Commentary | Budget, Taxes, and Public Investment

Budget reflects weakened economy, EPI analysis shows

The Obama administration today released its fiscal year 2011 budget, and its budget projections continue to reflect the poor state of the economy. The recession—with greater unemployment and lower incomes—automatically leads to lower revenues and higher spending levels:  2011 revenues are projected to be significantly below trend at 16.8% of gross domestic product, and outlays are projected to be higher than trend at 25.1% of GDP.  However, the resulting deficit in 2011, at 8.3% of GDP, would be down from the projection for 2010 of 10.6%. The overall forward-looking trend in the deficit is positive, with the deficit as a share of the economy peaking in 2010, and then falling to around 4% of GDP for 2013 through 2020.

This budget attempts to preserve some of the President’s core priorities—including increases in the departments of Education, Energy, Transportation, and the National Science Foundation—but it also restrains many spending areas.  And as indicated last week, the budget also freezes non-security discretionary spending for three years starting with fiscal year 2011, which represents an inflation-adjusted reduction in this category of spending.

The budget also includes funding and placeholders for further action on job creation, including additional funds for tax credits, support for unemployed workers, and additional aid to state governments. These efforts, which total nearly $250 billion in 2010 and 2011, would boost employment and economic growth over the next 18 months. But because off the enormity of the unemployment problem, more spending on job creation will likely be required to bring unemployment down.

Although significant challenges remain over the long term, the larger threat to the economy comes from economic stagnation and slow job growth. A weak recovery will mean lower revenues and higher spending, compounding the nation’s fiscal problems. The first thing we must do to address the long-term debt is to put Americans back to work so we can get the recovery on the right track.

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