The federal budget

Tax and build

  by R.A. | WASHINGTON

WASHINGTON wonks are focused today on the release of the Obama administration's budget proposals for the 2013 fiscal year. We will have in depth coverage following the White House budget briefing. For now, a few things stand out. First, the president's proposals generate a federal deficit of $900 billion in fiscal 2013. If it is verified, that would be America's first deficit of less than $1 trillion since the 2008 fiscal year. It would also represent a reduction in the deficit, as a share of GDP, from 8.5% to 5.5%. Overall, the budget calls for a reduction in the deficit to 2.8% of GDP by 2019, where it is projected to remain through the end of the ten-year budget window. That's close to primary balance—the government's books would nearly balance net of interest costs. The 2013 budget's proposals result in less deficit reduction than the plan produced (but not agreed upon) by last fall's bipartisan budget "Supercommittee".


In the short term, much of the president's deficit reduction can be attributed to economic improvement. The budget envisions a recovery that accelerates, in real terms, through 2015, after which growth settles down to 2.5%. That's certainly an optimistic forecast, though it's not entirely unreasonable. Given the scope for catch-up growth back to potential, we would expect, in the presence of appropriate macro policy and absent severe shocks, for growth to be above trend for a few years. Of course, both policy and unexpected headwinds have constrained recovery since 2009.
Toward the end of the ten-year period, the biggest deficit cuts come from reductions in overseas military spending and from higher taxes on top earners, including the expiration of the Bush tax cuts for those earning more than $250,000 a year. Savings that aren't directed toward deficit reduction are focused, in the short term, on stimulative measures like an extension of a payroll-tax cut through 2013 and, in the long term, on infrastructure priorities, like a long-overdue reauthorisation of the nation's surface transportation laws and new spending on immediate transport needs. The budget for those items runs to nearly $170 billion over the ten-year window. That sounds like a lot, but the CBO has suggested that the economy could use that much spending every two years. The president is likely to make much of proposals to support manufacturing and "insourcing", but among his initiatives on this score, most of the budget room is allotted to an extension of the R&D tax credit, which is virtually guaranteed to take place anyway.
In the best of times, the budget document is best understood as a political document, used to frame administration priorities in a way that might possibly inform actual legislation, if the president is lucky and controls Congress. Amid a divided Congress and ahead of a presidential election, the budget is both an opening bid and a campaign tool. The White House cannot expect to get much of what it wants, but it can hope to show voters the difference between Mr Obama's goals and those of his Congressional antagonists.
At the end of the day, however, serious fiscal questions loom. The long-run debt picture is disconcerting, but more worrisome, perhaps, is the fiscal hit the economy will take if the parties are unable to agree on extensions of at least some of the many tax cuts scheduled to expire at year's end. Mr Obama hopes this budget will help get him re-elected, but if it makes actual budget deals more difficult to achieve, he could be in for a tough start to a second term.