Obama's deficit plan based on optimistic assumptions

McClatchy NewspapersFebruary 22, 2009 

WASHINGTON — In order to achieve his goal of cutting the federal budget deficit in half, to $533 billion by 2013, President Barack Obama would need cooperation from Congress; the U.S. and world economies; Iraqi political and militia leaders; Afghan warlords and politicians; and perhaps even Iran, China and Pakistan.

Few politicians or economists question the need to address the $1.2 trillion and growing deficit that Obama inherited from former President George W. Bush, as the president will do Thursday when he releases his budget message.

"That's really important," said Robert Bixby, the head of the Concord Coalition, a bipartisan watchdog group that advocates balanced budgets. "He's set a standard that he can be held to. If his policies would lead to a bigger deficit, he would either have to scale them back or say, 'I've changed my mind.'"

Obama's plans to cut spending, however, are, like every other president's, at the mercy of economic developments, congressional action and inaction and developments around the world over which he has little if any control.

_ The economy. The president's projections are based on an assumption that the U.S. economy will rebound late this year and begin to recover next year, hitting a fast pace in 2011 and 2012. While it's quite possible, this scenario relies on successful efforts to shore up the banking system, recovery in the housing market and a sharp recovery in the global economy to lift U.S. exports.

Few analysts, however, can say whether this crisis will pass quickly or whether we're at the beginning of a global slump that could rival the Great Depression. That's why the nonpartisan Congressional Budget Office projected last month that the economy will grow at an average rate of 4 percent between 2011 and 2014 — but with a warning that no one knows how the government's rescue efforts will play out.

The CBO said, "The scale and novelty of federal intervention, particularly by the Federal Reserve, and uncertainty about the degree to which those interventions will affect the economic outlook, make it particularly difficult for analysts to use historical patterns to forecast the near future."

"You don't know how much more bailout money is going to be required and whether there is going to be another stimulus bill," said Bixby. "It strikes me as an ambitious goal, but one that could be realized if the economy cooperates, which of course Obama doesn't have control over."

The Concord Coalition's own budget analysis projects a deficit of $832 billion in 2013, substantially higher than what Obama is projecting.

Some of the president's proposed budget-balancing measures raise eyebrows, however. For example, Obama plans to collect more tax revenue by raising the rate of taxation on hedge fund managers, who now enjoy a 15 percent tax rate.

They run private investment pools for the wealthy and are compensated on a percentage of their capital gains, or investment earnings. Obama wants to tax hedge fund managers at the corporate tax rate, but these funds are dropping like flies in today's twin banking and credit crises, and it's not clear how many will be around to tax when the crisis eases.

Obama also promises to find savings from scrubbing the federal budget, thanks to advances in electronic record keeping in the healthcare sector and more robust enforcement of tax collection. This has been a constant promise from the executive and legislative branches over the past decade, and the savings have been elusive.

The CBO's budget projections do suggest one way that Obama could get serious deficit reductions, but it would be politically unpopular. The CBO projections assume that there are no further patches to the Alternative Minimum Tax. Every year, Congress passes a one-year patch to prevent it from hitting more taxpayers, and breaking that habit would close a big hole in the projected deficit — but let an unpopular tax hit more and more middle-income Americans.

_ Congress. Lawmakers will talk a lot about curbing spending, but history — as well as Congress's recent actions — suggest that it won't show much restraint. Members are already giving two reasons to spend: Pent-up demand and the argument that any spending stimulates the economy.

First, Democrats feel that a Republican White House has denied them the programs they wanted for years, and they finally have big congressional majorities and a sympathetic president.

President George W. Bush last year proposed cuts or slower spending in a long list of domestic programs. Energy-related programs, for instance, would have gone up about 1 percent under Bush's blueprint; Democrats in Congress wrote legislation to boost spending 8 percent. The impasse was never resolved.

Bush also wanted less than a 1 percent boost in key health, labor and education spending, but Democrats wanted it up about 5 percent. The two sides could never agree on that, either.

Democrats are prepared to debate and vote this week on a $410 billion measure that keeps most of the government running through Sept. 30 and more closely reflects their priorities.

"There is a worry that this (fiscal 2009 spending bill) is an opportunity for people to get things that they didn't get in the stimulus," said Maya MacGuineas, the president of the Committee for a Responsible Federal Budget.

There will be efforts to restrict spending by members of both parties, but over the years, few have worked. In 1985, for instance, the Gramm-Rudman-Hollings legislation mandated automatic across-the-board cuts in most programs if deficits were projected to exceed certain levels.

The goal was to produce a balanced budget by 1991. Instead, the deficit, which hit $221 billion in fiscal 1986, was $269 billion in 1991, as the economy sagged and the savings and loan industry collapse cost the government billions.

_ Military spending. There are 146,000 U.S. soldiers and Marines in Iraq and 38,000 in Afghanistan, and reducing spending on them would require both a rapid drawdown in Iraq and a limited escalation of the war in Afghanistan.

Obama has approved sending an additional 17,000 soldiers and Marines to Afghanistan, but the U.S. commander there, Army Gen. David McKiernan, has requested a total of 30,000.

The U.S. military had hoped that the peaceful Iraqi provincial elections last month and record-low violence in Iraq would allow it to reduce troops in Iraq, shifting a fraction of them to Afghanistan and ultimately cutting costs.

However, many, including Army Gen. Raymond T. Odierno, the Iraq commander, and Army Gen. David Petraeus, the U.S. Central Command commander, are pushing for a slower withdrawal. They point to violence between Sunni Muslim Arabs and Kurds in northern Iraq — where no additional troops were sent during the so-called "surge" — that could destabilize the rest of the country if it escalates.

Nancy A. Youssef contributed to this article.

ON THE WEB

Congressional Budget Office historical budget data

CBO budget outlook

CBO projections

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