Posted on Mon, Feb. 13, 2012
last updated: February 14, 2012 09:47:00 AM
WASHINGTON — President Barack Obama's proposed federal budget would shrink annual deficits over 10 years, but it would fall far short of taming the nation's exploding federal debt.
By the end of his second term, if he's re-elected, debt held by the public would rise to $15.7 trillion. That's more than double the $7.5 trillion national debt he inherited when he came into office. And debt held by the public is projected to keep rising under his budget, reaching $19.5 trillion by 2022.
Meanwhile, Obama's budget wouldn't slash annual budget deficits, but it would reduce them to levels seen as less threatening — but still high.
After spending 2011 fighting with Congress over how to cut the budget, Obama projects that the fiscal 2012 deficit actually will rise, to $1.326 trillion _slightly higher than last year's $1.299 trillion.
Annual deficits then would shrink, to $612 billion in fiscal 2017 — which starts Oct. 1, 2016, the final year of Obama's second term if he wins re-election. While that's a sizable drop, $612 billion still would be higher than any deficit ever recorded before Obama took office — nominally, though not as a share of the economy.
Annual deficits would creep back up through fiscal 2022, but as a percentage of gross domestic product — the value of all U.S. goods and services produced in one year — the deficit would fall from 8.5 percent in fiscal 2012 to 3 percent in fiscal 2017, a level most economists say is sustainable.
To get that, Obama would raise taxes on the wealthy. He'd let Bush-era tax cuts expire for American families with taxable income above $250,000 and for single filers over $200,000. He'd end preferential treatment of dividends from stocks; they'd be taxed as ordinary income for those in higher brackets. He'd limit their itemized deductions, roll back their personal exemptions and raise the tax rate on their capital gains — profits from the sale of stocks, bonds, real estate and the like — up to 20 percent from 15 percent.
Those tax hikes have no chance of passing the current Congress, owing to Republican opposition. With them, Obama is showing voters his preference for how to attack deficits.
Republicans have called for sharper spending cuts and substantial overhauls for Medicare and Medicaid, whose long-term financial shortfalls are prime drivers of future deficits.
On Election Day, Nov. 6, Americans will choose between two clearly competing visions of federal government and federal finance.
Former Comptroller General David Walker, appointed by President Bill Clinton as the nation's chief auditor, sharply criticized Obama's budget.
"The proposed budget would greatly increase the portion of government spending that is on 'autopilot.' While the president's budget cuts discretionary spending programs by 1 percent over a 10-year period, mandatory spending programs and interest on debt grow by more than 96 percent over the same decade," Walker said. "The result is that in the year 2022 more than 78 percent of total outlays (spending) will be on autopilot — which is both irresponsible and unsustainable."
At the end of a second Obama term, federal spending would amount to about 22.2 percent of GDP. That's about 1 point above historical averages. Incoming revenues would amount to about 19.2 percent of GDP, also about 1 point higher than historical averages.
While high, the national debt would be stabilized in a range of 76 percent to 78 percent of GDP for most of the decade. That's about twice the nation's historical debt levels.
Maya MacGuineas, president of the Committee for a Responsible Federal Budget, called that debt stabilization plan "an important first step for putting the country on a sustainable fiscal path."
The president's budget would increase revenue by about $1.6 trillion over 10 years. But in a gimmick that MacGuineas found troubling, it also counts as savings $850 billion from ending the wars in Iraq and Afghanistan. And it would spend $230 billion of that "savings" on new highways.
Analysts say this is a gimmick, not savings, because the wars were never expected to continue through the decade, and they were financed through deficits that contributed to mounting debt. Ending a stream of debt is not savings you can spend elsewhere.
"When you finish college, you don't suddenly have thousands of dollars a year to spend elsewhere — in fact you have to find a way to pay back your loans," MacGuineas said.
What economists still want to see is a strong signal that debt and deficits are being tackled — not all at once while the economy remains weak, but a beginning that leads toward large-scale fiscal restructuring over the coming decade.
"If we don't make policy changes that achieve deficits that are small enough to result in a stable debt-to-GDP ratio over the next few years, then our economic difficulties are going to mount pretty rapidly," said Mark Zandi, chief economist for Moody's Analytics, a forecasting and consulting firm. "It's not going to be a problem until it is, like Europe. We will seemingly be going along our merry path and then for whatever reason, things will go awry."
One need only look at Europe to see what could happen. When investors lose confidence, they demand a higher rate of return in exchange for holding government debt. The cost of new debt, and of servicing existing debt, soars to crippling levels and forces dramatic austerity measures on government spending. Greek citizens are rioting in the streets now in protest of their government's austerity program, which financial markets insisted upon.
"It's very important that we make tough decisions now so that we don't go down that dark path," Zandi said.
Nevertheless, he's somewhat optimistic because last year's Budget Control Act committed lawmakers to $2 trillion in spending cuts over 10 years, and he's encouraged by the Obama budget's aim to reduce the decade-ahead deficit total by $4 trillion below what it would be under current policies.
"I think we are getting serious, we just need to seal the deal," Zandi said. "... Given the political environment, I think it's going to be hard to walk away ... we just need to execute."
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