So President Barack Obama wants to shrink the deficit by 2013, the end of his term. If he's serious, he will have to do better than what he has outlined in his fiscal year 2010 budget, titled A New Era of Responsibility: Renewing America's Promise (note: all subsequent mentions of years indicate federal fiscal years, which annually run October 1 through September 30 of the following calendar year). To cut the size of the federal government, one actually has to, you know, cut programs. While Obama's overall numbers do show a spending decrease between 2009 and 2010, he actually increases many categories of spending, which remains far above 2008 levels in any case. In fact, his "cuts" are basically the results of 2009 bailout payments not being extended into 2010.
Moreover, if the spending reductions planned for 2010 look at all promising, that's only because the increase between outlays in 2009 and 2008 was immense, rising by at least 32 percent. Outlays in 2010 represent a whopping 19 percent increase over outlays in 2008. Additionally, although Obama has stressed "transparency" in his budgeting process, his spending and revenue plan relies on accounting tricks in key areas. All of this falls far short of the hope and change Obama promised to bring to the White House.
The just-released document is a summary version of the more detailed proposal that Obama will put out in April. In the 134-page summary, the president forecasts a budget deficit of $1.75 trillion in 2009. That represents 12.3 percent of gross domestic product (GDP), making it the highest deficit as a share of the economy since World War II (see chart).
In 2010, Obama envisions a reduction in the deficit to $1.17 trillion. He also assumes a 3.4 percent increase in GDP between 2009 and 2010, which would mean that the deficit as a share of GDP would decline to 8 percent. That's a very optimistic forecast that actually weakens the foundation of the budget document itself. Other projections for GDP growth in 2010 are much less bright. The Congressional Budget Office (CBO) projects 1.5 percent growth in 2010 and the February Blue Chip Consensus figure is 2.1 percent.
Indeed, if the president is right about this relatively robust growth in 2010, how can he justify spending the bulk of his stimulus funds after the economy would have already recovered? After all, by his own count, 75 percent of stimulus funds won't be released until 2010. Maybe this sort of contradiction is to be expected from a man who signed the biggest spending bill in history one week and then organized a fiscal responsibility summit the next.
The Spending Side
In the federal budget, the two most basic categories of outlays are mandatory spending and discretionary spending, each of which makes up about half of total spending. Mandatory spending includes entitlement programs (such as Medicare) that are provided for by law rather than by new appropriations bills each year. Discretionary spending includes most defense and homeland security spending, farm subsidies, and other programs that are funded each year by congressional appropriations. Beginning in 1962, discretionary spending had itself been split into two large categories: defense and non-defense spending.
In 2009, total spending (mandatory plus discretionary) will reach $3.94 trillion. That's a 32 percent increase over the 2008 level, one of the biggest year-to-year increases in the past 50 years. It represents 27.7 percent of GDP, a serious hike from the 21 percent level reached in 2008. Much of this increase is the product of the bailout signed by President Bush last fall. It is also the result of the federal takeover of Freddie and Fannie as well as the 2009 share of stimulus spending.
For 2010, the president requests $3.55 trillion in total spending. Based on the administration's unrealistic assumption about growth, spending would fall to 24.1 percent of GDP.
Table 1: Proposed Budget By Category
Source: OMB (2009), A New Era of Responsibility, www.budget.gov.
Table 2: Spending Increase by Category
Source: OMB (2009), A New Era of Responsibility, www.budget.gov.
The decrease in total spending comes from a $500 billion drop in mandatory spending. Where do the savings come from? Almost entirely from the fact that a one-time $247 billion blast of TARP funds and a $250 billion placeholder for potential additional financial stabilization were spent in 2009.
The Tax Side
Moving from outlays to revenue sources, Obama's budget proposes boosting tax collection from about 16.2 percent of the economy this year to 19 percent in 2013. He will do that by allowing some of the 2001 and 2003 tax cuts enacted under Bush to expire on schedule. This affects people in households making more than $250,000 a year. Under the president's plan, the top two marginal tax rates will increase from 33 to 36 percent and from 35 to 39.6 percent, while both the capital-gains tax and dividend tax will rise from 15 to 20 percent.
In addition, he plans to pay for his new health care "reserve fund" mostly by a $318 billion tax hike over 10 years in the form of reduced deductions—such as the mortgage interest deduction—for the wealthiest Americans. These taxpayers would also see their capital gains tax rates go up.
Businesses would also see their tax burdens increase. Obama plans to raise $353 billion over 10 years through 13 different taxes (new or old). For instance, his budget reinstates superfund taxes, repeals manufacturing tax deductions for oil and natural gas companies, increases the geological and geophysical amortization period for independent producers to 7 years, and eliminates the advanced earned income tax credit.
He also proposes to create a new $112 billion tax over the next decade on the energy use and production of every American. This "cap and trade" program is designed to battle global warming by forcing companies to buy permits if they wish to emit heat-trapping pollutants. The permits will be auctioned to businesses beginning in 2012. The money raised will help pay for an extension of the Making Work Pay tax credit originally introduced in the stimulus bill.
However, the controversial nature of the proposal raises the question of whether these revenues will ever materialize.
For several weeks now the president has been emphasizing that he will "restore honesty and accountability" to the budget process. And his budget proposal for 2010 does indeed abandon some of the budget tricks of previous administrations.
For instance, Obama's first budget does not assume that the alternative minimum tax (AMT) will generate billions in revenue. The AMT is a parallel tax system enacted in 1969 to prevent a handful of wealthy individuals from using tax shelters to avoid paying any income tax. Today, this tax hits millions of households and penalizes families with children living in states with high income tax rates. Under Bush's budgets, the president proposed a one-year patch of the AMT to neutralize its effects on taxpayers, yet he would assume the revenue for the following years in order to reduce the projected budget deficit.
Obama is also making good on his promise to stop relying exclusively on supplemental bills to fund predictable costs like the wars in Iraq and Afghanistan and the cost of disaster responses. This is a clear improvement over the previous administration.
The United States spent about $190 billion on the wars in Iraq and Afghanistan in 2008. Obama expects that the costs of the Iraq and Afghanistan wars will total just over $140 billion this year. Half of that money has already been appropriated by Congress. Supposedly, the president will make one final "supplemental" budget request to Congress for an additional $75 billion to cover war costs for the rest of 2009.
The main assumption in the defense budget is that the cost of the wars will be $130 billion in 2010 and that it will drop sharply after that, to $50 billion annually beginning in 2011. Are these assumptions realistic? Maybe. If Obama does withdraw troops from Iraq over the next 18 months or so, we will see the cost of the war drop for sure. Yet he is ramping up the U.S. military effort in Afghanistan, which will cost money. The question is how much? And how long will it take him to shove the cost of the war (or other spending projects) back into supplemental spending bills, which typically get much less scrutiny from the public, the press, and Congress?
Despite some improvements from the Bush budgets, Obama's plan is far from being free of tricks. First, while he told Congress on Tuesday that his budget team has "already identified $2 trillion in savings" over the next decade to help tame record budget deficits, one would be hard press to actually find any programs getting cut. In fact, it appears that about half of the "savings" come from his proposed tax increases. He plans on reducing the deficit by $639.7 billion over 10 years with only his income tax increase and a $311 billion reduction in the debt service.
More importantly, the budget "saves" hundreds of billions of dollars by not continuing to spend $170 billion a year in Iraq until 2019. Obama includes war spending in his baseline projections to be able to show a $1.49 billion savings over 10 years. Yet even under the previous administration we were supposed to be out of Iraq by 2012. It's highly dissembling to say we can get savings by cutting spending that isn't actually going to occur.
The bottom line is that there is very little to be happy about in Obama's first budget. It simply expands the Bush policies of bigger government and increased centralization, which threatens to permanently transform America's culture and economic outlook by making more and more Americans dependent on government.
Veronique de Rugy is a columnist at Reason magazine and an economist at the Mercatus Center at George Mason University.