The Truth About Obama's 2012 Budget

Separating economic myth from economic fact

Editor's Note: Reason columnist Veronique de Rugy appears weekly on Bloomberg TV to separate economic fact from economic myth.

Myth 1: Under President Barack Obama's 2012 budget, we will "live within our means".

Fact 1: Debt and spending will continue to grow and deficits will continue to persist under the president's Fiscal Year 2012 Budget Request.

White House Office of Management and Budget Director Jack Lew claims that President Obama's new budget calls for a "sustainable" deficit but the facts tell a different story. Despite a nominal commitment to fiscal reform, the president's budget calls for $3.7 trillion in spending. That's more spending than occurred in fiscal year 2010. This spending will result in a projected net deficit of $1.6 trillion, the highest level of deficit in U.S. history.

Under the president's budget, total spending would increase 49 percent over the next 10 years. Even after inflation, this represents a 30 percent increase in spending.

If we keep to this course, publically-held debt will double from $9 trillion to $18 trillion in 2021—a figure that represents 77 percent of GDP by 2021.

Nor is this the first time Obama has made unrealistic budgetary promises. The president's first budget was called "A New Era of Responsibility." The chart below shows the differences between that claim and the economic reality. The blue line represents the deficit promises made by Obama's first budget and the red line represents what the president says will happen now.

As you can see, back in 2010, the president promised to cut the deficit to $912 billion in 2011 and to $581 billion by 2012. Based on the president's 2012 budget released last week, the deficits in 2011 and 2012 will be twice the size originally promised. In 2011, the deficit will be $1.6 trillion, not $912 billion. In 2012, the deficit is expected to be $1.1 trillion, not $581 million.

Take a moment to let these numbers sink in. Over the course of two years, projected deficits have increased by $1.5 trillion. Not even primary budget balance, one of the goals set by the administration, is achieved by this new proposal.

Myth 2: The president's budget reduces 2012 discretionary spending by 5 percent. This will bring domestic discretionary spending to the lowest level since Dwight Eisenhower was president.

Fact 2: Domestic discretionary spending has been decreasing steadily as a proportion of total spending due the growth of mandatory entitlement spending. Moreover, many of the "cuts" in the president's budget are actually just budgetary gimmicks.

The budget focuses on domestic, non-discretionary spending cuts, which would reach 37 percent of all federal spending in 2010. Yet this share of the budget has been decreasing steadily as a total share of federal spending since at least the 1960's due to the growth in entitlements. The president's claim he will decrease this level of spending is therefore meaningless.

In addition, Obama claims the budget will reduce 2012 discretionary spending by 5 percent. But as the Heritage Foundation's J.D. Foster details, these "cuts" are only made possible by three gimmicks:

• Redefining Pell grants as mandatory spending. Stripped of this gimmick, discretionary spending jumps by $14 billion in 2012.

• Reclassifying $54 billion worth of discretionary surface transportation spending as mandatory spending.
Spending the peace dividend. The budget proposal includes discretionary spending for "overseas contingency operations" in Iraq and Afghanistan and reduces funding for these operations by $38.2 billion in 2012.

• Reversing these budget tricks lifts 2012 discretionary spending by $106.2 billion for an overall increase of $31 billion in discretionary spending.

Myth 3: The president's budget accurately reflects economic and politic reality.

Fact 3: The president's budget incorporates unrealistic assumptions about both the U.S. economy and the implications of the president's policy choices. Our fiscal situation is far more dire than the president's budget lets on.

The above chart contrasts the impact on the debt of the president's unrealistic budget (black) with a more realistic set of assumptions (red). So what are the president's unrealistic assumptions?

First, the president's projected levels of economic growth and rate of unemployment are overly optimistic. According to Table S-13 in the budget's summary tables, the president's numbers are based on the assumption that the economy will grow, in real terms, by 3.6 percent in 2012 and 4.4 percent in 2013. Yet these predictions are well above most private and governmental projections. Also, Obama's budget assumes that unemployment will fall to 8.6 percent in 2012 and 7.5 percent in 2013. Taken together, these two assumptions not only allow the president to pencil in more revenue but also to incorporate less spending in the form of reduced unemployment benefits. That's how the new budget reaches $1.5 trillion in lower deficits in the next 10 years.

Second, the budget relies on budgetary savings that are unsupported by policy. For example, after two years, the budget assumes doc fixes will be fully offset – on a same year basis – without identifying any policies to achieve this. Meanwhile, the president calls for existing and expanded transportation spending to be paid for through "bipartisan financing," but never actually identifies where this financing would come from.

However, if we omit such unspecified savings and switch to the Congressional Budget Office's (CBO) baseline projections (but continue to assume the policy costs and savings reached by the White House Office of Management and Budget), the deficit picture in the president's budget becomes quite different. Rather than running $7.2 trillion in deficits over the decade, the budget would run $9.5 trillion.

Furthermore, if we assume the CBO baseline as the starting point, take away the unspecified savings, and use the CBO's GDP numbers, the debt looks far worse than the projected 77 percent. It would eclipse 77 percent in 2013, 80 percent in 2016, and reach 87 percent by 2021.

Unfortunately, these are the realistic budgetary assumptions we need to take into account.

Myth 4: Budget cuts proposed by Republicans will eviscerate the American middle class.

Fact 4: The Republican cuts may be bigger than the president's cuts but they still barely scratch the surface of our overspending problem.

First, the proposed Republican cuts only apply to non-defense discretionary spending, which is just 12 percent of the budget.

Second, as the chart below shows, even when it comes to Republican cuts to the non-defense part of the budget, spending still won't go down to 2008 levels as promised.

Contributing Editor Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University.