted measure that would threaten over hundreds of thousands of American jobs and destabilize the program, which has worked successfully for seniors thus far. Reducing the number of years biologic medicines have data exclusivity hurts the development of these cutting-edge medicines. And strengthening IPAB, the unelected panel created by the national health care law to contain the growth in Medicare spending, would enable panel members to enact comprehensive Medicare spending cuts without Congress’ oversight and would not be subject to judicial or administrative review.
We should discard Obama’s budget and go back to the Bowles-Simpson framework, which would reduce tax rates overall and eliminate deductions, and do more to reduce the deficit and the debt, which would potentially have a greater simulative impact on jobs and the economy. The President and the Republicans need to get serious now because if we wait until 2013, we could face a crisis of unimaginable proportions.
