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A Very Obama Budget

The President’s 2011 Budget Reflects His Unwavering Priorities

The president’s 2011 budget reflects a balance of critical investments from health care to the economy, education, and energy—seasoned with fiscal responsibility, writes Michael Ettlinger.

President Barack Obama, far right, walks back after delivering a statement on his budget. From left are: Chief Economic Adviser Lawrence Summers, Council of Economic Advisers Chair Christina Romer, Budget Director Peter Orszag, and Treasury Secretary Timothy Geithner. (AP/Pablo Martinez Monsivais)
President Barack Obama, far right, walks back after delivering a statement on his budget. From left are: Chief Economic Adviser Lawrence Summers, Council of Economic Advisers Chair Christina Romer, Budget Director Peter Orszag, and Treasury Secretary Timothy Geithner. (AP/Pablo Martinez Monsivais)

The president’s budget reflects the important investments that he has championed since his first entry into the race to become president—the economy, health reform, education, and energy—balanced with the particular needs of a nation just emerging from the worst recession in most Americans’ lifetimes, and a challenged public balance sheet.

The deficit path

It would be an exaggeration to say that the president’s 2011 budget offers a path to a balanced budget. But it does, perhaps, offer a path to a path to a balanced budget. And it certainly makes substantial progress against the high deficits we are currently experiencing.

The 9.9 percent of GDP deficit in 2009 is in the books. That’s what happens when the government collects revenues equal to only 60 percent of what it spends. For 2010, this “revenue-to-spending ratio” is projected to drop to 58 percent and the deficit is projected to be 10.6 percent of GDP. These deficits are scary, but vital. A balanced budget in 2009 would have crushed the economy—we needed to borrow to stop the Great Recession from plunging into a second Great Depression. We needed the federal government to borrow money and pump it into the economy. Without that extra $1.4 trillion creating demand in the economy, getting customers in the door, businesses would have contracted even more, job loss would have been greater, and the return to investing would have lagged even further.

With 15 million Americans unemployed, 2010 is not the time to take the pedal off the floor. If anything, the roughly $100 billion that the administration has slotted for additional job creation measures in 2010 is short. A bigger shot to get people back to work and give the economy the shove it needs to gain its own momentum would pay off in 2011 and beyond. After all, a significant share of the deficits we’re running now are due to the weak economy—falling incomes mean less taxes. We’ll need strong growth to deal with the deficits. A bigger kick-start in 2010 would help.

The budget released today, however, is mainly about 2011 and beyond. It is the president’s proposed budget for 2011 and offers his blueprint into the future. The president plans to start reining in the deficits as the economy strengthens in 2011. Revenues will gradually start to cover more spending year by year—rising to 67 percent in 2011 and peaking at 85 percent in 2018. Deficits will fall as revenue covers more of spending. The administration projects deficits of 8.3 percent of GDP in 2011, falling to 3.9 percent of GDP in 2014 and 2015. The deficit continues to fall through 2018 and then starts to creep back up as the costs of an aging population and rising health care costs start to bite.

Even after the president’s proposed deficit reduction measures, the deficits projected in the budget for 2014 and beyond—after we’re presumably past the recession—are still too high: in the vicinity of 4 percent of GDP. The administration knows this, and on top of the concrete deficit reduction measures it proposes, is handing the job of further deficit reduction to a commission that is given both a medium-term and a long-term objective.

In the medium term, the commission is charged with identifying policies that will bring the budget into “primary balance” by 2015. Primary balance is when revenues and program spending are in balance—they equal each other. There is still an overall deficit, however, because of interest payments on the debt. When a budget is in primary balance the national debt is, in general, no longer on the rise. Giving the commission such a specific goal—figuring out how to make revenues match program spending—greatly increases its chances of success.

The commission’s long-term charge is less specific. It is supposed to “examine policies to meaningfully improve the long-run fiscal outlook, including changes to address the growth of entitlement spending and the gap between projected revenues and expenditures of the federal government.”

The president's 2-11 budget results in lower deficits than under current policiesThe path the administration proposes through 2015 is a responsible one. If the economic recovery lags, it could prove to be too aggressive in deficit reduction. If the economy does better than projected, then we should be able to make greater progress.

We called in our report “A Path To Balance” for a completely balanced budget by 2020, primary balance by 2014, and a series of intermediate targets. The administration proposes, with the commission’s help, to hit the target we set for 2014 one year later in 2015. This is not a critical difference. In addition to the 2014 target, we proposed a set of intermediate targets defined by the primary revenue-to-spending ratio. PRSR refers to the percent of program spending—excluding interest on the debt—covered by revenues. That ratio was 63 percent in 2009.

The administration’s budget trajectory before 2015, when the commission’s proposals will presumably bring us to primary balance, is similar to what we proposed. The administration’s budget blueprint between now and 2015 meets, or is close to meeting, the intermediate PRSR targets we set out in our paper—in fact, all of our targets are hit or bettered, though one year later than we proposed. Figure 2 shows the yearly PRSR recommended by CAP, the PRSRs calculated from the president’s budget without the further deficit reduction anticipated from the commission, and the PRSR assuming that the administration reaches its goal of primary balance by 2015 through the intervention of the commission. A PRSR of 100 percent, of course, means the budget is in primary balance.

primary revenue-to-spending ratios under two paths to primary balance

projected deficits under CAP's path and the president's 2011 budget

The administration offers a path that we consider a responsible one through 2015 when all of the challenges are weighed against each other. Beyond 2015, it is disappointing that the administration did not more firmly commit itself to further deficit reduction. The deficit levels associated with primary balance may not cause any economic harm and will stabilize the level of debt, but there really is no reason to be running deficits at times of economic growth. Servicing the debt takes funds away from better uses. And paying down the level of overall debt could offer benefits in the future, leaving more room to borrow when new crises emerge.

Specific steps toward balance

The mid-range and long-run deficits in this budget are higher than desirable—which is why the Obama administration has established the commission. But they would be even higher if not for the several key deficit-reduction proposals in the budget, including, most notably, a spending freeze, tax increases, and health care reform

The spending freeze has gotten the most attention leading into the budget release, but it is probably the least important of these measures from the standpoint of the deficit. The terms of the freeze are that it holds constant the spending for nonsecurity discretionary spending for three years. This category of spending, at $447 billion, constitutes 12 percent of the federal budget. The savings in 2011 will only be $10 billion relative to the baseline, and $27 billion by the end of the freeze period in 2014. The administration has wisely chosen not to do this as an “across-the-board” freeze—instead, it has prioritized spending. It will become more apparent as the details of the budget are examined more closely in the coming weeks whether the resources available in this category are sufficient to serve the public in the various program areas.

The tax hikes are more substantial, but are largely proposals that have long been a central part of the administration’s fiscal plan. The president has always said that we should allow the tax cuts for those making over $250,000 per year, passed under President Bush, to expire. This will raise close to $700 billion over 10 years and contribute handsomely to relieving our fiscal woes. The president also reprises some of his proposed reforms in the taxation of multinational corporations—raising $122 billion over 10 years. The main new proposal, announced several weeks ago, is the tax on banks to recoup the TARP funding. This is a modest tax, given the wealth of the industry, raising $90 billion over 10 years. And it is far less than what many are advocating through a broader-based financial transactions tax. Other tax increases and loophole closings include a limit on the value of itemized deductions for high-income taxpayers, eliminating the “carried interest” loophole; eliminating tax subsidies for oil, gas, and coal producers; other corporate tax changes; and improved tax enforcement.

The budget also includes the savings from health care reform. These amount to $150 billion over 10 years. The greatest benefit to the budget will, however, occur beyond the 10-year budget horizon. Health care is a must for dealing with the long-term fiscal challenges.

The president’s priorities for 2011 and beyond

The Obama administration’s budget isn’t balanced in the sense that revenues match spending, but it is balanced in another sense. It reflects a balancing between several objectives.

The president came into office with a set of objectives that he outlined during the 2008 campaign. The economy, health care, a clean energy economy, and education were all at the top of the list. And regulatory reform became a priority with the financial meltdown. Doing all of it in a fiscally prudent way was always part of the plan.

This framework has run into the buzz saw of the Great Recession. The downturn makes everything harder. Crashing revenues and the need to spend to jumpstart the economy sap funds that the president had planned on investing in his priority areas. And a Great Recession has a way of making people nervous about changes in the economy. On the one hand, people want their government to respond to the recession and restore growth. On the other hand, transformations such as those the president has proposed in health care and energy can cause a case of the nerves even though they would re-align the economy in important, positive, ways.

It’s understandable that people would be nervous. After all, we have had a robust, growing economy in the past without the transformations the president suggests. Wouldn’t it be safer to just get back to that state of affairs before launching down a new path? The answer to that question is, actually, “no.” We’ve reached the end of the line on stringing along the current way we do health care. The costs to the government are too high, the costs to employers are too high, and the costs to consumers are too high. The least safe approach is to do nothing—we’ve gotten away with that for years, we can’t put it off any more.

Nor is it safe to put off moving our economy to cleaner energy. This is the way of the future. There is a finite amount of fossil fuels on the planet and the world has come to recognize that continuing their unrestrained use will have grave consequences. Because we have to import fossil fuels, relying on them is a drain on our economy. The rest of the world has recognized these things and taken action. We need to take action unless we want to be the last modern country to move to greater energy efficiency and advanced energy technologies, leaving ourselves forever in the wake of our competitors in the most important economic transformation since industrialization.

Education, too, is not something that we can just put off. Every year delayed on improving education is another year delayed in giving people the opportunity to be the most productive, and best compensated, contributors to our economy that they can be.

The president’s budget reflects the balancing of his commitment to stick to these core investments. Health reform is more than paid for and ends up helping the budget. There are substantial increases in energy technology investments. Space is held for broader market-based climate change policy that will not have any net budget impact because any proceeds will be used to compensate those hurt by transition costs and used for more clean-energy investments. Finally, the education budget is boosted in this budget even as it falls within the frozen category of nonsecurity discretionary spending. Funds are drawn from other programs.

Conclusion

It is clear with all of these changes that the administration is taking deficit reduction seriously. The president has offered tax increases and taken on the monumental task of health care reform. Neither of those are easy things to do. And yet the deficit problem persists—and that is handed to the commission to address.

But deficit reduction isn’t the purpose of a budget, it’s a constraint. This is really the first budget to fully show the president’s imprint. It shows a commitment to getting the job market back in shape and to make the investments needed for long-term economic growth. It is these investments that are the real story of the budget.

The positions of American Progress, and our policy experts, are independent, and the findings and conclusions presented are those of American Progress alone. A full list of supporters is available here. American Progress would like to acknowledge the many generous supporters who make our work possible.

Authors

Michael Ettlinger

Vice President, Economic Policy

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