Ladies and gentlemen, start your calculators...the Grand Budget Debate of 2011 has begun!
Last week, House Republicans laid down their markers. At the urging of its freshman class, Republican leadership came up with $100 billion in cuts from this year's budget, with the promise of more to come. On Monday, President Obama presented his budget, which foresees this fiscal year's deficit rising to a record $1.645 trillion.
Here, Aaron Task and I discuss the budget proposal with Yahoo! News editor Jane Sasseen:
The good news: the president's budget projects the deficit dropping to $1.01 trillion in 2012, thanks in part to a five percent reduction in spending. The president's plan would reduce the deficit-to-GDP ratio from 10.9 percent in the current fiscal year to 7 percent in 2012, on its way to 3.2 percent by 2015. And for once, the bidding war in Washington seems to be over who wants to spend less — or, more precisely, who wants spending to rise less in the future — rather than who wants to spend more.
But those hoping for a British-style, stiff-upper-lip dose of austerity are sure to be disappointed by the budget debate. The spending cuts proposed, by both Republicans and Democrast, are a drop in the bucket. And the proposals highlight and clarify a highly inconvenient truth. If the U.S. is really serious about fiscal discipline, taxes will have to rise.
This is austerity lite. And, like lite beer, it is less satisfying and may leave a bad aftertaste.
Here's why. First, both sides are going after a tiny portion of the budget. Even if the GOP's tough cuts — which are anathema to Democrats and moderate Republicans — were to be enacted this year, they would only reduce the current fiscal year's deficit by about 6 percent. By and large, Congressional Republicans and the Obama administration are exempting defense spending and entitlements like Medicare and Medicaid from the portion of the budget to be cut. They're focused on discretionary, non-defense spending: the Justice Department, the State Department, the Interior Department. But as the House Budget Committee notes, in Fiscal 2010 non-security discretionary spending totaled only $478 billion. Cutting budgets almost exclusively discretionary non-defense spending is like saying you're going to clean the house — but only taking the vacuum cleaner up to the guest room.
Second, spending is only half the equation. Of course government spending has been rising over time. You'd expect it to do so even if politicians didn't have a hankering for pork. The U.S. population is growing (which means it needs more schools, more roads, more prisons), new entitlements like the Medicare prescription drug benefit were added without a financing mechanism, and defense spending has skyrocketed. That wouldn't be such a big deal if revenues were rising in tandem with spending. But they haven't been.
Revenues peaked in 2007 at $2.57 trillion, and then fell off a cliff. In 2009, the federal government collected $2.1 trillion in revenues, off 18 percent from 2007. Tax receipts began to rise as the economy began to grow, but in fiscal 2011 federal revenues are still expected to be lower than they were in 2007 — in absolute and relative terms. In 2007, federal taxes were 18.5 percent of GDP; in 2010, they were just 14.8 percent. (For a look at historical revenue figures, go here.)
Either the tax system is very inefficient at collecting revenues from today's economy, or there are too many loopholes and deductions that are easily exploited, or tax rates are too low given the level of spending. Or some combination of all three.
Obama's budget plan recognizes this problem, to a degree. The Obama budget contemplates letting tax cuts for those in the top tax brackets expire, reducing some tax deductions for high earners, and raising revenues by eliminating tax breaks for energy companies. Of course, Obama pledged to let taxes on high earners rise in 2008, 2009, and 2010 — and then, when push came to shove, gave in on it. But at least he's willing to contemplate a world in which taxes rise on some companies or individuals. Republican orthodoxy circa 2011 bans even the hint of a whiff of a discussion about the need for more government revenues.
Then there's the matter of entitlements. Both Republicans and Democrats have pledged that the cuts they proposed are just a down payment on further structural changes. Both sides concede that they have to start preparing the American public for an adult conversation about the sustainability of all the parts of the budget they have so far placed off limits — defense, Social Security, Medicare, etc. But the early phase of a presidential campaign, in a period when partisan comity is low and demagoguery is high, usually isn't an auspicious time to kick off that conversation. (Death panels, anyone?)
History shows that, if politicians are serious about closing budget cuts, they have to consider the prospect of higher taxes or eliminating tax breaks. There is just too much support for too many programs — from the beneficiaries (Social Security and Medicare), from huge industries (Medicare, Defense, food stamps), and from smaller programs with potent lobbies (Ethanol subsidies) to cut your way to balance. Every president in the past 30 years, except for George W. Bush, recognized this truth. Ronald Reagan signed off on tax increases in 1986, George H.W. Bush signed off on higher marginal rates in 1991, and Bill Clinton enacted higher taxes in his 1993 budget. Each move also involved spending reductions, and each was part of an effort to place the nation's short- and long-term fiscal future on a sounder footing. And they succeeded. By the late 1990s, thanks to the work of Democrats and Republicans on costs, revenues, and entitlements, the budget was balanced.
Both parties have pledged that the tough cuts they propose are simply down payments — and small down payments at that. But in the late housing boom, it often turned out that small down payments were the only ones new home buyers were able to make. As the U.S. struggles to dig out from the fiscal chasm caused in large measure by the housing and credit bust, we can only hope that won't be the case again.
Read more
Last week, House Republicans laid down their markers. At the urging of its freshman class, Republican leadership came up with $100 billion in cuts from this year's budget, with the promise of more to come. On Monday, President Obama presented his budget, which foresees this fiscal year's deficit rising to a record $1.645 trillion.
Here, Aaron Task and I discuss the budget proposal with Yahoo! News editor Jane Sasseen:
The good news: the president's budget projects the deficit dropping to $1.01 trillion in 2012, thanks in part to a five percent reduction in spending. The president's plan would reduce the deficit-to-GDP ratio from 10.9 percent in the current fiscal year to 7 percent in 2012, on its way to 3.2 percent by 2015. And for once, the bidding war in Washington seems to be over who wants to spend less — or, more precisely, who wants spending to rise less in the future — rather than who wants to spend more.
But those hoping for a British-style, stiff-upper-lip dose of austerity are sure to be disappointed by the budget debate. The spending cuts proposed, by both Republicans and Democrast, are a drop in the bucket. And the proposals highlight and clarify a highly inconvenient truth. If the U.S. is really serious about fiscal discipline, taxes will have to rise.
This is austerity lite. And, like lite beer, it is less satisfying and may leave a bad aftertaste.
Here's why. First, both sides are going after a tiny portion of the budget. Even if the GOP's tough cuts — which are anathema to Democrats and moderate Republicans — were to be enacted this year, they would only reduce the current fiscal year's deficit by about 6 percent. By and large, Congressional Republicans and the Obama administration are exempting defense spending and entitlements like Medicare and Medicaid from the portion of the budget to be cut. They're focused on discretionary, non-defense spending: the Justice Department, the State Department, the Interior Department. But as the House Budget Committee notes, in Fiscal 2010 non-security discretionary spending totaled only $478 billion. Cutting budgets almost exclusively discretionary non-defense spending is like saying you're going to clean the house — but only taking the vacuum cleaner up to the guest room.
Second, spending is only half the equation. Of course government spending has been rising over time. You'd expect it to do so even if politicians didn't have a hankering for pork. The U.S. population is growing (which means it needs more schools, more roads, more prisons), new entitlements like the Medicare prescription drug benefit were added without a financing mechanism, and defense spending has skyrocketed. That wouldn't be such a big deal if revenues were rising in tandem with spending. But they haven't been.
Revenues peaked in 2007 at $2.57 trillion, and then fell off a cliff. In 2009, the federal government collected $2.1 trillion in revenues, off 18 percent from 2007. Tax receipts began to rise as the economy began to grow, but in fiscal 2011 federal revenues are still expected to be lower than they were in 2007 — in absolute and relative terms. In 2007, federal taxes were 18.5 percent of GDP; in 2010, they were just 14.8 percent. (For a look at historical revenue figures, go here.)
Either the tax system is very inefficient at collecting revenues from today's economy, or there are too many loopholes and deductions that are easily exploited, or tax rates are too low given the level of spending. Or some combination of all three.
Obama's budget plan recognizes this problem, to a degree. The Obama budget contemplates letting tax cuts for those in the top tax brackets expire, reducing some tax deductions for high earners, and raising revenues by eliminating tax breaks for energy companies. Of course, Obama pledged to let taxes on high earners rise in 2008, 2009, and 2010 — and then, when push came to shove, gave in on it. But at least he's willing to contemplate a world in which taxes rise on some companies or individuals. Republican orthodoxy circa 2011 bans even the hint of a whiff of a discussion about the need for more government revenues.
Then there's the matter of entitlements. Both Republicans and Democrats have pledged that the cuts they proposed are just a down payment on further structural changes. Both sides concede that they have to start preparing the American public for an adult conversation about the sustainability of all the parts of the budget they have so far placed off limits — defense, Social Security, Medicare, etc. But the early phase of a presidential campaign, in a period when partisan comity is low and demagoguery is high, usually isn't an auspicious time to kick off that conversation. (Death panels, anyone?)
History shows that, if politicians are serious about closing budget cuts, they have to consider the prospect of higher taxes or eliminating tax breaks. There is just too much support for too many programs — from the beneficiaries (Social Security and Medicare), from huge industries (Medicare, Defense, food stamps), and from smaller programs with potent lobbies (Ethanol subsidies) to cut your way to balance. Every president in the past 30 years, except for George W. Bush, recognized this truth. Ronald Reagan signed off on tax increases in 1986, George H.W. Bush signed off on higher marginal rates in 1991, and Bill Clinton enacted higher taxes in his 1993 budget. Each move also involved spending reductions, and each was part of an effort to place the nation's short- and long-term fiscal future on a sounder footing. And they succeeded. By the late 1990s, thanks to the work of Democrats and Republicans on costs, revenues, and entitlements, the budget was balanced.
Both parties have pledged that the tough cuts they propose are simply down payments — and small down payments at that. But in the late housing boom, it often turned out that small down payments were the only ones new home buyers were able to make. As the U.S. struggles to dig out from the fiscal chasm caused in large measure by the housing and credit bust, we can only hope that won't be the case again.
Read more
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