Barack Obama's budget

The phony war

  by G.I. | WASHINGTON

TAKEN at face value, Barack Obama’s latest budget is a bold combination of fiscal rectitude, populist tax increases and industrial policy-lite: tax breaks for manufacturers, more money for community colleges, and a dollop of money for infrastructure.
Do not take it at face value. A president’s budget has always been hostage to whatever Congress is in a mood to grant. In the last three years, however, the gap between aspiration and reality has become so large as to be almost surreal.


Mr Obama promises to cut the deficit by $3.8 trillion over the next decade. Of that, $1.4 trillion comes from raising taxes on the wealthy. Most of this he has asked for since his first budget, in 2009, when he proposed eliminating George W. Bush’s tax cuts for those earning more than $250,000 and capping their deductions. This year, he adds a hefty new charge: repealing preferential rates on dividend income for the wealthy, which raises $206 billion over 10 years.
His proposal to shut down all sorts of tax breaks for multinationals and slap banks with a crisis fee return, once again, to the budget, along with a handful of populist new measures such as “removing tax deductions for shipping jobs overseas” (worth $90m over 10 years).
Such tax increase went nowhere when Democrats controlled both the House of Representatives and the Senate. With Republicans in charge of the House and able to filibuster almost anything in the Senate, the odds any of these tax proposals will pass this year are close to nil.
Much of his purported spending reduction is accounting legerdemain: he claims to save more than $800 billion from drawing down operations in Iraq and Afghanistan, but most of that was never going to be spent anyway. His cuts to Medicare and Medicaid consist almost entirely of squeezing health-care providers; benefits and beneficiaries are spared. There are painful cuts to discretionary spending excluding defence: it sinks from 3.1% of GDP in fiscal 2012 to 1.7% in 2022. Those cuts, however, were forced on him by budget deals last year, and it’s not clear how the federal government is supposed to fulfill so many of its responsibilities, from running the courts to fighting forest fires, on a starvation diet. Mr Obama did omit nearly $1 trillion of further cuts set to begin next year under last year’s budget deal (the “sequester”); he argued his budget provides a wiser alternative.
The gap between rhetoric and reality shows up plainly in the bottom line. In 2009, Mr Obama laid out a plan that would lower the budget deficit to 3.5% of GDP by this year; he now reckons it will be 8.5% instead. The national debt was supposed to peak as a share of GDP at 67% last year; he now figures it will peak next year, at a much higher 78%.
There are two reasons Mr Obama’s budgets have become irrelevant, one good and one bad. The first, good reason is that since 2008 balancing the budget has simply had to take a back seat to averting economic collapse. Nominal GDP this year will be 6%, or almost $1 trillion, smaller than Mr Obama projected three years ago. That miss alone explains some of the worsening in the deficit and debt ratios. The remainder is largely down to explicit decisions to delay tax increases and spending cuts. The resulting red ink is not pretty but plainly better than applying a fiscal vice at a time when monetary policymakers are running out of ideas for stimulating demand.
The second, bad reason is that the parties are deeply polarised, largely over Republicans’ refusal to consider tax increases on a scale that Democrats consider meaningful. The result of these two forces is that fiscal policy only gets made when it absolutely must, usually in late-night white knuckle negotiating sessions with a sword hanging over the heads of both parties: the expiration of Mr Bush’s tax cuts in December, 2010; a government shutdown in April, 2011; and a near-default last August.
Mr Obama’s advisers know how little the budget matters. As they went through the motions of explaining it today, they noted that big initiatives, such as corporate tax reform and the Buffett rule minimum tax for millionaires, are not part of it; they will come later as part of a broader reform proposal. Bigger changes to entitlements would likewise be part of a “grand bargain” between Republicans and Democrats and Mr Obama was not about to share his negotiating position with reporters.
Administration officials, like the Republicans, know the real fight comes after November, when the battle for the White House is over and several big deadlines loom. Chief among these are the expiration of Mr Bush’s tax cuts and the sequester. No one knows how that crunch will be avoided, and reading Mr Obama’s budget leaves one none the wiser.