More Spending, Taxes, and Debt

The President's Budget for Fiscal Year 2012

Having repeatedly acknowledged the gravity of the Federal Government’s fiscal outlook, the President seems to have ignored his own rhetoric: he has submitted a budget that extends a pattern of record spending, chased by ever high taxes that still fail to catch up with his ambitions. His budget makes no serious attempt to address the rapid growth of spending that threatens to smother the U.S. economy. Facing the Nation’s greatest domestic challenge, the President opted to punt rather than lead. His budget spends too much, taxes too much, and borrows too much – stifling job growth today and leaving a diminished future for the next generation.

A quick summary:

The budget spends $3.8 trillion in fiscal year 2011, 25.3 percent of gross domestic product [GDP], and $46 trillion over the 10-year period. Federal spending falls slightly (due to natural declines from stimulus and unemployment insurance), but climbs above 23 percent of GDP by the end of the 10- year window. The budget increases spending by a total of $77 billion relative to the baseline for this year (2011) and next (2012). By its own baseline accounting, the Office of Management and Budget [OMB] shows no spending savings until fiscal year 2013. This continues the pattern of budgets that keep increasing spending in the near term while promising deficit reduction in the outyears. Last year’s budget projected a fiscal year 2011 deficit of $1.3 trillion, nearly $400 billion lower than what OMB is projecting this year.

OMB’s “current policy baseline” only assumes extension of tax relief for incomes under $200,000 for single filers and $250,000 for joint filers. Relative to this baseline, the budget increases taxes by $819 billion over 10 years. Adding increases for the expiration of current rates on incomes over $200,000/$250,000, and a return of the estate tax to 2009 parameters brings the President’s total tax increases to $1.6 trillion over 10 years.

The President’s fiscal year 2011 deficit is $1.6 trillion, 10.9 percent of GDP, an all-time record in nominal terms and a new post-World War II record as a share of the economy. The President’s budget projects deficits will decline to $607 billion in fiscal year 2015 and then rise to $774 billion by 2021. Over 10 years, the President’s budget deficits total $7.2 trillion. Deficits never fall below 3 percent of GDP – the official maximum allowed deficit for membership in the European Union. The budget has unspecified savings in the outyears (offsets for alternative minimum tax relief and highway funding) and is built on more optimistic projections than those of the Congressional Budget Office [CBO]: for its baseline, OMB projects deficits that are $1.5 trillion lower than CBO’s over the 10-year period.

Debt. Debt held by the public climbs to $10.9 trillion by the end of this year (72 percent of GDP), and it continues rising after that, reaching 77 percent of GDP in 2021. In the European Union, the official maximum debt allowed for member countries is 60 percent of GDP. His budget would  double and then triple the debt compared to when he took office. The current debt limit is $14.294 trillion. Debt subject to limit increases to $15.5 trillion by the end of fiscal year 2011, a nearly $2-trillion increase compared to last year. By the end of the decade, debt subject to limit climbs to above $26 trillion.

Interest on the Debt. Net interest grows more than four-fold, from $207 billion this year to $844 billion in 2021, with some optimistic assumptions about deficit reduction and interest rates (OMB assumes the 10-year Treasury rate never gets above 5.3 percent).

The President’s budget last year called for the creation of a fiscal commission that would develop proposals for tackling the government’s unsustainable deficits and debt. The commission reported its findings in December – and the President’s budget all but ignores them, leading the commission’s Co-Chairman, Erskine B. Bowles, to contend in The Washington Post (14 February 2011) the budget goes “nowhere near where they will have to go to resolve our fiscal nightmare.”

The balance of this discussion summarizes the President’s main spending and tax proposals, his economic assumptions, and his proposed budget “disciplines.”

View full anaylsis here.