No huge surprises in the budget proposal. There is a bit more short-term stimulus than I had expected. In addition to the widely trailed $100bn “jobs package”, the proposal includes another $150bn or so of temporary tax cuts, extended unemployment benefits, and help for states. (It tells you something that the administration is now playing down its efforts to stimulate the economy instead of playing them up.) That’s fine: if anything, too modest. On the other hand the proposals for longer-term fiscal control are weaker than I had hoped. For the past six months, officials have been promising a budget that would bring fiscal policy back under control. This is not it. Again, given the political difficulties, this is not so surprising.
The budget proposes a deficit target of 3% of GDP (compared with 8.3% in 2011). This would be enough to stabilize public debt, at what the White House hopes will be a supportable level. Having announced the goal, the plan misses it by a wide margin. Through 2020, the deficit is above 3% despite the three-year freeze on non-security discretionary spending (if it happens), despite the Medicare savings that will supposedly flow from the health care plan (if it happens), and despite the substantial tax increases on upper-income households already legislated for 2011 (if they happen). After 2020, the deficit’s trajectory is rising. A proposed budget deficit commission will have to come up with other ideas, and Congress will have to enact them, to close the gap.
It would be a serious mistake to withdraw stimulus too quickly while the economy is still weak. But a further and possibly prolonged delay in addressing the long-term issue is just as bad – and that is what the budget, in effect, advocates.
Robert Greenstein’s supportive analysis is well worth reading. I agree with his praise for the proposed narrowing of tax subsidies, including the cap on high earners’ tax deductions. But I think he is too generous in offering this rationale for the administration’s timidity on longer-term control:
Had the President proposed major additional budget cuts and revenue increases, not only would Congress almost certainly have rejected them, but the inevitable harsh attacks on them could have “poisoned the well” and made them even harder to achieve in the future if and when a more bipartisan atmosphere makes greater budgetary progress possible.
Obama needs to wait for a more bipartisan atmosphere before he starts advocating long-term fiscal discipline, and spelling out to the country what that would mean? How long might that be? Even if outreach to Republicans is pointless at the moment, this does not stop Obama taking the message to the wider public. It might be one way to put Republicans on the spot. Greenstein’s advice is to admit defeat at the outset.
Keith Hennessey’s hostile take on the proposal is also worth reading. I disagree with his insistence that the deficit problem is not taxes that are too low but spending that is too high. It is both. But it is still valuable to look, as he does, not only at what the budget would expect to “save” from some questionable current-policy baseline – the usual approach – but simply at levels of taxes, spending and deficits, compared with those in the previous budget, and with historical averages. Freeze notwithstanding, the main difference between this year’s budget and last is that public spending is significantly higher all through the next decade. That is something you might have missed.