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President Obama’s budget: An honest path to sustainability

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President Obama’s Budget: First Take

Note: This document examines the elements of the president’s budget submission, and will be updated as we review the release. It was last updated 1:18pm.

Overall

President Obama’s fiscal year 2010 budget overview released today is a welcome change from submissions from the prior administration.

First, the budget looks out over the next 10 years to give a more complete view of where the nation’s finances are headed. President Bush’s budgets only looked at a 5 year horizon, and thus avoided making clear the true cost of extending the 2001 and 2003 tax cuts beyond their expiration date. The 5 year horizon also masked the full impact of tax and budget policies that were set to either phase-in over time or sunset at a given date, or both. Looking out over a full 10-year horizon gives the public a better picture of where our nation’s finances are headed.

Second, the budget avoids the gimmicks that were used to artificially improve the outlook. Specifically, under President Bush, the budget typically:

* Did not include a full accounting of the costs for military activities in Iraq and Afghanistan
* Did not include the cost of “patching” the alternative minimum tax in the out-years
* Did not include contingency funding for natural disasters and other emergencies beyond immediate needs
* Assumed an artificially low level of spending on Medicare by assuming politically unrealistic cuts in doctor payments.

By more honestly accounting for these costs, the American public can better assess the future trajectory of spending, tax levels and the deficit.

Bottom line

The budget makes it clear that, once a full accounting is done, President Obama is inheriting a sizeable budget gap. Even excluding the recently passed recovery package, the deficit for the current fiscal year is expected to be $1.3 trillion or 9.2% of gross domestic product–a measure of the size of the overall economy. Recent analysis by the Congressional Budget Office confirms this finding and also shows deficits under Bush’s policies in the $1 trillion range for each of the next 10 years, totaling nearly $11 trillion over this time. While some of this gap is due to the recession (which has depressed revenues and placed additional demands on spending), it is clear that the policies followed over the last 8 years -in particular tax changes that have eroded federal revenues and additional spending for military activities in Iraq and Afghanistan-have been the root cause of this imbalance.

The budget proposal does show a halving of the deficit by 2013, at which point it will reach approximately 3% of GDP. This is a deficit reduction relative to current levels, but also relative to projected deficits under Bush’s policies. With deficits at this level, the nation’s debt as a share of the economy will be stable. The deficit path beyond 2013 shows that the national debt will stabilize at around 67% of GDP.

Revenue changes

The president’s budget includes the cost of his “making work pay” tax credit that will provide a $400 per worker credit to the vast majority of working Americans. The president is proposing to reverse some of the Bush tax changes that have benefited the very wealthiest.

The president also proposes to reach his deficit goal by reducing the tax break that top earners receive by itemizing their deductions.  Currently, taxpayers in the top brackets receive larger tax breaks when filing the same itemized deduction as other taxpayers in lower brackets.  The budget proposes to reduce the itemized deduction for households making over $250,000 to bring it closer to the size of tax break that is available to most taxpayers.

Overall, the level of revenue in 2009 is expected to be low by historical standards, at 15.4% of GDP. However, once the economy recovers, revenue are expected to  return to approximately 19% of GDP from 2012 and after.

Outlays

Overall spending levels are expected to reach 27.7% of GDP in 2009, well above historical averages, as a result of efforts to stabilize financial markets and to bring about economic recovery. This figure falls steadily through 2012 and maintains a spending level just above 22% for the remainder of the budget horizon.

Discretionary

The president is proposing that non-defense discretionary spending will grow no faster than the overall economy over the next 10 years. Substantial savings is achieved by reducing the number of troops deployed in Iraq. Other department of defense operations see modest increases. 

Full details of the program areas that will see increases (or decreases) are not yet available.

Other elements

Health care

The budget blueprint and creates a $634 billion reserve fund over the next 10 years to pay for large expansion in health coverage. This cost is a realistic down payment for universal coverage, and the sources of savings identified are realistic. Savings come from a combination of cost savings, through, for example, reducing over payments to insurers and by reducing drug prices; and also from additional revenue generated by limiting deduction rates for high-income taxpayers. 

Final details of the changes are yet to be worked out–and stakeholders in this debate, particularly Congress, will need to work with the administration to improve the US health system and guarantee coverage for all.

Energy

The president’s budget proposes a reserve fund for climate change policies that are designed to reduce greenhouse gas emissions, clean the environment, and wean the country off of its addiction to fossil fuels.  The system is expected to generate at least $645 billion over ten years, most of which (82 percent or $526 billion) would be recycled back to households in the form a permanent extension of the Making Work Pay tax credit (currently worth $800 per family), while the remainder would be used for $15 billion per year in investments in clean energy technology.  Any further revenues would be rebated back to the public.

The budget also includes money for making buildings more energy efficient.  The president proposes to start by reducing the federal government’s energy use by 25% and weatherizing low-income homes, which the administration estimates will save families $350 per year.  The budget also includes increasing funds for a national electricity grid to promote renewable energy generation and lower energy costs by managing demand more efficiently. 

Infrastructure Investments

The budget contains $5 billion in annual funding to establish a national Infrastructure Bank. This funding would in part be used to leverage private capital to fund new projects. A further $1 billion increase is also requested to fund state grant programs for high-speed rail (this is in addition to $8 billion included in the recently passed recovery package). 

The EPA will also see a substantial increase in part to fund an increase in clean water and drinking water projects. Additional money for broadband internet access, and science program are also included.


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